UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (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 27, 1998. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. COMMISSION FILE NUMBER: 0-7907 C. H. HEIST CORP. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) New York 16-0803301 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 810 North Belcher Road Clearwater, Florida 33765 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (727) 461-5656 - ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.05 par value - ------------------------------------------------------------------------------ (Title of Class) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K (X). -1- The aggregate market value of the Registrant's common shares held by non-affiliates at March 12, 1999 was approximately $7,446,000. The number of common shares of the Registrant outstanding at February 26, 1999 was 2,880,393. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in the following parts of this report: Part I and II -- the Registrant's Annual Report to Shareholders for the year ended December 27, 1998, which appears as Exhibit 13 to this Form 10-K; Part III -- the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission and used in connection with the solicitation of proxies for the Registrant's annual meeting of shareholders to be held on May 10, 1999. - 2 - PART I ITEM 1. BUSINESS General. Staffing Services and Industrial Maintenance are the two professional service segments of C. H. Heist Corp. and its United States and Canadian subsidiaries. Staffing Services The Company supplies temporary employees in the U.S. through Ablest Service Corp. ("Ablest"), a wholly owned subsidiary of the Company. Ablest is a staffing services organization with 44 offices located in the Eastern United States and selected Southwest markets with the capability to supply temporary employees for the clerical, industrial and technical needs of their customers. Ablest does not have any principal customers, nor does it service any specific industry or field. Instead, its services are provided to a broad-based customer list. On April 13, 1998, Ablest purchased 100% of the common stock of Milestone Technologies, Inc., an information technology staffing services provider in the Phoenix, Arizona metropolitan area. On November 17, 1998, Ablest also purchased certain assets from SoftWorks International Consulting, Inc., an information technology staffing provider in the Denver, Colorado metropolitan area. See note 12 to the Consolidated Financial Statements on page 24 of the Company's Annual Report to Shareholders incorporated herein by reference, for additional information regarding acquisitions. The staffing services business is highly competitive. There are numerous local, regional and national firms principally engaged in offering such services. The primary competitive factors in the staffing services field are quality of service, reliability of personnel and price. Industrial Maintenance Services The Company also performs industrial maintenance services. The Industrial Maintenance Services segment focuses on providing industrial maintenance solutions to a wide range on industries, such as chemical, petrochemical, power generation, pulp and paper, mining and metallurgical plants. Its industrial services consist of hydroblasting, painting, sandblasting, vacuuming of industrial wastes, turnaround services, chemical cleaning and commercial insulation. Service facilities are located throughout the eastern United Sates and eastern Canada. - 3 - Many of the Company's industrial maintenance services are performed outdoors, but the Company does not consider its business to be seasonal. However, due in part to weather factors, the first quarter of the Company's fiscal year has historically produced the lowest levels of revenue and profitability. The Company from time to time investigates and develops new equipment components, tools and methods for use in the conduct of its operations. Most of the components in its equipment are designed to the Company's specification. The amounts expended for such activities, all of which were performed at a Company facility, during the fiscal years ended December 27, 1998, December 28, 1997 and December 29, 1996 amounted to $352,000, $338,000, and $248,000 respectively. During the fiscal year ended December 27, 1998, these services were performed primarily by five individuals who were employed by the Company on a full-time basis. The Company competes with numerous other companies engaged in high-pressure water maintenance cleaning services, industrial painting, maintenance-cleaning of heavy industrial equipment through the use of mechanical, chemical and other methods, the vacuum removal of dry and wet industrial waste, and the installation and maintenance of insulation. The Company does not believe that any single competitor is dominant in any of these services. Competition is primarily based upon quality of services and price. The Company is subject to various statutes and regulations respecting control of noise, air, water and land pollution. In addition, its customers may be subject to other environmental protection statutes and regulations relating to some of the industrial maintenance services rendered by the Company. From time to time modifications or improvements have been required in the Company's equipment in order to comply with government regulations, including those relating to safety and noise reductions. Such modifications or improvements have not resulted in any material capital expenditures nor are any anticipated for such purpose in the foreseeable future. - 4 - Industry Segments and Service Activities. The following table is a summary of information relating to the Company's operations in its two industry segments for each of the Company's last three fiscal years: Fiscal Year Ended -------------------------------------------------- (In thousands) Dec. 27, Dec. 28, Dec. 29, 1998 1997 1996 --------------- --------------- ------------- Revenues from Unaffiliated Customers: Staffing Services $ 78,471 63,268 49,514 Industrial Maintenance 57,176 56,248 57,001 Operating Income (Loss): Staffing Services 2,779 1,353 1,918 Industrial Maintenance (350) 1,473 198 Identifiable Assets: Staffing Services 25,603 12,555 9,212 Industrial Maintenance 27,134 29,414 31,548 * Revenue figures do not include intersegment revenues of approximately $101,000, $39,000 and $84,000 in 1998, 1997 and 1996, respectively. The following table sets forth the approximate amounts of total sales and revenues by service activity within the Company's two industry segments for each of the Company's last three fiscal years: Fiscal Year Ended -------------------------------------------------- Dec. 27, Dec. 28, Dec. 29, Industrial Maintenance Revenues 1998 1997 1996 -------------- -------------- -------------- Hydro/Mechanical 63 % 63 % 69 % Sandblasting and Painting 15 % 17 % 16 % Other 22 % 20 % 15 % Staffing Services Revenues Commercial Staffing 76 % 89 % 99 % Information Technology Staffing 24 % 12 % 1 % - 5 - Working Capital. By virtue of the nature of the Company's business segments and the size and financial status of its customers, the attainment and maintenance of high levels of working capital is not required, other than to meet debt requirements as disclosed in Note 5 to the Consolidated Financial Statements on page 20 of the Company's Annual Report to Shareholders, which is incorporated herein by reference. Backlog. In view of the fact that the Company's services are primarily furnished pursuant to purchase orders or on a call basis, backlog is not material. Employees. On December 27, 1998, the Company employed approximately 4,033 persons of whom 274 persons were employed on a full-time basis and the remainder were part-time and temporary employees. Some of the Company's industrial maintenance employees are represented by unions. The Company considers its employee relations to be good. Canadian Operations. The following table sets forth the relative contributions in U.S. dollars to revenues and identifiable assets attributable to the Company's Canadian operations for the last three fiscal years: Fiscal Year Ended ------------------------------------------------- (In thousands) Dec. 27, Dec. 28, Dec. 29, 1998 1997 1996 -------------- -------------- ------------- Revenues to Unaffiliated Customers $ 16,149 16,300 14,877 Identifiable Assets 9,830 10,570 9,316 There were no export revenues during any period. - 6 - Executive Officers of Registrant (a) Identification. The Company's executive officers are: Served as Position and Office Executive Name Age with Registrant Officer Since - -------------------------------- ------ -------------------------------------- -------------------- Charles H. Heist 48 Chairman of the Board of 1978 Directors and Chief Executive Officer W. David Foster 64 President-Chief Operating 1976 Officer John L. Rowley 55 Vice President Finance, 1979 Chief Financial Officer Isadore Snitzer 77 Secretary 1956 Duane F. Worthington 47 Vice President - U.S. 1989 Operations, C.H. Heist Corp. Andrew R. Crowe, Jr. 47 Vice President - Chief 1990 Operating Officer, C.H. Heist, Ltd. Kurt R. Moore 40 Executive Vice President - 1991 Ablest Service Corp. Christopher H. Muir 37 Vice President - Marketing 1997 and Sales, C.H. Heist Corp. Mark P. Kashmanian 43 Treasurer - Chief 1996 Accounting Officer - 7 - (b) Arrangements and Understandings. There are no arrangements or understandings pursuant to which the above officers were elected. (c) Family Relationships. None of the officers has any family relationship with any other officer of the Company. (d) Business Experience. Messrs. Charles H. Heist, W. David Foster, John L. Rowley, Kurt R. Moore, Duane F. Worthington, Andrew R. Crowe, Jr. and Mark P. Kashmanian have been employees of the Company for more than five years. Mr. Snitzer is a partner in the Buffalo, New York, law firm of Borins, Setel, Snitzer & Brownstein, and its predecessors, which firm served as general counsel to the Company until July 1996. Christopher H. Muir joined the Company on April 28, 1997. Mr. Muir holds an M.B.A. in Marketing from the University of South Florida and a B.A. degree in Philosophy, English, and Business Administration from Southwestern University. His recent work history includes, Director of Marketing at Quanterra, Inc. (formerly the Enseco division of Corning, Inc.), 1992-1994; Principal at Paradox Consulting Group(R), Inc., 1994-1997; and Adjunct Professor of Marketing at the College of Business Administration, University of South Florida, 1995-1997. ITEM 2. PROPERTIES The Company's subsidiary, Ablest Service Corp., owns the executive office facilities for C.H. Heist Corp. and Ablest Service Corp. in Clearwater, Florida. The Company owns and leases properties in Buffalo, New York and Clearwater, Florida which house its administrative offices, and Methods and Development facilities. The leased facilities in Buffalo are leased from persons who are affiliates of certain officers and directors. See Part III, Item 13 "Certain Relationships and Related Transactions" in this form 10-K, the response to which is incorporated herein by reference. The daily operations of the Company are currently operated out of the following: Location Description Leased Owned Total --------- ----------------------------------------- ------------ ------------ ------------ Staffing Services U.S. Branch Offices 44 - 44 U.S. Regional Offices 7 - 7 ============ ============ ============ Total Staffing Services 51 - 51 ============ ============ ============ Industrial Maintenance U.S. Branch Offices 11 8 19 Canada Branch Offices 3 3 6 ------------ ------------ ------------ 14 11 25 ------------ ------------ ------------ U.S. Regional Offices 3 - 3 Canada Regional Offices 1 - 1 ------------ ------------ ------------ 4 - 4 ------------ ------------ ------------ Total Industrial Maintenance 18 11 29 ============ ============ ============ - 8 - The Company considers all of its offices and facilities suitable and adequate for servicing its customers. In meeting the requirements of its industrial maintenance customers, the Company relies on its extensive, specially designed and equipped (to Company's specifications) mobile equipment, which must be kept in good repair and replaced from time to time. The Company considers this equipment adequate for current operations. Each of the Company's active service facilities has mobile equipment permanently assigned to it by the Company. Certain of the properties owned by the Company are subject to mortgages. Reference is made to Note 5 to the Consolidated Financial Statements on page 20 of the Company's Annual Report to Shareholders, incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS The Company is exposed to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of management, the resolution of such matters will not have a material adverse effect on the Company's financial condition or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company during the fourth quarter of fiscal 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information in response to this item is hereby incorporated by reference to the information presented on page 29 of the Company's 1998 Annual Report to Shareholders which appears as Exhibit 13 to this Form 10-K. ITEM 6. SELECTED FINANCIAL DATA The information in response to this item is hereby incorporated by reference to the information presented at page 12 in the Company's 1998 Annual Report to Shareholders which appears as Exhibit 13 to this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information in response to this item is hereby incorporated by reference to the information presented at pages 13 through 15 in the Company's 1998 Annual Report to Shareholders which appears as Exhibit 13 to this Form 10-K. - 9 - ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company, in the normal course of business, has exposure to interest rate risk from its long term debt obligations and to foreign exchange rate risk with respect to its foreign operations and currency conversions. The Company does not believe that its exposure to fluctuations in either interest rates in the United States or currency exchange rates with regards to the Canadian dollar, are material. A 10% change in the interest rate utilized on its long term debt obligations would have produced approximately $78,000 in additional interest expense at December 27, 1998. Likewise, since the majority on the Company's revenues, expenses and cash flows are transacted in U.S dollars a 10% decline in the Canadian exchange rate would only have impacted fiscal 1998 year end earnings by approximately $51,000. Due to the immateriality of the above noted market risks, the Company has decided not to utilize any form of financial instrument as a hedge against these risks. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and independent auditors report required in response to this item is hereby incorporated by reference to pages 16 through 27 in the Company's 1998 Annual Report to Shareholders which appears as Exhibit 13 to this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information in response to this item is hereby incorporated by reference to the information under the caption "Nominees for Directors" presented in the Company's definitive proxy statement to be filed with the Securities and Exchange Commission and used in connection with the solicitation of proxies for the Company's annual meeting of shareholders to be held on May 10, 1999, except insofar as information with respect to executive officers is presented in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION The information in response to this item is hereby incorporated by reference to the information under the caption "Compensation of Executive Officers" presented in the Company's definitive proxy statement to be filed with the Securities and Exchange Commission and used in conjunction with the solicitation of proxies for the Company's annual meeting of shareholders to be held on May 10, 1999; provided, however, that information appearing in the proxy statement under the headings "Report on Executive Compensation by the Compensation Committee and Board of Directors" and "Common Stock Performance" is not incorporated herein and should not be deemed to be included in this document for any purposes. - 10 - ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information in response to this item is hereby incorporated by reference to the information under the caption "Security Ownership of Certain Beneficial Owners and Management" presented in the Company's definitive proxy statement to be filed with the Securities and Exchange Commission and used in connection with the solicitation of proxies for the Company's annual meeting of shareholders to be held on May 10, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information in response to this item is hereby incorporated by reference to the information under the caption "Certain Transactions" presented in the Company's definitive proxy statement to be filed with the Securities and Exchange Commission and used in connection with the solicitation of proxies for the Company's annual meeting of shareholders to be held on May 10, 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: (1) Financial Statements and Schedules See Index to Financial Statements and Schedules at page 13. (2) Exhibits Exhibits identified below are filed herewith or incorporated herein by reference to the documents indicated in parentheses. Exhibit Number Description 3.1 Restated Certificate of Incorporation of Registrant dated January 19, 1983 (Exhibit to the Company's Form 10-K Report for the year ended June 25, 1989) 3.2 Certificate of Amendment of Certificate of Incorporation of the Company (Appendix A to the Company's definitive Proxy Statement in connection with its Annual Meeting held on May 11, 1992) 3.3 Amended By-laws of the Registrant adopted August 27, 1990 (Exhibit to the Company's Form 10-K Report for the year ended June 24, 1990) 10.1 Business Loan Agreement with Manufacturers and Traders Trust Company dated December 22, 1994 (Exhibit to the Company's Form 10-K report for the year ended December 25, 1994) - 11 - 10.2 Corporate Revolving Term Loan Agreement with Manufacturer and Traders Trust Company dated August 21, 1995 (Exhibit to the Company's Form 10-K report for the year ended December 31, 1995) 10.3 Amendment to Business Loan Agreement dated October 25, 1996 (Exhibit to the Company's Form 10-K Report for the year ended December 29, 1996) 10.4 EVA incentive plan, incorporated herein by reference to the Company's definitive Proxy Statement in connection with its annual meeting held on May 10, 1996 10.5 Leveraged Stock Option plan, incorporated herein by reference to the Company's definitive Proxy Statement in connection with its annual meeting held on May 10, 1996 10.6 Purchase Agreement dated as of April 13, 1998, with Milestone Technologies, Inc. (Exhibit to the Company's Form 8-K report dated April 24, 1998) 10.7 Purchase Agreement dated as of November 17, 1998, with SoftWorks International Consulting, Inc. (Exhibit to the Company's Form 8-K report dated December 1, 1998) 10.8 Amendment agreement dated November 13, 1997, to Corporate Revolving and Term Loan Agreement (Exhibit to the Company's Form 10-K Report for the year ended December 28, 1997) 10.9 * Amendment No.5 dated July 1, 1998, to Corporate Revolving and Term Loan Agreement 13 * 1998 Annual Report to Shareholders 15 * Letter regarding Unaudited Interim Financial Information 21 * Subsidiaries of the Registrant - refer to inside back cover of the 1998 Annual Report to Shareholders (Exhibit 13 to this 10-K report) 23 * Consent of KPMG LLP to incorporation of reports into Form S-8 No. 33-48497 and No. 333-26007 27.1 * Financial Data Schedule - --------------------- * Filed herewith - 12 - (b) Two reports on Form 8-K were filed by the Company during 1998. The first was filed on April 24, 1998 during the quarter ended June 28, 1998, regarding the Company's acquisition of 100% of the common stock of Milestone Technologies, Inc. The second was filed on December 1, 1998 during the quarter ended December 27, 1998, regarded the acquisition of certain assets of SoftWorks International Consulting, Inc. The Company will furnish, without charge to a security holder upon request, a copy of the documents portions of which are incorporated by reference herein and will furnish any other exhibit at cost. - 13 - C.H. HEIST CORP. AND SUBSIDIARIES Index to Financial Statements and Schedules Form 10-K Items 8, 14(a)(1) Page Reference ------------------- Annual Form Report 10-K --------- --------- The financial statements of the registrant and its subsidiaries required to be included in Item 8 are listed below: Independent Auditors' Report 26 Financial Statements: Consolidated Balance Sheets as of December 27, 1998 and December 28, 1997 16 Consolidated Statements of Earnings and Comprehensive Income for the years ended December 27, 1998, December 28, 1997 and December 29, 1996 17 Consolidated Statements of Stockholders' Equity for the years ended December 27, 1998, December 28, 1997 and December 29, 1996 17 Consolidated Statements of Cash Flows for the years ended December 27, 1998, December 28, 1997 and December 29, 1996 18 Notes to Consolidated Financial Statements 19-25 Supplemental information, Quarterly data 27 The following consolidated financial statement schedules for the Registrant and its subsidiaries are included in Item 14(a)(1): Independent Auditors' Report 14 Schedule: II - Valuation Account 15 Schedules other than those listed above are omitted because the conditions requiring their filing do not exist or because the required information is provided in the consolidated financial statements, including the notes thereto. - 14 - Independent Auditors' Report The Board of Directors C.H. Heist Corp.: Under date of February 12, 1999, we reported on the consolidated financial statements of C. H. Heist Corp. and subsidiaries as listed in the accompanying index. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1998. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Buffalo, New York February 12, 1999 -15- SCHEDULE II C. H. HEIST CORP. AND SUBSIDIARIES VALUATION ACCOUNT Additions Balance at Charged to Accounts Balance Allowance for Doubtful Beginning Cost and Receivable At end Accounts: Of period expenses Written-off Of period ------------- ------------- ---------------- ------------- Year ended December 29, 1996 $426,234 42,296 (9,219) 459,311 Year ended December 28, 1997 459,311 274,903 (317,798) 416,416 Year ended December 27, 1998 416,416 47,305 (33,577) 430,144 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 9, 1999 C. H. HEIST CORP. By: /s/ Mark P. Kashmanian ------------------------------- Mark P. Kashmanian Treasurer, Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and as of the date indicated: C. H. HEIST CORP. By: /s/ Charles H. Heist By: /s/ John L. Rowley -------------------------------------- ------------------------------------------- Charles H. Heist John L. Rowley, Director and Vice Chairman of the Board President-Finance, Chief Financial Officer and Chief Executive Officer By: /s/ W. David Foster -------------------------------------- W. David Foster Director and President By: /s/ Ronald K. Leirvik By: /s/ Chauncey D. Leake, Jr. -------------------------------------- ------------------------------------------- Ronald K. Leirvik Chauncey D. Leake, Jr. Director Director By: /s/ Brian J. Lipke By: /s/ Charles E. Scharlau -------------------------------------- ------------------------------------------- Brian J. Lipke Charles E. Scharlau Director Director By: /s/ Richard W. Roberson By: /s/ Donna R. Moore -------------------------------------- ------------------------------------------- Richard W. Roberson Donna R. Moore Director Director March 9, 1999 EXHIBIT INDEX Exhibit Page or Number Description Reference 3.1 Restated Certificate of Incorporation of Registrant Dated January 19, 1983 1 3.2 Certificate of amendment of Certificate of Incorporation of the Registrant 2 3.3 Amended By-laws of the Registrant adopted on August 27, 1990 3 10.1 Business Loan Agreement with Manufacturers and Traders Trust Company Dated December 22, 1994 4 10.2 Corporate Revolving Term Loan Agreement with Manufacturers and traders Trust company Dated August 21, 1995 7 10.3 Amendment to Corporate Revolving Term Loan Agreement with Manufacturers and Traders Trust Company dated October 25, 1996 8 10.4 EVA Incentive Plan 5 10.5 Leveraged Stock Option Plan 5 10.6 Purchase agreement dated April 13, 1998 with Milestone Technologies, Inc. 6 10.7 Purchase agreement dated November 17, 1998 with SoftWorks International Consulting, Inc. 9 10.8 Amendment dated November 13, 1997 to the Corporate Revolving and Term Loan Agreement 10 10.9 Amendment dated July 1, 1998 to the Corporate Revolving and Term Loan Agreement 11 13 1998 Annual Report to Shareholders 11 15 Letter regarding Unaudited Interim Financial Information 11 23 Consent of KPMG LLP to incorporation Of reports into Form S-8 No. 33-48497 and No. 333-26007 11 27.1 Financial Data schedule 11 - ----------------- (1) Filed as an Exhibit to the Registrant's Form 10-K Report for the year ended June 25, 1989 and incorporated herein by reference. (2) Filed as Appendix A to the Registrant's definitive Proxy Statement in connection with its Annual Meeting of Shareholders held on May 11, 1992. (3) Filed as an Exhibit to the Registrant's Form 10-K Report for the year ended June 24, 1990 and incorporated herein by reference. (4) Filed as an Exhibit to the Registrant's Form 10-K report for the period ended December 25, 1994 and incorporated herein by reference. (5) Filed as part of Registrant's definitive Proxy statement in connection with its annual meeting of shareholders held on May 10,1997 and incorporated herein by reference. (6) Filed as an Exhibit to the Registrant's Form 8-K report dated April 24, 1998 and incorporated herein by reference. (7) Filed as an Exhibit to the Registrant's Form 10-K report for the period ended December 31, 1995 and incorporated herein by reference. (8) Filed as an Exhibit to the Registrant's Form 10-K report for the period ended December 29, 1996 and incorporated herein by reference. (9) Filed as an Exhibit to the Registrant's Form 8-K report dated December 1, 1998 and incorporated herein by reference. (10) Filed as an Exhibit to the Registrant's Form 10-K report for the period ended December 28, 1997 and incorporated herein by reference. (11) Filed as an Exhibit to this report. EXHIBIT 10.9 AMENDMENT NO.5 TO CORPORATE REVOLVING AND TERM LOAN AGREEMENT Manufacturers and Traders Trust Company (the "Bank") and C.H. Heist Corp. (the "Borrower") hereby agree as follows: 1. Loan Agreement. The Bank and the Borrower are parties to a Corporate Revolving and Term Loan Agreement dated December 23, 1993, and as amended (the "Loan Agreement"). The Bank and the Borrower wish to amend the Loan Agreement as set forth herein. 2. Amendment to Loan Agreement. The Bank and the Borrower hereby agree that the Loan Agreement is amended as follows: a. Section 2.(i) of the Loan Agreement is modified to read in entirety as follows: "Compensating balances may, but need not, be maintained by the Borrower with the Bank with respect to all Revolving Loans. Such compensating balances shall be unrestricted as to use at any time." b. Section 11.dd(i) of the Loan Agreement, as previously amended, is modified so that the reference to "August 1, 1999" is deleted and "August 1, 2000" is substituted in its place. 3. Except as expressly modified herein, the Loan Agreement otherwise remains unchanged and the Borrower hereby ratifies and reaffirms the Loan Agreement, as amended, and any other documents executed in connection therewith, and agrees that the Loan Agreement and all documents executed in connection herewith are in full force and effect and fully enforceable with their terms and not subject to any offset, claim, counterclaim or defense. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 5 to be duly executed by their authorized officers as of the 1st day of July, 1998. C. H. HEIST CORP. MANUFACTURERS AND TRADERS TRUST COMPANY By: /s/ John L. Rowley By: /s/ Kevin B. Quinn ---------------------- ----------------------- John L. Rowley Kevin B. Quinn Vice President and Assistant Vice President Chief Financial Officer EXHIBIT 13 A FOCUS ON OUTSOURCING (PHOTO) C.H. HEIST CORP. NINETEEN NINETY EIGHT ANNUAL REPORT Table of Contents 1 Performance Highlights and Company Profile 2 Chairman's Letter 7 Review of Operations 12 Summary of Selected Financial Data 13 Management's Discussion & Analysis 16 Consolidated Balance Sheets 17 Consolidated Statements of Earnings and Comprehensive Income 17 Consolidated Statements of Stockholders' Equity 18 Consolidated Statements of Cash Flows 19 Notes to Consolidated Financial Statements 26 Independent Auditors' Report 27 Quarterly Financial Data 28 Directors & Officers 29 Shareholder and Corporate Information EVA (R) is a registered trademark of Stern Stewart & Co. Financial Highlights (In thousands, except per share data) December 27, 1998 December 28, 1997 - ----------------------------------------------------------------------- Net Service Revenues $ 135,647 $ 119,516 Cost of Services 97,658 85,290 Gross Profit 37,989 34,226 Selling, General & Administrative Expenses 35,560 31,400 Operating Income 2,429 2,826 Other Expense, Net (292) (822) Earnings Before Income Taxes 2,137 2,004 Income Taxes 843 1,106 Net Earnings 1,294 898 Earnings Per Share $ .45 $ .31 Statements made in this report, other than those concerning historical information, should be considered forward-looking and subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Readers should carefully review and consider disclosures, including periodic reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission, which attempt to advise interested parties of the factors which affect the Company's business. Performance Highlights * Revenues increased 13.5% to a record $135.6 million for 1998. Earnings per share increased approximately 45.2% from $.31 to $.45 per share in 1998. * EBITDA continued improvement up to $8.3 million for 1998. * Information Technology Staffing Services revenues grew more than 150%, and contributed 23.8% of subsidiary Ablest Service Corp.'s net service revenues. * Commercial Staffing Services revenues grew 6.8%. * Ablest Technology Services established itself in two new U.S. high-tech marketplaces with the acquisitions of Milestone Technologies in Phoenix and SoftWorks in Denver. Net Service Revenue (in millions) (CHART) Company Profile Staffing Services and Industrial Maintenance Services are the two professional service segments of C.H. Heist Corp. and its U.S. and Canadian subsidiaries. The Staffing Services segment focuses on providing temporary and contract staffing solutions to the business, professional and industrial sectors from 44 locations throughout the nation's eastern and southwestern states. Ablest Service Corp. offers commercial staffing solutions - such as "traditional" clerical, accounting and light industrial assignments and information technology (IT) staffing solutions. The Industrial Maintenance Services segment focuses on providing industrial cleaning and maintenance solutions to a wide range of industries, such as