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U.S. Securities & Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period.....................to......................
Commission file number.................000-24470
NATIONAL ENVIRONMENTAL SERVICE CO.
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(Exact name of small business issuer as specified in its charter)
Oklahoma 73-1296420
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12331 East 60th Street, Tulsa, Oklahoma 74l46
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(Address of principal executive offices)
(918)-250-2227
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of August 1, 1997:
Number of shares
Title of Class Outstanding
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Common Stock, $.01 Par Value 7,876,143
Transitional Small Business Issuer Format (Check one): Yes No X
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NATIONAL ENVIRONMENTAL SERVICE CO.
TABLE OF CONTENTS
PAGE
FINANCIAL INFORMATION:
Consolidated Balance Sheet
June 30, 1998 3
Consolidated Statements of Income
Three Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Income
Six Months Ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of the
Financial Condition and Results of Operation 9
PART II
OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(In Thousands)
(Unaudited)
ASSETS
Current assets:
Cash $ 111
Accounts Receivable and Costs in Excess of Billings 7,134
Materials and Supplies 1,181
Prepaid Expenses 44
-------
Total current assets 8,470
-------
Property and equipment, at cost 3,959
Less accumulated depreciation (1,852)
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Property and equipment, net 2,107
-------
Other assets 6
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Total assets $10,583
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long term obligations
and revolving line of credit $ 3,181
Accounts payable 1,692
Accrued liabilities 263
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Total current liabilities 5,136
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Long-term obligations 801
Deferred income taxes 120
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Total Liabilities 6,057
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Shareholders' equity:
Preferred stock: 1,000,000 shares authorized;
none issued
Common stock, par value $.01; authorized 20,000,000 shares;
issued and outstanding 7,876,143 shares, including treasury
shares 79
Additional paid-in capital 3,942
Retained Earnings 553
Common stock in Treasury, at cost, 12,376 shares (48)
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Total shareholders' equity 4,526
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Total liabilities and shareholders' equity $10,583
=======
The accompanying notes are an integral part of the financial statements.
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(In thousands except per share amounts)
(Unaudited)
1998 1997
------ ------
Revenues $2,944 $3,387
Costs and Expenses 1,872 2,204
Selling, general and administrative expenses 913 799
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Income from operations 159 384
Other income 2 20
Interest expense 90 107
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Income before provision for income taxes 71 297
Provision for income taxes 27 109
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Net Income $ 44 $ 188
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Basic Net Income per share $ 0.01 $ 0.03
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Diluted Net Income per share $ 0.01 $ 0.03
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The accompanying notes are an integral part of the financial statements.
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENT OF INCOME
FOR SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(In thousands except for per share amounts)
(Unaudited)
1998 1997
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Revenues $6,632 $6,974
Cost and expenses 4,653 4,390
Selling, general and administrative expenses 1,696 1,577
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Income from operations 283 1,007
Other Income 23 41
Interest Expense 197 192
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Income before provision for income taxes 109 856
Provision for taxes on income 39 306
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Net Income $ 70 $ 550
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Basic Net Income per share $ 0.01 $ 0.06
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Diluted Net Income per share $ 0.01 $ 0.06
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The accompanying notes are an integral part of the financial statements.
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(In thousands)
(Unaudited)
1998 1997
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Operating activities
Net Income $ 70 $ 550
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 217 190
Change in:
Accounts receivable (6) (1,161)
Materials and supplies (187) (17)
Prepaid expenses 38 (45)
Accounts payable (387) (69)
Accrued liabilities (323) 327
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Net cash provided by (used in) operating activities (578) (225)
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Investing activities
Purchases of property, plant and equipment (141) (160)
Other 16 (1)
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Net cash provided by (used in) investing activities (125) (161)
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Financing activities:
Proceeds from notes payable and long-term obligations 2,430 440
Principal payments on notes and long term obligations (2,421) (803)
Proceeds from common stock 712 963
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Net cash provided by financing activities 721 600
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Increase in cash 18 204
Cash, beginning of period 93 119
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Cash, end of period $ 111 $ 333
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NATIONAL ENVIRONMENTAL SERVICE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, the accompanying condensed financial
statements contain all adjustments of a normal recurring nature necessary to
present fairly the financial position of the Company as of June 30, 1998 and the
results of operations and cash flows for the three and six month periods ended
June 30, 1998 and 1997.
2. BUSINESS COMBINATION
Lab One Analytical, Inc. and the corporate office building and facilities
were purchased from Eddy Patterson and Albert McCutchan, the President and
Executive Vice President of the Company following the completion of independent
appraisals of the entities and the review and unanimous consent of the outside
directors of the Company to the transactions and terms and conditions thereof.
The following restatement increases are included in the l997 financial
statements:
2nd Quarter 6 Months
Ended 6-30-97 ended 6-30-97
Income from operations $39 $87
Income before provision 19 37
Net Income 13 25
3. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" (see Note 10). SFAS 128 replaced primary earnings
per share ("EPS") with basic EPS and fully diluted EPS with diluted EPS. Basic
EPS is calculated by dividing net earnings available to common shares by the
weighted average common shares outstanding. Diluted EPS is calculated similarly,
except that it includes the dilutive effect of the assumed exercise of all
dilutive potential common shares outstanding. SFAS 128 also requires previously
reported EPS to be restated.
