<PAGE>
As filed with the Securities and Exchange Commission on February 1, 1996
Registration No. 33-82112
================================================================================
SECURITIES AND EXCHANGE COMMISSION
AMENDMENT NO. 2
to
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
----------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
--------------------------
(State of Incorporation)
2860
--------------------------------------------------------
(Primary Standard Industrial Classification Code Number)
33-0041789
----------------------------------------
(I.R.S. Employer Identification No.)
4710 Bellaire Blvd. - Suite 301
Bellaire, Texas 77401
(713) 662-2699
-----------------------------------------------------------
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
Mr. Tim B. Tarrillion
CHIEF EXECUTIVE OFFICER
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
4710 Bellaire Blvd. - Suite 301
Bellaire, Texas 77401
(713) 662-2699
----------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
copy to:
Joseph P. Galda, Esquire
Clark, Ladner, Fortenbaugh & Young
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
(215) 241-1800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practical after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and then in compliance with
General Instruction G, please check the following box: [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================
Proposed
Maximum Proposed Maximum Amount of
Title of Each Class of Securities Amount to be Offering Price Aggregate Offering Registration
Being Registered Registered (1) per Unit (2) Price (2) Fee
<S> <C> <C> <C> <C>
Common Stock (par value
$.001 per share) 1,382,071 shares $.0033 $4,560.83 $500(2)
=========================================================================================================
</TABLE>
(1) The number of shares of common stock, par value $.001 par share ("Company
Common Stock"), of North American Technologies Group, Inc. (the "Company"),
is based on the estimated maximum number of such shares to be issued to
stockholders of North American Environmental Group, Inc. ("NAE") in
connection with the merger of NAE into Daily Mail, Inc. ("DM"), a wholly-
owned subsidiary of the Company.
(2) Estimated pursuant to Rule 457(f)(2) of the Securities Act of 1933, as
amended, solely for the purpose of calculating the registration fee. There
is no trading market for the shares of Common Stock, par value $.01, of NAE
to be exchanged with shares of Company Common Stock in connection with the
merger of NAE into DM, and NAE has an accumulated capital deficit. The
registration fee is therefore calculated based on one-third of the par
value of the shares of Company Common Stock which are to be registered, or
$500, whichever is greater.
The Company paid the $500 registration fee upon filing the initial
Registration Statement to which this Amendment No. 2 to Form S-4 Registration
Statement relates.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
Cross-Reference Sheet to Form S-4 of
North American Technologies Group, Inc.
PART I. INFORMATION REQUIRED IN THE PROSPECTUS
A. INFORMATION ABOUT THE TRANSACTION
<TABLE>
<CAPTION>
Item of Form S-4 Caption in Information Statement and Prospectus
- ---------------- -----------------------------------------------
<S> <C>
1. Forepart of Registration Statement and Outside Facing Page; Cross-Reference Sheet; Outside Front Cover
Front Cover Page of Prospectus.................... Page of Information Statement and Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Available Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information............................. Risk Factors; Summary
4. Terms of the Transaction............................ Summary; The Merger; Exhibit A
5. Pro Forma Financial Information..................... The Merger
6. Material Contracts with the Company Being
Acquired.......................................... The Merger
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be
Underwriters...................................... Resale of Company Common Stock
8. Interests of Named Experts and Counsel.............. Legal Opinions; Experts
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.................... Part II; Item 20 - Indemnification of Directors and Officers
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants.......
11. Incorporation of Certain Information by
Reference....................................... *
12. Information with Respect to S-2 or S-3
Registrants..................................... *
13. Incorporation of Certain Information by
Reference....................................... *
14. Information with Respect to Registrants
Other than S-3 or S-2 Registrants............... The Business of the Company and NAE; Financial Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies......... *
16. Information with Respect to S-2 or S-3
Companies....................................... *
17. Information with Respect to Companies other
than S-3 or S-2 Companies....................... The Business of the Company and NAE; Financial Statements
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations
are to be Solicited............................. *
19. Information if Proxies, Consents or Authorizations
are not to be Solicited in an Exchange.......... Voting and the Special Meeting; Management of the Company and NAE;
Security Offer Ownership of Certain Beneficial Owners and Management
of the Company and NAE
</TABLE>
_________________
* Omitted since the answer is negative or the Item is not
applicable.
<PAGE>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
4710 Bellaire Blvd
Suite 301
Bellaire, Texas 77401
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 6, 1996
Dear Stockholder:
A Special Meeting of Stockholders of North American Environmental Group,
Inc., a Delaware corporation ("NAE"), will be held at the offices of Clark,
Ladner, Fortenbaugh & Young, One Commerce Square, 2005 Market Street, 22nd
Floor, Philadelphia, Pennsylvania 19103 on March 6, 1996 at 10:00 A.M. E.D.T.
for the following purpose:
To consider, adopt and approve an Agreement and Plan of Merger, dated as of
____ __, 1996 (the "Merger Agreement"), by and among North American Technologies
Group, Inc., a Delaware corporation (unless otherwise specified, referred to
hereafter as the "Company"), Daily Mail, Inc., a Delaware corporation and
wholly-owned subsidiary of the Company ("DM"), and NAE, pursuant to which, among
other things, NAE will be merged with and into DM (the "Merger"). As a result
of the Merger, the shares of common stock of NAE, par value $.01 ("NAE Common
Stock"), outstanding immediately prior to the effective time of the Merger (the
"Effective Date") (other than shares with respect to which dissenters' rights
are perfected in accordance with Delaware law and shares held directly or
indirectly by the Company and DM or held in NAE's treasury, which shall be
cancelled) shall be converted into shares of common stock, $.001 par value, of
the Company ("Company Common Stock"), as follows: each share of NAE Common
Stock outstanding immediately prior to the Effective Date shall be converted
into and become exchangeable for one share of Company Common Stock. The text of
the Merger Agreement is set forth as Exhibit A to the attached Information
Statement.
The affirmative vote of the holders of a majority of the outstanding shares
of NAE as of the record date is required to approve the Merger Agreement. The
Company and the Company's wholly-owned subsidiary, DM, own 350,000 and
10,408,333 shares of NAE Common Stock, respectively, representing an aggregate
of approximately eighty-nine percent (89%) of the issued and outstanding shares
of NAE Common Stock. DM and the Company have informed NAE by written consent
that they intend to vote their shares in favor of the Merger. Accordingly, in
recognition of the affirmative vote of the Company and DM, collectively the
holders of an aggregate of eighty-nine percent (89%) of the issued and
outstanding shares of NAE Common Stock, the Merger will be approved at the
Special Meeting and NAE is not soliciting proxies and stockholders are requested
not to send proxies to NAE.
Stockholders may, however, attend the Special Meeting to vote their shares
of NAE Common Stock or to exercise their dissenters' rights. See "VOTING AND THE
SPECIAL MEETING - Dissenters' Rights" in the attached Information Statement and
Prospectus for a description of the procedures required to be followed to
perfect appraisal or dissenters' rights. Stockholders of NAE who do not vote in
favor of the Merger Agreement and who dissent to the Merger in compliance with
the requirements of Section 262 of the Delaware General Corporation Law will
have, when the Merger is consummated, the right to appraisal of their shares of
NAE Common Stock.
The accompanying Information Statement and Prospectus provides a
description of the proposal to be presented at the Special Meeting and extensive
information concerning the Company and NAE. Please give the information your
careful attention.
<PAGE>
WE ARE NOT SOLICITING PROXIES AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
Stockholders of record at the close of business on February 12, 1996 will
be entitled to notice of, and to vote at, the meeting and any adjournment or
adjournments thereof.
By Order of the Board of Directors,
/s/Tim B. Tarrillion
-------------------------
Dated: February 14, 1996 Chief Executive Officer
<PAGE>
INFORMATION STATEMENT AND PROSPECTUS
1,382,071 Shares of Common Stock, Par Value $.001 Per Share
of
North American Technologies Group, Inc.
4710 Bellaire Blvd
Suite 301
Bellaire, Texas 77401
_______________
Special Meeting of North American Environmental Group, Inc.
Stockholders to be Held March 6, 1996
_________________
This Information Statement and Prospectus, and the accompanying notice, are
being furnished to the stockholders of North American Environmental Group, Inc.
("NAE"), in connection with the Special Meeting of Stockholders of NAE to be
held on March 6, 1996, at the offices of Clark, Ladner, Fortenbaugh & Young, One
Commerce Square, 2005 Market Street, 22nd Floor, Philadelphia, Pennsylvania
19103, at 10:00 A.M. E.D.T., and at any adjournments or postponements thereof
(the "Special Meeting").
This Information Statement and Prospectus is furnished to the holders of
shares of common stock of NAE, par value $.01 ("NAE Common Stock"), in
connection with the adoption by the Board of Directors of NAE of a resolution
approved as of ____________ __, 1996, which was also approved by the Board of
Directors of North American Technologies Group, Inc., a Delaware corporation
(the "Company"), and Daily Mail, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Company ("DM"), which resolutions authorize the Agreement and
Plan of Merger, dated ____ __, 1996 (the "Merger Agreement"), by and among NAE
and the Company and DM. The Merger Agreement is attached to this Information
Statement and Prospectus as Exhibit A. The affirmative vote of the holders of a
majority of the outstanding shares of NAE Common Stock as of the record date is
required to approve and adopt the Merger Agreement. The Company and the
Company's wholly-owned subsidiary, DM, own 350,000 and 10,408,333 shares of NAE
Common Stock, respectively, representing an aggregate of approximately eighty-
nine percent (89%) of the issued and outstanding shares of NAE Common Stock. DM
and the Company have informed NAE by written consent that they intend to vote
their shares in favor of the Merger. Accordingly, in recognition of the
affirmative vote of the Company and DM, collectively the holders of eighty-nine
(89%) of the issued and outstanding shares of NAE Common Stock, the Merger will
be approved at the Special Meeting. Pursuant to the Merger Agreement, NAE will
be merged with and into DM and each outstanding share of NAE Common Stock (other
than shares with respect to which dissenters' rights are perfected in accordance
with Delaware law and shares held directly or indirectly by the Company and DM
or held in NAE's treasury, which shall be cancelled) will be converted into one
share of common stock (the "Merger Consideration"), par value $.001, of the
Company ("Company Common Stock"), as described in this Information Statement and
Prospectus.
The Board of Directors of NAE knows of no business that will be presented
at the Special Meeting, other than the matters described in this Information
Statement and Prospectus.
The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), covering the shares of Company Common Stock to be issued
in connection with the Merger. This Information Statement, along with the
materials which are incorporated by reference, also constitutes the Prospectus
of the Company filed as part of the Registration Statement.
The descriptions of all documents in this Information Statement and
Prospectus are qualified by reference to the text of those documents, including
but not limited to, those documents attached as exhibits to this Information
Statement and Prospectus.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS."
1
<PAGE>
No person is authorized to give any information or to make any
representation not contained in this Information Statement and Prospectus, and,
if given or made, such information or representation should not be relied upon
as having been authorized. This Information Statement and Prospectus does not
constitute an offer to sell, or a solicitation of an offer to purchase the
securities offered by the Information Statement and Prospectus, or the
solicitation of a proxy, in any jurisdiction to or from any person to whom it is
unlawful to make such offer, or solicitation of an offer or proxy, in such
jurisdiction. Neither the delivery of this Information Statement and Prospectus
nor any distribution of the securities offered pursuant to this Information
Statement and Prospectus shall create an implication that there has been no
change in the affairs of NAE or the Company since the date of this Information
Statement and Prospectus.
_______________
THE SECURITIES TO BE ISSUED PURSUANT TO THIS INFORMATION STATEMENT AND
PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS INFORMATION STATEMENT AND PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This Information Statement and Prospectus is dated and was first mailed or given
to NAE stockholders on or about February 14, 1996.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
AVAILABLE INFORMATION........................................... 8
SUMMARY......................................................... 9
RISK FACTORS.................................................... 14
VOTING AND THE SPECIAL MEETING.................................. 18
THE MERGER 20
Terms of the Merger........................................ 20
Reasons for the Merger..................................... 20
Exchange of Certificates................................... 21
Effective Date and Termination............................. 21
Expenses................................................... 21
Resale of Company Common Stock............................. 21
Interest of Certain Persons in Merger...................... 21
Federal Income Tax Consequences............................ 22
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY..................... 24
MARKET PRICE OF AND DIVIDENDS
ON THE NAE AND COMPANY COMMON STOCK............................. 27
BUSINESS OF THE COMPANY AND NAE................................. 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 42
MANAGEMENT OF THE COMPANY AND NAE............................... 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF THE COMPANY AND NAE........................... 54
LEGAL OPINIONS.................................................. 58
EXPERTS......................................................... 58
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR
NORTH AMERICAN TECHNOLOGIES GROUP, INC..................... F-1
REPORT OF INDEPENDENT AUDITORS FOR EET, INC................ F-3
NORTH AMERICAN TECHNOLOGIES GROUP, INC., CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 1994 AND 1993............ F-4
NORTH AMERICAN TECHNOLOGIES GROUP, INC., CONSOLIDATED
STATEMENTS OF OPERATIONS FOR EACH OF THE THREE
YEARS IN THE PERIOD ENDED DECEMBER 31, 1994................ F-6
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1994.......... F-8
NORTH AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1994.......... F-10
NORTH AMERICAN TECHNOLOGIES GROUP, INC. SUMMARY
OF ACCOUNTING POLICIES..................................... F-14
NORTH AMERICAN TECHNOLOGIES GROUP, INC. NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.......................... F-16
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1995
(UNAUDITED) AND DECEMBER 31, 1994.......................... F-35
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994 (UNAUDITED)...... F-37
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994 (UNAUDITED)...... F-38
NORTH AMERICAN TECHNOLOGIES GROUP, INC. NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS ......................... F-39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FOR NORTH AMERICAN ENVIRONMENTAL GROUP, INC................ F-44
REPORT OF INDEPENDENT AUDITORS
FOR NORTH AMERICAN ENVIRONMENTAL GROUP, INC................ F-46
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 1994 AND 1993............ F-47
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. CONSOLIDATED
STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1994, AND CUMULATIVE FROM
INCEPTION (MAY 7, 1991) THROUGH DECEMBER 31, 1994.......... F-49
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
FOR THE PERIOD FROM INCEPTION (MAY 7, 1991) TO
DECEMBER 31, 1991, AND FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1994............................. F-50
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1994 AND CUMULATIVE FROM
INCEPTION (MAY 7, 1991) THROUGH DECEMBER 31, 1994.......... F-51
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
SUMMARY OF ACCOUNTING POLICIES............................. F-52
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS....................... F-54
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1995
(UNAUDITED) AND DECEMBER 31, 1994......................... F-60
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995
AND SEPTEMBER 30, 1994, AND CUMULATIVE
FROM INCEPTION (MAY 7, 1991) THROUGH
SEPTEMBER 30, 1995 (UNAUDITED)............................. F-61
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. -
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995
AND SEPTEMBER 30, 1994, AND CUMULATIVE
FROM INCEPTION (MAY 7, 1991) THROUGH
SEPTEMBER 30, 1995 (UNAUDITED)............................. F-62
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
SUMMARY OF ACCOUNTING POLICIES............................. F-63
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS FOR GAIA TECHNOLOGIES, INC..................... F-64
GAIA TECHNOLOGIES, INC. BALANCE SHEETS AS
OF DECEMBER 31, 1994 AND 1993.............................. F-65
GAIA TECHNOLOGIES, INC. STATEMENTS OF LOSS FOR THE
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992............... F-67
GAIA TECHNOLOGIES, INC. STATEMENTS OF CAPITAL
DEFICIT FOR THE YEARS ENDED
DECEMBER 31, 1994, 1993 AND 1992........................... F-68
GAIA TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992....... F-69
GAIA TECHNOLOGIES, INC. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES............................ F-71
GAIA TECHNOLOGIES, INC. NOTES TO
FINANCIAL STATEMENTS....................................... F-73
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
GAIA TECHNOLOGIES, INC. BALANCE SHEET AS OF
SEPTEMBER 30, 1995 (UNAUDITED)............................. F-82
GAIA TECHNOLOGIES, INC. STATEMENTS OF LOSS FOR
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995
AND SEPTEMBER 30, 1994 (UNAUDITED)......................... F-84
GAIA TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995
AND SEPTEMBER 30, 1994 (UNAUDITED)......................... F-85
GAIA TECHNOLOGIES, INC. SUMMARY OF ACCOUNTING
POLICIES................................................... F-86
PROFORMA BALANCE SHEET AS OF SEPTEMBER 30, 1995............ F-88
PROFORMA STATEMENTS OF LOSS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995......................................... F-89
PROFORMA STATEMENTS OF LOSS FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1994.................................... F-90
</TABLE>
6
<PAGE>
EXHIBITS TO INFORMATION STATEMENT AND PROSPECTUS
Exhibit A Agreement and Plan of Merger dated as of _______ __, 1996 by and
among NAE and the Company and DM
Exhibit B Section 262 of the Delaware General Corporation Law
Exhibit C Tax Opinion of Clark, Ladner, Fortenbaugh & Young
7
<PAGE>
AVAILABLE INFORMATION
The Company has filed a Registration Statement with the Securities and
Exchange Commission (the "SEC") covering the shares of Company Common Stock to
be issued in connection with the Merger. The Registration Statement may be
inspected and copied at the principal office of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of the Registration Statement can be
obtained from the SEC at prescribed rates by writing to the SEC at such address.
For further information, reference is made to the Registration Statement and its
exhibits. Statements in the Information Statement and Prospectus concerning any
document are not necessarily complete and, in each instance, reference is made
to the copy of such document filed as an exhibit to the Registration Statement.
Each such statement is qualified in its entirety by such reference.
NAE and the Company are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and are required
to file periodic reports, proxy statements and other information with the SEC
relating to their business, financial statements and other matters. Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the SEC
located at 7 World Trade Center, Suite 1300, New York, NY 10048, and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661-2511. Copies of
such material can also be obtained from the SEC at prescribed rates from the
Public Reference Section of the SEC at 450 Fifth Street, N.W. Washington, D.C.
20549.
8
<PAGE>
SUMMARY
The following is a summary of information which appears in more detail
elsewhere in this Information Statement and Prospectus. This summary is not
complete and is qualified by reference to the detailed information appearing
elsewhere in the Information Statement and Prospectus, including the financial
statements and the notes thereto. Stockholders should review carefully the
entire Information Statement and Prospectus, including the exhibits and other
documents referred to in this Information Statement and Prospectus.
THE COMPANY
Prior to the acquisitions of EET, Inc. ("EET") and Industrial Pipe Fitting,
Inc. ("IPF") described below, North American Technologies Group, Inc. ("NATK" or
the "Company") had been a development-stage company engaged in the development,
acquisition and application of technologies which management believes may have
applications in various industries including environmental services. As a result
of those acquisitions and previous development work, the Company now owns or has
the right to several technologies that include a patented chemical
decontamination process, enzyme and chemical solutions, mechanical soil washing
systems, bioremedial technologies, a patented oleofilter, and manufacturing
processes for transition fittings and rubber/plastic products. Applications of
these technologies could include environmental services (including the cleanup
of contaminated soils and waters), decontamination of buildings and equipment,
treatment of oil field drilling production waste, the upgrading of crude
oils, and the manufacturing of porous pipe, synthetic construction materials and
transition fittings for plastic pipe. The business of the Company was expanded
during 1995 with Company's acquisition by merger of EET, an environmental
decontamination technologies and process company, and IPF, a manufacturer and
distributor of proprietary and standard thermoplastic fittings for the mining,
environmental and water works industries. In addition, effective as of December
29, 1995, the Company acquired substantially all of the assets of GAIA
Technologies, Inc., a manufacturer of porous pipe, synthetic construction
materials and other products using recycled rubber and plastics. Unless the
context requires otherwise, the term "Company" refers to North American
Technologies Group, Inc. and its subsidiaries and affiliates. The Company was
organized as of December 24, 1986 under the laws of the State of Delaware.
Prior to June 30, 1992, the Company's principal business was operated under
the name "Mail Boxes Coast-to-Coast, Inc." as an exclusive area franchisee in
Los Angeles County, California for Mail Boxes Etc. U.S.A., Inc. ("MBE"), a
franchisor of postal business, packaging and communication service centers. As
an MBE area franchisee, the Company sold franchises for MBE service centers on
behalf of MBE and provided subsequent operational assistance to the individual
MBE service center franchisees.
In an effort to maximize stockholder value in recognition of the depressed
market price of the Company's outstanding publicly traded securities, during the
first quarter of 1992, management elected to restructure the operations of the
Company. Such a restructuring was concluded by management to include a
divestiture of the Company's existing business and the identification of
potential business combinations intended to develop a new line of business for
the Company.
Restructuring of the Company commenced during the second quarter of 1992,
when, effective as of April 1, 1992, the Company sold substantially all of the
assets related to the MBE area franchise to certain individuals consisting of
the former principal stockholders, directors and officers for approximately
$1,550,000.
In further conjunction with this restructuring, the Company acquired on
June 30, 1992 controlling share interests in two publicly-held affiliated
companies, North American Technologies, Inc., a Canadian corporation ("NAT"),
and North American Environmental Group, Inc., a Delaware corporation ("NAE").
NAT and NAE were each involved in the development and marketing of environmental
remediation technologies. NAT and NAE were acquired in stock for stock
transactions characterized for financial accounting purposes as a "reverse
acquisition" pursuant to which the historic stockholders of NAT and NAE acquired
a controlling interest in the Company and subsequently renamed the Company
"North American Technologies Group, Inc."
Acquisition of the remaining minority interest of NAT was completed during
November 1993 pursuant to a Plan of Arrangement in which the Company issued
approximately 5.5 million shares of Company Common Stock (on the
9
<PAGE>
basis of one share of NATK for each two shares of NAT). Through the merger
transaction covered by this Prospectus, the Company intends to further
consolidate its holdings through a proposed acquisition of the remaining 11%
minority interest of NAE for 1,382,071 shares of newly issued Company Common
Stock.
Principal executive offices of the Company and NAE are located at 4710
Bellaire Blvd. Suite 301, Bellaire, Texas 77401, telephone: (713) 662-2699.
THE SPECIAL MEETING
The Special Meeting will be held March 6, 1996 at 10:00 A.M. E.D.T., at the
offices of Clark, Ladner, Fortenbaugh & Young, One Commerce Square, 2005 Market
Street, 22nd Floor, Philadelphia, PA 19103. The purpose of the Special Meeting
is to consider and vote upon a proposal to approve the Merger Agreement and the
transactions contemplated thereunder.
Only holders of record of shares of NAE Common Stock at the close of
business on February 12, 1996 will be entitled to notice of and to vote at the
Special Meeting. At the close of business on such date, there were
approximately 12,140,404 shares of NAE Common Stock issued and outstanding. The
affirmative vote of the holders of a majority of the outstanding shares of NAE
Common Stock as of the record date is required to approve the Merger Agreement.
The Company and DM, a wholly-owned subsidiary of the Company, collectively own
an aggregate of 10,758,333 shares of NAE Common Stock, representing
approximately eighty-nine percent (89%) of the issued and outstanding shares of
NAE Common Stock. The Board of Directors of the Company and DM have approved
the Merger Agreement and the Merger. In addition, the Company and DM intend to
vote the shares of NAE Common Stock in favor of the Merger. Thus the Merger
will be approved at the Special Meeting. NAE is not soliciting proxies and
stockholders are requested not to send proxies to NAE. See "VOTING AND THE
SPECIAL MEETING."
Under Delaware law, appraisal rights are available to holders of NAE Common
Stock who dissent from approving the Merger Agreement and Merger and take the
other actions specified herein to perfect such appraisal rights. See "VOTING
AND THE SPECIAL MEETING - Dissenters' Rights."
THE MERGER
The Board of Directors of NAE believes that the Merger is in the best
interest of NAE and its stockholders and it recommends that the NAE stockholders
vote for the approval of the Merger Agreement and the transactions contemplated
thereby. The primary reasons for the Merger are to eliminate the complexity
presented by having multiple corporations with varying degrees of overlapping
minority ownership as well as to decrease the overall costs of regulatory
compliance if NAE were to remain a publicly-traded company. Since there is no
material trading market in the shares of NAE Common Stock, the Board of
Directors of NAE believes that the Merger is advantageous to NAE stockholders
primarily because of the valuation being accorded to NAE Common Stock in the
Merger and the possible greater market liquidity of the Company Common Stock,
although there can be no assurances that such liquidity will continue.
Upon the Effective Date of the Merger ("Effective Date"), each outstanding
share of NAE Common Stock will be converted into and exchangeable for one share
of Company Common Stock. Subsequent to the Merger, a holder of NAE Common Stock
will not be able to receive dividends or other distributions on Company Common
Stock or to vote those shares until the holder exchanges the holder's NAE Common
Stock certificate for a Company Common Stock certificate. After the Effective
Date, Continental Stock Transfer and Trust Company, New York, New York, the
Company's transfer agent, will send transmittal forms to NAE stockholders for
their use in exchanging these certificates.
At the time of the initial acquisition by the Company of its interest in
NAE, the former Board of Directors, consisting of John Parrott, a current
director of NAE, and James E. Impero and Thom E. Robinson, established the
Merger Consideration based upon their assessment of NAE's assets and earnings
prospects at the time. The current Board of Directors of NAE consists of John
Parrott, who is a former director and executive officer of the Company, Tim
Tarrillion, President and CEO of the Company, and Donovan Boyd, COO of the
Company. On January __, 1996 the Boards of Directors of the Company and NAE
reconsidered the value of NAE's assets and its earnings potential and
10
<PAGE>
the relative market values of NAE and Company Common Stock. Based upon
subsequent history, the Boards concluded that the Merger Consideration as
originally established continued to be fair to the NAE stockholders. However,
the Merger Consideration was not determined by arms-length negotiation and there
was no formal valuation of the Company and NAE, either by the Company or NAE or
an independent third party. Neither the Company nor NAE have obtained a
fairness opinion by an investment banking firm or other qualified appraiser.
FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to constitute a "reorganization" within the meaning
of Section 368 of the Internal Revenue Code of 1986, as amended. No gain or
loss will be recognized by a stockholder of NAE who exchanges NAE Common Stock
solely for Company Common Stock. See "THE MERGER - Federal Income Tax
Consequences."
RISK FACTORS
The securities offered hereby involve a high degree of risk and prospective
investors should carefully consider the factors specified under "RISK FACTORS"
before electing to invest. See "RISK FACTORS."
MARKET PRICE OF COMMON STOCK
The Company Common Stock is reported on The NASDAQ SmallCap Market/SM/
under the symbol "NATK". NAE Common Stock has traded in the over-the-counter
market under the symbol "NAME." See "MARKET PRICE OF AND DIVIDENDS ON THE NAE
AND COMPANY COMMON STOCK."
11
<PAGE>
SELECTED FINANCIAL DATA OF THE COMPANY/(1)/
The following table sets forth historical financial information for the
Company and should be read in conjunction with the Financial Statements and the
Notes thereto and Management's Discussion of Financial Condition and Results of
Operations which are contained elsewhere in this Information Statement and
Prospectus.
<TABLE>
<CAPTION>
================================================================================================================================
Nine Nine
Months Months
Ended Ended
Year Year Year Year Year September 30, September 30,
30, 30,
1994/(4)/ 1995/(4)/
1990 1991 1992 1993 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 0 $ 0 $ 0 $ 269,073 $ 1,945,697 $ 1,404,447 $ 1,981,620
- --------------------------------------------------------------------------------------------------------------------------------
Net loss $ (169,309) $ (376,735) $(2,481,206) $ (1,503,502) $(4,936,330) $(2,167,539) $(3,040,466)
- --------------------------------------------------------------------------------------------------------------------------------
Net loss per share $(.03)/(2)/ $(.04)/(2)/ $(.37) $ (.25) $(.35) $(.16) $(.17)
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 621,352 $ 987,447 $ 2,383,445 $6,515,883/(3)/ $ 8,190,676 $ 8,190,676 $ 9,242,988
- --------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity $ 564,454 $ 713,517 $ 1,648,155 $ 4,272,312 $ 5,007,443 $ 5,007,443 $ 4,093,457
- --------------------------------------------------------------------------------------------------------------------------------
Long term debt -0- -0- $ 250,000 $ 462,500 $ 500,000 $ 500,000 $ 3,257,406
=============================================================================================================================
</TABLE>
/(1)/ Selected financial data of the Company for the periods after 1991 are
after recapitalization; Selected financial data of NAT at all other dates.
See Note 1 to the Consolidated Financial Statements of the Company.
/(2)/ Figures based on one for fifteen reverse stock split.
/(3)/ Increase over prior period is principally due to the exercise of options
for NAT common stock. See Note 5 to the Consolidated Financial Statements
of the Company.
/(4)/ Unaudited.
12
<PAGE>
SELECTED FINANCIAL DATA OF NAE
The following table sets forth historical financial information for NAE and
should be read in conjunction with the Financial Statements and the Notes
thereto which are contained elsewhere in this Information Statement and
Prospectus.
<TABLE>
<CAPTION>
===================================================================================================================================
Period From Nine Nine Cumulative
Inception Months Months From Inception
(May 7, 1991) Ended Ended (May 7, 1991) to
to September 30, September 30, September 30,
December 31, 1991 Year Year Year 1994 1995 1995
(unaudited) (unaudited) (unaudited)
1992 1993 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 0 $ 0 $ 0 $ 13,542 $ 13,542 -0- $ 13,542
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss $(299,689) $ (337,464) $(1,359,971) $ (870,756) $ (693,654) $ (80,058) $(2,947,938)
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss per share $ (.03) $(.03) $(.11) $(.07) $ (.06) $ -
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 194,582 $1,096,084 $ 613,910 $ 109,683 $ 109,683 $ 55,388
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
(Deficit) $ 169,587 $ 367,949 $ (992,022) $(1,862,778) $(1,862,778) $(1,942,836)
- -----------------------------------------------------------------------------------------------------------------------------------
Convertible Debenture -0- $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000
===================================================================================================================================
</TABLE>
13
<PAGE>
RISK FACTORS
Holding or making an investment in shares of Company Common Stock entails a
high degree of risk. In addition to the other information appearing elsewhere
in this Information Statement and Prospectus, the following factors should be
considered carefully in evaluating holding or making an investment in Company
Common Stock.
LACK OF OPERATING REVENUE AND PROFITS
Until the recent acquisitions of EET and IPF, the Company remained a
development stage company with limited revenues and substantial losses.
Although the Company believed that most of its technologies were sufficiently
developed so as to permit commercial sales, the new management of the Company is
in the process of reevaluating the Company's product portfolio. Substantially
all of the Company's revenues generated prior to the acquisition of EET and IPF
were from demonstration projects resulting in no material commercial sales.
Furthermore, management's prior expectations of commercial sales during 1994
were not met and the Company realized no revenues during fiscal 1994 nor is
expecting commercial sales from non-EET and IPF products in fiscal 1995. While
it is anticipated that the operations of EET and IPF will generate operating
revenues during fiscal 1995, such revenues are unlikely to result in profitable
operations of the Company on a consolidated basis in the short term.
The Company has incurred cumulative losses since inception of $15,495,040.
Further, until the Company is able to generate material revenues from the
commercialization of its technologies, there can be no assurances that
profitable operation can be attained or maintained in the short term, if at all.
Should losses continue at their historic rate, there can be no assurances that
the Company can remain viable as a going concern for more than the short term.
See "Capital Needs; Going Concern Qualifications."
CAPITAL NEEDS; GOING CONCERN QUALIFICATIONS
Through the nine months ended September 30, 1995, the Company incurred
operating losses which are anticipated to continue for the near term at expected
levels of between $200,000 and $250,000 per month. In addition, effective as of
December 29, 1995 the Company acquired GAIA Technologies, Inc. The net monthly
cash operating requirements of GAIA are expected to approximate $100,000 per
month through the first quarter of 1996, and decline thereafter as revenues
increase. The Company has historically met its working capital requirements
through the license of its technologies, issuance of convertible debentures and
financing transactions involving the private placement of equity securities or
equity equivalents. Operating revenues have not historically provided a
meaningful source of working capital for the Company. The Company does not
expect that revenues from operations will at any time within the short term be
sufficient to offset the Company's costs of operations. 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. If adequate funds are not available and the losses
continue at historic rates, the Company will be unlikely to continue as a going
concern for more than the short term.
Accordingly, the Company's independent auditors have noted in their opinion
on the Company's consolidated financial statement for the year ended December
31, 1994 that these factors raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of assets carrying
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
NOTE RECEIVABLE FROM EURO SCOTIA FUNDING LIMITED
Euro Scotia Funding Limited ("ESF") owes the Company approximately $2.8
million in principal under the terms of a note agreement. The January 1996
payment of the ESF note was not paid in whole or in part as required by the
terms of the ESF note. The Company is currently in the process of making demand
for payment on the ESF note in accordance with the terms of such note and
applicable law. In addition, the Company's management is exploring its other
options against ESF and the brokerage firm charged with holding the collateral
for the ESF note.
The Company learned, in the last quarter of 1995, that the brokerage firm
that holds the collateral for the ESF note and an affiliate of ESF were named as
defendants in a lawsuit filed by the Florida Department of Insurance in which it
is alleged, among other things, that such brokerage firm issued false account
confirmations. The Company has also learned that such brokerage firm has applied
for withdrawal as a registered broker/dealer in a number of states, including
the state in which such securities were to have been held.
In early 1996, the Company also learned that the United States Securities
and Exchange Commission sought and was granted in late December 1995, a
temporary restraining order against certain affiliates of ESF in the United
States District Court for the District of Colorado that, among other things,
froze investor funds of the defendants and certain of their affiliates, and
required each such party to prevent the disposition, transfer or other disposal
of any of their funds or other assets then held by them, under their control or
over which they exercise investment or other authority.
After learning of the lawsuit, the Company unsuccessfully attempted to gain
reliable confirmations of the existence and the value of the securities that
were to have been held for the Company's benefit in connection with the ESF
note. The Company is uncertain at this time what effect, if any, the failure to
pay the January 1996 installment, the results of the litigation and other
matters described above may have on the ESF note and the related collateral. If
satisfactory alternative collateral arrangements cannot be obtained, the Company
may be required to write off all or a portion of the ESF note. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE
The industries in which the Company participates, particularly the
environmental remediation industry, are highly competitive and subject to rapid
and significant technological change. Others may independently develop
technologies similar or superior to those of the Company, which may result in
the Company's processes or systems becoming less competitive or obsolete.
Competition from other companies, as well as universities, research institutions
and others, may increase as advances in technology are made. Most of the
Company's competitors have substantially
14
<PAGE>
greater financial and marketing resources and capabilities than the Company. In
addition, some competitors due to a broader product line may be able to offer a
more complete solution to a client's problems than the Company will be able to
offer. See "BUSINESS OF THE COMPANY AND NAE."
RELIANCE ON ENVIRONMENTAL REGULATION
Federal, state and local legislation and regulations that require
substantial expenditures to meet minimum environmental quality standards and
that impose penalties for non-compliance are and will continue to be a principal
factor affecting demand for the systems and services being developed or offered
by the Company. In addition, the level of enforcement activities by federal,
state and local environmental protection agencies will also affect demand. To
the extent that the scope or enforcement of such laws and regulations may be
eased, the business of the Company could be materially and adversely affected.
See "BUSINESS OF THE COMPANY AND NAE."
TECHNOLOGY RIGHTS
Although the Company owns or has the right to several patents on its
technologies, the Company intends to rely primarily on confidentiality
agreements to maintain the proprietary nature of its technology. In addition,
the Company may also seek patent protection in certain situations in the future,
but the Company does not believe that patents are critical to the successful
development of commercially viable processes. In general, the application of
the patent laws to the Company's potential products is undergoing a developing
and evolving process and, due to the difficulty and expense of enforcing
patents, the Company may not be able to protect those patents which have been
issued. If the Company is unable to maintain the proprietary nature of its
technologies, the Company's financial condition and results of operations could
be materially and adversely affected. See "BUSINESS OF THE COMPANY AND NAE -
Description of Technologies" and "Patents and Proprietary Rights."
In addition, the Company may seek licenses to other party's technology in
order to develop, manufacture and market certain technologies in the future.
However, the Company may not be able to obtain necessary licenses or such
licenses may not be available on commercially acceptable terms. Even if such
licenses are available, the patents or proprietary rights underlying the
licenses may prove to be invalid or unenforceable.
GOVERNMENTAL REGULATIONS AND APPROVALS
Technologies and products under development by the Company and the
application of such may be subject to regulation by various federal, state and
local agencies either in general or on a project-by-project basis. Such
regulation applies to all stages of field testing and to the manufacture and use
of the Company's technologies and products. Prior to the manufacture, sale and
use of its technologies, the Company may be required to conduct extensive
testing to demonstrate safety and environmental effectiveness. The regulatory
process may be costly and time consuming and may delay or prevent production or
marketing of the Company's technologies. Failure to comply with environmental
or other related laws could result in the Company facing fines or penalties
which could be material in amount or injunctive relief which could materially
and adversely affect the business of the Company. Furthermore, the Company may
encounter objections to the use of its technologies and products by special
interest groups which could deter governmental agencies from granting the
requisite approvals or doing so on a timely basis or otherwise might adversely
effect the Company's ability to field test and market its services and products.
DEPENDENCE ON THIRD PARTIES
The Company, at times, is dependent on third parties for the production of
its processes, equipment and the production of certain enzymes/chemicals used in
its technologies. Although the Company does not anticipate any difficulty in
obtaining any of its supplies from third parties, no assurance can be given that
the Company can continue to obtain such products in the future.
15
<PAGE>
SALES AND MARKETING
Until recently, the management of the Company, has had very limited
experience in sales, marketing and distribution. The Company intends to market
certain products in Canada and the United States as well as other parts of the
world. To do so, the Company must either develop a substantial sales force with
technical expertise, or license distribution rights to third parties with such
expertise. There can be no assurance that the Company will be able to build
such a sales force or find appropriate licensees or that sales and marketing
efforts will be successful. However, the Company has recently added management
personnel with extensive experience in sales and marketing of environmental
services. See "BUSINESS OF THE COMPANY AND NAE" and "MANAGEMENT."
RISKS OF OUTSTANDING LITIGATION
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. See "THE BUSINESS OF THE COMPANY AND NAE - Material
Outstanding Litigation."
CONTROL BY EXISTING STOCKHOLDERS
After the Merger, Gold Spinners International, Inc. ("GSI"), will
beneficially own in the aggregate 2,925,000 shares of the outstanding shares of
Company Common Stock which will represent approximately 11.8% of the issued and
outstanding shares of Company Common Stock. This stockholder will continue to
be able to exert significant influence over the election of the Company's board
of directors and significant corporate actions. See "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE COMPANY AND NAE."
VOLATILITY OF SHARE PRICE - RECENT DECLINE IN MARKET VALUE
The market prices of securities of technology companies, including those of
the Company, have been historically volatile. Future announcements concerning
the Company or its competitors, including the results of testing, technological
innovations or commercial products, government regulations, developments
concerning proprietary rights, litigation and public concern as to the safety of
the Company's products may have a significant impact on the market price of the
shares of the Company Common Stock. In addition, the Company's share price may
be affected by sales by existing stockholders. See "Shares Eligible for Future
Sale." Although it is impossible to predict market influences and prospective
values of securities, it is possible that, in and of itself, the substantial
increase in the number of shares available for sale upon the registration of the
shares of Common Stock under this Prospectus may have a depressive effect upon
the market value of the Company's Common Stock. Because of these factors, the
market price of the Company's Common Stock following the date of this Prospectus
may be highly volatile.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company Common Stock in the public
market could have an adverse effect on the market price of the Company Common
Stock and may make it more difficult for the Company to sell its equity
securities in the future at times and at prices it deems appropriate. As of
December 31, 1995, there were 23,477,285 shares of Company Common Stock
outstanding, and an additional 10,218,916 shares, subject to options or
warrants, which may be eligible for public trading. Furthermore, the Company has
outstanding convertible securities which, based upon the closing bid price of
the Company Common Stock on December 29, 1995, were convertible into an
additional 4,085,000 shares of Company Common Stock. Upon completion of the
distribution of shares covered by this Prospectus, 1,382,071 additional
outstanding shares of Company Common Stock will have been registered under the
Securities Act or will then be eligible for resale under Rule 144 under the
Securities Act or otherwise. Such shares eligible for trading will constitute
approximately 6% of the outstanding shares of Company Common Stock upon
completion of the distribution of shares covered by this Prospectus.
