10-Q 1 nesco10q63001.txt 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 June 30, 2001 ------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 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 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, 2001: Number of shares Title of Class Outstanding -------------------------------------------- ----------- Common Stock, $.01 Par Value 10,081,145 Transitional Small Business Issuer Format (Check one): Yes No X --- --- NESCO, INC. TABLE OF CONTENTS Page Part I - Financial Information Financial Information: Item 1. Financial Statements Consolidated Balance Sheets June 30, 2001, and December 31, 2000 3 Consolidated Statements of Income Three Months Ended June 30, 2001 and 2000 4 Consolidated Statements of Income Six Months Ended June 30, 2001 and 2000 5 Consolidated Statements of Cash Flows Six Months Ended June 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of the Financial Condition and Results of Operations 12 Part II Other Information: Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other information 19 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 19 2

The accompanying notes are an integral part of the financial statements. 3 NESCO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000 (In thousands except per share amounts) (Unaudited) 2001 2000 ------- ------- Revenues $ 7,715 $ 9,441 Costs and Expenses 7,298 5,694 Selling, general and administrative expenses 4,491 1,907 ------- ------- Income (loss) from operations (4,074) 1,840 Other income 205 46 Interest expense (448) (386) ------- ------- Income (loss) before provision (benefit) for income taxes (4,317) 1,500 Income tax provision (benefit) (1,640) 589 ------- ------- Net (loss) Income $(2,677) $ 911 ======= ======= Basic Net Income (loss) per share $ (0.27) $ 0.10 ======= ======= Diluted Net Income (loss) per share $ (0.27) $ 0.10 ======= ======= The accompanying notes are an integral part of the financial statements. 4 NESCO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (In thousands except per share amounts) (Unaudited) 2001 2000 -------- -------- Revenues $ 19,295 $ 18,972 Cost and expenses 15,012 11,254 Selling, general and administrative expenses 7,820 3,658 -------- -------- Income (loss) from operations (3,343) 4,060 Other Income 368 85 Interest Expense (956) (705) -------- -------- Income (loss) before provision (benefit) for income taxes (4,031) 3,440 Income tax provision (benefit) (1,531) 1,322 -------- -------- Net (loss) Income ($ 2,500) $ 2,118 -------- -------- Basic Net Income (loss) per share ($ 0.26) $ 0.23 ======== ======== Diluted Net Income (loss) per share ($ 0.26) $ 0.22 ======== ======== The accompanying notes are an integral part of the financial statements. 5

7 3. SEGMENT INFORMATION - The Company's business segments have been grouped as follows: Thousands of Dollars --------------------------------------------- Inter- Segment Pre-tax Segment Sales Sales Income Assets ------- --------------------------------------------- 2001 Fueling Installations $ 9,178 $ -- ($2,635) $ 21,587 Environmental 8,381 972 16,926 Miscellaneous 1,830 691 482 576 Corporate Overhead -- -- (2,756) 3,167 --------------------------------------------- $ 19,389 $ 691 ($4,031) $ 42,886 ============================================= 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 --------------------------------------------- $ 18,972 $ 160 $3,440 $ 35,138 ============================================= 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. 8 7. NOTES PAYABLE - On June 27, 2001, the Company entered into a fourth amendment to credit agreement with Bank One, Oklahoma, N.A. The amendment provided that the interest rate applicable to the loan facility would be changed to equal the Prime Rate, plus three percent per annum; the working capital credit commitment will be subject to a borrowing base limitation equal to eighty-five percent of the eligible accounts; and an extension of the construction loan facility maturity date to August 10, 2001. On August 6, 2001, Bank One requested the Company move its credit facility to another lender by the end of the year. The bank cited the Company's lower than expected profitability and that the Company's type of business no longer was the type of business the bank wanted to keep in its loan portfolio. The Company is actively pursuing several other financing arrangements. 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. This company is being sold to its original owners. 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. 9 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. 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: 2001 2000 ---------------------- (unaudited) Net sales $19,295 $24,248 Net income ($ 2,677) $ 1,603 Net income per share: Basic ($0.26) $0.17 Diluted ($0.26) $0.17 9. RESTATEMENT AND GOING CONCERN CONSIDERATIONS - On August 20, 2001, the Company's financial statements as of December 31, 2000 and for the year then ended were restated, as reported on Form 10-KSB/A filed on that date. The financial information included herein as of December 31, 2000 and March 31, 2001 have been similarly restated as follows: March 31, 2001 December 31, 2000 -------------- ----------------- Reported Previously Reported Previously Herein Reported Herein Reported Revenues $11,674 $11,454 $36,954 $40,606 Net Income $ 177 $ 41 $ 588 $ 2,847 Earnings per share $.02 $.00 $.06 $.31 10 For the year ended December 31, 2000, the Company was not in compliance with three debt covenants of its principal credit facility. These covenants related to minimum crrrent ratio, minimum debt coverage service ratio, and the maximum leverage ratio. The lending institution waived the noncompliance, prior to the adjustments described above, as of December 31, 2000, and again at March 31, 2001. The Company continues to be out of compliance with these covenants and in August 2001, the lending institution informed the Company that it was requiring the Company to transfer its banking relationships to another institution. Accordingly, all amounts owed under notes to the financial institution have been classified as current in the accompanying financial statements. The Company is in the process of negotiating with other institutions to moveits banking relationship. During 2000 and continuing in 2001, the Company's operating activities have not produced positive cash flow. During 2000, the Company relied on its primary credit facility to fund operations and investments. Lack of liquidity in 2001 has impeded the Company's ability to pay vendors and subcontractors when due, which affects operations in the ordinary course of business. As a result, in the near term, the Company's ability to continue as a going concern is dependent on the actions of the current lending institution and, in the longer term, it depends on the speed it can put in place, and the adequacy of the replacement credit facility. The accompanying financial statements do not contain any adjustments resulting from this contingency. At the August 16, 2001, Board of Directors meeting, the Company's Chairman and President resigned. 11 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, 2001 and June 30, 2000. Unless otherwise indicated, discussion of results for the three-month period ending June 31, 2001 is based on a comparison with the corresponding period in 2000. Revenue for the three months decreased 18% or $1,726,000. A summary of the Company's revenues by segment follows: Three Months Ended Difference Percentage June 30 Increase or Increase or 2001 2000 (Decrease) (Decrease) --------------------------------------------- (Thousands of Dollars) -------------------------------- Fueling Installations $ 3,124 $ 5,266 ($2,142) (41%) Environmental 3,847 4,183 (336) (8%) Miscellaneous 744 (8) 752 NA --------------------------------------------- $ 7,715 $ 9,441 ($1,726) (18%) ============================================= The decline in fueling installations was a result of fewer starts of site development projects due to delays by owners in starting some fueling system installations and the Company's capital shortage. The decline in environmental revenue resulted from the start of fewer pay-for-performance remediation projects. The start of new environmental projects in South Carolina was delayed by the Company's limited capital for project startups. The increase in miscellaneous revenues reflect the revenue from Hopkins Appraisal Services, Inc. acquired in mid June, 2000, and sold in June 2001. 12

