_________________________________________________________________
UNITED STATES
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 September 30, 1999
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of October 31, 1999.
11,603,963
_________________________________________________________________
INDEX
OP-TECH Environmental Services, Inc. and Subsidiary
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets
-September 30, 1999 (Unaudited) and
December 31, 1998 (Audited).............................3
Consolidated Statements of Operation
-Three months ended September 30, 1999 and
September 30, 1998 (Unaudited)
-Nine months ended September 30, 1999 and
September 30, 1998 (Unaudited)............................4
Consolidated Statements of Cash Flows
-Nine months ended September 30, 1999 and
September 30, 1998 (Unaudited).. .........................5
Notes to Consolidated Financial Statements (Unaudited)......6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................8
PART II. OTHER INFORMATION ..................................12
SIGNATURES..........................................13
2
ITEM #1 FINANCIAL STATEMENTS PART I - FINANCIAL INFORMATION
OP-TECH ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
1999 1998
ASSETS
Current Assets:
Cash and cash equivalents $ 7,692 $ 122,106
Accounts receivable (net of allowance
for doubtful accounts):
Unaffiliated parties 3,259,336 2,847,001
Affiliated parties 410,944 109,190
Total accounts receivable (net) 3,670,280 2,956,191
Costs on uncompleted projects
applicable to future billings 648,754 289,768
Prepaid expenses and other assets 390,842 316,882
Total Current Assets 4,717,568 3,684,947
Property and equipment, net 1,244,545 1,199,635
Assets held for sale 1,605,427 1,605,427
Other assets 86,147 142,744
Total Assets $7,653,687 $6,632,753
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ 101,704 $ 45,085
Accounts payable:
Unaffiliated parties 1,940,389 1,350,204
Affiliated parties 9,553 51,184
Total accounts payable 1,949,942 1,401,388
Billings in excess of costs and
estimated profit on uncompleted
projects 475,618 569,393
Accrued expenses and other
liabilities 330,360 298,018
Current portion of long-term debt
and obligations under capital leases 537,820 351,751
Note payable to bank 1,619,814
Total Current Liabilities 5,015,258 2,665,635
Note payable to bank 739,531
Long-term debt and obligations
under capital leases 409,743 435,278
Shareholders' Equity:
Common stock, par value $.01 per
share; authorized 20,000,000
shares; 11,603,963 shares
outstanding as of September 30,
1999 and December 31, 1998 116,040 116,040
Additional paid-in capital 7,787,152 7,787,152
Accumulated deficit (5,674,506) (5,110,883)
Total Shareholders' Equity 2,228,686 2,792,309
Total Liabilities and
Shareholders' Equity $7,653,687 $6,632,753
The accompanying notes are an integral part of the financial statements.
3
ITEM #1 FINANCIAL STATEMENTS PART I - FINANCIAL INFORMATION
OP-TECH ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
Revenues:
Project billings
and services $3,746,540 $3,025,542 $9,748,846 $7,531,604
Project costs 3,075,201 2,181,844 7,564,035 5,302,814
Gross margin 671,339 843,698 2,184,811 2,228,790
Selling, general
and administrative
expenses 925,568 571,995 2,586,706 1,594,016
Operating (loss)
income (254,229) 271,703 (401,895) 634,774
Other income and
expense:
Interest expense 58,527 31,930 126,458 83,977
Other expense
(income), net 21,691 (175) 35,270 (13,229)
Total other income
and expense 80,218 31,755 161,728 70,748
NET (LOSS) INCOME $ (334,447) $ 239,948 $ (563,623) $ 564,026
Earnings (loss)
per common share
- basic and
diluted $ (0.03) $ 0.02 $ (0.05) $ 0.05
Weighted average
shares outstanding 11,603,963 11,565,379 11,603,963 11,565,379
The accompanying notes are an integral part of the financial statements.
