SCHEDULE 14c (Rule 14c-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
Information Statement Pursuant to Section 14(c) of the Securities Exchange Act
of 1934
Check the appropriate box:
[x] Preliminary Information Statement [ ] Confidential, for use of the
Commission only
NESCO INDUSTRIES, INC.
[ ] Definitive Information Statement
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
3) Price per unit or other underlying value of transaction pursuant to
Exchange Act Rule 0-11. (Set forth the amount on which the filing fee is
calculated and state how it was determined.)
- --------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid: ____________________________________________________
2) Form, Schedule or Registration Statement No.: ______________________________
3) Filing Party: ______________________________________________________________
4) Date Filed: ________________________________________________________________
NESCO INDUSTRIES, INC.
305 Madison Avenue
New York, New York 10165
INFORMATION STATEMENT
To the Holders of the Voting Stock:
The purpose of this Information Statement is to notify you that the holders
of shares representing a majority of the voting stock of Nesco Industries, Inc.
("Nesco") have given their written consent to resolutions adopted by the Board
of Directors of Nesco (a) to effect an exchange of our securities for
outstanding securities and debt instruments of Hydrogel Design Systems, Inc.
("HDSI") pursuant to a Share Exchange Agreement dated April 29, 2004, as a
consequence of which, on May 25, 2004, exchanging security holders of HDSI
acquired a majority of our outstanding voting stock, and HDSI became a
subsidiary of Nesco; and (b) to amend the Articles of Incorporation of Nesco so
as (1) to change the name of the company to "Aquamatrix, Inc." ("Aquamatrix"),
and (2) to increase the authorized number of common shares to 400,000,000. The
Board of Directors has fixed August _, 2005 as the record date for determining
the holders of voting stock entitled to notice and receipt of this Information
Statement. We anticipate that this Information Statement will be mailed on
August ___, 2005 to stockholders of record. On or after [20 days from mailing
date], the Amendment to the Articles of Incorporation will be filed with the
Nevada Secretary of State and become effective.
The Nevada Revised Statutes permits holders of a majority of the voting
power to take stockholder action by written consent. Accordingly, Nesco will not
hold a meeting of its stockholders to consider or vote upon either the Share
Exchange Agreement or the amendment to Nesco's Articles of Incorporation.
WE ARE NOT ASKING YOU FOR A PROXY.
YOU ARE REQUESTED NOT TO SEND US A PROXY
MATTHEW HARRITON
President, Chief Executive Officer
And Chairman of the Board
By Order of the Board of Directors
________________, 2005
Page 2 of total
Summary
This summary presents selected information contained in this information
statement relating to the share exchange effected pursuant to the share exchange
agreement and the amendment to our articles of incorporation and may not contain
all of the information that is important to you. To understand the share
exchange and the amendment fully, you should carefully read this entire document
as well as the additional documents to which it refers. We have included page
references to direct you to a more complete description of the topics presented
in this summary.
Share Exchange (see page 13)
The share exchange was effected pursuant to a Share Exchange Agreement among us,
Hydrogel Design Systems, Inc. ("HDSI"), and a majority of our shareholders and
of the shareholders of HDSI. As a consequence of the share exchange, on May 25,
2004, HDSI became our majority owned subsidiary.
The Company (see page 16)
Nesco Industries, Inc.
305 Madison Avenue, Suite 4510
New York, NY 10165
Telephone: (212) 808-0607
Through our HDSI subsidiary, we develop, manufacture and sell high water content
polymer- based radiation ionized gel for medical and cosmetic uses. Our gel
products are marketed by us under the AQUAMATRIX(R) brand name, and by other
manufacturers that use our products in the products they sell to others.
We have been in this business since May 25, 2004 when we acquired a majority of
the outstanding securities of HDSI. HDSI has conducted this business since 1997.
Prior to our acquisition of a majority of the outstanding securities of HDSI, we
were not actively engaged in business as we had ceased our prior activity of
providing asbestos abatement and indoor testing, monitoring and remediation
services in 2003. Prior to the acquisition, our business address was 12-12 43rd
Avenue, Long Island City, NY 11101, and our phone number was 718-937-5333.
Page 3 of total
HDSI (see page 16)
Prior to our acquisition of a majority of the outstanding securities of HDSI,
HDSI conducted its business of developing, manufacturing and selling high water
content polymer-based radiation ionized gel for medical and cosmetic uses from
the offices currently occupied by us.
Former Holders of HDSI Securities
own a Majority of our Voting Securities ( see page 12)
The holders of approximately 97% of HDSI common stock and of 90% of HDSI
preferred stock have accepted our exchange offer, and own approximately 54.1% of
our voting securities outstanding at the time of the exchange.
If all holders of HDSI common and preferred stock become holders of our
securities and convert such securities into shares of our common stock, former
HDSI shareholders would own approximately 55.3% of the shares of our common
stock outstanding at the time of the exchange.
Issuance of Preferred Shares in Share Exchange (see page 11)
When we agreed to acquire a majority of the outstanding securities of HDSI, we
did not have enough shares of common stock available for issue under our
articles of incorporation to acquire all the securities of HDSI and assume all
of its share issuance obligations under various debt instruments and options.
We agreed to issue to the former HDSI stockholders shares of our preferred stock
convertible into shares of our common stock once our articles of incorporation
were amended to provide for the issuance of such additional shares. We made
similar promises to the holders of other securities of HDSI convertible into
HDSI common stock.
Accounting Treatment (see page 11)
The accounting for the share exchange is a recapitalization of HDSI, with HDSI
being treated as the acquirer. The acquired assets and assumed liabilities, if
any, of Nesco are carried forward at their historical values.
Material US Federal Income Tax Considerations (see page 37)
There are no material U.S. Federal Income Tax consequences for either HDSI or
Nesco as a consequence of the share exchange. There are no U.S. Federal Income
Page 4 of total
Tax consequences resulting from the share exchange for holders of Nesco common
stock who have not participated in the share exchange.
Regulatory Approvals (see page 38)
We do not believe that the share exchange was subject to any state or federal
regulatory requirements. Other than the filing of this information statement and
a registration statement with respect to shares of our common stock, including
shares issuable upon conversion of securities issued in the share exchange, and
certain other filings under applicable securities laws and the filing of the
amendment to our Articles of Incorporation with the Secretary of State of the
State of Nevada, we do not believe that, in connection with the share exchange
and the amendment to our Articles of Incorporation, any consent, approval,
authorization or permit or filing with any regulatory authority will be
required.
Rights to Dissent (see page 41)
Under applicable Nevada law, holders of shares of Nesco common stock who did not
participate in the share exchange do not have the right to dissent and exercise
appraisal rights.
Interest of our Officers and Directors (see pages 29, 34 and 37)
As a condition to the share exchange, we transferred our wholly owned
subsidiaries, NAC, IAP and NACS to a corporation controlled by Ronald Kuzon, a
former interim officer and consultant to the Company. In consideration for an
indemnification undertaking, the transferee received 3,000,000 of our common
shares. We also issued an aggregate of 6,500,000 of our common shares to an
advisor, a limited liability company owned by an affiliate of Ronald Kuzon, for
services in connection with the share exchange agreement. This advisor, under
related contractual obligations, assigned an aggregate of 5,000,000 of these
common shares to third parties. On May 25, 2004, we entered into a two year
consulting agreement with an affiliate of Ronald Kuzon which provided for the
issuance of 2,000,000 of our common shares and a minimum monthly consulting fee
of $7,500. We also issued, in exchange for outstanding notes and accrued
payroll, convertible 8% debentures in the aggregate principal amounts of
approximately $385,000 to Mr. Matthew Harriton and approximately $439,000 to Mr.
Geoffrey Donaldson, and a like number of warrants.
The officers and directors named below own securities convertible into shares of
our common stock. Our other officers and directors do not own securities
convertible into shares of our common stock. Because we do not have sufficient
authorized shares of common stock, the securities can not presently be converted
into shares of common stock. Upon filing of the amendment, this limitation will
no longer apply and all of such securities will become convertible into shares
of our common stock.
The following table sets forth the beneficial ownership as of August __ , 2005
Page 5 of total
of each of the below named officers and directors, specifying the number of
shares of common stock then held directly(none) and the number of shares of
common stock beneficially owned as of such date. After the amendment becomes
effective, each such person may acquire direct ownership of all shares of common
stock beneficially owned:
Shares of Common Stock held Shares of Common Stock
in the form of Common Stock Beneficially Owned 1
Name and Title
Matthew L. Harriton 0 7,910,244
President,
Chief Executive Officer
and Chairman of Board
Geoffrey Donaldson
Director and Chief
Operating Officer of HDSI 0 3,962,715
Purpose of Information Statement
We are sending you this information statement to inform you of the share
exchange and the amendment to our articles of incorporation increasing the
number of authorized shares of common stock before the amendment becomes
effective. We are required to do this by the rules of the Securities and
Exchange Commission. We are not requesting a proxy. Please do not send us a
proxy.
<FN>
- --------
1 See Footnotes 1, 3 and 5 to the table under the heading "Voting Securities
and Principal Stockholders" on page 28 for additional information as to the
shares beneficially owned, and how beneficial ownership is determined.
</FN>
Page 6 of total
SUMMARY SELECTED FINANCIAL INFORMATION
The financial information as presented below and elsewhere in this information
statement reflect the historical results of our predecessor entity, HDSI, prior
to May 25, 2004, the date of the Exchange Agreement, and our consolidated
results of operations subsequent to the acquisition date of May 25, 2004.
Years ended April 30, Nine Months Ended
2002, 2003, 2004 January 31, 2005
Statement of Operations Data (Unaudited)
Total revenues $1,043,995 $1,130,995 $623,349 $516,318
Total costs and expenses 2,439,956 2,204,555 1,690,032 4,774,477
Other income (expense) (573,537) (589,360) (432,358) (2,232,870)
Net loss (1,969,498) (1,662,920) (1,499,041) (6,491,029)
Net loss per share ($0.44) ($0.37) ($0.34) ($0.42)
Balance Sheet Data:
Total Assets 1,518,536 1,234,674 924,295 2,009,218
Working capital (deficit) (3,229,395) (4,222,237) (1,368,544) (4,813,127)
Total liabilities 3,376,359 4,424,683 5,482,465 5,340,951
(3,331,733)
Stockholders' equity (deficit) (1,857,823) (3,190,009) (4,558,170)
Selected Unaudited Pro Forma Financial Information
The share exchange is accounted for as a recapitalization of HDSI, with HDSI
being treated as the acquirer.
We have presented below selected unaudited pro forma financial information that
reflects the recapitalization of HDSI. The unaudited pro forma combined
statement of operations data gives effect to the acquisition as if it had
occurred on May 1, 2003 and the unaudited pro forma combined balance sheet data
gives effect to the acquisition as if it had occurred on April 30, 2004. The
unaudited proforma financial information may have been different had the share
exchange been assumed to have occurred on a different date.
The following selected unaudited financial information has been derived from,
and should be read in conjunction with, the unaudited proforma financial
information and related notes thereto included elsewhere in this information
statement.
The unaudited pro forma financial information is provided for illustrative
purposes only and its inclusion in the information statement should not be
regarded as an indication that it is an accurate prediction of future events,
and it should not be relied on as such. Given the limitations of this
information, we believe it should not be meaningful to an evaluation of the
share exchange. No one has made, or makes, any representation regarding the
Page 7 of total
information contained in the unaudited pro forma financial information.
Pro Forma Statement of Operations Data: May 1, 2003 to April 30, 2004
Total Revenues $623,349
Total Costs and Expenses 2,302,282
Other income (expense) (1,589,049)
Net Loss (3,267,982)
Net Loss per share (.03)
Pro Forma Balance Sheet Data April 30, 2004
Total Assets $1,068,990
Working Capital (deficit) (1,065,488)
Total Liabilities $3,543,953
Stockholders' Equity (deficit) (2,474,963)
Book value per share (.02)
COMPARATIVE PER SHARE INFORMATION
The following table sets forth selected historical per share information of
Nesco and HDSI and unaudited pro forma book value per share information after
giving effect to the share exchange. You should read this information in
conjunction with the selected historical financial information included
elsewhere in this information statement, and the historical financial statements
of Nesco and HDSI and related notes that are included elsewhere in this
information statement. The unaudited proforma per share information is derived
from, and should be read in conjunction with, the unaudited proforma information
and related notes included elsewhere in this information statement. The
historical per share information is derived from financial statements as of and
for the year ended April 30, 2004.
Page 8 of total
Nesco HDSI
Net loss per share-historical Year ended ($.30) ($.34)
April 30, 20041
Book value per share-historical April 30, (.23) (.99)
2004
Book value per share-proforma April 30, (.02)
20042
Net loss per share-proforma April 30, 2004 (.03)
<FN>
- --------
1 The historical net loss and book value per share was calculated based on
the actual common shares outstanding at April 30, 2004 which aggregated
7,627,105 and 4,452,806 for Nesco and HDSI, respectively.
2 The proforma net loss and book value per share was calculated based on a
total of 106,387,000 common shares, the total common shares to be issued as
a result of the share exchange.
</FN>
Page 9 of total
BACKGROUND AND REASONS FOR SHARE EXCHANGE
Nesco Industries, Inc. was incorporated in Nevada in March 1993, and was
inactive for a number of years. In March 1998, Nesco acquired National Abatement
Corporation ("NAC") and NAC Environmental Services, Inc. ("NACE").
Nesco was a provider of asbestos abatement and indoor air quality testing,
monitoring and remediation services. In the fiscal year ended April 30, 2003, we
consolidated the operations of our various subsidiaries into a single
environmental services operating unit organized under the banner of our
wholly-owned subsidiary NAC. Prior to this consolidation, we also operated
through two other wholly-owned subsidiaries, NAC/Indoor Air Professionals, Inc.
("IAP") and NACE.
In the fourth quarter of fiscal 2003, we elected to deactivate the
environmental services operating unit, and authorized NAC to cease business
operations, in order to conserve financial and other resources until a new
business focus was identified. We ceased business operations in May 2003 and
wrote-off goodwill, fixed assets and inventory in fiscal 2003. Our efforts at
that time were directed to winding down this business, and considering other
ventures we might pursue.
On April 29, 2004, we entered into a share exchange agreement with Hydrogel
Design Systems, Inc. ("HDSI"), a privately held Delaware corporation, whereby
HDSI would become a majority-owned subsidiary of the Company and upon completion
of the exchange, the holders of HDSI common stock and debt would hold a majority
interest of Company.
We initially became aware of HDSI through information provided by KSH
Securities, Inc. KSH Securities, Inc. had previously assisted us in obtaining
financing and knew of the opportunity with HDSI because of prior business
contacts with HDSI management. KSH Securities, Inc. did not participate in any
negotiations with HDSI, and did not receive any fee for introducing HDSI to us.
Ronald Kuzon, who was an interim officer and consultant to the Company
prior to the share exchange, acted as a financial advisor to the Company in
negotiating the terms of the share exchange with then senior management of HDSI.
Mr. Kuzon also provided due diligence services to the Company in this
engagement. Discussions and negotiations, involving the parties respective
officers and their financial advisors, took place over a period of several
months commencing in December 2003. The definitive agreement was signed on April
29, 2004 and the transaction closed on May 25, 2004. The final exchange ratio
was based on a number of factors including the parties evaluation of the
respective liquidation preferences of their then outstanding preferred stock,
their respective debt obligations, the Company's liquidity and ability to access
capital markets and HDSI's business prospects.
Page 10 of total
This exchange was completed on May 25, 2004.
Accounting Treatment for Share Exchange
The accounting for the transaction is a recapitalization of HDSI, with HDSI
treated as the acquirer. The acquired assets and assumed liabilities, if any, of
Nesco are carried forward at their historical values. HDSI's historical
financial statements are carried forward as those of the combined entity.
The auditors for HDSI have raised substantial doubts about the ability of
HDSI to continue as a going concern because of operating deficits, working
capital deficits and stockholder deficits. HDSI is not a development company.
Issuance of Preferred Shares
We had intended to issue shares of our common stock in exchange for the
equity securities of HDSI in certain ratios as provided for in the exchange
agreement. However, because we did not have the required number of authorized
shares of common stock to complete the exchange on this basis, we agreed to
issue shares of our newly designated Series B Preferred Stock instead of common
shares. Upon filing of a certificate of amendment to our articles of
incorporation to increase the number of shares of common stock which we are
authorized to issue, each share of our Series B Preferred Stock will be
automatically converted into shares of our common stock at a fixed ratio of 750
shares of common stock for each 1 share of Series B Preferred Stock.
Steps to Effect Share Exchange Transaction
As a condition to this transaction, we transferred our wholly-owned
subsidiaries, NAC, IAP and NACE under the terms of a stock purchase and
assumption agreement to a newly-formed corporation, NAC Calabria Acquisition
Corporation, controlled by Ronald Kuzon, who had been an interim officer and
consultant to us. The transferee assumed all liabilities and obligations of
these subsidiaries and agreed to indemnify us against any claims. In
consideration for the indemnity, the transferee received 3,000,000 shares of our
common stock, certain related registration rights, and our agreement that the
transferee, at its election, may demand that we repurchase from the transferee
2,400,000 of the common shares upon written notice from the transferee if the
transferee cannot in good faith resell the shares of common stock in an
arms-length transaction during the twelve month period immediately following the
closing for a price equal to the lesser of (i) all liabilities resulting from
the agreement between NAC and its labor union plus legal fees or (ii) $330,000.
In addition to the transfer of our subsidiaries, we were required to
convert our outstanding shareholder debt to equity. On May 11, 2004, prior to
the date of the closing, the holders of this debt in the aggregate principal
amount of $952,501 agreed to exchange the debt for an aggregate of 20,000 shares
Page 11 of total
of our Series B Preferred Stock which will be converted into 15,000,000 shares
of common stock. We were also required to obtain the consent to cancel an
aggregate of 602,500 special warrants prior to the closing. The holders of these
special warrants were granted shares in the exchange as part of the common
advisor shares issued. In addition, we were required to retain net cash of
approximately $350,000 as part of the terms of the agreement, of which
approximately $208,500 was paid as a bridge loan prior to April 30, 2004 and is
included in our assets at April 30, 2004. This bridge loan became part of the
closing requirements in May 2004.
Concurrent with the exchange, our Series A Preferred Stock shareholders
agreed to exchange 512,500 shares of stock for an aggregate of 20,500 shares of
our Series B Preferred Stock, which will be converted into 15,375,000 shares of
common stock (a ratio of approximately 30 of our common shares for 1 share of
Series A Preferred Stock). As of January 31, 2005, 445,500 shares of Series A
Preferred Stock shares have been exchanged for 17,820 shares of Series B
Preferred shares. No Series A shareholder has rejected the exchange and we
anticipate that the balance will be exchanged over time.
Former Holders of HDSI Securities
Own a Majority of Our Voting Securities
At the time of the transaction, HDSI common shareholders exchanged
3,240,593 shares of stock for 38,887 shares of our Series B Preferred Stock,
which will be converted into 29,165,250 shares of common stock (a ratio of
approximately 9 of our shares for 1 share of HDSI stock). The HDSI preferred
shareholders exchanged 295,853 shares of stock for 14,201 shares of our Series B
Preferred Stock, which will be converted into 10,650,750 shares of common stock
(a ratio of approximately 36 of our shares for 1 share of HDSI stock).
Approximately 97% of the common and 90% of the preferred shareholders have
exchanged their shares as of January 31, 2005 which has resulted in
approximately 54.1% of our voting securities outstanding at the time of the
exchange owned by HDSI stockholders. We anticipate that the remaining
shareholders will exchange their shares in the near future, which will result in
55.3% of our voting securities outstanding at the time of the exchange being
owned by HDSI stockholders. Upon completion of this exchange, HDSI common
shareholders will exchange a total of 4,452,806 shares of stock for 53,434
shares of our Series B Preferred Stock, which will be converted into 40,075,167
shares of common stock (a ratio of approximately 9 of our shares for 1 share of
HDSI stock). The HDSI preferred shareholders will exchange a total of 522,487
shares of stock for 25,079 shares of our Series B Preferred Stock which will be
converted into 18,809,574 shares of common stock (a ratio of approximately 36 of
our shares for 1 share of HDSI preferred stock). The HDSI stockholders, upon
completion of the exchange of shares, will receive an aggregate of 58,884,741 of
our common shares or 55.3% of the total shares outstanding at the time of the
exchange which aggregated 106,386,847 equivalent common shares on May 25, 2004.
In connection with the share exchange agreement, we also issued an
aggregate of 6,500,000 common shares (with a fair value of $975,000) to an
advisor, a limited liability corporation owned by an affiliate of Ronald Kuzon,
an interim officer and consultant, for services rendered in connection with the
Page 12 of total
exchange agreement. This advisor, under related contractual obligations,
assigned an aggregate of 5,000,000 of these common shares to third parties.
Approximately 2,900,000 of these shares were issued to the parties who agreed to
cancel their special warrants. We also incurred additional costs related to the
exchange approximating $48,000. Approximately $328,000 of these costs, the net
amount of cash retained at the time of the acquisition, were charged to equity,
and the balance of $695,000 was recorded as a charge to operations in the
quarter ended July 31, 2004.
Prior to the transaction, we had 7,627,105 common shares outstanding. After
giving effect to the transactions above and after such time that we increase the
number of shares that we are authorized to issue, we will have approximately
106,387,000 shares outstanding as of the exchange date. This amount does not
include the additional shares issuable pursuant to the exchanges described in
the following paragraph.
In addition to the exchange of shares, all outstanding options/warrants of
HDSI were exchanged for our options/warrants based on the same ratios as the
stock exchange. This resulted in the issuance of approximately 25,137,000
options/warrants. These options/warrants are currently exercisable at prices
that range between $.08 -$.39 and expire between one and eight years.
Compensation expense approximating $1,794,000 was recorded on May 25, 2004 for
the increase in the fair value of the vested HDSI options/warrants as a result
of the exchange. The HDSI debt holders were also granted, in consideration of an
extension of term debt, a warrant to acquire one share of our common stock for
each dollar of HDSI debt, for an aggregate issuance of 2,736,000 warrants. The
total HDSI term debt of $2,736,000 was also exchanged for our convertible debt
and the holders may convert this debt to approximately 28,551,000 shares of our
common stock. Approximately $156,000 of the total HDSI debt exchanged was
attributed to the fair value of the warrants and $1,703,000 was attributed to
the intrinsic value of the beneficial conversion feature. These amounts were
recorded as equity components. The remaining balance of $877,000 was recorded as
long-term debt. Our convertible debt bears interest at the rate of 8% per annum
and matures on December 31, 2005. Convertible debt in the amount of $1,933,000
has a conversion price of $.0833 per share, and the remaining convertible debt
in the amount of $803,000 converted at the time of the share exchange has a
conversion price of $.15 per share.
Prior to the transaction, we had approximately 4,212,500 options and
warrants outstanding. After giving effect to the transactions above (including
the cancellation of 602,500 warrants), we will have approximately 31,483,000
options and warrants outstanding and debt convertible into approximately
28,551,000 common shares as a result of the exchange agreement.
Share Exchange Agreement
The summary of the material terms of the Share Exchange Agreement set forth
above under "Steps to Effect Share Exchange Transaction" and elsewhere in this
information statement is qualified in its entirety by reference to the Share
Exchange Agreement, a copy of which is attached to this information statement as
Page 13 of total
Appendix A and which we incorporate by reference into this document. This
summary may not contain all of the information about the Share Exchange
Agreement that is important to you. We encourage you to read carefully the Share
Exchange Agreement in its entirety.
Page 14 of total
Summary of Consideration or Contributions in Exchange
The following table summarizes the respective consideration or
contributions by Nesco and HDSI referred to above in the exchange:
Nesco HDSI
Approximately $350,000 in cash in exchange for HDSI's business and business assets
Shares of Series B Preferred Stock in exchange for Shares of HDSI common stock
Shares of Series B Preferred Stock in exchange for Shares of HDSI preferred stock
Options and warrants to purchase shares of Nesco Options and warrants to purchase shares of HDSI
common stock in exchange for common stock and preferred stock
Shares of Series B Preferred Stock in exchange for
its own indebtedness
Shares of Series B Preferred Stock in exchange for
shares of its Series A Preferred Stock
Convertible debentures in exchange for HDSI indebtedness
Warrants to acquire common stock for extension of HDSI indebtedness
maturity of
Dilution from Share Exchange
The following table sets forth, as of May 25, 2004, the date of the share
exchange effected pursuant to the Share Exchange Agreement, the dilution in
direct ownership of shares of common stock that will occur following the
effectiveness of the amendment to our Articles of Incorporation, assuming that
all of our securities issued pursuant to the Share Exchange Agreement are
converted into shares of our common stock:
Number of
Shares
Percentage of Outstanding Percentage of Shares
Number of Shares Outstanding after Exchange Outstanding after
Sources of Share Outstanding Shares Prior to assuming Exchange assuming
Issuances Prior to Exchange Exchange Amendment Amendment
- -------------------- ------------------ ----------------- ----------------- -----------------------
Common Stock 19,127,106 100% 19,127,106 11.61%
outstanding
immediately after
share exchange
Page 15 of total
0 0 15,000,000 9.1%
Conversion of
Series B preferred
stock into common
stock by debt
holders
Conversion of 0 0 15,375,000 9.33%
Series A preferred
stock into Series
B preferred stock
and subsequent
exchange into
common stock
Exchange of Series 0 0 58,884,750 35.73%
B preferred stock
by HDSI holders
Exercise of 0 0 27,873,032 16.91%
options and
warrants exchanged
by HDSI holders
Conversion of debt 0 0 28,550,747 17.32%
held by HDSI
holders
- -------------------- ------------------ ----------------- ----------------- -----------------------
Total no. of Shares 19,127,106 100% 164,810,635 100.00%
The 19,127,106 shares of common stock outstanding immediately after the
share exchange represent approximately 11.61% of the total number of shares of
common stock that would be outstanding on a fully diluted basis after giving
effect to the amendment, or a total dilution of approximately 88.39% for the
shares of common stock. The above table does not include 3,610,000 shares of
common stock issuable upon exercise of our options and warrants outstanding
prior to the share exchange.
BUSINESS
HDSI develops, manufactures and markets high water content, electron beam
cross-linked, aqueous polymer hydrogels used for wound care, medical
diagnostics, transdermal drug delivery and cosmetics. HDSI gels are produced
using unique proprietary manufacturing technologies which enable HDSI to
develop, manufacture and market electron beam cross-linked aqueous polymer sheet
Page 16 of total
hydrogels, hereafter referred to as "gels". Through discussions with various
customers of our products and through market research, to the best of
Management's knowledge and belief, HDSI is one of two known manufacturers in the
world of these gels.
HDSI specializes in custom gels capitalizing on proprietary manufacturing
technologies. These capabilities allow HDSI to manufacture gels which meet the
rigid specifications of our customers, a key requirement in gels used for
delivery of active ingredients, the most rapidly growing component of the
hydrogel industry.
Gels are colloidal substances made of water and solids. They can be created
chemically (through a combination of ultra violet cross-linking and chemical
interface), or by mixing a hydrophilic polymer and water then exposing it to an
electron beam creating a "sheet" of water. Active ingredients such as OTC
medication, and skin care, wound healing or other materials can be added before
or after cross-linking. Materials that do not survive radiation are added after
the cross-linking process is completed. Once the gels have been mixed and
cross-linked, they form sheets which can be delivered to customers or first cut
and shaped according to customer specifications.
Currently, and for the foreseeable future, all of the gel products produced
by HDSI are electron beam cross-linked, water and polymer gels. The Company
cross-links its gels using an electron beam accelerator.
Electron beam cross-linking is achieved through the introduction of the
high energy field, created by the accelerated electrons, which causes the
release of hydrogen atoms thereby causing carbon molecule covalent bonding. The
creation of longer chains of the polymer in the gel increases its molecular
integrity, giving the gel characteristics which make it useful in a variety of
products.
HDSI owns and operates a Radiation Dynamics, Inc., Dynamitron IEA 1500-40
Industrial Electron Accelerator, serial number 318. The HDSI RDI Dynamitron
Industrial Electron Accelerator has been customized to handle the cross-linking
of the type of materials the Company uses, but can also be used for several of
the other potential uses such as coloring gemstones and treating wire, cable and
tubing. Replacement cost of the Company's RDI Accelerator and processing
equipment is estimated to be in excess of $7 million. The delivery and
installation process is time-consuming with replacement estimated to take 2.5 to
3 years. The Company's equipment has a useful life of approximately 20 years and
provides annual production capacity in excess of 6,000 hours.
Management believes that many of the processes are proprietary to the
Company and provide significant competitive advantages. The company believes
HDSI gels have a significant competitive advantage, in part due to the following
product characteristics:
-- painless adhesion to the human body;
-- stability of form and composition;
Page 17 of total
-- purity;
-- reproducibility (manufacturing high quality product on a consistent
basis);
-- compatibility with active ingredients; and
-- high water content.
Many of the competitive products feature physical characteristics which are
less desirable than those of HDSI's gels. These include aggressive skin bonding,
chemical and form instability, lack of uniformity, low water content, and active
receptivity issues. Some of these products do offer higher absorptive and
adherence characteristics than the HDSI gels.
While the Company believes that HDSI's products have significant commercial
potential, the Company recognizes that such potential has not yet been achieved
and may not occur. The Company acknowledges that HDSI has never operated at a
profit, incurred a loss of $1,499,041 in its fiscal year ended April 30, 2004
and at April 30, 2004 had an accumulated deficit of $10,684,870.
The auditors for HDSI have raised substantial doubts about the ability of
HDSI to continue as a going concern because of operating deficits, working
capital deficits and stockholder deficits. HDSI is not a development stage
company.
HDSI manufactures and markets electron-beam cross-linked sheet gels and
patches for use as moist wound/burn dressings with and without active
ingredients, components in certain medical devices, transdermal and intradermal
delivery of medication, and topical application of non-prescription drugs, other
skin care treatments and cosmetics. HDSI markets its own brand of moist
wound/burn dressings under the AQUAMATRIX(R) brand name, and is currently
developing additional line extensions of this product. In addition, the HDSI
gels are prepared as components for products distributed by HDSI customers under
their brand names. HDSI, in addition to manufacturing gels, offers its customers
converting services, allowing HDSI to create competitive advantage in pricing
while expediting the production process. HDSI specializes in cutting sheet gels
to customers' specified shape, a converting process requiring technological
expertise and pouching.
For the year ended April 30, 2004, HDSI filled orders from approximately 22
different customers. Of these 82.9% of the annual revenue is attributable to 6
of these customers. Four (4) of our customers accounted for more than 10% of our
annual revenues individually with our largest customer accounting for 31.1% of
annual revenues. While we have a single manufacturing facility located in the
Northeast United States, our customers are located throughout the world. The
products for which our gels are used by our customers include wound and burn
dressings, transdermal drug delivery devices, warming/cooling apparatus, and
medical electrodes. Our non-gel customers utilize our electron accelerator for
material modification (the enhancement of materials through cross-linking).
Page 18 of total
We have identified several markets in which to market the products by
identifying those fields, such as wound care, which offer reasonable means of
entry, in which we have some form of competitive advantage and those which offer
meaningful growth opportunities. Several of these markets fall under the
regulatory authority of the Food and Drug Administration ("FDA"). Our basic
wound care dressings are Class I exempt devices and therefore are subject only
to very basic regulatory requirements. Some of our other products, including
those which incorporate active ingredients, may fall under more stringent FDA
regulatory requirements that may require prior approvals or testing before the
products are sold.
As of January 31, 2005 HDSI had eleven employees, five in administration,
finance and marketing, and six in manufacturing and quality control.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The following table sets forth our working capital (deficiency) position as at
January 31, 2005:
As at January 31, 2005
Current assets $399,124
Current liabilities 5,212,251
Working capital (deficiency) $(4,813,127)
============
Our cash at January 31, 2005 increased to $124,000 as compared to $17,000 in the
prior fiscal period. This increase is primarily attributable to the additional
net cash provided by the issuance of new convertible debentures in the current
fiscal period.
Net cash used in operating activities in the nine months ended January 31, 2005
was $1,615,000 as compared with $138,000 in the prior fiscal period ended
January 31, 2004. The net cash used in operations in the nine months ended
January 31, 2005 was used to fund current operations and pay down accounts
payable and amounts due to affiliates which consisted primarily of overdue rent
and other expenses which were required to be paid in order for us to continue to
be able to operate. The balance of the cash used to fund operations was used to
fund increased general and administrative costs and to cover fixed manufacturing
costs as discussed below in results of operations. In the period ending January
31, 2004, we used approximately $138,000 to fund current operations as funds
were not available to pay down accounts payable and other liabilities which were
due. In addition, approximately $323,000 in funding was provided from customer
Page 19 of total
deposits and included in net cash used in operations which offset the actual use
of cash for operating activities. The increase in the current period excluding
these deposits was approximately $1,154,000 which is the result of the paydown
of liabilities and increased expenses as described. As our revenues and accounts
receivable collections did not significantly increase during the nine months
ended January 31, 2005, additional cash was not provided to cover these
increased expenses. However, management believes that the paydown of these
liabilities and increased expenses are required in order to continue to operate
and to build our future operations.
Net cash provided by investing activities in the nine months ended January 31,
2005 was $77,000 as compared with $2,000 in the nine months ended January 31,
2004. The net cash provided by investing activities was due to the cash received
at the closing of the share exchange, net of closing costs. Nesco had advanced
HDSI $208,000 in the prior fiscal year. The net cash provided by financing
activities in the nine months ended January 31, 2005 was $1,661,000 as compared
with $108,000 in the nine months ended January 31, 2004. The net cash provided
by financing activities was primarily provided by the issuance of convertible
debentures.
On July 1, 2004, we entered into an investment banking agreement with Sloan
Securities Corp. for the sale of up to $3,000,000 principal amount of our 8%
senior convertible notes due December 1, 2005, with interest payable on December
1 and June 1 semi- annually, either in cash or common stock, and convertible
into common stock at $.15 per share. Each note was issued with a five-year
warrant to purchase shares of our common stock at $.25 per share or 666,667
warrants for each $100,000 of principal amount of notes purchased. As a result
of the agreement, which terminated on September 30, 2004, we received $2,295,000
in gross proceeds in connection with this agreement and issued warrants to
purchase 15,300,000 shares. Under the terms of the private placement we have
agreed to undertake to register the common stock issuable upon the conversion of
the notes and the exercise of the warrants, which are included in this
prospectus. Approximately $1,108,000 of the proceeds was attributed to the fair
value of the warrants and $1,004,000 to the intrinsic value of the beneficial
conversion feature of the convertible debt. These amounts were recorded as
equity components. The remaining balance of $183,000 was recorded as long-term
debt. For the nine months ended January 31, 2005 the amortization of debt
discount was approximately $764,000. Interest expense for the nine months ended
January 31, 2005 was approximately $90,000, of which approximately $32,000 is
included in interest payable at January 31, 2005. On December 1, 2005, we issued
390,305 shares of common stock as payment for interest due in the aggregate of
approximately $59,000.
Financing fees in connection with this agreement approximated $286,000 which are
being amortized over the term of the convertible notes. For the nine months
ended January 31, 2005, the amortization of financing costs approximated
$107,000.
In connection with this agreement, we issued the broker warrants to acquire
Page 20 of total
5,052,600 shares of Nesco common stock at an exercise price of $.15 per share.
The fair value of the warrants ($405,000) will be charged to operations over the
life of the underlying debt. For the nine months ended January 31, 2005,
approximately $168,000 was charged to operations as financing costs for these
warrants.
In connection with this agreement, under the terms of a related registration
rights agreement, we were required to file a registration statement to
effectively register the common stock issuable upon the conversion of the notes
and exercise of the warrants no later than 60 days after the termination of the
offering. We did not file the required registration statement until January 27,
2005, and liquidated damages in the amount of 2% per month of the aggregate
purchase price were required to be paid in cash under the terms of the
agreement. The holders of the notes agreed to accept instead of cash, payment in
the aggregate of $91,800 in our common stock. The fair value of the shares due
($91,800) has been charged to operations and this expense is included in current
liabilities as these shares have not been issued at January 31, 2005. The above
registration statement covers the shares issuable upon conversion of notes and
exercise of the warrants and the additional share payment.
On August 23, 2004, we entered into a Standby Equity Distribution Agreement with
Cornell Capital Partners, L.P. an investment firm. Under the terms of the
agreement, the investment firm has committed to purchase up to $10,000,000 of
our common stock at a purchase price equal to 98% of the market price at the
time of purchase. The investment firm is entitled to a 5% commission per
transaction. The equity line can be drawn down upon a registration statement
covering the shares being declared effective by the SEC. The shares are covered
by this Registration Statement. On November 16, 2004 we filed a preliminary
information statement with the Securities and Exchange Commission (ASEC@) to
allow us to increase the number of common shares we are authorized to issue.
This must be completed before this registration statement can be declared
effective by the SEC. On December 16, 2004, the SEC responded with comments
pertaining to the preliminary information statement. On February 25, 2005, we
responded to these comments and on May 2, 2005 responded to further comments
subsequently received from the SEC and on July 7, 2005 responded to further
comments subsequently received from the SEC and on July --, 2005 responded to
further comments received from the SEC so that the information statement can be
completed. On January 27, 2005, a preliminary registration statement was filed.
On March 1, 2005, the SEC responded with comments pertaining to the preliminary
registration statement. On August 15, 2005 we responded to these comments. The
registration statement will be effective at such time that the SEC completes its
review of our responses to the comments in regard to both the preliminary
information statement and the preliminary registration statement and we are able
to complete the information statement. Upon completion of this process, we will
file the Certificate of Amendment to increase the number of common shares we are
authorized to issue. As consideration for entering into the Standby Equity
Distribution Agreement, we granted Cornell Capital Partners, LP 3,266.66 shares
Page 21 of total
of Series B Preferred Stock (convertible into 2,450,000 common shares) and paid
a $70,000 cash consulting fee. In addition, we granted the placement agent 66.66
shares of Series B Preferred shares (convertible into 50,000 common shares). The
fair value of the shares ($625,000) as well as $17,500 in fees and the $70,000
cash consulting fee associated with this agreement were recorded on the balance
sheet as stock issuance costs in the quarter ended October 31, 2004.
At January 31, 2005, we had an accumulated deficit of approximately $17,176,000,
a working capital deficit of approximately $4,813,000 and incurred a net loss of
approximately $6,491,000 for the nine months then ended. The recoverability of a
major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheet is dependent on our ability to obtain financing on an
as needed basis. We have obtained additional financing and have completed an
acquisition as described above. In addition, we have additional financing
available as described above upon this registration statement being declared
effective by the SEC. However, our financial condition raises substantial doubt
about our ability to continue as a going concern. The consolidated 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 we be unable to continue in
existence.
Management intends to focus its efforts in the next twelve months on building
the business of HDSI, as described below, which we believe will be possible as a
result of the additional financing as described above. The proceeds from the
additional financing will be used to repay indebtedness, for product
development, working capital (including the addition of employees and
consultants to further develop our products and services), pay professional fees
associated with the share exchange transaction as well as the ongoing costs
associated with SEC compliance, and marketing of our products and services. The
additional financing should provide sufficient capital to sustain these efforts
for the next 12 months.
The Company's current primary sources of revenues are the development,
manufacture and sale of hydrogel related products to the original equipment
manufacturer market and developers and distributors of skin care preparations
and other cosmetics as well as prescription and OTC medications. The Company has
expanded its business to include the sales of finished product including its
branded wound care products, Aquamatrix(R), to wound care providers and other
potential users and plans to expand this business by: (i) Increasing the number
of distributors who carry Aquamatrix(R), (ii) Identifying potential private
label opportunities; (iii) Incorporating novel active ingredients for wound
healing into the gels as product extensions; and (iv) Expanding the
Aquamatrix(R) product line to include complimentary products. Management
believes that these efforts will result in an increase in revenues within the
next 12 months with product development expenses including salaries and
consulting fees of approximately $250,000 other working capital needs of
approximately $350,000 and distribution costs of approximately $75,000 over this
time period.
Page 22 of total
Results of Operations
For the nine months ended January 31, 2005
Revenues for the nine months ended January 31, 2005 were $516,000 as compared to
$512,000 for the nine months ended January 31, 2004. Cost of revenues for the
nine months ended January 31, 2005 decreased by $40,000 from $693,000 to
$653,000. Cost of revenues consists primarily of direct labor and other
manufacturing fixed costs. The decrease relates primarily to lower allocation of
depreciation of manufacturing equipment as some assets became fully depreciated
in the current period. The majority of our cost of revenues are fixed costs such
as salaries and plant costs. The gross margin for the nine months ended January
31, 2005 was ($136,000) and compared with ($181,000) for the nine months ended
January 31, 2004. The negative gross margin is attributable to the amount of
direct fixed costs such as rent, equipment depreciation and manufacturing
overhead (primarily labor) which approximate $180,000 quarterly. At such time
that we can generate additional revenue to cover these fixed costs, the margin
should improve as increased revenues will result in little, if any,
corresponding increase to these fixed costs. We anticipate that as a result of
additional capital resources that revenues will increase in the future and these
fixed costs as well as general and administrative expenses will be covered.
