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U.S. Securities & Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
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[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period................to ...............
Commission file number.................000-24470
NATIONAL ENVIRONMENTAL SERVICE CO.
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(Exact name of small business issuer as specified in its charter)
Oklahoma 73-1296420
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12331 East 60th Street, Tulsa, Oklahoma 74l46
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(Address of principal executive offices)
(918)-250-2227
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(Insurer's telephone number)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes____X____No_________.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of September 30, 1996:
Number of shares
Title of Class Outstanding
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Common Stock, $.01 Par Value 5,771,927
Transitional Small Business Disclosure Format (Check one): Yes____No__X
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NATIONAL ENVIRONMENTAL SERVICE CO.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
FINANCIAL INFORMATION:
Consolidated Balance Sheet
September 30, 1996 3
Consolidated Statements of Income
Three Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Income
Nine Months Ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of the
Financial Condition and Results of Operation 8
PART II
OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
</TABLE>
2
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(In Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash $ 22
Accounts receivable 3,607
Materials and supplies 550
Prepaid expenses 118
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Total current assets 4,297
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Property and equipment, at cost 2,692
Less accumulated depreciation (1.087)
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Property and equipment, net 1,605
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Other assets 22
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Total assets $5,924
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LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
Current liabilities:
<S> <C>
Current maturities of long term obligations
and revolving line of credit $2,297
Accounts payable 1,299
Accrued liabilities 100
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Total current liabilities 3,696
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Long-term obligations 190
Deferred income taxes 30
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Total liabilities 3,916
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Shareholders' equity:
Preferred stock: 1,000,000 shares authorized;
none issued
Common stock, par value $.01; authorized 20,000,000 shares;
issued 5,801,143 shares, including treasury shares 58
Additional paid-in capital 1,746
Retained earnings 280
Common stock in treasury, at cost, 29,216 shares (76)
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Total shareholders' equity 2,008
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Total liabilities and shareholders' equity $5,924
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</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
Revenues $3,153 $2,521
Costs and expenses 2,412 1,862
Selling, general and administrative expenses 689 564
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Income from operations 52 95
Other income 21 (5)
Interest expense 61 28
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Income before provision for income taxes 12 62
Provision for income taxes 4 23
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Net income $ 8 $ 39
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Net income per share (1) $ 0.00 $ 0.01
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</TABLE>
(1) The weighted average number of shares used in the calculation was 5,662,511
for the three months ended September 30, 1995 and 5,772,394 for the three months
ended September 30, 1996.
The accompanying notes are an integral part of the financial statements.
4
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENT OF INCOME
FOR NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(In thousands except for per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
Revenues $ 7,487 $7,070
Cost and expenses 5,684 4,760
Selling, general and administrative expenses 1,986 1,829
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Income (loss) from operations (183) 481
Other income 53 17
Interest expense 158 82
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Income (loss) before provision for income taxes (288) 416
Provision for (benefit from) taxes on income (103) 156
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Net income (loss) (185) $ 260
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Net income (loss) per share (1) ($0.03) $ 0.05
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</TABLE>
(1)The weighted average number of shares used in the calculation was 5,657,787
for the nine months ended September 30, 1995 and 5,771,719 for the nine months
ended September 30, 1996.
The accompanying notes are an integral part of the financial statements.
5
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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Operating activities
<S> <C> <C>
Net income (loss) $ (185) $ 260
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 208 194
Deferred taxes (22) -
Change in:
Accounts receivable (550) (671)
Materials and supplies (106) (54)
Prepaid expenses (36) (34)
Accounts payable 300 236
Accrued liabilities (84) 354
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Net cash provided by (used in) operating activities (475) 285
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Investing activities
Increase in accounts receivable from
stockholders and affiliates - (137)
Purchases of property, plant and equipment (143) (380)
Other - 16
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Net cash used in investing activities (143) (501)
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Financing activities:
Proceeds from notes payable and long-term obligations 2,400 805
Principal payments on notes and long-term obligations (1,547) (618)
Proceeds from issuance of common stock - 92
Purchase of treasury stock (49) (15)
Cash dividends paid (173) -
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Net cash provided by financing activities 631 264
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Increase in cash 13 48
Cash, beginning of period 9 212
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Cash, end of period $ 22 $ 260
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</TABLE>
The accompanying notes are an integral part of the financial statements.
