<PAGE>
_________________________________________________________________
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K/A No. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
----------------------------------
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
September 10, 1999
------------------
NATIONAL ENVIRONMENTAL SERVICE CO.
----------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
State of Oklahoma 000-24470 73-1296420
- ----------------------------------------------------------------------------------------------------------
(State or other jurisdiction (Commission File No.) (I..R.S. Employer Identification No.)
of incorporation)
</TABLE>
12331 East 60th Street
Tulsa, Oklahoma 74l46
----------------------
(Address of principal executive offices) (Zip Code)
(918) 250-2227
--------------
(Registrant's telephone number, including area code)
_________________________________________________________________
<PAGE>
Item 7. Financial Statements and Exhibits.
Page
----
Independent Auditors' Report F-2
Supplemental Consolidated Balance Sheet as of December 31, 1998 F-3
Supplemental Consolidated Statements of Income for the Years Ended
December 31, 1998 and 1997 F-4
Supplemental Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1998 and 1997 F-5
Supplemental Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 F-6
Notes to Supplemental Consolidated Financial Statements F-7
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused his amendment to the report to be signed on its
behalf by the duly authorized undersigned officer of the Registrant.
National Environmental Service Co.
(Registrant)
Date: November 11, 1999
By: /s/ LARRY G. JOHNSON
-----------------------------------
Larry G. Johnson, Vice President
& Secretary-Treasurer & Chief
Financial Officer (Authorized Officer and
Principal Financial
Officer)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
National Environmental Service Co.
We have audited the accompanying supplemental consolidated balance sheet of
National Environmental Service Co. (formed as a result of the acquisition by
National Environmental Service Co. of Summit Environmental Services, Inc.) as of
December 31, 1998, and the related supplemental consolidated statements of
income, changes in shareholders' equity and cash flows for each of the two years
in the period ended December 31, 1998. The supplemental consolidated financial
statements give retroactive effect to the acquisition by National Environmental
Service Co. of Summit Environmental Services, Inc. consummated on September 10,
1999, which has been accounted for using the pooling-of-interests method as
described in the notes to the supplemental consolidated financial statements.
These supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of National Environmental Service Co. at December 31, 1998 and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 1998, after giving retroactive effect to
the acquisition of Summit Environmental Services, Inc., as described in the
notes to the supplemental consolidated financial statements, in conformity with
generally accepted accounting principles.
TULLIUS TAYLOR SARTAIN & SARTAIN LLP
Tulsa, Oklahoma
October 22, 1999
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
December 31, 1998
(In thousands of dollars)
<TABLE>
<CAPTION>
Assets
<S> <C>
Current assets:
Cash $ 331
Accounts receivable, trade, net of allowance for doubtful accounts of $73 8,063
Costs and estimated earnings in excess of billings on uncompleted contracts 2,660
Materials and supplies 1,061
Prepaid expenses 32
-----------------
Total current assets 12,147
-----------------
Property and equipment:
Land 50
Buildings and improvements 608
Vehicles 2,230
Testing, drilling and other equipment 645
Furniture, fixtures and other 1,015
-----------------
4,548
Less accumulated depreciation (2,034)
-----------------
Property and equipment, net 2,514
Other 131
-----------------
Total assets $14,792
=================
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term obligations $ 3,541
Accounts payable 1,565
Accrued income taxes 911
Other accrued liabilities 233
Deferred income taxes 505
Total current liabilities 6,755
-----------------
Long-term obligations 1,007
Deferred income taxes 197
Commitments and contingencies
Shareholders' equity:
Preferred stock: 1,000,000 shares authorized; none issued -
Common stock; par value $.01; authorized 20,000,000 shares; issued 9,388,643 shares 94
Additional paid-in capital 3,998
Retained earnings 2,981
Common stock in Treasury, at cost, 122,911shares (240)
-----------------
Total shareholders' equity 6,833
-----------------
Total liabilities and shareholders' equity $14,792
=================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998 and 1997
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
Revenue: 1998 1997
---------------------------------------------------
<S> <C> <C>
Fueling installations $14,685 $13,134
Environmental 6,435 3,405
Other 880 261
---------------------------------------------------
