<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 September 30, 1999
-------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period ............... to ...............
Commission file number.................000-24470
NATIONAL ENVIRONMENTAL SERVICE CO.
----------------------------------
(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
---------------------------------------------
(Address of principal executive offices)
(918)-250-2227
--------------
(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 October 31, 1999:
Number of shares
Title of Class Outstanding
-------------- -----------
Common Stock, $.01 Par Value 9,241,652
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
September 30, 1999 3
Consolidated Statements of Income
Three Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Income
Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
Nine Months Ended September 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 10
Part II - Other Information
Other Information:
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
2
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED BALANCE SHEET
September 30, 1999
(In Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash $ 441
Accounts Receivable and Costs in Excess of Billings 13,136
Materials and Supplies 2,117
Prepaid Expenses 156
-------
Total current assets 15,850
-------
Property and equipment, at cost 6,580
Less accumulated depreciation (2,469)
-------
Property and equipment, net 4,111
-------
Other assets 2,913
-------
Total assets $22,874
=======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Current liabilities:
Current maturities of long term obligations
and revolving line of credit $ 1,465
Accounts payable 2,453
Accrued liabilities 690
-------
Total current liabilities 4,608
-------
Long-term obligations 9,263
Deferred income taxes 695
-------
Total Liabilities 14,566
-------
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, including treasury
shares 79
Additional paid-in capital 3,905
Retained Earnings 4,572
Common stock in Treasury, at cost, 146,991 shares (248)
-------
Total shareholders' equity 8,308
-------
Total liabilities and shareholders' equity $22,874
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Revenues $8,279 $6,048
Costs and Expenses 5,316 3,197
Selling, general and administrative expenses 1,671 960
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Income from operations 1,292 1,891
Other income 97 33
Interest expense 223 105
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Income before provision for income taxes 1,166 1,819
Provision for income taxes 442 690
------ ------
Net Income $ 724 $1,129
====== ======
Basic Net Income per share $ 0.08 $ 0.13
====== ======
Diluted Net Income per share $ 0.08 $ 0.13
====== ======
</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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Revenues $22,116 $13,997
Costs and expenses 13,991 8,355
Selling, general and administrative expenses 4,737 2,682
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Income from operations 3,388 2,960
Other Income 280 73
Interest Expense 460 280
------- -------
Income before provision for income taxes 3,208 2,753
Provision for taxes on income 1,220 1,045
------- -------
Net Income $ 1,988 $ 1,708
------- -------
Basic Net Income per share $ 0.22 $ 0.19
======= =======
Diluted Net Income per share $ 0.22 $ 0.19
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- --------
Operating activities
<S> <C> <C>
Net Income $ 1,988 $ 1,708
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 435 388
Change in:
Accounts receivable (1,481) (2,171)
Materials and supplies (164) (263)
Prepaid expenses (115) 1
Accounts payable 638 (14)
Accrued liabilities (506) 529
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Net cash provided by operating activities 795 178
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Investing activities
Business Acquisitions (3,791) -
Purchases of property, plant and equipment (1,717) (776)
Other (1,139) (92)
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Net cash used in investing activities (6,647) (868)
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Financing activities:
Proceeds from sale of common stock - 732
Proceeds from notes payable and long-term obligations 17,075 1,471
Principal payments on notes and long term obligations (10,466) (803)
Purchase of treasury stock (184) (37)
Distributions to Summit owners net of current taxes (463) (803)
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Net cash provided by financing activities 5,962 560
-------- -------
Increase (decrease) in cash 110 (130)
Cash, beginning of period 331 399
-------- -------
Cash, end of period $ 441 $ 269
======== =======
</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 September 30, 1999
and the results of operations for the three and nine month periods ended
September 30, 1999 and 1998. Cash flows are shown, as permitted, for only the
nine months ended September 30, 1999 and 1998.
