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 October 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
----------------------------------------------------
(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 December 19, 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 October 31, 2003
and April 30, 2003......................................... 1
Consolidated Statements of Operations for the
three and six months ended October 31, 2003 and 2002....... 2
Consolidated Statement of Stockholders' Equity
(Deficit) for the six months ended October 31, 2003........ 4
Consolidated Statements of Cash Flows for the
six months ended October 31, 2003 and 2002................. 5
Notes to Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis or Plan of Operation.. 12
Item 3. Controls and Procedures.................................... 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 19
Item 3. Defaults Upon Senior Securities............................ 19
Item 6. Exhibits and Reports on Form 8-K........................... 19
Signatures ........................................................... 20
Exhibit 31 Section 302 Certification
Exhibit 32 Section 906 Certification
i
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
October 31, 2003 April 30, 2003*
---------------- ---------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 392,763 $ 78,695
Accounts receivable, net of allowance for uncollectibles 119,348 990,901
Inventory -- 20,000
Prepaid taxes and expenses -- 112,674
----------- -----------
Total current assets 512,111 1,202,270
Fixed assets, net of accumulated depreciation 9,286 35,002
Other assets 1,909 51,259
----------- -----------
$ 523,306 $ 1,288,531
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued expenses $ 976,346 $ 1,369,610
Related party accounts payable 128,659 128,659
Loans payable, shareholders 982,501 1,032,501
Billing in excess of costs and estimated earnings
on uncompleted contracts -- 73,586
----------- -----------
Total current liabilities 2,087,506 2,604,356
Deferred sublease rental - related party 187,200 210,600
----------- -----------
Total liabilities 2,274,706 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 (177,469 and 93,182 shares, respectively) 180,584 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 2,601,078 2,571,227
Accumulated deficit (4,540,345) (4,193,199)
----------- -----------
(1,751,400) (1,526,425)
----------- -----------
$ 523,306 $ 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 OCTOBER 31,
Operations of Discontinued Business 2003 2002
----------- -----------
Revenues $ 690 $ 1,282,671
Cost of revenues (3,996) 1,186,962
----------- -----------
Gross profit 4,686 95,709
General and administrative expenses 83,072 627,720
----------- -----------
(78,386) (532,011)
----------- -----------
Other income (expense):
Sub-lease income-related party 11,700 11,700
Interest expense (14,738) (2,313)
----------- -----------
Net loss $ (81,424) $ (522,624)
Recurring convertible preferred stock dividends in kind 32,981 25,625
Net loss attributable to common shareholders $ (114,405) $ (548,249)
=========== ===========
Basic and diluted loss per share $ (0.02) $ (0.08)
=========== ===========
Weighted average common shares outstanding -- basic and diluted 6,769,963 6,769,963
=========== ===========
The accompanying notes are an integral part of these statements.
2
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED OCTOBER 31,
2003 2002
----------- -----------
Operations of Discontinued Business
Revenues $ 9,689 $ 2,654,995
Cost of revenues (1,083) 2,344,888
----------- -----------
Gross profit 10,772 310,107
General and administrative expenses 254,988 1,166,683
----------- -----------
(244,216) (856,576)
----------- -----------
Other Income (Expense):
Sub-lease income-related party 23,400 23,400
Interest expense (29,851) (101,659)
Loss on disposal of fixed assets (4,159) --
----------- -----------
Net Loss $ (254,826) $ (934,835)
Recurring convertible preferred stock dividends in kind 64,528 37,014
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 $ (347,146) $(1,484,349)
=========== ===========
Basic and diluted loss per share $ (0.05) $ (0.22)
=========== ===========
Weighted average common shares outstanding -
basic and diluted 6,769,963 6,746,729
=========== ===========
The accompanying notes are an integral part of these statements.
3
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
SIX MONTHS ENDED OCTOBER 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 58,662 64,528
Additional shares of convertible
preferred stock to holders 25,625 27,792
Imputed interest on shareholder loans
Net loss for the six months ended
October 31, 2003
----------- ---------- ----------- --------- --------- -------
Balances at October 31, 2003 512,500 $ 513 177,469 $ 180,584 6,769,963 $ 6,770
=========== ========== =========== ========= ========= =======
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 (64,528)
Additional shares of convertible
preferred stock to holders (27,792)
Imputed interest on shareholder loans 29,851 29,851
Net loss for the six months ended
October 31, 2003 (254,826) (254,826)
----------- ------------- ------------
Balances at October 31, 2003 $ 2,601,078 $ (4,540,345) $ (1,751,400)
=========== ============= ============
The accompanying notes are an integral part of these statements.
