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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[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: PROXY STATEMENT FOR ANNUAL MEETING OF
SHAREHOLDERS.
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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
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.
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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
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.
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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.
- 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
facilities in the U.S. were constructed in the late 60's and early 70's
using federal 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
driving 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
available 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
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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 remediation
and water/wastewater treatment systems from the conceptual stage through
final design.
- 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.
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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:
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
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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
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
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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
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.
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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.
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.
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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
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
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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 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
11
<PAGE>
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.
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.
12
<PAGE>
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
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.
13
<PAGE>
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 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.
14
<PAGE>
The Company's services are conducted from the following spaces:
<TABLE>
<CAPTION>
CURRENT
LEASE MONTHLY
SQ. FT EXPIRATION RENT
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
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*
- -------------------------------------------------------------------------------
</TABLE>
*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
a defendant is likely to have a material adverse effect on the Company's
financial position or results of operations.
15
<PAGE>
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.
16
<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:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
-----------------------------------------------------------
<S> <C> <C>
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
</TABLE>
(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.
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
- -----------------------------------------------------------------------------------------------------------------------------------
17
<PAGE>
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.
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:
18
<PAGE>
<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 Administrative 5.4 5.8 4.3 (7.0) 53.0
Amortization of Excess of Acquired
Net Assets in Excess 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%)
- -----------------------------------------------------------------------------------------------------------------------------------
Pro Forma Information (Note 1):
Historical Earnings Before -- -- 5.6% -- --
Income Taxes
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.
19
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
---------------------------- ------------------------------ -----------------------------
---------------------------- ------------------------------ -----------------------------
</TABLE>
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.
- 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.
20
<PAGE>
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:
<TABLE>
<CAPTION>
JULY-DECEMBER JANUARY-JUNE JULY-DECEMBER
1996 1997 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE $27,904,819 $20,111,396 $34,058,357
- -----------------------------------------------------------------------------
NET INCOME (LOSS) $(3,788,581) $(1,421,492) $1,074,201
</TABLE>
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
21
<PAGE>
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
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
22
<PAGE>
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.
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.
23
<PAGE>
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.
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.
24
<PAGE>
PART III
ITEM 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these Items is incorporated herein by reference
to the Company's definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held May 26, 1998.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are filed herewith:
<TABLE>
<CAPTION>
PAGES
<S> <C>
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
</TABLE>
2. No financial statement schedules are required to be filed.
3. EXHIBITS. THE FOLLOWING EXHIBITS ARE FILED HEREWITH:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- --------------------------------------------------------------------------------
<S> <C> <C>
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 Filed herewith
Bank of Canada and the Company electronically.
21 Subsidiaries of the Registrant Filed herewith electronically
23 Consent of Grant Thornton LLP Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically
</TABLE>
(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.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CET ENVIRONMENTAL SERVICES, INC.
Dated: April 9, 1998 By /S/
-------------------------------------
Steven H. Davis
President and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
Signature Capacity Date
--------- -------- ----
/S/ President, Chief April 9, 1998
----------------------------------- Executive Officer
Steven H. Davis and Director
/S/ Executive Vice April 9, 1998
----------------------------------- President, Chief
Rick C. Townsend Financial Officer,
Secretary and Director
(Principal Accounting
Officer)
/S/ Director April 9, 1998
-----------------------------------
Craig C. Barto
/S/ Executive Vice April 9, 1998
----------------------------------- President, Chief
Douglas W. Cotton Operating Officer
and Director
/S/ Senior Vice President April 9, 1998
----------------------------------- and Director
John G. L. Hopkins
/S/ Director April 9, 1998
-----------------------------------
Robert A. Taylor
27
<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.
GRANT THORNTON LLP
Denver, Colorado
March 6, 1998
F-1
<PAGE>
CET Environmental Services, Inc.
BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS
1997 1996
----------- -----------
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
----------- -----------
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
F-3
<PAGE>
CET Environmental Services, Inc.
STATEMENTS OF OPERATIONS
Years ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
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
-----------
-----------
</TABLE>
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 (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>
CET Environmental Services, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997 and 1996
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.
F-9
<PAGE>
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATED FAIR VALUE INFORMATION
Statement of Financial Accounting Standards ("SFAS") No. 107, DISCLOSURE
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of the
estimated fair value of an entity's financial instrument assets and
liabilities, as defined, regardless of whether recognized in the financial
statements of the reporting entity. The fair value information does not
purport to represent the aggregate net fair value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
CASH: The carrying amount approximates fair value due to the short-term
maturity.
NOTE PAYABLE - LINE OF CREDIT: The carrying amount approximates fair value
as the line of credit has a variable interest rate which is considered to
approximate the market rate.
LOAN FROM SHAREHOLDER: The carrying amount approximates the fair value
because of the short terms to maturity of the notes (within 3 months).
LONG-TERM DEBT / OBLIGATIONS UNDER CAPITAL LEASES: The carrying value
approximates fair value as the interest rate at December 31, 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
F-10
<PAGE>
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS (Continued)
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).
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:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Government - EPA contracts $ 3,801,853 $ 648,973
Non-EPA contracts 9,542,366 6,007,889
----------- ----------
Total $13,344,219 $6,656,862
----------- ----------
----------- ----------
</TABLE>
The Environmental Protection Agency (EPA) awards the Company an award fee
for work performed based upon a percentage of sub-contract and material
costs incurred plus a percentage of program management fees billed.
F-11
<PAGE>
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.
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:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
F-12
<PAGE>
NOTE F -- CAPITAL LEASES (CONTINUED)
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:
<TABLE>
<S> <C>
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
----------
----------
</TABLE>
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.
F-13
<PAGE>
NOTE G -- LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
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:
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
Scheduled future maturities of these notes for the years ending December 31
are as follows:
<TABLE>
<S> <C>
1998 $ 647,194
1999 750,000
----------
$1,397,194
----------
----------
</TABLE>
F-14
<PAGE>
NOTE G -- LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
Related party debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Loan from shareholder, uncollateralized, due January 15,
1997, interest at 10% (see note E) $ - $ 545,000
Note payable to related party, uncollateralized, due
February 28, 1998, interest at 10% (see note E) - 200,000
Subordinated notes payable to related parties, due
February 28, 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
-------- ----------
-------- ----------
</TABLE>
NOTE H -- SUBORDINATED NOTES PAYABLE
In March and April 1995, the Company issued debt securities in a private
offering pursuant to which it raised $890,000. In exchange for each
$10,000 invested, the nineteen investors were given a warrant to acquire
approximately 1,312 shares of common stock at approximately $1.20 per
share, to be exercised on 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.
F-15
<PAGE>
NOTE I -- TAXES ON INCOME
The provision (benefit) for taxes on income includes the following for the
year ended December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
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)
--------- ---------
--------- ---------
</TABLE>
A reconciliation between the expected federal income tax expense computed
by applying the Federal statutory rate to income before income taxes and
the actual provision (benefit) for taxes on income for the year ended
December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- -----------
<S> <C> <C>
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)
--------- -----------
--------- -----------
</TABLE>
Deferred tax assets and liabilities consist of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
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)
----------- ----------
----------- ----------
</TABLE>
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:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1998 $ 475,897
1999 221,975
2000 178,250
2001 63,792
---------
Total $ 939,914
---------
---------
</TABLE>
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).
F-17
<PAGE>
NOTE K -- STOCKHOLDERS' EQUITY (CONTINUED)
In June 1995, the Company distributed an aggregate of $927,101 to certain
shareholders, which aggregate amount is approximately the amount of the tax
liabilities of such shareholders resulting from the Company's former
Subchapter "S" tax status. The primary source of funds for such
distribution was the proceeds from the sale of the Subordinated Notes (note
H). Immediately after such distribution, these same shareholders loaned an
aggregate of $357,865 to the Company. Such shareholder loans bore interest
at 10% and were repaid out of the proceeds of the Company's initial public
offering in July 1995.
In July 1995, the Company completed an initial public offering of 1,200,000
shares of its common stock, and in August 1995, sold an additional 180,000
shares pursuant to an over-allotment option. The net proceeds to the
Company from the public offering was approximately $5,800,000.
In connection with this offering, the Company issued a warrant to the
representatives of the underwriters in this offering to purchase up to
120,000 shares of the Company's common stock at $6.00 per share (the
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.
F-18
<PAGE>
NOTE K -- STOCKHOLDERS' EQUITY (CONTINUED)
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.
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.
F-19
<PAGE>
NOTE M -- STOCK OPTIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1996
--------- -----------
<S> <C> <C>
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)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions for grants used in 1997 and 1996: no expected dividends;
expected volatility of 74.77%; risk-free interest rate of 6.07%; and
expected lives of five years.
A summary of the status of the Plan follows:
<TABLE>
<CAPTION>
Average price
Shares per share
--------- -------------
<S> <C> <C>
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
-------- -----
-------- -----
</TABLE>
F-20
<PAGE>
NOTE M -- STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OPTIONS PROCEEDS EXERCISE PRICE
------------- ------- -------- ----------------
<S> <C> <C> <C> <C>
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
------ -------- ------
------ -------- ------
</TABLE>
The following information applies to options outstanding at December 31,
1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OF OPTIONS WEIGHTED AVERAGE REMAINING
EXERCISABLE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE
------------------ ----------- ---------------- ----------------
<S> <C> <C> <C>
$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
</TABLE>
In May 1995, options for 181,000 shares of common stock were granted under
the Plan of which options for 90,500 shares will vest only upon the
occurrence of certain circumstances. On December 31, 1995, 13,500 of such
remaining options were granted as events upon which these options were
contingent occurred. The Company recorded compensation expense of $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.
F-21
<PAGE>
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:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
1997 AMOUNT FAIR VALUE
---------------------------------- ---------- -----------
<S> <C> <C>
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
<CAPTION>
CARRYING ESTIMATED
1996 AMOUNT FAIR VALUE
---------------------------------- ---------- -----------
<S> <C> <C>
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
</TABLE>
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-22
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS AGREEMENT made this 29th day of May, 1997 by and between NATIONAL BANK
OF CANADA, a Canadian chartered bank ("Lender"), with an address at One Tabor
Center, 1200 Seventeenth Street, Suite 2760, Denver, Colorado 80202, and
CET ENVIRONMENTAL SERVICES, INC., a California corporation, with an address at
7670 South Vaughn Court, Suite 130, Englewood, Colorado 80112 ("Borrower").
WITNESSETH:
WHEREAS, the parties wish to provide for the terms and conditions upon
which Loans may be made, and Letters of Credit may be issued, for the account of
Borrower;
NOW, THEREFORE, in consideration of any Loans made and/or Letters of Credit
issued for the account of Borrower, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
Borrower, the parties agree as follows:
1. DEFINITIONS.
(a) "Acceptable Equipment" shall mean Equipment owned or to be
acquired by Borrower and used by Borrower in the ordinary course of business in
which Lender shall have a valid, perfected, first priority security interest
subject to no other lien, encumbrance or security interest and which is
otherwise acceptable to Lender.
