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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[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, 1996
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 (I.R.S. Employer
Of Incorporation Or Identification Number)
organization)
7670 South Vaughn Court, Ste. 130, Englewood, Colorado 80112
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(Address of Principal Executive Offices, Including Zip Code)
Issuer's telephone number, including area code: (303) 708-1360
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 24, 1997, 5,798,585 Shares of the Registrant's Common Stock were
outstanding. The aggregate market value of voting stock held by nonaffiliates
of the Registrant was approximately $13,100,000.
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: $54,918,520
Documents incorporated by reference: Proxy Statement for Annual Meeting of
Shareholders.
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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 five 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 500 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, thermal desorption, soil
washing and groundwater remediation systems. The Company also offers a broad
range of services in support of municipal and industrial water and wastewater
treatment, military base closures, and other operations with significant
environmental components. The Company believes it has gained a solid
reputation for promptly providing cost effective and innovative remediation
solutions.
In November 1996, the Company relocated its corporate headquarters to
Englewood, Colorado from Tustin, California to be more centrally located for
its expanding business. The Company also maintains offices in Tustin,
California; Richmond, California; Portland, Oregon; Edmonds, Washington;
Denver, Colorado; Phoenix, Arizona; Pasadena, Texas; New Orleans, Louisiana;
Jackson, Mississippi; Mobile, Alabama; and Atlanta, Georgia.
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 overallotment option. The net proceeds to the
Company from the public offering were approximately $5,800,000. Concurrent
with IPO, the Company became listed on the American Stock Exchange under the
call letters "ENV."
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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 was merged
into the Company effective March 15, 1996.
In December 1996, the Company commenced a Private Placement Offering of
Common Stock. This offering was completed in January 1997, and resulted in
the issuance of 729,248 shares with net proceeds to the Company totalling
$2,053,562. 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.
THE ENVIRONMENTAL REMEDIATION INDUSTRY
Environmental Business International, Inc. ("EBI") estimated that the
total United States environmental services industry would generate revenues
during 1996 in excess of $90 billionand that the remediation industry would
account for approximately $8.5 billion of such estimated revenue 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.
Since 1994, relaxing cleanup regulations and pressure to create uses for
contaminated and idle properties has driven the rapid growth of industrial
redevelopment or "Brownfield" site remediation programs. The term
"Brownfield" comes from an EOA sponsored program to study the redevelopment
of "abandoned, idled, or underused industrial facilities where expansion or
redevelopment is complicated by real or perceived environmental
contamination" (U.S. EPA). The exact number of Brownfield sites is unclear;
however, their existence and a governmental effort to facilitate their
cleanup have created an opportunity for full service remediation as well as
financial participation in the redevelopments.
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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 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. The Company utilizes the following resources to provide turnkey
environmental remediation services to its customers:
o Registered engineers, geologists and earth scientists for
performing investigations and remediation feasibility studies.
o In-house laboratory facilities for evaluating water treatment
techniques, numerous remedial technologies, monitoring ongoing
projects, and accelerating remediation.
o Engineers, earth scientists and construction managers to design
remediation and water/wastewater treatment systems from the
conceptual stage through final design.
o A team of certified water treatment system operators to provide
design, construction, consultation and operation for municipal,
industrial, and mining wastewater treatment.
o 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.
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o Manpower and equipment for erecting or installing remediation
equipment, support buildings and enclosures for remediation of
contaminated soil, water, sludge or sediment.
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:
o Phase I Site Assessments
o Site Characterizations
o Remedial Investigations/Feasibility Studies
o Interim Remedial Management Programs
o Health Risk Assessments
o Remedial Action Plans
o Remedial Design and Construction
o Underground Storage Tank Management and Removal
o Regulatory Agency Coordination and Maintenance
o Remediation System Operation and Maintenance
o Facility Decontamination, Demolition and Site Restoration
o 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:
o Bioremediation/Bioventing
o Vapor Extraction
o Gas/Air Sparging
o Thermal Desorption (the Company owns and operates a
TD system that is permitted in several states
o Chemical Fixation
o Soil Washing
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o Groundwater Remediation Systems
- Ex Situ
o Free Product Extraction
o Activated Carbon Adsorption
o Air Stripping
o Advanced Oxidation Technologies (Ultraviolet and Ozone)
- In Situ
o Gas/Air Sparging
o Bioremediation
o Physical/Chemical Treatment
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:
o Mechanical Maintenance and Construction
o Facility Decontamination and Demolition
o Waste Area Closures
o Drum Removals
o Lab Packing and Waste Services
o Excavation, Transport and Disposal of Waste
WATER AND WASTEWATER TREATMENT. The Company has gained a vast and
comprehensive body of experience in performing a variety of traditional and
innovative water and wastewater treatment services. These services range from
laboratory treatability studies to construction management and from conceptual
design to operation and maintenance.
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
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The Company provides water and wastewater treatment services to both
public and private sector clients in the industrial, mining, municipal, and
manufacturing markets. The key water/wastewater services provided are:
FACILITY DESIGN AND CONSTRUCTION. The Company's process and mechanical
engineers have decades of experience in the planning, design, and
construction of water and wastewater treatment facilities. Facilities are
designed to minimize operating costs through the use of such techniques as
energy efficient low-pressure air systems, ergonomic treatment building
design, and rotating equipment optimized for energy consumption. The Company
employs state of the art construction management techniques to efficiently
construct water and wastewater treatment plants with its own work forces.
FACILITY OPERATION AND MAINTENANCE SERVICES. The Company provides cost
effective operation and maintenance services that are customized to meet the
needs of specific clients. All operations contracts include the development
of site-specific preventive maintenance programs and standard operating
procedures. All operators have routine equipment, maintenance skills, and are
supported by a staff of mechanics who perform major maintenance of equipment,
including rebuilds.
LAB CAPABILITIES. The Company has an in-house laboratory designed and
certified to meet the needs of our water and wastewater treatment clientele.
In addition to a complete battery of wet chemical and bacteriological
testing, the lab is equipped to conduct treatability studies for water and
wastewater treatment processes and pilot scale treatment plant investigations.
PROJECT FINANCING AND CONCESSION AGREEMENTS. The Company offers clients
a comprehensive concession service that includes the highest quality facility
design, construction, financing, and operational services. With today's
increasingly stringent regulatory environment, and the need for more
sophisticated treatment processes, the concession approach allows clients to
place their water and wastewater treatment responsibilites in the hands of
the Company's qualified team of professionals.
