<PAGE>
As filed with the Securities and Exchange Commission on June 14, 1996
Registration No. 33-82112
================================================================================
SECURITIES AND EXCHANGE COMMISSION
______________
AMENDMENT NO. 3
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)
4955
--------------------------------------------
(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
Buchanan Ingersoll
Professional Corporation
Two Logan Square, 12th Floor
18th and Arch Streets
Philadelphia, PA 19103
(215) 665-3879
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>
===============================================================================================================
Title of Each Class of Proposed Maximum Proposed Maximum
Securities Being Amount to be Offering Price per Aggregate Offering Amount of
Registered Registered (1) Unit (2) Price (2) Registration Fee
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock (par value 1,382,071 shares $.0033 $4,560.83 $500 (2)
$.001 per share)
===============================================================================================================
</TABLE>
(1) The number of shares of common stock, par value $.001 per 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. 3 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.
================================================================================
2
<PAGE>
CROSS-REFERENCE SHEET TO FORM S-4 OF
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
PART I. INFORMATION REQUIRED IN THE PROSPECTUS
<TABLE>
<CAPTION>
A. INFORMATION ABOUT THE TRANSACTION
Item of Form S-4 Caption in Information Statement and Prospectus
- --------------------------- ---------------------------------------------------
<S> <C>
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus............................ Facing Page; Cross-Reference Sheet; Outside Front
Cover 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 Offer.................... Voting and the Special Meeting; Management of the
Company and NAE; Security Ownership of Certain
Beneficial Owners and Management of the Company
and NAE
- ----------------------
* Omitted since the answer is negative or the Item is not applicable.
</TABLE>
3
<PAGE>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
4710 Bellaire Blvd.
Suite 301
Bellaire, Texas 77401
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY _____, 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 Buchanan
Ingersoll Professional Corporation, Two Logan Square, 18th and Arch Streets,
12th Floor, Philadelphia, Pennsylvania, on July ___, 1996 at 10:00 a.m., EDT,
for the following purpose:
To consider, adopt and approve an Agreement and Plan of Merger, dated as of
February 9, 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 June ____, 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: June _______, 1996 Chief Executive Officer
5
<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 JULY ______, 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 July ___, 1996 at the offices of Buchanan Ingersoll Professional Corporation,
Two Logan Square, 18th and Arch Streets, 12th Floor, Philadelphia, Pennsylvania,
at 10:00 a.m., EDT, 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 February 9, 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 February 9, 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
percent (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.
<PAGE>
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."
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 June ____, 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................................ 22
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......... 28
BUSINESS OF THE COMPANY AND NAE........................................... 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................ 45
MANAGEMENT OF THE COMPANY AND NAE......................................... 54
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE
COMPANY AND NAE........................................................... 60
LEGAL OPINIONS............................................................ 66
EXPERTS................................................................... 66
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR
NORTH AMERICAN TECHNOLOGIES GROUP, INC. .................................. F-1
NORTH AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1994........................... F-2
NORTH AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED
STATEMENTS OF LOSS FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1995............................................ F-3
NORTH AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1995............................................ F-4
NORTH AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE
YEARS IN THE PERIOD ENDED DECEMBER 31, 1995............................... F-8
NORTH AMERICAN TECHNOLOGIES GROUP, INC. NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS......................................... F-9
NORTH AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED
BALANCE SHEETS AS OF MARCH 31, 1996 (UNAUDITED)
AND DECEMBER 31, 1995..................................................... F-27
NORTH AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED
STATEMENTS OF LOSS FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1996 AND MARCH 31, 1995 (UNAUDITED)............................. F-28
NORTH AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED
STATEMENTS OF STOCKHOLERS' EQUITY FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1996 AND 1995 (UNAUDITED)........................................ F-29
NORTH AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1996 AND MARCH 31, 1995 (UNAUDITED)..................... F-30
NORTH AMERICAN TECHNOLOGIES GROUP, INC. NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)........................... F-31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. ............................... F-33
INDEPENDENT AUDITORS' REPORT FOR NORTH AMERICAN ENVIRONMENTAL
GROUP, INC............................................................. F-35
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1994......................... F-36
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. CONSOLIDATED
STATEMENTS OF LOSS FOR THE YEARS ENDED DECEMBER 31, 1995,
1994 AND 1993, AND CUMULATIVE FROM INCEPTION (MAY 7, 1991)
THROUGH DECEMBER 31, 1995............................................... F-37
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
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, 1995....................................................... F-38
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993, AND CUMULATIVE FROM
INCEPTION (MAY 7, 1991) THROUGH DECEMBER 31, 1995....................... F-40
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. SUMMARY OF
ACCOUNTING POLICIES..................................................... F-41
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS....................................... F-43
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. CONSOLIDATED
BALANCE SHEETS AS OF MARCH 31, 1996 (UNAUDITED) AND
DECEMBER 31, 1995....................................................... F-48
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. CONSOLIDATED
LOSS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND
MARCH 31, 1995, AND CUMULATIVE FROM INCEPTION (MAY 7, 1991)
THROUGH MARCH 31, 1996 (UNAUDITED)...................................... F-49
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1996 AND MARCH 31, 1995, AND CUMULATIVE
FROM INCEPTION (MAY 7, 1991) THROUGH MARCH 31, 1996
(UNAUDITED)............................................................ F-50
NORTH AMERICAN ENVIRONMENTAL GROUP, INC. SUMMARY OF
ACCOUNTING POLICIES.................................................... F-51
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FOR GAIA TECHNOLOGIES, INC. ........................................... F-52
GAIA TECHNOLOGIES, INC. BALANCE SHEETS AS OF DECEMBER 31,
1994 AND 1993.......................................................... F-53
GAIA TECHNOLOGIES, INC. STATEMENTS OF LOSS FOR THE YEARS
ENDED DECEMBER 31, 1994, 1993 AND 1992................................. F-55
GAIA TECHNOLOGIES, INC. STATEMENTS OF CAPITAL DEFICIT FOR THE
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992........................... F-56
GAIA TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992........................... F-57
GAIA TECHNOLOGIES, INC. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES.................................................... F-59
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
GAIA TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS................... F-61
GAIA TECHNOLOGIES, INC. BALANCE SHEET AS OF
SEPTEMBER 30, 1995 (UNAUDITED)......................................... F-70
GAIA TECHNOLOGIES, INC. STATEMENTS OF LOSS FOR
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995
AND SEPTEMBER 30, 1994 (UNAUDITED)..................................... F-72
GAIA TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995
AND SEPTEMBER 30, 1994 (UNAUDITED)..................................... F-73
GAIA TECHNOLOGIES, INC. SUMMARY OF ACCOUNTING
POLICIES............................................................... F-74
PRO FORMA STATEMENT OF LOSS FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1995................................................ F-76
</TABLE>
6
<PAGE>
EXHIBITS TO INFORMATION STATEMENT AND PROSPECTUS
Exhibit A Agreement and Plan of Merger dated as of February 9, 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 Buchanan Ingersoll Professional Corporation
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, DC 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, DC 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, DC
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
North American Technologies Group, Inc. ("NATK" or the "Company") conducts
business through four principal business groups, EET, Inc. (onsite
decontamination of buildings and equipment contaminated with polychlorinated
biphenyls ("PCBs"), radioactive isotopes or other toxic materials utilizing
EET's patented TechXtract/TM/ System), Industrial Pipe Fittings, Inc.
(manufactures and distributes transition fittings for high-density polyethylene
("HDPE") pipe), GAIA Technologies, Inc. (manufactures and distributes porous
pipe and rubber/plastic composite support pads for air conditioning condensers),
and other separate NATK operating units (dealing with the commercial development
of several environmentally related and hydrocarbon upgrading technologies).
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 then-
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 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.
9
<PAGE>
THE SPECIAL MEETING
The Special Meeting will be held July _____, 1996 at 10:00 a.m., EDT, at
the offices of Buchanan Ingersoll Professional Corporation, Two Logan Square,
18th and Arch Streets, 12th Floor, Philadelphia, Pennsylvania. 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 June ____, 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, NAE 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 February 9, 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 concluded that the Merger Consideration as originally
established continued to be fair to the NAE stockholders. However, the Merger
Consideration was not determined by arm's length negotiation, and there was no
10
<PAGE>
formal valuation of the Company and NAE, either by the Company or NAE or an
independent third party. Neither the Company nor NAE has 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 MarketSM 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
--------------------------------------
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>
===================================================================================================================================
Year Year Year Year Year ProForma Three Months Three Months
Year Ended Ended
1991 1992(1) 1993 1994 1995 1995(2) March 31, March 31,
1995(5) 1996(5)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 0 $ 0 $ 269,073 $ 1,945,697 $ 2,642,735 $ 2,642,735 $ 572,578 $ 862,999
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss $(376,735) $(2,481,206) $(1,503,502) $(4,936,330) $(7,340,240) $(7,340,240) $ (939,645) $ (986,838)
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss per share $(.04)(3) $(.37) $(.25) $(.35) $(.40) $(.40) $ (.06) $ (.04)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 987,447 $ 2,383,445 $ 6,515,883(4) $ 8,190,677 $ 7,884,719 $13,453,469 $6,166,540 $8,391,314
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity $ 713,517 $ 1,648,155 $ 4,272,312 $ 5,007,443 $ 1,086,810 $10,505,560 $4,313,943 $1,748,866
- ---------------------------------------------------------------------------------------------------------------------------------
Long-term debt -0- $ 250,000 $ 462,500 $ 500,000 $ 3,535,461 $ 835,461 $ 500,000 $3,470,057
=================================================================================================================================
</TABLE>
(1) Selected financial data of the Company for periods after 1991 are
after recapitalization.
(2) After giving effect to the issuance of the Series E and F Convertible
Preferred Stock issued in March and April 1996; reflects payment of
debt obligations of $1,050,000 from the net proceeds.
(3) Figures based on one-for-fifteen reverse stock split.
(4) Increase over prior period is principally due to the exercise of
options for NAT common stock.
(5) 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 Cumulative
Inception From inception
(May 7, 1991) Three Months Three Months (May 7, 1991)
to Year Year Year Year Ended Ended to
December 31, March 31, 1995 March 31, 1996 March 31, 1996
1991 1992 1993 1994 1995 (unaudited) (unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 0 $ 0 $ 0 $ 13,542 $ 0 $ - -0- $ 13,542
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $(299,689) $ (337,464) $(1,359,971) $ (870,756) $ (119,469) $ (56,135) $ (9,827) $(2,997,176)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per share $ (.03) $(.03) $(.11) $(.07) $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 194,582 $1,096,084 $ 613,910 $ 109,683 $ 19,018 $ 61,556 $ 15,976
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity $ 169,587 $ 367,949 $ (992,022) $(1,862,778) $(1,982,247) $(1,918,913) $(1,992,074)
(Deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Debenture -0- $ 250,000 $ 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 acquisitions in 1995 of EET, IPF and GAIA, 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 and fiscal
1995 from non-EET and IPF products. While it is anticipated that the operations
of EET, IPF and GAIA will generate operating revenues during fiscal 1996, 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 $20,731,650.
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."
CAPITAL NEEDS
- -------------
Through the three months ended March 31, 1996, the Company incurred
operating losses which are anticipated to continue for the near term at expected
levels of between $250,000 and $300,000 per month. 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 expects that revenues from operations will be
sufficient to offset the Company's costs of operations beginning in the second
half of fiscal 1996. In April and May 1996 the Company obtained $6,550,000 in
additional financing which it expects will be sufficient to fund its operating
requirements until it can achieve profitable operations. However, if
management's expectations are incorrect and the losses continue at historic
rates, the Company will likely need to secure additional capital. There can be
no assurance that such capital will be available, if at all, on terms attractive
to the Company.
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 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 noncompliance are and will continue to be a principal
14
<PAGE>
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
affect 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 products, 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.
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 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."
15
<PAGE>
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."
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 May
20, 1996, there were 24,900,632 shares of Company Common Stock outstanding, and
an additional 28,800,000 shares subject to conversion privileges, options or
warrants, which are or may become eligible for public trading. 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.
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.
CLASSIFIED BOARD
- ----------------
At the Company's upcoming Annual Meeting of Stockholders, the Company is
submitting for stockholder approval a proposal to classify the Board of
Directors into three classes, with the members of one class elected each year to
serve a three-year term. If approved, the classified Board of Directors makes
it more difficult to change majority control of the Board, even if such attempt
would be beneficial to the Company and its stockholders. As the
16
<PAGE>
Annual Meeting of the Company will occur prior to the Effective Date of the
Merger, NAE stockholders will not have the right to vote on the proposal at the
Annual Meeting.
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
June __, 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 February 9, 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 ("GCL") 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 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 4710 Bellaire
Boulevard, Suite 301, Bellaire, Texas 77401. 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.
19
<PAGE>
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 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
20
<PAGE>
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 February 9, 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 concluded that the Merger
Consideration as originally established continued to be fair to the NAE
stockholders. However, the Merger Consideration was not determined by arm's
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 has 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 file the Merger Agreement with the
Secretary of State of the State of Delaware in accordance with the GCL (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.
21
<PAGE>
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 11.1% of the issued outstanding shares of Company
Common Stock.
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, Buchanan
Ingersoll Professional Corporation ("Counsel"), as to federal tax consequences
of the Merger to the NAE Minority Shareholders (as defined in the opinion). Such
opinion is attached hereto as Exhibit C.
The following is a discussion of material federal income tax consequences
under the Internal Revenue Code of 1986 (the "Code") to the NAE Minority
Shareholders who receive Company Common Stock as a result of the Merger. The
discussion is based upon present federal tax law. All NAE Minority Shareholders
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 has stated it will not issue rulings on
whether a merger qualifies as a tax-free reorganization under Code Section
368(a)(1)(A), and consequently, the Company is not seeking and will not receive
such an opinion.
Based on certain assumptions, representations and qualifications as set
forth more fully in Exhibit C, Counsel has advised the Company that it is more
likely than not, if the transaction were litigated, a court of law would hold
that as to the NAE Minority Shareholders, the Merger would constitute a
Reorganization under Code Sections 368(a)(1)(A) and 368(a)(2)(D). Upon such a
finding, the Merger will have the following federal income tax consequences
to the NAE Minority Shareholders:
(a) No gain or loss will be recognized by the NAE Minority
shareholders who exchange their shares of NAE Common Stock solely
in exchange for the Company's Common Stock pursuant to the
Merger.
(b) The aggregate tax basis of the Company's Common Stock received by
each NAE Minority Shareholder in the Merger will be the same as
the aggregate tax basis of such NAE Minority 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; and
(c) The holding period of the shares of the Company's Common Stock
received by each NAE Minority Shareholder will include the
holding period for the shares of NAE Common Stock of each
shareholder exchanged in the Merger, provided that such shares of
NAE Common Stock were held as capital assets on the Effective
Date.
Under Section 382 of the Code, the Company's ability to utilize existing
net operating loss carryforwards of NAE and certain other tax attributes to
reduce its tax liability may be limited. See "Note 15 to the Company's
Consolidated Financial Statement for the fiscal year ended December 31, 1995."
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 MINORITY SHAREHOLDER. THE DISCUSSION IS BASED ON CURRENTLY
EXISTING PROVISIONS OF THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS
THEREUNDER
22
<PAGE>
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 MINORITY SHAREHOLDER 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.
PRO FORMA 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 the market
price of the Company's Common Stock, the volatility of the market price, and the
liquidity of a large block of shares. Giving 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 $600,000, 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 $7,540,240 and $986,838 for the year ended
December 31, 1995 and for the three months ended March 31, 1996, respectively;
and net loss per share would have been $.38 and $.04, 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 24,900,632 are outstanding as of May 20, 1996.
The Company is submitting to its stockholders at its Annual Meeting scheduled
for June 27, 1996 (the "Annual Meeting") a proposal to increase the authorized
Company Common Stock to 100,000,000 shares.
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 28,800,000 shares of Common Stock issuable upon
the exercise of outstanding conversion rights, stock options and common stock
purchase warrants.
SHARES OF COMMON STOCK SUBJECT TO ESCROW
- -----------------------------------------
GSI owns of record 2,925,000 shares of Company 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 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 May 20, 1996, 10
shares of Series D Convertible Preferred Stock, 50 shares of Series E
Convertible Preferred Stock and 92,500 shares of Series F 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
24
<PAGE>
involuntary liquidation, (4) sinking fund provisions, if any, for the redemption
by the Company or purchase of shares, (5) the terms 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 acquiror 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
10 were outstanding on May 20, 1996 . 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
convertible, at the option of the holder, at various times after March 11, 1996
at a conversion rate equal to the lessor of (i) a calculated value utilizing a
discount to the market price, as defined, of the Company's Common Stock, 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
25
<PAGE>
to payment of $25,000 per share plus accrued dividends thereon. Except as
otherwise required by law, the holders of the Series D Convertible Preferred
Stock do not have any voting rights.
Series E Convertible Preferred Stock
------------------------------------
In February and March 1996, the Company issued 50 shares of Series E
Convertible Preferred Stock("Series E Shares"). The holders of the Series E
Shares have certain liquidation preferences and are not entitled to any
dividends. At the option of the holder, the Series E Shares may be converted
into the Company's Common Stock using a conversion rate computed as the lesser
of (a) a calculated value utilizing a discount to the market price, as defined,
of the Company's Common Stock, or (b) $1.50 per share. One-fourth of the Series
E Shares can be converted after August 1996, with another one-fourth available
for conversion every three months thereafter. In addition, the Company at its
option may redeem any of the Series E preferred stock still outstanding on or
after February 16, 1999 at $25,000 per share.
Series F Convertible Preferred Stock.
-------------------------------------
In April and May 1996, the Company issued an aggregate 92,500 shares of
Series F Convertible Preferred Stock ("Series F Shares").
Dividends accrue on the Series F Shares at a per annum rate of $13.50 per
share and are payable semi-annually. The Company may elect to defer and accrue
dividend payments during the first three years, in which case each holder may
elect to receive payment of the dividend in the form of additional Series F
Shares. The holders of the Series F Shares have certain liquidation
preferences. The Series F Shares may be converted into Company Common Stock at
the option of the holder using a conversion rate, subject to certain
adjustments, of $1.00 per share. On or after April 8, 2001, the Series F Shares
can be converted at the holder's option at the lower of (a) the then-current
conversion price, or (b) a calculated value utilizing a discount to the market
price, as defined, of the Company's Common Stock. The Company may redeem the
Series F Shares at face value on or after April 8, 2004.
Each Series F Share entitles the holder thereof to the number of votes
equal to the number of shares of Common Stock into which such Series F Share may
be converted from time to time. In addition, the Company has agreed to cause
its Board of Directors to be increased to nine positions, four of which may be
filled by nominees selected by the holders of the Series F Shares.
The preferred stock purchase agreement and the certificate of designation
for the Series F Shares contain certain covenants which, if breached by the
Company, provide for certain remedies. Certain of these covenants are
considered outside of the Company's control. These covenants include, among
other things, that the Company obtain a minimum net worth, as defined in the
agreement, by December 31, 2000. For breach of these covenants that are outside
of the Company's control, the remedy allows the Series F holders to convert
their shares into the Company's Common Stock using a conversion rate computed as
the lesser of (a) the conversion price, as adjusted, or (b) a calculated value
utilizing a discount to the market price, as defined. Also, the stock purchase
agreement contains certain covenants that are considered within the control of
the Company. These covenants, among other things, require the delivery of
financial information and restrict the Company from incurring additional debt
if, immediately upon incurrence of such debt, the Company's debt-to-equity ratio
would exceed a certain ratio, as defined by the agreement. For breach of these
covenants that are within the Company's control the remedies allow the Series F
holders to elect a majority of the Company's Board of Directors and to either
(1) convert their shares into the Company's Common Stock using a conversion rate
computed as the lesser of (a) the conversion price, as adjusted, or (b) a
calculated value utilizing a discount to the market price, as defined; or (2)
request the Company to redeem their shares. If the Series F holders elect
redemption, the shares will be redeemed at the greater of (a) the fair market
value, as defined; or (b) the initial purchase price, plus unpaid dividends and
interest, if any. At the Company's option, the shares may be redeemed with cash
or a three-year promissory note.
26
<PAGE>
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 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.
27
<PAGE>
MARKET PRICE OF AND DIVIDENDS
ON THE NAE AND COMPANY COMMON STOCK
The Company Common Stock is currently traded on The NASDAQ SmallCap
MarketSM 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 May 20, 1996
was approximately 348. The number of record holders of the NAE Common Stock as
of May 20, 1996 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 1.5
Fourth Quarter 2.75 1.25 1.25 .0625
1995
- ----
First Quarter $3.125 $1.625 2.00 .125
Second Quarter 1.94 .94 .75 .125
Third Quarter 1.50 .813 .25 .25
Fourth Quarter 1.03 .46 .25 .01
1996
- ----
First Quarter $ 1.00 $ .50 * *
</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.
28
<PAGE>
BUSINESS OF THE COMPANY AND NAE
GENERAL - BACKGROUND
North American Technologies Group, Inc. ("NATK" or the "Company") conducts
business through four principal business groups, EET, Inc. (onsite
decontamination of buildings and equipment contaminated with polychlorinated
biphenyls ("PCBs"), radioactive isotopes or other toxic materials utilizing
EET's patented TechXtract/TM/ System), Industrial Pipe Fittings, Inc.
(manufactures and distributes transition fittings for high-density polyethylene
("HDPE") pipe), GAIA Technologies, Inc. (manufactures and distributes porous
pipe and rubber/plastic composite support pads for air conditioning condensers),
and other separate NATK operating units (dealing with the commercial development
of several environmentally related and hydrocarbon upgrading technologies).
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 the acquisitions in 1995 of EET, IPF and GAIA, the Company had
been a development-stage company engaged in the development, acquisition and
application of technologies with possible applications in various industries,
including environmental services and energy.
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 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 the audited financial statements for the full
year prior to the merger (1994), EET incurred a loss of $880,822 on revenues of
$1,426,748. 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."
Further expansion of its business has also been accomplished by the
Company's acquisition of IPF and GAIA. 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 formerly 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 shares 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, a manufacturer of porous pipe, synthetic construction
materials and other products using recycled rubber and plastics. The acquired
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
consideration paid for the assets of GAIA 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
29
<PAGE>
Company in the principal amount of $1,050,000, (iv) the forgiveness of certain
debt obligations (together with all interest owed thereon) owed by GAIA to the
Company of approximately $1,881,400, and (v) the assumption of $194,000 in
liabilities.
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 owned by three individuals, two of whom are
officers 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 for a fifteen-year period after the exercise of
the Crosstie Purchase Option. In connection with the sale of the GAIA assets,
TieTek received the right to use certain of the patented and proprietary
technologies included in the GAIA assets to develop synthetic 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 the synthetic railroad
crossties. 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
collateralized by a pledge of, and lien on, all of TieTek's assets and capital
stock, and 666,667 of the shares of the Company's Common Stock.
The acquisition of GAIA has been 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). The Company has not given any accounting
effect to the Crosstie Purchase Option because, given the early stage of
testing, management believes that the exercise of such option is not, as of the
date of this Information Statement and Prospectus, probable of occurrence.
MANAGEMENT RESTRUCTURING
Since the beginning of 1995, the Company has undergone a major
restructuring of its management group. This restructuring was primarily a
result of the acquisition of EET and the merging of EET's existing management
personnel into NATK. Included in EET's management was Tim B. Tarrillion, who
was named President and Chief Executive Officer of NATK once the merger with EET
was completed. When the previous Chairman of NATK's Board of Directors resigned
in July 1995, Mr. Tarrillion was also named to the position of Chairman. EET's
management group also included Mike Bonem, who is currently the President of
EET, Ron Borah, who was the inventor of TechXtract/TM/ and is currently Vice
President of Technology for NATK, and Mr. Klaus Schwitzgebel, who is currently
NATK's Director of Research. Prior to EET, these individuals had worked with
Mr. Tarrillion when he was President and Chief Operating Officer of EnClean,
Inc. ("EnClean"). EnClean was a publicly traded company that Mr. Tarrillion had
co-founded in 1984 which grew to over $100 million in revenues by 1992. It was
an industrial and environmental services company that was acquired by Rust
International in 1993.
In addition to the executives that came to NATK through the EET
acquisition, Mr. Tarrillion also hired two individuals (Donovan Boyd, Chief
Operating Officer, and Judy Shields, Chief Financial Officer) who had also
worked with him at EnClean. Thus, most of NATK's new management team has worked
for EET, EnClean, or both. The new management team of NATK was further
augmented when Mr. William Aldrich and Dr. Henry Sullivan, each a senior GAIA
management team member, became employees of NATK in connection with the
acquisition of GAIA. In addition, the NATK management team includes Mr. David
Daniels, who was a member of NATK's management team prior to 1995, as a director
and Executive Vice President of the Company as well as President of IPF.
DESCRIPTION OF BUSINESS AND TECHNOLOGIES
The Company's strategy is to acquire and internally develop businesses that
are based on proprietary technologies, proprietary manufacturing processes
and/or defendable market positions. These businesses will be
30
<PAGE>
commercially developed to provide a mix of products, services and licensing
arrangements to a range of customers in the natural resources, energy,
environmental and related industries.
Certain of the Company's businesses have been commercialized to varying
extents while others remain in the development stage. EET's TechXtract/TM/ and
Waste Management businesses, IPF's manufacturing and distribution of transition
and related fittings businesses, and GAIA's porous pipe and A/C pad businesses
are contributing to the revenue growth of the Company. NATK's Oleofilter/TM/ is
expected to contribute to the Company's 1996 revenues. The railroad crosstie
product line and the BioKatT/TM/ technology are still in the development stage
and may add to the Company's growth at some time in the future. The commercial
development of the Company's BioTreat/TM/ System and the Terrazyme/TM/ System
has currently been suspended pending improvement in the economics of the soil
remediation market.
The following chart provides a list of the Company's businesses and
technologies, together with their respective operational functions and current
status of commercialization.
<TABLE>
<CAPTION>
================================================================================
BUSINESSES AND FUNCTION STAGE OF
TECHNOLOGIES COMMERCIALIZATION
- --------------------------------------------------------------------------------
<S> <C> <C>
EET's TechXtract/TM/ Process Extraction of Technology is
radionuclides, PCB's, heavy patented, commercial
metals and other toxic projects are
materials to decontaminate on-going, and market
buildings and equipment for development in
reuse. Other industrial progress.
uses for cleaning and scale Additional product
removal lines are being
developed.
