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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, 1999
( ) 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
NESCO, INC.
(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: $29,567,000.
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 March 10, 2000 was $21,774,497.
The number of shares outstanding of each of the issuer"s classes of common stock
as of February 29, 2000 is shown below: Number of shares
Title of Class Outstanding
-------------- -----------
Common Stock, $.01 Par Value 9,255,855
Documents Incorporated by Reference
-----------------------------------
Portions of the Proxy Statement for the Annual Meeting of
Stockholders of NESCO, Inc. to be held May 18, 2000, 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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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.
PART I
Item 1. Description of Business
The Company
Since our formation in January 1986, NESCO has expanded from a servicer
of underground fuel storage tanks to a single-source provider of fueling
facility services to meet the changing needs of the dynamic fueling facility
market. Over the past few years, we have experienced substantial growth in our
revenues, our employees and our services.
Today, we provide equipment, maintenance, monitoring, installation and
other services primarily to owners and operators of fueling facilities. Our
customers include:
. Service stations;
. Convenience stores;
. Grocery store and hypermarket chains with fueling facilities; and
. Commercial and industrial fueling facilities.
Our commercial and industrial customers include commercial trucking
companies, industrial and utility fueling stations, railroads, hospitals, school
districts, oil producers and refiners, pipeline operators and federal, state and
local governments.
We provide our customers with a variety of services from turn-key
solutions to discrete products and services, allowing them to satisfy their
fueling service needs with a single full-service provider. We offer the
following products and services:
. Site management utilizing our SiteTrac.com software;
. Site development and financing;
. Fuel systems installations, upgrades and remodeling; and
. Environmental services.
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Our Industry
Over the last ten years, two major forces have impacted our industry: a
tremendous growth in non-traditional fueling facilities and an increase in
environmental laws and regulations.
The non-service station fueling business has grown as convenience stores
have grown in size, number, and importance to consumers and as grocery stores
and hypermarkets have entered the business of dispensing fuel. Moreover,
petroleum companies that have retail operations have begun upgrading their
operations with modern fueling systems and adding many of the products and
services offered by the convenience store chains. At least seven of the top 25
grocery store chains have begun building or are in the discussion and planning
stages of developing fuel facilities at their store sites. For example, one
national grocery store chain announced it expects to add fueling to 50 stores in
North Texas by 2002. The Wall Street Journal recognized this growth in an
article it published predicting that 50% of all grocery store chains will offer
petroleum sales within the next five years.
The owners and operators of these non-traditional fueling facilities
utilize fueling facilities as a method to cross-market their core business
(grocery or hypermarket) but typically do not have the expertise or resources to
manage fueling facilities. Because the logistics required for fuel delivery and
the experience necessary for site management are highly specialized, grocery
store and convenience store management prefer to outsource these
responsibilities. With the growth of non-traditional fueling facilities, the
industry is seeing that owners of fueling systems are seeking ways to contain
their operating costs through use of state-of-the-art fuel management technology
and by outsourcing certain site management activities such as environmental
compliance and facility maintenance. As a result, the industry is experiencing
an increase in demand for outsourcing the management of the fueling and
compliance responsibilities.
While experiencing growth in the number and types of fueling service
providers, the industry has also experienced growth due to increased regulations
that require strict environmental compliance and site management of these
facilities. This increased regulation has increased the cost and the expertise
required to sell fuel. The increased cost and managerial resources that must be
expended to comply with environmental regulations have created an opportunity
for established environmental protection and service companies that can assemble
the expertise, technology and financial resources to provide a complete range of
services to the fueling industry. Consequently, increased environmental
regulation has caused a greater demand for environmental and management services
from industry participants.
There also exists significant growth in the international market for
environmental and management services. Owners and operators of fueling
facilities in Europe are being required to comply with stricter environmental
laws commencing in 2000, which will eventually require all fueling tanks to have
environmental monitoring equipment. Based on industry estimates, less than 5% of
all existing fuel tanks currently have this equipment in place. This increased
regulation will create a significant demand for environmental and management
services, as, based on industry estimates, approximately one-third of the number
of existing fueling tanks are located in Europe.
Our Services
Site Management
A new service made possible by advances in technology, equipment and the
growth and acceptance of the Internet is the provision of a complete range of
site management services typically at a cost less than the owner or operator
would pay for in-house site management. The site management services we provide
to our
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customers include:
. Environmental compliance services;
. Fuel management services; and
. Facilities management.
We provide these services to our customers through SiteTrac.com, our proprietary
Internet-based information management software program that provides real-time
site management services. Our SiteTrac.com program allows the remote gathering
of information collected by our Encompass system, a proprietary leak detection
and monitoring system installed in our customer's fuel tanks. SiteTrac.com may
also be used to gather information from leak detection and monitoring systems
manufactured or installed by our competitors. This flexibility allows customers
to contract with us for their fuel and facilities management needs without
incurring an additional expense to install new monitoring systems. We believe
that this flexibility provides us with a competitive advantage over other remote
site management service providers.
SiteTrac.com allows us to manage environmental compliance for our
customers through the Internet. This software allows remote monitoring of
regulatory compliance, alarm-driven leak detection, cathodic protection
equipment and well monitoring data.
SiteTrac.com also improves fuel inventory management. By efficiently
monitoring product levels in our customer's fuel storage tanks, our customers
can optimize the timing and quantities of purchases and deliveries of fuel. Our
customers can improve cash flow management by minimizing excessive inventory
carrying costs and fuel outages and by seizing market opportunities to purchase
fuel at times when favorable prices exist.
Additionally, with SiteTrac.com, we can provide our customers with a
number of add-on services for monitoring non-fueling mechanical and electronic
units, such as refrigeration units, air compressors and security systems, among
others.
SiteTrac.com enables us to capture a segment of the fuel management
outsourcing market, particularly the outsourcing market created by the entrance
of grocery store and hypermarket chains into the retail fuel industry. These
entrants typically seek to outsource their fuel management and regulatory
compliance responsibilities in order to concentrate on their core retail
operations.
Based on industry figures, there are currently over 180,000 retail
fueling facilities in the United States, accounting for approximately 60% of all
fuel sales. The remaining 40% of fuel sales are to industrial, fleet, pipeline
and government fueling facilities. We estimate that less than 5% of the total
market is currently being remotely monitored by third party service providers.
SiteTrac.com has few site management competitors in the fuel systems market. We
believe we are well positioned to capture a significant portion of the revenues
from this emerging market for Internet-based fueling systems site management.
Site Development and Financing
With the complexity and increasingly significant cost of installing a
competitive fueling system, small- to-medium-sized operators need assistance in
bringing together all of the various aspects for site installations. We are a
leading single source provider for:
. Site analysis;
. Land acquisition;
. Facility design, construction, and equipment installation; and
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. Financing.
In 1999, we formed NESCO Acceptance Corporation to facilitate the
financing of sites for selected customers. We assist fuel facility owners or
operators by selecting and analyzing a site to determine its suitability for
constructing and operating a fueling facility. Once a site is selected and
analyzed, we design a fueling facility to meet the specific requirements of the
customer. Additionally, we evaluate our customer's financial resources and
capabilities and design a financing arrangement that best suits the customer's
needs. We offer customers assistance in the financing or leasing of the facility
on competitive terms. We generally expect to sell our lease positions in these
sites as soon as possible after the site development is completed while
retaining a residual fee.
Total expenditures in 2000 in the United States for new site development
will approach $4 billion based on industry projections of planned additions for
all convenience stores and other retail fuel providers. As a leading
single-source provider of turn-key site development services, we believe we are
well positioned to capture a portion of this market.
Fuel Systems Installations, Upgrades and Remodeling
The installation of complete fueling systems as well as upgrading
various facets of fueling systems is dependent on experience, full-service
capabilities, the ability to perform over a geographically disperse area and an
understanding of various local, state and federal agencies. We provide
full-service turn-key solutions for installing new fueling facilities and for
upgrading and remodeling existing fueling facilities. These solutions include:
. Design and installation of fueling facilities;
. Upgrade of fueling systems;
. Tank removals;
. Cathodic protection of underground storage tanks and piping;
. Equipment and installation distributor program; and
. Manufacture, sales and service of fueling systems equipment.
We are able to build fueling facilities ranging from fully automated,
non-attended systems to large convenience store facilities. We work closely with
manufacturers, distributors and subcontractors to install the key components of
these facilities, including the building, canopy, storage tanks, piping,
dispensers, electronic equipment, signs and store fixtures. We maintain overall
control over all these aspects to ensure a quality project.
We have benefitted from the recent increase in the installation of
fueling facilities by grocery store and hypermarket chains at the perimeters of
their parking lots. The Wall Street Journal predicts that 50% of all grocery
store chains are expected to offer gasoline sales by the end of 2004. This
represents a $5 billion potential market size for these new fuel installations.
This move into retail gasoline sales has provided an opportunity for us to use
our experience in the fuel services industry to become a turn-key provider of
fuel facilities.
We have also benefitted from an increase in upgrading and remodeling
activity. Many of the petroleum companies with retail operations have begun
upgrading their facilities with modern fueling systems in response to the
increased competition with the growing number of non-traditional fueling
facilities. In addition, the recent trend of consolidations involving petroleum
companies with retail operations has created a demand for our upgrading and
remodeling services as the consolidated companies generally upgrade their
fueling systems when their petroleum products are rebranded. The estimated
market size for the upgrading
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and remodeling segment is approximately $2 billion annually based on industry
figures. Our capabilities in upgrading and remodeling fuel facilities places us
in a position to capture a portion of this market.
Environmental Services
We provide a number of environmental services to our fueling systems
customers, including:
. Environmental site assessments;
. Soil and water remediation; and
. Laboratory environmental analysis.
Whenever an underground storage tank leak is suspected, an investigation
to confirm the presence of a leak must be conducted within seven days. We
perform these investigations. In addition, we may conduct site assessments for
contamination in connection with sales and financing of commercial real estate.
Our environmental services also include Phase I visual assessments and Phase II
drilling and sampling. Our staff of hydrologists, environmental engineers and
technicians:
. Review any documents regarding historical uses of the site;
. Analyze soil and water samples through our Lab One subsidiary; and
. Study the sub-surface geology to determine if there is contamination
or potential contamination of soil and water on the site.
In connection with our performance of other services, opportunities
arise for us to provide Phase III soil and water remediation services. These
services primarily involve the treatment of ground or surface water and the use
of our air sparging and vapor extraction products. These products utilize
perforated pipes to inject air into the soil to promote the degradation of
contaminants by endemic microbes and extract vapors produced by such
degradation. In some cases, contaminated soil must be removed and transported to
hazardous waste disposal sites. Our acquisition of Summit Environmental
Services, Inc. in August 1999, expanded and complemented our remediation and
environmental consulting services. Summit has been a leader in providing
efficient and cost-saving clean-up of contaminated petroleum fueling sites under
the "Pay For Performance" program adopted by the Oklahoma Corporation Commission
in 1996, which is funded through the collection of fuel taxes. Under the Pay for
Performance program, fixed amount remediation contracts are awarded by the
Oklahoma Corporation Commission and are paid from encumbered funds as
predetermined stages are completed. The average contract awarded under this
program is approximately $555,000. The Oklahoma program has become a model for
the programs which the U.S. Environmental Protection Agency (the "EPA") is
encouraging other states to adopt.
