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 January 31, 2002
[ ] 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)
________________________________________________________________________________
(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 January 31, 2002
Traditional small business issuer format: Yes [ ] No [X]
Page 1 of 22
NESCO INDUSTRIES, INC.
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets --
January 31, 2002 (unaudited) and April 30, 2001........................................ 3
Consolidated Statements of Operations--(unaudited)
for the three months and nine ended January 31, 2002 and 2001.......................... 4,5
Consolidated Statements of Cash Flows (unaudited)
for nine months ended January 31, 2002 and 2001........................................ 6
Notes to Consolidated Financial Statements............................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 13
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.............................................. 21
Item 6. Exhibits and Reports on Form 8K........................................................ 21
Signatures........................................................................................... 22
Page 2 of 22
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
January 31 April 30
2002 2001
----------- ---------
(Unaudited)
Current Assets:
Cash and equivalents $ 433,450 $ 68,169
Accounts receivable 2,509,564 2,497,904
Unbilled costs and estimated earnings in excess
of billings on uncompleted contracts 426,876 318,247
Prepaid taxes and expenses 163,951 21,427
Other current assets 233,786 126,329
----------- -----------
Total current assets 3,767,627 3,032,076
Fixed assets, net 149,358 187,504
Intangibles, net 425,480 455,224
Other assets 97,564 91,264
----------- -----------
$ 4,440,029 $ 3,766,068
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
January 31 April 30
2002 2001
----------- ---------
(Unaudited)
Current Liabilities:
Accounts payable and accrued expenses $ 2,723,150 $ 2,437,905
Notes payable, equipment - current portion 1,577
Notes payable, (Bridge Loan) 411,000
Loans payable, shareholders 673,490 648,490
Interest payable 214,221 190,052
Billing in excess of costs and estimated
earnings on uncompleted contracts 493,770 422,294
----------- -----------
Total current liabilities 4,515,631 3,700,318
Deferred Rental Income 269,100 304,200
----------- -----------
Total liabilities 4,784,731 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 1,083,105 983,105
Accumulated Deficit (1,434,502) (1,228,250)
----------- -----------
(344,702) (238,450)
----------- -----------
$ 4,440,029 $ 3,766,068
----------- -----------
See accompanying notes Page 3 of 22
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDING JANUARY 31, 2002 AND 2001
January 31
-----------------------------------
2002 2001
---- ----
(Unaudited)
Earned Revenues $ 2,640,623 $ 1,927,058
Cost of earned revenues 2,106,172 1,440,179
----------- -----------
Gross profit 534,451 486,879
General and administrative expenses 511,551 525,419
----------- -----------
Operating loss 22,900 (38,540)
----------- -----------
Other Income (Expense):
Sub-lease income 11,700 11,700
Interest expense, net (28,709) (14,226)
----------- -----------
Loss before income taxes 5,891 (41,066)
Income tax benefit (13,410)
----------- -----------
Net Income (Loss) $ 19,301 $ (41,066)
----------- -----------
Basic and diluted loss per share $ - $ (0.01)
----------- -----------
Weighted average common shares outstanding -
basic and diluted 6,694,963 6,614,963
----------- -----------
See accompanying notes Page 4 of 22
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDING JANUARY 31, 2002 AND 2001
January 31
-----------------------------------
2002 2001
---- ----
(Unaudited)
Earned Revenues $ 6,813,207 $ 7,183,646
Cost of earned revenues 5,631,923 5,808,276
----------- -----------
Gross profit 1,181,284 1,375,370
General and administrative expenses 1,378,975 1,615,205
----------- -----------
Operating loss (197,691) (239,835)
----------- -----------
Other Income (Expense):
Sub-lease income 35,100 35,100
Interest expense, net (58,817) (50,670)
----------- -----------
Loss before income taxes (221,408) (255,405)
Income tax benefit (15,156)
----------- -----------
Net Loss $ (206,252) $ (255,405)
----------- -----------
Basic and diluted loss per share $ (0.03) $ (0.04)
----------- -----------
Weighted average common shares outstanding -
basic and diluted 6,694,963 6,614,963
----------- -----------
See accompanying notes Page 5 of 22
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDING JANUARY 31, 2002 AND 2001
January 31
--------------------------------
2002 2001
---- ----
(Unaudited)
Cash Flows from Operating Activities:
Net loss $ (206,252) $ (255,405)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Amortization of discount on bridge loan 11,000
Amortization of deferred sub-lease income (35,100) (35,100)
Depreciation and amortization 82,766 80,507
Provision for bad debts (16,565) 14,689
Changes in operating assets and liabilities:
Accounts receivable 4,905 679,352
Prepaid expenses and taxes (142,524) (238,254)