Total revenue 22,000 16,800
Costs and expenses 12,875 10,708
Selling, general and administrative expenses 4,203 3,434
-----------------------------------------------
Income from operations 4,922 2,658
Other income (expenses):
Interest (407) (370)
Other, net 121 158
-----------------------------------------------
Income before income taxes 4,636 2,446
Provision for income taxes
Current 1,322 684
Deferred 436 244
1,758 928
-----------------------------------------------
Net income $ 2,878 $ 1,518
===============================================
Basic net income per share $ 0.31 $ 0.18
Diluted net income per share $ 0.31 $ 0.18
===============================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1998 and 1997
(In thousands of dollars)
<TABLE>
<CAPTION>
Common Common Additional
Stock Shares Stock Paid-in Retained Treasury
Issued In Treasury Issued Capital Earnings Shares Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Dec. 31, 1996 7,301,143 29,216 $73 $1,796 $ 61 $ (76) $1,854
Shares sold 1,450,000 15 1,488 - - 1,503
Shares issued to acquire
related party business
and building 225,000 2 - (380) - (378)
Shares issued
employee awards (16,840) - - - 28 28
Summit owner distributions
net of current income taxes - (110) - (110)
Net income - - - - 1,518 - 1,518
----------------------------------------------------------------------------
Balance at Dec. 31, 1997 8,976,143 12,376 90 3,284 1,089 (48) 4,415
Shares sold 400,000 - 4 695 - - 699
Shares issued to acquire
business 12,500 - 19 - - 19
Purchase of Treasury Stock 110,615 - - (192) (192)
Summit owner distributions
net of current income taxes - - - - (986) - (986)
Net income - - - - 2,878 - 2,878
----------------------------------------------------------------------------
Balance at Dec. 31, 1998 9,388,643 122,991 $94 $3,998 $2,981 $(240) $6,833
============================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
(In thousands of dollars)
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 2,878 $ 1,518
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Depreciation and amortization 420 347
Deferred taxes 436 244
Stock issued for employee compensation - 28 28
Change in:
Accounts receivable (2,803) (1,741)
Costs and estimated earnings in excess of billings on
uncompleted contracts 68 (1,825)
Materials and supplies (67) (321)
Prepaid expenses 50 (49)
Accounts payable (533) 684
Billings in excess of costs and estimated earnings on
uncompleted contracts - (68)
Accrued liabilities 549 424
Other (15) -
-------------------------------------
Net cash provided by (used in) operating activities 983 (759)
-------------------------------------
Cash Flows from Investing Activities
Acquisition of business, net of cash acquired (498) (721)
Purchases of property and equipment (663) (615)
Proceeds from sales of property and equipment 11 5
-------------------------------------
Net cash used in investing activities (1,150) (1,331)
-------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 699 1,504
Proceeds from notes payable and long-term obligations 4,336 5,040
Decrease in notes payable to related parties (31) (257)
Principal payments on notes payable and long-term obligations (3,729) (3,842)
Summit owner distributions net of tax (987) (110)
Purchase of common shares (192) 0
-------------------------------------
Net cash provided by financing activities 96 2,335
-------------------------------------
Increase (decrease) in cash (71) 245
Cash, beginning of year 402 157
-------------------------------------
Cash, end of year $ 331 $ 402
=====================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
Note 1 - Summary of Significant Accounting Policies
Description of business
National Environmental Service Co. (the "Company") is engaged in the businesses
of providing cathodic protection for underground metal tanks, installation of
spill and overfill protection, environmental site assessments, contaminated soil
and water remediation, installation and removal of storage tanks, and the
installation of fueling systems and related facilities. The Company is
headquartered in Tulsa, Oklahoma, and has division facilities in Oklahoma City
and Enid, Oklahoma; Dallas and San Antonio, Texas; Largo, Florida; Columbia,
South Carolina; Greenville North Carolina; South Charleston, West Virginia; and
Pittsburgh, Pennsylvania.
Basis of presentation
The Company owns 100% of Fuel Recovery Systems, Inc. and Lab One Analytical,
Inc. ("Lab One"). The financial statements of Fuel Recovery Systems, Inc. and
Lab One are consolidated and all material intercompany accounts and transactions
are eliminated.
On September 10, 1999, the Company acquired Summit Environmental Services, Inc.
("Summit") in a business combination accounted for as a pooling of interests
(See Note 14). Accordingly, the supplemental consolidated financial statements
included herein give retroactive effect to this transaction and include the
combined operation of the Company and Summit for all periods presented.
