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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, 1997 (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 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 $14,746,000.
------------
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 27, 1998 was $11,489,812.
The number of shares outstanding of each of the issuer's classes of common stock
as of February 27, 1998 is shown below:
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
-------------- -----------
Common Stock, $.01 Par Value 7,876,143
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Proxy Statement for the Annual Meeting of Stockholders
of National Environmental Service Co. to be held May 21, 1998, 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 National Environmental Service 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 ("RCRA"), as amended by the Solid Waste Disposal Act ("SWDA"), the Company's
focus shifted toward environmental services, assessment and remediation. It
currently is engaged in the businesses of installation of fueling systems and
related facilities, 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.
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 $340,000 and pre-tax income of $41,000 (unaudited). In 1997, the
Company had revenues of $14,746,000 and pre-tax income of $1,204,000. At the
time of purchase by Messrs. Patterson and McCutchan, the Company had eight
full-time employees and one office. At the end of 1997, the Company had 97
full-time employees. In addition to the corporate office in Tulsa, Oklahoma, the
Company had regional offices in Dallas (as of December 29, 1995), Houston
(closed effective January 31, 1998) and San Antonio, Texas.
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 1994 and terminated in
January 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 and San Antonio, Texas. The Company has regional managers in
each of its offices who are responsible for the operations conducted in their
respective regions.
GENERAL
The Company provides "turn-key" installation of fueling systems and related
facilities, 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
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generated increasing demand for the types of services provided by 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 recent phenomenon at supermarkets and grocery stores is the installation
of gasoline fueling facilities at the perimeters of the stores' parking lots.
This move into retail gasoline sales has provided an opportunity for the Company
to use its experience in the fuel services industry to also become a "turn-key"
builder of fuel facilities for multinational oil companies and supermarket
chains.
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.
Under its cathodic protection distributorship program (described below),
the Company sells cathodic protection systems designed and manufactured by the
Company to other environmental and pump and tank service companies. The Company
believes this program will allow the Company greater participation in the huge
market for these services prior to the December 1998 deadline of the regulatory
requirement that such systems be installed for older underground tanks in
existing fueling systems.
New Installations: The Company provides "turn-key" installation of new
fueling facilities including the underground storage
tanks, piping, dispensing equipment, and other site
improvements including the building, canopy, and related
equipment.
Cathodic Production: The Company employs a method of method of protecting
metal underground storage tanks and pipelines from the
natural processes of corrosion which involves
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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
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 materials. 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 addition, 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.
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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.
The Company has developed a significant fueling
equipment service facility in Dallas to serve the
Dallas-Fort Worth Metroplex.
MATERIAL CONTRACTS
The Whiteman A.F.B. contract began April 1995 and was completed in 1997.
At Whiteman, the Company demolished an old fuel storage facility and replaced
it with a new system. In addition, other above and underground fuel storage
tanks were to have been 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 contract was
completed in early 1997.
The Warren A.F.B. contract began November 1995 and was completed in
September 1997. Revenues to be earned by the Company under the Warren contract
total approximately $1,100,000 of which $33,000 was recorded in 1995, $705,000
was recorded in 1996, and the remaining $338,000 was recorded in 1997. At
Warren, the Company upgraded 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 two
grocery store chains. Revenues earned in 1996 were $1,400,000 and $1,065,000
for the two convenience store chains. The total of revenues for both chains
combined in 1997 was $1,315,000. Revenues earned in 1996 for fuel system
installations for one grocery store chain was $1,324,000. Revenues for 1997
for fuel system installations at two grocery chains were $1,323,000 and
$2,071,000. Revenues for work on these chains will continue in 1998 as
additional stores are scheduled for upgrades and installations.
The Company is performing site upgrades on eleven hospitals owned by a
national hospital corporation. The upgrades include removal and replacement of
emergency generator fuel storage tanks, piping, and related equipment. The
total revenues expected from these contracts should exceed $900,000.
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. There are even fewer competitors for the installation of "turn-key"
fueling facilities for gasoline service stations and convenience store chains.
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.
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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 two and has four 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 20% of the services
performed by the Company have been pursuant to projects awarded by competitive
bidding.
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.
EFFECT OF GOVERNMENTAL REGULATIONS
The RCRA, as amended by SWDA, 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 the 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 the 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 to be installed
by 1995, the state has not made significant progress in the clean-up of
contaminated sites as have other states. The Company's operations in Iowa
declined due to completion of upgrade work to meet the 1995 deadline and the
lack of significant clean-up opportunities. The Iowa office was closed in March
1996. The Nebraska office was also closed in March 1996 due to a shortage of
state 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 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
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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 18 states on an on-going basis
and obtain 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 landfill. 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 1997, the Company received 14 percent of its revenue from one grocery
store chain. 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 2% 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 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
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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 97 full-time employees and no part-time employees. This
number includes 7 senior managers, 6 division managers, 10 field supervisors, 2
marketing employees, 4 full-time professionals, 18 accounting/clerical/drafting
personnel, and 50 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 was leased from McCutchan and
Patterson Partnership, a partnership owned by the President and Executive Vice
President of the Company. The lease was in effect through 1997 with annual
lease payments totaling $66,000.
On February 27, 1998, the Company acquired the office building, warehouse
and lot on which the Company's corporate offices are located. The purchase
price was $600,000, and the Company secured a loan from Citizen's Bank of Tulsa
for $480,000 secured by a mortgage on the acquired real estate. The loan has a
term of 7 years. The interest rate floats at one-half percent above Low New
York Prime rate, and the current rate is 9.0% per annum. The Company paid a
one-half percent origination fee.
The Company acquired Lab One Analytical, Inc. on January 30, 1998, for
$75,000 cash and 225,000 shares of the Company's common stock.
Both Lab One Analytical, Inc. and the real estate were purchased from Eddy
Patterson and Albert McCutchan, the President and Executive Vice President of
the Company following the completion of independent appraisals of the entities
and the review and unanimous consent of the outside directors of the Company to
the transactions and terms and conditions thereof.
The Company constructed a new building in San Antonio, Texas, which was
completed during the
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first quarter of 1995 at a cost of $259,000. At December 31, 1997, a balance of
$466,000 remained to be paid which includes liens on real estate and other
equipment.
The Company leased space for its Dallas office on October 1, 1995. Annual
lease payments are $34,000. The lease expires on September 30, 1998.
The Company leased space for its Houston office on November 1, 1996. The
annual lease payments are $23,000, and the lease expires on October 31, 1999.
This office was closed on January 31, 1998, and the Company is in the process of
subleasing the office for the remainder of the lease term.
The Company owns various vehicles and equipment which were purchased at a
total cost of approximately $2,178,000. At December 31, 1997, the Company had
outstanding loans of approximately $808,000 principal amount collateralized by
the vehicles, equipment, and real estat e.
ITEM 3. LEGAL PROCEEDINGS.
The Company has various legal proceedings for the collection of accounts
receivable. The amounts sought in the legal proceedings are relatively
insignificant with regard to the Company's total accounts receivable balances.
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 Stock
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 markup, markdown or
commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
Quarter
ended High Low
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<S> <C> <C>
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
</TABLE>
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<TABLE>
<CAPTION>
Quarter
ended High Low
------ ------ ------
<S> <C> <C>
3/31/97 $1.875 $0.875
6/30/97 2.00 .625
9/30/97 2.875 1.625
12/31/97 4.375 2.375
</TABLE>
At December 31, 1997, there were 257 holders of record of the Company's
outstanding shares of common stock and an estimated 300 additional shareholders
whose shares were registered in street name. No shares of preferred stock are
currently outstanding.
The Board of Directors paid no dividends to shareholders in 1997. 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. The
Company paid no dividends in 1995.
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.
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, 1997, TO THE
YEAR ENDED DECEMBER 31, 1996.
The Company had revenues of $14,746,000 in 1997 compared to $10,261,000 in
1996, a 44% increase. Fueling systems installation and repair accounted for
the largest source of revenues in 1997 as compared to 1996, a 81% increase.
Fueling systems installation and repair revenues in 1997 were $9,569,000
compared to $5,300,000 for 1996. The fueling systems installation and repair
revenues increased due to significantly greater activity in the installation of
fueling systems for petroleum companies, convenience stores and grocery store
chains. Cathodic Protection revenues increased 49% in 1997 as compared to
1996. Cathodic Protection revenues were $3,564,000 in 1997 compared to
$2,398,000 in 1996. The increase resulted from increased purchases of cathodic
protection kits from the Company's distributor network and increases in the
installation of cathodic protection systems by the Company. The increased sales
result from the approaching deadline for regulatory compliance by owners and
operators of underground storage tanks. Site assessment revenues were $573,000
in 1997 compared to $1,549,000 in 1996. Site assessment revenues exhibited the
largest decrease in 1997 compared to 1996. The decrease of 63% resulted from
the significantly increased activity in Texas in 1996 following that state's
revision of its LUST cleanup program. The Company performed an unusually large
amount of assessments in late 1996 which boosted that year's revenue
considerably in relation to 1997. Remediation revenues increased 8% in 1997
compared to 1996, $776,000 compared to $720,000. Sales of Parts and Pumps
increased to $674,000 in 1997 compared to $114,000 in 1996. The increase
resulted from the considerable expansion of the Company's service division
activities in 1997 following the division's establishment in late 1996 and the
increase in sales of pumps and parts due to the Company's increased activity in
installing fueling systems for petroleum companies, convenience stores, and
grocery chains.
Costs and expenses in 1997 were $10,129,000 compared to $7,833,000 in 1996,
an increase of 29%. Costs and expenses for 1997 represented 69% of total
revenue for the year compared with 76% for
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1996. The decrease in percentage of costs and expenses in 1997 resulted from
problems encountered on one government contract in 1996. Additionally, 1996
costs and expenses included 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 was 8%, relatively
minor in comparison to the increase in revenue. Labor costs for 1997 were
$1,922,000 compared to $1,774,000 for 1996. Payments to subcontractors increased
10% to $1,463,000 in 1997 compared to $1,332,000 in 1996. Supplies and materials
cost increased 73% in 1997 to $4,740,000 compared to $2,744,000 for 1996. The
increase in both subcontractor expense and supplies and materials was due to
increased volume of business in the fueling systems installation and repair area
which include the type of projects requiring more equipment and supplies and use
of subcontractors. Lab service costs decreased from $536,000 in 1996 to $304,000
in 1997, primarily due to the significant decrease in site assessments in Texas
as explained in the revenues paragraph above.
Selling, general and administrative expenses were $3,215,000 in 1997
compared to $2,775,000 in 1996, a 16% increase. The $440,000 increase was due
to salary increases and the employment of more highly qualified and skilled
employees in 1997. Salaries accounted for $288,000 of the $440,000 increase.
Salaries increased 21% to $1,645,000 in 1997 compared to $1,357,000 in 1996.
Part of the increase in salaries for 1997 over 1996 was the result of a one time
temporary reduction of $103,000 of certain executive officer salaries during
1996. Office supplies and postage was $112,000 in 1997 compared to $82,000 in
1996. Telephone expenses were $108,000 in 1997 compared to $74,000 in 1996.
Both telephone expense and office supplies and postage increases were related to
the increased volume of sales. Professional fees increased to $116,000 in 1997
compared to $75,000 in 1996. The Company's efforts in capital acquisition and
investor relations accounted for most of the increase in professional fees.
Advertising expense declined to $43,000 in 1997 compared to $79,000 in 1996 due
to less advertising in trade publications.
Interest expense is higher due to the larger debt balance in 1997 resulting
from funding for long-term contracts, additional working capital, and purchases
of machinery and equipment. Interest expense for 1997 was $308,000 compared to
$238,000 in 1996.
CAPITAL RESOURCES AND LIQUIDITY
Cash on hand at the end of 1997 was $90,000 compared to $119,000 at the end
of 1996. Net cash used by operating activities was $1,496,000 in 1997 compared
to $563,000 in 1996. The increase in the net cash used was due to an increase
in accounts receivable of $1,696,000 and an increase in costs and estimated
earnings in excess of billings of $1,437,000. The increase in accounts
receivable and costs and estimated earnings in excess of billings is due to the
44% increase in revenues.
The Company continued to make periodic debt repayments during the year. The
Company continued to make investments in property, plant and equipment as well
as materials and supplies as needed. The Company secured $1,000,000 from a
private placement of one million shares of common stock during the second
quarter of 1997. As part of the private placement, the company granted options
to purchase 530,000 shares of common stock at $1.50 per share exercisable at any
time prior to April 30, 1999. The Company secured $540,000 when options for
450,000 shares were exercised at $1.20 per share (adjusted from $1.50) on
December 8, 1998. Accounts receivable at the end of 1997 totaled $5,015,000
compared to $3,198,000 at the end of 1996. Costs and estimated earnings in
excess of billings on uncompleted contracts were $2,066,000 at the end of 1997
compared to $629,000 at the end of 1996. Accounts payable increased to
$1,827,000 at the end of 1997 compared to $1,362,000 at the end of 1996.
10
<PAGE>
During 1997, the Company obtained installment loans which totaled $312,000
and were secured by 13 trucks and attached equipment.
The Company extended its revolving line of credit in April 1997, and the
extended loan maturity was May 31, 1997. The amount of the line was decreased
from $2.1 million to $2.0 million pending the transfer of the Company's banking
relationships from Boatmen's National Bank of Oklahoma ("Boatmen's") to Bank of
Oklahoma. The interest rate on the loan during the extension was national prime
plus 3 percenage points. On July 15, 1997, the Company executed loan documents
and transferred its line of credit loan and various equipment loans to the Bank
of Oklahoma. The line of credit was increased to $2.5 million with an interest
rate of national prime plus 1.5 percentage points. The Company used $2.028
million of the new line to payoff the line of credit at Boatmen's. The line of
credit was increased to $3.0 million on December 2, 1997. All other terms and
conditions of the line of credit remained unchanged. Various equipment loans at
Boatmen's totaling $391,000 were consolidated into a Bank of Oklahoma $500,000
loan on equipment with an interest rate of Wall Street Journal prime plus 1.5%.
-------------------
The monthly payment of $10,624 is based on a five year amortization. A balloon
payment at maturity is required on July 31, 2000.
CAPITAL EXPENDITURES
The Company has no commitments for material capital expenditures. The
Company acquired Lab One Analytical, Inc. on January 30, 1998 for $75,000 cash
and 225,000 shares of the Company's common stock. On February 27, 1998, the
Company acquired the office building, warehouse and lot on which the Company's
corporate offices are located. The purchase price was $600,000. The Company may
make capital expenditures in connection with acquisition of other companies or
businesses.
YEAR 2000 ISSUE
The Company is making an assessment of its Year 2000 date issues as it
relates to computer operations of the Company, the computer hardware and
software owned by the Company, the accounting software provided by its vendor,
the software of other suppliers and vendors, and the software of customers. The
most critical aspect for the Company regarding the Year 2000 problem involves
the Company's accounting software. The Company's vendor of the software is
addressing this issue and assures its users that all software will be revised to
permit the usage of the year 2000 date without adverse consequences to the
software users' systems. The Company has made arrangements with its local
computer systems consultant to survey all of the Company's computers and non-
accounting software acquired and used in Company operations. This survey will
include alarm systems, office equipment, computers, "off-the-shelf" software,
and software designed by the Company or its subsidiaries. It has been
determined that Year 2000 problems encountered by the Company's customers would
not be material. However, the Company does supply equipment which will be
affected by the Year 2000 problem. The Company will contact vendors of such
equipment supplied by the Company and determine if the equipment requires
modifications to address its customers' Year 2000 problems. The Company has
determined that the Year 2000 problem is not a material event or uncertainty
that would cause reported financial information not to be necessarily indicative
of future operating results or financial condition. Additionally, the Company
has determined that the costs or consequences of incomplete or untimely
resolution of the Year 2000 issue is not a material event. These determinations
are based on three factors: the availability of accounting software which has
dealt with the Year 2000 problem, the relatively small amount of reliance by the
Company on specialized software or computer equipment, and the inconsequential
impact on the Company of any of the Company's customers' Year 2000 problems.
11
<PAGE>
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 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 1998 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 1998 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 1998 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 1998 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 Restated Certificate of Incorporation of
National Environmental Service Co., dated June 17, 1994
(incorporated by reference to
12
<PAGE>
Exhibit 3.1a to the Registration Statement).
3.2 Amended and Restated Bylaws of National Environmental Service
Co., as amended on June 16, 1994 (incorporated by reference to
Exhibit 3.2 to the Registration Statement).
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 Registrant McCutchan and Patterson
Partnership (incorporated by reference as filed as Exhibit 10.2
on Form 10-KSB for the fiscal year ended December 31, 1994).
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 Bank IV 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.
10.11 Private Placement Agency Agreement between National Environmental
Service Co. Peacock, Hislop, Staley & Given, Inc. dated January
15, 1998; Amendment to the Placement Agency Agreement dated
January 15, 1998; and First Supplement to the Private Placement
Memorandum dated January 12, 1998.
10.12 National Environmental Service Co. Common Stock Purchase Warrant
to Peacock, Hislop, Staley & Given, Inc. dated January 21, 1998
10.13 Purchase and Sale Agreement for sale of real estate dated January
30, 1998, between National Environmental Service Co. and
McCutchan and Patterson, an Oklahoma general partnership.
10.14 Citizens' Bank of Tulsa Credit Agreement dated February 27, 1998.
10.15 Agreement and Plan of Merger with respect to Lab One Analytical,
Inc. dated January 30, 1998.
21.1 Subsidiaries of National Environmental Service Co.
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None.