OPERATION AND MAINTENANCE SERVICES. Although a treatment process may be
properly designed and constructed, successful remediation or water/wastewater
treatment depend 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.
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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 Exxon
Unocal LASMO Oil and Gas, Inc.
Tesoro Enron Oil Trading and Transportation
Ultramar
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
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.
On December 20, 1996, the Company was notified by EPA of its selection as
the successful bidder for the Emergency and Rapid Response Services (ERRS)
West contract. This contract calls for the provision of similar services as
the ERCS contract and covers EPA Regions VI, VIII and IX. It runs for five
years and was originally estimated at $250 million. Subsequent to award, the
Company was notified by EPA that the estimated contract amount has been
increased to $292 million. The Company is currently awaiting notification on
results from its bid for ERRS contracts in EPA Regions IV and X. The Company
also provides similar emergency response services to other governmental and
commercial clients under various contracts on an as-needed basis.
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The ERRS West Contract, like most of the Company's other government
contracts, is not a binding agreement requiring the performance of work by
the Company and payment by the government. This occurs only when the
government issues work orders under the contract. Management believes, based
on its prior experience with government contracts, that the Company will
receive work orders for a substantial portion if not the full amount of the
contract during the life of the contract, or extensions thereof. However, the
possibility always exists that the government will terminate work under the
contract at any time.
The Company is a prime contractor on a three year, $25 million Pre-placed
Remedial Action Contract (PRAC) 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 Prime Contractor for the McClellan Environmental
Technologies Remediation Implementation Contract (METRIC). The contract has a
5-year ordering period and a potential program value of $19 million. The
METRIC program, sponsored by the United States Air Force, has been developed
to repair environmental damage at various installations and to prevent
further environmental degradation at these installations. Under this
contract, the Company will perform work primarily at McClellan Air Force
Base, near Sacramento, California, and its satellite facilities.
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 and southeastern United
States and the Trust Territory of the Pacific Islands. In 1996, the Company
opened an office in Brazil to pursue the growing water and wastewater market.
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 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:
o 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.
o 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.
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o Remediation at active industrial sites under the RCRA corrective
action program represents an important private sector segment in an
early stage of development.
o 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
controlled 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.
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.")
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 utilizes non-proprietary specialized software for job
cost accounting and governmental contracts to assist with both bidding and
managing projects.
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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.
MARKETING
The Company has a dedicated marketing and sales staff of approximately 20
people, including sales professionals, proposal writers, technical editors,
and project estimators. 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.
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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 sectors of the environmental
industry, the Company can adapt to changes in the marketplace by allocating
its resources to the industry sector 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 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
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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.
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
13
<PAGE>
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.
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.
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
14
<PAGE>
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 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.
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
15
<PAGE>
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.
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, which has been settled. 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.
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 $2 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 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
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<PAGE>
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 200 persons full time and 50
part time at its 12 offices, including 4 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 permanent offices
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 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
7670 S. Vaughn Court, Ste. 130, Englewood, Colorado, in approximately 4,600
square feet of leased office space. The lease expires in July, 1998. 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
17
<PAGE>
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
3033 Richmond Parkway, Suite 300
Richmond, California..................... 7,664 April 30, 2001 $6,438
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
7670 S. Vaughn Court, Ste. 130
Englewood, Colorado...................... 4,600 July 31, 1998 $4,622
5275, 5251, & 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 Carrere Court
New Orleans, Louisiana................... 13,520 April 14, 1998* $3,500
3222 Pasadena Freeway
Pasadena, Texas.......................... 2,755 May 31, 2001 $4,375
275-A Industrial Drive
Jackson, Mississippi...................... 11,325 October 31, 1998* $3,080
1401 Business Center Drive
Conyers, Georgia 30207.................. 5,000 June 30, 1997 $1,540
- ------------------------
* 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.
18
<PAGE>
On February 12, 1997, LMU & Company ("LMU") filed suit against the
Company alleging that LMU was entitled to cash compensation of up to $25,000
and warrants to purchase 100,000 shares of Common Stock of the Company at an
exercise price based on the market price on or about November 1, 1996, for
services rendered in conjunction with the development of the Private
Placement equity offering which completed in January, 1997. The Company is
currently in settlement discussions with the plaintiff.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the period covered by this report.
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<PAGE>
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
March 31, 1996........... $ 11.625 $ 9.00
June 30, 1996............ $ 13.375 $ 9.50
September 30, 1996....... $ 9.875 $ 5.375
December 31, 1996........ $ 7.50 $ 3.8125
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of record
holders of the Company's common stock at March 21, 1997, was 124. 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.
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. It also provides water and wastewater treatment
facilities and services to municipal and industrial clients. 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, Denver and St. Louis were opened in 1994; offices in Houston, New
Orleans, Jackson, Mobile, Atlanta and Georgetown, Colorado were opened in
1995; and offices in Birmingham, Kansas City, Tucson and Campinas, Brazil
were opened in 1996. In late 1996, the corporate offices of the Company were
moved to Englewood, Colorado from Tustin, California.
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<PAGE>
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:
<TABLE>
<CAPTION>
RELATIONSHIP PERCENTAGE
TO PROJECT REVENUE PERIOD TO
------------------------------- PERIOD CHANGE
YEAR ENDED DECEMBER 31, --------------------
------------------------------- 1996 VS. 1995 VS.
1996 1995 1994 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Project Revenue.................................... 100.0% 100.0% 100.0% 14.7% 103.7%
Project Costs:
Direct .......................................... 79.5 71.7 75.1 27.1 95.6
Indirect......................................... 14.9 14.7 10.1 16.1 187.2
--------- --------- --------- --------- ---------
Gross Profit (Loss)................................ 5.6 13.6 14.8 (52.5) 87.5
Other Operating Expenses (Income):
Selling ......................................... 5.6 3.6 4.6 77.5 57.9
General and Administrative....................... 5.8 4.3 4.2 53.0 122.6
Amortization of excess of acquired
net assets in excess of cost.................. 0.0 (0.7) (1.6) (100.0) (8.3)
--------- --------- --------- --------- ---------
Operating Income (Loss)............................ (5.8) 6.3 7.6 (205.4) 66.1
Other Income (Expense)............................. (1.7) (0.7) (0.6) (185.7) 89.4
--------- --------- --------- --------- ---------
Income (Loss) before taxes on income............... (7.5) 5.6 7.0 (252.3) 64.0
Taxes on Income.................................... (0.7) 1.4 0.1 (152.0) 3691.2
--------- --------- --------- --------- ---------
Net Income (Loss).................................. (6.8%) 4.3% 6.9% (284.6%) 25.3%
--------- --------- --------- --------- ---------
Pro forma information (Note 1):
Historical earnings before income taxes.......... -- 5.6% 7.0% -- 64.0%
Pro forma income taxes........................... -- 2.3 1.7 -- 114.2
Pro forma net income............................. -- 3.8 5.3 -- 47.2
</TABLE>
- ------------------------
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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<PAGE>
The Company's revenues continued to grow in 1996, but at a much slower
rate. Total revenues increased 14.7 percent from 1995 to 1996 compared to
103.7 percent from 1994 to 1995. In the past two years, the Company has
accomplished its goal of increasing the proportion of non-EPA work (in 1994
EPA contract work accounted for 67 percent of revenues). With the award of
the EPA ERRS contract, the proportion of non-EPA work will most likely reduce
in 1997. However, the Company's goal is to maintain an equal distribution of
revenues from government contracts and commercial contracts to produce a
solid continuity of revenues, while optimizing margins.
