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, 2003
[ ] 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: 000-28307
NESCO INDUSTRIES, INC.
------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 13-3709558
------------------------------- ---------------------------------
(State or 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
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(Issuer's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer 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 issuer's common stock, par value $.001,
was 6,769,963 as of November 28, 2003.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
NESCO INDUSTRIES, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of July 31, 2003
and April 30, 2003 1
Consolidated Statements of Operations for the
three months ended July 31, 2003 and 2002 2
Consolidated Statement of Stockholders' Equity
(Deficit) for the three months ended July 31, 2003 3
Consolidated Statements of Cash Flows for the
three months ended July 31, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operation 12
Item 3. Controls and Procedures 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 3. Defaults Upon Senior Securities 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Exhibit 31 Section 302 Certification
Exhibit 32 Section 906 Certification
i
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
July 31, 2003 April 30, 2003*
------------- ----------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 260,651 $ 78,695
Accounts receivable, net of allowance for uncollectibles 312,292 990,901
Inventory -- 20,000
Prepaid taxes and expenses 83,345 112,674
---------- -----------
Total current assets 656,288 1,202,270
Fixed assets, net of accumulated depreciation 9,643 35,002
Other assets 85,259 51,259
---------- -----------
$ 751,190 $ 1,288,531
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued expenses $1,100,844 $ 1,369,610
Related party accounts payable 128,659 128,659
Loans payable, shareholders 1,007,501 1,032,501
Billing in excess of costs and estimated earnings
on uncompleted contracts -- 73,586
---------- -----------
Total current liabilities 2,237,004 2,604,356
Deferred sublease rental - related party 198,900 210,600
---------- -----------
Total liabilities 2,435,904 2,814,956
---------- -----------
Commitments and Contingencies:
Stockholders' Equity (Deficit):
10% convertible preferred stock, $0.001 par value;
1,000,000 shares authorized, 512,500 shares issued and
outstanding 513 513
Preferred stock issuable (147,486 and 93,182 shares, respectively) 147,603 88,264
Common stock, $0.001 par value;
25,000,000 shares authorized, 6,769,963
shares issued and outstanding 6,770 6,770
Capital in excess of par value 2,586,340 2,571,227
Accumulated deficit (4,425,940) (4,193,199)
---------- -----------
(1,684,714) (1,526,425)
---------- -----------
$ 751,190 $ 1,288,531
========== ===========
* Condensed from audited financial statements.
The accompanying notes are an integral part of these statements.
1
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JULY 31
2003 2002
---- ----
Operations of Discontinued Business
Revenues $ 8,999 $ 1,372,324
Cost of revenues 2,913 1,157,926
---------- -----------
Gross profit 6,086 214,398
General and administrative expenses 171,916 538,963
---------- -----------
(165,830) (324,565)
---------- -----------
Other income (expense):
Sub-lease income-related party 11,700 11,700
Interest expense (15,113) (99,346)
Loss on disposal of fixed assets (4,159) --
---------- -----------
Net loss $ (173,402) $ (412,211)
Recurring convertible preferred stock dividends in kind 31,547 11,389
Additional shares of convertible preferred stock to holders 27,792 --
Beneficial conversion feature of convertible preferred stock -- 512,500
---------- -----------
Net loss attributable to common shareholders (232,741) $ (936,100)
========== ===========
Basic and diluted loss per share $ (0.03) $ (0.14)
========== ===========
Weighted average common shares outstanding -- basic and diluted 6,769,963 6,723,496
========== ===========
The accompanying notes are an integral part of these statements.
2
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
THREE MONTHS ENDED JULY 31, 2003
Preferred Stock
Preferred Stock Issuable Common Stock
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balances at May 1, 2003
(as reclassified) 512,500 $ 513 93,182 $ 88,264 6,769,963 $ 6,770
Preferred stock issuable
Recurring convertible preferred
stock dividend in kind 28,679 31,547
Additional shares of convertible
preferred stock to holders 25,625 27,792
Imputed interest on shareholder loans
Net loss for the quarter ended
July 31, 2003
------------- ------------ ------------ ---------- ---------- ---------
Balances at July 31, 2003 512,500 $ 513 147,486 $ 147,603 6,769,963 $ 6,770
------------- ------------ ------------ ---------- ---------- ---------
[STUBBED]
Capital in
Excess of Accumulated
Par Value Deficit Total
--------- ------- -----
Balances at May 1, 2003
(as reclassified) $ 2,571,227 $(4,193,199) $(1,526,425)
Preferred stock issuable
Recurring convertible preferred
stock dividend in kind (31,547)
Additional shares of convertible
preferred stock to holders (27,792)
Imputed interest on shareholder loans 15,113 15,113
Net loss for the quarter ended
July 31, 2003 (173,402) (173,402)
--------------- --------------- ---------------
Balances at July 31, 2003 $ 2,586,340 (4,425,940) (1,684,714)
--------------- --------------- ---------------
The accompanying notes are an integral part of these statements.
3
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDING JULY 31,
2003 2002
---- ----
Cash Flows from Operating Activities:
Net loss (173,402) (412,211)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Loss on disposal of fixed assets 4,159 --
Imputed interest on shareholders loan 15,113 --
Amortization of discount on bridge loan -- 52,726
Amortization of deferred sub-lease income (11,700) (11,700)
Depreciation and amortization 357 51,972
Provision for bad debts -- 18,029
Changes in applicable assets and liabilities:
Accounts receivable 678,609 735,647
Unbilled costs and estimated earnings in excess of
billings on uncompleted contracts -- 23,191
Inventory 20,000 2,013
Prepaid expenses and taxes 29,329 (94,476)
Other assets (34,000) (42,300)
Accounts payable and accrued expenses (268,763) (424,620)
Billings in excess of costs and estimated earnings on
uncompleted contracts (73,586) (48,538)
-------- --------
Net cash provided (used) by operating activities 186,116 (150,267)
-------- --------
Cash Flows from Investing Activities:
Proceeds on sale of fixed asset 20,840 --
-------- --------
Net cash provided by investing activities 20,840 --
-------- --------
Cash Flows from Financing Activities:
Repayment of bridge loan -- (400,000)
Repayments of shareholder loans (25,000) --
Net proceeds of convertible preferred stock offering -- 865,959
-------- --------
Net cash provided (used) by financing activities (25,000) 465,959
-------- --------
Net increase in cash and equivalents 181,956 315,692
Cash and equivalents, beginning of period 78,695 111,260
-------- --------
Cash and equivalents, end of period $260,651 $426,952
-------- --------
Interest paid -- --
Income taxes paid -- --
The accompanying notes are an integral part of these statements.
