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 March 31, 1996 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 March 31, 1996
Common stock, $.0001 par value 531,667,515 shares
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Form 10-Q
1st Quarter
INDEX
PART I - FINANCIAL INFORMATION *
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1996
and December 31, 1995
Condensed Consolidated Statements of Operations - For the Three
Months Ended March 31, 1996 and 1995
Condensed Consolidated Statements of Cash Flows - For the Three
Months Ended March 31, 1996 and 1995
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis
PART II - OTHER INFORMATION
ITEMS 1 through 6.
Signature
* The accompanying financial statements are not covered
by an independent auditor's report.
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<TABLE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS March 31, December 31,
1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 155,000 $ 186,000
Trade accounts receivable, net of allowance
for doubtful accounts of $40,000 3,761,000 1,622,000
Unbilled trade receivable 297,000 17,000
Prepaid expenses 388,000 428,000
Income tax receivable, net 10,000 201,000
Total current assets $4,611,000 $2,454,000
PROPERTY, PLANT AND EQUIPMENT:
Equipment 3,510,000 3,453,000
Furniture and fixtures 371,000 352,000
Transportation equipment 391,000 391,000
4,272,000 4,196,000
Accumulated depreciation (2,763,000) (2,658,000)
1,509,000 1,538,000
INTANGIBLES AND OTHER ASSETS:
Goodwill and other intangibles, net of
accumulated amortization of $561,000
and $549,000 990,000 1,001,000
Other 3,000 3,000
993,000 1,004,000
Total assets 7,113,000 $ 4,996,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade 2,425,000 904,000
Revolving loans 1,101,000 725,000
Current portion of long term debt -
Financial institutions 343,000 348,000
Related parties 1,000 1,000
Accrued expenses and other liabilities 770,000 591,000
Income taxes payable - -
Total current liabilities 4,640,000 2,569,000
LONG-TERM DEBT:
Financial institutions 1,089,000 1,171,000
DEFERRED INCOME TAXES 171,000 178,000
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK:
$.0001 par value; 27,108,000 shares
authorized; 27,108,000 and 30,648,000
issued and outstanding in 1996 and 1995,
respectively; liquidation preference of
$220,000 in 1996 and $249,000 in 1995 209,000 237,000
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;
531,668,000 issued and outstanding 53,000 53,000
Additional paid-in capital 548,000 548,000
Retained earnings 401,000 238,000
Total stockholders' equity 1,004,000 841,000
Total liabilities and
stockholders' equity 7,113,000 $4,996,000
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1996 1995
<S> <C> <C>
SERVICE REVENUES $5,034,000 $3,757,000
COSTS AND EXPENSES:
Service costs and expenses 3,739,000 2,401,000
Selling, general & administrative 674,000 691,000
Management fees, related party 36,000 36,000
Interest 67,000 65,000
Depreciation and amortization 116,000 144,000
4,632,000 3,325,000
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 402,000 432,000
INCOME TAX EXPENSE 225,000 223,000
NET INCOME (LOSS) 177,000 209,000
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 163,000 $ 187,000
NET INCOME (LOSS) PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ .0003 $ .0004
WEIGHTED AVERAGE SHARES OUTSTANDING $531,668,000 $531,668,000
</TABLE>
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<TABLE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS
ENDED MARCH 31,
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FORM OPERATING ACTIVITIES:
Net income $ 177,000 $ 209,000
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 116,000 144,000
Deferred income taxes (7,000) (15,000)
Decrease (increase) in -
Trade accounts receivable (2,139,000) 1,196,000
Unbilled trade receivables (280,000) 189,000
Prepaids and other assets 40,000 89,000
Increase (decrease) in -
Accounts payable 1,521,000 (227,000)
Accrued expenses 179,000 (180,000)
Income taxes payable - 64,000
Net cash provided by operating activities (202,000) 1,469,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (76,000) (143,000)
Other - 3,000
Net cash used in investing activities (76,000) (140,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving lines of credit 3,340,000 290,000
Repayments of lines of credit (2,964,000) (1,079,000)
Proceeds from issuance of long-term debt - 403,000
Repayments of notes payable (87,000) (109,000)
Redemption of Series A preferred stock (28,000) (24,000)
Dividends declared (14,000) (20,000)
Net cash provided by (used in)
financing activities 247,000 (539,000)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (31,000) 790,000
CASH AND CASH EQUIVALENTS, beginning of period 186,000 126,000
CASH AND CASH EQUIVALENTS, end of period $ 155,000 $ 916,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ - $ 203,000
Cash paid for interest $ 76,000 $ 90,000
The accompanying notes are an integral part of these financial statements.
