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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[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, 1997
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.
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(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 33-0285964
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
7670 SOUTH VAUGHN COURT, STE. 130, ENGLEWOOD, COLORADO 80112
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(Address of Principal Executive Offices, Including Zip Code)
Issuer's telephone number, including area code: (303) 708-1360
Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _
As of March 19, 1998, 5,809,485 Shares of the Registrant's Common Stock were
outstanding. The aggregate market value of voting stock held by nonaffiliates
of the Registrant was approximately $15,900,000.
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K 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-K or any
amendment to this Form 10-K. []
Documents incorporated by reference: None.
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PART I
ITEM 1. BUSINESS.
THE COMPANY
The Company was incorporated in February 1988 under the name "Thorne
Environmental, Inc." to conduct business in environmental consulting,
engineering, remediation and construction. The Company's initial growth
resulted from its successful performance of emergency response cleanup
services in certain western states and the Trust Territory of the Pacific
Islands for the U.S. Government. The Company has since developed a broad
range of expertise in non-proprietary technology-based environmental
remediation and water treatment techniques for both the public and private
sectors throughout North and South America and the Trust Territory of the
Pacific Islands. The Company was purchased by its existing majority
shareholders in November 1991, and for the last six years has engaged in a
program of expansion through internal client development and add-on contracts,
the acquisition of personnel and assets in desirable geographic locations, and
the acquisition of smaller companies involved with target growth technologies.
The Company has built a backlog in excess of $300 million of government work
through the award of several multi-year contracts with the Environmental
Protection Agency, the Department of Defense, and the Department of
Transportation. The Company has achieved and maintains a balance between its
commercial and government sector business through an aggressive industrial
marketing strategy. To date, the Company has performed remediation services
for both public and private sector customers at more than 500 sites.
The Company's strategy has been to distinguish itself in the market by
providing full service environmental contracting, municipal and industrial
water and wastewater treatment, and emergency response services. Through
several major government contracts and a diversified commercial client base,
the Company provides turnkey waste management for a complete range of water,
soil, and air pollution issues. The Company's personnel have developed
expertise in a broad range of remediation techniques such as bioremediation,
bioventing, vapor extraction, gas/air sparging, thermal desorption, soil
washing and groundwater remediation systems. The Company also offers a
variety of services in support of municipal and industrial water and
wastewater treatment, military base closures, and other operations with
significant environmental components. The Company believes it has gained a
solid reputation for promptly providing cost effective and innovative
remediation and treatment solutions.
In November 1996, the Company relocated its corporate headquarters to
Englewood, Colorado from Tustin, California to be more centrally located for
its expanding business. The Company also maintains offices in Tustin,
California; Richmond, California; Portland, Oregon; Edmonds, Washington;
Denver, Colorado; Phoenix, Arizona; Pasadena, Texas; New Orleans, Louisiana;
Jackson, Mississippi; and Mobile, Alabama.
In July 1995, the Company completed an initial public offering of
1,200,000 shares of its Common Stock, and in August 1995, sold an additional
180,000 shares pursuant to an overallotment option. The net proceeds to the
Company from the public offering were approximately $5,800,000. Concurrent
with the IPO, the Company became listed on the American Stock Exchange under
the symbol "ENV."
In November 1995, the Company acquired all of the outstanding stock of
En-Tech, Inc., a Colorado corporation ("En-Tech"), doing business as
Environmental Technologies, Inc., in exchange for 35,769 shares of the
Company's Common Stock. En-Tech is engaged in the design, construction, and
operation of industrial wastewater and water treatment facilities, and
provides services in
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both the public and private sectors. En-Tech was merged into the Company
effective March 15, 1996.
In December 1996, the Company commenced a Private Placement Offering of
Common Stock.
This offering was completed in January 1997, and resulted in the
issuance of 729,248 shares with net proceeds to the Company totaling
$2,035,662. The Common Stock sold via this offering was registered for resale
under an S-3 Registration which was effective January 7, 1998. 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.
In August 1997, the Company acquired all of the outstanding stock of
Water Quality Management Corporation, a Colorado corporation ("WQM"), in a
cash transaction. WQM is engaged in the operation and maintenance of
municipal and industrial water and wastewater treatment facilities. WQM is
operated as a wholly owned subsidiary of the Company.
In January 1998, the Company acquired all of the outstanding stock of H2O
Construction and Maintenance, Inc. a Colorado corporation ("H2O"), for cash
and notes. H2O is engaged in the construction, operation and maintenance of
water and wastewater treatment, collection and distribution facilities. H2O
provides services to both public and private sector clients. H2O is currently
operated as a wholly owned subsidiary of the Company, but it is planned to be
merged into WQM during 1998.
THE ENVIRONMENTAL REMEDIATION INDUSTRY
Various analysts have recently estimated that the total United States
environmental services industry generates revenues of $180-200 billion per
year.
ENVIRONMENTAL BUSINESS JOURNAL has indicated that the remediation industry
accounted for approximately $6.1 billion of revenue in 1997. Driven largely
by legislation passed during the late 1970's and early 1980's in response to
widespread public concern regarding clean air and water, the environmental
services business has expanded rapidly during the past decade. The Company is
involved primarily in the remediation segment of the industry, which is
focused on cleanup of existing environmental problems.
Arising in response to the 1980 CERCLA ("Superfund") legislation, the
remediation services business grew quickly. A study by the Waste Management
and Education Research and Educational Institute at the University of
Tennessee, Knoxville, has estimated the total cost of cleaning up America's
worst hazardous toxic waste sites as high as $750 billion in 1990 dollars.
This revenue is divided among six major regulation-driven sectors, including
Superfund (federally funded) programs, state-funded programs, federal
facilities programs (primarily Department of Energy and Department of
Defense), UST removals, private remediation programs and hazardous waste
management facility corrective actions. Federal facilities cleanup programs
have become an increasingly important sector of the business as a result of
active military base and other facility closures.
Since 1994, increased pressure to create uses for contaminated and idle
properties has driven a rise in industrial redevelopment or "Brownfield" site
remediation programs. The term "Brownfield" comes from an EPA sponsored
program to study the redevelopment of "abandoned, idled, or underused
industrial
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facilities where expansion or redevelopment is complicated by real or
perceived environmental contamination" (U.S. EPA). The exact number of
Brownfield sites is unclear; however, their existence and a governmental
effort to facilitate their cleanup have created an opportunity for full
service remediation as well as financial participation in the redevelopments.
The remediation business consists of three phases: site assessment,
remediation program design and the actual site remediation. The first phase is
largely investigative and can involve substantial chemical analysis to
understand the nature and extent of the problem. The design phase involves
detailed engineering to develop the optimal solution for cleaning the site.
The third phase is the true implementation of the site remediation plan and
involves various on-site treatment procedures for contaminated materials or
the excavation and containment or off-site transportation of toxic materials.
The Company provides an extensive full-service offering in all phases of
contaminated site remediation.
Innovative on-site remediation technologies are in high demand to provide
an alternative to off-site disposal of hazardous waste. On-site technologies
such as bioremediation, bioventing, vapor extraction, gas/air sparging, low
temperature thermal desorption, chemical fixation and soil washing are gaining
wide-spread regulatory acceptance. The Company strives to utilize these
remediation techniques more efficiently than its competitors.
Responding to emergency spills or leaks of contaminants by petroleum
companies, by state or federal agencies or commercial treaters and haulers of
hazardous materials is another important segment of the environmental
remediation services industry. Emergency situations can involve the use of
various containment and treatment techniques. Providers of these services must
be able to handle these sorts of problems on a stand-by basis, due to public
concerns and publicity regarding hazardous material spills. The federal
government routinely contracts with private parties to maintain fast response
capabilities to deal with these sorts of problems.
THE WATER TREATMENT INDUSTRY
According to Merrill Lynch in its GLOBAL WATER INDUSTRY OUTLOOK dated
October 1, 1997, the global water treatment market is currently estimated in
excess of $300 billion and expected to exceed $400 billion by the turn of the
century. There is an overwhelming percentage of the population, both
domestically and internationally, who are either consuming impure water or
directly dumping sewage. There are 45 million people in the U.S. and 40% of
the world's population drinking contaminated water. Ninety percent of the
world's population dumps raw sewage.
The water treatment industry is experiencing various trends, including
concurrent substantial growth and consolidation. These trends include:
- - CONSOLIDATION: There are currently 50,000 companies in the U.S. providing
services, equipment and supplies to the industry, allowing substantial
opportunity for consolidation through merger and acquisition.
- - TURN KEY FIRMS: Clients are looking for firms which can supply "cradle to
grave" services to solve their water treatment problems. Total solution
companies are generally providing these services by acquiring specialty
companies and combining the multiple services under one umbrella. Customer
needs are driving the consolidation process.
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- - PRIVATIZATION/CONTRACT OPERATIONS: Through favorable changes in IRS
regulations, the privatization market is beginning to accelerate in the
U.S. New rules allow for 30-year operations contracts (instead of the
previous 5-year contracts) in conjunction with tax exempt financing. This
is a critical driver in the marketplace.
- - DETERIORATING INFRASTRUCTURE: Many municipal wastewater treatment facilit-
ies in the U.S. were constructed in the late 60's and early 70's using fed-
eral grant monies. These facilities are coming to the end of their useful
lives, but there are no longer any grant programs. This is driving the
move to public/private partnerships for financing and operating new
facilities.
- - GLOBALIZATION: Increased industrialization in emerging economies is driv-
ing the need for water/wastewater treatment. Many do not have adequate
water supplies which makes this process even more important. European and
American firms overwhelmingly lead in the developed technologies for these
services.
- - RISING WATER/WASTEWATER RATES: The supply of water has actually decreased
slightly over the past decades due to the loss of replenishment into avail-
able resources and pollution of fresh water supplies. Population growth
and economic demand has further pushed up the value of existing supplies.
This increased cost of water is driving the market for reuse and recycling
of these supplies, increasing the number and type of treatment
opportunities.
- - INDUSTRIAL WATER: The need for ultrapure process water in the power,
mining, semiconductor, pharmaceutical, food processing and other industries
is expected to double over the next six years. Advanced manufacturing
techniques are driving this increase. This current market is $9 billion
and is expected to reach $15 billion by the year 2000.
- - INDUSTRIAL WASTEWATER: Regulatory pressures are driving industrial firms
to upgrade wastewater treatment and pre-treatment facilities. Because the
operation and compliance reporting for these facilities is complex and not
part of their core business, more industrial firms are outsourcing for
these services.
ORGANIZATION OF THE COMPANY
The Company is organized into three primary business lines: industrial
services, which includes in-plant maintenance, environmental remediation and
emergency response; federal government programs; and water/wastewater
services. This is overlaid with a geographic structure in which each office is
able to provide manpower and equipment to support projects in each of the
business lines.
The Company utilizes the following resources to provide turnkey services
to its customers:
- Registered engineers, geologists and earth scientists for performing
investigations and remediation feasibility studies.
- In-house laboratory facilities for evaluating water treatment techniques,
numerous remedial technologies, monitoring ongoing projects, and
accelerating remediation.
- Engineers, earth scientists and construction managers to design remedia-
tion and water/wastewater treatment systems from the conceptual stage
through final design.
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- A team of certified water treatment system operators to provide design,
construction, consultation and operation for municipal, industrial, and
mining wastewater treatment.
- Manpower and equipment for performing site preparation such as
excavation, grading, berming and hauling soil; removal of obstacles,
i.e., drums, transformers, USTs and piping; and dismantling ASTs.
- Manpower and equipment for erecting or installing remediation equipment,
support buildings and enclosures for remediation of contaminated soil,
water, sludge or sediment.
SERVICES AND PRODUCTS PROVIDED BY THE COMPANY
The Company provides full turnkey services for environmental remediation
of hazardous and toxic waste on a planned and emergency basis, and for
water/wastewater treatment, collection and distribution facilities. This can
include assessment and characterization studies, conceptual design, detail
design, construction and installation, and operation and maintenance. By
offering turnkey services, the Company believes it enjoys a competitive
advantage in soliciting new customers, as well as in obtaining follow-on
contracts that may be tangential or unrelated to the original scope of work.
REMEDIATION SERVICES. The Company believes it has a solid
reputation for responsiveness and technical excellence in providing turnkey
remediation services, utilizing a variety of innovative technologies. The
Company does not promote a single technology, but recommends the remediation
methods that provide the most cost-effective and timely mitigation.
