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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, 1997
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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 74146
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(Address of principal executive offices)
(918)-250-2227
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(Issurer'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
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of November 1, 1997:
Number of shares
Title of Class Outstanding
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Common Stock, $.01 Par Value 6,784,427
Transitional Small Business Disclosure Format (Check one): Yes No X
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NATIONAL ENVIRONMENTAL SERVICE CO.
TABLE OF CONTENTS
PAGE
FINANCIAL INFORMATION:
Consolidated Balance Sheet
September 30, 1997 3
Consolidated Statements of Income
Three Months Ended September 30, 1997 and 1996 4
Consolidated Statements of Income
Nine Months Ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 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
2
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(In Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash $ 40
Accounts receivable 5,151
Materials and supplies 747
Prepaid expenses 87
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Total current assets 6,025
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Property and equipment, at cost 3,210
Less accumulated depreciation (1,408)
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Property and equipment, net 1,802
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Other assets 6
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Total assets $ 7,833
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long term obligations
and revolving line of credit $ 2,020
Accounts payable 1,131
Accrued liabilities 539
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Total current liabilities 3,690
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Long-term obligations 676
Deferred income taxes 16
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Total liabilities 4,382
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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 6,801,143 shares, including treasury shares 68
Additional paid-in capital 2,699
Retained earnings 746
Common stock in treasury, at cost, 19,216 shares (62)
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Total shareholders' equity 3,451
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Total liabilities and shareholders' equity $ 7,833
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</TABLE>
3
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Revenues $3,220 $3,153
Costs and expenses 2,222 2,412
Selling, general and administrative expenses 791 689
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Income from operations 207 52
Other income 36 21
Interest expense 68 61
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Income before provision for income taxes 175 12
Provision for income taxes 50 4
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Net income $ 125 $ 8
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Net income per share (1) $ 0.02 $ 0.00
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</TABLE>
(1) The weighted average number of shares used in the calculation was 5,772,394
for the three months ended September 30, 1996 and 6,781,927 for the three months
ended September 30, 1997.
4
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENT OF INCOME
FOR NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(In thousands except for per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Revenues $10,194 $ 7,487
Cost and expenses 6,691 5,684
Selling, general and administrative expenses 2,376 1,986
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Income (loss) from operations 1,127 (183)
Other income 79 53
Interest expense 210 158
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Income (loss) before provision for income taxes 996 (288)
Provision for (benefit from) taxes on income 344 (103)
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Net income (loss) 652 (185)
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Net income (loss) per share (1) $ 0.11 $ (0.03)
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</TABLE>
(1)The weighted average number of shares used in the calculation was 5,771,719
for the nine months ended September 30, 1996 and 6,195,260 for the nine months
ended September 30, 1997.
5
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Operating activities
Net income (loss) $ 652 $ (185)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 278 208
Deferred taxes - (22)
Change in:
Accounts receivable (1,157) (550)
Materials and supplies (122) (106)
Prepaid expenses (54) (36)
Accounts payable (231) 300
Accrued liabilities 310 (84)
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Net cash used in operating activities (324) (475)
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Investing activities
Purchases of property, plant and equipment (471) (143)
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Net cash used in investing activities (471) (143)
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Financing activities:
Proceeds from notes payable and long-term obligations 3,364 2,400
Principal payments on notes and long-term obligations (3,625) (1,547)
Proceeds from issuance of common stock 963 -
Issuance (purchase) of treasury stock 14 (49)
Cash dividends paid - (173)
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Net cash provided by financing activities 716 631
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Increase (decrease) in cash (79) 13
Cash, beginning of period 119 9
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Cash, end of period $ 40 $ 22
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</TABLE>
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, 1997
and the results of operations and cash flows for the three and nine month
periods ended September 30, 1997 and 1996.