chemical, petrochemical, power generation, pulp and paper, mining and metallurgical plants. Its industrial services consist of hydroblasting, painting, sandblasting, vacuuming of industrial wastes, turnaround services, chemical cleaning and commercial insulation. Industrial Maintenance Services facilities are located throughout the eastern United States and eastern Canada. Net Income (in millions) (CHART) Net Earnings Per Share (CHART) 1 To Our Shareholders: We are proud to report another improved year of financial performance by C.H. Heist Corp., highlighted by record revenues and improved profits as a number of the initiatives implemented in recent years began to take hold and show tangible results. In addition, Heist recorded improved gains in EBITDA and return on invested capital. (PHOTO) Chairman of the Board and Chief Executive Officer Charles H. Heist Another Solid Financial Performance Net service revenues increased 13.5%, or $16.1 million, to $135.6 million in 1998 from $119.5 million in 1997. Net earnings increased 44.1%, or $396,000, to $1.3 million in 1998 from $898,000 in 1997. Accordingly, with approximately 2.9 million shares outstanding, 1998 net earnings per share was $.45 compared to $.31 in 1997. The Staffing Services segment increased revenues 24.0%, or $15.2 million, to $78.5 million in 1998 from $63.3 million in 1997. Fueled by internal growth and the 1998 acquisitions of Milestone Technologies and SoftWorks, IT staffing services revenues increased 157% to $18.7 million in 1998 from $7.3 million in 1997. Commercial staffing revenues increased 6.8% to $59.8 million in 1998 from $56.0 million in 1997. The increased proportion of higher-margin IT revenues and increases in the commercial staffing margins drove the overall gross margin up a point to 23% for 1998. Industrial Maintenance Services segment revenues increased 1.6% to $57.2 million from $56.2 million in 1997. While growth in this segment will continue to be modest, it's important to keep in mind that its margins can be very healthy. In fact, its 1998 gross margins were over 30%. Industrial Maintenance Services segment revenues were affected somewhat by the decline in value of the Canadian dollar to the U.S. dollar. While Canadian industrial maintenance revenues actually increased 6.8% in 1998, currency conversion to the U.S. dollar equivalent resulted in a 1% decline in net service revenues from those operations. The Company continued the tradition of maintaining its solid balance sheet. The quick ratio at December 27, 1998 was 2.7 to 1 compared to 3.1 to 1 for the end of fiscal 1997, and the current ratio was 2.9 to 1 compared to 3.4 to 1 for fiscal 1997. The Company finished 1998 with a year-end debt-to-equity ratio of .57, in spite of completing over $11 million in acquisitions since 1996. While it has been stated in this forum before, it's worth repeating that Heist's financial stability allows us to complete acquisitions under very reasonable terms that immediately generate positive cash flow for the Company and its shareholders. 2 (PHOTO) Acquisition Strategy We added to our information technology (IT) services brand, Ablest Technology Services, by completing two acquisitions in 1998 which contributed significantly to the year's revenues and earnings. Milestone Technologies in the thriving Phoenix, Arizona suburb of Tempe and SoftWorks in the cornerstone western market of Denver, Colorado were immediately accretive and are integrating nicely into our culture and operations. While maintaining our niche-market focus, we broadened our geographic reach by acquiring IT service providers in two high-tech markets. The Company's acquisition strategy calls for ongoing targeted acquisitions in key markets where we identify profitable opportunities for our services. This strategy is not limited to absorbing IT firms into Ablest Technology Services. With the outsourcing industry rapidly consolidating, we continually look for opportunities to acquire strong commercial-staffing service providers. Industry consolidation can, in turn, provide us with good buying opportunities at favorable acquisition terms. Fully Y2K Ready To the benefit of the Company and its shareholders, we believe C.H. Heist Corp. is fully year 2000 (Y2K) ready. Internally, we do not anticipate any problems with date-sensitive computer hardware or software applications. In 1998, the Company completed an extensive review of internal systems, and before the second quarter of 1999 we will complete an applications upgrade to make all systems compliant. Return On Invested Capital (CHART) Well before the end of 1999, we plan to finish our program to ensure that suppliers providing critical services to Heist are also Y2K compliant. These Y2K program costs are well within our normal and ongoing systems maintenance and support expenditures. Unlike some IT providers, our Company does not derive a significant portion of revenues from Y2K consulting, thereby avoiding the negative impact of any precipitous drop in demand for such services. Operating Income (in millions) (CHART) 3 (PHOTO) Specialty Outsourcing Outlook Heist is operating in a very promising demand environment for outsourcing services, including those provided by the Staffing Sevices and Industrial Maintenance Segments. U.S. economic conditions and near-zero unemployment provided excellent operating conditions for the Company and strong demand for our outsourcing services in 1998. We expect those conditions to be sustained for the foreseeable future. While today's tight labor market puts a premium on Heist's services, we also believe the Company can benefit from increasing unemployment. If, as some economists predict, companies begin workforce reductions, we believe the trend toward downsizing non-revenue-generating departments will continue. Information systems, network administration, inbound and outbound call center, accounting, data processing, logistics, and plant and equipment maintenance departments are among the necessary, but non-core, functions that we can administer more efficiently than our customers. EBITDA (in millions) (CHART) Technology and Staffing Solutions The National Association of Temporary and Staffing Services (NATSS) quantified the booming temporary help services industry as generating an unprecedented $50.3 billion in receipts for the 12 months of 1997, a 15.4% increase over 1996. In 1998, NATSS reported 18.5% growth over the first nine months of 1997. While 1998 receipts already totaled $43.6 billion by the end of the third quarter, the final three months of the year are historically the industry's best. Therefore, when NATSS publishes its 1998 full-year data this spring, we expect to see growth in the range of 15% to 20%. Similar growth may be expected from the staffing industry in 1999. The 10-year temporary staffing industry growth rate is 152%, according to the Bureau of Labor Statistics. As reported by Forbes magazine in October 1998, the staffing industry compares very favorably to the average 20% 10-year growth rate for all other industries. More recently, Forbes highlighted outsourcing in the Business Services category of its 1999 Platinum 400 feature: "Information technology has created a seemingly insatiable demand for skilled temps. Therefore the biggest gains are going to agencies that are strong in IT." Indeed, our Company is growing strong in IT, with Ablest Technology Services representing 23.8% of our staffing subsidiary's net service revenues in 1998. We expect to continue our expansion of the IT business through both our internal growth and our acquisition strategy. Industrial Maintenance Services 4 Outsourcing Solutions Since 1949 Long before anyone coined the word, business and industry leaders from Canada to the Gulf Coast turned to Heist for "outsourcing" solutions. Staffing Services Ablest Service Corp. began providing traditional "commercial" staffing services - - such as temporary accounting, clerical and administrative personnel - in 1978. Today, many of those temporary service assignments have been nurtured into long-time customer relationships resulting in value-added, customized solutions and vendor-on-premise (VOP) programs, such as Ablest's Point Source,(TM) which benefit both customers and the Company. Ablest Technology Services provides customers with information technology (IT) staffing solutions. The most dynamic growth area for the Company, IT service revenues expanded to 23.8% of total 1998 staffing revenues. STOCK PRICE VS. BOOK VALUE ($ VALUE AT PERIOD END) (CHART) Industrial Maintenance Services is where Heist has its roots. In 1949 the Company began as an innovative option for manufacturers seeking to focus on core operations while outsourcing essential maintenance activities such as industrial painting, sandblasting and hydrocleaning. Over time, chemical, waste handling, and vacuuming were developed to better serve customers. While today Heist employs high-tech equipment and processes, its role in enabling business, industry and government to outsource a host of critical industrial maintenance tasks is just as vital as it was 50 years ago. (PHOTO) 5 (PHOTO) A Specialty Outsourcing Provider Industrial Maintenance Solutions The market for services offered by the industrial maintenance segment is more than $3 billion and growing at least 4% per year, according to a study commissioned by C.H. Heist Corp. Although the industry is rapidly consolidating, no single company is believed to hold a commanding share of the market. Outsourcing non-core industrial maintenance functions allows customers to concentrate greater resources on their revenue-generating activities while shifting fixed personnel, training, R&D, capital and liability costs to Heist. The Company, in turn, benefits from the economies of scale in providing its services to a wide spectrum of customers in a variety of locations. Because of our reputation and long history in the industrial maintenance business, as well as excellent individual customer relationships, we believe Heist benefits when manufacturers limit their preferred or approved vendor lists to a select few providers. To take further advantage of this trend, Heist continues to seek opportunities to cross-sell its broad portfolio of industrial maintenance services. Focus on Specialty Outsourcing Solutions Focusing on specialty outsourcing solutions has served the Company well for over 50 years, and your management team is looking forward to making that focus even more profitable for our shareholders in the months and years ahead. We remain committed to improving shareholder value, and we appreciate your investment in C.H. Heist Corp. Sincerely, /S/ Charles H. Heist Charles H. Heist Chairman of the Board and Chief Executive Officer 6 (PHOTO) Outsourcing Solutions for Business & Industry As a provider of "outsourcing solutions," C.H. Heist Corp. is well positioned to take advantage of the outsourcing industry's exceptional growth rates. The Company overcomes obstacles, rather than simply filling orders for personnel, equipment or products. It identifies problems before customers see them, and recommends corrective actions. It challenges customers' assumptions, and explains process-improving or cost-saving alternatives. That's what providing outsourcing solutions is all about. The way our people see it, the only way to truly provide solutions is to be extremely flexible in how you address customers' needs, and to be personally committed to getting every job done right the first time. That attitude comes from giving managers and branch offices the independence to be entrepreneurial and innovative, while supplying the administrative and financial infrastructure of a $135 million company. Staffing Industry Receipts (in billions) (CHART) 7 Customized Outsourcing Solutions An advantage the Company has over many of its competitors is the ability to provide customized out-sourcing solutions to its customers. The managers who work directly with customers have the autonomy to make necessary decisions to get the job done. "Customization clearly differentiates the Company from competitors and reduces the extent to which outsourcing solutions can be considered commodity services." (PHOTO) Customization is good for customers because they get timely and knowledgeable responses that are tailored to their specific needs. Customization is good for C.H. Heist Corp. because it clearly differentiates the Company from competitors and reduces the extent to which outsourcing solutions can be considered commodity services. A Customized Solution for ISO 9002 Certification When a Point Source(TM) managed service, vendor-on-premise (VOP) customer began the rigorous ISO 9002 quality certification process, Ablest customized both its services and the manner in which they were delivered to help the company achieve its objectives. Responding to the needs of the software packaging company, Ablest customized several systems to improve the level of quality in a production setting. Ablest developed an enhanced skill-evaluation program designed to identify personnel that were uniquely qualified for the customer's quality control environment. Keen observation skills, for example, were highly desirable for this particular customer. To reward effective quality control practices, Ablest created the Quality Catch employee-incentive program. Quality Catch was integrated into the customers ISO 9002 compliance program, achieving record results in minimizing defective parts per million. Successful in its bid for certification, and appreciative of their outsourcing provider's ability to customize staffing solutions to complement their quality improvement efforts, the customer included Ablest's personnel and management in the ISO 9002 award ceremonies. Recognizing Ablest's contributions, the customer's quality assurance manager declared, "Ablest is a large part of our production team and they played an important role in our ISO 9002 certification. They have been and continue to be part of our success story. Thank you Ablest!" 8 A Customized Solution To Slash Costs When a customer put an industrial waste cleanup and removal project out to bid, Heist asked for - and was given - the opportunity to present an alternative plan. In an environmentally sensitive area of the manufacturing complex, standing 60 feet tall and 65 feet round, was a 1.8-million gallon tank to which chlorinated liquid sludge continuously flowed from round-the-clock production operations. Over a period of years, 80% of the tank's capacity had been diminished by a buildup of solids that was severely reducing the efficiency of operations and threatening the integrity of the production process. The production facility's initial plan called for a plant shutdown in order to divert wastes to a temporary storage tank that would have to be built especially for the clean-up project. Next, a massive hole would be cut in the side of the tank and months would then be spent removing the toxic sludge with earth-moving payloaders and hauling the material to a waste disposal site. Once cleaned, the tank would be resealed. Finally, after about 18 months, a second plant shutdown would take place to return the waste flow to the clean tank. With a $2 million price tag and a high likelihood of at least some impact on the surrounding environment, the customer rejected its own plan and turned to Heist for a solution. In response, Heist customized a plan that would cost less, incur zero downtime, pose little environmental risk and reduce the weight and volume of the waste to be disposed of. (PHOTO) "The customized Heist solution cut more than $1 million and 6 months from the customer's initial estimates." Heist's alternative, while the tank remained on line, had the sludge pumped out and run through a truck-mounted mobile filter press several hundred yards away. The liquid brine was returned to the production process by the Heist system with the plant still on line, while 1,280 tons of dry non-toxic material was hauled to a nearby landfill. Heist completed the project in just 90 days with zero environmental impact and no lost production time. A total success, the customized Heist solution cut more than $1 million and 6 months from the customer's initial estimates, and completely avoided the massive indirect costs that could have been incurred from environmental-control, trucking, storage and work-stoppages. Staffing Services Revenues (in millions) (CHART) 9 Strong Outsourcing Partnerships C.H. Heist Corp. earns strong, long-lasting partnerships with many of its customers. Some of the nation's largest and most prominent businesses have relationships with the Company that are measured in decades. These customer partnerships are highly valued, not taken for granted, and provide yet another advantage over much of the competition. "Some of the nation's largest and most prominent businesses have relationships with the Company that are measured in decades." (PHOTO) Close working partnerships are good for customers because they benefit from faster response times and lower recruitment and training costs, while avoiding elaborate bidding processes. Those factors are all pluses for the Company. In addition, customer partnerships differentiate the Company from the competition, as well as position C.H. Heist Corp. to become customers' preferred suppliers of staffing and industrial maintenance services. 