<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 MARCH 31, 1998
--------------
[ ] 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
--------------
(Issurer's telephone number)
Check whether the issuer (1) filed all reports required 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 March 31, 1998:
Number of shares
Title of Class Outstanding
-------------- -----------
Common Stock, $.01 Par Value 7,876,143
Transitional Small Business Issuer Format (Check one): Yes No X
--- ---
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
TABLE OF CONTENTS
PART I
PAGE
FINANCIAL INFORMATION:
Item 1 - Financial Statements
Consolidated Balance Sheet
March 31, 1998 3
Consolidated Statements of Income
Three Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis
Management's Discussion and Analysis of the
Financial Condition and Results of Operation 8
PART II
OTHER INFORMATION:
Item 2 - Changes in Securities and Use of Proceeds 10
Item 6 - Exhibits and Reports on Form 8-K 10
Signatures 11
2
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash $ 35
Accounts receivable:
Trade, net of allowance for doubtful accounts of $87 5,810
Refundable income taxes 46
Costs in excess of billings and estimated earnings on
uncompleted contracts 2,385
Inventories 1,118
Prepaid Expenses 106
-------
Total current assets 9,500
-------
Property and equipment, at cost 3,856
Less accumulated depreciation (1,731)
-------
Property and equipment, net 2,125
-------
Other assets 42
-------
Total assets $11,667
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long term obligations $ 3,408
Accounts payable 2,153
Income tax payable 373
Accrued liabilities 263
-------
Total current liabilities 6,197
-------
Long-term obligations 860
-------
Deferred income taxes 120
-------
Shareholders' equity:
Preferred stock: 1,000,000 shares authorized;
none issued
Common stock, par value $.01; authorized 20,000,000 shares;
issued 7,876,143 shares, including treasury shares 79
Additional paid-in capital 3,949
Retained Earnings 510
Common stock in Treasury, at cost, 12,376 shares (48)
-------
Total shareholders' equity 4,490
-------
Total liabilities and shareholders' equity $11,667
=======
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 MARCH 31, 1998 AND 1997
(In thousands except per share amounts)
(Unaudited)
1998 1997
-------- --------
Revenues $3,688 $3,586
Costs and Expenses 2,781 2,186
Selling, general and administrative expenses 782 778
------ ------
Income from operations 125 622
Other income 21 21
Interest expense (108) (85)
------ ------
Income before provision for income taxes 38 558
Provision for income taxes 12 197
------ ------
Net Income $ 26 $ 361
====== ======
Basic Net Income per share $ 0.00 $ 0.06
====== ======
Diluted Net Income per share $ 0.00 $ 0.06
====== ======
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands)
(Unaudited)
1998 1997(1)
-------- --------
Operating activities
Net Income $ 26 $ 361
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 110 95
Change in:
Accounts receivable (794) (705)
Costs and estimated earnings in excess of
billings on uncompleted contracts (319) (341)
Inventories (124) (251)
Prepaid and other expenses (45) (32)
Accounts payable 75 529
Accrued liabilities 38 199
Income tax payable 12 197
Billings in excess of cost and estimated
earnings on uncompleted contracts (68)
-------- --------
Net cash provided by (used in) operating activities (1,021) (16)
-------- --------
Investing activities
Purchases of property, plant and equipment (52) (77)
-------- --------
Net cash used in investing activities (52) (77)
-------- --------
Financing activities:
Proceeds from notes payable and long-term obligations 500 357
Principal payments on notes and long term obligations (204) (372)
Proceeds from common stock 719 -
-------- --------
Net cash provided by financing activities 1,015 (15)
------- --------
Decrease in cash (58) (108)
Cash, beginning of period 93 119
-------- --------
Cash, end of period $ 35 $ 11
======== ========
The accompanying notes are an integral part of the financial statements.
5
<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 March 31, 1998 and
the results of operations and cash flows for the three month periods ended March
31, 1998 and 1997. Results of operations and cash flows are not necessarily
indicative of the results which will be achieved for the full year.
2. BUSINESS COMPENSATION
Lab One Analytical, Inc. and the corporate office building and facilities
were purchased from Eddy Patterson and Albert McCutchan, the President and
Executive Vice President of the Company following the completion of independent
appraisals of the entities and the review and unanimous consent of the outside
directors of the Company to the transactions and terms and conditions thereof.
The following increases occurred:
Income from operations $39
Income before provision 19
Net Income 13
3. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" (see Note 10). SFAS 128 replaced primary earnings
per share ("EPS") with basic EPS and fully diluted EPS with diluted EPS. Basic
EPS is calculated by dividing net earnings available to common shares by the
weighted average common shares outstanding. Diluted EPS is calculated similarly,
except that it includes the dilutive effect of the assumed exercise of all
dilutive potential common shares outstanding. SFAS 128 also requires previously
reported EPS to be restated.