13
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F-2
Consolidated Balance Sheet as of December 31, 1997 F-3
Consolidated Statements of Income for the Years Ended
December 31, 1997 and 1996 F-4
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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, 1997 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, 1997 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 LLP
Tulsa, Oklahoma
March 13, 1998
F-2
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED BALANCE SHEET
December 31, 1997
(In Thousands of Dollars)
ASSETS
------
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash $ 90
Accounts receivable:
Trade, net of allowance for doubtful accounts of $52 5,015
Refundable income tax 46
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,066
Materials and supplies 946
Prepaid expenses 82
-------
Total current assets 8,245
-------
Property and equipment, at cost:
Land 50
Buildings and improvements 344
Vehicles 1,916
Testing, drilling and other equipment 262
Furniture, fixtures and other 710
-------
3,282
Less accumulated depreciation 1,438
-------
Property and equipment, net 1,844
-------
Other 22
-------
Total assets $10,111
=======
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Current liabilities:
Current maturities of long-term obligations $ 2,870
Notes payable to related parties 31
Accounts payable 1,827
Accrued liabilities 583
-------
Total current liabilities 5,311
-------
Long-term notes payable 588
-------
Deferred income taxes 113
-------
Commitments and contingencies
Shareholders' equity:
Preferred Stock; 1,000,000 shares authorized; none issued
Common Stock; par value $.01; authorized 20,000,000 shares;
issued 7,251,143 shares 73
Additional paid-in capital 3,234
Retained earnings 840
Common stock in Treasury, at cost, 12,376 shares (48)
-------
Total shareholders' equity 4,099
-------
Total liabilities and shareholders' equity $10,111
=======
</TABLE>
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, 1997 and 1996
(In Thousands of Dollars except per share amounts)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenue:
Site assessments $ 576 $ 1,549
Cathodic protection 3,564 2,398
Fueling Systems 9,569 5,300
Remediation 776 720
Other 261 294
------- -------
Total revenue 14,746 10,261
Costs and expenses 10,129 7,833
Selling, general and
administrative expenses 3,215 2,775
------- -------
Income (loss) from operations 1,402 (347)
Other income (expense):
Interest (308) (238)
Other income 110 54
------- -------
Income (loss) before income taxes 1,204 (531)
------- -------
Provision (benefit) for taxes on income
Current 361 (196)
Deferred 97 36
------- -------
458 (160)
------- -------
Net income (loss) $ 746 $ (371)
======= =======
Basic net income (loss) per share $ 0.12 $ (0.06)
======= =======
Diluted net income (loss) per share $ 0.11 $ (0.06)
======= =======
</TABLE>
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, 1997 and 1996
(In Thousands of Dollars)
<TABLE>
<CAPTION> Additional
Common Common paid-in Retained Treasury
stock shares stock issued capital earnings shares Total
-------------------------- ------------ ---------- -------- -------- --------
Issued In Treasury
------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 53 1,746 94 (76) 1,822
Shares sold 1,450,000 15 1,488 1,503
Shares issued
employee awards (16,840) 28 28
Net income (loss) 746 746
--------- ------ ------ ------ ------ ----- ------
Balance at Dec 31, 1997 7,251,143 12,376 $ 73 $3,234 $ 849 $ (48) $4,099
========= ====== ====== ====== ===== ===== ======
</TABLE>
The accompanying notes are an integral part of the financial
statements.
F-5
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 and 1996
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1997 1996
----------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ 746 $ (371)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 317 318
Deferred taxes 97 (36)
Stock issued as employee compensation 28 -
Change in:
Accounts receivable (1,696) (458)
Costs and estimated earnings in excess
of billings on uncompleted contracts (1,437) (90)
Materials and supplies (321) (181)
Prepaid expenses (49) 71
Accounts payable 465 162
Billings in excess of costs and estimated
earnings on uncompleted contracts ( 68) 68
Accrued liabilities 422 (23)
Other - (23)
------- -------
Net cash used in operating activities (1,496) (563)
------- -------
Investing activities:
Acquisition of business, net of cash acquired - (240)
Purchases of property and equipment (556) (190)
Proceeds from sales of property and equipment 5 41
------- -------
Net cash used in investing activities (551) (389)
------- -------
Financing activities:
Proceeds from issuance of common stock 1,502 -
Proceeds from notes payable and long-term
obligations 4,560 3,161
Increase (decrease) in notes payable to related parties (257) 289
Principal payments on notes payable and
long-term obligations (3,787) (2,166)
Dividends paid - (173)
Purchase of common shares - (49)
------- -------
Net cash provided by financing
activities 2,018 1,062
------- -------
Increase (decrease) in cash (29) 110
Cash, beginning of year 119 9
------- -------
Cash, end of year $ 90 $ 119
======= =======
Cash paid during the year for interest $ 304 $ 238
======= =======
Supplemental disclosure of non-cash investing activities:
Acquisition of business for common stock $ 0 $ 45
======= =======
</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 - In the fourth quarter of 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" (see Note 10). SFAS 128 replaced primary earnings per share ("EPS")
with basic EPS and fully diluted EPS with diluted EPS. Basic EPS is
calculated by dividing net earnings available to common shares by the
weighted average common shares outstanding. Diluted EPS is calculated
similarly, except that it includes the dilutive effect of the assumed
exercise of all dilutive potential common shares outstanding. SFAS 128 also
requires previously reported EPS to be restated. The adoption of SFAS 128
did not have a material effect on the calculation of EPS.
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, 1997 and 1996,
deferred taxes were recorded primarily for temporary differences related to
depreciation of fixed assets.
FINANCIAL INSTRUMENTS - The Company's financial instruments consist of
trade accounts receivable, trade accounts payable, short-term and long-term
debt. The carrying amounts of these financial instruments approximate fair
value at December 31, 1997. The fair value of debt is estimated based on
current rates offered for similar debt.
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 2% and 14%
of sales during fiscal 1997 and 1996, respectively. One commercial customer
accounted for 14% of sales in 1997.
F-7
<PAGE>
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 principles 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 the financial statements and reported amounts of
revenue and expense during the reporting period. Actual results could
differ from those estimates.
NEW ACCOUNTING STANDARDS - The Company will adopt SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" during 1998. The Company is evaluating
the impact of these statements on its consolidated financial statements.
ACQUISITIONS - 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.
EMPLOYEE STOCK OPTIONS - When the exercise price of employee stock options
equals or exceeds the market value of the stock at the date of grant, the
company recognizes no compensation expense.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of unpaid billings for long-term
percentage of 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, 1997, total
$521,000, for which all of the related contracts were completed. Retainage
receivable at December 31, 1997, totaled $250,000.
Accounts receivable at December 31, 1997, include amounts subject to
claims of $461,000 arising from disputes. In the opinion of the Company's
legal counsels, the Company has valid claims against the counterparties.
3. UNCOMPLETED CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts are
summarized as follows (in thousands):
F-8
<PAGE>
<TABLE>
<CAPTION>
1997
------
<S> <C>
Costs incurred on uncompleted contracts $2,841
Estimated earnings recognized 1,086
------
3,927
Billings to date 1,861
------
$2,066
======
Included in the accompanying balance sheet under the following caption:
Costs and estimated earnings in excess of
billings on uncompleted contracts $2,066
======
</TABLE>
4. NOTES PAYABLE
Notes payable at December 31, 1997, consist of the following (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Revolving line of credit of $3,000,000 bearing interest at the prime rate
published in The Wall Street Journal plus 1.5% floating ( 10.0% at
-------------------
December 31, 1997), payable on July 31, 1998, with interest payable
monthly. The line is collateralized by accounts receivable,
inventory, and equipment. $2,650
Note payable to a bank bearing interest at the prime rate published in
The Wall Street Journal plus 1.5% floating (10.0% at December 31,
-------------------
1997), payable in monthly installments of $10,624
including interest with the final installment due July 2000. The note
is collateralized by real estate, receivables,
inventory, and equipment. 466
Notes payable bearing interest at rates from 5.9% to 10%, payable in
monthly installments aggregating $13,313 including interest with
various maturity dates through January 2001. The notes are
collateralized by vehicles. 342
-------
$ 3,458
Less current portion (2,870)
-------
Total long-term notes payable $ 588
=======
</TABLE>
Maturities of long-term debt over the next five years are as follows:
1998 - $2,870,000, 1999 - $224,000, 2000 - $358,000, 2001 - $6,000.
The Company extended its Revolving line of credit in April 1997, and
the extended loan maturity was May 31, 1997. The amount of the line was
decreased from $2.1 million to $2.0 million pending the transfer of the
Company's banking relationships from Boatmen's National Bank of Oklahoma to
Bank of Oklahoma. The interest rate on the loan during the Boatmen's
extension was national prime plus 3 percentage points. On July 15, 1997,
the Company executed loan documents and transferred its line of credit loan
and various equipment loans to the Bank of Oklahoma. The line of credit was
increased to $2.5 million with an interest rate of Wall Street Journal
-------------------
prime plus 1.5 percentage points. The Company used $2.028 million of the
new line to payoff the line of credit at Boatmen's. The line of credit was
increased to $3.0 million on December 2, 1997. All other terms and
conditions remained unchanged. Various equipment loans at Boatmen's
totaling $391,000 were consolidated into a Bank of Oklahoma $500,000 loan
on equipment with an interest rate of Wall Street
-----------
F-9
<PAGE>
Journal prime plus 1.5%. The loan is amortized on a five year term with
-------
monthly payments. A balloon payment at maturity is required on July 31,
2000. The monthly payment is $10,624.
The Revolving line of credit and note payable to a bank contain
certain restrictive covenants. The Company is restricted from paying
dividends and is limited as to the incurrence of additional debt and as to
capital expenditures and other acquisitions. In addition, the Company must
maintain minimum leverage and current ratios. The Company's president and
executive vice president have guaranteed the repayment of the Revolving
line of credit and note payable to a bank.
5. COMMITMENTS AND CONTINGENCIES
Total rent expense for the years ended December 31, 1997 and 1996, was
$165,000 and $125,000, respectively. Rental commitments under noncancelable
leases are $48,000 in 1998 and $21,000 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 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 573,876
shares. At December 31, 1997, options to purchase 238,000 common shares at
$3.00 per share are outstanding. A total of 75,200 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, 1997.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 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 SFAS 123, the Company's net income and EPS would have been reduced to
the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net income (loss):
As reported $ 746,000 $(371,000)
Pro Forma 625,000 (451,000)
Basic EPS:
As reported $ 0.12 $ (0.06)
Pro Forma 0.10 (0.08)
Diluted EPS:
As reported $ 0.11 $ (0.06)
Pro Forma $ 0.09 $ (0.08)
</TABLE>
F-10
<PAGE>
A summary of the status of the Company's stock options at December 31, 1997
and 1996, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------
Wtd. Avg. Wtd. Avg.
Shares Exer. Price Shares Exer. Price
-------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 238,000 $3.00 318,000 $3.00
Granted 40,000 $3.00 20,000 $3.00
Forfeited (40,000) $3.00 (100,000) $3.00
-------------------------------------------------------
Outstanding at end of year 238,000 $3.00 238,000 $3.00
Exercisable at end of year 75,200 $3.00 43,600 $3.00
=======================================================
Weighted average fair value of options granted $2.34 $1.38
===== =====
</TABLE>
Weighted average remaining contractual life 7.5 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 1997 and 1996, respectively: risk
free interests rates of 6.37% and 6.89%; expected dividend yields of 0%;
expected lives of 10 years in 1997 and 1996; and expected volatility of
107% and 110%.
At December 31, 1997 and 1996, 723,876 and 577,192 shares of common
stock were reserved for the exercise of stock awards of which 485,876 and
339,192 shares were available for future grants.
7. SHAREHOLDERS' EQUITY
The Company secured $1,000,000 from a private placement of one million
shares of common stock during the second quarter of 1997. As part of the
private placement, the Company granted options to purchase 530,000 shares
of common stock at $1.50 per share exercisable at any time prior to April
30, 1999. The Company secured $540,000 when options for 450,000 shares were
exercised at $1.20 per share (adjusted from $1.50) on December 8, 1998.
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
The tax effects of temporary differences that give rise to the
deferred tax assets and liabilities at December 31, 1997, are as follows:
Deferred tax assets:
Allowance for doubtful accounts $19
Other 17
------
Total deferred tax assets 36
Deferred tax liability:
Financial basis in excess of tax basis of fixed assets (149)
------
Net deferred tax liability $(113)
======
F-11
<PAGE>
The following table summarizes the significant differences between the
U.S. Federal statutory tax rate and the Company's effective tax rate for
financial statement purposes.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory tax rate 34.0% 34.0%
State income taxes, net 2.4% -
Other 1.6% (3.9)
38.0% 30.1%
==== ====
</TABLE>
9. RELATED PARTIES
The Company purchases laboratory analysis services from Lab One
Analytical, Inc. ("Lab One"), a company affiliated through common
ownership. For the years ended December 31, 1997 and 1996, purchases of
these services amounted to $217,000 and $431,000, respectively included in
costs and expenses. The Company acquired Lab One subsequent to December 31,
1997. See Note 11.
The Company leases office space from a partnership owned by the
Company's two principal shareholders. Payments under this lease amounted to
$88,000 in 1997 and $77,000 in 1996 included in selling, general, and
administrative expenses. The Coompany acquired the office space subsequent
to December 31, 1997. See Note 11.
In 1996, the Company borrowed $400,000 from its two principal
shareholders and repaid $111,000. In 1997, the Company repaid notes payable
of $257,000 to the two principal shareholders.
During 1997 and 1996, the Company's revenues included sales of $86,000
and $234,000 respectively to entities with which two Directors of the
Company are affiliated.
10. NET INCOME PER SHARE
Basic and diluted EPS for the years ended December 31, 1997 and 1996,
were computed as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Basic EPS Computation:
Net income (loss) available to common
stockholders $ 746 $ (371)
Weighted average number of common
shares outstanding 6,486 5,775
------ ------
Basic EPS $0.12 $(0.06)
====== ======
Diluted EPS Computation:
Net income (loss) available to common
stockholders $ 746 $(371)
Average number of common shares
outstanding 6,486 5,775
Incremental number of shares for
assumed exercise of options 124 -
------ ------
Total shares 6,610 5,775
------ ------
Diluted EPS $ 0.11 $(0.06)
====== ======
</TABLE>
F-12
<PAGE>
Outstanding stock options to purchase common stock with an exercise
price greater than the average market price of common stock were not
included in the computation of diluted EPS for 1996. The balance of such
options was 238,000 with an exercise price of $3.00 per share.
11. SUBSEQUENT EVENTS
The Company acquired Lab One on January 30, 1998, for $75,000 cash and
225,000 shares of the Company's common stock, a total purchase price of
$750,000.
On February 27, 1998, the Company acquired the office building,
warehouse and lot on which the Company's corporate offices are located. The
purchase price was $600,000, and the Company secured a loan from Citizens'
Bank of Tulsa for $480,000 secured by a mortgage on the acquired real
estate. The loan has a term of 7 years. The interest rate floats at 0.5%
above Low New York Prime rate, and the current rate is 9.0% per annum. The
Company paid 0.5% origination fee.
Both Lab One and the real estate were purchased from Eddy Patterson
and Albert McCutchan, the President and Executive Vice President of the
Company following the completion of independent appraisals of the entities
and the review and unanimous consent of the outside directors of the
Company to the transactions and terms and conditions thereof.
Due to common ownership, these transactions will be accounted for in a
manner similar to the pooling of interests method in 1998. The combined
unaudited revenues and expenses of the Company and the acquired entities
during 1997 were $14,746,000 and $13,220,000, respectively. All
transactions were with the Company.
In January 1998, the Company sold 400,000 shares of common stock at
$2.00 per share and warrants to purchase 50,000 shares of common stock at
$2.00 per share under a private placement arrangement with Peacock, Hislop,
Staley & Given, Inc. Gross proceeds totaled $800,000. Net proceeds totaled
$744,000.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected comparative fourth quarter data is as follows:
<TABLE>
<CAPTION>
1997 1996
----- ------
<S> <C> <C>
Revenues $4,552 $2,774
Costs and expenses 4,247 2,938
------ ------
Operating income (loss) 305 (164)
Interest expense 98 79
------ ------
Income (loss) before income taxes 207 (243)
Provision for income taxes (benefit) 113 (57)
------ ------
Net income (loss) $ 94 $(186)
------ ------
Basic net income (loss) per common share $ 0.01 $(0.03)
------ ------
Diluted net income (loss) per common share $ 0.01 $(0.03)
====== ======
</TABLE>
In the fourth quarter of 1996, 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-13
<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 20, 1998.
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.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Eddy L. Patterson President, Chief Executive Officer March 20, 1998
- ------------------------------- and Director
Eddy L. Patterson
/s/ Albert A. McCutchan Executive Vice President and March 20, 1998
- ------------------------------- Director
Albert A. McCutchan
/s/Larry G. Johnson Secretary, Treasurer and Chief March 20, 1998
- ------------------------------- Financial Officer
Larry G. Johnson
/s/ Robert Watson Controller (Principal Accounting March 20, 1998
- ------------------------------- Officer)
Robert Watson
/s/ E. R. Foraker Director March 20, 1998
- -------------------------------
E.R. Foraker
/s/ Jerry Danielson Director March 20, 1998
- -------------------------------
Jerry Danielson
/s/ W. F. Simpson Director March 20, 1998
- -------------------------------
W. F. Simpson
</TABLE>
F-14
<PAGE>
EXHIBITS
10.11 Private Placement Agency Agreement between National
Environmental Service Co. and Peacock, Hislop, Staley & Given,
Inc. dated January 15, 1998; Amendment to the Placement Agency
Agreement dated January 15, 1998; and First Supplement to the
Private Placement Memorandum dated Janaury 12, 1998.
10.12 National Environmental Service Co. Common Stock Purchase Warrant
to Peacock, Hislop, Staley & Given, Inc. dated January 21, 1998.
