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, 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
incorporation or organization) No.)
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 July 20, 2006, 5,554,489 shares of common stock, no par value per
share, were outstanding.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CET SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2006 December 31,
(unaudited) 2005
------------- ------------
ASSETS
Cash ...................................... $ 377,083 $ 392,470
Restricted cash ........................... 43,119 43,119
Accounts receivable ....................... 47,386 69,757
Real estate inventories ................... 4,390,096 5,016,997
Prepaid expenses .......................... 49,799 30,454
Equipment and improvements - net .......... 3,750 4,541
Deposits .................................. 3,024 3,024
Investment in LLC ......................... 280,330 263,367
----------- -----------
TOTAL ASSETS $ 5,194,587 $ 5,823,729
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ......................... $ 66,042 $ 118,471
Accrued expenses ......................... 36,651 57,037
Accrued construction expense ............. - 25,207
Retainage payable ........................ - 5,356
Construction loan ........................ - 652,322
Notes payable ............................ 1,409,495 1,259,153
----------- -----------
TOTAL LIABILITIES 1,512,188 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 ...................... (4,753,394) (4,729,610)
----------- -----------
Total stockholders' equity 3,682,399 3,706,183
----------- -----------
$ 5,194,587 $ 5,823,729
=========== ===========
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,
2006 2005
----------- -----------
REVENUE ....................................... $ 900,689 $ 701,095
COST OF REVENUE:
Direct .................................... 743,396 618,328
Indirect .................................. - 13,895
----------- -----------
743,396 632,223
----------- -----------
Gross profit .......................... 157,293 68,872
----------- -----------
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 148,966 167,042
----------- -----------
Operating profit (loss) ............... 8,327 (98,170)
----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of equipment ................. - 305
Interest expense .......................... (218) (7,916)
Other (expense) income, net ............... - 263
----------- -----------
(218) (7,348)
----------- -----------
NET INCOME (LOSS) ............................. $ 8,109 $ (105,518)
=========== ===========
Earnings (Loss) per common share - basic ...... $ 0.00 $ (0.02)
=========== ===========
Weighted average number of common shares
outstanding ............................... 5,554,489 5,554,489
=========== ===========
Earnings (Loss) per common share - diluted .... $ 0.00 $ (0.02)
=========== ===========
Weighted average number of common shares
outstanding ............................... 5,626,989 5,626,989
=========== ===========
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,
2006 2005
----------- -----------
REVENUE ....................................... $ 2,172,092 $ 839,132
COST OF REVENUE:
Direct .................................... 1,925,537 744,084
Indirect .................................. - 18,908
----------- -----------
1,925,537 762,992
----------- -----------
Gross profit .......................... 246,555 76,140
----------- -----------
SELLING, GENERAL & ADMINISTRATIVE EXPENSES .... 312,840 319,507
----------- -----------
Operating loss ........................ (66,285) (243,367)
----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of equipment ................. - 405
Gain on elimination of payables ........... 43,936 31,358
Interest expense .......................... (635) (10,271)
Other (expense) income .................... (800) 704
----------- -----------
42,501 22,196
----------- -----------
NET LOSS ...................................... $ (23,784) $ (221,171)
=========== ===========
Loss per common share - basic and diluted ..... $ (0.00) $ (0.04)
=========== ===========
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)
Six Months Ended
June 30, June 30,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................... $ (23,784) $ (221,171)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............. 791 3,745
Gain on disposal of equipment ............. - (405)
Gain on elimination of payables ........... (43,936) (31,358)
Changes in operating assets and liabilities:
Decrease in accounts receivable ......... 22,371 26,348
(Increase) decrease in prepaid expenses.. (19,345) 7,208
Decrease in deposits and other assets ... - 5,245
Decrease (increase) in real estate
inventories ........................... 626,901 (2,492,422)
(Decrease) increase in accounts payable.. (8,493) 410
(Decrease) increase in retainage payable. (5,356) 97,326
Decrease in accrued construction expense. (25,207) (36,770)
Decrease in accrued expenses ............ (20,386) (22,094)
----------- -----------
Net cash provided by (used in)
operating activities ............... 503,556 (2,663,938)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in LLC ............................ (16,963) (131,710)
Purchases of vehicles and office equipment ... - (5,064)
Proceeds from sales of equipment ............. - 5,390
----------- -----------
Net cash used in investing activities. (16,963) (131,384)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash .................. - 91,750
(Payments on) proceeds from construction loan. (652,322) 1,358,866
Payments on notes payable .................... (300,658) -
Proceeds from notes payable .................. 451,000 630,146
----------- -----------
Net cash (used in) provided by
financing activities ............... (501,980) 2,080,762
----------- -----------
DECREASE IN CASH (15,387) (714,560)
CASH AT BEGINNING OF PERIOD 392,470 1,044,894
----------- -----------
CASH AT END OF PERIOD $ 377,083 $ 330,334
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
CET SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 six months ended June 30, 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
For the six months ended June 30 2006 and 2005 and for the three months ended
June 30, 2005 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. For the three months ended June 30, 2006 basic and diluted earnings
per share were less than $0.01.
