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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended: DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission File No. 1-13852
CET ENVIRONMENTAL SERVICES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
CALIFORNIA 33-0285964
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(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
14761 BENTLEY CIRCLE, TUSTIN, CALIFORNIA 92680
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(Address of Principal Executive Offices, Including Zip Code)
Issuer's telephone number, including area code: (714) 505-1800
Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK
Securities registered pursuant to Section 12(g) of the Act: NONE.
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 No
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As of March 25, 1996, 5,066,537 Shares of the Registrant's Common Stock were
outstanding. The aggregate market value of voting stock held by nonaffiliates
of the Registrant was approximately $16,100,000.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
State Issuer's revenues for its most recent fiscal year: $47,871,972
Documents incorporated by reference: NONE.
(PF61.ka)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
THE COMPANY
The Company was incorporated in February 1988 under the name "Thorne
Environmental, Inc." to conduct business in environmental consulting,
engineering, remediation and construction. The Company's initial growth
resulted from its successful performance of emergency response cleanup services
in certain western states and the Trust Territory of the Pacific Islands for the
U.S. Government. The Company has since developed a broad range of expertise in
non-proprietary technology-based environmental remediation and water treatment
techniques for both the public and private sectors throughout North and South
America and the Trust Territory of the Pacific Islands. The Company was
purchased by its existing majority shareholders in November 1991, and for the
last four years has engaged in a program of expansion through internal client
development and add-on contracts, the acquisition of personnel and assets in
desirable geographic locations, and the acquisition of smaller companies
involved with target growth technologies. The Company has built a large backlog
of government work through the award of several multi-year contracts with the
Department of Defense, Department of Energy and the Environmental Protection
Agency. The Company has achieved and maintains a balance between its commercial
and government sector business through an aggressive industrial marketing
strategy. To date, the Company has performed remediation services for both
public and private sector customers at more than 250 sites.
The Company's strategy has been to distinguish itself in the market by
providing full service environmental contracting, municipal and industrial water
and wastewater treatment, and emergency response services. Through several
major government contracts and a diversified commercial client base, the Company
provides turnkey waste management for a complete range of water, soil, and air
pollution issues. The Company's personnel have developed expertise in a broad
range of remediation techniques such as bioremediation, bioventing, vapor
extraction, gas/air sparging, low temperature thermal desorption, soil washing
and groundwater remediation systems. The Company also offers a broad range of
services in support of municipal drinking water and sewage treatment, military
base closures, defense industry conversions, and other operations with
significant environmental components. The Company also cleans, tests and
removes aboveground and underground storage. The Company believes it has gained
a solid reputation for promptly providing cost effective and innovative
remediation solutions.
The Company's corporate headquarters is located in Tustin, California, with
additional offices in Emeryville, California; Portland, Oregon; Edmonds,
Washington; Denver, Colorado; Phoenix, Arizona; Tucson, Arizona; St. Louis,
Missouri; Houston, Texas; New Orleans, Louisiana; Jackson, Mississippi; Mobile,
Alabama; Atlanta, Georgia; Kansas City, Missouri; and Sao Paulo, Brazil.
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In July 1995, the Company completed an initial public offering of 1,200,000
shares of its Common Stock, and in August 1995, sold an additional 180,000
shares pursuant to an over-allotment option. The net proceeds to the Company
from the public offering was approximately $5,800,000.
On November 10, 1995, the Company acquired all of the outstanding stock of
En-Tech, Inc., a Colorado corporation ("En-Tech"), doing business as
Environmental Technologies, Inc., in exchange for 35,769 shares of the Company's
Common Stock. En-Tech is engaged in the design, construction, and operation of
industrial wastewater and water treatment facilities, and provides services in
both the public and private sectors. En-Tech is based in Georgetown, Colorado,
and employs approximately 20 persons. En-Tech was merged into the Company
effective March 15, 1996.
Unless the context otherwise requires, the Company and En-Tech are referred
to collectively herein as the "Company."
THE ENVIRONMENTAL REMEDIATION INDUSTRY
Environmental Business International, Inc. ("EBI") estimates that the total
United States environmental services industry is currently generating revenues
in excess of $130 billion per year and that the remediation industry accounts
for over $9.3 billion per year. Driven largely by legislation passed during the
late 1970s and early 1980s in response to widespread public concern regarding
clean air and water, the environmental remediation services business has grown
rapidly during the past decade. The Company is involved primarily in the
remediation segment of the environmental services industry that is focused on
cleanup of existing environmental problems.
Arising in response to the 1980 CERCLA ("Superfund") legislation, the
remediation services business grew quickly. A study by the Waste Management and
Education Research and Educational Institute at the University of Tennessee,
Knoxville, has estimated the total cost of cleaning up America's worst hazardous
toxic waste sites as high as $750 billion in 1990 dollars. This revenue is
divided among six major regulation-driven sectors, including Superfund
(federally funded) programs, state-funded programs, federal facilities programs
(primarily Department of Energy and Department of Defense), UST removals,
private remediation programs and hazardous waste management facility corrective
actions. Federal facilities cleanup programs have become an increasingly
important sector of the business as a result of active military base and other
facilities closure. According to reports published in the Winter 1994 edition of
the industry journal GROUND WATER MONITORING AND REMEDIATION, the Department of
Defense spent approximately $1.6 billion and the Department of Energy spent
approximately $5.3 billion for environmental remediation in fiscal 1993.
The remediation business consists of three phases: site assessment,
remediation program design and the actual site remediation. The first phase is
largely investigative and can involve substantial chemical analysis to
understand the nature and extent of the problem. The design phase
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involves detailed engineering to develop the optimal solution for cleaning
the site. The third phase is the true implementation of the site remediation
plan and involves various on-site treatment procedures for contaminated
materials or the excavation and containment or off-site transportation of
toxic materials. The Company provides an extensive full-service offering in
all phases of contaminated site remediation.
Innovative on-site remediation technologies are in high demand to provide
an alternative to off-site disposal of hazardous waste. On-site technologies
such as bioremediation, bioventing, vapor extraction, gas/air sparging, low
temperature thermal desorption, chemical fixation and soil washing are gaining
wide-spread regulatory acceptance. The Company strives to utilize these
remediation techniques more efficiently than its competitors.
Responding to emergency spills or leaks of contaminants by petroleum
companies, by state or federal agencies or commercial treaters and haulers of
hazardous materials is another important segment of the environmental
remediation services industry. Emergency situations can involve the use of
various containment and treatment techniques. Providers of these services must
be able to handle these sorts of problems on a stand-by basis, due to public
concerns and publicity regarding hazardous material spills. The federal
government routinely contracts with private parties to maintain fast response
capabilities to deal with these sorts of problems.
ORGANIZATION OF THE COMPANY
The Company is organized by function, with most remediation projects
requiring a multi-disciplinary approach that involves more than one department.
For example, a major remediation system installation can require the
coordination of the Company's Construction (148 persons), Engineering (20
persons), Geology (19 persons), Finance (22 persons), Laboratory (3 persons),
Administration (50 persons), and Sales (24 persons) and Project Managers (37
persons). The Company utilizes the following resources to provide turnkey
environmental remediation services to its customers:
- Registered engineers, geologists and earth scientists for performing
investigations and remediation feasibility studies.
- In-house laboratory facilities for evaluating water treatment
techniques, numerous remedial technologies, monitoring ongoing
projects, and accelerating remediation.
- Engineers, earth scientists and construction managers to design
remediation systems from the conceptual stage through final design.
- A team of certified water treatment system operators to provide
design, construction, consultation and operation for municipal,
industrial, and mining wastewater treatment.
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- Specialized software to integrate geological, hydrogeological and
analytical data for modeling groundwater and contaminant plumes,
generating risk assessment maps and optimizing remediation system
design parameters.
- Manpower and equipment for performing site clearance such as removal
of structures and debris.
- Manpower and equipment for performing site preparation such as
excavation, grading, berming and hauling soil; removal of obstacles,
i.e., drums, transformers, USTs and piping; and dismantling ASTs.
- Manpower and equipment for erecting or installing remediation
equipment, support buildings and enclosures for remediation of
contaminated soil, water, sludge or sediment.
- Manpower and equipment for performing planned and emergency cleanups,
including:
- Lab packing and disposal of caustics, flammable materials, heavy
metals, polychlorinated biphenyls ("PCBs") and asbestos.
- Neutralization/detoxification.
- Waste minimization/recycling.
- Waste segregation and analysis of hazardous and non-hazardous
waste liquids, soils, sludges and sediments.
- Installation of liners and caps for waste disposal facilities.
- Facility decontamination using a variety of structural
decontamination technologies.
SERVICES AND PRODUCTS PROVIDED BY THE COMPANY
The Company provides full turnkey services for environmental remediation of
hazardous and toxic waste on a planned and emergency basis. By offering turnkey
services, the Company believes it enjoys a competitive advantage in soliciting
new customers, as well as in obtaining follow-on contracts that may be
tangential or unrelated to the original scope of work.
Customers contractually engage the Company to accomplish some or all of the
following tasks:
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- Phase I Site Assessments
- Site Characterizations
- Remedial Investigations/Feasibility Studies
- Interim Remedial Management Programs
- Health Risk Assessments
- Remedial Action Plans
- Remedial Design and Construction
- Underground Storage Tank Management and Removal
- Regulatory Agency Coordination and Maintenance
- Remediation System Operation and Maintenance
- Facility Decontamination, Demolition and Site Restoration
- Emergency Response Cleanup Services
REMEDIATION SERVICES. The Company believes it has a solid reputation for
responsiveness and technical excellence in providing turnkey remediation
services such as design, construction, operation and maintenance for a variety
of innovative technologies, including:
- Bioremediation/Bioventing
- Vapor Extraction
- Gas/Air Sparging
- Low Temperature Thermal Desorption
- Chemical Fixation
- Soil Washing
- Groundwater Remediation Systems
WATER AND WASTEWATER TREATMENT. The Company, through its EN-TECH division,
has gained a vast and comprehensive body of experience in performing the range
of both traditional and innovative water treatment system services. These
services range from laboratory treatability studies to construction management
and from conceptual design to operation and maintenance.
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The following treatment technologies are currently being used successfully by
Company personnel in the performance of municipal and industrial wastewater
treatment projects:
- Filtration - Ultraviolet treatment
- Chemical precipitation - Dissolved air
- Reverse osmosis - Recirculated air
- Ion exchange - Activated sludge
BIOREMEDIATION AND BIOVENTING. Bioremediation has become a preferred
remediation option because it is relatively inexpensive to implement compared
with other treatment technologies and is generally 25 to 50 percent of the cost
of off-site disposal. More importantly, the contaminants are destroyed, thereby
eliminating future liability and providing an environmentally sound solution. A
type of bioremediation technique that can be designed as an IN SITU or EX SITU
treatment process is bioventing. Bioventing is the process of delivering oxygen
by forced air movement through contaminated unsaturated soils in order to
stimulate the aerobic biodegradation of the contaminants. Air flow can be
provided by either air injection or vacuum extraction. The process frequently
results in volatization of volatile organics and soil venting. With proper
design, the process is efficient and cost effective for the remediation of
petroleum hydrocarbon contamination. The Company was one of the first
organizations to apply bioventing technology in the western United States.
VAPOR EXTRACTION. Vapor extraction is an effective tool for the IN SITU
removal of liquid, residual and vapor phase volatile and some semi-volatile
organic compounds ("VOCs") from subsurface soils as well as liquid phase VOCs
floating on the groundwater. Vacuum extraction technology has been successfully
implemented at EPA Superfund sites nationwide. It involves the removal of VOC
vapors from subsurface soil by inducing a vacuum at an extraction well at the
points of maximum soil contamination through the use of vacuum pumps and
blowers. As the air flows through the soil void space, liquid hydrocarbons are
volatilized and the vapors are purged from the soils into the extraction wells
and fed into the treatment unit. The Company has successfully installed and
operated vapor extraction systems for the remediation of soil contaminated with
VOCs and was the first to receive a Various Location Permit from the South Coast
Air Quality Management District ("SCAQMD"), one of the nation's most stringent
air quality regulatory agency. The Various Location Permits obtained by the
Company provide substantial flexibility and cost savings since the permitting
process for its units has been completed.
GAS/AIR SPARGING. Gas/air sparging involves the injection of air or inert
(contaminant-free) gas under pressure into contaminated soils below the water
table. The injected gas forms air pockets that migrate horizontally and
vertically away from the injection well. The injected gas contacts contaminated
soils and groundwater, stripping the contaminants into the vapor phase. As
volatilized contaminants rise to the unsaturated zone, they are recovered using
a vapor extraction system. Using this combined technique, gas sparging can
effectively remediate VOCs in both soils and groundwater IN SITU. The Company
has effectively used gas/air sparging at a variety of sites
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as an alternative to groundwater extraction and treatment. Currently, the
Company is responsible for the design, installation, operation and
maintenance of a groundwater air sparging system which involves more than 100
dual-purpose wells to remediate a 40-acre petroleum hydrocarbon and
trichloroethene contamination plume at a former refinery site. The system is
anticipated to operate for five years.
HIGH TEMPERATURE THERMAL DESORPTION. High temperature thermal desorption
("HTTD") is a method in which soils and sludges contaminated with petroleum
hydrocarbons, pesticides and chlorinated solvents are heated. The volatilized
contaminants are then removed using air, steam or combustion gases. The Company
owns and operates an HTTD system that is permitted in Arizona and applications
for permits are underway in several other states. The Company's HTTD system is
constructed to effectively clean soils contaminated with gasoline, diesel fuel,
kerosene, jet fuels, motor oils, lubricating oils as well as hazardous
substances such as pesticides and chlorinated solvents. The HTTD system has a
variable feed rate of between 5 and 15 tons per hour depending on the type of
soil, contaminant concentration and the moisture content. HTTD has received
strong regulatory and public acceptance because quality assurance can be
maintained throughout the EX SITU treatment process.
CHEMICAL FIXATION. The chemical fixation process utilizes a two-part,
inorganic chemical system that reacts with polyvalent metal ions and selected
other waste components for treatment of inorganic hazardous waste. The process
is based on the reaction between sulfides, silicates and silicate setting agents
that respond in a controlled manner to produce a solid matrix. The advantages of
chemical fixation include a cost savings of one-third to one-fifth the cost of
excavation and off-site disposal, a favorable regulatory climate and the
capability of allowing soil impacted with heavy metals to remain on-site after
treatment or be disposed as non-hazardous waste. Chemical fixation is typically
applied to metal contaminated soil, sludge, ash, sandblast grit, autoshredder
fluff and baghouse dust. The Company has developed a large data base of
reactions as a function of contaminants and soil types. This data base is used
to optimize the additives for a particular situation. Using this data base and
samples of the contaminated soil, the process can be tried on a bench-scale
basis to empirically demonstrate its effectiveness. The Company tailors the
process to the contaminants and soils involved with the specific site. A major
advantage of the Company's approach is that the Company develops specific
applications to suit different soil types and contamination.