6
<PAGE>
Basic and diluted EPS for the three months ended March 31, 1998 and 1997,
were computed as follows:
Three Months Ended March 31
---------------------------
1998 1997
---------------------------
Basic EPS Computation:
Net income $ 26 $ 361
===========================
Weighted average shares outstanding 6,917,540 5,771,977
===========================
Basic EPS $ .00 $ .06
===========================
Diluted EPS Computation:
Net income $ 26 $ 361
===========================
Weighted average shares outstanding 6,986,913 5,771,977
Incremental shares for assumed exercise
of securities:
Warrants 1,926 -
Options 29,947 -
---------------------------
6,986,913 5,771,977
Diluted EPS $ .00 $ .06
===========================
The 238,000 shares of employee stock options were not included in the
computation of diluted EPS as their effect is anti-dilutive.
7
<PAGE>
ITEM 2.
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 MARCH 31, 1998
AND MARCH 31, 1997.
Revenue for the three months ended March 31, 1998 increased 3% compared to
the same period in 1997 ($3,688,000 compared to $3,586,000). The increase is
primarily due to the 7% increase in construction and repair revenues ($2,191,000
for the first quarter of 1998 compared to $2,051,000 for the same period in
1997). Sales and service revenues increased to $178,000 for the first quarter
of 1998 compared with $32,000 for the first quarter of 1997. The increase was
due to the growth of sales and service in both the Tulsa and Dallas offices
following a startup of the departments in late 1996 and early 1997. Remediation
revenues declined $83,000 during the first quarter of 1998 compared to the same
quarter in 1997 ($100,000 compared to $183,000). The decline resulted from the
completion of several remediation projects active in the first quarter of 1997
but completed prior to the first quarter of 1998. Additionally, the change by
several state indemnity fund agencies to a risk based determination as to which
sites will be allowed into a state funded remediation program has tended to
limit the number of sites which enter a state's remediation program. Site
assessments and reports revenues declined $75,000 in the first quarter of 1998
compared to the same quarter in 1997 ($131,000 compared to $206,000). Site
assessments and reports revenues declined in the first quarter of 1998 relative
to the first quarter of 1997 due to the significant amount of site assessments
and reports performed for a major account in the first quarter of 1997.
Cost and expenses increased 27% ($2,781,000 for the first three months of
1998 compared to $2,186,000 for the first three months of 1997). Costs of
supplies and materials declined $448,000 for the first quarter of 1998 compared
to $1,069,000 for the same quarter in 1997. The decline in supplies and
materials resulted from a decline in the number of fueling systems installations
started during the first quarter pending the receipt of permits by project
owners to begin construction of the planned facilities. These projects will be
started in future quarters. Direct labor expense increased 9% ($605,000 for the
first quarter of 1998 compared to $556,000 for the first quarter of 1997).
Subcontractor expense was $1,206,000 for the first quarter of 1998 compared to
$107,000 in the first quarter of 1997. The significant increase in the use of
subcontractors occurred due to the type of projects constructed in the first
quarter of 1998 as compared to the same quarter of 1997. Several design and
build installations of fueling facilities and other types of projects required
larger than normal commitments of personnel and resources to meet certain
deadlines. These deadlines were successfully met but required much greater use
of subcontractors than prior quarters.
8
<PAGE>
Selling, general and administrative expenses increased $4,000 for first
quarter of 1998 as compared to the first quarter of 1997 ($782,000 compared to
$778,000). These expenses represented 22% of revenues for the first quarter of
1998 and 22% of revenues for the first quarter of 1997. Salaries decreased 1%
for the first quarter of 1998 compared with the same quarter in 1997 ($402,000
compared to $405,000). The management and office salaries portion of selling,
general and administrative expense increased $50,000 for the first quarter of
1998 compared to the same quarter of 1997. However, this increase was offset by
a decrease in salesmen's salaries of $53,000. Salesmen's travel expense declined
$21,000 for the first quarter of 1998 compared to the same quarter in 1997
($3,000 compared to $24,000). The decline in salesmen's salaries and related
travel expenses was due to having fewer salesmen, particularly in the area of
cathodic protection distributorship solicitations and sales of cathodic
protection systems. Some of the sales positions will be reinstated in the second
and third quarters to market other services offered by the Company. Telephone
expense increased to $37,000 for the first quarter of 1998 compared to $15,000
for the same quarter in 1997. The increase resulted from greater use of cellular
phones by field personnel.
Interest expense increased 27% in the first quarter of 1998 compared to the
same quarter in 1997 ($108,000 compared to $85,000) due to larger loan balances
outstanding. Loans were increased for operating capital, acquisition of
equipment, and to finance the costs and expenses of certain jobs on which
customers were given extended payment terms. Discounts earned increased to
$20,000 for the first quarter of 1998 compared to $2,000 for the same quarter in
1997. The Company's increased line of credit allowed the Company to take
discounts for early payment of vendor invoices.
