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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 SEPTEMBER 30, 2003
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 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
(Former name, former address and former fiscal year, if changed since last
report)
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 October 15, 2003, 5,757,792 shares of common stock, no par value per
share, were outstanding.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CET SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------- ------------
ASSETS
CURRENT ASSETS:
Cash ............................................................. $ 445,153 $ 391,304
Restricted cash .................................................. 247,945 -
Accounts receivable, less allowance for doubtful accounts of
$17,904 in 2003 and 2002 ....................................... 59,081 262,400
Accounts receivable-RFI .......................................... 2,875,000
Contracts in process, less allowance for doubtful accounts of
0$ in 2003 and $8,944 in 2002 ................................ - 42,295
Retention receivable ............................................. - 27,200
Other receivables ................................................ - 23,662
Income tax receivable ............................................ 24,240 -
Supplies inventories ............................................. 4,565 13,972
Real estate inventories .......................................... 2,170,758 1,700,891
Prepaid expenses ................................................. 65,450 92,442
------------- ------------
Total Current Assets .................................... 5,892,192 2,554,166
------------- ------------
EQUIPMENT AND IMPROVEMENTS:
Field equipment .................................................. 57,175 160,412
Vehicles ......................................................... 4,073 311,199
Furniture & fixtures ............................................. 56,647 56,647
Office equipment ................................................. 137,474 145,859
Leasehold improvements ........................................... 24,931 24,931
------------- ------------
280,301 699,048
Less allowance for depreciation and amortization ................. (230,845) (610,655)
------------- ------------
Equipment and improvements, net ......................... 49,455 88,393
------------- ------------
OTHER ASSETS:
Deposits ......................................................... 8,269 12,268
Accounts receivable - non current ................................ - 3,234,739
------------- ------------
Total Other Assets ...................................... 8,269 3,247,007
------------- ------------
$ 5,949,916 $ 5,889,566
============= ============
The accompanying notes are an integral part of these statements.
1
CET SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................. $ 574,251 $ 928,586
Accrued expenses ................................................. 19,035 51,217
Accrued payroll and benefits ..................................... 23,317 27,943
Construction loan ................................................ 221,331 -
Notes payable - current .......................................... 600,000 300,000
------------- ------------
Total current liabilities ............................... 1,437,934 1,307,746
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COMMITMENTS AND CONTINGENT LIABILITIES .................................... - -
STOCKHOLDERS' EQUITY:
Common stock (no par value) - authorized 20.0 million shares;
5,757,792 shares issued and outstanding in 2003 and 2002,
respectively ................................................. 8,419,407 8,419,407
Paid-in capital .................................................. 104,786 104,786
Accumulated deficit .............................................. (4,012,211) (3,942,373)
------------- ------------
Total stockholders' equity .............................. 4,511,982 4,581,820
------------- ------------
$ 5,949,916 $ 5,889,566
============= ============
The accompanying notes are an integral part of these statements.
2
CET SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- ------------
REVENUE ................................................................... $ 142,653 $ 420,891
COST OF REVENUE:
Direct ........................................................... 95,779 468,532
Indirect ......................................................... 7,921 65,108
------------- ------------
103,700 533,640
------------- ------------
Gross profit (loss) ..................................... 38,953 (112,749)
------------- ------------
SELLING, GENERAL & ADMINISTRATIVE EXPENSES ................................ 186,083 277,043
------------- ------------
Operating profit (loss) ................................. (147,130) (389,792)
------------- ------------
OTHER INCOME:
(Loss) on sale of equipment ...................................... (753) (2,623)
Interest income, net ............................................. 19,717 2,133
Other income ..................................................... 660 2,674
------------- ------------
19,624 2,184
------------- ------------
Income (loss) before income taxes ....................... (127,506) (387,608)
------------- ------------
INCOME TAX BENEFIT ........................................................ - -
------------- ------------
NET INCOME (LOSS) ......................................................... $ (127,506) $ (387,608)
============= ============
Earnings (loss) per common share - basic .................................. $ (0.02) $ (0.07)
============= ============
Weighted average number of common shares outstanding ...................... 5,757,792 5,757,792
============= ============
The accompanying notes are an integral part of these statements.