FACILITY CONSTRUCTION, MAINTENANCE AND CLOSURE SERVICES. In addition to
remediation of soil and groundwater, the Company provides services related to
facilities that have contaminated surrounding areas or have the potential to
do so. The Company has completed a variety of projects related to
construction, maintenance and closure/site restoration of facilities
including:
- Mechanical Maintenance and Construction
- Facility Decontamination and Demolition
- Waste Area Closures
- Drum Removals
- Lab Packing and Waste Services
- Excavation, Transport and Disposal of Waste
- Remote System Monitoring
- System Optimization
WATER AND WASTEWATER TREATMENT. The Company has gained a comprehensive
body of experience in performing a variety of traditional and innovative water
and wastewater treatment services. The following treatment technologies are
currently being used successfully by the Company in the performance of
municipal and industrial wastewater treatment projects:
X Filtration X Ultraviolet Treatment
X Chemical Precipitation X Dissolved Air
X Reverse Osmosis X Recirculated Air
X Ion Exchange X Activated Sludge
The Company has full turnkey capability for treatment plants, collection
and distribution systems, and ancillary facilities. The key water/wastewater
services provided to both public and private sector clients include:
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FACILITY DESIGN AND CONSTRUCTION. Facilities are designed to minimize
operating costs through the use of such techniques as energy efficient
low-pressure air systems, ergonomic treatment building design, and rotating
equipment optimized for energy consumption. The Company utilizes automated
design tools and incorporates ongoing constructability and operability
revenues to ensure a highly efficient facility. The Company employs state of
the art construction management techniques to efficiently construct facilities
with its own work forces.
FACILITY OPERATION AND MAINTENANCE SERVICES. The Company provides cost
effective operation and maintenance services that are customized to meet the
needs of specific clients. All operations contracts include the development
of site-specific preventive maintenance programs and standard operating
procedures. All operators have routine equipment, maintenance skills, and are
supported by a staff of mechanics who perform major maintenance of equipment,
including rebuilds. The Company is also capable of performing non-disruptive,
in situ pipeline leak detection and repair.
LAB CAPABILITIES. The Company has an in-house laboratory designed and
certified to meet the needs of water and wastewater treatment clientele. In
addition to a complete battery of wet chemical and bacteriological testing,
the lab is equipped to conduct treatability studies for water and wastewater
treatment processes and pilot scale treatment plant investigations.
PROJECT FINANCING AND CONCESSION AGREEMENTS. The Company offers clients
a comprehensive concession service that includes the highest quality facility
design, construction, financing, and operational services. With today's
increasingly stringent regulatory environment, and the need for more
sophisticated treatment processes, the concession approach allows clients to
place their water and wastewater treatment responsibilities in the hands of
the Company's qualified team of professionals.
CUSTOMERS
The Company's customers include federal, state and local government
agencies and commercial enterprises including Fortune 500 companies. The
following is a representative list of the Company's past and present
customers:
PETROLEUM INDUSTRY
Texaco Exxon
Unocal LASMO Oil and Gas, Inc.
Tesoro Enron Oil Trading and Transportation
Coastal Arco
FINANCIAL
First Interstate Bank Bank of America
Seafirst Bank Bank One
Wells Fargo Bank Principal Financial Group
MANUFACTURING AND PROCESSING
Monsanto Chemical ConAgra
Georgia Pacific Pacific Gas & Electric
Hewlett-Packard Intel
GOVERNMENT (FEDERAL AND STATE)
U.S. EPA Oregon Dept. of Environmental Quality
U.S. Army Corps of Engineers Colorado Dept. of Health
U.S. Dept. of Transportation Missouri Dept. of Natural Resources
U.S. Dept. of Energy Arizona Dept. of Environmental Quality
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The Company was the prime contractor for a six-year, $75 million Fixed
Rate, Indefinite Quantity, Cost Plus Fixed Fee, Cost Plus Award Fee contract
for the EPA to provide emergency response cleanup services ("ERCS") in EPA
Regions IX and X, which include California, Hawaii, Nevada, Arizona,
Washington, Oregon, Idaho, Alaska, Guam, American Samoa, Saipan and the Trust
Territory of the Pacific Islands. Under the contract, which began March 1,
1991, the Company received over 120 delivery orders to provide ERCS for oil,
petroleum and hazardous substance releases in accordance with the provisions
of the federal Clean Water Act ("CWA"), RCRA and Superfund legislation.
In December 1996, the Company was notified by EPA of its selection as the
successful bidder for the Emergency and Rapid Response Services (ERRS) West
contract. This contract calls for the provision of similar services as the
ERCS contract and covers EPA Regions VI, VIII and IX. It runs for five years
and is estimated at $292 million. The Company has received in excess of 90
delivery orders with an approximate contract amount of $33 million to date
under this contract.
In September 1997, the Company was selected as the successful bidder for
the ERRS contract in Region X. This contract also runs for five years and is
estimated at $42 million. To date, the Company has received seven delivery
orders with an approximate contract amount of $5 million under this contract.
The ERRS contracts, like most of the Company's other government
contracts, are "basic ordering documents," not binding agreements requiring
the performance of work by the Company and payment by the government. This
occurs only when the government issues delivery orders under the contract.
Management believes, based on its prior experience with government contracts,
that the Company will receive delivery orders for a substantial portion if
not the full amount of the contract during the life of the contract, or
extensions thereof. However, the possibility always exists that the
government will terminate work under the contract at any time.
The Company is a prime contractor on a three year, $25 million Pre-placed
Remedial Action Contract (PRAC) with the Corps of Engineers, Omaha District.
Under this contract, the Company is providing remedial actions at hazardous
waste sites within the District's Midwest region. In 1997 the Company was
issued two delivery orders valued at approximately $11 million.
The Company is a Prime Contractor for the McClellan Environmental
Technologies Remediation Implementation Contract (METRIC). The contract has a
5-year ordering period and a potential program value of $19 million. The
METRIC program, sponsored by the United States Air Force, has been developed
to repair environmental damage at various installations and to prevent further
environmental degradation at these installations. Under this contract, the
Company will perform work primarily at McClellan Air Force Base, near
Sacramento, California, and its satellite facilities.
Individual contracts with customers typically have an award value of
$25,000 to $100,000 for the performance of specific tasks, and from $125,000
to $7,000,000 for comprehensive turnkey services. Geographically, the Company
provides services to customers throughout the western and southeastern United
States and the Trust Territory of the Pacific Islands.
The Company has Master Service Agreements or emergency response contracts
with approximately 100 clients. These include ABF Freight, Arco Chemical,
Bank of America, Burlington Northern, Conoco, Exxon, Georgia Pacific,
Monsanto, Ryder Truck, Texaco, U.S. Coast Guard and United Parcel Service.
Master Service
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Agreements and the emergency response contracts set forth the terms and
conditions pursuant to which the Company would provide services in the future
when needed or requested pursuant to a purchase order or request for services.
BUSINESS STRATEGY
The Company plans to capitalize on the following trends:
- On-site remediation is increasing, especially at large sites. Public
opposition and regulatory resistance to incineration and landfilling
will enhance the prospects for bioremediation, vapor extraction,
thermal desorption and other innovative on-site technologies.
- Privatization and outsourcing of drinking water and sewage treatment
systems in the U.S. and internationally will provide a large and
expanding opportunity well into the next century.
- Remediation at active industrial sites under the RCRA corrective
action program represents an important private sector segment in an
early stage of development.
- Most government contracts require a defined percentage of the work
be subcontracted to small business enterprise companies ("SBEs"),
typically between 20 and 60 percent. The Company qualifies as an SBE
under Standard Industrial Classification Code 8744, Environmental
Remediation Services, by having less than 500 employees.
The Company's strategy to capitalize on these trends emphasizes the
following key elements:
DIVERSIFICATION THROUGH CONTROLLED EXPANSION. The Company seeks
controlled growth and diversification by providing its services to additional
industries and by broadening the mix of related services performed for each
client. Management has identified several areas of interest for expansion
including additional work in the areas of base closure services to the U.S.
Government, in plant services for industrial clients, mining facility
decommissioning and reclamation, and privatization of water treatment
facilities throughout North and South America.
MIXTURE OF PUBLIC AND PRIVATE SECTOR WORK. The Company seeks to maintain
a mix of government projects and private sector projects. Government projects
can offer the advantage of multi-year scope of work, but generally have lower
gross margins. Private sector projects tend to have shorter time frames, but
offer opportunities for greater gross margins. Management plans to continue
developing business opportunities in both sectors and would like to keep a
reasonable balance between EPA and non-EPA work. (See "MANAGEMENT'S DISCUSSION
AND ANALYSIS.")
EMPHASIS ON RECURRING REVENUE. The Company seeks to expand its base of
recurring revenue sources in order to mitigate the cyclical nature of the
environmental remediation services industry. The Company is on appropriate
approved-contractor lists with its major governmental customers and large
corporate customers whereby the Company is invited to bid on future
environmental engineering/remediation projects. Inclusion on such lists is a
result of the Company's having completed prior contracts to the satisfaction
of these customers. The Company also intends to increase the number of
operations and maintenance contracts, both for water/wastewater facilities and
industrial services. These contracts are generally longer term, providing a
more sustainable revenue base.
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COMMITMENT TO QUALITY. Management believes that the long-term success of
the Company depends upon its reputation with customers and government
regulators for performing top quality, turnkey services. The Company must
continue to distinguish itself with private and government sector customers by
maintaining competence in various state-of-the-art technology based
remediation and treatment alternatives, and by efficient and effective job
site performance.
PROFESSIONAL MARKETING AND MANAGEMENT. The Company is committed to
maintaining a professional marketing and project management staff that
understands the needs and requirements of its various customers, that can
accurately evaluate requests for proposals and invitations to bid and that
responds in a timely manner with high quality comprehensive formal proposals.
This includes understanding the intricacies of the detailed and time-consuming
process associated with bidding and managing projects for the federal
government. The Company utilizes non-proprietary specialized software for job
cost accounting and government contracts to assist with both bidding and
managing projects.
STABLE WORK FORCE. The Company strives to maintain a stable, dedicated
work force of experienced professionals, managers, administrative personnel,
and trained operators and laborers. The Company seeks to attract and retain
such employees by providing fair compensation, incentives and a dynamic work
environment. The Company maintains a comprehensive program for providing
health and safety training related to hazardous material exposure, in full
compliance with the highest standards set forth by federal and other
applicable regulatory agencies. Management believes that the Company's
experienced work force will continue to contribute to the Company's excellent
safety record, reducing insurance costs and increasing customer satisfaction.
OWNERSHIP OF EQUIPMENT. The Company attempts to purchase specialized
emergency response and remediation equipment, thereby providing the Company
with key business advantages, including reduced operating costs, greater
flexibility in scheduling the use of resources (equipment, personnel, etc.)
and greater reliability in meeting contractually defined performance
timetables and deadlines. The Company typically rents non-specialized
equipment such as backhoes and excavators.
MARKETING
The Company has a dedicated marketing and sales staff of approximately 20
people, including sales professionals, proposal writers, technical editors,
and project estimators. A significant portion of new business is derived from
current customers seeking services for additional sites and new needs. The
Company has developed ongoing relations with a broad range of customers in
various industries and geographical sites.
The Company has segregated its marketing efforts for the public and
private sectors. The public sector proposal effort is managed on a centralized
basis. The Company pursues federal contracts which range from $5 million to
$70 million annually. On larger opportunities, the Company may establish
teaming agreements with large engineering/construction firms to enhance the
chances for award.
The marketing organization for the commercial business is primarily
decentralized. Sales leads and customer relationships are developed on a
regional basis by the Regional Manager, Project Managers or the Business
Development Manager.
The Company's contracts are primarily obtained through competitive
bidding and through negotiations with long-standing customers. The Company is
typically invited to bid on projects undertaken by recurring customers who
maintain
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pre-qualified contractor bid lists. Bidding activity, backlog and revenue
resulting from the award of contracts to the Company vary significantly from
period to period.
COMPETITION
The environmental industry in the United States has developed rapidly
since the passage of RCRA in 1976 and is highly competitive. The industry
today is highly fragmented, with numerous small and medium sized companies
serving niche markets according to geography, industry, media (air, water,
soil, etc.) and technological specialization (bioremediation, etc.).
Because the Company operates in many sectors of the environmental
industry, the Company can adapt to changes in the marketplace by allocating
its resources to the industry sector in which the business opportunities
exist. Management believes that the keys to success in the industry today are
service and capabilities. The Company will continue to focus on the
application of new technology as well as innovative applications of existing
technologies to solve complex problems. The Company also plans to continue
providing high quality services to its customers.
Management believes that the primary factors of competition are price,
technological capabilities, reputation for quality and safety, relevant
experience, availability of machinery and equipment, financial strength,
knowledge of local markets and conditions, and estimating abilities.
Management believes that the Company has competed and will continue to compete
favorably on the basis of the foregoing factors. However, many of the
Company's competitors have financial resources and facilities greater than
that of the Company. Additionally, at any time and from time to time the
Company may face competition from new entrants into the industry. The Company
may also face competition from technologies that may be introduced in the
future, and there can be no assurance that the Company will be successful in
meeting the challenges which will be posed by its competition in the future.
GOVERNMENT REGULATION
The Company is presently regulated by a myriad of federal, state and
local environmental and transportation regulatory agencies, including but not
limited to the EPA, which regulates the generation and disposal of hazardous
waste; the U.S. Department of Labor, which sets safety and training standards
for workers; the U.S. Department of Transportation, which regulates
transportation of hazardous materials and hazardous waste; and similar state
and local agencies.
