<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to ________.
Commission File Number 1-13852
CET ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0285964
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7670 SOUTH VAUGHN COURT, ENGLEWOOD, COLORADO 80112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 708-1360
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No .
--- ---
As of August 10, 1999, 6,284,288 shares of common stock, no par value per
share, were outstanding.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------------ ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash........................................................... $ 511 $ 25
Accounts receivable, less allowance for doubtful accounts of
$552 and $722 in 1999 and 1998, respectively................ 4,610 11,781
Contracts in process, less allowance for doubtful accounts of
$119 and $284 in 1999 and 1998, respectively............... 4,957 10,154
Prepaid expenses and other current assets...................... 2,437 4,710
----------- -----------
Total current assets.................................. 12,515 26,670
EQUIPMENT AND IMPROVEMENTS, NET......................................... 3,741 3,480
OTHER ASSETS............................................................ 55 52
----------- -----------
$ 16,311 $ 30,202
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
1
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CET ENVIRONMENTAL SERVICES, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
---------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES:
Cash overdraft................................................... $ 703 $ 1,937
Accounts payable................................................. 3,224 11,383
Accrued expenses................................................. 1,224 3,249
Current portion of long-term debt and capital lease
obligations.................................................. 943 1,067
Line of credit................................................... 1,847 1,040
Other current liabilities........................................ - 159
---------------- -----------------
Total current liabilities............................... 7,941 18,835
DEFERRED INCOME TAXES..................................................... - -
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS.............................. 113 251
COMMITMENTS AND CONTINGENT LIABILITIES.................................... - -
STOCKHOLDERS' EQUITY
Common stock (no par value) - authorized 20.0 million shares;
issued and outstanding 6.3 million and 6.1 million shares
in 1999 and 1998, respectively............................... 8,671 8,540
4% convertible Preferred Stock (no par value) - authorized 5.0
million shares; -0- and 1,710 shares issued and outstanding
in 1999 and 1998, respectively............................... - 1,589
Paid-in capital.................................................. 105 574
Retained earnings (deficit)...................................... (519) 413
---------------- -----------------
Total stockholders' equity.............................. 8,257 11,116
---------------- -----------------
$ 16,311 $ 30,202
---------------- -----------------
---------------- -----------------
</TABLE>
The accompanying notes are an integral part of these statements.
2
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CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- ------------------------------
1999 1998 1999 1998
-------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
PROJECT REVENUE........................................ $ 8,503 $ 16,005 $ 21,448 $ 27,460
PROJECT COSTS
Direct........................................ 6,251 13,470 15,775 22,538
Indirect...................................... 2,048 1,741 3,813 3,513
-------------- --------------- ------------- -------------
8,299 15,211 19,588 26,051
Gross profit......................... 204 794 1,860 1,409
OPERATING EXPENSES
Selling....................................... 404 481 712 934
General and administrative.................... 968 665 1,646 1,302
-------------- --------------- ------------- -------------
1,372 1,146 2,358 2,236
-------------- --------------- ------------- -------------
Operating income (loss)............. (1,168) (352) (498) (827)
OTHER INCOME (EXPENSE), NET............................ (325) (252) (429) (438)
-------------- --------------- ------------- -------------
Income (loss) before income taxes.... (1,493) (604) (927) (1,265)
Provision (credit) for income taxes.. (215) - - 4
-------------- --------------- ------------- -------------
NET INCOME (LOSS)...................................... $ (1,278) $ (604) $ (927) $(1,269)
-------------- --------------- ------------- ------------
-------------- --------------- ------------- ------------
Earnings (loss) per common share....................... $ (0.20) $ (0.10) $ (0.15) $ (0.22)
-------------- --------------- ------------- ------------
-------------- --------------- ------------- ------------
Earnings (loss) per common share-assuming dilution .... $ (0.20) $ (0.10) $ (0.15) $ (0.22)
-------------- --------------- ------------- ------------
-------------- --------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
3
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CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................................... $ (927) $ (1,269)
Adjustments to reconcile net income to net cash provided by (used in)
