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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 (FEE REQUIRED)
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD___________________ TO _____________________ .
COMMISSION FILE NO. 000-24470
NATIONAL ENVIRONMENTAL SERVICE CO.
(NAME OF SMALL BUSINESS ISSUER 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, OK 74146
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (918)250-2227
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Title of each class: Common Stock, $.01 Par value
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
---- ----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB __________________.
State issuer's revenues for its most recent fiscal year $10,261,000,
The aggregate market value of the voting stock held by non-affiliates of
the registrant computed using the average of the high and low sales prices at
which the stock sold on February 28, 1997 was $2,263,880.
The number of shares outstanding of each of the issuer's classes of common stock
as of February 28, 1997 is shown below:
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
-------------- -----------
Common Stock, $.01 Par Value 5,781,927
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Proxy Statement for the Annual Meeting of Stockholders
of National Environmental Service Co. to be held June 12, 1997, are incorporated
by reference in Part III of this Form 10-KSB.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES_____;NO___X____.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
THE COMPANY
The business of the Company commenced in 1986 and consisted of providing
testing and service on underground storage tanks and piping systems. With
adoption of the U.S. Environmental Protection Agency ("EPA") regulations in
1988, implementing the Resource Conservation and Recovery Act, as amended by the
Solid Waste Disposal Act, the Company's focus shifted toward environmental
services, assessment and remediation. It currently is engaged in the businesses
of, providing cathodic protection for underground metal tanks, installation of
spill and overfill protection, environmental site assessments, contaminated soil
and water remediation and the installation and removal of storage tanks, and the
construction of fueling systems and related facilities.
All of the common stock of the Company was purchased from the original
owners in May 1989, by two employees of the Company, Eddy L. Patterson and
Albert A. McCutchan. Messrs. Patterson and McCutchan have served as President
and Executive Vice President, respectively, of the Company since that time. In
1988 (the year prior to purchase by current management), the Company had
revenues of $339, 996 and pre-tax income of $40,749 (unaudited). In 1996, the
Company had revenues of $10,261,000 and a loss before income tax benefit of
$531,000. At the time of purchase by Messrs. Patterson and McCutchan, the
Company had eight full-time employees and one office. At the end of 1996, the
Company had 99 full-time employees and one part-time employee and regional
offices in Dallas (as of December 29, 1995), Houston (as of November 1996) and
San Antonio, Texas, in addition to the corporate office in Tulsa, Oklahoma. The
Company has one small satellite office in Winston Salem, North Carolina.
The Company operated under an S Corporation election for federal income tax
purposes effective January 1, 1990. This election was revoked effective April
30, 1994. In April 1994, in preparation for the initial public offering of the
Company's common stock which commenced in September of 1994 and terminated in
January of 1995 (the "Offering"), the Company amended its Certificate of
Incorporation to increase its authorized capital to 20,000,000 shares of Common
Stock and 1,000,000 shares of Preferred Stock and effected a stock split whereby
the shares owned by each of the Company's two equal shareholders increased from
225 shares of Common Stock, $1.00 par value, to 2,295,257 shares of newly
authorized Common Stock, $.01 par value.
The Company's headquarters are located at 12331 East 60th Street, Tulsa,
Oklahoma 74146 and its telephone number is (918) 250-2227. It also has regional
offices in Dallas, Houston, and San Antonio, Texas. The Company has regional
managers in each of its offices who are responsible for both the operations and
marketing conducted in their respective regions.
GENERAL
The Company provides testing, cathodic protection, remediation, consulting
services, and fueling equipment sales, installation, and service to individuals
and businesses who are owners or operators of underground fuel storage tanks and
fueling systems. Environmental laws and regulations adopted or implemented
within the last ten years have generated increasing demand for the types of
services provided by
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the Company and its competitors. The principal activities of the Company have
focused on underground storage tanks and fueling systems, primarily because to
date they have been the subject of substantially greater regulation by both
federal and state authorities than above-ground tanks. Primary customers of the
Company are owners of fueling systems, underground storage tanks, above-ground
storage tanks and pipelines. These include motor fuel service stations and
convenience stores, commercial trucking companies, railroads, airports, oil
producers, refiners, pipeline operators and federal, state and local
governments.
SERVICES
A significant portion of the Company's work involves clean-up of sites
contaminated by leaking underground storage tanks for which the site owners or
operators are entitled to funding from state indemnity funds. Generally, in
order to be eligible for reimbursement of clean-up costs from state indemnity
funds, owners of underground storage tanks must have registered their
underground storage tanks with the fund manager and complied with all applicable
regulations. Although the Company generally contracts with the owners to
perform this work, payment is frequently received directly from the state agency
responsible for administering leaking underground storage tank programs
(commonly known as "LUST" programs).
These state LUST programs are generally funded by motor fuel taxes, permit
and installation fees for storage tanks and penalties and reimbursements
collected from tank owners and operators. Thus, most LUST funds are not
dependent upon appropriations or a state's financial condition for funding.
Nevertheless, almost all provisions establishing LUST funds provide that, if
sufficient funding is unavailable, claims are to be paid in the order they were
filed. Most LUST funds also contain a cap on the amount paid for a single spill
or release occurrence. If funds were to become unavailable under any state LUST
programs, the entity with whom the Company has contracted to perform the work
would be contractually obligated to pay the Company for its work. Because of
the shortage of LUST funds in Nebraska, the Company's Nebraska operations
declined, and as result, the Company closed its Omaha office as of March 31,
1996.
The Cathodic Protection Dealership Program (below) will allow the Company to
sell to the Nebraska area without the overhead required by a fully staffed
office. The Iowa office was closed on March 31, 1996 due to substantial
completion of the accelerated schedule for meeting regulatory upgrade
requirements and the small amount of contaminated site clean-up authorized by
state officials in Iowa.
Cathodic Protection: The Company employs a method of protecting metal
underground storage tanks and pipelines from the
natural processes of corrosion which involves placing
metal rods (anodes) in holes drilled around a tank. The
rods are connected to a low-voltage electrical power
supply such as a rectifier. The introduction of the
electrical current into the ground concentrates
corrosion away from the tank to the anodes. Corrosion
protection of metal underground storage tanks and
piping is required by EPA regulations. In 1995, the
Company began offering a cathodic protection dealership
program to qualified individuals and companies. Under
this program, distributors are established and trained
to install cathodic protection systems manufactured by
the Company. The Company provides technical support and
certification of systems installed.
Spill and
Overfill Protection: Spill and overfill protection is attained by placing
spill containment basins around the fill pipe of an
underground storage tank and installing an overfill
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prevention valve in the fill pipe.
Environmental Site
Assessments: Whenever an underground storage tank leak is suspected,
an investigation to confirm the presence of a leak must
be conducted within seven days. The Company's
personnel possess the experience to conduct such
investigations. In addition, when title to commercial
real estate is being transferred, an investigation for
contamination may be requested. The Company's staff of
hydrologists, environmental engineers and technicians
review any documents regarding historical uses of the
site, analyze soil and water samples and study the sub-
surface geology to determine if there is contamination
or potential contamination of soil and water on the
site. Possible contaminants include hydrocarbons,
PCB's, radon, asbestos and other hazardous material.
These services include Phase I visual assessments and
Phase II drilling and sampling .
Soil and Water
Remediation: Often through the Company's performance of other
services, opportunities arise for the Company to
provide Phase III soil and water remediation services
which primarily involve treatment of ground or surface
water and the use of air sparging and vapor extraction
units (manufactured by Fuel Recovery Systems, Inc.
("FRS"), a wholly-owned subsidiary) which utilize
perforated pipes to inject air into the soil in order
to promote the degradation of contaminants by endemic
microbes and to extract vapors produced by such
degradation from the soil. In some cases, contaminated
soil must be removed and transported to hazardous waste
disposal sites.
Tank Removals: Because of stringent environmental regulations, many
companies are choosing to exit the fuel storage
business. In additin, many tanks too corroded to
upgrade are being removed and replaced. The Company is
engaged in the removal and disposal of old tanks,
cleaning-up any contaminated soil, and the replacement
of any concrete or asphalt.
New Installations: The Company installs fueling systems, underground
storage tanks and above-ground storage tanks at new
motor fueling and industrial sites. The Company either
acquires a new tank on behalf of its customer or
installs a tank which the customer has obtained. The
Company does not manufacture or maintain an inventory
of fuel storage tanks.
Equipment Sales and
Service: The Company has become a distributor for Wayne Fueling
Equipment sales and service in Houston and for eastern
Oklahoma, western Arkansas, and southwestern Missouri.