The need for governments and business to comply with the complex scheme
of federal and state regulations governing their operations is the market in
which the Company operates, although the Company itself must operate under and
in conformance with applicable federal and state laws and regulations. The
Company attempts to pass the cost of compliance on to the customer through the
prices paid by customers for the Company's services.
ENVIRONMENTAL LAWS
Most environmental laws and regulations are promulgated by the U.S.
Congress and federal departments and agencies. For example, the National
Environmental Policy Act compels federal governmental agencies at all levels
to make decisions with environmental consequences in mind. The EPA and the
U.S. Occupational Safety and Health Administration ("OSHA") are responsible
for protecting and monitoring certain natural resources (such as air, water
and soil) and working conditions. These laws and regulations establish a
comprehensive regulatory framework
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consisting of permitting processes, systems construction, monitoring and
reporting procedures, and administrative, civil and criminal enforcement
mechanisms.
Many of the federal laws and regulations contemplate enforcement by state
agencies and adoption by the states of similar environmental laws and
regulations which must meet minimum federal requirements. In areas of
environmental law where federal regulation is silent, the states may adopt
their own environmental laws.
Local governments such as counties and municipalities may also enact and
enforce environmental laws that address local concerns which may be more
stringent than applicable state laws.
The Company's ability to assist customers to comply with these
environmental laws and regulations forms the basis for the current and future
environmental consulting, engineering, remediation, laboratory and other
services provided by the Company. Enforcement of such laws and regulations,
such as EPA mandated registration and upgrade of USTs, also leads to business
for the Company.
The federal laws and regulations described below constitute the major
actions that have caused industry growth in the environmental and
water/wastewater service industries.
COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF
1980 ("CERCLA"). This legislation, as amended by the Superfund Amendments and
Reauthorization Act of 1986, established the Superfund program to identify and
clean up existing contaminated hazardous waste sites and other releases of
hazardous substances into the environment. While federal funds of
approximately $8.5 billion exist to pay for the cleanup, CERCLA gives the EPA
authorization to compel private parties to undertake the cleanup and
enforcement incentives including the imposition of penalties and punitive
damages.
RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 ("RCRA"). This
legislation, as amended by the Hazardous and Solid Waste Amendments of 1984
("HSWA"), provides for the regulation of hazardous waste from the time of
generation to its ultimate disposal as well as the regulation of persons
engaged in generation, handling, transportation, treatment, storage and
disposal of hazardous waste. Hydrocarbon-based hazardous waste as defined by
RCRA can include leaked/spilled crude oil, refined oil, gasoline, kerosene and
industrial solvents (used, for example, in the transportation and
manufacturing industries). Hazardous waste also includes the by-products of
virtually any business, including the production of plastics, pesticides,
fertilizers, soaps, medicines, explosives, etc. These wastes can contain heavy
metals, organic chemicals, dioxin, PCBs, cyanide and other toxic substances.
EPA UST REGULATIONS. The EPA has mandated that USTs that are used to
store gasoline, diesel fuel, fuel oil, waste oil and hazardous materials be
registered with the appropriate state regulatory agency, designed or upgraded
to meet construction and operational standards, and monitored to insure
against groundwater and soil contamination from leaking. Owners and operators
are further required to report leaks and undertake appropriate corrective
action, including testing and monitoring to identify the extent of the
contamination, removal and disposal of contaminated soil, or on-site treatment
of contaminated soil or groundwater. The EPA has delegated the administration
of UST regulations to state agencies. To assist the remediation process when
leaking USTs are identified, many state legislatures have created
reimbursement programs funded by gasoline taxes or other taxes and fees.
-12-
<PAGE>
RCRA mandates that by December 31, 1998, every single-walled UST in the
United States be removed and replaced with a double-walled tank. Any
environmental danger to the soil or water caused by leakage of a UST must also
be remediated. The Company anticipates that UST-related business
opportunities will be substantial in 1998, and that a significant number of
UST owners will not meet the deadline, providing further opportunities for
several years. Management believes that the Company is well positioned in the
niche market of removing and replacing USTs and performing remediation and
construction services required in conjunction with UST replacement.
CLEAN WATER ACT ("CWA"). The CWA established a system of standards,
permits and enforcement procedures for the discharge of pollutants into
navigable waters from industrial, municipal and other wastewater sources. The
CWA requires, under certain circumstances, pretreatment of industrial
wastewater before discharge into municipal treatment facilities. The EPA and
delegated state agencies are also placing some non-complying municipalities
under enforcement schedules. These regulations are creating the need for the
upgrade or construction of new treatment facilities by both industrial and
municipal entities.
SAFE DRINKING WATER ACT ("SDWA"). Under the SDWA and its subsequent
reauthorization, the EPA is empowered to set drinking water standards for
public water systems in the United States. The SDWA requires that the EPA set
maximum permissible contamination levels for over 80 substances and also
requires the EPA to establish a list every three years of contaminants that
may cause adverse health effects and may require regulation. Enforcement
responsibility is placed on the states and includes water supply systems
monitoring. The SDWA also requires that the EPA set criteria for the use of
treatment techniques including when filtration should be used for surface
water supplies and when to require utilities to disinfect their water. The EPA
regulations under the SDWA are expected to result in significant expenditures
by public water systems for evaluation and, ultimately, for upgrading of many
facilities.
Bolstering federal laws are stringent state laws, such as California's
Safe Drinking Water and Toxic Enforcement Act of 1986 ("Prop 65"), which took
full legal effect in 1992. To cite just one facet of Prop 65, California's
drinking water must not have concentrations of more than one part per billion
of benzene. However, one tablespoon of gasoline contains enough benzene to
render 50,000 gallons of water undrinkable by California's standards. To place
the problem within a commercial context, an estimated one in four gas stations
has a UST that is leaking, and a single leak can result in thousands of
gallons of benzene-rich gasoline leaking into the watertable.
OSHA AND OSHA REFORM ACT. OSHA has promulgated various regulations
setting forth standards for disclosure of health hazards in the work place and
for response thereto. The Hazard Communication Standard, for example, requires
manufacturers and importers of chemicals to assess the hazards of their
products and disclose the same through material data safety sheets and label
warnings. In 1990, in an effort in part to create a self-funding
administration, Congress increased the ceiling for certain OSHA-imposed
penalties.
POTENTIAL LIABILITY AND INSURANCE
The Company maintains quality assurance, quality control, health and
safety programs to reduce the risk of damage to persons and property.
However, in providing environmental remediation services to the Company's
customers, the Company faces substantial potential liability for environmental
damage, personal injury, property damage, economic losses and fines and costs
imposed by regulatory agencies. Furthermore, it is possible that one or more
of the Company's customers may assert a claim against the Company for
negligent
-13-
<PAGE>
performance of services. The Company's potential environmental liability
arises, in part, because some of its services involve the cleanup of petroleum
products and other hazardous substances for its customers.
The scope of liability under existing law for environmental damage is
potentially very broad and could apply to the Company in a number of ways. For
example, the Company may be exposed to liability under CERCLA when it conducts
a cleanup operation that results in a release of hazardous substances, or when
it arranges for disposal of such substances. Other liabilities may arise if
the Company creates or exacerbates a contamination problem through errors or
omissions in its cleanup work, potentially giving rise to, among other things,
tort actions for resulting damages and Superfund liability for any resulting
cleanup. Finally, it is possible that one or more of the Company's customers
will assert a claim against the Company for an allegedly incomplete or
inadequate cleanup.
Many state and federal environmental laws apply to the Company's
activities, and the potential for liability exists depending on the
circumstances and substances involved in each cleanup operation. Moreover, the
law in this area is developing rapidly and is thus subject to considerable
uncertainty.
The Company has had no claim made against it by governmental agencies or
third parties under environmental laws or regulations. The Company has had one
claim made by a former customer related to the design of a remediation
project, which has been settled. The Company is not aware of any pending
litigation of this nature, and has not established any reserves for potential
liabilities.
The Company maintains comprehensive general liability insurance and
worker's compensation insurance that provide $5 million of coverage each. In
addition, the Company maintains pollution liability and errors and omissions
insurance that provides $2 million of coverage each. Because there are
various exclusions and retentions under the insurance policies described
above, not all liabilities that may be incurred by the Company will
necessarily be covered by insurance. In addition, certain of the policies are
"claims made" policies which only cover claims made during the term of the
policy. If a policy terminates and retroactive coverage is not obtained, a
claim subsequently made, even a claim based on events or acts which occurred
during the term of the policy, might not be covered by the policy. In the
event the Company expands its services into a new market, no assurance can be
given that the Company will be able to obtain insurance coverage for such
activities or, if insurance is obtained, that the dollar amount of any
liabilities incurred in connection with the performance of such services will
not exceed policy limits.
The market for liability insurance has been severely constrained at
times, due in part to high losses experienced by the insurance industry from
environmental impairment liability claims, including claims associated with
hazardous materials and toxic wastes. Consequently, the available insurance
coverage for enterprises such as the Company may be reduced, eliminated
entirely or priced beyond the reach of many companies. To date, the Company
has been able to obtain any insurance required by a customer. However, there
can be no assurance that the Company will be able to maintain adequate
liability insurance in the future.
BONDING REQUIREMENTS
Commercial remediation projects, as well as federal, state and municipal
projects, often require contractors to post both performance and payment bonds
at the execution of a contract. Performance bonds guarantee that the project
will be completed and payment bonds guarantee that vendors will be paid for
equipment
-14-
<PAGE>
and other purchases. Contractors without adequate bonding may be ineligible to
bid or negotiate on many projects. The Company has frequently been required to
obtain such bonds and it should be assumed that the Company will continue to
be required to obtain such bonds in the future. The Company obtains required
bonds on a case-by-case basis as needed and has not experienced any problems
in obtaining necessary bonds. The Company could experience such difficulties
in the future if its total amount of bonds outstanding exceeds the limits
imposed by bonding companies based on the financial condition of the Company
at any given time. Bonds typically cost between 1% and 3% of the cost of a
project. To date, no payments have been made by any bonding company for bonds
issued for the Company.
EMPLOYEES
The Company presently employs approximately 200 persons full time and 150
part time at its 11 offices, including four Company officers. The Company's
employees are not represented by a labor union or covered by a collective
bargaining agreement, and the Company believes it has good relations with its
employees.
While all of the Company's projects are performed under the supervision
and direction of the Company's supervisors and foremen, and the Company
attempts to utilize as many of the Company's regular laborers as possible to
staff projects, the location and other factors affecting projects performed
away from the immediate vicinity of the Company's permanent offices result in
the Company occasionally hiring temporary workers on site. The Company
carefully reviews the training and qualifications of all temporary workers
hired to assure that all such personnel are qualified to perform the work in
question. However, due to the temporary nature of such employment, there is no
assurance that all such temporary workers will perform at levels acceptable to
the Company and its customers.
The operations of the Company are substantially dependent upon its
executive officers. The Company has no employment contracts with these persons
and the loss of their services could have a material adverse effect on the
Company. The Company's further success will also depend significantly on its
ability to attract and retain additional skilled personnel, including highly
trained technical personnel, project managers and supervisors. The Company
believes it currently has adequate qualified supervisory personnel, but there
is no assurance that experienced and qualified management level personnel will
be available to the Company in the future to fill positions as needed.
ITEM 2 PROPERTIES.
The Company's headquarters and administrative facilities are located at
7670 S. Vaughn Court, Ste. 130, Englewood, Colorado, in approximately 4,600
square feet of leased office space. The lease expires in July, 1998. The
Company's corporate and administrative functions are conducted from these
facilities.
The Company's services are conducted from the following spaces:
-15-
<PAGE>
CURRENT
LEASE MONTHLY
SQ. FT EXPIRATION RENT
- ------------------------------------------------------------------------------
14761 BENTLEY CIRCLE
TUSTIN, CALIFORNIA 18,490 April 14, 1999 10,169.50
- ------------------------------------------------------------------------------
150 WEST DAYTON STREET
EDMONDS, WASHINGTON 5,000 April 30, 1998 3,548.04
- ------------------------------------------------------------------------------
170 WEST DAYTON, STE. 106A
EDMONDS, WASHINGTON
(NEW OFFICE LOCATION
RENT TO COMMENCE MAY 1, 1998) 6,920 March 31, 2001* 8,073.00
- ------------------------------------------------------------------------------
170 WEST DAYTON, STE. 106 B-D
EDMONDS, WASHINGTON
(NEW WAREHOUSE SPACE)
RENT COMMENCED MARCH 1, 1998 5,568 March 31, 2001* 3,062.40
- ------------------------------------------------------------------------------
3033 RICHMOND PARKWAY, STE. 300
RICHMOND, CALIFORNIA 7,664 April 30, 2001 6,438.00
- ------------------------------------------------------------------------------
6900 E. 47TH AVENUE DRIVE, SUITE 200
DENVER, COLORADO 11,051 July 31, 1998 2,993.00
- ------------------------------------------------------------------------------
525 SOUTH MADISON
TEMPE, ARIZONA 3,254 August 31, 1998 1,952.00
- ------------------------------------------------------------------------------
7670 S. VAUGHN COURT, STE. 130
ENGLEWOOD, COLORADO 4,600 July 31, 1998 4,622.00
- ------------------------------------------------------------------------------
5275, 5251, & 5315 NW ST. HELENS ROAD
PORTLAND, OREGON 3,000 January 6, 1999 3,500.00
- ------------------------------------------------------------------------------
150 NOEL STREET
MOBILE, ALABAMA 20,000 April 30, 2000 3,275.00
- ------------------------------------------------------------------------------
13120 CARRERE COURT
NEW ORLEANS, LOUISIANA 13,520 April 14, 2001* 3,771.21
- ------------------------------------------------------------------------------
3222 PASADENA FREEWAY
PASADENA, TEXAS 2,755 May 31, 2001 4,375.00
- ------------------------------------------------------------------------------
275-A INDUSTRIAL DRIVE
JACKSON, MISSISSIPPI 11,325 October 31, 3,080.00
1998*
- ------------------------------------------------------------------------------
*CONTAINS AN OPTION TO RENEW OR EXTEND THE LEASE.