(b) "Account," "Account Debtor," "Chattel Paper," "Documents,"
"Equipment," "General Intangibles," "Goods," "Instruments" and "Inventory" shall
have the respective meanings assigned to such terms, as of the date of this
Agreement, in the Colorado Uniform Commercial Code.
(c) "Affiliate" shall mean any Person directly or indirectly
controlling, controlled by or under common control with another Person.
(d) "Agreement" shall mean this Loan and Security Agreement, any
exhibits or schedules hereto, any concurrent or subsequent riders hereto and any
extensions, supplements, amendments or modifications hereto.
(e) "Blocked Account" shall have the meaning specified in Section 8
hereof.
(f) "Closing" shall mean satisfaction of the conditions precedent in
Section 4 below and closing of the transactions contemplated by the Agreement.
(g) "Collateral" shall mean all of the property of Borrower described
in Section 5 hereof, together with all other real or personal property of
Borrower now or hereafter
<PAGE>
pledged to Lender to secure repayment of any of the Liabilities, including,
without limitation, all Accounts, Inventory, General Intangibles and Equipment
of Borrower.
(h) "Collateral Report" shall have the meaning specified in Section 9
hereof.
(i) "Eligible Accounts" shall mean those Accounts of Borrower which
are unpaid less than ninety (90) days from invoice date, and which Lender, in
its sole discretion, determines to be eligible. Eligible Accounts may, at
Lender's option, include up to $625,000 of bonded accounts. Without limiting
Lender's discretion, unless otherwise agreed by Lender, the following Accounts
of Borrower are not Eligible Accounts: (i) all Accounts owing by a single
Account Debtor, including currently scheduled Accounts, if twenty-five percent
(25%) or more of the balance owing by such Account Debtor to Borrower is
ineligible under clauses (iv) or (v) below; (ii) Accounts with respect to which
the Account Debtor is an officer, director, employee, Subsidiary or Affiliate of
Borrower; (iii) Accounts with respect to which the Account Debtor is not a
resident of the United States unless the Account Debtor has supplied Borrower
with an irrevocable letter of credit, in form and substance satisfactory to
Lender, issued by a U.S. financial institution satisfactory to Lender, to cover
the full amount of such Account, and such letter of credit is assigned and
delivered to Lender; (iv) Accounts in dispute or with respect to which the
Account Debtor has asserted a counterclaim or has asserted a right of setoff;
(v) Accounts with respect to which the prospect of payment or performance by the
Account Debtor is or will be impaired, as determined by Lender in the exercise
of its sole discretion; (vi) Accounts with respect to which Lender does not have
a first and valid fully perfected security interest; (vii) Accounts with respect
to which the Account Debtor is the subject of bankruptcy or a similar insolvency
proceeding or has made an assignment for the benefit of creditors or whose
assets have been conveyed to a receiver or trustee; (viii) Accounts with respect
to which the Account Debtor's obligation to pay the Account is conditional upon
the Account Debtor's approval or is otherwise subject to any prepurchase
obligation or return right, as with sales made on a bill-and-hold, guaranteed
sale, sale-or-return, sale on approval or consignment basis; (ix) Accounts to
the extent that the Account Debtor's indebtedness to Borrower exceeds a credit
limit determined by Lender in Lender's discretion; (x) Accounts with respect to
which the Account Debtor is located in New Jersey or Minnesota unless Borrower
(a) with respect to each such state, has received a certificate of authority to
do business and is in good standing in such state, or (b) has filed a Notice of
Business Activities Report with the New Jersey Division of Taxation or the
Minnesota Department of Revenue, as applicable, for the then current year;
(xi) Accounts which arise out of sales not made in the ordinary course of
Borrower's business; (xii) Accounts with respect to which the Account Debtor has
returned to Borrower any portion of the Inventory the sale of which gave rise to
such Accounts; and (xiii) Accounts with respect to which any document or
agreement executed or delivered in connection therewith, or any procedure used
in connection with any such document or agreement, fails in any material respect
to comply with the requirements of applicable law.
(j) "Eligible Unbilled Accounts" shall mean those Eligible Accounts
with respect to which the work giving rise to such Eligible Account was
completed within the last thirty days but for which no invoice has yet been
issued.
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(k) "Equipment Loan" or "Equipment Loans" means all advances made by
Lender to Borrower pursuant to paragraph 2(b) below.
(l) "Equipment Value" shall mean, at any time, up to eighty percent
(80%) of the cost as determined by Lender in its sole discretion of new
Acceptable Equipment (less any costs for installation, transportation, and
tooling) purchased or being purchased by Borrower.
(m) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
(n) "Event of Default" shall have the meaning specified in Section 13
hereof.
(o) "Indemnified Party" shall have the meaning specified in
Section 15 hereof.
(p) "Letter of Credit Issuer" shall mean Lender or its designee.
(q) "Letters of Credit" shall mean any Letter of Credit which shall
now or hereafter be issued by the Letter of Credit Issuer at the request and for
the account of Borrower pursuant to the terms of this Agreement.
(r) "Liabilities" shall mean any and all obligations, liabilities and
indebtedness of Borrower to Lender or to any Affiliate of Lender of any and
every kind and nature, howsoever created, arising or evidenced and howsoever
owned, held or acquired, whether now or hereafter existing, whether now due or
to become due, whether primary, secondary, direct, indirect, absolute,
contingent or otherwise (including, without limitation, obligations of
performance), whether several, joint or joint and several, and whether arising
or existing under written or oral agreement or by operation of law, including,
without limitation, all obligations for payment of the Loans and for payment of
the reimbursement obligations under paragraph 2(c) with respect to the Letters
of Credit.
(s) "Loans" shall mean all advances made by Lender to Borrower
pursuant to Section 2 and shall refer collectively to the Revolving Loans,
Equipment Loans and the Term Loans.
(t) "Maturity Date" shall mean the earliest to occur of the
following: (i) November 30, 1998, and (ii) the date the Liabilities are
accelerated pursuant to Section 14 hereof.
(u) "Maximum Loan Availability" shall mean (a) the lesser of Nine
Million Dollars ($9,000,000) or Revolving Loan Availability minus (b) the
outstanding principal amount of all Equipment Loans minus (c) the aggregate
undrawn face amount of all Letters of Credit.
(v) "Obligor" shall mean Borrower and each Person who is or shall
become primarily or secondarily liable for any of the Liabilities.
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(w) "Other Agreements" shall mean all agreements, instruments and
documents, including, without limitation, guaranties, mortgages, trust deeds,
pledges, powers of attorney, consents, assignments, security agreements,
intercreditor agreements, financing statements and all other writings
heretofore, now or from time to time hereafter executed by or on behalf of
Borrower or any other Person and delivered to Lender or to any Affiliate of
Lender in connection with the Liabilities or the transactions contemplated
hereby.
(x) "Permitted Liens" shall mean (i) statutory liens of landlords,
carriers, warehousemen, mechanics, materialmen or suppliers incurred in the
ordinary course of business and securing amounts not yet due or declared to be
due by the claimant thereunder, (ii) liens or security interests in favor of
Lender, (iii) zoning restrictions and easements, licenses, covenants and other
restrictions affecting the use of real property that do not individually or in
the aggregate have a material adverse effect on Borrower's ability to use such
real property for its intended purpose in connection with Borrower's business,
and (iv) the liens set forth on EXHIBIT B.
(y) "Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, institution, entity, party or foreign or United States government
(whether federal, state, county, city, municipal or otherwise), including,
without limitation, any instrumentality, division, agency, body or department
thereof.
(z) "Plan" shall mean any employee benefit plan defined in
Section 3(3) of ERISA, including any multiemployer plan or any employee welfare
benefit plan which is maintained or has been maintained pursuant to a collective
bargaining agreement to which two or more unrelated employers contribute and in
respect of which Borrower is an "employer" as defined in Section 3(5) of ERISA.
(aa) "Reference Rate" shall mean the rate of interest publicly
announced from time to time by National Bank of Canada at its principal office
as its United States (rather than Canadian) prime lending rate. The Reference
Rate is a reference rate and does not necessarily represent the lowest or best
rate actually charged to any customer. Any change in the Reference Rate shall
be effective as of the effective date stated in the announcement by National
Bank of Canada of such change.
(bb) "Revolving Loan" or "Revolving Loans" shall mean all advances
made by Lender to Borrower pursuant to paragraph 2(a) hereof.
(cc) "Revolving Loan Availability" shall mean at any time, the sum of
the following:
(i) up to eighty percent (80%) of the face amount (less maximum
discounts, credits and allowances which may be taken by or granted to Account
Debtors in connection therewith) then outstanding under existing Eligible
Accounts at such time, less such reserves as Lender in its sole discretion
elects to establish; and
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(ii) up to fifty percent (50%) of the face amount (less maximum
discounts, credits and allowances which may be taken by or granted to Account
Debtors in connection therewith) then outstanding under existing Eligible
Unbilled Accounts at such time, less such reserves as Lender in its sole
discretion elects to establish.
Lender may at any time and from time to time in its sole discretion change the
advance percentage as set forth above.
(dd) "Subsidiary" shall mean any corporation of which more than fifty
percent (50%) of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors of such corporation (irrespective of
whether at the time stock of any other class of such corporation shall have or
might have voting power by reason of the happening of any contingency) is at the
time, directly or indirectly, owned by Borrower or by any partnership or joint
venture of which more than fifty percent (50%) of the outstanding equity
interests are at the time, directly or indirectly, owned by Borrower.
(ee) "Subordinated Debt" means collectively (i) indebtedness to
Dorothy R. Munroe as Trustee of the Dorothy R. Munroe Trust in the amount of
$84,250.00 (ii) indebtedness to Dorothy R. Munroe as Trustee for Stephanie Ann
Davis in the amount of $16,850.00, (iii) indebtedness to Dorothy R. Munroe as
Trustee for Charles Howe Davis in the amount of $16,850.00, (iv) indebtedness to
Dorothy R. Munroe as Trustee of Birnie Children's Trust I in the amount of
$337,000.00, (v) indebtedness to Dorothy R. Munroe, as the Trustee of the Rempel
Family Trust in the amount of $16,850.00, and (vi) indebtedness to Dorothy R.
Munroe as Trustee of the Birnie Children's Trust I in the amount of $200,000.00.
(ff) "Term Loan" shall have the meaning set forth in paragraph 2(d)
below.