3
CET SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- ------------
REVENUE................................................................. $ 719,788 $ 2,001,023
COST OF REVENUE:
Direct......................................................... 548,021 1,963,631
Indirect....................................................... 83,566 437,706
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631,587 2,401,337
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Gross profit (loss) .................................. 88,201 (400,314)
------------- ------------
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 370,525 1,399,330
------------- ------------
Operating loss........................................ (282,324) (1,799,644)
------------- ------------
OTHER INCOME (EXPENSE):
Gain (loss) on sale of equipment............................... 63,665 (385,523)
Interest income (expense), net................................. 18,326 8,421
Other income .................................................. 3,102 3,764
------------- ------------
85,093 (373,338)
------------- ------------
Income (loss) before income taxes..................... (197,231) (2,172,982)
------------- ------------
INCOME TAX BENEFIT...................................................... 127,393 -
------------- ------------
NET INCOME (LOSS)....................................................... $ (69,838) $ (2,172,982)
============= ============
Earnings (loss) per common share - basic................................ $ ( 0.01) $ (0.38)
============= ============
Weighted average number of common shares outstanding.................... 5,757,792 5,787,440
============= =============
The accompanying notes are an integral part of these statements.
4
CET SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED,
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................................... $ (69,838) $ (2,172,982)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................. 31,552 142,829
Loss (gain) on disposal of equipment ...................................... (63,665) 385,523
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ....................... (2,671,681) 3,838,700
Decrease in contracts in process ................................. 42,295 1,626,356
Decrease (increase) in retention and other receivables ........... 50,862 (33,333)
Increase in income tax receivable ................................ (24,240) -
Decrease in prepaid expenses ..................................... 26,992 69,803
Decrease in supply inventory and other assets .................... 3,248,145 112,965
Increase in real estate inventories .............................. (469,867) (698,650)
Decrease in accounts payable ..................................... (354,335) (2,522,067)
Decrease in accrued expenses ..................................... (36,808) (151,602)
------------- -------------
Net cash provided by (used in) operating activities ..... (290,588) 597,542
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of vehicles ....................................................... (4,073) -
Proceeds for sales of equipment ............................................. 75,124 146,363
------------- -------------
Net cash provided by (used in) investing activities ..... 71,051 146,363
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash ................................................. (247,945) -
Proceeds from construction loan ............................................. 221,331 -
Proceeds from issuance of notes ............................................. 300,000 -
Payments on notes ........................................................... - (98,466)
Payments on repurchases of common stock ..................................... - (86,600)
------------- -------------
Net cash provided by (used in) financing activities ..... 273,386 (185,066)
------------- -------------
INCREASE IN CASH ............................................................................ 53,849 558,829
CASH AT BEGINNING OF PERIOD ................................................................. 391,304 469,939
------------- -------------
CASH AT END OF PERIOD ....................................................................... $ 445,153 $ 1,028,778
============= =============
The accompanying notes are an integral part of these statements.
5
CET SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
NOTE 1. BASIS OF PRESENTATION. The accompanying unaudited financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America 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 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, 2002 has been
derived from the audited consolidated financial statements at that
date. Operating results for the nine months ended September 30, 2003
are not necessarily indicative of results that may be expected for the
year ending December 31, 2003. For further information, refer to the
audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2002.
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 2003 and 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.
NOTE 3. STOCK-BASED COMPENSATION. SFAS No. 123, Accounting for Stock-Based
Compensation, establishes financial accounting and reporting standards
for stock-based employee compensation plans. SFAS No. 123 encourages
entities to adopt a fair-value-based method of accounting for stock
compensation plans. However, SFAS No. 123 also permits entities to
continue to measure compensation costs under APB 25 with the
requirement that pro forma disclosures of net income and earnings per
share be included in the notes to financial statements. The Company
follows the disclosure requirements of SFAS No. 123 and SFAS 148 by
presenting pro forma results of net income and earnings per share data;
however, the Company uses the intrinsic value method as prescribed by
APB 25 to account for its stock-based employee compensation plans.