2. EARNINGS PER SHARE
Basic and diluted EPS for the nine months ended September 30, 1999 and
1998, were computed as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30
-------------------------------------
1999 1998
-------------------------------------
(Dollars in thousand except per share
awards)
<S> <C> <C>
Basic EPS Computation:
Net income $ 1,988 $ 1,708
========== ==========
Weighted average shares outstanding 9,055,166 8,989,140
========== ==========
Basic EPS $.22 $.19
========== ==========
Diluted EPS Computation:
Net income $ 1,988 $ 1,708
========== ==========
Weighted average shares outstanding 9,056,166 8,989,140
Incremental shares for assumed exercise
of securities:
Warrants 14,748
Options 22,714 10,711
---------- ----------
9,092,628 8,999,852
========== ==========
Diluted EPS $.22 $.19
========== ==========
</TABLE>
7
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The 164,000 shares in 1999 and the 272,000 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:
1999 Thousands of Dollars
------------------------------------------
Inter-
Segment Pre-tax
Segment Sales Sales Income Assets
------- ------------------------------------------
Fueling Installations $12,596 $ 912 $10,491
Environmental 8,814 2,193 8,454
Fueling equipment mfg. 469 28 1,373
Miscellaneous 706 352 75 2,556
------------------------------------------
$22,116 $ 821 $3,208 $22,874
===========================================
1998 Thousands of Dollars
------------------------------------------
Inter- Pre-tax
Segment Income
Segment Sales Sales (Loss) Assets
------- ------------------------------------------
Fueling Installations $ 9,138 $ 301 $ 6,388
Environmental 4,251 2,090 4,110
Fueling equipment mfg. 835 271 992
Miscellaneous 607 489 91 2,236
------------------------------------------
$13,996 $1,324 $2,753 $13,726
===========================================
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.
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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 acquired all of the issued and
outstanding shares of Summit Environmental Services, Inc. (hereafter "Summit"),
Enid, Oklahoma in a stock exchange with all of the Shareholders of Summit.
Summit is the successor corporation to Summit Environmental Services, L.L.C. and
Applied Geoscience Environmental Services, L.L.C. The total consideration paid
was 1,500,000 shares of the Company's common stock. Summit is a provider of
environmental consulting and remediation services to the fueling systems
industry in Oklahoma. The Summit acquisition has been accounted for using the
pooling-of-interests method. The accompanying financial statements include the
operation of Summit for all periods presented.
<TABLE>
<CAPTION>
NESCO
(Pre-merger) Summit Combined
------------ ------ --------
<S> <C> <C> <C>
Nine months ended September 30, 1998
Net revenue $11,183 $2,814 $13,997
======= ====== =======
Income from operations $ 1,190 $1,770 $ 2,960
======= ====== =======
Net Income $ 573 $1,135 $ 1,708
======= ====== =======
</TABLE>
9
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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.
On September 30, 1999, the Company acquired Summit Environmental Services, Inc.
using the pooling-of-interests method, and all periods have been restated to
reflect that acquisition.
Comparison of Results of Operations for the Three Months Ended September 30,
1999 and September 30, 1998.
Revenue for the three months ended September 30, 1999 increased 37%
compared to the corresponding period of 1998 ($8,279,000 compared to
$6,048,000). New offices in Florida, North Carolina, West Virginia,
Pennsylvania, Arizona, and additional acquisitions in South Carolina and Florida
provided revenues for the three months ended September 30, 1999 that were not
available to the Company in the same quarter of 1998. Each segment's revenues
increased due to the addition of the offices.
The fueling installations segment increased $985,000 or 29% for the three
months ended September 30, 1999 compared to the same period in 1998 ($4,375,000
compared to $3,390,000). The number of turn-key fueling facilities built in the
third quarter of 1999 exceeded the number of facilities built in the same
quarter of 1998. This increase was partially offset by the decline in the
number of cathodic protection installations in the third quarter of 1999
compared to the same quarter in 1998. The amount of this offset was $650,000.
The environmental segment increased $925,000, or 38%, for the three months
ended September 30, 1999 compared to the same period in 1998 ($3,336,000
compared to $2,411,000). Environmental revenues increased due to the acquisition
of the assets of TET Environmental Services, Inc. in May 1999; the increased
amount of environmental work performed by the Company's North Carolina
operation.