1,000 Miles to a Stronger Partnership Deciding to move its corporate headquarters more than 1,000 miles across country, executives with a fast-growing retailer, and an Ablest customer, asked the Staffing Services segment to open a branch in their new hometown. Ablest agreed. In 1991, when Ablest first began providing a handful of temporary employees to the customer's headquarters, then located in Florida, the retailer's locations already numbered more than 2,000. Six years later the customer shifted corporate headquarters to be near its distribution hub in Texas. Ablest followed, opening its first branch in the state and expanding service levels to accommodate the customer's needs. As the retailer grew, Ablest opened a second office in the customer's new hometown. Continuing to grow with its partner, Ablest now provides personnel for hundreds of positions annually at the retailer's new headquarters, as well as its distribution hub. In addition to enhancing Ablest's ability to identify new business opportunities with existing customers, strong partnerships like the one shared with the retailing giant often lead to exclusive assignments that might otherwise be open to bids from a field of competitors. 10 Trusting a 40-Year-Long Partnership For more than 40 years, C.H. Heist Corp. has been an outsourcing partner of one of the world's largest chemical manufacturers. Continuously serving this blue-chip company since the 1950s, the customer's trust in Heist played an instrumental role in one recent assignment. A critical component of the customer's manufacturing process involved the use of distillation columns. At over 230 feet tall and 6 feet in diameter, the particular columns Heist was asked to clean, posed a unique challenge. Historically, the rust and other materials that accumulate during the construction phase on this type of equipment would be cleaned vertically using a method that includes pouring cleaning solution - heated to hundreds of degrees Fahrenheit - down the columns. Because of the size and design of the customer's equipment, the conventional process simply would not work. Instead, Heist proposed cleaning the columns in a revolutionary manner that had never been attempted before. Heist's innovative solution for the distillation columns included injecting cleaning solution into steam at the base of the columns. The vaporized cleaning solution would then travel the same bottom-to-top flow pattern through the column as occurs in the normal chemicals production process, producing better results than the traditional liquid cleaning method. (PHOTO) "Strong partnerships ... often lead to exclusive assignments that might otherwise be open to bids from a field of competitors." As with this chemicals manufacturer, Heist often places managers on-site, where they participate in customers' day-to-day planning meetings. The longevity of operational assignments and the close working relationships with customers fosters an environment where Heist managers get to know their customers' business as well as the customers themselves. In fact, with the trend toward increased outsourcing it's not uncommon to find that Heist's people are among the most-experienced in a customer's facility or department. If the innovative Heist vapor cleaning method worked, the customer would benefit from tremendous cost and down-time savings. Although Heist's proposal was thoroughly tested, it had never been applied in an operational environment. Trusting in the outsourcing provider it had relied on for over four decades, the customer allowed Heist to execute its plan. The results were excellent with complete removal and capture of hundreds of pounds of rust and material, and zero environmental impact. Industrial Maintenance Revenues (in millions) (CHART) Thanks to the strong outsourcing partnership the customer and Heist shared, and the valuable trust the two organizations forged during years of collaborative work, the Heist solution was a complete success. The newly constructed unit was brought on line as scheduled, in an industry where start-ups can be delayed by months when new equipment is improperly cleaned and prepared for installation. 11 C. H. HEIST CORP. & SUBSIDIARIES Summary of Selected Financial Data (In thousands, except per share earnings and percentages) FISCAL YEAR ENDED DECEMBER 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Net service revenues $ 135,647 119,516 106,515 102,659 102,572 Cost of service revenues 97,658 85,290 76,045 75,530 79,897 - --------------------------------------------------------------------------------------------------------------------------------- Gross Profit 37,989 34,226 30,470 27,129 22,675 Selling, general & administrative expense 35,560 31,400 28,354 23,843 21,399 - --------------------------------------------------------------------------------------------------------------------------------- Operating income 2,429 2,826 2,116 3,286 1,276 Interest expense (892) (729) (643) (541) (396) Other income (expense) 600 (93) 36 166 172 - --------------------------------------------------------------------------------------------------------------------------------- Earnings before taxes 2,137 2,004 1,509 2,911 1,052 Income taxes 843 1,106 819 1,305 734 - --------------------------------------------------------------------------------------------------------------------------------- Net earnings $ 1,294 898 690 1,606 318 ================================================================================================================================= Effective tax rate 39.4% 55.2% 54.3% 44.8% 69.8% Net earnings per share $ 0.45 0.31 0.24 0.56 0.11 ================================================================================================================================= Canadian operations (U.S. $): Net service revenues $ 16,149 16,300 14,877 14,483 12,673 Operating income 612 1,525 923 1,118 549 Total assets $ 9,830 10,570 9,316 10,093 9,451 ================================================================================================================================= Other data: Working capital $ 17,110 16,559 14,661 15,738 14,356 Property, plant & equipment, net 17,354 16,839 17,406 17,642 14,964 Capital expenditures, including acquisitions 13,361 6,708 5,859 7,091 3,957 Depreciation and amortization 5,310 5,357 4,905 4,530 4,433 Cash flows from operations (1) 6,208 6,255 5,595 6,135 4,751 Total assets 54,021 44,086 40,797 39,548 36,756 Long-term debt 16,050 8,755 6,492 6,980 5,121 Stockholders' equity $ 28,141 27,488 27,074 26,368 24,513 Return on beginning stockholders' equity 4.7% 3.3% 2.6% 6.6% 1.3% Weighted average number of shares outstanding 2,878 2,877 2,873 2,872 2,872 ================================================================================================================================= (1) Defined as net earnings plus depreciation and amortization. 12 C. H. Heist Corp. & Subsidiaries Management's Discussion & Analysis For the fiscal year ended December 27, 1998 compared to December 28, 1997 Results of Operations Service revenues for the current fiscal year increased by $16.1 million or 13.5% to $135.6 million from $119.5 million. Service revenues in the Company's staffing services segment, Ablest Service Corp. (Ablest), increased by $15.2 million or 24.0% to $78.5 million from $63.3 million over the prior fiscal year. Internal growth accounted for 9.9% of this increase in service revenues with the remainder resulting from two acquisitions in the Information Technology staffing field: Milestone Technologies, Inc. in April and SoftWorks International Consulting, Inc. in November of the current fiscal year. Service revenues for information technology services accounted for 23.8% of total staffing service revenues for the current fiscal year. Service revenues in the Company's industrial maintenance service segment increased by approximately $1 million or 1.6% to $57.2 million from $56.2 million during the current fiscal year. Service revenues in this segment's United States industrial maintenance operation increased by $1.0 million over the prior year, fueled by a new office opening and increased market penetration predominately in the southern region. Partially offsetting this increase was a decrease in service revenue at this segments Canadian subsidiary, C. H. Heist, Ltd. Service revenues for the Canadian operation actually increased by $1.5 million or 6.4% over the prior fiscal year when measured in its domestic, Canadian currency. Upon conversion, due to the declining value of the Canadian dollar in relationship to the United States dollar, the revenues decreased by 0.9%, period to period. Gross profit on a consolidated basis increased by $3.8 million or 11.0% to $38.0 million from $34.2 million, one year earlier. For the same period gross profit as a percentage of service revenues decreased to 28.0% from 28.6%. Year to year gross profit percentage for the Company's staffing services segment increased to 23.5% from 23.0%, one year earlier. Contributing to this increase were improved margins in commercial staffing services and growth in this segment's information technology staffing services. Gross profit dollars in the Company's industrial maintenance segment decreased by $121,000 or 0.6% and as a percentage of sales decreased to 34.2% from 35.0%, year to year. The decrease in gross margin dollars and percentage was the result of reduced margins on painting and paint-related services in the Company's Canadian subsidiary. Also contributing to this decline in gross profit dollars is the impact of the decline in value of the Canadian dollar, as noted above. Starting in fiscal 1998, the Company reclassified branch expenses that are not directly attributable to the services it performs from cost of services to selling, general and administrative expense. Management believes that its current presentation is generally consistent with industry practices. Selling, general and administrative expenses, inclusive of amortization expenses, increased by $4.2 million or 13.2% over the prior fiscal year. Selling, general and administrative expense for the staffing services segment increased by $2.5 million or 18.7% for the current fiscal year compared to one year ago. Contributing to this increase are costs associated with new office openings and acquisitions including increased amortization expense of intangible assets. Partially offsetting this increase in costs was a reduction in bad debt expenses of approximately $518,000 as compared to the prior fiscal year. This relates directly to three large customer write-offs that were made during 1997. Selling, general and administrative expense for the Company's industrial maintenance segment increased by $1.7 million or 9.4% over the prior fiscal year. Contributing to this increase is this segment's ongoing strategic sales and marketing planning initiative including the hiring of territorial sales representatives. Also contributing to the increase is our continuing investment in information technology and other support personnel in order to provide our customers with more accurate and timely information. These increases were partially offset by the allocation of proceeds received from the settlement of litigation in the Company's Canadian division. See the heading "Litigation Settlement" below. Other expense, net decreased by approximately $530,000 or 64.5% during the current fiscal year, compared to one year ago. This improvement was primarily attributable to costs associated with the planned spin-off and initial public offering of Ablest, which were written off during the first fiscal quarter of 1997, and not repeated in the current year. The Company's Board of Directors subsequently called off the spin-off and initial public offering. Also having a major impact during the current fiscal year was the settlement of litigation in the Company's Canadian subsidiary. See the heading "Litigation Settlement" below. Partially offsetting these decreases in other expense, net was an increase in interest expense due to the higher level of borrowing utilized to fund acquisitions during 1998. The effective tax rate for the current fiscal year is 39.4% as compared to 55.2% for the prior fiscal year. The reduced effective tax rate is the result of a reallocation of various corporate expenses between reporting segments. This reallocation resulted in the utilization of certain state tax net operating loss carry-forwards which had been fully offset by a valuation allowance. Refer to Footnote 8 of the Company's financial statements for a further explanation of income taxes. 