10-Q 1 d89762e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2001 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 JUNE 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 incorporation or (IRS Employer Identification No.) 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 August 10, 2001, 5,976,549 shares of common stock, no par value per share, were outstanding. ================================================================================ 2 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 3 CET ENVIRONMENTAL SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements. 2 4 CET ENVIRONMENTAL SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these statements. 3 5 CET ENVIRONMENTAL SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these statements. 4 6 CET ENVIRONMENTAL SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these statements. 5 7 CET ENVIRONMENTAL SERVICES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 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 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, 2000 has been derived from the audited consolidated financial statements at that date. Operating results for the three and six months ended June 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 June 30, 2001, the Company repurchased a total of 61,600 shares of the Company's common stock at a weighted average price of $0.49 per share including associated broker fees and commissions. For the six months ending June 30, 2001, the Company repurchased a total of 77,500 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 June 30, 2001, the Company had receivables of $2,467,895 for the Santa Clarita project and $3,731,902 for the Hercules project. These amounts represent $6,199,797 or 92% of accounts receivable at June 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. 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 6 8 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. NOTE 6. SUBSEQUENT EVENTS - During July 2001, under the Company's Stock Repurchase Plan, 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. 7 9 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 JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 PROJECT REVENUES. Project revenues decreased $4.2 million or 62% from $6.7 million for the quarter ended June 30, 2000 to $2.5 million for the quarter ended June 30, 2001. The decrease primarily reflected a decrease in commercial revenues from the Brownfield projects which were terminated in late 2000 (see Liquidity and Capital Resources below). The Brownfield projects accounted for no revenue in the current period compared to $2.8 million in the year-earlier period. In addition, a decrease in work orders from the EPA reduced EPA revenues by $0.7 million to $2.0 million for the current period compared to $2.7 million in the year-earlier period. Also, the Tustin, California operation, sold in April 2000, contributed $0.5 million of other governmental revenues in the year-earlier period with no corresponding revenues in the current period. DIRECT COSTS. Direct costs decreased $3.6 million or 70% from $5.2 million for the quarter ended June 30, 2000 to $1.6 million for the corresponding period of 2001. Direct cost were equal to 78% of project revenues in the second quarter of 2000 as compared to 63% of project revenues for the second quarter of 2001. 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 April and May 2001 caused direct costs to decline at a greater rate than that experienced in revenues. INDIRECT COSTS. Indirect project costs decreased $0.1 million or 25% from $0.5 million for the quarter ended June 30, 2000 to $0.4 million for corresponding period of 2001. Indirect costs declined less than the drop in sales, since the under utilized personnel and equipment costs were higher. Consequently, indirect costs increased from 8% of project revenues in the second quarter of 2000 to 16% in the second quarter of 2001. SELLING AND GENERAL & ADMINISTRATIVE COSTS. Selling and General and Administrative costs decreased $0.1 million or 21% from $0.7 million for quarter ended June 30, 2000 to $0.5 million for the quarter ended June 30, 2001. This decrease is primarily the result of the sale of the Tustin, California operations in April 2000 and the cost savings arising from the restructuring plan implemented late 1999. In addition, the Company incurred approximately $0.1 million of restructuring expenses due to the EPA suspension in the quarter ended June 30, 2000. OTHER INCOME (EXPENSE). Other income, net of other expenses, decreased primarily due to (i) the gain on the sale of the Tustin, California operations recognized in April 2000 for $1.3 million; this decrease was offset by (ii) lower debt balances resulting in decreased interest expense for the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000; (iii) interest income increased as a result of overall higher cash balances in the quarter ended June 30, 2001 compared to the quarter ended June, 2000; and (iv) the gain on equipment dispositions in the quarter ended June 30, 2001 compared to the loss on equipment dispositions for the quarter ended June 30, 2000. NET INCOME (LOSS). With the sharp drop in project revenues resulting in essentially breakeven operations, net income for the quarter ended June 30, 2001 was $16,350. In the year-earlier period, net income was $1,504,291, 8 10 which included an operating profit of $173,000 and the $1.3 million gain on the sale of the Tustin, California operations. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 PROJECT REVENUE. Project revenues decreased $3.5 million or 35% from $10.1 million for the six months ended June 30, 2000 to $6.6 million for the six months ended June 30, 2001. The decrease primarily reflected a decrease in commercial revenues from the Brownfield projects which were terminated in late 2000 (see Liquidity and Capital Resources below). The Brownfield projects accounted for no revenue in the current period compared to $3.5 million in the year-earlier period. In addition, the Tustin, California operation, sold in April 2000, contributed $1.4 million of other governmental revenues in the year-earlier period with no corresponding revenues in the current period. Providing a partial offset to the decline in the current period, EPA revenues increased $1.7 million to $5.7 million from $4.0 million in the year-earlier period. DIRECT COSTS. Direct costs decreased $2.8 million or 37% from $7.6 million for the six months ended June 30, 2000 to $4.8 million for the six months ended June 30, 2001. The decrease in direct costs arises from a combination of lower project revenues and a change in the mix of project revenues. Direct cost were equal to 75% of project revenues for the six months ending June 30, 2000 as compared to 73% of project revenues for the six months ended June 30, 2001. 