MATERIAL CONTRACTS
The Whiteman A.F.B. contract began April 1995 and is scheduled to be
completed by March 1997 with the exception of some additional work awarded to
the Company. At Whiteman, the Company
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demolished an old fuel storage facility and replaced it with a new system. In
addition, other above and underground fuel storage tanks will be removed and
replaced. Revenues to be earned under the Whiteman contract total approximately
$1.8 million, of which $1 million was reported as revenue in 1995 and $502
thousand in 1996.
The Warren A.F.B. contract began November 1995 and is scheduled to be
completed by October 1997. Revenues to be earned by the Company under the
Warren contract total approximately $1.1 million, of which $33 thousand was
recorded in 1995 and $705 thousand was recorded in 1996. At Warren, the
Company will upgrade fuel tanks for 50 missile launch facilities by adding
piping, spill and overfill equipment, leak detection and automatic tank gauging.
The Company is performing cathodic protection and other fuel system upgrade
work for two convenience store chains and fuel system installations for a
grocery store chain. Revenues earned in 1996 were $1,400,000 and $1,065,000
for the two convenience store chains. Revenues earned in 1996 for fuel system
installations for the grocery store chain were $1,324,000. The 1995 combined
revenues for all three of these chains totaled $257,000. Revenues for work on
these chains will continue in 1997 as additional stores are scheduled for
upgrades and installations.
BACKLOG
At March 1, 1997, the Company had a backlog of orders which should generate
revenues of approximately $15 million. This includes contracts to be completed
in 1997 for cathodic protection, remediation, and upgrades with customers
throughout the United States.
COMPETITION
The Company competes with numerous other companies and individuals
(consultants, etc.) in providing the various types of services described above,
but very few companies offer the complete range of services which the Company
provides. The main factors on which the Company competes for business are
personal contacts, experience, reputation, price, availability and location.
Many of the Company's potential customers seek competitive bids in awarding
contracts for the work to be performed.
For certain competitive bid projects, particularly those involving large
expenditures for labor or materials, the financial strength of the bidder may be
an important factor. The Company often competes against companies with
substantially greater financial and/or human resources.
MARKETING
A large percentage of the Company's business is from previous customers and
their referrals. The Company also obtains referrals from petroleum equipment
manufacturers and environmental consultants with whom the Company has worked.
The Company maintains a full-time marketing staff of four and has five other
executive and administrative personnel who spend a significant amount of time
calling on prospective customers. The marketing staff also responds to
inquiries obtained through advertising in state and national trade publications,
direct mail and trade show participation. Approximately 50% of the services
performed by the Company have been pursuant to projects awarded by competitive
bidding.
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FUTURE GROWTH
Acquisition of Other Businesses. The Company plans to increase the types
of services it is able to provide within the environmental protection and
remediation industry, to diversify its product and service offering and to
expand the geographic regions in which it performs these services. In pursuit
of these expansion goals, the Company intends to consider acquiring companies
that perform other types of environmental and other services compatible with the
Company's expertise and marketing philosophy. Management has initiated
preliminary discussions with consulting companies specializing in water and
waste water treatment, air pollution abatement and asbestos monitoring. Other
acquisition candidates include single segment companies (such as consulting or
drilling companies) which serve a particular geographical region outside the
scope of the Company's present operations.
Through two asset acquisitions (on December 29, 1995 and February 29,
1996), the Company has an established office in Dallas, Texas. These
acquisitions have added to the Company's market presence and penetration in
Texas and have presented additional diversification opportunities. The
acquisitions of machinery and equipment, furniture, vehicles, and inventories
along with a trained staff gave the Company immediate revenues, backlog of
business and the tools to increase its revenues in the expanding Dallas-Ft.
Worth market. Additionally, the Company established its Houston office in
November, 1996. This office should give the Company greater exposure to the
large petroleum firms based in Houston and allow a greater ability to sell and
service these accounts.
EFFECT OF GOVERNMENTAL REGULATIONS
The Resource Conservation and Recovery Act, as amended by the Solid Waste
Disposal Act, and as implemented by EPA regulations, is intended to protect
human health and the environment from hazardous material, including leaks or
spills from underground storage tanks. The term "hazardous materials" includes
motor fuels (gasoline and diesel) and chemicals used in manufacturing processes.
The goals of the underground storage tank regulations include preventing leaks
and spills, detecting leaks and spills, correcting problems caused by leaks and
spills and requiring each state to undertake a regulatory program equal to or
more stringent than required by EPA.
The regulations require the underground storage tank owner or operator to
take action to correct problem underground storage tanks, to upgrade them to
meet prescribed standards and to maintain them in proper condition. All
underground storage tanks had to be tested not later than December 1993, and
must be tested annually until upgraded to meet leak detection, spill and
overfill prevention, interior lining, piping and cathodic protection standards
established by EPA. Required upgrading must be completed by December 22, 1998.
Owners of underground storage tanks also must demonstrate their financial
ability to pay for damages caused by spills or leaks.
States' regulations may differ from Federal regulations. While Iowa
required spill and overfill protection and cathodic protection installed by
1995, Iowa has not allowed the clean-up of contaminated sites as have other
states. The Company's operations in Iowa have declined due to passage of the
1995 requirement and the lack of clean-up opportunities. This office was closed
in March 1996. The Nebraska office was closed in March 1996 due to a shortage
of LUST funds for clean-up of contaminated sites.
For the most part, the applicable federal and state environmental
regulations do not provide for liability for a contractor with respect to the
removal of tanks or conducting remedial services. If a release
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occurs or if applicable standards are not met, such regulations hold the owner
or operator of the tank responsible. Consequently, the only exposure of the
Company would be based on general negligence principles and the contractual
arrangement with the owner or operator of the tank. The Company maintains
insurance coverage to protect itself against any such liabilities which may
arise from the installation, removal or replacement of underground storage
tanks. It believes that the amount and coverage of its insurance are standard in
the industry and are consistent with prudent practices. However, there can be no
assurance that any such insurance will be sufficient to avoid any substantial
loss or liability of the Company by virtue of any negligent performance of or
breach of its contractual obligations by the Company.
Certain licensing requirements pertaining to entities which inspect,
install, protect, repair and remove storage tanks and which investigate and
clean up releases are in place in states in which the Company operates. The
Company and/or its employees maintain licenses in 15 states on an on-going basis
and obtains licenses in other states as needed. Generally, state licenses are
issued after review of applications which include descriptions of the Company's
experience, the backgrounds of its personnel and payment of the applicable
license fees. In addition, some states require certain employees, such as tank
testers and installers, to be separately licensed. Usually passing a written
examination is required to obtain these licenses. The Company has not
encountered any material difficulties in obtaining required licenses, but the
Company cannot predict when licensing requirements may change.
As part of the remediation services offered to its customers, the Company
often disposes of, or arranges for the disposal of, contaminated soil or water.
Prior to any disposal, the Company must obtain approval from the appropriate
state agency to dispose of the contaminated soil in an approved land fill. Under
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), any person who disposes of statutorily defined hazardous substances
at a disposal site is potentially liable for clean up costs if there is a
release from such disposal site. However, petroleum products are excluded for
the most part from the scope of these provisions. Since virtually all of the
material which the Company disposes or arranges the disposal of consists of
petroleum products and material contaminated by petroleum products, the Company
is largely exempt from these provisions of CERCLA. The only exposure the
Company would likely face in this area would be for failure to obtain necessary
state agency approvals for disposal of waste materials or the failure to dispose
of such materials in approved landfills.
DEPENDENCE ON MAJOR CUSTOMERS
In 1996, the Company received 14 percent of its revenue from the U.S. Army
Corps of Engineers (Corps) for three contracts, Tinker A.F.B, Whiteman A.F.B.
and Warren A.F.B. Other significant contracts in 1996 were a grocery store
chain (13 percent of revenue) and two convenience store chains (13 percent and
10 percent of revenue). The Company believes that it has a broad overall
customer base and the loss of any single customer would not have a material
adverse affect on its business, although the loss of several of those customers
could have such an effect.
TRADEMARKS, LICENSES
On November 1, 1992, the Company entered into a license agreement to use
patented technology for testing above-ground storage tanks. The term of the
license is for the remaining life of the patent (12 years) and requires the
Company to pay the licensor two percent of its annual revenues from use of the
technology. The Company has not yet realized significant revenues from the use
of such technology, but anticipates that utilization of the technology may
produce significant new revenue if more states and the Federal government
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enact above-ground storage tank testing and upgrading legislation.
