<PAGE>
U.S. Securities & Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period....................to...................
Commission file number.................000-24470
NATIONAL ENVIRONMENTAL SERVICE CO.
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(Exact name of small business issuer as specified in its charter)
Oklahoma 73-1296420
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12331 East 60th Street, Tulsa, Oklahoma 74l46
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(Address of principal executive offices)
(918)-250-2227
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(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 July 31, 1999:
Number of shares
----------------
Title of Class Outstanding
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Common Stock, $.01 Par Value 7,621,652
Transitional Small Business Issuer Format (Check one): Yes____No__X__
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NATIONAL ENVIRONMENTAL SERVICE CO.
TABLE OF CONTENTS
Page
Part I - Financial Information
Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheet
June 30, 1999 3
Consolidated Statements of Income
Three Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Income
Six Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2.
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 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED BALANCE SHEET
June 30, 1999
(In Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash $ 201
Accounts Receivable and Costs in Excess of Billings 10,985
Materials and Supplies 2,271
Prepaid Expenses 106
-------
Total current assets 13,563
-------
Property and equipment, at cost 5,528
Less accumulated depreciation (2,216)
-------
Property and equipment, net 3,312
-------
Other assets 1,890
-------
Total assets $18,765
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long term obligations
and revolving line of credit $ 1,578
Accounts payable 3,186
Accrued liabilities 376
-------
Total current liabilities 5,140
-------
Long-term obligations 7,027
Deferred income taxes 198
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Total Liabilities 12,365
-------
Shareholders' equity:
Preferred stock: 1,000,000 shares authorized;
none issued
Common stock, par value $.01; authorized 20,000,000 shares;
issued 7,888,643 shares, including treasury
shares 79
Additional paid-in capital 3,912
Retained Earnings 2,897
Common stock in Treasury, at cost, 266,991 shares (488)
-------
Total shareholders' equity 6,400
-------
Total liabilities and shareholders' equity $18,765
=======
The accompanying notes are an integral part of the financial statements.
</TABLE>
3
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Revenues $5,992 $2,944
Costs and Expenses 4,054 1,872
Selling, general and administrative expenses 1,401 913
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Income from operations 537 159
Other income 79 2
Interest expense 135 90
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Income before provision for income taxes 481 71
Provision for income taxes 183 27
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Net Income $ 298 $ 44
====== ======
Basic Net Income per share $ 0.04 $ 0.01
====== ======
Diluted Net Income per share $ 0.04 $ 0.01
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENT OF INCOME
FOR SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Revenues $12,482 $6,632
Cost and expenses 7,954 4,653
Selling, general and administrative expenses 2,926 1,696
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Income from operations 1,602 283
Other Income 127 23
Interest Expense 240 197
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Income before provision for income taxes 1,499 109
Provision for taxes on income 570 39
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Net Income $ 929 $ 70
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Basic Net Income per share $ 0.12 $ 0.01
======= ======
Diluted Net Income per share $ 0.12 $ 0.01
======= ======
</TABLE>
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, 1999 AND 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Operating activities
Net Income $ 929 $ 70
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 260 217
Change in:
Accounts receivable (699) (6)
Materials and supplies (317) (187)
Prepaid expenses (64) 38
Accounts payable 809 (387)
Accrued liabilities (334) (323)
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Net cash provided by (used in) operating activities 584 (578)
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Investing activities
Business Acquisitions (3,114) -
Purchases of property, plant and equipment (830) (141)
Other (152) 16
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Net cash provided by (used in) investing activities (4,096) (125)
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Financing activities:
Proceeds from notes payable and long-term obligations 7,032 2,430
Principal payments on notes and long term obligations (3,065) (2,421)
Proceeds from sale (purchase) of treasury stock (406) 712
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Net cash provided by financing activities 3,561 721
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Increase in cash 49 18
Cash, beginning of period 152 93
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Cash, end of period $ 201 $ 111
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
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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, 1999 and the
results of operations for the three and six month periods ended June 30, 1999
and 1998. Cash flows are shown, as permitted, for only the six months ended
June 30, 1999 and 1998.
2. 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.
Basic and diluted EPS for the six months ended June 30, 1999 and 1998, were
computed as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Basic EPS Computation:
Net income $ 929 $ 70
========== ==========
Weighted average shares outstanding 7,805,120 7,270,764
========== ==========
Basic EPS $ .12 $ .01
========== ==========
</TABLE>
7
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<TABLE>
<CAPTION>
<S> <C> <C>
Diluted EPS Computation:
Net income $ 929 $ 70
========== ==========
Weighted average shares outstanding 7,805,120 7,270,764
Incremental shares for assumed exercise
of securities:
Warrants 6,584 3,367
Options 37,631 26,455
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7,849,335 7,300,586
========== ==========
Diluted EPS $.12 $.01
========== ==========
</TABLE>
The 230,703 shares in 1999 and the 212,000 shares in 1998 of employee stock
options were not included in the computation of diluted EPS as their effect is
anti-dilutive.
3. SEGMENT INFORMATION
The Company's business segments have been grouped as follows:
<TABLE>
<CAPTION>
1999 Thousands of Dollars
--------------------------------------------
Inter-
Segment Pre-tax
Segment Sales Sales Income Assets
------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Fueling Installations $ 9,495 $ 1,085 $ 9,868
Environmental 2,485 287 5,249
FRS 427 51 1,404
Other 502 267 78 2,244
---------- ---------- ---------- -------
$12,482 $ 694 $ 1,499 $18,765
========== ========== ========== =======
1998 Thousands of Dollars
--------------------------------------------
Inter- Pre-tax
Segment Income
Segment Sales Sales (Loss) Assets
------- ---------- ---------- ---------- -------
Fueling Installations $ 5,711 $ (189) $ 6,194
Environmental 550 (35) 1,129
FRS 303 235 337
Other 371 303 98 2,923
---------- ---------- ---------- -------
$ 6,632 $ 666 $ 109 $10,583
========== ========== ========== =======
</TABLE>
8
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4. 1999 ACQUISITIONS
On January 1, 1999, the Company acquired the assets of a company in Largo,
Florida, for $50,000 cash and the assumption of certain liabilities totaling
$95,590. The acquired business is a provider of environmental, drilling, and
related services to the owners and operators of fueling systems as well as other
businesses.
On January 11, 1999, the Company acquired the assets, subject to certain
liabilities assumed, of a group of companies based in Greenville, North
Carolina, which provides services to the owners and operators of fueling
systems. The purchase price of the assets acquired was $791,000 consisting of
$250,000 cash, notes payable in the aggregate principal amount of $419,000, and
the issuance of 40,000 shares of Company stock, and options to purchase 45,000
shares of Company stock.
On April 30, 1999, the Company acquired the assets of a division of Arizona
Instrument Corporation, Phoenix, Arizona, for cash in the amount of $1,061,531.
The assets included all inventory, related patents, trademarks, test equipment,
computer software, computers, contracts, and such other assets related to the
manufacture and marketing of the Soil Sentry and Encompass Systems. The
acquired business is a provider of tank monitoring equipment and service to the
owners and operators of fueling systems as well as other businesses.
On May 11, 1999, the company acquired the assets, subject to certain
liabilities assumed, of TET Environmental Services, Inc., Columbia, South
Carolina, for cash in the amount of $2,200,000. The acquired business is a
provider of environmental and related services to the owners and operators of
fueling systems as well as other businesses.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the company's
financial statements and notes thereto and other financial information relating
to the Company.
Comparison of Results of Operations for the Three months Ended June 30, 1999 and
June 30, 1998.
Revenue for the three months ended June 30, 1999 increased 104% compared to
the corresponding period of 1998 ($5,992,000 compared to $2,944,000). The
increase in 1999 in comparison to the same quarter in 1998 occurred in all but
one revenue category. Increases in the site assessments and reports category
(the environmental segment) totaled $1,691,000 or 782% ($1,908,000 in the second
quarter of 1999 compared to $216,000 in the same quarter of 1998). Remediation
revenues (the environmental segment) increased 592% ($712,000 in the second
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quarter of 1999 compared to $103,000 for the corresponding three month period of
1998). The increase in site assessments and reports and remendation resulted
from additional work performed in South Carolina and other new division offices
added since the second quarter of 1998. The 27% cathodic protection revenue
(fueling systems installation segment) decrease is the result of shipments of
cathodic protection equipment to distributors and completion of most cathodic
protection installations prior to the December 1998 compliance deadline.
Cathodic protection revenues were $716,000 in the second quarter of 1999
compared to $980,000 for the same period in 1998. The fueling systems
installation and repair (fueling systems installation segment) revenues
increased $582,000 in the second quarter of 1999 as compared to the
corresponding period for 1998 ($2,003,000 compared to $1,421,000). The 41%
increase resulted primarily from the addition of division offices in Florida,
South Carolina, North Carolina, West Virginia, and Pittsburgh. Additionally,
NESCO experienced lower than expected revenues during the second quarter of 1998
because of delays in the start of projects previously awarded to the Company due
to delays in the receipt of required permits by the project owners. Fueling
systems service and parts sales (the other segment) increased $213,000 during
the second quarter of 1999 compared to the same quarter in 1998 ($419,000
compared to $206,000). The Dallas parts and service operation accounted for most
of the increase as it continues to become established and increase its share of
service work and parts sales in the Dallas market since its beginning in the
spring of 1997. Tank monitoring (fueling systems installation segment) has been
added as a new category of service by NESCO since the purchase of certain assets
from Arizona Instrument Corporation on April 30, 1999. Revenues for the quarter
were $96,000. There were no revenues for this category for the corresponding
period in 1998.
The 117% increase in the cost of sales for the second quarter of 1999
compared to the second quarter of 1998 was substantially attributable to the
104% increase in revenues for the same period. The slight increase in cost of
sales relative to the increase in revenues was attributable to expected
transition costs and loss of efficiencies in the establishment of a new office
(Tempe, Arizona) and the acquisition of assets and employees of another company
(TET Environmental Services, Inc.). Second quarter cost of sales was $4,054,000
compared to $1,872,000 for the corresponding period in 1998. Direct labor
increased $532,000 or 116% ($991,000 in the second quarter of 1999 compared to
$459,000 for the same quarter in 1998). Staffing at the new division offices
accounted for the increase. Supplies and materials increased 236% ($1,515,000
compared to $451,000). The increase resulted from the type of jobs performed
that required the use of a greater amount of materials and supplies. Three other
areas in cost of sales were significantly increased due to the establishment of
the six division offices since the second quarter of 1998: equipment rental
expense increased $43,000 or 89% ($91,000 compared to $48,000); depreciation
expense increased $25,000 or 30% ($111,000 compared to $86,000); and lodging on
the job increased $37,000 or 115% ($69,000 compared to $32,000).