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,
1997 AND SEPTEMBER 30, 1996.
Revenue for the three months ended September 30, 1997 increased 2% from the
corresponding period of 1996 ($3,220,000 compared to $3,153,000). Increases in
construction and repair revenue reflected the most revenue increase in the third
quarter of 1997 as compared to the same period in 1996. The construction and
repair revenue was $1,745,000 for the third quarter in 1997 and $1,337,000 for
the same quarter in 1996. Revenue from the initial stages of work and equipment
sales involved in installing fueling facilities for a major grocery store chain
accounted for much of the increase. The increase in construction and repair
revenue was offset by a decrease in site assessments and reports ($83,000 for
the third quarter of 1997 compared to $596,000 for the corresponding three month
period of 1996). The 1996 revenues for the third quarter were significantly
larger due to the performance of a large contract for a series of site
assessments in Texas. All other revenue categories combined increased $172,000
for the third quarter of 1997 as compared to the third quarter of 1996
($1,392,000 compared to $1,220,000). This increase resulted from increased
activity in the areas of fueling systems upgrades, cathodic protection and other
miscellaneous categories including service and maintenance work on fueling
systems.
The cost of sales for the third quarter of 1997 was $2,222,000 compared to
$2,412,000 for the same period in 1996. Cost of sales as a percentage of
revenue also declined in the third quarter of 1997 (69% of revenues compared to
76% for the same period in 1996). Direct labor decreased by 5% for the quarter
ended September 30,1997 as compared to the corresponding period for 1996
($386,000 compared to $455,000). The reduction in direct labor expense
resulted from the elimination of wages on the Whiteman Air Force Base project
without a corresponding reduction in revenues. Lab services decreased $71,000
($87,000 compared to $158,000) in the third quarter of 1997 compared to 1996.
Lab services expense for the third quarter 1996 was higher due to the addition
of cathodic protection suitability studies and greater volume of site
assessments in this quarter. Vehicle expense except depreciation for the third
quarter of 1997 was $101,000 compared to $67,000 for the same period of 1996 due
to the larger fleet of vehicles and increased maintenance.
Selling, general and administrative expenses increased 15% in the third
quarter of 1997 as compared to the third quarter of 1996 ($791,000 compared to
$689,000). The third quarter 1997 selling, general and administrative expense
as a percent of revenue reflects a three percent increase over the same period
in 1996 (25% compared to 22%). Selling and general administrative salaries
increased $115,000 in the third quarter of 1997 compared to the
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corresponding period for 1996 ($327,000 compared to $212,000). The third quarter
selling and general administrative salaries for 1996 reflected a one time
reduction in certain executive officer salaries of $50,000. Therefore, $50,000
of the increase in the third quarter of 1997 reflected a return to normal levels
for this expense category. The remaining portion of the increase in the third
quarter 1997 selling and general administrative salaries resulted from the
additional staff hired for the Dallas and Houston divisions and general salary
increases. Salesmen salaries decreased $30,000 ($50,000 compared to $80,000) in
the third quarter of 1997 compared to the same period in 1996. This decrease
resulted from a reduction in the sales force for certain areas of the Company's
operations. Other third quarter 1997 changes in comparison to the same quarter
in 1996 are as follows: a reduction in salesmen's travel expenses of $13,000 due
to the decrease in sales force, a $12,000 increase in office supplies and
postage due to the Texas divisions' activities, an increase in bad debt expense
of $11,000, and a decrease in office rent expense of $10,000 due to the
elimination of the Chenco facility in Dallas.
Interest expense increased 5% due to larger loan balances outstanding.
Interest for the third quarter of 1997 was $68,000 compared to $61,000 for the
same period in 1996. Other income included discounts of $16,000 earned in the
third quarter of 1997 compared to no discounts earned in the third quarter of
1996. The discounts were earned primarily on the early payment of invoices on
purchases of dispensers and supplies.
Net income for the quarter was $125,000. This compares to net income for
the third quarter of 1996 of $8,000. The principal reason for the increase in
revenue is the reduction in the cost of sales as a percentage of revenue.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND SEPTEMBER 30, 1996.
