UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended July 31, 2001
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
-------------------- -----------------------
COMMISSION FILE NUMBER: 0-28307
NESCO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Nevada 13-3709558
------------------------------- ---------------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
22-09 Queens Plaza North, Long Island City, New York
----------------------------------------------------
(Address of principal executive offices)
718/752-2400
(Registrant's telephone number, including area code)
12-12 43rd Avenue
Long Island City, NY 11101
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of outstanding shares of the registrant's Common Stock, par value
$.01, was 6,694,963 as of August 8, 2001
Traditional small business issuer format: Yes [ ] No [X]
NESCO INDUSTRIES, INC.
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets --
July 31, 2001 (unaudited) and April 30, 2001................. 3
Consolidated Statements of Operations (unaudited)
for the three months ended July 31, 2001 and 2000............ 4
Consolidated Statements of Cash Flows (unaudited)
for three months ended July 31, 2001 and 2000................ 5
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 11
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K...................... 15
Signatures................................................................. 15
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------------------
A S S E T S
-----------
July 31 April 30
------- --------
2001 2001
----------- -----------
(Unaudited)
Current Assets:
Cash and equivalents $ 9,255 $ 68,169
Accounts receivable 2,415,262 2,497,904
Unbilled costs and estimated earnings in excess
of billings on uncompleted contracts 498,055 318,247
Prepaid taxes and expenses 37,879 21,427
Other current assets 106,972 126,329
----------- -----------
Total current assets 3,067,423 3,032,076
Fixed assets, net 172,973 187,504
Intangibles, net 442,532 455,224
Other assets 91,264 91,264
----------- -----------
$ 3,774,192 $ 3,766,068
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
July 31 April 30
2001 2001
----------- -----------
(Unaudited)
Current Liabilities:
Accounts payable and accrued expenses $ 2,555,837 $ 2,437,905
Notes payable, equipment - current portion 1,577
Loans payable, shareholders 673,490 648,490
Interest payable - shareholder 198,889 190,052
Billing in excess of costs and estimated
earnings on uncompleted contracts 340,843 422,294
----------- -----------
Total current liabilities 3,769,059 3,700,318
Deferred Rental Income 292,500 304,200
----------- -----------
Total liabilities 4,061,559 4,004,518
----------- -----------
Stockholders' Equity:
Common stock, $.001 par value
Authorized 25,000,000 shares
Issued and outstanding 6,694,963 shares 6,695 6,695
Capital in excess of par value 983,105 983,105
Accumulated Deficit (1,277,167) (1,228,250)
----------- -----------
(287,367) (238,450)
----------- -----------
$ 3,774,192 $ 3,766,068
----------- -----------
See accompanying Notes. Page 3 of 15
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDING JULY 31, 2001 AND 2000
------------------------------------------
July
--------------------------------
2001 2000
---- ----
(Unaudited)
Earned Revenues $ 2,022,833 $ 2,646,083
Cost of earned revenues 1,660,173 2,221,551
------------- ------------
Gross profit 362,660 424,532
General and administrative expenses 407,610 553,498
------------- ------------
Operating loss (44,950) (128,966)
------------- ------------
Other Income (Expense):
Sub-lease income 11,700 11,700
Interest expense, net (16,308) (19,666)
------------- ------------
Loss before income taxes (49,558) (136,932)
Income tax expense benefit (641)
------------- ------------
Net Loss $ (48,917) $ (136,932)
------------- ------------
Basic and diluted loss per share (0.01) (0.02)
------------- ------------
Weighted average common shares outstanding 6,694,963 6,614,963
------------- ------------
See accompanying notes. Page 4 of 15
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDING JULY 31, 2001 AND 2000
------------------------------------------
July 31
------------------------------
2001 2000
---- ----
(Unaudited)
Cash Flows from Operating Activities:
Net loss $ (48,917) $(136,932)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Amortization of deferred sub-lease income (11,700) (11,700)
Depreciation and amortization 27,223 27,088
Provision for bad debts (18,923) 8,292
Changes in operating assets and liabilities:
Accounts receivable 101,565 193,954
Prepaid expenses and taxes (16,452) (60,697)
Other current assets 19,357 (305)
Unbilled costs and estimated earnings in excess
of billings on uncompleted contracts (179,808) (167,742)
Other assets 807
Accounts payable and accrued expenses 126,769 132,971
Billings in excess of costs and estimated
earnings on uncompleted contracts (81,451) 25,231
--------- ---------
Net cash (used) provided by operating activities (82,337) 10,967
--------- ---------
Cash Flows from Investing Activities:
Purchase of fixed assets -- (55,200)
Proceeds from sub-lease -- 397,800
--------- ---------
Net cash provided by investing activities -- 342,600
--------- ---------
Cash Flows from Financing Activities:
Payment of equipment notes (1,577) (10,278)
Net proceeds (payments) from shareholder loans 25,000 (319,390)
--------- ---------
Net cash provided (used) by financing activities 23,423 (329,668)
--------- ---------
Net (decrease) increase in cash and equivalents (58,914) 23,899
Cash and equivalents, beginning of year 68,169 32,515
--------- ---------
Cash and equivalents, end of period $ 9,255 $ 56,414
--------- ---------
See accompanying notes Page 5 of 15
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. Organization, Operations and Significant Accounting Policies
General:
The unaudited consolidated interim financial statements, and
accompanying notes included herein, have been prepared by NESCO
Industries, Inc., (the Company) pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC") and reflect all
adjustments which are of a normal recurring nature and which, in the
opinion of management, are necessary for a fair statement of the
results for interim periods. Certain information and footnote
disclosures have been condensed or omitted pursuant to such rules and
regulations. The results of the interim period are not necessarily
indicative of the results for the full year. These consolidated
financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's latest annual report filed with the Securities and Exchange
Commission (Form 10-KSB for the fiscal year ended April 30, 2001).
