U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission File Number: 1-13852
CET ENVIRONMENTAL SERVICES, INC.
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(Exact name of small business issuer as specified in its charter)
California 33-0285964
- - ------------------------------- ---------------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
14761 Bentley Circle, Tustin, CA 92680
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(Address of principal executive offices including zip code)
(714) 505-1800
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 No___
As of May 13, 1996, 5,066,537 shares of common stock, no par value per share,
were outstanding.
Transitional Small Business Disclosure Format (check one): Yes___ No X
PART I.
ITEM 1. FINANCIAL STATEMENTS
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
1996 1995
(UNAUDITED) (UNAUDITED)
CURRENT ASSETS:
Cash $ 610,116 $ 476,655
Accounts receivable, less allowance
for doubtful accounts of $172,358
in 1996 and $135,404 in 1995 8,907,008 13,356,823
Contracts in process 6,898,025 6,791,490
Prepaid expenses and other
current assets 923,673 1,198,241
----------- -----------
Total Current Assets 17,338,822 21,823,209
EQUIPMENT AND IMPROVEMENTS, NET 4,323,019 3,983,902
OTHER ASSETS 525,040 478,740
----------- -----------
$22,186,881 $26,285,851
=========== ===========
The accompanying notes are an integral part of these financial statements.
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
1996 1995
(UNAUDITED) (UNAUDITED)
CURRENT LIABILITIES:
Note payable - line of credit $ 865,079 $ 2,424,836
Subordinated notes payable 471,800 682,425
Accounts payable 3,344,861 7,857,824
Accrued expenses 3,945,531 2,358,983
Current portion of long-term
debt and capital lease obligations 399,219 535,751
----------- -----------
Total current liabilities 9,026,490 13,859,819
DEFERRED INCOME TAXES 37,282 37,282
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS 1,580,561 1,356,650
COMMITMENTS AND CONTINGENT LIABILITIES -- --
STOCKHOLDERS' EQUITY:
Common stock (no par value) -
authorized 20,000,000 shares;
issued and outstanding 5,066,537
shares in 1996 and 1995 6,165,977 6,165,977
Paid-in capital 666,474 645,175
Retained earnings 4,710,097 4,220,948
----------- -----------
Total stockholders' equity 11,542,548 11,032,100
----------- -----------
$22,186,881 $26,285,851
=========== ===========
The accompanying notes are an integral part of these financial statements.
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31,
1996 1995
(UNAUDITED) (UNAUDITED)
PROJECT REVENUE $12,995,880 $ 6,665,529
PROJECT COSTS:
Direct 8,924,989 4,662,458
Indirect 1,572,545 775,973
----------- -----------
10,497,534 5,438,431
----------- -----------
Gross profit 2,498,346 1,227,098
----------- -----------
OTHER OPERATING EXPENSES (INCOME)
Selling 811,936 359,140
General and administrative 805,973 332,331
Amortization of excess of
acquired net assets in excess of
cost -- (92,028)
----------- -----------
1,617,909 599,443
----------- -----------
Operating income 880,437 627,655
----------- -----------
OTHER INCOME (EXPENSE), NET (65,288) (52,445)
Income before taxes on income 815,149 575,210
Taxes on income 326,000 8,628
----------- -----------
NET INCOME $ 489,149 $ 566,582
=========== ===========
Weighted average number of shares
outstanding 5,072,993 3,677,044
=========== ===========
Net income per common share $ 0.10
===========
PRO FORMA INFORMATION <NOTE 4>
Historical income before taxes on
income $ 575,210
Pro forma income taxes 193,262
-----------
Pro forma net income $ 381,948
===========
Pro forma net income per common share $ 0.10
===========
The accompanying notes are an integral part of these financial statements.
