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, 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 November 7, 1997
Common stock, $.0001 par value 531,667,515 shares
INDEX
PART I - FINANCIAL INFORMATION *
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1997
and December 31, 1996
Condensed Consolidated Statements of Operations - For the Three
Months and Nine Months Ended September 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows - For the Nine
Months Ended September 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.
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS September 30, December 31,
1997 1996
CURRENT ASSETS:
Cash and cash equivalents 426,000 $ 151,000
Trade accounts receivable, net of allowance
for doubtful accounts of $40,000 2,237,000 1,339,000
Unbilled trade receivable 48,000 203,000
Income tax receivable, net - 488,000
Deferred tax asset 114,000 404,000
Asset held for sale - 157,000
Prepaid and other current assets 135,000 62,000
Total current assets $2,960,000 $2,804,000
PROPERTY, PLANT AND EQUIPMENT:
Equipment 3,249,000 2,992,000
Furniture and fixtures 344,000 313,000
Transportation equipment 391,000 391,000
3,984,000 3,696,000
Accumulated depreciation (2,804,000) (2,517,000)
1,180,000 1,179,000
INTANGIBLES AND OTHER ASSETS:
Goodwill and other intangibles, net of
accumulated amortization of $623,000
and $592,000 927,000 958,000
Other 41,000 50,000
968,000 1,008,000
Total assets 5,108,000 $ 4,991,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade 1,190,000 1,304,000
Revolving loans - 519,000
Current portion of long term debt -
Financial institutions 251,000 184,000
Related parties - 425,000
Income taxes payable 254,000 -
Accrued expenses and other liabilities 602,000 622,000
Total current liabilities 2,297,000 3,054,000
LONG-TERM DEBT:
Financial institutions 804,000 982,000
DEFERRED INCOME TAXES 194,000 161,000
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) 1,048,000 (4,000)
Total stockholders' equity 1,745,000 693,000
Total liabilities and
stockholders' equity 5,108,000 $4,991,000
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,
1997 1996
SERVICE REVENUES $3,548,000 $1,632,000
COSTS AND EXPENSES:
Service costs and expenses 2,624,000 1,536,000
Selling, general & administrative 544,000 679,000
Management fees, related party 51,000 38,000
Interest 67,000 59,000
Depreciation and amortization 105,000 113,000
Other (income) and expenses, net (17,000) (158,000)
3,374,000 2,267,000
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 174,000 (635,000)
INCOME TAX EXPENSE (BENEFIT) 12,000 (451,000)
NET INCOME (LOSS) 162,000 (184,000)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 152,000 $ (198,000)
NET INCOME (LOSS) PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ .0003 $ (.0004)
WEIGHTED AVERAGE SHARES OUTSTANDING $531,668,000 $531,668,000
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1997 1996
SERVICE REVENUES $11,278,000 $8,930,000
COSTS AND EXPENSES:
Service costs and expenses 7,399,000 6,885,000
Selling, general & administrative 1,749,000 2,093,000
Management fees, related party 135,000 110,000
Interest 203,000 195,000
Depreciation and amortization 330,000 344,000
Other (income) and expense, net (377,000) (238,000)
9,439,000 9,389,000
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 1,839,000 (459,000)
INCOME TAX EXPENSE (BENEFIT) 756,000 (303,000)
NET INCOME (LOSS) 1,083,000 (156,000)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 1,052,000 $ (198,000)
NET INCOME (LOSS) PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ .0020 $ (.0004)
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,
1997 1996
CASH FLOWS FORM OPERATING ACTIVITIES:
Net income (loss) $ 1,083,000 $ (156,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities -
Depreciation and amortization 330,000 344,000
Net Gain on sale of equipment (360,000) -
Deferred income taxes 323,000 (9,000)
Decrease (increase) in -
Trade accounts receivable (898,000) 31,000
Unbilled trade receivables 155,000 (95,000)
Prepaids and other assets (79,000) 134,000
Income tax receivables 488,000 (273,000)
Increase (decrease) in -
Accounts payable (114,000) 299,000
Accrued expenses (20,000) 148,000
Income taxes payable 254,000 -
Net cash provided by operating activities 1,162,000 423,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (268,000) (199,000)
Proceeds from sale of equipment 500,000 -
Other - (5,000)
Net cash provided by (used in)
investing activities 232,000 (204,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving lines of credit 7,103,000 9,515,000
Repayments of lines of credit (7,622,000) (9,409,000)
Proceeds from issuance of long-term debt 94,000 -
Repayments of notes payable (630,000) (260,000)
Redemption of Series A preferred stock (33,000) (89,000)
Deferred financing costs - (28,000)
Dividends declared (31,000) (42,000)
Net cash used in financing activities (1,119,000) (313,000)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 275,000 (94,000)
CASH AND CASH EQUIVALENTS, beginning of period 151,000 186,000
CASH AND CASH EQUIVALENTS, end of period $ 426,000 $ 92,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 190,000 $ -
Cash paid for interest $ 187,000 $ 221,000
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, 1997, the results of its operations for the three month
and nine month periods ended September 30, 1997 and its cash flows for the
nine month period ended September 30, 1997. Operating results for the three
and nine month periods ended September 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. RECLASSIFICATIONS
Certain reclassifications have been made in the prior period's consolidated
financial statements in order to conform with the current period presentation.