Had compensation cost for these plans been determined consistent with
SFAS No. 123, the Company's net loss and loss per share would have been
increased to the following pro forma amounts:
6
Three Months Ended Three Months Ended
September 30, September 30,
2003 2002
------------------ ------------------
Net profit (loss) available to common
stockholders:
As reported $ (127,506) $ (387,608)
Stock compensation expense (1,329) (3,468)
------------------ ------------------
Pro forma $ (128,835) $ (391,076)
================== ==================
Basic and diluted net loss available
to common stockholders per common
share:
As reported $ (0.02) $ (0.07)
Pro forma $ (0.02) $ (0.07)
Nine Months Ended Nine Months Ended
September 30, September 30,
2003 2002
------------------ ------------------
Net profit (loss) available to common
stockholders:
As reported $ (69,838) $ (2,172,982)
Stock compensation expense (4,728) (10,404)
------------------ ------------------
Pro forma $ (74,566) $ (2,183,386)
================== ==================
Basic and diluted net loss available
to common stockholders per common
share:
As reported $ (0.01) $ (0.38)
Pro forma $ (0.01) $ (0.38)
NOTE 4. SEGMENT INFORMATION. The Company operates in two business segments -
water/wastewater construction, and residential housing development and
construction. All of the Company's operations and customers are located
in Colorado. Through December 31, 2002, the Company operated in one
business segment, water/wastewater construction, and accordingly
comparable prior year information cannot be presented. A summary of the
Company's business segments is shown below (in thousands).
Year to Date Residential Water/wastewater
September 30, 2003 Housing Construction Corporate Total
- ---------------------------------- -------------------------------------------------------------
Revenues $ - $ 720 $ - $ 720
Segment profit (loss) $ (66) $ 83 $ (87) $ (70)
Interest revenue (expense) net $ - $ (1) $ 20 $ 19
Depreciation and amortization $ 8 $ 24 $ 32
Segment assets $ 2,171 $ 67 $ 3,712 $ 5,950
Expenditures for segment assets $ 470 $ - $ 4 $ 474
7
Quarter to Date Residential Water/wastewater
September 30, 2003 Housing Construction Corporate Total
- ---------------------------------- -------------------------------------------------------------
Revenues $ - $ 143 $ - $ 143
Segment profit (loss) $ (22) $ 24 $ (130) $ (128)
Interest revenue (expense) net $ - $ - $ 20 $ 20
Depreciation and amortization $ 4 $ 6 $ 10
Segment assets $ 2,171 $ 67 $ 3,712 $ 5,950
Expenditures for segment assets $ 289 $ - $ - $ 289
NOTE 5. RESTRICTED CASH. Under the terms of the $1.63 million construction loan
from Vectra Bank, the Company is required to maintain a $200,000 money
market account as part of its collateral (see Note 10. Construction
Loan). Also in the same money market account, an additional $47,945 is
held on a restricted basis to support two letters of credit issued by
Vectra Bank, totaling $367,000. The letters of credit are required by
the City of Westminster for payment of infrastructure changes at the
redevelopment site (see Note 8. Real Estate Inventories).
NOTE 6. INCOME TAX RECEIVABLE. Earlier in the current year, the Company filed
amended tax returns for 1998 and 2000. Utilizing the loss-carryback
provisions of the tax code, the Company deemed that it was entitled to
recover $127,393 of prior tax payments. During the third quarter,
$103,153 was received plus $20,000 of accrued interest. At September
30, 2003, a tax receivable of $24,240 remained on the balance sheet as
a current asset.
NOTE 7. ACCOUNTS RECEIVABLE-RFI. On August 7, 2002, after a lengthy
court-ordered arbitration, the Company entered into an agreement with
Remediation Financial, Inc. ("RFI") allowing for the recovery of $3.2
million plus accrued interest at an annual rate of 8% from October 19,
2001, contingent upon, but not limited to, the sale of the Hercules
property by not later than November 1, 2003.
In June 2003, the RFI agreement was modified in an effort to help
facilitate the sale of the Hercules property to a third party. Under
the modification, the Company would receive a flat payment of
approximately $2.9 million upon the closing of the property sale to the
third party. Consequently, the Company recorded a bad debt expense of
approximately $321,000 for the reduction in the total principal amounts
due.
