<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to ________.
Commission File Number 1-13852
CET ENVIRONMENTAL SERVICES, INC.
(Exact name of small business issuer as specified in its charter)
California 33-0285964
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7670 South Vaughn Court, Englewood, Colorado 80112
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (303) 708-1360
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No .
------- -------
As of August 8, 1997, 5,798,585 shares of common stock, no par value per
share, were outstanding.
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<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
1997 1996
(UNAUDITED)
----------- ------------
CURRENT ASSETS:
Cash......................................... $ 129,717 $ 1,887,001
Accounts receivable, less allowance
for doubtful accounts of $645,467
in 1997 and $538,087 in 1996................. 8,460,544 7,454,393
Contracts in process......................... 6,382,346 6,656,862
Prepaid expenses and other current assets.... 1,344,277 2,425,216
----------- -----------
Total Current Assets...................... 16,316,884 18,423,472
EQUIPMENT AND IMPROVEMENTS, NET.................. 4,317,152 4,886,288
OTHER ASSETS..................................... 512,587 485,557
----------- -----------
$21,146,623 $23,795,317
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
1
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
1997 1996
(UNAUDITED)
----------- ------------
CURRENT LIABILITIES:
Note payable-line of credit.................. $ 4,975,651 $ 4,200,650
Other notes payable.......................... 671,800 545,000
Accounts payable............................. 4,291,622 7,758,668
Accrued expenses............................. 1,867,599 1,156,858
Current portion of long-term debt
and capital lease obligations............... 840,223 1,459,997
----------- -----------
Total current liabilities................. 12,646,895 15,121,173
DEFERRED INCOME TAXES............................ - -
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS..... 895,575 1,700,171
COMMITMENTS AND CONTINGENT LIABILITIES....... - -
STOCKHOLDERS' EQUITY
Common stock (no par value) - authorized
20,000,000 shares; issued and outstanding
5,798,585 and 5,066,537 shares in 1997
and 1996, respectively...................... 8,211,439 6,165,977
Paid-in capital.............................. 561,743 555,530
Retained earnings............................ (1,169,029) 252,466
----------- -----------
Total stockholders' equity................ 7,604,153 6,973,973
----------- -----------
$21,146,623 $23,795,317
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
2
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
---------------------------
1997 1996
(unaudited)
----------- -----------
PROJECT REVENUE............................... $12,593,652 $14,468,821
PROJECT COSTS
Direct.................................... 9,431,739 10,547,377
Indirect.................................. 1,838,170 2,094,780
----------- -----------
11,269,909 12,642,157
Gross profit.......................... 1,323,743 1,826,664
OTHER OPERATING EXPENSES (INCOME)
Selling................................... 594,613 928,985
General and administrative................ 735,590 607,180
----------- -----------
1,330,203 1,536,165
----------- -----------
Operating income (loss)............... (6,460) 290,499
OTHER INCOME (EXPENSE), NET................... (68,906) (236,768)
----------- -----------
Income (loss) before income taxes..... (75,366) 53,731
Provision (credit) for income taxes........... (114,564) 21,600
----------- -----------
NET INCOME (LOSS)............................. $ 39,198 $ 32,131
Weighted average number of shares outstanding. 5,798,585 5,083,580
----------- -----------
----------- -----------
Net income (loss) per common share............ $ .01 $ .01
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
3
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
Six Months Ended June 30,
---------------------------
1997 1996
(unaudited)
----------- -----------
PROJECT REVENUE............................... $20,111,396 $27,013,701
PROJECT COSTS
Direct................................... 14,775,176 19,472,366
Indirect................................. 3,895,393 3,667,325
----------- -----------
18,670,569 23,139,691
----------- -----------
Gross profit......................... 1,440,827 3,874,010
OTHER OPERATING EXPENSES (INCOME)
Selling.................................. 1,195,231 1,740,921
General and administrative............... 1,569,756 1,396,943
----------- -----------
2,764,987 3,137,864
----------- -----------
Operating (loss) income.............. (1,324,160) 736,146
OTHER INCOME (EXPENSE), NET................... (211,896) (302,056)
----------- -----------
Income (loss) before income taxes........ (1,536,056) 434,090
Provision (credit) for income taxes........... (114,564) 173,600
----------- -----------
NET INCOME (LOSS)............................. $(1,421,492) $ 260,490
----------- -----------
----------- -----------
Weighted average number of shares outstanding. 5,770,144 5,083,225
----------- -----------
----------- -----------
Net income (loss) per common share............ $ (.25) $ .05
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
4
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
Six Months Ended June 30,
1997 1996
(unaudited)
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss). . . . . . . . . . . . . . . . . . . . . . . . $(1,421,492) $ 260,490
