<PAGE> 1
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended MARCH 31, 2000
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)
7032 SOUTH REVERE PARKWAY, ENGLEWOOD, CO 80112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (720) 875-9115
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
----- ----
As of May 5, 2000, 6,284,288 shares of common stock, no par value per share,
were outstanding.
================================================================================
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
2000 DECEMBER 31,
ASSETS (UNAUDITED) 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash ................................................................ $ 416,441 $ 504,583
Accounts receivable, less allowance for doubtful accounts of
$354,623 in 2000 and $359,648 in 1999 ........................... 2,838,404 6,086,086
Contracts in process, less allowance for doubtful accounts of
$287,138 in 2000 and $118,907 in 1999 ........................... 2,134,117 1,770,954
Retention receivable ................................................ 889,043 318,883
Income tax receivable ............................................... -- 90,542
Due from related party .............................................. 67,271 104,036
Other receivables ................................................... 451,572 1,612,962
Inventories ......................................................... 65,379 73,601
Prepaid expenses .................................................... 444,886 570,532
------------ ------------
Total Current Assets ....................................... 7,307,113 11,132,179
------------ ------------
EQUIPMENT AND IMPROVEMENTS:
Field equipment ..................................................... 2,973,742 3,059,206
Vehicles ............................................................ 885,456 890,193
Furniture & fixtures ................................................ 76,164 84,543
Office equipment .................................................... 773,644 815,278
Leasehold improvements .............................................. 49,862 49,861
------------ ------------
4,758,868 4,899,081
Less allowance for depreciation and amortization .................... (2,387,177) (2,262,736)
------------ ------------
Equipment and improvements, net ............................ 2,371,691 2,636,345
------------ ------------
OTHER ASSETS:
Deposits ............................................................ 31,455 36,656
------------ ------------
$ 9,710,259 $ 13,805,180
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE> 3
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
2000 DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Cash overdraft ................................................... $ 36,709 $ 118,348
Accounts payable ................................................. 3,235,367 4,959,733
Accrued expenses ................................................. 410,745 586,612
Accrued contract costs ........................................... 83,396 364,573
Accrued payroll and benefits ..................................... 291,282 361,443
Current obligations under capital leases ......................... 89,402 119,091
Current portion of long-term debt ................................ 210,534 290,982
Line of credit ................................................... -- 818,152
------------ ------------
Total current liabilities ............................... 4,357,435 7,618,934
------------ ------------
OBLIGATIONS UNDER CAPITAL LEASES .......................................... 13,496 25,669
LONG-TERM DEBT ............................................................ 116,087 153,127
COMMITMENTS AND CONTINGENT LIABILITIES .................................... -- --
STOCKHOLDERS' EQUITY
Common stock (no par value) - authorized 20.0 million shares;
6,284,288 shares issued and outstanding in 2000 and 1999,
respectively ................................................. 8,671,261 8,671,261
Paid-in capital .................................................. 104,786 104,786
Accumulated deficit .............................................. (3,552,806) (2,768,597)
------------ ------------
Total stockholders' equity .............................. 5,223,241 6,007,450
------------ ------------
$ 9,710,259 $ 13,805,180
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
PROJECT REVENUE ...................................................... $ 3,453,202 $ 12,944,961
PROJECT COSTS
Direct ...................................................... 2,417,951 9,524,165
Indirect .................................................... 732,333 1,764,649
------------ ------------
3,150,284 11,288,814
------------ ------------
Gross profit ....................................... 302,918 1,656,147
------------ ------------
OPERATING EXPENSES
Selling ..................................................... 147,822 307,703
General and administrative .................................. 732,457 677,709
Restructuring expense ....................................... 144,312 --
------------ ------------
1,024,591 985,412
------------ ------------
Operating income (loss) ............................ (721,673) 670,735
------------ ------------
OTHER INCOME (EXPENSE)
Gain (loss) on sale of equipment ............................ (46,842) --
Interest expense, net ....................................... (20,034) (104,320)
Other income (expense) ...................................... 4,340 --
------------ ------------
(62,536) (104,320)
------------ ------------
Income (loss) before income taxes .................. (784,209) 566,415
------------ ------------
Provision for income taxes ......................... -- (215,237)
------------ ------------
NET INCOME (LOSS) .................................................... $ (784,209) $ 351,178
