<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 1995
Commission File Number: 0-16217
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0041789
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
4710 BELLAIRE BOULEVARD, SUITE 301, BELLAIRE, TEXAS 77401
(Address of principal executive offices)
(713) 662-2699
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ________
--------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
21,633,843 Shares of Common Stock, $.001 par value at November 7, 1995
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets 3
September 30, 1995 (unaudited), and
December 31, 1994
Consolidated Statements of Operations 5
Nine months ended September 30, 1995 and 1994 (unaudited)
Three months ended September 30, 1995 and 1994 (unaudited) 6
Consolidated Statements of Cash Flows 7
Nine months ended September 30, 1995 and 1994 (unaudited)
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 13
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
</TABLE>
2
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
Assets (Unaudited)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Current
Cash $1,837,641 $3,266,518
Accounts receivable, less allowance for
doubtful accounts of $32,606 in 1995
and $30,000 in 1994 755,113 501,328
Inventory 188,497 64,254
Accrued interest receivable 216,218 -
Notes receivable, current portion 572,313 -
Prepaids and other current assets 213,719 101,476
--------- ---------
Total current assets 3,783,501 3,933,576
Notes receivable 3,680,421 2,800,763
Property and equipment, net of accumulated depreciation
of $235,979 in 1995 and $140,696 in 1994 504,152 592,858
Investment in joint venture 192,494 -
Goodwill, net of accumulated amortization
of $49,600 in 1995 and $31,744 in 1994 426,565 444,421
Purchased technologies, patents and patent rights, net of
accumulated amortization of $133,183 in 1995 and
$76,032 in 1994 214,649 191,498
Other intangible assets, net of accumulated amortization
of $32,455 in 1995 and $16,698 in 1994 151,316 62,627
Other assets 289,890 164,933
--------- ---------
$9,242,988 $8,190,676
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
Liabilities and Stockholders' Equity (Unaudited)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current
Line of credit $ - $ 300,000
Current portion of long-term debt 411,332 562,500
Notes payable to officers 120,308 213,302
Accounts payable 581,525 692,998
Accrued expenses 762,472 580,121
--------- ---------
Total current liabilities 1,875,637 2,348,921
Long-term debt 3,257,406 500,000
Minority interest 16,488 334,312
Commitment and contingencies
Stockholders' equity
Preferred stock, $.001 par value;
10,000,000 shares authorized; 80 issued in 1994 -
Common stock, $.001 par value; 50,000,000 shares
authorized; 22,056,051 and 18,692,489 issued 22,056 18,692
Additional paid-in capital 19,726,897 17,613,667
Deficit (15,495,040) (12,454,572)
------------ ------------
4,253,913 5,177,787
Less treasury stock, at cost - 450,000 and 803,000 shares (16,488) (32,312)
Less notes receivable for purchase of stock (143,968) (138,032)
--------- ---------
Total stockholders' equity 4,093,457 5,007,443
--------- ---------
$9,242,988 $8,190,676
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Nine months ended
September 30,
1995 1994
---- ----
<S> <C> <C>
Revenues $ 1,981,620 $ 1,404,447
Cost of revenues 1,273,103 819,006
--------- ---------
Gross margin 708,517 585,441
--------- ---------
Selling, general and administrative 3,223,369 2,326,410
Research and development 524,540 908,936
--------- ---------
Total expenses 3,747,909 3,235,346
--------- ---------
Operating loss (3,039,392) (2,649,905)
---------- ----------
Other income (expense):
Investment income - 512,312
Interest income 245,530 57,629
Interest expense (74,537) (68,371)
Equity in net loss of joint venture (176,892) -
Minority interest in net (income)
of subsidiary (5,432) -
Equity in net income of affiliate - 50,000
Other income (expense) 10,257 6,868
-------- ---------
(1,074) 558,438
--------- ---------
Loss from continuing operations (3,040,466) (2,091,467)
---------- ----------
Discontinued operations:
Revenues - 291,618
Cost of revenues - 367,690
----------- -------
Loss from discontinued operations - (76,072)
----------- -------
Net Loss $(3,040,466) $(2,167,539)
=========== ===========
Loss per common and
common share equivalent $ (.17) $ (.16)
Weighted average number of
common shares outstanding 18,202,928 13,415,711
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Three months ended
September 30,
1995 1994
---- ----
<S> <C> <C>
Revenues $ 809,047 $ 732,937
Cost of revenues 487,374 399,426
--------- --------
Gross margin 321,673 331,511
--------- --------
Selling, general and administrative 1,257,097 695,813
Research and development 112,300 269,406
--------- --------
Total expenses 1,369,397 965,219
--------- --------
Operating loss (1,047,724) (633,708)
----------- ---------
Other income (expense):
Interest income 77,238 28,408
Interest expense (26,069) (25,943)
Equity in net loss of joint venture (44,894) -
Equity in net income of affiliate 50,000
Other income (expense) 3,552 6,868
--------- --------
9,827 59,331
--------- --------
Loss from continuing operations (1,037,896) (574,377)
---------- ---------
Discontinued operations:
Revenues - 54,011
Cost of revenues - 83,285
--------- ---------
Loss from discontinued operations - (29,274)
--------- ---------
Net Loss $(1,037,896) $ (603,651)
=========== =========
Loss per common and
common share equivalent $ (.05) $ (.04)
Weighted average number of
common shares outstanding 19,715,763 13,622,330
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Nine months ended
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $(3,476,907) $(3,040,533)
----------- -----------
INVESTING ACTIVITIES
Payments received from finance lease $ 58,860 14,092
Payments relating to patent and patent rights (80,302) (11,136)
Purchase of property and equipment (226,577) (67,464)
Payment for non-compete agreements (105,000) -
Increase in note receivable (1,451,971) (268,101)
Increase in note receivable - stockholders - (55,000)
Cash invested in joint venture (169,386) -
Increase in organizational costs - (29,635)
----------- -----------
Net cash used in investing activities (1,974,376) (417,244)
----------- -----------
FINANCING ACTIVITIES
Issuance of common stock 2,119,594 2,353,819
Redemption of preferred stock (305,000) -
Payment of dividends on preferred stock of
subsidiary (5,432) -
Proceeds from notes payable to shareholders 7,006 210,746
Proceeds from issuance of preferred stock 15,000
Repayment of line of credit (300,000) -
Proceeds from long term debt 2,918,738 768,974
Repayments of long term debt (412,500) -
----------- ----------
Net cash used in financing activities 4,022,406 3,348,539
----------- ----------
Increase (decrease) in cash (1,428,877) (109,238)
Cash at beginning of period 3,266,518 286,904
---------- ----------
Cash at end of period $ 1,837,641 $ 177,666
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim financial information of North American Technologies Group, Inc. and
its subsidiaries (the "Company") which is included herein is unaudited and has
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. In the opinion of management, these interim financial
statements include all the necessary adjustments to fairly present the results
of the interim periods, and all such adjustments are of a normal recurring
nature. The interim financial statements should be read in conjunction with the
audited financial statements for the years ended December 31, 1994 and 1993.
Certain reclassifications have been made to the accompanying 1994 financial
statements to conform them 1995 consolidated financial statement presentation.
The interim results reflected in the accompanying financial statements are not
necessarily indicative of the results of operations for a full fiscal year.
The accompanying financial statements have been restated retroactively to
include the historical financial results of EET, Inc. ("EET") which was acquired
on March 7, 1995, and Industrial Pipe Fittings, Inc. ("IPF") which was acquired
on June 30, 1995. Both of these transactions are accounted for as a pooling-of-
interests. Accordingly, the consolidated financial statements for all periods
prior to the acquisitions have been restated to combine the previously separate
entities. See also Note 2.
The loss per common share is computed by dividing the loss applicable to common
stock by the weighted average number of shares outstanding and common stock
equivalents, if dilutive.
2. ACQUISITION OF EET, INC. AND INDUSTRIAL PIPE FITTINGS, INC.
On March 7, 1995 the Company acquired EET, Inc., a Texas corporation, pursuant
to an Agreement and Plan of Merger dated February 7, 1995. On June 30, 1995, the
Company acquired Industrial Pipe Fittings, Inc., a Texas corporation, pursuant
to an Agreement and Plan of Merger dated June 22, 1995. In each transaction, a
newly formed subsidiary of the Company acquired the respective entity by merger
in consideration for the issuance of newly issued shares of the Company's common
stock and, in the case of EET, warrants. To effect these acquisitions, the
Company issued an aggregate of 3,070,729 shares of the Company's common stock
and warrants to purchase up to 71,000 shares of the Company's common stock. The
newly formed subsidiaries have continued as the surviving corporations with the
names of EET, Inc. and Industrial Pipe Fittings, Inc., respectively. The
transactions meet the requirements of a pooling-of-interests, and as such the
financial statements of the Company have been restated retroactively to include
the historical financial results of EET and IPF.
EET had revenues of $1,426,748 and $269,073 for the years ended December 31,
1994 and 1993,
8
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
respectively. IPF had revenues of $505,407 for its first year of operations in
1994. Combined with the previously reported revenues of North American
Technologies Group, Inc., the pro forma revenues for 1994 and 1993 would have
been $1,945,697 and $351,794. EET reported losses before discontinued
operations of $764,405 and $133,201 for the years ended December 31, 1994 and
1993, respectively. IPF reported net income of $24,221 for 1994. Combined with
the previously reported losses of North American Technologies Group, Inc., the
pro forma losses before discontinued operations for 1994 and 1993 would have
been $4,797,381 and $1,510,880.
As part of the acquisition of IPF, the Company entered into non-compete
agreements with the three shareholders of IPF. All three shareholders are
active in the on-going operations of IPF. The non-compete agreements provide for
a one-time payment of $35,000 per individual and provide for non-competition
during the term of each individual's employment and for a three year period
thereafter. The total amount paid of $105,000 has been included as an intangible
asset on the balance sheet at September 30, 1995, less the amortization based on
seven and one-half years.
3. RELATED PARTY TRANSACTIONS
At September 30, 1995 the Company had a note receivable of $60,000 outstanding
to a corporate joint venture partner. The note bears interest at 10% and has a
term of less than one year.
The notes receivable included in the equity section of $143,968 and $138,032 at
September 30, 1995 and December 31, 1994, respectively, include the unpaid
portion of the original EET shareholders' capital contributions from the
formation of EET, and from new shares issued in 1994 in exchange for notes
receivable. Additionally, the balances include approximately $13,000 and $8,000
in accrued interest income at September 30, 1995 and December 31, 1994,
respectively. The notes bear interest at 6% per annum and are due upon one of
the following events: (i) EET pays dividends to its shareholders, but only to
the extent of the dividends, (ii) the maker sells his or her shares, or (iii)
there is a payment from a defined bonus pool, but only to the extent of such
bonus.
Included in notes payable to officers at September 30, 1995 and December 31,
1994, is $120,308 and $113,302, respectively, that is payable to an officer and
director of the Company who was also a shareholder of IPF prior to its
acquisition by the Company. The officer advanced money to IPF under the terms
of a note agreement, and subsequent to the acquisition this note remains in
effect. Interest is accrued monthly at 8% and the full amount is due and payable
on or before December 31, 1995. The remaining balance in notes payable to
officers at December 31, 1994, relates to amounts owed to the former
shareholders of EET who became officers of the Company in March 1995. Those
notes were repaid as part of the acquisition of EET.
Effective July 28, 1995, John W. Parrott resigned from his position as Chairman
of the Board of Directors and as a director of North American Technologies
Group, Inc. Mr. Parrott will continue
9
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to serve the Company in the capacity of an independent consultant pursuant to a
short-term consulting agreement that provides him with, among other things, a
payment in settlement of his five-year employment contract of $250,000 due no
later than December 31, 1995. An accrual to record the $250,000 in general and
administrative expenses was made in the three months ended September 30, 1995.
4. INVESTMENT IN JOINT VENTURE
During the first nine months of 1995 the Company contributed equipment valued at
$200,000 and cash of $169,000 to its joint venture with a private company. The
Company uses the equity method to record its share of the earnings and losses of
the joint venture, and accordingly has recognized $176,892 as its share of the
joint venture's losses for the first nine months of 1995 on its statement of
operations and as a reduction of the Company's investment in the joint venture.
5. DISCONTINUED OPERATIONS
Effective July 29, 1994, EET entered into a formal plan to dispose of its
analytical services operations. On July 29, 1994, EET entered into a direct
financing lease to sell the fixed assets and the analytical division to a third
party. All remaining assets and liabilities, which consisted of accounts
receivable and accrued liabilities, were retained by EET. The results of such
discontinued operations have been separated from the continuing operations on
the income statement. The balance sheet reflects the current and non-current
balance on the financing lease receivable.
6. MINORITY INTEREST
EET issued 305,000 shares of preferred stock in 1994 for $305,000 which has been
reflected as minority interest on the consolidated balance sheet at December 31,
1994. The preferred stock was redeemed in March 1995 in connection with the
acquisition by the Company of EET, and dividends of $5,432 were paid. The
dividends have been reflected as minority interest in net income of subsidiary
on the accompanying consolidated statement of operations for the nine months
ended September 30, 1995.
7. STOCKHOLDERS' EQUITY
During the nine months ended September 30, 1995, the Company:
(i) issued 3,070,729 shares of common stock for the acquisition of EET and
IPF;
(ii) issued 424,506 shares of common stock upon the conversion of the
remaining 80 shares of the Company's Series A, Series B and Series C
convertible preferred stock;
(iii) issued 2,929,713 shares of common stock for net proceeds to the
Company of $2,120,000;
10
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(iv) issued from treasury stock 350,000 shares that had been reserved for
the conversion of preferred stock of a subsidiary of the Company.
8. NOTES RECEIVABLE
Pursuant to the terms of a letter of intent to acquire assets of GAIA
Technologies, Inc., a Delaware corporation, and certain of its affiliates
(collectively, "GAIA"), the Company has entered into a note agreement with GAIA
whereby the Company will loan up to $2,100,000 to GAIA for working capital and
other purposes. Such advances bear interest at 10%, are due not later than July
1, 1998, and are collateralized by certain assets of GAIA. Upon the closing of
the purchase of the assets of GAIA by the Company in accordance with the terms
of the letter of intent, the Company will forgive the amounts advanced under
such note agreement. As of September 30, 1995, the Company had advanced
$1,339,000 under the note agreement. Since September 30, 1995, and through
November 4, 1995, the Company advanced an additional $154,000 thereunder.
Since the interest on the amounts advanced is to be forgiven in the event the
closing of the purchase of the GAIA assets occurs, interest income on the note
agreement is not accrued in the accompanying financial statements. All amounts
are included in the non-current portion of notes receivable at September 30,
1995.
The Company currently anticipates entering into another agreement with certain
affiliates of GAIA in connection with which the Company will loan additional
amounts for working capital, equipment purchases and other operating purposes
relating to the development of certain railroad crosstie technology.
9. LONG-TERM DEBT
In September 1995 the Company received cash proceeds of $2,700,000 from the
placement of its convertible subordinated notes and warrants to acquire
2,700,000 shares of the Company's common stock. The notes bear interest at 13
1/2 % per annum, which is payable semi-annually but may be deferred during the
first three years at the option of the Company. The principal amount of the
notes, and any deferred interest, is convertible at the option of the holders
into shares of the Company's common stock at an exercise price of $1.00 per
share, subject to certain adjustments, at any time after September 22, 1996 and
prior to their maturity on September 22, 2000. Repayment of the unconverted
portion of the principal amount of the notes is due in one balloon payment on
September 22, 2000. The indebtedness evidenced by the Notes is subordinated to
certain existing and future indebtedness of the Company.
The warrants permit the holders thereof to purchase an aggregate of 2,700,000
shares of the Company's common stock at an exercise price of $1.00 per share,
subject to certain adjustments,
11
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
during a four year period beginning after September 22, 1996. Under certain
circumstances, the Company may require the holders to exercise up to 40% of the
warrants, and if not exercised, such portion of the warrants would expire.
12
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The results of operations for the nine months ended September 30, 1995 and 1994,
have been restated to include the historical financial results of EET, Inc.
("EET") and Industrial Pipe Fittings, Inc. ("IPF"). These companies were
acquired on March 7, 1995 and June 30, 1995, respectively, in transactions
accounted for as poolings-of-interests. See also the Notes to the Consolidated
Financial Statements.
Revenues
- --------
Revenues increased $577,000 for the nine-month period ended September 30, 1995,
and $76,000 for the three-month period ended September 30, 1995, compared to
same periods of the previous year. These increases of 41% and 10%,
respectively, are the result of increased sales volume by both IPF and EET.
IPF'S growth in monthly shipments is reflected in their revenue increases of
$333,000 and $25,000 for the nine months and three months ended September 30,
1995. EET contributed to the balance of the revenue growth by increasing sales
of its services $244,000 and $52,000 for the nine months and three months ended
September 30, 1995.
<TABLE>
<CAPTION>
Gross margin
- ------------
<S> <C>
Gross margin for the three months ended September 30, 1995 40%
Gross margin for the three months ended September 30, 1994 45%
Gross margin for the nine months ended September 30, 1995 36%
Gross margin for the nine months ended September 30, 1994 42%
</TABLE>
Gross margins decreased from 45% for the three months ended September 30, 1994,
to 40% for the three months ended September 30, 1995, due primarily to lower
margins experienced by IPF. IPF's decrease in margin was due primarily to costs
incurred in preparing personnel and the manufacturing facilities for new
equipment that is expected to contribute positively to margins in future
quarters. In addition, although the gross margin for the Company of 40% for the
three months ended September 30, 1995 was lower than the same period of the
prior year, it was higher than the first quarter 1995 margin of 34% and the
second quarter 1995 margin of 32%. Also, the dollar volume of gross profit of
$321,673 for the third quarter 1995 was 66% higher than the gross profit for the
first quarter of $193,000 and the second quarter of $194,000.
Gross margins decreased from 42% to 36% for the nine months ended September 30,
1994, compared to the nine months ended September 30, 1995, due primarily to
lower margins experienced earlier in the year by EET which resulted from higher
than anticipated out-of-town
13
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
expenses and contract labor costs on certain projects undertaken and completed
by EET in 1995 as compared with 1994.
Selling, general and administrative
- -----------------------------------
Selling, general and administrative expenses for the nine-month period ended
September 30, 1995, increased $897,000 over the same period for the previous
year, primarily as a result of the Company's acquisition program (including the
acquisitions of EET and IPF) and management restructuring. This increase
represents (i) an increase of $300,000 in legal and accounting fees, (ii) a
$250,000 accrual for amounts owed to the former Chairman of the Company (see
Notes to Consolidated Financial Statements); and (iii) an increase in salaries
and related benefits of approximately $200,000 relating to the addition of new
management members. There were no significant increases in selling expenses.
The majority of these increased expense were incurred in the second and third
quarters of 1995, accounting for the increase for the three-month period ended
September 30, 1995 of $561,000.
The legal and professional fees for the nine-month period ended September 30,
1995 include approximately $145,000 relating to the acquisition of EET and IPF.
Since each acquisition was accounted for as a pooling-of-interest, all related
expenses were expensed in the current financial statements. In addition,
included in the professional fees for the first nine months are the accounting
and legal fees associated with the audit and the preparation of Form 10-K for
the year ended December 31, 1994. Other increased legal fees are the result of
management actively pursuing the resolution of several outstanding lawsuits,
including the arbitration hearings that have occurred and are continuing
relating to Biotrace International Inc. and the activity relating to the lawsuit
against a former officer and director of the Company. It is management's
intention to resolve as many of these issues as prudently as possible during the
current fiscal year without prejudicing the Company's rights in these matters.
Research and development
- ------------------------
Research and development expense for the nine-month period ended September 30,
1995 decreased $384,000 from the same period of the previous year. This is
primarily the result of decreased lab testing fees and chemical costs, and the
termination or completion of various consulting arrangements. Many of these
consulting arrangements were terminated or completed during the first quarter of
1995.
Other income and expense
- ------------------------
14
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Other income and expense decreased from income of $558,438 for the nine months
ended September 30, 1994 to expense of $1,074 for the nine months ended
September 30, 1995. This was primarily due to a decrease in investment income
from $512,312 to $0 for the same periods. Investment income had been derived
from the investment of the proceeds of a note receivable executed by Euro Scotia
Funding Limited ("ESF") in various market transactions. In April 1994, the
Company instructed ESF to invest in less speculative investments, and thereafter
the Company has recognized only interest income from the note receivable.
Effective December 31, 1994, the Company and ESF entered into a new note
agreement which provides for repayment over a five-year period with interest at
10%. The new note agreement allowed ESF to prepay its first payment and a
portion of its second payment by offsetting the amount that the Company owed to
ESF under a previous line of credit arrangement. The outstanding principal
balance on the note at December 31, 1994, after these offsets was $2,800,763.
Interest income of approximately $212,000 has been recognized for the nine
months ended September 30, 1995.
The brokerage firm which holds the collateral for the ESF note and an affiliate
of ESF have been recently named as defendants in a lawsuit filed by the Florida
Department of Insurance. The Company is uncertain at this time what effect, if
any, the results of this litigation may have upon the note receivable from ESF
and the related collateral. The Company has no knowledge at this time of any
impairment in value to the ESF note or the collateral.
The equity in loss from joint venture represents the Company's share of the
losses for the nine month and three-month period ended September 30, 1995 in its
joint venture arrangement with a privately owned company. The Company
contributed equipment valued at $200,000 and cash of $169,000 for the first nine
months of 1995. See also the Notes to the Consolidated Financial Statements.
The Company's share of the joint venture's losses is $176,892 and $44,894 for
the nine months and three months ended September 30, 1995. The joint venture has
substantially completed a demonstration project for a major landfill facility in
South Texas. The joint venture has entered into discussions with the
representatives of this facility regarding the results of the demonstration
project, and pricing arrangements for future processing using related
technologies at the current facility or at another facility owned by the same
company. Under the terms of the joint venture agreement, profits and losses are
shared equally.