ITEM 3. LEGAL PROCEEDINGS.
Except as set forth below, the Company is not a party to any material
legal proceedings which are pending before any court, administrative agency or
other tribunal. Further, the Company is not aware of any material litigation
which is threatened against it in any court, administrative agency or other
tribunal. Management believes that no pending litigation in which the Company
is named as
-16-
<PAGE>
a defendant is likely to have a material adverse effect on the Company's
financial position or results of operations.
On February 13, 1998, the Company filed suit in the United States
District Court for the District of Oregon against Road Runner Oil, Inc. and
Bernard J. Roscoe, alleging breach of contract for non-payment of services
performed by the Company at an oil field in Roosevelt, Utah. The amount of
unpaid invoices, including interest and collection costs, is approximately
$1.8 million. The Company has also filed liens on all equipment at the site
and on the mineral rights related to the oil field. Management believes that
it has clear cause of action, and that between Road Runner and Mr. Roscoe,
guarantor of the contract, there are ample assets to satisfy the claim. On
February 27, 1998, the Company was granted a pre-judgment writ of attachment
on certain equipment provided to Road Runner by the Company. The estimated
value of this equipment is $700,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the period covered by this report.
-17-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) PRINCIPAL MARKET OR MARKETS. Since July 18, 1995, the Company's
Common Stock has been listed on the American Stock Exchange ("AMEX") under the
symbol "ENV". The following table sets forth the high and low sale prices for
the Company's Common Stock as reported on the AMEX for the periods indicated:
QUARTER ENDED HIGH LOW
-----------------------------------------------------------
March 31, 1996 $11.625 $9.00
-----------------------------------------------------------
June 30, 1996 13.375 9.50
-----------------------------------------------------------
September 30, 1996 9.875 5.375
-----------------------------------------------------------
December 31, 1996 7.50 3.8125
-----------------------------------------------------------
March 31, 1997 7.875 5.00
-----------------------------------------------------------
June 30, 1997 5.625 4.25
-----------------------------------------------------------
September 30, 1997 6.9375 5.125
-----------------------------------------------------------
December 31, 1997 7.8125 6.00
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of record
holders of the Company's common stock at March 21, 1998, was 88. This does
not include those shareholders who hold their shares in street name.
(c) DIVIDENDS. The Board of Directors does not anticipate paying cash
dividends on the Company's Common Stock in the foreseeable future as it
intends to retain future earnings to finance the growth of the business. The
payment of future cash dividends will depend on such factors as earnings
levels, anticipated capital requirements, the operating and financial
conditions of the Company and other factors deemed relevant by the Board of
Directors. The California Corporations Code provides that a corporation may
not pay dividends if the corporation is, or as a result of the distribution
would likely be, unable to meet its liabilities as they mature.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information for the years ended December
31, 1997, 1996, 1995, 1994, and 1993 is derived from financial statements of
the Company audited by Grant Thornton LLP, independent certified public
accountants.
-18-
<PAGE>
Balance Sheet Data:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
AT DECEMBER 31,
- ----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS $25,089,253 $18,423,472 $21,245,209 $6,478,993 $5,855,163
- ----------------------------------------------------------------------------------------
TOTAL ASSETS 29,882,811 23,795,317 25,707,851 7,591,699 6,406,740
- ----------------------------------------------------------------------------------------
CURRENT LIABILITIES 12,970,393 15,121,173 12,921,426 3,461,813 3,690,851
- ----------------------------------------------------------------------------------------
WORKING CAPITAL (DEFICIT) 12,118,860 3,302,299 8,323,783 3,017,180 2,164,312
- ----------------------------------------------------------------------------------------
LONG TERM DEBT 8,203,701 1,700,171 2,076,357 380,727 44,845
- ----------------------------------------------------------------------------------------
TOTAL LIABILITIES 21,174,094 16,821,344 14,997,783 4,179,977 4,421,245
- ----------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 8,708,717 6,973,973 10,710,068 3,411,722 1,965,495
- ----------------------------------------------------------------------------------------
Statement of Income Data:
- ------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES $54,169,753 $54,918,520 $47,871,972 $23,506,066 $17,399,068
- ------------------------------------------------------------------------------------------
OPERATING EXPENSES 54,046,462 58,096,290 44,857,996 21,717,086 15,790,125
- ------------------------------------------------------------------------------------------
NET INCOME (LOSS)
FROM CONTINUING
OPERATIONS (347,291) (3,756,450) 2,034,997 1,623,804 1,547,501
- ------------------------------------------------------------------------------------------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS PER
COMMON SHARE (0.06) (0.74) 0.49 0.44 0.42
- ------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES 5,785,264 5,066,537 4,113,725 3,676,830 3,675,764
- ------------------------------------------------------------------------------------------
CASH DIVIDENDS PER
COMMON SHARE -0- -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion is intended to provide an analysis of the
Company's financial condition and results of operations and should be read in
conjunction with the Company's financial statements and notes thereto
contained elsewhere herein.
-19-
<PAGE>
GENERAL
The Company provides comprehensive environmental remediation services of
hazardous and toxic waste on a planned and emergency basis to both government
and private sector customers. It also provides water and wastewater treatment
facilities and services to municipal and industrial clients. The Company
provides these services from its offices in: Denver, Colorado; Houston,
Texas; Jackson, Mississippi; Mobile, Alabama; New Orleans, Louisiana; Phoenix,
Arizona; Portland, Oregon; Richmond, California; Seattle, Washington; and
Tustin, California. In late 1996, the corporate offices of the Company were
moved to Englewood, Colorado from Tustin, California.
STATISTICAL ANALYSIS OF RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship which certain items of the Company's statements of income bear to
project revenue and the percentage increase or (decrease) in the dollar amount
of such items:
<TABLE>
<CAPTION>
PERCENTAGE RELATIONSHIP TO
PROJECT REVENUE PERIOD TO PERIOD
YEAR ENDED CHANGE
------------------------------- -------------------
1997 1996
VS. VS.
1997 1996 1995 1996 1995
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Project Revenue 100.0% 100.0% 100.0% (1.4%) 14.7%
Project Costs:
Direct 79.9 79.5 71.7 (0.9) 27.1
Indirect 10.6 14.9 14.7 (29.6) 16.1
- -----------------------------------------------------------------------------------
Gross Profit (Loss) 9.5 5.6 13.6 66.5 (52.5)
Other Operating Expenses (Income):
Selling 3.8 5.6 3.7 (33.3) 77.5
General Admin-
istrative 5.4 5.8 4.3 (7.0) 53.0
Amortization of
Excess of Ac-
quired Net
Assets in Ex-
cess of Cost 0.0 0.0 (0.7) - (100.0)
- ----------------------------------------------------------------------------------
Operating Income
(Loss) 0.3 (5.8) 6.3 103.9 (205.4)
Other Income
(Expense) (1.1) (1.7) (0.7) (36.5) (185.7)
- ----------------------------------------------------------------------------------
Income (Loss) Before
Taxes on Income (0.8) (7.5) 5.6 88.8 (252.3)
Taxes on Income (0.2) (0.7) 1.4 66.8 (152.0)
- -----------------------------------------------------------------------------------
Net Income (Loss) (0.6%) (6.8%) 4.2% 90.8% (284.6%)
- -----------------------------------------------------------------------------------
-20-
<PAGE>
Pro Forma Information (Note 1):
Historical Earn-
ings Before
Income Taxes -- -- 5.6% -- --
Pro Forma
Income Taxes -- -- 1.8% -- --
Pro Forma
Net Income -- -- 3.8% -- --
</TABLE>
Note 1: From January 1, 1994 to June 14, 1995, income taxes on net earnings
were payable personally by the stockholders pursuant to an election
under Subchapter S of the Internal Revenue Code not to have the
Company taxed as a corporation. However, the Company was liable for
state franchise taxes at a rate of 1.5 percent on its net income.
Pro forma financial information is presented to show the effects on
1995 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.
The Company experienced a slight decrease in revenues (1.4%) from 1996 to
1997, compared to a 14.7% increase from 1995 to 1996. As expected with the
award of the EPA ERRS contracts, the proportion of non-EPA work was reduced in
1997 from 80.2% to 61.2% of total revenue. The Company's goal is to maintain
a relatively equal distribution of revenues from government contracts and
commercial contracts to produce a solid continuity of revenues, while
optimizing margins.
The following table sets forth the percentages of the Company's revenues
attributable to the EPA vs. non-EPA public and private sector customers:
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
1997 1996 1995
----------------- ------------------ -----------------
Non-EPA $33,125,032 61.2% $44,065,990 80.2% $34,959,345 73.0%
EPA $21,044,721 38.8% $10,852,530 19.8% $12,912,627 27.0%
----------------- ----------------- -----------------
Total $54,169,753 100.0% $54,918,520 100.0% $47,871,972 100.0%
================= ================= =================
Direct costs as a percentage of revenues remained relatively constant at 79.9%
compared to 79.5% in 1996.
Indirect expenses decreased significantly from $8,175,951 (14.9% of
revenues) in 1996 to $5,752,064 (10.6% of revenues) in 1997. This decrease in
indirect operating costs caused gross profit to increase from 5.6% of revenues
in 1996 to 9.5% in 1997. The decrease in indirect operating costs were a
result of the Company taking the following corrective actions:
- Closed unprofitable offices in Atlanta, Birmingham, Georgetown,
Kansas City, St. Louis and Tucson.
- Reduced staff and realigned personnel classifications to better
control indirect labor costs.
- Restructured employee benefit programs to reduce cost.
-21-
<PAGE>
- Hired new key financial management staff with significant industry
experience.
- Implemented revised processes and controls for contracts
administration, revenue recognition, billing and collection, and
accounts payable.
These actions have significantly reduced overhead, but have not had any
material impact on the Company's ability to perform current projects or obtain
new work.
Selling expenses also decreased significantly from $3,101,197 (5.6% of
revenue) in 1996 to $2,070,130 (3.8% of revenue) in 1997. This decrease is
the result of some reduction of the sales and proposal staff, and the
refocusing of commercial sales efforts out to the regional offices. The
Company also implemented a sales commission program, reducing the fixed salary
component of sales costs. The changes have not impacted the Company's ability
to continue to win new work in both the government and commercial sectors.
General and administrative expenses decreased slightly from $3,158,707
(5.8% of revenue) in 1996 to $2,937,762 (5.4% of revenue) in 1997. This
decrease was due primarily to lower insurance costs.
Amortization of acquired net assets in excess of cost of $337,437 in 1995
resulted from the estimated fair value of net assets purchased exceeding the
purchase price when the Company was acquired by current management on November
29, 1991. The acquired net assets in excess of cost were amortized over a
four-year period beginning December 1, 1991, and ending on November 30, 1995.
Interest expense (net) increased from $627,537 in 1996 to $704,575 in
1997, due primarily to increased borrowing. The increased borrowings were
necessary because of the build up of accounts receivable and contracts in
process as revenues grew in the second half of the year.
In 1996, the Company was able to carryback losses equivalent to 1995
profits for federal tax purposes, resulting in a federal tax benefit of
$341,855 for 1996 and $113,547 in 1997. There amount of loss carryforward
available for federal tax purposes in 1998 is approximately $2.3 million.
Until June 15, 1995, the Company was a Subchapter S Corporation as
defined by the Internal Revenue Service and substantially all taxes were paid
by the shareholders. However, the Company traditionally made distributions of
cash to its shareholders in approximately the amount of such shareholders' tax
liabilities related to the income of the Company. On June 15, 1995, the
Company made a revocation of its Subchapter S Corporation status and
accordingly is now subject to the tax laws and rates applicable to a
Subchapter C Corporation. At the date of the revocation of the "S" status,
there were no net operating loss carryforwards available to be carried forward
to any subsequent period. Additionally, at the date of the revocation, any
prior earnings of the S Corporation not previously distributed were
reclassified from retained earnings
to paid-in capital accounts.