FORWARD LOOKING STATEMENTS
Certain statements included in this report which are not historical facts
are forward looking statements, including the information provided with respect
to the projected or future business opportunities, expansions and
diversification; contract completions, expected financing sources and related
matters. These forward looking statements are based on current expectations,
estimates, assumptions and beliefs of management; and words such as "expects,"
"anticipates," "intends," "believes," "estimates" and similar expressions are
intended to identify such forward looking statements. These forward looking
statements involve risks and uncertainties, including, but not limited to,
changes in governmental regulations, the Company's ability to effectively and
efficiently absorb its newly acquired businesses and assets and any additional
businesses and/or assets it may acquire in the near future, general economic
conditions and conditions affecting the industries which utilize the Company's
services and products, the availability of experienced personnel, raw materials
and equipment and the Company's ability to comply with its obligations under its
existing contracts and to obtain new contracts. Accordingly, actual results may
differ materially from those expressed in the forward looking statements.
EMPLOYEES
The Company has 99 full-time employees and one part-time employee. This
number includes 7 senior managers, 7 division managers and field supervisors, 6
marketing employees, 5 full-time and one part-time professionals, 17
accounting/clerical personnel, and 57 technical and field personnel. The areas
of expertise of the professionals include hydrogeology, environmental
engineering, biology and chemistry. The Company has no collective bargaining
agreements and management considers employee relations to be excellent.
ITEM 2. DESCRIPTION OF PROPERTY.
PROPERTIES
The Company maintains its corporate headquarters, an equipment storage yard
and a warehouse in a business park in Tulsa, Oklahoma, each with 9,000, 10,000
and 4,500 square feet, respectively. The facility is leased from McCutchan-
Patterson Partnership, a partnership owned by the President and Executive Vice
President of the Company. The current lease is in effect through 1997 with
annual lease payments totaling $66,000.
The Company constructed a new building in San Antonio, Texas which was
completed during the first quarter of 1995 at a cost of $258,975. At December
31, 1996, a balance of $140,894 remained to be paid on the five year mortgage.
As a result of the December 29, 1995 asset acquisition, the Company entered
into a lease for office and warehouse space in Dallas, Texas for $37,800 per
year. The Company moved from this location and leased another facility for
$33,600 per year which was previously occupied by Remedial Services, a company
acquired on February 29, 1996. The first property leased by the Company was
vacated and subleased to another company on May 1, 1996 for $2000 per month
through December 31, 1996 at which time the rent escalated to $3150 per month.
The sublease was terminated on February 15, 1997, and the Company's
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obligation to continue lease payments expires on June 30, 1997.
The Company owns various vehicles and equipment which were purchased at a
total cost of approximately $2,292,000. At December 31, 1996, the Company had
outstanding loans of approximately $494,000 principal amount collateralized by
the vehicles and equipment.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock began trading on March 7, 1995 and was quoted on
the OTC Bulletin Board. Prior to that time, there was no public trading market
for the stock.
On January 24, 1996 the Company's stock began trading on The Nasdaq
SmallCap Market under the symbol: NESC .
The following table sets forth, for the periods indicated, the high and low
bid prices of the Company's common stock on the OTC Bulletin Board through
January 23, 1996 and on the Nasdaq Small Cap Market thereafter. These
quotations reflect interdealer prices, without retail mark up, mark down or
commissions, and may not represent actual transactions.
Quarter
ended High Low
---------- ------ -------
3/31/95 $ 3.50 $ 2.00
6/30/95 3.375 2.25
9/30/95 3.25 2.25
12/31/95 3.375 2.50
3/31/96 3.50 2.00
6/30/96 2.00 0.875
9/30/96 3.375 1.00
12/31/96 2.00 0.75
At December 31, 1996, there were approximately 540 holders of record of the
Company's outstanding shares of common stock in addition to an unknown number of
shareholders whose shares were registered in street name. No shares of
preferred stock are currently outstanding.
The Board of Directors declared a dividend of three cents per share to
shareholders of record on February 15, 1996. The dividend was paid on March 1,
1996.
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Payment of dividends in the future, if any, will depend on the applicable
legal and contractual restrictions, as well as the Company's earnings, financial
position, expansion plans and objectives and cash requirements, among other
factors. The Company paid no dividends in 1995.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 TO THE
YEAR ENDED DECEMBER 31, 1995.
The Company had revenues of $10,261,000 compared to $9,029,000 in 1995, a
14 percent increase. Site Assessments revenue exhibited the largest increase
to $1,549,000 in 1996 compared to $432,000 in 1995, a 259% increase. The
increase is primarily due to the significant increased activity in Texas
following that state's revision of its LUST clean-up program. Cathodic
protection revenue increased $649,000 from $1,749,000 in 1995 to $2,398,000 in
1996, a 37% increase. Cathodic protection revenue increases are due primarily
to UST owner-operator efforts to comply with the approaching regulatory
compliance deadlines. Construction and repair revenue was virtually unchanged at
$5,300,000 for 1996 compared to $5,301,000 for 1995. Remediation revenue
declined from $1,245,000 in 1995 to $720,000 in 1996. This decrease is due to
the movement toward clean-ups based on the risk-based assessments, the
moratorium on site clean-ups in Nebraska followed by the closing of the Nebraska
office, and the pending changes in the Texas site clean-up program.
Costs and expenses in 1996 were $7,833,000 compared to 1995 costs and
expenses of $6,240,000. Costs and expenses for 1996 represented 76% of total
revenue for the year compared with 69% for 1995. The increase in percentage of
costs and expenses resulted from problems encountered on one government contract
and the initial loss of operational efficiencies following the acquisition of
two small companies which became the Dallas division office. The percentage of
increase in labor costs exhibited a very slight increase in comparison to the
increase in revenue. Labor costs were also held down because of the increased
use of subcontractors on certain government contracts, particularly at the
Warren AFB. Labor costs for 1996 were $1,774,000 compared to $1,466,000 for
1995. Payments to subcontractors increased 47% to $1,332,000 in 1996 compared
to $905,000 for 1995. Supplies and materials cost increased 30% in 1996 to
$2,744,000 compared to $2,110,000 for 1995. This increase was due to increased
volume of business as well as an increase in the type of projects requiring more
equipment and supplies. Lab service costs increased from $262,000 in 1995 to
$536,000 in 1996, primarily due to the significant increases in site assessments
in Texas.
Selling, general and administrative expenses were $2,775,000 in 1996
compared to $2,568,000 in 1995, an 8% increase. The $207,000 increase was due
to a larger staff, salary increases and an increased marketing effort in 1996.
Office rent and utilities increased from $106,000 in 1995 to $197,000 in 1996
due to the opening of two offices in Texas.
Interest expense is higher due to the larger debt balance in 1996 resulting
from funding for long-term contracts, additional working capital, and purchases
of machinery and equipment. Interest expense for 1996 was $238,000 compared to
$114,000 in 1995.
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CAPITAL RESOURCES AND LIQUIDITY
Cash on hand at the end of 1996 was $119,000 compared to $9,000 at the end
of 1995. Net cash provided (used) by operating activities was ($563,000)
compared to ($304,000) in 1995. The increase in the net cash used was due to an
increase in accounts receivable of $458,000. The increase in accounts
receivable is due to the general increase in revenues.
On December 29, 1995, the Company purchased $483,000 of assets in Dallas,
Texas for cash, common stock, and assumption of certain liabilities.
On February 29, 1996, an additional asset purchase of approximately
$500,000 in Dallas was also completed for cash, common stock, and assumption of
certain liabilities. Both purchases were from unrelated parties.
To meet its working capital needs in 1996, the Company entered into a
$1,200,000 revolving line of credit. The interest rate was prime plus 1
percent. The bank funding anticipated to fund the purchase of $483,000 of
assets in Dallas was formally approved in early January 1996 with an increase in
the credit line to $1,750,000. The credit line was increased again in September
1996 to $2,100,000. The credit line was further modified and reduced to
$2,000,000 effective April 15, 1997 with an extension of maturity to May 31,
1997 at which time the entire balance of the outstanding principal and accrued
but unpaid interest will be due and payable. The Company is actively seeking
other financing sources to replace the existing line of credit and fund
anticipated growth.
In addition, collateralized borrowing of $650,000 on two loans was
completed in January 1996 as follows: The Company borrowed $295,000 to be
repaid in 10 installments with a maturity of October 29, 1996. The Company
borrowed $355,000 to be repaid in 36 installments with a maturity of December
29, 1998. The interest rate on both loans was Wall Street Journal Prime Rate
plus one percent with an initial rate of 9.5 percent.
