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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 MARCH 31, 1999
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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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(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, 1999:
Number of shares
Title of Class Outstanding
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Common Stock, $.01 Par Value 7,888,643
Transitional Small Business Issuer Format (Check one): Yes____No__X__
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NATIONAL ENVIRONMENTAL SERVICE CO.
TABLE OF CONTENTS
PART I
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PAGE
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FINANCIAL INFORMATION:
Item 1 - Financial Statements
Consolidated Balance Sheet
March 31, 1999 3
Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 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 11
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 12
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2
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(In Thousands)
(Unaudited)
ASSETS
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<S> <C>
Current assets:
Cash $ 168
Accounts receivable:
Trade, net of allowance for doubtful accounts of $169 6,941
Costs in excess of billings and estimated earnings on
uncompleted contracts 1,956
Inventories 1,222
Prepaid Expenses 60
-------
Total current assets 10,347
-------
Property and equipment, at cost 5,002
Less accumulated depreciation (2,079)
-------
Property and equipment, net 2,923
-------
Other assets 625
-------
Total assets $13,895
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long term obligations $ 4,162
Accounts payable 1,287
Income tax payable 728
Accrued liabilities 375
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Total current liabilities 6,552
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Long-term obligations 1,120
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Deferred income taxes 198
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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 7,888,643 shares, including treasury shares 79
Additional paid-in capital 4,006
Retained Earnings 2,597
Common stock in Treasury, at cost, 316,991 shares (657)
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Total shareholders' equity 6,025
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Total liabilities and shareholders' equity $13,895
=======
</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 MARCH 31, 1999 AND 1998
(In thousands except per share amounts)
(Unaudited)
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<CAPTION>
1999 1998
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<S> <C> <C>
Revenues $ 6,490 $ 3,688
Costs and Expenses 3,900 2,781
Selling, general and administrative expenses 1,524 782
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Income from operations 1,066 125
Other income 56 21
Interest expense (104) (108)
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Income before provision for income taxes 1,018 38
Provision for income taxes 387 12
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Net Income $ 631 $ 26
======== ========
Basic Net Income per share $ 0.08 $ 0.00
======== ========
Diluted Net Income per share $ 0.08 $ 0.00
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands)
(Unaudited)
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<CAPTION>
1999 1998
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<S> <C> <C>
Operating activities
Net Income $ 631 $ 26
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 122 110
Change in:
Accounts receivable 1,967 (794)
Costs and estimated earnings in excess of
billings on uncompleted contracts (1,431) (319)
Inventories (145) (251)
Prepaid and other expenses (32) (45)
Accounts payable (430) 75
Accrued liabilities 147 38
Income tax payable (183) 12
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Net cash provided by (used in) operating activities 646 (1,021)
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Investing activities
Business acquisitions (250) -
Purchases of property, plant and equipment (542) (52)
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Net cash used in investing activities (792) (52)
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Financing activities:
Proceeds from notes payable and long-term obligations 2,407 500
Principal payments on notes and long term obligations (1,764) (204)
Purchase of treasury stock (481) -
Proceeds from common stock - 719
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Net cash provided by financing activities 162 1,015
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Increase (decrease) in cash 16 (58)
Cash, beginning of period 152 93
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Cash, end of period $ 168 $ 35
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</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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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 March 31, 1999 and
the results of operations and cash flows for the three month periods ended March
31, 1999 and 1998. Results of operations and cash flows are not necessarily
indicative of the results which will be achieved for the full year.
2. EARNINGS PER SHARE
Basic and diluted EPS for the three months ended March 31, 1999 and 1998,
were computed as follows:
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<CAPTION>
Three Months Ended March 31
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1999 1998
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<S> <C> <C>
Basic EPS Computation:
Net income $ 631 $ 26
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Weighted average shares outstanding 7,838,793 6,917,540
===================================
Basic EPS $ .08 $ .00
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Diluted EPS Computation:
Net income $ 631 $ 26
===================================
</TABLE>
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<TABLE>
<CAPTION>
Three Months Ended March 31
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1999 1998
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<S> <C> <C>
Weighted average shares outstanding 7,838,793 6,986,913
Incremental shares for assumed exercise
of securities:
Warrants 6,553 1,926
Options 33,582 29,947
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7,878,928 6,986,913
=============================
Diluted EPS $ .08 $ .00
=============================
</TABLE>
The 190,000 shares of employee stock options were not included in the
computation of diluted EPS as their effect is anti-dilutive.