4
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED OCTOBER 31,
2003 2002
--------- ---------
Cash Flows from Operating Activities:
Net loss (254,826) (934,835)
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 29,851 --
Amortization of discount on bridge loan -- 52,726
Amortization of deferred sub-lease income (23,400) (23,400)
Depreciation and amortization 714 65,572
Provision for bad debts -- (25,465)
Changes in applicable assets and liabilities:
Accounts receivable 871,553 787,364
Unbilled costs and estimated earnings in excess of
billings on uncompleted contracts -- 95,044
Inventory 20,000 (7,326)
Prepaid expenses and taxes 112,674 (45,530)
Other assets 49,350 (54,910)
Accounts payable and accrued expenses (393,261) (283,610)
Billings in excess of costs and estimated earnings on
uncompleted contracts (73,586) (160,518)
--------- ---------
Net cash provided (used) by operating activities 343,228 (534,888)
--------- ---------
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 -- (500,000)
Net proceeds of convertible note -- 100,000
Repayments of shareholder loans (50,000) --
Net proceeds of convertible preferred stock offering -- 865,959
--------- ---------
Net cash provided (used) by financing activities (50,000) 465,959
--------- ---------
Net increase in cash and equivalents 314,068 (68,929)
Cash and equivalents, beginning of period 78,695 111,260
--------- ---------
Cash and equivalents, end of period $ 392,763 $ 42,331
========= =========
Interest paid -- 22,500
Income taxes paid -- --
The accompanying notes are an integral part of these statements.
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
A. Organization, Basis of Presentation and Principles of Consolidation
General
NESCO Industries, Inc. ("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").
Basis of Presentation and Principles of Consolidation
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 three and
six months ended October 31, 2003 and 2002. Certain information and footnote
disclosures have been condensed or omitted pursuant to such rules and
regulations. The results for the current interim periods 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 in the Company's latest annual report filed
with the SEC on Form 10-KSB for the fiscal year ended April 30, 2003.
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 accounting principles
generally accepted in the United States of America which require 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. Certain April 30, 2003
balances relating to related party payables and preferred stock have been
reclassified to conform to the current year presentation.
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.
6
In April 2002 and when active, the Company issued interest-free, unsecured
promissory notes ("Shareholder Loans") in the aggregate amount of $1,032,501 in
full satisfaction of outstanding loans and fees payable to shareholders and
affiliates. In fiscal 2004, the Company began to impute interest on the
Shareholder Loans at 6% per annum with an equivalent offset to additional paid
in capital. Repayment on the Shareholder Loans was scheduled to commence in
February and May 2003, however, the lenders agreed to defer the commencement
dates indefinitely. The lenders could, however, demand that repayment begin on
the Shareholder Loans at any time. Due to the repayment demand option, the
Shareholder Loans were reclassified to current. The Company has made sporadic
payments on Shareholder Loans totaling $50,000 in the six months ended October
31, 2003, which includes a $25,000 payment made in October 2003 on a Shareholder
Loan owed to Chairman Santo Petrocelli, Sr. At October 31, 2003, the Shareholder
Loans totaled $982,501.
At October 31, 2003, the Company had a deficit of $1,751,400, negative working
capital of $1,575,395 and incurred a net loss of $254,826 for the six months
then ended. The continuation of the Company as a going concern 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. The Company is discussing a merger or acquisition with a
private entity, however, the parties have not committed to enter into any merger
or acquisition as of the date of this filing. If it is unable to meet its
financing requirements on an as needed basis or consummate a merger or
acquisition in the near future, the Company may have to explore options such as
bankruptcy or discontinue its existence. 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. Preferred Stock
Dividends in Period
In the six months ended October 31, 2003, the Company had accrued issuable
Preferred Stock dividends in kind of 58,662 shares valued at $64,528. 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. The Preferred
Stock is redeemable at the option of the Company after the second anniversary of
the sale date and has been classified as equity.