Generally accepted accounting principles prohibit giving effect to a consummated
business combination accounted for by the pooling-of-interests method in
financial statements that do not include the date of consummation. These
financial statements do not extend through the consummation date of the Summit
merger; however, they will become the historical consolidated financial
statements of National Environmental Service Co. after financial statements
including the consummation date of the Summit merger are issued.
Materials and supplies
Materials and supplies consist of purchased materials and are valued at cost
(first-in, first-out).
<PAGE>
Property and equipment
Property and equipment are carried at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets.
Gains and losses on retirement of property and equipment are recognized in the
period of retirement.
Net income per share
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" (see Note 10). SFAS
128 replaced primary earnings per share ("EPS") with basic EPS and fully diluted
EPS with diluted EPS. Basic EPS is calculated by dividing net earnings available
to common shares by the weighted average common shares outstanding. Diluted EPS
is calculated similarly, except that it includes the dilutive effect of the
assumed exercise of all dilutive potential common shares outstanding. SFAS 128
also requires previously reported EPS to be restated. The adoption of SFAS 128
did not have a material effect on the calculation of EPS.
Income taxes
Deferred taxes are determined under the liability method, whereby deferred tax
assets and liabilities are recognized based on differences between financial
statement and tax bases of assets and liabilities using presently enacted rates.
At December 31, 1998 and 1997, deferred taxes were recorded primarily for
temporary differences related to uncompleted contract income recognition and
depreciation of fixed assets.
Financial instruments
The Company's financial instruments consist of trade accounts receivable, trade
accounts payable, short-term and long-term debt. The carrying amounts of these
financial instruments approximate fair value at December 31, 1998. The fair
value of debt is estimated based on current rates offered for similar debt.
Concentration of credit risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables from customers and contracts
which will be due from customers when billable under the contracts. The Company
does not require collateral from its customers although it may have the ability
to place liens. Such credit risk is considered by management to be limited
because a substantial portion of contract billings are due from the Oklahoma
Indemnity Fund and due to the Company's broad customer base. One commercial
customer accounted for 13% of sales in 1998 and another customer accounted for
13% of sales in 1997.
<PAGE>
Revenue recognition
The Company enters into fixed fee, cost-plus-fee and performance incentive
contracts. For long-term contracts, revenue is recognized on the percentage of
completion method measured by the percentage of direct costs to date to
estimated total direct costs for each long-term contract. For short-term and
multiple unit contracts, revenue is recognized as services are rendered, based
on physical completion of the project. Related costs are expensed as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
Management estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
New accounting standards
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in 1998.
The Company has no comprehensive income items for the two years in the period
ended December 31, 1998. Therefore, net income equals comprehensive income.
The Company will adopt SFAS No. 133, "Accounting for Derivative Investments and
Hedging Activities" during 2001. Currently the Company does not engage in
hedging activities or transactions involving derivatives.
Employee stock options
When the exercise price of employee stock options equals or exceeds the market
value of the stock at the date of grant, the Company recognizes no compensation
expense.
Note 2 - Supplemental Cash Flow Information
<TABLE>
<CAPTION>
(in thousands)
1998 1997
------------------------------
<S> <C> <C>
Cash paid for interest $ 405 $ 307
Cash paid for income taxes $ 319 $ -
==================================
Non-cash investing and financing activities:
Issuance of common stock in connection with
business acquisition $ 19 $ 605
Issuance of stock option and warrants for services $ 175 $ 51
==================================
</TABLE>
<PAGE>
Note 3 - Accounts Receivable
Accounts receivable consist of unpaid billings for long-term percentage of
completion type contracts, billings for short-term multiple unit contracts
(completed contracts), and completed contract projects not yet billed.
Retainage receivable at December 31, 1998, totaled $343,000.
Accounts receivable at December 31, 1998, include amounts subject to claims of
$660,000 arising from disputes. The Company is suing to collect various
collection matters. In the opinion of the Company's legal counsels, the Company
has valid claims against the defendants.