- --------------------------------------------------------------------------------
EET's Waste Management Specialized waste Group has an
Services Group management and remediation established customer
services base in central
Texas market.
- --------------------------------------------------------------------------------
Industrial Pipe Fittings Manufactures and Products are being
distributes transition pipe manufactured and
fittings, tapping saddles sold. Facilities
and fabricated large have recently been
diameter elbows, tees, and expanded to allow
wyes. for manufacture and
distribution of new
product lines.
- --------------------------------------------------------------------------------
GAIA Technologies Porous Manufactures porous pipe Currently selling
Pipe using recycled rubber from product into
discarded automobile tires international and
and plastic for use in domestic irrigation
commercial irrigation markets. Several
systems. foreign licensees
have been
established.
- --------------------------------------------------------------------------------
GAIA Technologies A/C Pads Manufactures rigid support Currently selling
pads for outside air products through
conditioning condensers manufacturer's
using recycled rubber from representatives in
discarded automobile tires U.S. air
and recycled plastics. conditioning supply
industry.
- --------------------------------------------------------------------------------
Oleofilter/TM/ System Mechanical separation of Technology is
oil from contaminated patented and
waters. developed, market
development is
beginning and
commercial projects
are expected soon.
- --------------------------------------------------------------------------------
BioKatT/TM/ Hydrocarbon Treatment and processing of Laboratory
Process crude oils verification and
testing have been
completed and
results are
positive. Currently
discussing joint
research and
commercialization
efforts with several
major oil companies.
- --------------------------------------------------------------------------------
GAIA Technologies Railroad Development (in conjunction Under option to the
Crossties with TieTek) and, if and Company. A working
when proven commercially prototype design is
viable, ultimate currently being
manufacture of a synthetic tested by a major
railroad crosstie U.S. railroad
company.
================================================================================
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
================================================================================
BUSINESSES AND FUNCTION STAGE OF
TECHNOLOGIES COMMERCIALIZATION
- --------------------------------------------------------------------------------
<S> <C> <C>
crosstie from recycled
rubber, plastic and other
material.
- --------------------------------------------------------------------------------
Bio Treat/TM/ System Biological remediation of Technology is
oil-contaminated soils proven, but
economics of
contaminated soil
market are not
sufficient to allow
full
commercialization of
this technology at
this time.
- --------------------------------------------------------------------------------
Terrazyme/TM/ System Mechanical separation of Technology is
oil and sludge from proven, but
hydrocarbon-contaminated economics of
soils. contaminated soil
market are not
sufficient to allow
full
commercialization of
this technology at
this time.
================================================================================
</TABLE>
EET's 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/. Areas and equipment that have been cleaned using the
TechXtract/TM/ technology are routinely sampled and tested by independent
laboratories which have verified that the contaminant extraction process has
been successful in achieving levels of extraction that meet the EPA's cleanup
standard.
EET has also demonstrated TechXtract/TM/'s 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, metalworking 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.
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.
32
<PAGE>
EET is also pursuing potential market opportunities for the TechXtract/TM/
technology and formulation in commercial and retail cleaning applications and
for the removal of scale in downhole oil drilling and production piping systems.
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. 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.
EET'S WASTE MANAGEMENT SERVICES
EET's Waste Management Services ("WMS") is a service group providing
expertise and project personnel in the identification, packaging, documentation,
transportation and disposal of hazardous and special wastes for government,
environmental consulting/engineering firms and industry. These services include
identification and characterization of unknown wastes, waste consolidation, drum
handling, lab packing, and remediation and decontamination of sites and
facilities. WMS provides 40-hour Occupational Safety and Health Act ("OSHA")-
certified project managers and environmental technicians who can mobilize
quickly and economically to the customer's location. The skills and credentials
of WMS field personnel are also complementary to those of TechXtract/TM/ field
personnel, and can provide extra capacity for peaks in the TechXtract/TM/
business of EET.
The need for WMS services originates with the Resource Conservation and
Recovery Act ("RCRA"), enacted in 1976 and amended in 1984. RCRA is the
fundamental driving force behind proper handling and disposal of wastes, and the
associated civil and criminal penalties causing manufacturing companies to
consider its requirements seriously. RCRA created numerous service industries,
including the range of services currently provided by WMS. In general, waste
management service companies, like WMS, were formed with the knowledge required
for compliance and handling of hazardous waste, and to assist smaller waste
generators in the complex analytical and documentation requirements of waste
disposal. It is management's belief that EET's WMS enjoys a defendable niche
and a set of distinctive competencies in the central Texas waste management
business.
EET's WMS group also has a research laboratory and staff that performs
research and analysis to support other EET/NATK project activities. This group
can also employ other technologies based on processes for the reduction, removal
and stabilization of environmental contaminants in soil, wastewater or
groundwater. In this regard, EET has four water and soil treatment patents
which have not yet been commercialized to any great extent. However, one
commercial system, based on one of these EET patents, for removing metals from a
waste stream generated by a plating facility, is currently in use. Furthermore,
several feasibility projects using techniques from
33
<PAGE>
the soil fixation patent are pending. NATK is currently developing a plan to
determine the long-term commercial opportunities for these technologies.
Finally, EET's research staff is also used for internal and government-funded
research projects relating to NATK's current and future technologies.
INDUSTRIAL PIPE FITTINGS
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. 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.
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 manufactures 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 has recently expanded its product line to include
internally fabricated large diameter HDPE elbows, tees and wyes, as well as a
high-quality line of tapping saddles obtained through an exclusive distribution
agreement with Alprene SAS of Bologna, Italy.
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 is estimated by IPF's management to exceed
$1.5 billion. Because of the number of applications of polyethylene, the market
is expanding worldwide, particularly in Central and South America.
IPF currently markets its products within a two-tier plan. First, IPF has
alliances with approximately 100 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.
IPF currently utilizes a modular-based assembly procedure for
manufacturing. Most internally manufactured components are made directly from
raw materials 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. IPF also carries a certain amount of
finished goods inventory for quick shipment and to support its distribution of
the tapping saddle product line.
IPF has recently completed the expansion of its manufacturing facilities by
adding two more buildings and thus tripled the size of its operations. One
building will now house all inventoried items, and the other building will add
to IPF's manufacturing floor space. Since being acquired by NATK, IPF has also
further upgraded its manufacturing capabilities with the purchase of a Computer
Number Controlled ("CNC") lathe, a Vertical Turret Lathe ("VTL"), and a large
diameter "YTL" fabrication machine. Management believes that once the YTL
machine becomes fully operational, it will give IPF capabilities that few
companies have. This machine not only allows the Company to fabricate large
diameter fittings of any specification, but the DIPS (Ductile Iron Pipe Size)
capabilities of the equipment gives IPF a significant advantage because
currently only few competitors can produce these fittings. In addition, this
generation of YTL machine is unique in that it provides a way to produce every
style of fabricated fittings in any diameter, its full body insert clamps
eliminate deflection, it has the ability to make any angled mitered joint, and
its computer data logger provides a physical record of all fuses made.
34
<PAGE>
GAIA TECHNOLOGIES' PRODUCTS
GAIA's technologies utilize a combination of new and recycled
thermoplastics mixed under pressure with crumbed rubber made from discarded
vehicle tires or virgin synthetic (vulcanized) rubber scraps. The rubber and
plastic are uniformly mixed in the feed-reparation stage, where additives may be
used to enhance certain physical properties. The mix is then subjected to
mechanical work and pressures which increase the temperature and melt the
plastic, basically "gluing" the rubber particles and plastics together. The
precise proportions of each of the raw materials used vary greatly based upon
the desired characteristics of the end product. As the volume of rubber
particles decreases and the proportion of thermoplastics increases, the
resulting product becomes less flexible, rapidly loses its porosity, and
ultimately becomes impervious and rigid rather than flexible. Certain aspects
of this technology, including formulations and manufacturing techniques, are
covered by six existing patents, and the Company will continue to pursue
additional patents as improvements or new innovations are made. However,
additional protection for these technologies, over and above these patents, is
afforded by the significant amount of practical know-how possessed by GAIA and
its management that could only be replicated through significant investment of
time and money. The GAIA technologies are currently being applied to produce
porous pipe and building materials (currently A/C pads). These technologies
could also be used to produce synthetic railroad crossties through a licensing
agreement and joint development program with TieTek.
POROUS PIPE
GAIA manufactures and sells porous pipe as an integral part of an
underground, integrated and engineered distribution network for commercial
irrigation. The Company's management believes that GAIA's porous pipe has
unique physical, structural and fluid dynamic properties. When used in
underground irrigation systems, porous pipe promotes increased crop field, weed
control and water conservation. A properly engineered and installed subsurface
irrigation system using porous pipe can deliver water, oxygen, nutrients,
pesticides and other agricultural chemicals to the root system of a crop.
GAIA's patented technology and proprietary manufacturing process for its
porous pipe converts a mixture of rubber from recycled tires and thermoplastic
raw materials into a flexible pipe that is a continuous cylindrical membrane of
rubber-plastic polymeric alloy. The process is scientifically controlled to
provide a consistent network of capillary pathways through the pipe walls,
resulting in a slow, steady and uniform osmotic weep rate when water flows
through the pipe at low pressure.
Porous pipe is a recent commercial irrigation development, spawned by the
concern and expense of conventional watering systems and their inefficient
application of water. Underground irrigation using porous pipes has numerous
advantages over above-ground watering. With above-ground systems, water must
enter soil and penetrate through the root zone to benefit plants, a pathway that
is often lengthy or difficult. Underground irrigation systems pump water
through piping systems, delivering water directly to root structures. In
addition, nutrients, air, herbicides and/or insecticides can be directly
delivered to the subsurface root zone.
The efficiency of subsurface porous piping is multi-faceted. Conventional
irrigation systems waste significant amounts of valuable water to evaporation
and distribution losses, and require disruptive above-ground canals or piping
structures. Empirical tests show that underground irrigation consumes as much
as 30% less water than its alternatives. Application of farm chemicals is
equipment intensive and can result in the waste and environmental impacts from
runoff. With porous pipe, simple mixing and injection systems allow for 100%
retention in targeted root zones. Porous piping systems can also be effective
for introducing aerated water, or even air, and can be used for effluent
treating, bioremediation and fish farming.
GAIA has sold over 28 million feet of porous pipe over the past five years
for use in subsurface irrigation systems in the domestic and international
markets. GAIA has licensing agreements for the manufacture and sales of porous
pipe with companies in Japan and Spain. In addition, GAIA has an agreement with
a group in Florida for the development of porous pipe use in commercial
landscaping projects. International sales of the product are currently handled
through sales agents in target countries and markets. The product is currently
being manufactured
35
<PAGE>
by GAIA utilizing the facilities and personnel of a company in St.
Francisville, Louisiana pursuant to a tolling agreement.
BUILDING MATERIALS - AIR CONDITIONER BASE PADS
The substitution of synthetic materials for naturally derived building
materials provides many opportunities for application of GAIA's technologies.
Potential opportunities exist for new products because of the potential
shortages of natural raw materials, the proven application of the technology to
make a range of products, and the almost unlimited number of product
possibilities. Currently, GAIA has proven mold designs and compositions for a
number of product shapes, including its first product in this category --
support pads for outside air conditioning condenser units.
Original equipment manufacturers of air conditioning units deliver
approximately five million units annually in the United States alone. When each
unit is installed, it typically requires a support pad. At a price of $15-20
per pad, this implies a market size of over $50 million per year. This market
is an ideal opportunity for GAIA building material products, since the support
pad's design is relatively simple yet visible in almost every new construction
project. The GAIA product has clear competitive advantages over cement (the
traditional pad) and competing synthetics. Distribution agreements are already
in place for this product in Texas and in the southeastern U.S. market. The
product is currently being manufactured by GAIA utilizing the facilities and
personnel of a company in St. Francisville, Louisiana pursuant to a tolling
agreement. Sales of this product to date have been somewhat limited by the
production capabilities of this new manufacturing system; however, management
believes that these start-up problems will be corrected in the near term, and
production rates should meet design rates as those problems are solved.
Extension of GAIA's air conditioning pad business into other construction
materials is a natural evolution, particularly in applications requiring
rectangular shapes and strong resistance to breakage under impact or weight.
Currently, GAIA is investigating the possibility of developing new products for
this market, including pallets, oil field mats, roofing shingles, industrial
flooring, marine decking and transformer pads.
RAILROAD CROSSTIES
A key potential new product for the use of GAIA's technologies is a
composite railroad crosstie. As part of the purchase of GAIA Technologies,
Inc., NATK has the exclusive rights to acquire Tietek, which currently is
working to perfect a prototype synthetic crosstie. The techniques used for
these prototypes are based on GAIA's technologies, and initial indications are
that the prototypes can function and perform with similar characteristics to a
wood tie with regard to toughness, density, elasticity and flexibility.
Preliminary testing and evaluation on this product was originally accomplished
during 1994 at the Discas Laboratory in Waterbury, Connecticut and was followed
by a period of theoretical modeling based on the Discas results. The Polymer
Processing Institute in Hoboken, New Jersey was engaged to confirm the
properties of the prototypes. The prototype composite railroad crossties that
were tested were compounded rubber-plastic mixtures, enhanced by additives and
foaming agents. They were extruded on a twin screw extruder that was fed with
raw materials that were specifically mixed to generate a product with properties
indicative of those required in railroad crosstie service.
Based on those preliminary results, a major U.S. railroad is working with
GAIA and Tietek to complete a series of pilot runs to manufacture composite
crossties for deployment under its own tracks and for use in a battery of
independent tests, including accelerated aging tests. These pilot runs should
result in improved product formulation and validation of the physical
characteristics of this product, including both installation and service
aspects. The improved product formulation and units from these runs are and
will be tested by an independent testing facility at the University of Illinois
at Urbana. The railroad intends to install these prototype crossties in a
variety of locations, examining their performance under heavy, light and turning
traffic. In addition, the Company intends to market this product to other
companies worldwide. TieTek currently leases manufacturing space from a
plastics manufacturer for product development and production of the crosstie
prototypes. If this product proves to
36
<PAGE>
have strong commercial application, the Company would exercise its purchase
option and its own manufacturing capabilities for the production of these
synthetic crossties.
When and if a commercial product is realized in the domestic crosstie
market, there would be natural extensions of this technology to other markets,
including the international market, and to similar products. As such, GAIA is
currently examining the potential for sales to other rail systems, international
marketing and licensing opportunities, and the potential for similarly extruded
products such as marine pilings.
The Company's exercise of the Crosstie Purchase Option is dependent upon
the successful completion of the testing program described above and
confirmation of the commercial potential for synthetic crossties. As a result,
the Company has not given effect, from an accounting point of view, to the
Crosstie Purchase Option since, as of the date of this Information Statement and
Prospectus, it can not be said to be probable of occurrence.
OTHER NATK TECHNOLOGIES
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. During 1995, 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. 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 emulsified hydrocarbons. The
Oleofilter/TM/ System has various applications, including the treatment of
contaminated groundwater, 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.
Application of the Oleofilter/TM/ System was successfully demonstrated by
the Company in 1994 in conjunction with tests at a Superfund site administered
by the 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 the Orkney Water
Test Center in Scotland 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 indicate interest by several
potential customers. As a result, the Company currently has presented price
quotations and/or proposals to potential customers for several Oleofilter/TM/
Systems. The cumulative value of price quotations and proposals currently
outstanding exceeds $1 million. However, to date, the Company has been unable to
yield any revenues from the sale or application of its Oleofilter/TM/ System,
and management can make no assurances that any revenues from the quotes and
proposals currently outstanding.
37
<PAGE>
THE BIOKATT/TM/ PROCESS
The Biocatalytic Hydrocarbon Upgrade Process (the "BioKatT/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 BioKatT/TM/ Hydrocarbon Process uses the
catalytic properties of enzymes distinguishes it 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 BioKatT/TM/ versus these other processes.
The BioKatT/TM/ technology was originally developed by NATK through work
related to its other environmental remediation technologies based on certain
enzyme solutions and formulations. In the past, NATK has spent over $1 million
in its attempts to develop and commercialize this technology. BioKatT/TM/ was
the main technology of interest at the time that NATK's new management team took
over. The new management team set out to reverify this technology with its own
laboratory facilities and staff at EET's WMS laboratories. This reverification
was completed in 1995 and has given NATK the data it needed to approach several
major oil companies concerning a joint research and commercialization project
for this technology. NATK has recently received indications of interest in such
a program from several major oil companies. Under such a program, NATK would be
reimbursed for the time its employees spend assisting the oil company partner in
researching and developing the BioKatT/TM/ technology for its own potential
applications. If successfully commercialized, it is anticipated that NATK would
receive a small royalty from that partner and be free to market the proven
technology to other potential customers. If the technology does prove to have
commercial application, the long-term financial effects on NATK could be very
substantial, but such benefits, if any, are extremely difficult to estimate at
this time. Still, since the potential economic benefits of BioKatT/TM/ are so
large and laboratory tests have continued to show consistent positive results,
the Company intends to pursue BioKatT/TM/ development and its ultimate
commercialization if the Company can attract a capable research partner and the
technical results continue to be positive.
BIOTREAT/TM/ AND TERRAZYME/TM/ TECHNOLOGIES
The BioTreat/TM/ and Terrazyme/TM/ technologies rely to varying extent upon
enzyme and microbe technologies. The principal objective of these two
technologies is, through the use of novel or proprietary systems and application
of specific enzymes, to secure the remediation of hydrocarbon contaminated soils
and other hydrocarbon/solid waste streams.
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.
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 contaminated material travels up the screw feed it
is sprayed with a mixture of enzymes, water and/or other chemicals.
These two technologies 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. In addition, the current economic factors and
38
<PAGE>
disposal options affecting the soil remediation market limit the commercial
viability of these two technologies. Thus, until there is a significant change
in the economic parameters related to the soil remediation market, the Company
has suspended funding any additional commercialization efforts pertaining to
these two technologies. However, the Company could revitalize its
commercialization efforts if changes in the market place so dictate.
COMPETITION
The Company and its operating groups are active in many different segments
of the energy, environmental, natural resources, and related industries.
Essentially all of the segments in which the company operates are highly
competitive. As such, the Company competes with a large number of companies in
substantially all of the markets into which it sells its products and services.
The competitors tend to be different for each of the Company's technologies.
Many of these competitors are local operations servicing a limited geographic
area; however, in various service lines, 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 extent) 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.
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.
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<PAGE>
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 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.
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<PAGE>
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 protection from its customers.
SALES, MARKETING AND JOINT VENTURE AGREEMENTS
As a result of the acquisitions that were effected by the Company in 1995,
the subsequent restructuring of the Company's management, and the evolution of a
new operating strategy for NATK, the Company's approach to sales and marketing
has changed significantly during and subsequent to 1995. The Company now has a
sales and marketing strategy for each of its businesses designed to meet the
needs of the structure of their specific market and industry. To varying extent
and depending on the specific needs of the market, the Company now employs or
anticipates using a full range of sales and marketing techniques, including an
internal sales staff, manufacturers representatives, licensees, finders'
incentive programs, joint ventures, advertising and other promotional programs.
In addition, the Company has developed an in-depth strategic marketing and sales
plan for each of its products and services and operating units. Sales targets
for each product and service have been established and all marketing and sales
programs are assessed against their ability to meet those targets. The Company
anticipates that it will continue to evolve its sales and marketing strategy as
its products and services continue to expand and its new technologies become
more accepted in the marketplace. The following is a summary of the Company's
sales and marketing strategy by business or technology.
<TABLE>
<CAPTION>
================================================================================
Businesses and Technologies Target Sales and Marketing
Markets/Industries Efforts
- --------------------------------------------------------------------------------
<S> <C> <C>
EET's TechXtract/TM/ Process Remediation Companies, Direct Sales, Licensees,
Heavy Industrial Finders' Program,
Customers, Department Advertising, Direct
of Energy, Department Mail, Technical
of Defense, Commercial Papers/Presentation.
Cleaning Companies, Oil
Field Service, Gas
Transmission, Utility
Companies.
- --------------------------------------------------------------------------------
EET's Waste Management Light Industrial Direct Sales, Direct
Group Customers, State Mail, Trade Shows,
Agencies, Environmental Customer Referrals.
Consultants,
Transportation
Companies, Small
Quantity Generators
(all located in central
Texas market).
- --------------------------------------------------------------------------------
Industrial Pipe Fittings Mining, Environmental Direct Sales, Pipe
Contractors, Landfills, Distributors, Direct
Water Works, Gas Mail, Trade Shows,
Utilities. Advertising.
- --------------------------------------------------------------------------------
GAIA Technologies Porous Irrigation Equipment Direct Sales,
Pipe Suppliers, Commercial International Agents,
Farms, Commercial Joint Ventures,
Landscape Contractors, Licensees, Direct Mail,
International Video, Trade Shows.
Agricultural Business.
- --------------------------------------------------------------------------------
GAIA Technologies A/C Pads U.S. Air Conditioning Manufacturer
Supply Industry. Representatives, Direct
Mail.
- --------------------------------------------------------------------------------
Oleofilter/TM/ System Light Industrial Manufacturer
Customers, Terminals, Representatives, Direct
Offshore Platforms, Sales, Direct Mail,
Refineries, Trade Shows, advertising.
Petrochemical Plants,
Superfund Sites, Water
Treatment Supplies.
- --------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Businesses and Technologies Target Sales and Marketing
Markets/Industries Efforts
- --------------------------------------------------------------------------------
<S> <C> <C>
BioKat/TM/ Hydrocarbon Heavy Crude Oil Direct Sales to
Process Production Companies. Potential Joint Ventures
Partners.
- --------------------------------------------------------------------------------
GAIA Technologies Railroad Major U.S. and Awaiting completion of
Crossties International development efforts.
Railroads, Railroad
Maintenance Companies.
- --------------------------------------------------------------------------------
BioTreat/TM/ System Remediation Companies, Sales and Marketing
Waste Disposal efforts have been
Companies, Contaminated suspended.
Property Owners.
- --------------------------------------------------------------------------------
Terrazyme/TM/ System Remediation Companies, Sales and Marketing
Waste Disposal efforts have been
Companies, Contaminated suspended.
Property Owners.
================================================================================
</TABLE>
Historically, the Company had 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, in the past,
precluded its ability to finance the development and staffing of an internal
sales force. However, the Company's new strategy, new management, and stronger
financial structure now allows the Company to implement a much broader and
stronger sales and marketing plan as outlined above. As such, the Company's
historical joint ventures and teaming arrangements will play a much smaller role
in marketing the Company's products and services in the future. The Company
believes that it is likely only a small portion of its future revenues will be
generated by its existing joint ventures. However, new joint ventures developed
in the future may offer new opportunities for sales and product development and
will be used when deemed favorable for the Company.
In addition, the Company's joint ventures and teaming arrangements, in the
past, were motivated as a financing strategy. In certain instances, joint
venture partners paid the Company for the exclusive right to market its
technologies in specified areas. Since the Company's resources were somewhat
limited, 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. Regardless of the purpose behind their
initial formation, the Company's past joint venture arrangements have, to date,
generated no material revenues or made any technical progress. Management does
not believe that its past joint ventures will add any significant opportunities
in the future, and is not actively operating any of these joint ventures at this
time.
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. Furthermore, 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. In addition, the
Company intends to apply for patents for other of its technologies as they are
developed, if such patent protection is available and advantageous to the
Company. Beyond these current or future patents, there is currently no patent
protection for any other of the Company's products or technologies. While the
Company believes it possesses proprietary rights to some of its other products
and 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
42
<PAGE>
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 Information Statement and 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 an "as is"
or "best efforts" basis. As such, no warranty is expressed or implied.
However, in some cases, some limited "warranties" do apply. For example, EET
sometimes 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 very limited instances, has EET
not been paid for the work in connection with this guarantee, amounting to
$10,000 in the aggregate. 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. For both GAIA and IPF, the Company does assume some
responsibility that the products they manufacture will perform as indicated in
company literature. If the products are used as instructed and fail, the
Company, at times, will replace the product at no cost to the customer. To
date, such replacement of failed or discarded products has not been significant.
In addition, the Company carries product liability insurance when it is deemed
necessary. Management believes its product liability insurance is sufficient
for its purposes and warranty issues are not significant.
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. Ten 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 noncircumvention, nondisclosure agreements
over the Company's technologies. The Company believes that its relations with
its employees are good.
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.]
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
43
<PAGE>
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 150,000
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. Discovery is ongoing, and management cannot evaluate the Company's
exposure at this time.
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 injunction, 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 and Mr. Weaver each filed a lawsuit against
the Company and other parties in June 1995 in the U.S. District Court in
Maryland. Mr. Weaver also filed a lawsuit against the Company in a state court
in Maryland. The lawsuit filed by Mr. Impero has been dismissed. The lawsuit
filed by Mr. Weaver in the U.S. District Court in Maryland has been remanded to
Texas. No activity in the lawsuit filed in Maryland state court has occurred
pending an appeal by Mr. Weaver's attorney.
If the foregoing litigation is decided against the Company, it could have a
material adverse effect on the financial condition and results of operations of
the Company. See "RISK FACTORS."
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND AND BASIS OF PRESENTATION
Prior to the acquisitions in 1995 of EET, IPF and GAIA, the Company was a
development-stage company engaged in the development, acquisition and
application of technologies in the environmental and energy industries. Until
such acquisitions, the Company had limited revenues, consisting primarily of
payments for demonstration projects.
The Company ended its development-stage status by virtue of its
acquisitions on March 7, 1995 of EET, on June 30, 1995 of IPF, and on December
29, 1995 of GAIA. EET's TechXtract/TM/ Process has been used in over 200
successful projects and has generated for EET revenues of approximately
$1,900,000 from its inception through December 31, 1995. In addition, EET
generated revenues of approximately $1,500,000 from environmental services in
the same period which were not related to the TechXtract/TM/ Process. IPF
generated revenues of approximately $1,400,000 from its inception through
December 31, 1995. GAIA's patented process for manufacturing products from
recycled rubber began generating revenues for the Company in the first quarter
of 1996.
