Back to GetFilings.com
Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-19761
OP-TECH Environmental Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 91-1528142
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6392 Deere Road, Syracuse, NY 13206
(Address of principal executive offices) (Zip Code)
(315) 463-1643
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X or No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes or No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 30, 2005: 11,725,370
OP-TECH Environmental Services, Inc. and Wholly-Owned Subsidiaries
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets
-March 31, 2005 (Unaudited) and December 31, 2004(Audited) 3
Consolidated Statements of Operations
-Three months ended March 31, 2005 and
March 31, 2004 (Unaudited) 4
Consolidated Statements of Cash Flows
-Three months ended March 31, 2005 and
March 31, 2004 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION 15
SIGNATURES 16
CERTIFICATIONS 19-21
2
ITEM #1 FINANCIAL STATEMENTS PART I - FINANCIAL INFORMATION
OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2005 2004
------------- -------------
ASSETS
Current Assets:
Cash $127,622 $101,738
Accounts receivable (net of allowance for
doubtful accounts of approximately $210,000
and $175,000, respectively) 4,083,999 5,632,209
Costs on uncompleted projects applicable
to future billings 812,850 879,200
Inventory 234,344 227,463
Current portion of deferred tax asset 45,500 45,500
Prepaid expenses and other current assets, net 377,437 531,500
----------- ----------
Total Current Assets 5,681,752 7,417,610
Property and equipment, net 3,613,951 3,415,731
Deferred tax asset 1,398,078 1,378,878
Other assets 28,849 28,849
----------- ----------
Total Assets $10,722,630 $12,241,068
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,250,955 $2,533,373
Billings in excess of costs and estimated
profit on uncompleted projects 575,433 1,096,475
Accrued expenses and other current liabilities 418,774 245,057
Current portion of long-term debt 505,389 775,671
----------- -----------
Total Current Liabilities 2,750,551 4,650,576
Long-term debt, net of current portion 2,310,415 2,210,913
Note payable to bank under line of credit 2,686,973 2,380,375
---------- -----------
Total Liabilities 7,747,939 9,241,864
---------- -----------
Shareholders' Equity:
Common stock, par value $.01 per share; authorized
20,000,000 shares; 11,725,370 and 11,697,707
shares issued and outstanding as of March 31,
2005 and December 31, 2004, respectively 117,254 116,976
Additional paid-in capital 6,846,815 6,842,942
Accumulated deficit (3,992,960) (3,960,714)
Accumulated other comprehensive income 3,582 -
----------- -----------
Total Shareholders' Equity 2,974,691 2,999,204
----------- -----------
Total Liabilities and Shareholders' Equity $10,722,630 $12,241,068
=========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
ITEM #1 FINANCIAL STATEMENTS PART I - FINANCIAL INFORMATION
OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
March 31, March 31,
2005 2004
---------- ----------
Project revenue $4,865,202 $3,262,062
Project costs 3,523,489 2,167,776
----------- ----------
Gross margin 1,341,713 1,094,286
----------- ----------
Operating expenses:
Payroll expense and related payroll taxes
and benefits 569,873 627,708
Office Expense 124,181 120,150
Occupancy 120,395 98,108
Business Insurance 94,750 66,285
Professional Services 89,539 104,877
Telephone 38,869 39,669
Equipment Expenses
Fuel 131,705 94,854
Insurance 44,994 29,343
Depreciation 121,643 121,351
Repairs & Maintenance 125,405 101,065
Operating Leases 68,233 36,253
Other Equipment Expenses 20,683 5,770
Equipment Utilization Credit (366,278) (314,584)
Other expenses 141,406 68,224
---------- ----------
1,325,398 1,199,073
---------- ----------
Operating income (loss) 16,315 (104,787)
---------- ----------
Other income and (expense):
Interest expense (71,235) (42,103)
Other, net 1,174 (8)
--------- ----------
(70,061) (42,111)
---------- ----------
Net loss before income taxes (53,746) (146,898)
Income tax benefit 21,500 52,000
--------- -----------
Net loss $(32,246) $(94,898)
========= ===========
Earnings per common share:
Basic and diluted $(0.003) $(0.008)
Weighted average shares outstanding:
Basic 11,713,690 12,419,305
Diluted 11,713,690 12,419,305
The accompanying notes are an integral part of the consolidated financial
statements.
