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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
( _ ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD_________ TO __________ .
COMMISSION FILE NO. 000-24470
NATIONAL ENVIRONMENTAL SERVICE CO.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
OKLAHOMA 73-1296420
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12331 EAST 60TH STREET, TULSA, OK 74146
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (918)250-2227
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Title of class: Common Stock, $.01 Par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No ___ .
---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB __________.
State issuer's revenues for its most recent fiscal year $18,304,000.
------------
The aggregate market value of the voting stock held by non-affiliates of
the registrant computed using the average of the high and low sales prices at
which the stock sold on February 26, 1999 was $6,882,208
The number of shares outstanding of each of the issuer's classes of common stock
as of February 26, 1999 is shown below:
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
-------------- -----------
Common Stock, $.01 Par Value 7,888,643
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Proxy Statement for the Annual Meeting of Stockholders
of National
Environmental Service Co. to be held May 20, 1999, are incorporated by
reference in Part III of this Form 10-KSB.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES___; NO___X____.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
THE COMPANY
The business of National Environmental Service Company commenced in 1986
and consisted of providing testing and service on underground storage tanks and
piping systems. With adoption of the U.S. Environmental Protection Agency
("EPA") regulations in 1988, implementing the Resource Conservation and Recovery
Act ("RCRA"), as amended by the Hazardous and Solid Waste Amendment of 1984
("HASWA"), the Company's focus shifted toward environmental services, assessment
and remediation. It currently is engaged in the businesses of installation of
fueling systems and related facilities, providing cathodic protection for
underground metal tanks, installation of spill and overfill protection,
environmental site assessments, contaminated soil and water remediation, and the
installation and removal of storage tanks.
All of the common stock of the Company was purchased from the original
owners in May 1989, by two employees of the Company, Eddy L. Patterson and
Albert A. McCutchan. Messrs. Patterson and McCutchan have served as Chairman and
Executive Vice President, respectively, of the Company since that time. In 1988
(the year prior to purchase by current management), the Company had revenues of
$340,000 and pre-tax income of $41,000 (unaudited). In 1998, the Company had
revenues of $18,304,000 and pre-tax income of $2,365,000. At the time of
purchase by Messrs. Patterson and McCutchan, the Company had eight full-time
employees and one office. At the end of 1998, the Company had 131 full-time
employees. In addition to the corporate office in Tulsa, Oklahoma, the Company
had regional offices in Oklahoma City, Oklahoma; Dallas, Texas; San Antonio,
Texas; Columbia, South Carolina; Largo, Florida; Greenville, North Carolina;
Pittsburgh, Pennsylvania; and South Charleston, West Virginia.
The Company acquired Lab One Analytical, Inc. on January 30, 1998, for
$75,000 cash and 225,000 shares of the Company's common stock.
The Company acquired the assets of a division of a company on July 1,
1998. This office is located in Columbia, South Carolina. The Company assumed
the remainder of the lease which has an expiration date of September 30, 2001.
Annual lease payments are $27,000 through September 30, 1999. Thereafter until
expiration of the lease the annual lease payments are $29,000.
The Company established an office in Largo, Florida, on August 1, 1998.
Effective January 1, 1999, the Company acquired a company occupying the same
building and assumed the monthly rent payment of $1,328. The building is rented
on a month to month basis. The Largo company had a satellite office in South
Charleston, West Virginia, where the Company assumed the lease on a warehouse
building. The lease expires on May 31, 1999. Annual lease payments are $4,500.
The Company established an office in Pittsburgh, Pennsylvania, on
October 1, 1998. The Company entered into a lease agreement that has an
expiration date of September 30, 1999. Annual lease payments are $10,200.
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The Company acquired the assets of a company located in Greenville,
North Carolina, as of January 11, 1999. The Company assumed the lease that has
an expiration date of June 1, 2001. Annual lease payments are $21,000.
The Company operated under an S Corporation election for federal income
tax purposes effective January 1, 1990. This election was revoked effective
April 30, 1994. In April 1994, in preparation for the initial public offering of
the Company's common stock which commenced in September 1994 and terminated in
January 1995 (the "Offering"), the Company amended its Certificate of
Incorporation to increase its authorized capital to 20,000,000 shares of Common
Stock and 1,000,000 shares of Preferred Stock and effected a stock split whereby
the shares owned by each of the Company's two equal shareholders increased from
225 shares of Common Stock, $1.00 par value, to 2,295,257 shares of newly
authorized Common Stock, $.01 par value.
The Company's headquarters are located at 12331 East 60th Street, Tulsa,
Oklahoma 74146 and its telephone number is (918) 250-2227. The Company has
division managers in each of its offices who are responsible for the operations
conducted in their respective regions.
GENERAL
The Company provides "turn-key" installation of fueling systems and
related facilities, testing, cathodic protection, remediation, consulting
services, fuel management and maintenance services, and fueling equipment sales,
installation, and service to individuals and businesses who are owners or
operators of underground fuel storage tanks and fueling systems. Environmental
laws and regulations adopted or implemented within the last ten years have
generated increasing demand for the types of services provided by the Company
and its competitors. The principal activities of the Company have focused on
underground storage tanks and fueling systems, primarily because to date they
have been the subject of substantially greater regulation by both federal and
state authorities than above-ground tanks. Primary customers of the Company are
owners of fueling systems, underground storage tanks, above-ground storage tanks
and pipelines. These include motor fuel service stations, grocery stores and
convenience stores with fueling facilities, commercial trucking companies,
railroads, airports, oil producers, refiners, pipeline operators and federal,
state and local governments.
SERVICES
A recent phenomenon at supermarkets and grocery stores is the
installation of gasoline fueling facilities at the perimeters of the stores'
parking lots. This move into retail gasoline sales has provided an opportunity
for the Company to use its experience in the fuel services industry to also
become a "turnkey" builder of fuel facilities for multinational oil companies
and supermarket chains.
A significant portion of the Company's work involves clean-up of sites
contaminated by leaking underground storage tanks for which the site owners or
operators are entitled to funding from state indemnity funds. Generally, in
order to be eligible for reimbursement of clean-up costs from state indemnity
funds, owners of underground storage tanks must have registered their
underground storage tanks with the fund manager and complied with all applicable
regulations. Although the Company generally contracts with the owners to perform
this work, payment is frequently received directly from the state agency
responsible for administering leaking underground storage tank programs
(commonly known as "LUST" programs).
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These state LUST programs are generally funded by motor fuel taxes,
permit and installation fees for storage tanks and penalties and reimbursements
collected from tank owners and operators. Thus, most LUST funds are not
dependent upon appropriations or a state's financial condition for funding.
Nevertheless, almost all provisions establishing LUST funds provide that, if
sufficient funding is unavailable, claims are to be paid in the order they were
filed. Most LUST funds also contain a cap on the amount paid for a single spill
or release occurrence. If funds were to become unavailable under any state LUST
programs, the entity with whom the Company has contracted to perform the work
would be contractually obligated to pay the Company for its work.
Fueling Systems -
New Installations: The Company provides "turn-key" installation of new
fueling facilities including the underground storage
tanks, piping, dispensing equipment, and other site
improvements such as the building, canopy, and related
equipment.
Fueling Systems -
Spill and Overfill Spill and overfill protection is attained by placing
Protection: spill containment basins around the fill pipe of an
underground storage tank and installing an overfill
prevention valve in the fill pipe.
Fueling Systems -
Tank Removals: Because of stringent environmental regulations, many
companies are choosing to exit the fuel storage
business. In addition, many tanks too corroded to
upgrade are being removed and replaced. The Company is
engaged in the removal and disposal of old tanks,
cleaning-up any contaminated soil, and the replacement
of any concrete or asphalt.
Fueling Systems -
Equipment Sales The Company has become a distributor for Wayne Fueling
and Service: Equipment sales and service in Houston and for eastern
Oklahoma, western Arkansas, and southwestern Missouri.
The Company has developed a significant fueling
equipment service facility in Dallas to serve the
Dallas-Fort Worth Metroplex.
Fueling Systems -
Fuel Management The Company has entered into agreements to provide
and Maintenance: fuel management and maintenance for new entrants into
the automobile fueling business. The significant move
of the grocery store chains into provision of fueling
has given the Company an opportunity to provide a much
needed service to those companies that do not have the
experience, staff, or desire to manage their fuel
acquisitions, regulatory reporting, environmental
compliance, and maintenance. The Company believes this
to be a source of revenues that will continue beyond
the initial installation of equipment and related
facilities.