We estimate that total expenditures for these activities exceed $4.3
billion annually, including both private and government funded operations. We
believe we are well positioned to capture a portion of this market segment
through our extensive service offerings and the replication of Summit's
operations in other states as they adopt programs to clean up contaminated
fueling sites in the future.
We also provide a number of other environmental services to a
wide-variety of non-fuel facility customers, such as:
. Air quality services;
. Environmental drilling services;
. Hazardous waste field services, including asbestos and lead removal;
. Solid waste siting design and permitting;
. Compliance services, including compliance with the Resource
Conservation Recovery Act; and
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. Litigation support and expert testimony.
Our Strategy
Our objective is to maximize shareholder value through profitable
growth. In the past, our growth resulted primarily from expanding and
diversifying our services, offering these services in new geographic markets and
making strategic acquisitions. In the future, we will continue to seek and
pursue strategic acquisitions as we identify companies which will expand our
geographic scope or the scope of our services. However, we believe our primary
growth will result from executing a business strategy focused on offering our
customers an integrated package of services. For example, we expect to use our
site development and financing to expand our SiteTrac.com service offerings and
customer base. Likewise, we expect to cross-market our environmental expertise
and compliance management services to our current SiteTrac.com customers.
Finally, we expect to market all of our services to customers who rely on our
environmental expertise.
Recent Acquisitions
During 1999, we acquired the following businesses and assets:
. In January 1999, we acquired the assets of National Environmental
Corporation located in Largo, Florida. National Environmental was
primarily a provider of environmental services to the owners and
operators of fueling systems and to others.
. In January 1999, we acquired the assets of a group of companies based
in Greenville, North Carolina, operating as UTTS Environmental. The
companies were providers of environmental services to owners and
operators of fueling systems.
. In April 1999, we acquired the assets of a division of Arizona
Instrument Corporation based in Phoenix, Arizona. The assets primarily
consisted of the Soil Sentry and Encompass leak detection systems for
underground and above-ground storage tanks and their related patents.
. In May 1999, we acquired the assets of TET Environmental Services,
Inc. based in Columbia, South Carolina. TET Environmental Services was
a provider of environmental services to owners and operators of
fueling systems and others.
. In September 1999, we acquired Summit Environmental Services, Inc.
located in Enid, Oklahoma, pursuant to a merger. Summit Environmental
Services was a provider of environmental services to owners and
operators of fueling systems.
Competition
We operate in a highly competitive environment. We compete against a
large number of other companies and individual consultants in providing our
various types of services, but very few companies offer the complete range of
services which we provide. We have fewer competitors for the turn-key
installation of fueling facilities for gasoline service stations and grocery and
convenience store chains. The main factors on which we compete for business are
personal contacts, experience, reputation, price, availability and location. We
often must participate in a competitive bidding process in attempting to obtain
contracts for our services.
For certain competitive bid and other projects, particularly those
involving large expenditures for
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labor or materials, the financial strength of the bidder may be an important
factor. Many of our competitors have substantially greater financial and human
resources than we do.
Marketing
We maintain a full-time marketing staff of nine and have several other
executives and division managers who spend a significant amount of time calling
on prospective customers. Our marketing efforts are supported through national
trade publication advertising, direct mail and trade show participation. Our
marketing staff is responsible for responding to inquiries obtained through our
advertising in trade publications, direct mail and trade show participation. A
large percentage of our business is from previous customers and their referrals.
We also obtain referrals from petroleum equipment manufacturers and
environmental consultants with whom we have previously worked. Approximately 30%
of the services performed by us has been pursuant to projects awarded by
competitive bidding.
We utilize distributors to generate sales outside the United States. We
currently have relationships with eight distributors covering the marketing and
distribution of our Encompass system in Sweden, Denmark, Norway, Netherlands,
United Kingdom, Spain, Poland and Belgium.
Effect of Governmental Regulations
The Resource Conservation Recovery Act, as amended by the Hazardous and
Solid Waste Amendment of 1984, 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 lining, piping and cathodic protection standards
established by the EPA. Required upgrading was to be completed by December 22,
1998. State regulations may be more stringent than federal regulations. Some
states 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.
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, our only exposure would be based on general
negligence principles and the contractual arrangement with the owner or operator
of the tank. We maintain insurance coverage to protect us against any
liabilities which may arise from the installation, removal or replacement of
underground storage tanks. We believe that the amount and coverage of our
insurance are standard in the industry and are consistent with prudent
practices. However, there is no assurance that this insurance will be sufficient
to avoid any substantial loss or liability by virtue of any negligent
performance of or breach of our contractual obligations by us.
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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 the states in which we operate. We and/or our
employees maintain licenses in 19 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 our experience, the
backgrounds of our 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. We have not encountered any material
difficulties in obtaining required licenses, but we cannot predict when
licensing requirements may change.
As part of the remediation services offered to our customers, we often
dispose of, or arrange for the disposal of, contaminated soil or water. Prior to
any disposal, we 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 continue to be excluded for
the most part from the scope of these provisions. Since virtually all of the
material which we dispose or arrange the disposal of consists of petroleum
products and material contaminated by petroleum products, we are largely exempt
from these provisions of CERCLA. The only exposure we 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
landfills.
Dependence on Major Customers
We received 10% of our total revenues from a regional oil marketer in
1999 and 14% of our total revenues from a major oil marketer in 1998. We believe
that we have a broad overall customer base and the loss of any single customer
would not have a material adverse effect on our business, although the loss of
several of these customers could have such an effect.
Trademarks, Licenses, and Patents
On November 1, 1992, we entered into a license agreement to use patented
technology for testing above-ground storage tanks. The patent is dated January
1, 1990, and the license expires at the expiration of the patent and requires us
to pay the licensor 2% of our annual revenues from use of the technology. We
have not yet realized significant revenues from the use of such technology, but
anticipate that utilization of the technology may produce significant new
revenue if more states and the Federal government enact legislation for
above-ground storage tank testing and upgrading.
We have a number of patents on our Encompass and Soil Sentry products
acquired from Arizona Instrument Corporation as part of an acquisition of the
tanking monitoring division of that company. The patents relate to devices for
the electronic monitoring of tank leaks. These patents cover:
Description of Patent Patent No. Issue Date
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Fuel Tank Vent Valve and Probe Assembly 5,706,857 January 13, 1998
Fuel Tank Transducer Module Circuit 5,594,352 January 14, 1997
Soil Pollution Monitory System 4,618,855 October 10, 1986
Liquid Measuring System and Methods 5,939,634 August 17, 1999
Liquid Measuring System and Methods 5,979,233 November 9, 1999
We also own a patent on a liquid separator (patent no. 5,229,015 issued
July 20, 1993) acquired from Nautus, Inc. The gravity type liquid separator
(commonly called an oil/water separator) is a device used
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to separate a mixture of immiscible liquids of different densities. The patent
covers the randomly arranged, loosely packed, coalescing medium within a
container.
We own the registered trademark, Soil Sentry(R) and, subject to the
rights of the American Petroleum Institute, Encompass(R). We have a pending
trademark application for the registration of SiteTrac.com with the United
States Patent and Trademark Office.
We currently rely on a combination of patent, trademark, service mark
and trade secret laws and contractual provisions to establish and protect our
proprietary technology in our services. Although we currently have no patented
or proprietary technology that would preclude or inhibit competitors from
entering our markets, we believe our success is partially dependant upon our
proprietary technology. We cannot assure you that the steps taken by us to
protect our proprietary technology will prove sufficient to prevent infringement
or misappropriation of our technology or to deter the development or acquisition
of similar or superior technology by others. In addition, litigation may be
necessary to enforce our intellectual property rights, to protect our trade
secrets, to determine the proprietary rights of others, or to defend against
claims of infringement, misappropriation or invalidity. Litigation could result
in substantial costs and a diversion of our resources.
We recently changed our name from National Environmental Service Co. to
NESCO, Inc. We have used the name NESCO in our business ever since the company
was formed, but we have never registered that name as a trade mark or service
mark. We recently received a notice from another company claiming that we are
infringing on its registered service mark. We do not believe that we are
infringing on that service mark and expect to vigorously defend any legal
proceedings that may be brought on this issue.
Employees
As of January 31, 2000, we had 212 full-time employees, including five
senior managers, 16 division managers, 24 field supervisors, nine marketing
employees, 36 professionals, 38 accounting/clerical/drafting personnel, and 84
technical and field personnel. Our professionals have expertise in hydrogeology,
environmental engineering, biology and chemistry. Our employees are not
represented by any collective bargaining agreement, and we believe our employee
relations to be excellent.
Item 2. Description of Property.
We own the following properties:
. Corporate Headquarters - Tulsa, Oklahoma (offices - 9000 square feet;
warehouse - 10,000 square feet; and equipment storage yard -4,500
square feet). The property is mortgaged to secure indebtedness having
an outstanding principal balance of $385,002 at December 31, 1999.
. San Antonio Division Offices - San Antonio, Texas (office/warehouse -
4000 square feet).
. Columbia Division Offices - Columbia, South Carolina (office -5300
square feet; warehouse - 3680 square feet; and shed - 2,784 square
feet).
Both the San Antonio and Columbia properties are security for our
secured line of credit which had an outstanding principal balance of $7.45
million at January 31, 2000.
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We also lease the following office and/or warehouse facilities:
<TABLE>
<CAPTION>
Annual
------
Location Square Feet Lease Payments Lease Expiration
-------- ----------- -------------- ----------------
<S> <C> <C> <C>
Office and warehouse facilities:
Dallas, Texas 8,230 $35,520 9-30-2001
Clearwater, Florida 12,946 $66,000 9-14-2003
Pittsburgh, Pennsylvania 7,400 $18,000 9-30-2001
Office facilities:
Oklahoma City, Oklahoma 3,600 $16,800 Month-to-month*
Greenville, North Carolina 2,000 $31,200 9-30-2000
Tempe, Arizona 8,928 $65,353 5-31-2004
Macon, Georgia 2,340 $17,550 9-30-2002
Enid, Oklahoma 2,640 $13,200 7-31-2003
Edmond, Oklahoma 1,855 $22,800 Month-to-month*
Warehouse facilities:
South Charleston, West Virginia 1,000 $4,800 Month-to-month
</TABLE>
*We intend to build a new facility in Oklahoma City in the near future
to consolidate our Oklahoma City and Edmond, Oklahoma, offices.
At January 31, 2000, we had outstanding loans aggregating approximately
$12.2 million in principal amount which are secured by our vehicles, equipment,
real estate and other assets. This amount includes the balance owed under our
line of credit, which was $7.45 million at January 31, 2000.
Item 3. Legal Proceedings
We are not a party to any litigation which, in our judgment, would have
a material adverse effect on our operations or financial condition if adversely
determined. However, due to the nature of our business, we are, from time to
time, and are currently, a party to certain legal proceedings arising in the
ordinary course of our business.
Item 4. Submission of Matters to a Vote of Security Holders.