Revenue decline in fueling installations was a result of fewer starts of site development projects due to delays by owners in starting some fueling system installations and the Company's capital shortage. The increase in environmental revenue resulted from the acquisition of Trust Environmental in August, 2000 and Kentucky Environmental Network in September, 2000. The increase was limited due to the timing of revenue recognition on pay for performance remediation projects. Additionally, the start of new environmental projects in South Carolina were delayed by the Company's limited capital for project startups. The increase in miscellaneous revenues reflect the revenue from Hopkins Appraisal Services, Inc. acquired in mid June, 2000, and sold in June 2002. 14

Selling, general and administrative expense increased 95% due to a significant increase in the number of offices and personnel, increase in bad debt expense, and professional fees. The Company acquired four companies in 2000 (Hopkins Appraisal Services, Inc., Trust Environmental Services, Inc., Kentucky Environmental Network, and Atlanta Petroleum Equipment Company, Inc.). One of the companies was purchased in mid June of 2000 and the remainder in the last half of 2000. Offices were established in Noblesville, Indiana, Lafayette, Louisiana, and Benicia, California, subsequent to the second quarter of 2000 and contributed to the increased personnel and occupancy expenses. The Denver, Colorado, office was established midway through the second quarter in 2000. Professional fees increased primarily due to the accrual of costs of litigation awarded to opposing counsel and the Company's unsuccessful appeal of a lawsuit. Another significant portion of the professional fees expense resulted from costs associated with investment banking efforts to raise additional capital. Bad debt expense increased due to an increase in reserve for bad debt for receivables deemed to be non-collectable. Goodwill amortization expense increased due to the amortization of goodwill associated with the acquisition of the four companies in 2000. Interest expense increased $251,000 in the six months ended June 30, 2001 compared to the same period in 2000 ($956,000 compared to $705,000) 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 Company issued 730,000 shares of common stock at $2.00 per share in accordance with a Private Placement Memorandum dated May 14, 2001. Additionally, for every two shares of common stock purchased, purchasers received one warrant to purchase one share of common stock at a price of $2.00 per share. The warrants expire August 31, 2001. 16 The Company borrowed $300,000 from E. R. Foraker, a director of NESCO, under two transactions dated April 30 and May 22, 2001. The interest rate is 10% per annum with a maturity date of July 22, 2001. The loan was converted to a demand note on August 1, 2001 at an interest rate of 10% per annum. The funds were used to pay past due accounts payable. The Company borrowed $400,000 from Eddy Patterson, Chairman and CEO of NESCO, on June 4, 2001. The interest rate is 10% per annum with a maturity date is August 3, 2001. An additional $150,000 was advanced on August 1, 2001, and the $550,000 note was converted to a demand note at an interest rate of 10% per annum. The funds were used to pay past due accounts payable. On June 27, 2001, the Company entered into a fourth amendment to credit agreement with Bank One, Oklahoma, N.A. The amendment provided that the interest rate applicable to the loan facility would be changed to equal the Prime Rate, plus three percent per annum; the working capital credit commitment will be subject to a borrowing base limitation equal to eighty-five percent of the eligible accounts; and an extension of the construction loan facility maturity date to August 10, 2001. On August 6, 2001, Bank One requested the Company move its credit facility to another lender by the end of the year. The bank cited the Company's lower than expected profitability and that the Company's type of business no longer was the type of business the bank wanted to keep in its loan portfolio. The Company is actively pursuing several other financing arrangements. The Company continued to make periodic debt repayments during this period. The Company is currently experiencing significant liquidity problems and is considering various strategies to be able to fund certain of its outstanding financial obligations which are past due and to meet other working capital requirements. These may involve sales of assets or operations, corporate restructurings, personnel reductions, or other measures designed to decrease costs and expenses and to generate needed funds. Forward Looking Statements