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U.S. Securities & Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period...............to......................
Commission file number.................000-24470
NESCO, Inc.
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(Exact name of small business issuer as specified in its charter)
Oklahoma 73-1296420
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12331 East 60th Street, Tulsa, Oklahoma 74l46
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(Address of principal executive offices)
(918)-250-2227
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No .
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of July 31, 2000:
Number of shares
Title of Class Outstanding
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Common Stock, $.01 Par Value 9,225,855
Transitional Small Business Issuer Format (Check one): Yes No X .
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NESCO, INC.
TABLE OF CONTENTS
Page
Part I - Financial Information
<TABLE>
Financial Information:
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet
June 30, 2000 3
Consolidated Statements of Income
Three Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Income
Six Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2.
Management's Discussion and Analysis of the
Financial Condition and Results of Operation 9
Part II
Other Information:
Item 2. Changes in Securities and Use of Proceeds 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
</TABLE>
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NESCO, INC.
CONSOLIDATED BALANCE SHEET
June 30, 2000
(In Thousands)
(Unaudited)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash $ 377
Accounts Receivable and Costs in Excess of Billings 20,237
Materials and Supplies 2,362
Prepaid Expenses 174
-------
Total current assets 23,150
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Property and equipment, at cost 8,887
Less accumulated depreciation (2,998)
-------
Property and equipment, net 5,889
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Other assets 80
-------
Goodwill 6,019
-------
Total assets $35,138
=======
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities:
Current maturities of long term obligations
and revolving line of credit $ 1,681
Accounts payable 4,549
Accrued liabilities 565
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Total current liabilities 6,795
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Long-term obligations 18,678
Deferred income taxes 417
-------
Total Liabilities 25,890
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Shareholders' equity:
Preferred stock: 1,000,000 shares authorized;
none issued
Common stock, par value $.01; authorized 20,000,000 shares;
issued 9,388,643 shares, including treasury
shares 94
Additional paid-in capital 4,139
Retained Earnings 5,341
Common stock in Treasury, at cost, 162,788 shares (326)
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Total shareholders' equity 9,248
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Total liabilities and shareholders' equity $35,138
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
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NESCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<S> <C> <C>
2000 1999
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Revenues $9,441 $6,364
Costs and Expenses 5,694 4,091
Selling, general and administrative expenses 1,907 1,610
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Income from operations 1,840 663
Other income 46 87
Interest expense 386 136
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Income before provision for income taxes 1,500 614
Provision for income taxes 589 237
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Net Income $ 911 $ 377
====== ======
Basic Net Income per share $ 0.10 $ 0.04
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Diluted Net Income per share $ 0.10 $ 0.04
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
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NESCO, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<S> <C> <C>
2000 1999
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Revenues $18,972 $13,896
Cost and expenses 11,254 8,472
Selling, general and administrative expenses 3,658 3,197
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Income from operations 4,060 2,227
Other Income 85 144
Interest Expense 705 240
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Income before provision for income taxes 3,440 2,131
Provision for taxes on income 1,322 814
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Net Income $ 2,118 $ 1,317
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Basic Net Income per share $ 0.23 $ 0.14
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Diluted Net Income per share $ 0.22 $ 0.14
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</TABLE>
The accompanying notes are an integral part of the financial statements.
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NESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands)
(Unaudited)
<TABLE>
<S> <C> <C>
2000 1999
-----------------
Operating activities
Net Income $ 2,118 $ 1,317
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 379 297
Change in:
Accounts receivable (8,237) (542)
Materials and supplies (100) (317)
Prepaid expenses (15) (64)
Accounts payable 2,131 799
Accrued liabilities (235) (591)
Goodwill (566) -
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Net cash provided by (used in) operating activities (4,525) 899
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Investing activities
Business Acquisitions (2,887) (3,114)
Purchases of property, plant and equipment (1,070) (856)
Other - (152)
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Net cash provided by (used in) investing activities (3,957) (4,122)
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Financing activities:
Proceeds from notes payable and long-term obligations 12,156 7,032
Principal payments on notes and long term obligations (3,926) (3,065)
Proceeds from sale (purchase) of treasury stock - (406)
Summit owners distributions net of tax - (430)
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Net cash provided by financing activities 8,230 3,130
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Decrease in cash (252) (92)
Cash, beginning of period 629 331
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Cash, end of period $ 377 $ 239
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
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NESCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, the accompanying condensed financial
statements contain all adjustments of a normal recurring nature necessary to
present fairly the financial position of the Company as of June 30, 2000 and
the results of operations and cash flows for the six month periods ended June
30, 2000 and 1999. Results of operations and cash flows are not necessarily
indicative of the results which will be achieved for the full year.
