<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
---------- ----------
Commission File Number 1-13852
CET ENVIRONMENTAL SERVICES, INC.
(Exact name of small business issuer as specified in its charter)
California 33-0285964
(State or other jurisdiction 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 November 4, 1997, 5,799,785 shares of common stock, no par value per
share, were outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED BALANCE SHEET
ASSETS
<TABLE>
SEPTEMBER 30, DECEMBER 31
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . $ 375,742 $ 1,887,001
Accounts Receivable, less allowance for doubtful
accounts of $525,000 in 1997 and $538,087 in 1996 . . 9,151,396 7,454,393
Contracts in process . . . . . . . . . . . . . . . . . 8,972,330 6,656,862
Income tax receivable. . . . . . . . . . . . . . . . . 62,658 1,282,778
Due from related party . . . . . . . . . . . . . . . . -- 158,010
Other receivables. . . . . . . . . . . . . . . . . . . 478,739 199,016
Inventories. . . . . . . . . . . . . . . . . . . . . . 177,357 171,642
Prepaid expenses . . . . . . . . . . . . . . . . . . . 859,505 613,770
----------- -----------
Total Current Assets. . . . . . . . . . . . . . . 20,077,727 18,423,472
----------- -----------
EQUIPMENT AND IMPROVEMENTS, NET. . . . . . . . . . . . . .
Field equipment and vehicles . . . . . . . . . . . . . 5,857,445 5,672,638
Office furniture, equipment and leasehold
improvements. . . . . . . . . . . . . . . . . . . . . 1,757,676 1,591,910
----------- -----------
7,615,121 7,264,548
Less allowance for depreciation and amortization . . . (3,479,963) (2,378,260)
----------- -----------
Equipment and improvements - net. . . . . . . . . 4,135,158 4,886,288
----------- -----------
GOODWILL . . . . . . . . . . . . . . . . . . . . . . . . . 508,505 352,644
DEPOSITS . . . . . . . . . . . . . . . . . . . . . . . . . 257,613 132,913
----------- -----------
$24,979,003 $23,795,317
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements
1
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
SEPTEMBER 30 DECEMBER 31
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Note payable - line of credit. . . . . . . . . . . . . $ 4,594,078 $ 4,200,650
Other notes payable. . . . . . . . . . . . . . . . . . 671,800 545,000
Accounts payable . . . . . . . . . . . . . . . . . . . 7,017,120 7,758,668
Accrued expenses . . . . . . . . . . . . . . . . . . . 1,865,081 1,156,858
Income taxes payable . . . . . . . . . . . . . . . . . 7,053 --
Current portion of long-term debt and capital
lease obligations . . . . . . . . . . . . . . . . 977,463 1,459,997
----------- -----------
Total current liabilities . . . . . . . . . . . . 15,132,595 15,121,173
----------- -----------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS . . . . . . . 1,670,416 1,700,171
STOCKHOLDERS' EQUITY
Common stock (no par value) - authorized
20,000,000 shares; issued and outstanding
5,798,585 and 5,066,537 shares in
1997 and 1996, respectively . . . . . . . . . . . . . 8,211,439 6,165,977
Paid-in capital. . . . . . . . . . . . . . . . . . . . 561,743 555,530
Retained earnings. . . . . . . . . . . . . . . . . . . (597,190) 252,466
----------- -----------
Total stockholders' equity. . . . . . . . . . . . 8,175,992 6,973,973
----------- -----------
$24,979,003 $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 SEPTEMBER 30
--------------------------------
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
PROJECT REVENUE. . . . . . . . . . . . . . . . $ 14,777,195 $ 12,994,919
PROJECT COSTS
Direct . . . . . . . . . . . . . . . . . . . 11,193,007 11,470,294
Indirect . . . . . . . . . . . . . . . . . . 1,725,850 2,322,852
------------ ------------
12,918,857 13,793,146
------------ ------------
Gross profit . . . . . . . . . . . . 1,858,338 (798,227)
OTHER OPERATING EXPENSES (INCOME)
Selling. . . . . . . . . . . . . . . . . . . 421,273 918,412
General and administrative . . . . . . . . . 672,569 994,761
------------ ------------
1,093,842 1,913,173
------------ ------------
Operating income (loss) . . . . . . . 764,496 (2,711,400)
OTHER INCOME (EXPENSE), NET. . . . . . . . . . (191,643) (276,251)
------------ ------------
Income (loss) before income taxes . . 572,853 (2,987,651)
Provision (credit) for income taxes. . . . . . 1,017 (163,600)
------------ ------------
NET INCOME (LOSS). . . . . . . . . . . . . . . $ 571,836 $ (2,824,051)
------------ ------------
------------ ------------
Weighed average number of shares outstanding . 5,798,585 5,079,572
------------ ------------
------------ ------------
Net income (loss) per common share . . . . . . $ .10 $ (.56)
------------ ------------
------------ ------------
The accompanying notes are an integral part of these statements.