Certain statements included in this report which are not historical facts are forward looking statements, including the information provided with respect to the projected or future business opportunities, expansions and diversification; contract completions, expected financing sources and related matters. These forward looking statements are based on current expectations, estimates, assumptions and beliefs of management; and words such as "expects," "anticipates," "intends," "believes," "estimates" and similar expressions are intended to identify such forward looking statements. These forward looking statements involve risks and uncertainties, including, but not limited to, changes in governmental regulations, the Company"s ability to effectively and efficiently absorb its newly acquired businesses and assets and any additional businesses and/or assets it may acquire in the near future, general economic conditions and conditions affecting the industries which utilize the Company"s services and products, the availability of experienced personnel, raw materials and equipment and the Company"s ability to comply with its obligations under its existing contracts and to obtain new contracts. Accordingly, actual results may differ materially from those expressed in the forward-looking statements. 17 PART II OTHER INFORMATION Item 1. Legal Proceedings Two legal proceedings were reported in the Form 10-Q for the first quarter of 2001. Item 2. Changes in Securities The Company issued 730,000 shares of common stock at $2.00 per share in accordance with a Private Placement Memorandum dated May 14, 2001. Additionally, for every two shares of common stock purchased, purchasers received one warrant to purchase one share of common stock at a price of $2.00 per share. The warrants expire August 31, 2001. The Offering was made only to persons who were "accredited investors" as that term is defined in Rule 501(a) of Regulation D of the Securities Act. The securities sold were not registered under the Securities Act. The were offered in reliance upon the exemption under Section 4(2) of the Securities Act and provisions of Regulation D promulgated thereunder. Proceeds of $1,460,000 were used for general working capital purposes. 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 17, 2001. At the meeting the following directors were elected for one-year terms: For Withheld --- -------- Eddy L. Patterson 6,277,630 1,894 E. R. Foraker 6,277,630 1,894 Dallin Bagley 6,277,630 1,894 Robert Sumner 6,277,630 1,894 James Howell 6,277,630 1,894 The shareholders ratified KPMG, LLP as auditors to perform the audit for the fiscal year ending December 31, 2001: For: 6,276,882 Against: -0- Abstain: 2,552 The shareholders approved an increase in the number of authorized shares of NESCO's common stock from 20,000,000 shares to 50,000,000 shares and the number of authorized shares of NESCO's preferred stock from 1,000,000 to 10,000,000 shares: For: 6,269,059 Against: 1,496 Abstain: 8,969 18 Item 5. Other Information - (a) On May 8, 2001, Company management received notice that David Hopkins and seven other employees of Hopkins Appraisal Services, Inc., a wholly owned subsidary of the Company, resigned effective at the close of business on May 7, 2001. Mr. Hopkins opened a competing appraisal firm and has employed the former Hopkins Appraisal employees. NESCO management filed suit to restrain Mr. Hopkins from competing against Hopkins Appraisal Services, Inc. and to seek damages. Settlement discussions were held between the parties, and NESCO has agreed to sell Hopkins Appraisal Service, Inc. to David Hopkins. The settlement and sales agreements are being written. (b) The Company previously announced the termination of Tullius Taylor Sartain & Sartain as its independent accountant and the engagement of KPMG LLP. However, that firm never began providing services to the Company. The firm of Tullius Taylor Sartain & Sartain has continued to render services to the Company, including providing reviews of its quarterly financial statements. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.23 Copy of Fourth Amendment to Credit Agreement dated June 27, 2001 and Promissory Note between the Company and Bank One, Oklahoma, N.A. (b) Reports on Form 8-K: None 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 17, 2001 BY: /s/ Larry Johnson -------------------------------------- Larry G. Johnson, Vice President & Secretary-Treasurer BY: /s/ Thomas Franz -------------------------------------- Thomas Franz, Chief Financial Officer 19 EXHIBITS 10.23 Copy of Fourth Amendment to Credit Agreement dated June 27, 2001 and Promissory Note between the Company and Bank One, Oklahoma, N.A. 20

NESCO INC/OK 10-Q