13 Financial Condition: The quick ratio at December 27, 1998 was 2.7 to 1 as compared to 3.1 to 1 at December 28, 1997, and the current ratio was 2.9 to 1 as compared to 3.4 to 1, for the respective periods. Net working capital increased by $551,000 during fiscal 1998. The increase in net working capital is attributable to increases in cash and cash equivalents, accounts receivable and a decrease in income taxes payable. These were partially offset by a decrease in prepaid expenses and increases in accounts payable and accrued expenses. The increase in cash and cash equivalents, as well as, the increase in accounts receivable are primarily in the staffing services segment. These increases are predominately the result of acquisitions made during 1998 and the strong sales growth that this segment has achieved. Reference should be made to the Consolidated Statement of Cash Flows, which details the sources and uses of cash. Open credit commitments at the end of fiscal 1998 were approximately $9.0 million. The Company also has approximately $322,000 (the U. S. dollar equivalent) available for C. H. Heist, Ltd., the Company's Canadian subsidiary. Capital expenditures (excluding acquisitions) were approximately $6.1 million. Of this amount, $3.6 million was for additions to the mobile equipment fleet, $1.2 million was for computer hardware, software, office automation and communication systems, $344,000 was for new facilities and the balance was for other equipment. Open commitments at December 27, 1998 were $434,000, of which $308,000 is for new mobile equipment and the rest for other equipment. It is anticipated that existing internally available funds, cash flows from operations and available borrowings will be sufficient to cover working capital and capital expenditure requirements in fiscal 1999. Acquisitions On April 13, 1998, Ablest purchased 100% of the common stock of Milestone Technologies, Inc., (Milestone) an information technology staffing provider in the Phoenix, Arizona Metropolitan area. On November 17, 1998, Ablest purchased certain assets from SoftWorks International Consulting, Inc., (SoftWorks), an information technology staffing services provider in the Denver, Colorado Metropolitan area. Reference should be made to the Company's April 24, 1998 form 8-K filing for Milestone and December 1, 1998, form 8-K filing for SoftWorks. Litigation Settlement During fiscal 1998, the Company's Canadian subsidiary successfully negotiated a settlement of an outstanding lawsuit, which it had brought against an international bridge authority in Sarnia, Ontario Canada. The suit alleged that the bridge authority and its engineering firm misrepresented the total volume of steel that was to be sandblasted and painted on the structure in fiscal 1993 and 1994. The settlement reached was for $661,000 in Canadian dollars (approximately $430,000 in U. S. dollars). The allocation of the proceeds from this settlement was first used to pay off an outstanding receivable, and then to offset expenses incurred for legal and engineering services utilized to prepare and present our case. The balance of approximately $235,000 (U. S. dollars) was credited to miscellaneous other income and included in fiscal 1998. Impact of Year 2000 Readiness Items disclosed herein constitute "Y-2000 Readiness Disclosures" under the Year 2000 Information and Readiness Disclosure Act. Year 2000 problems, defined as computer programs and hardware have date-sensitive software which may recognize a date using "00" as the year 1900 rather than the year 2000 (Y2K), this could result in a systems failure or miscalculation causing disruptions of certain day to day accounting and information handling systems. The Company has undertaken an extensive review of its internal systems and has recently completed an applications upgrade to its integrated accounting programs that make them Y2K ready. The term "Y2K ready" as used throughout this document means that the relevant hardware, software, embedded chips or interfaces specifically referenced herein will correctly process, provide and receive date data within and between the 20th and 21st centuries. The Company is currently upgrading operating systems at all of its remote locations and anticipates being materially Y2K ready by the end of the first quarter of 1999. The next phase of our plan is to assess external and third party reliance for those suppliers of critical services that the Company relies upon. It is anticipated that this final phase will be completed in the first half of 1999. The upgrade to the various applications, which the Company has undertaken, did not result in additional expense, as they were part of the normal maintenance and support fees that are incurred on an ongoing basis. The total cost associated with the Company's Y2K readiness program is not material to the Company's operations. Although there can be no assurances, the Company does not anticipate any foreseeable problems regarding date-sensitive computer hardware or software applications that would have a material adverse effect on the Company. For the fiscal year ended December 28, 1997 compared to December 29, 1996 Results of Operations Service revenues (net sales) for the current fiscal year increased by $13.0 million or 12.2% to $119.5 million from $106.5 million. Service revenues in the Company's growing staffing services segment, Ablest Service Corp. (Ablest), increased by $13.8 million or 27.8%, over the prior year. Ablest now represents 53% of the 14 Company's consolidated service revenues. Started in 1978, Ablest service revenues have grown at a compound annual growth rate of 21.6% since 1990. Between September '96 and June '97, three acquisitions of information technology (IT) staffing companies were consummated adding $8.0 million in service revenues. Revenues from these acquisitions represented 11.5% of total service revenues for this segment in 1997. The commercial staffing division of Ablest grew at approximately 15%, which is slightly above the industry growth rate. Service revenues in the Company's industrial maintenance segment, long the bulwark of the Company, declined by $753,000 or 1.3% compared to the prior year. After a slow first quarter in which service revenues were down by $3.2 million, this segment showed solid growth with increases in three consecutive quarters. Of particular note, service revenues increased in the fourth quarter by $1.7 million or 12.8%, over the same period of the prior year. Service revenue increases, in the fourth quarter, were achieved in field service repair, equipment related services, chemical cleaning, wet and dry vacuuming and waste management services. The Company's Canadian industrial maintenance subsidiary had increased service revenues for the year of $1.4 million, contributing significantly to the service revenue improvement during the last 9 months of 1997. Gross profit on a consolidated basis increased by $2.8 million, or 17.6%, to $18.8 million from $16.0 million, one year earlier. Gross profit as a percentage of service revenues increased to 15.8% from 15.0% in the prior fiscal year. Gross profit percentage for the Company's staffing services segment decreased to 16.8% from 17.4%, one year earlier. Costs associated with new office openings, staffing existing offices to accommodate increased service revenues and the increased competitive pressures on pricing within the staffing industry contributed to this decline. Gross profit percentage for the industrial maintenance segment improved to 14.6% in 1997 from 13.1% during the prior year. The improvement in gross profit percentage was due to improved pricing in the Company's industrial maintenance segment and reductions in insurance reserves due to decreased claims for workers' compensation and the settlement of two liability claims pending against the Company for less-than-reserved amounts. The Company attributes the decreased workers' compensation claim level to continued improvements in the Company's safety - risk management program. Selling, general and administrative expenses on a consolidated basis increased by approximately $2.0 million or 14.3% in fiscal 1997, as compared to fiscal 1996. Selling, general and administrative expenses for the staffing services segment increased by $2.4 million or 46.2% for the current fiscal year, compared with 1996. This increase is the result of costs associated with new office openings and information technology staffing company acquisitions. Additional increases were incurred to improve and expand support structures and field operations to accommodate the growth that Ablest has achieved and to position it for future growth. During the current year Ablest wrote-off approximately $218,000 in accounts receivable for one customer over disputed invoices on a short-term commercial staffing project. Additional write-offs were made for two customers who have filed for protection under Chapter 11 of the bankruptcy code. Selling, general and administrative expenses for the industrial maintenance segment decreased by approximately $400,000 or 4.7% during 1997. The decrease is primarily the result of streamlining and consolidations that were made in the Company's support functions. Over the past two years the Company has made a major investment in information technology hardware, software and personnel, which also contributed to the increase in selling, general and administrative expense. This investment was made to provide management, and ultimately our customers, with more timely and accurate information. The Company has wide- and local- area networks for real-time communications throughout the geographically dispersed operating offices, which makes timely and reliable dissemination of information possible. Other expenses, net increased approximately $345,000, or 47.7%, during the current fiscal year, as compared to 1996. Amortization of goodwill and other assets associated with the technology staffing acquisitions contributed to this increase. The three acquisitions completed in the past fifteen months were financed by borrowing on the Company's line-of-credit and through long-term earnouts with previous owners. This increased the level of borrowing, and thus increased interest expense. Long-term debt reached $11.4 million during the year and at year-end was $8.75 million. The acquisitions were accretive to earnings and generated positive cash flow, which was used to reduce debt. During the fourth quarter of 1997, the Company consolidated and increased its line-of-credit facility to a total availability of $25 million under more favorable terms and conditions than were in effect prior to the termination of separate credit facilities for the industrial maintenance services and staffing services segments. Also contributing to the increase in other expenses was the write-off of costs associated with the preparation of documents for the proposed spin-off and initial public offering of Ablest Service Corp., which was terminated by the Company's Board of Directors in the third quarter of 1997. The effective tax rate for the current fiscal year was 55.2%. The effective rates are affected by the multiple taxing jurisdictions in which the Company operates, including higher foreign rates on earnings of the Company's Canadian subsidiary. Please refer to Footnote 8 of the Company's financial statements for a further explanation of income taxes. 15 C. H. Heist Corp. & Subsidiaries Consolidated Balance Sheets (In thousands, except share data) YEAR ENDED Dec. 27,1998 Dec. 28,1997 ASSETS Current assets: Cash and cash equivalents $ 3,147 2,948 Receivables, less allowance for doubtful receivables of $430 and $416 in 1998 and 1997, respectively 19,653 16,621 Services in progress 1,017 1,357 Parts and supplies 1,174 1,254 Prepaid expenses 317 539 Deferred income taxes ( note 8 ) 626 806 - -------------------------------------------------------------------------------------------------- Total current assets 25,934 23,525 - -------------------------------------------------------------------------------------------------- Property, plant and equipment, at cost ( note 2 ) 56,350 52,677 Less accumulated depreciation 38,996 35,838 - -------------------------------------------------------------------------------------------------- Net property, plant and equipment 17,354 16,839 Deferred income taxes ( note 8 ) 144 176 Intangible assets, net ( note 3 ) 10,471 3,386 Other 118 160 - -------------------------------------------------------------------------------------------------- $ 54,021 44,086 ================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt ( note 5 ) $ 5 38 Accounts payable 3,030 2,660 Accrued expenses ( note 4 ) 5,788 3,814 Income taxes payable 1 454 - -------------------------------------------------------------------------------------------------- Total current liabilities 8,824 6,966 Long-term debt, excluding current installments ( note 5 ) 16,050 8,755 Deferred incentive compensation ( note 6 ) 869 479 Deferred income taxes ( note 8 ) 137 398 - -------------------------------------------------------------------------------------------------- Total liabilities 25,880 16,598 - -------------------------------------------------------------------------------------------------- Stockholders' equity ( notes 5, 7 and 8 ): Common stock of $.05 par value. Authorized 8,000,000 shares; issued 3,167,092 shares for 1998 and 1997, respectively 158 158 Additional paid-in capital 4,278 4,274 Retained earnings 27,176 25,882 Accumulated other comprehensive losses (2,235) (1,583) - -------------------------------------------------------------------------------------------------- 29,377 28,731 Less cost of common shares in treasury - 288,754 and 290,269 shares for 1998 and 1997, respectively (1,236) (1,243) - -------------------------------------------------------------------------------------------------- Total stockholders' equity 28,141 27,488 - -------------------------------------------------------------------------------------------------- Commitments and contingencies ( notes 9, 12, 13 and 14 ) - - - -------------------------------------------------------------------------------------------------- $ 54,021 44,086 ================================================================================================== See accompanying notes to consolidated financial statements. 16 C. H. Heist Corp. & Subsidiaries Consolidated Statements of Earnings and Comprehensive Income (In thousands, except share and per share data) YEAR ENDED Dec. 27,1998 Dec. 28,1997 Dec. 29,1996 Net service revenues $ 135,647 119,516 106,515 Cost of services 97,658 85,290 76,045 - --------------------------------------------------------------------------------------------------------------------- Gross profit 37,989 34,226 30,470 Selling, general and administrative expenses 35,036 31,153 28,237 Amortization of intangible assets 524 247 117 - --------------------------------------------------------------------------------------------------------------------- Operating income 2,429 2,826 2,116 - --------------------------------------------------------------------------------------------------------------------- Other income (expense): Interest expense (892) (729) (643) Interest income 85 78 62 Gain on disposal of property, plant and equipment, net 24 14 11 Miscellaneous, net 491 (185) (37) - --------------------------------------------------------------------------------------------------------------------- Other expense, net (292) (822) (607) - --------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 2,137 2,004 1,509 Income taxes (note 8) 843 1,106 819 - --------------------------------------------------------------------------------------------------------------------- Net earnings $ 1,294 898 690 ===================================================================================================================== Basic and diluted net earnings per common share $ 0.45 0.31 0.24 ===================================================================================================================== Weighted average number of common shares outstanding 2,877,977 2,876,505 2,873,337 ===================================================================================================================== Reconciliation of Net Earnings to Comprehensive Income - ------------------------------------------------------ Net earnings $ 1,294 898 690 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (652) (499) 2 - --------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 642 399 692 Consolidated Statements of Stockholders' Equity Accumulated Additional other Total Common paid-in Retained comprehensive Treasury stock stockholders' (In thousands, except share data) stock capital earnings losses Shares Amounts equity ====================================================================================================================== Balances at December 31, 1995 $158 4,254 24,294 (1,086) 292,419 (1,252) 26,368 Net earnings -- -- 690 -- -- -- 690 Exercised options -- 14 -- -- -- -- 14 Foreign currency translation adjustment -- -- -- 2 -- -- 2 - ---------------------------------------------------------------------------------------------------------------------- Balances at December 29, 1996 158 4,268 24,984 (1,084) 292,419 (1,252) 27,074 Net earnings -- -- 898 -- -- -- 898 Stock compensation awards -- 6 -- -- (2,150) 9 15 Foreign currency translation adjustment -- -- -- (499) -- -- (499) - ---------------------------------------------------------------------------------------------------------------------- Balances at December 28, 1997 158 4,274 25,882 (1,583) 290,269 (1,243) 27,488 Net earnings -- -- 1,294 -- -- -- 1,294 Stock compensation awards -- 4 -- -- (1,515) 7 11 Foreign currency translation adjustment -- -- -- (652) -- -- (652) - ----------------------------------------------------------------------------------------------------------------------- Balances at December 27, 1998 $158 4,278 27,176 (2,235) 288,754 (1,236) 28,141 ======================================================================================================================= See accompanying notes to consolidated financial statements. 