(gg) "Term Loan Availability" shall mean up to eighty percent (80%) of
the acceptable auction value for existing Acceptable Equipment as determined
pursuant to an appraisal acceptable to Lender in its sole discretion.
2. LOANS, LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this Agreement and the
Other Agreements, prior to the Maturity Date, Lender may, in its reasonable
discretion, make Revolving Loans to Borrower as Borrower shall from time to time
request for general working capital purposes. The aggregate unpaid principal
amount of all Revolving Loans outstanding at any one time shall not exceed the
Maximum Loan Availability at such time. The Revolving Loan shall be repaid as
provided elsewhere in this Agreement. If at any time the outstanding principal
balance of the Revolving Loan exceeds the Maximum Loan Availability, Borrower
shall immediately, and without the necessity of a demand of Lender, pay to
Lender such amount as may be necessary to eliminate such excess.
(b) Subject to the terms and conditions of this Agreement and the
Other Agreements, prior to the Maturity Date, Lender may, in its reasonable
discretion, make
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Equipment Loans to Borrower as Borrower shall from time to time request to
purchase Acceptable Equipment. The maximum amount of each Equipment Loan shall
not exceed the lesser of (1) the Equipment Value of the Acceptable Equipment
purchased with such Equipment Loan, (2) One Million Dollars ($1,000,000) minus
the aggregate unpaid principal amount of all Equipment Loans outstanding on such
date and (3) the Maximum Loan Availability minus the outstanding principal
amount of all Revolving Loans. Borrower shall make equal monthly principal
payments on each Equipment Loan on the first day of each month based on a
sixty-month (60) straight line amortization schedule, commencing with the first
payment on July 1, 1997, and continuing on the first day of each month
thereafter until the Maturity Date at which time the entire outstanding amount
of each Equipment Loan shall be due and payable in full.
(c) Subject to the terms and conditions of this Agreement and the
Other Agreements, prior to the Maturity Date, Lender may, in its reasonable
discretion, at Borrower's request, cause Letters of Credit to be issued for the
account of Borrower; provided, that the aggregate undrawn face amount of the
Letters of Credit shall not at any time exceed the lesser of (i) FIVE HUNDRED
THOUSAND DOLLARS ($500,000) and (ii) Maximum Loan Availability. If at any time
the outstanding principal balance of the Revolving Loan is zero and Maximum Loan
Availability is less than zero, Borrower shall provide cash collateral to Lender
in an amount equal to the amount by which Maximum Loan Availability is less than
zero to secure any Letters of Credit. The Letters of Credit shall be in form
and substance satisfactory to Lender and shall have an expiration date not later
than the earlier of (1) twelve (12) months from the date of issuance or (2) the
Maturity Date. Borrower authorizes Lender to reimburse the Letter of Credit
Issuer for any payments made in respect of the Letters of Credit. Borrower
shall reimburse Lender, immediately upon demand, in the amount of any payments
made by Lender to the Letter of Credit Issuer or any Person with respect to the
Letters of Credit, and until Lender shall have been so reimbursed by Borrower
such payments by Lender shall be deemed to be Revolving Loans. In connection
with the Letters of Credit, Borrower hereby indemnifies Lender for any payments
made by Lender with respect to the Letters of Credit and for any taxes, levies,
deductions, charges and costs and expenses incurred by Lender with respect to
the Letters of Credit. The Lender will not release any collateral until such
time as all Letters of Credit have been canceled.
(d) Subject to the terms and conditions of this Agreement and the
Other Agreements, Lender shall make a loan to Borrower (the "Term Loan") in an
amount equal to the lesser of (A) ONE MILLION DOLLARS ($1,000,000) and (B) Term
Loan Availability at the time of the advance of the Term Loan. Borrower shall
make equal monthly principal payments on the Term Loan on the first day of each
month based on a sixty-month (60) straight line amortization schedule with the
first payment commencing on the first day of the month following the advance of
the Term Loan, and continuing on the first day of each month thereafter until
the Maturity Date at which time the entire unpaid principal balance of the Term
Loan shall be due and payable in full.
(e) The Loans and all other amounts due to Lender from Borrower shall
be due and payable in full on the Maturity Date.
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3. FEES AND CHARGES. Borrower shall pay to Lender the following fees:
(a) Borrower shall pay to Lender interest on the outstanding
principal balance of the Loans monthly in arrears beginning on June 1, 1997, at
the per annum rate of one-quarter of one percent (0.25%) plus the Reference
Rate. If Borrower's earnings net of extraordinary income for the year ended
December 31, 1997 exceed $2,000,000 and the ratio of Borrower's
liabilities-to-net worth calculated in accordance with Section 12(q)(iv) below
is less than 2.5 to 1 for the fiscal year ending on December 31, 1997, then the
interest rate set forth above shall be reduced by one-quarter of one percent
(0.25%) to the Reference Rate; effective upon receipt by Lender of audited
financial statements acceptable to Lender together with such other information
as Lender may require. If Borrower's earnings net of extraordinary income for
the year ended December 31, 1997 are less than $1,000,000 then the interest rate
set forth above shall be increased by one-quarter of one percent (0.25%) to
one-half percent (0.50%) plus the Reference Rate; effective retroactively to the
date of this Agreement; provided that if audited financials are not received on
or before March 31, 1998, the interest rate shall be increased one-quarter
percent effective retroactively to the date of this Agreement until such time as
such audited financial statements are received and then shall be adjusted in
accordance with the results set forth in such audited financial statements. If
the interest rate is increased effective retroactively to the date of this
Agreement, Borrower shall, within five days after request by Lender, pay to
Lender all additional interest due as a result of the retroactive increase.
Following the occurrence of an Event of Default, Borrower shall pay to Lender
interest on the outstanding principal balance of the Loans at the per annum rate
of two percent (2%) plus the Reference Rate. Interest shall be computed on the
basis of a year of three hundred sixty (360) days for the actual number of days
elapsed.
(b) Borrower shall pay to Lender a letter of credit fee equal to one
and one-half percent (1.5%) per annum (computed on the basis of a year of three
hundred sixty (360) days for the actual number of days elapsed) of the average
undrawn face amount of the Letters of Credit, payable monthly in arrears within
10 days after the end of each month; provided, that following the occurrence of
an Event of Default, the letter of credit fee shall increase to three and
one-half percent (3.5%) per annum. In addition, Borrower shall pay to Lender
all expenses incurred by Lender and the Letter of Credit Issuer in connection
with the issuance and negotiation of any Letter of Credit, payable on the date
incurred by Lender or the Letter of Credit Issuer.
(c) Borrower shall pay to Lender a closing fee equal to TWENTY-FIVE
THOUSAND DOLLARS ($25,000.00) at Closing.
(d) Borrower shall pay to Lender an audit fee at a rate of FIVE
HUNDRED DOLLARS ($500.00) per auditor per day, plus travel and other
out-of-pocket expenses, which shall be payable by Borrower upon completion of
each audit.
(e) Borrower shall pay to Lender a monthly unused fee equal to the
(i) product obtained by multiplying (A) one-quarter of one percent (0.25%) per
annum (computed on the basis of a year of three hundred sixty (360) days for the
actual number of days elapsed) times,
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(B) the amount by which (i) $10,000,000 exceeds (2) the sum of the average daily
outstanding balance of the Loans during each calendar month and the average
outstanding face amount of all Letters of Credit during such month, and
(ii) dividing such product by 360 and multiplying the results by the number of
days in the month. Such unused fee shall be payable monthly in arrears within
ten (10) days after the end of each month.
(f) If Borrower elects to terminate this Agreement prior to the
Maturity Date, but within 365 days after Closing, Borrower will pay Lender an
early termination fee equal to the amount obtained by multiplying one-half
percent times $10,000,000, which amount shall be payable at the time Borrower
terminates this Agreement.
(g) It is the intent of the parties that the rate of interest and the
other fees and charges to Borrower under this Agreement shall be lawful;
therefore, if for any reason the interest or other fees and charges payable
under this Agreement are found by a court of competent jurisdiction, in a final
determination, to exceed the limit which Lender may lawfully charge Borrower,
then the obligation to pay interest and other charges shall automatically be
reduced to such limit and, if any amount in excess of such limit shall have been
paid, then such amount shall be refunded to Borrower.
4. CONDITIONS OF ADVANCES AND LETTERS OF CREDIT. Without limiting
Lender's discretion to make advances hereunder, the making of any advance
provided for in this Agreement shall be conditioned upon the following:
(a) Lender shall have received, (i) with respect to a request for an
advance in connection with the Revolving Loan, by at least twelve o'clock p.m.
(12:00 p.m.) Denver time on the day on which such advance is requested to be
made hereunder with respect to request for an advance in connection with an
Equipment Loan by at least twelve o'clock p.m. (12:00 p.m.) Denver time on the
day which is three business days prior to the day on which such advance is
requested to be made hereunder, a telephonic request from an officer of Borrower
(or any Person authorized by Borrower pursuant to a written list provided to
Lender), for an advance in a specific amount, and (ii) with respect to a request
for the issuance of a Letter of Credit in connection with the Revolving Loan, at
least five days prior to the date such Letter of Credit is requested to be
issued, an application for such Letter of Credit executed by an officer of
Borrower. In addition, Lender shall also have received all of the schedules and
reports required to have been delivered by Borrower pursuant to Section 9
hereof;
(b) No Event of Default shall have occurred and be continuing, in no
event that with notice, or the passage of time, or both could become an Event of
Default shall have occurred;
(c) All of the representations and warranties contained in this
Agreement and the Other Agreements shall be true and correct as if made on the
date the request for an advance or Letter of Credit is made;
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(d) With respect to any advance of an Equipment Loan, Borrower shall
have provided Lender evidence of the Equipment Value of the Acceptable
Equipment;
(e) Within fifteen days after the making of any prior Equipment Loan,
Borrower shall have provided to Lender the information required pursuant to
Section 12(t) below;
(f) Lender shall have received, in form and substance satisfactory to
Lender, all certificates, orders, authorities, consents, affidavits, schedules,
instruments, security agreements, financing statements, opinions, mortgages and
other documents which are provided for hereunder, or which Lender may at any
time request, including without limitation a Subordination Agreement in
connection with the Subordinated Debt;
(g) With respect to the initial advance of the Loans, Lender shall
have satisfactorily completed all due diligence on the Borrower and the
collateral which Lender determines is necessary, including, without limitation,
field audits and financial review;
(h) There shall have been no material adverse change in the
condition, financial or otherwise, of Borrower as reasonably determined by
Lender;
(i) With respect to the initial advance of the Revolving Loan, the
amount of Revolving Loan Availability minus the amount of such advance and minus
all accounts payable of Borrower in excess of thirty days must be at least
$1,000,000;
(j) With respect to the advance of the Term Loan, (i) Lender shall
have received appraisals acceptable to Lender in its sole discretion in order to
determine Term Loan Availability, (ii) Lender shall have received UCC search
results from such jurisdictions as Lender may require which must be acceptable
to Lender in its sole discretion, (iii) Lender shall have a valid, perfected
lien on all vehicles owned by Borrower and (iv) Lender shall have received such
other documents and information as Lender may reasonably require; and
(k) Lender shall have received such other documents, instruments,
agreements or information as Lender may reasonably require.