General and administrative expenses for the nine months ended January 31, 2005
increased to $3,986,000 from $526,000 for the nine months ended January 31,
2004. This increase of $3,460,000 includes a charge of approximately 1,187,000
for stock issued for consulting and other services and a charge of approximately
$1,794,000 for the revaluation of the HDSI outstanding warrants which were
exchanged for Nesco warrants at the time of the share exchange. The balance of
the increase is primarily due to ongoing consulting fees and executive salaries
from agreements entered into as a result of the share exchange of approximately
$198,000 and increased professional fees as a result of increased reporting
requirements and other services needed as a result of the share exchange of
approximately $224,000. In addition insurance costs increased by approximately
$30,000 due to increased premiums in directors and officers insurance in
connection with the share exchange and rent increased by approximately $25,000
as per the terms of the lease for the nine months ended January 31, 2005.
The net loss for the nine months ended January 31, 2005 increased to $6,491,000
from $1,161,000 for the nine months ended January 31, 2004. This increase of
$5,330,000 includes a non-cash debt discount charge of $1,602,000, an increase
of $1,443,000 from the nine months ended January 31, 2004. This increase is
primarily due to a charge of $798,000 for the fair value of additional warrants
issued to the HDSI debt holders for the extension of their term debt and for the
intrinsic value of the beneficial conversion feature as related to the exchange
of the HDSI term debt for Nesco convertible debt at the time of the share
exchange and a charge of $764,000 for the intrinsic value of the beneficial
conversion feature as related to the issuance of convertible debentures and
warrants in connection with the investment banking agreement. The increase in
the net loss also includes a charge of $275,000 in the current period for
amortization of various financing costs and a charge of $91,800 for liquidated
Page 23 of total
damages paid in stock for not filing the required registration statement as per
the terms of an investment banking agreement. The rest of the increase is
primarily attributable to the increase in general and administrative expenses as
described above.
Revenues for the three months ended January 31, 2005 increased from $115,000 for
the three months ended January 31, 2004 to $184,000 in the current period. This
increase of $69,000 is due primarily to revenue of approximately $113,000
derived from one customer in the current period who started a developmental
project that did not place any orders in the prior period offset by one customer
in the prior period that had revenues of approximately $32,000 that did not run
any product in the current period. Cost of revenues for the three months ended
January 31, 2005 decreased by $15,000 from $246,000 to $231,000. Cost of
revenues consists primarily of direct labor and other manufacturing fixed costs.
The decrease relates primarily to lower allocation of depreciation of
manufacturing equipment as some assets became fully depreciated in the current
period. The majority of the Company=s cost of revenues are fixed costs such as
salaries and plant costs. The gross margin for the three months ended January
31, 2005 was ($47,000) and compared with ($131,000) for the three months ended
January 31, 2004. The negative gross margin is attributable to the amount of
direct fixed costs such as rent, equipment depreciation and manufacturing
overhead (primarily labor) which approximate $180,000 quarterly. At such time
that we can generate additional revenue to cover these fixed costs, the margin
should improve as increased revenue will result in little, if any, corresponding
increase to these fixed costs. We anticipate that as a result of additional
capital resources that revenues will increase in the future and these fixed
costs as well as general and administrative expenses will be covered.
General and administrative expenses for the three months ended January 31, 2005
increased to $437,000 from $183,000 for the three months ended January 2004.
This increase of $254,000 includes a charge of approximately $88,000 for stock
and warrants issued for consulting and other services. The balance of the
increase is primarily due to ongoing consulting fees and executive salaries from
agreements entered into as a result of the share exchange of approximately
$93,000 and increased professional fees as a result of increased reporting
requirements and other services needed as a result of the share exchange of
approximately $36,000. In addition insurance costs increased by approximately
$14,000 due to increased premiums in directors and officers insurance in
connection with the share exchange and rent increased by approximately $8,000 as
per the terms of the lease for the three months ended January 31, 2005.
The net loss for the three months ended January 31, 2005 increased to $1,534,000
from $428,000 for the three months ended January 31, 2004. This increase of
$1,106,000 includes a non-cash debt discount charge of $702,000, an increase of
$702,000 from the three months ended January 31, 2004. This increase is
primarily due to a charge of $293,000 for the fair value of additional warrants
issued to the HDSI debt holders for the extension of their term debt and for the
Page 24 of total
intrinsic value of the beneficial conversion feature as related to the exchange
of the HDSI term debt for Nesco convertible debt at the time of the share
exchange and a charge of $409,000 for the intrinsic value of the beneficial
conversion feature as related to the issuance of convertible debentures in
connection with the investment banking agreement. The increase in the net loss
also includes a charge of $126,000 in the current period for amortization of
various financing costs and a charge of approximately $91,800 for liquidated
damages paid in stock for not filing the required registration statement as per
the terms of an investment banking agreement. The rest of the increase is
primarily attributable to the increase in general and administrative expenses
offset by the increase in revenue as described above.
Fiscal years ended April 30, 2004 and 2003
Revenues for the year ended April 30, 2004 decreased by $508,000 to $623,000, or
45% as compared with revenues of $1,131,000 for the prior fiscal year. This
decline is due primarily to revenue derived from one customer in the prior
period which aggregated $557,000 as compared to $57,000 in the current period.
This customer ceased production of the product for which HDSI was a supplier in
the year ended April 30, 2004 due to problems with production and its parent
Company. Cost of revenues for the year ended April 30, 2004 decreased by
$117,000 from $1,029,000 to $912,000 in the prior fiscal year. Cost of revenues
consists primarily of direct labor and other manufacturing fixed costs. The
decrease relates to material costs which are attributable to the decreased
revenue. Material costs generally range between 10-20% of revenue depending on
the type of gel related product.
General and administrative expenses for the year ended April 30, 2004 decreased
to $662,000 from $1,057,000 for the prior fiscal year. This decrease of $395,000
is primarily due to reduction of salaries and layoffs aggregating approximately
$295,000 inclusive of payroll taxes and benefits and reduction of professional
fees and other administrative costs as a result of the loss of a major customer
as described above.
The net loss for the year ended April 30, 2004 decreased to $1,499,000 from
$1,663,000 for the year ended April 30, 2003. The loss from operations remained
relatively the same as the decrease in revenues and corresponding decrease in
gross margin of approximately $390,000 was offset by the savings in general and
administrative expenses of $395,000. This decrease of $164,000 is primarily
attributable to the decrease in amortization of debt discount of $161,000 as
most of the debt was fully amortized in 2003 and was due in early fiscal 2004.
Fiscal years ended April 30, 2003 and 2002
Revenues for the year ended April 30, 2003 increased by $87,000 to $1,131,000,
Page 25 of total
or 8% as compared with revenues of $1,044,000 for the prior fiscal year. This
increase is due primarily to revenue derived from one customer in the current
period which aggregated $557,000 as compared to $202,000 in the prior period.
This customer increased production of the product for which HDSI was a supplier
in the year ended April 30, 2003. This increase was offset by a decrease in
revenue from another customer of $62,000 in the current period as compared to
$238,000 in the prior period as this customer has downsized its operations. The
remainder of the change in revenues is a result of the customer mix changing as
there were some new customers entering into development contracts and some prior
customers either reducing production or completing developmental work for which
no product was finalized. Cost of revenues for the year ended April 30, 2003
increased by $41,000 to $1,029,000 from $988,000 in the prior fiscal year. Cost
of revenues consists primarily of direct labor and other manufacturing fixed
costs. The increase relates to material costs which are attributable to the
increased revenue and also to an increase in certain fixed costs. Material costs
generally range between 10-20% of revenue depending on the type of gel related
product.
General and administrative expenses for the year ended April 30, 2003 decreased
to $1,057,000 from $1,339,000 for the prior fiscal year. This decrease of
$282,000 is primarily due to reduction of salaries aggregating approximately
$110,000 inclusive of payroll taxes and benefits and reduction of consulting
fees of approximately $150,000 due to the termination of a sales consultant
contract.
The net loss for the year ended April 30, 2003 decreased by $306,000 to
$1,663,000 from $1,969,000 for the year ended April 30, 2002. The loss from
operations decreased by approximately $322,000 as a result of the reduction of
general and administrative costs as described above of $282,000 and the increase
in gross margin of $46,000 due to increased revenues as described above.
Critical Accounting Policies
Revenue Recognition
Revenues are generally recognized as product is shipped to a customer. In cases
where a customer requests a development project for a gel or a gel to be used as
a component of a new product, the Company will recognize revenue at the time the
project is completed.
Stock Compensation
Stock options and warrants issued to non-employees are valued using the fair
value of the securities issued. This valuation is made using the Black-Scholes
option-pricing model.
The Company applies APB No. 25, Accounting for Stock Issued to Employees, and
Page 26 of total
related interpretations in accounting for its employee stock option plans and,
accordingly, no compensation cost has been recognized because all stock options
granted to employees under the plans were at exercise prices which were equal or
above the market value of the underlying stock at date of grant.
On December 16, 2004, the FASB issued Statement No. 123 (revised) ("Statement
No. 123(R)"), Share-Based Payment, an Amendment of FASB Statements No. 123 and
APB No. 25, that addressed the accounting for share-based awards to employees,
including employee-stock-purchase plans, or ESPPs. Statement No. 123(R) requires
companies to recognize the fair value of stock options and other stock-based
compensation to employees. The statement eliminates the ability to account for
share-based compensation transactions using APB Opinion No. 25, Accounting for
Stock Issued to Employees, and generally requires instead, that such
transactions be accounted for using a fair-value- based method. The requirements
of Statement No. 123(R) will be effective for the Company effective February 1,
2006.
New Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." 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. We are currently evaluating
the impact, if any, of FIN 46 on our financial position, results of operations
and cash flows. In May 2003, the FASB issued SFAS No. 150, "Accounting for
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.
Page 27 of total
On December 16, 2004, the FASB issued Statement No. 123 (revised) ("Statement
No. 123(R)"), Share-Based Payment, an Amendment of FASB Statements No. 123 and
APB No. 25, that addressed the accounting for share-based awards to employees,
including employee-stock-purchase plans, or ESPPs. Statement No. 123(R) requires
companies to recognize the fair value of stock options and other stock-based
compensation to employees. The statement eliminates the ability to account for
share-based compensation transactions using APB Opinion No. 25, Accounting for
Stock Issued to Employees, and generally requires instead, that such
transactions be accounted for using a fair-value- based method. The requirements
of Statement No. 123(R) will be effective for the Company effective February 1,
2006. Had this pronouncement been in effect as of May 1, 2003, the Company=s net
losses for the year ended April 30, 2004 and the nine months ended January 31,
2005 would be increased by $-0- and $211,603 respectively.
Page 28 of total
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS
We determined the stockholders of record for purposes of this information
statement at the close of business on August _, 2005 (the "Record Date"). On the
Record Date, the authorized voting stock consisted of 25,000,000 shares of
common stock, par value $0.001 ("Common Stock"), 850,000 shares of Series A
preferred stock ("Series A Stock") and 150,000 shares of Series B preferred
stock ("Series B Preferred Stock"). Each share of common stock is entitled to
one vote; each share of Series A Stock is entitled to 30 votes and each share of
Series B Preferred Stock is entitled to 750 votes. On the Record Date there were
20,136,225 shares of common stock, 67,000 shares of Series A Stock and
116,686.84 shares of Series B Preferred Stock issued, outstanding and entitled
to vote. Upon conversion, these shares would aggregate 109,661,357 common
shares.
The following table sets forth the beneficial ownership as of August __,
2005 of each person who, as of the Record Date, owned beneficially more that 5%
of our common stock as well as the shares beneficially owned by our officers and
directors individually and as a group. For this purpose, each outstanding share
of Series A Stock has been treated as having been converted into 30 shares of
common stock and each outstanding share of Series B Preferred Stock has been
treated as having been converted into 750 shares of common stock. Unless
otherwise indicated, all shares are beneficially owned and sole investment and
voting power is held by the beneficial owners indicated.
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership (1) of Class
Santo Petrocelli, Sr.
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, NY 10165 (2) 19,741,667 17.80%
Matthew Harriton
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, NY 10165 (3) 7,910,244 6.85%
Cornell Capital Partners L.P.
101 Hudson Street
Jersey City, New Jersey 07302 (4) 12,074,739 10.15%
Karen Nazzareno
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, NY 10165 180,000 *
Page 29 of total
Richard Selinfreund
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, New York 10165 -0- *
Geoffrey Donaldson
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, New York 10165 (5) 3,962,715 3.49%
Gene E. Burelson
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, New York 10165 -0- *
Wayne M. Celia
c/o Nesco Industries, Inc.
305 Madison Avenue -0- *
New York, New York 10165
Joel S. Kanter
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, New York 10165 -0- *
Arlen Reynolds
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, New York 10165 -0- *
Richard Harriton
305 Madison Avenue, Suite 4510
New York, NY 10165 (6) 27,840,007 20.29%
KSH Strategic Investments
575 Jericho Turnpike
Jericho, NY 11753 (7) 10,316,500 8.90%
Directors and Officers
as a Group (8 persons) 12,052,959 10.09%
<FN>
* Less than 1% unless otherwise indicated.
(1) As used herein, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of
sole or shared voting power (including the power to vote or direct the vote)
and/or sole or shared investment power (including the power to dispose or direct
the disposition of) with respect to the security through any contract,
Page 30 of total
arrangement, understanding, relationship or otherwise, including a right to
acquire such power(s) during the next 60 days. Unless otherwise noted,
beneficial ownership consists of sole ownership, voting and investment rights.
Additionally, the number of shares shown assumes the conversion or exercise of
all Series A Stock, Series B Preferred Stock, Convertible Debentures, warrants
and vested options.
(2) Mr. Petrocelli was the Chairman and a director until June 22, 2004. The
above number of shares beneficially owned includes 2,900,000 shares owned of
record by Petrocelli Industries, Inc. and 566,667 shares owned by SMFS Corp. Mr.
Petrocelli is the President and Chief Executive Officer of Petrocelli
Industries, Inc., and beneficially owns 25% of its outstanding capital stock.
The other 75% is owned by members of Mr. Petrocelli's family. Mr. Petrocelli is
the President of SMFS Corp. In addition, the number of shares beneficially owned
includes 1,000,000 shares issuable upon the exercise of a warrant issued in
March 2002 to Mr. Petrocelli and 275,000 shares issuable upon the exercise of a
warrant issued in December 2003 to Petrocelli Industries, Inc.
(3) Mr. Matthew Harriton is our President, Chief Executive Officer and a
director. Prior to the share exchange agreement with HDSI and currently, Mr.
Harriton remains as CEO and a director of HDSI. Mr. Harriton is also CEO and a
director and the holder of approximately 32.1% of the outstanding common and
Class B shares of Embryo Development Corp., a public company traded under the
symbol "EMBR" which holds a 4.44% beneficial interest in us. The above number of
shares beneficially owned includes 2,430,647 shares issuable upon the conversion
of debt, 364,597 shares issuable upon exercise of a warrant granted for the
extension of debt, and 3,000,000 of a total of 5,000,000 shares issuable upon
exercise of a warrant granted as part of Mr. Harriton's employment agreement in
May 2004, 2,000,000 of which are not exercisable until after the second
anniversary of his employment agreement.
(4) The above number of shares beneficially owned by Cornell Capital includes
4,666,669 shares issuable upon the conversion of a debenture, and 4,666,669
shares issuable upon the exercise of warrants granted in conjunction with a
convertible debenture. Marc Angelo and Troy Willow, the President and Senior
Vice President, Capital Markets, respectively, of Cornell Capital Partners L.P.
hold voting and investment control over the shares held by Cornell.
(5) Mr. Donaldson, a director, is also a director and the Chief Operating
Officer of Hydrogel Design Systems, Inc., our majority owned subsidiary. The
above number of shares beneficially owned includes 2,924,100 shares issuable
upon the conversion of debt, 438,615 shares issuable upon exercise of a warrant
granted for the extension of debt, and 600,000 shares issuable upon exercise of
a warrant granted as part of Mr. Donaldson's employment agreement with Hydrogel
Design Systems, Inc. in January 2000.
(6) The above number of shares beneficially owned by Mr. Richard Harriton
includes 15,696,000 shares issuable upon the conversion of debentures, and
11,874,007 shares issuable upon the exercise of warrants granted in conjunction
Page 31 of total
with convertible debentures and for the extensions of debenture debt of Hydrogel
Design Systems, Inc. Both the convertible debenture and the related warrants
have been converted to our debt and warrants. Mr. Richard Harriton is a related
party of Mr. Matthew Harriton, a director and officer (See (3) above).
(7) The above number of shares beneficially owned by KSH Strategic Investment
Fund includes 3,900,000 shares issuable upon the conversion of a debenture,
2,417,500 shares issuable upon the exercise of warrants granted in conjunction
with a convertible debenture and for the extensions of such debenture debt of
Hydrogel Design Systems, Inc. Both the convertible debenture and the related
warrants have been converted to our debt and warrants. Cary Sucoff and Harvey
Kohn, each a manager of KSH Strategic Investment Fund, hold voting and
investment control over the shares held by KSH. Strategic Investment Fund.
</FN>
Page 32 of total
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationships and related transactions prior to the HDSI exchange agreement.
In fiscal 2004 and 2003, we paid PEC Realty Corp., a company controlled by
our former Chairman Santo Petrocelli, Sr., rents totaling $2,108 and $79,729,
respectively.
On April 1, 2002,we issued interest-free, unsecured promissory notes in
favor of Mr. Petrocelli, Petrocelli Industries, Inc., a private company
controlled by Mr. Petrocelli and then Chief Financial Officer Lawrence S. Polan
in the aggregate amount of $1,032,501 in exchange for and in full satisfaction
of all outstanding balances due on demand loans, management fees, and consulting
fees. In fiscal 2004, we began to impute interest on the stockholder loans at 6%
per annum with an equivalent offset to additional paid in capital. Repayment on
the stockholder loans was scheduled to commence in February and May 2003,
however, the lenders agreed to defer the commencement dates indefinitely. We
made sporadic payments on stockholder loans totaling $80,000 in the year ended
April 30, 2004. At April 30, 2004, the stockholder loans totaled $952,501. Upon
the completion of the transaction with HDSI on May 25, 2004, the stockholder
loans were exchanged for an equity interest in the Company in the aggregate of
15,000,000 common shares. Accordingly, such liabilities have been classified as
long-term at April 30, 2004.
During the fiscal year ended April 30, 2004, we issued 500,000 warrants to
Jeffrey Powell, former President and CEO, 275,000 warrants to Petrocelli
Industries, Inc., a private company controlled by Mr. Petrocelli, and 285,000
warrants to Richard Cohen, a former officer, all such warrants immediately
exercisable at a price of $.05 per share. During the fiscal year ended April 30,
2003, we issued 500,000 fully vested warrants to then interim President and
Principal Executive Officer Michael Caputo, exercisable at a price of $0.55 per
share. Such issuances were free-standing grants, outside of the 1999 plan. The
fair value per warrant was estimated at approximately $0.35 and $0.07 for the
fiscal years ended April 30, 2004 and 2003, respectively. This transaction
resulted in a charge to operations of $370,295 in the fiscal year ended April
30, 2004.
In December 2003, the exercise price for previously issued warrants to
purchase 3,440,000 shares of common stock, of which 3,400,000 were granted to
officers, employees and consultants, was repriced from $.55 to $.05 per share.
These warrants were issued to the parties as described in Report on Repricing
for an aggregate of 2,500,000 shares and to former Chief Financial Officer
Lawrence S. Polan in the aggregate of 900,000 warrants. The fair value per
warrant was estimated at approximately $0.35 on the date of the repricing. This
transaction resulted in a charge to operations of $1,193,665 in the current
year.
In March 2004, Mr. Ronald Kuzon, an interim officer and consultant ,
exercised 1,000,000 warrants for $.05 in a cashless exercise. An aggregate of
857,142 shares were received as the excess of the fair value $(.35) of the stock
Page 33 of total
purchased over the exercise price was used to pay for the shares in the
aggregate of 142,858 shares. The cashless exercise of these warrants in March,
2004 subsequently resulted in the issuance of 857,412 common shares. Such shares
were issued as free-trading without restrictive legend under Rule 144K of the
Securities Act of 1933 pursuant to an opinion provided by counsel, based in part
on representations made that the purchaser had not been our affiliate for the
preceding three months.
On April 29, 2004, we entered into a share exchange agreement with HDSI,
whereby HDSI would become a majority-owned subsidiary and upon completion of the
share exchange agreement, the holders of HDSI common stock and debt would hold a
majority interest of Nesco. This exchange was completed on May 25, 2004. On
January 12, 2004, we entered into an agreement to make term loans of up to
$125,000 to HDSI, which was subsequently increased prior to the closing. The
term loans were to mature January 1, 2005 and bear interest at 8% per annum if
the closing did not take place. If we did not enter into an agreement with HDSI
stockholders to purchase a minimum of 50.1 % and up to all of the capital stock
of HDSI in exchange for our securities by July 1, 2004, or failed to purchase
such securities by July 1, 2004, at election we could convert the term loans
into HDSI Series B Convertible Preferred Stock or accelerate the maturity of the
term loan to August 1, 2004.We advanced an aggregate of $208,500 to HDSI as of
April 30, 2004. On May 25, 2004, the exchange was completed and the outstanding
amount of the term loan was included as part of the minimum cash requirement as
per the agreement to be provided to HDSI.
As a condition to this transaction, we transferred our wholly-owned
subsidiaries, NAC, IAP and NACE under the terms of a stock purchase and
assumption agreement to a newly-formed corporation, NAC Calabria Acquisition
Corporation, controlled by Ronald Kuzon, who had been an interim officer and
consultant to us. The transferee assumed all liabilities and obligations of
these subsidiaries and agreed to indemnify us against any claims. In
consideration for the indemnity, the transferee received 3,000,000 shares of our
common, certain related registration rights, and our agreement that the
transferee, at its election, may demand that we repurchase from the transferee
2,400,000 of the common shares upon written notice from the transferee if the
transferee cannot in good faith resell the shares of common stock in an
arms-length transaction during the twelve month period immediately following the
closing for a price equal to the lesser of (i) all liabilities resulting from
the agreement between NAC and its labor union plus legal fees or (ii) $330,000.
In connection with the share exchange agreement, we also issued an
aggregate of 6,500,000 common shares to an advisor, a limited liability company
owned by an affiliate of Ronald Kuzon for services rendered in connection with
the exchange agreement. This advisor, under related contractual obligations,
assigned an aggregate of 5,000,000 of these common shares to third parties.
Approximately 2,900,000 of these shares were issued to the parties who agreed to
cancel their special warrants.
On May 25, 2004, we entered into a two year consulting agreement with an
affiliate of Ronald Kuzon which provided for the issuance of 2,000,000 shares of
common stock and a minimum monthly consulting fee of $7,500 to be credited
Page 34 of total
against any other cash fees earned under the terms of the agreement. The
agreement also provides for certain transaction fees to be paid to the
consultant based on sales and contracts with strategic alliances.
Relationships and related transactions related to the operations of HDSI prior
to and as a result of the exchange agreement.
In the prior two fiscal years, HDSI had an aggregate balance due to an
affiliate, Embryo Development Corp., in connection with an $850,000 8% revolving
line of credit, which expired in September 2002. The balance due on this
obligation was approximately $69,000 at April 30, 2003, and $15,000 at April 30,
2004. Subsequent to April 30, 2004, the balance with accrued interest has been
paid in full. Embryo Development Corp. held approximately 11.4% of the common
stock of HDSI prior to the exchange agreement and currently holds approximately
4.44% of the common stock of Nesco as a result of the exchange. HDSI was a
majority subsidiary of Embryo Development Corp. Since the inception of HDSI,
Embryo Development Corp.'s equity interest has decreased as financings have
occurred. Matthew Harriton, our President, Chief Executive Officer and director,
is also CEO and a director and the holder of approximately 32.1% of the
outstanding common and Class B shares of Embryo Development Corp.
Effective May 25, 2004, Nesco, HDSI, certain stockholders of Nesco and
certain stockholders of HDSI completed the transactions contemplated by the
Share Exchange Agreement, whereby HDSI became a majority owned subsidiary of
Nesco and, as a consequence of the exchange of securities for shares of Nesco
common stock, the holders of HDSI common stock and debt hold a majority interest
of Nesco.
On January 25, 2002, the manufacturing facility of HDSI was purchased by an
entity owned by a related party, Mr. Richard Harriton, the father of Mr. Matthew
Harriton, the then CEO and President of HDSI and currently the CEO and President
of HDSI and Nesco (subsequent to the exchange agreement). In addition, Mr. R.
Harriton has a beneficial ownership of approximately 10.04% upon conversion of
all outstanding warrants issued to him in Nesco and holds debt in the amount of
$1,308,000 convertible to 15,696,000 shares of Nesco common stock as a result of
the exchange agreement. On January 25, 2002, HDSI entered into a lease with 2150
Cabot, LLC, an entity owned by Mr. R. Harriton, which provides for minimum
monthly rental payments of $11,687 and expires in 2012. The rent increases by 5%
every two years for the duration of the lease. On September 30, 2002, in
consideration for extension of certain debt due, the rent increase of 5%
effective February 1, 2004 was increased by an additional 10%. The rent
increases subsequent to that date, every two years, remain at 5% of the prior
period amount inclusive of the 10% additional one-time increase. HDSI also
entered into a month to month lease for office space with another entity, Park
Avenue Consulting, owned by Mr. R. Harriton in December 1, 2001 which terminated
in April 2004. Unpaid rents of approximately $229,000 and $69,000 were due to
Mr. R. Harriton on these leases as of April 30, 2004 and April 30, 2003,
respectively.
Page 35 of total
On September 30, 2002, HDSI issued a promissory note in the aggregate
amount of $550,000, which consolidated all balances due under prior notes, to
Mr. Richard Harriton. The note was to bear interest at the same rates as the
original notes and was due on December 31, 2002. In addition, he was granted
warrants to purchase 17,500 shares of the Company's Series B Preferred Stock at
an exercise price of $3.00 per share for a period of ten (10) years. On December
24, 2002, Mr. R. Harriton loaned the Company an additional $160,000. On December
31, 2002 all of the above outstanding debt due to him was consolidated into one
convertible debenture in the amount of $710,000. The 8% debenture was due on
April 30, 2003. The debenture was convertible to Series B Preferred Stock at a
price of $3.00 per share. He was also granted warrants to purchase Series B
Preferred Stock in an amount equal to 50% of the debenture amount ($355,000) at
$3.00 per share or 118,333 shares, which expire on April 30, 2012.
On June 21, 2002, we issued a series of convertible debentures in the
aggregate of $500,000 of which $200,000 were issued to Mr. R. Harriton. The 8 %
debentures were due on April 30, 2003. Each debenture was convertible to Series
B Preferred Stock at a price of $3.00 per share. He was also granted warrants to
purchase Series B Preferred Stock in an amount equal to 50% of the debenture
amount ($100,000) or 33,333 shares at an exercise price of $3.00 per share,
which expire on April 30, 2012.
On May 1, 2003, Mr. R. Harriton agreed to extend the due date for the above
two debentures in the aggregate of $910,000 to October 31, 2003. In
consideration for the extension, the party was granted warrants to purchase
Series B Preferred Stock in an amount equal in shares of 5% of the debenture
amount (45,500 shares) at an exercise price of $3.00 per share, which expire on
April 30, 2012.
On March 7, 2003, Mr. R. Harriton loaned HDSI an additional $200,000 under
the terms of a convertible debenture. The 8% debenture was due on October 31,
2003. The debenture was convertible to Series B Preferred Stock at a price of
$3.00 per share. He was also granted warrants to purchase Series B Preferred
Stock in an amount equal to 50% of the debenture amount ($100,000) at $3.00 per
share or 33,333 shares, which expire on April 30, 2012.
On August 7, 2003, Mr. R. Harriton loaned HDSI an additional $198,000 under
the terms of a convertible debenture. The 8% debenture due on October 31, 2003.
The debenture was convertible to Series B Preferred Stock at a price of $3.00
per share. He was also granted warrants to purchase Series B Preferred Stock in
an amount equal to 50% of the debenture amount ($99,000) at $3.00 per share or
33,000 shares, which expire on April 30, 2012.
On April 19, 2004, Mr. R. Harriton agreed to exchange the debentures and
related warrants for Nesco debentures and warrants and to extend the due dates
of the four outstanding debentures in the aggregate of $1,308,000 and accrued
interest in the amount of $135,000 until December 31, 2005 upon the closing of
the exchange agreement. This transaction was completed on May 25, 2004. Mr. R.
Harriton was also granted approximately 1,308,000 warrants in connection with
Page 36 of total
this conversion. As a result of the exchange agreement, Mr. R. Harriton
currently holds convertible debentures in the aggregate of $1,308,000
convertible into 15,696,000 shares of common stock and an aggregate of
11,874,007 warrants. These conversion amounts were based on the same ratios as
described in the exchange agreement.
At April 30, 2004 and 2003 we had notes payable, including interest, of
approximately $370,000 and $270,000 respectively, due to Mr. Matthew Harriton,
the President and CEO of HDSI. The notes were at an interest rate of 10% per
annum and collateralized by the accounts receivable of HDSI. On May 1, 1999,
200,000 options, which were previously granted to Mr. M. Harriton under the
terms of an employment agreement, were exercised at a price of $.40 and 200,000
shares of common stock were issued. We received a promissory note dated May 1,
1999 from Mr. M. Harriton in the amount of $80,000 for payment of the shares.
The note matured on May 1, 2004, with interest at 8% and was secured by the
related securities. On May 25, 2004, this note and related interest in the
aggregate amount of $112,000 was cancelled and applied as a reduction of the
notes due to the officer. At April 30, 2004, HDSI also owed Mr. M. Harriton
approximately $113,000 in accrued payroll. On May 25, 2004, the remaining
aggregate balance of approximately $365,000 due to Mr. M. Harriton on that date
was exchanged for convertible 8% debentures which mature in December 2005. Mr.
M. Harriton was also granted approximately 365,000 warrants in connection with
this conversion.
At April 30, 2004, HDSI owed Mr. Geoffrey Donaldson, the COO of HDSI
approximately $439,000 in accrued payroll. On May 25, 2004, this obligation due
to Mr. G. Donaldson was exchanged for a convertible 8% debenture which matures
in December 2005. Mr. Donaldson was also granted approximately 439,000 warrants
in connection with this conversion.
Interests of Certain Persons in the Share Exchange
Information as to the participation in the share exchange by the holders of more
than five per cent (5%) of our outstanding voting interests, our officers and
directors and other affiliates is set forth above in this information statement
under the heading "Relationships and related transactions related to the
operations of HDSI prior to and as a result of the exchange agreement".
Material U.S. Federal Income Tax Consequences
Beckman, Lieberman & Barandes, LLP, as counsel to Nesco, has rendered an opinion
to Nesco to the effect that, with respect to Nesco and the Nesco stockholders
who did not participate in the share exchange, the share exchange will be a
nontaxable transaction for U.S. federal income tax purposes. As a consequence,
neither Nesco nor such Nesco stockholders will recognize any gain or loss in the
share exchange.
Page 37 of total
EACH NESCO STOCKHOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE SPECIFIC
TAX CONSEQUENCES OF THE SHARE EXCHANGE TO HIM OR HER, INCLUDING THE APPLICATION
AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS
OF CHANGES IN FEDERAL LAW OR OTHER TAX LAWS.
Regulatory Approvals
Nesco does not believe that the share exchange was subject to any state or
federal regulatory requirements.
Other than the filing of this information statement and a registration statement
with respect to shares of our common stock, including shares issuable upon
conversion of our securities issued in the share exchange, and certain other
filings under applicable securities laws and the filing of the amendment to our
articles of incorporation with the Secretary of State of the State of Nevada, we
do not believe that, in connection with the and the amendment to our articles of
incorporation any consent, approval, authorization or permit of, or filing with
or notification to, any regulatory authority will be required.
AMENDMENT OF THE ARTICLES OF INCORPORATION TO CHANGE THE
NAME OF THE CORPORATION AND
INCREASE SHARES OF AUTHORIZED COMMON STOCK
Our Board of Directors has unanimously adopted resolutions to (i) change the
name of the corporation from "Nesco Industries, Inc." to "Aquamatrix, Inc." and
(ii) increase the authorized number of common shares to 400,000,000. The holders
of shares representing 91.40 of our outstanding voting power have given their
written consent to the resolution. As of the Record Date, of the (i) 20,136,225
shares of common stock outstanding, 15,898,809 shares, or 78.96% of the shares
outstanding have provided written consent; and (ii) of the 116,686.84 shares of
Series B Preferred Stock outstanding, 112,445 shares of Series B Preferred Stock
(which are convertible into 84,333,750 shares of common stock) or 96.36%, have
provided written consent to this action. In aggregate, as converted, 100,232,559
of 109,661,357 total outstanding common shares (91.40%) have consented. Under
the Nevada Revised Statutes, the consent of the holders of a majority of the
voting power is effective as stockholders' approval. We will file the Amendment
with the Secretary of State of Nevada on or after [20 days from date of
mailing], and it will become effective on the date of such filing (the
"Effective Date").
Reasons for Approving the Name Change
The name change has been approved because the new name better represents
the corporation's business. We develop, manufacture and market high water
content, electron beam cross-linked, aqueous polymer hydrogels used for wound
Page 38 of total
care, medical diagnostics, transdermal drug delivery and cosmetics. Our gels are
produced using proprietary manufacturing technologies which enable us to produce
gels that can satisfy rigid tolerance specifications with respect to a wide
range of physical characteristics while maintaining product integrity. Our gels
are also stable in form and composition, adhere painlessly to the human body and
are compatible with active ingredients.
Certificates for the corporation's common stock that recite the name "Nesco
Industries, Inc." will continue to represent shares in the corporation after the
Effective Date. If, however, a stockholder wishes to acquire a certificate
reciting the name "Aquamatrix" after the Effective Date, he may do so by
surrendering his certificate to our transfer agent with a request for a
replacement certificate and the appropriate stock transfer fee. Our transfer
agent is:
Interwest Transfer Co., Inc.
1981 East 4800 South, Suite 100
Salt Lake City, UT 84117
Attn: Stacie Banks
Phone: 801-272-9294
Reasons for Approving the Increase in Authorized Common Stock
The primary purposes of the increase are (i) to enable us to satisfy the
conversion obligations set forth in our outstanding convertible securities,
including preferred stock, convertible debentures, options and warrants, (ii) to
enable us to satisfy provisions of the Share Exchange Agreement by and among
Nesco, HDSI, certain stockholders of Nesco and certain stockholders of HDSI ,
(iii) have authorized common stock available to issue in accordance with an
August 23, 2004 standby equity distribution agreement with Cornell Capital
Partners L.P. , (iv) have authorized common stock available for securities
issuances to fund our business plan and operations and (v) to have authorized
common stock available for such other purposes as may be properly taken by us.
Information as to the number of shares of our common stock issuable upon
conversion, exchange or exercise of the securities issued pursuant to the Share
Exchange Agreement is set forth under the caption "Dilution from Share Exchange"
on page 14 of this Information Statement.
Under the terms of the exchange agreement, we were required to issue
58,884,786 shares of our common stock (the "Nesco Common Stock") to the former
HDSI shareholders. We had 25,000,000 shares authorized. In order to facilitate
the closing of the Agreement in the absence of sufficient shares of our Common
Stock, we issued a newly created Series B Preferred Stock convertible in to
shares of our common stock at a fixed ratio of 750 shares of common stock for
each share of Series B Preferred Stock upon filing of the amendment authorizing
additional common stock described in this Information Statement.
Page 39 of total
If all shares of HDSI common and preferred stock are exchanged for Nesco
voting securities, the equivalent of a total of 58,884,786 shares of Nesco
Common Stock will be issued in the exchange. If all the HDSI common and
preferred stock is exchanged for Nesco Common Stock the holders would own
approximately 55.3 % of Nesco's Common Stock outstanding at the time of the
exchange.
In addition to the Nesco Common Stock exchange shares, Nesco also issued the
following:
-- 6,500,000 shares of common stock to various advisors for services
rendered in connection with the Exchange Agreement.
-- 3,000,000 shares of common stock issued in connection with the sale of
the Nesco subsidiaries; and
-- 20,000 shares of Preferred Stock which will be converted to 15,000,000
shares of common stock for the conversion of Nesco outstanding debt of
$953,000.
The amendment to the articles of incorporation will permit us to issue:
- -- 2,010,000 shares of common stock upon conversion of 67,000 shares of Series A
Preferred Stock (one into 30 conversion ratio).
- -- 87,515,130 shares of common stock upon conversion of 116,686.84 shares of
Series B Preferred Stock (one into 750 conversion ratio).
- -- 56,436,304 shares of common stock upon exercise of outstanding options and
warrants to purchase shares of common stock (exercise prices between $.08 and
$.39 per share and varying exercise periods through April 30, 2012).
- -- 43,850,747 shares of common stock upon conversion of $5,031,212 principal
amount of convertible debentures (conversion price of either $.0833 or $.15 per
share).
The amendment of our Articles of Incorporation to increase the authorized
common stock is not being done for the purpose of impeding any takeover attempt,
and we are is not aware of any person who is acquiring or plans to acquire
control of our company. Nevertheless, the power of the Board of Directors to
provide for the issuance of shares of common stock without stockholder approval
has potential utility as a device to discourage or impede a takeover. In the
event that a non-negotiated takeover were attempted, the private placement of
stock into "friendly" hands, for example, could make us unattractive to the
party seeking control. This would have a detrimental effect on the interests of
any stockholder who wanted to tender his or her shares to the party seeking
control or who would favor a change of control.
Page 40 of total
VOTE OBTAINED NEVADA LAW
Nevada Revised Statutes ("NRS") 78.390 provides that every amendment to our
Articles of Incorporation shall first be adopted by the resolution of the Board
of Directors and then be subject to the approval of stockholders entitled to
vote on any such amendment. Under NRS 78.390 and our bylaws, an affirmative vote
by stockholders holding shares entitling them to exercise at least a majority of
the voting power is sufficient to amend our Articles of Incorporation. NRS
78.320 provides that, unless otherwise provided in our Articles of Incorporation
or the bylaws, any action required or permitted to be taken at a meeting of the
stockholders may be taken without a meeting if, before or after the action, a
written consent thereto is signed by stockholders holding at least a majority of
the voting power. In order to eliminate the costs and management time involved
in holding a special meeting and in order to effect the amendments described
herein as early as possible in order to accomplish the purposes as hereafter
described, our Board of Directors voted to utilize, and did in fact obtain, the
written consent of the holders of a majority in interest of our voting power.
NRS 78.320 provides that in no instance where action is authorized by written
consent need a meeting of stockholders be called or notice given.
No Dissenters Rights
Under Nevada law, stockholders are not entitled to dissenters' rights with
respect to any of the transactions in this Information Statement.
DESCRIPTION OF SECURITIES
Our authorized capital consists of 25,000,000 shares of common stock $0.001
par value, of which 20,136,225 shares were outstanding as of August ___, 2005.
In addition, we are authorized to issue 850,000 shares of our Series A
Convertible Preferred Stock ("Series A Stock") and 150,000 shares of our Series
B Convertible Preferred Stock ("Series B Preferred Stock") respectively. As of
August ___, 2005, there were 67,000 shares of our Series A Stock outstanding and
116,686.84 shares of our Series B Preferred Stock outstanding.
Set forth below is a summary description of certain provisions relating to
our capital stock contained in and qualified in its entirety by our Articles of
Incorporation and by-laws and under the Nevada Revised Statutes.
Common Stock
Holders of common stock are entitled to one vote for each share of common
stock owned of record on all matters to be voted on by stockholders. Our
Articles of Incorporation do not contain any special voting provisions, and no
corporate action requires a greater than majority vote of stockholders.
Cumulative voting is not permitted in the election of directors.
Page 41 of total
The holders of common stock are entitled to receive such dividends, if any,
as may he declared from time to time by the Board of Directors, in its
discretion, from funds legally available therefor.
The common stock has no preemptive or other subscription rights, and there
are no conversion rights or redemption provisions. All outstanding shares of
common stock are validly issued, fully paid, and non-assessable.
Series A Preferred Stock
The board of directors has designated and authorized the issuance of
850,000 shares of Series A Preferred Stock of which 67,000 shares are
outstanding.
Conversion
Each share of Series A Preferred Stock shall be automatically converted
into 30 shares of our common stock upon the filing of an amendment to our
Articles of Incorporation to increase the number of shares of common stock we
are authorized to issue.
Voting Rights
At a meeting of our stockholders, each share of common stock shall have one
vote per share and each share of our Series A Preferred Stock 30 votes per
share. Each share of Series A Preferred Stock when voting as a class shall be
entitled to one vote per share.
Liquidation
Until exchange for common shares as contemplated by the exchange agreement,
upon any liquidation or dissolution, holders of Series A Preferred Stock shall
be entitled to receive $2 per share plus an amount equal to all dividends
accrued but unpaid.
Series B Preferred Stock
The board of directors has designated and authorized the issuance of
150,000 shares of Series B Preferred Stock of which 116,686.84 shares are
outstanding.
Conversion
Each share of Series B Preferred Stock shall be automatically converted
into 750 shares of our common stock upon the filing of an amendment to our
Articles of Incorporation to increase the number of shares of common stock we
are authorized to issue sufficient to convert the then outstanding shares of
Series B Preferred Stock.
