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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number: 0-16217
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NORTH AMERICAN TECHNOLOGIES GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 33-0041789
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4710 Bellaire Blvd. - Suite 301
Bellaire, Texas 77401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (713) 662-2699
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X YES ______ NO
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained herein, and will not be contained to the best of registrant's
knowledge in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
As of March 31, 1996, there were 24,440,216 shares of Common
Stock, par value $.001 per share, outstanding. The aggregate market value of the
shares of Common Stock held by non-affiliates as of March 29, 1996 was
$18,773,695 based upon the closing bid price of the Company's Common Stock on
the National Association of Securities Dealers Automated Quotation System
("NASDAQ") of $.8125 per share of Common Stock.
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PART I
ITEM 1. BUSINESS OF THE REGISTRANT
GENERAL-BACKGROUND
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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 the Company's 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 the Company's
Common Stock in connection with the merger. IPF has been in
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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 the Company's Common Stock, (ii) the payment of $305,500 in cash,
(iii) the issuance of a 90-day promissory note by the Company in the principal
amount of $1,050,000, (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 Report, probable of occurrence.
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MANAGEMENT RESTRUCTURING
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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.
The Company's new management team provides a base of experience on which
NATK can build:
. The team has worked together before in building EnClean from $1
million in sales to over $100 million annually. As such, it
understands the entrepreneurial nature and needs of small enterprises,
but also understands the need for and knows how to implement
professional management systems as the company grows. It has direct
management experience in the needs of start-up operations.
. The team has experience in growing by acquisition, as it grew EnClean
by effecting thirteen different acquisitions in an eight-year period.
Because of this experience they understand the requirements for
successful integration of new companies, including understanding
market trends, the customer's perspective of the products, the need
for a common and centralized accounting system, and sound operating
management.
. The team is comprised of individuals who have a broad background and
experience in several scientific and technical fields. It includes
four chemical engineers, two chemists, several other
engineers/scientists, and two Ph.D.'s, all who have diverse experience
in the technical and business aspects of energy,
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environmental, polymer and other industries. This combination allows
the team to understand both the technical and market aspects of new
technologies.
. The management group has implemented a strategic planning process to
manage the diverse set of businesses that will comprise the new NATK.
This team successfully used this planning process at EnClean to manage
forty different profit centers each with a wide range of services,
market conditions, and customers.
. The management group is very comfortable with the reporting
requirements of a public company and in dealing with the various
components of Wall Street, inasmuch as it successfully completed an
initial public offering at EnClean and managed EnClean as a public
company prior to its acquisition by Rust International.
. The team has operated in the environmental and energy industries for
the past twenty years and has gained valuable experience in
understanding the critical needs of both industries. Through direct
experience, it believes it knows where potential problems exist and
what segments need to be avoided because of structural forces that
will dictate low profitability.
DESCRIPTION OF BUSINESS AND TECHNOLOGIES
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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 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
extent 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 system and the Terrazyme have currently
been suspended pending improvement in the economics of the soil remediation
market.
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The following chart provides a summary of all of the Company's businesses
and technologies, together with their respective operational functions and
current status of commercialization:
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<CAPTION>
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BUSINESSES AND FUNCTION STAGE OF
TECHNOLOGIES COMMERCIALIZATION
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<S> <C> <C>
EET's TechXtract(TM) Extraction of Technology is
Process radionuclides, PCB's, heavy patented and proven,
metals and other toxic commercial projects
materials to decontaminate are on-going, and
buildings and equipment for market development
reuse. Other industrial is in progress.
uses for cleaning and scale Additional product
removal. lines are being
developed.
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EET's Waste Management Specialized waste Group has an
Services Group management and remediation established customer
services. base in central
Texas market.
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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.
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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.
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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 the established U.S.
and recycled plastics. air conditioning
supply industry.
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Oleofilter(TM) System Mechanical separation of Technology is
oil from contaminated patented and proven.
waters. Market development
is beginning, and
commercial sales are
expected soon.
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</TABLE>
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<TABLE>
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<S> <C> <C>
BioKatT(TM) Hydrocarbon Treatment and upgrading 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.
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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 from U.S. railroad
recycled rubber, plastic company.
and other material.
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BioTreat(TM) System Biological remediation of Technology is
hydrocarbon-contaminated proven, but
soils. economics of
contaminated soil
market are not
sufficient to allow
full
commercialization of
this technology at
this time.
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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.
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</TABLE>
EET'S TECHXTRACT(TM) PROCESS
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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.
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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 clean-up
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, metal working equipment, tools, lead
bricks/shielding, clothing, internal piping, evaporation basins, and holding
tanks. Deradiation has been effective on both surface and fixed contaminants,
as verified by surface smears and by alpha, beta/gamma, and x-ray detectors.
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 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. 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
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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
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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 complimentary 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. This Act 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. This Act 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 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.
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INDUSTRIAL PIPE FITTINGS
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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 world wide, 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
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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.
GAIA TECHNOLOGIES
- -----------------
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 preparation 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.
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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 for GAIA by 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 provide 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 its 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 for GAIA by a company in St. Francisville, Louisiana pursuant
to a tolling agreement. Sales of this product in the first quarter of 1996 have
been somewhat limited by the production capabilities of this new manufacturing
system; however, management believes that these start-up problems will be
11
<PAGE>
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 pilot run of up to 1,000 composite crossties for
deployment under its own tracks and for use in a battery of independent tests,
including accelerated aging tests. This paid production run should result in
validation of the attractive characteristics of this product, including both
installation and service aspects. The first units from this production run are
currently being 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. TieTek currently leases manufacturing space from a plastics
manufacturer for product development and production of the crosstie prototypes.
