10-Q 1 a2049603z10-q.txt 10-Q U.S. Securities & Exchange Commission Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2001 [ ] 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. ----------- (Exact name of small business issuer as specified in its charter) Oklahoma 73-1296420 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12331 East 60th Street, Tulsa, Oklahoma 74l46 --------------------------------------------- (Address of principal executive offices) (918)-250-2227 -------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /. State the number of shares outstanding of each of the issuer's classes of common equity, as of March 31, 2001: Number of shares Title of Class Outstanding ---------------------------- ----------- Common Stock, $.01 Par Value 9,325,855 Transitional Small Business Issuer Format (Check one): Yes / / No /X/ NESCO, INC. TABLE OF CONTENTS

The accompanying notes are an integral part of the financial statements. 3 NESCO, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (In thousands except per share amounts) (Unaudited)

The accompanying notes are an integral part of the financial statements. 4 NESCO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (In thousands) (Unaudited)

The accompanying notes are an integral part of the financial statements. 5 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 March 31, 2001 and the results of operations and cash flows for the three month periods ended March 31, 2001 and 2000. 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 three months ended March 31, 2001 and 2000, were computed as follows:

6 3. SEGMENT INFORMATION The Company's business segments have been grouped as follows:

4. NEW ACCOUNTING STANDARD - The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" in the first quarter of 2001. Currently, the Company does not engage in hedging activities or transactions involving derivatives. 5. ASSETS HELD FOR SALE - The lessee of three fueling facilities defaulted on the leases and, as a result, the Company terminated the leases during the first quarter. The carrying value of the sales type leases has been transferred to Assets Held for Sale while the facilities are being marketed to other potential owners. Based on appraisal information and indications of buyer interest to date, management believes the facilities will be sold within a year and that the Company's full carrying value will be realized. 6. COMMITMENTS AND CONTINGENCIES - A lessee of a fueling facility constructed and leased by the Company has initiated a suit claiming adjustments of the facility costs and seeking exemplary damages aggregating $2,000,000. This action was commenced as the Company was preparing to bring an action against the lessee for breach of the lease and recovery of the facilities. Management believes the suit is without merit. 7 7. NOTES PAYABLE - As of March 31, the Company was not in compliance with one restrictive covenant under Bank One, Oklahoma, N. A. credit facilities. The Company has obtained a waiver from the lender waiving noncompliance through March 31, 2001. The Company continued to make periodic debt repayments during this period. 8. ACQUISITIONS IN 2000 - On June 12, 2000, NESCO acquired all of the issued and outstanding shares of Hopkins Appraisal Services, Inc. The purchase price was $3,000,000. The definitive agreement provided for the payment to David E. Hopkins of 250,000 shares over a period of five years (to a maximum of 50,000 shares per year) subject to the attainment of certain performance objectives in the operation and management of Hopkins Appraisal Services, Inc. In anticipation of a possible award, 250,000 shares have been reserved. On April 20, 2001, 25,005 shares were awarded upon the attainment of performance objectives. Hopkins is a leader in the provision of appraisals on convenience stores and gasoline service stations. The client list includes a majority of major banks and major oil companies in the United States. On August 31, 2000, NESCO acquired certain assets and assumed certain liabilities of Trust Environmental Services Company, LLC. The purchase price was $1,000,000 and warrants to purchase 120,000 shares of NESCO common stock at $4.00 per share. The warrants expire August 31, 2005. Trust is a provider of environmental and related services to the owners and operators of fueling systems. On September 1, 2000, the Company acquired an office building located in Independence, Missouri, from David E. and Margaret Hopkins, in exchange for 100,000 shares of the Company's common stock. The building is occupied by Hopkins Appraisal Services, Inc. that was acquired by the Company on June 12, 2000. On September 28, 2000, NESCO acquired all of the shares of membership interests of the owners of Kentucky Environmental Network, LLC. The purchase price was $600,000. Additionally, the owners will receive five percent of the gross revenues invoiced and collected by buyer for environmental consulting and remediation services rendered in the State of Kentucky during the period of five years following the date of acquisition. This cost will be expensed as incurred. Kentucky Environmental Network is a provider of environmental and related services to the owners and operators of fueling systems. On September 29, 2000, NESCO acquired all of the issued and outstanding shares of Atlanta Petroleum Equipment Company, Inc. The purchase price was $2,800,000 and options to purchase 80,000 shares of NESCO common stock at $4.00 per share for a period of five years following closing. Cash of $1,400,000 was paid at closing. The remainder of the purchase price will be paid as follows: $700,000 on September 30, 2001 and $700,000 on September 30, 2002. 8 Atlanta Petroleum is a provider of petroleum fueling systems equipment sales, installation, service, maintenance, and related services. Each of the four business combinations described above was accounted for using the purchase method of accounting. A portion of each purchase price was allocated to assets acquired and liabilities assumed based on estimated fair market values, at the dates of the acquisitions, and the remainder of the purchase prices was recorded as goodwill. Total goodwill in connection with these four acquisitions of $6,747,000 is being amortized over 20 years. The operating results of these acquired businesses have been included in the consolidated statement of income from the dates of acquisition. The table below reflects the unaudited pro forma combined results of the Company, and the six purchase business combinations described above as if the acquisitions had taken place at the beginning of 2000:

9 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 MARCH 31, 2001 AND MARCH 31, 2000. Unless otherwise indicated, discussion of results for the three-month period ending March 31, 2001 is based on a comparison with the corresponding period in 2000. Revenue for the three months increased 26% as a result of growth from existing offices, the addition of two offices, and the addition of four acquisitions. A summary of the Company's revenues by segment follows:

The increase in fueling systems installations revenues was due to an increase in the projects performed, somewhat offset by a delay in starting some ground-up installations of convenience stores pending the completion of financing arrangements. Environmental revenue increased 33% due to the addition of contracts from Trust Environmental Services on August 31, 2000, the acquisition of Kentucky Environmental Network, LLC on September 28, 2000, and the establishment of an environmental office in Denver, Colorado in May, 2000. In addition to the revenue from the acquisitions and one environmental office, significant additional environmental revenue was generated from the installation of equipment on two pay-for-performance projects in Oklahoma. Other revenue includes sales and service of fueling equipment, and the 274% increase in this segment is attributed to the acquisition of Atlanta Petroleum Equipment Company, Inc. on September 29, 2000. Cost and expenses increased 39%. Three cost items accounted for the majority of the increase as follows: 10

A portion of the 39% increase in direct labor was due to the increased work performed by the Company. During the first quarter, a number of direct labor supervisors and other personnel were maintained on the Company's payroll in anticipation of the start of certain ground-up convenience store projects. Some of the projects were delayed pending the completing of financing arrangements. This delay resulted in a higher than anticipated cost of direct labor. The cost of lab services increased 153% due to the increase in site analysis and remediation services performed by the Company. The acquisition of Trust Environmental contracts and Kentucky Environmental Network contributed to the increase in lab services. One-half of the subcontractor expense increase was due to the significant use of subcontractors by the Hopkins Appraisal Services division. Hopkins uses independent subcontractors to perform appraisal fieldwork and report writing. Of the $1,233,000 increase, subcontractors performing work for the Hopkins division accounted for $613,000. The remainder of the increase in subcontractor expense resulted from increases in business in the fueling installations and environmental segments and greater use of subcontractors. Selling, general and administrative expenses increased 90%. Several selling, general and administrative expense items had significant increases as follows:

11 The 90% increase in selling, general and administrative expense resulted from the acquisition of Hopkins Appraisal Services, Inc., Trust Environmental Services contracts and assets, Kentucky Environmental Network, LLC, and Atlanta Petroleum Equipment Company, Inc. All of the companies were purchased in the second or third quarters of 2000. Offices were added in Denver, Colorado, and Lafayette, Louisiana, subsequent to the first quarter of 2000 and contributed to the increase in expenses. The acquisitions, new offices, and the growth in the other business of the Company caused the increases in the personnel, office, indirect travel, and insurance related expenses as shown above. Depreciation expense increased due to the addition of equipment through the four acquisitions and the establishment of two other offices. Interest expense increased $189,000 in the first quarter of 2001 compared to the same quarter in 2000 ($508,000 compared to $319,000) due to increases in the line of credit for operations, term loans for the acquisition of companies and equipment, and the addition of a line of credit for the construction of convenience stores. A portion of the increase resulted from an increase in interest rates paid by the Company. CHANGES IN CAPITAL RESOURCES AND LIQUIDITY The Bank One, Oklahoma, N.A. credit facilities contain certain restrictive covenants. The Company is restricted from paying dividends and is limited as to the incurrence of additional debt and as to capital expenditures and business acquisitions. Among other covenants, the Company must maintain minimum leverage and current ratios. As of March 31, the Company was not in compliance with one restrictive covenant under Bank One, Oklahoma, N. A. credit facilities. The Company has obtained a waiver from the lender waiving non-compliance through March 31, 2001. The Company continued to make periodic debt repayments during this period. The Company is currently experiencing tight cash flow and believes that additional capital is also important for it to be able to fund certain of its outstanding financial obligations which are past due. FORWARD LOOKING STATEMENTS Certain statements included in this report which are not historical facts are forward looking statements, including the information provided with respect to the projected or future business opportunities, expansions and diversification; contract completions, expected financing sources and related matters. These forward looking statements are based on current expectations, estimates, assumptions and beliefs of management; and words such as "expects," "anticipates," "intends," "believes," "estimates" and similar expressions are intended to identify such forward looking statements. These forward looking statements involve risks and uncertainties, including, but not limited to, changes in governmental regulations, the Company's ability to effectively and efficiently absorb its newly acquired businesses and assets and any additional businesses and/or assets it may acquire in the near future, its ability to obtain needed working capital, the potential effect of pending and possible legal proceedings, general economic conditions and conditions 12 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 1. Legal Proceedings On March 21, 2001, a suit was filed by James and Ann C. Jay against NESCO Acceptance Corporation, a wholly owned subsidiary of the Company, in the District Court of/Eastland County, Texas, 91st Judicial District, Case No. CV-01-38565 in connection with a sale leaseback transaction in which property of the plaintiffs was conveyed to the defendant. A fueling station and convenience store facility was constructed on the property and it was leased back to the plaintiffs. The plaintiffs were in breach of the lease obligations and proceedings were being prepared to judicially enforce the defendant's rights under the arrangement when the pending action was brought by the plaintiffs seeking to set aside the conveyance of the property and to recover actual and exemplary damages in excess of $2 million plus costs and attorneys' fees for alleged fraud, negligent misrepresentation and breach of contract. The Company denies the allegations, will defend the action vigorously and expects to counterclaim (or file a separate action) for breach of the lease by the plaintiffs. On January 29, 2001, a suit for patent infringement was brought by Environmental Improvement Technologies, Inc. against Summit Environmental Services, Inc., a wholly owned subsidiary of the Company, in the District Court of Oklahoma County, Oklahoma, Case No. CIV-01-0203-W. The plaintiff is seeking damages and injunctive relief in connection with the defendants alleged infringement of plaintiff's patented air-sparging and vapor extraction processes used to remediate contaminated soil. The defendant has not yet answered but expects to deny any infringement of the patent and to also assert as a defense the invalidity of the subject patents. Item 5. Other Information - On May 8, 2001, Company management received notice that David Hopkins and seven other employees of Hopkins Appraisal Services, Inc., a wholly owned subsidiary of the Company, resigned effective at the close of business on May 7, 2001. Mr. Hopkins has opened a competing appraisal firm and has employed the former Hopkins Appraisal employees. NESCO management is consulting with its legal counsel to determine a course of action. Item 6. Exhibits and Reports on Form 8-K (a) Reports on Form 8-K: A report on Form 8-K dated April 5, 2001 was filed by the Registrant in connection with the Company's change of independent accountants. 13 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: May 11, 2001 BY /s/ LARRY G. JOHNSON ---------------------------------------- LARRY G. JOHNSON, Vice President & Secretary-Treasurer (Authorized Officer and Principal Financial Officer) 14

NESCO INC/OK 10-Q