Page 42 of total
Voting Rights
At a meeting of our stockholders, each share of common stock shall have one
vote per share and each share of our Series B Preferred Stock 750 votes per
share. Each share of Series B Preferred Stock when voting as a class shall be
entitled to one vote per share.
Rank
Shares of Series B Preferred Stock shall rank junior to shares of Series A
Stock.
Page 43 of total
MANAGEMENT
Directors and Officers
Our directors and executive officers are as follows:
Name Age Position
Matthew L. Harriton 40 Chairman of the Board of Directors,
President and Chief Executive Officer
Karen Nazzareno 47 Chief Financial Officer
Richard Selinfreund 47 Director
Geoffrey Donaldson 62 Director
Gene E. Burelson 64 Director
Wayne M. Celia 50 Director
Joel S. Kanter 48 Director
Arlen Reynolds 63 Director
Matthew L. Harriton became our Chairman of the Board of Directors, Chief
Executive Officer and President in May 2004. He has served as Chief Executive
Officer of HDSI since October 1996, and also serves as Chief Executive Officer,
Chief Financial Officer and Director of Embryo Development Corporation, a
company formerly involved in the medical device development industry, since
January 1996. Prior to joining Embryo Development Corporation, Mr. Harriton's
professional experience included positions at CIBC Wood Gundy Securities
Corporation, Coopers & Lybrand, and The First Boston Corporation. He is a
graduate of Lehigh University and received his M.B.A. from Duke University's
Fuqua School of Business.
Karen Nazzareno became our Chief Financial Officer in May, 2004. She has
served as Chief Financial Officer of HDSI since January 1999 and Controller
since October 1996. Prior to joining HDSI Ms. Nazzareno's professional
experience included positions as Assistant Controller at Fischbach Corporation,
and audit supervisor at Holtz Rubenstein, a public accounting firm. She is a
graduate of Dowling College and a licensed CPA in the State of New York.
Richard Selinfreund became a Director in October 2004. From May 1997 to the
present, he has been president and Chief Technology Officer of Verification
Technology, Inc., a biotech company specializing in developing brand equity
protection technology; specifically, technology to detect
counterfeiting/adulteration of pharmaceuticals, beverages and CDs. From August
1994 to May 1997, he was president of Lion Laboratories Inc., a testing
laboratory for consumer products. From September 1993 to June 1994, he was a
research scientist with the department of pharmacology of Yale University school
of medicine.
Gene E. Burelson became a director in December 2004. From June 2002 to the
Page 44 of total
present he has been a private investor in healthcare companies. From January
2000 to June 2002, he served as Chairman of the Board of Directors of Mariner
Post-Acute Network Inc., an operator of long term health care facilities. From
October 1989 to November 1997 he served as Chairman of the Board of GranCare
Inc., and from December 1990 to February 1997, its President and CEO. Mr.
Burelson is involved with several private health care companies as an investor
and member of the board of directors.
Wayne M. Celia became a director in December 2004. He has been President of
Dicon Technologies, a wholly-owned subsidiary of Berkshire Hathaway, Inc. since
1997. From 1975 until 1997, Mr. Celia founded Dicon Inc., WP Industries, TekPak
Inc. and Dicon Systems Inc., all of which have been acquired by Berkshire
Hathaway.
Joel S. Kanter became a director in December 2004. Since July 1986, he has
served as President of Windy City Inc., a privately held investment firm. Mr.
Kanter has also been President of Chicago Advisory Group Inc., a privately held
equity financing and consulting company. Since its inception in November 1999,
Mr. Kanter serves on the boards of directors of several public companies as well
as a number of private concerns.
Arlen Reynolds became a director in December 2004. He is currently and has
been since 1997, a private investor and strategic advisor to healthcare
companies. From 1995 to 1997, Mr. Reynolds was President of TeamCare, Inc., an
institutional pharmacy company. From 1972 to 1995, he served as CEO of, among
others, Brookwood Medical Center in Birmingham, Alabama and Park Plaza Hospital
in Houston, Texas. Mr. Reynolds serves on the boards of several private
companies and not-for-profit charitable organizations.
Geoffrey Donaldson became a Director in December 2004. He is currently and
has been since January 2000 Chief Operating Officer of HDSI. He is also Chief
Executive Officer of Sea Change Group, LLC, a consulting firm which provides
capitalization and management skills to start-up companies. Prior to that, Mr.
Donaldson was President of the Revlon Department Store Group and Chief Executive
Officer of Asian American Partners. He is a graduate of L.I. University and has
performed graduate work at both Harvard Business School and Wharton School Of
Business, University of Pennsylvania.
Summary Compensation
The following table sets forth, for our last three fiscal years, all
compensation awarded to, earned by or paid to all persons serving as our chief
executive officer ("CEO") or interim CEO in fiscal 2004 and the most highly
compensated executives officer of our other than the CEO or interim CEO whose
salary and bonus payments exceeded $100,000 in fiscal 2004.
Page 45 of total
Summary Compensation Table
- --------------------------
----------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
----------------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
----------------------------------------------------------------------------------------------------------------------------
Other Restricted Securities
Name and Annual Stock Underlying LTIP All Other
Principal Salary Bonus Compen- Award(s) Options/ Payouts Compensation
Position Year ($) ($) sation) ($) SARS(#) ($) ($)
----------------------------------------------------------------------------------------------------------------------------
Santo 2004 12,750 -0- * -0- 1,275,000 -0- -0-
Petrocelli, -------------------------------------------------------------------------------------------------------------
Sr., Chairman 2003 4,500 -0- * -0- -0- -0- -0-
of the Board, ------------------------------------------------------------------------------------------------------------
and former 2002 3,300 -0- * -0- -0- -0- -0-
President and
CEO (1)
----------------------------------------------------------------------------------------------------------------------------
Jeffrey L. 2004 -0- -0- * -0- 500,000 -0- -0-
Powell, former -------------------------------------------------------------------------------------------------------------
President, 2003 57,000 -0- * -0- -0- -0- -0-
CEO and -------------------------------------------------------------------------------------------------------------
Director (2) 2002 -0- -0- 108,500 -0- -0- -0- -0-
----------------------------------------------------------------------------------------------------------------------------
Michael J. 2004 -0- -0- * -0- 500,000 -0- -0-
Caputo, -------------------------------------------------------------------------------------------------------------
President, 2003 135,000 -0- * -0- -0- -0- -0-
Principal -------------------------------------------------------------------------------------------------------------
Executive and 2002 135,000 -0- * -0- -0- -0- -0-
Financial
Officer (3)
----------------------------------------------------------------------------------------------------------------------------
Ronald 2004 -0- -0- 300,000 -0- 1,000,000 -0- -0-
Kuzon --------------------------------------------------------------------------------------------------------------
Treasurer (4) 2003 -0- -0- * -0- -0- -0- -0-
--------------------------------------------------------------------------------------------------------------
2002 -0- -0- * -0- -0- -0- -0-
-------
<FN>
* Less than $50,000
(1) Mr. Petrocelli was succeeded by Jeffrey L. Powell as President and CEO,
effective July 10, 2002. Mr. Petrocelli was compensated through Petrocelli
Industries, Inc. Payments to this company may be referred to as "management
Page 46 of total
fees" and "consulting fees" in the Annual Report on Form 10-KSB for the fiscal
year ended April 30, 2003 and other reports filed by us with the SEC. In March
2002, we issued to Mr. Petrocelli a warrant exercisable for 1,000,000 shares of
common stock at an exercise price of $0.55 per share. On December 11, 2003, this
warrant was repriced at an exercise price of $.05 per share. In addition, on
December 11, 2003, Petrocelli Industries was issued a warrant exercisable for
275,000 shares of common stock at an exercise price of $.05 per share.
(2) Succeeded by Michael J. Caputo as President and Principal Executive Officer
(interim), effective October 25, 2002. Mr. Powell served as our President, CEO
and Director from July 10, 2002 to October 25, 2002. In fiscal 2002 and prior to
his election as President, CEO and Director in fiscal 2003, Mr. Powell served as
our consultant. Mr. Powell received a total of $108,500 in compensation for his
consulting services in fiscal 2002. In addition, on December 11, 2003, we issued
to Mr. Powell a warrant exercisable for 500,000 shares of common stock at an
exercise price of $.05 per share.
(3) In fiscal 2003, Mr. Caputo served as Chief Operating Officer until October
25, 2002, and as interim President, Principal Executive and Financial Officer
from October 25, 2002 to April 29, 2003. On June 25, 2003, we engaged Mr.
Caputo, on a limited basis, to serve as interim President, Principal Executive
and Financial Officer. Mr. Caputo's engagement terminated on May 25, 2004. In
December 2002, Nesco issued to Mr. Caputo a warrant exercisable for 500,000
shares of common stock at an exercise price of $0.55 per share. On December 11,
2003, this warrant was repriced at an exercise price of $.05 per share.
(4) In fiscal 2004, Mr. Kuzon, a former consultant served as interim Treasurer
from February 26th until May 25th, 2004. In March 2002, Nesco issued to Mr.
Kuzon a warrant exercisable for 1,000,000 shares of common stock at an exercise
price of $0.55 per share. On December 11, 2003, this warrant was repriced at an
exercise price of $.05 per share and in March 2004 this warrant was exercised in
a cashless exercise. An aggregate of 857,142 shares were received as the excess
of the fair value $(.35) of the stock purchased over the exercise price ($.05)
was used to pay for the shares in the aggregate of 142,858 shares.
</FN>
Except as set forth above, no other options or warrants have been issued to our
officers and directors named in the above summary compensation table during the
last three fiscal years.
Options/SAR Grants in Last Fiscal Year
Our 1999 Stock Option Plan ("1999 Plan") provides that key employees are
eligible to receive incentive stock options or non-qualified and that directors
and advisors shall be eligible to receive non-qualified options. Under the 1999
Plan, management may grant options to purchase up to a total of 1,000,000 shares
of common stock. As of April 30, 2004 and 2003, there were 850,000 and 780,000
options available for future grants, respectively. For options granted to
greater than 10% stockholders, the exercise price of the options must be fixed
at not less than 110% of the fair market value on the date of grant. The maximum
term of these options may not exceed five years from the date of grant.
Page 47 of total
During fiscal 2004 the following option grants were made to the named executive
officers:
% of Total
Options
Number of Granted Hypothetical
Options Officers/Employees Exercise Expiration Value at
Name Granted in Fiscal Year Price(1) Date Grant Date
- ---- --------- ----------------- -------- ------------ ----------
Santo Petrocelli Sr. 1,000,000 22.2% $.05 3/13/07 $346,995
275,000 6.1% .05 12/11/07 96,067
Jeffrey L. Powell 500,000 11.1% .05 12/11/07 174,667
Michael J. Caputo 500,000 11.1% .05 12/26/07 173,497
Ronald Kuzon 1,000,000 22.2% .05 3/13/07 346,995
<FN>
(1) The market price underlying all of these options at the time of repricing
was $.35. See repricing report.
</FN>
The hypothetical value of the options as of their date of grant has been
calculated using the Black-Scholes option-pricing model, as permitted by SEC
rules, based upon various assumptions, which include: no dividend yield,
expected volatility of 249%, risk free interest rate of .95% and expected lives
of 3 to 5 years. The fair value per warrant was estimated at approximately $0.35
on the date of the issuance of the warrants granted in the fiscal year 2004 and
on the repriced warrants .The approach used in developing the assumptions upon
which the Black-Scholes valuations were calculated is consistent with the
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." It should be noted that this model is only one
method of valuing options, and our company's use of the model should not be
interpreted as an endorsement of its accuracy. The actual value of the options
may be significantly different, and the value actually realized, if any, will
depend upon the excess of the market value of the common stock over the option
exercise price at the time of exercise.
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value
Information relating to the number and value of options exercised during the
year and held at year end by such officers is set forth in the following table:
Number of Securities Value of Unexercised
Underlying Unexercised In-the -Money Options/SAR
Options/SAR at 4/30/04 at
(#)(1) 4/3/04 ($)(2)
Shares Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
______________________________________________________________________________________________________________
Santo Petrocelli, Sr -0- -0- 1,425,000 -0- $ 127,500 -0-
Jeffrey L. Powell -0- -0- 500,000 -0- 50,000 -0-
Michael J. Caputo -0- -0- 500,000 -0- 50,000 -0-
Ronald Kuzon (3) 1,000,000 300,000 -0- -0- -0- -0-
Page 48 of total
<FN>
(1) Shares of common stock.
(2) Based on the high "bid" price of shares quoted on April 30, 2004.
(3) Upon cashless exercise, Mr. Kuzon actually received 857,142 shares.
</FN>
Long-Term Incentive Plans
Not Applicable.
Compensation of Directors
During the fiscal year ended April 30, 2004, no director received any
compensation for services provided in such capacity. Directors are reimbursed
for any expenses incurred by them in connection with their activities on our
behalf.
Employment Contracts and Termination of Employment and Change in Control
Arrangements
At April 30, 2004, we had no employment contracts or compensatory plans or
arrangements. However, in May 2004 in connection with our acquisition of HDSI we
entered into an employment agreement with Mr. Matthew Harriton for a term of
three years with an automatic one year extension. The agreement provides for an
annual base salary of $120,000 with annual increases of 10%. The agreement also
provides for an annual performance bonus based on an annual operating profit in
excess of $500,000. The agreement provides for certain payments in the event of
death, disability or change in control. In addition, the officer was granted
nonqualified options, effective the date of the closing of the share exchange
agreement, to purchase 5,000,000 shares of common stock for a period of 5 years.
The option is immediately exercisable for the purchase of 2,000,000 shares and
exercisable as to an additional 1,000,000 shares commencing on each of the
first, second, and third anniversaries of the closing date, respectively,
provided that optionee remains an employee. The options are exercisable at the
"Applicable Trading Price" in the Share Exchange Agreement which is the lesser
of (i) the average closing bid price per share of our common stock for 30
consecutive trading days prior to the closing date and (ii) the average closing
bid price per share of our common stock for 30 consecutive trading days
commencing on the 31st day following the effective date of the Reverse Split as
defined in the share exchange agreement; provided however, the exercise price
shall be the price determined under (i) at any time prior to the Reverse Split.
The average bid closing price for 30 consecutive trading days prior to the
closing was $.15.
On December 3, 2004, this employment agreement was amended and restated.
The amended and restated agreement provides for annual compensation of $200,000
effective January 1, 2005, with a 10% increase each year on December 31 during
the term of the agreement. The annual performance bonus was eliminated and
bonuses now are to be paid at the discretion of the Board of Directors. The
Page 49 of total
agreement was also extended to December 31, 2009. All other terms remained the
same as in the original agreement.
Report on Repricing of Options/SARS
In December 2003, we repriced 3,440,000 outstanding warrants, of which
3,400,000 were granted to officers, employees and consultants, with exercise
prices lower than the terms of the original grants. These actions were taken in
order to provide an incentive to these individuals to engage in transactions on
our behalf. The following table sets forth certain information concerning the
repricing of options to the named executive officers within the previous ten
years.
Ten-Year Options Repricings
Length of Original
Market Price of Exercise Price Option Term
Number of Securities Stock at Time at Time of New Remaining at Date
Underlying of Repricing Repricing or Exercise of Repricing or
Name Date Repriced or Awarded or Amendment Amendment Price Amendment (Yrs.)
- ---- ---- -------------------- --------------- ------------- ------------------------
Ronald Kuzon (1) 12/11/03 1,000,000 $.35 $.55 $.05 3.25
Santo Petrocelli, Sr. 12/11/03 1,000,000 $.35 $.55 $.05 3.25
Michael Caputo 12/11/03 500,000 $.35 $.55 $.05 4.00
<FN>
(1) These options were exercised by Mr. Kuzon in March 2004.
</FN>
By Order of the Board of Directors, at
New York, New York on _____________, 2005
By: /s/ Matthew Harriton
Matthew Harriton, President
Page 50 of total
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements of Hydrogel Design Systems, Inc.
Report of Independent Public Registered Accounting Firm 52
Consolidated Balance Sheets 53
Consolidated Statements of Operations 55
Consolidated Statements of Stockholders' Deficit 56
Consolidated Statements of Cash Flows 57
Notes to Consolidated Financial Statements 59-73
Unaudited Interim Financial Statements of Nesco Industries, Inc.
Consolidated Balance Sheet 74
Consolidated Statement of Operations 77
Consolidated Statement of Cash Flows 79
Notes to Consolidated Financial Statements 82-91
Unaudited proforma condensed financial information
Unaudited proforma combined condensed statement of operations 92
Unaudied proforma combined condensed balance sheet 93
Notes to unaudited proforma combined condensed financial information 94-97
Index Page 1 of 1
Page 51 of total
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Hydrogel Design Systems, Inc.
We have audited the accompanying consolidated balance sheets of Hydrogel Design
Systems, Inc. and Subsidiary as of April 30, 2004 and 2003, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hydrogel Design
Systems, Inc. and Subsidiary, as of April 30, 2004 and 2003, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2, the
Company's ability to continue in the normal course of business is dependent upon
the success of future operations. The Company has incurred cumulative losses of
approximately $10,685,000 since inception and utilized cash of approximately
$569,000 for operating activities during the two years ended April 30, 2004. The
Company has a working capital deficit of approximately $1,369,000 and a
stockholders' deficit of approximately $4,558,000 as of April 30, 2004. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans regarding these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Roseland, New Jersey
July 2, 2004
Auditor's Statement 1 of 1
Page 52 of total
HYDROGEL DESIGN SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
April 30, 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 828 $ 44,854
Accounts receivable 73,692 59,872
Inventories 88,338 85,660
Prepaid expenses and other current assets 58,019 12,060
-------------------------------------------
Total current assets 220,877 202,446
-------------------------------------------
Property and equipment, net 570,101 789,380
-------------------------------------------
Other assets
Purchased technology, net of accumulated amortization
of $711,757 in 2004 and $597,876 in 2003
85,411 199,292
Investments 6,000 6,000
Other 41,906 37,556
-------------------------------------------
Total other assets 133,317 242,848
-------------------------------------------
$ 924,295 $ 1,234,674
===========================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Notes and interest payable
$ 104,500 $ 1,006,028
Convertible debentures and interest payable, related party
net of debt discount of $27,646 in 2003 1,117,119
Convertible debentures and interest payable, other 681,220
Bridge loan, merger candidate 208,500
Customer deposits 847,653 531,948
Accounts payable and accrued expenses 185,214 200,530
Accrued payroll 479,907
Due to affiliates 243,554 137,575
Due to officer 270,356
-------------------------------------------
Total current liabilities 1,589,421 4,424,683
-------------------------------------------
Long-term liabilities
Note and interest payable
804,868
Convertible debentures and interest payable, related party 1,443,108
Convertible debentures and interest payable, other 731,220
Accrued payroll 544,002
Due to officer 369,846
-------------------------------------------
Total long-term liabilities 3,893,044
-------------------------------------------
Hydrogel Report Page F-1 of 6
Page 53 of total
HYDROGEL DESIGN SYSTEMS, INC. AND SUBSIDIARY (CONTINUED)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
April 30, 2004 April 30, 2003
Commitments and contingencies
Stockholders' deficit
Series A preferred stock, $.0001 par value, authorized 13,000,000 shares,
none issued or outstanding
Series B convertible preferred stock, $.0001 par value, authorized
2,000,000 shares, 522,487 issued and outstanding (aggregate
liquidation preference: $1,567,461) 52 52
Preferred stock, $.0001 par value, authorized 5,000,000 shares,
none issued or outstanding
Common stock, $.0001 par value, authorized 20,000,000 shares,
4,702,806 issued and outstanding
470 470
Additional paid-in-capital 6,317,678 6,186,798
Accumulated other comprehensive loss (69,000) (69, 000)
Accumulated deficit (10,684,870) (9,185,829)
Note receivable, officer (80,000) (80, 000)
-------------------------------------------
(4,515,670) (3,147,509)
Less treasury stock, 250,000 common shares, at cost (42,500) (42,500)
-------------------------------------------
Total stockholders' deficit (4,558,170) (3,190,009)
-------------------------------------------
$ 924,295 $ 1,234,674
===========================================
Hydrogel Report Page F-2 of 6
Page 54 total
HYDROGEL DESIGN SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
OPERATIONS
Years Ended April 30, 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $ 623,349 $ 1,130,995
Cost of revenues 912,082 1,029,044
--------------------------------------------
Gross margin (288,733) 101,951
--------------------------------------------
Operating expenses
General and administrative
661,737 1,056,648
Amortization and other expense 116,213 118,863
--------------------------------------------
777,950 1,175,511
--------------------------------------------
Loss from operations (1,066,683) (1,073,560)
--------------------------------------------
Other expenses
Amortization of debt discount
(158,526) (320,445)
Interest expense (152,398) (195,476)
Interest expense, related parties (121,434) (67,189)
Financing costs (6,250)
--------------------------------------------
(432,358) (589,360)
--------------------------------------------
Net loss $ (1,499,041) $ (1,662,920)
--------------------------------------------
Weighted average common shares outstanding
Basic
4,452,806 4,452,806
Diluted 4,452,806 4,452,806
--------------------------------------------
Loss per common share
Basic
$ (0.34) $ (0.37)
Diluted $ (0.34) $ (0.37)
--------------------------------------------
Hydrogel Report Page F-3 of 6
Page 55 of Total
HYDROGEL DESIGN SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended April 30, 2004 and 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Series B Convertible Additional Other Note
Preferred Stock Common Stock Paid-in Comprehensive Accumulated Receivable, Treasury Stock
Capital Loss Deficit Officer Total
Shares Amount Shares Amount Shares Amount
Balances,April 30, 2002 522,487 $ 52 4,702,806 $470 $5,856,064 $(69,000) $(7,522,909) $(80,000) 250,000 $(42,500) $(1,857,823)
Issuance of warrants in
connection with
convertible debentures 330,734 330,734
Net loss / comprehensive (1,662,920) (1,662,920)
loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balances,April 30, 2003 522,487 52 4,702,806 470 6,186,798 (69,000) (9,185,829) (80,000) 250,000 (42,500) (3,190,009)
Issuance of warrants in
connection with
convertible debentures 130,880 130,880
Net loss / comprehensive (1,499,041) (1,499,041)
loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balances,April 30, 2004 522,487 $52 4,702,806 $470 $6,317,678 $(69,000) $(10,684,870) $(80,000) 250,000 $(42,500) $(4,558,170)
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements
</FN>
Hydrogel Report Page F-4 of 6
Page 56 of Total
HYDROGEL DESIGN SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Years Ended April 30, 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (1,499,041) $ (1,662,920)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization
334,160 345,744
Amortization of debt discount 158,526 320,445
Gain on sale of equipment (950)
Changes in operating assets and liabilities:
Accounts receivable (13,820) 11,032
Inventories (2,678) (29,296)
Prepaid expenses and other current assets (45,959) (1,459)
Other assets (6,400) (6,400)
Customer deposits 315,705 531,948
Accounts payable and accrued expenses 48,779 (11,463)
Due to affiliates 195,329 112,302
Interest payable 273,000 64,617
-------------------------------------------
Net cash used in operating activities (243,349) (325,450)
-------------------------------------------
Cash flows from investing activities,
proceeds from sale of equipment 2,000
-------------------------------------------
Cash flows from financing activities
Proceeds from bridge loan, merger candidate
208,500
Proceeds from issuance of convertible debentures, related party 198,000 560,002
Payment on note payable, related party (30, 000)
Proceeds from issuance of convertible debentures, other 299,998
Payments on notes payable (191,827) (317,641)
Proceeds from loan from officer 72,000 80,000
Payments to affiliate (89,350) (231,150)
-------------------------------------------
Net cash provided by financing activities 197,323 361,209
-------------------------------------------
Net decrease in cash (44,026) (235,512)
Cash
Beginning of year 44,854 9,095
-------------------------------------------
End of year $ 828 $ 44,854
===========================================
Supplemental disclosure of cash flow information,
cash paid during the year for interest $ 24,827 $ 180,847
-------------------------------------------
Hydrogel Report Page F-5 of 6
Page 57 of total
<FN>
6
See accompanying notes to consolidated financial statements.
</FN>
Hydrogel Report Page F-6 of 6
Page 58 of total
Notes to Consolidated Statements (Hydrogel)
1. Organization and nature of operations
Hydrogel Design Systems, Inc. (the "Company") is a Delaware Corporation which
was formed on October 3, 1996. Subsequent to formation, the Company entered into
an asset acquisition agreement for the purchase of certain assets and the
ongoing business of a group of medical products companies. These companies were
engaged in the manufacture, marketing, selling and distribution of hydrogel, an
aqueous polymer-based radiation ionized medical/consumer product. Substantially
all of the Company's revenues come from wholesale sales and its customers are
located in the continental United States.
The Company's affiliate, Embryo Development Corporation ("Embryo"), a
publicly-traded entity, which previously owned 33.3% of the Company's
outstanding common stock reduced its ownership to 13.1% as a result of the sale
of a portion of its shares held in the Company to third parties in January 1999
and the additional issuance of stock by the Company. At April 30, 2004, Embryo
owned approximately 11.4% of the Company's common stock.
In August 1999, the Company acquired a majority interest in Converting Sciences,
Inc. ("CSI"). CSI is engaged in the converting of hydrogels into finished
products which are primarily manufactured for use in the cosmetic and medical
sectors. At April 30, 2004, the Company held a 60% majority interest in CSI.
On April 29, 2004, the Company entered into a Share Exchange Agreement with
Nesco Industries, Inc. ("Nesco"), a Nevada publicly held corporation, whereby
the Company would become a majority-owned subsidiary of Nesco and upon
completion of the Share Exchange Agreement, the holders of the Company's common
stock and debt would hold a majority interest of Nesco. This exchange was
completed on May 25, 2004 as more fully described in Note 19.
2. Going concern and liquidity
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. The Company has
incurred cumulative losses of approximately $10,685,000 since inception and
utilized cash of approximately $569,000 for operating activities during the two
years ended April 30, 2004. The Company has a working capital deficit of
approximately $1,369,000 and a stockholders' deficit of approximately $4,558,000
as of April 30, 2004.
Management recognizes that the Company must generate additional revenue to
achieve profitable operations. Management's plans to increase revenues include
the continued building of its customer base, especially in the medical and
cosmetic industries, through its ability to manufacture goods on a custom basis
or to the exacting standards required by medical customers. Management also will
seek to increase revenues through the development of alternative uses of its
equipment, such as irradiation and sterilization services.
As a result of the completion of the Share Exchange Agreement with Nesco on May
25, 2004, the Company was effectively able to obtain debt extensions on a
significant portion of its current debt obligations to December 31, 2005 (see
Note 7 and Note 19). In addition, the Company received net cash of approximately
$328,000 as part of the terms of the agreement, of which approximately $208,000
was received as a bridge loan prior to April 30, 2004 and is included in current
liabilities at April 30, 2004 (see Note 8). Management believes that this
transaction will enable the Company to seek additional debt or equity financing.
In June 2004, Nesco entered into an Investment Banking Agreement with a third
party whereby Nesco would issue 8% Senior Convertible Notes to private investors
for an aggregate of a minimum of $250,000 and a maximum of $1,700,000. In June
and July 2004, the Company received approximately $705,000 in connection with
this transaction.
Notes to Hydrogel Page 1 of 15
Page 59 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Going concern and liquidity (continued)
There can be no assurance that the Company will be able to obtain sufficient
debt or equity financing on favorable terms if at all, or that it will be
successful in building its customer base or developing alternative uses for its
equipment. If the Company is unsuccessful in building its customer base and
developing alternative uses for its equipment or is unable to obtain additional
financing on terms favorable to the Company there could be a material adverse
effect on the financial position, results of operations and cash flows of the
Company. The accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
3. Summary of significant accounting policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its majority-owned subsidiary, CSI. Upon consolidation, all
significant intercompany accounts and transactions are eliminated.
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on a
history of past write-offs and collections and current credit conditions.
Inventories
Inventories, consisting principally of raw materials, are stated at cost on the
first-in, first-out basis, which does not exceed market value.
Depreciation and Amortization
Property and equipment is recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the related assets. Amortization of
leasehold improvements is computed using the straight-line method over the
estimated lives of the related assets or the remaining term of the lease, which
ever is shorter.
The Company provides for depreciation and amortization over the following
estimated useful lives:
Machinery and equipment 10 Years
Office equipment and fixtures 3-7 Years
Leasehold improvements 5-7 Years
Purchased technology 7 Years
Loss Per Share
Basic loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted loss per
common share incorporates the dilutive effect of common stock equivalents on an
average basis during the period. The calculation of diluted net loss per share
excludes potential common shares if the effect is anti- dilutive. Therefore,
basic and diluted loss per share were the same for the years ended April 30,
2004 and 2003.
Notes to Hydrogel Page 2 of 15
Page 60 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies (continued)
Income Taxes
The Company complies with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires an asset and liability
approach to financial accounting and reporting for income taxes. Deferred income
tax assets and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future, based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce the deferred
income tax assets to the amount expected to be realized.
Investments
Available-for-sale securities are recorded at fair value, with the change in
fair value during the year excluded from earnings and recorded net of tax as a
component of other comprehensive income.
Fair Value of Financial Instruments
The fair value of the Company's assets and liabilities, which qualify as
financial instruments under SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," approximate the carrying amounts presented in the
balance sheets.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk are cash and accounts receivable arising from its normal business
activities. The Company routinely assesses the financial strength of its
customers and third party payors and, believes that its accounts receivable
credit risk exposure is limited. The Company places its cash with high credit
quality financial institutions. The amount on deposit in any one institution
that exceeds federally insured limits is subject to credit risk. As of April 30,
2004 and 2003, the Company was not subject to credit risk with any financial
institution beyond the insured amount. The Company does not require collateral
or other security to support financial instruments subject to credit risk.
Notes to Hydrogel Page 3 of 15
Page 61 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies (continued)
Impairment of Long-Lived Assets
Certain long-lived assets (including purchased technology) of the Company are
reviewed at least annually to determine whether there are indications that their
carrying value has become impaired, pursuant to guidance established in SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
Management considers assets to be impaired if the carrying value exceeds the
future projected cash flows from related operations (undiscounted and without
interest charges). If impairment is deemed to exist, the assets will be written
down to fair value. Management also reevaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of April 30, 2004 and 2003, management expects these assets
to be fully recoverable.
Stock-Based Compensation
The Company complies with the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation", as amended by SFAS No. 148.
The Company applies APB No. 25 and related interpretations in accounting for its
stock option plans and, accordingly, no compensation cost has been recognized
because stock options granted under the plans were at exercise prices which were
equal to or above the market value of the underlying stock at date of grant. Had
compensation for the Company's stock options been determined as provided by SFAS
No. 123 using the Black-Scholes option pricing model, the Company's consolidated
net loss would have been adjusted to the pro forma amounts indicated below:
2004 2003
Net loss, as reported $(1,499,041) $(1,662,920)
Stock-based compensation determined under the
fair value-based method, net of related tax effects (25,625)
---------------------------
Net loss, pro forma $(1,499,041) ($1,688,545)
==========================
Loss per common share, basic and diluted
As reported $ (0.34) (0.37)
Pro forma $ (0.34) (0.38)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal years ended April 30, 2004 and 2003: risk
free interest rate 6%; no dividend yield; expected lives of 3-10 years; and zero
volatility.
Comprehensive Income
The Company complies with the provisions of SFAS No. 130, "Reporting
Comprehensive Income". SFAS 130 governs the financial statement presentation of
changes in shareholder's equity resulting from non-owner sources. Accumulated
other comprehensive income as reported in the accompanying balance sheets
represents unrealized losses on available-for-sale securities.
Notes to Hydrogel Page 4 of 15
Page 62 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Property and equipment
Property and equipment, at cost, consist of the following at April 30, 2004 and
2003:
2004 2003
Marchinery and equipment $1,614,114 $1,615,614
Office equipment and fixtures 82,957 82,957
Leasehold improvements 373,856 373,856
----------------------------
2,070,927 2,072,427
Less accumulated depreciation
and amortization 1,500,826 1,283,047
----------------------------
$ 570,101 $ 789,380
============================
Depreciation expense for the years ended April 30, 2004 and 2003 amounted to
approximately $218,000 and $230,000, respectively.
5. Purchased technology
On February 6, 1997, the Company acquired certain assets from a group of
entities for an aggregate purchase price of $150,000 in cash and 150,000 shares
of Embryo Common Stock (valued at $75,000), which would vest in two years if the
Company met certain revenue levels. At that time, if the shares had a fair value
of less than $900,000, the parties could demand that the Company purchase the
shares at an aggregate price of $900,000 in cash and/or marketable securities.
Assets acquired included property rights and technology, machinery and
equipment, and inventory. This agreement was modified and incorporated into the
Settlement Agreement as discussed below.
On November 6, 1997, the Company brought action in New York State Court against
the former owners of the entities alleging breach of contract, negligence and
other charges. On November 24, 1997, the former owners filed their answer and
counterclaim against the Company. On January 21, 1998, the Company entered into
a Settlement Agreement (the "Agreement") with the former owners settling in all
regards its outstanding litigation. In connection with the Agreement, the former
owners received a cash payment of $450,000 and a promissory note from the
Company in the amount of $950,000 which was due and payable upon the earlier of
the (a) initial public offering of securities of the Company, (b) completion of
a private financing by the Company in the aggregate amount of at least
$4,000,000, (c) the sale or transfer of all, or substantially all of the assets
of the Company, or (d) January 10, 2002. In addition, they surrendered their
rights to the 150,000 shares of Embryo Common Stock formerly granted to them and
one of the former owners surrendered the 250,000 shares of the Company's Common
Stock formerly issued to him under the terms of an employment agreement. The
note was extended numerous times until it was paid in full on August 8, 2003
(see Note 6).
For the years ended April 30, 2004 and 2003, amortization expense related to the
purchased technology, amounted to approximately $114,000. The amortization
expense will approximately be $85,000 for the year ending April 30, 2005.
Notes to Hydrogel Page 5 of 15
Page 63 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Notes and interest payable
Note Payable, Purchased Technology
At April 30, 2003, notes and interest payable includes $191,827 due to the
parties within the Agreement (see Note 5). The obligation was paid in full in
August 2003.
Note Payable, Manufacturing Equipment
On January 24, 1997, the Company entered into a financing agreement with a
customer for the purchase of $600,000 of manufacturing equipment from a third
party. The agreement consisted of a promissory note in the amount of $600,000
bearing interest at 8% per annum and principal and interest due between three
(3) and six (6) years from the anniversary date, depending upon the amount of
product the customer ordered from the Company. The funds were transferred
directly from the lender to the seller of the equipment. The note is
collateralized by the related equipment.
On January 23, 2001, the note was amended and restated in the amount of $793,053
which was the aggregate amount of the original note plus interest through the
date of the restated note. The amended note bears interest at 8%, payable
quarterly, and was due on January 23, 2002. On December 9, 2001, the note was
again amended and restated in the amount of $793,053 which was originally due on
January 23, 2002. The amended note bears interest at 8%, payable quarterly, and
called for a principal payment of $250,000 on January 23, 2002, and the balance
on January 23, 2003. At April 30, 2003, the Company was in default for the
non-payment of the $250,000 payment due on January 23, 2002 and for the $543,053
payment due on January 23, 2003.
On April 21, 2004, the lender agreed to amend and restate the note in the amount
of $793,053 upon the Company's entering into a Share Exchange Agreement with
Nesco (see Note 19) which occurred on April 29, 2004. The amended note bears
interest at 11% (the default rate) until such time that an aggregate interest
payment of $84,000 is made, which was due July 3, 2004 but which was extended to
August 16, 2004, interest from such date forward until the maturity date shall
be at the interest rate of 8% payable at maturity. The Company has paid interest
through December 31, 2002 and has accrued interest at 11% through April 30,
2004. The Company is required to repay the principal in the amount of ten (10)
percent of any equity funding in excess of $500,000. Accordingly, after the
Company collected $705,000 from the issuance of Senior Convertible Notes in July
2004 (see Note 2), the Company repaid $20,500 in principal. The Company also
made an interest payment of $84,000. The balance of the note and additional
accrued interest at April 30, 2004 and 2003 is $909,368 and $814,201 and is due
on December 31, 2005. Accrued interest was $116,315 and $21,148 as of April 30,
2004 and 2003, respectively.
7. Convertible debentures
Convertible Debentures - Related Party
On October 12, 1999, a related party loaned CSI $200,000 under the terms of a
promissory note. The note bears interest at 8%, is collateralized by the assets
of CSI, and was due with interest on October 12, 2002.
On November 3, 2000, this related party loaned the Company an additional
$200,000 under the terms of a promissory note. The note bears interest at 10%
and was due on September 30, 2002. In addition, the related party was granted
options to purchase 50,000 shares of the Company's common stock at an exercise
price of $3.50 per share for a period of ten (10) years. The fair value of the
options ($78,958) was amortized over the life of the loan.
Notes to Hydrogel Page 6 of 15
Page 64 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Convertible debentures (continued)
On August 31, 2001, this related party loaned the Company an additional $180,000
under the terms of a promissory note. The note bears interest at 10% and was due
on September 30, 2002. On June 19, 2002, the Company repaid $30,000 to this
related party.
On September 30, 2002, the above notes in the aggregate of $550,000 were
consolidated into one promissory note. The note bears interest at the same rates
as the original notes and was due on December 31, 2002. In addition, the related
party was granted warrants to purchase 17,500 shares of the Company's Series B
Preferred stock at an exercise price of $3.00 per share for a period of ten (10)
years. The fair value of the warrants ($22,033) was amortized over the life of
the loan.
On December 24, 2002, this related party loaned the Company an additional
$160,000. On December 31, 2002 all of the above outstanding debt due to the
related party was consolidated into one convertible debenture in the amount of
$710,000. The debenture bears interest at 8% and was due on April 30, 2003. The
debenture is convertible to Series B Preferred stock at a price of $3.00 per
share. The related party was also granted warrants to purchase Series B
Preferred Stock in an amount equal to 50% of the debenture amount ($355,000) at
$3.00 per share or 118,333 shares, which expire on April 30, 2012. The fair
value of the warrants ($125,344) was amortized over the life of the loan.
On June 21, 2002, the Company issued a series of convertible debentures in the
aggregate of $500,000 of which $200,002 were issued to this related party. The
debentures bear interest at 8% and were due on April 30, 2003. Each debenture is
convertible to Series B Preferred Stock at a price of $3.00 per share. The
related party was also granted warrants to purchase Series B Preferred Stock in
an amount equal to 50% of the debenture amount ($100,000) or 33,333 shares at an
exercise price of $3.00 per share, which expire on April 30, 2012. The fair
value of the warrants ($36,814) was amortized over the life of the debentures.
On May 1, 2003, the related party agreed to extend the due date for the above
two debentures in the aggregate of $910,002 to October 31, 2003. In
consideration for the extension, the party was granted warrants to purchase
Series B Preferred Stock in an amount equal in shares of 5% of the debenture
amount (45,500 shares) at an exercise price of $3.00 per share, which expire on
April 30, 2012. The fair value of the warrants ($57,684) was amortized over the
life of the loan extension.
On March 7, 2003, this related party loaned the Company an additional $200,000
under the terms of a convertible debenture. The debenture bears interest at 8%
and was due on October 31, 2003. The debenture is convertible to Series B
Preferred stock at a price of $3.00 per share. The related party was also
granted warrants to purchase Series B Preferred Stock in an amount equal to 50%
of the debenture amount ($100,000) at $3.00 per share or 33,333 shares, which
expire on April 30, 2012. The fair value of the warrants ($35,308) was amortized
over the life of the loan. As of April 30, 2003, the unamortized portion of the
fair value of the warrants was $27,646.
On August 7, 2003, this related party loaned the Company an additional $198,000
under the terms of a convertible debenture. The debenture bears interest at 8%
and was due on October 31, 2003. The debenture is convertible to Series B
Preferred stock at a price of $3.00 per share. The related party was also
granted warrants to purchase Series B Preferred Stock in an amount equal to 50%
of the debenture amount ($99,000) at $3.00 per share or 33,000 shares, which
expire on April 30, 2012. The fair value of the warrants ($33,579) was amortized
over the life of the loan.
On April 19, 2004, the related party agreed to extend the due dates of the four
outstanding debentures in the aggregate of $1,308,002 and accrued interest in
the amount of $135,106 until December 31, 2005 upon the closing of the Share
Exchange Agreement with Nesco. This transaction was completed on May 25, 2004
(see Note 19).
Notes to Hydrogel Page 7 of 15
Page 65 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Convertible debentures (continued)
Convertible Debentures - Other
On January 10, 2002, the Company received a bridge loan in connection with a
private placement. The aggregate loan in the amount of $475,000, which bears
interest at 8%, was due upon the earlier of April 15, 2002, or immediately upon
the closing of any additional private placement subsequent to the date of the
note of a minimum of $650,000. The lender, as consideration for the loan, was
also paid a 5% fee of $23,750, granted 40,000 shares of common stock which were
valued at $3 per share, and issued warrants to purchase 50,000 shares of the
Company's common stock at an exercise price of $3 per share for a period of ten
(10) years. The pro rata fair value of the stock issued ($86,015), the warrants
granted ($48,511) and the lenders fee ($23,750) were amortized over the loan
term which expired on April 15, 2002. The Company repaid $150,000 of the
principal balance on February 28, 2002. On May 1, 2002, a restated promissory
note was issued for the $325,000 outstanding balance. The restated loan, which
bears interest at 8%, was due on April 30, 2003. The lender was also granted
warrants to purchase 50,000 shares of the Company's common stock at an exercise
price of $3 per share which expire on April 1, 2012. The fair value of the
warrants ($56,014) was amortized over the life of the loan. The loan is
collateralized, under the terms of a security agreement, by the assets of the
Company. On May 1, 2003, the lender agreed to exchange the restated promissory
note for a convertible debenture of the same amount ($325,000) and to extend the
due date to October 31, 2003. The debenture is convertible to Series B Preferred
stock at a price of $3.00 per share and bears interest at 8%. In consideration
for the exchange and extension, the lender was granted warrants to purchase
Series B Preferred Stock in an amount equal in shares of 5% of the debenture
amount (16,250 shares) at an exercise price of $3.00 per share, which expire on
April 30, 2012. The fair value of the warrants ($20,601) was amortized over the
life of the loan extension.