4
ITEM #1 FINANCIAL STATEMENTS PART I - FINANCIAL INFORMATION
OP-TECH ENVIRONMENTAL SERVICES, INC. AND WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
March 31, March 31,
2005 2004
----------- ----------
Operating activities:
Net loss $(32,246) $(94,898)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Bad debt expense 13,535 1,875
Depreciation and amortization 130,443 136,075
Provision for deferred income taxes (21,500) (52,000)
(Increase) decrease in operating assets and
increase (decrease) in operating liabilities:
Accounts receivable 1,534,675 533,300
Costs on uncompleted projects applicable to
future billings 66,350 5,910
Billings and estimated profit in excess of
costs on uncompleted contracts (521,042) (72,139)
Prepaid expenses, inventory and other assets 147,182 32,086
Accounts payable and accrued expenses (1,108,701) (405,500)
----------- ----------
Net cash provided by operating activities 208,696 84,709
----------- ----------
Investing activities:
Purchase of property and equipment (258,823) (409,595)
----------- ----------
Net cash used in investing activities (258,823) (409,595)
----------- ----------
Financing activities:
Proceeds from issuance of common stock 4,151 333
Purchase of common stock - (250,000)
Proceeds from note payable to bank and current
and long-term borrowings, net of financing costs 2,075,457 2,525,203
Principal payments on current and
long-term borrowings (2,003,597)(2,008,723)
----------- ----------
Net cash provided by financing activities 76,011 266,813
----------- ----------
Increase (decrease) in cash 25,884 (58,073)
Cash at beginning of period 101,738 58,073
----------- ---------
Cash at end of period $127,622 $-
=========== =========
Non-cash item
Equipment purchased through bank and other
financing sources $69,840 $-
The accompanying notes are an integral part of the consolidated financial
statements.
5
PART I - FINANCIAL INFORMATION
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form 10-Q
to make applicable and take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, the Company. This 10-Q, press releases
issued by the Company, and certain information provided periodically in
writing and orally by the Company's designated officers and agents contain
statements which constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The words expect, believe, goal, plan, intend,
estimate, and similar expressions and variations thereof used are intended to
specifically identify forward-looking statements. Where any such forward-
looking statement includes a statement of the assumptions or basis underlying
such forward-looking statement, the Company cautions that, while it believes
such assumptions or basis to be reasonable and makes them in good faith,
assumed facts or basis almost always vary from actual results, and the
differences between assumed facts or basis and actual results can be material,
depending on the circumstances. Where, in any forward-looking statement, the
Company, or its management, expresses an expectation or belief as to future
results, such expectation or belief is expressed in good faith and believed to
have a reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished.
6
OP-TECH ENVIRONMENTAL SERVICES, INC.
AND WHOLLY-OWNED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, quarterly results include
all adjustments (consisting of only normal recurring adjustments) that the
Company considers necessary for a fair presentation of such information for
interim periods.
The unaudited financial statements include the accounts of the Company and its
two wholly-owned subsidiaries; OP-TECH Environmental Services, Ltd, an
inactive Canadian company, and OP-TECH AVIX, Inc. All material intercompany
transactions and balances have been eliminated in consolidation.
The balance sheet at December 31, 2004 has been derived from the audited
balance sheet included in the Company's annual report on Form 10-K for the
year ended December 31, 2004.
