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 March 31, 2006
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)
12503 E Euclid Dr. #30, Centennial, CO 80111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (720) 875-9115
N/A
(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 [ ].
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of April 20, 2006, 5,554,489 shares of common stock, no par value per
share, were outstanding.
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Balance Sheets - March 31, 2006 (unaudited) and
December 31, 2005 .................................... 3
Consolidated Statements of Operations for the
Quarter Ended March 31, 2006 and 2005
(unaudited) .......................................... 4
Consolidated Statements of Cash Flows for the
Quarter Ended March 31, 2006 and 2005 (unaudited) .... 5
Notes to Unaudited Consolidated Financial Statements .. 6
ITEM 2. Management's Discussion and Analysis .................. 10
ITEM 3. Controls and Procedures ............................... 12
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings ..................................... 13
ITEM 2. Unregistered Sales of Equity Securities and Use
of Proceeds .......................................... 13
ITEM 3. Defaults on Senior Securities ......................... 13
ITEM 4. Submission of Matters to a Vote of Security Holders ... 13
ITEM 5. Other Information ..................................... 13
ITEM 6. Exhibits .............................................. 14
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CET SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2006 2005
----------- -----------
(unaudited)
ASSETS
Cash ......................................... $ 364,727 $ 392,470
Restricted cash .............................. 43,119 43,119
Accounts receivable .......................... 43,573 69,757
Real estate inventories ...................... 4,045,211 5,016,997
Prepaid expenses ............................. 14,282 30,454
Equipment and improvements - net ............. 4,145 4,541
Deposits ..................................... 3,024 3,024
Investment in LLC ............................ 278,594 263,367
----------- -----------
TOTAL ASSETS ................................... $ 4,796,675 $ 5,823,729
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ............................. $ 78,049 $ 118,471
Accrued expenses ............................. 30,175 57,037
Accrued construction expense ................. - 25,207
Retainage payable ............................ 20,000 5,356
Construction loan ............................ 35,666 652,322
Notes payable ................................ 958,495 1,259,153
----------- -----------
TOTAL LIABILITIES .............................. 1,122,385 2,117,546
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock (no par value - authorized
20,000,000 shares; 5,554,489 shares issued
and outstanding ............................. 8,331,007 8,331,007
Paid-in capital .............................. 104,786 104,786
Accumulated deficit .......................... (4,761,503) (4,729,610)
----------- -----------
Total stockholders' equity ................ 3,674,290 3,706,183
----------- -----------
$ 4,796,675 $ 5,823,729
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
CET SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Ended
--------------------------
March 31, December 31,
2006 2005
----------- -----------
REVENUE ........................................ $ 1,271,403 $ 138,037
COST OF REVENUE:
Direct ....................................... 1,182,141 125,756
Indirect ..................................... - 5,013
----------- -----------
1,182,141 130,769
Gross profit .............................. 89,262 7,268
----------- -----------
SELLING, GENERAL & ADMINISTRATIVE EXPENSES ..... 163,874 152,465
Operating loss ............................ (74,612) (145,197)
----------- -----------
OTHER INCOME (EXPENSE):
Gain on elimination of payables .............. 43,936 31,358
Interest expense ............................. (418) (2,355)
Other (expense) income ....................... (799) 541
----------- -----------
42,719 29,544
----------- -----------
NET LOSS ....................................... $ (31,893) $ (115,653)
=========== ===========
Loss per common share - basic and diluted ...... $ (0.01) $ (0.02)
=========== ===========
Weighted average number of common shares
outstanding .................................. 5,554,489 5,554,489
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
CET SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarter Ended
--------------------------
March 31, December 31,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................... $ (31,893) $ (115,653)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .............. 396 2,094
Gain on elimination of payables ............ (43,936) (31,358)
Changes in operating assets and liabilities:
Decrease in accounts receivable ........... 26,184 37,600
Decrease in prepaid expenses .............. 16,172 13,850
Decrease (increase) in real estate
inventories .............................. 971,786 (1,422,245)
Increase in accounts payable .............. 3,514 49,526
Increase in retainage payable ............. 14,644 50,608
Decrease in accrued construction expense .. (25,207) -
(Decrease) increase in accrued expenses ... (26,862) 34,816
----------- -----------
Net cash provided by (used in)
operating activities ................... 904,798 (1,380,762)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in LLC ............................ (15,227) (114,830)
----------- -----------
Net cash used in investing activities ... (15,227) (114,830)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash .................. - 91,750
(Payments on) proceeds from construction
loan ....................................... (616,656) 831,874
Payments on notes payable .................... (300,658) (1,545)
Proceeds from notes payable .................. - 307,500
----------- -----------
Net cash (used in) provided by
financing activities ................... (917,314) 1,229,579
----------- -----------
DECREASE IN CASH ............................... (27,743) (266,013)
CASH AT BEGINNING OF PERIOD .................... 392,470 1,044,894
----------- -----------
CASH AT END OF PERIOD .......................... $ 364,727 $ 778,881
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
CET SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
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, 2005 has been derived from the
audited consolidated financial statements at that date. Operating results
for the three months ended March 31, 2006 are not necessarily indicative of
results that may be expected for the year ending December 31, 2006. 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, 2005.