Basis of Presentation and Principles of Consolidation:
The accompanying financial statements include the accounts of the
Company and its wholly-owned subsidiaries on a consolidated basis. All
significant intercompany accounts and transactions have been
eliminated.
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going
concern. However, as of July 31, 2001, the Company has an accumulated
deficit in stockholders' equity of $287,367, negative working capital
of $701,636 and has incurred a net loss of $48,917 for three months
ended July 31, 2001.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon the Company's
ability to meet its financing requirements on a continuing basis, to
maintain its present financing, and to succeed in its future
operations. The financial statements do not include any adjustments
relating to the recoverability and classification of assets and
liabilities that might be necessary should the Company be unable to
continue its existence.
Revenue and Cost Recognition:
Earned revenues are recorded using the percentage of completion method.
Under this method, earned revenues are determined by reference to
Company's engineering estimates, contract expenditures incurred, and
work performed. The calculation of earned revenue and the effect on
several asset and liability amounts is based on the common industry
standard revenue determination formula of actual costs-to-date compared
to total estimated job costs. Due to uncertainties inherent in the
estimation process, and uncertainties relating to future performance as
the contracts are completed, it is at least reasonably possible that
estimated job costs, in total or on individual contracts, will be
revised. When a loss is anticipated, the entire amount of the estimated
loss is provided for in the period.
Page 6 of 15
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The asset, "unbilled costs and estimated earnings in excess of billings
on uncompleted contracts" represents revenues recognized in excess of
amounts billed. The liability, "billings in excess of costs and
estimated earnings on uncompleted contracts" represents billings in
excess of revenues recognized.
B. Sublease income:
In June 2000, the Company received a payment of $397,800 in connection
with the sublease of its New York City offices from a tenant for future
rent. The payment received will be recognized as "other income" on a
straight-line basis over the life of the lease. The lease expires on
October 31, 2008.
C. Business Segment Information:
The asbestos removal segment provides asbestos abatement including
removal and disposal, enclosure and encapsulation. The environmental
services segment provides environmental remediation Phase I, II, and
III environmental assessments, including underground storage tank
removals, injection well closures, soil and ground water treatment
systems, contaminated soil removal and emergency response. The indoor
air quality services segment provides indoor air quality testing,
monitoring and remediation services including mold and microbiological
remediation services.
Identifiable assets by segment are those assets that are used in the
operations of each segment as well as the accounts receivable generated
by each segment. Corporate assets consist primarily of cash and cash
equivalents, prepaid expenses, and corporate furniture, fixtures and
equipment. Capital expenditures are comprised primarily of additions to
data processing equipment, furniture and fixtures, and leasehold
improvements.