4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
A. Organization, Basis of Presentation, Operations and Significant Accounting
Policies
General
NESCO Industries, Inc. (hereinafter sometimes referred to as "we" or the
"Company"), prior to ceasing business operations and becoming inactive in May
2003, was a provider of asbestos abatement and indoor air quality testing,
monitoring and remediation services. In the fiscal year ended April 30, 2003,
the Company consolidated the operations of its various subsidiaries, through
which it provided services, into a single environmental services operating unit
organized under the banner of its wholly-owned subsidiary National Abatement
Corporation. Prior to consolidation, the Company provided asbestos abatement,
indoor air quality and a variety of other environmental services through its
wholly-owned subsidiaries, National Abatement Corporation ("NAC"), NAC/Indoor
Air Professionals, Inc. ("IAP") and NAC Environmental Services, Inc. ("NACE").
In May 2003, the Company and its environmental services operating unit ceased
business operations and became inactive. The Company's present plan is to
identify and complete a merger or acquisition with a private entity whose
business presents an opportunity for the Company's stockholders. The Company is
in merger/acquisition negotiations with an entity. However, the Company has not
entered into, nor does it have any commitment to enter into, any merger or
acquisition as of the date of this filing.
The Company's fiscal year ends on April 30 and, therefore, references to fiscal
2004 and fiscal 2003 refer to the fiscal years ending April 30, 2004 and April
30, 2003, respectively.
Certain April 30, 2003 balances relating to related party payables and preferred
stock have been reclassified to conform to the current year presentation.
The unaudited consolidated interim financial statements, and accompanying notes
included herein, have been prepared by 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 the fiscal
quarters ended July 31, 2003 and 2002. Certain information and footnote
disclosures have been condensed or omitted pursuant to such rules and
regulations. The results of the first quarter of fiscal 2004 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 SEC on Form 10-KSB for the fiscal year ended April 30, 2003 and
the subsequent reports that are filed by the Company with the SEC, as amended
from time to time.
5
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 preparation of
consolidated financial statements in accordance with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingencies as of the date of the consolidated financial statements and the
reported amount of revenues and expenses during the period. Actual results could
differ from those estimates.
B. Liquidity and Going Concern
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.
In May 2003, the Company and its environmental services operating unit ceased
business operations and became inactive. The Company's present plan is to
identity and complete a merger or acquisition with a private entity whose
business presents an opportunity for the Company's stockholders. The Company is
in merger/acquisition negotiations with an entity. However, the Company has not
entered into, nor does it have any commitment to enter into, any merger or
acquisition as of the date of this filing.
In April 2002 and when active, the Company issued unsecured promissory notes
("Shareholder Loans") totaling $1,032,501, in exchange for and in full
satisfaction of all outstanding balances due on the demand loans, management
fees and consulting fees payable to shareholders and affiliates of the Company.
The Shareholder Loans do not bear interest pursuant to their terms. However,
commencing in fiscal 2004, the Company has imputed interest on the Shareholder
Loans at 6% per annum with an equivalent offset to additional paid in capital.
Each Shareholder Loan requires repayment in twenty-one (21) equal monthly
payments. Repayment on a Shareholder Loan in the principal amount of $10,263 was
scheduled to commence in February 2003, however, the lender agreed to defer the
commencement date indefinitely. Repayment on the Shareholder Loans in the
aggregate principal amount of $1,022,238 was scheduled to commence in May 2003.
In May 2003, the Company paid $25,000 on account of the $1,022,238 Shareholder
Loans and the lenders agreed to defer the commencement dates indefinitely. The
lenders could, however, demand that repayment begin on the Shareholder Loans at
any time. The Company does not have adequate funds as of the date of this filing
to pay the monthly installments required under the Shareholder Loans had the
lenders demanded that repayment resume. Due to the repayment demand option, the
Shareholder Loans were reclassified to current.
In June 2002 and when active, the Company completed the initial and only closing
of a private placement of a minimum of 500,000 and a maximum of 1,000,000 shares
of its 10% Series A Convertible Preferred Stock ("Preferred Stock") to
accredited investors at a sale price of $2.00 per share. Five hundred twelve
thousand five hundred shares of Preferred Stock were issued, each of which is
convertible into four shares of common stock at a conversion price of $0.50 per
share. As of the closing, it was determined that the holders of the Preferred
Stock received a common stock conversion preference based on the excess of the
common stock's then current market value of $0.75 per share over the Preferred
Stock's $0.50 per share conversion price. This preference was assigned a value
of $512,500 relative to the 2,050,000 underlying shares of common stock into
which the issued Preferred Stock may be converted. The Company received net
proceeds of $865,959 from the issuance of the 512,500 shares of Preferred Stock.
The Company used a portion of the proceeds derived from the private placement to
repay $400,000 in principal and all accrued interest on secured bridge loans in
the aggregate principal amount of $500,000 procured by the Company in January
2002 from lenders affiliated with the placement agent. The placement agent
received, among other things, a cash commission equal to 7.5% of the aggregate
purchase price of the shares sold, a non-accountable expense allowance equal to
1.5% of the aggregate purchase price of the shares sold, and warrants to
purchase 402,500 shares of common stock at an exercise price of $0.65 per share
in connection with the private placement. Warrants for 325,625 shares were
issued in June 2002 and warrants for the remaining 76,875 shares were issued in
September 2002.