3. SEGMENT INFORMATION
The Company's business segments have been grouped as follows:
<TABLE>
<CAPTION>
1999 Thousands of Dollars
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Inter-
Segment Pre-tax
Segment Sales Sales Income Assets
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<S> <C> <C> <C> <C>
Fueling Installations $ 4,988 $ 666 $ 7,782
Environmental 1,210 241 3,038
FRS 333 86 264
Other 292 106 25 2,811
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$ 6,490 $ 439 $ 1,018 $13,895
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<CAPTION>
1998 Thousands of Dollars
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Inter-tax Pre-tax
Segment Income
Segment Sales Sales (Loss) Assets
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<S> <C> <C> <C> <C>
Fueling Installations $ 3,282 $ (50) $ 7,071
Environmental 231 (60) 1,104
FRS 176 117 279
Other 175 138 31 3,213
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$ 3,688 $ 314 $ 38 $11,667
===============================================
</TABLE>
4. 1999 ACQUISITIONS
On January 1, 1999, the Company acquired the assets of a company in Largo,
Florida, for $50,000 cash and the assumption of certain liabilities totaling
$95,590. The acquired business is a provider of environmental, drilling, and
related services to the owners and operators of fueling systems as well as other
businesses.
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On January 11, 1999, the Company acquired the assets, subject to certain
liabilities assumed, of a group of companies based in Greenville, North
Carolina, which provides services to the owners and operators of fueling
systems. The purchase price of the assets acquired was $791,000 consisting of
$250,000 cash, notes payable, and the award of 40,000 shares of Company stock,
and options to purchase 45,000 shares of Company stock.
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, 1999
AND MARCH 31, 1998.
Revenue for the three months ended March 31, 1999 increased 75% compared to
the same period in 1998 ($6,490,000 compared to $3,688,000). The increase is
due to Increases in all revenue categories. Cathodic protection revenues
increased to $1,822,000 in the first quarter of 1999 compared to $1,087,000 for
the same quarter in 1998, an increase of 68% . The regulatory deadlines for
upgrading fueling systems with cathodic protection occurred at the end of the
fourth quarter. However, due to the significant amount of non-compliance by
owners and operators of underground storage tanks, cathodic protection revenues
to complete pending upgrades continued to be strong through most of the first
quarter of 1999. Fueling systems installation and repair revenues increased 31%
in the first quarter of 1999 compared to the same quarter in 1998 ($2,899,000
compared to $2,209,000). The growth resulted from a significant increase in the
number of fueling system installations that began occurring in the second half
of 1998 and that has continued through the first quarter of 1999. Remediation
revenues increased from $100,000 during the first quarter of 1998 compared to
$741,000 for the first quarter in 1999. The increase of $641,000 was a
combination of (i) a decline in the first quarter of 1998 due to the completion
of several remediation projects active in 1997 and completed prior to the first
quarter of 1998, and (ii) a significant increase in remediation projects added
by the South Carolina division office that was added in the last half of 1998.
Site assessments and reports revenues increased $616,000 in the first quarter of
1999 compared to the same quarter in 1998 ($747,000 compared to $131,000). The
increase in site assessments and reports occurred for the same reasons given for
the increase in remediation revenues.
Cost and expenses increased 40% ($3,900,000 for the first three months of
1999 compared to $2,781,000 for the first three months of 1998). Although a
significant increase, this was much less than the 75% increase in sales
experienced by the Company. Direct labor increased 47% to $889,000 in the first
quarter of 1999 compared to $605,000 for the first quarter of 1998. The increase
was due to the amount of increased work performed by the Company. Costs of
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supplies and materials increased $966,0000 for the first quarter of 1999
compared to the same quarter in 1998 ($1,636,000 compared to $670,000). The
increase in supplies and materials resulted from an increase in the number of
fueling systems installations started during the last half of 1998 and
continuing into the first quarter of 1999. Revenues for the first quarter of
1998 was particularly low due to the non-receipt of permits by project owners to
begin construction of the planned facilities. These projects were started in
the second half of 1998 and continued through the first quarter of 1999.