SOIL WASHING. Heavy metals may also be extracted from the soil through the
process of soil washing. Soil washing consists of physically transferring
contaminants in soil into a solvent waste stream for subsequent treatment. The
resulting non-contaminated soil can then be returned to its original location
without further treatment. Soil washing is coupled with water treatment designed
to generate water of an acceptable quality for reuse or discharge. Depending on
the nature of the contaminants removed, water treatment may be accomplished
using gravity separation, coagulation and precipitation, adsorption or any other
appropriate means. The Company provides soil washing for a range of organic
contaminants, including PCBs, pentachlorophenol ("PCP"), pesticides and fuel oil
waste.
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GROUNDWATER REMEDIATION SYSTEMS. Remediation of contaminated groundwater
is complex and often difficult to resolve. Most groundwater contamination is the
result of improper discharges or uncontrolled releases to soil which have, over
a period of time, migrated into underlying groundwater. The treatment processes
for remediating groundwater contamination fall into two general categories: EX
SITU and IN SITU treatment methods.
The Company has used the following ex situ treatment methods:
FREE-PRODUCT EXTRACTION. Petroleum product floating on the surface of
groundwater is extracted from the groundwater to limit the migration of a free
product plume. Two primary methods are used to extract the product from the
subsurface: total fluid pumps and selective oil skimmers. Total fluid pumps are
effective when the thickness of free product is large. The total fluid pumps
"pull" the contamination toward the extraction wells' zones of influence. The
free product (and potentially groundwater) are then pumped to a settling tank
and the free product is separated and recycled. When the thickness of floating
product is not very deep, selective oil skimmers are generally used. Floats in
the skimmers allow the pumps to seek the interface between the water and the
free product by discerning the two specific gravities, thereby allowing pumps to
remove only the floating product.
ACTIVATED CARBON ADSORPTION. Activated carbon adsorption of organic
waste materials from groundwater is one of the most commonly applied groundwater
treatment processes. Organic compounds dissolved in water can diffuse into the
pores of the activated carbon and adsorb onto the carbon surface. The affinity
of each organic molecule for carbon varies depending upon the molecular weight
and solubility in water. Organics that are less soluble and have greater
molecular weight tend to have a greater affinity for carbon and can thus be
removed at lower cost. Activated carbon adsorption is most effective when
concentrations are low and inorganic compounds are minimal.
AIR STRIPPING. A commonly employed process for removing dissolved
VOCs from groundwater is air stripping, in which the groundwater is brought into
contact with a counter-current of air. The process is normally performed using a
packed column, with the groundwater sprayed on the top of the packing, through
which it percolates and is contacted by an up-flow of air. The air containing
VOCs is then decontaminated using an activated carbon operating in the vapor
phase. Generally, less activated carbon is consumed using air stripping with
vapor-phase carbon as compared with liquid-phase carbon for the same quantity of
groundwater. This is due to the higher concentrations of organic material in the
air stripper vapor and the greater affinity for VOCs in the vapor phase as
compared with VOCs in the liquid phase.
BIOREACTORS. Surface bioreactors are another form of treatment of
water contaminated with organic chemicals. The design is frequently site
specific due to the sensitivity of treatment response to site-specific
properties, physical-chemical interactions and microbial consortium. Bioreactors
consist of two basic designs: suspended growth and fix film. The microorganisms
are suspended in the liquid in the suspended-growth bioreactors and are on or
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within a solid medium in the fix-film bioreactors. Suspended-growth
bioreactors can be designed as batch, plug flow or continuously-stirred
reactor. Fix-film bioreactors can be designed as fixed beds, fluidized beds
or rotating media.
ADVANCED OXIDATION TECHNOLOGIES (ULTRAVIOLET AND OZONE). In some
cases, partial or complete destruction of dissolved organics or chlorinated
solvents can be obtained with chemical or photochemical oxidation. There are a
number of variations of this process which utilize ozone, hydrogen peroxide or
chlorine dioxide as oxidants, often using ultraviolet light (UV) as the
catalyst. UV and ozone have been especially effective for destruction of
chlorinated organics. Depending upon process conditions, there is complete
conversion of organics to carbon dioxide and water or partial conversion to a
combination of ketones, alcohols and carboxylic acids, which can then be treated
with biological processing.
A greater emphasis is currently being placed on the use and
development of IN SITU methods for treating groundwater due to their
effectiveness and lower costs. The Company has used the following IN SITU
methods:
- Gas/Air Sparging
- Bioremediation
- Physical/Chemical Treatment
Sites impacted by multiple contaminants often require a combination of
remedial technologies to maximize treatment effectiveness. A significant
percentage of remediation costs can be attributed to system operation and
maintenance over the course of the project. Therefore, a greater initial capital
investment on additional remediation technology can often result in overall
project savings due to the shortened treatment times. The Company does not
promote a single technology, but recommends the remediation methods that provide
the most cost-effective and timely mitigation.
FACILITY CONSTRUCTION, MAINTENANCE AND CLOSURE SERVICES. In addition to
remediation of soil and groundwater, the Company provides services related to
facilities that have contaminated surrounding areas or have the potential to do
so. The Company has completed a variety of projects related to construction,
maintenance and closure/site restoration of facilities including:
- Mechanical Maintenance and Construction
- Facility Decontamination and Demolition
- Waste Area Closures
- Drum Removals
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- Lab Packing and Waste Services
- Excavation, Transport and Disposal of Waste
MECHANICAL MAINTENANCE AND CONSTRUCTION. The Company provides general
mechanical contracting services for facilities, including the repair,
construction and removal of:
- Process Piping
- Aviation Fuel Systems
- USTs/ASTs
- Floating Roofs
- Boiler and Pressure Systems
FACILITY DECONTAMINATION AND DEMOLITION. The Company has completed several
large-scale demolitions for a variety of facilities including:
- Specialty Chemical Plants
- Large Wood Treating Facilities
- Multiple Plating Shops
- PCB-Contaminated Bunkers
- Metal and Oil Recycling Facilities
- Asphalt Plants
WASTE AREA CLOSURES. The Company has demonstrated skill in the capping and
closure of various facilities, ranging from soil and compacted clay covers to
composite geosynthetic lining systems. The Company has demonstrated skills in
the stabilization and solidification of waste materials and sludges.
DRUM REMOVALS. The Company has extensive experience in remediating sites
impacted by buried and abandoned drums. Experience has been gained at more than
100 sites, including more than 60 federal Superfund sites, and has involved:
- Locating
- Excavation
- Recontainerization
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- Hazardous categorization
- Waste segregation
- Chemical neutralization
- Transport and disposal to CERCLA-approved facilities
LAB PACKING AND WASTE SERVICES. The Company offers comprehensive waste
management services from simple waste stream identification and disposal
services to waste tracking and regulatory support to unknown materials
characterization and designation. Typical projects include:
- Lab pack waste inventory and disposal
- Waste stream sampling, profiling and disposal
- Qualitative characterization of unknown compounds
- Regulatory support for waste determinations
EXCAVATION, TRANSPORT AND DISPOSAL OF WASTE. The Company's excavation
activities have ranged from the removal of a few cubic yards associated with
small spills to treating 1.4 million cubic yards of contaminated soil in an EX
SITU bioventing system. Excavations have been performed for:
- Contaminated soil removal and off-site transportation and
disposal
- UST removals
- Drum removals
- Trenching
- On-site low temperature thermal desorption
- On-site chemical fixation/solidification
- EX SITU bioremediation and bioventing
- Landfarming
- EX SITU vapor extraction
The Company's excavation expertise is complemented by its experience installing
liners and capping of sites. The Company has installed high density polyethylene
liners and barriers and
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capped sites to prevent migration of contaminants. The Company's construction
superintendents and equipment operators work closely with project engineers
and geologists to provide maximum effectiveness in removing contaminated soil.
OPERATION AND MAINTENANCE SERVICES. Although a treatment process may be
properly designed and constructed, successful remediation depends upon system
operation and maintenance by trained, experienced staff. The Company provides
not only the equipment, but services it on a long-term basis to see the
remediation program through to completion. Most of the Company's remediation
systems are installed with remote monitoring equipment so that the system can be
efficiently monitored from a central location with operating information
obtained and stored for later reference. The systems are serviced by in-house
technicians and engineers. To control costs, visits to the site are made to
perform preventive maintenance and to take quality assurance samples.
Integral to successful system operation and maintenance of treatment
systems, and ultimately the success of remediation, is system optimization which
provides an engineering analysis of the system's performance. The Company
provides periodic evaluations of system operating parameters to ensure the
original design is performing to specification. If the monitoring results do not
indicate that the desired result is occurring, the system is further analyzed to
determine the problem and decide how to maximize performance.
CUSTOMERS
The Company's customers include federal, state and local government
agencies and commercial enterprises including Fortune 500 companies. The
following is a representative list of the Company's past and present customers:
PETROLEUM INDUSTRY
Texaco Occidental Petroleum
Unocal LASMO Oil and Gas, Inc.
Tesoro Enron Oil Trading and Transportation
Ultramar Exxon
FINANCIAL
First Interstate Bank Bank of America
Seafirst Bank Bank One
Wells Fargo Bank Principal Financial Group
CHEMICAL, MANUFACTURING, DISTRIBUTING
Monsanto Chemical Fleming
Georgia Pacific Pacific Gas & Electric
Hewlett-Packard Certified Grocers of California, Ltd.
GOVERNMENT (FEDERAL AND STATE)
U.S. EPA Oregon Department of Environmental Quality
U.S. Corps of Engineers Colorado Department of Health
U.S. Navy Missouri Department of Natural Resources
U.S. Dept. of Energy Arizona Department of Environmental Quality
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The Company is the prime contractor for a six-year, $75 million Fixed Rate,
Indefinite Quantity, Cost Plus Fixed Fee, Cost Plus Award Fee contract for the
EPA to provide emergency response cleanup services ("ERCS") in EPA Regions IX
and X, which include California, Hawaii, Nevada, Arizona, Washington, Oregon,
Idaho, Alaska, Guam, American Samoa, Saipan and the Trust Territory of the
Pacific Islands. Under the contract, which began March 1, 1991, the Company has
received over 120 delivery orders to provide ERCS for oil, petroleum and
hazardous substance releases in accordance with the provisions of the federal
Clean Water Act ("CWA"), RCRA and Superfund legislation. The Company intends to
bid for renewal of this contract which expires in the first quarter of 1997 and
is considering bidding on contracts in other EPA regions. Based upon ratings and
correspondence from the EPA, the Company believes it has developed a solid
reputation and relationship with the EPA which could increase the likelihood of
successfully obtaining one or more of the EPA's regional contracts to be awarded
in the next couple of years. There is no assurance that this contract will be
renewed. The Company also provides similar emergency response services to other
governmental and commercial clients under various contracts on an as-needed
basis.
The Company is also a prime contractor on a three year, $25 million
Pre-placed Remedial Action Contract with the Corps of Engineers, Omaha District.
Under this contract, the Company is providing remedial actions at hazardous
waste sites within the District's Midwest region. Delivery orders are in the
planning stages.
The Company is a subcontractor on a $50 million Pre-placed Remedial Action
Contract with the Corps of Engineers, Sacramento District. Under this contract,
the Company is providing remedial actions at hazardous waste sites within the
District's South Pacific Division, primarily California, Nevada and Utah. Five
delivery orders are in the planning stages and include the construction of a
treatment cell, excavating and transporting soil from various locations to the
treatment cell, and lead-based paint abatement, removal and disposal of
transformers and repair of concrete surfaces damaged by previous remedial
action.
Individual contracts with customers typically have an award value of
$25,000 to $100,000 for the performance of specific tasks, and from $125,000 to
$7,000,000 for comprehensive turnkey services. Geographically, the Company
provides services to customers throughout the western United States and the
Trust Territory of the Pacific Islands. The Company has recently opened offices
in the Gulf Coast region of the United States to expand its service offerings to
current customers in this region such as Bank of America, Boeing Support
Services, Chevron USA, Henkel Corporation, Mobil Oil Corporation and
Ultramar, Inc., and to new customers.
The Company has Master Service Agreements with LASMO Oil and Gas, Inc.,
Texaco, Unocal, Tesoro, Monsanto, Bank of America and Seafirst Bank as well as
emergency response contracts with the State of Arizona, State of Missouri, Ryder
Trucks, Yellow Freight Lines, Burlington Northern Railroad, Exxon, U.S. Coast
Guard, United Parcel Service, Norfolk and Southern Railroad, Simplot and Cenex.
Master Service Agreements and the emergency response contracts set forth the
terms and conditions pursuant to which the Company would provide
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services in the future when needed or requested pursuant to a purchase order
or request for services.
BUSINESS STRATEGY
The Company plans to capitalize on the following trends:
- On-site remediation is increasing, especially at large sites. Public
opposition and regulatory resistance to incineration and landfilling
will enhance the prospects for bioremediation, vapor extraction,
thermal desorption and other innovative on-site technologies.
- Privatization of drinking water and sewage treatment systems in the
U.S. and internationally will provide a large and expanding
opportunity throughout the decade and well into the next century.
- Remediation at active industrial sites under the RCRA corrective
action program represents an important private sector segment in an
early stage of development.
- Most government contracts require a defined percentage of the work be
subcontracted to small business enterprise companies ("SBEs"),
typically between 20 and 60 percent. The Company qualifies as an SBE
under Standard Industrial Classification Code 8744, Environmental
Remediation Services, by having less than 500 employees.
The Company's strategy to capitalize on these trends emphasizes the
following key elements:
DIVERSIFICATION THROUGH CONTROLLED EXPANSION. The Company seeks growth and
diversification by providing its services to additional industries and expansion
into new geographical territories including Latin America. Management has
identified several areas of interest for expansion including additional work in
the areas of emergency response service to the U.S. Government, mining facility
decommissioning and reclamation, and privatization of water treatment facilities
throughout North and South America. For these reasons, the Company has recently
opened offices in Kansas City, Missouri, Tucson, Arizona and Sao Paulo, Brazil.
MIXTURE OF PUBLIC AND PRIVATE SECTOR WORK. The Company seeks to maintain a
mix of government projects and private sector projects. Government projects can
offer the advantage of multi-year scope of work but generally have lower gross
margins. Private sector projects tend to have shorter time frames but offer
opportunities for greater gross margins. Management plans to continue developing
business opportunities in both sectors and would like to keep a balance between
EPA and non-EPA work. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.")
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EMPHASIS ON RECURRING REVENUE. The Company seeks to expand its base of
recurring revenue sources in order to mitigate the cyclical nature of the
environmental remediation services industry. The Company is on appropriate
approved-contractor lists with its major governmental customers and largest
corporate customers whereby the Company is invited to bid on future
environmental engineering/remediation projects. Inclusion on such lists is a
result of the Company's having completed prior contracts to the satisfaction of
these customers.
