As filed with the Securities and Exchange Commission on January 31, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB12G/A
AMENDMENT NO. 2 TO
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
NESCO INDUSTRIES , INC
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(Name of Small Business Issuer in its charter)
Nevada 13-3709558
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
570 Lexington Avenue, Third Floor, New York, NY 10022
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 212/829-0880 (telecopier 212/829-8895)
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Securities to be registered under Section 12(b) of the Act: None
----
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value
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NESCO INDUSTRIES, INC.
FORM 10-SB
TABLE OF CONTENTS
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<S> <C>
PART I...................................................................................................1
ITEM I.1 - DESCRIPTION OF BUSINESS...................................................................1
(a) Business Development.......................................................................1
(b) Business of the Issuer.....................................................................1
(c) Reports to Shareholders....................................................................7
ITEM I.2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..............................................................................7
ITEM 1.3 - DESCRIPTION OF PROPERTY...................................................................10
ITEM 1.4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................10
ITEM 1.5 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL......................................12
ITEM 1.6 - EXECUTIVE COMPENSATION....................................................................13
(a) Summary Compensation Table................................................................13
(b) Options/SAR Grants........................................................................14
(c) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value......................14
(d) Long-Term Incentive Plans.................................................................14
(e) Compensation of Directors.................................................................14
(f) Employment Contracts and Termination of Employment and Change in Control Arrangements.....14
(g) Report on Repricing of Options/SARS.......................................................14
ITEM 1.7 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................14
ITEM 1.8 - DESCRIPTION OF SECURITIES.................................................................15
PART II.................................................................................................18
ITEM II.1 - MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.................................................................18
(a) Market Information........................................................................18
(b) Holders...................................................................................19
(c) Dividends.................................................................................19
ITEM II.2 - LEGAL PROCEEDINGS.........................................................................19
ITEM II.3 - CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS..............................................19
ITEM II.4 - RECENT SALES OF UNREGISTERED SECURITIES...................................................20
ITEM II.5 - INDEMNIFICATION OF DIRECTORS AND OFFICERS.................................................20
FINANCIAL STATEMENTS....................................................................................21
PART III................................................................................................44
ITEM III.1 - INDEX TO EXHIBITS.........................................................................44
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PART I
ITEM I.1 - DESCRIPTION OF BUSINESS
(a) Business Development:
NESCO Industries, Inc. (hereinafter sometimes referred to as "we" or the
"Company") is principally engaged in providing asbestos abatement services,
indoor air quality monitoring, testing and remediation, and other environmental
services through its wholly-owned subsidiaries, National Abatement Corp., NAC
Environmental Services Corp. and NAC/Indoor Air Professionals, Inc.
The Company was incorporated in Nevada in March 1993, and was inactive for a
number of years until it acquired National Abatement Corp. and NAC Environmental
Services Corp. in March 1998. National Abatement Corp. ("NAC") was incorporated
in May 1988 to provide asbestos abatement services primarily in the greater
metropolitan New York City area, and today is a full service asbestos abatement
contractor. NAC Environmental Services Corp. ("NACE") was incorporated in May
1993. It is a provider of environmental services such as subsurface
soils/groundwater remediation, Phase I and Phase II environmental site
assessments and underground storage tank management and remediation.
In June 1999, we formed NAC/Indoor Air Professionals, Inc. ("NAC/IAP"), through
which we provide indoor air quality monitoring, testing and remediation
services, primarily in New York, New Jersey and Connecticut. Prior to the
organization of NAC/IAP, we provided limited air quality services through NACE.
(b) Business of the Issuer:
(b)(1) Principal products and services and their markets:
(b)(1)(A). National Abatement Corp.
NAC has expertise in all types of asbestos abatement including removal and
disposal, enclosure (constructing structures around asbestos-containing area)
and encapsulation (spraying asbestos-containing materials with an approved
sealant). Asbestos abatement is principally performed in commercial buildings,
hospitals, government and institutional buildings, universities and industrial
facilities. NAC's revenues in the past three fiscal years ended April 30 were as
follows: 1999 - $9,819,053 (84.7% of total Company revenues); 1998 - $11,071,751
(92.3% of total revenues); and 1997 - $9,927,882 (97.7% of total revenues).
Asbestos is a fibrous mineral found in rock formations around the world that was
used extensively as a construction material and in construction-related products
as a fire retardant and insulating material prior to the early 1970s. Asbestos
also was used as a component in a variety of building materials (such as
plaster, drywall, mortar and building block) and in caulking, tile adhesives,
paint, roofing felts, floor tile and other surfacing materials.
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In the early 1970s, it became widely recognized that inhalation or ingestion of
asbestos fibers caused a number of diseases, including asbestosis (a
debilitating pulmonary disease), lung cancer and mesothelioma (a cancer of the
abdominal and lung lining). The Environmental Protection Agency ("EPA") banned
the use of asbestos as a construction material in 1973, and the federal
government subsequently banned the use of asbestos in other building materials
as well. Most structures built before 1973, however, contained asbestos in some
form. The asbestos abatement industry grew rapidly in the 1980s due to
increasing awareness and concern over health hazards associated with asbestos,
legislative action mandating safety standards and requiring abatement in certain
circumstances, and economic pressures on building owners seeking to satisfy the
requirements of financial institutions, insurers and tenants. The market first
leveled off and then declined in the 1990s as building owners and facilities
managers developed containment and management programs and procedures that were
less costly than removal.
NAC provides its services on a project contract basis. Individual projects are
competitively bid, although many requests for bids from private owners are
subject to changes in specifications, additions and other factors with the
result that the final terms are negotiated. The majority of contracts undertaken
are on a fixed price basis with monthly billings based upon percentage of
completion or a schedule of values, less retainage. The lengths of the contracts
are typically less than one year; however, larger projects may require two or
three years to complete. Responsibility for each contract is assigned to a
project manager who coordinates the project until its completion. NAC provides
its asbestos abatement services using a qualified labor force in accordance with
regulatory requirements, contract specifications and operating procedures
manual, which describes worker safety and protection procedures, air monitoring
protocols and abatement methods.
NAC's asbestos abatement operations generally have been concentrated in the
tri-state New York, New Jersey and Connecticut region. Prior to the year ended
April 30, 1999, NAC had been involved in a joint venture project in
Pennsylvania. NAC is licensed and/or certified in all jurisdictions where
required by its current work in order to conduct its operations. In addition,
certain management and staff members are licensed and/or certified by various
governmental agencies as asbestos abatement supervisors and workers. Disposal of
hazardous material is subcontracted to licensed haulers, who transport the
material to a licensed landfill or other disposal facility. A "chain of custody"
for the material is set forth in a waste manifest on which each step in the
disposal process is accounted for.
Since NAC is able to perform asbestos abatement work throughout the year, the
business is not considered seasonal in nature. However, it is affected by the
timing of large contracts.
(b)(1)(B) NAC Environmental Services Corp.
NAC Environmental Services Corp. is a full service environmental firm with a
focus on remediation, closure and cost effectiveness. NACE's staff consists of
environmental engineers, hydrogeologists, environmental scientists, project
managers and field technicians. NACE has established long term relationships
with many fortune 500 companies, institutional and military organizations.
Services offered by NACE include Phase I, II, and III environmental assessments,
including underground storage tank removals, injection well closures, soil and
groundwater treatment systems, contaminated soil removal and emergency response.
The following is a brief summary of our environmental assessment services:
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Phase I: A Phase I site assessment is undertaken to identify potential
environmental concerns at a subject property. The process is non-invasive,
utilizing site visits, historical review, regulatory review, etc. to develop a
competent environmental survey of the subject property.
Phase II: Once an environmental concern has been identified (i.e., an
underground storage tank, evidence of hazardous waste, etc.), a Phase II
assessment or investigation will take place. This investigation could include
such procedures as drilling, ground penetrating radar or leaching pools
sampling. As part of the investigation, soil and/or water samples are collected
and analyzed to determine the presence or absence of contamination.
Phase III: If contamination is confirmed, an appropriate remedial action plan
is designed and implemented, based upon the nature and severity of the
contamination and the current conditions of the subject property. Remediation
could take place in the form of soil vapor extraction, ground water pump and
treatment systems, and many other options.
In satisfying our customers' needs, NACE generally provides inspection, various
testing services and project planning and management services directly, and
subcontracts with other environmental service providers for such specialized
services as hazardous waste removal, transportation and disposal.
(b)(1)(C) NAC/Indoor Air Professionals, Inc.
NAC/IAP provides indoor air quality testing, monitoring and remediation
services. Upon its organization, NAC/IAP took over the indoor air quality
testing and remediation activities previously conducted by NACE. In July 1999,
the Company expanded NAC/IAP's operation by acquiring the name and certain other
assets from, and hiring personnel formerly employed by, a Long Island, New York
based air quality contractor. The acquisition price of $637,860 was paid through
the issuance of common stock valued for this purpose at $500,000 and cash.
$500,000 of the purchase price was allocated to "goodwill", $50,000 was
allocated to covenants not to compete, and the balance was allocated to other
assets.
NAC/IAP offers an integrated approach to indoor air quality (IAQ) issues by
offering investigative services, mechanical hygiene through HVAC system cleaning
and engineering redesign, and microbiological decontamination. IAQ is an
important concern in a wide variety of industries and facilities, including
hospitals and other health care facilities, pharmaceutical and medical device
companies, food manufacturing facilities, cruise ships, commercial and
government office buildings, laboratories, universities, schools and retail
outlets. This concern results from increased awareness of health, mechanical and
fire hazards, related litigation exposure, and compliance with federal and state
IAQ mandates. As a result of increased awareness of IAP as a health issue, terms
such as "Sick Building Syndrome", "Legionnaire's Disease" and "Building Related
Illness" have come into common use.