Selling, general and administrative expenses increased 53% in the second
quarter as compared to the second quarter of 1998 ($1,401,000 compared to
$913,000). The increase was substantially attributable to the addition of
administrative staff and related expenses for the six division offices added
since the second quarter of 1998 as described above. Salaries increased
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$223,000 or 53% the second quarter of 1999 compared to the second quarter of
1998 ($646,0000 compared to $423,000). Although a substantial part of the
increase resulted from added personnel at the new division offices, a portion
was attributable to normal salary increases. Other areas of increased general
and administrative expenses were attributable to the addition of six division
offices: employee insurance expense increased $31,000 or 100% during the second
quarter of 1999 compared to the same quarter in 1998 ($62,000 compared to
$31,000); telephone expense increased $25,000 or 52% for the second quarter of
1999 compared to the same quarter in 1998 ($73,000 compared to $48,000); general
insurance increased 33% or $20,000 ($81,000 compared to $61,000) and most of
this increase was for workers compensation insurance premiums; and contract
labor in the area of general and administrative expense increased $37,000 from
$12,000 for the second quarter of 1998 to $49,000 in the second quarter of 1999.
Office rent increased $49,000 in the second quarter of 1999 compared to the
second quarter of 1998 due to the additional division offices established.
Consulting services expense related to investor relations increased to $20,000
in the second quarter of 1999 compared to $2,000 in the same quarter of 1998.
The increase resulted from a contract with a firm to provide investor relations
services to the Company. Professional fees increased to $69,000 in the second
quarter of 1999 compared to $29,000 in the same quarter of 1998. The 138%
increase resulted from legal expense incurred for collection of certain
accounts.
Interest expense increased 51% for the second quarter of 1999 compared to
the same quarter in 1998 due to greater amounts of borrowed money ($135,000
compared to $90,000). A larger loan balance outstanding on the Company's
revolving line of credit and additional term loans for the acquisition of
equipment accounted for the increase. However, the increase was somewhat offset
by more favorable rates received by the Company in the second quarter of 1999 as
compared to the second quarter of 1998. Discounts earned increased $61,000
($62,000 compared to $1,000) due to quicker payment of invoices from vendors and
suppliers.
Comparison of Results of Operations for the Six months Ended June 30, 1999 and
June 30, 1998.
Revenue for the six months ended June 30, 1999 increased 88% compared to
the corresponding period of 1998 ($12,482,000 compared to $6,632,000). The
increase in revenues for the first six months of 1999 compared to the
corresponding period in 1998 was due to increases in all revenue categories.
Site assessments and reports (environmental segment) increased $2,307,000 or
664% in the first six months of 1999 compared to the first six months of 1998
($2,654,000 compared to $347,000). Remediation (environmental segment) revenues
increased $1,250,000 or 616% in the first six months of 1999 compared to the
same period in 1998 ($1,453,000 compared to $203,000). During the first six
months of 1998, several of the state indemnity funds that pay for site
remediation work had initiated a risked-based determination as to which
contaminated sites will be allowed into a state funded remediation program.
This program resulted in fewer remediation projects and a corresponding decline
in revenues for remediation and site assessments and reports. This decline in
1998 coupled with the addition of the South Carolina division office with
significant concentrations of environmental work
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accounted for the large increase in and site assessment and reports and
remediation revenues. Cathodic protection (fueling systems installation segment)
revenues increased $471,000 during the first six months of 1999 compared to the
same period in 1998 ($2,538,000 compared to $2,067,000). The cathodic protection
revenue increase of 23% reflects the continued shipment and installation of
cathodic protection systems in the first quarter of 1999. The deadline for
system upgrade including cathodic protection was December 1998. However, due to
the large numbers of fueling facilities not in compliance, strong demand was
present throughout the first quarter of 1999. Fueling systems installation and
repair (fueling systems installation segment) revenues increased 35% or
$1,273,000 for the first six months of 1999 compared to the same period in 1998
($4,902,000 compared to $3,629,000). Although there was some revenue growth
during the first six months of 1999 in the divisions that existed during the
first six months of 1998, the greatest portion of the increase was attributable
to the addition of six division offices subsequent to the end of the first six
months of 1998. Fueling systems service and parts sales (the other segment)
increased $317,000 during the first six months of 1999 compared to the same
period in 1998 ($701,000 compared to $384,000). The Dallas parts and service
operation accounted for most of the increase as it continued to become
established and increase its share of service work and parts sales in the Dallas
market since its beginning in the spring of 1997. Tank monitoring (fueling
systems installation segment) was a new revenue category in the second quarter
of 1999 as discussed above.
Cost of sales increased $3,301,000 to $7,954,000 for the first six months
of 1999 compared to $4,653,000 for the first six months of 1998. The cost of
sales increase of 71% was favorable for the first six months of 1999 compared to
the 88% increase in revenues. Direct labor increased 77% or $817,000 during the
first six months of 1999 compared to the same period in 1998 ($1,880,000
compared to $1,063,000). Staffing at new division offices accounted for most of
the increase. Supplies and materials increased 181% or $2,030,000 ($3,151,000
for the first quarter of 1999 compared to $1,121,000). Lab services increased
$295,000 in the first quarter of 1999 compared to the first quarter of 1998 due
to the new South Carolina division which conducts a heavy volume of
environmental work. Several items of expense increased in the first six months
of 1999 compared to the same period in 1998 as a result of the increased volume
of sales: equipment rental increased 105% or $88,000 ($172,000 compared to
$84,000); vehicle expense except depreciation increased 96% or $79,000 ($162,000
compared to $83,000); small tools and equipment increased 332% or $50,000
($65,000 compared to $15,000); meals and entertainment on the job increased 106%
or $48,000 ($93,000 compared to $45,000); lodging on the job increased 215% or
$97,000 ($142,000 compared to $45,000 ), and travel expense increased 181% or
$43,000 ($67,000 compared to $24,000).
Selling, general and administrative expense increased 73% for the six
months ended June 30, 1999 compared to the same period in 1998 ($2,926,000
compared to $1,696,000). Officer, management, and clerical salaries increased
62% or $509,000 for the first six months of 1999 compared to the same period in
1998 ($1,336,000 compared to $827,000). As with increases in a number of other
expense categories during the first six months of 1999, the salary increase was
substantially the result of the addition of six division offices and personnel
necessary to staff the
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offices. Office supplies and postage increased $63,000 or 82% ($140,000 compared
to $77,000). Office rent increased $54,000 ($74,000 compared to $20,000).
However, the office rent for the first six months of 1998 was unusually low due
to an accounting adjustment as the result of an acquisition of the corporate
home office facilities from an affiliated party at the end of January 1998.
Telephone expense increased $57,000 or 68% during the first six months of 1999
compared to the same period in 1998 ($142,000 compared to $85,000) due to the
significant additions of cellular telephones and other communication equipment
and the addition of six division offices. Consulting services increased $31,000
or 362% in the first six months of 1999 compared to the same period in 1998
($39,000 compared to $8,000) as a result of a contract with a firm to provide
investor relations services to the Company. Professional fees increased$108,000
in the first six months of 1999 compared to the same period in 1998 ($148,000
compared to $40,000) as a result of legal expense incurred for collection of
certain accounts. Bad debt expense increased $70,000 in the first six months of
1999 compared to the same period in 1998 ($143,000 compared to $73,000) due to
the recognition or writeoff of certain doubtful accounts and increases in the
reserve for bad debts due to an increase in sales and accounts receivable.
General insurance expense increased 37% or $42,000 ($155,000 in the first six
months of 1999 compared to $113,000 for the same period in 1998) due primarily
to the increased number of employees and corresponding increase in workers
compensation insurance premiums paid. Likewise, employee insurance premiums
increased 77% or $42,000 ($97,000 compared to $55,000) due to increased numbers
of employees. Indirect travel expense increased 256% or $60,000 ($83,000
compared to $23,000) in the first six months of 1999 compared to the same period
in 1998.
Interest expense increased 22% or $43,000 for the first six months of 1999
compared to the corresponding period in 1998 ($240,000 compared to $197,000).
The additional expense resulted from larger loan balances (revolving line of
credit and additional term loans for equipment purchases) outstanding during the
first six months of 1999 compared with the same period in 1998. The interest
expense resulting from the larger loan balances outstanding was partially offset
by lower interest rates obtained by the Company on its line of credit and on
equipment loans. Discounts taken increased $99,000 during the first six months
of 1999 compared to the same period in 1998 ($120,000 compared to $21,000) due
to due to quicker payment of invoices from vendors and suppliers offering such
discounts.
Changes in Capital Resources and Liquidity
On January 1, 1999, the Company acquired the assets of a company in Largo,
Florida, for $50,000 cash and the assumption of certain liabilities totaling
$95,590. The acquired business is a provider of environmental, drilling, and
related services to the owners and operators of fueling systems as well as other
businesses.
On January 11, 1999, the Company acquired the assets, subject to certain
liabilities assumed, of a group of companies based in Greenville, North
Carolina, which provides services to the owners and operators of fueling
systems. The purchase price of the assets acquired was
13
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$791,000 consisting of $250,000 cash, notes payable in the aggregate amount of
$419,000, and the award of 40,000 shares of Company stock, and options to
purchase 45,000 shares of Company stock.
Early in the first quarter the Company repurchased 6,000 shares of its
common stock. On March 25, 1999, the Company repurchased a total of 228,000
shares of its common stock. The amount of the purchases totaled $481,000.
Options for the purchase of 50,000 shares of the Company's common stock
were exercised on April 15, 1999. The amount received by the Company upon
exercise totaled $75,000.
The Company renewed its revolving line of credit loan with Bank of Oklahoma
on April 30, 1999. The loan has a maturity date of April 30, 2002. The
interest rate is National Prime and represents a reduction from National Prime
plus .75% on the previous loan. The revolving line of credit was increased to
$7,000,000 from the previous limit of $4,500,000.
The Company obtained a $4,000,000 term loan with the Bank of Oklahoma. The
term loan provided funds for the acquisition of the assets of TET Environmental
Services, Inc., acquisition of the South Carolina office building and property
occupied by TET, acquisition of the Soil Sentry and Encompass Systems from
Arizona Instrument Corporation, to refinance the loan on the Company's San
Antonio office building, and to provide additional funds for future needs. The
loan maturity is April 30, 2004. The loan has an interest rate at National
Prime with a monthly payment of $81,585.
The Company continued to make periodic debt repayments during this period.