The Company has performed services for over 500 commercial customers. The
following table sets forth the percentages of the Company's revenues
attributable to the EPA vs. other non-EPA public and private sector customers:
YEAR ENDED DECEMBER 31
--------------------------------------------------
1996 1995
------------------------ -----------------------
Non-EPA............. $ 44,065,990 80.2% $ 34,959,345 73.0%
EPA................. $ 10,852,530 19.8% $ 12,912,627 27.0%
------------- --------- ------------- ---------
Total............... $ 54,918,520 100.0% $ 47,871,972 100.0%
------------- --------- ------------- ---------
Direct costs as a percentage of revenues increased significantly from 72.1
percent in 1995 to 79.5 percent in 1996. This increase was due to a variety of
factors:
o Increased competition, which results in tighter bidding.
o Cost overruns on certain projects.
o Additional work performed without obtaining formal change orders.
o The write-down in the fourth quarter of $761,811 in revenue related
to a specific phase of work performed on a $13 million project
involving clean-up of a major chemical fire. Because there were
multiple entities involved on the client side, the authorization
for this phase of work was not fully documented. Management
believes that the work product for this phase is important to the
ongoing litigation related to the fire and that there is reasonable
likelihood of collecting a substantial portion of this amount. All
other amounts related to the project have been collected.
Indirect expenses increased from $7,039,432 (14.7% of revenues) in 1995
to $8,175,951 (14.9% of revenues) in 1996. This increase was due primarily to
the inclusion of a full year's cost in 1996 for offices opened in mid-1995,
and the opening of additional offices in 1996.
The combined increase in direct and indirect operating costs caused gross
profit to decline from 13.6 percent of revenues in 1995 to 5.6 percent in
1996. Much of this decline is attributable to the efforts undertaken to win
the new EPA work. Several of the offices opened in 1995 and 1996 were
specifically related to qualifying for that work. Since the award was delayed
for one year, significant extra costs were incurred. Nevertheless, in
response to this decline, the Company has taken the following corrective
actions:
22
<PAGE>
o Closed unprofitable offices in Birmingham, Georgetown, Kansas City,
St. Louis and Tucson.
o Restructured employee benefit programs to reduce cost.
o Reduced staff and realigned personnel classifications to better control
indirect labor costs.
o Hired a new Chief Financial Officer with significant industry
experience and further enhanced financial management staff in
conjunction with the move of the corporate office.
o Implemented revised processes and controls for contracts
administration, revenue recognition, billing and collection, and
accounts payable.
o Initiated an analysis of pricing and bidding procedures to ensure
new projects are bid with adequate margins.
These actions are projected to significantly reduce overhead and improve
project performance, but are not expected to have any material impact on the
Company's ability to perform current projects or obtain new work.
Selling expenses increased from 3.6 percent of revenue in 1995 to 5.6
percent of revenue in 1996. This 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, with 1996
results reflecting a full year of these personnel costs. Approximately 50% of
the costs in 1996 were related to the development of specific bids and
proposals, both public and private sector.
General and administrative expenses increased from 4.3 percent of
revenues in 1995 to 5.8 percent of revenues in 1996. Contributors to this
increase included higher insurance costs, additional financial management
personnel, move of the corporate office and an increase in the allowance for
doubtful accounts of approximately $400,000.
Amortization of acquired net assets in excess of cost was $337,437 in
1995 ($0 in 1996). 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 from $326,331 in 1995 to $627,537 in
1996, due primarily to increased borrowing. The increased borrowings were
necessary because of greater working capital needs due to the Company's
expansion into new geographic areas, the growth in the Company's business,
and a tightened cash flow in the last half of the year.
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
23
<PAGE>
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 $927,101 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 $357,865 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.
In 1996, the Company was able to carryback losses equivalent to 1995
profits for federal tax purposes, resulting in a federal tax benefit of
$353,878 for 1996. This carryback does not apply for state income taxes, but
there will be amounts available as loss carryforward for both federal and
state tax purposes in 1997.
BONDING
The amount of bonding capacity offered by sureties is a function of the
financial health of the company requesting the bond. At March 1997, 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 was
collateralized by all assets of the Company and personally guaranteed by the
shareholders of the Company. Interest accrued at Comerica's base rate plus
1.5 percent, 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. 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. The combined amount of these loans was refinanced in March, 1996
as described below.
In January 1995, the Company borrowed $550,000 from the Birnie
Children's Trust No. I (the "Birnie Trust") at the interest rate of 2
percent per month, due and payable monthly. The
24
<PAGE>
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. 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 receivable 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 per annum.
On July 24, 1996, the Company borrowed an additional $200,000 from the
Birnie Trust under a Promissory Note payable in one year at 10% interest. On
March 1, 1997, the notes totaling $671,800 were extended to February 28,
1998.
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 nine percent
commencing December 30, 1995 and January 30, 1996, respectively. As of
December 31, 1996, the combined balance due on these loans was $296,675.
In March, 1996, the Company established a line of credit facility with
Union Bank of California, N.A. (the "Bank") to replace the Comerica facility.
This line provides up to $6,000,000 of available credit to the Company based
upon a percentage (75%) of eligible receivables (as defined in the loan
agreement). Interest is payable monthly at the Bank's adjusted LIBOR Rate
plus 2% or the Bank's Reference Rate, at the option of the Company. The line
of credit facility has an expiration date of May 1, 1997. In addition, the
Company borrowed $124,940 from the Bank for the purchase of equipment.