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 2006 and 2005, 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. During the first quarter of fiscal 2006,
the Company adopted the provisions of, and account for stock-based
compensation in accordance with, the Financial Accounting Standards Board's
("FASB") Statement of Financial Accounting Standards No. 123-revised 2004
("SFAS 123R"), "Share-Based Payment" which replaced` Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees." Under the fair value recognition provisions of
this statement, stock-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as expense on a
straight-line basis over the requisite service period, which is the vesting
period. The Company elected the modified-prospective method, under which
prior periods are not revised for comparative purposes. The valuation
provisions of SFAS 123R apply to new grants and to grants that were
outstanding as of the effective date and are subsequently modified. Estimated
compensation for grants that were outstanding as of the effective date will
be recognized over the remaining service period using the compensation cost
estimated for the SFAS 123 pro forma disclosures.
6
Through March 1, 2005, the Company had an incentive stock option plan ("the
Plan") which is more fully described in the Company's form 10K-SB for the
year-ended December 31, 2005. No options have been granted under the Plan
subsequent to its termination on March 1, 2005.
At March 31, 2006, the Company had outstanding options to purchase 72,500
shares of common stock at $.20 to $.4375 per share. 71,500 options are
exercisable at March 31, 2006 and 1,000 will vest on December 4, 2006. Based
on a Black-Scholes options pricing model utilizing the following weighted
average assumptions for grants in 2000 and 2002; no expected dividends,
expected volatility of 183%, risk-free interest rate of 5.0%, and expected
lives of 5 years; the fair value and the intrinsic value of options
outstanding and vesting during the three months ended March 31, 2006 is not
significant, therefore, the adoption of SFAS 123R did not have a material
impact on the consolidated financial position, results of operations and cash
flows. Proforma net loss and proforma net loss per share for the three months
ended March 31, 2005 are not materially different from reported amounts.
Note 4. Segment Information. The Company operates in two business segments
- - water/wastewater services, 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
March 31, 2006 Housing Services Corporate Total
- ------------------- ----------- ---------------- --------- -------
Revenues $ 1,182 $ 89 $ - $ 1,271
Net income (loss) $ 85 $ 4 $(121) $ (32)
Depreciation and
amortization $ - $ - $ - $ -
Segment assets $ 4,045 $ - $ 752 $ 4,797
Three months ended: Residential Water/wastewater
March 31, 2005 Housing Services Corporate Total
- ------------------- ----------- ---------------- --------- -------
Revenues $ - $ 138 $ - $ 138
Net income (loss) $ (29) $ 39 $(126) $ (116)
Depreciation and
amortization $ - $ - $ 2 $ 2
Segment assets $ 5,688 $ 54 $ 927 $ 6,669
Note 5. Restricted Cash. Short term letters of credit in the amount of
approximately $43,000 are being used in lieu of bonds to satisfy the City of
Westminster's requirements for infrastructure construction coverage. Cash of
approximately $43,000 is being held on a restricted basis in a money market
account to support these letters of credit issued by the lender.