As a member of the National Air Duct Cleaners Association, NAC/IAP practices
source removal techniques to provide a level of cleaning in compliance with the
Association's 1992-01 industry standard.
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NAC/IAP's present service area includes primarily the New York/New Jersey/
Connecticut Tri-State area. The Company is aggressively seeking to expand
NAC/IAP's service area to include the entire Atlantic seaboard and Puerto Rico.
(b)(1)(D) Backlog
At April 30, 1999, we had contracts, including contract work in progress,
representing future revenues of approximately $1,691,000. At year end 1998 and
1997, we had contracts representing future revenues of approximately $1,325,000
and $988,000, respectively. At October 31, 1999, backlog was approximately
$3,321,000.
(b)(2) Distribution Methods:
We undertake work primarily pursuant to written "fixed price" contracts which
are obtained through competitive bidding, or on a negotiated, non-bid basis.
Work performed in excess of the original contract amount is usually done
pursuant to change order. The incidence of time and material contracts, and unit
price contracts are not significant.
In marketing our services, we rely principally on a Company-employed sales staff
and upon the efforts of our operating and executive management team who
regularly call upon existing and prospective customers. We also utilize a number
of independent sales representatives. As the breadth of the services that we
offer has expanded beyond asbestos abatement to include indoor air quality and
general environmental services, cross selling and cross referrals among its
operating subsidiaries has increased and is emphasized by management to take
advantage of the working relationships which we have developed over the years
with industrial, commercial, engineering and other professional concerns in its
service area.
We support our direct sales effort through regular advertising in trade
publications, direct mailings to selected industrial and engineering firms
(e.g., in the IAQ area, to industries that are most affected by IAQ issues),
strategic telemarketing and regular participation in industry conferences and
trade shows.
(b)(3) New Products or Services:
Prior to the organization of NAC/IAP in June 1999, the indoor air quality
segment of our business was not significant. We are now actively promoting that
service segment, and presently expect NAC/IAP to generate approximately 10% of
total Company revenues in the current fiscal year.
(b)(4) Competition:
The environmental services industry is highly competitive and fragmented. We
face competition from local owner-operated service contractors and from national
and regionally based companies that perform a variety of industrial and
environmental services. Competition in this market is based primarily on hourly
rates, productivity, safety, innovative approaches and quality of service. A
substantial portion of work in our service areas is performed pursuant to
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contracts obtained through competitive bidding. Among qualified bidders, price
usually is the determining factor.
(b)(5) Sources of Supply:
We purchase job related materials and equipment from several vendors. We are not
dependent on purchasing from any one vendor, as there are a number of sources of
supply.
(b)(6) Major Customers:
Our customers include most frequently owners of commercial real estate, managing
agents and general contractors, industrial facilities and hospitals and
educational institutions. During the fiscal year ended April 30, 1999,
approximately 80% of our operating revenues were derived from commercial and
industrial clients, and approximately 20% was derived from institutional
customers such as educational institutions and hospitals. Due to the nature of
our business, which involves contracts that are often completed within one year,
customers that account for a significant portion of revenue in one year may not
represent a significant portion of revenue in subsequent years. We do not
believe that the loss of future business from any single customer would have a
material adverse effect on our results of operations or financial position taken
as a whole.
No single customer accounted for more than 10% of our revenues in any of the
past three fiscal years. Prior to the year ended April 30, 1998, a significant
portion of NAC's business was conducted through a joint venture with another
contractor. That joint venture was wound down during 1998, and did not generate
significant business activity in the last fiscal year.
(b)(7) Patents, Trademarks, Licenses, etc.
We do not consider intellectual property (apart from trade secrets concerning
customer and bidding information) to be significant to our operations.
(b)(8) and (9) Governmental Approvals and Regulations:
A core component of our business is advising and assisting our customers in
complying with local, state and federal laws and regulations concerning the
environment. With respect to asbestos abatement services, numerous regulations
at the federal, state and local levels impact the industry, including the EPA's
Clean Air Act and Occupational Safety and Health Administration ("OSHA")
requirements.
EPA regulations provide national emissions standards for asbestos abatement.
These standards mandate detailed procedures for collection, waste disposal,
handling and shipment of asbestos. The EPA regulations require precise methods
for accomplishing various aspects of asbestos abatement and include
specifications on:
o temporary storage of asbestos;
o air test protocols;
o air cleaning devices;
o record maintenance;
o placement, content and size of signs and labels warning of the presence of
asbestos and associated health risks; and
o reporting requirements to the EPA.
In addition, the EPA requires schools to inspect for asbestos and implement
response actions and submit asbestos management plans to States. These
regulations specify the use of accredited inspectors, air sampling methods and
waste disposal procedures. The EPA also has notification requirements before
removal operations can begin.
The health and safety of personnel involved in the removal of asbestos is
protected by OSHA regulations. These regulations provide worker protection
measures and standards for asbestos exposure in all work and include
specifications on:
o worker training;
o engineering controls;
o labeling respiratory protection;
o bagging of waste;
o permissible exposures limits;
o exposure assessment and monitoring;
o methods of compliance;
o hygiene facilities and practices;
o communication of hazards;
o medical surveillance;
o record maintenance; and
o designation, duties and training of a "competent person" to ensure worker
safety.
Many state authorities and local jurisdictions have implemented similar programs
governing removal, handling and disposal of asbestos.
The transportation of asbestos, which has been designated a hazardous material,
is governed by the Department of Transportation under the Hazardous Materials
Act of 1975. The Department of Transportation's current regulations direct the
transportation of asbestos-containing waste materials and require the
maintenance of detailed waste contamination and shipping papers.
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The health and safety of personnel involved in the removal of asbestos is
protected by OSHA regulations which specify allowable airborne exposure
standards for asbestos workers, engineering and administrative control methods,
work area practices, proper supervision, training, medical surveillance and
decontamination practices for worker protection.
NAC's business depends, in part, on the issuance of permits from state and
federal agencies to allow NAC to transport hazardous materials, to operate
certain of NAC's equipment and to operate NAC's container cleaning and
wastewater pretreatment facilities. NAC believes that it has and will be able to
obtain and retain the applicable and necessary permits from governmental
authorities. The majority of these permits require renewal annually and,
accordingly, such permits may be subject to revocation, modification or denial.
NAC believes it is in compliance with all of the federal, state and local
statutes and regulations which affect its asbestos abatement business.
Certain services offered by NACE and NAC/IAP are required to be performed by
licensed individuals. In addition, as indicated above, NACE frequently
subcontracts with third parties for services which require licensing or permits
(e.g., transportation of hazardous waste).
(b)(10) Research and Development:
We continuously pursue innovative and creative approaches and methods for
providing services to our customers. We do not, however, engage in any
significant research and development activities.
(b)(11) Environmental Compliance:
Except in the ordinary course of our business operations, we do not anticipate
any significant costs to comply with environmental laws and requirements.
(b)(12) Employees: As of September 30, 1999, we had 43 full time employees. Six
of our employees are executives, six are engaged in sales and marketing, and the
remaining 31 employees are technical, production and administrative employees.
In addition to our "permanent" work force, we typically hire temporary laborers
to staff NAC and NACE projects. Temporary laborers generally are represented by
a labor union and, in New York and New Jersey, are covered by a collective
bargaining agreement between the Company and the Mason Tenders Union. We also
employ union laborers with other affiliations, depending on project
jurisdiction, on a project by project basis. Our permanent work force is not
unionized.
We believe we have good relations with our employees, and have never incurred a
significant work stoppage due to any strike or protest by our employees.
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(c) Reports to Shareholders:
At the time of filing of this Registration Statement, we are not subject to the
informational and reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Following the effective date of this
Registration Statement, we will be subject to Exchange Act reporting
requirements and, in accordance therewith, will file reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information filed with
the Commission may be inspected and copied at the public reference facilities
maintained by the Commission at its principal offices at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. Such reports, proxy statements and
other information may also be obtained from the web site that the Commission
maintains at http://www.sec.gov. Copies of these materials can also be obtained
at prescribed rates from the Public Reference Section of the Commission at its
principal offices in Washington, D.C., as set forth above.
ITEM I.2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
When used in this discussion, the words "expect(s)", "feels", "believe(s)",
"will", "may", "anticipate(s)" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from the
possible results described in such statements. Readers are cautioned not to
place undue reliance on these forward-looking statements.
General
NESCO Industries, Inc. was incorporated in March 1993 as Coronado Communications
Corp. In March 1998, NESCO, which was then inactive, acquired all of the
outstanding capital stock of National Abatement Corp. ("NAC"), a corporation
engaged primarily in asbestos abatement services, and NAC Environmental Services
Corp. ("NACE"), a provider of a variety of other environmental remediation
services. As a result of this acquisition, which was the result of arms length
negotiation between previously non-affiliated parties, the former shareholders
of NAC acquired 5,000,000 shares or 80% of the total outstanding immediately
following the acquisition. For accounting purposes, NAC was treated as the
acquiring corporation. Thus, the historical financial statements of NAC prior to
this acquisition date are deemed to be the historical financial statements of
the Company.
Results of Operations
Six months ended October 31, 1999 and 1998
The following table sets forth our revenues by operating area in the periods
indicated:
Six months ended October 31,
1999 1998
---- ----
Asbestos abatement $5,288,910 $5,380,643
Indoor air quality services 379,575 --
Other environmental services 598,704 628,154
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Total $6,267,189 $6,008,797
In the six months ended October 31, 1999, our cost of earned
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revenues increased slightly more on a percentage basis than the increase in
revenues. As a result, our gross profit margin decreased to 17.9% in the six
months ended October 31, 1999, compared to 18.1% in the six months ended July
31, 1998.