If this product proves to have strong commercial application, the Company would
exercise its purchase option and add to 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 and telephone poles.
The Company's exercise of the Crosstie Purchase Option is dependent upon
the 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
12
<PAGE>
of view, to the Crosstie Purchase Option since, as of the date of this Report,
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 the Company is
using to manufacture and market the Oleofilter(TM) System.
The Oleofilter(TM) System is a patented oil/water separation system based
on combining an amine-coated ceramic chip technology with a gravimetric
separator design that permits both separation of mechanical oil/water emulsions
and provides reduction and recovery of dissolved hydrocarbons. The
Oleofilter(TM) System has various applications, including the treatment of
contaminated ground water, bilge and ballast waters, water produced from off-
shore drilling platforms and other oil/water mixtures. The Oleofilter(TM)
System competes with many other products/companies designed to meet the
requirements of this market. Before selection, each system is judged on its
ability to meet specific cleanup standards, complexity of operations, cost of
operations, flexibility to changing conditions and initial capital cost of the
system. Management believes the Oleofilter(TM) System compares favorably to
other competing products, especially in the areas of meeting cleanup standards,
ease of operation, low maintenance cost and flexibility to adapt to changing
inlet conditions.
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 an internationally
recognized water test center indicate a high degree of confidence in oil/water
separation within certain input parameters.
Although the Company had limited success in selling units directly through
a 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 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
13
<PAGE>
management can make no assurances that any revenues will result from the quotes
and proposals currently outstanding.
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 itself from other competing
processes. However, given that the specifics of competing processes are not
well defined and are not known to the general industry, the Company cannot
completely judge the effectiveness of 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
has just recently been completed 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 their 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
14
<PAGE>
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 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 operate 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,
15
<PAGE>
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.
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
16
<PAGE>
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.
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.
17
<PAGE>
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 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) Remediation Companies, Direct Sales, Licensees,
Process 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.
================================================================================
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
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.
- --------------------------------------------------------------------------------
BioKatT(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.
19
<PAGE>
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 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 Report, "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
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
20
<PAGE>
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 non-circumvention, non-disclosure
agreements over the Company's technologies. The Company believes that its
relations with its employees are good.
ITEM 2. PROPERTIES
The Company leases 7,860 square feet in Houston, Texas for its corporate
headquarters which provides executive offices for the Company and its two
subsidiaries, EET and GAIA. This lease expires in September 2000, and has
monthly rent obligations of $5,895 through September 1996, $7,860 through
September 1997, and $10,480 thereafter.
In addition to its offices at the corporate headquarters, EET has two
facilities in Austin, Texas: 8,900 square feet for its research laboratory and
administrative offices leased through March 1998, with a monthly rental of
$5,600; and a 1,500-square-foot warehouse where supplies and equipment are
stored with a monthly rental of $800. EET also leases a small office in
northern Indiana and an additional office/warehouse in Oak Ridge, Tennessee.
IPF has 9,000 square feet of manufacturing, warehouse and office space in
an industrial area in southwest Houston. The monthly rental for these
facilities is $2,900.
ITEM 3. LEGAL PROCEEDINGS
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
21
<PAGE>
the delivery of 200,000 common shares of NAT and damages for failure to provide
such shares on a timely basis.
The plaintiff has claimed against all defendants damages in the amount of
Cdn. $1.5 million, punitive and exemplary damages in the amount of Cdn. $200,000
and an interlocutory injunction to prevent the defendants from trading in the
shares of NAT pending a final disposition of the action. The proceeding is
pending as of the date of this Report. The plaintiff has indicated that he
intends to amend his Statement of Claim. Because the outcome of this matter
cannot presently be determined, no adjustments have been made to the
consolidated financial statements.
Thomas W. Reid v. North American Gold Corp. and Karr Capital, Inc., is a
-------------------------------------------------------------------
matter commenced in July 1993 in the 134th Judicial District Court of Dallas
County, Texas, by Thomas Reid against North American Gold Corp., which was the
corporate predecessor of NAT, a wholly owned subsidiary of the Company. Mr.
Reid alleges in his complaint that he was denied the right to purchase 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. v. BioTrace International, Inc. is
-----------------------------------------------------------------------
an arbitration proceeding before the American Arbitration Association. On
January 15, 1992, the Company entered into a License Agreement with BioTrace
International, Inc. ("BioTrace") wherein the Company received the exclusive
rights to purchase a certain propriety stabilized enzyme. Pursuant to the
License Agreement, 90,000 shares of Common Stock of the Company were placed into
escrow for the benefit of BioTrace. During the second quarter of 1993,
management of the Company discovered that BioTrace had violated the agreement by
selling the enzyme to competitors of the Company. In response to this
violation, and because the enzyme proved to be ineffective, the Company
terminated the agreement.
In September 1993, BioTrace brought suit against the escrow agent in the
Federal District Court for the Northern District of Illinois in Chicago seeking
delivery of the 90,000 shares of Common Stock of the Company which were being
held in escrow pursuant to the License Agreement. The escrow agent brought the
Company into the case as a third-party defendant. In March 1994, the Company
was successful in terminating the federal court proceeding and compelling
arbitration before the American Arbitration Association. In addition to
vigorously defending itself against the claim of BioTrace, the Company is
requesting reimbursement of approximately $200,000 which was previously
forwarded to BioTrace, return of the 90,000 shares of Company Common Stock, and
other consequential damages. The arbitration proceedings were completed in
February 1996 and the Company is awaiting the arbitrators' decision.
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
22
<PAGE>
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 of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
23
<PAGE>
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
- ------------------
The Company's Common Stock is traded on the over-the-counter market and
listed on the National Association of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ") under the symbol "NATK." The following table sets
forth, for the periods indicated, the range of high and low bid prices of the
Common Stock as reported by the National Quotation Bureau.