Note 4 - Uncompleted Contracts
Costs, estimated earnings and billings on uncompleted contracts are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1998
---------------------
<S> <C>
Costs incurred on uncompleted contracts $1,732
Estimated earnings recognized 4,464
---------------------
6,196
Billings to date 3,536
---------------------
$2,660
Included in the accompanying balance sheet under the following caption:
Costs and estimated earnings in excess of billings on uncompleted contracts $2,660
=====================
</TABLE>
Note 5 - Notes Payable
Notes payable at December 31, 1998, consist of the following (in thousands):
<TABLE>
<S> <C>
Revolving line of credit of $4,500,000 bearing interest at the prime rate published
in The Wall Street Journal plus .75% floating (8.5% at December 31, 1998),
payable on July 31, 1999, with interest payable monthly. The line is
collateralized
by accounts receivable, inventory, and equipment. $ 3,150
Note payable to a bank bearing interest at the prime rate published in The Wall
Street Journal plus .75% floating (8.5% at December 31, 1998), payable in monthly
installments of $10,257 including interest with the final installment due July
2000.
The note is collateralized by real estate, receivables, inventory, and equipment. 374
Note payable to bank bearing interest at Low New York Prime rate plus .5% floating
(8.25% at December 31, 1998), payable in monthly installments of $7,774
including interest with the final installment due March 2005. The loan is
collateralized by real estate and equipment. 443
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Notes payable bearing interest at rates from 5.9% to 10%, payable in monthly
installments aggregating $25,493 including interest with various maturity dates
through December 2001. The notes are collateralized by vehicles. 581
---------------------
$ 4,548
Less current portion (3,541)
---------------------
Total long-term notes payable $ 1,007
=====================
</TABLE>
Maturities of long-term debt over the next five years are as follows: 1999 -
$3,541,000; 2000 - $650,000; 2001 - $207,000; 2002 - $72,000; 2003 - $78,000.
The Revolving line of credit and note payable to a bank contain certain
restrictive covenants. The Company is restricted from paying dividends and is
limited as to the incurrence of additional debt and as to capital expenditures
and other acquisitions. In addition, the Company must maintain minimum leverage
and current ratios.
Note 6 - Commitments and Contingencies
Total rent expense for the years ended December 31, 1998 and 1997, was $80,400
and $72,700, respectively. Rental commitments under noncancelable leases are
$94,000 in 1999, $82,000 in 2000, and $56,000 in 2001.
The Company is not a party to any litigation which, in the judgment of the
Company, would have a material adverse effect on its operations or financial
condition if adversely determined. However, due to the nature of its business,
it is, from time to time, and is currently, a party to certain legal proceedings
arising in the ordinary course of its business.
Note 7 - Stock Option Plans
Effective April 22, 1994, the Company established The National Environmental
Service Co. 1994 Employee Stock Plan ("the Plan"), the purpose of which is to
help the Company retain key employees and to reward them for contributing to the
Company's success. On the same date, the Company also established The National
Environmental Service Co. Director Stock Option Plan (the "Director Plan"), the
purpose of which is to provide an incentive to non-employee Directors of the
Company so they may increase their interest in the success of the Company and to
encourage them to remain as Directors by providing them an opportunity to obtain
or increase their equity interest in the Company. The total amount of common
stock authorized and reserved for issuance under the Employee Plan is 638,864
common shares. At December 31, 1998, options to purchase 190,000 common shares
at $3.00 per share and 65,000 shares at $2.00 per share are outstanding. A
total of 131,000 options were exercisable. Under the Director Plan, 150,000
shares of common stock have been reserved for issuance and no options are
outstanding as of December 31, 1998.
<PAGE>
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") provides an
alternative method of determining compensation cost for stock options, which
alternative method may be adopted at the option of the Company. Had
compensation cost for these plans been determined consistent with SFAS 123, the
Company's net income and EPS would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------
<S> <C> <C>
Net income (loss):
As reported $2,878,000 $1,518,000
Pro forma $2,813,000 $1,439,000
Basic EPS:
As reported $ 0.31 $ 0.18
Pro forma $ 0.30 $ 0.18
Diluted EPS:
As reported $ 0.31 $ 0.18
Pro forma $ 0.30 $ 0.17
</TABLE>
A summary of the status of the Company's stock options at December 31, 1998 and
1997, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------
Wtd. Avg. Wtd. Avg.