10.13 Purchase and Sale Agreement for sale of real estate dated
January 30, 1998 between National Environmental Service Co. and
McCutchan and Patterson, an Oklahoma general partnership.
10.14 Citizens' Bank of Tulsa Credit Agreement dated February 27,
1998.
10.15 Agreement and Plan of Merger with respect to Lab One Analytical,
Inc. dated January 30, 1998.
21.1 Subsidiaries of National Environmental Service Co.
27.1 Financial Data Schedule
<PAGE>
Exhibit 10.11
PRIVATE PLACEMENT AGENCY AGREEMENT
This AGREEMENT, made effective as of the 30th day of December 1997, by and
between NATIONAL ENVIRONMENTAL SERVICE CO., an Oklahoma corporation (the
"Company"), and PEACOCK, HISLOP, STALEY & GIVEN, INC., an Arizona corporation
(the "Agent"), as selling agent.
1. Description of the Offering. The Company proposes to offer and sell to
Accredited "accredited Investors investors" within the meaning as such term is
defined in Rule 501(a) of Regulation D of the Securities Act of 1933, as
amended, through the Agent hereby appointed as exclusive selling agent, on a
"best efforts" basis (the "Offering"), up to 300,000 shares of the Company's
Common Stock (the "Shares"), at a price of $2.00 per share. The Offering shall
terminate the earlier of (i) the sale of 300,000 Shares totaling $600,000, (ii)
January 15, 1998 (or if extended March 16, 1998), or (iii) an earlier
termination date as described herein. (the "Offering Period"). The Offering
Period may be extended for up to 60 days (through March 16, 1998) with the
agreement of the Company and the Agent.
All terms used herein, unless specifically defined herein, shall have the
meanings as defined in the Confidential Private Placement Memorandum, dated
December 1930, 1997 and any supplements thereto (collectively, as supplemented,
the "Memorandum") and various documents to be executed on closing of the
purchase of the Shares (the "Purchase Documents").
2. Representations, Warranties and Covenants of the Company. The Company
represents, warrants and covenants to the Agent that:
(a) The offer, offer for sale, and sale of the Shares have not been and
will not be registered with the Securities and Exchange Commission (the "SEC").
The Shares shall be offered and sold pursuant to the exemption from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended, and the rules and regulations of the SEC thereunder (collectively,
called the "Act"), provided by Sections 4(2) and 4(6) thereof. The Company will
conduct the Offering in compliance with the requirements of Rule 506 of
Regulation D ("Rule 506"), promulgated under the Act and with all other
securities laws and rules and regulations (the "Rules and Regulations")
applicable to the Company and to the Offering. The Company will, in a timely
manner, file on Form D appropriate notices of the Offering with the SEC and will
make any required filings with any applicable state securities regulatory
authorities. The issuance, offer, sale and delivery of the Shares, in the
manner and circumstances contemplated by the Memorandum and this Agreement, is
an exempt transaction under the Act and does not require the registration of the
Shares under the Act, as amended.
(b) The Memorandum, with respect to the Shares, has been prepared by the
Company in conformity with the applicable requirements of the Act.
(c) Neither the SEC nor any state securities commission has issued any
order
<PAGE>
preventing or suspending the Offering contemplated herein or use of the
Memorandum, as amended or supplemented, relating to the proposed Offering of the
Shares nor instituted, or to the best knowledge of the Company contemplated
instituting, proceedings for that purpose. Neither the Memorandum (including the
exhibits, financial statements and schedules thereto), nor any amendment or
supplement thereto, to be utilized in connection with the sale of the Shares,
contains or will contain, as the case may be, any untrue statement of any
material fact or omits or will omit to state any material fact necessary to be
stated therein in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Notwithstanding the
foregoing, the Company makes no representations or warranties as to the
information provided in writing to the Company by the Agent expressly for use in
the Memorandum.
(d) Neither the Company nor any of its subsidiaries is in violation of or
default under any provision of its articles of incorporation or bylaws or any of
its agreements, leases, licenses, contracts, franchises, mortgages, permits,
deeds of trust, indentures or other instruments or obligations to which it is a
party or by which it or any of its properties is bound or may be affected
(collectively, "Contracts"), which failure or default would materially adversely
affect the business, properties, operations, financial condition or earnings of
the Company and its subsidiaries taken as a whole ("Material Adverse Effect").
The execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated herein, and in the Memorandum do not and will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute, either with or without notice or the passage of
time or both, a default under, any Contract to which the Company or any of its
subsidiaries is a party or by which the Company, any of its subsidiaries or any
of their respective properties, is bound, or violate any statute, rule or
regulation applicable to the Company or any of its subsidiaries or violate any
order, judgment or decree of any court or of any regulatory, administrative or
governmental body or agency or arbitral forum having jurisdiction over the
Company, any of its subsidiaries or any of their respective property, or result
in the creation or imposition of any lien, charge or encumbrance upon any of the
assets of the Company or any of its subsidiaries, or violate any of the
provisions of the articles of incorporation or bylaws of the Company or any of
its subsidiaries. No other consent, approval, authorization or action is
required for the consummation of the transactions herein contemplated other than
such as has been obtained.
(e) The Company shall provide to the Agent and to each purchaser, and his
representatives, if any, such information, documents and instruments as may be
reasonably requested and are required to be provided pursuant to Rule 506 and
the laws of any state in which the offer or sale of securities has been approved
by the Company and the Agent and to otherwise comply with such requirements.
(f) The Company:
(i) has not offered for sale or sold any Shares or other securities of
the Company, the offer for sale or sale of which would be "integrated" under the
standards of existing published rules and regulations under the Act with the
offers for sale or sales of the Shares proposed to be made by Agent pursuant
hereto in determining whether a public
<PAGE>
offering of the Shares has been made so as to render the exemption provided by
Section 4(2) of the Act or Rule 506 unavailable with respect to the Offering of
the Shares hereunder by the Agent; and
(ii) Shall not offer for sale or sell any Shares or other securities
except and to the extent that any such offer for sale or sale shall not render
unavailable the exemptions from registration and qualification requirements of
applicable federal and state securities laws relied upon with respect to the
Offering and sale of the Shares contemplated by this Agreement.
(g) The Company and each of its subsidiaries is duly authorized to transact
the business in which it is engaged and in which it proposes to engage as
described in the Memorandum.
(h) Since the respective dates as of which information is given in the
Memorandum and other than as therein contemplated, neither the Company nor any
of its subsidiaries has incurred, nor during the period of the Offering will it
incur, any material liabilities or obligations contingent or otherwise, except
in the ordinary course of business, or as set forth in the Memorandum and there
has not been, and during the period of the Offering there will not be, any
material adverse change in the business, assets, operations or condition of the
Company, financial or otherwise.
(i) The Company will notify the Agent immediately and confirm the notice in
writing of the issuance by the SEC or by any state securities commission of any
stop order suspending the effectiveness of any qualification of the Shares for
sale, suspending the sale of the Shares or the use of the Memorandum, or of the
initiation of any proceedings for any such purpose. The Company will use its
best efforts to prevent the issuance of any such stop order and, if any such
stop order shall at any time be issued, to obtain the lifting thereof at the
earliest possible moment.
(j) The Company's Board of Directors consists of those persons listed in
the Memorandum. Except as disclosed in the Memorandum, none of such persons is
employed by the Company, nor is any of them affiliated with the Company, except
for service on such Board of Directors.
(k) Other than as disclosed in the Memorandum, neither the Company, nor to
its knowledge, after due and diligent inquiry, any person other than the Agent,
has made any representation, promise or warranty, whether verbal or in writing
to anyone, whether an existing creditor or shareholder or not, that any of the
Shares will be reserved for or directed to them during the proposed Offering.
(l) Each of the Company and its subsidiaries has been incorporated and is
validly existing and in good standing under the laws of its jurisdiction of
incorporation. Each of the Company and its subsidiaries is duly qualified to
transact business in all jurisdictions in which the conduct of its business
requires such qualification where the failure to do so would have a Material
Adverse Effect. The Company has fully disclosed to the Agent the existence of
each of its subsidiaries.
<PAGE>
(m) Each of the Company and its subsidiaries possesses all requisite
licenses, permits and other authorities which may be required to conduct its
business, each of which remains in full force and effect in accordance with its
terms, where the failure to possess the same would have a Material Adverse
Effect. The government authority which issued each such license has not denied
or threatened to revoke or suspend any such license, no investigation or
proceeding is pending or threatened with respect to any such license and the
Company has disclosed to the Agent and in the Memorandum any current unresolved
dispute or disagreement between the Company or any subsidiary and any such
governmental authority regarding the business or financial condition of the
Company or any subsidiary or the Company's or any subsidiary's alleged lack of
compliance with applicable laws, rules or regulations, which dispute or
disagreement if resolved adversely to the Company would have a Material Adverse
Effect.
(n) The Company and each of its subsidiaries is conducting business in
compliance with all applicable federal, state and local laws, rules and
regulations, including, without limitation, ERISA, OSHA, environmental laws,
rules and regulations, and all federal laws, except where the failure to so
comply would not have a Material Adverse Effect on the business or financial
condition of the Company.
(o) All representations, warranties and covenants of the Company made to
investors in the Subscription Agreement relating to the Shares are hereby made
to the Agent and are incorporated herein by reference.
(p) The Company has the legal right, corporate power and authority to enter
into this Agreement on behalf of itself and to perform as contemplated thereby.
This Agreement has been duly authorized, executed and delivered by the Company,
and is legally binding upon and enforceable against the Company in accordance
with its terms. All necessary and proper corporate proceedings have been or will
be taken to validly authorize the Shares and no further approval or authority of
the stockholders of the Company is required for the making and sale of the
Shares as contemplated herein, and in the Memorandum.
(q) The Shares conform with the statements concerning them in the
Memorandum in all material respects, and there are no Contracts or other
documents required to be described in the Memorandum or to be included as
exhibits to the Memorandum in order to make the information therein not
misleading which have not been described or included as required.
(r) The consolidated financial statements of the Company, together with
related Shares and schedules as set forth in the Memorandum, present fairly in
all material respects the financial position and the results of operations of
the Company and its subsidiaries, as at the dates and for the periods indicated.
Such financial statements, schedules and related Shares have been prepared in
accordance with generally accepted accounting principles, consistently applied
throughout the periods involved, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary and
selected financial and statistical data and schedules included in the Memorandum
present fairly the information shown therein and have been compiled on a
<PAGE>
basis consistent with the financial statements presented therein.
(s) There is no action, suit or proceeding pending or, to the best
knowledge of the Company after due inquiry, threatened against the Company
before any court or regulatory, governmental or administrative agency or body,
or arbitral forum, domestic or foreign, which might result in any Material
Adverse Effect upon the business or condition (financial or otherwise) or
results of operations or prospects for the future of the Company, except as set
forth in the Memorandum. Neither the Company nor any of its subsidiaries is
subject to the provisions of any injunction, judgment, decree or order of any
court, regulatory body, administrative agency or other governmental body or
arbitral forum that would have a Material Adverse Effect upon the business of
the Company. There are no labor disputes involving the Company that exist or are
imminent which could have a Material Adverse Effect upon the conduct of the
business, property, operations, financial condition or earnings of the Company.
(t) The Company has good and marketable title to all of the properties and
assets reflected as owned by it in either the financial statements or as
described in the Memorandum, and such properties and assets are subject to no
lien, mortgage, security interest, pledge or encumbrance (other than easements,
if any) of any kind, except those (i) reflected in such financial statements or
as described in the Memorandum; and (ii) that, individually or in the aggregate,
would not have a Material Adverse Effect on the Company;
(u) Each of the Company and its subsidiaries has filed all federal, state,
local and foreign income tax returns which have been required to be filed and
has paid all taxes indicated by said returns and has paid all tax assessments
against it where the failure to file or pay would have a Material Adverse
Effect. There is no income, sales, use, transfer or other tax deficiency or
assessment which has been or might reasonably be expected to be asserted or
threatened against the Company or its subsidiaries which could have a Material
Adverse Effect upon the business operations or property or business prospects of
the Company. Each of the Company and its subsidiaries has paid all sales, use,
transfer and other taxes applicable to it and its business and operations.
(v) Any material transactions among the Company and the officers,
directors, and affiliates of the Company have been accurately disclosed in the
Memorandum to the extent necessary to make the statements therein, in light of
the circumstances under which the Memorandum is to be used, not misleading.
(w) The Company maintains insurance of the types and in the amounts (with
deductibles and retentions) which it deems adequate for its business and which
is customary for companies in its industry, all of which insurance is in full
force and effect.
(x) Tullius Taylor Sartain & Sartain, who have certified the financial
statements included in the Memorandum, are independent public accountants within
the meaning of the Act.
(y) The Company is in material compliance with all reporting requirements
<PAGE>
under Section 12(b), Section 12(g) or Section 15(d), as applicable, of the
Securities and Exchange Act of 1934, as amended ("Exchange Act"). The Company's
Common Stock is traded on the NASDAQ SmallCap Market under the symbol "NESC."
The Company shall, for a period of at least three years following the closing of
this Offering continue to remain in material compliance with all of its
reporting requirements under the Exchange Act and shall continue to cause its
Common Stock to be traded on the NASDAQ SmallCap or National Markets or listed
on a nationally recognized exchange.
3. Representations, Warranties and Covenants of the Agent. Agent represents,
warrants and covenants to the Company that:
(a) The Agent is a corporation duly organized, validly existing and in
good standing under the laws of the State of Arizona, with all requisite power
and authority to enter into this Agreement and to carry out its obligations
hereunder.
(b) This Agreement has been duly authorized, executed and delivered by the
Agent and is a valid and binding agreement on the part of the Agent, except as
its enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or other similar laws from time to time in effect
affecting creditors' rights generally or by principles governing the
availability of equitable remedies.
(c) The consummation of the transaction contemplated herein and those
contemplated by the Memorandum will not result in a material breach of any of
the terms or conditions of or constitute a default under any indenture,
agreement or other instrument to which the Agent is a party which default would
have a Material Adverse Effect upon the Agent or its business, or, assuming the
accuracy of the representations and warranties of the Company made herein,
violate any law or any order directed to the Agent of any court or any federal
or state regulatory body or administrative agency having jurisdiction over the
Agent or its property.
(d) The Agent is duly registered pursuant to the provisions of the
Securities Exchange Act of 1934, as amended, as a broker-dealer and is a member
in good standing of the National Association of Securities Dealers, Inc.
("NASD") and is duly registered as a broker dealer in those states in which it
is required to be so registered in order to carry out the Offering contemplated
by the Memorandum.
(e) The Agent will conduct the Offering in compliance with the requirements
of Rule 506 and in this regard it will:
(i) During the course of the Offering, make every reasonable effort to
avoid making representations other than those set forth in the Memorandum, and
to the extent any representations other than those set forth in the Memorandum
are made, not to make any untrue statements of a material fact or omit to state
a material fact required to be stated or necessary to make any statement made
not misleading concerning the Offering or any matters set forth in or
contemplated by the Memorandum;
(ii) Not offer, offer for sale or sell the Shares by any means
prohibited
<PAGE>
by Rule 506;
(iii) Limit its offer and sale of the Shares to persons who it has
reasonable grounds to believe and, in fact, believes are "Accredited accredited
Investorsinvestors," and maintain for the Agent's benefit and for the benefit of
the Company, memoranda and other appropriate records substantiating the
foregoing;
(iv) Prior to the sale of any of the Shares, have reasonable grounds
to believe and, in fact, believe that each subscriber alone or together with his
duly appointed purchaser representative, if any, meets the suitability standards
set forth in the Memorandum and it will prepare and maintain for its benefit and
for the benefit of the Company, file memoranda and other appropriate records
substantiating the foregoing, copies of which shall be delivered to the Company
promptly upon receipt by the Agent;
(v) Distribute no sales materials to prospective investors, other than
the Memorandum, without the express written permission of the Company and
refrain from providing any such permitted sales materials to any purchaser of
the Shares unless such materials are accompanied or preceded by the Memorandum
and are permitted for use in connection with the Offering under applicable state
blue sky or securities laws and the Act;
(vi) Provide each investor with a copy of the Memorandum during the
course of the Offering and within a reasonable time prior to. such investor
executing a Subscription Agreement; and
(vii) Until the Closing Date (as defined below), if any event
affecting the Company should occur which the Company, or its counsel, or the
Agent or its counsel believe should be set forth in a supplement or amendment to
the Memorandum, promptly distribute such supplement or amendment to the
Memorandum to persons who have previously received a copy of the Memorandum from
the Agent and who continue to be interested in the Company, and include such
supplement or amendment in all further deliveries of the Memorandum. The Company
shall, at its own expense, promptly prepare and furnish to the Agent a
reasonable number of copies of each such supplement or amendment to the
Memorandum for such distribution.
4. Further Undertakings of the Company. The Company represents, covenants and
warrants that:
(a) Except as set forth or otherwise contemplated in the Memorandum, the
Company hereby covenants to the Agent that offers for sale or sales of Shares
shall not be made by the Company, by any subsidiary or by any employee or agent
of the Company or any subsidiary during the Offering without the prior approval
of the Agent.
(b) Until the Closing Date (as defined below), if any event affecting the
Company, shall occur which, in the Company's or the Agent's opinion should be
set forth in a supplement or an amendment to the Memorandum, the Company will
forthwith, at its own expense, prepare and furnish to the Agent a reasonable
number of copies of a
<PAGE>
supplement or amendment to the Memorandum so that it, as so supplemented or
amended, will not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading. The
Company shall not prepare or file any such amendment or supplement of which the
Agent shall not previously have been advised and furnished with a copy or to
which the Agent shall have reasonably objected in writing or which is not in
compliance with the Act.