Operating activities:
Depreciation and amortization................................. 430 752
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable........... 7,171 (3,077)
Decrease (Increase) in contracts in process.......... 5,197 2,056
Decrease (Increase) in prepaid expenses and other
assets........................................... 1,000 (3)
(Decrease) Increase in accounts payable and
accrued expenses................................. (10,184) (1,360)
Other................................................ (159) -
---------------- ---------------
Net cash provided by (used in) operating activities.. 2,528 (2,901)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment.................................................. (691) (436)
Purchase of subsidiary................................................. - (477)
Proceeds from sale of subsidiary....................................... 1,250 -
---------------- ---------------
Net cash provided by (used in) investing activities.. 559 (913)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subordinated debt............................ - 3,908
Payments on debt and capital lease obligations......................... (262) (415)
Proceeds from exercise of Employee Stock Options....................... - 17
Preferred Stock dividends.............................................. (5) -
Preferred Stock redemption............................................. (1,927) -
Net borrowings on line of credit....................................... 807 1,798
Proceeds on loans from shareholders.................................... - 825
Payments on loan to related party...................................... 20 -
Bank overdraft......................................................... (1,234) -
---------------- ---------------
Net cash provided by (used in) financing activities........... (2,601) 6,133
---------------- ---------------
INCREASE (DECREASE) IN CASH............................................ 486 2,319
Cash at the beginning period........................................... 25 344
---------------- ---------------
Cash at end of period.................................................. $ 511 $ 2,663
---------------- ---------------
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
4
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CET ENVIRONMENTAL SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1. BASIS OF PRESENTATION. The accompanying unaudited financial statements
have been prepared in accordance with generally accepted accounting
principles for condensed interim financial statements and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. Certain amounts in the 1998
financial statements have been reclassified to conform to the 1999
presentation. Management does not believe the effect of such
reclassifications is material. Operating results for the quarter and
six months ended June 30, 1999 are not necessarily indicative of
results that may be expected for the year ending December 31, 1999. For
further information, refer to the audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
NOTE 2. EARNINGS PER 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.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
-------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Numerator
Net Income (loss) $ (1,278) $ (604) $ (927) $ (1,269)
Preferred Stock dividends - - (5) -
-------------- ------------- ------------ --------------
Numerator for basic earnings per share -
income available to common stockholders (1,278) (604) (932) (1,269)
Effect of dilutive securities:
Preferred Stock dividends - - - -
-------------- ------------- ------------ --------------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions $ (1,278) $ (604) $ (932) $ (1,269)
-------------- ------------- ------------ --------------
-------------- ------------- ------------ --------------
Denominator:
Denominator for basic earnings per share -
weighted average shares outstanding 6,284 5,809 6,280 5,809
Effect of dilutive securities:
Warrants - - - -
Convertible Preferred Stock - - - -
Stock options - - - -
-------------- ------------- ------------ --------------
Dilutive potential common shares - - - -
-------------- ------------- ------------ --------------
Denominator for diluted earnings per share -
adjusted weighted average share and
assumed conversion 6,284 5,809 6,280 5,809
-------------- ------------- ------------ --------------
Basic earnings (loss) per share $ (0.20) $ (0.10) $ (0.15) $ (0.22)
-------------- ------------- ------------ --------------
-------------- ------------- ------------ --------------
Diluted earnings (loss) per share $ (0.20) $ (0.10) $ (0.15) $ (0.22)
-------------- ------------- ------------ --------------
-------------- ------------- ------------ --------------
</TABLE>
5
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CET ENVIRONMENTAL SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS - CONTINUED
NOTE 3. SALE OF SUBSIDIARY. Effective December 1, 1998, the Company sold all
of the outstanding shares of its subsidiary, Water Quality Management
Corporation ("WQM") for a sale price of $12.5 million plus an
adjustment for net working capital of WQM at November 30, 1998. The
Company received $11.3 million at the date of sale and in the first
quarter of 1999 received an additional 1.2 million. As of June 30,
1999, the Company has included in other receivables remaining amounts
due on the sale of WQM.