Page 7 of 15
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
C. Business Segment Information (continued)
The following table presents the Company's business segment financial
information:
Three months
Ended July 31,
2001 2000
---- ----
Revenues
Asbestos removal $ 1,572,924 $ 1,951,444
Environmental services 14,815 308,020
Indoor air quality services 435,094 386,619
------------ -----------
Total revenues $ 2,022,833 $ 2,646,083
------------ -----------
Operating income (loss) from segments
Asbestos removal $ 100,155 $ (645)
Environmental services (8,936) (57,963)
Indoor air quality services (80,748) (24,326)
------------ -----------
10,471 (82,934)
Corporate expenses, net (55,421) (46,032)
Interest expense, net (16,308) (19,666)
Other income, net 11,700 11,700
Income tax benefit 641
------------ -----------
Net loss $ (48,917) $ (136,932)
============ ===========
Depreciation and amortization
Asbestos removal $ 2,602 $ 4,178
Environmental services 304 304
Indoor air quality services 22,790 17,446
Corporate 1,527 5,160
------------ -----------
Total depreciation and amortization $ 27,223 $ 27,088
============ ===========
Page 8 of 15
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
C. Business Segment Information (continued)
JULY 31
-------
2001 2000
---- ----
Capital expenditures
Asbestos removal $ 0 $ 2,148
Indoor air quality services 0 53,052
----------- -----------
Total capital expenditures $ 0 $ 55,200
=========== ===========
Identifiable assets
Asbestos removal $ 2,351,886 $ 3,420,845
Environmental services 40,124 421,364
Indoor air quality services 1,328,049 892,715
----------- -----------
Total assets for reportable segments 3,720,059 4,734,924
Corporate 54,133 220,684
----------- -----------
Total assets $ 3,774,192 $ 4,955,608
=========== ===========
D. Loss per share:
Basic loss per share excludes dilution and is computed by dividing loss
available to common shareholders by the weighted-average common shares
outstanding for the period. As a result of the Company's net loss,
diluted net loss per share was the same as basic net loss per share for
the three months ended July 31, 2001 and 2000, since the effect of any
potentially dilutive securities would be antidilutive. Options which
were excluded from the calculation of diluted earnings per share
because the exercise prices of the options were greater than the
average market price of the common shares and therefore, would be
antidilutive totaled 445,000 with an exercise price of $1.50 for the
three months ended July 31, 2001 and 2000.
E. New accounting pronouncements:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "
Business Combinations." SFAS No. 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company does not
believe that the adoption of SFAS No. 141 will have a significant
impact on its financial statements.
Page 9 of 15
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
E. New accounting pronouncements (continued)
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets," which is effective for all fiscal years beginning after
December 31, 2001; however, early adoption is permitted. SFAS No. 142
requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out previously
reported goodwill and the identification of reporting units for
purposes of assessing potential future impairment of goodwill. SFAS No.
142 also requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The Company is
required to adopt SFAS No. 142 in fiscal 2003. The Company is currently
assessing but has not yet determined the impact of SFAS No. 42 on its
financial position and results of operations.
F. Contingencies
The Company is a defendant in lawsuits involving personal injury claims
arising from job-site accidents. These plaintiff's claims exceed the
Company's applicable insurance coverages; therefore, any judgment or
settlement in excess of insurance will require payment by the Company.
Claims in excess of insurance coverage total approximately $31,000,000
as of July 31, 2001. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially
affect the financial position of the Company.
Page 10 of 15
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Item 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations
When used in this discussion, the words "expect(s)", believe(s)", "will", "may",
"anticipate(s)" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from the possible results,
described in such statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, and are urged to carefully review and
consider the various disclosures which discuss factors which affect our
business, including the discussion under the caption "Risk Factors" in our
Registration Statement on Form 10-SB, filed November 29, 1999, and amended
January 31, 2000 and May 11, 2001.
You should read the following discussion and analysis in conjunction with the
financial statements and related notes that comprise Item I of this Report.
General
NESCO Industries, Inc. was incorporated in March 1993 as Coronado Communications
Corp. In March 1998, NESCO, which was then inactive, acquired all of the
outstanding capital stock of National Abatement Corp. ("NAC"), a corporation
engaged primarily in asbestos abatement services, and NAC Environmental Services
Corp. ("NES"), a provider of a variety of other environmental remediation
services. As a result of this acquisition, which was the result of arms length
negotiation between previously non-affiliated parties, the former shareholders
of NAC and NES acquired 5,000,000 shares or 80% of the total outstanding
immediately following the acquisition. The former shareholders of NAC were the
same as the former shareholders of NACE. For accounting purposes, NAC was
treated as the acquiring corporation. Thus, the historical financial statements
of NAC prior to this acquisition date are deemed to be the historical financial
statements of the Company.
In June 1999, we organized NAC/Indoor Air Professionals, Inc. ("NAC/IAP") to
carry on and further develop the indoor air quality testing and remediation
activities previously conducted by NES.
Results of Operations
Revenues are reported on the percentage of completion method of accounting using
job costs incurred to date to determine percentages of construction completion.
As the level of work installed fluctuates, job costs and earned revenues
fluctuate accordingly.