Discontinued operations
- -----------------------
Discontinued operations for the nine months and three months ended September 30,
1994 reflect the results of operations for the analytical services division of
EET, Inc. which was discontinued in July 1994. See also the Notes to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
General
- -------
Through the quarter ended September 30, 1995, the Company incurred operating
losses that are
15
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
anticipated to continue for the near term, notwithstanding recent increases in
revenues. The operations of IPF, which have been profitable, and EET, each of
which is currently experiencing increases in demand for its core products and
services, will also require additional short-term infusions of capital to
finance equipment purchases and other operating needs. Management currently
anticipates the Company's operating cash needs to continue during the short term
at levels in the range of $200,000 to $250,000 per month, not including certain
legal and other professional fees and expenses. These estimates also do not
include additional amounts needed to fund the proposed acquisition of the assets
of GAIA (as defined hereafter) and the operation of its related businesses.
Since its inception, the Company has financed its operations primarily through
private placements of its equity securities and convertible debentures, short
term loans and proceeds received upon the exercise of its warrants and options
to acquire its securities. The Company's long-term viability and growth will
depend upon a combination of the successful commercialization of its
technologies and products, and its ability to continue to obtain adequate
financing (whether debt or equity). There can be no assurances that the Company
will be able to continue to secure sources of working capital from financing
transactions or sources other than operations for an indefinite period. In the
event the financings are completed, they may be at per share prices that are
lower than the current market price of the Company's common stock, and they may
contain provisions for future contingent consideration in the event the market
price of the Company's common stock changes over a period of time. If adequate
funds are not available and operating losses continue at current rates, the
Company would be unlikely to continue as a going concern for more than the short
term. The Company's independent auditors have noted in their report on the
Company's consolidated financial statements for the year ended December 31,
1994, that these factors raise substantial doubt about the Company's ability to
continue as a going concern.
In September 1995, the Company completed the sale of $2,700,000 of its 13 1/2%
convertible subordinated notes due September 22, 2000, and warrants to acquire
2,700,000 shares of the Company's common stock. See Notes to Consolidated
Financial Statements. Management of the Company is continuing to explore
several financing arrangements and believes that continued financing of the
Company's development and operations will be made available for the foreseeable
future, primarily through the issuance and sale of additional debt and equity
securities of the Company. In that regard, the Company has engaged Hambro
Resource Development Incorporated to provide certain investment banking services
and to assist in creating a long-term capital plan for the Company. In
addition, certain personnel and other changes have been made in order to
streamline management and reduce long-term corporate overhead, and management
intends to continue to explore methods of decreasing administrative and other
overhead expenses.
16
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Analysis of Nine Months ended September 30, 1995
- ------------------------------------------------
The Company's cash decreased $1,428,877 from December 31, 1994 to September 30,
1995 to a balance of $1,837,641. This decrease in cash was comprised of the
following: (i) net cash used in operating activities of $3,476,907, (ii) net
cash used in investing activities of $1,974,376 and (iii) net cash provided by
financing activities of $4,022,406. See also Consolidated Statements of Cash
Flows for the components of each of the preceding categories.
From January through September 30, 1995 the Company issued 2,929,713 shares of
the Company's common stock for cash proceeds, net of all fees and expenses, of
$2,120,000.
In connection with the merger of EET in March 1995, the Company advanced cash to
EET for it to repay (i) an outstanding line of credit obligation of $300,000,
(ii) debt obligations of $212,500, (iii) notes payable to certain former
shareholders of EET of $100,000, and (iv) certain accounts payable and other
accrued expenses. In addition, EET redeemed its outstanding preferred stock of
$305,000 and paid preferred stock dividends of $5,432.
In May 1995 the Company renegotiated the maturity of its $250,000 outstanding
note. This note is now due on June 15, 1996.
In connection with the merger of Industrial Pipe Fittings, Inc. in June 1995,
the Company entered into non-compete agreements with the three former
shareholders of IPF, all of whom continue to be active in the on-going
operations of IPF. These non-compete agreements required a one-time payment of
$35,000 per individual, and provide for non-competition during the term of each
individual's employment and for a three-year period thereafter.
IPF recently secured certain exclusive rights to market and sell in the United
States, Mexico and Canada products of an Italian manufacturing concern. In
connection therewith, in October 1995 the Company caused a letter of credit to
be issued securing certain of its payment obligations, and posted a $200,000
certificate of deposit as collateral therefor. In addition, IPF has outstanding
purchase orders for manufacturing equipment of approximately $250,000 which is
scheduled for delivery in November 1995.
Pursuant to the terms of a letter of intent to acquire assets of GAIA
Technologies, Inc., a Delaware corporation, and certain of its affiliates
(collectively, "GAIA"), the Company has entered into a note agreement with GAIA
whereby the Company will loan up to $2,100,000 to GAIA for working capital and
other purposes. Such advances bear interest at 10%, are due not later than July
1, 1998, and are collateralized by certain assets of GAIA. Upon the closing of
the purchase of the assets of GAIA by the Company in accordance with the terms
of the letter of intent, the Company will forgive
17
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
the amounts advanced under the note agreement. As of September 30, 1995, the
Company had advanced $1,339,000 under the note agreement. Since September 30,
1995, and through November 4, 1995, the Company advanced an additional $154,000
thereunder. See also Notes to Consolidated Financial Statements.
The Company currently anticipates entering into another agreement with certain
affiliates of GAIA in connection with which the Company will loan additional
amounts for working capital, equipment purchases and other operating purposes
relating to the development of certain railroad crosstie technology.
The Company entered into an agreement with its former Chairman of the Board in
July 1995 which provides for, among other things, a payment of $250,000 in
settlement of his five-year employment contract due no later than December 31,
1995. See also Notes to Consolidated Financial Statements.
The Company is a defendant in several legal actions which, if decided against
the Company, could have a material adverse effect on the financial condition of
the Company. The Company has not established a reserve for any losses that
might result from these lawsuits.
18
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is a party to several material legal proceedings that have
been reported on its Annual Report on Form 10-K for the year ended
December 31, 1994. During the quarter ended September 30, 1995, there
were no material changes to the status of these legal proceedings.
ITEM 2: CHANGES IN SECURITIES: None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES: None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None
ITEM 5: OTHER INFORMATION
Management is not aware of any events required to be reported hereunder.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
4(v) Investment Agreement entered into September 22, 1995
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K: None
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
North American Technologies Group, Inc.
Date: November 13, 1995 /s/ Judith Knight Shields
---------------------------------------------------
Judith Knight Shields
Chief Financial Officer and Chief Accounting Officer
20
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
EXHIBIT INDEX
EXHIBIT 4(v)
EXHIBIT 27
<PAGE>
THE NOTES, THE WARRANTS AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE
NOTES OR THE EXERCISE OF THE WARRANTS HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES OR BLUE SKY LAWS. NEITHER
THE NOTES, THE WARRANTS, OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE
NOTES OR THE EXERCISE OF THE WARRANTS MAY BE SOLD, ASSIGNED, TRANSFERRED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER SAID ACT AND UNDER
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR EXEMPTIONS FROM SUCH
REGISTRATION. WITHOUT SUCH REGISTRATION, THIS NOTE, THE WARRANTS AND THE COMMON
STOCK ISSUABLE UPON CONVERSION OF THE NOTES OR THE EXERCISE OF THE WARRANTS MAY
NOT BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT UPON DELIVERY
TO THE COMPANY OF AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT
REGISTRATION IS NOT REQUIRED UNDER SUCH ACT AND THAT SUCH SALE, ASSIGNMENT,
TRANSFER OR OTHER DISPOSITION WILL NOT BE IN VIOLATION OF ANY APPLICABLE STATE
SECURITIES OR BLUE SKY LAWS.
INVESTMENT AGREEMENT
THIS INVESTMENT AGREEMENT is made and entered into as of this 22nd day of
September, 1995, by and among North American Technologies Group, Inc., a
Delaware corporation (the "COMPANY"), and the persons listed on Exhibit A (the
---------
"INVESTORS").
SECTION 1. SALE AND PURCHASE OF SECURITIES.
-------------------------------
(a) Subject to the terms and conditions hereof and in reliance on the
mutual representations and warranties hereof, the Company agrees to sell to the
Investors, and the Investors agree to purchase from the Company, the 13 1/2%
Convertible Subordinated Notes (the "NOTES"), substantially in the form
designated as Exhibit 1(a) in all material respects and in the face amounts as
------------
set forth for each Investor in Exhibit A and aggregating $2,700,000.
---------
(b) Subject to the terms and conditions hereof and in reliance on the
mutual representations and warranties hereof, the Company agrees to issue to the
Investors "WARRANTS" (as herein called), substantially in the form designated
as Exhibit 1(b) in all material respects, entitling the Investors to purchase on
------------
the terms and conditions contained therein the number of shares of the common
stock of the Company, par value $.001 per share (the "COMMON STOCK"), as set
forth for each Investor in Exhibit A.
---------
SECTION 2. CLOSING. The closing of the transactions contemplated
-------
hereunder (the "CLOSING") shall take place at the offices of Thompson & Knight,
A Professional Corporation, located at 1700 Texas Commerce Tower, Houston,
Texas, at 11:00 a.m. local time, on September 22, 1995, or at such other date
and time as the Company and the Investors may
-1-
<PAGE>
mutually agree upon. The date on which the Closing occurs is herein called the
"CLOSING DATE". At the Closing, (a) the Company shall execute and deliver to
the Investors (i) Notes in favor of the Investors in the respective principal
amounts set forth opposite the names of the Investors in Exhibit A and (ii)
---------
Warrants entitling the Investors to purchase the respective number of shares of
Common Stock set forth opposite the names of the Investors in Exhibit A and (b)
---------
each Investor shall either (A) deliver to the Company a certified or cashier's
check made payable to the Company or (B) wire transfer to an account designated
by the Company immediately available funds, in an amount equal to the aggregate
face amounts of the Notes being purchased by such Investor.
SECTION 3. CONDITIONS PRECEDENT.
--------------------
(a) The obligations of the Investors to consummate the transactions
contemplated hereby shall be subject to each of the following conditions being
met:
(i) Each and every representation of the Company under this
Agreement shall be true and accurate in all material respects as of the
date when made and shall be deemed to have been made again at and as of the
time of Closing and shall at and as of the time of the Closing be true and
accurate in all material respects except as to changes specifically
contemplated by this Agreement or consented to by the Investors.
(ii) The Company shall have performed and complied in all material
respects with (or compliance therewith shall have been waived by the
Investors) each and every covenant and agreement required to be performed
or complied with by the Company prior to or at the Closing.
(iii) The Company shall have furnished the Investors with a copy of
the certificate of incorporation and a copy of the bylaws of the Company in
effect on the Closing Date, certified by the Secretary of the Company.
(iv) The Company shall have furnished to the Investors an incumbency
certificate and copies of resolutions of the Board of Directors of the
Company, authorizing the execution, delivery and performance of this
Agreement and all related documents and agreements, such resolution to be
certified by the Secretary of the Company as being true and correct copies
of the originals thereof, subject to no modifications or amendments as of
the Closing Date.
(v) The Investors shall have received a certificate (or facsimile
thereof) from the Secretary of State of Delaware, dated not more than four
business days prior to the Closing Date, as to the legal existence and good
standing of the Company under the laws of such state.
(vi) The Investors shall have received certificates (or facsimiles
thereof) from the appropriate public officials of jurisdiction of formation
of each of the Significant Subsidiaries (as defined herein), each dated not
more than four business days prior to the Closing Date, as to the legal
existence and good standing of the Significant Subsidiaries under the laws
of their respective jurisdictions of formation.
-2-
<PAGE>
(vii) The Investors shall have received certificates (or facsimiles
thereof) of the appropriate officials of the states in which the Company
and the Significant Subsidiaries are qualified or licensed to do business
as to the due qualification or licensing of the Company and the Significant
Subsidiaries to do business in such states and the good standing of the
Company and the Significant Subsidiaries in such states, such certificates
to be dated not more than four business days prior to the Closing Date.
(viii) The Investors shall have received an opinion of Theodore J.
Lee, (or other counsel satisfactory to the Investors), dated the Closing
Date, in form and substance reasonably satisfactory to the Investors, with
respect to the matters described in Exhibit 3(a)(viii) (subject, however,
------------------
to Section 15(i)).
-------------
(ix) No suit, action or other proceedings shall, on the Closing
Date, be pending or threatened before any court or governmental agency
seeking to restrain, prohibit, or obtain damages or other relief in
connection with the consummation of the transactions contemplated by this
Agreement.
(x) The Investors shall have received a schedule from the Company,
in form reasonably satisfactory to the Investors, that sets forth (i) the
cash balance of the Company as of the Closing Date or as of a date as near
to the Closing Date as possible and (ii) the aggregate amount of all
indebtedness for borrowed money of the Company as of the Closing Date.
(xi) All corporate and other proceedings taken or to be taken in
connection with this Agreement and the transactions contemplated hereby,
and all documents incident thereto, shall be satisfactory in form and
substance to the Investors and their special counsel.
(b) The obligation of the Company to consummate the transactions
contemplated hereby shall be subject to each of the following conditions being
met:
(i) Each and every representation of the Investors under this
Agreement shall be true and accurate in all material respects as of the
date when made and shall be deemed to have been made again at and as of the
time of Closing and shall at and as of the time of Closing be true and
accurate in all material respects except as to changes specifically
contemplated by this Agreement or consented to by the Company.
(ii) Each Investor shall have performed and complied in all material
respects with (or compliance therewith shall have been waived by the
Company) each and every covenant and agreement required to be performed or
complied with by such Investor prior to or at Closing (including, without
limitation, payment by such Investor of the aggregate amount owed by such
Investor, as provided in Section 2(b)).
------------
(iii) No suit, action or other proceedings shall, on the date of
Closing, be pending or threatened before any court or governmental agency
seeking to restrain, prohibit, or obtain damages or other relief in
connection with the consummation of the transactions contemplated by this
Agreement.
-3-
<PAGE>
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
---------------------------------------------
hereby represents and warrants to the Investors as follows:
(a) The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the jurisdiction of its incorporation and has
all requisite corporate power and corporate authority to own, lease, and operate
its properties and to carry on its business as now being conducted. No actions
or proceedings to dissolve the Company are pending.
(b) The Company is duly qualified or licensed to do business and is in
good standing in the State of Texas, which is the only jurisdiction in which it
owns, leases, or operates property or in which such qualification or licensing
is required for the conduct of its business.
(c) The Company has made available to the Investors accurate and complete
copies of (i) the charter and bylaws of each of the Company and the Significant
Subsidiaries as currently in effect, (ii) the stock records of each of the
Company and the Significant Subsidiaries, and (iii) the minutes of all meetings
of the respective Boards of Directors of the Company and the Significant
Subsidiaries, any committees of such Boards, and the shareholders of the Company
and the Significant Subsidiaries (and all consents in lieu of such meetings)
occurring on or after December 31, 1994, and to the best knowledge of the
Company, those occurring prior to December 31, 1994. Such records, minutes, and
consents occurring on or after December 31, 1994, and to the best knowledge of
the Company, those occurring prior to December 31, 1994, accurately reflect the
stock ownership of the Company and the Significant Subsidiaries and all actions
taken by such Boards of Directors, committees, and shareholders. Neither the
Company nor any Significant Subsidiary is in violation of any provision of its
charter or bylaws.
(d) The authorized capital stock of the Company consists of 50,000,000
shares of Common Stock, par value $0.001 per share, of which 28,431,051 shares
are outstanding and zero shares are held in the Company's treasury and
10,000,000 shares of Preferred Stock, par value $0.001 per share, of which, as
of the date hereof, zero shares are outstanding and zero shares are held in the
Company's treasury. All outstanding shares of capital stock of the Company have
been validly issued and are fully paid and nonassessable, and no shares of
capital stock of the Company are subject to, nor have any been issued in
violation of, preemptive or similar rights. All issuances, sales, and
repurchases by the Company of shares of its capital stock have been effected in
compliance with all laws, rules or regulations, or any judgment, order, writ,
injunction or decree of any governmental entity to which the Company is subject
("APPLICABLE LAWS"), including without limitation applicable federal and state
securities laws. As of the date hereof, an aggregate of 3,110,000 shares of
Common Stock of the Company are reserved for issuance and issuable upon the
exercise of outstanding employee stock options granted by the Company. Except
as set forth above in this Section, as provided in this Agreement and as
described in Schedule 4(d), there are outstanding (i) no shares of capital
-------------
stock or other voting securities of the Company, (ii) no securities of the
Company convertible into or exchangeable for shares of capital stock or other
voting securities of the Company, (iii) no options or other rights to acquire
from the Company, and no obligation of the Company to issue or sell, any shares
of capital stock or other voting securities of the Company or any securities of
the Company convertible into or exchangeable for such capital stock or voting
securities, and (iv) no equity equivalents, interests in the ownership or
earnings, or other similar rights of or with
-4-
<PAGE>
respect to the Company. Except as set forth in Schedule 4(d), there are no
-------------
outstanding obligations of the Company or any Subsidiary to repurchase, redeem,
or otherwise acquire any of the foregoing shares, securities, options, equity
equivalents, interests, or rights.
(e) The Company has full corporate power and corporate authority to
execute, deliver, and perform this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery, and performance by the Company of
this Agreement, and the consummation by it of the transactions contemplated
hereby, have been duly authorized by all necessary corporate action of the
Company. This Agreement has been duly executed and delivered by the Company and
constitutes, and each other agreement, instrument, or document executed or to be
executed by the Company in connection with the transactions contemplated hereby
has been, or when executed will be, duly executed and delivered by the Company
and constitutes, or when executed and delivered will constitute, a valid and
legally binding obligation of the Company, enforceable against the Company in
accordance with their respective terms, except that such enforceability may be
limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium,
and similar laws affecting creditors' rights generally and (ii) equitable
principles which may limit the availability of certain equitable remedies (such
as specific performance) in certain instances.
(f) The execution, delivery, and performance by the Company of this
Agreement and the consummation by it of the transactions contemplated hereby do
not and will not (i) conflict with or result in a violation of any provision of
the charter or bylaws of the Company or any Subsidiary, (ii) conflict with or
result in a violation of any provision of, or constitute (with or without the
giving of notice or the passage of time or both) a default under, or give rise
(with or without the giving of notice or the passage of time or both) to any
right of termination, cancellation, or acceleration under, any bond, debenture,
note, mortgage, indenture, lease, contract, agreement, or other instrument or
obligation to which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary or any of its/their respective properties may be
bound, (iii) result in the creation or imposition of any lien, mortgage,
security interest or any other encumbrance upon the properties of the Company or
any Subsidiary, or (iv) assuming compliance with the matters referred to in
Section 4(g), violate any Applicable Law binding upon the Company or any
- ------------
Subsidiary.
(g) No consent, approval, order, or authorization of, or declaration,
filing, or registration with, any court or tribunal in any jurisdiction or any
public, governmental, or regulatory body, agency, department or other authority
or instrumentality (a "GOVERNMENTAL ENTITY") is required to be obtained or made
by the Company or any Subsidiary in connection with the execution, delivery, or
performance by the Company of this Agreement or the consummation by it of the
transactions contemplated hereby, other than (i) compliance with any applicable
requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT");
(ii) compliance with any applicable requirements of the Securities Exchange Act
of 1934, as amended (the "EXCHANGE ACT"); (iii) compliance with any applicable
state securities laws; and (iv) filings with Governmental Entities to occur in
the ordinary course following the consummation of the transactions contemplated
hereby. The representations and warranties of the Company contained in this
Section, insofar as such representations and warranties pertain to compliance by
the Company with the requirements of the Securities Act and applicable state
securities laws, are based on the representations and warranties of the
Investors contained in Section 5.
----------
-5-
<PAGE>
(h) As used herein, the term "SUBSIDIARY" shall mean any entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are owned, directly or indirectly, by the Company. As used herein, the term
"SIGNIFICANT SUBSIDIARY" shall mean (i) EET, Inc., a Texas corporation ("EET"),
Industrial Pipeline Fittings, Inc., a Texas corporation ("IPF"), and North
American Environmental Group, Inc., a Delaware corporation ("NAEG"), ((ii) if
hereafter acquired by the Company, GAIA (as herein defined) and (iii) at any
particular time, any other Subsidiary that accounts for 5% or more of the
Company's consolidated revenues, expenses, assets or liabilities (determined as
of the last day of the fiscal quarter of the Company immediately preceding the
date as to which the determination of whether a Subsidiary is a Significant
Subsidiary is being made). A list of Subsidiaries, other than EET, IPF, NAEG
and (if applicable) GAIA, that constitute Significant Subsidiaries as of the
date hereof are set forth in Schedule 4(h). Each Significant Subsidiary is a
-------------
corporation duly organized, validly existing, and in good standing under the
laws of the jurisdiction of its incorporation. Each Significant Subsidiary is
duly qualified or licensed to do business and is in good standing in each of the
jurisdictions set forth on Schedule 4(h), which are all of the jurisdictions in
-------------
which it owns, leases, or operated property or in which such qualification or
licensing is required for the conduct of its business. Each Significant
Subsidiary has all requisite corporate power and corporate authority to own,
lease, and operate its properties and to carry on its business as now being
conducted. No actions or proceedings to dissolve any Significant Subsidiary are
pending. The Company owns 100% of issued and outstanding shares of capital stock
of EET and IPF, 89% of the issued and outstanding shares of NAEG and the
percentage ownership of each the Significant Subsidiaries listed in Schedule
--------
4(h) as is set forth opposite the name of such Significant Subsidiary in such
- ----
Schedule. Except as otherwise indicated on Schedule 4(h), all the outstanding
-------------
capital stock or other equity interests of each Significant Subsidiary are owned
directly or indirectly by the Company, free and clear of all liens, mortgages,
security interests and other encumbrances. All outstanding shares of capital
stock of each Significant Subsidiary have been validly issued and are fully paid
and nonassessable. No shares of capital stock or other equity interests of any
Significant Subsidiary are subject to, nor have any been issued in violation of,
preemptive or similar rights. Except as set forth on Schedule 4(h), there are
-------------
outstanding (i) no shares of capital stock or other voting securities of any
Significant Subsidiary, (ii) no securities of the Company or any Significant
Subsidiary convertible into or exchangeable for shares of capital stock or other
voting securities of any Significant Subsidiary, (iii) no options or other
rights to acquire from the Company or any Significant Subsidiary, and no
obligation of the Company or any Significant Subsidiary to issue or sell, any
shares of capital stock or other voting securities of any Significant Subsidiary
or any securities convertible into or exchangeable for such capital stock or
voting securities, and (iv) no equity equivalents, interests in the ownership or
earnings, or other similar rights of or with respect to any Significant
Subsidiary. There are no outstanding obligations of the Company or any
Significant Subsidiary to repurchase, redeem, or otherwise acquire any of the
foregoing shares, securities, options, equity equivalents, interests, or rights.