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 670,867 615,767
Provision for bad debts . . . . . . . . . . . . . . . . . . . . 122,098 71,200
Employee stock option plan. . . . . . . . . . . . . . . . . . . - 10,178
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable . . . . . . . . . . (929,233) 3,068,447
Decrease (increase) in contracts in process. . . . . . . . . . 274,515 (708,482)
Decrease (increase) in income taxes receivable . . . . . . . . 426,410 -
Decrease (increase) in prepaid expenses and other assets . . . 428,483 177,055
(Decrease) increase in accounts payable and
accrued expenses. . . . . . . . . . . . . . . . . . . . . . . (3,376,081) (4,458,640)
----------- -----------
Net cash provided by (used in) operating activities. . . . . . (3,804,433) (963,985)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment. . . . . . . . . . . . . . . . . . . . . . (101,730) (798,952)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subordinated and long-term debt. . . . (25,264) -
Payments on long-term debt and capital lease obligations . . . . (107,532) (53,360)
Proceeds from exercise of Employee Stock Options. . . . . . . . 9,800 -
Proceeds from Private Placement Equity Offering .. . . . . . . . 2,041,874 -
Proceeds from National Bank of Canada line of credit,
net of payments.. . . . . . . . . . . . . . . . . . . . . . . . 4,975,651 -
Principal payments (net borrowings) on Union Bank
line of credit. . . . . . . . . . . . . . . . . . . . . . . . . (4,200,650) 1,775,814
Payments on loans from shareholders. . . . . . . . . . . . . . . (545,000) (210,625)
Distributions paid . . . . . . . . . . . . . . . . . . . . . . . - -
----------- -----------
Net cash provided by (used in) financing activities. . . . . . 2,148,879 1,511,829
----------- -----------
INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . (1,757,284) (251,108)
Cash at the beginning period . . . . . . . . . . . . . . . . . . 1,887,001 476,655
----------- -----------
Cash at end of period. . . . . . . . . . . . . . . . . . . . . . $ 129,717 $ 225,547
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
NOTE 1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for condensed
interim financial statements and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the six months ended June 30, 1997
are not necessarily indicative of results that may be expected for the
year ending December 31, 1997.
NOTE 2. The Company has maintained a $6,000,000 line of credit with Union Bank
of California, N.A. which replaced the previous banking relationship
with Comerica Bank. On May 30, 1997, the Company terminated all
financing arrangements with Union Bank with a payment of $3,108,390
using proceeds of a new financing agreement with National Bank of
Canada. This new financing is comprised of a line of credit of
$9,000,000 and an equipment term loan of $1,000,000. As of June 30,
1997, the balance owed on the line of credit was $4,975,651. The
equipment loan is still being processed.
NOTE 3. In December, 1996, the Company commenced a private placement offering
of common stock. The offering was completed in January, 1997, and
resulted in the issuance of 729,248 shares at a price of $3.20 per
share with net proceeds to the Company totaling $2,061,242. The
Company has committed to use its best efforts to register these shares
for resale prior to December 31, 1997. In conjunction with the
offering, warrants for an additional 72,925 shares of common stock
were issued as partial compensation for underwriting services. These
warrants are exercisable at a price of $3.60 per share for five years
from the date of the offering.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1997 COMPARED TO QUARTER ENDED JUNE 30, 1996
Project revenue for the quarter ended June 30, 1997 was $12,593,652, a decrease
of 13.1% from $14,468,821 for the second quarter of 1996. This decrease was due
primarily to three factors:
- Lower commercial revenues largely attributable to a large remediation
project that was active in 1996.
- The winding down of the U.S. Environmental Protection Agency Emergency
Response Cleanup Services (ERCS) Contract for Regions IX and X.
- Slower than anticipated start-up of the five year $292 million U.S.
Environmental Protection Agency Emergency and Rapid Response Services
(ERRS) Contract for Regions VI, VIII and IX awarded in December, 1996.
The composition of revenue also changed when comparing the second quarter of
1997 to the second quarter of 1996. In the second quarter of 1997, 50.5% of
total project revenue or $6,362,369 was derived from one client, the U.S.
Environmental Protection Agency. During the second quarter of 1996, the revenue
from this client was $2,720,687 or 18.8% of total project revenue. However, in
1996 the EPA revenue came from a single contract (ERCS), while in 1997 it came
from a combination of ERCS and ERRS.
A comparison of the second quarter of 1997 to the second quarter of 1996 showed
that gross profit decreased 27.5% and the gross profit margin decreased from
12.6% to 10.5% of revenue. Direct project costs increased as a percentage of
revenue to 74.9% from 72.9% for second quarter 1997 and 1996 respectively. This
was due primarily to the higher percentage of EPA work, which generally produces
lower margins. The Company's goal is to achieve a generally equal distribution
of revenues from government contracts and commercial contracts in order to
balance continuity of revenues with increased margins after direct costs.