2. EARNINGS PER SHARE
Basic and diluted EPS for the six months ended June 30, 2000 and 1999, were
computed as follows:
<TABLE>
Six Months Ended June 30
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<S> <C> <C>
2000 1999
------------------------
Basic EPS Computation:
Net income $ 2,118 $ 1,317
========================
Weighted average shares outstanding 9,225,855 9,327,296
========================
Basic EPS $ .23 $ .14
========================
Diluted EPS Computation:
Net income $ 2,118 $ 1,317
========================
Weighted average shares outstanding 9,225,855 9,225,855
Incremental shares for assumed exercise
of securities:
Warrants 164,780 6,584
Options 92,341 3,761
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9,482,956 9,236,200
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Diluted EPS $ .22 $ .14
========================
</TABLE>
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3. SEGMENT INFORMATION
The Company's business segments have been grouped as follows:
<TABLE>
Thousands of Dollars
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Inter-
Segment Pre-tax
Segment Sales Sales Income Assets
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<S> <C> <C> <C> <C>
2000
Fueling Installations $ 10,571 $ 2,146 $ 18,431
Environmental 7,353 2,708 11,356
Miscellaneous 1,048 160 168 3,094
Corporate Overhead (1,582) 2,254
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$ 18,972 $ 160 $ 3,440 $ 35,138
=================================================
1999
Fueling Installations $ 9,495 $ $ 1,682 $ 9,868
Environmental 3,899 1,247 6,366
Miscellaneous 502 694 238 1,404
Corporate Overhead (1,036) 2,244
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$ 13,896 $ 694 $ 2,131 $ 19,882
==================================================
</TABLE>
4. ACQUISITIONS IN 2000
On June 12, 2000, the Company acquired all of the issued and outstanding
shares of Hopkins Appraisal Services, Inc. for $3,000,000 cash. Hopkins
Appraisal Services, located in Independence, Missouri, is a provider of service
station and convenience store appraisals and feasibility studies to major oil
companies, major banks, and other smaller lenders and fueling facility owners.
On June 12, 2000, the Company entered into an agreement with David E. Hopkins
and Marie L. Hopkins to acquire the office building occupied by Hopkins
Appraisal Services, Inc. for 100,000 shares of NESCO common stock.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto and other financial information relating
to the Company.
Comparison of Results of Operations for the Three Months Ended June 30, 2000 and
June 30, 1999.
Revenue for the three months ended June 30, 2000 increased 48%, or
$3,077,000, compared to the same period in 1999 ($9,441,000 compared to
$6,364,000). Revenues increased due to growth from existing operating locations
and new acquisitions The fueling installations segment increased 5% or $239,000
for the second quarter of 2000 compared to the same quarter in 1999 ($5,248,000
compared to $5,009,000). During the third quarter of 1999, the Company began
installation of turn-key fueling facilities under the NESCO Acceptance
Corporation program for providing design, permitting, installation, and
financing of such facilities. Since the beginning of the program through June
30, 2000, six fueling facilities have been completed or are under construction.
Fueling facilities for other clients continue to be installed. Environmental
services revenue increased $2,628,000, or 237%, for the second quarter of 2000
compared to the same quarter in 1999 ($3,738,000 compared to $1,110,000). The
acquisition of TET Environmental Services in South Carolina in May, 1999, added
significant environmental contracts and personnel to the existing South Carolina
division. The growth of that office and the receipt of benefits from the TET
acquisition for the full second quarter in 2000 compared to the second quarter
in 1999 contributed to the increase. The addition of the TET revenues and the
growth in pay-for-performance environmental revenues from the Company's other
offices accounted for the growth in environmental revenues. Miscellaneous
revenues increased $210,000, or 86%, for the second quarter of 2000 compared to
the same quarter the previous year ($455,000 compared to $245,000). The
increase was due to increased sales of Encompass tank gauging systems.