16
<PAGE>
DEPENDENCE ON KEY PERSONNEL
To a material extent, the Company's future success is dependent upon the
continued efforts of its Chief Executive Officer, Mr. Tim B. Tarrillion, and
other executive officers. While the Company currently has employment agreements
with certain executive officers, including Mr. Tarrillion, the loss of their
services would likely have a material adverse effect on the Company's business.
See "MANAGEMENT - Employment Agreements."
DIVIDEND POLICY
To date, the Company has paid no dividends on its shares of Common Stock
and does not intend to pay dividends in the foreseeable future.
17
<PAGE>
VOTING AND THE SPECIAL MEETING
RECORD DATE; REQUIRED VOTE; NO SOLICITATION
Holders of record of shares of NAE Common Stock at the close of business on
February 12, 1996 will be entitled to notice of and to vote at the Special
Meeting and any adjournment or adjournments thereof. At the close of business
on that date, there were approximately 12,140,404 shares of NAE Common Stock
issued and outstanding held by approximately 75 holders of record.
Stockholders of record on the record date are entitled to one vote per
share on any matter that may properly come before the Special Meeting. The
presence, either in person or by proxy, of the holders of a majority of the
outstanding shares of NAE Common Stock is necessary to constitute a quorum at
the Special Meeting. The affirmative vote of the holders of a majority of the
outstanding shares of NAE Common Stock as of the record date is required to
approve and adopt the Merger Agreement and the transactions contemplated
thereby.
The Merger Agreement was adopted and approved by the Boards of Directors of
the Company, DM and NAE as of ___________, 1996. The affirmative vote of the
holders of a majority of the outstanding shares of NAE Common Stock as of the
record date is required to approve the Merger Agreement. The Company and the
Company's wholly-owned subsidiary, DM, own 350,000 and 10,408,333 shares of NAE
Common Stock, respectively, representing an aggregate of approximately eighty-
nine percent (89%) of the issued and outstanding shares of NAE Common Stock.
The Board of Directors of the Company and DM have approved the Merger Agreement
and the Merger. The Company and DM have notified NAE that they intend to vote
their shares of NAE Common Stock in favor of the Merger. Accordingly, in
recognition of the affirmative vote of the Company and DM, collectively the
holders of an aggregate of eighty-nine percent (89%) of the issued and
outstanding shares of NAE Common Stock, the Merger will be approved at the
Special Meeting and NAE is not soliciting proxies and stockholders are requested
not to send proxies to NAE.
Stockholders may, however, attend the Special Meeting to vote their shares
of NAE Common Stock or to exercise their dissenters' rights. Stockholders of
NAE who do not vote in favor of the Merger Agreement and who dissent to the
Merger in compliance with the requirements of Section 262 of the Delaware
General Corporation Law will have, if the Merger is consummated, the right to
appraisal of their shares of NAE Common Stock.
WE ARE NOT SOLICITING PROXIES AND YOU ARE REQUESTED NOT TO SEND US A PROXY
DISSENTERS' RIGHTS
Stockholders have the right to seek a determination of the "fair value" of
their shares (exclusive of any element of value arising from the accomplishment
or expectation of the Merger) if they (i) deliver a written demand for appraisal
of their shares to NAE prior to the Effective Date of the Merger, (ii) do not
vote their shares in favor of the Merger, and (iii) otherwise comply with the
provisions of Section 262 of the Delaware General Corporation Law ("GCL")
regarding appraisal rights.
The following is a brief summary of Section 262 which sets forth the
procedures for dissenting from the Merger and demanding statutory appraisal
rights. This summary is qualified in its entirety by reference to Section 262,
the text of which is attached hereto as Exhibit B.
Stockholders of record who desire to exercise their appraisal rights must
satisfy all of the conditions contained in Section 262. A written demand for
appraisal must be delivered to NAE before the taking of the vote on the Merger
Agreement. This written demand for appraisal must be in addition to and
separate from any proxy or vote abstaining from or against the Merger. Neither
voting against, nor abstaining from voting nor failing to vote on the Merger
will constitute a demand for appraisal within the meaning of Section 262.
Stockholders electing to exercise their appraisal rights under Section 262 must
not vote for approval and adoption of the Merger Agreement.
18
<PAGE>
A demand for appraisal must be executed by or for the stockholder of
record, fully and correctly, as such stockholder's name appears on his or her
NAE Common Stock certificates. If the shares of NAE Common Stock are owned of
record in a fiduciary capacity, such as by a trustee, guardian, or custodian,
such demand must be executed by the fiduciary. If the shares of NAE Common
Stock are owned of record by more than one person, as in a joint tenancy or
tenancy in common, such demand must be executed by all joint owners. An
authorized agent, including an agent for two or more joint owners, may execute
the demand for appraisal for a stockholder of record; however, the agent must
identify the record owner and expressly disclose the fact that in exercising the
demand, he or she is acting as agent for the record owner.
A record owner, such as a broker, who holds shares of NAE Common Stock as a
nominee for others may exercise his or her right of appraisal with respect to
the shares held for all or less than all the beneficial owners of shares as to
which he or she is the record owner. In such case, the written demand must set
forth the number of shares covered by such demand. Where the number of shares
is not expressly stated, the demand will be presumed to cover all shares of NAE
Common Stock outstanding in the same name of such record owner.
Stockholders who elect to exercise appraisal rights should mail or deliver
their written demands to the Secretary of the Company at 9818 Wilcrest Drive,
Houston, Texas 77099. The written demand for appraisal should specify the
stockholder's name and mailing address, the number of shares owned, and that the
stockholder is thereby demanding appraisal of his or her shares. It is the
responsibility of each stockholder electing appraisal rights to ensure that the
written demand is received by NAE before the taking of the vote at the Special
Meeting. Within ten days after the Effective Date of the Merger, NAE must
provide notice of the Effective Date of the Merger to all stockholders who have
complied with Section 262 and have not voted for adoption of the Merger
Agreement.
Within 120 days after the Effective Date of the Merger, any stockholder who
has complied with the required conditions of Section 262 may file a petition in
the Delaware Court demanding a determination of the fair value of the shares of
the dissenting stockholders. If a petition for appraisal is timely filed, after
a hearing on such petition, the Delaware Court will determine which stockholders
are entitled to appraisal rights and will appraise the shares owned by such
stockholders, determining the fair value of such shares, exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest to be paid, if any, upon the amount
determined to be the fair value. In determining fair value, the Court is to
take into account all relevant factors. In Weinberger v. UOP, Inc. et al.,
decided February 1, 1983, the Delaware Supreme Court expanded the considerations
that could be considered in determining fair value in an appraisal proceeding,
stating that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered, and that "fair price obviously requires
consideration of all relevant factors involving the value of a company...."
Accordingly, the Delaware Supreme Court has stated that in making this
determination of fair value the court must consider market value, asset value,
dividends, earnings prospects, the nature of the enterprise and any other facts
which would be ascertained as of the date of the merger which throw any light on
future prospects of the merged corporation. Section 262 provides that fair
value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger." In Weinberger, the Delaware
Supreme Court held that "elements of future value, including the nature of the
enterprise, which are known or susceptible of proof as of the date of the merger
and not the product of speculation, may be considered."
Stockholders considering seeking appraisal should keep in mind that the
fair value of their shares determined under Section 262 could be more, the same
or less than the Merger Consideration they are entitled to receive pursuant to
the Merger Agreement. The cost of the appraisal proceeding may be determined by
the Delaware Court and taxed against the parties as the Delaware Court deems
equitable in the circumstances. Upon application of a dissenting stockholder,
the Court may order that all or a portion of the expenses incurred by any
dissenting stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts, be charged pro rata against the value of all shares entitled to
appraisal. In the absence of such a determination or assessment, each party
bears its own expenses.
Any stockholder who has duly demanded appraisal in compliance with Section
262 will not, after the Effective Date, be entitled to vote for any purpose the
shares subject to such demand or to receive payment of dividends or
19
<PAGE>
other distributions on such shares, except for dividends or distributions
payable to stockholders of record at a date prior to the Effective Date.
At any time within 60 days after the Effective Date, any former holder of
shares of NAE Common Stock shall have the right to withdraw his or her demand
for appraisal and to accept the terms offered in the Merger; after this period
such holder may withdraw his or her demand for appraisal only with the consent
of NAE. If no petition for appraisal is filed with the Delaware Court within
120 days after the Effective Date, stockholders' rights to appraisal shall cease
and all stockholders shall be entitled to receive the Merger Consideration as
provided for in the Merger Agreement. Inasmuch as NAE (or DM) has no obligation
to file such a petition, and has no present intention to do so, any stockholder
who desires such a petition to be filed is advised to file it on a timely basis.
However, no petition timely filed in the Delaware Court demanding appraisal
shall be dismissed as to any stockholder without the approval of the Delaware
Court, and such approval may be conditioned upon such terms as the Delaware
Court deems just.
The provisions of Section 262 are technical in nature and complex.
Stockholders desiring to exercise appraisal rights and to obtain appraisal of
the fair value of their shares should consult counsel, since the failure to
comply strictly with the provisions of Section 262 may defeat their appraisal
rights.
THE MERGER
TERMS OF THE MERGER
Set forth below is a brief description of the material provisions of the
Merger Agreement and the Merger. This description does not purport to be
complete and is qualified in its entirety by reference to the Merger Agreement.
The full text of the Merger Agreement is attached as Exhibit A to this
Information Statement and Prospectus and is incorporated herein by reference.
The Merger Agreement provides that NAE will be merged with and into DM, a
wholly-owned subsidiary of the Company. In conjunction with the Merger, DM will
change its name to "North American Environmental Group, Inc." Pursuant to the
Merger, on the Effective Date, each outstanding share of NAE Common Stock (other
than shares with respect to which dissenters' rights are perfected in accordance
with Delaware law and shares held directly or indirectly by the Company and DM
or held in NAE's treasury, which shall be cancelled) will be converted into one
share of Company Common Stock. DM will be the surviving corporation after the
Merger and remain a wholly-owned subsidiary of the Company.
REASONS FOR THE MERGER
The Board of Directors of NAE believes that the Merger is in the best
interest of NAE and its stockholders and it recommends that the NAE stockholders
vote for the approval of the Merger Agreement and the transactions contemplated
thereby. The primary reasons for the Merger are to eliminate the complexity
presented by having multiple corporations with varying degrees of overlapping
minority ownership as well as to decrease the overall costs of regulatory
compliance necessitated were NAE to remain as a publicly-traded company. Since
there is no material trading market in the shares of NAE Common Stock, the Board
of Directors of NAE believes that the Merger is advantageous to NAE stockholders
primarily because of the valuation being accorded to NAE Common Stock in the
Merger and the possible greater market liquidity of the Company Common Stock,
although there can be no assurances that such liquidity will continue.
At the time of the initial acquisition by the Company of its interest in
NAE, the former Board of Directors, consisting of John Parrott, a current
director of NAE, and James E. Impero and Thom E. Robinson, established the
Merger Consideration based upon their assessment of NAE's assets and earnings
prospects at the time. The current Board of Directors of NAE consists of John
Parrott, who is a former director and executive officer of the Company, Tim
Tarrillion, President and CEO of the Company, and Donovan Boyd, COO of the
Company. On January __, 1996 the Boards of Directors of the Company and NAE
reconsidered the value of NAE's assets and its earnings potential and the
relative market values of NAE and Company Common Stock. Based upon subsequent
history, the Boards
20
<PAGE>
concluded that the Merger Consideration as originally established continued to
be fair to the NAE stockholders. However, the Merger Consideration was not
determined by arms-length negotiation and there was no formal valuation of the
Company and NAE, either by the Company or NAE or an independent third party.
Neither the Company nor NAE have obtained a fairness opinion by an investment
banking firm or other qualified appraiser.
EXCHANGE OF CERTIFICATES
After the Effective Date, each outstanding certificate, which prior to the
Merger represented shares of NAE Common Stock, will be deemed to evidence the
right to receive that number of shares of Company Common Stock. A holder of NAE
Common Stock will not be able to receive dividends or other distributions on
Company Common Stock or to vote those shares until the holder exchanges the
holder's NAE Common Stock certificate for a Company Common Stock certificate.
When that exchange occurs, the Company will pay to the holder all dividends and
other distributions (without interest) which were payable prior to the exchange
with respect to the shares of Company Common Stock delivered to the holder as a
result of the exchange.
If any Company Common Stock certificate is to be issued in a name other
than that of the registered owner, the person requesting the issuance must pay
all applicable transfer and other taxes before the Company will be obligated to
issue the certificate, unless that person establishes to the satisfaction of the
Company or its agent that the taxes have been paid. The Company and NAE will
not be liable to any NAE stockholder for any Company Common Stock certificate,
cash or related property delivered to any government official under any
applicable abandoned property or similar law.
After the Effective Date, the Company's transfer agent will send
transmittal forms to NAE stockholders for their use in forwarding NAE
certificates to the transfer agent. Shares should not be surrendered for
exchange prior to receipt of the transmittal forms after completion of the
Merger.
EFFECTIVE DATE AND TERMINATION
Once the Merger is approved by NAE's stockholders, the Merger will become
effective as soon as NAE and the Company files the Merger Agreement with the
Secretary of State of the State of Delaware in accordance with the Delaware
General Corporation Law (the "Effective Date"). The Merger Agreement provides
that the Company and NAE will make this filing on the first business day after
all of the conditions to completion of the Merger are satisfied or waived.
EXPENSES
The Company has agreed to bear the expenses related to the Merger.
RESALE OF COMPANY COMMON STOCK
All shares of Company Common Stock received by NAE stockholders in the
Merger will be freely transferable, except those shares of Company Common Stock
received by NAE stockholders who are deemed to be "affiliates" of NAE prior to
the Merger may be resold by them only in transactions permitted by the resale
provisions of SEC Rule 145 (or SEC Rule 144 in the case of such persons who
become affiliates of the Company) or as otherwise permitted under the Securities
Act.
INTEREST OF CERTAIN PERSONS IN MERGER
Mr. Parrott is a director and officer of NAE. In addition, Mr. Parrott is
a director and an owner of approximately 25% of the outstanding voting stock of
GSI. GSI beneficially owns 12.5% of the issued outstanding shares of Company
Common Stock.
21
<PAGE>
As noted above, the Company and DM collectively own an aggregate of
10,758,333 shares of NAE Common Stock, representing approximately eighty-nine
percent (89%) of the outstanding shares of NAE Common Stock.
FEDERAL INCOME TAX CONSEQUENCES
The Company has requested and received an opinion of its counsel, Clark,
Ladner, Fortenbaugh & Young ("Counsel"), as to federal tax consequences of the
Merger to the Company and the NAE Stockholders. Such opinion is attached hereto
as Exhibit C.
The following is a discussion of certain material federal income tax
consequences under the Internal Revenue Code of 1986 (the "Code") to holders of
NAE Common Stock who receive Company Common Stock as a result of the Merger.
The discussion is based upon present federal tax law. All NAE stockholders
should consult their own tax advisors regarding the federal income tax
consequences of the Merger and the holding and disposing of the Company Common
Stock received in the Merger. Tax advisors should also be consulted with regard
to the tax consequences of the Merger arising under the laws of any state or
other jurisdiction.
The Internal Revenue Service in Rev. Proc. 77-85 has stated it will not
issue rulings on whether a merger qualifies as a tax free acquisition and,
consequently, the Company is not seeking and will not receive such an opinion.
The Company has been advised by Counsel that based upon certain assumptions
and subject to certain qualifications, the Merger, if carried out in the manner
set forth in the Merger Agreement and based on certain assumptions and
qualifications, will constitute a reorganization as defined in Sections
368(a)(1)(A) and 368(a)(2)(D) of the Code. Accordingly, among other things the
following federal income tax consequences will result:
(a) No gain or loss will be recognized by NAE.
(b) No gain or loss will be recognized by the holders of NAE Common
Stock with respect to the receipt of Company Common Stock pursuant to the
Merger.
(c) The aggregate tax basis of the Company Common Stock received by
each stockholder of NAE in the Merger will be the same as the aggregate tax
basis of NAE Common Stock surrendered in exchange therefor.
(d) The holding period of the Company Common Stock received by each
stockholder of NAE will include the period for which the NAE Common Stock
surrendered in exchange therefor was considered to be held, provided the Company
Common Stock so surrendered was held as a capital asset at the time of the
Merger.
Under Section 382 of the Code, the Company's ability following the Merger
to utilize existing net operating loss carryforwards of NAE and certain other
tax attributes to reduce its tax liability may be limited. See "Note 16 to the
Company's Consolidated Financial Statement for the fiscal year ended December
31, 1994."
THE DISCUSSION SET FORTH ABOVE DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN
TAX ASPECTS OF THE MERGER, WHICH LOCAL AND STATE LAWS MAY IMPOSE A TAX ON THE
MERGER TO AN NAE STOCKHOLDER. THE DISCUSSION IS BASED ON CURRENTLY EXISTING
PROVISIONS OF THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER
AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING
ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY
OF THIS DISCUSSION. EACH NAE STOCKHOLDER SHOULD CONSULT HIS OR HER OWN TAX
ADVISOR WITH RESPECT TO SPECIFIC TAX CONSEQUENCES OF THE MERGER TO HIM OR HER,
INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN TAX
LAWS.
PROFORMA EFFECTS OF THE MERGER
The acquisition of the minority interest of NAE will be accounted for using
the purchase method of accounting. The consideration given of 1,382,071 shares
of Company Common Stock will be valued using information relating to
22
<PAGE>
the market price of the Company's Common Stock, the volatility of the market
price, and the liquidity of a large block of shares. Given effect to the
preceding, and considering the range of the Company's Common Stock price over
the last three months, the purchase price could be as high as $900,000, which
would be assigned to goodwill. The Company will amortize the goodwill over a
three year period. On an unaudited pro forma basis, after giving effect to the
amortization, the Company's net loss would have been $(5,236,330) and
$(3,265,466) for the year ended December 31, 1994 and for the nine months ended
September 30, 1995, respectively; loss per share would have been $(.34) and
$(.17), respectively.
23
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Company Common
Stock, $.001 par value, of which 23,477,285 are outstanding as of December 31,
1995.
Holders of Company Common Stock have equal rights to receive dividends
when, as and if declared by the Board of Directors, out of funds legally
available therefor. Holders of Common Stock have one vote for each share held
of record and do not have cumulative voting rights.
Holders of Company Common Stock are entitled upon liquidation of the
Company to share ratably in the net assets available for distribution, subject
to the rights, if any, of holders of any Preferred Stock then outstanding.
Shares of Common Stock are not redeemable and have no preemptive or similar
rights. All outstanding shares of Company Common Stock are, and the shares of
Company Common Stock to be issued in the Merger will, upon issuance, be fully
paid and non-assessable.
In addition to the shares of Common Stock presently outstanding, the
Company has reserved a total of 10,218,916 shares of Common Stock issuable upon
the exercise of outstanding stock options and common stock purchase warrants.
Furthermore, the Company has outstanding convertible securities which, based
upon the closing bid price of the Company Common Stock on December 29, 1995,
were convertible into 4,085,000 shares of Company Common Stock.
SHARES OF COMMON STOCK SUBJECT TO ESCROW
GSI owns of record 2,925,000 shares of the Company's Common Stock, which
were acquired in connection with the acquisition of NAT by the Company on or
about June 30, 1992. Of these shares of Company Common Stock owned by GSI,
1,625,000 shares are contingent escrow shares ("Class II Escrow Shares"). For
financial statement purposes, 1,625,000 shares of the Company's Common Stock
which were subject to escrow ("Class I Escrow Shares") were deemed surrendered
as of December 31, 1994.
The Class II Escrow Shares shall be released to the owner thereof if, and
only if, the Company shall have, during any of the fiscal years ending December
31, 1992, December 31, 1993, December 31, 1994 or December 31, 1995, annual
after-tax earnings (determined in accordance with GAAP) of at least $12,500,000,
or if the Company shall be acquired prior to December 31, 1996 (whether by
merger, share exchange involving more than 80% of its outstanding securities, or
a sale of all or substantially all of its assets) for a purchase price exceeding
$250,000,000.
DIVIDEND POLICY
The Company has not paid any cash dividends and does not anticipate paying
cash dividends on Company Common Stock in the foreseeable future.
PREFERRED STOCK
General. Within the limitations and restrictions contained in the
Certificate of Incorporation, the Board of Directors has authority, without
further action by the stockholders, to issue up to 10,000,000 shares of
Preferred Stock, $.001 par value, in one or more series. As of December 31,
1995, 30 shares of Series D Convertible Preferred Stock were outstanding.
Under Delaware law and under the terms of the amended Certificate of
Incorporation, the Company's Preferred Stock may be issued in series established
from time to time by the Board of Directors. In this connection, the Board of
Directors has broad discretion to set the terms of the Preferred Stock, and, if
it decided to, may fix for each series, without further stockholder approval,
(1) the rate of the dividend, (2) the price at which and the terms and
conditions on which shares may be redeemed, (3) the amount payable upon shares
in the event of voluntary or involuntary liquidation, (4) sinking fund
provisions, if any, for the redemption by the Company or purchase of shares, (5)
the terms
24
<PAGE>
and conditions on which shares may be converted, if the shares of any series are
issued with the privilege of conversion, and (6) voting rights, if any.
The Board of Directors may fix the number of votes to which each share of
Preferred Stock is entitled, or deny voting rights to the shares of any series,
except to the extent voting rights are expressly granted by applicable law.
Depending upon the terms or voting rights granted to any series of Preferred
Stock, issuance thereof could result in a reduction in the voting power of the
holders of Company Common Stock or other Preferred Stock.
It is not possible to state the actual effect of the Preferred Stock or
other classes of stock upon the rights of holders of Company Common Stock until
the Board determines the respective rights of the holders of one or more series
of the Preferred Stock. However, such effects might include without limitation:
(a) restrictions on dividends on Company Common Stock if Preferred Stock is
issued with a preferential (and possibly cumulative) dividend right and
dividends on the Preferred Stock are in arrears; (b) substantial dilution of the
voting power of the Company Common Stock to the extent that the Preferred Stock
has voting rights or to the extent that any Preferred Stock is given conversion
rights into Company Common Stock; and (c) the holders of Company Common Stock
not being entitled to share in the Company's assets upon liquidation or
dissolution until satisfaction of any liquidation preference granted to the
Preferred Stock, which the Board can set at its discretion. The Board could
also authorize holders of the Preferred Stock to vote, either separately as a
class or with the holders of Company Common Stock, on any merger, sale or
exchange of assets by the Company or other extraordinary corporate transaction.
Shares of Preferred Stock could also be privately placed with purchasers who
might ally themselves with the Board in opposing a hostile takeover bid,
diluting the stock ownership or voting power of persons seeking to obtain
control of the Company.
In addition, the Company may be affected to the extent that Preferred Stock
is issued which is, by its terms, redeemable, either at the option of the
Company or the holder of Preferred Stock, in accordance with such terms and
conditions as may be designated by the Board of Directors in creating such
series. The amount payable by the Company upon redemption of the Preferred
Stock will be the redemption price fixed for the shares of each series by the
Board of Directors and may also include payment of all accumulated and unpaid
dividends. There are many other potential effects not mentioned here.
Shares of Preferred Stock could be used to impede a takeover attempt since
new shares could be issued to dilute the stock ownership of a person attempting
to acquire control of the Company. Any provision which discourages the
acquisition of Company stock by a person seeking control could be beneficial to
the stockholders generally to the extent that it (i) provides for greater
stability and continuity of management, (ii) protects stockholders against
unfair or inequitable mergers or tender offers, and (iii) helps discourage or
prevent a takeover by an acquirer seeking to obtain control in order to break up
and auction off the Company's component parts or otherwise act in nonbeneficial
ways with respect to the Company or its assets. However, such provisions could
also have the effect of discouraging, making costlier or more difficult, or
preventing a merger or a tender offer which would be beneficial to the Company's
stockholders. Moreover, the issuance of Preferred Stock may have the effect of
assisting the Company's management in retaining its position, even if removal
would be beneficial to the stockholders generally. Consequently, management
would be in a better position to resist changes that might benefit stockholders
generally, but that might be disadvantageous to management.
Series D Convertible Preferred Stock.
On December 27, 1995, the Board of Directors of the Company designated
30 shares of its preferred stock as Series D Convertible Preferred Stock, of
which all are outstanding on the date of this Prospectus. Each share of Series
D Convertible Preferred Stock is entitled to receive cumulative quarterly
dividends at the annual rate of $3,750 per share. The Series D Convertible
Preferred Stock is required to be redeemed on December 31, 1996 at a redemption
price per share of $25,000 plus all accrued and unpaid dividends thereon to the
date of redemption unless prior thereto such shares have been converted. The
Series D Convertible Preferred Stock is convertible, at the option of the
holder, at various times after March 11, 1996 at a conversion rate equal to the
lesser of (i) 72.5% of the market price of a share of Company Common Stock
during the five trading days immediately preceding the conversion date or (ii)
$0.875. In the event of liquidation of the Company, the Series D Convertible
Preferred Stock is entitled prior to any payment with respect to the Company
Common Stock to payment of $25,000 per share plus accrued dividends
25
<PAGE>
thereon. Except as otherwise required by law, the holders of the Series D
Convertible Preferred Stock do not have any voting right.
TRANSFER AGENT
Continental Stock Transfer and Trust Company, New York, New York serves as
transfer agent for the Company Common Stock.
DELAWARE ANTI-TAKEOVER LAW
The Company is be governed by the provisions of Section 203 of the General
Corporation Law of the State of Delaware. In general, the law prohibits a
public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business Combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock.
26
<PAGE>
MARKET PRICE OF AND DIVIDENDS
ON THE NAE AND COMPANY COMMON STOCK
The Company Common Stock is currently traded on The NASDAQ SmallCap
Market/SM/ under the symbol "NATK." The NAE Common Stock has traded on the
over-the-counter market under the symbol "NAME." The following table sets
forth, for the periods indicated, the range of high and low bid prices of the
Common Stock of the Company and NAE as reported by the National Quotation
Bureau. These quotations represent prices between dealers and do not include
retail markups, markdowns or commissions and do not necessarily represent actual
transactions. The number of record holders of the Company's Common Stock as of
December 31, 1995 was approximately 2,400. The number of record holders of the
NAE Common Stock as of December 31, 1995 was approximately 75.
<TABLE>
<CAPTION>
Company NAE
Common Stock Common Stock
--------------------- -------------------
High Bid Low Bid High Bid Low Bid
------------ ------- --------- --------
<S> <C> <C> <C> <C>
1993
- ----
First Quarter $11.38 $ 9.75 (*) (*)
Second Quarter 11.75 8.50 $7.00 $2.00
Third Quarter 11.13 7.00 5.00 .50
Fourth Quarter 7.63 3.13 1.00 .25
1994
- ----
First Quarter $ 5.25 $ 3.00 (*) (*)
Second Quarter 4.25 2.50 $1.00 $ .125
Third Quarter 3.25 1.25 1.50 1.50
Fourth Quarter 2.75 1.25 1.25 .0625
1995
- ----
First Quarter $3.125 $1.625 $2.00 $ .0625
Second Quarter 1.94 .94 1.25 .75
Third Quarter 1.50 .813 .25 .125
Fourth Quarter 1.03 .46 .25 .01
</TABLE>
(*) No Trading Activity.
__________________________
The Company has not paid any cash dividends and does not anticipate doing
so in the near future. NAE has not paid any cash dividends since its inception.
27
<PAGE>
BUSINESS OF THE COMPANY AND NAE
GENERAL-BACKGROUND
Prior to the recent acquisitions of EET, IPF and GAIA Technologies, Inc.,
North American Technologies Group, Inc. ("NATK" or the "Company") had been a
development-stage company engaged in the development, acquisition and
application of technologies which management believes may have applications in
various industries including environmental services. As a result of those
acquisitions and previous development work, the Company now owns or has the
right to several technologies that include a patented chemical decontamination
process, enzyme and chemical solutions, mechanical soil washing systems,
bioremedial technologies, a patented oleofilter, and manufacturing processes for
transition fittings and rubber/plastic products. Applications of these
technologies could include environmental services (including the cleanup of
contaminated soils and waters), decontamination of buildings and equipment,
treatment of oil field drilling production waste, the upgrading of crude oils,
and the manufacturing of porous pipe, synthetic construction materials and
transition fittings for plastic pipe. Unless the context requires otherwise, the
term "Company" refers to North American Technologies Group, Inc. and its
subsidiaries and affiliates. The Company was organized as of December 24, 1986
under the laws of the State of Delaware.
Prior to June 30, 1992, the Company's principal business was operated under
the name "Mail Boxes Coast-to-Coast, Inc." as an exclusive area franchisee in
Los Angeles County, California for Mail Boxes Etc. U.S.A., Inc. ("MBE"), a
franchisor of postal business, packaging and communication service centers. As
an MBE area franchisee, the Company sold franchises for MBE service centers on
behalf of MBE and provided subsequent operational assistance to the individual
MBE service center franchisees.
In an effort to maximize stockholder values in recognition of the depressed
market price of the Company's outstanding publicly traded securities, during the
first quarter of 1992, management elected to restructure the operations of the
Company. Such a restructuring was concluded by management to include a
divestiture of the Company's existing business and the identification of
potential business combinations intended to develop a new line of business for
the Company.
Restructuring of the Company commenced during the second quarter of 1992,
when, effective as of April 1, 1992, the Company sold substantially all of the
assets related to the MBE area franchise to certain individuals consisting of
the former principal stockholders, directors and officers for approximately
$1,550,000.
In further conjunction with this restructuring, the Company acquired on
June 30, 1992 controlling share interests in two publicly-held affiliated
companies, North American Technologies, Inc., a Canadian corporation ("NAT"),
and North American Environmental Group, Inc., a Delaware corporation ("NAE").
NAT and NAE were each involved in the development and marketing of environmental
remediation technologies. NAT and NAE were acquired in stock for stock
transactions characterized for financial reporting purposes as a "reverse
acquisition" pursuant to which the historic stockholders of NAT and NAE acquired
a controlling interest in the Company and subsequently renamed the Company
"North American Technologies Group, Inc."
Acquisition of the remaining minority interest of NAT was completed during
November 1993 pursuant to a Plan of Arrangement pursuant to which the Company
issued approximately 5.5 million shares of Company Common Stock on the basis of
one share of NATK for each two shares of NAT). Through the merger transaction
covered by this Prospectus the Company intends to further consolidate its
holdings through a proposed acquisition of the remaining 11% minority interest
of NAE for 1,382,071 shares of newly issued Company Common Stock.
The business of the Company was expanded during the first quarter of 1995
with the Company's acquisition by merger of EET. The Company issued 1,770,729
shares of Company Common Stock and 71,000 common stock purchase warrants (to
replace EET's outstanding stock purchase warrants) in connection with the
merger. EET was formed in 1993 when it completed the purchase of certain
patents and proprietary environmental decontamination technologies and processes
from EnClean, Inc., a Texas-based public company. Prior to its acquisition by
the Company, EET was owned by approximately forty shareholders, including Tim
Tarrillion, the current CEO and President of the Company and Judith Knight
Shields, the current Senior Vice President, CFO and Treasurer of the Company.
EET and the Company were not affiliated prior to the acquisition of EET.
According to its most recent audited financial
28
<PAGE>
statements, EET incurred a loss of $880,822 on revenues of $1,426,748 for the
year ended December 31, 1994. The acquisition of EET has been accounted for as
a "pooling of interests." Accordingly, the Company's consolidated financial
statements have been restated to include the accounts of EET from its inception,
August 23, 1993. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
Mr. Tim Tarrillion, the Chief Executive Officer and principal stockholder
of EET, had prior to 1993 served as the President of EnClean, Inc. Mr.
Tarrillion became Chief Executive Officer of the Company effective upon
completion of the merger with EET on March 7, 1995. See "MANAGEMENT OF THE
COMPANY AND NAE."
Further expansion of its business has also been accomplished by the
Company's acquisition of IPF and GAIA Technologies, Inc. In June 1995, the
Company acquired by merger IPF, a Houston, Texas, based manufacturer and
distributor of proprietary and standard thermoplastic fittings for the mining,
environmental and water works industries owned by David Daniels, a director and
officer of the Company and two other unrelated individuals. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS." The Company issued 1,300,000 of
Company Common Stock in connection with the merger. IPF has been in business
since 1994 and according to internally generated financial statements provided
to the Company for due diligence review, had revenues in 1994 of approximately
$500,000. The acquisition of IPF has been accounted for as a "pooling of
interests." Accordingly, the Company's consolidated financial statements have
been restated to include the accounts of IPF from its inception, January 1,
1994. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
Effective as of December 29, 1995, the Company acquired substantially all
of the assets of GAIA Technologies, Inc. ("GAIA"), a manufacturer of porous
pipe, synthetic construction materials and other products using recycled rubber
and plastics. See "Acquisition of Certain Assets of GAIA Holdings, Inc." The
acquisition of GAIA will be accounted for under the purchase method of
accounting with the results of operations of GAIA to be included in the
consolidated results of operations of the Company from the effective date of the
acquisition (December 29, 1995).
Description of Technologies
Through its subsidiaries and affiliates, the Company has developed,
licensed, or acquired, a number of technologies that may have broad application
in the environmental industry and in the treatment and processing of heavy or
sulfurous crude oils.
Certain of these technologies have been fully developed from an operational
perspective, while others remain in the development stage. With the exception
of the TechXtract/TM/ Process obtained in the recent merger with EET and the
Oleofilter/TM/ technology and the thermoplastic fittings sold by IPF, none of
the Company's technologies have been subject to any material commercial
application.
The following chart provides a list of the Company's technologies, together
with their respective operational functions and status of development.
29
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================
PRODUCTS, BUSINESSES TECHNOLOGIES FUNCTION STAGE OF DEVELOPMENT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Extraction of radionuclides, PCB's, Technology is patented, commercial
EET's TechXtract /TM/ Process heavy metals and other contaminants projects are on-going, and market
development in progress.
- --------------------------------------------------------------------------------------------------------------------
EET's Waste Management Group Specialized waste management and Commercial projects are ongoing in
remediation services Central Texas market
- --------------------------------------------------------------------------------------------------------------------
Bio Treat/TM/ System Biological remediation of oil- Technology is developed, but some
contaminated soils enhancements are still required,
additional demonstration projects in
short term.
- --------------------------------------------------------------------------------------------------------------------
Terrazyme/TM/ System Mechanical separation of oil and Technology is developed, but some
sludge from oil-contaminated soils. enhancements are still required. First
commercial project is underway.
- --------------------------------------------------------------------------------------------------------------------
Oleofilter/TM/ System Mechanical separation of oil from Technology is patented and
contaminated waters. developed, market development is
beginning and commercial projects
are expected soon.
- --------------------------------------------------------------------------------------------------------------------
BioCat/TM/ Hydrocarbon Process Treatment and processing of crude Laboratory verification and testing are
oils in progress.
- --------------------------------------------------------------------------------------------------------------------
Industrial Pipe Fittings Manufacture and distribute Products are being manufactured and
transition pipe fittings. sold.
- --------------------------------------------------------------------------------------------------------------------
GAIA Technologies, Inc. Manufacture and distribute Products are being manufactured and
industrial products made from sold.
recycled rubber and plastics.
====================================================================================================================
</TABLE>
TechXtract/TM/ Process
During March 1995, the Company acquired a decontamination process known as
TechXtract/TM/ in connection with its acquisition of EET. TechXtract/TM/ is a
patented technology that permits the extraction of subsurface contaminants
without destroying the surface or substrate. Management believes that this
technology is unique in its ability to remediate contaminated porous surfaces
where surface cleaning is ineffective or insufficient, and physical
(destructive) processes are unacceptable or uneconomical.
The TechXtract/TM/ technology can be used to remove a wide variety of
contaminants from porous surfaces and substrates. This is made possible through
tailoring of the chemistry and process for individual contaminant(s) and other
project-specific factors. Although the technology has focused on those
contaminants which are particularly difficult to remove and which have extremely
low acceptable levels for clean-up, the Company believes that modifications can
be made in the technology to treat other types of contaminants.
The technology has been utilized in removing all types of Polychlorinated
Biphenyls ("PCBs") from an array of substrates. The United States Environmental
Protection Agency ("EPA") has established a clean-up standard in respect of
PCB's of 10 mg/100 cm/2/. EET has submitted the TechXtract technology to
independent laboratory listing which has verified that the contaminant
extraction process succeeds in achieving levels of extraction that meet the
EPA's clean-up standard.
The technology has also demonstrated its ability to extract radioactive
contaminants for the Department of Energy and several other customers. EET has
either demonstrated or developed chemistry and applications for the deradiation
of concrete floors and walls, metal working equipment, tools, lead
bricks/shielding, clothing, internal piping, evaporation basins, and holding
tanks. Deradiation has been effective on both surface and fixed contaminants,
as verified by surface smears and by alpha, beta/gamma, and x-ray detectors.
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Heavy metal contamination is prevalent throughout industry and is
particularly problematic due to the low levels of contamination which are
required to avoid classification as "hazardous." The TechXtract/TM/ heavy metal
extraction formulas and process have been developed to deal with the most
challenging constituents, including lead, arsenic, and mercury.
In addition to the other categories of contaminants, EET has successfully
modified its technology to address the other hazardous constituents on the EPA's
list. As with the other contaminants, the process is most applicable when
reduction to below regulatory levels will result in substantial economic
benefits to the customer due to opportunities for "delisting" or nonhazardous
disposal.
EET's patent application for the TechXtract/TM/ Process has recently
received approval from the United States Patent and Trademark Office. In
addition, EET is seeking patent protection for several chemical formulations
associated with the TechXtract/TM/ process. See "Patents and Proprietary
Rights." EET has developed certain base blends which are effective for a wide
range of contaminants, but can make special formula modifications if required.
When TechXtract/TM/ is used, liability is reduced for the customer in two
ways. First, the low volume of waste produced in itself decreases liability.
Second, if the customer's other remediation option is total disposal, then
incineration of solids is not an alternative. With incineration of the waste
liquids from the TechXtract/TM/ Process, hydrocarbon based contaminants are
completely destroyed and the generator receives a "certificate of destruction"
from the licensed incinerator. Furthermore, once the contaminants are removed
from the facility or piece of equipment, they may be able to be delisted as a
hazardous waste and therefore, only the site may be able to be given a clean
closure status by the EPA or appropriate state regulatory agency. The
TechXtract/TM/ process has been used with approval of or has been used as
evidence given to several EPA regions to meet PCB cleanup standards. The
TechXtract/TM/ process was recently included in the remediation plan relating to
a consent decree to cleanup PCBs from a series of gas compressor stations owned
and operated a major U.S. gas transmission company.
Management believes the TechXtract/TM/ Process compares favorably to
competing processes. The chemicals used in some surface cleaning processes are
inherently hazardous, tend to require much higher volumes, and are ineffective
on subsurface contamination. Scarification and other physical processes produce
large volumes of waste (particularly if there is significant subsurface
contamination), create airborne hazards, and therefore, only move the problem to
another location.
The TechXtract/TM/ Process has been employed in a number of commercial
projects. Prior to its acquisition by the Company, the TechXtract/TM/ Process
had been used in over 200 successful projects. Using this technology, EET has
generated aggregate revenues of approximately $1,000,000. The projects range
from the removal of PCB contamination from concrete floors and walls of a major
steel company in the Midwest, to the deradiation of fixed radionuclides at the
DOE Nuclear Production and Research Facility in Oak Ridge, Tennessee. In
addition, the TechXtract/TM/ process has been selected for a test demonstration
by the EPA as part of the EPA's Superfund Innovative Technology Evaluation
(Site) Program.