On November 5, 1999, a proposal to amend our certificate of
incorporation to change the name of the Company from National Environmental
Service Co. to NESCO, Inc. was submitted the holders of a majority of our
outstanding common stock.. These shareholders, who held a total of 4,723,346
shares of our outstanding common stock, adopted the resolution by a written
consent to action in lieu of a special meeting of the shareholders. An
information statement notifying our shareholders was first mailed to them on or
about December 7, 1999. The amended Certificate of Incorporation was filed with
the Oklahoma Secretary of State on December 9, 1999, but was not effective until
December 27, 1999.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common stock began trading on March 7, 1995, on the OTC Bulletin Board.
Prior to that time, there was no public trading market for the stock. On January
24, 1996, our common stock began trading on the Nasdaq SmallCap Market under the
symbol "NESC." We have applied to have our common stock traded on the Nasdaq
National Market under the same symbol. The following table sets forth, for the
periods indicated, the high and low bid prices of our common stock on the Nasdaq
SmallCap Market. These quotations reflect interdealer prices, without retail
markup, markdown or commissions, and may not represent actual transactions.
1998: High Low
---- ---
First quarter $3.375 $ 2.25
Second quarter 2.75 1.50
Third quarter 2.00 1.125
Fourth quarter 2.00 1.375
1999:
First quarter $2.875 $ 1.50
Second quarter 2.875 1.875
Third quarter 4.00 2.375
Fourth quarter 3.313 2.125
At December 31, 1999, our common stock was held by 223 holders of record
and by an estimated 1,190 additional shareholders whose shares were registered
in street name.
We do not presently intend to declare or pay dividends on our common
stock. Whether we pay dividends in the future will depend on the applicable
legal and contractual restrictions, as well as our earnings, financial position,
expansion plans and objectives and cash requirements, among other factors. Our
loan agreement with the Bank of Oklahoma, N.A. prohibits us from paying any
dividends on our common stock without the bank's consent.
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, 1999, to the
Year Ended December 31, 1998.
The Company had revenues of $29,567,000 in 1999 compared to $21,207,000
in 1998, a 39% increase. Fueling systems installation and upgrade revenue
increased 8% to $16,067,000 in 1999 as compared to $14,872,000 for 1998,
consisting of a 39% increase in construction and repair revenues to $11,603,000
in 1999 compared to $8,331,000 in 1998, partially offset by a 47% decline in
cathodic protection revenues ($3,403,000 in 1999 compared to $6,368,000 in
1998). Construction and repair revenues increased due to a significant increase
in the installation of turn-key ground-up fueling systems in 1999. The reduction
in cathodic protection revenues resulted from greater 1998 sales of cathodic
protection kits and increases in the 1998 installation of cathodic protection
systems by the Company due to the
12
<PAGE>
December 1998 deadline for regulatory compliance by owners and operators of
underground storage tanks.
Revenues from our environmental segment increased 128% to $12,562,000
in 1999 compared to $5,520,000 in 1998 due to increased business activity.
Within our environmental segment, site assessments revenue increased 194% or
$3,021,000 in 1999 compared to 1998 ($4,574,000 compared to $1,553,000) and the
remediation portion of the environmental segment increased $3,890,000 in 1999
compared to 1998 ($7,979,000 compared to $4,089,000). The increases resulted
from the addition of activities and contracts of TET Environmental Services in
May 1999, and the greater volume of environmental work added by the Company's
Oklahoma and South Carolina divisions not included in the revenues added by TET
Environmental's contracts. .
The miscellaneous segment increased 15% or $123,000 in 1999 compared to
1998 ($938,000 compared to $815,000). This increase resulted from the pump and
service maintenance operation in Dallas, Texas, and Tulsa, Oklahoma. The pump
service and maintenance revenues account for substantially all of the
miscellaneous segment revenues.
Costs and expenses in 1999 were $18,826,000 compared to $12,716,000 in
1998, an increase of 48%. Costs and expenses for 1999 represented 64% of total
revenue for the year compared with 60% for 1998. The increase in percentage of
costs and expenses in 1999 resulted from decreased sales of cathodic protection
goods and services during 1999, a revenue category with a relatively high gross
margin. The increase in the amount of costs and expenses is due generally to the
increased business activity during 1999.
The percentage of increase in labor costs was 93%, higher than the 39%
growth in revenues during the same period, due to the addition of employees from
various acquisitions. The acquisition of the assets of four companies during
1999 added many employees to the payroll (National Environmental Corporation and
UTTS Environmental in January 1999, TET Environmental Services in April 1999,
and a division of Arizona Instrument Corporation in May 1999. Labor costs for
1999 were $4,878,000 in 1999 compared to $2,527,000 due to the greater use of
our employees on Company jobs. This greater usage of our personnel was enhanced
by our acquisition of various companies and subsequent sharing of personnel
between divisions.
Supplies and materials cost increased 58% in 1999 to $6,133,000
compared to $3,881,000 for 1998. The increase was due to the increase in
business activity primarily from the greater volume of turn-key fueling systems
installed in 1999 compared to 1998. Depreciation expense increased 28%, to
$476,000 compared to $370,000 in 1998, due to the significant increase in
vehicles and equipment added to the company during 1999. Equipment rental
expense increased $187,000, or 86%, from $216,000 in 1998 to $403,000 in 1999
due to the increased business activity and the greater use of Company personnel
as opposed to subcontractors in 1999 compared to 1998.
Lab services expense was $756,000 in 1999 compared to $173,000 in 1998.
This 338% increase was due to the addition of the environmental contracts of TET
Environmental Services in April 1999, the greater volume of environmental work
added by the Oklahoma division, and the growth in environmental work performed
by the Company's South Carolina division excluding the additional work received
from the TET Environmental contracts. Lodging on the job increased $129,000. The
lodging on job expense for 1999 was $281,000 compared to $152,000 in 1998. The
increase in work performed in 1999 and the greater use of Company personnel as
opposed to subcontractors accounted for the 85% increase. Vehicle expense except
depreciation was $430,000 in 1999 compared to $257,000 in 1998. The increase in
expense is attributable to the larger numbers of vehicles owned and maintained
by the Company through new acquisitions of vehicles and vehicles added through
acquisitions of companies in 1999.
Selling, general and administrative expenses were $6,822,000 in 1999
compared to $4,203,000 in
13
<PAGE>
1998, an increase of 62%. The $2,619,000 increase in 1999 was due to normal
salary increases and the addition of acquisitions to existing offices in Florida
and South Carolina. Also, offices were added through acquisitions in Arizona,
North Carolina, and two offices in Oklahoma. Salaries accounted for $726,000 of
the $2,619,000 increase in 1999 compared to 1998. Salaries increased 32% to
$2,981,000 in 1999 compared to $2,255,000 in 1998. Office rent, telephone
expense, and office supplies and postage were $925,000 in 1999 compared to
$484,000 in 1998. Office rent, telephone expense, and office supplies and
postage were higher due to increased business activity, the addition of four
offices, and the leasing of larger facilities for two offices to accommodate a
larger staff due to acquisitions. Bad debt expense increased to $354,000 in 1999
compared to $21,000 in 1998. Approximately 68% of the bad debt expense was
attributable to an adverse decision on a Company lawsuit for non-performance
brought against one of its suppliers on a government contract. The Company has
appealed the court's decision.
Interest expense is higher due to the larger debt balance in 1999
resulting from funding for long-term contracts, additional working capital, and
purchases of machinery and equipment. Interest expense for 1999 was $677,000
compared to $407,000 in 1998.
Discounts earned increased to $230,000 in 1999 compared to $34,000 in
1998. The discounts earned are included in other income. The increase in
discounts earned resulted from the efforts of the Company to take such discounts
when available.
Capital resources and liquidity
Cash on hand at the end of 1999 was $629,000 compared to $331,000 at the end of
1998.
On January 1, 1999, the Company acquired the assets of a company in
Largo, Florida, for $50,000 cash and the assumption of certain liabilities
totaling $95,590. The acquired business is a provider of environmental,
drilling, and related services to the owners and operators of fueling systems as
well as other businesses.
On January 11, 1999, the Company acquired the assets, subject to
certain liabilities assumed, of a group of companies based in Greenville, North
Carolina, which provides services to the owners and operators of fueling
systems. The purchase price of the assets acquired was $791,000 consisting of
$250,000 cash, notes payable in the aggregate amount of $419,000, and the award
of 40,000 shares of Company stock, and options to purchase 45,000 shares of
Company stock.
Early in the first quarter the Company repurchased 6,000 shares of its
common stock. On March 25, 1999, the Company repurchased a total of 228,000
shares of its common stock. The amount of the purchases totaled $481,000.
Options for the purchase of 50,000 shares of the Company's common stock
were exercised on April 15, 1999. The amount received by the Company upon
exercise totaled $75,000.
The Company renewed its revolving line of credit loan with Bank of
Oklahoma on April 30, 1999. The loan has a maturity date of April 30, 2002. The
interest rate is National Prime and represents a reduction from National Prime
plus .75% on the previous loan. The revolving line of credit was increased to
$7,000,000 from the previous limit of $4,500,000.
The Company obtained a $4,000,000 term loan with the Bank of Oklahoma.
The term loan provided funds for the acquisition of the assets of TET
Environmental Services, Inc., acquisition of the South Carolina office building
and property occupied by TET, acquisition of the Soil Sentry and Encompass
Systems from
14
<PAGE>
Arizona Instrument Corporation, to refinance the loan on the Company's San
Antonio office building, and to provide additional funds for future needs. The
loan maturity is April 30, 2004. The loan has an interest rate at National Prime
with a monthly payment of $81,585.
On September 9, 1999, the Company sold 120,000 treasury shares of its
common stock at $2.00 per share or $240,000.
On September 10, 1999, the Company acquired all of the issued and
outstanding shares of Summit Environmental Services, Inc., Enid, Oklahoma, in
exchange for 1,488,503 shares of the Company's common stock. The transaction was
accounted for under pooling of interests rules.
Between December 3 and December 9, 1999, the Company repurchased 4,300
shares of its common stock at an average price of $2.99 per share or $12,800.50.
The Company continued to make periodic debt repayments during this
period.
Year 2000
The Year 2000 issue represented a potentially serious information
systems problem because many software applications and operation systems written
in the past may not properly recognize calendar dates beginning in the Year
2000. This problem could force computers and other systems relying on date
sensitive computer chips to either shut down or provide incorrect data or
information.
The Company's principal exposures were (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.
The Company did not encounter material problems in either respect. The Company
developed 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. This contingency plan remains
available for implementation should any subsequent Year 2000 problems occur. 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 any remaining Year 2000
problems. Additionally, the fueling systems industry tends to utilize
electronics and systems which are not particularly date sensitive.
The Company estimates that the cost to address its Year 2000 compliance
issues was not 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 $20,000 and has not materially changed from prior
estimates. The Company believes that there will not be Year 2000 effects on
operating trends.
Item 7. Financial Statements.
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.
15
<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 2000 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
2000 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 2000 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 2000 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).