Year 2000
The Year 2000 issue represents a potentially serious information systems
problem because many software applications and operation systems written in the
past may not properly recognize calendar dates beginning in the Year 2000. This
problem could force computers and other systems relying on date sensitive
computer chips to either shut down or provide incorrect data or information. In
consultation with its software and hardware providers, the Company began the
process of identifying the changes required to its major
financial/administrative systems and hardware in October of 1998. The Company
has completed the process of testing its computer hardware and software for Year
2000 compliance and was substantially in compliance by the end of the second
quarter of 1999. The Company has surveyed its non-information technology systems
for compliance with Year 2000 requirements. This area involves communication
equipment (telephones, fax machines, printers), security equipment (alarm
systems), heat and air systems, copiers, laboratory equipment, and similar
systems. The Company surveyed its vendors and service suppliers. Division
managers are reviewing and will submit compliance certification forms to
corporate headquarters during the third quarter. The certifications require that
each
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manager certify compliance with Year 2000 requirements, note any exceptions, and
develop plans and a timetable for eliminating the exceptions. The certifications
cover areas of computer hardware, software systems, support equipment (copiers,
fax machines, telephone system, security systems, HVAC systems, and other
systems that involve date sensitive computer chips, banking relationships,
equipment and replacement part suppliers, inventory suppliers, and other
suppliers of services. The certifications must detail any exceptions to the
division's compliance with Year 2000 compliance issues and provide efforts to
complete any remaining compliance efforts including a timetable for completion.
Contingency plans are being developed and will be established on or before the
end of October, 1999.
The Company believes that the costs to address its Year 2000 compliance
issues will not be significant. Substantially all of the Company's computer
hardware and software are "off-the-shelf" versions which the Company believes
can be upgraded or replaced as required. The cost for such replacements is
currently estimated to be approximately $15,000.
The Company's principal exposure will be (1) in its inability to process
accounting transactions and invoice customers and (2) the ability of its vendors
and service suppliers to provide critical components or services to the Company.
While the Company believes it will not encounter material problems in either
respect, it is in the process of developing contingency plans to implement a
manual system for accounting and invoicing functions and identifying alternative
sources for the goods and services that are critical to the Company. The Company
believes that its customer base is sufficiently broad and varied and that it
will not encounter material difficulties if the ability of some of them to do
business were substantially curtailed due to Year 2000 problems. Additionally,
the fueling systems industry tends to utilize electronics and systems which are
not particularly date sensitive.
Forward Looking Statements
Certain statements included in this report which are not historical facts
are forward looking statements, including the information provided with respect
to the projected or future business opportunities, expansions and
diversification; contract completions, expected financing sources and related
matters. These forward looking statements are based on current expectations,
estimates, assumptions and beliefs of management; and words such as "expects,"
"anticipates," "intends," "believes," "estimates" and similar expressions are
intended to identify such forward looking statements. These forward looking
statements involve risks and uncertainties, including, but not limited to,
changes in governmental regulations, the Company's ability to effectively and
efficiently absorb its newly acquired businesses and assets and any additional
businesses and/or assets it may acquire in the near future, general economic
conditions and conditions affecting the industries which utilize the Company's
services and products, the availability of experienced personnel, raw materials
and equipment and the Company's ability to comply with its obligations under its
existing contracts and to obtain new contracts. Accordingly, actual results may
differ materially from those expressed in the forward looking statements.
15
<PAGE>
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 20, 1999. At the meeting the following
directors were elected for one year terms:
<TABLE>
<CAPTION>
Abstain/Broker
For Withheld Non-Votes
---------- --------- --------------
<S> <C> <C>
Eddy L. Patterson 5,401,882 1,713
Albert A. McCutchan 5,401,882 1,713
E. R. Foraker 5,400,771 2,824
Dallin Bagley 5,401,882 1,713
</TABLE>
The shareholders ratified Tullius, Taylor, Sartain & Sartain as auditors to
perform the audit for the fiscal year ending December 31, 1998:
For 5,401,611 Against -0- Abstain/Broker Non-votes 1,984
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.20 Copy of Amendment Three to Revolving Credit and Term Loan
Agreement dated as of April 30, 1999 and Promissory Note
between the Company and Bank of Oklahoma, N.A.
10.21 Copy of Asset Purchase Agreement dated May 3, 1999, by and
between National Environmental Service Co. and TET
Environmental Services, Inc. (incorporated by reference to
Registrant's Form 8-K dated May 18, 1999)
10.22 Copy of Asset Purchase Agreement dated April 30, 1999, by and
between National Environmental Service Co. and Arizona
Instrument Corporation.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K dated May 18, 1999, as amended by Form 8-K/A No.
1 dated July 20, 1999, was filed by the Registrant in connection with
its acquisition of TET Environmental Services, Inc.
16
<PAGE>
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 10, 1999 /s/ EDDY L. PATTERSON
---------------------------------------------
EDDY L. PATTERSON, Chairman
Date: August 10, 1999 LARRY G. JOHNSON
---------------------------------------------
LARRY G. JOHNSON, Vice President & Secretary-
Treasurer & Chief Financial
Officer
17
<PAGE>
EXHIBIT INDEX
10.20 Copy of Amendment Three to Revolving Credit and Term Loan
Agreement dated as of April 30, 1999 and Promissory Note
between the Company and Bank of Oklahoma, N.A.
10.22 Copy of Asset Purchase Agreement dated April 30, 1999, by and
between National Environmental Service Co. and Arizona
Instrument Corporation.
27.1 Financial Data Schedule
18
<PAGE>
EXHIBIT 10.20
AMENDMENT THREE TO
REVOLVING CREDIT LOAN AGREEMENT
THIS AMENDMENT THREE TO REVOLVING CREDIT LOAN AGREEMENT ("Amendment"), is
made and entered into effective as of April 30, 1999, 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, Amendment One to Revolving Credit Loan Agreement dated
December __, 1997, and Amendment Two to Revolving Credit Loan Agreement dated
July 2, 1998, between Borrower and Bank (as amended, the "Credit Agreement"),
pursuant to which currently exists a $4,500,000 Revolving Line and a $700,000
Advancing Term Loan. All terms used herein shall have the meanings given in the
Credit Agreement, unless otherwise expressly defined.
B. Borrower has requested Bank to: (i) increase the principal amount of
the $4,500,000 Revolving Line to $7,000,000 and extend its maturity, (ii) amend
the Borrower's Borrowing Base calculation and (iii) extend a new $4,000,000 term
loan for asset acquisitions. Bank has agreed to accommodate Borrower's request,
subject to the terms and conditions set forth below.
AGREEMENT
For valuable consideration received, the parties agree to the following:
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
--------------
thereof, the sum of eighty percent (80%) of Borrower's Qualified
Receivables at such date, plus fifty percent (50%) of Borrower's
----
Qualified Inventory at such date; provided Qualified Inventory
--------
shall not exceed 50% of the Borrower's total Borrowing Base, as
determined by Bank based upon the most recent information
relating thereto provided to Bank pursuant to Section 2.2."
<PAGE>
The Borrowing Base Certificate shall be in form and content as set forth on
Schedule "1.1" attached hereto.
--------------
b. Schedule 1.35 to the Credit Agreement is hereby amended to
additionally include the South Carolina property described on Schedule
--------
"1.2" to this Amendment.
-----
c. Section 1.49 is hereby amended to delete the reference to
"2,500,000" and replace it with "$3,750,000".
d. Section 1.53 is hereby amended to delete all references to the
$4,500,000 Revolving Credit Note and replace with the "$7,000,000
Revolving Credit Note". The form of the $7,000,000 Revolving Credit
Note is attached as Schedule "1.4" hereto. All references in the
--------------
Credit Agreement to "$4,500,000" are hereby deleted and replaced with
"$7,000,000".
e. Section 1.54 is hereby amended to replace the "Termination Date"
with "April 30, 2002".
f. Section 1 is hereby amended to additionally include the following
new section:
"1.58 '$4,000,000 Term Note' shall mean the $4,000,000 Promissory
--------------------
Note in the form and content as set forth on Schedule '1.58' attached
---------------
hereto."
The $4,000,000 Term Note is attached to this Amendment as Schedule "1.6".
--------------
g. Section 2.1 is hereby deleted and shall now mean and read as
follows:
"2.1 $4,000,000 Term Loan. Subject to the terms and conditions
--------------------
of this Agreement, the Bank agrees to loan Borrower by advancing funds
not to exceed $4,000,000 in the aggregate, to be further evidenced by
the $4,000,000 Term Note. The purpose of the advances under the
$4,000,000 Term Note is to enable Borrower to acquire assets from
Arizona Instrument Corporation ("AIC") and TET Environmental Service,
Inc. ("TET") and refinance existing debt."
h. Section 3 is hereby amended to additionally include the following
new section:
"3.5 A first and prior mortgage lien on the South Carolina
Mortgaged Property, as evidenced by the Commercial Mortgage in form and
content of Schedule "3.5" hereto."
--------------
The Commercial Mortgage is attached to this Amendment as Schedule "1.8".
--------------
<PAGE>
i. Section 7.6 is hereby amended to delete the remainder of the
section after "Notwithstanding, Borrower may..." and replace with the
following: "NOTWITHSTANDING, Borrower may declare or pay dividends to
the extent (i) Borrower's total liabilities to tangible net worth does
not exceed 1.5 to 1 and (ii) if Borrower in Bank's sole discretion and
determination is in complete compliance with all representations and
warranties of this Agreement."
j. Section 8.3 is hereby amended to delete the reference to "1.1 to
1" and replace it with "1.2 to 1".
2. CONDITIONS PRECEDENT. The making of any loan provided for
--------------------
herein, unless otherwise noted herein or waived in writing by Bank, shall
be conditioned upon the Borrower executing and/or delivering the following:
a. This Amendment, with all schedules attached.
b. $7,000,000 Revolving Credit Note.
c. Amendment Two to Real Estate Deed of Trust and Security
Agreement, in the form and content of Schedule "2.3" attached hereto.
-------------
d. $4,000,000 Term Note.
e. Commercial Mortgage on South Carolina property shall be
delivered before any advance for the purchase of the South Carolina
Mortgage Property, only.
f. All Mortgage Related Documents for the South Carolina
Mortgage Property (i.e. title commitment, Phase I environmental
report, etc.), shall be delivered before any advance to close or
purchase the South Carolina Mortgage Property.
g. Financing Statement in form and content of Schedule "2.7(a)"
-----------------
and Schedule "2.7(b)" attached hereto.
-----------------
h. 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 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
<PAGE>
that each shall additionally secure payment of the $7,000,000 Revolving
Credit Note and the $4,000,000 Term Note, together with extensions,
renewals and changes in form thereof.