4
ITEM #1 FINANCIAL STATEMENTS PART I - FINANCIAL INFORMATION
OP-TECH ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
September 30, September 30,
1999 1998
Operating activities:
Net (loss) income $ (563,623) $ 564,026
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities:
Depreciation and amortization 223,540 121,032
(Gain) loss on sale of equipment 134
(Increase) decrease in operating
assets and increase (decrease) in
operating liabilities:
Accounts receivable (714,089) (411,120)
Costs on uncompleted projects
applicable to future billings (358,986) (56,495)
Billings and estimated profit in
excess of costs of uncompleted
contracts (93,775) 223,686
Prepaid expenses and other assets 21,956 (139,857)
Accounts payable and accrued expenses 580,896 (195,101)
Net cash (used in) provided by operating
activities (903,947) 106,171
Investing activities:
Proceeds from sale of equipment 30,531
Purchase of property and equipment (65,885) (178,965)
Net cash used in investing activities (35,354) (178,965)
Financing activities:
Cash overdraft 56,619 (173,110)
Proceeds from notes payable to banks
and current and long-term borrowings,
net of financing costs 4,090,139 3,377,142
Principal payments on current and
long-term borrowings (3,321,871) (3,194,417)
Net cash provided by financing activties 824,887 9,615
Decrease in cash and cash equivalents (114,414) (63,179)
Cash and cash equivalents at beginning
of period 122,106 81,517
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 7,692 $ 18,338
Non-cash items:
Financed equipment $ 256,818 $ 309,989
Issuance of common stock 0 28,651
The accompanying notes are an integral part of the 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.
Item 1. Financial Statements.
OP-TECH ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles 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 generally accepted accounting principles 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 subsidiary. All material intercompany transactions
and balances have been eliminated in consolidation.
2. 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.
6
3. The Company purchased technical services, consulting services
and rented certain office space from a shareholder and its affiliates.
The costs for these services amounted to $263,190 and $253,619 for
the nine months ended September 30, 1999 and 1998 respectively.
Additionally, the Company provided $929,883 and $208,546 of
remediation, sub-contract support and project services to a
shareholder and its affiliates for the nine months ended September
30, 1999 and 1998 respectively. Services provided were at
competitive rates, which were bid on a project-by-project basis.
4. Earnings per Share
Basic earnings per share is computed based on the weighted
average shares outstanding. Diluted earnings per share is computed
based on the weighted average shares outstanding adjusted for the
dilutive effect of the assumed exercise of stock options and stock
warrants during the year. Due to the loss incurred by the Company
during the first nine months of 1999, the impact of the outstanding
options and warrants is anti-dilutive and, therefore, their impact
has not been included in the diluted earnings per share disclosure.
7
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash
equivalents of $7,692 as compared to $122,106 at December 31, 1998.
At September 30, 1999, the Company had a working capital
deficit of $297,690 compared to a surplus of $1,019,312 at December
31, 1998, with a current ratio of .94 to 1 at September 30, 1999 and
1.38 to 1 at December 31, 1998. The decrease in working capital is
primarily due to the Company's revolving loan being classified as a
current liability as of September 30, 1999 and as a long-term
liability as of December 31, 1998.
For the nine months ended September 30, 1999, the Company's net
cash used in operations was $903,947 compared to net cash provided
by operations of $106,171 during the nine months ended September 30,
1998. The increase in cash used in operating activities during the
first nine months of 1999 was attributable to several factors.
First, the Company was completing the implementation of its
expansion and growth plan during the first quarter of 1999, and
outlayed cash of approximately $95,000 related to the opening of its
new office in Buffalo, NY. Second, the Company had cash outlays of
approximately $80,000 preparing for an emergency spill contract that
covers 75% of the land area in New York State. The contract, which
the Company had anticipated would begin in July of 1999, did not
begin until October 17, 1999 as a result of delays in the New York
State budget being approved. Third, the Company incurred losses of
$170,000 on several tank installation projects. As a result of
these losses, the Company is no longer pursuing tank installation
work and is in the process of selling its tank installation
equipment. The result of this sale is not anticipated to have a
significant impact on the Company's overall financial results.