7
Note 6. Real Estate Inventories. Real estate inventories consist of the
following (in thousands):
March 31, 2006 December 31, 2005
-------------- -----------------
Townhomes under construction
and finished lots $1,424 $2,001
Land and land under development 2,621 3,016
------ ------
$4,045 $5,017
====== ======
Note 7. Investment. In January 2005 the Company entered into an operating
agreement with a newly-formed entity, Arizona Avenue, LLC, a Colorado limited
liability company in which the Company is a 50% owner. The Company accounts
for this investment using the equity method of accounting. The Company has
been engaged by the LLC to manage the development of a five-acre site in
Aurora, Colorado. There were no management fees in connection therewith
during the three months ended March 31, 2006. As of March 31 2006, the
Company has contributed approximately $279,000 of its required $465,000
contribution. The Company's remaining contribution, expected to be funded
from current operations, is to be paid prior to Arizona Avenue, LLC's
application for a construction loan to build 54 town homes on land
contributed by the other 50% owner. Profits and losses, which are generally
to be allocated 50% to the Company and 50% to the other owner, were not
material for the three months ended March 31, 2006 and 2005.
Note 8. Construction Loan. In October 2004, the Company secured a $2.93
million construction loan for Sites II and III of its initial redevelopment
project in the City of Westminster, Colorado. The loan is due April 27,
2006, carries interest at prime plus three quarters of one percent (8.5 % at
March 31, 2006), and is secured by certain properties. Repayment terms
include 100% of sales proceeds after normal selling and closing costs are
deducted. During the third quarter of 2005, the Company began repayment of
the loan, which peaked at $2.1 million and the outstanding balance at March
31, 2006 is $35,666. The loan was repaid in full on April 13, 2006.
Note 9. Construction Contract. In August 2004, the Company entered into a
fixed-price construction contract with a local general contractor for the
construction at Sites II and III. The contract, in the amount of $2,745,417,
requires that certain funds are withheld as retainage payable. At March 31,
2006, approximately $5,000 was remaining to be incurred on the contract.
Accrued construction expense represents construction costs that have been
incurred but which have not yet been paid from the Company's construction
loan. The accrual is estimated based on invoices received from the Company's
general contractor.
Note 10. Notes Payable. In May 2005, the Company, supplemented by $100,000
available under the November 2004 development agreement with the City of
Westminster, purchased two properties in a redevelopment area within the
City. The Company obtained two notes, $126,000 and $200,000, from a local
lender to complete the purchase. The notes are for a term of two years
bearing interest at the rate of prime plus 0.75%, (8.5% at March 31, 2006)
8
with monthly interest-only payments. The principal is due at maturity, and
the notes are collateralized by a first deed of trust on the properties.
In April 2005, the Company obtained a loan in the amount of $161,000 from a
local lender to replace a $161,000 draw note which financed the purchase of a
property located in Westminster, Colorado. The loan, payable in one year, has
been extended, with a new maturity date of December 2006. The loan bears
interest at the rate of prime plus 0.75%, (8.5% at March 31, 2006) with
monthly interest-only payments. The principal is due at maturity, and the
loan is collateralized by a first deed of trust on the property.
In June 2004, the Company signed a Brownfields Cleanup Revolving Loan Fund
Agreement with the City of Aurora, Colorado, for approximately $471,000, to
finance the remediation of a five-acre site on which the Company has approval
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 loan is collateralized by a deed of trust on
the property.
Note 11. 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 the outcome on
any pending litigation that would have a material adverse effect on the
Company's financial position or results of operations is remote.
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 they 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 March 31, 2006 relating to this matter as management believes any
material adverse effect on the Company's financial position of results of
operations is remote. 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
Note 12. 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.
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
Quarter Ended March 31, 2006 Compared to the Quarter Ended March 31, 2005
Revenue. Revenues for the first quarter of 2006 were $1,271,403, up
from the $138,037 reported for the year-earlier period. The sale of an
industrial building and the sale of housing units accounted for 93% of
revenues in the current period, and the remaining 7% of revenue arose from
water services activity. In the first quarter of the prior year, water
services activity accounted for 100% of revenue. The increase in sales
activity was due to an increase in units available for sale in the first
quarter of 2006 as compared to the first quarter of 2005.