4. TERM NOTES. Borrower and Bank acknowledge and agree that Borrower did
----------
not request or receive any advances under the $700,000 Advancing Term Note.
Borrower and Bank hereby consent and agree that upon execution of this
Agreement any and all commitment to advance under the $700,000 Advancing
Term Note is released. Furthermore, all references to the $700,000 Term
Note shall cease and be deleted.
5. NAME REPRESENTATION. Borrower hereby represents and warrants to Bank
-------------------
that upon acquiring the assets of AIC and TET, Borrower shall continue to
do business as "National Environmental Service Co." in each state and shall
deliver to Bank within thirty (30) days of closing, evidence of Borrower's
registration as a foreign corporation in Arizona and South Carolina.
6. 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.
7. COSTS, EXPENSES AND FEES. Borrower agrees to pay all costs, expenses
------------------------
and fees incurred in connection herewith.
8. CAPITAL EXPENDITURES. Bank hereby consents to a limited waiver of the
--------------------
$1,000,000 capital expenditure restriction to the limited extent of the
asset purchases from AIC and TET, only. Said AIC and TET asset purchases
shall not be included within the capital expenditure calculation for 1999,
only.
"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, Senior Vice President
<PAGE>
EXHIBIT 10.22
================================================================================
ASSET PURCHASE AGREEMENT
Between
ARIZONA INSTRUMENT CORPORATION,
as Seller
And
NATIONAL ENVIRONMENTAL SERVICE CO.,
as Buyer
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - DEFINITIONS.....................................................1
ARTICLE II - ASSET PURCHASE AND SALE........................................3
2.01 The Transaction.......................................3
2.02 Assets to be Acquired.................................3
2.03 Purchase Price........................................5
2.04 Assumption of Assumed Liabilities.....................6
2.05 Excluded Assets.......................................8
2.06 Allocation of Purchase Price..........................8
2.07 Treatment of Accounts Receivable......................8
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SELLER......................8
3.01 Organization, Good Standing and Corporate Power.......8
3.02 Authorization.........................................8
3.03 No Breach or Violation................................9
3.04 Consents.............................................10
3.05 Contracts and Agreements.............................10
3.06 Trademarks and Copyrights............................10
3.07 Patents and Know-How.................................10
3.08 Title................................................11
3.09 Reserved.............................................11
3.10 Software.............................................11
3.11 Customers and Suppliers..............................11
3.12 Taxes................................................11
3.13 Employee Matters.....................................11
3.14 Litigation...........................................11
3.15 Brokers and Finders..................................12
3.16 Compliance with Laws.................................12
3.17 Permits..............................................12
3.18 Bills and Invoices...................................12
3.19 Inventories..........................................12
3.20 Untrue Statements....................................13
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BUYER.......................13
4.01 Organization, Good Standing and Corporate Power......13
4.02 Authorization........................................13
4.03 No Breach or Violation...............................13
4.04 Brokers and Finders..................................14
i
<PAGE>
ARTICLE V - COVENANTS OF SELLER............................................14
5.01 Confidentiality......................................14
5.02 Covenant Not to Compete..............................14
ARTICLE VI - RESERVED......................................................15
ARTICLE VII - COVENANTS OF BUYER AND SELLER................................15
7.01 Employees of Seller..................................15
7.02 Further Assurances...................................16
ARTICLE VIII - RESERVED....................................................16
ARTICLE IX - RESERVED......................................................16
ARTICLE X - RESERVED.......................................................16
ARTICLE XI - AMENDMENTS AND WAIVER.........................................16
11.01 Amendment............................................16
11.02 Waiver...............................................16
ARTICLE XII - OTHER AGREEMENTS; SURVIVAL
OF REPRESENTATIONS AND WARRANTIES...........................17
12.01 Confidentiality......................................17
12.02 Public Announcements.................................17
12.03 Additional Agreements................................17
12.04 Available Remedies...................................17
12.05 Survival of Representations and Warranties;
Indemnification.....................................17
12.06 Actions of the Parties after the Closing.............18
ARTICLE XIII - MISCELLANEOUS...............................................19
13.01 Severability.........................................19
13.02 Expenses.............................................19
13.03 Notices..............................................19
13.04 Time.................................................20
13.05 Entire Agreement.....................................20
13.06 Binding Effect; Benefits.............................20
13.07 Assignment...........................................21
13.08 Applicable Law.......................................21
13.09 Article and Section Headings.........................21
13.10 Counterparts.........................................21
13.11 Knowledge............................................21
ii
<PAGE>
Exhibit A - Form of Assignment and Bill of Sale
Exhibit B - Legal Opinion of Sellers' Counsel
Exhibit C - Legal Opinion of Buyer's Counsel
Schedule 2.02(a) -- Patents and Know-How
Schedule 2.02(b) -- Trademarks and Copyrights
Schedule 2.02(c) -- Equipment
Schedule 2.02(d) -- Software
Schedule 2.02(f) -- Contracts
Schedule 2.02(h) -- Accounts Receivable
Schedule 2.02(i) -- Inventory
Schedule 2.04 -- Assumed Liabilities
Schedule 2.06 -- Allocation of Purchase Price
Schedule 3.08 -- Leases and Other Agreements
Schedule 3.13 -- Employees and Employee Benefit Plans
Schedule 3.14 -- Litigation
Schedule 3.17 -- Scheduled Permits
Schedule 7.01 -- Assumed Employees
iii
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement is entered into as of April 30, 1999
(this "Agreement"), by and between National Environmental Service Co., an
Oklahoma corporation ("Buyer"), and Arizona Instrument Corporation, a Delaware
corporation ("Seller").
WHEREAS, on the terms, in the manner and subject to the conditions
reflected below, Seller desires to sell, assign, convey and transfer to Buyer,
and Buyer desires to purchase and acquire from Seller, all of the Purchased
Assets defined below.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements herein set forth, the
parties to this Agreement have agreed, and hereby agree subject to the terms and
conditions hereinafter set forth, as follows:
ARTICLE I
DEFINITIONS
Capitalized terms used herein shall have the meanings ascribed to them
in this Article I, unless such terms are defined elsewhere in this Agreement.
Affiliates: of any person means persons who control, are controlled by or
----------
in common control with such person.
Allocation: as defined in Section 2.06.
----------
Assumed Employees: as defined in Section 7.01.
-----------------
Assumed Liabilities: as defined in Section 2.04.
-------------------
Assumed Warranty Obligations: as defined in Schedule 2.04.
----------------------------
BP Litigation: as defined in Section 2.04.
-------------
Business: as defined in Section 2.02.
--------
Closing: as defined in Section 2.01(b).
-------
Closing Date: as defined in Section 2.01(b).
------------
1
<PAGE>
Closing Payment: as defined in Section 2.03(a).
---------------
Delaware Law: the Delaware General Corporation Law, as amended
------------
Encompass System Revenues: as defined in Section 2.03(b).
-------------------------
Excluded Assets: any of the assets of Seller other than those assets
---------------
included in Section 2.02, including, without limitation, (i) cash, cash
equivalents and receivables, (ii) real estate or any rights under leases to real
estate, (iii) Seller's business records, corporate minute book and charter
documents, and (iv) all assets of Seller not solely and exclusively necessary to
own and operate the Business in the manner heretofore owned and operated by
Seller.
Excluded Liabilities: as defined in Section 2.04(b).
--------------------
GAAP: United States generally accepted accounting principles.
----
Governmental Entity: any court, government, governmental agency,
-------------------
commission or instrumentality, domestic or foreign.
Legal Requirements: any law, statute, ordinance, decree, requirement,
------------------
order, judgment, rule or regulation of, including the terms of any license,
certificate, franchise or permit issued by, the United States, any state,
commonwealth, territory or possession thereof and any political or judicial
subdivision or instrumentality of the foregoing, including, without limitation,
courts, departments, commissions, boards, bureaus or agencies.
Oklahoma Law: the Oklahoma General Corporation Act, as amended.
------------
Purchased Assets: those assets defined in Section 2.02.
----------------
Purchase Price: the consideration to be paid by Buyer to Seller for the
--------------
Purchased Assets as provided in Article II.
Taxes: all net income, gross income, gross receipts, sales and use, ad
-----
valorem, franchise, profits, licenses, withholding, payroll, excise, severance,
stamp, occupation, property, customs duties or other taxes, fees or charges of
any kind whatsoever imposed by a foreign, federal, state, county or local taxing
authority together with any interest or penalty thereon.
Transaction: the sale and purchase of the Purchased Assets pursuant to,
-----------
and the related transactions contemplated by, this Agreement.
Transaction Documents: the documents, instruments, agreements, etc.
---------------------
referred to in Section 2.01(b).
2
<PAGE>
Year 2000 Compliant: software that is designed to do the following, as may
-------------------
be applicable to each software, subject to potential deviation that will not
materially and adversely affect the use of such software: (i) handle date
information before, during, and after January 1, 2000, and will correctly
recognize, calculate, process, sequence, store and transmit date data without
error or interruption, including leap years; (ii) function accurately and
without interruption before, during and after January 1, 2000, without any
change in operations associated with the advent of the new century; (iii)
respond to year-date input in a way that resolves any ambiguity as to century in
a defined and predetermined manner; and (iv) store and provide output of date
information in a way that is unambiguous as to century.
ARTICLE II
ASSET PURCHASE AND SALE
2.01 The Transaction. (a) At the Closing, in accordance with the
---------------
provisions the terms of this Agreement, Seller shall (or cause its subsidiaries
to) sell assign, convey, transfer and deliver to Buyer the Purchased Assets, and
Buyer shall pay to Seller the Purchase Price for the Purchased Assets as
contemplated by Section 2.03 below.
(b) The consummation of the transaction contemplated by Section
2.01(a) together with the delivery of the various deeds, bills of sale,
assignments, conveyances, certificates, agreements, assumptions, opinions and
other documents required or contemplated by this Agreement (the "Transaction
Documents") is herein called the "Closing." It is anticipated by the parties
that the Closing shall take place at the offices of Quarles & Brady, One East
Camelback, Suite 400, Phoenix, Arizona, at 10:00 a.m., local time on April 30,
1999 (the "Closing Date").