</TABLE>
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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 March 31, 1996, the results of its operations for the three
month period ended March 31,1996 and its cash flows for the three month
period ended March 31, 1996. Operating results for the three month period
ended March 31, 1996 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1996.
The consolidated balance sheet as of December 31, 1995 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, 1995.
2. CONTINGENCIES
The Company previously reported that a complaint was filed in March 1994 with
the Equal Employment Opportunity Commission by a temporary employee of the
Company for claims of sexual harassment. There have been no new developments
in this matter, and as of the date of this report, it is not possible to
make any determination of the probable outcome of this matter or the
likelihood of a material adverse judgment against the Company.
During 1995, an individual who allegedly sustained injuries while providing
services to the Company at a Koch Nitrogen Company ("Koch") facility
commenced litigation against the Company, Koch and others, seeking amounts
for compensatory and punitive damages. The plaintiff's minor daughter has
also asserted claims for a loss of consortium and support. Koch has
demanded that it be defended and indemnified by the Company and its insurer.
Additionally, in 1995, an employee of the Company initiated litigation for
damages in respect of injuries claimed to have occurred while performing
catalyst services at a Unocal Corporation ("Unocal") facility. The Company
has not been named a party in the proceedings as Unocal is being defended
by the Company's general liability insurer pursuant to Unocal's demand for
coverage as an additional insured on a contractual indemnity. Demand has
also been made on the Company by Koch Refining Company, L.P. ("KRC")
regarding a total of $219,000 paid by KRC to three employees of the Company
for alleged injuries sustained in October 1995 at KRC's Corpus Christi,
Texas facility. The Company's general liability insurer has not responded
to the demand.
The Company believes that, to the extent it may have any liability with
respect to the claims described on the paragraph immediately above, the
Company would be covered by its workers' compensation and general liability
insurance carriers. The initial premium paid by the Company with respect to
these policies is subject to adjustment based on certain insurance
components plus losses during the applicable policy periods. Based on
current estimates prepared by the Company's insurers, the Company at
December 31, 1995 accrued a retrospective insurance premium of $300,000.
This amount represents a general reserve pending the resolution of the Koch,
KRC, and Unocal claims, and various other open routine claims incidental to
the Company's business which affect the same policy years and, therefore,
the retrospective premium adjustments. However, due to the uncertainty of
various factual and legal issues which may affect these claims, there can be
no assurance as to the outcome of these claims or the adequacy of the amount
reserved.
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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 increased
from ($115,000) at December 31, 1995 to ($29,000) at March 31, 1996. This
improvement in working capital is attributable to profitable operations
during the first quarter of 1996.
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 $1,450,000 and the line expires
on July 31, 1996. At March 31, 1996 there was a $1,101,000 balance
outstanding on this line-of-credit.
Net worth increased from $841,000 at December 31, 1996 to $1,004,000 at
March 31, 1996. The $163,000 increase in net worth is due to net income of
$177,000 for the three months ended March 31, 1996, reduced by $14,000 in
dividends declared on preferred stock for the period.
In the previous years, the Company financed capital equipment expenditures
through a $2,100,000 loan with a financial institution. The current balance
outstanding on this loan is approximately $1,432,000. The loan is to be
repaid in monthly installments of $46,000 with all unpaid interest and
principal due December 31, 1997. The Company currently has no commitments
to purchase any additional equipment and the capital equipment loan referred
to above has no availability currently for future capital expenditures.
The Company's available borrowings under its existing credit facility,
existing cash and internally generated funds should be sufficient to meet
the current ongoing requirements of the operations of the Company.