NOTE 4. LINE OF CREDIT AND LONG TERM DEBT. On May 30, 1997, the Company entered
into a financing agreement (the "Original Agreement") with National
Bank of Canada. The Original Agreement provides for a line of credit
(the "Credit Facility"), a term loan, and a $0.5 million stand-by
letter of credit which in total shall not exceed the lesser of $7.5
million or a percentage of eligible receivables (as defined in the
Original Agreement). Interest is payable under the Original Agreement
at the Bank's Reference Rate plus .25% (8.25% as of June 30, 1999). The
Original Agreement had an expiration date of May 30, 1999 upon which
amounts outstanding under the Credit Facility and term loan became due
and payable. Pursuant to subsequent amendments to the Agreement, the
maturity date of the Original Agreement has been extended to August 27,
1999. In addition, the Original Agreement contains certain financial
covenants which must be maintained. As of June 30, 1999, the Company
was not in compliance with certain of these covenants.
The Company is currently in the process of working out a new
arrangement with National Bank of Canada (Bank). As a result of the EPA
suspension (Note 6), the Bank has agreed to extend the current
agreement to August 27, 1999. The Bank has reduced the revolver to
$6,000,000 from $7,500,000 and has agreed to advance the Company
necessary funds on a discretionary basis. The Bank may discontinue
advancing funds on the loans at any time. CET's management is currently
reviewing its liquidity needs and is planning to investigate other
liquidity arrangements.
NOTE 5. STOCKHOLDERS' EQUITY. In July 1998, the Company completed a private
placement of 2,000 shares of 4% convertible Preferred Stock (the
"Preferred Stock") providing net proceeds of approximately $1.9
million. The Preferred Stock is convertible into shares of common stock
based on the stated value of $1,000 per share of Preferred Stock
divided by conversion price on the conversion date. The conversion
price is equal to 85% of the lowest closing price of the common stock
during the six days immediately preceding the conversion date, not to
exceed $3.35. A total of 290 shares of Preferred Stock were converted
into 317,786 shares of common stock in 1998 and a total of 140 shares
of Preferred Stock were converted into 155,017 shares of common stock
in 1999. Additionally, in January 1999, the Company redeemed the
remaining shares of Preferred Stock for approximately $1.9 million.
Warrants totaling 35,000 issued to the placement agent in the offering
remain outstanding.
NOTE 6. CONTINGENCIES. On August 10, 1999, CET Environmental Services, Inc.
(AMEX: "ENV") received a notice from the Environmental Protection
Agency (EPA) that it had been suspended, pending further review, from
receiving additional government contracts. The suspension does allow
CET to continue performance on existing contracts. The suspension does
prevent CET from being awarded new contracts under the provisions of 48
C.F.R. Subpart 9.4 of the Federal Acquisition Regulations. The EPA
represents approximately 63% of CET's revenue during 1999. The
Company has been advised that the EPA's Office of Inspector General
Western Investigative Division is in the process of conducting
several investigations of the Company relating to the issues underlying
the Notice of Suspension. It appears that these investigations are
being conducted under the direction of the United States Department of
Justice, particularly the United States Attorney's Office for the
Western District of Washington in Seattle, Washington. The precise
nature of the inquiry being directed by the Department of Justice is
not known to the Company at this time, but the Company is presently
in the process of attempting to obtain as much information in that
regard as possible. CET's management, after a review of available
information and consultation with its legal counsel, believes the
issues raised do not warrant a suspension. The issues relate to
billing and accounting matters occurring in prior years. CET intends
to vigorously pursue having the suspension lifted. However, there can
be no assurance that the Company will prevail in this matter, and if
the suspension is not lifted, it will have an adverse material
effect on the Company's financial position, results of operation, and
liquidity.
6
<PAGE>
While the Company's management believes the EPA suspension is not
warranted, the uncertain relationship with the EPA and the timing of
contract renewals require that certain operational changes be
instituted in the near future. Specifically, there is a significant EPA
Region 10 contract scheduled for renewal at the end of August 1999,
which, under EPA's current interpretation, would preclude CET from
being awarded the renewal. The Company is trying to obtain a contract
modification which would prevent the Company's being precluded from the
award of this renewal. Further, the Company has been informed by the
EPA that their position is that CET will receive no new delivery orders
until the suspension issue is resolved. Management has met with EPA
suspension officials and is vigorously pursuing all administrative and
legal avenues to have the suspension lifted. The Company has a 60-90
day existing backlog of EPA work. Other Federal agencies have continued
to issue delivery orders to CET under existing contracts. Management
is currently preparing a restructuring plan in response to the adverse
impact of the EPA suspension. Due to the fact that the suspension
occurred only 13 days prior to the filing of this report, there has
been insufficient time to estimate the potential restructuring
charge. However, management does anticipate that the charge will be
significant.
