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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 JUNE 30, 2004
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 July 15, 2004, 5,554,489 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
JUNE 30,
2004 DECEMBER 31,
(UNAUDITED) 2003
----------- -----------
ASSETS
CURRENT ASSETS:
Cash .................................................... $ 986,916 $ 1,050,945
Restricted cash ......................................... 248,049 1,209,983
Accounts receivable ..................................... 70,520 89,089
Real estate inventories ................................. 3,670,034 3,087,740
Prepaid expenses ........................................ 35,495 45,695
----------- -----------
Total Current Assets .......................... 5,011,014 5,483,452
----------- -----------
EQUIPMENT AND IMPROVEMENTS:
Field equipment ......................................... 38,235 55,436
Vehicles ................................................ 4,073 4,073
Furniture & fixtures .................................... 56,647 56,647
Office equipment ........................................ 140,803 137,474
Leasehold improvements .................................. 24,931 24,931
----------- -----------
264,689 278,561
Less allowance for depreciation and amortization ........ (242,016) (239,333)
----------- -----------
Equipment and improvements, net ............... 22,673 39,228
----------- -----------
OTHER ASSETS:
Deposits ................................................ 8,269 8,269
----------- -----------
Total Other Assets ............................ 8,269 8,269
----------- -----------
$ 5,041,956 $ 5,530,949
=========== ===========
(Continued)
CET SERVICES, INC.
1
CONSOLIDATED BALANCE SHEETS
(continued)
JUNE 30,
2004 DECEMBER 31,
(UNAUDITED) 2003
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ...................................................... $ 284,761 $ 319,213
Accrued expenses ...................................................... 30,277 33,771
Accrued construction expense .......................................... 91,447
Retainage payable ..................................................... 125,514 48,231
Construction loan ..................................................... - 750,033
Note payable .......................................................... 161,000 -
----------- -----------
Total current liabilities ................................... 692,999 1,151,248
----------- -----------
LONG-TERM DEBT ................................................................... 298,668 -
STOCKHOLDERS' EQUITY:
Common stock (no par value) - authorized 20,000,000 shares;
5,554,489 and 5,534,489 shares issued and outstanding in
2004 and 2003, respectively ...................................... 8,331,007 8,331,007
Paid-in capital ....................................................... 104,786 104,786
Accumulated deficit ................................................... (4,385,504) (4,056,092)
----------- -----------
Total stockholders' equity .................................. 4,050,289 4,379,701
----------- -----------
$ 5,041,956 $ 5,530,949
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
CET SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
2004 2003
----------- -----------
REVENUE ................................................................... $ 2,248,649 $ 151,376
COST OF REVENUE:
Direct ......................................................... 2,235,521 111,295
Indirect ....................................................... 2,478 36,867
----------- -----------
2,237,999 148,162
----------- -----------
Gross profit ......................................... 10,650 3,214
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses ......... 203,992 262,989
Bad debt recovery, net ............................... - (278,421)
----------- -----------
(15,432)
----------- -----------
Operating (loss) profit .............................. (193,342) 18,646
----------- -----------
OTHER INCOME :
Gain on sale of equipment ...................................... 4,225 64,418
Interest (expense) income, net ................................. (592) 243
Other income (expense) ......................................... - (1)
----------- -----------
3,633 64,660
----------- -----------
(Loss) income before income taxes .................... (189,709) 83,306
INCOME TAX BENEFIT ........................................................ - 127,393
----------- -----------
NET (LOSS) INCOME ......................................................... $ (189,709) $ 210,699
=========== ===========
(Loss) earnings per common share - basic .................................. $ (0.03) $ .04
=========== ===========
Weighted average number of common shares outstanding ...................... 5,554,489 5,757,792
=========== ===========
(Loss) earnings per common share - diluted ................................ $ (0.03) $ .04
=========== ===========
Weighted average number of common shares outstanding ...................... 5,554,489 5,758,490
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
CET SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
2004 2003
----------- -----------
REVENUE ................................................................... $ 2,747,034 $ 577,135
COST OF REVENUE:
Direct ......................................................... 2,692,349 452,242