Cathodic Protection: The Company employs a method of protecting metal
underground storage tanks and pipelines from the
natural processes of corrosion which involves placing
metal rods (anodes) in holes drilled around a tank. The
rods are connected to a low-voltage electrical power
supply such as a rectifier. The introduction of the
electrical current into the ground concentrates
corrosion
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away from the tank to the anodes. Corrosion protection
of metal underground storage tanks and piping is
required by EPA regulations. In 1995, the Company began
offering a cathodic protection dealership program to
qualified individuals and companies. Under this
program, distributors are established and trained to
install cathodic protection systems manufactured by the
Company. The Company provides technical support and
certification of systems installed.
Environmental -
Site Assessments: Whenever an underground storage tank leak is suspected,
an investigation to confirm the presence of a leak must
be conducted within seven days. The Company's personnel
possess the experience to conduct such investigations.
In addition, when title to commercial real estate is
being transferred, an investigation for contamination
may be requested. The Company's staff of hydrologists,
environmental engineers and technicians review any
documents regarding historical uses of the site,
analyze soil and water samples and study the sub-
surface geology to determine if there is contamination
or potential contamination of soil and water on the
site. Possible contaminants include hydrocarbons,
PCB's, radon, asbestos and other hazardous materials.
These services include Phase I visual assessments and
Phase II drilling and sampling.
Environmental -
Soil and Water Often through the Company's performance of other
Remediation: services, opportunities arise for the Company to
provide Phase III soil and water remediation services
which primarily involve treatment of ground or surface
water and the use of air sparging and vapor extraction
units (manufactured by Fuel Recovery Systems, Inc.(
"FRS"), a wholly-owned subsidiary) which utilize
perforated pipes to inject air into the soil in order
to promote the degradation of contaminants by endemic
microbes and to extract vapors produced by such
degradation from the soil. In some cases, contaminated
soil must be removed and transported to hazardous waste
disposal sites.
MATERIAL CONTRACTS
The Company has several contracts for the installation of turn-key
fueling systems installations for various owners: three sites for a grocery
store chain totaling $970,000, one site for a municipality totaling $495,000,
one site for a school district in the amount of $189,000, and one site for a
county government for $235,000. The Company has installed fueling systems for a
large Texas grocery chain for the last three years. Individual contracts are
issued for each of these sites as they are released for construction. The
Company expects to complete a number of these locations in 1999; however,
contracts will not be signed until the work is released. There are numerous
other contracts for the installation of cathodic protection, system upgrades,
and environmental remediation. Individually, these contracts are not significant
but represent a series of projects which have been verbally committed by various
companies.
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COMPETITION
The Company competes with numerous other companies and individuals
(consultants, etc.) in providing the various types of services described above,
but very few companies offer the complete range of services which the Company
provides. There are even fewer competitors for the installation of "turn-key"
fueling facilities for gasoline service stations and convenience store chains.
The main factors on which the Company competes for business are personal
contacts, experience, reputation, price, availability and location. Many of the
Company's potential customers seek competitive bids in awarding contracts for
the work to be performed.
For certain competitive bid projects, particularly those involving large
expenditures for labor or materials, the financial strength of the bidder may be
an important factor. The Company often competes against companies with
substantially greater financial and/or human resources.
MARKETING
A large percentage of the Company's business is from previous customers
and their referrals. The Company also obtains referrals from petroleum equipment
manufacturers and environmental consultants with whom the Company has worked.
The Company maintains a full-time marketing staff of six and has several other
executives and division managers who spend a significant amount of time calling
on prospective customers. The marketing staff also responds to inquiries
obtained through advertising in state and national trade publications, direct
mail and trade show participation. Approximately 10% of the services performed
by the Company have been pursuant to projects awarded by competitive bidding.
FUTURE GROWTH
Acquisition of Other Businesses. The Company plans to increase the types
of services it is able to provide within the environmental protection and
remediation industry, to diversify its product and service offering and to
expand the geographic regions in which it performs these services. In pursuit of
these expansion goals, the Company intends to consider acquiring companies that
perform other types of environmental and other services compatible with the
Company's expertise and marketing philosophy.
EFFECT OF GOVERNMENTAL REGULATIONS
The RCRA, as amended by HASWA, and as implemented by EPA regulations, is
intended to protect human health and the environment from regulated substances,
including leaks or spills from underground storage tanks. The term "regulated
substances" includes motor fuels (gasoline and diesel) and chemicals used in
manufacturing processes. The goals of the underground storage tank regulations
include preventing leaks and spills, detecting leaks and spills, correcting
problems caused by leaks and spills and requiring each state to undertake a
regulatory program equal to or more stringent than required by the EPA.
The regulations require the underground storage tank owner or operator
to take action to correct problem underground storage tanks, to upgrade them to
meet prescribed standards and to maintain them in proper condition. All
underground storage tanks had to be tested not later than December 1993, and
must be tested annually until upgraded to meet leak detection, spill and
overfill prevention, interior
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lining, piping and cathodic protection standards established by the EPA.
Required upgrading was to be completed by December 22, 1998. Some states have
extended the enforcement deadline until the first or second quarter of 1999.
However, a significant percentage of the sites did not meet the deadline and
will either be permanently closed and dismantled or closed pending completion of
work to meet current requirements. Owners of underground storage tanks also must
demonstrate their financial ability to pay for damages caused by spills or
leaks.
States' regulations may be more stringent than federal regulations.
While Iowa required spill and overfill protection and cathodic protection to be
installed by 1995, the state has not made significant progress in the clean-up
of contaminated sites as have other states. The Company's operations in Iowa
declined due to completion of upgrade work to meet the 1995 deadline and the
lack of significant clean-up opportunities. The Iowa office was closed in March
1996. The Nebraska office was also closed in March 1996 due to a shortage of
state LUST funds for clean-up of contaminated sites.
For the most part, the applicable federal and state environmental
regulations do not provide for liability for a contractor with respect to the
removal of tanks or conducting remedial services. If a release occurs or if
applicable standards are not met, such regulations hold the owner or operator of
the tank responsible. Consequently, the only exposure of the Company would be
based on general negligence principles and the contractual arrangement with the
owner or operator of the tank. The Company maintains insurance coverage to
protect itself against any such liabilities which may arise from the
installation, removal or replacement of underground storage tanks. It believes
that the amount and coverage of its insurance are standard in the industry and
are consistent with prudent practices. However, there can be no assurance that
any such insurance will be sufficient to avoid any substantial loss or liability
of the Company by virtue of any negligent performance of or breach of its
contractual obligations by the Company.
Certain licensing requirements pertaining to entities which inspect,
install, protect, repair and remove storage tanks and which investigate and
clean up releases are in place in states in which the Company operates. The
Company and/or its employees maintain licenses in 18 states on an on-going basis
and obtain licenses in other states as needed. Generally, state licenses are
issued after review of applications which include descriptions of the Company's
experience, the backgrounds of its personnel and payment of the applicable
license fees. In addition, some states require certain employees, such as tank
testers and installers, to be separately licensed. Usually passing a written
examination is required to obtain these licenses. The Company has not
encountered any material difficulties in obtaining required licenses, but the
Company cannot predict when licensing requirements may change.
As part of the remediation services offered to its customers, the
Company often disposes of, or arranges for the disposal of, contaminated soil or
water. Prior to any disposal, the Company must obtain approval from the
appropriate state agency to dispose of the contaminated soil in an approved
landfill. Under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), any person who disposes of statutorily defined
hazardous substances at a disposal site is potentially liable for clean up costs
if there is a release from such disposal site. However, petroleum products are
excluded for the most part from the scope of these provisions. Since virtually
all of the material which the Company disposes or arranges the disposal of
consists of petroleum products and material contaminated by petroleum products,
the Company is largely exempt from these provisions of CERCLA. The only exposure
the Company would likely face in this area would be for failure to obtain
necessary state agency approvals for disposal of waste materials or the failure
to dispose of such materials in approved
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landfills.
DEPENDENCE ON MAJOR CUSTOMERS
In 1998, the Company received 16 percent of its revenues from a major
oil company marketer and 14 percent of its revenue from one grocery store chain
in 1997. The Company believes that it has a broad overall customer base and the
loss of any single customer would not have a material adverse affect on its
business, although the loss of several of those customers could have such an
effect.
TRADEMARKS, LICENSES
On November 1, 1992, the Company entered into a license agreement to use
patented technology for testing above-ground storage tanks. The term of the
license is for the remaining life of the patent (9 years) and requires the
Company to pay the licensor 2% of its annual revenues from use of the
technology. The Company has not yet realized significant revenues from the use
of such technology, but anticipates that utilization of the technology may
produce significant new revenue if more states and the Federal government enact
above-ground storage tank testing and upgrading legislation.