CHANGES IN CAPITAL RESOURCES AND LIQUIDITY
The Company acquired Lab One on January 30, 1998, for $75,000 cash and
225,000 shares of the Company's common stock, a total purchase price of
$750,000.
On February 27, 1998, the Company acquired the office building, warehouse
and lot on which the Company's corporate offices are located. The purchase
price was $600,000, and the Company secured a loan from Citizens' Bank of Tulsa
for $480,000 secured by a mortgage on the acquired real estate. The loan has a
term of 7 years. The interest rate floats at 0.5% above Low New York Prime
rate, and the current rate is 9.0% per annum. The Company paid a 0.5%
origination fee.
Both Lab One and the real estate were purchased from Eddy Patterson and
Albert McCutchan, the President and Executive Vice President of the Company
following the completion of independent appraisals of the entities and the
review and unanimous consent of the outside directors of the Company to the
transactions and terms and conditions thereof.
Due to common ownership, these transactions were accounted for in a manner
similar to the pooling of interests method in 1998. The combined unaudited
revenues and expenses of the
9
<PAGE>
Company and the acquired entities during 1997 were $14,746,000 and $13,220,000,
respectively. All transactions were with the Company.
In January 1998, the Company sold 400,000 shares of common stock at
$2.00 per share and warrants to purchase 50,000 shares of common stock at $2.00
per share under a private placement arrangement with Peacock, Hislop, Staley &
Given, Inc. Gross proceeds totaled $800,000. Net proceeds totaled $744,000.
The Company continued to make periodic debt repayments during this
period.
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) On January 22, 1998, the Company sold a total of 400,000 shares of
its common stock, par value $.01 per share, at a price of $2.00 per share.
Peacock, Hislop, Staley & Given, Inc. served as placement agent and received a
commission of 5% or $40,000 plus an expense reimbursement of approximately
$16,000. In addition, Peacock, Hislop, Staley & Given, Inc. received warrants
to purchase 50,000 shares of the Company's common stock with an exercise price
of $2.00 per share. The warrants have a term of five years.
The offering was a private placement made to accredited investors only
pursuant to the exemption provided by Rule 506 of Regulation D promulgated by
the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.11 Private Placement Agency Agreement between National
Environmental Service Co. and Peacock, Hislop, Staley &
Given, Inc. dated January 15, 1998; Amendment to the
Placement Agency Agreement dated January 15, 1998; and
First Supplement to the Private Placement Memorandum dated
January 12, 1998 (incorporated by reference as filed as
Exhibit 10.11 on Form 10-KSB for the fiscal year ended
December 31, 1997).
10.12 National Environmental Service Co. Common Stock Purchase
Warrant to Peacock, Hislop, Staley & Given, Inc. dated
January 21, 1998 (incorporated by reference as filed as
Exhibit 10.12 on Form 10-KSB for the fiscal year ended
December 31, 1997).
10.13 Purchase and Sale Agreement for sale of real estate dated
January 30, 1998 between National Environmental Service
Co. and McCutchan and Patterson, an Oklahoma general
partnership (incorporated by reference as filed as Exhibit
10.13 on Form 10-KSB for the fiscal year ended December
31, 1997).
10
<PAGE>
10.14 Citizens' Bank of Tulsa Credit Agreement dated February
27, 1998 (incorporated by reference as filed as Exhibit
10.14 on Form 10-KSB for the fiscal year ended December
31, 1997).
10.15 Agreement and Plan of Merger with respect to Lab One
Analytical, Inc. dated January 30, 1998 (incorporated by
reference as filed as Exhibit 10.14 on Form 10-KSB for the
fiscal year ended December 31, 1997).
(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: May 11, 2998 BY /s/ Larry G. Johnson
----------------------------------------
LARRY G. JOHNSON, Vice President &
Secretary-Treasurer & Chief Financial
Officer
(Authorized Officer and Principal
Financial Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 35
<SECURITIES> 0
<RECEIVABLES> 5,897
<ALLOWANCES> 87
<INVENTORY> 1,118
<CURRENT-ASSETS> 950
<PP&E> 3,856
<DEPRECIATION> 1,731
<TOTAL-ASSETS> 11,667
<CURRENT-LIABILITIES> 6,198
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 4,410
<TOTAL-LIABILITY-AND-EQUITY> 11,667
<SALES> 661
<TOTAL-REVENUES> 3,688
<CGS> 412
<TOTAL-COSTS> 3,563
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108
<INCOME-PRETAX> 38
<INCOME-TAX> 12
<INCOME-CONTINUING> 26
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26
<EPS-PRIMARY> .004
<EPS-DILUTED> .004
</TABLE>