============ ============
Earnings (loss) per common share ..................................... $ (0.12) $ 0.06
============ ============
Weighted average number of common shares outstanding ................. 6,284,288 6,276,414
============ ============
Earnings (loss) per common share - assuming dilution ................. $ (0.12) $ 0.06
============ ============
Weighted average number of fully diluted common shares outstanding ... 6,284,288 6,276,543
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
CET ENVIRONMENTAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................... $ (784,209) $ 351,178
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... 206,378 263,669
Loss on disposal of equipment ...................................... 46,842 --
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable ................ 3,247,682 3,857,120
Decrease (Increase) in contracts in process ............... (363,163) 1,222,888
Decrease (Increase) in income tax, retention and other
receivables ....................................... 681,772 660,940
Decrease (Increase) in prepaid expenses ................... 125,646 (4,798)
Decrease (Increase) in inventory and deposits ............. 13,423 (54,782)
Increase (decrease) in accounts payable ................... (1,724,366) (5,942,100)
Increase (decrease) in accrued expenses and income taxes .. (527,205) (818,109)
------------ ------------
Net cash provided by (used in) operating activities ....... 922,800 (463,994)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment ....................................................... -- (413,340)
Proceeds from sales of equipment ............................................ 11,434 --
Proceeds from sale of subsidiary ............................................ -- 1,250,000
------------ ------------
Net cash provided by (used in) operating activities ....... 11,434 836,660
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft .............................................................. (81,639) (1,013,807)
Payments on long-term debt .................................................. (117,488) (41,599)
Payments on capital lease obligations ....................................... (41,862) (69,401)
Payments on credit line loan ................................................ (818,152) 3,119,224
Payment of dividends on preferred stock ..................................... -- (4,872)
Preferred stock redemption .................................................. -- (1,927,400)
Proceeds from loan to related party ......................................... 36,765 20,000
------------ ------------
Net cash provided by (used in) financing activities ................ (1,022,376) 82,145
------------ ------------
INCREASE (DECREASE) IN CASH ................................................. (88,142) 454,811
Cash at the beginning period ................................................ 504,583 25,192
------------ ------------
Cash at end of period ....................................................... $ 416,441 $ 480,003
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
CET ENVIRONMENTAL SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1. BASIS OF PRESENTATION. The accompanying unaudited financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial statements and with the instructions
to Form 10-Q and Article 10 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. The consolidated balance sheet at December 31, 1999
has been derived from the audited consolidated financial statements at
that date. Operating results for the quarter ended March 31, 2000 are
not necessarily indicative of results that may be expected for the year
ending December 31, 2000. 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, 1999.
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.
In 2000, basic earnings per share data was computed by dividing net
loss, by weighted average number of common shares outstanding during
the period. Diluted earnings per share computations do not give effect
to potentially dilutive securities including stock options and warrants
as their effect would have been anti-dilutive.
In 1999, basic earnings per share data was computed by dividing net
income, less preferred stock dividends, by the weighted average number
of common shares outstanding during the period. Diluted earnings per
share were adjusted for the assumed conversion of potentially dilutive
securities including stock options and warrants to purchase common
stock.
NOTE 3. SUBSEQUENT EVENTS - SALE OF TUSTIN, CALIFORNIA OPERATIONS. On March 8,
2000, the Company entered into an Asset Purchase Agreement with Cape
Environmental Management, Inc. ("CEM") to sell certain assets and
assign certain contracts and liabilities associated with its Tustin,
California operations for $2.1 million. The transaction was closed on
May 8, 2000, effective as of April 30, 2000, with final consideration
consisting of approximately $1.775 million in cash, the assignment of
$0.075 million of vacation accruals and related payroll taxes, and a
holdback of $0.250 million due within 60 days subject to certain
adjustments. The nature and dollar value attributed to the assets and
liabilities transferred in the sale consisted of $0.9 million of field
and office equipment, $1.05 million of project contracts consisting of
non-EPA federal and commercial contracts, a $0.1 million non-compete
covenant and $0.05 million of intangibles. The Company's net book value
of the assets and liabilities of approximately $0.7 million resulted in
a recorded gain of $1.4 million on the date of sale. The Company will
retain approximately $1.3 million of assets related to the Tustin
operations consisting primarily of receivables recorded through the
date of closing.