3.1b Amendment to the Amended and Restated Certificate of
Incorporation of National Environmental Service Co., dated
December 8, 1999
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
16
<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 Copy of Revolving Credit and Term Loan Agreement,
Promissory Notes, and Security Agreement dated as of July
15, 1997, between the Company and Bank of Oklahoma, N.A.,
and forms of Promissory Note and Security Agreements
executed and delivered pursuant thereto (incorporated by
reference to Exhibit 10.11 to the Registrant's Form 10-QSB
dated June 30, 1997).
10.10 Copy of Amendment One to Revolving Credit Agreement and
Term Loan Agreement dated December 2, 1997 and Promissory
Note between the Company and Bank of Oklahoma, N.A.
10.11 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).
10.12 Copy of Amendment Three to Revolving Credit and Term Loan
Agreement dated April 30, 1999 and Promissory Note between
the Company and Bank of Oklahoma, N.A. (incorporated by
reference Exhibit 10.20 to Form 10-QSB dated June 30,
1999).
10.13 Copy of Fourth Amendment to Revolving Credit and Term Loan
Agreement dated February 15, 2000 and Promissory Note
between the Company and Bank of Oklahoma, N.A.
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 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. (incorporated by reference
to Exhibit 10.18 on Form 10-KSB dated December 31, 1998).
10.19 Agreement for Acquisition of certain assets and the
assumption of certain liabilities of National Environmental
Corporation, dated December 18, 1998 (incorporated by
reference to Exhibit 10.19 on Form 10-KSB dated December
31, 1998).
10.20 Copy of Asset Purchase Agreement dated May 3, 1999, by and
between National Environmental Service Co. and TET
Environmental Services, Inc. (incorporated by reference to
Exhibit 2.1 on Form 8-K dated May 18, 1999).
10.21 Copy of Asset Purchase Agreement dated April 30, 1999, by
and between National Environmental Service Co. and Arizona
Instrument Corporation (incorporated by reference to
Exhibit 10.22 on Form 10-QSB dated June 30, 1999).
10.22 Copy of Stock Acquisition Agreement and Plan of
Reorganization dated September 10, 1999, by and between
National Environmental Service Co. and Summit Environmental
Services, Inc. (incorporated by reference to Registrant's
17
<PAGE>
Form 8-K dated September 21, 1999).
21.1 Subsidiaries of National Environmental Service Co.
23.1 Consent of Tullius Taylor Sartain and Sartain, Independent
Auditors, dated February 22, 2000
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On November 12, 1999 we filed an amendment to our current report on 8-K
previously filed on September 22, 1999, describing the September 10, 1999
acquisition of Summit Environmental Services, Inc. The transaction was accounted
for as a pooling of interests and the following financial statements reflecting
the effects of the acquisition were included in that amendment:
Independent Auditor's Report
Supplemental Consolidated Balance Sheet as of December 31, 1998
Supplemental Consolidated Statements of Income for the years ended
December 31, 1998 and 1997
Supplemental Consolidated Statement of Changes in Shareholders Equity
for the years ended December 31, 1998 and 1997
Supplemental Consolidated Statement of Cash Flows for the years ended
December 31, 1998 and 1997
Notes to Supplemental Consolidated Financial Statements
18
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheet as of December 31, 1999 F-3
Consolidated Statements of Income for the Years Ended
December 31, 1999 and 1998 F-4
Consolidated Statement of Changes in Shareholders" Equity
for the Years Ended December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998 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 NESCO, Inc. (the
"Company") as of December 31, 1999, 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 NESCO, Inc. as of December 31,
1999, 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.
As discussed in Note 15 to the financial statements, the supplemental
consolidated financial statements previously issued for the year ended December
31, 1998, have been retroactively restated for the change in accounting for
certain performance incentive contracts.
TULLIUS TAYLOR SARTAIN & SARTAIN LLP
Tulsa, Oklahoma
February 22, 2000
F-2
<PAGE>
NESCO, Inc.
CONSOLIDATED BALANCE SHEET
December 31, 1999
(In Thousands of Dollars)
<TABLE>
<S> <C>
ASSETS
------
Current assets:
Cash $ 629
Accounts receivable, trade, net of allowance for doubtful accounts of $240 7,363
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,392
Deferred income taxes 170
Materials and supplies 2,262
Prepaid expenses 158
--------
Total current assets 12,974
--------
Property and equipment, at cost:
Land 50
Buildings and improvements 1,199
Vehicles 3,027
Testing, drilling and other equipment 1,852
Furniture, fixtures and other 1,602
--------
7,730
Less accumulated depreciation 2,619
--------
Property and equipment, net 5,111
--------
Lease contracts receivable 2,157
Goodwill, net of accumulated amortization of $52 2,293
Other 360
--------
Total assets $ 22,895
========
LIABILITIES AND SHAREHOLDERS" EQUITY
------------------------------------
Current liabilities:
Current maturities of notes payable $ 1,662
Accounts payable 1,641
Accrued income taxes 776
Other accrued liabilities 793
--------
Total current liabilities 4,872
--------
Long-term notes payable 10,468
--------
Deferred income taxes 424
--------
Commitments and contingencies
Shareholders" equity:
Preferred Stock; 1,000,000 shares authorized; none issued Common Stock;
par value $.01; authorized 20,000,000 shares;
issued 9,388,643 shares 94
Additional paid-in capital 4,139
Retained earnings 3,224
Common stock in Treasury, at cost, 162,788 shares (326)
--------
Total shareholders" equity 7,131
--------
Total liabilities and shareholders" equity $ 22,895
========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
NESCO, Inc.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999 and 1998
(In Thousands of Dollars except per share amounts)
1999 1998
-------- --------
Revenue:
Fueling Systems $ 16,067 $ 14,872
Environmental 12,562 5,520
Miscellaneous 938 815
-------- --------
Total Revenue 29,567 21,207
Costs and expenses 18,826 12,716
Selling, general and administrative expenses 6,822 4,203
-------- --------
Income from operations 3,919 4,288
Other income (expense):
Interest (677) (407)
Other, net 240 122
-------- --------
Income before income taxes 3,482 4,003
-------- --------
Provision (benefit) for taxes on income
Current 1,422 1,298
Deferred (104) 219
-------- --------
1,318 1,517
-------- --------
Net income $ 2,164 2,486
======== ========
Basic net income per share $ 0.24 $ 0.27
======== ========
Diluted net income per share $ 0.23 $ 0.27
======== ========
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
NESCO, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS" EQUITY
For the years ended December 31, 1999 and 1998
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Common Additional
Common Stock Paid-in Retained Treasury
Stock shares Issued Capital Earnings Shares Total
------------ ------ ------- -------- ------ -----
Issued In Treasury
------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Dec 31, 1997 8,976,143 12,376 $ 90 $ 3,284 $ 866 $ (48) $ 4,192
Shares sold 400,000 -- 4 695 -- -- 699
Shares issued to acquire
business 12,500 -- -- 19 -- -- 19
Purchase of treasury stock -- 110,615 -- -- -- (192) (192)
Summit owner distributions
net of current income taxes (987) (987)
Net income 2,486 2,486
------------ ----------- ---------- ---------- ---------- ---------- ----------
Balance at Dec 31, 1998 9,388,643 122,991 94 3,998 2,365 (240) 6,217
Stock option issuances 120 120
Stock options exercised (50,000) (28) 103 75
Purchase of
treasury stock 249,797 (494) (494)
Sale of treasury stock (120,000) 240 240
Summit owner distributions
net of current income taxes (1,305) (1,305)
Shares and options used to
acquire businesses (40,000) 49 65 114
Net income 2,164 2,164
------------ ----------- ---------- ---------- ---------- ---------- ----------
Balance at Dec 31, 1999 9,388,643 162,788 94 4,139 3,224 (326) 7,131
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
NESCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
(In Thousands of Dollars)
1999 1998
------- -------
Operating activities:
Net income $ 2,164 $ 2,486
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 684 457
Stock options issued as consideration 120 --
Deferred taxes (104) 195
Change in:
Accounts receivable 1,361 (2,803)
Costs and estimated earnings in excess
of billings on uncompleted contracts (717) 878
Materials and supplies (308) (67)
Prepaid expense (117) 50
Accounts payable (550) (533)
Accrued liabilities 390 611
Lease contracts receivable (2,157) --
Other (704) (16)
------- -------
Net cash provided by operating activities 62 1,258
------- -------
Investing activities:
Acquisition of businesses, net of cash acquired (4,114) (498)
Purchases of property and equipment (1,678) (72)
Proceeds from sales of property and equipment 121 11
------- -------
Net cash used in investing activities (5,671) (559)
------- -------
Financing activities:
Proceeds from issuance of common stock
and exercised options 323 699
Proceeds from notes payable and
long-term obligations 4,788 2,970
Net change in line of credit 3,550 500
Decrease in notes payable to related parties -- (31)
Summit ownership distributions (1,174) (987)
Principal payments on notes payable and
long-term obligations (1,086) (3,729)
Purchase of common shares (494) (192)
------- -------
Net cash provided by financing
activities 5,907 (770)
------- -------
Increase (decrease) in cash 298 (71)
Cash, beginning of year 331 402
------- -------
Cash, end of year $ 629 $ 331
======= =======
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
NESCO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - NESCO, Inc. (the "Company"), (National
Environmental Service Co. until December 27, 1999, when it changed its
name to NESCO, Inc.) is engaged in the business of providing
installation of fueling systems, equipment, maintenance, and services
to the owners and operators of petroleum fueling systems. These
services include site management (fuel inventory management,
environmental compliance monitoring and reporting, and facility
maintenance management); site development and financing (land
acquisition, design, construction, and financing); site installation
and upgrades. The Company is also engaged in the business of
environmental services (site analysis and remediation). The Company, an
Oklahoma corporation, is headquartered in Tulsa, Oklahoma. The
Company's markets are primarily domestic with division facilities in
Oklahoma City, Oklahoma; Dallas and San Antonio, Texas; Clearwater,
Florida; Columbia, South Carolina; Greenville, North Carolina; South
Charleston, West Virginia; Greensburg, Pennsylvania; Macon, Georgia,
and Tempe, Arizona.
CONSOLIDATION - The Company owns 100% of Fuel Recovery Systems, Inc.,
Lab One Analytical, Inc. ("Lab One"), THH Alpha, Inc., Carolina
Drilling Services, Inc., and Summit Environmental Services, Inc.
("Summit"). The financial statements of these companies are
consolidated. Inter-company accounts and transactions are eliminated in
consolidation.
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 ranging from 3 to 20
years. Gains and losses on retirement of property and equipment are
recognized in the period of retirement. Depreciation expense totals
$649,000 and $452,000 for the years ended December 31, 1999 and 1998,
respectively.
NET INCOME PER SHARE - Basic earnings per share ("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.
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,
1999 and 1998, 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, 1999. The fair value of debt is
estimated based on current rates offered for similar debt.
F-7
<PAGE>
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily
of trade receivables from customers, cost and estimated earnings in
excess of billings on uncompleted contracts which will be due from
customers when billable under the contracts, and lease contracts
receivable. The Company does not require collateral from its customers
although it may have the ability to place liens. Such credit risk is
considered by management to be limited due to the Company's broad
customer base. One commercial customer accounted for 10% of sales in
1999 and a different customer for 14% of sales in 1998.
