<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended: December 31, 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
- ---------------------------- ---------------------
(State Or Other Jurisdiction (I.R.S. Employer
Of Incorporation Or Identification Number)
organization)
7670 South Vaughn Court, Ste. 130, Englewood, Colorado 80112
------------------------------------------------------------
(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
-----
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.
<PAGE>
[Grant Thornton Letterhead]
Item 7.
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 deferred tax assets depends on achieving a certain minimum
level of future taxable income. At December 31, 1995, management believed
that it was more likely than not that the deferred tax asset would be
realized. For the year ended December 31, 1996, the Company incurred a loss
and a valuation allowance was recorded equal to the entire deferred tax
asset because its realization was uncertain. In the event the realization
becomes more likely, an adjustment to the valuation allowance will be
required.
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