Our general and administrative expenses also rose faster than revenues and gross
profit in the first six months of the current fiscal year. As a result, we had a
net loss of $115,146 in the six months ended October 31, 1999, verses net income
of $43,106 in the comparable 1998 period. The increase in general and
administrative expense was due primarily to increases in occupancy costs,
depreciation and amortization and payroll associated with staffing of our indoor
air quality operations.
Years ended April 30, 1999 and 1998
The following table sets forth our revenues by operating area in the periods
indicated:
Fiscal year ended April 30,
1999 1998
---- ----
Asbestos abatement $ 9,819,053 $11,071,751
Indoor air quality services -- --
Other environmental services 1,767,437 922,749
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$11,586,490 $11,994,500
As indicated in the above table we experienced a slight decline (approximately
3.4%) in earned revenues in the year ended April 30, 1999. We did achieve,
however, a proportionately greater reduction (approximately 7.4%) in our cost
of earned revenues (to $9,239,824 from $9,975,115). As a result our gross
profit margin improved by approximately 20% (to 20.25% in 1999 from 16.84% in
1998). The reduction in our cost of earned revenues, and the corresponding
improvement in our gross profit margin, in the year ended April 30, 1999, was
attributable primarily to a more profitable mix of business, which reflected in
part a greater contribution to our total revenues by NACE.
Our increase in gross profit for the year ended April 30, 1999 (to $2,346,666 in
1999 from $2,019,385 in the prior year) was more than offset, however, by a
substantial increase in general and administrative expenses during the year (to
$2,464,079 from $1,800,427). This increase in general and administrative
expense resulted in a net operating loss of ($117,413) in 1999 compared to
operating income of 218,958 in the prior year.
The increase in general and administrative expense in the year ended April 30,
1999, was attributable primarily to increased occupancy costs of $69,072 related
in part to a move of our executive offices in November 1998; increased personnel
costs of $178,342; increased travel and entertainment expenses of $78,501
attributable to an expanded sales and marketing effort; a $66,000 increase in
management fees paid to two executive officers; and an increase in provision for
uncollectibles of $141,000 which was reflective of the increase in receivables
at year end 1999 compared to the prior year.
Our net loss of ($116,328) in the year ended April 30, 1999 ($.02 per share),
compared with net income of $200,743, or $.03 per share in year ended April 30,
1998, was primarily the result of increased general and administrative expenses
in 1999, as described above, and the fact that in 1999 we realized a loss of
($12,381) on the operations of a joint venture which were primarily related to
the wind-up of the joint venture's activities, compared to income of $296,293
from joint venture operations in 1998.
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Liquidity and Capital Resources
The following table sets forth our working capital position at the end of each
of the fiscal periods indicated:
Six months ended
October 31,
--------------------- Fiscal year ended
1999 1998 April 30, 1999
---- ---- -----------------
Current assets $4,090,630 $3,557,563 $3,271,366
Current liabilities 3,951,063 3,139,558 2,963,266
---------- ---------- ----------
Working capital $ 139,567 $ 418,005 $ 308,100
========== ========== ==========
Our cash and cash equivalents declined from $631,853 at April 30, 1998 to
$97,765 at April 30, 1999, primarily as a result of operating activities
($261,189) and the purchase of fixed assets ($336,785) associated with the move
of our executive and administrative offices from working capital. At October 31,
1999, cash and cash equivalents were $52,725.
Our significant increase in accounts receivable at year end 1999, to $2,822,824
from $2,184,516 at April 30, 1998, was the result of a greater percentage of
projects in which we performed as a subcontractor rather than contracting
directly with the owner. Accounts receivable on projects in which we bill a
general contractor rather than the owner of the project tend to be outstanding
for a longer period. In addition, we experienced a general slowdown in accounts
receivable collection in the second half of the year attributable in part to the
relocation of our administrative and executive offices in the third quarter, and
the temporary loss of key administrative personnel in the third and fourth
quarter. Our receivables turnover ratios for the year ended April 30, 1999 and
six months ended October 31, 1999 and 1998 (i.e., revenues divided by average
accounts receivable in the period) were 3.86, 2.07 and 2.16, respectively.
To provide additional working capital in the current fiscal year, we have
borrowed a total of $600,000, net of repayments, from Petrocelli Industries,
Inc., a company controlled by Santo Petrocelli, Sr., our Chairman, President and
Chief Executive Officer. These borrowings were made over the period July 2,
1999, through January 14, 2000, and bear interest at 10% per annum, payable
monthly. Terms for the repayment of the loan principal have not been
established, and we consider this loan to be repayable on demand.
In the quarter ended July 31, 1999, we acquired certain assets now used by
NAC/IAP from an unrelated third party for $137,860 and the issuance of 364,963
shares of common stock. The cash used to acquire these assets was provided by
the loan from Petrocelli Industries that is described in the preceding
paragraph.
With the additional working capital provided by the borrowings from Petrocelli
Industries, we expect to be able to finance our operating cash needs with cash
generated by operations. We have investigated the possibility of raising
additional equity capital, however, to provide increased liquidity, to fund
increased business activity and to be in a position to take advantage of
acquisition opportunities should they arise. We presently plan to raise a
minimum of $1,000,000 in additional equity capital through a direct (i.e.,
non-underwritten) public offering of common stock within the next quarter. At
the present time, however, we have no commitments for any additional financing,
and we are not assured of success in raising any additional capital in our
planned public offering.
Year 2000
We have completed our assessment of year 2000 issues and believes that the
consequences of such issues have not had and in the future will not have a
material effect on our business, results of operations or financial condition,
without taking into account any efforts by the Company to avoid such
consequences.
New Accounting Pronouncements
In June 1997. the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. SFAS No. 130
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is effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 130 did not have a material impact on the Company's financial
reporting.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 establishes standards for public business enterprises to
report information about operating segments in annual financial statements and
selected information in the notes thereto. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the year of adoption, but comparative information is required in the second year
of application. The Company believes that the adoption of SFAS No. 131 will not
have a material impact on the Company's financial reporting.
In 1998, the FASB issued Statement of Financial Accounting Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 modifies the accounting for derivative and hedging activities and
is effective for fiscal years beginning after December 15, 1999. The Company
believes that the adoption of SFAS No. 133 will not have a material impact on
the Company's financial reporting.
In 1998, the AICPA issued Statement of Position (SOP) 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use". The Company
believes that the adoption of SOP 98-1 will not have a material impact on the
Company's financial reporting.
Item 2(c) Quantitative and Qualitative Disclosures About Financial Derivative
and Other Market Risks
The Company employs no "hedging" strategies at the present time, and all of our
cash deposits are denominated in US dollars.
ITEM I.3 - DESCRIPTION OF PROPERTY
Our executive and administrative offices are located in leased premises of
approximately 5,100 square feet at 570 Lexington Avenue, Third Floor, New York,
NY 10022. The annual lease costs for these offices is approximately $160,000 for
the first five years, and $180,000 thereafter. The lease expires on October 31,
2008.
We also lease warehouse and office space in Rutherford, NJ (approximately 6,000
square feet) at an annual rent of approximately $38,000, and in Farmingdale, NY
(approximately 500 square feet) at an annual rent of approximately $12,000. We
rent a small amount of storage area in midtown Manhattan (approximately 170
square feet) at an annual rent of approximately $5,800.
We believe our offices and other facilities are adequate for our present needs.
ITEM I.4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
10
<PAGE>
The following table sets forth information as of January 28, 2000, with respect
to the beneficial ownership of our securities by officers and directors,
individually and as a group, and all holders of more than 5% of our Common
Stock. Unless otherwise indicated, all shares are beneficially owned and sole
investment and voting power is held by the beneficial owners indicated. On
January 28, 2000, there were 6,614,963 shares of Common Stock outstanding, and
no shares of any other class of capital stock were outstanding.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Percentage of
Outstanding Common
Number of Shares of Common Stock Beneficially
Names and Addresses Stock Beneficially Owned(1) Owned
of Beneficial Owner
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Santo Petrocelli, Sr. (2) 2,550,000 37.7%
c/o Petrocelli Industries, Inc.
1212 43rd Avenue
Long Island City, NY 11101
- ----------------------------------------------------------------------------------------------------
Marshall H. Geller(3) 2,550,000 37.7%
20 Country Ridge Circle
Rybrook, NY 10573
- ----------------------------------------------------------------------------------------------------
Michael J. Caputo(4) 150,000 2.3%
c/o Nesco Industries, Inc.
570 Lexington Avenue
Third Floor
New York, NY 10022
- ----------------------------------------------------------------------------------------------------
Lawrence S. Polan(5) 150,000 2.3%
c/o Petrocelli Industries, Inc.
1212 43rd Avenue
Long Island City, NY 11101
- ----------------------------------------------------------------------------------------------------
Santo Petrocelli, Jr.(6) -0- -0-
c/o Petrocelli Industries, Inc.
1212 43rd Avenue
Long Island City, NY 11101
- ----------------------------------------------------------------------------------------------------
All Officers and Directors as a 5,400,000 78.0%
Group (5 persons)
- ----------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
- --------------
(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, 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.
(2) Includes options to purchase 150,000 shares, and 2,400,000 shares owned of
record by Petrocelli Industries Inc. 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.