3
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
PROJECT REVENUE. . . . . . . . . . . . . . . . $ 34,888,591 $ 40,008,620
PROJECT COSTS
Direct . . . . . . . . . . . . . . . . . . . 25,946,666 30,942,660
Indirect . . . . . . . . . . . . . . . . . . 5,642,760 5,990,177
------------ ------------
31,589,426 36,932,837
------------ ------------
Gross profit . . . . . . . . . . . . 3,299,165 3,075,783
OTHER OPERATING EXPENSES (INCOME)
Selling. . . . . . . . . . . . . . . . . . . 1,616,504 2,659,333
General and administrative . . . . . . . . . 2,242,325 2,391,704
------------ ------------
3,858,829 5,051,037
------------ ------------
Operating (loss) income. . . . . . . . . . (559,664) (1,975,254)
OTHER INCOME (EXPENSE), NET. . . . . . . . . . (403,539) (578,307)
------------ ------------
Income (loss) before income taxes. . . . . (963,203) (2,553,561)
Provision (credit) for income taxes. . . . . . (113,547) 10,000
------------ ------------
NET INCOME (LOSS). . . . . . . . . . . . . . . $ (849,656) $ (2,563,561)
------------ ------------
------------ ------------
Weighted average number of shares
outstanding. . . . . . . . . . . . . . . . . 5,779,624 5,078,715
------------ ------------
------------ ------------
Net income (loss) per common share . . . . . . $ (.15) $ (.50)
------------ ------------
------------ ------------
The accompanying notes are an integral part of these statements
4
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . $ (849,656) $ (2,563,561)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:.
Depreciation and amortization. . . . . . . . . . . . . 1,120,720 924,748
Provision for bad debts. . . . . . . . . . . . . . . . (13,087) 298,200
Employee stock option plan . . . . . . . . . . . . . . - 15,267
Loss on sale of equipment. . . . . . . . . . . . . . . - 9,422
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable . . . . . (1,683,916) 4,675,025
Decrease (increase) in contracts in process. . . . . (2,315,468) (893,587)
Decrease (increase) in income taxes receivable . . . 1,220,120 -
Decrease (increase) in prepaid expenses and
other assets . . . . . . . . . . . . . . . . . . . (497,863) (491,518)
(Decrease) increase in accounts payable and
accrued expenses . . . . . . . . . . . . . . . . . (26,272) (2,502,299)
------------ ------------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . (3,045,422) (528,303)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment. . . . . . . . . . . . . . . . . . (350,573) (1,143,527)
Purchase of subsidiary in excess of net assets . . . . . (174,878) -
------------ ------------
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . (525,451) (1,143,527)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subordinated and
long-term debt . . . . . . . . . . . . . . . . . . . . 1,038,312 124,940
Payments on long term debt and capital lease
obligations. . . . . . . . . . . . . . . . . . . . . . (878,801) (424,412)
Proceeds from exercise of Employee Stock Options . . . . 9,800 -
Proceeds from Private Placement Equity Offering. . . . . 2,041,875 -
Proceeds from National Bank of Canada line of
credit, net of payments. . . . . . . . . . . . . . . . 4,594,078 -
Principal payments (net borrowings) on Union Bank
line of credit . . . . . . . . . . . . . . . . . . . . (4,200,650) 1,775,814
Proceeds from loans from shareholders. . . . . . . . . . 200,000
Payments on loans from shareholders. . . . . . . . . . . (545,000) (210,625)
------------ ------------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . 2,059,614 1,465,717
------------ ------------
INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . (1,511,259) (206,113)
Cash at the beginning of period. . . . . . . . . . . . . 1,887,001 476,655
------------ ------------
Cash at end of period. . . . . . . . . . . . . . . . . . $ 375,742 $ 270,542
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for condensed
interim financial statements and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the nine months ended September 30,
1997 are not necessarily indicative of results that may be expected
for the year ending December 31, 1997.
