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, 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 March 31, 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 - March 31, 1997
and December 31, 1996
Condensed Consolidated Statements of Operations - For the Three
Months Ended March 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows - For the Three
Months Ended March 31, 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.
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<TABLE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS March 31, December 31,
1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 494,000 $ 151,000
Trade accounts receivable, net of allowance
for doubtful accounts of $40,000 2,477,000 1,339,000
Unbilled trade receivable - 203,000
Prepaid expenses 103,000 62,000
Income tax receivable, net - 488,000
Deferred tax asset 131,000 404,000
Asset held for sale 157,000 157,000
Total current assets $3,362,000 $2,804,000
PROPERTY, PLANT AND EQUIPMENT:
Equipment 3,046,000 2,992,000
Furniture and fixtures 341,000 313,000
Transportation equipment 391,000 391,000
3,778,000 3,696,000
Accumulated depreciation (2,638,000) (2,517,000)
1,140,000 1,179,000
INTANGIBLES AND OTHER ASSETS:
Goodwill and other intangibles, net of
accumulated amortization of $602,000
and $592,000 948,000 958,000
Other 61,000 50,000
1,009,000 1,008,000
Total assets 5,511,000 $ 4,991,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade 825,000 1,304,000
Revolving loans 1,153,000 519,000
Current portion of long term debt -
Financial institutions 255,000 184,000
Related parties - 425,000
Accrued expenses and other liabilities 914,000 690,000
Total current liabilities 3,147,000 3,122,000
LONG-TERM DEBT:
Financial institutions 929,000 982,000
DEFERRED INCOME TAXES 161,000 161,000
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) 577,000 (4,000)
Total stockholders' equity 1,274,000 693,000
Total liabilities and
stockholders' equity 5,511,000 $4,991,000
The accompanying notes are an integral part of these financial statements.
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<TABLE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1997 1996
<S> <C> <C>
SERVICE REVENUES $4,678,000 $5,034,000
COSTS AND EXPENSES:
Service costs and expenses 2,794,000 3,739,000
Selling, general & administrative 586,000 674,000
Management fees, related party 42,000 36,000
Interest 54,000 67,000
Depreciation and amortization 115,000 116,000
3,591,000 4,632,000
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 1,087,000 402,000
INCOME TAX EXPENSE 495,000 225,000
NET INCOME (LOSS) 592,000 177,000
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 581,000 $ 163,000
NET INCOME (LOSS) PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ .0011 $ .0003
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>
1997 1996
<S> <C> <C>
CASH FLOWS FORM OPERATING ACTIVITIES:
Net income $ 592,000 $ 177,000
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 115,000 116,000
Deferred income taxes 273,000 (7,000)
Decrease (increase) in -
Trade accounts receivable (1,137,000) (2,139,000)
Unbilled trade receivables 203,000 (280,000)
Prepaids and other assets (36,000) 40,000
Income tax receivables 488,000 191,000
Increase (decrease) in -
Accounts payable (479,000) 1,521,000
Accrued expenses 256,000 179,000
Income taxes payable - -
Net cash provided by (used in)
operating activities 275,000 (202,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (82,000) (76,000)
Other - -
Net cash used in investing activities (82,000) (76,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving lines of credit 3,771,000 3,340,000
Repayments of lines of credit (3,138,000) (2,964,000)
Proceeds from issuance of long-term debt 94,000 -
Repayments of notes payable (529,000) (87,000)
Redemption of Series A preferred stock (37,000) (28,000)
Dividends declared (11,000) (14,000)
Net cash provided by financing activities 150,000 247,000
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 343,000 (31,000)
CASH AND CASH EQUIVALENTS, beginning of period 151,000 186,000
CASH AND CASH EQUIVALENTS, end of period $ 494,000 $ 155,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ - $ -
Cash paid for interest $ 59,000 $ 76,000
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 March 31, 1997, the results of its operations for the three month period
ended March 31,1997 and its cash flows for the three month period ended
March 31, 1997. Operating results for the three month period ended
March 31, 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 indemnity.
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. The Company's insurer requested information from
the customer documenting liability and damages in connection with the demand.
The requested information was not provided to the Company's insurer, and the
Company's insurer accordingly has not made a determination regarding the
Company's duty to defend, indemnify, and treat the customer as an additional
insured under the Company's insurance policies.
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 Incat 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 Incat's
insurers, the Company believes its $175,000 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 $215,000 of working capital
at March 31, 1997 as compared to a $318,000 deficiency of working capital at
December 31, 1996 due to profitable operations during the first quarter of
1997.
Incat's financial institution is (a) extending the terms of its credit
facility subject to completion of documents to September 30, 1997 and
(b) increasing the credit facility to $1,600,000 for the three months ended
June 30, 1997, at which time the credit facility will return to $1,400,000.
The credit facility is collateralized by Incat's accounts receivable.
Amounts drawn under the facility from time to time bear interest at a rate of
2.5% plus the prime rate in effect from time to time. At March 31, 1997,
there was a $1,153,000 balance outstanding on this line-of-credit.
On March 31, 1997, a term loan from a financial institution was amended and
increased to include an additional $94,000 in long-term financing, which was
used to repay certain Series B preferred stock accumulated dividends to
Industrial Services Technologies, Inc., which owns a majority of the Company's
common stock and all its preferred stock. Additionally, the interest rate on
the balance of the term loan was reduced from 3.5% to 3% plus the prime rate
in effect from time to time and the maturity date of the loan was extended
from December 31, 1997 to March 31, 2000. Under the amended note, the
monthly amount required to service obligations to the financial institution
was reduced from approximately $52,000 to approximately $30,000 per month
assuming a current prime rate of 8.5%.
