FORM 10-Q
UNITED STATES
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, 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
of the Securities Exchange Act of 1934 during the pre-
ceding 12 months (or for such shorter period that the No X
registrant was required to file such reports), and (2)
has been subject to such filing requirements for the
past 90 days.
In July 1996, the statement of Changes in Beneficial Ownership of Securities
on Form 4 of Industrial Services Technologies, Inc. was filed late.
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
Form 10-Q
3rd Quarter
INDEX
PART I - FINANCIAL INFORMATION *
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1996
and December 31, 1995
Condensed Consolidated Statements of Operations - For the Three
Months and Nine Months Ended September 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows - For the Nine
Months Ended September 30, 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.
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS September 30, December 31,
1996 1995
CURRENT ASSETS:
Cash and cash equivalents 92,000 $ 186,000
Trade accounts receivable, net of allowance
for doubtful accounts of $40,000 1,591,000 1,622,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 112,000 17,000
Prepaid expenses 294,000 428,000
Income tax receivable, net 474,000 201,000
Total current assets $2,563,000 $2,454,000
PROPERTY, PLANT AND EQUIPMENT:
Equipment 3,621,000 3,453,000
Furniture and fixtures 339,000 352,000
Transportation equipment 391,000 391,000
4,351,000 4,196,000
Accumulated depreciation (2,927,000) (2,658,000)
1,424,000 1,538,000
INTANGIBLES AND OTHER ASSETS:
Goodwill and other intangibles, net of
accumulated amortization of $580,000
and $549,000 998,000 1,001,000
Other 7,000 3,000
1,005,000 1,004,000
Total assets 4,992,000 $ 4,996,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade 1,203,000 904,000
Revolving loans 831,000 725,000
Current portion of long term debt -
Financial institutions 339,000 348,000
Related parties - 1,000
Accrued expenses and other liabilities 739,000 591,000
Income taxes payable - -
Total current liabilities 3,112,000 2,569,000
LONG-TERM DEBT:
Financial institutions 920,000 1,171,000
DEFERRED INCOME TAXES 169,000 178,000
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 148,000 237,000
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 40,000) 238,000
Total stockholders' equity 643,000 841,000
Total liabilities and
stockholders' equity 4,992,000 $4,996,000
The accompanying notes are an integral part of these financial statements.
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1996 1995
SERVICE REVENUES $1,632,000 $1,912,000
COSTS AND EXPENSES:
Service costs and expenses 1,536,000 1,357,000
Selling, general & administrative 679,000 668,000
Management fees, related party 38,000 24,000
Interest 59,000 55,000
Depreciation and amortization 113,000 107,000
Retrospective insurance refund (158,000) -
2,267,000 2,211,000
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT) (635,000) (299,000)
INCOME TAX EXPENSE (BENEFIT) (451,000) 144,000
NET LOSS (184,000) (443,000)
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (198,000) $ (461,000)
NET LOSS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ (.0004) $ (.0009)
WEIGHTED AVERAGE SHARES OUTSTANDING $531,668,000 $531,668,000
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1996 1995
SERVICE REVENUES $ 8,930,000 $ 8,060,000
COSTS AND EXPENSES:
Service costs and expenses 6,885,000 5,499,000
Selling, general & administrative 2,093,000 2,044,000
Management fees, related party 110,000 72,000
Interest 195,000 172,000
Depreciation and amortization 344,000 376,000
Retrospective insurance refund (238,000) -
9,389,000 8,163,000
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT) (459,000) (103,000)
INCOME TAX EXPENSE (BENEFIT) (303,000) 19,000
NET LOSS (156,000) (122,000)
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (198,000) $ (175,000)
NET LOSS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ (.0004) $ (.0003)
WEIGHTED AVERAGE SHARES OUTSTANDING $531,668,000 $531,668,000
The accompanying notes are an integral part of these financial statements.
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1996 1995
CASH FLOWS FORM OPERATING ACTIVITIES:
Net loss $ (156,000) $ (122,000)
Adjustments to reconcile net loss to net
cash provided by operating activities -
Depreciation and amortization 344,000 376,000
Deferred income taxes (9,000) 27,000
Decrease (increase) in -
Trade accounts receivable 31,000 1,585,000
Unbilled trade receivables (95,000) (282,000)
Prepaids and other assets 134,000 54,000
Income tax receivable (273,000) -
Increase (decrease in -
Accounts payable 299,000 (626,000)
Accrued expenses 148,000 (218,000)
Net cash provided by operating activities 423,000 794,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (199,000) (318,000)
Proceeds form sale of property, plant
and equipment - -
Other (5,000) (60,000)
Net cash used in investing activities (204,000) (378,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds form revolving line of credit 9,515,000 2,120,000
Repayments of line of credit (9,409,000) (2,573,000)
Proceeds from notes payable - 403,000
Repayments of notes payable (260,000) (269,000)
Redemption of Series A preferred stock (89,000) (77,000)
Deferred financing costs (28,000) -
Dividends declared (42,000) (53,000)
Net cash used in financing activities (313,000) (449,000)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (94,000) (33,000)
CASH AND CASH EQUIVALENTS, beginning of period 186,000 126,000
CASH AND CASH EQUIVALENTS, end of period $ 92,000 $ 93,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ - $ 165,000
Cash paid for interest $ 221,000 $ 167,000
The accompanying notes are an integral part of these financial statements.