Oleofilter/TM/ System
The Oleofilter/TM/ System is a patented system developed by Exxon Research
and Engineering Corp. ("Exxon") in conjunction with SEREP a French engineering
company. Recently the Company and Exxon executed a licensing agreement whereby
the Company has full future rights to the Oleofilter/TM/ System in exchange for
a one-time licensing fee paid to Exxon. Prior to this license arrangement, the
Company's rights to the Oleofilters/TM/ were derived from a sublicense between
the Company and an affiliate of a former director and officer. In addition, the
Company has negotiated an agreement with SEREP to provide the Company with
drawings, filter material and other commercial and technical know-how which
should assist the Company to manufacture and market the Oleofilter/TM/ System.
The Oleofilter/TM/ System is a patented oil/water separation system based
on combining an amine-coated ceramic chip technology with a gravimetric
separator design that permits both separation of mechanical oil/water emulsions
and provides reduction and recovery of dissolved hydrocarbons. The
Oleofilter/TM/ System has various applications, including the treatment of
contaminated ground water, bilge and ballast waters, water produced from off-
shore drilling platforms and other oil/water mixtures. The Oleofilter/TM/
System competes with many other products/companies designed to meet the
requirements of this market. Before selection, each system is judged on its
ability to meet specific cleanup standards, complexity of operations, cost of
operations, flexibility to changing conditions and initial capital cost of the
system. Management believes the Oleofilter/TM/ System compares favorably to
other competing products, especially in the areas of meeting cleanup standards,
ease of operation, low maintenance cost and flexibility to adapt to changing
inlet conditions.
The Company began extensive testing of the Oleofilter/TM/ System during the
fourth quarter of 1994. Application of the Oleofilter/TM/ System was also
successfully demonstrated by the Company in 1994 in conjunction with tests at a
superfund site administered by the
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EPA as part of the EPA's Superfund Innovative Technology Evaluation ("SITE")
Program. These test results indicated a positive application of this technology
in connection with the removal of emulsified oils from water.
Other testing efforts have validated the efficacy of the Oleofilter/TM/
System. The U.S. Coast Guard currently certifies a number of the Company's
models as compliant with international standards for filtration of offshore
discharge, as well as applicable U.S. law. In addition, test results from an
internationally recognized water test center indicate a high degree of
confidence in oil/water separation within certain input parameters.
Although the Company had limited success in selling units directly through
its prior sublicense arrangement, there are many such units that are in use
throughout the world that were sold by prior licensees. Management believes that
the Oleofilter/TM/ System can accomplish its stated technical objectives and
that the Company can market the system on a commercial basis under its new
agreement with Exxon. Current marketing efforts have indicated interest by
several potential customers. However, to date, the Company has been unable to
yield any revenues from the sale or application of its Oleofilter/TM/ System.
BioTreat/TM/ System
The Company's BioTreat/TM/ System, Terrazyme/TM/ System and Biocat/TM/
Hydrocarbon Process rely to varying extents upon enzyme technologies. The
principal objective of most of these technologies is, through the use of novel
or proprietary systems and application of specific enzymes, to secure the
remediation of hydrocarbon contaminated soils and treatment of hydrocarbons.
The Biotreat/TM/ System involves the treatment of soils in a variety of
methods and multiple steps that ultimately rely on microbes and other bacteria
to destroy hydrocarbons (oil) contained in the contaminated soils. This is done
in conjunction with a mechanical process that involves tilling the soils to
achieve maximum penetration and concentration of the microbes and bacteria, and
provide microbes with sufficient oxygen and nutrients to live and reproduce.
A key to the BioTreat/TM/ System involves the use of enzymes and other
chemicals for pretreatment of the soils to enhance the successful introduction
of the appropriate bacteria for the particular contaminant. The enzymes, when
applied with water, are believed to help the soil particles to separate from
each other. As a result, any contaminants that are caught within the layers of
soil are exposed to the bacteria. Other chemicals and solutions are applied to
kill non-essential bacteria and to make the contaminants more suitable as food
for the bacteria. When applied to the soils that have been treated with the
enzymes and other solutions, the bacteria can identify the hydrocarbons as a
desired food source. The bacteria, which is a microbe, consumes the hydrocarbon
molecule and turns into a fatty acid which, in turn, fertilizes the previously
contaminated soil. Management believes that this combination of steps,
chemistries, and sequential methods of treatment distinguish the BioTreat/TM/
System from standard bioremediation techniques by providing faster, more
predictable, and ultimately, lower cost results.
The Company's BioTreat/TM/ System can be used to treat soil in a totally
enclosed, plastic-lined treatment cell, which is referred to as a "biocell."
The alternative treatment method is "in situ," which means a treating the soil
in place. However, specific cleanup criteria and regulatory approval is
specific to each project, location, type of contaminant and controlling
regulatory authority.
The Company's BioTreat/TM/ System has been successfully tested by the
Company in a number of demonstration projects in which this system achieved
environmental clean-up in significantly less time than industry averages.
Notwithstanding such positive test applications, to date, the Company has been
unable to generate any material revenues from the application of its BioTreat
System/TM/. In addition, no testing or validation of this technology has been
conducted by independent laboratory or agency. Nonetheless, management believes
that the BioTreat System/TM/ has been fully developed and field proven, and
attributes the absence of commercial success to sales, marketing, and
competitive issues. See "Sales, Marketing & Joint Venture Agreements" and
"Competition."
Terrazyme/TM/ System
The Terrazyme/TM/ System is a mechanical system that uses enzymes and/or
other chemistries in conjunction with a process developed by the Company to
separate hydrocarbons and segregate different size fractions of soils and
sludges. Contaminated soils are fed into the machinery through a mechanical
screw or augur feed. As the contamination material travels up the screw feed it
is sprayed with a mixture of enzymes, water and/or other chemicals.
The enzymes are believed to assist in separating the soil particles from
each other. The enzymes continue to act as the soils are mixed in the machine.
The mixing action allows free oil that has been separated from the soil to float
to the surface where it can be skimmed off. This portion of the process can
effect a significant reduction in the levels of contamination. Once the free
oil has been
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skimmed off, the soils which are mixed with the enzymes, water and/or other
chemicals, are treated with different chemistries in a second tank. The intent
of the second phase is to introduce chemistries that will attack specific types
of contamination found on the soils. The chemistries used in the Terrazyme
System/TM/ vary based on the particular level and nature of the contamination.
The wash solution is finally drained from the soils before the treated soils are
discharged from the machine. The wash solution is then recirculated for reuse
in the machine.
The technology differs from traditional soil washing techniques as it
involves a continuous flow, ambient temperature, water-mechanical process using
a recycled cross flow of enzymes and other solutions. In addition, it allows
for the simultaneous segregation and recovery of different sized fractions of
solid material. The combination of segregation and washing allows for maximum
recovery of products with commercial value and minimum waste disposal. The
ability to introduce additional chemistries and washing steps for removal of
specific contaminants also differentiates the system from traditional soil
washing technologies.
The Company's Terrazyme/TM/ System has been used in a number of pilot
projects with mixed results. In certain instances, the technology was deployed
successfully, however, at a cost that was greater than more conventional means
of disposal. In other instances, the technology failed to perform up to
management's expectations. However, a previous pilot project at a landfill site
in South Texas has shown the system to be effective in cleaning certain wastes
for recycle and reuse. The technology has not been tested and/or validated by
any independent laboratory or agency. The Company is continuing to test this
system to verify its technical, regulatory and commercial effectiveness.
Biocatalytic Hydrocarbon Upgrade Process
The Biocatalytic Hydrocarbon Upgrade Process (the "Biocat/TM/ Hydrocarbon
Process") is based on enzyme technologies that the Company believes may
catalytically alter the molecular structure of long chain hydrocarbons and
simultaneously reduce the sulphur and metal content of the treated hydrocarbons.
Development of this technology to date has focused on the upgrading of heavy,
sulfurous crude oils. Although other companies are pursuing technologies to
biologically upgrade crude oil and/or other petroleum fractions, management
believes that the manner in which the Biocat/TM/ Hydrocarbon Process uses the
catalytic properties of enzymes distinguishes itself from other competing
processes. However, given that the specifics of competing processes are not
well defined and are not known to the general industry, the Company cannot
completely judge the effectiveness of Biocat/TM/ versus these other processes.
Presently, a significant amount of the world's known crude oil reserves are
heavy hydrocarbons that have a low API Gravity in the range of 8 to 18.
Typically, heavy crude oils also contain higher concentrations of sulphur and
heavy metals. "API" gravity refers to the American Petroleum Institute standard
of measuring the gravity of crude oils. A higher API gravity number designates
a "lighter" crude oil, which will typically contain more light hydrocarbons,
less sulphur and less metals and are thus more valuable crude oils. West Texas
Intermediate Crude, for example may have an API Gravity higher than 25, whereas
heavy, sour (sulphur containing) crude or tar sand crude oil may range from 8 to
18 API gravity. As a result, West Texas Intermediate Crude may command a spot
price significantly higher per barrel than that of heavy or sour crude oils. If
developed to the point of being operationally effective, the Company's
Biocat/TM/ Hydrocarbon Process could provide significant opportunity for
upgrading the value of these heavy, sour crude oils.
Numerous tests have been performed on the Biocat/TM/ Hydrocarbon Process.
These tests comprise work done by the Company and also work done by independent
third party laboratories. The tests performed by these laboratories involved
processing crude oils from a variety of sources in laboratory bench scale tests
using enzymes and mixing equipment designed to simulate a possible commercial
mechanical system. The treated samples were then analyzed to determine changes
in the viscosity, gravity, sulfur and metal content, as well as any change in
the temperature at which the treated oils would flow.
Through this testing the Company has found that in certain cases its
BioCat/TM/ Hydrocarbon Process has been effective in reducing viscosity, sulfur
and metals content, while increasing the API gravity of certain crude oils. It
is important to note, however, that this testing is in an early stage and this
process has not been effective on every crude oil that has been tested. The
Company is continuing to develop this process and is testing it, in its own
laboratories, on a variety of crude oils to determine the optimum operating
parameters and to identify which type of crude oils may respond effectively to
this treatment.
The BioCat/TM/ Hydrocarbon Process has not reached the stage of
development that is ready for commercial application. The process has only been
tested in laboratory settings and in very limited processing situations. Even
though certain of these tests have provided some evidence of the technology's
potential effectiveness, management realizes that to perfect this type of
process, if at all possible, will require significant additional laboratory and
field testing and the allocation of significant capital resources. There can be
no assurances that this process can be developed sufficiently to justify the
allocation of resources likely to be required to achieve
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commercial effectiveness, if at all possible. In addition, there has been no
attempt by the Company to determine if this technology will need or receive
regulatory approval before it can be introduced as a commercial process.
Limitations on Effectiveness of the Company's Technologies
Each of the Company's technologies and systems have been used in a variety
of projects or field tests over the last several years. In most cases, the
technologies have shown some effectiveness, have performed technically and have
met the expectations of the Company. It should be noted, however, each of these
technologies have certain limits and parameters within which they are either
effective or ineffective. Thus, until further field work is performed on a
commercial basis, each project or potential application must be approached on a
job-by-job basis to determine efficacy.
The Company has attempted to test its technologies in various operating
field and laboratory (internal and external) situations. In some cases the
technologies have achieved the desired results. In other cases, the technologies
have not achieved the desired levels of performance. This information has been
extremely helpful, however, in redesigning the mechanical systems and adapting
the chemistries to achieve better and more consistent results. As an example,
recent modifications in the mechanical design in the Terrazyme/TM/ System have
resulted in successes in a 1995 field demonstration at a large landfill in South
Texas.
Other than the TechXtract/TM/ technology and products made by IPF and GAIA,
and despite the fact that the Company has tested the environmental technologies
in a variety of demonstration projects, the Company has yet to achieve more
than minimal revenues from the commercial application of its other
technologies. Management of the Company believes that the failure of the other
technologies to achieve commercial acceptance is not a reflection of the
viability of its technologies, but rather the result of marketing factors, some
of which are beyond the Company's control. See "Sales, Marketing and Joint
Venture Agreements." Nonetheless, until the Company is able to successfully
apply all of its technologies in a commercial setting, there can be no
assurance that management's expectations for the technologies will be
fulfilled.
Competition
The environmental industry is highly competitive. Competition is provided
by a number of traditional waste removal and disposal companies, operators of
landfills as well as companies that offer a variety of remediation services that
treat rather than remove contaminated soils. The Company believes that the
principal competitive factors in its business are the ability to satisfy
applicable environmental laws relating to clean-up, the reduction of waste that
requires ultimate disposal, price and efficiency of service. Other factors
include quality, safety record, reputation, amount of insurance coverage and
knowledge of the customer's operations.
The Company competes with a large number of companies in substantially all
segments of the industries in which it competes. These competitors tend to be
different for each of the Company's technologies and products. Many of these
competitors are local operations servicing a limited geographic area; however,
in some services or products, there are a few large national and regional
competitors which have significantly greater resources than the Company.
As an example, it is estimated that there are over 1,000 companies directly
involved in providing some type of environmental remediation services in the
United States. These companies would compete (to varying extents) with the
Company in areas of TechXtract/TM/, BioTreat/TM/ and Terrazyme/TM/. Further, it
is estimated that 35 of these companies account for 65% of the revenue generated
in this business segment. Clearly, this market is dominated by companies with
significantly larger resources than the Company, including Rust International,
Bectel, Fluor, OHM, Morrison Knudson and many others. Similar competition and
competitor profiles exist for all of the Company's technologies and businesses.
Governmental Regulations
State and federal governments have enacted and amended numerous
environmental protection laws in response to public concerns about the
environment. The operations of the Company and its customers are subject to
these evolving laws and related regulations. The principal federal
environmental laws that the Company believes are applicable to itself and its
customers include The Clean Water Act, The Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 ("CERCLA"), The Resource Conservation
and Recovery Act of 1976 ("RCRA"), The Pollution Prevention Act of 1990, and the
Superfund Amendments and Reauthorization Act ("SARA"). Most of these laws have
state counterparts which are generally at least as stringent as federal laws.
The Company believes that this regulatory framework creates the demand for
products that control the release of hazardous substances into the environment
or facilitate the clean-up of contaminated soils and waters.
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The Clean Water Act or its state counterparts permit the discharge of
pollutants into the waters of the United States only in accordance with the
terms of a National Pollutant Discharge Elimination System Permit. Similarly,
the discharge of pollutants by generators into a sanitary sewer system that
leads to a local Publicly Owned Treatment Works ("POTW") is regulated by state
and local laws and by local permitting requirements, as are the discharges by
the POTW's themselves of their waste streams onto land or into surface water
bodies.
RCRA provides a comprehensive framework for the regulation of the
generation and transportation of solid and hazardous waste, as well as for the
treatment, storage and disposal of such waste. RCRA is intended to provide a
"cradle to grave" system for the control of hazardous waste; that is, regulation
of wastes from the time they are generated until they are properly disposed of.
Both civil and criminal liability may be imposed on parties that fail to comply
with RCRA's requirements. RCRA requires that hazardous waste generators,
transporters or operators of hazardous waste treatment, storage and disposal
facilities, meet strict standards set by governmental agencies, and in certain
instances, obtain and comply with RCRA permits.
The Pollution Prevention Act of 1990 establishes pollution prevention as a
national objective, naming it a primary goal wherever feasible. According to
this Act, where pollution cannot be prevented, material should be recycled,
reduced or minimized in an environmentally safe manner.
CERCLA and SARA (the "Superfund" laws) provide for the investigation and
remediation of hazardous waste sites. Under Superfund, parties who own or
operate sites or facilities contaminated by hazardous substances or who have
generated hazardous substances or which have arranged for the transportation or
disposal of hazardous substances may be subject to strict, joint and several
liability for the investigation and remediation of contamination associated with
those hazardous substances. Superfund's remedy selection process includes a
preference for innovative technology as well as technology which reduces the
volume of waste materials. Regulations under Superfund require that any
hazardous substances remaining on-site meet: (i) applicable; and (ii) relevant
and appropriate regulatory requirements. This may create an incentive to
utilize technologies that can potentially recycle hazardous waste, transform
such waste into non-hazardous by-products or reduce waste volumes. Under SARA,
parties engaged in Superfund or RCRA remedial actions may, in certain
circumstances, be able to use an environmental technology without the need to
conform with all aspects of the permit application procedures that would
otherwise be required under RCRA, the Clean Air Act, or other applicable
environmental laws.
Many of the same federal and state laws and regulations that affect the
Company's customers may also directly regulate the Company's own operations or
create potential liabilities for the Company. With respect to permits and
permitting requirements, the Company's own operations include the use of small
amounts of various hazardous substances, both in the use of its processes and
the testing of those processes on various waste streams and the testing and
maintenance of the Company's processes and technologies in the field. Because
the handling, use, treatment and storage of disposal of hazardous substances and
waste are a highly regulated activity, many of these activities require the
procurement of federal, state or local government permits and approvals.
Obtaining and maintaining these permits and approvals generally require
strict compliance with exacting regulatory requirements. Accordingly, permit
applications are subject to denials, and the permits themselves are subject to
suspension, modification or revocation for failure to meet applicable
requirements. The failure by the Company to obtain a permit or to comply with
permit requirements in its operations could potentially subject the Company to
liabilities under the various federal, state, or environmental laws. Similarly,
the failure by the Company's customers to obtain such permits or approvals, or
to comply with permit requirements could subject them to environmental
liabilities as well and could affect the demand for the Company's services and
products. If existing environmental laws and regulations are amended,
interpreted or enforced differently than at present, or if new environmental
laws or regulations are enacted or promulgated, the Company or its customers may
be required to obtain additional permits or approvals or modify their handling,
use, treatment, storage or disposal of hazardous substances or waste. Failure
to comply with such laws could have a material impact on the demand for the
Company's products and services or could subject the Company or its customers to
unanticipated and material penalties.
Although the Company does not generate streams of waste, the Company, like
its customers, may be potentially subject to environmental liabilities with
respect to the investigation or clean-up of hazardous waste sites. Regulatory
agencies may argue, for example, that in instances where the Company's system is
utilized to treat hazardous waste, the Company would be potentially liable under
the Superfund law, as an "owner" or "operator" of a "facility" for any releases
of hazardous substances from that system, even if the Company did not cause the
release, and even if the Company was not negligent. Although the Company
believes that the risk is minimal that the Company would ever be found by a
court or regulatory agency to be liable for the investigation or clean-up of a
hazardous waste site, the cost associated with such a finding could be
substantial.
In addition, the Company is also potentially liable for damages suffered by
its customers or others under environmental laws and regulations,
indemnification provisions of certain contracts with customers, or various tort
or contract law theories in the event that
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there are liabilities arising from the failure or malfunction of the design,
construction or operation of any of the Company's systems or processes.
Although the Company does maintain liability insurance, there can be no
assurances that such insurance would cover any or all environmental tort or
contract liabilities that could potentially be imposed on the Company. There
can be no assurance that the Company will not be adversely affected by a claim
by a governmental agency or by a private party regarding environmental or
related liabilities.
The Company has developed plans to take appropriate measures to reduce its
exposure to Superfund liability, including, implementing strict operational
guidelines for the handling and disposal of contaminated waste, as well as
seeking contractual protections from its customers.
Sales, Marketing and Joint Venture Agreements
With the exception of EET's TechXtract/TM/ Process, IPF's thermoplastic
transition fittings, and GAIA's porous pipe and synthetic construction
materials, the Company has been unable to develop a marketing strategy that has
permitted successful commercialization of any of its proprietary technologies or
processes.
Historically, the Company has attempted to market its technologies through
teaming arrangements and joint ventures with select partners in specified
geographic regions. In addition, through its officers, directors and
consultants, the Company actively engaged in ad hoc sales and marketing efforts
directed towards governmental agencies, branches of the defense department and
private industry. The Company's limited capital resources have, in the past,
precluded the ability to finance the development and staffing of an internal
sales force.
The Company's marketing strategy had been devised on two premises that
have, in hindsight, proven unsuccessful. First, management assumed that
commercialization of the Company's technologies would be motivated by customer
demand, which in turn would be motivated by regulatorily-required clean-up
requirements. Management has determined, however, that notwithstanding public
pronouncements of broad-based environmental remediation programs, the regulatory
requirements of states have in most instances permitted contaminated sites to
remain subject to contamination for longer periods than anticipated by the
Company. Second, management viewed the application of certain of its
technologies as a more environmentally sound means of remediation, and thus,
assumed that property owners would resort to these type of clean-up solutions
over traditional means (removing and dumping contaminated soils in a landfill).
This strategy was developed several years ago in view of escalating dumping
costs, increased dumping regulations and scarce landfill space. Subsequently,
however, dumping costs have been dramatically reduced and landfill space is more
available than anticipated. In some instances the costs of landfill disposal are
less expensive than solutions offered by the Company. Accordingly, even though
many of the Company's technologies appear to perform successfully, management
must devise strategies that either reduce the cost of these services, otherwise
convince land owners of the benefits of remediation, target certain situations
where the Company's technologies provide significant value and efficiency, or
wait until the economics of disposal options change significantly from the
current situation.
In an effort to avoid the cost of building an internal sales staff, the
Company had attempted to market its technologies through teaming arrangements
and joint ventures. Customarily, a subsidiary of the Company would enter into
an agreement with a third party to market particular services in a specified
geographic region. Although the Company has entered into many such agreements,
no material work has been undertaken pursuant to such arrangements. As noted
above, in an effort to address this issue the Company has recently completed the
acquisition of an operating environmental company, EET, with personnel
experienced in directly marketing environmental services.
The Company's joint ventures and teaming arrangements have also been
motivated as a financing strategy. In certain instances, joint venture partners
have paid the Company for the exclusive right to market its technologies in
specified areas. Since the Company's resources have remained somewhat limited
since inception, these arrangements were often undertaken as a means to secure
additional working capital for the Company. In other cases, no advance payments
were made, however, the joint venture partner agreed to fund certain operating
or other expenses of the ventures. In either event, the Company's joint venture
arrangements have, to date, generated no material revenues or made any technical
progress.
The Company is presently operating subject to five (5) joint venture or
teaming arrangements. Two (2) of these arrangements, which cover marketing
rights in certain areas in Canada, are expected to terminate shortly, having
made no material contributions to the Company. Three (3) other arrangements
remain active and may offer some potential benefits to the Company.
In conjunction with an agreement with Universal Remediation Services, Inc.
("Universal"), in May 1992 the Company obtained financing in the form of a
convertible debenture. Repayment of the debenture has been extended twice and
is now scheduled for June 15, 1996. As part of the original agreements,
Universal was given certain rights, which include, among others, half of the
operating profits
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generated from projects that use the Company's BioTreat/TM/ and Terrazyme/TM/
technologies in the states of Illinois and Indiana. There is no termination
date for these marketing rights.
During February 1993, the Company entered into a Joint Venture Agreement
with Canadian Crude Separators, Inc. ("CCSI"). CCSI, which was once affiliated
with certain of the former officers and directors of the Company (See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS"), owns and operates waste treatment
facilities in the Provinces of Alberta and Saskatchewan, Canada. Under the
terms of this arrangement, a joint venture between the Company and CCSI was
formed which has the exclusive right to market and utilize the Company's
technologies in the Provinces of Alberta and Saskatchewan in Canada. The
Company and CCSI would be entitled to evenly split the profits from any projects
or receive a percentage of the projects revenues undertaken by the joint
venture. The Company received shares of the common stock of CCSI upon execution
of these arrangements. These shares are subject to escrow provisions and only
may be "earned" by the Company on the basis of cash flow generated by the joint
venture.
In July 1993, the Company entered into a joint venture with Oil Waste
Treatment, Inc. ("OWT") to jointly develop the Terrazyme/TM/ System and other
Company technologies as they pertain to fixed site facilities within an area
encompassing Texas, Louisiana, Mississippi, Alabama, Florida and the Gulf of
Mexico. Under the terms of this joint venture agreement, the Company agreed to
contribute its technologies to a joint venture in exchange for OWT contributing
rights to an environmental processing facility that it had permitted in South
Texas. Concurrently, OWT agreed to prepare equipment for a demonstration
project with a major environmental company and potential joint venture partner.
This demonstration project, which commenced in early 1995, has shown the
Terrazyme/TM/ System to be effective in cleaning certain wastes for recycle and
reuse. To date, no revenues have been generated. Profits and losses of the
joint venture are split equally. As a cost savings measure, the OWT joint
venture was suspended in late 1995 pending the development of waste streams from
OWT's principal customers sufficient to justify further investment.
In recognition of the absence of sales generated through the Company's
historical sales and marketing program and in view of the recent acquisition of
EET, the Company intends to change the direction of its sales and marketing
strategies. Joint ventures and teaming arrangements will no longer be utilized
as the primary means of marketing. The Company intends to hire and develop its
own sales and marketing personnel. As such, direct sales strategies and goals
will be developed and implemented by experienced sales personnel. Joint
ventures and teaming arrangements will be relegated to a lesser corporate
priority but still used when appropriate to achieve specific marketing and sales
objectives.
Patents and Proprietary Rights
The Company is the beneficiary of patent protection on the Oleofilter/TM/
and TechXtract/TM/ Process. In addition, EET holds four other patents on
environmental treatment technologies that may have commercial value but have not
yet produced any significant revenue. GAIA holds six patents on the
compounding, molding and extrusion of shapes and structures using recycled
polymers. These technologies form the basis for manufacturing products which
GAIA has sold historically or which are under development. There is no patent
protection for any other owned or licensed technologies. While the Company
believes it possesses proprietary rights to its other technologies including
unpatented trade secrets and know-how, and that its continuing technological
innovations will enable it to maintain a competitive position in the manufacture
and use of its products and services, no assurances can be given that others
will not independently develop substantially equivalent proprietary information
and technology or otherwise gain access to the Company's trade secrets or
disclose such technology, nor can the Company assure that it can meaningfully
protect its unpatented trade secrets. As used in this context and throughout
this Prospectus, "proprietary information" refers to technology, mechanical
configurations, chemical information or formulations, processes, applications
techniques and/or other know-how developed by the Company and its employees or
consultants.
Warranty
Typically, the Company provides its services and technologies on a "best
efforts" basis. As such, no warranty is expressed or implied. However, in some
cases, EET provides its TechXtract/TM/ services on a "guaranteed results" basis.
That is, EET must decontaminate to a preset, verifiable level or the customer
will not be required to pay. However, once the cleanup standard is met, no
future guarantee is given or required. In only one instance has EET not been
paid for the work in connection with this guarantee and that was for a project
bid at less than $10,000. Although the Company has not developed a warranty
policy for its Oleofilter/TM/, it is likely that some type of limited mechanical
warranty may be required. Once commercial success is achieved with its
Biotreat/TM/ and Terrazyme/TM/ technology, the Company anticipates that projects
will either be done on an hourly rate and cost of material basis or on a fixed-
price bid either lump sum or per unit volume if the perimeters of the project
can be well defined. In any fixed-price bid situation, there is an implied
guarantee to meet the required cleanup specifications, but these are usually
negotiated based on the conditions that
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arise during the project. To date, most of the Company's demonstration projects
are for a negotiated price and done on a "best efforts" basis.
Human Resources
The Company currently employs 48 full-time employees and consultants.
Eight of the employees are in management, eight in administrative and
accounting, two in research and development, six in sales, and twenty-four in
operations. Eleven of the Company's employees have employment agreements. None
of its employees are covered by collective bargaining agreements. All of the
Company's personnel, as well as companies with which it has an ongoing
relationship, however, are covered by non-circumvention, non-disclosure
agreements over the Company's technologies. The Company believes that its
relations with its employees are good.
DESCRIPTION OF BUSINESS OF INDUSTRIAL PIPE FITTINGS, INC.
The Business
In June 1995 the Company acquired Industrial Pipe Fittings, Inc. ("IPF"), a
privately-held Houston-based manufacturing and distribution company. IPF
manufactures and distributes both proprietary and standard thermoplastic
fittings for the high density polyethylene pipe business. In its first year of
operation (1994), IPF generated over $500,000 in revenues and realized a profit
of $24,000. IPF principally markets to the industrial, mining and water works
industries. The acquisition was accounted for as a pooling of interests by the
Company effective June 30, 1995 and, as such, historical financial statements of
the Company have been restated to include the financial effects of IPF from the
date of its inception, January 1, 1994.
The Products
IPF manufactures and distributes products that relate primarily to the High
Density Polyethylene ("HDPE") market. IPF currently fabricates metallic
connectors for various HDPE applications. It also manufacturers four types of
quick connect fittings (Victaulic, Gheen, Camlock, Bauer) as well as threaded,
weld-end and flanged adaptor fittings. IPF also stocks and distributes related
thermoplastic products which complement the use of its existing line of
manufactured fittings. IPF management believes that IPF can expand its product
line to include high end items such as fabrications of large elbows, tees and
wyes, specialized fusion and molded fittings as well as other high margin
products. Although IPF does not actively pursue sales of HDPE pipe and liners,
IPF is an OEM distributor for three different polyethylene pipe manufacturers.
The Market
The domestic market for HDPE pipe resins is currently estimated by industry
trade organizations to exceed $6 billion annually. The domestic market for HDPE
related fittings and supplies exceeds $1.5 billion. Because of the number of
applications of polyethylene, the market is expanding world wide, particularly
in Central and South America.
IPF currently markets its products within a two tier plan. First, IPF has
alliances with 93 distributors that cover most of the North and South American
Continents. IPF management believes that this creates greater marketing
capacity than could be realized through inside sales efforts only. Secondly,
IPF offers customized engineering and specification writings for many end-user
applications. At times, this gives IPF exclusivity on large projects that use
many of IPF's currently existing product lines.
Manufacturing
IPF currently utilizes a modular based assembly procedure for
manufacturing. Most individual components are made from raw materials in-house
and are stocked in appropriate quantities based on demand. Final assembly for
large orders is typically done on a per order basis with most shipments of
finished goods occurring within days after receipt of a purchase order. IPF
management is committed to expanding manufacturing capacity through increased
integration and automation. Depending upon the availability of capital, IPF's
expansion plans over the next twelve months include one Computer Numerically
Controlled ("CNC") lathe, one YTL machine for producing large fabricated
wyes, tees and elbows, a Vertical Turret Lathe ("VTL"), and other additional
fabrication machinery. IPF estimates that the total cost for upgrading the
production facility to be approximately $750,000.
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ACQUISITION OF CERTAIN ASSETS OF GAIA HOLDINGS, INC.
On December 29, 1995, a wholly-owned subsidiary of the the Company acquired
substantially all of the assets of GAIA Holdings, Inc., formerly known as GAIA
Technologies, Inc., a Delaware corporation, and two of its affiliates ("GAIA").
The acquired assets (the "Assets") consist of a number of patented and
proprietary technologies and other business assets (including among others
certain equipment, inventory and raw materials) relating to the use of recycled
rubber and plastics for the manufacture and distribution of porous pipe,
synthetic construction materials and certain other products with advanced
structural properties, together with substantially all other business assets of
GAIA relating thereto. The Company currently intends to continue to use the
Assets in the same business as did GAIA.
The consideration paid for the Assets included (i) the issuance of
1,666,667 shares of Company Common Stock, (ii) the payment of $305,500 in cash,
(iii) the issuance of a 90-day promissory note (the "90-Day Note") by the
Company in the principal amount of $1,050,000 and (iv) the forgiveness of
certain debt obligations (together with all interest owed thereon) owed by GAIA
to the Company of approximately $1,881,400. A portion of the cash payment
described in (ii) above was applied from the proceeds of a recent sale of shares
of the Company's Series D Convertible Preferred Stock.
The 90-Day Note bears interest at an annual rate of twelve percent (12%)
and is secured by a lien on and security interest in all of the Assets.
Interest payments on the 90-Day Note are due and payable monthly, and the entire
principal thereof and all accrued and unpaid interest thereon is due and payable
in full on March 28, 1996.
In connection with the purchase of the Assets, the Company also agreed to
pay, during a 15-year period, certain royalty payments and license fees based on
the gross margin (defined as the difference between revenues and cost of goods
sold, as calculated pursuant to the terms of a written royalty agreement) from
sales of certain products manufactured using the technologies included in the
Assets and sublicenses of such technologies.
The Company also entered into written employment agreements with each of
Henry W. Sullivan, formerly of GAIA, and William Aldrich, formerly of Thor
Ventures, L.C. Under such agreements, Mr. Sullivan will serve as President of
the Company's newly formed subsidiary, GAIA Technologies, Inc., a Texas
corporation ("Sub"), and Mr. Aldrich will serve as an executive officer of Sub,
in exchange for certain salary payments and other benefits, including among
others the issuance by the Company of options to each such person to acquire up
to 200,000 shares of Company Common Stock (an aggregate of 400,000 shares of
Company Common Stock) at an exercise price of $2.50 per share, 25% of which
options vest each year over a four-year period. The Company also agreed to
cause Mr. Aldrich to be appointed to the Board of Directors of the Company in
the first half of 1996.
In addition, the Company entered into a Crosstie Purchase Option and Loan
Agreement pursuant to which it acquired an option (the "Crosstie Purchase
Option") to purchase all of the capital stock of TIETEK, INC., a Texas
corporation ("TieTek") which is an affiliate of GAIA. The Company may exercise
the Crosstie Purchase Option during a two-year period (which period may be
extended for an additional year under certain circumstances) by forgiving all
then-outstanding indebtedness under the Crosstie Loan referred to below, and
paying certain royalty payments based on products to be sold by TieTek after the
exercise of the Crosstie Purchase Option. In connection with the sale of the
Assets, TieTek received the right to use certain of the patented and proprietary
technologies included in the Assets to produce railroad crossties and certain
other related products.
The Company also agreed in the Crosstie Purchase Option and Loan Agreement
to lend up to $1,500,000 (the "Crosstie Loan") to TieTek, the proceeds of which
loan are to be used in connection with developing TieTek's business. As of
December 31, 1995, the Company has lent to TieTek an aggregate of approximately
$220,000 of such Crosstie Loan amount. The Crosstie Loan is secured by a pledge
of, and lien on, all of TieTek's assets and capital stock, and 666,667 of the
Shares.
MATERIAL OUTSTANDING LITIGATION
Kellert et al. v. Mail Boxes Etc., USA, Inc., et al is an action commenced
in November 1988 in the New York State Supreme Court for New York County by one
of the former franchisees of MBE against the Company, MBE and several individual
officers and former officers of the Company. Plaintiff alleged that the Company
failed to provide plaintiff with an offering prospectus in violation of New York
State franchise law and made false representations regarding revenues, earnings
and profits from both existing and new franchise centers. Plaintiff sought
damages in excess of $425,000. The Court recently granted the Company's motion
to dismiss the action based upon the plaintiff's failure to prosecute the
action. The Plaintiff responded by filing a motion to reinstate the action,
which is now before the Court.
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Winch v. North American Technologies, Inc., et al. On or about April 23,
1993, Douglas Winch commenced an action against North American Technologies,
Inc. ("NAT"), a wholly owned Canadian subsidiary of the Company, Peter W.
Fisher, a former officer and director of NAT's predecessor corporation, John H.
McPhedran and J.H. & J.K.M. Corporation, Ltd. This is an action for specific
performance of an alleged agreement between NAT and the plaintiff for the
delivery of 200,000 common shares of NAT and damages for failure to provide such
shares on a timely basis.
The plaintiff has claimed against all defendants damages in the amount of
Cdn. $1.5 million, punitive and exemplary damages in the amount of Cdn. $200,000
and an interlocutory injunction to prevent the defendants from trading in the
shares of NAT pending a final disposition of the action. The proceeding is
pending as of the date of this Report. The plaintiff has indicated that he
intends to amend his Statement of Claim. Because the outcome of this matter
cannot presently be determined, no adjustments have been made to the
consolidated financial statements.
Thomas W. Reid v. North American Gold Corp. and Karr Capital, Inc., is a
matter commenced in July 1993 in the 134th Judicial District Court of Dallas
County, Texas, by Thomas Reid against North American Gold Corp., which was the
corporate predecessor of NAT, a wholly owned subsidiary of the Company. Mr.
Reid alleges in his complaint that he was denied the right to purchase 350,000
shares of stock of North American Gold Corp. for $.50 per share. Mr. Reid sued
for conveyance of the stock or alternatively for damages, plus attorneys' fees.
Mr. Reid's claim is based upon a letter dated July 17, 1991, purportedly signed
by Mr. Robert Ciccarelli as President of Karr Capital, an unrelated Canadian
corporation. No discovery or other activity has occurred in the case, and
management cannot evaluate the Company's exposure at this time.
North American Technologies Group, Inc. v. BioTrace International, Inc. is
an arbitration proceeding before the American Arbitration Association. BioTrace
first brought an action against Richardson Greenshields Ltd., a brokerage firm
in Canada, in the federal district court for the Northern District of Illinois
in Chicago, in September 1993. BioTrace alleged that, pursuant to the provision
of a License Agreement entered into by BioTrace and NATK on January 15, 1992,
Richardson, Greenshields was the escrow agent holding approximately 90,000
shares of NATK stock for the benefit of BioTrace and that the stock was to be
tendered to BioTrace on July 15, 1993.
Prior to July 15, 1993, NATK learned of various material breaches of the
License Agreement committed by BioTrace and/or its agents. Based upon the
material breaches of the License Agreement, a tender of the 90,000 shares of
NATK stock was not made to BioTrace by Richardson, Greenshields on July 15,
1993. This License Agreement was an exclusive agreement under which BioTrace
agreed to provide NATK with a certain proprietary stabilized enzyme. However,
BioTrace violated the exclusive agreement by selling or making available the
enzyme to various NATK competitors. In addition, BioTrace's claims that the
enzyme was non-toxic to the environment proved false. In response to this
violation of the exclusive agreement and because the enzyme proved to be
ineffective for NATK's purposes, the Company abandoned the agreement.
In October 1993, Richardson, Greenshields brought NATK into the case as a
third-party defendant arguing that Richardson, Greenshields had no stake in the
dispute over the ownership of the NATK stock and that the true dispute was
between BioTrace and NATK over the License Agreement. NATK filed a motion to
stay the federal court proceedings and to compel arbitration before the American
Arbitration Association in Chicago. On March 7, 1994, NATK's motion was granted
and the federal court case was terminated.
However, at present there is a proceeding on this matter before the
American Arbitration Association upon the Company's claims that BioTrace
materially breached the License Agreement by selling a certain proprietary
stabilized enzyme to its competitors. NATK is requesting reimbursement for
approximately $200,000 previously forwarded to BioTrace, return of the 90,000
shares of NATK stock and other consequential damages.
On March 14, 1994, the Company had a preliminary hearing before an
arbitrator of the American Arbitration Association in Chicago. Various
pleadings were filed with the arbitrator, including several motions for summary
judgment. The Company also amended its complaint to include claims based on a
theory of fraudulent inducement to enter into the transaction. In February
1995, the Company received results of independent toxicity tests on the
ingredients used in the BioTrace enzyme formula. The report from the independent
California testing laboratory reported that the ingredients used in required
concentrations in the BioTrace enzymes made it toxic to aquatic life, which is a
standard environmental test for toxicity.
The Company has responded to the BioTrace claim by vigorously asserting its
defenses to that claim and its claims for damages due to BioTrace's contractual
breaches. While this matter may still be resolved short of an arbitration
hearing, NATK has dedicated the time and resources to aggressively pursuing its
arbitration claim against BioTrace. The arbitration proceedings are currently in
progress, and consequently the outcome cannot be determined at this time.