Finally, the Company had approximately $272,000 in losses on several
asbestos projects and an industrial cleaning project during the
third quarter of 1999. These losses were the result of incomplete
bidding practices and poor project management. The Company has
since refined its approach to asbestos projects, is revising its
estimating practices, and has started an education program for
branch managers in better project execution. The Company has also
replaced several project managers with more experienced personnel
from other firms.
The Company's net cash used in investing activities of $35,354
during the first nine months of the year was attributable to the
purchase of a wet/dry vacuum, six gas meters, several negative air
machines, a pressure washer, and computer and office equipment and
to the sale of several pieces of equipment.
Cash provided by financing activities was $824,887, which was
primarily due to the items discussed above and the timing of
paydowns and cash advances on the Company's line of credit.
8
As of September 30, 1999, the Company had a loan agreement that
provided for borrowings up to $2,000,000 on a revolving basis,
collateralized by all accounts receivable, inventory and equipment
now owned or acquired later. The loan is subject to renewal at the
bank's option and is payable on April 30, 2000, and is guaranteed by
a shareholder for an amount not to exceed $500,000. In addition,
effective August 13, 1999, the Company obtained an additional loan
for $150,000 which is payable on November 13, 1999.
During the first nine months of 1999, all principal payments on
the Company's debt were made timely.
Management believes that the Company will have adequate cash
flow to meet its obligations during the next twelve months.
Effective January 1, 1999, the Company sold its wholly-owned
subsidiary, St. Lawrence Industrial Services, Inc., to a director of
the Company. The sale did not have a significant impact on the
Company's financial statements.
YEAR 2000
The Company recognizes the need to evaluate its operations so
they will not be adversely impacted by year 2000 software failures.
The company is addressing the risk to the availability and integrity
of financial systems and the reliability of operational systems.
The Company is in the process of reviewing its major suppliers for
year 2000 compliance. In 1998, the company upgraded its financial
systems to comply with year 2000 requirements and has also
undertaken an upgrade of its headquarters information and decision
support systems, which was completed in October of 1999. The
Company has spent approximately $40,000 to date on these system
upgrades.
THE MASSENA PORT FACILITY
The Massena Port Facility is a former oil tank farm, which is
located on the St. Lawrence River in Massena, NY. The property is
improved with several buildings and a deep water docking facility
for large ocean going ships. The property is still a viable
location for a petroleum distribution facility and could still
function as one pending upgrades of tanks and diking systems to
current state and federal guidelines. Any improvements such as
these would be treated as a capital expense in the year they were
incurred. Currently, the Company uses the property for its Massena
branch office headquarters, equipment storage and its Aqueous
Treatment/360 Facility. A wholly-owned subsidiary of a shareholder
currently has an option to purchase the Massena Port Facility for
$2,000,000.
In 1996, the Company reclassified the Massena Property to
Assets Held for Sale. The property at that time had a carrying
value of approximately $1.9 million. Due to the significance of the
carrying value of the property, in March of 1997, management
obtained an independent third party appraisal to support its
carrying value. Such appraisal included an evaluation of similar
sales plus a pending transaction at the time. The appraisal also
included an evaluation of the time frame during which a sale would
be expected. Based upon the appraisal report and an estimate of the
costs to sell, management recognized an impairment of $308,377 on
the property during 1997. As of September 30, 1999, the carrying
value of the property is $1,605,427.
9
RESULTS OF OPERATIONS
BILLINGS
The Company's project billings for the third quarter of 1999
increased 24% to $3,746,540 from $3,025,542 for the third quarter of
1998. For the nine month period ended September 30, 1999, the
Company's billings have increased 29% to $9,748,846 from $7,531,604
for the same period in 1998. Revenues from underground storage tank
removals and installations increased approximately $1,200,000, which
was primarily attributable to the Federal Government deadline to
remove all underground storage tanks ("USTs") that are not in
compliance with the EPA guidelines for USTs. Billings from asbestos
projects increased approximately $1,400,000 while billings from
remediation projects increased approximately $900,000. The increase
in these service lines was offset by a decrease of approximately
$2,000,000 in the transportation and disposal and industrial
cleaning service lines combined. The decrease was due to a major
emergency spill contract and a large industrial cleaning contract
the Company had during 1998. During the nine months ended September
30, 1999, the Company's branches that were opened during the last
half of 1998 generated revenue of approximately $2,000,000, all of
which was core service revenue resulting from competitive bidding in
both the public and private markets. The Company's Braintree, MA,
and Albany, NY, branches also showed an increase of approximately
$2,800,000 in revenue when compared to the first nine months of
1998.