COMMITMENT TO QUALITY. Management believes that the long-term success of
the Company depends upon its reputation with customers and government regulators
for performing top quality, turnkey environmental remediation services. The
Company must continue to distinguish itself with private and government sector
customers by maintaining competence in various state-of-the-art technology based
remediation alternatives, by efficient and understandable documentation on
accounting systems, and by efficient and effective job site performance.
PROFESSIONAL MARKETING AND MANAGEMENT. The Company is committed to
maintaining a professional marketing staff that understands the needs and
requirements of its various customers, that can accurately evaluate requests for
proposals and invitations to bid and that responds in a timely manner with high
quality comprehensive formal proposals. It is critical that contractors
understand the intricacies of the detailed and time-consuming process associated
with bidding and managing projects for the federal government. The Company
efficiently utilizes non-proprietary specialized software for job cost
accounting and governmental contracts which help with both bidding and managing
projects while keeping administrative costs down.
STABLE WORK FORCE. The Company strives to maintain a stable work force of
skilled professionals (engineers, etc.), professional managers (executive and
supervisory levels), dedicated administrative personnel (accounting, contract
administration, etc.), as well as trained and experienced laborers
(transportation, construction and remediation). The Company seeks to attract and
retain such employees by providing fair compensation, cash bonus incentives and
a dynamic work environment. The Company maintains a comprehensive program for
providing health and safety training related to hazardous material exposure, in
full compliance with the highest standards set forth by federal and other
applicable regulatory agencies. Management believes that the Company's stable
and experienced work force has contributed, and will continue to contribute, to
the Company's excellent safety record, which reduces insurance costs and should
make doing business with the Company more inviting for current and prospective
customers.
OWNERSHIP OF EQUIPMENT. The Company attempts to purchase specialized
emergency response and remediation equipment, thereby providing the Company with
key business advantages, including reduced operating costs, greater flexibility
in scheduling the use of resources (equipment, personnel, etc.) and greater
reliability in meeting contractually defined performance timetables and
deadlines. The Company typically rents non-specialized equipment such as
backhoes and excavators.
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MARKETING
The Company has a dedicated marketing and sales staff of approximately 20
people, including sales professionals, proposal writers, technical editors, and
project estimators. The sales process typically involves mailing of literature,
follow-up communications, meetings, requests for proposals, project scoping,
estimating and submittal of the proposal for specific projects. A significant
portion of new business is derived from current customers seeking services for
additional sites and new needs. The Company has developed ongoing relations with
a broad range of customers in various industries and geographical sites.
The Company has segregated its marketing efforts for the public and private
sectors. The public sector proposal effort is managed by a Government Marketing
Specialist with assistance from the Marketing Services Group. The Company
pursues federal contracts which range from $5 to $70 million annually, as a
prime contractor, especially if they are designated for SBEs. On larger
opportunities, unless the Company is uniquely qualified such as with EPA work,
the Company establishes teaming agreements with large engineering/construction
firms that provide specific contract percentages if awarded.
The marketing organization for the commercial business is primarily
decentralized. Sales leads and customer relationships are developed on a
regional basis by the Regional Manager, Project Manager or Business Development
Manager.
The Company's contracts are primarily obtained through competitive bidding
and through negotiations with long-standing customers. The Company is typically
invited to bid on projects undertaken by recurring customers who maintain
pre-qualified contractor bid lists. Bidding activity, backlog and revenue
resulting from the award of contracts to the Company vary significantly from
period to period.
COMPETITION
The environmental industry in the United States has developed rapidly since
the passage of RCRA in 1976 and is highly competitive. The industry today is
highly fragmented, with numerous small and medium sized companies serving niche
markets according to geography, industry, media (air, water, soil, etc.) and
technological specialization (bioremediation, etc.).
Because the Company operates in many segments of the environmental
industry, the Company can adapt to changes in the marketplace by allocating its
resources to the industry segment in which the business opportunities exist.
Management believes that the keys to success in the industry today are service
and capabilities. The Company will continue to focus on the application of new
technology as well as innovative applications of existing technologies to solve
complex problems. The Company also plans to continue providing quality
environmental remediation services to its customers.
Management believes that the primary factors of competition are price,
technological capabilities, reputation for quality and safety, relevant
experience, availability of machinery and
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equipment, financial strength, knowledge of local markets and conditions and
estimating abilities. Management believes that the Company has competed and
will continue to compete favorably on the basis of the foregoing factors.
However, many of the Company's competitors have financial resources and
facilities far greater than that of the Company. Additionally, at any time
and from time to time the Company may face competition from new entrants into
the industry. The Company may also face competition from technologies that
may be introduced in the future, and there can be no assurance that the
Company will be successful in meeting the challenges which will be posed by
its competition in the future.
GOVERNMENT REGULATION
The Company is presently regulated by a myriad of federal, state and
local environmental and transportation regulatory agencies, including but not
limited to the EPA, which regulates the generation and disposal of hazardous
waste; the U.S. Department of Labor, which sets safety and training standards
for workers; the U.S. Department of Transportation, which regulates
transportation of hazardous materials and hazardous waste; and similar state
and local agencies.
The need for governments and business to comply with the complex scheme
of federal and state regulations governing their operations is the market in
which the Company operates, although the Company itself must operate under
and in conformance with applicable federal and state laws and regulations.
The Company attempts to pass the cost of compliance on to the customer
through the prices paid by customers for the Company's services.
ENVIRONMENTAL LAWS
Most environmental laws and regulations are promulgated by the U.S.
Congress and federal departments and agencies. For example, the National
Environmental Policy Act compels federal governmental agencies at all levels to
make decisions with environmental consequences in mind. The EPA and the U.S.
Occupational Safety and Health Administration ("OSHA") are responsible for
protecting and monitoring certain natural resources (such as air, water and
soil) and working conditions. These laws and regulations establish a
comprehensive regulatory framework consisting of permitting processes, systems
construction, monitoring and reporting procedures, and administrative, civil and
criminal enforcement mechanisms.
Many of the federal laws and regulations contemplate enforcement by state
agencies and adoption by the states of similar environmental laws and
regulations which must meet minimum federal requirements. In areas of
environmental law where federal regulation is silent, the states may adopt their
own environmental laws. As an example, some states monitor the transfer of real
estate with potential environmental contamination by requiring the preparation
of environmental assessments and disclosures of the findings of such assessments
or the issuance of pre-transfer disclosure statements. Some states have also
provided an environmental audit privilege whereby land owners undertaking such
audits and disclosing the findings to the state will not be penalized for
violations if they clean up the property.
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Local governments such as counties and municipalities may also enact and
enforce environmental laws that address local concerns which may be more
stringent than applicable state laws.
The Company's ability to assist customers to comply with these
environmental laws and regulations forms the basis for the current and future
environmental consulting, engineering, remediation, laboratory and other
services provided by the Company. Enforcement of such laws and regulations also
leads to business for the Company. For example, the EPA has promulgated
regulations that require the registration and upgrading of USTs that contain
liquid petroleum or hazardous substances, and the reporting of leaks and cleanup
of contamination from those USTs. The UST regulations have in turn been adopted
by the states in forms no less strict than the federal regulations. To encourage
compliance with UST regulations, some states have passed laws that provide for
the creation of a fund to cover the costs of cleanup but condition access to the
fund or the amount of the costs for which an owner can obtain fund reimbursement
on the proper registration of the USTs or compliance with other regulatory
requirements.
The federal laws and regulations described below constitute the major
actions that have caused industry growth in the consulting, engineering and
remediation and analytical laboratory service industries.
COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF
1980 ("CERCLA"). This legislation, as amended by the Superfund Amendments and
Reauthorization Act of 1986, established the Superfund program to identify and
clean up existing contaminated hazardous waste sites and other releases of
hazardous substances into the environment. CERCLA in most instances imposes
strict joint and several liability on certain hazardous substance generators,
transporters and disposal facility owners and operators for the costs of removal
or remedial action, other necessary response costs, damages for injury,
destruction or loss of natural resources, and the costs of any health effects
study. While federal funds of approximately $8.5 billion exist to pay for the
cleanup, CERCLA gives the EPA authorization to compel private parties to
undertake the cleanup and enforcement incentives including the imposition of
penalties and punitive damages.
RESOURCE CONSERVATION AND RECOVERY ACT OF 1976. RCRA, as amended by the
Hazardous and Solid Waste Amendments of 1984 ("HSWA"), provides for the
regulation of hazardous waste from the time of generation to its ultimate
disposal as well as the regulation of persons engaged in generation, handling,
transportation, treatment, storage and disposal of hazardous waste.
Hydrocarbon-based hazardous waste as defined by RCRA can include leaked/spilled
crude oil, refined oil, gasoline, kerosene and industrial solvents (used, for
example, in the transportation and manufacturing industries). Hazardous waste
also includes the by-products of virtually any business, including the
production of plastics, pesticides, fertilizers, soaps, medicines, explosives,
etc. These wastes can contain heavy metals, organic chemicals, dioxin, PCBs,
cyanide and other toxic substances.
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The RCRA scheme includes both a permitting and a manifest tracking
system for hazardous waste. With few exceptions, facilities that treat, store
or dispose of hazardous waste must obtain an RCRA permit from the EPA or
appropriate state agency authorized by the EPA to administer the RCRA program
and must comply with certain operating, financial responsibility and
disclosure requirements. Although most states have obtained authority to
administer this program within their respective states, the applicable state
regulations must be at least as stringent as the federal standards and the
federal government retains enforcement authority. Regulations have been
issued pursuant to RCRA in the following areas, among others: permitting
assistance, remediation of environmental contamination associated with USTs,
municipal solid waste disposal and land disposal of hazardous waste. HSWA has
increased the number of hazardous waste generators subject to RCRA. HSWA also
imposes land disposal restrictions on certain listed hazardous wastes which
do not meet specified treatment standards, prescribes more stringent
standards for hazardous waste disposal sites, sets standards for USTs, and
provides for corrective action at or near sites of waste management units.
EPA UST REGULATIONS. The EPA has mandated that USTs that are used to store
gasoline, diesel fuel, fuel oil, waste oil and hazardous materials be registered
with the appropriate state regulatory agency, designed or upgraded to meet
construction and operational standards and monitored to insure against
groundwater and soil contamination from leaking. Owners and operators are
further required to report leaks and undertake appropriate corrective action,
including testing and monitoring to identify the extent of the contamination,
removal and disposal of contaminated soil, or on-site treatment of contaminated
soil or groundwater. The EPA has delegated the administration of UST regulations
to state agencies. To assist the remediation process when leaking USTs are
identified, many state legislatures have created reimbursement programs funded
by gasoline taxes or other taxes and fees.
Another significant segment of the environmental industry results from EPA
requirements for upgrading or eliminating storage tanks. RCRA mandates that by
December 31, 1998, every single-walled UST in the United States be removed and
replaced with a double-walled tank. Any environmental danger to the soil or
water caused by leakage of a UST must also be remediated. According to the
Environmental Business Report published by BTI Consulting Group, Inc.,
approximately 2,200,000 USTs containing petroleum products or hazardous
chemicals are located in the United States. Over 1.6 million of these tanks are
subject to federal regulations, and approximately 91 percent of those contain
petroleum products. In order to comply with the December 1998 deadline,
approximately 250,000 tanks must be removed each year through 1998. However, the
greatest number of USTs replaced to date in a calendar year was approximately
80,000 during 1989. Thus, the Company anticipates that UST-related business
opportunities will increase each year through 1998, and that a substantial
number of UST owners then in violation of EPA mandates will provide business
opportunities well into the start of the next decade. Management believes that
the Company is well positioned in the niche market of removing and replacing
USTs and performing remediation and construction services required in
conjunction with UST replacement.
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CLEAN WATER ACT ("CWA"). The CWA established a system of standards,
permits and enforcement procedures for the discharge of pollutants into
navigable waters from industrial, municipal and other wastewater sources. Key
areas for which regulations have been issued or are proposed include industrial
wastewater pretreatment, surface water toxic control, wastewater sludge,
disposal and storm water discharges. The CWA requires, under certain
circumstances, pretreatment of industrial wastewater before discharge into
municipal treatment facilities. These enforcement efforts by the EPA will prompt
facility upgrading and control of industrial discharges. The EPA and delegated
state agencies are placing some of the non-complying communities under
enforcement schedules. In cases of noncompliance, the EPA may assess
administrative penalties and may sue for court-ordered compliance and penalties.
Some public funding is available to assist municipalities in complying with
treatment requirements.
SAFE DRINKING WATER ACT ("SDWA"). Under the SDWA and its subsequent
reauthorization, the EPA is empowered to set drinking water standards for public
water systems in the United States. The SDWA requires that the EPA set maximum
permissible contamination levels for over 80 substances and also requires the
EPA to establish a list every three years of contaminants that may cause adverse
health effects and may require regulation. Enforcement responsibility is placed
on the states and includes water supply systems monitoring. The SDWA also
requires that the EPA set criteria for the use of treatment techniques including
when filtration should be used for surface water supplies and when to require
utilities to disinfect their water. The EPA regulations under the SDWA are
expected to result in significant expenditures by public water systems for
evaluation and, ultimately, for upgrading of many facilities.
Bolstering federal laws are stringent state laws, such as California's Safe
Drinking Water and Toxic Enforcement Act of 1986 ("Prop 65"), which took full
legal effect in 1992. To cite just one facet of Prop 65, California's drinking
water must not have concentrations of more than one part per billion of benzene.
However, one tablespoon of gasoline contains enough benzene to render 50,000
gallons of water undrinkable by California's standards. To place the problem
within a commercial context, an estimated one in four gas stations has a UST
that is leaking, and a single leak can result in thousands of gallons of
benzene-rich gasoline leaking into the watertable.
OSHA AND OSHA REFORM ACT. OSHA has promulgated various regulations setting
forth standards for disclosure of health hazards in the work place and for
response thereto. The Hazard Communication Standard, for example, requires
manufacturers and importers of chemicals to assess the hazards of their products
and disclose the same through material data safety sheets and label warnings. In
1990, in an effort in part to create a self-funding administration, Congress
increased the ceiling for certain OSHA-imposed penalties.
POTENTIAL LIABILITY AND INSURANCE
The Company maintains quality assurance and quality control programs to
reduce the risk of damage to persons and property. However, in providing
environmental remediation services to the Company's customers, the Company faces
substantial potential liability for environmental
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damage, personal injury, property damage, economic losses and fines and costs
imposed by regulatory agencies. Furthermore, it is possible that one or more
of the Company's customers may assert a claim against the Company for
negligent performance of services. The Company's potential environmental
liability arises, in part, because some of its services involve the cleanup
of petroleum products and other hazardous substances for its customers. Many
state and federal laws have been enacted regulating the use and cleanup of
these substances and creating liability for environmental contamination
caused by them. Moreover, so-called "toxic tort" litigation has increased
markedly in recent years as those injured by chemical contamination seek
recovery for personal injuries or property damage under common law theories.
