<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, 1998
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 registrant 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)
Registrant'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, 1998, 5,809,485 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>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
(UNAUDITED)
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 310,193 $ 343,878
Accounts receivable, less allowance for doubtful
accounts of $638,638 in 1998 and $642,097 in 1997. . . . . 11,633,362 10,042,516
Contracts in process.. . . . . . . . . . . . . . . . . . . 8,371,902 13,344,219
Prepaid expenses and other current assets. . . . . . . . . 1,812,142 1,358,640
----------- -----------
Total Current Assets . . . . . . . . . . . . . . . . 22,127,599 25,089,253
EQUIPMENT AND IMPROVEMENTS, NET. . . . . . . . . . . . . . . . . 3,640,792 3,806,364
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . 1,854,659 987,194
----------- -----------
----------- -----------
$27,623,050 $29,882,811
----------- -----------
----------- -----------
</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>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
(UNAUDITED)
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Note payable-line of credit. . . . . . . . . . . . . . . . $ - $ -
Other notes payable. . . . . . . . . . . . . . . . . . . . 1,171,800 -
Accounts payable . . . . . . . . . . . . . . . . . . . . . 7,290,487 8,974,502
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 1,732,194 3,054,740
Current portion of long-term debt and capital
lease obligations. . . . . . . . . . . . . . . . . . . . . 766,834 941,151
----------- -----------
Total current liabilities. . . . . . . . . . . . . . 10,961,315 12,970,393
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . - -
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS . . . . . . . . . . 8,601,113 8,203,701
COMMITMENTS AND CONTINGENT LIABILITIES . . . . . . . . . . . . . - -
STOCKHOLDERS' EQUITY
Common stock (no par value) - authorized 20,000,000
shares; issued and outstanding 5,809,485 and 5,805,485
shares in 1998 and 1997, respectively. . . . . . . . . . . 8,249,589 8,235,589
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . 571,060 567,953
Retained earnings. . . . . . . . . . . . . . . . . . . . . (760,027) (94,825)
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . 8,060,622 8,708,717
----------- -----------
$27,623,050 $29,882,811
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1998 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
PROJECT REVENUE. . . . . . . . . . . . . . . . . . . . . . . . . $11,455,258 $ 7,517,744
PROJECT COSTS
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . 9,039,051 5,666,617
Indirect . . . . . . . . . . . . . . . . . . . . . . . . . 1,780,619 1,811,189
----------- -----------
10,819,670 7,477,806
Gross profit . . . . . . . . . . . . . . . . . . . . 635,588 39,938
OTHER OPERATING EXPENSES (INCOME)
Selling. . . . . . . . . . . . . . . . . . . . . . . . . . 446,651 516,335
General and administrative . . . . . . . . . . . . . . . . 664,222 841,306
----------- -----------
1,110,873 1,357,641
----------- -----------
Operating income (loss) . . . . . . . . . . . . . . (475,285) (1,317,703)
OTHER INCOME (EXPENSE), NET. . . . . . . . . . . . . . . . . . . (186,083) (142,990)
----------- -----------
Income (loss) before income taxes . . . . . . . . . (661,368) (1,460,693)
Provision (credit) for income taxes. . . . . . . . . 3,835 -
----------- -----------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . $ (665,203) $(1,460,693)
----------- -----------
----------- -----------
Weighted average number of shares outstanding. . . . . . . . . . 5,808,952 5,741,702
----------- -----------
----------- -----------
Net income (loss) per common share . . . . . . . . . . . . . . . $ (0.11) $ (0.25)
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1998 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ (665,203) $(1,460,693)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . 387,842 335,331
Provision for bad debts. . . . . . . . . . . . . . . (3,459) 107,380
Employee stock option plan . . . . . . . . . . . . . - -
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable. . . (1,587,387) (658,759)
Decrease (Increase) in contracts in process . . 4,972,318 3,459,753
Decrease (Increase) in prepaid expenses
and other assets . . . . . . . . . . . . . . . (807,878) 351,548
(Decrease) Increase in accounts payable
and accrued expenses. . . . . . . . . . . . . . (3,006,561) (3,323,453)
----------- -----------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . (710,328) (1,188,893)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment. . . . . . . . . . . . . . . . . . . (222,270) (75,856)
Purchase of subsidiary . . . . . . . . . . . . . . . . . . (513,089) -
----------- -----------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . (735,359) (75,856)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subordinated and
long-term debt . . . . . . . . . . . . . . . . . . . . . . 1,066,158 (62,491)
Payments on long-term debt and capital lease
obligations. . . . . . . . . . . . . . . . . . . . . . . . (321,570) (46,207)
Proceeds from exercise of Employee Stock Options . . . . . 17,107 9,800
Proceeds from Private Placement Equity Offering. . . . . . - 2,061,242
Proceeds from National Bank of Canada line of credit,
net of payments. . . . . . . . . . . . . . . . . . . . . . 150,307 -
Principal payments (net borrowings) on Union Bank
line of credit . . . . . . . . . . . . . . . . . . . . . . - (1,419,244)
Proceeds from loans from shareholders. . . . . . . . . . . 500,000 -
Payments on loans from shareholders. . . . . . . . . . . . - (545,000)
----------- -----------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . . . 1,412,002 (1,900)
----------- -----------
INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . (33,685) (1,266,649)
Cash at the beginning period . . . . . . . . . . . . . . . 343,878 1,887,001
----------- -----------
Cash at end of period. . . . . . . . . . . . . . . . . . . $ 310,193 $ 620,352
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(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, 1998
are not necessarily indicative of results that may be expected for the
year ending December 31, 1998.