(3) Includes options to purchase 150,000 shares, and 2,400,000 shares owned
wned of record by Gelco Development Corp., a company owned and controlled
by Mr. Geller and members of his family.
(4) Includes options to purchase 50,000 shares.
(5) Includes options to purchase 50,000 shares, and 100,000 shares owned of
record by LPS Consultants Inc., a company owned and controlled by Mr. Polan
and his wife.
(6) Does not include shares owned by Petrocelli Industries, Inc., in which Mr.
Petrocelli has an economic interest by reason of his equity ownership of
Petrocelli Industries, Inc.
ITEM I.5 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
The Company's executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name of Director Age Positions With Company
- ---------------- --- ----------------------
<S> <C> <C>
Santo Petrocelli, Sr. .............. 64 President and Chief Executive Officer, Chairman
of the Board of Directors
Michael J. Caputo .................. 47 Chief Operating Officer and Director
Marshall H. Geller ................. 61 Executive Vice President and Director
Lawrence S. Polan .................. 69 Chief Financial Officer, Secretary-Treasurer and
Director
Santo Petrocelli, Jr. .............. 32 Director
</TABLE>
12
<PAGE>
Santo Petrocelli, Sr., has served as Chairman and CEO of the Company and
its predecessors since 1988. Mr. Petrocelli is the Chairman and CEO and a
Director of Petrocelli Industries, Inc., Petrocelli Electric Co., Inc., a
privately-owned company based in Long Island City, New York, which is engaged in
the business of electrical and telecommunications contracting. Mr. Petrocelli
devotes less than a majority of his working time (approximately 30%) to the
Company's business.
Michael J. Caputo has served as Chief Operating Officer and a director of
the Company and its predecessors since 1988.
Marshall H. Geller, Executive Vice President and a director of the Company,
has served as a director of the Company since March 1998, and in a variety of
executive and consulting capacities with the Company and its predecessors since
1988. He has owned and operated an exterior maintenance and restoration firm in
New York City since 1962. Mr. Geller devotes less than a majority of his time
(approximately 30%) to the business of the Company.
Lawrence S. Polan has served as Secretary, Treasurer, Chief Financial
Officer and a director of the Company and its predecessors since 1988. Mr. Polan
also is the Chief Financial Officer of Petrocelli Electric Co., Inc. Mr. Polan
devotes less than a majority of his time (approximately 30%) to the Company's
business.
Santo Petrocelli, Jr., has served as a director of the Company since March
1998. Mr. Petrocelli also is President of Petrocelli Communications Company, a
division of Petrocelli Electric Co., Inc., a position he has held since May
1998. From May 1992 to May 1998, Mr. Petrocelli was Executive Vice President of
Petrocelli Communications Company.
Santo Petrocelli, Sr., is the father of Santo Petrocelli, Jr. There are no
other family relationships among the Company's officers and directors.
ITEM I.6 - EXECUTIVE COMPENSATION
(a) Summary Compensation Table:
The following table sets forth information concerning compensation for services
rendered in all capacities awarded to, earned by or paid to Santo Petrocelli,
Sr., the Company's Chairman and Chief Executive Officer, Michael J. Caputo,
Chief Operating Officer, and Marshall Geller, Executive Vice President, in the
year ended April 30, 1999. No other executive officer of the Company received
compensation of $100,000 or more from the Company in the last fiscal year.
Mr. Petrocelli is compensated by the Company through Petrocelli Industries,
Inc., and Mr. Geller is compensated through Gelco Development Corp. Payments to
these companies were classified as "Management Fees" in the Company's Statement
of Operations for the years ended April 30, 1999 and 1998.
13
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================================
Summary Compensation Table
=====================================================================================================================
Long Term Compensation
-----------------------------------------------------
Annual Compensation Awards Payouts
------------------------------- ------------------------ -------------------------
Other Restricted Securities All
Name and Annual Stock Underlying LTIP Other
Principal Salary Bonus Compensation Award(s) Options/ Payouts Compensation
Position Year ($) ($) ($) ($) SARS(#) ($) ($)
- -------- ---- ------ ----- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Santo Petrocelli, 1999 104,000 -0- * -0- -0- -0- -0-
Sr., Chairman of
the Board,
President and CEO
Michael J. Caputo, 1999 132,500 40,000 * -0- -0- -0- -0-
COO
Marshall H. Geller, 1999 104,000 -0- * -0- -0- -0- -0-
Executive Vice
President
=====================================================================================================================
</TABLE>
*Less than $50,000
(b) Options/SAR Grants: None.
(c) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value: None;
not applicable.
(d) Long-Term Incentive Plans: None.
(e) Compensation of Directors:
During the fiscal year ended April 30, 1999, no director of the Company received
any compensation for any services provided in such capacity. Directors of the
Company are reimbursed for expenses incurred by them in connection with their
activities on behalf of the Company.
(f) Employment Contracts and Termination of Employment, and Change in Control
Arrangements:
None of the Company's executive officers have fixed term employment agreements
and there are no agreements relating to severance, change of control or other
similar terms between the Company and any of its executive officers.
(g) Report on Repricing of Options/SARS: Not Applicable.
(h) Supplementary Information on Stock Options. Not applicable.
ITEM I.7 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
14
<PAGE>
From time to time, the Company uses Petrocelli Electric Co., a company
controlled by its Chairman, Santo Petrocelli, as a subcontractor for electrical
work on jobs which require such services. Similarly, Petrocelli Electric uses
the Company as a subcontractor for asbestos abatement and other environmental
services. In the year ended April 30, 1999, revenues to the Company as a
subcontractor to Petrocelli Electric were $140,500, and revenues to Petrocelli
Electric as a subcontractor to the Company were $130,616. We believe that the
terms of the business transactions between the Company and Petrocelli Electric
are no less favorable to the Company than could be obtained by us through arms
length negotiation with non-affiliated parties.
The Company has borrowed $600,000 (net of repayments of $250,000) from
Petrocelli Industries, a company controlled by Santo Petrocelli. Interest at the
rate of 10% per annum, payable monthly, is being charged on these loans, which
are unsecured. No terms for the repayment of principal have been fixed, and we
consider them to be repayable on demand. In our opinion, the terms of these
loans are as favorable to the Company as could be obtained by us in arms length
negotiations with non-affiliated parties.
ITEM I.8 - DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 25,000,000 shares of Common
Stock, $.001 par value per share, of which 6,614,963 shares were outstanding as
of October 31, 1999, and 1,000,000 shares of Preferred Stock, $.001 par value,
as to which the Board has the power to designate the rights, terms, preferences,
etc. As of October 31, 1999, the Board had not designated or issued any
Preferred Stock.
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. The Company's
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.
The holders of Common Stock are entitled to receive such dividends, if any, as
may be 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 nonassessable.
Undesignated Preferred Stock
The Company's Board of Directors presently has the authority by resolution to
issue up to 1,000,000 shares of preferred stock in one or more series and fix
the number of shares constituting any such series, the voting powers,
designations, preferences and relative, participating, optional or other special
rights and qualifications, limitations, or restrictions thereof, including the
dividend rights, dividend rate, terms of redemption (including sinking fund
provisions), redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series, without any further vote or
action by the stockholders. For example, the Board of Directors is authorized to
issue a series of preferred stock that would have the right to vote, separately
or with any other series of preferred stock, on any proposed amendment to the
Company's Certificate of Incorporation or any other proposed corporate action,
including business combinations and other transactions.
Stock Option Plan
In June 1999, we adopted an Incentive Stock Option Plan:
15
<PAGE>
o to provide incentives and rewards to our employees who are in a
position to contribute to our long term growth and profitability;
o to assist us in attracting, retaining and motivating personnel with
experience and ability we need; and
o to make our compensation program more competitive with those of other
employers.
We also anticipate that we will benefit from the added interest which personnel
who receive options will have in our success as a result of their proprietary
interest. The Plan is administered by our Board of Directors. However, the Board
may establish a stock option committee of at least three (3) directors to
administer the Plan.
The Board or committee is authorized to select from among eligible employees,
directors, advisors and consultants those individuals to whom options are to be
granted. The Board or committee also will to determine the number of shares each
person may acquire and the terms and conditions of the options. The Board or
committee also is authorized to prescribe, amend and rescind terms relating to
options granted under the plan. Generally, the interpretation and construction
of any provision of the Plan or any options granted thereunder is within the
discretion of the Board or committee.
The Plan provides that options may or may not be incentive stock options within
the meaning of Section 422 of the Internal Revenue Code. Only persons classified
as employees are eligible to receive incentive stock options. Non-employee
directors, advisors and consultants are eligible to receive options which do not
qualify as incentive stock options under applicable Internal Revenue Code. The
options granted by the Board in connection with its adoption of the Plan are not
incentive stock options.
The terms of options granted under the Plan are determined by the Board or
committee at the time the option is granted. Each option is evidenced by a
written option document. The option documents, together with the provisions of
the Plan, determine such terms as:
o when options under the Plan become exercisable;
o the exercise price of options, which, for incentive stock options, may
not be less than 100% of the fair market value of our common stock on
the date the option is granted (110% in the case of optionees who own
10% or more of our common stock);
o the term of the option;
o vesting provisions; and
o special termination provisions.
An option may not be transferred, other than to the heirs of the option holder
and is exercisable only by the original option holder during his lifetime or, in
the event of his death, by his heirs.
16
<PAGE>
At April 30, 1999, no options had been granted under the Plan. In the first
quarter of the current year, we granted options to purchase 445,000 shares of
Common Stock to eight individuals, including options to purchase 400,000 to
executive officers and directors as follows:
No. of
Optionee Shares
-------- -------
Santo Petrocelli, Sr. 150,000
Marshal H. Geller 150,000
Lawrence S. Polan 50,000
Michael J. Caputo 50,000
All options granted in the first quarter are 100% vested, are exercisable at a
price of $1.50 per share, and expire on June 13, 2004, subject to earlier
termination under the Plan.