The acquisitions of EET and IPF were accomplished through mergers pursuant
to which an aggregate of 3,070,729 shares of the Company's Common Stock and
71,000 common stock purchase warrants were issued to former EET and IPF security
holders. The acquisition of substantially all the assets of GAIA was
accomplished for the following consideration: (a) issuance of 1,666,667 shares
of the Company's Common Stock, (b) payment of $305,500 in cash, (c) the issuance
of a 90-day promissory note by the Company in the principal amount of
$1,050,000, (d) forgiveness of certain debt obligations (together with all
interest owed thereon) owed by GAIA to the Company of approximately $1,881,400;
and (e) assumption of approximately $194,000 in account payable obligations.
The acquisitions of EET and IPF have been accounted for as poolings-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, August 1993 and January 1994. 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.
LIQUIDITY AND CAPITAL RESOURCES
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 from the exercise of its warrants and
options to acquire its securities. The Company continued to use the placement
of such securities during 1995 and through April 8, 1996 to generate the cash
needed to fund its operating losses and capital requirements, and to complete
the acquisition of GAIA. Specifically, during 1995 the Company used net cash of
$4,333,000 for operating activities and $3,440,000 for investing activities,
while the net cash proceeds from financing activities was $4,840,000. The debt
and equity transactions for 1995 and through April 8, 1996 are described below.
Common Stock
The Company received net proceeds of approximately $2,110,000 from the sale
of the Company Common Stock throughout 1995.
45
<PAGE>
13-1/2% Convertible Subordinated Notes
In September 1995, the Company received cash proceeds of $2,700,000 from
the placement of its convertible subordinated notes (the "Notes") and warrants
to acquire 2,700,000 shares of the Company's Common Stock (the "Note Warrants").
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 Note plus the deferred interest, if any, is convertible
at the option of the holders into shares of the Company's Common Stock at a
conversion price of $1.00 per share, subject to certain adjustments, at any time
after September 22, 1996 and prior to maturity on September 22, 2000. Repayment
of the unconverted portion of the principal amount 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.
On April 8, 1996, the Notes and the Note Warrants were converted into
27,000 shares of the Company's Series F Convertible Preferred Stock ("Series F
Shares") and new warrants to purchase 2,700,000 shares of the Company's Common
Stock. See discussion below. The Company elected to defer the interest payment
relating to the Notes that was due on March 22, 1996. However, interest of
approximately $198,000 (which includes the deferred interest) was paid to the
note holders on April 8, 1996 in conjunction with the conversion into the Series
F Shares.
Approximately $1,035,000 of the net proceeds received from the Notes was
used to fund a loan to GAIA prior to its acquisition on December 29, 1995. This
loan was forgiven as part of the purchase price consideration.
Series D Convertible Preferred Stock
On December 28, 1995, the Company received net proceeds of $750,000 from
the issuance of 30 shares of Series D Convertible Preferred Stock ("Series D
Shares"). The holders of the Series D Shares are entitled to dividends, payable
quarterly at a per annum rate of $3,750 per Series D Share and certain
liquidation preferences. At the option of the holder, the Series D Shares may
be converted into the Company's Common Stock using a conversion rate computed as
the lesser of (a) a calculated value utilizing a discount to the market price,
as defined, of the Company's Common Stock, or (b) $.875 per share.Twenty Series
D Shares have been converted through May 20, 1996, resulting in the issuance of
811,724 shares of the Company's Common Stock. The remaining 10 Series D Shares
are currently available for conversion. At March 31, 1996, the Company owed
dividends of approximately $28,000 to the holders of the Series D Shares.
Approximately $305,500 of the proceeds received from the Series D Shares
was used to complete the acquisition of GAIA on December 29, 1995.
Series E Convertible Preferred Stock
In February and March 1996, the Company received net proceeds of $1,218,750
from the issuance of 50 shares of Series E Convertible Preferred Stock ("Series
E Shares"). The holders of the Series E Shares have certain liquidation
preferences and are not entitled to any dividends. At the option of the holder,
the Series E Shares may be converted into the Company's Common Stock using a
conversion rate computed as the lesser of (a) a calculated value utilizing a
discount to the market price, as defined, of the Company's Common Stock, or (b)
$1.50 per share. One-fourth of the Series E Shares can be converted after
August 1996, with another one-fourth available for conversion every three months
thereafter.
Series F Convertible Preferred Stock
In April and May 1996, the Company issued 92,500 shares of Series F
Convertible Preferred Stock ("Series F Shares") and warrants to acquire
9,250,000 shares of the Company's Common Stock (the "Series F Warrants"). Cash
proceeds of $6,550,000 was received for 65,500 Series F Shares and 6,550,000
Series F Warrants. The remaining 27,000 Series F Shares and 2,700,000 Series F
Warrants were issued in exchange for the surrender of
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<PAGE>
the Notes and the Note Warrants. See discussion above. The Series F Warrants
have an exercise price of $1.00 per share, subject to certain adjustments, and
expire on April 8, 2004.
Dividends accrue on the Series F Shares at a per annum rate of $13.50 per
share and are payable semi-annually. The Company may elect to defer and accrue
dividend payments during the first three years, in which case each holder may
elect to receive payment of the dividend in the form of additional Series F
Shares. The holders of the Series F Shares have certain liquidation
preferences. The Series F Shares may be converted into Company Common Stock at
the option of the holder using a conversion rate, subject to certain
adjustments, of $1.00 per share. On or after April 8, 2001, the Series F Shares
can be converted at the holder's option at the lower of (a) the then-current
conversion price, or (b) a calculated value utilizing a discount to the market
price, as defined, of the Company's Common Stock. The Company may redeem the
Series F Shares at face value on or after April 8, 2004.
Each Series F Share entitles the holder thereof to the number of votes
equal to the number of shares of Common Stock into which such Series F Share may
be converted from time to time. In addition, the Company has agreed to cause
its Board of Directors to be increased to nine positions, four of which may be
filled by nominees selected by the holders of the Series F Shares.
The preferred stock purchase agreement and the certificate of designation
for the Series F Shares contain certain covenants which, if breached by the
Company, provide for certain remedies. Certain of these covenants are
considered outside of the Company's control. These covenants include, among
other things, that the Company obtain a minimum net worth, as defined in the
agreement, by December 31, 2000. For breach of these covenants that are outside
of the Company's control, the remedy allows the Series F holders to convert
their shares into the Company's Common Stock using a conversion rate computed as
the lesser of (a) the conversion price, as adjusted, or (b) a calculated value
utilizing a discount to the market price, as defined. Also, the stock purchase
agreement contains certain covenants that are considered within the control of
the Company. These covenants, among other things, require the delivery of
financial information and restrict the Company from incurring additional debt
if, immediately upon incurrence of such debt, the Company's debt-to-equity ratio
exceeds a certain ratio, as defined by the agreement. For breach of these
covenants that are within the Company's control the remedies allow the Series F
holders to elect a majority of the Company's Board of Directors and to either
(1) convert their shares into the Company's Common Stock using a conversion rate
computed as the lesser of (a) the conversion price, as adjusted, or (b) a
calculated value utilizing a discount to the market price, as defined; or (2)
request the Company to redeem their shares. If the Series F holders elect
redemption, the shares will be redeemed at the greater of (a) the fair market
value, as defined, or (b) the initial purchase price, plus unpaid dividends and
interest, if any. At the Company's option, the shares may be redeemed with cash
or a three-year promissory note.
Of the proceeds received from the Series F Shares, $1,050,000 was used to
repay the outstanding principal balance on the note issued on December 29, 1995
to GAIA Holdings, Inc. related to the acquisition of the assets of GAIA. The
Company has an additional 7,500 Series F Shares that are authorized and could be
issued for consideration of $750,000 under the same terms and conditions upon
approval of the holders of existing Series F Shares.
As a result of the financing transactions described above, the Company
believes it has sufficient cash available to finance the Company's operations
during 1996. As shown in the pro forma balance sheet, as of December 31, 1995,
the Company had a pro forma cash balance of $5,902,000, pro forma working
capital of $5,337,000 and pro forma stockholders' equity of $10,505,000.
Depending upon the availability of traditional secured debt financing for both
working capital and capital expenditures, and the amount of cash needed to
consummate future acquisitions, if any, the cash received from these equity
placements could provide operating capital through 1997.
Transactions Relating to Euro Scotia Funding Limited
In April 1993, the Company had invested $2,554,859 with Euro Scotia Funding
Limited (ESF) in exchange for a secured note receivable, which the Company could
call upon thirty days' notice to ESF. Through April 1994,
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<PAGE>
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, 1995, 1994 and
1993, the Company recognized interest income totaling $283,966, $85,832 and
$523,623, respectively, and trading profits for the years ended December 31,
1994 and 1993 totaling $512,312 and $2,169,672, respectively.
Effective December 31, 1994, the Company renegotiated the terms of the note
receivable from ESF. Under the new agreement, ESF was to repay the note in ten
semi-annual installments 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 the amounts owed to it by the
Company for borrowings under the line of credit agreement and for services
rendered. At December 31, 1994, the face value of the original note plus
accrued interest receivable totaled $3,278,857, borrowings under the line of
credit plus accrued interest payable totaled $356,473, and amounts owed to ESF
for services totaled $121,621. The net balance of $2,800,763 was reflected on
the consolidated balance sheet at December 31, 1994.
The note was to be collateralized by $3,200,000 in U.S. Treasury
obligations held by a third-party brokerage firm for the benefit of the Company.
ESF had signed an irrevocable power of attorney to the Company giving it the
ability to seize the collateral in the event of a default, provided that such
default was not cured within thirty days after written notice. In addition,
there were irrevocable instructions provided to the brokerage firm stating that
ESF would be allowed to trade the securities constituting the collateral.
However, the securities had to be substituted with U.S. treasuries, and the
value of such securities could not fall below the lesser of $3,200,000 or 110%
of the outstanding principal balance on the note.
The semi-annual payment due January 1996, in accordance with the note
agreement, was not paid by ESF. During the fourth quarter of 1995, the Company
learned 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 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 exercised investment or other authority.
After learning of the lawsuit, the Company unsuccessfully attempted to gain
reliable information about the existence and value of the securities that were
to have been held for the Company's benefit in connection with the ESF note.
Accordingly, as of December 31, 1995, the Company decided to write off the note
receivable of $2,800,763 and accrued interest recognized during 1995 of
$283,966, for a total loss of $3,084,729.
The Company has made demand for payment of the ESF note, in accordance with
the agreement, and is exploring other legal remedies available against ESF and
the brokerage firm charged with holding the collateral for the note.
Acquisitions
During 1995 the Company completed three acquisitions: EET, IPF and GAIA.
The aggregate consideration paid for these acquisitions was (a) 4,737,396 shares
of the Company's Common Stock; (b) $305,500 cash; (c) forgiveness of amounts due
to the Company of $1,881,400; (d) issuance of a 90-day promissory note of
$1,050,000; (e) 71,000 warrants to purchase Company Common Stock; and (f)
assumption of approximately
48
<PAGE>
$194,000 in account payable obligations. In addition, as a result of the
acquisition of EET, the Company advanced cash to EET for it to repay certain
outstanding debt obligations totaling $612,500. The Company also redeemed EET's
outstanding preferred stock of $305,000.
Simultaneous with the acquisition of GAIA, the Company entered into a
Crosstie Purchase Option and Loan Agreement with TieTek, Inc. ("TieTek"), a
newly formed corporation owned by three individuals, two of whom are officers of
the Company's new subsidiary, GAIA Technologies, Inc. Pursuant to this
agreement, the Company is obligated to lend up to $1,500,000 (the "Crosstie
Loan") to TieTek for it to use in the development of an alternative railroad
crosstie manufactured from recycled rubber using GAIA's patented and proprietary
technologies. Amounts advanced to TieTek bear interest at 10% and are due two
years after the earlier of (a) the date on which the Company provides notice to
TieTek that it will not exercise its option to purchase all the capital stock of
TieTek (the "Crosstie Purchase Option"), or (b) the expiration of the Crosstie
Purchase Option Period, which is a two-year period unless extended by one year
upon the occurrence of certain events. The consideration for acquiring TieTek
utilizing the Crosstie Purchase Option would be the forgiveness of all the then-
outstanding indebtedness under the Crosstie Loan and payment of certain
royalties based on certain products sold by TieTek over a fifteen-year period.
As of December 31, 1995, the Company had advanced $220,000 under the Crosstie
Loan. The Crosstie Loan is collateralized by a pledge of, and a lien on, all of
TieTek's assets and capital stock, and 666,667 shares of the Company's Common
Stock.
Other
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.
The Company entered into an agreement with its former Chairman of the Board
in July 1995, as amended in December 1995, which provides for, among other
things, a payment of $250,000 in settlement of his five-year employment
contract, payable in bi-weekly installments of $11,538 beginning in January
1996. The outstanding balance was repaid in full in April 1996.
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.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121). SFAS No.
121 requires, among other things, that impairment losses on assets to be held
and gains or losses from assets that are expected to be disposed of be included
as a component of income from continuing operations. The Company adopted SFAS
No. 121 in the first quarter of 1996, and its implementation did not have a
material effect on the consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" (APB No. 25) for all
arrangements under which employees receive shares of stock or other equity
investments of the employer or the employer incurs liabilities to employees in
amounts based on the price of its stock. The Company does not anticipate
adopting the fair value method encouraged by SFAS No. 123 and will continue to
account for such transactions in accordance with APB No. 25. Beginning with the
1996 Annual Report on Form 10-KSB the Company will be required to provide
additional disclosure providing proforma effects as if the Company had elected
to adopt SFAS No. 123.
49
<PAGE>
RESULTS OF OPERATIONS
Analysis Of Years Ended December 31, 1995 ("1995") And December 31, 1994
- ------------------------------------------------------------------------
("1994")
- --------
The total net loss for 1995 of $7,340,000 reflects an increase of
$2,404,000 from the 1994 net loss of $4,936,000. This increase in net loss
occurred despite an increase in revenues and gross profits due to an increase in
selling, general and administrative expenses and an increase in other expenses.
Specifically, revenues increased $697,000, generating an increase in gross
profits of $131,000; selling, general and administrative expenses increased
$1,313,000; research and development expenses decreased $910,000; and other
expenses increased $2,249,000, each as described in detail below.
Revenues
The increase in revenues of $697,000 in 1995 reflects increased sales
volume by both IPF and EET. IPF's growth in monthly shipments is reflected in
its revenue increase of $400,000. EET contributed to the balance of the revenue
growth by increasing sales of its services $297,000 in 1995. Revenue increases
are attributable to increased marketing efforts undertaken in 1995 by each of
the Company's principal operating units. Prices for the Company's products and
services remained stable during 1995. The Company expects revenues to increase
significantly in 1996 due to the commencement in the first quarter of commercial
sales of GAIA's air conditioning condenser support pads and increased management
attention to marketing now that the Company's business restructuring is
substantially complete. While market acceptance of the support pad is
encouraging, such revenues may be limited by plant capacity. Furthermore, the
Company's revenues from its TechXtract/TM/ Process remain subject to
uncertainties caused by the difficulties associated with the project nature of
its past business strategy and with marketing to governmental units such as the
Department of Energy. As a result, the Company is evaluating additional
opportunities for commercial revenues of the TechXtract/TM/ Process.
Gross Profit
Although revenues increased 36%, the gross profit percentage decreased from
41% in 1994 to 35% in 1995. This decrease in gross profit was due primarily to
lower margins experienced earlier in 1995 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 Expenses
Selling, general and administrative expenses increased $1,313,000 during
1995 compared with 1994 primarily as a result of the effect of increased legal
fees, the expenses associated with the management restructuring completed in
1995, and the addition of new officers to the Company, each as described below.
Legal fees increased $550,000 in 1995, reflecting the effect of increased
outside counsel costs and other direct expenses associated with management's
decision to actively pursue the resolution of several outstanding lawsuits,
including the arbitration hearings that concluded in February 1996 relating to
Bio Trace International, Inc. and the activity early in 1995 relating to the
lawsuit against a former officer and director of the Company. Neither of these
lawsuits should contribute significantly to legal expenses in 1996. Another
factor for the increase in fees relates to the acquisition of EET and IPF.
Since each acquisition was accounted for as a pooling of interest, all related
costs were expensed in the consolidated statement of loss for 1995.
Restructuring costs contributed to an increase of $500,000 in 1995. This
consisted of the one-time accruals and/or payments for the following: (a)
$250,000 for settlement of the five-year employment contract of the former
Chairman of the Company; (b) $100,000 in severance costs for seven employees no
longer with the Company; (c) $50,000 in facility closing costs or for the
termination of equipment rental contracts; and (d) $100,000 in consulting
contracts and related expenses that were terminated in 1995.
50
<PAGE>
The Company also employed two new officers in late March and early April
1995. Including relocation costs and prorated salary amounts, the addition of
these employees accounted for an increase of approximately $250,000 in 1995.
Research and Development Expenses
Research and development expenses decreased $910,000 in 1995 due primarily
as a result of decreased lab testing fees and the termination or completion of
various consulting arrangements. Research and development expenses should
continue to decrease in 1996 to reflect management's focus on the
commercialization of its existing products. However, the Company is expecting
to spend in excess of $350,000 a year on research and development to support the
Company's technologies.
Other Income and Expense
Other income and expense increased from expense of $864,000 in 1994 to
expense of $3,112,000 in 1995. This was primarily due to the write-off of the
ESF note receivable and related accrued interest totaling $3,804,729 and the
related decrease in investment income from $512,000 to $0 for the same periods.
See "Liquidity and Capital Resources" for discussion relating to the ESF note
receivable.
Discontinued Operations
Discontinued operations for 1994 reflect the results of operations for the
analytical services division of EET which was discontinued in July 1994.
Accordingly, no loss from discontinued operation was incurred in 1995.
Analysis of Years Ended December 31, 1994 ("1994") And December 31, 1993
- ------------------------------------------------------------------------
("1993")
- --------
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 loss occurred
despite increased revenues and gross profits and decreased expenses due to the
significant decrease in other income. Specifically, revenues increased
$1,677,000, generating an increase in gross profits of $700,000; expenses
decreased $15,000; other income decreased $4,025,000; and loss from discontinued
operations increased $124,000. These changes are addressed individually below.
Revenues and Gross Profit
The increase of $1,677,000 in 1994 reflects increased revenues from a full
year of operations of EET in 1994 compared with only four months in 1993, and
the operations of IPF which began its business in January 1994. The increase in
sales volume from 1993 to 1994 generated an increase in gross profit for 1994 of
$700,000. The gross profit percentage increased from 35% in 1993 to 41% in
1994, reflecting improved margins from EET during its first full year of
operations.
Expenses
Expenses decreased $15,000 in 1994, consisting of an increase in selling,
general and administrative expenses of $305,000 and a decrease in research and
development expenses of $320,000.
Other Income and Expense
Other income and expense decreased $4,025,000 from income of $3,161,000 in
1993 to expense of $864,000. Of this decrease, (a) $2,068,000 can be attributed
to a reduction in investment income and interest income relating to the
Company's investment with ESF, as discussed under Liquidity and Capital
Resources; (b) $1,200,000 relates to the change from recognition of $600,000
income in 1993 from the sale of marketing rights to the recognition of $600,000
as write-off of investment in 1994 when the stock received in consideration for
the
51
<PAGE>
marketing rights was determined to be worthless; and (c) $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 to a loss of $116,000 in
1994, compared to a gain of $7,000 in 1993.
Analysis of Three Months Ended March 31, 1996 and March 31, 1995
- ----------------------------------------------------------------
The results of operations for the three months ended March 31, 1995 has
been restated to include the historical financial results of Industrial Pipe
Fittings, Inc. ("IPF") which was acquired on June 30, 1995 in a transaction
accounted for as a pooling-of-interests. See also the Notes to the Consolidated
Financial Statements.
Revenues
Revenues increased $290,000 for the three-month period ended March 31,
1996. This increase is the result of the revenues generated from new product
lines of GAIA (air-conditioner condenser support pads and porous pipe) and IPF
(tapping saddles).
Shipments of GAIA's products began in February 1996. Initial market
reaction to the support pads has been encouraging. However, revenues from the
support pads were limited during the first quarter by the production
capabilities of the new manufacturing line. Management believes these start-up
issues will be corrected in the near term and that production rates should meet
design rates as those problems are solved.
The increase in revenue from GAIA and IPF was partially offset by a decline
in EET's extraction revenue due to the postponement of several projects. These
projects are expected to begin in subsequent quarters.
Gross Profit
The gross profit percentage for the three months ended March 31, 1996
decreased to 31% from 34% for the same period of the previous year. This
decrease occurred primarily because of the costs arising from the increased
manufacturing capacity at IPF and the start-up costs related to its fabricated
fittings business. The manufacturing facilities were expanded during the first
quarter and a new YTL machine was purchased and installed in January 1996.
IPF's gross profit percentage is expected to increase in the future as sales
increase to absorb the excess capacity currently available at their facilities.
Selling, general and administrative
Selling, general and administrative expense for the three-month period
ended March 31, 1996 increased approximately $135,000 over the same period for
the previous year, primarily as a result of the selling, general and
administrative expenses of GAIA, which were over $200,000 for the quarter and
were not included in prior financial statements of the Company since it was
acquired on December 29, 1995 using the purchase method of accounting. The
increase in expenses relating to GAIA was offset by a decline of approximately
$60,000 in the Company's corporate expenses, caused primarily by a decrease in
legal and professional fees.
Research and development
Research and development expense for the three-month period ended March 31,
1996 decreased $169,000 from the same period of the previous year. This is
primarily the result of the completion or termination of various consulting
arrangements during the first quarter of 1995.
52
<PAGE>
Other income and expense
Other expense increased $105,000 for the three months ended March 31, 1996
compared with the same period of the previous year. This is primarily the
result of increased interest expense arising from the $2,700,000 13.5%
convertible subordinated debenture and the $1,050,000 note incurred from the
acquisition of GAIA. Neither of these obligations were outstanding during the
first quarter of 1995. The convertible subordinated debentures and related
warrants were surrendered on April 8, 1996 in exchange for 27,000 shares of
Series F convertible preferred stock and warrants to purchase 2,700,000 shares
of Company common stock, while the $1,050,000 was repaid in April 1996 from the
proceeds received from the issuance of the Series F preferred stock. See Notes
to the Consolidated Financial Statements.
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 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, 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.
53
<PAGE>
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 45 Chief Executive Officer, President and
Director of the Company; Director of NAE
Donovan W. Boyd 43 Senior Vice President, Chief Operating
Officer, and Director of the Company;
Director of NAE
David M. Daniels 39 Executive Vice President, Secretary and
Director of the Company; and President of IPF
William T. Aldrich 64 Executive Vice President of GAIA and Director
of the Company
Judith Knight Shields 39 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. At the
Annual Meeting the Company is submitting to its stockholders a proposal to
divide the directors into three classes, each of which will serve for a term of
three years. 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 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
54
<PAGE>
over $100 million in revenue with 40 locations nationwide, EnClean was bought by
and merged into Rust Industries in 1992.
Mr. Tarrillion holds an MBA from Harvard University and a Master's Degree
and Bachelor's 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 joining 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 Bachelor's Degree in Finance from the University of Houston as well as
an Associate's Degree from Georgia Military Academy.
WILLIAM T. ALDRICH
Mr. Aldrich was elected to the Board of Directors on May 14, 1996, and
currently holds the position of Executive Vice President of GAIA Technologies,
Inc., a subsidiary of the Company. Mr. Aldrich is also the President of Thor
Ventures, L.C., a research and development firm (1993 to present), and the
President of WTA Enterprises, Inc., a personal holding company (1977 to
present). In addition, Mr. Aldrich is the President of TieTek, Inc., a
privately held company developing a railroad crosstie made from a recycled
rubber composite (October 1995 to present). Mr. Aldrich was the President of
Caravelle Petroleum, Inc. from April 1978 to December 1993. In April 1993,
Caravelle Petroleum, Inc. sought protection under Chapter 11 of the Bankruptcy
Code. A plan of reorganization was approved and fully implemented in August
1993.
JUDITH KNIGHT SHIELDS
Ms. Judith Knight Shields joined the Company in March 1995. Ms. Shields
currently holds the positions 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 of 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 Bachelor's 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.
55
<PAGE>
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."
56
<PAGE>
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
====================================================================================================================================
Annual Compensation Long-Term 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 - - - 300,000 - -
and Director 1993 - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Tim B. Tarrillion(4) 1995 146,537 - 25,000(5) - 500,000 - -
Chief Executive Officer, 1994 - - - - - - -
President and Director 1993 - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
David M. Daniels(6) 1995 130,529 - - - 200,000 - -
Executive Vice President, 1994 125,000 - - - 300,000 - -
Secretary and Director 1993 60,000 - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Donovan W. 1995 98,655(7) - - - 300,000 - 26,417(8)
Boyd 1994 - - - - - - -
Senior Vice 1993 - - - - - - -
President, COO
- ------------------------------------------------------------------------------------------------------------------------------------
Judith K. 1995 92,308(9) - - - 300,000 - -
Shields 1994 - - - - - - -
Senior Vice 1993 - - - - - - -
President-Finance
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 $15,000 a month for consulting services in August through
December 1995.
(4) Mr. Tarrillion became Chief Executive Officer, President and a Director of
the Company on March 7, 1995.
(5) Payments received in January and February 1995 as a consultant to the
Company.
(6) Mr. Daniels became a Director during August 1994 and became an Executive
Vice President and Secretary of the Company during January 1995.
(7) Mr. Boyd's employment began on April 1, 1995.
(8) Payments made to relocate Mr. Boyd to Houston, Texas.
(9) Ms. Shield's employment began on March 20, 1995.
57
<PAGE>
STOCK OPTIONS
The following table sets forth for each of the named executive officers
regarding the grant of stock options by the Company in the 1995 fiscal year and
their potential realizable values. No stock appreciation rights have been
granted to employees.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Option Grants in the 1995 Fiscal Year
- --------------------------------------------------------------------------------------------------
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
% of
No. of Total
Securities Options
Underlying Granted to Exercise
Options Employees or Base
Granted in Fiscal Price Expiration 5% (Price 10% (Price
Name (#) Year ($/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 M. 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 $16,900,000 for all stockholders. The purpose
of providing this information is to indicate the total potential
stockholder gain over the term of the options comparable to the potential
gain shown for the options.