6
Annual dividends on the outstanding shares of Preferred Stock accrue and are
payable in May of each year at a rate of $0.20 per share. Dividends are payable
in shares of Preferred Stock based upon the market value of the common stock
into which the Preferred Stock is convertible, or in shares of common stock
valued at market if sufficient shares of Preferred Stock are not available. In
the three months ended July 31, 2003, the Company had accrued Preferred Stock
dividends in kind of 28,679 shares valued at $31,547. The Preferred Stock is
redeemable at the option of the Company after the second anniversary of the sale
date. Consequently, the Preferred Stock has been classified as equity.
The Company attempted to complete the second half of the Preferred Stock
offering in fiscal 2003, but was unable to sell any other shares of Preferred
Stock due to the economic climate and state of operations of the Company.
Because of this and because it did not file a registration statement to register
the Preferred Stock sold in the initial closing as required under the
registration rights agreements with holders, the Company must issue to such
holders, on a pro-rata basis, shares of Preferred Stock in the aggregate amount
of 5% of the total amount sold, or 25,625 shares valued at $27,792. The Company
intends to issue these shares of Preferred Stock in the third quarter of fiscal
2004.
At July 31, 2003, the Company had a deficit of $1,684,714, negative working
capital of $1,580,716 and incurred a net loss of $173,402 for the three months
then ended. The 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 an as needed basis, consummate a merger or
acquisition and succeed in operations. The Company is not seeking any financing,
nor has it entered into or have any commitment to enter into any merger or
acquisition as of the date of this filing. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should the Company be unable to continue in
existence.
C. Loss Per Share
Basic loss per share excludes dilution and is calculated by dividing the net
loss attributable to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted loss per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock and resulted in the
issuance of common stock. Because the Company incurred a net loss, diluted net
loss per share was the same as basic net loss per share for the three months
ended July 31, 2003 and 2002, since the effect of any potentially dilutive
securities would be antidilutive. Options, warrants and other agreements for the
issuance of common stock which were excluded from the calculation of diluted
loss per share totaled 4,152,500 with an average exercise price of $0.59 as of
July 31, 2003, and 3,870,625 with an average exercise price of $0.67 as of July
31, 2002.
7
D. New Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The adoption of this requirement did not have a
material impact on the Company's financial position, results of operations and
cash flows.
In November 2002, FASB Interpretation 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company previously did not record a
liability when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. The Company does not anticipate that FIN 45 will
have a material impact on its financial position, results of operations and cash
flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure: an amendment of FASB Statement 123,"
to provide alternative transition methods for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in annual financial statements about the method of
accounting for stock-based employee compensation and the pro forma effect on
reported results of applying the fair value based method for entities that use
the intrinsic value method of accounting. The pro forma effect disclosures are
also required to be prominently disclosed in interim period financial
statements. This statement is effective for financial statements for fiscal
years ending after December 15, 2002 and is effective for financial reports
containing condensed financial statements for interim periods beginning after
December 15, 2002, with earlier application permitted. The Company has elected
to continue accounting for stock-based compensation using the intrinsic value
method. However, the Company has adopted the new disclosure requirements
specified under SFAS No. 148.
8
In January 2003, the FASB issued FASB Interpretation 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, for certain
entities that do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not
anticipate that FIN 46 will have a material impact on its financial position,
results of operations and cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designed after June
30, 2003. The Company does not anticipate an impact on its financial position,
results of operations and cash flows by adoption of SFAS No. 149.
In May 2003, the FASB issued SFAS No. 150, "Accounting of Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, be accounted for as liabilities. The financial
instruments affected include mandatory redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain obligations that can be
settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003. The Company does not
anticipate an impact on its financial position, results of operations and cash
flows by adoption of SFAS No. 150.
9
E. Contingencies - Subsequent Events
Litigation
NAC and/or NACE are co-defendants in lawsuits involving property damage and/or
personal injury claims which arose in the ordinary course of business from
job-site accidents. Plaintiffs' claims in these lawsuits exceed NAC's and/or
NACE's applicable insurance coverages. At July 31, 2003, claims in excess of
NAC's and/or NACE's insurance coverages totaled approximately $11,800,000. In
October 2003, one case with claims totaling approximately $8,800,000 settled
within limits of applicable insurance coverage, which had the effect of reducing
claims in excess of insurance coverage to approximately $3,000,000. NAC and/or
NACE are being represented in these lawsuits by legal counsel engaged by their
insurers and, in most or all cases, have filed cross-claims and third-party
claims against other parties. Any judgment or settlement in excess of insurance
coverages, however, will require payment by NAC and/or NACE. The Company
believes, based on prior experience, that the amount of ultimate liability of
NAC and/or NACE with respect to these claims will not have a material impact on
the financial position, results of operations and cash flows of the Company.
There can be no assurance, however, that any judgment or settlement of these
claims will not exceed NAC's and/or NACE's insurance coverages, which could have
a material impact on the financial position, results of operations and cash
flows of the Company.
On January 15, 2003, NAC and one employee were charged with violation of the
Clean Air Act in a one-count federal indictment filed in the United States
District Court for the Southern District of New York. The indictment, which
relates to work performed in January 1998, alleges that NAC and the employee
caused asbestos material to be stripped from a building without adequately
wetting it, failed to lower the asbestos material to the floor without dropping
or otherwise damaging it, and did not keep asbestos material that had been
removed wet until it was collected and contained. The prosecutor subsequently
filed a three-count prosecutor's information that superseded the indictment and
charged NAC with two additional violations of the Clean Air Act.
On July 1, 2003, NAC pled guilty to the three-count prosecutor's information in
accordance with the terms of a negotiated plea agreement. The plea agreement and
plea were intended to conclude the proceedings commenced against NAC by the
filing of the federal indictment in January 2003. In connection with the plea,
NAC received a fine totaling $76,200, which was paid in full by September 30,
2003. A five year probationary period was also imposed on NAC, and in addition,
NAC agreed, as a condition of probation, to not engage in any activity relating
to (i) inspection, sampling or analysis for the presence of asbestos, (ii)
removal, transportation or disposal of asbestos, or (iii) demolition or
renovation of buildings. This prohibition does not extend to any construction
work limited exclusively to the installation or addition of building components
to a structure, not involving the removal of any building components or
construction debris. The fine imposed upon NAC has been accrued in the
accompanying financial statements. The Company believes that the fine and
probation imposed on NAC will not have a material impact on the financial
position, results of operations and cash flows of the Company.