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North American Technologies Group, Inc. and North Environmental Group, Inc.
v. James E. Impero, Robyn Impero, Val Weaver and The Impero Family Trust. On
April 10, 1995, the Company and its subsidiary, North American Environmental
Group, Inc., filed a lawsuit in the District Court of Harris County, Texas
against James Impero, a former officer and director of the Company and Val
Weaver, an officer of a subsidiary of the Company. The Company is seeking a
temporary restraining order, permanent injunction and substantial monetary
damages based on claims against Mr. Impero which include breaches of his
fiduciary duties of care, loyalty and obedience, tortious acts against the
Company and defamation of the Company's business reputation. The Company's
claims against Mr. Weaver include the breach of his fiduciary duties of care,
loyalty and tortious acts against the Company based on his alleged aid to Impero
in many of Impero's activities. The Company alleges that Mr. Impero usurped
corporate opportunities, diverted business from the Company, and subsequent to
his resignation, he has made damaging statements about the Company. In apparent
response to this lawsuit, Mr. Impero filed a lawsuit against the Company and
other parties in June 1995 in the U.S. District Court in Maryland. No answer or
other response is due or has been made.
If the foregoing litigation is decided against the Company, it could have a
material adverse effect on the financial condition of the Company. See "RISK
FACTORS."
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND AND BASIS OF PRESENTATION
Prior to the acquisitions of EET and IPF, the Company had been a
development stage company engaged in the development, acquisition and
application of technologies which management believes may have acquisitions in
various industries, including environmental services. Until such acquisitions,
the Company had limited revenues and substantial losses. Although the Company
believes that most of their technologies are now sufficiently developed so as to
permit commercial sales, there can be no assurances to this effect. To date,
substantially all of NAT's and NAE's revenues have been generated from
demonstration projects resulting in no material commercial sales. Management's
prior expectations of commercial sales from the technologies owned by NAT and
NAE during 1994 and 1995 have not been met.
The likelihood of the Company realizing commercial sales within the short
term has been enhanced by virtue of its acquisitions on March 7, 1995 of EET and
on June 30, 1995 of IPF. Both acquisitions were accomplished through mergers
pursuant to which an aggregate of 3,070,729 shares of Company Common Stock and
71,000 common stock purchase warrants were issued to the former EET and IPF
security holders. EET's TechXtract/TM/ Process has been used in over 200
successful projects and has generated for EET revenues of approximately
$1,000,000 since 1993. In addition, EET generated revenues of approximately
$500,000 from environmental services in 1994 which were not related to the
TechXtract/TM/ Process. IPF generated revenues of $500,000 during its first
year of operations in 1994. Both of these transactions have been accounted for
as a pooling of interests. Accordingly, the Company's consolidated financial
statements have been restated to include the accounts of EET and IPF from their
respective dates of inception.
Further expansion of the Company's business was accomplished on December
29, 1995 when the Company acquired substantially all of the assets of GAIA. The
consideration paid for the GAIA assets included (i) the issuance of 1,666,667
shares of Company Common Stock, (ii) the payment of $305,500 in cash, (iii) the
issuance of a 90-day promissory note by the Company in the principal amount of
$1,050,000 and (iv) the forgiveness of certain debt obligations (together with
all interest owed thereon) owed by GAIA to the Company of approximately
$1,881,400. The acquisition of GAIA has been accounted for under the purchase
method of accounting. Accordingly, the consolidated results of operations of
the Company do not include the operations of GAIA, which will be included in
future results of operations from the effective date of the acquisition,
December 29, 1995.
Until the Company is able to generate material revenues from the
commercialization of its technologies, there can be no assurance that profitable
operations can be attained in the short term, if at all. Should losses continue
at their historic rate, there can be no assurances that the Company can remain
viable as a going concern. See "RISK FACTORS." As more fully described below
under "Liquidity and Capital Resources," to address the historic operating
losses experienced by the Company, management is currently implementing and
pursuing a plan of operation that management believes will result in a positive
operating cash flow commencing in late 1996. There can be no assurances that
management's assumptions and projections used in developing the plan of
operation will be accurate or complete or that cash will be generated at the
rates or from the sources set forth in the plan of operation. The Company may
seek to raise additional operating capital through offerings of equity and/or
debt of the Company until such time as the Company experiences positive
operating cash flow.
RESULTS OF OPERATIONS
ANALYSIS OF YEARS ENDED DECEMBER 31, 1993 ("1993") AND DECEMBER 31, 1994
("1994")
The total net loss for 1994 of $4,936,000 reflects an increase of
$3,433,000 from the 1993 net loss of $1,503,000. This increase in losses
occurred despite increased revenues and gross profits and decreased expenses due
to the significant decrease in the other income and expense category.
Specifically, revenues increased $1,676,000, generating an increase in gross
profits of $551,000; expenses decreased $165,000; other income decreased
$4,002,000; and loss from discontinued operations increased $124,000. These
changes are addressed individually below.
REVENUES AND GROSS PROFIT
The increase of $1,676,000 in 1994 reflects increased volume from (i) a
full year of operations of EET, and (ii) the operations of IPF, which began its
business in January 1994. The increase in sales volumes from 1993 to 1994
generated an increase in gross profits
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for 1994 of $551,000. The gross margin percentage increased from 29% in 1993 to
32% in 1994, reflecting the impact of the margins contributed by IPF.
EXPENSES
Expenses decreased $165,000 in 1994, consisting of an increase in selling,
general and administrative expenses of $155,000 and a decrease in research and
development expenses of $320,000.
OTHER INCOME AND EXPENSE
Other income and expense decreased $4,002,000 from income of $3,161,00 in
1993 to expense of $841,000 in 1994. Of this decrease, (i) $2,068,000 can be
attributed to a reduction in investment and interest income relating to the
Company's investment with Euro Scotia Funding (Barbados) Limited ("ESF"); (ii)
$1,200,000 relates to the change from recognition of $600,000 income in 1993
from the sale of certain marketing rights to the recognition of $600,000 as
write-off of investment in 1994 when the stock received in consideration for the
marketing rights was determined to be worthless; and (iii) $751,000 relates to
the increase in loss from the abandonment of mining properties in 1994.
DISCONTINUED OPERATIONS
In 1994, EET entered into a formal plan to dispose of its analytical
operations. These discontinued operations contributed a loss of $116,000 in
1994, compared to a gain of $7,000 in 1993.
ANALYSIS OF YEARS ENDED DECEMBER 31, 1992 ("1992") AND DECEMBER 31, 1993
("1993")
The total net loss for 1993 of $1,503,000 reflects a decrease of $978,000
from the 1992 net loss of $2,481,000. This decrease in losses occurred
primarily due to the significant positive increases in other income categories
in combination with an increase in total expenses. Specifically, revenues
increased $269,000, generating an increase in gross profits of $77,000; expenses
increased $2,876,000; other income increased $3,769,000; and discontinued
operations generated an increase in income of $7,000. These changes are
addressed individually below.
REVENUES AND GROSS PROFITS
The increase in revenues of $269,000 and gross profits of $77,000 in 1993
is attributed totally to four months of operations of EET, which began its
business in September 1993.
EXPENSES
Expenses increased $2,876,000 in 1993, consisting of an increase in
selling, general and administrative of $1,649,000 and an increase in research
and development expenses of $1,227,000. The increase in selling, general and
administrative expenses can be attributed to increases in the following: (i)
office and administrative expenses, (ii) consulting and personnel costs, (iii)
legal and professional expenses, and (iv) the selling, general and
administrative expenses associated with EET's four months of operations
beginning in September 1993. The increase in research and development expense
can be attributed to an increase in testing and lab fees and R&D related
consulting fees.
OTHER INCOME AND EXPENSE
Other income and expenses increased $3,769,000 from an expense of $608,000
in 1992 to income of $3,161,000 in 1993. Of this increase, (i) $2,686,000 can
be attributed to the increase in investment and interest income relating to the
Company's investment with ESF; and (ii) 600,000 can be attributed to the
recognition of income relating to the sale of certain marketing rights, which
was later written off in 1994.
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ANALYSIS OF PERIODS ENDED SEPTEMBER 30, 1994 AND 1995
The results of operations for the nine months ended September 30, 1994 and
1995 have been restated to include the historical financial results of EET and
IPF. As noted above, the Company's results of operations do not include the
results of GAIA.
Revenues
Revenues increased $577,000 for the nine-month period ended September 30,
1995, compared to the same period of the previous year. This increase of 41% is
the result of increased sales volume by both IPF and EET. IPF's growth in
monthly shipments is reflected in its revenue increases of $333,000 for the nine
months ended September 30, 1995. EET contributed to the balance of the revenue
growth by increasing sales of its services $244,000 for the nine months ended
September 30, 1995.
Gross margin
Gross margin for the nine months ended September 30, 1995 36%
Gross margin for the nine months ended September 30, 1994 42%
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 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;
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 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
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.
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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.
See discussion under "Liquidity and Capital Resources" regarding (i) the
recent lawsuits filed against certain affiliates of ESF and the brokerage firm
that holds the collateral for the ESF note, and (ii) the possibility of certain
write-offs of some or all of the ESF note and the related accrued interest
receivable.
The equity in loss from joint venture represents the Company's share of the
losses for the nine-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 for the nine 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. In December 1995, the OWT joint venture was suspended pending the
development of waste streams from OWT's principal customers sufficient to
justify further investment. 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.
LIQUIDITY AND CAPITAL RESOURCES
Through September 30, 1995, the Company incurred operating losses that are
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 complete the acquisition of the assets of
GAIA and the operation of its related businesses, which will require $1,050,000
to repay a note to the sellers due by March 31, 1996 and net operating cash
requirements which are expected to approximate $100,000 per month through the
first quarter of 1996, and decline thereafter as revenues increase.
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 Common Stock, and they may
contain provisions for future contingent consideration in the event the market
price of the Company 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.
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. If successful, these offerings would provide adequate capital to repay
the $1,050,000 note due in 90 days relating to the acquisition of assets of GAIA
and to fund the Company's operations for twelve months from the date of the
latest balance sheet included in this prospectus (September 30, 1995). If not
successful, the Company would be required to scale back operations and may be
unable to continue as a going concern.
45
<PAGE>
During 1994, the Company's, cash requirements from operations increased to
$2,864,419 from $1,862,422 in 1993 and $2,400,627 in 1992. The Company's
financing activities provided the cash need for operations as follows.
The Company received approximately $5,700,000 in net cash proceeds from the
sale of approximately 1,940,000 shares of its Common Stock and 220 shares of its
preferred stock (subsequently converted to Company Common Stock) during 1994.
An additional $478,000 was obtained through borrowing from ESF which was offset
against the note receivable from ESF, described below. An additional $2,120,000
has been received from the sale of 2,929,713 shares of Company Common Stock from
January 1, 1995 through September 30, 1995. The Company has also received
$100,000 from the proceeds of note agreements since January 1, 1995. In May 1995
the Company renegotiated the maturity of its $250,000 outstanding note. This
note is now due in June 1996.
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 Company Common Stock in a limited offering to six accredited
investors. 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 Company 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.
In December 1995, the Company received proceeds of $750,000 from the
issuance of 30 shares of its Series D Convertible Preferred Stock. These
preferred shares are convertible into Company Common Stock at a discount to the
market price of Common Stock beginning in April 1996. Holders of these
preferred shares are entitled to receive an annual 15% dividend which is payable
quarterly.
In connection with the merger with EET and IPF, since January 1, 1995 the
Company has issued an aggregate of 3,070,729 shares of Company Common Stock and,
with respect to the acquisition of EET, warrants to purchase 71,000 shares of
Company Common Stock. The warrants were issued to replace EET's outstanding
stock purchase warrants.
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 connection with the merger of IPF 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. Amortization of these agreements over seven-and-
one-half years began in July 1995.
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.
In connection with the acquisition of the assets of GAIA in December 1995,
the Company paid cash of $305,500 and forgave loans made through December 29,
1995 that together with accrued interest totalled $1,881,400. The Company
issued a promissory note to the seller in the principal amount of $1,050,000
that is due March 28, 1996. In addition, the Company has an obligation to fund
up to $1,500,000 to TieTek, Inc., an affiliate of GAIA Holdings, Inc., during
the next two years for the continued development of certain technologies and
products.
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, payable in bi-weekly payments
of $11,538 beginning January 12, 1996.
In December 1995, the Company paid $100,000 to an investor relations firm
as partial payment for their annual fee per their consulting agreement. An
additional $200,000, in either cash or free-trading company common stock, is
payable by April 1996.
46
<PAGE>
In January 1996, an officer and director of the Company loaned $250,000 to
IPF under the terms of a promissory note. The note bears interest at 13% per
annum, requires monthly payments of $5,700 and matures in January 1999.
Proceeds from the note were used by IPF to purchase a machine for fabricating
wyes, tees and els. The equipment purchased serves as collateral for the note.
In 1993 and prior years, the Company derived a significant amount of its
working capital from a Note Receivable executed by ESF. Income from this Note
through April 1994 had been generated from the management by ESF of investments
in various market transactions involving the United States and other
governmental debt securities, currency forward contracts and certain corporate
debt and equity securities. Under the terms of the Note, the Company and ESF
shared equally in trading profits, although the Company's losses were limited to
income. Accordingly, the Company was not obligated to any third parties in
connection with the trading activity and ESF remained responsible to the Company
for the principal value of the Note. Beginning in the second quarter of 1994,
the Company instructed ESF to invest in less speculative investments, and
therefore, for the last three quarters of 1994 the Company received only
interest income from the Note. This change in the investment portfolio
objectives accounts for the decrease in trading profits from approximately
$2,170,000 in 1993 to approximately $512,000 in 1994 and the decrease in
interest income from approximately $520,000 in 1993 to approximately $85,000 in
1994.
The Company and ESF entered into a new note agreement which provides for
the outstanding principal balance at December 31, 1994 of $3,270,857 to be
repaid in ten (10) semi-annual payments of $327,885, plus interest at 10% per
annum, beginning July 1, 1995. The agreement allows ESF to prepay as of
December 31, 1994 the earliest payments using amounts owed to it by the Company
under the line of credit agreement and for services rendered. ESF elected to
prepay these amounts as of December 31, 1994, thereby offsetting the principal
balance by a total of $478,094. Because of this prepayment, the first payment
due under the note agreement was January 1, 1996 of $177,676, plus accrued
interest on the outstanding net balance at December 31, 1994 of $2,800,763.
Payments thereafter will be $327,885 plus accrued interest. In addition, the
line of credit agreement previously in place with ESF has been terminated.
The January 1996 payment on the ESF note was not paid in whole or in part
as required by the terms of the ESF note. The Company is currently in the
process of making demand for payment on the ESF note in accordance with the
terms of such note and applicable law. In addition, the Company's management is
exploring its other options against ESF and the brokerage firm charged with
holding the collateral for the ESF note.
The Company learned, in the last quarter of 1995, that the brokerage firm
that holds the collateral for the ESF note and an affiliate of ESF were named as
defendants in a lawsuit filed by the Florida Department of Insurance in which it
is alleged, among other things, that such brokerage firm issued false account
confirmations. The Company has also learned that such brokerage firm has
applied for withdrawal as a registered broker/dealer in a number of states,
including the state in which such securities were to have been held.
In early 1996, the Company also learned that the United States Securities
and Exchange Commission sought and was granted in late December 1995, a
temporary restraining order against certain affiliates of ESF in the United
States District Court for the District of Colorado that, among other things,
froze investor funds of the defendants and certain of their affiliates, and
required each such party to prevent the disposition, transfer or other disposal
of any of their funds or other assets then held by them, under their control or
over which they exercise investment or other authority.
After learning of the lawsuit, the Company unsuccessfully attempted to gain
reliable confirmations of the existence and the value of the securities that
were to have been held for the Company's benefit in connection with the ESF
note. The Company is uncertain at this time what effect, if any, the failure to
pay the January installment, the results of the litigation and other matters
described above may have on the ESF note and the related collateral. If
satisfactory alternative collateral arrangements cannot be obtained, the Company
may be required to write off all or a portion of the ESF note.
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.
ANALYSIS OF GAIA TECHNOLOGIES, INC.
Historically, GAIA's revenues resulted from the manufacturing and
installation of porous pipe for irrigation purposes. In 1993 and 1992 there
were two multi-phased projects used to establish the technology in the
California market which resulted in revenues of $400,000 and $390,000,
respectively. These two projects were also used to develop and document GAIA's
installation and system maintenance technology, which negatively impacted the
gross profit during this time period. In September 1994, GAIA closed its
manufacturing facility in Texas and its California sales office, and made other
costs reduction in order to refocus on the development of its technology and its
strategies for future growth. The lack of operating funds was also a major
issue for GAIA to address, and this
47
<PAGE>
significantly restricted its marketing efforts during the later part of 1994 and
1995. As a result, the majority of its sales for the year ended December 31,
1994 occurred during the first nine months of the year, and sales subsequent to
that were primarily to existing customers from manufactured inventory stock.
GAIA's current products consist of porous pipe and a new product, air-
conditioner base pads that are manufactured using GAIA's patented manufacturing
process. Two manufacturing lines were installed during the fourth quarter of
1995 that are currently able to produce porous pipe and air-conditioner base
pads. Both products are anticipated to contribute to revenues during 1996.
The equity in loss of joint venture reflects primarily GAIA's share of
legal expenses associated with the pursuit of a patent infringement case. The
Company did not assume any liabilities associated with this patent infringement
case, nor will it be entitled to any portion of a reward, if any, which may be
collected as a result of this case.
Net monthly cash operating needs of GAIA are expected to approximate
$100,000 per month through the first quarter of 1996, and decline thereafter as
revenues increase. No major expenditures are anticipated relating to equipment
or manufacturing facilities in the short term.
48
<PAGE>
EFFECTS OF INFLATION
Management does not believe the effects of inflation is material to its
operations at this time.
MANAGEMENT OF THE COMPANY AND NAE
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Directors and Executive Officers of the Company and NAE are listed
below.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John W. Parrott 46 Chief Executive Officer, President and
Director of NAE
Tim B. Tarrillion 44 Chief Executive Officer, President,
Director and Chairman of the Board of the Company;
Director of NAE
Donovan W. Boyd 42 Senior Vice President, Chief
Operating Officer, and Director of
the Company; Director of NAE
David M. Daniels 38 Executive Vice President, Secretary and Director
of the Company; and President of IPF
Judith Knight Shields 38 Senior Vice President-Finance, Chief Financial Officer
and Treasurer of the Company
</TABLE>
All directors of the Company hold office until the next annual meeting of
stockholders or until their successors are duly elected and qualified. There
are currently no committees of the Board. Executive officers hold office at the
pleasure of the Board of Directors.
JOHN W. PARROTT
John W. Parrott was Chairman of the Company from March 7, 1995 until July
28, 1995. Prior to that he served as President and Director of the Company and
NAE and after June 17, 1994 he also became Interim Chief Executive Officer and
Treasurer of the Company. Prior to joining the Company and NAE, Mr. Parrott
served since 1987 in various capacities with natural resource companies
including St. Genevieve Resources, Ltd. of Montreal, Quebec.
Mr. Parrott is an attorney who previously practiced law in Michigan from
1981 to 1987 and served as a tax specialist with the public accounting firm of
Coopers & Lybrand. He has maintained his license to practice law in the State
of Michigan and is licensed to practice before the United States Supreme Court.
He holds a Bachelor of Arts (with Highest Honors) from the University of Arizona
where he was inducted into the Phi Beta Kappa and Phi Kappa Phi Honor Societies.
He also holds a Master of Arts Degree from George Washington University and a
Juris Doctor from Wayne State University Law School.
TIM B. TARRILLION
Mr. Tim B. Tarrillion became Chief Executive Officer, President and a
Director of the Company on March 7, 1995, Chairman of the Board of the Company
in August, 1995 and Director of NAE on December 12, 1995. Mr. Tarrillion was
most recently the President and Founder of EET. Prior to starting EET, Mr.
Tarrillion was co-founder, President and Chief Operating Officer of EnClean,
Inc., a public company which was listed on NASDAQ. EnClean provided industrial
and environmental cleaning services to companies in the refining, petrochemical,
steel, paper and utility industries. After growing to over $100 million in
revenue with 40 locations nationwide, EnClean was bought by and merged into Rust
Industries in 1992.
49
<PAGE>
Mr. Tarrillion holds an MBA from Harvard University and a Masters Degree
and Bachelors Degree in Chemical Engineering from Rice University. Mr.
Tarrillion has significant experience in the environmental field. Mr.
Tarrillion received the 1991 Merrill Lynch, Inc. Magazine's Entrepreneurial
award for the Houston area in connection with his role in building EnClean from
$1 million in sales in 1984 to more than $100 million in 1992.
DONOVAN W. BOYD
Mr. Donovan W. Boyd joined the Company as Senior Vice President in April
1995, and was appointed Chief Operating Officer in July, 1995 and Director of
NAE on December 12, 1995. Prior to his position with the Company, Mr. Boyd was
Vice President of Sales and Marketing for Rust International, Industrial
Services. In that capacity he was responsible for more than $400 million in
annual sales throughout the United States. Before Rust, Mr. Boyd was a Regional
Vice President with EnClean, Inc. He holds a Bachelor's Degree in Chemical
Engineering from Tulane University and an MBA from Harvard University.
DAVID M. DANIELS
Mr. David M. Daniels joined the Company in August 1994 and currently holds
the position of Executive Vice President, Secretary and Director. Mr. Daniels
also serves as President of IPF. Prior to his current position with the
Company, Mr. Daniels was previously employed by Dean Witter Reynolds for 10
years, of which he held the position of Vice President for 8 years. Mr. Daniels
holds a Bachelors Degree in Finance from the University of Houston, as well as
an Associate Degree from Georgia Military Academy.
JUDITH KNIGHT SHIELDS
Ms. Judith Knight Shields joined the Company in March 1995. Ms. Shields
currently holds the position of Senior Vice President-Finance, Chief Financial
Officer and Treasurer. Prior to her current position with the Company, Ms.
Shields was Vice President of Mergers and Acquisitions and subsequently
Controller, with EnClean, Inc. Her ten years of experience prior to joining
EnClean, Inc. were in public accounting and venture capital. She graduated
summa cum laude from Texas A&M University with a Bachelors Degree in Accounting
and is a Certified Public Accountant.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
To the best of the Company's knowledge, there have been no events under any
state or federal bankruptcy laws, no criminal proceedings, no judgments, orders,
decrees or injunctions entered against any officer or director, and no
violations of federal or state securities or commodities laws material to the
ability and integrity of any director or executive officer during the past five
years.
EXECUTIVE COMPENSATION OF THE COMPANY
The following table sets forth a summary of the compensation paid or
accrued for the years 1993 through 1995 by the Company or for the benefit of the
named executive officers. No options were granted by the Company to management
during the fiscal year ending December 31, 1993. See "Stock Options and
Warrants."
50
<PAGE>
SUMMARY COMPENSATION TABLE/1/
<TABLE>
<CAPTION>
=================================================================================================================================
Long Term Compensation
-------------------------
Annual Compensation Awards Payouts
- ---------------------------------------------------------------------------------------------------------------------------------
Other Restricted Stock
Name Annual Stock Options/ All Other
and Compen- Award(s) SARS LTIP Compen-
Principal Position Year(s) Salary($) Bonus($) sation($) ($) (#) Payouts($) sation($)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John Parrott(2) 1995 101,205 - 75,000(3) - - - -
Former Chairman 1994 150,000 - - - - - -
and Director 1993 - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Tim B. Tarrillion(4) 1995 146,537 - 25,000(5) - 500,000 - -
Chief Executive 1994 - - - - - - -
Officer, President 1993 - - - - - - -
and Director
- ---------------------------------------------------------------------------------------------------------------------------------
David M. Daniels(6) 1995 130,529 - - - 200,000 - -
Executive Vice 1994 125,000 - - - - - -
President, 1993 60,000 - - - - - -
Secretary and Director
- ---------------------------------------------------------------------------------------------------------------------------------
Donovan W. Boyd 1995 98,655(7) - - - 300,000 - 26,417(8)
Senior Vice 1994 - - - - - - -
President, COO 1993 - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Judith K. Shields 1995 92,308(9) - - - 300,000 - -
Senior Vice 1994 - - - - - - -
President-Finance 1993 - - - - - - -
CFO and Treasurer
=================================================================================================================================
</TABLE>
___________________________
(1) Based upon the fiscal years ended December 31, 1995, 1994 and 1993.
(2) Mr. Parrott resigned as Chairman and Director on July 28, 1995.
(3) Payment of $15,000 a month for consulting services in August through
December 1995.
(4) Mr. Tarrillion became Chief Executive Officer, President and a Director of
the Company on March 7, 1995.
(5) Payments received in January and February 1995 as a consultant to the
Company.
(6) Mr. Daniels became a Director during August 1994 and became an Executive
Vice President, and Secretary of the Company during January 1995.
(7) Mr.Boyd's employment began on April 1, 1995.
51
<PAGE>
(8) Payments made to relocate Mr. Boyd to Houston, Texas.
(9) Ms. Shield's employment began on March 20, 1995.
52
<PAGE>
STOCK OPTIONS
The following table sets forth for each of the named executive officers
regarding the grant of stock options by the Company in the 1995 fiscal year and
their potential realizable values. No stock appreciation rights have been
granted to employees.
<TABLE>
<CAPTION>
Option Grants in the 1995 Fiscal Year
- --------------------------------------------------------------------------------------------------------------
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
% of
No. of Total
Securities Options
Underlying Granted to Exercise
Options Employees or Base
Granted in Fiscal Price Expiration 5% (Price 10% (Price
Name (#) Year ($/Sh) Date = $.82 = $1.25
- --------------------------------------------------------------------------------------------------------------
All stockholders N/A N/A $ N/A 19,200,000(1) $29,200,000(1)
- --------------------------------------------------------------------------------------------------------------
John Parrott 0 0 0 0 0 0
Tim B. Tarrillion 400,000 16% 2.50 2004 1,550,000 2,360,000
100,000 4% 1.00 2001 134,000 177,000
Daniel D. Daniels 200,000 8% 2.50 2004 775,000 1,180,000
Donovan W. Boyd 200,000 8% 2.50 2004 775,000 1,180,000
100,000 4% 1.00 2001 134,000 177,000
Judith K. Shields 200,000 8% 2.50 2004 775,000 1,180,000
100,000 4% 1.00 2001 134,000 177,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
_______________________
(1) The aggregate value of the 23,477,285 outstanding shares of Common Stock
of the Company on December 31, 1995, assuming a share price of $.53 on
December 29, 1995, was approximately $12,400,000. If the Common Stock
appreciates at a compound rate of 5% per year over the option term, the
aggregate value of all such shares would be approximately $19,200,000, an
increase of $6,800,000 for all stockholders. Similarly, if the Common
Stock appreciates at a compound rate of 10% per year over the ten-year
option term, the aggregate value of all such shares would be approximately
$29,200,000, an increase of $16,800,000 for all stockholders. The purpose
of providing this information is to indicate the total potential
stockholder gain over the term of the options comparable to the potential
gain shown for the options.
53
<PAGE>
The following table sets forth for each of the named executive officers
information regarding stock options exercised by such officers during the 1995
fiscal year, together with the number and value of stock options held at 1995
fiscal year-end, each on an aggregated basis.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Aggregated Option Exercises in the 1995 Fiscal Year
and Fiscal Year-End Option Value
- --------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year-End Fiscal Year-End /1/
Number of --------------- -------------------
Shares Value
Name Acquired Realized Exercisable/ Exercisable/
on Exercise Unexercisable Unexercisable
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John Parrott -- -- 300,000/0 --
Tim B. Tarrillion -- -- 0/500,000 --
David M. Daniels -- -- 180,000/320,000 --
Donovan W. Boyd -- -- 0/300,000 --
Judith K. Shields -- -- 0/300,000 --
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------
/1/ Market value of underlying securities at year-end ($.53), minus the
exercise price.
54
<PAGE>
EMPLOYMENT AGREEMENTS
In February 1995, the Company entered into employment agreements with Mr.
Tarrillion, Mr. Boyd, Mr. Daniels and Ms. Shields.
Mr. Tarrillion's employment agreement provides for a base salary of
$180,000, plus bonuses and cost of living increases, and stock options to
purchase 500,000 shares of the Company's Common Stock which vest over four years
commencing on March 31, 1996. His agreement has a term of five years.
Mr. Boyd's employment agreement provides for a base salary of $135,000,
plus bonuses and cost of living increases, as well as options to purchase
300,000 shares of the Company's Common Stock which vest over a period of four
years commencing March 31, 1996. His agreement has a term of five years.
Mr. Daniels' employment agreement provides for a base salary of $135,000,
plus bonuses and cost of living increases, as well as options to purchase
200,000 shares of the Company's Common Stock which vest over a period of four
years commencing March 31, 1996. His agreement has a term of five years.
Ms. Shields' employment agreement provides for a base salary of $120,000,
plus bonuses and cost of living increases, as well as options to purchase
300,000 shares of the Company's Common Stock which vest over a period of four
years, commencing on March 31, 1996. Her employment is for a term of five
years.
STOCK OPTIONS AND WARRANTS
The Company presently has no formal stock option plan. However, through
December, 1995 the Company has granted options to purchase 4,940,000 shares of
the Company's common stock. Of these 3,190,000 are outstanding to current and
former employees, have option prices ranging from $1.25 to $2.50, vest 20% to
25% per year, and have terms ranging from four to five years after vesting. The
remaining options were granted to current or past note holders. Options to
purchase 600,000 shares relate to one certain note agreement, have option prices
ranging from $1.50 to $2.50, and expire in November 1997. The remaining options
have prices ranging from $.75 to $1.75 and expire September 1996 through
September 1999.
Included in these options to employees are 1,900,000 granted to current or
former directors of the Company and 300,000 granted to other executive officers
of the Company.
In addition, the Company has outstanding warrants to purchase approximately
5,280,000 shares of the Company's common stock. These originated from debt and
equity placements, the merger with EET, and certain consulting arrangements. Of
these warrants, 2,700,000 have a $1.00 warrant price and expire in September
2000; 1,900,000 have a $2.00 warrant price and expire in December 1997; 200,000
have a warrant price of $1.50 and expire July 1998 through December 1999; 75,000
have a warrant price of $2.25 and expire in June 1996; 75,000 have a warrant
price of $3.30 and expire in April 1996; 50,000 have warrant prices of $4.50 to
$6.00 and expire in January 1998; 130,000 have a warrant price of $.75 and
expire in December 1998; and 150,000 have a warrant price of $1.00 and expire in
August 1998.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF THE COMPANY AND NAE
The following table sets forth information with respect to the securities
holdings of all persons which the Company, by virtue of filings with the
Securities and Exchange Commission, has reason to believe may be deemed the
beneficial owners of more than 5% of the Company's outstanding common stock as
of December 31, 1995. Also set forth in the table is the beneficial ownership
of all of the Company's outstanding common stock as of such date by all officers
and directors, individually and as a group.
55
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percentage
Name and Address of Beneficial Owner Ownership of Class(1)
- ------------------------------------- ----------------- -------------
<S> <C> <C>
John W. Parrott(2) 731,205 3.1
10021 N. 42nd Street
Phoenix, AR 85028
Tim B. Tarrillion(3) 681,630 2.9
10102 Cedar Creek
Houston, TX 77042
Donovan W. Boyd - -
4014 N. Beechwood Ct.
Houston, TX 77059
David M. Daniels(4) 805,000 3.4
7940 Drove Ridge Drive
Houston, TX 77061
Judith Knight Shields(5) 17,500 -
4710 Bellaire Boulevard, Suite 300
Bellaire, TX 77401
Gold Spinners International, Inc(6) 2,925,000 12.4
5201 S. Mission Road
Mt. Pleasant, MI 48858
All officers and directors as a group 2,235,380 9.5
(4) persons
</TABLE>
_____________________
(1) Based upon 23,477,285 shares outstanding at December 31, 1995.
(2) Includes options to purchase 300,000 shares of the Company's Common Stock.
See MANAGEMENT OF THE COMPANY AND NAE - Executive Compensation of the
Company." Also, Mr. Parrott is a director and 25% stockholder of GSI. The
foregoing table reflects Mr. Parrott's proportionate interest in 731,250
shares owned by GSI. Mr. Parrott disclaims beneficial ownership as to all
other shares of the Company's Common Stock owned by GSI.
(3) Includes 530,500 shares and 50,000 common stock purchase warrants received
by Mr. Tarrillion in conjunction with a merger transaction between the
Company and EET in March, 1995. Also includes 91,130 shares owned through
a profit sharing plan for the benefit of Mr. Tarrillion. Does not include
options to purchase 500,000 shares of the Company's common stock which
will not commence vesting until March 31, 1996, which were received in
conjunction with the EET merger. Also does not include 51,000 shares
received by trusts on behalf of Mr. Tarrillion's minor children in
connection with the EET merger which are held by an independent trustee as
to which Mr. Tarrillion disclaims any beneficial ownership. See
"MANAGEMENT OF THE COMPANY AND NAE -Executive Compensation of the
Company."
56
<PAGE>
(4) Includes 600,000 shares received by Mr. Daniels in conjunction with a
merger transaction between the company and IPF in June 1995. Includes
options to purchase 120,000 shares of the Company's common stock. Does not
include options to purchase 180,000 shares which do not commence vesting
until January 1, 1996 or options to purchase 200,000 shares that do not
commence vesting until March 31, 1996. See "MANAGEMENT OF THE COMPANY AND
NAE - Executive Compensation of the Company."
(5) Includes 10,000 shares received by Ms. Shields and her husband in
connection with the merger transaction between the Company and EET in
March, 1995, but does not include options to purchase 300,000 shares that
do not commence vesting until March 31, 1996. See "MANAGEMENT OF THE
COMPANY AND NAE - Executive Compensation of the Company."
(6) Of these shares, 1,625,000 are "contingent escrow shares" which may be
cancelled if certain performance criteria are not met. Although these
shares have been treated as outstanding for purposes of this schedule,
they shall be released to the owner thereof, if, and only if,
the Company shall be acquired prior to December 31, 1996 (whether by
merger, share exchange involving more than 80% of its outstanding
securities, or a sale of all or substantially all of its assets) for a
purchase price exceeding $250,000,000.
57
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Advances From Directors, Officers and Certain Affiliates.
Mr. John W. Parrott, former Chairman of the Company and the President and
director of NAE, and Mr. Thom Robinson, former chief executive officer and
director of the Company, each own 25% of the issued and outstanding shares of
GSI. From its inception through 1992, the Company was advanced an aggregate of
$42,600 from GSI. During 1993, the Company repaid $40,000 of the advances and
was advanced an additional $281,381, resulting in aggregate unpaid advances of
$281,382. During 1994, the Company repaid all of the advances to GSI.
Through a corporate affiliate, Mr. Robinson also advanced the Company
$670,000 during 1993, of which the Company repaid $493,500, leaving aggregate
unpaid advances of $176,500 at the end of 1993. During 1994, this affiliate
provided additional advances of $335,000 to the Company and was repaid $522,500
of the advances, thus, leaving a balance of $11,000 as of December 31, 1994.
Mr. Parrott advanced the Company $30,000 for expenses during 1994, all of
which was repaid by the end of 1994.
Consulting Agreement with John W. Parrott
Effective as of July 28, 1995, John W. Parrott terminated his employment
agreement with the Company and entered into a consulting agreement (the
"Consulting Agreement"). The Consulting Agreement provides that Mr. Parrott
will provide advice to the Company with respect to the Company's transition in
management and certain litigation and financing matters through December 31,
1995. Pursuant to the Consulting Agreement, Mr. Parrott will receive $15,000 a
month through December 31, 1995 for his consulting services, and a payment in
settlement of his five-year employment contract of $250,000, payable in bi-
weekly payments of $11,538 beginning January 12, 1996.
Transactions with Directors, Officers and Certain Affiliates
Certain corporate affiliates of James Impero, a former officer and director
of the Company, entered into a sublicense agreement with the Company during
March 1994 pursuant to which these affiliates assigned and conveyed to the
Company the exclusive marketing rights to the Oleofilter/TM/ System that such
affiliates had directly licensed from Exxon. Pursuant to that sublicense, the
Company paid those affiliates a license fee of $50,000 during 1994 and $50,000
in January 1995.
During 1993, Mr. John Parrott and Mr. Thom Robinson were directors,
officers and minority stockholders of an inactive Canadian public company,
International Technologies, Inc. ("ITI"). In April 1993, ITI acquired CCSI in a
"reverse acquisition" whereby the former CCSI stockholders received a
controlling interest in stock of ITI and ITI was subsequently renamed CCSI.
CCSI entered in a joint venture agreement with the Company and Messrs. Parrott
and Robinson resigned from all positions with, and relinquished their stock
ownership in CCSI. See "BUSINESS OF THE COMPANY AND NAE - Sales, Marketing and
Joint Venture Agreements."
In June 1995, the Company acquired by merger IPF, a company owned by Mr.
David Daniels, a director and officer of the Company and two other individuals
who were subsequently hired by the Company. The Company issued 1,300,000 shares
of the Company's Common Stock in conjunction with the merger, 600,000 of which
were issued to Mr. Daniels. Mr. Daniels was also released from a personal
guaranty of certain debts of IPF in the amount of $50,000. The Company also
agreed to repay certain outstanding loans made by Mr. Daniels to IPF on or
before December 31, 1995. The outstanding balance due to Mr. Daniels with
respect to such loans was $120,000 at December 31, 1995. This amount was repaid
to him by Mr. Tarrillion. IPF simultaneously executed a note payable to Mr.
Tarrillion in the amount of $120,000. The note due to Mr. Tarrillion bears
interest at 12% per annum, payable monthly, and matures in January 1997.
Further, Mr. Daniels entered into an amendment to his existing employment
agreement with the Company to serve as President of IPF.
In January 1996, Mr. Tarrillion loaned $250,000 to IPF under the terms of a
promissory note. The note bears interest at 13% per annum, requires monthly
payments of $5,700 and matures in January 1999. Proceeds from the note were used
by IPF to purchase a machine for fabricating wyes, tee and els. The equipment
purchased serves as collateral for the note.
The Company has employment agreements with Messrs. Tarrillion, Boyd and
Daniels, and Ms. Shields. See "MANAGEMENT OF THE COMPANY AND NAE - Employment
Agreements."
58
<PAGE>
The Company has granted certain options and warrants to directors and
officers of the Company. See "MANAGEMENT - Stock Options and Warrants."
LEGAL OPINIONS
Clark, Ladner, Fortenbaugh & Young has passed upon the validity of the
shares of Company Common Stock to be issued in connection with the Merger and
certain tax consequences of the Merger.
EXPERTS
The financial statements included in this registration statement have been
audited by BDO Seidman, LLP, and Shoemaker & Wilson, independent certified
public accountants, to the extent and for the periods set forth in the
respective reports of such firms contained in the registration statement and are
included in reliance upon such reports given upon the authority of such firms as
experts in accounting and auditing. The reports of BDO Seidman, LLP, contain an
additional paragraph regarding the Company's and NAE's ability to continue as
going concerns.
STATEMENT OF INDEMNIFICATION
Article IX of the Restated Certificate of Incorporation states that
directors of the registrant shall not be liable for monetary damages for breach
of fiduciary duty "to the full extent permitted by the General Corporation Law
of Delaware as the same exists or may hereafter be amended." The registrant is
also empowered by Section 102(b) of the Delaware General Corporation Law to
include a provision in the Certificate of Incorporation which would limit a
director's liability to the registrant or its stockholders for monetary damages
for breaches of fiduciary duty as a director. Article VIII of the Certificate
of Incorporation provides such a limitation. As Delaware law now exists,
directors will remain liable for damages for (i) breach of their duty or loyalty
to the registrant and its stockholders; (ii) their failure to act in good faith;
(iii) their intentional misconduct or knowing violation of law; (iv) improper
dividend payments, stock repurchases or redemptions; and (v) any transaction
from which the director derived an improper personal benefit.
59
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
North American Technologies Group, Inc.
