<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( x ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________ to ________.
Commission File Number 1-13852
CET ENVIRONMENTAL SERVICES, INC.
(Exact name of small business issuer as specified in its charter)
California 33-0285964
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7670 South Vaughn Court, Englewood, Colorado 80112
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (303) 708-1360
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes __X__ No ____.
As of May 14, 1997, 5,798,585 shares of common stock, no par value per share,
were outstanding.
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<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED)
----------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 620,352 $ 1,887,001
Accounts receivable, less allowance for doubtful accounts
of $645,467 in 1997 and $538,087 in 1996. . . . . . . . . 8,005,772 7,454,393
Contracts in process. . . . . . . . . . . . . . . . . . . 3,197,109 6,656,862
Prepaid expenses and other current assets . . . . . . . . 2,039,074 2,425,216
----------- -----------
Total Current Assets . . . . . . . . . . . . . . . 13,862,307 18,423,472
EQUIPMENT AND IMPROVEMENTS, NET . . . . . . . . . . . . . 4,626,813 4,886,288
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . 520,151 485,557
----------- -----------
$19,009,271 $23,795,317
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED)
----------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Note payable-line of credit. . . . . . . . . . . . . . $ 2,781,406 $ 4,200,650
Other notes payable. . . . . . . . . . . . . . . . . . 671,800 545,000
Accounts payable . . . . . . . . . . . . . . . . . . . 3,541,736 7,758,668
Accrued expenses . . . . . . . . . . . . . . . . . . . 2,071,396 1,156,858
Current portion of long-term debt and capital lease
obligations. . . . . . . . . . . . . . . . . . . . . . 1,438,939 1,459,997
----------- -----------
Total current liabilities. . . . . . . . . . . . 10,505,277 15,121,173
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . - -
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS . . . . . . . . 919,672 1,700,171
COMMITMENTS AND CONTINGENT LIABILITIES . . . . . . . . . . . - -
STOCKHOLDERS' EQUITY
Common stock (no par value) - authorized 20,000,000
shares; issued and outstanding 5,798,585 and 5,066,537
shares in 1997 and 1996, respectively. . . . . . . . . 8,237,019 6,165,977
Paid-in capital. . . . . . . . . . . . . . . . . . . . 555,530 555,530
Retained earnings. . . . . . . . . . . . . . . . . . . (1,208,227) 252,466
----------- -----------
Total stockholders' equity . . . . . . . . . . . 7,584,322 6,973,973
----------- -----------
$19,009,271 $23,795,317
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
----------------------------
1997 1996
(unaudited) (unaudited)
----------- -----------
PROJECT REVENUE. . . . . . . . . . . . . . . . $ 7,517,744 $12,544,880
PROJECT COSTS
Direct . . . . . . . . . . . . . . . . . 5,352,409 8,924,989
Indirect . . . . . . . . . . . . . . . . 1,871,737 1,572,545
----------- -----------
7,224,146 10,497,534
----------- -----------
Gross profit . . . . . . . . . . . 293,598 2,047,346
----------- -----------
OTHER OPERATING EXPENSES (INCOME)
Selling. . . . . . . . . . . . . . . . . 562,562 811,936
General and administrative . . . . . . . 1,048,739 789,763
Amortization of excess of acquired net
assets in excess of cost. . . . . . . . - -
----------- -----------
1,611,301 1,601,699
----------- -----------
Operating (loss) income. . . . . . (1,317,703) 445,647
----------- -----------
OTHER INCOME (EXPENSE), NET. . . . . . . . . . (142,990) (65,288)
(Loss) income before income taxes. . . . . . . (1,460,693) 380,359
(Credit) provision for income taxes. . . . . . - 152,000
----------- -----------
NET INCOME (LOSS). . . . . . . . . . . . . . . $(1,460,693) $ 228,359
----------- -----------
----------- -----------
Weighted average number of shares outstanding. 5,741,702 5,072,993
----------- -----------
----------- -----------
Net income (loss) per common share . . . . . . $ (0.25) $ .05
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
3
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
Three Months Ended March 31,
------------------------------
1997 1996
(unaudited) (unaudited)
---------------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,460,693) $ 228,359
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 335,331 275,511
Amortization of acquired net assets in excess of cost. . . . . .