(c) The Company will cause to be prepared, executed and timely filed with
respect to the Offering, appropriate notices on Form D with the SEC, will
promptly furnish the Agent and its counsel with a true and correct copy of each
such notice and will take all action necessary or appropriate to comply with the
laws, rules or regulations of each state in which the Company has authorized the
Shares to be offered or sold.
(d) The Company will apply the net proceeds from the sale of the Shares
substantially in accordance with the use of proceeds section of the Memorandum.
(e) Piggyback Registration of Common Stock.
(i) If the Company proposes to register any of its securities under
the Securities Act, on any registration statement, whether or not for its own
account (other than by a registration statement on Form S-8 or other form which
does not include substantially the same information as would be required in a
form for the general registration of securities, would not otherwise be
available for the Shares or relates to any employee benefit plan or
reorganization of the Company), it shall as expeditiously as possible give
written notice to all persons purchasing Shares in the Offering ("Holders") of
such Holders' "piggyback registration rights" as set forth in this Section 4(e).
Upon the written request of any Holder made within 20 days after receipt of any
such notice, the Company shall (subject to the additional terms hereof) include
in the registration statement the Shares which the Company has been so requested
to register by the Holder thereof and the Company shall keep such registration
statement in effect and maintain compliance with each federal and state law or
regulation for the period necessary for such Holder to effect the proposed sale
or other disposition (but in no event for a period greater than 120 days).
(ii) If, at any time after giving written notice of its intention to
register Shares in a "piggyback registration" but prior to the effective date of
the related registration statement, the Company shall determine for any reason
not to register any of its securities, the Company shall give notice of such
determination to each Holder and, thereupon, shall be relieved of its obligation
to register any Shares in connection with such piggyback registration. All best
efforts obligations of the Company shall cease if the Company determines to
terminate prior to such effective date any registration pursuant to this Section
4(e).
(iii) If a piggyback registration involves an offering by or through
underwriters, all Holders requesting to have their Shares included in the
Company's registration statement must sell their Shares to the underwriters
selected by the Company on the same terms and conditions as apply to other
selling shareholders, and any Holder
<PAGE>
requesting to have its Shares included in such registration statement may elect
in writing, not later than three business days prior to the effectiveness of the
registration statement filed in connection with such registration, not to have
its Shares so included in connection with such registration.
(iv) If a piggyback registration involves an offering by or through
underwriters, the Company, except as otherwise provided herein, shall not be
required to include Shares therein if and to the extent the underwriter managing
the offering reasonably believes in good faith and advises each Holder
requesting to have Shares included in the Company's registration statement that
such inclusion would materially adversely affect such offering, provided that if
other selling shareholders who are employees, officers, directors or other
affiliates of the Company have requested registration of securities in the
proposed offering, the Company will reduce or eliminate such other selling
shareholders' securities before any reduction or elimination of Shares held by
Holders, and any such reduction or elimination (after taking into account the
effect of the preceding clause) shall be pro rata to all other holders of the
securities of the Company exercising registration rights similar to those set
forth herein in proportion to the respective number of Shares such holders have
requested to be registered.
(v) The Company shall pay all expenses in connection with the
registration of Shares other than underwriters' fees, discounts, concessions or
expenses, but including the fees of one attorney (as mutually agreed upon by the
Company and the Holders holding a majority of the Shares) to represent the
selling Holders. All fees and expenses (other than registration expenses
otherwise required to be paid) of any managing underwriter, any co-manager or
any independent underwriter or other independent price required under the rules
of NASD shall be paid for by such underwriters.
(vi) The Company's obligation to provide "piggyback registration" to
Holders of Shares under this Section 4(e) shall cease upon the Shares being
generally tradable by non-affiliates of the Company under Rule 144 as
promulgated under the Securities Act or any successor thereto.
(vii) (1) In connection with any registration statement relating to
disposition of Shares, the Company shall indemnify and hold harmless each Holder
and each underwriter of Shares and each person, if any, who controls such Holder
or underwriter (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable investigation, legal and
other expenses incurred in connection with, and any amount paid in settlement of
any action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Securities Act, the Exchange Act or other
federal or state law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto, or arise out of or are based upon any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; provided, however,
that such indemnity shall not inure
<PAGE>
to the benefit of any Holder or underwriter (or any person controlling such
Holder or underwriter within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) on account of any losses, claims, damages or
liabilities arising from the sale of the Shares if such untrue statement or
omission or alleged untrue statement or omission was made in such registration
statement, prospectus or preliminary prospectus, or such amendment or
supplement, in reliance upon and in conformity with information furnished in
writing to the Company by the Holder or underwriter specifically for use
therein. The Company shall also indemnify selling brokers, dealer managers and
similar securities industry professionals participating in the distribution,
their officers and directors and each person who controls such persons (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) to the same extent as provided above with respect to the indemnification of
the Holders if requested. This indemnity agreement shall be in addition to any
liability which the Company may otherwise have.
(2) In connection with each registration statement, each Holder
shall indemnify, to the same extent as the indemnification provided by the
Company in Section [need reference here]____(g)(i)4(e) (vii) (1), the Company,
its directors and each officer who signs the registration statement and each
person who controls the Company (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) but only insofar as such
losses, claims, damages and liabilities arise out of or are based upon any
untrue statement or omission or alleged untrue statement or omission which was
made in the registration statement, the prospectus or preliminary prospectus or
any amendment thereof or supplement thereto, in reliance upon and in conformity
with information furnished in writing by such Holder to the Company specifically
for use therein. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, to the same extent as provided
above, with respect to information so furnished in writing by such persons
specifically for inclusion in any prospectus, registration statement or
preliminary prospectus or any amendment thereof or supplement thereto.
(3) In connection with each registration statement relating to
the disposition of Shares if the indemnification provided for in subsection (a)
hereof is unavailable to an indemnified party thereunder in respect to any
losses, claims, damages or liabilities referred to therein, then the Company
shall in lieu of indemnifying such indemnified party, contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities. The amount to be contributed by the Company hereunder
shall be an amount which is in the same proportionate relationship to the total
amount of such losses, claims, damages or liabilities as the total net proceeds
from the offering (before deducting expenses) of the Shares bears to the total
price to the public (including underwriters' discounts) for the offering of the
Shares covered by such registration.
5. State Securities Filings. The Company further represents, warrants and
covenants that:
(a) It shall take all necessary action and file all necessary forms and
documents
<PAGE>
to be filed in connection with an offering exempt from registration pursuant to
the National Securities Markets Improvements Act of 1996 in the State of
Arizona, in each of the other states listed on Exhibit A hereto and in such
other states as the Agent and the Company mutually agree upon.
(b) In each jurisdiction where the Shares have been offered in an exempt
transaction as provided above, the Company will make and file such statements,
documents, materials and reports in each year and take all other actions as are
or may be required to be made or filed by the Company by the laws of each
jurisdiction.
(c) The Company will promptly provide to the Agent for delivery to all
purchasers and their representatives any additional information, documents and
instruments which the Agent or the Company deem necessary to comply with the
rules, regulations and judicial and administrative interpretations with respect
to compliance with such exemption from registration requirements in those states
where the Shares are to be offered or sold.
6. Appointment of the Agent and Nature of the Offering.
(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Company hereby
appoints the Agent as its exclusive agent to effect sales of the Shares during
the period prescribed in Section 6(b) and upon the terms and conditions set
forth in the Memorandum. The Agent hereby accepts such appointment and agrees,
as agent for the Company, to use its best efforts to find purchasers for the
Shares.
(b) The Offering shall commence on the date designated by the Agent and
shall continue until the earlier of (i) the sale of 300,000 Shares totaling
$600,000, (ii) January 15, 1998 (or if extended March 16, 1998), or (iii) an
earlier termination date as described herein (the "Offering Period"). The
Offering Period may be extended for up to 60 days with the agreement of the
Company and the Agent.
(c) Payment for Shares sold is to be made by the investors by certified or
bank cashier's check(s) drawn to the order of the Company, or by wire transfer
of funds as the investors shall elect, against delivery of Shares. Such payment
and delivery is to be made at the offices of the Agent set forth in Section 14
hereof at 10:00 A.M., Phoenix time, on the fifth business day after the sale of
such Shares or at such other time, date and place not later than seven business
days thereafter as the Agent and the Company shall agree upon. The time and date
after the termination of the Offering pursuant to Section 6(cb) on which the
final transfer of funds due the Company hereunder is being herein referred to as
the "Closing Date." The Shares shall be represented by certificates in
definitive form, and shall be made to the order of such holders as the Agent
requests in writing not later than the third full business day prior to the
Closing Date, and shall be made available for inspection by the Agent prior to
the Closing Date at the offices of the Agent Shared stated in Section 14. As
used herein, "business day" means a day other than (i) a Saturday or a Sunday or
(ii) a day on which banks in Arizona are authorized or obligated by law or
executive order to be closed.
<PAGE>
(d) Upon the successful consummation of the Offering, the Agent shall be
entitled to (i) a commission equal to five percent (5 %) of the gross amount
raised through the sale of the Shares and, in addition thereto, (ii)
reimbursement for all expenses incurred by the Agent in connection with the sale
of the Shares, including the fees and expenses of Agent's legal counsel incurred
in connection with this Agreement, the Purchase Documents and the Offering
(which shall be in addition to the commission set forth in the foregoing clause
(i)) and (iii) a warrant to purchase 50,000 shares of the Company's Common
Stock exercisable at a price of $2.00 per share for a period of five years. On
the Closing Date, the Agent shall deduct the commission and the expense
reimbursement from the proceeds received from the sale of the Shares prior to
transmitting payment to the Company. The Company shall remit any unpaid
commission or reimbursement due the Placement Agent no later than five days from
the Closing Date.
(e) The Agent has not assumed, will not assume nor will it be permitted to
assume any duties, responsibilities or obligations regarding the management,
operations or any of the business affairs of the Company after the Closing Date.
The Agent shall be held harmless by the Company from and against any claim,
suit, loss, damage, liability or action by or against the Company based upon or
arising out of the assertion that the Agent has any continuing duty or
obligations after the Closing Date to the Company, except the indemnification
obligations as set forth in Paragraph 11 of this Agreement.
7. Expenses of Sale. Subject to Section 6(ed) of this Agreement, the Company
will pay all reasonable costs, expenses and fees in connection with the Offering
or incident to the performance of the obligations of the Company hereunder
including, but not limited to, the fees and expenses of the Company, the fees
and expenses of the Company's counsel and accounting firm, the fees and expenses
of the Agent's counsel, the cost of qualifying the offer and sale of the Shares
in various states for an exemption from state registration requirements, the
cost of printing and delivering to, or as requested by, the Agent the Shares and
copies of the Memorandum and other documents related to the Offering, and any
transfer taxes imposed on the sale of the Shares. If the transactions
contemplated by this Agreement shall not be consummated because this Agreement
is terminated by the Agent pursuant to Section 8 or 12 hereof, because this
Agreement is terminated automatically pursuant to Section 6(b), hereof because
the Agent, despite its best efforts, was unable to sell the Shares, or because
of a decision by the Company to terminate or delay the Offering for any reason
or a failure, refusal or inability on the part of the Company to perform any
undertaking or satisfy any condition of this Agreement or to comply with any of
the terms hereof on its part to be performed, then in lieu of the foregoing
provisions in this Section 7 (and without prejudice to all other rights and
remedies which the Agent may have against the Company at law and in equity, and
which are in accordance with the NASD's Rules of Fair Practice) the Company
shall reimburse the Agent upon demand and on an accountable basis for all
reasonable out-of-pocket costs and expenses, including all fees and
disbursements of the Agent's counsel, actually incurred by the Agent in
connection with investigating, marketing and proposing to market the Shares or
in contemplation of performing its obligations hereunder.
8. Conditions to the Agent's Obligations. The Company's right to receive
payments and the obligations of the Agent hereunder shall be subject to the
accuracy of and
<PAGE>
compliance with, as of the date hereof and on the Closing Date, the
representations, covenants and warranties contained herein, to the performance
by the Company of its obligations hereunder required to be performed on or
before the Closing Date and to the following additional conditions:
(a) No stop order suspending the Offering contemplated herein or use of the
Memorandum, as amended or supplemented, shall have been issued and no
proceedings for that purpose shall have been taken or, to the best knowledge of
the Company, after due inquiry, shall be contemplated by the SEC or any state
securities commission.
(b) The Agent shall have received on the Closing Date the opinion of Conner
& Winters, counsel for the Company, in a form reasonably satisfactory to the
Agent. Such opinion shall be dated as of the Closing Date and addressed to the
Agent.
(c) The Agent shall have received on the Closing Date a certificate or
certificates of the Chief Executive Officer and the Chief Financial Officer of
the Company to the effect that, as of the Closing Date, each of them jointly and
severally represents as follows:
(i) No stop order suspending the Offering contemplated herein or use
of the Memorandum has been issued, and no proceedings for such purpose have been
taken or are, to the best of their knowledge, after due inquiry, contemplated or
threatened by the SEC or any state securities commission;
(ii) They do not know of any material investigation, litigation, or
proceeding instituted, threatened or contemplated against the Company which is
not disclosed in the Memorandum. The representations and warranties of the
Company contained in Section 2 hereof are true and correct in all material
respects as of the Closing Date as if such representations and warranties were
made as of such date;
(iii) They have carefully examined the Memorandum and, in their
opinion, at the time the Memorandum was distributed or used or at the Closing
Date and through the date the Offering is terminated, the statements contained
in the Memorandum were and are correct, in all material respects, and such
Memorandum does not omit to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading and, in
their opinion, no event has occurred which should be set forth in a supplement
to or an amendment of the Memorandum which has not been so set forth in such
supplement or amendment; and
(iv) The Company has performed all of its obligations pursuant to this
Agreement and the Purchase Agreement.
(d) The Company shall have furnished to the Agent such further certificates
and documents confirming the representations, warranties and covenants contained
herein and related matters as the Agent may reasonably have requested.
The opinions and letters described in this Agreement shall be addressed to
the
<PAGE>
Agent. The opinions, letters and certificates described in this Agreement shall
be deemed to be in compliance with the provisions hereof only if they are in all
respects satisfactory in form and substance to the Agent and to counsel for the
Agent.
If any of the conditions herein above provided for in this Section 8 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Agent hereunder may be terminated by the Agent by
notifying the Company of such termination in writing or by telegram at or prior
to the Closing Date. In such event, the Company and the Agent shall not be
under any obligation to each other (except to the extent provided in Sections 7
and 11 hereof).
9. Conditions of Company's Obligations. The obligations of the Company (other
than its obligations under Sections 7 and 11 hereof) shall be subject to (i) the
accuracy as of the date hereof and on the Closing Date of the representations
and warranties contained in Section 3 hereof, (ii) the performance by the Agent
of all its obligations pursuant to this Agreement required to be performed prior
to the Closing Date, and (iii) the successful completion of the Offering by the
Agent in the manner described in Section 6.
If any of the conditions herein above provided for in this Section 9 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Company hereunder may be terminated by the Company by
notifying the Agent of such termination in writing or by telegram at or prior to
the Closing Date. In such event, the Company and the Agent shall not be under
any obligation to each other (except to the extent provided in Sections 7 and 11
hereof).
10. Agent's Authority. It is understood and agreed that neither the Agent nor
any of its representatives is authorized to make any representations on behalf
of the Company other than those contained in the Memorandum or to act as the
agent of the Company in any other capacity except as expressly set forth herein.
11. Indemnification and Contribution.
(a) The Company will indemnify and hold the Agent harmless against any
losses, claims, damages or liabilities, joint or several, to which the Agent may
become subject under the Act, the various state securities acts or otherwise,
insofar as such losses, claims, damages or liabilities (or actions with respect
thereto) arise out of or are based upon (1) any untrue statement or alleged
untrue statement of any material fact contained in the Memorandum, any other
documentation prepared by the Company or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, except, however, any misstatements or
omissions provided to the Company for inclusion in the Memorandum under the
section captioned "Terms of the Offering" by the Agent, and/or (2) a breach by
the Company of the representations, covenants or warranties contained in this
Agreement; and will reimburse the Agent for any legal or other expense
reasonably incurred in connection with investigating or defending any such loss,
claim, damage, liability or action. Notwithstanding the preceding sentence, the
Company shall in no event be liable for any
<PAGE>
lost profits or loss of bargain damages of the Agent.
The foregoing indemnity agreement shall extend upon the same terms and
conditions to, and shall inure to the benefit of the Agent's officers, directors
and counsel, and each person, if any, who "controls" the Agent.
(b) The Agent will indemnify and hold the Company harmless against any
losses, claims, damages or liabilities, joint or several, to which the Company
may become subject under the Act, the various state securities acts or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
with respect thereto) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Memorandum under
the section captioned "Terms of the Offering," which arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
insofar as and only insofar as any such misstatement or omission was contained
in any material provided the Company in writing by the Agent for inclusion in
the Memorandum, and/or (ii) a breach by the Agent of the representations,
covenants and warranties contained in Paragraph 3 of this Agreement; and will
reimburse the Company for any legal or other expenses reasonably incurred in
connection with investigating or defending any such loss, claim, damage,
liability or action. Notwithstanding the preceding sentence, the Agent shall in
no event be liable for any lost profits or loss of bargain damages of the
Company.
The foregoing indemnity agreement shall extend upon the same terms and
conditions to, and shall inure to the benefit of the Company's officers,
directors and counsel, and each person, if any, who "controls" the Company.
(c) Promptly after receipt by an indemnified person of notice of the
commencement of any action, such indemnified person shall, if a claim in respect
thereof is to be made against the indemnifying party pursuant to this Section
11, notify the indemnifying party in writing of the commencement thereof; but
the omission to so notify the indemnifying party shall not relieve it from any
liability which it may have to any indemnified party otherwise than under such
subparagraph. In case any such action shall be brought against such indemnified
party, and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate in, and, to the extent
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel approved by the
indemnified party. The indemnified party shall not be responsible for any legal
or other expenses incurred by such indemnified party in connection with the
defense thereof, other than reasonable costs of investigation.