2.02 Assets to be Acquired. The assets to be acquired by Buyer
---------------------
shall include all of the right, title and interest of Seller or any of its
subsidiaries in and to all of the assets used by Seller solely and exclusively
in the business of owning, marketing, licensing, distributing, developing,
manufacturing, servicing and operating the Encompass Systems and Soil Sentry
Systems and conducting the monitoring services on behalf of the users of such
products (the "Business") which assets include the following (the "Purchased
Assets"):
(a) Patents and Know-How. All right, title and interest in and to
--------------------
(i) all patents, patent applications and docketed inventions, domestic and
foreign relating solely and exclusively to the Encompass Systems and Soil Sentry
Systems (the "Patents"), including without limitation those that are listed on
Schedule 2.02(a) hereto, and (ii) all research and development results,
processes, trade secrets, methods, operating techniques, know-how, algorithms,
formulae, specifications, drawings, designs, chip designs, inventions,
engineering information, and quality control, testing, operational, logistical,
maintenance and other technical data and information and technology relating
solely and exclusively to the Encompass Systems and Soil Sentry Systems (the
"Know-How").
3
<PAGE>
(b) Trademarks and Copyrights. All right, title, interest and
-------------------------
goodwill in and to all trademarks, trade names and service marks, and
registrations and applications for such trademarks, trade names and service
marks domestic and foreign, to the extent used solely and exclusively in the
Business (the "Trademarks"), including without limitation those that are listed
on Schedule 2.02(b), and all right, title, and interest in and to all
copyrights, and registrations and applications for such copyrights, domestic and
foreign, to the extent used solely and exclusively in the Business (the
"Copyrights"), including without limitation those that are listed on Schedule
2.02(b).
(c) Equipment. All of the test equipment, computers, machinery,
---------
tools, demonstration units, and other tangible assets listed on Schedule 2.02(c)
(collectively, the "Equipment").
(d) Computer Software. All right, title and interest (including
-----------------
copyright interests) in and to all computer programs (including computer
modeling programs, design and operational and applications software and computer
source and object codes), firmware, computer data bases, and related
documentation, solely and exclusively developed or used for the use or operation
of (i) the Encompass Systems or Soil Sentry Systems, (ii) the Equipment, (iii)
the Site Trac program or (iv) for design, development, engineering, or
manufacturing purposes, related thereto, (the "Software"), including without
limitation the computer programs identified on Schedule 2.02(d).
(e) Warranties and Other Rights. All rights under or pursuant to
---------------------------
all warranties, representations, guarantees and service contacts made by
suppliers, manufacturers and contractors in connection with products or services
purchased by Seller or any of its subsidiaries affecting the Equipment or the
Software.
(f) Contracts. All contracts, subcontracts, licenses and
---------
sublicenses, distribution, franchise, representative and marketing rights and
agreements and agreements and other arrangements, proposals, bids, quotations,
purchase orders and commitments, sales orders and commitments, and
manufacturing, servicing and monitoring agreements of any kind, whether written
or oral, including joint venture, teaming and partnership agreements solely and
exclusively relating to the Business (the "Contracts"), including without
limitation those Contracts identified on Schedule 2.02(f).
(g) Causes of Action. All causes of action, claims or rights of
----------------
action against third parties arising from or based on the infringement,
misappropriation, misuse or unauthorized use of the Patents, the Know-How, the
Software, the Trademarks or the Copyrights.
(h) Other. All right, title and interest of Seller in and to all
-----
licenses and permits solely and exclusively related to the Business and the
Purchased Assets and all customer and supplier lists and sales literature
related solely and exclusively to the Business.
4
<PAGE>
(i) Inventory. All raw material, work in process, components,
---------
completed Encompass Systems and Soil Sentry Systems products and all other
merchantable inventory as of the date hereof, to the extent solely and
exclusively manufactured and/or held for sale in the Business, as set forth on
Schedule 2.02(i), and updated as of the Closing Date.
2.03 Purchase Price. (a) The purchase price for the Purchased
--------------
Assets (the "Purchase Price") shall be $1,000,000, subject to adjustment as
provided in (c) below, payable in cash at the Closing by wire transfer of
immediately available funds (the "Closing Payment") plus the royalty payments
described in Section 2.03(b) below.
(b) As part of the Purchase Price, Buyer shall pay Seller a royalty
payment equal to the percentage indicated below of the revenues realized by
Buyer from its sales and leasing of, and monitoring, enhancement, licensing and
other services and rights relating solely and exclusively to the Encompass
Systems and the patent and other intellectual property rights relating thereto
("Encompass System Revenues"). For the period from the Closing Date until the
second anniversary of the Closing Date, the royalty payment shall equal 5% of
the Encompass System Revenues and, for the period following the second
anniversary of the Closing Date to the fifth anniversary of the Closing Date,
the royalty payment shall be equal to 3% of the Encompass System Revenues.
Encompass System Revenues shall not include any revenues realized by Buyer in
connection with the installation or repair of Encompass Systems but shall
include revenues attributable to monitoring services, software and patent
licensing and enhancements and technical support and other sources generally
attributable to the intellectual property rights in and relating to the
Encompass Systems and which are included in the Purchased Assets.
Notwithstanding anything in the foregoing to the contrary, Encompass System
Revenues realized by Buyer shall not include or shall be reduced by, as the case
may be:
(i) the amount of any sales taxes, use taxes, ad valorem or
other personal property taxes, and any other taxes, fees or
assessments payable to any governmental or quasi-governmental
authority or agency in connection with Encompass Systems or any
services, rights or interests related thereto other than federal,
state or local income taxes payable by Buyer in respect of the
revenues it receives which are attributable to the Encompass Systems;
(ii) any commissions, fees, remuneration and expense
reimbursements paid to any independent sales representatives by Buyer
in connection with any sales, services or rights giving rise to
Encompass System Revenues; and
(iii) any rebates, returns, allowances, discounts, set-offs,
refunds or recoveries paid or granted by Buyer in connection with any
sales, services or rights giving rise to Encompass System Revenues.
The royalty payments due Seller on Encompass System Revenues pursuant to this
Section 2.02(b) shall be paid by Buyer on or before the last business day of the
month following the calendar
5
<PAGE>
quarters ending each March 31, June 30, September 30 and December 31 for each
such calendar quarter and on or before the 30/th/ day following the fifth
anniversary of the Closing Date for the period covered thereby. Buyer shall
provide a report containing an itemization of its Encompass System Revenues
applicable to each period with its payment.
Seller or its designated agent shall be provided access to such books
and records of Buyer as may be necessary to determine or audit, with respect to
any period covering no more than four calendar quarters prior to the date of
such request, the correctness of payments made or due under this Agreement, or
to obtain information about payments under this Agreement. Such examination
shall be during reasonable business hours. If Seller or its designated agent,
through an audit or otherwise, shall have any objections to any amount of
royalties paid Seller hereunder, it will deliver a written report to Buyer
within forty-five days after the date of Seller's written notice above
describing in detail Seller's objections. Each of Buyer and Seller will use its
commercially reasonable efforts to resolve any such objections. If Buyer does
not dispute Seller's report, it shall pay any additional royalties due Seller
within five days of its receipt of Seller's report. In the event Seller and
Buyer are unable to resolve any disputed amount owed hereunder within fourteen
(14) days after Buyer has received the report of Seller's objections, Buyer and
Seller shall select a mutually acceptable independent accounting firm (the
"Auditor") will resolve any unresolved objections. The Auditor shall have
access to such books and records of Buyer, including all purchase orders and
agreements with respect to the Encompass Systems, as it deems necessary to
determine the amount of royalties due hereunder. The Auditor shall determine
the amount of royalties due with respect to the period(s) under review and
communicate the determination to Buyer and Seller in writing, not later than
thirty (30) days following the date of its receipt of such dispute, such
determination to constitute the final amount due with respect to such period.
Any additional royalties due Seller pursuant to the Auditor's report shall be
paid by Buyer within five days of its receipt of the Auditor's report. If any
determination by the Auditor shows that royalties were underpaid by Buyer by an
amount of five percent (5%) or more, the Buyer shall promptly pay all fees and
expenses of the Auditor. In the event the Auditor's determination shows that
royalties to Seller were underpaid by Buyer by an amount of less than five
percent (5%), Seller shall promptly pay all fees and expenses of the Auditor and
bear all of Seller's expenses in connection with its examination pursuant
hereto.
(c) The Purchase Price is subject to adjustment, upwards or downwards,
based on a physical inventory of the Purchased Assets to be taken immediately
prior to Closing. Immediately before the Closing, representatives of Seller and
Buyer shall conduct a complete physical inventory of the Purchased Assets.
Before the final Purchase Price is determined, a report of this physical
inventory shall be prepared and signed by the authorized representatives of both
Seller and Buyer, which report shall be final and binding on other parties for
all purposes. The report shall be as specific as possible in identifying each
asset by serial number, stock number or other identifying mark. The adjustment
in the Purchase Price shall equal the amount by which the value of the Purchased
Assets is greater or lesser than $1,000,000, and such adjustment will be
reflected in the Closing Payment. The inventory and intangible assets included
in the Purchased Assets shall be valued at the Seller's depreciated book value
maintained in accordance
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with GAAP. All other assets included in the Purchased Assets shall be valued at
an amount agreed upon by Buyer and Seller prior to Closing.
2.04 Assumption of Assumed Liabilities. (a) As additional
---------------------------------
consideration to Seller included in the Purchase Price and in exchange for the
performance by Seller of its obligations hereunder, effective as of the Closing
Date, Buyer hereby assumes and agrees to pay, discharge and perform as and when
due, (i) all liabilities and obligations (including all obligations with respect
to performance) arising under each of the Contracts after the Closing Date,
except for such post-Closing liabilities that are expressly set forth as
Excluded Liabilities in Section 2.04(b) below, and (ii) those additional
liabilities and obligations expressly set forth on Schedule 2.04. The
liabilities and obligations described in the preceding sentence are referred to
herein as the "Assumed Liabilities."
(b) Subject to the other provisions of this Agreement, it is
understood and agreed that Seller shall retain all liability for, and Buyer
shall not assume or have any obligation with respect to, the following
obligations or liabilities of Seller (all such obligations and liabilities being
herein referred to as the "Excluded Liabilities"):
(i) any and all obligations of Seller arising under law or
contract with respect to any individual in connection with his or her
employment by Seller before or after the Closing including obligations
arising in connection with Seller's termination of his or her
employment with Seller at any time, regardless of whether such
obligations would have arisen had Buyer chosen to employ any such
employee following Closing, including, without limitation, obligations
under any and all of Seller's severance benefits, medical or other
insurance coverages, retire ment benefits or any other benefit or
obligation of Seller of whatsoever nature, arising out of the
employment relationship between Seller and such employee;
(ii) the occupancy, ownership, use or operation of the Purchased
Assets or the operation of the Business on or prior to the Closing
Date including, without limitation, taxes attributable to the period
on and before Closing but not due and payable as of the Closing;
(iii) any liability, obligation or expense heretofore or which
may hereafter be incurred with respect to the Encompass Systems and
Soil Sentry Systems placed in service by Seller prior to Closing based
on such systems not being Year 2000 Compliant or incurred with respect
to such systems to render them Year 2000 Complaint; and
(iv) any liability, obligation or expense heretofore or which
may hereafter be incurred by Seller in connection with lawsuit filed
against Seller by BP Oil Company in the United States District Court
in the Northeast District of Ohio (Case No. ______________) (the "BP
Litigation").