Cost of Revenue. Cost of revenue for the March 2006 period was
$1,182,141, up from the $130,769 recorded in the first quarter of 2005,
reflecting the expensing of capitalized costs related to the units sold.
Selling, General & Administrative Costs. Selling, General and
Administrative costs were $163,874, up from the year-earlier comparable of
$152,465, largely as a result of severance payments made to an employee who
was laid off.
Other Income (Expense). Other income of $42,719 was recorded in the
first quarter of 2006 as compared to other income of $29,544 in the
respective period of 2005. A gain of $43,936 and $31,358 in the first quarter
of 2006 and 2005, respectively, was realized from the elimination of
payables.
10
Net Loss. For the first quarter of 2006, a net loss of $31,893, or
$0.01 a share, was incurred, compared to the net loss of $115,653, or $0.02 a
share, in the first quarter of 2005. The reduced net loss was primarily due
to the increased sales of housing units during the quarter.
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 was required to and has sold 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 March 31, 2006, the
Company had capitalized $1.4 million of costs related to permits,
architectural designs, and land acquisitions and building. 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 complete and as of March 31,
2006, 22 units had been sold. In developing this site, the Company secured a
$1.67 million construction loan in mid-2003 that was repaid in June 2004. In
late September 2004, the Company entered into an agreement with a general
contractor in the amount of approximately $2.75 million for the construction
of the remaining 27 housing units at Site II and III. Shortly thereafter,
the Company secured a construction loan (see Note 8 - Construction Loan) in
the amount of approximately $2.9 million, which the Company believes is
sufficient to complete the development. The loan was repaid in full on April
13, 2006. Demolition and remediation has been completed, building activity
began during the fourth quarter of 2004, and initial sales were achieved in
the second quarter of 2005.
In addition the Company owns a five-acre residential site in Aurora,
Colorado, "the Aurora project", and during 2004, completed a major
remediation at the site, aided by a Brownfields Cleanup Revolving Loan Fund
Agreement with the City of Aurora in the amount of approximately $471,000
(see Note 10 - Notes Payable). The Company currently has this property
listed for sale with a local real estate broker.
11
In November 2004, the Company executed a second development agreement
with the City of Westminster under which the City would provide approximately
$410,000 and other assistance to the Company for the development of a
retail/office building of approximately 11,000 square feet as well as twelve
townhomes. The Company acquired the property necessary for this project in
May 2005, borrowing $326,000 and receiving $100,000 under the development
agreement (see Note 10 - Notes Payable). In October 2005, upon approval of
the development plan, the Company received the remaining $310,000 provided
for under the development agreement.
Also, in January 2005, the Company entered into an operating agreement
with a newly-formed entity, Arizona Avenue, LLC, a Colorado limited liability
company in which the Company is a 50% owner. The Company has been engaged by
the LLC to manage the development of a five-acre site in Aurora, Colorado.
There were no management fees in connection therewith during the three months
ended March 31, 2006. Through March 31, 2006, the Company has contributed
approximately $279,000 of its required $465,000 contribution. The Company's
remaining contribution, expected to be funded from current operations and
incurred in 2006, is to be paid prior to Arizona Avenue, LLC's application
for a construction loan to build 54 town homes on land contributed by the
other 50% owner. Profits and losses, which are generally to be allocated 50%
to the Company and 50% to the other owner, were not material for the three
months ended March 31, 2006.
Contractual Obligations
Payments Due By Period
-------------------------------------
Contractual Less Than
Obligations Total 1 Year 1-3 Years
----------------- ---------- --------- ---------
Operating Leases 94,668 37,639 57,029
Construction Loan 35,666 35,666 -
Notes Payable 958,495 161,000 797,495
---------- -------- --------
Total $1,088,829 $234,305 $854,524
========== ======== ========
ITEM 3. CONTROLS AND PROCEDURES
As of March 31, 2006, 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 March 31,
2006. 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.
12
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 will 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
13
ITEM 6. 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
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: May 12, 2006 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