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.
CAPITAL EXPENDITURES
The Company has no commitments for material capital expenditures. The
Company may make capital expenditures in connection with acquisition of other
companies or businesses.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements required by this item begin
at page F-1 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE
10
<PAGE>
EXCHANGE ACT.
Information required by this item is incorporated by reference to the
Sections entitled "Election of Directors," " Executive Officers"and "Section
16(a) Beneficial Ownership Compliance" of the Company's Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1997 annual meeting.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item is Incorporated by reference to the
Sections entitled "Board Compensation and Committees" and "Executive Officers-
Executive Compensation" of the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Company's 1997 annual
meeting.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the
Section entitled "Principal Shareholders " of the Company's Proxy Statement to
be filed with the Securities and Exchange Commission in connection with the
Company's 1997 annual meeting.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the
Section entitled "Certain Relationships and Related Transactions" of the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1997 annual meeting.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of
National Environmental Service Co. and amendments thereto
(incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form SB-2,
No. 33-78612-D, (the "Registration Statement").
3.1a Amendment to Amended and Environmental Service Co., dated
Restated Certificate of June 17, 1994 (incorporated by
Incorporation of National reference to Exhibit 3.1a to the
Registration Statement).
3.2 Amended and Restated Bylaws of on June 16, 1994
(incorporated by Statement). National Environmental Service
reference Exhibit 3.2 to the Co., as amended Registration
4.1 Form of Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registrant's Form 10-KSB for the year
ended December 31, 1994 (the "1994 10-KSB").
10.1 Contract with U.S. Corps of Engineers regarding project for
Tinker Air Force Base, Oklahoma (incorporated by reference
Exhibit 10.1a to the Registration Statement).
10.2 Office Warehouse lease between (incorporated by reference
as ended 12-31-97). Registrant and Patterson-McCutchan
filed as Exhibit 10.2 on Form Partnership 10-KSB for the
fiscal year ended 12-31-97).
10.3 Contract for Sale of Corporation with respect to Fuel
Recovery Systems, Inc. (incorporated by reference to
Exhibit 10.8 to the Registration Statement).
10.4 Agreement effective December 1, 1992 between National
Environmental Service Co., Eddy Patterson, Albert
McCutchan, and Lab One Analytical, Inc. providing for
11
<PAGE>
licensing of Search Testing System technology (incorporated
by reference to Exhibit 10.7 to the Registration
Statement).
10.5 National Environmental Service Co. 1994 Employee Stock Plan
dated April 22, 1994 (incorporated by reference to Exhibit
10.7 to the 1994 10-KSB).
10.6 National Environmental Service Co. 1994 Director Stock
Option Plan dated April 22, 1994 (incorporated by reference
to Exhibit 10.8 to the 1994 10-KSB).
10.7 Contract with the U.S. Corps of Engineers regarding project
for Fort Hood, TX (incorporated by reference to Exhibit
10.9 to the 1994 10-KSB).
10.8 Contract with U.S. Corps of Engineers regarding project for
Whiteman Air Force Base, Missouri (incorporated by
reference as filed as Exhibit 10.1 to Form 10-QSB for the
quarter ended March 31, 1995).
10.9 BankIV Oklahoma , N.A. Credit Agreement dated January 9,
1995 (incorporated by reference as filed as Exhibit 10.2 on
Form 10-QSB for the quarter ended March 31, 1995) and
amendments to the Credit Agreement.
10.9a Bank IV Oklahoma, N.A. Amendments to Credit Agreement as
described in Exhibit 10.9.
10.10 Contract with Department of the Air Force regarding project
for Warren AFB, Wyoming (incorporated by reference as filed
as Exhibit 10.1 on Form 10-QSB for the quarter ended
September 30, 1995).
21.1 Subsidiaries of National Environmental Service Co
(incorporated by reference to Exhibit 10.8 to the 1994
10-KSB).
(B) REPORTS ON FORM 8-K
None.
12
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheet as of December 31, 1996 F-3
Consolidated Statements of Income for the Years Ended
December 31, 1996 and 1995 F-4
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
National Environmental Service Co.
We have audited the accompanying consolidated balance sheet of National
Environmental Service Co. (the "Company") as of December 31, 1996 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Environmental Service
Co. as of December 31, 1996 and the results of its operations and its cash flows
for the two years in the period then ended in conformity with generally accepted
accounting principles.
TULLIUS TAYLOR SARTAIN & SARTAIN
Tulsa, Oklahoma
March 24, 1997
F-2
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED BALANCE SHEET
December 31, 1996
(In Thousands of Dollars)
ASSETS
------
Current assets:
Cash $ 119
Accounts receivable:
Trade, net of allowance for doubtful accounts of $36 3,198
Refundable income tax 167
Costs and estimated earnings in excess of billings on
uncompleted contracts 629
Materials and supplies 625
Prepaid expenses 33
------
Total current assets 4,771
------
Property and equipment, at cost:
Land 50
Buildings and improvements 318
Vehicles 1,567
Testing, drilling and other equipment 265
Furniture and fixtures 544
------
2,744
Less accumulated depreciation 1,135
------
Property and equipment, net 1,609
------
Other 23
------
Total assets $ 6,403
======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term obligations $ 2,359
Notes payable to related parties 289
Accounts payable 1,362
Billings in excess of costs and estimated earnings
on uncompleted contracts 68
Accrued liabilities 161
------
Total current liabilities 4,239
------
Long-term notes payable 326
------
Deferred income taxes 16
------
Commitments and contingencies (Note 4)
Shareholders' equity (Note 6):
Preferred Stock; 1,000,000 shares authorized; none issued
Common Stock; par value $.01; authorized 20,000,000 shares;
issued 5,801,143 shares 58
Additional paid-in capital 1,746
Retained earnings 94
Common stock in Treasury, at cost, 29,216 shares (76)
------
Total shareholders' equity 1,822
------
Total liabilities and shareholders' equity $6,403
======
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1996 and 1995
(In Thousands of Dollars except per share amounts)
1996 1995
-------- -------
Revenue:
Site assessments $ 1,549 $ 432
Cathodic protection 2,398 1,749
Construction and repair 5,300 5,301
Remediation 720 1,245
Other 294 302
------- ------
Total revenue 10,261 9,029
Costs and expenses 7,402 6,113
Costs and expenses - Related parties 431 127
Selling, general and
administrative expenses 2,698 2,500
Office rent - Related parties 77 68
------- ------
Income (loss) from operations (347) 221
Other income (expense):
Interest (238) (114)
Other income 54 48
------- ------
Income (loss) before income taxes (531) 155
------- ------
Provision (benefit) for taxes on income
Current (196) 42
Deferred 36 22
------- ------
(160) 64
------- ------
Net income (loss) $ (371) $ 91
======= ======
Net income (loss) per share $(.06) $.02
======= ======
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1996 and 1995
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Additional
Common Common paid-in Retained Treasury
stock shares stock shares capital Earnings shares Total
------------------- ----------------- -------------- ----------- ---------- -------
Issued In Treasury
------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Dec. 31, 1994 5,417,843 - $ 54 $ 1,245 $ 547 $ - $ 1,846
Shares issued-cash 250,300 3 89 92
Purchases of Treasury stock 14,580 (42) (42)
Shares issued for
employee awards 18,000 ( 5,000) 52 15 67
Shares issued to
acquire business 100,000 1 213 214
Tax benefit of share-
holder stock gift 102 102
Net income 91 91
-------- -------- ------- -------- ------- ----- ------
Balance at Dec.31, 1995 5,786,143 9,580 58 1,701 638 (27) 2,370
Shares issued to
acquire business 15,000 45 45
Purchases of Treasury stock 1,000 (3) (3)
Adjusted shares issued to
acquire business 18,636 (46) (46)
Dividends paid (173) (173)
Net income (loss) (371) (371)
-------- -------- ------- -------- ------- ----- ------
Balance at Dec.31, 1996 5,801,143 29,216 $ 58 $ 1,746 $ 94 $ (76) $ 1,822
========= ======== ======== ========= ======== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended December 31, 1996 and 1995
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1996 1995
----------- -------
<S> <C> <C>
Operating activities:
Net income (loss) $ (371) $ 91
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 318 240
Deferred taxes (36) 22
Stock issued as employee compensation - 67
Change in:
Accounts receivable (458) (634)
Costs and estimated earnings in excess
of billings on uncompleted contracts (90) (539)
Materials and supplies (181) (25)
Prepaid expenses 71 (35)
Accounts payable 162 402
Billings in excess of costs and estimated
earnings on uncompleted contracts 68 -
Accrued liabilities ( 23) 141
Other ( 23) (34)
------- ------
Net cash used in operating activities (563) (304)
------- ------
Investing activities:
Acquisition of business, net of cash acquired (240) (98)
Purchases of property and equipment (190) (549)
Proceeds from sales of property and equipment 41 224
------- ------
Net cash used in investing activities (389) (423)
------- ------
Financing activities:
Proceeds from issuance of common stock - 92
Proceeds from notes payable and long-term
obligations 3,161 1,380
Increase (decrease) in notes payable to related parties 289 (137)
Principal payments on notes payable and
long-term obligations (2,166) (769)
Dividends paid (173) -
Purchase of common shares (49) (42)
------- ------
Net cash provided by financing
activities 1,062 524
------- ------
Increase (decrease) in cash 110 (203)
Cash, beginning of year 9 212
------- ------
Cash, end of year $ 119 $ 9
======= ======
Cash paid during the year for interest $ 238 $ 109
======= ======
Income taxes paid $ 0 $ 72
======= ======
Supplemental disclosure of non-cash investing activities
Acquisition of business for common stock $ 45 $ 214
======= ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - National Environmental Service Co. (the "Company") is
engaged in the businesses of providing cathodic protection for underground metal
tanks, installation of spill and overfill protection, environmental site
assessments, contaminated soil and water remediation and the installation and
removal of storage tanks, and the construction of fueling systems and related
facilities. The Company is headquartered in Tulsa, Oklahoma, and has three
division facilities in Texas.