6
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NATIONAL ENVIRONMENTAL SERVICE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, the accompanying condensed financial
statements contain all adjustments of a normal recurring nature necessary to
present fairly the financial position of the Company as of September 30, 1996
and the results of operations and cash flows for the three and nine month
periods ended September 30, 1996 and 1995.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto and other financial information relating
to the Company.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1996 AND SEPTEMBER 30, 1995.
Revenue for the three months ended September 30, 1996 increased 25%
from the corresponding period of 1995 ($3,153,000 compared to $2,521,000).
Increases in site assessments and reports reflected the most increase in the
third quarter of 1996 as compared to 1995. The site assessments and reports
revenues were $532,000 for the third quarter and $115,000 for the same quarter
in 1995. System upgrade revenues increased $144,000 ($176,000 compared to
$32,000 for the corresponding three month period of 1995. Cathodic protection
revenues were $544,000 as compare to $392,000 for the same period in 1995. The
42% cathodic protection revenue increase is the result of progress on several
cathodic protection contracts with convenience store chains located in the
Southwestern United States. Cathodic protection suitability studies, parts, and
kits reflected revenues for the first time in 1996 of $208,000. The Construction
and Repair revenue declined 10% in the third quarter of 1996 as compared to the
corresponding period for 1995 ($1,337,309 compared to $1,493,329) due to the
completion of the Tinker AFB and Fort Hood contracts following the third quarter
of 1995. Remediation revenues declined $300,000 for the third quarter of 1996
compared to the same quarter in 1995 ($134,000 compared to $434,000) due to a
slowdown in projects authorized by certain state indemnity funds.
Although the increase in the cost of sales for the third quarter of
1996 was 30% higher than the corresponding period in 1995, the cost of sales as
a percentage of revenues was only 3% higher (77% compared to 74%). Third quarter
cost of sales was $2,412,000 compared to $1,862,000 for the corresponding period
in 1995. Direct labor increased by 17% for the quarter ended June 30,1996 as
compared to the corresponding period for 1995 . This direct labor increase is
the result of a 25% increase in revenues for the third quarter of 1996 as
compared to the corresponding quarter in 1995. Supplies and materials were
$114,000 for the third quarter compared to the corresponding period in 1995
($760,000 compared to $874,000). Subcontractors expense increased $303,000 for
the third quarter compared to the same quarter in 1995 ($481,000 compared to
$178,000). Lab services increased $82,000 ($158,000 compared to $76,000) in the
third quarter of 1996 compared to 1995 primarily due to the addition of cathodic
protection suitability studies in 1996 and the increase in site assessments in
1996 as compared to 1995.
Selling, general and administrative expenses increased 22% in the
third quarter as compared to the second quarter of 1995 ($689,000 compared to
$564,000). However, the third quarter 1996 selling, general and administrative
expense as a percent of revenue reflects a one-half
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percent decline over the same period in 1995. Salesmen salaries increased
$45,000 ($80,000 compared to $35,000) in the third quarter of 1996 compared to
the same period in 1995. Selling and general administrative salaries declined
$66,000 in the third quarter of 1996 compared to the corresponding period for
1995 ($212,000 compared to $278,000). Due to the unexpected first quarter
results, a reduction in certain executive salaries was made in the third
quarter. This reduction totaled $50,000. Other third quarter 1996 changes in
comparison to the same quarter in 1995 are as follows: consulting services
represent a $25,000 increase due to investor relations activities, provision for
bad debt increased $30,000, and office rent expense increased $24,000 due to the
addition of the Dallas division offices. Other selling and general
administrative expense increases in the third quarter of 1996 as compared to the
same quarter in 1995 resulted from the greater amount of revenues and associated
expenses.