Subcontractor expense was $620,000 for the first quarter of 1999 compared to
$1,206,000 in the first quarter of 1998. The significant decrease 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 1999. In the first quarter of
1998, 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. Four categories
of expense increased significantly due to the increased volume of work performed
in the first quarter of 1999 compared to the same quarter in 1998. These
categories were equipment rental ($81,000 in the first quarter of 1999 compared
to $45,000 in the first quarter of 1998), meals and entertainment on job
($50,000 in the first quarter of 1999 compared to $26,000 in the first quarter
of 1998), lodging on job ($72,000 in the first quarter of 1999 compared to
$13,000 in the first quarter of 1998), and travel expense ($34,000 in the first
quarter of 1999 compared to $13,000 in the same quarter in 1998). Three
categories of expense increased significantly due to the acquisition and
establishment of other companies in the last half of 1998 and the first quarter
of 1999. These new offices resulted in the addition of significant amounts of
tools, vehicles, and equipment. These categories were vehicle expense except
depreciation ($77,000 in the first quarter of 1999 compared to $24,000 for the
first quarter of 1998), small tools and equipment ($52,000 in the first quarter
of 1999 compared to $6,000 in the first quarter of 1998), and certification fees
($22,000 in the first quarter of 1999 compared to $1,000 in the first quarter of
1998).
Selling, general and administrative expenses increased $742,000 for first
quarter of 1999 as compared to the first quarter of 1998 ($1,524,000 compared to
$782,000). During the first quarter of 1999 there were six division offices
that did not exist during the first quarter of 1998. This increase in offices
and personnel accounted for the 91% increase in selling, general and
administrative expenses. Officers, management and administrative salaries
increased 70% for the first quarter of 1999 compared with the same quarter in
1998 ($690,000 compared to $405,000). Of this 70% increase, 62% is attributed to
the addition of new personnel at the six offices. The remaining 8% of the 70%
increase is attributable to salary increases and addition of management and
administrative personnel at the existing offices. Other categories with
significant increases in expense related to the addition of new division
officers were telephone expense ($69,000 for the first quarter of 1999 compared
to $37,000 for the same quarter in 1998), office supplies and postage ($76,000
for the first quarter of 1999 compared to $24,000 for the first quarter of
1998), and indirect travel ($51,000 for the first quarter of 1999 compared to
$3,000 for the first quarter of 1998). Bad debt expense increased $42,000
during the first quarter of 1999 compared to the same quarter in 1998 ($96,000
compared to $54,000). This increase was related to the increased
9
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volume of sales and accounts receivable. Professional fees including legal and
accounting increased $68,000 during the first quarter of 1999 compared to the
same period in 1998 ($79,000 compared to $11,000). Significant legal and
accounting fees were incurred due to the acquisition of two companies in the
first quarter of 1999. Additionally, the company was pursuing collection efforts
on several accounts receivable.
Interest expense decreased 3% in the first quarter of 1999 compared to the
same quarter in 1998 ($105,000 compared to $108,000) due to lower interest rates
charged the Company. Discounts earned increased $37,000 for the first quarter of
1999 compared to $20,000 for the same quarter in 1998. 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
On January 1, 1999, the Company acquired the assets of a company in Largo,
Florida, for $50,000 cash and the assumption of certain liabilities totaling
$95,590. The acquired business is a provider of environmental, drilling, and
related services to the owners and operators of fueling systems as well as other
businesses.
On January 11, 1999, the Company acquired the assets, subject to certain
liabilities assumed, of a group of companies based in Greenville, North
Carolina, which provides services to the owners and operators of fueling
systems. The purchase price of the assets acquired was $791,000 consisting of
$250,000 cash, notes payable, and the award of 40,000 shares of Company stock,
and options to purchase 45,000 shares of Company stock.