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%.
25
<PAGE>
The Company has been notified by the Bank that the Company is in breach
of certain loan covenants relating to the three Company loans from the Bank
under which, as of December 31, 1996, the Company had borrowed an aggregate
of approximately $4,776,000. The Company is not in default with respect to
any loan payments due to the Bank. The breached covenants relate to the ratio
of the Company's liabilities to its tangible net worth, the maintenance of a
minimum net worth, and the maintenance of profitable operations. The Bank
notified the company that no further funds would be loaned while the Company
is in breach of covenants.
The Company has entered into an agreement with the Bank whereby the Bank
has agreed to forebear from taking any action against the Company based upon
the breached covenants as long as the Company does not default on any payment
due to the Bank or otherwise breaches any of the other terms of the
forbearance agreement. Under the terms of the forbearance agreement, in
addition to regular interest payments, the Company has made payments of
$500,000 on January 10, 1997; $250,000 on February 15, 1997; $169,244 on
February 26, 1997; and $250,000 on March 15, 1997. An additional $250,000 is
due on April 15, 1997 with the balance of the loan repaid not later than May
1, 1997. These payments are personally guaranteed by certain of the officers
and directors of the Company. The forbearance agreement has also increased
the interest rate on the line of credit to the Bank's Reference Rate plus 1.
5%.
If the Company does not comply with the forbearance agreement, the Bank
could declare the loans in default and could proceed to foreclose on the
collateral securing the loans, which consists of all the Company's accounts
receivable, inventory, equipment, and other assets. Any such actions by the
Bank would have a material adverse impact upon the Company. Management
intends to fully comply with the forbearance agreement and believes that they
will be able to secure enough funds through operations or by obtaining
additional financing sufficient to pay all amounts due the Bank within the
required time frame.
On March 25, 1997, the Company accepted a proposal (out of three
proposals received) from another bank to replace the Union Bank facility with
a line of credit of $9,000,000 and equipment term loan of $1,000,000. This
proposal is contingent upon due diligence and approval of the bank's credit
committee.
On November 8, 1996, the Company borrowed $545,000 from Signal Hill
Petroleum under a Promissory Note payable in 30 days at 10% interest per
annum. This note was extended to January 15, 1997, then repaid in the amount
of $300,000 on January 15, 1997, and $250,129 (including accrued interest) on
February 27, 1997.
The Company has also financed vehicles and equipment using long term
capital leases from various entities. As of December 31, 1996, the combined
balance due on these leases was $1,204,457.
During 1996, the Company increased its available cash by $1,410,346. Cash
flow provided by operations was $1,057,486 as the Company experienced a
significant decrease in accounts receivable. This was compared to cash flow
used in operations of $4,284,087 in 1995. During 1996, net cash used in
investing activities was $1,457,777 compared to $2,777,630 in 1995. This was
due to reduced equipment purchases. Cash flow provided by financing
activities was $1,810,637 in 1996, compared to $7,106,417 in 1995 which
included the receipt of $5,763,679 from the Company's initial public offering.
26
<PAGE>
As of December 31, 1996, the Company had working capital of $3,302,299
compared to working capital of $8,323,783 at December 31, 1995. The change was
primarily due to the decrease in accounts receivable.
Management believes that funds provided from operations, the new lines of
credit and the sale of stock in January 1997 (as described below) will be
sufficient to fund the Company's immediate needs for working capital.
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 $51,000 in the aggregate.
Management anticipates that capital expenditures in the foreseeable future
will be at similar levels to 1996, and will be funded from working capital and
equipment leases.
In December, 1996, the Company commenced a Private Placement Offering of
Common Stock. This offering was completed in January 1997, and resulted in the
issuance of 729,248 shares with net proceeds to the Company totalling
$2,053,562. The shares issued pursuant to this offering are currently classified
as "restricted securities" as such term is defined in Rule 144 of the Securities
Act of 1933. 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.
ITEM 7. FINANCIAL STATEMENTS.
Please see pages F-1 through F-22.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
27
<PAGE>
PART III
ITEM 9. 10, 11 AND 12. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT; EXECUTIVE
COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT;
AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these Items is incorporated herein by reference
to the company's definitive proxy Statement relating to the Annual Meeting of
Shareholders to be held May 15, 1997.
28
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION LOCATION PAGE NO.
- ----------- --------------------------------------------- --------------------------------------------- ---------------
<C> <S> <C> <C>
3.1 Amended and RestatedArticles of Incorporation Incorporated by reference to 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 Agreement Incorporated by reference to Exhibit 10.2 to --
the Company's Form SB-2 Registration
Statement No. 33-91602
10.3 Loan Documents Between Comerica Bank and the Incorporated by reference to Exhibit 10.3 to --
Company the Company's Form SB-2 Registration
Statement No. 33-91602
10.4 Award/Contract No. 68-W1-0012 Between the Incorporated by reference to Exhibit 10.4 to --
Company and the EOA (unredacted) the Company's Form SB-2. Registration
Statement No. 33-91602
23 Consent of Grant Thornton LLP Filed herewith electronically --
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 of Form 8-K.
29
<PAGE>
[Grant Thornton Letterhead]
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, 1996 and 1995, and the related statements
of operations, stockholders' equity and cash flows for each of 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.
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, 1996 and 1995, and the results of its
operations and its cash flows for each of the years then ended, in conformity
with generally accepted accounting principles.
/s/GRANT THORNTON LLP
Denver, Colorado
March 25, 1997
F-1
<PAGE>
CET Environmental Services, Inc.
BALANCE SHEETS
December 31,
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash...................................... $ 1,887,001 $ 476,655
Accounts receivable, less allowance for
doubtful accounts; $538,087 in 1996 and
$135,404 in 1995........................ 7,454,393 13,356,823
Contracts in process...................... 6,656,862 6,213,490
Income tax receivable..................... 1,282,778 --
Due from related party.................... 158,010 --
Other receivables......................... 199,016 146,531
Inventories............................... 171,642 256,140
Prepaid expenses.......................... 613,770 506,240
Deferred income tax asset................. -- 289,330
------------ ------------
Total current assets.................... 18,423,472 21,245,209
------------ ------------
EQUIPMENT AND IMPROVEMENTS
Field equipment and vehicles.............. 5,672,638 4,061,144
Office furniture, equipment and
leasehold improvements.................. 1,591,910 1,204,474
------------ ------------
7,264,548 5,265,618
Less allwoance for depreciation
and amortization........................ (2,378,260) (1,281,716)
------------ ------------
Equipment and improvements--net......... 4,886,288 3,983,902
GOODWILL.................................... 352,644 373,061
DEPOSITS.................................... 132,913 105,679
------------ ------------
$ 23,795,317 $ 25,707,851
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
CET Environmental Services, Inc.