RESULTS OF OPERATIONS
Service revenues for the three months ended March 31, 1996 and 1995 were
$5,034,000 and $3,757,000, respectively. The increase in service revenues
of $1,277,000 from 1996 to 1995 is attributable to both the rescheduling of
1995 work into the first quarter of 1996 and work subcontracted to sister
companies on two large projects. Approximately $3,190,000 of 1996 service
revenues was work originally scheduled to be performed during 1995. The
rescheduling of 1995 work by the customer into the first quarter of 1996
is believed to have cost the Company at least $850,000 in lost revenue
opportunities due to the Company operating at full capacity and unable to
commit and perform additional work in the quarter ended March 31, 1996.
A significant percentage of the Company's sales are generated through
reputation and referrals. Management continues to emphasis its sales and
marketing programs in an effort to expand the Company's customer base.
However, a highly competitive market is making expansion more difficult.
Cost of services as a percentage of service revenues was 74% and 64% for the
quarters ended March 31, 1996 and 1995, respectively. Excluding
subcontractor pass-through revenues of $1,068,000 and $505,000,
respectively, service costs as a percentage of service revenues were
approximately 68% for the quarter ended March 31, 1996 and 59% for the
quarter ended March 31, 1995. Subcontractor costs are normally
passed-through with an administrative charge of 0-10%. The net increase in
the cost of services as a percentage of service revenues is attributable to
an increase in direct costs. In slow periods, the Company will bid work at
lower gross profit margins to utilize its work force. In the fourth quarter
of 1995, the Company bid work at lower profit margins because it had
available manpower. When the 1995 work was rescheduled by customers into
1996, the Company did not have available manpower. As a result, the major
factor contributing to the increase in direct costs was lack of available
manpower, the hiring of contract laborers at rates in excess of pay rates
for Company employees to perform the the low margin work and associated
overtime, travel and per diem costs.
Management does not believe the lower margins incurred in the first quarter
of 1996 are indicative of margins expected for the remainder of the year.
To prevent future shifting of low margin work into peak periods, management
has changed its contract terms and conditions.
A $17,000 decrease in selling, general and administrative (SG&A) costs, for
the three month period ended March 31, 1996 as compared to the same period
in 1995 is due primarily to reduced administrative costs. Management
continues to focus efforts on controlling SG&A costs.
Depreciation and amortization expense decreased for the three months ended
March 31, 1996 as compared to the corresponding period in the previous year
due to some equipment being fully depreciated.
The Company's net income for the three months ended March 31, 1996 was
$177,000 as compared to net income of $209,000 for the three months ended
March 31, 1995. Overall net income decreased due to an increase in direct
costs. Management does not believe the increase in direct costs (exclusive
of subcontractor pass-through work) is indicative of the Company's future
direct costs or its impact on operating results.
The Company will continue to be affected by general economic conditions
including fluctuations in interest rates and international economic
conditions. Service revenues are subject to significant quarterly
fluctuations, affected primarily by the timing of planned shutdowns at its
customers' facilities. Fiscal 1996 is expected to be a challenging year for
the Company; however, management anticipates revenues and profits to exceed
prior fiscal year results.
<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: May 15, 1996 BY: /s/Alfred O. Breher
Alfred O. Brehmer,
Director, Secretary
and Treasurer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MARCH 31, 1996 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 155,000
<SECURITIES> 0
<RECEIVABLES> 3,801,000
<ALLOWANCES> 40,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,611,000
<PP&E> 4,272,000
<DEPRECIATION> 2,763,000
<TOTAL-ASSETS> 7,113,000
<CURRENT-LIABILITIES> 4,640,000
<BONDS> 1,432,000
211,000
0
<COMMON> 53,000
<OTHER-SE> 949,000
<TOTAL-LIABILITY-AND-EQUITY> 7,113,000
<SALES> 5,034,000
<TOTAL-REVENUES> 5,034,000
<CGS> 3,739,000
<TOTAL-COSTS> 3,739,000
<OTHER-EXPENSES> 826,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,000
<INCOME-PRETAX> 402,000
<INCOME-TAX> 225,000
<INCOME-CONTINUING> 177,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 177,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