Revenue for the nine months ended September 30, 1997 increased 36% compared
to the corresponding period of 1996 ($10,194,000 compared to $7,487,000). The
increase in revenues for the first nine months is due primarily to increases in
construction and repair ($4,951,000 compared to $3,420,000 for the prior
period), cathodic protection ($3,157,000 compared to $1,510,000 for the prior
period, and system upgrades ($573,000 compared to $469,000 for the prior
period). Remediation revenues increased to $716,000 for the nine months ended
September 30, 1997 as compared to $591,000 for the same period in 1996. Site
assessments and reports declined to $406,000 for the first nine months of 1997
from $869,000 for the same period in 1996. Construction and repair revenue grew
due to the greater emphasis on installation of fueling systems and related work.
Cathodic protection revenues grew due to the greater acquisition of cathodic
protection installation kits by NESCO's distributors and because of NESCO's own
installations of cathodic protection systems. The approaching deadlines for
completing this work is causing owners and operators of fueling systems to have
these systems installed. Remediation revenue grew due to the increase
remediation activity in Texas. Site assessments and reports revenue was lower
in the third quarter of 1997 in comparison to the same quarter in 1996 due to
the performance of a large contract for a series of site assessments in Texas in
1996.
9
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Cost of sales increased 18% to $6,691,000 for the first nine months of 1997
compared to $5,684,000 for the first nine months of 1996. However, the cost of
sales as a percentage of revenue for the first nine months of 1997 was 66%
compared to 76% for the same period in 1996. This decrease was due to improved
margins in most revenue categories and increased sales in the higher margin
cathodic protection category. Direct labor was substantially unchanged at
$1,269,000 for 1997 compared to $1,277,000 in 1996). Contract labor increased
to $144,000 for the first nine months of 1997 compared to $49,000 for the same
period in 1996. Lab services decreased $163,000 in the first nine months of
1997 compared to the same period in 1996 ($227,000 compared to $390,000)
primarily due to the decrease in site assessments in 1997 as compared to 1996 as
described in the preceding paragraph. Subcontractor expense increased $155,000
for the first nine months of 1997 compared to the same period in 1996 ($962,000
compared to $807,000). Contract labor expense and subcontractor expense
increased due to the larger volume of work for the nine months ended September
30, 1997 as compared to the same period in 1996. Supplies and materials
increased 37% in the first nine months of 1997 compared to the same period of
1996 ($2,959,000 compared to $2,167,000). However, the increase is comparable
to the 36% increase in revenues. Vehicle expense except depreciation increased
$80,000 to $234,000 for the first nine months of 1997 compared to $154,000 for
the same period in 1996. This increase was the result of the larger fleet of
vehicles and the increased service and maintenance.
Selling, general and administrative expense increased 20% for the nine months
ended September 30, 1997 over the same period in 1996 ($2,376,000 compared to
$1,986,000). Selling and general administrative salaries increased$174,000 for
the first nine months of 1997 compared to the same period of 1996 ($975,000
compared to $801,000). The second and third quarters of 1996 included a one-
time reduction in certain executive salaries of $103,000. Therefore, $103,000
of the expense increase for the first nine months of 1997 was due to a return to
normal levels of expense for the selling and general administrative salaries.
The remainder of the increase was due to normal salary increases and staff
additions. Other areas of increased expense in the first nine months of 1997
compared to the corresponding period in 1996 include: office supplies and
postage ($21,000 increase) due primarily to addition of new division office
activities; consulting and professional services ($36,000 increase); bad debt
expense ($21,000 increase); and general insurance ($111,000 increase). The
increase in general insurance for the first nine months of 1997 compared to the
same period in 1996 resulted from rate reductions and one-time refunds of prior
year premiums in 1996. Areas of decreased expense include: advertising
($25,000 decrease) and life insurance premiums for officers ($11,000 decrease).