Cost and expenses increased 39%, or $1,603,000 ($5,694,000 for the second
quarter of 2000 compared to $4,091,000 for the same quarter in of 1999). Cost
of sales as a percent of revenues for the second quarter of 2000 was 60%
compared to 64% for the same quarter in 1999. Direct labor increased 32% to
$1,409,000 in the second quarter of 2000 compared to $1,066,000 for the second
quarter of 1999. Costs of supplies and materials increased, 40% or $526,000,
for the second quarter of 2000 compared to the same quarter in 1999 ($1,850,000
compared to $1,324,000). The increase in the cost direct labor and supplies and
materials was due to the increased work performed by the Company. Subcontractor
expense increased $625,000 ($1,384,000 for the second quarter of 2000 compared
to $759,000 in the second quarter of 1999). The 82% increase in the use of
subcontractors resulted from the greater amount of work performed and the
increased use of subcontractors for turnkey installation of fueling facilities.
Vehicle expense except depreciation increased $33,000 ($128,000 compared to
$95,000) in the
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second quarter of 2000 compared to the same quarter in 1999 due to the greater
number of vehicles owned by the Company.
Selling, general and administrative expenses increased $297,000 for second
quarter of 2000 as compared to the second quarter of 1999 ($1,907,000 compared
to $1,610,000). The 18% increase was a result of the Company's growth through
acquisitions and increased business activities in its ongoing operations. This
increase was significantly less than the 48% increase in revenue due to
administrative cost savings as the acquired companies were integrated into the
Company's operation and to the realization of economies of scale as the
Company's operations grew larger. Selling, general and administrative expenses
as a percent of revenues was 20% for the second quarter of 2000 compared to 25%
for the same quarter in 1999. During the second quarter of 2000 there were six
division offices that did not exist during the second quarter of 1999.
Officers, management and administrative salaries increased 39% for the second
quarter of 2000 compared with the same quarter in 1999 ($900,000 compared to
$646,000). The increase is attributable to the addition of new personnel at the
six offices and normal salary increases. Salesmen's travel expenses increased
$32,000 in the second quarter compared to the same quarter in 1999 due to the
increase in number of sales personnel employed ($39,000 compared to $7,000).
Office rent expense also increased due to the addition of the six offices. The
office rent expense increased $40,000 in the second quarter of 2000 compared to
the same quarter in 1999 ($85,000 compared to $45,000). Advertising increased
$34,000 in the second quarter of 2000 compared to the same quarter in 1999
($50,000 compared to $16,000). The increase was due to a larger sales staff and
increased advertising expenditures to support the staff. Bad debt expense
decreased $81,000 in the second quarter of 2000 compared to the same quarter in
1999 due to significant write off of accounts receivable generated by a division
that was subsequently closed for poor performance.
Interest expense increased $250,000 in the second quarter of 2000 compared
to the same quarter in 1999 ($386,000 compared to $136,000) due to increases in
the line of credit for operations and term loans for the acquisition of
companies and equipment. A portion of the increase resulted from an increase in
interest rates paid by the Company. The line of credit adjusts as the national
prime rate adjusts. The Company has the option to fix the interest rate for
specified periods at the Eurodollar rate for such period plus a margin
previously established. The prime rate at the end of the second quarter of 1999
was 7.75%. By the end of the second quarter of 2000, the rate had increased to
9.5%.
Comparison of Results of Operations for the Six Months Ended June 30, 2000 and
June 30, 1999.
Revenue for the six months ended June 30, 2000 increased 37%, or
$5,076,000, compared to the same period in 1999 ($18,972,000 compared to
$13,896,000). Revenues increased due to growth from existing offices and new
acquisitions. The fueling installations segment increased 11%, or $1,076,000,
for the first six months of 2000 compared to the same period in 1999
($10,571,000 compared to $9,495,000). The company increased the number of
installations of turnkey fueling facilities under the NESCO Acceptance
Corporation program for providing design, permitting, installation, and
financing of such facilities. The fueling systems installation under the site
development program was not begun until the third quarter of 1999. Fueling
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facilities for other clients continue to be installed. Environmental services
revenue increased $3,454,000, or 89%, for the first six months of 2000 compared
to the same period in 1999 ($7,353,000 compared to $3,899,000). The acquisition
of a company in South Carolina in May, 1999, added significant environmental
contracts and personnel to the South Carolina division office. The growth of
that office and the receipt of benefits for the entire six-month period in 2000
compared to the same period in 1999 contributed to the increase. This addition
and the growth in pay-for-performance environmental revenues from the Company's
other offices accounted for the growth in environmental revenues. Miscellaneous
revenues increased $546,000, or 109%, for the second quarter of 2000 compared to
the same quarter the previous year ($1,048,000 compared to $502,000). The
increase was due to increased sales of Encompass tank gauging systems.