Indirect ....................................................... 7,751 75,645
----------- -----------
2,700,100 527,887
----------- -----------
Gross profit ......................................... 46,934 49,248
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses ......... 382,845 462,863
Bad debt recovery, net ............................... - (278,421)
----------- -----------
382,845 184,442
----------- -----------
Operating loss ....................................... (335,911) (135,194)
----------- -----------
OTHER INCOME :
Gain on sale of equipment ...................................... 4,225 64,418
Interest income (expense), net ................................. 2,058 (1,391)
Other income ................................................... 216 2,442
----------- -----------
6,499 65,469
----------- -----------
Loss before income taxes ............................. (329,412) (69,725)
INCOME TAX BENEFIT ........................................................ - 127,393
----------- -----------
NET(LOSS) INCOME .......................................................... $ (329,412) $ 57,668
=========== ===========
(Loss) earnings per common share - basic .................................. $ (0.06) $ 0.01
=========== ===========
Weighted average number of common shares outstanding ...................... 5,554,489 5,757,792
=========== ===========
(Loss) earnings per common share - diluted ................................ $ (0.06) $ 0.01
=========== ===========
Weighted average number of common shares outstanding ...................... 5,554,489 5,758,299
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
CET SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ...................................................................... $ (329,412) $ 57,668
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization ................................................ 18,894 21,900
Gain on disposal of equipment ................................................ (4,225) (64,418)
Changes in operating assets and liabilities:
Decrease in accounts receivable .................................... 18,569 210,340
Decrease in contracts in process ................................... - 42,295
Decrease in retention and other receivables ........................ - 48,083
Increase in income tax ............................................. (127,393)
Decrease in prepaid expenses ....................................... 10,200 73,858
Decrease in inventory and deposits ................................. - 372,284
Increase in real estate inventories ................................ (582,294) (180,865)
Decrease in accounts payable ....................................... (34,452) (274,167)
Increase in retainage payable ...................................... 77,283 -
Increase in accrued construction expense ........................... 91,447 -
Decrease in accrued expenses ....................................... (3,494) (29,071)
----------- -----------
Net cash (used in) provided by operating activities ....... (737,484) 150,514
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of vehicles and office equipment ............................................. (3,329) (4,073)
Proceeds from sales of equipment ....................................................... 5,215 71,624
Decrease (increase) in restricted cash ................................................. 961,934 (200,000)
----------- -----------
Net cash provided by (used in) investing activities ....... 963,820 (132,449)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments on) proceeds from construction loan .......................................... (750,033) 29,076
Proceeds from long term debt ........................................................... 298,668
Proceeds from notes payable ............................................................ 161,000 300,000
----------- -----------
Net cash (used in) provided by financing activities ....... (290,365) 329,076
----------- -----------
(DECREASE) INCREASE IN CASH ....................................................................... (64,029) 347,141
CASH AT BEGINNING OF PERIOD ....................................................................... 1,050,945 391,304
----------- -----------
CASH AT END OF PERIOD ............................................................................. $ 986,916 $ 738,445
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
CET SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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, 2003 has been derived from the audited consolidated
financial statements at that date. Operating results for the six months
ended June 30, 2004 are not necessarily indicative of results that may
be expected for the year ending December 31, 2004. 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, 2003.
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, 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 dilution, using the treasury stock method, of potentially
dilutive securities including stock options and warrants to purchase
common stock. The weighted average number of fully diluted common
shares outstanding includes 698 shares and 507 shares for the three
months and six months ended June 30, 2003, respectively, representing
the dilutive effect of stock options.