Other current assets (35,534) 52,502
Unbilled costs and estimated earnings in excess
of billings on uncompleted contracts (108,629) 152,765
Other assets (6,300) 3,067
Accounts payable and accrued expenses 253,164 (577,249)
Billings in excess of costs and estimated
earnings on uncompleted contracts 71,476 64,618
---------- ---------
Net cash used by operating activities (127,593) (58,508)
---------- ---------
Cash Flows from Investing Activities:
Purchase of fixed assets (5,549) (53,069)
Proceeds from sub-lease 397,800
---------- ---------
Net cash provided (used) by investing activities (5,549) 344,731
---------- ---------
Cash Flows from Financing Activities:
Payment of equipment notes (1,577) (10,278)
Proceeds from bridge loan 500,000
Payment of financing costs (25,000)
Net proceeds (repayment) of shareholder loans 25,000 (249,877)
---------- ---------
Net cash provided (used) by financing activities 498,423 (260,155)
---------- ---------
Net increase in cash and equivalents 365,281 26,068
Cash and equivalents, beginning of year 68,169 32,515
---------- ---------
Cash and equivalents, end of period $ 433,450 $ 58,583
---------- ---------
Non cash financing activities:
On January 10, 2002, the Company granted warrants to purchase 200,000 shares of the
Company's common stock at an exercise price of $.50 per share. The estimated fair value
of these warrants, which totals $100,000 was recorded as a loan discount and will be
amortized over the loan term.
See accompanying notes Page 6 of 22
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, as
amended).
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 generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, as of January
31, 2002, the Company has an accumulated deficit in stockholders'
equity of $344,702, negative working capital of $748,004 and has
incurred a net loss of $206,252 for nine months ended January 31, 2002.
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 7 of 22
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. During the three and nine months ended January 31, 2002, one customer
comprised 18% and 26% of revenues, respectively.
C. 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.
D. 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 8 of 22
D. Business Segment Information (continued)
The following table presents the Company's business segment financial
information:
Three Months Nine months
Ended January 31, Ended January 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenues
Asbestos removal $1,783,544 $1,260,162 $ 4,796,206 $ 5,388,606
Environmental services 25,107 130,030 47,306 465,166
Indoor air quality services 831,972 536,866 1,969,695 1,329,874
---------- ---------- ------------ -----------
Total revenues $2,640,623 $1,927,058 $ 6,813,207 $ 7,183,646
---------- ---------- ------------ -----------
Operating income (loss)
from segments
Asbestos removal $ 153,978 $ 241 $ 231,773 $ 108,421
Environmental services (7,295) (28,451) (45,870) (155,973)
Indoor air quality services 64,415 (12,292) (40,660) (82,574)
---------- ---------- ------------ -----------
211,098 (40,502) 145,243 (130,126)
Corporate expenses, net (188,198) 1,962 (342,934) (109,709)
Interest expense, net (28,709) (14,226) (58,817) (50,670)
Other income, net 11,700 11,700 35,100 35,100
Income tax benefit 13,410 15,156
---------- ---------- ------------ -----------
Net income (loss) $ 19,301 $ (41,066) $ (206,252) $ (255,405)
========== ========== ============ ===========
Depreciation and
amortization
Asbestos removal $ 2,602 $ 4,176 $ 7,805 $ 12,527
Environmental services 304 305 912 913
Indoor air quality services 18,624 13,641 60,038 52,344
Corporate 10,955 4,782 14,011 14,723
---------- ---------- ------------ -----------
Total depreciation and
amortization $ 32,485 $ 22,904 $ 82,766 $ 80,507
========== ========== ============ ===========
Page 9 of 22
Three Months Nine Months
Ended January 31, Ended January 31,
2002 2001 2002 2001
---- ---- ---- ----
Capital expenditures
Asbestos removal $ 0 $ 0 $ 0 $ 0
Indoor air quality services 5,549 1,675 5,549 50,921
-------- ---------- ---------- ----------
Total capital expenditures $ 5,549 $ 1,675 $ 5,549 $ 53,069
======== ========== ========== ==========
Identifiable assets
Asbestos removal $287,118 (1,021,599) $2,669,827 $2,640,020
Environmental services 26,152 21,383 57,501 124,317
Indoor air quality services (468,945) 197,107 1,169,932 1,204,174
-------- ---------- ---------- ----------
Total assets for reportable
segments (155,675) (803,109) 3,897,260 3,968,511
Corporate 492,083 28,711 542,769 243,906
-------- ---------- ---------- ----------
Total assets $336,408 ($ 774,398) $4,440,029 $4,212,417
======== ========== ========== ==========
E. 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, the diluted net loss per share
was the same as basic net loss per share for the three and nine months
ended January 31, 2002 and January 31, 2001, since the effect of any
potentially dilutive securities would be anti-dilutive. Options, which
were excluded from the calculation of diluted loss per share, totaled
445,000 with an exercise price of $1.50 for the three and nine months
ended January 31, 2002 and 2001.
