================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(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, 2002
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 small business issuer 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 August 1, 2002, 5,757,792 shares of common stock, no par value per share,
were outstanding.
================================================================================
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CET ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
JUNE 30,
2002 DECEMBER 31,
ASSETS (UNAUDITED) 2001
------------ ------------
CURRENT ASSETS:
Cash .......................................................... $ 1,556,672 $ 469,939
Accounts receivable, less allowance for doubtful accounts of
$48,595 in 2002 and $63,753 in 2001 ....................... 3,495,978 7,171,579
Contracts in process, less allowance for doubtful accounts of
$8,944 in 2002 and $38,944 in 2001 ........................ 73,505 1,751,874
Retention receivable .......................................... 90,097 65,288
Other receivables ............................................. 165,819 19,233
Inventories ................................................... 15,371 15,838
Land under development ........................................ 542,726 185,350
Prepaid expenses .............................................. 68,006 228,260
------------ ------------
Total Current Assets ................................. 6,008,174 9,907,361
------------ ------------
EQUIPMENT AND IMPROVEMENTS:
Field equipment ............................................... 209,625 1,210,037
Vehicles ...................................................... 311,199 316,494
Furniture & fixtures .......................................... 75,378 75,378
Office equipment .............................................. 425,643 421,205
Leasehold improvements ........................................ 24,931 49,862
------------ ------------
1,046,776 2,072,976
Less allowance for depreciation and amortization .............. (876,230) (1,267,959)
------------ ------------
Equipment and improvements, net ...................... 170,546 805,017
------------ ------------
OTHER ASSETS:
Deposits ...................................................... 13,505 123,368
------------ ------------
$ 6,192,225 $ 10,835,746
============ ============
</Table>
The accompanying notes are an integral part of these statements.
1
CET ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
JUNE 30,
2002 DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) 2001
------------ ------------
CURRENT LIABILITIES:
Accounts payable .................................................. $ 864,622 $ 3,341,708
Accrued expenses .................................................. 77,663 143,520
Accrued contract costs ............................................ -- 49,570
Accrued payroll and benefits ...................................... 20,556 101,124
Notes payable - current ........................................... -- 98,466
------------ ------------
Total current liabilities ................................ 962,841 3,734,388
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES ..................................... -- --
STOCKHOLDERS' EQUITY:
Common stock (no par value) - authorized 20.0 million shares;
5,757,792 and 5,976,549 shares issued and outstanding in 2002
and 2001, respectively ........................................ 8,419,407 8,506,007
Paid-in capital ................................................... 104,786 104,786
Accumulated deficit ............................................... (3,294,809) (1,509,435)
------------ ------------
Total stockholders' equity ............................... 5,229,384 7,101,358
------------ ------------
$ 6,192,225 $ 10,835,746
============ ============
</Table>
The accompanying notes are an integral part of these statements.
2
CET ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
2002 2001
----------- -----------
PROJECT REVENUE .................................................... $ 547,858 $ 2,508,618
PROJECT COSTS:
Direct .................................................... 723,370 1,574,179
Indirect .................................................. 126,203 403,450
----------- -----------
849,573 1,977,629
----------- -----------
Gross profit (loss) .............................. (301,715) 530,989
----------- -----------
OPERATING EXPENSES:
Selling ................................................... 27,730 54,998
General and administrative ................................ 395,021 479,949
----------- -----------
422,751 534,947
----------- -----------
Operating loss ................................... (724,466) (3,958)
----------- -----------
OTHER INCOME (EXPENSE):
Loss on sale of equipment ................................. 861 13,480
Interest income (expense), net ............................ 6,557 4,267
Other income (expense) .................................... 88 2,561
----------- -----------
7,506 20,308
----------- -----------
Income (loss) before income taxes ................ (716,960) 16,350
----------- -----------
Provision for income taxes ....................... -- --
----------- -----------
NET INCOME (LOSS) .................................................. $ (716,960) $ 16,350
=========== ===========
Earnings (loss) per common share ................................... $ (0.12) $ .00
=========== ===========
Weighted average number of common shares outstanding ............... 5,757,792 6,101,811
=========== ===========
Earnings (loss) per common share - assuming dilution ............... $ (0.12) $ .00
=========== ===========
Weighted average number of fully diluted common shares outstanding . 5,757,792 6,110,662
=========== ===========
</Table>
The accompanying notes are an integral part of these statements.
