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 June 30, 1997 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 June 30, 1997
Common stock, $.0001 par value 531,667,515 shares
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION *
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1997
and December 31, 1996
Condensed Consolidated Statements of Operations - For the Three
Months and Six Months Ended June 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows - For the Six
Months Ended June 30, 1997 and 1996
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.
<PAGE>
<TABLE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS June 30, December 31,
1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 680,000 $ 151,000
Trade accounts receivable, net of allowance
for doubtful accounts of $40,000 2,677,000 1,339,000
Unbilled trade receivable 40,000 203,000
Prepaid expenses 97,000 62,000
Income tax receivable, net - 488,000
Deferred tax asset 131,000 404,000
Asset held for sale - 157,000
Total current assets $3,625,000 $2,804,000
PROPERTY, PLANT AND EQUIPMENT:
Equipment 3,179,000 2,992,000
Furniture and fixtures 344,000 313,000
Transportation equipment 391,000 391,000
3,914,000 3,696,000
Accumulated depreciation (2,715,000) (2,517,000)
1,199,000 1,179,000
INTANGIBLES AND OTHER ASSETS:
Goodwill and other intangibles, net of
accumulated amortization of $613,000
and $592,000 937,000 958,000
Other 51,000 50,000
988,000 1,008,000
Total assets 5,812,000 $ 4,991,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade 588,000 1,304,000
Revolving loans 1,363,000 519,000
Current portion of long term debt -
Financial institutions 235,000 184,000
Related parties - 425,000
Accrued expenses and other liabilities 484,000 690,000
Income taxes payable 382,000 -
Total current liabilities 3,052,000 3,122,000
LONG-TERM DEBT:
Financial institutions 863,000 982,000
DEFERRED INCOME TAXES 161,000 161,000
OTHER LONG TERM LIABILITIES 143,000 -
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series A, 0 and 4,074,000 shares
issued and outstanding in 1997 and 1996,
respectively; 33,000
COMMON AND OTHER STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value,
Convertible Series A and B; 750,000,000
shares authorized; 36,249,000 shares
issued and outstanding; liquidation
preference of $295,000 4,000 4,000
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 640,000 640,000
Retained earnings(deficit) 896,000 (4,000)
Total stockholders' equity 1,593,000 693,000
Total liabilities and
stockholders' equity 5,812,000 $4,991,000
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 JUNE 30,
1997 1996
<S> <C> <C>
SERVICE REVENUES $3,052,000 $2,264,000
COSTS AND EXPENSES:
Service costs and expenses 1,981,000 1,610,000
Selling, general and administrative 619,000 725,000
Management fees, related party 42,000 36,000
Interest 82,000 69,000
Depreciation and amortization 110,000 115,000
Other (income) and expenses, net (360,000) (80,000)
2,474,000 2,475,000
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 578,000 (211,000)
INCOME TAX (EXPENSE) BENEFIT (249,000) 62,000
NET INCOME (LOSS) 329,000 (149,000)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 319,000 $ (163,000)
NET INCOME (LOSS) PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ .0006 $ (.0003)
WEIGHTED AVERAGE SHARES OUTSTANDING $531,668,000 $531,668,000
FOR THE SIX MONTHS
ENDED JUNE 30,
1997 1996
<S> <C> <C>
SERVICE REVENUES $7,730,000 $7,298,000
COSTS AND EXPENSES:
Service costs and expenses 4,775,000 5,349,000
Selling, general and administrative 1,205,000 1,414,000
Management fees, related party 84,000 72,000
Interest 136,000 136,000
Depreciation and amortization 225,000 231,000
Other (income) and expenses, net (360,000) (80,000)
6,065,000 7,122,000
INCOME BEFORE INCOME TAX EXPENSE 1,665,000 176,000
INCOME TAX EXPENSE (744,000) (148,000)
NET INCOME 921,000 28,000
NET INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 900,000 $ -
NET INCOME PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ .0016 $ *
WEIGHTED AVERAGE SHARES OUTSTANDING $531,668,000 $531,668,000
- ------------------------------
* Less than $.0001 per share.