REVENUE RECOGNITION -The Company enters into fixed fee, cost-plus-fee,
and performance incentive contracts. For long-term contracts, other
than performance incentive contracts, revenue is recognized on the
percentage of completion method measured by the percentage of direct
costs to date to estimated total direct costs for each long-term
contract. For performance incentive contracts, revenue and contract
costs are recognized upon attainment of the performance criteria
specified in the contracts. For short-term and multiple unit contracts,
revenue is recognized as services are rendered, based on physical
completion of the project. Related costs are expensed as incurred.
Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined.
MANAGEMENT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and reported
amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates. Significant items subject to
such estimates and assumptions include the carrying value of long-lived
assets including goodwill; valuation allowances for receivables, and
inventories; and potential litigation claims and settlements.
COMPREHENSIVE INCOME - The Company has no comprehensive income items
for the two years in the period ended December 31, 1999. Therefore, net
income equals comprehensive income.
GOODWILL - Goodwill resulting from business acquisitions is amortized
over the estimated period of benefit of 20 years. Amortization expense
is $35,000 in 1999 and $5,000 in 1998.
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.
NEW ACCOUNTING STANDARD - The Company will adopt Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" in 2001. Currently, the Company
does not engage in hedging activities or transactions involving
derivatives.
2. ACQUISITIONS
On September 10, 1999, NESCO completed a merger with Summit
Environmental Services, Inc. by exchanging 1.49 million shares of its
common stock for all of the common stock of Summit.
F-8
<PAGE>
The merger was accounted for as a pooling of interests and
accordingly all prior period financial statements have been restated to
include the combined results of operations, financial position, and
cash flows of Summit.
The following information presents certain income statement
data of the separate companies for the periods preceding the merger
(1998 information is restated - see Note 15) (in thousands):
1999 1998
-----------------
Net Sales
NESCO $24,572 $18,304
Summit 4,995 2,903
-----------------
Total $29,567 $21,207
Net Income
NESCO $ 539 $ 1,332
Summit 1,625 1,054
-----------------
Total $ 2,164 $ 2,486
Until the merger, Summit was operated as a limited liability
company which is taxed as a partnership. Accordingly, Summit incurred
no income taxes until the merger. For purposes of presenting the
combined operation of the Company and Summit on a retroactive basis,
Summit's income has been adjusted by $429,000 in 1999 and $728,000 in
1998, representing a provision for income taxes at an effective 38%
combined federal and state tax rate. Taxes on Summit's temporary
differences have been credited to deferred income taxes payable and the
remainder has been credited to retained earnings.
There were no material transactions between NESCO and Summit
prior to the merger. The effects of conforming Summit's accounting
policies to those of NESCO were not material.
On March 3, 1999, Applied Geoscience Environmental Services,
L.L.C., which was formed and controlled by Summit's members, acquired
the operating assets of Applied Geoscience Environmental Services,
Inc., an unrelated company engaged in the environmental service
business in Oklahoma. The assets were acquired for $425,000 cash.
On January 1, 1999, the Company acquired the assets of a
company in Largo, Florida, for $50,000 cash and the assumption of
certain liabilities totaling $95,590. The acquired business is a
provider of environmental, drilling, and related services to the owners
and operators of fueling systems as well as other businesses.
On January 11, 1999, the Company acquired the assets, subject
to certain liabilities assumed, of a group of companies based in
Greenville, North Carolina, which provides services to the owners and
operators of fueling systems. The purchase price of the assets acquired
was $791,000 consisting of $250,000 cash, notes payable, and the award
of 40,000 shares of common stock, and stock options to purchase 45,000
shares at $2.00 per share.
On April 30, 1999, the Company acquired the assets of a
division of Arizona Instrument Corporation, Phoenix, Arizona, for cash
in the amount of $1,062,000. Assets acquired relate to the manufacture
and marketing of the Soil Sentry and Encompass Systems for the remote
monitoring of fueling systems.
F-9
<PAGE>
On May 7, 1999, the Company acquired assets and assumed
certain liabilities of TET Environmental Services, Inc., Columbia,
South Carolina ("TET"). TET is a provider of environmental consulting
and services to the fueling systems industry. The purchase price was
$2,328,000.
Each of the five business combinations described above was
accounted for using the purchase method of accounting. A portion of
each purchase price was allocated to assets acquired and liabilities
assumed based on estimated fair market values, at the dates of the
acquisitions, and the remainder of the purchase prices was recorded as
goodwill. Total goodwill in connection with these five acquisitions of
$2,250,000 is being amortized over 20 years.
The operating results of these acquired businesses have been
included in the consolidated statement of income from the dates of
acquisition. The table below reflects the unaudited pro forma combined
results of the Company, and the five purchase business combinations
described above as if the acquisitions had taken place at the beginning
of 1999 and 1998:
1999 1998
-----------------------
(unaudited)
Net sales $29,817 $ 28,683
Net income $ 2,099 $ 2,879
Net income per share:
Basic $ 0.23 $ 0.31
Diluted $ 0.23 $ 0.31
3. ACCOUNTS AND LEASE CONTRACTS 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, 1999,
totaled $239,000.
Accounts receivable at December 31, 1999, include amounts
subject to claims of $581,000 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.
Lease contracts receivable result from customer leases of
NESCO constructed fueling facilities that qualify as sale-type leases.
Annual future lease payments to be received under sales-type leases are
as follows (dollars in thousands):
2000 $ 243
2001 305
2002 305
2003 305
2004 305
Thereafter 3,109
------
4,572
less unearned interest at 11.5% 2,374
------
Total 2,225
less current principal portion
(included in accounts reeivable) (68)
------
$2,157
F-10
<PAGE>
4. UNCOMPLETED CONTRACTS
Costs, estimated earnings and billings on uncompleted
contracts are summarized as follows (in thousands):
1999
------
Costs incurred on uncompleted contracts $2,485
Estimated earnings recognized 6,442
------
8,927
Billings to date 6,535
------
$2,392
======
Included in the accompanying balance sheet under the following
caption:
Costs and estimated earnings in excess of
billings on uncompleted contracts $2,392
======
5. NOTES PAYABLE
Notes payable at December 31, 1999, consist of the following
(in thousands):
<TABLE>
<S> <C>
Revolving line of credit of $7,000,000 bearing interest at the Chase Manhattan
Bank prime (8.5% at December 31, 1999), payable on
April 30, 2002, with interest payable monthly. The line is
collateralized by accounts receivable, inventory, and equipment. $ 6,700
Note payable to a bank bearing interest at the Chase Manhattan prime rate
(8.5% at December 31, 1999), payable in monthly installments of
$81,585 plus interest with the final installment due April 30, 2004.
The note is collateralized by real estate, receivables, inventory,
and equipment. 3,569
Note payable to bank bearing interest at Low New York Prime rate plus .5% floating
(9.00% at December 31, 1999), 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. 385
Notes payable bearing interest at rates from 3.9% to 9.5%, payable in monthly
installments aggregating $52,843 including interest with various maturity
dates through November 2002. The notes are collateralized by vehicles
and equipment. 1,226
Other 250
---------
12,130
Less current portion (1,662)
---------
Total long-term notes payable $10,468
=========
</TABLE>
Maturities of long-term debt over the next five years are as
follows: 2000 - $1,662,000; 2001 - $1,247,000; 2002 - $7,733,000; 2003
- $982,000; 2004 - $438,000; thereafter - $68,000.
F-11
<PAGE>
The Revolving line of credit and note payable to a bank
contain certain restrictive covenants. The Company is restricted from
paying dividends and is limited as to the incurrence of additional debt
and as to capital expenditures and business acquisitions. Among other
covenants, the Company must maintain minimum leverage and current
ratios. At December 31, 1999, the Company is in compliance with its
restrictive covenants.
6. COMMITMENTS AND CONTINGENCIES
Total rent expense for the years ended December 31, 1999 and
1998, was $257,000 and $81,000 respectively. Rental commitments under
noncancelable leases are $282,000 in 2000, $243,000 in 2001, $160,000
in 2002, $129,000 in 2003, and $29,000 in 2004.
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 772,856 shares. At December 31,
1999, options to purchase 127,000 common shares at $3.00 per share and
130,000 shares at $2.00 per share are outstanding. A total of 123,600
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, 1999.
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:
1999 1998
---- ----
Net income (loss):
As reported $2,164 $2,486
Pro Forma 2,117 2,421
Basic EPS:
As reported $ 0.24 $ 0.27
Pro Forma $ 0.23 $ 0.26
Diluted EPS:
As reported $ 0.23 $ 0.27
Pro Forma $ 0.23 $ 0.26
F-12
<PAGE>
A summary of the status of the Company's employee stock
options at December 31, 1999 and 1998, and changes during the years
then ended is presented below:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------
Wtd. Avg. Wtd. Avg
Shares Exer. Price Shares Exer.Price
----------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 255,000 $ 2.75 238,000 $ 3.00
Granted 75,000 $ 2.00 75,000 $ 2.00
Forfeited (73,000) $ 2.86 (58,000) $ 2.83
----------------------------------------------
Outstanding at end of year 257,000 $ 2.49 255,000 $ 2.75
==============================================
Exercisable at end of year 123,600 $ 2.75 131,000 $ 2.73
==============================================
Weighted average fair value of options granted $ 1.43 $ 1.03
======== ========
Weighted average remaining contractual life 6.3 years 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 1999 and
1998, respectively: risk free interests rates of 5.05% and 5.51%;
expected dividend yields of 0%; expected lives of 10 years in 1999 and
1998; and expected volatility of 77%.
At December 31, 1999 and 1998, 922,586 and 926,565 shares of
common stock were reserved for the exercise of stock awards of which
665,586 and 671,565 shares were available for future grants.
The Company periodically issues stock to third parties as
consideration for services. In 1999, the Company issued options for
200,000 shares to an investor relations firm. The options are
exercisable for 120,000 shares at $2.00 per share and 80,000 shares at
$2.50 per share. The company recognized $120,000 in expense based on
the weighted-average grant date fair value of $.59 calculated using the
Black-Scholes model. Options issued to non-employees are generally
exercisable upon issuance. A summary of the status of options issued to
non-employees at December 31, 1999 and 1998, and changes during the
years then ended is presented below:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------
Wtd. Avg. Wtd. Avg
Shares Exer. Price Shares Exer.Price
----------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 113,685 $1.93 85,000 $1.56
Granted 200,000 $2.20 28,685 $3.00
Exercised (50,000) $1.50
Outstanding at end of year 263,685 $2.22 113,685 $1.93
==============================================
Exercisable at end of year 263,685 $2.22 113,685 $1.93
==============================================
Weighted average fair value of options granted $ 0.59 $ 0.98
======= ========
Weighted average remaining contractual life 3.8 years 1 year
</TABLE>
The fair value of each option granted to non-employees is
estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants
in 1999 and 1998, respectively: risk free interests rates of 5.05% and
5.56%; expected dividend yields of 0%; expected lives of 5 years in
1999 and 2 years in 1998; and expected volatility of 77%.