In 2004, basic loss per share data was computed by dividing net loss by
the weighted average number of common shares outstanding during the
period. Diluted loss per share is equivalent to basic loss per share
since the computation does 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 Accounting Principles
Board Opinion 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) profit and (loss) earnings per
share would have been increased to the following pro forma amounts:
Three Months Ended Three Months Ended
June 30, June 30,
2004 2003
------------------ ------------------
Net (loss) profit:
As reported $(189,709) $ 210,699
Stock compensation expense (928) (1,329)
--------- ---------
Pro forma $(190,637) $ 209,370
========= =========
6
Basic and diluted net (loss) profit per common share:
As reported $ (0.03) $ 0.04
Pro forma $ (0.03) $ 0.04
Six Months Ended Six Months Ended
June 30, June 30,
2004 2003
---------------- ----------------
Net (loss) profit:
As reported $(329,412) $ 57,668
Stock compensation expense (1,856) (3,399)
--------- ---------
Pro forma $(331,268) $ 54,269
========= =========
Basic and diluted net (loss) profit per common share:
As reported $ (0.06) $ 0.01
Pro forma $ (0.06) $ 0.01
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. A summary of the Company's business segments is shown
below (in thousands).
Three months ended: Residential Water/wastewater
June 30, 2004 Housing Construction Corporate Total
------------------- ----------- ---------------- --------- -------
Revenues $ 2,099 $ 150 $ - $ 2,249
Net income (loss) $ (31) $ 43 $ (202) $ (190)
Depreciation and amortization $ - $ 1 $ 8 $ 9
Segment assets $ 3,918 $ 9 $ 1,115 $ 5,042
Three months ended:
June 30, 2003
------------------
Revenues $ - $ 151 $ - $ 151
Net income (loss) $ (22) $ 42 $ 191 $ 211
Depreciation and amortization $ - $ 2 $ 8 $ 10
Segment assets $ 1882 $ 79 $ 4,012 $ 5,973
7
Six months ended: Residential Water/wastewater
June 30, 2004 Housing Construction Corporate Total
---------------- ----------- ---------------- --------- -------
Revenues $ 2,429 $ 318 $ - $ 2,747
Net income (loss) $ (43) $ 81 $ (367) $ (329)
Interest income $ - $ - $ 2 $ 2
Depreciation and amortization $ - $ 3 $ 16 $ 19
Segment assets $ 3,918 $ 9 $ 1,115 $ 5,042
Six months ended:
June 30, 2003
-----------------
Revenues $ - $ 577 $ - $ 577
Net income (loss) $ (44) $ 59 $ 43 $ 58
Interest expense $ - $ (1) $ - $ (1)
Depreciation and amortization $ - $ 4 $ 18 $ 22
Segment assets $ 1,882 $ 79 $ 4,012 $ 5,973
NOTE 5. RESTRICTED CASH. At June 30, 2004, approximately $200,000 was held
in a restricted cash account to support construction, down from
$962,000 at December 31, 2003. Also, an additional $48,000 was
deposited on a restricted basis to support two letters of credit issued
by Vectra Bank, totaling $367,000 which were required by the City of
Westminster to assure completion of the infrastructure at the
redevelopment site. These letters of credit expired on July 2, 2004 and
were replaced by two new letters of credit totaling approximately
$50,000 and a reduction to the restricted cash requirement to $50,000.
NOTE 6. REAL ESTATE INVENTORIES.
Real estate inventories consist of the following (in thousands):
June 30, 2004 December 31, 2003
------------- -----------------
Townhomes under construction
and finished lots $1,524 $1,482
Land under development $2,146 $1,606
------ ------
$3,670 $3,088
====== ======
NOTE 7. CONSTRUCTION LOAN. In June 2003, the Company secured a $1.63 million
construction loan from Vectra Bank for the Westminster Redevelopment
Project. Under the terms of the loan, which carried an interest rate of
prime plus one percent, proceeds, net of normal selling and closing
costs, from the sale of housing units were applied to the loan. The
loan was completely repaid in June, 2004.
NOTE 8. CONSTRUCTION CONTRACT. In June 2003, the Company entered into a
fixed price construction contract with a local general contractor in
the amount of $2,448,000 to build housing units. Under the terms of the
contract, certain funds are withheld as retainage payable. At June 30,
2004, approximately $98,000 remained to be incurred on the contract.