On June 21, 2002, the Company issued a series of convertible debentures in the
aggregate of $500,000, of which $200,002 were issued to a related party. The
debentures bear interest at 8% and were due on April 30, 2003. Each debenture is
convertible to Series B Preferred Stock at a price of $3.00 per share. Each
purchaser was also granted warrants to purchase Series B Preferred Stock in an
amount equal to 50% of the debenture amount ($150,000) or 50,000 shares at an
exercise price of $3.00 per share, which expire on April 30, 2012. The fair
value of the warrants ($55,221) was amortized over the life of the debentures.
On May 1, 2003, the parties agreed to extend the due date for the series of
debentures in the aggregate of $300,000 to October 31, 2003. In consideration
for the extension, each party was granted warrants to purchase Series B
Preferred Stock in an amount equal in shares of 5% of the debenture amount
(15,000 shares) at an exercise price of $3.00 per share, which expire on April
30, 2012. The fair value of the warrants ($19,016) was amortized over the life
of the loan extension.
On April 19, 2004, the lenders agreed to extend the due dates of all debentures
in the aggregate amount of $624,998 and accrued interest in the amount of
$106,222 until December 31, 2005 upon the closing of the Share Exchange
Agreement with Nesco. This transaction was completed on May 25, 2004 (see Note
19).
8. Bridge loan, merger candidate
On April 29, 2004, the Company entered into a Share Exchange Agreement with
Nesco Industries, Inc. ("Nesco"), a Nevada publicly held Corporation, whereby
the Company would become a majority owned subsidiary of Nesco and upon
completion of the Share Exchange Agreement, the holders of the Company's common
stock and debt would hold a majority interest of Nesco. This exchange was
completed on May 25, 2004 as more fully described in Note 19. The Company
received net cash of approximately $328,000 as part of the terms of the
agreement, of which approximately $208,000 was received as a bridge loan prior
to April 30, 2004 and is included in current liabilities at April 30, 2004.
Notes to Hydrogel Page 8 of 15
Page 66 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Customer deposits
At April 30, 2004 and 2003, approximately $831,000 and $508,000, respectively,
of customer deposits represents deposits from a customer to be applied against
future purchase orders. The deposits are non-refundable but applicable to future
purchases from the Company until December 31, 2008. To the extent that any
portion of the deposits is not used for purchases by the end of calendar year
2008, the deposits will be forfeited.
10. Due to affiliates
Due to affiliates at April 30, 2004 and 2003 of approximately $244,000 and
$138,000, respectively, consists of unpaid rents of approximately $229,000 and
$69,000 at April 30, 2004 and 2003, respectively and the aggregate due under a
revolving line of credit. The line, which bears interest at 8% per annum,
provided for maximum borrowing of $850,000. The original line of credit, which
expired on January 31, 1999, was extended to January 31, 2001. On February 1,
2001, the affiliate agreed to extend the maturity date by an additional twenty
(20) months to September 30, 2002. The terms of the extension prohibited any
future cash advances on the credit line and provided for repayment of an amount
equal to 50% of any cash flow from operations in excess of $500,000 annually to
be paid within 45 days of the fiscal year end of the Company, with any remaining
outstanding balance due on September 30, 2002. On September 30, 2002 the Company
was unable to repay the outstanding balance in full but has continued to make
monthly payments. The outstanding balance at April 30, 2004 was $15,000.
11. Due to officer
At April 30, 2004 and 2003 the Company has notes payable, including interest, of
approximately $370,000 and $270,000 respectively, to an officer of the Company.
The notes bear interest at 10% per annum and are collateralized by the accounts
receivable of the Company. Interest expense pertaining to these notes was
approximately $27,500 and $16,800 for the years ended April 30, 2004 and 2003,
respectively.
On May 1, 1999, 200,000 options, which were previously granted to this officer
under the terms of an employment agreement, were exercised at a price of $.40
and 200,000 shares of common stock were issued. The Company received a
promissory note dated May 1, 1999 from the officer in the amount of $80,000 for
payment of the shares. The note matures on May 1, 2004, bears interest at 8% and
is secured by the related securities. On May 25, 2004, this note and related
interest in the aggregate amount of $112,000 was cancelled and applied as a
reduction of the notes due to the officer.
On May 25, 2004, the net amount of these notes was exchanged for Nesco
convertible 8% debentures which mature in December 2005 (see Note 19).
12. Stockholders' deficit
Capitalization
The Company's initial authorized capitalization consists of 20,000,000 shares of
common stock, 15,000,000 shares of Series A preferred stock and 5,000,000 shares
of preferred stock. In October 2001, the Company designated 2,000,000 of the
20,000,000 shares of preferred stock to be issued as Series B Convertible
Preferred Stock. All stock has a $.0001 par value. Each share of common, Series
A preferred, Series B preferred convertible, and preferred has one vote in all
matters.
Notes to Hydrogel Page 9 of 15
Page 67 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Stockholders' deficit (continued)
The Series B preferred shares rank senior to all common and preferred stock. The
Series A preferred stock has been retired and will not be reissued. The Series B
convertible preferred stockholders are entitled to a cumulative dividend,
payable in shares of common stock calculated at a rate of 7% of the purchase
price, issuable only upon conversion to common shares. Each share of Series B
convertible preferred stock is convertible to one share of common stock, subject
to certain anti-dilution provision adjustments. The Series B convertible
preferred shares have liquidation preference over all other shares of the
capital stock of the Company. The liquidation preference is $3.00 per share
before any distributions of assets or surplus funds to common stockholders.
Private Placement
During the year ended April 30, 2000, the Company issued 155,019 shares of
common stock at $3.50 per share for an aggregate of $542,566 in conjunction with
a private placement. During the year ended April 30, 2001, the Company issued an
additional 64,287 shares of common stock at $3.50 per share for an aggregate of
$225,005 in conjunction with this same offering.
During the year ended April 30, 2002, the Company issued 522,487 shares of
Series B convertible preferred stock at $3.00 per share in conjunction with a
private placement. The Company received net proceeds of $1,303,226 after private
placement fees and related costs. As an additional placement fee, the agent was
granted warrants to purchase 182,870 shares of the Company's common stock at an
exercise price of $3.00 per share for a period of ten years.
13. Income taxes
Income taxes have been recorded under SFAS No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss carryforwards.
The tax effects of significant items comprising the Company's net deferred tax
asset as of April 30, 2004 and 2003 are as follows:
2004 2003
Deferred tax asset
Net operating loss carryforward $3,435,000 $2,984,000
Tax basis of intangible assets in
excess of book basis 150,000 126,000
---------- ----------
Deferred tax asset 3,585,000 3,110,000
Valuation allowance (3,585,000 (3,110,000)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
The increase in valuation allowance of $475,000 and $523,000 for the years ended
April 30, 2004 and 2003 respectively is primarily attributable to the Company's
additional net operating losses. At April 30, 2004, the Company has federal and
state net operating loss carryforwards of approximately $8,590,000, which expire
beginning in 2012.
Notes to Hydrogel Page 10 of 15
Page 68 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Income taxes (continued)
Ownership changes resulting from the Company's issuance of capital stock (see
Note 19) may limit the amount of net operating loss carryforwards that can be
utilized annually to offset future taxable income. The amount of the annual
limitation is determined based upon the Company's value immediately prior to the
ownership change. Subsequent significant changes in ownership could further
affect the limitation in future years.
The following table presents the principal reasons for the differences between
the effective tax rate and the U.S. Federal statutory income tax rate
attributable to continuing operations for the years ended April 30, 2004 and
2003:
2004 2003
U.S. federal statutory income tax rate -34.0% -34.0%
State and local statutory income tax rate
(net of Federal benefit) -7.3% -7.3%
Change in the valuation allowance 31.7% 31.5%
Other 9.6% 9.8%
------------------
0.0% 0.0%
==================
14. Commitments and contingencies
Employment Agreements
In September 1997, the Company entered into five-year employment agreement with
an executive. The agreement, which took effect January 1, 1998, provides for
minimum annual compensation of $30,000, which may increase to $150,000 based
upon earnings and other contingencies, and minimum bonuses. Further, the
executive was granted options to purchase 200,000 shares of the Company's common
stock at an exercise price of $.40 per share, which were exercised in May 1999
(see Note 11). No compensation expense was recorded in the granting of options
as the exercise price approximates the fair value of the stock at the date of
grant. At April 30, 2004 and 2003, this executive is owed approximately $105,000
and $30,000, respectively under the terms of this agreement which expired on
December 31, 2002.
On January 1, 2000, the Company entered into a three-year employment agreement
with an executive, which provides for an aggregate minimum annual salary of
$200,000 in the first year with annual increases thereafter. In addition, the
executive will receive a semi-annual bonus of 3% of sales on certain products.
Further, the executive was granted options to purchase 200,000 shares of the
Company's common stock at a price equal to the offering price of the next
private placement ($3.50) (see Note 17). The options vest over a three-year
period and expire three years from the vesting dates. No compensation expense
was recorded in the granting of options as the exercise price approximates the
fair value of the stock at the date of grant. At April 30, 2004 and 2003, this
executive is owed approximately $439,000 under the terms of this agreement which
expired on December 31, 2002.
On May 25, 2004, approximately $544,000 of accrued payroll relating to the above
agreements was exchanged for Nesco convertible 8% debentures which mature in
December 2005 (see Note 19).
Notes to Hydroges Page 11 of 15
page 69 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Commitments and contingencies (continued)
Consulting Agreements
On February 1, 2001, the Company entered into a one-year consulting agreement
which provided for an aggregate annual fee of $200,000 to be payable monthly
commencing with two monthly installments payable on May 31, June 30, and July
31, and the last day of the month thereafter. The agreement also provides for a
sales incentive bonus, a budget incentive bonus and a profit incentive bonus
based on sales and performance. In addition, the consultant was granted options
to purchase 50,000 shares of common stock exercisable for a period of five (5)
years at $3.50 per share (see Note 17). The fair value of the options ($45,357)
was charged to operations over the term of the agreement. At April 30, 2003, the
Company has paid the consultant an aggregate of $157,000. The remaining balance
of $43,000, which is included in current liabilities at April 30, 2003, was paid
during the fiscal year ended April 30, 2004.
15. Related party transactions
The Company entered into a seven-year sub-lease agreement for a manufacturing
facility with Embryo, effective February 14, 1997, which provided for minimum
monthly rental payments of $9,625 and expires in 2004. In February 2000, the
monthly rent was increased to $10,214 per the escalation provision in the
sublease.
On January 25, 2002, this manufacturing facility was purchased by an entity
owned by a related party of the Company and the Company entered into a lease
with the related party, which provides for minimum monthly rental payments of
$11,687 and expires in 2012. The rent increases by 5% every two years for the
duration of the lease. On September 30, 2002, in consideration for extension of
certain debt (see Note 7) due to the related party, the rent increase of 5%
effective February 1, 2004 was increased by an additional 10%. The rent
increases subsequent to that date, every two years, remain at 5% of the prior
period amount inclusive of the 10% additional one-time increase.
On December 1, 2001, the Company, along with other co-tenants, entered into a
month-to-month lease for office space with an entity owned by a related party of
the Company, which provided for a monthly lease payment of $3,735. This lease
payment was reduced to $2,500 per month effective November 1, 2003 due to
reallocation of the space with other tenants.
Minimum annual rentals under the manufacturing facility lease are approximately
as follows:
Year ending April 30,
2005 $ 162,000
2006 164,000
2007 170,000
2008 172,000
2009 179,000
Thereafter 509,000
----------
$1,356,000
==========
Rent expense for the years ended April 30, 2004 and 2003 was approximately
$186,000 and $185,000, respectively.
Notes to Hydrogel Page 12 of 15
Page 70 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Major customers
The Company generated revenues from four major customers during fiscal 2004 and
two major customers in 2003 aggregating approximately $420,000 and $674,000,
respectively. Accounts receivable from these customers aggregated approximately
$46,000 and $8,000 at April 30, 2004 and April 30, 2003, respectively.
17. Stock options and warrants
Stock Options
A summary of common stock options are as follows:
Number of Exercise Weighted Average
Options Price Exercise Price
-------------------------------------------------
Balance outstanding 425,000 $1.00-3.50 $2.76
May 1, 2003
Expired (66,666) 3.50 3.50
----------------------------------------------
Balance outstanding
April 30, 2003 and 2004 358,334 $1.00-3.50 $2.63
==============================================
Exercisable
April 30, 2004 358,334 $1.00-3.50 $2.63
==============================================
Further information about the Company's outstanding stock options at April 30,
2004 is as follows:
Weighted
Average Weighted
Number Remaining Average
Range of of Contractual Exercise
Exercise Prices Shares Life (in Years) Price
- --------------------------------------------------------------
$1.00 125,000 N/A $1.00
$3.50 233,334 2.53 $3.50
--------------------------------------
358,334 N/A $2.76
======================================
Notes to Hydrogel Page 13 of 15
Page 71 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Stock options and warrants (continued)
Warrants for the years ended April 30, 2004 and 2003, warrant activity is as
follows:
Exercise Price Type of Warrants Balance Warrants Balance Warrants Balance
per Share Stock Expiring May 1, 2002 Granted April 30, 2003 Granted April 30, 2004
3.00 Common 01/17/2011 50.000 50,000 50,000
3.00 Common 06/04/2011 17,500 17,500 17,500
3.00 Common 01/10/2012 50,000 50,000 50,000
3.00 Common 04/01/2012 182,870 182,870 182,870
3.00 Common 04/30/2012 50,000 50,000 50,000
3.00 Preferred 04/30/2012 252,500 252,500 109,750 362,250
-------------------------------------------------------------------------
300,370 302,500 602,870 109,750 712,620
=========================================================================
All warrants outstanding at April 30, 2004 are exercisable.
18. Employee benefit plan
The Company maintains a 401(k) plan that allows all full-time employees to
participate immediately in the plan. The plan is funded 100% by employee
contributions as the Company does not make any matching contributions.
19. Subsequent events
Share Exchange Agreement
On April 29, 2004, the Company entered into a Share Exchange Agreement with
Nesco, a Nevada publicly held corporation, whereby the Company would become a
majority owned subsidiary of Nesco and upon completion of the Share Exchange
Agreement, the holders of the Company's common stock and debt would hold a
majority interest of Nesco. This exchange was completed on May 25, 2004. Nesco
was previously engaged in asbestos abatement contracting but had ceased
operations in May 2003.
Nesco had intended to issue shares of its common stock in exchange for the
equity securities of the Company in certain ratios as provided for in the
Exchange Agreement. However, because Nesco did not have the required number of
authorized shares of common stock to complete the exchange on this basis, it
agreed to issue shares of its newly designated Series B Preferred Stock
("Preferred Stock") for, among others, equity and debt of the Company. Upon
filing of the Certificate of Amendment to the Certificate of Incorporation to
increase the number of shares of common stock which Nesco is authorized to
issue, each share of the Preferred Stock will be automatically converted into
shares of Nesco Common Stock.
Notes to Hydrogel Page 14 of 15
Page 72 of total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Subsequent events (continued)
On May 25, 2004, the Company's common shareholders exchanged 3,240,593 shares of
stock for 38,887 shares of Nesco Preferred B Stock which will be converted into
29,165,250 shares of Nesco common stock (a ratio of approximately 9 Nesco common
shares for every 1 share of the Company's common stock). The Company's preferred
shareholders exchanged 295,853 shares of stock for 14,201 shares of Nesco
Preferred B Stock which will be converted into 10,650,750 shares of common stock
(a ratio of approximately 36 Nesco common shares for 1 share of the Company's
preferred stock). Approximately 72% of the common and 57% of the preferred
shareholders exchanged their shares at this time. This resulted in approximately
44.6% of Nesco's voting securities exchanged and owned by the Company's
stockholders. The Company anticipates that the majority of the remaining
shareholders will exchange their shares in the near future, which will result in
54.3% of Nesco's voting securities owned by the Company's stockholders upon
exchange of all outstanding the Company's securities. In addition, all
outstanding warrants and options of the Company were exchanged for Nesco
warrants based on the same ratios as the common and preferred share exchange.
In addition, Nesco was required to retain net cash of approximately $350,000 and
to dispose of all of its subsidiaries as part of the terms of the agreement, of
which approximately $208,000 was received as a bridge loan prior to April 30,
2004 and is included in current liabilities at April 30, 2004. This bridge loan
became part of the closing requirements in May 2004.
The accounting of the transaction will differ from its legal form, as the
Company will be considered the accounting acquirer and Nesco the acquired
entity. The transaction will be accounted for as a reverse acquisition under the
purchase method of accounting, whereby the assets of Nesco will be revalued and
the purchase price allocated to those assets acquired and liabilities assumed.
The Company's historical financial statements will be carried forward as those
of the combined entity. The results of operations for Nesco are not reflected in
the accompanying consolidated statements of operations.
Current Debt Exchanges and Extensions
As a result of the Share Exchange Agreement which was completed on May 25, 2004,
the convertible debentures due to related party in the aggregate principal
amount of $1,308,000, the convertible debentures in the aggregate principal
amount of $625,000, the amount due to officer in the aggregate amount of
approximately $258,000 and accrued payroll of approximately $544,000
representing primarily payroll due to current and former officers were all
exchanged for Nesco convertible 8% debentures which mature on December 31, 2005.
Investment Banking Agreement
In June 2004, Nesco entered into an Investment Banking Agreement with a third
party whereby Nesco would issue 8% Senior Convertible Notes to investors for an
aggregate of a minimum of $250,000 and a maximum of $1,700,000. In June and July
2004, the Company received approximately $634,500 in connection with this
transaction, net of expenses of $70,500.
Notes to Hydrogel Page 15 of 15
Page 73 of total
NESCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------
January 31,
2005
(unaudited)
- ------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 124,457
Accounts receivable 91,659
Inventories 98,415
Prepaid expenses and other current assets 84,593
-------------------
Total current assets 399,124
-------------------
Property and equipment, net of accumulated depreciation of $1,626,115 459,067
-------------------
Other assets
Deferred financing costs 416,072
Stock issuance costs 712,500
Investments 6,000
Other 16,455
-------------------
Total other assets 1,151,027
-------------------
$ 2,009,218
-------------------
Consolidated Unaudited 1 of 8
Page 74 of total
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Note and interest payable $ 632,687
Convertible debentures and interest payable, related party, net
of debt discount of $682,754 839,479
Convertible debentures and interest payable, other, net of debt
discount of $1,674,026 1,421,623
Convertible debentures and interest payable, officers, net of
debt discount of $52,390 795,009
Customer deposits 839,653
Accounts payable and accrued expenses 159,383
Stock to be issued 163,320
Common stock subjuect to redemption 330,000
Due to affiliate 31,097
----------------
Total current liabilities 5,212,251
----------------
Long-term liabilities
Deferred sublease income 128,700
----------------
Total long-term liabilities 128,700
----------------
Consolidated Unaudited 2 of 8
Page 75 of total
NESCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET (CONTINUED)
- ------------------------------------------------------------------------------------------
January 31,
2005
(unaudited)
- ------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' deficit
Series A convertible preferred stock, $.001 par value, authorized
850,000 shares, 67,000 issued and outstanding 67
Series B convertible preferred stock, $.001 par value, authorized
150,000 shares, 116,687 issued and outstanding 117
Common stock, $.001 par value, authorized 25,000,000 shares,
17,117,410 issued and outstanding 17,117
Additional paid-in-capital 13,895,865
Accumulated other comprehensive loss (69,000)
Accumulated deficit (17,175,899)
----------------
Total stockholders' deficit (3,331,733)
----------------
$ 2,009,218
================
Consolidated Unaudited 3 of 8
Page 76 of total
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------
Nine Months Ended January 31, Three Months Ended January 31,
2005 2004 2005 2004
(unaudited) (unaudited) (unaudited) (unaudited)
- ------------------------------------------------------------------------------------------------------------------------
Revenues $ 516,318 $ 511,990 $ 184,232 $ 115,277
Cost of revenues 652,587 693,408 231,174 246,080
------------------------------------------------------------------------------------
Gross margin (136,269) (181,418) (46,942) (130,803)
------------------------------------------------------------------------------------
Operating expenses
General and administrative 3,985,770 526,177 436,653 182,579
Amortization and other expenses 136,120 86,759 28,685 28,470
------------------------------------------------------------------------------------
4,121,890 612,936 465,338 211,049
------------------------------------------------------------------------------------
Loss from operations (4,258,159) (794,354) (512,280) (341,852)
------------------------------------------------------------------------------------
Other income (expenses)
Sublease income 35,100 - 11,700 -
Amortization of debt discount (1,602,329) (158,526) (701,586) -
Interest expense (175,076) (130,046) (71,309) (57,808)
Interest expense, related parties (123,314) (78,224) (42,571) (28,084)
Amortization of financing costs (275,451) (126,330)
Liquidated damages - stock (91,800) - (91,800) -
------------------------------------------------------------------------------------
(2,232,870) (366,796) (1,021,896) (85,892)
------------------------------------------------------------------------------------
Net loss $ (6,491,029) $ (1,161,150) $ (1,534,176) $ (427,744)
====================================================================================
Weighted average common shares
outstanding
Basic and diluted 15,299,647 - 16,990,138 -
------------------------------------------------------------------------------------
Consolidated Unaudited 4 of 8
Page 77 of total
Loss per common share
Basic and diluted $ (0.42) $ N/A $ (0.09) $ N/A
====================================================================================
Consolidated Unaudited 5 of 8
Page 78 of total
NESCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------
Nine Months Ended January 31,
2005 2004
(unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (6,491,029) $ (1,161,150)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock issued for services 1,186,773 -
Reveluation of warrants and options 1,793,555 -
Depreciation and amortization 209,839 257,201
Amortization of debt discount 1,602,329 158,526
Amortization of financing costs 275,451 -
Liquidating damages - stock 91,800 -
Gain on sale of equipment - (950)
Changes in operating assets and liabilities:
Accounts receivable (17,967) 40,591
Inventories (10,077) (29,192)
Prepaid expenses and other assets (26,574) 3,346
Other assets (6,549) (1,528)
Customer deposits (8,000) 322,500
Accounts payable and accrued expenses (194,849) (7,447)
Deferred sublease income (35,100) -
Due to affiliates (197,581) 86,550
Interest payable 212,636 193,270
----------------------------------------
Net cash used in operating activities (1,615,343) (138,283)
----------------------------------------
Cash flows from investing activities
Net cash acquired from merger 86,183 -
Purchase of equipment (8,455) -
Proceeds from sale of equipment - 2,000
----------------------------------------
Net cash provided by investing activities 77,728 2,000
----------------------------------------
Consolidated Unaudited 6 of 8
Page 79 of total
Cash flows from financing activities
Proceeds from issuance of convertible
debentures, other 2,008,620 -
Proceeds from issuance of convertible
debentures, related party - 198,000
Proceeds from bridge loan, merger candidate - 75,000
Payments on notes payable (238,000) (180,140)
Payments of stock issuance costs (87,500) -
Proceeds from loan from officer - 65,000
Payments on loan from officer (7,000) -
Payments to affiliate (14,876) (49,524)
----------------------------------------
Net cash provided by financing activities 1,661,244 108,336
----------------------------------------
Net increase (decrease) in cash 123,629 (27,947)
Cash
Beginning of period 828 44,854
----------------------------------------
End of period $ 124,457 $ 16,907
========================================
Supplemental disclosure of cash flow information,
cash paid during the period for interest $ 88,436 $ 18,227
Consolidated Unaudited 7 of 8
Page 80 of total
NESCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------
2005 2004
(unaudited) (unaudited)
- -----------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash investing and financing,
activities:
Stock issued in connection with Equity Distribution Agreement $ 625,000 $ -
========================================
Fair value of warrants issued to brokers $ 405,143 $ -
========================================
Debt discount related to convertible debentures $ 3,971,073 $ -
========================================
Stock issued for interest payment on convertible debentures $ 58,543 $ -
========================================
Consolidated Unauditied 8 of 8
Page 81 of total
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
Organization
NESCO Industries, Inc. (hereinafter referred to as "OLDCO"), a Nevada publicly
traded corporation, 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, OLDCO 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, OLDCO operated through its wholly-owned
subsidiaries, National Abatement Corporation ("NAC"), NAC/Indoor Air
Professionals, Inc. ("IAP") and NAC Environmental Services, Inc. ("NACE").
On April 29, 2004, OLDCO entered into a share exchange agreement with Hydrogel
Design Systems, Inc. ("HDS"), a Delaware privately held corporation, whereby HDS
became a majority- owned subsidiary of OLDCO and the holders of HDS common stock
and debt acquired a majority interest of OLDCO. This exchange (the "Share
Exchange") was completed on May 25, 2004. The accounting for the transaction,
commonly called a reverse acquisition, resulted in a recapitalization of HDS,
which was treated as the accounting acquirer. The acquired assets and assumed
liabilities of OLDCO were carried forward at their historical values which
approximates fair value (with the exception of deferred liabilities for which
there was no legal continuing obligation, which were not recorded). HDS's
historical financial statements were carried forward as those of the combined
entity (hereinafter referred to as "NEWCO" or the "Company"). HDS is engaged in
the manufacture, marketing, selling and distribution of aqueous polymer-based
radiation ionized gels ("gels" or "hydrogels") used in various medical and
cosmetic consumer products.
NEWCO's fiscal year ends on April 30 and, therefore, references to fiscal 2005
and fiscal 2004 refer to the fiscal years ending April 30, 2005 and April 30,
2004, respectively.
The accompanying condensed consolidated financial statements of the Company
reflect the historical results of the predecessor entity, HDS, prior to May 25,
2004 and the consolidated results of operations of NEWCO subsequent to the
acquisition date of May 25, 2004.
The common stock and per share information in the consolidated financial
information and related notes have been retroactively adjusted to give effect to
the reverse acquisition on May 25, 2004.
The accompanying interim consolidated financial statements and the accompanying
notes included herein have been prepared by the Company without audit, in
accordance with the instructions for Form 10-QSB pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and therefore do
not include all information and notes normally provided in the annual financial
statements and should be read in conjunction with the audited financial
statements and the notes thereto of HDS and Nesco Industries, Inc. for the year
ended April 30, 2004. Included in the Form 8-K/A of Nesco Industries, Inc., as
filed on August 9, 2004 with the SEC, is HDS's audited financial statements for
the year ended April 30, 2004. The Form 10-KSB of Nesco Industries, Inc., as
filed on September 16, 2004 with the SEC, sets forth Nesco Industries, Inc.'s
audited financial statements for the year ended April 30, 2004. These statements
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
nine and three month periods ended January 31, 2005 and 2004. The results of of
operations for the nine month periods ended January 31, 2005 and 2004 are not
necessarily indicative of the results for the full year.
Notes Page 1 of 10
Page 82 of total
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.
Revenue Recognition
Revenues are generally recognized as product is shipped to a customer. In cases
where a customer requests a development project for a gel or a gel to be used as
a component of a new product, the Company will recognize revenue at the time the
project is completed.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2. Acquisition
On May 25, 2004, HDS consummated the Share Exchange with OLDCO whereby HDS
became a majority-owned subsidiary of OLDCO, and the holders of HDS common stock
and debt acquired a majority interest of NEWCO. Because the former HDS
stockholders own a majority of the voting stock of NEWCO (common stock and
Series B preferred stock convertible into common stock), HDS is considered for
accounting purposes to be the acquirer in the transaction. The accounting for
the transaction, commonly called a reverse acquisition, resulted in a
recapitalization of HDS.
NEWCO had intended to issue shares of its common stock in exchange for the
equity securities of HDS in certain ratios as provided for in the exchange
agreement. However, because NEWCO did not have the required number of authorized
shares of common stock to complete the exchange on this basis, it agreed to
issue shares of its newly designated Series B Preferred Stock instead of common
stock. Upon filing of a Certificate of Amendment to the Certificate of
Incorporation to increase the number of shares of common stock which NEWCO is
authorized to issue, each share of the Series B Preferred Stock will be
automatically converted into shares of NEWCO common stock. On November 16, 2004
NEWCO filed a preliminary information statement with the Securities and Exchange
Commission ("SEC"). On December 16, 2004, the SEC responded with comments
pertaining to the preliminary information statement. On February 25, 2005, the
Company responded to these comments and is currently in the process of
responding to further comments subsequently received from the SEC so that the
information statement can be completed. Upon completion of this process, the
Company will file the Certificate of Amendment and issue the common stock.
At the time of the transaction, HDS common shareholders exchanged 3,240,593
shares of stock for 38,887 shares of NEWCO Preferred B Stock, which will be
converted into 29,165,250 shares of NEWCO common stock (a ratio of approximately
9 NEWCO shares for 1 share of HDS stock). The HDS preferred shareholders
exchanged 295,853 shares of stock for 14,201 shares of NEWCO Preferred B Stock,
which will be converted into 10,650,750 shares of NEWCO common stock (a ratio of
approximately 36 NEWCO shares for 1 share of HDS stock). Approximately 97% of
the common and 90% of the preferred shareholders have exchanged their shares as
of January 31, 2005 which has resulted in approximately 54.1% of NEWCO's voting
securities outstanding at the time of the exchange owned by HDS stockholders.
The Company anticipates that the remaining shareholders will exchange their
shares in the near future, which will result in 55.3% of NEWCO's voting
securities outstanding at the time of the exchange being owned by HDS
Notes Page 2 of 10
Page 83 of total
stockholders. Upon completion of this exchange, HDS common shareholders will
exchange a total of 4,452,806 shares of stock for 53,434 shares of NEWCO
Preferred B Stock, which will be converted into 40,075,167 shares of NEWCO
common stock (a ratio of approximately 9 NEWCO shares for 1 share of HDS stock).
The HDS preferred shareholders will exchange a total of 522,487 shares of stock
for 25,079 shares of NEWCO Preferred B Stock which will be converted into
18,809,574 shares of NEWCO common stock (a ratio of approximately 36 NEWCO
shares for 1 share of HDS stock). The HDS stockholders, upon completion of the
exchange of shares, will receive an aggregate of 58,884,741 common shares or
55.3% of the total shares outstanding at the time of the exchange which
aggregated 106,386,847 equivalent common shares on May 25, 2004.
In addition, OLDCO was required to convert its outstanding shareholder debt to
equity. On May 11, 2004, prior to the date of the closing, the holders of this
debt in the aggregate principal amount of $952,501 agreed to exchange the debt
for an aggregate of 20,000 shares of OLDCO's Series B Preferred Stock, which is
convertible into 15,000,000 shares of NEWCO's common stock. OLDCO was also
required to obtain the consent to cancel an aggregate of 602,500 special
warrants prior to the closing. Certain holders of these special warrants were
granted shares of NEWCO common stock in the exchange as part of the common
advisor shares issued. OLDCO's Series A Preferred shareholders also agreed, that
upon completion of the exchange agreement, they would convert their shares to
NEWCO's common stock and that NEWCO would have no further obligations with
respect to these preferred shares including payment of any prior preferred share
dividends. In addition, OLDCO was required to have net cash of approximately
$350,000 at the closing of the transaction as part of the terms of the
agreement. OLDCO provided approximately $208,500 as a bridge loan to HDS prior
to April 30, 2004. This bridge loan was applied to the net cash obligation of
OLDCO, which was satisfied at the closing.
Concurrent with the exchange, OLDCO Series A Preferred shareholders agreed to
exchange 512,500 shares of stock for an aggregate of 20,500 shares of NEWCO
Preferred B Stock, which will be converted into 15,375,000 shares of NEWCO
common stock (a ratio of approximately 30 NEWCO common shares for 1 share of
Series A preferred stock). As of January 31, 2005, 445,500 shares of Series A
Preferred shares have been exchanged for 17,820 shares of Series B Preferred
shares. The Company anticipates that the majority of the remaining Series A
shareholders will exchange their shares in the near future.
As part of this transaction, OLDCO conditionally transferred its three wholly
owned subsidiaries, NAC, IAP and NACE, to a consultant and interim officer of
OLDCO who resigned his position as officer at the time of the transfer. The
transferee assumed all liabilities and obligations with respect to these
subsidiaries and agreed to indemnify NEWCO against any claims and, in exchange
therefore, received 3,000,000 shares of common stock of OLDCO and certain
related registration rights. As additional consideration for the indemnification
by the transferee, NEWCO agreed that if the transferee cannot in good faith
resell the shares of common stock in an arm's length transaction during the
twelve month period immediately following the closing for a price equal to the
lesser of (i) all liabilities resulting from the agreement between NAC and its
labor union plus legal fees or (ii) $330,000, then the Company will repurchase
from the transferee 2,400,000 of the common shares at that amount upon written
notice from the transferee requesting such. The repurchase of the 2,400,000
common shares, which are subject to redemption by the transferee, are included
in current liabilities at an aggregate of $330,000, the maximum amount the
Company would be required to pay in the event of a redemption.
In connection with the share exchange agreement, NEWCO also issued an aggregate
of 6,500,000 common shares (with a fair value of $975,000 based on the market
price of $.15 on the date of the exchange) to an advisor, a limited liability
corporation owned by an affiliate of an interim officer and consultant, for
services rendered in connection with the exchange agreement. This advisor, under
Notes Page 3 of 10
Page 84 of total
related contractual obligations, assigned an aggregate of 5,000,000 of these
common shares to third parties. Approximately 2,900,000 of these shares were
issued to the parties who agreed to cancel their special warrants of OLDCO.
NEWCO also incurred additional costs related to the exchange approximating
$48,000. Approximately $328,000 of these costs, the net amount of cash received
from the OLDCO acquisition, were charged to equity, and the balance of $695,000
was recorded as a charge to operations in the quarter ended July 31, 2004.
Prior to the transaction, OLDCO had 7,627,105 common shares outstanding. After
giving effect to the transactions above and after such time that NEWCO increases
the number of common shares it is authorized to issue, NEWCO will have
approximately 106,387,000 shares outstanding as of the exchange date.
In addition to the exchange of shares, all outstanding options/warrants of HDS
were exchanged for NEWCO options/warrants based on the same ratios as the stock
exchange. An aggregate of 612,500 options and warrants for the purchase of HDS
common stock were exchanged for an aggregate of 5,512,500 options and warrants
for the purchase of common stock of NEWCO (a ratio of 9 NEWCO common shares for
1 share of HDS common stock). An aggregate of 545,120 options and warrants for
the purchase of HDS preferred stock were exchanged for an aggregate of
19,624,320 options and warrants for the purchase of common stock of NEWCO (a
ratio of 36 NEWCO common shares for 1 share of HDS preferred stock). This
resulted in the issuance of approximately 25,137,000 options/warrants. These
options/warrants are currently exercisable at prices that range between $.08
- -$.39 and expire between one and eight years. Compensation expense approximating
$1,794,000 was recorded on May 25, 2004 for the increase in the fair value of
the vested HDS options/warrants as a result of the exchange. The increase in the
fair value was estimated on the date of the share exchange using the
Black-Scholes option pricing model with the following assumptions: no dividend
yield, expected volatility of 59%, risk-free interest rate of 1.38% and two to
three-year expected lives.
The HDS debt holders were also granted, in consideration of an extension of term
debt, a warrant to acquire one share of NEWCO Common Stock at an exercise price
of $.15 for a term of five years for each dollar of HDS debt, for an aggregate
of the issuance of 2,736,212 warrants. The total HDS term debt of $2,736,212 was
also exchanged for NEWCO convertible debt and the holders may convert this debt
to approximately 28,551,000 shares of NEWCO common stock. Approximately $156,000
of the total debt exchanged was attributed to the fair value of the warrants and
$1,703,000 was attributed to the intrinsic value of the beneficial conversion
feature. These amounts were recorded as equity components. The remaining balance
of $877,000 was recorded as long-term debt. For the nine months ended January
31, 2005 the amortization of debt discount approximated $798,000.
Prior to the transaction, OLDCO had approximately 4,212,500 options and warrants
outstanding. After giving effect to the transactions above, NEWCO had
approximately 31,483,000 options and warrants outstanding and debt convertible
into approximately 28,551,000 common shares as a result of the exchange
agreement.
The following supplemental pro forma information is presented to illustrate the
effects of the acquisition of HDS on the historical operating results for the
nine and three months ended January 31, 2005 and 2004 as if the acquisition had
occurred at the beginning of the respective period:
Notes Page 4 of 10
Page 85 of total
Nine Months Ended Three Months Ended
----------------- ------------------
January, 31 January, 31
----------- -----------
2005 2004 2005 2004
---- ---- ---- ----
Revenues $ 516,318 $ 511,990 $ 184,232 $ 115,277
Net loss $ (6,585,487) $ (6,599,984) $ (1,534,176) $ (2,161,814)
Net loss $ (0.43) $ (0.00) $ (0.09) $ (0.00)
per share
The above unaudited pro forma condensed financial information is presented for
illustrative purposes only and is not necessarily indicative of the condensed
consolidated results of operations that actually would have been realized had
HDS and OLDCO been a combined company during the specified periods.
Included in the proforma information for the nine months ended January 31, 2005
and 2004 net loss is a one-time charge for warrant revaluation of approximately
$1,794,000.
Note 3. 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.
At January 31, 2005, the Company had an accumulated deficit of approximately
$17,176,000, a working capital deficit of approximately $4,813,000 and incurred
a net loss of approximately $6,491,000 for the nine months then ended. The
recoverability of a major portion of the recorded asset amounts shown in the
accompanying consolidated balance sheet is dependent on the Company's ability to
obtain financing on an as needed basis. The Company has obtained additional
financing as described in Note 4 and has completed an acquisition as described
in Note 2. In addition, the Company has additional financing available as
described in Note 5. However, the Company's financial condition raises
substantial doubt about the Company's ability to continue as a going concern.
The consolidated 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.
Management intends to focus its efforts in the next twelve months on building
the business of HDS which it believes will be possible as a result of the
additional financing as described above. Management believes this will enable
the Company to expand its current operations, develop new products and explore
new markets and increase its current sales force to achieve theses objectives.
Note 4. Current Debt
Note Payable, Manufacturing Equipment
On January 24, 1997, the Company entered into a financing agreement with a
customer for the purchase of $600,000 of manufacturing equipment from a third
party. The agreement consisted of a promissory note in the amount of $600,000
bearing interest at 8% per annum and principal and interest due between three
(3) and six (6) years from the anniversary date, depending upon the amount of
product the customer ordered from the Company. The funds were transferred
directly from the lender to the seller of the equipment. The note was
collateralized by the related equipment.
On January 23, 2001, the note was amended and restated in the amount of $793,053
which was the aggregate amount of the original note plus interest through the
date of the restated note. The amended note, with interest at 8%, payable
quarterly, was due on January 23, 2002. On December 9, 2001, the note was again
Notes Page 5 of 10
Page 86 of total
amended and restated in the amount of $793,053 which was originally due on
January 23, 2002. The amended note, with interest at 8%, payable quarterly,
called for a principal payment of $250,000 on January 23, 2002, and the balance
on January 23, 2003. The note was not paid when due.
On April 21, 2004, the lender agreed to amend and restate the note in the amount
of $793,053 upon the Company's entering into a Share Exchange Agreement with
OLDCO which occurred on April 29, 2004. The amended note matures on December 31,
2005 and was interest bearing at 11% (the default rate) until such time that an
aggregate interest payment of $84,000 was made, interest from such date forward
until the maturity date at the interest rate of 8% payable at maturity. The
Company made the interest payment of $84,000 on July 27,2004. In addition, the
lender agreed to release its security position on the collateral 90 days after
receipt of a payment of $200,000 against the principal balance. The Company made
this payment on August 13, 2004. The balance due on the note at January 31, 2005
was approximately $633,000 consisting of approximately $555,000 in principal and
$78,000 of accrued interest, Interest expenses for the nine months ended January
31, 2005 and January 31, 2004 approximated $45,000 and $73,000 respectively.
HDS Debt Conversion
Concurrent with the May 25, 2004 Share Exchange, HDS liabilities aggregating
approximately $2,736,000 consisting of convertible debentures due to a related
party ($1,308,000), convertible debentures due to third parties ($625,000), an
amount due to an officer ($259,000), and accrued payroll ($544,000) were
exchanged for NEWCO convertible 8% debentures which mature, with interest, on
December 31, 2005 (See Note 2). Accrued interest, which is included in current
interest payable, as of January 31, 2005 related to these debentures was
approximately $402,000. Interest expense for the nine months ended January 31,
2005 related to these debentures approximated $161,000.