On July 31, 2003, an individual commenced an action against IAP in the Supreme
Court of New York, County of Queens. The plaintiff alleges to have been injured
in an automobile accident with an IAP employee, and seeks damages in the amount
of $1,000,000. This claim for damages is within limits of applicable insurance
coverages. IAP denies culpability and will vigorously pursue its defenses in
this action. The Company believes that the amount of ultimate liability of IAP
in this action will not have a material impact on the financial position,
results of operations and cash flows of the Company.
Except for the claims against NAC, NACE and IAP set forth above, the Company and
its subsidiaries were not involved in any other material legal proceedings in
the three months ended July 31, 2003.
10
Risk and Uncertainties
When the Company was active it routinely handled waste materials in the ordinary
course of business, some of which may have been considered to be hazardous
waste. The Company was subject to numerous local, state and federal laws and
regulations concerning the containment and disposal of asbestos, pursuant to
which it incurred compliance and clean-up costs. Proceedings resulting from
violations of such laws and regulations could result in substantial costs even
though the Company discontinued business operations in May 2003, and could have
a material adverse effect on the Company's financial position, results of
operations and cash flows.
F. Disposition of Assets - Related Party Transaction
In June 2003, the Company sold vehicles, furniture and equipment to an affiliate
of President Michael J. Caputo in a private transaction for a purchase price of
$25,000.
G. Subsequent Events - Related Party Transaction
In August 2003, the Company sold substantially all of its remaining vehicles,
furniture and equipment in an auction sale for aggregate proceeds of $13,714.
Commissions and expenses related to the auction totaled $4,714.
In August 2003, the Company agreed to pay $9,350 in charges to cancel the lease
for the warehouse space in Rahway, New Jersey, effective September 30, 2003.
This payment will be recorded as a charge to operations in the second quarter of
fiscal 2004. The Company was refunded the $40,000 deposit held by the landlord.
In September 2003, the Company cancelled the lease for the small storage area in
midtown Manhattan without charge.
In October 2003, the Company paid $25,000 on account of a Shareholder Loan owed
to Chairman Santo Petrocelli, Sr.
H. Stock Based Compensation
The Company has one effective stock-based employee compensation plan and one
plan that failed to become effective in fiscal 2003. The Company uses the
intrinsic value method set forth in APB Opinion 25, "Accounting for Stock Issued
to Employees", and related Interpretations in accounting for its plans. The
following table illustrates the effect on net loss and earnings per share for
the three months ended July 31, 2003 if the Company had applied the fair value
recognition provisions of FASB Statement 123, "Accounting for Stock-Based
Compensation".
July 31, 2003
-------------
Net loss, as reported $ (173,402)
Add: Total stock-based employee compensation expense determined under fair
value based method for awards granted, modified, or settled, net of related tax
effects 5,775
---------
Proforma net loss $(179,177)
=========
Basis and diluted loss per share, as reported $(0.03)
======
Basis and diluted loss per share, proforma $(0.03)
======
11
Item 2. Management's Discussion and Analysis or Plan of Operation
Forward-Looking Statements
This Quarterly Report on Form 10-QSB of NESCO Industries, Inc. (hereinafter
sometimes referred to as "we" or the "Company") for the quarter ended July 31,
2003, contains statements that constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements can be identified by introductory words such as "anticipates,"
"expects," "plans," "intends," "believes," "will," "estimates," "forecasts,"
"projects" or words of similar meaning, and by the fact that they do not relate
strictly to historical or current facts. Forward-looking statements frequently
convey the Company's expectations regarding, among other things,
o ability to continue in existence;
o ability to secure funds necessary to continue in existence;
o merger and acquisition prospects;
o transition to a new business;
o current and potential claims, actions and proceedings;
o financial condition, results of operations and cash flows; and
similar matters. Any or all of the forward-looking statements may turn out to be
wrong. Many factors may cause actual results to differ from forward-looking
statements, including inaccurate assumptions and a broad variety of risks and
uncertainties, some of which are known and others of which are not. Known risks
and uncertainties include those identified from time to time in the Company's
reports filed with the Securities and Exchange Commission ("SEC"), which should
be considered together with any forward-looking statement. No forward-looking
statement is a guarantee of future results or events, and one should avoid
placing undue reliance on such statements. The Company expressly disclaims any
obligation or undertaking to update or revise forward-looking statements made in
this report or in other reports it files with the SEC.
About the Company
NESCO Industries, Inc. (hereinafter sometimes referred to as "we" or the
"Company"), prior to ceasing business operations and becoming inactive in May
2003, was a provider of asbestos abatement and indoor air quality testing,
monitoring and remediation services. In the fiscal year ended April 30, 2003,
the Company consolidated the operations of its various subsidiaries, through
which it provided services, into a single environmental services operating unit
organized under the banner of its wholly-owned subsidiary National Abatement
Corporation. Prior to consolidation, the Company provided asbestos abatement,
indoor air quality and a variety of other environmental services through its
wholly-owned subsidiaries, National Abatement Corporation ("NAC"), NAC/Indoor
Air Professionals, Inc. ("IAP") and NAC Environmental Services, Inc. ("NACE").
12
Corporate History
- -----------------
The Company was incorporated in Nevada in March 1993, and was inactive for a
number of years until it acquired NAC and NACE in March 1998. As a result of
this acquisition, which was the result of arms length negotiations between
previously non-affiliated parties, the former shareholders of NAC and NACE
acquired 5,000,000 shares of the Company's common stock, 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.
NAC was incorporated in May 1988 and became inactive in May 2003. Prior to
becoming inactive NAC provided asbestos abatement, lead abatement and indoor air
quality services.
