10-Q 1 d92041e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 =============================================================================== 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 SEPTEMBER 30, 2001 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 November 9, 2001, 5,976,549 shares of common stock, no par value per share, were outstanding. =============================================================================== PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CET ENVIRONMENTAL SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements. 1 CET ENVIRONMENTAL SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements. 2 CET ENVIRONMENTAL SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these statements. 3 CET ENVIRONMENTAL SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these statements. 4 CET ENVIRONMENTAL SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these statements. 5 CET ENVIRONMENTAL SERVICES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 NOTE 1. BASIS OF PRESENTATION. The accompanying unaudited consolidated financial statements included the accounts of CET Environmental Services, Inc. (the "Company") and its wholly owned subsidiary Cleanwater Contracting, Inc. All intercompany transactions have been eliminated in consolidation. The consolidated 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 accounting principles generally accepted in the United States of America 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, 2000 has been derived from the audited consolidated financial statements at that date. Operating results for the three and nine months ended September 30, 2001 are not necessarily indicative of results that may be expected for the year ending December 31, 2001. 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, 2000. NOTE 2. EARNINGS PER SHARE. The Financial Accounting Standards Board 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 and 2001, basic earnings per share data was computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share was adjusted for the assumed conversion of potentially dilutive securities including stock options and warrants to purchase common stock. NOTE 3. STOCK REPURCHASE PLAN - During the quarter ended September 30, 2001, the Company repurchased a total of 15,300 shares of the Company's common stock at a weighted average price of $0.50 per share including associated broker fees and commissions. For the nine months ending September 30, 2001, the Company repurchased a total of 92,800 shares of the Company's common stock at a weighted average price of $0.49 per share including associated broker fees and commissions. NOTE 4. ACCOUNT RECEIVABLE - REMEDIATION FINANCIAL, INC. - During the third quarter of 2000, the Company experienced problems collecting on receivables from Remediation Financial, Inc. ("RFI"), the parent company for the two Brownfields projects located in Hercules and Santa Clarita, CA. The severity of the problems caused the Company to suspend work on the Santa Clarita, CA project. Subsequently, the Company was presented with termination notices for both the Hercules and Santa Clarita projects from RFI, with the Santa Clarita project termination effective October 6, 2000 and the Hercules termination being effective October 31, 2000. At September 30, 2001, the Company had receivables of $2,467,895 for the Santa Clarita project and $3,763,380 for the Hercules project. These amounts represent $6,231,275 or 74% of accounts receivable at September 30, 2001. Management believes that the receivables are collectible from RFI through either cash receipts or by secured liens placed on the projects. See Item 1, Legal Proceeding regarding legal actions taken against RFI for both the Santa Clarita and Hercules, CA projects. 6 NOTE 5. STOCK REPURCHASE RELATED TO RFI RECEIVABLE - On May 2, 2001, the Company reached an agreement to purchase 631,514 shares of the Company's common stock from a former Director and Executive Vice President of the Company for a maximum of $250,000 or approximately $0.395 per share. The Company has purchased 189,454 shares for $75,000. The remaining 442,060 shares will be purchased for a maximum of $175,000, the payment of which is contingent upon receipt of the $6.2 million of past due receivables from Remediation Financial, Inc. Under the terms of the agreement, 5% of the proceeds from Remediation Financial, Inc. as collected, up to the maximum of $175,000, will be applied to the purchase of the stock. See Item 1, Legal Proceeding regarding legal actions taken against Remediation Financial, Inc. for both the Hercules and Santa Clarita, CA projects. 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," "forecast," "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 THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 PROJECT REVENUES. Project revenues for the three months ended September 30, 2001 were $4.0 million, down $3.7 million or 48% from those of the year-earlier period. The bulk of the decline reflected the absence of commercial revenues from the Brownfields projects which were terminated in October, 2000 (see Liquidity and Capital Resources) and accounted for $2.6 million in the third quarter of 2000. In addition, a decrease in work orders from the EPA reduced EPA revenues by $1.2 million to $3.7 million for the current period compared to $4.9 million in the year-earlier period. DIRECT COSTS. Direct costs for the current period were $3.1 million, equal to 78% of project revenues, down $3.6 million or 53% from the $6.7 million of the corresponding period of 2000 when direct costs amounted to 86% of project revenues. The decrease in direct costs largely stems from lower project revenues. In addition, under-utilization of selected personnel and equipment resulting from a reduced level of EPA work orders in the period caused direct costs to decline at a greater rate than that experienced in revenues. INDIRECT COSTS. Indirect costs for the current period were $234,000, down $53,000 or 19% from the year-earlier period. Indirect costs declined less than the drop in sales, since the under-utilized personnel and equipment costs were higher. Consequently, indirect costs increased from 4% of project revenues in the third quarter of 2000 to 6% in the third quarter of 2001. SELLING AND GENERAL & ADMINISTRATIVE COSTS. Selling and General and Administrative costs for the third quarter of 2001 were $492,000, down 24% from the prior year level. This decrease is primarily the result of the sale of the Tustin, California operations in April 2000, the cost savings arising from the restructuring plan implemented late 1999, and the reduction in administrative personnel in anticipation of the January 2002 completion of the existing EPA contract. OTHER INCOME (EXPENSE). Other income, net of other expenses, amounted to $26,194 for the current period, arising primarily from a gain on the sale of equipment. A year-earlier, a gain of $212,000 was realized on the sale of property held for investment, which, after other expenses, resulted in net other income of $152,000. NET INCOME. Net income of $212,376, for the quarter ending September 30, 2001, resulted primarily from income from operations, whereas the net income for the same period in 2000 of $262,296 resulted from the gain on the sale of property held for investment of $211,862. 