Note 3. Stock-Based Compensation. During the first quarter of fiscal 2006,
the Company adopted the provisions of, and accounts 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 10-KSB for the
year-ended December 31, 2005. No options have been granted under the Plan
subsequent to its termination on March 1, 2005.
At June 30, 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 June 30, 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 six months ended June 30, 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 six months
ended June 30, 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
June 30, 2006 Housing Services Corporate Total
- ------------------- ---------------------------------------------------
Revenues $ 828 $ 73 $ - $ 901
Net income (loss) $ 154 $ 4 $(150) $ 8
Depreciation and
amortization $ - $ - $ - $ -
Segment assets $ 4,670 $ 47 $ 478 $5,195
Three months ended:
June 30, 2005
- ------------------- ---------------------------------------------------
Revenues $ 513 $ 188 $ - $ 701
Net income (loss) $ 35 $ 35 $(175) $ (105)
Depreciation and
amortization $ - $ 1 $ 1 $ 2
Segment assets $ 6,775 $ 66 $ 478 $ 7,319
Six months ended: Residential Water/wastewater
June 30, 2006 Housing Services Corporate Total
- ------------------- ----------------------------------------------------
Revenues $ 2,010 $ 162 $ - $ 2,172
Net income (loss) $ 239 $ 8 $(271) $ (24)
Depreciation and
amortization $ - $ - $ 1 $ 1
Segment assets $ 4,670 $ 47 $ 478 $ 5,195
7
Six months ended:
June 30, 2005
- ------------------- ----------------------------------------------------
Revenues $ 513 $ 326 $ - $ 839
Net income (loss) $ 6 $ 74 $(301) $ (221)
Depreciation and
amortization $ - $ 1 $ 3 $ 4
Segment assets $ 6,775 $ 66 $ 478 $ 7,319
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.
Note 6. Real Estate Inventories. Real estate inventories consist of the
following (in thousands):
June 30, 2006 December 31, 2005
Townhomes under construction
and finished units $1,143 $2,001
Land under development 3,247 3,016
------ ------
$4,390 $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 corporation 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 six months ended June 30, 2006. As of June 30 2006, the
Company has invested approximately $280,000 to develop this project. Profits
and losses, which are generally to be allocated 50% to the Company and 50% to
the other owner, were not material for the six months ended June 30, 2006.
This property is currently listed for sale with a local real estate broker.
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 was repaid in full on
April 13, 2006.
Note 9. Notes Payable. In June 2006, the Company signed a promissory note
in the amount of $694,000 (of which $451,000 was drawn) with a local lender
to finance the purchase and the remodeling of a retail/office building and
the purchase of an adjacent industrial building located in Wheat Ridge,
Colorado. The note is for a term of one year bearing interest at the rate of
prime plus 0.75% with monthly interest-only payments (9.0% at June 30, 2006).
The principal is due at maturity and the loan is collateralized by a first
deed of trust on the property.
8
In May 2005, the Company, with $100,000 from 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% with monthly interest-only payments (9.0% at June
30, 2006). 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 is due and payable on
January 11, 2007, bears interest at the rate of prime plus 0.75%, with
monthly interest-only payments (9.0% at June 30, 2006). 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 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 Loan is collateralized by a deed of trust on the property.
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 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 June 30, 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 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.
