-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G5t0cENp/Xgmr3ORmyu81HBGkeMsuJWFSy/MVhsOgqSkW8uXlBaMsDq1xKik/lsB giGHdTyQyJXB3M7q/0KK9A== 0000796960-96-000012.txt : 19961120 0000796960-96-000012.hdr.sgml : 19961120 ACCESSION NUMBER: 0000796960-96-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961118 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED ENVIRONMENTAL SYSTEMS INC CENTRAL INDEX KEY: 0000796960 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 841059226 STATE OF INCORPORATION: NY FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19013 FILM NUMBER: 96668584 BUSINESS ADDRESS: STREET 1: 730 17TH STREET STE 712 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3035715564 MAIL ADDRESS: STREET 1: 730 17TH STREET STREET 2: SUITE 712 CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: NORTHWEST PASSAGE OF NORTH AMERICA INC DATE OF NAME CHANGE: 19901127 10-Q 1 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER 30, 1996 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 92,000 0 1,631,000 40,000 0 2,563,000 4,351,000 2,927,000 4,719,000 3,112,000 1,259,000 150,000 0 53,000 588,000 4,992,000 8,930,000 8,930,000 6,885,000 6,885,000 2,309,000 0 195,000 (459,000) (303,000) (156,000) 0 0 0 (156,000) 0 0
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