In summary, the Company undertook a variety of corrective actions as
described above beginning in late 1996. These have resulted in significant
improvement to financial performance in the second half of 1997. Both
revenues and net income were up markedly in the second half of 1997 as
compared to both the second half of 1996 and the first half of 1997, as
reflected in the following table:
-22-
<PAGE>
JULY-DECEMBER JANUARY-JUNE JULY-DECEMBER
1996 1997 1997
- ----------------------------------------------------------------------------
REVENUE $27,904,819 $20,111,396 $34,058,357
- ----------------------------------------------------------------------------
NET INCOME (LOSS) $(3,788,581) $(1,421,492) $1,074,201
BONDING
The amount of bonding capacity offered by sureties is a function of the
financial health of the company requesting the bond. At March 1998, the
bonding capacity for the Company was in excess of $25 million.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by $8,816,561 from $3,302,299 at December 31,
1996 to $12,118,860 at December 31, 1997. The current ratio increased in the
same period from 1.22 to 1.93.
Current assets increased by $6,665,781 primarily from increases in
accounts receivable - net ($2,588,123) and contracts in process ($6,687,357)
due to significantly higher revenues in the second half of 1997 ($34,058,357)
compared to the second half of 1996 ($27,904,819). This was partially offset
by reductions in cash of $1,543,123 and income tax receivable of $1,262,436.
The Company also increased working capital through a private placement of
common stock as described below.
Current liabilities decreased by $2,150,780. This was due to a reduction
in the current portion of debt of $5,264,496 which was partially offset by an
increase in accounts payable and accrued expenses of $3,113,716.
Equipment and improvements (net) decreased by $1,079,924 due to an excess
of depreciation over capital expenditures, which were relatively low at
approximately $450,000.
Goodwill increased by $156,584. This was the result of acquiring 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.
Deposits and other assets increased by $345,053. This was due to
deposits made on custom remediation equipment delivered in early 1998.
Capital resources are used primarily to fund the acquisition of capital
equipment and provide working capital needed to support continued expansion of
the Company's operations. Historically, the Company has been
under-capitalized, attempting to meet cash requirements through funds
generated from operations, together with funds borrowed under revolving and
term loans.
DEBT. In February 1994, as amended in March 1995, the Company entered
into a credit arrangement with Comerica whereby Comerica provided a credit
line of $4 million to the Company. The credit line was collateralized by all
assets of the Company and personally guaranteed by the shareholders of the
Company. Interest accrued at Comerica's base rate plus 1.5 percent, payable
monthly.
On October 14, 1994, the Company borrowed $380,000 from Comerica on a
term basis, with interest at Comerica's base rate plus 2.0 percent. The loan
is collateralized by certain fixed assets of the Company. In 1995, the
Company
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<PAGE>
borrowed an additional $300,000, in loan amounts of $195,000 and $105,000,
from Comerica also on a term basis, with interest payable monthly at
Comerica's base rate plus 2.0 percent. These loans were collateralized by
certain fixed assets of the Company. The combined amount of these loans was
refinanced in March, 1996 as described below.
In January 1995, the Company borrowed $550,000 from the Birnie Children's
Trust No. I (the "Birnie Trust") at the interest rate of 2 percent per month,
due and payable monthly. The wife of Steven H. Davis, President of the
Company, is a beneficiary of the Birnie Trust. The Company has borrowed funds
from the Birnie Trust at various times in order to meet its working capital
requirements. The Company repaid $350,000 of this loan with proceeds of the
Company's initial public offering which closed during July 1995. The
remaining $200,000 was invested into the subordinated notes described in the
following paragraph.
In February 1995, the Company issued Subordinated Notes, coupled with
warrants to purchase shares of common stock at an exercise price of $1.20 per
share which could be exercised on or before December 31, 1996. The
Subordinated Notes were offered on a selective, privately arranged basis, and
bore interest at ten percent per annum, payable monthly, and were subordinated
to senior commercial or institutional lending indebtedness. Each $10,000 face
value note purchaser received a warrant to purchase 1,312 shares of the
Company's common stock. The notes were secured by a second lien on the
Company's accounts receivable and contracts in progress and were due and
payable on March 1, 1996. The Company received subscriptions for $890,000 of
these notes. Relatives of officers of the Company accounted for $680,000 of
such subscriptions. One of the notes in the amount of $80,000 was paid off
during August 1995. During December 1995, all nineteen of the investors
exercised their warrants to purchase a total of 116,768 shares of common
stock. Eighteen of the investors exchanged a total of $127,575 of the
outstanding Subordinated Notes and one investor paid $12,600 in cash to
exercise his warrants. A total amount of $210,625 of the remaining balance of
$682,425 of the Subordinated Notes was paid off at maturity and the remaining
balance of $471,800 was rolled over into new notes which with extensions are
now due on February 28, 1999 with interest payable monthly at 10 percent per
annum.
On July 24, 1996, the Company borrowed an additional $200,000 from the
Birnie Trust under a Promissory Note payable in one year at 10% interest.
This note was also extended to February 28, 1999.
During December 1995, the Company financed two purchases of equipment
through Comerica for $74,774 and $354,297. These loans are payable in 36
monthly installments of $2,378 and $11,267 including interest at nine percent
commencing December 30, 1995 and January 30, 1996, respectively. As of
December 31, 1997, the combined balance due on these loans was $142,847.
In March, 1996, the Company established a line of credit facility with
Union Bank of California, N.A. (the "Bank") to replace the Comerica facility.
This line provided up to $6,000,000 of credit to the Company based upon a
percentage (75%) of eligible receivables. In addition, the Company borrowed
$124,940 from the Bank for the purchase of equipment. This bank also loaned
the Company $600,000 to pay off term loans at Comerica. Interest was payable
monthly at the Bank's Reference Rate plus .25%.
On November 8, 1996, the Company borrowed $545,000 from Signal Hill
Petroleum under a Promissory Note payable in 30 days at 10% interest per
annum. This note was extended to January 15, 1997, then repaid in the amount
of $300,000 on January 15, 1997, and $250,129 (including accrued interest) on
February 27, 1997.
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<PAGE>
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 December 31, 1997, the balance
owed on the new line of credit was $6,198,631 and on the equipment loan was
$950,000.
The Company has also financed vehicles and equipment using long term
capital leases from various entities. As of December 31, 1997, the combined
balance due on these leases was $877,227.
Management believes that funds provided from operations, the new line of
credit and the sale of stock in January 1997 (as described below) will be
sufficient to fund the Company's immediate needs for working capital.
During 1997, the Company decreased its available cash by $1,543,123. Net
cash used in operations was $3,958,059 which was largely caused by the
significant increase in accounts receivable and contracts in progress due to
the high level of revenues in the third and fourth quarters. This increase
was partially funded by a corresponding increase in accounts payable and
accrued expenses.
Cash used in investing activities was $649,745. This was comprised of
$462,947 for capital expenditures and $186,798 for the purchase of Water
Quality
Management Corporation.
Net cash provided by financing activities was $3,064,681. This was
primarily from net proceeds of the private placement of common stock of
$2,035,662 and a net increase on the line of credit of $1,997,981. These were
partially offset by payments on capital leases of $327,230 and payoff of the
short term shareholder loan from Signal Hill Petroleum Inc. of $545,000.
In December, 1996, the Company commenced a Private Placement Offering of
Common Stock. This offering was completed in January 1997, and resulted in
the issuance of 729,248 shares with net proceeds to the Company totaling
$2,035,662. The shares issued pursuant to this offering were classified as
"restricted securities" as such term is defined in Rule 144 of the Securities
Act of 1933. The Company completed an S-3 registration of these shares for
resale which was effective January 7, 1998. 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.
CAPITAL COMMITMENTS. The Company has entered into leases for its
Existing facilities with such leases expiring at various dates through 2001.
Monthly rentals currently are approximately $58,900 in the aggregate.
Management anticipates that capital expenditures will increase in 1998 and
will be funded from working capital, term loans and equipment leases.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see pages F-1 through F-22.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Executive Officers of the Company are as follows:
Name Age Positions and Offices Held
- ----------------- --- ----------------------------------------------
Steven H. Davis 44 Chief Executive Officer, President and Director
Douglas W. Cotton 47 Executive Vice President, Chief Operating
Officer, Secretary and Director
Craig C. Barto 39 Director
Robert A. Taylor 52 Director
Rick C. Townsend 47 Executive Vice President, Chief Financial
Officer, Secretary and Director
John G.L. Hopkins 50 Senior Vice President - Federal Programs
and Director
There is no family relationship between any Director or Executive
Officer of the Company.
The Company has no Nominating Committee, but does have an Audit
Committee, an Executive Committee and a Compensation Committee.
The Audit Committee presently consists of Craig C. Barto and
Robert A. Taylor. The Audit Committee reviews financial statements and data
with the Company's independent accountants before the information and data are
released to the public.
The Executive Committee consists of Steven H. Davis, John G.L. Hopkins,
Douglas W. Cotton and Rick C. Townsend. The Executive Committee has
authority, during the intervals between the meetings of the Board of
Directors, in the management of the business and affairs of the Company not
contrary to the specific direction of the Board of Directors and except as
provided by the Company's Bylaws.
The Compensation Committee presently consists of Craig C. Barto and
Robert A. Taylor. The Compensation Committee reviews compensation matters
relating to the Executive Officers of the Company and makes recommendations to
the Board of Directors, and administers the Company's Incentive Stock Option
Plan.
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<PAGE>
Rick C. Townsend currently serves as an advisor to the Audit Committee,
and Steven H. Davis serves as an advisor to the Compensation Committee.
Set forth below are the names of all directors, nominees for director
and executive officers of the Company, all positions and offices with the
Company held by each such person, the period during which he has served as
such, and the principal occupations and employment of such persons during at
least the last five years:
STEVEN H. DAVIS has served as the Company's Chief Executive Officer,
President and a Director since 1991. Prior to that time he was operating
partner of Lincoln Property Company which developed over 3 million square feet
of buildings in California, Nevada and Colorado. He has almost 20 years of
experience in construction, financing and developing industrial real estate.
Mr. Davis graduated from Brown University with an emphasis in Economics and
obtained an MBA from the University of Southern California. As President,
Mr. Davis manages the Company's business affairs and has been instrumental in
securing financing, negotiating bonding agreements, projecting and analyzing
the feasibility of expansion, mergers and acquisitions, and formulating
business relationships with customers, financial entities and the legal
community.
CRAIG C. BARTO has been a Director of the Company since 1991. He is also
the President and Chairman of the Board of Directors of Signal Hill
Petroleum, Inc., Barto/Signal Petroleum, Inc., Signal Hill Operating, Inc.,
and Signal Oil and Refining, Inc., which operate businesses such as Paramount
and Fletcher oil refineries. A graduate of UCLA with a degree in Economics,
Mr. Barto was instrumental in the growth of the Signal Hill Petroleum
companies in the oil business in 1979 with the reclamation of a marginal
operation in the West Newport Oil Field in Orange County, California. In
addition to the oil and gas operations, Mr. Barto is also responsible for the
commercial and residential development of over 100 acres of some of the last
undeveloped hilltop property in Southern California.
DOUGLAS W. COTTON has served as the Company's Executive Vice President
and a Director since 1991 and is responsible for all aspects of the Company's
operations in the Southwest, and provides guidance for marketing and sales to
commercial clients nationwide. He was appointed Chief Operating Officer in
October, 1996. Prior to joining the Company, Mr. Cotton served as Vice
President of Ecova Corporation and worked for 13 years at IT Corporation where
he held various positions culminating in serving as General Manager for the
Gulf Coast Region. He has more than 20 years of experience managing on-site
biological, chemical and physical remediation of hazardous wastes in sludge,
soil and groundwater using a variety of innovative technologies. His knowledge
of the industry has been gained at more than 100 remediation projects ranging
from $100,000 to $45 million, including Superfund sites, emergency response
cleanups and large excavation/on-site treatment projects.
ROBERT A. TAYLOR has been a Director of the Company since 1996. He is a
veterinarian and manages the Alameda East Veterinary Hospital in Denver,
Colorado which he started in 1971. Currently, Alameda East Veterinary
Hospital employs 55 persons and provides a small animal practice specializing
in orthopedic and rehabilitation services. Dr. Taylor received a B.S. degree
in Animal Science from Texas A&M University in 1969, a D.V.M. degree from
Texas A&M University in 1970, and a M.S. degree in Veterinary Surgery from
Colorado State University in 1978.