58
<PAGE>
The following table sets forth for each of the named executive officers
information regarding stock options exercised by such officers during the 1995
fiscal year, together with the number and value of stock options held at 1995
fiscal year-end, each on an aggregated basis.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Aggregated Option Exercises in the 1995 Fiscal Year
and Fiscal Year-End Option Value
- ------------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year-End Fiscal Year-End/1/
Number of --------------- -------------------
Shares Acquired Value
Name on Exercise Realized Exercisable/ Exercisable/
Unexercisable Unexercisable
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John Parrott -- -- 300,000/0 --
Tim B. Tarrillion -- -- 0/500,000 --
David M. Daniels -- -- 120,000/380,000 --
Donovan W. Boyd -- -- 0/300,000 --
Judith K. Shields -- -- 0/300,000 --
- ----------------------------------------------------------------------------------
</TABLE>
- ----------------------
/1/ Market value of underlying securities at year-end ($.53), minus the
exercise price.
59
<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.
Mr. Aldrich has an employment agreement with GAIA Technologies, Inc.
providing for an annual salary of $90,000 and an annual bonus at the discretion
of the Board of Directors.
STOCK OPTIONS AND WARRANTS
The Company presently has no formal stock option plan. However, through
December, 1995 the Company has granted options to purchase 3,550,000 shares of
the Company's common stock to current and former employees. These options have
prices ranging from $1.00 to $2.50, vest 20% to 25% per year, and have terms
ranging from four to five years after vesting. 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. The Company
also has outstanding warrants to purchase 71,000 shares of the Company's Common
Stock that were issued in connection with the merger with EET, Inc. in 1995.
These warrants have an exercise price of $1.50 and expire on December 31, 1999.
Of these warrants, 50,000 are issued to a director and officer of the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF THE COMPANY AND NAE
Certain Beneficial Owners
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 and
Series F Preferred Stock as of May 20, 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
COMMON STOCK
- -----------------------------------------------------------------------------------------------
Amount and Nature of Percentage
Name and Address of Beneficial Owner Beneficial Ownership of Class(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
NationsBanc 10,000,000 28.7
Capital Corporation(2)
901 Main Street
- -----------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
66th Floor
Dallas, Texas 75202
- -----------------------------------------------------------------------------------------------
Robert H. Chaney(3) 2,500,000 9.1
R. Chaney & Partners, 1993 L.P.
909 Fannin, Suite 1275
Two Houston Center
Houston, Texas 77010-1006
- -----------------------------------------------------------------------------------------------
Gold Spinners International, Inc. (4) 2,750,000 11.1
5201 S. Mission Road
Mt. Pleasant, Michigan 48858
- -----------------------------------------------------------------------------------------------
The CCG Charitable 1,500,000 5.7
Remainder Unitrust #1
14450 T.C. Jester Boulevard
Suite 170
Houston, Texas 77014
- -----------------------------------------------------------------------------------------------
William T. Aldrich(5) 1,666,667 6.7
10406 Memorial Drive
Houston, Texas 77024
- -----------------------------------------------------------------------------------------------
- ---------------------------
</TABLE>
(1) Calculated in accordance with the General Rules and Regulations of the
Securities and Exchange Commission, and includes shares of Common Stock
which can be acquired upon exercise of conversion of outstanding options,
warrants or other convertible securities (such as the Series F Preferred
Stock) which are exercisable within sixty days of May 20, 1996.
(2) Includes 5,000,000 shares of Common Stock issuable upon conversion of
shares of Series F Preferred Stock and 5,000,000 shares of Common Stock
which may be acquired upon exercise of Common Stock purchase warrants.
(3) Includes 1,250,000 shares of Common Stock issuable upon conversion of
shares of Series F Preferred Stock and 1,250,000 shares of Common Stock
which may be acquired upon exercise of Common Stock purchase warrants.
(4) Of these shares, 1,625,000 are "contingent escrow shares" which may be
canceled 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.
(5) Includes 1,666,667 shares of Common Stock owned by Thor Ventures, L.C. and
GAIA Holdings, Inc. Of these shares, WTA Enterprises, a closely held
corporation controlled by Mr. Aldrich, owns 397,633 shares, of which Mr.
Aldrich owns of record 218,698 shares and his wife, Natalie B. Aldrich, his
son, Jeffrey B. Aldrich and his daughter, Amy A. Norman own the remaining
178,935 shares. Mr. Aldrich disclaims any beneficial ownership of
1,447,969 shares of the 1,666,667 shares owned by Thor Ventures, L.C. and
GAIA Holdings, Inc.. Does not include stock options to purchase 200,000
shares of Common Stock which have not yet vested.
<TABLE>
<CAPTION>
SERIES F PREFERRED STOCK
- ------------------------------------------------------------------------------------------------
Amount and Nature of Percentage
Name and Address of Beneficial Owner Beneficial Ownership of Class
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
NationsBanc Capital Corporation 50,000 54.1
901 Main Street
66th Floor
Dallas, Texas 75202
- ------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert H. Chaney 12,500 13.5
R. Chaney & Partners, 1993 L.P.
909 Fannin, Suite 1275
Two Houston Center
Houston, Texas 77010-1006
- ------------------------------------------------------------------------------------------------
CCG Venture Partners, LLC 7,500(1) 8.1
14450 T.C. Jester Boulevard
Suite 170
Houston, Texas 77010-1006
- ------------------------------------------------------------------------------------------------
Harrison Interests, Ltd. 5,000 5.4
Texas Commerce Bank Bldg.
Suite 1900
Houston, Texas 77002
================================================================================================
- -----------------------
</TABLE>
(1) Registered in the name of The CCG Charitable Remainder Unitrust No. 1 for
which CCG Venture Partners, LLC provides investment management services.
CCG Venture Partners, LLC disclaims beneficial ownership of these shares.
62
<PAGE>
Ownership by Officers, Directors and Nominees for Director
The following table sets forth the beneficial ownership of all of the
Company's outstanding Common Stock as of May 20, 1996, by all officers and
directors and nominees for director, individually and as a group.
<TABLE>
<CAPTION>
===============================================================================
Ownership by Officers, Directors and Nominees for Director
- -------------------------------------------------------------------------------
Amount and Nature Percentage
Name and Address of Beneficial Owner of Beneficial Ownership of Class(1)
- -------------------------------------------------------------------------------
<S> <C> <C>
Tim B. Tarrillion(2) 881,630 3.5
10102 Cedar Creek
Houston, Texas 77042
- -------------------------------------------------------------------------------
Donovan W. Boyd(3) 150,000 Less than 1%
4014 N. Beechwood Court
Houston, Texas 77059
- -------------------------------------------------------------------------------
David M. Daniels(4) 915,000 3.6
5717 Hogue Street
Houston, Texas 77087
- -------------------------------------------------------------------------------
Robert H. Chaney(5) 2,500,000 9.1
R. Chaney & Partners, 1993 L.P.
909 Fannin, Suite 1275
Two Houston Center
Houston, Texas 77010
- -------------------------------------------------------------------------------
Mark E. Leyerle(6) 1,500,000 5.7
14450 T.C. Jester Boulevard
Suite 170
Houston, Texas 77014
- -------------------------------------------------------------------------------
Douglas C. Williamson(7) 0 0
901 Main Street
66th Floor
Dallas, Texas 75202
- -------------------------------------------------------------------------------
Edwin H. Knight(8) 0 0
707 Travis
Suite 1900
Houston, Texas 77002
- -------------------------------------------------------------------------------
Christopher Roser(9)
1105 Spruce Street 1,000,000 3.8
Boulder, Colorado 80302
- -------------------------------------------------------------------------------
William T. Aldrich(10) 1,666,667 6.7
10406 Memorial Drive
Houston, Texas 77024
- -------------------------------------------------------------------------------
All officers, directors and nominees 8,780,797 28.6
for director, as a group (10 persons)
===============================================================================
- ---------------------
</TABLE>
(1) Based upon 24,900,632 shares outstanding at May 20, 1996. Calculated in
accordance with the General Rules and Regulations of the Securities and
Exchange Commission, and includes shares of Common Stock which can be
acquired upon exercise or conversion of outstanding options, warrants and
shares of Series F Preferred Stock which are exercisable or convertible
within 60 days of May 20, 1996.
63
<PAGE>
(2) 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 300,000 of the 500,000 shares of the Company's Common
Stock which have not yet vested and 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.
(3) Includes options to purchase 150,000 shares of the Company's Common Stock
which have vested. Does not include options to purchase 150,000 shares of
the Company's Common Stock which have not vested.
(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 230,000 shares of the Company's Common Stock.
(5) Includes 1,250,000 shares of Common Stock issuable upon conversion of
shares of Series F Preferred Stock and 1,250,000 shares of Common Stock
which may be acquired upon exercise of Common Stock purchase warrants.
(6) Includes 750,000 shares of Common Stock issuable to The CCG Charitable
Remainder Unitrust No. 1 upon conversion of shares of Series F Preferred
Stock and 750,000 shares of Common Stock which may be acquired by The CCG
Charitable Remainder Unitrust No. 1 upon exercise of Common Stock purchase
warrants. CCG Venture Partners, LLC provides investment management
services to CCG Charitable Remainder Unitrust No. 1. Mr. Leyerle, a
principal of CCG Venture Partners, LLC, disclaims any beneficial ownership
of these shares.
(7) Does not include 5,000,000 shares of Common Stock issuable to NBCC upon
conversion of shares of Series F Preferred Stock and 5,000,000 shares of
Common Stock which may be acquired by NBCC upon exercise of Common Stock
purchase warrants.
(8) Does not include 500,000 shares of Common Stock issuable to Harrison
Interests, Ltd. upon conversion of shares of Series F Preferred Stock and
500,000 shares of Common Stock which may be acquired by Harrison Interests,
Ltd. upon exercise of Common Stock purchase warrants.
(9) Includes 500,000 shares of Common Stock issuable to The Roser Partnership
II Ltd. upon conversion of shares of Series F Preferred Stock and 500,000
shares of Common Stock which may be acquired by The Roser Partnership II
Ltd. upon exercise of Common Stock purchase warrants. Mr. Roser, a general
partner of The Roser Partnership II Ltd., disclaims beneficial ownership of
these shares.
(10) Includes 1,666,667 shares of Common Stock owned by Thor Ventures, L.C. and
GAIA Holdings, Inc. Of these shares, WTA Enterprises, a closely held
corporation controlled by Mr. Aldrich, owns 397,633 shares, of which Mr.
Aldrich owns of record 218,698 shares and his wife, Natalie B. Aldrich, his
son, Jeffrey B. Aldrich and his daughter, Amy A. Norman own the remaining
178,935 shares. Mr. Aldrich disclaims any beneficial ownership of
1,447,969 shares of the 1,666,667 shares owned by Thor Ventures, L.C. and
GAIA Holdings, Inc. Does not include stock options to purchase 200,000
shares of Common Stock which have not yet vested.
64
<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
$42,800 from GSI. During 1993, the Company repaid $40,000 of the advances and
was advanced an additional $281,382, resulting in aggregate unpaid advances of
$284,182. 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. This amount was repaid
in April 1996, including accrued interest of $7,000.
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 oustanding balance of such loans at December 31,
1995 was $120.00. Mr. Daniels was repaid the $120,000 by Mr. Tarrillion. IPF
then executed a note in the amount of $120,000 due to Mr. Tarrillion. The note
bears interest at 12% per annum and is due January 31, 1997. Further, Mr.
Daniels entered into an amendment to his existing employment agreement with the
Company to serve as President of IPF.
65
<PAGE>
In December 1995, the Company purchased assets from GAIA Holdings, Inc.
and/or Thor Ventures, L.C., for $2.5 million cash plus 1,666,667 shares of
Common Stock of the Company (restricted) plus certain future royalties. Mr.
Aldrich is a director of GAIA Holdings, Inc. and the President of Thor Ventures,
L.C.
The Company has employment agreements with Messrs. Tarrillion, Boyd,
Daniels and Aldrich, and Ms. Shields. See "MANAGEMENT OF THE COMPANY AND NAE -
Employment Agreements."
The Company has granted certain options and warrants to directors and
officers of the Company. See "MANAGEMENT - Stock Options and Warrants."
LEGAL OPINIONS
Buchanan Ingersoll Professional Corporation 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.
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.
66
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
North American Technologies Group, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of North American
Technologies Group, Inc. as of December 31, 1995 and 1994, and the related
consolidated statements of loss, stockholders' equity and cash flows for the
each of the three years in the period ended December 31, 1995. 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of North
American Technologies Group, Inc. at December 31, 1995 and 1994, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Houston, Texas
March 14, 1996
(Except for Notes 7(a), 8(a)
and 20, which are as of
April 8, 1996)
F-1
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
PRO FORMA
1995 1995 1994
------------- ------------- -------------
ASSETS (Note 20)
------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents.................................. $ 5,902,076 $ 333,326 $ 3,266,518
Certificates of deposit (Note 17).......................... 200,000 200,000 -
Accounts receivables, less allowance for
doubtful accounts of $34,000 and $30,000................. 626,146 626,146 501,328
Inventories (Note 3)....................................... 329,902 329,902 64,254
Prepaid expenses and other................................. 374,623 374,623 101,476
------------ ------------ ------------
Total Current Assets..................................... 7,432,747 1,863,997 3,933,576
Note Receivable (Note 4).................................... 248,967 248,967 2,800,763
Property and Equipment, Less Accumulated
Depreciation (Note 5)...................................... 1,401,634 1,401,634 592,858
Patents and Purchased Technologies, Less Accumulated
Amortization of $155,361 and $75,000....................... 1,224,777 1,224,777 175,000
Goodwill, Less Accumulated Amortization of $55,553
and $31,744................................................ 2,576,481 2,576,481 444,422
Other Intangible Assets, Less Accumulated
Amortization of $38,900 and $16,145........................ 144,872 144,872 62,627
Other (Note 6).............................................. 423,991 423,991 181,431
------------ ------------ ------------
$ 13,453,469 $ 7,884,719 $ 8,190,677
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Short-term borrowings (Note 7)............................. $ 61,658 $ 1,111,658 $ 300,000
Current maturities of long-term debt (Note 8).............. 264,396 264,396 562,500
Notes payable to stockholders (Note 9)..................... - - 213,302
Accounts payable........................................... 974,400 974,400 692,998
Accrued expenses (Note 9).................................. 795,506 895,506 580,122
------------ ------------ ------------
Total Current Liabilities................................ 2,095,960 3,245,960 2,348,922
Long-term Debt, Less Current Maturities (Note 8)............ 835,461 3,535,461 500,000
Minority interest (Note 10)................................. 16,488 16,488 334,312
------------ ------------ ------------
Total Liabilities........................................ 2,947,909 6,797,909 3,183,234
------------ ------------ ------------
Commitments and Contingencies (Note 17)
Stockholders' Equity (Note 11):
Preferred stock, $.001 par value, 10,000,000
shares authorized; 30 and 80 shares issued............... 10,168,750 750,000 -
Common stock, $.001 par value, 50,000,000 shares
authorized; 23,927,285 and 18,692,489 shares issued...... 23,927 23,927 18,692
Additional paid-in capital................................. 20,270,015 20,270,015 17,613,667
Deficit.................................................... (19,794,812) (19,794,812) (12,454,572)
Treasury stock, at cost, 450,000 and 803,000 shares........ (16,488) (16,488) (32,312)
Less notes receivable for sale of stock.................... (145,832) (145,832) (138,032)
------------ ------------ ------------
Total Stockholders' Equity............................... 10,505,560 1,086,810 5,007,443
------------ ------------ ------------
$ 13,453,469 $ 7,884,719 $ 8,190,677
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF LOSS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................. $ 2,642,735 $ 1,945,697 $ 269,073
Cost of revenues..................................... 1,716,715 1,151,056 174,928
----------- ----------- -----------
Gross profit...................................... 926,020 794,641 94,145
----------- ----------- -----------
Expenses:
Research and development expenses................... 595,771 1,506,073 1,826,089
Selling, general and administrative expenses........ 4,557,949 3,244,858 2,940,041
----------- ----------- -----------
Total expenses....................................... 5,153,720 4,750,931 4,766,130
----------- ----------- -----------
Operating loss.................................... (4,227,700) (3,956,290) (4,671,985)
----------- ----------- -----------
Other Income (Expense):
Investment income (Note 4).......................... - 512,312 2,169,672
Interest income (Note 4)............................ 354,665 112,897 523,623
Interest expense.................................... (157,725) (121,986) (37,102)
Minority interest in net loss (income)
of subsidiary (Note 2)............................ (5,432) (22,532) 182,009
Equity in net (loss) income of affiliates (Note 6).. (231,712) 50,000 (233,846)
Sale of marketing rights (Note 12).................. - - 600,000
Loss on write-off of investments (Notes 4 and 12)... (3,084,729) (600,000) -
Loss on abandonment of mining property (Note 13).... - (794,314) (43,251)
Other............................................... 12,393 - -
----------- ----------- -----------
Total Other Income (Expense)......................... (3,112,540) (863,623) 3,161,105
----------- ----------- -----------
Loss From Continuing Operations...................... (7,340,240) (4,819,913) (1,510,880)
----------- ----------- -----------
Discontinued Operations (Note 14)
Revenues............................................ - 291,588 138,975
Costs of services rendered.......................... - 408,005 131,597
----------- ----------- -----------
Gain (Loss) from Operations of Discontinued Segment.. - (116,417) 7,378
----------- ----------- -----------
Net Loss............................................. $(7,340,240) $(4,936,330) $(1,503,502)
=========== =========== ===========
Net Loss Per Share................................... $(.40) $(.35) $(.25)
=========== =========== ===========
Weighted Average Number of Common
Shares Outstanding.................................. 18,199,474 13,994,515 5,986,711
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Preferred Common Stock
-------------------- --------------------
Shares Amount Shares Amount
-------- -------- --------- --------
<S> <C> <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, 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-4
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Additional Notes
Paid-In Treasury Stock Receivable
-------------------------
Capital Deficit Shares Amount Stockholders 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 notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Preferred Common Stock
------------------ -------------------------
Shares Amount Shares Amount
------- ------- ------------- -------
<S> <C> <C> <C> <C>
Interest on notes receivable from stockholders................. - $ - - $ -
Sale of EET shares (40lk) paln................................. - - 12,343 12
Sale of common stock........................................... - - 3,009,280 3,010
Issuance of common stock upon conversion
of series A, B and C convertible
preferred stock........................................... (80) - 424,506 424
Issuance of common stock from treasury......................... - - - -
Cancellation of treaasury stock................................ - - (3,000) (3)
Stock issued for compensation.................................. - - 125,000 125
Stock issued for purchase of GAIA.............................. - - 1,666,667 1,667
Issuance of Series D preferred stock........................... 30 750,000 - -
Net loss for the year.......................................... - - - -
------- ------- ------------- -------
BALANCE, December 31, 1995..................................... 30 750,000 23,927,285 23,927
======= ======= ============= =======
</TABLE>
F-6
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Additional Notes
Paid-In Treasury Stock Receivable
-------------------------
Capital Deficit Shares Amount Stockholders Total
-------------- --------------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
$ - $ - - $ $ (7,800) $ (7,800)
12,285 - - - - 12,297
2,094,276 - - - 2,097,286
(424) - - - - -
- - (350,000) 12,824 - 12,824
(2,997) - (3,000) 3,000 - -
54,875 - - - - 55,000
498,333 - - - - 500,000
- - - - - 750,000
- (7,340,240) - - - (7,340,240)
----------- ------------ -------- -------- --------- -----------
$20,270,015 $(19,794,812) 450,000 $(16,488) $(145,832) $1,086,810
=========== ============ ======== ======== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(7,340,240) $(4,936,330) $(1,503,502)
Adjustments to reconcile net loss to
net cash used in operating activities:
Stock received in exchange for sale
of marketing rights................................ - - (600,000)
Equity in net loss of joint venture
and minority interest of subsidiary................ 231,712 - (182,009)
Depreciation and amortization....................... 283,884 238,609 79,416
Provision for bad debts............................. 78,002 30,000 -
Accrued interest on notes receivable, stockholders.. (7,800) (8,032) -
Stock issued for services........................... 55,000 31,260 -
Loss on abandonment of mining properties............ - 794,315 43,251
Loss on write-off of investment..................... - 600,000 -
Loss on write-off of note receivable................ 3,084,729 - -
Changes in assets and liabilities, net of
purchase of GAIA:
Accounts receivable................................ (199,820) 37,064 (16,847)
Inventories........................................ (248,401) - -
Prepaid expenses and other current assets.......... (187,876) 8,068 (52,491)
Other assets....................................... (201,304) (11,327) (6,670)
Accounts payable and accrued expenses.............. 119,235 362,099 376,430
----------- ----------- -----------
Net cash used in operating activities.......... (4,332,879) (2,854,274) (1,862,422)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of certificates of deposit.................... (200,000) - -
Increase in note receivable............................ (326,217) (130,817) (2,931,580)
Purchase of businesses................................. (2,297,914) - (923,827)
Investment in joint venture............................ (210,829) - -
Collection of notes receivable......................... 106,895 (12,467) 175,000
Purchase of technology and patents..................... (112,608) - (252,703)
Payment of organization costs.......................... - (29,957) (49,136)
Payment for non-compete agreement...................... (105,000) - -
Purchase of property and equipment..................... (294,936) (480,302) (75,331)
----------- ----------- -----------
Net cash used in investing activities............ (3,440,609) (653,543) (4,057,577)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable to stockholder............. 6,698 40,000 350,000
Issuance of common stock............................... 2,109,583 3,623,569 1,754,809
Issuance of preferred stock............................ 750,000 2,024,000 -
Issuance of preferred stock of subsidiary.............. - 15,000 -
Issuance of common stock of subsidiaries............... - - 2,554,859
Purchase of treasury stock............................. - (3,000) -
Line of credit borrowings (repayments)................. (300,000) 634,000 -
Issuance of notes payable and long-term debt........... 3,035,166 724,508 729,782
Repayment of notes payable and long-term debt.......... (456,151) (570,646) (12,500)
Redemption of preferred stock.......................... (305,000) - -
----------- ----------- -----------
Net cash provided by financing activities...... 4,840,296 6,487,431 5,376,950
----------- ----------- -----------
Net increase (decrease) in cash......................... (2,933,192) 2,979,614 (543,049)
Cash and cash equivalents, beginning of year............ 3,266,518 286,904 829,953
----------- ----------- -----------
Cash and cash equivalents, end of year.................. $ 333,326 $ 3,266,518 $ 286,904
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND 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. 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.
During March and June 1995, the Company acquired 100% of the outstanding
stock of EET, Inc. (EET) and Industrial Pipe Fittings, Inc. (IPF). In addition,
in December 1995, the Company acquired certain assets of GAIA Technologies, Inc.
and its affiliates (collectively GAIA) (see Note 2(a)). The acquisition of EET
and IPF were accounted for as pooling-of-interests, and accordingly, the
financial statements have been restated to include the historical financial
results of EET and IPF (see Note 2). In addition, as a result of the acquisition
of EET and IPF, 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.
NATK was incorporated December 24, 1986, in the state of Delaware as Mail
Boxes Coast to Coast (MBCC). Prior to March 1992, MBCC was a franchisee for Mail
Boxes, Etc. USA, Inc. and from inception incurred significant operating losses.
As a result, between March and June 1992, MBCC 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% of the outstanding common
stock of North American Technologies, Inc. (NAT), a company engaged in
developing technologies related to the environmental clean-up industry and
reclamation of natural resources. For accounting purposes, NAT was considered
the continuing entity, and the transactions were accounted for as a
recapitalization of NAT followed by the issuance of new NAT shares of common
stock for the net assets of MBCC.
On January 29, 1993, MBCC changed its name to North American Technologies
Group, Inc. On November 5, 1993, North American Technologies Group, Inc.
acquired the remaining 41.3% minority interest of NAT (see Note 11). This
transaction was recorded at book value of MBCC.
THE COMPANY
The Company and its wholly-owned subsidiaries are engaged in the
development, acquisition and application of technologies which management
believes have applications in various industries. The Company through EET
provides on-site decontamination of buildings and equipment contaminated with
polycholorinated biphenyls, radioactive isotopes or other toxic materials
utilizing EET's patented TechXTract system. IPF manufactures and distributes
proprietary and standard transition products (custom pipe, pipe fittings and
valves). GAIA manufactures and distributes porous pipes used for irrigation
purposes and alternative building materials, such as air-conditioner base pads,
made from recycled rubber and thermoplastic. All other wholly-owned or majority
owned subsidiaries of the Company are not significant or are inactive.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Costs includes material costs, direct labor, and applied overhead.
F-9
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PATENTS AND PURCHASED TECHNOLOGIES
Patents and purchased technologies are stated at cost, less accumulated
amortization. Patent costs and purchased technologies are being amortized by
the straight-line method over their remaining lives, ranging from two to sixteen
years.
INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair market
value of net asset received in business combinations accounted for by the
purchase method. Goodwill is being amortized by the straight-line method over
twenty years. The Company analyzes goodwill periodically to determine whether
any impairment has occurred in the carrying value. Based upon the anticipated
future undiscounted cash flows from operations, in the opinion of Company
management, there has been no impairment.
Other intangible assets are comprised of non-compete agreements and
organization costs and are stated at cost, less accumulated amortization. The
non-compete agreements are being amortized by the straight-line method over the
life of the agreements, seven years. The organization costs are being amortized
by the straight-line method over five years.
INVESTMENT IN JOINT VENTURE
The Company's investment in its 50% 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.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property and equipment are stated at cost. Leasehold improvements are
amortized over the term of the lease. Fixed assets are depreciated by the
straight-line method for financial reporting purposes and accelerated methods
for tax reporting purposes over their estimated useful lives, ranging from three
to fifteen years.
INCOME TAXES
Deferred taxes result from temporary differences between the financial
statement and income tax basis of assets and liabilities (see Note 15). The
Company adjusts the deferred tax asset valuation allowance based on judgments as
to future realization of the deferred tax benefits supported by demonstrated
trends in the Company's operating results.
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.
LOSS PER COMMON SHARE
The loss per common share is computed by dividing the loss 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-10
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
initial maturity of three months or less to be cash equivalents.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121). SFAS No. 121,
requires, among other things, that impairment losses on assets to be held and
gains or losses from assets that are expected to be disposed of, be included as
a component of income from continuing operations. The Company will adopt SFAS
No. 121 in 1996 and its implementation is not expected to have a material effect
on the consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 encourages entities to adopt the fair
value method in place of the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for all
arrangements under which employees receive shares of stock or other equity
investments of the employer or the employer incurs liabilities to employees in
amounts based on the price of its stock. The Company does not anticipate
adopting the fair value method encouraged by SFAS No. 123 and will continue to
account for such transactions in accordance with APB No. 25. However, the
Company will be required to provide additional disclosures beginning in 1996
providing pro forma effects as if the Company had elected to adopt SFAS No. 123.