The miscellaneous segment increased $322,000 or 130% for the three months
ended September 30, 1999 compared to the same period in 1998 ($569,000 compared
to $247,000). The majority of the increase in this segment resulted from sales
of automatic tank gauging equipment produced by the Company's Arizona technology
division acquired in May 1999.
Costs and expenses increased $2,119,000, or 66%, in the third quarter of
1999 compared to the third quarter of 1998. The increase was partially
attributable to the 37% increase in revenues for the same period. However,
increases in the following items were partially attributable to the amount of
time necessary to efficiently employ the assets acquired and
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employees retained from the acquired companies. Direct labor expense increased
$668,000, or 104% ($1,311,000 compared to $642,000). Supplies and materials
increased $617,000, or 56% ($1,712,000 compared to $1,095,000). Subcontractors
expense increased $418,000, or 45% ($1,353,000 compared to $935,000).
Lab services expense increased $158,000 or 367% ($201,000 compared to
$43,000), due to the significantly greater volume of environmental work
performed by the South Carolina operations which resulted following the
acquisition of TET Environmental Services, Inc. in May 1999; increase in the
volume of environmental work performed by the North Carolina division.
Selling, general and administrative expenses increased 74% in the third
quarter as compared to the third quarter of 1998 ($1,671,000 compared to
$960,000). Management, sales, and clerical salaries increased $251,000 or 51%
($744,000 compared to $493,000). Office rent increased $68,000 or 252% ($95,000
compared to $27,000). Telephone expense increased $52,000 or 116% ($97,000
compared to $45,000). Salaries, office rent, and telephone expense increased
due to the addition of the five offices, discussed above, subsequent the third
quarter of 1998. All of these offices contributed to the increased expense in
the third quarter of 1999. Indirect travel expense increased $56,000 or 224%
($81,000 compared to $25,000). In additional to the increased number of offices
requiring greater amounts of indirect travel in the third quarter of 1999
compared to the same quarter of 1998, there was significant amounts of indirect
travel involved in the acquisitions of the companies previously mentioned. Bad
debt expense increased $80,000 or 364% ($102,000 compared to $22,000). Certain
accounts receivable were written off during the third quarter of 1999 which
increased the bad debt expense . Professional fees increased $71,000 or 237%
($101,000 compared to $30,000). The increase resulted from legal fees not
recovered in the Company's accounts receivable collection efforts during the
third quarter of 1999.
Interest expense increased 112% for the third quarter of 1999 compared to
the same quarter in 1998 due to greater amounts of borrowed money ($223,000
compared to $105,000). 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 a 1.5% rate reduction received by the Company in the third quarter of 1999 as
compared to the third quarter of 1998. Discounts earned increased $58,000
($98,000 compared to $40,000) due to quicker payment of invoices from vendors
and suppliers.
Comparison of Results of Operations for the Nine Months Ended September 30, 1999
and September 30, 1998.
Revenue for the nine months ended September 30, 1999 increased 58% compared
to the corresponding period of 1998 ($22,116,000 compared to $13,997,000). The
fueling installations segment increased 38% or $3,459,000 in the first nine
months of 1999 compared to the same period in 1998 ($12,597,000 compared to
$9,138,000). As discussed in the comparison of the three month periods above,
new offices and additional acquisitions in Florida provided revenues
11
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for the nine months ended September 30, 1999 that were not available to the
Company in the same period of 1998. The new offices added revenues for various
lengths of time for the nine months ended September 30, 1999: the Pennsylvania
office was established in October 1998; additional Florida and West Virginia
operations were acquired in January 1999; the North Carolina operations were
acquired in January 1999; the Arizona operations were acquired in May 1999; and
the additional South Carolina operations were acquired in May 1999. Each
segment's revenues increased due to the office additions and acquisitions.