(i) The shares of Common Stock to be issued by the Company upon conversion
of the Notes (the "NOTE SHARES") have been duly authorized for such issuance
and, when issued and delivered by the Company in accordance with the provisions
of this Agreement, will be validly issued, fully paid, and nonassessable. The
issuance of the Note Shares under this Agreement is not subject to any
preemptive or similar rights.
-6-
<PAGE>
(j) At all times since December 31, 1994, and, to the best knowledge of
the Company, at all times prior to December 31, 1994, the Company has filed with
the Securities and Exchange Commission (the "COMMISSION") all forms, reports,
schedules, statements, and other documents required to be filed by it since
January 1, 1992 under the Securities Act, the Exchange Act, and all other
federal securities laws (as such documents have been amended since the time of
their filing, collectively, the "SEC FILINGS"). The Company has made available
to the Investors accurate and complete copies of all the SEC Filings in the form
filed by the Company with the Commission since January 1, 1992. At all times
since December 31, 1994, and, to the best knowledge of the Company, at all times
prior thereto, the SEC Filings, at the time filed, complied in all material
respects with all applicable requirements of federal securities laws. None of
the SEC Filings, including, without limitation, any financial statements or
schedules included therein, at the time filed, contained any untrue statement of
a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements contained therein, in light
of the circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited consolidated interim financial
statements of the Company included in the SEC Filings present fairly, in
conformity with generally accepted accounting principles applied on a consistent
basis (except as may be indicated in the notes thereto), the consolidated
financial position of the Company as of the dates thereof and its consolidated
results of operations and cash flows/changes in financial position for the
periods then ended (subject to normal year-end audit adjustments in the case of
any unaudited interim financial statements).
(k) Except as and to the extent disclosed in the SEC Filings filed prior
to the date hereof as of June 30, 1995, neither the Company nor any Subsidiary
has any material liabilities or obligations (whether accrued, absolute,
contingent, unliquidated, or otherwise, whether or not known to the Company or
any Subsidiary, and whether due or to become due) of a nature required by
generally accepted accounting principles to be recognized or disclosed in
consolidated financial statements of the Company. Except as set forth in
Schedule 4(k), since June 30, 1995, neither the Company nor any Subsidiary has
- -------------
incurred any such liabilities or obligations, other than those incurred in the
ordinary course of business consistent with past practice or pursuant to or as
contemplated by this Agreement.
(l) Except as disclosed in the SEC Filings filed prior to the date hereof,
since June 30, 1995, (i) there has not been any material adverse change in, or
any event or condition that might reasonably be expected to result in any
material adverse change in, the business, assets, results of operations,
condition (financial or otherwise), or prospects of the Company and the
Subsidiaries considered as a whole; (ii) the businesses of the Company and the
Subsidiaries have been conducted only in the ordinary course consistent with
past practice; (iii) neither the Company nor any Subsidiary has engaged in any
material transaction, or entered into any material agreement outside the
ordinary course of business consistent with past practice; and (iv) neither the
Company nor any Subsidiary has suffered any material loss, damage, destruction,
or other casualty to any of its assets (whether or not covered by insurance).
(m) Except as disclosed in this subsection (m) or in the SEC Filings filed
--------------
prior to the date hereof, at all times on or after December 31, 1994, and, to
the best knowledge of the Company, at all time prior thereto, the Company and
the Subsidiaries have complied with all Applicable Laws (including without
limitation Applicable Laws relating to securities, properties,
-7-
<PAGE>
business products, manufacturing processes, advertising and sales practices,
employment practices, terms and conditions of employment, wages and hours,
safety, occupational safety, health, environmental protection, product safety,
and civil rights), and neither the Company nor any Subsidiary has received any
written notice, which has not been dismissed or otherwise disposed of, that the
Company or any Subsidiary has not so complied, except, in the good faith
judgement of the Company, where the failure to do so would not, either
individually or in the aggregate, reasonably be expected to have a material
adverse effect on the business, assets, results of operations, condition
(financial or otherwise), or prospects of the Company and its Subsidiaries
considered as a whole (a "MATERIAL ADVERSE EFFECT"). Neither the Company nor
any Subsidiary is charged or, to the best knowledge of the Company, threatened
with or under investigation with respect to, any violation of any Applicable Law
relating to any aspect of the business of the Company or any Subsidiary.
Notwithstanding the foregoing, the Company failed to file U.S. federal and state
tax returns for the years 1992, 1993 and 1994 (although, to the best knowledge
of the Company, no taxes are owed by the Company with respect to any such year
and it is not believed that the failure to so file will result in any material
liability).
(n) Except as disclosed in the SEC Filings filed prior to the date hereof,
there are no proceedings pending or, to the best knowledge of the Company,
threatened against or involving the Company or any Subsidiary (or any of their
respective directors or officers in connection with the business or affairs of
the Company or any Subsidiary) or any properties or rights of the Company or any
Subsidiary which might result in any judgment against or liability of the
Company. No judgment, order, writ, injunction, or decree of any Governmental
Entity has been issued or entered against the Company or any Subsidiary which
continues to be in effect.
(o) Each of the Company and the Significant Subsidiaries has good,
marketable, and (in the case of real property) insurable title to all properties
(real, personal, and mixed, tangible and intangible) it owns or purports to own,
including without limitation the properties reflected in its books and records
and in the latest balance sheet of the Company included in the SEC Filings filed
prior to the date hereof.
(p) Neither the Company nor any of its affiliates has retained any
financial advisor, broker, agent, or finder or paid or agreed to pay any
financial advisor, broker, agent, or finder on account of this Agreement or any
transaction contemplated hereby. The Company has retained Hambro Resource
Development Incorporated, Rhone Finance S.A. and Epsom Investments Services N.V.
to provide certain financial and/or securities placement services, but no such
entity is entitled to receive any fee or other compensation in connection with
the offer, sale or issuance of the Notes, the Warrants, the securities into
which the Notes or Warrants may be converted or the other transactions in
connection therewith or contemplated hereby. The Company shall indemnify and
hold harmless the Investors from and against any and all losses, claims,
damages, and liabilities (including legal and other expenses reasonably incurred
in connection with investigating or defending any claims or actions) with
respect to any finder's fee, brokerage commission, or similar payment in
connection with any transaction contemplated hereby asserted by any person on
the basis of any act or statement made or alleged to have been made by the
Company or any of its affiliates.
(q) No statement of the Company contained in any document, certificate, or
other writing furnished or to be furnished by the Company pursuant hereto or in
connection herewith,
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<PAGE>
contains or will contain, at the time of delivery, any untrue statement of a
material fact or omits or will omit, at the time of delivery, to state any
material fact necessary in order to make the statements contained therein, in
light of the circumstances under which they are made, not misleading. The
Company knows of no matter (other than matters of a general economic character
not relating solely to the Company or any Subsidiary in any specific manner)
which has not been disclosed to the Investors pursuant to this Agreement which
materially and adversely affects, or, so far as the Company can now reasonably
foresee, will materially and adversely affect, the business, assets, results of
operations, condition (financial or otherwise), or prospects of the Company and
the Subsidiaries considered as a whole or the ability of the Company to
consummate the transactions contemplated hereby.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR. Each Investor
-----------------------------------------------
severally (and not jointly or jointly and severally) represents and warrants to
the Company as follows:
(a) Such Investor has the right, power and authority to execute this
Agreement and to consummate the transactions contemplated hereunder. Such
Investor has full power and authority to execute, deliver, and perform this
Agreement and to consummate the transactions contemplated hereby. The
execution, delivery, and performance by such Investor of this Agreement, and the
consummation by it of the transactions contemplated hereby, have been duly
authorized by all necessary corporate or partnership action of such Investor.
This Agreement has been duly executed and delivered by such Investor and
constitutes, and each other agreement, instrument, or document executed or to be
executed by such Investor in connection with the transactions contemplated
hereby has been, or when executed will be, duly executed and delivered by such
Investor and constitutes, or when executed and delivered will constitute, a
valid and legally binding obligation of such Investor, enforceable against such
Investor in accordance with their respective terms, except that such
enforceability may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium, and similar laws affecting creditors' rights
generally and (ii) equitable principles which may limit the availability of
certain equitable remedies (such as specific performance) in certain instances.
(b) Such Investor is acquiring the Notes and the Warrants for its own
account for investment and not with a view to distribution, except (i) in an
offering covered by a registration statement filed with the Commission under the
Securities Act covering the Notes, the Warrants or the shares of Common Stock
into which the Notes or Warrants are convertible or (ii) pursuant to an
applicable exemption under the Securities Act.
(c) Such Investor is an "accredited investor", as such term is defined in
Regulation D promulgated pursuant to the Securities Act.
(d) Such Investor understands that the Notes and Warrants (and the shares
of Common Stock issued upon conversion of the Notes and the Warrants) will not
have been registered pursuant to the Securities Act or any applicable state
securities laws, that the Notes and Warrants (and the shares of Common Stock
issued upon conversion of the Notes and Warrants) will be characterized as
"restricted securities" under federal securities laws, and that under such laws
and applicable regulations the Notes and Warrants (and the shares of Common
Stock issued upon
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<PAGE>
conversion of the Notes and Warrants) cannot be sold or otherwise disposed of
without registration under the Securities Act or an exemption therefrom.
(e) Neither such Investor nor any of its affiliates has retained any
financial advisor, broker, agent, or finder or paid or agreed to pay any
financial advisor, broker, agent, or finder on account of this Agreement or any
transaction contemplated hereby. Such Investor shall indemnify and hold
harmless the Company from and against any and all losses, claims, damages, and
liabilities (including legal and other expenses reasonably incurred in
connection with investigating or defending any claims or actions) with respect
to any finder's fee, brokerage commission, or similar payment in connection with
any transaction contemplated hereby asserted by any person on the basis of any
act or statement made or alleged to have been made by such Investor or any of
its affiliates.
SECTION 6. COVENANTS OF THE COMPANY. The Company covenants and agrees
------------------------
that, so long as either any amount remains unpaid on the Notes or any of the
Warrants have not expired and remain unexercised, it will comply with the
following provisions:
(a) The Company will deliver to each holder of Notes:
(i) within 55 days after the end of each quarterly fiscal period in
each fiscal year of the Company (other than the last quarterly fiscal
period of each such fiscal year), duplicate copies of,
A. a consolidated balance sheet of the Company and its
Subsidiaries as at the end of such quarter, and
B. consolidated statements of income, changes in shareholders'
equity and cash flows of the Company and its Subsidiaries, for such
quarter,
setting forth in each case in comparative form the figures for the
corresponding periods in the previous fiscal year, all in reasonable
detail, prepared in accordance with generally accepted accounting
principles applicable to quarterly financial statements generally, and
certified by a senior financial officer of the Company as fairly
presenting, in all material respects, the financial position of the
companies being reported on and their results of operations and cash flows,
subject to changes resulting from year-end adjustments; provided, that
delivery within the time period specified above of copies of the Company's
Quarterly Report on Form 10-Q (or, if the Company files with the Commission
a Form 12b-25 with respect to a particular 10-Q in accordance with the
Exchange Act, no later than 15 days after the filing of such Form) prepared
in compliance with the requirements therefor and filed with the Commission
shall be deemed to satisfy the requirements of this Section 6(a)(i);
---------------
(ii) within 100 days after the end of each fiscal year of the
Company, duplicate copies of,
A. a consolidated balance sheet of the Company and its
Subsidiaries, as at the end of such year, and
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<PAGE>
B. consolidated statements of income, changes in shareholders'
equity and cash flows of the Company and its Subsidiaries, for such
year,
setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail, prepared in accordance with
generally accepted accounting principles, and accompanied by an opinion
thereon of independent certified public accountants of recognized national
standing, which opinion shall state that such financial statements present
fairly, in all material respects, the financial position of the companies
being reported upon and their results of operations and cash flows and have
been prepared in conformity with generally accepted accounting principles,
and that the examination of such accountants in connection with such
financial statements has been made in accordance with generally accepted
auditing standards, and that such audit provides a reasonable basis for
such opinion in the circumstances; provided, that the delivery within the
time period specified above (or, if the Company files with the Commission a
Form 12b-25 with respect to a particular 10-K in accordance with the
Exchange Act, no later than 15 days after the filing of such Form) of the
Company's Annual Report on Form 10-K for such fiscal year, together with
the Company's annual report to shareholders, if any, prepared pursuant to
Rule 14a-3 under the Exchange Act, prepared in accordance with the
requirements therefor and filed with the Commission, shall be deemed to
satisfy the requirements of this Section 6.1(a)(ii);
------------------
(iii) promptly upon their becoming available, one copy of (a) each
financial statement, report, notice or proxy statement sent by the Company
or any Significant Subsidiary to public securities holders generally, and
(b) each regular or periodic report, each final registration statement
(without exhibits except as expressly requested by such holder), and each
final prospectus and all amendments thereto filed by the Company or any
Significant Subsidiary with the Commission and of all press releases and
other statements made available generally by the Company or any Significant
Subsidiary to the public concerning developments that are material;
(iv) promptly, and in any event within ten days after a Responsible
Officer (as defined below) becoming aware of the existence of any Default
or Event of Default or that any Person has given any notice or taken any
action with respect to a claimed default hereunder, a written notice
specifying the nature and period of existence thereof and what action the
Company is taking or proposes to take with respect thereto (as used herein,
the terms "RESPONSIBLE OFFICER" shall mean any of the following officers of
the Company: the Chairman, the President, the Chief Executive Officer, the
Chief Operating Officer, the Chief Financial Officer, the Treasurer, and
Senior or Executive Vice President and the controller or the chief
accounting officer (and any person who performs one of the same functions
under a different title));
(v) promptly, and in any event within 30 days of receipt thereof,
copies of any notice to the Company or any Significant Subsidiary from any
Governmental Entity relating to any order, ruling, statute or other law or
regulation that would reasonably be expected to have a Material Adverse
Effect; and
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<PAGE>
(vi) with reasonable promptness, such other data and information
relating to the business, operations, affairs, financial condition, assets
or properties of the Company or any of its Significant Subsidiaries or
relating to the ability of the Company to perform its obligations hereunder
and under the Notes as from time to time may be reasonably requested by any
such holder of Notes.
(b) The Company will and will cause each of its Significant Subsidiaries
to comply with all laws, ordinances or governmental rules or regulations to
which each of them is subject, and will obtain and maintain in effect all
licenses, certificates, permits, franchises and other governmental
authorizations necessary to the ownership of their respective properties or to
the conduct of their respective businesses, except, in the good faith judgment
of the Company, where the failure to do so would not, individually or in the
aggregate, have a Material Adverse Effect.
(c) The Company will and will cause each of its Significant Subsidiaries
to maintain, with financially sound and reputable insurers, insurance with
respect to their respective properties and businesses against such casualties
and contingencies, of such types, on such terms and in such amounts (including
deductibles, co-insurance and self-insurance, if adequate reserves are
maintained with respect thereto) as is customary in the case of entities of
established reputations engaged in the same or a similar business and similarly
situated.
(d) The Company will and will cause each of its Significant Subsidiaries
to maintain and keep, or cause to be maintained and kept, their respective
properties in good repair, working order and condition (other than ordinary wear
and tear), so that the business carried on in connection therewith may be
properly conducted at all times.
(e) The Company will and will cause each of its Subsidiaries to file all
tax returns required to be filed in any jurisdiction and to pay and discharge
all taxes shown to be due and payable on such returns and all other taxes,
assessments, governmental charges, or levies imposed on them or any of their
properties, assets, income or franchises, to the extent such taxes and
assessments have become due and payable and before they have become delinquent
and all claims for which sums have become due and payable that have or might
become a lien or other encumbrance on properties or assets of the Company or any
Subsidiary; provided, that neither the Company nor any Subsidiary need pay any
such tax or assessment or claims if the amount, applicability or validity
thereof is contested by the Company or such Subsidiary on a timely basis in good
faith and in appropriate proceedings, and the Company or a Subsidiary has
established adequate reserves therefor in accordance with generally accepted
accounting principles on the books of the Company or such Subsidiary.
(f) The Company will at all times preserve and keep in full force and
effect its corporate existence. The Company will at all times preserve and keep
in full force and effect the corporate existence of each of its Significant
Subsidiaries (unless merged into the Company or a Subsidiary) and all rights and
franchises of the Company and its Significant Subsidiaries unless, in the good
faith judgment of the Company, the termination of or failure to preserve and
keep in full force and effect such corporate existence, right or franchise would
not, individually or in the aggregate, have a Material Adverse Effect.
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<PAGE>
(g) The Company will use the proceeds derived from the sale of the Notes
only for (i) effecting the acquisition of GAIA Technologies, Inc. ("GAIA") and
certain affiliated companies of GAIA and (ii) working capital (provided, that in
no event shall such proceeds be used to retire any existing indebtedness for
borrowed money of the Company).
(h) The Company will not declare or pay any dividend on any class of its
stock or make any payment on account of the purchase, redemption or other
retirement of any shares of its stock or of any warrants, options, similar
rights to purchase its stock, either directly or indirectly.
(i) The Company will not, and will not permit any Subsidiaries to
(directly or indirectly), make any loans or advances to officers, directors and
employees of the Company or any Subsidiary, except that the foregoing shall not
apply to such arrangements (i) currently existing and disclosed in writing to
the Investors, (ii) as provided for in employment agreements with any such
persons in the form of such agreements currently existing, (iii) in connection
with the hiring by the Company of any person who is, immediately prior thereto,
not in any way affiliated with the Company or (iv) in connection with the
relocation of any employee of the Company.
(j) The Company will not, and will not permit any Significant Subsidiary
to, guarantee or otherwise in any way be responsible for obligations of any
other person, whether by agreement to purchase the indebtedness of any other
person or to purchase any materials, supplies or other property, if the relevant
contract or other related document requires that payment for such materials,
supplies or other property shall be made regardless of whether delivery of such
materials, supplies or other property is ever made, or otherwise; provided,
however, that the foregoing shall not be deemed to prohibit (i) the endorsement
by the Company or any Significant Subsidiary of negotiable instruments for the
purpose of collection in the ordinary course of business and (ii) the Company or
any Significant Subsidiary from guaranteeing or otherwise becoming responsible
for obligations of the Company or any Subsidiary in connection with the business
of the Company or any Significant Subsidiary.
(k) The Company will not, and will not permit any Significant Subsidiary
to, merge or consolidate with any other entity unless the Company or such
Significant Subsidiary is the continuing or surviving entity or to sell, lease,
transfer or otherwise dispose of all or substantially all of its assets to any
person, except that (i) any Significant Subsidiary may merge or consolidate with
the Company (provided the Company shall be the continuing or surviving
corporation) or with any one or more other Subsidiaries and (ii) any Significant
Subsidiary may sell, lease, transfer or otherwise dispose of any of its assets
to the Company or another Subsidiary.
(l) The Company will not, and will not permit any Subsidiary to (directly
or indirectly), create, incur, assume or permit to exist any mortgage, lien,
pledge, charge, security interest or other encumbrance if, as a result of such
mortgage, lien, pledge, security interest or other encumbrance, more than 50% of
then aggregate book value of the Consolidated Assets (as defined in Section
-------
10(b)) would be subject to a mortgage, lien, pledge, security interest or other
- -----
encumbrance.
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<PAGE>
(m) The Company will not, and will not permit any to Subsidiary to,
acquire equity securities in another entity unless the Company or such
Subsidiary acquires all of the equity securities of such entity, except that the
foregoing shall not apply (i) when, in the reasonable judgement of the Company,
the acquisition of less than all of the equity securities of another entity is
necessary in order to facilitate an acquisition which the Company believes is in
the best interests of the Company to consummate and (ii) the Company's or a
Subsidiary's participation in a joint venture or similar entity that is formed
for bona fide business development purposes and which the Company believes is in
its best interests.
(n) The Company will not, and will not permit any Subsidiary to, purchase
any shares of stock in the Company of any employee or other stockholder that
would prevent the Common Stock to be acquired by the Investors upon conversion
of the Notes or exercise of the Warrants from qualifying under Section 1202 of
the Internal Revenue Code of 1986, as amended (the "INTERNAL REVENUE CODE"), as
qualified small business stock.
(o) The Company will, upon request of the holders of at least 51% of the
aggregate principal amount of the Notes at the time outstanding, take all steps
as are necessary to cause a person designated by such holders to become a member
of the board of directors of the Company and will thereafter include that person
on the list of nominees for the board of directors submitted to the shareholders
of the Company in connection with the election of the board of directors. The
person so designated shall either be the person that holds the greatest
aggregate principal amount of the Notes outstanding at the time outstanding (in
this Section, the "LEAD INVESTOR") or a person reasonably acceptable to the Lead
Investor. Upon the occurrence of an Event of Default (as defined herein), the
Company shall, upon request of the holders of at least 51% of the aggregate
principal amount of the Notes at the time outstanding, take all steps as are
necessary to cause two additional persons designated by such holders to become
members of the board of directors of the Company and will thereafter include
such persons on the list of nominees for the board of directors submitted to the
shareholders of the Company in connection with the election of the board of
directors, which two additional persons may serve as members of the board of
directors of the Company only so long as the Event of Default remains uncured or
the Notes remain unpaid, whichever first occurs. The Company shall cause the
chairman of the board of directors of the Company to meet separately with any
Investor-designated member(s) of the board of directors on a quarterly basis in
conjunction with, to the extent possible, regular scheduled meetings of the
board of directors. The Company agrees that, after July 1, 1996 and upon the
request of at least 50% of the aggregate principal amount of the Notes at the
time outstanding, it will use its best efforts to obtain and maintain directors'
and officers' liability insurance in form, scope and amount reasonably
satisfactory to the Company and the such holders. As used in this Agreement,
the term "PERSON" shall include an individual, an estate, a corporation, a
partnership, a limited liability company, an association, a trust or other
entity.