CONCENTRATION OF CREDIT RISK
At December 31, 1995, the Company's cash in a financial institution
exceeded the federally insured deposit limit by $330,424. The Company extends
credit to its customers in various industries, including petrochemical,
construction, mining, waterworks and environmental, and there is no
concentration of credit risk.
NOTE 2 - ACQUISITIONS
(a) On December 29, 1995, the Company acquired certain tangible and
intangible assets of GAIA Technologies, Inc. and certain affiliates
(collectively GAIA), for a total purchase price of $4,041,500, pursuant to the
purchase agreement dated December 29, 1995. The purchase price was paid as
follows: (1) $2,186,903 in cash; (2) a note payable of $1,050,000; (3) 1,666,667
shares of the Company's common stock; (4) assumption of $194,000 of liabilities;
and (5) transactional costs totalling $111,011. Prior to the closing, the
Company had advanced GAIA $1,881,400 under debt agreements bearing interest at
10%. At closing, the outstanding advances and accrued interest were forgiven as
part of the cash portion of the purchase price. See Note 7 for terms of the note
payable portion of the purchase price. The agreement provides for royalty
payments on certain products sold by the Company for a period of up to 15 years.
The Company is not currently manufacturing any products subject to the royalty
provisions.
F-11
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of the transaction, the Company granted to TieTek, Inc. (TieTek) an
exclusive license to develop the railroad crosstie business using certain
patents and technologies purchased from GAIA and currently owned by the Company.
TieTek is owned by three individuals, two of whom are officers of the Company's
subsidiary, GAIA. The Company has a two year exclusive right and option to
purchase TieTek if the Company satisfies certain funding obligations over the
next two years. The Company entered into a loan agreement to provide TieTek up
to $1,500,000 to be used exclusively for the development of the crosstie
technology. See Note 4 for the terms of the loan agreement.
The GAIA acquisition was accounted for as a purchase, and accordingly, the
purchase price has been allocated to the assets acquired based on their
estimated fair value at the date of acquisition. The excess of the purchase
price over the estimated fair value of the assets acquired has been recorded as
goodwill, which will be amortized over twenty years. The estimated fair value
of assets acquired are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Inventories.................................................. $ 17,249
Accounts receivable.......................................... 3,000
Equipment.................................................... 865,384
Patents and purchased technology............................. 1,000,000
Goodwill..................................................... 2,155,867
----------
$4,041,500
==========
</TABLE>
The operating results of GAIA are not included in the accompanying
statements of loss since the purchase occurred on December 29, 1995. The
following pro forma summary presents the effect on the statements of loss for
the year ended December 31, 1995 and the preceding year, as if the purchase had
occurred at the beginning of 1994, after giving effect to certain adjustments,
including depreciation, amortization, interest expense and legal expense,
penalties and other expense associated with liabilities not assumed.
<TABLE>
<CAPTION>
1995 1994
------------ -------------
<S> <C> <C>
Revenues...................................... $ 2,869,000 $ 2,362,000
=========== ===========
Loss from continuing operations............... $(8,138,000) $(5,889,000)
=========== ===========
Net loss...................................... $(8,138,000) $(6,006,000)
=========== ===========
Net loss per share............................ $ (.45) $ (.43)
=========== ===========
</TABLE>
These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of what would have occurred had the
acquisition been made as of these dates or of results which may occur in the
future.
F-12
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) 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.
The EET and IPF acquisitions were accounted for as a pooling-of-interest,
accordingly, the accompanying consolidated financial statements for the years
ended December 31, 1994 and 1993 have been restated to include the financial
position and operations of EET and IPF.
Operating results of the separate companies for the years prior to the
merger were:
<TABLE>
<CAPTION>
December 31, 1994 1993
----------- ---------------
<S> <C> <C>
Revenue as previously reported............. $ 13,542 $ -
Revenue of EET............................. 1,426,748 269,073
Revenue of IPF............................. 505,407 -
----------- ---------------
$ 1,945,697 $ 269,073
=========== ===============
Net loss as previously reported............ $(4,057,098) $ (1,377,679)
Net loss of EET............................ (880,822) (125,823)
Dividends on EET preferred stock........... (22,532) -
Net income of IPF.......................... 24,122 -
----------- ---------------
$(4,936,330) $ (1,503,502)
=========== ===============
Net loss per share as previously reported.. $ (.37) $(.25)
Effect of EET.............................. .02 -
Effect of IPF.............................. - -
----------- ---------------
$ (.35) $(.25)
=========== ===============
</TABLE>
The dividends on EET preferred stock are reflected as minority interest in
net loss (income) of subsidiary in the consolidated statement of operations for
the years ended December 31, 1995 and 1994.
(c) On August 31, 1993, EET acquired certain assets and assumed certain
liabilities from Enclean, Inc., at a total cost of $923,827. 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 twenty years on a straight-line basis commencing with date of acquisition.
F-13
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVENTORIES
At December 31, 1995 and 1994, inventories consisted of the following:
<TABLE>
<CAPTION>
1995 1994
-------- ----------
<S> <C> <C>
Raw materials................................................................ $ 40,938 $ 25,219
Work-in-process.............................................................. 11,796 17,507
Finished goods............................................................... 277,168 21,528
-------- ----------
$329,902 $ 64,254
======== ==========
</TABLE>
NOTE 4 - NOTES RECEIVABLE
At December 31, 1995 and 1994, notes receivable consisted of the following:
<TABLE>
<CAPTION>
1995 1994
-------- ----------
<S> <C> <C>
Note receivable from Euro Scotia Funding Limited (a)......................... $ - $2,800,763
Note receivable from TieTek (b).............................................. 219,592 -
Other........................................................................ 29,375 -
-------- ----------
$ 248,967 $2,800,763
======== ==========
</TABLE>
(a) In April 1993, the Company had invested $2,554,859 with Euro Scotia
Funding Limited (ESF) in exchange for a secured note receivable, which the
Company could call upon thirty 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, 1995, 1994 and
1993, the Company recognized interest income totalling $283,966, $85,832 and
$523,623, respectively, and trading profits for the years ended December 31,
1994 and 1993, totalling $512,312 and $2,169,672, respectively.
Effective December 31, 1994, the Company renegotiated the terms of the note
receivable from ESF. Under the new agreement, ESF was to repay the note in ten
semi-annual installments 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 the amounts owed to it by the
Company for borrowings under the line of credit agreement (see Note 7(c)) and
for services rendered. At December 31, 1994, the face value of the original
note plus accrued interest receivable totalled $3,278,857, borrowings under the
line of credit plus accrued interest payable totalled $356,473, and amounts owed
to ESF for services totalled $121,621. The net balance of $2,800,763 was
reflected on the consolidated balance sheet at December 31, 1994.
F-14
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The note was to be collateralized by $3,200,000 in U.S. Treasury
obligations held by a third-party brokerage firm for the benefit of the Company.
ESF had signed an irrevocable power of attorney to the Company giving it the
ability to seize the collateral in the event of a default, provided that such
default was not cured within thirty days after written notice. In addition,
there were irrevocable instructions provided to the brokerage firm stating that
ESF would be allowed to trade the securities constituting the collateral.
However, the securities had to be substituted with U.S. treasuries, and the
value of such securities could not fall below the lesser of $3,200,000 or 110%
of the outstanding principal balance on the note.
The semi-annual payment due January 1996, in accordance with the note
agreement was not paid by ESF. During the fourth quarter of 1995, the Company
learned 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 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 information about 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. Accordingly, as of December 31, 1995, the Company decided to write-off
the note receivable of $2,800,763 and accrued interest recognized during 1995 of
$283,966, for a total loss of $3,084,729.
The Company has made demand for payment of the ESF note, in accordance with
the agreement and is exploring its other options against ESF and the brokerage
firm charged with holding the collateral for the note.
(b) On December 29, 1995, the Company, in association with the acquisition
of GAIA (see Note 2(a)), has provided TieTek with a credit facility that allows
TieTek to borrow a maximum of $1,500,000 to be used exclusively for the
development of the crosstie technology. The loan bears interest at 10% and is
due two years after the earlier of (1) the date the Company provides notice that
they will not exercise their option or (2) the expiration of the option period.
The loan is collateralized by TieTek's assets, capital stock and 666,667 shares
of the Company's common stock issued for the purchase of GAIA.
NOTE 5 - PROPERTY AND EQUIPMENT
At December 31, 1995 and 1994, major classes of property and equipment
consist of:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Machinery and equipment....................... $1,433,223 $ 492,855
Automobiles................................... 81,232 60,514
Furniture and fixtures........................ 110,387 131,153
Leasehold improvements........................ 49,032 49,032
---------- ---------
1,673,874 733,554
Less: Accumulated depreciation............... (272,240) (140,696)
---------- ---------
$1,401,634 $ 592,858
========== =========
</TABLE>
F-15
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INVESTMENT IN JOINT VENTURE
Effective January 1, 1995, the Company entered into a joint venture
agreement with a non-affiliated company. The Company has a 50% ownership
interest in the joint venture which is accounted for using the equity method of
accounting and is included in other assets. The joint venture performed a
demonstration project for a major environmental company which documented the
Terrazyme system to be effective in cleaning certain waste streams for recycle
and reuse. In December 1995, the Company suspended any additional funding of
the joint venture pending the results of a current test project and the
development of waste streams sufficient to justify further investment. During
1995, the Company had contributed cash totalling $210,829 and equipment valued
at $200,000. The Company's share of net loss from the joint venture for the
year ended December 31, 1995 totalled $231,712.
The following is a summary of financial position at December 31, 1995, and
results of operations of the joint venture for the year ended December 31, 1995:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Assets:
Current.................................................... $ -
Equipment.................................................. 358,233
----------
$ 358,233
==========
Liabilities:
Current.................................................... $ -
Equity..................................................... 358,233
----------
$ 358,233
==========
Revenues................................................... $ -
Expenses................................................... 463,424
----------
Net loss................................................... $ (463,424)
==========
</TABLE>
The net income (loss) from affiliates totalling $50,000 and $(233,846) for
1994 and 1993, respectively, represents the Company's share of net income (loss)
from a joint venture which was terminated in June 1994.
NOTE 7 - SHORT-TERM BORROWINGS
At December 31, 1995 and 1994, short-term borrowing were as follows:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
12% note payable, due March 1996 (a)......... $1,050,000 $ -
Line of credit (b)........................... - 300,000
Other........................................ 61,658 -
---------- --------
$1,111,658 $300,000
========== ========
</TABLE>
(a) The Company issued the note payable in association with the purchase
of GAIA (see Note 2(a)). The note is due March 28, 1996, including interest at
12% and is collateralized by all assets acquired from GAIA. On March 26,1996, an
amendment to the note was executed to extend the maturity date to April 15,
1996. The note was paid in full upon the issuance of the Series F convertible
preferred stock on April 8, 1996, see Note 20.
F-16
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Borrowings outstanding under EET's $500,000 line of credit with a
bank. The borrowings bear interest at the bank's prime plus 2%. This agreement
was repaid and terminated when the Company acquired EET.
(c) In January 1994, the Company entered into an agreement with ESF which
provided for a line of credit. As additional consideration for the loan, the
Company issued ESF 200,000 shares of common stock with a quoted market price
totalling $650,000. 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 totalling $356,473 against the
note receivable owed to the Company by the lender (see Note 4(a)).
The Company's weighted average short-term borrowing rate for the years
ended December 31, 1995 and 1994 were 10.2% and 10.5%, respectively.
NOTE 8 - LONG-TERM DEBT
At December 31, 1995 and 1994, long-term debt is as follows:
<TABLE>
<CAPTION>
1995 1994
------ -----
<S> <C> <C>
13.5% convertible subordinated debentures
due September 2000 (a)................................................ $2,700,000 $ -
12% convertible note payable, due
January 1996 (b)...................................................... 150,000 -
Convertible debenture, prime rate plus 2%
(10.5% at December 31, 1995), due June
1996 (c).............................................................. 250,000 250,000
8% convertible debenture, due August
1999 (d).............................................................. 500,000 500,000
12% note payable to officer, due January 31, 1997 (e)................... 120,000 -
Note payable, 6%, paid-off in 1995...................................... - 100,000
Note payable, prime plus 2.5%
paid-off in 1995...................................................... - 212,500
Other................................................................... 79,857 -
--------- ----------
3,799,857 1,062,500
Less current maturities................................................. (264,396) (562,500)
-------- --------
$3,535,461 $ 500,000
========== =========
</TABLE>
(a) In September 1995, the Company borrowed $2,700,000 from issuance of
convertible subordinated debentures and stock warrants to acquire 2,700,000
shares of the Company's common stock at an exercise price of $1 per share. The
notes bear interest at 13.5% per annum, which is payable semi-annually beginning
March 1996, 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 holder's option into the Company's common stock at $1.00 per
share, subject to anti-dilution provisions, as defined, any time after September
1996, through the maturity date of September 2000. Any portion of the debt that
has not been converted is due in September 2000. The notes are subordinated to
all existing and future senior indebtedness of the Company.
As part of the closing on the Series F preferred stock in April 1996, the
holders of the subordinated debentures converted the $2,700,000 principal
balance of their notes into 27 shares of Series F convertible preferred stock.
Interest on the subordinated debentures through the closing of $198,000 was paid
prior to the conversion (see Note 20).
F-17
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) In January 1996, the note payable and accrued interest was converted
into 248,131 shares of the Company's common stock in accordance with the
original terms of the agreement. Accordingly, the note has been classified as
long-term at December 31, 1995.
(c) 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.
(d) 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 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.
(e) The note payable to an officer of the Company is unsecured, bears
interest at 12% payable monthly, and is due on January 31, 1997.
NOTE 9 - RELATED PARTY TRANSACTIONS
At December 31, 1995, the Company had accrued $250,000 in settlement of the
former Chairman of the Board's five-year employment agreement. The settlement is
payable in bi-weekly payments of $11,538, beginning January 12, 1996. From July
1995 through December 1995, the former Chairman was a consultant to the Company
and was paid $15,000 a month.
Included in long-term debt at December 31, 1995, is a note payable to an
officer of the Company (see Note 8). The Company incurred no interest expense
on this note for 1995.
At December 31, 1994, notes payable stockholders consisted of various
unsecured notes payable to stockholders of the Company. The notes are due on
demand and bear interest at 8% per annum. Interest expense for the years ended
1995, 1994 and 1993 totalled $10,849, $28,933 and $8,889, respectively.
Simultaneously, with the purchase of GAIA, certain former officers of GAIA
became officers of the Company. In addition, the former stockholders of GAIA
have the right to select an individual as director of the Company. See Notes 7
and 2(a), for note payable and other transactions with GAIA in association with
the purchase of certain assets.
In 1994, $290,000 of notes payable to the stockholders of EET were
converted to preferred stock. In 1995, the preferred stock was redeemed as a
result of the acquisition of EET (see Note 10).
F-18
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - MINORITY INTEREST
The minority interest shown on the consolidated balance sheets are
comprised of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Preferred shares
522728 Alberta $2.50 convertible
preferred 4,500 shares and 8,000
shares outstanding in 1995 and 1994,
respectively................................................. $ 16,488 $ 29,312
EET, Inc.
Preferred stock $1.00 par value,
cumulative; 305,000 shares outstanding
in 1994 and redeemed in 1995 for $305,000................... - 305,000
---------- ----------
$ 16,488 $ 334,312
========== ==========
</TABLE>
NOTE 11 - STOCKHOLDERS' EQUITY
On December 28, 1995, the Company issued 30 shares of Series D convertible
preferred stock (Series D) for $750,000. The Series D holders are entitled to
quarterly cumulative dividends totalling $3,750 per year per share of preferred
stock and certain liquidation preferences. At the option of the Series D
holders, the preferred stock may be converted into the Company's common stock
using a conversion rate computed as the lesser of (a) a calculated value
utilizing a discount to market as defined or (b) $.875 per share. The Series D
stock can not be converted until March 11, 1996, at which time one third is
eligible for conversion, with the remaining two thirds eligible for conversion
in April and May 1996. In March 1996, 10 shares of Series D convertible
preferred stock were converted into 414,800 shares of the Company's common
stock.
During 1994, the Company issued 220 shares of Series A convertible
preferred stock (Series A) for net proceeds totalling $2,024,000. Each share of
Series A was convertible into the Company's common stock at a conversion rate
equal to $10,000 divided by 77% of the closing bid price of the Company's common
stock on the conversion date, per share. During 1994, Series A holders elected
to convert 170 shares for 1,219,751 shares of the Company's common stock. In
1994, as an inducement not to convert any further Series A shares, the Company
issued 15 shares of Series B and C convertible preferred stock to the holders of
the Series A shares. The Series B and C preferred stock were issued with
conversion terms identical to those of the Series A. The Company realized no
proceeds from the issuance of the Series B and C preferred shares. During 1995,
all remaining Series A, B and C preferred stock were converted into 424,506
shares of the Company's common stock.
During 1995 and 1994, 3,500 and 1,000 shares, respectively, of $3.50
convertible preferred stock of the Company's majority-owned subsidiary 522728
Alberta, Ltd. were converted into 350,000 and 100,000 shares, respectively, of
the Company's common stock which was issued from treasury stock.
During 1993, the Company purchased the minority interest in one of its
majority-owned subsidiaries (NAT). In accordance with a plan of arrangement
with the minority stockholders, each majority stockholder received one share of
the Company's common stock in exchange for two shares of the subsidiary's stock
held by the minority stockholders. The Company issued 4,443,147 shares of
treasury stock and 1,034,626 shares of common stock for the purchase of the
minority interest and recorded the transaction at book value of the subsidiary.
F-19
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In association with the Company's purchase of the remaining minority
interest of the subsidiary described above, 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 shares.
The provisions relating to the "Class I Escrow Shares" were not met, and
these shares were retired effective December 31, 1994. The "Class II Escrow
Shares" shall be released if the Company shall be acquired prior to December 31,
1996 for a purchase price exceeding $250,000,000. At December 31, 1995, these
shares are held in escrow.
At December 31, 1995, the Company had common stock reserved for future
issuance as follows:
<TABLE>
<CAPTION>
SHARES
-----------
<S> <C>
Conversion of convertible debt.............................. $ 3,900,000
Conversion of preferred stock............................... 1,100,000
Stock options outstanding................................... 4,900,000
Stock warrants outstanding.................................. 5,300,000
-------------
$ 15,200,000
=============
</TABLE>
NOTE 12 - 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 transactions, 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. For the year ended
December 31, 1993, the Company had recorded a gain of $600,000 from the sale of
marketing rights in the consolidated statement of loss.
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 and recorded as a
loss in the statement of loss for the year ended December 31, 1994.
NOTE 13 - MINING ASSETS
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 totalling $794,314.
F-20
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - 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.
NOTE 15 - INCOME TAXES
Deferred taxes are determined based on the temporary differences between
the financial statement and income tax 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, 1995 and 1994,
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1994
------------ ----------- -----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward.............. $ 3,886,000 $ 2,685,000
Bad debt reserves............................ 1,076,000 -
Other........................................ 125,000 4,000
----------- -----------
Gross deferred tax assets..................... 5,087,000 2,689,000
Valuation allowance........................... (5,087,000) (2,689,000)
----------- -----------
Net deferred income taxes..................... $ - $ -
=========== ===========
</TABLE>
At December 31, 1995, the Company has net operating loss carryforwards
for federal income tax purposes totalling approximately $11,429,000 which, if
not utilized, will expire as follows:
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER 31, AMOUNT
------------ -----------
<S> <C>
1999.........................................................$ 162,000
2000......................................................... 32,000
2001......................................................... 102,000
2002......................................................... 391,000
2003......................................................... 376,000
2004......................................................... 457,000
2005......................................................... 169,000
2006......................................................... 559,000
2007......................................................... 462,000
2008......................................................... 1,669,000
2009......................................................... 3,125,000
2010......................................................... 3,925,000
----------
$11,429,000
===========
</TABLE>
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.
F-21
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - STOCK OPTIONS AND WARRANTS
The Company has not adopted a formal stock option plan, however, as of
December 31, 1995, by approval of the Board of Directors, the Company has
granted the following stock options: approximately 3,550,000 options to
directors, officers and employees and approximately 1,350,000 options to
consultants and in connection with financing transactions.
All of the options to directors, officers and employees are exercisable at
prices that range from $1.00 to $2.50, which equaled or exceeded the market
price per share at the date granted. These options generally vest over a four or
five year period and expire five years after vesting. All options issued to
consultants and in connection with financing transactions are exercisable at
prices that range from $.75 to $2.50, which equalled or exceeded the market
price per share at the date granted. These options primarily vest immediately
and expire through the year 1999.
As of December 31, 1995, the Company has issued stock warrants totalling
5,278,916 primarily in connection with financing transactions. These warrants
are exercisable at prices that range from $.75 to $6.00 per share, which equaled
or exceeded the market price per share at the date of grant, and expire through
the year 2000.
At December 31, 1995, the Company had stock options and warrants available
for exercise totalling 2,375,000 and 5,278,916, respectively, at exercisable
prices ranging from $.75 to $6.00.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
The Company rents equipment and office space under operating leases on both
long and short-term basis. Rent expense amounted to approximately $168,000,
$156,000 and $259,000, for the years ended December 31, 1995, 1994 and 1993,
respectively.
Minimum annual rentals under non-cancelable operating leases of more than
one year in duration are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
<S> <C>
1996............................................ $ 144,000
1997............................................ 170,000
1998............................................ 126,000
1999............................................ 126,000
2000............................................ 94,000
----------
$ 660,000
==========
</TABLE>
At December 31, 1995, the Company had employment contracts that provide for
payments of approximately $1,090,000 annually through 1999.
At December 31, 1995, the Company had an outstanding letter of credit
totalling $200,000. The letter of credit is collateralized by a certificate of
deposit and expires June 1, 1996.
F-22
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 1988, a suit was filed against MBCC, the predecessor to the
Company, by a former franchisee. The plaintiff alleged that the Company failed
to provide the plaintiff with an offering prospectus and made false
representations. The suit claims 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. The Company
intends to vigorously defend against this action.
In April 1993, an individual brought an action against NAT and other
defendants, which seeks delivery of 200,000 shares of common stock of NAT and
damages amounting to $1.7 million (CND) for failure to provide the shares on a
timely basis. 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 a brokerage firm for the conveyance of 150,000
shares of North American Gold Corp. at $.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 firm named in the suit. The
Company intends to vigorously defend against this action.
Under a 1992 license agreement, the Company 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 its competitors. In response to this violation and because
the enzyme proved to be ineffective, the Company terminated 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. The Company was successful in terminating the federal
court proceedings and thereby requiring arbitration before the American
Arbitration Association. The arbitration proceedings were completed in February
1996, and the Company is awaiting the arbitrator's decision.
In April 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 and 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
injunction, permanent injunction and other damages. In June 1995, the former
officer filed a counter lawsuit against the Company and other parties, which has
been dismissed. The lawsuit also includes claims against a former officer of a
subsidiary of the Company. The claims against him include breach of duties owed
by him to the Company and torts against the Company, based on his alleged aid to
the former officer and director. This individual has filed a counter lawsuit
against the Company and other parties.
If the foregoing litigation is decided against the Company, it could have a
material adverse effect on the financial conditions of the Company.
NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended December 31, 1995, the Company paid interest
totalling approximately $25,000. For the years ended December 31, 1994 and 1993,
the Company paid no interest.
During 1995, the Company issued shares of common stock for the acquisition
of EET and IPF totalling 3,070,729. These acquisitions have been accounted for
as pooling-of-interests (see Note 2(b)). Accordingly, these non-cash
transactions have been recorded in the years the acquired companies were
organized due to the restatement of the Company's consolidated financial
statement.
During 1995, in association with the purchase of GAIA, the Company issued
1,666,667 shares of common stock, issued debt of $1,050,000 and assumed
liabilities of $194,000.
F-23
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1995, the Company contributed equipment with a book value totalling
$200,000 to a 50% owned joint venture.
In 1995 and 1994, the Company issued 125,000 and 20,000 shares,
respectively, of the Company's common stock for compensation and services
provided totalling $55,000 and $31,260, respectively.
In 1993, the Company sold marketing rights (see Note 12) in exchange for
common stock valued at $600,000.
In 1993, the Company acquired the remaining minority interest in a
subsidiary 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.
NOTE 19 - BUSINESS SEGMENTS
The Company has two reportable business segments, as noted below:
Environmental Group: Environmental services and energy resource
reclamation, including enzyme processes, mechanical systems and bioremedial
technologies.
Manufacturing and Distribution Group: Manufactures and distributes
proprietary and standard products (custom pipe, pipe fittings and valves).
Manufactures and distributes porous pipe, wood substitution and alternative
building materials made from recycled rubber and thermoplastics.
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
Environmental......................... $1,725,384 $ 1,440,290 $ 269,073
Manufacturing and Distribution........ 917,351 505,407 -
---------- ----------- -----------
Total revenues....................... $2,642,735 $ 1,945,697 $ 269,073
========== =========== ===========
Operating income (loss):
Environmental......................... $(1,943,874) $(2,101,652) $(2,111,810)
Manufacturing and Distribution........ (4,088) 30,785 -
Other................................. (2,279,738) (1,885,423) (2,560,175)
----------- ----------- -----------
Total operating loss................. $(4,227,700) $(3,956,290) $(4,671,985)
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Identifiable assets:
Environmental..................................... $ 1,827,628 $ 1,940,169
Manufacturing and Distribution.................... 5,012,144 194,221
Other............................................. 1,044,947 6,056,287
----------- -----------
$ 7,884,719 $ 8,190,677
=========== ===========
</TABLE>
F-24
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Capital expenditures:
Environmental........................................... $ 150,297 $ 422,187 $ 549,158
Manufacturing and distribution.......................... 991,004 58,115 -
Other................................................... 19,019 - -
---------- ---------- ----------
$1,160,320 $ 480,302 $ 549,158
========== ========== ==========
Depreciation and amortization:
Environmental........................................... $ 230,851 $ 211,104 $ 79,416
Manufacturing and Distribution.......................... 27,236 8,785 -
Other................................................... 25,797 18,720 -
---------- ---------- ----------
$ 283,884 $ 238,609 $ 79,416
========== ========== ==========
</TABLE>
NOTE 20 - SUBSEQUENT EVENTS
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%,
requires monthly payments of $5,700, matures January 1999 and is collateralized
by equipment. Proceeds from the note were used to purchase equipment.