<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
<S> <C> <C>
1994
- ----
First Quarter $5.25 $3.00
Second Quarter 4.25 2.50
Third Quarter 3.25 1.25
Fourth Quarter 2.75 1.25
1995
- ----
First Quarter $3.125 $1.625
Second Quarter 1.94 .94
Third Quarter 1.50 .813
Fourth Quarter 1.03 .46
</TABLE>
_________________________
HOLDERS
- -------
Records of the Company's stock transfer agent indicate that as of March 31,
1996, the Company had approximately 340 record holders of its Common Stock. A
significant number of the shares of the Company are held by financial
institutions in "street name." Inquiry of brokerage sources leads management to
believe that it is likely that the Company has more than 2,300 stockholders.
DIVIDENDS
- ---------
The Company has not paid any cash dividends to date and does not anticipate
or contemplate paying cash dividends in the foreseeable future. It is the
present intention of management to utilize all available funds for working
capital of the Company.
ITEM 6. SELECTED FINANCIAL DATA
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
24
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations which are contained elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR PRO FORMA
1991 1992(1) 1993 1994 1995 YEAR 1995(2)
<S> <C> <C> <C> <C> <C> <C>
REVENUE $-0- $-0- $269,073 $1,945,697 $2,642,735 $2,642,735
NET LOSS $(376,735) $(2,481,206) $(1,503,502) $(4,936,330) $(7,340,240) $(7,340,240)
NET LOSS PER SHARE $(.04)/(3)/ $(.37) $(.25) $(.35) $(.40) $(.40)
TOTAL ASSETS $987,447 $2,383,445 $6,515,883/(4)/ $8,190,677 $7,884,719 $13,453,469
STOCKHOLDERS' EQUITY $713,517 $1,648,155 $4,272,312 $5,007,443 $1,086,810 $10,505,560
LONG TERM DEBT $-0- $250,000 $462,500 $500,000 $3,535,461 $835,461
</TABLE>
1. Selected financial data of the Company for the 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.
ITEM 7. 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
25
<PAGE>
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.
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.
26
<PAGE>
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. One-third of
the Series D Shares were converted in mid-March 1996 into 414,800 shares of the
Company's Common Stock. Another one-third can be converted in mid-April 1996,
with all remaining Series D Shares available for conversion by the end of May
1996. 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
- ------------------------------------
On April 8, 1996, the Company issued 82,000 share of Series F Convertible
Preferred Stock ("Series F Shares") and warrants to acquire 8,200,000 shares of
the Company's Common Stock (the "Series F Warrants"). Cash proceeds of
$5,500,000 was received for 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 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
27
<PAGE>
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 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 18,000 Series F Shares that are authorized and could
be issued for consideration of $1,800,000 under the same terms and conditions
through May 15, 1996.
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, 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
28
<PAGE>
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 exercise 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 $194,000 in account payable obligations. In
addition, as a result of the acquisition of EET, the Company advanced
29
<PAGE>
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 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 will adopt SFAS
No. 121 in 1996 and its implementation is not expected to have a material effect
on the consolidated financial statements.
30
<PAGE>
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.
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
31
<PAGE>
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 attributed 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.
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.
32
<PAGE>
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 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.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are included in Items 14(a) and
(b) of this Report and are incorporated by reference thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
The Directors and Executive Officers of the Company are listed below.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Tim B. Tarrillion 45 Chief Executive Officer, President
and Director of the Company
Donovan W. Boyd 42 Senior Vice President, Chief
Operating Officer and Director of
the Company
David M. Daniels 39 Executive Vice President,
Secretary and Director of the
Company; and President of IPF
Judith Knight Shields 38 Senior Vice President-Finance,
Chief Financial Officer and
Treasurer of the Company
</TABLE>
All directors of the Company hold office until the next annual meeting of
stockholders or until their successors are duly elected and qualified. There are
currently no committees of the Board. Executive officers hold office at the
pleasure of the Board of Directors.
BIOGRAPHIES
- -----------
TIM B. TARRILLION
Mr. Tim B. Tarrillion became Chief Executive Officer, President and a
Director of the Company on March 7, 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
34
<PAGE>
industrial and environmental cleaning services to companies in the refining,
petrochemical, steel, paper and utility industries. After growing to over $100
million in revenue with 40 locations nationwide, EnClean was bought by and
merged into Rust International in 1993.
Mr. Tarrillion holds an MBA from Harvard University and a Masters Degree
and Bachelors Degree in Chemical Engineering from Rice University. Mr.
Tarrillion has significant experience in the environmental field. Mr. Tarrillion
received the 1991 Merrill Lynch, Inc. Magazine's Entrepreneurial award for the
Houston area in connection with his role in building EnClean from $1 million in
sales in 1984 to more than $100 million in 1992.
DONOVAN W. BOYD
Mr. Donovan W. Boyd joined the Company as Senior Vice President in April
1995, and was appointed Chief Operating Officer in July, 1995. Prior to his
position with the Company, Mr. Boyd was Vice President of Sales and Marketing
for the Industrial Services division of Rust International. In that capacity he
was responsible for more than $400 million in annual sales throughout the United
States. Before Rust, Mr. Boyd was a Regional Vice President with EnClean, Inc.
He holds a Bachelor's Degree in Chemical Engineering from Tulane University and
an MBA from Harvard University.
DAVID M. DANIELS
Mr. David M. Daniels joined the Company in July 1994, after working with
the Company as a consultant for several years. He 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 employed by Dean Witter Reynolds for 10 years, of which he held the position
of Vice President for 8 years. Mr. Daniels holds a Bachelors Degree in Finance
from the University of Houston, as well as an Associate Degree from Georgia
Military Academy.