NOTE 2. Certain amounts have been shifted between categories on the 1997
Statement of Operations for consistent treatment with 1998. This did
not result in any adjustment to net income or loss.
NOTE 3. Through May 30, 1997, the Company maintained a $6,000,000 line of
credit with Union Bank of California, N.A. During the first quarter
of 1997, the Company was 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 was not in default
with respect to any loan payments due to the Bank. The breached
covenants related 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.
On May 30, 1997 the Company entered into a financing agreement with
the National Bank of Canada. This agreement is comprised of a line of
credit of $9,000,000 based upon a percentage (80%) of qualifying
receivables, 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. Interest is payable monthly at the Bank's Reference
Rate plus .25%. This rate may be adjusted up or down an additional
.25% depending upon the Company's profitability. 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 March 31, 1998, the
balance owed on the new line of credit was $6,548,938 and on the
equipment loan was $920,000.
Because the Company incurred a loss in the first quarter of 1998, it
is in breach of loan covenants requiring the Company to breakeven and
to maintain a certain ratio between operating income and interest
expense in each quarter. The Company is not in default on any loan
payments due to the Bank. Management believes it will be able to
resolve any related issues with the Bank.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
Project revenue for the quarter ended March 31, 1998 was $11,455,258, an
increase of 52.4% or $3,937,514 from $7,517,744 for the first quarter of 1997.
This increase was due to a variety of factors:
- Increased activity under the five year EPA ERRS West contract awarded
in December, 1996, with an estimated value of $292 million.
- Start-up of the EPA ERRS Region X contract awarded in September, 1997,
with an estimated five year value of $42 million.
- Continued activity on two delivery orders totaling $11 million issued
in mid-1997 under a Preplaced Remedial Action Contract (PRAC) with the
U. S. Army Corps of Engineers.
- Continued activity on a $7 million wastewater treatment plant begun in
mid-1997 for a large industrial client.
- Increased revenues in water and wastewater treatment operations due to
the acquisition of Water Quality Management Corporation (August, 1997)
and H2O Construction and Maintenance, Inc. (January 1998).
In the first quarter of 1998, 40.0% of total project revenue or $4,585,808
was derived from one client, the U.S. Environmental Protection Agency.
During the first quarter of 1997, the revenue from this client was $2,791,156
or 37.1% of total project revenue.
A comparison of the first quarter of 1998 to the first quarter of 1997 showed
that gross profit increased from $39,938 to $635,588. The gross profit margin
increased from 0.5% to 5.6% of revenue. Direct project costs increased as a
percentage of revenue to 78.9% from 75.4% for first quarter 1998 and 1997
respectively. Indirect project costs decreased slightly to $1,780,619 from
$1,811,189. However, indirect costs as a percentage of revenue decreased
significantly to 15.5% from 24.1%. This decrease was primarily the result of
the Company's efforts to control indirect costs as revenues increase.
Selling expenses for the first quarter of 1998 decreased by $69,684 or 13.5%
when compared to the first quarter of 1997 due to a more focused sales effort
and the implementation of a sales commission program. Selling expense was 3.9%
and 6.9% of project revenue for the first quarter of 1998 and 1997 respectively.