17 C. H. Heist Corp. & Subsidiaries Consolidated Statements of Cash Flows (In thousands) YEAR ENDED Dec. 27,1998 Dec. 28,1997 Dec. 29,1996 Cash flows from operating activities: Net earnings $ 1,294 898 690 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation of plant and equipment 4,786 5,110 4,788 Amortization of intangible assets 524 247 117 Gain on disposal of property, plant and equipment, net (24) (14) (11) Deferred income taxes (340) 8 (64) Stock compensation awards 11 15 - Changes in assets and liabilities (see below) (309) (1,116) 238 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 5,942 5,148 5,758 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment (6,095) (4,804) (4,740) Proceeds from disposal of property, plant and equipment 525 210 225 Acquisitions and earnout payments, net of cash acquired (7,266) (1,904) (1,119) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (12,836) (6,498) (5,634) - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from bank line of credit borrowings 24,597 17,000 8,700 Repayment of bank line of credit borrowings (17,297) (14,700) (9,150) Repayment of acquisition note payable - (500) - Repayment of other long-term debt (38) (37) (37) Exercised stock options - - 14 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 7,262 1,763 (473) Effect of exchange rate changes on cash and cash equivalents (169) (157) - - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 199 256 (349) Cash and cash equivalents at beginning of year 2,948 2,692 3,041 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 3,147 2,948 2,692 =================================================================================================================================== Changes in assets and liabilities providing (using) cash, excluding effects of acquisitions: Receivables $ (2,123) (2,199) (256) Services in progress 600 (255) (128) Parts and supplies 75 345 566 Prepaid expenses 220 (226) (136) Accounts payable 222 1,074 293 Accrued expenses 874 (625) 316 Income taxes payable (620) 267 (349) Other assets 48 298 (344) Deferred incentive compensation 395 205 276 - ----------------------------------------------------------------------------------------------------------------------------------- Total $ (309) (1,116) 238 =================================================================================================================================== Supplemental disclosure of cash flow information: Cash paid during year for: Interest $ 871 692 458 Income taxes $ 1,633 823 1,144 Non cash investing and financing activities: Note issued in connection with acquisition $ - - 500 Liabilities assumed in acquisition transactions $ 760 - - =================================================================================================================================== See accompanying notes to consolidated financial statements. 18 C.H. HEIST CORP. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 27, 1998, December 28, 1997 and December 29, 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES C. H. Heist Corp. and subsidiaries (the Company) has two professional service segments: staffing services and industrial maintenance services. The Ablest Service Corp. (Ablest) staffing services subsidiary focuses on providing temporary and contract staffing solutions to businesses in the clerical, light industrial and technology professional sectors. The industrial maintenance segment services a wide range of industries, such as chemical, petrochemical, power generation, pulp and paper, mining and metallurgical plants. The industrial services business includes hydroblasting, painting, sandblasting, vacuuming of industrial wastes, turnaround services, chemical cleaning and commercial insulation. These services are offered domestically and in Canada through C. H. Heist Ltd., a wholly owned subsidiary. Many of these services are rendered on a contract basis. Significant accounting policies followed by the Company are summarized as follows: (a) FISCAL YEAR The Company's fiscal year ends on the last Sunday of December. The consolidated financial statements include 52 weeks for each of the years ended December 27, 1998, December 28, 1997 and December 29, 1996. (b) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation. (c) CASH EQUIVALENTS All highly liquid investments with original maturities of three months or less are considered cash equivalents. (d) REVENUE RECOGNITION The industrial maintenance segment operates primarily under time-and-material contracts, and to a lesser extent under fixed contracts. Time-and-material contract revenue and associated costs are recognized in the period the services are provided. Revenue on fixed price contracts is recognized on the percentage of completion method based on costs incurred in relation to total estimated costs. The staffing services segment recognizes revenue and associated costs in the period the services are provided. Services in progress represents, for both segments, the revenue for services provided but not yet billed. Costs associated with any services in progress are reflected as expenses. Anticipated losses, if any, are provided for in full. (e) PARTS AND SUPPLIES Parts and supplies used in the industrial maintenance segment are valued at the lower of cost (first-in, first-out) or market. (f) PROPERTY, PLANT AND EQUIPMENT Depreciation of plant and equipment is provided over the estimated useful lives of the respective assets, principally on the straight-line method. Leasehold improvements are amortized on the straight-line method over the shorter of the lease term or estimated useful life of the asset. Estimated useful lives generally range from 3 to 40 years. (g) INTANGIBLE ASSETS The values ascribed to acquired intangibles, primarily goodwill, covenants not-to-compete, customer and employee lists are being amortized on the straight-line method primarily over periods of three to thirty years. The Company regularly evaluates whether events and circumstances have occurred that indicate the carrying amounts of intangible assets may warrant revision or may not be recoverable. In the event of possible impairment, the asset's value will be determined by projected net cash flows of the related business. (h) INCOME TAXES Income taxes are accounted for by the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating loss and credit carryforwards and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. (i) EARNINGS PER SHARE Basic earnings per share is computed by using the weighted average number of common shares outstanding. Diluted earnings per share is computed by using the weighted average number of common shares outstanding plus the dilutive effect, if any, of stock options. The dilutive effect of stock options was not significant for any of the years presented. (j) FOREIGN CURRENCY TRANSLATION The Canadian subsidiary utilizes the Canadian dollar as its functional currency. Assets and liabilities are translated using rates of exchange as of the balance sheet date and the statements of earnings are translated at an average rate of exchange during the year. Gains and losses resulting from translation are reported separately in stockholders' equity as "Accumulated other comprehensive losses." Foreign currency transaction gains and losses, if any, are reflected in operations. 19 (k) Use of Estimates Management has made a number of estimates and assumptions in preparing these financial statements to conform with generally accepted accounting principles. Actual results could differ from those estimates. (l) Methods and Development Costs Methods and development costs amounted to $352,000, $338,000, and $248,000 for the fiscal years 1998, 1997 and 1996, respectively. (m) Accounting Standards Pronouncements In 1999, the Company will adopt SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". Management believes that the adoption of this standard will not have a material effect on the reported operating results of the Company. (n) Reclassification The Company has reclassified 1997 and 1996 branch expenses that are not directly attributable to the services it performs from cost of services to selling, general and administrative expenses to conform to the 1998 classification. The effect of these reclassifications was to lower cost of services and increase selling, general and administrative expenses by $15,397,000 and $14,453,000 for fiscal 1997 and 1996, respectively, as compared to amounts previously reported. Management believes that its current presentation is generally consistent with industry practice. (2) PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment, at cost, follows: (In thousands) YEAR ENDED DEC. 27, 1998 DEC. 28, 1997 Land $ 1,321 1,380 Buildings and improvements 5,249 5,394 Machinery and equipment 27,126 25,092 Automotive equipment 14,852 14,276 Office furniture and equipment 7,329 6,070 Leasehold improvements 473 465 - ------------------------------------------------------------ $56,350 52,677 - ------------------------------------------------------------ (3) INTANGIBLE ASSETS A summary of intangible assets follows: (In thousands) YEAR ENDED DEC. 27, 1998 DEC .28, 1997 Goodwill, less accumulated amortization of $263 and $68 $ 8,908 2,413 Other intangible assets, less accumulated amortization of $623 and $293 1,563 973 - ------------------------------------------------------------ $10,471 3,386 ============================================================ Intangible assets relate primarily to acquisitions in the staffing services segment (note 12). (4) ACCRUED EXPENSES A summary of accrued expenses follows: (In thousands) YEAR ENDED DEC. 27, 1998 DEC. 28, 1997 Payroll and other compensation $2,474 1,353 Taxes, other than income 155 150 Insurance 1,277 1,535 Acquisition earnout costs (note 12) 1,311 264 Other 571 512 - ------------------------------------------------------------------ $5,788 3,814 ================================================================== (5) INDEBTEDNESS A summary of long-term debt follows: (In thousands) YEAR ENDED DEC. 27, 1998 DEC. 28, 1997 Notes payable, bank-revolving credit agreement $16,050 8,750 Mortgage note with interest at 9% payable in 1999 5 43 - ------------------------------------------------------------------ Total long-term debt 16,055 8,793 Less current installments of long-term debt 5 38 - ------------------------------------------------------------------ Long-term debt, excluding - ------------------------------------------------------------------ current installments $16,050 8,755 ================================================================== The Company has a $25,000,000 unsecured bank line of credit under a revolving credit agreement. The interest rate on borrowings under the line of credit is elected weekly by the Company and is either (i) the bank's prime rate or (ii) the Secondary Market Certificate of Deposit (CD) Rate plus 3/4%. The rate in effect at December 27, 1998 is 5.785%. On July 31, 2000, the Company has the option of converting the then outstanding borrowings to a term loan, payable in twenty equal quarterly installments, bearing interest at either (i) the bank's prime rate plus 1/2% or (ii) the Secondary Market CD Rate plus 1-1/2%. If converted, the company continues electing, on a weekly basis, the interest rate to be charged. The revolving credit agreement contains working capital requirements, and limits the amount of liabilities, capital expenditures and payment of cash dividends. Under the most restrictive of these provisions, $1,000,000 of retained earnings is free of dividend restrictions at December 27, 1998. The Company also pays a commitment fee of 1/4% per annum on the average daily unused portion. Compensating balances, may be, but are not required to be maintained. The Company's Canadian subsidiary has an unsecured line of credit in the U.S. dollar equivalent amount of $322,000 at December 27, 1998. Any borrowings thereunder bear interest at the bank's prime rate. Commitment fees of 1/4% per annum are payable on the average daily unused portion of the line of credit. No compensating balances are required. No amounts were outstanding at December 27, 1998 and December 28, 1997. 20 Long-term debt matures as follows assuming conversion, on July 31, 2000, of the amount due under the revolving credit agreement; $5,000 in 1999; $1,605,000 in 2000; $3,210,000 in 2001; $3,210,000 in 2002; $3,210,000 in 2003; and $4,815,000 thereafter. The fair value of long-term debt approximates its recorded value. (6) DEFERRED INCENTIVE COMPENSATION The Company has initiated an Economic Value Added (EVA((R))) Incentive Remuneration Plan for officers and key employees. The purpose of the plan is to provide incentive compensation in a form which relates the participants incentive compensation to an increase in the economic value of the Company. The participant is paid a portion of the declared bonus in the February following the year in which the bonus was deemed earned and is reflected in accrued expenses. The remaining portion of the bonus that is declared but unpaid may be paid in succeeding years if performance targets are met. A participant may forfeit any declared but unpaid bonus upon termination of employment other than by reason of death, disability or retirement, at the discretion of the Compensation Committee of the Board of Directors. (7) STOCK OPTION PLANS The Company has reserved 375,000 common shares for issuance in conjunction with its Stock Option Plan (Plan). The Plan provides for the granting of incentive stock options and/or non qualified options to officers and key employees to purchase shares of common stock at a price not less than the fair market value of the stock on the dates options are granted. Such options are exercisable at such time or times as may be determined by the Compensation Committee of the Board of Directors and generally expire no more than ten years after grant. Options vest and become fully exercisable six months after the grant date. A summary of stock option activity follows: Weighted Options average exercisable Shares exercise price at year end ========================================================================== Outstanding Dec. 31, 1995 189,700 $ 7.80 142,700 Exercised (1,900) 7.48 Canceled or expired (5,411) 8.06 - -------------------------------------------------------------------------- Outstanding Dec. 29, 1996 182,389 7.80 182,389 Canceled or expired (12,905) 9.13 - -------------------------------------------------------------------------- Outstanding Dec. 28, 1997 169,484 7.70 169,484 Canceled or expired (3,396) 7.98 - -------------------------------------------------------------------------- Outstanding Dec. 27, 1998 166,088 $ 7.69 166,088 ========================================================================== At