FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1995 Commission File Number 0-19013
ADVANCED ENVIRONMENTAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York 84-1059226
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
730 17th Street, Suite 712 Denver, Colorado 80202
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (303) 571-5564
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) Yes X
of the Securities Exchange Act of 1934 during the pre-
ceding 12 months (or for such shorter period that the No
registrant was required to file such reports), and (2)
has been subject to such filing requirements for the
past 90 days.
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the
latest practicable date.
Number of shares outstanding
Class at October 31, 1995
Common stock, $.0001 par value 531,667,515 shares
<PAGE>
Form 10-Q
3rd Quarter
INDEX
PAGE
PART I - FINANCIAL INFORMATION *
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1995
and December 31, 1994 3
Condensed Consolidated Statements of Operations - For the Three
Months and Nine Months Ended September 30, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows - For the Nine
Months Ended September 30, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis 7
PART II - OTHER INFORMATION
ITEMS 1 through 6. 10
Signature 11
* The accompanying financial statements are not covered
by an independent auditor's report.
<PAGE>
<TABLE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS September 30, December 31,
1995 1994
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 93,000 $ 126,000
Trade accounts receivable, net of allowance
for doubtful accounts of $40,000 912,000 2,497,000
Unbilled trade receivable 471,000
Prepaid expenses 235,000 197,000
Income tax receivable, net - 92,000
Total current assets $1,711,000 $3,101,000
PROPERTY, PLANT AND EQUIPMENT:
Equipment 3,447,000 3,084,000
Furniture and fixtures 364,000 346,000
Transportation equipment 360,000 360,000
4,171,000 3,790,000
Accumulated depreciation (2,547,000) (2,238,000)
1,624,000 1,552,000
INTANGIBLES AND OTHER ASSETS:
Goodwill and other intangibles, net of
accumulated amortization of $531,000
and $461,000 1,048,000 1,058,000
Other 8,000 5,000
1,056,000 1,063,000
Total assets 4,391,000 $ 5,716,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade 302,000 928,000
Revolving loans 336,000 789,000
Current portion of long term debt -
Financial institutions 437,000 248,000
Related parties 1,000 26,000
Accrued expenses and other liabilities 241,000 459,000
Income taxes payable - -
Total current liabilities 1,317,000 2,450,000
LONG-TERM DEBT:
Financial institutions 1,167,000 1,134,000
DEFERRED INCOME TAXES 208,000 181,000
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK:
$.0001 par value; 34,066,000 shares
authorized; 34,066,000 and 43,616,000
issued and outstanding in 1995 and 1994,
respectively; liquidation preference of
$277,000 in 1995 and $355,000 in 1994 265,000 342,000
COMMON AND OTHER STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value,
Convertible Series B; 100,000,000
shares authorized; 24,592,000 shares
issued and outstanding; liquidation
preference of $200,000 2,000 2,000
Common stock, $.0001 par value,
2,250,000,000 shares authorized;
531,667,515 issued and outstanding 53,000 53,000
Additional paid-in capital 548,000 548,000
Retained earnings 831,000 1,006,000
Total stockholders' equity 1,434,000 1,609,000
Total liabilities and
stockholders' equity 4,391,000 $5,716,000
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1995 1994
<S> <C> <C>
SERVICE REVENUES $1,912,000 $1,817,000
COSTS AND EXPENSES:
Service costs and expenses 1,357,000 1,557,000
Selling, general & administrative 668,000 549,000
Management fees, related party 24,000 24,000
Interest 55,000 43,000
Depreciation and amortization 107,000 154,000
2,211,000 2,327,000
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (299,000) (510,000)
INCOME TAX EXPENSE 144,000 (123,000)
NET INCOME (LOSS) (443,000) (387,000)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (211,000) $ (410,000)
NET INCOME (LOSS) PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ (*) $ (*)
WEIGHTED AVERAGE SHARES OUTSTANDING $531,667,515 $531,667,515
*Less than $.0001 per share
</TABLE>
<TABLE>
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
<CAPTION>
1995 1994
<S> <C> <C>
SERVICE REVENUES $ 8,060,000 $ 9,373,000
COSTS AND EXPENSES:
Service costs and expenses 5,499,000 6,304,000
Selling, general & administrative 2,044,000 1,774,000
Management fees, related party 72,000 72,000
Interest 172,000 161,000
Depreciation and amortization 376,000 468,000
8,163,000 8,779,000
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (103,000) 594,000
INCOME TAX EXPENSE 19,000 482,000
NET INCOME (LOSS) (122,000) 112,000
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (175,000) $ 47,000
NET INCOME (LOSS) PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ (*) $ (*)
WEIGHTED AVERAGE SHARES OUTSTANDING $531,667,515 $531,667,515
*Less than $.0001 per share
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FORM OPERATING ACTIVITIES:
Net income $ (122,000) $ 112,000
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 376,000 468,000
Deferred income taxes 27,000 (40,000)
Decrease (increase) in -
Trade accounts receivable 1,585,000 34,000
Unbilled trade receivables (282,000) -
Prepaids and other assets 54,000 (95,000)
Increase (decrease in -
Accounts payable (626,000) 123,000
Accrued expenses (218,000) (92,000)
Net cash provided by operating activities 794,000 510,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (318,000) (106,000)