7
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(c) Buyer hereby agrees to indemnify, defend and hold harmless
Seller with respect to any claims, damages or liability arising with respect to
the Assumed Liabilities and, after Closing, with respect to the Purchased Assets
and the Business. Seller hereby agrees to indemnify, defend and hold harmless
Buyer with respect to any claims, damages or liability arising with respect to
the Excluded Liabilities.
2.05 Excluded Assets. Seller shall not sell, and Buyer is under
---------------
no obligation to buy, the Excluded Assets.
2.06 Allocation of Purchase Price. Buyer and Seller agree that
----------------------------
the Purchase Price shall be allocated to the Purchased Assets in accordance with
Schedule 2.06 hereto (the "Allocation"). Buyer and Seller shall report the sale
and purchase of the Purchased Assets for all income tax purposes in a manner
consistent with the Allocation and hereby acknowledge that the Allocation was
determined pursuant to arm's length bargaining between them regarding the fair
market value for the Purchased Assets.
2.07 Treatment of Accounts Receivable. All accounts receivable
--------------------------------
of Seller arising prior to the Closing shall remain the property of Seller, and
Seller shall have the right to pursue collection of such receivables through
reasonable methods after the Closing Date. Seller shall be entitled to retain
(and if received by Buyer, Buyer shall remit to Seller within five (5) business
days after receipt) all payments made on receivables after Closing until such
time as the pre-Closing receivables have been paid in full. Buyer shall be
entitled to retain (and if received by Seller, Seller shall remit to Buyer
within five (5) business days after receipt) all payments made on receivables of
Buyer. At or immediately after Closing, Seller shall provide Buyer a true and
accurate schedule of accounts receivable related to the Business as of the
Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
3.01 Organization, Good Standing and Corporate Power. Seller is a
-----------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite corporate power and authority to
carry on its business as it is now being conducted. Seller is duly qualified as
a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of the properties owned or leased by it, or the
nature of its activities, is such that qualification as a foreign corporation in
that jurisdiction is required by law, except those jurisdictions, if any, in
which the failure to so qualify would not have a material adverse effect on the
Purchased Assets or the Business or in Seller's ability to perform its covenants
and commitments hereunder and to otherwise consummate the Transaction in the
manner and to the extent contemplated hereby.
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3.02 Authorization. Seller has all requisite corporate power and
-------------
authority to enter into and perform all of its obligations under this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by Seller and the consummation and performance by
Seller of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Seller. This Agreement has been duly
executed and delivered by Seller and constitutes the legal, valid and binding
obligation of Seller and is enforceable in accordance with its terms except as
enforceability may be subject to (i) any applicable bankruptcy, insolvency,
reorganization or other law relating to or affecting creditors' rights generally
and (ii) general principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law).
3.03 No Breach or Violation. (a) Neither the execution and
----------------------
delivery of this Agreement by Seller nor the consummation of the transactions
contemplated hereby to be performed by Seller will (i) violate or conflict with
any provision of the Certificate of Incorporation or Bylaws of Seller, as
currently in effect, or (ii) violate or conflict with any provision of any law,
rule, regulation, order, permit, certificate, writ, judgment, injunction,
decree, determination, award or other decision of any Governmental Entity, other
regulatory or self-regulatory body or association or arbitrator binding upon
Seller or any of its properties, except where such violations or conflicts would
not in the aggregate have a material adverse effect on the Business, or the
Purchased Assets or on the ability of Seller to consummate the transactions
contemplated hereby.
(b) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby to be performed by Seller
will result in a breach of or constitute a default (or with notice or lapse of
time or both result in a breach of or constitute a default) under, or give rise
to a right of termination, cancellation, acceleration or repurchase of any
obligation or a right of first refusal with respect to any material property or
asset or a loss of a material benefit or the imposition of a material penalty
under, any of the terms, conditions or provisions of
(i) any mortgage, indenture, loan or credit agreement or any
other agreement or instrument evidencing indebtedness for money
borrowed to which Seller is a party or by which it or any of its
properties is bound or affected, or pursuant to which Seller has
guaranteed the indebtedness or preferred stock of any person or
entity, or
(ii) any lease, license, tariff, contract or other agreement or
instrument to which Seller is a party or by which it or any of its
properties is bound or affected, except in the case of each of clauses
(i) and (ii) above,
(x) for any such breaches, defaults, rights, losses or
penalties that do not have a material adverse effect on the
Purchased Assets or the business, financial condition or
results of operations of Seller or on the
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ability of Seller to consummate the transactions
contemplated hereby, and
(y) for such third party consents as will be obtained
prior to the Closing.
(c) Neither the execution and delivery by Seller of this Agreement
nor the consummation of the transactions contemplated hereby to be performed by
Seller will result in, or require, the creation or imposition of any mortgage,
deed of trust, pledge, lien, security interest or other charge or encumbrance of
any nature upon or with respect to any of the Purchased Assets.
3.04 Consents. No consent, approval, order, certificate or
--------
authorization of, or registration, declaration or filing with, any Governmental
Entity is required by or with respect to Seller in connection with the execution
and delivery of this Agreement by Seller or the consummation by Seller of the
transactions contemplated hereby.
3.05 Contracts and Agreements. (a) Before the Closing, Seller
------------------------
will provide Buyer access to and the right to copy all the Contracts during
normal business hours.
(b) Seller has complied in all material respects with the provisions
of all the Contracts. Seller is not in material breach or default under any
Contract. The Contracts are in full force and effect and constitute legal,
valid and binding obligations of the respective parties thereto in accordance
with their terms. There has been no amendment or modification of any of the
Contracts, except such amendments that have been delivered to Buyer.
3.06 Trademarks and Copyrights. Schedule 2.02(b) sets forth a
-------------------------
complete and accurate list of each trademark, trade name, and each trademark and
trade name registration or application, and copyright registration and
application for copyright registration, and each license or licensing agreement
for each trademark and copyright license, held or employed by Seller or any of
its subsidiaries relating solely and exclusively to the Purchased Assets or the
Business (each such trademark, trade name, copyright, application and license or
licensing agreement hereafter referred to as the "Trademarks and Licenses"). To
Seller's knowledge, the use of the Trademarks and Licenses does not conflict
with, infringe upon or violate any proprietary right of any other person,
corporation or other entity. There are no outstanding or, to Seller's
knowledge, threatened proceedings or disagreements which challenge the rights of
Seller with respect to the Trademarks and Licenses.
3.07 Patents and Know-How. Schedule 2.02(a) sets forth a
--------------------
complete and accurate list of each patent, patent application and docketed
invention, by date and germane case or docket number and country of origin, and
each license or licensing agreement, by date, term and the parties thereto, for
each patent, patent application, invention, trade-secret, rights to know-how,
processes, computer programs or use of technology, held or employed by Seller
and any of its subsidiaries relating solely and exclusively to the Purchased
Assets or the Business (each such patent, patent application, license or
licensing agreement listed thereon hereinafter termed the
10
<PAGE>
"Patents and Licenses"). Except as set forth on Schedule 2.02(a), with respect
to the Patents and Licenses and with respect to all other technology, processes,
trade secrets, methods, operating techniques, know-how, specifications,
drawings, designs, chip designs, mask works, inventions, discoveries and
engineering information, and other technical data and information and technology
of Seller relating solely and exclusively to the Business ("Seller's
Technology"), to Seller's knowledge, the use of the Patents and Licenses and the
Seller's Technology does not conflict with, infringe upon or violate any patent,
patent license, patent application, or any pending application relating thereto,
or any trade secret, know-how, programs or processes of any third person, entity
or corporation.
3.08 Title. Seller has good and marketable title to all of the
-----
Purchased Assets to be assigned by it to the Buyer, tangible and intangible,
free and clear of all mortgages, liens, pledges, charges and encumbrances of any
nature whatsoever except for those liabilities which are being specifically
assumed by Buyer.
3.09 Reserved.
--------
3.10 Software. Except as set forth in Schedule 2.02(d), the
--------
Software constitutes all necessary proprietary computer programs, firmware,
computer data bases and related documentation used solely and exclusively with
respect to the use and operation of the Encompass Systems and Soil Sentry
Systems. The Software does not include, and this representation does not apply
to, software used in other aspects of Seller's business that may also be used in
connection with the Business, such as Windows NT software, accounting software
and other software of general applicability. As a courtesy, and without
representation or warranty, Seller shall provide Buyer a list of software Seller
believes is necessary for the operation of the Business but that is not included
in the Software. All Software used in the operation of the Encompass Systems is
Year 2000 Compliant, and the Software used in the Soil Sentry Systems is not
Year 2000 Compliant.
3.11 Customers and Suppliers. A list of all customers and
-----------------------
suppliers of the Business is set forth on Schedule 3.11.
3.12 Taxes. There are no federal, state or local tax liens upon
-----
any of the Purchased Assets.
3.13 Employee Matters. Schedule 3.13 hereto is a complete and
----------------
correct list of all personnel employed by Seller in the operation of the
Business including each employee's name, title or position, current
compensation, years of service, and Social Security Number. Except as set forth
in Schedule 3.13, all of the personnel employed by Seller in the Business are
"at will" employees. Schedule 3.13 contains a written description of all
director, officer and employee retirement, welfare or other benefit plans,
agreements, practices, programs or arrangements available to employees of the
Business ("Employee Benefit Plans").
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<PAGE>
3.14 Litigation. Except as disclosed in Schedule 3.14 hereto:
----------
(a) There is no claim, action, suit, proceeding, arbitration,
investigation or inquiry now pending or, to the knowledge of Seller, threatened
against, relating to or affecting any of the Purchased Assets or the Business or
that questions the validity of this Agreement or affects the transactions
contemplated herein; nor is there any basis for any such claim, action, suit,
proceeding, arbitration, investigation or inquiry.
(b) Neither Seller nor any of its officers, directors or employees
has been permanently or temporarily enjoined or prohibited by order, judgment or
decree of any Governmental Entity, other regulatory or self-regulatory body or
association, or arbitrator from engaging in or continuing any conduct or
practice in connection with the Business .
(c) There is not in existence any order, judgment or decree of any
Governmental Entity, other regulatory or self-regulatory body or association or
arbitrator enjoining or prohibiting Seller from taking, or requiring Seller to
take, any action of any kind which the Purchased Assets or Business are subject
or bound.