Subsequent to the close of the third quarter, on November 4, 2003 the
sale of the property was completed and the Company received $2,875,000,
and ended all litigation with RFI and affiliated partnerships, and
extinguished all related obligations (see Note 12. Contingencies.) The
prolonged delay in collecting this has had a negative impact on the
Company's cash flow. On the December 31, 2002 financial statements this
accounts receivable was classified as non-current due to the
uncertainty of collection.
NOTE 8. REAL ESTATE INVENTORIES. The Company has a development agreement with
the City of Westminster, Colorado to redevelop a residential
real-estate project. The project entails purchasing the subject
property, demolition and environmental remediation, and construction of
new residential housing units and other related structures. Under the
Development Agreement, the City of Westminster has provided
approximately $901,000 toward the $1,601,000 purchase price of the
property, paid the Company approximately $185,000 for demolition work,
and provided other assistance. The Company recorded the $901,000
received from the City of Westminster as a reduction to the cost of the
property acquired during 2002. The Company is required to sell at least
10 of the 50 housing units at a base price of $170,000, or less, to
qualified buyers; to make certain off-site improvements along street
frontages; and to provide the necessary insurance for the project. The
Company commenced construction of the Westminster Redevelopment housing
units in June 2003. In addition, the Company is engaged in a
Brownfields project of approximately five acres in size that entails
purchasing subject property, environmental remediation, and
construction of residential housing units. There has been no revenue
recorded on these projects. All direct costs, including land, land
development costs, and indirect costs related to development are
capitalized during the development period.
8
NOTE 9. BAD DEBT RECOVERY. In the mid-1990's, the Company performed remediation
work for RRO, which failed to pay for tendered invoices approximating
$2.1 million. While the Company sought legal recourse in an effort to
collect these receivables, the legal problems of the RRO principals and
third party claims regarding RRO's property and mineral rights
suggested that collection of the receivables was becoming highly
problematic; and the receivables were written off in 1998.
Subsequently, a third party attempted to resurrect RRO's operations
and, in November 2001, the Company exchanged the written-off
receivables for a $500,000 note secured by a deed of trust. Since
certain issues regarding RRO property remained unresolved the value of
the note was considered suspect and, therefore, remained a written-off
asset. At the end of the second quarter, the Company sold a
previously-written-off note issued by Road Runner Oil and an affiliated
company ("RRO"), a former customer, to Elk Petroleum Uintah, Inc. for
the face value of $500,000 plus $46,000 in interest. In June 2003, the
Company collected $546,000 as final payment on this previously
written-off receivable. The $546,000 recovery, plus $9,000 resulting
from a decrease in bad debt reserves no longer needed and $44,000
collected from other previously written-off accounts, were offset
against a bad debt expense of approximately $321,000 stemming from the
write down of the RFI receivable due to the modified settlement with
RFI. See Note 7, Accounts Receivable-RFI.
NOTE 10. CONSTRUCTION LOAN. In June, the Company secured a $1.63 million
construction loan from Vectra Bank for the Westminster Redevelopment
Project. The loan is for a term of one year with an interest rate of
prime plus one percent (5% at September 30, 2003) and secured by
certain properties and a $200,000 money market deposit with Vectra
Bank. Also, during the third quarter, the Company provided the City of
Westminster two Letters of Credit issued by Vectra Bank totaling
approximately $367,000 to assure payment for infrastructure changes
related to the project.
NOTE 11. NOTES PAYABLE. In May 2003, the Company issued a nine-month $300,000
note to Western Capital Partners, LLC in exchange for working capital
cash. The note pays interest at 14% with monthly interest-only
payments. The principal is due at maturity, and the Company has an
option to extend the note for three months. The note is collateralized
by a first deed of trust on certain properties related to the
Westminster Redevelopment Project. In addition, the Company has a
$300,000 promissory note due December 31, 2003 which carries an
interest rate of 8% and is secured by a five-acre parcel of property
(see Note 8. Real Estate Inventories).
NOTE 12. CONTINGENCIES. In addition to the contingency discussed in Note 7.