PROJECT COSTS AND GROSS MARGIN
Project costs for the third quarter of 1999 increased 41% to
$3,075,201 from $2,181,844 for the same period in 1998. Project
costs as a percentage of revenues were 82% and 72% for the three
months ended September 30, 1999 and 1998 respectively. Gross margin
for the third quarter of 1999 decreased to 18% from 28% for the same
period in 1998.
For the nine month period ended September 30, 1999, project
costs increased 43% to $7,564,035 from $5,302,814 for the nine
months ended September 30, 1998. Project costs as a percentage of
revenues were 78% and 70% for the nine month periods ended September
30, 1999 and 1998, respectively. Gross margin for the nine months
ended September 30, 1999 decreased to 22% from 30% for the same
period in 1998.
As a result of increased billings, project costs also
increased. The decrease in gross margin was due to the significant
losses taken on several tank installation and asbestos projects
during the third quarter of 1999. As a result of these projects,
the Company had approximately $640,000 in cash outlays and lost
gross margin dollars. Most of this loss was absorbed by the Company
during the third quarter of 1999. Also, in 1998, the Company had a
major emergency cleanup contract that was performed on a time and
materials basis, which produced a higher gross margin than bid work.
10
SELLING, GENERAL, ADMINISTRATIVE AND INTEREST EXPENSES
Selling, general and administrative expenses ("SG&A") for the
quarter ended September 30, 1999 increased 62% to $925,568 from
$571,995 for the same period in 1998. For the nine months period
ended September 30, 1999, SG&A increased 62% to $2,586,706 from
$1,594,016 for the same period in 1998. SG&A as a percentage of
revenues increased to 25% versus 19% for the three months ended
September 30, 1999. For the nine month period ended September 30,
1999, SG&A increased to 27% of revenues versus 21% for the same
period in 1998. The increase in SG&A was due to the Company's
branch expansion. During the last half of 1998 and during 1999, the
Company opened branches in Edison, NJ, Buffalo, NY, and Rochester,
NY and significantly increased the operations of the Athens, PA
branch. The Company also increased the number of administrative
personnel in order to accommodate the higher volume of billing,
payroll, and other administrative functions created by the new
branches. In addition, depreciation expense for the nine months
ended September 30, 1999, was $102,508 higher than for the first
nine months of 1998. Approximately $50,000 of this increase was
related to the purchase of eleven utility vehicles, a backhoe, and
other equipment, valued at approximately $297,000, subsequent to
September 30, 1998.
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 1999
increased 51% to $126,458 from $83,977 for the same period in 1998.
As of September 30, 1999, the Company has $2,000,000 in total
available borrowings as compared to total available borrowings of
$1,000,000 as of September 30, 1998. The increase in interest
expense was primarily due to the increase in the Company's average
outstanding balance on the revolving loan. The increase was also
attributable to the financing of new equipment.
NET (LOSS) INCOME
The net loss for the three months ended September 30, 1999 was
($334,447), or ($.03) per share (basic and diluted), compared to a
net income of $239,948, or $.02 per share (basic and diluted), for
the same period in 1998. For the nine months ended September 30,
1999, the net loss was ($563,623), or ($.05) per share (basic and
diluted), compared to a net income of $564,026, or $.05 per share
(basic and diluted), for the same period in 1998.
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 September 30, 1999.
11
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.
No reports on Form 8-K were filed during the quarter
ended September 30, 1999.
12
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: November 15, 1999 /s/ John R. Loveland
John R. Loveland,
Chief Executive Officer
Date: November 15, 1999 /s/ Christopher J. Polimino
Christopher J. Polimino,
Executive Vice President
and Chief Accounting Officer
13