NACE was incorporated in May 1993 and became inactive in fiscal 2003 so the
Company could focus resources toward indoor air quality services. Prior to
becoming inactive NACE provided environmental services such as subsurface
soils/groundwater remediation, Phase I and Phase II environmental site
assessments, underground storage tank management and remediation.
IAP was incorporated in June 1999 and became inactive in fiscal 2003. Prior to
becoming inactive IAP provided indoor air quality testing, monitoring and
remediation services primarily in New York, New Jersey and Connecticut.
Business Developments - Fiscal 2003
- -----------------------------------
In the first part of fiscal 2003, the Company began to implement strategies for
achieving its operational goals which included changes in the way the business
was managed and operated. The Company consolidated the operations and activities
of its various subsidiaries into a single environmental services operating unit,
under the banner of NAC, to cut costs and improve efficiency. As a result, the
Company believed that it operated in one business segment.
In the first part of fiscal 2003, the Company focused on increasing revenues and
margins by expanding its indoor air quality services to businesses and
organizations primarily in the tri-state metropolitan New York City area through
strategic mergers, acquisitions or relationships with leaders in the indoor air
quality business. The Company engaged in confidential negotiations with certain
merger and acquisition targets, but was unable to complete any merger or
acquisition due primarily to inadequate financing. The Company also attempted to
expand its indoor air quality services through promotions and marketing, but
achieved limited success. The Company also phased out the business conducted by
NACE in order to focus on indoor air quality services. In October 2002, the
Company's then chief executive officer and then chief financial officer
resigned.
Due primarily to the inability of the Company to implement its growth strategy
for indoor air quality services, the change in management in October 2002, and
the trend of lower revenues and margins from the environmental services
operating unit, the Company elected in the third quarter of fiscal 2003 to seek
a new business focus beyond the environmental services industry. The Company
13
began to evaluate alternative business focuses and engage in negotiations with
potential buyers of the environmental services operating unit. The Company,
however, was unable to find a new business focus or sell the environmental
services operating unit.
In the forth quarter of fiscal 2003, the Company elected to wind down business
operations, terminate substantially all of its employees and become inactive in
order to conserve financial and other resources until a new business focus was
identified.
Business Developments - Fiscal 2004
- -----------------------------------
In May 2003, the Company and its environmental services operating unit completed
the wind down of their business operations and became inactive. The Company's
present plan is to identify and complete a merger or acquisition with a private
entity whose business presents an opportunity for the Company's stockholders.
The Company is in merger/acquisition negotiations with an entity. However, the
Company has not entered into, nor does it have any commitment to enter into, any
merger or acquisition as of the date of this filing.
In June 2003, the Company sold vehicles, furniture and equipment to an affiliate
of President Michael J. Caputo in a private transaction for a purchase price of
$25,000. The Company believes the purchase price for these assets was fair, and
as favorable as if the transaction were negotiated at arms length with an
unaffiliated party.
In August 2003, the Company auctioned substantially all of its remaining
vehicles, furniture and equipment for gross proceeds of $13,714. Commissions and
expenses related to the auction totaled $4,714.
In August 2003, the Company agreed to pay $9,350 in charges to cancel the lease
for the warehouse space in Rahway, New Jersey, effective September 30, 2003. The
Company was refunded the $40,000 deposit held by the landlord. In September
2003, the Company cancelled the lease for the small storage area in midtown
Manhattan without charge.
Critical Accounting Policies And Estimates
The Company considers certain accounting policies related to revenue
recognition, allowance for doubtful accounts and valuation of deferred tax
assets, to be critical policies due to the estimation processes involved in
each.
Revenue Recognition
- -------------------
When active the Company derived a significant portion of its revenue from fixed
price contracts, which required continuing estimations of costs to complete each
job. From time to time due to job conditions, job scheduling and productivity,
the cost to complete estimates were revised upward or downward which
correspondingly increased or decreased both estimated revenues and estimated
gross profits, and earned revenues and earned gross profits. The Company used
the percentage of completion method to recognize revenue for each project. When
an estimate indicated a significant loss (i.e., estimated costs exceed estimated
14
revenues), the entire estimated loss was recognized in the Company's results of
operations. Any changes in estimated amounts, including contract losses, could
have been material to the Company's results of operation in both current and
future periods, as jobs progressed 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 the Company's customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances could be required. The
Company's accounts receivable balance as of July 31, 2003 was $312,292, net of
an allowance for doubtful accounts of $234,722.
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 of 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.
Results of Operation - Three Months ended July 31, 2003 and 2002
Due to the fact the Company ceased business operations and became inactive in
May 2003, revenues declined significantly to $8,999 in the first quarter of
fiscal 2004, compared with revenues of $1,372,324 in the first quarter of fiscal
2003. General and administrative expenses also declined significantly to
$171,916 in the first quarter of fiscal 2004, compared with general and
administrative expenses of $538,963 in the first quarter of fiscal 2003
Interest expense declined significantly to $15,113 in the first quarter of
fiscal 2004, compared with interest expense of $99,346 in the first quarter of
fiscal 2003. The decline of interest expense was principally due to satisfaction
of interest-bearing debt in fiscal 2003. In fiscal 2004 the Company began
imputing interest on non-interest bearing shareholder loans at 6% which is the
only component of interest expense in this quarter.
The Company recorded dividends of $31,547 in the first quarter of fiscal 2004
payable to holders of its 10% Series A Convertible Preferred Stock ("Preferred
Stock"), compared with dividends of $11,389 in the first quarter of fiscal 2003.
The Preferred Stock, which was issued in June 2002, pays annual dividends at the
rate of $.20 per share in kind, or in shares of common stock if a sufficient
number of shares of Preferred Stock is not available.
Issuance of the Preferred Stock in June 2002 resulted in a preferential
conversion feature that was valued at $512,500 during the first quarter of
fiscal 2003. The preference's value was determined based on: (a) the number of
15
underlying shares of common stock into which the Preferred Stock may be
converted, and (b) the difference between the Preferred Stock conversion price
per share of common stock and the prevailing market value of a share of common
stock on the date the Preferred Stock was issued.