(p) The Company will not incur, and will not permit any Subsidiary to
incur, any additional Debt (as defined below) if, immediately upon the
incurrence of such Debt, the ratio of Consolidated Debt (as defined below) to
Consolidated Net Worth (as defined below) would be equal to or greater than 1.0
to 1.0. As used in this Section 6(p), the term "CONSOLIDATED DEBT" shall mean,
------------
as of the date of determination, the total of all Debt of the Company and its
Subsidiaries outstanding on such date, after eliminating all offsetting debits
and credits between the Company and its Subsidiaries and all other items
required to be eliminated in the course of
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<PAGE>
the preparation of consolidated financial statements of the Company and its
Subsidiaries in accordance with generally accepted accounting principles. As
used in this Section 6(p), the term "CONSOLIDATED NET WORTH" shall mean, as of
------------
the date of determination, the total assets of the Company and its Subsidiaries
which would be shown as assets on a consolidated balance sheet of the Company
and its Subsidiaries as of such time prepared in accordance with generally
accepted accounting principles, after eliminating all amounts properly
attributable to minority interests, if any, in the stock and surplus of
Subsidiaries, minus the total liabilities of the Company and its Subsidiaries
-----
which would be shown on a consolidated balance sheet of the Company and its
Subsidiaries as of such time prepared in accordance with generally accepted
accounting principles. As used in this Section 6(p), the term "DEBT" shall
------------
mean, with respect to a particular person, without duplication, (i) its
liabilities for borrowed money, (ii) it liabilities for the deferred purchase
price of property acquired by such person (including, without limitation, all
liabilities created or arising under any conditional sale or other title
retention agreement with respect to such property), (iii) the amount of any
obligation under a capital lease which would, under generally accepted
accounting principles, appear as a liability on the balance sheet of such
person, (iv) all liabilities for borrowed money secured by a lien with respect
to any property owned by such person (whether or not it has assumed or otherwise
become liable for such liabilities) and, (v) accrued but unpaid interest on any
of the liabilities of the type described in clauses (i) through (iv) above and
----------- ----
(vi) any guaranty of such person with respect to the liabilities of the type
described in clauses (i) through (v) above, which Debt is senior to or pari
----------- --- ----
passu with the Notes, as provided herein.
- -----
(q) The Company will not, and will not permit any Subsidiary to, engage in
any transaction with any officer, director or employee of the Company or any
Subsidiary (or any entity directly or indirectly controlled by such officer,
director or employee) on terms less favorable to the Company or such Subsidiary
than would have been obtained in arm's length dealing in the ordinary course of
business with an unrelated person.
(r) The Company will use its best efforts (i) to maintain with
responsible insurance carriers key man life insurance coverage in an amount not
less than (A) $1,700,000 with respect to Ron Borah and $500,000 with respect to
Mike Bonem, (ii) to maintain with responsible insurance carriers key man life
insurance coverage in an amount not less than $500,000 with respect to Tim B.
Tarrillion and, as promptly as practicable after the Closing, to increase the
amount of such coverage to $2,000,000, and (iii) as promptly as practicable
after the Closing, to obtain and maintain with responsible insurance carriers,
key man life insurance coverage in an amount not less than $500,000 with respect
to Judith K. Shields and Donovan W. Boyd, respectively.
(s) The Company will cause to be delivered to each of the Investors the
unaudited consolidated financial statements of the Company and its Subsidiaries
for the eight-month period ending August 31, 1995, by no later than October 16,
1995.
SECTION 7. CONVERSION OF NOTES.
-------------------
(a) Each Note shall be convertible in whole or in part (subject to Section
-------
7(b) below) at the option of the holder thereof at any time on or after
- ----
September 22, 1996, into shares of Common Stock (i) on the basis of one share of
Common Stock for each dollar of the principal
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<PAGE>
amount of such Note then outstanding (as such principal amount may be adjusted
pursuant to the terms of such Note) and (ii) at an exercise price per share of
$1.00 (the "EXERCISE PRICE"). The Exercise Price shall be subject to adjustment
from time to time as hereinafter provided. Upon conversion, the Company shall
make no adjustment on account of dividends on shares of the Common Stock
issuable on conversion but shall pay on that portion of the Note surrendered for
conversion interest accrued to the date of conversion.
(b) In order to convert Notes into Common Stock hereunder, the holder
thereof must surrender the Note or Notes, duly endorsed to the Company or in
blank and accompanied by proper instruments of transfer, together with a
completed "EXERCISE AGREEMENT" (as herein called) in the form attached hereto as
Exhibit 7(b), to the Company during normal business hours on any business day at
- ------------
the Company's principal office in Houston, Texas (or such other office or agency
of the Company as it may designate by notice to the Investors). The shares to
be issued upon conversion shall be deemed to be issued to the holder thereof or
its designee as the record owner of such shares as of the close of business on
the date on which the Note shall have been so surrendered and the completed
Exercise Agreement delivered. Certificates for the shares so issued,
representing the aggregate number of shares specified in the Exercise Agreement,
shall be delivered to the holder thereof with a reasonable time, not exceeding
ten business days, after the Note shall have been deemed converted. The
certificates so delivered shall be in such denominations as may be requested by
the holder hereof and shall be registered in the name of said holder or such
other name as shall be designated by said holder, subject to compliance with
applicable securities laws. If any Note shall have been exercised only in part,
then the Company shall, at its expense, at the time of delivery of said
certificates, deliver to said holder a new Note or Notes in principal amount
equal to the unconverted portion of the Note so converted. The Company shall
pay all taxes and other expenses and charges payable in connection with the
preparation, execution, and delivery of stock certificates (and any new Notes)
pursuant to this Section 7 except that, in case such stock certificates shall be
---------
registered in a name or names other than the holder of the Notes, funds
sufficient to pay all stock transfer taxes which shall be payable in connection
with the execution and delivery of such stock certificates shall be paid by the
holder hereof to the Company at the time of the delivery of such stock
certificates by the Company as mentioned above. Notwithstanding anything herein
to the contrary, in connection with any conversion of Notes by a holder thereof,
such conversion must be either (i) of all such holder's Notes then outstanding
or (ii) in two tranches, with the first such tranche constituting not less than
50% of the principal amount of such holder's Notes outstanding at the time of
such conversion and the second such tranche constituting the remaining portion
of such holder's Notes outstanding at the time of the subsequent conversion.
(c) If the issuance of any shares required to be reserved for purposes of
exercise of the Notes requires registration with or approval of any governmental
authority under any federal or state law (other than any registration under the
Securities Act or under applicable state securities or blue sky laws) or listing
on any national securities exchange, before such shares may be issued upon
exercise of a Note, the Company will, at its expense, use its best efforts to
cause such shares to be duly registered or approved, or listed on the relevant
national securities exchange, as the case may be, at such time, so that such
shares may be issued in accordance with the terms hereof.
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<PAGE>
(d) The Exercise Price shall be subject to adjustment downward from time to
time as provided in this Section 7(d). Upon each adjustment of the Exercise
------------
Price, the holder of a Note shall thereafter be entitled to purchase, at the
Exercise Price resulting from such adjustment, the largest number of Note Shares
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Note Shares purchasable hereunder immediately prior
to such adjustment and dividing the product thereof by the Exercise Price
resulting from such adjustment. For purposes of this Section 7(d), the term
------------
"CAPITAL STOCK" (v) includes the Common Stock and any additional class of stock
of the Company having no preference as to dividends or distributions on
liquidation which may be authorized in the future, provided that the shares
purchasable pursuant to any Note shall include only shares of Common Stock, or
shares resulting from any subdivision or combination of the Common Stock, or in
the case of any reorganization, reclassification, consolidation, merger, or sale
of the character referred to in Section 7(i), the stock or other securities or
------------
property provided for in said Section, (w) excludes any Capital Stock that may
be issued pursuant to currently existing and outstanding written agreements or
obligations of the Company to sell or issue Capital Stock as listed in Schedule
--------
4(d), (x) excludes any shares of Common Stock or options to acquire Common Stock
- ----
issued in connection with the Company's proposed acquisition of certain assets
of GAIA and certain affiliates of GAIA, (y) excludes any shares of Common Stock
that may be issued in connection with an offering currently being conducted by
the Company to qualified non-U.S. persons of units of Common Stock, convertible
notes of the Company and warrants to purchase Common Stock, including without
limitation any Common Stock or other securities, warrants or options issuable to
the placement agents or financial advisors of the Company in connection
therewith (and excludes any Common Stock that may be issued upon conversion of
such notes, warrants or options), and (z) excludes any Common Stock and any
additional class of stock of the Company having no preference as to dividends or
distributions on liquidation that may be issued pursuant to the exercise of any
currently existing or future options to purchase Common Stock (or any such
additional class of stock) granted by the Company to its employees.
(i) If and whenever the Company shall issue or sell any shares of
Capital Stock without consideration or for a consideration per share less
than the Exercise Price in effect immediately prior to the time of such
issue or sale, then, forthwith upon such issue or sale, the Exercise Price
shall be reduced to a price (calculated to the nearest cent) determined by
dividing (x) an amount equal to the sum of (aa) the total number of shares
of Capital Stock outstanding immediately prior to such issue or sale
multiplied by the then existing Exercise Price, and (bb) the consideration,
if any, received by the Company upon such issue or sale, by (y) the total
number of shares of Capital Stock outstanding immediately after such issue
or sale.
(ii) For purposes of Section 7(d)(i), the following provisions shall
---------------
also be applicable:
(A) In case the Company shall hereafter grant any rights to
subscribe for or purchase, or any options for the purchase of, Capital
Stock or securities convertible into or exchangeable for Capital Stock
(such rights and options being herein called "OPTIONS" and such
convertible or exchangeable securities being herein called
"CONVERTIBLE SECURITIES"), whether or not such Options or the rights
to convert or exchange any such Convertible Securities are immediately
-17-
<PAGE>
exercisable, and the price per share for which Capital Stock is
issuable upon the exercise of such Options or upon the conversion or
exchange of such Convertible Securities (as determined in accordance
with the following sentence) shall be less than the Exercise Price in
effect immediately prior to the time of the granting of such Options,
then the total maximum number of shares of Capital Stock issuable upon
the exercise of such Options or upon the conversion or exchange of the
total maximum amount of such Convertible Securities issuable upon the
exercise of such Options shall (as of the date of granting of such
Options) be deemed to be outstanding and to have been issued and sold
for such price per share. The price per share for which the Capital
Stock is issuable, as provided in the preceding sentence, shall be
determined by dividing (x) the total amount, if any, received or
receivable by the Company as consideration for the granting of such
Options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of such Options, plus, in the
case of any such Options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable
to the Company upon the conversion or exchange of such Convertible
Securities, by (y) the total maximum number of shares of Capital Stock
issuable upon the exercise of such Options or upon the conversion or
exchange of all such Convertible Securities issuable upon the exercise
of such Options. Except as provided in Section 7(d)(ii)(F), no
-------------------
further adjustments of the Exercise Price shall be made upon the
actual issue of such Capital Stock or of such Convertible Securities
upon the exercise of such Options or upon the actual issue of such
Capital Stock upon the conversion or exchange of such Convertible
Securities.
(B) In case the Company shall hereafter issue or sell
Convertible Securities, whether or not the rights to convert or
exchange such Convertible Securities are immediately exercisable, and
the price per share for which Capital Stock is issuable upon the
conversion or exchange of such Convertible Securities (as determined
in accordance with the following sentence) shall be less than the
Exercise Price in effect immediately prior to the time of the issue or
sale of such Convertible Securities, then the total maximum number of
shares of Capital Stock issuable upon the conversion or exchange of
all such Convertible Securities shall (as of the date of the issue or
sale of such Convertible Securities) be deemed to be outstanding and
to have been issued and sold for such price per share, provided that
(a) except as provided in Section 7(d)(ii)(F), no further adjustments
-------------------
of the Exercise Price shall be made upon the actual issue of such
Capital Stock upon the conversion or exchange of such Convertible
Securities, and (b) if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustments
of the Exercise Price have been or are to be made pursuant to other
provisions of this Section 7(d), no further adjustment of the Exercise
------------
Price shall be made by reason of such issue or sale. The price per
share for which the Capital Stock is issuable, as provided in the
preceding sentence, shall be determined by dividing (x) the total
amount received or receivable by the Company as consideration for the
issue or sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (y) the total
maximum
-18-
<PAGE>
number of shares of Capital Stock issuable upon the conversion or
exchange of all such Convertible Securities.
(C) In case at any time the Company shall pay a dividend or make
any other distribution upon the Capital Stock payable in Capital
Stock, Options or Convertible Securities, any Capital Stock, Options
or Convertible Securities, as the case may be, issuable in payment of
such dividend or distribution shall be deemed to have been issued
without consideration.
(D) In case at any time any Capital Stock, Convertible
Securities, or Options shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount
received by the Company therefor, without deduction therefrom of any
expenses incurred or any underwriting commissions or concessions paid
or allowed by the Company in connection therewith. In case any
Capital Stock, Convertible Securities, or Options shall be issued or
sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company therefor shall
be deemed to be the fair value of such consideration as determined in
good faith by the Board of Directors of the Company, except where such
consideration consists of securities, in which case the amount of
consideration received by the Company shall be the market price
thereof (determined as provided in Section 7(g)) as of the date of
------------
receipt, but in each such case without deduction therefrom of any
expenses incurred or any underwriting commissions or concessions paid
or allowed by the Company in connection therewith. In computing the
market price of a note or other obligation that is not listed or
admitted to trading on any securities exchange or quoted in the
National Association of Securities Dealers, Inc. Automated Quotation
System or reported by the National Quotation Bureau, Inc. or a similar
reporting organization, the total consideration to be received by the
Company thereunder (including interest) shall be discounted to present
value at the prime rate of interest of NationsBank of Texas, N.A. in
effect at the time the note or obligation is deemed to have been
issued. In case any Capital Stock, Convertible Securities, or Options
shall be issued in connection with any merger of another corporation
into the Company, the amount of consideration therefor shall be deemed
to be the fair value as determined in good faith by the Board of
Directors of the Company of such portion of the assets of such merged
corporation as the Board shall determine to be attributable to such
Capital Stock, Convertible Securities, or Options.
(E) In case at any time the Company shall take a record of the
holders of Capital Stock for the purpose of entitling them (a) to
receive a dividend or other distribution payable in Capital Stock,
Options or Convertible Securities, or (b) to subscribe for or purchase
Capital Stock, Options or Convertible Securities, then such record
date shall be deemed to be the date of the issue or sale of such
Capital Stock, Options or Convertible Securities.
(F) If the purchase price provided for in any Option referred to
in Section 7(d)(ii)(A), or the price at which any Convertible
-------------------
Securities referred to
-19-
<PAGE>
in Section 7(d)(ii)(A) or Section 7(d)(ii)(B) are convertible into or
------------------- -------------------
exchangeable for Capital Stock, shall change at any time (whether by
reason of provisions designed to protect against dilution or
otherwise), the Exercise Price then in effect hereunder shall
forthwith be increased or decreased to such Exercise Price as would
have obtained had the adjustments made upon the issuance of such
Options or Convertible Securities been made upon the basis of (a) the
issuance of the number of shares of Capital Stock theretofore actually
delivered upon the exercise of such Options or upon the conversion or
exchange of such Convertible Securities, and the total consideration
received therefor, and (b) the number of shares of Capital Stock to be
issued for the consideration, if any, received by the Company therefor
and to be received on the basis of such changed price.
(G) If any adjustment has been made in the Exercise Price
because of the issuance of Options or Convertible Securities and if
any of such Options or rights to convert or exchange such Convertible
Securities expire or otherwise terminate, then the Exercise Price
shall be readjusted to eliminate the adjustments previously made in
connection with the Options or rights to convert or exchange
Convertible Securities which have expired or terminated.
(H) The number of shares of Capital Stock outstanding at any
given time shall not include shares owned or held by or for the
account of the Company, and the disposition of any such shares shall
be considered an issue or sale of Capital Stock.
(e) In case at any time the Company shall subdivide the outstanding shares
of Capital Stock into a greater number of shares, the Exercise Price in effect
immediately prior to such subdivision shall be proportionately reduced, and
conversely, in case the outstanding shares of Capital Stock shall be combined
into a smaller number of shares, the Exercise Price in effect immediately prior
to such combination shall be proportionately increased. An adjustment made
pursuant to this Section 7(e) shall become effective immediately after the
------------
effective date of such subdivision or combination.
(f) In case at any time the Company shall pay a dividend or make a
distribution to all holders of Capital Stock, as such, of shares of its stock,
evidences of its indebtedness, assets, or rights, options, or warrants to
subscribe for or purchase such shares, evidences of indebtedness, or assets,
other than (i) a dividend or distribution payable in Capital Stock, Options, or
Convertible Securities or (ii) a dividend or distribution payable in cash out of
earnings or earned surplus, then in each such case the Exercise Price shall be
adjusted so that the same shall equal the price determined by multiplying the
Exercise Price in effect immediately prior to the record date mentioned below by
a fraction, the numerator of which shall be the total number of shares of
Capital Stock outstanding on such record date multiplied by the market price per
share of Capital Stock (determined as provided in Section 7(g)) on such record
------------
date, less the fair market value (as determined in good faith by the Board of
Directors of the Company) as of such record date of such shares of stock,
evidences of indebtedness, assets, or rights, options, or warrants so paid or
distributed, and the denominator of which shall be the total number of shares of
Capital Stock outstanding on such record date multiplied by the market price per
share of Capital Stock (determined as provided in Section 7(g)) on such record
------------
date. Such adjustment shall be made
-20-
<PAGE>
whenever such dividend is paid or such distribution is made and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such dividend or distribution.
(g) For the purpose of any computation under Section 7(d) or 7(f), the
------------ ----
market price of the security in question on any day shall be deemed to be the
average of the last reported sale prices for the security for the 20 consecutive
Trading Days (as defined below) commencing 30 Trading Days before the day in
question. The last reported sale price for each day shall be (i) the last
reported sale price of the security on the National Market of the National
Association of Securities Dealers, Inc. Automated Quotation System, or any
similar system of automated dissemination of quotations of securities prices
then in common use, if so quoted, or (ii) if not quoted as described in clause
------
(i) above, the mean between the high bid and low asked quotations for the
- ---
security as reported by the National Quotation Bureau, Inc. if at least two
securities dealers have inserted both bid and asked quotations for such security
on at least 10 of such 20 consecutive Trading Days, or (iii) if the security is
listed or admitted for trading on any national securities exchange, the last
sale price, or the closing bid price if no sale occurred, of such class of
security on the principal securities exchange on which such class of security is
listed or admitted to trading. If the security is quoted on a national
securities or central market system, in lieu of a market or quotation system
described above, the last reported sale price shall be determined in the manner
set forth in clause (ii) of the preceding sentence if bid and asked quotations
-----------
are reported but actual transactions are not, and in the manner set forth in
clause (iii) of the preceding sentence if actual transactions are reported. If
- ------------
none of the conditions set forth above is met, the last reported sale price of
the security on any day or the average of such last reported sale prices for any
period shall be the fair market value of such security as determined by a member
firm of the New York Stock Exchange, Inc. selected by the Company. The term
"TRADING DAYS", as used herein, means (i) if the security is quoted on the
National Market of the National Association of Security Dealers, Inc. Automated
Quotation System, or any similar system of automated dissemination of quotations
of securities prices, days on which trades may be made on such system or (ii) if
the security is listed or admitted for trading on any national securities
exchange, days on which such national securities exchange is open for business.
(h) In any case in which this Section 7 requires that a downward
---------
adjustment of the Exercise Price shall become effective immediately after a
record date for an event, the Company may defer until the occurrence of such
event issuing to the holder of a Note exercised after such record date and
before the occurrence of such event the additional Shares issuable upon such
exercise by reason of the adjustment required by such event over and above the
Shares issuable upon such exercise before giving effect to such adjustment.
(i) If any capital reorganization of the Company, or any reclassification
of the Capital Stock, or any consolidation or merger of the Company with or into
another corporation or entity, or any sale of all or substantially all the
assets of the Company to another corporation or entity, shall be effected in
such a way that the holders of Common Stock (or any other securities of the
Company then issuable upon the exercise of a Note) shall be entitled to receive
stock or other securities or property (including cash) with respect to or in
exchange for Common Stock (or such other securities), then, as a condition of
such reorganization, reclassification, consolidation, merger, or sale, lawful
and adequate provision shall be made whereby the holder of a Note shall
thereafter have the right to purchase and receive upon the basis and upon the
terms and conditions
-21-
<PAGE>
specified in such Note, and in lieu of the shares of Common Stock (or such other
securities) immediately theretofore purchasable and receivable upon the exercise
hereof, such stock or other securities or property (including cash) as may be
issuable or payable with respect to or in exchange for a number of outstanding
shares of Common Stock (or such other securities) equal to the number of shares
of Common Stock (or such other securities) immediately theretofore purchasable
and receivable upon the exercise of such Note, had such reorganization,
reclassification, consolidation, merger, or sale not taken place. In any such
case appropriate provision shall be made with respect to the rights and
interests of the holder of each Note to the end that the provisions hereof
(including, without limitation, the provisions for adjustments of the Exercise
Price and of the number of Shares purchasable upon exercise hereof) shall
thereafter be applicable, as nearly as reasonably may be, in relation to the
stock or other securities or property thereafter deliverable upon the exercise
hereof (including an immediate adjustment of the Exercise Price if by reason of
or in connection with such consolidation, merger, or sale any securities are
issued or event occurs which would, under the terms hereof, require an
adjustment of the Exercise Price). In the event of a consolidation or merger of
the Company with or into another corporation or entity as a result of which a
greater or lesser number of shares of common stock of the surviving corporation
or entity are issuable to holders of Capital Stock in respect of the number of
shares of Capital Stock outstanding immediately prior to such consolidation or
merger, then the Exercise Price in effect immediately prior to such
consolidation or merger shall be adjusted in the same manner as though there
were a subdivision or combination of the outstanding shares of Capital Stock.
The Company shall not effect any such consolidation, merger, or sale unless
prior to or simultaneously with the consummation thereof the successor
corporation or entity (if other than the Company) resulting from such
consolidation or merger or the corporation or entity purchasing such assets and
any other corporation or entity the shares of stock or other securities or
property of which are receivable thereupon by the holder of a Note shall
expressly assume, by written instrument executed and delivered (and reasonably
satisfactory in form) to the holder of each Note, (i) the obligation to deliver
to such holder such stock or other securities or property as, in accordance with
the foregoing provisions, such holder may be entitled to purchase and (ii) all
other obligations of the Company under this Section 7.