F. 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 10 of 22
F. 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. 142 on its
financial position and results of operations.
In August 2001, the FASB issued Statement of Financial Accounting
Standards Board No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", ("SFAS 144"). This statement is effective for
fiscal years beginning after December 15, 2001. This statement
supercedes SFAS 121, while retaining many of the requirements of such
statement. The Company is currently assessing but has not yet
determined the impact of SFAS No. 144 on its financial position and
results of operations.
G. Contingencies
National Abatement Corp. ("NAC"), a wholly-owned subsidiary of the
Company, is a co-defendant with one or more additional defendants in
lawsuits involving personal injury claims arising from job-site
accidents. These plaintiff's claims exceed NAC's applicable insurance
coverages; therefore, any judgment or settlement in excess of insurance
will require payment by NAC. Claims in excess of insurance coverage
total approximately $44,000,000 as of January 31, 2002. In the opinion
of management, the amount of ultimate liability of NAC with respect to
these actions will not materially impact the financial position,
results of operations and cash flow of the Company. However, there can
be no assurance that the settlement of these claims will not exceed
NAC's insurance coverage, which could have a material impact on the
financial position, results of operations and cash flows of the
Company.
H. Bridge Loan
On January 10, 2002, the Company secured bridge financing in the amount
of $500,000 from KSH Strategic Investment Fund I, LP ("KSH") and
Cleveland Overseas, Ltd ("Cleveland"). In exchange, KSH and Cleveland
was granted five-year warrants to purchase a total of 200,000 shares of
the Company's common stock at an exercise price of $.50 per share and a
promissory note in the principal amount of $500,000 at a 10% rate of
interest secured by substantially all of the assets of the Company. The
promissory note will mature on the earlier of July 10, 2002 or the
initial closing of the anticipated private placement of a minimum of
$1,000,000 of the Company's securities, unless the private placement
does not close by March 29, 2002, in which case the maturity date will
be extended to October 10, 2002. The estimated fair value of the
warrants granted to KSH and Cleveland, subject to valuation, totals
$100,000, and was recorded as a loan discount and will be amortized
over the loan term of six months.
Page 11 of 22
The Company has paid KSH Investment Group Inc., a registered
broker-dealer and affiliate of KSH, $25,000 and issued 75,000 shares of
the Company's restricted common stock as a fee for arranging the bridge
financing. This fee has been recorded as deferred financing costs and
will be amortized over the loan term of six months.
The Company is retaining KSH Investment Group Inc. to act as placement
agent for the anticipated private placement.
I. Prior quarter adjustment
During the quarter ended January 31, 2002, the Company corrected an
error in the Form 10-Q for the fiscal quarter ended October 31, 2001.
This error overstated revenue and understated net loss by $162,000 in
the three and six months ended October 31, 2001, due to an
overstatement of unbilled costs and estimated earnings in excess of
billings and uncompleted contracts. The Form 10-Q for the fiscal
quarter ended October 31, 2001 has been amended to reflect this
restatement. The results of operations for the three and nine months
ended January 31, 2002 reflect the corrected presentation.
Page 12 of 22
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, May 11, 2001 and March 5, 2002.
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.
Critical Accounting Policies
The Company considers certain accounting policies related revenue recognition,
impairment of long-lived assets, allowance for doubtful accounts and valuation
of deferred tax assets to be critical policies due to the estimation processes
involved in each.