(d) If the indemnification provided for in this Section 11 is unavailable
to or insufficient to hold harmless an indemnified party under Section 11 (a) or
(b) above in respect of any losses, claims, damages or liabilities referred to
therein, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and
<PAGE>
the Agent on the other from the Offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law, then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party in such proportion as is appropriate
to reflect not only such relative benefits but also the relative fault of the
Company on the one hand and the Agent on the other in connection with the
statements, omissions or breaches which resulted in such losses, claims, damages
or liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Agent on the
other shall be deemed to be in the same proportion as the total net proceeds
from the Offering (before deducting expenses) received by the Company bear to
the total commissions received by the Agent, in each case as set forth in the
Memorandum. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Agent on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Agent agree that it would not be just and equitable if
contributions pursuant to this Section 11 (d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to above in this Section 11(d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities referred to above in this Section 11 (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 11 (d), (i) the Agent
shall not be required to contribute any amount in excess of the commission
received by it, and (ii) no person guilty of fraudulent misrepresentations
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
In any proceeding relating to the Memorandum or any supplement or amendment
thereto, each party against whom contribution may be sought under this Section
11(d) hereby consents to the jurisdiction of any court having jurisdiction over
any other contributing party, agrees that process issuing from such court may be
served upon him or it by any other contributing party and consents to the
service of such process and agrees that any other contributing party may join
him as an additional defendant in any such proceeding in which such other
contributing party is a party.
12. Termination. This Agreement may be terminated by the Agent by notice to
the Company as follows:
(a) at any time prior to the Closing itself if any of the following has
occurred:
(i) since the respective dates as of which information is given in the
Memorandum, any material adverse change or any development involving a
prospective material adverse change in or affecting the condition, financial or
otherwise, of the Company, or the earnings, business affairs, management or
business prospects of the
<PAGE>
Company, whether or not arising in the ordinary course of business;
(ii) any outbreak of hostilities or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, calamity, crisis or change on the financial markets or
economic conditions would, in the Agent's reasonable judgment, make the offering
or delivery of the Shares impracticable;
(iii) suspension of trading in securities on the New York Stock
Exchange, Inc. or the American Stock Exchange or limitation on prices (other
than limitations on hours or numbers of days of trading) for securities on
either such Exchangee;
(iv) the enactment, publication, decree or other promulgation of any
federal or state statute, regulation, rule or order of any code or other
governmental authority which in the Agent's reasonable opinion materially and
adversely affects or will materially or adversely affect the business or
operations of the Company;
(v) declaration of a banking moratorium by either federal, Oklahoma or
Arizona authorities;
(vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Agent's reasonable opinion has a Material Adverse Effect on the securities
markets in the United States or the prospects of the Company; or
(vii) if the Agent's "due diligence" review discloses information
which (a) is in any material respect inconsistent with the information
previously provided to the Agent; (b) discloses materially adverse matters
concerning the business (past, current or prospective) of the Company or any its
subsidiaries not previously fully disclosed to the Agent; or (c) would require
any material amendment or modification to the drafts of the Memorandum
previously circulated to reflect additional risk factors or significant adverse
changes; and
(b) as provided in Section 6(b) or 8 of this Agreement
13. Representations and Agreements to Survive Delivery. All representations,
warranties and agreements of the Company and Agent, herein or in certificates
delivered pursuant hereto, and the indemnity agreement contained in Paragraph 11
hereof, shall survive the delivery, execution and closing hereof and shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of the Agent or any controlling person, the Company, and
shall survive delivery of the Shares hereunder. The indemnification provisions
of Paragraph 11 hereof are in addition to any and all other remedies for any
breach of any representation, warranty or covenant made or given by one or more
parties to any other party.
14. Notices. All notices requires or permitted hereunder shall be in writing
and shall be mailed, delivered or telegraphed to the following addresses:
<PAGE>
If to the Agent: Peacock, Hislop, Staley & Given, Inc.
2999 North 44th Street, Suite 100
Phoenix, Arizona 85018
Attention: Thomas L. Thomas, Senior Vice President
with a copy to: Gallagher & Kennedy
2600 North Central Avenue
Phoenix, Arizona 85004-3020
Attention: Thomas J. Morgan, Esq.
If to the Company: National Environmental Service Co.
12331 East 60th Street
Tulsa, Oklahoma 74146
Attention: Eddy Patterson, President
with a copy to: Conner & Winters A Professional Corporation
3700 1st Place Tower
15 East Fifth Street
Tulsa, Oklahoma 74103
Attention: Lynnwood More, Jr., Esq.
Any such notices shall be either (a) sent by certified mail, return receipt
requested, in such case notice shall be deemed delivered three (3) business days
after deposit, postage prepaid in the U.S. mail, or (b) sent by personal
delivery or by a nationally recognized overnight courier, in which case it shall
be deemed delivered upon receipt if personally delivered or one (1) business day
after deposit with an overnight courier. The above addresses may be changed by
written notice to the other party; provided, however, that no notice of a change
of address shall be effective until actual receipt of such notice.
15. Parties. This Agreement shall inure to the benefit of and be binding upon
the Agent and the Company and each of their respective successors and assigns
and, if expressly applicable, their affiliates. Nothing expressed or mentioned
in this Agreement is intended or shall be construed to give any person or
corporation, other than the parties hereto and their respective successors and
assigns, affiliates, and the controlling persons, officers, directors and
counsel referred to in Paragraph 11, any legal or equitable right, remedy or
claim under or with respect to this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of the
parties hereto. No purchaser of any of the Shares shall be construed a
successor assign by reason merely of such purchase.
16. Severability. Every provision in this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegally or invalidity shall not affect the validity of the
remainder hereof.
17. Captions. The captions or headings in this Agreement are inserted for
convenience and identification only and are in no way intended to describe,
interpret, define, or limit the scope, extent, or intent of this Agreement or
any provision hereof.
<PAGE>
18. Applicable Law. This Agreement and all disputes and controversies relating
hereto or in connection with the transactions contemplated hereby shall be
governed and construed in accordance with the internal laws of the State of
Arizona without regard to choice or conflict of law principles. Personal
jurisdiction and venue in any action arising hereunder shall be in a court of
competent subject matter jurisdiction in Maricopa County, Arizona.
19. Prior Agreements. This Agreement supersedes all prior agreements, oral or
written, covered in the same subject matter.
20. Counterparts. This Agreement and any notices delivered hereunder may be
executed in two or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument. This
Agreement and any and all notices may be delivered by telecopy and shall be
effective upon receipt, with the original of such document to be deposited
promptly in the U.S. Mail.
IN WITNESS HEREOF, the parties hereto have executed this Agreement this 15th
day of January 1998, to be effective as of the date first written above.
NATIONAL ENVIRONMENTAL PEACOCK, HISLOP, STALEY
SERVICE CO. & GIVEN, INC.
By: /s/ Eddy Patterson By: /s/ Tom T. Thomas
Name: Eddy Patterson Name: Tom T. Thomas
Title: President Title: Managing Director
<PAGE>
EXHIBIT A
States
Arizona
California
Idaho
Michigan
Minnesota
Montana
Oklahoma
(C) Peacock, Hislop, Staley & Given, Inc. 1998
PAGE 15 of 15
<PAGE>
Exhibit 10.11
January 14, 1998
Mr. Eddy Patterson
President
National Environmental Service Co.
12331 East 60th Street
Tulsa, Oklahoma 74146
Dear Mr. Patterson:
This letter shall serve as the formal agreement between National Environmental
Service Co. and Peacock, Hislop, Staley & Given, Inc. that the Private Placement
Agency agreement made effective as of December 30, 1997 shall be amended to
reflect such terms as set forth in the First Supplement the Confidential Private
Placement Memorandum dated January 12, 1998 a copy of which is attached hereto.
Agreed to this 15th day of January, 1998
PEACOCK, HISLOP, STALEY NATIONAL ENVIRONMENTAL
& GIVEN, INC. SERVICE CO.
By: Mr. Thomas L. Thomas By: Mr. Eddy Patterson
Managing Director President
Capital Markets Group
<PAGE>
Exhibit 10.11
National Environmental Service Co.
First Supplement to the Confidential Private Placement Memorandum
Supplement dated January 12, 1998
This First Supplement dated January 12, 1998 supplements the Confidential
Private Placement Memorandum dated December 30, 1997 (the "Memorandum") and must
be read together with the Memorandum. All section references herein correspond
to the Memorandum and all capitalized terms used herein, unless otherwise
indicated, shall have the meaning set forth in the Memorandum. All terms and
conditions of the Offering, unless amended herein, shall be as set forth in the
Memorandum.
Changes in the Offering Terms
The purpose of this Fist Supplement is to:
disclose the increase to the Offering amount up to 400,000 shares of Common
Stock;
disclose the Company's agreement to provide "piggyback" registration rights
relating to the Shares; and,
correct a misstatement in the Risk Factors section of the Memorandum.
Effects of the Changes
The increase of the Offering amount up to 400,000 shares from 300,000 will,
assuming the Offering is fully subscribed and sold, have the effect of:
increasing the total proceeds received from the Offering to up to $800,000 from
$600,000;
increasing the maximum placement fee to up to $40,000 from $30,000; and,
increasing the net proceeds to the Company to up to $760,000 from $570,000.
The Company has agreed to grant certain registration rights to the holders of
Shares purchased in the Offering. In the event that the Company files a
registration statement with the Securities and Exchange Commission, except for
registrations related to employee benefit plans or corporate reorganizations,
the holders of the Shares purchased in the Offering will be notified and,
subject to the following, be allowed to include ("piggyback") Shares in such
registration. With respect to any registration related to an underwritten
offering of the Company's securities, the number of Shares included in such
registration may be reduced or eliminated as determined by the underwriter in
such offering. The Company will bear the cost and expenses associated with any
such registration of Shares except for selling commissions or underwriter
discounts associated with the Shares sold in any such registered offering.
These registration rights will lapse upon the Shares being generally tradable
under Rule 144 of the Securities Act (currently
<PAGE>
one year from the closing of the Offering).
Correction to Private Placement Memorandum
In the risk factor titled "Environmental Liability" on page 7 of the Memorandum,
it is misstated that the Company has general liability insurance which provides
for $2 million of coverage per occurrence. Instead, the Company's insurance
policy provides for $1 million of coverage per occurrence with a $2 million
aggregate limit.
Status of the Offering
The Company and the Placement Agent have agreed to increase the offering amount
of the Offering to 400,000 Shares from 300,000 Shares of Common Stock and to
provide "piggyback" registration rights to holders of the Shares. As of the
date of this supplement, the Placement Agent has received subscriptions for the
purchase of approximately 325,000 shares.
<PAGE>
Exhibit 10.12
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT.
50,000 Shares
NATIONAL ENVIRONMENTAL SERVICE CO.
COMMON STOCK PURCHASE WARRANT
Transfer Restricted -- Section 5.2
This certifies that, for and in consideration of $.001 per Warrant Share,
Peacock, Hislop, Staley & Given, Inc., or registered, permitted assigns, is
entitled to purchase from National Environmental Service Co., a corporation
incorporated under the laws of the State of Oklahoma (the "Company"), subject to
the terms and conditions hereof, at any time after the Effective Date and on or
prior to the Expiration Date, the number of Shares stated above at the Exercise
Price (as defined herein). The Exercise Price and the number and type of Shares
and component securities thereof (as defined below) purchasable hereunder are
subject to adjustment from time to time as provided in Article 3 hereof.
ARTICLE 1
DEFINITIONS
Section 1.1 Definition of Terms. As used in this Warrant, the following
capitalized terms shall have the following respective meanings:
(a) Business Day. A day other than a Saturday, Sunday or other day
on which federal banks or banks chartered by the state of the principal
place of business of the Company are authorized by law to remain closed.
(b) Common Stock. Common Stock of the Company.
<PAGE>
(c) Common Stock Equivalents. Securities that are convertible
into or exercisable for shares of Common Stock.
(d) Company. National Environmental Service Co., an Oklahoma
corporation.
(e) Effective Date. January ___, 1998, the date of issuance of this
Warrant by the Company.
(f) Exchange Act. The Securities Exchange Act of 1934, as amended.
(g) Exercise Price. $2.00 per Share, as such price may be adjusted
from time to time pursuant to Article 3 hereof.
(h) Expiration Date. 5:00 p.m., local time on January ___, 2003 or,
if such day is not a Business Day, the next succeeding day which is a
Business Day.
(i) Holder. A Holder of Registrable Securities.
(j) NASD. National Association of Securities Dealers, Inc.
(k) Person. An individual, partnership, joint venture, limited
liability company, corporation, trust, unincorporated organization of
government or department or agency thereof.
(l) Piggyback Registration. A registration of securities under the
terms of Section 6.1.
(m) Piggyback Registration Rights. The rights of the Warrantholders
to have securities received from the exercise of Warrants to be registered
under the Securities Act in conjunction with a registration of securities
by the Company as set forth in Section 6.1.
(n) Placement Agent. Peacock, Hislop, Staley & Given, Inc.
(o) Prospectus. Any prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by such Registration Statement and all other amendments
and supplements to the Prospectus, including posteffective amendments and
all material incorporated by reference in such Prospectus.
(p) Public Offering. A public offering of any of the Company's
equity or debt securities pursuant to a Registration Statement.
<PAGE>
(q) Registration Expenses. Any and all expenses incurred in
connection with any registration or action incident to performance of or
compliance by the Company with Article 6, including, without limitation (i)
all SEC, national securities exchange and NASD registration and filing
fees; all listing fees and all transfer agent fees; (ii) all fees and
expenses of complying with state securities or blue sky laws (including the
fees and disbursements of counsel of the underwriters in connection with
blue sky qualifications of the Registrable Securities); (iii) all printing,
mailing, messenger and delivery expenses; (iv) all reasonable fees and
disbursements of counsel for the Company and of its accountants, including
the expenses of any special audits and/or "cold comfort" letters required
by or incident to such performance and compliance; and (v) any
disbursements of underwriters customarily paid by issuers or sellers of
securities including the reasonable fees and expenses of any special
experts retained in connection with the requested registration, but
excluding underwriting discounts or concessions and commissions, brokerage
fees and transfer taxes, if any, and fees of counsel or accountants
retained by the Holders of Registrable Securities to advise them in their
capacity as Holders of Registrable Securities.
(r) Registrable Securities. Any shares of Common Stock issued to
Placement Agent and/or its designees or transferees as permitted under
Section 5.2 and/or other securities that may be or are issued by the
Company upon exercise of this Warrant including those which may thereafter
be issued by the Company in respect of any such securities by means of any
stock splits, stock dividends, recapitalizations, reclassifications or the
like, and as adjusted pursuant to Article 3 hereof; provided, however, that
as to any particular security contained in Registrable Securities, such
securities shall cease to be Registrable Securities when (i) a Registration
Statement with respect to the sale of such securities shall have been
declared effective under the Securities Act and such securities shall have
been disposed of in accordance with such Registration Statement; (ii) such
securities shall have been sold to the public pursuant to Rule 144 (or any
successor provisions) under the Securities Act; or (iii) such securities
shall have been sold, assigned or otherwise transferred to any person other
than to any spouse, lineal descendants or adopted children of such Persons
to whom such securities are transferred by operation of law or by bequest.
(s) Registration Statement. Any registration statement of the
Company filed or to be filed with the SEC which covers any of the
Registrable Securities pursuant to the provisions of this Agreement,
including all amendments (including post-effective amendments) and
supplements thereto, all exhibits thereto and all material incorporated
therein by reference.
(t) SEC. The Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act or the Exchange
Act.
<PAGE>
(u) Securities Act. The Securities Act of 1933, as amended.
(v) Share. A share of Common Stock.
(w) Transfers. The disposition or encumbering of a Warrant or
Shares as set forth in Section 5.2.
(x) Warrants. This Warrant and all other warrants that may be
issued in its place (together initially evidencing the right to purchase an
aggregate of one share of Common Stock, as adjusted), originally issued as
set forth in the definition of Registrable Securities.
(y) Warrantholder. The person(s) or entity(ies) to whom this
Warrant is originally issued, or any successor in interest thereto, or any
registered, permitted assignee or transferee thereof, in whose name this
Warrant is registered upon the books to be maintained by the Company for
that purpose.
ARTICLE 2
DURATION AND EXERCISE OF WARRANT
Section 2.1 Duration of Warrant. The Warrantholder may exercise this
Warrant at any time and from time to time after execution and delivery hereof
and before 5:00 p.m., local time, on the Expiration Date. If this Warrant is not
exercised on or before the Expiration Date, it shall become void, and all rights
hereunder shall thereupon cease.
Section 2.2 Exercise of Warrant.
(a) The Warrantholder may exercise this Warrant, in whole or in
part, by presentation and surrender of this Warrant to the Company at its
corporate office at 12331 East 60th Street, Tulsa, Oklahoma 74146 with the
Subscription Form annexed hereto duly executed and accompanied by payment
of the full Exercise Price for each Share to be purchased.
(b) Upon receipt of this Warrant with the Subscription Form fully
executed and accompanied by payment of the aggregate Exercise Price for the
shares for which this Warrant is then being exercised, the Company shall
cause to be issued certificates for the total number of whole shares of
Common Stock for which this Warrant is being exercised (adjusted to reflect
the effect of the anti-dilution provisions contained in Article 3 hereof,
if any, and as provided in Section 2.4 hereof) in such denominations as are
requested for delivery to the Warrantholder, and the Company shall
thereupon deliver such certificates to the Warrantholder. The Warrantholder
shall be deemed to be the Holder of record of the shares of Common Stock
issuable
<PAGE>
upon such exercise, notwithstanding that the stock transfer books of the
Company shall then be closed or that certificates representing such shares
of Common Stock shall not then be actually delivered to the Warrantholder.