FORWARD LOOKING STATEMENTS
Certain statements included in this report which are not historical
facts are forward looking statements, including the information provided with
respect to the projected or future business opportunities, expansions and
diversification; contract completions, expected financing sources and related
matters. These forward looking statements are based on current expectations,
estimates, assumptions and beliefs of management; and words such as "expects,"
"anticipates," "intends," "believes," "estimates" and similar expressions are
intended to identify such forward looking statements. These forward looking
statements involve risks and uncertainties, including, but not limited to,
changes in governmental regulations, the Company's ability to effectively and
efficiently absorb its newly acquired businesses and assets and any additional
businesses and/or assets it may acquire in the near future, general economic
conditions and conditions affecting the industries which utilize the Company's
services and products, the availability of experienced personnel, raw materials
and equipment and the Company's ability to comply with its obligations under its
existing contracts and to obtain new contracts. Accordingly, actual results may
differ materially from those expressed in the forward looking statements.
EMPLOYEES
As of February 26, 1999, the Company has 157 full-time employees and no
part-time employees. This number includes 6 senior managers, 10 division
managers, 12 field supervisors, 6 marketing employees, 16 full-time
professionals, 28 accounting/clerical/drafting personnel, and 79 technical and
field personnel. The areas of expertise of the professionals include
hydrogeology, environmental engineering, biology and chemistry. The Company has
no collective bargaining agreements and management considers employee relations
to be excellent.
ITEM 2. DESCRIPTION OF PROPERTY.
PROPERTIES
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The Company maintains its corporate headquarters, an equipment storage
yard and a warehouse in a business park in Tulsa, Oklahoma, each with 9,000,
10,000 and 4,500 square feet, respectively. The facility was leased from
McCutchan and Patterson Partnership, a partnership owned by the Chief Executive
Officer and Executive Vice President of the Company. The lease was in effect
through 1997 with annual lease payments totaling $66,000.
On February 27, 1998, the Company acquired the office building,
warehouse and lot on which the Company's corporate offices are located. The
purchase price was $600,000, and the Company obtained a loan from Citizen's Bank
of Tulsa for $480,000 secured by a mortgage on the acquired real estate. The
loan has a term of 7 years. The interest rate floats at one-half percent above
Low New York Prime rate, and the current rate is 8.25% per annum. The Company
paid a one-half percent origination fee.
The real estate was purchased from Eddy Patterson and Albert McCutchan,
the Chief Executive Officer and Executive Vice President of the Company
following the completion of an independent appraisal of the real estate and the
review and unanimous consent of the outside directors of the Company to the
transactions and terms and conditions thereof.
The Company constructed a new 4000 square feet building in San Antonio,
Texas, and was completed during the first quarter of 1995. At December 31, 1998,
a balance of $374,000 remained to be paid on the related bank note payable which
includes liens on real estate and other equipment.
The Company leased space for its Dallas office on October 1, 1995.
Annual lease payments are $36,000. The lease expires on September 30, 2001.
The Company established an office and leased space in Oklahoma City on
April 1, 1998. The annual lease payment is $13,000, and the lease expires on
March 31, 1999.
The Company owns various vehicles, equipment, and real estate which were
purchased at a total cost of approximately $4,382,000. At December 31, 1998, the
Company had outstanding loans of approximately $4,548,000 principal amount
collateralized by the vehicles, equipment, real estate, and other assets. This
amount includes the balance owed under the line of credit agreement which was
$3,150,000 at December 31, 1998.
ITEM 3. LEGAL PROCEEDINGS.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock began trading on March 7, 1995, and was
quoted on the OTC Bulletin Board. Prior to that time, there was no public
trading market for the stock.
On January 24, 1996, the Company's stock began trading on The Nasdaq
Stock Market under the symbol: NESC.
The following table sets forth, for the periods indicated, the high and
low bid prices of the Company's common stock on the Nasdaq SmallCap Market.
These quotations reflect interdealer prices, without retail markup, markdown or
commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
Quarter
ended High Low
----- ---- ---
<S> <C> <C>
3/31/97 $1.875 $0.875
6/30/97 2.00 .625
9/30/97 2.875 1.625
12/31/97 4.375 2.375
Quarter
ended High Low
----- ---- ---
3/31/98 $3.375 $2.25
6/30/98 2.75 1.50
9/30/98 2.00 1.125
12/31/98 2.00 1.375
</TABLE>
At December 31, 1998, there were 253 holders of record of the Company's
outstanding shares of common stock and an estimated 300 additional shareholders
whose shares were registered in street name. No shares of preferred stock are
currently outstanding.
The Board of Directors paid no dividends to shareholders in 1997 or
1998.
Payment of dividends in the future, if any, will depend on the
applicable legal and contractual restrictions, as well as the Company's
earnings, financial position, expansion plans and objectives and cash
requirements, among other factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998, TO THE
YEAR ENDED DECEMBER 31, 1997.
The Company had revenues of $18,304,000 in 1998 compared to $14,746,000
in 1997, a 24% increase. Fueling systems installation and repair revenue
declined 8% in 1998 as compared to 1997. Fueling systems installation and repair
revenues in 1998 were $8,830,000 compared to $9,569,000 for
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1997. The fueling systems installation and repair revenues decreased due to the
delay into 1999 of some planned installations and store owners' concentration of
resources on the upgrading of existing sites to meet December 1998 regulatory
deadlines. Cathodic Protection revenues increased 78% in 1998 as compared to
1997, or $6,355,000 in 1998 compared to $3,564,000 in 1997. The increase
resulted from increased purchases of cathodic protection kits by the Company's
distributor network and increases in the installation of cathodic protection
systems by the Company. The increased sales were caused by the December 1998
deadline for regulatory compliance by owners and operators of underground
storage tanks. Site assessment revenues were $1,553,000 in 1998 compared to
$576,000 in 1997, a 171% increase. The increase in site assessments and reports
resulted from the new offices established in Florida and South Carolina and the
additional site assessments being performed in Texas. Owners and operators of
underground storage tanks in Texas must have had corrective action plans in
place prior to the December 1998 Environmental Protection Agency deadlines in
order to avoid significant increases in their deductibles for clean-up of
contaminated sites. Remediation revenues increased 53% in 1998 compared to 1997,
or $1,186,000 compared to $776,000. The increase in remediation revenues
resulted from more field work in Texas and the addition of work produced by the
new offices in Oklahoma City, South Carolina and Florida. Sales of fueling
equipment and service increased to $878,000 in 1998 compared to $261,000 in
1997. The increase resulted from the continued growth of the Company's pump
service operation in Dallas, Texas. The operation was established in the second
quarter of 1997 and has grown steadily as new customers have been added.
Costs and expenses in 1998 were $11,859,000 compared to $10,028,000 in
1997, an increase of 18%. Costs and expenses for 1998 represented 65% of total
revenue for the year compared with 68% for 1997. The decrease in percentage of
costs and expenses in 1998 resulted from increased sales of cathodic protection
goods and services, a revenue category with a relatively high gross margin. The
percentage of increase in labor costs was 26%, only slightly higher than the 24%
growth in revenues during the same period. Labor costs for 1998 were $2,465,000
compared to $1,952,000 for 1997. Payments to subcontractors increased 161% to
$3,826,000 in 1998 compared to $1,463,000 in 1997. Supplies and materials cost
decreased 23% in 1998 to $3,778,000 compared to $4,922,000 for 1997. The
increase was due to the significantly greater use of subcontractors on the
greater volume of turn-key fueling systems installations performed in 1998
compared to 1997. Additionally, the subcontracts required the subcontractors to
provide supplies and materials. This requirement caused the subcontractor
expense category to increase while at the same time it caused a decrease in
supplies and materials expense. Depreciation expense increased 16% due to the
significant increase in vehicles and equipment added to the company during 1998.
Depreciation expense was $333,000 in 1998 compared to $287,000 in 1997.
Equipment rental expense declined $52,000 from $261,000 in 1997 to $209,000 in
1998. This reduction was due to the greater provision of equipment by the
subcontractors in 1998 compared to 1997.