RICK C. TOWNSEND has been Executive Vice President and Chief Financial
Officer of the Company since November 1996, a Director since May 1997, and
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<PAGE>
Secretary since January 1998. From 1992 until October 1996, Mr. Townsend held
the position of Vice President and Chief Financial Officer for the
international operations of CH2M HILL, a major environmental consulting and
engineering firm. In that role, Mr. Townsend managed all financial and
administrative affairs for the unit. He also assisted in securing financing
for international environmental and infrastructure projects, including water
and wastewater treatment systems in Brazil and Canada. From 1990 until 1992,
Mr. Townsend served as Vice President for The Futures Corporation, a business
development and management services company. From 1974 until 1988, Mr.
Townsend was employed by Morrison Knudsen Corporation where he held several
positions including General Director and Group Business Manager of Morrison
Knudsen Technologies. In these positions, he was exposed to several business
sectors relevant to the Company's environmental contracting operations. Mr.
Townsend received a degree in Economics from the University of California at
Los Angeles in 1973.
JOHN G.L. HOPKINS served as the Company's Senior Vice President-Federal
Programs since 1990 and as a Director since 1991. Mr. Hopkins has advised the
Company that his term as a Director will end at the next Annual Meeting of
Shareholders and that effective July 1, 1998, he will retire as an officer.
He has agreed to continue to provide services to the Company on a consulting
basis, as needed. From 1990 to October 1996, he was also Chief Operating
Officer. Since October 1996 he has been Senior Vice President - Federal
Programs. With more than 20 years of experience in managing large-scale
hazardous waste remediation projects, Mr. Hopkins is presently responsible for
the Company's operations in the Northwest and all Federal government programs.
Previously, he held senior management positions with Hydro-Search, Inc.,
Riedel Environmental Services, Inc. and IT Corporation. Mr. Hopkins has
managed more than 500 remedial action projects in 24 states and has negotiated
and managed three large multi-year indefinite delivery contracts with the EPA
totaling more than $350 million. Mr. Hopkins graduated from the University of
Southern California in 1973 with a Bachelor of Science degree in Chemistry and
Biological Sciences. His publications include work involving sampling
protocols and emergency response.
The Company's executive officers hold office until the next annual
meeting of directors of the Company, which currently is scheduled for June 2,
1998. There are no known arrangements or understandings between any director
or executive officer and any other person pursuant to which any of the above-
named executive officers or directors was selected as an officer or director
of the Company.
SECTION 16(A) BENEFICIAL REPORTING COMPLIANCE
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, four persons who were
officers and directors of the Company failed to file on a timely basis reports
required by Section 16(a) of the Exchange Act during the most recent fiscal
year. Steven H. Davis and John G. L. Hopkins each filed two late reports each
of which reported one transaction; Douglas W. Cotton filed two late reports
which reported a total of four transactions; and Craig C. Barto filed one late
report reporting one transaction.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
received for services rendered in all capacities to the Company for the years
ended December 31, 1997, 1996 and 1995, by the Company's President and each
other executive officer whose compensation exceeded $100,000 during such
years.
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<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ ----------------- ---------------
SECURI-
TIES
OTHER UNDERLY-
ANNUAL RE- ING ALL
COMPEN- STRICTED OPTIONS/ OTHER
NAME AND PRINCIPAL SATION STOCK SARs LTIP COMPEN-
POSITION YEAR SALARY BONUS <FN1> AWARD(S) (NUMBER) PAYOUTS SATION
- ------------------ ---- ------ ----- ------ -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven H. Davis, 1997 $ 84,907 $ 0 $1,003 0 0 0 $0
Chief Executive 1996 $ 79,150 $ 0 $ 951 0 0 0 $0
Officer 1995 $126,160 $ 0 $1,027 0 0 0 $0
John G.L. Hopkins, 1997 $123,183 $ 0 $ 0 0 0 0 $0
Senior Vice Presi- 1996 $125,000 $ 0 $ 0 0 0 0 $0
dent - Federal 1995 $124,923 $ 0 $ 0 0 0 0 $0
Programs
Douglas W. Cotton, 1997 $ 32,147 $ 0 $ 425 0 0 0 $0
Executive Vice 1996 $ 63,831 $ 0 $1,038 0 0 0 $0
President and 1995 $124,000 $5,652 $1,873 0 0 0 $0
Chief Operating
Officer
Rick C. Townsend, 1997 $125,587 $ 0 $ 958 0 0 0 $0
Chief Financial 1996 $ 16,827 $ 0 $ 0 0 60,000 0 $0
Officer
_______________
<FN>
<FN1>
Includes matching 401K contributions by the Company and automobile expenses.
</FN>
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
SECURITIES
UNDERLYING VALUE OF UNEXER-
SHARES UNEXERCISED CISED IN-THE
ACQUIRED OPTIONS MONEY OPTIONS/
ON SARs AT FY-END SARs AT FY-END
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
---- -------- -------- -------------- ---------------
Steven H. Davis -0- -0- 0/0 $0 / $0
John G. L. Hopkins -0- -0- 0/0 $0 / $0
Douglas W. Cotton -0- -0- 0/0 $0 / $0
Rick C. Townsend -0- -0- 20,000/40,000 $53,750/$107,500
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<PAGE>
The Company has no formal employment agreements with any of its
Executive Officers. The Company does have a letter agreement with Rick C.
Townsend, the Company's Chief Financial Officer, regarding his employment
which provides that he is to receive an annual salary of $125,000 and bonuses
based on certain net profit levels achieved by the Company. Either the
Company or Mr. Townsend may terminate his employment without notice. However,
Mr. Townsend is entitled to six months' severance pay on termination by the
Company.
401K PLAN
The Company has a Non-standardized Cash or Deferred Profit Sharing Plan
pursuant to which all eligible employees may contribute a portion of their
income. Company contributions to the Profit Sharing Plan are discretionary.
The Company does, however, make a matching contribution in the amount of 25
percent of the first six percent of all elective deferrals.
STOCK OPTION PLAN
On March 1, 1995, the Company adopted an Incentive Stock Option Plan
(the "Plan") for key personnel. A total of 550,000 shares of 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 currently 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 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
Board of Directors may adopt, amend and rescind such rules and regulations as
in its opinion may be advisable for the administration of the Plan. The Board
of Directors may also construe the Plan and the provisions in the instruments
evidencing the Options granted under the Plan and make all other
determinations deemed necessary or advisable for the administration of the
Plan.
The Board of Directors has broad discretion to determine the number of
shares with respect to which Options may be granted to participants. 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
Common Stock on the date of grant. However, any Option granted under the Plan
to a person owning more than 10 percent of the Common Stock shall be at a
price of at least 110 percent of such fair market value. During May 1995,
options for 181,000 shares of Common Stock had been granted under the Plan, at
an exercise price of $3.50 per share, of which options for 90,500 shares will
vest over a five-year period commencing May 1, 1996 and the remaining options
for 90,500 shares will vest over a five-year period only upon the occurrence
of certain circumstances. On December 31, 1995, 13,500 of such remaining
options were granted and immediately vested for two employees terminated in
October, 1995. The Company recorded compensation expense of $20,356 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. On January
1, 1996, it was determined that the contingent events did occur as to 33,000
of the remaining shares, with vesting thus commencing one year later. The
remaining options totaling 44,000 shares of those originally granted in May,
1995, were cancelled because the events upon which they were contingent did
not occur.
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<PAGE>
Options to purchase 5,000 shares of common stock at $3.50 per share,
granted in May 1995, were canceled prior to December 31, 1995, due to the
termination of the employment of one employee.
Prior to January 1, 1996, no options were granted to any executive
officer of the Company except Kathleen V. Dunlap, a former Treasurer and Chief
Financial Officer. Ms. Dunlap received options for 20,000 shares in the
aggregate, as part of the original 181,000 shares. The vesting on all 20,000
shares was accelerated to May 15, 1996 related to Ms. Dunlap's termination due
to a terminal illness.
On January 8, 1996, the Board of Directors granted options to seven
employees to purchase an aggregate of 45,000 shares. Options as to 30,000
shares vest over a five-year period commencing on the date of grant and are
exercisable at $9.00 per share until 10 years after the date of grant.
Options as to 10,000 shares vest over a five-year period commencing on April
10, 1997. The Options as to the remaining 5,000 shares were issued to an
employee who is the wife of Douglas W. Cotton, an Officer and Director of the
Company, and vest 20% immediately with the remainder vesting over a four-year
period commencing on the date of grant and are exercisable at $9.90 per share
until five years after the date of grant. On February 29, 1996, options to
purchase 10,000 shares granted on January 8, 1996, with an exercise price of
$9.00 per share were cancelled upon the termination of an employee.
On February 21, 1996, the Board of Directors granted options to an
employee to purchase up to 5,000 shares of Common Stock. These options vest
over a five-year period commencing on the date of grant and are exercisable at
$9.70 per share until ten years after the date of grant.
On May 1, 1996, the Board of Directors granted an option to Keith Conti,
who was then the Company's principal financial officer, to purchase 10,000
shares of Common Stock at $10.625 per share. On March 28, 1997, these options
were cancelled in conjunction with the termination of Mr. Conti's employment.
On May 14, 1996, the Board of Directors granted options to seven
employees to purchase an aggregate of 22,500 shares of Common Stock at $11.875
per share. These options vest over a five year period commencing on the date
of grant, and are exercisable until ten years after the date of grant.
On November 14, 1996, the Board of Directors granted an option to Rick
C. Townsend, the Company's Executive Vice President and Chief Financial
Officer to purchase 60,000 shares of Common Stock at $4.25 per share. This
option vests as to 20,000 shares on each anniversary of the date of grant and
expires on November 4, 2001.
On December 2, 1996, the Board of Directors granted an option to an
employee to purchase 7,500 shares of Common Stock at $5.00 per share. This
option vests as to 1,875 shares on each anniversary of the date of grant and
expires on December 2, 2001.
On December 5, 1997, the Board of Directors granted options to ten
employees to purchase an aggregate of 72,500 shares of Common Stock at prices
ranging from $7.00 to $7.70 per share. The options vest over periods of five
to six years and expire ten years after the date of grant. In connection with
these grants, options to purchase 40,000 shares at an average exercise price
of $10.01 per share were cancelled.
On August 13, 1996, the Company filed a registration statement on Form
S-8 to register the 550,000 shares of the Company's Common Stock reserved for
the Company's Incentive Stock Option Plan.
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<PAGE>
During 1997, unvested options totaling an aggregate amount of 25,200
shares with an average exercise price of $8.30 were cancelled due to the
termination of five employees. In addition, vested options totaling 5,200
shares with an average exercise price of $5.09 were cancelled due to the
termination of five employees who did not exercise their options prior to the
expiration date stipulated in the option agreement.
As of December 31, 1997, options for 80,325 shares were exercisable at
prices ranging from $3.50 to $11.88 per share.
If an optionee ceases to be employed by the Company for any reason other
than death or disability, the optionee may exercise all Options within three
months following such cessation to the extent exercisable on the date of
cessation. If an optionee dies while employed by the Company, or during the
three-month period following termination of the optionee's employment, or if
the optionee becomes disabled, the optionee's Options, unless previously
terminated, may be exercised, whether or not otherwise exercisable, by the
optionee or his legal representative or the person who acquires the Options by
bequest or inheritance at any time within one year following the date of death
or disability of the optionee.
An Option granted under the Plan is not transferable by the optionee
other than by will or by the laws of descent and distribution and, during the
lifetime of the optionee, may be exercised only by the optionee, his guardian
or legal representative.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", which requires entities to calculate the fair value of
stock awards granted to employees. This statement provides entities with the
option of either electing to expense the fair value of employee stock-based
compensation or continuing to recognize compensation expense under existing
accounting pronouncements and to provide proforma disclosures of net income
and, if presented, income per share, as if the above-mentioned fair market
value method of accounting was used in determining compensation expense.
Additionally, the statement requires that all equity awards granted to
nonemployees such as suppliers of goods and services be recognized based on
fair value.
The Company has elected the proforma method of disclosure. Under this
method, 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 1997 and 1996: no expected dividends;
expected volatility of 74.77%; risk free interest rate of 6.07%; and expected
lives of five years.
Using these assumptions, the Company's net income(loss) and
earnings(loss) per common share would have been:
1997 1996
Net income(loss) --------- -----------
As reported $(347,291) $(3,756,450)
Pro Forma (495,586) (3,854,017)
Earnings(loss) per common share
As reported $ (0.06) $ (0.74)
Pro Forma (0.09) (0.76)
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of shares of
the Company's no par value common stock owned beneficially, as of April 10,
1998, by any person, who is known to the Company to be the beneficial owner of
5% or more of such common stock, and, in addition, by each Director of the
Company, and by all Directors and Officers of the Company as a group.
Information as to beneficial ownership is based upon statements furnished to
the Company by such persons.
