U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 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 October 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
September 30, December 31,
2006 2005
(unaudited)
------------- ------------
ASSETS
Cash ......................................... $ 405,485 $ 392,470
Restricted cash .............................. 43,119 43,119
Accounts receivable .......................... 56,168 69,757
Real estate inventories ...................... 4,310,213 5,016,997
Prepaid expenses ............................. 45,064 30,454
Equipment and improvements - net ............. 3,355 4,541
Deposits ..................................... 3,024 3,024
Investment in LLC ............................ 280,375 263,367
----------- -----------
TOTAL ASSETS $ 5,146,803 $ 5,823,729
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ............................. $ 136,479 $ 118,471
Accrued expenses ............................. 56,731 57,037
Accrued construction expense ................. - 25,207
Retainage payable ............................ 7,592 5,356
Construction loan ............................ - 652,322
Notes payable ................................ 1,409,495 1,259,153
----------- -----------
TOTAL LIABILITIES 1,610,297 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 .......................... (4,899,287) (4,729,610)
----------- -----------
Total stockholders' equity ................ 3,536,506 3,706,183
----------- -----------
$ 5,146,803 $ 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
September 30, September 30,
2006 2005
------------- -------------
REVENUE ...................................... $ 410,717 $ 1,098,430
COST OF REVENUE:
Direct ..................................... 402,915 1,023,219
Indirect ................................... - 10,902
---------- -----------
402,915 1,034,121
---------- -----------
Gross profit ............................ 7,802 64,309
---------- -----------
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 156,380 144,159
---------- -----------
Operating loss .......................... (148,578) (79,850)
---------- -----------
OTHER INCOME:
Interest income ............................ 1,149 8,872
Other income ............................... 1,536 16,357
---------- -----------
2,685 25,229
---------- -----------
NET LOSS ..................................... $ (145,893) $ (54,621)
========== ===========
Loss per common share - basic and diluted .... $ (0.03) $ (0.01)
========== ===========
Weighted average number of common shares
outstanding ................................ 5,554,489 5,554,489
========== ===========
The accompanying notes are an integral part of these financial statements.
3
CET SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30, September 30,
2006 2005
------------- -------------
REVENUE ....................................... $2,582,809 $1,937,562
COST OF REVENUE:
Direct ...................................... 2,328,452 1,767,303
Indirect .................................... - 29,810
---------- -----------
2,328,452 1,797,113
---------- -----------
Gross profit ............................. 254,357 140,449
---------- -----------
SELLING, GENERAL & ADMINISTRATIVE EXPENSES .... 469,220 463,666
---------- -----------
Operating loss (214,863) (323,217)
---------- -----------
OTHER INCOME (EXPENSE):
Gain on elimination of payables ............. 43,936 31,358
Interest income (expense), net .............. 514 (1,399)
Other income ................................ 736 17,466
---------- -----------
45,186 47,425
---------- -----------
NET LOSS ...................................... $ (169,677) $ (275,792)
========== ===========
Loss per common share - basic and diluted ..... $ (0.03) $ (0.05)
========== ===========
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)
Nine Months Ended
September 30, September 30,
2006 2005
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................... $(169,677) $ (275,792)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization ............ 1,111 4,714
(Gain) loss on disposal of equipment ..... (425) 472
Gain on elimination of payables .......... (43,936) (31,358)
Changes in operating assets and liabilities:
Decrease in accounts receivable ......... 13,589 39,124
Increase in prepaid expenses ............ (14,610) (1,079)
Decrease in deposits and other assets ... - 5,245
Decrease (increase) in real estate
inventories ............................ 706,784 (2,104,123)
Increase in accounts payable ............ 61,944 13,032
Increase in retainage payable ........... 2,236 51,865
Decrease in accrued construction expense. (25,207) (101,941)
Decrease in accrued expenses ............ (306) (7,447)
--------- -----------
Net cash provided by (used in)
operating activities ................. 531,503 (2,407,288)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in LLC .......................... (17,008) (239,529)
Purchases of vehicles and office equipment.. - (5,064)
Proceeds from sales of equipment ........... 500 5,390
--------- -----------
Net cash used in investing activities.. (16,508) (239,203)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash ................ - 141,532
(Payments on) proceeds from construction
loan ..................................... (652,322) 920,308
Payments on notes payable .................. (300,658) -
Proceeds from notes payable ................ 451,000 628,401
--------- -----------
Net cash (used in) provided by
financing activities ................. (501,980) 1,690,241
--------- -----------
INCREASE (DECREASE) IN CASH 13,015 (956,250)
CASH AT BEGINNING OF PERIOD 392,470 1,044,894
--------- -----------
CASH AT END OF PERIOD $ 405,485 $ 88,644
========= ===========
The accompanying notes are an integral part of these financial statements.
5
CET SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
Note 1. Basis of Presentation. The accompanying unaudited consolidated
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 nine months ended September 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 nine months ended September 30 2006 and 2005 and for the
three months ended September 30, 2006 and 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.
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. The Plan terminated on March 1, 2005, and no
additional options may be granted under the Plan.