JUDITH KNIGHT SHIELDS
Ms. Judith Knight Shields joined the Company in March 1995. Ms. Shields
currently holds the position of Senior Vice President-Finance, Chief Financial
Officer and Treasurer. Prior to her current position with the Company, Ms.
Shields was Vice President of Mergers and Acquisitions and subsequently
Controller, with EnClean, Inc. Her ten years of experience prior to joining
EnClean, Inc. were in public accounting and venture capital. She graduated summa
cum laude from Texas A&M University with a Bachelors Degree in Accounting and is
a Certified Public Accountant.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
- ----------------------------------------
To the best of the Company's knowledge, there have been no events under any
state or federal bankruptcy laws, no criminal proceedings, no judgments, orders,
decrees or injunctions entered against any officer or director, and no
violations of federal or state securities or commodities laws material to the
ability and integrity of any director or executive officer during the past five
years .
35
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- -------------------------------------------------
To the knowledge of the Company, each of the Company's directors, executive
officers and 10% beneficial owners has complied with the requirements of Section
16(a) of the Securities and Exchange Act of 1934 except that Mr. Tarrillion, Mr.
Boyd and Ms. Shields each were one month late in filing their Form 4 upon the
amendment of their respective stock option agreements in December 1995.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth a summary of the compensation paid or
accrued for the years 1993 through 1995 by the Corporation to or for the benefit
of the named executive officers.
36
<PAGE>
SUMMARY COMPENSATION TABLE/(1)/
<TABLE>
<CAPTION>
====================================================================================================================================
Long Term Compensation
------------------------------------
Annual Compensation Awards Payouts
- ------------------------------------------------------------------------------------------------------------------------------------
Name Other
and Annual Restricted Stock All Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year(s) Salary($) Bonus($) sation($) Award(s)($) SARS (#) Payouts($) sation($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John Parrott/(2)/ 1995 101,205 - 75,000/(3)/ - - - -
Former Chairman and 1994 150,000 - - - 300,000 - -
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. Boyd 1995 98,655/(7)/ - - - 300,000 - 26,417/(8)/
Senior Vice President, COO 1994 - - - - - - -
1993 - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Judith K. Shields 1995 92,308/(9)/ - - - 300,000 - -
Senior Vice 1994 - - - - - - -
President-Finance CFO and 1993 - - - - - - -
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 $15,000 a month for consulting services in August through
December 1995.
/(4)/ Mr. Tarrillion became Chief Executive Officer, President and a Director
of the Company on March 7, 1995.
/(5)/ Payments received in January and February 1995 as a consultant to the
Company.
/(6)/ Mr. Daniels became a Director during August 1994 and became an Executive
Vice President, and Secretary of the Company during January 1995.
/(7)/ Mr. Boyd's employment began on April 1, 1995.
/(8)/ Payments made to relocate Mr. Boyd to Houston, Texas.
/(9)/ Ms. Shield's employment began on March 20, 1995.
37
<PAGE>
STOCK OPTIONS
The following table sets forth for each of the named executive officers
regarding the grant of stock options by the Company in the 1995 fiscal year and
their potential realizable values. No stock appreciation rights have been
granted to employees.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Option Grants in the 1995 Fiscal Year
- ---------------------------------------------------------------------------------------------------------
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term
- ---------------------------------------------------------------------------------------------------------
% of
No. of Total
Securities Options
Underlying Granted to Exercise
Options Employees or Base
Granted in Fiscal Price Expiration 5% (Price 10% (Price
Name (#) Year ($/Sh) Date = $.82 = $1.25
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
All stockholders N/A N/A $ N/A $19,200,000/(1)/ $29,300,000/(1)/
- --------------------------------------------------------------------------------------------------------------
John Parrott 0 0 0 0 0 0
Tim B. Tarrillion 400,000 16% 2.50 2004 1,550,000 2,360,000
100,000 4% 1.00 2001 134,000 177,000
Daniel D. Daniels 200,000 8% 2.50 2004 775,000 1,180,000
Donovan W. Boyd 200,000 8% 2.50 2004 775,000 1,180,000
100,000 4% 1.00 2001 134,000 177,000
Judith K. Shields 200,000 8% 2.50 2004 775,000 1,180,000
100,000 4% 1.00 2001 134,000 177,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
_________________________
/(1)/ The aggregate value of the 23,477,285 outstanding shares of Common
Stock of the Company on December 31, 1995, assuming a share price of
$.53 on December 29, 1995, was approximately $12,400,000. If the
Common Stock appreciates at a compound rate of 5% per year over the
option term, the aggregate value of all such shares would be
approximately $19,200,000, an increase of $6,800,000 for all
stockholders. Similarly, if the Common Stock appreciates at a compound
rate of 10% per year over the nine-year option term, the aggregate
value of all such shares would be approximately $29,300,000, an
increase of $16,900,000 for all stockholders. The purpose of providing
this information is to indicate the total potential stockholder gain
over the term of the options comparable to the potential gain shown
for the options.
38
<PAGE>
The following table sets forth for each of the named executive officers
information regarding stock options exercised by such officers during the 1995
fiscal year, together with the number and value of stock options held at 1995
fiscal year-end, each on an aggregated basis.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Aggregated Option Exercises in the 1995 Fiscal Year
and Fiscal Year-End Option Value
- ------------------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Number of Options at Options at
Shares Fiscal Year-End Fiscal Year-End/(1)/
--------------- --------------------
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John Parrott -- -- 300,000/0 --
Tim B. Tarrillion -- -- 0/500,000 --
David M. Daniels -- -- 120,000/380,000 --
Donovan W. Boyd -- -- 0/300,000 --
Judith K. Shields -- -- 0/300,000 --
- ------------------------------------------------------------------------------------------
</TABLE>
_________________
/(1)/ Market value of underlying securities at year-end ($.53), minus the
exercise price.