Liquidity and Capital Resources
Net cash provided by operating activities was $186,116 in the first quarter of
fiscal 2004, compared with net cash used of $150,267 in the first quarter of
fiscal 2003. Net cash provided by operating activities in the first quarter of
fiscal 2004 was principally derived from the collection of accounts receivable
in the quarter. Net cash provided by investing activities was $20,840 in the
first quarter of fiscal 2004, compared with no cash provided or used in the
first quarter of fiscal 2003. Net cash provided by investing activities in the
first quarter of fiscal 2004 was principally derived from sale of vehicles,
furniture and equipment. Net cash used by financing activities was $25,000 in
the first quarter of fiscal 2004, compared with net cash provided of $465,959 in
the first quarter of fiscal 2003. The net cash used by financing activities in
the first quarter of 2004 was derived from the repayment on account of
Shareholder Loans (as defined below). The net cash provided by financing
activities in the first quarter of fiscal 2003 was principally derived from the
private placement of 512,500 shares of Preferred Stock.
In June 2002 and when active, the Company completed the initial and only closing
of a private placement of a minimum of 500,000 and a maximum of 1,000,000 shares
of its Preferred Stock to accredited investors at a sale price of $2.00 per
share. Five hundred twelve thousand five hundred shares of Preferred Stock were
issued, each of which is convertible into four shares of common stock at a
conversion price of $0.50 per share. As of the closing, it was determined that
the holders of the Preferred Stock received a common stock conversion preference
based on the excess of the common stock's then current market value of $0.75 per
share over the Preferred Stock's $0.50 per share conversion price. This
preference was assigned a value of $512,500 relative to the 2,050,000 underlying
shares of common stock into which the issued Preferred Stock may be converted.
The Company received net proceeds of $865,959 from the issuance of the 512,500
shares of Preferred Stock. The Company used a portion of the proceeds derived
from the private placement to repay $400,000 in principal and all accrued
interest on secured bridge loans in the aggregate principal amount of $500,000
procured by the Company in January 2002 from lenders affiliated with the
placement agent. The placement agent received, among other things, a cash
commission equal to 7.5% of the aggregate purchase price of the shares sold, a
non-accountable expense allowance equal to 1.5% of the aggregate purchase price
of the shares sold, and warrants to purchase 402,500 shares of common stock at
an exercise price of $0.65 per share in connection with the private placement.
Warrants for 325,625 shares were issued in June 2002 and warrants for the
remaining 76,875 shares were issued in September 2002.
Annual dividends on the outstanding shares of Preferred Stock accrue and are
payable in May of each year at a rate of $0.20 per share. Dividends are payable
in shares of Preferred Stock based upon the market value of the common stock
into which the Preferred Stock is convertible, or in shares of common stock
valued at market if sufficient shares of Preferred Stock are not available. In
the three months ended July 31, 2003, the Company had accrued Preferred Stock
dividends in kind of 28,679 shares valued at $31,547. The Preferred Stock is
redeemable at the option of the Company after the second anniversary of the sale
date. Consequently, the Preferred Stock has been classified as equity.
16
The Company attempted to complete the second half of the Preferred Stock
offering in fiscal 2003, but was unable to sell any other shares of Preferred
Stock due to the economic climate and state of operations of the Company.
Because of this and because it did not file a registration statement to register
the Preferred Stock sold in the initial closing as required under the
registration rights agreements with holders, the Company must issue to such
holders, on a pro-rata basis, shares of Preferred Stock in the aggregate amount
of 5% of the total amount sold, or 25,625 shares valued at $27,792. The Company
intends to issue these shares of Preferred Stock in the third quarter of fiscal
2004.
In April 2002 and when active, the Company issued unsecured promissory notes
("Shareholder Loans") totaling $1,032,501, in exchange for and in full
satisfaction of all outstanding balances due on the demand loans, management
fees and consulting fees payable to shareholders and affiliates of the Company.
The Shareholder Loans do not bear interest pursuant to their terms. However,
commencing in fiscal 2004, the Company has imputed interest on the Shareholder
Loans at 6% per annum with an equivalent offset to additional paid in capital.
Each Shareholder Loan requires repayment in twenty-one (21) equal monthly
payments. Repayment on a Shareholder Loan in the principal amount of $10,263 was
scheduled to commence in February 2003, however, the lender agreed to defer the
commencement date indefinitely. Repayment on the Shareholder Loans in the
aggregate principal amount of $1,022,238 was scheduled to commence in May 2003.
In May 2003, the Company paid $25,000 on account of the $1,022,238 Shareholder
Loans and the lenders agreed to defer the commencement dates indefinitely. The
lenders could, however, demand that repayment begin on the Shareholder Loans at
any time. In October 2003, the Company paid $25,000 on account of a Shareholder
Loan owed to Chairman Santo Petrocelli, Sr. The Company does not have adequate
funds as of the date of this filing to pay the monthly installments required
under the Shareholder Loans had the lenders demanded that repayment resume. Due
to the repayment demand option, the Shareholder Loans were reclassified to
current. The Company does not believe it can procure any additional shareholder
loans due to its financial condition and inactive state of operations.
NAC and/or NACE are co-defendants in lawsuits involving property damage and/or
personal injury claims which arose in the ordinary course of business from
job-site accidents. Plaintiffs' claims in these lawsuits exceed NAC's and/or
NACE's applicable insurance coverages. At July 31, 2003, claims in excess of
NAC's and/or NACE's insurance coverages totaled approximately $11,800,000. In
October 2003, one case with claims totaling approximately $8,800,000 settled
within limits of applicable insurance coverage, which had the effect of reducing
claims in excess of insurance coverage to approximately $3,000,000. NAC and/or
NACE are being represented in these lawsuits by legal counsel engaged by their
insurers and, in most or all cases, have filed cross-claims and third-party
claims against other parties. Any judgment or settlement in excess of insurance
coverages, however, will require payment by NAC and/or NACE. The Company
believes, based on prior experience, that the amount of ultimate liability of
NAC and/or NACE with respect to these claims will not have a material impact on
the financial position, results of operations and cash flows of the Company.