Cost and expenses increased 33%, or $2,782,000, ($11,254,000 for the first
six months of 2000 compared to $8,472,000 for the same period in of 1999). Cost
and expenses as a percent of revenues was 59% for the first six months of 2000
compared to 61% for the same period in 1999. Direct labor increased 30%, or
$615,000 ($2,691,000 for the first six months of 2000 compared to $2,076,000 for
the same period in1999). Costs of supplies and materials increased 23% or
$694,000 for the first six months of 2000 compared to the same period in 1999
($3,668,000 compared to $2,974,000). The increase in the cost of direct labor
and supplies and materials was due to the increased work performed by the
Company. Subcontractor expense increased $976,000 ($2,664,000 for the first six
months of 2000 compared to $1,688,000 in the same period of 1999). The 58%
increase in the use of subcontractors resulted from the greater amount of work
performed and the increased use of subcontractors for turnkey installation of
fueling facilities. Vehicle expense except depreciation increased $95,000
($267,000 compared to $172,000) in the first six months of 2000 compared to the
same period in 1999 due to the greater number of vehicles owned by the Company.
Selling, general and administrative expenses increased $461,000 for first
six months of 2000 as compared to the same period of 1999 ($3,658,000 compared
to $3,197,000). The 14% increase was a result of the Company's growth through
acquisitions and increased business activities in its ongoing operations. This
increase was significantly less that the 37% increase in revenue due to
administrative cost savings as the acquired companies were integrated into the
Company's operation and to the realization of economies of scale as the
Company's operations grew larger. Selling, general and administrative expenses
as a percent of revenues was 19% for the first six months of 2000 compared to
23% for the same period in 1999. During the first six months of 2000 there were
six division offices that did not exist during the same period of 1999.
Officers, management and administrative salaries increased 31% or $420,000 for
the first six months of 2000 compared with the same period in 1999 ($1,756,000
compared to $1,336,000). The increase is attributable to the addition of new
personnel at the six offices and normal salary increases. Salesmen's travel
expenses increased $61,000 in the first six months of 2000 compared to the same
period in 1999 due to the increase in number of sales personnel employed
($75,000 compared to $14,000). Office rent expense also increased due to the
addition of the six offices. The office rent expense increased $87,000 in the
first six months of 2000 compared to the same period in 1999 ($168,000 compared
to $81,000). Bad debt expense decreased $144,000 in the
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first six months of 2000 compared to the same period in 1999 due to significant
write off of accounts receivable generated by a division that was subsequently
closed for poor performance.
Interest expense increased $465,000 in the first six months of 2000 compared to
the same period in 1999 ($705,000 compared to $240,000) due to increases in the
line of credit for operations and term loans for the acquisition of companies
and equipment. A portion of the increase resulted from an increase in interest
rates paid by the Company. The line of credit adjusts as the national prime
rate adjusts. The Company has the option to fix the interest rate for specified
periods at the Eurodollar rate for such period plus a margin previously
established. The prime rate at the end of the second quarter of 1999 was 7.75%.
By the end of the second quarter of 2000, the rate had increased to 9.5%.
Changes in Capital Resources and Liquidity
On February 15, 2000, the Company obtained an increase in its line of
credit loan from the Bank of Oklahoma. The line was increased from $7 million
to $9 million. All other terms and conditions remained unchanged.
On May 12, 2000, the Company obtained a new credit facility from Bank One,
Oklahoma, N.A. The existing line of credit and term loan with another lender
and a series of purchase financing and other loans were paid off with the
proceeds of the new credit facility. The new credit facility comprised three
loans. The term loan of $13,300,000 included $2,500,000 for the acquisition of
a Florida company and a Kentucky company. The funds were placed in the
revolving line of credit facility pending the closing of the acquisitions. When
the Florida acquisition was terminated, $1,900,000 of the $2,500,000 borrowed
for that acquisition was applied to the purchase of Hopkins Appraisal Services,
Inc. The second loan of $4,000,000 line of credit was for future acquisitions.
As of June 30, 2000, $1,390,000 was borrowed against the acquisition line of
credit to fund the remainder of the Hopkins acquisition. The third loan was a
revolving line of credit for $8,000,000 to be used for working capital.