NOTE 4. RECLASSIFICATIONS. Certain amounts in the 1999 financial statements
have been reclassified to conform with the 2000 presentation.
5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Quarterly Report on Form 10-Q contains forward-looking statements
(as such term is defined in the private Securities Litigation Reform Act of
1995), and information relating to the Company that is based on beliefs of
management of the Company, as well as assumptions made by and information
currently available to management of the Company. When used in this Report, the
words "estimate," "project," "believe," "anticipate," "intend," "expect," and
similar expressions are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events based on currently available information and are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in such forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company does not undertake any obligation to release
publicly any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999
PROJECT REVENUE. Project revenues decreased $9.4 million or 73% from
$12.9 million in the quarter ended March 31, 1999 to $3.5 million in the quarter
ended March 31, 2000. The decrease results from several factors including but
not limited to (i) the EPA suspension enacted in August 1999 which disrupted the
normal flow of business, reducing EPA revenues by approximately $7.0 million
from $8.3 million in the quarter ended March 31, 1999 to $1.3 million in the
quarter ended March 31, 2000; (ii) as a result of the EPA suspension, the
Company implemented a restructuring plan in the third and fourth quarter of 1999
during which the Company sold the Mobile and Jackson regions and closed its
regional offices located in New Orleans and Houston. Revenues from these regions
approximated $1.4 million in commercial revenues for the quarter ended March 31,
1999 with no corresponding commercial revenues in the quarter ended March 31,
2000; and (iii) the completion of a commercial project in early 1999 which
contributed approximately $1.0 million in the quarter ended March 31, 1999.
DIRECT COSTS. Direct costs decreased $7.1 million or 75% from $9.5
million in the quarter ended March 31, 1999 to $2.4 million in the quarter ended
March 31, 2000. The decrease is commensurate with the decrease in projects
revenues for the reasons stated above.
INDIRECT COSTS. Indirect project costs decreased $1.1 million or 58%
from $1.8 million in the quarter ended March 31, 1999 to $0.7 million in the
quarter ended March 31, 2000. The decrease is commensurate with the overall
decrease in revenues noted above. However, this decrease was offset by retaining
certain key project managers/employees whose labor costs where not chargeable to
direct projects during the disruption of business from the EPA suspension.
SELLING AND GENERAL & ADMINISTRATIVE COSTS. Selling and General and
Administrative costs increased $0.04 million or 4% from $0.98 million in the
quarter ended March 31, 1999 to $1.02 million in the quarter ended March 31,
2000. This increase is primarily the result of an additional $150,000 in
restructuring charges incurred on the closing of the Mobile and Jackson regional
offices. The Company does not anticipate incurring any other material
restructuring charges related to the closure of regional offices in late 1999.
OTHER EXPENSE AND INCOME TAXES. Other expenses decreased slightly due
to lower average debt balances resulting in decreased interest expense for the
quarter ended March 31, 2000 compared to the quarter ended March 31, 1999. In
addition, the Company incurred income tax expense as a result of the positive
earnings in the quarter ended March 31, 1999 compared to the loss incurred in
the quarter ended March 31, 2000.
NET INCOME (LOSS). Net income of $351,178 was recorded during the
quarter ended March 31, 1999 compared to a net loss of ($784,209) for the
quarter ended March 31, 2000. As discussed above, the net loss incurred in 2000
resulted from the effects of the business interruptions and restructuring
charges from the EPA suspension in August 1999.
6
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital declined by $0.6 million from $3.5
million as of December 31, 1999 to $2.9 million as of March 31, 2000. The change
in working capital resulted from a decrease in current assets of $3.8 million
compared to a decrease in current liabilities of $3.2 million. The decrease in
current assets results from a reduction in combined receivables of $2.3 million
and a decrease in other current assets of $1.5 million due primarily from the
collection of $0.8 million from the sale of WQM in 1998. The decrease in current
liabilities results primarily from the reduction of accounts payable and current
debt of $2.6 million.