5. GRANT OF SECURITY INTEREST TO LENDER. As security for the payment or
other satisfaction of all Liabilities, Borrower hereby assigns to Lender and
grants to Lender a continuing security interest in the following property of
Borrower, whether now or hereafter owned, existing, acquired or arising and
wherever now or hereafter located: (a) all Accounts and all Goods whose sale,
lease or other disposition by Borrower has given rise to Accounts and have been
returned to or repossessed or stopped in transit by Borrower; (b) all Chattel
Paper, Instruments, Documents and General Intangibles (including, without
limitation, all patents, patent applications, trademarks, trademark
applications, tradenames, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, tax refund claims, claims against carriers
and shippers, guarantee claims, contracts rights, security interests, security
deposits and any rights to indemnification); (c) all Inventory and other Goods,
including, without
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limitation, Equipment, vehicles and fixtures; (d) all deposits and cash and any
other property of Borrower now or hereafter in the possession, custody or
control of Lender or any agent or any Affiliate of Lender or any participant
with Lender in the Loans and/or Letters of Credit for any purpose (whether for
safekeeping, deposit, collection, custody, pledge, transmission or otherwise);
(e) all mobile goods; (f) Account No. 1018171774 at Norwest Bank Colorado,
National Association, and all renewals thereof or substitutions, additions
thereto, proceeds therefrom, and all cash and other amounts at any time on
deposit therein and all interest and dividends thereon; (g) Account No.
4500148743 at Union Bank of California, N.A., and all renewals thereof or
substitutions, additions thereto, proceeds therefrom, and all cash and other
amounts at any time on deposit therein and all interest and dividends thereon;
and (h) all additions and accessions to, substitutions for, and replacements,
products and proceeds of the foregoing property, including, without limitation,
proceeds of all insurance policies insuring the foregoing property, and all of
Borrower's books and records relating to any of the foregoing and to Borrower's
business.
6. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS
THEREIN. Borrower shall, at Lender's request, at any time and from time to
time, execute and deliver to Lender such financing statements, documents and
other agreements and instruments (and pay the cost of filing or recording the
same in all public offices deemed necessary or desirable by Lender) and do such
other acts and things as Lender may deem necessary or desirable in order to
establish and maintain a valid, attached and perfected security interest in the
Collateral in favor of Lender (free and clear of all other liens, claims and
rights of third parties whatsoever, whether voluntarily or involuntarily
created, except Permitted Liens) to secure payment of the Liabilities, and in
order to facilitate the collection of the Collateral. Borrower irrevocably
hereby makes, constitutes and appoints Lender (and all Persons designated by
Lender for that purpose) as Borrower's true and lawful attorney and
agent-in-fact to execute such financing statements, documents and other
agreements and instruments and do such other acts and things as may be necessary
to preserve and perfect Lender's security interest in the Collateral. Borrower
further agrees that a carbon, photographic, photostatic or other reproduction of
this Agreement or of a financing statement shall be sufficient as a financing
statement.
7. CAPITAL ADEQUACY. If Lender shall reasonably determine that the
application or adoption of any law, rule, regulation, directive, interpretation,
treaty or guideline regarding capital adequacy, or any change therein or in the
interpretation or administration thereof, whether or not having the force of
law, increases the amount of capital required or expected to be maintained by
Lender or any Person controlling, directly or indirectly, Lender, and such
increase is based upon the existence of Lender's obligations hereunder and other
commitments of this type, then from time to time, within thirty (30) days after
demand from Lender, Borrower shall pay to Lender such amount or amounts as will
compensate Lender or such controlling Person, as the case may be, for such
increased capital requirement. The determination of any amount to be paid by
Borrower under this Section 7 shall take into consideration the policies of
Lender or any Person controlling Lender with respect to capital adequacy and
shall be based upon any reasonable averaging, attribution and allocation methods
selected by Lender. A certificate of Lender setting forth the amount or amounts
as shall be
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necessary to compensate Lender as specified in this Section 7 shall be delivered
to Borrower and shall be conclusive in the absence of manifest error. If Lender
invokes its rights under this Section 7, the Borrower shall have the right, in
lieu of making such payment to the Lender, to terminate this Agreement without
payment of any fees that would otherwise be payable under Section 3(f) hereof,
by giving the Lender written notice of such election within thirty (30) days of
demand by the Lender for payment and within thirty (30) days after giving such
notice, making payment of the Liabilities in full and causing the Letters of
Credit to be canceled and fully terminated.
8. COLLECTIONS.
(a) Borrower shall establish an account (the "Blocked Account") in
Borrower's name with a financial institution acceptable to Lender, into which
Borrower will immediately deposit all payments received by Borrower with respect
to Accounts and other Collateral in the identical form in which such payments
were made, whether by cash or check. If Borrower, any Affiliate or Subsidiary
of Borrower, or any shareholder, officer, director, employee or agent of
Borrower or any Affiliate or Subsidiary of Borrower, or any other Person acting
for or in concert with Borrower shall receive any monies, checks, notes, drafts
or other payments relating to or as proceeds of Accounts or other Collateral,
Borrower and each such Person shall receive all such items in trust for, and as
the sole and exclusive property of, Lender and, immediately upon receipt
thereof, shall remit the same (or cause the same to be remitted) in kind to the
Blocked Account. The financial institution with which the Blocked Account is
established shall acknowledge and agree, in a manner satisfactory to Lender,
that the amounts on deposit in such Blocked Account are the sole and exclusive
property of Lender, that such financial institution has no right to setoff
against the Blocked Account, and that such financial institution shall by ACH
transfer, wire transfer, or otherwise transfer in immediately available funds in
a manner satisfactory to Lender, funds deposited in the Blocked Account on a
daily basis as such funds are collected, to Lender. Lender shall, two
(2) business days after receipt by Lender of immediately available funds, apply
the whole or any part of such collections or proceeds against the Liabilities in
such order as Lender shall determine in its sole discretion. Borrower agrees
that all payments deposited to such Blocked Account or otherwise received by
Lender, whether in respect of the Accounts or as proceeds of other Collateral or
otherwise, will be applied on account of the Liabilities in accordance with the
terms of this Agreement. All checks, drafts, instruments and other items of
payment or proceeds of Collateral shall be endorsed by Borrower to Lender, and,
if that endorsement of any such item shall not be made for any reason, Lender is
hereby irrevocably authorized to endorse the same on Borrower's behalf. For the
purpose of this paragraph, Borrower irrevocably hereby makes, constitutes and
appoints Lender (and all Persons designated by Lender for that purpose) as
Borrower's true and lawful attorney and agent-in-fact (i) to endorse Borrower's
name upon said items of payment and/or proceeds of Collateral and upon any
Chattel Paper, document, instrument, invoice or similar document or agreement
relating to any Account of Borrower or goods pertaining thereto; (ii) to take
control in any manner of any item of payment or proceeds thereof; and (iii) if
an Event of Default occurs and is continuing, to have access to any lock box or
postal box into which any of Borrower's mail is deposited, and open and process
all mail addressed to Borrower and deposited therein; provided, however, that
all such mail and contents thereof that do not constitute
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Collateral shall be forwarded to the Borrower at its chief executive office in a
timely fashion; and provided further that any mail sent to the Borrower from its
attorneys or accountants shall be forwarded unopened to the Borrower.
(b) Lender may, at any time and from time to time after the
occurrence and during the continuance of an Event of Default, whether before or
after notification to any Account Debtor and whether before or after the
maturity of any of the Liabilities, (i) enforce collection of any of Borrower's
Accounts or contract rights by suit or otherwise; (ii) exercise all of
Borrower's rights and remedies with respect to proceedings brought to collect
any Accounts; (iii) surrender, release or exchange all or any part of any
Accounts, or compromise or extend or renew for any period (whether or not longer
than the original period) any indebtedness thereunder; (iv) sell or assign any
Account of Borrower upon such terms, for such amount and at such time or times
as Lender deems advisable; (v) prepare, file and sign Borrower's name on any
proof of claim in bankruptcy or other similar document against any Account
Debtor; and (vi) do all other acts and things which are necessary, in Lender's
sole discretion, to fulfill Borrower's obligations under this Agreement and to
allow Lender to collect the Accounts. In addition to any other provision
hereof, Lender may at any time after the occurrence of an Event of Default, at
Borrower's expense, notify any parties obligated on any of the Accounts to make
payment directly to Lender of any amounts due or to become due thereunder.
(c) Lender, in its sole discretion, without waiving or releasing any
obligation, liability or duty of Borrower under this Agreement or the other
Agreements or any Event of Default, may at any time or times hereafter, but
shall not be obligated to, pay, acquire or accept an assignment of any security
interest, lien, encumbrance or claim asserted by any Person in, upon or against
the Collateral; provided, however, that so long as no Event of Default has
occurred and is continuing, Lender shall first notify the Borrower of such lien
and allow ten (10) business days for the Borrower to pay or otherwise settle
such lien. All sums paid by Lender in respect thereof and all costs, fees and
expenses, including, without limitation, reasonable attorneys' fees, all court
costs and all other charges relating thereto incurred by Lender shall constitute
Revolving Loans, payable by Borrower to Lender on demand and, until paid, shall
bear interest at the rate then applicable to Loans hereunder.
(d) Immediately upon Borrower's receipt of any portion of the
Collateral evidenced by an agreement, Instrument or Document, including, without
limitation, any Chattel Paper, Borrower shall deliver the original thereof to
Lender together with an appropriate endorsement or other specific evidence of
assignment thereof to Lender (in form and substance acceptable to Lender). If
an endorsement or assignment of any such items shall not be made for any reason,
Lender is hereby irrevocably authorized, as Borrower's attorney and
agent-in-fact, to endorse or assign the same on Borrower's behalf.
9. SCHEDULES AND REPORTS.
(a) Borrower shall deliver to Lender, on a monthly basis, a
collateral report (the "Collateral Report") describing the aging of the
Accounts, all Eligible Accounts created or acquired by Borrower subsequent to
the immediately preceding Collateral Report, information in
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connection with any Account which has ceased to be an Eligible Account since the
most recent Collateral Report, and information on all amounts collected by
Borrower on Accounts subsequent to the immediately preceding Collateral Report;
provided that (i) Lender reserves the right to require such report on a weekly
or more frequent basis at any time requested by Lender and (ii) such report
shall be required on a weekly basis at all times after the Maximum Loan
Availability decreases below $1,000,000.00 unless otherwise agreed by Lender.