While these developments in large part create the growing market for the
Company's services, they also present a risk of liability should the Company
itself be deemed responsible for contamination caused by a cleanup effort in
any such case conducted by the Company for a customer or for an accident
which occurs in the course of a cleanup effort.
The scope of liability under existing law for environmental damage is
potentially very broad and could apply to the Company in a number of ways. For
example, the Company may be exposed to liability under CERCLA when it conducts a
cleanup operation that results in a release of hazardous substances, or when it
arranges for disposal of such substances. Other liabilities may arise if the
Company creates or exacerbates a contamination problem through errors or
omissions in its cleanup work, potentially giving rise to, among other things,
tort actions for resulting damages and Superfund liability for any resulting
cleanup. Finally, it is possible that one or more of the Company's customers
will assert a claim against the Company for an allegedly incomplete or
inadequate cleanup. These examples illustrate the Company's potential
liabilities, but they are not exhaustive. Many state and federal environmental
laws apply to the Company's activities, and the potential for liability exists
depending on the circumstances and substances involved in each cleanup
operation. Moreover, the law in this area is developing rapidly and is thus
subject to considerable uncertainty.
The Company has had no claim made against it by governmental agencies or
third parties under environmental laws or regulations. The Company has had one
claim made by a former customer related to the design of a remediation project.
It has not established any reserves for potential liabilities as management of
the Company, based on advice of counsel, believes that the Company will be
successful in its defense of the claims. (See "LEGAL PROCEEDINGS.")
The Company maintains comprehensive general liability insurance and
worker's compensation insurance that provide $5 million of coverage each. In
addition, the Company maintains pollution liability and errors and omissions
insurance that provides $1 million of coverage each. Because there are various
exclusions and retentions under the insurance policies described above, not all
liabilities that may be incurred by the Company are likely to be covered by
insurance. In addition, certain of the policies are "claims made" policies which
only cover claims made during the term of the policy. If a policy terminates and
retroactive coverage is not obtained, a claim subsequently made, even a claim
based on events or acts which occurred during the term of the policy, might not
be covered by the policy. In the event the Company expands its
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services into a new market, no assurance can be given that the Company will
be able to obtain insurance coverage for such activities or, if insurance is
obtained, that the dollar amount of any liabilities incurred in connection
with the performance of such services will not exceed policy limits.
The market for liability insurance has been severely constrained in the
past several years, due in part to high losses experienced by the insurance
industry from environmental impairment liability claims, including claims
associated with hazardous materials and toxic wastes. Consequently, the
available insurance coverage for enterprises such as the Company has been
reduced, eliminated entirely or priced beyond the reach of many companies. To
date, the Company has been able to obtain any insurance required by a customer.
However, there can be no assurance that the Company will be able to maintain
adequate liability insurance in the future.
BONDING REQUIREMENTS
Commercial remediation projects, as well as federal, state and municipal
projects, often require contractors to post both performance and payment bonds
at the execution of a contract. Performance bonds guarantee that the project
will be completed and payment bonds guarantee that vendors will be paid for
equipment and other purchases. Contractors without adequate bonding may be
ineligible to bid or negotiate on many projects. The Company has frequently been
required to obtain such bonds and it should be assumed that the Company will
continue to be required to obtain such bonds in the future, particularly with
government contracts. The Company obtains required bonds on a case-by-case basis
as needed and has not experienced any problems in obtaining necessary bonds. The
Company could experience such difficulties in the future if the total amount of
the bonds then outstanding against the Company exceeds the limits imposed by
bonding companies based on the financial condition of the Company at the time.
Bonds typically cost between 1 and 3 percent of the cost of a project. To date,
no payments have been made by any bonding company for bonds issued for the
Company.
EMPLOYEES
The Company presently employs approximately 300 persons full time at its 16
offices, including 3 people who are officers of the Company. The Company's
employees are not represented by a labor union or covered by a collective
bargaining agreement, and the Company believes it has good relations with its
employees.
The Company typically hires temporary workers on location to staff certain
projects. While all of the Company's jobs are performed under the supervision
and direction of the Company's supervisors and foremen, and the Company attempts
to utilize as many of the Company's full-time laborers as possible to staff
jobs, the location and other factors affecting jobs performed away from the
immediate vicinity of the Company's headquarters result in the Company
occasionally hiring temporary workers on site. The Company carefully reviews the
training and qualifications of all temporary workers hired to assure that all
such personnel are qualified to perform the work
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in question. However, due to the temporary nature of such employment, there
is no assurance that all such temporary workers will perform at levels
acceptable to the Company and its customers.
The operations of the Company are substantially dependent upon its
executive officers. The Company has no employment contracts with these persons
and the loss of their services could have a material adverse effect on the
Company. The Company's further success will also depend significantly on its
ability to attract and retain additional skilled personnel, including highly
trained technical personnel, project managers and supervisors. The Company
believes it currently has adequate qualified supervisory personnel, but there is
no assurance that experienced and qualified management level personnel will be
available to the Company in the future to fill positions as needed.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's headquarters and administrative facilities are located at
14761 Bentley Circle, Tustin, California, in approximately 18,490 square feet of
leased office and warehouse space. The lease expires in April 1997 and contains
an option to extend for one 24-month period. The Company's corporate and
administrative functions are conducted from these facilities.
The Company's remediation services are conducted from the following spaces:
Current
Sq. Ft Lease Expiration Monthly Rent
------ ---------------- ------------
14761 Bentley Circle
Tustin, California 18,490 April 14, 1997* $6,700
120 West Dayton Street, Suite A-7
Edmonds, Washington 6,910 December 31, 1997* $7,198
150 West Dayton Street
Edmonds, Washington 5,000 February 28, 1998* $2,522
5845 Doyle Street, Suite 104
Emeryville, California 2,800 October 21, 1996* $2,576
13795 Rider Trail North, Suite 104
Earth City, Missouri 3,602 May 31, 1998 $1,336
6900 E. 47th Avenue Drive, Suite 200
Denver, Colorado 11,051 July 31, 1998 $2,993
525 South Madison
Tempe, Arizona 5,014 February 28, 1998 $3,150
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5315 NW St. Helens Road
Portland, Oregon 3,000 January 6, 1999 $3,500
150 Noel Street
Mobile, Alabama 20,000 April 30, 1997* $2,950
13120 Carrera Court
New Orleans, Louisiana 13,520 April 14, 1998* $3,500
8920 Lawndale, Suite J
Houston, Texas 7,500 April 30, 1996* $2,250
275-A Industrial Drive
Jackson, Mississippi 11,325 October 31, 1998* $3,080
1410 Argentine Street
Georgetown, Colorado 1,600 May 17, 1997 $ 700
5085 East Shore Drive N/A N/A N/A
Convyers, Georgia 30208
__________________
*Contains an option to renew or extend the lease.
ITEM 3. LEGAL PROCEEDINGS.
Except as set forth below, the Company is not a party to any material legal
proceedings which are pending before any court, administrative agency or other
tribunal. Further, the Company is not aware of any material litigation which is
threatened against it in any court, administrative agency or other tribunal.
Management believes that no pending litigation in which the Company is named as
a defendant is likely to have a material adverse effect on the Company's
financial position or results of operations.
In November 1994, TCW Realty Fund VA et al. ("TCW") filed suit against the
Company and Med-Tox Associates, Inc. in the Los Angeles County Superior Court
seeking damages of approximately $1 million arising from the design,
installation and operation of a remediation project. The Company has responded
to the complaint by filing a cross-complaint, which included a counterclaim
against the plaintiff for receivables of approximately $65,000. If judgment were
entered against the Company, the Company believes this claim is covered by the
Company's insurance subject to a $100,000 deductible. The Company has not
established any reserves for potential liabilities as management of the Company,
based on advice of counsel, believes that the Company will be successful in its
defense of the claims and therefore that any potential liability is remote.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) PRINCIPAL MARKET OR MARKETS. Since July 18, 1995, the Company's
Common Stock has been listed on the American Stock Exchange ("AMEX") under the
symbol "ENV". The following table sets forth the high and low sale prices for
the Company's Common Stock as reported on the AMEX for the periods indicated:
Quarter Ended High Low
------------- ---- ---
September 30, 1995 $7.25 $4.75
December 31, 1995 $9.50 $7.0625
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of record
holders of the Company's common stock at March 20, 1996, was 61. This does not
include those shareholders who hold their shares in street name.
(c) DIVIDENDS. The Board of Directors does not anticipate paying cash
dividends on the Company's Common Stock in the foreseeable future as it intends
to retain future earnings to finance the growth of the business. The payment of
future cash dividends will depend on such factors as earnings levels,
anticipated capital requirements, the operating and financial conditions of the
Company and other factors deemed relevant by the Board of Directors. The
California Corporations Code provides that a corporation may not pay dividends
if the corporation is, or as a result of the distribution would be, likely to be
unable to meet its liabilities as they mature.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion is intended to provide an analysis of the
Company's financial condition and results of operations and should be read in
conjunction with the Company's financial statements and notes thereto contained
elsewhere herein.
GENERAL
The Company provides comprehensive environmental remediation services of
hazardous and toxic waste on a planned and emergency basis to both government
and private sector customers. The Company has provided these services from its
Southern California and Seattle area offices since the Company was acquired by
current management on November 29, 1991. Offices in metro San Francisco and
Portland were established in 1993, offices in Phoenix, St. Louis and Denver were
opened in 1994, and offices in Houston, New Orleans, Jackson, Mobile, Atlanta
and Georgetown, Colorado were opened in 1995. Offices in Tucson, Kansas City,
and Sao Paulo, Brazil have been opened in 1996, and additional offices may be
added in 1996.
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STATISTICAL ANALYSIS OF RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship which certain items of the Company's statements of income bear to
project revenue and the percentage increase or (decrease) in the dollar amount
of such items:
Percentage Relationship
to Project Revenue
--------------------------- Period to Period Change
Year Ended December 31, -----------------------
--------------------------- 1995 vs. 1994 vs.
1995 1994 1993 1994 1993
------- ------- ------- ---------- ----------
Project Revenue 100.0% 100.0% 100.0% 103.7% 35.1%
Project Costs:
Direct 72.1 75.1 73.5 95.6 37.9
Indirect 14.2 10.1 11.7 187.2 16.9
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Gross Profit 13.7 14.8 14.8 87.5 35.4
Other Operating Expenses
(Income):
Selling 3.5 4.6 1.7 57.9 256.0
General and Adminis-
trative 4.6 4.2 5.9 122.6 (4.0)
Amortization of excess
of acquired net assets
in excess of cost (0.7) (1.6) (2.1) (8.3) (0.0)
- -------------------------------------------------------------------------------
Operating Income 6.2 7.6 9.3 66.1 11.2
Other Income (Expense) (0.6) (0.6) (0.3) 89.4 213.4
- -------------------------------------------------------------------------------
Income before taxes on
income 5.6 7.0 9.0 64.0 5.1
Taxes on income 1.4 0.1 0.1 3691.2 21.4
- -------------------------------------------------------------------------------
Net Income 4.3% 6.9% 8.9% 25.3% 4.9%
- -------------------------------------------------------------------------------
Pro forma information
(Note 1):
Historical earnings
before income taxes 5.6% 7.0% -- 64.0% --
Pro forma income taxes 1.8 1.7 -- 114.2 --
Pro forma net income 3.8 5.3 -- 47.2 --
- -------------------------------------------------------------------------------
Note 1 From January 1, 1994 to June 14, 1995, income taxes on net
earnings were payable personally by the stockholders pursuant to
an election under Subchapter S of the Internal Revenue Code not
to have the Company taxed as a corporation. However, the Company
was liable for state franchise taxes at a rate of 1.5 percent on
its net income. Pro forma financial information is presented to
show the effects on 1995 and 1994 financial information had the
Company not been treated as an S Corporation for income tax
purposes. Effective June 15, 1995, the Company terminated its
Subchapter S election and began to be taxed as a Subchapter C
Corporation.
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The Company's revenues have increased substantially since November 1991
when current management acquired the Company. Total revenues increased 103.7
percent from 1994 to 1995 and 35.1 percent from 1993 to 1994. The Company
initially focused on EPA contract work which provides a large volume of work
over the six-year contract period. Starting from that base, the Company has
targeted a greater amount of non-EPA work, which generally yields 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.
During 1995, the distribution of revenues between non-EPA and EPA contracts was
73.0 percent and 27.0 percent, respectively. Direct project costs as a
percentage of project revenue decreased to 72.1 percent in 1995 from 75.1
percent in 1994 when the distribution of revenues was 33.0 percent for non-EPA
contracts and 67.0 percent for EPA contracts.
The Company performs its services for over 250 commercial customers on an
ongoing basis. The following table sets forth the percentages of the Company's
revenues attributable to the EPA and other non-EPA public and private sector
customers:
Year Ended December 31,
------------------------------------------------
1995 1994
---------------------- ----------------------
Non-EPA. . . . . . .$34,959,345 73.0% $ 7,761,140 33.0%
EPA. . . . . . . . .$12,912,627 27.0% $15,744,926 67.0%
----------- ------ ----------- ------
Total. . . . . . . .$47,871,972 100.0% $23,506,066 100.0%
----------- ------ ----------- ------
----------- ------ ----------- ------
The Company's non-EPA revenues increased 350.4 percent from 1994 to 1995.
From 1993 to 1994, non-EPA revenues increased 73.9 percent and from 1992 to 1993
non-EPA revenues increased 57.0 percent. The opening of the offices in Houston,
New Orleans, Jackson, Mobile, Atlanta and Georgetown, Colorado have contributed
to the growth of the non-EPA business in 1995. The offices opened in 1994 in
St. Louis, Denver and Phoenix also added significantly to the dramatic growth
in non-EPA revenues in 1995. In 1995, the EPA revenue was $12,912,627, or 27.0
percent of the total revenues and in 1994, 67.0 percent of the revenues, or
$15,744,926, were derived from the EPA contract. The Company's revenues with the
EPA decreased 18.0 percent in 1995.
Gross profit as a percentage of revenues declined marginally from 14.8
percent in 1994 to 13.7 percent in 1995. The objective of the Company is to
increase the gross profit by increasing the number of commercial contracts which
typically have higher margins than governmental contracts due to the multiple
types of remediation services and more specialized personnel generally required
to perform such contracts. However, due to normal start-up costs and start-up
delays in obtaining and performing business, the new offices in Houston, New
Orleans, Jackson, Mobile and Atlanta, which were opened in the second quarter of
1995, were
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not as operationally efficient or profitable as the established offices.