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Basic and diluted EPS for the three months ended June 30, 1998 and 1997,
were computed as follows:
Six Months Ended June 30
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1998 1997
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Basic EPS Computation:
Net income $70 $550
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Weighted average shares outstanding 7,270,764 6,771,977
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Basic EPS $.01 $.06
=========================
Diluted EPS Computation:
Net income $80 $550
=========================
Weighted average shares outstanding 7,270,764 6,771,977
Incremental shares for assumed exercise
of securities:
Warrants 3,367 -
Options 26,455 -
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7,300,586 6,771,977
=========================
Diluted EPS $.01 $.06
=========================
The 212,000 shares in 1998 and the 238,000 in 1997 shares of employee stock
options were not included in the computation of diluted EPS as their effect is
anti-dilutive.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the company's
financial statements and notes thereto and other financial information relating
to the Company.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
JUNE 30, 1997.
Revenue for the three months ended June 30, 1998 decreased 13% from the
corresponding period of 1997 ($2,944,000 compared to $3,387,000). The decrease
in 1998 in comparison to the same quarter in 1997 occurred in all but two
revenue categories. Increases in the site assessments and reports category
totaled $99,000 or 85% ($216,000 in the second quarter of 1998 compared to
$117,000 in the same quarter of 1997). Remediation revenues decreased 75%
($103,000 in the second quarter of 1998 compared to $414,000 for the
corresponding three month period of 1997). The increase in site assessments and
reports resulted from additional work being performed in Texas. At the same
time, several of the state indemnity funds which pay for site remediation work
have initiated a risked-based determination as to which contaminated sites will
be allowed into a state funded remediation program. This has resulted in fewer
remediation projects and a corresponding decline in revenues for remediation.
The 19% cathodic protection revenue decrease is the result of significant
shipments of cathodic protection kits in prior periods to distributors for
installation in advance of the December 1998 compliance deadline. Cathodic
protection revenues were $980,000 in the second quarter of 1998 compared to
$1,207,000 for the same period in 1997. The construction and repair revenues
declined 12% in the second quarter of 1998 as compared to the corresponding
period for 1997 ($1,421,000 compared to $1,609,000). The 12% decline resulted
from delays in the start of projects previously awarded to the Company because
of delays in the receipt of required permits by the project owners. Fueling
systems service and parts sales increased $170,000 during the second quarter of
1998 compared to the same quarter in 1997 ($206,000 compared to $36,000). The
Dallas parts and service operation accounted for most of the increase. The
significant increase in the 2nd quarter of 1998 was due to the start-up of the
service operation in Dallas during the first half of 1997 and corresponding
small amount of revenues for that period.
The 15% decrease in the cost of sales for the second quarter of 1998
compared to the second quarter of 1997 was attributable to the 13% decline in
revenues for the same period. Second quarter cost of sales was $1,872,000
compared to $2,204,000 for the corresponding period in 1997. Supplies and
materials decreased 55% ($443,000 compared to $985,000). The decrease resulted
from a shift in the type of jobs performed by the Company in the second quarter
of 1998 compared to the same period in the previous year. The types of jobs
performed in 1998 involved installation of fueling systems on which the project
owner purchased the needed supplies and materials directly from the supplier.
The decrease in supplies and materials was offset by increases in the use of
subcontractors during the second quarter of 1998 as compared to the same
9
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period in 1997 ($607,000 compared to $356,000). The shift to increased
installation of fueling systems required the greater use of subcontractors to
perform the work.
Selling, general and administrative expenses increased 14% in the second
quarter as compared to the second quarter of 1997 ($913,000 compared to
$799,000). Salaries increased $15,143 or 4% in the second quarter of 1998
compared to the second quarter of 1997 ($415,000 compared to $400,000). The
increase resulted from normal salary increases. Office rent decreased $24,000
during the second quarter of 1998 as compared to the same quarter in 1997 due to
the acquisition of the corporate home office facilities at the end of January
1998, and the elimination of one of two lease payments on two Dallas locations.
The Company relocated its Dallas offices in 1996, and the lease on the vacated
facility did not expire until June 30, 1997. The telephone expense increased
$27,000 for the second quarter of 1998 compared to the same quarter in 1997
($48,000 compared to $21,000) due to the significant additions of cellular
telephones and other communication equipment and the addition of an Oklahoma
City office. Office supplies increase $29,000 in the second quarter of 1998
compared to the same quarter of 1997 ($53,000 compared to $24,000). The office
supplies expense increase resulted from significant computer software upgrades
and additions, establishment of the Oklahoma City office, printing of
significant amounts of stationery and other forms.
Even with somewhat higher loan balances, interest expense decreased 16% for
the second quarter of 1998 compared to the same quarter in 1997 due to
significantly lower cost of borrowed money. Interest expense for the second
quarter of 1998 was $90,000 compared to $107,000 for the same period in 1997.
The lower interest rates were due to a change in lenders beginning in July of
1997 and to special dealer rates on eight service body trucks purchased in the
fourth quarter of 1997.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
JUNE 30, 1997.
Revenue for the six months ended June 30, 1998 decreased 5% compared to the
corresponding period of 1997 ($6,632,000 compared to $6,974,000). The decrease
in revenues for the first six months in 1998 compared to the corresponding
period in 1997 was due primarily to reduced revenues in remediation and sale of
cathodic protection systems. Remediation revenues declined $395,000 in the
first six months of 1998 compared to the same period in 1997 ($203,000 compared
to $598,000). Several of the state indemnity funds which pay for site
remediation work have initiated a risked-based determination as to which
contaminated sites will be allowed into a state funded remediation program.