Accounts Receivable-RFI and the subsequent resolution thereof, the
Company was party to, along with LCRI Investments, LLC, and RFI, a
guarantee on a $10.1 million bond securing financing for the Hercules
property. LCRI Investments, LLC was the primary borrower and was in
default on quarterly payments since 2001. The sale of the property on
November 4, 2003 extinguishes the Company's guarantee and all
obligations regarding the bond.
NOTE 13. LEGAL. Except as set forth below, the Company is not a party to any
material legal proceedings, which are pending before any court,
administrative agency, or other tribunal. Further, the Company is not
aware of any material litigation, which is threatened against it in any
court, administrative agency, or other tribunal. Management believes
that no pending litigation in which the Company is named as a defendant
is likely to have a material adverse effect on the Company's financial
position or results of operations.
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
investigation is now focused on 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. 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.
In an effort to resolve the dispute, the Company requested non-binding
arbitration, which allows for a full discussion of the issues before a
neutral party. The OIG rejected this proposal. Subsequently, during the
third quarter of 2002, the Company attempted to reach a settlement
agreement in order to limit further legal costs. In response to this
initiative, OIG has offered to settle the case for $8.7 million based
on certain scenarios and imputed costs generated within its offices.
The Company strongly disputes and rejects the basis upon which the
scenarios were developed and denies any wrongdoing in dealings with the
EPA. No loss provision has been made at September 30, 2003 relating to
this matter as the probable outcome is unknown. If the Company does not
prevail in its defense of this dispute, it could have a material
adverse effect on the Company's financial position, results of
operations, and liquidity.
9
On August 8, 2002, the Company was named as a third-party defendant in
a pending lawsuit in the U.S. District Court for the Western District
of Washington in which the United State Environmental Protection Agency
("EPA") sued Dan Alexander and Harriett Alexander (the "Alexanders").
The EPA alleges that the Alexanders caused the pollution of soil and
groundwater through its use and storage of a certain weed killer and is
seeking reimbursement of costs the EPA expended to clean up the site,
which totaled approximately $3,500,000. The Alexanders have denied
liability but have asserted that, if they are held liable, the Company,
Dow Chemical Company, and Ecology and Environment, Inc., the third
party defendants named in the lawsuit, should be held at least
partially responsible. In 1998 and 1999, as required under the
then-existing Emergency and Rapid Response and Clean-up Services
contract with the EPA, the Company provided and was compensated for
clean-up operations at the site. The Alexanders allege that the Company
caused the amount of pollution to increase through negligent actions in
its clean-up operations. The Alexanders are also seeking monetary
damages from the Company to reimburse them for damage to their
property, which they allege the Company caused during the clean-up
operations. The Company strongly disputes and rejects the allegations
upon which the lawsuit is based. No loss provision has been made at
September 30, 2003 relating to this matter as the probable outcome is
unknown. If the Company does not prevail in its defense of this
dispute, it could have a material adverse effect on the Company's
financial position, results of operations, and liquidity.
NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS. The Company has evaluated all recent
accounting pronouncements and believes such pronouncements do not have
a material effect on the Company's financial statements.
10
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 SEPTEMBER 30, 2003 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
REVENUE. Revenues were $143,000 in 2003, down $278,000 from $421,000 in
2002. The decline reflects the continuing transition of the Company's activities
away from its historical environmental services to the property development
business, which is not expected to contribute to revenues until the first
quarter of 2004.
COST OF REVENUE. Cost of revenue was $103,700 for the current period,
down $429,900 from $533,600 in the year-earlier period. The drop reflects the
changing nature of the Company's business from a service provider to a project
development manager and the lower level of overall activity as the transition
takes place.
SELLING AND GENERAL & ADMINISTRATIVE COSTS. Selling and General and
Administrative costs were $186,000 in 2003, down $91,000 from $277,000 in 2002.
The decrease stems from the reductions in Company personnel and office space
related to the EPA contract expiration and the withdrawal from the
water/wastewater business.
OTHER INCOME (EXPENSE). Other income is primarily accumulated interest
received in connection with the Company's tax refund (see Note 6. Income Tax
Receivable).