Exercise Exercise
Shares Price Shares Price
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 238,000 $3.00 238,000 $3.00
Granted 75,000 $2.00 40,000 $3.00
Forfeited (58,000) $2.83 (40,000) $3.00
---------------------------------------------------------------
Outstanding at end of year 255,000 $2.75 238,000 $3.00
Exercisable at end of year 131,000 $2.73 75,200 $3.00
===============================================================
Weighted average fair value
of options granted $1.03 $2.34
===============================================================
Weighted average remaining
contractual life 6.1 years
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively: risk free interest
rates of 5.51% and 6.37%; expected dividend yields of 0%; expected lives of 10
years in 1998 and 1997; and expected volatility of 77% and 107%.
At December 31, 1998 and 1997, 788,864 and 723,876 shares of common stock were
reserved for the exercise of stock awards of which 638,864 and 485,876 shares
were available for future grants.
<PAGE>
Note 8 - Shareholders' Equity
In January 1998, the Company sold 400,000 shares of common stock at $2.00 per
share and warrants to purchase 50,000 shares of common stock at $2.00 per share
under a private placement arrangement with Peacock, Hislop, Staley & Given, Inc.
Gross proceeds totaled $800,000. Net proceeds totaled $712,000.
The Company secured $1,000,000 from a private placement of one million shares of
common stock during the second quarter of 1997. As part of the private
placement, the Company granted options to purchase 530,000 shares of common
stock at $1.50 per share exercisable at any time prior to April 30, 1999. The
Company secured $540,000 when options for 450,000 shares were exercised at $1.20
per share (adjusted from $1.50) on December 8, 1997.
Note 9 - Income Taxes
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1998, are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax liability:
Financial basis in excess of tax basis of:
Fixed assets $(209)
Uncompleted contracts (505)
Other 12
---------------------
Net deferred tax liability $(702)
=====================
</TABLE>
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes.
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------
<S> <C> <C>
Statutory tax rate 34.0% 34.0%
State income taxes, net 2.5% 2.4%
Other 1.4% 1.6%
37.9% 38.0%
===========================================
</TABLE>
Note 10 - Related Parties
The Company purchases laboratory analysis services from Lab One. On January 30,
1998, the Company acquired Lab One for $75,000 cash and 225,000 shares of the
Company's common stock.
On February 27, 1998, the Company acquired the office building, warehouse and
land on which the Company's corporate offices are located. The purchase price
was $600,000.
<PAGE>
Lab One and the real estate were purchased from the Company's principal
shareholders (the Chairman and CEO and Executive Vice President) following
completion of independent appraisals and the unanimous consent of the Company's
outside directors.
Due to common ownership interests in the Company and acquired businesses, the
business combinations have been accounted for in a manner similar to the
pooling-of-interests method. The 1997 financial statements have been restated
by decreasing costs and expenses $101,000, decreasing selling, general and
administrative expenses $17,000, increasing interest expense by $62,000 and
income taxes by $21,000 and increasing net income by $36,000. The assets were
recorded by the Company at the cost basis of the principal shareholders. The
excess of the purchase price over the recorded cost of the assets acquired of
$344,000 is reported as a reduction in shareholders' equity.
Note 11 - Net Income Per Share
Basic and diluted EPS for the years ended December 31, 1998 and 1997, were
computed as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997
----------------------------------
Basic EPS Computation:
<S> <C> <C>
Net income available to common stockholders $2,878 $1,518
Weighted average number of common shares outstanding 9,293 8,211
Basic EPS $ 0.31 $ 0.18
==================================
Diluted EPS Computation:
Net income available to common stockholders $2,878 $1,518
Average number of common shares outstanding 9,293 8,211
Incremental number of shares for assumed exercise of options 12 124
Total shares 9,305 8,335
Diluted EPS $ 0.31 $ 0.18
==================================
</TABLE>
Outstanding stock options to purchase common stock with an exercise price
greater than the average market price of common stock were not included in the
computation of diluted EPS for 1998. The balance of such options was 230,703
with an exercise price of $3.00 per share and 115,000 with a price of $2.00 per
share.
Note 12 - Segment Information
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," in 1998 which changes the way the Company reports
information about its operating segments. The information for 1997 has been
restated from the prior year's presentation in order to conform to the 1998
presentation.