We have audited the accompanying consolidated balance sheets of North American
Technologies Group, Inc. and subsidiaries as of December 31, 1993 and 1994 and
the related consolidated statements of operations, cash flows and stockholders'
equity for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of EET, Inc., which
statements reflect total assets of $1,686,212 and $1,366,425, respectively as of
December 31, 1993 and 1994 and total revenues of $269,073 and $1,426,748 for the
years then ended. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for EET, Inc. is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of North American
Technologies Group, Inc. and subsidiaries as of December 31, 1993 and 1994 and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
F-1
<PAGE>
We previously audited and reported on the consolidated financial statements of
North American Technologies Group, Inc. and subsidiaries for the years ended
December 31, 1993 and 1994, prior to their restatement for the 1995 pooling of
interests. We have audited the combination of the accompanying financial
statements for the years ended December 31, 1993 and 1994, after restatement for
the 1995 pooling of interests; in our opinion, such consolidated financial
statements have been properly combined on a basis described in note 4 to the
consolidated financial statements.
As discussed in Note 5 to the consolidated financial statements, the Company is
involved in several legal matters, the ultimate outcome of which cannot
presently be determined, and, therefore, the consolidated financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in notes 5 and 22 to the
consolidated financial statements, the Company's attainment of profitable
operations are dependent upon future events, including obtaining adequate
financing to fulfill its development activities, achieving a level of sales
adequate to support the Company's cost structure, and favorable resolution of
certain litigation. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with regard to these
matters are discussed in Note 22. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ BDO SEIDMAN LLP
BDO SEIDMAN LLP
Philadelphia, Pennsylvania
April 13, 1995, except for
Note 6, as to which the
date is April 24, 1995
and Notes 4 and 21, as
to which the date is
September 22, 1995
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
EET, Inc.
We have audited the accompanying balance sheets of EET, Inc., a development
stage company, as of December 31, 1994 and 1993, and the related statements of
operations, shareholders' equity, and cash flows for the period from August 23,
1993 (inception) through December 31, 1994, for the year ended December 31,
1994, and for the period from August 23, 1993 (inception) through December 31,
1993 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EET, Inc., at December 31, 1994
and 1993, and the results of its operations and its cash flows for the period
from August 23, 1993 (inception) through December 31, 1994, for the year ended
December 31, 1994, and for the period from August 23, 1993 (inception) through
December 31, 1993, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Houston, Texas
February 9, 1995
F-3
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
December 31, 1993 1994
- ----------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash $ 286,904 $3,266,518
Accounts receivable, less allowance for doubtful
accounts of $30,000 in 1994 351,892 424,626
Note receivable 2,931,580 -
Advance payments 216,500 45,812
Prepaid expenses and other current assets 62,324 165,730
Advances to related parties - 30,890
- ----------------------------------------------------------------------------------
Total current assets 3,849,200 3,933,576
Note receivable - 2,800,763
Property and equipment, net of accumulated depreciation
of $46,146 in 1993 and $140,696 in 1994 512,447 592,858
Investment, at cost 600,000 -
Mining assets 794,315 -
Purchased technologies, net of accumulated amortization
of $25,000 in 1993 and $75,000 in 1994 225,000 175,000
Goodwill, net of accumulated amortization
of $7,936 in 1993 and $31,744 in 1994 468,231 444,422
Other 66,690 244,058
- ----------------------------------------------------------------------------------
$6,515,883 $8,190,677
- ----------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE>
North American Technologies Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
December 31, 1993 1994
- ----------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current
<S> <C> <C>
Line of credit $ - $ 300,000
Current maturities of long-term debt 75,000 562,500
Accounts payable and accrued expenses 796,357 1,201,019
Notes payable to stockholders 350,000 213,302
Advances from related parties 487,582 3,142
Accrued interest payable 39,156 68,959
- ----------------------------------------------------------------------------------
Total current liabilities 1,748,095 2,348,922
- ----------------------------------------------------------------------------------
Long-term debt 462,500 500,000
- ----------------------------------------------------------------------------------
Minority interest 32,976 334,312
- ----------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value
10,000,000 shares authorized, none and 80 issued - -
Common stock, $.001 par value
50,000,000 shares authorized
15,834,719 and 18,692,489 issued 15,835 18,692
Additional paid-in capital 11,882,695 17,613,667
Deficit (7,518,242) (12,454,572)
Less notes receivable for the purchase of stock (75,000) (138,032)
Treasury stock, at cost - 900,000 and 803,000 shares (32,976) (32,312)
- ----------------------------------------------------------------------------------
Total stockholders' equity 4,272,312 5,007,443
- ----------------------------------------------------------------------------------
$6,515,883 $8,190,677
- ----------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-5
<PAGE>
North American Technologies Group, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Year Ended December 31, 1992 1993 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ - $ 269,073 $1,945,697
Cost of revenues - 191,310 1,317,171
- ----------------------------------------------------------------------------------
Gross margin - 77,763 628,526
- ----------------------------------------------------------------------------------
Expenses
Research and development expenses
(including $120,000 paid to related
parties in 1992) 598,665 1,826,089 1,506,073
Selling, general and administrative
expenses 1,274,393 2,923,659 3,078,743
- ----------------------------------------------------------------------------------
Total expenses 1,873,058 4,749,748 4,584,816
- ----------------------------------------------------------------------------------
Operating loss (1,873,058) (4,671,985) (3,956,290)
- ----------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
North American Technologies Group, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Year Ended December 31, 1992 1993 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Other income (expense)
Investment income $ - $2,169,672 $ 512,312
Interest income 6,624 523,623 112,897
Interest expense (6,545) (37,102) (121,986)
Minority interest in net loss
(income) of subsidiary 180,122 182,009 (22,532)
Equity in net (loss) income
of affiliate - (233,846) 50,000
Recapitalization costs (788,349) - -
Sale of marketing rights - 600,000 -
Loss on write-off of investment - - (600,000)
Loss on abandonment of mining properties - (43,251) (794,314)
- ----------------------------------------------------------------------------------
Total other income (expense) (608,148) 3,161,105 (863,623)
- ----------------------------------------------------------------------------------
Loss from continuing operations (2,481,206) (1,510,880) (4,819,913)
- ----------------------------------------------------------------------------------
Discontinued operations
Revenues - 138,975 291,588
Costs of services rendered - 131,597 408,005
- ----------------------------------------------------------------------------------
Gain (loss) from operations of
discontinued segment - 7,378 (116,417)
- ----------------------------------------------------------------------------------
Net loss $(2,481,206) $(1,503,502) $(4,936,330)
- ----------------------------------------------------------------------------------
Loss per common and common
equivalent share $(.37) $(.25) $(.35)
- ----------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 6,772,297 5,986,711 13,994,515
- ----------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-7
<PAGE>
North American Technologies Group, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Year ended December 31, 1992 1993 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(2,481,206) $(1,503,502) $(4,936,330)
Adjustments to reconcile net loss to
net cash (used) in operating activities
Stock received in exchange for sale
of marketing rights - (600,000) -
Minority interest in net loss of
subsidiary (180,122) (182,009) -
Depreciation and amortization - 79,416 238,609
Provision for bad debts - - 30,000
Stock of subsidiary issued for
services 450,000 - -
Accrued interest on notes receivable,
stockholder - - (8,032)
Stock issued for services - - 31,260
Loss on abandonment of mining
properties - 43,251 794,315
Loss on write-off of investment - - 600,000
Decrease (increase) in assets
Accounts receivable - (338,873) (102,734)
Advance payments (538,526) 322,026 170,688
Prepaid expenses and other
current assets (1,200) (52,491) 8,068
Advances to related parties - - (30,890)
Other assets (5,100) (6,670) (11,327)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 348,982 354,055 319,019
Accrued interest payable 6,545 22,375 43,080
- ------------------------------------------------------------------------------------
Net cash (used) in operating activities (2,400,627) (1,862,422) (2,854,274)
- ------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE>
North American Technologies Group, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Year ended December 31, 1992 1993 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from investing activities
Increase in note receivable $ - $(2,931,580) $(130,817)
Purchase of business,
net of cash acquired - (923,827) -
Decrease in advances receivable 54,500 - -
Collection of notes receivable 667,910 175,000 -
Purchase of technology - (250,000) -
Payment of organization costs - (49,136) (29,957)
Payments relating to patent - (2,703) (12,467)
Purchase of property and equipment - (75,331) (480,302)
- ------------------------------------------------------------------------------------
Net cash provided (used) by investing
activities 722,410 (4,057,577) (653,543)
- ------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from notes payable
to stockholder - 350,000 40,000
Issuance of common stock - 1,754,809 3,623,569
Issuance of preferred stock - - 2,024,000
Issuance of preferred stock
of subsidiary 350,000 - 15,000
Issuance of common stock
of subsidiaries 1,307,989 2,554,859 -
Purchase of treasury stock - - (3,000)
Line of credit borrowings - - 634,000
Issuance of debt 756,000 729,782 724,508
Repayment of debt - (12,500) (570,646)
- ------------------------------------------------------------------------------------
Net cash provided by financing
activities 2,413,989 5,376,950 6,487,431
- ------------------------------------------------------------------------------------
Net increase (decrease) in cash 735,772 (543,049) 2,979,614
Cash, at beginning of year 94,181 829,953 286,904
- ------------------------------------------------------------------------------------
Cash, at end of year $829,953 $286,904 $3,266,518
- ------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Preferred Common Stock
Shares Shares Amount
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1992 - 13,120,333 $13,120
Issuance of common stock in exchange
for all outstanding shares of EET, Inc. - 1,568,617 1,569
Sale of common stock - 111,143 111
Issuance of common stock of subsidiary
upon exercise of options - - -
Issuance of common stock and treasury stock in
exchange for minority interest of subsidiary - 1,034,626 1,035
Notes receivable from stockholders - - -
Net loss for the year - - -
- ------------------------------------------------------------------------------------------
Balance, at December 31, 1993 - 15,834,719 15,835
Issuance of common stock in exchange for all outstanding
shares of Industrial Pipe Fittings, Inc. - 1,300,000 1,300
Sale of common stock - 1,943,019 1,942
Issuance of common stock in connection with financing - 200,000 200
Issuance of Series A convertible preferred stock 220 - -
Issuance of common stock upon conversion
of Series A preferred stock (170) 1,219,751 1,220
Issuance of Series B convertible preferred stock 15 - -
Issuance of Series C convertible preferred stock 15 - -
Issuance of common stock for services - 20,000 20
Issuance of common stock from treasury - - -
Purchase of treasury stock - - -
Retirement of Series I Escrow shares - (1,625,000) (1,625)
Cancellation of common stock - (200,000) (200)
Notes receivable from stockholders - - -
Net loss for the year - - -
- ------------------------------------------------------------------------------------------
Balance, December 31, 1994 80 18,692,489 $18,692
- ------------------------------------------------------------------------------------------
</TABLE>
F-10
<PAGE>
North American Technologies Group, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Additional Notes
Paid-In Treasury Stock Receivable
Capital Deficit Shares Amount Stockholder Total
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$7,844,883 $(6,014,740) 5,343,147 $(195,108) $ - $ 1,648,155
1,078,240 - - - - 1,079,809
749,889 - - - - 750,000
1,629,833 - - - - 1,629,833
579,850 - (4,443,147) 162,132 - 743,017
- - - - (75,000) (75,000)
- (1,503,502) - - - (1,503,502)
- ----------------------------------------------------------------------------------
11,882,695 (7,518,242) 900,000 (32,976) (75,000) 4,272,312
- - - - - 1,300
3,675,327 - - - - 3,677,269
649,800 - - - - 650,000
2,024,000 - - - - 2,024,000
(1,220) - - - - -
- - - - - -
- - - - - -
31,240 - - - - 31,260
- - (100,000) 3,664 - 3,664
- - 3,000 (3,000) - (3,000)
1,625 - - - - -
(649,800) - - - - (650,000)
- - - - (63,032) (63,032)
- (4,936,330) - - - (4,936,330)
- ----------------------------------------------------------------------------------
$17,613,667 $(12,454,572) 803,000 $(32,312) $(138,032) $5,007,443
- ----------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-11
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Preferred Common Stock
Shares Shares Amount
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1992 - 21,527,251 $ 4,241,368
Issuance of common stock of subsidiary
in exchange for cancellation of debt - - -
Sale of common stock of subsidiary - - -
Issuance of common stock of subsidiary in
exchange for investment in common stock
of MBCC - - -
Adjustment arising from recapitalization,
1 for 1.73 share reverse stock split and
change from no par value to $.001 per share - (9,105,942) (4,228,947)
Acquisition of treasury stock through issuance
of preferred stock of subsidiary and
resultant creation of minority interest - - -
Issuance of common stock of subsidiary as
payment for services - - -
Sale of common stock of subsidiary - - -
Sale of preferred stock of subsidiary and
conversion into common stock of the Company - 70,000 70
Issuance of common stock of subsidiary upon
exercise of options - - -
Issuance of common stock in exchange for
net assets of MBCC - 561,820 562
Issuance of common stock for conversion
of debenture - 67,204 67
Net loss for the year - - -
- -------------------------------------------------------------------------------------
Balance, at December 31, 1992 - 13,120,333 $13,120
- -------------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
North American Technologies Group, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Additional Notes
Paid-In Treasury Stock Receivable
Capital Deficit Shares Amount Stockholder Total
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 15,683 $(3,533,534) - $ - $(10,000) $713,517
175,000 - - - - 175,000
250,000 - - - - 250,000
334,950 - - - - 334,950
4,218,947 - - - 10,000 -
- - 5,343,147 (195,108) - (195,108)
450,000 - - - - 450,000
994,153 - - - - 994,153
349,930 - - - - 350,000
45,846 - - - - 45,846
510,441 - - - 511,003
499,933 - - - 500,000
- (2,481,206) - - (2,481,000)
- ----------------------------------------------------------------------------------
$7,844,883 $(6,014,740) 5,343,147 $(195,108) $ - $1,648,155
- ----------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-13
<PAGE>
North American Technologies Group, Inc.
Summary of Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of North
American Technologies Group, Inc. ("NATK") and the accounts of subsidiaries in
which the corporation directly or indirectly owns more than 50% of the voting
stock as of the end of each year. Investments in other companies in which less
than a majority interest is held are generally accounted for by the equity
method. All significant intercompany accounts and transactions have been
eliminated. North American Technologies Group, Inc., its subsidiaries and
affiliates are referred to herein as the "Company".
As a result of the acquisitions of EET, Inc. and Industrial Pipe Fittings, Inc.
(See note 4), the consolidated financial statements which had previously been
presented as a development stage enterprise have been restated and reclassified
to conform the prior years' data to the current presentation.
The Company
The Company is engaged in the development, acquisition and application of
technologies which management believes have applications in various industries,
including environmental services and energy resource reclamation. The
technologies include enzyme processes, mechanical systems and bioremedial
technologies.
Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents.
Goodwill
Goodwill is stated at cost, net of accumulated amortization. The Company
amortizes goodwill over a period of 20 years.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Leasehold improvements are amortized
over the term of the lease. Fixed assets are depreciated on the straight line
basis over their estimated useful lives, generally three to seven years.
F-14
<PAGE>
North American Technologies Group, Inc.
Summary of Accounting Policies
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". Under this method, deferred
tax assets or liabilities result from temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in taxable or deductible amounts in future years.
This change in accounting method had no effect upon the consolidated financial
statements.
Prior to 1993, the Company utilized the deferred method to compute income taxes
as required by Accounting Principles Board Opinion No. 11.
Research and Development
Expenditures for research and development of products and processes and for the
operation of pilot projects are charged to expense as incurred. The Company
reclassified $213,761 and $82,721 previously reported by the Company as revenue
in the years ended December 31, 1992 and 1993 as an offset against research and
development expenses since these amounts represent a reimbursement of cost.
Loss Per Common Share
The loss per common share is computed by dividing the loss applicable to common
stock by the weighted average number of common shares outstanding and common
stock equivalents, if dilutive.
Revenue Recognition
Service revenues are recognized as services are performed. Such revenues also
include the cost of services subcontracted to third parties that are reimbursed
to the Company by its customers. Product revenues are recognized when the
products are shipped.
F-15
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
1. Recapitalization and Other Significant Corporate Matters
From its initial public offering in 1987 until March 31, 1992, the Company's
predecessor, Mail Boxes Coast to Coast, Inc. ("MBCC"), acted as exclusive area
franchisee for Mail Boxes, Etc. U.S.A., Inc. ("MBE") and, in that capacity, sold
franchises on behalf of MBE and provided subsequent operational assistance to
the individual MBE service center franchisees. During that period, MBCC incurred
significant operating losses and in 1991 it sold its Manhattan, New York
exclusive MBE area franchise to concentrate on its Los Angeles, California MBE
area franchise and to reduce expenses associated with maintaining operations on
both the East and West coasts. However, operating losses continued and MBCC was
in danger of losing its NASDAQ listing. After considering various alternatives,
the Board of Directors concluded that it was in the best interest of MBCC's
stockholders for the Company to reorganize and restructure to maximize the value
of the Company as a public corporation. As a result, between March and June,
1992, the Company undertook a series of transactions that resulted in the
disposition of all of the operating assets and liabilities of MBCC, and the
acquisition of 58.7 percent of the outstanding common stock of North American
Technologies, Inc. ("NAT"), a company engaged in developing technologies
relating to the environmental clean-up industry and reclamation of natural
resources.
At the time of the combination with NAT, MBCC had sold to its existing
management and principal stockholders the operating assets in exchange for
98,711 shares of MBCC's common stock and other consideration. As a result, MBCC
had no operations. Additionally, the stockholders of NAT received MBCC shares
which, after considering the conversion of convertible preferred stock issued in
the combination, gave them voting control over the combined companies.
Accordingly, for accounting purposes, NAT is considered the continuing entity,
and the transactions are accounted for as a recapitalization of NAT followed by
the issuance of new NAT shares of common stock for the net assets of MBCC.
The following describes both the legal form and the financial statement
treatment of each of the transactions in the combination of the two companies:
(a) An MBCC subsidiary (Daily Mail, Inc.) issued 55,360 shares of convertible
preferred stock, which were subsequently converted into 5,536,000 shares of
MBCC common stock, in exchange for 10,840,958 shares, representing 50.3% of
the outstanding common stock of NAT.
F-16
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
Additionally, an MBCC subsidiary issued 266,617 shares of convertible
preferred stock, which were subsequently converted into 1,542,162 shares of
MBCC common stock, in exchange for 10,662,633 shares, representing 91.2% of
the outstanding common stock of North American Environmental Group, Inc.
("NAE"), a NAT subsidiary.
(b) In connection with the NAE transaction, Daily Mail, Inc. issued to NAT
50,000 shares of convertible preferred stock, which were subsequently
converted into 5,000,000 shares of MBCC common stock, in exchange for NAT's
investment in NAE; this transaction has been eliminated in consolidation and
the 5,000,000 common shares are considered to have been retired for
financial statement purposes.
(c) An MBCC subsidiary (522728 Alberta Ltd.) issued 9,000 shares of $3.50
convertible preferred stock (convertible into 900,000 shares of MBCC common
stock) for 1,800,000 shares, representing 8.4% of the outstanding common
stock of NAT. This is accounted for as the purchase of 900,000 treasury
shares in exchange for a preferred stock minority interest in a subsidiary,
recorded at the book value of the treasury shares acquired.
(d) 8,886,293 shares, representing 41.3 percent of the outstanding common stock
of NAT, were not acquired by MBCC in the transactions. This has been
recorded, at the book value, as the repurchase of 4,443,147 shares of
treasury stock in exchange for a 41.3 percent minority interest in a
subsidiary. During 1993, the Company acquired those shares on the basis of
one NATK common share for two NAT shares.
(e) The effect of the transactions in (a) through (d) above have been accounted
for as a reverse stock split whereby 21,527,251 previously outstanding NAT
common shares become 12,421,309 outstanding common shares.
(f) The 561,820 previously outstanding shares of MBCC became 561,820 outstanding
shares of North American Technologies Group, Inc. ("NATK") as a result of
the change in MBCC's name to NATK. This is accounted for as the issuance by
NAT of 561,820 shares of common stock for the net assets, recorded at book
value, of MBCC.
F-17
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
At the conclusion of these transactions, NATK, the parent company, had
outstanding 12,983,129 shares of common stock (including the shares issued on
the conversion of the preferred stock referred to in (a) above), and NATK owned
58.7 percent of the common equity of NAT.
Before and after June 30, 1992, subsidiaries sold common or preferred stock for
cash or in exchange for services or the cancellation of debt (see Note 3).
On August 10, 1992, MBCC effected a 1 for 15 share reverse stock split. All
references to MBCC shares give effect to this transaction as if it had occurred
on January 1, 1992.
The Company entered a Plan of Arrangement with NAT, pursuant to which the
minority stockholders of NAT would receive one share of the Company's common
stock in exchange for two shares of NAT owned by them. The transaction was
consummated on November 5, 1993 and has been accounted for as the issuance of
4,443,147 shares of treasury stock and 1,034,626 shares of newly-issued common
stock for the minority interest, recorded at book value, of NAT.
2. Shares of Common Stock Subject to Escrow
5,250,000 of the shares of the Company's common stock issued upon conversion of
the convertible preferred stock were issued to Gold Spinners International, Inc.
("GSI"), a former principal stockholder of NAT. GSI owned, prior to the
reorganization of the Company, 10,280,958 shares or approximately 48% of NAT.
These shares were acquired in connection with the transaction described in
Note 1.
Of the 5,250,000 shares of Company common stock issued to GSI, 3,250,000 shares
were subject to escrow; 1,625,000 shares are "Class I Escrow Shares" and
1,625,000 shares are "Class II Escrow Shares." These shares are treated as
contingent shares, and accordingly, have been excluded from weighted average
shares in the computation of loss per common share.
"Class I Escrow Shares" were to be released if, and only if, the Company had,
during either of the fiscal years ending December 31, 1993 or December 31, 1994,
annual after-tax earnings of at least $5,000,000, or if the Company was acquired
prior to December 31, 1994 for a purchase price exceeding $150,000,000. Since
neither event occurred, the "Class I Escrow Shares" were retired for financial
reporting purposes effective December 31, 1994.
F-18
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
"Class II Escrow Shares" shall be released to the owner thereof if, and only if,
the Company shall have, during any of the fiscal years in the period ending
December 31, 1995, annual after-tax earnings of at least $12,500,000, or if the
Company shall be acquired prior to December 31, 1996 for a purchase price
exceeding $250,000,000.
3. Minority Interest and Capital Transactions of Subsidiaries
In addition to the transactions described in Note 1, subsidiaries of the parent
had the following transactions involving the issuance of shares of their common
or preferred stock:
(a) During 1992, 175,000 shares of the common stock of NAE, representing 1.5%
of the ownership of NAE, were issued to retire debt.
(b) During 1992, 450,000 shares of NAE, representing 3.7% of the ownership of
NAE, were issued in exchange for services recorded at $450,000.
(c) During 1992, 366,572 shares of NAT, representing 1.8% of the ownership of
NAT, were issued for cash in the aggregate (net of offering costs) of
$1,011,176.
(d) During 1992, 30,000 shares of NAT, representing 0.1% of the ownership of
NAT and during 1993, 1,660,679 shares representing 7.0% of the ownership of
NAT, were issued on the exercise of options.
(e) During 1992, 100,000 shares of $3.50 convertible preferred stock
(convertible into 70,000 shares of NATK common stock) were issued by Daily
Mail, Inc. for cash of $350,000.
(f) During 1994, 305,000 shares of Series A, $1.00 par value, redeemable
preferred stock were issued by EET, Inc. in exchange for the cancellation
of $290,000 notes payable and cash of $15,000.
Common stock issued by subsidiaries may be issued at per share amounts that
differ from the per share book value of its subsidiary. Any resulting increase
or decrease in the parent's investment in the subsidiary is credited or charged
directly to stockholders' equity.
F-19
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
The minority interest shown on the consolidated balance sheet is comprised of:
<TABLE>
<CAPTION>
December 31, 1993 1994
- -----------------------------------------------------------------------------
<S> <C> <C>
Preferred shares
522728 Alberta Ltd.
$3.50 convertible preferred
9,000 shares and
8,000 shares outstanding in
1993 and 1994, respectively $32,976 $29,312
- -----------------------------------------------------------------------------
EET, Inc.
Preferred stock $1.00 par value, cumulative;
305,000 shares outstanding in 1994 - 305,000
- -----------------------------------------------------------------------------
$32,976 $334,312
- -----------------------------------------------------------------------------
</TABLE>
The holders of the preferred stock of EET, Inc. are entitled to receive
cumulative preferential dividends at a rate of 10% per annum per share. On
March 7, 1995, all of the outstanding shares were redeemed for a payment of
$305,000. See Note 4 for additional information.
At December 31, 1993 and 1994, NAE has a capital deficit and, accordingly, the
minority interest in its common equity has been eliminated.
4. Acquisitions
On March 7, 1995, the Company acquired EET, Inc., ("EET") 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., ("IPF") a Texas
corporation, pursuant to an Agreement and Plan of Merger dated June 22, 1995. To
effect these acquisitions, the Company issued an aggregate of 3,070,729 shares
of the Company's common stock and warrants (issued to replace EET's outstanding
stock purchase warrants) to purchase up to 71,000 shares of
the Company's common stock.
F-20
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
Each transaction was accounted for as a pooling of interests and, accordingly,
each of the accompanying consolidated financial statements for the years ended
December 31, 1993 and 1994 have been restated.
Operating results of the separate companies for the years prior to the merger
were:
<TABLE>
<CAPTION>
December 31, 1993 1994
- ----------------------------------------------------------------------
<S> <C> <C>
Revenue as previously reported $ - $ 13,542
Revenue of EET 269,073 1,426,748
Revenue of IPF - 505,407
- ----------------------------------------------------------------------
$ 269,073 $ 1,945,697
- ----------------------------------------------------------------------
Net loss as previously reported $(1,377,679) $(4,057,098)
Net loss of EET (125,823) (880,822)
Dividends on EET preferred stock - (22,532)
Net income of IPF - 24,122
- ----------------------------------------------------------------------
$(1,503,502) $(4,936,330)
- ----------------------------------------------------------------------
Net loss per share as previously
reported $ (.25) $ (.37)
Effect of EET - .02
Effect of IPF - -
- ----------------------------------------------------------------------
$ (.25) $ (.35)
- ----------------------------------------------------------------------
</TABLE>
The dividends paid on EET preferred stock are reflected as minority interest in
net loss (income) of subsidiary in the consolidated statement of operations for
the year ended December 31, 1994.
F-21
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
On August 31, 1993, EET acquired certain assets and assumed certain liabilities
from Enclean, Inc., at a total cost of $924,227. The acquisition was accounted
for as a purchase and, accordingly, the operations of the acquired business are
included in the Company's results of operations from August 31, 1993. The
accounts of the acquired business are included in the Company's balance sheet at
the fair market value of the assets acquired net of liabilities assumed as of
the purchase date. The excess of cost over the fair market value of the net
assets acquired has been assigned to goodwill and is being amortized over 20
years on a straight-line basis commencing with the date of acquisition.
5. Legal Matters
In connection with the transaction described in Note 1, the Company has agreed
to continue the defense, and to remain liable for any liabilities which may
arise from the outcome of certain lawsuits against MBCC. The suits allege, among
other things, that the Company violated state franchise laws and breached
certain franchise agreements. The suits claim damages in excess of $425,000. The
Company believes that the suits are without merit and intends to vigorously
defend against them.
In April 1993, an individual brought an action against NAT and other parties,
which seeks delivery of 200,000 shares of common stock of NAT and damages
amounting to $1.7 million for failure to provide the shares on a timely basis.
The Company believes that the shares in question were validly issued in
accordance with the plaintiff's written instructions to a corporate purchaser
and that the claims, inasmuch as they pertain to NAT, are without merit. The
Company intends to vigorously defend against this action.
In July 1993, an individual brought action against North American Gold Corp.
(predecessor to NAT) and the brokerage for the stock for conveyance of 350,000
shares of North American Gold Corp. for $.50 per share or alternatively, for
damages and attorney fees. The claim is based upon a letter dated July 17, 1991,
purportedly signed by the president of the brokerage named in the suit. The
Company believes that this letter is a forgery and was not authorized by any
parties to the suit. The Company intends to vigorously defend against this
action.
In 1991, NAT and Drexel Oilfield Services, Inc. ("DOSI") formed North American
Drilling Technologies, Inc. ("NADT") to pursue the remediation of oil and gas
processing, exploration or production waste. NAT and DOSI each owned 50% of the
voting shares of NADT. Each stockholder agreed to provide operating capital, in
equal amounts when required, up to a maximum of $100,000. In October 1993, DOSI
terminated the agreement, and
F-22
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
commenced legal action against the Company. In June 1994, the Company and DOSI
settled their differences and formally terminated the joint venture agreement.
In connection with the settlement, the Company purchased equipment from DOSI for
cash amounting to $337,500.
Under a 1992 license agreement, NAT received exclusive rights to purchase a
certain proprietary stabilized enzyme. During the second quarter of 1993,
management discovered that the licensor had violated the agreement by selling
the enzyme to NAT's competitors. In response to this violation and because the
enzyme proved to be ineffective for NAT's purposes, the Company abandoned the
agreement. In September 1993, the licensor brought suit in federal court for
delivery of 90,000 common shares of NATK which were being held in escrow under
the terms of the license agreement. NAT filed a motion to stay the federal court
proceedings and to compel arbitration before the American Arbitration
Association in Chicago. On March 7, 1994, NAT's motion was granted and the
federal court case was terminated.
At present, there is a proceeding on this matter before the American Arbitration
Association upon NAT's claims that the licensor materially breached the License
Agreement. NAT is requesting reimbursement of approximately $200,000 paid to the
licensor, return of the 90,000 shares of NATK stock and other consequential
damages. Because the outcome of this matter can not presently be determined, no
adjustments have been made to the consolidated financial statements.
On April 10, 1995, the Company filed a lawsuit against a former officer and
director of the Company. In late 1994, the Company commenced an investigation of
this former director's activities, and on January 23, 1995, requested and
received his resignation. The Company's claims against him are based on actions
taken both before and after his resignation that include breaches of duties owed
by him to the Company, torts against the Company and defamation of the Company's
business reputation. The Company has requested relief in the form of a temporary
restraining order, injunction and damages.
F-23
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
6. Note Receivable
In April 1993, the Company invested $2,554,859 with Euro Scotia Funding Limited
("ESF") in exchange for a secured note receivable, which the Company could call
upon 30 days notice to ESF. Through April 1994, income from the note was
generated from the management, by ESF, of investments in various margin
transactions involving U.S. and other governmental debt securities, currency
forward exchange contracts and certain corporate debt and equity securities.
Under the terms of the note, the Company and ESF shared equally in trading
profits. For the years ended December 31, 1993 and 1994, the Company recognized
interest income amounting to $523,623 and $85,832, respectively, and trading
profits (included in investment income in the consolidated financial statement
of operations) amounting to $2,169,672 and $512,312, respectively. At December
31, 1993, the note had a principal balance of $2,931,580 and was secured by
marketable securities amounting to $6,000,000 which were being held in an
irrevocable trust.
Effective December 31, 1994, the Company renegotiated the terms of the note
receivable from ESF. Under the new agreement, ESF will repay the note in ten
semi-annual payments of $327,885, plus interest at 10% per annum, commencing
July 1, 1995. ESF elected, as permitted under the agreement, to prepay as of
December 31, 1994 the earliest payments using amounts owed to it by the Company
for borrowings under the line of credit agreement (see Note 12) and for services
rendered. At December 31, 1994, the face value of the original note plus accrued
interest receivable amounted to $3,278,857, borrowings under the line of credit
plus accrued interest payable amounted to $356,473, and amounts owed to ESF for
services amounted to $121,621. The net balance of $2,800,763 has been reflected
on the consolidated balance sheet at December 31, 1994.
As part of the new agreement, ESF has deposited $3.2 million in U.S. Treasury
Obligations ("Collateral") in an account with a third-party brokerage firm for
the benefit of NATK. ESF has signed an irrevocable power of attorney to NATK
giving it the ability to seize the Collateral in the event of a default,
provided that such default is not cured within thirty days after written notice.
In addition, there are irrevocable instructions provided to the brokerage firm
stating that ESF shall be allowed to trade the securities constituting the
Collateral, so long as the securities are substituted with U.S. Treasury
obligations and that the Collateral does not fall below the Minimum Value,
defined in the note agreement as the lesser of $3.2 million or 110% of the
outstanding principal balance on the note.
F-24
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
7. Property and Equipment
Major classes of property and equipment consist of:
<TABLE>
<CAPTION>
December 31, 1993 1994
- ------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 34,789 $492,855
Automobiles 62,351 60,514
Furniture and office equipment 412,570 131,153
Leasehold improvements 48,883 49,032
- ------------------------------------------------------------------
558,593 733,554
Less accumulated depreciation 46,146 140,696
- ------------------------------------------------------------------
$512,447 $592,858
- ------------------------------------------------------------------
</TABLE>
8. Investment - Sale of Marketing Rights
In February 1993, the Company sold rights to market its environmental
technologies throughout Canada, excluding the Provinces of Alberta and
Saskatchewan. In exchange, the Company received 600,000 common shares of Katlor
Environmental Technologies, Inc. ("Katlor"), a publicly traded Canadian
corporation. Such shares were restricted for a period of one year from the date
of the transaction. At the time of the transaction, unrestricted common shares
of Katlor had a quoted market value of Canadian $2.32 per share (U.S. $1.83).
Because the shares received represent such a large percentage (8.1%) of the
outstanding common shares of Katlor and because the shares could not be sold for
a period of one year, management of the Company assigned a value of U.S.
$600,000 (U.S. $1.00 per share) to the transactions. The quoted market price of
unrestricted common shares of Katlor at December 31, 1993 was Canadian $1.83
(U.S. $1.37 or $822,000). The investment has been reflected in the consolidated
balance sheet as of December 31, 1993 and the value of the shares was recognized
as revenues in the consolidated statement of operations for the year ended
December 31, 1993.
During the fourth quarter of 1994, the market price of the Katlor shares
experienced a dramatic decline and, subsequently, Katlor filed for bankruptcy
protection. There has been no public trading in Katlor common stock since
December 31, 1994. Due to the current bankruptcy filing and because management
believes it is unlikely that the Company will be able to recognize any proceeds
from its investment, the balance of $600,000 was written off as of December 31,
1994.
F-25
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
9. Mining Assets
Mining assets consisted of:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, 1993 1994
- -----------------------------------------------------------------
Harquahala Project, Arizona $794,315 $ -
- -----------------------------------------------------------------
</TABLE>
During 1993, the Company abandoned its claim to certain properties in Canada
and, accordingly, wrote off its investment in those properties amounting to
$43,251. In 1994, the Company decided not to pursue further development of any
of its mining properties and, accordingly, wrote off the remainder of its
investment in those properties amounting to $794,315.
10. Purchased Technologies
In July 1993, the Company acquired a proprietary dry oxidation process for a
purchase price of $250,000. Through the use of this proprietary process,
contaminants are removed from the soil by chemical reduction. The Company is
amortizing this cost over a five year period.
11. Related Parties
At December 31, 1993 and 1994, the Company has balances payable to related
parties amounting to $487,582 and $3,142, respectively. There are no specific
repayment terms.
The Company paid $120,000 for supplies and certain operating expenses (included
in research and development expenses) to a corporation owned by two directors
during 1992.
The Company paid $110,000 for commissions related to certain equity transactions
to two corporations owned by a director during 1992.
In 1994, the Company paid royalties amounting to $50,000 to a company owned by a
former director.
12. Line of Credit
The Company's subsidiary, EET, has a $500,000 revolving line of credit with a
bank. The line of credit, which expired in March 1995, is secured by accounts
receivable and is guaranteed by the stockholders of EET. Interest is charged at
the bank's prime rate plus 2% per annum. The balance at December 31, 1994 was
$300,000. As part of the acquisition of EET, the line of credit was paid in full
by the Company.
F-26
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
In January 1994, NATK and NAT entered into an agreement which provided for a
line of credit of up to $18,000,000. As additional consideration for the loan,
NATK issued to the lender (ESF) 200,000 shares of its common stock with a quoted
market price of $650,000. During 1994, the Company borrowed $334,000.
Effective December 31, 1994, the Company and the lender agreed to terminate the
agreement, cancel the related common shares and offset all outstanding
borrowings plus accrued interest aggregating $356,473 against the note
receivable owed to the Company by the lender (see Note 6).
13. Long-Term Debt
Long-term debt is as follows:
<TABLE>
<CAPTION>
December 31, 1993 1994
- -----------------------------------------------------------------
<S> <C> <C>
Convertible debenture, prime rate
plus 2% (11% at December 31, 1994),
due May 1995 (a). $ 250,000 $ 250,000
Convertible debenture, 8%, due
August 1999 (b). - 500,000
Note payable, 6%, due January 1995 (c). - 100,000
Note payable, prime plus 2.5% (11.5% at
December 31, 1994, due June 1996 (d). 287,500 212,500
- -----------------------------------------------------------------
537,500 1,062,500
Less current maturities 75,000 562,500
- -----------------------------------------------------------------
$ 462,500 $ 500,000
- -----------------------------------------------------------------
</TABLE>
(a) The debentures are convertible into the Company's common stock by dividing
the principal balance by 75% of the average trading price of the stock
during the ten days preceding conversion.
(b) In August 1994, the Company borrowed $500,000, bearing interest at 8% per
annum, from an individual lender. The loan matures in August 1999. The
Company may prepay the loan with a penalty amounting to 2% of the principal
balance for each year the prepayment precedes the
F-27
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
scheduled maturity date. The loan is convertible into shares of the
Company's common stock at $1.50 per share which exceeded the fair market
value at the date of the agreement. However, if the Company elects to
prepay the loan when the market price is below $1.50 per share, the lender
has the option to convert the loan into shares of common stock at a 15%
discount from the then-current market price.
(c) In September 1994, the Company borrowed $100,000, bearing interest at 6%
per annum, from an individual lender. The loan was repaid in January 1995.
(d) As required under the terms of the merger with EET, the Company repaid all
loans outstanding and, accordingly, all amounts outstanding will be
reflected as current liabilities.
14. Notes Payable - Stockholders
Notes payable stockholders consist of various notes payable to the stockholders
of EET and IPF. The notes are due on demand and bear interest at 8% per annum.
In 1994, $290,000 notes payable to the stockholders of EET were converted to
preferred stock (see Note 3). In 1995, as a result of the acquisition of each
company, the loans were paid in full.
15. Discontinued Operations
Effective July 29, 1994, EET entered into a formal plan to dispose of its
analytical services operations. On July 29, 1994, EET sold the fixed assets of
the analytical division to a third party. All remaining assets and liabilities,
which consisted of accounts receivable and accrued liabilities, were retained by
the Company. This is considered a discontinued operation. No gain or loss on the
disposal of the discontinued segment was incurred because the analytical
services operations did not continue beyond July 29, 1994 and there was no gain
or loss on the disposal of the assets.
F-28
<PAGE>
16. Income Taxes
At December 31, 1994, the Company has net operating loss carryforwards for
federal income tax purposes amounting to approximately $8,008,000 which, if not
utilized, will expire as follows:
<TABLE>
<CAPTION>
Year ended December 31,
- --------------------------------------------------------------
<S> <C>
1999 $ 162,000
2000 32,000
2001 102,000
2002 391,000
2003 376,000
2004 457,000
2005 169,000
2006 559,000
2007 594,000
2008 1,242,000
2009 3,924,000
- --------------------------------------------------------------
$8,008,000
- --------------------------------------------------------------
</TABLE>
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires a
change from the deferred method to an asset/liability method of computing
deferred income taxes.