The Company's cash and cash equivalents decreased by $0.1 million from
$0.5 million as of December 31, 1999 to $0.4 million as of March 31, 2000. The
decrease in cash and cash equivalents is due primarily to cash provided by
operations of $0.9 million offset by cash used in financing activities of $1.0
million.
In August 1999, the Company received a notice of suspension from the
EPA. Under the suspension, the Company was prohibited from receiving additional
government contracts; however, the suspension did allow the Company to continue
performance on existing government contracts. The suspension was subsequently
lifted by the EPA in November of 1999 and the Company became immediately
eligible to bid for, receive, and perform any federal contract without
restriction. However, the suspension had significantly disrupted the normal flow
of business, and the Company has not yet reached the level of EPA job orders
that were in the pipe-line prior to the EPA suspension. The Company cannot
predict the number of EPA job orders that will be awarded to the Company in the
future, if at all.
As a result of the EPA suspension, the Company entered into a letter
of intent to sell all of its EPA contracts pending consent of the sales
transaction from the EPA. In April 2000, the Company was notified by the EPA
that the sale was not in the best interest of the Government and therefore
declined. The Company will continue performing services for the EPA.
The Company's sources of liquidity and capital resources historically
have been net cash provided by operating activities, funds available under its
financing arrangements, proceeds from offerings of equity securities, and loans
from shareholders. In the past, these sources have been sufficient to meet its
needs and finance the Company's business. The Company can give no assurance that
the historical sources of liquidity and capital resources will be available for
future operations, and it may be required to seek alternative financing sources
not necessarily favorable to the Company.
On May 8, 2000, the Company closed on the sale of its Tustin,
California operations for $2.025 million in cash subject to certain adjustments
and the assumptions of $0.075 million in accrued vacation and payroll taxes
liabilities. The net proceeds will be used for working capital requirements and
further expansion into the maintenance and construction of waste/water treatment
facilities through either direct investment or through possible industry
acquisitions. The Company's future growth will be dependent upon expansion into
the maintenance and construction of waste/water treatment facilities, optimizing
margins on its EPA and non-EPA environmental remediation projects, marketing,
and its ability to obtain financing at favorable terms.
On January 27, 2000, the Company satisfied the repayment terms of its
line of credit with the National Bank of Canada, which has now released all
claims against the Company. The Company is currently exploring new financing
arrangements; however, due to the EPA Suspension in 1999 and the continued
Office of Inspector General's investigation, the Company can give no assurance
that it will be able to obtain financing at favorable terms.
While the Company will continue to seek alternative sources of
financing, management believes that the proceeds for the sale of Tustin,
California offices, coupled with its efforts to improve cash flows from
operations, should allow the Company to meet its immediate working capital
requirements. However, there can be no assurance that alternate financing
sources can be successfully negotiated which, if not obtained, could have a
material effect on the Company's financial position, operating activities, and
liquidity.
7
<PAGE> 9
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule Filed herewith electronically
(b) Reports on Form 8-K
None
8
<PAGE> 10
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CET ENVIRONMENTAL SERVICES, INC.
Dated: May 11, 2000 By: /s/ Steven H. Davis
--------------------------------------
Steven H. Davis, President, and Chief
Executive Officer
By: /s/ Dale W. Bleck
--------------------------------------
Dale W. Bleck, Interim Chief Financial
Officer
9
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CET
ENVIRONMENTAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31,
2000.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 416,441
<SECURITIES> 0
<RECEIVABLES> 7,022,168
<ALLOWANCES> 641,761
<INVENTORY> 65,379
<CURRENT-ASSETS> 7,307,113
<PP&E> 4,758,868
<DEPRECIATION> 2,387,177
<TOTAL-ASSETS> 9,710,259
<CURRENT-LIABILITIES> 4,357,435
<BONDS> 326,621
0
0
<COMMON> 8,671,261
<OTHER-SE> (3,448,020)
<TOTAL-LIABILITY-AND-EQUITY> 9,710,259
<SALES> 3,453,202
<TOTAL-REVENUES> 3,453,202
<CGS> 3,150,284
<TOTAL-COSTS> 4,174,875
<OTHER-EXPENSES> 62,536
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,034
<INCOME-PRETAX> (784,209)
<INCOME-TAX> 0
<INCOME-CONTINUING> (784,209)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (784,209)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