CONSOLIDATION - The Company owns 100% of Fuel Recovery systems, Inc. The
financial statements of Fuel Recovery Systems, Inc. are consolidated and all
material intercompany accounts and transactions are eliminated.
MATERIALS AND SUPPLIES - Materials and supplies consist of purchased materials
and are valued at cost (first-in, first-out).
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets. Gains and losses on retirement of property
and equipment are recognized in the period of retirement.
NET INCOME PER SHARE - Net income per share is calculated based on the weighted
average number of shares outstanding during the period of 5,663,249 in 1995 and
5,760,109 in 1996.
INCOME TAXES - Deferred taxes are determined under the liability method, whereby
deferred tax assets and liabilities are recognized based on differences between
financial statement and tax bases of assets and liabilities using presently
enacted rates. At December 31, 1996 and 1995, deferred taxes were recorded
primarily for temporary differences related to depreciation of fixed assets.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject
the Company to concentrations of credit risk consist primarily of trade
receivables from customers and cost and estimated earnings in excess of billings
on uncompleted contracts which will be due from customers when billable under
the contracts. The Company does not require collateral from its customers
although it may have the ability to place liens. Such credit risk is considered
by management to be limited due to the Company's broad customer base. Sales to
the U.S. Corp of Engineers amounted to 14% and 36% of sales during fiscal 1996
and 1995, respectively. Three commercial customers accounted for 36% of sales in
1996.
REVENUE RECOGNITION -The Company enters into both fixed fee and cost-plus-fee
contracts. For long-term contracts, revenue is recognized on the percentage of
completion method measured by the percentage of direct costs to date to
estimated total direct cost for each long-term contract. For short-term and
multiple unit contracts, revenue is recognized as services are rendered, based
on physical completion of the project. Related costs are expensed as incurred.
Provisions for estimated losses on uncompleted fixed fee contracts are made in
the period in which such losses are determined.
MANAGEMENT ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principals requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
F-7
<PAGE>
the financial statements and reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates.
ACQUISITIONS - On December 29, 1995, the Company acquired $483,000 of assets in
Dallas, Texas for 85,564 shares of common stock, $100,000 cash, and assumption
of $170,000 of liabilities. The revenue and expenses of the acquired business
were not material.
On February 29, 1996, the Company acquired an environmental company in
Dallas, Texas for 15,000 shares of common stock and $239,000 cash. The Company
acquired assets of $541,000 and assumed liabilities of $257,000. Additionally,
operating lease obligations totaling $112,000 were assumed. The revenue and
expenses of the acquired business have been included in the financial statements
since the acquisition date. Revenues and expenses for the two month period
prior to the acquisition were not material.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of unpaid billings for long-term
percentage completion type contracts, billings for short-term multiple unit
contracts (completed contracts), and completed contract projects not yet billed.
Accounts receivable not billed at December 31, 1996 total $704,000 all of which
was completed.
3. UNCOMPLETED CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts are
summarized as follows:
1996
--------
Costs incurred on uncompleted contracts $ 2,316
Estimated earnings (loss) recognized (245)
--------
2,071
Billings to date 1,510
--------
$ 561
========
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 629
Billings in excess of costs and estimated
earnings on uncompleted contracts (68)
--------
$ 561
========
The Company entered into a $1.8 million contract with the U.S. Army Corp of
Engineers related to the fuel storage facilities at an Air Force Base. At
completion in March 1997, the Company estimates its costs will exceed
revenues, before adjustment for any claims, by $686,000 which loss has been
accrued in the financial statements. While the Company expects to assert
claims for additional revenues, such claims have not yet been asserted and
no provision for any recovery has been made.
4. NOTES PAYABLE
Notes payable at December 31, 1996 consist of the following:
F-8
<PAGE>
Revolving line of credit of $2,100,000 bearing interest
at the prime rate published in the Wall Street Journal
plus 1% floating ( 8.25% at December 31, 1996), payable
on April 15, 1997, with interest payable monthly. The
line is collateralized by accounts receivable, inventory,
equipment, and life insurance. $ 2,050,000
Note payable to a bank bearing interest at the prime rate
published in The Wall Street Journal plus 1% floating,
payable in monthly installments of $2,115 including
interest with the final installment due February 2000.
The note is collateralized by real estate, receivables,
inventory, equipment and assignment of life insurance
policies. 140,894
Notes payable bearing interest at rates from 7.25% to 10.25%,
payable in monthly installments of $18,706 including
interest with various maturity dates through June 1998.
The notes are collateralized by vehicles. 247,533
Notes payable bearing interest at the prime rate published in
The Wall Street Journal plus 1% floating, payable in
monthly installments of $11,375 due December 29, 1998.
The note is collateralized by equipment. 247,323
-----------
$ 2,685,750
Less current portion (2,359,382)
-----------
Total long-term notes payable $ 326,368
===========
Maturities of long-term debt over the next five years are as follows: 1997-
$2,359,382, 1998 - $193,154, 1999 - $31,902, 2000 - $15,939, 2001 - $17,608, and
$68,035 thereafter.
On March 18, 1997, the bank agreed to amend the terms of the revolving line
of credit agreement. Under the amended agreement, the maximum amount available,
subject to the borrowing base, will be $2,000,000 and the due date will be
extended from April 15 to May 31, 1997, at which time the entire balance of the
outstanding principal and accrued but unpaid interest will be due and payable.
The Company is actively seeking a credit facility with another institution.
In addition, collateralized borrowing of $650,000 on two loans was
completed in January 1996 as follows: The Company borrowed $295,000 to be
repaid in 10 installments with a maturity of October 29, 1996. The Company
borrowed $355,000 to be repaid in 36 installments with a maturity of December
29, 1998. The interest rate on both loans was Wall Street Journal Prime Rate
plus one percent with an initial rate of 9.5 percent.
5. COMMITMENTS AND CONTINGENCIES
Total rent expense for the years ended December 31, 1996 and 1995 was
$125,000 and $78,000, respectively. Rental commitments under noncancellable
leases are $142,000 in 1997, $49,000 in 1998, and $22,000 in 1999.
6. STOCK OPTION PLANS
Effective April 22, 1994, the Company established The National
Environmental Service Co. 1994 Employee Stock Plan (the "Plan"), the purpose of
which is to help the Company retain key
F-9
<PAGE>
employees and to reward them for contributing to the Company's success. On the
same date, the Company also established The National Environmental Service Co.
Director Stock Option Plan (the "Director Plan"), the purpose of which is to
provide an incentive to non-employee Directors of the Company so they may
increase their interest in the success of the Company and to encourage them to
remain as Directors by providing them an opportunity to obtain or increase their
equity interest in the Company. The total amount of common stock authorized and
reserved for issuance under the Employee Plan is 416,334 shares. At December 31,
1996, options to purchase 238,000 at $3.00 per share had been issued. A total of
43,600 options were exercisable. Under the Director Plan, 150,000 shares of
common stock have been reserved for issuance and no options are outstanding as
of December 31, 1996.