The components of deferred income taxes were as follows:
<TABLE>
<CAPTION>
December 31, 1993 1994
- ----------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward $ 1,590,000 $ 2,685,000
Other 9,000 4,000
- ----------------------------------------------------------------
Gross deferred tax assets 1,599,000 2,689,000
Valuation allowance 1,599,000 2,689,000
- ----------------------------------------------------------------
Net deferred income taxes $ - $ -
- ----------------------------------------------------------------
</TABLE>
F-29
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
The figures above are stated on a consolidated basis. Federal tax laws only
permit the use of net operating loss carryforwards by the individual entities
that originally sustained the losses.
17. Stockholders' Equity
In May, 1994, the Company issued 220 shares of Series A convertible preferred
stock, which were issued at $10,000 per share. Net proceeds to the Company
amounted to $2,024,000 after payment of the placement agent's fee. Each share of
Series A convertible preferred stock is convertible into a number of shares of
Company common stock equal to $10,000 divided by 77% of the closing bid price of
Company common stock on the conversion date. The convertible preferred shares
were issued with limitations on the timing and amount of shares to be converted,
however, these restrictions lapsed and all shares became convertible after
September 19, 1994. As of September 21, 1994, the holder had converted 90 shares
of Series A preferred stock into 711,448 shares of common stock. On October 7,
1994, the holder converted 15 shares of Series A preferred stock into 86,580
shares of common stock, and the Company issued 15 shares of its Series B
convertible preferred stock to the Series A holder as an inducement not to
convert any further Series A shares until after November 15, 1994. On November
29, 1994, the holder converted 15 shares of the Series A preferred stock into
86,580 shares of common stock, and the Company issued 15 shares of its Series C
convertible preferred stock to the holder as an inducement not to convert any
further preferred shares until after December 9, 1994. The Series B and Series C
preferred stock were issued with conversion terms identical to those of the
Series A preferred stock. The Company realized no proceeds from the issuance of
the Series B and Series C preferred stock. By December 31, 1994, an additional
50 shares of the Series A preferred stock had been converted into 335,143 shares
of Company common stock, and by January 26, 1995, the remaining shares of the
Series A, and all of the Series B and Series C shares have been converted into
424,506 shares of Company common stock.
F-30
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
In July, 1994, the Company issued 100,000 shares of its common stock from its
treasury stock in exchange for 1,000 shares of $3.50 convertible preferred stock
of its subsidiary, 522728 Alberta Ltd. This is a continuation of a transaction
previously recorded at book value (see Note 1(c)).
At various times during 1994, the Company sold 1,750,250 shares of its common
stock for cash amounting to $3,484,500. In the largest of these private
placements, the Company sold at a price of $2.50 each, units consisting of one
common share and one warrant to purchase one common share at $2.00 per share.
These warrants expire at various dates in 1997. As of December 31, 1994, the
Company had sold 1,425,000 units and has realized net proceeds of $3,348,750
after payment of commissions and fees.
18. Stock Options
The Company has not adopted a formal stock option plan, however, since its
inception and through April 13, 1995 it has granted the following: approximately
3,200,000 options to directors, officers and employees, and approximately
2,000,000 options and warrants to consultants and in connection with financing
transactions and joint venture arrangements. In addition, the Company has
granted approximately 1,800,000 warrants to purchase common stock at a price of
$2.00 per share in connection with the private placement of Units that occurred
during the fourth quarter.
All of the options to directors, officers and employees bear exercise prices
that range from $1.25 to $2.50, which equates to the average trading price of
the Company's common stock at the time granted. These options generally vest
over a four or five year period and expire five years after vesting.
A significant portion of the options and warrants granted to consultants and in
connection with financing transactions and joint venture arrangements bear
exercise prices that are significantly in excess of the current market price of
the Company's common stock. Most of these options and warrants expire in 1995
and 1996.
In connection with the acquisition of EET, warrants to acquire 71,000 shares of
the Company's common stock were issued. The warrants are exercisable at $1.50
per share and expire in June 1999.
F-31
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
19. Commitments
The Company rents equipment and office space under operating leases on both long
and short term bases. Rent expense amounted to approximately $56,000, $259,000
and $156,000 for the years ended December 31, 1992, 1993 and 1994, respectively.
Minimum annual rentals under non-cancellable operating leases of more than one
year in duration are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
- ----------------------------------------------------------------------
<S> <C>
1995 $144,494
1996 112,750
1997 79,173
1998 22,609
Thereafter -
- ----------------------------------------------------------------------
$359,026
- ----------------------------------------------------------------------
</TABLE>
Subsequent to December 31, 1994, the Company entered into employment contracts
that provide for payments of approximately $1,050,000 annually through 1999.
20. Supplemental Cash Flow Information
Due to its operating losses, the Company pays no income taxes. Under the terms
of its borrowing agreements, the Company is not required to, and does not pay
interest currently.
During 1992, North American Environmental Group, Inc., a subsidiary of the
Company, issued 450,000 shares of its common stock for services rendered in
connection with the recapitalization (see Note 1) of the Company. The shares
were valued at $450,000.
In 1993, the Company sold marketing rights (see Note 8) in exchange for common
stock valued at $600,000.
In 1993, the Company acquired the remaining minority interest in NAT through the
issuance of 4,443,147 common shares held in the treasury and 1,034,626 newly
issued common shares. The transaction was recorded at net book value or
$743,017.
F-32
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
21. Subsequent Events
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 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.
From January 1, 1995 through August 31, 1995, the Company:
(i) 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;
(ii) issued 2,554,700 shares of common stock for proceeds to the Company, net of
all related fees, of $1,798,000;
(iii) issued from treasury stock 350,000 shares that had been reserved for the
conversion of preferred stock of a subsidiary of the Company; and
(iv) received $100,000 from the issuance of a convertible note, due within six
months.
On June 9, 1995, and subsequently amended on June 30, 1995, the Company signed a
letter of intent to purchase certain tangible and intangible assets of Thor
Industries, Inc., Thor Ventures, L. C. and GAIA Technologies, Inc. (collectively
"GAIA") for $2,500,000, issuance of 1,666,667 shares of the Company's common
stock and various other contingent payments in the form of licensing and royalty
fees over the next five and fifteen years, respectively. The $2,500,000 payment
to GAIA will consist of a $2,000,000 cash payment and the forgiveness of a
$500,000 loan. The Company also has agreed to provide an additional $1,000,000
loan, the proceeds of which will be used to purchase equipment and provide
working capital. The Company is currently performing its due diligence review.
The letter of intent terminates on October 31, 1995 or such later date as the
parties may mutually agree on.
The agreement also stipulates that upon closing, the Company will have the
exclusive right and option for two years from that date to purchase all of the
remaining tangible and intangible assets relating to GAIA's railroad crosstie
business. In exchange for the option, the Company has agreed to loan $1,500,000
at various dates, the proceeds of which shall be used exclusively
F-33
<PAGE>
North American Technologies Group, Inc.
Notes to Consolidated Financial Statements
for expenses incurred in connection with the development of railroad crosstie
technology. GAIA will pledge as security for the loans, 666,667 shares of the
common stock of NATK received as part of the initial acquisition. NATK has the
right to extend the option period for up to one additional year.
Upon expiration of the letter of intent, all loans will be due and payable on
July 1, 1998. The loans bear interest at 10% per annum and are collateralized by
a lien on all equipment, technologies, know-how, patents and working capital of
GAIA.
In September 1995, the Company sold $2,700,000 of convertible, subordinated
notes bearing interest at 13.5% per annum to a small group of investment firms.
After one year, the notes are convertible into shares of the Company's common
stock at the rate of $1 per share. The Company also issued warrants to purchase
shares of its common stock at a price of $1 per share. The notes, maturing in
September 2000, provide for the deferral of interest payments for three years.
22. Going Concern
The Company has not achieved sales necessary to support operations. The Company
has incurred an accumulated deficit of $12,454,572 through December 31, 1994. It
can be expected that operating expenses will increase as the Company incurs
expenses to market its technologies and to build an operating structure which
can provide products and services to its customers. Until the Company is able to
generate sufficient revenues from its technologies and businesses, there can be
no assurance that profitable operations can be attained.
To the extent that funds generated from operations and existing capital
resources are insufficient, the Company will have to raise additional funds. No
assurance can be given that additional financing will be available, or if
available, will be available on acceptable terms. If adequate funds are not
available, the Company may be required to curtail its operations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
F-34
<PAGE>
<TABLE>
<CAPTION>
North American Technologies Group, Inc.
Consolidated Balance Sheets
- -----------------------------------------------------------------------------------------------
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.
F-35
<PAGE>
<TABLE>
<CAPTION>
North American Technologies Group, Inc.
Consolidated Balance Sheets
- -----------------------------------------------------------------------------------------------
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.
F-36
<PAGE>
<TABLE>
<CAPTION>
North American Technologies Group, Inc.
Consolidated Statements of Operations
(Unaudited)
- -----------------------------------------------------------------------------------------------
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 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.
F-37
<PAGE>
<TABLE>
<CAPTION>
North American Technologies Group, Inc.
Consolidated Statements of Operations
(Unaudited)
- -----------------------------------------------------------------------------------------------
Nine Months ended
September 30, September 30,
1995 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.
F-38
<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 to the 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,
F-39
<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
F-40
<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;
F-41
<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,
F-42
<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.
F-43
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
North American Environmental Group, Inc.
We have audited the consolidated balance sheets of North American
Environmental Group, Inc. (a development stage enterprise) and subsidiaries
as of December 31, 1993 and 1994, and the related consolidated statements of
operations, and cash flows for each of the three years in the period ended
December 31, 1994 and from the date of inception (May 7, 1991) to December
31, 1994 and the consolidated statements of stockholders' equity (capital
deficit) for each of the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the consolidated
statements of operations, stockholders' equity (capital deficit), and cash
flows of North American Environmental Group, Inc. and subsidiaries from the
date of inception (May 7, 1991) to December 31, 1991. Those statements were
audited by other auditors and our opinion, insofar as it relates to the
amounts included for the period from the date of inception (May 7, 1991) to
December 31, 1991, is based solely on the report of other auditors dated
November 18, 1992 (the "1992 report").
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the 1992
report of other auditors provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company
entered into a series of transactions which have been accounted for as a
recapitalization.
F-44
<PAGE>
In our opinion, based upon our audits and the 1992 report of other auditors,
the consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of North American
Environmental Group, Inc. and subsidiaries as of December 31, 1993 and 1994
and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1994 and from the date
of inception (May 7, 1991) to December 31, 1994 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is in the development
stage as of December 31, 1994. As discussed in Note 2 to the consolidated
financial statements, successful completion of the Company's development
program, and ultimately, the attainment of profitable operations is
dependent upon future events, including obtaining adequate financing to
fulfill its development activities, and achieving a level of sales adequate
to support the Company's cost structure. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans, with regard to these matters, is discussed in Note 2.
The financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
/s/ BDO SEIDMAN LLP
BDO SEIDMAN LLP
Philadelphia, Pennsylvania
April 13, 1995
F-45
<PAGE>
SHOEMAKER AND WILSON, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
POINTE SOUTH EXECUTIVE BUILDING
P.O. BOX 444
5201 S. MISSION
MT. PLEASANT, MICHIGAN 48804-0444
(517) 773-6449
INDEPENDENT AUDITORS' REPORT
Officers and Directors
North American Environmental Group, Inc.
(a development stage enterprise)
Mt. Pleasant, Michigan
We have audited the accompanying consolidated statements of operations and
deficit accumulated during the development stage, changes in stockholders'
equity, and cash flows of North American Environmental Group, Inc. (a
development stage enterprise) and subsidiaries for the period from the date of
inception (May 7, 1991) to December 31, 1991. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
North American Environmental Group, Inc. and subsidiaries for the period from
the date of inception (May 7, 1991) to December 31, 1991, in conformity with
generally accepted accounting principles.
/s/ SHOEMAKER & WILSON, P.C.
SHOEMAKER & WILSON, P.C.
Certified Public Accountants
November 18, 1992
F-46
<PAGE>
<TABLE>
<CAPTION>
December 31, 1993 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash $ 1,170 $ 1,001
Advance payments 216,500 44,500
Due from affiliate 347,343 33,328
Accrued interest receivable 3,600 -
- ---------------------------------------------------------------------------------
Total current assets 568,613 78,829
Property and equipment, net of accumulated depreciation of
$10,269 in 1993 and $24,712 in 1994 42,597 28,154
Deposits 2,700 2,700
- ---------------------------------------------------------------------------------
$613,910 $109,683
- ---------------------------------------------------------------------------------
</TABLE>
F-47
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1993 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Capital Deficit
Current
Accounts payable $ 431,594 $ 5,035
Due to affiliates 885,182 1,660,521
Convertible debenture - 250,000
Accrued interest payable 39,156 56,905
- --------------------------------------------------------------------------------
Total current liabilities 1,355,932 1,972,461
- --------------------------------------------------------------------------------
Convertible debenture 250,000 -
- --------------------------------------------------------------------------------
Commitments and contingencies
Capital deficit
Preferred stock, $.001 par value
Authorized 1,000,000 shares
Issued shares - none - -
Common stock, $.01 par value
Authorized 20,000,000 shares
Issued and outstanding 12,138,333 shares 121,383 121,383
Additional paid-in capital 883,719 883,719
Deficit accumulated during the development stage (1,997,124) (2,867,880)
- --------------------------------------------------------------------------------
Total capital deficit (992,022) (1,862,778)
- --------------------------------------------------------------------------------
$ 613,910 $ 109,683
- --------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-48
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Cumulative
from Inception
(May 7, 1991)
Year ended December 31, through
------------------------------- December 31,
1992 1993 1994 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales of environmental services $ - $ - $ 13,542 $ 13,542
- ---------------------------------------------------------------------------------------
Expenses
Research and development
expenses 95,701 882,742 373,026 1,306,369
Consulting fees 1,600 115,910 226,539 437,632
Travel and promotion 31,872 93,702 50,723 240,288
Legal and professional fees 74,010 20,479 93,020 224,140
General and administrative
expenses 128,936 225,880 118,085 526,510
Management fees - - - 50,000
- ---------------------------------------------------------------------------------------
Total expenses 332,119 1,338,713 861,393 2,784,939
- ---------------------------------------------------------------------------------------
Operating loss (332,119) (1,338,713) (847,851) (2,771,397)
- ---------------------------------------------------------------------------------------
Other income (expense)
Interest income 1,200 1,200 - 3,600
Interest expense (6,545) (22,458) (22,905) (60,083)
Write-off of goodwill - - - (40,000)
- ---------------------------------------------------------------------------------------
Total other income (expense) (5,345) (21,258) (22,905) (96,483)
- ---------------------------------------------------------------------------------------
Net loss $(337,464) $(1,359,971) $(870,756) $(2,867,880)
- ---------------------------------------------------------------------------------------
Loss per common share $(0.03) $(0.11) $(0.07)
- ---------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 11,865,804 12,138,333 12,138,333
- ---------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-49
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Capital Deficit)
<TABLE>
<CAPTION>
Additional Stock
Common Stock Paid-In Subscriptions
Shares Amount Capital Deficit Receivable
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stock issued at inception (May 7, 1991) 50,000 $ 50,000 $ - $ - $(50,000)
Adjustment arising from recapitalization, 180 for 1 stock
split and change in the par value per share
from $1.00 par value to $.01 (November 11, 1991) 8,950,000 40,000 - - 50,000
Stock issued for net assets of Rittenhouse
Capital Corp. (November 11, 1991) 2,130,000 21,300 15,802 - -
Stock issued for services (November 14, 1991) 300,000 3,000 - - -
Net loss for year - - - (299,689) -
- ------------------------------------------------------------------------------------------------------------------------
Balance, at December 31, 1991 11,430,000 114,300 15,802 (299,689) -
Stock issued in exchange for cancellation of
debt (January 23, 1992) 175,000 1,750 173,250 - -
Stock issued for cash (March 3, 1992) 83,333 833 249,167 - -
Stock issued for services (July 21, 1992) 450,000 4,500 445,500 - -
Net loss for year - - (337,464) -
- ------------------------------------------------------------------------------------------------------------------------
Balance, at December 31, 1992 12,138,333 121,383 883,719 (637,153) -
- ------------------------------------------------------------------------------------------------------------------------
Net loss for year - - - (1,359,971) -
- ------------------------------------------------------------------------------------------------------------------------
Balance, at December 31, 1993 12,138,333 121,383 883,719 (1,997,124) -
Net loss for year - - - (870,756) -
- ------------------------------------------------------------------------------------------------------------------------
Balance, at December 31, 1994 12,138,333 $121,383 $883,719 $(2,867,880) $ -
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-50
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Cumulative
from
Inception
(May 7,
1991)
through
Year ended December 31, December 31,
1992 1993 1994 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(337,464) $(1,359,971) $(870,756) $(2,867,880)
Adjustments to reconcile net
loss to net cash (used) in
operating activities
Depreciation and amortization (5,309) 10,269 14,443 18,602
Stock issued for services 450,000 - - 453,000
Write-off of goodwill - - - 40,000
Decrease (increase) in assets
Advance payments (484,025) 322,025 172,000 (32,500)
Accrued interest (1,200) (1,200) 3,600 -
Deposits - (2,700) - (2,700)
Increase (decrease) in liabilities
Accounts payable 87,898 269,740 (426,559) (285)
Accrued interest payable 6,545 22,375 17,749 54,844
- --------------------------------------------------------------------------------------------
Net cash (used in) operating
activities (283,555) (739,462) (1,089,523) (2,336,919)
- --------------------------------------------------------------------------------------------
Cash flows from investing activities
Cash received in acquisition of
subsidiary - - - 58,593
Purchase of property and equipment - (52,866) - (52,866)
- --------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities - (52,866) - 5,727
- --------------------------------------------------------------------------------------------
Cash flows from financing activities
Issuance of convertible debenture 750,000 - - 750,000
Issuance of common stock 250,000 - - 250,000
Increase in notes payable - - - 175,000
Increase in amounts due to
affiliates (766,833) 765,004 1,089,354 1,157,193
- --------------------------------------------------------------------------------------------
Net cash provided by financing
activities 233,167 765,004 1,089,354 2,332,193
- --------------------------------------------------------------------------------------------
Net increase (decrease) in cash (50,388) (27,324) (169) 1,001
Cash, at beginning of period 78,882 28,494 1,170 -
- --------------------------------------------------------------------------------------------
Cash, at end of period $28,494 $ 1,170 $ 1,001 $ 1,001
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-51
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Summary of Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of North
American Environmental Group, Inc. and the accounts of its subsidiaries all of
which are wholly-owned. All significant intercompany accounts and transactions
have been eliminated. North American Environmental Group, Inc., and its
subsidiaries are referred to herein as the "Company". Through December 31, 1994,
the Company had received only minimal revenues from its operations at certain
test projects. Because the Company has not yet utilized its various technologies
on a commercial scale, management believes it is appropriate to present the
accompanying consolidated financial statements as those of a development stage
enterprise.
The statement of operations for the years ended December 31, 1992 and 1993 and
from the date of inception (May 7, 1991) to December 31, 1994 have been
reclassified to conform to the current year's presentation.
The Company
The Company has developed and acquired certain proprietary technologies, which
have applications in environmental clean-up services through elimination of
hydrocarbon contamination of soil and water.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets. Machinery
and equipment are depreciated over periods ranging from five to seven years.
Leasehold improvements are amortized over the life of the lease.
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". Under this method, deferred
tax assets or liabilities result from temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in taxable or deductible amounts in future years.
This change in accounting method had no effect upon the consolidated financial
statements.
Research and Development
Expenditures for research and development of products and processes and for the
operation of pilot projects are charged to expense as incurred. The Company
reclassified $212,899 and $77,721 previously reported by the Company as revenue
in the years ended December 31, 1992 and 1993 as an off-set against research and
development expenses since these amounts represent a reimbursement of cost.
F-52
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Summary of Accounting Policies
Loss Per Common Share
The loss per common share is computed by dividing the loss applicable to common
stock by the weighted average number of common shares outstanding and common
stock equivalents, if dilutive.
F-53
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Recapitalization and Other Significant Corporate Matters
From its incorporation in February 1988 to November 11, 1991, Rittenhouse
Capital Corp. ("Rittenhouse"), a development stage enterprise, evaluated
possible merger and acquisition partners to enhance stockholder value, but
engaged in no material operations until entering into a Plan of Reorganization
among North American Technologies, Inc. ("NAT"), North American Environmental
Corporation ("NAEC"), and James E. Impero ("Impero"). NAT and Impero were sole
stockholders of NAEC, which in turn had a wholly-owned subsidiary, Inplant
Bioremedial Services, Inc. ("Inplant"). Pursuant to the Plan of Reorganization,
Rittenhouse acquired 100% of the outstanding stock of NAEC in exchange for the
issuance of 9,000,000 new shares, representing 80.9% of the common stock of
Rittenhouse. Because the stockholders of NAEC obtained voting control over the
combined entities, for accounting purposes, NAEC is considered the continuing
entity, and the transactions are accounted for as a recapitalization of NAEC
followed by the issuance of new NAEC shares of common stock for the net assets
of Rittenhouse.
The 2,130,000 previously outstanding shares of Rittenhouse became 2,130,000
outstanding shares of North American Environmental Group, Inc. ("NAE") as a
result of the change in Rittenhouse's name to NAE. This is accounted for as the
issuance by NAEC of 2,130,000 shares of common stock for the net assets,
recorded at book value, of Rittenhouse.
On November 11, 1991, Rittenhouse effected a 1 for 10 share reverse stock split.
All references to Rittenhouse shares give effect to this transaction as if it
had occurred on May 7, 1991, the date of inception of NAEC.
The consolidated financial statements for the year ended December 31, 1992 have
been restated to give effect to the recapitalization described above.
During 1992, a related corporation, North American Technologies Group, Inc.
("NATK"), through a series of transactions, obtained control over 10,758,333
shares, representing 88.6% of the outstanding common shares of NAE. NATK intends
to acquire the remaining outstanding common shares of the Company.
F-54
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. Going Concern
The Company is in the development stage and, accordingly, has not achieved sales
necessary to support operations. The Company has a working capital deficit of
$1,893,632 and a capital deficit of $1,862,778 at December 31, 1994 and has
incurred an accumulated deficit of $2,867,880 through December 31, 1994.
Although the Company believes that its technologies are now sufficiently
developed to begin commercial operations, substantially all revenues to date
have been derived from demonstration projects. Further, it can be expected that
operating expenses will increase as the Company incurs expenses associated with
the fabrication of equipment and the training and other costs of personnel to be
deployed at project sites as it commences commercial operations. Until the
Company is able to generate sufficient revenues from its technologies, there can
be no assurance that profitable operations can be attained.
The Company believes that it has sufficient capital and available sources of
financing to fully develop its proprietary technologies into commercially viable
products and services. However, to the extent that funds generated from
operations and existing capital resources are insufficient, the Company may have
to raise additional funds. No assurance can be given that additional financing
will be available, or if available, will be available on acceptable terms. If
adequate funds are not available, the Company may be required to curtail its
operations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
F-55
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
3. Advance Payments
Advance payments consist of:
December 31, 1993 1994
- ----------------------------------------------------------
Prepaid commissions $160,000 $ -
Travel advances and other 56,500 44,500
- ----------------------------------------------------------
$216,500 $ 44,500
==========================================================
4. Property and Equipment
Major classes of property and equipment consist of:
December 31, 1993 1994
- ---------------------------------------------------------
Machinery and equipment $ 30,945 $ 30,945
Furniture and office equipment 3,844 3,844
Leasehold improvements 18,077 18,077
- ---------------------------------------------------------
52,866 52,866
Less accumulated depreciation and
amortization 10,269 24,712
- ---------------------------------------------------------
Net property and equipment $ 42,597 $ 28,154
=========================================================
5. Balances with Affiliates
Balances with affiliates consists of:
December 31, 1993 1994
- ---------------------------------------------------------
Due from affiliates
North American Technologies, Inc. $347,343 $ -
Inplant Systems, Inc. - 22,328
Brookstone - 11,000
- ---------------------------------------------------------
$347,343 $33,328
=========================================================
F-56
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1993 1994
- ------------------------------------------------------------------
<S> <C> <C>
Due to affiliates
North American Technologies Group, Inc. $622,500 $ 809,025
North American Technologies, Inc. - 851,496
Gold Spinners International, Inc. 59,882 -
Brookstone 176,500 -
Other 26,300 -
- -------------------------------------------------------------------
$885,182 $1,660,521
===================================================================
</TABLE>
There are no specific repayment terms associated with the above balances.
6. Convertible Debenture
During 1992, the Company issued two debentures convertible into shares of the
common stock of NATK, the Company's majority stockholder. The debentures had
principal amounts of $500,000 and $250,000 and original maturities of two years
from the date of issuance, unless sooner redeemed or converted by the holders.
The holder of the $250,000 debenture granted a one-year extension of the
maturity date to May 22, 1995.
On December 31, 1992, a holder converted the $500,000 debenture into shares of
NATK's common stock.
The balance outstanding consists of:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, 1993 1994
- -----------------------------------------------------------------
Convertible debenture, prime rate
plus 2% (11% at December 31, 1994),
due May 22, 1995 $ 250,000 $ 250,000
Less current maturities - 250,000
- -----------------------------------------------------------------
Long-term debt $ 250,000 $ -
=================================================================
</TABLE>
7. Commitments
The Company rents equipment and office space under operating leases on both long
and short term basis. Rent expense amounted to approximately $39,000, $53,000
and $30,000 for the years ended December 31, 1992, 1993 and 1994, respectively.
F-57
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
Minimum annual rentals under non-cancelable operating leases of more than one
year in duration are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
- -----------------------------
<S> <C>
1995 $44,832
1996 20,245
1997 2,601
1998 -
1999 -
Thereafter -
- ------------------------------
$67,678
==============================
</TABLE>
8. Income Taxes
At December 31, 1994, the Company has net operating loss carryforwards for
federal income tax purposes amounting to approximately $2,726,000 which, if not
utilized, will expire as follows:
<TABLE>
<CAPTION>
Year ending December 31,
- -----------------------------
<S> <C>
2004 $ 2,000
2005 56,000
2006 260,000
2007 337,000
2008 1,360,000
2009 711,000
- ------------------------------
$2,726,000
==============================
</TABLE>
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires a
change from the deferred method to an asset/liability method of computing
deferred income taxes.
F-58
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
The components of deferred income taxes were as follows:
<TABLE>
<CAPTION>
December 31, 1993 1994
- --------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $685,100 $926,840
Other 1,050 -
- --------------------------------------------------------------
Gross deferred tax assets 686,150 926,840
Valuation allowance 686,150 926,840
- --------------------------------------------------------------
Net deferred income taxes $ - $ -
- --------------------------------------------------------------
</TABLE>
9. Warrants
During the first quarter of 1992, the Company issued 83,333 shares of restricted
common stock for $250,000. Each common share had a class "C" warrant attached,
entitling the holder to purchase one share of common stock at the exercise price
of $7.00 per share. The class "C" warrants expire on March 1, 1997.
10. Supplemental Cash Flow Information
Due to its operating losses, the Company pays no income taxes. Under the terms
of its borrowing agreements, the Company is not required to, and does not pay
interest currently.
During 1992, the Company issued 450,000 shares of its common stock for services
rendered in connection with the recapitalization (see Note 1) of the Company.
The shares were valued at $450,000. During 1991, the Company issued 300,000
shares of its common stock for services valued at $3,000. In January 1992,
certain lenders converted loans amounting to $175,000 into 175,000 shares of the
Company's common stock.
F-59
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Consolidated Balance Sheet
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, September 30,
1994 1995
(unaudited)
- ----------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash $ 1,001 $ 333
Advance payments 44,500 -
Due from affiliate 33,328 33,328
- ----------------------------------------------------------------------------
Total current assets 78,829 33,661
Property and equipment, net of accumulated
depreciation of $24,712 in 1994 and $33,839
in 1995 28,154 19,027
- ----------------------------------------------------------------------------
Deposits 2,700 2,700
- ----------------------------------------------------------------------------
$ 109,683 $ 55,388
============================================================================
Liabilities and Capital Deficit
Current
Accounts payable $ 5,035 $ 5,035
Due to affiliates 1,660,521 1,667,194
Convertible debenture 250,000 250,000
Accrued interest payable 56,905 75,995
- ----------------------------------------------------------------------------
Total current liabilities 1,972,461 1,998,224
- ----------------------------------------------------------------------------
Commitments and contingencies
Capital deficit
Preferred stock, $.001 par value
Authorized 1,000,000 shares
Issued shares - none - -
Common stock, $.01 par value
Authorized 20,000,000 shares
Issued and outstanding 12,138,333 shares 121,383 121,383
Additional paid-in capital 883,719 883,719
Deficit accumulated in development stage (2,867,880) (2,947,938)
- ----------------------------------------------------------------------------
Total capital deficit (1,862,778) (1,942,836)
- ----------------------------------------------------------------------------
$ 109,683 $ 55,388
============================================================================
</TABLE>
F-60
<PAGE>
<TABLE>
<CAPTION>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Consolidated Statements of Operations
(Unaudited)
- -------------------------------------------------------------------------------------------
Cumulative from
Inception
Nine Months Nine Months (May 7, 1991)
ended ended through
September 30, September 30, September 30,
1994 1995 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales of environmental services $ 13,542 $ - $ 13,542
- -------------------------------------------------------------------------------------------
Expenses
Research and development expenses 334,275 - 1,306,369
Consulting fees 102,140 - 437,632
Management fees - - 50,000
Travel and promotion 50,722 - 240,288
Legal and professional fees 93,020 - 224,140
General and administrative expenses 110,571 60,968 587,478
- -------------------------------------------------------------------------------------------
Total expenses 690,728 60,968 2,845,907
- -------------------------------------------------------------------------------------------
Operating loss (677,186) (60,968) (2,832,365)
- -------------------------------------------------------------------------------------------
Other income (expense)
Interest income 900 - 3,600
Interest expense (17,368) (19,090) (79,173)
Write-off of goodwill - - (40,000)
- -------------------------------------------------------------------------------------------
Total other (expense) (16,468) (19,090) (115,573)
- -------------------------------------------------------------------------------------------
Net loss $ (693,654) $(80,058) $(2,947,938)
===========================================================================================
Loss per common share $ (0.06) $ -
===========================================================================================
Weighted average number of common
shares outstanding 12,138,333 12,138,333
===========================================================================================
</TABLE>
F-61
<PAGE>
<TABLE>
<CAPTION>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(Unaudited)
- ---------------------------------------------------------------------------------------------------
Cumulative from
Inception
Nine Months Nine Months (May 7, 1991)
ended ended through
September 30, September 30, September 30,
1994 1995 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (693,654) $(80,058) $(2,947,938)
Adjustments to reconcile net loss to net
cash (used) in operating activities
Depreciation and amortization 10,833 9,127 27,729
Stock issued for services - - 453,000
Write-off of goodwill - - 40,000
Decrease (increase) in assets
Advance payments (22,328) 44,500 12,000
Accrued interest (900) - -
Deposits - - (2,700)
Increase (decrease) in liabilities
Accounts payable (426,560) - (285)
Accrued interest payable 17,368 19,090 73,934
- ---------------------------------------------------------------------------------------------------
Net cash (used) in operating activities (1,115,241) (7,341) (2,344,260)
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities
Cash received in acquisition of subsidiary - - 58,593
Purchase of property and equipment (30,000) - (52,866)
- ---------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (30,000) - 5,727
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities
Issuance of convertible debenture - - 750,000
Issuance of common stock - - 250,000
Increase in notes payable - - 175,000
Increase in amounts due to affiliates 1,146,031 6,673 1,163,866
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,146,031 6,673 2,338,866
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 790 (668) 333
Cash, at beginning of period 1,170 1,001 -
- ---------------------------------------------------------------------------------------------------
Cash, at end of period $ 1,960 $ 333 $ 333
===================================================================================================
</TABLE>
F-62
<PAGE>
North American Environmental Group, Inc.
(A Development Stage Enterprise)
Summary of Accounting Policies
- -----------------------------------------------------------------------------
Basis of The financial information has been
Presentation prepared in accordance with the
Company's customary accounting
practices and with the instructions
for Form 10-Q, and has not been
audited. Readers of the information
should refer to the Company's audited
financial statements as of December
31, 1994, because certain footnote
disclosures which would substantially
duplicate those contained in such
audited financial statements have
been omitted from this report. In
the opinion of management, the
information presented reflects all
adjustments necessary for a fair
statement of interim results. All
such adjustments are of a normal and
recurring nature. The foregoing
interim results are not necessarily
indicative of the results of
operations for a full fiscal year.
F-63
<PAGE>
Independent Certified Public Accountants' Report
GAIA Technologies, Inc.
Houston, Texas
We have audited the accompanying balance sheets of GAIA Technologies, Inc.
as of December 31, 1994 and 1993, and the related statements of loss,
capital deficit, and cash flows for each of the years in the three year
period ending December 31, 1994. These financial statements are the
responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Notes 4 and 5, the company had significant transactions
with related parties for each of the years in the three year period ending
December 31, 1994. Also, as discussed in Note 11, subsequent to December
31, 1994 the company signed a letter of intent to sell substantially all
assets of the company.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GAIA Technologies, Inc.
as of December 31, 1994 and 1993, and the results of its operations and its
cash flows for each of the years in the three year period ending December
31, 1994 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 1 to the
financial statements, the company has incurred operating losses since
inception and at December 31, 1994, the company had a negative working
capital position and a capital deficit. This situation raises substantial
doubt about the company's ability to continue as a going concern.
Subsequent to December 31, 1994, the company has entered into a letter of
intent to sell substantially all assets of the company. The company's
ability to continue as a going concern is dependent upon the successful
completion of the sale. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
Certified Public Accountants
October 2, 1995
Houston, Texas
F-64
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets (Notes 4 and 11)
Current
Cash $ 21,272 $ 30,513
Accounts receivable, less allowance for doubtful
accounts of $49,541 at 1994 11,317 62,236
Inventories (Note 2) 99,056 212,057
Prepaid expenses and other 2,000 35,261
- -------------------------------------------------------------------------------
Total current assets 133,645 340,067
Note receivable, less allowance for doubtful
collection of $12,603 at 1994 12,602 25,205
Property and equipment, less accumulated
depreciation (Note 3) 233,572 371,445
Organization costs, less accumulated
amortization of $44,186 and $30,438 24,564 38,312
Patents and trademarks, less accumulated
amortization of $21,406 and $10,707 29,464 40,163
- --------------------------------------------------------------------------------
$433,847 $815,192
================================================================================
</TABLE>
F-65
<PAGE>
GAIA Technologies, Inc.
Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Capital Deficit
Current Liabilities
Notes payable (Note 4) $1,335,979 $1,107,086
Accounts payable:
Trade 227,287 150,617
Stockholders (Note 4) 54,220 9,733
Accrued expenses:
Payroll taxes (Note 6) 386,642 222,612
Other (Note 4) 177,167 91,790
- --------------------------------------------------------------------------------
Total current liabilities 2,181,295 1,581,838
Long-term Debt (Note 4) 500,000 480,000
Investment in joint venture (Note 5) 132,262 -
- --------------------------------------------------------------------------------
Total liabilities 2,813,557 2,061,838
- --------------------------------------------------------------------------------
Redeemable Preferred Stock (Note 7) 349,981 1,000,000
- --------------------------------------------------------------------------------
Commitments and Contingencies (Notes 7 and 11)
- --------------------------------------------------------------------------------
Capital Deficit
Common stock (Note 7) 2,195,245 1,495,226
Deficit (4,924,936) (3,741,872)
- --------------------------------------------------------------------------------
Total capital deficit (2,729,691) (2,246,646)
- --------------------------------------------------------------------------------
$ 433,847 $815,192
================================================================================
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-66
<PAGE>
GAIA Technologies, Inc.
Statements of Loss
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales (Note 8) $416,262 $731,134 $1,156,409
Cost of Sales 408,293 673,101 1,080,908
- --------------------------------------------------------------------------------
Gross Profit 7,969 58,033 75,501
Operating Expenses 1,015,197 1,648,084 1,350,493
- --------------------------------------------------------------------------------
Operating Loss (1,007,228) (1,590,051) (1,274,992)
- --------------------------------------------------------------------------------
Other Income (Expense):
Loss in equity investment (Note 5) (132,262) - -
Loss on sale of property and
equipment (25,417) (10,646) -
Interest expense (Note 4) (157,243) (110,073) (85,710)
Other (Note 9) 148,414 102,702 12,834
- --------------------------------------------------------------------------------
Total Other Expense, net (166,508) (18,017) (72,876)
- --------------------------------------------------------------------------------
Net Loss $(1,173,736) $(1,608,068) $(1,347,868)
- --------------------------------------------------------------------------------
Weighted Average Number of
Common Shares Outstanding 73,533 70,044 66,230
================================================================================
Loss Per Share $(15.96) $(22.96) $(20.35)
================================================================================
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-67
<PAGE>
GAIA Technologies, Inc.
Statements of Capital Deficit
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock (1)
----------------------
Shares Amount Deficit Total
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, at January
1, 1992 66,230 $1,145,247 $ (785,936) $359,311
Net loss - - (1,347,868) (1,347,868)
- ------------------------------------------------------------------------------------
BALANCE, at December
31, 1992 66,230 1,145,247 (2,133,804) (988,557)
Common stock issued
for cash 6,538 349,979 - 349,979
Net loss - - (1,608,068) (1,608,068)
- ------------------------------------------------------------------------------------
BALANCE, at December
31, 1993 72,768 1,495,226 (3,741,872) (2,246,646)
Conversion of preferred
stock to common stock 12,143 650,019 - 650,019
Common stock issued
for cash 778 50,000 - 50,000
Dividends on preferred stock - - (9,328) (9,328)
Net loss - - (1,173,736) (1,173,736)
- ------------------------------------------------------------------------------------
BALANCE, at December
31, 1994 85,689 $2,195,245 $(4,924,936) $(2,729,691)
====================================================================================
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
__________________
(1) No stated par, 1,000,000 shares authorized
F-68
<PAGE>
GAIA Technologies, Inc.
Statements of Cash Flows
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Year ended December 31, 1994 1993 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(1,173,736) $(1,608,068) $(1,347,868)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Loss in equity investment 132,262 - -
Depreciation and amortization 81,865 97,881 89,724
Bad debt expense 105,564 234,559 104,911
Loss on sale of property and equipment 25,417 10,646 -
Changes in assets and liabilities:
Accounts receivable (42,042) (158,347) (116,415)
Inventories 113,001 69,839 (99,182)
Prepaid expenses and others 33,261 13,968 (29,127)
Accounts payable 121,157 (100,261) 254,410
Accrued expenses 240,079 246,490 39,228
- -----------------------------------------------------------------------------------------
Net cash used in operating activities (363,172) (1,193,293) (1,104,319)
- -----------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures - (30,647) (149,600)
Proceeds from sale of fixed assets 55,038 - -
Advances on note receivable - - (25,205)
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 55,038 (30,647) (174,805)
- -----------------------------------------------------------------------------------------
</TABLE>
F-69
<PAGE>
GAIA Technologies, Inc.
Statements of Cash Flows
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Year ended December 31, 1994 1993 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities:
Repayment of notes payable - (2,205) (450,240)
Proceeds from notes payable and long-term debt 248,893 900,086 701,162
Proceeds from sale of common stock 50,000 349,979 -
Proceeds from sale of preferred stock - - 1,000,000
- -----------------------------------------------------------------------------------------
Net cash provided by financing activities 298,893 1,247,860 1,250,922
- -----------------------------------------------------------------------------------------
Net increase (decrease) in cash (9,241) 23,920 (28,202)
Cash, at beginning of year 30,513 6,593 34,795
- -----------------------------------------------------------------------------------------
Cash, at end of year of year $ 21,272 $ 30,513 $ 6,593
=========================================================================================
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-70
<PAGE>
GAIA Technologies, Inc.
Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Nature of GAIA Technologies, Inc. (the
Business company), was incorporated on July
10, 1991, in the State of Delaware.