2. Comprehensive Income
The components of comprehensive income (loss) were as follows:
March 31, 2005 March 31, 2004
Net income (loss) $ (32,246) $ (94,898)
Other comprehensive income (loss):
Change in fair value of cash flow hedge
Net of income tax of $2,300 in 2005 3,582 -
---------- -----------
Comprehensive income (loss) $ (28,664) $ (94,898)
========== ==========
7
3. Revenue Recognition
The timing of revenues is dependent on the Company's backlog, contract awards,
and the performance requirements of each contract. The Company's revenues are
also affected by the timing of its clients planned remediation work as well as
the timing of unplanned emergency spills. Historically, planned remediation
work generally increases during the third and fourth quarters. Although the
Company believes that the historical trend in quarterly revenues for the third
and fourth quarters of each year are generally higher than the first and
second quarters, there can be no assurance that this will occur in future
periods. Accordingly, quarterly or other interim results should not be
considered indicative of results to be expected for any quarter or for the
full year.
4. Related Party Transactions
The Company purchases subcontract labor services from St. Lawrence Industrial
Services, Inc., which is owned by a director of the Company. The costs for
these services amounted to approximately $209,000 and $133,000 for the three
months ended March 31, 2005 and 2004, respectively.
5. Earnings per Share
Basic earnings per share are computed by dividing net income by the weighted
average shares outstanding. Diluted earnings per share includes the
potentially dilutive effect of common stock equivalents, which include
outstanding options under the Company's Stock Option Plan and warrants that
were issued to a financial advisor in May 2002 to purchase 480,000 shares of
common stock at $0.066 per share, expiring in May 2007.
6. Stock Based Compensation
The Company applies APB Opinion 25 and related interpretations in accounting
for its stock option plan. Accordingly no compensation cost was recognized
for non-qualified stock options issued. Had compensation cost for these
options been determined based on their fair value at the grant date consistent
with the method proscribed under Financial Accounting Standards Board ("FASB")
Statement No. 123 "Accounting For Stock-Based Compensation", the Company's net
income (loss) and per share amounts reported for the quarters ended March 31,
2005 and 2004 would not be materially different. The Company does not intend
to adopt the fair value accounting for stock based compensation in accordance
with FASB Statement No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure, an Amendment of FASB Statement No. 123".
On January 26, 2005 the Company issued options to purchase 369,000 shares at
$0.40 per share.
In February 2005 holders of options to purchase common stock at $.15 per share
exercised those options resulting in the issuance of 27,663 shares of common
stock.
7. Income Taxes
The Company has recognized a tax benefit in the quarter ended March 31, 2005
as the benefit is expected to be realized during the current year.
8
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005 the Company had cash of $127,622 compared to $101,738 at
December 31, 2004. The Company voluntarily applies all available cash in the
Company's operating account to pay down the Company's note payable to bank
under the line of credit.
At March 31, 2005, the Company had working capital of $2,931,201 compared to
$2,767,034 at December 31, 2004, with a current ratio of 2.07 to 1 at March
31, 2005 and 1.60 to 1 at December 31, 2004.
For the three months ended March 31, 2005, the Company's net cash provided by
operations was $208,696 compared to net cash provided by operations of $84,709
during the three months ended March 31, 2004. The cash provided by operations
for the three months ended March 31, 2005 was primarily a result of a net
collection of accounts receivable, partially offset by a paydown of accounts
payable.
The Company's net cash used in investing activities of $258,823 during the
first three months of the year was attributable to the purchase of various
field equipment.
The Company's net cash provided by financing activities was $76,011, which was
primarily due to the net proceeds from the Company's long-term debt as a
result of the financing of the cash used in investing activities.
As of March 31, 2005, the Company had a loan agreement that provided for
borrowings up to $2,900,000 on a revolving basis, collateralized by all
accounts receivable, inventory and equipment now owned or acquired later. The
loan is payable on September 30, 2006. The loan bears interest at a rate of
prime plus .50 percent, is subject to certain restrictive financial covenants,
and is subject to default if there is a material adverse change in the
financial or economic condition of the Company. As of March 31, 2005,
borrowing against the revolving loan aggregated $2,692,855.
During the first quarter of 2005, all principal payments on the Company's debt
were made within payment terms.
The Company expects, based on its operating results and the continued
availability of its line of credit, that it will be able to meet obligations
as they come due.
9
RESULTS OF OPERATIONS
PROJECT REVENUE
The Company's project revenue for the first quarter of 2005 increased 49% to
$4,865,202 from $3,262,062 for the first quarter of 2004.