---------
(j) No fractional shares of Common Stock are to be issued upon the
exercise of a Note, but the Company shall pay a cash adjustment in respect of
any fractional share which would otherwise be issuable in an amount equal to the
same fraction of the current market value of a share of Common Stock, which
current market value shall be the last reported sale price (determined as
provided in Section 7(g)) on the Trading Day immediately preceding the date of
------------
the exercise.
(k) Upon the occurrence of any event which requires any adjustment of the
Exercise Price, then and in each such case the Company shall give notice thereof
to the holder of each Note, which notice shall state the Exercise Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon exercise, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
(l) If any event occurs as to which, in the good faith judgment of the
Board of Directors of the Company, the other provisions of this Section 7 are
---------
not strictly applicable or if strictly applicable would not fairly protect the
exercise rights of the holder of a Note in accordance with the essential intent
and principles of such provisions, then the Board of Directors
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<PAGE>
of the Company shall appoint the Company's regular independent auditors or
another firm of independent public accountants of recognized national standing
who are satisfactory to the holders of the Notes which shall give their opinion
upon the adjustment, if any, on a basis consistent with such essential intent
and principles, necessary to preserve, without dilution, the rights of the
holders of the Notes. Upon receipt of such opinion, the Board of Directors of
the Company shall forthwith make the adjustments described therein; provided
that no such adjustment shall have the effect of increasing the Exercise Price
as otherwise determined pursuant to this Section 7.
---------
SECTION 8. REGISTRATION RIGHTS.
-------------------
(a) When used in this Section, the following terms shall have the
respective meanings assigned to them in this subsection (a) or in the sections,
--------------
subsections or other subdivisions or other documents referred to below:
"COMMISSION" shall mean the Securities and Exchange Commission (or any
successor body thereto).
"DEMAND REGISTRATION" shall have the meaning assigned to it in Section
-------
8(b).
"HOLDER" shall mean any Person that holds Registrable Securities.
"LOCKUP PERIOD" shall mean the one-year period following the Closing Date.
"PERSON" shall mean any individual, corporation, partnership, joint
venture, limited partnership, limited liability company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"PIGGYBACK REGISTRATION" shall have the meaning assigned to it in Section
-------
8(c).
- ----
"REGISTRABLE SECURITIES" shall mean (i) the shares of Common Stock issuable
upon conversion of the Notes, (ii) the shares of Common Stock issuable under the
terms of the Warrants and (iii) any securities issued or issuable with respect
to the foregoing shares by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization.
"REGISTRATION EXPENSES" shall mean (i) all expenses incident to the
Company's performance of or compliance with the registration rights granted
hereunder, including (without limitation) all registration and filing fees, fees
and expenses of compliance with securities and blue sky laws, printing and
engraving expenses, messenger, telephone and delivery expenses, and fees and
disbursements of counsel for the Company, all independent certified public
accountants and underwriters (excluding discounts and commissions) and (ii) in
connection with each registration hereunder, the reasonable fees and
disbursements of no more than one counsel chosen by the holders of a majority of
the Registrable Securities included in such registration in an amount not to
exceed $10,000; provided, that Registration Expenses shall not include any
Selling Expenses.
"REGISTRATION REQUEST" shall have the meaning assigned to it in Section
-------
8(b).
- ----
-23-
<PAGE>
"REGISTRATION RIGHTS EXPIRATION POINT" shall mean the expiration of a five-
year period commencing as of the Closing Date.
"SELLING EXPENSES" shall mean underwriting discounts or commissions and any
selling commissions attributable to sales of Registrable Securities.
(b) If, on or after the Lockup Period but prior to the Registration Rights
Expiration Point and provided that at least one year has elapsed since the most
recent Registration Request (as defined below), Holders of more than 33.33% of
the Registrable Securities not theretofore registered pursuant to this Section 8
---------
request in writing that the Company register under the Securities Act at least
25% of the Registrable Securities not theretofore registered pursuant to this
Section 8 (a "REGISTRATION REQUEST"), the Company shall promptly give written
- ---------
notice of such Registration Request to all holders of Registrable Securities,
Notes and Warrants, and will, as expeditiously as possible, use its best efforts
to effect the registration under the Securities Act of (i) the Registrable
Securities which the Company has been requested to register for disposition in
accordance with the intended method of disposition described in the Registration
Request and (ii) the Registrable Securities of any Holder that elects to join in
the Registration Request within 20 days after receipt of the above written
notice from the Company. The Company may include in any such registration (x)
similar securities held by other parties with registration rights and (y)
similar securities that the Company desires to register; provided, that in
connection with an underwritten offering, such additional similar securities
shall be reduced to a number, if any, that in the reasonable opinion of the
managing underwriters of such offering would not adversely affect the
marketability or offering price of the Registrable Securities to be included in
such offering. Notwithstanding anything herein to the contrary, any
registration requested pursuant to this Section 8(b) (a "DEMAND REGISTRATION")
------------
will not be deemed to have been effected unless it has become effective and
remained effective no less than 180 days; provided, further, that any such
registration which does not become effective after the Company has filed a
registration statement in accordance with the provisions of this Section 8(b)
------------
solely by reason of the refusal to proceed of the Holder or Holders that have
made or joined in the Registration Request, including failure to comply with the
provisions of this Agreement (other than any refusal to proceed based upon the
advice of counsel to such Holder or Holders that the registration statement, or
the prospectus contained therein, contains an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing, or that such registration statement or such
prospectus, or the distribution contemplated thereby, otherwise violates or
would, if such distribution using such prospectus took place, violate any
applicable state or federal securities law) shall be deemed to have been
effected by the Company at the request of such Holder or Holders.
(c) If, on or after the Lockup Period but prior to the Registration Rights
Expiration Point, the Company proposes to register any of its securities under
the Securities Act other than (i) under employee compensation or benefit
programs, (ii) an exchange offer or an offering of securities solely to the
existing stockholders or employees of the Company and (iii) any registration
conducted solely in connection with a proposed acquisition by the Company or any
of its Subsidiaries, and the registration form to be used may be used for the
registration of Registrable Securities, the Company will give prompt written
notice to all holders of Registrable Securities of its intention to effect such
a registration and will include in such registration all
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<PAGE>
Registrable Securities with respect to which the Company has received written
requests for inclusion therein within 20 days after the receipt of the Company's
notice (a "PIGGYBACK REGISTRATION"). The Company shall use its best efforts to
cause the managing underwriters of a proposed underwritten offering to permit
the Registrable Securities requested to be included in the registration
statement (or registration statements) for such offering to be included therein
on the same terms and conditions as any similar securities of the Company
included therein. Notwithstanding the foregoing, if the Company gives notice of
such a proposed registration, the total number of Registrable Securities which
shall be included in such registration shall be reduced pro rata to such number,
if any, as in the reasonable opinion of the managing underwriters of such
offering would not adversely affect the marketability or offering price of all
of the securities proposed to be offered by the Company in such offering;
provided however, that (A) if such Piggyback Registration is incident to a
primary registration on behalf of the Company, and to the extent not prohibited
by any registration rights agreements existing as of the date hereof, the
securities to be included in the registration statement (or registration
statements) for any person other than the Holders and the Company shall be first
reduced prior to any such pro rata reduction, and (B) if such Piggyback
Registration is incident to a secondary registration on behalf of holders of
securities of the Company, the securities to be included in the registration
statement (or registration statements) for any person not exercising "demand"
registration rights other than the Holders shall be first reduced prior to any
such pro rata reduction.
(d) In connection with any request that any Registrable Securities be
registered pursuant to Section 8(b) or Section 8(c), the Company will use its
------------ ------------
best efforts to effect the registration of the Registrable Securities in
accordance with the intended method of disposition thereof, and pursuant thereto
the Company will as expeditiously as possible:
(i) prepare and file with the Commission a registration statement on
the appropriate form with respect to such Registrable Securities and use
its best efforts to cause such registration statement to become effective
(provided, that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company will furnish to the counsel,
if any, selected by the holders of a majority of the Registrable Securities
covered by such registration statement copies of all such documents
proposed to be filed) (provided, however, that in connection with a Demand
Registration, the Company shall be deemed to have met its obligations under
this paragraph (i) so long as it files a registration statement within six
-------------
months of a Registration Request);
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period of not less than six months or such
shorter period which will terminate when Registrable Securities covered by
such registration statement have been sold (but not before the expiration
of the applicable prospectus delivery period) and comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof
set forth in such registration statement;
-25-
<PAGE>
(iii) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement
thereto, the prospectus included in such registration statement (including,
without limitation, each preliminary prospectus) and such other documents
as such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such seller;
(iv) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such
jurisdictions within the United States as any seller reasonably requests
and do any and all other acts and things which may be reasonably necessary
or advisable to enable such seller to consummate the disposition in such
jurisdictions of the Registrable Securities owned by such seller (provided
that the Company will not be required to qualify generally to do business
or subject itself to any general service of process in any jurisdiction
where it is otherwise not then so subject);
(v) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event of which the Company becomes
aware which requires the making of any change in the prospectus included in
such registration statement so that such document will not contain an
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company will
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
will not contain an untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading;
(vi) use its best efforts to cause all such Registrable Securities
to be listed on each securities exchange or exchanges, automated quotation
system or over-the-counter market upon which securities of the Company of
the same class are then listed;
(vii) enter into such customary agreements (including, without
limitation, underwriting agreements in customary form, substance, and
scope) and take all such other actions as the holders of a majority of the
Registrable Securities being sold or the underwriters, if any, reasonably
request in order to expedite or facilitate the disposition of such
Registrable Securities;
(viii) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make generally available to
its security holders an earnings statement no later than 90 days after the
end of the 12 month period beginning with the first day of the Company's
first full calendar quarter after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 thereunder;
(ix) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the
disqualification of any common stock included in such
-26-
<PAGE>
registration statement for sale in any jurisdiction, the Company will use
its best efforts promptly to obtain the withdrawal of such order; and
(x) use its best efforts to cause such Registrable Securities covered
by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable
the sellers thereof to consummate the disposition of such Registrable
Securities.
(e) The Company shall pay all Registration Expenses in connection (i) the
first two Demand Registrations and (ii) each registration effected pursuant to
Section 8(c) and, in any event, shall pay its internal expenses (including,
- ------------
without limitation, all salaries and expenses of its officers and employees
performing legal and accounting duties, but subject to the last sentence of this
subsection (e)), the expense of any annual audit and the fees and expenses
- --------------
incurred in connection with the listing of the securities to be registered on
each securities exchange on which similar securities issued by the Company are
then listed. All Registration Expenses in connection with a Demand Registration
other than the first two Demand Registrations shall be borne by the seller or
sellers of Registrable Securities pro rata based upon the number of Registrable
Securities included in such registration. All Selling Expenses incurred in
connection with a registration effected pursuant to the terms hereof shall be
borne by the seller or sellers of Registrable Securities pro rata based upon the
number of Registrable Securities included in such registration. Notwithstanding
the foregoing, however, if, in connection with any Demand Registration effected
other than the first two Demand Registrations, the Company in good faith
determines it is necessary to hire or engage additional temporary employees or
consultants in connection with the preparation and consummation of such
registration, the reasonable fees, costs and expenses of such employees or
consultants incurred by the Company shall be borne by the seller or sellers of
Registrable Securities pro rata based upon the number of Registrable Securities
included in such registration.
(f) The Company shall indemnify and hold harmless, with respect to any
registration statement filed by it, to the full extent permitted by law, each
holder of Registrable Securities covered by such registration statement, and
each other Person, if any, who controls such holder within the meaning of
Section 15 of the Securities Act (collectively, "HOLDER INDEMNIFIED PARTIES")
against all losses, claims, damages, liabilities and expenses, joint or several
to which any such Holder Indemnified Party may become subject under the
Securities Act, the Exchange Act, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon (i) any untrue statement or alleged untrue statement of a material fact
contained in any registration statement in which such Registrable Securities
were included as contemplated hereby or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, (ii) any untrue statement or alleged
untrue statement of a material fact contained in any preliminary, final or
summary prospectus, together with the documents incorporated by reference
therein (as amended or supplemented if the Company shall have filed with the
Commission any amendment thereof or supplement thereto), or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or (iii) any violation
by the Company of any federal, state or common law rule or regulation applicable
to the Company and relating
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<PAGE>
to action of or inaction by the Company in connection with any such
registration; and in each such case, the Company shall reimburse each such
Holder Indemnified Party for any reasonable legal or other expenses incurred by
any of them in connection with investigating or defending any such loss, claim,
damage, liability, expense, action or proceeding; provided, however, that the
Company shall not be liable to any such Holder Indemnified Party in any such
case to the extent, that any such loss, claim, damage, liability or expense (or
action or proceeding, whether commenced or threatened, in respect thereof)
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in such registration statement or amendment
thereof or supplement thereto or in any such preliminary, final or summary
prospectus in reliance upon and in conformity with written information furnished
to the Company by or on behalf of any such Holder Indemnified Party for use in
the preparation thereof. Such indemnity and reimbursement of expenses and other
obligations shall remain in full force and effect regardless of any
investigation made by or on behalf of the Holder Indemnified Parties and shall
survive the transfer of such securities by such Holder Indemnified Parties.
(g) Each holder of Registrable Securities participating in any
registration hereunder shall severally (and not jointly or jointly and
severally) indemnify and hold harmless, to the fullest extent permitted by law,
the Company, its directors, officers, employees and agents, and each Person who
controls the Company (within the meaning of Section 15 of the Securities Act)
(collectively, "COMPANY INDEMNIFIED PARTIES") against all losses, claims,
damages, liabilities and expenses to which any Company Indemnified Party may
become subject under the Securities Act, the Exchange Act, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions or proceedings, whether commenced or threatened, in respect thereof) are
caused by (i) any untrue statement or alleged untrue statement of a material
fact contained in any registration statement in which such holder's Registrable
Securities were included or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue statement of
a material fact contained in any preliminary, final or summary prospectus,
together with the documents incorporated by reference therein (as amended or
supplemented if the Company shall have filed with the Commission any amendment
thereof or supplement thereto), or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading to the extent in the cases described in clauses (i)
-----------
and (ii), that such untrue statement or omission was furnished in writing by
----
such holder for use in the preparation thereof, or (iii) any violation by such
holder of any federal, state or common law rule or regulation applicable to such
holder and relating to action of or inaction by such holder in connection with
any such registration. Such indemnity obligation shall remain in full force and
effect regardless of any investigation made by or on behalf of the Company
Indemnified Parties (except as provided above) and shall survive the transfer of
such securities by such holder.
(h) Promptly after receipt by an indemnified party under Section 8(f) or
-------------
Section 8(g) of written notice of the commencement of any action, suit,
- ------------
proceeding, investigation or threat thereof made in writing with respect to
which a claim for indemnification may be made pursuant to this Section 8, such
---------
indemnified party shall, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the indemnifying party of the threat
or commencement thereof; provided, however, that the failure to so notify the
indemnifying party
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<PAGE>
shall not relieve it from any liability which it may have to any indemnified
party except to the extent that the indemnifying party is actually prejudiced by
such failure to give notice. If any such claim or action referred to under
Section 8(f) or Section 8(g) is brought against any indemnified party and it
- ------------ ------------
then notifies the indemnifying party of the threat or commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it wishes, jointly with any other indemnifying party similarly notified, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense of any such claim or action, the
indemnifying party shall not be liable to such indemnified party under this
Section 8 for any legal expenses of counsel or any other expenses subsequently
- ---------
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation unless the indemnifying party has failed
to assume the defense of such claim or action or to employ counsel reasonably
satisfactory to such indemnified party. Under no circumstances will the
indemnifying party be obligated to pay the fees and expenses of more than one
law firm for all indemnified parties. The indemnifying party shall not be
required to indemnify the indemnified party with respect to any amounts paid in
settlement of any action, proceeding or investigation entered into without the
written consent of the indemnifying party, which consent shall not be
unreasonably withheld. No indemnifying party shall consent to the entry of any
judgment or enter into any settlement without the consent of the indemnified
party unless (i) such judgment or settlement does not impose any obligation or
liability upon the indemnified party other than the execution, delivery or
approval thereof, and (ii) such judgment or settlement includes as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a full release and discharge from all liability in respect
of such claim for all persons that may be entitled to or obligated to provide
indemnification or contribution under this Section 8.
---------
(i) Indemnification similar to that specified in the preceding subsections
of this Section 8 (with appropriate modifications) shall be given by the Company
---------
and each seller of Registrable Securities with respect to any required
registration or qualification of securities under any state securities or blue
sky laws.
(j) If the indemnification provided for in this Section 8 is unavailable
---------
to or insufficient to hold harmless an indemnified party under Section 8(f) or
------------
Section 8(g), then each indemnifying party shall contribute to the amount paid
- ------------
or payable by such indemnified party as a result of the losses, claims, damages,
liabilities or expenses (or actions or proceedings in respect thereof) referred
to in Section 8(f) or Section 8(g) in such proportion as is appropriate to
------------ ------------
reflect the relative fault of the indemnifying party on the one hand and the
indemnified party on the other in connection with the statements, omissions,
actions or inactions which resulted in such losses, claims, damages, liabilities
or expenses as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or the
indemnified party, any action or inaction by any such party, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement, omission, action or inaction. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
liabilities or expenses (or actions or proceedings in respect thereof) pursuant
to this Section 8(j) shall be deemed to include, without
------------
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<PAGE>
limitation, any reasonable legal or other expenses incurred by such indemnified
party in connection with investigating or defending any such action or claim
(which shall be limited as provided in Section 8(h) if the indemnifying party
------------
has assumed the defense of any such action in accordance with the provisions
thereof) which is the subject of this Section 8(j). No person guilty of
------------
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Promptly after receipt by an
indemnified party under this Section 8(j) of written notice of the commencement
------------
of any action, suit, proceeding, investigation or threat thereof made in writing
with respect to which a claim for contribution may be made against an
indemnifying party under this Section 8(j), such indemnified party shall, if a
------------
claim for contribution in respect thereof is to be made against an indemnifying
party, give written notice to the indemnifying party in writing of the
commencement thereof (if the notice specified in Section 8(h) has not been given
------------
with respect to such action); provided, however, that the failure to so notify
the indemnifying party shall not relieve it from any obligation to provide
contribution which it may have to any indemnified party under this Section 8
---------
except to the extent that the indemnifying party is actually prejudiced by the
failure to give notice. The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section were determined by pro rata
allocation or by any other method of allocation which does not take account the
equitable considerations referred to in the immediately preceding paragraph. If
indemnification is available under this Section 8, the indemnifying parties
---------
shall indemnify each indemnified party to the fullest extent provided in
Sections 8(f) and (g), without regard to the relative fault of said indemnifying
- ------------- ---
party or any other equitable consideration provided for in this paragraph. The
provisions of this paragraph shall be in addition to any other rights to
indemnification or contribution which any indemnified party may have pursuant to
law or contract, shall remain in full force and effect regardless of any
investigation made by or on behalf of any indemnified party, and shall survive
the transfer of securities by any such party. In connection with any
underwritten offering contemplated by this Agreement which includes Registrable
Securities, the Company and all sellers of Registrable Securities included in
any registration statement shall agree to customary provisions for
indemnification and contribution (consistent with the other provisions of this
Section 8) in respect of losses, claims, damages, liabilities and expenses of
- ---------
the underwriters of such offering.
(k) If any registration effected pursuant to Section 8(b) is an
------------
underwritten offering, or a best efforts underwritten offering, the investment
banker or investment bankers and manager or managers that will administer the
offering shall be mutually agreed upon by the Company and the holders of a
majority of the Registrable Securities to be included in such offering. If any
Piggyback Registration is an underwritten offering, the Company shall have the
right to select the investment banker or investment bankers and manager or
managers to administer the offering; provided, that such investment bankers and
managers must be reasonably satisfactory to the holders of a majority of the
Registrable Securities to be registered in such Piggyback Registration, if any
Person (other than the Company) has the right, in the case of an underwritten
secondary offering, to select the same.
(l) The Company covenants to each Holder that, to the extent that the
Company shall be required to do so under the Exchange Act, the Company shall (i)
timely file the reports required to be filed by it under the Exchange Act or the
Securities Act (including, but not limited to, the reports under Section 13 and
15(d) of the Exchange Act referred to in subparagraph (c)
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<PAGE>
(1) of Rule 144 adopted by the Commission under the Securities Act) and the
rules and regulations adopted by the Commission thereunder, and (ii) take such
further action as any Holder may reasonably request, all to the extent required
from time to time to enable such Holder to sell Registrable Securities without
registration under the Securities Act within the limitations of the exemption
provided by Rule 144 under the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the
Commission. Upon the request of any Holder, the Company shall deliver to such
Holder a written statement as to whether it has complied with such requirements.
(m) From and after the date of this Agreement, the Company will not enter
into any agreement with respect to its securities which is inconsistent with or
violates the rights granted to the holders of Registrable Securities in this
Agreement.
(n) Each Holder agrees as follows:
(i) If any Registrable Securities are included in a registration
statement, the holder thereof will not (until further notice) effect sales
thereof after receipt of telegraphic or written notice from the Company to
suspend sales to permit the Company to correct or update a registration
statement or prospectus; provided that the obligations of the Company with
respect to maintaining any registration statement current and effective
shall be extended by a period of days equal to the period said suspension
is in effect.
(ii) If any Registrable Securities are being registered in any
registration pursuant to this Agreement, the holder thereof will comply
with all anti-stabilization, manipulation and similar provisions of Section
10 of the Exchange Act, as amended, and any rules promulgated thereunder by
the Commission and, at the request of the Company, will execute and deliver
to the Company and to any underwriter participating in such offering, an
appropriate agreement to such effect.
(iii) At the end of any period during which the Company is obligated
to keep a registration statement current and effective as described herein,
the holders of Registrable Securities included in the registration
statement shall discontinue sales thereof pursuant to such registration
statement.
(iv) If any Registrable Securities are included in a registration
statement, the holder thereof will (A) furnish to the Company in writing
such information as is reasonably requested by the Company for use in the
registration statement (or any prospectus included therein), (B) complete
and execute all customary questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required by an underwriter
relating to the terms of the underwriting agreements and (C) only sell such
Registrable Securities on the basis provided in any such underwriting
agreements.