This has resulted in fewer remediation projects and the corresponding decline in
revenues for remediation. Cathodic protection revenues declined $250,000 during
the first six months of 1998 compared to the same period in 1997 ($2,067,000
compared to $2,317,000). The 11% cathodic protection revenue decrease is the
result significant shipments in prior periods of cathodic protection kits to
distributors for installation in advance of the December 1998 compliance
deadline. Construction and repair revenues were virtually unchanged for the
first six months of 1998 compared to the same period
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in 1997 ($3,629,000 compared to $3,660,000). Fueling systems service and parts
sales increased $326,000 during the first six months of 1998 compared to the
same period in 1997 ($394,000 compared to $68,000). The Dallas parts and
service operation accounted for most of the increase. The significant increase
in the first six months of 1998 was due to the start-up of the service operation
in Dallas during the first half of 1997 and the corresponding small amount of
revenues for the first six month period.
Cost of sales increased 6% to $4,653,000 for the first six months of 1998
compared to $4,391,000 for the first six months of 1997. Subcontractor expense
increased $1,350,000 for the first six months of 1998 compared to the same
period in 1997 ($1,813,000 compared to $463,000. The increase in subcontractor
expense was substantially offset by significant declines in materials and
supplies expense. Materials and supplies decreased $1,030,000 ($1,071,000 for
the first six months of 1998 compared to $2,101,000 for the same period in
1997). The decrease in materials and supplies expense and the increase in
subcontractor expense resulted from a shift in the types of jobs performed by
the Company in the first six months of 1998 compared to the same period in the
previous year. The type of jobs performed in 1998 involved installation of
fueling systems on which the project owner purchased the needed supplies and
materials directly from the supplier. This shift increased installation of
fueling systems required the greater use of subcontractors to perform the work.
Vehicle expense except depreciation decreased 26% ($103,000 for the first six
months of 1998 compared to $139,000 for the first six months of 1997). This
decrease was a result of significant expenditures for equipment usage and repair
during the first six months of 1997. There were a number of major repairs on
vehicles. Additionally, a number of new vehicles were added in the last half of
1997 which required few repairs in the first half of 1998.
Selling, general and administrative expense increased 6% for the six months
ended June 30, 1998 compared to the same period in 1997 ($1,696,000 compared to
$1,577,000). Salesmen's salaries declined $105,000 during the first six months
of 1998 compared to the same period the prior year. This reduction was offset by
increases in officer, management, and clerical salaries resulting in an overall
administrative salaries increase of 2% for the first six months of 1998 compared
to the same period in 1997 ($817,000 compared to $804,000). Salesmen's travel
expense decreased $28,000 in the first six months of 1998 compared to the first
six months of 1997. The reduction in salesmen's salaries and salesmen's travel
expense resulted because several additional sales personnel added in late 1996
and early 1997 were no longer with the Company during the first half of 1998.
Office supplies and postage increased $23,000 during the first six months of
1998 compared to the same period the previous year ($77,000 compared to
$54,000). The office supplies expense increase resulted from significant
computer software upgrades and additions, establishment of the Oklahoma City
office, printing of significant amounts of stationery and other forms. Office
rent decreased $17,000 during the first six months of 1998 compared to the same
period the prior year ($20,000 compared to $37,000) due to the acquisition of
the corporate home office facilities at the end of January 1998, and the
elimination of one of two lease payments on two Dallas locations. The Company
relocated its Dallas offices in 1996, and
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the lease on the vacated facility did not expire until June 30, 1997. Telephone
expense increased $41,000 during the first six months of 1998 compared to the
same period in 1997 ($85,000 compared to $44,000) due to the significant
additions of cellular telephones and other communication equipment and the
addition of an Oklahoma City office. Bad debt expense increased $21,000 in the
first six months of 1998 compared to the same period in 1997 ($73,000 compared
to $52,000) due to the recognition or writeoff of certain doubtful accounts.
Advertising expense declined $20,000 during the first six months of 1998
compared to the same period in 1997 ($9,000 compared to $29,000). The decline
resulted from a shift of emphasis on the type of job marketed, a reduction in
the advertising of cathodic protection systems, and fewer trade publication
advertisements.
Interest expense increased 5% or $9,000 for the first six months of 1998
compared to the corresponding period in 1997 ($197,000 compared to $192,000).
The additional expense resulted from larger loan balances outstanding during the
first six months of 1998 compared with the same period in 1997. The interest
expense resulting from the larger loan balances outstanding was substantially
offset by lower interest rates obtained by the Company on its line of credit and
on several truck loans.
CHANGES IN CAPITAL RESOURCES AND LIQUIDITY
The Company acquired Lab One on January 30, 1998, for $75,000 cash and
225,000 shares of the Company's common stock, a total purchase price of
$750,000.
On February 27, 1998, the Company acquired the office building, warehouse
and lot on which the Company's corporate offices are located. The purchase
price was $600,000, and the Company secured a loan from Citizens' Bank of Tulsa
for $480,000 secured by a mortgage on the acquired real estate. The loan has a
term of 7 years. The interest rate floats at 0.5% above Low New York Prime
rate, and the current rate is 9.0% per annum. The Company paid a 0.5%
origination fee.