The Collateral Reports shall contain such additional information as Lender shall
require. Borrower shall also furnish copies of any other reports or information
concerning the Accounts and Inventory included, described or referred to in the
Collateral Reports, including, without limitation, but only if specifically
requested by Lender, copies of all invoices prepared in connection with
Accounts. Lender, through its officers, employees or agents, shall have the
right, at any time and from time to time in Lender's name, in the name of a
nominee of Lender or in Borrower's name, to verify the validity, amount or any
other matter relating to any of the Accounts, by mail, telephone, telegraph or
otherwise. Borrower shall reimburse Lender, on demand, for all costs, fees and
expenses incurred by Lender in this regard.
(b) Without limiting the generality of the foregoing, Borrower shall
deliver to Lender, at lease once a month (or more frequently when requested by
Lender), a report with respect to Borrower's Accounts and Inventory reconciling
the information described in paragraph 9(a) for such month.
(c) All schedules, certificates, reports, and assignments and other
items delivered by Borrower to Lender hereunder shall be executed by an
authorized representative of Borrower and shall be in such form and contain such
information as Lender shall specify.
10. TERMINATION. This Agreement shall be in effect until the Maturity
Date. The security interests and liens created under this Agreement and the
Other Agreements shall survive such maturity until the Letters of Credit have
been terminated and canceled and the payment of the other Liabilities has become
indefeasible. At such time as Borrower has repaid all of the Liabilities and
this Agreement has terminated, Borrower shall deliver to Lender a release, in
form and substance satisfactory to Lender, of all obligations and liabilities of
Lender and its officers, directors, employees, agents and Affiliates to Borrower
and Lender shall deliver to Borrower a similar release of all claims other than
those intended to survive repayment of the Loans. Without limiting the
generality of the foregoing, Borrower and Lender agree that the provisions of
Section 15 are intended to survive repayment of the Loans and shall not be
released.
11. REPRESENTATIONS, WARRANTIES AND COVENANTS. Borrower hereby
represents, warrants and covenants that:
(a) the financial statements delivered or to be delivered by Borrower
to Lender at or prior to the date of this Agreement and at all times subsequent
thereto accurately reflect the financial condition of Borrower, and there has
been no adverse change in the financial condition, the operations or any other
status of Borrower since the date of the financial statements delivered to
Lender most recently prior to the date of this Agreement;
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(b) the office where Borrower keeps its books, records and accounts
(or copies thereof) concerning the Collateral and Borrower's principal place of
business is the location set forth in the introduction on page 1; all of
Borrower's other places of business and locations of Collateral or locations
where Borrower maintains any offices or conducts any business are as set forth
in EXHIBIT A; Borrower shall promptly (but in no event less than ten (10) days
prior thereto) advise Lender in writing of the proposed opening or establishment
of any new office, place of business or location at which Borrower conducts
business, the closing of any existing place of business, any change in the
location of Borrower's books, records and accounts (or copies thereof) or the
opening or closing of any post office box of Borrower;
(c) the Collateral, including, without limitation, the Equipment is
and shall be based, only at the addresses set forth on the first page of this
Agreement or on Schedule 1 of EXHIBIT A;
(d) if any of the Collateral consists of Goods of a type normally
used in more than one state, whether or not actually so used, Borrower shall
immediately give written notice to Lender of any use of any such Goods in any
state other than a state in which Borrower has previously advised Lender such
Goods shall be used, and such Goods shall not, unless Lender shall otherwise
consent in writing, be used outside of the continental United States;
(e) each Account which Borrower shall, expressly or by implication,
request Lender to classify as an Eligible Account or Eligible Unbilled Account,
respectively, shall, as of the time when such request is made, conform in all
respects to the requirements of such classification as set forth in the
respective definitions of "Eligible Account" and "Eligible Unbilled Account" as
set forth herein and as otherwise established by Lender from time to time, and
Borrower shall promptly notify Lender in writing if any such Eligible Account or
Eligible Unbilled Account shall subsequently become ineligible;
(f) Borrower is and shall at all times be the lawful owner of its
property now purportedly owned or hereafter purportedly acquired by Borrower
(including without limitation the Collateral), free from all liens, claims,
security interests and encumbrances whatsoever, whether voluntarily or
involuntarily created and whether or not perfected, other than the Permitted
Liens;
(g) Borrower has the right and power and is duly authorized and
empowered to enter into, execute and deliver this Agreement and the Other
Agreements and perform its obligations hereunder and thereunder; Borrower's
execution, delivery and performance of this Agreement and the Other Agreements
does not and shall not conflict with the provisions of any statute, regulation,
ordinance or rule of law, or any agreement, contract or other document which may
now or hereafter be binding on Borrower, and Borrower's execution, delivery and
performance of this Agreement and the Other Agreements shall not result in the
imposition of any lien or other encumbrance upon any of the Borrower's property
under any existing indenture, mortgage, deed of trust, loan or credit agreement
or other agreement or instrument by which Borrower or any of its property may be
bound or affected;
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<PAGE>
(h) there are no actions or proceedings which are pending or
threatened against Borrower which might result in any material adverse change in
its financial condition or materially adversely affect Borrower's property and
Borrower shall, promptly upon becoming aware of any such pending or threatened
action or proceeding, give written notice thereof to Lender;
(i) Borrower has obtained all licenses, authorizations, approvals,
and permits, the lack of which would have a material adverse effect on the
operation of its business, and Borrower is and shall remain in compliance in all
material respects with all applicable federal, state, local and foreign
statutes, orders, regulations, rules and ordinances, the failure to comply with
which could reasonably be expected to have a material adverse effect on its
business, property, assets, operations or condition, financial or otherwise;
(j) all written information now, heretofore or hereafter furnished by
Borrower to Lender is and shall be true and correct as of the date with respect
to which such information was or is furnished;
(k) Borrower is not conducting, permitting or suffering to be
conducted, nor shall it conduct, permit or suffer to be conducted, any
activities or transactions with any Affiliate of Borrower; provided, however,
that Borrower may enter into transactions with Affiliates of Borrower in the
ordinary course of business pursuant to terms that are no less favorable to
Borrower than the terms upon which such transfers or transactions would have
been made had they been made to or with a Person that is not an Affiliate of
Borrower and, in connection therewith, may transfer cash or property to
Affiliates of Borrower for fair value;
(l) Borrower's name has always been as set forth on the first page of
this Agreement and Borrower uses no tradenames or division names in the
operation of its business, except as set forth on EXHIBIT A; Borrower shall
notify Lender in writing within ten (10) days of the change of its name or the
use of any tradenames or division names not previously disclosed to Lender in
writing;
(m) with respect to Borrower's Equipment: (i) Borrower has good and
indefeasible and merchantable title to and ownership of all Equipment that it
purports to own, including, without limitation, the Equipment described or
listed on the schedule of Equipment delivered to Lender concurrently with this
Agreement and any Equipment with respect to which Lender makes an Equipment
Loan; (ii) Borrower shall keep and maintain the Equipment in good operating
condition and repair and shall make all necessary replacements thereof and
renewals thereto so that the value and operating efficiency thereof shall at all
times be preserved and maintained; (iii) Borrower shall not permit any such
items to become a fixture to real estate or an accession to other personal
property; and (iv) Borrower, immediately on demand by Lender, shall deliver to
Lender any and all evidence of ownership of, including, without limitation,
certificates of title and applications of title to, any of the Equipment;
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<PAGE>
(n) this Agreement and the Other Agreements to which Borrower is a
party are the legal, valid and binding obligations of Borrower and are
enforceable against Borrower in accordance with their respective terms;
(o) Borrower is solvent, is able to pay its debts as they become due
and has capital sufficient to carry on its business, now owns property having a
value both at fair valuation and at present fair saleable value greater than the
amount required to pay its debts, and will not be rendered insolvent by the
execution and delivery of this Agreement or any of the Other Agreements or by
completion of the transactions contemplated hereunder or thereunder;
(p) Borrower is not now obligated, nor shall it create, incur, assume
or become obligated (directly or indirectly), for any loans or other
indebtedness for borrowed money other than the Loans, except that Borrower may
(i) borrow money from a Person other than Lender on an unsecured and
subordinated basis if a subordination agreement in favor of Lender and in form
and substance satisfactory to Lender is executed and delivered to Lender
relative thereto; (ii) borrow money from a Person other than Lender on a secured
and unsubordinated basis provided that such secured and unsubordinated
indebtedness is incurred to purchase equipment and the amount of such
indebtedness incurred after the date hereof and outstanding at any one time does
not exceed $100,000; (iii) maintain the Subordinated Debt and any other present
indebtedness to any Person which is set forth on EXHIBIT C; (iv) incur unsecured
indebtedness to trade creditors in the ordinary course of Borrower's business;
and (v) other than financing of insurance premiums in the ordinary course of
Borrower's business.
(q) Borrower does not own any margin securities, and none of the
proceeds of the Loans hereunder shall be used for the purpose of purchasing or
carrying any margin securities or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase any margin securities or
for any other purpose not permitted by Regulation G or Regulation U of the Board
of Governors of the Federal Reserve System as in effect from time to time;
(r) Other than as set forth on EXHIBIT A, Borrower has no
Subsidiaries or divisions, nor is Borrower engaged in any joint venture or
partnership with any other Person;
(s) Borrower is duly organized and in good standing in its state of
organization and Borrower is duly qualified and in good standing in all states
where the nature and extent of the business transacted by it or the ownership of
its assets makes such qualification necessary;
(t) Borrower is not in default under any material contract, lease or
commitment to which it is a party or by which it is bound, nor does Borrower
know of any dispute regarding any contract, lease or commitment which is
material to the continued financial success and well-being of Borrower;
(u) there are no controversies pending or threatened between Borrower
and any of its employees, other than employee grievances arising in the ordinary
course of business
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<PAGE>
which are not, in the aggregate, material to the continued financial success and
well-being of Borrower, and Borrower is in compliance in all material respects
with all federal and state laws respecting employment and employment terms,
conditions and practices; and
(v) Borrower possesses, and shall continue to possess, adequate
licenses, patents, patent applications, copyrights, service marks, trademarks,
trademark applications, tradestyles and tradenames to continue to conduct its
business as heretofore conducted by it.
(w) Exhibit D attached hereto contains a complete list of all
vehicles owned by Borrower and a complete and accurate list of the state in
which each such vehicle is titled.
