<PAGE>
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 JUNE 30, 1996
-------------
[ ] 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.
----------------------------------
(Exact name of small business issuer as specified in its charter)
Oklahoma 73-1296420
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12331 East 60th Street, Tulsa, Oklahoma 74l46
---------------------------------------------
(Address of principal executive offices)
(918)-250-2227
--------------
(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 June 30, 1996:
Number of shares
Title of Class Outstanding
-------------- -----------
Common Stock, $.01 Par Value 5,772,627
Traditional Small Business Issuer Format (Check one): Yes____No__X_
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
FINANCIAL INFORMATION:
Consolidated Balance Sheet
June 30, 1996 3
Consolidated Statements of Income
Three Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Income
Six Months Ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows
Six Months Ended June 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
</TABLE>
PART II
<TABLE>
<CAPTION>
OTHER INFORMATION:
<S> <C>
Item 4. Submission of Matters to a vote of
Security holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
</TABLE>
2
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(In Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash $ 12
Accounts Receivable 3,619
Materials and Supplies 530
Prepaid Expenses 98
------
Total current assets 4,259
------
Property and equipment, at cost 2,656
Less accumulated depreciation (996)
------
Property and equipment, net 1,660
------
Other assets 21
------
Total assets $5,940
======
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C>
Current maturities of long term obligations
and revolving line of credit $2,421
Accounts payable 1,146
Accrued liabilities 8
------
Total current liabilities 3,575
------
Long-term obligations 333
Deferred income taxes 30
------
Total Liabilities 363
------
Shareholders' equity:
Preferred stock: 1,000,000 shares authorized;
none issued
Common stock, par value $.01; authorized
20,000,000 shares; issued and outstanding
5,801,143 shares, including treasury shares 58
Additional paid-in capital 1,746
Retained Earnings 272
Common stock in Treasury, at cost, 28,516 shares (74)
------
Total shareholders' equity 2,002
------
Total liabilities and shareholders' equity $5,940
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Revenues $3,007 $2,486
Costs and Expenses 2,157 1,688
Selling, general and administrative expenses 535 674
------ ------
Income from operations 315 124
Other income 20 10
Interest expense 46 33
------ ------
Income before provision for income taxes 289 101
Provision for income taxes 87 35
------ ------
Net Income $ 202 $ 66
====== ======
Net Income per share (1) $0.04 $0.01
====== ======
</TABLE>
(1) The weighted average number of shares used in the calculation was 5,663,344
for the three months ended June 30, 1995 and 5,771,291 for the three months
ended June 30, 1996.
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENT OF INCOME
FOR SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(In thousands except for per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Revenues $ 4,334 $ 4,549
Cost and expenses 3,272 2,898
Selling, general and administrative expenses 1,297 1,265
------- -------
Income (loss) from operations (235) 386
Other Income 31 22
Interest Expense 96 54
------- -------
Income (loss) before provision for income taxes (300) 354
Provision for (benefit from) taxes on income (107) 133
------- -------
Net Income (loss) ($193) $ 221
------- -------
Net income (loss) per share (1) ($0.03) $0.04
------- -------
</TABLE>
(1)The weighted average number of shares used in the calculation was 5,655,425
for the six months ended June 30, 1995 and 5,771,473 for the six months ended
June 30, 1996.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------- --------
Operating activities
<S> <C> <C>
Net Income (loss) $ (191) $ 221
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 118 129
Deferred taxes (22) -
Change in:
Accounts receivable (583) (1,013)
Materials and supplies (87) (131)
Prepaid expenses (16) 25
Accounts payable 165 321
Accrued liabilities (175) 323
------ -------
Net cash provided by (used in) operating activities (791) (125)
------ -------
Investing activities
Increase in accounts receivable from
stockholders and affiliates - (137)
Purchases of property, plant and equipment (107) 376
Other 1 (10)
------ -------
Net cash provided by (used in) investing activities (106) 229
------ -------
Financing activities:
Proceeds from notes payable and long-term obligations 1,684 181
Principal payments on notes and long term obligations (565) (576)
Proceeds from common stock - 92
Purchase of treasury stock (47) -
Cash dividends paid (172) -
------ -------
Net cash provided by (used in) financing activities 900 (303)
------ -------
Increase (decrease) in cash 3 (199)
Cash, beginning of period 9 212
------ -------
Cash, end of period $ 12 $ 13
====== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
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 June 30, 1996 and the
results of operations and cash flows for the three and six month periods ended
June 30, 1996 and 1995.