Both Lab One and the real estate were purchased from Eddy Patterson and
Albert McCutchan, the President and Executive Vice President of the Company
following the completion of independent appraisals of the entities and the
review and unanimous consent of the outside directors of the Company to the
transactions and terms and conditions thereof.
Due to common ownership, these transactions were accounted for in a manner
similar to the pooling of interests method in 1998. The combined unaudited
revenues and expenses of the 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
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placement arrangement with Peacock, Hislop, Staley & Given, Inc. Gross proceeds
totaled $800,000. Net proceeds totaled $744,000.
On July 2, 1998, Bank of Oklahoma renewed the Line of Credit Loan which was
to mature on July 31, 1998. The amount of the line was increased from $3
million to $4.5 million at a rate based on Chase Manhattan Prime plus 3/4th of 1
percent. The maturity is July 31, 1999. Additionally, Bank of Oklahoma has
committed to advancing 80% of the purchase price (up to $700,000 on individual
notes) for the purchase of equipment, machinery, and vehicles.
On July 15, 1998, the Company purchased certain assets, assumed certain
leases, and hired the employees of Steffen, Robertson and Kirsten (U.S.), Inc.'s
Columbia, South Carolina, office. The purchase price was $472,686 plus 12,500
shares of the Company's common stock. The assets purchased included fixed
assets, accounts receivable, and accrued revenues for work performed but not
invoiced. The effective date of the acquisition was June 26, 1998.
The Company continued to make periodic debt repayments during this period.
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PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held at 12331 East
60th Street, Tulsa, Oklahoma on May 21, 1998. At the meeting the following
directors were elected for one year terms:
Abstain/Broker
For Withheld Non-Votes
--------- -------- ---------
Eddy L. Patterson 6,777,801 8,000
Albert A. McCutchan 6,777,801 8,000
E. R. Foraker 6,777,801 8,000
Jerry Danielson 6,777,801 8,000
W. F. Simpson 6,777,801 8,000
The shareholders ratified Tullius, Taylor, Sartain & Sartain as auditors to
perform the audit for the fiscal year ending December 31, 1998:
For 6,774,134 Against 500 Abstain/Broker Non-votes 12,167
Item 5. Other Information
As set forth in the Company's Proxy Statement for the 1998 Annual Meeting,
stockholder proposals submitted pursuant to Rule 14a-8 for inclusion in the
Company's proxy statement for the 1999 Annual Meeting of Stockholders must be
received no later than December 18, 1998. Any stockholder who intends to present
a proposal at the 1999 Annual Meeting and has not sought inclusion of the
proposal in the Company's proxy materials pursuant to Rule 14a-8 must provide
notice of such proposal to the Company no later than March 3, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.16 Copy of Amendment Two to Revolving Credit and Term Loan
Agreement dated as of July 2, 1998 and Promissory Note
between the Company and Bank of Oklahoma, N.A.
10.17 Copy of Purchase Agreement dated July 15, 1998 to be
effective as of June 26, 1998 between National Environmental
Service Company and Steffen, Robertson & Kirsten (U.S.),
Inc.
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27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NATIONAL ENVIRONMENTAL SERVICE CO.
Date: August 8, 1998 /s/ Eddy L. Patterson
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EDDY L. PATTERSON, President
Date: August 8, 1998 /s/ Larry G. Johnson
---------------------------------------------
LARRY G. JOHNSON, Vice President & Secretary-
Treasurer & Chief Financial
Officer
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EXHIBIT INDEX
10.16 Copy of Amendment Two to Revolving Credit and Term Loan
Agreement dated as of July 2, 1998 and Promissory Note between
the Company and Bank of Oklahoma, N.A.
10.17 Copy of Purchase Agreement dated July 15, 1998 to be effective
as of June 26, 1998 between National Environmental Service
Company and Steffen, Robertson & Kirsten (U.S.), Inc.
27.1 Financial Data Schedule
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EXHIBIT 10.16
AMENDMENT TWO TO
REVOLVING CREDIT LOAN AGREEMENT
THIS AMENDMENT TWO TO REVOLVING CREDIT LOAN AGREEMENT ("Amendment"), is
made and entered into effective as of July 2, 1998, by and between NATIONAL
ENVIRONMENTAL SERVICE CO., an Oklahoma corporation ("Borrower") and BANK OF
OKLAHOMA, NATIONAL ASSOCIATION, a national banking association ("Bank").
RECITALS
A. Reference is made to the Revolving Credit Loan Agreement dated
effective July 14, 1997, and Amendment One to Revolving Credit Loan Agreement
dated December __, 1997, between Borrower and Bank (as amended, the "Credit
Agreement"), pursuant to which currently exists a (I) $3,000,000 Revolving Line
and (ii) $500,000 Term Loan.
B. Borrower has requested Bank to: (I) increase the principal amount of
the $3,000,000 Revolving Line to $4,500,000 and extend its maturity, and (ii)
amend the Borrower's Borrowing Base calculation. Bank has agreed to accommodate
Borrower's request, subject to the terms and conditions set forth below. All
terms used herein shall have the meanings given in the Credit Agreement, unless
otherwise expressly defined.
For valuable consideration received, the parties agree to the following:
AGREEMENT
1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is amended as
------------------------------
follows:
a. Section 1.5 is hereby deleted and amended to read and mean as follows:
"1.5 "Borrowing Base" means, at any date of determination
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thereof, the sum of seventy-five percent (75%) of Borrower's
Qualified Receivables at such date, plus fifty percent (50%) of
----
Borrower's Qualified Inventory at such date, as determined by Bank
based upon the most recent information relating thereto provided
to Bank pursuant to Section 2.2."