BALANCE SHEETS - CONTINUED
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Note payable--line of credit.............. $ 4,200,650 $ 2,424,836
Loan from shareholder..................... 545,000 --
Acounts payable........................... 7,758,668 7,857,824
Accrued expenses.......................... 1,156,858 1,730,853
Income taxes payable...................... -- 372,162
Current obligations under capital leases.. 329,934 208,248
Current portion of long-term debt......... 1,130,063 327,503
------------ ------------
Total current liabilities............... 15,121,173 12,921,426
DEFERRED INCOME TAXES....................... -- 37,282
OBLIGATONS UNDER CAPITAL LEASES............. 874,523 661,697
NOTES PAYABLE TO RELATED PARTIES............ 671,800 682,425
LONG-TERM DEBT.............................. 153,848 694,953
COMMITMENTS AND CONTINGENT LIABILITIES...... -- --
STOCKHOLDERS' EQUITY
Common stock (no par value)--authorized
20,000,000 shares; issued and
outstanding, 5,066,537 shares........... 6,165,977 6,165,977
Paid-in capital........................... 555,530 535,175
Retained earnings......................... 252,466 4,008,916
------------ ------------
Total stockholders' equity.............. 6,973,973 10,710,068
------------ ------------
$ 23,795,317 $ 25,707,851
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Ch Environmental Services Inc.
STATEMENTS OF OPERATIONS
Year Ended December 31,
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
PROJECT REVENUE.................................................................... $ 54,918,520 $ 47,871,972
PROJECT COSTS
Direct........................................................................... 43,660,435 34,343,855
Indirect......................................................................... 8,175,951 7,039,432
------------- -------------
51,836,386 41,383,287
------------- -------------
Gross profit................................................................... 3,082,134 6,488,685
------------- -------------
OTHER OPERATING EXPENSES (INCOME)
Selling.......................................................................... 3,101,197 1,747,298
General and administrative....................................................... 3,158,707 2,064,848
Amortization of excess of acquired net asset in excess of cost................... -- (337,437)
------------- -------------
6,259,904 3,474,709
------------- -------------
Operating income (loss)........................................................ (3,177,770) 3,013,976
------------- -------------
OTHER INCOME (EXPENSE)
Interest expense, net............................................................ (627,537) (326,331)
Other income (expense)........................................................... (292,998) 4,144
------------- -------------
(920,535) (322,187)
------------- -------------
Income (loss) before taxes on income........................................... (4,098,305) 2,691,789
(Benefit) taxes on income...................................................... (341,855) 656,792
------------- -------------
NET INCOME (LOSS)............................................................ $ (3,756,450) $ 2,034,997
------------- -------------
------------- -------------
Weighted average number of shares outstanding...................................... 5,066,537 4,113,725
Net income per common share...................................................... $ (0.74)
-------------
-------------
Pro forma Information (Note B)
Historical earnings before income taxes.......................................... $ -- $ 2,691,789
Pro forma income taxes........................................................... 882,538
------------- -------------
Pro forma net income............................................................. $ -- $ 1,809,251
------------- -------------
------------- -------------
Pro forma net income per common share............................................ $ -- $ 0.44
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CET Environmental Services, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996 And 1995
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995.................................... 3,534,000 $ 12,123 $ -- $3,399,599 $3,411,722
Distributions paid............................................ -- -- -- (927,101) (927,101)
Undistributed S Corp. 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
Issuance of stock options at exercise price below market value -- -- 20,355 -- 20,355
Net income (loss) for the year................................ -- -- -- (3,756,450) (3,756,450)
--------- --------- --------- --------- ------------
Balance at December 31, 1996.................................. 5,066,537 $6,165,977 $ 555,530 $ 252,466 $6,973,973
--------- --------- --------- --------- ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
CET Environmental Services, Inc.
STATEMENT OF CASH FLOWS
Year Ended December 31, 1996 And 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Increase (decrease) in cash
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................. $ (3,756,450) $ 2,034,997
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization................................................... 1,252,781 761,840
Amortization of excess of acquired net assets in excess of cost................. -- (337,437)
Provision for bad debts......................................................... 402,683 71,441
Deferred income taxes........................................................... 252,048 (250,756)
Loss on sale of equipment....................................................... 13,304 18,842
Employee stock option plan...................................................... 20,355 36,596
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.................................... 5,499,747 (10,543,941)
Increase in contracts in process.............................................. (443,372) (3,253,311)
Increase in due from related party............................................ (158,010) --
Increase in income tax & other receivables.................................... (1,335,263) (92,791)
Increase in prepaid expenses.................................................. (107,530) (415,462)
(Increase) decrease in inventory and deposits................................. 50,210 (200,163)
Increase (decrease) in accounts payable....................................... (99,156) 6,220,408
Increase (decrease) in accrued expenses and income taxes...................... (533,861) 1,665,650
------------- -------------
Net cash (used in) provided by operating activities......................... 1,057,486 (4,284,087)
------------- -------------
INVESTING ACTIVITIES:
Purchase of equipment............................................................. (1,523,418) (2,779,478)
Proceeds from sale of equipment................................................... 65,641 1,848
------------- -------------
Net cash used in investing activities....................................... (1,457,777) (2,777,630)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.......................................... 766,751 727,254
Payments on long-term debt........................................................ (917,592) (222,466)
Payments on capital leases........................................................ (348,711) (134,185)
Proceeds from credit line loan--net of payments................................... 1,775,814 1,076,636
Borrowings from related party trust fund.......................................... 200,000 550,000
Payments on related party trust fund.............................................. -- (350,000)
Proceeds from issuance of stock................................................... -- 5,763,679
Distributions paid................................................................ -- (927,101)
Proceeds from loans from shareholders............................................. 545,000 357,865
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............................................ (210,625) (80,000)
------------- -------------
Net cash provided by financing activities................................... 1,810,637 7,106,417
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CET Environmental Services, Inc.