When comparing the first three months of 2005 to the same period in 2004, the
increase in project revenue is due primarily to $475,000 of revenue recognized
from a spill response project on the Delaware River near Philadelphia as well
as an overall project volume increase aided by the creation and continued
development of the sales department.
PROJECT COSTS AND GROSS MARGIN
Project costs for the first quarter of 2005 increased 63% to $3,523,489 from
$2,167,776 for the same period in 2004. Project costs as a percentage of
revenues were 72% and 66% for the three months ended March 31, 2005 and 2004,
respectively. Gross margin for the first quarter of 2005 decreased to 28%
from 34% for the same period in 2004.
Both project revenue and project costs increased. The decrease in the gross
margin is due to the performance of several large jobs which typically produce
a lower gross margin than the Company earns for small and medium size
projects. In addition, higher prices paid for fuel and steel drums in the
first quarter have slightly eroded the margin for projects performed for
certain customers that have fixed contractual billing rates.
OPERATING EXPENSES
Operating expenses for the quarter ended March 31, 2005 increased 11% to
$1,325,398 from $1,199,073 for the same period in 2004. Operating expenses as
a percentage of revenues decreased to 27% for the quarter ended March 31, 2005
from 37% in the same period in 2004.
When comparing the first quarter of 2005 to 2004, the overall increase in
operating expenses is due primarily to an increase in equipment-related
expenses. Equipment expense, net of the utilization credit that is charged to
project cost, increased $72,000. The majority of this increase related to the
increase in fuel costs as well as an increase in repairs and maintenance
expense.
Included in other expenses for the quarter ended March 31, 2005 is $55,000
accrued for an amount owed to New York State which resulted from a New York
State sales and use tax audit performed in March and April, 2005. The amount
owed is primarily related to use tax not remitted to out-of-state vendors on
purchases made during the audit period of March 1, 2002 through February 28,
2005. As of the date of this report, management has instituted use tax
reporting controls to timely remit the correct amount of use tax owed.
10
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2005 increased 69% to
$71,235 from $42,103 for the same period in 2004. This increase is due to
both an increase in the interest rates paid on the Company's floating-rate
debt as well as an increase in the principal balances owed.
NET LOSS BEFORE INCOME TAXES
Due to the factors discussed above, net loss before income taxes amounted to
$53,746 for the three months ended March 31, 2005 compared to $146,898 for the
same period in 2004.
INCOME TAX BENEFIT
The Company recorded an income tax benefit of $21,500 for the quarter ended
March 31, 2005 compared to $52,000 for the same quarter in 2004.
NET LOSS
Net loss for the quarter ended March 31, 2005 and 2004 was $32,246 or $.003
per share basic and diluted, and $94,898, or $.008 per share basic and
diluted, respectively.
11
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has identified the following critical accounting policies that
affect the Company's more significant judgments and estimates used in the
preparation of the Company's consolidated financial statements. The
preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company's management to make estimates and judgments that affect
the reported amounts of assets and liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities. On an on-going
basis, management evaluates those estimates, including those related to assets
held for sale, revenue recognition, valuation allowances on deferred tax
assets, allowance for doubtful accounts and contingencies and litigation. The
Company states these accounting policies in the notes to the consolidated
financial statements and in relevant sections in this discussion and analysis.
These estimates are based on the information that is currently available to
the Company and on various other assumptions that management believes to be
reasonable under the circumstances. Actual results could vary from those
estimates.
The Company believes that the following critical accounting policies affect
significant judgments and estimates used in the preparation of its
consolidated financial statements:
Contracts are predominately short-term in nature (less than three months) and
revenue is recognized as costs are incurred and billed. Income on long-term
fixed-priced contracts greater than three months is recognized on the
percentage-of-completion method. Project costs are generally billed in the
month they are incurred and are shown as current assets. Revenues recognized
in excess of amounts billed are recorded as an asset. In the event interim
billings exceed costs and estimated profit, the net amount of deferred revenue
is shown as a current liability. Estimated losses are recorded in full when
identified.