The Borrowing Base Certificate shall be in form and content as set forth on
Schedule "1.1" attached hereto.
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b. Sections 1.25 and 1.26 are hereby deleted, and Bank hereby releases the
Guarantors, Albert A. McCutchan and Eddy Patterson, from their
respective Guaranty Agreements executed July 14, 1997.
c. Section 1.49 is hereby amended to additionally include the following
new section:
"1.49.12 As reported in accordance with GAAP, all receivables
reported as "Costs in Excess of Billings", not to exceed $2,500,000 in
aggregate."
d. Section 1.52 is hereby amended to additionally include Lab One, Inc. as
a subsidiary of Borrower.
e. Section 1.53 is hereby amended to delete all references to the
$3,000,000 Revolving Credit Note and replace with the "$4,500,000
Revolving Credit Note". The form of the $4,500,000 Revolving Credit
Note is attached as Schedule "1.4" hereto. All references in the
--------------
Credit Agreement to "$3,000,000" are hereby deleted and replaced with
"$4,500,000".
f. Section 6.4 is hereby deleted.
g. Section 8.5 is hereby amended to delete the reference to "$500,000" and
replace it with "$1,000,000" as the limitation on capital expenditures.
h. Section 9.1(6) is amended to delete the reference to "$50,000" and
replace it with "$100,000".
2. CONDITIONS PRECEDENT. The making of any loan provided for herein, shall be
--------------------
conditioned upon the Borrower executing and/or delivering the following:
2.1. This Amendment, with all schedules attached.
2.2. $4,500,000 Revolving Credit Note.
2.3. Amendment One to Real Estate Deed of Trust and Security
Agreement, in the form and content of Schedule "2.3" attached
--------------
hereto.
2.4. Any other instruments, documents and/or agreements reasonably
required by Bank in connection herewith.
3. RATIFICATION. Borrower hereby ratifies and confirms all Loan Documents to
------------
which it is a party, and represents and warrants that: (I) the Loan
Documents remain in full
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force and effect and unchanged except as expressly amended hereby, (ii) all
representations and warranties made thereunder are true and correct as of
the date hereof and (iii) no Event of Default exists as of the execution of
this Amendment. Borrower further represents and warrants that the Security
Agreement and Deed of Trust delivered to Bank in connection with the Credit
Agreement remain in full force and effect, and that each shall additionally
secure payment of the $4,500,000 Revolving Credit Note, together with
extensions, renewals and changes in form thereof.
4. GOVERNING LAW AND BINDING EFFECT. This instrument shall be governed by and
--------------------------------
construed in accordance with and governed by the laws of the State of
Oklahoma, and shall be binding upon and inure to the benefit of the parties
hereto, their respective heirs, executors, administrators, trustees,
successors and assigns.
5. COSTS, EXPENSES AND FEES. Borrower agrees to pay all costs, expenses and
------------------------
fees incurred in connection herewith.
"Borrower"
NATIONAL ENVIRONMENTAL SERVICE
CO., an Oklahoma corporation
By
---------------------------------------------
Eddy Patterson, CEO and Chairman of the Board
"Bank"
BANK OF OKLAHOMA, NATIONAL
ASSOCIATION
By
---------------------------------------------
Kevin M. Lackner, Vice President
<PAGE>
PROMISSORY NOTE
$4,500,000 July ___, 1998
Tulsa, Oklahoma
FOR VALUE RECEIVED, the undersigned, NATIONAL ENVIRONMENTAL SERVICE COMPANY
("Maker"), promises to pay to the order of BANK OF OKLAHOMA, N.A. ("Lender"), at
its offices in Tulsa, Oklahoma, the principal sum of FOUR MILLION FIVE HUNDRED
THOUSAND AND NO\100THS DOLLARS ($4,500,000) or, if less, the aggregate sum of
advances made by Lender to Maker under the Revolving Credit and Term Loan
Agreement between Maker and Lender dated July 14, 1997, as amended, payable as
follows:
a. Principal. Principal shall be payable on July 31, 1999.
---------
b. Interest. Interest shall be payable on the first day of each month,
--------
commencing the first day of August, 1998, and at maturity. Interest
shall accrue on the principal balance outstanding hereunder and on any
past due interest hereunder at a rate at all times equal to the Prime
Rate (defined below), plus three-quarters of one percent (3/4%) per
annum.
If any payment shall be due on a Saturday or Sunday or upon any other day on
which state or national banks in the State of Oklahoma are closed for business
by virtue of a legal holiday for such banks, such payment shall be due and
payable on the next succeeding banking day and interest shall accrue to such
day. All interest due hereon shall be computed on the actual number of days
elapsed (365 or 366) based upon a 360-day year.
Such installment payments are to be applied first to the payment of interest
on the principal balance from time to time remaining unpaid at the aforesaid
rate, and any balance shall be used to reduce the principal balance; except that
if any advances made by the holder hereof under the terms of any instrument,
document or agreement executed by Maker in connection herewith have not been
repaid, any monies received may, at the option of holder, be applied first to
repay such advances and interest thereon, and the balance, if any, applied to
any installment then due. Any prepayments shall be applied to installments in
the inverse order of occurrence.