STATEMENT OF CASH FLOWS-CONTINUED
Year Ended December 31, 1996 And 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
INCREASE IN CASH.................................................................... $ 1,410,346 $ 44,700
Cash at beginning of year........................................................... 476,655 431,955
------------- -------------
Cash at end of year................................................................. $ 1,887,001 $ 476,655
------------- -------------
------------- -------------
Supplemental disclosures to cash flow information:
Cash paid during the year
Interest........................................................................ $ 485,951 $ 282,230
Income taxes.................................................................... $ 656,900 $ 518,757
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 paid 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.................... $ 683,223 $ 837,000
Conversion of remaining portion of related party note payable to a subordinated
note payable.................................................................... $ -- $ 200,000
Issuance of note payable for financing of insurance premiums...................... $ 412,296 $ --
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
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--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.
CASH
For purposes of the statement of cash flows, the Company considers all
highly liquid cash investments with an original maturity of three months or
less to be cash.
CONTRACTS
A majority of the Company's revenues are generated from 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. In addition, many of the time
and material contracts have a stated maximum contract price which can not be
exceeded without an authorized change order. Revenues are recorded on
contracts based upon the labor hours and costs incurred. Provision for
losses on uncompleted contracts are made in the period in which such losses
are determined. Claims are recorded in revenue when received.
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.
F-8
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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.
The Company evaluates its goodwill annually to determine potential
impairment by comparing the carrying value to the undiscounted estimated
expected future cash flows of the related assets.
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. The amount was fully amortized at December 31, 1995.
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.
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 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.
F-9
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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 due to the short-term
maturity.
Note Payable--Line of Credit: The carrying amount approximates fair value as
the line of credit has a variable interest rate which is considered to
approximate the market rate.
Loan from shareholder: The carrying amount approximates the fair value
because of the short terms to maturity of the notes (within 3 months).
Long-Term Debt / Obligations Under Capital Leases: The carrying value
approximates fair value as the interest rate at December 31, 1996 and 1995
is considered to approximate the market rate.
Notes Payable to Related Parties: The carrying value approximates fair value
as the interest rate at December 31, 1996 and 1995 is considered to
approximate the market rate.
RECLASSIFICATIONS
Certain financial statement reclassifications have been made in 1995 to
conform with presentations used in 1996.
F-10
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE C--CONTRACTS IN PROCESS
Contracts in process consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ------------
<S> <C> <C>
Government--EPA contracts.......................................... $ 648,973 $ 832,468
Commercial contracts............................................... 6,007,889 5,209,500
Award Fees/Project Management--EPA contracts....................... -- 171,522
---------- ------------
Totals.......................................................... 6,656,862 $ 6,213,490
---------- ------------
---------- ------------
</TABLE>
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 D--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). A new
contract was awarded by the EPA in December 1996 with estimated maximum
revenues of $292,000,000 over five years. As of December 31, 1996 and 1995,
the net balance of accounts receivable from the EPA was $2,256,448 and
$2,610,539, respectively. Revenues from the EPA in 1996 and 1995 amounted
to approximately $10.9 million and $12.9 million, respectively.
NOTE E--RELATED PARTY TRANSACTIONS
In order to meet short term operating needs, the Company, from time to time
borrows funds on a short term basis from affiliates of the Company or from a
trust fund of a relative of the President. On November 8, 1996, the Company
borrowed $545,000 from Signal Hill Petroleum, a company controlled by Craig
C. Barto, one of the Company's directors, pursuant to a 30 day note which
bears interest at 10% per annum. The due date on the note was extended to
January 15, 1997. The Company also borrowed $671,800, which includes
subordinated notes of $471,800 (see Notes G and H), from relatives of
Steven H. Davis, President, pursuant to one year notes which bear interest
at the rate of 10% per annum. These notes are due February 28, 1998. The
Company intends to repay these loans from revenues when sufficient funds
are available. Interest expense attributable to these related party
borrowings amounted to $55,898 and $44,696 for 1996 and 1995, respectively.
F-11
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE E--RELATED PARTY TRANSACTIONS--CONTINUED
A director and 12.1% 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,
1996 and 1995 for fees amounting to approximately $340,000 and $293,000,
respectively.
On April 30, 1996, the Company loaned $105,764 to an officer and director of
the Company pursuant to a demand note which bears interest at the rate of
8.25% per annum. Interest is payable monthly and principal is due on demand.
Throughout 1996, the Company made additional advances to this individual
bringing the total amount due to $158,010 at December 31, 1996.
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 H).
NOTE F--CAPITAL LEASES
Vehicles and equipment recorded under capital leases consist of the
following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Vehicles........................................................... $ 1,497,407 $ 882,347
Equipment.......................................................... 272,151 239,117
------------ ----------
1,769,558 1,121,464
Less accumulated depreciation...................................... (465,228) (167,474)
------------ ----------
Totals......................................................... $ 1,504,330 $ 953,990
------------ ----------
------------ ----------
</TABLE>
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:
<TABLE>
<CAPTION>
1996
------------
<S> <C>
1997....................................................... $ 471,092
1998....................................................... 427,256
1999....................................................... 377,575
2000....................................................... 265,251
2001....................................................... 35,337
---------
Total minimum lease payments................................. 1,576,511
Less amounts representing estimated executory costs (taxes).. 120,977
---------
Net minimum lease payments................................... 1,455,534
Less amount representing interest............................ 251,077
---------
Present value of net minimum lease payments.................. $ 1,204,457
---------
</TABLE>
F-12
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE F--CAPITAL LEASES--CONTINUED
<TABLE>
<S> <C>
Current portion............................................ 329,934
Noncurrent portion......................................... 874,523
---------
$1,204,457
---------
---------
</TABLE>
NOTE G--LINE OF CREDIT AND LONG-TERM DEBT
The Company has a line of credit facility with Union Bank of California,
N.A. (the "Bank") which provides up to $6,000,000 of available credit to the
Company based upon a percentage (75%) of eligible receivables (as defined in
the loan agreement). Interest is payable monthly at the Bank's adjusted
LIBOR-Rate plus 2% or the Bank's Reference Rate, at the option of the
Company. The line of credit facility has an expiration date of May 1, 1997.
In addition, the Company borrowed $124,940 from the Bank for the purchase of
equipment. Interest is 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 is payable monthly at the Bank's
Reference Rate plus .25%.
The Company has been notified by the Bank that the Company is in breach of
certain loan covenants relating to the three Company loans from the Bank
under which, as of December 31, 1996, the Company had borrowed an aggregate
of approximately $4,776,000. The Company is not in default with respect to
any loan payments due to the Bank. The breached covenants relate to the
ratio of the Company's liabilities to its tangible net worth, the
maintenance of a minimum net worth, and the maintenance of profitable
operations. The Bank notified the Company that no further funds would be
loaned while the Company is in breach of these covenants.