The Company filed a Complaint and Jury Demand against AquaSource
Services and Technologies, Inc. ("AquaSource"), a Texas corporation, on
July 15, 1999 for additional amounts due under the Water Quality
Management Stock Purchase Agreement. The Company believes AquaSource
owes $2.8 million attributable to Net Working Capital and an additional
$0.2 million related to expense reimbursements agreed to by the
parties. AquaSource filed a Motion to Dismiss the Complaint but has not
yet filed an Answer to the Complaint. In view of this litigation, CET's
management believes it has adequately provided for potential
uncollectable amounts related to this dispute.
The Company is party to various legal actions arising out of the normal
course of its business. Management believes that the ultimate
resolution of such actions, except as previously disclosed, will not
have a material adverse effect on the Company's financial position,
results of operations and liquidity of the Company. For a discussion of
certain legal proceedings to which the Company is party, see Part I -
Item 3. "Legal Proceedings" in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1999 COMPARED TO QUARTER ENDED JUNE 30, 1998
PROJECT REVENUE. Project revenue decreased $7.5 million or 47% from
$16.0 million in the quarter ended June 30, 1998 to $8.5 million in the
quarter ended June 30, 1999. The decrease results primarily from (i) a $2.8
million decrease in project revenue resulting from the sale of WQM in
December 1998 (see also Note 3 to the Company's Condensed Financial
Statements); (ii) a decline of $1.4 million in revenue provided by EPA
contracts as a result of EPA delays in project commencement; (iii) a decline
of $2.2 million in commercial contract revenue as a result of an overall
decrease in the Company's commercial business during 1999; and (iv) a
decrease of $1.4 million in revenue provided to the Company in 1998 under a
Preplaced Remedial Action Contract ("PRAC") with the U.S. Army Corps of
Engineers.
DIRECT COSTS. Direct costs decreased $7.2 million or 55% from $13.5
million or 84% of project revenue in the quarter ended June 30, 1998 to $6.3
million or 74% of project revenue in the quarter ended June 30, 1999. The
improvement in direct costs as a percentage of project revenue results
primarily from cost overruns incurred in 1998 on one project in the State of
Washington. The net effect of this project on the results for the second
quarter of 1998 was a negative margin of $0.7 million or 5% of revenue.
INDIRECT COSTS. Indirect costs increased from 11% of project revenue
in the quarter ended June 30, 1998 to 24% of project revenue in the quarter
ended June 30, 1999. The increase in indirect costs as a percentage of
project revenue results primarily from the decrease in project revenue
described above.
GROSS PROFIT. Gross profit decreased $0.6 million from $0.8 million
or a gross margin of 5% in the quarter ended June 30, 1998 to $0.2 million or
a gross margin of 2% in the quarter ended June 30, 1999. As described above,
the decline in gross margin in 1999 results primarily from the decline in
project revenue offset by the improvement in direct costs as a percentage of
gross revenue.
OPERATING EXPENSES. Operating expenses increased $.2 million or 19%
for the second quarter ended June 30, 1999, when compared to the second
quarter ended June 30, 1998. This increase is primarily due to an increase in
insurance expense, legal services, training and minor expense
reclassification.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
PROJECT REVENUE. Project revenue decreased $6.0 million or 22% from
$27.5 million in the six months ended June 30, 1998 to $21.5 million in the
six months ended June 30, 1999. The decrease results primarily from (i) a
$4.8 million decrease in project revenue resulting from the sale of WQM in
December 1998 (see also Note 3 to the Company's Condensed Financial
Statements); (ii) a decline of $1.9 million in commercial contract revenue as
a result of an overall decrease in the Company's commercial business during
1999; and (iii) a decrease of $2.0 million in revenue provided to the Company
in 1998 under a Preplaced Remedial Action Contract ("PRAC") with the U.S.