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, 1996, the results of its operations for
the three and nine month periods ended September 30, 1996 and its cash
flows for the nine month period ended September 30, 1996. Operating
results for the three and nine month periods ended September 30, 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. 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
The Company previously reported that (a) the Company's general liability
carrier is defending litigation pursuant to an indemnification given by
the Company regarding claims for damages in respect of injuries alleged
to have occurred at a refining facility and (b) demand has also been
made on the Company 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 general liability
insurer has not responded to the demand in the latter matter.
The Company believes that, to the extent it may have any liability with
respect to the claims described in 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 the retro adjustment calculated by the Company's insurers,
the Company at December 31, 1995 accrued a retrospective insurance
premium of $300,000. This amount represents additional premiums
due 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 recorded.
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 ($115,000) at December 31, 1995 to ($549,000) at September 30, 1996.
This decrease in working capital is primarily attributable to operating
losses during the second and third 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 $1,400,000.
At September 30, 1996 there was a $831,000 balance outstanding on this
line-of-credit. Currently, the Company is not in compliance with its
debt covenants primarily due to the operating losses incurred during the
second and third quarters. On November 7, 1996, the financial
institution notified management that the line-of-credit would be
terminated effective November 30, 1996. Management has requested the
financial institution reconsider the time of the termination and extend
the expiration date to December 31, 1996. So far the financial
institution has been unwilling to review its decision. The Company
currently is in discussions with several financial institutions for the
replacement of the existing working capital credit facility. Any new
arrangements are likely to involve significant fees and costs and provide
for a rate of interest in excess of that currently paid by the Company.
Net worth decreased from $841,000 at December 31, 1995 to $643,000
at September 30, 1996. The $198,000 decrease in net worth is due to net
losses of $156,000 for the nine months ended September 30, 1996, and
$42,000 in dividends declared on preferred stock for the period.
In 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 $1,222,000 and there is
no further availability. The loan is to be repaid in monthly installments
of $46,000 with all unpaid interest and principal due December 31, 1997.
The Company has no commitments to purchase additional equipment. The
Company has notified the financial institution that it is not in
compliance with the debt covenants, but continues to make all required
monthly debt service payments. What actions, if any, the financial
institution may take with respect to these defaults is unknown at this
time.
The Company is currently experiencing an unusually soft market for 1996,
as refineries avoided shutdowns during a period in which demand for
their products was high in conjunction with improved margins. As
discussed, the Company's cash liquidity has been adversely affected
by losses from operations and the Company is in default under certain
of its loan covenants. The Company will experience extreme cash
shortfall in the fourth quarter which management believes will be
resolved through 1) extension of credit facility expiration date to
December 31, 1996 and/or replacement of the present asset based facility
with a new credit or factoring facility 2) further identification
of costs to be eliminated 3) closing of the two regional offices
that contributed significantly to the operating losses incurred the
past and current year, 4) filing of its March 31, 1996 federal and
state tax returns resulting in refunds in excess of $470,000.
It is anticipated that under the worse scenario these refunds will be
received within 45-60 days and that under the best scenario the
collateral associated with the refunds will be used to generate over-
advances from a new asset based lender or used as collateral for
an interim loan , and 5) negotiations with vendors in accepting
significant late payment of outstanding invoices. The Company
believes that the execution of this plan should provide sufficient
liquidity for it to continue in its present form.
RESULTS OF OPERATIONS
Service revenues for the three months ended September 30, 1996 were
$280,000 or 15% lower than for the corresponding period of the previous
year. The decrease in the third quarter revenue from the previous
corresponding period is due to shifting and rescheduling of work by
customers. The Company continues to be impacted by quarterly
fluctuations in revenue caused by customers rescheduling work.
Management's ability to replace revenue when customers reschedule
is dependent upon timely notice by the customer and the Company
being successful in moving projects from backlog into the time frame
related to the work shifted. In most cases, the customer cannot give
notification in a timely manner. Therefore, due to the nature of the
business, there will always be certain quarterly fluctuations in
revenues. For the nine months ended September 30, 1996, service revenues
increased $870,000 or 11% from the same period ended September 30,
1995. Excluding the impact of subcontractor pass-through revenues
of $1,074,000 and $607,000 for the nine month periods ended
September 30, 1996 and 1995, respectively, the increase in revenues
was approximately $403,000 or 5%.
