10-Q/A 1 nesco10qa33101.txt U.S. Securities & Exchange Commission Washington, D.C. 20549 Form 10-Q/A-No. 1 (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 -------------- (Issurer'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 9,326,140 Transitional Small Business Issuer Format (Check one): Yes No X --- --- 1 NESCO, INC. TABLE OF CONTENTS PART I PAGE Financial Information: Item 1 - Financial Statements Consolidated Balance Sheet March 31, 2001 and December 31, 2000 3 Consolidated Statements of Income Three Months Ended March 31, 2001 and 2000 4 Consolidated Statements of Cash Flows Three Months Ended March 31, 2001 and 2000 5 Notes to Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis Management's Discussion and Analysis of the Financial Condition and Results of Operation 10 PART II Other Information: Item 1 - Legal Proceedings 13 Item 6 - Exhibits and Reports on Form 8-K 13 Signatures 14 2

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) 2001 2000 -------- -------- Revenues $ 11,674 $ 9,532 Costs and Expenses 7,714 5,560 Selling, general and administrative expenses 3,329 1,751 -------- -------- Income from operations 631 2,221 Other income 163 39 Interest expense (508) (319) -------- -------- Income before provision for income taxes 286 1,941 Provision for income taxes 109 735 -------- -------- Net Income $ 177 $ 1,206 ======== ======== Basic Net Income per share $ 0.02 $ 0.13 ======== ======== Diluted Net Income per share $ 0.02 $ 0.13 ======== ======== 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) 2001 2000 ------- ------- Operating activities Net Income $ 177 $ 1,206 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 367 202 Change in: Accounts receivable (1,945) (629) Costs and estimated earnings in excess of billings on uncompleted contracts 1,090 (3,836) Materials and supplies 33 (186) Prepaid and other 171 (132) Accounts payable 582 722 Accrued liabilities 27 (105) Income tax payable 111 797 ------- ------- Net cash provided by operating activities 613 (1,961) ------- ------- Investing activities Purchases of property and equipment (515) (579) Other (184) -- ------- ------- Net cash used in investing activities (699) (579) ------- ------- Financing activities: Proceeds from notes payable and long-term obligations 920 2,415 Principal payments on notes and long term obligations (1,033) (292) ------- ------- Net cash provided by (used in) financing activities (113) 2,123 ------- ------- Decrease in cash (199) (417) Cash, beginning of period 417 629 ------- ------- Cash, end of period $ 218 $ 212 ======= ======= 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: Three Months Ended March 31 --------------------------- 2001 2000 ----------- ----------- Basic EPS Computation: Net income $ 177 $ 1,206 =========== =========== Weighted average shares outstanding 9,325,855 9,225,855 =========== =========== Basic EPS $ .02 $ .13 =========== =========== Diluted EPS Computation: Net income $ 177 $ 1,206 =========== =========== Weighted average shares outstanding 9,325,855 9,225,855 Incremental shares for assumed exercise of securities: Warrants 99,764 153,232 Options 130,906 130,906 ----------- ----------- 9,425,619 9,491,462 =========== =========== Diluted EPS $ .02 $ .13 =========== =========== 6 3. SEGMENT INFORMATION- The Company's business segments at March 31 have been grouped as follows: Thousands of Dollars --------------------------------------------- Inter- Segment Pre-tax Segment Sales Sales Income Assets ------- --------------------------------------------- 2001 Fueling Installations $ 5,625 $ -- $ 736 $ 25,380 Environmental 4,705 -- 708 13,145 Miscellaneous 1,344 30 (29) 4,086 Corporate Overhead -- -- (784) 2,358 --------------------------------------------- $ 11,674 $ 30 $ 631 $ 44,969 ============================================= 2000 Fueling Installations $ 5,324 -- $ 1,308 $ 13,416 Environmental 3,615 -- 1,269 10,383 Miscellaneous 593 160 45 2,286 Corporate Overhead -- -- (681) 1,552 --------------------------------------------- $ 9,532 $ 160 $ 1,941 $ 27,637 ============================================= 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 - 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 receivable; 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. 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. 8 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 $11,674 $14,284 Net income $ 177 $ 1,451 Net income per share: Basic $0.02 $0.16 Diluted $0.02 $0.15 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 9 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. 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. 10 Revenue for the three months increased 22% 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: Three Months Ended March 31 Difference Percentage ------------------ Increase or Increase or 2001 2000 (Decrease) (Decrease) ---------------------------------------------- (Thousands of Dollars) ---------------------------- Fueling Installations $ 5,697 $ 5,295 $ 402 8% Environmental 4,633 3,662 971 27% Miscellaneous 1,344 575 769 134% ---------------------------------------------- $11,674 $ 9,532 $ 2,142 22% ============================================== 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 27% 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 134% 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: Three Months Ended March 31 Difference Percentage ------------------ Increase or Increase or 2001 2000 (Decrease) (Decrease) ---------------------------------------------- (Thousands of Dollars) ---------------------------- Direct Labor $1,789 $1,283 $ 506 39% Lab Services 359 142 217 153% Subcontractors 2,512 1,280 1,232 96% All other 3,054 2,855 199 7% ------ ------ ------- ------ $7,714 $5,560 $ 2,154 39% ====== ====== ======= ====== 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. 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 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 receivable; and an extension of the construction loan facility maturity date to August 10, 2001. 12 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 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 o expects, o o anticipates, o o intends, o o believes, o o estimates o 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 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. 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 G. Johnson ----------------------------------- Larry G. Johnson, Vice President & Secretary-Treasurer 13

NESCO INC/OK 10-Q/A