"Prime Rate" shall mean a fluctuating interest rate per annum as in effect
from time to time, which interest rate per annum shall at all times be equal to
the rate of interest announced publicly from time to time (whether or not
charged in each instance), by The Chase Manhattan Bank, N.A. at New York, New
York ("Rate Bank"), as its base rate or general reference rate. Each change in
the Prime Rate (or any component thereof) shall become effective hereunder
without notice to Maker (which notice is hereby expressly waived by Maker), on
the effective date of each such change. Should the Rate Bank abolish or abandon
the practice of announcing or publishing a Prime Rate, then the Prime Rate used
during the remaining term of this Note shall be that interest rate or other
general reference rate then in effect at the Rate Bank which, from time to time,
in the
<PAGE>
reasonable judgment of Bank, most effectively approximates the initial
definition of the "Prime Rate." Maker acknowledges that Lender may, from time to
time, extend credit to other borrowers at rates of interest varying from, and
having no relationship to, the Prime Rate. The rate of interest payable upon the
indebtedness evidenced by this Note shall not, however, at any time exceed the
maximum rate of interest permitted under the laws of the State of Oklahoma for
loans of the type and character evidenced by this Note.
All payments under this Note shall be made in legal tender of the United
States of America or in other immediately available funds at Lender's office
described above, and no credit shall be given for any payment received by check,
draft or other instrument or item until such time as the holder hereof shall
have received credit therefor from the holder's collecting agent or, in the
event no collecting agent is used, from the bank or other financial institution
upon which said check, draft or other instrument or item is drawn.
From time to time the maturity date of this Note may be extended or this
Note may be renewed, in whole or in part, or a new note of different form may be
substituted for this Note and/or the rate of interest may be changed, or changes
may be made in consideration of loan extensions, and the holder, from time to
time, may waive or surrender, either in whole or in part, any rights,
guarantees, security interests or liens given for the benefit of the holder in
connection herewith; but no such occurrences shall in any manner affect, limit,
modify or otherwise impair any rights, guarantees or security of the holder not
specifically waived, released or surrendered in writing, nor shall any maker,
guarantor, endorser or any person who is or might be liable hereon, either
primarily or contingently, be released from such liability by reason of the
occurrence of any such event. The holder hereof, from time to time, shall have
the unlimited right to release any person who might be liable hereon; and such
release shall not affect or discharge the liability of any other person who is
or might be liable hereon.
If any payment required by this Note to be made is not made when due, or if
any default occurs under any loan agreement or under the provisions of any
mortgage, security agreement, assignment, pledge or other document or agreement
which provides security for the indebtedness evidenced by this Note, the holder
hereof may, at its option, without notice or demand, declare this Note in
default and all indebtedness due and owing hereunder immediately due and
payable. Interest from the date of default on such principal balance and on any
past due interest hereunder shall accrue at the rate of five percent (5%) per
annum above the non-default interest rate accruing hereunder. The Maker and any
endorsers, guarantors and sureties hereby severally waive protest, presentment,
demand, and notice of protest and nonpayment in case this Note or any payment
due hereunder is not paid when due; and they agree to any renewal, extension,
acceleration, postponement of the time of payment, substitution, exchange or
release of collateral and to the release of any party or person primarily or
contingently liable without prejudice to the holder and without notice to the
Maker or any endorser, guarantor or surety. Maker and any guarantor, endorser,
surety or any other person who is or may become liable hereon will, on demand,
pay all costs of collection, including reasonable attorney fees of the holder
hereof in attempting to enforce payment of this Note and reasonable attorney
fees for defending the validity of any document securing this Note as a valid
first and prior lien.
<PAGE>
Upon the occurrence of any default hereunder, Lender shall have the right,
immediately and without further action by it, to set off against this Note all
money owed by Lender in any capacity to the Maker or any guarantor, endorser or
other person who is or might be liable for payment hereof, whether or not due,
and also to set off against all other liabilities of Maker to Lender all money
owed by Lender in any capacity to Maker; and Lender shall be deemed to have
exercised such right of set off and to have made a charge against such money
immediately upon the occurrence of such default even though such charge is made
or entered into the books of Lender subsequently thereto.
The holder of this Note may collect a late charge not to exceed an amount
equal to five percent (5%) of the amount of any payment which is not paid within
ten (10) days from the due date thereof, for the purposes of covering the extra
expenses involved in handling delinquent payments. This late charge provision
shall not be applicable in the event the holder hereof, at its option, elects to
receive interest at the increased rate as provided hereunder in the event of
default.
This Note is given for an actual loan of money for business purposes and not
for personal, agricultural or residential purposes, and is executed and
delivered in the State of Oklahoma and shall be governed by and construed in
accordance with the laws of the State of Oklahoma.
This Note is an amendment and increase to the $3,000,000 Promissory Note
dated December ___, 1997, between Maker and Lender.
NATIONAL ENVIRONMENTAL SERVICE
COMPANY
By
---------------------------------------------
Eddy Patterson, CEO and Chairman of the Board
<PAGE>
EXHIBIT 10.17
PURCHASE AGREEMENT
This Purchase Agreement (hereafter "Agreement") is entered into this 15th
day of July, 1998 to be effective as of June 26, 1998 (hereafter "Effective
Date") by and between Steffen, Robertson & Kirsten (U.S.), Inc. (hereafter
"SRK") and National Environmental Service Company (hereafter "NESCO").