F-13
<PAGE>
8. SHAREHOLDERS' EQUITY
In the first quarter the Company repurchased a total of 234,000 shares
of its common stock. The amount of the purchases totaled $481,000.
Options awarded April 30, 1997, for the purchase of 50,000 shares of
the Company's common stock were exercised on April 15, 1999. The amount
received by the Company upon exercise totaled $75,000.
On September 9, 1999, the Company sold 120,000 treasury shares of its
common stock at $2.00 per share or $240,000.
On September 10, 1999, the Company acquired all of the issued and
outstanding shares of Summit Environmental Services, Inc., Enid, Oklahoma,
in exchange for 1,488,503 shares of the Company's common stock. The
transaction was accounted for under pooling of interests rules.
Between December 3 and December 9, 1999, the Company repurchased 4,300
shares of its common stock at an average price of $2.99 per share or
$13,000.
9. INCOME TAXES
The tax effects of temporary differences that give rise to the
deferred tax assets and liabilities at December 31, 1999, are as follows:
Financial basis in excess of tax basis of fixed assets $ (424)
------
Other $ 170
------
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>
1999 1998
---- ----
<S> <C> <C>
Statutory tax rate 34.0% 34.0%
State income taxes, net 2.5% 2.5%
Other 1.5% 1.4%
---- ----
38.0% 37.9%
==== ====
</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.
F-14
<PAGE>
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 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, 1999 and 1998,
were computed as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
Basic EPS Computation:
Net income available to common
shareholders $2,164 $2,486
Weighted average number of common
shares outstanding 9,195 9,293
--------------------------
Basic EPS $ 0.24 $ 0.27
====== ======
</TABLE>
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
Diluted EPS Computation:
Net income available to common
shareholders $2,164 $2,486
Weighted average number of common
shares outstanding 9,195 9,293
Incremental number of shares for
assumed exercise of options 86 12
------ ------
Total shares 9,281 9,305
------ ------
Diluted EPS $ 0.23 $ 0.27
====== ======
</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 1999 and 1998. The balance
of such options was 155,685 in 1999 with an exercise price of $3.00 per
share. The balance of such options was 230,703 in 1998 with an exercise
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 1998 has been restated from the prior year's presentation in order to
conform to the 1999 presentation.
The Company's operations are classified into two reportable business
segments: fueling installations and environmental. Each business segment is
comprised of several divisions or subsidiary operations which individually
operate predominately either in the fueling installations business or the
environmental business.
Fueling installations includes site management, site development and
financing, and site installations and upgrades. Fueling site management
services include fuel inventory management,
F-15
<PAGE>
environmental compliance monitoring and reporting, and facility management.
Site development and financing services include land acquisition, design,
construction, and financing.
Environmental services consist primarily of environmental site
analysis and remediation of contaminated sites.
The Company allocates resources and evaluates performance based on the
pre-tax income of operating divisions. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Inter-segment sales are at current market
prices. Interest and income taxes are attributed to corporate activities.
Following is a tabulation of business segment information for 1999 and
1998. Information for 1998 has been restated to conform to the 1999
presentation. Corporate information is included to reconcile segment data
to the consolidated statements.
The Company's business segments have been grouped as follows:
<TABLE>
<CAPTION>
1999 Thousands of Dollars
---------------------------------------------------------------------
Inter- Additions
Segment Pre-tax Depr. & Long-term
Segment Sales Sales Income Assets Amort. Assets
------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fueling Installations $ 16,068 $ $ 1,308 $ 9,759 $ 344 $ 906
Environmental 12,562 4,616 10,017 271 3,478
Miscellaneous 937 860 87 1,679 25 189
Corporate overhead (2,529) 1,340 44 232
---------------------------------------------------------------------
$ 29,567 $ 860 $ 3,482 $ 22,895 $ 684 $ 4,805
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
1998 Thousands of Dollars
---------------------------------------------------------------------
Inter- Additions
Segment Pre-tax Depr. & Long-term
Segment Sales Sales Income Assets Amort. Assets
------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fueling Installations $ 14,872 $ $ 2,075 $ 7,480 $ 355 $ 295
Environmental 5,520 2,399 3,497 57 198
Miscellaneous 815 2,693 1,175 2,201 30 15
Corporate overhead (1,646) 830 15 365
---------------------------------------------------------------------
$ 21,207 $ 2,693 $ 4,003 $ 14,008 $ 457 $ 873
=====================================================================
</TABLE>
13. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash paid for interest $ 625 $ 405
====== ======
Cash paid for income taxes $1,000 $ 319
====== ======
Non-cash investing and financing activities:
Issuance of common stock in connection
with business acquisitions $ 65 $ 19
Issuance of stock option and warrants
for services $ 120 $ 175
====== ======
</TABLE>
F-16
<PAGE>
14. SUBSEQUENT EVENTS
On February 15, 2000, the Company obtained an increase in its line of
credit loan from the Bank of Oklahoma. The line was increased from $7
million to $9 million. All other terms and conditions remained unchanged.
15. CHANGE IN ACCOUNTING FOR PAY FOR PERFORMANCE CONTRACTS
As disclosed in Note 2, NESCO completed a merger with Summit
Environmental Services, Inc. on September 10, 1999. In connection
therewith, the supplemental consolidated financial statements of NESCO and
Summit were included in the Company's current report on Form 8-K filed with
the Securities and Exchange Commission, which included the supplemental
statement of income for the year ended December 31, 1998. The accompanying
1998 statement of income has been restated from that included in the
Form 8-K, as described below:
Summit contracts with the Oklahoma Indemnity Fund for environmental
clean-up services under pay-for-performance contracts. The contracts
provide for installation of a clean-up system, for which specific
compensation is provided, and remediation of the contaminated site.
Incentive compensation is provided, depending on the level of reduction in
soil contamination. In NESCO's Form 8-K, Summit's pay-for-performance
incentive contracts were accounted for using the percentage of completion
method measured by the percentage of direct costs to date to estimated
total direct costs for each contract (the "cost to cost" method). In
December, 1999, the Securities and Exchange Commission issued its staff
Accounting Bulletin No. 101 on revenue recognition. Based on the provisions
of SAB 101, the Company is changing its accounting policy for pay-for-
performance contracts. Revenue for equipping and system installation is
accounted for using the percentage of completion method. Revenue for
contract performance is recognized as the performance benchmarks are
reached, at which time the related costs are recognized. The 1998 statement
of income included herein has been retroactively restated from that
previously reported to report the change in contract revenues and costs for
pay-for-performance contracts.
Prior to 1999, the Company had not accrued for compensated absences
because the amounts have been immaterial. The retroactive restatement
includes an adjustment to accrue for compensated absences.
The 1998 consolidated statement of income has been adjusted as
follows:
<TABLE>
<CAPTION>
Included Previously
Herein reported
------ --------
<S> <C> <C>
Environmental revenue $ 5,520 $ 6,435
Cost and expenses 12,716 12,875
Operating profit 4,288 4,922
Net income 2,486 2,878
Net income per share:
Basic $ 0.27 $ 0.31
======= =======
Diluted $ 0.27 $ 0.31
======= =======
</TABLE>
F-17
<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 13, 2000.
NESCO, Inc.
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.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Eddy L. Patterson Chairman, Chief Executive March 13, 2000
- -----------------------------
Eddy L. Patterson Officer and Director
/s/ James Howell President March 13, 2000
- -----------------------------
James Howell
/s/ Larry G. Johnson Vice President, Secretary, Treasurer and Chief March 13, 2000
- -----------------------------
Larry G. Johnson Financial Officer
/s/ Robert Watson Controller (Principal Accounting Officer) March 13, 2000
- -----------------------------
Robert Watson
_____________________________ Director March 13, 2000
E.R. Foraker
_____________________________ Director March 13, 2000
Albert McCutchan
_____________________________ Director March 13, 2000
Dallin Bagley
</TABLE>
F-18
<PAGE>
EXHIBITS
3.1b Amendment to the Amended and Restated Certificate of Incorporation of
National Environmental Service Co., dated December 8, 1999
10.10 Amendment One to Revolving Credit Agreement and Term Loan Agreement
dated December 2, 1997 and Promissory Note between the Company and Bank
of Oklahoma, N.A.
10.13 Fourth Amendment to Revolving Credit and Term Loan Agreement dated
February 15, 2000 and Promissory Note between the Company and Bank of
Oklahoma, N.A.
21.1 Subsidiaries of NESCO, Inc.
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 3.1b
AMENDMENT TO THE
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
NATIONAL ENVIRONMENTAL SERVICE CO.
TO: THE SECRETARY OF STATE OF OKLAHOMA
State Capitol Building
Oklahoma City, Oklahoma 73105
The undersigned Oklahoma corporation, for the purpose of amending its
Certificate of Incorporation as originally filed on March 5, 1987, and amended
and restated on March 15, 1990, and further amended on June 17, 1994, as
provided by Section 1077 of the Oklahoma General Corporation Act, hereby states
as follows:
1. The name of the corporation is: National Environmental Service Co.
2. The date of filing its original Certificate of Incorporation with
the Secretary of State of Oklahoma was March 5, 1987. Said Certificate of
Incorporation was subsequently amended and restated and an Amended and Restated
Certificate of Incorporation was filed with the Secretary of State of Oklahoma
on March 15, 1990, and further amended on June 17, 1994.
3. That Article One is hereby amended to read as follows:
"FIRST: The name of the corporation is NESCO, Inc."
4. All other provisions of the Amended and Restated Certificate of
Incorporation of the Corporation not amended hereby shall remain in full force
and effect.
5. This Amendment to the Amended and Restated Certificate of
Incorporation was set forth in a resolution duly adopted by the Board of
Directors, which declared the adoption of the Amendment to be advisable and
which ordered that the Amendment be considered by the shareholders of the
Corporation entitled to vote thereon.
6. Such Amendment was duly adopted in accordance with Sections 1073
and 1077 of the Oklahoma General Corporation Act by the written consent of the
holders of a majority of all of the issued and outstanding shares of voting
stock of the Corporation, in lieu of a special meeting thereof, on November 5,
1999.
7. Such Amendment shall not become effective until December 27, 1999.
38
<PAGE>
IN WITNESS WHEREOF, said National Environmental Service Co., has caused
its corporate seal to be affixed hereto and this Amendment to be signed by its
President and Secretary this 8th day of December, 1999.
NATIONAL ENVIRONMENTAL SERVICE CO.
ATTEST:
By:_____________________________ By:_________________________________
Larry G. Johnson, Secretary James Howell, President
39
<PAGE>
EXHIBIT 10.10
AMENDMENT ONE TO
REVOLVING CREDIT LOAN AGREEMENT
THIS FOURTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT
("Amendment"), is made and entered into effective as of December 2, 1997, by and
between NATIONAL ENVIRONMENTAL SERVICE CO., an Oklahoma corporation ("Borrower")
and BANK OF OKLAHOMA, NATIONAL ASSOCIATION, a national banking association
("Bank").
RECITALS
A. Reference is made to the Revolving Credit Loan Agreement dated
effective July 14, 1997, between Borrower and Bank (as amended, the "Credit
Agreement"), pursuant to which currently exists a (i) $2,500,000 Revolving Line
and (ii) $500,000 Term Loan.