Subsequent to year end, the Company issued 50 shares of Series E
convertible preferred stock (Series E) for net proceeds of $1,218,750. The
Series E holders have certain liquidation preferences, and are not entitled to
any dividends. At the option of the Series E holders, the preferred stock may
be converted into the Company's common stock using a conversion rate computed as
the lesser of (a) a calculated value utilizing a discount to the market price,
as defined or (b) $1.50 per share. One-fourth of the Series E shares can be
converted after August 1996, with another one-fourth available for conversion
every three months thereafter. In addition, the Company at its option may redeem
any of the Series E preferred stock still outstanding on or after February 16,
1999 at $25,000 per share.
On April 8, 1996, the Company issued 82,000 shares of Series F convertible
preferred stock (Series F) and stock purchase warrants to purchase 8,200,000
shares of the Company's common stock (Series F Warrants). Cash proceeds of
$5,500,000 were received for issuance of 55,000 Series F shares and 5,500,000
Series F Warrants. The remaining 27,000 Series F shares and 2,700,000 Series F
Warrants were issued in exchange for the surrender of the 13.5% convertible
subordinated debentures and the warrants (see Note 8(a)). The Series F Warrants
have an exercise price of $1.00 per share, subject to certain adjustments, and
expire on April 8, 2004.
Dividends accrue on the Series F shares at a per annum rate of $13.50 per
share and are payable semi-annually. The Company may elect to defer and accrue
dividend payments during the first three years, in which case, each holder may
elect to receive payment of the dividend in the form of additional Series F
shares. All accrued but unpaid dividends shall accrue interest at a rate of
13.5%. The holders of the Series F shares have certain liquidation preferences.
The Series F shares may be converted into the Company's common stock at the
option of the holder using a conversion rate, subject to certain adjustments, of
$1.00 per share. On or after April 8, 2001, the Series F shares can be converted
at the holder's option using the lesser of (a) the current conversion price; or
(b) a calculated value utilizing a discount to the market price, as defined.
Subject to certain conversion rights, the Company may redeem the Series F shares
at a face value on or after April 8, 2004.
F-25
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each Series F share entitles the holder to voting privileges equal to the
number of shares of common stock into which such Series F share may be converted
from time to time. In addition, the Company has agreed to cause its Board of
Directors to be increased to nine positions, four of which may be filled by
nominees selected by the holders of the Series F shares.
The preferred stock purchase agreement and the certificate of designation
for the Series F shares contain covenants which, if breached by the Company,
provide for certain remedies. Certain of these covenants are considered outside
of the Company's control. These covenants include, among other things, that the
Company obtain a minimum net worth, as defined in the agreement, by December 31,
2000. For breach of these covenants that are outside of the Company's control
the remedy allows the Series F holders to convert their shares into the
Company's common stock using a conversion rate computed as the lesser of (a) the
conversion price, as adjusted; or (b) a calculated value utilizing a discount to
the market price, as defined. Also, the stock purchase agreement contains
certain covenants that are considered within the control of the Company. These
covenants, among other things, require the delivery of financial information and
restrict the Company from incurring additional debt if, immediately upon
incurrence of such debt, the Company's debt to equity ratio exceeds a certain
ratio, as defined by the agreement. For breach of these covenants that are
within the Company's control the remedies allow the Series F holders to elect a
majority of the Company's Board of Directors and to either (1) convert their
shares into the Company's common stock using a conversion rate computed as the
lesser of (a) the conversion price, as adjusted; or (b) a calculated value
utilizing a discount to the market price, as defined; or (2) request the Company
to redeem their shares. If the Series F holders elect redemption, the shares
will be redeemed at the greater of (a) the fair market value, as defined; or (b)
the initial purchase price, plus unpaid dividends and interest, if any. At the
Company's option, the shares may be redeemed with cash or a three year
promissory note.
The proceeds of the Series E and Series F preferred stock issuances will be
used to repay certain debt, accrued interest, and to meet general working
capital needs. Because of the significance of the Series E and Series F
preferred stock issuances, a pro forma balance sheet presentation has been
provided to show the effect of the issuances of the Series E and Series F
preferred stock, repayment of certain debt and accrued interest, and the
exchange of debt for Series F preferred stock, as if such events occurred at
December 31, 1995.
F-26
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
MAR. 31, 1996 MAR. 31
PROFORMA 1996 DEC. 31
ASSETS SEE NOTES UNAUDITED 1995
------- ------------- ------------- -------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............................. $ 5,464,059 $ 154,409 $ 333,326
Certificates of deposit............................... 200,000 200,000 200,000
Accounts receivables, less allowance for
doubtful accounts of $30,250 and $34,000............. 660,572 660,572 626,146
Inventories........................................... 458,734 458,734 329,902
Prepaid expenses and other............................ 454,803 454,803 374,623
------------ ------------ ------------
Total Current Assets................................. 7,238,168 1,928,518 1,863,997
Note receivable........................................ 439,199 439,199 248,967
Property and equipment, less accumulated depreciation
of $334,597 and $272,240............................. 1,718,468 1,718,468 1,401,634
Patents and purchased technologies, less accumulated
amortization of $193,734 and $155,361................. 1,196,446 1,196,446 1,224,777
Goodwill, less accumulated amortization of $88,459
and $55,553........................................... 2,545,825 2,545,825 2,576,481
Other intangible assets, less accumulated
amortization of $46,338 and $38,900................... 137,434 137,434 144,872
Other.................................................. 425,424 425,424 423,991
------------ ------------ ------------
$ 13,700,964 $ 8,391,314 $ 7,884,719
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Short-term borrowings................................. $ 51,353 $ 1,101,353 $ 1,111,658
Current maturities of long-term debt.................. 420,000 420,000 264,396
Accounts payable...................................... 689,121 689,121 974,400
Accrued expenses...................................... 755,079 945,429 895,506
------------ ------------ ------------
Total current liabilities............................ 1,915,553 3,155,903 3,245,960
Long-term debt, less current maturities................ 770,057 3,470,057 3,535,461
Minority interest...................................... 16,488 16,488 16,488
------------ ------------ ------------
Total Liabilities.................................... 2,702,098 6,642,448 6,797,909
------------ ------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized; 50 and 80 shares issued
(92,550 proforma).................................... 10,968,750 1,718,750 750,000
Common stock, $.001 par value, 50,000,000 shares
authorized; 24,890,216 and 23,927,285 shares issued... 24,891 24,891 23,927
Additional paid-in capital............................ 20,901,145 20,901,145 20,270,015
Deficit............................................... (20,731,650) (20,731,650) (19,794,812)
Treasury stock, at cost, 450,000 shares............... (16,488) (16,488) (16,488)
Less notes receivable for sale of stock............... (147,782) (147,782) (145,832)
------------ ------------ ------------
Total Stockholders' Equity........................... 10,998,866 1,748,866 1,086,810
------------ ------------ ------------
$ 13,700,964 $ 8,391,314 $ 7,884,719
============ ============ ============
</TABLE>
F-27
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF LOSS
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
UNAUDITED
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues................................. $ 862,999 $ 572,578
Cost of revenues......................... (595,854) (380,034)
----------- -----------
Gross profit........................ 267,145 192,544
Expenses:
Selling, general and administrative
expenses........................... 977,997 842,640
Research and development expenses.... 86,309 255,063
----------- -----------
Total expenses........................... 1,064,306 1,097,703
----------- -----------
Operating loss...................... (797,161) (905,159)
Other Income (Expense):
Interest income...................... 16,335 86,614
Interest expense..................... (162,303) (28,809)
Equity in net loss of joint venture.. - (82,835)
Other................................ 6,291 (9,456)
----------- -----------
Total Other Income (Expense)............. (139,677) (34,486)
----------- -----------
Net Loss................................. $ (936,838) $ (939,645)
=========== ===========
Net Loss per share....................... ($.04) ($.06)
=========== ===========
Weighted average number of common shares
outstanding ............................. 22,301,669 16,843,753
=========== ===========
</TABLE>
F-28
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THREE MONTHS ENDED MARCH 31, 1996 AND 1995
UNAUDITED
<TABLE>
<CAPTION>
Preferred Common Stock Additional
------------------------- ------------------------ Paid-In
Shares Amount Shares Amount Capital Deficit
---------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 30 $ 750,000 23,927,285 $23,927 $20,270,015 $(19,794,812)
Stock issued for services
or settlement of liability - - 300,000 300 223,610 -
Issuance of common stock
upon conversion of
convertible note and
accrued interest thereon - - 248,131 249 157,935 -
Issuance of common stock
upon conversion of 10
shares of Series D
preferred stock (10) (250,000) 414,800 415 249,585 -
Issuance of Series E
preferred stock 50 1,218,750 - - - -
Interest on notes
receivable from
stockholders - - - - - -
Net loss for the period - - - - - (936,838)
--------- ------------ ---------- ------- ----------- ------------
Balance March 31, 1996 70 $1,718,750 24,890,216 $24,891 $20,901,145 $(20,731,650)
========= ============ ========== ======= =========== ============
Balance December 31, 1994 80 - 18,692,489 $18,692 $17,613,667 $(12,454,572)
Issuance of common stock
upon conversion Series A, B
and C convertible preferred
stock (80) - 424,506 424 (424) -
Issuance of common stock
from treasury - - - - - (150,000)
Sale of common stock - - 98,000 98 230,202 -
Sale of EET shares (401k)
plan - - 12,343 12 12,285 -
Cancellation of treasury
stock - - (3,000) (3) (2,997) -
Interest in notes receivable
from stockholders - - - - - -
Net loss for the period - - - - - (939,645)
--------- ------------ ---------- ------- ----------- ------------
Balance March 31, 1995 - $ - 19,224,338 $19,223 $17,852,733 $(13,394,217)
========= ============ ========== ======= =========== ============
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock Notes
------------------ Receivable
Shares Amount Stockholder Total
-------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Balance December 31, 1995 450,000 $(16,488) $(145,832) $1,086,810
Stock issued for services
or settlement of liability - - - 223,910
Issuance of common stock
upon conversion of
convertible note and
accrued interest thereon - - - 158,184
Issuance of common stock
upon conversion of 10
shares of Series D
preferred stock - - - -
Issuance of Series E
preferred stock - - - 1,218,750
Interest on notes
receivable from
stockholders - - (1,950) (1,950)
Net loss for the period - - - (936,838)
------- -------- ----------- ----------
Balance March 31, 1996 450,000 $(16,488) $(147,782) $1,748,866
======= ======== =========== ==========
Balance December 31, 1994 803,000 $(32,312) $(138,032) $5,007,443
Issuance of common stock
upon conversion Series A, B
and C convertible preferred
stock - - - -
Issuance of common stock
from treasury 5,496 - - 5,496
Sale of common stock - - - 230,300
Sale of EET shares (401k)
plan - - - 12,297
Cancellation of treasury
stock (3,000) 3,000 - -
Interest in notes
receivable from stockholders - - (1,950) (1,950)
Net loss for the period - - - (939,645)
------- -------- ----------- ----------
Balance March 31, 1995 650,000 $(23,816) $(139,982) $4,313,941
======= ======== =========== ==========
</TABLE>
F-29
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
UNAUDITED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
MAR. 31 MAR. 31
1996 1995
------------- -------------
<S> <C> <C>
Net cash used in operating activities..................... $(1,058,402) $(1,308,386)
----------- -----------
Cash flows from investing activities:
Increase in note receivable........................... (190,232) (129,795)
Payment of patent costs............................... (10,042) (3,057)
Purchase of property and equipment.................... (379,191) (55,738)
Investment in joint venture........................... - (52,708)
----------- -----------
Net cash used in investing activities.... (579,465) (241,298)
----------- -----------
Cash flows from financing activities:
Issuance of common stock.............................. - 242,601
Issuance of preferred stock........................... 1,218,750 -
Issuance of notes payable and long-term debt.......... 250,000 -
Repayment of notes payable and long-term debt......... (9,800) (712,500)
Redemption of preferred stock......................... - (305,000)
Payment of dividend on preferred stock of subsidiary.. - (5,432)
----------- -----------
Net cash provided by financing activities...... 1,458,950 (780,331)
----------- -----------
Net increase (decrease) in cash........................... (178,917) (2,330,015)
Cash and cash equivalents, beginning of year.............. 333,326 3,266,518
----------- -----------
Cash and cash equivalents, end of year.................... $ 154,409 $ 936,503
=========== ===========
</TABLE>
F-30
<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-QSB. 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 three years in the period ended December 31, 1995. The interim results
reflected in the accompanying financial statements are not necessarily
indicative of the results of operations for a full fiscal year.
During March and June 1995, the Company acquired 100% of the outstanding stock
of EET, Inc. ("EET") and Industrial Pipe Fittings, Inc. ("IPF"). In addition,
in December 1995, the Company acquired certain assets of GAIA Technologies, Inc.
and its affiliates (collectively "GAIA"). The acquisition of EET and IPF were
accounted for as poolings-of-interests, and accordingly the financial statements
for all periods prior to the acquisitions have been restated to combine the
previously separate entities. The acquisition of GAIA was accounted for using
the purchase method of accounting, and accordingly the results of its operations
are included from the acquisition date.
The loss per common share is computed by dividing the loss by the weighted
average number of common shares outstanding and common stock equivalents, if
dilutive.
2. STOCKHOLDERS' EQUITY
In February and March, 1996 the Company issued 50 shares of Series E convertible
preferred stock ("Series E Shares") for net proceeds of $1,218,750. The Series
E holders have certain liquidation preferences, and are not entitled to any
dividends. At the option of the Series E holders, the preferred stock may be
converted into the Company's common stock using a conversion rate computed as
the lesser of (a) a calculated value utilizing a discount to the market price of
the Company's common stock, as defined or (b) $1.50 per share. One-fourth of
the Series E Shares can be converted after August 9, 1996, with another one-
fourth available for conversion every three months thereafter. In addition, the
Company at its option may redeem any of the Series E Shares still outstanding
after February 16, 1999 at $25,000 per share.
3. SUBSEQUENT EVENTS
In April and May, 1996, the Company issued 92,500 shares of Series F convertible
preferred stock ("Series F Preferred") and stock purchase warrants to purchase
9,250,000 shares of the Company's
F-31
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common stock ("Series F Warrants"). Cash proceeds of $6,550,000 were received
for issuance of 65,500 Series F shares and 6,550,000 Series F Warrants. The
remaining 27,000 Series F shares and 2,700,000 Series F Warrants were issued in
exchange for the surrender of (a) $2,700,000 in principal amount of the 13.5%
convertible subordinated debentures and (b) 2,700,000 warrants. The Series F
Warrants have an exercise price of $1.00 per share, subject to certain
adjustments, and expire on April 8, 2004.
Dividends accrue on the Series F Shares at a per annum rate of $13.50 per share
and are payable semi-annually. The Company may elect to defer and accrue the
dividend payments during the first three years, in which case, each holder may
elect to receive payment of the dividend in the form of additional Series F
Shares. All accrued but unpaid dividends accrue interest at a per annum rate of
13.5%. The holders of the Series F Shares have certain liquidation preferences.
The Series F Shares may be converted into the Company's common stock at the
option of the holder using a conversion rate, subject to certain adjustments, of
$1.00 per share. On or after April 8, 2001, the Series F Shares can be
converted at the holder's option using the lesser of (a) the current conversion
price; or (b) a calculated value utilizing a discount to the market price of the
Company's common stock, as defined. Subject to certain conversion rights, the
Company may redeem the Series F Shares at face value on or after April 8, 2004.
Of the proceeds received from the Series F Shares, $1,050,000 was used to repay
the outstanding note issued in connection with the purchase of GAIA. Because of
the significance of the Series F preferred stock issuance, a proforma balance
sheet presentation has been provided to show the effect of the issuance,
repayment of the $1,050,000 note, and repayment of certain accrued interest on
the 13.5% convertible subordinated debentures, as if such events occurred at
March 31, 1996.
F-32
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
North American Environmental Group, Inc.
We have audited the accompanying balance sheets of North American Environmental
Group, Inc. (a development stage enterprise) as of December 31, 1995 and 1994,
and the related consolidated statements of loss, and cash flows for each of the
three years in the period ended December 31, 1995 and from the date of inception
(May 7, 1991) to December 31, 1995 and the consolidated statements of
stockholders' equity (capital deficit) for each of the four years in the period
ended December 31, 1995. 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 loss, stockholders' equity (capital deficit), and cash flows of
North American Environmental Group, Inc. 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.
In our opinion, based upon our audits of 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. as of December 31, 1995 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, 1995 and from the date of inception (May 7, 1991) to
December 31, 1995 in conformity with generally accepted accounting principles.
F-33
<PAGE>
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, 1995. As discussed in Note 2 to the consolidated
financial statements, the Company's soil and water remediation processes have
performed technically and have met the expectations of the Company. However,
current economic factors and disposal options affecting the soil and water
remediation market limit the commercial viability of these technologies. This
condition raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans, with regard to this matter, is discussed in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
BDO Seidman, LLP
Houston, Texas
March 14, 1996
F-34
<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-35
<PAGE>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
------------ -----------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 333 $ 1,001
Advance payments - 44,500
Due from affiliates (Note 4) - 33,328
----------- -----------
Total current assets 333 78,829
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $36,881 and $24,712 (Note 3) 15,985 28,154
DEPOSITS 2,700 2,700
----------- -----------
$ 19,018 $ 109,683
=========== ===========
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES
Accounts payable $ - $ 5,035
Due to affiliates (Note 4) 1,668,395 1,660,521
Convertible debenture (Note 5) 250,000 250,000
Accrued interest payable 82,870 56,905
----------- -----------
Total current liabilities 2,001,265 1,972,461
----------- -----------
CAPITAL DEFICIT:
Preferred stock - -
Common stock 121,404 121,383
Additional paid-in capital 883,698 883,719
Deficit accumulated during the
development stage (2,987,349) (2,867,880)
----------- -----------
Total capital deficit (1,982,247) (1,862,778)
----------- -----------
$ 19,018 $ 109,683
=========== ===========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-36
<PAGE>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
Cumulative
from Inception
(May 7, 1991)
YEAR ENDED DECEMBER 31, Through
------------------------------- December 31,
1995 1994 1993 1995
------ ------ ------ ------------
<S> <C> <C> <C> <C>
SALES OF ENVIRONMENTAL SERVICES $ - $ 13,542 $ - $ 13,542
----------- ---------- ----------- -----------
EXPENSES
Research and development - 373,026 882,742 1,306,369
Consulting fees - 226,539 115,910 437,632
Travel and promotion - 50,723 93,702 240,288
Legal and professional fees - 93,020 20,479 224,140
General and administrative 93,504 118,085 225,880 620,014
Management fees - - - 50,000
----------- ---------- ----------- -----------
TOTAL EXPENSES 93,504 861,393 1,338,713 2,878,443
----------- ---------- ----------- -----------
OPERATING LOSS (93,504) (847,851) (1,338,713) (2,864,901)
----------- ---------- ----------- -----------
Other income (expense):
Interest income - - 1,200 3,600
Interest expense (25,965) (22,905) (22,458) (86,048)
Write-off of goodwill - - - (40,000)
----------- ---------- ----------- -----------
TOTAL OTHER EXPENSES (25,965) (22,905) (21,258) (122,448)
----------- ---------- ----------- -----------
NET LOSS $ (119,469) $(870,756) $(1,359,971) $(2,987,349)
=========== ========== =========== ============
LOSS PER COMMON SHARE $ - (0.07) (0.11) $
=========== ========== =========== ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12,138,333 12,138,333 12,138,333
=========== ========== =========== ===========
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-37
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
(1) Preferred Stock (2) Common Stock
------------------- --------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Stock issued at inception
(May 7, 1991) - $ - 50,000 $ 50,000
Adjustment arising from
recapitalization, 180 for 1
stock split and change in
the par value to $.01
(November 11, 1991) - - 8,950,000 40,000
Stock issued for net assets
of Rittenhouse - - 2,130,000 21,300
Stock issued for services
(November 14, 1991) - - 300,000 3,000
Net loss for the year - - - -
------- ------ ---------- ---------
BALANCE, at December 31, 1991 - - 11,430,000 114,300
Stock issued in exchange for
cancellation of debt (January 21, 1992) - - 175,000 1,750
Stock issued for cash (March 3, 1992) - - 83,333 833
Stock issued for services (July 21, 1992) - - 450,000 4,500
Net loss for the year - - - -
------- ------ ---------- ---------
BALANCE, at December 31, 1992 - - 12,138,333 121,383
Net loss for the year - - - -
------- ------ ---------- ---------
BALANCE, at December 31, 1993 - - 12,138,333 121,383
Net loss for the year - - - -
------- ------ ---------- ---------
BALANCE, at December 31, 1994 - - 12,138,333 121,383
Stock issued - - 2,071 21
Net loss for year - - - -
------- ------ ---------- ---------
BALANCE, at December 31, 1995 - $ - 12,140,404 $ 121,404
======= ====== ========== =========
</TABLE>
__________________
(1) $.001 par value; 1,000,000 shares authorized.
(2) $.01 par value; 20,000,000 shares authorized.
F-38
<PAGE>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
<TABLE>
<CAPTION>
Additional Stock Subscriptions
Paid-in Capital Deficit Receivable Total
--------------- -------------- ------------------- ------------
<C> <C> <C> <C>
$ - $ - $ (50,000) $ -
- - 50,000 90,000
15,802 - - 37,102
- - - 3,000
- (299,689) - (299,689)
---------- ----------- ---------- -----------
15,802 (299,689) - (169,587)
173,250 - - 175,000
249,167 - - 250,000
445,500 - - 450,000
- (337,464) - (337,464)
---------- ----------- ---------- -----------
883,719 (637,153) - 367,949
- (1,359,971) - (1,359,971)
---------- ----------- ---------- -----------
883,719 (1,997,124) - (992,022)
- (870,756) - (870,756)
---------- ----------- ---------- -----------
883,719 (2,867,880) - (1,862,778)
(21) - - -
- (119,469) - (119,469)
---------- ----------- ---------- -----------
$ 883,698 $(2,987,349) $ - $(1,982,247)
========== =========== ========== ===========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-39
<PAGE>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Cumulative
from Inception
(May 7, 1991)
Year ended December 31, Through
------------------------------------- December 31,
1995 1994 1993 1995
---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(119,469) $ (870,756) $(1,359,971) $(2,987,349)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 12,169 14,443 10,269 30,771
Stock issued for services - - - 453,000
Write-off of goodwill - - - 40,000
Changes in assets and liabilities:
Advance payments 44,500 172,000 322,025 12,000
Accrued interest receivable - 3,600 (1,200) -
Deposits - - (2,700) (2,700)
Accounts payable (5,035) (426,559) 269,740 (5,320)
Accrued interest payable 25,965 17,749 22,375 80,809
--------- ----------- ----------- -----------
Net cash used in operating activities (41,870) (1,089,523) (739,462) (2,378,789)
--------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in acquisition of subsidiary - - - 8,593
Purchase of property and equipment - - (52,866) (52,866)
--------- ----------- ----------- -----------
Net cash used in investing activities - - (52,866) (44,273)
--------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible debenture - - - 750,000
Issuance of common stock - - - 300,000
Increase in notes payable - - - 175,000
Increase in amounts due to affiliates 41,202 1,089,354 765,004 1,198,395
--------- ----------- ----------- -----------
Net cash provided by financing activities 41,202 1,089,354 765,004 2,423,395
--------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (668) (169) (27,324) 333
CASH, at beginning of period 1,001 1,170 28,494 -
--------- ----------- ----------- -----------
CASH, at end of period $ 333 $ 1,001 $ 1,170 $ 333
========= =========== =========== ===========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements
F-40
<PAGE>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying 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, 1995, 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 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
Deferred taxes result from temporary differences between the financial
statements and income tax basis of assets and liabilities (see Note 6).
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.
LOSS PER COMMON SHARE
The loss per common share is computed by dividing the loss by the weighted
average number of common shares outstanding and common stock equivalents, if
dilutive.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from those estimates.
F-41
<PAGE>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121). SFAS No. 121,
requires, among other things, that impairment losses on assets to be held and
gains or losses from assets that are expected to be disposed of, be included as
a component of income from continuing operations. The Company will adopt SFAS
No. 121 in 1996 and its implementation is not expected to have a material effect
on the consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 encourages entities to adopt the fair
value method in place of the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for all
arrangements under which employees receive shares of stock or other equity
investments of the employer or the employer incurs liability to employees in
amounts based on the price of its stock. The Company does not anticipate
adopting the fair value method encouraged by SFAS No. 123 and will continue to
account for such transactions in accordance with APB No. 25. However, the
Company will be required to provide additional disclosures beginning in 1996
providing pro forma effects as if the Company had elected to adopt SFAS No. 123.
F-42
<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.
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-43
<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 since inception has concentrated
on the development and acquisition of certain proprietary technologies, which
have applications in environmental clean-up services through elimination of
hydrocarbon contamination of soil and water.
To date, these technologies 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. However, each of these technologies have certain limits and
parameters within which they are either effective or ineffective. In addition,
the current economic factors and disposal options affecting the soil and water
remediation market limit the commercial viability of these technologies. Thus,
until there is a significant change in economic parameters related to the soil
and water remediation market, the Company has suspended funding any additional
commercialization efforts pertaining to these technologies. However, the Company
could revitalize its commercialization efforts if changes in the market place so
dictate.
This factor raises 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-44
<PAGE>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT
Major class of property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1995 1994
-------------------- --------- ---------
<S> <C> <C>
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 (36,881) (24,712)
--------- ---------
Net property and equipment $ 15,985 $ 28,154
========= =========
</TABLE>
4. BALANCES WITH AFFILIATES
Balances with affiliates consists of:
<TABLE>
<CAPTION>
December 31, 1995 1994
-------------------- ---------- -----------
<S> <C> <C>
Due from (to) affiliates:
North American Technologies
Group, Inc. $ (816,899) $ (809,025)
North American Technologies, Inc. (851,496) (851,496)
Inplant Systems, Inc. - 22,328
Brookstone - 11,000
----------- -----------
$(1,668,395) $(1,627,193)
=========== ===========
</TABLE>
There are no specific repayment terms associated with the above balances.