Revenue Recognition
The Company derives a significant portion of its revenue from fixed price
contracts, which require continuing estimations of costs to complete for each
job, each of which are viewed as individual profit centers. From time to time
due to job conditions, job scheduling and productivity, the cost to complete
estimates are revised upward or downward which correspondingly increases or
decreases both estimated revenues and estimated gross profits, and earned
revenues and earned gross profits. The Company uses the percentage of completion
method, to recognize revenue for each project. When the estimate indicates a
Page 13 of 22
loss, that is, estimated costs exceed estimated revenues, the entire estimated
loss is recognized in the Company's results of operations. Any changes in
estimated amounts including contract losses could be material to the Company's
results of operation in both current and future periods, as jobs progress to
completion.
Allowance for Doubtful Accounts
The Company records an allowance for uncollectible amounts based on a review of
the collectibility of its accounts receivable. Management determines the
adequacy of this allowance by analyzing historical bad debts, continually
evaluating individual customer receivables and considering the customer's
financial condition and current economic conditions. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances could be required. Our accounts
receivable balance as of January 31, 2002 was $2,509,564, net of allowance for
doubtful accounts of $317,389.
Impairment of Long Lived Assets
The Company's long-lived assets include goodwill and other intangible assets
with a carrying value of $425,480 as of January 31, 2002. In assessing the
recoverability of the Company's goodwill and other intangibles, the Company must
make assumptions regarding estimated future cash flows and other factors to
determine the fair value of these assets. If these estimates or their related
assumptions change in the future, the Company may be required to record
impairment charges that were not previously recorded for these assets.
Valuation of Deferred Tax Assets
The Company records the tax benefit of unused income tax losses and credits as
recoverable assets and evaluates the realizability of recorded deferred tax
assets by considering future cash flows and the applicability tax laws, tax
jurisdictions and certain other assumptions. The Company has determined that a
one hundred percent (100.0%) valuation allowance is appropriate at the present
time, therefore, the carrying value of the Company's deferred tax asset is zero
in amount, and is evaluated on a quarterly basis.
Three Months ended January 31, 2002 and 2001
The following table presents selected consolidated financial data for the
periods indicated expressed as a percentage of net sales:
Page 14 of 22
=====================================================================================================================
Three Months Ended Nine Months Ended
January 31, January 31,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Earned revenues 100.0 100.0 100.0 100.0
Cost of earned revenues 79.8 74.7 82.7 80.9
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 20.2 25.3 17.3 19.1
General and administrative
expense (excluding depreciation) 18.2 25.9 19. 21.3
Depreciation 1.1 1.4 1.3 1.1
- ---------------------------------------------------------------------------------------------------------------------
Operating income (loss) .9 (2.0) (3.0) (3.3)
Other expense (.2) (.1) (.1) (.2)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) .7 (2.1) (3.1) (3.5)
=====================================================================================================================
The following table sets forth our revenues by operating area in the periods
indicated:
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
January 31, January 31,
- ---------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Asbestos abatement $1,783,544 $1,260,162 $4,796,206 $5,388,606
- ---------------------------------------------------------------------------------------------------------------------
Indoor air quality services 831,972 536,866 1,969,695 1,329,874
- ---------------------------------------------------------------------------------------------------------------------
Other environmental
services 25,107 130,030 47,306 465,166
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $2,640,623 $1,927,058 $6,831,207 $7,183,646
- ---------------------------------------------------------------------------------------------------------------------
Three months ended January 31, 2002 compared to the three months ended January
31, 2001:
In the fiscal quarter ended January 31, 2002, our revenues increased 37.0%, and
cost of earned revenues increased 46.3%. Our increase in revenues and costs were
due to increased levels of both asbestos abatement and our indoor air quality
services as we continue to expand this segments of our business. As a result our
gross margin decreased to 20.2% compared to 25.3% in the three months ended
January 31, 2001. The lower gross margin was primarily due to lower average
margins from our asbestos abatement operations as a result of on-going
competitive conditions in a finite market that lacks a recurring services
component.
Our asbestos abatement operations experienced an average lower gross margin from
its mix of jobs in progress during the period. One significant job in progress
accounted for approximately 20% of the Company's cost of earned revenues, and
its gross profit margin of 11.1% was less than the Company's margin of 20.2% in
the quarter ended January 31, 2002. We have not experienced any significant
losses on jobs in the current period.
Page 15 of 22
Our indoor air quality operations experienced an average lower gross profit
margin from its mix of jobs in progress during the period when compared to the
three months ended January 31, 2001. The average gross profit margins of the
Company's jobs in progress was lower at January 31, 2002 than at January 31,
2001 due to the mix of jobs in progress for each period. The Company has not
experienced losses from jobs during the current period, and the Company did not
experienced significant revisions in cost estimates from prior periods.