If at the time this Warrant is exercised, a Registration Statement is not
in effect to register under the Securities Act the Shares issuable upon
exercise of this Warrant, the Company may require the Warrantholder to make
such representations, and may place such legends on certificates
representing the Shares, as may be reasonably required in the opinion of
counsel to the Company to permit the Shares to be issued without such
registration.
(c) In case the Warrantholder shall exercise this Warrant with
respect to less than all of the Shares that may be purchased under this
Warrant, the Company shall execute a new warrant in the form of this
Warrant for the balance of such Shares and deliver such new warrant to the
Warrantholder.
(d) The Company shall pay any and all stock transfer and similar
taxes which may be payable in respect of the issue of any Shares.
Section 2.3 Reservation of Shares. The Company hereby agrees that at all
times there shall be reserved for issuance and delivery upon exercise of this
Warrant such number of shares of Common Stock or other shares of capital stock
of the Company from time to time issuable upon exercise of this Warrant and the
components thereof. All such shares shall be duly authorized, and when issued
upon such exercise, shall be validly issued, fully paid and non-assessable, free
and clear of all liens, security interests, charges and other encumbrances or
restrictions on sale (except as provided in Section 5.2 hereof) and free and
clear of all preemptive rights.
Section 2.4 Fractional Shares. The Company shall not be required to issue
any fraction of a share of its capital stock in connection with the exercise of
this Warrant, and in any case where the Warrantholder would, except for the
provisions of this Section 2.4, be entitled under the terms of this Warrant to
receive a fraction of a share upon the exercise of this Warrant, the Company
shall, upon the exercise of this Warrant and receipt of the Exercise Price,
issue only the number of whole shares purchasable upon exercise of this Warrant.
The Company shall not be required to make any cash or other adjustment in
respect of such fraction of a share to which the Warrantholder would otherwise
be entitled.
Section 2.5 Listing. Upon the issuance of any shares of Common Stock upon
exercise of this Warrant, the Company shall secure the listing of such shares of
Common Stock upon each national securities exchange or automated quotation
system, if any, upon which shares of Common Stock are then listed (subject to
official notice of issuance upon exercise of this Warrant) and shall maintain,
so long as any other shares of Common Stock shall be so listed, such listing of
all shares of Common Stock from time to time issuable upon the exercise of this
Warrant; and the Company shall so list on each national securities exchange or
automated quotation system, and shall maintain such listing of, any other shares
of capital stock of the Company issuable upon the exercise of this Warrant if
and so long as
<PAGE>
any shares of the same class shall be listed on such national securities
exchange or automated quotation system.
ARTICLE 3
ADJUSTMENT OF SHARES
PURCHASABLE AND OF EXERCISE PRICE
The Exercise Price and the number and kind of Shares shall be subject to
adjustment from time to time upon the happening of certain events as provided in
this Article 3.
Section 3.1 Mechanical Adjustments.
(a) In the event the Company at any time or from time to time prior
to the exercise of this Warrant in full shall declare or pay any dividend
on the Common Stock payable in Common Stock or Common Stock Equivalents, or
effect a subdivision or combination of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in
Common Stock or Common Stock Equivalents), then and in any such event, the
Exercise Price shall be adjusted by multiplying the Exercise Price prior to
the adjustment by the number of shares of Common Stock (assuming the
issuance of all Common Stock in exchange for Common Stock Equivalents, if
applicable, have been issued) outstanding immediately prior to the
effective time of such event and dividing the result by the number of
shares of Common Stock outstanding immediately after the effective time of
such event, effective in the case of such dividend, immediately after the
close of business on the record date for the determination of holders of
Common Stock entitled to receive such dividend, or in the case of a
subdivision or combination, at the close of business immediately prior to
the date upon which such corporate action becomes effective.
(b) In the event the Company at any time or from time to time prior
to the exercise of this Warrant in full makes, or fixes a record date for
the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in capital stock of the Company other than
shares of Common Stock or Common Stock Equivalents, then and in each such
event provision shall be made so that the Holders receive upon exercise of
this Warrant, in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities which such Holders would
have received had they exercised the Warrant prior to such effective record
date.
(c) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to paragraph (a) of this Section 3.1, the
number of Shares shall simultaneously be adjusted by multiplying the number
of Shares initially issuable upon
<PAGE>
exercise of each Warrant by the Exercise Price in effect on the date
thereof and dividing the product so obtained by the Exercise Price, as
adjusted.
(d) All calculations under this Section 3.1 shall be made to the
nearest cent or, subject to Section 2.4, to the nearest one-hundredth of a
share, as the case may be. Notwithstanding anything in this Section 3.1 to
the contrary, the Exercise Price shall not be reduced to less than the then
existing par value of the Common Stock as a result of any adjustment made
hereunder.
Section 3.2 Notices of Adjustment. Whenever the number of Shares or the
Exercise Price is adjusted as herein provided, the Company shall prepare and
deliver forthwith to the Warrantholder a certificate signed by (i) its Chief
Executive Officer and President; and (ii) any Vice President, Treasurer or
Secretary. Such certificate shall set forth the adjusted number of shares
purchasable upon the exercise of this Warrant and the Exercise Price of such
shares after such adjustment, setting forth a brief statement of the facts
requiring such adjustment and setting forth the computation by which such
adjustment was made.
Section 3.3 No Adjustment for Cash Dividends. Except as provided in Section
3.1 of this Agreement, no adjustment in respect of any cash dividends shall be
made during the term of this Warrant or upon the exercise of this Warrant.
Section 3.4 Preservation of Purchase Rights in Certain Transactions. In
case of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock (other than a subdivision or combination of
the outstanding Common Stock and other than a change in the par value of the
Common Stock) or in case of any consolidation or merger of the Company with or
into another corporation (other than merger with a subsidiary in which the
Company is the continuing corporation and that does not result in any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the class issuable upon exercise of this Warrant) or in the
case of any sale, lease, transfer or conveyance to another corporation of the
property and assets of the Company as an entirety or substantially as an
entirety, the Company shall, as a condition precedent to such transaction, cause
such successor or purchasing corporation, as the case may be, to execute with
the Warrantholder an agreement granting the Warrantholder the right thereafter,
upon payment of the Exercise Price in effect immediately prior to such action,
to receive upon exercise of this Warrant the kind and amount of shares, and
other securities and property which the Warrantholder would have owned or have
been entitled to receive after the happening of such reclassification, change,
consolidation, merger, sale or conveyance had this Warrant been exercised
immediately prior to such action. Such agreement shall provide for adjustments
in respect of such shares of stock, and other securities and property, which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Article 3. In the event that in connection with any such
reclassification, capital reorganization, change, consolidation, merger, sale or
conveyance, additional shares of Common Stock shall be issued in exchange,
conversion, substitution or payment, in whole or in part, for, or of, a security
of the Company other than Common Stock, any such issue shall be treated as an
issue of
<PAGE>
Common Stock covered by the provisions of Article 3. The provisions of this
Section 3.4 shall similarly apply to successive reclassifications, capital
reorganizations, consolidations, mergers, sales or conveyances.
Section 3.5 Form of Warrant After Adjustments. The form of this Warrant
need not be changed because of any adjustments in the Exercise Price of the
number or kind of the shares, and Warrants theretofore or thereafter issued may
continue to express the same price and number and kind of shares as are stated
in this Warrant, as initially issued.
Section 3.6 Treatment of Warrantholder. Prior to due presentment for
registration of transfer of this Warrant, the Company may deem and treat the
Warrantholder as the absolute owner of this Warrant (notwithstanding any
notation of ownership or other writing hereon) for all purposes and shall not be
affected by any notice to the contrary.
ARTICLE 4
OTHER PROVISIONS RELATING TO RIGHTS OF WARRANTHOLDER
Section 4.1 No Rights as Shareholders; Notice to Warrantholders. Nothing
contained in this Warrant shall be construed as conferring upon the
Warrantholder, or such Warrantholder's transferees, the right to vote or to
receive dividends or to consent or to receive notice as a shareholder in respect
of any meeting of shareholders for the election of directors of the Company or
of any other matter, or any rights whatsoever as shareholders of the Company.
The Company shall give notice to the Warrantholder by registered mail if at any
time prior to the expiration or exercise in full of the Warrants, any of the
following events shall occur:
(a) the Company shall authorize the payment of any dividend payable
in any securities upon shares of Common Stock or authorize the making of
any distribution to all holders of Common Stock;
(b) the Company shall authorize the issuance to all Holders of
Common Stock of any additional shares of Common Stock or Common Stock
Equivalents or of any other subscription rights, options or warrants;
(c) a dissolution, liquidation or winding up of the Company shall
be proposed; or
(d) a capital reorganization or reclassification of the Common
Stock (other than a subdivision or combination of the outstanding Common
Stock and other than a change in the par value of the Common Stock) or any
consolidation or merger of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the
continuing corporation and that does not result in any
<PAGE>
reclassification or change of Common Stock outstanding) or any sale or
conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety.
Such giving of notice shall be initiated at least 10 Business Days prior to the
date fixed as a record date or effective date or the date of closing of the
Company's stock transfer books for the determination of the shareholders
entitled to such dividend, distribution or subscription rights, or for the
determination of the shareholders entitled to vote on such proposed merger,
consolidation, sale, conveyance, dissolution, liquidation or winding up. Such
notice shall specify such record date or the date of closing the stock transfer
books, as the case may be. Failure to provide such notice shall not affect the
validity of any action taken in connection with such dividend, distribution or
subscription rights, or proposed merger, consolidation, sale, conveyance,
dissolution, liquidation or winding up.
Section 4.2 Lost, Stolen, Mutilated or Destroyed Warrants. If this Warrant
is lost, stolen, mutilated or destroyed, the Company may, on such terms as to
indemnity or otherwise as it may in its discretion impose (which shall, in the
case of a mutilated Warrant, include the surrender thereof), issue a new Warrant
of like denomination and tenor as, and in substitution for, this Warrant.
ARTICLE 5
SPLIT-UP, COMBINATION, EXCHANGE
AND TRANSFER OF WARRANTS
Section 5.1 Split-Up, Combination, Exchange and Transfer of Warrants.
Subject to the provisions of Section 5.2 hereof, this Warrant may be split-up,
combined or exchanged for another Warrant or Warrants containing the same terms
to purchase a like aggregate number of shares of Common Stock. If the
Warrantholder desires to split-up, combine or exchange this Warrant, the
Warrantholder shall make such request in writing delivered to the Company and
shall surrender to the Company this Warrant and any other Warrants to be so
split-up, combined or exchanged. Upon any such surrender for a split-up,
combination or exchange, the Company shall execute and deliver to the person
entitled thereto a Warrant or Warrants, as the case may be, as so requested. The
Company shall not be required to effect any split-up, combination or exchange
which will result in the issuance of a Warrant entitling the Warrantholder to
purchase upon exercise a fraction of a share of Common Stock or a fractional
Warrant. The Company may require such Warrantholder to pay a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
split-up, combination or exchange of Warrants.
Section 5.2 Restrictions on Transfer. This Warrant is registered on the
books of the Company and is transferable only by surrender thereof at the
principal office of the Company duly endorsed or accompanied by a written
instrument of transfer duly executed by the Warrantholder or its attorney duly
authorized in writing. This Warrant or the subject
<PAGE>
Shares may not be resold, transferred or disposed of in any manner unless
registered under applicable federal and state securities laws or an exemption
from registration is available and the holder obtains an opinion of counsel
satisfactory to the Company that such exemption is available and that transfer
will not jeopardize the Company's reliance on the exemption from registration in
connection with the issuance hereof. If at the time of a Transfer, a
Registration Statement is not in effect to register this Warrant or the subject
Shares, the Company may require the Warrantholder to make such representations,
and may place such legends on certificates representing this Warrant or the
subject Shares, as may be reasonably required in the opinion of counsel to the
Company to permit a Transfer without such registration.
Section 5.3 Redemption. The Warrants are not redeemable by the Company.
ARTICLE 6
REGISTRATION UNDER THE SECURITIES ACT OF 1933
Section 6.1 Piggyback Registration of Common Stock.
(a) If the Company proposes to register any of its Common Stock
under the Securities Act, on any Registration Statement, whether or not for
its own account (other than by a registration statement on Form S-8 or
other form which does not include substantially the same information as
would be required in a form for the general registration of securities,
would not be available for the Common Stock or relates to any employee
benefit plan or reorganization of the Company), it shall as expeditiously
as possible give written notice to all Holders of such Holders' Piggyback
Registration Rights as set forth in this Section 6.1. Upon the written
request (which request shall, if applicable, specify that Holder shall be
required to convert the shares and the number of shares of Registrable
Securities intended to be sold by such Holder after conversion) of any
Holder made within 20 days after receipt of any such notice, the Company
shall (subject to the additional terms of these Articles) include in the
Registration Statement the Registrable Securities which the Company has
been so requested to register by the Holder thereof and the Company shall
keep such registration statement in effect and maintain compliance with
each federal and state law or regulation for the period necessary for such
Holder to effect the proposed sale or other disposition (but in no event
for a period greater than 120 days).
(b) If, at any time after giving written notice of its intention to
register Registrable Securities in a Piggyback Registration but prior to
the effective date of the related Registration Statement, the Company shall
determine for any reason not to register any Common Stock, the Company
shall give notice of such determination to each Holder and, thereupon,
shall be relieved of its obligation to register any Registrable Securities
in connection with such Piggyback Registration (and shall not convert any
of the shares into shares of Common Stock pursuant to Section 4, if
applicable). All best efforts obligations of the Company shall cease if the
Company
<PAGE>
determines to terminate prior to such effective date any registration
pursuant to this Section 6.1.
(c) If a Piggyback Registration involves an offering by or through
underwriters, all Holders requesting to have their Registrable Securities
included in the Company's Registration Statement must sell their
Registrable Securities to the underwriters selected by the Company on the
same terms and conditions as apply to other selling shareholders, and any
Holder requesting to have its Registrable Securities included in such
Registration Statement may elect in writing, not later than three business
days prior to the effectiveness of the Registration Statement filed in
connection with such registration, not to have its Registrable Securities
so included in connection with such registration.
(d) If a Piggyback Registration involves an offering by or through
underwriters, the Company, except as otherwise provided herein, shall not
be required to include Registrable Securities therein if and to the extent
the underwriter managing the offering reasonably believes in good faith and
advises each Holder requesting to have Registrable Securities included in
the Company's Registration Statement that such inclusion would materially
adversely affect such offering, provided that if other selling shareholders
who are employees, officers, directors or other affiliates of the Company
have requested registration of securities in the proposed offering, the
Company will reduce or eliminate such other selling shareholders'
securities before any reduction or elimination of Registrable Securities
held by Holders, and any such reduction or elimination (after taking into
account the effect of preceding clause) shall be pro rata to all other
holders of the securities of the Company exercising "Piggyback Registration
Rights" similar to those set forth herein in proportion to the respective
number of shares of Registrable Securities they have requested to be
registered.
Section 6.2 Payment of Registration Expenses. The Company shall pay all
expenses in connection with the registration of Registrable Securities other
than underwriters' fees, discounts, concessions or expenses, or attorneys fees
of any attorney representing the selling Holders. All fees and expenses (other
than registration expenses otherwise required to be paid) of any managing
underwriter, any co-manager or any independent underwriter or other independent
price required under the rules of NASD shall be paid for by such underwriters.
Section 6.3 Indemnification.
(a) In connection with each Registration Statement relating to
disposition of Registrable Securities, the Company shall indemnify and hold
harmless each Holder and each underwriter of Registrable Securities and
each Person, if any, who controls such Holder or underwriter (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) against any and all losses, claims, damages and
<PAGE>
liabilities, joint or several (including any reasonable investigation,
legal and other expenses incurred in connection with, and any amount paid
in settlement of any action, suit or proceeding or any claim asserted), to
which they, or any of them, may become subject under the Securities Act,
the Exchange Act or other federal or state law or regulation, at common law
or otherwise, insofar as such losses, claims, damages or liabilities arise
out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in any Registration Statement, prospectus or
preliminary prospectus or any amendment thereof or supplement thereto, or
arise out of or are based upon any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that such
indemnity shall not inure to the benefit of any Holder or underwriter (or
any Person controlling such Holder or underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) on
account of any losses, claims, damages or liabilities arising from the sale
of the Registrable Securities if such untrue statement or omission or
alleged untrue statement or omission was made in such Registration
Statement, prospectus or preliminary prospectus, or such amendment or
supplement, in reliance upon and in conformity with information furnished
in writing to the Company by the Holder or underwriter specifically for use
therein. The Company shall also indemnify selling brokers, dealer managers
and similar securities industry professionals participating in the
distribution, their officers and directors and each Person who controls
such Persons (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) to the same extent as provided above with
respect to the indemnification of the Holders if requested. This indemnity
agreement shall be in addition to any liability which the Company may
otherwise have.
(b) In connection with each Registration Statement, each Holder
shall indemnify, to the same extent as the indemnification provided by the
Company in Section 6.3(a), the Company, its directors and each officer who
signs the Registration Statement and each Person who controls the Company
(within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act) but only insofar as such losses, claims, damages and
liabilities arise out of or are based upon any untrue statement or omission
or alleged untrue statement or omission which was made in the Registration
Statement, the prospectus or preliminary prospectus or any amendment
thereof or supplement thereto, in reliance upon and in conformity with
information furnished in writing by such Holder to the Company specifically
for use therein. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities
industry professionals participating in the distribution, to the same
extent as provided above, with respect to information so furnished in
writing by such Persons specifically for inclusion in any prospectus,
Registration Statement or preliminary prospectus or any amendment thereof
or supplement thereto.