Three Months ended July 31, 2001 and 2000
The following table presents selected consolidated financial data for the
periods indicated expressed as a percentage of net sales:
Page 11 of 15
----------------------------------------------------------------------
Three months ended
July 31,
2001 2000
-----------------------------------------------------------------------
Earned revenues 100.0 100.0
Cost of earned revenues 82.0 84.0
-----------------------------------------------------------------------
Gross profit......................... 18.0 16.0
General and administrative expense
(excluding depreciation) 18.8 19.9
Depreciation......................... 1.4 1.0
-----------------------------------------------------------------------
Operating loss....................... (2.2) (4.9)
Other expense (.2) (.3)
-----------------------------------------------------------------------
Net loss (2.4) (5.2)
-----------------------------------------------------------------------
The following table sets forth our revenues by operating area in the periods
indicated:
---------------------------------------------------------------------
Three Months Ended Three Months Ended
July 31, 2001 July 31, 2000
---------------------------------------------------------------------
Asbestos abatement $1,572,924 $1,951,444
---------------------------------------------------------------------
Indoor air quality services 435,094 386,619
---------------------------------------------------------------------
Other environmental 41,815 308,020
services
---------------------------------------------------------------------
TOTAL $2,022,833 $2,646,083
---------------------------------------------------------------------
Three months ended July 31, 2001 compared to the three months ended July 31,
2000:
In the fiscal quarter ended July 31, 2001, our revenues decreased 24%, cost of
earned revenues decreased 25%. Our decrease in revenues and costs were due to
lower levels of both asbestos abatement and other environmental services
rendered by the Company as a result of on-going competitive market conditions.
Our indoor air quality services segment is more profitable than our other
segments, and we have not experienced significant losses on jobs from our
asbestos abatement segment. We will continue to focus on expanding our customer
base and revenues from our indoor air quality services segment. The continued
declining revenues from our environmental services segment are the result of our
reduced marketing efforts. In our view, revenues and margins from environmental
services are lower than from indoor air quality services.
Page 12 of 15
As a result, our gross profit margin increased to 18% compared to 16% in the
three months ended July 31, 2000. The increase in gross margin was primarily due
to improved average margins from our asbestos abatement operations and a
decrease in revenues from our environmental services segment.
Our general and administrative expenses decreased 26% principally due to
reductions in salaries and related expenses, and management fees.
The decrease in expenses was greater than the decrease in gross profit, as a
result our net loss of $48,917 in the three months ended July 31, 2001 was less
than our net loss of $136,932 in the comparable 2000 quarter.
Liquidity and Capital Resources
The following table sets forth our working capital position at the dates
indicated:
-------------------------------------------------------------------------------
July 31, 2001 April 30, 2001
-------------------------------------------------------------------------------
Current assets $3,067,423 $3,032,076
-------------------------------------------------------------------------------
Current liabilities 3,769,059 $3,700,318
-------------------------------------------------------------------------------
Working Capital Deficiency $ 701,636 $ 668,242
-------------------------------------------------------------------------------
Net cash used in operating activities was $82,377 for the three months ended
July 31, 2001, which was primarily a result of our net operating loss of $48,917
for the period. Net cash provided by financing activities was $23,423 for the
three months ended July 31, 2001, which was primarily a result of proceeds from
shareholder loans.
As of July 31, 2001 the Company total stockholders' equity was $287,367, has a
negative working capital of $701,636, and has incurred a net loss of $48,917 for
the three months ended July 31, 2001.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon the Company's ability to meet its financing requirements
on a continuing basis, to maintain its present financing, and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of assets and liabilities that
might be necessary should the Company be unable to continue its existence.
Page 13 of 15
The Company's ability to finance its operating cash needs with cash generated by
operations is a function of returning to profitability. We have taken measures
to conserve cash by cutting back on personnel and related expenses and have
subleased our New York City office and relocated to less expensive offices. The
Company is exploring credit markets to secure financing of its working capital
needs, but there is no assurance that the Company will be able to obtain any
other financing.
We are directing our efforts toward improved profitability and revenue share,
reduction of overhead expense and therefore conserving and improving cash flow
from operations. Because of our net losses and negative working capital, our
auditors expressed a doubt about our ability to continue as a going concern in
their report on our financial statements for the fiscal year ended April 30,
2001. We may continue to be dependent upon loans from our shareholder until we
become profitable.
New Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company does not believe that the adoption of
SFAS No. 141 will have a significant impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," which is effective
for all fiscal years beginning after December 31, 2001; however, early adoption
is permitted. SFAS No. 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out previously reported goodwill and the
identification of reporting units for purposes of assessing potential future
impairment of goodwill. SFAS No. 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company is required to adopt SFAS No. 142 in fiscal 2003. The Company is
currently assessing but has not yet determined the impact of SFAS No. 42 on its
financial position and results of operations.
Page 14 of 15
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
NESCO INDUSTRIES, INC.
DATE: September 28, 2001 By: /s/ Lawrence S. Polan
------------------------------------------
Lawrence S. Polan, Chief Financial Officer