3
CET ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
------------------------------
JUNE 30, JUNE 30,
2002 2001
------------ ------------
PROJECT REVENUE ..................................................... $ 1,580,132 $ 6,574,738
PROJECT COSTS:
Direct ..................................................... 1,495,099 4,816,785
Indirect ................................................... 372,598 673,338
------------ ------------
1,867,697 5,490,123
------------ ------------
Gross profit (loss) ............................... (287,565) 1,084,615
------------ ------------
OPERATING EXPENSES:
Selling .................................................... 61,321 94,100
General and administrative ................................. 1,060,966 1,010,367
------------ ------------
1,122,287 1,104,467
------------ ------------
Operating loss .................................... (1,409,852) (19,852)
------------ ------------
OTHER INCOME (EXPENSE):
Loss on sale of equipment .................................. (382,900) 11,454
Interest income (expense), net ............................. 6,288 14,673
Other income (expense) ..................................... 1,090 21,567
------------ ------------
(375,522) 47,694
------------ ------------
Income (loss) before income taxes ................. (1,785,374) 27,842
------------ ------------
Provision for income taxes ........................ -- --
------------ ------------
NET INCOME (LOSS) ................................................... $ (1,785,374) $ 27,842
============ ============
Earnings (loss) per common share .................................... $ (0.31) $ .00
============ ============
Weighted average number of common shares outstanding ................ 5,802,510 6,177,765
============ ============
Earnings (loss) per common share - assuming dilution ................ $ (0.31) $ .00
============ ============
Weighted average number of fully diluted common shares outstanding .. 5,802,510 6,192,069
============ ============
</Table>
The accompanying notes are an integral part of these statements.
4
CET ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
------------------------------
JUNE 30, JUNE 30,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................................... $ (1,785,374) $ 27,842
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ..................................... 105,208 210,410
Loss on disposal of equipment ..................................... 382,900 (11,454)
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable ............... 3,675,601 870,182
Decrease (Increase) in contracts in process .............. 1,678,369 1,765,957
Decrease (Increase) in income tax, retention and other
receivables ...................................... (171,395) 184,678
Decrease (Increase) in prepaid expenses .................. 160,254 206,174
Decrease (Increase) in inventory and deposits ............ 110,330 (86,493)
Increase (Decrease) in accounts payable .................. (2,477,086) (2,083,769)
Decrease (Increase) in land under development ............ (357,376) --
Increase (Decrease) in accrued expenses and income taxes . (195,995) (240,617)
------------ ------------
Net cash provided by (used in) operating activities ...... 1,125,436 842,910
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment ..................................................... -- (4,409)
Proceeds for sales of equipment ............................................ 146,363 15,000
------------ ------------
Net cash provided by (used in) investing activities ...... 146,363 10,591
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes .......................................................... (98,466) (116,283)
Payments on capital lease obligations ...................................... -- (31,420)
Payments on repurchases of common stock .................................... (86,600) (115,731)
------------ ------------
Net cash provided by (used in) financing activities ............... (185,066) (263,434)
------------ ------------
INCREASE (DECREASE) IN CASH ................................................ 1,086,733 590,067
Cash at the beginning period ............................................... 469,939 953,641
------------ ------------
Cash at end of period ...................................................... $ 1,556,672 $ 1,543,708
============ ============
</Table>
The accompanying notes are an integral part of these statements.
5
CET ENVIRONMENTAL SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
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-QSB and Item 310(b) of Regulation S-B.