Transfer Agent
Our transfer agent is Interwest Stock Transfer Company, 1981 East 4800 South,
Salt Lake City, UT 84117, telephone 801/272-9294.
Anti-Takeover Provisions
We are not presently aware of any takeover attempt or interest involving the
Company. Our Articles of Incorporation and Bylaws, however, and the Nevada
General Corporation Law (the "NGCL"), do contain certain provisions which may be
deemed to be "anti-takeover" in nature in that such provisions may deter,
discourage or make more difficult the assumption of control of the Company by
another corporation or person through a tender offer, merger, proxy contest or
similar transaction or series of transactions.
Authorized but Unissued Shares: Our authorized capital stock includes 25,000,000
shares of Common Stock and 1,000,000 shares of Preferred Stock. These shares of
capital stock were authorized for the purpose of providing our Board of
Directors with as much flexibility as possible to issue additional shares for
proper corporate purposes, including equity financing, acquisitions, stock
dividends, stock splits, employee stock option plans. Shares of Preferred Stock
could be issued quickly with terms calculated to delay or prevent a change in
control of the Company without any further action by the stockholders. Our
stockholders do not have preemptive rights with respect to the purchase of these
shares. Therefore, such issuance could result in a dilution of voting rights and
book value per share of our Common Stock. No shares of Preferred Stock have been
issued, and we have no present plan to issue any such shares.
No Cumulative Voting: Neither our Articles of Incorporation nor our Bylaws
contain provisions for cumulative voting. Cumulative voting entitles each
stockholder to as many votes as equal the number of shares owned by him
multiplied by the number of directors to be elected. With cumulative voting, a
stockholder may cast all these votes for one candidate or distribute them among
any two or more candidates. Thus, cumulative voting for the election of
17
<PAGE>
directors allows a stockholder or group of stockholders who hold less than 50%
of the outstanding shares voting to elect one or more members of a board of
directors. Without cumulative voting for the election of directors, the vote of
holders of a plurality of the shares voting is required to elect any member of a
board of directors and would be sufficient to elect all the members of the board
being elected.
Control Share Acquisitions: Sections 78.378 et seq. of the Nevada General
Corporation Law (the "NGCL") provide for notice of shareholders of a "control
share acquisition", which is defined as the acquisition of 20% of the voting
power of a Nevada corporation, or of voting power exceeding one-third of such
total voting power by a person who owns 20% or more of such voting power prior
to the acquisition, or a majority or more of such voting power by a person who
already owns one-third or more of the voting power. shareholders have the right
to demand "fair value" for their shares if a control share acquisition occurs.
The "control share" provisions limit the voting power of the acquirer in a
control share acquisition, and permit a corporation to recover profits resulting
from the sale of control shares in certain situations. The control share
acquisition provisions of the NGCL apply only to Nevada corporations with a
minimum of 100 shareholders of record who reside in Nevada and, for that reason,
do not now apply to the Company.
General Effect of Anti-Takeover Provisions: The overall effect of these
provisions may be to deter a future tender offer or other takeover attempt that
some stockholders might view to be in their best interests at that time. In
addition, these provisions may have the effect of assisting current management
in retaining its position and place it in a better position to resist changes
which some stockholders may want to make if dissatisfied with the conduct of our
business.
PART II
ITEM II.1 - MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
(a) Market Information
Our Common Stock is traded over-the-counter on the electronic bulletin board
operated by the National Association of Securities Dealers under the symbol
"NESK.OB". The following table sets forth the high and low bid prices quoted for
our Common Stock since April 1998:
1998 High Low
-------------- ---- ---
Second Quarter $4 3/4 $3
Third Quarter $3 7/8 $2
Fourth Quarter $2 1/2 $1
18
<PAGE>
1999
--------------
First Quarter $1 1/4 $1 1/8
Second Quarter $1 1/2 $1 1/8
Third Quarter $1 1/4 $ 7/8
Fourth Quarter $1 7/8 $ 9/16
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
(b) Holders
As of January 27, 2000, there were 29 record holders of our Common Stock.
(c) Dividends
The Company has never declared or paid any cash dividends on its Common Stock.
We currently anticipate that all future earnings will be retained to support
expansion of our business. Accordingly, we do not anticipate paying cash
dividends on our Common Stock in the foreseeable future.
ITEM II.2 - LEGAL PROCEEDINGS
The Company is a defendant in a number of litigations relating to property
damage and/or bodily injury claims which arise in the ordinary course of its
business operations. We believe that all pending claims are covered by
insurance, and will be settled or otherwise disposed of within policy limits.
The Company is not involved in any other material legal proceedings.
We maintain commercial general liability insurance for claims arising from its
business operations with coverage of $5 million limit per claim and in the
aggregate against loss arising from property damage and bodily injury. The
policy is written on an "occurrence" basis which provides coverage for insured
risks that occur during the policy period, irrespective of when a claim is made.
Higher policy limits are available for individual projects. We also carry
pollution errors and omissions liability insurance ($1 million limit per claim
and in the aggregate), a $15 million commercial umbrella policy, and worker's
compensation insurance within statutory coverage limits. In addition, a
substantial number of NAC's customers require performance and payment bonds and
the registrant maintains a bonding program to satisfy these requirements.
ITEM II.3 - CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not Applicable.
19
<PAGE>
ITEM II.4 - RECENT SALES OF UNREGISTERED SECURITIES
For the two years preceding the date of this Registration Statement, we have
issued the following securities in transactions not registered under the
Securities Act of 1933:
(a) In March 1998, we issued 5,000,000 shares of Common Stock to the then
stockholders of National Abatement Corp. and NAC Environmental Services Corp. in
exchange for all of the outstanding capital stock of those corporations. The
transaction was a negotiated business combination by which the buyer and sellers
were represented by counsel, all the five former shareholders of NAC and NACE
were sophisticated investors who acquired the shares for investment, and the
beneficial owners of the shares, following the transaction, became officers and
directors of the Company. The shares were issued without registration under the
Securities Act in reliance upon Section 4(2) of the Act, and are "restricted
securities" as that term is defined in Rule 144 under the Act. Certificates
representing the shares are legended, and stop orders against unauthorized
transfers of the shares have been entered.
(b) In July 1999, we issued 364,963 shares of Common Stock in partial
payment for certain business assets acquired from IAP, Inc. The transaction was
a negotiated business combination in which both buyer and seller were
represented by counsel. We relied on Section 4(2) of the Securities Act in
issuing the shares without registration under the Act.
ITEM II.5 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation contain a provision permitted by the NGCL which
eliminates the personal liability of directors for monetary damages for breach
of their fiduciary duty of care which arises under state law. Although this does
not change the directors' duty of care, it limits legal remedies which are
available for breach of that duty to equitable remedies, such as an injunction
or rescission. This provision has no effect on directors' liability for: (1)
breach of the directors' duty of loyalty; (2) acts or omissions not in good
faith or involving intentional misconduct or known violations of law; and (3)
approval of any transactions from which the directors derive an improper
personal benefit.
The NGCL empowers the Company to indemnify officers, directors, employees and
others from liability in certain circumstances such as where the person
successfully defended himself on the merits or acted in good faith in a manner
reasonably believed to be in the best interests of the corporation. Our Bylaws
require indemnification, to the fullest extent permitted by the NGCL, of any
person who is or was involved in any manner in any investigation, claim or other
proceeding by reason of the fact that such person is or was a director or
officer of the Company, or of another corporation serving at the Company's
request, against all expenses and liability actually and reasonably incurred by
such person in connection with the investigation, claim or other proceeding.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers, and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, we are advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
20
<PAGE>
PART F/S
FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report............................................ F-1
Consolidated Balance Sheets............................................. F-2
Consolidated Statements of Operations................................... F-3
Consolidated Statements of Cash Flows................................... F-4
Consolidated Statements of Changes in
Shareholders' Equity.................................................... F-5
Notes to Consolidated Financial Statements.............................. F-6
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
NESCO Industries, Inc.
We have audited the accompanying consolidated balance sheet of NESCO Industries,
Inc. and subsidiaries as of April 30, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the two years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NESCO Industries,
Inc. and subsidiaries as of April 30, 1999, and the results of their operations
and cash flows for each of the two years ended April 30, 1999, in conformity
with generally accepted accounting principles.