7
<PAGE>
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 JUNE 30, 1996 AND
JUNE 30, 1995.
Revenue for the three months ended June 30, 1996 increased 21% from the
corresponding period of 1995 ($3,007,000 compared to $2,486,000). An increase in
the amount of work under contract resulted in increases in various revenue
categories in the second quarter of 1996 in comparison to the same quarter in
1995. Increases in two revenue categories accounted for most of the increase.
System upgrade revenues increased 121% ($258,000 as compared to $117,000 for the
corresponding three month period of 1995. The 127% 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 revenues were $629,000 as compared to $277,000 for the same period in
1995. The Construction and Repair revenue declined 21% in the second quarter of
1996 as compared to the corresponding period for 1995 ($1,294,309 compared to
$1,645,329).
The 16% increase in the cost of sales for the second quarter of 1996 was
slightly lower than the increase in revenues for the second quarter of 1996
compared to the corresponding period in 1995. Second quarter cost of sales was
$1,957,000 compared to $1,688,000 for the corresponding period in 1995. Supplies
and materials increased 24% ($839,000 compared to $675,000). The increase
resulted from purchases of supplies and materials for system upgrades, a revenue
category exhibiting significant increases in 1996. Direct labor increased by 22%
for the quarter ended June 30, 1996 as compared to the corresponding period for
1995 . This direct labor increase is the result of a 21% increase in revenues
for the second quarter of 1996 as compared to the corresponding quarter in 1995.
The revenue increase resulted from an increase in contract work being performed
by the company in the second quarter of 1996 compared to the same period for
1995.
Selling, general and administrative expenses declined 22% in the second
quarter as compared to the second quarter of 1995 ($527,000 compared to
$674,000). Declines in several expense categories contributed to the overall
decline. Some of the expense reduction in telephone expense and supplies and
postage expense resulted from the closing of the Iowa and Nebraska branch
offices. Shareholder related expenses were reduced by using company personnel
to perform certain activities previously supplied by outside vendors. Insurance
expense was reduced due to a significant reduction in the workers compensation
insurance experience modifier and refunds on general liability policies.
Selling, general and administrative salaries declined 20% in the second quarter
of 1995 compared to the corresponding period for 1995 ($253,000 compared to
$315,000). Due to the unexpected first quarter results, a one-time reduction in
certain executive salaries was made in the second quarter. This reduction
totaled $53,000.
Interest expense increased 39% due to larger loan balances outstanding.
Interest expense for the second quarter of 1996 was $46,000 compared to $33,000
for the same period in 1995.
CHANGES IN CAPITAL RESOURCES AND LIQUIDITY
The company continued to make periodic debt repayments during the quarter.
Significant
8
<PAGE>
growth in revenues during the second quarter resulted in increased balances in
accounts receivable. The company continued to make investments in property,
plant and equipment as well as materials and supplies as needed. The company
secured a loan from stockholders in June, 1996. The $145,000 loan has an
interest rate of 9.5% and matures on January 5, 1997.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
JUNE 30, 1995.
Revenue for the six months ended June 30, 1996 decreased 5% compared to the
corresponding period of 1995 ($4,334,000 compared to $4,549,000). The reduction
in revenues for the first six months is due primarily to the first quarter
decline in revenues which resulted from completion of two projects for the U.S.
Government in the third and fourth quarters of 1995. Also, contracts which were
to begin in the first quarter of 1996 were delayed until the second quarter of
1996 and beyond. Site assessment revenues increased 76% in the first six months
of 1996 compared to the corresponding period for 1995 ($337,000 compared to
$191,000), and cathodic protection revenues increased 72% ($957,000 compared to
$556,000). System upgrades increased 25% ($294,000 compared to $235,000), but
construction and repair revenues declined 27% ($2,084,000 compared to
$2,859,000).
Cost of sales increased 14% from $2,898,000 for the first six months of
1995 compared to $3,306,000 for the first six months of 1996. Direct labor
increased by $192,000 ($826,000 for 1996 compared to $634,000 in 1995). However,
the labor increase was partially offset by a 28% decrease in subcontractor
expense ($326,000 compared to $454,000 for the corresponding period in 1995).
Supplies and materials increased $125,000.
Selling, general and administrative expense increased 1% for the six months
ended June 30, 1996 ($1,283,000 compared to $1,265,000). Areas of increased
expense in the first six months of 1996 compared to the corresponding period in
1995 include office rent (addition of new Dallas facilities), advertising
(promotion of the cathodic protection dealer program), and indirect travel.