December 27, 1998, the range of exercise prices and weighted average contractual life of outstanding and exercisable options was $6.94 - $10.13 and 5.4 years, respectively. At December 27, 1998 there were 204,512 shares available for grant under the Plan. In May 1996, the Company's shareholders approved the adoption of a Leveraged Stock Option plan (Leveraged Plan) for key employees. The Leveraged Plan authorizes the issuance of options covering up to 375,000 shares of common stock. Pursuant to the Leveraged Plan, 10% of a participant's annual EVA incentive compensation payment will be used to purchase stock options, which will be granted, following the end of the fiscal year. The number of options and the exercise price will be based on the average market price per share of common stock for the ten days prior to the calendar year end for which the option is granted. The exercise price of the options will be subject to escalation at 8% per year over the original option price. Options will vest after three years and will be exercisable over a ten-year period from the date of grant. The Compensation Committee of the Board of Directors establishes the percentage of the compensation to be applied towards the options, and the escalation percentage of the options. A summary of Leveraged Plan option activity follows: Weighted average Weighted fair value average of options Shares exercise price granted ====================================================================== Outstanding Dec. 29, 1996 - $ - Granted 33,583 6.22 $ 2.59 - ---------------------------------------------------------------------- Outstanding Dec. 28, 1997 33,583 6.22 Granted 38,803 7.02 $ 2.54 - ---------------------------------------------------------------------- Outstanding Dec. 27, 1998 72,386 $ 6.88 ====================================================================== At December 27, 1998, the range of exercise prices and weighted average contractual life of outstanding and exercisable options was $6.72 - $7.02 and 8.7 years, respectively. No options were exercisable as of December 27, 1998. At December 27, 1998 there were 302,614 shares available for grant under the Leveraged Plan. The per share weighted average fair value of stock options granted was determined using the Black Scholes option-pricing model with the following weighted average assumptions for 1998 and 1997, respectively: risk free interest rates of 6.4% and 5.6%; expected dividend yield - none for both years; expected life of ten years for both years; and volatility of 28% and 24%, respectively. Based on the fair value of all options at the grant date under the disclosure provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: (In thousands, except per share data) YEAR ENDED DEC. 27, 1998 DEC. 28, 1997 DEC. 29, 1996 Net earnings As reported $ 1,294 898 690 Pro forma 1,261 884 598 Basic and diluted net earnings As reported $ 0.45 0.31 0.24 per share Pro forma 0.44 0.31 0.21 21 (8) INCOME TAXES Income tax expense consists of: (In thousands) YEAR ENDED DEC. 27, 1998 DEC. 28, 1997 DEC. 29, 1996 Current expense (benefit): Federal $ 655 (50) 150 State 75 257 295 Foreign 453 891 438 - ------------------------------------------------------------------------------------------ Total current 1,183 1,098 883 - ------------------------------------------------------------------------------------------ Deferred expense (benefit): Federal (167) 54 (29) State (173) 10 (2) Foreign 1 (56) (33) - ------------------------------------------------------------------------------------------ Total deferred (340) 8 (64) - ------------------------------------------------------------------------------------------ $ 843 1,106 819 ========================================================================================== Earnings before income taxes consist of: Domestic $ 1,161 348 426 Foreign 976 1,656 1,083 - ------------------------------------------------------------------------------------------ $ 2,137 2,004 1,509 ========================================================================================== Actual income taxes differ from the "expected" taxes (computed by applying the U.S. Federal corporate tax rate of 34% to earnings before income taxes) as follows: (In thousands) YEAR ENDED Dec. 27, 1998 Dec. 28, 1997 Dec. 29, 1996 Computed expected tax expense $ 727 681 513 Adjustments resulting from: Effect of higher foreign tax rates 123 272 167 State taxes net of Federal Tax benefit (65) 176 193 Expiration of excess foreign tax credits 403 -- -- Change in beginning of year valuation allowance for deferred tax assets (403) -- (129) Goodwill amortization 62 -- -- Meals & entertainment 79 57 57 Other 83 (80) 18 - ------------------------------------------------------------------------------ $ 843 1,106 819 - ------------------------------------------------------------------------------ Effective tax rate 39.4% 55.2% 54.3% ============================================================================== The tax effects of temporary differences that give rise to the deferred tax assets and liability are as follows: (In thousands) YEAR ENDED DEC. 27, 1998 DEC. 28, 1997 Current deferred tax assets: Allowance for doubtful receivables $ 154 155 Accrued insurance expense 429 543 Other 43 108 - --------------------------------------------------------------------- 626 806 - --------------------------------------------------------------------- Long-term deferred tax assets: Accumulated depreciation of plant and equipment 117 143 Deferred compensation 27 33 - --------------------------------------------------------------------- 144 176 - --------------------------------------------------------------------- Long-term deferred tax liability, net: Liabilities: Accumulated depreciation of plant and equipment (692) (683) Assets: Operating loss and credit carryforwards 581 961 Accumulated amortization of other assets 92 119 Deferred compensation 324 162 Valuation allowance (446) (959) Other 4 2 - --------------------------------------------------------------------- (137) (398) - --------------------------------------------------------------------- Net deferred tax assets $ 633 584 ===================================================================== In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the years in which the deferred tax assets are deductible, management has provided valuation allowances for those deferred tax assets that are not expected to be realized. Undistributed earnings of the Canadian subsidiary, which are intended to be permanently reinvested in the business, are approximately $10,723,000 at December 27, 1998. If such earnings were remitted to the domestic parent, taxes based at the then current rates and subject to certain limitations would be payable after reduction for any foreign taxes previously paid on such earnings. 22 (9) EMPLOYEE BENEFIT PLANS The Company has qualified noncontributory defined benefit pension plans covering substantially all of its non-bargaining unit personnel in the United States. The benefits are based on years of service and the employee's average compensation during employment. Pension costs are funded as required by applicable regulations. Plan assets are invested in a diversified portfolio which includes common stocks, bond and mortgage obligations, insurance contracts and money market funds. In 1998 the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". The standard does not change any accounting measurements, but requires additional disclosures of the beginning and ending balances of the benefit obligation and the fair value of plan assets, the funded status of the plan and the components of pension expense. The following tables set forth the funded status of the plans at the October 1 measurement date and the components of pension expense: In thousands) YEAR ENDED DEC. 27, 1998 DEC. 28, 1997 Change in benefit obligation: Benefit obligation at beginning of year $ 3,593 3,339 Service cost 467 411 Interest 233 199 Actuarial loss 783 445 Benefits paid (32) (95) Other -- (706) - ------------------------------------------------------------------------ Benefit obligation at end of year $ 5,044 3,593 ======================================================================== Change in plan assets: Fair value of plan assets at beginning of year $ 3,806 3,513 Actual return on plan assets 137 387 Employer contributions 242 726 Benefits paid (32) (95) Other -- (725) - ------------------------------------------------------------------------ Fair value of plan assets at end of year $ 4,153 3,806 ======================================================================== Reconciliation of funded status: Funded status (underfunded)/overfunded $ (891) 212 Unrecognized net actuarial (gain)/loss 89 (887) Unrecognized transition obligation 9 12 Unrecognized prior service cost 562 624 - ------------------------------------------------------------------------ Accrued benefit cost $ (229) (39) - ------------------------------------------------------------------------ Principal actuarial assumptions are: Weighted average discount rate 5.5% 6.5% Weighted average return on plan assets 7.9% 7.8% Rate of compensation increase 3.9% 4.9% (In thousands) YEAR ENDED DEC. 27, 1998 DEC. 28, 1997 DEC. 29, 1996 Pension expense: Service cost $ 467 411 427 Interest cost 232 199 172 Expected return on plan assets (292) (242) (195) Recognized net actuarial gain (39) (47) (26) Amortization of transition obligation 3 3 3 Amortization of prior service costs 62 62 62 - ---------------------------------------------------------------------- Total pension expense $ 433 386 443 ====================================================================== On January 15, 1999 the Company announced its intention to terminate its qualified noncontributory defined benefit pension plans covering substantially all of its non-bargaining unit personnel in the United States. The net assets of the plans will be allocated, as prescribed by ERISA and its related regulations. At this time management does not foresee that the Company's obligation for funding deficiencies, if any, in benefits will have a material adverse effect on the Company's financial condition or liquidity. The Company maintains a deferred profit sharing plan covering all salaried employees of its Canadian subsidiary that meet certain eligibility requirements. Contributions to the plan are based on net earnings, as defined, subject to certain limitations based on the salaries of the participants. Expenses under the plan were $39,000 in 1998, $38,000 in 1997 and $35,000 in 1996. In 1997, the Company initiated a qualified defined contribution plan covering the non-bargaining unit employees of the United States. The Company matches the contributions of participating employees, with a maximum contribution limit, on the basis of the percentages specified in the plan. The matching contributions were $47,000 in 1998 and $16,000 in 1997. (10) INDUSTRY SEGMENTS The Company has two professional service segments: staffing and industrial maintenance services. Staffing services are provided on a temporary and contract basis to businesses in clerical, light industrial and technology professional sectors throughout the eastern United States and select south-western U.S. markets. Industrial maintenance services a wide range of industries by providing hydroblasting, painting, sandblasting, and vacuuming of industrial wastes throughout the eastern United States and Canada. 23 The Company has adopted the provision of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". In connection with the adoption of this standard the Company has revised its allocation of various corporate overhead expenses between its reporting segments. The effect of this reclassification was to allocate $1,408,000 and $1,335,000 of additional expenses for fiscal 1997 and 1996, respectively, to the Company's staffing services segment as compared to the allocation previously reported. The reallocation was made based on an assessment of actual corporate costs necessary to serve each segment. Intersegment revenues, where applicable, are accounted for on the same basis as sales to unaffiliated customers. Corporate assets not allocated include certificates of deposit. Operating segment data as of and for each of the years ended December 27, 1998, December 28, 1997 and December 29, 1996 are as follows: (In thousands) YEAR ENDED Dec. 27, 1998 Dec. 28, 1997 Dec. 29, 1996 Staffing services: Net revenues $ 78,471 63,268 49,514 Intersegment revenues 101 39 84 - ------------------------------------------------------------------------------------------ Total revenues $ 78,572 63,307 49,598 Cost of services 60,059 48,740 37,700 Selling, general & administrative: Operations 11,986 10,344 7,087 Allocated overhead 3,141 2,616 2,716 - ------------------------------------------------------------------------------------------ Total selling general & administrative 15,127 12,960 9,803 Amortization 506 215 93 Operating income 2,779 1,353 1,918 Depreciation 426 409 320 Assets 25,603 12,555 9,212 Capital expenditures and acquisitions $ 8,039 2,581 1,374 - ------------------------------------------------------------------------------------------ Industrial maintenance services: Net revenues $ 57,176 56,248 57,001 Cost of services 37,599 36,550 38,345 Selling, general & administrative: Operations 13,911 13,301 13,097 Overhead 5,998 4,892 5,337 - ------------------------------------------------------------------------------------------ Total selling general & administrative 19,909 18,193 18,434 Amortization 18 32 24 Operating income (loss) (350) 1,473 198 Depreciation 4,360 4,701 4,468 Assets 27,134 29,414 31,548 Capital expenditures $ 5,322 4,127 4,485 - ------------------------------------------------------------------------------------------ Corporate assets $ 1,284 2,117 37 ========================================================================================== (In thousands) YEAR ENDED Dec. 27, 1998 Dec. 28, 1997 Dec. 29, 1996 Consolidated: Net revenues $ 135,647 119,516 106,515 Cost of services 97,658 85,290 76,045 Selling, general & administrative 35,036 31,153 28,237 Amortization 524 247 117 Operating income 2,429 2,826 2,116 Other expense, net (292) (822) (607) Earnings before income taxes 2,137 2,004 1,509 Depreciation 4,786 5,110 4,788 Assets 54,021 44,086 40,797 Capital expenditures and acquisitions $ 13,361 6,708 5,859 =========================================================================================== (11) CANADIAN OPERATION A summary of financial data (in U.S. dollars) relating to the Company's Canadian industrial maintenance operation follows: (In thousands) YEAR ENDED DEC. 27, 1998 DEC. 28, 1997 DEC. 29, 1996 Identifiable assets $ 9,830 10,570 9,316 Liabilities 1,312 1,921 754 Net service revenues 16,149 16,300 14,877 (12) ACQUISITIONS On September 15, 1996, Ablest purchased certain assets from Tech Resource, Inc., an information technology staffing services business in the Atlanta, Georgia metropolitan area, and its shareholder. The aggregate purchase price, including acquisition costs was approximately $1,619,000, of which approximately $1,119,000 was paid in cash and $500,000 was in the form of a one-year promissory note paid September 1997. Approximately $1,581,000 of the purchase price has been allocated to various intangible assets, primarily goodwill. On April 28, 1997, Ablest purchased certain assets from Solution Source, Inc., an information technology staffing services business in the Atlanta, Georgia metropolitan area, and its shareholders. The aggregate purchase price, including acquisition costs, was approximately $1,429,000, paid in cash, of which approximately $1,379,000 has been allocated to various intangible assets, primarily goodwill. The acquisition agreement also provides that Ablest may be required to pay additional consideration if certain performance criteria are met in 1997, 1998 and 1999. Total additional payments of $489,000 have been paid or accrued in 1997 and 1998. 