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNERS BENEFICIAL OWNERSHIP OF CLASS
- ------------------------ -------------------- --------
Craig C. Barto 703,554 12.1%
2440 Bayshore Drive
Newport Beach, CA 92663
Douglas W. Cotton 635,314 (1) 11.0%
Four Bowditch
Irvine, CA 92720
Steven H. Davis 1,262,563 (2) 21.7%
7625 S. Yampa Street
Aurora, CO 80016
John G. L. Hopkins 550,125 9.5%
120 West Dayton #A-7
Edmonds, WA 98020
Robert A. Taylor 10,496 0.2%
9870 East Alameda
Denver, CO 80231
Rick C. Townsend 20,000 (3) 0.3%
10816 Eagle Crest Court
Parker, CO 80134
All directors and executive 3,182,052 54.6%
officers as a group (6 persons)
__________________
(1) Includes 1,000 shares underlying stock options exercisable within 60
days held by Mr. Cotton's wife.
(2) Includes 1,000 shares held by the wife of Mr. Davis. Also includes
73,656 shares held by relatives of Mr. Davis of which he disclaims beneficial
ownership.
(3) Represents shares underlying stock options exercisable within 60 days
held by Mr. Townsend.
There are no known agreements, the operation of which may at a
subsequent date result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since July 1992, the Company has relied upon financing from the Birnie
Trust. The mother-in-law of Steven Davis, the Company's President, is trustee
of the Birnie Trust and Mr. Davis' wife is a beneficiary. The Company has
borrowed
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<PAGE>
funds from the Birnie Trust pursuant to promissory notes due and payable on
demand with the interest payable monthly. The Birnie Trust is also an investor
in the Company's private offering of debt securities, described below. The
total borrowings since July 1, 1992, were $2,269,000. However, the maximum
principal amount outstanding at any one time was $671,800.
In 1997 and 1996, the Company provided services to Signal Hill
Petroleum, Inc., Paramount Petroleum and Fletcher Oil in the aggregate amount
of approximately $835,000 and $340,000, respectively. These services include
remediation services, ground water monitoring and site investigations for
existing properties and environmental assessments in relation to property
acquisition. Mr. Barto, Chairman of the Company, is a 50 percent owner of
these businesses.
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 19 investors were given a warrant to acquire approximately 1,312
shares of Common Stock at approximately $1.20 per share, for an aggregate of
116,768 shares, and a Subordinated Note for the amount invested. The
promissory notes were due on March 1, 1996, with interest of 10 percent per
annum payable on the first day of each month commencing on April 1, 1995.
Investors who held Subordinated Notes in the aggregate amount of $680,000 are
related to Company management. The Birnie Trust held $400,000 of such
Subordinated Notes and other relatives of Mr. Davis held $230,000 of such
Subordinated Notes. A relative of Mr. Cotton held $50,000 of such Subordinated
Notes. During August 1995, one of the Subordinated Notes in the principal
amount of $80,000 was repaid. During November and December 1995, the 19
investors exercised their warrants to purchase a total of 116,768 shares of
Common Stock. Eighteen (18) of the investors converted a total of $127,575 of
the outstanding Subordinated Notes and one investor paid $12,600 in cash to
exercise his warrant. On March 1, 1996, the remaining balances were repaid on
all Subordinated Notes except for $471,800 (comprised of a $337,000 Note held
by the Birnie Trust and $134,800 of Notes held by relatives of Mr. Davis)
which was rolled over into new Notes, payable in one year with interest due
monthly at ten percent per annum. On July 24, 1996, the Company borrowed an
additional $200,000 from the Birnie Trust under a Promissory Note payable in
one year at 10% interest. On December 31, 1997, the Promissory Notes to the
Birnie Trust totaling $537,000 and to the relatives of Mr. Davis totaling
$134,800 were extended to February 28, 1999.
On April 30, 1996, the Company loaned $105,764.38 to John G. L. Hopkins,
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. Since that date, several additional advances have
been made to Mr. Hopkins bringing the total amount of the loan to Mr. Hopkins
to approximately $148,000 (excluding accrued interest) as of December 31,
1996. On February 27, 1997, these loans were repaid in full by Mr. Hopkins.
During 1997, the Company made additional advances to Mr. Hopkins and the
balance due at December 31, 1997, was $100,010. Interest is payable monthly,
and principal is due on demand.
In order to meet short-term operating needs, the Company from time to
time borrows money from affiliates of the Company. 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, then repaid in the amount of $300,000 on January 15,
1997, and $250,129 (including accrued interest) on February 27, 1997.
-34-
<PAGE>
All of these transactions were approved by the Board of Directors and
were made on terms as fair and reasonable to the Company as those that could
be obtained from non-affiliated third parties. Any future transactions between
the Company and its officers, directors, employees and affiliates that are
outside the scope of the Company's employment relationship with such persons
will be subject to the approval of a majority of the disinterested members of
the Board of Directors based upon a determination that the terms are at least
as favorable to the Company as those that could be obtained from unrelated
parties.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are filed herewith:
PAGES
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-22
2. No financial statement schedules are required to be filed.
3. EXHIBITS. THE FOLLOWING EXHIBITS ARE FILED HEREWITH:
EXHIBIT
NUMBER DESCRIPTION LOCATION
- -------------------------------------------------------------------------------
3.1 Amended and Restated Articles Incorporated by reference to
of Incorporation Exhibit 3.1 to the Company's
Form SB-2 Registration
Statement No. 33-91602
3.2 Bylaws Incorporated by reference to
Exhibit 3.2 to the Company's
Form SB-2 Registration
Statement No. 33-91602
10.1 Incentive Stock Option Plan Incorporated by reference to
Exhibit 10.1 to the Company's
Form SB-2 Registration
Statement No. 33-91602
10.2 Form of Incentive Stock Option Incorporated by reference to
Agreement Exhibit 10.2 to the Company's
Form SB-2 Registration
Statement No. 33-91602
10.3 Loan Documents Between National Previously filed
Bank of Canada and the Company
21 Subsidiaries of the Registrant Previously filed
23 Consent of Grant Thornton LLP Filed herewith electronically
27 Financial Data Schedule Previously filed
(b) REPORTS ON FORM 8-K. During the last quarter of the period covered
by
this Report, the Company did not file any Reports of Form 8-K.
-35-
<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 Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
CET ENVIRONMENTAL SERVICES, INC.
Dated: April 30, 1998 By /s/ Steven H. Davis
Steven H. Davis
President and Chief Executive Officer
-36-
<PAGE>
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, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period 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, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period then ended, in
conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Denver, Colorado
March 6, 1998
F-1
<PAGE>
CET Environmental Services, Inc.
BALANCE SHEETS
December 31,
ASSETS
1997 1996
----------- -----------
CURRENT ASSETS
Cash $ 343,878 $ 1,887,001
Accounts receivable, less allowance for
doubtful accounts; $642,097 in 1997
and $538,087 in 1996 10,042,516 7,454,393
Contracts in process 13,344,219 6,656,862
Retention receivable 268,949 -
Income tax receivable 20,342 1,282,778
Due from related party 100,010 158,010
Other receivables 154,838 199,016
Inventories 248,417 171,642
Prepaid expenses 566,084 613,770
----------- -----------
Total current assets 25,089,253 18,423,472
----------- -----------
EQUIPMENT AND IMPROVEMENTS
Field equipment and vehicles 5,931,499 5,672,638
Office furniture, equipment and
leasehold improvements 1,795,996 1,591,910
----------- -----------
7,727,495 7,264,548
Less allowance for depreciation and
amortization (3,921,131) (2,378,260)
----------- -----------
Equipment and improvements - net 3,806,364 4,886,288
GOODWILL, net of accumulated amortization
of $57,684 in 1997 and $27,471 in 1996 509,228 352,644
DEPOSITS 477,966 132,913
----------- -----------
$29,882,811 $23,795,317
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
----------- -----------
CURRENT LIABILITIES
Note payable - line of credit $ - $ 4,200,650
Loan from shareholder - 545,000
Accounts payable 8,974,502 7,758,668
Accrued expenses 3,054,740 1,156,858
Current obligations under capital leases 293,957 329,934
Current portion of long-term debt 647,194 1,130,063
----------- -----------
Total current liabilities 12,970,393 15,121,173
DEFERRED INCOME TAXES - -
OBLIGATIONS UNDER CAPITAL LEASES 583,270 874,523
LINE OF CREDIT 6,198,631 -
NOTES PAYABLE TO RELATED PARTIES 671,800 671,800
LONG-TERM DEBT 750,000 153,848
COMMITMENTS AND CONTINGENT LIABILITIES - -
STOCKHOLDERS' EQUITY
Common stock (no par value) - authorized
20,000,000 shares; 5,805,485 and
5,066,537 shares issued and outstanding
at December 31, 1997 and 1996, respectively 8,235,589 6,165,977
Paid-in capital 567,953 555,530
Retained earnings (accumulated deficit) (94,825) 252,466
----------- -----------
Total stockholders' equity 8,708,717 6,973,973
----------- -----------
$29,882,811 $23,795,317
----------- -----------
----------- -----------
F-3
<PAGE>
CET Environmental Services, Inc.
STATEMENTS OF OPERATIONS
Years ended December 31,
1997 1996 1995
----------- ----------- -----------
PROJECT REVENUE $54,169,753 $54,918,520 $47,871,972
PROJECT COSTS
Direct 43,286,506 43,660,435 34,343,855
Indirect 5,752,064 8,175,951 7,039,432
----------- ----------- -----------
49,038,570 51,836,386 41,383,287
----------- ----------- -----------
Gross profit 5,131,183 3,082,134 6,488,685
----------- ----------- -----------
OTHER OPERATING EXPENSES (INCOME)
Selling 2,070,130 3,101,197 1,747,298
General and administrative 2,937,762 3,158,707 2,064,848
Amortization of excess of
acquired net assets in
excess of cost - - (337,437)
----------- ----------- -----------
5,007,892 6,259,904 3,474,709
----------- ----------- -----------
Operating income (loss) 123,291 (3,177,770) 3,013,976
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense, net (704,575) (627,537) (326,331)
Other income (expense) 120,446 (292,998) 4,144
----------- ----------- -----------
(584,129) (920,535) (322,187)
----------- ----------- -----------
Income (loss) before
taxes on income (460,838) (4,098,305) 2,691,789
(Benefit) taxes on income (113,547) (341,855) 656,792
----------- ----------- -----------
NET INCOME (LOSS) $ (347,291) $(3,756,450) $ 2,034,997
=========== =========== ===========
Weighted average number of
shares outstanding 5,785,264 5,066,537 4,113,725
Net income (loss) per
common share $ (0.06) $ (0.74) $ 0.49
=========== =========== ===========
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
===========
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CET Environmental Services, Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS TOTAL
--------------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) 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 (loss) 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
Shares issued in private
placement 729,248 2,035,662 - - 2,035,662
Exercise of stock options 9,700 33,950 - - 33,950
Issuance of stock options
at exercise price below
market value - - 12,423 - 12,423
Net income (loss) for the year - - - (347,291) (347,291)
--------- ---------- -------- ----------- -----------
Balance at December 31, 1997 5,805,485 $8,235,589 $567,953 $ (94,825) $ 8,708,717
========= ========== ======== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CET Environmental Services, Inc.
STATEMENTS OF CASH FLOWS
Years ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (347,291) $(3,756,450) $ 2,034,997
Adjustments to reconcile net income to net cash
net cash (used in) provided by
operating activities:
Depreciation and amortization 1,573,085 1,252,781 761,840
Amortization of excess of acquired
net assets in excess of cost - - (337,437)
Provision for bad debts 104,010 402,683 71,441
Deferred income taxes - 252,048 (250,756)
Loss on sale of equipment - 13,304 18,842
Employee stock option plan 12,423 20,355 36,596
Changes in operating assets and liabilities:
(Increase) decrease in accounts
receivable (2,692,133) 5,499,747 (10,543,941)
Increase in contracts in process (6,687,357) (443,372) (3,253,311)
Decrease (increase) in income tax
and other receivables 1,037,665 (1,335,263) (92,791)
Decrease (increase) in prepaid expenses 47,686 (107,530) (415,462)
(Increase) decrease in inventory
and deposits (421,828) 50,210 (200,163)
Increase (decrease) in accounts payable 1,215,834 (99,156) 6,220,408
Increase (decrease) in accrued expenses
and income taxes 2,199,847 (533,861) 1,665,650
----------- ---------- ----------
Net cash (used in) provided by
operating activities (3,958,059) 1,215,496 (4,284,087)
----------- ---------- ----------
INVESTING ACTIVITIES:
Purchase of equipment (462,947) (1,523,418) (2,779,478)
Proceeds from sale of equipment - 65,641 1,848
Net purchase of subsidiary (186,798) - -
----------- ---------- ----------
Net cash used in investing activities (649,745) (1,457,777) (2,777,630)
----------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,286,476 766,751 727,254
Payments on long-term debt (1,475,158) (917,592) (222,466)
Payments on capital leases (327,230) (348,711) (134,185)
Proceeds from credit line loan -
net of payments 1,997,981 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 2,035,662 - 5,763,679
Proceeds from exercise of stock options 33,950 - (927,101)
Proceeds from loans from shareholders - 545,000 357,865
Payments on loans from shareholders (545,000) - (357,865)
Net payments from related party 58,000 (158,010) -
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CET Environmental Services, Inc.