General and administrative expenses for the first quarter of 1998 decreased by
$177,084 or 21.0% when compared to the first quarter of 1997. General and
administrative expenses as a percentage of project revenue were 5.8% for the
first quarter of 1998 as compared to 11.2% for the first quarter of 1997. This
decrease was primarily due to decreases in insurance costs, and elimination of
redundancies and other costs associated with relocating the corporate office.
Other income (expense)-net, consists primarily of interest expense which
increased $34,871 or 24.9% in the first quarter of 1998 compared to the first
quarter of 1997. The increase is due primarily to higher balances on the
Company's line of credit.
The Company experienced a net loss for the first quarter of 1998 of $665,202, as
compared with net loss of $1,460,694 for the first quarter of 1997. This
improvement in operating results is due to the increase in revenues coupled with
the efforts to reduce overhead.
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net working capital decreased by $952,576 from $12,118,860 at December 31, 1997
to $11,166,284 at March 31, 1998. Current assets decreased by $2,961,654 during
the first three months of 1998 primarily due to a decrease in contracts in
process of $4,972,317. Reduced revenues due to seasonal slowdown were largely
responsible for the decrease. This decrease in contracts in process was
partially offset by an increase in accounts receivable-net of $1,590,846. In
addition, prepaid expenses and other current assets increased by $453,502
primarily due to additional goodwill related to the purchase of H2O Construction
and Maintenance, Inc.
The decrease in current liabilities of $2,009,078 during the first three months
of 1998 resulted primarily from a decrease in accounts payable of $1,684,015 and
accrued expenses of $1,322,546. This was partially offset by a shift of other
notes payable from long term to short term.
Equipment and improvements-net showed a decrease of $165,572 during the first
three months of 1998 which was comprised of depreciation of $387,842, partially
offset with new purchases of $222,270.
Through May, 1997, the Company maintained a $6,000,000 line of credit with Union
Bank of California, N.A. As of March 31, 1997, the Company had borrowed an
aggregate of approximately $3,289,678 under the line of credit and two other
equipment loans from the Bank. At that time it was also in breach of certain
covenants related 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 Company was not in default with respect to any loan payments
due to the Bank.
On May 30, 1997 the Company entered into a new financing agreement with National
Bank of Canada. This agreement is comprised of a line of credit of $9,000,000
based upon a percentage (80%) of qualifying receivables, 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. Interest is payable monthly at the Bank's
Reference Rate plus .25%. This rate may be adjusted up or down an additional
.25% depending upon the Company's profitability. 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 March 31, 1998, the balance owed on the new
line of credit was $6,548,938 and on the equipment loan was $920,000.
Based on the loss incurred for the quarter ended March 31, 1998, the Company is
in breach of loan covenants requiring the Company to breakeven and to maintain a
certain ratio between operating income and interest expense in each quarter.
The Company is not in default on any payment provisions of the loan agreement.
Management believes it will be able to resolve any related issues with the Bank.
On March 6, 1998, the Company borrowed $500,000 from a shareholder under a short
term promissory note. This note carries an interest rate of 10% per annum and a
maturity date of May 31, 1998.
Management believes that funds provided from operations and the 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.
7
<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.
8
<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 15, 1998 By: /s/ Steven H. Davis
-----------------------------------------
Steven H. Davis, President
Dated: May 15, 1998 By: /s/ Rick C. Townsend
-----------------------------------------
Rick C. Townsend, Chief Financial Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 310,193
<SECURITIES> 0
<RECEIVABLES> 12,272,000
<ALLOWANCES> (638,638)
<INVENTORY> 8,371,902
<CURRENT-ASSETS> 22,127,599
<PP&E> 7,949,765
<DEPRECIATION> (4,308,973)
<TOTAL-ASSETS> 27,623,050
<CURRENT-LIABILITIES> 10,961,315
<BONDS> 2,052,195
0
0
<COMMON> 8,249,589
<OTHER-SE> (188,967)
<TOTAL-LIABILITY-AND-EQUITY> 27,623,050
<SALES> 11,455,258
<TOTAL-REVENUES> 11,455,258
<CGS> 0
<TOTAL-COSTS> 10,819,670
<OTHER-EXPENSES> 1,110,873
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175,532
<INCOME-PRETAX> (661,368)
<INCOME-TAX> 3,835
<INCOME-CONTINUING> (665,203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (665,203)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