3.15 Brokers and Finders. No broker or finder has acted on behalf
-------------------
of Seller in connection with this Agreement and the transactions contemplated
hereby. No person has a valid claim for a brokerage commission, finder's fee or
other like payment against Seller in connection with the transactions
contemplated by this Agreement.
3.16 Compliance with Laws. Seller has not received notice of any
--------------------
noncompliance or alleged noncompliance with any Legal Requirement relating or
applicable to the Purchased Assets or to the operation of the Business, the
existence or enforcement of which would have a material adverse effect on the
Buyer's ability to operate them on the same basis as currently conducted and
operated or which would require the payment of refunds, fines, penalties or
restitution in respect of matters occurring prior to the Closing.
3.17 Permits. Schedule 3.17 sets forth all permits, licenses,
-------
certificates, authorizations, orders and approvals granted by any Governmental
Entity to Seller solely and exclusively in connection with the ownership, use or
operation of the Purchased Assets and the operation of the Business in the
manner heretofore operated by Seller, other than sales tax permits, certificates
of occupancy, and certificates of corporate authority (the "Scheduled
Permits"). Except as set forth on Schedule 3.17, the Scheduled Permits are in
full force and effect, all fees and other payments due and owing in connection
with the Scheduled Permits have been paid in full, and there are no unpaid fees
or other payments that could cause the lapse or revocation of any of the
Scheduled Permits.
3.18 Bills and Invoices. Except for items included in the Assumed
------------------
Liabilities, all bills and other payments due and payable by Seller with respect
to the Purchased Assets and the Business have been or will be paid in full in
the ordinary course of business, and no labor,
12
<PAGE>
material or services have been provided or performed with respect to the
Purchased Assets that have not been or will not be paid in full.
3.19 Inventories. Set forth on Schedule 2.02(i) is a complete list
-----------
of the inventories of Seller included as a part of the Purchased Assets,
including a description thereof. All inventories are of a nature and quality
equal to the inventory historically held by and sold by Seller in the ordinary
course of the Business.
3.20 Untrue Statements. This Agreement and the exhibits, schedules
-----------------
and appendices hereto, and the financial statements furnished by Seller or any
of its affiliates or representatives to Buyer or its representatives pursuant
hereto or in connection herewith, do not include and will not include any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements made herein and therein, in light of the circumstances in
which they are made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
4.01 Organization, Good Standing and Corporate Power. Buyer is a
-----------------------------------------------
corporation, duly organized, validly existing and in good standing under the
laws of Oklahoma and has all requisite corporate power and authority to carry on
its business as now being conducted.
4.02 Authorization. (a) Buyer has all requisite corporate power
-------------
and authority to enter into and perform all of its obligations under this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by Buyer and the consummation and performance by
Buyer of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Buyer. This Agreement has been duly
executed and delivered by Buyer and constitutes the legal, valid and binding
obligation of Buyer, enforceable against Buyer in accordance with its terms
except as enforceability may be subject to (i) any applicable bankruptcy,
insolvency, reorganization or other law relating to or affecting creditors'
rights generally and (ii) general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
4.03 No Breach or Violation. (a) Neither the execution and
----------------------
delivery of this Agreement by Buyer nor the consummation of the transactions
contemplated hereby to be performed by Buyer will (i) violate or conflict with
any provision of the Certificate of Incorporation or Bylaws of Buyer, as
currently in effect, or (ii) violate or conflict with any provision of any law,
rule, regulation, order, permit, certificate, writ, judgment, injunction,
decree, determination, award or other decision of any Governmental Entity, other
regulatory or self-
13
<PAGE>
regulatory body or association or arbitrator binding upon Buyer or any of its
properties, except where such violations or conflicts would not in the aggregate
have a material adverse effect on the business, financial condition or
properties of Buyer or on the ability of Buyer to consummate the transactions
contemplated hereby and except for violations that will be cured, waived or
terminated prior to the Closing.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to Buyer in connection with the execution and delivery of this
Agreement by Buyer or the consummation by Buyer of the transactions contemplated
hereby other than such filings or registrations which, if not made, and such
authorizations, consents or approvals which, if not received, would not have any
material adverse effect on the business, financial condition, or properties of
Buyer or on the ability of Buyer to consummate the transactions contemplated
hereby.
4.04 Brokers and Finders. No broker or finder has acted on behalf
-------------------
of Buyer in connection with this Agreement and the transactions contemplated
hereby. No person has a valid claim for a brokerage commission, finder's fee or
other like payment against Buyer in connection with the transactions
contemplated by this Agreement.
ARTICLE V
COVENANTS OF SELLER
5.01 Confidentiality. Seller acknowledges that Buyer would be
---------------
irreparably damaged if confidential information concerning the Purchased Assets
or Buyer were disclosed to or utilized by any person to the detriment of Buyer.
Consequently, during the five-year period immediately following the Closing,
Seller shall not, at any time directly or indirectly, without the prior written
consent of Buyer, make use of or divulge, or permit any of its affiliates,
employees or agents to make use of or divulge, any information concerning the
Purchased Assets, the Business, or the financial condition or other affairs of
Buyer that could be used to the detriment of Buyer, including without
limitation, customer information, Patents and Licenses and Seller's Technology,
except to the extent Seller reasonably deems disclosure of any such items to be
necessary or prudent under applicable securities laws, or if required by law or
in order to preserve or enforce its rights under this Agreement. Seller's
obligations hereunder shall not apply with respect to any confidential
information which (i) is disclosed in a printed publication which is generally
available to the public or becomes publicly known through no wrongful act on the
part of Seller, (ii) becomes known to Seller through disclosure from a third-
party source which, after reasonable inquiry, Seller believes that such source
has a right to disclose without a breach of any contractual or fiduciary
obligation by such source to Buyer, or (iii) is disclosed with the written
approval of Buyer.
5.02 Covenant Not to Compete. (a) Except as set forth in Section
-----------------------
5.02(d) below, Seller agrees that it will not, and will cause Seller's
subsidiaries not to, engage or
14
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participate, directly or indirectly, as principal, agent, employee, employer,
consultant or in any other individual or representative capacity whatever, in
the conduct or management of, or own (legally or beneficially), or have the
right or option to acquire, any direct or indirect interest in any business
which engages, directly or indirectly, in any business competitive with the
Business, in the United States and Europe, for a period of five (5) years
following the Closing Date.
(b) Seller agrees that the covenants set forth herein are
appropriate and reasonable when considered in light of the nature and extent of
the Business and Purchased Assets acquired by Buyer hereunder, which includes
the goodwill of the Business. Seller acknowledges that (i) Buyer has a
legitimate interest in protecting the Business and Purchased Assets acquired
from Seller, (ii) the covenants set forth herein are not oppressive to the
Seller and contain reasonable limitations as to time, scope, geographical area
and activity, (iii) the covenants do not harm in any manner whatsoever the
public interest, (iv) the Seller has received and will receive substantial
consideration for agreeing to such covenants, (v) the Seller is agreeing to such
covenants in order, among other things, to induce Buyer to enter into this
Agreement and (vi) Seller will derive substantial benefits from the consummation
of the transactions contemplated by this Agreement, including, but not limited
to, the payment of the consideration for the Purchased Assets and of future
royalties in accordance with this Agreement.
(c) In the event Seller violates the foregoing covenant not to
compete or any other covenants set forth in this Agreement (collectively, the
"Covenants"), then, in addition to any other rights and remedies available,
Buyer shall have the right and remedy to have the applicable Covenant provisions
specifically enforced by any court of competent jurisdiction by way of an
injunction or other legal equitable relief, it being agreed that any breach of
the applicable Covenant would cause irreparable injury to Buyer and damages
would be an inadequate remedy.
(d) Notwithstanding anything in this Section 5.02 or in any other
provision of this Agreement to the contrary, Seller shall have the right to use
the "Soil Sentry Twelve - X" technology (the "Technology") at any future time,
as long as Seller does so in strict accordance with this Section 5.02(d).
Seller can use the Technology in conjunction with any business conducted by
Seller as long as that business does not involve in the monitoring of
aboveground or underground storage tanks of alcohol or petroleum based fuels or
oils. Further, Seller's right to use the Technology shall not entitle Seller to
use the name "Soil Sentry Twelve - X."
ARTICLE VI
RESERVED
15
<PAGE>
ARTICLE VII
COVENANTS OF BUYER AND SELLER
7.01 Employees of Seller. Buyer agrees to offer employment only to
-------------------
those employees of the Business specified by Buyer on or before the Closing
on Schedule 7.01 (the "Assumed Employees"). Seller agrees to terminate the
employment of all Assumed Employees effective upon Closing and agrees not to
rehire any Assumed Employees unless they are either terminated by Buyer or have
been out of Buyer's employment for a period of at least six (6) months. Seller
shall retain and perform any and all obligations to (i) the Assumed Employees
incurred prior to the Closing or by reason of such termination of employment and
(ii) all other employees employed by Seller in connection with the Business
incurred prior to or after the Closing, including without limitation in the case
of both (i) and (ii) obligations pursuant to any employment agreement, any
severance, bonus, vacation, deferred compensation, stock purchase, stock option,
profit sharing, pension, retirement or other employee benefit plan, policy or
agreement, or any laws or regulations governing wages, employee benefit plans,
withholding, plant closings and employee notification.
7.02 Further Assurances. Seller and Buyer shall each use their
------------------
commercially reasonable efforts to take all actions necessary, proper, or deemed
by them advisable, to fulfill promptly their obligations hereunder and to
consummate the transactions contemplated by this Agreement. Seller and Buyer
will coordinate and cooperate with each other in exchanging such information and
supplying such reasonable assistance as may be requested by the other in
connection with the foregoing. From time to time after the Closing, Seller will
at its own expense, execute and deliver, or cause to be executed and delivered,
such documents to Buyer as Buyer may reasonably request, and from time to time
after the Closing, Buyer will, at its own expense, execute and deliver such
documents to Seller as Seller may reasonably request, in order to more
effectively consummate the transactions contemplated by this Agreement.
ARTICLE VIII
RESERVED
ARTICLE IX
RESERVED
ARTICLE X
RESERVED
16
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ARTICLE XI
AMENDMENTS AND WAIVER
11.01 Amendment. This Agreement may not be amended except by an
---------
instrument in writing signed on behalf of each of the parties hereto.
11.02 Waiver. Any term or provision of this Agreement may be
------
waived in writing at any time by Buyer, if it is entitled to the benefits
thereof, or by Seller, if it is entitled to the benefits thereof.