There can be no assurance, however, that any judgment or settlement of these
claims will not exceed NAC's and/or NACE's insurance coverages, which could have
a material impact on the financial position, results of operations and cash
flows of the Company.
17
On January 15, 2003, NAC and one employee were charged with violation of the
Clean Air Act in a one-count federal indictment filed in the United States
District Court for the Southern District of New York. The indictment, which
relates to work performed in January 1998, alleges that NAC and the employee
caused asbestos material to be stripped from a building without adequately
wetting it, failed to lower the asbestos material to the floor without dropping
or otherwise damaging it, and did not keep asbestos material that had been
removed wet until it was collected and contained. The prosecutor subsequently
filed a three-count prosecutor's information that superseded the indictment and
charged NAC with two additional violations of the Clean Air Act.
On July 1, 2003, NAC pled guilty to the three-count prosecutor's information in
accordance with the terms of a negotiated plea agreement. The plea agreement and
plea were intended to conclude the proceedings commenced against NAC by the
filing of the federal indictment in January 2003. In connection with the plea,
NAC received a fine totaling $76,200, which was paid in full by September 30,
2003. A five year probationary period was also imposed on NAC, and in addition,
NAC agreed, as a condition of probation, to not engage in any activity relating
to (i) inspection, sampling or analysis for the presence of asbestos, (ii)
removal, transportation or disposal of asbestos, or (iii) demolition or
renovation of buildings. This prohibition does not extend to any construction
work limited exclusively to the installation or addition of building components
to a structure, not involving the removal of any building components or
construction debris. The fine imposed upon NAC has been accrued in the
accompanying financial statements. The Company believes that the fine and
probation imposed on NAC will not have a material impact on the financial
position, results of operations and cash flows of the Company.
On July 31, 2003, an individual commenced an action against IAP in the Supreme
Court of New York, County of Queens. The plaintiff alleges to have been injured
in an automobile accident with an IAP employee, and seeks damages in the amount
of $1,000,000. This claim for damages is within limits of applicable insurance
coverages. IAP denies culpability and will vigorously pursue its defenses in
this action. The Company believes that the amount of ultimate liability of IAP
in this action will not have a material impact on the financial position,
results of operations and cash flows of the Company.
Except for the claims against NAC, NACE and IAP set forth above, the Company and
its subsidiaries were not involved in any other material legal proceedings in
the three months ended July 31, 2003.
The following table provides a summary of our contractual obligations at
November 28, 2003:
Less than 1-3 3 or More
Total 1 Year Years Years
----------- ----------- ----- ---------
Loans payable, shareholders (a) $ 1,007,501 $ 1,007,501 $ -- $ --
Operating lease (b) 12,000 12,000 -- --
Operating lease, sublease (c) 863,765 178,710 357,420 327,635
----------- ----------- --------- ---------
Total contractual obligations $ 1,883,266 $ 1,198,211 $ 357,420 $ 327,635
=========== =========== ========= =========
18
- ------------------
(a) Loans payable, shareholders:
----------------------------
In April 2002 and when active, the Company issued unsecured promissory
notes ("Shareholder Loans") totaling $1,032,501, in exchange for and in
full satisfaction of all outstanding balances due on the demand loans,
management fees and consulting fees payable to shareholders and
affiliates of the Company. The Shareholder Loans do not bear interest
pursuant to their terms. However, commencing in fiscal 2004, the
Company has imputed interest on the Shareholder Loans at 6% per annum
with an equivalent offset to additional paid in capital. Each
Shareholder Loan requires repayment in twenty-one (21) equal monthly
payments. Repayment on a Shareholder Loan in the principal amount of
$10,263 was scheduled to commence in February 2003, however, the lender
agreed to defer the commencement date indefinitely. Repayment on the
Shareholder Loans in the aggregate principal amount of $1,022,238 was
scheduled to commence in May 2003. In May 2003, the Company paid
$25,000 on account of the $1,022,238 Shareholder Loans and the lenders
agreed to defer the commencement dates indefinitely. The lenders could,
however, demand that repayment begin on the Shareholder Loans at any
time. The Company does not have adequate funds as of the date of this
filing to pay the monthly installments required under the Shareholder
Loans had the lenders demanded that repayment resume. Due to the
repayment demand option, the Shareholder Loans were reclassified to
current.
(b) Operating lease:
----------------
The Company subleases its office space from PEC Realty Corp., an entity
owned and controlled by Chairman Santo Petrocelli, Sr. and his family.
The sublease term is month-to-month with a monthly rent of
approximately $1,000.
(c) Operating lease, sublease:
--------------------------
The Company subleases office facilities to a subtenant at cost under a
lease with an annual rent of approximately $178,000 that expires on
September 30, 2008. The Company would have to pay the obligations under
the lease in the event of default by the subtenant under the parties'
sublease agreement.
At July 31, 2003 and 2002, 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 activities.
At July 31, 2003, the Company had a deficit of $1,684,714, negative working
capital of $1,580,716 and incurred a net loss of $173,402 for the three months
then ended. The 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 an as needed basis, consummate a merger or
acquisition and succeed in operations. The Company is in merger/acquisition
negotiations with an entity. However, the Company has not entered into, nor does
it have any commitment to enter into, any merger or acquisition as of the date
of this filing. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
New Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
19
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The adoption of this requirement did not have a
material impact on the Company's financial position, results of operations and
cash flows.
In November 2002, FASB Interpretation 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company previously did not record a
liability when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. The Company does not anticipate that FIN 45 will
have a material impact on its financial position, results of operations and cash
flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure: an amendment of FASB Statement 123,"
to provide alternative transition methods for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in annual financial statements about the method of
accounting for stock-based employee compensation and the pro forma effect on
reported results of applying the fair value based method for entities that use
the intrinsic value method of accounting. The pro forma effect disclosures are
also required to be prominently disclosed in interim period financial
statements. This statement is effective for financial statements for fiscal
years ending after December 15, 2002 and is effective for financial reports
containing condensed financial statements for interim periods beginning after
December 15, 2002, with earlier application permitted. The Company has elected
to continue accounting for stock-based compensation using the intrinsic value
method. However, the Company has adopted the new disclosure requirements
specified under SFAS No. 148.