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, 2001 has been derived from the audited consolidated
financial statements at that date. Operating results for the six months
ended June 30, 2002 are not necessarily indicative of results that may
be expected for the year ending December 31, 2002. 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, 2001.
NOTE 2. EARNINGS PER SHARE. The Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("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 2002, 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 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. ACCOUNT RECEIVABLE - REMEDIATION FINANCIAL, INC. - During the third
quarter of 2000, the Company experienced problems collecting
receivables from Remediation Financial, Inc. ("RFI"), and its
affiliated partnerships Santa Clarita, LLC and LCRI Investments, LLC,
the developers of the two Brownfield projects. The severity of the
problems was of such sufficiency to cause the Company to suspend work
on the Santa Clarita, CA project. Subsequently, the Company was
presented with termination notices for both projects with the Santa
Clarita termination effective October 6, 2000 and the Hercules
termination effective October 31, 2000. At December 31, 2001, the
Company had receivables of $2,021,164 for the Santa Clarita project and
$3,313,575 for the Hercules project. In February, 2002, the Company
entered into a settlement agreement with respect to the Santa Clarita
project and received $2.1 million. At June 30, 2002, the Company had a
receivable of $3,234,738 for the Hercules project. This amount
represents 93% of accounts receivable at June 30, 2002. The Company has
a secured lien on the Hercules property and management believes it will
recover most, if not all, of the related receivables. However, failure
to collect this receivable will have a material adverse effect on the
financial position and operations of the Company. Additionally, the
continued delay in collecting the receivable has an adverse effect on
the cash flow of the Company. See Item 3, Legal Proceeding in the
Company's filed Form 10K for the year ended December 31, 2001 regarding
legal actions taken against RFI and its affiliated partners for the
Hercules, CA project. There has been no significant progress in the
collection of this account receivable since year-end 2001, and the
Company currently does not know when this collection will occur.
NOTE 4. EQUIPMENT DISPOSITIONS - During the six months ended June 30, 2002,
field equipment dispositions consisted of $529,263 of net equipment
disposals for proceeds of $146,363. The Company recorded a loss of
$382,900 on the equipment dispositions.
6
NOTE 5. STOCK REPURCHASE - 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. Initially, the Company
purchased 189,454 shares for $75,000. The remaining 442,060 shares
would be purchased for a maximum of $175,000, the payment would be
contingent upon receipt of the $6.2 million of past due receivables
from RFI and its affiliated partners. Under the terms of the agreement,
5% of the proceeds from RFI as collected, up to the maximum of
$175,000, would be applied to the purchase of the stock. In February
2002, as a result of the Santa Clarita settlement with RFI and its
affiliated partners, the Company purchased 218,757 shares of common
stock for $86,600 or $0.395 per share.
NOTE 6. LAND UNDER DEVELOPMENT - The Company has signed a pre-development
agreement with a Colorado municipality to redevelop a commercial
real-estate project. All direct costs, including land, land development
costs, and indirect costs related to development are capitalized during
the development period.
NOTE 7. CONTINGENCIES - 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 a
previously filed mechanics' lien/lien release bond against Santa
Clarita, LLC, an affiliated partnership of RFI, in response to
non-payment for services performed by the Company on the Porta Bella
project located in Santa Clarita, CA. In February, 2002, the Company
entered into a settlement agreement under which it received $2.1
million (See Note 3. Accounts Receivable - Remediation Financial,
Inc.).
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 a previously filed
mechanics' lien, and judicial foreclosure of the deed of trust in the
amount of $10.1 million against LCRI Investments, LLC, an affiliated
partnership of RFI, in response to non-payment for services performed
by the Company on the Hercules project located in Hercules, CA. 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 Company and LCRI Investments are engaged in
arbitration proceedings. The amount of unpaid invoices is approximately
$3.2 million. 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 (See Note G to the Company's filed Form 10K for
the year ended December 31, 2001).