Indirect expenses as a percentage of revenues increased from 10.1% to 14.2%
between 1994 and 1995.
Selling, general and administrative expenses increased from $2,067,284 (8.8
percent of revenue) in 1994 to $3,905,164 (8.2 percent of revenue) in 1995.
Selling expenses increased from $1,075,954 (4.6 percent of revenue) in 1994 to
$1,698,776 (3.5 percent of revenue) in 1995. This 57.9 percent increase is the
result of management's commitment to a formal sales/bid and proposal staff and
the increase in salaries and benefits primarily resulting from the addition of
personnel. The dedicated sales staff increased from 9 to 20 persons during
1995. Selling expenses are expected to be approximately 25 percent greater in
1996 to reflect a full year's cost of the staff that was added through 1995.
Management believes that this level of expenditure will accomplish the revenue
goals of the Company for the next few years allowing for normal salary
increases.
General and administrative expenses increased from $991,330 (4.2 percent of
revenues) in 1994 to $2,206,388 (4.6 percent of revenues) in 1995. Most general
and administrative expenses increased in proportion to the increased revenues.
Severance costs due to the reduction of overhead personnel, legal expenses and
increased insurance costs due to new locations and different types of work
contributed to the increases. An increase in general and administrative
expenses is expected in 1996 due to the Company's expansion into new geographic
areas and the growth in the Company's business.
Amortization of acquired net assets in excess of cost was $368,112 in 1994
and $337,437 in 1995. The acquired net assets in excess of cost was created
when the estimated fair value of net assets purchased exceeded the purchase
price by approximately $1,472,000 when the Company was acquired by current
management on November 29, 1991. The acquired net assets in excess of cost were
amortized over a four-year period beginning December 1, 1991, and ending on
November 30, 1995. The four-year period for amortization was selected because
it matched the term of the contract with the EPA.
Interest expense, net increased between 1994 and 1995, from $151,296 in
1994 to $283,234 in 1995, due primarily to increased borrowing on the following:
the Company's line of credit and equipment loans with Comerica Bank-California
("Comerica"), the Birnie Trust, capital leases, and the Subordinated Notes. The
increased borrowings were necessary because of greater working capital needs due
to the Company's expansion into new geographic areas and the growth in the
Company's business.
Until June 15, 1995, the Company was a Subchapter S Corporation as defined
by the Internal Revenue Service and substantially all taxes were paid by the
shareholders. However, the Company has traditionally made distributions of cash
to its shareholders in approximately the amount of such shareholders' tax
liabilities related to the income of the Company. On June 15, 1995, the Company
made a revocation of its Subchapter S Corporation status and accordingly is now
subject to the tax laws and rates applicable to a Subchapter C Corporation.
Distributions of $900,000 were paid to the Company's shareholders prior to the
termination of the Company's Subchapter "S" tax status. Immediately following
these distributions, the shareholders loaned
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$358,000 to the Company, and these loans were repaid from the proceeds of the
Company's initial public offering in July 1995. At the date of the revocation
of the "S" status, there were no net operating loss carryforwards available
to be carried forward to any subsequent period. Additionally, at the date of
the revocation, any prior earnings of the S Corporation not previously
distributed will be reclassified from retained earnings to paid-in capital
accounts. A special grace period of one year will exist whereby these
undistributed S Corporation earnings could be distributed to the S
Corporation shareholders in a tax-free manner.
BONDING
The amount of bonding capacity offered by sureties is a function of the
financial health of the company requesting the bond. At March 1996, the bonding
capacity for the Company was $25 million.
LIQUIDITY AND CAPITAL RESOURCES
Capital resources are used primarily to fund the acquisition of capital
equipment and increase working capital needed to support continued expansion of
the Company's operations. Historically, the Company has been under-capitalized,
attempting to meet cash requirements through funds generated from operations,
together with funds borrowed under installment and term loans.
DEBT. In February 1994, as amended in March 1995, the Company entered into
a credit arrangement with Comerica whereby Comerica provided a credit line to
the Company. Borrowings are based on 75 percent of certain eligible accounts
receivable, plus certain adjustments, up to $4,000,000. The credit line is
collateralized by all assets of the Company and personally guaranteed by the
shareholders of the Company. Interest accrues at Comerica's base rate plus 1.5
percent and is payable monthly.
On October 14, 1994, the Company borrowed $380,000 from Comerica, with
interest payable monthly at Comerica's base rate plus 2.0 percent. The monthly
payment is $7,917. The loan is collateralized by certain fixed assets of the
Company. As of December 31, 1995, the balance due on this loan was $267,667.
In 1995, the Company borrowed $300,000, in loan amounts of $195,000 and
$105,000, from Comercia, with interest payable monthly at Comerica's base rate
plus 2.0 percent. The monthly payments are $4,062 and $2,187, respectively.
The loans are collateralized by certain fixed assets of the Company. As of
December 31, 1995, the balance due on these loans was $170,625 and $89,687,
respectively.
In January 1995, the Company borrowed $550,000 from the Birnie Children's
Trust No. 1 (the "Birnie Trust") at the interest rate of 2 percent per month,
due and payable monthly. The wife of Steven H. Davis, President of the Company,
is a beneficiary of the Birnie Trust. The Company has borrowed funds from the
Birnie Trust at various times in order to meet its working capital requirements.
These borrowings have allowed the Company to grow at the rate it has in the
past.
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<PAGE>
The Company believes that the cash from operations and borrowings under the
existing or future lines of credit will be sufficient to fund future growth.
However, the Company believes the Birnie Trust could be a source of funds in
the future, if necessary. The Company repaid $350,000 of this loan with
proceeds of the Company's initial public offering which closed during July
1995. The remaining $200,000 was invested into the subordinated notes
described in the following paragraph.
In February 1995, the Board of Directors determined to issue
Subordinated Notes, coupled with warrants to purchase shares of common stock
at an exercise price of $1.20 per share which can be exercised on or before
December 31, 1996. The Subordinated Notes were offered on a selective,
privately arranged basis, and bear interest at ten percent per annum, payable
monthly, and are subordinated to senior commercial or institutional lending
indebtedness. Each $10,000 face value note purchaser received a warrant to
purchase 1,312 shares of the Company's common stock. The notes are secured
by a second lien on the Company's accounts receiveable and contracts in
progress and were due and payable on March 1, 1996. The Company received
subscriptions for $890,000 of these notes. Relatives of officers of the
Company accounted for $680,000 of such subscriptions. One of the notes in the
amount of $80,000 was paid off during August 1995. During December 1995, all
nineteen of the investors exercised their warrants to purchase a total of
116,768 shares of common stock. Eighteen of the investors exchanged a total
of $127,575 of the outstanding Subordinated Notes and one investor paid
$12,600 in cash to exercise his warrants. A total amount of $210,625 of the
remaining balance of $682,425 of the Subordinated Notes was paid off at
maturity and the remaining balance of $471,800 was rolled over into new notes
due in one year with interest payable monthly at 10 percent.
During December 1995, the Company financed two purchases of equipment
through Comerica for $74,774 and $354,297. These loans are payable in 36
monthly installments of $2,378 and $11,267 including interest at 9 percent
commencing December 30, 1995 and January 30, 1996, respectively.
In March 1996, the Company established a $6,000,000 revolving line of
credit with Union Bank which replaces the previous banking relationship with
Comerica. The new line of credit provides more favorable account receivable
eligibility and, coupled with the increased capacity, is sufficient to satisfy
the Company's working capital requirements.
Associated with the acquisition of En-Tech, the Company assumed eight
installment notes payable, to a bank and finance companies, which are
collateralized by vehicles and are payable in monthly installments ranging from
$182 to $713 including interest ranging from 9.75% to 18%.
During 1995, the Company increased its available cash by $44,700. Cash
flow used in operations was $4,284,087 as the Company experienced a significant
increase in the accounts receivable and contracts in progress associated with
its commercial business. During 1995, net cash used in investing activities was
$2,777,630 due to the acquisition of new equipment. Cash flow provided by
financing activities was $7,106,417 due primarily to the receipt of $5,763,679
from the Company's initial public offering.
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<PAGE>
The Company has made distributions in the past to its shareholders in
amounts substantially equal to their tax liabilities resulting from the
Subchapter S status of the Company. The Company terminated its Subchapter S tax
status on June 15, 1995. Distributions of $900,000 were paid to the Company's
shareholders immediately prior to the termination of such tax status. The source
of funds for such distribution was primarily the proceeds from the sale of the
Subordinated Notes.
As of December 31, 1995, the Company was in a strong financial condition
with working capital of $7,641,358 as compared to working capital of $3,017,180
at December 31, 1994. The increase was primarily due to the receipt of
approximately $5,763,679 in net proceeds from the Company's initial public
offering which had closings in July and August 1995. Upon receipt of the
proceeds, the Company paid off the line of credit in the amount of $1,789,264,
the shareholder notes payable in the amount of the $357,865, and the Birnie
trust loan in the amount of $350,000.
Management believes that funds provided from operations, short-term lines
of credit and the above sale of stock 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.
CAPITAL COMMITMENTS. The Company has entered into leases for its existing
facilities with such leases expiring at various dates through 1998. Monthly
rentals currently are approximately $42,500 in the aggregate. Primarily in
connection with its expansion into parts of the southeastern region of the
United States, the Company has entered into leases for certain equipment calling
for payments in 1996 of approximately $335,000.
EQUITY. On March 1, 1995, the Company declared a 291.5-for-one stock
dividend that was treated as a stock split, which increased the number of shares
of Common Stock outstanding from 12,123 to 3,534,000. The Company also increased
the number of authorized shares of Common Stock from 10,000,000 to 20,000,000.
In July 1995, the Company completed an initial public offering of 1,200,000
shares of its Common Stock, and in August 1995, sold an additional 180,000
shares pursuant to an over-allotment option. The net proceeds to the Company
from the public offering was approximately $5,800,000.
On November 10, 1995, the Company acquired all of the outstanding stock of
En-Tech, Inc., a Colorado corporation ("En-Tech"), doing business as
Environmental Technologies, Inc., in exchange for 35,769 shares of the Company's
Common Stock.
During November and December 1995, 116,768 shares of common stock were
issued when the investors in the Subordinated Notes exercised their stock
purchase warrants. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.")
On February 9, 1996, the Company filed a registration statement on Form SB-
2 to register 402,537 shares of common stock for resale by certain shareholders
("Selling Shareholders"),
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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.
ITEM 7. FINANCIAL STATEMENTS.
Please see pages F-1 through F-20.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Company's executive officers, directors and other key employees are as
follows:
Name Age Position
---- --- --------
Craig C. Barto 37 Director
Douglas W. Cotton 44 Executive Vice President, Secretary and Director
Steven H. Davis 42 Chief Executive Officer, President and Director
John G. L. Hopkins 47 Chief Operating Officer and Director
All of the directors are elected at the annual meeting of shareholders to serve
for one year or until their successors are elected and have qualified. Officers
serve at the discretion of the Board of Directors. All of the above-listed
directors have held office since December 1991.
CRAIG C. BARTO has been a director of the Company since 1991. He is also
the President and Chairman of the Board of Directors of Signal Hill
Petroleum, Inc., Barto/Signal Petroleum, Inc., Signal Hill Operating, Inc., and
Signal Oil and Refining, Inc., which operate businesses such as Paramount and
Fletcher oil refineries. A graduate of UCLA with a degree in Economics,
Mr. Barto was instrumental in the growth of the Signal Hill Petroleum companies
in the oil business in 1979 with the reclamation of a marginal operation in the
West Newport Oil Field in Orange County, California. In addition to the oil and
gas operations, Mr. Barto is also responsible for the commercial and residential
development of over 100 acres of some of the last undeveloped hilltop property
in Southern California.
STEVEN H. DAVIS has served as the Company's Chief Executive Officer,
President and a director since 1991. Prior to that time he was operating partner
of Lincoln Property Company which developed over 3 million square feet of
buildings in California, Nevada and Colorado. He has almost 20 years of
experience in construction, financing and developing industrial real estate.
Mr. Davis graduated from Brown University with an emphasis in Economics and
obtained an MBA from the University of Southern California. As President,
Mr. Davis manages the Company's business affairs and has been instrumental in
securing financing, negotiating bonding agreements, projecting and analyzing the
feasibility of expansion, mergers and acquisitions, and formulating business
relationships with customers, financial entities and the legal community.
JOHN G. L. HOPKINS served as the Company's Senior Vice President and
General Manager since 1990 and as Chief Operating Officer and a director since
1991. With more than 20 years of experience in managing large-scale hazardous
waste remediation projects, Mr. Hopkins is
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presently responsible for the Company's operating division in Seattle,
Washington. Previously, he held senior management positions with
Hydro-Search, Inc., Riedel Environmental Services, Inc. and IT Corporation.
Mr. Hopkins has managed more than 500 remedial action projects in 24 states
and has negotiated and managed three large multi-year indefinite delivery
contracts with the EPA totaling more than $350 million. Mr. Hopkins graduated
from the University of Southern California in 1973 with a Bachelor of Science
degree in Chemistry and Biological Sciences. His publications include work
involving sampling protocols and emergency response.
DOUGLAS W. COTTON has served as the Company's Executive Vice President and
a director since 1991 and is responsible for all operational aspects of the
Company's Southern California Region. Prior to joining the Company, Mr. Cotton
served as Vice President of Ecova Corporation and worked for 13 years at IT
Corporation where he held various positions culminating in serving as General
Manager for the Gulf Coast Region. He has more than 20 years of experience
managing on-site biological, chemical and physical remediation of hazardous
wastes in sludge, soil and groundwater using a variety of innovative
technologies. His knowledge of the industry has been gained at more than 100
remediation projects ranging from $100,000 to $45 million, including Superfund
sites, emergency response cleanups and large excavation/on-site treatment
projects.
COMPENSATION OF DIRECTORS
The Company does not currently pay or intend to pay its employee directors
for their services in that capacity; however, directors who are not employees
are reimbursed for out-of-pocket expenses incurred in connection with the
business of the Company. The Company pays Mr. Barto, a non-employee director, a
fee of $250 per meeting attended.
BOARD COMPOSITION AND COMMITTEES
The Company's Bylaws provide that the business and affairs of the Company
shall be managed by the Board of Directors consisting of 4 to 7 directors with
the exact number to be set by the Board.