Proceeds form sale of property, plant
and equipment - -
Other (60,000) 4,000
Net cash used in investing activities (378,000) (102,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds form revolving lines of credit 2,120,000 6,812,000
Repayments of lines of credit (2,573,000) (6,683,000)
Proceeds from notes payable 403,000 -
Repayments of notes payable (269,000) (390,000)
Redemption of Series A preferred stock (77,000) (67,000)
Dividends declared (53,000) (65,000)
Net cash used in financing activities (449,000) (393,000)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (33,000) 15,000
CASH AND CASH EQUIVALENTS, beginning of period 126,000 120,000
CASH AND CASH EQUIVALENTS, end of period $ 93,000 $ 135,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 165,000 $ 282,000
Cash paid for interest $ 167,000 $ 149,000
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all the normal recurring
adjustments necessary to present fairly the financial position of the
Company as of September 30, 1995, the results of its operations for
the three and nine month periods ended September 30, 1995 and its cash
flows for the nine month period ended September 30, 1995. Operating
results for the three and nine month periods ended September 30, 1995
are not necessarily indicative of the results that may be expected for
the year ended December 31, 1995.
The consolidated balance sheet as of December 31, 1994 is derived from
the audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. As a result, these
financial statements should be read in conjunction with the Company's
form 10-K for the fiscal period ended December 31, 1994.
2. RECLASSIFICATIONS
Certain amounts in the prior period's statement of operations and
cash flows have been reclassified to conform with the current period
presentation.
3. CONTINGENCIES
A customer is seeking indemnification from the Company in a personal
injury case pursuant to the terms of the contract between this customer
and the Company. This matter is being defended by the Company's insurer.
A former independent contractor has filed a sexual harassment complaint
with the Equal Employment Opportunity Commission against the Company.
There has not been a review of the claim sufficient for an evaluation of
its merits.
The Company was recently named as a defendant in litigation brought by
an employee of a sub-contractor for injuries allegedly sustained by him.
This matter is being defended by the Company's insurer.
A customer is seeking indemnification from the Company in a personal
injury case pursuant to the terms of the contract between this customer
and the Company. The Company and its insurer are denying indemnification.
The customer has notified the Company that it is considering filing a
cross-complaint against the Company.
Three Company employees were injured on a customer's premises. The
customer has notified the Company that it will seek indemnification as
an additional insured under the Company's insurance policy and pursuant
to contractual terms. The Company has notified the insurance carrier,
but has not received a response.
Based on information presently available to the Company which is
preliminary and subject to change, management does not believe these
matters will have a material adverse effect on the financial condition
of the Company. The accompanying financial statements do not include
any adjustments that might result from the outcome of the above matters.
<PAGE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
General - The Company, through its subsidiary, International Catalyst,
Inc. (Incat), provides catalyst handling services to chemical and
petrochemical refineries.
Liquidity and Capital Resources - The Company's working capital decreased
from $651,000 at December 31, 1994 to $394,000 at September 30, 1995.
This decrease in working capital is primarily attributable to operating
losses during the second and third quarter of 1995.
Incat has had an annual revolving working capital credit facility with
a financial institution since 1988, collateralized by its accounts
receivable and other intangible property. The maximum amount which may
be outstanding from time to time under the line is currently $1,400,000
and the next renewal date is July 31, 1996. At September 30, 1995 there
was a $336,000 balance outstanding on this line-of-credit.
Net worth decreased from $1,609,000 at December 31, 1994 to $1,434,000
at September 30, 1995. The $175,000 decrease in net worth is due to net
losses of $122,000 for the nine months ended September 30, 1995, reduced
by $53,000 in dividends declared on preferred stock for the period.
The Company financed capital equipment expenditures with a $2,100,000
financial institution loan. The current balance outstanding on this
loan is approximately $1,533,000. The loan is to be repaid in monthly
installments of $46,000 with all unpaid interest and principal due
December 31, 1997.
The Company may replace some equipment in the fourth quarter and will
finance this equipment with capital leases. Management believes that
its liquidity requirements can be funded through cash generated from
operations and through usage of the working capital credit facility as
discussed above.
RESULTS OF OPERATIONS
Service revenues for the three months ended September 30, 1995 were
$95,000 higher than for the corresponding period of the previous year.
Excluding the impact of subcontractor pass-through revenues of $22,000
for the quarter ended September 30, 1995 and $80,000 for the quarter
ended September 30, 1994, the increase in service revenues was $177,000.