NOTE 9. NOTES PAYABLE. In March 2004, the Company obtained a draw note
payable in the amount of $380,600 to Guarantee Bank payable in one year
to finance the purchase of two parcels of property located in
Westminster, Colorado. Through June 30, 2004, the Company had draws of
$161,000 under the note which was used to purchase one of the parcels
of property. The note bears interest at the rate of prime plus 1%
8
with a minimum of 5.5% with monthly interest only payments. The
principal is due at maturity and the note is collateralized by a first
deed of trust on the properties.
In June 2004, the Company signed a Brownfields Cleanup Revolving Loan
Fund Agreement with the City of Aurora, Colorado, for $471,495 to
finance the remediation of a five-acre site on which the Company
intends to construct 54 residential townhomes. The Loan is for a period
of three years with interest at 2% per annum payable monthly. The
principal is to be repaid at 1/54th of the outstanding balance within
30 days of each residential unit sale and the note is collateralized by
a deed of trust on the property. At June 30, 2004 the Company had drawn
approximately $299,000 on the loan.
NOTE 10. 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,
were not adverse nor did they result 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 June 30, 2004 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 11. 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.
NOTE 12. RELATED PARTY TRANSACTIONS. In March 2004, the Company sold a
townhome to Steven H. Davis, Chief Executive Officer, President and
Director for $160,949 which was comparable to the price received for
similar units from outside customers. The sales price approximated the
cost of the unit. In addition, the Company agreed to lease the unit on
a month-to-month basis from Mr. Davis for $1,050 per month to serve as
the model unit for the outside marketing firm.
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.
9
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2004 COMPARED TO THE QUARTER ENDED JUNE 30, 2003
REVENUE. Revenues for the second quarter of 2004 were $2,248,649, up
from the $151,376 reported for the year-earlier period. The increase for the
current period is largely the result of closings on housing units at the
Westminster development project.
COST OF REVENUE. Cost of revenue for the June 2004 period was
$2,237,999 up from the $148,162 recorded in the second quarter of 2003,
reflecting increased activity on development sites.
SELLING, GENERAL & ADMINISTRATIVE COSTS. Selling, General and
Administrative costs were $203,992, down 22% from the year-earlier comparable of
$262,989. However, the 2003 period benefited from a net recovery of $278,421 on
previously written off debt of $546,000, less a write down of $321,000 related
to a modification of a settlement agreement concluding a lengthy litigation.
OTHER INCOME (EXPENSE). Other income was $3,633 and $64,660 in the
respective periods reflecting gains on the sales of equipment.
NET LOSS. For the June 2004 quarter, a net (loss) income of ($189,709),
or ($0.03) a share, was incurred, compared to the net income of $210,699, or
$0.04 a share, in the second quarter of 2003, which arose from a gain on the
sale of equipment and an income tax recovery of $127,393.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003
REVENUE. Revenues were $2,747,034, up from the $577,135 reported for
the year-earlier period. The increase for the current period is largely the
result of closings on housing units at the Westminster development project.
COST OF REVENUE. Cost of revenue was $2,700,100, up from the $527,887
recorded in 2003, reflecting increased activity on development sites.
SELLING, GENERAL & ADMINISTRATIVE COSTS. Selling, General and
Administrative costs were $382,845, down 17% from $462,863 in the first half of
2003. Again, as noted in the discussion of the second quarter results, the prior
year first half benefited from a net bad debt recovery of $278,421.
OTHER INCOME (EXPENSE). Other income was $6,499 and $65,469 in the
respective periods reflecting gains on the sales of equipment.
NET LOSS. A net (loss) income of ($329,412), or ($0.06) a share was
incurred, compared to the net income of $57,668, or $0.01 a share in the first
six months of 2003, which arose totally from non-recurring items.
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.
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
10
buyers; to make certain off-site improvement along street frontages; and to
provide the necessary insurance for the project. At June 30, 2004, the Company
had capitalized $2.3 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.