NET (LOSS). Net loss of $128,000 was recorded during the current
quarter compared to the net loss of $388,000 in the third quarter of 2002. The
net loss in 2003 was primarily due to overhead costs associated with
transitioning the business. The loss in 2002 was primarily due to cost overruns
on water/wastewater projects.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2002
REVENUE. Revenues were $720,000 in 2003, down $1,281,000 from
$2,001,000 in 2002. The revenue decline reflects the Company's continuing
transition from a provider of environmental services to property development
activities which are not expected to generate revenues until the first quarter
of 2004.
COST OF REVENUE. Cost of revenue for the current period was $631,600,
down $1,769,700 from $2,401,300 in the first nine months of 2002. The reduction
arises from the drop in overall activity, which, in turn, stems from the current
transitional shift in the Company's business from environmental services to
property development.
SELLING AND GENERAL & ADMINISTRATIVE COSTS. Selling and General and
Administrative costs were $371,000 in 2003, down $1,028,000 from $1,399,000 in
2002. This decrease arises from the reductions in Company personnel and office
space related to the EPA contract expiration and the withdrawal from the
water/wastewater business. In addition, a previously written off note was sold
to Elk Petroleum at the face value of $500,000 plus interest of $46,000 (see
Note 9. Bad Debt Recovery). The $546,000 recovery, plus $9,000 recovered from
bad debt reserves
11
and $44,000 collected from other previously written-off accounts, were offset
against a $321,000 write down of the RFI receivable (see Note 7. Accounts
Receivable-RFI.)
OTHER INCOME (EXPENSE). Other income is primarily the result of $64,000
from gains on dispositions of equipment and interest income of $20,000 on the
income tax refund (see Note 6. Income Tax Receivable). In the year-earlier
period, the loss on equipment dispositions of $386,000, net of other income,
resulted in a net other expenses of $373,000.
NET (LOSS). A net loss of $70,000 was recorded during the current
period compared to the net loss of $2,173,000 in the same period in 2002. The
loss in 2002 was primarily due to cost overruns on certain water/wastewater
projects and loss on equipment dispositions of $386,000.
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.
In February 2002, the Company reached a settlement agreement with
respect to the Santa Clarita project and received $2.1 million. In August 2002,
the Company entered into a settlement agreement with respect to the Hercules
project whereby the Company would receive $3.2 million plus interest at an
annual rate of 8% from October 19, 2001, contingent upon, but not limited to,
the sale of the Hercules property by RFI no later than November 1, 2003. In June
2003, the agreement was modified in an effort to help facilitate the sale of the
property to a third party. Under the modification, the Company agreed to a flat
payment of approximately $2.9 million upon the closing of the sale. At September
30, 2003, the Company had a receivable of approximately $2.9 million for the
Hercules project which had been classified as Non Current (see Note 7. Accounts
Receivable-RFI and Note 12. Contingencies). Subsequent to the close of the third
quarter, on November 4, 2003, the sale of the property was closed and the
Company received $2,875,000 and extinguished all contingent liabilities of the
Company to related parties. The delay in collecting the aforementioned
receivable on a timely basis has adversely effected the Company's cash flow.
The Company is currently engaged in a redevelopment project under an
agreement with the City of Westminster, Colorado. The project includes the
purchase of certain property, the demolition of existing structures,
environmental remediation, and construction of 50 new affordable housing units.
Under the Development Agreement, the City of Westminster has provided
approximately $901,000 toward the $1,601,000 purchase price of the property,
paid the Company approximately $185,000 for demolition work, and provided other
assistance. The Company is required to sell at least 10 of the 50 housing units
at a base price of $170,000, or less, to qualified buyers; to make certain
off-site improvement along street frontages; and to provide the necessary
insurance for the project. At September 30, 2003, the Company had capitalized
$1.6 million of costs related to permits, architectural designs, and land
acquisitions. The Company recorded the $901,000 received in 2002 from the City
of Westminster as a reduction to the cost of the property acquired.
At this time, the Company has completed the demolition work on the
first phase and has begun construction. The Company secured $1.63 million in
financing and has contracted with a builder for the construction of the housing
units. The Company is utilizing the services of a real estate marketing firm to
handle sales of the housing units. The estimated aggregate sales price of the
units is approximately $8.7 million, with initial sales anticipated to occur in
the first quarter of 2004.