The company is a manufacturer of
porous pipe made from recycled rubber
and thermoplastic. Also, the company
has certain patented and unpatented
proprietary technology pertaining to
the manufacturing of wood
substitution and alternative building
materials (hard goods) which are to
be made from recycled rubber and
thermoplastic. As of October 2,
1995, the company has not integrated
this material substitution technology
into its manufacturing process.
However, the company is currently
building a manufacturing line to
produce hard goods and porous pipe
with production scheduled to begin in
December 1995.
Inventories Inventories consist of raw materials
and finished goods and are valued at
the lower of cost (first-in,
first-out) or market. Costs for
finished goods include raw materials,
direct labor and allocation of
manufacturing overhead costs.
Property, Property and equipment are stated at
Equipment and cost. Depreciation is computed using
Depreciation the straight-line method for both
financial and tax reporting purposes.
Investment in The company's investment in its 50%
Joint Venture owned joint venture is accounted for
using the equity method of
accounting, whereby, the investment
is carried at cost and adjusted for
the company's proportionate share of
undistributed earnings or losses.
Intangible Organization costs are being
Assets amortized by the straight-line method
over a five year period. Purchased
patents and trademarks are being
amortized by the straight-line method
over their remaining lives of five
years.
Revenue The company recognizes revenues when
Recognition the products are shipped.
Income Taxes Deferred income taxes result from the
temporary differences between the
financial statement and income tax
basis of assets and liabilities (see
Note 6).
F-71
<PAGE>
GAIA Technologies, Inc.
Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Loss Per Loss per share amounts are based on
Share the weighted average number of common
shares outstanding for all periods
presented. Common stock equivalents
were not included in the loss per
share calculation for all years
presented because they are
anti-dilutive.
Concentration As of October 1994, the company had
of Credit cancelled all insurance coverage.
Risk
F-72
<PAGE>
GAIA Technologies, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Financial Since the inception of the company,
Condition the company has incurred operating
and Going losses and at December 31, 1994, the
Concern company had a negative working
capital position of $2,047,650 and a
capital deficit of $2,729,691. Also,
during 1995 because of the working
capital position the company has had
limited manufacturing operations.
This situation raises substantial
doubt about the company's ability to
continue as a going concern.
Subsequent to December 31, 1994, the
company has entered into a letter of
intent to sell substantially all
assets of the company (see Note 11).
Absent of any additional debt or
equity financing, the company's
ability to continue as a going
concern is dependent on the
successful completion of the sale.
The financial statements do not
include any adjustments that might
result from the outcome of this
uncertainty.
2. Inventories At December 31, 1994 and 1993,
inventories consisted of the following:
1994 1993
-------------------------------------
Finished goods $ 94,142 $ 210,986
Raw material 4,914 1,071
-------------------------------------
Total $ 99,056 $ 212,057
=====================================
F-73
<PAGE>
GAIA Technologies, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. Property and At December 31, 1994 and 1993, property and equipment
Equipment consisted of the following:
Estimated
Useful
Lives (Years) 1994 1993
----------------------------------------------------
Equipment and
machinery 7 $ 377,023 $ 481,356
Furniture and
fixtures 5-7 35,967 47,227
Vehicles 5 5,000 9,238
----------------------------------------------------
417,990 537,821
Less accumulated
depreciation (184,418) (166,376)
----------------------------------------------------
$ 233,572 $ 371,445
----------------------------------------------------
4. Related Party At December 31, 1994 and 1993, the company had accounts
Transactions payable to various stockholders totalling $54,220 and
$9,733, respectively, for various administrative expenses
incurred on behalf of the company.
At December 31, 1994, the company had dividends payable to
preferred stockholders totalling $9,328.
F-74
<PAGE>
GAIA Technologies, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
At December 31, 1994 and 1993, the company had various
notes payable primarily with related parties as follows:
1994 1993
-----------------------------------------------------------
Note payable to a stockholder due
on October 21,1995, interest payable
monthly at prime plus 2% (10.5% at
December 31, 1994), collateralized
by substantially all assets of the
company $ 778,000 $ 778,000
Unsecured note payable to a stock-
holder, due on demand, interest
payable at 8.5% 285,784 161,022
Unsecured note payable to a stock-
holder, due on demand, interest
at prime plus 1% (10% at December
31, 1994) 100,000 100,000
Unsecured convertible note payable
to a stock option holder, due on
demand, interest payable at 8.5%,
convertible into common stock at
approximately $60 per share 50,000 50,000
Note payable to a stockholder due on
demand, interest payable at 10%,
collateralized by the lawsuit
proceeds from the settlement
discussed in Note 11 75,000 -
Other, non-related 47,195 18,064
-----------------------------------------------------------
$1,335,979 $1,107,086
===========================================================
At December 31, 1994 and 1993, the company had long-term
debt agreements with a stockholder totalling $500,000 and
$480,000, respectively. The notes bear interest at 8.5%,
payable quarterly, with principal due September 13, 1998
and December 13, 1998. The notes are collateralized by
common stock warrants issued in association with the debt.
F-75
<PAGE>
GAIA Technologies, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
For the years ended December 31, 1994, 1993 and 1992, the
company incurred interest expense on these related party
notes totalling approximately $153,000, $102,000 and
$64,000, respectively, of which approximately $135,000 and
$49,000 remained unpaid at December 31, 1994 and 1993,
respectively.
5. Investment in Effective January 1, 1994, the company entered into a
Joint Venture joint venture agreement with a company that is a
stockholder of the company. The company has a 50% ownership
interest in the joint venture which is accounted for using
the equity method of accounting. The original purpose of
the joint venture was to sublicense the hard goods and
porous pipe technology on a national and international
basis. However, the primarily activity of the joint venture
to date has been the pursuit of a patent infringement case
in which the company is the plaintiff (see Note 11). The
company contributed the porous pipe licenses as their
initial contribution to the joint venture, which had no
book value at the time of contribution. The company's share
of net loss from the joint venture for the year ended
December 31, 1994 was $232,262, however, the company was
limited to recording a loss of $132,262 which represents
the net amount the company is potentially liable for as of
December 31, 1994.
The following is a summary of financial position at
December 31, 1994 and results of operations of the joint
venture for the year ended December 31, 1994:
Amount
---------------------------------------
Assets:
License agreements, net $ 187,614
Other 3,107
---------------------------------------
$190,721
---------------------------------------
F-76
<PAGE>
GAIA Technologies, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Amount
----------------------------------------
Liabilities and deficit:
Note payable to venturer $ 200,000
Accounts payable, legal fees 255,245
Deficit (264,524)
----------------------------------------
$ 190,721
========================================
Revenues $ -
Expenses, primarily legal fees 464,524
----------------------------------------
Net loss $(464,524)
========================================
6. Income and Deferred taxes are determined based on the temporary
Payroll differences between the financial statement and income tax
Taxes basis of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse.
The components of deferred income tax assets at December 31,
consist of the following:
1994 1993
---------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 21,000 $ -
Net operating loss carryforward 1,619,000 1,265,000
---------------------------------------------------------
Net deferred tax asset 1,640,000 1,265,000
Valuation allowance (1,640,000) (1,265,000)
---------------------------------------------------------
Total $ - $ -
=========================================================
At December 31, 1994 and 1993, the company provided a 100%
deferred tax asset valuation allowance because it is unlikely
that the company will recognize the deferred tax asset unless
the asset sale as described in Note 11 is completed.
At December 31, 1994, the company had net operating loss
carryfowards of approximately $4,763,000 available to reduce
taxable income through the year 2009. The net operating loss
carryforwards expire as follows:
F-77
<PAGE>
GAIA Technologies, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Year ended December 31, Amount
2006 $ 794,000
2007 1,348,000
2008 1,579,000
2009 1,042,000
-------------------------------------
$4,763,000
=====================================
At December 31, 1994 and 1993, the company had past due
payroll taxes totalling $386,642 and $222,612,
respectively. The internal revenue service has a lien
filed on all assets of the company until these liabilities
have been satisfied.
7. Capital Stock, The company has 18,680 shares of authorized cumulative
Options And convertible redeemable preferred stock of which 18,680 and
Warrants 6,538 shares were outstanding at December 31, 1994 and
1993, respectively.
The redeemable preferred stock earns dividends at an
annual rate of 8% beginning September 1, 1994 payable
annually on August 31, of each year. The preferred
stockholders have voting rights and are entitled to
participate in dividends declared and paid to common
stockholders as if their preferred stock had been
converted into common stock.
The preferred stock has a liquidation preference of $53.53
per share plus all unpaid dividends, and is convertible at
the option of the holder into common stock, as determined
by dividing $53.53 by the conversion price, as computed in
accordance with the agreement.
The company is required, in accordance with the mandatory
redemption clause, to redeem 20% of the outstanding
preferred stock as of August 31, 1995 at a redemption
price of $53.53 plus all unpaid dividends, and 25% of the
remaining outstanding preferred stock at $53.53 plus all
unpaid dividends on August 31, of each year thereafter
through August 31, 1999. At any time after August 31,
1996, the company, at its option, may redeem any or all
outstanding preferred stock at $53.53 per share plus all
unpaid dividends.
As of October 2, 1995, the company did not have the
funds available to comply with the 20% mandatory
redemption as discussed above.
F-78
<PAGE>
GAIA Technologies, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
During the years ended December 31, 1994 and 1993, the
company issued common stock warrants totalling 3,822 and
7,786, respectively, in association with certain debt
financing. Each warrant allows the holder to purchase one
share of common stock at an exercise price of $19.62 and
$64.22, respectively, per share and expire on January 13,
2004 and September 13, 2003, respectively.
During 1993, the company issued common stock options
totalling 1,019 in association with certain debt
financing. Each option allows the holder to purchase one
share of common stock at an exercise price ranging from
$60.15 to $72.20 per share. The stock options have no
expiration date.
No common stock options or warrants were exercised during
the years ended December 31, 1994, 1993 and 1992. Also,
the company did not issue any stock options or warrants
during the year ended December 31, 1992.
At December 31, common stock was reserved for future
issuance as follows:
1994 1993
(Shares) (Shares)
---------------------------------------------------
Conversion of preferred stock to
common stock 6,538 18,681
Stock options outstanding 1,019 1,019
Stock Warrants outstanding 11,608 7,786
---------------------------------------------------
19,165 27,486
===================================================
8. Major For the years ended December 31, 1994, 1993 and 1992, the
Customers company had sales from four customers representing the
following percentage of total sales:
1994 1993 1992
---------------------------------------
Customer A 1% 31% 22%
Customer B 1% 16% 12%
Customer C 23% 7% 6%
Customer D 1% 17% 12%
=======================================
F-79
<PAGE>
GAIA Technologies, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. Miscellaneous During the years ended December 31, 1994 and 1993, the
Income company sold certain licensing rights for approximately
$119,000 and $100,000, respectively, and recorded it as
miscellaneous income.
10. Supplemental For the years ended December 31, 1994, 1993 and 1992, the
Cash Flow company paid interest totalling $66,350, $73,085 and
Information $48,803, respectively.
During the year ended December 31, 1994, 12,143 shares of
preferred stock were converted into 12,143 shares of
common stock at $53.53 per share.
At December 31,1 994, the company had dividends payable to
preferred stockholders totalling $9,328.
11. Subsequent On June 9, 1995, the company entered into a letter of
Events intent to sell substantially all of the assets of the
company to a publicly traded company for $2,500,000 in
cash and 1,666,667 shares of common stock of the publicly
traded company, which was trading at $.94 a share at
October 2, 1995. The company plans to use the proceeds to
retire existing debts of the company. In association with
the letter of intent, the company entered into debt
agreements, whereby the purchaser will loan the company up
to $1,100,000. The debt bears interest at 10%, is due July
1, 1998 and is collateralized by certain assets of the
company. On closing of the sale, the purchaser is expected
to forgive the amounts advanced under the loan agreements
as part of the cash portion of the purchase price. As of
October 2, 1995, the company had borrowed $1,020,000 in
accordance with these debt agreements.
In addition to the debt agreements discussed above, the
letter of intent allowed the company to enter into a third
debt agreement with the purchaser, whereby the purchaser
will loan the company up to $1,000,000 to be used
exclusively for the purchase of equipment and working
capital needs for the company's hard goods business. The
debt bears interest at 10%, is due July 1, 1998 and is
collateralized by assets purchased with the proceeds. On
closing of the sale, the purchaser is expected to forgive
the balance advanced to the company under this debt
agreement in consideration for the assets received by the
purchaser that were purchased with the proceeds. As of
October 2, 1995, the company had borrowed $318,592 in
accordance with this agreement.
F-80
<PAGE>
GAIA Technologies, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
In accordance with the letter of intent, the company will
receive a 10% licensing fee, as defined by the agreement
for a period of five years after the closing. Also, the
company will receive a 5% royalty on all revenues as
defined by the agreement for a period of fifteen years.
Additionally, at closing the company will grant the
purchaser an exclusive right and option exercisable at any
time during a two year period following the closing to
acquire the railroad crosstie business assets, as defined
by the agreement, with a one year extension at the option
of the purchaser. In exchange for the grant of the option,
the purchaser agrees to loan up to $1,500,000 to the
company to be used exclusively for the development of the
railroad crosstie technology. The loan will bear interest
at 10% and is due two years after the earlier of (1) the
date the purchaser provides notice that they will not
exercise their option or (2) the expiration of the option
period. The loan will be secured by 666,667 shares of the
common stock of the publicly traded company received from
the sale.
On March 16, 1995, the company won its patent infringement
case in which the company was the plaintiff and a final
judgment was entered on behalf of the company for
approximately $22,000,000. As of October 2, 1995, the case
and final judgment were under appeal. Subsequent to March
16, 1995, the main corporate defendant filed for
bankruptcy and the amount and timing of any collection is
uncertain. Accordingly, any receivable or gain resulting
from the judgment had not been recorded in the company's
financial statements as of December 31, 1994. The sale of
the assets discussed above does not entitle the purchaser
to any amounts or assets that the company may recover in
the future as a result of this judgment.
F-81
<PAGE>
GAIA Technologies, Inc.
Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
September 30,
1995
- -----------------------------------------------------------------
<S> <C>
Assets
Current
Cash $ 974
Accounts receivable, less allowance for doubtful
accounts of $22,149 64,740
Inventories 53,842
Prepaid expenses and other 9,004
- ------------------------------------------------------------------
Total current assets 128,560
Note receivable, less allowance for doubtful
collection of $12,603 12,602
Property and equipment, less accumulated
depreciation of $191,240 225,391
Organization costs, less accumulated
amortization of $57,936 10,814
Patents and trademarks, less accumulated
amortization of $31,580 19,290
- ------------------------------------------------------------------
$396,657
- ------------------------------------------------------------------
</TABLE>
F-82
<PAGE>
GAIA Technologies, Inc.
Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
September 30,
1995
- --------------------------------------------------------------------------
<S> <C>
Liabilities and Capital Deficit
Current Liabilities
Notes payable $1,754,908
Bank overdraft 36,430
Accounts payable:
Trade 191,226
Stockholders 232,935
Accrued expenses:
Payroll taxes 225,287
Other 131,767
- --------------------------------------------------------------------------
Total current liabilities 2,572,553
Long-term Debt 500,000
Investment in joint venture 319,298
- --------------------------------------------------------------------------
Total liabilities 3,391,851
- --------------------------------------------------------------------------
Redeemable Preferred Stock 349,981
- --------------------------------------------------------------------------
Commitments and Contingencies
- --------------------------------------------------------------------------
Capital Deficit
Common stock 2,195,245
Deficit (5,540,420)
- --------------------------------------------------------------------------
Total capital deficit (3,345,175)
- --------------------------------------------------------------------------
$396,657
- --------------------------------------------------------------------------
</TABLE>
F-83
<PAGE>
GAIA Technologies, Inc.
Statements of Loss
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Nine Months Ended September 30, 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C>
Net Sales $193,845 $404,762
Cost of Sales 117,099 407,663
- -------------------------------------------------------------------------
Gross Profit (Loss) 76,746 (2,901)
Operating Expenses 479,776 893,790
- -------------------------------------------------------------------------
Operating Loss (403,030) (896,691)
- -------------------------------------------------------------------------
Other Income (Expense):
Loss in equity investment (187,036) (99,196)
Loss on sale of property and equipment - (25,417)
Interest expense (66,148) (116,632)
Other 40,730 144,202
- -------------------------------------------------------------------------
Total Other Expense, net (212,454) (97,043)
- -------------------------------------------------------------------------
Net Loss $(615,484) $(993,734)
- -------------------------------------------------------------------------
Weighted Average Number of
Common Shares Outstanding 85,689 72,855
- -------------------------------------------------------------------------
Loss Per Share $(7.18) $(13.64)
- -------------------------------------------------------------------------
</TABLE>
F-84
<PAGE>
GAIA Technologies, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Increase (Decrease) in Cash
Nine Months Ended September 30, 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(615,484) $(993,734)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Loss in equity investment 187,036 99,196
Depreciation and amortization 30,205 84,982
Bad debt expense - 105,564
Loss on sale of property and equipment - 25,417
Changes in assets and liabilities:
Accounts receivable (53,423) (50,614)
Inventories 45,214 111,886
Prepaid expenses and others (7,004) 36,192
Accounts payable 179,084 163,395
Accrued expenses (206,755) 51,265
--------------------------------------------------------------------------
Net cash used in operating activities (441,127) (366,451)
- --------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from sale of fixed assets 1,900 55,038
- --------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from notes payable and long-term debt 418,929 233,254
Proceeds from sale of common stock - 50,000
- --------------------------------------------------------------------------
Net cash provided by financing activities 418,929 283,254
- --------------------------------------------------------------------------
Net decrease in cash (20,298) (28,159)
Cash, at beginning of period 21,272 30,513
- --------------------------------------------------------------------------
Cash, at end of year of period $ 974 $ 2,354
- --------------------------------------------------------------------------
</TABLE>
F-85
<PAGE>
GAIA Technologies, Inc.
Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Nature of GAIA Technologies, Inc. (the
Business company), was incorporated on July
10, 1991, in the State of Delaware.
The company is a manufacturer of
porous pipe made from recycled rubber
and thermoplastic. Also, the company
has certain patented and unpatented
proprietary technology pertaining to
the manufacturing of wood
substitution and alternative building
materials (hard goods) which are to
be made from recycled rubber and
thermoplastic. As of October 2,
1995, the company has not integrated
this material substitution technology
into its manufacturing process.
However, the company is currently
building a manufacturing line to
produce hard goods and porous pipe
with production scheduled to begin in
December 1995.
Inventories Inventories consist of raw materials
and finished goods and are valued at
the lower of cost (first-in,
first-out) or market. Costs for
finished goods include raw materials,
direct labor and allocation of
manufacturing overhead costs.
Property, Property and equipment are stated at
Equipment and cost. Depreciation is computed using
Depreciation the straight-line method for both
financial and tax reporting purposes.
Investment in The company's investment in its 50%
Joint Venture owned joint venture is accounted for
using the equity method of
accounting, whereby, the investment
is carried at cost and adjusted for
the company's proportionate share of
undistributed earnings or losses.
Intangible Organization costs are being
Assets amortized by the straight-line method
over a five year period. Purchased
patents and trademarks are being
amortized by the straight-line method
over their remaining lives of five
years.
Revenue The company recognizes revenues when
Recognition the products are shipped.
Income Taxes Deferred income taxes result from the
temporary differences between the
financial statement and income tax
basis of assets and liabilities.
F-86
<PAGE>
GAIA Technologies, Inc.
Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Loss Per Loss per share amounts are based on
Share the weighted average number of common
shares outstanding for all periods
presented. Common stock equivalents
were not included in the loss per
share calculation for all years
presented because they are
anti-dilutive.
Concentration As of October 1994, the company had
of Credit cancelled all insurance coverage.
Risk
F-87
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
PROFORMA BALANCE SHEET
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
North American
Technologies
Group, Inc.
Unaudited Adjustments dr (Cr) Proforma
September 30, 1995 #1 #2 #3 September 30, 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash $ 1,837,641 $(512,793) $ (305,500) $ $ 1,019,348
Accounts receivable 755,113 17,412 772,525
Inventory 188,497 65,158 253,655
Accrued interest receivable 216,218 53,600 (53,600) 216,218
Note Receivable 572,313 572,313
Prepaids and other current assets 213,719 213,719
- -----------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS 3,783,501 (459,193) (359,100) 82,570 3,047,778
Notes Receivable 3,680,421 512,793 (1,851,386) 2,341,828
Property and equipment, net 504,152 856,500 1,360,652
Investment in joint venture 192,494 192,494
Goodwill and other intangibles 792,530 3,082,426 3,874,956
Other assets 289,890 (111,010) 178,880
Investment in GAIA 4,021,496 (4,021,496) 0
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 9,242,988 53,600 1,700,000 0 10,996,588
- -----------------------------------------------------------------------------------------------------------------------
Current portion LTD 411,332 411,332
Accounts payable 581,525 (150,000) 731,525
Accrued expenses 762,472 762,472
Note payable to officer 120,308 120,308
Note payable to Seller (1,050,000) 1,050,000
- -----------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES 1,875,637 0 (1,200,000) 0 3,075,637
Long term debt, net 3,257,406 3,257,406
Minority interest 16,488 16,488
Common stock 22,056 (1,667) 23,723
Additional Paid in Capital 19,726,897 (498,333) 20,225,230
Retained deficit (15,495,040) (53,600) (15,441,440)
Treasury shares (16,488) (16,488)
Notes receivable-stock (143,968) (143,968)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & EQUITY $ 9,242,988 $ (53,600) $(1,700,000) $ 0 $ 10,996,588
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
ADJUSTMENTS:
1. To record cash expended for equipment and working capital after 9/30/95 but
prior to closing.
2. To record consideration given for assets acquired.
3. To record the allocation of purchase price to assets acquired.
F-88
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
PROFORMA STATEMENTS OF LOSS
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Nine Months ended September 30, 1995
- -------------------------------------------------------------------------------------------------------------------------------
North American
Technologies
Group, Inc. GAIA Holdings Adjustments
Unaudited Unaudited #1 #2 Proforma
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,981,620 $ 193,845 $ 2,175,465
Costs of services rendered 1,273,103 117,099 1,390,202
- --------------------------------------------------------------------------------------------------------------------------------
Gross margin 708,517 76,746 785,263
Research and development 524,540 524,540
Selling, general and administrative 3,223,369 479,776 (67,675) 206,250 3,841,720
- --------------------------------------------------------------------------------------------------------------------------------
3,747,909 479,776 (67,675) 206,250 4,366,260
- --------------------------------------------------------------------------------------------------------------------------------
Operating Loss (3,039,392) (403,030) 67,675 (206,250) (3,580,997)
Other income (expense)
Interest income 245,530 245,530
Interest expense (74,537) (66,148) 66,148 (94,500) (169,037)
Equity in net of joint venture (176,892) (176,892)
Minority interest in net (income) of
subsidiary (5,432) (5,432)
Loss in equity investment (187,036) 187,036 0
Other 10,257 40,730 50,987
- --------------------------------------------------------------------------------------------------------------------------------
(1,074) (212,454) 253,184 (94,500) (54,844)
- --------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations $(3,040,466) $(615,484) $320,859 $(300,750) $(3,635,841)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ADJUSTMENTS:
1. To (a) remove depreciation, amortization and interest expense in total since
amounts relating to the assets purchased are recorded in Adjustment 2, and
(b) to remove legal, penalties and other expense associated with liabilities
not assumed.
2. To record depreciation and amortization on the assets acquired, and interest
on the Seller note as if it were outstanding during the period.
F-89
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
PROFORMA STATEMENTS OF LOSS
TWELVE MONTHS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Twelve Months ended December 31, 1994
- -------------------------------------------------------------------------------------------------------------------------------
North American
Technologies Adjustments
Group, Inc. GAIA Holdings #1 #2 Proforma
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,945,697 $ 416,262 $ 2,361,959
Costs of services rendered 1,317,171 408,293 1,725,464
- --------------------------------------------------------------------------------------------------------------------------------
Gross margin 628,526 7,969 636,495
Research and development 1,506,073 1,506,073
Selling, general and administrative 3,078,743 1,015,197 (190,429) 275,000 4,178,511
- --------------------------------------------------------------------------------------------------------------------------------
4,584,816 1,015,197 (190,429) 275,000 5,684,584
- --------------------------------------------------------------------------------------------------------------------------------
Operating Loss (3,956,290) (1,007,228) 190,429 (275,000) (5,048,089)
Other income (expense)
Investment income 512,312 512,312
Interest income 112,897 112,897
Interest expense (121,986) (157,243) 157,243 (126,000) (247,986)
Minority interest in net (income) of
subsidiary (22,532) (22,532)
Equity in net income of affiliate 50,000 50,000
Loss on write-off of investment (600,000) (600,000)
Loss on abandonment of mining properties (794,314) (794,314)
Loss in equity investment (132,262) 132,262 0
Loss on sale of property and equipment (25,417) 25,417 0
Other 148,414 148,414
- --------------------------------------------------------------------------------------------------------------------------------
(863,623) (166,508) 314,922 (126,000) (841,209)
- --------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations $(4,819,913) $(1,173,736) $ 505,351 $(401,000) $(5,889,298)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ADJUSTMENTS:
1. To (a) remove depreciation, amortization and interest expense in total since
amounts relating to the assets purchased are recorded in Adjustment 2, and
(b) to remove legal, penalties and other expense associated with liabilities
not assumed.
2. To record depreciation and amortization on the assets acquired, and interest
on the Seller note as if it was outstanding all year.
F-90
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, approved as of _______, 1996 by
NORTH AMERICAN TECHNOLOGIES GROUP, INC., a Delaware corporation ("NATK"), by
resolution duly adopted by its Board of Directors on said date, and by NORTH
AMERICAN ENVIRONMENTAL GROUP, INC., a Delaware corporation ("NAE"), approved on
__________, 1996 by resolution duly adopted by its Board of Directors on said
date, and by DAILY MAIL, INC, a Delaware corporation ("Daily Mail"), approved on
___________, 1996 by resolution duly adopted by its Board of Directors and sole
stockholder on said date. This Agreement and Plan of Merger constitutes a plan
of merger and an agreement of merger pursuant to the provisions of the Delaware
General Corporation Law:
1. The constituent corporation, NAE, shall, pursuant to the
provisions of Section 251 of the Delaware General Corporation Law, be merged
into Daily Mail, a wholly-owned subsidiary of NATK ("Surviving Corporation"),
which shall be the surviving corporation upon the effective date of the merger
and its name will be changed to "North American Environmental Group, Inc.", and
which shall continue to exist under the provisions of the laws of the state of
Delaware. Upon the effective date of the merger, all assets and liabilities of
NAE shall become assets and liabilities of Daily Mail and the separate corporate
existence of NAE shall cease.
2. The Articles of Incorporation of Daily Mail shall be the Articles
of Incorporation of the Surviving Corporation and shall be amended on the
effective date of the merger to reflect "North American Environmental Group,
Inc." as the name of the Surviving Corporation.
3. The present bylaws of Daily Mail shall be the bylaws of the
Surviving Corporation and will continue in full force and effect until altered
or amended as therein provided under the authority of the laws of the state of
Delaware.
4. The directors and officers of Daily Mail upon the effective date
of the merger shall be the members of the Board of Directors and the officers of
the Surviving Corporation, all of whom shall hold their directorships and
offices until the election and qualification of their respective successors or
until their tenure is otherwise terminated in accordance with the bylaws of the
Surviving Corporation.
5. The manner of providing for the exchange and cancellation of all
the shares of stock of NAE issued and outstanding at the effective date, by
virtue of the merger, shall be as follows:
(a) At the effective date and only upon consummation of the merger,
each of the shares of common stock of NAE outstanding immediately prior to the
merger, other than shares of common stock that are Dissenting Shares (as such
term is defined in Section 6) shall be automatically converted and exchanged for
one share of common stock of NATK, and thereupon all of the issued shares of NAE
shall be surrendered, cancelled and extinguished;
(b) At the effective date, each share of common stock of NAE held,
directly or indirectly by Daily Mail or NATK or any direct or indirect
subsidiary or parent of Daily Mail or NATK or held in NAE's treasury shall be
cancelled and retired without payment of any consideration therefor; and
(c) At the effective date, the shares of the Surviving Corporation
shall not be converted, but each share of Daily Mail which is issued as of the
effective date of the merger shall continue to represent one issued share of the
Surviving Corporation.
6. Notwithstanding anything in this Agreement to the contrary, NAE
Shares that are outstanding immediately prior to the effective date and are held
by stockholders (other than Daily Mail or NATK) who shall not have voted such
shares in favor of adoption of this Agreement and who shall have delivered to
the Company a
A-1
<PAGE>
written demand for appraisal of such shares in the manner provided in Section
262 of the Delaware General Corporation Law ("Dissenting Shares") shall not be
converted into the right to receive, or be exchangeable for, the shares of NATK,
but the holders thereof shall be entitled to payment of the appraised value of
such shares in accordance with the provisions of such Section 262; provided,
however, that (i) if any holder of Dissenting Shares shall subsequently deliver
a written withdrawal of his demand for appraisal of such Dissenting Shares
(within the written approval of the Surviving Corporation, if such withdrawal is
not tendered within 60 days after the Effective Time), or (ii) if any holder
fails to establish his entitlement to appraisal rights as provided in such
Section 262, or (iii) if neither any holder of Dissenting Shares nor the
Surviving Corporation has filed a petition demanding a determination of the
value of all Dissenting Shares within the time provided in such Section 262,
such holders (as the case may be) shall forfeit the right to appraisal of such
Dissenting Shares and such Dissenting Shares shall thereupon be deemed to have
been converted into the right to receive and to have become exchangeable for, as
of the Effective Time, the Merger Consideration.
7. This Agreement and Plan of Merger shall be submitted to the
stockholders of NAE for their approval or rejection in the manner prescribed by
the Delaware General Corporation Law. This Agreement and Plan of Merger shall
be submitted to the stockholder of Daily Mail for its approval or rejection in
the manner prescribed by the Delaware General Corporation Law. Pursuant to
Section 251 of the Delaware General Corporation Law, the approval of the
stockholders of NATK to this Agreement and Plan of Merger is not required.
8. In the event that this Agreement and Plan of Merger shall be
approved by the stockholders of NAE and Shareholder of Daily Mail in accordance
with the provisions of Delaware law, Daily Mail, as the Surviving Corporation,
agrees that it will cause to be executed and filed and recorded any document or
documents prescribed by the laws of the State of Delaware, and it will cause to
be performed all necessary acts within the State of Delaware and elsewhere to
effectuate the merger.
9. The Board of Directors, the Chairman, the President, any Vice
President, the Secretary, and any Assistant Secretary, and any other proper
officers of NATK, NAE and Daily Mail respectively, are hereby authorized,
empowered, and directed to do any and all acts and things, and to make, execute,
deliver, file and record any and all instruments, papers and documents which
shall be or become necessary, proper or convenient to carry out or put into
effect any of the provisions of this Agreement and Plan of Merger or of the
merger herein provided for.
10. The merger herein provided for shall be effective as soon as NAE
and the Company files the Merger Agreement with the Secretary of State of the
State of Delaware in accordance with the Delaware General Corporation Law
("Effective Time").
IN WITNESS WHEREOF, NAE, Daily Mail, and NATK, by their duly
authorized officers, have executed this Agreement and Plan of Merger as of the
date first above written.
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
Attest:
/s/ David M. Daniels By: /s/ John Parrott
- -------------------- ------------------------------
David M. Daniels John Parrott, President
Secretary
A-2
<PAGE>
North American Technologies Group, Inc.
Attest:
/s/ David M. Daniels By: /s/ Tim B. Tarrillion
- -------------------- ------------------------------
David M. Daniels Tim B. Tarrillion, Chief
Secretary Executive Officer
DAILY MAIL, INC.
Attest:
/s/ David M. Daniels By: /s/ Tim B. Tarrillion
- --------------------- ------------------------------
David M. Daniels Tim B. Tarrillion, Chief
Secretary Executive Officer
A-3
<PAGE>
EXHIBIT B
SECTION 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to the provisions of
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with the provisions of subsection (d) of this Section and
who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to (S)228 of this Chapter shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this Section.
As used in this Section, the word "stockholder" means a holder of record of
stock in a stock corporation and also a member of record of a non-stock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of a
non-stock corporation.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251, 252, 254, 257, 258 or 263 of this Chapter;
(1) provided, however, that no appraisal rights under this Section
shall be available for the shares of any class or series of stock which, at the
record date fixed to determine the stockholders entitled to receive notice of
and to vote a the meeting of stockholders to act upon the agreement of the
merger or consolidation, were either (i) listed on a national securities
exchange or (ii) held of record by more than 2,000 stockholders; and further
provided that no appraisal rights shall be available for any shares of stock of
the constituent corporation surviving a merger if the merger did not require for
its approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this Chapter.
(2) Notwithstanding the provisions of subsection (b)(1) of this
Section, appraisal rights under this Section shall be available for the shares
of any class or series of stock of a constituent corporation if the holders
thereof are required by the terms of an agreement of merger or consolidation
pursuant to Sections 251, 251, 254, 257, and 258 of this Chapter to accept for
such stock anything except (i) shares of stock of the corporation surviving or
resulting from such merger or consolidation; (ii) shares of stock of any other
corporation which at the effective date of the merger or consolidation will be
either listed on a national securities exchange or held of record by more than
2,000 stockholders; (iii) cash in lieu of fractional shares of the corporations
described in the foregoing clauses (i) and (ii); or (iv) any combination of the
shares of stock and cash in lieu of fractional shares described in the foregoing
clauses (i), (ii) and (iii) of this subsection.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this chapter is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this Section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this Section, including those set forth in subsections (d) and
(e), shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
B-1
<PAGE>
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this Section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this Section. Each stockholder electing to demand the appraisal of
his shares shall deliver to the corporation, before the taking of the vote on
the merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein provided.
Within 10 days after the effective date of such merger or consolidation, the
surviving or resulting corporation shall notify each stockholder of each
constituent corporation who has complied with the provisions of this subsection
and has not voted in favor of or consented to the merger or consolidation of the
date that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this Chapter, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or within 10
days thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that appraisal
rights are available for any or all of the shares of the constituent
corporation, and shall include in such notice a copy of this Section. The
notice shall be sent by certified or registered mail, return receipt requested,
addressed to the stockholder at his address as it appears on the records of the
corporation. Any stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of the notice, demand in writing from the surviving or
resulting corporation the appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with the provisions of subsections (a) and (d) hereof and who is
otherwise entitled to appraisal rights, may file a petition in the Court of
Chancery demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days after
the effective date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the terms offered
upon the merger or consolidation. With 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the requirements
of subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after his written request for such a statement is received by the surviving
or resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by one or more publications at
least one week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
B-2
<PAGE>
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with the provisions of this Section and who have
become entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair
rate of the interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose names appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this Section
and who has submitted his certificates of stock to the Register in Chancery, if
such is required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this Section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and in the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any other state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this Section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this Section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand of
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this Section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation into which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have status of authorized and
unissued shares of the surviving or resulting corporation.
B-3
<PAGE>
EXHIBIT C
[THIS LETTER CONSTITUTES THE PROPOSED OPINION
OF COUNSEL TO BE SUBMITTED AT CLOSING
CONCURRENT WITH THE EFFECTIVE DATE OF THE MERGER]
_______________ ___, 1996
North American Technologies Group, Inc.
4710 Bellaire Blvd.
Suite 301
Bellaire, Texas 77401
Gentlemen:
You have requested our opinion as to whether the proposed merger (the
"Merger") of North American Environmental Group, Inc. ("NAE"), a Delaware
corporation, which is an eighty-nine percent (89%) owned second-tier subsidiary
of North American Technologies Group, Inc., a Delaware corporation (the
"Company") with and into Daily Mail, Inc. ("DM"), a Delaware corporation, which
is a direct, wholly owned subsidiary of the Company, in which DM will survive
the Merger, to be effected pursuant to an Agreement and Plan of Merger dated
_____, 1996 and the provisions of 8 Del. C. Section 251, qualifies as a
reorganization within the meaning of Section 368(a)(1)(A) and 368(a)(2)(D) of
the Internal Revenue Code of 1986, as amended (the "Code").
Our opinion is conditioned upon the accuracy of the following facts, that
we have assumed without independent investigation:
1. In the Merger, the minority shareholders of NAE will surrender all of
their NAE stock in exchange for the voting common stock of the Company (the
"Company's common stock") with a fair market value at the effective date of the
Merger (the "Effective Date") approximately equal to the fair market value of
the shares of stock surrendered in NAE./(1)/
2. DM, On the Effective Date, will own at least eighty percent (80%) of
the outstanding voting common stock of NAE (the "NAE common stock") which is the
only class of NAE stock outstanding.
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North American Technologies Group, Inc.
3. The shareholders of NAE (other than DM) will receive only the
Company's common stock in consideration for the transfer of their NAE common
stock in the Merger and will not receive shares of any class of stock of DM.
4. The Merger of NAE into DM, and the distribution of NAE's assets to DM,
will occur within a single taxable year of NAE and DM.
5. NAE, will cease to function on a going concern basis, and its
activities shall cease, except to conclude its affairs, pay its debts and
distribute its assets to DM, which will continue NAE's business.
6. No shares of any class of stock of DM or NAE have been redeemed during
the three years preceding the Effective Date.
7. NAE has not acquired any assets in a non-taxable transaction, except
for acquisitions occurring more than three years prior to the Effective Date.
8. Since January 1, 1995, no assets of NAE have been or will be, sold,
transferred, distributed, or disposed of by NAE except for (i) dispositions in
the ordinary course of business; (ii) dispositions occurring more than three
years prior to the Effective Date; or (iii) transfers in connection with the
Merger. Neither DM nor the Company have any intention to dispose of NAE's
assets after the Merger, except in the ordinary course of business. The Merger
of NAE into DM will not be preceded or followed by the re-incorporation into or
transfer or sale to, a recipient of the businesses or assets of NAE, if such
person, directly or indirectly, holds more than twenty percent in the value of
the stock received. For the purposes of this representation, ownership will be
determined by application of the constructive ownership rules of Section 318(a)
of the Code as modified by Section 304(c)(3).
9. NAE will be an insolvent corporation as that term is used in Treasury
Regulation Section 1.332-2(b) on the Effective Date.
10. DM's acquisition of NAE occurred more than three years prior to the
Effective Date of the Merger.
11. There is no intercompany debt between DM and NAE that would be
extinguished in the Merger.
12. The Company's common stock to be received by the NAE shareholders, as
a group, will be equal in value, as of the Effective Date, to at least fifty
percent of the value of all the consideration transferred in the Merger as of
the Effective Date.
13. DM will receive substantially all of the assets of NAE in the
Merger./(2)/
14. There is no plan or intention by the shareholders of NAE who own five
percent or more of NAE's common stock, and to the best of the knowledge of the
management of NAE, there is no plan or intention on the part of the remaining
shareholders of NAE to sell, exchange or otherwise dispose of a number of shares
of the Company's stock received in the transaction that would reduce the NAE
shareholders' ownership of the Company stock to a number of shares having a
value, as of the date of the Merger, of less than fifty percent of the value of
all of the formerly outstanding stock of NAE as of the same date.
15. To the best of the knowledge of the Company's, NAE's and DM's
management, no NAE common stock is to be exchanged for cash or other property.
Our opinion is also based and conditioned on the assumption that the
representations set forth in Exhibits A, B and C hereto shall be validly and
accurately given by the Company, NAE or DM, respectively, as of the Effective
Date. For purposes of this opinion, we have relied upon the representations
made in Exhibits A, B and C without independent
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North American Technologies Group, Inc.
investigation thereof, and, consequently, if there are any changes to any
representation or the factual assumptions made herein, the opinions given herein
will no longer be valid and may not be relied upon.