Interest expense increased 132% due to larger loan balances
outstanding. Interest for the third quarter of 1996 was $61,000 compared to
$28,000 for the same period in 1995.
Net income for the quarter was $8,000 after provision for income
taxes. This compares to net income for the third quarter of 1995 of $39,000. The
principal reason for the small amount of net income for the quarter is the
losses incurred on an Air Force Base Project as discussed below in the
Comparison of Results of Operations for the Nine months Ended September 30, 1996
and September 30, 1995. The completion of this project is expected in the fourth
quarter of 1996. Resolution of disagreements over specification requirements and
payment for additional work will be resolved after completion of the project.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND SEPTEMBER 30, 1995.
Revenue for the nine months ended September 30, 1996 increased 5%
compared to the corresponding period of 1995 ($7,487,000 compared to
$7,070,000). The increase in revenues for the first nine months is due primarily
to increases in site assessments and reports ($869,000 compared to $302,000 for
the prior period), cathodic protection ($1,510,000 compared to $948,000 for the
prior period, and system upgrades ($469,000 compared to $267,000 for the prior
period). Additionally, the sale of cathodic protection suitability studies,
parts, and kits reflected revenues for the first time in 1996 and totaled
$214,000. These increases were offset by decreases in revenue for two
categories: construction and repair ($3,420,000 in 1996 compared to $4,352,000
in 1995) and remediation ($591,000 in 1996 compared to $987,000 for the same
period in 1995). Construction and repair revenues declined because of the
completion of the Tinker AFB and Fort Hood projects in late 1995. New government
contracting projects were smaller in 1996. Remediation revenues due to a
slowdown in projects authorized by certain state indemnity funds.
Cost of sales increased 19% from $4,760,000 for the first nine months
of 1995 compared to $5,684,000 for the first nine months of 1996. Direct labor
increased by $258,000 ($1,277,000 for 1996 compared to $1,019,000 in 1995). Lab
services increased $198,000 (from $192,000 to
9
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$390,000) primarily due to the addition of cathodic protection suitability
studies in 1996 and the increase in site assessments in 1996 as compared to
1995. Subcontractor expense increased $174,000 due to the use of a primary
subcontractor on the Warren Air Force Base contract.
Selling, general and administrative expense increased 9% for the nine
months ended September 30, 1996 ($1,986,000 compared to $1,829,000). Areas of
increased expense in the first nine months of 1996 compared to the corresponding
period in 1995 include: office rent ($56,000 increase) due primarily to addition
of new Dallas division office; salesmen salaries ($86,000 increase); consulting
services ($25,000 increase) for investor relations activities; provision for bad
debt ($56,000 increase); and indirect travel ($25,000 increase). Areas of
decreased expense include: office supplies and postage ($16,000 decrease);
general insurance ($121,000 decrease) due to reductions in rates and refunds of
prior year premiums; and bonuses $11,000 decrease). Due to the unexpected first
quarter results, a reduction in certain executive salaries was made in the
second and third quarters. This reduction totaled $103,000.
Interest expense increased $76,000 for the nine months of 1996
compared to the corresponding period in 1995 ($158,000 in 1996 compared to
$82,000 for the same period in 1995).
The net loss for the nine months ended September 30, 1996 after
provision for benefit from taxes on income was $185,000 compared to net income
of $260,000 for the same period in 1995. The principal reason for this loss was
an Air Force Base project started by NESCO in the spring of 1995. Several
factors have caused difficulties on the project including unusual weather
problems, all of which have contributed to the 1996 losses. Additionally, the
local government contracting office in charge of the project has been unusually
difficult to work with in comparison to the many other such offices with which
NESCO has worked. Disagreements over specification requirements and payment for
additional work will be resolved after completion of the project. Apart from the
Air Force Base project, other factors contributing to the lowering of income are
the establishment of the Dallas division office and the implementation of the
cathodic protection distributor program.