The Company, LCRI Investments, and RFI are parties to a Commercial
Insurance Premium Finance and Security Agreement under which the
Company guaranteed a $10.1 million Bond to Secure Financial Obligation
for the Hercules, CA 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, 2002, LCRI Investment, LLC was in
default on their 2001 and 2002 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. 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. Based on the secured deed of
trust mentioned above, management believes that any amounts paid as a
result of the guarantee will be recovered.
Since early 1998, the Company has been the subject of an investigation
by the Office of the Inspector General (OIG) of the Environmental
Protection Agency (EPA). While initially broad in scope, the focus of
the investigation appears to involve labor billing-rates to the EPA
beginning in the 1992-1994 period and selected subsequent years. The
Company has cooperated fully in all OIG inquiries and will continue to
do so when and if required. To date, no claims have been made against
the Company. In addition, independent audits by the Defense Contract
Audit Agency (DCAA), subsequent to initiation of the OIG investigation,
have not been adverse nor have resulted in claims against the Company.
No loss provision has been made at June 30, 2002 as a result of the
investigation as the probable outcome is unknown.
7
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.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Quarterly Report on Form 10-QSB 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
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
PROJECT REVENUE. Project revenues were $0.5 million in 2002, down $2.0
million from $2.5 million in 2001. The decrease in revenues largely reflects the
substantial completion of work orders from the EPA. The Company's contract with
the EPA expired on January 8, 2002 and there were no revenues in the current
period from the EPA compared to $2.0 million in the year-earlier period.
Water/waste water revenues decreased slightly over the year-earlier period but
were offset with a similar increase in revenues from other commercial projects.
DIRECT COSTS. Direct costs were $0.7 million in 2002, down $0.9 million
from $1.6 million in 2001. Despite the substantial reduction on a year-to-year
basis, direct costs exceeded revenues for the current period. Ongoing costs
related to closing out EPA work orders coupled with cost over-runs at two
water-wastewater projects were the primary causes of higher-than-anticipated
direct costs. In the year-earlier period, direct costs amounted to 63% of
revenues.
INDIRECT COSTS. Indirect project costs were $126,000 in 2002, a
decrease of $277,000 from $403,000 in 2001. As a percentage of revenue, indirect
costs for 2002 were 23%, up from 16% in 2001. The relatively higher level of
indirect costs to revenue for the current period stems in part from expenses
related to closing out EPA work orders.
SELLING AND GENERAL & ADMINISTRATIVE COSTS. Selling and General and
Administrative costs were $423,000 in 2002, down $112,000 from $535,000 in 2001.
This decrease arises from the reductions in Company personnel and office space
related to the EPA contract expiration.
OTHER INCOME (EXPENSE). Other income, net of other expenses, amounted
to a net income of $7,500, the bulk of which arose from interest income of
$6,500. In the year earlier period, gains on sales of equipment of $13,000 and
interest income of $4,000, resulted in other income of approximately $20,000.
NET INCOME (LOSS). A net loss of $716,960 was recorded during the
current period compared to the net income of $16,350 for the year earlier
period. The loss in 2002 was the result of the expiration of the EPA contract
and losses incurred on the water/waste water projects.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
PROJECT REVENUE. Project revenues were $1.6 million in 2002, down $5.0
million from $6.6 million in 2001. The decrease in revenues largely reflects the
substantial completion of work orders from the EPA. The
9
Company's contract with the EPA expired on January 8, 2002 and EPA related
revenues were only $335,000 during the period, as compared with $5.4 million in
the year-earlier period. The reduction in EPA revenues was partially offset with
increases in other commercial revenues of $0.4 million over the year earlier
period.
DIRECT COSTS. Direct costs were $1.5 million in 2002, down $3.3 million
from $4.8 million in 2001. As a percentage of revenues, direct costs for 2002
were 95%, up from 73% in 2001. The relatively high level of direct costs during
the current period reflects close-out expenses related to EPA work orders and
cost over-runs arising from unanticipated difficulties at three water/wastewater
projects of which two were completed in the 2nd quarter.