Generally, the receipt of stock in a transaction which qualifies as a
reorganization within the meaning of Section 368 of the Code (a
"Reorganization") is not taxable. Under Section 368(a)(1)(A) of the Code, a
statutory merger is included within the definition of a Reorganization. Under
Section 368(a)(2)(D) of the Code, a merger in which the consideration is stock
of a corporation directly controlling the acquiring corporation qualifies as a
Reorganization if the acquiring corporation acquires substantially all of the
properties of the acquired corporation, no stock of the acquiring corporation is
used in the transaction, and the transaction would have qualified under Section
368(a)(1)(A) of the Code had the merger been into the controlling corporation.
NAE will be merged under state law into DM, satisfying the initial test
under Code Section 368(a)(1)(A) of the Code. Since the Company's common stock
will be given to the shareholders of NAE, the requirements of Code Section
368(a)(2)(D) of the Code must be satisfied in order for the Company to be a
party to the Reorganization. DM will acquire substantially all of the assets of
NAE in the Merger. No stock of DM will be transferred to the shareholders of
NAE in consideration for the stock of NAE surrendered since the sole
consideration is the Company's common stock, which is stock of the corporation
directly controlling DM. Finally, if NAE was merged directly into the Company,
the transaction would qualify as a Reorganization under Code Section
368(a)(1)(A). Thus, the proposed merger of NAE into DM satisfies the technical
requirements of a Code Section 368(a)(2)(D) Reorganization and the Company will
be considered a party to the Reorganization. See Rev. Rul. 64-73 1964-1 C.B.
142.
In addition to the foregoing statutory requirements, in order for the
Merger to qualify under Section 368(a)(1)(A) and Section 368(a)(2)(D) of the
Code as a tax-free reorganization, certain judicially developed requirements
must be satisfied, including but not limited to the "Continuity of Interest
Test"; the "Business Purpose Test" and the "Continuity of Business Enterprise
Test".
The "Continuity of Interest Test" provides that the shareholders of the
acquired corporation must maintain a continuing interest in the acquiring
corporation. Ordinarily, the Internal Revenue Service (the "Service") will not
rule that a merger is a Reorganization unless the acquired corporation's
shareholders, as a group, have a continuing stock interest in the acquiring
corporation equal in value, as of the effective date of the merger, to at least
fifty percent of the value of the formerly outstanding stock of the acquired
corporation as of the same date./(3)/ See, Rev. Proc. 77-37, 1977-2 C.B. 568.
The Service's "fifty percent ruling policy" is not substantive law; however, in
instances in which continuing interest of the target shareholders is below fifty
percent, there is a risk that the Service will challenge the satisfaction of the
continuity of interest requirement.
Despite the Service's ruling position, the U.S. Supreme Court, in Nelson
Co. v. Helvering, 36-1 USTC (P)9019 (S.Ct 1935), held that thirty-eight percent
continuity of interest was sufficient to satisfy the test, and the U.S. Court of
Appeals for the Sixth Circuit in Miller v. Commissioner, 36-2 USTC (P)9032 (6th
Circuit 1936), held that twenty-five percent continuity of interest was
sufficient. However, these cases are more than fifty years old. More recently
in, Kass v. Commissioner, 60 TC 218 (1973), aff'd 491 F.2d 749 (1974), the
United States Tax Court, in a decision confirmed by the United States Court of
Appeals for the Third Circuit, held that sixteen percent continuity was
inadequate. Thus, between twenty-five and fifty percent (25% and 50%) is
necessary to satisfy the continuity of interest test.
In the Merger, all the NAE shareholders (other then DM) will receive the
Company's common stock. If the NAE stock of DM is included with the NAE
minority shareholders receipt of the Company's common stock in determining if
the continuity of interest test is satisfied, one hundred percent of the former
shareholders of NAE will have a continuing interest in the Company and the
continuity of interest test will be satisfied. The court in Kass v.
Commissioner, supra, held, in dicta, that "old-and-cold" stock previously
acquired by the acquiring corporation as well as equity newly acquired, will be
aggregated in determining whether the continuity of interest rule is satisfied.
See also, GCM 39404 (September 14, 1985) and Rev. Rul. 85-107, 1985-2 C.B. 121.
In GCM 39404, the Service found that the prior stock interest of a parent in an
upstream merger of a seventy-nine percent owned subsidiary into that parent in a
Section 368(a)(1)(A) reorganization will be aggregated with the other
shareholders' stock in determining whether the
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<PAGE>
North American Technologies Group, Inc.
continuity of interest test is satisfied, assuming the parent's prior stock
interest is "old-and-cold", since the parent's original investment remains at
the risk of the acquired business. In the instant case, DM is converting its
stock interest in NAE into a direct holding of NAE's assets. Thus, DM's
original investment continues to remain at the risk of the NAE business, since
the NAE business will be continued by DM. See, Rev. Rul. 69-17, 1969-2 C.B. 57,
(the Service held that P's ownership of more than eighty percent of the stock of
S does not prevent the transfer of the assets of S to P from qualifying as a
statutory merger, where the assets were transferred to another subsidiary and
the remaining minority shareholders received stock in the parent corporation).
Thus, in the instant case, since DM holds more than eighty-nine percent of NAE,
termination of DM's interest in NAE in the Merger, will count toward
satisfaction of the fifty percent continuity of interest test, when included
with the NAE minority shareholders' stock. As a result, when the DM interest is
combined with the NAE minority shareholders' receipt of the Company's common
stock, all of the consideration consists of the Company's common stock, far
exceeding the fifty percent required.
Every Reorganization must be undertaken for a valid business purpose. The
Company, NAE and DM have all represented to counsel that there are valid
business purposes for the Merger. Thus, based upon and in reliance on the
representations of the Company, DM and NAE, the "business purpose test" is
satisfied. For example, one express business purpose for the Merger is the
Company's desire to consolidate its affairs and eliminate several tiers of
duplicate structure in an effort to reduce administrative costs.
The "continuity of business enterprise test" of Regulation Section 1.368-
1(d) provides that the historic business of the acquired company must be
continued. It has been represented to counsel, by officers of the Company, DM
and NAE that the historic business of NAE will be continued by DM. Thus, based
upon and in reliance on such representations, the "Continuity of Business
Enterprise Test" will be satisfied.
Generally, a statutory merger of an eighty-nine percent owned subsidiary
(NAE) into its parent corporation (DM) (a so called "upstream merger")
constitutes both a Section 368(a)(1)(A) reorganization and a liquidation under
Code Section 332. Code Section 332 overrides the reorganization rules to the
extent that the two overlap. Regs. (S)(S)1.332-2(d) and 1.332-2(c). However,
in the instant case, Code Section 332 will not apply since NAE will be insolvent
at the time of the merger. Regs. (S)1.332-2(b). Thus, even though the Merger
will not constitute a tax-free liquidation under Code Section 332, it still
should be a Reorganization since (i) the liquidation is effected by a statutory
merger, and (ii) DM's stock ownership of NAE is "old-and-cold". See Kass v.
Commissioner, 60 T.C. 218 (1973), aff'd without an opinion, 491 F.2d 749 (3rd
Cir., 1974), and Rev. Rul. 69-17, 1969-2 C.B. 57.
Pursuant to Code Section 361(a), no gain or loss is recognized by a
corporation if such corporation is a party to a Reorganization and it exchanges
property, pursuant to a plan of reorganization, solely for stock or securities
in another corporation that is a party to the Reorganization. Thus, under Code
Section 361(a), no gain or loss should be recognized by NAE upon NAE's transfer
of its assets to DM solely in exchange for the Company's common stock (which is
a party to the Reorganization under Code Section 368(a)(2)(D)) and the
distribution thereof to NAE shareholders.
Under Code Section 354, no gain or loss is recognized if stock or
securities in a corporation that is a party to a Reorganization are, pursuant to
the plan of reorganization, exchanged solely for stock or securities in such
corporation or in another corporation a party to the Reorganization. The effect
of Code Section 354 is to provide nonrecognition treatment to shareholders of an
acquired corporation to the extent that the shareholders of the acquired
corporation receive stock or securities of the acquiring corporation or the
corporation that controls the acquiring corporation. Thus, under Code Section
354, no gain or loss should be recognized by the NAE shareholders in the Merger.
Our opinion is based and conditioned on the assumptions made herein, that
the Merger will be undertaken as described herein with appropriate corporate
authorization and approval, and upon current law and rulings. Accordingly,
subject to the foregoing and provided that (a) the Merger qualifies as a
statutory merger under applicable state law, (b) after the Merger DM will hold
substantially all NAE's properties and assets, (c) solely the Company's common
stock will be issued as consideration for the assets received from NAE, and (d)
the Company is the sole
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<PAGE>
North American Technologies Group, Inc.
shareholder of DM, it is our opinion that, it is more likely than not, if the
transaction were litigated, a court of law, would hold that the Merger would
constitute a Reorganization and that the federal income tax consequences to NAE
and its shareholders will be as follows:
(1) No gain or loss will be recognized by NAE upon its transfer of
substantially all of its assets to DM solely in exchange for the Company's
common stock and the assumption by DM of NAE's liabilities under Code Sections
361(a) and 357(a);
(2) No gain or loss will be recognized by the NAE shareholders on the
exchange of their NAE stock solely in exchange for the Company's common stock
under Code Sections 368(a)(1)(A), 368(a)(2)(D) and 354(a)(1);
(3) The aggregate tax basis of the Company's common stock received by each
NAE shareholder in the Merger will be the same as the aggregate tax basis of
such NAE shareholder in the NAE common stock surrendered in the exchange,
decreased by the amount of any cash or other property received, and increased by
the amount of any gain recognized under Code Section 358(a)(1); and
(4) The holding period of the NAE shareholders in the Company's common
stock received will include the holding period of the NAE shareholders in their
NAE stock exchanged therefor. Code Section 1223(1).
The conclusions made in this opinion are based upon the provisions of the
Code, applicable regulations thereunder, judicial authority and current
administrative rulings and practice, all as in effect as of the date hereof (the
"Applicable Law"). In the event of any change in the Applicable Law, these
conclusions may no longer apply.
This opinion is limited to those provisions of the Code discussed herein
and we express no opinion with the respect to the applicability of any other
Code provisions or the tax consequences of the Merger under any state, local or
other taxing jurisdiction, whether foreign or domestic. The opinions relating
to the NAE shareholders are made solely in their capacity as shareholders of NAE
and we express no opinion with respect to the tax consequences of any payments
or other consideration received by any NAE shareholder that such shareholder
receives in his capacity as an employee or creditor of NAE. We also express no
opinion on the tax treatment on any other aspects of the Merger.
The opinions expressed herein are solely for the benefit of the Company and
its shareholders and may not be relied upon by any other person or entity
including, but without limitation, any other party to the Merger.
Sincerely,
CLARK, LADNER, FORTENBAUGH & YOUNG
____________________
(1) We note that the fair market value of such a thinly traded company is an
inherently factual issue. If the Internal Revenue Service were to contend
successfully that these assumed values for the Company's common stock or
the NAE common stock are too high, satisfaction of the continuity of
interest requirement (discussed below) could be jeopardized.
(2) Substantially all shall mean at least seventy percent of the fair market
value of the gross assets and ninety percent of the net assets of NAE.
Amounts paid by NAE to its shareholders or for the expenses of NAE in
connection with the Merger prior to the Effective Date shall be included as
assets of NAE prior to the Effective Date.
(3) Sales of stock made after the Effective Date of the Merger but pursuant to
an intention to sell which existed on the Effective Date would reduce the
stock counting toward satisfying the continuity of interest test.
C-5
<PAGE>
North American Technologies Group, Inc.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The registrant, a Delaware corporation, is empowered by Section 145 of the
Delaware General Corporation Law, subject to the procedures and limitations
stated therein, to indemnify any person against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in the defense of any threatened, pending or completed action,
suit or proceeding with which such person is made a party by reason of his being
or having been a director or officer of the registrant. The statute provides
that indemnification pursuant to its provisions is not exclusive of other rights
of indemnification to which a person may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors, or otherwise.
Article IX of the Restated Certificate of Incorporation states that
directors of the registrant shall not be liable for monetary damages for breach
of fiduciary duty "to the full extent permitted by the General Corporation Law
of Delaware as the same exists or may hereafter be amended." The registrant is
also empowered by Section 102(b) of the Delaware General Corporation Law to
include a provision in the Certificate of Incorporation which would limit a
director's liability to the registrant or its stockholders for monetary damages
for breaches of fiduciary duty as a director. Article VIII of the Certificate
of Incorporation provides such a limitation. As Delaware law now exists,
directors will remain liable for damages for (i) breach of their duty of loyalty
to the registrant and its stockholders; (ii) their failure to act in good faith;
(iii) their intentional misconduct or knowing violation of law; (iv) improper
dividend payments, stock repurchases or redemptions; and (v) any transaction
from which the director derived an improper personal benefit.
II-1
<PAGE>
North American Technologies Group, Inc.
Item 21. Exhibits
The following Exhibits are filed as part of this Registration Statement.
<TABLE>
<CAPTION>
Number Description Method of Filing
- ------ ------------- ----------------
<S> <C> <C>
1 Agreement and Plan of Merger Included as
Exhibit A to
the Information
Statement and
Prospectus
2 Section 262 of the Delaware General Corporate Law Included as
Exhibit B to
the Information
Statement and
Prospectus
4 Instruments defining the rights of security holders:
4.1 Certificate of Incorporation of Registrant. Incorporated by
reference to
Exhibit A to
the Company's
Form S-4.
4.2 Certificate of Amendment of Certificate of Incorporation Incorporated by
of the Company as of August 10, 1993 reference to
Exhibit B to
the Company's
Form S-4.
4.3 Certificate of Amendment of Certificate of Incorporation Incorporated by
of the Company as of January 29, 1993 reference to
Exhibit C to
the Company's
Form S-4.
4.7 Bylaws of Registrant Incorporated by
reference to
the Company's
Registration
Statement on
Form S-18
</TABLE>
II-2
<PAGE>
North American Technologies Group, Inc.
<TABLE>
<S> <C> <C>
(File No.
33-10845).
4.8 Certificate of Designation for Series D Convertible Preferred Stock of the Company Filed herewith
5 Opinion of Clark, Ladner, Fortenbaugh & Young To be filed
by Amendment.
8 Tax Opinion of Clark, Ladner, Fortenbaugh & Young Included as
Exhibit C to
the Information
Statement and
Prospectus
10 Material Contracts
10.1 Joint Venture Agreement Among Environmental Resource Corporation, BioTrace Incorporated by
International and Implant Bioremedial Services, dated June 29, 1991. reference to
Exhibit 10.1 to
the Company's
Form S-4.
10.2 License Agreement Between Gold Spinners International, Inc. and BioTrace Incorporated by
International, Inc. reference to
Exhibit 10.2 to
the Company's
Form S-4.
10.3 Assignment of License Agreement Between Gold Spinners International and BioTrace Incorporated by
International, Inc. by Gold Spinners International, Inc. to North American reference to
Environmental Group and North American Technologies, Inc. Exhibit 10.3 to
the Company's
Form S-4.
10.4 Plan of Arrangement Incorporated by
reference to
Exhibit 10.4 to
the Company's
Annual Report
on Form 10-K
for the Fiscal
Year ended
December 31,
1993 ("1993
10-K")
</TABLE>
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<PAGE>
North American Technologies Group, Inc.
<TABLE>
<S> <C> <C>
10.5 Stock Option Agreement between John Parrott and the Company dated February 7, 1993 Incorporated by
reference to
Exhibit 10.6 to
the Company's
1994 10-K.
10.6 Stock Option Agreement between Tim B. Tarrillion and the Company dated February 7, Incorporated by
1995 reference to
Exhibit 10.7 to
the Company's
1994 10-K.
10.7 Stock Option Agreement between David Daniels and the Company dated February 7, 1995 Incorporated by
reference to
Exhibit 10.8 to
the Company's
1994 10-K.
10.8 Stock Option Agreement between Judith Shields and the Company dated February 23, 1995 Incorporated by
reference to
Exhibit 10.9 to
the Company's
1994 10-K.
10.9 Stock Option Agreement between Donovan W. Boyd and the Company dated February 23, Previously filed
1995
10.10 EET 401(k) Plan Incorporated by
reference to
Exhibit 10.10
to the
Company's 1994
10-K.
10.11 Employment Agreement of John Parrott dated February 7, 1995 Incorporated by
reference to
Exhibit 10.1
the Company's
Current Report
on Form 8-K
dated March 22,
1995 ("8-K").
10.12 Employment Agreement of Tim Tarrillion dated February 7, 1995 Incorporated by
reference
</TABLE>
II-4
<PAGE>
North American Technologies Group, Inc.
<TABLE>
<S> <C> <C>
to Exhibit 10.2
to the 8-K.
10.13 Employment Agreement of David Daniels dated February 7, 1995 Incorporated by
reference to
Exhibit 10.3 to
the 8-K.
10.14 Employment Agreement of Judith Shields dated February 23, 1995 Incorporated by
reference to
Exhibit 10.5 to
the 8-K.
10.15 Employment Agreement of Donovan W. Boyd dated February 23, 1995 Previously filed
10.16 Amended Joint Venture Agreement between Oil Waste Treatment, Inc. and the Company Incorporated by
dated February 3, 1994 reference to
Exhibit 10.16
to the
Company's 1994
10-K.
10.17 Joint Venture Agreement between the Company and Canadian Crude Separators, Inc. Incorporated by
dated February 4, 1994 reference to
Exhibit 10.17
to the
Company's 1994
10-K.
10.18 Sublicense Agreement between the Company and Oil Water Separator Systems, Inc., a Incorporated by
wholly owned subsidiary of Implant Systems, Inc. dated March 2, 1994 reference to
Exhibit 10.18
to the
Company's 1994
10-K.
10.19 Agreement and Plan of Merger between Industrial Pipe Fittings, Inc. and the Company Previously filed
dated June 22, 1995
10.20 Consulting Agreement with John W. Parrott dated July 28, 1995. Previously filed
22 Subsidiaries of Registrant Filed herewith
24.1 Consents of BDO Seidman, LLP, with respect
</TABLE>
II-5
<PAGE>
North American Technologies Group, Inc.
<TABLE>
<S> <C> <C>
to the North American Technologies Group, Inc., North American Environmental Filed herewith
Group, Inc. and GAIA Technologies, Inc.
24.2 Consent of Ernst and Young, LLP, with respect to EET, Inc. Filed herewith
24.3 Consent of Shoemaker & Wilson with respect to North American Environmental Group, Filed herewith
Inc.
24.4 Consent of Clark, Ladner, Fortenbaugh & Young Included within
Exhibit 5
hereto.
</TABLE>
II-6
<PAGE>
North American Technologies Group, Inc.
Item 22. Undertakings
(1) Insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification is against such
liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection
with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this Amendment
No. 2 to the Registration Statement on Form S-4 to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Houston, State of
Texas on the 31st day of January, 1996.
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
By: /s/ Tim B. Tarrillion
-----------------------------------
Tim B. Tarrillion
Chief Executive Officer and Director
By: /s/ Judith Knight Shields
-----------------------------------
Judith Knight Shields
Senior Vice President-Finance,
Chief Financial Officer and Treasurer
II-7
<PAGE>
North American Technologies Group, Inc.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
----------- ------- ------
<C> <S> <C> <C>
/s/ Tim B. Tarrillion Chief Executive Officer, January 31, 1996
--------------------- President and Director
Tim B. Tarrillion
* Senior Vice President, __________, 1996
--------------------- Chief Operating Officer
Donovan W. Boyd and Director
* Executive Vice President, __________, 1996
--------------------- Secretary and Director
David M. Daniels
/s/ Judith Knight Shields Senior Vice President- January 31, 1996
--------------------- Finance, Chief Financial
Judith Knight Shields Officer and Treasurer
</TABLE>
*By: /s/ Tim B. Tarrillion
----------------------
Tim B. Tarrillion
Attorney-in-fact
II-8
<PAGE>
CERTIFICATE OF DESIGNATION
Tim B. Tarrillion and David M. Daniels do hereby certify that they are the
President and Secretary, respectively of NORTH AMERICAN TECHNOLOGIES GROUP,
INC., a Delaware corporation (hereinafter referred to as the "Corporation" or
the "Company"); that, pursuant to the Corporation's Certificate of Incorporation
and Section 151 of the Delaware General Corporation Law, the Board of Directors
of the Corporation adopted the following resolutions on December 27, 1995; and
that none of the Series D Convertible Preferred Stock has been issued.
1. Creation of Series D Convertible Preferred Stock. There is hereby
created a series of preferred stock consisting of thirty (30) shares and
designated as the Series D Convertible Preferred Stock, having the voting
powers, preferences, relative, participating, optional and other special rights
and qualifications, limitations and restrictions thereof that are set forth
below.
2. Dividend Provisions.
(a) Dividends. The holders of shares of Series D Convertible Preferred
Stock shall be entitled to receive, in any calendar year, when and as declared
by the Board of Directors, out of any assets at the time legally available
therefor and subject to the further limitations set out herein, dividends at the
per annum rate of $3,750.00 per share, all such dividends due quarterly in
arrears as of the last day of each March, June, September and December of each
year, the first dividend being declarable on March 31, 1996. Each date on which
a dividend may be declared is hereinafter referred to as the "Dividend Date,"
and each quarterly period ending with a Dividend Date is hereinafter referred to
as the "Dividend Period." Dividend shall be payable ten (10) days after the
Dividend Date; provided however, that if such date on which a dividend is
payable is not a business day (as defined herein), such dividend shall be
payable on the next following business day to the holders of record (whether
singular or plural, the "Holder") on the Dividend Date. Dividends on a share of
Series D Convertible Preferred Stock shall be prorated to the Conversion Date
(as defined herein) if such share is converted in accordance with the provisions
of Section 5 hereof on a day other than a Dividend Date. Dividends on the
Series D Convertible Preferred Stock shall be paid only out of those assets of
the Corporation legally available therefor and shall be paid in cash.
(b) Dividends Cumulative. Dividends upon the Series D Convertible
Preferred Stock shall be cumulative, whether or not in any Dividend Period or
Periods there shall be assets of the Corporation legally available for the
payment of such dividends. Furthermore, if there are sufficient assets of the
Corporation legally available for payment of dividends, the Corporation shall
declare and pay all or a portion of the dividend to the extent of those
available assets.
(c) Dividends Paid with Series on Parity. All dividends declared on the
Series D Convertible Preferred Stock for any Dividend Period and on any class or
series of stock ranking on parity with the Series D Convertible Preferred Stock
as to dividends for such Dividend Period
<PAGE>
shall be declared pro rata so that the amounts of dividends per share declared
for such period on the Series D Convertible Preferred Stock and on any class or
series of stock ranking on a parity with the Series D Convertible Preferred
Stock as to dividends that are outstanding during such Dividend Period shall in
all cases bear to each the same proportions that the respective Liquidation
Preference (as defined herein) on such stock bear to each other; provided,
however, that all unpaid dividends accrued in respect to any series of stock
ranking on a parity with any other series which does not have unpaid accrued
dividends shall be paid, or set aside for payment, prior to any payments or
distributions in respect to such other series which has no unpaid accrued
dividends; further provided, however, that if funds available therefore are
sufficient to pay off such accrued and unpaid dividends, then they shall be paid
in this same ratio among the various series ranking on a parity with the Series
D Convertible Preferred Stock. For all other purposes hereof, the Series D
Convertible Preferred Stock shall be senior in right of dividend payment to any
other class of Preferred Stock of the Corporation, unless the Holder expressly
consents in writing to the contrary.
(d) Dividends for Other Classes or Series or Redeemed. Dividends shall be
payable under the Series D Convertible Preferred Stock before any sum or sums
shall be set aside for the purchase or redemption of any class or series of
stock ranking on a parity with the Series D Convertible Preferred Stock as to
dividends or distribution or assets and before any dividends shall be declared
or paid upon or set apart for, or any other distribution shall be ordered or
made in respect of, or any payment shall be made on account of common stock, par
value $.001 per share, of the Corporation ("Common Stock") or any class or
series of stock ranking junior to the Series D Convertible Preferred Stock as to
dividends or distribution of assets. If at any time dividends upon the
outstanding Series D Convertible Preferred Stock at the per annum rate
hereinabove specified from the date of cumulation to the end of the then current
Dividend Period shall not have been paid or declared, whether in whole or in
part, or a sum sufficient thereof set apart for such payment, then, the amount
of the deficiency shall be fully paid but without interest, or dividends in such
amount declared and a sum sufficient for the payment thereof set apart for such
payment, before any sums shall be paid or set aside for the purchase or
redemption of any class or series of stock ranking on a parity with the Series D
Convertible Preferred Stock as to dividends or distribution of assets and before
any dividends shall be declared or paid upon or set apart for or any other
distribution shall be ordered or made in respect of or any payment shall be made
on the account of the Common Stock or any class or series of stock ranking
junior to the Series D Convertible Preferred Stock as to dividends or
distribution of assets.
(e) Date of Cumulation. The term "date of cumulation" as used in this
resolution with reference to the Series D Convertible Preferred Stock shall be
deemed to mean (i) the most recent Dividend Date on which dividends have been
paid, or (ii) if no dividends have been paid, December 28, 1995.
3. Redemption Provisions. The Corporation shall redeem all shares of
Series D Convertible Preferred Stock outstanding on December 31, 1996, at a
redemption price per share equal to $25,000.00, plus all accrued and unpaid
dividends thereon to the date of redemption,
2
<PAGE>
which redemption payment shall be paid in cash. Notice of redemption shall be
mailed to the Holders of the shares of Series D Convertible Preferred Stock to
be redeemed at least 30 days prior to the date fixed for such redemption. The
Corporation shall not have the right to require the redemption or cancellation
of the Series D Convertible Preferred Stock prior to December 31, 1996.
4. Liquidation Provisions. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the Series D
Convertible Preferred Stock shall be entitled to receive an amount equal to
$25,000.00 per share, plus all accrued and unpaid dividends thereon to the date
of such liquidation, dissolution or winding up of the affairs of the
Corporation, which amount shall be paid in cash. After the full preferential
liquidation amount has been paid to, or determined and set apart for, all other
series of Preferred Stock hereafter authorized and issued, if any, the remaining
assets of the Corporation available for distribution to stockholders shall be
paid to the Common Stock, which amount shall be distributed ratable to the
holders of Common Stock. In the event the assets of the Corporation available
for distribution to its stockholders are insufficient to pay the full
preferential liquidation amount per share required to be paid on the
Corporation's Series D Convertible Preferred Stock, the entire amount of assets
of the Corporation available for distribution to stockholders shall be paid up
to their respective full liquidation amounts first to the Series D Convertible
Preferred Stock, then to any other series of Preferred Stock hereafter
authorized and issued, all of which amounts shall be distributed ratably among
holders of each such series of Preferred Stock, and the Common Stock shall
receive nothing. A reorganization or any other consolidation or merger of the
Corporation with or into any other corporation, or any other sale of all or
substantially all for the assets of the Corporation, shall not be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section, and the Series D Convertible Preferred Stock shall be entitled
only to (i) the right provided in any agreement or plan governing the
reorganization or other consolidation, merger or sale of assets transactions,
(ii) the rights contained in the Delaware General Corporation Law and (iii) the
rights contained in other Sections hereof. Such right to payment described in
this Section 4 is referred to herein as the "Liquidation Preference."
5. Conversion Provisions. The holders of Series D Convertible Preferred
Stock shall have conversion rights as follows ("Conversion Rights"):
(a) Right to Convert.
(1) Each share of Series D Convertible Preferred Stock shall be
convertible, at the option of its Holder, at any time until December 31, 1996,
into a number of shares of Common Stock of the Company at the Conversion Rate,
as defined herein, then in effect in cumulative amounts of Series D Convertible
Preferred Stock increments during the term of conversion of Series D Convertible
Preferred Stock as follows:
3
<PAGE>
Number of Shares of Series D
Time Period Convertible Preferred Stock
Until March 11, 1996 None
On March 11, 1996
to April 14, 1996 Up to one-third (1/3rd) of all shares
of Series D Convertible Preferred
Stock issued on December 28, 1995
From April 15, 1996
to May 24, 1996 Up to two-thirds (2/3rds) of all
shares of Series D Convertible
Preferred Stock issued on
December 28, 1995 (less any such
shares previously converted)
From and after May 25, 1996 All shares (no restriction)
The conversion rate per share of Series D Convertible Preferred Stock (the
"Conversion Rate"), subject to the adjustments described below, shall be a
number of shares of Common Stock (rounded to the nearest whole number) equal to
$25,000.00 divided by the lesser of (x) seventy-two and one-half percent (72.5%)
of the Market Price, as defined below, per share of Common Stock or (y) $0.875.
"Market Price" per share of Common Stock shall be the average closing bid price
per share of Common Stock during the five (5) trading days immediately preceding
the Conversion Date, as defined below, as such bid price is reported by the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"), or the average closing bid price in the over-the-counter market if
other than NASDAQ, or in the event the Common Stock is listed on a stock
exchange, the Market Price shall be the average closing bid price on such
exchange, as reported in the Wall Street Journal.
Such conversion shall be effected by surrendering the certificate or
certificates representing the shares of Series D Convertible Preferred Stock to
be converted to the principal corporate office of the Company (located at 4710
Bellaire Blvd., Suite 301, Bellaire, Texas 77401 USA, Attention: Corporate
Secretary), with the form of conversion notice attached hereto as Exhibit A,
executed by the Holder evidencing such Holder's intention to convert those
Series D Convertible Preferred Stock or a specified portion (as above provided)
hereof, and accompanied, if required by the Company, by proper assignment hereof
in blank. The date on which notice of conversion (the "Conversion Date") is
given shall be the date on which the Corporation has received the certificate or
certificates representing the Series D Convertible Preferred Stock so to be
converted, together with conversion notice duly executed, and the Company shall
complete the issuance of the shares of Common Stock as promptly as reasonably
practical
4
<PAGE>
and in no event later than three (3) business days after the Conversion Date. At
the option of the Holder, the conversion notice, together with a copy of the
face of the certificate or certificates representing the Series D Convertible
Preferred Stock so to be converted, may be delivered to the Company by telecopy
or facsimile transmission, and in such event, the Conversion Date shall be
deemed to be the date of receipt by the Company of the same by such telecopy or
fascimile transmission. Any Holder electing to deliver such notice by telecopy
or facsimile shall promptly mail or cause to be delivered to the Company the
original executed notice of conversion, together with the original certificates
representing the shares of Series D Convertible Preferred Stock so to be
converted.
(2) No fractional shares of Series D Convertible Preferred Stock may be
converted. No fractional shares of Common Stock shall be issued upon conversion
of the Series D Convertible Preferred Stock. However, in lieu of the Company's
permitting the conversion of fractional shares of Common Stock, it shall pay a
cash adjustment in respect of such fractional interest in an amount equal to
such fractional interest multiplied by the Conversion Rate calculated in
connection with the shares of Series D Convertible Preferred Stock so to be
converted.
(3) The Company shall pay in cash all accrued and unpaid dividends to the
Conversion Date on all shares of Series D Convertible Preferred Stock that are
to be converted, together with the cash payment, if any, due as provided in
clause (a)(2) above, which cash payments shall be due on the date that the
certificate or certificates representing the shares of Common Stock to be issued
in connection with such conversion are due to be issued.
(4) The Company shall have no responsibility to pay any taxes with respect
to the Series D Convertible Preferred Stock.
(5) If the Company receives certificates representing shares of Series D
Convertible Preferred Stock, together with proper notices of conversion, for
conversion in excess of the number of shares of Series D Convertible Preferred
Stock that may then be converted in accordance with the provisions of this
subsection (a), then those certificates, together with proper notices of
conversion, first received by the Company for conversion shall have the right to
be converted up to the permitted number of shares that may then be converted.
(b) Adjustments to the Conversion Rate.
(1) RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If the Common Stock
issuable on conversion of the Series D Convertible Preferred Stock shall be
changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification, or
otherwise (other than a subdivision or combination of shares provided for
above), the holders of Series D Convertible Preferred
5
<PAGE>
Stock shall, upon its conversion, be entitled to receive, in lieu of the Common
Stock which the Holders would have become entitled to receive but for such
change, a number of shares of such other class or classes of stock that would
have been subject to receipt by the Holders if they had exercised their rights
of conversion of the Series D Convertible Preferred Stock immediately before
that change.
(2) REORGANIZATIONS, MERGERS, CONSOLIDATION OR SALE OF ASSETS. If at any
time there shall be a capital reorganization of the Corporation's Common Stock
(other than a subdivision, combination, reclassification or exchange of shares
provided for elsewhere in this subsection (b)) or merger of the Corporation into
another corporation, or the sale of the Corporation's properties and assets as,
or substantially as, an entirety to any other person, then, as a part of such
reorganization, merger or sale, lawful provision shall be made so that the
holders of the Series D Convertible Preferred Stock shall thereafter be entitled
to receive upon conversion of the Series D Convertible Preferred Stock, the
number of shares of stock or other securities or property of the Corporation, or
of the successor corporation resulting from such merger, to which holders of the
Common Stock deliverable upon conversion of the Series D Convertible Preferred
Stock would have been entitled on such capital reorganization, merger or sale if
the Series D Convertible Preferred Stock had been converted immediately before
that capital reorganization, merger or sale to the end that the provisions of
this paragraph (b)(2) (including adjustment of the Conversion Rate then in
effect and number of shares purchasable upon conversion of the Series D
Convertible Preferred Stock) shall be applicable after that event as nearly
equivalently as may be practicable.
(3) Any adjustments made pursuant to this paragraph (b) shall become
effective at the close of business on the day upon which such capital
reorganization, reclassification, reorganization, merger, consolidation, sale or
assets or other event becomes effective.
(c) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, merger, dissolution or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 5 and in taking
all such action as may be necessary or appropriate in order to protect the
conversion rights of the Holders against impairment.
(d) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the Conversion Rate for any shares of Series D Convertible
Preferred Stock, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each Holder effected thereby a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any Holder, furnish or cause to be furnished to such
Holder a like certificate
6
<PAGE>
setting forth (i) such adjustment and readjustments, (ii) the Conversion Rate at
the time in effect and (iii) the number of shares of Common Stock and the
amount, if any, of other property which at the time would be received upon the
conversion of such Holder's shares of Series D Convertible Preferred Stock.
(e) Notices of Record Date. In the event of the establishment by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, the Corporation
shall mail to each holder of Series D Convertible Preferred Stock at least
twenty (20) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purposes of such dividend
or distribution and the amount and character of such dividend or distribution.
(f) Reservation of Stock Issuable Upon Conversion. The Corporation shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of Series D Convertible Preferred Stock such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all then outstanding shares of the Series D Convertible Preferred Stock; and
if ant any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then outstanding shares
of Series D Convertible Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose.
(g) Notices. Any notices required by the provisions of this Section 5 to
be given to the Holders of shares of Series D Convertible Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each Holder at such Holder's address appearing on the books of the
Corporation.
6. Voting Provisions. Except as otherwise expressly provided or required
by law, the Series D Convertible Preferred Stock shall not entitle the holders
thereof to any voting rights, and the consent of the Holders thereof shall not
be required for the taking of any corporate action.
7. Required Shares. Any shares of Series D Convertible Preferred Stock
converted, purchased or otherwise acquired by the Company in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof, and, if necessary, to provide for the lawful purchase of such shares,
the capital represented by such shares shall be reduced in accordance with the
Delaware General Corporation Law. All such shares upon their cancellation shall
become authorized but unissued shares of Preferred Stock, $.001 par value, of
the Company and may be reissued as part of another series of Preferred Stock,
$.001 par value, of the Company.
7
<PAGE>
8. Certain Definitions. For the purposes of the Certificate of
Designation of Series D Convertible Preferred Stock which embodies this
resolution:
"business day" means any day other than a Saturday, Sunday, or a day on
which banking institutions in the States of Delaware or Texas are authorized or
obligated by law or executive order to close; and
"trading day" means a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of business or, if the Common Stock is not listed or admitted to
trading on any national securities exchange any day other than a Saturday,
Sunday, or a day on which banking institutions in the States of Delaware or
Texas are authorized or obligated by law or executive order to close.
IN WITNESS WHEREOF, the Company has caused this Certificate of Designation
of Series D Convertible Preferred Stock to be duly executed by its President and
attested to by its Secretary and has caused its corporate seal to be affixed
hereto, this 27th day of December, 1995.
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Date: December 27, 1995 /s/ Tim B. Tarrillion
-----------------------------------------
Tim B. Tarrillion
President and Chief Executive Officer
Date: December 27, 1995 /s/ David M. Daniels
----------------------------------------
David M. Daniels
Secretary
8
<PAGE>
EXHIBIT A
FORM OF CONVERSION NOTICE
[Please Type or Print]
North American Technologies Group, Inc. Date: _____________________, 1996
4710 Bellaire Blvd., Suite 301
Bellaire, Texas 77401 USA
Attention: Corporate Secretary
Facsimile No.: (713) 662-3728 [Note: if telecopied, deliver the original
form and Series D Convertible Preferred Stock
Certificate(s) by mail to the Company.]
Name: ________________________________________________________
Address: ______________________________________________________
______________________________________________________
______________________________________________________
Telephone: ____________________ Telecopier: _____________________
Taxpayer Identification No. (if applicable):_______________________________
The undersigned holder of the following shares of Series D Convertible Preferred
Stock of North American Technologies Group, Inc., a Delaware corporation (the
"Company"), hereby requests that such shares be converted into __________ shares
of common stock, par value $.001 per share, of the Company in accordance with
the terms of such Series D Convertible Preferred Stock.
SHARES OF SERIES D CONVERTIBLE PREFERRED STOCK TO BE CONVERTED
<TABLE>
<CAPTION>
Number of Shares of Series D Name and Address for Issuance
Convertible Preferred Stock of Shares of Common Stock
Certificate No. to be Converted (if different from above)
<S> <C> <C>
- ------------------ ---------------------------- ------------------------------
------------------------------
------------------------------
------------------------------
Printed or Typed
Name of Holder: ___________________________ (Must be signed by
By (execute here): ___________________________ registered holder)
Title: ___________________________
</TABLE>
(If signature is by a spouse, administrator, guardian, attorney-in-fact, officer
of a corporation or other officer or capacity, please specify such capacity.)
9
<PAGE>
EXHIBIT 22
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
SUBSIDIARIES OF REGISTRANT
The following are significant subsidiaries of North American Technologies
Group, Inc.:
EET, Inc., a Texas corporation
Industrial Pipe Fittings, Inc., a Texas corporation
GAIA Technologies, Inc., a Texas corporation
North American Environmental Group, Inc., a Delaware corporation
All subsidiaries conduct their operations in their corporate names.
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
North American Technologies Group, Inc.
Houston, Texas
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated April 13, 1995, except for Note 6, as
to which the date is April 24, 1995 and Notes 4 and 21, as to which the date is
September 22, 1995, relating to the consolidated financial statements of North
American Technologies Group, Inc. and of our report dated April 13,1995 relating
to the financial statements of North American Environmental Group, Inc. and of
our report dated October 2, 1995 relating to the financial statements of GAIA
Technologies, Inc., which are contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
January 31, 1996
<PAGE>
EXHIBIT 24.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 9, 1995, with respect to
the financial statements of EET, Inc., not separately presented herein, in
Amendment No. 2 to the Registration Statement (Form S-4 No. 33-82112) of North
American Technologies Group, Inc. for the registration of 1,382,071 shares of
its Common Stock.
ERNST & YOUNG LLP
Houston, Texas
January 31, 1996
<PAGE>
EXHIBIT 24.3
SHOEMAKER AND WILSON, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
POINTE SOUTH EXECUTIVE BUILDING
P.O. BOX 444
5201 S. MISSION
MT. PLEASANT, MICHIGAN 48804-0444
(517) 773-6449
North American Technologies Group, Inc.
Houston, Texas
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated November 18, 1992, relating to the
consolidated financial statements of North American Environmental Group, Inc.,
which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ Shoemaker & Wilson, P.C.
SHOEMAKER & WILSON, P.C.
Certified Public Accountants
January 29, 1995