8 RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 PROJECT REVENUE. Project revenues for the nine months ended September 30, 2001 were $10.6 million, down $7.2 million or 41% from the $17.9 million in the year-earlier period. The decline largely reflects the absence of commercial revenues from Brownfields projects which were terminated in October 2000 and accounted for $6.2 million of revenues in the first nine months of 2000 (see Liquidity and Capital Resources). In August 2000, a contract with the State of California provided other governmental revenues of $0.7 million with no corresponding revenues in the current period. Providing a partial offset to the decline in the current period, EPA revenues increased $1.2 million to $9.4 million from $8.2 million in the year-earlier period. DIRECT COSTS. Direct costs were $7.9 million in the current period, down $7.2 million or 45% from the year-earlier period. The decrease in direct costs arises from a combination of lower project revenues and a change in the mix of project revenues. Direct costs were equal to 75% of project revenues for the nine months ending September 30, 2001 as compared to 80% of project revenues for the nine months ended September 30, 2000. The slightly more favorable ratio of direct costs to project revenues during the current period reflects from a change in utilization of personnel and equipment. INDIRECT COSTS. Indirect project costs were $910,000 for the current period, down $648,000 or 42% from the year earlier period. Indirect cost were equal in both 2001 and 2000 at 9% of project revenues. SELLING AND GENERAL & ADMINISTRATIVE COSTS. Selling and General and Administrative were $1.6 million for the first three quarters of 2001, down 34% from the $2.4 million reported in the like 2000 period. This decrease is primarily the result of the sale of the Tustin, California operations in April 2000, the cost savings of the full effect of the restructuring plan implemented late 1999, and the reduction in administrative personnel in anticipation of the January, 2002 completion of the existing EPA contract. In addition, the Company incurred approximately $0.2 million of restructuring expenses due to the EPA suspension in the nine months ended September 30, 2000. OTHER INCOME (EXPENSE). Other income, net of other expenses, amounted to $74,000 for the current period, the bulk of which arose from a gain on the sale of equipment and interest income. In the year-earlier period, a $1.3 million gain on the sale of the Tustin, CA operations and a $212,000 gain on the sale of property held for investment resulted, after other expenses, in other income of $1.4 million. NET INCOME. Net income of $240,218 was recorded during the nine months ended September 30, 2001 compared to the net income of $982,379 for the nine months ended September 30, 2000. The net income at September 30, 2000 was primarily the result of the $1.3 million gain on the sale of the Tustin, California operations recorded in April 2000. LIQUIDITY AND CAPITAL RESOURCES During the third quarter of 2000, the Company experienced problems collecting on receivables from Remediation Financial, Inc. ("RFI"), the parent company for the two Brownfields projects located in Hercules and Santa Clarita, California. The severity of the problems caused the Company to suspend work on the Santa Clarita, California project. Subsequently, the Company was presented with termination notices for both the Hercules and Santa Clarita projects from RFI, with the Santa Clarita project termination effective October 6, 2000 and the Hercules termination being effective October 31, 2000. At September 30, 2001, the Company had receivables of $2,467,895 for the Santa Clarita project and $3,763,380 for the Hercules project. These amounts represent $6,231,275 or 74% of accounts receivable at September 30, 2001. Management believes that the receivables are collectible from RFI through either cash receipts or by secured liens placed on the projects. The continued delay in collecting the receivables has an adverse effect on the cash flow of the Company. See Item 1, Legal Proceeding regarding legal actions taken against RFI for both the Santa Clarita and Hercules, California projects. 9 The Company has elected not to pursue a new EPA contract and, therefore, the current contract will expire on January 8, 2002. The Company will complete the EPA work-orders awarded up to the date of expiration. Management believes it will require an additional 6 months to finish those work-orders and to complete final administrative procedures. Personnel levels will be reduced in conjunction with the completion of work-orders. The Seattle operations will be closed with related assets being disposed. Management expects little or no net cash proceeds from the sale of these assets. For the nine months ending September 30, 2001, EPA revenues were approximately $9.4 million or 89% of total revenues. Management will attempt to replace EPA activities by focusing on water/wastewater projects, Brownfields developments, and other environmental activities. Currently, the Company has identified a redevelopment project which is undergoing the pre-development approval process with a Colorado municipality. The project would entail purchasing subject property, demolition and environmental remediation, and construction of new affordable housing units and other related structures. The completed project is estimated at $10 to $20 million. Upon approval of final project