Bridge Loans
In June 2004 the Company borrowed $100,000 under bridge loans bearing interest
at 8%. The lenders were also granted warrants to acquire 666,667 common shares
at $.15 per share. These loans were converted into convertible debentures in
connection with the July 2004 investment banking agreement. The fair value of
these warrants of approximately $40,000 was charged to debt discount in the
quarter ended July 31, 2004.
Investment Banking Agreement
On July 1, 2004, the Company entered into an investment banking agreement with a
third party for the sale of up to $3,000,000 principal amount of the Company's
8% senior convertible notes due December 1, 2005, with interest payable on
December 1 and June 1 semi-annually, either in cash or common stock, and
convertible into common stock at $.15 per share. Each note was issued with a
five-year warrant to purchase shares of the Company's common stock at $.25 per
share or 666,667 warrants for each $100,000 of principal amount of notes
purchased. As a result of the agreement, which terminated on September 30, 2004,
the Company received $2,295,000 in gross proceeds in connection with this
agreement and issued warrants to purchase 15,300,000 shares. Under the terms of
the private placement the Company has agreed to undertake to register the common
stock issuable upon the conversion of the notes and the exercise of the
warrants. Approximately $1,108,000 of the proceeds was attributed to the fair
value of the warrants and $1,004,000 to the intrinsic value of the beneficial
conversion feature of the convertible debt. These amounts were recorded as
equity components. The remaining balance of $183,000 was recorded as long-term
debt. For the nine months ended January 31, 2005 the amortization of debt
Notes Page 6 of 10
Page 87 of total
discount was approximately $764,000. Interest expense for the nine months ended
January 31, 2005 was approximately $90,000, of which approximately $32,000 is
included in interest payable at January 31, 2005. On December 1, 2005, the
Company issued 390,305 shares of common stock as payment for the interest due in
the aggregate of approximately $59,000.
Financing fees in connection with this agreement approximated $286,000 which are
being amortized over the term of the convertible notes. For the nine months
ended January 31, 2005, the amortization of financing costs approximated
$107,000.
In connection with this agreement, the Company issued the broker warrants to
acquire 5,052,600 shares of NEWCO common stock at an exercise price of $.15 per
share. The fair value of the warrants ($405,000) will be charged to operations
over the life of the underlying debt. For the nine months ended January 31,
2005, approximately $168,000 was charged to operations as financing costs for
these warrants.
In connection with this agreement, under the terms of a related registration
rights agreement, the Company was required to file a registration statement to
effectively register the common stock issuable upon the conversion of the notes
and exercise of the warrants no later than 60 days after the termination of the
offering. As the Company did not file the required registration statement until
January 27, 2005, liquidated damages in the amount of 2% per month of the
aggregate purchase price were required to be paid in cash under the terms of the
agreement. The holders of the notes agreed to accept this payment in the
aggregate of $91,800 in common stock of the Company. The fair value of the
shares due ($91,800) has been charged to operations and this expense is included
in current liabilities as these shares have not been issued at January 31, 2005.
Note 5. Standby Equity Distribution Agreement
On August 23, 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP, an investment firm. Under the terms
of the agreement, the investment firm has committed to purchase up to
$10,000,000 of the Company's common stock at a purchase price equal to 98% of
the market price at the time of purchase. The investment firm is entitled to a
5% commission per transaction. The equity line can be drawn down upon a
registration statement covering the shares being declared effective by the SEC.
On November 16, 2004 the Company filed a preliminary information statement with
the Securities and Exchange Commission ("SEC") to allow the Company to increase
the number of common shares it is authorized to issue. This must be completed
before the Company can have a registration statement declared effective by the
SEC. On December 16, 2004, the SEC responded with comments pertaining to the
preliminary information statement. On February 25, 2005, the Company responded
to these comments and is currently in the process of responding to further
comments subsequently received from the SEC so that the information statement
can be completed. On January 27, 2005, a preliminary registration statement was
filed. On March 1, 2005, the SEC responded with comments pertaining to the
preliminary registration statement. The Company is in the process of responding
to these comments. The registration statement will be effective at such time
that the SEC completes its review of the Company's responses to the comments in
regard to both the preliminary information statement and the preliminary
registration statement and the Company is able to complete the information
statement. Upon completion of this process, the Company will file the
Certificate of Amendment to increase the number of common shares it is
authorized to issue. As consideration for entering into this agreement, the
Company granted the investment firm 3,266.66 shares of Series B Preferred shares
(convertible into 2,450,000 common shares) and $70,000 cash consulting fee. In
addition, the Company granted the placement agent 66.66 shares of Series B
Preferred shares (convertible into 50,000 common shares). The fair value of the
shares ($625,000) as well as $17,500 in fees and the $70,000 cash consulting fee
associated with this agreement were recorded on the balance sheet as stock
issuance costs in the quarter ended October 31, 2004.
Note 6. Commitments and Contingencies
Notes Page 7 of 10
Page 88 of total
Employment Agreement
On May 19, 2004, the Company entered into a three-year employment agreement with
an officer. The agreement provides for annual compensation of $120,000 with a
10% increase each year on December 31 during the term of the agreement and
bonuses based on the Company's annual operating profit as defined in the
agreement. In addition, the officer was granted nonqualified options, effective
the date of the closing of the Share Exchange, to purchase 5,000,000 shares of
common stock for a period of 5 years. The option is immediately exercisable for
the purchase of 2,000,000 shares and exercisable as to an additional 1,000,000
shares commencing on each of the first, second, and third anniversaries of the
closing date, respectively, provided that optionee remains an employee of the
Company. The options are exercisable at the "Applicable Trading Price" in the
Share Exchange which is the lesser of (i) the average closing bid price per
share of the Company's common stock for 30 consecutive trading days prior to the
closing date or (ii) the average closing bid price per share of the Company's
common stock for 30 consecutive trading days commencing on the 31st day
following the effective date of the reverse split as defined in the share
exchange agreement; provided however, the exercise price shall be the price
determined under (i) at any time prior to the reverse split. The average bid
closing price for the 30 consecutive trading days prior to the closing was $.15.
On November 22, 2004, this employment agreement was amended and restated. The
amended and restated agreement provides for annual compensation of $200,000
effective January 1, 2005, with a 10% increase each year on December 31 during
the term of the agreement. Bonuses are to be paid as determined by the Board of
Directors. The agreement was also extended to December 31, 2009. All other terms
remained the same as defined in the original agreement.
Consulting Agreements
On May 25, 2004, the Company entered into a two-year consulting agreement with
an affiliate of an interim officer and consultant of OLDCO which provided for
the issuance of 2,000,000 shares of common stock and a minimum monthly
consulting fee of $7,500 to be credited against any other cash fees earned under
the terms of the agreement. The agreement also provides for certain transaction
fees to be paid to the consultant based on sales and contracts with strategic
alliances. The fair value of the 2,000,000 shares of common stock ($300,000
based on the market price of $.15 on the date of the agreement) was charged to
operations in the quarter ended July 31, 2004. As of January 31, 2005, the
Company has prepaid approximately $45,000 in consulting fees associated with
this agreement.
On May 25, 2004, the Company entered into a one-year advisory services agreement
which provided for the issuance of 681,667 shares of common stock and a minimum
monthly consulting fee of $6,250 to be credited against any other cash fees
earned under the terms of the agreement. The agreement also provides for certain
transaction fees to be paid to the consultant based on sales and contracts with
strategic alliances. The fair value of the shares ($102,250 based on the market
price of $.15 on the date of the agreement) was charged to operations in the
quarter ended July 31, 2004. On December 17, 2004, the Company terminated the
agreement which was cancelable by either party after six months. On January 5,
2005, the Company issued an aggregate of 908.89 shares of Series B Preferred
shares (convertible into 681,667 common shares) as per the agreement.
On November 1, 2004, the Company entered into a one-year advisory services
agreement which provides for compensation of $10,000 per month, of which $1,800
shall by payable in cash and $8,200 shall be payable, at the Company's
discretion, in cash or in common stock of the Company. The common stock payment
shall be based each month on the closing bid price of the Company's common stock
on the first day of the month for which payment is due. The consultant shall
have customary piggyback registration rights with respect to any shares issued
Notes Page 8 of 10
Page 89 of total
under this agreement As of January 31, 2005, the Company has paid the monthly
minimum compensation of $1,800. The fair value of the shares due under the
agreement ($24,600) has been charged to operations and this expense is included
in current liabilities as these shares have not been issued at January 31, 2005.
On November 15, 2004, the Company entered into a one-year consulting agreement
for research and public relations services which provided for the issuance of
276,000 shares of restricted common stock and a one-time consulting fee of $500.
The fair value of the shares due under the agreement ($46,920 based on the
market price of $.17 on the date of the agreement) has been charged to
operations and this expense is included in current liabilities as these shares
have not been issued at January 31, 2005.
On December 14, 2004, the Company entered into two four-month consulting
agreements for advisory services related to financial matters and marketing.
Each agreement provides for the payment of a monthly fee of $7,800 and the
issuance of a five-year warrant to purchase 40,000 shares of the common stock of
the Company exercisable at the closing price on the date of the agreement
($.15). The warrants vest at the rate of 10,000 shares per month. The fair value
of the warrants vested as of January 31, 2005 ($6,000) were charged to
operations in the current fiscal quarter.
On December 20, 2004, the Company entered into a one-year advisory services
agreement which provides for compensation in the form of a five year warrant to
purchase 204,000 shares of the common stock of the Company at an exercise price
of $.15. The warrants vest at the rate of 1/3 immediately, 1/3 on the six month
anniversary of the agreement and 1/3 one year from the agreement date. The fair
value of the warrants vested as of January 31, 2005 ($10,200) were charged to
operations in the current fiscal quarter.
Litigation
Except for the claims against former subsidiaries of OLDCO, as described in the
OLDCO's April 30, 2004 10-KSB filing, the Company and its subsidiaries were not
involved in any other material legal proceedings in the nine months ended
January 31, 2005.
Note 7. Stockholders' Equity
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 nine months
ended January 31, 2005, since the effect of any potentially dilutive securities
would be antidilutive.
The loss per common share at January 31, 2005 includes the current outstanding
common shares in the aggregate of 19,517,410 shares less the 2,400,000 shares
which are subject to redemption (see Note 2). It does not include 116,687 shares
of Series B preferred shares which will be converted into 87,515,132 common
shares, 67,000 shares of Series A preferred shares which will be converted into
2,010,000 common shares, and 2,916,308 common shares for the prior HDS common
and preferred holders who have not yet exchanged their shares. There is no loss
per common share at January 31, 2004 as the historical financial statements of
HDS are carried forward as those of the combined entity and at January 31, 2004
all HDS common stock is considered to be exchanged for Series B stock of NEWCO.
The Series A and Series B preferred shares will be automatically exchanged for
common shares upon the filing of a Certificate of Amendment to the Certificate
of Incorporation to increase the number of shares of common stock which the
Company is authorized to issue.
Notes Page 9 of 10
Page 90 of total
The loss per common shares does not include an aggregate of 56,436,304 warrants
and options outstanding and 43,850,747 shares issuable under the terms of
convertible debt. The effect of these securities would be antidilutive.
Stock Based Compensation
The Company has a 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 plans. The
following table illustrates the effect on net loss and earnings per share for
the nine and three months ended January 31, 2005 and 2004 as if the Company had
applied the fair value recognition provisions of FASB Statement 123, "Accounting
for Stock-Based Compensation".
Nine Months Ended Three Months Ended
January, 31 January, 31
2005 2004 2005 2004
Net loss, as reported $ (6,491,029) $ (1,161,150) $ (1,534,176) $ (427,744)
Add: Total stock-based employee
compensation expense determined
under fair value based method,
net of related tax effects 211,603 - 30,146 -
---------------- ---------------- --------------- ----------------
Pro forma net loss $ (6,702,632) $ (1,161,150) $ (1,564,322) $ (427,744)
================ ================ =============== ================
Net loss per share, as reported $ (0.42) $ 0.00 $ 0.09) $ 0.00
================ ================ =============== ================
Pro-forma net loss per share $ (0.44) $ 0.00 $ (0.09) $ 0.00
================ ================ =============== ================
Notes Page 10 of 10
Page 91 of total
Proforma Financial Information
The following unaudited proforma combined condensed financial statements of
the Company consist of the Company's consolidated statements of operations for
the year ended April 30, 2004 and consolidated balance sheet as of April 30,
2004, to give effect to the acquisition of HDS by the Company (collectively, the
"Unaudited Proforma Combined Condensed Financial Statements"). The unaudited
proforma combined condensed statements of operations gives effect to the
acquisition as if it had occurred on May 1, 2003 and the unaudited proforma
combined condensed balance sheet gives effect to the acquisition as if it had
occurred on April 30, 2004. The unaudited Proforma Combined Condensed Financial
Statements are provided for informational purposes only and do not purport to
reflect the results of operations that would have existed or occurred had such
transaction taken place on the date indicated nor do they purport to reflect the
financial condition or results of operations that will exist or occur in the
future. The proforma adjustments are based upon available information and
certain assumptions that management believes are reasonable. The Unaudited
Proforma Combined Condensed Financial Statements should be read in conjunction
with the Company's historical consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended April 30, 2004 filed on September 16, 2004, and in conjunction with the
HDS audited financial statements filed as Exhibit 99.2 with Form 8-K/A
(Amendment No.1) on August 9, 2004.
UNAUDITED PROFORMA COMBINED CONDENSED STATEMENTS OF
OPERATIONS FOR THE FISCAL YEAR ENDED APRIL 30, 2004
(*)
NESCO HDS
--------------------------------------------------
YEAR ENDED PROFORMA PROFORMA
APRIL 30,2004 ADJUSTMENTS COMBINED
------------- ----------- -------
REVENUES $ --- $623,349 $623,349
--------- -------- --------
COST OF REVENUES: --- 912,082 912,082
--------- -------- --------
GROSS MARGIN --- (288,733) (288,733)
--------- -------- --------
OPERATING EXPENSES
General and administrative --- 661,737 612,250 (1) 1,273,987
--------- -------- -------- ---------
Amortization and other expenses --- 116,213 -- 116,213
--- 777,950 612,250 1,390,200
--------- -------- -------- ---------
LOSS FROM OPERATIONS --- (1,066,683) (612,250) (1,678,933)
--------- -------- -------- ---------
OTHER EXPENSES
Amortization of debt discount --- (158,526) (1,089,983)(5) (1,248,509)
Interest expense (152,398) (152,398)
Interest expense, related parties --- (121,434) (66,708)(5) (188,142)
--------- -------- -------- ---------
--- (432,358) (1,156,691) (1,589,049)
Pro Forma Page 1 of 6
Page 92 of total
NET LOSS FROM CONTINUING
OPERATIONS --- (1,499,041) (1,768,941) (3,267,982)
======== =========================================
BASIC AND DILUTED NET LOSS
PER SHARE:
LOSS FROM CONTINUING OPERATIONS --- (.03)
NET LOSS PER SHARE BASIC AND
DILUTED (.--) (.03)
========= ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING USED IN COMPUTING
BASIC AND DILUTED LOSS PER
SHARE 7,019,963 109,068,514
========= ===========
* = The consolidated operations of Nesco and its subsidiaries for the fiscal
year ended April 30, 2004 were all due to discontinued operations which are not
included in the proforma condensed statements of operations.
See notes to the unaudited proforma combined condensed financial statements.
UNAUDITED PROFORMA COMBINED CONDENSED
BALANCE SHEET AS OF APRIL 30, 2004
NESCO HDS
--------------------------------------------------
YEAR ENDED PROFORMA PROFORMA
APRIL 30,2004 ADJUSTMENTS COMBINED
------------- ----------- --------
ASSETS
Current Assets
Cash 135,462 828 136,290
Accounts receivable 4,293 73,692 77,985
Inventories -- 88,338 88,338
Prepaid expenses and other
current assets -- 58,019 _________ 58,019
------- ------- --------- ---------
Total current assets 139,755 220,877 --- 360,632
------- ------- --------- ---------
Loan receivable, merger candidate 208,500 -- (208,500) (2) --
------- ------- --------- ---------
Property and equipment, net 4,940 570,101 -- 575,041
------- ------- --------- ---------
Other Assets
Purchased Technology, net -- 85,411 85,411
Investments -- 6,000 6,000
Other -- 41,906 41,906
------- ------- --------- ---------
Total other assets -- 133,317 -- 133,317
------- ------- --------- ---------
TOTAL ASSETS 353,195 924,295 (208,500) 1,068,990
======= ======= ========= =========
Pro Forma Page 2 of 6
Page 93 of Total
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Notes and interest payable -- 104,500 104,500
Bridge loan, merger candidate -- 208,500 (208,500)(2) --
Customer deposits -- 847,653 847,653
Accounts payable and accrued expenses 928,828 185,214 (883,629)(3) 230,413
Related party accounts payable 95,705 -- ( 95,705)(3) --
Due to affiliates -- 243,554 -- 243,554
--------- --------- --------- ---------
Total current liabilities 1,024,533 1,589,421 (1,187,834) 1,426,120
--------- --------- --------- ---------
Long-term Liabilities
Notes and interest payable -- 804,868 804,868
Loans payable, shareholders 952,501 -- (952,501)(4) --
Convertible debentures and interest
payable, related parties -- 1,443,108 (453,755)(5) 989,353
Convertible debentures and interest
payable, other -- 731,220 (571,408)(5) 159,812
Accrued payroll -- 544,002 (544,002)(5) --
Due to officer -- 369,846 (369,846)(5) --
Deferred sublease rental,
related party 163,800 -- -- (3) 163,800
--------- --------- --------- ---------
Total long-term liabilities 1,116,301 3,893,044 (2,891,512) 2,117,833
--------- --------- --------- ---------
Stockholders' deficit
Preferred stock 242,758 52 (242,810)(6) --
Common stock. $.001 par value,
authorized 400,000,000 shares,
109,068,514 outstanding 7,627 470 100,972 (6) 109,069
Additional paid-in-capital 4,193,206 6,317,678 549,269 (6) 11,060,153
Accumulated other comprehensive
loss -- (69,000) (69,000)
Accumulated deficit (6,231,230) (10,684,870) 3,340,915 (6)(13,575,185)
Note receivable, officer -- (80,000) 80,000 (5) --
--------- --------- --------- ---------
(1,787,639) (4,515,670) 3,828,346 (2,474,963)
--------- --------- --------- ---------
Less treasury stock, 250,000 shares
at cost -- (42,500) 42,500 (6) --
--------- --------- --------- ---------
Total stockholders' deficit (1,787,639) (4,558,170) 3,870,846 (2,474,963)
--------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT 353,195 924,295 (208,500) 1,068,990
========= ========= ========= =========
See notes to the unaudited proforma combined condensed financial statements.
NOTES ON UNAUDITED PROFORMA COMBINED
CONDENSED FINANCIAL INFORMATION
Basis of Presentation
On May 25, 2004, Nesco Industries, Inc. ("Nesco"), a Nevada corporation,
Hydrogel Design Systems, Inc., a privately-held Delaware corporation ("HDS"),
certain stockholders of Nesco (the "Nesco Stockholders") and certain
stockholders of HDS (the "HDS Stockholders") completed the transactions
contemplated by the Share Exchange Agreement, dated as of April 29, 2004, by and
among Nesco, HDS, the Nesco Stockholders and the HDS Stockholders (the "Exchange
Agreement"), whereby HDS has become a majority owned subsidiary of Nesco and the
holders of HDS common stock and debt hold a majority interest of Nesco.
The unaudited proforma combined condensed statements of operations are
presented as if the acquisition of HDS by the Company occurred on May 1, 2003
and the unaudited proforma combined condensed balance sheet is presented as if
Pro Forma Page 3 of 6
Page 94 of Total
the acquisition of HDS by the Company occurred on April 30, 2004. The unaudited
proforma combined condensed statement of operations for the year ended April 30,
2004 was derived from the Company's audited statement of operations for the year
ended April 30, 2004 which was included in its Form 10-KSB filed on September
16, 2004 and from HDS's audited statement of operations for the year ended April
30, 2004 which was filed as Exhibit 99.2 with Form 8-K/A (Amendment No. 1) on
August 9, 2004.
Nesco had intended to issue shares of its common stock in exchange for the
equity securities of HDS in certain ratios as provided for in the Exchange
Agreement. However, because Nesco did not have the required number of authorized
shares of common stock to complete the exchange on this basis, it issued shares
of its newly designated Series B Preferred Stock for among others, equity and
debt of HDS. Upon filing of the Certificate of Amendment to the Certificate of
Incorporation to increase the number of shares of common stock which Nesco is
authorized to issue to 400,000,000, each share of Preferred stock will be
automatically converted into shares of Nesco common stock. For purposes of
shares outstanding and issued, all stock is presented as if the conversion had
taken place at the time of the transaction.
As a result of the execution of the Share Exchange Agreement, HDS is
considered for accounting purposes to be the acquiring Company since the
stockholders of HDS acquired more than 50% of the issued and outstanding stock
of Nesco.
ProForma Adjustments Related to the Acquisition
The accompanying unaudited proforma combined condensed financial
information has been prepared as if the acquisition was completed on April 30,
2004 for balance sheet purposes and as of May 1, 2003 for statements of
operations purposes and reflect the following proforma adjustments:
<FN>
(1) To record the issuance of 6,500,000 Advisor shares in connection with the
transaction valued at fair value ($.15) on the date of the transaction. The
total amount of $975,000 is being charged as $694,510 to operations and
$$280,490 to equity which is the net remaining amount of cash received from
the acquisition after other merger costs. This transaction is a one-time
charge to operations and directly attributed to the share exchange and is
not included in the proforma statement of operations.
To record the exchange of HDS outstanding warrants and options which were
exchanged for Nesco outstanding warrants and options based on the same
ratios as the share exchange. Compensation expense of $1,793,555 is
recorded for the increase in the fair value of the vested HDS warrants and
options as a result of the merger. This transaction is a one-time charge to
Pro Forma Page 4 of 6
Page 95 of Total
operations and directly attributed to the share exchange and is not
included in the proforma statement of operations.
To record the issuance of 2,681,667 shares of common stock issued under two
consulting agreements at the time of the share exchange at the fair value
at the time of the exchange ($.15) of $402,250 and to record consulting
fees under these two agreements in the amount of $165,000.
To record additional employee compensation in the amount of $45,000 for the
issuance of an employee agreement with an officer entered into at the time
of the share exchange. Included in the statement of operations for HDS for
the period presented was $75,000 in compensation expense for this officer.
Under the terms of the new employment agreement, effective at the date of
the exchange, the officer would receive $120,000 annually.
(2) Elimination of advances made between Company and HDS prior to closing of
transaction.
(3) To record sale of Company subsidiaries. Purchaser acquired all of the
outstanding stock of each of Nesco's subsidiaries and assumed all of their
liabilities in exchange for 3,000,000 shares of Nesco common stock. Nesco
liabilities which were not assumed were accrued expenses and other payables
in the amount of $45,199 and deferred sublease rental for a lease which
Nesco retained in the amount $163,800.
(4) To record the exchange of Nesco shareholder debt for 15,000,000 shares of
Nesco common stock.
(5) To record exchange of HDS accrued payroll and net officer's loans to
convertible debt in the amount of $833,848 and to record interest expense
in the amount of $66,708 on this debt.
To record debt discount in the aggregate of $1,859,011 for the issuance of
warrants to prior HDS debt holders and for the intrinsic value of the
beneficial conversion feature of the prior HDS debt to the new Nesco
convertible debt and to record amortization of debt discount in the amount
of $1,089,983.
Below is a summary of the transaction as related to the convertible
debentures on the balance sheet of HDS:
Convertible Convertible
debentures, debentures,
related parties other
-------------- -----------
Balance April 30, 2004 $ 1,443,108 $ 731,220
Exchange of payroll and net
officers loans to debt 833,848 --
Recording of debt discount
for issuance of warrants
and intrinsic value of the
beneficial conversion feature
from HDS debt to Nesco debt (1,287,603) (571,408)
Balance, proforma,
April 30, 2004 $ 989,353 $ 159,812
============= ===========
Pro Forma Page 5 of 6
Page 96 of total
(6) To record the following adjustments to stockholders' deficit:
</FN>
Total
(6a) (6b) (6c) 6(d) (6e) Adjustment
------- ------- --------- --------- ----- ----------
Preferred Stock (242,758) (52) (242,810)
Common Stock (7,627) 108,599 100,972
Additional paid-in-capital (4,193,206) 2,881,133 1,859,011 2,331 549,269
Accumulated deficit 6,231,230 (2,890,315) 3,340,915
Treasury stock -- 42,500 -- -- -- 42,500
<FN>
(6a) To eliminate the historical stockholders' deficit of Nesco.
(6b) To record the issuance of common stock and recapitilization of HDS, the
acquiring Company for accounting purposes, as follows:
- Cancellation of HDS treasury stock, 250,000 shares at cost of $42,500
- Stock issued as follows:
Issued
Shares Par $.001
---------- ---------
Nesco debtholder 15,000,000 $ 15,000
Nesco preferred shareholders exchange,
512,500 shares 15,375,000 15,375
HDS preferred shareholders exchange,
522,487 shares 18,809,574 18,810
HDS common shareholders exchange, 4,702,856 (470)
shares 40,075,167 40,075
Nesco common shares prior to exchange 7,627,106 7,627
Advisor shares issued at exchange 6,500,000 6,500
Shares issued to purchaser of Nesco subsidiaries 3,000,000 3,000
Shares issued to consultants 2,681,667 2,682
----------- ---------
109,068,514 $ 108,599
----------- ---------
(6c) To record the following:
Accumulated Additional
deficit paid-in-capital
----------- ---------------
- Advisor shares (See (1) above): $ 694,510 688,010
- Exchange of HDS warrants/options (See (1)
above): 1,793,555 1,793,555
- Issuance of consultants shares (See (1)
above): 402,250 399,568
----------- -----------
$2,890,315 $2,881,133
(6d) To record debt discount (see (5) above.
(6e) Various adjustments made to additional paid-in-capital as a result of share
exchange to record proper recapitalization of HDS, the acquiring entity for
accounting purposes, including recording of opening Nesco balance sheet and
reclassification of equity accounts.
</FN>
Pro Forma Page 6 of 6
Page 97 of total
APPENDIX A
SHARE EXCHANGE AGREEMENT
SHARE EXCHANGE AGREEMENT (this "Agreement"), by and among HYDROGEL DESIGN
SYSTEMS, INC., a Delaware corporation ("HDS") having an address at 305 Madison
Avenue, Suite 4510, New York, NY 10165, NESCO INDUSTRIES, INC., a Nevada
corporation ("Nesco") having an address at 22- 09 Queens Plaza North, Long
Island City, NY 11101, certain stockholders of HDS signatory hereto (the "HDS
Signatory Stockholders"), and certain stockholders of Nesco signatory hereto
(the "Nesco Signatory Stockholders"), effective as of the date on which HDS
Signatory Stockholders holding the minimum number of shares of HDS securities,
as set forth herein, and the other parties shall have executed and delivered
this Agreement.
WHEREAS, HDS, Nesco, the HDS Signatory Stockholders and the Nesco Signatory
Stockholders wish to enter into an agreement for, inter alia, the exchange of
outstanding securities of HDS for securities of Nesco in a transaction intended
to be a tax-free exchange pursuant to Sections 351 and 368 of the Internal
Revenue Code of 1986, subject to the terms and conditions set forth in this
Agreement (the "Exchange");
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, the parties hereto, intending to be legally
bound, do hereby agree as follows:
1. INCORPORATION OF RECITALS; CERTAIN DEFINITIONS; CONSTRUCTION.
1.1 Recitals. The recitals set forth above are incorporated unto this
Agreement as if they were set forth in full in the body of this Agreement.
1.2 Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings::
"Accredited Investor" has the meaning given to such term in Rule 501 of
Regulation D.
"Additional Capitalization Amendment" has the meaning set forth in Section 4.1.
Share Exchange Agreement Page 1 of 67
Page 98 of total
"Adviser"means Ariel Holdings, LLC, a limited liability company.
"Adviser Shares"has the meaning set forth in Section 6.3.
"Affiliate" means (i) a Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with
the Person specified; or (ii) any relative or spouse of such Person, or any
relation of such spouse, who has the same home as such Person. As used in this
definition, the term "control" (including the terms "controlling," "controlled
by" and "under common control") means the possession, direct or indirect, of the
power, whether exercised or not, to direct or cause the acquisition and/or
disposition by such Person of securities of the other Person, whether through
the ownership of voting securities or otherwise.
"Applicable Trading Price" means the lesser of (i) the average closing bid price
per share of Nesco Common for the thirty (30) consecutive Trading Days prior to
the Closing Date, as adjusted to reflect the Reverse Split by multiplying such
price by the number of shares of Nesco Common that became one share thereof in
the Reverse Split, and (ii) the average closing bid price per share of Nesco
Common for the thirty (30) consecutive Trading Days commencing on the 31st day
following the effective date of the Reverse Split (the "Post-Split Period");
provided, however, whenever this Agreement provides for application of the
Applicable Trading Price at any time prior to commencement of the Post-Split
Period, the Applicable Trading Price shall be the price determined under clause
(i) of this paragraph.
"Blue Sky Law" means the securities laws and regulations of the various states
of the United States, Puerto Rico and the District of Columbia.
"Certificate of Designation" has the meaning set forth in Section 4.8
"Closing" means the closing of the Exchange.
"Closing Date" means the date of the Closing as set forth in Section 7.2.
Share Exchange Agreement Page 2 of 67
Page 99 of total
"Closing Transactions" has the meaning set forth in Section 7.2.
"Code" means the United States Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder, and any successor law, rules
and regulations.
"DGCL" means the Delaware General Corporation Law.
"Employment Agreement" means the employment agreement to be entered into by
Nesco and Matthew Harriton pursuant to Section 8.1.
"Encumbrance" means any mortgage, charge, claim, community property interest,
lien, option, pledge, security interest, pre-emptive right, right of first
refusal or restriction, including restriction on use, voting, transfer, receipt
of income or exercise of any other attribute of ownership, or any other adverse
claim of any kind.
"Environmental Laws" means any federal, state, local or foreign law (including,
without limitation, common law), treaty, judicial decision, regulation, rule,
judgment, order, decree, injunction, permit or governmental restriction or
requirement or any agreement with any governmental authority or other third
party, relating to human health and safety or the environment and arising from
the use, presence, disposal, discharge or release of pollutants, contaminants,
wastes or chemicals or any toxic, radioactive, ignitable, corrosive, reactive or
otherwise hazardous substances, wastes or materials.
"Environmental Permits" mean, with respect to any person, all permits, licenses,
franchises, certificates, approvals and other similar authorization of
governmental authorities relating in any way to, the business of such person as
currently conducted.
"ERISA" means the United States Employee Retirement Income Security Act of 1974.
"Exchange" means the exchange of Nesco securities for HDS securities on the
Closing Date pursuant to the terms of this Agreement.
Share Exchange Agreement Page 3 of 67
Page 100 of total
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended.
"GAAP" means generally accepted U.S. accounting principles consistently applied.
"Governmental Authority" means any court, tribunal, authority, agency,
commission, bureau, department, arbitrator or official or other instrumentality
of the United States or any other country or any provincial, state, local,
county, city or other political subdivision.
"Governmental Permit" means any license, franchise, permit or other
authorization, consent or approval of any Governmental Authority.
"Harriton Option" has the meaning set forth in Section 8.2.
"HDS" means Hydrogel Design Systems, Inc., a Delaware corporation.
"HDS Balance Sheet" has the meaning set forth in Section 10.9
"HDS Balance Sheet Date" has the meaning set forth in Section 10.9
"HDS Board" means the Board of Directors of HDS.
"HDS Common" means common stock of HDS, par value $0.0001 per share.
"HDS Common Stockholders" means the current holders of HDS Common.
"HDS Common Warrants" has the meaning set forth in Section 3.3.2.
Share Exchange Agreement Page 4 of 67
Page 101 of total
"HDS Disclosure Schedule" means the disclosure schedule of HDS attached as
Exhibit B to this Agreement.
"HDS Officer Debt" has the meaning set forth in Section 6.2.
"HDS Options" means options outstanding on the date hereof to purchase shares of
HDS Common.
"HDS Preferred Warrants" has the meaning set forth in Section 3.3.2.
"HDS Preferred Stockholders" means the current holders of HDS Series B
Preferred.
"HDS Preferred Warrantholders" means the current holders of HDS Preferred
Warrants.
"HDS Securities" means the HDS Common, the HDS Preferred, the HDS Options, the
HDS Warrants and the HDS Term Debt.
"HDS Series B Preferred" means the Series B Convertible Preferred Stock of HDS,
par value $0.0001 per share.
"HDS Signatory Stockholders" means the current holders of HDS Common who are
identified as signatories to this Agreement in their capacity as such holders.
"HDS Stockholders" means the HDS Signatory Stockholders and all other holders of
HDS Common and/or HDS Series B Preferred immediately prior to the Closing.
"HDS Term Debt" has the meaning set forth in Section 6.2.
Share Exchange Agreement Page 5 of 67
Page 102 of total
"HDS Warrants" means the HDS Common Warrants and the HDS Preferred Warrants.
"Intellectual Property Right" means any right to use, whether through ownership,
licensing or otherwise, or any title to, any patents, trademarks, service marks,
trade names, copyrights, trade secrets and other proprietary rights and
processes.
"Investor Statement" has the meaning set forth in Section 6.1.3.
"Letter of Intent" means that certain letter of intent, dated as of December
2003, by and among HDS and Nesco with respect to the Exchange.
"Lien" means any lien, pledge, hypothecation, levy, mortgage, deed of trust,
security interest, claim, lease, charge, option, right of first refusal,
easement, or other real estate declaration, covenant, condition, restriction or
servitude, transfer restriction under any Stockholder or similar agreement,
encumbrance, other adverse claim of any kind or any other restriction or
limitation whatsoever.
"Lock-Up" has the meaning set forth in Section 13.10.
"Material Adverse Effect" means any change, effect, event, occurrence or state
of facts that has had, or would reasonably be expected to have, a material
adverse effect on the business, financial condition or results of operations of
the entity in question and its subsidiaries, if any, taken as a whole.
"NAC Entities" means, collectively, Nesco's subsidiaries, National Abatement
Corporation, a Delaware corporation, NAC/Indoor Air Professionals, Inc., a New
York corporation, and NAC Environmental Services, Inc., a Delaware corporation.
"NAC Shares" has the meaning set forth in Section 4.5.
Share Exchange Agreement Page 6 of 67
Page 103 of total
"Nesco" means NESCO Industries, Inc., a Nevada corporation.
"Nesco Balance Sheet" has the meaning set forth in Section 9.1.
"Nesco Balance Sheet Date" has the meaning set forth in Section 9.1.
"Nesco Board" means the Board of Directors of Nesco.
"Nesco Common" means common stock of Nesco, par value $0.001 per share.
"Nesco Conversion Shares" has the meaning set forth in Section 4.2.
"Nesco Debentures" means convertible debentures of Nesco to be issued pursuant
to Sections 4.5 and 6.2.
"Nesco Debenture Shares" means shares of Nesco Common to be issued upon
conversion of the Nesco Debentures.
"Nesco Disclosure Schedule" means the disclosure schedule of Nesco attached as
Exhibit A to this Agreement.
"Nesco Exchange Options" has the meaning set forth in Section 6.1.4.
"Nesco Exchange Securities" means Nesco Exchange Shares, Nesco Exchange Options
and Nesco Exchange Warrants.
Share Exchange Agreement Page 7 of 67
Page 104 of total
"Nesco Exchange Shares" means the shares of Nesco Common (including Nesco
Debenture Shares) and/or Nesco Series B Preferred to be issued by Nesco in
exchange for HDS Securities at the Closing or any Subsequent Closing(s) and the
shares of Nesco Common to be issued to the holders of Nesco Series B Preferred
following the filing of the Additional Capitalization Amendment, all pursuant to
the terms of this Agreement. Whenever this Agreement provides for conversion or
exchange of securities or debt for Nesco Common, at the option of the company,
at any time prior to the filing of the Additional Capitalization Amendment,
Nesco Series B Preferred representing such number of shares of Nesco Common may
be issued in lieu of the Nesco Common.
"Nesco Exchange Warrants" has the meaning set forth in Section 6.1.4.
"Nesco Information Statement" has the meaning set forth in Section 4.10.
"Nesco Name Change" has the meaning set forth in Section 4.7.
"Nesco Series A Preferred" means the 10% Series A Convertible Preferred Stock,
par value $0.001 per share, of Nesco.
"Nesco Preferred Conversion" means the conversion of outstanding and issuable
shares of Nesco Series A Preferred into Nesco Common as described in Section
4.2.
"Nesco Preliminary Information Statement" has the meaning set forth in Section
4.9.
"Nesco SEC Filings" has the meaning set forth in Section 9.9.1.
"Nesco Series B Preferred" means the convertible Series B Preferred Stock of
Nesco, par value $0.001 per share, to be issued by Nesco in connection with the
Exchange on the terms and conditions set forth in Section 4.8.
"Nesco Special Warrants" has the meaning set forth in Section 3.1.4.
Share Exchange Agreement Page 8 of 67
Page 105 of total
"Nesco Stockholder Debt" has the meaning set forth in Section 4.4.
"Nesco's 2003 Annual Report" means the annual report of Nesco on Form 10-KSB for
the year ended April 30, 2004.
"Nesco Warrant Conversion" has the meaning set forth in Section 4.3.
"Nesco Warrant Shares" means the shares of Nesco Common to be issued upon the
Nesco Warrant Conversion as provided in Section 4.3.
"Nesco Warrants" has the meaning set forth in Section 3.1.4.
"NRS" means the Nevada Revised Statutes as currently in effect or hereafter
amended, and any successor statute(s).
"OTCBB" means the Over-the-Counter Bulletin Board.
"Person" means any individual, group, corporation, company, partnership, limited
liability company or partnership, association, trust or other entity or
organization, including any government or political subdivision or any agency or
instrumentality of either.
"Regulation D" means Regulation D promulgated under the Securities Act.
"Regulation FD" means Regulation FD promulgated under the Exchange Act.
"Reverse Split" has the meaning set forth in Section 4.6.
Share Exchange Agreement Page 9 of 67
Page 106 of total
"Reverse Split Amendment" means a certificate of amendment to the certificate of
Incorporation of Nesco to be filed by Nesco following the Closing to change
Nesco's name and effectuate the Reverse Split and any other changes to Nesco's
articles of incorporation required to consummate the Exchange and any other
transactions contemplated hereby or by the Nesco Information Statement.
"Rule 144" means Rule 144 promulgated under the Securities Act as currently in
effect or hereafter amended and any successor rule.
"SEC" means the United States Securities and Exchange Commission, or any
successor body.
"Securities Act" means the United States Securities Act of 1933, as amended, or
any successor statute.
"Seller" means each HDS Signatory Stockholder and each other Person who
participates in the Exchange, complies with the requirements for participation
set forth in this Agreement and is the beneficial owner of (i) any outstanding
voting securities of HDS or (ii) any other security or securities of HDS,
including the HDS Term Debt, which may be exchanged for any security of Nesco
pursuant to the terms of this Agreement.
"Standstill Agreement" means the covenants, representations and warranties of
the parties contained in Section 13.4.
"Subsequent Closing Date" has the meaning set forth in Section 6.1.5.
"Taxes" means any and all federal, state, local, foreign or other taxes of any
kind (together with any and all interest, penalties, additions to tax and
additional amounts imposed with respect thereto) imposed by any taxing authority
including, without limitation, taxes or other charges on or with respect to
income, franchises, windfall or other profits, gross receipts, sales, use,
capital stock, payroll, employment, social security, workers' compensation,
unemployment compensation or net worth, and taxes or other charges in the nature
of excise, withholding, ad valorem or value added.
Share Exchange Agreement Page 3 of 67
Page 107 of total
"Termination Date" means the date of termination of this Agreement as set forth
in Section 16.2.
"Trading Day" means a day on which trades may be effected in the Pink Sheets or
any system of automated dissemination of quotations of securities prices,
including the OTCBB.
"Transaction Documents" means this Agreement (including all exhibits hereto),
the Additional Capitalization Amendment, the Reverse Split Amendment, the
Harriton Option, the Employment Agreement, the Nesco Information Statement and
all other documents and instruments delivered by HDS or Nesco pursuant to this
Agreement.
1.3 Gender; Number; Certain Definitions, References. The headings of
Sections in this Agreement are provided for convenience only and shall not
affect its construction or interpretation. In this Agreement (i) words denoting
the singular include the plural and vice versa, (ii) "it" or "its" or words
denoting any gender include all genders, (iii) the word "including" shall mean
"including, without limitation," whether or not expressed, (iv) any reference to
a statute shall mean the statute and any regulations thereunder in force as of
the date of this Agreement or the Closing, as applicable, unless otherwise
expressly provided, (v) any reference herein to a Section, Schedule or Exhibit
refers to a Section of or a Schedule or Exhibit to this Agreement, unless
otherwise stated, and (vi) when calculating the period of time within or
following which any act is to be done or steps taken, the date which is the
reference day in calculating such period shall be excluded and if the last day
of such period is not a Business Day, then the period shall end on the next day
following that is a Business Day. Each party acknowledges that such party has
been advised and represented by counsel in the negotiation, execution and
delivery of this Agreement and accordingly agrees that if an ambiguity exists
with respect to any provision of this Agreement, such provision shall not be
construed against any party because such party or its representatives drafted
such provision.