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.
39
<PAGE>
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 agreement is for a term of five years.
STOCK OPTIONS AND WARRANTS
- --------------------------
The Company presently has no formal stock option plan. However, through
December, 1995 the Company has granted options to purchase 4,900,000 shares of
the Company's common stock. Of these 3,550,000 are outstanding to current and
former employees, have option 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. The
remaining options were granted to current or past note holders or consultants.
Options to purchase 600,000 shares relate to one certain note agreement, have
option prices ranging from $1.50 to $2.50, and expire in November 1997. The
remaining options have prices ranging from $.75 to $1.75 and expire September
1996 through September 1999.
Included in these options to employees are 1,900,000 granted to current or
former directors of the Company and 300,000 granted to other executive officers
of the Company.
In addition, at December 31, 1995, the Company has outstanding warrants to
purchase approximately 5,280,000 shares of the Company's common stock. These
originated from debt and equity placements, the merger with EET, and certain
consulting arrangements. Of these warrants, 2,700,000 have a $1.00 warrant price
and expire in September 2000; 1,900,000 have a $2.00 warrant price and expire in
December 1997; 200,000 have a warrant price of $1.50 and expire July 1998
through December 1999; 75,000 have a warrant price of $2.25 and expire in June
1996; 75,000 have a warrant price of $3.30 and expire in April 1996; 50,000 have
warrant prices of $4.50 to $6.00 and expire in January 1998; 130,000 have a
warrant price of $.75 and expire in December 1998; and 150,000 have a warrant
price of $1.00 and expire in August 1998.
In connection with the issuance of the Series E Convertible Preferred Stock
in March 1996, the Company issued 250,000 warrants with an exercise price of
$1.00 that expire in 1999. In connection with the issuance of the Series F
Convertible Preferred Stock in April 1996, the Company issued 8,200,000 warrants
with an exercise price of $1.00 that expire in 2004. Of these warrants,
5,500,000 were new and 2,700,000 were issued in exchange for 2,700,000 warrants
that were surrendered as part of the transaction.
DIRECTORS' FEES
- ---------------
The directors of the Company receive no fees or other compensation in
connection with their service as directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the securities
holdings of all persons which the Company, by virtue of filings with the
Securities and Exchange Commission, has reason to believe may be deemed the
beneficial owners of more than 5% of the Company's outstanding common stock as
of December 31, 1995. Also set forth in the table is the beneficial
40
<PAGE>
ownership of all of the Company's outstanding common stock as of such date by
all officers and directors, individually and as a group.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percentage
Name and Address of Beneficial Owner Ownership of Class/(1)
- --------------------------------------- ----------------- --------
<S> <C> <C>
Tim B. Tarrillion/(2)/ 681,630 2.9
10102 Cedar Creek
Houston, Texas 77042
Donovan W. Boyd - -
4014 N. Beechwood Court
Houston, Texas 77059
David M. Daniels/(3)/ 805,000 3.4
5717 Hogue Street
Houston, Texas 77087
Judith Knight Shields/(4)/ 17,500 -
4710 Bellaire Boulevard, Suite 300
Bellaire, Texas 77401
Gold Spinners International, Inc/(5)/ 2,750,000 11.7
5201 S. Mission Road
Mt. Pleasant, MI 48858
All officers and directors as a group 1,504,130 6.4
(3) persons
_______________________
</TABLE>
/(1)/ Based upon 23,477,285 shares outstanding at December 31, 1995.
/(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 500,000 shares of the Company's common stock which
will not commence vesting until March 31, 1996, which were received in
conjunction with the EET merger. Also does not include 51,000 shares
received by trusts on behalf of Mr. Tarrillion's minor children in
connection with the EET merger which are held by an independent trustee as
to which Mr. Tarrillion disclaims any beneficial ownership.
/(3)/ Includes 600,000 shares received by Mr. Daniels in conjunction with a
merger transaction between the company and IPF in June 1995. Includes
options to purchase 120,000 shares of the Company's common stock. Does not
include options to purchase 180,000 shares
41
<PAGE>
which do not commence vesting until January 1, 1996 or options to purchase
200,000 shares that do not commence vesting until March 31, 1996.
/(4)/ Includes 10,000 shares received by Ms. Shields and her husband in
connection with the merger transaction between the Company and EET in
March, 1995, but does not include options to purchase 300,000 shares that
do not commence vesting until March 31, 1996.
/(5)/ 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ADVANCES FROM DIRECTORS, OFFICERS AND CERTAIN AFFILIATES.
- -----------------------------------------------------------
Mr. John W. Parrott, former Chairman of the Company, and Mr. Thom
Robinson, former Chief Executive Officer and Director of the Company, each own
33 1/3% of the issued and outstanding shares of Gold Spinners International,
Inc. ("GSI"). From its inception through 1992, the Company was advanced an
aggregate of $42,600 from GSI. During 1993, the Company repaid $40,000 of the
advances and was advanced an additional $281,381, resulting in aggregate unpaid
advances of $281,382. During 1994, the Company repaid all of the advances to
GSI.
Through a corporate affiliate, Mr. Robinson also advanced the Company
$670,000 during 1993, of which the Company repaid $493,500, leaving aggregate
unpaid advances of $176,500 at the end of 1993. During 1994, this affiliate
provided additional advances of $335,000 to the Company and was repaid $522,500
of the advances, thus, leaving a balance of $11,000 as of December 31, 1994.