WHEREAS, SRK owns and operates a consulting engineering business with an
office located in Columbia, South Carolina (hereafter "Business") and desires to
sell certain assets of such Business and NESCO proposes to purchase those assets
under the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions set forth herein and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged the parties hereto agree
as follows:
1. Assets to be Purchased -
----------------------
A. Accounts Receivable - SRK agrees to sell, assign and transfer to
NESCO, and NESCO agrees to purchase for cash all bonafide accounts
receivable at 100% of invoice amount. Bonafide accounts receivable shall be
all receivables as of the Effective Date whose invoice date is equal or less
than 90 days prior to the Effective Date listed on Attachment A attached
hereto. Bonafide receivables shall not include any receivables that are
known by SRK to be in dispute or uncollectible. Within ten (10) days of
Closing (as defined herein), SRK shall provide NESCO with a schedule of all
relevant accounts receivable collected by SRK from the Effective Date to the
Closing Date (as defined herein) and shall pay NESCO in cash for any amounts
owed to NESCO pursuant to such schedule. If SRK receives payment after
Closing of any accounts receivable purchased by NESCO, SRK agrees to forward
such amounts received to NESCO within seven (7) days of receipt. If NESCO
receives payment after Closing of any of SRK's accounts receivable not
purchased by NESCO, NESCO agrees to forward such amounts received to NESCO
within seven (7) days of receipt.
B. Work in Progress - SRK agrees to sell, assign and transfer to
NESCO, and NESCO agrees to purchase for cash all receivables as of the
Effective Date not invoiced but accrued as work in progress at 100% of the
accrued amount as scheduled by the attached summary marked Attachment B.
For any amount of work-in-process accrued for by SRK up through the
Effective Date but for which a "change-order" does not exist, NESCO agrees
to pay SRK in cash for such work-in-progress within seven (7) days of
receipt of a change order, invoice or payment for such work.
C. Fixed Assets - SRK agrees to sell, assign and transfer to NESCO,
and NESCO
<PAGE>
agrees to purchase for cash all fixed assets at 100% of the "net book value"
at June 26, 1998, as shown on the attached Attachment C. Net book value
shall be defined as the original cost booked by SRK less all depreciation
through June 26, 1998.
2. Assumption of Leases - NESCO agrees to assume the liability as of the
--------------------
Effective Date for the leases and the remainder of the payments for such leases
as set forth on Attachment D, attached hereto (the "Assumed Leases").
3. Liabilities -
-----------
A. It is understood that SRK will pay all liabilities prior to the
Effective Date for which it is obligated (excluding the Assumed Leases) with
regard to the Business including but not limited to: accounts payable; notes
payable; all payroll and payroll taxes through the Effective Date; all other
benefits due SRK employees through the Effective Date except for accrued
vacation which has been assumed by NESCO; and all rent, utilities, taxes,
and assessments due through the Effective Date.
B. NESCO shall be responsible for all liabilities as of the Effective
Date with regard to the Business. After Closing, SRK shall provide NESCO
with a schedule listing (I) any liabilities of the Business arising as of
the Effective Date that have been paid by SRK and (ii) any liabilities that
were prepaid by SRK and prorating such liabilities through the Effective
Date and (iii) deposits paid relating to the Business (collectively, the
"Prepaid Liabilities"). NESCO shall pay in cash to SRK the amount of the
Prepaid Liabilities within seven (7) days of receipt of the Prepaid
Liabilities schedule.
4. Assignment - SRK will use their best endeavors to assign without
----------
penalty or loss to NESCO all existing material contracts, backlog, customer
lists, good and merchantable title to the purchased assets, purchased accounts
receivable, purchased receivables accrued as work in progress and not invoiced,
licenses that are assignable, and such other rights as SRK presently enjoys at
its Columbia office.
5. Purchase Price - NESCO shall pay to SRK the total purchase price set
--------------
forth below (the "Purchase Price") in cash or immediately available funds on or
before July 17, 1998. If the Purchase Price is not received by SRK before 5:00
p.m., Denver time, on July 17, 1998, this Purchase Agreement shall be null and
void.
The Purchase Price shall be allocated as follows:
<PAGE>
A. Cash (all amounts in US $):
Accounts Receivable $ 110,063.28
Work in Progress $ 271,756.21
Assets (Fixed Assets at Net Book Value) $ 55,976.21
Goodwill $ 50,000.00
Accrued Vacation (Attachment E attached) ($15,109.78)
TOTAL $ 472,685.92
B. NESCO common stock to be issued from the authorized but unissued
shares: 12,500 shares
Any adjustments made pursuant to subparagraphs 1.A, 1.B, 1.C, or 3.B.
above shall be treated as adjustments to the Purchase Price.
6. Payment of Accounts Payable - SRK agrees to pay in full within two (2)
---------------------------
weeks of Closing all accounts payable that it has received for the Business and
furnish NESCO evidence of such payment. Should any additional payables for the
period on or before July 15, 1998, be received by NESCO, SRK agrees to pay said
invoices within seven (7) days and furnish NESCO evidence of such payment.
NESCO agrees to invoice such amounts to clients if these are recoverable and
reimburse SRK for amounts paid by clients within seven (7) days of receipt of
payment of such invoice.