F-45
<PAGE>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. CONVERTIBLE DEBENTURES
At December 31, 1995 and 1994, the Company had convertible debentures totalling
$250,000 outstanding. The debentures bear interest at prime plus 2% (10.5% at
December 31, 1995) and are due June 15, 1996. The debentures are convertible
into NATK's common stock by dividing the principal balance by 75% of the average
trading price of the stock during the ten days preceding the conversion.
6. INCOME TAXES
Deferred taxes are determined based on the temporary differences between the
financial statement and income tax 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, 1995 and 1994, were
as follows:
<TABLE>
<CAPTION>
Description 1995 1994
- ----------- ---------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 968,000 $ 927,000
Valuation allowance (968,000) (927,000)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
</TABLE>
At December 31, 1995, the Company had a net operating loss carryforwards for
federal income tax purposes totalling approximately $2,846,000 which, if not
utilized, will expire as follows:
<TABLE>
<CAPTION>
Year ended December 31, Amount
- ----------------------- ------------
<S> <C>
2004 $ 2,000
2005 56,000
2006 260,000
2007 337,000
2008 1,360,000
2009 711,000
2010 120,000
----------
$2,846,000
==========
</TABLE>
F-46
<PAGE>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. WARRANTS
At December 31, 1995, the Company had 83,333 class "C" warrants outstanding,
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. As of
December 31, 1995 no warrants had been exercised.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During 1992, the Company issued 450,000 shares of its common stock for services
rendered. The shares were valued at $450,000. In January 1992, certain lenders
converted loans totalling $175,000 into 175,000 shares of the Company's common
stock. In addition, on December 31, 1992, a convertible debenture holder
converted a $500,000 debenture into shares of NATK's common stock.
During 1991, the Company issued common stock totalling $37,102 for the net
assets of Rittenhouse. In addition, during 1991, the Company issued 300,000
shares of its common stock for services valued at $3,000.
F-47
<PAGE>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT
Cash $ 333 $ 333
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $39,923 and $36,881 12,943 15,985
DEPOSITS 2,700 2,700
----------- -----------
$ 15,976 $ 19,018
=========== ===========
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES
Accounts payable $ - $ -
Due to affiliates 1,668,395 1,668,395
Convertible debenture 250,000 250,000
Accrued interest payable 89,655 82,870
----------- -----------
Total current liabilities 2,008,050 2,001,265
----------- -----------
CAPITAL DEFICIT:
Common stock 121,404 121,404
Additional paid-in capital 883,698 883,698
Deficit accumulated during the development stage (2,997,176) (2,987,349)
----------- -----------
Total capital deficit (1,992,074) (1,982,247)
----------- -----------
$ 15,976 $ 19,018
=========== ===========
</TABLE>
F-48
<PAGE>
NORTH AMERICA ENVIRONMENTAL GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
from Inception
(May 7, 1991)
Three Months ended March 31, Through
---------------------------- March 31,
1996 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
SALES OF ENVIRONMENTAL
SERVICES $ - $ - $ 13,542
----------- ----------- ------------
EXPENSES
Research and development - - 1,306,369
Consulting fees - - 437,632
Travel and promotion - - 240,288
Legal and professional fees - - 224,140
General and administrative 3,042 49,364 623,056
Management fees - - 50,000
----------- ----------- ------------
TOTAL EXPENSES 3,042 49,364 2,881,485
----------- ----------- ------------
OPERATING LOSS (3,042) (49,364) (2,867,943)
----------- ----------- ------------
Other income (expense):
Interest income - - 3,600
Interest expense (6,785) (6,771) (92,833)
Write-off of goodwill - - (40,000)
----------- ----------- ------------
TOTAL OTHER EXPENSES (6,785) (6,771) (129,233)
----------- ----------- ------------
NET LOSS $ (9,827) $ (56,135) $ (2,997,176)
=========== =========== ============
Loss per common share $ - $ -
----------- ----------- ------------
Weighted average number of
common shares outstanding 12,140,404 12,138,333
=========== =========== ============
</TABLE>
F-49
<PAGE>
NORTH AMERICA ENVIRONMENTAL GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Increase (Decrease) in Cash
Cumulative
from Inception
(May 7, 1991)
Three Months ended March 31, Through
---------------------------- March 31,
1996 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (9,827) $ (56,135) $ (2,997,176)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization 3,042 3,600 33,813
Stock issued for services - - 453,000
Write-off of goodwill - - 40,000
Changes in assets and
liabilities:
Advance payments - 44,500 12,000
Deposits - - (2,700)
Accounts payable - - (5,320)
Accrued interest payable 6,785 6,771 87,594
----------- ----------- ------------
Net cash used in operating
activities - 1,264 (2,378,789)
----------- ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Cash received in acquisition
of subsidiary - - 8,593
Purchase of property and
equipment - - (52,866)
----------- ----------- ------------
Net cash used in investing
activities - - (44,273)
----------- ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of convertible
debenture - - 750,000
Issuance of common stock - - 300,000
Increase in notes payable - - 175,000
Increase in amounts due to
affiliates - 1,249 1,198,395
----------- ----------- ------------
Net cash provided by
financing activities - 1,249 2,423,395
----------- ----------- ------------
NET INCREASE (DECREASE)
IN CASH - (15) 333
CASH, at beginning of period 333 1,001 -
----------- ----------- ------------
CASH, at end of period $ 333 $ 986 $ 333
=========== =========== ============
</TABLE>
F-50
<PAGE>
NORTH AMERICAN ENVIRONMENTAL GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial information has been prepared in accordance with the Company's
customary accounting practices and with the instructions for Form 10-QSB, and
has not been audited. Readers of the information should refer to the Company's
audited financial statements as of December 31, 1995, 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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
PROFORMA STATEMENTS OF LOSS
TWELVE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Twelve Months ended December 31, 1995
North American
Technologies
Group, Inc. GAIA Holdings Adjustments
Audited Unaudited #1 #2 PROFORMA
<S> <C> <C> <C> <C> <C>
Revenues 2,642,735 226,947 2,869,682
Costs of services rendered 1,716,715 126,337 1,843,052
---------- -------- ----------
Gross margin 926,020 100,610 1,026,630
Research and development 595,771 595,771
Selling, general and administrative 4,557,949 680,034 (86,445) 230,000 5,381,538
---------- -------- ------- -------- ----------
5,153,720 680,034 (86,445) 230,000 5,977,309
---------- -------- ------- -------- ----------
Operating Loss (4,227,700) (579,424) 86,445 (230,000) (4,950,679)
Other income (expense)
Interest income 354,665 4,261 358,926
Interest expense (157,725) (181,718) 181,718 (126,000) (283,725)
Minority interest in net (income) of subsidiary (5,432) (5,432)
Equity in net income of affiliate (231,712) (231,712)
Loss on write-off of investment (3,084,729) (3,084,729)
Other 12,393 47,368 59,761
---------- -------- ------- -------- ----------
(3,112,540) (130,089) 181,718 (126,000) (3,186,911)
---------- -------- ------- -------- ----------
Loss from continuing operations (7,340,240) (709,513) 268,163 (356,000) (8,137,590)
---------- -------- ------- -------- ----------
Weighted average number of
common shares outstanding 18,199,474 1,666,667 19,866,141
========== ========= ==========
Net loss per share (0.41)
=====
</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-76
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
----------------------------
This Agreement and Plan of Merger, approved as of February 9, 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
February 9, 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 February 9, 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
<PAGE>
have voted such shares in favor of adoption of this Agreement and who shall
have delivered to the Company a 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
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<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
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 at 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, 252, 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 or 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.
<PAGE>
(d) Appraisal rights shall be perfected as follows:
(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
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<PAGE>
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.
(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 name 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.
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<PAGE>
(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.
4
<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., a Delaware corporation
("NAE"), with and into Daily Mail, Inc., a Delaware corporation ("DM"), which is
a wholly-owned subsidiary of North American Technologies Group, Inc., a Delaware
corporation (the "Company"), in which DM will be the surviving corporation, to
be effected pursuant to an Agreement and Plan of Merger dated February 9, 1996
and the provisions of the Delaware General Corporation Law, 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").
In connection with this opinion, we have examined originals, photocopies of
originals or certified copies of the following documents:
1. Agreement and Plan of Merger dated February 9, 1996 by and among the
Company, DM and NAE (the "Merger Agreement");
2. Amendment No. 3 to Form S-4 Registration Statement dated June ___, 1996
(the "Registration Statement");
3. Certificate of North American Technologies Group, Inc., Daily Mail, Inc.
and North American Environmental Group, Inc. dated even date herewith (the
"Certificate");
In examination of such documents, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals
and the conformity to the original documents of all documents submitted to us as
certified or photostatic copies, and we have relied upon the aforesaid documents
with respect to the accuracy of material factual matters contained therein. As
to any facts relevant to our opinion, we have relied solely upon information
contained in the Certificate, and we have made no independent examination of
such information for the purpose of rendering this opinion.
<PAGE>
Our opinion is conditioned upon the accuracy of the following facts, that
we have assumed without independent investigation:
1. The Merger will constitute a statutory merger under the applicable
laws of the State of Delaware.
2. All of the conditions precedent to the Merger set forth in the Merger
Agreement are met, and that the Merger will be approved by the holders of NAE
common stock and will become effective under state and federal law in accordance
with the Merger Agreement.
3. 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 dissenter's rights are perfected under Delaware law and shares held
directly or indirectly by the Company and DM or held in NAE's treasury, which
shall be canceled) 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.
4. The Company owns 350,000 shares of NAE Common Stock, representing
approximately 3% of the total issued and outstanding shares of NAE Common Stock.
5. DM owns 10,408,333 shares of NAE Common Stock, representing
approximately 86% of the issued and outstanding shares of NAE Common Stock.
6. The minority shareholders of NAE (all NAE shareholders other than the
Company and DM) (the "NAE Minority Shareholders") own 1,382,071 shares of NAE
Common Stock, representing approximately 11% of the issued and outstanding
shares of NAE Common Stock.
7. The Company owns 100% of the issued and outstanding shares of DM
voting Common Stock ("DM Common Stock").
8. Through the Merger, the Company will issue 1,382,071 shares of newly
issued Company Common Stock to be distributed to the NAE Minority Shareholders
in exchange for their shares of NAE Common Stock.
9. The NAE Minority Shareholders will receive only the Company's Common
Stock in consideration for the transfer of their shares of NAE Common Stock in
the Merger and will not receive shares of any class of stock of DM.
10. No shares of any class of stock of DM or NAE have been redeemed
during the three years preceding the Effective Date.
11. NAE has not acquired any assets in a non-taxable transaction, except
for acquisitions occurring more than three years prior to the Effective Date.
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<PAGE>
12. 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; or (ii) 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.
13. DM's acquisition of its shares of NAE Common Stock occurred more than
three years prior to the Effective Date of the Merger.
14. There is no intercompany debt between DM and NAE that would be
extinguished in the Merger.
15. DM will receive at least seventy percent of the fair market value of
the gross assets and ninety percent of the fair market value of the net assets
held by NAE immediately prior to the Merger.
16. There is no plan or intention by the shareholders of NAE who own 5%
or more of the issued and outstanding NAE 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 Common Stock received in the transaction that
would reduce the NAE shareholders' ownership of the Company Common Stock to a
number of shares having a value, as of the Effective Date, of less than fifty
percent of the value of all of the formerly outstanding stock of NAE as of the
same date.
17. To the best of the knowledge of the management of Company, NAE and
DM, 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 the Certificate, attached hereto as Exhibit A, and
the representations set forth in the Merger Agreement 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 Exhibit A without independent 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.
3
<PAGE>
We have assumed that NAE will be merged under state law into DM, satisfying
the initial test under Code Section 368(a)(1)(A). 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. The parties to the Merger have represented in the
Certificate that: (i) DM will acquire substantially all of the assets of NAE in
the Merger, (ii) no stock of DM will be transferred to the shareholders of NAE
in consideration for the stock of NAE surrendered; and (iii) if NAE was merged
directly into the Company, the transaction would qualify as a Reorganization
under Code Section 368(a)(1)(A).
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
50% of the value of the formerly outstanding stock of the acquired corporation
as of the same date. See Rev. Proc. 77-37, 1977-2 C.B. 568. The Service's 50%
rule is applicable only if a taxpayer is attempting to obtain a ruling that a
transaction qualifies as a tax-free reorganization. It is not a rule of
substantive law. For instance, the U.S. Supreme Court, in Nelson Co. v.
Helvering, 296 U.S. 374 (1935), held that 38% continuity of interest was
sufficient to satisfy the test, and the U.S. Court of Appeals for the Sixth
Circuit in Miller v. Commissioner, 85 F.2d 415 (6th Circuit 1936), held that 25%
continuity of interest was sufficient. However, in instances in which
continuing interest of the target shareholders is below 50%, there is a risk
that the Service will challenge the satisfaction of the continuity of interest
requirement.
It has been represented that in the Merger, the NAE Minority Shareholders
will receive the Company's Common Stock. If the NAE Common Stock held by the
Company and DM is included with the NAE Minority Shareholders receipt of the
Company's Common Stock, 100% 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, 60 TC 218 (1973), aff'd 491 F.2d
749 (3rd Circuit 1974), held, in dicta, that "old-and-cold" stock previously
acquired by the acquiring corporation may contribute to continuity of interest
as long as such stock was not acquired as a step in a integrated plan to acquire
assets of the target corporation. See also, GCM 39404 (September 14, 1985) and
Rev. Rul. 85-107, 1985-2 C.B. 121. In GCM 39404, the Service held that the
prior stock interest of a parent in an upstream merger of a 70% 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 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
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<PAGE>
continues to remain at the risk of the NAE business, since the NAE business will
be continued by DM. DM has represented in the Certificate that it acquired its
stock in NAE in June, 1992, approximately four years prior to the Effective
Date, and that such purchase was not part of an integrated plan to acquire the
assets of NAE. Based on this representation, it appears that DM's 86% stock
interest in NAE should be counted in determining whether the continuity of
interest requirement will be satisfied.
Every Reorganization must be undertaken for a valid business purpose. The
Company, NAE and DM have all represented in the Certificate to counsel that
there are valid business purposes for the Merger.
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 in the Certificate by officers of the
Company, DM and NAE that the historic business of NAE will be continued by DM.
A statutory merger of an 86% owned subsidiary (NAE) into its parent
corporation (DM) (a so called "upstream merger") may qualify as both a Section
368(a)(1)(A) reorganization and a liquidation under Code Section 332. In Kansas
Sand and Concrete, Inc., 72-2 USTC (P) 9590, 462 F.2d 805 (CA-10, 1972), the
Court held that where a statutory merger between a parent and a wholly-owned
subsidiary also qualified as a liquidation under Code Section 332, the
provisions of Code Section 332 took preference over the reorganization
provisions. However, the Service has privately ruled that where a merger of a
less than 100% owned subsidiary into the parent qualifies as both a Section
368(a)(1)(A) reorganization and a Code Section 332 liquidation, the minority
shareholders in the subsidiary are entitled to the benefits of the tax-free
reorganization provisions while the subsidiary and parent corporations are
entitled to the non-taxable liquidation provisions of Code Section 332. See
Private Letter Ruling 9351028. If DM and NAE are subject to the provisions of
Code Section 332, generally, there would be no gain or loss recognized by DM or
NAE on the Merger, and DM would have a carryover basis in the assets of NAE.
NAE's unaudited Consolidated Balance Sheet as of March 31, 1996 reflects a
capital deficit. Pursuant to Reg. (S) 1.332.2(b), the provisions of Code
Section 332 may not apply to the Merger if NAE is determined to be insolvent on
the Effective Date. In such case, the Service and the Courts have differed on
the appropriate tax treatment to the parent and the subsidiary. In Revenue
Ruling 59-296, 59-2 C.B. 87, the Service ruled that where a creditor-parent took
over all of the assets of its wholly-owned insolvent debtor-subsidiary in a
statutory merger, the transaction was treated as a taxable transfer made in
satisfaction of indebtedness rather than a non-taxable Code Section 332
liquidation or tax-free reorganization under Code Section 368(a)(1)(A).
Conversely, in Norman Scott Inc., 48 TC 598 (1967), the U.S. Tax Court ruled
that the statutory merger of a creditor corporation with its two insolvent
sister corporations qualified as a tax free reorganization under Code Section
368(a)(1)(A). The present transaction may be distinguishable from Revenue
Ruling 59-296 based on representations that there is no indebtedness outstanding
between DM and NAE, and no indebtedness between the Company and NAE will be
retired or otherwise satisfied in the Merger. Also, it is uncertain whether
NAE's
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<PAGE>
current financial situation would preclude the application of Code Section
332. Accordingly, we are unable to predict with certainty whether the
appropriate tax treatment of the Merger as to the Company, DM and NAE will be a
Code Section 332 liquidation, a Code Section 368(a)(1)(A) reorganization or some
other treatment.
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, it is our opinion that, it is more likely than not, if
the transaction were litigated, a court of law would hold that as to the NAE
Minority Shareholders, the Merger would constitute a Reorganization under Code
Sections 368(a)(1)(A) and 368(a)(2)(D). In rendering such an opinion, we have
relied solely upon the written representations and covenants of the Company, DM
and NAE as set forth in the Certificate. No ruling has been sought from the
Service as to the federal income tax consequences of the Merger, and our opinion
is not binding on the Service or any court.
If the Merger is a tax free reorganization, the Merger will have the
following federal income tax consequences to the NAE Minority Shareholders:
1. No gain or loss will be recognized by the NAE Minority shareholders
who exchange their shares of NAE Common Stock solely in exchange for the
Company's Common Stock pursuant to the Merger;
2. The aggregate tax basis of the Company's Common Stock received by
each NAE Minority Shareholder in the Merger will be the same as the aggregate
tax basis of such NAE Minority 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; and
3. The holding period of the shares of the Company's Common Stock
received by each NAE Minority Shareholder will include the holding period for
the shares of NAE Common Stock of each shareholder exchanged in the Merger,
provided that such shares of NAE Common Stock were held as capital assets on the
Effective Date.
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 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 Minority 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 Minority 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.
6
<PAGE>
This opinion is furnished to you solely for use in connection with the
Registration Statement and may not be relied upon by any other person or entity
including, but without limitation, any other party to the Merger.
BUCHANAN INGERSOLL
PROFESSIONAL CORPORATION
By:________________________________
7
<PAGE>
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.
<PAGE>
Item 21. Exhibits
The following Exhibits are filed as part of this Registration Statement.
<TABLE>
<CAPTION>
Number Description Method of Filing
- ------ ----------- ----------------
<C> <S> <C>
1 Agreement and Plan of Included as Exhibit A to the Information
Merger Statement and Prospectus
2 Section 262 of the Included as Exhibit B to the Information
Delaware General Corporate Statement and Prospectus
Law
4 Instruments defining the
rights of security holders:
4.1 Certificate of Incorporated by reference to Exhibit A to
Incorporation of Registrant the Company's Form S-4
4.2 Certificate of Amendment Incorporated by reference to Exhibit B to
of Certificate of the Company's Form S-4
Incorporation of the
Company as of August 10,
1993
4.3 Certificate of Amendment Incorporated by reference to Exhibit C to
of Certificate of the Company's Form S-4
Incorporation of the
Company as of January 29,
1993
4.7 Amended and Restated Filed herewith
Bylaws of Registrant
4.8 Certificate of Designation Incorporated by reference to the Company's
for Series D Convertible current Report on Form 8-K/A dated January
Preferred Stock of the 31, 1996
Company
4.9 Certificate of Designation Incorporated by reference to the Company's
for Series E Convertible Annual Report on form 10-K for the year
Preferred Stock of the ended December 31, 1995
Company
4.10 Certificate of Designation Incorporated by reference to the 1995 Form
for Series F Convertible 10-K
Preferred Stock of the
Company
5 Opinion of Buchanan Filed herewith
Ingersoll Professional
Corporation
8 Tax Opinion of Buchanan Included as Exhibit C to the Information
Ingersoll Professional Statement and Prospectus
Corporation
10 Material Contracts
10.1 Stock Option Agreement Incorporated by reference to Exhibit 10.6
between John Parrott and to the Company's 1994 10-K
the Company dated February
7, 1993
10.2 Stock Option Agreement Incorporated by reference to Exhibit 10.7
between Tim B. Tarrillion to the Company's 1994 10-K
and the Company dated
February 7, 1995
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Number Description Method of Filing
- ------ ----------- ----------------
<C> <S> <C>
10.3 Stock Option Agreement Incorporated by reference to Exhibit 10.8
between David Daniels and to the Company's 1994 10-K
the Company dated February
7, 1995
10.4 Stock Option Agreement Incorporated by reference to Exhibit 10.9
between Judith Shields and to the Company's 1994 10-K
the Company dated February
23, 1995
10.5 Stock Option Agreement Previously filed as an exhibit to this
between Donovan W. Boyd Form S-4
and the Company dated
February 23, 1995
10.6 EET 401(k) Plan Incorporated by reference to Exhibit 10.10
to the Company's 1994 10-K
10.7 Amendment to Stock Option Incorporated by reference to the 1995 10-K
Agreement of Tim Tarillion
10.8 Amendment to Stock Option Incorporated by reference to the 1995 10-K
Agreement of Donovan W.
Boyd
10.9 Amendment to Stock Option Incorporated by reference to the 1995 10-K
Agreement of Judith Shields
10.10 Employment Agreement of Incorporated by reference to Exhibit 10.1
John Parrott dated the Company's Current Report on Form 8-K
February 7, 1995 dated March 22, 1995 ("8-K")
10.11 Employment Agreement of Incorporated by reference to Exhibit 10.2
Tim Tarrillion dated to the 8-K
February 7, 1995
10.12 Employment Agreement of Incorporated by reference to Exhibit 10.3
David Daniels dated to the 8-K
February 7, 1995
10.13 Employment Agreement of Incorporated by reference to Exhibit 10.5
Judith Shields dated to the 8-K
February 23, 1995
10.14 Employment Agreement of Incorporated by reference to the March 22,
Ron Borah dated February 1995 8-K
23, 1995
10.15 Employment Agreement of Previously filed as an exhibit to this
Donovan W. Boyd dated Form S-4
February 23, 1995
10.16 Agreement and Plan of Previously filed as an exhibit to this
Merger between Industrial Form S-4
Pipe Fittings, Inc. and
the Company dated June 22,
1995
10.17 Consulting Agreement with Previously filed as an exhibit to this
John W. Parrott dated July Form S-4
28, 1995.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Number Description Method of Filing
- ------ ----------- ----------------
<C> <S> <C>
10.18 Stock and Warrant Purchase Incorporated by reference to the 1995 10-K
Agreement
10.19 Stockholders' Agreement Incorporated by reference to the 1995 10-K
10.20 Warrant dated as of April Incorporated by reference to the 1995 10-K
5, 1996
22 Subsidiaries of Registrant Previously filed as an exhibit to this
Form S-4
24 Consents of Experts
24.1 Consents of BDO Seidman, Filed herewith
LLP, with respect to the
North American
Technologies Group, Inc.
24.2 Consent of BDO Seidman, Filed herewith
LLP, with respect to North
American Environmental
Group, Inc.
24.3 Consent of Shoemaker & Filed herewith
Wilson with respect to
North American
Environmental Group, Inc.
24.4 Consent of Buchanan Included within Exhibit 5 hereto
Ingersoll Professional
Corporation
</TABLE>
4
<PAGE>
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.
5
<PAGE>
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. 3 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 14th day of June, 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
(Principal Accounting Officer)
6
<PAGE>
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
<S> <C> <C> <C>
/s/ Tim B. Tarrillion Chief Executive June 14, 1996
---------------------- Officer, ________
Tim B. Tarrillion President and
Director
* Senior Vice June 14, 1996
---------------------- President, ________
Donovan W. Boyd Chief Operating
Officer
and Director
* Executive Vice June 14, 1996
---------------------- President, ________
David M. Daniels Secretary and
Director
/s/ William T. Aldrich Director June 14, 1996
---------------------- ________
William T. Aldrich
</TABLE>
*By: /s/ Tim B. Tarrillion
-----------------------
Tim B. Tarrillion
Attorney-in-fact
7
<PAGE>
AMENDED AND RESTATED
BYLAWS OF
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
A Delaware Corporation
ARTICLE I
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Place and Time of Meetings. An annual meeting of the
stockholders shall be held each year for the purpose of electing directors and
conducting such other proper business as may come before the meeting. The date,
time and place of the annual meeting may be determined by resolution of the
board of directors or as set by the Chairman of the Board, if there be one, or
the President, of the Corporation.
Section 2. Special Meetings. Unless otherwise prescribed by Delaware
Corporation Law or by the Certificate of Incorporation, special meetings of
stockholders, for any purpose or purposes, may be called only by either the
Chairman of the Board, if there be one, or the President, and shall be called by
the Secretary or any Assistant Secretary, if there be one, at the request in
writing of a majority of the board of directors. Such request shall state the
purpose or purposes of the proposed meeting. Upon receipt of such written
request, the Chairman of the Board, if there be one, or the President of the
Corporation, shall fix a date and time for such meeting which such date shall be
within ten business days of the proposed date specified in the written request.
Section 3. Place of Meetings. The board of directors may designate any
place, either within or without the State of Delaware, as the place of meeting
for any annual meeting or for any special meeting called by the board of
directors. If no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the principal executive office of the
Corporation.
Section 4. Notice. Whenever stockholders are required or permitted to
take action at a meeting, written or printed notice stating the place, date,
time, and, in the case of special meetings, the purpose or purposes, of such
meeting, shall be given to each stockholder entitled to vote at such meeting not
less than 10 nor more than 60 days before the date of the meeting. All such
notices shall be delivered, either personally or by mail, by or at the direction
of the board of directors, the President and Chief Executive Officer or the
Secretary, and if mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, postage prepaid, addressed to the
stockholder at his, her or its address as the same appears on the records of the
Corporation. Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when the person attends for the express purpose
of objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened.
<PAGE>
Section 5. Quorum. The holders of the majority of the outstanding shares
of capital stock entitled to vote at a meeting, present in person or represented
by proxy, shall constitute a quorum at all meetings of the stockholders, except
as otherwise provided by statute or by the Certificate of Incorporation. If a
quorum is not present, the holders of fifty percent of the shares present in
person or represented by proxy at the meeting, and entitled to vote at the
meeting, may adjourn the meeting to another time and/or place. When a specified
item of business requires a vote by a class or series (if the Corporation shall
then have outstanding shares of more than one class or series) voting as a
class, the holders of a majority of the shares of such class or series shall
constitute a quorum (as to such class or series) for the transaction of such
item of business.