NOTE 2. At the beginning of the year, the Company maintained a $6,000,000
line of credit with Union Bank of California, N.A. On May 30, 1997,
the Company terminated all financing arrangements with Union Bank with
a payment of $3,108,390 using proceeds of a new financing agreement
with National Bank of Canada. This new financing is comprised of a
line of credit of $9,000,000 and an equipment term loan of $1,000,000.
As of September 30, 1997, the balance owed on the line of credit was
$4,594,078 and on the equipment loan was $1,000,000.
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 agreed to use its best efforts to register these shares
for resale prior to December 31, 1997. In conjunction with the
offering, warrants for an additional 72,925 shares of common stock
were issued as partial compensation for underwriting services. These
warrants are exercisable at a price of $3.60 per share for five years
from the date of the offering.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1996
Project revenue for the quarter ended September 30, 1997 was $14,777,195, an
increase of 13.7% from $12,994,919 for the third quarter of 1996. This increase
was due primarily to three factors:
- Commencement in the third quarter of 1997 of two delivery orders for
$9 million and a $2.5 million respectively, issued under a Preplaced
Remedial Action Contract (PRAC) with the U.S. Army Corps of Engineers.
- Commencement of construction on a $7 million wastewater treatment
plant and a $2.5 million groundwater remediation project, each for
large industrial clients.
- Ongoing work on the five year $292 million U.S. Environmental
Protection Agency Emergency and Rapid Response Services (ERRS)
Contract for Regions VI, VIII and IX awarded in December, 1996.
The composition of revenue also changed when comparing the third quarter of 1997
to the third quarter of 1996. In the third quarter of 1997, 48.0% of total
project revenue or $7,095,742 was derived from one client, the U.S.
Environmental Protection Agency. During the third quarter of 1996, the revenue
from this client was $2,485,267 or 19.1% of total project revenue.
A comparison of the third quarter of 1997 to the third quarter of 1996 showed
that gross profit increased by $2,656,565 from a loss of ($798,227) to a gain of
$1,858,338. Direct project costs decreased as a percentage of revenue to 75.7%
from 88.3% for third quarter 1997 and 1996 respectively. This was due primarily
to tighter project management practices, as the third quarter 1996 margins were
depressed due to revenue reductions taken because of the inability to obtain
change orders for cost overruns incurred on certain projects.
Indirect project costs decreased $597,002 to $1,725,850 for the three months
ending September 30, 1997, a decrease from 17.9% to 11.7% as a percentage of
revenue. This decrease was primarily attributable to the Company's cost
reduction program.
Selling expenses for the third quarter of 1997 decreased by $497,139 or 54.0%
when compared to the third quarter of 1996 due to a more focused sales effort
and the implementation of a sales commission program. Selling expense also
decreased as a percent of revenue to 2.8% in 1997 from 7.1% in 1996.
General and administrative expenses for the third quarter of 1997 decreased by
$322,192 or 32.4% when compared to the third quarter of 1996. General and
administrative expenses as a percentage of revenue decreased to 4.5% as compared
to 7.6%. This was primarily due to decreases in insurance costs and bad debt
expense.
Other expenses decreased $84,608 or 30.6% in the third quarter of 1997 compared
to the third quarter of 1996. This is primarily attributable to a late payment
penalty on Texas sales taxes of $101,600 recorded in the third quarter of 1996,
but subsequently refunded in the second quarter of 1997.
The Company experienced net income for the third quarter of 1997 of $571,836 as
compared with a net loss of ($2,824,051) for the third quarter of 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996.
Project revenue for the nine months ended September 30, 1997 was $34,888,591, a
decrease of 12.8% or $5,120,029 from $40,008,620 for the nine months ended
September 30, 1996. This decrease was due primarily to three factors:
7
<PAGE>
- Reduced commercial revenues in the first three quarters of 1997
because in the same period of 1996 the Company performed substantial
work on a major chemical warehouse fire clean-up and a large
remediation project.
- The winding down in 1997 of the EPA ERCS Contract for Regions IX and
X.
- Slower than anticipated start-up of the five year $292 million EPA
ERRS Contract for Regions VI, VIII and IX awarded in December, 1996.
Gross profit increased by 7.3% or $223,382 between the nine months ended
September 30, 1997 and the nine months ended September 30, 1996. The gross
profit margin increased from 7.7% to 9.5% for the same periods. Direct
project costs as a percent of revenue decreased to 74.3% in 1997 from 77.3% in
1996. This was due to non-recurring revenue write-downs on under performing
projects in 1996. The 1.2% increase in indirect project costs was primarily
the result of treating fringe benefits on direct labor as indirect cost in 1997
(as opposed to direct cost in 1996), which in turn was largely offset by
overhead reductions from the Company's cost containment program.