Army Corps of Engineers. Additionally, despite the decline in the second
quarter of 1999, the Company's project revenue provided by EPA contracts
increased $2.4 million during 1999.
DIRECT COSTS. Direct costs decreased $6.8 million or 30% from $22.5
million or 82% of project revenue in the six months ended June 30, 1998 to
$15.8 million or 74% of project revenue in the six months ended June 30,
1999. The improvement in direct costs as a percentage of project revenue
results primarily from cost overruns incurred in 1998 on one project in the
State of Washington.
INDIRECT COSTS. Indirect costs increased from 13% of project revenue
in the six months ended June 30, 1998 to 18% of project revenue in the six
months ended June 30, 1999. The increase in indirect costs as a percentage of
project revenue results primarily from the decrease in project revenue
described above.
8
<PAGE>
GROSS PROFIT. Gross profit increased $0.5 million from $1.4 million
or a gross margin of 5% in the six months ended June 30, 1998 to $1.9 million
or a gross margin of 9% in the six months ended June 30, 1999. As described
above, the decline in gross margin in 1999 results primarily from the decline
in project revenue offset by the improvement in direct costs as a percentage
of gross revenue.
OPERATING EXPENSES. Operating expenses increased $.1 million or 5.4%
for the six months ended June 30, 1999, when compared to the six months ended
June 30, 1998. Operating costs are primarily fixed and do not fluctuate with
volume changes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital declined $3.3 million from $7.8
million as of December 31, 1998 to $4.5 million as of June 30, 1999. The
change in working capital results from a decrease in current assets of $14.2
million compared to a decrease in current liabilities of $10.9 million. The
decrease in current assets results from a continued reduction in combined
receivables of $12.3 million and a decrease in other current assets of $2.3
million resulting from the collection of $1.3 million on the sale of
business. The decrease in current liabilities results primarily from a
reduction of accounts payable and accrued liabilities of $10.2 million.
The Company improved its financial position in 1999 with its focus
on overall operational improvement. The transition in the Company's financial
position in 1999 was primarily the result of the Company's reduction in
current liabilities along with its continued reduction in its outstanding
receivables. The improvement is evidenced by an improvement of the Company's
debt to equity ratio from 1.72 at December 31, 1998 to 0.98 at June 30, 1999.
In addition, the Company reduced its combined receivables from 120 days sales
outstanding as of December 31, 1998 to 80 days sales outstanding as of June
30, 1999 and reduced accounts payable and accrued expenses by $10.2 million.
The Company's cash and cash equivalents increased $0.5 million from
$0.03 million as of December 31, 1998 to $0.5 million as of June 30, 1999. The
increase in cash and cash equivalents is due primarily to cash provided by
operating activities of $2.5 million and cash provided by investing activities
of $0.6 million offset by cash used in financing activities of $2.6 million.
Cash provided by operating activities of $2.5 million results from a combined
reduction in receivables of $12.3 million offset by a decrease of $10.2 million
in accounts payable and accrued expenses. Cash provided by investing activities
of $0.6 million is primarily the result of the receipt of $1.3 million
additional proceeds on the sale of WQM offset by a $0.7 million purchase of
assets during the six months ended June 30, 1999. Cash used in financing
activities of $2.6 million results from a payment of $1.9 million for the
redemption of the Company's Preferred Stock (see also Note 5 to the Company's
Condensed Financial Statements) and a reduction of $1.2 million in the Company's
cash overdraft offset by $0.8 million net borrowings on the Company's line of
credit.
DEBT. As of June 30, 1999, the Company's debt obligations include a
financing agreement with National Bank of Canada. The Original Agreement had
an expiration date of May 30, 1999 upon which amounts outstanding under the
Credit Facility and term loans become immediately due and payable. Pursuant
to subsequent amendments to the Original Agreement, the maturity date of the
Original Agreement has been extended to August 27, 1999. In addition, the
Original Agreement contains certain financial covenants which must be
maintained. As of June 30, 1999, the Company was not in compliance with
certain of these covenants.
The Company is currently in the process of working out a new
arrangement with National Bank of Canada (Bank). As a result of the EPA
suspension, the Bank has agreed to extend the current agreement to August 27,
1999. The Bank has reduced the revolver to $6,000,000 from $7,500,000 and has
agreed to advance the Company necessary funds on a discretionary basis. The
Bank may discontinue advancing funds on the loans at any time. CET's
management is currently reviewing its liquidity needs and is planning to
investigate other liquidity arrangements.