7. Insurance - SRK and NESCO will each maintain errors and omissions
---------
insurance in the minimum amount of US $2,000,000 following the Closing Date for
a period of at least three (3) years. SRK agrees to be responsible for any
professional liability claims on work completed or performed prior to the
Closing Date. NESCO agrees to be responsible for any professional liability
claims on work completed or performed after the Closing Date.
8. Indemnification -
---------------
A. SRK agrees to indemnify NESCO against (I) professional liability,
bodily injury or property damage claims asserted against NESCO for work
performed by SRK or its subcontractors on or prior to the Closing Date, and
(ii) third-party claims for liabilities arising prior to the Effective Date
not assumed by NESCO under this Agreement. On receipt of notice of any such
claim, NESCO shall immediately notify SRK of the claim and allow SRK to
defend such claim. NESCO will provide SRK with reasonable assistance in
defending such claims.
B. NESCO agrees to indemnify SRK against any claims (including
professional liability, bodily injury, property damage or third party
claims) asserted against
<PAGE>
SRK for liabilities assumed by NESCO under this Agreement.
9. Confidentiality - Each party shall keep confidential any information
---------------
with respect to the other party that is not otherwise generally available to the
public or has been made available to the public by persons other than such
party, its representatives, agents, or employees, except as is necessary in
connection with the preparation of the definitive agreement relating to the
transaction or as may be required by applicable law or stock exchange rules. If
for any reason the transaction is abandoned or terminated prior to being
consummated, each party will return promptly all information containing
confidential or proprietary information disclosed to the other party and this
paragraph shall survive termination of this Agreement.
10. Publicity - Except as may be required by NESCO by applicable law or
---------
securities laws or rules, neither party hereto shall make any public
announcement or any press release regarding this proposal or the transaction or
the subject matter hereof or thereof without the prior consent of the other
party.
11. Expenses - Each party hereto will separately bear its own expenses
--------
incurred in connection with this proposal and the transaction, regardless of
whether the transaction is consummated.
12. Interim Operations - SRK shall continue to operate in a manner which
------------------
will maintain the SRK Columbia office's value, customers, reputation, and
goodwill during the time period between the acceptance of this proposal and the
earlier of the Closing Date, or the termination date. Pending execution of the
Agreement, SRK agrees that it will conduct its Business only in the ordinary
course and not engage in any extraordinary transaction without NESCO's prior
consent.
13. Employee's - NESCO shall make offers of employment to all staff
----------
currently employed by SRK in the Business under NESCO's normal policies and
procedures.
14. Contracts - NESCO will provide to SRK within fourteen (14) days of
---------
Closing, a schedule listing each current work order that continues past the
Closing Date and identifying the work performed by SRK prior to the Closing
Date. Furthermore, for any current work orders that are contracted to or with
any other SRK offices relating to work for the Business, NESCO agrees that such
arrangements can continue and the respective offices can finalize their work on
such projects.
15. Exemption from Registration - NESCO represents to SRK that the
---------------------------
issuance of the shares of NESCO to SRK pursuant to the transaction shall be
exempt from the registration requirement of federal and applicable state
securities laws. SRK shall provide at Closing such representations and
commitments as may be necessary or appropriate, to the extent that SRK can make
such representations and commitments, to comply with applicable exemptions from
such registration requirements.
<PAGE>
16. Closing Date - The closing of the transactions contemplated hereby
------------
("Closing") date shall be on July 15, 1998 ("Closing Date"), with transfer of
funds by bank wire transfer and approval of the NESCO and SRK's respective
boards of directors.
17. Assistance to SRK - NESCO shall provide reasonable assistance to SRK
-----------------
at no cost to assist SRK with the collection of receivables not purchased by
NESCO for a period of ninety (90) days after the Closing Date.
18. Delivery of NESCO Stock - Within fourteen (14) days of Closing, NESCO
-----------------------
shall issue to SRK 12,500 shares of it's common stock, free and clear of all
liens and encumbrances, to SRK.
19. Waiver of Bulk Sales - The parties waive compliance with the
--------------------
provisions of the applicable uniform commercial code relating to bulk transfers
in connection with the transactions contemplated by this Agreement.
20. Applicable Law - This agreement shall be governed by and construed in
--------------
accordance with the laws of the State of Colorado. The parties agree that
jurisdiction and venue will be in the District Court of Richland County, South
Carolina.
21. Attorney's Fees - In the event suit or action is instituted on account
---------------
of the breach of this agreement by either party, the losing party shall pay the
prevailing party such additional sum as the court may adjudge reasonable
attorney's fees.
DULY AUTHORIZED:
Steffen, Robertson & Kirsten (U.S.), Inc.
- -----------------------------------------
Andrew J. Barrett - President
National Environment Service Company
- -----------------------------------------
Eddy Patterson - Chairman & CEO
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 111
<SECURITIES> 0
<RECEIVABLES> 7,256
<ALLOWANCES> 122
<INVENTORY> 1,181
<CURRENT-ASSETS> 8,470
<PP&E> 3,959
<DEPRECIATION> 1,852
<TOTAL-ASSETS> 10,583
<CURRENT-LIABILITIES> 5,136
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 4,447
<TOTAL-LIABILITY-AND-EQUITY> 10,583
<SALES> 1,514
<TOTAL-REVENUES> 6,632
<CGS> 1,013
<TOTAL-COSTS> 6,349
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 197
<INCOME-PRETAX> 109
<INCOME-TAX> 39
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