(o) In connection with its obligations under this Section 8, the Company
---------
shall have no obligation (i) to assist or cooperate in the offering or
disposition of the Registrable Securities or (ii) to obtain a commitment from an
underwriter relative to the sale of the Registrable Securities.
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<PAGE>
SECTION 9. SUBORDINATION.
-------------
(a) As used herein, the term "SENIOR INDEBTEDNESS" shall mean (i) the
principal of, and premium if any, and interest on all indebtedness of the
Company hereafter created for money borrowed by the Company in connection with
the acquisition of properties or assets or for money borrowed by a Subsidiary in
connection with the acquisition of properties or assets and guaranteed by the
Company, (ii) the principal of, and premium, if any, and interest on all
indebtedness hereafter created secured by a lien or other charge upon property
or assets owned by the Company, even though the Company has not assumed or
become liable for the payment of such indebtedness, (iii) the principal of, and
premium if any, and interest on all indebtedness which has been or is created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by the Company, notwithstanding the fact that the
rights and remedies of the seller, lender or lessor under such agreement in the
event of default are limited to repossession or sale of such property and (iv)
the obligations of the Company, if any, to deposit certain monies currently
referred to as the "Euro Scotia Principal Payments" into a special account and
to hold and pay the funds in such account, if any, to certain holders of notes
proposed to be issued by the Company in connection with its current offering
(the "EUROPEAN OFFERING") of certain "Units" outside the United States of
America, as described in that certain Memorandum, dated September 1, 1995, as
the same may be amended or supplemented from time to time. As used herein,
Senior Indebtedness shall not include indebtedness of the Company for borrowed
money which is created or evidenced by an instrument by the terms of which such
indebtedness is made to rank either pari passu or junior in right of payment to
----------
the payment in full of the principal of and interest on the Notes other than the
obligations of the Company described in clause (iv) of the preceding sentence.
-----------
It is expressly agreed (and the Company shall take steps reasonably satisfactory
to the Investors to evidence such agreement) (A) that the Notes shall rank pari
----
passu with the convertible notes to be issued by the Company in connection with
- -----
the European Offering (exclusive of the obligations of the Company as described
in clause (iv) of the first sentence of this Section 9(a)) and (B) that all
----------- ------------
indebtedness of the Company for borrowed money that is neither Senior
Indebtedness nor the convertible notes referenced in clause (A) above shall rank
----------
junior in right of payment to the payment in full of the principal of and
interest on the Notes.
(b) Notwithstanding anything herein or in any Note to the contrary, the
indebtedness evidenced by the Notes shall be subordinated and junior to the
extent set forth below:
(i) No payment on account of the principal of or interest on any of
the Notes shall be made, and no holder of a Note shall be entitled to
receive any such payment (A) unless full payment for amounts then due for
principal and interest on Senior Indebtedness has been made or provided for
in money or money's worth or (ii) if, at the time of such payment or
immediately after giving effect thereto there shall exist under any Senior
Indebtedness or any agreement pursuant to which any Senior Indebtedness is
issued any default or any condition, event or act which, with notice or
lapse of time, or both, would constitute a default.
(ii) In the event of any insolvency or bankruptcy proceedings, and
any receivership, liquidation, reorganization or other similar proceedings
in connection therewith, relative to the Company or to its creditors, as
such, or to its property, or in
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<PAGE>
the event of any proceedings for voluntary liquidation, dissolution, or
other winding up of the Company, whether or not involving bankruptcy or
insolvency, the holders of Senior Indebtedness shall be entitled to receive
payment in full of all principal, premium, if any, and interest on all
Senior Indebtedness before any holder of any Note is entitled to receive
any payment on account of principal or interest upon such Note.
(iii) In the event that the Notes are declared or become due and
payable because of the occurrence of any Event of Default (as defined
herein) under circumstances when Section 9(b)(i) shall not be applicable,
---------------
the holders of the Notes shall be entitled to payments only after the
Senior Indebtedness outstanding at the time the Notes shall become so due
and payable shall have been paid in full or such payment shall have been
provided for in a manner satisfactory to the holders of the Senior
Indebtedness.
(iv) In the event that, notwithstanding the foregoing, any payment
or distribution of assets of the Company, whether in cash, property or
securities (other than shares of stock of the Company as reorganized or
readjusted or securities of the Company or any other corporation provided
for by a plan of reorganization or readjustment, the payment of which is
subordinated to the payment of all Senior Indebtedness which may at the
time be outstanding), shall be received by the holders of the Notes before
all Senior Indebtedness is paid in full, or provision made for its payment,
such payment or distribution shall be held in trust for the benefit of, and
shall be paid over or delivered to, the holders of the Senior Indebtedness.
(c) Upon payment in full of the Senior Indebtedness, the holders of the
Notes shall be subrogated to the rights of the holders of the Senior
Indebtedness to receive payments or distributions of any kind or character,
which may be payable or deliverable to the holders of the Senior Indebtedness
(but shall not include any right to a pledge of, lien on, security interest in
or other hypothecation or interest in any asset of the Company that may have
been granted to or held by or in favor of the holders of any Senior
Indebtedness), until the principal of, and interest on, the Notes shall be paid
in full and no such payments or distributions to the holders of the Senior
Indebtedness shall, as between the Company, its creditors other than the holders
of the Senior Indebtedness, and the holders of the Notes, be deemed to be a
payment by the Company to the holders of or on account of the Notes.
(d) Subject to the rights under this Section of the holders of the Senior
Indebtedness to receive cash, property, stock or obligations otherwise payable
or deliverable to the holders of the Notes, nothing herein shall either impair,
as between the Company and the holder of any Note, the obligation of the
Company, which is unconditional and absolute, to pay to the holder thereof the
principal and interest thereon in accordance with its terms and the provisions
of this Agreement or prevent the holders of the Notes from exercising all
remedies otherwise permitted by applicable law or hereunder upon default
hereunder or under the Notes.
SECTION 10. PUT RIGHT.
---------
(a) Upon the occurrence of a Significant Event (as defined below), each
holder of a Note shall have the option to sell such Note to the Company for cash
at the Agreed Value (as defined below), and if such option is so exercised
pursuant to the terms hereof, the Company
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<PAGE>
shall be obligated to purchase such Note from the holder thereof for cash at the
Agreed Value and to pay to such holder all accrued and unpaid interest on such
Note up through and including the date of purchase. To effectuate the foregoing,
the Company shall give notice of a Significant Event to each holder of a Note
(the "EVENT NOTICE") no later than five business days after the occurrence of
such Significant Event. Each holder of a Note shall thereupon have 30 days from
the receipt of an Event Notice to notify the Company whether it elects to
exercise its option under this Section. Failure of a holder of a Note to give
notice to the Company within the aforementioned thirty-day period shall be
deemed an election on the part of such holder not to exercise its option. If a
holder of a Note gives timely notice to the Company of its election to exercise
its option under this Section, such holder and the Company shall consummate the
sale at a time and place mutually agreed upon in good faith by the parties, but
in any event within ten business days after receipt by the Company of the notice
from the holder of its election to exercise its option. At the closing of any
sale under this Section, the holder of the Note being sold shall surrender such
Note together with a duly executed instrument of assignment and the Company
shall deliver a certified or cashier's check made payable to such holder (or
such other person as such holder may designate) in the amount of the Agreed
Value plus all accrued and unpaid interest on such Note up through and including
the date of closing.
(b) As used in this Section, the following terms shall have the respective
meanings assigned to them below:
"AGREED VALUE" shall mean, when used with respect to a Note, (i) if the
Significant Event occurs during the First Period, the outstanding principal
amount of the Note on the date of purchase times 110%; (ii) if the Significant
Event occurs during the Second Period, the outstanding principal amount of the
Note on the date of purchase times 108%; and (iii) if the Significant Event
occurs during the Third Period, the outstanding principal amount of the Note on
the date of purchase times 106%.
"CONSOLIDATED ASSETS" shall mean the total assets of the Company and its
Subsidiaries which would be shown as assets on a consolidated balance sheet of
the Company and its Subsidiaries prepared in accordance with generally accepted
accounting principles.
"DISPOSITION VALUE" shall mean, when used with respect to a property, the
book value of such property.
"FIRST PERIOD" shall mean the period commencing the Closing Date and ending
three years thereafter.
"SECOND PERIOD" shall mean the period commencing immediately after the
expiration of the First Period and ending one year thereafter.
"SIGNIFICANT EVENT" shall mean any of the following: (i) if any person or
persons acting in concert, together with affiliates, shall in the aggregate,
directly or indirectly, control or own (beneficially or otherwise) more than 50%
of the outstanding shares of capital stock of the Company that are then entitled
to vote for the election of directors of the Company, (ii) the engagement, to
any substantial extent, by the Company and its Subsidiaries in any business
other than the acquisition, development, manufacture, marketing and/or sale of
innovative technologies,
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<PAGE>
products and services to the environmental, natural resource and related
industries and businesses reasonably related thereto or in furtherance thereof
(provided, however, that the engagement by the Company, to any substantial
extent, in any other business shall not constitute a Significant Event if such
engagement is voted for or ratified at a board meeting or by written consent by
any member of the Company's board of directors, if any, who is designated to
serve as a director by the holders of the Notes pursuant to Section 6(o)) ; and
------------
(iii) the sale or other disposition of a Substantial Portion (as defined below)
of the Consolidated Assets (as defined below).
"SUBSTANTIAL PORTION" shall mean, with respect to any sale or other
---------------------
disposition of property, any portion of property of the Company and its
Subsidiaries, if the Disposition Value (as defined below) of such property, when
added to the Disposition Value of all other property of the Company and its
Subsidiaries that was sold or otherwise disposed of during any fiscal year
exceeds an amount equal to 50% of Consolidated Assets determined as of the end
of the then most recently ended fiscal year of the Company.
"THIRD PERIOD" shall mean the period commencing immediately after the
expiration of the Second Period and ending one year thereafter.
SECTION 11. EVENTS OF DEFAULT.
-----------------
(a) An "EVENT OF DEFAULT" shall exist if any of the following conditions
or events shall occur and be continuing:
(i) the Company defaults in the payment of any interest on any Note
for more than five Business Days after the same becomes due and payable
(subject, however, to the terms of the fourth paragraph of the Note); or
(ii) the Company or any Subsidiary defaults (as principal or
guarantor or surety) either in the payment of the principal of, premium, if
any, or interest on any indebtedness for money borrowed (other than the
Notes) or with respect to any of the provisions of any evidence of
indebtedness for money borrowed (other than the Notes) or which represent a
purchase money obligation, or any agreement relating to either thereof, and
such default shall continue and remain unwaived by the lender for more than
the period of grace, if any, therein specified; or
(iii) the Company defaults in the performance of or compliance with
any term contained herein (other than those referred to in Section
-------
11(a)(i)) and such default is not remedied within 30 days after the earlier
of (A) a Responsible Officer obtaining actual knowledge of such default and
(B) the Company receiving written notice of such default from any holder of
a Note (any such written notice to be identified as a "notice of default"
and to refer specifically to this Section 11(a)(iii)); or
------------------
(iv) any representation or warranty made in writing by or on behalf
of the Company or by any officer of the Company in this Agreement or in any
writing furnished in connection with the transactions contemplated hereby
proves to have been false or incorrect in any material respect on the date
as of which made; or
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<PAGE>
(v) the Company or any Subsidiary (A) is generally not paying, or
admits in writing its inability to pay, its debts as they become due, (B)
files, or consents by answer or otherwise to the filing against it of, a
petition for relief or reorganization or arrangement or any other petition
in bankruptcy, for liquidation or to take advantage of any bankruptcy,
insolvency, reorganization, moratorium or other similar law of any
jurisdiction, (C) makes a general assignment for the benefit of its
creditors, (D) consents to the appointment of a custodian, receiver,
trustee or other officer with similar powers with respect to it or with
respect to any substantial part of its property, (E) is adjudicated as
insolvent or to be liquidated, or (F) takes corporate action for the
purpose of any of the foregoing; or
(vi) a court or governmental authority of competent jurisdiction
enters an order appointing, without consent by the Company or any of its
Subsidiaries, a custodian, receiver, trustee or other officer with similar
powers with respect to it or with respect to any substantial part of its
property, or constituting an order for relief or approving a petition for
relief or reorganization or any other petition in bankruptcy or for
liquidation or to take advantage of any bankruptcy or insolvency law of any
jurisdiction, or ordering the dissolution, winding-up or liquidation of the
Company or any of its Subsidiaries, or any such petition shall be filed
against the Company or any of its Subsidiaries and such petition shall not
be dismissed within 60 days; or
(vii) a final judgment or judgments for the payment of money
aggregating in excess of $100,000 are rendered against one or more of the
Company and its Subsidiaries and which judgments are not, within 60 days
after entry thereof, bonded, discharged or stayed pending appeal, or are
not discharged within 60 days after the expiration of such stay.
(b) Upon the occurrence of an Event of Default described in either clause
------
(v) or clause (vi) of Section 11(a), all of the Notes shall automatically become
- --- ----------- -------------
due and payable. Upon the occurrence of the Event of Default described in
clause (i) of Section 11(a), any holder of a Note may declare during the time of
- ---------- -------------
its continuance, by written notice to the Company, that such Note is immediately
due and payable. Upon the occurrence of an Event of Default other than one
described in the two sentences immediately preceding, the holders of at least 66
2/3% of the aggregate principal amount of the Notes then outstanding may declare
during the time of its continuance, by written notice to the Company, that all
of the Notes shall be immediately due and payable.
(c) If any "DEFAULT" (which, for purposes hereof, shall mean an event or
condition the occurrence or existence of which would, with the lapse of time or
the giving of notice or both, become an Event or Default) or Event of Default
has occurred and is continuing, and irre spective of whether any Notes have
become or have been declared immediately due and payable under this Section, the
holder of any Note at the time outstanding may proceed to protect and enforce
the rights of such holder by an action at law, suit in equity or other
appropriate proceeding, whether for the specific performance of any agreement
contained herein or in any Note, or for an injunction against a violation of any
of the terms hereof or thereof, or in aid of the exercise of any power granted
hereby or thereby or by law or otherwise.
-36-
<PAGE>
(d) If any holder of any Note shall give notice or take any other action
in respect of a claimed default, the Company will promptly give written notice
thereof to all other holders of Notes describing the notice or action and the
nature of the claimed default.
(e) No course of dealing and no delay on the part of any holder of any
Note in exercising any right shall operate as a waiver thereof or otherwise
prejudice such holder's rights or the rights of the holder of any other Note.
SECTION 12. WAIVER OR AMENDMENT. This Agreement and the Notes may be
-------------------
amended, and the observance of any terms hereof or of the Notes may be waived
(either retroactively or prospectively), with (and only with) the written
consent of the Company and the holders of at least 51% of the aggregate
principal amount of the Notes at the time outstanding; provided, however, (a)
that no such amendment or waiver shall change the fixed maturity of the
principal of the Notes or reduce the rate or extend the time of payment of
interest thereon, or reduce the principal amount thereof, or modify any of the
provisions of this Agreement or any Note with respect to the time and amount of
payment thereof or with respect to the right to convert the Notes or make any
change with respect to the subordination of the Notes which would adversely
affect the rights of the holder of the any Note, without the consent of the
holder of each Note so affected; (b) that no such amendment or waiver shall
reduce the percentage or number of holders of the principal amount of the Notes
required to approve such amendment or waiver without the consent of all the
holders of 100% in principal amount of the Notes at the time outstanding; and
(c) no such amendment or waiver shall change the rights to registration under
Section 8 or change the terms of the Warrants. Any amendment or waiver of any
- ---------
of the provisions of Section 8 shall be made only with the written consent of
---------
the Company and the holders of all the Registrable Securities then outstanding.
Any amendment or waiver of any of the provisions of the Warrants shall be made
only with the written consent of the Company and the holders of all of the
Warrants then outstanding.
SECTION 13. NOTICES. All notices and other communications provided for
-------
under this Agreement or under the Notes shall be in writing and either mailed
(by registered or certified United States mail, postage prepaid), or delivered
by personal delivery or by delivery service with proof of delivery, or sent by
facsimile transmission. Any such notice must be sent:
If to the Company, at
Prior to October 1, 1995
------------------------
9818 Wilcrest
Houston, Texas 77099
Telecopier No.: 713-495-3434
Attention: President
And Thereafter
--------------
4710 Bellaire Boulevard
Suite 301
Bellaire, Texas 77401
Telecopier No.: 713-662-2322
Attention: President
-37-
<PAGE>
If to any Investor, at its address specified on Schedule 13
-----------
and shall be considered delivered on the date of receipt. Any party hereto may
specify as its proper address any other street address or telecopier number
within the continental limits of the United States by giving notice to the other
parties, in the manner provided in this Section, at least ten (10) days prior to
the effective date of such change of address or telecopier number.
SECTION 14. CERTAIN ALLOCATIONS. Both generally accepted accounting
-------------------
principles and the Internal Revenue Code require a determination of the value of
the Warrants being delivered hereunder. After taking into account the general
condition of the bond market at this time (including prevailing interest rates),
the exercise price of the Warrants, the time at which the Warrants are
exercisable, the restrictions on transfer (both of the Warrants and the shares
of Common Stock issuable upon exercise of the Warrants) and all other matters
concerning the Notes and the Warrants, the Company and the Investors are of the
opinion that the application of a yield which is the greater of (a) the original
yields of comparable debt of other issuers, taking into account relevant
factors, or (b) the applicable Federal rate on the issue date of the Notes
pursuant to Section 1274(d) of the Internal Revenue Code, as amended, would not
have required any discount on the Notes. Accordingly, it is therefore agreed by
the Company and the Investors that the amount of the issue price allocated to
the Warrants to be issued by the Company is zero, which shall be the value
ascribed to such Warrants by the Company, the Investors and any subsequent
holder of the Notes and/or such Warrants for all purposes, including the
preparation of tax returns and the preparation of the Company's financial
statements.
SECTION 15. MISCELLANEOUS.
-------------
(a) All representations, warranties and covenants made by each party
hereto in this Agreement or any other document contemplated hereby shall be
considered to have been relied upon by the other parties hereto and shall
survive the execution and delivery of this Agreement or such other document.
(b) The Company shall bear and pay (i) all expenses (including, without
limitation, legal fees) incurred by it in connection with the transactions
contemplated by this Agreement and (ii) (A) the reasonable fees and expenses of
Thompson & Knight, P.C., special counsel to the Investors, incident to the
preparation of this Agreement, the Notes, the Warrants and all other documents
and instruments delivered in connection herewith and (B) the reasonable out-of-
pocket expenses of the Investors in connection with their consideration of an
investment in the Notes and the Warrants and the transactions contemplated
hereby; provided, that the maximum amount that the Company shall be required to
pay with respect to the items described in clause (ii) of this sentence shall be
-----------
$20,000.
(c) Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Note and, in the case of any such loss,
theft or destruction, upon delivery of an indemnity satisfactory to the Company,
or, in the case of any such mutilation, upon surrender or cancellation of such
Note, the Company will make and deliver, in lieu of such lost, stolen, destroyed
or mutilated Note, a new Note of like tenor and unpaid principal amount, dated
as of the date to which interest has been paid on such earlier Note.
-38-
<PAGE>
(d) This Agreement and the other documents contemplated hereunder contain
the entire understanding of the parties hereto with respect to the subject
matter hereof and supersedes all prior agreements, understandings, negotiations,
and discussions among the parties with respect to such subject matter.
(E) THIS AGREEMENT, THE NOTES AND ALL OTHER DOCUMENTS EXECUTED AND
DELIVERED HEREWITH AND THEREWITH SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY (I)
CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF
DELAWARE FOR THE PURPOSE OF ANY ACTION OR PROCEEDING ARISING OUT OF THIS
AGREEMENT, THE NOTES OR THE WARRANTS AND (II) AGREES, TO THE EXTENT SUCH PARTY
IS NOT A RESIDENT OF, OR HAS ITS PRINCIPAL PLACE OF BUSINESS IN, THE STATE OF
DELAWARE, TO APPOINT AND MAINTAIN AN AGENT IN THE STATE OF DELAWARE AS SUCH
PARTY'S AGENT FOR ACCEPTANCE OF LEGAL PROCESS IN CONNECTION WITH ANY SUCH ACTION
OR PROCEEDING WITH THE SAME LEGAL FORCE AND VALIDITY AS IF SERVED UPON SUCH
PARTY PERSONALLY IN THE STATE OF DELAWARE, AND TO NOTIFY PROMPTLY EACH OF THE
PARTIES HERETO OF SUCH AGENT.
(f) This Agreement shall be binding on and inure to the benefit of the
parties hereto and their respective successors and assigns, provided that the
Company shall not assign its rights and obligations under this Agreement or the
Notes without the consent of the holders of the Notes.
(g) All references in this Agreement to sections, subsections and other
subdivisions refer to corresponding sections, subsections and other subdivisions
of this Agreement unless expressly provided otherwise. Titles appearing at the
beginning of any of such subdivisions are for convenience only and shall not
constitute part of such subdivisions and shall be disregarded in construing the
language contained in such subdivisions. The words "this Agreement", "this
instrument", "herein", "hereof", "hereby", "hereunder" and words of similar
import refer to this Agreement as a whole and not to any particular subdivision
unless expressly so limited. Words in the singular form shall be construed to
include the plural and vice versa, unless the context otherwise requires. No
---- -----
consideration shall be given to the fact or presumption that one party had a
greater or lesser hand in drafting this Agreement and related documents. All
references herein to "$" or "dollars" shall refer to U.S. Dollars.
(h) The Investors and the Company intend to contract in strict compliance
with applicable usury law from time to time in effect. In furtherance thereof
such persons stipulate and agree that none of the terms and provisions contained
in the Notes, this Agreement or the other documents executed and delivered
pursuant hereto shall ever be construed to provide for interest in excess of the
maximum amount of interest permitted to be charged by applicable law from time
to time in effect. The Investors expressly disavow any intent to charge or
collect excessive unearned interest in the event the maturity of the Notes are
accelerated for any reason (whether by action of the Investors, any prepayments
hereafter agreed to or otherwise), and if any such acceleration occurs, and, as
a result thereof, any amounts held to constitute interest are determined to
exceed any applicable legal limit, then such excess amounts shall, without
penalty, be applied to reduce the amounts otherwise owing under the Notes or
otherwise returned to the Company. Neither the Company nor any present or
future endorsers, sureties, guarantors or other persons hereafter becoming
liable for payment of any obligations under the Notes, this
-39-
<PAGE>
Agreement or any other document executed and delivered pursuant hereto shall
ever be liable for unearned interest thereon or shall ever be required to pay
interest thereon in excess of the maximum amount that may be lawfully charged
under applicable law from time to time in effect, and the provisions of this
paragraph shall control over all other provisions herein, in the Notes or in any
other document executed and delivered pursuant hereto which may be in conflict
or apparent conflict herewith.