The Company has entered into an agreement with the Bank whereby the Bank has
agreed to forebear from taking any action against the Company based upon the
breached covenants as long as the Company does not default on any payment
due to the Bank or otherwise breach any of the other terms of the
forbearance agreement. Under the terms of the forbearance agreement, in
addition to regular interest payments the Company has made a payment of
$500,000 on January 10, 1997, and then made payments of $250,000 each on
January 31, 1997, February 15, 1997 and March 15, 1997 with a required
payment of $250,000 on April 15, 1997. The Company made an additional
payment of $170,000 in January 1997. The balance on the loan shall be repaid
not later than May 1, 1997. These payments are personally guaranteed by
certain of the officers and directors of the Company.
If the Company does not comply with the forbearance agreement, the Bank
could declare the loans in default and could proceed to foreclose on the
collateral securing the loans which consists of all the Company's accounts
receivable, inventory, equipment, and other assets. Any such actions by the
Banks would have a material adverse impact upon the Company. Management
intends to fully comply with the forbearance agreement and believes that
they will be able to secure enough funds through operations and by obtaining
additional financing sufficient to pay all amounts due the Bank within the
required time frame.
F-13
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE G--LINE OF CREDIT AND LONG-TERM DEBT--CONTINUED
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
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%.
Paid in 1996. $ -- $ 267,667
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%.
Paid in 1996. -- 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%.
Paid in 1996. -- 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. 49,859 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. 246,816 354,297
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%. Paid in 1996. -- 67,223
Note payable to a bank, collateralized by equipment,
payable in monthly installments of $16,667 including
interest at 8.5%, due May 1, 1997. 450,000 --
Note payable to a bank collateralized by equipment,
due May 1, 1997, interest at 8.25%. 124,940 --
</TABLE>
F-14
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE G--LINE OF CREDIT AND LONG-TERM DEBT--CONTINUED
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Note payable for annual insurance premium, interest at
4.98%, with monthly payments of $43,531, due June 15, 1997......................... 412,296 --
--------- ---------
1,283,911 1,022,456
Less current portion................................................................... 1,130,063 327,503
--------- ---------
$ 153,848 $ 694,953
--------- ---------
</TABLE>
Scheduled future maturities of these notes for the years ending December 31
are as follows:
<TABLE>
<S> <C>
1997................................................ $1,130,063
1998................................................ 153,848
---------
$1,283,911
---------
</TABLE>
Related party debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- --------------
<S> <C> <C>
Loan from shareholder, uncollateralized, due January 15,
1997, interest at 10% (see Note E).................................. 545,000 --
Note payable to related party, uncollateralized, due
February 28, 1998, interest at 10% (see Note E)..................... 200,000 --
Subordinated notes payable to related parties, due
February 28, 1998, interest at 10% (see Notes E and H).............. 471,800 682,425
--------- -------
1,216,800 682,425
Less current portion.................................................... 545,000 --
--------- -------
$ 671,800 $ 682,425
--------- -------
</TABLE>
NOTE H--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
F-15
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE H--SUBORDINATED NOTES PAYABLE--CONTINUED
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, 1998 with interest payable monthly at ten
percent per annum. Interest of $39,316 was paid to the holders of these
notes during 1996.
NOTE I--TAXES ON INCOME
The provision (benefit) for taxes on income includes the following for the
year ended December 31:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
CURRENT
Federal............................................. $ (569,268) $ 732,205
State............................................... (24,635) 176,635
---------- ---------
(593,903) 908,840
---------- ---------
DEFERRED
Federal............................................. 215,390 (215,390)
State............................................... 36,658 (36,658)
---------- ---------
252,048 (252,048)
---------- ---------
TOTAL....................................................... $ (341,855) $ 656,792
---------- ---------
</TABLE>
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 (benefit) for taxes on income for the year ended December
31 is as follows:
F-16
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE I TAXES ON INCOME--CONTINUED
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Provision (benefit) for income taxes at statutory rate....... $ (1,598,400) $ 1,076,715
Change in valuation reserve.................................. 1,076,366 --
Stock options................................................ 8,142 14,638
Purchase accounting effects Negative goodwill................ -- (134,975)
S Corporation earnings....................................... -- (225,746)
Other........................................................ 172,037 (73,840)
------------- ------------
$ (341,855) $ 656,792
------------- ------------
</TABLE>
Deferred tax assets and liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Net deferred tax asset
Accrued salary expense................................... $ 85,704 $ 154,203
Allowance for doubtful accounts.......................... 198,661 58,223
NOL carryforward......................................... 870,209 --
Other.................................................... (78,208) 76,904
--------- --------
1,076,366 289,330
--------- --------
Valuation reserve........................................ (1,076,366) --
--------- --------
$ -- $ 289,330
Deferred tax liability depreciation and amortization......... $ -- $ (37,282)
--------- --------
</TABLE>
Realization of the deferred tax asset depends on achieving a certain minimum
level of future taxable income and although management currently believes
that the achievement of the required future taxable income is more likely
than not, it is reasonably possible that this belief could change in the
near term, resulting in an adjustment to the valuation allowance.
The Company has net operating loss carryforwards for tax purposes of
$2,231,304 which expire in 2011.
NOTE J--COMMITMENTS AND CONTINGENCIES
The Company is obligated under certain operating leases for its facilities.
The leases expire at various dates through 2001, with appropriate rentals as
set forth below. Some leases also provide for payments of taxes and certain
common area costs and expenses.
F-17
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE J--COMMITMENTS AND CONTINGENCIES--CONTINUED
The following is a summary at December 31, 1996, of the future minimum rents
due under noncancellable operating leases:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997...................................... $ 634,933
1998...................................... 308,151
1999...................................... 170,717
2000...................................... 151,825
2001...................................... 49,412
----------
Total..................................... $1,315,038
----------
</TABLE>
Total rent expense under operating leases for the years ended December 31,
1996 and 1995 was approximately $892,700 and $492,400, 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 K--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 B).
In June 1995, the Company distributed an aggregate of $927,101 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 H).
Immediately after such distribution, these same shareholders loaned an
aggregate of $357,865 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.
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
F-18
<PAGE>
NOTE K -STOCKHOLDERS' EQUITY--Continued
"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 was engaged in the design, construction, and
operation of industrial wastewater and water treatment facilities, and
provided 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
were received by the Company.