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
1996 1995
(UNAUDITED) (UNAUDITED)
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 489,149 $ 566,582
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 267,059 77,502
Amortization of acquired net
assets in excess of cost -- (92,028)
Provision for bad debts 36,954 22,563
Employee stock option plan 21,299 --
Changes in operating assets and
liabilities:
Decrease (Increase) in accounts
receivable 4,412,861 (1,150,384)
Increase in contracts in process (106,535) (843,164)
Decrease (Increase) in prepaid
expenses and other assets 228,268 (249,302)
(Decrease) Increase in accounts
payable and accrued expenses (2,926,415) 1,216,252
----------- -----------
Net cash provided by (used in)
operating activities 2,422,640 (451,979)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (398,757) (491,837)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subordinated
and long-term debt -- 750,000
Payments on long-term debt and capital
lease obligations (120,040) (46,072)
Borrowings from related party trust
fund -- 150,000
Proceeds from credit line loan,
net of payments (1,559,757) 176,488
Payments on loans from shareholders (210,625) --
Distributions paid -- (13,500)
----------- -----------
Net cash used by financing
activities (1,890,422) 1,016,916
----------- -----------
INCREASE IN CASH 133,461 73,100
Cash at the beginning of period 476,655 431,955
----------- -----------
Cash at end of period $ 610,116 $ 505,055
=========== ===========
The accompanying notes are an integral part of these financial statements.
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
1996 1995
(UNAUDITED) (UNAUDITED)
Supplemental disclosures to cash
flow information:
Cash paid during the period:
Interest $ 101,699 $ 61,478
=========== ===========
Income taxes $ 605,445 $ --
=========== ===========
Capital lease and equipment financing
obligations incurred $ 207,419 $ 76,625
=========== ===========
The accompanying notes are an integral part of these financial statements.
CET ENVIRONMENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 (UNAUDITED)
NOTE 1. The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for condensed
interim financial statements and with the instructions to Form 10-QSB and Item
310(b) of Regulation S-B. 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, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three
months ended March 31, 1996 are not necessarily indicative of results that may
be expected for the year ending December 31, 1996.
NOTE 2. The Company maintains a $6,000,000 line of credit with Union Bank
which replaced the previous banking relationship with Comerica Bank.
NOTE 3. On July 20, 1995, the Company completed its initial public offering
of 1,380,000 shares of common stock at $5.00 per share. The net proceeds to
the Company after sales commissions and other offering-related costs was
approximately $5.8 million.
NOTE 4. The Pro Forma Statement of Income reflects the Company's operations
as if it were a "C" Corporation for the three months ended March 31, 1995.
The Company converted from an "S" Corporation to a "C" Corporation on June 15,
1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995
Project revenue for the first quarter of 1996 was $12,995,880, an increase of
95.0% or $6,330,351 from $6,665,529 for the first quarter of 1995 due to the
growth of the commercial business in all office locations. The composition
of revenues also changed between the first quarter of 1995 and the first
quarter of 1996. In the first quarter of 1995, 33.7% of total project revenue
or $2,244,083 was derived from one contract with the U. S. Environmental
Protection Agency. In the first quarter of 1996, the revenue from this
contract was $1,978,534 or 15.2% of total project revenue.
Gross profit increased 103.6% between the first quarter of 1995 and the first
quarter of 1996. The improvement in the gross profit margin reflects an
increase in commercial business where the Company is able to obtain higher
gross profit margins. The Company's goal is to achieve an equal distribution
of revenues from government contracts and commercial contracts which should
produce both a better continuity of revenues and increased margin after direct
costs. Net income was $489,149 for the first quarter of 1996, an increase of
28.1%, from $381,948 for the first quarter of 1995.
Selling expenses for the first quarter of 1996 increased by $452,796 from the
first quarter of 1995 due to additional sales professionals resulting from
management's commitment to a formal sales/bid and proposal staff. Selling
expense was 6.2% of project revenues for the first quarter of 1996 and was
5.4% of project revenue for the first quarter of 1995.