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments, which
results in bad debt expense. Management determines the adequacy of this
allowance by continually evaluating individual customer receivables,
considering the customer's financial condition, credit history and current
economic conditions. If the financial condition of customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
The Company maintains a valuation allowance for deferred tax assets to reduce
these assets to their realizable amounts. Recognition of these amounts and
the adjustment of the corresponding allowance is dependent on the generation
of taxable income in current and future years. As circumstances change with
respect to managements expectations of future taxable income, the valuation
allowance is adjusted.
12
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
There were no material changes in the Company's market risk or market risk
strategies during the quarter ended March 31, 2005.
13
Item 4. - Controls and Procedures
(a) Disclosure Controls and Procedures.
As of the end of the period covering this Form 10-Q, we evaluated the
effectiveness of the design and operation of our "disclosure controls and
procedures". OP-TECH conducted this evaluation under the supervision and with
the participation of management, including our Chief Executive Officer and
Chief Financial Officer.
(i) Definition of Disclosure Controls and Procedures.
Disclosure controls and procedures are controls and other procedures that are
designed with the objective of ensuring that information required to be
disclosed in our periodic reports filed under the Exchange Act, such as this
report, is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. As defined by the SEC, such
disclosure controls and procedures are also designed with the objective of
ensuring that such information is accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer,
in such a manner as to allow timely disclosure decisions.
(ii) Limitations on the Effectiveness of Disclosure Controls and Procedures
and Internal Controls.
OP-TECH recognizes that a system of disclosure controls and procedures (as
well as a system of internal controls), no matter how well conceived and
operated, cannot provide absolute assurance that the objectives of the system
are met. Further, the design of such a system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented in a number of ways. Because of the inherent limitations in a
cost-effective control system, system failures may occur and not be detected.
However, the Chief Executive Officer and Chief Financial Officer believe that
our system of disclosure controls and procedures provides reasonable assurance
of achieving their objectives.
(iii) Conclusions with Respect to Our Evaluation of Disclosure Controls and
Procedures.
Our Chief Executive Officer and Chief Financial Officer have concluded, based
on the evaluation of these controls and procedures, that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to OP-TECH required to be included in OP-TECH's periodic
SEC filings.
(b) Changes in Internal Controls.
There have been no changes in OP-TECH's internal controls over financial
reporting that could significantly affect these controls subsequent to the
date of their evaluation.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 20: January 25, 2005 - Item 2.03, Creation of a Direct Financial
Obligation.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OP-TECH Environmental Services, Inc.
(Registrant)
Date: May 12, 2005 /s/ Christopher J. Polimino
Christopher J. Polimino
President and Chief Executive Officer
/s/ Douglas R. Lee
Douglas R. Lee
Treasurer and Chief Financial Officer
16
EXHIBIT 20 - REPORTS ON FORM 8-K
Item 2.03, Creation of a Direct Financial Obligation
On January 25, 2005 the Company entered into financing agreements (the
"Agreements") with a new financial institution ("Primary Lender").
The Agreements include a Line of Credit note which provides for borrowings up
to $2,900,000 to be used to provide working capital and expires on September
30, 2006, unless renewed by the lender. Interest will be charged at a rate
ranging from prime plus .50% to prime minus .50%, adjusted annually based upon
the minimum fixed charge coverage ratio (EBITDA (earnings before interest
expense, income tax expense, depreciation and amortization) minus dividends
paid minus unfunded capital expenditures divided by current maturities of
long-term debt and leases plus interest expense) as calculated in the previous
year-end audited financial statements, beginning in 2005 using the calculation
from the December 31, 2004 financial statements, as follows:
Fixed Charge Coverage Ratio Interest Rate
>/= 1.05 - 1.24 Prime + .50%
>/= 1.25 - 1.39 Prime
>/= 1.40 Prime - .50%
The Agreements also include a Line of Credit agreement which provides for
borrowings up to $250,000 to be used to provide equipment financing. Advances
on the Equipment Line of Credit may be made until September 30, 2005 (the
"Conversion Date"). Advances on the Equipment Line of Credit are limited to a
maximum of 90% of the purchase price of titled vehicles and 80% of the
purchase price of non-titled vehicles. Interest will be accrued and paid at a
rate of prime plus .50% until the Conversion Date and at a rate of prime plus
..75% after the conversion date. The outstanding principal balance on the
Conversion Date shall be repaid in equal installments of principal and
interest based upon a seven (7) year amortization period.