(x) Except as otherwise disclosed in writing to and approved by
Lender, in connection with each request for an advance hereunder, Borrower
represents and warrants that in connection with each Eligible Account, (i) the
contract giving rise to such Eligible Account is in full force and effect,
(ii) all work covered by the invoice giving rise to such Eligible Account was
performed in full compliance with all requirements of law and the contract,
(iii) the invoice giving rise to the Eligible Account was prepared in compliance
with all requirements of the contract and accurately reflects both the work to
which it relates and the amounts payable under the contract, (iv) the invoice
giving rise to such Eligible Account was presented for payment in compliance
with all requirements of the contract and all amounts evidenced by such invoice
are due under the contract and do not exceed the amount properly due and payable
under the contract and (v) no party under any contract giving rise to any
Eligible Account has requested that any audit be conducted in connection with
such contract nor has any such party requested any retroactive adjustments of
any amounts previously invoiced in connection with any such contract.
(y) All of the information set forth in the Representation and
Warranty Certificate, dated May 14, 1997, and delivered to Lender is true and
correct.
Borrower and Lender agree that all of the representations and warranties set
forth in EXHIBIT A attached hereto are incorporated herein and made a part
hereof by this reference just as if such representations and warranties were set
forth in this Section 11. Borrower represents, warrants and covenants to Lender
that all representations, warranties and covenants of Borrower contained in this
Agreement (whether appearing in EXHIBIT A, Sections 11 or 12 hereof or
elsewhere) shall be true at the time of Borrower's execution of this Agreement,
shall survive the execution, delivery and acceptance hereof by the parties
hereto and the closing of the transactions described herein or related hereto,
shall remain true until the repayment in full of all of the Liabilities and
termination of this Agreement, and shall be remade by Borrower at the time each
Loan is made or Letters of Credit issued pursuant to this Agreement.
12. ADDITIONAL COVENANTS OF BORROWER. Until payment or satisfaction in
full of all Liabilities and termination of this Agreement, unless Borrower
obtains Lender's prior written consent waiving or modifying any of Borrower's
covenants hereunder in any specific instance, Borrower agrees as follows:
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(a) Borrower shall at all times keep accurate and complete books,
records and accounts with respect to all of Borrower's business activities, in
accordance with sound accounting practices and generally accepted accounting
principles consistently applied, and shall keep such books, records and
accounts, and any copies thereof, only at the addresses indicated for such
purpose on EXHIBIT A;
(b) Borrower agrees to deliver to Lender the following financial
information, all of which shall be prepared in accordance with generally
accepted accounting principles consistently applied: (i) no later than
forty-five (45) days after each calendar month, copies of internally prepared
financial statements, including, without limitation, balance sheets and
statements of income, certified by the Chief Financial Officer of Borrower;
(ii) no later than ninety (90) days after the end of each of Borrower's fiscal
years, annual financial statements audited by independent certified public
accountants selected by Borrower and satisfactory to Lender; (iii) quarterly,
within forty-five (45) days after the end of each quarter, a covenant compliance
certificate in a form acceptable to Lender confirming Borrower's compliance with
the financial covenants set forth in Section 12(s) below, and (iv) such other
financial information as Lender shall reasonably request;
(c) Borrower shall promptly advise Lender in writing of any material
adverse change in business, assets or condition, financial or otherwise, of
Borrower, the occurrence of any Event of Default hereunder or the occurrence of
any event which, if uncured, will become an Event of Default hereunder after
notice or lapse of time (or both);
(d) Lender, or any Persons designated by it, shall have the right, at
any time, to call at Borrower's places of business at any reasonable times, and,
without hindrance or delay, to inspect the Collateral and to inspect, audit,
check and make extracts from Borrower's books, records, journals, orders,
receipts and any correspondence and other data relating to Borrower's business,
the Collateral or any transactions between the parties hereto, and shall have
the right to make such verification concerning Borrower's business as Lender may
consider reasonable under the circumstances. Borrower shall furnish to Lender
such information relevant to Lender's rights under this Agreement as Lender
shall at any time and from time to time request. Borrower authorizes Lender to
discuss the affairs, finances and business of Borrower with any officers,
employees or directors of Borrower or with any Affiliate or the officers,
employees or directors of any Affiliate, and to discuss the financial condition
of Borrower with Borrower's independent public accountants. Any such
discussions shall be without liability to Lender or to Borrower's independent
public accountants. Borrower shall pay to Lender all customary fees and
out-of-pocket expenses incurred by Lender in the exercise of its rights
hereunder, and all of such fees and expenses shall constitute Revolving Loans
hereunder, payable on demand and, until paid, shall bear interest at the rate
then applicable to Loans hereunder;
(e) Borrower shall:
(i) keep the Collateral properly housed and shall keep the
Collateral insured for the full insurable value thereof against loss
or damage by fire, theft, explosion, sprinklers, collision (in the
case of motor vehicles) and such other risks
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as are customarily insured against by Persons engaged in businesses
similar to that of Borrower with such companies, in such amounts and
under policies in such form as shall be satisfactory to Lender. At
the request of Lender, original (or certified) copies of such policies
of insurance shall be delivered to Lender, together with evidence of
payment of all premiums therefor, and shall contain an endorsement, in
form and substance acceptable to Lender, showing loss under such
insurance policies payable to Lender. Such endorsement, or an
independent instrument furnished to Lender, shall provide that the
insurance company shall give Lender at least thirty (30) days written
notice before any such policy of insurance is altered or cancelled and
that no act, whether willful or negligent, or default of Borrower or
any other Person shall affect the right of Lender to recover under
such policy of insurance in case of loss or damage. Borrower hereby
directs all insurers under such policies of insurance to pay all
proceeds payable thereunder directly to Lender and all proceeds
received by Lender may be applied to the Liabilities in such order and
manner as Lender shall determine. Borrower irrevocably, makes,
constitutes and appoints Lender (and all officers, employees or agents
designated by Lender) as Borrower's true and lawful attorney (and
agent-in-fact) for the purpose of making, settling and adjusting
claims under such policies of insurance, endorsing the name of
Borrower on any check, draft, instrument or other item of payment for
the proceeds of such policies of insurance and making all
determinations and decisions with respect to such policies of
insurance; and
(ii) maintain, at its expense, such public liability and third
party property damage insurance as is customary for Persons engaged in
businesses similar to that of Borrower with such companies and in such
amounts, with such deductibles and under policies in such form as
shall be satisfactory to Lender and, at the request of Lender,
original (or certified) copies of such policies shall be delivered to
Lender, together with evidence of payment of all premiums therefor;
each such policy shall contain an endorsement showing Lender as
additional insured thereunder and providing that the insurance company
shall give Lender at least thirty (30) days written notice before any
such policy shall be altered or cancelled.
If Borrower at any time or times hereafter shall fail to obtain or
maintain any of the policies of insurance required above or to pay any premium
in whole or in part relating thereto, then Lender, without waiving or releasing
any obligation or default by Borrower hereunder, may (but shall be under no
obligation to) obtain and maintain such policies of insurance and pay such
premiums and take such other actions with respect thereto as Lender deems
advisable. All sums disbursed by Lender in connection with any such actions,
including, without limitation, court costs, expenses, other charges relating
thereto and reasonable attorneys' fees, shall constitute Revolving Loans
hereunder and shall be payable on demand by Borrower to Lender and, until paid,
shall bear interest at the rate then applicable to Loans hereunder;
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(f) Borrower shall not use its property, or any part thereof, in any
unlawful business or for any unlawful purpose or use or maintain any of its
property in any manner that does or could result in material damage to the
environment or a violation of any applicable environmental laws, rules or
regulations; shall keep its property in good condition, repair and order; shall
permit Lender to examine any of its property at any time; shall not permit its
property, or any part thereof, to be levied upon under execution, attachment,
distraint or other legal process; shall not grant a security interest in or
suffer to exist a lien on any of its property other than the Permitted Liens;
shall not sell, lease, transfer or otherwise dispose of any of its property
except in the ordinary course of its business; and shall not secrete or abandon
any of its property, or remove or permit removal of any of its property from any
of the locations listed on Schedule 1 of EXHIBIT A or in any written notice to
Lender pursuant to paragraph 10(b) hereof, except for the removal of Inventory
sold in the ordinary course of Borrower's business;
(g) all monies and other property obtained by Borrower from Lender
pursuant to this Agreement will be used solely for business purposes of
Borrower;
(h) Borrower shall, at the request of Lender, indicate on its records
concerning the Collateral a notation, in form satisfactory to Lender, of the
security interest of Lender hereunder, and Borrower shall not maintain
duplicates or copies of such records at any address other than Borrower's
principal place of business set forth on the first page of this Agreement;
(i) Borrower shall file all required tax returns and pay all of its
taxes when due, including, without limitation, taxes imposed by federal, state
or municipal agencies, and shall cause any liens for taxes to be promptly
released; provided, that Borrower shall have the right to contest the payment of
such taxes in good faith by appropriate proceedings so long as (i) the amount so
contested is shown on Borrower's financial statements, (ii) the contesting of
any such payment does not give rise to a lien for taxes, (iii) Borrower keeps on
deposit with Lender (such deposit to bear interest at a rate reasonably
determined by Lender) an amount of money which, in the sole judgment of Lender,
is sufficient to pay such taxes and any interest or penalties that may accrue
thereon, and (iv) if Borrower fails to prosecute such contest with reasonable
diligence, Lender may apply the money so deposited in payment of such taxes. If
Borrower fails to pay any such taxes and in the absence of any such contest by
Borrower, Lender may (but shall be under no obligation to) advance and pay any
sums required to pay any such taxes and/or to secure the release of any lien
therefor, and any sums so advanced by Lender shall constitute Revolving Loans
hereunder, shall be payable by Borrower to Lender on demand, and, until paid,
shall bear interest at the rate then applicable to Loans hereunder;
(j) Borrower shall not assume, guarantee or endorse, or otherwise
become liable in connection with, the obligations of any Person, except by
endorsement of instruments for deposit or collection or similar transactions in
the ordinary course of business;
(k) Borrower shall not enter into any merger or consolidation, or
enter into any transaction outside the ordinary course of Borrower's
business, including, without limitation, any purchase, redemption or
retirement of any shares of any class of its stock, and any issuance of any
shares of, or warrants or other rights to receive or purchase any shares of,
any class of its
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stock; provided, however, that the parties agree that the following
transactions, without limitation, shall be deemed to be within the ordinary
course of the Borrower's business: (1) the granting of options, and the
issuance of stock upon the exercise of such options, pursuant to any stock
option plan duly adopted by the Borrower's shareholders; (2) the issuance of
common stock upon the exercise of currently outstanding warrants to purchase
up to 300,000 shares of such stock; and (3) the future issuance of warrants
to purchase up to 100,000 shares of common stock per year, and the issuance
of stock upon exercise of such warrants.