Under existing accounting standards for stock options, no compensation
expense is recognized when the exercise price of stock options equals or exceeds
the market value of the stock at date of grant. Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") provides an alternative method of determining compensation cost for
stock options, which alternative method may be adopted at the option of the
Company. Had compensation cost for these plans been determined consistent with
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), the Company's net income and earnings per share
("EPS") would have been reduced to the following pro forma amounts:
1996 1995
---------------------------
Net income (loss):
As reported $(371,000) $ 91,000
Pro Forma (451,000) (21,000)
EPS:
As reported $ (.06) $.02
Pro Forma (.08) (.00)
A summary of the status of the Company's stock options at December 31, 1996 and
1995, and changes during the years then ended is presented below:
1996 1995
---------------------------------------------
Wtd Avg. Wtg. Avg.
Shares Exer. Price Shares Exer. Price
---------------------------------------------
Outstanding at beginning of year 318,000 $ 3.00 ---
Granted 20,000 $ 3.00 416,000 $3.00
Forfeited (100,000) $ 3.00 (98,000) $3.00
---------------------------------------------
Outstanding at end of year 238,000 $ 3.00 318,000 $3.00
Exercisable at end of year 43,600 $ 3.00 -
=============================================
Weighted average fair
value of options granted $ 1.38 $2.84
======= =====
Weighted average remaining contractual life 8.2 years
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk free interests
rates of 6.89% in 1996 and 7.74% in 1995; expected dividend yields of 0% in 1996
and 1995; expected lives of 10 years in 1996 and 1995; and expected volatility
of 110% in 1996 and 1995.
At December 31, 1996 and 1995, 577,192 and 578,614 shares of common stock
were reserved for the exercise of stock awards of which 339,192 and 260,614
shares were available for future grants.
F-10
<PAGE>
7. SHAREHOLDERS' EQUITY
The initial public offering of the Company's common stock was
concluded in January 1995. The Company issued 1,072,658 shares and received
$1,067,000, after deducting expenses of the offering
In December 1995, the two principal shareholders of the Company made
non-compensatory gifts of 127,500 shares of common stock to employees with whom
the shareholders had close relationships. The $102,000 tax benefit of this gift
is added to Additional Paid in Capital.
The Board of Directors declared a dividend of three cents per share to
shareholders of record on February 15, 1996. The dividend was paid
March 1, 1996.
8. INCOME TAXES
Income tax at the federal statutory rate differs from the Company's
actual income tax expense (benefit) for the years ended December 31, 1996 and
1995 due to state income taxes.
9. RELATED PARTIES
The Company purchases laboratory analysis services from Lab One, a
company affiliated through common ownership. For the years ended December 31,
1996 and 1995, purchases of these services amounted to $431,000 and $127,000,
respectively.
The Company leases office space from a partnership owned by the
Company's two principal shareholders. Payments under this lease amounted to
$77,000 in 1996 and $68,000 in 1995.
In 1996, the Company borrowed $400,000 from its two principal
shareholders and repaid $111,000. In 1995, the Company repaid notes payable of
$137,000 to the two principal shareholders.
During 1996 and 1995, the Company's revenues included sales of
$234,000 and $220,000 respectively to entities with which two Directors of the
Company are affiliated.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected comparative fourth quarter data is as follows:
1996 1995
------- -------
Revenues $2,774 $1,959
Costs and expenses 2,938 2,188
----- ------
Operating income (loss) (164) (229)
Interest expense 79 32
------ ------
Income (loss) before income taxes (243) (261)
Provision for income taxes (benefit) (57) (92)
------ ------
Net income (loss) $ (186) $ (169)
====== ======
Net income (loss) per common share $(0.03) $(0.03)
------ ------
In the fourth quarter of 1996 and 1995, the Company substantially
reduced its estimate of profit that will be realized on one of its long-term
contracts, resulting in lower revenue recognition and an operating loss for the
quarter.
F-11
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, March 24, 1997.
NATIONAL ENVIRONMENTAL SERVICE CO.
By: /s/ Eddy L. Patterson
---------------------------------
Eddy L. Patterson, President
In accordance with the requirements of Section 13 or 15(d) of the Exchange
Act, this report has been signed below by the following persons, on behalf of
the Registrant and in the capacities and on the dates indicated.
Signatures Title Date
----------- ----- ----
/s/ Eddy L. Patterson President, Chief Executive Officer March 24,1997
- ------------------------ and Director
Eddy L. Patteson
/s/ Albert A. McCutchan Executive Vice President and March 24, 1997
- ------------------------ Director
Albert A. McCutchan
/s/Larry G. Johnson Secretary, Treasurer and Chief March 24, 1997
- ------------------------ Financial Officer
Larry G. Johnson
/s/ Robert Watson Controller (Principal Accounting March 24, 1997
- ------------------------ Officer)
Robert Watson
- ------------------------- Director March 24, 1997
E.R. Foraker
/s/Jerry Danielson Director March 24,1997
- -------------------------
Jerry Danielson
- ------------------------- Director March 24,1997
W. F. Simpson
F-12
<PAGE>
EXHIBIT 10.9A
AMENDMENTS TO BANK IV OKLAHOMA, N.A. CREDIT AGREEMENT
1. FIRST AMENDMENT TO CREDIT AGREEMENT
2. SECOND AMENDMENT TO CREDIT AGREEMENT
3. THIRD AMENDMENT TO CREDIT AGREEMENT
4. FOURTH AMENDMENT TO CREDIT AGREEMENT
5. FIFTH AMENDMENT TO CREDIT AGREEMENT
6. SIXTH AMENDMENT TO CREDIT AGREEMENT
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement ("First Amendment") is amended and
entered into as of this 23rd day of February, 1995, by and between BANK IV
Oklahoma, N.A., Tulsa, Oklahoma ("Lender") and National Environmental Service
Company ("Borrower").
RECITALS
WHEREAS, on or about January 9, 1995, the Lender and Borrower entered into a
credit agreement ("Agreement") involving a $1,200,000 revolving line of credit;
WHEREAS the Borrower has requested a new loan from the Lender for the purposes
of financing real property located in San Antonio, Texas, and the Lender has
agreed per the terms herein.
NOW, THEREFORE, in consideration of the above recitals and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Lender and Borrower hereby agree as follows:
1. The opening subparagraph of the Agreement is amended to include the
following:
$160,000 term loan dated February 23, 1995, including any renewals or
extensions thereof, in the form of Exhibit "A" attached hereto and made a
part hereof ("Term Note").
2. Paragraph I(F) of the Agreement is hereby amended to include the following:
I(F) Proceeds from the Term Note are to be used by the Borrower to finance
expenses involved in its real estate location in San Antonio, Texas.
3. Paragraph III (G) of the Agreement is hereby amended and restated as
follows:
III(G) Permit the ratio of its total liabilities to net worth to exceed
1.5 to 1.0.
4. Paragraph III(H) of the Agreement is hereby amended and restated as
follows:
III(H) Permit the net worth of the Borrower, as determined in accordance
with GAAP, to be less than $1,500,000.
5. Paragraph VII(A) is amended to include the following:
VII(A) The obligations arising from the term note shall be secured by a
perfected first deed of trust covering real property located at 4741
College Oak Drive, San Antonio, Bexar County, Texas, as more
specifically defined in the attached deed of trust ("Deed of Trust")
attached hereto as Exhibit "B" and made a part hereof.
6. All referenced in the Agreement to Related Documents shall be amended to
include the Term Note and Deed of Trust, as defined herein.
Except as especially provided herein, all of the terms and conditions of the
Agreement shall remain in full force and effect until all of the Borrower's
obligation to the Lender have been fully discharged. This Agreement shall be
binding on Borrower, Lender, and their respective successors, and assigns and
shall inure to the benefit of the Borrower, Lender, and their respective
successors and assigns.
<PAGE>
Agreed to as of the date first written above.
NATIONAL ENVIRONMENTAL SERVICE COMPANY
By:
--------------------------------------
"Borrower"
BANK IV OKLAHOMA, N.A.
By:
---------------------------------------
John D. Pixley, Senior Vice President
"Lender"
<PAGE>
SECOND AMENDMENT TO CREDIT AGREEMENT
This Second Amendment to Credit Agreement ("Second Amendment") is made and
entered into as of this 29th day of December, 1995, by and between BANK IV
Oklahoma, N.A., Tulsa, Oklahoma ("Lender") and National Environmental Service
Company ("Borrower").