12
The Company has also acquired a five-acre Brownfields remediation site
and plans to construct 54 residences providing a total estimated value of $9.5
million. At September 30, 2003, the Company had capitalized approximately
$629,000 of costs related to permits, architectural design, and property
acquisition. This property is encumbered by an 8%, $300,000 note, due on
December 31, 2003. The Company will seek financing for this project in the near
future. However, there can be no assurance that the Company will be successful
in obtaining additional financing for either of these projects on acceptable
terms. Failure to achieve such financing would have a major adverse impact on
the Company financial position, results of operations, and liquidity.
As noted in the Annual Report on Form 10-KSB for 2002, the Company has
been withdrawing from the water/wastewater services business because of the
limited potential opportunities and the highly competitive pricing practices
being encountered. At present, the Company provides certain on-going water
related services under two agreements which generate revenue of approximately
$20,000 to $40,000 monthly.
The Company's working capital increased to $4.45 million as of
September 30, 2003, up $3.21million from $1.24 million as of December 31, 2002.
The change in working capital is the result of an increase in current assets of
$3.34 million, which was primarily a result of the RFI settlement, and more than
offset an increase in current liabilities of $.13 million.
The Company's cash and cash equivalents increased approximately $54,000
to $445,000 at September 30, 2003 from $391,000 at December 31, 2002.
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ITEM 3. CONTROLS AND PROCEDURES
As of September 30, 2003, under the supervision and with the
participation of the Company's Chief Executive Officer and the Chief Financial
Officer, management has evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based on that evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of September 30,
2003. There were no changes in internal control over financial reporting that
occurred during the fiscal quarter covered by this report that have materially
affected, or are reasonably likely to affect, the Company's internal control
over financial reporting.
14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Subsequent to the close of the third quarter, on November 4, 2003,
certain legal proceedings between the Company, LCRI Investments, LLC
and RFI were concluded with the payment of $2,875,000 to the Company
and the extinguishing of all liabilities to parties related to the
litigation. See Note 7., Note 12. and Management Discussion of
Liquidity and Capital Resources for additional information.
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
investigation is now focused on 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. 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.
In an effort to resolve the dispute, the Company requested non-binding
arbitration which allows for a full discussion of the issues before a
neutral party. The OIG rejected this proposal. Subsequently, during the
third quarter of 2002, the Company attempted to reach a settlement
agreement in order to limit further legal costs. In response to this
initiative, OIG has offered to settle the case for $8.7 million based
on certain scenarios and imputed costs generated within its offices.
The Company strongly disputes and rejects the basis upon which the
scenarios were developed and denies any wrongdoing in dealings with the
EPA.
On August 8, 2002, the Company was named as a third-party defendant in
a pending lawsuit in the U.S. District Court for the Western District
of Washington in which the United State Environmental Protection Agency
("EPA") sued Dan Alexander and Harriett Alexander (the "Alexanders").
The EPA alleges that the Alexanders caused the pollution of soil and
groundwater through its use and storage of a certain weed killer and is
seeking reimbursement of costs the EPA expended to clean up the site,
which totaled approximately $3,500,000. The Alexanders have denied
liability but have asserted that, if they are held liable, the Company,
Dow Chemical Company, and Ecology and Environment, Inc., the third
party defendants named in the lawsuit, should be held at least
partially responsible. In 1998 and 1999, as required under the
then-existing Emergency and Rapid Response and Clean-up Services
contract with the EPA, the Company provided and was compensated for
clean-up operations at the site. The Alexanders allege that the Company
caused the amount of pollution to increase through negligent actions in
its clean-up operations. The Alexanders are also seeking monetary
damages from the Company to reimburse them for damage to their property
which they allege the Company caused during the clean-up operations.
The Company strongly disputes and rejects the basis upon which the
scenarios were developed and denies any wrongdoing.
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
15
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith:
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350
(b) Reports on Form 8-K
None.
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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 SERVICES, INC.
Dated: November 12, 2003 By: /s/ Steven H. Davis
-----------------------------------
Steven H. Davis, President and
Chief Executive Officer
By: /s/ Dale W. Bleck
-----------------------------------
Dale W. Bleck, Chief Financial
Officer
17
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
Exhibit 32.2 Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
18