We continue to focus on expanding our customer base and revenues from our indoor
air quality services segment. The decrease in revenues from our environmental
services segment are the result of reduced marketing efforts.
Our general and administrative expenses decreased by 3% for the three months
ended January 31, 2002 as compared to the three months ended January 31, 2001.
Interest expense increased by 101.8% due to interest accrued on a bridge loan
received on January 10, 2002 and amortization of discount on this loan for the
period.
Income tax benefit increased by $13,410 due to refunds received for prior year
taxes.
As a result of our increase in gross profit dollars, our net income was $19,301
in the three months ended January 31, 2002 as compared to our net loss of
$41,066 in the comparable 2001 period.
Nine months ended January, 2002 compared to the nine months ended January 31,
2001.
During the nine months ended January 31, 2002, our revenues decreased 5.2%, cost
of earned revenues decreased 3.1%. 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 conditions in these
finite markets that lack recurring services components.
Our asbestos abatement operations experienced an average lower gross profit
margin from its mix of job in progress during the period. One significant job in
progress accounted for approximately 27% of the Company's cost of earned
revenues, and its gross profit margin of 11.1% was less than the Company's
margin of 17.3% in the nine months ended January 31, 2002. We have not
experienced significant losses on jobs from our asbestos abatement segment.
Our indoor air quality operations experienced an average lower gross profit
margin from its mix of jobs in progress during the period when compared to the
nine months ended January 31, 2001. The average gross profit margins of the
Company's jobs in progress was lower at January 31, 2002 than at January 31,
2001. The Company has not experienced losses from jobs during the current
period, and the Company did not experience significant revisions in cost
estimates from prior periods.
Page 16 of 22
We continue to focus on expanding our customer base and revenues from our indoor
air quality services segment. The decrease in revenues from our environmental
services segment are the result of reduced marketing efforts.
Our general and administrative expenses decreased 14.6% principally due to
reductions in salaries and related expenses, and management fees.
Interest expense increased by 16.1% due to interest accrued on a bridge loan
received on January 10, 2002 and amortization of discount on this loan for the
period.
Income tax benefit increased by $15,156 due to refunds received for prior year
taxes.
The decrease in general and administrative expenses was greater than the
decrease in gross profit and as a result, our net loss of $206,252 in the nine
months ended January 31, 2002 was less than our net loss of $255,405 in the
comparable 2001 period.
Liquidity and Capital Resources
The following table sets forth our working capital position at the dates
indicated:
- --------------------------------------------------------------------------------
January 31, 2002 April 30, 2001
- --------------------------------------------------------------------------------
Current assets $3,767,627 $3,032,076
- --------------------------------------------------------------------------------
Current liabilities 4,515,631 $3,700,318
- --------------------------------------------------------------------------------
Working Capital Deficiency $ 748,004 $ 668,242
- --------------------------------------------------------------------------------
Net cash used in operating activities was $127,593 for the nine months ended
January 31, 2002, which was primarily a result of our net loss of $206,252 for
the period. Net cash provided by financing activities was $498,423 for the nine
months ended January 31, 2002, which was primarily a result of proceeds received
from the bridge loan of $500,000.
At January 31, 2002 the Company had total stockholder's equity deficit of
$344,702, had negative working capital of $748,004 and had incurred a net loss
of $206,252 during the nine months ended January 31, 2002.
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 on the Company's ability to meet its financing requirements
on a continuing basis and to succeed in its future operations. The financial
statements do not include any adjustments relating to the recoverability and
classifications of assets and liabilities that might be necessary should the
Company be unable to continue in its existence.
Page 17 of 22
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 equity and private debt funding as compared to capital
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.
NAC, a wholly-owned subsidiary of the Company, is a co-defendant with one or
more additional defendants in lawsuits involving personal injury claims arising
from job-site accidents. These plaintiff's claims exceed NAC's applicable
insurance coverages, therefore, any judgment or settlement in excess of
insurance will require payment by NAC. Claims in excess of insurance coverage
total approximately $44,000,000 as of January 31, 2002. In the opinion of
management, the amount of ultimate liability of NAC with respect to these
actions will not materially affect the financial position, results of operations
and cash flow of the Company. However, there can be no assurance that the
settlement of the claims will not exceed NAC's insurance coverage, which could
have a material effect on the results of financial position, results of
operations and cash flows of the Company.