Selling, general and administrative expenses were $3,715,000 in 1998
compared to $3,198,000 in 1997, an increase of 16%. The $517,000 increase was
due to the addition of offices in Oklahoma City, Florida, South Carolina, and
Pennsylvania during the last half of 1998. Salaries accounted for $221,000 of
the $517,000 increase. Salaries increased 13% to $1,899,000 in 1998 compared to
$1,678,000 in 1997. Office supplies and postage was $186,000 in 1998 compared to
$114,000 in 1997. Telephone expenses were $184,000 in 1998 compared to $112,000
in 1997. Both telephone expense and office supplies and postage increases were
related to the increased volume of sales as well as the addition of four offices
in the last half of 1998. Bad debt expense declined to $21,000 in 1998 compared
to $79,000 in 1997. The reserve for bad debt level for 1998 was maintained
without the need for the level of bad debt expense required in 1997. General
insurance increased $66,000 in 1998 compared to 1997 due to
10
<PAGE>
increased workers compensation insurance premiums resulting from increased
employee levels and volume of work performed. General insurance expense was
$260,000 in 1998 compared to $194,000 in 1997.
Interest expense is higher due to the larger debt balance in 1998
resulting from funding for long-term contracts, additional working capital, and
purchases of machinery and equipment. Interest expense for 1998 was $407,000
compared to $370,000 in 1997.
CAPITAL RESOURCES AND LIQUIDITY
Cash on hand at the end of 1998 was $152,000 compared to $93,000 at the
end of 1997. Net cash provided by operating activities was $28,000 in 1998
compared to net cash used by operating activities of $1,254,000 in 1997. The
increase in the net cash provided was due to an increase in net income of
$688,000 ($1,470,000 in 1998 compared to $782,000 in 1997) and a decrease in
costs and estimated earnings in excess of billings of $587,000 ($1,479,000 at
the end of 1998 compared to $2,066,000 at the end of 1997). These increases in
net cash provided were partially offset by increases in accounts receivable of
$2,743,000. The increase in accounts receivable is due to the 24% increase in
revenues and the reduction in costs and estimated earnings in excess of
billings.
The Company acquired Lab One on January 30, 1998, for $75,000 cash and 225,000
shares of the Company's common stock, a total purchase price of $750,000.
On February 27, 1998, the Company acquired the office building,
warehouse and lot on which the Company's corporate offices are located. The
purchase price was $600,000, and the Company secured a loan from Citizens' Bank
of Tulsa for $480,000 secured by a mortgage on the acquired real estate. The
loan has a term of 7 years. The interest rate floats at 0.5% above Low New York
Prime rate, and the current rate is 8.25% per annum. The Company paid a 0.5%
origination fee.
Both Lab One and the real estate were purchased from Eddy Patterson and
Albert McCutchan, the President and Executive Vice President of the Company
following the completion of independent appraisals of the entities and the
review and unanimous consent of the outside directors of the Company to the
transactions and terms and conditions thereof.
Due to common ownership, these transactions were accounted for in a
manner similar to the pooling of interests method in 1998. The combined revenues
and expenses of the Company and the acquired entities during 1997 was
$14,746,000. All transactions were with the Company.
In January 1998, the Company sold 400,000 shares of common stock at
$2.00 per share and warrants to purchase 50,000 shares of common stock at $2.00
per share under a private placement arrangement with Peacock, Hislop, Staley &
Given, Inc. Gross proceeds totaled $800,000. Net proceeds totaled $712,000.
On July 2, 1998, Bank of Oklahoma renewed the Line of Credit Loan which
was to mature on July 31, 1998. The amount of the line was increased from $3
million to $4.5 million at a rate based on Chase Manhattan Prime plus 3/4th of 1
percent. The maturity is July 31, 1999. Additionally, Bank of Oklahoma has
committed to advancing 80% of the purchase price (up to $700,000 on individual
notes) for the purchase of equipment, machinery, and vehicles.
11
<PAGE>
On July 15, 1998, the Company purchased certain assets, assumed certain
leases, and hired the employees of Steffen, Robertson and Kirsten (U.S.), Inc.'s
Columbia, South Carolina, office. The purchase price was $472,686 plus 12,500
shares of the Company's common stock. The assets purchased included fixed
assets, accounts receivable, and accrued revenues for work performed but not
invoiced. The effective date of the acquisition was June 26, 1998.
The Company continued to make periodic debt repayments during this
period. The Company has no commitments for material capital expenditures.
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 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 is
in the process of testing its computer hardware and software for Year 2000
compliance and expects to complete this testing by the end of the first quarter
of 1999. The Company is also in the process of surveying its vendors and service
suppliers.
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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements required by this item
begin at page F-1 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
12
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information required by this item is incorporated by reference to the
sections entitled "Election of Directors," " Executive Officers"and "Section
16(a) Beneficial Ownership Compliance" of the Company's Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1999 annual meeting.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the
sections entitled "Board Compensation and Committees" and "Executive Officers-
Executive Compensation" of the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Company's 1999 annual
meeting.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the
Section entitled "Principal Shareholders " of the Company's Proxy Statement to
be filed with the Securities and Exchange Commission in connection with the
Company's 1999 annual meeting.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the
Section entitled "Certain Relationships and Related Transactions" of the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1999 annual meeting.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of
National Environmental Service Co. and amendments thereto
(incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form SB-2, No. 33-
78612-D, (the "Registration Statement").
3.1a Amendment to Amended and Restated Certificate of
Incorporation of National Environmental Service Co.,
dated June 17, 1994 (incorporated by reference to
Exhibit 3.1a to the Registration Statement).
3.2 Amended and Restated Bylaws of National Environmental
Service Co., as amended on June 16, 1994
(incorporated by reference to Exhibit 3.2 to the
Registration Statement).
4.1 Form of Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Registrant's Form 10-KSB for
the year ended December 31, 1994 (the "1994
4.2 National Environmental Service Co. Common Stock Purchase
Warrant to Peacock, Hislop, Staley & Given, Inc. dated
January 21, 1998 (incorporated by
13
<PAGE>
reference to Exhibit 4.2 to the 1997 10-KSB).
10.5 National Environmental Service Co. 1994 Employee Stock
Plan dated April 22, 1994. (incorporated by reference to
Exhibit 10.7 to the 1994 10-KSB).
10.6 National Environmental Service Co. 1994 Director Stock
Option Plan dated April 22, 1994 (incorporated by
reference to Exhibit 10.8 to the 1994 10-KSB).
10.9 Bank IV Oklahoma , N.A. Credit Agreement dated January 9,
1995 (incorporated by reference as filed as Exhibit 10.2
on Form 10-QSB for the quarter ended March 31, 1995) and
amendments to the Credit Agreement.
10.11 Private Placement Agency Agreement between National
Environmental Service Co. Peacock, Hislop, Staley &
Given, Inc. dated January 15, 1998; Amendment to the
Placement Agency Agreement dated January 15, 1998; and
First Supplement to the Private Placement Memorandum
dated January 12, 1998, (incorporated by reference to
Exhibit 10.11 to the Registrant's Form 10-KSB for the
year ended December 31, 1997, the "1997 10-KSB").
10.13 Purchase and Sale Agreement for sale of real estate dated
January 30, 1998, between National Environmental Service
Co. and McCutchan and Patterson, an Oklahoma general
partnership (incorporated by reference to Exhibit 10.13
to the 1997 10-KSB).
10.14 Citizens' Bank of Tulsa Credit Agreement dated February
27, 1998 (incorporated by reference to Exhibit 10.14 to
the 1997 10-KSB).
10.15 Agreement and Plan of Merger with respect to Lab One
Analytical, Inc. dated January 30, 1998 (incorporated by
reference to Exhibit 10.15 to the 1997 10-KSB).
10.16 Copy of Amendment Two to Revolving Credit and Term Loan
Agreement dated as of July 2, 1998 and Promissory Note
between the Company and Bank of Oklahoma, N.A.
(incorporated by reference to Exhibit 10.16 on Form 10-
QSB for the quarter ended June 30, 1998).
10.17 Copy of Purchase Agreement dated July 15, 1998 to be
effective as of June 26, 1998 between National
Environmental Service Company and Steffen, Robertson &
Kirsten (U.S.), Inc. (incorporated by reference to
Exhibit 10.17 on Form 10-QSB for the quarter ended June
30, 1998).
10.18 Definitive Agreement dated December 16, 1998, containing
the terms of the acquisition of certain assets and the
assumption of certain liabilities of THH Alpha, Inc., THH
Services, LTD., UTTS Services, LTD., UTTS, Inc., and
Carolina Drilling Services, Inc.
10.19 Agreement for Acquisition of certain assets and the
assumption of certain liabilities of National
Environmental Corporation, dated December 18, 1998.
21.1 Subsidiaries of National Environmental Service Co.
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None.
14
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheet as of December 31, 1998 F-3
Consolidated Statements of Income for the Years Ended
December 31, 1998 and 1997 F-4
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
National Environmental Service Co.