CONSULTING AGREEMENT WITH JOHN W. PARROTT
- -----------------------------------------
Effective as of July 28, 1995, John W. Parrott terminated his employment
agreement with the Company and entered into a consulting agreement (the
"Consulting Agreement"). The Consulting Agreement provides that Mr. Parrott
will provide advice to the Company with respect to the Company's transition in
management and certain litigation and financing matters through December 31,
1995. Pursuant to the Consulting Agreement, Mr. Parrott will receive $15,000 a
month through December 31, 1995 for his consulting services, and a payment in
settlement of his five-year employment contract of $250,000, payable in bi-
weekly payments of $11,538 beginning January 12, 1996.
TRANSACTIONS WITH DIRECTORS, OFFICERS AND CERTAIN AFFILIATES
- ------------------------------------------------------------
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
42
<PAGE>
purchase a machine for fabricating wyes, tees and els. The equipment purchased
serves as collateral for the note.
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.
In June 1995, the Company acquired by merger IPF, a company owned by Mr.
David Daniels, a director and officer of the Company and two other individuals
who were subsequently hired by the Company. The Company issued 1,300,000 shares
of the Company's Common Stock in conjunction with the merger, 600,000 of which
were issued to Mr. Daniels. Mr. Daniels was also released from a personal
guaranty of certain debts of IPF in the amount of $50,000. The Company also
agreed to repay certain outstanding loans made by Mr. Daniels to IPF on or
before December 31, 1995. The outstanding balance of such loans at December 31,
1995, was $120,000. 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 twelve (12%) percent 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.
The Company has employment agreements with Messrs. Tarrillion, Boyd and
Daniels, and Ms. Shields.
The Company has granted certain options and warrants to directors and
officers of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. INDEX OF FINANCIAL STATEMENTS
Provided at Page F-1 of this Report
B. FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
43
<PAGE>
<TABLE>
<CAPTION>
C. EXHIBITS
<C> <S> <C>
PLAN OF ACQUISITION,
REORGANIZATION,
ARRANGEMENTS, LIQUIDATION
OR SUCCESSION:
2.1 Agreement and Plan of Incorporated by reference to the Company's
Merger between the Company Current Report on Form 8-K filed under the
and EET, Inc. dated Securities Exchange Act of 1934 on March
February 7, 1995 ("Merger 22, 1995 (the "March 22, 1995 8-K")
Agreement")
INSTRUMENTS DEFINING THE
RIGHTS OF SECURITY HOLDERS:
4.1 Certificate of Incorporated by reference to the Company's
Incorporation of Registration Statement on Form S-4
Registrant. (Commission File No. 33-82112)
4.2 Certificate of Amendment Incorporated by reference to the Company's
of Certificate of Registration Statement on Form S-4.
Incorporation of the
Company as of August 10,
1993
4.3 Certificate of Amendment Incorporated by reference to the Form S-4.
of Certificate of
Incorporation of the
Company as of January 29,
1993
4.4 Certificate of Designation Incorporated by reference to the Form S-4.
for the Company's Series A
Convertible Preferred Stock
4.5 Certificate of Designation Incorporated by reference to the Form S-4
for the Company's Series B
Convertible Preferred Stock
4.6 Certificate of Designation Incorporated by reference to the Form S-4
of the Company's Series C
Convertible Preferred Stock
4.7 Certificate of Designation Incorporated by reference to the Company's
for the Company's Series D Current Report on Form
Convertible Preferred Stock 8-K/A dated January 31, 1996
4.8 Certificate of Designation Filed herewith
for the Company's Series E
Convertible Preferred Stock
</TABLE>
44
<PAGE>
<TABLE>
<C> <S> <C>
4.9 Certificate of Designation Filed herewith
for the Company's Series F
Convertible Preferred Stock
4.10 Bylaws of Registrant Incorporated by reference to the Company's
Registration Statement on Form S-18 (File
No. 33-10845).
MATERIAL CONTRACTS:
10.1 Amended Line of Credit Incorporated by reference to the Form S-4
Agreement with Euro-Scotia
effective January 1, 1995
10.2 Stock Option Agreement Incorporated by reference to the Form S-4
between John Parrott and
the Company dated February
7, 1993
10.2 Stock Option Agreement Incorporated by reference to the Form S-4
between Tim B. Tarrillion
and the Company dated
February 7, 1995
10.3 Stock Option Agreement Incorporated by reference to the Form S-4
between David Daniels and
the Company dated February
7, 1995
10.4 Stock Option Agreement Incorporated by reference to the Form S-4
between Judith Shields and
the Company dated February
23, 1993
10.5 Stock Option Agreement Incorporated by reference to the Form S-4
between the Company and
Donovan W. Boyd
10.6 EET 401(k) Plan Incorporated by reference to the Form S-4
10.7 Amendment to Stock Option Filed herewith
Agreement of Tim Tarillion
10.8 Amendment to Stock Option Filed herewith
Agreement of Donovan W.
Boyd
10.9 Amendment to Stock Option Filed herewith
Agreement of Judith Shields
</TABLE>
45
<PAGE>
<TABLE>
<C> <S> <C>
10.10 Employment Agreement of Incorporated by reference to the March 22,
John Parrott dated 1995 8-K
February 7, 1995
10.11 Employment Agreement of Incorporated by reference to the March 22,
Tim Tarrillion dated 1995 8-K
February 7, 1995
10.12 Employment Agreement of Incorporated by reference to the March 22,
David Daniels dated 1995 8-K
February 7, 1995
10.13 Employment Agreement of Incorporated by reference to the March 22,
Judith Shields dated 1995 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 Incorporated by reference to the Form S-4
Donovan W. Boyd
10.16 Stock and Warrant Purchase Filed herewith
Agreement
10.17 Stockholders' Agreement Filed herewith
10.18 Warrant dated as of April Filed herewith
5, 1996
22 Subsidiaries of Registrant Incorporated by reference to the Form S-4
27 Financial Data Schedule Filed herewith
</TABLE>
D. REPORTS ON FORM 8-K
Report dated January 12, 1996 reporting the acquisition of GAIA, as amended
by a Form 8-K/A dated January 31, 1996 to provide financial statements of the
acquired business.