Provision for bad debts. . . . . . . . . . . . . . . . . . . . . 107,380 36,954
Employee stock option plan . . . . . . . . . . . . . . . . . . . - 5,089
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable . . . . . . . . (658,759) 4,412,861
Decrease (Increase) in contracts in process. . . . . . . . 3,459,753 344,465
Decrease (Increase) in prepaid expenses and other assets . 351,548 219,816
(Decrease) Increase in accounts payable and
accrued expenses. . . . . . . . . . . . . . . . . . . . . (3,323,453) (3,100,415)
------------- -----------
Net cash provided by (used in) operating activities. . . . (1,188,893) 2,422,640
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment . . . . . . . . . . . . . . . . . . . . . . . (75,856) (398,757)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subordinated and long-term debt . . . . . (62,491) -
Payments on long-term debt and capital lease obligations. . . . . . (46,207) (120,040)
Proceeds from exercise of Employee Stock Options. . . . . . . . . . 9,800 -
Proceeds from Private Placement Equity Offering . . . . . . . . . . 2,061,242 -
Proceeds from credit line loan, net of payments . . . . . . . . . . (1,419,244) (1,559,757)
Payments on loans from shareholders . . . . . . . . . . . . . . . . (545,000) (210,625)
Distributions paid. . . . . . . . . . . . . . . . . . . . . . . . . - -
------------- -----------
Net cash provided by (used in) financing activities. . . . (1,900) (1,890,422)
------------- -----------
INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . (1,266,649) 133,461
Cash at the beginning period . . . . . . . . . . . . . . . . . . 1,887,001 476,655
------------- -----------
Cash at end of period. . . . . . . . . . . . . . . . . . . . . . $ 620,352 $ 610,116
------------- -----------
------------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
NOTE 1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for condensed
interim financial statements and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 1997
are not necessarily indicative of results that may be expected for the
year ending December 31, 1997.
NOTE 2. The Company maintains a $6,000,000 line of credit with Union Bank of
California, N.A. which replaced the previous banking relationship with
Comerica Bank. The Company has been notified by the Bank that the
Company is in breach of certain loan covenants relating to the line of
credit and two other equipment loans from the Bank under which, as of
March 31, 1997, the Company had borrowed an aggregate of approximately
$3,289,678. 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 principal payments of $500,000 on January 10, 1997
and $250,000 each on January 31, 1997, February 15, 1997, March 15,
1997 and April 15, 1997. The Company also made an additional payment
of $169,244 in February, 1997. The forbearance agreement called for
the balance of the loans to be repaid by May 1, 1997, but the Bank has
agreed to an extension until June 1, 1997.
On March 25, 1997, the Company accepted a proposal from the National
Bank of Canada to replace the Union Bank facility with a line of
credit of $9,000,000 and an equipment term loan of $1,000,000. This
proposal has been approved by the Bank's credit committee and
management expects the loan documents to be completed by May 31, 1997.
At that time all loans with Union Bank will be paid in full.
NOTE 3. In December, 1996, the Company commenced a private placement offering
of common stock. The offering was completed in January, 1997, and
resulted in the issuance of 729,248 shares at a price of $3.20 per
share with net proceeds to the Company totaling $2,061,242. The
Company has committed to use its best efforts to register these shares
for resale prior to December 31, 1997. In conjunction with the
offering, warrants for an additional 72,925 shares of common stock
were issued as partial compensation for underwriting services. These
warrants are exercisable at a price of $3.60 per share for five years
from the date of the offering.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
Net working capital increased slightly by $54,731 from $3,302,299 at December
31, 1996 to $3,357,030 at March 31, 1997. Current assets decreased by
$4,561,165 during the first three months of 1997 primarily due to a decrease in
contracts in process of $4,257,284. Reduced revenues due to seasonal slowdown,
the winding down of the EPA Regions IX and X ERCS contract and the slower than
anticipated start-up of the EPA Regions VI, VIII and IX ERRS contract, were
largely responsible for the decrease. This decrease in contracts in process was
partially offset by an increase in accounts receivable of $551,379. In
addition, prepaid expenses and other current assets decreased by $386,142
primarily due to the continued amortization of prepaid corporate insurance
premiums for policy terms which began July 1, 1996.