Interest expense increased $52,000 for the nine months of 1997 compared to
the corresponding period in 1996 ($210,000 compared to $158,000 for the same
period in 1996). Other income included discounts of $18,000 earned in the first
nine months of 1997 compared to no discounts for the same period in 1996. The
discounts were earned primarily on the early payment of invoices on purchases of
dispensers and supplies.
The net income for the nine months ended September 30, 1997 was $652,000
compared
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to a net loss of $185,000 for the same period in 1996. Increased revenues and
reduction in the cost of sales as a percentage of revenue were the most
significant reasons for the increased income. The reduction in cost of sales
was attributable to the completion of the Whiteman Air Force Base project prior
to the third quarter of 1997.
CHANGES IN CAPITAL RESOURCES AND LIQUIDITY
The company continued to make periodic debt repayments during the quarter.
The company continued to make investments in property, plant and equipment as
well as materials and supplies as needed. The company secured funds from a
$1,000,000 private placement of one million shares of common stock during the
second quarter of 1997. As part of the private placement, the company granted
options to purchase 530,000 shares of common stock at $1.50 per share
exercisable at any time prior to April 30, 1999. Accounts receivable at the
end of the third quarter 1997 totaled $5,151,000 compared to $3,607,000 at the
end of the third quarter of 1996. Accounts payable declined to $1,131,000 at
September 30, 1997 compared to $1,299,000 for the same date in 1996.
The company obtained a bank loan secured by two trucks and attached
equipment in January, 1997 in the amount of $40,219 with an interest rate of
8.45%, a term of 36 months, and a maturity of January 10, 2000.
The company obtained a bank loan secured by two trucks and drill rigs in
June, 1997 in the amount of $82,797. The interest rate is national prime plus
one percent with an initial rate of 9.5%. The loan has a term of 36 months and
a maturity of June 15, 2000.
The Company extended its Revolving line of credit in April, 1997, and the
extended loan maturity was May 31, 1997. The amount of the line was decreased
from $2.1 million to $2.0 million pending the transfer of the company's banking
relationships from Boatmen's National Bank of Oklahoma to Bank of Oklahoma. The
interest rate on the loan during the extension was national prime plus 3
percent. On July 15, 1997, the company executed loan documents and transferred
its line of credit loan and various equipment loans to the Bank of Oklahoma. The
line of credit was increased to $2.5 million with an interest rate of national
prime plus 1.5%. The company used $2.028 million of the new line to payoff the
line of credit at Boatmen's National Bank of Oklahoma. Various equipment loans
at Boatmen's National Bank of Oklahoma totaling $391,000 were consolidated into
a Bank of Oklahoma $500,000 loan on equipment with an interest rate of national
prime plus 1.5%. The loan is amortized on a five year term with monthly
payments. A balloon payment at maturity is required on July 31, 2000. The
monthly payment is $10,624.
The company obtained loans to purchase eight service trucks in July and
August, 1997. The eight loans totaled $171,772. with interest rates of 5.9% per
annum. The loans will be repaid in 36 monthly installments with maturities in
August and September, 2000.
11
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(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: November 5, 1997 /s/ Eddy L. Patterson
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EDDY L. PATTERSON, President
Date: November 5, 1996 /s/ Larry G. Johnson
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LARRY G. JOHNSON, Vice President &
Secretary-Treasurer &
Chief Financial Officer
12
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 40
<SECURITIES> 0
<RECEIVABLES> 5151
<ALLOWANCES> 142
<INVENTORY> 747
<CURRENT-ASSETS> 6025
<PP&E> 3210
<DEPRECIATION> 1408
<TOTAL-ASSETS> 7833
<CURRENT-LIABILITIES> 3690
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 3383
<TOTAL-LIABILITY-AND-EQUITY> 7833
<SALES> 1995
<TOTAL-REVENUES> 10,194
<CGS> 1313
<TOTAL-COSTS> 9067
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 210
<INCOME-PRETAX> 996
<INCOME-TAX> 344
<INCOME-CONTINUING> 652
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 652
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