We have audited the accompanying consolidated balance sheet of National
Environmental Service Co. (the "Company") as of December 31, 1998; and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Environmental Service
Co. as of December 31, 1998; and the results of its operations and its cash
flows for the two years in the period then ended in conformity with generally
accepted accounting principles.
TULLIUS TAYLOR SARTAIN & SARTAIN LLP
Tulsa, Oklahoma
March 12, 1999
F-2
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED BALANCE SHEET
December 31, 1998
(In Thousands of Dollars)
ASSETS
------
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash $ 152
Accounts receivable:
Trade, net of allowance for doubtful accounts of $73 7,915
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,479
Materials and supplies 1,061
Prepaid expenses 32
-------
Total current assets 10,639
-------
Property and equipment, at cost:
Land 50
Buildings and improvements 608
Vehicles 2,143
Testing, drilling and other equipment 618
Furniture, fixtures and other 963
-------
4,382
Less accumulated depreciation 1,956
-------
Property and equipment, net 2,426
-------
Other 107
-------
Total assets $13,172
=======
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Current liabilities:
Current maturities of long-term obligations $ 3,541
Accounts payable 1,554
Accrued income taxes 911
Other accrued liabilities 209
-------
Total current liabilities 6,215
-------
Long-term notes payable 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 7,888,643 shares 79
Additional paid-in capital 3,948
Retained earnings 1,966
Common stock in Treasury, at cost, 122,991 shares (240)
-------
Total shareholders' equity 5,753
-------
Total liabilities and shareholders' equity $13,172
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998 and 1997
(In Thousands of Dollars except per share amounts)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Revenue:
Fueling Systems $ 8,330 $ 9,569
Cathodic protection 6,355 3,564
Site assessments 1,553 576
Remediation 1,186 776
Other 880 261
------- -------
Total revenue 18,304 14,746
Costs and expenses 11,859 10,028
Selling, general and
administrative expenses 3,715 3,198
------- -------
Income from operations 2,730 1,520
Other income (expense):
Interest (407) (370)
Other, net 42 111
------- -------
Income before income taxes 2,365 1,261
------- -------
Provision for taxes on income
Current 817 382
Deferred 78 97
------- -------
895 479
------- -------
Net income $ 1,470 $ 782
======= =======
Basic net income per share $ 0.19 $ 0.12
======= =======
Diluted net income per share $ 0.19 $ 0.11
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1998 and 1997
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Additional
Common Common paid-in Retained Treasury
stock shares stock issued capital earnings shares Total
---------------- --------------- ---------- -------- ------- --------
Issued In Treasury
------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Dec 31, 1996 5,801,143 29,216 $ 58 $ 1,746 $ 94 $ (76) $ 1,822
Shares sold 1,450,000 15 1,488 1,503
Shares issued to acquire
related party business
and building 225,000 2 (344) (342)
Shares issued
employee awards (16,840) 28 28
Net income 746 746
--------- ------- ------ ------- ------ ------- -------
Balance at Dec 31, 1997 7,476,143 12,376 75 3,234 496 (48) 3 ,757
Shares sold 400,000 4 695 699
Shares issued to
acquire business 12,500 - 19 19
Purchase of
Treasury Stock 110,615 (192) (192)
Net income 1,470 1,470
--------- ------- ------ ------- ------ ------- -------
Balance at Dec 31, 1998 7,888,643 122,991 $ 79 $ 3,948 $1,966 $ (240) $ 5,753
========= ======= ====== ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1998 1997
----------- --------
<S> <C> <C>
Operating activities:
Net income $ 1,470 $ 782
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 388 317
Deferred taxes 78 97
Stock issued as employee compensation - 28
Change in:
Accounts receivable (2,743) (1,696)
Costs and estimated earnings in excess
of billings on uncompleted contracts 860 (1,437)
Materials and supplies (67) (321)
Prepaid expenses 50 (49)
Accounts payable (524) 671
Billings in excess of costs and estimated
earnings on uncompleted contracts - (68)
Accrued liabilities 531 422
Other (15) -
------- -------
Net cash provided by (used in) operating activities 28 (1,254)
------- -------
Investing activities:
Acquisition of business, net of cash acquired (473) (721)
Purchases of property and equipment (590) (556)
Proceeds from sales of property and equipment 11 5
------- -------
Net cash used in investing activities (1,052) (1,272)
------- -------
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) (3,787)
Purchase of common shares (192) -
------- -------
Net cash provided by financing
activities 1,083 2,500
------- -------
Increase (decrease) in cash 59 (26)
Cash, beginning of year 93 119
------- -------
Cash, end of year $ 152 $ 93
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
NATIONAL ENVIRONMENTAL SERVICE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - National Environmental Service Co. (the
"Company") is engaged in the businesses of providing cathodic protection
for underground metal tanks, installation of spill and overfill protection,
environmental site assessments, contaminated soil and water remediation,
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, Oklahoma; Dallas
and San Antonio, Texas; Largo, Florida; Columbia, South Carolina;
Greenville, North Carolina; South Charleston, West Virginia; and
Pittsburgh, Pennsylvania.
CONSOLIDATION - 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.
MATERIALS AND SUPPLIES - Materials and supplies consist of purchased
materials and are valued at cost (first-in, first-out).
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets. Gains and losses on retirement of
property and equipment are recognized in the period of retirement.
NET INCOME PER SHARE - In the fourth quarter of 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" (see Note 10). SFAS 128 replaced primary earnings per share ("EPS")
with basic EPS and fully diluted EPS with diluted EPS. Basic EPS is
calculated by dividing net earnings available to common shares by the
weighted average common shares outstanding. Diluted EPS is calculated
similarly, except that it includes the dilutive effect of the assumed
exercise of all dilutive potential common shares outstanding. SFAS 128 also
requires previously reported EPS to be restated. The adoption of SFAS 128
did not have a material effect on the calculation of EPS.
INCOME TAXES - Deferred taxes are determined under the liability method,
whereby deferred tax assets and liabilities are recognized based on
differences between financial statement and tax bases of assets and
liabilities using presently enacted rates. At December 31, 1998 and 1997,
deferred taxes were recorded primarily for temporary differences related to
depreciation of fixed assets.
FINANCIAL INSTRUMENTS - The Company's financial instruments consist of
trade accounts receivable, trade accounts payable, short-term and long-term
debt. The carrying amounts of these financial instruments approximate fair
value at December 31, 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 cost and estimated earnings in excess
of billings on uncompleted contracts which will be due from customers when
billable under the contracts. The Company does not require collateral from
its
F-7
<PAGE>
customers although it may have the ability to place liens. Such credit risk
is considered by management to be limited due to the Company's broad
customer base. One commercial customer accounted for 16% of sales in 1998
and a different customer for 14% of sales in 1997.
REVENUE RECOGNITION -The Company enters into both fixed fee and cost-plus-
fee contracts. For long-term contracts, revenue is recognized on the
percentage of completion method measured by the percentage of direct costs
to date to estimated total direct cost for each long-term contract. For
short-term and multiple unit contracts, revenue is recognized as services
are rendered, based on physical completion of the project. Related costs
are expensed as incurred. Provisions for estimated losses on uncompleted
fixed fee contracts are made in the period in which such losses are
determined.
MANAGEMENT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenue and expense during the reporting period. Actual results could
differ from those estimates.
NEW ACCOUNTING STANDARDS - The Company 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
1999. 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.
2. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash paid for interest $ 405 $ 304
===== =====
Cash paid for income taxes $ 319 0
===== =====
Non-cash investing and financing activities:
Issuance of common stock in connection
with business acquisitions $ 19 $ 605
Issuance of stock option and warrants
for services $ 175 $ 51
===== =====
</TABLE>
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 counsel, the
Company has valid claims against the defendants.
F-8
<PAGE>
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 $ 580
Estimated earnings recognized 1,254
------
1,834
Billings to date 355
------
$1,479
======
Included in the accompanying balance sheet under the following caption:
Costs and estimated earnings in excess of
billings on uncompleted contracts $1,479
======
</TABLE>
5. NOTES PAYABLE
<TABLE>
<S> <C>
Notes payable at December 31, 1998, consist of the following (in thousands):
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
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 - $542,000, 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
F-9
<PAGE>
and as to capital expenditures and other acquisitions. In addition, the
Company must maintain minimum leverage and current ratios.
6. COMMITMENTS AND CONTINGENCIES
Total rent expense for the years ended December 31, 1998 and 1997, was
$66,000 and $67,000, 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.
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
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.