(l) Borrower shall not declare or pay any dividend or other
distribution (whether in cash or in kind) on any class of its stock;
(m) After the date of this Agreement, Borrower shall not make any
loans or similar advances to any of its officers or any Person related to any
such officer;
(n) Borrower shall (i) keep in full force and effect any and all
plans which may, from time to time, come into existence under ERISA, unless such
Plans can be terminated without liability to Borrower; (ii) make contributions
to all of the Plans in a timely manner and in a sufficient amount to comply with
the requirements of ERISA; (iii) comply with all material requirements of ERISA
which relate to Plans (including, without limitation, the minimum funding
standards of Section 302 of ERISA); and (iv) notify Lender immediately upon
receipt by Borrower of any notice of the institution of any proceeding or other
action which may result in the termination of any Plans;
(o) Borrower shall not invest in, purchase or otherwise acquire, or
contract to invest in, purchase or otherwise acquire, the obligations or stock
of any Person, other than direct obligations of the United States;
(p) Borrower shall not amend its organizational documents or change
its fiscal year;
(q) Borrower shall reimburse Lender for all costs and expenses,
including, without limitation, legal expenses and reasonable attorneys' fees,
incurred by Lender in connection with documentation and consummation of this
transaction and any other transactions between Borrower and Lender, including,
without limitation, Uniform Commercial Code and other public record searches,
lien filings, Federal Express or similar express or messenger delivery,
appraisal costs, surveys, title insurance and environmental audit or review
costs, and in seeking to administer, collect, protect or enforce any rights in
or to the Collateral or incurred by Lender in seeking to collect any Liabilities
and to administer, participate, assign and/or enforce any of Lender's rights
under this Agreement and the Other Agreements. All such costs, expenses and
charges shall constitute Revolving Loans hereunder, shall be payable by Borrower
to Lender on demand, and, until paid, shall bear interest at the rate then
applicable to Loans hereunder;
(r) Borrower at all times shall comply with the following financial
covenants:
-21-
<PAGE>
(i) Borrower shall not make or incur any capital expenditures
(as such term is defined in accordance with GAAP), exceeding $1,500,000 in
the aggregate during any fiscal year (beginning with the fiscal year ending
December 31, 1997).
(ii) Borrower shall achieve net profit after taxes and before
extraordinary gains (as such terms are defined in accordance with GAAP) for
each fiscal year of at least $500,000 per fiscal year beginning with the
fiscal year ending December 31, 1997.
(iii) Borrower shall achieve net profit before extraordinary
gains (as such terms are defined in accordance with GAAP) of at least zero
($0) for each fiscal quarter beginning with the fiscal quarter commencing
on April 1, 1997.
(iv) Total liabilities of Borrower to tangible net worth of
Borrower (as such term is defined in accordance with GAAP) shall not exceed
2.50 to 1.0 at any time.
(v) Borrower's minimum tangible net worth (as such term is
defined in accordance with GAAP) shall not be less than (A) $6,600,000 for
the fiscal year ended December 31, 1996 and (B) for each fiscal quarter
(calculated at the end of the fiscal quarter), commencing with the fiscal
quarter beginning January 1, 1997, $6,600,000 plus 90% of net income after
taxes from and after January 1, 1997 plus any additional new equity
contributed to Borrower or invested in Borrower after January 1, 1997. The
calculation of tangible net worth pursuant to this subsection (v) shall
exclude all intangible assets and other similar assets and shall include
the Subordinated Debt.
(vi) Borrower shall maintain a ratio of earnings before interest
and taxes to interest expense (as such terms are defined in accordance with
GAAP) of at least 2.0 to 1 for each fiscal quarter, calculated at the end
of each fiscal quarter, commencing with the quarter beginning April 1,
1997;
(s) Within fifteen days after the making of any Equipment Loan,
Borrower shall provide to Lender evidence that the proceeds of such Equipment
Loan have been used to acquire Acceptable Equipment, which evidence may include,
but shall not be limited to a bill of sale or certificate of title; and
(t) Immediately upon request by Lender, Borrower shall take all
actions necessary to comply with the Assignment of Claims Act of 1940, as
amended.
(u) Immediately upon request of Lender, Borrower shall provide a list
of each location at which any Equipment or other Collateral is located (which
list shall include not only offices but each individual job site) and
immediately take all actions required by Lender and execute all UCC Financing
Statements required by Lender in order to allow Lender to be fully perfected in
each such jurisdiction.
-22-
<PAGE>
13. DEFAULT. The occurrence of any one or more of the following events
shall constitute an "Event of Default" by Borrower hereunder:
(a) the failure of any Obligor to pay any of the Liabilities when
due;
(b) the failure of any Obligor to perform, keep or observe any of the
covenants, conditions, promises, agreements or obligations of such obligor under
this Agreement or any of the Other Agreements;
(c) the failure of any Obligor to perform, keep or observe any of the
covenants, conditions, promises, agreements or obligations of such Obligor under
any other agreement with any Person if such failure may have a material adverse
effect on such Obligor's business property, assets, operations or condition,
financial or otherwise;
(d) the making or furnishing by any Obligor to Lender of any
representation, warranty, certificate, schedule, report or other communication
within or in connection with this Agreement or the or the Other Agreements or in
connection with any other agreement between such Obligor and Lender, which is
untrue or misleading any respect;
(e) the making of any levy, seizure or attachment of any of
Borrower's property with a fair market value in excess of $100,000 in the
aggregate;
(f) the commencement of any proceedings in bankruptcy by or against
any Obligor or for the liquidation or reorganization of any Obligor, or alleging
that such Obligor is insolvent or unable to pay its debts as they mature, or for
the readjustment or arrangement of any Obligor's debts, whether under the United
States Bankruptcy Code or under any other law, whether state or federal, now or
hereafter existing for the relief of debtors, or the commencement of any
analogous statutory or non-statutory proceedings involving any Obligor;
provided, however, that if such commencement of proceedings against such Obligor
is involuntary and such Obligor is contesting such proceedings in good faith,
such action shall not constitute an Event of Default unless such proceedings are
not dismissed within thirty (30) days after the commencement of such
proceedings;
(g) the appointment of a receiver or trustee for any Obligor, for any
of the Collateral or for any substantial part of any Obligor's assets or the
institution of any proceedings for the dissolution, or the full or partial
liquidation, of any Obligor which is a corporation or a partnership; provided,
however, that if such appointment or commencement of proceedings against such
Obligor is involuntary and such Obligor is contesting such proceedings in good
faith, such action shall not constitute an Event of Default unless such
appointment is not revoked or such proceedings are not dismissed within thirty
(30) days after the commencement of such proceedings;
(h) the entry of any judgment or order against any Obligor which
remains unsatisfied or undischarged and in effect for thirty (30) days after
such entry without a stay of enforcement or execution;
-23-
<PAGE>
(i) the death of any Obligor who is a natural Person or the
dissolution of any Obligor which is a partnership or corporation;
(j) the occurrence of a change of control, direct or indirect, of
Borrower;
(k) the occurrence of an event of default under, or the revocation or
termination of, any agreement, instrument or document executed and delivered by
any Person to Lender pursuant to which such Person has guaranteed to Lender the
payment of all or any of the Liabilities or has granted Lender a security
interest in or lien upon some or all of such Person's real and/or personal
property to secure the payment of all or any of the Liabilities;
(l) the institution in any court of a criminal proceeding against any
Obligor, or the indictment of any Obligor for any crime; or
(m) there shall occur a material adverse change, as reasonably
determined by Lender, in the condition, financial or otherwise, of the Borrower
or the Collateral.
References herein to an Event of Default having occurred and be continuing
or to the occurrence and continuance of an Event of Default are not intended to
and shall not be construed as providing the Borrower any additional cure periods
other than those specifically set forth in this Section 13 nor shall Lender be
under any obligation to accept any cure from Borrower other than during the cure
period specifically set forth in this Section 13 and any agreement to accept any
cure by Borrower other than during the cure period specifically set forth in
this Section 13 shall be in Lender's sole and absolute discretion.
14. REMEDIES UPON AN EVENT OF DEFAULT.
(a) Upon the occurrence of an Event of Default described in
paragraph 13(f) hereof, all of Borrower's Liabilities shall immediately and
automatically become due and payable, without notice of any kind and upon the
occurrence of any other Event of Default, all Liabilities may, at the option of
Lender, and without demand, notice or legal process of any kind, be declared,
and immediately shall become, due and payable.
(b) Upon the occurrence of an Event of Default, Lender may exercise
from time to time any rights and remedies available to it under the Uniform
Commercial Code and any other applicable law in addition to, and not in lieu of,
any rights and remedies expressly granted in this Agreement or in any of the
Other Agreements and all of Lender's rights and remedies shall be cumulative and
non-exclusive to the extent permitted by law. In particular, but not by way of
limitation of the foregoing, Lender may, without notice, demand or legal process
of any kind, take possession of any or all of the Collateral (in addition to
Collateral of which it already has possession), wherever it may be found, and
for that purpose may pursue the same wherever it may be found, and may enter
into any of Borrower's premises where any of the Collateral may be, and search
for, take possession of, remove, keep and store any of the Collateral until the
same shall be sold or otherwise disposed of, and Lender shall have the right to
store the same at any of
-24-
<PAGE>
Borrower's premises without cost to Lender. At Lender's request, Borrower
shall, at Borrower's expense, assemble the Collateral and make it available to
Lender at one or more places to be designated by Lender and reasonably
convenient to Lender and Borrower. Borrower recognizes that if Borrower fails
to perform, observe or discharge any of its Liabilities under this Agreement or
the Other Agreements, no remedy at law will provide adequate relief to Lender,
and agrees that Lender shall be entitled to temporary and permanent injunctive
relief in any such case without the necessity of proving actual damages. Any
notification of intended disposition of any of the Collateral required by law
will be deemed reasonably and properly given if given at least ten (10) calendar
days before such disposition. Any proceeds of any disposition by Lender of any
of the Collateral may be applied by Lender to the payment of expenses in
connection with the Collateral, including, without limitation, legal expenses
and reasonable attorneys' fees, and any balance of such proceeds may be applied
by Lender toward the payment of such of the Liabilities, and in such order of
application, as Lender may from time to time elect, including, without
limitation, to provide cash collateral to secure the Letters of Credit.