plans and financing sources, the project could start as early as April or May 2002. At this time, no estimate can be made as to the amount and timing of revenues that may be afforded to the Company from this project. There can be no assurance that final redevelopment project plans or financing will be approved. In addition, there can be no assurance that this redevelopment project or any other effort will be successful in offsetting the loss of EPA revenues. Management believes that potential future cash flows from operations, the collection of receivables from RFI, and funds available under the $1.0 million line of credit with Compass Bank will be sufficient to fund the Company's immediate needs for working capital. In addition, Management believes that it will be successful in renewing the line of credit with Compass Bank in December 2001. However, there can be no assurance that the line of credit with Compass Bank will be renewed. In the event the line of credit is not renewed and alternate financing sources cannot be found, the Company's financial position, operating activities, and liquidity could be adversely affected. The Company's working capital increased slightly to $6.1 million as of September 30, 2001 from $5.7 million as of December 31, 2000. The change in working capital results from a decrease in current assets of $1.5 million compared to a decrease in current liabilities of $1.9 million. The decrease in current assets results from collections of combined receivables of $1.1 million and a decrease in cash of $0.4 million. The decrease in current liabilities results primarily from payment of accounts payable and accrued liabilities of $1.5 million and short-term debt of $0.4 million. The Company's cash and cash equivalents decreased approximately $0.4 million to $0.6 million at September 30, 2001 from $1.0 million at December 31, 2000. The decrease in cash and cash equivalents results from cash used in operating activities of $0.3 million as a result of an increase in net income of $0.2 million, a decrease in combined receivables of $1.1 million, $0.3 million of depreciation adjustments to net income, and a decrease in accounts payable and accrued expenses of $1.9 million. Cash used in financing activities of $0.1 million results primarily from proceeds related to debt, payments related to capital leases, and the repurchase of the Company's common stock. 10 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On December 19, 2000, the Company filed an action in the Superior Court of the State of California, County of Los Angeles for, among other things, breach of contract and foreclosure of mechanics' lien/lien release bond against Santa Clarita, LLC, a subsidiary of RFI, in response to non-payment for services performed by the Company on the Porta Bella project located in Santa Clarita, California. On February 16, 2001, the Company filed its First Amended Complaint in order to focus its recovery efforts on the lien release bond rather than sale of the property. Currently, the Company and Santa Clarita, LLC have initiated arbitration proceeding with final judgement scheduled for the first quarter of 2002. The amount of unpaid invoices is approximately $2.5 million. Previous to this action, the Company filed a mechanics' lien against the project. Based on the fact that Santa Clarita, LLC filed a lien release bond sufficient to cover the unpaid invoices, the Company believes it will prevail in this action and will recover most, if not all, of the amounts due the Company. On February 8, 2001, the Company filed an action in the Superior Court of the State of California, County of Contra Costa for, among other things, breach of contract, foreclosure of mechanics' lien, and judicial foreclosure of the deed of trust in the amount of $10.1 million against LCRI Investments, LLC, a subsidiary of RFI, in response to non-payment for services performed by the Company on the Hercules project located in Hercules, California. On March 5, 2001, the Company recorded a notice of default under the subject deed of trust in order to pursue a trustee's sale of the subject property. Currently, the Company and LCRI Investments have initiated arbitration proceedings with final judgement scheduled for the first quarter of 2002. The amount of unpaid invoices is approximately $3.8 million. Previous to this action, the Company filed a mechanics' lien against the project. Based on the secured deed of trust, the Company believes it will prevail in this action and will recover most, if not all, amounts due the Company. The Company, LCRI Investments, and RFI are parties to a Commercial Insurance Premium Finance and Security Agreement which guaranteed a $10.1 million Bond to Secure Financial Obligation for the Hercules, California project. The bond secures a note that requires quarterly principal payments of $542,278 which are made by LCRI Investments, LLC. As of September 30, 2001, LCRI Investment, LLC was in default on their 2001 quarterly payments. On July 11, 2001, a letter was issued to LCRI Investments, LLC, RFI, and the Company calling for the immediate payment of remaining principal and interest of $7.2 million. Currently, there has been no legal action taken against the Company for the default. Management believes the Company is entitled to be indemnified to the extent it is ultimately obligated to make any payments under any of these arrangements. The Company has incurred legal and other costs of approximately $289,000 related to the RFI receivables. The Company is currently under investigation by the Office of the Inspector General (OIG) of the Environmental Protection Agency due to a past suspended audit. To date, no claims have been made against the Company arising from this investigation, and subsequent independent audits by the Defense Contract Audit Agency (DCAA) have not been adverse and have not resulted in claims against the Company. The Company is cooperating with the OIG to complete its investigation. ITEM 2. CHANGES IN SECURITIES None. 11 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 None. (b) Reports on Form 8-K None. 12 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: November 9, 2001 By: /s/ Steven H. Davis -------------------------------- Steven H. Davis, President, and Chief Executive Officer By: /s/ Dale W. Bleck -------------------------------- Dale W. Bleck, Chief Financial Officer 13

CET ENVIRONMENTAL SERVICES INC 10-Q