INDIRECT COSTS. Indirect project costs were $373,000 in 2002, a
decrease of $300,000 from $673,000 in 2001. As a percentage of revenue, indirect
costs for 2002 were 24%, up from 10% in 2001. The relatively higher level of
indirect costs to revenues for the 2002 period is caused, in part, by close-out
expenses related to EPA work orders.
SELLING AND GENERAL & ADMINISTRATIVE COSTS. Selling and General and
Administrative costs were $1.1 million in 2002, up $0.1 million from $1.0
million in 2001. This slight increase is the result of additional legal expenses
relating to the RFI and its affiliated partners litigation and employee
severance costs incurred during the first quarter following the expiration of
the EPA contract.
OTHER INCOME (EXPENSE). Other expenses, net of other income, amounted
to a net loss of $376,000, the bulk of which arose from the loss on equipment
dispositions of $383,000. In the year earlier period, other income of $22,000
and interest income of $15,000, along with net gains on equipment disposals of
$11,000, resulted in other income of $48,000.
NET INCOME (LOSS). A net loss of $1,785,374 was recorded during the
current period compared to net income of $27,842 for the year earlier period.
The loss in 2002 was the result of the expiration of the EPA contract and
reduced profit margins on the water/waste water projects.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity and capital resources historically
have been net cash provided by operating activities, funds available under its
financing arrangements, and proceeds from offerings of equity securities. 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
development and acquisitions, and it may be required to seek alternative
financing sources not necessarily favorable to the Company.
During the third quarter of 2000, the Company experienced problems
collecting receivables from RFI and its affiliated partnerships for work
performed at Brownfields projects located at Santa Clarita and Hercules, 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 projects, with the Santa Clarita termination effective
October 6, 2000 and the Hercules termination effective October 31, 2000. At
December 31, 2001 receivables from the Santa Clarita project were approximately
$2.0 million while those arising from the Hercules project were $3.3 million for
a total of $5.3 million or 74% of total accounts receivable.
In February, 2002, the Company reached a settlement agreement with
respect to the Santa Clarita project and received $2.1 million. The Company
continues to pursue recovery efforts with respect to Hercules receivables (See
Item 3. Legal Proceedings and Notes G and S to the Consolidated Financial
Statements in the Company's filed Form 10K for the year ended December 31,
2001). The delay in collecting the aforementioned receivable on a timely basis
has adversely effected the Company's cash flow and will continue to have an
adverse effect into the foreseeable future.
In 2001, the Company elected not to bid on a new contract with the EPA.
Under terms of the prior contract, the fourth and final option year expired on
January 8, 2002. The Company has substantially completed the EPA work-orders
awarded up to the date of expiration. Personnel levels have been reduced in
conjunction with the
10
completion of work-orders. The Seattle operations were closed in December 2001
with related assets being disposed. For the year ended December 31, 2001, EPA
revenues were approximately $12.3 million or 87% of total revenues.
Management will attempt to replace EPA activities by focusing on
water/wastewater projects, Brownfields developments, and other environmental
activities. The Company has signed a pre-development agreement with a Colorado
municipality to redevelop a commercial real-estate project. 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 million to $20 million and the Company
is currently negotiating financing for this project. At this time, no estimate
can be made as to the amount and timing of revenues. At best, the project is
anticipated to generate nominal, if any, revenues for the current year. There
can be no assurance that final redevelopment project plans or financing will be
approved. Meanwhile, the Company is engaged in discussions regarding another
Colorado Brownfields project of approximately five acres in size. There can be
no assurance that these redevelopment projects or any other effort will be
successful in offsetting the loss of EPA revenues.
Management believes that the potential future cash flows from
operations, the collection of receivables related to the Hercules project, and
current cash balances will be sufficient to fund the Company's immediate needs
for working capital. Management has decided not to renew the $1.0 million line
of credit with Compass Bank as the semi-annual renewal fees, its lack of prior
and projected use, and the Company's current cash balances did not warrant its
renewal.