The environmental segment increased 107%, or $4,563,000, in the first nine
months of 1999 compared to the same period in 1998 ($8,814,000 compared to
$$4,251,000). Environmental revenues increased due to the acquisition of the
assets of TET Environmental Services, Inc. in May 1999 due to the increased
amount of environmental work performed by the Company's North Carolina
operations.
The miscellaneous segment increased 16%, or $99,000, in the first nine
months of 1999 compared to the same period in 1998 ($706,000 compared to
$607,000). The increase in this segment resulted from sales of automatic tank
gauging equipment produced by the Company's Arizona technology division acquired
in May 1999.
Costs and expenses increased $5,636,000 or 67% for the first nine months of
1999 compared to the first nine months of 1998 ($13,991,000 compared to
$8,355,000). The growth in costs and expenses was a result of the 58% growth in
revenues for the nine months ended September 30, 1999 compared to the same
period in 1998. However, increases in the following expense items were
partially attributable to the amount of time necessary to efficiently employ the
assets acquired and employees retained from the acquired companies. Direct
labor increased $1,623,000, or 91% ($3,418,000 compared to $1,794,000).
Equipment rental expense increased $132,000, or 92% ($276,000 compared to
$144,000). Vehicle expense except depreciation increased $151,000, or 93%
($314,000 compared to $163,000). Lodging on job expense increased $101,000, or
100% ($202,000 compared to $101,000). Supplies and materials expense increased
due to the nature of the jobs being performed in the first nine months of 1999
compared to the same period in 1998. Additionally, there was an increase in the
turn-key installation of equipment-intensive convenience stores as well an
increase in the manufacture and installation of automatic tank gauging
equipment. Supplies and materials expense increased $2,523,000, or 109%
($4,847,000 compared to $2,324,000).
Lab services expense increased $516,000, or 549% ($610,000 compared to
$94,000, increased significantly due to the greater volume of environmental work
performed by the South Carolina division.
Selling, general and administrative expense increased $2,055,000 or 77% for
the nine months ended September 30, 1999 compared to the same period in 1998
($4,737,000 compared to $2,682,000). The addition of the offices and
acquisitions of other companies accounted for the increases in this category of
expenses. Management, sales, and clerical salaries increased
12
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$760,000 or 58% ($2,080,000 compared to $1,320,000). Office rent increased
$133,000 or 242% ($188,000 compared to $55,000). Telephone expense increased
$110,000 or 81% ($245,000 compared to $135,000). Indirect travel expense
increased $116,000 or 242% ($164,000 compared to $48,000). In additional to the
increased number of offices requiring greater amounts of indirect travel in the
nine months ended September 30, 1999 compared to the same period of 1998, there
were significant amounts of indirect travel involved in the acquisitions of the
companies previously mentioned. Bad debt expense increased $151,000 or 159%
($246,000 compared to $95,000). Certain accounts receivable were written off
during the first nine months of 1999 which increased the bad debt expense .
Professional fees increased $183,000 or 247% ($257,000 compared to $74,000). The
increase resulted from legal fees not recovered in the certain of the Company's
collection efforts and the defense of certain other legal actions in which the
Company was involved during the nine months ended September 30, 1999.
Interest expense increased $180,000, or 64%, for the first nine months of
1999 compared to the corresponding period in 1998 ($460,000 compared to
$280,000). The additional expense resulted from larger loan balances (revolving
line of credit and additional term loans for equipment purchases) outstanding
during the first nine months of 1999 compared with the same period in 1998. The
interest expense resulting from the larger loan balances outstanding was
partially offset by a 1.5% reduction in the interest rate on the Company's line
of credit and on new equipment loans during the nine months ended September 30,
1999 compared to the same period in 1998. Discounts taken increased $185,000
during the first nine months of 1999 compared to the same period in 1998
($264,000 compared to $79,000) 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 $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
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$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.
On September 9, 1999, the Company sold 120,000 treasury shares of its
common stock at $2.00 per share or $240,000.