/s/ Mendelsohn Kary Bell & Natoli LLP
- -------------------------------------
MENDELSOHN KARY BELL & NATOLI LLP
New York, New York
July 27, 1999
F-1
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
A S S E T S
<TABLE>
<CAPTION>
October 31,
------------------------- April 30,
1999 1998 1999
---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Current Assets:
Cash and equivalents $ 52,725 $ 145,409 $ 97,765
Accounts receivable 2,784,107 2,783,556 2,822,824
Investment in joint venture 3,420 3,420 3,420
Unbilled costs and estimated earnings in excess
of billings on uncompleted contracts 905,019 469,101 211,961
Prepaid taxes and expenses 250,759 80,859 40,796
Deferred income taxes 94,600 75,218 94,600
---------- ---------- ----------
Total current assets 4,090,630 3,557,563 3,271,366
---------- ---------- ----------
Fixed assets, net 391,844 314,585 367,479
Intangibles, net 530,556
Other assets 114,889 155,952 109,714
---------- ---------- ----------
$5,127,919 $4,028,100 $3,748,559
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998 1999
---------- ---------- ----------
Current Liabilities:
Accounts payable and accrued expenses $2,539,763 $2,240,168 $2,099,956
Notes payable, equipment 17,606 16,066 15,221
Loans payable, shareholders 588,441 183,847 188,441
Billing in excess of costs and estimated
earnings on uncompleted contracts 690,860 456,646 474,210
Income taxes 75,603 227,207 166,873
Taxes, other than income 38,790 15,624 18,565
---------- ---------- ----------
Total current liabilities 3,951,063 3,139,558 2,963,266
Notes payable, equipment 17,996 10,912
---------- ---------- ----------
Total liabilities 3,951,063 3,157,554 2,974,178
---------- ---------- ----------
Stockholders' Equity:
Common stock, $.001 par value
Authorized 25,000,000 shares
Issued and outstanding 6,614,963 shares at October 31, 1999
and 6,250,000 shares at April 30, 1999 and October 31, 1998 6,615 6,250 6,250
Capital in excess of par value 883,185 383,550 383,550
Retained earnings 287,056 480,746 384,581
---------- ---------- ----------
1,176,856 870,546 774,381
---------- ---------- ----------
$5,127,919 $4,028,100 $3,748,559
---------- ---------- ----------
</TABLE>
See accompanying Notes.
F-2
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDING OCTOBER 31, 1999 AND 1998 (UNAUDITED)
AND YEARS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
October 31, April 30,
-------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Earned Revenues $6,267,189 $6,008,797 $11,586,490 $11,994,500
Cost of earned revenues 5,145,153 4,919,696 9,239,824 9,975,115
---------- ---------- ----------- -----------
Gross profit 1,122,036 1,089,101 2,346,666 2,019,385
General and administrative expenses 1,237,182 1,045,995 2,464,079 1,800,427
---------- ---------- ----------- -----------
Operating income (loss) (115,146) 43,106 (117,413) 218,958
---------- ---------- ----------- -----------
Other Income (Expense):
Income/(Loss) from Joint Venture (12,381) (12,381) 296,293
Unrealized gain on investments 18,000
Gain on disposal of fixed asset 736 790
Interest expense, net (13,881) (6,798) (24,285) (18,027)
---------- ---------- ----------- -----------
Income (loss) before income taxes (129,027) 23,927 (135,343) 498,014
Income tax expense (recovery) (31,502) 44,090 (19,015) 297,271
---------- ---------- ----------- -----------
Net Income (Loss) $ (97,525) $ (20,163) $ (116,328) $ 200,743
---------- ---------- ----------- -----------
Basic and diluted earnings (loss) per share (0.02) -- (0.02) 0.03
---------- ---------- ----------- -----------
Common and dilutive shares 6,474,135 6,250,000 6,250,000 6,250,000
---------- ---------- ----------- -----------
</TABLE>
See accompanying Notes.
F-3
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDING OCTOBER 31, 1999 AND 1998 (UNAUDITED)
AND YEARS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
October 31, April 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (97,525) $ (20,163) $(116,328) $ 200,743
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 55,919 26,178 50,276 38,516
Amortization of contracts acquired
Unrealized gain on marketable securities (18,000)
Gain on disposal of fixed asset (736) (790)
Deferred income taxes (274,000) (293,382) 99,995
Changes in operating assets and liabilities:
Accounts receivable 38,717 (599,040) (638,308) 117,270
Prepaid expenses and taxes (209,963) 39,689 66,408 (65,022)
Unbilled costs and estimated earnings in excess
of billings on uncompleted contracts (693,058) (279,702) (22,562) (56,804)
Other assets (5,175) (89,692) (85,454)
Accounts payable and accrued expenses 439,807 526,245 396,627 295,660
Income taxes (91,270) 214,605 167,615 17,641
Taxes other than income 20,225 (4,816) (1,875) 1,532
Billings in excess of costs and estimated
earnings on uncompleted contracts 216,650 216,966 234,530 (470,423)
--------- --------- --------- ---------
Net cash provided (used) by operating activities (325,673) (243,730) (261,189) 178,318
--------- --------- --------- ---------
Cash Flows from Investing Activities:
Purchase of fixed assets (22,980) (254,853) (336,785) (38,481)
Acquisition and intangibles (87,860)
Proceeds from disposition of fixed asset 5,676 1,000
Proceeds from refund of investment 60,000
Advances to joint venture, net 12,381 12,381 161,057
--------- --------- --------- ---------
Net cash provided (used) by investing activities (110,840) (242,472) (258,728) 123,576
--------- --------- --------- ---------
Cash Flows from Financing Activities:
Payment of equipment notes (8,527) (6,242) (14,171) (10,435)
Borrowings from shareholder loans 400,000 6,000 (9,070)
Proceeds from issuance of stock 75,000
Payments for treasury stock (326,230)
--------- --------- --------- ---------
Net cash provided (used) by financing activities 391,473 (242) (14,171) (270,735)
--------- --------- --------- ---------
Net increase (decrease) in cash and equivalents (45,040) (486,444) (534,088) 31,159
Cash and equivalents, beginning 97,765 631,853 631,853 600,694
--------- --------- --------- ---------
Cash and equivalents, ending $ 52,725 $ 145,409 $ 97,765 $ 631,853
--------- --------- --------- ---------
</TABLE>
See accompanying Notes.
F-4
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Notes Due
Common Stock Capital in on Common Treasury Stock
------------------- Excess of Retained Stock ------------------
Shares Amount Par Value Earnings Purchases Shares Amount Total
--------- ------ ---------- --------- ---------- ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1997 60 $ 314,800 $ 705,166 $ 326,230 20 $(405,000) $ 614,966
--------
Net income for the year
ended April 30, 1998 200,743 200,743
Capital contributed 75,000 75,000
Payments-Treasury shares notes (326,230)
Effect of reverse acquisition
and recapitalization:
March 11, 1998 (See Note 1) 6,250,000 $6,250 $ (6,250)
Retirement of Treasury stock (405,000) (20) 405,000
--------- ------ --------- --------- ---------- ----- --------- ----------
Balance April 30, 1998 6,250,000 6,250 383,550 500,909 890,709
Net loss for the year
ended April 30, 1999 (116,328) (116,328)
--------- ------ --------- --------- ---------- ------ --------- ----------
Balance April 30, 1999 6,250,000 $6,250 $ 383,550 $ 384,581 $ 774,381
--------- ------ --------- --------- ---------- ------ --------- ----------
Stock issued in connection
with acquisition 364,963 365 499,635 500,000
Net income for the six months
ended October 31, 1999 (Unaudited) (97,525) (97,525)
--------- ------ --------- --------- ---------- ------ --------- ----------
Balance October 31, 1999 6,614,963 $6,615 $ 883,185 $ 287,056 $1,176,856
--------- ------ --------- --------- ---------- ------ --------- ----------
</TABLE>
See accompanying Notes.
F-5
<PAGE>
1. Organization, Operations and Significant Accounting Policies
Organization:
NESCO Industries, Inc., (the Company) was incorporated in Nevada on March 29,
1993, under the name Coronado Capital Corp. (formerly Coronado Communications
Corp.).
On March 11, 1998, the Company acquired National Abatement Corp. ("NAC") and NAC
Environmental Services Corp. ("NESC") pursuant to an Agreement and Plan of
Reorganization. To effect the reorganization, NESCO issued 5,000,000 shares of
its common stock in exchange for the outstanding common shares of NAC and NESC.
Upon consummation of the reorganization, NAC and NESC became wholly-owned
subsidiaries of NESCO. As part of the reorganization, the Company amended its
articles of incorporation to change its name to NESCO Industries, Inc. and
authorized 1,000,000 shares of preferred stock. For accounting purposes the
acquisition has been treated as a recapitalization of NAC with NAC as the
acquirer (reverse acquisition).
The Company is a holding company and all of its business is conducted through
its six wholly-owned subsidiaries.
NAC was organized under the laws of the state of Delaware on May 15, 1988. NAC
is engaged in the abatement and removal of asbestos materials found in
commercial and industrial structures located in New York, New Jersey, and
Pennsylvania. The work is performed principally in office buildings for owners
of various commercial businesses and other contractors principally under lump
sum contracts.
NESC was organized under the laws of the state of Delaware on May 12, 1993. NESC
is engaged in providing various environmental services including air quality
management, lead abatement services, and management of storage tanks found in
commercial and industrial structures located in New York and New Jersey.
NAC/Indoor Air Professionals, Inc. was organized under the laws of the State of
New York on June 28, 1999. The Company provides indoor air quality monitoring,
testing and remediation services.
F-6
<PAGE>
1. Organization, Operations and Significant Accounting Policies (continued)
Basis of Presentation and Principles of Consolidation:
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries on a consolidated basis. All significant
intercompany accounts and transactions have been eliminated.
The financial statements as of October 31, 1999 and 1998 and for the six months
ended October 31, 1999 and 1998 are unaudited; however, in the opinion of
management such statements include all adjustments, consisting solely of normal
recurring adjustments, necessary for a fair presentation of the results for the
periods presented.
The interim financial statements should be read in conjunction with the
financial statements for the fiscal year ended April 30, 1999 and notes thereto.
The results of operations for the interim periods are not necessarily indicative
of the results that might be expected for the future interim periods or for the
full year ended April 30, 2000.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and revenues and
expenses during the reporting period. In these financial statements; assets,
liabilities, and earnings from contracts involve extensive reliance on
management's estimates. Actual results could differ from those estimates.