The Board of Directors presently has Executive and Audit Committees. The
Executive Committee consists of Messrs. Davis, Hopkins and Cotton. The Audit
Committee consists of Mr. Barto and Mr. Davis. The Audit Committee is
responsible for reviewing the Company's financial statements and data with the
Company's independent accountants before the information and data are released
to the public.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely on a review of Forms 3 and 4 and amendments thereto furnished
to the Company during its most recent fiscal year, and Forms 5 and amendments
thereto furnished to
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the Company with respect to its most recent fiscal year and certain written
representations, two persons who were officers and directors of the Company
failed to file on a timely basis reports required by Section 16(a) of the
Exchange Act during the most recent fiscal year. Steve Davis filed one late
report which reported one transaction, and Douglas Cotton filed two late
reports each of which reported one transaction.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the compensation
received for services rendered in all capacities to the Company for the years
ended December 31, 1994 and 1995, by Mr. Davis, the Company's President,
Mr. Hopkins and Mr. Cotton. No other executive officer's compensation exceeded
$100,000 during such year. No restricted stock awards, stock options, long-term
incentive plan payouts or stock appreciation rights were granted to the named
executives for the years ended December 31, 1994 and 1995.
Summary Compensation Table
--------------------------
Other Annual
Name and Principal Position Year Salary Bonus Compensation(1)
- --------------------------- ---- ----- ----- ---------------
Steven H. Davis, 1995 $126,160 $0 $1,027
Chief Executive Officer 1994 $118,702 $0 $4,638
John G. L. Hopkins, 1995 $124,923 $0 $0
Chief Operating Officer 1994 $118,821 $0 $5,538
Douglas W. Cotton, 1995 $124,000 $5,652 $1,873
Senior Vice President 1994 $118,702 $0 $ 896
_________________
(1) Includes matching 401K contributions by the Company and automobile
expenses.
401K PLAN
The Company has a Non-standardized Cash or Deferred Profit Sharing Plan
pursuant to which all eligible employees may contribute a portion of their
income. Company contributions to the Profit Sharing Plan are discretionary. The
Company does, however, make a matching contribution in the amount of 25 percent
of the first six percent of all elective deferrals.
STOCK OPTION PLAN
On March 1, 1995, the Company adopted an Incentive Stock Option Plan (the
"Plan") for key personnel. A total of 550,000 shares of Common Stock are
reserved for issuance pursuant to
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the exercise of stock options (the "Options") which may be granted to
full-time employees of the Company. The Plan is currently administered by the
Board of Directors. In addition to determining who will be granted Options,
the Board of Directors has the authority and discretion to determine when
Options will be granted and the number of Options to be granted. The Board of
Directors may grant Options intended to qualify for special treatment under
the Internal Revenue Code of 1986, as amended ("Incentive Stock Options") and
may determine when each Option becomes exercisable, the duration of the
exercise period for Options and the form of the instruments evidencing
Options granted under the Plan. The Board of Directors may adopt, amend and
rescind such rules and regulations as in its opinion may be advisable for the
administration of the Plan. The Board of Directors may also construe the Plan
and the provisions in the instruments evidencing the Options granted under
the Plan and make all other determinations deemed necessary or advisable for
the administration of the Plan.
The Board of Directors has broad discretion to determine the number of
shares with respect to which Options may be granted to participants. The maximum
aggregate fair market value (determined as of the date of grant) of the shares
as to which the Incentive Stock Options become exercisable for the first time
during any calendar year may not exceed $100,000. The Plan provides that the
purchase price per share for each Incentive Stock Option on the date of grant
may not be less than 100 percent of the fair market value of the Common Stock on
the date of grant. However, any Option granted under the Plan to a person owning
more than 10 percent of the Common Stock shall be at a price of at least 110
percent of such fair market value. During May 1995, options for 181,000 shares
of Common Stock had been granted under the Plan, at an exercise price of $3.50
per share, of which options for 90,500 shares will vest over a five-year period
commencing May 1, 1996 and the remaining options for 90,500 shares will vest
over a five-year period only upon the occurrence of certain circumstances. On
December 31, 1995, 13,500 of such remaining options were granted as events upon
which these options were contingent occurred. The Company recorded compensation
expense of $36,596 in 1995 relating to these options. Compensation expense of
$42,717 will be recorded in future periods as these options vest over a five-
year period commencing December 31, 1996.
Options to purchase 5,000 shares of common stock at $3.50 per share,
granted in May 1995, were canceled prior to December 31, 1995, due to the
termination of the employment of one employee.
Prior to January 1, 1996, no options were granted to any executive officer
of the Company except Kathleen V. Dunlap, a former Treasurer and Chief Financial
Officer. Ms. Dunlap received options for 20,000 shares in the aggregate, and
options for 10,000 of her shares vested during December 1995. The remaining
10,000 options were to vest over a five year period only upon the occurrence of
certain circumstances. None of these remaining options were granted as events
upon which these options were contingent did not occur.
On January 8, 1996, the Board of Directors granted options to seven
employees to purchase an aggregate of 35,000 shares. Options as to 20,000
shares vest over a five-year period
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<PAGE>
commencing on the date of grant and are exercisable at $9.00 per share until
10 years after the date of grant. Options as to 10,000 shares vest over a
five-year period commencing on May 1, 1996. The Options as to the remaining
5,000 shares were issued to an employee who is the wife of Douglas W. Cotton,
an Officer and Director of the Company, and vest 20% immediately with the
remainder vesting over a four-year period commencing on the date of grant and
are exercisable at $9.90 per share until five years after the date of grant.
On February 21, 1996, the Board of Directors granted options to an employee
to purchase up to 5,000 shares of Common Stock. These options vest over a five-
year period commencing on the date of grant and are exercisable at $9.70 per
share until ten years after the date of grant.
If an optionee ceases to be employed by the Company for any reason other
than death or disability, the optionee may exercise all Options within three
months following such cessation to the extent exercisable on the date of
cessation. If an optionee dies while employed by the Company, or during the
three-month period following termination of the optionee's employment, or if the
optionee becomes disabled, the optionee's Options, unless previously terminated,
may be exercised, whether or not otherwise exercisable, by the optionee or his
legal representative or the person who acquires the Options by bequest or
inheritance at any time within one year following the date of death or
disability of the optionee.
An Option granted under the Plan is not transferable by the optionee other
than by will or by the laws of descent and distribution and, during the lifetime
of the optionee, may be exercised only by the optionee, his guardian or legal
representative.
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 proforma disclosures of net income and,
if presented, income per share, as if the above-mentioned fair market value
method of accounting was 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. Although the Company intends to adopt this statement in the first
quarter of 1996, it has not yet determined the impact of adopting this
statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of Common Stock as of March 22, 1996, by (i) each person known to the
Company to own beneficially more than 5 percent of the outstanding Common Stock;
(ii) each director of the Company; and (iii) all directors and officers as a
group. So far as is known to the Company, the persons indicated below have sole
voting and investment power with respect to the Common Stock indicated as owned
by them except as otherwise stated in the notes to the table.
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Shares Beneficially Owned
-------------------------
Name and Address Number Percent
- ---------------- ------ --------
Craig C. Barto(1) 717,825 14.2%
2440 Bayshore Drive
Newport Beach, CA 92663
Douglas W. Cotton 665,550 13.1%
Four Bowditch
Irvine, CA 92720
Steven H. Davis(2) 1,322,531 26.1%
7625 S. Yampa Street
Aurora, CO 80016
John G. L. Hopkins 663,650 13.1%
120 West Dayton #A-7
Edmonds, WA 98020
All directors and
executive officers
as a group (4 persons) 3,369,556 66.5%
__________________
(1) As trustee of the Craig and Gisele M. Barto Living Trust.
(2) Includes 82,656 shares held by relatives of Mr. Davis. Also includes 1,000
shares held by the wife of Mr. Davis.
There are no known agreements, the operation of which may at a subsequent
date result in a change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Since July 1992, the Company has relied upon financing from the Birnie
Trust. The mother-in-law of Steven Davis, the Company's President, is trustee of
the Birnie Trust and Mr. Davis' wife is a beneficiary. The Company has borrowed
funds from the Birnie Trust pursuant to promissory notes due and payable on
demand with the interest payable monthly. The Birnie Trust is also an investor
in the Company's private offering of debt securities, described below. The total
borrowings since July 1, 1992, were $2,269,000. However, the maximum principal
amount outstanding at any one time was $550,000.
In 1994 and 1995, the Company provided services to Signal Hill Petroleum,
Inc., Paramount Petroleum and Fletcher Oil in the aggregate amount of
approximately $345,000 and
-40-
<PAGE>
$293,000, respectively. These services include remediation services, ground
water monitoring and site investigations for existing properties and
environmental assessments in relation to property acquisition. Mr. Barto,
Chairman of the Company, is a 50 percent owner of these businesses.
In March and April 1995, the Company issued debt securities in a private
offering pursuant to which it raised $890,000. In exchange for each $10,000
invested, the 19 investors were given a warrant to acquire approximately 1,312
shares of Common Stock at approximately $1.20 per share, for an aggregate of
116,768 shares, and a Subordinated Note for the amount invested. The promissory
notes were due on March 1, 1996, with interest of 10 percent per annum payable
on the first day of each month commencing on April 1, 1995. The Subordinated
Notes are redeemable by the Company at any time upon 60 days' notice to the
holders. Holders of the Subordinated Notes have a security interest in the
Company's accounts receivable and contracts in progress that is subordinate to
holders of the senior indebtedness. Investors holding Subordinated Notes in the
aggregate amount of $680,000 are related to Company management. The Birnie Trust
holds $400,000 of such Subordinated Notes and other relatives of Mr. Davis hold
$230,000 of such Subordinated Notes. A relative of Mr. Cotton, holds $50,000 of
such Subordinated Notes. During August 1995, one of the Subordinated Notes in
the principal amount of $80,000 was repaid. During November and December 1995,
the 19 investors exercised their warrants to purchase a total of 116,768 shares
of Common Stock. Eighteen (18) of the investors converted a total of $127,575
of the outstanding Subordinated Notes and one investor paid $12,600 in cash to
exercise his warrant. On March 1, 1996, the remaining balances were repaid on
all Subordinated Notes except for $471,800 (comprised of a $337,000 Note held by
the Birnie Trust and $134,800 of Notes held by relatives of Mr. Davis) which was
rolled over into new Notes, payable in one year with interest due monthly at ten
percent per annum.
In June 1995, the Company distributed an aggregate of $900,000 to certain
shareholders as follows: Craig C. Barto--$226,497; Douglas W. Cotton--$173,140;
Steven H. Davis--$349,423; and John G.L. Hopkins--$150,940, which aggregate
amount is approximately the amount of the tax liabilities of such shareholders
resulting from the Company's former Subchapter "S" tax status. The primary
source of funds for such distribution was the proceeds from the sale of the
Subordinated Notes. Immediately after such distribution these same shareholders
loaned an aggregate of $358,000 to the Company as follows: Mr. Barto--$94,467;
Mr. Cotton--$54,030; Mr. Davis--$175,233; and Mr. Hopkins--$34,280. Such
Shareholder Loans bore interest at 10% and were repaid out of the proceeds of
the Company's initial public offering in July 1995.
All of these transactions were approved by the Board of Directors and were
made on terms as fair and reasonable to the Company as those that could be
obtained from non-affiliated third parties. Any future transactions between the
Company and its officers, directors, employees and affiliates that are outside
the scope of the Company's employment relationship with such persons will be
subject to the approval of a majority of the disinterested members of the Board
of Directors based upon a determination that the terms are at least as favorable
to the Company as those that could be obtained from unrelated parties.
-41-
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description Location
- ------- ----------- ---------
<S> <C> <C>
3.1 Amended and Restated Articles Incorporated by reference to
of Incorporation Exhibit 3.1 to the Company's
Form SB-2 Registration
Statement No. 33-91602
3.2 Bylaws Incorporated by reference to
Exhibit 3.2 to the Company's
Form SB-2 Registration
Statement No. 33-91602
10.1 Incentive Stock Option Plan Incorporated by reference to
Exhibit 10.1 to the Company's
Form SB-2 Registration
Statement No. 33-91602
10.2 Form of Incentive Stock Option Incorporated by reference to
Agreement Exhibit 10.2 to the Company's
Form SB-2 Registration
Statement No. 33-91602
10.3 Loan Documents Between Incorporated by reference to
Comerica Bank and the Exhibit 10.3 to the Company's
Company Form SB-2 Registration
Statement No. 33-91602
10.4 Award/Contract No. 68-W1-0012 Incorporated by reference to
Between the Company and the Exhibit 10.4 to the Company's
EPA (unredacted) Form SB-2 Registration
Statement No. 33-91602
27 Financial Data Schedule Filed herewith electronically
</TABLE>
(b) REPORTS ON FORM 8-K. During the last quarter of the period covered by
this Report, the Company did not file any Reports on Form 8-K.
-42-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
CET Environmental Services, Inc.
We have audited the accompanying balance sheets of CET Environmental
Services, Inc. as of December 31, 1995 and 1994, and the related statements
of income, stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
On March 22, 1996, we previously reported on the financial statements
referred to above. This report was issued prior to the discovery of the
matters set forth in Note B to the financial statements, wherein revisions of
amounts previously reported on as of December 31, 1995, and for the year then
ended are described.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of CET Environmental
Services, Inc. as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Irvine, California
March 22, 1996, (except for Note B, as to which the date is June 27, 1996)
F-1
<PAGE>
CET Environmental Services, Inc.
BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1995 1994
------------------------ -------------
(as revised, see Note B)
<S> <C> <C>
CURRENT ASSETS
Cash $ 476,655 $ 431,955
Accounts receivable, less allowance for
doubtful accounts; $135,404 in 1995 and
$63,963 in 1994 13,356,823 2,838,974
Contracts in process 6,213,490 2,960,179
Other receivables 146,531 52,665
Inventories 256,140 103,150
Prepaid expenses 506,240 90,778
Deferred income tax asset 289,330 1,292
----------- ----------
Total current assets 21,245,209 6,478,993
----------- ----------
EQUIPMENT AND IMPROVEMENTS
Field equipment and vehicles 4,061,144 953,402
Office furniture, equipment and leasehold improvements 1,204,474 501,690
----------- ----------
5,265,618 1,455,092
Less allowance for depreciation and amortization (1,281,716) (397,755)
----------- ---------
Equipment and improvements - net 3,983,902 1,057,337
GOODWILL 373,061 -
DEPOSITS 105,679 55,369
----------- ----------
$25,707,851 $7,591,699
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
CET Environmental Services, Inc.
BALANCE SHEETS - CONTINUED
December 31,
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
------------------------ ----------
(as revised, see Note B)
<S> <C> <C>
CURRENT LIABILITIES
Note payable - line of credit $ 2,424,836 $1,348,200
Subordinated notes payable 682,425 -
Accounts payable 7,857,824 1,540,499
Accrued expenses 1,730,853 410,596
Income taxes payable 372,162 11,600
Current obligations under capital leases 208,248 55,914
Current portion of long-term debt 327,503 95,004
---------- ----------
Total current liabilities 13,603,851 3,461,813
DEFERRED INCOME TAXES 37,282 -
OBLIGATIONS UNDER CAPITAL LEASES 661,697 111,623
LONG-TERM DEBT 694,953 269,104
ACQUIRED NET ASSETS IN EXCESS OF COST - 337,437
COMMITMENTS AND CONTINGENT LIABILITIES - -
STOCKHOLDERS' EQUITY
Capital stock (no par value) - authorized 20,000,000 shares;
issued and outstanding, 5,066,537 shares in 1995 and
3,534,000 shares in 1994 6,165,977 12,123
Paid-in capital 535,175 -
Retained earnings 4,008,916 3,399,599
------------- -----------
Total stockholders' equity 10,710,068 3,411,722
------------ -----------
$25,707,851 $7,591,699
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CET Environmental Services, Inc.