RECITALS
WHEREAS, on or about January 9, 1995, the Lender and Borrower entered into a
credit agreement ("Agreement") involving a $1,200,000 revolving line of credit;
WHEREAS, on or about February 23, 1995, the Lender and Borrower entered into a
First Amendment to Credit Agreement ("First Amendment") involving a $160,000
Term Loan to finance expenses of its real estate in San Antonio, Texas;
WHEREAS, the Borrower has requested two new term loans totaling $650,000 for the
purposes of financing equipment purchases and a specific account receivable, and
the Lender has agreed per the terms herein.
NOW, THEREFORE, in consideration of the above recitals and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Lender and Borrower hereby agree as follows:
1. The opening subparagraph of the Agreement is amended to include the
following:
$355,000 term loan dated December 29, 1995, including any renewals or
extensions thereof, in the form of Exhibit "A" attached hereto and made a
part hereof ("Equipment Term Note").
$295,000 term loan dated December 29, 1995, including any renewals or
extensions thereof, in the form of Exhibit "B" attached hereto and made a
part hereof ("Invoice Term Note").
2. Paragraph I(F) of the Agreement is hereby amended to include the following:
I(F) Proceeds from the Equipment Term Note are to be used by the Borrower
only to finance and/or purchase the assets listed in the attached
Exhibit "C" attached hereto and made a part hereof.
Proceeds from the Invoice Term Note are to be used by the Borrower to
finance that certain account receivable existing between the Borrower
and Southwest Convenient Stores, Inc. in the amount of $309,820 dated
December 14, 1995.
3. All references in the Agreement to Related Documents shall be amended to
include the Equipment Term Note and the Invoice Term Note as defined
herein.
4. The Equipment Term Note shall be secured by a perfected first security
interest in the equipment as more particularly described in the Security
Agreement attached hereto and made a part hereof as Exhibit "D."
5. The Invoice Term Note shall be secured by a perfected first security
interest in that certain invoice as more particularly described in that
certain security agreement attached hereto as Exhibit "E" attached hereto
and made a part hereof.
6. The equipment which is being pledged by the Borrower shall be warranted by
the Borrower to be free and clear of all liens, and the Borrower shall
warrant title and ownership of the equipment at all times.
<PAGE>
Except as especially provided herein, all of the terms and conditions of the
Agreement shall remain in full force and effect until all of the Borrower's
obligation to the Lender have been fully discharged. This Agreement shall be
binding on Borrower, Lender, and their respective successors, and assigns and
shall inure to the benefit of the Borrower, Lender, and their respective
successors and assigns.
Agreed to as of the date first written above.
NATIONAL ENVIRONMENTAL SERVICE COMPANY
By:______________________________________
Larry G. Johnson
Vice President, Secretary & Treasurer
"Borrower"
BANK IV OKLAHOMA, N.A.
By:______________________________________
John D. Pixley, Senior Vice President
"Lender"
<PAGE>
THIRD AMENDMENT TO CREDIT AGREEMENT
This Third Amendment to Credit Agreement ("Third Amendment") is made and entered
into as of this 9th day of January, 1996, by and between BANK IV Oklahoma, N.A.,
Tulsa, Oklahoma ("Lender") and National Environmental Service Company
("Borrower").
RECITALS
WHEREAS, on or about January 9, 1995, the Lender and Borrower entered into a
credit agreement ("Agreement") involving a $1,200,000 revolving line of credit;
WHEREAS, on or about February 23, 1995, the Lender and Borrower entered into a
First Amendment to Credit Agreement ("First Amendment") involving a $160,000
Term Loan to finance expenses of its real estate in San Antonio, Texas;
WHEREAS, on or about December 29, 1995, the Lender and Borrower entered into a
Second Amendment to Credit Agreement ("Second Amendment") involving two term
loans totaling $650,000 for the purpose of financing equipment and a specific
account receivable;
WHEREAS, the Borrower has requested an extension of the maturity date of the
revolving line of credit to April 9, 1996, and the Lender has agreed per the
terms herein.
NOW, THEREFORE, in consideration of the above recitals and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Lender and Borrower hereby agree as follows:
1. The opening subparagraph of the Agreement, referring only to the Revolving
Note, is amended and restated as follows:
$1,200,000.00 revolving line of credit dated January 9, 1996, including any
renewals or extensions thereof, attached hereto in the form of Exhibit "A"
and made a part hereof ("Revolving Note").
2. Paragraph VI. Termination, of the Agreement is amended and restated as
follows:
VI. Termination. This Agreement shall terminate, except as otherwise
provided herein on April 9, 1996.
Except as especially provided herein, all the terms and conditions of the
Agreement shall remain in full force and effect until all of the Borrower's
obligation to the Lender have been fully discharged. This Agreement shall be
binding on Borrower, Lender, and their respective successors, and assigns and
shall inure to the benefit of the Borrower, Lender, and their respective
successors and assigns.
<PAGE>
Agreed to as of the date first written above.
NATIONAL ENVIRONMENTAL SERVICE COMPANY
By:______________________________________
Larry G. Johnson
Vice President, Secretary & Treasurer
"Borrower"
BANK IV OKLAHOMA, N.A.
By:______________________________________
John D. Pixley, Senior Vice President
"Lender"
<PAGE>
FOURTH AMENDMENT TO CREDIT AGREEMENT
This Fourth Amendment to Credit Agreement ("Fourth Amendment") is made and
entered into as of this 26th day of February, 1996, by and between BANK IV
Oklahoma, N.A., Tulsa, Oklahoma ("Lender") and NATIONAL ENVIRONMENTAL SERVICE
COMPANY ("Borrower").
RECITALS
WHEREAS, on or about January 9, 1995, the Lender and Borrower entered into a
Credit Agreement ("Agreement") involving a $1,200,000 revolving line of credit;
WHEREAS, on or about February 23, 1995, the Lender and Borrower entered into a
First Amendment to Credit Agreement ("First Amendment") involving a $160,000
Term Loan to finance expenses of its real estate in San Antonio, Texas;
WHEREAS, on or about December 29, 1995, the Lender and Borrower entered into a
Second Amendment to Credit Agreement ("Second Amendment") involving two term
loans totaling $650,000 for the purpose of financing equipment and a specific
account receivable;
WHEREAS, on or about January 9, 1996, the Lender and Borrower entered into a
Third Amendment to Credit Agreement ("Third Amendment") involving the extension
of the maturity date of the revolving line of credit to April 9, 1996;
WHEREAS, the Borrower has requested an extension of the maturity date of the
revolving line of credit to April 15, 1997, and the Lender has agreed per the
terms herein.
NOW THEREFORE, in consideration of the above recitals and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Lender and Borrower hereby agree as follows:
1. The opening subparagraph of the Agreement, referring only to the Revolving
Note, is hereby amended and restated as follows:
$1,750,000.00 revolving line of credit dated February 26, 1996, including
any renewals or extensions thereof, attached hereto in the form of Exhibit
"A" and made a part hereof ("Revolving Note"). This Revolving Note is a
renewal and extension of the $1,200,000.00 line of credit dated
January 9, 1996.
2. Paragraph III. G. of the Agreement is hereby amended and restated as
follows:
III. G. Permit the ratio of its total liabilities to net worth to exceed
1.25:1.0.
3. Paragraph III. H. of the Agreement is hereby amended and restated as
follows:
III. H. Permit the net worth of the Borrower, as determined in accordance
with GAAP, to be less than $2,400,000.00.
4. Paragraph VI of the Agreement is hereby amended and restated as follows:
VI. TERMINATION. This Agreement shall terminate, except as otherwise
provided herein, on April 15, 1997.
5. Paragraph VII. A. of the Agreement is hereby amended and restated as
follows:
<PAGE>
VII. A. The obligations arising hereunder, including those from the
Revolving Note, shall be secured by accounts, inventory ("Qualified
Inventory" is defined in the attached Security Agreement), equipment
and general intangibles more particularly described in the Security
Agreement attached hereto as Exhibit "B" and made a part hereof
("Security Agreement").
This Security agreement is executed in accordance with the increase in
the Revolving Line of Credit to $1,750,000.00.
Except as otherwise provided herein, all of the terms and conditions of the
Agreement shall remain in full force and effect until all of the Borrower's
obligation to the Lender have been fully discharged. This Agreement shall be
binding on Borrower, Lender, and their respective successors and assigns and
shall inure to the benefit of the Borrower, Lender, and their respective
successors and assigns.
Agreed to as of the date first written above.
NATIONAL ENVIRONMENTAL SERVICE COMPANY
By:______________________________________
Eddy Patterson, President
"Borrower"
BANK IV OKLAHOMA, N.A.