On September 10, 1999, the Company acquired all of the issued and
outstanding shares of Summit Environmental Services, Inc., Enid, Oklahoma, in
exchange for 1,500,000 shares of the Company's common stock. The transaction
was accounted for under pooling of interests rules.
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.
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.
14
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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.
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 have reviewed and submitted compliance certification forms to corporate
headquarters during the third quarter. The certifications required that each
manager certify compliance with Year 2000 requirements, note any exceptions, and
develop plans and a timetable for eliminating the exceptions. The certifications
covered 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 detailed 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.
On October 8, 1999, each division manager received a copy of the Company's
Contingency Planning and Continuity of Operations guidelines for development of
contingency plans for each of their divisions. These contingency plans are being
developed by division managers and should be completed by December 10, 1999.
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
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PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On September 9, 1999, the Company sold 120,000 treasury shares of its
common stock at $2.00 per share. The securities were sold pursuant to the
exemption from the registration requirements of the Securities Act of 1933, as
amended, provided by Section 4(2) thereof for transactions not involving a
public offering and by Regulation D promulgated under such Act. The persons that
acquired the treasury shares are four sophisticated individuals capable of
evaluating the risks of an investment in the Company's stock and bearing the
financial risks of the investment. All of the persons acquiring the shares are
accredited investors as that term is defined in Regulation D. Such persons had
access to all material information regarding the Company that would have been
included in a registration statement covering the securities if the shares had
been offered publicly. No advertising or general solicitation was involved in
the offering of the securities. The shares were acquired for investment
purposes and not with a view to the distribution thereof. The certificates
evidencing the shares contained the appropriate legend indicating the
restrictive nature of the shares.
On September 10, 1999, the Company acquired all of the issued and
outstanding shares of Summit Environmental Services, Inc., Enid, Oklahoma in a
stock exchange with all of the Shareholders of Summit. The Summit acquisition
has been accounted for using the pooling-of-interests method. Summit is the
successor corporation to Summit Environmental Services, L.L.C. and Applied
Geoscience Environmental Services, L.L.C. ("Summit"). The total consideration
paid was 1,500,000 shares of the Company's common stock. Summit is a provider
of environmental consulting and remediation services to the fueling systems
industry in Oklahoma. The securities were issued pursuant to the exemption from
the registration requirements of the Securities Act of 1933, as amended,
provided by Section 4(2) thereof for transactions not involving a public
offering and by Regulation D promulgated under such Act. The sellers of Summit
are four sophisticated individuals and one corporation, capable of evaluating
the risks of an investment in the Company's stock and bearing the financial
risks of the investment. All of the persons acquiring the shares are accredited
investors as that term is defined in Regulation D. Such persons had access to
all material information regarding the Company that would have been included in
a registration statement covering the securities if the shares had been offered
publicly. No advertising or general solicitation was involved in the offering of
the securities. The shares were acquired for investment purposes and not with a
view to the distribution thereof. The certificates evidencing the shares
contained the appropriate legend indicating the restrictive nature of the
shares.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.23 Copy of Stock Acquisition Agreement and Plan of
Reorganization dated September 10, 1999, by and between
National Environmental Service Co. and Summit
Environmental Services, Inc. (incorporated by reference
to Registrant's Form 8-K dated September 21, 1999)
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K dated September 10, 1999, was filed by the
Registrant in connection with its acquisition of Summit
Environmental Services, Inc.
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: November 12, 1999 /s/ EDDY L. PATTERSON
-----------------------------------
EDDY L. PATTERSON, Chairman
Date: November 12, 1999 /s/ LARRY G. JOHNSON
-----------------------------------
LARRY G. JOHNSON, Vice President & Secretary-
Treasurer & Chief Financial
Officer
17
<PAGE>
EXHIBIT INDEX
10.23 Copy of Stock Acquisition Agreement and Plan of Reorganization
dated September 10, 1999, by and between National
Environmental Service Co. and Summit Environmental Services,
Inc. (incorporated by reference to Registrant's Form 8-K dated
September 21, 1999)
27.1 Financial Data Schedule
18
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<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> DEC-31-1999
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