STATEMENTS OF INCOME
Year ended December 31,
<TABLE>
<CAPTION>
1995 1994
----------------------- ------------
(as revised, see Note B)
<S> <C> <C>
PROJECT REVENUE $47,871,972 $23,506,066
PROJECT COSTS
Direct 34,518,905 17,645,675
Indirect 6,813,480 2,372,239
----------- ----------
41,332,385 20,017,914
----------- ----------
Gross profit 6,539,587 3,488,152
----------- ----------
OTHER OPERATING EXPENSES (INCOME)
Selling 1,698,776 1,075,954
General and administrative 2,206,388 991,330
Amortization of excess of acquired net assets in excess of cost (337,437) (368,112)
----------- ----------
3,567,727 1,699,172
----------- ----------
Operating income 2,971,860 1,788,980
----------- ----------
OTHER INCOME (EXPENSE)
Interest expense, net (283,234) (151,296)
Other income 3,163 3,444
----------- ----------
(280,071) (147,852)
----------- ----------
Income before taxes on income 2,691,789 1,641,128
Taxes on income 656,792 17,324
----------- ----------
NET INCOME $ 2,034,997 $ 1,623,804
----------- ----------
----------- ----------
Weighted average number of shares outstanding 4,113,725 3,676,830
Pro forma Information (Note B)
Historical earnings before income taxes $ 2,691,789 $ 1,641,128
Pro forma income taxes 882,538 412,000
----------- ----------
Pro forma net income $ 1,809,251 $ 1,229,128
----------- ----------
----------- ----------
Pro forma net income per common share $ .44 $ .33
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CET Environmental Services, Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
Two years ended December 31, 1995
(as revised, see Note B)
<TABLE>
<CAPTION>
Capital stock Total
--------------------- Paid-in Retained stockholders'
Shares Amount capital earnings equity
--------- ---------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 2,915,000 $ 10,000 $ - $1,955,495 $1,965,495
Net income for the year - - - 1,623,804 1,623,804
Exercise of stock options 619,000 2,123 - - 2,123
Distributions paid - - - (179,700) (179,700)
--------- ------ ------- ---------- ---------
Balance at December 31, 1994 3,534,000 12,123 - 3,399,599 3,411,722
Distributions paid - - - (927,101) (927,101)
Undistributed S Corporation
earnings - - 498,579 (498,579) -
Initial public offering of
common stock 1,380,000 5,763,679 - - 5,763,679
Shares issued for acquisition
of En-Tech, Inc. 35,769 250,000 - - 250,000
Exercise of stock purchase
warrants by holders of sub-
ordinated promissory notes 116,768 140,175 - - 140,175
Issuance of stock options
at exercise price below
market value - - 36,596 - 36,596
Net income for the year - - - 2,034,997 2,034,997
--------- ---------- --------- ---------- ----------
Balance at December 31, 1995 5,066,537 $6,165,977 $535,175 $4,008,916 $10,710,068
--------- ---------- -------- ---------- -----------
--------- ---------- -------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CET Environmental Services, Inc.
STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1995 1994
---------------------- ------------
(as revised, see Note B)
<S> <C> <C>
Increase (decrease) in cash
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,034,997 $1,623,804
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 761,840 269,409
Amortization of excess of acquired net assets in excess of cost (337,437) (368,112)
Provision for bad debts 71,441 92,089
Credit for deferred income taxes (250,756) -
Loss on sale of equipment 18,842 -
Employee stock option plan 36,596 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (10,543,941) 57,844
Increase in contracts in process (3,253,311) (481,314)
Increase in other receivables (92,791) (19,922)
Increase in prepaid expenses (415,462) (21,733)
Increase in inventory and deposits (200,163) (24,906)
Increase (decrease) in accounts payable 6,220,408 (975,697)
Increase in accrued expenses and income taxes payable 1,665,650 64,358
----------- -----------
Net cash (used in) provided by operating activities (4,284,087) 215,820
----------- -----------
INVESTING ACTIVITIES:
Purchase of equipment (2,779,478) (691,753)
Proceeds from sale of equipment 1,848 -
---------- ---------
Net cash used in investing activities (2,777,630) (691,753)
---------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 727,254 380,000
Payments on long-term debt (222,466) (15,892)
Payments on capital leases (134,185) (31,027)
Proceeds from credit line loan - net of payments 1,076,636 552,875
Borrowings from related party trust fund 550,000 500,000
Payments on related party trust fund (350,000) (500,000)
Proceeds from issuance of stock 5,763,679 2,123
Distributions paid (927,101) (179,700)
Proceeds from loans from shareholders 357,865 -
Payments on loans from shareholders (357,865) -
Proceeds from exercise of stock purchase warrants 12,600 -
Proceeds from issuance of subordinated notes payable 690,000 -
Payments on subordinated notes payable (80,000) -
---------- --------
Net cash provided by financing activities 7,106,417 708,379
---------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CET Environmental Services, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
<TABLE>
<CAPTION>
1995 1994
---------------------- ------------
(as revised, see Note B)
<S> <C> <C>
INCREASE IN CASH 44,700 232,446
Cash at beginning of year 431,955 199,509
-------- --------
Cash at end of year $476,655 $431,955
-------- --------
-------- --------
Supplemental disclosures to cash flow information:
Cash paid during the year
Interest $282,230 $157,908
Income taxes $518,757 $ 4,400
Noncash investing and financing activities:
Acquisition of business
Fair value of tangible and intangible assets acquired $500,047 $ -
Liabilities assumed or incurred 250,047 -
-------- --------
Fair value of common stock given as consideration $250,000 $ -
-------- --------
-------- --------
Reduction of subordinated notes payable
as a result of the exercise of related stock
purchase warrants $127,575 $ -
Capital lease and financing obligations
incurred for equipment $837,000 $132,227
Conversion of remaining portion of
related party note payable to a
subordinated note payable $200,000 $ -
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1994
(as revised, see Note B)
NOTE A - ORGANIZATION AND DESCRIPTION OF COMPANY
CET Environmental Services, Inc. (the "Company") was incorporated on
February 9, 1988 under the laws of the State of California. On November
29, 1991 ("Acquisition Date"), Environmental Operations, Inc., purchased
100% of the Company's outstanding stock from Consolidated Environmental
Technologies, Inc. In August 1992, Environmental Operations, Inc. was
merged into CET Environmental Services, Inc. The Company provides a
variety of consulting and technical services to resolve environmental and
health risk problems in the air, water and soil. The Company has developed
a broad range of expertise in non-proprietary technology-based
environmental remediation and water treatment techniques for both the
public and private sectors throughout North and South America and the Trust
Territory of the Pacific Islands.
NOTE B - REVISIONS TO PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Subsequent to the Company's original issuance of its financial statements
for the year ended December 31, 1995, the Company discovered that an
accounting error resulted in overstated revenues on one of its significant
commercial contracts. The accompanying financial statements have been
revised to reflect the correction of this error, resulting in reductions of
current assets, current liabilities, and total stockholders' equity of
approximately $578,000, $256,000, and $322,000, respectively at December
31, 1995 and reductions of project revenue, net income, pro forma net
income and pro forma net income per common share of $578,000, $212,000,
$212,000 and $.05 per share, respectively for the year then ended.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CONTRACTS IN PROCESS
Most of the Company's contracts are time-and-material contracts whereby the
Company provides services, as prescribed under the various contracts, for a
specified fixed hourly rate for each type of labor hour and receives
reimbursement for material, inventories and subcontractor costs. Many of
the contracts also have a fixed mark-up to be applied to material,
inventories and subcontract costs. Revenues are recorded on contracts based
upon the labor hours and costs incurred.
F-8
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
(as revised, see Note B)
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
CONTRACTS IN PROCESS - CONTINUED
Contracts in process consists of the accumulated unbilled labor at
contracted rates, material, subcontractor costs and other direct job costs
and award fees related to projects in process.
INVENTORIES
Inventories consist of various supplies and materials used in the
performance of the services related to the Company's projects and are
stated at the lower of cost or market.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are recorded at cost. Depreciation and
amortization are provided on a straight-line method over the estimated
useful lives of the respective assets, usually between 3 to 7 years.
GOODWILL
The excess of the purchase price over the estimated fair values of the
assets acquired less the liabilities assumed, from the Company's November
1995 purchase of En-Tech, Inc. was recorded as goodwill. Such goodwill is
being amortized over a fifteen-year period using the straight-line method.
ACQUIRED NET ASSETS IN EXCESS OF COST
The acquisition of the Company by Environmental Operations, Inc. on
November 29, 1991 (see Note A), was accounted for as a purchase. The
estimated fair value of net assets purchased exceeded the purchase price by
approximately $1,472,000 (after a reduction of all long-term assets to
zero). The acquired net assets in excess of cost was amortized over a
four-year period beginning December 1, 1991. Accumulated amortization
amounted to approximately $1,472,000 and $1,135,000 at December 31, 1995
and 1994, respectively.
INCOME TAXES
The Company accounts for income taxes on the liability method which
requires that deferred tax assets and liabilities be recorded for expense
and income items that are recognized in different periods for financial and
income tax reporting purposes.
F-9
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
(as revised, see Note B)
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
INCOME TAXES - CONTINUED
From January 1, 1994 to June 14, 1995, income taxes on net earnings were
payable personally by the stockholders pursuant to an election under
Subchapter S of the Internal Revenue Code not to have the Company taxed as
a corporation. However, the Company was liable for state franchise taxes at
a rate of 1.5 percent on its net income. Pro forma financial information
is presented to show the effects on 1995 and 1994 financial information had
the Company not been treated as an S Corporation for income tax purposes.
Effective June 15, 1995, the Company terminated its Subchapter S election
and began to be taxed as a Subchapter C corporation.
STOCK SPLIT AND EARNINGS PER SHARE
Earnings per share has been computed based upon the weighted average number
of shares outstanding and equivalent shares outstanding during the year.
Equivalent shares relate to shares issuable upon the exercise of stock
options and warrants. On March 1, 1995, the Board of Directors of the
Company approved a resolution which increased the number of authorized
shares from 10,000,000 shares to 20,000,000 shares. Additionally, a stock
split was approved which converted each issued and outstanding share into
291.5 shares. All share and per share data have been retroactively
restated to give effect to this stock split.
ESTIMATED FAIR VALUE INFORMATION
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
about Fair Value of Financial Instruments" requires disclosure of the
estimated fair value of an entity's financial instrument assets and
liabilities, as defined, regardless of whether recognized in the financial
statements of the reporting entity. The fair value information does not
purport to represent the aggregate net fair value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
CASH: The carrying amount approximates fair value.
NOTE PAYABLE - LINE OF CREDIT: The carrying amount approximates fair value
as the line of credit has a variable interest rate.
SUBORDINATED NOTES PAYABLE: The carrying amount approximates the fair
value because of the short terms to maturity of the notes (within three
months).
F-10
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
(as revised, see Note B)
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
LONG-TERM DEBT: The fair values are estimated using discounted cash flow
analyses, based on the Company's current borrowing rates for similar types
of borrowing arrangements.
RECLASSIFICATIONS
Certain financial statement reclassifications have been made in 1994 to
conform with presentations used in 1995.
NOTE D - CONTRACTS IN PROCESS
Contracts in process consists of the following at December 31:
1995 1994
---------- ----------
Government - EPA contracts $ 832,468 $1,160,972
Commercial contracts 5,209,500 1,577,791
Award Fees/Project Management - EPA contracts 171,522 221,416
---------- ----------
Totals $6,213,490 $2,960,179
---------- ----------
---------- ----------
The Environmental Protection Agency (EPA) awards the Company an award fee
for work performed based upon a percentage of sub-contract and material
costs incurred plus a percentage of program management fees billed.
NOTE E - SIGNIFICANT CUSTOMERS
A significant portion of the Company's business is from a contract entered
into in March 1991, with the Environmental Protection Agency (EPA) which
expires in February 1997. The Company plans to submit a proposal to
continue serving the EPA when this contract expires. However, there can be
no assurance that the Company will be successful in this endeavor. As of
December 31, 1995 and 1994, the net balance of accounts receivable from the
EPA was $2,610,539 and $2,220,633, respectively. Revenues from the EPA in
1995 and 1994 amounted to approximately $12.9 million and $15.7 million,
respectively.
Revenues from one commercial customer amounted to approximately $6.8
million in 1995.
F-11
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
(as revised, see Note B)
NOTE F - RELATED PARTY TRANSACTIONS
In order to meet short term operating needs, the Company, from time to time
in 1994 and 1995, borrowed funds (up to $550,000) on a short term basis
from a trust fund of a relative of the President. These borrowings bore
interest at a rate of 2% per month. Interest expense attributable to
these related party borrowings amounted to $44,696 and $27,435 for 1995
and 1994, respectively. There were no borrowings outstanding at December
31, 1995 or 1994.
The Chairman of the Board and 14% owner of the Company is a 50% owner in
Signal Hill Petroleum, Inc., Paramount Petroleum Corp. and Fletcher Oil.
The Company provided services to these companies during the years ended
December 31, 1995 and 1994 for fees amounting to approximately $293,000 and
$345,000, respectively.
In March and April 1995, the Company issued debt securities in a private
offering totaling $890,000 of which $680,000 were issued to investors
related to Company management (see Note I).
NOTE G - CAPITAL LEASES
Vehicles and equipment recorded under capital leases consist of the
following at December 31:
1995 1994
---------- --------
Vehicles $ 882,347 $ 42,439
Equipment 239,117 173,912
---------- --------
1,121,464 216,351
Less accumulated depreciation (167,474) (67,440)
---------- --------
Totals $ 953,990 $148,911
---------- --------
---------- --------
The following is a schedule by year of the future minimum lease payments
under capital leases together with the present value of the net minimum
lease payments as of December 31:
1995
----------
1996 $ 344,083
1997 296,056
1998 248,291
1999 223,413
2000 98,080
----------
Total minimum lease payments 1,209,923
F-12
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
(as revised, see Note B)
NOTE G - CAPITAL LEASES - Continued
Less amounts representing estimated
executory costs (taxes) $ 260,456
-----------
Net minimum lease payments 949,467
Less amount representing interest 79,522
-----------
Present value of net minimum lease payments $ 869,945
-----------
-----------
Current portion 208,248
Noncurrent portion 661,697
-----------
$ 869,945
-----------
-----------
NOTE H - LINE OF CREDIT AND LONG-TERM DEBT
At December 31, 1995, the Company had a line of credit facility with a
Bank which provided for up to $4,000,000 of available credit to the
Company based upon percentages of eligible receivables and contracts in
process (as defined in the loan and security agreement). At December
31, 1995 and 1994, eligible borrowings under this agreement were
$2,827,858 and $1,437,384, respectively and the Company had borrowings
outstanding of $2,424,836 and $1,348,200, respectively. Borrowings
under this agreement bear interest at the Bank's base rate plus 1.5%
(10.0% at December 31, 1995). Interest is payable monthly.