ARTICLE XII
OTHER AGREEMENTS; SURVIVAL
OF REPRESENTATIONS AND WARRANTIES
12.01 Confidentiality. Except as may be required to comply with
---------------
applicable law and regulations or to obtain required regulatory approvals to
consummate this transaction, whether state, federal or foreign, each of the
parties hereto will use its best efforts to keep confidential any and all
information relating to this transaction and to one another and will instruct
its officers, employees and other representatives having access to such
information of such obligation of confidentiality. In the event the
transactions contemplated herein are not consummated, each of the parties hereto
shall return all documents, including any copies thereof, to the party which
provided the same.
12.02 Public Announcements. None of the parties hereto will make
--------------------
any public announcement without prior approval of the other, except as may
otherwise be required by law.
12.03 Additional Agreements. Subject to this Agreement, each of
---------------------
the parties agrees to use its best efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement. If at any time after the Closing
any further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and directors of each corporation that is a party
to this Agreement will take all such necessary action.
17
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12.04 Available Remedies. Each party expressly agrees that,
------------------
consistent with its intention and agreement to be bound by the terms of this
Agreement and to consummate the transactions contemplated hereby, subject only
to the performance or satisfaction of conditions precedent, the remedy of
specific performance shall be available to a non-breaching and non-defaulting
party to enforce performance of this Agreement by a breaching or defaulting
party, including, without limitation, to require the consummation of the Closing
pursuant to Section 2.01.
12.05 Survival of Representations and Warranties; Indemnification.
-----------------------------------------------------------
All representations, warranties, covenants and obligations in this Agreement,
and in the schedules hereto, will survive the Closing and the consummation of
the transactions contemplated hereby; provided, however, that the
representations and warranties of Seller contained in Section 3.12 shall survive
until 90 days after the date on which the applicable period on limitation of
assessment of tax has expired, and the representations and warranties of Seller
contained elsewhere in Article III and the representations of Buyer contained in
Article IV shall survive for a period of six months following Closing. No claim
for the recovery of indemnifiable damages based upon the inaccuracy of the
Article III or Article IV representations and warranties may be asserted by a
party after such representations and warranties shall be thus extinguished;
provided, however, that claims first asserted in writing within the applicable
period shall not be barred. The right to payment of damages or other remedy
based on such representations, warranties, covenants, and obligations will not
be affected by any investigation conducted with respect to, or any knowledge
acquired (or capable of being acquired) at any time, whether before or after the
execution and delivery of this Agreement or the Closing, with respect to the
accuracy or inaccuracy of or compliance with, any such representation, warranty,
covenant, or obligation. The waiver of any condition based on the accuracy of
any representation or warranty, or on the performance of or compliance with any
covenant or obligation, will not affect the right to indemnification, payment of
damages, or other remedy based on such representations, warranties, covenants,
and obligations.
12.06 Actions of the Parties after the Closing. The parties
----------------------------------------
hereto agree that after the Closing, they will take the actions described in
this Section 12.06.
(a) Seller acknowledge and agree that from and after the Closing,
Buyer will be entitled to originals of all title documents and copies of all
other documents, books, records (including tax records), agreements, and
financial data of any sort relating to the Business and Purchased Assets.
(b) In the event and for so long as (i) Seller is a party to the
BP Litigation or (ii) either party actively is contesting or defending against
any action, suit, proceeding, hearing, investigation, charge, complaint, claim,
or demand in connection with (A) any transaction contemplated under this
Agreement or (B) any fact, situation, circumstance, status, condition, activity,
practice, plan, occurrence, event, incident, action, failure to act, or
transaction on or prior to the Closing Date involving the Business or the
Purchased Assets, the other party will to the
18
<PAGE>
extent reasonably practicable cooperate with the contesting or defending party
and its counsel in the contest or defense, make available its personnel, and
provide such testimony and access to its books and records as shall be necessary
in connection with the contest or defense, all at the sole cost and expense of
the contesting or defending party. In particular, and without limiting the
preceding sentence, Buyer shall make available any of the Assumed Employees, as
reasonably requested by Seller, in order to assist Seller in the BP Litigation.
However, with respect to any such information as to which the contesting or
defending party may reasonably assert that the disclosure pursuant hereto would
waive a privilege, the parties will use their reasonable efforts to develop
procedures to maintain such privilege.
(c) Seller will not take any action that is designed or intended to
have the effect of discouraging any lessor, licensor, customer, supplier, or
other business associate of the Business from maintaining the same business
relationships with Buyer after the Closing as it maintained with the Seller
prior to the Closing. The Seller will refer all customer inquiries relating to
the Business to Buyer from and after the Closing.
(d) Promptly after Closing, Seller shall use its commercially
reasonable efforts to obtain the consents necessary, if any, to convey, transfer
and assign to Buyer the Contracts. Without limiting the obligation set forth in
the immediately preceding sentence, if any consent necessary to convey, transfer
and assign the Contracts has not been obtained prior to the Closing Date, Seller
shall use its commercially reasonable efforts to afford Buyer the benefits under
each such Contract and Seller's protection from the obligations under each such
Contract, to the extent Seller may do so without breaching or violating the
terms of any such Contract.
(e) It is the parties' intent that all of the Purchased Assets be
conveyed to Buyer at the Closing. Accordingly, if either party determines that
less than all of the Purchased Assets have been conveyed (whether due to the
failure to identify all of the Purchased Assets at Closing, the failure to
include all Purchased Assets in any applicable assignment or bill of sale, the
failure to obtain all required consents to assignment or otherwise), such party
shall promptly notify the other of such fact and the parties will take all
appropriate action and execute any additional documents, instruments or
conveyances of any kind which may be reasonably necessary to carry out the
foregoing intent.
ARTICLE XIII
MISCELLANEOUS
13.01 Severability. If any term, provision, condition or covenant
------------
of this Agreement or the application thereof to any party or circumstances shall
be held to be unenforceable to any extent in any jurisdiction, then the
remainder of this Agreement and the application of such term, provision,
condition or covenant in any other jurisdiction or to persons or circumstances
other than those as to whom or which it is held to be invalid or unenforceable,
shall not be affected thereby, and each term, provision, condition and covenant
of this Agreement
19
<PAGE>
shall be valid and enforceable to the fullest extent permitted by law.
13.02 Expenses. Except as otherwise provided herein, each party
--------
hereto will pay its own costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby. Seller will pay all state
and local real estate transfer, documentary, stamp and other similar Taxes
arising from the transfer of the real property included within the Purchased
Assets. In addition, Seller agree that the purchase price includes all
applicable state and local sales, use, transfer, retailer occupation and other
similar Taxes due with respect to the transfer of the Purchased Assets.
13.03 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been given if delivered
personally or sent by telex, facsimile transmission, a nationally recognized
overnight delivery service or registered or certified mail (return receipt
requested), postage prepaid, to the parties to this Agreement at the following
addresses or at such other address for a party as shall be specified by like
notice:
If to Buyer: National Environmental Service Co.
12331 East 60/th/ Street
Tulsa, Oklahoma 74133-3621
Telefax No.: (918) 250-1418
Attention: Eddy Patterson
with a copy to: Conner & Winters, A Professional Corporation
15 East 5/th/ Street, Suite 3700
Tulsa, Oklahoma 74103
Telefax No.: (918) 596-8548
Attention: Lynnwood R. Moore, Jr.
If to Seller: Arizona Instrument Corporation
4114 East Wood Street
Phoenix, Arizona 85040
Telefax No.:
Attention: George G. Hays
with a copy to: Quarles & Brady
One East Camelback, Suite 400
Phoenix, AZ 85012
Telefax No.: (602) 230-5598
Attention: Robert S. Bornhoft
All such notices and communications shall be deemed to have been received on the
date of delivery or on the third business day after the mailing thereof.
20
<PAGE>
13.04 Time. Time is of the essence of this Agreement.
----
13.05 Entire Agreement. This Agreement (including the schedules,
----------------
documents and instruments referred to herein) constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements and undertakings, written and oral, including, but not limited
to, the letter of intent between the parties, dated April 8, 1999; provided,
however, this Agreement shall not constitute a waiver of termination of any
right a party may have against the other party for any breach of the binding
provisions of such letter of intent prior to the Closing.
13.06 Binding Effect; Benefits. This Agreement shall be binding
------------------------
upon and inure to the benefit of the parties to this Agreement and their
respective successors and permitted assigns. Nothing expressed or implied in
this Agreement is intended to or shall be construed to give any person other
than the parties to this Agreement or their respective successors or permitted
assigns any legal or equitable right, remedy or claim under or in respect of
this Agreement, it being the intention of the parties to this Agreement that
this Agreement shall be for the sole and exclusive benefit of such parties or
such successors or assigns and for the benefit of no other person.
13.07 Assignment. Neither this Agreement nor any right, remedy,
----------
obligation or liability arising hereunder or by reason hereof shall be
assignable by any party to this Agreement without the prior written consent of
the other parties.
13.08 Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the laws of the State of Oklahoma applicable to
contracts made and to be performed within that State, without regard to the
principles of conflicts of laws thereof.
13.09 Article and Section Headings. The article, section and
----------------------------
other headings contained in this Agreement are for reference purposes only and
shall not affect the meaning or interpretation of this Agreement.
13.10 Counterparts. This Agreement may be executed in any number
------------
of counterparts, each of which shall be deemed to be an original and all of
which together shall be deemed to be a single agreement.
21
<PAGE>
13.11 Knowledge. Whenever the phrase "to Seller's knowledge" or
---------
similar such words are used in this Agreement, the phrase shall mean the
current, actual knowledge of George G. Hays, President of Seller, with respect
to the matter as of the Closing Date, without any investigation.
IN WITNESS WHEREOF, the parties to this Agreement have caused this
Agreement to be duly executed as of the date first written above.
NATIONAL ENVIRONMENTAL
SERVICE CO.
By:
-------------------------------
Albert A. McCutchan,
Executive Vice President
ARIZONA INSTRUMENT
CORPORATION
By:
-------------------------------
George G. Hays, President
22
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 201
<SECURITIES> 0
<RECEIVABLES> 11,199
<ALLOWANCES> 214
<INVENTORY> 2,271
<CURRENT-ASSETS> 13,563
<PP&E> 5,528
<DEPRECIATION> 2,216
<TOTAL-ASSETS> 18,765
<CURRENT-LIABILITIES> 5,140
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 6,321
<TOTAL-LIABILITY-AND-EQUITY> 18,765
<SALES> 850
<TOTAL-REVENUES> 12,482
<CGS> 480
<TOTAL-COSTS> 10,880
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 240
<INCOME-PRETAX> 1,499
<INCOME-TAX> 570
<INCOME-CONTINUING> 929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 929
<EPS-BASIC> .12
<EPS-DILUTED> .12
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