Indirect project costs decreased $256,610 to $1,828,170 for the six months
ending June 30, 1997, but remained comparable as a percentage of revenues at
14.6% for 1997 compared to 14.5% for 1996. The decrease in actual dollars was
primarily attributable to the Company's cost reduction program.
Selling expenses for the second quarter of 1997 decreased by $334,372 or 36.0%
when compared to the second quarter of 1996 due to a more focused sales effort
and the implementation of a sales commission program. Selling expense also
decreased as a percent of revenue to 4.7% in 1997 from 6.4% in 1996.
General and administrative expenses for the second quarter of 1997 increased by
$128,410 or 21.1% when compared to the second quarter of 1996. General and
administrative expenses as a percentage of project revenue were 5.8% for the
first quarter of 1997 as compared to 4.2% for the first quarter of 1996. This
increase was primarily due to increases in insurance costs and data processing
maintenance costs.
Other income (expense) net, consists primarily of interest expense which
decreased $167,862 or 70.1% in the second quarter of 1997 compared to the second
quarter of 1996.
The Company experienced net income for the second quarter of 1997 of $39,198 as
compared with net income of $32,131 for the second quarter of 1996.
In response to these operating results, the Company has continued to tighten
operating costs by reducing operations in Phoenix, Arizona. The Company has
also implemented new labor management practices whereby all operations staff
below foreman level will be hired on a casual basis only when needed for
specific project work. This will reduce indirect labor costs and company paid
benefits.
7
<PAGE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996.
Project revenue for the six months ended June 30, 1997 was $20,111,396, a
decrease of 25.6% or $6,902,305 from $27,013,701 for the six months ended June
30, 1996. This decrease was due primarily to three factors:
- Higher commercial revenues in the first half of 1996 because of
continued work on a major chemical warehouse fire clean-up and the
commencement of work on a large remediation project.
- The winding down of the EPA ERCS Contract for Regions IX and X.
- Slower than anticipated start-up of the five year $292 million EPA
ERRS Contract for Regions VI, VIII and IX awarded in December, 1996.
Gross profit deceased by 62.8% or $2,433,183 between the six months ended
June 30, 1997 and the six months ended June 30, 1996 and the gross profit
margin decreased from 14.3% to 7.2% during the same period. Direct project
costs as a percent of revenue increased to 73.5% in 1997 from 72.1% in 1996.
This was due to the higher level of EPA work. The 6.2% increase in indirect
project costs was primarily the result of treating fringe benefits on direct
labor as indirect cost in 1997 (as opposed to direct cost in 1996), which in
turn was largely offset by overhead reductions from the Company's cost
containment program.
Selling expenses for the six months ended June 30, 1997 decreased by $545,690 or
31.3% compared to the six months ended June 30, 1996 due to a reduction of sales
staff and implementation of a sales commission program.
General and administrative expenses for the first six months of 1997 increased
by $172,813 or 12.4% from the first six months of 1996 primarily due to
increases in insurance and data processing maintenance costs, and from costs
associated with relocating the corporate office from California to Colorado.
A net loss of $1,421,492 was incurred for the six months ended June 30, 1997, as
compared to a profit of $260,490 for the six months ended June 30, 1996. This
decrease resulted from the lower level of revenue in the first half of 1997.
In response to these results, the Company has continued with its cost
containment program, and in the first six months of 1997 has closed offices in
Atlanta, Georgia and Georgetown, Colorado, and reduced operations in Phoenix,
Arizona.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased by $367,690 from $3,302,299 at December 31, 1996
to $3,669,989 at June 30, 1997. The current ratio increased from 1.22/1 at
December 31, 1996, to 1.29/1 at June 30, 1997. Current assets decreased by
$2,106,588 during the first six months of 1997, primarily due to a decrease in
cash of $1,757,284 and prepaid expenses and other current assets by $1,080,939,
comprised mostly of continued amortization of prepaid insurance premiums and a
reduction of income taxes receivable. This decrease was partially offset by an
increase in accounts receivable of $1,006,151.
Equipment and improvements, net showed a decrease of $569,136 during the first
six months of 1997, primarily due to depreciation with very little in capital
expenditures during the period.
The decrease in current liabilities of $2,474,278 during the first six months of
1997 resulted primarily from a decrease in accounts payable of $3,467,046, which
was partially offset by an increase in accrued expenses of $710,741.