CHANGES IN CAPITAL RESOURCES AND LIQUIDITY
The company obtained a bank loan secured by equipment in December,
1995 in the amount of $355,000. This loan was funded in early January, 1996. The
interest rate on the loan is prime plus 1 percent, and the loan is repayable in
36 monthly installments of principal and interest. Maturity is December 29,
1998.
The company obtained a bank loan secured by proceeds to be received
from work performed on a contract. The loan amount was $295,000 and funded in
January, 1996. The loan is payable in nine equal installments plus interest with
a maturity of October 29, 1996. The interest rate is prime plus 1 percent.
10
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The board of directors declared a dividend of three cents per share to
stockholders of record on February 15, 1996. The dividend was paid March 1, 1996
and aggregated $173,000.
The company obtained a loan from stockholders in June, 1996. The
$145,000 loan has an interest rate of 9.5% and matures on January 5, 1997.
Interest is payable monthly.
The Company renewed its Revolving line of credit in February, 1996,
and the new loan maturity is April, 1997. The amount of the line was increased
from $1.2 million to $1.75 million. The line of credit was increased in
September, 1996 to $2.1 million. The maturity remained at April, 1997. The
interest rate on all of the loans and modifications was at prime plus 1 percent.
The outstanding balance on the line of credit at September 30, 1996 was
$1,650,000.
In conjunction with its acquisition in February of certain assets from
Leigh Engineering, Inc. of Dallas, Texas, the Company obtained two loans. The
Company obtained a $117,000 loan secured by equipment at an interest rate of
prime plus 1 percent. The loan is repayable in twenty-four installments of
principal and interest and matures in March of 1998. Additionally, the Company
negotiated a $150,000 short-term line of credit loan secured by accounts
receivable obtained from Leigh Engineering. The interest rate is prime plus 1
percent, and the maturity is June 18, 1996. The loan has since matured and has
been paid off.
On August 26, 1996, NESCO entered into a letter of intent with the
sole stockholder of Perry Williams, Inc. of Amarillo, Texas, to acquire all of
the issued and outstanding stock of the corporation subject to the acquisition
of capital necessary to complete the transaction. The company is in the
preliminary states of a private placement of equity capital for the purpose of
financing the acquisition among other things. The offer and sale of any
securities issued pursuant to this offering will not be registered under the
Securities Act of 1933, as amended, and will not be able to be offered or sold
in the United States absent registration or an applicable exemption for the
federal and state registration requirements.
11
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NATIONAL ENVIRONMENTAL SERVICE CO.
/s/ EDDY L.PATTERSON
Date: November 12, 1996 _________________________________________
EDDY L. PATTERSON, President
/S/ LARRY G. JOHNSON
Date: November 12, 1996 _________________________________________
LARRY G. JOHNSON, Vice President & Secretary-
Treasurer & Chief Financial
Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 22
<SECURITIES> 0
<RECEIVABLES> 3,607
<ALLOWANCES> 105
<INVENTORY> 550
<CURRENT-ASSETS> 4,297
<PP&E> 2,692
<DEPRECIATION> 1,087
<TOTAL-ASSETS> 5,924
<CURRENT-LIABILITIES> 3,696
<BONDS> 0
0
0
<COMMON> 58
<OTHER-SE> 1,950
<TOTAL-LIABILITY-AND-EQUITY> 5,924
<SALES> 426
<TOTAL-REVENUES> 7,487
<CGS> 289
<TOTAL-COSTS> 5,684
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 74
<INTEREST-EXPENSE> 158
<INCOME-PRETAX> (288)
<INCOME-TAX> (103)
<INCOME-CONTINUING> (96)
<DISCONTINUED> (89)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (185)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