Equipment and improvements, net showed a decrease of $259,475 during the first
three months of 1997 primarily due to depreciation with very little in capital
expenditures during the period.
The decrease in current liabilities of $4,618,896 during the first three months
of 1997 resulted primarily from payments on the Union Bank line of credit of
$1,419,244 and from a decrease in accounts payable of $4,216,932, which was
partially offset by an increase in accrued expenses of $914,538. The Company
experienced build ups of large volumes of work during the fourth quarter of 1996
which resulted in the large balances of accounts receivable and payable at year
end 1996.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1997 COMPARED TO QUARTER ENDED MARCH 31, 1996
Project revenue for the quarter ended March 31, 1997 was $7,517,744, a decease
of 40.1% or $5,027,136 from $12,544,880 for the first quarter of 1996. This
decrease was due primarily to three factors:
- Seasonal slowdown in environmental remediation/construction due to
weather constraints, which in the first quarter of 1996 was largely
offset by the relatively high level of revenue from a major chemical
warehouse fire clean-up.
- The winding down of the EPA ERCS Contract for Regions IX and X.
- Slower than anticipated start-up of the five year $292 million EPA
ERRS Contract for Regions VI, VIII and IX awarded in December, 1996.
The composition of revenue also changed when comparing the first quarter of 1997
to the first quarter of 1996. In the first quarter of 1997, 36.6% of total
project revenue or $2,863,630 was derived from one client, the U.S.
Environmental Protection Agency. During the first quarter of 1996, the revenue
from this client was $1,978,534 or 15.8% of total project revenue. However, in
1996 the EPA revenue came from a single contract (ERCS), while in 1997 it came
from a combination of ERCS and ERRS.
A comparison of the first quarter of 1997 to the first quarter of 1996 showed
that gross profit decreased 85.7% and the gross profit margin decreased from
16.3% to 3.9% of revenue. Direct project costs were comparable as a percentage
of revenue at 71.2% and 71.1% for first quarter 1997 and 1996 respectively.
Indirect project costs increased from $299,192 to $1,871,73 (24.9% of revenue)
in the three months ending March 31, 1997, from $1,572,545 (12.5% of revenue) in
the three months ending March 31, 1996. This increase was primarily
attributable to lower labor utilization due to the reduced revenues. The
Company's goal is to achieve a generally equal distribution of revenues from
government contracts and commercial contracts in order to balance continuity of
revenues with increased margins after direct costs.
6
<PAGE>
Selling expenses for the first quarter of 1997 decreased by $249,374 or 30.7%
when compared to the first quarter of 1996 due to a more focused sales effort
and the implementation of a sales commission program. Selling expense was 7.5%
and 6.5% of project revenue for the first quarter of 1997 and 1996 respectively.
General and administrative expenses for the first quarter of 1997 increased by
$258,976 or 32.8% when compared to the first quarter of 1996. General and
administrative expenses as a percentage of project revenue were 14.0% for the
first quarter of 1997 as compared to 6.3% for the first quarter of 1996. This
increase was primarily due to increases in insurance costs, data processing
maintenance costs and costs associated with the transition of the corporate
office from California to Colorado.
Other income (expense) net, consists primarily of interest expense which
increased $74,093 or 115.9% in the first quarter of 1997 compared to the first
quarter of 1996. The increase is due primarily to higher balances on the
Company's line of credit and on the loan from Signal Hill Petroleum.
The Company experienced a net loss for the first quarter of 1997 of $1,460,693,
as compared with net income of $228,359 for the first quarter of 1996. This
decrease in operating results is explained in the preceding paragraphs by the
reduced revenues and increased indirect project costs.
In response to these operating results, the Company has closed offices in
Georgetown, Colorado and Atlanta Georgia. The Company has also implemented new
labor management practices whereby all operations staff below foreman level will
be hired on a casual basis only when needed for specific project work. This
will reduce indirect labor costs and company paid benefits.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had working capital of $3,357,030 which was an
increase from working capital of $3,302,299 as of December 31, 1996. The
current ratio was 1.32 to 1 at March 31, 1997 as compared with 1.22 to 1 at
December 31, 1996.