CONTINGENCIES. On August 10, 1999, CET Environmental Services, Inc.
(AMEX: "ENV") received a notice from the Environmental Protection Agency (EPA)
that it had been suspended, pending further review, from
9
<PAGE>
receiving additional government contracts. The suspension does allow CET to
continue performance on existing contracts. The suspension does prevent CET
from being awarded new contracts under the provisions of 48 C.F.R. Subpart
9.4 of the Federal Acquisition Regulations. The EPA represents approximately
63% of CET's revenue during 1999. The Company has been advised that the EPA's
Office of Inspector General Western Investigative Division is in the process
of conducting several investigations of the Company relating to the issues
underlying the Notice of Suspension. It appears that these investigations are
being conducted under the direction of the United States Department of
Justice, particularly the United States Attorney's Office for the Western
District of Washington in Seattle, Washington. The precise nature of the
inquiry being directed by the Department of Justice is not known to the
Company at this time, but the Company is presently in the process of
attempting to obtain as much information in that regard as possible. CET's
management, after a review of available information and consultation with its
legal counsel, believes the issues raised do not warrant a suspension. The
issues relate to billing and accounting matters occurring in prior years. CET
intends to vigorously pursue having the suspension lifted. However, there can
be no assurance that the Company will prevail in this matter, and if the
suspension is not lifted, it will have an adverse material effect on the
Company's financial position, results of operation, and liquidity. See also
Note 6 to the Company's Condensed Financial Statements.
While the Company's management believes the EPA suspension is not
warranted, the uncertain relationship with the EPA and the timing of contract
renewals require that certain operational changes be instituted in the near
future. Specifically, there is a significant EPA Region 10 contract scheduled
for renewal at the end of August 1999, which, under EPA's current
interpretation, would preclude CET from being awarded the renewal. The
Company is trying to obtain a contract modification which would prevent the
Company's being precluded from the award of this renewal. Further, the
Company has been informed by the EPA that their position is that CET will
receive no new delivery orders until the suspension issue is resolved.
Management has met with EPA suspension officials and is vigorously pursuing
all administrative and legal avenues to have the suspension lifted. The
Company has a 60-90 day existing backlog of EPA work. Other Federal agencies
have continued to issue delivery orders to CET under existing contracts.
Management is currently preparing a restructuring plan in response to the
adverse impact of the EPA suspension. Due to the fact that the suspension
occurred only 13 days prior to the filing of this report, there has been
insufficient time to estimate the potential restructuring charge. However,
management does anticipate that the charge will be significant.
CAPITAL COMMITMENTS. As of June 30, 1999, the Company did not have any
material commitments for capital expenditures. The Company has entered into
leases for its existing facilities with such leases expiring at various dates
through 2004. During the six months ended June 30, 1999, capital expenditures
totaled approximately $0.7 million. Management anticipates an increase in
capital expenditures and will fund these expenditures from working capital, term
loans and equipment leases.
YEAR 2000 COMPLIANCE
The Company has assessed the Year 2000 compliance problem and has
determined that it has potential for exposure regarding Year 2000 compliance in
three areas of its internal and external business activities. These areas
include (1) its own internal hardware, software systems, and the
telecommunications systems which are utilized to process and provide the
Company's accounting, operational information, and communications, (2) the
vulnerability of the Company to the failure of other companies to be Year 2000
compliant, and (3) the Year 2000 Compliance efforts of the Environmental
Protection Agency (EPA), a significant client of the Company, on its daily
tracking & billing system. The following discusses management's assessment and
solutions of those risks and the steps that are being taken to minimize them.