Revenue and Cost Recognition:
Earned revenues are recorded using the percentage of completion method. Under
this method, earned revenues are determined by reference to Company's
engineering estimates, contract expenditures incurred, and work performed. The
calculation of earned revenue and the effect on several asset and liability
amounts based on the common industry standard revenue determination
F-7
<PAGE>
1. Organization, Operations and Significant Accounting Policies (continued)
formula of actual costs-to-date compared to total estimated job costs. Due to
uncertainties inherent in the estimation process, and uncertainties relating to
future performance as the contracts are completed, it is at least reasonably
possible that estimated job costs, in total or on individual contracts, will be
revised. When a loss is anticipated, the entire amount of the estimated loss is
provided for in the period.
The asset, "unbilled costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The liability, "billings in excess of costs and estimated earnings on
uncompleted contracts" represents billings in excess of revenues recognized.
Cash and Equivalents:
The Company classifies highly liquid debt instruments, purchased with a maturity
of six months or less, as cash equivalents. The carrying amount approximates
fair value due to the short maturity of the investments.
F-8
<PAGE>
1. Organization, Operations and Significant Accounting Policies (continued)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
<TABLE>
<CAPTION>
Six Months
Ending Year Ending
October 31, April 30,
--------------------- -----------------------
1999 1998 1999 1998
-------- ------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Interest $ 5,417 $ 4,968 $15,557 $ 27,699
-------- ------- ------- --------
Taxes $ 198 $ -- $73,640 $189,518
-------- ------- ------- --------
Non-cash Investing and Financing Items:
Debt incurred in connection
with the purchase of property
and equipment $ -- $27,578 $27,578 $ --
-------- ------- ------- --------
Issuance of Company shares
in connection with asset
purchase $500,000 $ -- $ -- $ --
-------- ------- ------- --------
</TABLE>
Fixed Assets and Depreciation:
Depreciation is computed principally using accelerated methods over the
estimated useful lives of the assets. Expenditures for maintenance, repairs, and
minor renewals are charged to operations. Major renewals and betterments are
capitalized.
Intangible Assets:
Intangible assets represent goodwill and covenant not to compete. Amortization
is provided in a straight line method over 15 years for goodwill and 2 years for
the covenant not to compete.
F-9
<PAGE>
1. Organization, Operations and Significant Accounting Policies (continued)
Joint Venture:
NAC has a joint venture agreement with American Standard Corp. to complete
contracts aggregating $1,276,000 for abatement projects in Pittsburgh,
Pennsylvania. The joint venture projects were substantially complete at April
30, 1998. The equity method is used to account for the Company's investment in
the venture. The joint venture agreement provides for profit allocation based on
agreed upon formulas applied on a project by project basis.
Income Taxes:
Provisions for income taxes are based on taxes payable or refundable for the
current year and deferred taxes on temporary differences between the amount of
taxable income and pretax financial income and between the tax bases of assets
and liabilities and their reported amounts in the financial statements. Deferred
tax assets and liabilities are included in the financial statements at enacted
income tax rates expected to apply to taxable income in the years when such
temporary differences are expected to be recovered as prescribed in Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. As
changes in tax laws or rate are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
An allowance for uncollectibles is provided for financial statement purposes and
the direct write off method is used for tax reporting. For years ending April
30, 1998 and prior, income from construction contracts was reported for tax
purposes on the completed-contract method, and for financial statement purposes
on the percentage-of-completion method. In accordance with income tax
regulations, NAC and NESC are required to report income from construction
contracts using the percentage of completion method for years beginning May 1,
1998. (See Note 6)
F-10
<PAGE>
1. Organization, Operations and Significant Accounting Policies (continued)
Earnings Per Share:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings per Share" which
requires companies to present basic earnings per share and diluted earnings per
share, instead of the primary and fully diluted EPS that was required. The
Company adopted SFAS No. 128, "Earnings per Share," effective December 15, 1997.
2. Accounts Receivable
The Company submits requisitions (invoices) to customers based on work
performed. Pursuant to contract provisions, these requisitions include amounts,
referred to as retainage, which are retained until completion and acceptance of
the contract. Included in accounts receivable are amounts retained by customers
at April 30, 1999 and 1998 of $4,900 and $61,700, respectively. The allowance
for uncollectible accounts at October 31, 1999 and April 30, 1999 was $146,800
and April 30, 1998 was $116,013.
The Company's principal accounts receivable are due from owners of commercial
real estate and other contractors.
3. Unbilled Costs and Estimated Earnings on Uncompleted Contracts
An analysis of job costs and billings, on a per job basis, reflects the
following:
October 31,
------------------------- April 30,
1999 1998 1999
---------- ---------- ----------
(Unaudited)
Costs incurred on
uncompleted contracts $4,847,954 $4,767,796 $3,222,013
Estimated earnings 1,461,112 1,534,420 1,026,524
---------- ---------- ----------
6,309,066 6,302,216 4,248,537
Less: Billing to date 6,094,907 6,289,761 4,510,786
---------- ---------- ----------
$ 214,159 $ 12,455 $ (262,249)
---------- ---------- ----------
F-11
<PAGE>
3. Unbilled Costs and Estimated Earnings on Uncompleted Contracts (continued)
The aforementioned balance is included in the accompanying balance sheet under
the following captions:
October 31,
----------------------- April 30,
1999 1998 1999
-------- -------- ---------
(Unaudited)
Unbilled costs and
estimated earnings in
excess of billings on
uncompleted contracts $905,019 $469,101 $ 211,961
Less: Billings in excess
of costs and estimated
earnings on uncompleted
contracts 690,860 456,646 474,210
-------- -------- ---------
$214,159 $ 12,455 $(262,249)
4. Fixed Assets
The major classes of fixed assets and the range of their useful lives are as
follows:
October 31, Estimated
--------------------- April 30, Useful Life
1999 1998 1999 (Years)
-------- -------- -------- -----------
(Unaudited)
Vehicles $163,756 $166,333 $133,396 5
Office equipment 112,870 74,051 104,271 5
Furniture and fixtures 118,976 42,148 112,964 7
Equipment and tools 37,648 27,837 31,002 5
Leasehold improvements 196,530 209,573 187,303 10
-------- -------- --------
629,780 519,942 568,936
Less: Accumulated
depreciation 237,936 205,357 201,457
-------- -------- --------
$391,844 $314,585 $367,479
Depreciation and
amortization of
leaseholds for the
period $ 36,475 $ 26,178 $ 50,276
-------- -------- --------
F-12
<PAGE>
5. Intangibles
Intangibles consist of:
Goodwill $500,000
Covenant not to compete 50,000
--------
$550,000
--------
October 31,
------------------- April 30,
1999 1998 1999
------- ------- ---------
(Unaudited)
Amortization expense
for the period $19,444 $ -- $ --
------- ------- -------
6. Income Taxes
The provision for income taxes consists of the following:
October 31, April 30,
----------------------- ----------------------
1999 1998 1999 1998
-------- --------- --------- --------
(Unaudited)
Current:
Federal $(50,300) $ 212,794 $ 162,580 $109,738
State and local 18,798 105,296 111,787 87,538
-------- --------- --------- --------
(31,502) 318,090 274,367 197,276
-------- --------- --------- --------
Deferred:
Federal (196,000) (174,182) 65,809
State and local (78,000) (119,200) 34,186
--------- --------- --------
(274,000) (293,382) 99,995
-------- --------- --------- --------
$(31,502) $ 44,090 $ (19,015) $297,271
-------- --------- --------- --------
F-13
<PAGE>
6. Income Taxes (continued)
The tax effects of temporary differences and tax credits that give rise to
deferred tax assets and liabilities are as follows:
April 30,
1999
---------
Deferred tax assets:
Accounts receivable allowance $56,900
Minimum tax credits --
Marketable securities allowance 7,700
Valuation allowance --
Net operating loss 27,000
Depreciation 1,800
Deferred rent 1,200
-------
94,600
-------
Deferred tax liabilities:
Deferred income on work in progress
-------
Net deferred tax asset (liability) $94,600
-------
F-14
<PAGE>
6. Income Taxes (continued)
A reconciliation of the federal statutory tax rate to the effective federal tax
rate is as follows:
October 31, April 30,
--------------- --------------
1999 1998 1999 1998
----- ---- ----- ----
(Unaudited)
Federal statutory rate (recovery) (34.0)% 34.0% (34.0)% 34.0%
State and local income taxes
net of federal tax benefit (5.0) (3.9) (1.9) (8.3)
Minimum tax credit adjustment 9.4 --
Non-deductible items 13.1 13.5 13.1
Surtax exemption 7.4 (3.1)
Provision variance 6.0 --
Other -- deferred tax adjustment 27.0 1.6 (0.5)
----- ---- ----- ----
Rate before valuation allowance (39.0) 70.2 2.0 35.2
Valuation allowance adjustment -- (10.6) --
----- ---- ----- ----
(39.0)% 70.2% (8.6)% 35.2%
7. Notes Payable, Treasury Stock
On January 15, 1997, the Company acquired 20 shares of its common stock in
exchange for a $405,000 note bearing interest at 9%. The note provides for
monthly installments of $28,648, and the final payment was in December 1997.
8. Notes Payable, Equipment
At April 30, 1999, notes payable, equipment consisted of the following:
Total Current Long Term
------- ------- ---------
Notes payable $26,832 $15,790 $11,042
Less: Prepaid interest 699 569 130
------- ------- -------
$26,133 $15,221 $10,912
------- ------- -------
F-15
<PAGE>
8. Notes Payable, Equipment (continued)
Equipment notes bear interest at varying rates from 1.9% to 9.5% and are secured
by the related equipment.