In December, 1996, the Company commenced a private placement offering of common
stock. The offering was completed in January, 1997, and resulted in the
issuance of 729,248 shares at a price of $3.20 per share with net proceeds to
the Company totaling $2,061,242. The Company has committed to use its best
efforts to register these shares for resale prior to December 31, 1997. In
conjunction with the offering, warrants for an additional 72,925 shares of
common stock were issued as partial compensation for underwriting services.
These warrants are exercisable at a price of $3.60 per share for five years from
the date of the offering.
The Company maintains a $6,000,000 line of credit with Union Bank of California,
N.A. which replaced the previous banking relationship with Comerica Bank. The
Company has been notified by the Bank that the Company is in breach of certain
loan covenants relating to the line of credit and two other equipment loans from
the Bank under which, as of March 31, 1997, the Company had borrowed an
aggregate of approximately $3,289,678. 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 principal payments of $500,000 on
January 10, 1997 and $250,000 each on January 31, 1997, February 15, 1997, March
15, 1997 and April 15, 1997. The Company also made an additional payment of
$169,244 in February, 1997. The forbearance agreement called for the balance of
the loans to be repaid by May 1, 1997, but the Bank has agreed to an extension
until June 1, 1997.
7
<PAGE>
On March 25, 1997, the Company accepted a proposal from the National Bank of
Canada to replace the Union Bank facility with a line of credit of $9,000,000
and an equipment term loan of $1,000,000. This proposal has been approved by
the Bank's credit committee and management expects the loan documents to be
completed by May 31, 1997. At that time all loans with Union Bank will be paid
in full.
During the first quarter of 1997 the Company paid back $545,000 of short term
notes executed in November 1996 with Signal Hill Petroleum. The Company also
extended to February 28, 1998, notes to shareholders totaling $671,800.
Management believes that funds provided from operations and he short term line
of credit will be sufficient to fund the Company's immediate needs for working
capital. Management anticipates that capital expenditures in the foreseeable
future will be minimal and funded from working capital or the Company's
equipment line, and any leases will be short term.
8
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
In January 1997, the Company sold 729,248 shares of its Common Stock to
75 accredited investors and 14 non-accredited investors in a private offering
at an offering price per share of $3.20. In connection with such offering,
the Company paid RAF Financial Corporation, the selling agent, commissions of
$233,360 and a non-accountable expense allowance of $46,672. In addition,
the Company issued the selling agent warrants to purchase up to 72,925 shares
of Common Stock.
With respect to these sales, the Company relied on Section 4(2) of the
Act, and Rule 506 of Regulation D promulgated thereunder. Each investor was
given a copy of a Private Placement Memorandum containing information
concerning the Company, a Form D was filed with the SEC and the Company
complied with the other applicable requirements of Rule 506. Each investor
signed a subscription agreement in which he represented that he was
purchasing the shares for investment only and not for the purpose of resale
or distribution. The appropriate restrictive legends were place on the
certificates and stop transfer orders were issued to the transfer agent.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule Filed herewith electronically
(b) Reports on Form 8-K
None.
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CET ENVIRONMENTAL SERVICES, INC.
Dated: May 20, 1997 By: /S/ STEVEN H. DAVIS
-----------------------------------------
Steven H. Davis, President
Dated: May 20, 1997 By: /S/ RICK C. TOWNSEND
-----------------------------------------
Rick C. Townsend, Chief Financial Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 620,352
<SECURITIES> 0
<RECEIVABLES> 8,651,239
<ALLOWANCES> (645,467)
<INVENTORY> 3,378,748
<CURRENT-ASSETS> 13,862,307
<PP&E> 7,340,404
<DEPRECIATION> (2,713,591)
<TOTAL-ASSETS> 19,009,271
<CURRENT-LIABILITIES> 10,505,277
<BONDS> 919,672
0
0
<COMMON> 8,237,019
<OTHER-SE> (652,697)
<TOTAL-LIABILITY-AND-EQUITY> 19,009,271
<SALES> 7,517,744
<TOTAL-REVENUES> 7,517,744
<CGS> 0
<TOTAL-COSTS> 7,224,146
<OTHER-EXPENSES> 1,611,301
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142,990
<INCOME-PRETAX> (1,460,693)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,460,693)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,460,693)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