1.4 Beneficial Ownership. Except as otherwise expressly provided herein,
all references in this Agreement to beneficial ownership of any securities shall
mean beneficial ownership thereof calculated in accordance with Section 13-d of
the Exchange Act and the rules promulgated thereunder.
2. PLAN OF REORGANIZATION. The transactions contemplated by this Agreement are
intended to be a reorganization under both Sections 351 and 368(a)(1)(B) of the
Code. Upon the terms and subject to the conditions contained in this Agreement
and on the basis of the representations, warranties and covenants contained
herein: (a) at the Closing, (i) the HDS Signatory Stockholders shall exchange
and (ii) any other Seller electing to participate in the Exchange who complies
with the requirements for participation set forth in Section 6 on or prior to
the Closing Date may exchange, all of their outstanding HDS Securities for Nesco
Exchange Securities pursuant to the terms of Section 6.1; and (b) at each
closing on a Subsequent Closing Date, each additional Seller that elects to
participate in the Exchange and complies with such requirements for
Share Exchange Agreement Page 11 of 67
Page 108 of total
participation following the Closing Date may exchange all of their outstanding
HDS Securities for Nesco Exchange Securities pursuant to the terms of Section
6.1 (the "Exchange").
3. CAPITALIZATION.
3.1 Capitalization of Nesco. Nesco covenants, represents and warrants that:
3.1.1On the date hereof, Nesco's authorized capital stock consists of:
25,000,000 shares of Nesco Common and 1,000,000 shares of Nesco Series A
Preferred.
3.1.2On the date hereof, Nesco has 6,769,963 shares of Nesco Common issued
and outstanding. On the date hereof, Nesco has 512,500 shares of Nesco
Series A Preferred issued and outstanding, and another 270,651 shares of
Nesco Series A Preferred are issuable as stock dividends in kind to the
current holders of outstanding Nesco Series A Preferred or otherwise. Each
share of Nesco Series A Preferred issued and outstanding or issuable is
convertible, on the date hereof, at the option of the holder into the
number of shares of Nesco Common set forth on Section 3.1.2 of the Nesco
Disclosure Schedule.
3.1.3On the date hereof, there are no unexpired options to purchase shares
of Nesco Common or any other security of Nesco that are currently
outstanding, whether under Nesco's 1998 Incentive Stock Option Plan or
Nesco's 2001 Stock Option Plan or otherwise, and Nesco has no other stock
option plans.
3.1.4On the date hereof, there are outstanding warrants to purchase an
aggregate of 602,500 shares of Nesco Common at $0.05 per share, all of
which expire on dates through March 2007 and none of which has been
exercised ("Nesco Special Warrants"), and outstanding warrants to purchase
4,500,000 shares of Nesco Common ("Nesco Warrants"). The Nesco Special
Warrants shall be cancelled prior to the Closing Date.
3.1.5Nesco has no securities outstanding or any obligation to issue any
securities other than as set forth in this Section 3.1.5 or those
securities which Nesco is required to issue pursuant to the terms of this
Agreement.
Share Exchange Agreement Page 12 of 67
Page 109 of total
3.2 Nesco Security Ownership. On the date hereof, the Nesco Signatory
Stockholders hold not less than 50.1 % of the shares of Nesco Common, on a
fully-diluted and as converted basis, or any higher percentage (on the same
basis) required by the NRS, or the articles of incorporation or by-laws of Nesco
that is required to bind Nesco to its obligations hereunder and to authorize and
effectuate the Exchange and the other transactions required by the terms of this
Agreement to be effected by Nesco on or before the Closing Date.
3.3 HDS Capitalization. HDS covenants, represents and warrants that:
3.3.1On the date hereof, the authorized capital stock of HDS consists of
20,000,000 shares of HDS Common, 15,000,000 shares of Series A Preferred
Stock, par value $0.0001 per share, and 5,000,000 shares of blank check
preferred stock, par value $0.0001 per share ("HDS Preferred"), of which
2,000,000 shares have been designated as HDS Series B Preferred.
3.3.2On the date hereof, there are issued and outstanding: (i) 4,702,806
shares of HDS Common; (ii) 522,487 shares of HDS Series B Preferred; (iii)
warrants to purchase the number of shares of HDS Series B Preferred set
forth in Section 3.3.2 of the HDS Disclosure Schedule ("HDS Preferred
Warrants"); (iv) debentures convertible into the number of shares of HDS
Series B Preferred set forth in Section 3.3.2 of the HDS Disclosure
Schedule; (v) warrants to purchase the number of shares of HDS Common set
forth on Section 3.3.2 of the HDS Disclosure Schedule (collectively, "HDS
Common Warrants"); and (vi) options to purchase the number of shares of HDS
Common set forth on Section 3.3.2 of the HDS Disclosure Schedule
(collectively, "HDS Options").
3.3.3Outstanding shares of HDS Series B Preferred accrue dividends of 7%
per annum payable solely in HDS Common upon conversion of such shares of
HDS Series B Preferred into HDS Common. The outstanding shares of HDS
Series B Preferred and accrued dividends thereof are convertible, on the
date hereof, into the number of shares of HDS Common set forth on Section
3.3.3 of the HDS Disclosure Schedule.
3.4 HDS Beneficial Ownership. On the date hereof, the HDS Signatory
Stockholders hold not less than fifty and one-tenths percent (50.1%) of the HDS
Common issued and outstanding and fifty and one-tenths percent (50.1%) of the
HDS Series B Preferred issued and outstanding, in each case on a fully diluted
basis.
4. CERTAIN NESCO COVENANTS.
Share Exchange Agreement Page 13 of 67
Page 110 of total
4.1 Additional Capitalization. As soon as practicable following the Closing
Date, Nesco shall increase the number of shares of Nesco Common which it is
authorized to issue to 400,000,000 shares, by obtaining all required security
holder approvals therefor and filing an amendment to its certificate of
incorporation to such effect as provided in the NRS substantially in the form of
Exhibit 4.1 (the "Additional Capitalization Amendment"), which Amendment shall
also provide for the Nesco Name Change as required by this Agreement. By
executing this Agreement, each Nesco Signatory Stockholder acknowledges that
such Stockholder has agreed to give its written consent to (a) the increase in
the number of shares of authorized Nesco Common provided for in this Section 4.1
and (b) the filing of the Additional Capitalization Amendment, in each case, on
the terms and conditions set forth in this Agreement.
4.2 Nesco Preferred Conversion. By executing this Agreement, the Nesco
Signatory Stockholders who are beneficial owners of Nesco Series A Preferred (a)
agree to exchange, on or prior to the Closing Date, all shares of Nesco Series A
Preferred held by them or issuable to them at any time from the date through the
Closing Date as dividends payable or otherwise, for shares of Nesco Common (or,
at the option of Nesco, shares of Series B Preferred representing the number of
shares of Nesco Common) in the ratio set forth in Section 4.2 of the Nesco
Disclosure Schedule (such shares of Nesco Common and/or Nesco Preferred, "Nesco
Conversion Shares"), (b) consent to the exchange of all other shares of Nesco
Series A Preferred for shares of Nesco Conversion Shares on the same terms,
respectively (the exchange pursuant to clauses (a) and (b) together, the "Nesco
Preferred Conversion"), (c) consent to the filing, execution and delivery by
Nesco of any and all documents and instruments, including, any amendment to the
terms of Nesco's certificate of incorporation (including the Certificate of
Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative
Rights of the Nesco Series A Preferred) that may be necessary to give effect to
such consent; and (d) understand and agree that upon the exchange of any shares
of Nesco Series A Preferred as provided in this Section, Nesco shall have no
further obligation in respect of such shares of Nesco Series A Preferred, and no
Person who exchanges such Person's shares of Nesco Series A Preferred shall have
any further right to require Nesco to issue any other securities in respect
thereof. Nesco agrees that, prior to the Closing Date, it shall do all things
necessary or proper to effect the Nesco Preferred Conversion by as many holders
thereof as possible and to carry out the intent of this Section. All Nesco
Signatory Stockholders who are beneficial owners of any shares of Nesco Series A
Preferred hereby agree that, immediately following the exchange by them of their
shares of Nesco Series A Preferred and their receipt of Nesco Conversion Shares
as provided in this Section, such Stockholders shall have all of the obligations
in respect of their Nesco Conversion Shares as the other Nesco Signatory
Stockholders that are holders of shares of Nesco Common on the date hereof.
4.3 Nesco Warrant Conversion. The Nesco Signatory Stockholders include the
beneficial owners of fifty and one-tenths percent (50.1%) of the Nesco Warrants
(or such higher percentage thereof as may be required by the terms of any of the
Nesco Warrants) (the "Nesco Signatory Warrantholders"). By executing this
Agreement, the Nesco Signatory Warrantholders hereby (a) give their written
consent to the exchange or exercise of all Nesco Warrants for 4,500,000 shares
of Nesco Common or, at the option of Nesco, shares of Nesco Series B Preferred
representing such shares of Nesco Common (the "Nesco Warrant Shares") on a pro
rata basis prior to the Closing Date (the "Nesco Warrant Conversion"), (b) agree
to exercise their Nesco Warrants pursuant to the Nesco Warrant Conversion on the
terms of this Section 4.3, and (c) agree, that (i) upon their exercise or
exchange of Nesco Warrants pursuant to the Nesco Warrant Conversion and their
receipt of Nesco Warrant Shares, except as otherwise expressly provided in this
Agreement, such Warrantholders shall have all of the obligations in respect of
such Nesco Warrant Shares as the Nesco Signatory Stockholders have in respect of
Share Exchange Agreement Page 14 of 67
Page 111 of total
their shares of Nesco Common on the date hereof. Nesco agrees to effectuate the
Nesco Warrant Conversion prior to the Closing Date, and upon exercise or
exchange of each Nesco Warrant pursuant to the Nesco Warrant Conversion, such
Warrants to purchase Nesco Common shall be cancelled and the holder(s) thereof
shall have no further rights to require Nesco to issue Nesco Warrant Shares or
any other securities in respect of any Nesco Warrants.
4.4 Conversion of Nesco Stockholder Debt. Prior to the Closing Date, Nesco
shall have exchanged the indebtedness of Nesco in the principal amount of
approximately $1,033,000 to the stockholders of Nesco identified on Section 4.4
of the Nesco Disclosure Schedule (the "Nesco Stockholder Debt"), at the election
of such stockholders, for either (i)15,000,000 shares of Nesco Common or (ii)
7,500,000 shares of Nesco Common and $500,000 in principal amount of Nesco
Debentures; such Debentures to be convertible into the number of shares of Nesco
Common determined by dividing the principal amount thereof by the Applicable
Trading Price. Upon such exchange, the Nesco Stockholder Debt shall be fully
paid and satisfied. Each holder of Nesco Stockholder Debt who executes this
Agreement hereby agrees (a) to the terms of this Section 4.4 and to convert its
portion of the Nesco Stockholder Debt prior to the Closing pursuant to the terms
of this Section 4.4, and (b) that such holder shall have all of the obligations
under this Agreement in respect of the shares of Nesco Common received upon such
exchange as the Nesco Signatory Stockholders who are beneficial owners of Nesco
Common on the date hereof.
4.5 Disposition of NAC Entities.
4.5.1Prior to the Closing Date, Nesco shall have transferred or otherwise
disposed of all of its right, title and interest in and to all of the
capital stock in, all indebtedness owed to it by, each NAC Entity in such
manner that each of the parties to whom any such capital stock and
indebtedness (collectively, "NAC Interests") are transferred ("NAC
Transferees") shall assume, in one or more written agreements
(collectively, the "NAC Acquisition Agreement"), all liabilities and
obligations of Nesco with respect to the NAC Entities or the NAC Interests
for and in consideration of a maximum of 3,000,000 shares of Nesco Common,
in the aggregate (the "NAC Shares"). The NAC Shares shall include all
shares of Nesco Common issued by Nesco to any creditors of any NAC Entity
between the date hereof and the Closing Date as consideration for the
discharge, or in payment of, any obligations of any of the NAC Entities.
The NAC Acquisition Agreement shall provide that the NAC Shares shall be
deliverable to the Transferees not later than the date of effectiveness of
the Additional Capitalization Amendment. The NAC Acquisition Agreement
shall further provide Nesco with all such assurances as Nesco or its
independent certified public accountants may require, whether in the form
of an indemnity secured by liquid assets, bonds or otherwise, (i) to enable
such accountants to exclude from pro forma, combined and audited financial
statements of Nesco as of a date on or after the Closing Date all
obligations and liabilities whatsoever of any NAC Entity or of Nesco in
respect of any NAC Entity, including, without limitation, all references to
any contingent or potential liabilities arising out of or related to any
pending legal or administrative proceedings involving or any going concern
issues with respect to, any NAC Entity, other than the obligation of Nesco
Share Exchange Agreement Page 15 of 67
Page 112 of total
to repurchase the NAC Shares pursuant to Section 4.5.3 of this Agreement
and (ii) to enable Nesco to obtain an opinion of counsel satisfactory to
HDS to the effect that Nesco has no further liability, contingent or
otherwise, arising out of or relating to any pending legal or
administrative proceedings involving or going concern issues with respect
to any NAC Entity and that the transfer or disposition by Nesco of any and
all of the NAC Interests for the NAC Shares is legally binding on the
parties and complies with all applicable laws and regulations.
4.5.2In the event that Nesco shall not have disposed of the NAC Interests
prior to the Closing Date as provided in Section 4.5.1, HDS may terminate
this Agreement.
4.5.3The NAC Acquisition Agreement shall provide that if the NAC
Transferees cannot in good faith resell all of the NAC Shares (in
compliance with the Securities Act and applicable Blue Sky Laws) in an
arms-length transaction during the twelve (12) months immediately following
the Closing Date for the lesser of (i) all liabilities of NAC resulting
directly from the agreement between NAC and Mason Tenders Union plus legal
fees due to the firm of Eckert et al. or (ii) $330,000, then Nesco, upon
written demand of the NAC Transferees establishing the facts required by
this Section 4.5.3, shall repurchase 2,400,000 NAC Shares for such amount
or a portion of such NAC Shares for a pro rata portion of such amount.
4.6 Reverse Split. Prior to the Closing Date, Nesco shall have obtained all
necessary authorization from its Board of Directors and security holders to
effect a 1:20 split of its issued and outstanding common stock as soon as
practicable following the Closing Date (the "Reverse Split"), including, without
limitation, authorization to file the Reverse Split Amendment. By executing this
Agreement, each of the Nesco Signatory Stockholders and the HDS Signatory
Stockholders acknowledges that such Stockholder has agreed to give its written
consent to the Reverse Split and the execution, delivery and filing of the
Reverse Split Amendment, in each case, on the terms and conditions set forth in
this Agreement and agrees to do all things necessary, proper or advisable,
including the execution and delivery of any and all further consents or other
documents and instruments, to effectuate the Reverse Split pursuant to the terms
of this Agreement.
4.7 Change of Name. As soon as practicable following the Closing Date,
Nesco shall effect the Nesco Name Change, by obtaining all required security
holder approvals therefor and executing, delivering and filing the Additional
Capitalization Amendment. By executing this Agreement, each Nesco Signatory
Stockholder acknowledges that such Stockholder has agreed to give its written
consent to the Nesco Name Change and to the filing of the Additional
Capitalization Amendment, in each case, on the terms and conditions set forth in
this Agreement. Prior to the Closing Date, Nesco shall have obtained all
necessary authorization of the Nesco Board to the Nesco Name Change and the
filing of the Additional Capitalization Amendment.
Share Exchange Agreement Page 16 of 67
Page 113 of total
4.8 Certificate of Designation. As soon as practicable following the date
hereof but in no event later than the Closing Date, Nesco shall file a
certificate of voting powers, designations, preferences, limitations,
restrictions and relative rights of the Nesco Series B Preferred Stock providing
for designation thereof with the following terms, and such other terms as are
set forth in Section 4.8 of the Nesco Disclosure Schedule or otherwise required
to give effect to the Exchange pursuant to the terms of this Agreement (the
"Certificate of Designation"): Each share of Nesco Series B Preferred shall
automatically convert into the number of shares of Nesco Common set forth in
said Section of the Nesco Disclosure Schedule (the "Conversion Share Number")
upon the filing of the Additional Capitalization Amendment; and, except as
otherwise required by the NRS, each share of Nesco Series B Preferred shall have
the right to vote with the Nesco Common, on any and all issues as to which
holders of Nesco Common have the right to vote, provided that each share of
Nesco Series B Preferred shall have the right to cast the number of votes equal
to the Conversion Share Number; holders of shares of Nesco Series B Preferred
shall have the right vote, and vote as a class, to the extent provided in
applicable provisions of the NRS; and no amendment or modification may be made
to the foregoing provisions of the Certificate of Designation other than as
provided in Section 4.8 of the Nesco Disclosure Schedule, without the consent of
HDS and the holders of two-thirds of the shares of the Nesco Series B Preferred
then outstanding.
4.9 Nesco Preliminary Information Statement. As soon as practicable after
the Closing Date, Nesco shall prepare and file a preliminary information
statement with SEC pursuant to Regulation 14C of the Exchange Act containing the
information necessary to effectuate (i) the Additional Capitalization Amendment
and conversion of shares of Nesco Series B Preferred to be issued pursuant to
this Agreement into Nesco Common pursuant to the Exchange and the terms of this
Agreement, (ii) the Reverse Split and the Reverse Split Amendment, (iii) the
Nesco Name Change, and (iv) any and all other transactions contemplated hereby
and by the other Transaction Documents (the "Information Statement
Transactions") requiring the filing of an information statement pursuant to
Regulation 14C under the Exchange Act (the "Nesco Preliminary Information
Statement"), and such amendments thereto as the SEC may require or Nesco or HDS
may deem necessary or proper.
4.10 Nesco Information Statement. As soon as practicable after the Closing
Date, Nesco shall prepare and file a definitive information statement pursuant
to Regulation 14C of the Exchange Act containing the information necessary to
effectuate the Information Statement Transactions.
4.11 Due Diligence. From the date hereof until the Closing Date, Nesco
shall give HDS, its counsel, financial advisers, auditors and other authorized
representatives (collectively, "HDS Representatives") (a) full access to the
offices, properties, books and records of Nesco and its subsidiaries, (b) such
financial and operating data and other information relating to Nesco and its
subsidiaries as such Persons may reasonably request, and (c) instruct the
employees of Nesco and its subsidiaries and Nesco's counsel, financial advisers,
auditors and other authorized representatives (collectively, the "Nesco
Representatives") to cooperate with HDS and the HDS Representatives in their due
diligence investigation of Nesco and its subsidiaries, their business, assets,
financial condition and other matters. No investigation by HDS or any of its
Share Exchange Agreement Page 17 of 67
Page 114 of total
representatives shall operate as a waiver or otherwise affect any
representation, warranty or agreement given or made by Nesco or any Nesco
Signatory Stockholder hereunder.
5. CERTAIN HDS COVENANTS.
5.1 Cooperation. Subject to compliance by the parties with the provisions
of Section 13.3, HDS and the HDS Signatory Stockholders shall cooperate with
Nesco in the preparation of the Nesco Preliminary Information Statement and the
Nesco Definitive Information Statement by providing Nesco with all information
regarding the business and financial condition of HDS any subsidiaries, their
management and security ownership as may be required to be included in such
Information Statements.
5.2 Due Diligence. Subject to compliance by the parties with the provisions
of Section 13.3, from the date hereof until the Closing Date, HDS shall give the
Nesco Representatives (a) full access to the offices, properties, books and
records of HDS and any subsidiaries, (b) such financial and operating data and
other information relating to HDS and its subsidiaries as such Persons may
reasonably request, and (c) instruct the employees of HDS and the HDS
Representatives to cooperate with Nesco and the Nesco Representatives in their
due diligence investigation of HDS and any subsidiaries, their business, assets,
financial condition and other matters. No investigation by Nesco or any of the
Nesco Representatives shall operate as a waiver or otherwise affect any
representation, warranty or agreement given or made by HDS or any HDS Signatory
Stockholder hereunder.
6. THE EXCHANGE. All references in this Agreement to numbers of shares of Nesco
Common issued and outstanding, to be issued, or issuable refer to such numbers
prior to the Reverse Split, unless otherwise expressly provided.
6.1 Exchange of Securities. Upon the terms and subject to the conditions
contained in this Agreement:
6.1.1At the Closing, each HDS Signatory Stockholder, and each other HDS
Stockholder who elects, prior to the Closing Date, to participate in the
Exchange and complies with the requirements therefor set forth in this
Section 6, shall exchange, transfer and assign all of such Person's right,
title and interest in and to its shares of HDS Common and HDS Preferred for
shares of Nesco Series B Preferred Stock by delivering to Nesco share
certificates for all such shares of HDS Common and or HDS Series B
Preferred, duly endorsed in blank, with all necessary stock transfer stamps
affixed, and Nesco shall issue shares of Nesco Series B Preferred Stock in
Share Exchange Agreement Page 18 of 67
Page 115 of total
exchange for shares of HDS Common and HDS Series B Preferred so tendered by
in the applicable ratio provided in Section 6.1.6. by delivering to each
such Stockholder one or more certificates evidencing the shares of Nesco
Series B Preferred issuable to such Stockholder.
6.1.2Each HDS Common Stockholder and each HDS Preferred Stockholder who is
not an HDS Signatory Stockholder and who elects, following the Closing
Date, to participate in the Exchange by giving written notice of its intent
to participate in the Exchange to HDS or Nesco (an "Exchange Notice"), and
complies with the other requirements for such participation set forth in
this Section 6.1, shall transfer and assign all of such Person's right,
title and interest in and to its shares of HDS Common and/or HDS Series B
Preferred for Nesco Series B Preferred by delivering, on a date following
the Closing Date selected for such purpose by Nesco, but in no event more
than five (5) business days following the giving of the Exchange Notice
(each such date, a "Subsequent Closing Date") (i) share certificates for
all such shares of HDS Common and/or HDS Series B Preferred, duly endorsed
in blank, with all necessary stock transfer stamps affixed, and (ii) an
executed and completed Investor Statement; and on such Subsequent Closing
Date, Nesco shall issue shares of Nesco Series B Preferred Stock in
exchange for shares of HDS Common and/or HDS Series B Preferred so tendered
in the applicable ratio pursuant to Section 6.1.6 by delivering one or more
certificates evidencing the shares of Nesco Series B Preferred issuable to
such Stockholder.
6.1.3Each HDS Signatory Stockholder that is the holder of HDS Common
Warrants and/or HDS Options outstanding on the date hereof hereby agrees
that all such Warrants and Options, shall, upon Closing, constitute
warrants and options, respectively, to purchase the number of shares of
Nesco Series B Preferred that such Stockholder would be entitled to receive
pursuant to such Warrants and Options, respectively, had they been
exercised (to the extent the exercise rights thereunder shall not have
expired) immediately prior to the Closing Date for shares of HDS Common.
6.1.4Each holder of HDS Options and/or HDS Common Warrants outstanding on
the date hereof who is not an HDS Signatory Stockholder may elect to
participate in the Exchange by delivering to HDS or Nesco an Exchange
Notice and a completed Investor Statement: (i) prior to the Closing Date,
in which event, on the Closing Date, all such HDS Options and HDS Warrants
shall thereupon constitute options and warrants, respectively, to purchase
the number of shares of Nesco Series B Preferred ("Nesco Exchange Options"
and "Nesco Exchange Warrants," respectively) that such holder would be
entitled to receive had such holder exercised such HDS Options and HDS
Warrants, respectively, for shares of HDS Common immediately prior to the
Closing Date; or (ii) after the Closing Date, in which event, on the
Subsequent Closing Date selected by Nesco pursuant to the terms of Section
6.1.2, all such HDS Options and HDS Warrants shall thereupon constitute,
respectively, Nesco Exchange Options and Nesco Exchange Warrants to
purchase the number of shares of Nesco Series B Preferred that such holder
would be entitled to receive had such holder exercised such HDS Options and
HDS Warrants for shares of HDS Common immediately prior to such Subsequent
Closing Date.
Share Exchange Agreement Page 19 of 67
Page 116 of total
6.1.5Each HDS Stockholder and each holder of any HDS Options or HDS
Warrants that wishes to participate in the Exchange but is not an HDS
Signatory Stockholder shall execute and deliver to Nesco on or prior to the
Closing Date or the applicable Subsequent Closing Date, as the case may be,
a written statement, in the form prepared by HDS prior to the Closing Date
and approved by Nesco (which approval shall not be unreasonably withheld),
providing that the signatory represents, warrants and agrees that such
signatory (i) is an Accredited Investor, (ii) makes the representations and
warranties contained in Sections 10.22.1, 10.22.2 and 10.22.4, and (iii)
consents to, and agrees to be bound by, the provisions of this Agreement
applicable to holders of HDS Common, HDS Preferred, Nesco Exchange Warrants
or Nesco Exchange Options, as the case may be, to be performed from and
after the Closing Date (or any Subsequent Closing Date on which any such
signatory participates in the Exchange), in respect of the Nesco Exchange
Shares to be received by such holder or issuable upon exercise of such
Nesco Exchange Warrants or Nesco Exchange Options, and (iv) gives its
written consent (or agrees to give such consent in respect of any Nesco
Exchange Shares it may receive upon exercise of any Nesco Exchange Options
or Nesco Exchange Warrants) to the matters which HDS Signatory Stockholders
are hereby deemed to consent to, including (A) an increase in the number of
shares of Nesco Common which Nesco is authorized to issue pursuant to the
Additional Capitalization Amendment and the execution, delivery and filing
of such Amendment, (B) the Nesco Name Change, and (C) implementation of the
Reverse Split and the filing, execution and delivery of the Reverse Split
Amendment (an "Investor Statement").
6.1.6Section 6.1.6 of the HDS Disclosure Schedule sets forth the number of
shares of Nesco Series B Preferred which each HDS Stockholder shall be
entitled to receive for (i) each share of HDS Common and (ii) each share of
HDS Series B Preferred tendered by each HDS Stockholder in the Exchange.
Section 4.8 of the HDS Disclosure Schedule sets forth the number of shares
of Nesco Common into which each share of Nesco Series B Preferred shall be
convertible.
6.1.7Anything contained herein to the contrary notwithstanding, any Person
who, is, on the date hereof or subsequently becomes (not in contravention
of the terms of this Agreement), the holder of HDS Common, HDS Preferred,
any HDS Option or HDS Warrant or any other security of HDS and is not an
Accredited Investor, may not participate in the Exchange on or prior to the
Closing Date, but may participate in the Exchange thereafter on a date
selected by Nesco, but not more than five (5) business days following the
last to occur of the filing by Nesco of the Nesco Information Statement
with the SEC and the Additional Capitalization Amendment with the Secretary
or Department of State of Nevada (a "Subsequent Closing Date") and the
giving by such Person of an Exchange Notice, and on the other terms and
conditions set forth in this Agreement, provided, however, that such
Person's Investor Statement need not represent that such Person is an
Accredited Investor.
6.1.8As a result of the Exchange, on the Closing Date HDS shall be a
majority-owned subsidiary of Nesco.
Share Exchange Agreement Page 20 of 67
Page 117 of total
6.2 HDS Debt. Simultaneously with the Closing:
6.2.1 The outstanding convertible debentures of HDS in the principal amount
of approximately $2,092,000 (the "HDS Term Debt") shall be exchanged for
and converted into (i) debentures of Nesco in the same principal amount
having a maturity date of December 31, 2005 (the "Maturity Date") and
bearing interest at the rate of eight percent (8%) per annum due and
payable in cash at the Maturity Date, which debentures ("Nesco
Debentures"), shall be convertible into the number shares of Nesco Common,
or at the election of Company, Nesco Series B Preferred convertible in that
number of shares of Nesco Common, ("Debenture Shares") which the holders of
the HDS Term Debt would be entitled to receive in the Exchange if they had
exercised their conversion rights on the principal amount of the HDS Term
Debt immediately prior to the Closing, and (ii) a warrant to purchase one
(1) share of Nesco Common for each $1.00 in amount of HDS Term Debt so
exchanged (the "Debtholder Warrants"). The interest due on the HDS Term
Debt shall remain due and payable on the Maturity Date notwithstanding the
conversion . The Debtholder Warrants shall have an exercise price equal to
the Applicable Trading Price.;
6.2.2 the outstanding indebtedness of HDS to certain of its officers in the
aggregate principal amount of approximately $800,000 on the date hereof
("HDS Officer Debt") shall be exchanged for and converted into (i)
debentures of Nesco in the same principal amount having a maturity date of
December 31, 2005 (the "Maturity Date") and bearing interest at the rate of
eight percent (8%) per annum due and payable in cash at the Maturity Date,
which debentures ("Nesco Debentures") may be exchanged for the number of
shares of Nesco Common, or at the election of Company, Nesco Series B
Preferred convertible in that number of shares of Nesco Common, determined
by dividing the HDS Officer Debt by the Applicable Trading Price, and (ii)
for each $1.00 in principal amount of the HDS Officer Debt, a Debtholder
Warrant to purchase one (1) share of Nesco Common.
6.3 Adviser Shares. Immediately following the Closing, Nesco shall issue to
the Adviser shares of Nesco Series B Preferred convertible into 6,500,000 shares
of Nesco Common or, at the option of Nesco, the same number of shares of Nesco
Common or any combination of Nesco Series B Preferred and Nesco Common on such
basis, as and for the fee due for providing advisory services to HDS (such
shares of Nesco Series B Preferred as convertible into such shares of Nesco
Common, the "Adviser Shares"). The Adviser is a Nesco Signatory Stockholder.
6.4 Harriton Stock Option. Immediately following the Closing, Nesco shall
issue the Harriton Option to Matthew Harriton pursuant to Section 8.2.
6.5 Reverse Split; Information Statement. As promptly as practicable
following the Closing, the effectiveness of the Additional Capitalization
Share Exchange Agreement Page 21 of 67
Page 118 of total
Amendment and the filing with the SEC of the Information Statement, Nesco shall
consummate the Reverse Split by filing the Reverse Split Amendment in compliance
with the applicable provisions of the NRS, and upon such filing, provide
certified copies of such Amendment to HDS and its counsel.
6.6 No Liens or Encumbrances. Except as otherwise expressly provided
herein, the HDS Exchange Shares, the HDS Preferred Exchange Shares, the Nesco
Exchange Shares, the Nesco Debentures, the Nesco Debenture Shares delivered at
the Closing on the Closing Date or on any Subsequent Closing Date, the Adviser
Shares, and the HDS Warrants and HDS Options to be converted into warrants and
options, respectively, to purchase securities of Nesco in the Exchange pursuant
to this Section 6.6, shall be free and clear of all Liens and Encumbrances other
than those created by the terms of this Agreement.
6.7 Change of Name. Immediately upon consummation of the Exchange, Nesco
shall effect the Nesco Name Change, unless the NRS requires approval thereof by
Nesco Stockholders, in which event, Nesco shall effect the Nesco Name Change
immediately upon the last to occur of filing of the Nesco Information Statement
with the SEC and the filing of the Additional Capitalization Amendment with the
Secretary or Department of State of Nevada.
6.8 Restrictions on Transfer. The parties acknowledge and agree that as of
the Closing Date:
6.8.1None of the Nesco Exchange Shares, the Adviser Shares, the NAC Shares,
the Nesco Debentures, the Nesco Debenture Shares, or the Nesco Series B
Preferred Shares to be issued upon the Nesco Preferred Conversion or
conversion of the Nesco Stockholder Debt (or the shares of Nesco Common
into which shares of Nesco Series B Preferred shall be automatically
converted as provided herein) shall be registered under U.S. Federal or
Blue Sky Laws and are intended to be issued pursuant to an exemption
therefrom under Rule 506 of Regulation D, Section 4(2) of the Act or other
applicable exemption, shall be "restricted securities" within the meaning
of Rule 144 promulgated under the Securities Act, and may not be resold,
offered for resale, transferred, pledged, distributed or otherwise
hypothecated unless registered under the Securities Act and applicable Blue
Sky Laws or exempt from such registration under the terms of Rule 144 or
otherwise, and Nesco receives an opinion of counsel satisfactory to Nesco
in its reasonable discretion to the effect that such registration is not
required. Each certificate representing any Nesco Exchange Shares, shares
Adviser Shares, NAC Shares, shares of Nesco Series B Preferred issued upon
the Nesco Preferred Conversion and conversion of the Nesco Stockholder
Debt, shares of Nesco Common issued upon automatic conversion of the Nesco
Series B Preferred, and the Nesco Debenture Shares and the Nesco Debentures
shall bear a legend substantially in the following form:
Share Exchange Agreement Page 22 of 67
Page 119 of total
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933 (THE "ACT") OR APPLICABLE STATE SECURITIES LAWS AND
ARE "RESTRICTED SECURITIES" WITHIN THE MEANING OF RULE 144 UNDER THE ACT.
THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED,
HYPOTHECATED OR OTHER-WISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS,
OR PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION, PROVIDED THAT THE
ISSUER OF THESE SECURITIES SHALL HAVE FIRST RECEIVED AN OPINION OF COUNSEL
REASONABLY ACCEPTABLE TO THE ISSUER TO THE EFFECT THAT SUCH REGISTRATION IS
NOT REQUIRED."
6.8.2 The shares of HDS Common Stock and HDS Series B Preferred to be
tendered to Nesco in the Exchange or the HDS Warrants and HDS Options to be
exchanged for Nesco Exchange Warrants and Nesco Exchange Options,
respectively, have not been registered under the Securities Act or
applicable Blue Sky Laws and will be offered for exchange pursuant to this
Agreement in compliance with an exemption from such registration under Rule
506 of Regulation D, or Section 4(2) of the Act and may not be offered,
resold, pledged, hypothecated or otherwise transferred unless registered
under the Securities Act and applicable Blue Sky Laws, or exempt from such
registration, provided that Nesco receives an opinion of counsel
satisfactory to Nesco in its reasonable discretion to the effect that such
registration is not required.
6.8.3(i) Nesco shall instruct its transfer agent to annotate the applicable
records to reflect the restrictions on transfer contained in this Agreement
(A) on the Closing Date with respect to the Nesco Exchange Shares, the
Adviser Shares, the Nesco Debentures, the Nesco Debenture Shares, the Nesco
Exchange Options and the Nesco Exchange Warrants issuable upon exchange of
the HDS Term Debt; and (B) on the respective dates of conversion or
issuance prior to the Closing with respect to the NAC Shares and the shares
of Nesco Common issuable upon the Nesco Preferred Conversion, and
conversion of the Nesco Stockholder Debt and the Nesco Debentures and Nesco
Debenture Shares that may be issued to the holder of the Nesco Stockholder
Debt, and (ii) HDS shall instruct its transfer agent, on the Closing Date,
to annotate the applicable records to reflect the restrictions on transfer
contained in this Agreement with respect to the shares of HDS Common
tendered in the Exchange;
Share Exchange Agreement Page 23 of 67
Page 120 of total
6.9 Reservation of Shares. (a) As promptly as practicable following the
Closing Date, Nesco shall file the Additional Capitalization Amendment with the
Nevada Secretary or Department of State and provided a certified copy thereof to
HDS; (b) on the Closing Date or any earlier date of issuance pursuant to the
terms of this Agreement, Nesco shall have reserved for issuance the number of
shares of Nesco Common and Nesco Series B Preferred sufficient to satisfy its
obligations to issue the Nesco Exchange Shares, the Adviser Shares, the NAC
Shares, the Nesco Debenture Shares, the Nesco Warrant Shares, all other shares
of Nesco Common issuable on or prior to the Closing Date pursuant to this
Agreement or pursuant to the exercise of Nesco Options outstanding on the date
hereof; and (c) no later than the date of effectiveness of the Capitalization
Increase Amendment, Nesco shall have reserved for issuance the number of shares
of Nesco Common sufficient to satisfy its obligations to issue Nesco Common upon
automatic conversion of the Nesco Series B Preferred issued or issuable in
connection with the Exchange, including shares of Nesco Series B Preferred
issuable upon exercise of the Harriton Option and any and all Nesco Exchange
Options and Nesco Exchange Warrants, and (ii) consummation of the transactions
contemplated by this Agreement and the other Transaction Documents.
6.10 Obligation to Participate in the Exchange; Exchange Procedures. On the
Closing Date, each HDS Signatory Stockholder shall tender to Nesco for exchange
all shares of HDS Common and HDS Series B Preferred owned by such Stockholder on
the date hereof or issued to such Stockholder (not in contravention of this
Agreement) between the date hereof and the Closing Date, and Nesco shall issue
and deliver to each such HDS Stockholder (and/or its designees) the number and
classification of Nesco Exchange Shares set forth above in this Section 6.
6.11 Expenses of Exchange and Other Transactions. Except as otherwise
provided in Section 16.3, each party shall pay all expenses, including legal and
auditing fees, incurred by such party in connection with the execution, delivery
and performance of this Agreement and consummation of the Exchange and the other
transactions contemplated hereby or by the other Transaction Documents.
7. CLOSING; CLOSING DATE.
7.1 Closing. The Closing of the Exchange and the other transactions
contemplated hereby or by any of the other Transaction Documents to take place
on the Closing Date (the "Closing Transactions") shall take place at 10:00 a.m.,
Eastern Time, on the Closing Date at the offices of Beckman, Lieberman &
Barandes, 116 John Street, Suite 1313, New York, NY 10038, or at such other time
and place as Nesco and HDS may agree.
7.2 Closing Date. The Closing of the Exchange and the other Closing
Transactions shall take place upon five days' written notice from Nesco to HDS,
but not later than sixty (60) days from the date hereof except as modified by
Share Exchange Agreement Page 24 of 67
Page 121 of total
agreement of Nesco and HDS or terminated pursuant to Section 16.3 (the "Closing
Date"). The parties agree to use their best efforts to cause the Nesco
Preliminary Information Statement and the Nesco Information Statement to be
filed with the SEC and the Exchange to be consummated as soon as practicable
hereafter.
7.3 Subsequent Closing Dates. The closing of the Exchange between Nesco and
those HDS Preferred Stockholders, HDS Common Stockholders, and holders of HDS
Options and HDS Warrants who are not HDS Signatory Stockholders and who,
following the Closing Date, wish to participate in the Exchange and comply with
the applicable requirements set forth in Section 6, shall take place on
Subsequent Closing Date(s) to be selected in compliance with the terms of said
Section.
8. EMPLOYMENT AGREEMENT; HARRITON OPTION.
8.1 Employment Agreement. Immediately following the Closing, Nesco shall
enter into an employment agreement with Matthew Harriton, effective as of the
Closing Date, substantially in the form of Exhibit 8.1 hereto (the "Employment
Agreement").
8.2 Harriton Option. On the Closing Date, Nesco shall issue to Matthew
Harriton an option to purchase Nesco Common on the following terms (the
"Harriton Option"):
8.2.1The Harriton Option shall grant Matthew Harriton the right to purchase
up to 5,000,000 shares of Nesco Common at the Applicable Trading Price per
share.
8.2.2The Harriton Option shall be exercisable for a period of five (5)
years commencing on the Closing Date (the "Exercise Period") and shall be
immediately exercisable for the purchase of 2,000,000 shares of Nesco
Common and exercisable as to an additional 1,000,000 shares of Nesco Common
commencing on each of the first, second and third anniversaries of the
Closing Date, respectively, provided that grantee remains a consultant to
or employee of Nesco or any subsidiary of Nesco, but if Nesco exercises its
right to terminate the Employment Agreement after the Initial Term without
specifying reasons for termination that constitute grounds for termination
for "cause" as defined in the Employment Agreement, the Harriton Option
shall become immediately exercisable as to all 5,000,000 shares. Following
termination of the Employment Agreement for any reason, the Harriton Option
shall thereafter remain exercisable for the balance, if any, of the
Exercise Period for the same number of shares of Nesco Common for which the
Harriton Option was exercisable upon termination of the Employment
Agreement, subject to the provisions of the immediately preceding sentence.
Share Exchange Agreement Page 25 of 67
Page 122 of total
8.2.3Anything contained in this Section 8.2 to the contrary
notwithstanding, the Harriton Option shall provide that until the last to
occur of the filing of the Information Statement with the SEC and filing of
the Additional Capitalization Amendment pursuant to the NRS, to the extent
that the Harriton Option is exercisable for shares of Nesco Common as
provided in Section 8.2.2, it shall instead be exercisable for the
equivalent number of shares of Nesco Series B Preferred.
9. REPRESENTATIONS AND WARRANTIES OF NESCO AND THE NESCO SIGNATORY STOCKHOLDERS.
Nesco and the Nesco Signatory Stockholders represent and warrant:
9.1 Corporate Existence and Power. Nesco is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Nevada and has all corporate power and authority and all Governmental Permits
required to carry on its business as now conducted, except for those
Governmental Permits, the absence of which would not, individually or in the
aggregate, have a Material Adverse Effect. Nesco is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
where such qualification is necessary, except for those jurisdictions where
failure to be so qualified would not, individually or in the aggregate, have a
Material Adverse Effect on Nesco.
9.2 Articles of Incorporation and By-laws; Minute Books. The copies of the
articles of incorporation and by-laws of Nesco, each as amended , provided by
Nesco to HDS are true, correct and complete. The minute books of Nesco contain
true and complete records of all meetings and consents in lieu of meetings of
its Board of Directors (and any committees thereof), or similar governing
bodies, and true, correct and complete records of all meetings and consents in
lieu of meetings of Nesco's stockholders since the time of its organization. The
stock books of Nesco are true, correct and complete.