Net worth increased from $693,000 at December 31, 1996 to $1,274,000 at
March 31, 1997. The $581,000 increase in net worth is due to net income of
$592,000 for the three months ended March 31, 1997, reduced by $11,000 in
dividends declared on Series A and B preferred stock for the period.
After evaluating the economics of its flow bin leasing operations, the
Company sold its flow bins during April 1997 for $500,000. $350,000 of the
purchase price has been received and the $150,000 balance is due on
May 30, 1997. The net proceeds will be used for working capital and to
purchase additional equipment. Currently, the Company has no commitments to
purchase additional equipment. However, the Company has budgeted and is
anticipating purchasing additional equipment of approximately $200,000
in fiscal 1997.
The combined effects of the receipt of proceeds from the sale of flow bins
and from borrowings under the Company's credit facility combined with
funds generated from operations, the Company's reduced tax payment through
utilization of its tax net operating losses, and reduced debt service
requirements 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 or that funds will be available from other
sources if needed.
RESULTS OF OPERATIONS
Service revenues for the three months ended March 31, 1997 and 1996 were
$4,678,000 and $5,034,000, respectively. Excluding subcontractor pass-through
revenues of $28,000 in 1997 and $1,068,000 in 1996, services revenues were
$4,650,000 and $3,966,000 for the three months ended March 31, 1997 and 1996,
respectively. The increase in service revenues of $684,000 from 1997 to 1996
is primarily attributable to new business generated from the Company's
tubular loader.
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 60% and 74% for the
quarters ended March 31, 1997 and 1996, respectively. Eliminating the impact
of subcontractor pass-through revenues discussed above, service costs as a
percentage of service revenues were approximately 59% for the quarter ended
March 31, 1997 and 68% for the quarter ended March 31, 1996. Subcontractor
costs are normally passed-through with an administrative charge of 0-10%.
The net decrease in the cost of services as a percentage of service revenues
is attributable to a decrease in direct costs. Direct costs decreased due to
the Company's ability to perform work in the first quarter of 1997 at higher
margins than in 1996 and due to the Company's ability to staff projects from
internal resources in 1997 as compared to the Company's need to staff
projects with external manpower in 1996.
Indirect costs increased $88,000 for the period ending March 31, 1997 as
compared to the corresponding period in 1996. The increase is primarily
attributable to the Company's safety incentive bonus program under which
bonuses were awarded to employees for outstanding safety performance in 1996,
increased freight costs for relocating some equipment and wage increases.
A decrease in selling, general and administrative (SG&A) costs of $88,000, for
the three month period ended March 31, 1997 as compared to the same period in
1996 is due primarily to a $123,000 decrease in administrative costs
associated with the Baton Rouge and Corpus Christi office closures,
administrative staff reductions, and an increase in selling costs of $35,000
due to the Company pursuing tubular loader sales.
Depreciation and amortization expense for the three months ended March 31,
1997 and 1996 is comparable.
The Company's net income for the three months ended March 31, 1997 was
$592,000 as compared to net income of $177,000 for the three months ended
March 31, 1996. Overall net income increased due to a decrease in direct
costs and SG&A.
The Company will continue to be affected by general economic conditions
including fluctuations in interest rates 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 does not believe the higher margins
incurred in the first quarter of 1997 are indicative of margins expected for
the remainder of the year. Due to the competitive nature of the catalyst
business, management anticipates lower margins in the second and third
quarters. However, fiscal 1997 is expected to be stronger than fiscal year
1996 with revenues and profits exceeding last year's results. There are no
assurances that the Company will not incur additional operating losses or be
able to achieve its 1997 operating plan. To achieve the 1997 operating plan,
the Company must continue to increase utilization of its full time employees,
control SG&A and direct labor costs, and increase revenues in the second and
third quarters.
Certain portions of the discussions contained in this Report include
"forward-looking statements". Forward-looking statements are identified by
phrases such as "expects", "projects", "anticipates", "believes" and other
similar expressions. All phases of the Company's operations are subject to
a number of uncertainies, risks and other influences, many of which are
beyond the control of the Company, and any one of which, or a combination of
which, could materially affect the results of the Company's operations and
whether forward-looking statements made by the Company ultimately prove to be
accurate. The Company cautions the reader that the factors mentioned above
may not be exhaustive and the reader should refer to some of the Annual Report
on Form 10-K for some of the additional matters which could affect the
Company's results and cause them to differ materially from those that may be
set forth in any forward-looking statement made by or on behalf of the
Company in this Quarterly Report on Form 10-Q.
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: May 15, 1997 BY: /s/ Alfred O. Brehmer
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, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 494,000
<SECURITIES> 0
<RECEIVABLES> 2,517,000
<ALLOWANCES> 40,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,362,000
<PP&E> 3,778,000
<DEPRECIATION> 2,638,000
<TOTAL-ASSETS> 5,511,000
<CURRENT-LIABILITIES> 3,147,000
<BONDS> 1,184,000
4,000
0
<COMMON> 53,000
<OTHER-SE> 1,217,000
<TOTAL-LIABILITY-AND-EQUITY> 5,511,000
<SALES> 4,678,000
<TOTAL-REVENUES> 4,678,000
<CGS> 2,794,000
<TOTAL-COSTS> 2,794,000
<OTHER-EXPENSES> 743,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,000
<INCOME-PRETAX> 1,087,000
<INCOME-TAX> 495,000
<INCOME-CONTINUING> 592,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 592,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