(i) Notwithstanding anything else herein to the contrary, the Investors
hereby agree that they will waive the condition precedent set forth in Section
-------
3.2(a)(viii) regarding the legal opinion to be delivered at the Closing inasmuch
- ------------
as such legal opinion relates to clause (ii)(b) of item 3, item 7 and item 8 in
Exhibit 3.2(a)(viii); provided, however, that the Company agrees to satisfy
- ---------------------
such condition precedent in full by no later than October 6, 1995.
(j) This Agreement may be executed in multiple counterparts, with each
such counterpart constituting an original and all of such counterparts
constituting but one and the same agreement.
[THE REMAINDER OF THIS PAGE HAS INTENTIONALLY BEEN LEFT BLANK]
-40-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date and year first above written.
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
By: /s/ Tim B. Tarrillion
-------------------------------------------------------
Tim B. Tarrillion, President and Chief Executive Officer
R. CHANEY & PARTNERS-1993 L.P.
By: R. CHANEY & CO., INC.
By: /s/ Robert H. Chaney
-----------------------------------------------------
Robert H. Chaney, President & CEO
THE CCG CHARITABLE REMAINDER UNITRUST #1
BY: CCG VENTURE PARTNERS, LLC
/s/ Mark Leyerle
By:_____________________________________________________
Manager
HARRISON INTERESTS, LTD.
By: /s/ Ed Knight
-----------------------------------------------------
Ed Knight, Attorney-in-Fact
/s/ Robert L. Zinn
--------------------------------------------------------
Robert L. Zinn
/s/ Robert L. Zinn
--------------------------------------------------------
Robert L. Zinn, as Attorney and Agent-in-Fact
for Natalie Z. Haar
ESTATE OF WILLIAM G. HELIS,
A LOUISIANA PARTNERSHIP
By: /s/ David A. Kerstein
-----------------------------------------------------
David A. Kerstein, General Agent
<PAGE>
Exhibit 1 (a)
-------------
THE TRANSFER OF THIS NOTE AND ANY SHARES OF STOCK ISSUABLE UPON CONVERSION
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
NOR ANY STATE SECURITIES OR BLUE SKY LAWS. NEITHER THIS NOTE NOR ANY OF SUCH
SHARES MAY BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF REGISTRATION UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES OR
BLUE SKY LAWS OR EXEMPTIONS FROM SUCH REGISTRATION. WITHOUT SUCH REGISTRATION,
THIS NOTE AND THE SHARES OF STOCK ISSUABLE UPON CONVERSION HEREOF MAY NOT BE
SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT UPON DELIVERY TO THE
COMPANY OF AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT REGISTRATION
IS NOT REQUIRED UNDER SUCH ACT AND THAT SUCH SALE, ASSIGNMENT, TRANSFER OR OTHER
DISPOSITION WILL NOT BE IN VIOLATION OF ANY APPLICABLE STATE SECURITIES OR BLUE
SKY LAWS.
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
13 1/2% CONVERTIBLE SUBORDINATED NOTE
DUE SEPTEMBER 22, 2000
$___________ Houston, Texas September 22, 1995
FOR VALUE RECEIVED, the undersigned, NORTH AMERICAN TECHNOLOGIES GROUP
INC., a Delaware corporation, having its principal place of business at 9818
Wilcrest, Houston, Texas 77099 (the "COMPANY"), hereby promises to pay on
September 22, 2000, to ___________________ ("PAYEE"), the principal sum of
____________ ($_________), as such sum may be adjusted pursuant to the terms
hereof, and to pay interest on said sum (as so adjusted) semi-annually from the
date hereof, at the rate of thirteen and one-half percent (13.50%) per annum, on
March 22 and September 22 of each year, commencing March 22, 1996, so long as
this Note is outstanding, both principal and interest payable by wire transfer
of lawful money of the United States of America to an account of Payee located
in the State of Delaware and designated in writing by Payee to the Company or at
such other place in the State of Delaware as from time to time may be designated
by the holder of this Note. If any payment of principal or interest becomes due
on a day other than a Business Day (as defined below), such payment shall be
payable on the immediately following Business Day. For purposes of the
foregoing, a "BUSINESS DAY" shall mean any day on which banks are required to be
open to carry on their normal business in the State of Texas and the state in
which the place of payment is located.
All past due principal and accrued unpaid interest (except as provided in
the fourth paragraph hereof) of this Note, whether due as result of acceleration
of maturity or otherwise as a result of an Event of Default under Section 11 of
the Investment Agreement (as defined below), shall bear interest at a rate per
annum equal to the lesser of fifteen and one-half percent (15.50%) or the
highest lawful rate of interest permitted by applicable law. Interest shall be
computed on the basis of a 360 day year-30 day month basis.
This Note is one of a duly authorized issue of a limited number of
convertible subordinated notes to be issued by the Company, up to an aggregate
principal amount of Two
1
<PAGE>
Million Seven Hundred Thousand ($2,700,000) and all maturing September 22, 2000,
pursuant to that certain "INVESTMENT AGREEMENT" (as herein called) dated as of
September 22, 1995, by and among the Company and each original holder of such
notes and in all respects the rights of the holder hereof and the obligations of
the Company hereunder shall be governed by the terms of the Investment
Agreement, a copy of which is on file at the offices of the Company in Houston,
Texas, Without limiting the foregoing, this Note (i) may be converted into
shares of common stock of the Company as provided in Section 7 of the Investment
Agreement and (ii) is subordinated to all Senior Indebtedness (as defined in the
Investment Agreement) of the Company as provided in Section 9 of the Investment
Agreement. No holder of this Note shall have the right to prepay all or any
portion of the principal amount of this Note (as such principal amount may be
adjusted pursuant to the fourth paragraph hereof) prior to the final maturity
date of this Note, September 22, 2000.
Notwithstanding anything in this Note or in the Investment Agreement to
the contrary, the Company shall have the right from time to time prior to
September 22, 1998, to elect not to make a regularly scheduled installment of
interest hereunder, in which event (i) such failure to pay shall not be an
"Event of Default", as such term is defined in Section 11 of the Investment
Agreement, (ii) such unpaid installment shall not bear interest at the default
rate set forth in the second paragraph of this Note and (iii) the amount of the
accrued interest not so paid shall be added to the principal amount of this Note
and bear interest at the rate of interest referenced in the first paragraph of
this Note.
The holders of this Note and the Company intend to contract in strict
compliance with applicable usury law from time to time in effect. In furtherance
thereof such persons stipulate and agree that none of the terms and provisions
contained herein, in the Investment Agreement under which this Note was
purchased or in any other document executed and delivered pursuant to the
Investment Agreement shall ever be construed to provide for interest in excess
of the maximum amount of interest permitted to be charged by applicable law from
time to time in effect. The holders of this Note expressly disavow any intent to
charge or collect excessive unearned interest in the event the maturity of this
Note is accelerated for any reason (whether by action of any holder, any
prepayments hereafter agreed to or otherwise), and if any such acceleration
occurs, and, as a result thereof, any amounts held to constitute interest are
determined to exceed any applicable legal limit, then such excess amounts shall,
without penalty, be applied to reduce the amounts otherwise owing under this
Note or otherwise returned to the Company. Neither the Company nor any present
or future endorsers, sureties, guarantors or other persons hereafter becoming
liable for payment of any obligations hereunder, under the Investment Agreement
or any other document executed and delivered pursuant to the Investment
Agreement shall ever be liable for unearned interest thereon or shall ever be
required to pay interest thereon in excess of the maximum amount that may be
lawfully charged under applicable law from time to time in effect, and the
provisions of this paragraph shall control over all other provisions herein or
in the Investment Agreement which may be in conflict or apparent conflict
herewith.
2
<PAGE>
If this Note is placed in the hands of an attorney for collection after
default, or if all or any part of the indebtedness represented hereby is proved,
established or collected in any court or in any bankruptcy, receivership, debtor
relief, probate or other court proceedings, the Company and all endorsers,
sureties and guarantors of this Note jointly and severally agree to pay
reasonable attorneys' fees and collection costs to the holder hereof in addition
to the principal and interest payable hereunder.
The Company and all endorsers, sureties and guarantors of this Note hereby
severally waive demand, presentment for payment, protest, notice of protest,
notice of intention to accelerate the maturity of this Note, diligence in
collecting, the bringing of any suit against any party and any notice of or
defense on account of any extensions, renewals, partial payments or changes in
any manner of or in this Note or in any of its terms, provisions and covenants,
or any releases or substitutions of any security, or any delay, indulgence or
other act of any trustee or any holder hereof, whether before or after maturity.
THIS NOTE SHALL BE DEEMED A CONTRACT AND INSTRUMENT MADE UNDER THE LAWS OF
THE STATE OF DELAWARE AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW.
IN WITNESS WHEREOF, the undersigned has caused its corporate name to be
affixed hereunto and this Note to be signed by its duly authorized officer, and
has further caused this Note to be dated as of the day and year first above
written.
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
By:
--------------------------------------------
Name: Tim B. Tarrillion
Title: President and Chief Executive Officer
3
<PAGE>
EXHIBIT 1(B)
------------
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES
OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD,
ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION
UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR
EXEMPTIONS FROM SUCH REGISTRATION. THIS WARRANT MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT UPON THE CONDITIONS SPECIFIED IN
THIS WARRANT, AND NO SALE, ASSIGNMENT, TRANSFER, OR OTHER DISPOSITION OF THIS
WARRANT SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE
BEEN COMPLIED WITH.
No. __________ Right to Purchase ________ Shares
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, __________ ____________________
_________, or registered assigns, is entitled to purchase from North American
Technologies Group, Inc., a Delaware corporation (the "COMPANY"), at any time
or from time to time during the period specified in Paragraph 2 hereof,
-----------
________________________(__________) fully paid and nonassessable shares of
the Company's Common Stock, par value $.001 per share (the "COMMON STOCK"), at
an exercise price per share of $1.00 (the "EXERCISE PRICE"). The term "WARRANT
SHARES", as used herein, refers to the shares of Common Stock purchasable
hereunder. The Warrant Shares and the Exercise Price are subject to adjustment
as provided in Paragraph 4 hereof. This Warrant is one of a duly authorized
-----------
issue of a limited number of Warrants to be issued by the Company pursuant to
that certain "INVESTMENT AGREEMENT" (as herein called) dated as of even date
herewith, by and among the Company and each original holder of the Warrants, a
copy of which is on file at the offices of the Company in Houston, Texas.
This Warrant is subject to the following terms, provisions, and
conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
----------------------------------------------------------------
Subject to the provisions hereof, this Warrant may be exercised by the holder
hereof, in whole or in part by the surrender of this Warrant, together with a
completed Exercise Agreement in the form attached hereto as Exhibit A, to the
---------
Company during normal business hours on any business day at the Company's
principal office in Houston, Texas (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon payment to
the Company in cash or by certified or cashier's check of the Exercise Price for
the Warrant Shares specified in said Exercise Agreement. The Warrant Shares so
purchased shall be deemed to be issued to
-1-
<PAGE>
EXHIBIT 1(B)
------------
the holder hereof or its designee as the record owner of such shares as of the
close of business on the date on which this Warrant shall have been surrendered,
the completed Exercise Agreement delivered, and payment made for such shares as
aforesaid. Certificates for the Warrant Shares so purchased, representing the
aggregate number of shares specified in said Exercise Agreement, shall be
delivered to the holder hereof within a reasonable time, not exceeding ten
business days, after this Warrant shall have been so exercised. The
certificates so delivered shall be in such denominations as may be requested by
the holder hereof and shall be registered in the name of said holder or such
other name as shall be designated by said holder. If this Warrant shall have
been exercised only in part, then, unless this Warrant has expired, the Company
shall, at its expense, at the time of delivery of said certificates, deliver to
said holder a new Warrant representing the number of shares with respect to
which this Warrant shall not then have been exercised. The Company shall pay
all taxes and other expenses and charges payable in connection with the
preparation, execution, and delivery of stock certificates (and any new
Warrants) pursuant to this Paragraph 1 except that, in case such stock
-----------
certificates shall be registered in a name or names other than the holder of
this Warrant, funds sufficient to pay all stock transfer taxes which shall be
payable in connection with the execution and delivery of such stock certificates
shall be paid by the holder hereof to the Company at the time of the delivery of
such stock certificates by the Company as mentioned above.
2. PERIOD OF EXERCISE. This Warrant is exercisable at any time or from
------------------
time to time on or after September 22, 1996, and before 5:00 p.m., local time on
September 22, 2000, subject, however, to the remaining provisions of this
Paragraph 2. If, prior to September 22, 2000, the Company gives written notice
- -----------
to the holder of this Warrant to the effect that (a) the average of the last
reported sale prices of Common Stock for the Trading Days included within a six-
month period ending immediately prior to the date of such notice (the "SUBJECT
PERIOD") is equal to or greater than $5.00 per share and (b) during the Subject
Period, such holder could have exercised its rights to effect a "Demand
Registration" or a "Piggyback Registration", as such terms are defined in
Section 8 of the Investment Agreement, then such holder must, within 30 days
after receipt of such notice, elect to exercise its right hereunder to purchase
Common Stock in an amount equal to X minus Y, where "X" is equal to 40% of the
total number shares of Common Stock which the holder of this Warrant may
purchase as of the date of the original issuance of this Warrant, and where "Y"
is equal to the aggregate number of shares of Common Stock which such holder has
previously elected to purchase pursuant to the terms of this Warrant; further,
the failure of such holder to exercise its right to purchase such shares of
Common Stock within the aforementioned 30-day period shall mean that such holder
shall have waived forever its rights hereunder to so purchase such shares of
Common Stock, and such right to purchase such shares shall automatically
terminate. As used above in this Paragraph 2 with respect to Common Stock, the
-----------
last reported sales price per share shall mean the reported closing sales price
per share on the principal national securities exchange on which the shares of
Common Stock are at the time listed on such day or, if no such sale takes place
on a day, the average of the reported closing bid and asked prices, or, if the
shares of Common Stock shall not be so listed, the average of the high bid and
low ask prices in the over-the-counter market as report by the National
Association of Securities Dealers' Automated Quotation System, or, if not so
reported, as reported by the National Quotation Bureau, Incorporated, or any
successor
-2-
<PAGE>
EXHIBIT 1(B)
------------
thereof, or, if not so reported, the average of the closing bid and asked prices
as furnished by any member of the National Association of Securities Dealers,
Inc. selected from time to time by the Company for that purpose. As used in
this Paragraph 2, the term "TRADING DAYS" shall mean (i) if the Common Stock is
-----------
listed or admitted for trading on any national securities exchange, days on
which the such national securities exchange is open for business or (ii) if the
Common Stock is quoted on the National Association of Securities Dealers Inc.'s
Automated Quotation System or any similar system of automated dissemination of
quotations of securities prices, days on which trades may be made on such
system.
3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
---------------------------------
agrees as follows:
(A) SHARES TO BE FULLY PAID. All Warrant Shares will, upon issuance in
-----------------------
accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, and charges with respect to the
issue thereof.
(B) RESERVATION OF SHARES. During the period within which this Warrant
---------------------
may be exercised, the Company will at all times have authorized, and reserved
for the purpose of issue upon exercise of this Warrant, a sufficient number of
shares of Common Stock to provide for the exercise of this Warrant.
(C) CERTAIN ACTIONS PROHIBITED. The Company will not, by amendment of
--------------------------
its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, (i) the Company
will not increase the par value of the shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect, (ii)
before taking any action which would cause an adjustment reducing the Exercise
Price below the then par value of the shares of Common Stock so receivable, the
Company will take all such corporate action as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock at such adjusted Exercise Price upon the
exercise of this Warrant.
(D) REGISTRATION. If the issuance of any Warrant Shares required to be
------------
reserved for purposes of exercise of this Warrant requires registration with or
approval of any governmental authority under any federal or state law (other
than any registration under the Securities Act of 1933, as amended, or under
applicable state securities or blue sky laws) or listing on any national
securities exchange, before such shares may be issued upon exercise of this
Warrant, the Company will, at its expense, use its best efforts to cause such
shares to be duly registered or approved, or listed on the relevant national
securities exchange, as the case may be, at such time, so that such shares may
be issued in accordance with the terms hereof.
-3-
<PAGE>
EXHIBIT 1(B)
------------
4. ANTIDILUTION PROVISIONS. The Exercise Price shall be subject to
-----------------------
adjustment from time to time as provided in this Paragraph 4. Upon each
-----------
adjustment of the Exercise Price, the holder of this Warrant shall thereafter be
entitled to purchase, at the Exercise Price resulting from such adjustment, the
largest number of Warrant Shares obtained by multiplying the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant Shares
purchasable hereunder immediately prior to such adjustment and dividing the
product thereof by the Exercise Price resulting from such adjustment. For
purposes of this Paragraph 4, the term "CAPITAL STOCK", as used herein, (v)
-----------
includes the Common Stock and any additional class of stock of the Company
having no preference as to dividends or distributions on liquidation which may
be authorized in the future, provided that the shares purchasable pursuant to
this Warrant shall include only shares of Common Stock, or shares resulting from
any subdivision or combination of the Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Paragraph 4(g) hereof, the stock or other securities or
--------------
property provided for in said Paragraph, (w) excludes any Capital Stock that may
be issued pursuant to currently existing and outstanding written agreements or
obligations of the Company to sell or issue Capital Stock as listed in Schedule
--------
4 attached hereto, (x) excludes any shares of Common Stock or options to acquire
- -
Common Stock issued in connection with the Company's proposed acquisition of
GAIA Technologies, Inc. ("GAIA") and certain affiliates of GAIA, (y) excludes
any shares of Common Stock that may be issued in connection with an offering
currently being conducted by the Company to qualified non-U.S. persons of units
of Common Stock, convertible notes of the Company and warrants to purchase
Common Stock, including without limitation any Common Stock or other securities,
warrants or options issuable to the placement agents or financial advisors of
the Company in connection therewith (and excludes any Common Stock that may be
issued upon conversion of such notes, warrants or options), and (z) excludes
any Common Stock and any additional class of stock of the Company having no
preference as to dividends or distributions on liquidation that may be issued
pursuant to the exercise of any currently existing or future options to purchase
Common Stock (or any such additional class of stock) granted by the Company to
its employees.
(A) ISSUANCE OF CAPITAL STOCK. If and whenever the Company shall issue
-------------------------
or sell any shares of Capital Stock without consideration or for a consideration
per share less than the Exercise Price in effect immediately prior to the time
of such issue or sale, then, forthwith upon such issue or sale, the Exercise
Price shall be reduced to a price (calculated to the nearest cent) determined by
dividing (x) an amount equal to the sum of (aa) the total number of shares of
Capital Stock outstanding immediately prior to such issue or sale multiplied by
the then existing Exercise Price, and (bb) the consideration, if any, received
by the Company upon such issue or sale, by (y) the total number of shares of
Capital Stock outstanding immediately after such issue or sale.
(B) TREATMENT OF OPTIONS AND CONVERTIBLE SECURITIES; COMPUTATION OF
---------------------------------------------------------------
CONSIDERATION. For purposes of Paragraph 4(a) hereof the following provisions
- ------------- --------------
shall also be applicable:
(i) In case the Company shall hereafter grant any rights to
subscribe for or purchase, or any options for the purchase of, Capital
Stock or securities convertible into
-4-
<PAGE>
EXHIBIT 1(B)
------------
or exchangeable for Capital Stock (such rights and options being herein
called "OPTIONS" and such convertible or exchangeable securities being
herein called "CONVERTIBLE SECURITIES"), whether or not such Options or
the rights to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Capital Stock
is issuable upon the exercise of such Options or upon the conversion or
exchange of such Convertible Securities (as determined in accordance with
the following sentence) shall be less than the Exercise Price in effect
immediately prior to the time of the granting of such Options, then the
total maximum number of shares of Capital Stock issuable upon the
exercise of such Options or upon the conversion or exchange of the total
maximum amount of such Convertible Securities issuable upon the exercise
of such Options shall (as of the date of granting of such Options) be
deemed to be outstanding and to have been issued and sold for such price
per share. The price per share for which the Capital Stock is issuable,
as provided in the preceding sentence, shall be determined by dividing
(x) the total amount, if any, received or receivable by the Company as
consideration for the granting of such Options, plus the minimum
aggregate amount of additional consideration payable to the Company upon
the exercise of such Options, plus, in the case of any such Options which
relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the
conversion or exchange of such Convertible Securities, by (y) the total
maximum number of shares of Capital Stock issuable upon the exercise of
such Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options. Except as provided
in Paragraph 4(b)(vi) hereof, no further adjustments of the Exercise
------------------
Price shall be made upon the actual issue of such Capital Stock or of
such Convertible Securities upon the exercise of such Options or upon the
actual issue of such Capital Stock upon the conversion or exchange of
such Convertible Securities.
(ii) In case the Company shall hereafter issue or sell
Convertible Securities, whether or not the rights to convert or exchange
such Convertible Securities are immediately exercisable, and the price
per share for which Capital Stock is issuable upon the conversion or
exchange of such Convertible Securities (as determined in accordance with
the following sentence) shall be less than the Exercise Price in effect
immediately prior to the time of the issue or sale of such Convertible
Securities, then the total maximum number of shares of Capital Stock
issuable upon the conversion or exchange of all such Convertible
Securities shall (as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been issued and sold
for such price per share, provided that (a) except as provided in
Paragraph 4(b)(vi) hereof, no further adjustments of the Exercise Price
------------------
shall be made upon the actual issue of such Capital Stock upon the
conversion or exchange of such Convertible Securities, and (b) if any
such issue or sale of such Convertible Securities is made upon exercise
of any Options for which adjustments of the Exercise Price have been or
are to be made pursuant to other provisions of this Paragraph 4(b), no
-------------
further adjustment of the Exercise Price shall be made by reason of such
issue or sale. The price per share for which the Capital Stock is
issuable, as provided in the preceding sentence, shall be determined by
dividing (x) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible Securities, plus
the minimum aggregate amount of
-5-
<PAGE>
EXHIBIT 1(B)
------------
additional consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (y) the total maximum number of shares
of Capital Stock issuable upon the conversion or exchange of all such
Convertible Securities.