General and administrative expenses for the first quarter of 1996 increased
by $473,642 from the first quarter of 1995 primarily due to increases in
personnel and insurance costs. General and administrative expenses were 6.2%
of project revenues for the first quarter of 1996 and 5.0% of project revenues
for the first quarter of 1995.
Interest expense for the first quarter of 1996 increased $3,845 from the first
quarter of 1995. The increase is due primarily to borrowings from the
Company's line of credit and equipment loans.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which requires entities to calculate the fair value of stock
awards granted to employees. This statement provides entities with the option
of either electing to expense the fair value of employee stock-based
compensation or continuing to recognize compensation expense under existing
accounting pronouncements and to provide pro forma disclosures of net income
and, if presented, income per share, as if the above mentioned fair method of
accounting were used in determining compensation expense. Additionally, the
statement requires that all equity awards granted to nonemployees such as
suppliers of goods and services be recognized based on fair value. The
Company was required to adopt this statement during the first quarter of 1996
and has elected to account for employee stock compensation plans under the
existing accounting pronouncement, APB Opinion 25, "Accounting for Stock
Issued to Employees."
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company was in a strong financial condition with
working capital of $8,312,332 as compared to working capital of $7,963,390 as
of December 31, 1995. The increase was primarily due to the receipt of
approximately $5,810,000 in net proceeds from the Company's initial public
offering, which was closed during July 1995, which enabled the Company to
decrease the overall amount of debt outstanding.
A total amount of $210,625 of the remaining balance of $682,425 of the
subordinated notes payable outstanding at December 31, 1995 was paid off at
the March 1, 1996 maturity date. The remaining balance $ 471,800 was rolled
over into new notes due in one year with interest payable monthly at 10
percent.
In March 1996, the Company established a $6,000,000 revolving line of credit
with Union Bank which replaced the previous banking relationship with Comerica
Bank. The new line of credit provides more favorable accounts receivable
flexibility and, coupled with the increased borrowing capacity, is sufficient
to satisfy the Company's immediate working capital requirements.
On February 9, 1996, the SEC declared effective a registration statement on
Form SB-2, which the Company had previously filed, to register 402,537 shares
of common stock for sale by certain stockholders ("Selling Shareholders")
which shares have been "restricted securities" as defined in Rule 144 under
the Securities Act of 1933. None of the proceeds from the sale of the common
stock by the Selling Shareholders will be received by the Company.
Management believes that funds provided from operations and the short term
line of credit will be sufficient to fund the Company's immediate needs for
working capital. Management anticipates that capital expenditures in the
foreseeable future will be minimal and funded from working capital, and any
leases will be short term.
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
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CET ENVIRONMENTAL SERVICES, INC.
By:/s/ Steven H. Davis
Steven H. Davis
President
By:/s/ Keith J. Conti
Keith J. Conti
Chief Accounting Officer
Date: May 14, 1996
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- - ------- -----------------------------
27. FINANCIAL DATA SCHEDULE Filed herewith electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on pages 2 and 3 of the
Company's Form 10-QSB for the year to date, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 610,116
<SECURITIES> 0
<RECEIVABLES> 9,079,366
<ALLOWANCES> 172,358
<INVENTORY> 0
<CURRENT-ASSETS> 17,338,822
<PP&E> 4,323,019
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,186,881
<CURRENT-LIABILITIES> 9,026,490
<BONDS> 0
<COMMON> 6,165,977
0
0
<OTHER-SE> 5,376,571
<TOTAL-LIABILITY-AND-EQUITY> 22,186,881
<SALES> 12,995,880
<TOTAL-REVENUES> 12,995,880
<CGS> 10,497,534
<TOTAL-COSTS> 10,497,534
<OTHER-EXPENSES> 1,617,909
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 815,149
<INCOME-TAX> 326,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 489,149
<EPS-PRIMARY> .10
<EPS-DILUTED> 0
</TABLE>