The Westminster development is segmented into three sites. Construction
at Site I, consisting of 23 housing units, is virtually complete. Construction
at Site II and III is expected to begin during the third quarter. The estimated
aggregate sales price for all three sites is approximately $8.7 million,
approximately half of which should be realized in 2004. The Company believes
sufficient resources are available to complete Site I and initiate work on Site
II and III. Proceeds from the sale of Site I housing units plus additional
construction loans will be required to complete Site II and III. Failure to
achieve such financing on acceptable terms would have a material adverse impact
on the Company's financial position, results from operations, and liquidity.
The Company has also acquired a five-acre Brownfields remediation site
in Aurora, Colorado and plans to construct 54 residences with a total estimated
value of $9.5 million. At June 30, 2004, the Company had capitalized
approximately $1,338,000 of costs related to permits, architectural design,
remediation and property acquisition. In June 2004, the Company signed a
Brownfields Cleanup Revolving Loan Fund Agreement with the City of Aurora,
Colorado, for $471,495 to finance the remediation (see Note 9 - Notes Payable).
Preliminary site plans have been approved and remediation activity is under way.
The Company is engaged in ongoing discussions with the City of Aurora regarding
a definitive development plan and with potential lenders regarding financing for
the project. However, there can be no assurance that the Company will be
successful in obtaining financing on acceptable terms. Failure to achieve such
financing would have a major adverse impact on the Company financial position,
results of operations, and liquidity.
In January 2004, the Company entered into two Buy and Sell Real Estate
agreements, one of which involved a residential property site in Westminster,
Colorado, and was purchased for $258,000 on March 31, 2004. To finance this
transaction, the Company obtained a draw note payable and has drawn $161,000
(see Note 9 - Notes Payable). The other agreement covers a vacant 10-acre tract
in Jefferson County, Colorado, with a purchase price of $1.5 million. Completion
of this transaction is dependent upon the mutual resolution of a number of
conditions and contingencies with government entities and upon obtaining
financing on terms satisfactory to the Company.
At June 30, 2004, the Company's working capital was approximately $4.3
million, virtually unchanged from December 31, 2003. Cash, including restricted
cash, declined to approximately $1.23 million from approximately $2.26 million
at 2003 year-end, reflecting an increase in real estate inventory of
approximately $600,000 and a reduction of approximately $750,000 in the
outstanding construction loan.
CONTRACTUAL OBLIGATIONS
Payments Due By Period
------------------------------------
Contractual Less Than
Obligations Total 1 Year 1-3 Years
----------- -------- --------- ---------
Operating Leases 89,565 56,765 32,800
Note Payable 298,668 - 298,668
Note Payable 161,000 161,000 -
-------- -------- --------
Total $549,233 $217,765 $331,468
======== ======== ========
ITEM 3. CONTROLS AND PROCEDURES
As of June 30, 2004, 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 June 30, 2004.
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.
11
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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,
were not adverse nor did they result 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.
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
2, 2004 for the purposes of electing directors to the Board of Directors and
ratifying the selection of Gelfond Hochstadt Pangburn, P.C. as the Company's
independent accountants for the year ended December 31, 2004.
The following votes were cast by Shareholders with respect to the
election of directors at the Annual Meeting:
NAME SHARES VOTED FOR SHARES WITHHELD
Craig C. Barto* 5,280,407 6,500
Steven H. Davis* 5,256,107 30,800
John D. Hendrick* 5,256,107 30,800
George Pratt* 5,280,407 6,500
* Re-elected as a Director.
12
The following votes were cast by Shareholders with respect to the
selection of Gelfond Hochstadt Pangburn, P.C. as the Company's independent
accountants for the year ended December 31, 2004:
SHARES VOTED FOR SHARES VOTED AGAINST
Gelfond Hochstadt Pangburn, P.C. 5,286,907 0
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
During the quarter ended June 30, 2004, the Company filed one
report on Form 8-K dated April 21, 2004, reporting information
under Items 4 and 7 of that form.
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 SERVICES, INC.
Dated: August 12, 2004 By: /s/ Steven H. Davis
--------------------------------------
Steven H. Davis, President and Chief
Executive Officer
By: /s/ Dale W. Bleck
--------------------------------------
Dale W. Bleck, Chief Financial Officer
14
EXHIBIT INDEX
Exhibits
No. 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 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