By:______________________________________
John D. Pixley, Senior Vice President
"Lender"
<PAGE>
FIFTH AMENDMENT TO CREDIT AGREEMENT
This Fifth Amendment to Credit Agreement ("Fifth Amendment") is made and entered
into as of this 18th day of March, 1996, by and between BANK IV Oklahoma, N.A.,
Tulsa, Oklahoma ("Lender") and NATIONAL ENVIRONMENTAL SERVICE COMPANY
("Borrower").
RECITALS
WHEREAS, on or about January 9, 1995, the Lender and Borrower entered into a
Credit Agreement ("Agreement") involving a $1,200,000 revolving line of credit;
WHEREAS, on or about February 23, 1995, the Lender and Borrower entered into a
First Amendment to Credit Agreement ("First Amendment") involving a $160,000
Term Loan to finance expenses of its real estate in San Antonio, Texas;
WHEREAS, on or about December 29, 1995, the Lender and Borrower entered into a
Second Amendment to Credit Agreement ("Second Amendment") involving two term
loans totaling $650,000 for the purpose of financing equipment and a specific
account receivable;
WHEREAS, on or about January 9, 1996, the Lender and Borrower entered into a
Third Amendment to Credit Agreement ("Third Amendment") involving the extension
of the maturity date of the revolving line of credit to April 9, 1996;
WHEREAS, on or about February 26, 1996, the Lender and Borrower entered into a
Fourth Amendment to Credit Agreement ("Fourth Amendment") involving an increase
and maturity extension of the Revolving Note;
WHEREAS, the Borrower has requested the Lender loan $150,000 under a revolving
note and $117,000 under a term note, the purpose of which is to support the
purchase of certain assets of Leigh Engineering, Inc. and the Lender has agreed
to, per the terms and conditions hereof.
NOW THEREFORE, in consideration of the above recitals and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Lender and Borrower hereby agree as follows:
1. The opening subparagraph of the Agreement is hereby amended to include the
following:
$150,000 revolving note dated March 18, 1996, including any renewals or
extensions thereof, attached hereto in the form of Exhibit "A" and made a
part hereof ("Leigh Revolving Note"). This Leigh Revolving Note shall
mature, unless otherwise provided herein, on June 18, 1996.
$117,000 term loan dated March 18, 1996, including any renewals or
extensions thereof, attached hereto in the form of Exhibit "B" and made a
part hereof ("Leigh Term Note"). This Leigh Term Note shall mature, unless
otherwise provided herein, on March 18, 1998.
2. Paragraph VII. A. of the Agreement is hereby amended to include the
following:
VII. A. The obligations arising hereunder, including those from the Leigh
Revolving Note and Leigh Term Note, shall be secured by a first
perfected security interest in accounts, inventory ("Qualified
Inventory" is defined in the attached Security Agreement), equipment
and general intangibles of the Borrower more particularly described in
the Security Agreement attached hereto as Exhibit "C" and made a part
hereof ("Leigh Security Agreement").
<PAGE>
3. All references in the Agreement to Related Document shall include the Leigh
Revolving Note and Leigh Term Note.
4. The accounts, inventory and equipment which are being pledged by the
Borrower shall be warranted by the Borrower to be free and clear of all
liens, and the Borrower shall warrant title and ownership of the same at
all times.
Except as otherwise provided herein, all of the terms and conditions of the
Agreement shall remain in full force and effect until all of the Borrower's
obligation to the Lender have been fully discharged. This Agreement shall be
binding on Borrower, Lender and their respective successors and assigns and
shall inure to the benefit of the Borrower, Lender and their respective
successors and assigns.
Agreed to as of the date first written above.
NATIONAL ENVIRONMENTAL SERVICE COMPANY
By:______________________________________
Larry Johnson
"Borrower"
BANK IV OKLAHOMA, N.A.
By:______________________________________
John D. Pixley, Senior Vice President
"Lender"
<PAGE>
SIXTH AMENDMENT TO CREDIT AGREEMENT
This Sixth Amendment to Credit Agreement ("Sixth Amendment") is made and entered
into as of this 15th of September, 1996, by and between BOATMEN'S NATIONAL BANK
OF OKLAHOMA successor by merger to BANK IV Oklahoma, N.A., Tulsa, Oklahoma
("Lender") and NATIONAL ENVIRONMENTAL SERVICE CO. ("Borrower").
RECITALS
WHEREAS, on or about January 9, 1995, the Lender and Borrower entered into a
Credit Agreement ("Agreement") involving a $1,200,000.00 revolving line of
credit;
WHEREAS, on or about February 23, 1995, the Lender and Borrower entered into a
First Amendment to Credit Agreement ("First Amendment") involving a $160,000.00
Term Loan to finance expenses of its real estate in San Antonio, Texas;
WHEREAS, on or about December 29, 1995, the Lender and Borrower entered into a
Second Amendment to Credit Agreement ("Second Amendment") involving two term
loans totaling $650,000.00 for the purpose of financing equipment and a specific
account receivable;
WHEREAS, on or about January 9, 1996, the Lender and Borrower entered into a
Third Amendment to Credit Agreement ("Third Amendment") involving the extension
of the maturity date of the revolving line of credit to April 9, 1996;
WHEREAS, on or about February 26, 1996, the Lender and Borrower entered into a
Fourth Amendment to Credit Agreement ("Fourth Amendment") involving an increase
and maturity extension of the Revolving Note;
WHEREAS, on or about March 18, 1996, the Lender and Borrower entered into a
Fifth Amendment to Credit Agreement ("Fifth Amendment") involving one revolving
loan in the amount of $150,000.00 and one term note in the amount of $117,000.00
for the purpose to support the purchase of certain assets of Leigh Engineering,
Inc.;
WHEREAS, the Borrower has requested the Lender to increase the revolving line of
credit, and the Lender has agreed to, per the terms and conditions hereof.
NOW THEREFORE, in consideration of the above recitals and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Lender and Borrower hereby agree as follows:
1. The opening subparagraph of the Agreement, referring only to the Revolving
Note, is hereby amended and restated as follows:
$2,100,000.00 revolving line of credit dated September 15, 1996, including
any renewals or extensions thereof, in the form of Exhibit "A" attached
hereto and made a part hereof ("Revolving Note"). This Revolving Note is a
renewal and increase of the $1,750,000.00 line of credit dated February 26,
1996.
2. Paragraphs II. B. (1) & (2) of this Agreement are hereby deleted in their
entirety and replaced with the following:
(1) Annual audited financial statements of Borrower in a form acceptable to
the Lender within 120 days of fiscal year-end beginning with
December 31, 1996 statement.
<PAGE>
(2) Borrower will provide the Lender with Form 10-Q SB beginning with the
September 30, 1996 form and quarterly thereafter. In addition, the
Borrower will provide the Lender with Form 10-K SB beginning with the
December 31, 1996 form and annually thereafter.
3. Paragraph III. G. of the Agreement is hereby amended and restated as
follows:
III. G. Permit the ratio of its total liabilities to net worth to exceed
2.50:1.
4. Paragraph III. H. of the Agreement is hereby amended and restated as
follows:
III. H. Permit the net worth of the Borrower, as determined in accordance
with GAAP, to be less than $2,000,000.00 at September 30, 1996, then
to be less than $2,400,000.00 at December 30, 1996.
Except as otherwise provided herein, all of the terms and conditions of the
Agreement shall remain in full force and effect until all of the Borrower's
obligations to the Lender have been fully discharged. This Agreement shall be
binding on Borrower, Lender, and their respective successors and assigns and
shall inure to the benefit of the Borrower, Lender, and their respective
successors and assigns.
Agreed to as of the date first written above.
NATIONAL ENVIRONMENTAL SERVICE CO. BOATMEN'S NATIONAL BANK OF OKLAHOMA
By:_______________________________ By:_________________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 119
<SECURITIES> 0
<RECEIVABLES> 3,994
<ALLOWANCES> 36
<INVENTORY> 625
<CURRENT-ASSETS> 4,771
<PP&E> 2,744
<DEPRECIATION> 1,135
<TOTAL-ASSETS> 6,403
<CURRENT-LIABILITIES> 4,239
<BONDS> 0
0
0
<COMMON> 58
<OTHER-SE> 1,764
<TOTAL-LIABILITY-AND-EQUITY> 6,403
<SALES> 502
<TOTAL-REVENUES> 10,261
<CGS> 325
<TOTAL-COSTS> 7,833
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<INCOME-PRETAX> (531)
<INCOME-TAX> (160)
<INCOME-CONTINUING> (282)
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