Areas of decreased expense include office supplies and postage, telephone,
general insurance, shareholder expense, and bonuses. Due to the unexpected
first quarter results, a one-time reduction in certain executive salaries was
made in the second quarter. This reduction totaled $53,000.
Interest expense increased $44,000 for the first six months of 1996
compared to the corresponding period in 1995 ($96,000 compared to $52,000).
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.
9
<PAGE>
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.
The company secured 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 interest rate on the loan remained at prime
plus 1 percent.
In conjunction with its acquisition 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 was not funded as of the end of the quarter.
The Company continued to make periodic debt repayments during the period.
The un-used portion of the bank line of credit ($50,000 at June 30, 1996) is
available, should it be needed. Due to funding problems at a state agency,
reimbursements for more than $169,000 from Nebraska have been delayed and are in
trade accounts receivable. The Company expects to receive a substantial portion
of the reimbursements with interest during the third quarter of 1996. As these
reimbursements are received, funds will be available to reduce the line of
credit balances.
10
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held at 12331 East
60th Street, Tulsa, Oklahoma on May 16, 1996. At the meeting the following
directors were elected for one year terms:
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
Eddy L. Patterson 4,720,292 1,192
Albert A. McCutchan 4,710,292 11,192
E. R. Foraker 4,720,157 1,327
Jack A. Griffith 4,720,292 1,192
Jerry Danielson 4,720,292 1,192
</TABLE>
The shareholders ratified Tullius, Taylor, Sartain & Sartain as auditors to
perform the audit for the fiscal year ending December 31, 1996:
For 4,709,181 Against 456 Abstain 580
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Promissory Note with Shareholders
(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.
Date: August 5, 1996 __________________________________
EDDY L. PATTERSON, President
Date: August 5, 1996 __________________________________
LARRY G. JOHNSON, Vice President &
Secretary-Treasurer & Chief Financial
Officer
11
<PAGE>
EXHIBIT 10.1
PROMISSORY NOTE
$144,896.00 Tulsa, Oklahoma Dated: June 28, 1996
SIX MONTHS & EIGHT DAYS after date (Maturity 1-5-1997), for value received,
National Environmental Service Company promises to pay to the order of
McCutchan-Patterson Partnership ONE HUNDRED FORTY FOUR THOUSAND EIGHT HUNDRED
NINETY SIX and no/100 DOLLARS ($144,896.00) at 12331 East 60th Street, Tulsa,
Oklahoma 74146 without defalcation or discount with interest at the rate of 9.5%
percent, per annum, payable as follows:
Interest of ONE THOUSAND ONE HUNDRED FORTY SEVEN and 09/100 DOLLARS
($1,147.09)each month, payable monthly beginning July 28, 1996 and on the 28th
of each month thereafter, and a final payment of interest and principal of ONE
HUNDRED FORTY FIVE THOUSAND ONE HUNDRED NINETY SEVEN and 68/100 DOLLARS
($145,197.68) on January 5, 1997.
Should any interest or principal not be paid when due, it shall bear
interest at the rate of 9.5 percent, per annum, until paid. The principals,
endorsers, sureties and guarantors of this note hereby severally waive
presentment and demand of payment, notice of non-payment, protest and notice of
protest, and extension of time of payment. If this note is not paid when due
and is collected by an attorney or by suit, principals, sureties and endorsers
agree to pay a reasonable attorney's fee for the collection of same.
NATIONAL ENVIRONMENTAL SERVICE
COMPANY
/s/Larry G. Johnson
_______________________________________________
Larry G. Johnson, Vice President and Secretary-
Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 12
<SECURITIES> 0
<RECEIVABLES> 3619
<ALLOWANCES> 76
<INVENTORY> 530
<CURRENT-ASSETS> 4259
<PP&E> 2656
<DEPRECIATION> 996
<TOTAL-ASSETS> 5940
<CURRENT-LIABILITIES> 3575
<BONDS> 0
0
0
<COMMON> 58
<OTHER-SE> 1944
<TOTAL-LIABILITY-AND-EQUITY> 5940
<SALES> 237
<TOTAL-REVENUES> 4334
<CGS> 145
<TOTAL-COSTS> 3272
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96
<INCOME-PRETAX> (300)
<INCOME-TAX> (107)
<INCOME-CONTINUING> (110)
<DISCONTINUED> (83)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (193)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