INTERNAL HARDWARE, SOFTWARE AND TELECOMMUNICATIONS. During the past 9
months, the Company has been and is replacing or adding new equipment to its
inventory of network and systems computers. The Company has committed
approximately $350,000 for this hardware/software replacement, which has been
financed with its cash resources and with lease financing. The hardware includes
the Company's organization-wide network systems and servers, telephone systems,
and personal computer equipment. The Company will test Year 2000 compliance on
this new hardware/software as it is accepted. In addition, the Company has
contracted for the replacement of its organization-wide accounting, costing, and
management information computer software. This new software will operate the
Company's accounting and operational information systems and will be functional
for use by all of its regional locations. The Vendor has warranted that the
software is Year 2000 compliant. System design is substantially complete,
customization of the software is scheduled, and the staff training has begun and
will continue into the third quarter of 1999. It is estimated that the system
will be installed and functional in the 3rd quarter 1999. The cost of this
system is expected to be approximately $250,000 including software, hardware and
implementation, and training expenses. The primary purpose of acquiring this
system is to provide improved functionality in the area of consolidated
financial reporting, financial project controls, Year 2000 compliance, timely
cost capturing, and management reporting. In addition, the Company has reviewed
its telecommunications systems, analyzed various options, and purchased a new
central telecommunication system that will provide increased functionality
associated with multiple office communication requirements. The new system is
Year 2000 compliant, and installation was completed during the 2nd quarter 1999.
The estimated costs associated with a new telecommunications system are $33,000.
In addition to the above activities, the Company is in the final
process of completing a full inventory and assessment of its computer
hardware, software, and equipment with embedded devices. It is anticipated
that this process will be completed by September 1999. Management intends to
identify any remaining remedial efforts that may be required to ensure its
internal hardware and software systems are Year 2000 complaint.
YEAR 2000 COMPLIANCE OF OTHER COMPANIES. Although the Company
expects its internal systems to be Year 2000 compliant, the failure of any of
its significant vendors or clients to correct a material Year 2000 problem
could result in an interruption in certain normal business activities and
operations. To date, the Company
10
<PAGE>
has received various inquires from its clients and significant vendors to
provide information on Year 2000 compliance or to inform the Company of their
Year 2000 compliance. The Company has been responding to these requests and
notices. Management is not aware of any claims by any client to provide
remedial services under any warranty agreement (stated or implied) for
systems it may have provided, nor is it aware of any system that may have
been provided that may be in violation of any Year 2000 compliance. To the
extent any such claims may be made, the Company intends to address these
issues on a case by case basis.
The Year 2000 problem is not limited to computer hardware and
software. It can affect a multitude of other day-to-day business activities.
Any type of equipment with a microchip that stores and processes dates can be
affected. The company is diligently identifying and addressing these issues
so that its ability to conduct business as usual is not compromised as it
moves into the 21st century. The Company is identifying mission-critical
business functions that rely upon date-sensitive equipment, software, or
hardware. The Company is requesting Year 2000 verification in these areas by
performance testing or certifications that use various types of testing for
compliance, i.e., century byte, hardware clock rollover, hardware clock leap
year, BIOS rollover, BIOS leap year, power-on rollover, and power-on leap
year. Due to the general uncertainty inherent in the Year 2000 problem, the
Company at this time is unable to completely determine if any adverse impact
will be experienced by the Company from other companies' Year 2000 failures.
EPA YEAR 2000 COMPLIANCE. The Company has been working with the EPA
on their efforts to bring their daily tracking & billing system (RCMS) to
Year 2000 compliance. The EPA has been developing a windows-based RCMS, Year
2000 Compliant system and is uncertain when it will be issued to its
contractors. Their efforts are currently in the design testing stage. The
Company expects some amount of problems that are inherent to conforming to a
new windows-based system. Given the current assurances from the EPA of their
compliance, the Company is only anticipating the normal conversion problems.
(i.e., DOS-based vs. Windows-based interaction).
While the Company may be vulnerable to other companies' Year 2000
compliance failures, the Company is well positioned to minimize the Year 2000
impact. The Company believes that with the implementation of its new
hardware, software, up-grades to our office equipment, and completion of its
assessment of vendors and clients, the possibility of significant
interruptions of normal operations has been greatly reduced.
11
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company filed a Complaint and Jury Demand against AquaSource
Services and Technologies, Inc. ("AquaSource"), a Texas corporation, on
July 15, 1999 for additional amounts due under the Water Quality
Management Stock Purchase Agreement. The Company believes AquaSource
owes $2.8 million attributable to Net Working Capital and an additional
$238,000 related to expense reimbursements agreed to by the parties.