24 On June 23, 1997, Ablest purchased certain assets from The Kelton Group, Inc., an information technology staffing and documentation services provider in the Raleigh, North Carolina metropolitan area, and its shareholder. The aggregate purchase price, including acquisition costs, was approximately $475,000, paid in cash, of which approximately $375,000 has been allocated to various intangible assets, primarily goodwill. On April 13, 1998, Ablest purchased 100% of the common stock of Milestone Technologies, Inc., an information technology staffing services provider in the Phoenix, Arizona metropolitan area, from its shareholders. The aggregate purchase price, including acquisition costs, was approximately $6,848,000, paid in cash, of which approximately $5,314,000 has been allocated to various intangible assets, primarily goodwill. The acquisition agreement also provides that Ablest may be required to pay additional consideration if certain performance criteria are met in 1998. Total additional payments of $786,000 have been accrued in 1998. On November 17, 1998, Ablest purchased certain assets from SoftWorks International Consulting, Inc., an information technology staffing services provider in the Denver, Colorado metropolitan area, and its shareholders. The aggregate purchase price, including acquisition costs, was approximately $1,009,000, paid in cash, of which approximately $984,000 has been allocated to various intangible assets, primarily goodwill. The acquisition agreement also provides that Ablest may be required to pay up to an additional $800,000 over the next two years if certain performance criteria are met in 1998 and 1999. Total additional payments of $300,000 have been accrued in 1998. All acquisitions were accounted for by the purchase method of accounting and accordingly, the results of operations since the respective dates of acquisition are included in the consolidated statements of earnings. The purchase prices have been allocated to assets acquired and liabilities assumed based on their fair values. The following unaudited, pro forma, condensed, combined financial information assumes the acquisitions occurred at the beginning of each fiscal year presented. The results do not purport to be indicative of what would have occurred had the acquisitions been made at the beginning of each fiscal year presented, or of the results that may occur in the future. (Unaudited) (In thousands, except per share data) (Unaudited) YEAR ENDED DEC. 27, 1998 DEC. 28, 1997 DEC. 29, 1996 Net service revenues $140,185 131,805 120,460 Net earnings 1,454 1,051 725 Basic and diluted net earnings per share $ 0.51 0.37 0.25 (13) LEASE COMMITMENTS The Company and its subsidiaries occupy certain facilities under noncancelable operating lease arrangements. Expenses under such arrangements amounted to $970,000, $941,000, and $786,000 in 1998, 1997 and 1996 respectively. Of these amounts $94,000, $93,000 and $92,000 applied to leases with related persons in 1998, 1997, and 1996, respectively. In addition, the Company leases certain automotive and office equipment under noncancelable operating lease arrangements, which provide for minimum monthly rentals. Expenses under such arrangements amounted to $924,000, $806,000 and $813,000 in 1998, 1997, and 1996, respectively. Management expects that in the normal course of business, new leases will replace leases that expire. Real estate taxes, insurance and maintenance expenses are obligations of the Company. A summary of future minimum rental payments at December 27, 1998 under operating leases follows: (In thousands) Real property ------------- Related Year persons Other Equipment - -------------------------------------------------------------------- 1999 $ 58 843 630 2000 55 567 492 2001 - 294 225 2002 - 108 13 (14) CONTINGENCIES The Company is exposed to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of management, the resolution of such matters will not have a material adverse effect on the Company's financial condition or liquidity. 25 C. H. HEIST CORP. & SUBSIDIARIES Independent Auditors' Report The Board of Directors C. H. Heist Corp.: We have audited the accompanying consolidated balance sheets of C. H. Heist Corp. and subsidiaries as of December 27, 1998 and December 28, 1997, and the related consolidated statements of earnings and comprehensive income, stockholders' equity and cash flows for the years ended December 27, 1998, December 28, 1997 and December 29, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of C. H. Heist Corp. and subsidiaries as of December 27, 1998 and December 28, 1997, and the results of their operations and their cash flows for the years ended December 27, 1998, December 28, 1997 and December 29, 1996, in conformity with generally accepted accounting principles. KPMG LLP Buffalo, New York February 12, 1999 27 C. H. Heist Corp. & Subsidiaries (QUARTERLY)FINANCIAL DATA (in thousands, except per share data and percentages) QUARTER ENDED MARCH JUNE SEPT. DEC. Fiscal 1999: Net revenues $ $ $ $ Earnings (loss) before income taxes % % % % Income taxes (benefit) % % % % Net earnings (loss) % % % % Earnings (loss) per share $ $ $ $ EPS - last 12 months $ $ $ $ Stock price range $ $ $ $ - ------------------------------------------------------------------------------------------------------------------------------------ Fiscal 1998: Net revenues $ 28,168 $ 34,136 $ 35,881 $ 37,462 Earnings (loss) before income taxes (890) (3.2)% 1,273 3.7% 1,402 3.9% 352 0.9% Income taxes (benefit) (397) (44.6)% 570 44.8% 644 45.9% 26 7.4% Net earnings (loss) (493) (1.8)% 703 2.1% 758 2.1% 326 0.9% Earnings (loss) per share $ (.17) $ .24 $ .26 $ .11 EPS - last 12 months $ .43 $ .51 $ .55 $ .45 Stock price range $8 5/8-6 1/2 $8 1/2-6 7/8 $7 5/8-6 3/4 $6 15/16-6 1/4 - ------------------------------------------------------------------------------------------------------------------------------------ Fiscal 1997: Net revenues $ 24,961 $ 31,123 $ 31,258 $ 32,174 Earnings (loss) before income taxes (1,212) (4.9)% 661 2.1% 1,181 3.8% 1,374 4.3% Income taxes (benefit) (369) (30.4)% 204 30.9% 551 46.7% 720 52.4% Net earnings (loss) (843) (3.4)% 457 1.5% 630 2.0% 654 2.0% Earnings (loss) per share $ (.29) $ .16 $ .22 $ .22 EPS - last 12 months $ (.03) $ .29 $ .31 $ .31 Stock price range $7 3/4-6 3/4 $7 3/8-6 3/8 $7 7/8-6 1/2 $8-6 15/16 - ------------------------------------------------------------------------------------------------------------------------------------ Fiscal 1996: Net revenues $ 25,769 $ 25,781 $ 28,219 $ 26,746 Earnings (loss) before income taxes (101) (.4)% (500) (1.9)% 878 3.1% 1,232 4.6% Income taxes (benefit) (39) (38.6)% (49) (9.8)% 305 34.7% 602 48.9% Net earnings (loss) (62) (.2)% (451) (1.8)% 573 2.0% 630 2.4% Earnings (loss) per share $ (.02) $ (.16) $ .20 $ .22 EPS - last 12 months $ .66 $ .35 $ .34 $ .24 Stock price range $7 5/8-6 1/4 $7 7/8-6 1/2 $8 7/8-5 1/2 $8 5/8-7 3/4 - ------------------------------------------------------------------------------------------------------------------------------------ QUARTER ENDED FULL YR. Fiscal 1999: Net revenues $ Earnings (loss) before income taxes % Income taxes (benefit) % Net earnings (loss) % Earnings (loss) per share $ EPS - last 12 months $ Stock price range $ - --------------------------------------------------------- Fiscal 1998: Net revenues $ 135,647 Earnings (loss) before income taxes 2,137 1.6% Income taxes (benefit) 843 39.4% Net earnings (loss) 1,294 1.0% Earnings (loss) per share $ .45 EPS - last 12 months $ .45 Stock price range $8 5/8-6 1/4 - --------------------------------------------------------- Fiscal 1997: Net revenues $ 119,516 Earnings (loss) before income taxes 2,004 1.7% Income taxes (benefit) 1,106 55.2% Net earnings (loss) 898 .8% Earnings (loss) per share $ .31 EPS - last 12 months $ .31 Stock price range $8-6 3/8 - --------------------------------------------------------- Fiscal 1996: Net revenues $ 106,515 Earnings (loss) before income taxes 1,509 1.4% Income taxes (benefit) 819 54.3% Net earnings (loss) 690 .6% Earnings (loss) per share $ .24 EPS - last 12 months $ .24 Stock price range $8 7/8-5 1/2 - --------------------------------------------------------- The percentages indicate the pre-tax margin (earnings before income taxes /net revenues), the effective tax rate (provision for income taxes /earnings before taxes) and after tax margin (net earnings /net revenues). On December 27, 1998 there were 554 registered shareholders. Proxies were mailed to an additional 405 shareholders whose certificates were registered in the name of brokers, banks and nominees on March 26, 1999. 27 DIRECTORS AND OFFICERS Charles H. Heist Chairman and Chief Executive Officer since 1988. Mr. Heist has served as a Director since 1979 and President from 1983 to 1997. In his 30 years with the Company, he has held numerous operations and general management positions throughout Heist's national network of regional offices. W. David Foster President and Chief Operating Officer since 1997. Mr. Foster has served as a Director since 1997. In his 29 years with the Company, he has served as Vice President-Marketing and Sales, President and Chief Executive Officer of the Ablest Service Corp. Staffing Services segment, and in other management positions. John L. Rowley Vice President and Chief Financial Officer since 1992. Mr. Rowley has served as a Director since 1994. In 28 years with the Company, he has served as Chief Accounting Officer, Treasurer and Assistant Treasurer. Chauncey D. Leake, Jr. A director since 1971. Mr. Leake is a financial consultant. He is formerly Vice President of First Albany Companies, Inc. and Vice President of Moseley Securities Corporation. Charles E. Scharlau A Director since 1980. Mr. Scharlau is Chairman of the Southwestern Energy Company and Arkansas Western Gas Company. He also serves on the Board of Directors of McIlroy Bank & Trust Company, and is a Trustee of the University of Arkansas in Fayetteville. Ronald K. Leirvik A Director since 1996. Mr. Leirvik is Chairman of RKL Enterprises, an acquirer and manager of small-to medium-size manufacturing companies. He is also Chairman and a Director of C. E. White Company, Chairman and a Director of Willow Hill Industries, Inc., and serves on the Boards of Directors of AGA Gas, Inc. and Purdue Research Corp. He was formerly President, Chief Executive Officer and a Director of RB&W Corporation. Brian J. Lipke A Director since 1997. Mr. Lipke is Chairman, President and Chief Executive Officer of Gibraltar Steel Corporation. He also serves on The Chase Manhattan Bank, N.A. Regional Advisory Board and the Dunlop Tire Corporation Board of Directors. Richard W. Roberson A Director since 1997. Mr. Roberson is on the Board of Directors of Priority Healthcare Corporation. He was formerly President and Chief Executive Officer of Visionworks, Inc., President of Eckerd Vision Group and Senior Vice President of Eckerd Corporation, and Chief Executive Officer of Insta-Care Pharmacy Services, Inc. Donna R. Moore A Director since 1997. Ms. Moore is an Executive Vice President and Director of Voyager Expanded Learning, Inc. and President of Eureka Experience. She was formerly Chairman and Chief Executive Officer of Discovery Zone, Inc., President and Chief Executive Officer of Motherhood Maternity, and President - North American Division of Laura Ashley, Inc. Isadore Snitzer Mr. Snitzer is Corporate Secretary and a Partner of Borins, Setel, Snitzer & Brownstein. Kurt R. Moore Executive Vice President - Ablest Service Corp. Andrew R. Crowe, Jr. Vice President and Chief Operating Officer - C.H. Heist, Ltd. Duane F. Worthington II Vice President - U.S. Operations Christopher H. Muir Vice President - Marketing and Sales Mark P. Kashmanian Chief Accounting Officer, Treasurer 28 Shareholder and Corporate Information Shareholder Services Corporate Information on the World Wide Web To change the name, address or ownership of stock, report lost certificates or C.H. Heist Corp. news and supplemental financial to consolidate accounts, please information is also available contact the Transfer Agent: from the Company's World Wide Web site: http://www.heist.com First Union National Bank Shareholder Services Group 1525 West W.T. Harris Blvd. - 3C3 Corporate Headquarters Charlotte, North Carolina 28288-1153 1-800-829-8432 C.H. Heist Corp. 810 North Belcher Road Clearwater, Florida 33765 Investor Relations and phone (727) 461-5656 General Information fax (727) 447-1146 Analysts, investors and others seeking financial information should contact: Annual Meeting John L. Rowley May 10, 1999 Vice President - Finance Hyatt West Shore Chief Financial Officer 6200 Courtney Campbell Causeway phone (727) 461-5656 Tampa, FL 33607 fax (727) 447-1146 John_Rowley@heist.com Wholly Owned Subsidiaries Form 10-K and C.H. Heist, Ltd. Other Information Ablest Service Corp. Milestone Technologies, Inc. Copies of the C.H. Heist Corp. Annual Report on PLP Corp. Form 10-K, as filed with the Securities and Exchange Commission, are available to shareholders at no charge. To Corporate Services acquire a copy, please fax a request to John L. Rowley at (727) 447-1146. Independent Public Accountants KPMG LLP Buffalo, New York 14202 General Counsel Baker & Hostetler Cleveland, Ohio 44114 The Company's common stock is traded on the American Stock Exchange. Its trading symbol is "HST." Chauncey D. Leake, Jr. SINCE 1971 CHAUNCEY D. LEAKE, JR. SERVED AS A C.H. HEIST CORP. DIRECTOR. At the end of 1998 Mr. Leake announced his retirement from the Board. A trusted advisor to three Heist CEOs and a respected peer to his Board of Directors colleagues, he helped guide the Company during three dynamic decades. The anthology that is Mr. Leake's long and distinguished career includes executive positions at the First Albany Companies and Moseley Securities Corporation, and we at Heist are honored to make up a worthy chapter in his venerable professional life. 29 [LOGO] C. H. HEIST CORP. 810 NORTH BELCHER ROAD CLEARWATER, FLORIDA 33765 PHONE 727.461.5656 FAX 727.447.1146 HTTP://WWW.HEIST.COM C. H. HEIST ABLEST 50TH 20TH ANNIVERSARY ANNIVERSARY EXHIBIT 15 C.H. Heist Corp. Clearwater, Florida Gentlemen: With respect to the registration statements No. 33-48497 and 333-26007, we acknowledge our awareness of the incorporation of our reports dated April 24, 1998, July 24, 1998 and October 23, 1998 related to our reviews of interim financial information. Pursuant to rule 436(c) under the Securities Act of 1933 (the Act), such reports are not considered part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. Very truly yours, KPMG LLP Buffalo, New York March 12, 1999 EXHIBIT 23 Independent Auditors' Consent The Board of Directors C.H. Heist Corp.: We consent to incorporation by reference in the registration statements No. 33-48497 and 333-26007 on Forms S-8 of C. H. Heist Corp. of our reports dated February 12, 1998, relating to the consolidated balance sheets of C. H. Heist Corp. and subsidiaries as of December 27, 1998 and December 29, 1997 and the related consolidated statements of earnings and comprehensive income, stockholders' equity and cash flows for the years ended December 27, 1998, December 28, 1997 and December 29, 1996, and related schedule, which reports appear in or are incorporated by reference in the December 27, 1998 annual report on Form 10-K of C. H. Heist Corp. KPMG LLP Buffalo, New York March 12, 1999 -----END PRIVACY-ENHANCED MESSA