Section 6. Waiver of Notice. Any stockholder, either before or after any
stockholders' meeting, may waive in writing notice of the meeting, and his
waiver shall be deemed the equivalent of giving notice. Attendance at a meeting
by a stockholder shall constitute a waiver of notice, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
Section 7. Notice of Business. At any meeting of the stockholders of the
Corporation, only such proper business shall be conducted as shall have been
brought before the meeting (i) by or at the direction of the board of directors
or (ii) by any stockholder of the Corporation who is a stockholder of record at
the time of giving of the notice provided for in this Section 7, who shall be
entitled to vote at such meeting and who complies with the notice procedures set
forth in this Section 7. For business to be brought before a meeting of
stockholders by a stockholder, the stockholder shall have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive office of the Corporation not less than 50 days nor more
than 75 days prior to the meeting; provided, however, that in the event that
less than 60 days' notice or prior public disclosure of the date of the meeting
is given or made to stockholders, notice by the stockholder to be timely must be
so received not later than the close of business on the tenth day following the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made, whichever first occurs. Such stockholder's notice to the
Secretary of the Corporation shall set forth as to each matter the stockholder
proposes to bring before the meeting (i) a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and, in the event that such business includes a proposal
to amend any document, including these Bylaws, the language of the proposed
amendment, (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business, (iii) the class and number of shares
of capital stock of the Corporation which are beneficially owned by such
stockholder and (iv) any material interest of such stockholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at a meeting of the stockholders except in accordance with the
procedures set forth in this Section 7. The chairman of the meeting of
stockholders shall, if the facts warrant, determine and declare to the meeting
that business was not properly brought before the meeting and in accordance with
the provisions of these Bylaws, and if he should so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted. Notwithstanding the foregoing provisions of
this Section 7, a stockholder shall
2
<PAGE>
also comply with all applicable requirements of the Securities and Exchange Act
of 1934, as amended, and the rules and regulations promulgated thereunder with
respect to matters set forth in this Section 7.
Section 8. Voting. Unless otherwise required by Delaware Corporation Law,
the Certificate of Incorporation or these Bylaws, any question brought before
any meeting of stockholders shall be decided by the vote of the holders of a
majority of the stock represented and entitled to vote thereat. Except as
otherwise provided in the Certificate of Incorporation or in a Certificate of
Designation with respect to a class or series of capital stock of the
Corporation, each stockholder shall have one vote for each share of capital
stock entitled to vote held of record by such stockholder and a proportionate
vote for each fractional share so held, unless otherwise provided in the
Certificate of Incorporation. The board of directors, in its discretion, or the
officer of the Corporation presiding at a meeting of stockholders, in his
discretion, may require that any votes cast at such meeting shall be cast by
written ballot. Persons holding stock in a fiduciary capacity shall be entitled
to vote the shares so held. Persons whose stock is pledged shall be entitled to
vote, unless in the transfer by the pledgor on the books of the Corporation he
has expressly empowered the pledgee to vote thereon, in which case only the
pledgee, or his proxy, may represent such stock and vote thereon.
If shares having voting power stand of record in the names of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, tenants by the entirety, or otherwise, or if two or more persons have
the same fiduciary relationship respecting the same shares, unless the Secretary
of the Corporation is given written notice to the contrary and is furnished with
a copy of the instrument or order appointing them or creating the relationship
wherein it is so provided, their acts with respect to voting shall have the
following effect: (i) if only one votes, his act binds all; (ii) if more than
one vote, the act of the majority so voting binds all; and (iii) if more than
one vote, but the vote is evenly split on any particular matter, each fraction
may vote the securities in question proportionately, or any person voting the
shares or a beneficiary, if any, may apply to the Court of Chancery or any court
of competent jurisdiction in the State of Delaware to appoint an additional
person to act with the persons so voting the shares. The shares shall then be
voted as determined by a majority of such persons and the person appointed by
the Court. If a tenancy is held in unequal interests, a majority or even-split
for the purpose of this subsection shall be a majority or even-split in
interest.
Section 9. Proxies. A stockholder entitled to vote at a meeting of
stockholders may authorize another person or persons to act for him by proxy.
No proxy shall be or acted upon after three (3) years from its date, unless the
proxy provides for a longer period.
Section 10. Consent of Stockholders in Lieu of Meeting. No action
required or permitted to be taken at any annual or special meeting of
stockholders of the Corporation may be taken without a meeting, and stockholders
of the Corporation may not take action by written consent.
Section 11. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting,
3
<PAGE>
arranged in alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The lists shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 12. Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 11 of this Article I or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
ARTICLE II
DIRECTORS
---------
Section 1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the board of directors.
Section 2. Number, Election and Term of Office. Except as otherwise fixed
by or pursuant to provisions of the Certificate of Incorporation relating to the
rights of the holders of any class or series of stock having a preference over
the Common Stock and as to dividends or upon liquidation to elect additional
directors under specified circumstances, the number of directors of the
Corporation which shall constitute the board as of the date these Bylaws are
first amended and restated shall be three. In connection with the annual
meeting of stockholders to be held in fiscal year 1996, the number of directors
constituting the board of directors shall be increased to nine. Thereafter, the
number of directors shall be established from time to time by resolution of the
board of directors. Beginning with the annual meeting of stockholders to be
held in fiscal year 1996 (assuming the approval of the stockholders at such
meeting of an amendment to the Certificate of Incorporation), the directors,
other than those who may be elected by the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation, shall be classified, with respect to the time for which they
severally hold office, into three classes, as nearly equal in number as
possible, one class to be originally elected for a term expiring at the annual
meeting of stockholders to be held in fiscal year 1997, another class to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in fiscal year 1998, and another class to be originally elected for a
term expiring at the annual meeting of stockholders to be held in fiscal year
1999, with each class to hold office until its successor is elected and
qualified. At each annual meeting of the stockholders of the Corporation after
fiscal year 1996, the successors of the class of directors whose term expires at
that meeting shall be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election. The directors shall be elected by a plurality of the votes of the
shares present in person or represented
4
<PAGE>
by proxy at the meeting and entitled to vote in the election of directors.
Directors need not be stockholders. Election of directors need not be by written
ballot.
Only persons who are nominated in accordance with the following procedures
shall be eligible for election by the stockholders as directors of the
Corporation. Nominations of persons for election as directors of the
Corporation may be made at a meeting of stockholders (a) by or at the direction
of the board of directors, (b) by any nominating committee or persons appointed
by the board of directors or (c) by any stockholder of the Corporation entitled
to vote for the election of directors at the meeting who complies with the
notice procedures set forth in this Section 2. Such nominations, other than
those made by or at the direction of the board of directors, shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice shall be delivered to or mailed and received at
the principal executive office of the Corporation not less than 50 days nor more
than 75 days prior to the meeting; provided, however, that in the event that
less than 60 days' notice or prior public disclosure of the date of the meeting
is given or made to stockholders, notice by the stockholder to be timely must be
so received not later than the close of business on the tenth day following the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made, whichever first occurs. Such stockholder's notice to the
Secretary of the Corporation shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director, (i)
the name, age, business address and residence address of the person, (ii) the
principal occupation or employment of the person, (iii) the class and number of
shares of capital stock of the Corporation which are beneficially owned by the
person and (iv) any other information relating to the person that is required to
be disclosed in solicitations for proxies for election of directors pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as now or hereafter
amended; and (b) as to the stockholder giving the notice, (i) the name and
record address of such stockholder and (ii) the class and number of shares of
capital stock of the Corporation which are beneficially owned by such
stockholder. The Corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the Corporation to determine
the eligibility of such proposed nominee to serve as a director of the
Corporation. No person shall be eligible for election by the stockholders as a
director of the Corporation unless nominated in accordance with the procedures
set forth herein. The chairman of the meeting of the stockholders shall, if the
facts warrant, determine and declare to the meeting that nomination was not made
in accordance with the foregoing procedure, and if he should so determine, he
shall so declare to the meeting and the defective nomination shall be
disregarded.
Section 3. Removal and Resignation. Subject to the rights of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect directors under specified circumstances, any director
may be removed from office only for cause and only by the affirmative vote of
the holders of two-thirds of the combined voting power of the then outstanding
shares of stock entitled to vote generally in the election of directors, voting
together as a single class. Any director may resign at any time upon written
notice to the Corporation.
Section 4. Vacancies. Any vacancies in the board of directors for any
reason, and directorships resulting from any increase in the number of
directors, may be filled by the board
5
<PAGE>
of directors, although less than a quorum, and any directors so chosen shall
hold office until the next election of the class for which such directors shall
have been chosen and until their successors shall be elected and qualified .
Section 5. Annual Meetings. The annual meeting of each newly elected
board of directors shall be held without other notice than this Bylaw
immediately after, and at the same place as, the annual meeting of stockholders.
Section 6. Other Meetings and Notice. Regular meetings, other than the
annual meeting, of the board of directors may be held without notice at such
time and at such place as shall from time to time be determined by resolution of
the board. Special meetings of the board of directors may be called by or at
the request of the Chairman of the Board, if there shall be one, or the
President, on at least 24 hours notice to each director, either personally, by
telephone, by mail, or by facsimile; in like manner and on like notice the
Chairman of the Board, if there shall be one, or the President, must call a
special meeting on the written request of at least a majority of the directors.
Section 7. Quorum. Required Vote and Adjournment. A majority of the total
number of directors shall constitute a quorum for the transaction of business.
The vote of a majority of directors present at a meeting at which a quorum is
present shall be the act of the board of directors. If a quorum shall not be
present at any meeting of the board of directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 8. Committees. The board of directors may, by resolution passed
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation, which
to the extent provided in such resolution or these Bylaws shall have and may
exercise the powers of the board of directors in the management and affairs of
the Corporation except as otherwise limited by law. The board of directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the board of directors. Each committee
shall keep regular minutes of its meetings and report the same to the board of
directors when required.
Section 9. Committee Rules. Each committee of the board of directors may
fix its own rules of procedure and shall hold its meetings as provided by such
rules, except as may otherwise be provided by a resolution of the board of
directors designating such committee. Unless otherwise provided in such a
resolution, the presence of at least a majority of the members of the committee
shall be necessary to constitute a quorum. The vote of a majority of committee
members present at a meeting at which a quorum is present shall be the act of a
committee.
Section 10. Communications Equipment. Members of the board of directors
or any committee thereof may participate in and act at any meeting of such board
or committee through the use of a conference telephone or other communications
equipment by means of which all
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persons participating in the meeting can hear each other, and participation in
the meeting pursuant to this section shall constitute presence in person at the
meeting.
Section 11. Waiver of Notice and Presumption of Assent. Any member of the
board of directors or any committee thereof who is present at a meeting shall be
conclusively presumed to have waived notice of such meeting except when such
member attends for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. Such member shall be conclusively presumed to have assented
to any action taken unless his or her dissent shall be entered in the minutes of
the meeting or unless his or her written dissent to such action shall be filed
with the person acting as the Secretary of the meeting before the adjournment
thereof or shall be forwarded by registered mail to the Secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to any member who voted in favor of such action.
Section 12. Action by Written Consent. Unless otherwise restricted by the
Certificate of Incorporation, any action required or permitted to be taken at
any meeting of the board of directors, or of any committee thereof, may be taken
without a meeting if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 13. Compensation. The directors may be paid their expenses, if
any, of attendance at each meeting of the board of directors and may be paid a
fixed sum (which may be cash or other property or any combination thereof) for
attendance at each meeting of the board of directors or a stated salary as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
ARTICLE III
OFFICERS
--------
Section 1. Number. The officers of the Corporation shall be elected by
the board of directors and shall consist of a Chairman of the Board, a President
and Chief Executive Officer, one or more Vice Presidents, a Secretary, a
Treasurer, and such other officers and assistant officers as may be deemed
necessary or desirable by the board of directors. Any number of offices may be
held by the same person, except that no person may simultaneously hold the
office of President and Secretary. In its discretion, the board of directors
may choose not to fill any office for any period that it may deem advisable.
Section 2. Election and Term of Office. The officers of the Corporation
shall be elected annually by the board of directors at its first meeting held
after each annual meeting of stockholders or as soon thereafter as conveniently
may be. The President and Chief Executive Officer shall appoint other officers
to serve for such terms as he or she deems desirable. Vacancies may be filled
or new offices created and filled at any meeting of the board of
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directors. Each officer shall hold office until a successor is duly elected and
qualified or until his or her earlier death, resignation or removal as
hereinafter provided.
Section 3. Removal. Any officer or agent elected by the board of
directors may be removed by the board of directors whenever in its judgment the
best interests of the Corporation would be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed.
Section 4. Vacancies. Any vacancy occurring in any office because of
death, resignation, removal, disqualification or otherwise, may be filled by the
board of directors for the unexpired portion of the term by the board of
directors then in office.
Section 5. Compensation. Compensation of all officers shall be fixed by
the board of directors, and no officer shall be prevented from receiving such
compensation by virtue of his or her also being a director of the Corporation.
Section 6. The Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the stockholders and board of directors at which he
or she is present and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or as may be provided in these
Bylaws.
Section 7. President and Chief Executive Officer. The President shall be
the Chief Executive Officer and, subject to the powers of the board of
directors, shall have general charge of the business, affairs and property of
the Corporation and control over its officers, agents and employees; and shall
see that all orders and resolutions of the board of directors are carried into
effect. The President and Chief Executive Officer shall execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the board of directors to some other officer or agent of
the Corporation. The President and Chief Executive Officer shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or as may be provided in these Bylaws.
Section 8. Vice-Presidents. The Vice-President, if any, or if there shall
be more than one, the Vice-Presidents in the order determined by the board of
directors shall, in the absence or disability of the President, act with all of
the powers and be subject to all the restrictions of the President. The Vice-
Presidents shall also perform such other duties and have such other powers as
the board of directors, the President and Chief Executive Officer or these
Bylaws may, from time to time, prescribe. The Board of Directors may designate
one or more of the Vice-Presidents as Senior Vice-Presidents and/or Executive
Vice-Presidents, with the additional duties and responsibilities as the Board of
Directors or the President and Chief Executive Officer shall provide.
Section 9. The Secretary and Assistant Secretaries. The Secretary shall
attend all meetings of the board of directors, all meetings of the committees
thereof and all meetings of the
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stockholders and record all the proceedings of the meetings in a book or books
to be kept for that purpose. Under the President and Chief Executive Officer's
supervision, the Secretary shall give, or cause to be given, all notices
required to be given by these Bylaws or by law; shall have such powers and
perform such duties as the board of directors, the President and Chief Executive
Officer or these Bylaws may, from time to time, prescribe; and shall have
custody of the corporate seal of the Corporation. The Secretary, or an Assistant
Secretary, shall have authority to affix the corporate seal to any instrument
requiring it and when so affixed, it may be attested by his or her signature or
by the signature of such Assistant Secretary. The board of directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his or her signature. The Assistant Secretary, or if
there be more than one, the Assistant Secretaries in the order determined by the
board of directors, shall, in the absence or disability of the Secretary,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as the board of directors, the
Chairman of the Board, the President, or Secretary may, from time to time,
prescribe.
Section 10. The Treasurer and Assistant Treasurer. The Treasurer shall
have the custody of the corporate funds and securities; shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation; shall deposit all moneys and other valuable effects in the name and
to the credit of the Corporation as may be ordered by the board of directors;
shall cause the funds of the Corporation to be disbursed when such disbursements
have been duly authorized, taking proper vouchers for such disbursements; and
shall render to the Chairman of the Board and the board of directors, at its
regular meeting or when the board of directors so requires, an account of the
Corporation; and shall have such powers and perform such duties as the board of
directors, the Chairman of the Board, the President or these Bylaws may, from
time to time, prescribe. If required by the board of directors, the Treasurer
shall give the Corporation a bond (which shall be rendered every six years) in
such sums and with such surety or sureties as shall be satisfactory to the board
of directors for the faithful performance of the duties of the office of
Treasurer and for the restoration to the Corporation, in case of death,
resignation, retirement, or removal from office, of all books, papers, vouchers,
money, and other property of whatever kind in the possession or under the
control of the Treasurer belonging to the Corporation. The Assistant Treasurer,
or if there shall be more than one, the Assistant Treasurers in the order
determined by the board of directors, shall in the absence or disability of the
Treasurer, perform the duties and exercise the powers of the Treasurer. The
Assistant Treasurers shall perform such other duties and have such other powers
as the board of directors, the Chairman of the Board, the President or Treasurer
may, from time to time, prescribe.
Section 11. Other Officers. Assistant Officers and Agents. Officers,
assistant officers and agents, if any, other than those whose duties are
provided for in these Bylaws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the board of directors.
Section 12. Absence or Disability of Officers. In the case of the absence
or disability of any officer of the Corporation and of any person hereby
authorized to act in such officer's place during such officer's absence or
disability, the board of directors may by resolution delegate the
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powers and duties of such officer to any other officer or to any director, or to
any other person whom it may select.
ARTICLE IV
CERTIFICATES OF STOCK
---------------------
Section 1. Form. Every holder of stock in the Corporation shall be
entitled to have a certificate, signed by, or in the name of the Corporation by
the Chairman of the Board, the President or a Vice-President and the Secretary
or an Assistant Secretary of the Corporation, certifying the number of shares
owned by such holder in the Corporation. If such a certificate is countersigned
(1) by a transfer agent or an assistant transfer agent other than the
Corporation or its employee or (2) by a registrar, other than the Corporation or
its employee, the signature of any such Chairman of the Board, President, Vice-
President, Secretary, or Assistant Secretary may be facsimiles. In case any
officer or officers who have signed, or whose facsimile signature or signatures
have been used on, any such certificate or certificates shall cease to be such
officer or officers of the Corporation whether because of death, resignation or
otherwise before such certificate or certificates have been delivered by the
Corporation, such certificate or certificates may nevertheless be issued and
delivered as though the person or persons who signed such certificate or
certificates or whose facsimile signature or signatures have been used thereon
had not ceased to be such officer or officers of the Corporation. All
certificates for shares shall be consecutively numbered or otherwise identified.
The name of the person to whom the shares represented thereby are issued, with
the number of shares and date of issue, shall be entered on the books of the
Corporation. Shares of stock of the Corporation shall only be transferred on
the books of the Corporation by the holder of record thereof or by such holder's
attorney duly authorized in writing, upon surrender to the Corporation of the
certificate or certificates for such shares endorsed by the appropriate person
or persons, with such evidence of the authenticity of such endorsement,
transfer, authorization, and other matters as the Corporation may reasonably
require, and accompanied by all necessary stock transfer stamps. In that event,
it shall be the duty of the Corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate or certificates, and record the
transaction on its books. The board of directors may appoint a bank or trust
company organized under the laws of the United States or Canada or any state or
province thereof to act as its transfer agent or registrar, or both in
connection with the transfer of any class or series of securities of the
Corporation.
Section 2. Lost Certificates. The board of directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates previously issued by the Corporation alleged to have been lost,
stolen, or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen, or destroyed. When
authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen, or destroyed certificate or
certificates, or his or her legal representative, to give the Corporation a bond
sufficient to indemnify the Corporation against any claim that may be made
against the Corporation on account of the loss, theft or destruction of any such
certificate or the issuance of such new certificate.
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Section 3. Fixing a Record Date for Stockholder Meetings. In order that
the Corporation may determine the stockholders entitled to notice of or to vote
at any meeting of stockholders or any adjournment thereof, the board of
directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the board of
directors, and which record date shall not be more than sixty nor less than ten
days before the date of such meeting. If no record date is fixed by the board
of directors, the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be the close of business on the
next day preceding the day on which notice is given, or if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
Section 4. Fixing a Record Date for Other Purposes. In order that the
Corporation may determine the stockholders entitled to receive payment of any
dividend or other distribution or allotment or any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or exchange
of stock, or for the purposes of any other lawful action, the board of directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted, and which record date shall be
not more than sixty days prior to such action. If no record date is fixed, the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the board of directors adopts the
resolution relating thereto.
Section 5. Registered Stockholders. Prior to the surrender to the
Corporation of the certificate or certificates for a share or shares of stock
with a request to record the transfer of such share or shares, the Corporation
may treat the registered owner as the person entitled to receive dividends, to
vote, to receive notifications, and otherwise to exercise all the rights and
powers of an owner. The Corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof.
Section 6. Subscriptions for Stock. Unless otherwise provided for in the
subscription agreement, subscriptions for shares shall be paid in full at such
time, or in such installments and at such times, as shall be determined by the
board of directors. Any call made by the board of directors for payment on
subscriptions shall be uniform as to all shares of the same class or as to all
shares of the same series. In case of default in the payment of any installment
or call when such payment is due, the Corporation may proceed to collect the
amount due in the same manner as any debt due the Corporation.
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ARTICLE V
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation. Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or any other purpose
and the directors may modify or abolish any such reserve in the manner in which
it was created.
Section 2. Checks, Drafts or Orders. All checks, drafts, or other orders
for the payment of money by or to the Corporation and all notes and other
evidences of indebtedness issued in the name of the Corporation shall be signed
by such officer or officers, agent or agents of the Corporation, and in such
manner, as shall be determined by resolution of the board of directors or a duly
authorized committee thereof.
Section 3. Contracts. The board of directors may authorize any officer or
officers, or any agent or agents, of the Corporation to enter into any contract
or to execute and deliver any instrument in the name of and on behalf of the
Corporation, and such authority may be general or confined to specific
instances.
Section 4. Loans. The Corporation may lend money to, or guarantee any
obligation of, or otherwise assist any officer or other employee of the
Corporation or of its subsidiary, including any officer or employee who is a
director of the Corporation or its subsidiary, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the Corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the board
of directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the Corporation at
common law or under any statute.
Section 5. Fiscal Year. The fiscal year of the Corporation shall be the
calendar year.
Section 6. Corporate Seal. The board of directors shall provide a
corporate seal which shall be in the form of a circle and shall have inscribed
thereon the name of the Corporation and the words "Corporate Seal, Delaware".
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
Section 7. Voting Securities Owned By Corporation. Voting securities in
any other corporation held by the Corporation shall be voted by the President
and Chief Executive Officer,
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unless the board of directors specifically confers authority to vote with
respect thereto, which authority may be general or confined to specific
instances, upon some other person or officer. Any person authorized to vote
securities shall have the power to appoint proxies, with general power of
substitution.
Section 8. Inspection of Books and Records. Any stockholder of record, in
person or by attorney or other agent, shall, upon written demand under oath
stating the purpose thereof, have the right during the usual hours for business
to inspect for any proper purpose the Corporation's stock ledger, a list of its
stockholders, and its other books and records, and to make copies or extracts
therefrom. A proper purpose shall mean any purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or
other agent shall be the person who seeks the right to inspection, the demand
under oath shall be accompanied by a power of attorney or such other writing
which authorizes the attorney or other agent to so act on behalf of the
stockholder. The demand under oath shall be directed to the Corporation at its
registered office in the State of Delaware or at its principal place of
business.
Section 9. Section Headings. Section headings in these Bylaws are for
convenience of reference only and shall not be given any substantive effect in
limiting or otherwise construing any provision herein.
Section 10. Inconsistent Provisions. In the event that any provision of
these Bylaws is or becomes inconsistent with any provision of the Certificate of
Incorporation, the General Corporation Law of the State of Delaware or any other
applicable law, the provision of these Bylaws shall not be given any effect to
the extent of such inconsistency but shall otherwise be given full force and
effect.
ARTICLE VI
AMENDMENTS
----------
These Bylaws may be amended, altered, or repealed and new bylaws adopted at
any meeting of the board of directors by a majority vote. The fact that the
power to adopt, amend, alter, or repeal the Bylaws has been conferred upon the
board of directors shall not divest the stockholders of the same powers.
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EXHIBIT 5
Opinion of Buchanan Ingersoll Professional Corporation
June 13, 1996
North American Technologies Group, Inc.
4710 Bellaire Blvd.
Suite 301
Bellaire, Texas 77401
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We have participated in the preparation of a Registration Statement (File
Number 33-82112) on Form S-4 of North American Technologies Group, Inc. (the
"Company"), as amended to the date of this letter (the "Registration
Statement"), for the purpose of registering under the Securities Act of 1933, as
amended, shares of the Company's Common Stock, par value $.001 per share (the
"Common Stock"), which may be issued to the stockholders of North American
Environmental Group, Inc. ("NAE") in connection with the merger (the "Merger")
of NAE into Daily Mail, Inc., a wholly-owned subsidiary of the Company, pursuant
to an Agreement and Plan of Merger ("the "Merger Agreement"). As counsel to the
Company, we have reviewed such corporate records, certificates and other records
as we have deemed necessary to the opinion hereinafter set forth.
On the basis of the foregoing and our consideration of such other legal and
factual matters that we have deemed appropriate, we are of the opinion that the
Common Stock covered by the Registration Statement has been duly authorized and,
upon approval of the Merger by the stockholders of NAE and the filing of a
certificate of merger with respect to the Merger with the Secretary of State of
Delaware, the shares of Common Stock, when issued in accordance with the Merger
Agreement, will be legally-issued, fully-paid and non-assessable.
This firm consents to the filing of this opinion as an exhibit to the
Registration Statement.
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
By:/s/ Joseph P. Galda
------------------------------
Joseph P. Galda
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 14, 1996, except for Notes
7(a), 8(a) and 20, which are as of April 8, 1996, relating to the consolidated
financial statements of North American Technologies Group, Inc., which is
contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/BDO Seidman, LLP
BDO Seidman, LLP
Houston, Texas
June 14, 1996
<PAGE>
EXHIBIT 24.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 14, 1996, relating to the
consolidated financial statements of North American Environmental Group, Inc.,
which is contained in that Prospectus. Our report contains an explanatory
paragraph regarding the Company's status as a development stage company and the
Company's ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/BDO Seidman, LLP
BDO Seidman, LLP
Houston, Texas
June 14, 1996
<PAGE>
EXHIBIT 24.3
[SHOEMAKER AND WILSON, P.C. LETTERHEAD APPEARS HERE]
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
June 14, 1996