Preferred Stock Issuable
The Company must issue a total of 25,625 shares of Preferred Stock to holders
because it did not register the 512,500 shares of Preferred Stock sold in June
2002 as required under the registration rights agreements with holders.
7
The Company must 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.
D. 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 and six
months ended October 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 October 31, 2003, and 3,822,500 with an average exercise
price of $0.62 as of October 31, 2002.
E. 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.
8
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.
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 a material 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 a material impact on its financial position, results of operations
and cash flows by the adoption of SFAS No. 150.
9
F. Pending Legal Proceedings
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. In October 2003, one case with claims
totaling approximately $8,800,000 settled within limits of applicable insurance
coverage. At October 31, 2003, claims in excess of NAC's and/or NACE's insurance
coverages totaled approximately $3,000,000.
In July 2003, NAC pled guilty to a three-count prosecutor's information which
concluded the Clean Air Act proceedings commenced in January 2003. 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 certain activities relating to
inspection, removal, transportation or disposal of asbestos and demolition or
renovation of buildings.
In July 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
coverage.
The Company believes that the amount of ultimate liability with respect to the
above legal proceedings will not have a material impact on its financial
position, results of operations and cash flows. However, any judgment or
settlement in excess of applicable insurance coverage would require payment by
the Company, which could have a material impact on its financial position,
results of operations and cash flows.
G. 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.
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.
H. Revisions to Lease Agreements
The Company subleases its office space on a month-to-month basis from PEC Realty
Corp., an entity owned and controlled by Chairman Santo Petrocelli, Sr. and his
family. The monthly rent on the sublease was approximately $1,000 in the first
quarter of fiscal 2004. Subsequently, the parties agreed to reduce the monthly
rent to $500, effective August 1, 2003.
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 was 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.
10
In September 2003, the Company cancelled the lease for the small storage area in
midtown Manhattan without charge.
I. Stock Based Compensation
The Company has one effective stock-based employee compensation plan. 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 plan. The following table illustrates the effect on net loss and loss per
share for the six months ended October 31, 2003 if the Company had applied the
fair value recognition provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation."
October 31, 2003
----------------
Net loss, as reported $ (254,826)
Add: Total stock-based employee compensation expense
determined under fair value based method for awards
granted, modified, or settled, net of related tax
effects 11,550
----------
Proforma net loss $ (266,376)
==========
Basic and diluted loss per share, as reported $ (0.05)
==========
Basic and diluted loss per share, proforma $ (0.05)
==========
11
Item 2. Management's Discussion and Analysis or Plan of Operation
Forward-Looking Statements
This Management's Discussion and Analysis or Plan of Operation contains
statements that are forward-looking. These statements are based on current
expectations and assumptions that are subject to risks and uncertainties. Actual
results could differ materially because of many factors, some of which may be
discussed in this report.
About the Company and Plan of Operation
NESCO Industries, Inc. ("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 fiscal 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").
The Company's present plan is to conserve capital until it is able to identify
and complete a merger or acquisition with a private entity whose business
presents an opportunity for the Company's stockholders. The Company will attempt
to reduce the amount or extend the repayment period of its current obligations
and liabilities, primarily consisting of trade payables and shareholder debt, in
order to maximize the capital generated from the collection of accounts
receivable. 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. If it is
unable to conserve adequate capital or consummate a merger or acquisition in the
near future, the Company may have to explore options such as bankruptcy or
discontinue its existence.
Fiscal 2004 Business Developments
In May 2003, the Company and its environmental services operating unit completed
the wind down of their business operations, which commenced in the fourth
quarter of fiscal 2003, and became inactive. The Company elected to cease
operations and become inactive due to continued losses in operations and its
inability to implement its business plan in fiscal 2003.
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 a
non-affiliated party.
12
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.
These charges were recorded to general and administrative expenses 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.
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
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 October 31, 2003 was $119,348, net
of an allowance for doubtful accounts of $234,013.
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.