The Agreements also include a $2,087,240 Term Loan agreement which is due in
monthly principal installment payments of $24,848 plus interest at a rate of
prime plus .75%, hedged by an Interest Rate Swap Transaction.
On January 25, 2005, the Company entered into an Interest Rate Swap
Transaction with its Primary Lender to hedge against rising interest rates on
the floating rate Term Loan debt. The liability being hedged is the
variability in cash flows related to fluctuations in interest payments made.
The fluctuation in interest rates exposes the Company to the risk of higher
interest expense. The purpose of the Swap Agreement is to limit the Company's
exposure to rising interest rates during the term of the floating rate Term
Loan noted above.
Based on Managements analysis of historical interest rates and current market
conditions, Management believes that interest rates will rise over the next
seven (7) years. Management entered into this Swap Agreement to guard the
Company from rising interest rates.
The interest rate swap hedge instrument has a fixed rate of 7.05%, matures on
February 1, 2012, and has a notional amount that remains equal to the
principal balance on the Term Loan. The notional amount on January 25, 2005
is $2,087,240. The difference between the prime rate, as periodically
adjusted, and the Interest Rate Swap rate of 7.05% will be settled monthly.
17
The Agreements are collateralized by all present and future right, title and
interest in all of the personal property of the Company including, but not
limited to, all accounts receivable, inventory and equipment. This collateral
has a carrying value at December 31, 2004 as follows:
Accounts Receivable, net of Allowance for Doubtful Accounts $5,632,209
Inventory 227,464
Equipment, net of Accumulated Depreciation 2,368,032
---------
$8,227,705
==========
The Agreements also include certain financial covenants including a minimum
fixed charge coverage ratio, a tangible net worth ratio, a debt to net worth
ratio, and a consecutive quarterly net loss provision; cross-collateralization
provisions; and a material adverse change clause which permits the financial
institution to call its obligation if the Company fails to comply with
covenants, as defined, or in the event of a material adverse change in the
Company's business. Management does not anticipate any adverse changes in the
next twelve months, however, there can be no assurances.
18
EXHIBIT 31 - CERTIFICATIONS
Certification of Chief Executive Officer
I, Christopher J. Polimino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OP-TECH Environmental
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15e and 15d-15e) and internal control over financial
reporting (as defined in Exchange Act Rules 13a - 15f and 15d - 15f) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonable likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls
over financial reporting.
Date: May 12, 2005
/s/ Christopher J. Polimino
Christopher J. Polimino
President and Chief Executive Officer
19
Certification of Chief Financial Officer
I, Douglas R. Lee, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OP-TECH Environmental
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15e and 15d-15e) and internal control over financial
reporting (as defined in Exchange Act Rules 13a - 15f and 15d - 15f) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonable likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls
over financial reporting.
Date: May 12, 2005
/s/ Douglas R. Lee
Douglas R. Lee
Chief Financial Officer and Treasurer
20
EXHIBIT 32 - SECTION 1350 CERTIFICATIONS
Certifications Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
I, Christopher J. Polimino, President and Chief Executive Officer of OP-TECH
Environmental Services, Inc. (the "Company"), certify, to the best of my
knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended
March 31, 2005 (the "Report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C.
78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: May 12, 2005
/s/ Christopher J. Polimino
Christopher J. Polimino
President and Chief Executive Officer
I, Douglas R. Lee, Chief Financial Officer and Treasurer of OP-TECH
Environmental Services, Inc. (the "Company"), certify, to the best of my
knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended
March 31, 2005 (the "Report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C.
78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: May 12, 2005
/s/ Douglas R. Lee
Douglas R. Lee
Chief Financial Officer and Treasurer
21