The Company's working capital decreased to $5.0 million as of June 30,
2002, down $1.2 million from $6.2 million as of December 31, 2001. The change in
working capital is the net result of a decrease in current assets of $3.9
million and a decrease in current liabilities of $2.7 million. The decrease in
current assets results from collections of combined receivables of $5.4 million
and a increase in cash of $1.1 million and a combined other current assets of
$0.4 million. The decrease in current liabilities results primarily from payment
of accounts payable and accrued liabilities of $2.6 million and notes of $0.1
million.
The Company's cash and cash equivalents increased approximately $1.1
million to $1.6 million at June 30, 2002 from $0.5 million at December 31, 2001.
The increase in cash and cash equivalents of approximately $1.5 million reflects
a reduction in combined receivables of $5.4 million plus $0.5 million of
depreciation and other non-cash charges, less a decrease of $2.6 million in
accounts payable and accrued expenses and minus the net loss of $1.8 million
incurred in the first half of 2002. Cash flow from investing activities of
$146,000 is from sale of equipment. Cash used in financing activities of $0.2
million is primarily for payment of notes and the repurchase of the Company's
common stock.
At present, the Company has no material commitments with respect to
capital expenditures. However, if and when actual Brownfields development
construction begins, capital expenditures of a material size may be required.
Management believes that such capital requirements could be met through secured
lending arrangements, but can give no assurance that such financing will be
available when required, nor under terms acceptable to the Company.
11
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
The Annual meeting of the Shareholders of the Company was held on June
7, 2002 for the purposes of electing directors to the Board of Directors,
ratifying the selection of Grant Thorton LLP as the Company's independent
accountants for the year ended December 31, 2002, and to consider a shareholder
proposal.
The following votes were cast by Shareholders with respect to the
election of directors at the Annual Meeting:
<Table>
<Caption>
NAME SHARES VOTED FOR SHARES WITHHELD
Craig C. Barto* 4,338,824 412,946
Steven H. Davis* 4,338,824 412,946
John D. Hendrick* 4,338,824 412,946
George Pratt* 4,338,824 412,946
Bruce W. Barren 100 --
Ross Gordon 100 --
James McCamant 100 --
Robert L. Surdam 3,175,500 --
</Table>
* 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, 2002:
<Table>
<Caption>
SHARES VOTED FOR SHARES VOTED AGAINST SHARES ABSTAINED
Grant Thorton 5,012,596 396,050 137,074
</Table>
12
The following votes were cast by Shareholders with respect to the
shareholder proposal to request the Board of Directors to nominate three
Investment Banking firms for the intention to liquidate all operations and
assets to the highest bidder(s) and after payment of liabilities, pay to
shareowners the remaining assets thus dissolving CET Environmental, Inc.
<Table>
<Caption>
SHARES VOTED FOR SHARES VOTED AGAINST SHARES ABSTAINED BROKER NON-VOTES
Shareholder 1,221,627 2,776,513 30,210 1,517,370
Proposal
</Table>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
13
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 8, 2002 By: /s/ Steven H. Davis
---------------------------------------
Steven H. Davis, President, and Chief
Executive Officer
By: /s/ Dale W. Bleck
---------------------------------------
Dale W. Bleck, Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER OF
CET ENVIRONMENTAL SERVICES, INC.
PURSUANT TO 18 U.S.C. SECTION 1350
We certify that, to the best of our knowledge and belief, the Quarterly
Report on Form 10Q-SB of CET Environmental Services, Inc. for the period ending
June 30, 2002:
(1) complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operation of CET Environmental Services, Inc.
/s/ Steven H. Davis /s/ Dale W. Bleck
- --------------------------------- ---------------------------
Steven H. Davis Dale W. Bleck
Chief Executive Officer Chief Financial Officer
August 8, 2002 August 8, 2002
14