Cost of services as a percentage of service revenues was 94% and 71% for
the quarters ended September 30, 1996 and 1995, respectively. The 23%
net increase in the cost of services as a percentage of revenues for the
quarter is attributable to a 4% increase in direct costs and a 19%
increase in indirect costs. Higher direct costs as a percentage of
revenue is attributable to management's decision to keep the Company's
work force busy during slow periods and development costs associated
with obtaining two new customers. The Company has obtained
additional work in the fourth quarter from these new customers.
Higher indirect costs as a percentage of revenue is mainly attributable
to a decrease in revenue. Overall, indirect costs increased 4% or
$23,000 for the quarter ended September 30, 1996 as compared to indirect
costs for the corresponding period in the previous year.
Cost of services as a percentage of service revenue was 77% and 68% for
the nine months ended September 30, 1996 and 1995, respectively.
The 9% increase is attributable to a 13% increase in direct costs and
a 4% decrease in indirect costs. The 13% increase in direct costs is
mainly attributable to work performed in the first and third quarter
of 1996. As mentioned above, the third quarter was a slow period in
catalyst handling services and the work performed resulted in low profit
margins. In the first quarter, the Company's work load was at a peak.
56% of the Company's nine month revenue was performed in the first
quarter of 1996. The Company was faced with a significant amount of
revenues being shifted from the fourth quarter of 1995 into the first
quarter of 1996. The Company did not have the available manpower and as
a result was forced to pay its employees travel and overtime in addition
to hiring contract laborers at rates in excess of its employee pay rates
to perform the work. Under the terms of the contracts, the Company was
unable to bill the increase in costs associated with the travel, overtime
and contract laborers which resulted in higher direct cost.
The Company has determined that the economic business conditions in
two regions do not justify the administrative overhead of supporting
these offices and therefore is restructuring its operations. In May 1996,
the Company began the process of closing down its Southern Region office
which resulted in a reduction of administrative costs in the third quarter
of approximately $80,000. In addition, the Company has scaled down its
Corpus Christi office and intends to close this office by January 1, 1997.
As a result of closing down these two offices and consolidating its
operations, the Company has increased its sales force in the Southwestern
Region and has devoted more resources towards pursuing the International
market. The Company has invested $123,000 in selling, general &
administrative (SG&A) costs in its International division for the nine
months ended September 30, 1996 as compared to $29,000 for the
corresponding period in 1995. The impact of focusing these resources on
the International markets has resulted in increasing the Company's
international sales from $125,000 to $733,000 for the nine months ended
September 30, 1995 and 1996, respectively. For the three and nine
months ended September 30, 1996, the Company's overall SG&A increased
$11,000 and $49,000, respectively, as compared to the same periods in 1995.
Depreciation and amortization expense increased $6,000 for the three
months ended September 30, 1996 as compared to the corresponding period
in the previous year due to the Company purchasing over $100,000 of new
equipment during the quarter. For the nine months ended September 30,
1996, depreciation and amortization expense decrease $32,000 due to
certain equipment being fully depreciated. The Company retired
approximately $60,000 of fully depreciated equipment during the nine
months ended September 30, 1996.
The Company experienced net losses of $184,000 and $156,000 for the three
and nine month periods ended September 30, 1996 and net losses of $443,000
and $122,000 for the three and nine month periods ended September 30, 1996.
Overall net losses (excluding the tax benefit) have increased due to the
combination of the matters discussed previously, but primarily due to
direct costs increases.
Regarding the fourth quarter, the Company will continue to experience a
slow period followed by what it believes to be a strong first quarter of
1997. It is anticipated that the fourth quarter will be breakeven, but
there are no assurances that the Company will not incur additional
operating losses. The Company sees 1997 shaping up to be a strong year
as refinery projects have been delayed from 1996 to spring and fall of
1997. Service revenues and operating income will continue to be subject
to significant quarterly fluctuations affected primarily by the timing of
planned shutdowns at its customers' facilities. The Company will
continue to be affected by general economic conditions and changes in the
international economic conditions. Ultimately, the Company's ability to
achieve the 1997 operating plan is dependent upon minimizing revenue
shortfalls and managing manpower availability which controls the cost of
direct labor incurred on projects, including contract labor costs.
PART II - OTHER INFORMATION
Items 1 For discussion of Legal Proceedings, see Contingencies, Footnote 3
in PART I.
Item 2,4,5 and 6. Not applicable.
Item 3 For discussion of Defaults Upon Senior Securities, see Management's
Discussion and Analysis of Financial Condition in PART I.
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 18, 1996 BY: /s/Alfred O. Brehmer
Alfred O. Brehmer,
Director, Secretary
and Treasurer