3. CONTINGENCIES
The Company believes that, to the extent it may have any liability with
respect to any claims, 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
various 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
$663,000 at September 30, 1997 as compared to a deficiency of $250,000 in
working capital at December 31, 1996 due to profitable operations during the
nine months ended September 30, 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 May 31, 1998. 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 $1,400,000.
At September 30, 1997, there was no amount outstanding on this
line-of-credit.
Net worth increased from $693,000 at December 31, 1996 to $1,745,000 at
September 30, 1997. The $1,052,000 increase in net worth is due to net
income of $1,083,000, reduced by $31,000 in dividends declared on Series A
and B preferred stock for the nine months ended September 30, 1997.
The Company currently has commitments of $55,000 to purchase additional
equipment and anticipates purchasing the additional equipment with available
working capital.
Management believes that its liquidity requirements can be funded through
cash generated from profitable operations and utilization of its revolving
working capital credit facility as discussed above.
RESULTS OF OPERATIONS
Service revenues for the three months ended September 30, 1997 and 1996 were
$3,548,000 and $1,632,000, respectively. Excluding the impact of
subcontractor pass-through revenues of $1,048,000 for the quarter ended
September 30, 1997 and $ -0- for the quarter ended September 30, 1996, the
increase in service revenue for the quarter was $868,000, a 53% increase from
prior year's third quarter revenues. The increase is primarily attributable
to an unplanned turnaround project with revenues of approximately $1,137,000
at a gulf coast chemical plant. Excluding the impact of subcontractor
pass-through revenues of $1,604,000 for the nine months ended
September 30, 1997 and $1,074,000 for the nine months ended
September 30, 1996, Service revenues increased by $1,818,000. The increase
is mainly attributable to an increase in the volume of services being
performed in the second and third quarter of 1997 due to an unusually strong
demand for catalyst services and performance of the aforementioned unplanned
project which normally should not have been scheduled for at least another
8 to 10 years.
Cost of services as a percentage of service revenues was 74% for the quarter
ended September 30, 1997 and 94% for the quarter ended September 30, 1996.
Excluding the subcontractor revenue mentioned above, cost of services as a
percentage of service revenues was 65% for the quarter ended September 30,
1997 and 93% for the quarter ended September 30, 1996. The significant
decrease in cost of services as a percentage of service revenue for the third
quarter is attributable to both a decrease in indirect cost and direct costs.
The decrease in indirect costs as a percentage of revenues is mainly
attributable to an increase in revenue. A decrease in direct costs as a
percentage of service revenues is attributable to work performed at
higher margins on an unplanned turnaround job. For the nine months ended
September 30, 1997, cost of services as a percentage of service revenues was
66% as compared to 77% for the nine months ended September 30, 1996. The net
decrease in the cost of services as a percentage of services revenues is
attributable to a decrease in direct costs and an increase in revenues.
The major factors contributing to the decrease in direct costs is the
Company's ability to perform work in 1997 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.
Selling costs increased $5,000 for the three months ended September 30, 1997
as compared to the same period in 1996. For the nine months ended
September 30, 1997, selling costs increased $85,000 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 $140,000 for the three months
ended September 30, 1997 as compared to the same period in 1996. For the
nine months ended September 30, 1997, general and administrative costs
decreased $429,000 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 nine month
periods ended September 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 September 30, 1997 was
$162,000 as compared to net loss of $184,000 for the three months ended
September 30, 1996. Excluding the effect of the unplanned project
discussed above, third quarter results would have been comparable to the 1996
third quarter loss of $184,000. For the nine months ended September 30, 1997,
the Company had net income of $1,083,000 including a $360,000 gain on the
sale of certain assts as compared to net loss of $156,000 for the
nine months ended September 30, 1996. Overall net income increased due to an
increase in revenues, an increase in gross profit margins, a decrease in
general and administrative costs, a $360,000 gain on the sale of certain
assets and the unexpected impact of the unplanned turnaround project.
The Company will continue to be affected by general economic conditions
including fluctuations in interest rates, national and international economic
conditions such as volatility in the Asian financial market and world events
such as continued peace in the Middle East. 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 1997 will not be indicative of the range of margins
expected for the remainder of the year due to the lower volume of revenue
anticipated in the fourth quarter. Based on the nine months ended September
30, 1997, fiscal 1997 is expected to be stronger than fiscal year 1996
with revenues and profits exceeding last year's results.
During the first quarter of 1997, the Company experienced a shift in revenues
from the fourth quarter of 1996. The shift in revenues contributed to the
positive operating results for the three months ended March 31, 1997 and the
nine months ended September 30, 1997. Currently, the Company has not
experienced a significant shift in revenues from customers rescheduling work
from 1997 to 1998. Presently, the Company does not anticipate revenues
for the first quarter of 1998 to be comparable to the first quarter of 1997.
Accordingly, there are no assurances that the Company will be able to
sustain its strong operating results due to the volatile nature of the
customers demand for catalyst handling services and timing of petroleum and
petrochemical/chemical facilities shutdowns.
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 retain and utilize its full time employees and keep
direct labor costs down, (2) loss, retirement or change in key management,
(3) ability to contain general and administrative cost structure,
(4) continued strong demand for the Company's services, and (5) pricing
pressures which could effect the Company's gross margins.
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: November 14, 1997 BY: /s/Gary L. Schmitt
Gary L. Schmitt,
V. President, Director