<PAGE>
(c) Any party that proposes to assert the right to be indemnified
hereunder will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim
is to be made against an indemnifying party or parties under this Section
6.3, notify each such indemnifying party of the commencement of such
action, suit or proceeding, enclosing a copy of all papers served. No
indemnification provided for in Section 6.3(a) or 6.3(b) shall be available
to any party who shall fail to give notice as provided in this Section
6.3(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by
the failure to give such notice, but the omission so to notify such
indemnifying party of any such action, suit or proceeding shall not relieve
it from any liability that it may have to any indemnified party for
contribution or otherwise than under this Section 6.3. In case any such
action, suit or proceeding shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in, and, to the extent
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and the
approval by the indemnifying party to such indemnified party of its
election so to assume the defense thereof and the approval by the
indemnified party of such counsel, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses, except as
provided below and except for the reasonable costs of investigation
subsequently incurred by such indemnified party in connection with the
defense thereof. The indemnified party shall have the right to employ its
counsel in any such action, but the fees and expenses of such counsel shall
be at the expense of such indemnified party, unless the employment of
counsel by such indemnified party has been authorized in writing by the
indemnifying parties, the indemnified party shall have reasonably concluded
that there may be a conflict of interest between the indemnifying parties
and the indemnified party in the conduct of the defense of such action (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party), or the
indemnifying parties shall not have employed counsel to assume the defense
of such action within a reasonable time after notice of the commencement
thereof, in each of which case the fees and expenses of counsel shall be at
the expense of the indemnifying parties. An indemnifying party shall not
be liable for any settlement of any action, suit, proceeding or claim
effected without its written consent.
(d) In connection with each Registration Statement relating to the
disposition of Registrable Securities if the indemnification provided for
in subsection (a) hereof is unavailable to an indemnified party thereunder
in respect to any losses, claims, damages or liabilities referred to
therein, then the Company shall in lieu of indemnifying such indemnified
party, contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities. The amount to
be contributed by the Company hereunder shall be an amount which is in the
same
<PAGE>
proportionate relationship to the total amount of such losses, claims,
damages or liabilities as the total net proceeds from the offering (before
deducting expenses) of the Registrable Securities bears to the total price
to the public (including underwriters' discounts) for the offering of the
Common Stock covered by such registration.
ARTICLE 7
OTHER MATTERS
Section 7.1 Successors and Assigns. All covenants and provisions of this
Warrant by or for the benefit of the Company shall bind and inure to the benefit
of its successors and assigns hereunder.
Section 7.2 No Inconsistent Agreements. The Company will not on or after
the date of this Warrant enter into any agreement with respect to its securities
which is inconsistent with the rights granted to the Holders in this Warrant or
otherwise conflicts with the provisions hereof. The rights granted to the
Holders hereunder do not in any way conflict with and are not inconsistent with
the rights granted to Holders of the Company's securities under any other
agreements.
Section 7.3 Adjustments Affecting Registrable Securities. The Company will
not take any action outside the ordinary course of business, or permit any
change within its control to occur outside the ordinary course of business, with
respect to the Registrable Securities which is without a bona fide business
purpose, and which is intended to interfere with the ability of the Holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Warrant.
Section 7.4 Integration/Entire Agreement. This Warrant is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company with
respect to the Warrants. This Warrant supersedes all prior agreements and
understandings between the parties with respect to such subject matter (other
than warrants previously issued by the Company to the Warrantholder).
Section 7.5 Amendments and Waivers. The provisions of this Warrant,
including the provisions of this sentence, may not be amended, modified or
supplemented. and waiver or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of Holders
of at least a majority of the outstanding Registrable Securities. Holders shall
be bound by any consent authorized by this Section whether or not certificates
representing such Registrable Securities have been marked to indicate such
consent.
<PAGE>
Section 7.6 Governing Law. This Warrant shall be governed by and construed
in accordance with the internal laws of the State of Arizona without regard to
choice of law principles.
Section 7.7 Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provisions in every other respect and of the
remaining provisions contained herein shall not be affected or impaired thereby.
Section 7.8 Attorneys' Fees. In any action or proceeding brought to enforce
any provisions of this Warrant, or where any provisions hereof or thereof is
validly asserted as a defense, the successful party shall be entitled to recover
reasonable attorneys' fees and disbursements in addition to its costs and
expenses and any other available remedy.
Section 7.9 Computations of Consent. Whenever the consent or approval of
Holders of a specified percentage of Registrable Securities is required
hereunder, Registrable Securities held by the Company or its affiliates (other
than the Warrantholder or subsequent Holders if they are deemed to be such
affiliates solely by reason of their holdings of such Registrable Securities)
shall not be counted in determining whether such consent or approval was given
by the Holders of such required percentage.
Section 7.10 Notice. Any notices or certificates by the Company to the
Warrantholder and by the Warrantholder to the Company shall be deemed delivered
if in writing and delivered in person or by registered mail (return receipt
requested) to the Warrantholder at the address as set forth on the books and
records of the Company and to the Company at the address set forth in Section
2.2(a) hereof.
In Witness Whereof, this Warrant has been duly executed by the Company
under its corporate seal as of this 21st day of January, 1998.
----
National Environmental Service Co.
By: /s/ Eddy L. Patterson
------------------------------
Eddy L. Patterson, President
Attest:
/s/ Larry G. Johnson
- -----------------------------
Larry G. Johnson, Secretary
<PAGE>
ASSIGNMENT
(To be executed only upon assignment of Warrant)
For value received, ____________________ hereby sells, assigns and
transfers unto _________________________ the within Common Stock Purchase
Warrant, together with all right, title and interest therein, and does hereby
irrevocably constitute and appoint ________________ attorney, to transfer the
same on the books of the within-named Company with respect to the number of
Warrants set forth below, with full power of substitution in the premises:
Name of Assignee and Address No. of Warrants
---------------------------- ---------------
And if such number of Warrants shall not be all the Warrants represented by the
Common Stock Purchase Warrant, a new Common Stock Purchase Warrant is to be
issued in the name of the undersigned for the balance remaining of the Warrants
registered on the books of the Company.
Dated:
_____________________________ _____________________________
Signature
_____________________________
Print Name
Note: The above signature should correspond exactly with the name on the face of
this Common Stock Purchase Warrant.
<PAGE>
SUBSCRIPTION FORM
(To be executed upon exercise of Warrant)
:
- ----------------------------------------------------
The undersigned hereby irrevocably elects to exercise the right of
purchaser represented by the within Common Stock Purchase Warrant for, and to
purchase thereunder _____ shares of Common Stock as provided for therein, and
tenders herewith payment of the purchase price in full in the form of cash or a
certified or official bank check in the amount of $______________.
The undersigned confirms and represents that the shares of Common Stock
being acquired pursuant hereto are being acquired for the undersigned's own
account and for investment and not with a view to, or for resale in connection
with, any distribution of such shares. The undersigned is aware that the shares
subscribed for hereby are being sold pursuant to an exemption from registration
under the Securities Act of 1933, as amended (the "Securities Act"), and
pursuant to an exemption from registration under state securities laws. The
undersigned is aware that the shares may not be sold, assigned or transferred
unless (i) such sale, assignment or transfer is registered under the Securities
Act and other applicable state securities laws, and (ii) such sale, assignment
or transfer is exempt from registration under the Securities Act and such other
state securities laws and the Company is provided with an opinion of counsel
reasonably satisfactory to the Company that the shares may be sold pursuant to
such exemption.
Please issue a certificate or certificates for such Common Stock in the
name of, and pay any cash for any fractional share to:
-------------------------------------------------------------
-------------------------------------------------------------
(Please print Name, Address and Social Security No.)
-------------------------------------------------------------
Signature
Note: The above signature should correspond exactly with the name
on the first page of the within Common Stock Purchase Warrant or
with the name of the assignee appearing in the assignment form
below.
If such number of shares shall not be all the shares purchasable under the
within Common Stock Purchase Warrant, a new Common Stock Purchase Warrant is to
be issued in the name of the undersigned for the balance remaining of the shares
purchasable thereunder rounded up to the next higher number of shares.
<PAGE>
Exhibit 10.13
PURCHASE AND SALE AGREEMENT
---------------------------
THIS PURCHASE AND SALE AGREEMENT (this "Agreement"), made this January 30,
1998, is entered into between McCUTCHAN AND PATTERSON, an Oklahoma general
partnership, whose Partners are Albert A. McCutchan and Eddy L. Patterson
("Seller"), and NATIONAL ENVIRONMENTAL SERVICE CO., an Oklahoma corporation
("Purchaser").
W I T N E S S E T H:
In consideration of the mutual covenants and agreements set forth herein,
the parties hereto hereby agree as follows:
SECTION 1. SALE AND PURCHASE.
-----------------
Seller hereby agrees to sell, convey and assign to Purchaser and Purchaser
hereby agrees to purchase and accept from Seller, for the Purchase Price
(hereinafter defined) and on and subject to the terms and conditions herein set
forth, that certain tract or parcel of land situated in Tulsa County, State of
Oklahoma, located at 12331 East 60/th/ Street, Tulsa, Oklahoma 74146-6902, and
further described in Exhibit "A" attached hereto, together with all rights and
-----------
interests appurtenant thereto (the "Land"), including all improvements,
structures and fixtures located on the land (the "Improvements") and all rights,
titles and interests appurtenant to the Land and Improvements (herein
collectively called (the "Property")).
SECTION 2. PURCHASE PRICE; EARNEST MONEY.
-----------------------------
The purchase price (the "Purchase Price") for which Seller agrees to sell
and convey the Property to Purchaser, and which the Purchaser agrees to pay to
Seller, subject to the terms hereof, is the amount of SIX HUNDRED THOUSAND AND
NO/100 DOLLARS ($600,000.00), which shall be paid at Closing (hereinafter
defined) as provided in Section 4(d) (1) hereof.
SECTION 3. REPRESENTATIONS AND WARRANTIES; CLOSING.
---------------------------------------
(a) Purchaser represents and warrants to Seller as follows:
(1) Purchaser and any person executing this Agreement on
behalf of Purchaser represent and warrant that (i)
Purchaser is a duly authorized and existing corporation,
(ii) Purchaser is qualified to do business in Oklahoma,
(iii) Purchaser has full right and authority to enter
into this Agreement and to consummate the transactions
contemplated herein, (iv) the person executing this
Agreement on behalf of Purchaser is authorized to do so,
and (v) this Agreement constitutes a valid and legally
binding obligation of Purchaser, enforceable in
accordance with its terms.
(2) In addition to the acts and deeds recited herein and
contemplated to be performed, executed and delivered by
Purchaser, Purchaser shall perform, execute and deliver
or cause to be performed, executed and delivered at the
Closing or after the Closing, any and all further acts,
deeds and assurances as Seller may reasonably require to
consummate the transactions contemplated herein.
(b) Seller represents and warrants to Purchaser as follows:
(1) Seller and the persons executing this Agreement on behalf
of Seller represent and warrant that do business in
Oklahoma, (iii) Seller has full right and authority to
enter into this Agreement and to consummate the
transactions contemplated herein, (iv) the person
<PAGE>
executing this Agreement on behalf of Seller is
authorized to do so, and (v) this Agreement constitutes a
valid and legally binding obligation of Seller,
enforceable in accordance with its terms.
(2) Seller has marketable title to the Property and the
Property will be conveyed to Purchaser free and clear of
any material liens, claims and encumbrances.
(3) In addition to the acts and deeds listed herein and
contemplated to be performed by Seller, Seller shall
perform, execute and deliver or cause to be performed,
executed or delivered at the Closing or after the
Closing, any and all further acts, deeds and assurances
as Purchaser may reasonably require to consummate the
transactions contemplated herein.
(c) Subject to the provisions of this Agreement, the Closing
("Closing") of the sale of the Property by Seller to Purchaser
shall occur on or before January 30, 1998 or at such other time
as Seller and Purchaser shall agree.
(d) At the Closing, the following shall occur:
(1) Purchaser, at its sole cost and expense, shall deliver or
cause to be delivered to Seller cash, wired funds or a
cashier's or certified check made payable to the order of
Seller, at Seller's option, in the amount of $600,000.00,
together with such additional funds as may be necessary
to cover Purchaser's share of the closing costs and
prorations hereunder.
(2) Seller, at its sole cost and expense except as noted
below, shall deliver or cause to be delivered to
Purchaser a Warranty Deed executed by Seller conveying
the Property to Purchaser.
(e) All normal and customarily proratable items, including, without
limitation, transfer fees, recording costs and other expenses and
fees, and payments relating to agreements affecting the Property
which survive the Closing, shall be prorated as of the Closing
Date, Seller being charged and credited for all of same up to
such date and Purchaser being charged and credited for all of
same on and after such date.
(f) All ad valorem real estate taxes and assessments levied or
assessed against the Property shall be prorated according to the
calendar year as of the Closing Date. If the Closing shall occur
before the tax rate is fixed for the then current year, the
apportionment of the taxes shall be upon the basis of the tax
rate for the preceding year applied to the latest assessed
valuation.
(g) In the event the Property has been assessed for property tax
purposes at such rates as would result in "roll-back" taxes upon
the change in land usage or ownership of the Property, Purchaser
hereby agrees to pay all such taxes and to indemnify and save
Seller harmless from and against all claims and liability for
such taxes. Such indemnity shall survive the closing and not be
merged therein.
(h) Upon completion of the Closing, Seller shall deliver to Purchaser
possession of the Property free and clear of all tenancies of
every kind and parties in possession, with all parts of the
Property (including without limitation the Improvements) in the
same conditions as on the date hereof, normal wear and tear
excepted.
(i) Purchaser shall pay for the costs (i) of recording the Deed, any
Mortgage and UCC Financing Statements and (ii) of any financing
obtained by Purchaser in connection with its purchase of
<PAGE>
the Property pursuant hereto. Seller shall pay for the costs of
any documentary stamp taxes on the Deed.
SECTION 4. NOTICES.
-------
Any notice provided or permitted to be given under this Agreement must be
in writing and may be served by depositing same in the United States mail,
addressed to the party to be notified, postage prepaid and registered or
certified with return receipt requested or by delivering the same in person to
such party. Notice given in accordance herewith shall be effective upon receipt
at the address of the addressee. For purposes of notice, the addresses of the
parties shall be as follows:
If to Seller, to: McCutchan and Patterson
12331 East 60th Street
Tulsa, Oklahoma 74145
If to Purchaser, to: National Environmental Service Co.
12331 East 60th Street
Tulsa, Oklahoma 74145
SECTION 5. COMMISSIONS.
-----------
Purchaser and Seller each represent and warrant to the other that no real
estate broker or agent has been used or consulted by such representing party in
connection with the negotiation or execution of this Agreement. Purchaser and
Seller covenant and agree that each will defend, indemnify and hold the other
harmless from and against all liabilities, claims, demands and actions by third
parties for brokerage, commission, finder's or other fees relative to
negotiation or execution of this Agreement, or the purchase and sale of the
Property, and any court costs, attorney's fees or other costs or expenses
arising therefrom, alleged to be due to the indemnifying party's acts. Such
indemnities shall survive the Closing and not be merged therein.
SECTION 6. ASSIGNS.
-------
This Agreement shall inure to the benefit of and be binding on the parties
hereto and their respective successors and assigns.
SECTION 7. GOVERNING LAW; TIME IS OF THE ESSENCE.
-------------------------------------
This Agreement shall be governed and construed in accordance with the laws
of the State of Oklahoma. Time is of the essence in the performance of each
party's obligations hereunder.
SECTION 8. ENTIRE AGREEMENT; INTERPRETATION.
--------------------------------
This Agreement is the entire Agreement between Seller and Purchaser
concerning the sale of the Property and no modification hereof or subsequent
Agreement relative to the subject matter hereof shall be binding on either party
unless reduced to writing and signed by the party to be bound. In case any one
or more of the provisions contained in this Agreement shall for any reason be
held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provisions hereof, and
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.
<PAGE>
EXECUTED the date and year above written.
SELLER:
McCUTCHAN AND PATTERSON, an Oklahoma general partnership
By: /s/Albert A. McCutchan
-------------------------------------------------
Albert A. McCutchan, Partner
By: /s/Eddy L. Patterson
-------------------------------------------------
Eddy L. Patterson, Partner
PURCHASER:
NATIONAL ENVIRONMENTAL SERVICE CO.
By: /s/ Larry G. Johnson
-------------------------------------------------
Larry G. Johnson, Vice President & Sec-Treas.
<PAGE>
EXHIBIT "A"
-----------
LAND DESCRIPTION
- ----------------
A part of Lot Nine (9), Block Five (5), METRO PARK, an Addition to the City of
Tulsa, County of Tulsa, State of Oklahoma, according to the recorded Plat
thereof, being more particularly described as follows, to-wit:
COMMENCING at the Southeast corner of Lot 9, Block Five (5), METRO PARK, said
point being the Southwest corner of Lot Eight (8), Block Five (5); thence N
7346'22" W a distance of 0.00 feet; thence along a curve to the right with a
central angle of 2105'07" and a radius of 690.00 feet, a distance of 253.93 feet
to a point; thence North 5241'15" W along the South line of Lot Nine (9), Block
Five (5), a distance of 941.35 feet to the point of beginning; thence continuing
N 5241'15" W a distance of 535.14 feet to a point; thence S 8955'56" E a
distance of 425.62 feet to a point; thence due South and parallel with the East
line of Lot Nine (9), Block Five (5), a distance of 323.88 feet to the point of
beginning.