For the nine months ended September 30, 1995, service revenues decreased
$1,313,000 from the same period ended September 30, 1994. Excluding the
impact of subcontractor pass-through revenues of $607,000 and $763,000 for
the nine month periods ended September 30, 1995 and 1994, respectively,
the decrease in revenues was approximately $1,157,000. The reduction in
service revenues for the nine months is attributable to slowing of
scheduled customer shutdowns and work which did not materialize in Mexico
due to extreme economic conditions in that country during the second
quarter of 1995.
Management plans to continue its sales and marketing programs in an
effort to expand the Company's customer base. For the quarter ended
September 30, 1995, the company has added four new customers in the
Southern and Southwest Regions totaling $45,000 in revenue. For the
nine months ended September 30, 1995, the Company has $285,000 in
revenue from new customers.
Cost of services as a percentage of service revenues was 71% and 86% for
the quarters ended September 30, 1995 and 1994, respectively. Excluding
low margin (5-10%) subcontractor pass-through revenues, service costs as
a percentage of service revenues were approximately 70% for the quarter
ended September 30, 1995 and 83% for the quarter ended September 30,
1994. This net decrease in the cost of services as a percentage of
revenues for the quarter is attributable to a reduction in direct cost
of 8.8% and a reduction of 2.6% in indirect cost. Direct cost as a
percentage of revenue for the year through September 30, 1995 is down
2.6% for this same period in 1994 and is attributable to doing a better
job of controlling direct job cost in the field.
Cost of services as a percentage of service revenue was 68% and 67% for
the nine months ended September 30, 1995 and 1994, respectively.
Excluding low margin (5-10%) subcontractor pass-through revenues, service
costs as a percentage of service revenues were approximately 65% and 64%
for the nine months ended September 30, 1995 and 1994, respectively.
Although service revenue volume is down for the nine month period ended
September 30, 1995, service costs and expenses as a percentage of revenue
are comparable to the prior year's because the decrease in direct costs
more than offset increases in indirect costs for the nine month period
ending September 30, 1995.
The increase of $119,000 and $270,000 in selling, general and adminis-
trative (SG&A) costs for the three months and nine month periods ended
September 30, 1995 as compared to the same period in 1994 is due
primarily to the opening of the Corpus Christi, Texas office. Expanding
services into Corpus Christi has caused an escalation in fixed SG&A;
however, management continues to focus efforts on controlling SG&A costs.
Depreciation and amortization expense decreased for the three month
and nine month periods ended September 30, 1995 as compared to the
corresponding periods in the previous year due to some equipment being
fully depreciated and some equipment not being depreciated due to it not
being placed in service until the fourth quarter.
The Company experienced a net loss of $443,000 and $122,000 for the three
and nine month periods ended September 30, 1995 and net loss of $387,000
and net income of $112,000 for the three and nine month periods ended
September 30, 1994. Overall net income has decreased due to a decline in
the volume of service revenues. Management is projecting 1995 fiscal
year service revenues to be down from 1994 by 17-20%. Major turnarounds
originally scheduled for 1995 have been delayed due to extended runs
and/or for economic reasons. Net income is anticipated to be less than
1994 fiscal year results primarily due to the decrease in volume and
the continuing costs of developing the Corpus Christi, Texas office.
<PAGE>
PART II - OTHER INFORMATION
Items 1 through 6. Not applicable.
<PAGE>
SIGNATURE
Pursuant to the requirements of The Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED ENVIRONMENTAL SYSTEMS, INC.
(Registrant)
DATE: November 14, 1995 BY: /s/Alfred O. Breher
Alfred O. Brehmer,
Director, Secretary
and Treasurer
<PAGE>
SIGNATURE
Pursuant to the requirements of The Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED ENVIRONMENTAL SYSTEMS, INC.
(Registrant)
DATE: November 14, 1995 BY: /s/ Alfred O. Brehmer
Alfred O. Brehmer,
Director, Secretary
and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SEPTEMBER 30, 1995 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 93,000
<SECURITIES> 0
<RECEIVABLES> 952,000
<ALLOWANCES> 40,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,711,000
<PP&E> 4,171,000
<DEPRECIATION> 2,547,000
<TOTAL-ASSETS> 4,391,000
<CURRENT-LIABILITIES> 1,317,000
<BONDS> 1,604,000
267,000
0
<COMMON> 53,000
<OTHER-SE> 1,379,000
<TOTAL-LIABILITY-AND-EQUITY> 4,391,000
<SALES> 8,060,000
<TOTAL-REVENUES> 8,060,000
<CGS> 5,499,000
<TOTAL-COSTS> 5,499,000
<OTHER-EXPENSES> 2,492,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 172,000
<INCOME-PRETAX> (103,000)
<INCOME-TAX> 19,000
<INCOME-CONTINUING> (122,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (122,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