In December, 1996, the Company commenced a private placement offering of common
stock. The offering was completed in January, 1997, and resulted in the
issuance of 729,248 shares at a price of $3.20 per share with net proceeds to
the Company totaling $2,061,242. The Company has committed to use its best
efforts to register these shares for resale prior to December 31, 1997. In
conjunction with the offering, warrants for an additional 72,925
8
<PAGE>
shares of common stock were issued as partial compensation for underwriting
services. These warrants are exercisable at a price of $3.60 per share for
five years from the date of the offering.
The Company has maintained a $6,000,000 line of credit with Union Bank of
California, N.A. which replaced the previous banking relationship with Comerica
Bank. On May 30, 1997 the Company entered into a new financing agreement with
National Bank of Canada. This agreement is comprised of a line of credit of
$9,000,000 and an equipment term loan of $1,000,000. Upon execution of the new
loan agreement, proceeds of $3,108,390 were used to pay off all outstanding
indebtedness to Union Bank. As of June 30, 1997, the balance owed on the new
line of credit is $4,975,651. The equipment loan is still being processed.
During the first quarter of 1997 the Company paid back $545,000 of short term
notes executed in November, 1996 with Signal Hill Petroleum. The Company also
extended to February 28, 1998, notes to shareholders totaling $671,800.
Management believes that funds provided from operations and the new line of
credit will be sufficient to fund the Company's immediate needs for working
capital. Management anticipates that capital expenditures in the foreseeable
future will be minimal and funded from working capital or the Company's
equipment line, and any leases will be short term.
9
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 23, 1997, the Company settled a lawsuit filed by LMU and Company in
February, 1997, claiming cash and other compensation for services rendered in
conjunction with the development of the private placement equity offering
completed in January, 1997.
ITEM 2. CHANGES IN SECURITIES
In conjunction with the settlement of the above referenced lawsuit, the Company
issued warrants for the purchase of 100,000 shares of common stock at a price of
$4.25 per share to LMU and Company as partial compensation for future services
to be performed by LMU and Company under the terms of a Management Services
Agreement.
In issuing the warrants, the Company relied on the exemption in Section 4(2) of
the Securities Act of 1933, as amended. The purchaser of the Warrants is an
accredited and sophisticated investor and the appropriate restrictive legend was
placed on the face of the Warrants.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual shareholders meeting held on May 15, 1997, the following matters
were voted affirmatively:
a) Election of the following directors to serve until the next annual
shareholders meeting:
--------------------------------------------------------------------
NOMINEE FOR AGAINST ABSTENTIONS
--------------------------------------------------------------------
Craig C. Barto 3,282,030 0 199,246
--------------------------------------------------------------------
Robert S. Coldren 3,471,030 0 10,246
--------------------------------------------------------------------
Douglas W. Cotton 3,473,830 0 7,446
--------------------------------------------------------------------
Steven H. Davis 3,473,830 0 7,446
--------------------------------------------------------------------
John G. L. Hopkins 3,473,830 0 7,446
--------------------------------------------------------------------
Robert S. Taylor 3,471,330 0 9,946
--------------------------------------------------------------------
Rick C. Townsend 3,471,030 0 10,246
--------------------------------------------------------------------
b) Confirmation of Grant Thornton LLP as the Company's outside auditors
for fiscal year 1997.
----------------------------------------------
FOR AGAINST ABSTENTIONS
----------------------------------------------
3,454,674 21,102 5,500
----------------------------------------------
10
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule Filed herewith electronically
(b) Reports on Form 8-K
None.
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CET ENVIRONMENTAL SERVICES, INC.
Dated: August 12, 1997 By: /s/ STEVEN H. DAVIS
--------------------------------------
Steven H. Davis, President
Dated: August 12, 1997 By: /s/ RICK C. TOWNSEND
--------------------------------------
Rick C. Townsend, Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 129,717
<SECURITIES> 0
<RECEIVABLES> 9,120,729
<ALLOWANCES> (660,185)
<INVENTORY> 6,593,338
<CURRENT-ASSETS> 16,316,884
<PP&E> 7,366,279
<DEPRECIATION> (3,049,127)
<TOTAL-ASSETS> 21,146,623
<CURRENT-LIABILITIES> 12,646,895
<BONDS> 895,575
0
0
<COMMON> 8,211,439
<OTHER-SE> (607,286)
<TOTAL-LIABILITY-AND-EQUITY> 21,146,623
<SALES> 20,111,396
<TOTAL-REVENUES> 20,111,396
<CGS> 0
<TOTAL-COSTS> 18,670,569
<OTHER-EXPENSES> 2,764,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 211,896
<INCOME-PRETAX> (1,536,056)
<INCOME-TAX> (114,564)
<INCOME-CONTINUING> (1,421,492)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,421,492)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