46
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NORTH AMERICAN TECHNOLOGIES
GROUP, INC.
Dated: April 15, 1996
/s/ Tim B. Tarrillion
By:__________________________________
Tim B. Tarrillion
Chief Executive Officer
/s/ Judith Knight Shields
By:__________________________________
Judith Knight Shields
Principal Financial and Accounting
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Tim B. Tarrilion
___________________________ Chairman, President April 15, 1996
Tim B. Tarrillion and Director
/s/ David M. Daniels
___________________________ Executive Vice President, April 15, 1996
David M. Daniels Secretary and Director
/s/ Donovan W. Boyd
___________________________ Senior Vice President, and April 15, 1996
Donovan W. Boyd Director
</TABLE>
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NORTH AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants.......................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994................ F-3
Consolidated Statements of Loss for the Years
Ended December 31, 1995, 1994 and 1993................................... F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993..................... F-5-F-8
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995, 1994 and 1993............................. F-9
Notes to Consolidated Financial Statements.................................. F-10-F-27
</TABLE>
F-1
<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-2
<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-3
<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-4
<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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<PAGE>
EXHIBIT 4.8
CERTIFICATE OF DESIGNATION
Tim B. Tarrillion and David M. Daniels do hereby certify that they are the
President and Secretary, respectively of NORTH AMERICAN TECHNOLOGIES GROUP,
INC., a Delaware corporation (hereinafter referred to as the "Corporation" or
the "Company"); that, pursuant to the Corporation's Certificate of Incorporation
and Section 151 of the Delaware General Corporation Law, the Board of Directors
of the Corporation adopted the following resolutions on February 6, 1996; and
that none of the Series E Convertible Preferred Stock has been issued.
1. Creation of Series E Convertible Preferred Stock. There is hereby
------------------------------------------------
created a series of preferred stock consisting of fifty (50) shares and
designated as the Series E Convertible Preferred Stock, having the voting
powers, preferences, relative, participating, optional and other special rights
and qualifications, limitations and restrictions thereof that are set forth
below.
2. Dividend Provisions. The holders of shares of Series E Convertible
-------------------
Preferred Stock shall not be entitled to receive any dividend with respect to
such shares of Series E Convertible Preferred Stock, regardless of whether or
not the Corporation declares and/or pays any dividends on any other shares of
any other series of preferred stock or any shares of Common Stock.
3. Redemption Provisions. The Corporation shall redeem, at the option of
---------------------
the holder thereof, any shares of Series E Convertible Preferred Stock
outstanding on or after August 15, 1997. In addition, the Corporation may from
time to time redeem, at the option of the Corporation, any of the Series E
Convertible Preferred Stock outstanding on or after February 16, 1999. Any
redemption of shares of Series E Convertible Preferred Stock under the
provisions of this Section 3 shall be at a redemption price per share equal to
$25,000.00, which redemption payment shall be paid in cash. Notice of an
election by the Corporation to redeem any such shares shall be mailed to the
Holders of the shares of Series E Convertible Preferred Stock to be redeemed at
least 30 days prior to the date fixed for such redemption. The Corporation
shall not have the right to require the redemption or cancellation of the Series
E Convertible Preferred Stock prior to February 16, 1999.
4. Liquidation Provisions. In the event of any liquidation, dissolution
----------------------
or winding up of the Corporation, whether voluntary or involuntary, the Series E
Convertible Preferred Stock shall be entitled to receive an amount equal to
$25,000.00 per share, which amount shall be paid in cash. After the full
preferential liquidation amount has been paid to, or determined and set apart
for, all other series of Preferred Stock hereafter authorized and issued, if
any, the remaining assets of the Corporation available for distribution to
stockholders shall be paid to the Common Stock, which amount shall be
distributed ratably to the holders of Common Stock. In the event the assets of
the Corporation available for distribution to its stockholders are insufficient
to pay the full preferential liquidation amount per share required to be paid on
the Corporation's Series E Convertible Preferred Stock, the entire amount of
assets of the Corporation available for distribution to stockholders shall be
paid up to their respective full
<PAGE>
liquidation amounts first to the Series D Convertible Preferred Stock, then to
the Series E Convertible Preferred Stock, then to any other series of Preferred
Stock hereafter authorized and issued, all of which amounts shall be distributed
ratably among holders of each such series of Preferred Stock, and the Common
Stock shall receive nothing. A reorganization or any other consolidation or
merger of the Corporation with or into any other corporation, or any other sale
of all or substantially all for the assets of the Corporation, shall not be
deemed to be a liquidation, dissolution or winding up of the Corporation within
the meaning of this Section, and the Series E Convertible Preferred Stock shall
be entitled only to (i) the right provided in any agreement or plan governing
the reorganization or other consolidation, merger or sale of assets
transactions, (ii) the rights contained in the Delaware General Corporation Law
and (iii) the rights contained in other Sections hereof. Such right to payment
described in this Section 4 is referred to herein as the "Liquidation
Preference."
5. Conversion Provisions. The holders of Series E Convertible Preferred
---------------------
Stock shall have conversion rights as follows ("Conversion Rights") at any time
between August 15, 1996 and February 15, 1999 (the "Conversion Period"):
(a) Right to Convert.