B. Borrower has requested Bank to increase the principal amount of
the $2,500,000 Revolving Line to $3,000,000. Bank has agreed to accommodate
Borrower's request, subject to the terms and conditions set forth below. All
terms used herein shall have the meanings given in the Credit Agreement, unless
otherwise expressly defined.
For valuable consideration received, the parties agree to the following:
AGREEMENT
1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is
------------------------------
amended as follows:
1.1. Section 1.53 is hereby amended to read: "'2,500,000
Note' means the "$3,000,000 Revolving Credit Note". The form of the
$3,000,000 Revolving Credit Note is attached as Schedule "1.1"
--------------
to this Amendment. All references in the Credit Agreement to
"$2,500,000" are hereby deleted and replaced with "$3,000,000".
2. CONDITIONS PRECEDENT. The making of any loan provided for
--------------------
herein, shall be conditioned upon the Borrower executing and/or delivering the
following:
2.1. This Amendment, with all schedules attached.
2.2. $3,000,000 Revolving Credit Note.
2.3 Amendment One to Real Estate Deed of Trust and Security
Agreement, in the form and content of Schedule "2.3"
--------------
attached hereto.
40
<PAGE>
2.4 Any other instruments, documents and/or agreements
reasonably required by Bank in connection herewith.
3. RATIFICATION. Borrower hereby ratifies and confirms all Loan
------------
Documents to which it is a party, and represents and warrants that: (i) the Loan
Documents remain in full force and effect and unchanged except as expressly
amended hereby, (ii) all representations and warranties made thereunder are true
and correct as of the date hereof and (iii) no Event of Default exists as of the
execution of this Amendment. Borrower further represents and warrants that the
Security Agreement and Deed of Trust delivered to Bank in connection with the
Credit Agreement remain in full force and effect, and that each shall
additionally secure payment of the $3,000,000 Revolving Credit Note, together
with extensions, renewals and changes in form thereof.
4. RATIFICATION (Guaranty). Each Guarantor, Albert A. McCutchan
-----------------------
and Eddy Patterson, hereby ratify and confirm their respective Guaranty
Agreements, and agrees that it is hereby amended to evidence that it shall
additionally guaranty payment of the $3,000,000 Revolving Credit Note, together
with extensions, renewals and changes in form thereof. Each Guarantor represents
and warrants to Bank that it is in full and complete compliance with the terms
and conditions of the guaranty Agreement, and any representations and warranties
made therein remain true and correct in all material respects.
5. GOVERNING LAW AND BINDING EFFECT. This instrument shall be
--------------------------------
governed by and construed in accordance with and governed by the laws of the
State of Oklahoma, and shall be binding upon and inure to the benefit of the
parties hereto, their respective heirs, executors, administrators, trustees,
successors and assigns.
6. COSTS, EXPENSES AND FEES. Borrower agrees to pay all costs,
------------------------
expenses and fees incurred in connection herewith.
"Borrower"
NATIONAL ENVIRONMENTAL SERVICE
CO., an Oklahoma corporation
By ________________________________________
Eddy Patterson, President
"Bank"
BANK OF OKLAHOMA, NATIONAL
ASSOCIATION
By ________________________________________
Kevin M. Lackner, Vice President
41
<PAGE>
Schedule "1.1"
--------------
($3,000,000 Revolving Credit Note)
PROMISSORY NOTE
$3,000,000 December 2/nd/, 1997
Tulsa, Oklahoma
FOR VALUE RECEIVED, the undersigned, NATIONAL ENVIRONMENTAL SERVICE
COMPANY ("Maker"), promises to pay to the order of BANK OF OKLAHOMA, N.A.
("Lender"), at its offices in Tulsa, Oklahoma, the principal sum of THREE
MILLION AND NO/100THS DOLLARS ($3,000,000) or, if less, the aggregate sum of
advances made by Lender to Maker under the Revolving Credit and Term Loan
Agreement between Maker and Lender dated July 14, 1997, as amended, payable as
follows:
a. Principal. Principal shall be payable on July 31, 1998.
---------
b. Interest. Interest shall be payable on the first day of each
--------
month, commencing the first day of January, and at maturity.
Interest shall accrue on the principal balance outstanding
hereunder and on any past due interest hereunder at a rate at
all times equal to the Prime Rate (defined below), plus one
and one-half percent (1.5%) per annum.
If any payment shall be due on a Saturday or Sunday or upon any other day on
which state or national banks in the State of Oklahoma are closed for business
by virtue of a legal holiday for such banks, such payment shall be due and
payable on the next succeeding banking day and interest shall accrue to such
day. All interest due hereon shall be computed on the actual number of days
elapsed (365 or 366) based upon a 360-day year.
Such installment payments are to be applied first to the payment of
interest on the principal balance from time to time remaining unpaid at the
aforesaid rate, and any balance shall be used to reduce the principal balance;
except that if any advances made by the holder hereof under the terms of any
instrument, document or agreement executed by Maker in connection herewith have
not been repaid, any monies received may, at the option of holder, be applied
first to repay such advances and interest thereon, and the balance, if any,
applied to any installment then due. Any prepayments shall be applied to
installments in the inverse order of occurrence.
"Prime Rate" shall mean a fluctuating interest rate per annum as in
effect from time to time, which interest rate per annum shall at all times be
equal to the rate of interest announced publicly from time to time (whether or
not charged in each instance), by The Chase Manhattan Bank, N.A., at New York,
New York ("Rate Bank"), as its base rate or general reference rate. Each change
in the Prime Rate (or any component thereof) shall become effective hereunder
without notice to Maker (which notice is hereby expressly waived by Maker), on
the effective date of each such change. Should the Rate Bank abolish or abandon
the practice of announcing or publishing a Prime Rate, then the Prime Rate used
during the remaining term of this Note shall be that interest rate or other
general reference rate then in effect at the Rate Bank which, from time to time,
in the reasonable judgment of Bank, most effectively approximates the initial
definition of the "Prime Rate." Maker acknowledges that Lender may, from time to
time, extend
<PAGE>
credit to other borrowers at rates of interest varying from, and having no
relationship to, the Prime Rate. The rate of interest payable upon the
indebtedness evidenced by this Note shall not, however, at any time exceed the
maximum rate of interest permitted under the laws of the State of Oklahoma for
loans of the type and character evidenced by this Note.
All payments under this Note shall be made in legal tender of the
United States of America or in other immediately available funds at Lender's
office described above, and no credit shall be given for any payment received by
check, draft or other instrument or item until such time as the holder hereof
shall have received credit therefor from the holder's collecting agent or, in
the event no collecting agent is used, from the bank or other financial
institution upon which said check, draft or other instrument or item is drawn.
From time to time the maturity date of this Note may be extended or
this Note may be renewed, in whole or in part, or a new note of different form
may be substituted for this Note and/or the rate of interest may be changed, or
changes may be made in consideration of loan extensions, and the holder, from
time to time, may waive or surrender, either in whole or in part, any rights,
guarantees, security interests or liens given for the benefit of the holder in
connection herewith; but no such occurrences shall in any manner affect, limit,
modify or otherwise impair any rights, guarantees or security of the holder not
specifically waived, released or surrendered in writing, nor shall any maker,
guarantor, endorser or any person who is or might be liable hereon, either
primarily or contingently, be released from such liability by reason of the
occurrence of any such event. The holder hereof, from time to time, shall have
the unlimited right to release any person who might be liable hereon; and such
release shall not affect or discharge the liability of any other person who is
or might be liable hereon.
If any payment required by this Note to be made is not made when due,
or if any default occurs under any loan agreement or under the provisions of any
mortgage, security agreement, assignment, pledge or other document or agreement
which provides security for the indebtedness evidenced by this Note, the holder
hereof may, at its option, without notice or demand, declare this Note in
default and all indebtedness due and owing hereunder immediately due and
payable. Interest from the date of default on such principal balance and on any
past due interest hereunder shall accrue at the rate of five percent (5%) per
annum above the nondefault interest rate accruing hereunder. The Maker and any
endorsers, guarantors and sureties hereby severally waive protest, presentment,
demand, and notice of protest and nonpayment in case this Note or any payment
due hereunder is not paid when due; and they agree to any renewal, extension,
acceleration, postponement of the time of payment, substitution, exchange or
release of collateral and to the release of any party or person primarily or
contingently liable without prejudice to the holder and without notice to the
Maker or any endorser, guarantor or surety. Maker and any guarantor, endorser,
surety or any other person who is or may become liable hereon will, on demand,
pay all costs of collection, including reasonable attorney fees of the holder
hereof in attempting to enforce payment of this Note and reasonable attorney
fees for defending the validity of any document securing this Note as a valid
first and prior lien.
Upon the occurrence of any default hereunder, Lender shall have the
right, immediately and without further action by it, to set off against this
Note all money owed by Lender in any
<PAGE>
capacity to the Maker or any guarantor, endorser or other person who is or might
be liable for payment hereof, whether or not due, and also to set off against
all other liabilities of Maker to Lender all money owed by Lender in any
capacity to Maker; and Lender shall be deemed to have exercised such right of
setoff and to have made a charge against such money immediately upon the
occurrence of such default even though such charge is made or entered into the
books of Lender subsequently thereto.
The holder of this Note may collect a late charge not to exceed an
amount equal to five percent (5%) of the amount of any payment which is not paid
within ten (10) days from the due date thereof, for the purposes of covering the
extra expenses involved in handling delinquent payments. This late charge
provision shall not be applicable in the event the holder hereof, at its option,
elects to receive interest at the increased rate as provided hereunder in the
event of default.
This Note is given for an actual loan of money for business purposes
and not for personal, agricultural or residential purposes, and is executed and
delivered in the State of Oklahoma and shall be governed by and construed in
accordance with the laws of the State of Oklahoma.
This Note is an amendment and increase to the $2,500,000 Note dated
July 14, 1997 between Maker and Lender.
NATIONAL ENVIRONMENTAL
SERVICE COMPANY
By_______________________________
Eddy Patterson, President
<PAGE>
EXHIBIT 10.13
FOURTH AMENDMENT TO
REVOLVING CREDIT AND TERM LOAN AGREEMENT
THIS FOURTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT
("Amendment"), is made and entered into effective as of February 15, 2000, by
and between NATIONAL ENVIRONMENTAL SERVICE CO., an Oklahoma corporation
("Borrower") and BANK OF OKLAHOMA, NATIONAL ASSOCIATION, a national banking
association ("Bank").
RECITALS
A. Reference is made to the Revolving Credit Loan Agreement dated
effective July 14, 1997, Amendment One to Revolving Credit Loan Agreement dated
December 2, 1997, Amendment Two to Revolving Credit Loan Agreement dated July 2,
1998, and Amendment Three to Revolving Credit Loan Agreement dated April 30,
1998, between Borrower and Bank (as amended, the "Credit Agreement"), pursuant
to which currently exists a $7,000,000 Revolving Line and a $4,000,000 Term
Loan. All terms used herein shall have the meanings given in the Credit
Agreement, unless otherwise expressly defined.