(iii) In case at any time the Company shall pay a dividend or
make any other distribution upon the Capital Stock payable in Capital
Stock, Options or Convertible Securities, any Capital Stock, Options or
Convertible Securities, as the case may be, issuable in payment of such
dividend or distribution shall be deemed to have been issued without
consideration.
(iv) In case at any time any Capital Stock, Convertible
Securities, or Options shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received
by the Company therefor, without deduction therefrom of any expenses
incurred or any underwriting commissions or concessions paid or allowed
by the Company in connection therewith. In case any Capital Stock,
Convertible Securities, or Options shall be issued or sold for a
consideration other than cash, the amount of the consideration other than
cash received by the Company therefor shall be deemed to be the fair
value of such consideration as determined in good faith by the Board of
Directors of the Company, except where such consideration consists of
securities, in which case the amount of consideration received by the
Company shall be the market price thereof (determined as provided in
Paragraph 4(e) hereof) as of the date of receipt, but in each such case
-------------
without deduction therefrom of any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Company in connection
therewith. In computing the market price of a note or other obligation
that is not listed or admitted to trading on any securities exchange or
quoted in the National Association of Securities Dealers, Inc. Automated
Quotation System or reported by the National Quotation Bureau, Inc. or a
similar reporting organization, the total consideration to be received by
the Company thereunder (including interest) shall be discounted to
present value at the prime rate of interest of NationsBank of Texas, N.A.
in effect at the time the note or obligation is deemed to have been
issued. In case any Capital Stock, Convertible Securities, or Options
shall be issued in connection with any merger of another corporation into
the Company, the amount of consideration therefor shall be deemed to be
the fair value as determined in good faith by the Board of Directors of
the Company of such portion of the assets of such merged corporation as
the Board shall determine to be attributable to such Capital Stock,
Convertible Securities, or Options.
(v) In case at any time the Company shall take a record of the
holders of Capital Stock for the purpose of entitling them (a) to receive
a dividend or other distribution payable in Capital Stock, Options or
Convertible Securities, or (b) to subscribe for or purchase Capital
Stock, Options or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of such Capital Stock, Options
or Convertible Securities.
-6-
<PAGE>
EXHIBIT 1(B)
------------
(vi) If the purchase price provided for in any Option referred to
in Paragraph 4(b)(i) hereof, or the price at which any Convertible
-----------------
Securities referred to in Paragraph 4(b)(i) or (ii) hereof are
----------------- ----
convertible into or exchangeable for Capital Stock, shall change at any
time (whether by reason of provisions designed to protect against
dilution or otherwise), the Exercise Price then in effect hereunder shall
forthwith be increased or decreased to such Exercise Price as would have
obtained had the adjustments made upon the issuance of such Options or
Convertible Securities been made upon the basis of (a) the issuance of
the number of shares of Capital Stock theretofore actually delivered upon
the exercise of such Options or upon the conversion or exchange of such
Convertible Securities, and the total consideration received therefor,
and (b) the number of shares of Capital Stock to be issued for the
consideration, if any, received by the Company therefor and to be
received on the basis of such changed price.
(vii) If any adjustment has been made in the Exercise Price
because of the issuance of Options or Convertible Securities and if any
of such Options or rights to convert or exchange such Convertible
Securities expire or otherwise terminate, then the Exercise Price shall
be readjusted to eliminate the adjustments previously made in connection
with the Options or rights to convert or exchange Convertible Securities
which have expired or terminated.
(viii) The number of shares of Capital Stock outstanding at any
given time shall not include shares owned or held by or for the account
of the Company, and the disposition of any such shares shall be
considered an issue or sale of Capital Stock.
(C) SUBDIVISIONS AND COMBINATIONS. In case at any time the Company
-----------------------------
shall subdivide the outstanding shares of Capital Stock into a greater number of
shares, the Exercise Price in effect immediately prior to such subdivision shall
be proportionately reduced, and conversely, in case the outstanding shares of
Capital Stock shall be combined into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination shall be proportionately
increased. An adjustment made pursuant to this Paragraph 4(c) shall become
--------------
effective immediately after the effective date of such subdivision or
combination.
(D) EXTRAORDINARY DIVIDENDS AND DISTRIBUTIONS. In case at any time the
-----------------------------------------
Company shall pay a dividend or make a distribution to all holders of Capital
Stock, as such, of shares of its stock, evidences of its indebtedness, assets,
or rights, options, or warrants to subscribe for or purchase such shares,
evidences of indebtedness, or assets, other than (i) a dividend or distribution
payable in Capital Stock, Options, or Convertible Securities or (ii) a dividend
or distribution payable in cash out of earnings or earned surplus, then in each
such case the Exercise Price shall be adjusted so that the same shall equal the
price determined by multiplying the Exercise Price in effect immediately prior
to the record date mentioned below by a fraction, the numerator of which shall
be the total number of shares of Capital Stock outstanding on such record date
multiplied by the market price per share of Capital Stock (determined as
provided in Paragraph 4(e) hereof) on such record date, less the fair market
--------------
value (as determined in good faith by the Board of Directors of the Company) as
of such record date of such shares of stock, evidences of indebtedness, assets,
or rights, options, or warrants so paid or distributed, and the
-7-
<PAGE>
EXHIBIT 1(B)
------------
denominator of which shall be the total number of shares of Capital Stock
outstanding on such record date multiplied by the market price per share of
Capital Stock (determined as provided in Paragraph 4(e) hereof) on such record
--------------
date. Such adjustment shall be made whenever such dividend is paid or such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive such dividend or
distribution.
(E) COMPUTATION OF MARKET PRICE. For the purpose of any computation
---------------------------
under Paragraph 4(b) or (d) hereof, the market price of the security in
question on any day shall be deemed to be the average of the last reported
sale prices for the security for the 20 consecutive Trading Days (as defined
below) commencing 30 Trading Days before the day in question. The last
reported sale price for each day shall be (i) the last reported sale price of
the security on the National Market of the National Association of Securities
Dealers, Inc. Automated Quotation System, or any similar system of automated
dissemination of quotations of securities prices then in common use, if so
quoted, or (ii) if not quoted as described in clause (i) above, the mean
----------
between the high bid and low asked quotations for the security as reported by
the National Quotation Bureau, Inc. if at least two securities dealers have
inserted both bid and asked quotations for such security on at least 10 of such
20 consecutive Trading Days, or (iii) if the security is listed or admitted for
trading on any national securities exchange, the last sale price, or the closing
bid price if no sale occurred, of such class of security on the principal
securities exchange on which such class of security is listed or admitted to
trading. If the security is quoted on a national securities or central market
system, in lieu of a market or quotation system described above, the last
reported sale price shall be determined in the manner set forth in clause (ii)
-----------
of the preceding sentence if bid and asked quotations are reported but actual
transactions are not, and in the manner set forth in clause (iii) of the
------------
preceding sentence if actual transactions are reported. If none of the
conditions set forth above is met, the last reported sale price of the security
on any day or the average of such last reported sale prices for any period shall
be the fair market value of such security as determined by a member firm of the
New York Stock Exchange, Inc. selected by the Company. The term "TRADING DAYS",
as used herein, means (i) if the security is quoted on the National Market of
the National Association of Security Dealers, Inc. Automated Quotation System,
or any similar system of automated dissemination of quotations of securities
prices, days on which trades may be made on such system or (ii) if the security
is listed or admitted for trading on any national securities exchange, days on
which such national securities exchange is open for business.
(F) RECORD DATE ADJUSTMENTS. In any case in which this Paragraph 4
----------------------- -----------
requires that a downward adjustment of the Exercise Price shall become effective
immediately after a record date for an event, the Company may defer until the
occurrence of such event issuing to the holder of this Warrant exercised after
such record date and before the occurrence of such event the additional Warrant
Shares issuable upon such exercise by reason of the adjustment required by such
event over and above the Warrant Shares issuable upon such exercise before
giving effect to such adjustment.
(G) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER, OR SALE.
----------------------------------------------------------------
If any capital reorganization of the Company, or any reclassification of the
Capital Stock, or any
-8-
<PAGE>
EXHIBIT 1(B)
------------
consolidation or merger of the Company with or into another corporation or
entity, or any sale of all or substantially all the assets of the Company to
another corporation or entity, shall be effected in such a way that the holders
of Common Stock (or any other securities of the Company then issuable upon the
exercise of this Warrant) shall be entitled to receive stock or other securities
or property (including cash) with respect to or in exchange for Common Stock (or
such other securities), then, as a condition of such reorganization,
reclassification, consolidation, merger, or sale, lawful and adequate provision
shall be made whereby the holder of this Warrant shall thereafter have the right
to purchase and receive upon the basis and upon the terms and conditions
specified in this Warrant, and in lieu of the shares of Common Stock (or such
other securities) immediately theretofore purchasable and receivable upon the
exercise hereof, such stock or other securities or property (including cash) as
may be issuable or payable with respect to or in exchange for a number of
outstanding shares of Common Stock (or such other securities) equal to the
number of shares of Common Stock (or such other securities) immediately
theretofore purchasable and receivable upon the exercise of this Warrant, had
such reorganization, reclassification, consolidation, merger, or sale not taken
place. In any such case appropriate provision shall be made with respect to the
rights and interests of the holder of this Warrant to the end that the
provisions hereof (including, without limitation, the provisions for adjustments
of the Exercise Price and of the number of Warrant Shares purchasable upon
exercise hereof) shall thereafter be applicable, as nearly as reasonably may be,
in relation to the stock or other securities or property thereafter deliverable
upon the exercise hereof (including an immediate adjustment of the Exercise
Price if by reason of or in connection with such consolidation, merger, or sale
any securities are issued or event occurs which would, under the terms hereof,
require an adjustment of the Exercise Price). In the event of a consolidation or
merger of the Company with or into another corporation or entity as a result of
which a greater or lesser number of shares of common stock of the surviving
corporation or entity are issuable to holders of Capital Stock in respect of the
number of shares of Capital Stock outstanding immediately prior to such
consolidation or merger, then the Exercise Price in effect immediately prior to
such consolidation or merger shall be adjusted in the same manner as though
there were a subdivision or combination of the outstanding shares of Capital
Stock. The Company shall not effect any such consolidation, merger, or sale
unless prior to or simultaneously with the consummation thereof the successor
corporation or entity (if other than the Company) resulting from such
consolidation or merger or the corporation or entity purchasing such assets and
any other corporation or entity the shares of stock or other securities or
property of which are receivable thereupon by the holder of this Warrant shall
expressly assume, by written instrument executed and delivered (and reasonably
satisfactory in form) to the holder of this Warrant, (i) the obligation to
deliver to such holder such stock or other securities or property as, in
accordance with the foregoing provisions, such holder may be entitled to
purchase and (ii) all other obligations of the Company hereunder.
(H) NO FRACTIONAL SHARES. No fractional shares of Common Stock are to
--------------------
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the current market value of a share
of Common Stock, which current market value shall be the last reported sale
price (determined as provided in Paragraph 4(e) hereof) on the Trading Day
--------------
immediately preceding the date of the exercise.
-9-
<PAGE>
EXHIBIT 1(B)
------------
(I) NOTICE OF ADJUSTMENT. Upon the occurrence of any event which
--------------------
requires any adjustment of the Exercise Price, then and in each such case the
Company shall give notice thereof to the holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease, if any, in the number of shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
(J) OTHER NOTICES. In case at any time:
-------------
(i) the Company shall declare any dividend upon the Capital Stock
payable in shares of stock of any class or make any other distribution
(other than dividends or distributions payable in cash out of earnings or
earned surplus) to the holders of the Capital Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Capital Stock any additional shares of stock of any class
or other rights;
(iii) there shall be any capital reorganization of the Company, or
reclassification of the Capital Stock, or consolidation or merger of the
Company with or into, or sale of all or substantially all its assets to,
another corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation, or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Capital Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Capital Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the
date on which the holders of Capital Stock shall be entitled to receive such
dividend, distribution, or subscription rights or to exchange their Capital
Stock for stock or other securities or property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding-up, as the case may be. Such notice shall be given, if
reasonably practicable, at least 20 days prior to the record date or the date on
which the Company's books are closed in respect thereto (and, if not reasonably
practicable, as promptly as reasonably practicable). Failure to give any such
notice or any defect therein shall not affect the validity of the proceeding
referred to in clauses (i), (ii), (iii), and (iv) above.
------------------------ ----
(K) CERTAIN EVENTS. If any event occurs as to which, in the good faith
--------------
judgment of the Board of Directors of the Company, the other provisions of this
Paragraph 4 are not strictly applicable or if strictly applicable would not
- -----------
fairly protect the exercise rights of the holder of
-10-
<PAGE>
EXHIBIT 1(B)
------------
this Warrant in accordance with the essential intent and principles of such
provisions, then the Board of Directors of the Company shall appoint the
Company's regular independent auditors or another firm of independent public
accountants of recognized national standing who are satisfactory to the holder
of this Warrant which shall give their opinion upon the adjustment, if any, on a
basis consistent with such essential intent and principles, necessary to
preserve, without dilution, the rights of the holder of this Warrant. Upon
receipt of such opinion, the Board of Directors of the Company shall forthwith
make the adjustments described therein; provided that no such adjustment shall
have the effect of increasing the Exercise Price as otherwise determined
pursuant to this Paragraph 4. The Company may make such reductions in the
-----------
Exercise Price or increase in the number of shares of Common Stock purchasable
hereunder as it deems advisable, including any reductions or increases, as the
case may be, necessary to ensure that any event treated for federal income tax
purposes as a distribution of stock rights not be taxable to recipients.
5. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
---------
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax in respect thereof, provided that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any certificate in a
name other than the holder of this Warrant.
6. AVAILABILITY OF INFORMATION. The Company and the holder of this
---------------------------
Warrant will cooperate with each other and each holder of any Warrant Shares in
supplying such information as may be necessary to complete and file any
information reporting forms presently or hereafter required by the Securities
and Exchange Commission as a condition to the availability of an exemption from
the Securities Act of 1933, as amended, for the sale of this Warrant or any
Warrant Shares. The Company will deliver to the holder of this Warrant,
promptly upon their becoming available, copies of all financial statements,
reports, notices, and proxy statements sent or made available generally by the
Company to its shareholders, and copies of all regular and periodic reports and
all final registration statements and prospectuses (and any amendments thereto)
filed by the Company with any securities exchange or with the Securities and
Exchange Commission.
7. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant shall not
-----------------------------------------
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
8. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT.
----------------------------------------------
(A) WARRANT TRANSFERABLE. The transfer of this Warrant and all rights
--------------------
hereunder, in whole or in part, is registrable at the office or agency of the
Company referred to in Paragraph 8(e) hereof by the holder hereof in person or
--------------
by his duly authorized attorney, upon surrender of this Warrant properly
endorsed, together with an Assignment substantially in the
-11-
<PAGE>
EXHIBIT 1(B)
------------
form of the instrument attached hereto as Exhibit B. Each taker and holder of
---------
this Warrant, by taking or holding the same, consents and agrees that this
Warrant, when endorsed in blank, shall be deemed negotiable, and that the holder
hereof, when this Warrant shall have been so endorsed, may be treated by the
Company and all other persons dealing with this Warrant as the absolute owner
and holder hereof for any purpose and as the person entitled to exercise the
rights represented by this Warrant and to the registration of transfer hereof on
the books of the Company; but until due presentment for registration of transfer
on such books as provided above the Company may treat the registered holder
hereof as the owner and holder hereof for all purposes, and the Company shall
not be affected by any notice to the contrary.
(B) WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Warrant is
------------------------------------------------
exchangeable, upon the surrender hereof by the holder hereof at the office or
agency of the Company referred to in Paragraph 8(e) hereof, for new Warrants of
--------------
like tenor representing in the aggregate the right to purchase the number of
shares of Common Stock which may be purchased hereunder, each of such new
Warrants to represent the right to purchase such number of shares as shall be
designated by said holder hereof at the time of such surrender.
(C) REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(D) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this
---------------------------------
Warrant in connection with any transfer, exchange, or replacement as provided
in this Paragraph 8, this Warrant shall be promptly cancelled by the Company.
-----------
The Company shall pay all taxes (other than securities transfer taxes) and all
other expenses and charges payable in connection with the preparation,
execution, and delivery of Warrants pursuant to this Paragraph 8.
-----------
(E) REGISTER. The Company shall maintain, at its principal office in
--------
Houston, Texas (or such other office or agency of the Company as it may
designate by notice to the holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(F) EXERCISE OR TRANSFER WITHOUT REGISTRATION. Anything in this
-----------------------------------------
Warrant to the contrary notwithstanding, if, at the time of the surrender of
this Warrant in connection with any exercise, transfer, or exchange of this
Warrant, this Warrant shall not be registered under the Securities Act of 1933,
as amended, and under applicable state securities or blue sky laws, the Company
may require, as a condition of allowing such exercise, transfer, or exchange,
that (i) the holder or transferee of this Warrant, as the case may be, furnish
to the Company a written opinion of counsel, which opinion and counsel are
acceptable to the Company, to the effect that such exercise, transfer, or
exchange may be made without registration under said Act and under applicable
state securities or blue sky laws and (ii) the holder or transferee execute and
deliver
-12-
<PAGE>
EXHIBIT 1(B)
------------
to the Company an investment letter in form and substance acceptable to the
Company. The first holder of this Warrant, by taking and holding the same,
represents to the Company that such holder is acquiring this Warrant for
investment and not with a view to the distribution thereof.
9. NOTICES. All notices, requests, and other communications required
-------
or permitted to be given or delivered hereunder to the holder of this Warrant or
to the holder of shares acquired upon exercise of this Warrant shall be in
writing, and shall be personally delivered, or shall be sent by certified or
registered mail, postage prepaid and addressed, to such holder at the address
shown for such holder on the books of the Company, or at such other address as
shall have been furnished to the Company by notice from such holder. All
notices, requests, and other communications required or permitted to be given or
delivered hereunder to the Company shall be in writing, and shall be personally
delivered, or shall be sent by certified or registered mail, postage prepaid and
addressed, to the office of the Company at 9818 Wilcrest, Houston, Texas 77099,
Attention: Corporate Secretary, or at such other address as shall have been
furnished to the holder of this Warrant or to the holder of shares acquired upon
exercise of this Warrant by notice from the Company. Any such notice, request,
or other communication may be sent by telegram or telex, but shall in such case
be subsequently confirmed by a writing personally delivered or sent by certified
or registered mail as provided above. All notices, requests, and other
communications shall be deemed to have been given either at the time of the
delivery thereof to (or the receipt by, in the case of a telegram or telex) the
person entitled to receive such notice at the address of such person for
purposes of this Paragraph 9, or, if mailed, at the completion of the third full
-----------
day following the time of such mailing thereof to such address, as the case may
be.
10. GOVERNING LAW. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN
-------------
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
11. MISCELLANEOUS.
-------------
(A) AMENDMENTS. This Warrant and any provision hereof may not be
----------
changed, waived, discharged, or terminated orally, but only by an instrument in
writing signed by the party (or any predecessor in interest thereof) against
which enforcement of the same is sought.
(B) DESCRIPTIVE HEADINGS. The descriptive headings of the several
--------------------
paragraphs of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.
(C) SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon any
----------------------
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all the Company's assets.
-13-
<PAGE>
EXHIBIT 1(B)
------------
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer, as attested by its duly authorized officer, on this
22nd day of September, 1995.
NORTH AMERICAN TECHNOLOGIES
GROUP, INC.
By: ______________________________________________
Name: Tim B. Tarrillion
Title: President and Chief Executive Officer
Attest:
_______________________________
Name: Judith K. Shields
Title: Assistant Secretary
-14-
<PAGE>
EXHIBIT 1(B)
------------
EXHIBIT A
---------
FORM OF EXERCISE AGREEMENT
Dated: ______, ____.
To: North American Technologies Group, Inc.
__________________________
__________________________
Attention: Corporate Secretary
The undersigned, pursuant to the provisions set forth in that certain
Stock Purchase Warrant No. ___________ (the "Warrant"), issued by North American
Technologies Group, Inc., a Delaware corporation ("NATK"), which Warrant is
attached hereto or enclosed herewith, hereby agrees to purchase __________
shares of Common Stock covered by such Warrant, and makes payment herewith in
full therefor at the price per share provided by such Warrant in cash or by
certified or cashier's check in the amount of $____________. Please issue a
certificate or certificates for such shares of Common Stock in the name of and
pay any cash for any fractional share to:
Name:_________________________________________
Address:______________________________________
_________________________________________
_________________________________________
Note: The above signature should correspond exactly with the name on the
face of the Warrant or with the name of the assignee appearing in
the assignment form.
and, if said number of shares of Common Stock shall not be all the shares
purchasable under the Warrant, a new Warrant is to be issued in the name of said
undersigned covering the balance of the shares purchasable thereunder less any
fraction of a share paid in cash.
Signature:____________________________________
Title of Signing Officer or Agent (if any):
______________________________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1995 OF NORTH AMERICAN TECHNOLOGIES GROUP, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,837,641
<SECURITIES> 0
<RECEIVABLES> 787,719
<ALLOWANCES> 32,606
<INVENTORY> 188,497
<CURRENT-ASSETS> 3,783,501
<PP&E> 740,131
<DEPRECIATION> 235,979
<TOTAL-ASSETS> 9,242,988
<CURRENT-LIABILITIES> 1,875,637
<BONDS> 3,257,406
<COMMON> 22,056
0
0
<OTHER-SE> 4,071,401
<TOTAL-LIABILITY-AND-EQUITY> 9,242,988
<SALES> 1,981,620
<TOTAL-REVENUES> 1,981,620
<CGS> 1,273,103
<TOTAL-COSTS> 1,273,103
<OTHER-EXPENSES> 3,747,909
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,537
<INCOME-PRETAX> (3,040,466)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,040,466)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,040,466)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