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 CASH FLOWS
FOR THE SIX MONTHS
ENDED JUNE 30,
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FORM OPERATING ACTIVITIES:
Net income $ 921,000 $ 28,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities -
Depreciation and amortization 225,000 231,000
Net Gain on sale of equipment (360,000) -
Deferred income taxes 273,000 (3,000)
Decrease (increase) in -
Trade accounts receivable (1,338,000) (413,000)
Unbilled trade receivables 163,000 (38,000)
Prepaids and other assets (34,000) (87,000)
Income tax receivables 488,000 88,000
Increase (decrease) in -
Accounts payable (716,000) 163,000
Accrued expenses (63,000) 158,000
Income taxes payable 382,000 12,000
Net cash provided by (used in)
operating activities (59,000) 139,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (205,000) (70,000)
Proceeds from sale of equipment 500,000 -
Other - (5,000)
Net cash provided by (used in) investing activities 295,000 (75,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving lines of credit 5,904,000 7,290,000
Repayments of lines of credit (5,060,000) (7,064,000)
Proceeds from issuance of long-term debt 94,000 -
Repayments of notes payable (587,000) (174,000)
Redemption of Series A preferred stock (37,000) (61,000)
Dividends declared (21,000) (28,000)
Net cash provided by (used in) financing activities 293,000 (37,000)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 529,000 27,000
CASH AND CASH EQUIVALENTS, beginning of period 151,000 186,000
CASH AND CASH EQUIVALENTS, end of period $ 680,000 $ 213,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 100,000 $ -
Cash paid for interest $ 145,000 $ 139,000
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 June 30, 1997, the results of its operations for the three month and
six month periods ended June 30, 1997 and its cash flows for the six month
period ended June 30, 1997. Operating results for the three and six month
periods ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997.
The consolidated balance sheet as of December 31, 1996 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, 1996.
2. CONTINGENCIES
During 1995, an Incat employee initiated litigation for damages in respect of
injuries claimed to have occurred while performing catalyst services at a
refining facility. Incat has not been named a party in the proceedings as
the customer is being defended by Incat's general liability insurer pursuant
to the customer's demand for coverage as an additional insured on a
contractual indemnify.
Demand has also been made on Incat and its general liability insurer for
indemnification by a customer regarding a total of $219,000 which it paid to
three employees of the Company for alleged injuries sustained in October 1995
at the customer's facility. As there has been no recent activity regarding
this matter, the Company's insurer has placed the claim on an inactive status.
The Company believes that, to the extent it may have any liability with
respect to the claims described in the above paragraphs, 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 estimates prepared by
the Company's insurers, the Company believes its $165,000 retrospective
insurance premium accrual is adequate. This amount represents a general
reserve pending the resolution of the above 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.
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 has working capital of
$573,000 at June 30, 1997 as compared to a deficiency of $318,000 in working
capital at December 31, 1996 due to profitable operations during first and
second quarters of 1997 and receipt of $500,000 from the sale of certain
assets.
Incat has had a revolving working capital credit facility with a financial
institution which expires on September 30, 1997. The credit facility is
collateralized by Incat's accounts receivable. The maximum amount which
currently may be outstanding from time to time under the line is $1,600,000
through June 30, 1997 and $1,400,000 through September 30, 1997. At June 30,
1997 there was a $1,363,000 balance outstanding on this line-of-credit.
Net worth increased from $693,000 at December 31, 1996 to $1,593,000 at
June 30, 1997. The $900,000 increase in net worth is due to net income of
$921,000, reduced by $21,000 in dividends declared on Series A and B
preferred stock for the six months ended June 30, 1997.
The Company currently has no commitments to purchase additional equipment.
However, the Company anticipates purchasing additional equipment with
available working capital.
The Company's available borrowings under its existing working capital credit
facility, cash generated from the sale of certain assets and from profitable
operations, combined with reduced debt payments resulting from an amendment
to the term loan and reduced tax payments from utilization of the Company's
tax net operating losses for its tax year ended March 31, 1997 should enable
the Company to maintain sufficient cash to meet its ongoing cash requirements
for the fiscal year. However, there are no assurances that the Company will
not incur additional operating losses and/or that its credit facility with
the financial institution will be renewed on its expiration in September 1997.
RESULTS OF OPERATIONS
Service revenues for the three months ended June 30, 1997 and 1996 were
$3,052,000 and $2,264,000, respectively. Service revenues increased to
$7,730,000 for the six months ended June 30, 1997 over the $7,298,000 amount
in the comparable period in 1996. The increase is mainly attributable to an
increase in the volume of services being performed in the second quarter of
1997 due to an unusually strong catalyst handling and refinery maintenance
market. Sub-contractor revenues were not significant in the second quarter
of 1997.
A significant percentage of the Company's sales are generated through
reputation and referrals. Management continues to emphasize its sales and
marketing programs in an effort to expand the Company's customer base.
Cost of services as a percentage of service revenues was 65% for the quarter
ended June 30, 1997 and 71% for the quarter ended June 30, 1996. For the six
months ended June 30, 1997, cost of services as a percentage of service
revenues was 62% as compared to 73% for the six months ended June 30, 1996.