B. Borrower has requested Bank to increase the principal amount of the
$7,000,000 Revolving Line to $9,000,000. Bank has agreed to accommodate
Borrower's request, subject to the terms and conditions set forth below.
AGREEMENT
For valuable consideration received, the parties agree to the following:
1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is
------------------------------
amended as follows:
1.1. Section 1.53 is hereby amended to delete all references to
the $7,000,000 Revolving Credit Note and replace with the "$9,000,000
Revolving Credit Note". The form of the $9,000,000 Revolving Credit Note
is attached as Schedule "1.4" to this Amendment. All references in the
-------------
Credit Agreement to "$7,000,000" are hereby deleted and replaced with
"$9,000,000".
2. CONDITIONS PRECEDENT. The making of any loan provided for herein,
--------------------
unless otherwise noted herein or waived in writing by Bank, shall be conditioned
upon the Borrower executing and/or delivering the following:
2.1. This Amendment, with all schedules attached.
2.2. $9,000,000 Revolving Credit Note.
<PAGE>
2.3. Any other instruments, documents and/or agreements
reasonably required by Bank in connection herewith, including without
limitation any amendments to the real estate collateral documents
together with applicable title assurances satisfactory to Bank.
3. RATIFICATION. Borrower hereby ratifies and confirms all Loan
------------
Documents to which it is a party, and represents and warrants that: (i) the Loan
Documents remain in full force and effect and unchanged except as expressly
amended hereby, (ii) all representations and warranties made thereunder are true
and correct as of the date hereof and (iii) no Event of Default exists as of the
execution of this Amendment. Borrower further represents and warrants that the
Security Agreement and Deed of Trust delivered to Bank in connection with the
Credit Agreement remain in full force and effect, and that each shall
additionally secure payment of the $9,000,000 Revolving Credit Note and the
$4,000,000 Term Note, together with extensions, renewals and changes in form
thereof.
4. NAME REPRESENTATION. Borrower hereby represents and warrants to
--------------------
Bank that its name has been changed to "NESCO, INC." and that evidence thereof
(e.g., copies of filed amendments with the appropriate government offices)
promptly shall be delivered to Bank; whereupon, the parties shall execute
appropriate UCC-1 amendments for filing.
5. GOVERNING LAW AND BINDING EFFECT. This instrument shall be
--------------------------------
governed by and construed in accordance with and governed by the laws of the
State of Oklahoma, and shall be binding upon and inure to the benefit of the
parties hereto, their respective heirs, executors, administrators, trustees,
successors and assigns.
6. COSTS, EXPENSES AND FEES. Borrower agrees to pay all costs,
------------------------
expenses and fees incurred in connection herewith.
"Borrower"
NATIONAL ENVIRONMENTAL SERVICE
CO., an Oklahoma corporation
By ________________________________________
Larry G. Johnson - Vice President & Sec.-Treas.
"Bank"
BANK OF OKLAHOMA, NATIONAL ASSOCIATION
By ________________________________________
Kevin M. Lackner, Senior Vice President
<PAGE>
Schedule "1.4"
-------------
($9,000,000 Revolving Credit Note)
PROMISSORY NOTE
$9,000,000 February 15, 2000
Tulsa, Oklahoma
FOR VALUE RECEIVED, the undersigned, NATIONAL ENVIRONMENTAL SERVICE
COMPANY ("Maker"), promises to pay to the order of BANK OF OKLAHOMA, N.A.
("Lender"), at its offices in Tulsa, Oklahoma, the principal sum of NINE MILLION
AND NO/100THS DOLLARS ($9,000,000) or, if less, the aggregate sum of advances
made by Lender to Maker under the Revolving Credit and Term Loan Agreement
between Maker and Lender dated July 14, 1997, as amended, payable as follows:
a. Principal. Principal shall be payable on April 30, 2002.
---------
b. Interest. Interest shall be payable on the first day of each
--------
month, commencing the first day of March, 2000, and at maturity.
Interest shall accrue on the principal balance outstanding
hereunder and on any past due interest hereunder at a rate at all
times equal to the Prime Rate (defined below) per annum.
If any payment shall be due on a Saturday or Sunday or upon any other day on
which state or national banks in the State of Oklahoma are closed for business
by virtue of a legal holiday for such banks, such payment shall be due and
payable on the next succeeding banking day and interest shall accrue to such
day. All interest due hereon shall be computed on the actual number of days
elapsed (365 or 366) based upon a 360-day year.
Such installment payments are to be applied first to the payment of
interest on the principal balance from time to time remaining unpaid at the
aforesaid rate, and any balance shall be used to reduce the principal balance;
except that if any advances made by the holder hereof under the terms of any
instrument, document or agreement executed by Maker in connection herewith have
not been repaid, any monies received may, at the option of holder, be applied
first to repay such advances and interest thereon, and the balance, if any,
applied to any installment then due. Any prepayments shall be applied to
installments in the inverse order of occurrence.
"Prime Rate" shall mean a fluctuating interest rate per annum as in
effect from time to time, which interest rate per annum shall at all times be
equal to the rate of interest announced publicly from time to time (whether or
not charged in each instance), by The Chase Manhattan Bank, N.A., at New York,
New York ("Rate Bank"), as its base rate or general reference rate. Each change
in the Prime Rate (or any component thereof) shall become effective hereunder
without notice to Maker (which notice is hereby expressly waived by Maker), on
the effective date of each such change. Should the Rate Bank abolish or abandon
the practice of announcing or publishing a Prime Rate, then the Prime Rate used
during the remaining term of this Note shall be that interest rate or other
general reference rate then in effect at the Rate Bank which, from
47
<PAGE>
time to time, in the reasonable judgment of Bank, most effectively approximates
the initial definition of the "Prime Rate." Maker acknowledges that Lender may,
from time to time, extend credit to other borrowers at rates of interest varying
from, and having no relationship to, the Prime Rate. The rate of interest
payable upon the indebtedness evidenced by this Note shall not, however, at any
time exceed the maximum rate of interest permitted under the laws of the State
of Oklahoma for loans of the type and character evidenced by this Note.
All payments under this Note shall be made in legal tender of the
United States of America or in other immediately available funds at Lender's
office described above, and no credit shall be given for any payment received by
check, draft or other instrument or item until such time as the holder hereof
shall have received credit therefor from the holder's collecting agent or, in
the event no collecting agent is used, from the bank or other financial
institution upon which said check, draft or other instrument or item is drawn.
From time to time the maturity date of this Note may be extended or
this Note may be renewed, in whole or in part, or a new note of different form
may be substituted for this Note and/or the rate of interest may be changed, or
changes may be made in consideration of loan extensions, and the holder, from
time to time, may waive or surrender, either in whole or in part, any rights,
guarantees, security interests or liens given for the benefit of the holder in
connection herewith; but no such occurrences shall in any manner affect, limit,
modify or otherwise impair any rights, guarantees or security of the holder not
specifically waived, released or surrendered in writing, nor shall any maker,
guarantor, endorser or any person who is or might be liable hereon, either
primarily or contingently, be released from such liability by reason of the
occurrence of any such event. The holder hereof, from time to time, shall have
the unlimited right to release any person who might be liable hereon; and such
release shall not affect or discharge the liability of any other person who is
or might be liable hereon.
If any payment required by this Note to be made is not made when due,
or if any default occurs under any loan agreement or under the provisions of any
mortgage, security agreement, assignment, pledge or other document or agreement
which provides security for the indebtedness evidenced by this Note, the holder
hereof may, at its option, without notice or demand, declare this Note in
default and all indebtedness due and owing hereunder immediately due and
payable. Interest from the date of default on such principal balance and on any
past due interest hereunder shall accrue at the rate of five percent (5%) per
annum above the nondefault interest rate accruing hereunder. The Maker and any
endorsers, guarantors and sureties hereby severally waive protest, presentment,
demand, and notice of protest and nonpayment in case this Note or any payment
due hereunder is not paid when due; and they agree to any renewal, extension,
acceleration, postponement of the time of payment, substitution, exchange or
release of collateral and to the release of any party or person primarily or
contingently liable without prejudice to the holder and without notice to the
Maker or any endorser, guarantor or surety. Maker and any guarantor, endorser,
surety or any other person who is or may become liable hereon will, on demand,
pay all costs of collection, including reasonable attorney fees of the holder
hereof in attempting to enforce payment of this Note and reasonable attorney
fees for defending the validity of any document securing this Note as a valid
first and prior lien.
48
<PAGE>
Upon the occurrence of any default hereunder, Lender shall have the
right, immediately and without further action by it, to set off against this
Note all money owed by Lender in any capacity to the Maker or any guarantor,
endorser or other person who is or might be liable for payment hereof, whether
or not due, and also to set off against all other liabilities of Maker to Lender
all money owed by Lender in any capacity to Maker; and Lender shall be deemed to
have exercised such right of setoff and to have made a charge against such money
immediately upon the occurrence of such default even though such charge is made
or entered into the books of Lender subsequently thereto.
The holder of this Note may collect a late charge not to exceed an
amount equal to five percent (5%) of the amount of any payment which is not paid
within ten (10) days from the due date thereof, for the purposes of covering the
extra expenses involved in handling delinquent payments. This late charge
provision shall not be applicable in the event the holder hereof, at its option,
elects to receive interest at the increased rate as provided hereunder in the
event of default.
This Note is given for an actual loan of money for business purposes
and not for personal, agricultural or residential purposes, and is executed and
delivered in the State of Oklahoma and shall be governed by and construed in
accordance with the laws of the State of Oklahoma.
NATIONAL ENVIRONMENTAL
SERVICE COMPANY
By___________________________________
Larry G. Johnson, Vice President &
Secretary-Treasurer
49
<PAGE>
Exhibit 21.1
NESCO, Inc.
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
5. Summit Environmental Services, Inc., an Oklahoma Corporation
6. NESCO Acceptance Corporation, an Oklahoma Corporation
50
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation of our report dated February 22, 2000, on the
financial statements of NESCO, Inc. as of December 31, 1999 and for each of the
two years in the period then ended included in this Form 10-KSB Annual Report of
NESCO, Inc. as of December 31, 1999, into NESCO, Inc.'s previously filed
Registration Statement on Form S-8 (File No. 333-93112).
TULLIUS TAYLOR SARTAIN & SARTAIN LLP
March 21, 2000
51
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-01-1999
<CASH> 629
<SECURITIES> 0
<RECEIVABLES> 9,755
<ALLOWANCES> 240
<INVENTORY> 2,262
<CURRENT-ASSETS> 12,974
<PP&E> 7,730
<DEPRECIATION> 2,619
<TOTAL-ASSETS> 22,895
<CURRENT-LIABILITIES> 4,872
<BONDS> 0
0
0
<COMMON> 94
<OTHER-SE> 7,037
<TOTAL-LIABILITY-AND-EQUITY> 22,895
<SALES> 1,833
<TOTAL-REVENUES> 29,567
<CGS> 1,100
<TOTAL-COSTS> 25,648
<OTHER-EXPENSES> (240)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 677
<INCOME-PRETAX> 3,482
<INCOME-TAX> 1,318
<INCOME-CONTINUING> 2,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,167
<EPS-BASIC> .24
<EPS-DILUTED> .23
</TABLE>