Aggregate future minimum payments are as follows:
For the year ending April 30,
2000 $15,221
2001 9,464
2002 1,448
-------
$26,133
-------
9. Loans Payable, Shareholders
The loans payable to shareholders are due on demand, and are unsecured. The
Company has subordinated the payment of loans totalling $188,441, pursuant to an
agreement with the Company's surety bonding company. Interest on borrowings
outstanding at April 30, 1999 is calculated using the applicable federal rate as
published by the Internal Revenue Service. Interest on borrowings received
subsequent to April 30, 1999 is calculated at a rate of 10%.
10. Stock Options
The Company's 1999 Stock Option Plan provides that key employees are eligible to
receive incentive stock options or nonstatutory stock options and that directors
and advisors shall be eligible to receive non-qualified options. Under the plan,
the Company may grant options to purchase up to 1,000,000 shares. In the case of
an optionee who beneficially owns more than ten percent of the Company's
outstanding shares as of the time the option is granted, the purchase price of
the optioned stock must be fixed at not less than one hundred and ten percent of
the fair market value.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions; no dividend yield, expected volatility of 196 percent, risk-free
interest rate of 6.04 percent, and 5 year expected lives.
F-16
<PAGE>
10. Stock Options (continued)
Options were granted on June 14, 1999 at 110% of fair market value, $1.50 per
share, as determined by the Company's Board of Directors, and these options were
fully vested on granting.
The Company accounts for this program under APB Opinion No. 25, under which no
compensation cost has been recognized.
Transactions during the quarter ended October 31, 1999 involving stock options
are summarized as follows:
<TABLE>
<CAPTION>
Number of Shares
Total ----------------------- Option
Number Non- Price per
of Shares Qualified Qualified Share
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Options outstanding
at April 30, 1999 -- -- -- --
1999 option grant
on June 14, 1999 445,000 277,000 168,000 $1.50
------- ------- ------- -----
Options outstanding
at October 31, 1999 445,000
-------
Exercisable at October 31, 1999 445,000
</TABLE>
F-17
<PAGE>
10. Stock Options (continued)
Had compensation cost for the Company's stock options plan been determined based
on the fair value at the grant dates for awards under the plan consistent with
the method of FASB Statement 123, Accounting for Stock-Based Compensation, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
Six months
Ended
October 31, 1999
----------------
(Unaudited)
Net loss:
As reported $ (97,525)
Pro Forma (640,425)
Basic and diluted loss per share:
As reported (0.02)
Pro Forma (0.10)
11. Preferred Shares
On March 11, 1998, the Company's Articles of Incorporation were amended to
authorize 1,000,000 shares of preferred stock, par value .001 per share to be
issued with rights, preferences and designations as determined by the Board of
Directors. To date, no preferred shares have been subscribed to or issued.
12. Related Party Transactions
During the year ended April 30, 1999, certain stockholders and officers rendered
consulting services totalling $208,000 and subcontractor services totalling
$130,616. Warehouse rental payments totalling $38,325 were paid to a former
stockholder. NAC rendered subcontractor services to related parties totalling
$140,500.
F-18
<PAGE>
12. Related Party Transactions (continued)
During the year ended April 30, 1998, certain stockholders and officers of the
Company rendered consulting services totalling $142,000 and subcontractor
services totalling $51,119. In addition, warehouse rental payments totalling
$36,600 were paid to a former stockholder. Subcontractor services rendered to
affiliates totalled $84,313.
13. Employee Benefit Plans
The Company maintains a profit sharing and a 401(k) plan covering substantially
all full-time, non-union employees who have completed one year of continuous
service and who meet certain other eligibility requirements. Contributions to
the plan are discretionary and are allocated in proportion to compensation. For
the year ended April 30, 1999 and 1998, the Company contributed $16,146 and
$16,518, respectively to the profit sharing plan.
14. Commitments and Contingencies
Litigation:
The Company is defendant in lawsuits involving personal injury claims arising
from job-site accidents. These plaintiffs' claims exceed the Company's
applicable insurance coverages, therefore, any judgement or settlement in excess
of insurance will require payment by the Company. In the opinion of management,
the amount of ultimate liability with respect to these actions will not
materially affect the Company's results of operations or financial position.
The Company is also defendant in two cases pending involving former employees of
the Company for claims totalling $170,500. The Company has requested Bill of
Particulars for each case, and the plaintiffs' attorney has not yet responded.
Management has accrued $40,000 as its estimate of potential liability for these
claims.
F-19
<PAGE>
14. Commitments and Contingencies (continued)
Leases:
On October 1, 1998, the Company entered into a 10 year lease through September
30, 2008 for rental of office facilities. The lease provides for escalations for
scheduled rent increases and for the Company's proportionate share of increases
in real estate taxes and maintenance costs.
Under generally accepted accounting principles, the Company charges rent expense
to operations ratably over the term of the lease. The Company has charged $2,553
to operations through April 30, 1999, representing its cumulative lease costs
calculated on a straight-line basis in excess of rent paid. The resulting
liability has been included in the accompanying balance sheet as deferred rent
payable. For income tax purposes, the Company deducts rent expense as it is paid
pursuant to lease terms.
Aggregate future minimum rental payments under the principal lease are as
follows:
For the year ending April 30,
2000 $ 158,300
2001 158,300
2002 158,300
2003 158,300
2004 170,200
Subsequent to 2004 789,300
----------
Total minimum future rental payments $1,592,700
==========
F-20
<PAGE>
14. Commitments and Contingencies (continued)
The Company leases warehouse space from a former stockholder on a month-to-month
basis. The monthly rent is $3,375, and the Company is required to pay insurance,
taxes, and maintain the premises.
Rent expense was charged as follows:
<TABLE>
<CAPTION>
October 31, April 30,
------------------- --------------------
1999 1998 1999 1998
------- ------- -------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Cost of earned revenues $20,250 $18,075 $ 38,325 $36,600
General and administrative expenses $96,749 $29,955 $127,633 $58,561
</TABLE>
15. Risk and Uncertainties
The Company is subject to laws and regulations relating to the protection of the
environment. While it is not possible to quantify with certainty the potential
impact of actions regarding environmental matters, particularly any future
remediation and other compliance efforts, in the opinion of management,
compliance with the present environmental protection laws will not have a
material adverse effect on the financial condition, competitive position or
capital expenditures of the Company. However, the Company's efforts to comply
with increasingly stringent environmental regulations may have an adverse effect
on the Company's future earnings.
16. Acquisition
On July 10, 1999 NAC/Indoor Air Professionals, Inc. purchased certain tangible
and intangible assets. The acquisition cost was $637,860, payable $137,860 in
cash and $500,000, 364,963 shares, in company stock. The acquisition was
accounted for as a purchase. The allocation of purchase price follows:
Life
--------
Assets $ 87,860 5 Years
Covenant not to compete 50,000 2 Years
Goodwill 500,000 16 Years
--------
$637,860
--------
F-21
<PAGE>
17. Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Cash and Cash Equivalents:
The carrying amount reported in the balance sheet for cash and cash equivalents
approximates its fair value.
Accounts Receivable and Accounts Payable:
The carrying amounts of accounts receivable and accounts payable in the balance
sheet approximates fair value.
Short-Term and Long-Term Debt
The carrying amount of the notes payable approximates fair value.
F-22
<PAGE>
PART III
ITEM III.1 - INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
*3.1 Articles of Incorporation as amended
*3.2 Bylaws as amended
*4.1 Common Stock Certificate
*4.2 Incentive Stock Option Plan
*21 Subsidiaries
27 Financial Data Schedules
*These exhibits were filed with Form 10-SB on November 30, 1999.
<PAGE>
SIGNATURES
In accordance with Section 12(g) of the Securities Exchange Act of 1934,
the registrant caused amendment no. 2 to this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, this 28th
day of January, 2000.
NESCO INDUSTRIES, INC.
By: s/ Santo Petrocelli, Sr.
--------------------------------
SANTO PETROCELLI, SR., President
and Chief Executive Officer
By: s/ Lawrence S. Polan
------------------------------------------
LAWRENCE S. POLAN, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> APR-30-2000 APR-30-1999
<PERIOD-START> MAY-01-1999 MAY-01-1998
<PERIOD-END> OCT-31-1999 APR-30-1999
<CASH> 52,725 97,765
<SECURITIES> 0 0
<RECEIVABLES> 2,930,907 2,969,624
<ALLOWANCES> (146,800) (146,800)
<INVENTORY> 905,019 211,961
<CURRENT-ASSETS> 4,090,630 3,271,366
<PP&E> 629,780 568,936
<DEPRECIATION> (237,936) (201,457)
<TOTAL-ASSETS> 5,127,919 3,748,559
<CURRENT-LIABILITIES> 3,951,063 2,963,266
<BONDS> 0 10,912
0 0
0 0
<COMMON> 6,615 6,250
<OTHER-SE> 1,170,241 768,131
<TOTAL-LIABILITY-AND-EQUITY> 5,127,919 3,748,559
<SALES> 6,267,189 11,586,490
<TOTAL-REVENUES> 6,267,189 11,586,490
<CGS> 5,145,153 9,239,824
<TOTAL-COSTS> 6,382,335 11,703,903
<OTHER-EXPENSES> 0 (6,355)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 13,881 24,285
<INCOME-PRETAX> (129,027) (135,343)
<INCOME-TAX> (31,502) (19,015)
<INCOME-CONTINUING> (97,525) (116,328)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (97,525) (116,328)
<EPS-BASIC> (0.02) (0.02)
<EPS-DILUTED> (0.02) (0.02)
</TABLE>