<PAGE>
Exhibit 10.14
PROMISSORY NOTE
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL
$480,000.00 02-27-1998 03-08-2005 8316444 1E0 84
ACCOUNT OFFICER INITIALS
2248 ELH
BORROWER: NATIONAL ENVIRONMENTAL SERVICES CO. (TIN:
73-1296420
12331 E. 60TH ST.
TULSA, OK 74146
LENDER: CITIZENS BANK OF TULSA
P O BOX 27127
TULSA, OK 74149
PRINCIPAL AMOUNT: INITIAL RATE: DATE OF NOTE:
$480,000.00 9.000% FEBRUARY 27, 1998
PROMISE TO PAY. NATIONAL ENVIRONMENTAL SERVICES CO. ("BORROWER") PROMISES TO PAY
TO CITIZENS BANK OF TULSA ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED
STATES OF AMERICA, THE PRINCIPAL AMOUNT OF FOUR HUNDRED EIGHTY THOUSAND & 00/100
DOLLARS ($480,000.00), TOGETHER WITH INTEREST ON THE UNPAID PRINCIPAL BALANCE
FROM FEBRUARY 27, 1998, UNTIL PAID IN FULL.
PAYMENT: SUBJECT TO ANY PAYMENT CHANGES RESULTING FROM CHANGES IN THE INDEX,
BORROWER WILL PAY THIS LOAN IN 84 PAYMENTS OF $7,774.04 EACH PAYMENT.
BORROWER'S FIRST PAYMENT IS DUE APRIL 8, 1998, AND ALL SUBSEQUENT PAYMENTS ARE
DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. BORROWER'S'S FINAL PAYMENT WILL
BE DUE ON MARCH 8, 2005, AND WILL BE FOR ALL PRINCIPAL AND ALL ACCRUED INTEREST
NOT YET PAID. PAYMENTS INCLUDE PRINCIPAL AND INTEREST. The annual interest rate
for this Note is computed on a 365/360 basis; that is, by applying the ratio of
the annual interest rate over a year of 360 days, multiplied by the outstanding
principal balance, multiplied by the actual number if days the principal balance
is outstanding. Borrower will pay Lender at Lender's address shown above or at
such other place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is the LOW NEW
YORK PRIME (the index). The index is not necessarily the lowest rate charged by
Lender on its loans. If the index becomes unavailable during the term of this
loan, Lender may designate a substitute index after notice to Borrower. Lender
will tell Borrower the current Index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each DAY. THE INDEX
CURRENTLY IS 8.500% PER ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID
PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 0.500 PERCENTAGE POINTS OVER
THE INDEX, RESULTING IN AN INITIAL RATE OF 9.000% PER ANNUM. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum rate
allowed by applicable law. Whenever increases occur in the interest rate,
Lender, at its option, may do one or more of the following: (a) increase
Borrower's payments to ensure Borrower's loan will pay off by its original final
maturity date, (b) increase Borrower's payments to cover accruing interest, c)
increase the number of Borrower's payments, and (d) continue Borrower's payments
at the same amount and increase Borrower's final payment.
PREPAYMENT. Borrower agrees that all loans and all fees and other prepaid
finance charges are earned fully as of the date of the loan and will not be
subject to refund upon early payment (whether voluntary or as a result of
default), except as otherwise required by law. Except for the foregoing,
Borrower may pay without penalty all or a portion of the amount owed earlier
than it is due. Early payments will not, unless agreed to by Lender in writing,
relieve Borrower of Borrower's obligation to continue to make payments under the
payment schedule. Rather, they will reduce the principal balance due and may
result in Borrower making fewer payments.
LATE CHARGE. If a payment is 11 DAYS OR MORE LATE, Borrower will be charged
10.000% OF THE UNPAID PORTION OF THE PAYMENT.
<PAGE>
DEFAULT. Borrower will be in default of any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Any representation or statement made or furnished to Lender
by Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (d) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property, Borrower
makes an assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any Bankruptcy or insolvency laws.
(e) Any creditor tries ro take any of Borrower's property on or which Lender has
a lien or security interest. This includes the garnishment of any of Borrower's
accounts with Lender. (f) Any guarantor dies or any of the other events
described in this default section occurs with respect to any guarantor of this
Note. (g) A material adverse change occurs in Borrower's financial condition, or
Lender believes the prospect of payment or performance of the indebtedness is
impaired.
If any default, other than a default in payment, is curable and if Borrower has
not been give a notice of a breach of the same provision of this Note within the
preceding twelve (12) months, it may be cured (and no event of default will have
occurred) if Borrower, after receiving written notice from Lender demanding cure
of such default: (a) cures the default within fifteen (15) days; or (b) of the
cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Lender may hire or pay someone
else to help collect this Note of Borrower does not pay. Borrower also will pay
Lender that amount. This includes, subject to nay limits under applicable law,
Lender's attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgement collection services. If not
prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO
LENDER AND ACCEPTED BY LENDER IN THE STATE OF OKLAHOMA. IF THERE IS A LAWSUIT,
BORROWER AGREES UPON LENDER'S'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE
COURTS, OF TULSA COUNTY, IN THE STATE OF OKLAHOMA. THIS NOTE SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OKLAHOMA.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $10.00 of Borrower
makes a payment on Borrower's loan and the check or other payment order
including any preauthorized charge with which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
COLLATERAL. This Note is secured by FIRST REAL ESTATE MORTGAGE ON 12331 E.
60TH ST., TULSA, OK 74146.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lenders security interest in the collateral; and
take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
<PAGE>
BORROWER:
NATIONAL ENVIRONMENTAL SERVICES CO.
BY: /s/ EDDY L. PATTERSON, PRESIDENT
citnote.wpd/lgj/3-16-98
<PAGE>
Exhibit 10.15
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into this 30th day of January, 1998, by and among NATIONAL ENVIRONMENTAL SERVICE
CO., an Oklahoma corporation ("NESCO"); LAB ONE ANALYTICAL, INC., an Oklahoma
corporation ("Lab One"); LAB ONE ACQUISITION, INC., an Oklahoma corporation and
a newly formed and wholly owned subsidiary of NESCO ("Acquisition Corporation");
EDDY L. PATTERSON, an individual residing in Tulsa, Oklahoma ("Patterson"); and
ALBERT A. MCCUTCHAN, an individual residing in Tulsa, Oklahoma ("McCutchan").
R E C I T A L S
---------------
WHEREAS, Patterson and McCutchan own in the aggregate all of the issued and
outstanding shares of common stock of Lab One; and
WHEREAS, it is the desire of NESCO to acquire Lab One through a merger of
Lab One with NESCO's wholly-owned subsidiary, Acquisition Corporation, pursuant
to which Lab One would be the surviving corporation; and
WHEREAS, it is the desire of Patterson and McCutchan that NESCO acquire Lab
One through such merger; and
WHEREAS, in order to carry out the foregoing objectives, the parties hereto
desire to enter into this Agreement to merge Acquisition Corporation with and
into Lab One.
A G R E E M E N T
-----------------
NOW, THEREFORE, in consideration of the mutual promises and agreements
hereinafter set forth, the parties agree as follows:
ARTICLE I. TERMS OF THE MERGER.
-------------------
1.1. The Merger. Pursuant to the terms and provisions of this Agreement
----------
and the Oklahoma General Corporation Act (the "Oklahoma Corporate Law"),
Acquisition Corporation shall merge with and into Lab One (the "Merger").
1.2. Merging Corporations. Acquisition Corporation shall be the merging
--------------------
corporation under the Merger and its corporate identity and existence, separate
and apart from Lab One, shall cease upon consummation of the Merger.
1.3. Surviving Corporation. Lab One shall be the surviving corporation
---------------------
(the "Surviving Corporation") in the Merger. No change in the certificate of
incorporation, bylaws, directors, or officers of Lab One shall be effected by
the Merger.
1.4. Effect of Merger. The Merger shall have all of the effects provided
----------------
by the Oklahoma Corporate Law. It is the understanding of the parties that the
Merger shall constitute a
<PAGE>
reorganization within the provisions of Section 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended (the "Code").
1.5. Consideration.
-------------
a. At the Effective Time (as hereinafter defined) each of the issued
and outstanding shares of common stock of Lab One shall be converted into
the right to receive 300 shares of NESCO Common Stock and $100.00 in cash
(collectively, the "Consideration") for each share, with the aggregate
consideration for all shares of common stock of Lab One to be 225,000
shares of NESCO Common Stock and $75,000.00 cash.
b. All of the shares of common stock of Lab One, by virtue of the
Merger and without any action on the part of the holders thereof, shall no
longer be outstanding and shall be canceled and retired and shall cease to
exist, and each holder of any certificate or certificates which,
immediately prior to the Effective Time represented outstanding shares of
Lab One (collectively, the "Certificates") shall cease to have any rights
with respect to such shares, except the right of the holder to receive
Consideration for each share upon the surrender of such Certificates in
accordance with Section 1.7 below.
-----------
c. Each share of common stock, par value $1.00 per share, of
Acquisition Corporation outstanding immediately prior to the Effective Date
shall convert into one share of Common Stock of the Surviving Corporation.
1.6. Closing Date. The closing of the transactions contemplated herein
------------
(the "Closing") shall take place on January 30, 1998, or on such other date as
the parties hereto may mutually agree (the "Closing Date"). The Merger shall be
effective upon the filing of a Certificate of Merger with the Secretary of State
of Oklahoma (the "Effective Time").
1.7. Exchange Procedure: Surrender of Certificates. At the Closing,
---------------------------------------------
Patterson and McCutchan shall deliver to NESCO the Certificates evidencing all
of the shares of common stock in Lab One that were converted into the right to
receive the Consideration in the Merger. Upon surrender of such Certificates,
and all other documents that may be required by NESCO in connection therewith,
the holder of each such Certificate shall be entitled to receive, in exchange
therefor, the Consideration as provided in Section 1.5 above, with the portion
-----------
of Consideration consisting of NESCO Common Stock represented by a certificate
or certificates issued by NESCO to the appropriate holder of such NESCO Common
Stock.
ARTICLE 2. REPRESENTATIONS AND WARRANTIES
------------------------------
2.1 Representations and Warranties by Patterson and McCutchan. Patterson
---------------------------------------------------------
and McCutchan each hereby represents and warrants to NESCO and Acquisition
Corporation that the shares of NESCO Common Stock he will receive in the Merger
are being acquired for his own separate account for investment only and not with
a view to, or for sale in connection with, any distribution of NESCO Common
Stock in violation of the Securities Act of 1933, as amended (the "Securities
Act"), or any rule or regulation under the Securities Act. Patterson and
McCutchan each understand that (a) the NESCO Common Stock may not be transferred
or sold for value in the absence of registration or qualification or an
exemption from registration or qualification under the Securities Act, the
Oklahoma Securities Act, and the securities or Blue Sky laws of any other state,
<PAGE>
as may be required, (b) a stop transfer instruction will be issued with respect
to NESCO Common Stock, and (c) the following legend will be placed on each
certificate representing NESCO Common Stock to be received in the Merger:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, the Oklahoma
Securities Act, or any other state securities law. Neither the record
nor beneficial ownership of said securities may be sold or transferred
in the absence of an effective registration statement for such
securities under said Acts unless, in the opinion of counsel
satisfactory to the Company, exemptions from the registration
requirements of said Acts are available with respect to such sales or
transfer and such sale or transfer is made pursuant to and in strict
compliance with the terms and conditions of said exemptions.
2.2 Representations and Warranties by Lab One, Patterson, and McCutchan.
-------------------------------------------------------------------
Lab One, Patterson, and McCutchan, jointly and severally, hereby represent and
warrant to NESCO and Acquisition Corporation as follows:
a. Organization and Standing: Charter and Bylaws. Lab One is a
---------------------------------------------
corporation duly organized and existing under, and by virtue of, the laws
of the State of Oklahoma and is in good standing under such laws. Lab One
has the requisite corporate power to own and operate its properties and
assets, and to carry on its businesses as presently conducted and as
proposed to be conducted. Lab One is qualified, licensed, or domesticated
as a foreign corporation in any jurisdiction where the nature of its
activities and of properties owned or leased by it makes such
qualification, licensing, or domestication necessary at this time. Lab One
has furnished NESCO with copies of its respective certificate of
incorporation and bylaws. Said copies are true, correct, and complete and
contain all amendments through the date of this Agreement.
b. Corporate Power and Authorization. Lab One has all requisite
---------------------------------
legal and corporate power to enter into this Agreement and to carry out and
perform its obligations under the terms of this Agreement. This Agreement
is a legal, valid and binding obligation of each of Lab One, enforceable
against each of Ward and Ward Services in accordance with its terms.
c. Capitalization. All of the issued and outstanding shares of
--------------
common stock of Lab One are, in the aggregate, held by Patterson and
McCutchan. The issued and outstanding shares of such common stock have
been duly authorized and validly issued, are fully paid and nonassessable
and were issued in compliance with all applicable state and federal laws
concerning the issuance of securities. There are no outstanding rights,
options, warrants, conversion rights, or agreements for the purchase or
acquisition from Lab One of any shares of its capital stock.
d. Financial Statements and Other Information. The financial
------------------------------------------
statements of Lab One provided by Lab One to NESCO, or to persons acting on
NESCO's behalf, fairly present the financial condition and results of
operations of Lab One as of the dates and for
<PAGE>
the periods thereof. Lab One has provided to NESCO all other material
information regarding its business, operations, affairs and assets. None of
the information provided to NESCO contained any material misstatements of
fact and there were no omissions of facts which are necessary to make the
information that was provided, in light of the circumstances in which the
information was provided, not misleading.
2.3. Representations and Warranties of NESCO and Acquisition Corporation.
-------------------------------------------------------------------
NESCO and Acquisition Corporation represent and warrant to Lab One, Patterson,
and McCutchan as follows:
a. Organization and Standing. NESCO is a corporation duly organized
-------------------------
and existing under, and by virtue of, the laws of the State of Oklahoma and
is in good standing under its laws.
b. Organization and Standing. Acquisition Corporation is a
-------------------------
corporation duly organized and existing under, and by virtue of, the laws
of the State of Oklahoma and is in good standing under its laws.
c. Corporate Powers and Authorization. Both NESCO and Acquisition
----------------------------------
Corporation have all requisite legal and corporate power to enter into this
Agreement and to carry out and perform their respective obligations under
the terms of this Agreement. Neither the certificates of incorporation nor
bylaws of NESCO or Acquisition Corporation, nor any other instrument to
which NESCO or Acquisition Corporation are parties, or by which either is
bound, nor any court order or any governmental law, rule or regulation,
will be violated by execution and consummation of this Agreement by NESCO
or Acquisition Corporation. All corporate action on the part of NESCO and
Acquisition Corporation, their directors, and stockholders necessary for
the transactions contemplated by this Agreement have been taken. This
Agreement is a legal, valid, and binding obligation of NESCO and
Acquisition Corporation, enforceable against each corporation in accordance
with its terms.
d. Common Stock. The NESCO Common Stock to be issued to Patterson
------------
and McCutchan hereunder is duly authorized and, when issued in accordance
with the terms of this Agreement, will be validly issued, fully paid, and
nonassessable.
ARTICLE 3. GENERAL PROVISIONS.
------------------
3.1 Waivers and Amendments. Any of the obligations or requirements set
----------------------
forth in this Agreement may be waived, and any provision of this Agreement may
be amended, by written agreement of the parties hereto.
3.2. Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of Oklahoma.
3.3. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, heirs, executors,
<PAGE>
and administrators of the parties hereto. No party hereto shall assign this
Agreement, or any rights thereto, without the prior written consent of the other
parties hereto.
3.4. Entire Agreement. This Agreement and the other documents delivered
----------------
pursuant hereto constitute the full and entire understanding and agreement
between the parties hereto with regard to the subjects hereof and thereof.
3.5. Notices. All notices and other communications required or permitted
--------
to be given to any party hereunder shall be in writing and shall be effective
when delivered at the address set forth below or at such other address as that
shall have furnished to the parties in writing:
12331 East 60/th/ Street South
Tulsa, Oklahoma 74145
3.6. Severability. In case any provision of this Agreement not material to
------------
the benefits intended to be conferred hereby shall be determined to be invalid,
illegal, or unenforceable, the validity, legality, and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
3.7 Survivability of Representations and Warranties. The representations
-----------------------------------------------
and warranties of the parties hereto shall survive the Closing of the Merger and
the other transactions contemplated hereby.
3.8. Other Documents. The parties to this Agreement shall in good faith
---------------
execute such other and further instruments, assignments or documents as may be
necessary or advisable to carry out the transactions contemplated by this
Agreement.
3.9. Titles and Headings. The titles of the Articles, Sections and
-------------------
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
3.10. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original and all of which together shall
constitute one instrument, which instrument shall be deemed effective when there
exist copies signed by all of the parties hereto.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by their duly authorized representatives, effective as of the date set
forth on the first page hereof.
"NESCO" "LAB ONE"
National Environmental Service Co., Lab One Analytical, Inc.,
an Oklahoma corporation an Oklahoma corporation
By: /s/Larry G. Johnson By: /s/Eddy L. Patterson
----------------------------- ----------------------------
Larry Johnson, Eddy L. Patterson,
Vice President Chairman of the Board
<PAGE>
"ACQUISITION CORPORATION"
Lab One Acquisition, Inc.,
an Oklahoma corporation
By: /s/Larry G. Johnson
----------------------------
Larry Johnson,
President
"PATTERSON" "MCCUTCHAN"
/s/ Eddy L. Patterson /s/ Albert A. McCutchan
----------------------------- ----------------------------
Eddy L. Patterson Albert A. McCutchan
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF NATIONAL ENVIRONMENTAL SERVICE CO.
1. Fuel Recovery Systems, Inc.
2. Lab One Analytical, Inc.
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