9.3 Corporate Authorization. The execution, delivery and performance by
Nesco of this Agreement and the other Transaction Documents and the consummation
by it of the transactions contemplated hereby and thereby are within Nesco's
corporate powers and have been duly authorized by all necessary corporate
action. No vote of the holders of the outstanding shares of Nesco Common, Nesco
Series A Preferred or any other securities of Nesco is necessary in connection
with the consummation of the Exchange on the Closing Date and the other
transactions contemplated hereby to be consummated on the Closing Date. Each of
this Agreement and the other Transaction Documents constitutes a valid and
binding agreement of Nesco enforceable against Nesco in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization or other laws affecting the enforcement of creditors' rights
generally now or hereafter in effect and subject to the application of equitable
principles and the availability of equitable remedies.
Share Exchange Agreement Page 26 of 67
Page 123 of total
9.4 Nesco Board Consent. The execution, delivery and performance by Nesco
of this Agreement and each of the other Transaction Documents has been duly
authorized by Nesco's Board of Directors which, at a meeting duly called and
held, duly (a) determined that this Agreement and the other Transaction
Documents, the Exchange and the other transactions contemplated hereby and
thereby are fair to and in the best interests of Nesco's Stockholders, and (b)
approved and adopted this Agreement, the other Transaction Documents, the
Exchange and the other transactions contemplated hereby or thereby, which
approval satisfies in full any applicable requirements of the NRS. The
resolutions of the Nesco Board attached to Exhibit 9.4 hereto are true, complete
and correct copies of the resolutions duly adopted by Nesco's Board relating to
this Agreement, the other Transaction Documents, the Exchange and the other
transactions contemplated hereby and thereby.
9.5 Governmental Authorization. The execution, delivery and performance by
Nesco of this Agreement and the other Transaction Documents and the consummation
by Nesco of the transactions contemplated hereby or thereby require no action by
or in respect of, or filing with, any Governmental Authority other than (a) the
filing of the Additional Capitalization Amendment and the Reverse Split
Amendment in accordance with the NRS, (b) filing with the SEC of Current Reports
on Form 8-K with respect to (i) the execution and delivery of this Agreement and
(ii) the Closing, (c) compliance with any applicable requirements of Regulation
D and Blue Sky Laws, and (d) any other filings, including the Nesco Information
Statement in connection with dissenters rights, if any, and/or other approvals
or authorizations which, if not obtained, would not, individually or in the
aggregate, have a Material Adverse Effect on Nesco or materially impair the
ability of Nesco to consummate the transactions contemplated by this Agreement.
9.6 Non-Contravention. The execution, delivery and performance by Nesco of
this Agreement and the other Transaction Documents and the consummation by Nesco
of the transactions contemplated hereby and thereby do not and will not (a)
violate the certificate of incorporation or bylaws of Nesco, (b) assuming
compliance with the matters referred to in Section 9.5(d), violate any
applicable law, rule, regulation, judgment, injunction, order or decree, (c)
require any consent or other action by any Person under, constitute a default
under, or give rise to any right of termination, cancellation or acceleration of
any right or obligation of Nesco or to a loss of any benefit to which Nesco is
entitled under any provision of any agreement or other instrument binding upon
Nesco or any Governmental Permit, or other similar authorization affecting, or
relating in any way to, the assets or business of Nesco, or (d) result in the
creation or imposition of any Lien or Encumbrance on any asset of Nesco except,
in the case of clauses (b), (c) and (d), for such matters as would not,
individually or in the aggregate, have Material Adverse Effect on Nesco or
materially impair the ability of Nesco to consummate the transactions
contemplated by this Agreement.
9.7 Capitalization; Validity of Securities. As of the Closing Date, the
authorized capital stock of Nesco will consist of 25,000,000 shares of Nesco
Common and 1,000,000 shares of preferred stock, of which Nesco shall have
designated as Nesco Series B Preferred a number of shares sufficient to meet
Nesco's obligations under this Agreement and effectuate the transactions
contemplated hereby. As of the date hereof, the authorized capital stock of
Nesco is as set forth in Section 3.1.1 and the outstanding capital stock and
other securities of Nesco are as set forth in Sections 3.1.2 through 3.1.5. All
outstanding shares of capital stock and other securities of Nesco have been duly
authorized and validly issued an are fully paid and non-assessable. Except as
set forth in Sections 3.1.2 through 3.1.4, there are no outstanding (a) shares
of capital stock or voting securities of Nesco, (b) securities of Nesco
Share Exchange Agreement Page 27 of 67
Page 124 of total
convertible into or exercisable or exchangeable for shares of capital stock or
voting securities of Nesco or (c) options, restricted stock, other stock-based
compensation awards or other rights to acquire from Nesco or other obligation of
Nesco to issue, any capital stock, voting securities or securities convertible
into or exchangeable for capital stock or voting securities of Nesco. Other than
as provided in this Agreement, there are no outstanding obligations of Nesco or
any of its subsidiaries to repurchase, redeem or otherwise acquire any
securities referred to in clauses (a), (b) or (c) above. The Nesco Exchange
Shares, the Adviser Shares, the NAC Shares, the Nesco Warrant Shares, the Nesco
Debentures, the Nesco Debentures Shares when issued, sold and delivered, and the
Nesco Exchange Options and Nesco Exchange Warrants when deemed exchanged for HDS
Options and HDS Warrants pursuant to the terms of this Agreement, will be duly
and validly issued (including compliance with Regulation D and applicable Blue
Sky Laws), fully-paid, and non-assessable and shall be free and clear of all
Liens and Encumbrances of any nature whatsoever. The Nesco Preliminary
Information Statement and the Nesco Information Statement shall provide for an
increase in the number of shares of Nesco Common which Nesco is currently
authorized to issue to 400,000,000 shares, and the same shall be set forth in
the Additional Capitalization Amendment.
9.8 Subsidiaries; No Liability for Obligations of NAC Entities. Nesco has
no subsidiaries other than the NAC Entities. Prior to the Closing, the NAC
Entities shall have been disposed of in compliance with the terms of Section
4.5.
9.9 SEC Filings.
9.9.1Nesco has delivered to HDS (i) Nesco's Annual Report for its 1999 through
2003 fiscal years, (ii) all proxy or information statements relating to meetings
of, or actions taken without a meeting by, the stockholders of Nesco since
November 1, 1999 and (c) all of its other reports, statements, schedules and
registration statements filed by Nesco with the SEC since November 1, 1999 (all
of the documents referred to in this Section 9.9.1 collectively, the "Nesco SEC
Filings").
9.9.2As of its filing date, each Nesco SEC Filing complied as to form and in
substance in all material respects with the applicable requirements of the
Securities Act and the Exchange Act and did not contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading.
9.10 Financial Statements. The audited consolidated financial statements
and unaudited consolidated interim financial statements of Nesco included in the
SEC Filings fairly present, in conformity with GAAP (except, as to application
on a consistent basis, as may be indicated in the notes thereto), the
consolidated financial position of Nesco as of the dates there of and the
consolidated results of operations and cash flows for the periods then ended
Share Exchange Agreement Page 28 of 67
Page 125 of total
(subject to normal year-end adjustments in the case of any unaudited interim
financial statements). For purposes of this Agreement, "Nesco Balance Sheet"
means the unaudited consolidated balance sheet of Nesco as of October 31, 2003
set forth in Nesco's Quarterly Report for the period end October 31, 2003 on
Form 10-QSB, as filed with the SEC on December 22, 2003, and "Nesco Balance
Sheet Date" means October 31, 2003.
9.11 Absence of Certain Changes. Since Nesco Balance Sheet Date, the
business of Nesco has been conducted in the ordinary course consistent with past
practices and there has not been, except as set forth in Section 9.11 of the
Nesco Disclosure Schedule or any SEC Filing made between the Balance Sheet Date
and the date hereof or required pursuant to the terms of this Agreement:
9.11.1any event, occurrence, development or state of circumstances or facts
which would, individually or in the aggregate, have a Material Adverse
Effect on Nesco, other than adverse effects resulting from the execution
and performance of this Agreement;
9.11.2any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of Nesco;
9.11.3except for the Additional Capitalization Amendment and the Reverse
Split Amendment, there has not been any amendment of any material term of
any outstanding security of Nesco.
9.11.4any incurrence, assumption or guarantee by Nesco of any material
indebtedness for borrowed money other than in the ordinary course and in
amounts and on terms consistent with past practices;
9.11.5any creation or other incurrence by Nesco of any Lien or Encumbrance
on any material asset other than in the ordinary course consistent with
past practices;
9.11.6any making of any material loan, advance or capital contributions to
or investment in any Person;
9.11.7any damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business or assets of Nesco which
would, individually or in the aggregate, have a Material Adverse Effect on
Nesco;
Share Exchange Agreement Page 29 of 67
Page 126 of total
9.11.8any transaction or commitment made, or any contract or agreement
entered into, by Nesco relating to its assets or business (including the
acquisition or disposition of any assets) or any relinquishment by Nesco of
any contract or other right, in either case, material to Nesco as a whole,
other than transactions and commitments in the ordinary course consistent
with past practices and those contemplated by this Agreement;
9.11.9any change in any method of accounting, method of tax accounting, or
accounting practice by Nesco except for any such change required by reason
of a concurrent change in GAAP or Regulation S- X promulgated under the
Exchange Act;
9.11.10 any (i) grant of any severance or termination pay to any current or
former director, officer or employee of Nesco, (ii) increase in benefits
payable under any existing severance or termination pay policies or
employment agreements, (iii) entering into of any employment, deferred
compensation or other similar agreement (or any amendment to any such
existing agreement) with any current or former director, officer or
employee of the Nesco, (iv) establishment, adoption or amendment (except as
required by applicable law) of any collective bargaining, bonus, profit
sharing, thrift, pension, retirement, deferred compensation, compensation,
stock option, restricted stock or other benefit plan or arrangement
covering any current or former director, officer or employee of Nesco, or
(v) increase in compensation, bonus or other benefits payable or otherwise
made available to any current or former director, officer or employee of
Nesco;
9.11.11 any material dispute or, with any officer, director or employee of
Nesco; or any tax election or any settlement or compromise of any tax
liability, that, individually or in the aggregate, are material to Nesco.
9.12 No Undisclosed Material Liabilities. As of the date hereof, there are
Share Exchange Agreement Page 30 of 67
Page 127 of total
no liabilities of Nesco of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, and there is
no existing condition, situation or set of circumstances which could
reasonably be expected to result in such a liability, other than:
9.12.1liabilities or obligations provided for in Nesco Balance Sheet or
disclosed in the notes thereto;
9.12.2other liabilities or obligations, which would not, individually or in
the aggregate, have a Material Adverse Effect on Nesco; and
9.12.3liabilities or obligations under this Agreement.
9.13 Compliance with Laws and Court Orders. Except as set forth in Section
9.13 of the Nesco Disclosure Schedule or in any SEC Filing made between the
Balance Sheet Date and the date hereof, Nesco is and has been in compliance
with, and to the best knowledge of Nesco, is not under investigation with
respect to and has not been threatened to be charged with or given notice of any
violation of, any applicable law, rule, regulation, judgment, injunction, order
or decree, including, without limitation, the requirements of the Exchange Act,
the Securities Act, ERISA or any federal labor laws except for such matters as
would not, individually or in the aggregate, have a Material Adverse Effect on
Nesco.
9.14 Litigation. Except as specifically set forth in any SEC Filings made
between the Nesco Balance Sheet Date and the date hereof or Section 9.14 of the
Nesco Disclosure Schedule, there is: (a) no claim, dispute, action, suit,
proceeding or investigation pending or, to the knowledge of Nesco, threatened,
against or affecting the business of Nesco, or challenging the validity or
propriety of the transactions contemplated by this Agreement or any of the other
Transaction Documents, at law or in equity or admiralty or before any federal,
state, local, foreign or other governmental authority, board, agency, commission
or instrumentality, nor to the knowledge of Nesco, has any such claim, dispute,
action, suit, proceeding or investigation been pending or threatened, during the
12 month period preceding the date hereof; (b) no outstanding judgment, order,
writ, ruling, injunction, stipulation or decree of any court, arbitrator or
federal, state, local, foreign or other governmental authority, board, agency,
commission or instrumentality, against or materially affecting the business of
Nesco; and (c) Nesco has not received any written or verbal inquiry from any
federal, state, local, foreign or other governmental authority, board, agency,
commission or instrumentality concerning the possible violation of any law, rule
or regulation or any matter disclosed in respect of its business. The disclosure
in such SEC Filings with respect to any matters covered by this Section 9.14 are
true, correct and complete in all material respects on the dates when made and
on the date hereof and do not contain any misstatement of any related material
fact or omit to state any such material fact required to be stated therein in
order to make the statements contained therein not misleading.
9.15 Finder's Fee. There is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of
Nesco who might be entitled to any fee or commission in connection with the
transactions contemplated by this Agreement.
9.16 Taxes. Except as set forth in the Nesco Balance Sheet (including the
notes thereto) and except as would not, individually or in the aggregate, have a
Material Adverse Effect on Nesco, (a) all tax returns, statements, reports and
forms (collectively, the "Nesco Returns") required to be filed with any taxing
authority by, or with respect to, Nesco and each affiliated, combined,
Share Exchange Agreement Page 31 of 67
Page 128 of total
consolidated or unitary group of which Nesco is a member are true, correct and
complete and have been filed in accordance with all applicable laws; (b) Nesco
has timely paid all taxes shown as due and payable on the Nesco Returns that
have been so filed (other than taxes which are being contested in good faith and
for which adequate reserves are reflected on the Nesco Balance Sheet) and, as of
the time of filing, the Nesco Returns correctly reflected the facts regarding
the income, business, assets, operations, activities and the status of Nesco;
(c) Nesco has made adequate provision in accordance with GAAP for all taxes
payable by Nesco for which no Nesco Return has yet been filed; (d) the charges,
accruals and reserves for taxes with respect to Nesco reflected on the Nesco
Balance Sheet are adequate under GAAP to cover the tax liabilities accruing
through the date thereof; (e) there is no action, suit, proceeding, audit or
claim now proposed or pending against or with respect to Nesco in respect of any
tax where there is a reasonable possibility of an adverse determination; (f)
Nesco is not and has not been a member of an affiliated, consolidated, combined
or unitary group other than one of which Nesco was the common parent.
9.17 Employee Benefit Plans. Other than as shall be fully described on the
Nesco Disclosure Schedule, Nesco does not maintain, nor has Nesco maintained in
the past, any "employee benefit plans" (as defined in Section 3(3) of ERISA, or
any plans, programs, policies, practices, arrangements or contracts (whether
group or individual) providing for payments, benefits or reimbursements to
employees of Nesco, former employees, their beneficiaries and dependents under
which such employees, former employees, their beneficiaries and dependents are
covered through an employment relationship with Nesco, any entity required to be
aggregated in a controlled group or affiliated service group with Nesco for
purposes of ERISA or the Code (including, without limitation, under Section
414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA, at any relevant
time ("Benefit Plans").
9.18 Environmental Matters. Except as set forth in Nesco SEC Filings prior
to the date hereof and except as would not, individually or in the aggregate,
have a Material Adverse Effect on Nesco:
9.18.1no notice, notification, demand, request for information, citation,
summons or order has been received, no complaint has been filed, no penalty
has been assessed, and no investigation, action, claim, suit, proceeding or
review is pending or, to the knowledge of Nesco, is threatened by any
governmental entity or other person relating to or arising out of any
Environmental Law;
9.18.2Nesco is and has been in compliance with all Environmental Laws and
all Environmental Permits; and
Share Exchange Agreement Page 32 of 67
Page 129 of total
9.18.3There are no liabilities of or relating to Nesco of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable
or otherwise arising under or relating to any Environmental Law and there
are no facts, conditions, situations or set of circumstances which could
reasonably be expected to result in or be the basis for any such liability.
9.18.4The terms "Nesco" shall, for purposes of this Section, include any
entity which is, in whole or in part, a corporate predecessor of Nesco or
any of the NAC Entities or any other subsidiary of Nesco.
9.19 Patents and Other Proprietary Rights. Nesco does not have any
Intellectual Property Right that is material to its business as now conducted.
To the best of Nesco's knowledge, Nesco has not and does not violate or infringe
any Intellectual Property Right of any other person, and Nesco has not received
any communication alleging that it violates or infringes any Intellectual
Property Right of any other person. Except for such matters as would not,
individually or in the aggregate, have a Material Adverse Effect on Nesco, Nesco
has not been sued for infringing any Intellectual Property Right of another
person.
9.20 Antitakeover Statutes. Excluding any statute or regulation applicable
solely by virtue of the jurisdiction of incorporation of HDS as to which Nesco
takes no position nor makes any representation or warranty, no antitakeover or
similar statute or regulation applies to the transactions contemplated hereby.
9.21 Affiliate Transactions. Except as disclosed in Section 9.21 of the
Nesco Disclosure Statement or any SEC Filing(s) made between the Nesco Balance
Sheet Date and the date hereof, either Nesco nor any officer, director or
employee of Nesco or any of the relatives, Affiliates or Associates of any of
the aforementioned Persons) is a party to any agreement, contract, commitment or
transaction with Nesco or affecting the business of Nesco or any of its
subsidiaries, or has any interest in any property, whether real, personal or
mixed, or tangible or intangible, used in or necessary to Nesco or any of its
subsidiaries which will subject Nesco, HDS or any of the Sellers to any
liability or obligation from and after the Closing Date.
9.22 Trading; Reporting Company Status. Nesco Common is currently listed
for trading on the OTCBB, and Nesco has received no notice that the Nesco Common
is subject to being delisted therefrom. Nesco is a reporting company under
Section 12(g) of the Exchange Act and has timely filed all reports and other
documents required to be filed by it under the Exchange Act.
9.23 Investment Representations. Nesco is acquiring shares of HDS Common
and HDS Series B Preferred for investment for its own account and not as a
nominee or agent, and not with a view to the resale or distribution of any part
thereof. Nesco understands that the offer and sale of shares of HDS Common and
Share Exchange Agreement Page 33 of 67
Page 130 of total
HDS Series B Preferred have not been and will not be registered under the
Securities Act or applicable state securities laws on the ground that the sale
and the issuance of securities hereunder is exempt from registration under the
Securities Act pursuant to Section 4(2) thereof, and that reliance by HDS on
such exemption is predicated on the representations of Nesco set forth in this
Section 9.23 and Section 9.26.
9.24 Insurance. Nesco has in effect directors' and officers' liability
insurance for the coverage amounts set forth in Section 9.24(a) of the Nesco
Disclosure Schedule. Each policy providing such directors' and officers'
liability insurance, the name(s) of the insured(s) and any additional loss
payee(s), the amounts and types of coverage and policy numbers are as set forth
in Section 9.24(a) of the Nesco Disclosure Schedule. Nesco shall take all
actions and deliver all written materials and execute such documents and
instruments as may be required to ensure that all Persons who will serve as
executive officers or directors of Nesco following the Exchange who do not serve
in such capacities on the date hereof are covered by such directors' and
officers' liability insurance policy or policies in amounts consented to by HDS,
which consent shall not be unreasonably withheld.
Nesco and/or the NAC Entities maintain in effect the liability insurance
and other business insurance policies described in Section 9.24(b) of the Nesco
Disclosure Schedule; Nesco shall do all things necessary and proper to retain
its status as an insured and additional loss payee on each such liability
insurance policy relating to any of the activities of any NAC Entity after the
date of disposition of each NAC Entity with respect to losses and claims that
may arise relating to any period on or prior to the Closing Date. Nesco has
provided to HDS true, complete and correct copies of all of the foregoing
insurance policies, each as currently in effect.
9.25 Ownership of Signatory Stockholders. On the date hereof, the Nesco
Signatory Stockholders hold a sufficient percentage of the securities of Nesco
entitled to vote (or that will be entitled to vote on the Closing Date), on a
fully-diluted basis, that is required by the NRS and the articles of
incorporation and by-laws of Nesco to bind Nesco to its obligations hereunder
and to authorize and effectuate the Exchange, the Reverse Split, the Reverse
Split Amendment, the Nesco Name Change, the Additional Capitalization Amendment
and the other transactions required to be effected by Nesco pursuant to this
Agreement. Except as otherwise expressly provided herein, the Nesco Signatory
Stockholders shall not offer, sell, transfer, pledge, assign or otherwise
dispose of any of their shares of Nesco Common or securities convertible into or
exchangeable for Nesco Common or Nesco Series B Preferred (other than the Nesco
Warrant Shares) from the date hereof until the earlier of (a) termination of
this Agreement, (b) the date of filing of the Nesco Information Statement with
the SEC and (c) the date of filing of the Additional Capitalization Amendment
pursuant to the NRS. On the date hereof the Nesco Signatory Stockholders own,
and shall at all relevant times continue to own, a sufficient number of shares
of Nesco Common and Nesco Series A Preferred to authorize the consummation of
the Exchange and the other transactions contemplated by this Agreement and the
other Transaction Documents by written consent. There is no provision of the
articles of incorporation or by-laws of Nesco or any other agreement to which
Nesco or any security holder of Nesco is a party that would prohibit the Nesco
Signatory Stockholders from authorizing consummation of the Exchange and the
other transactions contemplated hereby and by the other transaction documents by
written consent.
Share Exchange Agreement Page 34 of 67
Page 131 of total
9.26 Accredited Investor Status. Each Nesco creditor and each Person who,
on the date hereof, is the beneficial owner of any securities of Nesco and who,
pursuant to the terms of this Agreement, will receive any shares of Nesco Common
or any securities convertible into or exchangeable for Nesco Common pursuant to
the terms of this Agreement is an Accredited Investor. Each such Person shall
confirm in writing that such Person is an Accredited Investor prior to the
Closing.
9.27 Nesco Signatories. The Nesco Signatory Stockholders include each
officer, director and holder of 5% of each class of outstanding voting
securities of Nesco. Each Nesco Signatory Stockholder hereby consents, in
respect of all voting securities of Nesco held by such Stockholder, to the
Exchange and the other transactions contemplated hereby and by the other
Transaction Documents. Each Nesco Signatory Stockholder covenants, represents
and warrants that such Stockholder shall do all acts and things, including the
execution and delivery of all documents and instruments, necessary or proper (a)
to effectuate the Exchange and the other transactions contemplated hereby and by
any of the other Transaction Documents and (b) to cause Nesco to carry out its
obligations hereunder and under each of the other Transaction Documents, whether
by vote or written consent of such Stockholder, or otherwise.
9.28 No General Solicitation. Solicitation by Nesco of participants in the
Exchange and the exchange of currently outstanding Nesco securities for shares
of Nesco Common or Nesco Series B Preferred shall be effected without use of any
form of general solicitation or advertising and in all other respects in
compliance with the requirements for an exemption from registration pursuant to
Regulation D.
10. REPRESENTATION AND WARRANTIES OF HDS AND THE HDS SIGNATORY STOCKHOLDERS. HDS
and the HDS Signatory Stockholders that are executive officers or directors of
HDS represent and warrant that, except as otherwise set forth herein or in HDS
Disclosure Schedule:
10.1 Corporate Existence and Power. HDS is a company duly incorporated,
validly existing and in good standing under the laws of the State of Delaware
and has all corporate power and authority and all Governmental Permits required
to carry on its business as now conducted, except for those Governmental Permits
the absence of which would not, individually or in the aggregate, have a
Material Adverse Effect.
10.2 Certificate of Incorporation and By-laws; Minute Books. The copies
provided to Nesco by HDS of its certificate of incorporation and by-laws are
true, correct and complete copies thereof, each as amended to date. The minute
books of HDS contain true and complete records of all meetings and consents in
lieu of meetings of its Board of Directors (and any committees thereof), or
similar governing bodies, since the time of its organization. The stock books of
HDS are true, correct and complete.
Share Exchange Agreement Page 35 of 67
Page 132 of total
10.3 Corporate Authorization. The execution, delivery and performance by
HDS of this Agreement and the other Transaction Documents and the consummation
by HDS of the transactions contemplated hereby and thereby are within HDS's
corporate powers and have been duly authorized by all necessary corporate action
of HDS. If any vote of or consent by the holders of any outstanding shares of
HDS Common or any other securities of HDS is necessary in connection with the
consummation of the Exchange and the other transactions contemplated hereby,
each HDS Signatory Stockholder shall vote in favor thereof or provide written
consent thereto. This Agreement and each of the other Transaction Documents
constitutes a valid and binding agreement of HDS, enforceable against HDS in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or other laws affecting the enforcement
of creditors' rights generally now or hereafter in effect and subject to the
application of equitable principles and the availability of equitable remedies.
This Agreement and each of the other Transaction Documents constitutes a valid
and binding agreement of each HDS Signatory Stockholder, enforceable against
each such Stockholder in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization or other
laws affecting the enforcement of creditors' rights generally now or hereafter
in effect and subject to the application of equitable principles and the
availability of equitable remedies.
10.4 HDS Board Consent. The execution, delivery and performance by HDS of
this Agreement and each of the other Transaction Documents to which HDS is a
party have been duly authorized by HDS's Board of Directors, which, approved and
adopted this Agreement, such other Transaction Documents, the Exchange and the
other transactions contemplated hereby or thereby and involving HDS. The
resolutions of the HDS Board attached as Exhibit 10.4 hereto are true, complete
and correct copies of resolutions duly adopted by HDS's Board relating to this
Agreement, the other Transaction Documents, the Exchange and the other
transactions contemplated hereby and thereby.
10.5 Governmental Authorization. The execution, delivery and performance by
HDS and each HDS Signatory Stockholder of this Agreement and the other
Transaction Documents to be executed by HDS and the consummation by HDS of the
transactions contemplated hereby or thereby involving HDS require no action by
or in respect of, or filing with, any Governmental Authority other than
compliance with any applicable requirements of Regulation D and Blue Sky Laws,
and any other filings, approvals or authorizations which, if not obtained, would
not, individually or in the aggregate, have a material adverse effect on HDS or
materially impair the ability of HDS or any of the HDS Signatory Stockholders to
consummate the transactions contemplated by this Agreement or any of the other
Transaction Documents.
10.6 Non-Contravention. The execution, delivery and performance by HDS or
any of the HDS Signatory Stockholders of this Agreement and the other
Transaction Documents and the consummation by HDS of the Exchange and the other
transactions involving HDS contemplated hereby or thereby do not and will not
(a) violate the certificate of incorporation or by-laws of HDS, (b) assuming
compliance with the matters referred to in Sections 9.5 and 10.5, violate any
applicable law, rule, regulation, judgment, injunction, order or decree, (c)
require any consent or other action by any Person under, constitute a default
under, or give rise to any right of termination, cancellation or acceleration of
any right or obligation of HDS or a loss of any benefit to which HDS is entitled
Share Exchange Agreement Page 36 of 67
Page 133 of total
under any provision of any agreement or other instrument binding upon HDS (other
than the Certificate of Designation with respect to the HDS Series B Preferred)
or any Governmental Permit other similar authorization affecting, or relating in
any way to, the assets or business of HDS or any of its subsidiaries, or (d)
result the creation or imposition of any Lien or Encumbrance on any asset of HDS
except, in the case of clauses (b), (c) and (d), for such matters as would not,
individually or in the aggregate, have Material Adverse Effect on HDS or
materially impair the ability of HDS to consummate the transactions contemplated
by this Agreement or any of the other Transaction Documents.
10.7 Capitalization; Validity of Securities. As of the date hereof, the
authorized capital stock of HDS is as set forth in Section 3.1.3 hereof. As of
the date hereof, the outstanding capital stock and other securities of HDS are
as set forth in Section 3.3.2. All outstanding shares of capital stock of HDS
have been duly authorized and validly issued an are fully paid and
non-assessable. Except as set forth in this Agreement, there are no outstanding
(a) shares of capital stock or voting securities of HDS, (b) securities of HDS
convertible into exchangeable for shares of capital stock or voting securities
of HDS or (c) options, restricted stock, other stock- based compensation awards
or other rights to acquire from HDS or other obligation of HDS to issue, any
capital stock, voting securities or securities convertible into or exercisable
or exchangeable for capital stock or voting securities of HDS. There are no
outstanding obligations of HDS or any of its subsidiaries to repurchase, redeem
or otherwise acquire any securities referred to in clauses (a), (b) or (c)
above. The shares of HDS Common and HDS Series B Preferred, when transferred and
delivered pursuant to the terms of this Agreement, will be duly and validly
issued (including, without limitation, compliance with Regulation D and
applicable Blue Sky Laws), fully-paid, and non-assessable. The assignments,
endorsements, stock powers and other instruments of transfer to be delivered by
each Seller to Nesco at the Closing will be sufficient to transfer such Seller's
entire interest, legal and beneficial, in such HDS shares. Each HDS Signatory
Stockholder has full power and authority to transfer its shares of HDS Common
and/or HDS Series B Preferred, and upon transfer to Nesco of the instruments
representing such shares, Nesco will receive good and marketable title to such
shares, free and clear of all Liens and Encumbrances.
10.8 Subsidiaries. HDS does not as of the date hereof own, directly or
indirectly, any capital stock, equity or interest in any corporation, firm,
partnership, joint venture or other entity other than those listed in Section
10.8 of the HDS Disclosure Schedule.
10.9 Financial Statements; Absence of Certain Changes. For purposes of this
Agreement, "HDS Balance Sheet" means the unaudited balance sheet of HDS, as of
October 31, 2003 included as Exhibit 10.9 to this Agreement, and "HDS Balance
Sheet Date" means October 31, 2003. Except as otherwise set forth in Section
10.9 of the HDS Disclosure Schedule or required by the terms of this Agreement
or any of the other Transaction Documents, since the HDS Balance Sheet Date, the
business of HDS and its subsidiaries has been conducted in the ordinary course
consistent with past practices and there has not been:
Share Exchange Agreement Page 37 of 67
Page 134 of total
10.9.1any even, occurrence, development or state of circumstances or facts
which would, individually or in the aggregate, have a Material Adverse
Effect on HDS, other than adverse effects resulting from the execution and
performance of this Agreement;
10.9.2any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of HDS;
10.9.3there has not been any amendment of any material term of any
outstanding security of HDS or any of its subsidiaries;
10.9.4any incurrence, assumption or guarantee by HDS or any of its
subsidiaries of any material indebtedness for borrowed money other than in
the ordinary course and in amounts and on terms consistent with past
practices;
10.9.5any creation or other incurrence by HDS or any of its subsidiaries of
any Lien or Encumbrance on any material asset other than in the ordinary
course consistent with past practices;
10.9.6any making of any material loan, advance or capital contributions to
or investment in any person other than loans, advances or capital
contributions made in the ordinary course consistent with past practices;
10.9.7any damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business or assets of HDS or any of its
subsidiaries which would, individually or in the aggregate, have a Material
Adverse Effect on HDS.
10.9.8any transaction or commitment made, or any contract or agreement
entered into, by HDS or any of its subsidiaries relating to its assets or
business (including the acquisition or disposition of any assets) or any
relinquishment by HDS or any of its subsidiaries of any contract or other
right, in either case, material to HDS and its subsidiaries, taken as a
whole, other than transactions and commitments in the ordinary course
consistent with past practices and those contemplated by this Agreement;
Share Exchange Agreement Page 38 of 67
Page 135 of total
10.9.9any (i) grant of any severance or termination pay to any current or
former director, officer or employee of HDS or any of its subsidiaries,
(ii) increase in benefits payable under any existing severance or
termination pay policies or employment agreements, (iii) entering into of
any employment, deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any current or former
director, officer or employee of the Nesco or any of its subsidiaries, (iv)
establishment, adoption or amendment (except as required by applicable law)
of any collective bargaining, bonus, profit sharing, thrift, pension,
retirement, deferred compensation, compensation, stock option, restricted
stock or other benefit plan or arrangement covering any current or former
director, officer or employee of HDS or any of its subsidiaries, or (v)
increase in compensation, bonus or other benefits payable or otherwise made
available to any current or former director, officer or employee of HDS or
any of its subsidiaries;
10.9.10any material dispute or, with any officer, director or employee of
HDS; or any tax election or any settlement or compromise of any tax
liability, in either case that is material to HDS and its subsidiaries,
taken as a whole.
10.10 No Undisclosed Material Liabilities. As of the date hereof, there are
no liabilities of HDS or any of its subsidiaries of any kind whatsoever, whether
accrued, contingent, absolute, determined, determinable or otherwise, and there
is no existing condition, situation or set of circumstances which could
reasonably be expected to result in such a liability, other than:
10.10.1 liabilities or obligations provided for in HDS Balance Sheet or
disclosed in the notes thereto;
10.10.2 other liabilities or obligations, which would not, individually or
in the aggregate, have a Material Adverse Effect on HDS;
10.10.3 liabilities or obligations under this Agreement; and
10.10.4 liabilities or obligations described in this Agreement or in
Section 10.10 of the HDS Disclosure Schedule.
10.11 Compliance with Laws and Court Orders. HDS and each of its
subsidiaries is and has been in compliance with, and to the best knowledge of
HDS, is not under investigation with respect to and has not been threatened to
Share Exchange Agreement Page 39 of 67
Page 136 of total
be charged with or given notice of any violation of, any applicable law, rule,
regulation, judgment, injunction, order or decree, except for such matters as
would not, individually or in the aggregate, have a Material Adverse Effect on
HDS.
10.12 Litigation. There is no claim, dispute, action, suit, proceeding or
investigation pending or, to the knowledge of HDS, threatened, against or
affecting the business of HDS, or challenging the validity or propriety of the
transactions contemplated by this Agreement, at law or in equity or admiralty or
before any federal, state, local, foreign or other governmental authority,
board, agency, commission or instrumentality, nor to the knowledge of HDS, has
any such claim, dispute, action, suit, proceeding or investigation been pending
or threatened, during the 12 month period preceding the date hereof; (b) there
is no outstanding judgment, order, writ, ruling, injunction, stipulation or
decree of any court, arbitrator or federal, state, local, foreign or other
governmental authority, board, agency, commission or instrumentality, against or
materially affecting the business of HDS ; and (c) HDS has not received any
written or verbal inquiry from any federal, state, local, foreign or other
governmental authority, board, agency, commission or instrumentality concerning
the possible violation of any law, rule or regulation or any matter disclosed in
respect of its business.
10.13 Finder's Fee. There is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of HDS
or any of its subsidiaries who might be entitled to any fee or commission in
connection with the transactions contemplated by this Agreement other than
Adviser. Adviser has agreed that its sole compensation for acting as an adviser
to HDS in connection with the Exchange and any other transactions contemplated
hereby or by any other Transaction Document shall be the Adviser Shares.
10.14 Taxes. Except as set forth in the HDS Balance Sheet (including the
notes thereto) or Section 10.14 of the HDS Disclosure Schedule and except as
would not, individually or in the aggregate, have a Material Adverse Effect on
HDS, (a) all tax returns, statements, reports and forms (collectively, the "HDS
Returns") required to be filed with any taxing authority by, or with respect to,
HDS and its subsidiaries and each affiliated, combined, consolidated or unitary
group of which HDS is a member are true, correct and complete and have been
filed in accordance with all applicable laws; (b) HDS and its subsidiaries have
timely paid all taxes shown as due and payable on the HDS Returns that have been
so filed (other than taxes which are being contested in good faith and for which
adequate reserves are reflected on the HDS Balance Sheet) and, as of the time of
filing, the HDS Returns correctly reflected the facts regarding the income,
business, assets, operations, activities and the status of HDS and its
subsidiaries; (c) the charges, accruals and reserves for taxes with respect to
HDS and its subsidiaries reflected on the HDS Balance Sheet are adequate under
GAAP to cover the tax liabilities accruing through the date thereof; (d) there
is no action, suit, proceeding, audit or claim now proposed or pending against
or with respect to HDS or any of its subsidiaries in respect of any tax where
there is a reasonable possibility of an adverse determination; and (e) neither
HDS nor any of its subsidiaries has been a member of an affiliated,
consolidated, combined or unitary group other than one of which HDS was the
common parent.
Share Exchange Agreement Page 40 of 67
Page 137 of total
10.15 Employee Benefit Plans. Except as set forth in Section 10.15 of the
HDS Disclosure Schedule, HDS does not maintain, nor has HDS maintained in the
past, any "employee benefit plans"as defined in Section 3(3) of ERISA, or any
plans, programs, policies, practices, arrangements or contracts (whether group
or individual) providing for payments, benefits or reimbursements to employees
of HDS, former employees, their beneficiaries and dependents under which such
employees, former employees, their beneficiaries and dependents are covered
through an employment relationship with HDS, any entity required to be
aggregated in a controlled group or affiliated service group with HDS for
purposes of ERISA or the Code (including, without limitation, under Section
414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA), at any relevant
time.
10.16 Environmental Matters. Except as would not, individually or in the
aggregate, have a Material Adverse Effect on HDS: (a) no notice, notification,
demand, request for information, citation, summons or order has been received,
no complaint has been filed, no penalty has been assessed, and no investigation,
action, claim, suit, proceeding or review is pending or, to the knowledge of
HDS, is threatened by any governmental entity or other person relating to or
arising out of any Environmental Law; and (b) there are no liabilities of or
relating to HDS or any of its subsidiaries of any kind whatsoever, whether
accrued, contingent, absolute, determined, determinable or otherwise arising
under or relating to any Environmental Law and there are no facts, conditions,
situations or set of circumstances which could reasonably be expected to result
in or be the basis for any such liability.
10.17 Patents and Other Proprietary Rights. HDS has all Intellectual
Property Rights material to its business as currently conducted. To the best of
HDS's knowledge, neither HDS nor any of its subsidiaries has not and does not
violate or infringe any Intellectual Property Right of any other person, and
neither HDS nor any of its subsidiaries has received any communication alleging
that it violates or infringes any Intellectual Property Right of any other
person. Except for such matters as would not, individually or in the aggregate,
have a Material Adverse Effect on HDS, neither HDS nor any of its subsidiaries
has been sued for infringing any Intellectual Property Right of another person.
10.18 Antitakeover Statutes. Excluding any statute or regulation applicable
solely by virtue of the jurisdiction of incorporation of Nesco as to which HDS
takes no position nor makes any representation or warranty, and except as
provided in Section 10.5, no antitakeover or similar statute or regulation
applies to the transactions contemplated hereby.
10.19 Beneficial Ownership of Signatory Stockholders. The HDS Signatory
Stockholders own, in the aggregate, not less than 50.1% of (a) the shares of HDS
Common and (b) the shares of HDS Series B Preferred, in each case, issued and
outstanding on the date hereof. Except as otherwise expressly provided herein,
the HDS Signatory Stockholders shall not offer, sell, transfer, pledge, assign
or otherwise dispose of any of their shares of HDS Common, HDS Series B
Preferred or securities convertible into or exchangeable for HDS Common (and any
Nesco Exchange Shares received in accordance with this Agreement) from the date
hereof until the earlier of (a) termination of this Agreement and (b)
effectuation of the Exchange Transactions.
Share Exchange Agreement Page 41 of 67
Page 138 of total
10.20 HDS Signatories. The HDS Signatory Stockholders include each officer,
director and holder of 5% of any class of outstanding voting securities of HDS.
Each HDS Signatory Stockholder agrees to vote all voting securities of HDS held
by such Stockholder (and any Nesco Exchange Shares received in accordance with
this Agreement) in favor of and/or to consent in writing to, the Exchange and
the other transactions contemplated hereby and by the other Transaction
Documents. Each HDS Signatory Stockholder covenants, represents and warrants
that such Stockholder shall do all acts and things, including the execution and
delivery of all documents and instruments, necessary or proper (a) to effectuate
the Exchange, effectuate the Exchange Transactions and the other transactions
contemplated hereby and by any of the other Transaction Documents and (b) to
cause HDS to carry out its obligations hereunder and under each of the other
Transaction Documents.
10.21 No General Solicitation. Solicitation by HDS of participants in the
Exchange shall be effected without use of any form of general solicitation or
advertising and in all other respects in compliance with the requirements for an
exemption from registration pursuant to Regulation D.
10.22 Investment Representations.
10.22.1 Each HDS Signatory Stockholder is acquiring Nesco Exchange Shares
for investment for such Stockholder's own account and not as a nominee or
agent, and not with a view to the resale or distribution of any part
thereof.
10.22.2 Each HDS Signatory Stockholder understands, and each other Seller
shall execute and deliver, at or prior to the Closing, a statement that
such Seller understands, that the offer and sale of the Nesco Exchange
Shares have not been and will not be registered under the Securities Act on
the ground that the sale and the issuance of securities hereunder is exempt
from registration under the Securities Act pursuant to Section 4(2)
thereof, and that Nesco's reliance on such exemption is predicated on such
Seller's representations set forth in Sections 10.22.2 and 10.22.4 hereof.
10.22.3 Each HDS Signatory Stockholder hereby confirms that such
Stockholder is an Accredited Investor.
10.22.4 Each HDS Signatory Stockholder acknowledges, and each other Seller
shall acknowledge in writing on or prior to the Closing Date, that such
Share Exchange Agreement Page 42 of 67
Page 139 of total
Person can bear the economic risk of this investment, and has such
knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of the Exchange and the related
investment in Nesco Exchange Shares.