Interest rates on the loans float at the Bank One prime rate. The Company has
the option to fix the interest rate for specified periods at the Eurodollar rate
for such period plus a margin previously established. The working capital
revolving line of credit loan matures April 30, 2002, and requires monthly
payment of interest accrued. The acquisition line of credit matures April, 30,
2002, and requires a monthly principal payment of 1/60th of the acquisition loan
principal balance and accrued interest. The term loan matures April 30, 2003,
and requires a monthly principal payment of 1/60th of the original principal
balance and accrued interest to be paid monthly.
The Company continued to make periodic debt repayments during this period.
Forward Looking Statements
Certain statements included in this report which are not historical facts
are forward looking statements, including the information provided with respect
to the projected or future business opportunities, expansions and
diversification; contract completions, expected financing sources and related
matters. These forward looking statements are based on current expectations,
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estimates, assumptions and beliefs of management; and words such as "expects,"
"anticipates," "intends," "believes," "estimates" and similar expressions are
intended to identify such forward looking statements. These forward looking
statements involve risks and uncertainties, including, but not limited to,
changes in governmental regulations, the Company's ability to effectively and
efficiently absorb its newly acquired businesses and assets and any additional
businesses and/or assets it may acquire in the near future, general economic
conditions and conditions affecting the industries which utilize the Company's
services and products, the availability of experienced personnel, raw materials
and equipment and the Company's ability to comply with its obligations under its
existing contracts and to obtain new contracts. Accordingly, actual results may
differ materially from those expressed in the forward-looking statements.
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
In connection with the Company's acquisition of all of the issued and
outstanding shares of Hopkins Appraisal Services, Inc., it also entered into a
Real Estate Contract pursuant to which it committed to and did, acquire the real
property and improvements which serve as the headquarters for Hopkins Appraisal
Services in Independence, Missouri for a purchase consideration of 100,000
shares of the Company's common stock. For a more detailed description of this
transaction and the property acquired, reference is made to the description of
the transaction in the Current Report on Form 8-K listed below.
The issuance of the common stock issuable to the sellers of the property
was exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to the exemption from the registration
requirements provided by Section 4(2) thereof for transactions not involving a
public offering and by Regulation D promulgated under such Act. The sellers of
the property are sophisticated individuals capable of evaluating the risks of an
investment in the Company's stock and bearing the financial risks of the
investment. The persons acquiring the shares are accredited investors as that
term is defined in Regulation D. Such persons had access to all material
information regarding the Company that would have been included in a
registration statement covering the securities if the shares had been offered
publicly. No advertising or general solicitation was involved in the offering
of the securities. The shares were acquired for investment purposes and not
with a view to the distribution thereof. The certificates evidencing the shares
contained the appropriate legend indicating the restrictive nature of the
shares.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the company was held at 12331 East 60th
Street, Tulsa, Oklahoma, on May 18, 2000. At the meeting the following
directors were elected for one-year terms:
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<TABLE>
<S> <C> <C>
For Withheld
Eddy L. Patterson 7,359,618 -0-
E. R. Foraker 7,359,388 230
Dallin Bagley 7,359,303 315
Robert Sumner 7,359,303 315
James Howell 7,359,618 -0-
</TABLE>
The shareholders ratified Tullius, Taylor, Sartain & Sartain as auditors to
perform the audit for the fiscal year ending December 31, 2000:
For: 7,413,243 Against: 3,415 Abstain: 14,325
The shareholders ratified The NESCO, Inc. 2000 Equity Incentive Plan:
For: 5,986,688 Against: 107,819 Abstain: 15,014
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.14 Copy of Credit Agreement dated May 12, 2000 and
Promissory Notes between the Company and Bank One,
Oklahoma, N.A.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
On June 22, 2000, we filed an Form 8-K describing
the June 12, 2000, acquisition of Hopkins Appraisal
Services, Inc.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NESCO, Inc.
Date: August 4, 2000 BY: /s/ LARRY G. JOHNSON
------------------------------
LARRY G. JOHNSON, Vice President &
Secretary-Treasurer & Chief Financial Officer
(Authorized Officer and Principal Financial Officer)
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EXHIBITS
Exhibit 10.14 Copy of Credit Agreement dated May 12, 2000 and Promissory
Notes between the Company and Bank One, Oklahoma, N.A.
Exhibit 27.1 Financial Data Schedule
15