13
Results of Discontinued Operations - Three Months ended October 31, 2003
and 2002
Due to the fact the Company ceased business operations and became inactive in
May 2003, revenues declined significantly to $690 in the second quarter of
fiscal 2004, compared with revenues of $1,282,671 in the second quarter of
fiscal 2003. Revenues in the second quarter of fiscal 2004 resulted from a
revision to estimates pertaining to a prior contract. Cost of revenues declined
significantly to a credit of $3,996 in the second quarter of fiscal 2004,
compared with cost of revenues of $1,186,962 in the second quarter of fiscal
2003. The credit in cost of revenues in the quarter resulted from revisions to
estimates of previously accrued costs. General and administrative expenses also
declined significantly to $83,072 in the second quarter of fiscal 2004, compared
with general and administrative expenses of $627,720 in the second quarter of
fiscal 2003. General and administrative expenses in the quarter were comprised
principally of professional fees, insurance and salaries.
Interest expense increased to $14,738 in the second quarter of fiscal 2004,
compared with interest expense of $2,313 in the second quarter of fiscal 2003.
The increase in interest expense was principally due to the imputed interest on
non-interest bearing shareholder loans at 6%. In fiscal 2004 the Company began
to impute interest on the shareholder loans, which is the only component of
interest expense in this quarter.
The Company recorded dividends of $32,981 in the second quarter of fiscal 2004
payable to holders of its 10% Series A Convertible Preferred Stock ("Preferred
Stock"), compared with dividends of $25,625 in the second 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 in the second quarter of fiscal
2003. The preference's value was determined based on: (a) the number of
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.
Results of Discontinued Operations - Six Months ended October 31, 2003 and 2002
Due to the fact the Company ceased business operations and became inactive in
May 2003, revenues declined significantly to $9,689 in the six months ended
October 31, 2003, compared with revenues of $2,654,955 in the same period in the
prior year. Cost of revenues declined significantly to a credit of $1,083 in the
six months ended October 31, 2003, compared with cost of revenues of $2,344,888
in the same period in the prior fiscal year. The credit in cost of revenues in
the period resulted from revisions to estimates of previously accrued costs.
General and administrative expenses also declined significantly to $254,988 in
the six months ended October 31, 2003, compared with general and administrative
expenses of $1,166,683 in the same period in the prior year. General and
administrative expenses in the period were comprised principally of professional
fees, insurance and salaries.
Interest expense declined significantly to $29,851 in the six months ended
October 31, 2003, compared with interest expense of $101,659 in the same period
in the prior year. The decline in 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 period.
14
The Company recorded dividends of $64,528 in the six months ended October 31,
2003 payable to holders of its Preferred Stock, compared with dividends of
$37,014 in the same period in the prior year. 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 in the six months ended October
31, 2002. The preference's value was determined based on: (a) the number of
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 Going Concern
Net cash provided by operating activities was $343,228 in the six months ended
October 31, 2003, compared with net cash used of $534,888 in the same period in
the prior year. Net cash provided by operating activities in the six months
ended October 31, 2003 was principally derived from the collection of accounts
receivable in the period. Net cash provided by investing activities was $20,840
in the six months ended October 31, 2003, compared with no cash provided or used
in the same period in the prior year. Net cash provided by investing activities
in the six months ended October 31, 2003 was principally derived from sale of
vehicles, furniture and equipment. Net cash used by financing activities was
$50,000 in the six months ended October 31, 2003, compared with net cash
provided of $465,959 in the same period in the prior year. The net cash used by
financing activities in the six months ended October 31, 2003 was for the
repayments on Shareholder Loans (as defined below). The net cash provided by
financing activities in the six months ended October 31, 2002 was principally
derived from the private placement of 512,500 shares of Preferred Stock.
In June 2002 and when active, the Company sold 512,500 shares of its Preferred
Stock in a private placement to accredited investors at a price of $2.00 per
share. The Company received net proceeds of $865,959 from the sale, a portion of
which retired $400,000 in principal and all accrued interest on secured loans
procured in January 2002. In fiscal 2003, the Company attempted but was unable
to complete any additional closing in the private placement due to the then
current economic climate and its then financial condition. The Company does not
intend to seek, nor does it believe it could obtain, any equity financing at
this point due to its inactive state of operations.
In April 2002 and when active, the Company issued non-interest bearing
promissory notes ("Shareholder Loans") in the aggregate amount of $1,032,501 in
full satisfaction of outstanding loans and fees payable to shareholders and
affiliates. Repayment on the Shareholder Loans was scheduled to commence in
February and May 2003, however, the lenders agreed to defer the commencement
dates indefinitely. The lenders could, however, demand that repayment begin on
the Shareholder Loans at any time. Due to the repayment demand option, the
Shareholder Loans were reclassified to current. 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. The Company has made sporadic payments on Shareholder Loans totaling
$50,000 in the six months ended October 31, 2003, which includes a $25,000
payment made in October 2003 on a Shareholder Loan owed to Chairman Santo
Petrocelli, Sr. At October 31, 2003, the Shareholder Loans totaled $982,501. The
Company does not believe it can procure any additional shareholder loans due to
its financial condition and inactive state of operations.