AquaSource filed a Motion to Dismiss the Complaint but has not yet
filed an Answer to the Complaint. See also Note 3 to the Company's
Condensed Financial Statements.
On August 10, 1999, CET Environmental Services, Inc. (AMEX: "ENV")
received a notice from the Environmental Protection Agency (EPA) that
it had been suspended, pending further review, from receiving
additional government contracts. The suspension does allow CET to
continue performance on existing contracts. The suspension does prevent
CET from being awarded new contracts under the provisions of 48 C.F.R.
Subpart 9.4 of the Federal Acquisition Regulations. The EPA represents
approximately 63% of CET's revenue during 1999. The
Company has been advised that the EPA's Office of Inspector General
Western Investigative Division is in the process of conducting
several investigations of the Company relating to the issues underlying
the Notice of Suspension. It appears that these investigations are
being conducted under the direction of the United States Department of
Justice, particularly the United States Attorney's Office for the
Western District of Washington in Seattle, Washington. The precise
nature of the inquiry being directed by the Department of Justice is
not known to the Company at this time, but the Company is presently
in the process of attempting to obtain as much information in that
regard as possible. CET's management, after a review of available
information and consultation with its legal counsel, believes the
issues raised do not warrant a suspension. The issues relate to
billing and accounting matters occurring in prior years. CET intends
to vigorously pursue having the suspension lifted. However, there can
be no assurance that the Company will prevail in this matter, and if
the suspension is not lifted, it will have an adverse material
effect on the Company's financial position, results of operation, and
liquidity. See also Note 6 to the Company's Condensed Financial
Statements.
The Company is party to various legal actions arising out of the normal
course of its business. Management believes that the ultimate
resolution of such actions, except as previously disclosed, will not
have a material adverse effect on the Company's financial position,
results of operations and liquidity of the Company. For a discussion of
certain legal proceedings to which the Company is party, see Part I -
Item 3. "Legal Proceedings" in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual shareholders meeting held on June 8, 1999, the following
matters were voted affirmatively:
a) Election of the following directors to serve until the next annual
shareholders meeting:
<TABLE>
<CAPTION>
----------------------------------------------------------------
NOMINEE FOR WITHHELD
<S> <C> <C>
----------------------------------------------------------------
Craig C. Barto 5,661,829 78,398
----------------------------------------------------------------
Douglas W. Cotton 5,661,829 78,398
----------------------------------------------------------------
12
<PAGE>
Steven H. Davis 5,661,829 78,398
----------------------------------------------------------------
Robert S. Taylor 5,661,829 78,398
----------------------------------------------------------------
George Pratt 5,661,829 78,398
----------------------------------------------------------------
</TABLE>
b) Confirmation of Grant Thornton LLP as the Company's outside
auditors for fiscal year 1999.
<TABLE>
<CAPTION>
----------------------------------------------------
FOR AGAINST ABSTENTIONS
<S> <C> <C>
----------------------------------------------------
5,693,627 45,000 1,600
----------------------------------------------------
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule Filed herewith electronically
(b) REPORTS ON FORM 8-K
None.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CET ENVIRONMENTAL SERVICES, INC.
Dated: August 23, 1999 By: /s/ Steven H. Davis
---------------------------------------
Steven H. Davis, President and Chief
Executive Officer
By: /s/ Paul C. Kelly
--------------------------------------
Paul C. Kelly, Chief Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 511
<SECURITIES> 0
<RECEIVABLES> 10,238
<ALLOWANCES> 671
<INVENTORY> 285
<CURRENT-ASSETS> 12,515
<PP&E> 7,054
<DEPRECIATION> 3,313
<TOTAL-ASSETS> 16,311
<CURRENT-LIABILITIES> 7,941
<BONDS> 113
0
0
<COMMON> 8,671
<OTHER-SE> 105
<TOTAL-LIABILITY-AND-EQUITY> 16,311
<SALES> 0
<TOTAL-REVENUES> 21,448
<CGS> 19,588
<TOTAL-COSTS> 19,588
<OTHER-EXPENSES> 2,358
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<INTEREST-EXPENSE> 253
<INCOME-PRETAX> (927)
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