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 $1,470,000 $782,000
Pro Forma 1,405,000 703,000
Basic EPS:
As reported $0.19 $0.12
Pro Forma $0.18 $0.10
Diluted EPS:
As reported $0.19 $0.11
Pro Forma $0.18 $0.10
</TABLE>
F-10
<PAGE>
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.
Shares Exer. Price Shares Exer. 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
interests 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.
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.
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:
<TABLE>
<S> <C>
Deferred tax liability:
Financial basis in excess of tax basis of fixed assets $(209)
Other 12
------
Net deferred tax liability $(197)
======
</TABLE>
F-11
<PAGE>
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for
financial statement purposes.
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Statutory tax rate 34.0% 34.0%
State income taxes, net 2.5% 2.4%
Other 1.3% 1.6%
----- -----
37.8% 38.0%
===== =====
</TABLE>
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.
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 interest 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.
11. NET INCOME PER SHARE
Basic and diluted EPS for the years ended December 31, 1998 and 1997,
were computed as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Basic EPS Computation:
Net income available to common
shareholders $ 1,470 $ 782
Weighted average number of common
shares outstanding 7,793 6,711
------- -------
Basic EPS $ 0.19 $ 0.12
======= =======
</TABLE>
F-12
<PAGE>
<TABLE>
<S> <C> <C>
Diluted EPS Computation:
Net income available to common
shareholders $ 1,470 $ 782
Average number of common shares
outstanding 7,793 6,711
Incremental number of shares for
assumed exercise of options 12 124
------- --------
Total shares 7,805 6,835
------- --------
Diluted EPS $ 0.19 $ 0.11
======= ========
</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.
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.
The Company's business segments have been grouped as follows:
<TABLE>
<CAPTION>
1998 Thousands of Dollars
------------------------------------------------------------
Inter-
Segment Pre-tax
Segment Sales Sales Income Assets
------- ------------------------------------------------------------
<S> <C> <C> <C> <C>
Fueling Installations $14,872 $ 964 $ 7,480
Environmental 2,617 487 2,661
FRS 1,874 598 251
Other 815 819 316 2,780
------------------------------------------------------------
$18,304 $2,693 $2,365 $13,172
============================================================
</TABLE>
<TABLE>
<CAPTION>
1997 Thousands of Dollars
------------------------------------------------------------
Inter- Pre-tax
Segment Income
Segment Sales Sales (Loss) Assets
------- ------------------------------------------------------------
<S> <C> <C> <C> <C>
Fueling Installations $12,132 $ 825 $ 6,129
Environmental 1,347 283 1,212
FRS 1,074 329 353
Other 1,267 347 (176) 2,808
------------------------------------------------------------
$14,746 $1,421 $1,261 $10,502
============================================================
</TABLE>
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
F-13
<PAGE>
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.
F-14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, March 19, 1999.
NATIONAL ENVIRONMENTAL SERVICE CO.
By:/s/ Eddy L. Patterson
-------------------------------------
Eddy L. Patterson, Chairman &
Chief Executive Officer
In accordance with the requirements of Section 13 or 15(d) of the Exchange
Act, this report has been signed below by the following persons, on behalf of
the Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Eddy L. Patterson Chairman, Chief Executive Officer March 19, 1999
- ----------------------------
Eddy L. Patterson and Director
/s/ James Howell President March 19, 1999
- ----------------------------
James Howell
/s/ Albert A. McCutchan Executive Vice President and March 19, 1999
- ----------------------------
Albert A. McCutchan Director
/s/Larry G. Johnson Secretary, Treasurer and Chief March 19, 1999
- -----------------------------
Larry G. Johnson Financial Officer
/s/ Robert Watson Controller (Principal Accounting March 19, 1999
- -----------------------------
Robert Watson Officer)
/s/ E. R. Foraker Director March 19, 1999
- -------------------------------
E.R. Foraker
/s/ W. F. Simpson Director March 19, 1999
- ----------------------------
W. F. Simpson
/s/ Dallin Bagley Director March 19, 1999
- ----------------------------
Dallin Bagley
F-15
<PAGE>
EXHIBITS
10.18 Definitive Agreement dated December 16, 1998, containing the
terms of the acquisition of certain assets and the assumption
of certain liabilities of THH Alpha, Inc., THH Services,
LTD., UTTS Services, LTD., UTTS, Inc., and Carolina Drilling
Services, Inc.
10.19 Agreement for Acquisition of certain assets and the
assumption of certain liabilities of National Environmental
Corporation, dated December 18, 1998.
21.1 Subsidiaries of National Environmental Service Co.
27.1 Financial Data Schedule
F-16
<PAGE>
Exhibit 10.18
December 16, 1998
Kenneth L. Hadnott, Charles D. Harrison, and Brian Gray; and THH
Alpha, Inc.; THH Services, LTD.; UTTS Services, LTD.; UTTS, Inc.;
Carolina Drilling Services, Inc.
P. O. Box 8148
Greenville, NC 27835-8148
Re: Acquisition of certain assets of THH Alpha, Inc.; THH
Services, LTD.; UTTS Services, LTD.; UTTS, Inc.; Carolina
Drilling Services, Inc. (hereafter "Companies") from Kenneth L.
Hadnott, Charles D. Harrison, and Brian Gray, (hereafter
"Shareholders")
Gentlemen:
The Definitive Agreement, dated December 4, 1998, contained
the terms of the acquisition by National Environmental Service
Company (hereafter "NESCO") of the assets and assumption of
certain liabilities and obligations of the Companies. The terms
and conditions of the Definitive Agreement dated December 4, 1998
are hereby amended by the terms and conditions presented in this
document. The effective date of the acquisition shall be January
1, 1999. Notwithstanding anything contained herein to the
contrary, however, the covenants and agreements of the parties
expressed in paragraphs 10, 11, and 12 hereof shall be binding
regardless of whether or not this Definitive Agreement is
consummated.
Shareholders have a desire to sell certain assets and
dispose of certain liabilities at its Greenville, North Carolina,
offices, and NESCO proposes to purchase those assets and assume
those liabilities under the following terms and conditions:
1. Assets to be Purchased -
----------------------
A. Accounts Receivable - All accounts receivable
shall be acquired by NESCO except for those state indemnity fund
receivables owned by UTTS Services, LTD. UTTS Services, LTD.
shall retain the state indemnity fund receivables owned by it as
of the date of closing. UTTS Services, LTD. shall collect those
receivables and remit proceeds to NESCO without additional
payment to Shareholders by NESCO. UTTS Services, LTD. shall
execute a Note payable to NESCO at the date of closing in an
amount equal to the accounts receivable retained by UTTS
Services, LTD. Remittance to NESCO of all such accounts
receivable amounts collected by UTTS Services, LTD. shall
constitute payment of Note.
<PAGE>
NESCO Definitive Agreement - December 16, 1998 - Page 2
B. Work in Progress
C. Fixed Assets - NESCO agrees to purchase for cash
and/or notes all fixed assets as shown on the most recent
financial statements of Companies and provided to NESCO by
Shareholders.
D. Business Property - (a) all designs, methods,
inventions and know-how related thereto, (b) all trademarks,
trade names (including "UTTS Environmental"), service marks, and
copyrights claimed or used by Companies that have not been
registered, and (c) all customer lists of Companies, and (d)
corporate names used by the Companies (collectively "Business
Property Rights"), constitute all such proprietary rights owned
or held by Companies and which are reasonably necessary to, or
used in the conduct of the business of Companies. All such
methods, inventions and know-how constitute trade secrets of
Companies within the meaning of all applicable laws, and
Companies have taken all necessary steps required by law to
protect these trade secrets as such. Companies own or have valid
rights to use all Business Property Rights without conflict with
the rights of others. No person has made or threatened to make
any claims that the operation of the business of Companies is in
violation of or infringes any Business Property Rights or any
other proprietary or trade rights of any third person. No third
person is in violation of or is infringing upon any Business
Property Rights.
E. Other Assets - All other assets shown on the
most recent financial statements of Companies presented to NESCO
including but not limited to cash, bank accounts, deposits, and
prepayments.
2. Assumption of Lease - NESCO agrees to assume the
-------------------
liability for the remainder of the payments on Companies's
Greenville office building lease. It is a condition of this
agreement that NESCO be able to assume said lease and occupy the
premises.
3. Liabilities - It is understood that NESCO will assume
-----------
all liabilities as shown on the December 31, 1998, financial
statements but excluding any federal and state income taxes due
and payable. NESCO shall not be responsible for any liabilities
not shown on such statement. Said liabilities shall not exceed
amounts shown on the most recent financial statements presented
to NESCO by Companies.