In January 2003, the FASB issued FASB Interpretation 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, for certain
entities that do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not
anticipate that FIN 46 will have a material impact on its financial position,
results of operations and cash flows.
20
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designed after June
30, 2003. The Company does not anticipate an impact on its financial position,
results of operations and cash flows by adoption of SFAS No. 149.
In May 2003, the FASB issued SFAS No. 150, "Accounting of Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, be accounted for as liabilities. The financial
instruments affected include mandatory redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain obligations that can be
settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003. The Company does not
anticipate an impact on its financial position, results of operations and cash
flows by adoption of SFAS No. 150.
21
Item 3. Controls and Procedures
The principal executive officer and principal financial officer of the Company,
who are the same person (the "Certifying Officer"), maintains a system of
disclosure controls and procedures that is designed to provide reasonable
assurance that information, which is required to be disclosed, is accumulated
and communicated to management timely. The Certifying Officer, with the
assistance of advisors, evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rule
[13a-14(c)/15d-14(c)] under the Exchange Act) within 90 days prior to the filing
date of this report. Based upon that evaluation, the Certifying Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting management to material information relative to the Company which
is required to be disclosed in its periodic filings with the SEC.
The Certifying Officer has indicated that there were no significant changes in
the Company's internal controls or other factors that could significantly affect
such controls subsequent to the date of its evaluation, and there were no such
control actions with regard to significant deficiencies and material weaknesses.
22
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On January 15, 2003, NAC and one employee were charged with violation of the
Clean Air Act in a one-count federal indictment filed in the United States
District Court for the Southern District of New York. The indictment, which
relates to work performed in January 1998, alleges that NAC and the employee
caused asbestos material to be stripped from a building without adequately
wetting it, failed to lower the asbestos material to the floor without dropping
or otherwise damaging it, and did not keep asbestos material that had been
removed wet until it was collected and contained. The prosecutor subsequently
filed a three-count prosecutor's information that superseded the indictment and
charged NAC with two additional violations of the Clean Air Act.
On July 1, 2003, NAC pled guilty to the three-count prosecutor's information in
accordance with the terms of a negotiated plea agreement. The plea agreement and
plea were intended to conclude the proceedings commenced against NAC by the
filing of the federal indictment in January 2003. In connection with the plea,
NAC received a fine totaling $76,200, which was paid in full by September 30,
2003. A five year probationary period was also imposed on NAC, and in addition,
NAC agreed, as a condition of probation, to not engage in any activity relating
to (i) inspection, sampling or analysis for the presence of asbestos, (ii)
removal, transportation or disposal of asbestos, or (iii) demolition or
renovation of buildings. This prohibition does not extend to any construction
work limited exclusively to the installation or addition of building components
to a structure, not involving the removal of any building components or
construction debris. The fine imposed upon NAC has been accrued in the
accompanying financial statements. The Company believes that the fine and
probation imposed on NAC will not have a material impact on the financial
position, results of operations and cash flows of the Company.
On July 31, 2003, an individual commenced an action against IAP in the Supreme
Court of New York, County of Queens. The plaintiff alleges to have been injured
in an automobile accident with an IAP employee, and seeks damages in the amount
of $1,000,000. This claim for damages is within limits of applicable insurance
coverages. IAP denies culpability and will vigorously pursue its defenses in
this action. The Company believes that the amount of ultimate liability of IAP
in this action will not have a material impact on the financial position,
results of operations and cash flows of the Company.
In October 2003, a case against NAC relating to job site injuries with claims
totaling approximately $8,800,000 settled within limits of applicable insurance
coverage.
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Item 3. Defaults Upon Senior Securities
In June 2002, the Company completed the initial closing of an offering of up to
1,000,000 shares of its Preferred Stock to accredited investors at $2.00 per
share. Investors purchased a total of 512,500 in this closing. Although the
Company has successfully completed the initial closing of the Preferred Stock
offering, the Company will not be able to complete the second half of the
offering due to the current economic climate and state of operations of the
Company. The Company has not registered the 512,500 shares of Preferred Stock
sold in the initial closing, as required under the registration rights
agreements with holders, and, as a result, must issue to such holders, on a
pro-rata basis, shares of Preferred Stock in the aggregate amount of 5% of the
total amount sold, or 25,625 shares valued at $27,792.
The Company failed to issue 93,182 shares of Preferred Stock in payment of
annual dividends in kind accrued and payable to holders of Preferred Stock as of
May 1, 2003.
The Company intends to satisfy the above obligations and issue the required
shares of Preferred Stock in the third quarter of fiscal 2004.
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Item 6 Exhibits and Reports on Form 8-K
Exhibits
No. Description
- --- -----------
31 Section 302 Certification
32 Section 906 Certification
Reports on Form 8-K
Current Reports on Form 8-K filed during the first quarter of fiscal 2004 and
the subsequent interim period ended November 28, 2003 are as follows:
o Report on Form 8-K, filed with the Commission on June 26, 2003,
announcing the limited engagement of Michael J. Caputo as interim
President and Principal Executive and Financial Officer under
Item 5 - Other Events.
o Report on Form 8-K, filed with the Commission on July 17, 2002,
announcing the conclusion of the Clean Air Act proceedings commenced
against National Abatement Corporation in January 2003 under
Item 5 - Other Events.
o Report on Form 8-K, filed with the Commission on September 30, 2003,
announcing the change in independent auditors of the Company and
extension of the limited engagement of Michael J. Caputo as interim
President and Principal Executive and Financial Officer under Item 4 -
Changes in Registrants Certifying Accountant, Item 5 - Other Events,
and Item 7 - Financial Statements and Exhibits.
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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: December 8, 2003 By: /s/ Michael J. Caputo
-----------------------------
Michael J. Caputo
President
(Principal Executive and
Financial Officer)
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