15
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 by approximately $3,000,000 at October 31,
2003. 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 its financial
position, results of operations and cash flows. 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.
In July 2003, NAC pled guilty to a three-count prosecutor's information which
concluded the Clean Air Act proceedings commenced 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 certain
activities relating to inspection, removal, transportation or disposal of
asbestos and demolition or renovation of buildings. 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
its financial position, results of operations and cash flows.
In July 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 pending legal proceedings discussed above, the Company is not
involved in any other material legal proceedings in the period.
16
The following table provides a summary of the Company's contractual obligations
at December 19, 2003:
Less than 1-3 3 or More
Total 1 Year Years Years
----------- ----------- ---------- ---------
Loans payable, shareholders (a) $ 982,501 $ 982,501 $ -- $ --
Operating lease (b) 6,000 6,000 -- --
Operating lease, sublease (c) 848,873 178,710 357,420 312,743
----------- ----------- ---------- ---------
Total contractual obligations $ 1,837,374 $ 1,167,211 $ 357,420 $ 312,743
=========== =========== ========== =========
- ----------------
(a) Loans payable, shareholders:
For a discussion about loans payable to shareholders (Shareholder
Loans), see Liquidity and Going Concern on page 15.
(b) Operating lease:
The Company subleases its office space on a month-to-month basis from
PEC Realty Corp., an entity owned and controlled by Chairman Santo
Petrocelli, Sr. and his family. The monthly rent on the sublease was
approximately $1,000 in the first quarter of fiscal 2004. Subsequently,
the parties agreed to reduce the monthly rent to $500, effective August
1, 2003.
(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 October 31, 2003, the Company had a deficit of $1,751,400, negative working
capital of $1,575,395 and incurred a net loss of $254,826 for the six months
then ended. The continuation of the Company as a going concern 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. The Company is discussing a merger or acquisition with a
private entity, however, the parties have not committed to enter into any merger
or acquisition as of the date of this filing. If it is unable to meet its
financing requirements on an as needed basis or consummate a merger or
acquisition in the near future, the Company may have to explore options such as
bankruptcy or discontinue its existence. 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.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
New Accounting Pronouncements
See Note E - New Accounting Pronouncements to the financial statements beginning
on page 8.
17
Item 3. Controls and Procedures
The Company maintains disclosure controls and procedures that are intended to
ensure that information required to be disclosed in the Company's reports
submitted under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC. These controls and procedures also
are intended to ensure that information required to be disclosed in such reports
is accumulated and communicated to management to allow timely decisions
regarding required disclosures.
The Company's principal executive and financial officer, who are the same person
(the "Certifying Officer"), has evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a - 15(e)
and 15d - 15(e) under the Exchange Act) and has concluded that the Company's
disclosure controls and procedures were effective for their intended purposes as
of the end of the period covered by this report. There have been no significant
changes in the Company's internal controls or in those factors that could
significantly affect those controls since the date of their most recent
evaluation.
18
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In October 2003, NAC settled a suit commenced by an individual in 2002 in the
New York Supreme Court, County of Kings, relating to job-site tort claims within
limits of applicable insurance coverage.
For a discussion about other legal proceedings to which the Company is a party,
see Note F - Pending Legal Proceedings to the financial statements on page 10.
Item 3. Defaults Upon Senior Securities
The Company must issue a total of 25,625 shares of Preferred Stock to holders
because it did not register the 512,500 shares of Preferred Stock sold in June
2002 as required under the registration rights agreements with holders.
The Company must 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.
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
The Company filed one Current Report on Form 8-K in the second quarter of fiscal
2004.
The Current Report on Form 8-K, filed with the SEC on September 30, 2003,
announced the change in independent auditors of the Company and the 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.
19
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 22, 2003 By: /s/ Michael J. Caputo
---------------------------------------------
Michael J. Caputo
President
(Principal Executive and Financial Officer)
20