11. COVENANTS OF NESCO AND NESCO SIGNATORY STOCKHOLDERS PENDING CLOSING. Each of
(a) the Nesco Signatory Stockholders, to the extent within such Stockholder's
control, and (b) Nesco covenants that, except as otherwise provided in this
Agreement, from the date hereof until the first to occur of the Closing Date and
the Termination Date:
11.1Preservation. Nesco shall:
11.1.1maintain its corporate existence in good standing;
11.1.2preserve intact in all material respects its business organization,
preserve its goodwill, exercise reasonable efforts to keep available the
services of Nesco's current officers and employees, to preserve the
goodwill of those having business relations with Nesco, and perform all
contracts to which Nesco is a party; and
11.1.3maintain in effect all of its currently existing insurance coverage,
if any, or substantially equivalent insurance coverage; and
11.1.4notify HDS immediately of any litigation or other proceeding in which
Nesco or any of its executive officers or directors is named as a defendant
or respondent and any claim for insurance not disclosed in detail in any
Nesco SEC Filing made prior to January 1, 2004.
11.2 Negative Covenants. Nesco shall not and the Nesco Signatory
Stockholders agree they shall not, except as contemplated by this Agreement or
as may be necessary to effectuate the transactions contemplated by this
Agreement or any other Transaction Document, do or propose to do or vote their
shares in favor of or consent to any of the following:
11.2.1amend or otherwise modify its certificate of incorporation or
by-laws;
Share Exchange Agreement Page 43 of 67
Page 140 of total
11.2.2issue, sell, dispose of or subject to any Lien or Encumbrance or
authorize the issuance, sale, disposition, or creation or sufferance of any
Lien or Encumbrance on, or grant or issue any option, warrant or other
right to acquire, or make any agreement with respect to, any shares of any
class of Nesco's capital stock or any security convertible into or
exercisable for any such shares, or alter any of the terms of any
outstanding security or make any change in its authorized or outstanding
capital stock or its capitalization, whether by reason of any
reclassification, recapitalization, stock split, combination, exchange or
readjustment of shares, any stock dividend or otherwise, or permit the
exercise of any outstanding options;
11.2.3declare, set aside, make or pay any dividend or other distribution to
any Nesco Stockholder with respect to any class of capital stock of Nesco
or any NAC Entity; or
11.2.4redeem, purchase or otherwise acquire any of its outstanding
securities;
11.2.5encumber any of its material assets or properties;
11.2.6increase the compensation or other remuneration or benefits payable
or to become payable to any director or executive officer, or increase the
compensation or other remuneration of benefits payable or to become payable
to any other employee, consultant or agent;
11.2.7adopt or, except as required by applicable law, amend or make any
unscheduled contribution to any employee benefit plan for or with
employees, or hire any employees;
11.2.8enter into any material contracts or terminate or modify any
contract, other than in furtherance of the purposes of this Agreement,
except for any termination upon the expiration of any contract prior to the
earlier of the Closing Date or Termination Date in accordance with the
terms of such contract;
11.2.9create, incur, assume or otherwise become liable for any indebtedness
in an aggregate amount in excess of $5,000, other than indebtedness
directly in furtherance of the transactions contemplated by any of the
Transaction Documents;
11.2.10 commence any new operations, whether by acquiring or developing any
line of business;
Share Exchange Agreement Page 44 of 67
Page 141 of total
11.2.11 cancel, compromise, release or waive any material receivable, claim
or right;
11.2.12 change its method of accounting or the accounting principles or
practices used in the preparation of the Nesco Financial Statements, other
than as required by GAAP or SEC accounting rules or as may be requested in
writing by HDS's auditors;
11.2.13 make any loan or advance to any person or acquire any capital stock
or other securities or ownership interest in or any material amount of
assets of any other business enterprise, or make any material capital
investment or expenditure or capital improvement;
11.2.14 institute or settle any action or proceeding before any
Governmental Authority relating to Nesco, the issuance of any securities of
Nesco, or any of its material assets or properties;
11.2.15 adopt any plan of dissolution or liquidation;
11.2.16 make any new election or change in any current election with
respect to any Taxes, or settle or compromise any federal, state local or
foreign Tax liability or agree to the extension of any statute of
limitations;
11.2.17 take any action that would render any of the representations or
warranties of Nesco or the Nesco Signatory Stockholders contained in this
Agreement misleading, untrue or incorrect in any material respect (subject
to any limitations on materiality set forth therein), or cause Nesco or any
Nesco Signatory Stockholder to breach or fail to satisfy or comply with any
covenant, condition or agreement of Nesco or any Nesco Signatory
Stockholder contained herein or in any of the other Transaction Documents
in any material respect.
11.2.18 violate the terms of the Standstill Agreement.
11.3 Access and Information. Subject to the provisions of Section 13.3,
Nesco shall comply with the provisions of Section 4.10.
Share Exchange Agreement Page 45 of 67
Page 142 of total
11.4 Reservation of Shares of Nesco Common. Prior to the Closing, Nesco
shall have reserved for issuance pursuant to this Agreement the number of shares
of Nesco Common sufficient to meet all of Nesco's obligations hereunder.
11.5 Board of Directors.
11.5.1Nesco and each Nesco Signatory Stockholder who is a member of the
Nesco Board hereby covenant and agree that from and after the Closing, the
two (2) current members of the Nesco Board shall appoint Matthew Harriton
and another Person to be designated by HDS (the "HDS Designees") to fill
two (2) of the three (3) vacancies currently existing of Nesco's Board of
Directors; the foregoing to be acceptable to the Nesco Board in the good
faith exercise of its reasonable business judgment, which right shall not
be assignable. Nesco and each Nesco Signatory Stockholder who is a member
of the Nesco Board further agrees that they shall take all action necessary
to nominate the HDS Designees to stand for election as directors of Nesco
at the initial annual meeting of Nesco Stockholders held after the Closing
and at every annual meeting thereafter unless waived by the HDS Signatory
Stockholders.
11.5.2The HDS Designees may not be removed or replaced without the prior
written consent of the HDS Signatory Stockholders (other than any such
Stockholders who, at the time consent is requested, are no longer holders
of Nesco Common or officers or directors of HDS) except for removal for
Cause (but subject to the rights of such HDS Signatory Stockholders to
designate the individual to fill any such vacancy and of the Board of
Directors to accept the HDS Designee, as provided herein).
11.5.3Nesco agrees that the HDS Designees shall be entitled to and shall
receive the same compensation as other members of the Nesco Board receive
for serving on the Nesco Board.
11.5.4Anything contained in this Section 11.5 to the contrary
notwithstanding, Nesco, the Nesco Board and each Nesco Signatory
Stockholder who is a member of the Nesco Board shall not have any
obligation under this Section 11 to do any act or thing which violates any
provision of applicable law, rule or regulation whether of Nevada or
applicable Federal or state securities law, rule or regulation.
11.5.5The parties shall comply with the Exchange Act, including Rule 14-f-1
promulgated thereunder, in connection with the changes to be made in the
composition of the Nesco Board pursuant to this Section 11.5.
Share Exchange Agreement Page 46 of 67
Page 143 of total
12. COVENANTS OF HDS AND HDS SIGNATORY STOCKHOLDERS PENDING CLOSING. HDS and the
HDS Signatory Stockholders, as applicable, covenant and agree that except as
otherwise provided in this Agreement, from the date hereof until the first to
occur of the Closing Date and the Termination Date:
12.1Preservation. HDS shall:
12.1.1maintain its corporate existence in good standing;
12.1.2preserve intact in all material respects its business organization,
preserve its goodwill, exercise reasonable efforts to keep available the
services of its current officers and perform all contracts to which HDS is
or becomes a party;
12.1.3maintain in effect all of its currently existing insurance coverage,
if any, or substantially equivalent insurance coverage; and
12.1.4notify Nesco immediately of any litigation or other proceeding in
which HDS or any of its executive officers or directors is named as a
defendant or respondent.
12.2 Negative Covenants. HDS shall not and the HDS Signatory Stockholders
agree they shall not, except as contemplated by this Agreement or as may be
necessary to effect the transactions contemplated by this Agreement, do or
propose to do or vote their shares of HDS Common or HDS Series B Preferred or
otherwise consent to any of the following:
12.2.1amend or otherwise modify its certificate of incorporation or
by-laws;
12.2.2issue, sell, dispose of or subject to any Lien or Encumbrance or
authorize the issuance, sale, disposition, or imposition of any Lien or
Encumbrance on, or grant or issue any option, warrant or other right to
acquire, or make any agreement with respect to, any shares of any class of
capital stock of HDS or any security convertible into or exercisable for
any such securities, or alter any of the terms of any outstanding security
Share Exchange Agreement Page 47 of 67
Page 144 of total
or make any change in its authorized or outstanding capital stock or its
capitalization, whether by reason of any reclassification,
recapitalization, stock split, combination, exchange or readjustment of
shares, any stock dividend or otherwise, or permit the exercise of any
outstanding options;
12.2.3declare, set aside, make or pay any dividend or other distribution to
any HDS Stockholder in respect of any class of capital stock of HDS;
12.2.4redeem, purchase or otherwise acquire any of its outstanding
securities;
12.2.5increase the compensation or other remuneration or benefits payable
or to become payable to any director or executive officer, or increase the
compensation or other remuneration of benefits payable or to become payable
to any other employee or consultant or agent;
12.2.6adopt or, except as required by applicable law, amend or make any
unscheduled contribution to any employee benefit plan for or with
employees, or hire any employees;
12.2.7terminate or modify any contract, other than in furtherance of the
purposes of this Agreement, except for any termination upon the expiration
of any contract prior to the earlier of the Closing Date or Termination
Date in accordance with the terms of such contract;
12.2.8create, incur, assume or otherwise become liable for any indebtedness
in an aggregate amount in excess of $5,000, other than indebtedness in
furtherance of the transactions contemplated by any of the Transaction
Documents, any indebtedness to Nesco or any of its Affiliates and
indebtedness incurred in the ordinary course of business consistent with
past practices;
12.2.9cancel, compromise, release or waive any material receivable, claim
or right of HDS;
12.2.10 adopt accounting principles or practices other than as required by
GAAP or SEC accounting rules or as may be recommended by HDS's auditors;
Share Exchange Agreement Page 48 of 67
Page 145 of total
12.2.11 make any loan or advance to any person or acquire any capital stock
or other securities, or ownership interest in or any material amount of
assets, of any other business enterprise, or make any material capital
investment or expenditure or capital improvement;
12.2.12 adopt any plan of dissolution or liquidation;
12.2.13 settle or compromise any federal, state local or foreign Tax
liability or agree to the extension of any statute of limitations;
12.2.14 take any action that would render any of the representations or
warranties of HDS contained in this Agreement misleading, untrue or
incorrect in any material respect (subject to any limitations on
materiality set forth herein), or cause HDS or any HDS Signatory
Stockholder to breach or fail to satisfy or comply with any covenant,
condition or agreement of HDS or any HDS Signatory Stockholder contained
herein or in any of the other Transaction Documents in any material
respect; or
12.2.15 violate the terms of the Standstill Agreement.
12.3 Access and Information. Subject to the provisions of Section 10.2
hereof, HDS shall comply with the provisions of Section 5.2.
12.4 Covenants of HDS Signatory Stockholders. The HDS Signatory
Stockholders agree to vote their respective shares of HDS Common and/or HDS
Series B Preferred in favor of, or consent to, an action that may be required to
be taken by HDS Stockholders in connection with the transactions contemplated by
this Agreement or any other Transaction Document.
13. CERTAIN COVENANTS OF THE PARTIES PENDING AND FOLLOWING CLOSING.
13.1 Covenants of Nesco Signatory Stockholders and HDS Signatory
Stockholders. By executing this Agreement, the Nesco Signatory Stockholders and
the HDS Signatory Stockholders agree, subject to filing of the Information
Statement, to vote their respective shares of voting securities of Nesco
(whether held on the date hereof or acquired at any time from the date hereof
through the Closing Date) in favor of, or to consent to, the following: (i) the
Nesco Name Change, (ii) an increase in the number of authorized shares of Nesco
Common pursuant to the Additional Capitalization Amendment and such Amendment,
(iii) the Reverse Split and the Reverse Split Amendment and (iv) election of the
two HDS Directors to the Nesco Board as provided in Section 11.5 and any other
Share Exchange Agreement Page 49 of 67
Page 146 of total
actions that may be necessary or proper to effectuate any of the foregoing (the
"Exchange Transactions"). Each of the Nesco Signatory Stockholders and the HDS
Signatory Stockholders further acknowledges and agrees that except for the
exercise or exchange of securities contemplated by this Agreement, such
Stockholders may not offer, sell, transfer, pledge, assign, hypothecate or
otherwise dispose of their respective securities of Nesco (whether held on the
date hereof or acquired at any time from the date hereof through the Closing
Date) until the Exchange Transactions shall have been effected. Each Nesco
Signatory Stockholder who is and each HDS Signatory Stockholder who becomes a
member of the Nesco Board agrees to act in furtherance of the obligations
provided in Section 11.5, provided, however, that anything contained in this
Section 13.1 to the contrary notwithstanding, no such Stockholder shall have any
obligation under this Section to do any act or thing which violates its duties
as a director under applicable law or any other provision of applicable laws,
rules or regulations, whether applicable state corporate law or applicable state
or Federal securities laws, rules or regulations.
13.2 Initial 8-K. Upon execution and delivery of this Agreement, Nesco
shall prepare and cause its counsel to prepare and provide to HDS and its
counsel for review, a Current Report on Form 8-K for filing with the SEC with
respect to such execution and delivery (the "Initial 8-K"). HDS and its counsel
shall provide Nesco and its counsel with any comments on the Initial 8-K no
later than one business day prior to the due date for filing same with the SEC,
provided that HDS and its counsel shall have received a draft of same no later
than five (5) business days prior to such due date. HDS shall provide Nesco with
such information as Nesco may reasonably request in connection with the
preparation of the Initial 8-K.
13.3 Confidentiality. Each of the parties covenants and agrees to keep
confidential any and all material non-public information which it has heretofore
obtained or shall hereafter obtain, directly or indirectly, from Nesco or HDS
pursuant to this Agreement or otherwise, and agrees to use the same only for the
purposes of this Agreement but without disclosing the same to any party except
as provided below, without Nesco's prior written consent; provided that the
terms of this Section 13.3 shall not extend to any such information that: (a) is
already publicly known; (b) has become publicly known without any fault of the
disclosing party or anyone to whom HDS or Nesco has made disclosure in
compliance with the terms of this Section 13.3; or (c) is required to be
disclosed to any Governmental Authority as a result of operation of law,
regulation, or court order; provided, however, that party wishing to make any
disclosure pursuant to this clause (c) shall have first given prompt written
notice, if permitted, of such requirement to HDS and Nesco and cooperates with
Nesco and HDS to restrict such disclosure and/or obtain confidential treatment
thereof. The foregoing notwithstanding, each of HDS and Nesco may disclose such
information to its Affiliates and its directors, officers and employees and
representatives or the directors, officers, employees and representatives of any
of its Affiliates that have a need to know such information (collectively, the
"HDS Parties" and the "Nesco Parties," respectively); provided that HDS or
Nesco, as the case may be, informs such Persons of the restrictions set forth in
this Section 13.3 with respect to such information and such Persons agree to
comply with the provisions of this Section 13.3. Each of HDS and Nesco further
agrees to give prompt notice to the other of any disclosure made by any of the
HDS Parties or the Nesco Parties, respectively, in breach of this Section 13.3,
Share Exchange Agreement Page 50 of 67
Page 147 of total
to the extent HDS or Nesco, respectively, has knowledge of such disclosure;
provided that HDS or Nesco, respectively, shall have no liability for losses
incurred by the other party or any of its Affiliates or their respective
officers, directors, stockholders, employees, or representatives solely as the
result of the failure by Nesco or HDS, respectively, following its actual
receipt of notice from HDS or Nesco, respectively, of disclosure of information
in breach of this Agreement, to make prompt public disclosure of the information
so disclosed. For purposes of this Section 13.3, the knowledge of HDS shall mean
the actual knowledge of Matthew Harriton or any successors to him as Chief
Executive Officer of HDS and the knowledge of Nesco shall mean the actual
knowledge of its Chief Executive Officer.
13.4 Standstill Agreement. Except as otherwise provided in this Agreement,
the parties agree that the following affirmative and negative covenants apply
between the date hereof and the first to occur of (a) the Closing Date and (b)
termination of this Agreement (the "Standstill Agreement"):
13.4.1neither Nesco or any of the Nesco Signatory Stockholders shall
discuss or negotiate with any other Person, or entertain or consider any
inquiries, or proposals relating to any the possible issuance of any
capital stock or other securities of Nesco in connection with any
acquisition of another Person by Nesco or Nesco's acquisition by another
Person, whether through an exchange of securities, stock or asset
acquisition, merger, consolidation or otherwise; and Nesco shall, and the
Nesco Signatory Stockholders shall cause Nesco to, conduct business only in
the ordinary course.
13.4.2neither HDS or any of the HDS Signatory Stockholders shall discuss or
negotiate with any other Person, or entertain or consider any inquiries, or
proposals relating to any the possible issuance of any capital stock or
other securities of HDS in connection with any acquisition of another
Person by HDS or HDS's acquisition by another Person, whether through an
exchange of securities, stock or asset acquisition, merger, consolidation
or otherwise; and HDS shall, and the HDS Signatory Stockholders shall cause
HDS to, conduct business only in the ordinary course.
13.4.3Notwithstanding the foregoing provisions of this Section 13.4, Nesco
and HDS shall be free to engage in activities described in Sections 13.4.1
and 13.4.2, respectively, which are designed to further the mutual
interests of the parties for the contemplated Exchange, their
reorganization and advancement of HDS's business plan.
13.5 Notification as to Certain Events. Each party shall promptly notify
the others of (a) the occurrence or non-occurrence of any fact or event of which
such party has knowledge that would be reasonably likely (i) to cause any
representation or warranty of such party contained in this Agreement to be
untrue or incorrect in any material respect at any time from the date hereof to
the Closing or (ii) to cause any covenant, condition or agreement of such party
in this Agreement not to be complied with or satisfied in any material respect
and (b) any failure of such party to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder in any
Share Exchange Agreement Page 51 of 67
Page 148 of total
material respect; provided, however, that no such notification shall affect any
of the representations or warranties of such party, or the right of the other
party to rely thereon, or the conditions to the obligations of the parties, or
the remedies available hereunder, except as otherwise provided in Section 16.
The parties shall give prompt notice to the other parties of any notice or other
communication from any third Person alleging that the consent of such third
Person is or may be required in connection with the transactions contemplated by
this Agreement.
13.6 Reasonable Efforts; Further Action. Upon the terms and subject to the
conditions contained herein, each of the parties hereto shall use its reasonable
efforts (exercised diligently and in good faith) to take, or cause to be taken,
all actions and to do, or cause to be done, all other things reasonably
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement, to obtain in a
timely manner all necessary authorizations and approvals and to effect all
necessary registrations and filings, and otherwise to satisfy or cause to be
satisfied all conditions precedent to its obligations under this Agreement. If,
at any time after the Closing, any such further action is necessary or desirable
to carry out the purposes of this Agreement, the officers and directors of Nesco
and HDS immediately prior to the Closing are fully authorized in the name of
their respective companies or otherwise to take, and will take, all such lawful
and necessary or desirable action.
13.7 Nesco Charter Amendments. As promptly as practicable following the
Closing and otherwise in compliance with the terms of this Agreement, Nesco
shall increase to 400,000,000 the number of shares of Nesco Common which it is
authorized to issue and thereafter effectuate the Reverse Split. Prior to the
Closing Date, Nesco shall file the Certificate of Designation in Nevada in
compliance with the applicable provisions of the NRS.
13.8 Closing Report. Upon Closing, Nesco shall prepare and cause its
counsel to prepare and provide to HDS and its counsel for review, a Current
Report on Form 8-K for filing with the SEC with respect to the consummation of
the transactions contemplated by this Agreement (the "Closing Report"). HDS and
its counsel shall provide Nesco and its counsel with any comments on the draft
of the Closing 8-K no later than one business day prior to the due date for
filing same with the SEC, provided that HDS and its counsel shall have received
a draft of same no later than five (5) business days prior to such due date. HDS
shall provide Nesco with such information as Nesco may reasonably request in
connection with the preparation of the Closing 8-K. HDS and Nesco shall, and
shall cause their respective auditors to, cooperate in the preparation of the
financial statements required to be filed with or as an amendment to the Closing
Report (the "Exchange Financial Statements").
13.9 Additional Filings. The parties shall cooperate with respect to all
other filings, applications and notices required to be submitted to any
Governmental Authorities and other Persons, or necessary or proper to carry out
the transactions contemplated by any of the Transaction Documents.
Share Exchange Agreement Page 52 of 67
Page 149 of total
13.10 Lock-Up. Each participant in the Exchange, other than holders of
Nesco Series A Preferred and Nesco Warrants, agrees not to offer, sell,
transfer, assign pledge, hypothecate or otherwise dispose of the Nesco Common or
Nesco Series B Preferred (or the Nesco Common same will convert into upon filing
of the Additional Capitalization Amendment) such stockholder receives in the
Exchange for a period commencing on the date on which such holder receives such
securities in the Exchange and continuing until the first anniversary of the
Closing Date (the "Lock-Up").
13.11 Underwritten Public Offering. In the event that shares of Nesco
Common are registered in connection with an underwritten public offering
undertaken at any time after one hundred twenty (120) days following the Closing
Date, all shares of Nesco Common held by the Nesco Signatory Stockholders, the
HDS Signatory Stockholders, the holder of the Nesco Stockholder Debt, and the
holders of the NAC Shares, the Nesco Warrants and the Nesco Series A Preferred
shall be entitled to include their shares of Nesco Common outstanding or
issuable on the date hereof or immediately following the Closing, subject to
underwriter cutbacks, in the underwriter's sole discretion (an "Underwritten
Offering"). In the event that Nesco does not have a written agreement providing
for an Underwritten Offering by the 180th day following the Closing Date, the
Nesco Signatory Stockholders holding 50.1% or more, in the aggregate, of the
then outstanding voting securities held by them, shall have the right to demand
that Nesco register their shares for resale under the Securities Act.
14. DELIVERIES AT CLOSING.
14.1 Nesco Deliveries. Nesco and the Nesco Signatory Stockholders shall
deliver to HDS at Closing:
14.1.1certificates representing the Nesco Exchange Shares, duly endorsed in
blank for transfer;
14.1.2the Nesco Exchange Debentures issuable to the holders of the HDS Term
Debt and the holder of the Nesco Stockholder Debt, if such holder exercises
its option to receive debentures in exchange for such Debt;
14.1.3a certificate of an executive officer of Nesco certifying that the
representations and warranties of Nesco contained in this Agreement are
true and correct on the Closing Date (except those representations and
warranties which by their terms refer to another date or dates and that
Nesco has satisfied all of the conditions to Closing which it is required
to satisfy pursuant to this Agreement;
Share Exchange Agreement Page 53 of 67
Page 150 of total
14.1.4a copy of a certificate of good standing for Nesco issued not more
than five (5) days prior to Closing by the Nevada Secretary or Department
of State; and
14.1.5a certificate of the Secretary of Nesco certifying as to the
incumbency and signatures of the officers of Nesco executing and delivering
documents at Closing, and that attached to such certificate are true and
correct copies of the certificate of incorporation and by-laws of Nesco,
each as amended to the Closing Date, and including the Additional
Capitalization Amendment.
14.1.6opinion of counsel to Nesco to be annexed as Exhibit 14.1.6 hereto,
in form and substance substantially as delivered in transactions of this
nature and legally satisfactory to counsel for HDS, in the exercise of its
reasonable legal judgment, provided that such opinion may be given by
Nesco's New York State counsel and may refer to, and rely upon, an opinion
of Nevada counsel to Nesco as to matters of Nevada law.
14.2 HDS Deliveries. HDS and/or the HDS Signatory Stockholders shall
deliver to Nesco at Closing:
14.2.1certificates representing their shares of HDS Common and HDS Series B
Preferred or other evidence of issuance and ownership thereof;
14.2.2Evidence of the HDS Term Debt for cancellation upon conversion;
14.2.3a certificate of an executive officer of HDS certifying that the
representations and warranties of HDS contained in this Agreement are true
and correct on the Closing Date (except those representations and
warranties which by their terms refer to another date or dates and that HDS
has satisfied all of the conditions to Closing which it is required to
satisfy pursuant to Section 15 hereof;
14.2.4a copy of a certificate of good standing for HDS issued not more than
five (5) days prior to Closing by the Department or Secretary of State of
Delaware; and
14.2.5a certificate of the Secretary of HDS certifying as to the incumbency
and signatures of the officers of HDS executing and delivering documents at
Closing, and that attached to such certificate are true and correct copies
Share Exchange Agreement Page 54 of 67
Page 151 of total
of the certificate of incorporation and by-laws of HDS, each as amended to
the Closing Date; and
14.2.6an opinion of counsel to HDS to be annexed as Exhibit 14.2.6 hereto,
in form and substance substantially as delivered in transaction of this
nature and legally satisfactory to counsel for Nesco, in the exercise of
its reasonable legal judgment.
15. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PARTIES.
15.1 Conditions Precedent to Obligations of All Parties. The obligations of
the parties to consummate the Exchange and the other transactions contemplated
hereby are subject to the satisfaction of the following conditions:
15.1.1Nesco shall have filed Form 99 and all other documents required to be
filed by it in connection with the Exchange under New York Blue Sky Laws;
15.1.2there shall be no default subsisting under the secured equipment debt
of HDS to Becton, Dickinson in the outstanding principal amount of $800,000
which shall not have been waived or cured, and the note evidencing such
debt shall have been restructured on terms which Nesco and HDS agree can be
serviced and amortized by Nesco in the ordinary course of business;
15.1.3HDS shall have entered into an amended deposit agreement with Cygnus
Corp., pursuant to which the $800,000 deposit shall have become
non-refundable and terms for applying the deposit or otherwise satisfying
the deposit obligation shall have been set forth; and
15.1.4All required approvals of or consents to the Exchange and this
Agreement of any Governmental Authority shall have been obtained which may
be legally obtained on or before Closing Date.
15.2 Conditions Precedent to Obligations of Nesco and the Nesco Signatory
Stockholders. The obligations of Nesco and the Nesco Signatory Stockholders to
consummate the Exchange and the other transactions contemplated hereby are
subject to the satisfaction of the following conditions:
Share Exchange Agreement Page 55 of 67
Page 152 of total
15.2.1Each of HDS and the HDS Signatory Stockholders shall have performed,
in all material respects, all of their respective obligations under this
Agreement required to be performed by it or them prior to the Closing Date;
15.2.2the respective representations and warranties of HDS and the HDS
Signatory Stockholders contained in this Agreement and in any certificate
or other writing delivered by HDS or any such Stockholder pursuant to this
Agreement shall be true in all material respects at and as of the Closing
Date as if made at and as of such time, except to the extent that
particular representations or warranties are made as of other specified
date or dates, in which event, they shall be true in all material respects
as of such other date or dates, respectively, and Nesco shall have received
a certificate signed by an executive officer of HDS (which certificate
shall not impose any personal liability on such officer) to the foregoing
effect;
15.2.3there shall have occurred no material adverse changes in the business
or financial condition of HDS between the date hereof and the Closing Date;
and
15.2.4the holder (s)of the HDS Term Debt shall have agreed to effect the
HDS Term Debt Conversion upon Closing.
15.3 Conditions to Obligations of HDS and the HDS Signatory Stockholders.
The obligations of HDS and the HDS Signatory Stockholders to consummate the
Exchange and the other transactions contemplated hereby are subject to the
satisfaction of the following conditions, any of which may be waived by the HDS
Board with the consent of HDS Signatories holding a majority of the HDS Common
and HDS Series B Preferred held by such HDS Signatories:
15.3.1Each of Nesco and the Nesco Signatory Stockholders shall have
performed, in all material respects, all of their respective obligations
under this Agreement required to be performed by it at or prior to the
Closing or the Closing Date;
15.3.2the respective representations and warranties of Nesco and the Nesco
Signatory Stockholders contained in this Agreement and in any certificate
or other writing delivered by Nesco or any such Stockholder pursuant to
this Agreement shall be true in all material respects at and as of the
Closing Date as if made at and as of such time, except to the extent that
particular representations or warranties are made as of other specified
Share Exchange Agreement Page 56 of 67
Page 153 of total
date or dates, in which event, they shall be true in all material respects
as of such other date or dates, respectively, and Nesco shall have received
a certificate signed by an executive officer of Nesco (which certificate
shall not impose any personal liability on such officer) to the foregoing
effect;
15.3.3there shall have occurred no material adverse changes in the business
or financial condition of Nesco between the date hereof and the Closing
Date; and
15.3.4The Nesco Warrant Conversion shall have been effected and the Nesco
Special Warrants shall have been cancelled prior to the Closing Date;
15.3.5The Nesco Stockholder Debt shall have been converted into Nesco
Debentures as provided in this Agreement prior to the Closing Date;
15.3.6Nesco shall have disposed of all of its right, title and interest in
the NAC Entities on the terms set forth in Section 4.6 hereof prior to the
Closing Date;
15.3.7Nesco shall use its best efforts to have its shares of Nesco Common
re-admitted for quotation on the OTCBB as soon as practicable, and there
shall be no inquiry pending or threatened that could bar such readmission
or result in de-listing of Nesco Common for quotation or trading on the
OTCBB; Nesco and the Nesco Signatory Stockholders shall be current in
filing all reports and other documents required to be filed by them,
respectively, with the SEC;
15.3.8 On the Closing Date, Nesco shall have cash on hand of not less than
$550,000 and outstanding payables or debt not exceeding $200,000, after
giving effect to conversion of the Nesco Stockholder Debt as provided in
Section 4.4 hereof. The outstanding principal and accrued interest on the
Secured Term Loan in the principal amount of $125,000 between Hydrogel, as
borrower, and Nesco, as lender, shall be deemed part of the cash on hand as
required hereby;
15.3.9 The Exchange shall not violate any Federal or state law, rule or
regulation to which Nesco is subject, and Nesco shall have received all
necessary approvals and consents of the Nesco Board and its Stockholders,
if applicable.
Share Exchange Agreement Page 57 of 67
Page 154 of total
15.3.10 Other than as provided in this Agreement, immediately prior to the
Closing, the number of shares of Nesco Common outstanding shall be no
greater than the number outstanding on the date hereof and no other
securities of Nesco shall be outstanding and there shall be no commitment
outstanding to issue any such securities.
16. TERMINATION.
16.1 Right to Terminate. This Agreement may be terminated prior to Closing,
and the contemplated transactions abandoned at any time prior to the Closing
Date without liability to either party, except as specified below in this
Section 16:
16.1.1by mutual written agreement of Nesco and HDS;
16.1.2by Nesco or HDS if (a) any provision of any applicable law or regulation
or (b) any judgment, injunction, order or decree of a court of competent
jurisdiction that prohibits the consummation of the Exchange is entered and
shall have become final and non-appealable, which law, regulation, judgment,
injunction, order or decree is not based upon the requirement of approval of
Nesco's Stockholders, provided that the party seeking to terminate this
Agreement pursuant to the foregoing provisions of paragraph (b) of this Section
16.1.2 shall have used its reasonable best efforts to remove any such
injunction, order or decree.
16.1.3by Nesco if: (i) any of the conditions precedent to the obligations
of Nesco set forth in Section 16.2 hereof shall not have been satisfied in
any material respect by the Closing Date or any other date prior to the
Closing provided herein for satisfaction thereof; or (ii) if, on or prior
to the Closing Date, the due diligence review by Nesco or its
representatives of the books and records of HDS reveals a material breach
of any of the representations and warranties of HDS or any HDS Signatory
Stockholder contained herein or in any certificate delivered pursuant to
this Agreement or there is any material adverse change in the financial
condition or results of operations of HDS from those as presented in the
HDS Balance Sheet, unless such change is reflected herein or in the HDS
Disclosure Schedule.
16.1.4by HDS (i) if any of the conditions to the obligations of HDS set
forth in Section 16.3 hereof shall not have been satisfied in any material
respect by the Closing Date or any other date prior to the Closing provided
herein for satisfaction thereof; (ii) if, on or prior to the Closing Date,
the due diligence review by HDS or its representatives of Nesco's books and
records reveals a material breach of any of the representations and
Share Exchange Agreement Page 58 of 67
Page 155 of total
warranties of Nesco or any Nesco Signatory Stockholder contained herein or
in any certificate delivered pursuant to this Agreement or there is any
material adverse change in the business or financial condition or its
results of operations of Nesco from those as presented in the Nesco Annual
Report and the Nesco 10-QSB for the period ended October 31, 2003; or (iii)
pursuant to Section 4.5.2.
16.2 Termination Date; Notice of Termination. Any party may exercise its
right under Section to terminate this Agreement by giving notice thereof in
writing to each of the other parties (the "Termination Notice"). This Agreement
shall terminate on the date on which the first Termination Notice shall have
been given by HDS or Nesco pursuant to Section 18.
16.3 Effects of Termination. In the event of termination of this Agreement
pursuant to this Section 16 ("Termination"), each of the parties hereby
expressly waive their rights to recover all other damages, fees, costs, and
expenses, including incidental, consequential and punitive damages, from any of
the other parties as a result of any termination of this Agreement; provided,
however, that: (a) If either HDS or Nesco terminates this Agreement in bad
faith, the non-terminating party shall be entitled to recover reasonable
attorneys' and auditors' fees, costs and expenses expended in connection with
the Exchange; and (b) HDS may terminate this Agreement pursuant to the
provisions of Section 4.5.2. Effective as of the Termination Date, this
Agreement shall forthwith become void and of no further force or effect, except
for (i) the obligations set forth in this Section 16.3; and (ii) the obligations
of confidentiality set forth in Section 13.3 hereof.
17. NATURE AND SURVIVAL OF REPRESENTATIONS. All representations, warranties and
covenants of the parties contained herein or in any certificate or other
instrument delivered by or on behalf of any of the parties pursuant hereto, or
in connection with the transactions contemplated hereby, shall be deemed
representations and warranties by such party, respectively, but shall not
survive the Closing, provided, however, that representations of any party with
respect to any Tax matter, any Environmental Liability, any ERISA matter or
matter related to any employee benefit plan shall survive until expiration of
the applicable statute of limitations.
18. NOTICES. All notices, requests and other communications to any party
hereunder shall be in writing (including facsimile transmission) and shall be
given,
If to Nesco or any Nesco Signatory Stockholder, to:
Nesco Industries, Inc.
22-09 Queens Plaza North
Share Exchange Agreement Page 59 of 67
Page 156 of total
Long Island City, NY 11101
Fax No.: ____________________
Attention: ___________________
with a copy to:
Davidoff & Malto LLP
605 Third Avenue
34th Floor
New York, NY 10158
Fax No.: (212) 557-7200
Attention: Jeffrey Citron
If to HDS or any HDS Signatory Stockholder, to:
Hydrogel Design Systems, Inc.
305 Madison Avenue
Suite 4510
New York, NY 10165
Fax No.: (212) 808-0113
Attention: Matthew Harriton
Chief Executive Officer
with a copy to:
Share Exchange Agreement Page 60 of 67
Page 157 of total
Beckman, Lieberman & Barandes
116 John Street
Suite 1313
New York, New York 10038
Fax No.: (212) 608-9687
Attention: Robert Barandes, Esq.
or to such other address or fax number as such party may hereafter specify
for purposes of notice by giving notice to the other parties hereto. All such
notices, requests and other communications shall be deemed given on the date of
receipt by the recipient thereof, if received prior to 5 p.m. in the place of
receipt and such day is a business day in the place of receipt, or if received
later, the next succeeding business day in the place of receipt.
19. AMENDMENTS; NO WAIVERS. Any provision of this Agreement may be amended or
waived prior to the first to occur of the Closing Date and the Termination Date
but only if such amendment or waiver is in writing and is signed, in the case of
an amendment, by each party to this Agreement, or in the case of a waiver, by
the party against whom the waiver is to be effective. No failure or delay by any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.
20. GOVERNING LAW; ARBITRATION. This Agreement has been prepared, negotiated and
delivered in the State of New York and shall be governed by, and construed in
accordance with, the laws of that State, without giving effect to the principles
thereof relating to the conflict of laws. Any dispute arising pursuant to or in
any way related to this Agreement or the transactions contemplated hereby shall
be settled by arbitration, provided, however, that nothing in this Section shall
restrict the right of either party to apply to a court of competent jurisdiction
for emergency relief pending final determination of a claim by arbitration in
accordance with this Section. All arbitration shall be conducted in New York,
New York, in accordance with the rules and regulations of the American
Arbitration Association then obtaining. The laws of New York shall govern the
disposition of any such arbitration. The decision of the arbitrator shall be
binding upon the parties and judgment in accordance with that decision may be
entered in any court of competent jurisdiction. Each party hereby submits to the
jurisdiction of the American Arbitration Association and consents to the venue
stated in this Section.
Share Exchange Agreement Page 61 of 67
Page 158 of total
21. ENFORCEABILITY. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. To the extent permitted by applicable law, the parties
hereto hereby waive any provision of law which renders any provision hereof
prohibited or unenforceable in any respect.
22. SUCCESSORS AND ASSIGNS; NO THIRD PARTY BENEFICIARIES. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns; provided that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of the other parties hereto.
23. ENTIRE AGREEMENT. This Agreement, including all Exhibits and Schedules
hereto, constitutes the entire agreement between the parties with respect to the
subject matter of this Agreement and supersede all prior agreements and
understandings, both oral and written between or among any of the parties with
respect to the subject matter hereof and thereof.
24. COUNTERPARTS. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
SIGNATURE PAGES FOLLOW
COUNTERPART SIGNATURE PAGE
TO
SHARE EXCHANGE AGREEMENT
NESCO-HDS
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written, by signing on the appropriate signature page hereto.
Share Exchange Agreement Page 62 of 67
Page 159 of total
NESCO INDUSTRIES, INC.
By:________________________________
Chief Executive Officer
COUNTERPART SIGNATURE PAGE
TO
SHARE EXCHANGE AGREEMENT
NESCO-HDS
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written, by signing on the appropriate signature page hereto.
NESCO SIGNATORY STOCKHOLDERS:
- ----------------------------------- -------------------------------
- ----------------------------------- -------------------------------
Share Exchange Agreement Page 63 of 67
Page 160 of total
COUNTERPART SIGNATURE PAGE
TO
SHARE EXCHANGE AGREEMENT
NESCO-HDS
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written, by signing on the appropriate signature page hereto.
HYDROGEL DESIGN SYSTEMS, INC.
By:_________________________________
Matthew Harriton
Chief Executive Officer
COUNTERPART SIGNATURE PAGE
TO
SHARE EXCHANGE AGREEMENT
NESCO-HDS
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written, by signing on the appropriate signature page hereto.
HDS SIGNATORY STOCKHOLDERS
Share Exchange Agreement Page 64 of 67
Page 161 of total
- -----------------------------
Matthew Harriton
- ----------------------------------- -------------------------------
- ----------------------------------- -------------------------------
LIST OF EXHIBITS
Exhibit A NESCO DISCLOSURE SCHEDULE
Exhibit B HDS DISCLOSURE SCHEDULE
Exhibit 4.1 ADDITIONAL CAPITALIZATION AMENDMENT
Exhibit 8.1 EMPLOYMENT AGREEMENT
Exhibit 9.4 NESCO BOARD CONSENT
Exhibit 10.4 HDS BOARD CONSENT
Share Exchange Agreement Page 65 of 67
Page 162 of total
Exhibit 10.9 HDS BALANCE SHEET
Exhibit 14.1.6 OPINION OF COUNSEL TO NESCO
Exhibit 14.2.6 OPINION OF COUNSEL TO HDS
Exhibit A
NESCO DISCLOSURE SCHEDULE
Exhibit B
HDS DISCLOSURE SCHEDULE
No additional information required.
Exhibit 4.1
ADDITIONAL CAPITALIZATION AMENDMENT
Exhibit 8.1
EMPLOYMENT AGREEMENT
Share Exchange Agreement Page 66 of 67
Page 163 of total
Exhibit 9.4
NESCO BOARD CONSENT
Exhibit 10.4
HDS BOARD CONSENT
Exhibit 10.9
HDS BALANCE SHEET
Exhibit 14.1.6
OPINION OF COUNSEL TO NESCO
Exhibit 14.2.6
OPINION OF COUNSEL TO HDS
Share Exchange Agreement Page 67 of 67
Page 164 of total
APPENDIX B
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION CHANGING
THE NAME OF THE COMPANY
The following sets forth the changes to Article FIRST of the Company's
Articles of Incorporation:
FIRST; The name of the Corporation is: AQUAMATRIX, INC.
Amendments Page 1 of 2
Page 165 of total
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION
INCREASING THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The following sets forth the changes to Article FOURTH of the Company's
Articles of Incorporation:
FOURTH: That the total number of shares of stock which the corporation is
authorized to issue is:
(a) Common. 400,000,000 shares of Common Stock having a par value of $.001
per share.
(b) Preferred. 1,000,000 shares of Preferred Stock having a par value of
$.001 per share and to be issued in such series and to have such rights,
preferences, and designations as determined by the Board of Directors of the
Corporation.
Amendments Page 2 of 2
Page 166 of total