STATEMENT OF CASH FLOWS (CONTINUED)
Years ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
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 3,064,681 1,652,627 7,106,417
---------- ---------- ----------
DECREASE (INCREASE) IN CASH (1,543,123) 1,410,346 44,700
Cash at beginning of year 1,887,001 476,655 431,955
---------- ---------- ----------
Cash at end of year $ 343,878 $1,887,001 $ 476,655
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year
Interest $ 717,980 $ 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 $ 301,965 $ 412,296 $ -
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 AND 1996
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
(the 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
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 revenue is 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. Revenue is 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 and
indirect job costs and award fees related to projects in process.
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 three to seven
years. Leasehold improvements are amortized over the lives of the
respective leases or the service lives of the improvements, whichever is
shorter.
F-8
<PAGE>
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill is the excess of cost over the fair value of net assets acquired,
and 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.
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.
F-9
<PAGE>
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1997 and 1996
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, 1997 and 1996 is considered to
approximate the market rate.
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 revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS 121).
SFAS 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of that loss
would be based on the fair value of the asset. SFAS 121 also generally
requires that long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of the carrying amount or the fair
value, less cost to sell. SFAS 121 is effective for the Company's 1997
fiscal year-end. Any impairment provisions recognized in accordance with
SFAS 121 are permanent and may not be restored in the future. No
impairment expense was recognized in the years ended December 31, 1997 and
1996.
LOSS PER COMMON SHARE
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS 128).
F-10
<PAGE>
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS 128 requires the presentation of basic earnings per share (EPS) and,
for companies with potentially dilutive securities such as convertible
debt, options and warrants, diluted EPS.
EPS is computed in accordance with SFAS 128 by dividing net income by the
weighted average number of shares outstanding during the period. All
outstanding securities at the end of 1997 which could be converted into
common shares are anti-dilutive (see note M). Therefore, the basic and
diluted EPS are the same. There is no impact on EPS for prior years as a
result of the adoption of SFAS 128.
RECLASSIFICATIONS
Certain financial statement reclassifications have been made in 1995 and
1996 to conform with presentations used in 1997.
NOTE C -- CONTRACTS IN PROCESS
Contracts in process consists of the following at December 31:
1997 1996
----------- ----------
Government - EPA contracts $ 3,801,853 $ 648,973
Non-EPA contracts 9,542,366 6,007,889
----------- ----------
Total $13,344,219 $6,656,862
=========== ==========
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 EPA. A new contract was awarded by the EPA in
December 1996, with estimated maximum revenue of $292,000,000 over five
years. As of December 31, 1997 and 1996, the net balance of accounts
receivable from the EPA was $3,943,761 and $2,256,448, respectively.
Revenue from the EPA in 1997 and 1996 amounted to approximately $21 million
and $10.9 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; this note was paid in
1997. The Company also borrowed $671,800, which includes subordinated
notes of $671,800 (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, 1999. The Company intends
to repay these loans from revenue when sufficient funds are available.
Interest expense attributable to these related party borrowings amounted to
$73,544 and $55,898 for 1997 and 1996, respectively.
F-10
<PAGE>
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,
1997 and 1996 for fees amounting to approximately $835,000 and $340,000,
respectively.
The Company periodically makes advances to a officer and director of the
Company. The balance due was $100,010 and $158,010 at December 31, 1997
and 1996, respectively. Interest is payable monthly at 10% per annum, and
principal is due on demand.
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:
1997 1996
---------- ----------
Vehicles $1,497,407 $1,497,407
Equipment 272,679 272,151
---------- ----------
1,770,086 1,769,558
Less accumulated depreciation (806,148) (465,228)
---------- ----------
Total $ 963,938 $1,304,330
========== ==========
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, 1997:
1998 $ 422,258
1999 386,060
2000 253,612
2001 29,172
----------
Total minimum lease payments 1,091,102
Less amounts representing estimated
executory costs (taxes) 61,585
----------
Net minimum lease payments 1,029,517
Less amount representing interest 152,290
----------
Present value of net minimum lease payments $ 877,227
Current portion $ 293,957
Noncurrent portion 583,270
----------
$ 877,227
==========
F-11
<PAGE>
NOTE G -- LINE OF CREDIT AND LONG-TERM DEBT
The Company has a line of credit facility with National Bank of Canada (the
"Bank") which provides up to $9,000,000 of available credit to the Company
based upon a percentage (80%) of eligible receivables (as defined in the
loan agreement). Interest is payable monthly at the Bank's Reference Rate
plus .25% (9% at December 31, 1997). The line of credit facility has an
expiration date of May 30, 1999. In addition, the Company borrowed
$1,000,000 from the Bank under a term loan. Interest is payable monthly at
the Bank's Reference Rate plus .25% (9% at December 31, 1997). The Company
also has a stand-by letter of credit available at the Bank in the amount of
$1,000,000.
As of December 31, 1997, the Company was technically in breach of a loan
covenant with respect to maintaining profitable operations related to
borrowings of $7,148,631. Subsequently the loan agreement was amended to
delete the profitability covenant for 1997.
Long-term debt consists of the following at December 31:
1997 1996
---------- ----------
Note payable to bank, collateralized by equipment,
payable in 36 monthly installments of $2,378 including
interest at 9%, beginning December 30, 1995 $ 24,007 $ 49,859
Note payable to bank, collateralized by equipment,
payable in 36 monthly installments of $11,267 including
interest at 9%, beginning January 30, 1996 118,840 246,816
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
Note payable for annual insurance premium, interest at
5.73%, with monthly payments of $43,531, due June 30,
1998 304,347 412,296
Note payable to a bank, collateralized by equipment,
payable in monthly installments of $16,667 including
interest at 9%, balance due May 30, 1999 950,000 -
---------- ----------
1,397,194 1,283,911
Less current portion 647,194 1,130,063
---------- ----------
$ 750,000 $ 153,848
========== ==========
Scheduled future maturities of these notes for the years ending December 31
are as follows:
1998 $ 647,194
1999 750,000
----------
$1,397,194
==========
F-12
<PAGE>
NOTE G -- LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
Related party debt consists of the following at December 31:
1997 1996
-------- ----------
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, 1999, interest at 10% (see
notes E and H) 671,800 471,800
-------- ----------
671,800 1,216,800
Less current portion - 545,000
-------- ----------
$671,800 $ 671,800
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 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 had a maturity date of March 1, 1996. Holders of the
subordinated notes had a security interest in the Company's accounts
receivable and contracts in progress that was 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, with interest payable monthly at ten percent per annum.
Interest of $47,180 and $39,316 was paid to the holders of these notes
during 1997 and 1996, respectively.
NOTE I -- TAXES ON INCOME
The provision (benefit) for taxes on income includes the following for the
year ended December 31:
F-13
<PAGE>
NOTE I -- TAXES ON INCOME (CONTINUED)
1997 1996
--------- ---------
CURRENT
Federal $ (20,342) $(569,268)
State - (24,635)
--------- ---------
(20,342) (593,903)
--------- ---------
DEFERRED
Federal (79,650) 215,390
State (13,555) 36,658
--------- ---------
(93,205) 252,048
--------- ---------
Total $(113,547) $(341,855)
========= =========
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:
1997 1996
--------- -----------
Provision (benefit) for income
taxes at statutory rate $(180,000) $(1,598,400)
Change in valuation reserve 102,134 1,076,366
Stock options 6,900 8,142
Other 13,342 172,037
Change in prior year estimate
of tax refund (55,923) -
--------- -----------
$(113,547) $ (341,855)
========= ===========
Deferred tax assets and liabilities consist of the following at
December 31:
1997 1996
----------- ----------
Accrued salary expense $ 81,900 $ 85,704
Allowance for doubtful accounts 227,000 198,661
NOL carryforward 907,700 870,209
Other (38,100) (78,208)
----------- ----------
1,178,500 1,076,366
Valuation reserve (1,178,500) (1,076,366)
----------- ----------
$ - $ -
=========== ==========
Deferred tax liability
depreciation and amortization $ - $ (37,282)
=========== ==========
F-16
<PAGE>
NOTE I -- TAXES ON INCOME (CONTINUED)
Realization of the deferred tax asset depends on achieving future taxable
income. The Company incurred losses in the last two years and does not
consider it likely that the Company will realize the benefit of the
deferred tax asset and, accordingly, has recorded a valuation allowance
equal to the deferred tax asset.
The Company has net operating loss carryforwards for tax purposes of
approximately $2,300,000, which expire in 2012.
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.
The following is a summary at December 31, 1997, of the future minimum
rents due under noncancelable operating leases:
Year ending December 31,
1998 $ 475,897
1999 221,975
2000 178,250
2001 63,792
---------
Total $ 939,914
=========
Total rent expense under operating leases for the years ended December 31,
1997, 1996, and 1995, was approximately $723,900, $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.
F-17
<PAGE>
NOTE K -- STOCKHOLDERS' EQUITY (CONTINUED)
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
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.
In January 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 $2,035,000. 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 warrant was $100
and the exercise price under such warrants is $3.60 per share.
The warrants may be exercised in whole or in part at any time or from time
to time until the expiration date of December 31, 2001. The Company also
issued warrants to purchase 100,000 shares of common stock at $4.25 per
share to a management services firm as consideration for its assistance on
the private offering. The warrants may be exercised from July 1, 1998
through December 31, 1999. These warrants are considered stock issuance
costs, with a value of approximately $235,000 based on the fair value at
the grant date as required by Financial Accounting Standards 123.
F-18
<PAGE>
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 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
$65,206 and $83,738 for the years ended December 31, 1997 and 1996,
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
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
three to five 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:
1997 1996
--------- -----------
Net income (loss)
As reported $(347,291) $(3,756,450)
Pro forma (495,586) (3,854,017)
Earnings (loss) per common share
As reported $(0.06) $(0.74)
Pro forma (0.09) (0.76)
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 1997 and 1996: no expected dividends;
expected volatility of 74.77%; risk-free interest rate of 6.07%; and
expected lives of five years.
F-19
<PAGE>
NOTE M -- STOCK OPTIONS (CONTINUED)
A summary of the status of the Plan follows:
Average price
Shares per share
--------- -------------
Outstanding at January 1, 1995
Granted 181,000 $3.50
Exercised -
Canceled (5,000) $3.50
-------- -----
Outstanding at December 31, 1995 176,000 $3.50
-------- -----
Total exercisable shares 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
======== =====
Outstanding at January 1, 1997 214,000 $5.60
Granted 96,900 $7.00
Exercised (9,700) $3.50
Canceled (70,400) $9.04
-------- -----
Outstanding at December 31, 1997 230,800 $5.10
-------- -----
Total exercisable at December 31, 1997 80,375 $4.27
======== =====
WEIGHTED AVERAGE
RANGE OPTIONS PROCEEDS EXERCISE PRICE
------------- ------- -------- ----------------
Exercisable at December 31, 1997
$3.50 - 4.25 46,500 $162,750 $ 3.50
4.26 - 7.00 33,375 174,885 5.24
7.01 - 11.88 500 5,940 11.88
------ -------- ------
80,375 $343,575 $ 4.27
====== ======== ======
The following information applies to options outstanding at December 31,
1997:
WEIGHTED AVERAGE
RANGE OF OPTIONS WEIGHTED AVERAGE REMAINING
EXERCISABLE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE
------------------ ----------- ---------------- ----------------
$3.50 - 4.25 90,300 $ 3.84 6 years
4.26 - 7.00 140,000 5.71 9 years
7.01 - 11.88 500 11.55 8 years
F-20
<PAGE>
NOTE M -- STOCK OPTIONS (CONTINUED)
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 $12,423
and $20,355 in 1997 and 1996, respectively, relating to these options.
Compensation expense of $10,311 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, 1997 and 1996, are as follows:
CARRYING ESTIMATED
1997 AMOUNT FAIR VALUE
---------------------------------- ---------- -----------
Cash $ 343,878 $ 343,878
Due from related party 100,010 100,010
Other receivables 154,838 154,838
Note payable - line of credit 6,198,631 6,198,631
Long-term debt 1,397,194 1,397,194
Capitalized lease obligations 877,227 877,227
Notes payable to related parties 671,800 671,800
CARRYING ESTIMATED
1996 AMOUNT FAIR VALUE
---------------------------------- ---------- -----------
Cash $1,887,001 $1,887,001
Due from related party 158,010 158,010
Other receivables 199,016 199,016
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
NOTE O -- FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the year ended December 31, 1997, the Company
recorded a reduction of revenue of $370,457 related to change in the
estimated margin for a contract. This adjustment was considered necessary
to reflect the margin actually achieved on the project.
F-21
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated March 6, 1998, accompanying the financial
statements incorporated by reference or included in the Annual Report of CET
Environmental Services, Inc. (the "Company") on Form 10-K for the year ended
December 31, 1997. We consent to the incorporation by reference in the
Company's Registration Statement on Form S-8 of the aforementioned reports.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Denver, Colorado
March 6, 1998