<PAGE>
The Company's business segments have been grouped as follows (in thousands):
<TABLE>
<CAPTION>
Inter-Segment
Pre-tax
Sales Sales Income Assets
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Fueling installations $14,872 $ - $ 964 $ 7,480
Environmental 6,313 - 2,758 4,281
Fueling equipment mfg. - 1,874 598 251
Other 815 819 316 2,780
$22,000 $2,693 $4,636 $14,792
=======================================================================
1997
Fueling installations $12,132 $ - $ 825 $ 6,129
Environmental 3,401 - 1,468 2,043
Fueling equipment mfg. - 1,074 329 353
Other 1,267 347 (176) 2,808
-----------------------------------------------------------------------
$16,800 $1,421 $2,446 $11,333
=======================================================================
</TABLE>
Note 13 - Subsequent Events
On January 1, 1999, the Company acquired the assets of a company in Largo,
Florida, for $50,000 and the assumption of certain liabilities totaling $95,590.
The acquired business is a provider of environmental, drilling, and related
services to the owners and operators of fueling systems as well as other
businesses.
On January 11, 1999, the Company acquired the assets, subject to certain
liabilities assumed, of a group of companies based in Greenville, North
Carolina, which provides services to the owners and operators of fueling
systems. The purchase price of the assets acquired was $791,000, consisting of
$250,000 cash, notes payable, and the award of 40,000 shares of Company stock,
and options to purchase 45,000 shares of Company stock.
Note 14 - Business Acquisition
On September 10, 1999, the Company consummated the acquisition of Summit
Environmental Services, Inc., ("Summit"), successor to Summit Environmental
Services, L.L.C. In connection with the acquisition, each share of the Summit
common stock was converted on a tax free basis into 30 shares of the Company's
common stock. Prior to conversion, 50,000 shares of Summit common stock were
outstanding. Summit is an environmental consulting firm specializing in
environmental site assessments, risk assessments and soil and groundwater
remediation, with offices in Enid and Edmond, Oklahoma. Approximately 75% of
Summit's 1998 revenues and 78% of its 1997 revenues were from performance
incentive contracts funded by the Oklahoma Indemnity Fund.
<PAGE>
Approximately 62% of Summit's 1998 revenues and 92% of its 1997 revenues were
from businesses owned or controlled by its owners, prior to the merger. The
Summit merger has been accounted for as a pooling-of-interests, and, as such,
the Company's supplemental consolidated financial statements included herein
give retroactive effect to the Summit merger for all periods presented.
The following is a summary of results of operations of the separate entities
(in thousands):
<TABLE>
<CAPTION>
NESCO
(prior to NESCO
Summit (after Summit
acquisition) Summit Acquisition)
-------------------------------------------------------------
<S> <C> <C> <C>
1998
Revenue $18,304 $3,696 $22,000
=============================================================
Income from operations $ 2,730 $2,192 $ 4,922
=============================================================
Net income $ 1,470 $1,408 $ 2,878
=============================================================
1997
Revenue $14,746 $2,054 $16,800
=============================================================
Income from operations $ 1,520 $1,138 $ 2,658
=============================================================
Net income $ 782 $ 736 $ 1,518
===========================================================================================================
</TABLE>
During 1998 and 1997, Summit was operated as a limited liability company which
is taxed as a partnership. Accordingly, Summit incurred no income taxes during
the period. For purposes of presenting the combined operation of the Company
and Summit on a retroactive basis, Summit's income has been adjusted by $863,000
in 1998 and $450,000 in 1997, representing a provision for income taxes at an
effective 38% combined federal and state tax rate. Taxes on Summit's temporary
differences have been credited to deferred income taxes payable and the
remainder has been credited to retained earnings.