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 June 30, 2006 Compared to the Quarter Ended June 30, 2005
Revenue. Revenues for the second quarter of 2006 were $900,689, up from
the $701,095 reported for the year-earlier period. The sale of townhomes and
the sale of a recently purchased industrial building accounted for 92% of
revenues in the current period, and the remaining 8% of revenue arose from
water services activity. In the second quarter of the prior year, housing
unit sales accounted for 73% of revenue and water services activity 27%.
Cost of Revenue. Cost of revenue for the June 2006 period was $743,396,
up from the $632,223 recorded in the second quarter of 2005, reflecting the
costs associated with the townhomes and the industrial building.
Selling, General & Administrative Costs. Selling, General and
Administrative costs were $148,966, down 11% from the year-earlier comparable
of $167,042, largely reflecting lower costs such as rent, insurance, and
depreciation.
Other Expense. Other expense of $218 was incurred in the second quarter
of 2006 as compared to other expense of $7,348 in the respective period of
2005 which reflected interest expense.
Net Income (Loss). For the June 2006 quarter, net income of $8,109, or
$0.00 a share, was recorded, compared to the net loss of ($105,518), or
($0.02) a share, in the second quarter of 2005. The results were bolstered by
the purchase and immediate sale of the industrial building.
10
Results of Operations
Six Months Ended June 30, 2006 Compared to the Six Months Ended June 30, 2005
Revenue. Revenues were $2,172,092, up from the $839,132 reported for
the year-earlier period. The increase for the current period is largely the
result of an increase of closings on housing units at the Westminster
development project and the sale of two industrial buildings. Water services
activity accounted for revenue of 7% and 39% in the respective periods.
Cost of Revenue. Cost of revenue was $1,925,537, up from the $762,992
recorded in 2005, reflecting increased activity on development sites and the
costs associated with the sale of two industrial buildings.
Selling, General & Administrative Costs. Selling, General and
Administrative costs were $312,840, down slightly from $319,507 in the first
half of 2005, reflecting lower rent, insurance, and depreciation.
Other Income. Other income was $42,501 in 2006 and $22,196 in 2005
reflecting gains on the elimination of payables incurred in 2000.
Net Loss. A net loss of $23,784, or $0.00 a share was incurred during
the six months ended June 30, 2006, compared to the net loss of $221,171, or
$0.04 a share in the first six months of 2005. The sale of the industrial
building, a reduction in Selling, General and Administrative costs, and an
increase in Other Income resulted in a lower net loss for the first half of
2006.
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 June 30, 2006, the
Company had capitalized $2.0 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.
11
The Westminster development is segmented into three sites. Construction
at Site I, consisting of 23 housing units is complete and, as of June 30,
2006, all 23 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 was
paid in full on April 13, 2006. Building activity began during the fourth
quarter of 2004 and as of June 30, 2006 the Company has sold 19 of the 27
units.
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 City of Aurora in the amount of approximately $471,000 (see
Note 9 - Notes Payable). The Company currently has this property listed for
sale with a local real estate broker.
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 9 - 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
corporation 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
period. Through June 30, 2006, the Company has invested approximately
$280,000 to develop this project. The Company currently has this property
listed for sale with a local real estate broker.
In April 2006, the Company entered into a contract to purchase two
buildings, an industrial building and a retail/office building, in Wheat
Ridge, Colorado. In May 2006, the Company entered into a contract to sell the
industrial building. In June 2006, the Company borrowed $694,000 (of which
$451,000 was drawn) from a local lender (see Note 9 - Notes Payable) and
completed the purchase of both buildings and the sale of the industrial
building. The Company has begun the rehabilitation of the retail/office
building and has listed the property for sale with a local real estate
broker.
12
Contractual Obligations
Payments Due By Period
-------------------------------------
Contractual Less Than
Obligations Total 1 Year 1-3 Years
----------- ---------- ---------- ---------
Operating Leases $ 85,596 $ 38,218 $47,378
Notes Payable 1,409,495 1,409,495 -
---------- ---------- -------
Total $1,495,091 $1,447,713 $47,378
========== ========== =======
ITEM 3. CONTROLS AND PROCEDURES
As of June 30, 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 June 30,
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.
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
13
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
None.
ITEM 5. OTHER INFORMATION
None.
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: August 10, 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
13