15. INDEMNIFICATION. Borrower agrees to defend (with counsel satisfactory
to Lender), protect, indemnify and hold harmless Lender, each Affiliate of
Lender, and each of their respective officers, directors, employees, attorneys
and agents (each an "Indemnified Party") from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, expenses and disbursements of any kind or nature (including,
without limitation, the disbursements and the reasonable fees of counsel for
each Indemnified Party in connection with any investigative, administrative or
judicial proceeding, whether or not the Indemnified Party shall be designated a
party thereto), which may be imposed on, incurred by, or asserted against, any
Indemnified Party (whether direct, indirect or consequential and whether based
on any federal, state or local laws or regulations, including, without
limitation, securities, environmental and commercial laws and regulations, under
common law or in equity, or based on contract or otherwise) in any manner
relating to or arising out of this Agreement or any Other Agreement, or any act,
event or transaction related or attendant thereto, the making and the management
of the Loans or any Letters of Credit or the use or intended use of the proceeds
of the Loans or any Letters of Credit; provided, however, that Borrower shall
not have any obligation hereunder to any Indemnified Party with respect to
matters caused by or resulting from the willful misconduct or gross negligence
of such Indemnified Party. To the extent that the undertaking to indemnify set
forth in the preceding sentence may be unenforceable because it is violative of
any law or public policy, Borrower shall satisfy such undertaking to the maximum
extent permitted by applicable law. Any liability, obligation, loss, damage,
penalty, cost or expense covered by this indemnity shall be paid to each
Indemnified Party on demand, and, failing prompt payment, shall, together with
interest thereon at the highest rate then applicable to Loans hereunder from the
date incurred by each Indemnified Party until paid by Borrower, be added to the
Liabilities of Borrower and be secured by the Collateral. The provisions of
this Section 15 shall survive the satisfaction and payment of the other
Liabilities and the termination of this Agreement.
16. NOTICE. All written notices and other written communications with
respect to this Agreement shall be sent by ordinary, certified or overnight
mail, by telecopy or delivered in person, and in the case of Lender shall be
sent to it at One Tabor Center, 1200 Seventeenth
-25-
<PAGE>
Street, Suite 2760, Denver, Colorado 80202, and in the case of Borrower shall be
sent to it at its principal place of business set forth on the first page of
this Agreement, Attention: Rick C. Townsend.
17. CHOICE OF GOVERNING LAW; CONSTRUCTION; FORUM SELECTION. This
Agreement and the Other Agreements are submitted by Borrower to Lender for
Lender's acceptance or rejection as an offer by Borrower to borrow monies from
Lender now and from time to time hereafter, and shall not be binding upon Lender
or become effective until accepted by lender, in writing. If so accepted by
Lender, this Agreement and the Other Agreements shall be deemed to have been
made at said place of business. THIS AGREEMENT AND THE OTHER AGREEMENTS SHALL
BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE STATE OF COLORADO AS TO
INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER
RESPECTS, INCLUDING, WITHOUT LIMITATION, THE LEGALITY OF THE INTEREST RATE AND
OTHER CHARGES, BUT EXCLUDING PERFECTION OF THE SECURITY INTERESTS IN THE
COLLATERAL, WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE RELEVANT
JURISDICTION. If any provision of this Agreement shall be held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or remaining provisions of this Agreement.
To induce Lender to accept this Agreement, Borrower irrevocably agrees
that, subject to Lender's sole and absolute election, ALL ACTIONS OR PROCEEDINGS
IN ANY WAY, MANNER OR RESPECT ARISING OUT OF OR FROM OR RELATED TO THIS
AGREEMENT, THE OTHER AGREEMENTS OR THE COLLATERAL SHALL BE LITIGATED IN COURTS
HAVING SITUS WITHIN THE CITY OF DENVER, STATE OF COLORADO. BORROWER HEREBY
CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS
LOCATED WITHIN SAID CITY AND STATE. BORROWER HEREBY WAIVES ANY RIGHT IT MAY
HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST BORROWER
BY LENDER IN ACCORDANCE WITH THIS SECTION.
18. PARTICIPATION; ASSIGNMENT. Lender shall have the right to sell or
assign all or any of its rights under this Agreement and the Other Agreements,
and/or to offer participation interests therein or to syndicate the Loans, to
any Person, without the consent of Borrower; provided Lender retains at least a
50% interest in the Loans. In such event, Borrower shall execute such
agreements, instruments and documents as Lender shall request in connection
therewith, including, without limitation, agreements, instruments and documents
in favor of each assignee and participant.
19. MODIFICATION AND BENEFIT OF AGREEMENT. This Agreement and the Other
Agreements may not be modified, altered or amended except by an agreement in
writing signed by Borrower and Lender. Borrower may not sell, assign or
transfer this
-26-
<PAGE>
Agreement, or the Other Agreement or any portion thereof, including, without
limitation, Borrower's rights, titles, interest, remedies, powers or duties
thereunder.
20. HEADINGS OF SUBDIVISIONS. The headings of subdivisions in this
Agreement are for convenience of reference only, and shall not govern the
interpretation of any of the provisions of this Agreement.
21. POWER OF ATTORNEY. Borrower acknowledges and agrees that its
appointment of Lender as its attorney and agent-in-fact for the purposes
specified in this Agreement is an appointment coupled with an interest and shall
be irrevocable until all of the Liabilities are paid in full and this Agreement
is terminated.
22. WAIVER OF JURY TRIAL; OTHER WAIVERS.
(a) BORROWER HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION
OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, ANY OF
THE OTHER AGREEMENTS, THE LIABILITIES, THE COLLATERAL, ANY ALLEGED TORTIOUS
CONDUCT BY BORROWER OR LENDER OR WHICH, IN ANY WAY, DIRECTLY OR INDIRECTLY,
ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN BORROWER AND LENDER. IN NO
EVENT SHALL LENDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL
DAMAGES.
(b) Borrower hereby waives demand, presentment, protest and notice of
nonpayment, and further waives the benefit of all valuation, appraisal and
exemption laws.
(c) BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY
KIND PRIOR TO THE EXERCISE BY LENDER OF ITS RIGHTS TO REPOSSESS THE COLLATERAL
OF BORROWER WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH
COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.
(d) Lender's failure, at any time or times hereafter, to require
strict performance by Borrower of any provision of this Agreement or any of the
Other Agreements shall not waive, affect or diminish any right of Lender
thereafter to demand strict compliance and performance therewith. Any
suspension or waiver by Lender of an Event of Default under this Agreement or
any default under any of the Other Agreements shall not suspend, waive or affect
any other Event of Default under this Agreement or any other default under any
of the Other Agreements, whether the same is prior to subsequent thereto and
whether of the same or of a different kind or character. No delay on the part
of Lender in the exercise of any right or remedy under this Agreement or any
Other Agreement shall preclude other or further exercise thereof or the exercise
of any right or remedy. None of the undertakings, agreements, warranties,
covenants and representations of Borrower contained in this Agreement or any of
the Other Agreements and no Event of Default under this Agreement or default
under any of the Other Agreements shall be deemed to have been suspended or
waived by Lender unless such suspension or waiver is in
-27-
<PAGE>
writing, signed by a duly authorized officer of Lender and directed to Borrower
specifying such suspension or waiver.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the 29th day of May, 1997.
NATIONAL BANK OF CANADA, a Canadian chartered bank
By /S/
-----------------------------------------------------
Name: Andrew M. Conneen, Jr.
Title: Vice President
CET ENVIRONMENTAL SERVICES, INC., a California
corporation
By /S/
-----------------------------------------------------
Name Rick C. Townsend
Title: Executive Vice President
-28-
<PAGE>
LIST OF EXHIBITS
A - Business and Collateral Locations (Representation and Warranty
Certificate)
B - Permitted Liens
C - Indebtedness
D - Owned Vehicles
<PAGE>
EXHIBIT A
BUSINESS AND COLLATERAL LOCATIONS
(REPRESENTATION AND WARRANTY CERTIFICATE)
ATTACHED
<PAGE>
EXHIBIT B
PERMITTED LIENS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
SECURED PARTY FILING OFFICE COLLATERAL FILING FILING
NAME DATE NO.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RDO Equipment Inc., dba Arizona Secretary Reed Screen-All Model CV- 05/24/96 899361-0
Arizona Industrial of State 40-D Serial No. 1507
Machinery Co.
- --------------------------------------------------------------------------------------------------------------
Associates Capital Services Louisiana Central All present and future 07/10/95 08-371206
Corp. Filing Motorola products
- --------------------------------------------------------------------------------------------------------------
Power Motive Corporation Colorado Secretary RD40B S/N 40B986 08/29/95 952064813
of State
- --------------------------------------------------------------------------------------------------------------
Power Motive Corporation Colorado Secretary WA250 S/N A65514 09/18/96 962069669
of State
- --------------------------------------------------------------------------------------------------------------
American Compressor California Secretary 300 CFM @ 7 PSIG 12.2 09/13/93 93185583
Company of State BHP 91.6 dba s/n 8457 SM
- --------------------------------------------------------------------------------------------------------------
Bengal Equipment and California Secretary Used JCB Model 505-19 07/14/94 94143540
Tractor Co. of State Loadall
- --------------------------------------------------------------------------------------------------------------
Paragon Environmental California Secretary ICON Fluid Bed Solvent 12/02/96 9633760756
Systems, Inc. of State Recovery System
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT C
INDEBTEDNESS
ATTACHED
<PAGE>
EXHIBIT D
VEHICLES
ATTACHED
<PAGE>
EXHIBIT 21
CET ENVIRONMENTAL SERVICES, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF % CET
COMPANY INCORPORATION OWNERSHIP
- --------------------------------------------------------------------------------
<S> <C> <C>
Water Quality Management Corporation Colorado 100%
- --------------------------------------------------------------------------------
H2O Construction & Maintenance, Inc. Colorado 100%
</TABLE>
<PAGE>
[LETTERHEAD]
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
Denver, Colorado
March 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 343,878
<SECURITIES> 0
<RECEIVABLES> 10,953,562
<ALLOWANCES> (642,097)
<INVENTORY> 13,344,219
<CURRENT-ASSETS> 25,089,253
<PP&E> 7,727,495
<DEPRECIATION> (3,921,131)
<TOTAL-ASSETS> 29,882,811
<CURRENT-LIABILITIES> 12,970,393
<BONDS> 2,005,070
0
0
<COMMON> 8,235,589
<OTHER-SE> 473,128
<TOTAL-LIABILITY-AND-EQUITY> 29,882,811
<SALES> 54,169,753
<TOTAL-REVENUES> 54,169,753
<CGS> 0
<TOTAL-COSTS> 49,038,570
<OTHER-EXPENSES> 4,887,446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 704,575
<INCOME-PRETAX> (460,838)
<INCOME-TAX> (113,547)
<INCOME-CONTINUING> (347,291)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (347,291)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