Substantially all of the Company's assets are pledged as collateral for
this loan agreement. The loan agreement contains several financial and
other covenants with which the Company must comply.
During March 1996, the Company entered into a business loan agreement,
with a different bank, which includes a new line of credit facility to
replace the facility in existence at December 31, 1995. The new
facility, which has an expiration date of May 1, 1997, increased the
amount of available credit to the Company to $6 million based upon a
percentage (75%) of eligible receivables (as defined in the loan
agreement). Interest will be payable monthly at the Bank's adjusted
LIBOR-Rate plus 2% or the Bank's Reference Rate, at the option of the
Company. In addition, the Company may borrow up to $800,000 for the
purchase of equipment, through May 1, 1997, at which time the unpaid
principal will be converted to a fully amortizing loan. Interest will
be payable monthly at the Bank's adjusted LIBOR-Rate plus 2.25% or at
the Bank's Reference Rate plus .25%, at the option of the Company.
This Bank also loaned the Company $600,000 to pay off equipment loans
at the former bank. Interest will be payable monthly at the Bank's
Reference Rate plus .25%.
F-13
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
(as revised, see Note B)
NOTE H - LINE OF CREDIT AND LONG-TERM DEBT - Continued
Long-term debt consists of the following at December 31:
1995 1994
---------- --------
Note payable to bank, collateralized by equipment,
payable in 48 monthly installments of $7,917 plus
accrued interest at the bank's base rate plus 2%
(10.5% at December 31, 1995), beginning
November 1, 1994. $267,667 $364,108
Note payable to bank, collateralized by
equipment, payable in 48 monthly installments
of $2,187 plus accrued interest at the bank's
base rate plus 2% (10.5% at December 31, 1995),
beginning June 1, 1995. 89,687 -
Note payable to bank, collateralized by
equipment, payable in 48 monthly installments
of $4,062 plus accrued interest at the bank's
base rate plus 2% (10.5% at December 31, 1995),
beginning July 1, 1995. 170,625 -
Note payable to bank, collateralized by
equipment, payable in 36 monthly installments
of $2,378 including interest at 9%, beginning
December 30, 1995. 72,957 -
Note payable to bank, collateralized by
equipment, payable in 36 monthly installments
of $11,267 including interest at 9%, beginning
January 30, 1996. 354,297 -
Eight installment notes payable to a bank and
finance companies, collateralized by vehicles,
payable in monthly installments ranging from
$182 to $713 including interest ranging from
9.75% to 18%. 67,223 -
---------- --------
1,022,456 364,108
Less current portion 327,503 95,004
---------- --------
$ 694,953 $269,104
---------- --------
---------- --------
F-14
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
(as revised, see Note B)
NOTE H - LINE OF CREDIT AND LONG-TERM DEBT - Continued
Scheduled future maturities of these notes for the years ending December 31
are as follows:
1996 $ 327,503
1997 327,729
1998 320,171
1999 42,029
2000 5,024
----------
$1,022,456
----------
----------
NOTE I - SUBORDINATED NOTES PAYABLE
In March and April 1995, the Company issued debt securities in a
private offering pursuant to which it raised $890,000. In exchange for
each $10,000 invested, the nineteen investors were given a warrant to
acquire approximately 1,312 shares of common stock at approximately
$1.20 per share, to be exercised on or before December 31, 1996, for an
aggregate of 116,768 shares, and a subordinated note for the amount
invested. The subordinated notes bore interest at ten percent per
annum payable on the first day of each month commencing on April 1,
1995. The subordinated notes are redeemable by the Company at any time
upon 60 days' notice to the holders and have a maturity date of March
1, 1996. Holders of the subordinated notes have a security interest in
the Company's accounts receivable and contracts in progress that is
subordinate to holders of the senior indebtedness. Investors holding
subordinated notes in the aggregate amount of $680,000 are related to
Company management. In August 1995, one subordinated note in the
amount of $80,000 was paid off. During December 1995, all nineteen of
the investors exercised their warrants to purchase a total of 116,768
shares of common stock. Eighteen of the investors exchanged a total of
$127,575 of the outstanding subordinated notes and one investor paid
$12,600 in cash to exercise his warrants. Interest of approximately
$60,000 was paid to the holders of these subordinated notes during 1995.
On March 1, 1996, $210,625 of the remaining balance of $682,425 of the
subordinated notes was paid off. The remaining $471,800 was rolled
over into new notes payable February 28, 1997 with interest payable
monthly at ten percent per annum.
F-15
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
(as revised, see Note B)
NOTE J - TAXES ON INCOME
The provision for taxes on income includes the following for the year ended
December 31:
1995 1994
--------- --------
CURRENT
Federal $ 732,205 $ -
State 176,635 17,324
--------- --------
908,840 17,324
--------- --------
DEFERRED
Federal (215,390) -
State (36,658) -
--------- --------
(252,048) -
--------- --------
TOTAL $ 656,792 $ 17,324
--------- --------
--------- --------
A reconciliation between the expected federal income tax expense
computed by applying the Federal statutory rate to income before income
taxes and the actual provision for taxes on income for the year
ended December 31, 1995 is as follows:
Provision for income taxes at Federal
statutory rate $ 915,208
State income taxes, net of federal benefit 161,507
Stock options 14,638
Purchase accounting effects
Negative goodwill (134,975)
S Corporation earnings (225,746)
Other (73,840)
---------
$ 656,792
---------
---------
Deferred tax assets and liabilities at December 31, 1995 consist of the
following:
Deferred tax assets
Accrued salary expense $ 154,203
Allowance for doubtful accounts 58,223
Other 76,904
---------
$ 289,330
---------
---------
Deferred tax liability depreciation
and amortization $ (37,282)
---------
---------
There were no significant deferred tax assets or liabilities at December
31, 1994.
F-16
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
(as revised, see Note B)
NOTE K - COMMITMENTS AND CONTINGENCIES
The Company is obligated under certain operating leases for its
facilities. The leases expire at various dates through 1998, with
appropriate rentals as set forth below. Some leases also provide
for payments of taxes and certain common area costs and expenses.
The following is a summary at December 31, 1995, of the future minimum
rents due under noncancellable operating leases:
Year Ending
December 31,
------------
1996 $456,100
1997 323,100
1998 83,800
---------
Total $ 863,000
---------
---------
Total rent expense under operating leases for the years ended December 31,
1995 and 1994 was approximately $492,400 and $238,900, respectively.
Although the Company is involved in litigation in the normal course of its
business, management believes that no pending litigation in which the
Company is named as a defendant is likely to have a materially adverse
effect on the Company's financial position or results of operations.
NOTE L - STOCKHOLDERS' EQUITY
A reclassification of $498,579 from retained earnings to paid-in capital
was made which represented the approximate balance in the Company's S
corporation accumulated adjustment account which had not been distributed
to shareholders as of June 15, 1995 (date of termination of the Company's
S corporation status, see Note C).
In June 1995, the Company distributed an aggregate of $900,000 to certain
shareholders, which aggregate amount is approximately the amount of the tax
liabilities of such shareholders resulting from the Company's former
Subchapter "S" tax status. The primary source of funds for such
distribution was the proceeds from the sale of the Subordinated Notes (Note
I). Immediately after such distribution, these same shareholders loaned an
aggregate of $358,000 to the Company. Such shareholder loans bore interest
at 10% and were repaid out of the proceeds of the Company's initial public
offering in July 1995.
F-17
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
(as revised, see Note B)
NOTE L - STOCKHOLDERS' EQUITY - Continued
In July 1995, the Company completed an initial public offering of
1,200,000 shares of its common stock, and in August 1995, sold an
additional 180,000 shares pursuant to an over-allotment option. The
net proceeds to the Company from the public offering was approximately
$5,800,000.
In connection with this offering, the Company issued a warrant to the
representatives of the underwriters in this offering to purchase up to
120,000 shares of the Company's common stock at $6.00 per share (the
"Representatives' Warrant"). The Representatives' Warrant is entitled
to the benefit of adjustments in the purchase price and in the number
of shares of common stock and/or other securities deliverable upon the
exercise thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation or merger and may be
exercised at any time during the four-year period commencing on July
18, 1996. The Representatives' Warrant is restricted from sale,
transfer, assignment, or hypothecation until July 18, 1996, except to
officers or partners of the underwriters and members of the selling
group or their officers and directors.
On November 10, 1995, the Company acquired all of the outstanding
stock of En-Tech, Inc., a Colorado corporation ("En-Tech"), doing
business as Environmental Technologies, Inc., in exchange for 35,769
shares of the Company's common stock. En-Tech is engaged in the
design, construction, and operation of industrial wastewater and water
treatment facilities, and provides services in both the public and
private sectors. This acquisition was accounted for as a purchase
and, accordingly, En-Tech's assets, liabilities and results of
operations were included in the December 31, 1995 balance sheet and
statement of income since the date of acquisition. En-Tech was merged
into the Company effective March 15, 1996.
On February 9, 1996, the Company filed a registration statement on
Form SB-2 to register 402,537 shares of common stock for resale by
certain shareholders ("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.
NOTE M - PROFIT SHARING AND 401(K) PLAN
The Company maintains a Profit Sharing and 401(K) Plan, which has been
in effect since January 1, 1990. All classes of employees meeting the
participation requirements are eligible to participate in the Plan.
Company contributions to the profit sharing plan are discretionary.
The Company does, however, make a matching contribution in the amount
of 25% of the first 6% of all elective deferrals. The Company
contributed $50,304 and $29,506 for the years ended December 31, 1995
and 1994, respectively.
F-18
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
(as revised, see Note B)
NOTE N - STOCK OPTIONS
During March 1994, all options granted under a 1992 stock option plan
(619,000 shares) were exercised. Proceeds received on exercise of the
options were $2,123.
On March 1, 1995, the Company adopted an Incentive Stock Option Plan
(the "Plan") for key personnel. A total of 550,000 shares of the
Company's common stock are reserved for issuance pursuant to the
exercise of stock options (the "Options") which may be granted to
full-time employees of the Company. The Plan is administered by the
Board of Directors. In addition to determining who will be granted
Options, the Board of Directors has the authority and discretion to
determine when Options will be granted and the number of Options to be
granted. The Board of Directors may grant Options intended to qualify
for special treatment under the Internal Revenue Code of 1986, as
amended ("Incentive Stock Options") and may determine when each Option
becomes exercisable, the duration of the exercise period for Options
and for form of the instruments evidencing Options granted under the
Plan.
The maximum aggregate fair market value (determined as of the date of
grant) of the shares as to which the Incentive Stock Options become
exercisable for the first time during any calendar year may not exceed
$100,000. The Plan provides that the purchase price per share for
each Incentive Stock Option on the date of grant may not be less than
100 percent of the fair market value of the Company's common stock on
the date of grant. However, any Option granted under the Plan to a
person owning more than 10 percent of the Company's common stock shall
be at a price of at least 110 percent of such fair market value.
During May 1995, options for 181,000 shares of common stock had been
granted under the Plan, at an exercise price of $3.50 per share, of
which options for 90,500 shares will vest over a five-year period
commencing May 1, 1996 and the remaining options for 90,500 shares
will vest only upon the occurrence of certain circumstances. On
December 31, 1995, 13,500 of such remaining options were granted as
events upon which these options were contingent occurred. The Company
recorded compensation expense of $36,596 in 1995 relating to these
options. Compensation expense of $42,717 will be recorded in future
periods as these options vest over a five-year period commencing
December 31, 1996.
Options to purchase 5,000 shares of common stock at $3.50 per share,
granted in May 1995, were canceled prior to December 31, 1995 due to
the termination of the employment of one employee.
As of December 31, 1995, options to purchase 10,000 shares at $3.50
per share are exercisable and options to purchase 20,800 shares become
exercisable during 1996 at prices ranging from $3.50 to $9.90 per
share.
F-19
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
(as revised, see Note B)
NOTE N - STOCK OPTIONS - Continued
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 value
method of accounting was 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. Although, the Company intends to adopt this
statement in the first quarter of 1996, it has not yet determined the
impact of adopting this statement.
During January and February 1996, the Company granted options to
purchase 40,000 shares of common stock at exercise prices ranging from
$9.70 to $9.90 per share.
NOTE O - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
All of the Company's financial instruments are held for purposes other than
trading. The carrying amounts in the table below are the amounts at which
the financial instruments are reported in the financial statements.
The estimated fair values of the Company's financial instruments at
December 31, 1995 are as follows:
Carrying Amount Estimated Fair Value
--------------- --------------------
Cash $ 476,655 $ 476,655
Note payable - line of credit 2,424,836 2,424,836
Subordinated notes payable 682,425 682,425
Long-term debt 1,022,456 1,012,509
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
CET ENVIRONMENTAL SERVICES, INC.
Dated: July 15, 1996 By /s/ STEVEN H. DAVIS
----------------------------------
Steven H. Davis, President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
BALANCE SHEETS AND STATEMENTS OF INCOME FOUND ON PAGES F-2 TO F-4 OF THE
COMPANY'S FORM 10-KSB/A FOR THE YEAR ENDED DECEMBER 31, 1995, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 476,655
<SECURITIES> 0
<RECEIVABLES> 13,492,227
<ALLOWANCES> 135,404
<INVENTORY> 0
<CURRENT-ASSETS> 21,245,209
<PP&E> 5,265,618
<DEPRECIATION> 1,281,716
<TOTAL-ASSETS> 25,707,851
<CURRENT-LIABILITIES> 13,603,851
<BONDS> 0
0
0
<COMMON> 6,165,977
<OTHER-SE> 4,544,091
<TOTAL-LIABILITY-AND-EQUITY> 25,707,851
<SALES> 47,871,972
<TOTAL-REVENUES> 47,871,972
<CGS> 41,332,385
<TOTAL-COSTS> 41,332,385
<OTHER-EXPENSES> 3,567,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 283,234
<INCOME-PRETAX> 2,691,789
<INCOME-TAX> 882,538<F1>
<INCOME-CONTINUING> 1,809,251<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,809,251<F1>
<EPS-PRIMARY> 0.44<F1>
<EPS-DILUTED> 0
<FN>
<F1> PRO FORMA BASIS.
</FN>
</TABLE>