<PAGE>
NESCO Definitive Agreement - December 16, 1998 - Page 3
4. Assignment - This agreement is contingent upon the
----------
Companies' ability to assign without penalty or loss to NESCO all
existing contracts, backlog, customer lists, deposits, good and
merchantable title to assets, accounts receivable, receivables
accrued as work in progress and not invoiced, licenses, and such
other rights as Companies presently enjoys at their Greenville
office.
5. Acquisition of THH Alpha, Inc. - It is understood that
-----------------------------
the acquisition of all the issued and outstanding shares of THH
Alpha, Inc. is a part of the acquisition covered by this
Definitive Agreement. As soon as practical after the Closing Date
of the Transaction, NESCO and Shareholders of THH Alpha, Inc.
will take the necessary actions to transfer ownership of the
shares of THH Alpha, Inc. to NESCO while preserving the status of
the corporation as a professional geological corporation under
the laws of the State of North Carolina.
6. Purchase Price -
--------------
A. Cash - $500,000.00 payable as follows:
<TABLE>
<CAPTION>
One Year Two Years
At Closing After Closing After Closing
---------- ------------- -------------
<S> <C> <C> <C>
Kenneth L. Hadnott $100,000 $50,000 $50,000
Charles D. Harrison $100,000 $50,000 $50,000
Brian Gray $ 50,000 $25,000 $25,000
</TABLE>
B. NESCO Common Stock - Kenneth L. Hadnott and
Charles D. Harrison shall each receive 20,000 shares of Rule 144
NESCO common stock issued from the treasury shares presently
owned by NESCO.
C. Stock Options - Options to purchase NESCO Common
Stock to be issued from the authorized but unissued shares at
$2.00 per share in accordance with the National Environmental
Service Company Stock Option Plan as follows:
<TABLE>
<S> <C>
Kenneth L. Hadnott 20,000 Shares
Charles D. Harrison 20,000 Shares
Brian Gray 5,000 Shares
</TABLE>
<PAGE>
NESCO Definitive Agreement - December 16, 1998 - Page 4
D. Deduction for Sellers' Income Tax Liability -
Shareholders of THH Services, Inc. shall be permitted to deduct
from THH Services, Inc.'s cash the amount of unpaid income taxes
required on net income generated by THH Services, Inc. from the
beginning of the current tax year through December 31, 1998. Any
tax liabilities created by this transaction will be the
responsibility of the Companies' Shareholders.
E. Employment Contracts - Kenneth L. Hadnott,
Charles D. Harrison, and Brian Gray shall each enter into a two-
year employment contract with NESCO.
7. Indemnification - Companies and Shareholders shall
---------------
indemnify NESCO for any claims on work performed by Companies or
its subcontractors on or prior to December 31, 1998. Stockholders
shall indemnify NESCO and hold it harmless for all claims for a
period of five (5) years after the closing date which are not
reflected on the December 31, 1998 Balance Sheet and disclosed by
Shareholders and Companies and will pay all costs, expenses, and
reasonable attorney's fees in respect to any tax and other
accrued absolute or contingent liabilities or claims against
Companies existing at the time of the Closing, or arising out of
pre-closing transactions or events. However, Shareholders will
not be liable for claims against Companies to the extent that the
obligations the Companies are required to perform after the
Closing Date in the ordinary course of business, or under
agreements mentioned in or consistent with this transaction.
Shareholders shall repurchase all accounts receivable (excluding
accounts receivable due from state indemnity funds) purchased at
Closing but which remain unpaid ninety (90) days after Closing
date. Shareholders shall repurchase all accounts receivable due
from state indemnity funds purchased at closing but which remain
unpaid two hundred seventy (270) days after Closing Date.
Shareholders shall indemnify NESCO against any and all claims
from third parties made pursuant to any laws and/or regulations
covering the bulk sale of inventory and assets.
8. Contingency - Shareholders and Companies acknowledge
-----------
that NESCO's decision to enter into the definitive agreement is
particularly dependent upon (i) the satisfactory completion by
NESCO of an investigation of the business and assets of
Companies, (ii) arrangements satisfactory to NESCO concerning the
continued employment following consummation of the Transaction of
certain key employees of the Company, and (iii) approval of the
Transaction by the Board of Directors of NESCO and Companies.
This Definitive Agreement will be conditioned upon,
<PAGE>
NESCO Definitive Agreement - December 16, 1998 - Page 5
among other things, (i) approval of the Transaction by the
requisite vote of the shareholders of Companies, (ii) all
necessary governmental approvals having been obtained, and (iii)
all necessary debt holder or other contractual consents having
been obtained.
9. Access to Personnel, Books and Records and Properties -
-----------------------------------------------------
At all times prior to the consummation of the Transaction,
Companies shall afford NESCO and its representatives, agents, and
employees full access to the personnel, books and records,
tangible assets, agreements, and licenses of Companies as may be
reasonably requested by NESCO or its representatives, agents, or
employees. Companies agree that prior to closing the Transaction,
NESCO will be furnished with such accounting information and
reports to the extent NESCO deems necessary to enable NESCO to
perform its public reporting obligations and to satisfy the
disclosure requirements under the rules and regulations of the
Securities and Exchange Commission.
10. Confidentiality - Each party shall keep confidential
---------------
any information with respect to the other party that is not
otherwise generally available to the public or has been made
available to the public by persons other than such party, its
representatives, agents, or employees, except as is necessary in
connection with the preparation of the definitive agreement
relating to the transaction or as may be required by applicable
law or stock exchange rules. If for any reason the transaction is
abandoned or terminated prior to being consummated, each party
will return promptly all information containing confidential or
proprietary information disclosed to the other party.
11. Publicity - Except as may be required of NESCO by
---------
applicable law or securities laws or rules, neither party hereto
shall make any public announcement or any press release regarding
this proposal or the transaction or the subject matter hereof or
thereof without the prior consent of the other party.
12. Expenses - Each party hereto will separately bear its
--------
own expenses incurred in connection with this proposal and the
transaction, regardless of whether the transaction is
consummated.
13. Interim Operations - Shareholders and Companies shall
------------------
continue to operate in a manner which will maintain the
Companies' Greenville office's value, customers, reputation, and
goodwill during the time period between the
<PAGE>
NESCO Definitive Agreement - December 16, 1998 - Page 6
acceptance of this proposal and closing date. Pending execution
of the Agreement (or termination of this proposal), Shareholders
and Companies agree that they will conduct its business only in
the ordinary course and not engage in any extraordinary
transaction without NESCO's prior consent. Companies agree that,
prior to Closing of the Transaction, there will be no disposal of
any asset with a value greater than $1,000.
14. Closing Date - The closing date shall be on or before
------------
January 15, 1999. The Effective Date of the Transaction will be
January 1, 1999.
15. Term of Agreement - If not executed by Stockholders,
-----------------
this Agreement shall expire at 5:00 PM CDST, Friday, December 18,
1998.
If the foregoing is acceptable to you, please signify by
signing this letter in the space provided below and returning to
me a copy bearing original signatures.
Sincerely,
National Environmental Service Company
_____________________________________
Eddy Patterson - Chairman & CEO
AGREED AND ACCEPTED:
__________________________________
Kenneth L. Hadnott - Shareholder
__________________________________
Charles D. Harrison - Shareholder
_______________________________
Brian Gray - Shareholder
<PAGE>
NESCO Definitive Agreement - December 16, 1998 - Page 7
THH Alpha, Inc.
_________________________________
______________________________
President
THH Services, LTD.
_________________________________
______________________________
President
UTTS Services, LTD.
_________________________________
____________________________
UTTS, Inc.
_________________________________
____________________________
President
Carolina Drilling Services, Inc.
________________________________
____________________________
President
<PAGE>
Exhibit 10.19
AGREEMENT FOR THE ACQUISITION
BY NATIONAL ENVIRONMENTAL SERVICE COMPANY
OF CERTAIN ASSETS AND THE ASSUMPTION OF
CERTAIN OBLIGATION OF NATIONAL ENVIRONMENTAL CORPORATION
This Agreement shall outline the terms and conditions of the captioned matter:
1. Consideration - National Environmental Service Company (hereafter "NESCO")
-------------
will acquire from National Environmental Corporation (hereafter "NEC") the
assets and assume certain liabilities of NEC in exchange for a cash sum of
$50,000.00., said cash to be paid at closing and certain other items of
consideration that are described in this document. The effective date of this
transaction shall be January 1, 1999. Closing shall take place as soon as
practical thereafter but no later than the close of business on Friday, January
15, 1999. Additionally, NESCO shall hire the employees of NEC. This transaction
does not constitute a merger. NESCO is not acquiring the stock of NEC.