Early in the first quarter the Company repurchased 6,000 shares of its
common stock. On March 25, 1999, the Company repurchased a total of 228,000
shares of its common stock. The amount of the purchases totaled $481,000.
The Company continued to make periodic debt repayments during this period.
YEAR 2000
The Year 2000 issue represents a potentially serious information systems
problem because many software applications and operation systems written in the
past may not properly recognize calendar dates beginning in the Year 2000. This
problem could force computers to either shut down or provide incorrect data or
information. In consultation with its software and hardware providers, the
Company began the process of identifying the changes required to its major
financial/administrative systems and hardware in October of 1998. The Company
has completed the process of testing its computer hardware and software for Year
2000 compliance and expects to substantially complete its compliance
requirements by the end of the second quarter of 1999. The Company is also in
the process of surveying its vendors and service suppliers.
10
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The Company believes that the costs to address its Year 2000 compliance
issues will not be significant. Substantially all of the Company's computer
hardware and software are "off-the-shelf" versions which the Company believes
can be upgraded or replaced as required. The cost for such replacements is
currently estimated to be approximately $15,000.
The Company's principal exposure will be (1) in its inability to process
accounting transactions and invoice customers and (2) the ability of its vendors
and service suppliers to provide critical components or services to the Company.
While the Company believes it will not encounter material problems in either
respect, it is in the process of developing contingency plans to implement a
manual system for accounting and invoicing functions and identifying alternative
sources for the goods and services that are critical to the Company. The
Company believes that its customer base is sufficiently broad and varied and
that it will not encounter material difficulties if the ability of some of them
to do business were substantially curtailed due to Year 2000 problems.
Additionally, the fueling systems industry tends to utilize electronics and
systems which are not particularly date sensitive.
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On January 11, 1999, the Company issued a total of 40,000 shares of its
common stock and options to purchase 45,000 shares of its common stock as part
of the consideration for its purchase of certain assets and operations located
in North Carolina from a group of companies based in Greenville, North Carolina,
that provides services to the owners and operators of fueling systems. The
purchase price of the assets acquired was $791,000 consisting of $250,000 cash,
notes payable totaling $419,000, options to purchase 45,000 shares of Company
stock valued at $57,000, and the 40,000 shares of common stock of the Company
valued at $65,000. The securities were issued pursuant to the exemption from
the registration requirements of the Securities Act of 1933, as amended,
provided by Section 4(2) thereof for transactions not involving a public
offering. The sellers of the assets are three sophisticated individuals,
capable of evaluating the risks of an investment in the Company's stock and
bearing the financial risks of the investment. Such sellers had access to all
material information regarding the Company that would have been included in a
registration statement covering the securities if the shares had been offered
publicly. No advertising or general solicitation was involved in the offering
of the securities. The shares and the options were acquired for investment
purposes and not with a view to the distribution thereof. The certificates
evidencing the shares contained an appropriate legend indicating the restrictive
nature of the shares.
Early in the first quarter the Company repurchased 6,000 shares of its
common stock. On March 25, 1999, the Company repurchased a total of 228,000
shares of its common stock. The amount of the purchases totaled $481,000.
11
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(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, 1999
BY /s/ Larry G. Johnson
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LARRY G. JOHNSON, Vice President &
Secretary-Treasurer & Chief Financial
Officer (Authorized Officer and Principal
Financial Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 168
<SECURITIES> 0
<RECEIVABLES> 7,110
<ALLOWANCES> 169
<INVENTORY> 1,222
<CURRENT-ASSETS> 10,347
<PP&E> 5,002
<DEPRECIATION> 2,079
<TOTAL-ASSETS> 13,895
<CURRENT-LIABILITIES> 6,552
<BONDS> 0
79
0
<COMMON> 0
<OTHER-SE> 5,946
<TOTAL-LIABILITY-AND-EQUITY> 13,895
<SALES> 348
<TOTAL-REVENUES> 6,490
<CGS> 218
<TOTAL-COSTS> 5,424
<OTHER-EXPENSES> (56)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104
<INCOME-PRETAX> 1,018
<INCOME-TAX> 387
<INCOME-CONTINUING> 631
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 631
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