The net decrease in the cost of services as a percentage of services revenues
is mainly attributable to a decrease in direct costs. The major factors
contributing to the decrease in direct costs was the Company's ability to
perform work in the first and second quarters at higher margins than in 1996
and due to the Company's ability to staff projects in the first quarter from
internal resources as compared to the Company's need to staff projects with
external manpower in 1996. The increased margins in the second quarter is
attributable to the Company performing a major turnaround project and some
emergency catalyst work at higher rates than work performed in the second
quarter of 1996.
Indirect costs decreased $20,000 for the three months ended June 30, 1997 as
compared to the same period in 1996. The decrease is attributable to the
Company's closure of two regional offices in 1996 and consolidation of
operations in 1997. However, indirect costs as a percentage of revenue
decreased 9% as compared to the three months ended June 30, 1996. The
decrease in indirect costs as a percentage of revenue is mainly attributable
to an increase in revenue. For the six months ended June 30, 1997, indirect
costs as a percentage of revenue is comparable to the same period in 1996.
Selling costs increased $44,000 for the three months ended June 30, 1997 as
compared to the same period in 1996. For the six months ended June 30, 1997,
selling costs increased $80,000 as compared to the same period in 1996. The
increase is attributable to the Company increasing its sales force and sales
effort. The increase in selling costs is expected to continue through the
remainder of the year.
General and administrative costs decreased $150,000 for the three months
ended June 30, 1997 as compared to the same period in 1996. For the six
months ended June 30, 1997 general and administrative costs decreased
$289,000 as compared to the same period in 1996. The decrease is
attributable to the Company's closure of two regional offices in 1996 and
consolidation and reorganization of operations in 1997.
Depreciation and amortization expense decreased for the three and six month
periods ended June 30, 1997 as compared to the corresponding periods in the
previous year due to some equipment being fully depreciated.
The Company's net income for the three months ended June 30, 1997 was
$329,000 as compared to net loss of $149,000 for the three months ended
June 30, 1996. The Company had net income of $921,000 for the six months
ended June 30, 1997 as compared to net income of $28,000 for the six months
ended June 30, 1996. Overall net income increased due to an increase in
revenues, an increase in gross profit margins and a $360,000 gain on the sale
of certain assets.
The Company will continue to be affected by general economic conditions
including fluctuations in interest rates and national and international
economic conditions. Service revenues will continue to be subject to
significant quarterly fluctuations, affected primarily by the timing of
planned shutdowns at its customers' facilities. Management believe the
margins incurred in the first and second quarters of 1997 are generally
indicative of the range of margins expected for the remainder of the year.
Fiscal 1997 is expected to be stronger than fiscal year 1996 with revenues
and profits exceeding last year's results. However, there are no assurances
that the Company will not incur additional operating losses or be able to
achieve its 1997 operating plan.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for certain forward-looking statements. This quarterly report contains
statements that are forward-looking. While these statements reflect the
Company's beliefs as of the date of this report, they are subject to
assumptions, uncertainties and risks that could cause actual results to
differ materially and adversely from the results contemplated, forecast or
estimated in the forward-looking statements included in this report. These
factors include, but are not limited to, the following: (1) the ability of the
Company to continue to retain and utilize its full time employees and keep
direct labor costs down, (2) Control Selling, general and administrative
costs, (3) Continued strong sales volume, and (4) successful renewal of the
Company's line-of-credit which expires in September 1997.
PART II - OTHER INFORMATION
Items 1 through 6. Not applicable.
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: August 14, 1997 BY: /s/Gary L. Schmitt
Gary L. Schmitt,
V. President, Director
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MARCH 31, 1997 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 680,000
<SECURITIES> 0
<RECEIVABLES> 2,717,000
<ALLOWANCES> 40,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,625,000
<PP&E> 3,914,000
<DEPRECIATION> 2,715,000
<TOTAL-ASSETS> 5,812,000
<CURRENT-LIABILITIES> 3,052,000
<BONDS> 1,098,000
4,000
0
<COMMON> 53,000
<OTHER-SE> 1,536,000
<TOTAL-LIABILITY-AND-EQUITY> 5,812,000
<SALES> 7,730,000
<TOTAL-REVENUES> 7,730,000
<CGS> 4,775,000
<TOTAL-COSTS> 4,775,000
<OTHER-EXPENSES> 1,154,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136,000
<INCOME-PRETAX> 1,665,000
<INCOME-TAX> 744,000
<INCOME-CONTINUING> 921,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 921,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