NOTE L--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 $83,738
and $50,304 for the years ended December 31, 1996 and 1995, respectively.
NOTE M--STOCK OPTIONS
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
F-19
<PAGE>
NOTE M--STOCK OPTIONS-- Continued
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 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.
The Plan is accounted for under APB Opinion 25 and related interpretations.
The options generally have a term of 10 years when issued and vest over 3-5
years. Had compensation cost for the Plan been determined based on the fair
value of the options at the grant date consistent with the method of
Statement of Financial Accounting Standards 123, "Accounting for Stock-Based
Compensation", the Company's net income (loss) and earnings (loss) per
common share would have been:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Net income (loss)
As reported.................................... $ (3,756,450) $ 1,809,251
Pro forma...................................... (3,854,017) 1,781,220
Earnings (loss) per common share
As reported.................................... $ (0.74) $ 0.44
Pro forma...................................... (0.76) 0.43
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions for grants used in 1996 and 1995: no expected dividends;
expected volatility of 50%; risk-free interest rate of 5.5%; and expected
lives of 6 years.
A summary of the status of the Plan follows:
<TABLE>
<CAPTION>
AVERAGE
PRICE PER
SHARES SHARE
--------- -----------
<S> <C> <C>
Outstanding at January 1, 1995...................................... --
Granted............................................................. 181,000 $ 3.50
Exercised........................................................... --
</TABLE>
F-20
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE M--STOCK OPTIONS--CONTINUED
<TABLE>
<S> <C> <C>
Canceled........................................................... (5,000) $ 3.50
--------- ---------
Outstanding at December 31, 1995................................... 176,000 $ 3.50
--------- ---------
Total exercisable at December 31, 1995............................. 10,000 $ 3.50
--------- ---------
Outstanding at January 1, 1996..................................... 176,000 $ 3.50
Granted............................................................ 150,000 $ 6.89
Exercised.......................................................... --
Canceled........................................................... (112,000) $ 4.83
--------- ---------
Outstanding at December 31, 1996................................... 214,000 $ 5.60
--------- ---------
Total exercisable at December 31, 1996............................. 41,600 $ 3.92
--------- ---------
</TABLE>
In May 1995, options for 181,000 shares of common stock were granted under
the Plan of which 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 $20,355
and $36,596 in 1996 and 1995 respectively, relating to these options.
Compensation expense of $22,361 will be recorded in future periods as these
options vest over a five-year period commencing December 31, 1996.
NOTE N--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, 1996 and 1995 are as follows:
1996
-------
Carrying Amount Estimated Fair Value
--------------- --------------------
Cash............................ $ 1,887,001 $ 1,887,001
Note payable-line of credit..... 4,200,650 4,200,650
Loan from shareholder........... 545,000 545,000
Long-term debt.................. 1,348,340 1,348,340
Capitalized lease obligations... 1,204,457 1,204,457
Notes payable to related parties 671,800 671,800
F-21
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE N--DISCLOSURE ABOPUT FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
1995
-------
Carrying Amount Estimated Fair Value
--------------- --------------------
Cash............................ $ 476,644 $ 476,655
Note payable--line of credit..... 2,424,836 2,424,836
Long-term debt.................. 1,022,456 1,012,509
Notes payable to related parties 682,425 682,425
Capitalized lease obligations... 869,945 869,945
NOTE O--FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the year ended December[nb]31, 1996, the
Company wrote off accounts receivable, recorded as a reduction of revenues,
approximately $731,500. This adjustment was considered necessary due to the
age of the receivable which resulted from disputed amounts arising from
contract changes.
NOTE P--SUBSEQUENT EVENT
In January[nb]1997, the Company completed a private offering of 729,248
shares of its common stock. The net proceeds to the Company from this
offering were approximately $2,060,000. In connection with this offering,
the Company issued a warrant to the representatives of the underwriters in
this offering to purchase up to 10% of the number of shares sold in the
offering of the Company's common stock. The purchase price of such was
warrants was $100 and the exercise price under such warrants is $3.60 per
share. The warrant may be exercised in whole or in part at any time or from
time to time until the expiration date of December 31, 2001.
F-22
<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 Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CET ENVIRONMENTAL SERVICES, INC.
DATED: APRIL 10, 1997 BY /S/ STEVEN H. DAVIS
-----------------------------------------
Steven H. Davis
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
SIGNATURE CAPACITY DATE
- ------------------------------ --------------------------- -------------------
/s/ STEVEN H. DAVIS President, Chief Executive
- ------------------------------ Officer and Director April 10, 1997
Steven H. Davis
Executive Vice President April 10, 1997
/s/ RICK C. TOWNSEND and Chief Financial
- ------------------------------ Officer (Principal
Rick C. Townsend Accounting Officer)
/s/ CRAIG C. BARTO Director April 10, 1997
- ------------------------------
Craig C. Barto
/s/ ROBERT S. COLDREN Director April 10, 1997
- ------------------------------
Robert S. Coldren
Executive Vice President, April 10, 1997
/s/ DOUGLAS W. COTTON Chief Operating Officer,
- ------------------------------ Secretary and Director
Douglas W. Cotton
/s/ JOHN G. L. HOPKINS Senior Vice President April 10, 1997
- ------------------------------ and Director
John G. L. Hopkins
/s/ ROBERT A. TAYLOR Director April 10, 1997
- ------------------------------
Robert A. Taylor
<PAGE>
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated March 25, 1997, accompanying the
financial statements incorporated by reference or included in the Annual
Report of CET Environmental Services, Inc. (the Company) on Form 10-KSB for
the year ended December 31, 1996. We consent to the incorporation by
reference in the Company's Registration Statement on Form S-8 of the
aforementioned reports.
GRANT THORNTON LLP
Denver, Colorado
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,887,001
<SECURITIES> 0
<RECEIVABLES> 7,992,480
<ALLOWANCES> 538,087
<INVENTORY> 6,828,504
<CURRENT-ASSETS> 18,423,472
<PP&E> 7,264,548
<DEPRECIATION> 2,378,260
<TOTAL-ASSETS> 23,795,317
<CURRENT-LIABILITIES> 15,121,173
<BONDS> 1,028,371
0
0
<COMMON> 6,165,977
<OTHER-SE> 807,996
<TOTAL-LIABILITY-AND-EQUITY> 23,795,317
<SALES> 0
<TOTAL-REVENUES> 54,918,520
<CGS> 0
<TOTAL-COSTS> 51,836,386
<OTHER-EXPENSES> 6,254,702
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