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 decreased $0.6 million or 47% from $1.3 million for the six months ended June 30, 2000 to $0.7 million for the six months ended June 30, 2001. Indirect cost were equal to 13% of project revenues for the six months ended June 30, 2000 compared to 10% of project revenues for the six months ended June 30, 2001. The decrease in indirect costs arises from a combination of lower project revenues and a change in the mix of project revenues. Also, decreases in indirect costs and as a percentage of revenues reflects the absence of costs incurred in the year-earlier period to retain selected employees and maintaining idle equipment during the disruption of business caused by the EPA suspension. SELLING AND GENERAL & ADMINISTRATIVE COSTS. Selling and General and Administrative costs decreased $0.5 million or 29% from $1.6 million for the six months ended June 30, 2000 to $1.1 million for the six months ended June 30, 2001. This decrease is primarily the result of the sale of the Tustin, California operations in April 2000 and the cost savings of the full effect of the restructuring plan implemented late 1999. In addition, the Company incurred approximately $0.2 million of restructuring expenses due to the EPA suspension in the six months ended June 30, 2000. OTHER INCOME (EXPENSE). Other income, net of other expenses, decreased primarily due to (i) the gain on the sale of the Tustin, California operations recognized in April 2000 for $1.3 million; this decrease was offset by (ii) lower debt balances resulting in decreased interest expense for the six months ended June 30, 2001 compared to the six months ended June 30, 2000; (iii) interest income increased as a result of overall higher cash balances in the six months ended June 30, 2001 compared to the six months ended June, 2000; and (iv) the gain on equipment dispositions in the six months ended June 30, 2001 compared to the loss on equipment dispositions for the six months ended June 30, 2000. NET INCOME (LOSS). Net income of $27,842 was recorded during the six months ended June 30, 2001 compared to the net income of $720,083 for the six months ended June 30, 2000. The net income at June 30, 2000 was 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 9 11 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 June 30, 2001, the Company had receivables of $2,467,895 for the Santa Clarita project and $3,731,902 for the Hercules project. These amounts represent $6,199,797 or 92% of accounts receivable at June 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. The Company has elected not to pursue a new EPA contract and therefore, the current contract will terminate on January 8, 2002. A formal plan of disposition/discontinuation has not been established, but will be completed by September 30, 2001. For the six months ending June 30, 2001, EPA revenues were approximately $5.7 million or 86% or total revenues. Management will attempt to replace EPA activities by focusing on water/wastewater projects, Brownfield developments and other environmental activities. However, there can be no assurance that such efforts will be successful in offsetting the loss of EPA revenues. Management believes that 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 from $5.7 million as of December 31, 2000 to $5.8 million as of June 30, 2001. The change in working capital results from a decrease in current assets of $2.4 million compared to a decrease in current liabilities of $2.5 million. The decrease in current assets results from collections of combined receivables of $2.8 million and prepaid expenses of $0.2 million. These decreases were offset by an increase in cash of $0.6 million. The decrease in current liabilities results primarily from payment of accounts payable of $2.1 million and accrued liabilities and short-term debt of $0.4 million. The Company's cash and cash equivalents increased approximately $0.5 million from $1.0 million at December 31, 2000 to $1.5 million at June 30, 2001. The increase in cash and cash equivalents results from cash provided from operating activities of $0.8 million as a result of a decrease in combined receivables of $2.8 million, $0.2 million of depreciation adjustments to net income, a decrease in prepaids of $0.2 million, and a decrease in accounts payable and accrued expenses of $2.4 million. Cash used in financing activities of $0.3 million results primarily from payments related to debt, capital leases and the repurchase of the Company's common stock. 10 12 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 Remediation Financial, Inc. ("RFI") and 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 elected to pursue arbitration and are in discussions to select an arbitrator. 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 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 RFI and 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. The amount of unpaid invoices is approximately $3.7 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 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 June 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 $111,973 related to the RFI receivables. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11 13 The Annual meeting of the Shareholders of the Company was held on May 31, 2001 for the purposes of electing directors to the Board of Directors and ratifying the selection of Grant Thorton LLP as the Company's independent accountants for the year ended December 31, 2001. The following votes were cast by Shareholders with respect to the election of directors at the Annual Meeting:

* Re-elected as a Director. The following votes were cast by Shareholders with respect to the selection of Grant Thorton LLP as the Company's independent accountants for the year ended December 31, 2001:

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 14 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 10, 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