At September 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 September 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 nine months ended September 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 nine months
ended September 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
September 30, 2006 Housing Services Corporate Total
- ------------------- ---------------------------------------------------
Revenues $ 334 $ 77 $ - $ 411
Net income (loss) $ 4 $ 4 $(154) $ (146)
Depreciation and
amortization $ - $ - $ - $ -
Segment assets $4,590 $ 56 $ 501 $5,147
Three months ended:
September 30, 2005
- ------------------ ---------------------------------------------------
Revenues $1,033 $ 65 $ - $1,098
Net income (loss) $ 75 $ (4) $(126) $ (55)
Depreciation and
amortization $ - $ - $ 1 $ 1
Segment assets $6,494 $ 49 $ 198 $6,741
Nine months ended: Residential Water/wastewater
September 30, 2006 Housing Services Corporate Total
- ------------------- ---------------------------------------------------
Revenues $2,344 $239 $ - $2,583
Net income (loss) $ 243 $ 12 $(425) $ (170)
Depreciation and
amortization $ - $ - $ 1 $ 1
Segment assets $4,590 $ 56 $ 501 $5,147
7
Nine months ended:
September 30, 2005
- ------------------- ---------------------------------------------------
Revenues $1,547 $391 $ - $1,938
Net income (loss) $ 81 $ 71 $(428) $ (276)
Depreciation and
amortization $ - $ 1 $ 4 $ 5
Segment assets $6,494 $ 49 $ 198 $6,741
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):
September 30, 2006 December 31, 2005
------------------ -----------------
Townhomes under construction
and finished units $ 839 $2,001
Land under development 3,471 3,016
------ ------
$4,310 $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 nine months ended September 30, 2006. As of September 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 nine months
ended September 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 September 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
September 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 September 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 September 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 September 30, 2006 Compared to the Quarter Ended September 30,
2005
Revenue. Revenues for the third quarter of 2006 were $410,717, down
from the $1,098,430 reported for the year-earlier period. The sale of housing
units accounted for 81% of revenues in the current period, and the remaining
19% of revenue arose from water services activity. In the third quarter of
the prior year, housing unit sales accounted for 94% of revenue and water
services activity 6%. The number of closings on sales of housing units during
the current period was lower than the same period last year. This was
primarily the result of a decrease of units available for sale during the
period.
Cost of Revenue. Cost of revenue for the September 2006 period was
$402,915, down from the $1,034,121 recorded in the third quarter of 2005,
reflecting decreased sales activity on development sites.
Selling, General & Administrative Costs. Selling, General and
Administrative costs were $156,380, up from the year-earlier comparable of
$144,159, reflecting an increase in accounting and legal costs.
Other Income (Expense). Other income of $2,685 was recorded in the
third quarter of 2006 as compared to other income of $25,229 in the
respective period of 2005. This prior period benefited from the recovery of
unclaimed funds relating to business operations in 1988.
Net Loss. For the September 2006 quarter, a net loss of $145,893, or
$0.03 a share, was incurred, compared to the net loss of $54,621, or $0.01 a
share, in the third quarter of 2005. Revenue was significantly lower and
gross profits in the year-earlier period were bolstered by additional
concessions received from the City of Westminster.
10
Results of Operations
Nine Months Ended September 30, 2006 Compared to the Nine Months Ended
September 30, 2005
Revenue. Revenues were $2,582,809, up from the $1,937,562 reported for
the year-earlier period. The increase for the current period is largely the
result of the sale of two industrial buildings. Development activity
accounted for 91% of revenue in the current period as compared to 80% in the
prior year period. Water services activity accounted for the remaining
revenue of 9% and 20% in the respective periods.
Cost of Revenue. Cost of revenue was $2,328,452, up from the $1,797,113
recorded in 2005, reflecting the costs associated with the sale of the two
industrial buildings.
Selling, General & Administrative Costs. Selling, General and
Administrative costs were $469,220, up 1% from $463,666 in the comparable
period of 2005, reflecting an increase in accounting and legal costs which
was partially offset by a decrease in rent costs.
Other Income. Other income was $45,186 in 2006 and $47,425 in 2005
reflecting gains on the elimination of payables incurred in 2000 and the
recovery of unclaimed funds, respectively.
Net Loss. A net loss of $169,677, or $0.03 a share was incurred during
the nine months ended September 30, 2006, compared to the net loss of
$275,792, or $0.05 a share in the first nine months of 2005. The sale of the
two industrial buildings resulted in a lower net loss for the first three
quarters 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 September 30, 2006, the
Company had capitalized $1.5 million of costs related to permits,
11
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 September
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 September 30, 2006 the Company has sold 21 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 September 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 76,331 38,799 37,532
Notes Payable 1,409,495 1,409,495 -
---------- ---------- -------
Total $1,485,826 $1,448,294 $37,532
========== ========== =======
ITEM 3. CONTROLS AND PROCEDURES
As of September 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 September 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
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
13
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.
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
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CET SERVICES, INC.
Dated: November 14, 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
15