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1999
(In thousands of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
---------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 239 $ 331
Accounts receivable and costs in excess of billings 11,964 10,723
Materials and supplies 2,271 1,061
Prepaid expenses 106 32
---------------------------------------
Total current assets 14,580 12,147
---------------------------------------
Property and equipment, at cost 5,720 4,548
Less accumulated depreciation (2,332) (2,034)
---------------------------------------
Property and equipment, net 3,388 2,514
Other assets 1,914 131
---------------------------------------
Total assets $19,882 $14,792
=======================================
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term obligations and revolving line of credit $ 1,578 $ 3,541
Accounts payable 3,202 2,476
Accrued liabilities 386 233
Deferred income taxes 261 505
Total current liabilities 5,427 6,755
---------------------------------------
Long-term obligations 7,027 1,007
Deferred income taxes 198 197
---------------------------------------
Total liabilities 12,652 7,959
---------------------------------------
Shareholders' equity:
Preferred stock: 1,000,000 shares authorized; none issued - -
Common stock; par value $.01; authorized 20,000,000 shares; issued 9,388,643
shares 94 94
Additional paid-in capital 3,962 3,998
Retained earnings 3,662 2,981
Common stock in Treasury, at cost, 266,991 and 122,991shares
at 1999 and 1998, respectively (488) (240)
---------------------------------------
Total shareholders' equity 7,230 6,833
---------------------------------------
Total liabilities and shareholders' equity $19,882 $14,792
=======================================
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the six months ended June 30, 1999 and 1998
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30
1998 1997
--------------------------------------------------
<S> <C> <C>
Revenues $13,414 $7,962
Cost and expenses 8,183 5,049
Selling, general and administrative expenses 3,197 1,881
--------------------------------------------------
Income from operations 2,034 1,032
Other income 144 63
Interest expense 240 197
--------------------------------------------------
Income before income taxes 1,938 898
Provision for income taxes 741 339
--------------------------------------------------
Net income $ 1,197 $ 559
==================================================
Basic net income per share $ 0.13 $ 0.06
Diluted net income per share $ 0.13 $ 0.06
==================================================
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1999 and 1998
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
-------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 1,197 $ 559
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 297 236
Change in:
Accounts receivable (349) 26
Materials and supplies (317) (187)
Prepaid expenses (64) 38
Accounts payable 726 (218)
Accrued liabilities (591) (188)
-------------------------------------
Net cash provided by operating activities 899 266
-------------------------------------
Cash Flows from Investing Activities
Acquisition of business, net of cash acquired (3,114) (25)
Purchases of property and equipment (856) (147)
Other (152) 16
-------------------------------------
Net cash used in investing activities (4,122) (156)
-------------------------------------
Cash Flows from Financing Activities
Proceeds from notes payable and long-term obligations 7,032 2,430
Principal payments on notes payable and long-term obligations (3,065) (2,421)
Summit owner distributions net of tax (430) (897)
Sales (purchase) of common shares (406) 712
-------------------------------------
Net cash provided by financing activities 3,131 (176)
-------------------------------------
Decrease in cash (92) (66)
Cash, beginning of period 331 402
-------------------------------------
Cash, end of period $ 239 $ 336
=====================================
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
National Environmental Services Co. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for fair presentation
have been included. Operating results for the six month period ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999.
Note 2 - Earnings Per Share
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, June 30
1999 1998
------------------------------------
<S> <C> <C>
Basic EPS Computation
Net income $ 1,197 $ 559
====================================
Weighted average shares outstanding 9,305,120 8,770,764
====================================
Basic EPS $ 0.13 $ 0.06
====================================
Diluted EPS Computation:
Net income $ 1,197 $ 559
====================================
Weighted average shares outstanding 9,305,120 8,770,764
Incremental shares for assumed exercise of securities:
Warrants 6,584 3,367
Options 37,631 26,455
------------------------------------
9,349,335 8,800,586
Diluted EPS $ 0.13 $ 0.06
====================================
</TABLE>
<PAGE>
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.
Note 3 - Segment Information
The Company's business segments have been grouped as follows:
<TABLE>
<CAPTION>
Thousands of Dollars
Inter-
Segment Sales Pre-tax
Segment Sales Income Assets
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Fueling installations $ 9,495 $ - $1,085 $ 9,868
Environmental 3,417 - 724 6,366
Fueling equipment mfg. - 427 51 1,404
Other 502 267 78 2,244
----------------------------------------------------------------------
$13,414 $694 $1,938 $19,882
======================================================================
1998
Fueling installations $ 5,711 $ - $ (189) $ 6,194
Environmental 1,880 - 754 1,856
Fueling equipment mfg. - 363 235 337
Other 371 303 98 2,923
$ 7,962 $666 $ 898 $11,310
======================================================================
</TABLE>
Note 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 provide 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.
<PAGE>
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.
On September 10, 1999, the Company completed a merger with Summit Environmental
Services, Inc., Enid, Oklahoma, in a tax-free stock-for-stock transaction
accounted for as a pooling-of-interests. NESCO issued 1,500,000 shares of its
common stock for 100% (50,000 shares) of Summit's common stock.