Selling expenses for the nine months ended September 30, 1997 decreased by
$1,042,829 or 39.2% compared to the nine months ended September 30, 1996 due to
a reduction of sales staff and implementation of a sales commission program.
General and administrative expenses for the first nine months of 1997 decreased
by $149,378 or 6.2% from the first nine months of 1996 primarily due to
decreases in insurance costs in the third quarter of 1997.
A net loss of ($849,656) was incurred for the nine months ended September 30,
1997, as compared to a loss of ($2,563,561) for the nine months ended September
30, 1996.
In response to these results, the Company continues with its cost containment
program, and in the first nine months of 1997 has closed offices in Atlanta,
Georgia and Georgetown, Colorado, and reduced operations in Phoenix, Arizona.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased by $1,642,833 from $3,302,299 at December 31, 1996
to $4,945,132 at September 30, 1997. The current ratio increased from 1.22/1 to
1.33/1 in the same period. Current assets increased by $1,654,255 during the
first nine months of 1997, primarily due to an increase of $1,697,003 in
accounts receivable and an increase of $2,315,468 in contracts in progress.
This was partially offset by decreases in cash of $1,511,259 and income tax
receivable of $1,220,120. The Company also increased working capital through
a private placement of common stock as described below.
Equipment and improvements - net showed a decrease of $751,130 during the first
nine months of 1997, primarily due to depreciation with very little in capital
expenditures during the period.
Other assets increased by $280,561. This was primarily the result of acquiring
Water Quality Management Corporation (WQM). The acquisition was treated as a
purchase, with resultant goodwill of $174,877. WQM is currently maintained as a
wholly owned subsidiary and consolidated accordingly.
The minimal increase in current liabilities of $11,422 during the first nine
months of 1997 resulted primarily from an increase in Note Payable Line of
Credit of $393,428, which was offset by a decrease in the current portion of
long term debt of $482,534.
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. 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.
8
<PAGE>
At the beginning of the year, the Company maintained a $6,000,000 line of credit
with Union Bank of California, N.A. On May 30, 1997 the Company entered into a
new financing agreement with National Bank of Canada. This agreement is
comprised of a line of credit of $9,000,000 and an equipment term loan of
$1,000,000. The $9,000,000 line provides that up to $1,000,000 can be used for
capital expenditures. Upon execution of the new loan agreement, proceeds of
$3,108,390 were used to pay off all outstanding indebtedness to Union Bank. As
of September 30, 1997, the balance owed on the new line of credit was $4,594,078
and on the equipment loan was $1,000,000.
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 obtained extensions to February 28, 1998, on notes payable to
shareholders totaling $671,800.
There was a decrease in cash of $1,511,259 in the first nine months of 1997
compared to a decrease of $206,113 for the same period in 1996. The 1997
decrease was due to a substantial increase in accounts receivable and
contracts in progress, without a corresponding increase in accounts payable.
This was partially offset by the proceeds from the private placement.
Management believes that funds provided from operations and the new line of
credit will be sufficient to fund the Company's immediate needs for working
capital. Management anticipates that capital expenditures in the foreseeable
future will be minimal and funded from working capital or the Company's line of
credit, and any leases will be short term.
9
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
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.
10
<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: November 12, 1997 By: /s/ STEVEN H. DAVIS
-----------------------------------------
Steven H. Davis, President
Dated: November 12, 1997 By: /s/ RICK C. TOWNSEND
-----------------------------------------
Rick C. Townsend, Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 375,742
<SECURITIES> 0
<RECEIVABLES> 9,676,396
<ALLOWANCES> (525,000)
<INVENTORY> 8,972,330
<CURRENT-ASSETS> 20,077,727
<PP&E> 7,615,121
<DEPRECIATION> (3,479,963)
<TOTAL-ASSETS> 24,979,003
<CURRENT-LIABILITIES> 15,132,595
<BONDS> 1,670,416
0
0
<COMMON> 8,211,439
<OTHER-SE> (35,447)
<TOTAL-LIABILITY-AND-EQUITY> 24,979,003
<SALES> 34,888,591
<TOTAL-REVENUES> 34,888,591
<CGS> 0
<TOTAL-COSTS> 31,589,426
<OTHER-EXPENSES> 3,858,829
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 495,676
<INCOME-PRETAX> (963,203)
<INCOME-TAX> (113,547)
<INCOME-CONTINUING> (849,656)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (849,656)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