2. Assets Acquired -
---------------
A. Assets shall include all assets as shown on Exhibits A and B.
B. Work in Progress - Work in Progress shall include all work as shown
on Exhibit C and such other Work in Progress that shall have begun after the
preparation of Schedule C through the date of Closing.
C. Business Property - (a) all designs, methods, inventions and know-
how related thereto, (b) all trademarks, trade names (including "National
Environmental Corporation"), service marks, and copyrights claimed or used by
Companies that have not been registered, and (c) all customer lists of
Companies, and (d) corporate names used by the NEC (collectively "Business
Property Rights"), constitute all such proprietary rights owned or held by NEC
and which are reasonably necessary to, or used in the conduct of the business of
NEC. All such methods, inventions and know-how constitute trade secrets of NEC
within the meaning of all applicable laws, and NEC has taken all necessary steps
required by law to protect these trade secrets as such. NEC owns or has valid
rights to use all Business Property Rights without conflict with the rights of
others. No person has made or threatened to
<PAGE>
Page 2 - NESCO/NEC Agreement Dated December 18, 1998
make any claims that the operation of the business of NEC is in violation of or
infringes any Business Property Rights or any other proprietary or trade rights
of any third person. No third person is in violation of or is infringing upon
any Business Property Rights.
3. Assumption of Certain Liabilities - Schedule A reflects liabilities totaling
---------------------------------
$95,590.50. NESCO shall pay off these obligations as soon after closing as
practical. NESCO shall not assume any liabilities or contingent liabilities of
NEC other than those liabilities reflected on Schedule A, the assumption of the
lease on the office building located at 10710 75th Street North, Largo, Florida
33777, the lease on the lease on the offices at South Charleston, West Virginia,
and the assumption of a lease on the copier as shown on Schedule A. NESCO would
determine the employees to be retained by NESCO and their positions and duties.
NEC will pay all vacation accrued as of December 31, 1998 by NEC employees.
NESCO shall not be responsible for any benefits while said employees were
employed by NEC.
4. Salaries - NESCO shall enter into employment agreements with Chadwick A.
--------
Campbell and Greg Campbell. While employed by NESCO, each man shall be paid a
salary of $36,000. As with any NESCO employee, continued employment will be
based in part on the performance of the employee. Greg Campbell shall be
supplied a company vehicle for his use (including all maintenance, fuel,
insurance, and other expenses of operations). Chadwick A. Campbell shall be paid
an auto allowance of $500 per month paid in arrears. Both men shall receive
hospitalization insurance, vacation, and other similar benefits, said benefits
to begin January 1, 1999.
5. Performance Bonus - Chadwick A. Campbell and Greg Campbell shall share
-----------------
equally in a performance bonus plan. This plan shall operate as follows: Net
income after taxes shall be determined for the Largo, Florida, division office
following the close of the fiscal years ending on December 31, 1999 and December
31, 2000. Chadwick A. Campbell and Greg Campbell shall receive 25% of all net
income which exceeds 10% of revenue. [For example, assume that for the fiscal
year ended December 31, 1999, the revenues for the Largo Division office was
$100,000 and the net income after reduction for income taxes was $25,000. Ten
percent of the revenue would be $10,000. The two participants would share
equally in 25% of the net income after income tax which exceeds the $10,000. The
amount by which net income exceeds $10,000 is $15,000. Therefore, the two
participants would share equally in 25% of $15,000 or $3,750.]
6. Indemnification - Chadwick A. Campbell and NEC shall indemnify NESCO for any
---------------
claims on work performed by Companies or its subcontractors on or prior to
December 31, 1998. Chadwick A. Campbell and NEC shall indemnify NESCO and
<PAGE>
Page 3 - NESCO/NEC Agreement Dated December 18, 1998
hold it harmless for all claims for a period of five (5) years after the closing
date and will pay all costs, expenses, and reasonable attorney's fees in respect
to any tax and other accrued absolute or contingent liabilities or claims
against NEC existing at the time of the Closing, or arising out of pre-closing
transactions or events. However, Campbell and NEC will not be liable for claims
against Companies to the extent that the obligations the NEC are required to
perform after the Closing Date in the ordinary course of business, or under
agreements mentioned in or consistent with this transaction. Campbell and NEC
shall indemnify NESCO against any and all claims from third parties made
pursuant to any laws and/or regulations covering the bulk sale of inventory and
assets.
7. Contingency - Shareholders and Companies acknowledge that NESCO's decision
-----------
to enter into the definitive agreement is particularly dependent upon (i) the
satisfactory completion by NESCO of an investigation of the business and assets
of NEC, (ii) arrangements satisfactory to NESCO concerning the continued
employment following consummation of the Transaction of certain key employees of
NEC and (iii) approval of the Transaction by the Board of Directors of NESCO and
NEC. This Agreement will be conditioned upon, among other things, (i) approval
of the Transaction by the requisite vote of the shareholders of NEC, (ii) all
necessary governmental
approvals having been obtained, and (iii) all necessary debt holder or other
contractual consents having been obtained.
8. Access to Personnel, Books and Records and Properties - At all times prior
-----------------------------------------------------
to the consummation of the Transaction, NEC shall afford NESCO and its
representatives, agents, and employees full access to the personnel, books and
records, tangible assets, agreements, and licenses of NEC as may be reasonably
requested by NESCO or its representatives, agents, or employees. NEC agrees that
prior to closing the Transaction, NESCO will be furnished with such accounting
information and reports to the extent NESCO deems necessary to enable NESCO to
perform its public reporting obligations and to satisfy the disclosure
requirements under the rules and regulations of the Securities and Exchange
Commission.
9. Confidentiality - Each party shall keep confidential any information with
---------------
respect to the other party that is not otherwise generally available to the
public or has been made available to the public by persons other than such
party, its representatives, agents, or employees, except as is necessary in
connection with the preparation of the definitive agreement relating to the
transaction or as may be required by applicable law or stock exchange rules. If
for any reason the transaction is abandoned or terminated prior to being
consummated, each party will return promptly all Page 4 -
<PAGE>
Page 4 - NESCO/NEC Agreement Dated December 18, 1998
information containing confidential or proprietary information disclosed to the
other party.
10. Publicity - Except as may be required of NESCO by applicable law or
---------
securities laws or rules, neither party hereto shall make any public
announcement or any press release regarding this proposal or the transaction or
the subject matter hereof or thereof without the prior consent of the other
party.
11. Expenses - Each party hereto will separately bear its own expenses incurred
--------
in connection with this proposal and the transaction, regardless of whether the
transaction is consummated.
12. Interim Operations - Shareholders and NEC shall continue to operate in a
------------------
manner which will maintain NEC's Largo office's value, customers, reputation,
and goodwill during the time period between the acceptance of this proposal and
closing date. Pending execution of the Agreement (or termination of this
proposal), Campbell and NEC agree that they will conduct its business only in
the ordinary course and not engage in any extraordinary transaction without
NESCO's prior consent. .
13. Closing Date - The closing date shall be as soon as practical after January
-------------
1, 1999 but not later that the close of business on Friday, January 15, 1999.
The Effective Date of the Transaction will be January 1, 1999.
AGRED & ACCEPTED: AGREED & ACCEPTED:
National Environmental Service Company National Environmental Corporation
_____________________________________ __________________________________
Eddy Patterson, Chairman Chadwick A. Campbell, President
Dated________________________________ Dated_____________________________
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF NATIONAL ENVIRONMENTAL SERVICE CO.
1. Fuel Recovery Systems, Inc., an Oklahoma Corporation
2. Lab One Analytical, Inc., an Oklahoma Corporation
3. THH Alpha, Inc., a North Carolina Corporation
4. Carolina Drilling Services, Inc., a North Carolina
Corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 152
<SECURITIES> 0
<RECEIVABLES> 8,942
<ALLOWANCES> 73
<INVENTORY> 1,061
<CURRENT-ASSETS> 10,639
<PP&E> 4,382
<DEPRECIATION> 1,956
<TOTAL-ASSETS> 13,172
<CURRENT-LIABILITIES> 6,215
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 5,674
<TOTAL-LIABILITY-AND-EQUITY> 13,172
<SALES> 2,899
<TOTAL-REVENUES> 18,304
<CGS> 1,812
<TOTAL-COSTS> 15,574
<OTHER-EXPENSES> 42
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 407
<INCOME-PRETAX> 2,365
<INCOME-TAX> 895
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,470
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