The following table provides a summary of our contractual obligations at January
31, 2002:
Less than 1-3 3 or More
Total 1 Year Years Years
-------------- --------------- ----------- --------------
Notes Payable, (Bridge Loan) (a) $ 500,000 $ 500,000
Loans payable, shareholders (b) 673,490 673,490
Operating leases (c) 1,251,777 211,680 384,805 655,292
----------- ----------- --------- ---------
Total contractual obligations $ 2,425,267 $ 1,385,170 $ 384,805 $ 655,292
=========== =========== ========= =========
(a) Notes payable (Bridge Loan):
On January 10, 2002, the Company received bridge financing in the
amount of $500,000 evidenced by a secured promissory note in this
amount with an annual interest rate of 10%. This note will mature on
the earlier of July 10, 2002 or the initial closing of the anticipated
private placement of a minimum of $1,000,000 of the Company's
securities, unless the private placement does not close by March 20,
2002, in which case the maturity date will be extended to October 10,
2002. The note is secured by substantially all of the assets of the
Company. The lenders were granted warrants to purchase 200,000
Page 18 of 22
shares of the Company's common stock at an exercise price of $.50 per
share, which have not yet been issued. The estimated fair value of
these warrants, subject to valuation, which total $100,000 was recorded
as a loan discount and will be amortized over the loan term. An
affiliate of the lenders received $25,000 and 75,000 shares of
restricted common stock for arranging the financing. These fees have
been recorded as deferred financing costs and will be amortized over
the loan term of six months.
(b) Loans payable, shareholders:
The loans payable to shareholders are due on demand, bear interest at
varying rates, and are unsecured. Interest payable on borrowings
outstanding amounted to $204,795 as of January 31, 2002.
(c) Operating leases
We have entered into operating leases for office and warehouse
facilities, which expire through September 30, 2008.
At January 31, 2002 and 2001, the Company did not have any
relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special
purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. In addition, the Company does not engage in
trading activities involving non-exchange traded contracts. As such,
the Company is not exposed to any financing, liquidity, market, or
credit risk that could arise if the Company had engaged in such
relationships.
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. 142 on its
financial position and results of operations.
Page 19 of 22
In August 2001, the FASB issued Statement of Financial Accounting Standards
Board No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
(SFAS 144"). This statement is effective for fiscal years beginning after
December 15, 2001. This statement supercedes SFAS 121, while retaining many of
the requirements of such statement the Company is currently evaluating the
impact this may have but has not yet determined the impact of SFAS No. 144 on
its financial position and results of operations.
Page 20 of 22
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On January 10, 2002, the Company secured bridge financing in the amount of
$500,000 from KSH Strategic Investment Fund I, LP ("KSH") and Cleveland
Overseas, Ltd ("Cleveland"). In exchange, KSH and Cleveland were granted
five-year warrants to purchase a total of 200,000 shares of the Company's common
stock at an exercise price of $.50 per share and a promissory note in the
principal amount of $500,000 at a 10% rate of interest secured by substantially
all of the assets of the Company. The promissory note will mature on the earlier
of July 10, 2002 or the initial closing of the anticipated private placement of
a minimum of $1,000,000 of the Company's securities, unless the private
placement does not close by March 29, 2002, in which case the maturity date will
be extended to October 10, 2002.
The Company has paid KSH Investment Group Inc., a registered broker-dealer and
affiliate of KSH, $25,000 and 75,000 shares of the Company's
restricted common stock as a fee for arranging the bridge financing. The Company
is retaining KSH Investment Group Inc. to act as placement agent for the
anticipated private placement.
The issuance of 75,000 shares of the Company's common stock to KSH Investment
Group, Inc., and the grant of five-year warrants to KSH and Cleveland to
purchase a total of 200,000 shares of the Company's common stock at an exercise
price of $.50 per share, was exempt from registration pursuant to Rule 506 under
Regulation D of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The following Reports on Form 8-K were filed in the quarter ended January 31,
2002:
o On January 25, 2002, the Company filed a Current Report on Form
8-K to report the completion of the $500,000 bridge financing
transaction under Item 5 - "Other Events".
Page 21 of 22
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: March 22, 2002 By: /s/ Lawrence S. Polan
------------------------------------------
Lawrence S. Polan, Chief Financial Officer
Page 22 of 22