(1) Each share of Series E Convertible Preferred Stock shall be
convertible, at the option of its Holder, at any time during the Conversion
Period into a number of shares of Common Stock of the Company at the
Conversion Rate, as defined herein, then in effect in cumulative amounts of
Series E Convertible Preferred Stock increments, and at the applicable
price, as follows:
2
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Series E Applicable
Time Period Convertible Preferred Stock Market Price
<S> <C> <C>
Until August 15, 1996 None
On August 15, 1996
to November 15, 1996
("First Tranche Period") Up to one-fourth (1/4th) of all shares
of Series E Convertible Preferred
Stock issued in February 1996 64% of Market Price
From November 16, 1996
to February 15, 1997
("Second Tranche Period") Up to one-half (1/2) of all
shares of Series E Convertible
Preferred Stock issued in
February 1996 (less any such
shares previously converted) 61% of Market Price
From February 16, 1997
to May 15, 1997
("Third Tranche Period") Up to three-fourths (3/4ths) of all
shares of Series E Convertible
Preferred Stock issued in
February 1996 (less any such
shares previously converted) 58% of Market Price
From May 16, 1997
to February 15, 1999
("Fourth Tranche Period") All shares (no restriction) 55% of Market Price
</TABLE>
The conversion rate per share of Series E Convertible Preferred Stock
(the "Conversion Rate"), subject to the adjustments described below, shall
be a number of shares of Common Stock (rounded to the nearest whole number)
equal to $25,000.00 divided by the lesser of (a) $1.50 or (b) the
applicable Market Price, as set forth above, per share of Common Stock.
"Market Price" per share of Common Stock shall be the average closing bid
price per share of Common Stock during the twenty (20) trading days
immediately preceding the Conversion Date, as defined below, as such bid
price is reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), or the average closing bid price in
the over-the-counter market if other than NASDAQ, or in the event the
Common Stock is listed on a stock exchange, the Market Price shall be the
average closing bid price on such exchange, as reported in the Wall Street
Journal.
3
<PAGE>
Such conversion shall be effected by surrendering the certificate or
certificates representing the shares of Series E Convertible Preferred
Stock to be converted to the principal corporate office of the Company
(located at 4710 Bellaire Blvd., Suite 301, Bellaire, Texas 77401 USA,
Attention: Corporate Secretary), with the form of conversion notice
attached hereto as Exhibit A, executed by the Holder evidencing such
Holder's intention to convert those Series E Convertible Preferred Stock or
a specified portion (as above provided) hereof, and accompanied, if
required by the Company, by proper assignment hereof in blank. The date on
which notice of conversion (the "Conversion Date") is given shall be the
date on which the Corporation has received the certificate or certificates
representing the Series E Convertible Preferred Stock so to be converted,
together with conversion notice duly executed, and the Company shall
complete the issuance of the shares of Common Stock as promptly as
reasonably practical and in no event later than three (3) business days
after the Conversion Date. At the option of the Holder, the conversion
notice, together with a copy of the face of the certificate or certificates
representing the Series E Convertible Preferred Stock so to be converted,
may be delivered to the Company by telecopy or facsimile transmission, and
in such event, the Conversion Date shall be deemed to be the date of
receipt by the Company of the same by such telecopy or facsimile
transmission. Any Holder electing to deliver such notice by telecopy or
facsimile shall promptly mail or cause to be delivered to the Company the
original executed notice of conversion, together with the original
certificates representing the shares of Series E Convertible Preferred
Stock so to be converted.
(2) No fractional shares of Series E Convertible Preferred Stock may
be converted. No fractional shares of Common Stock shall be issued upon
conversion of the Series E Convertible Preferred Stock. However, in lieu
of the Company's permitting the conversion of fractional shares of Common
Stock, it shall pay a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest multiplied by the
Conversion Rate calculated in connection with the shares of Series E
Convertible Preferred Stock so to be converted.
(3) The Company shall pay in cash the cash payment, if any, due as
provided in clause (a)(2) above, which cash payments shall be due on the
date that the certificate or certificates representing the shares of Common
Stock to be issued in connection with such conversion are due to be issued.
(4) The Company shall have no responsibility to pay any taxes with
respect to the Series E Convertible Preferred Stock.
(5) If the Company receives certificates representing shares of Series
E Convertible Preferred Stock, together with proper notices of conversion,
for conversion in excess of the number of shares of Series E Convertible
Preferred Stock that may then be converted in accordance with the
provisions of this subsection (a), then those certificates, together with
proper notices of conversion, first received by the Company
4
<PAGE>
for conversion shall have the right to be converted up to the permitted
number of shares that may then be converted.
(b) Adjustments to the Conversion Rate.
(1) RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If the Common Stock
issuable on conversion of the Series E Convertible Preferred Stock shall be
changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification, or
otherwise (other than a subdivision or combination of shares provided for
above), the holders of Series E Convertible Preferred Stock shall, upon its
conversion, be entitled to receive, in lieu of the Common Stock which the
Holders would have become entitled to receive but for such change, a number
of shares of such other class or classes of stock that would have been
subject to receipt by the Holders if they had exercised their rights of
conversion of the Series E Convertible Preferred Stock immediately before
that change.
(2) REORGANIZATIONS, MERGERS, CONSOLIDATION OR SALE OF ASSETS. If at
any time there shall be a capital reorganization of the Corporation's
Common Stock (other than a subdivision, combination, reclassification or
exchange of shares provided for elsewhere in this subsection (b)) or merger
of the Corporation into another corporation, or the sale of the
Corporation's properties and assets as, or substantially as, an entirety to
any other person, then, as a part of such reorganization, merger or sale,
lawful provision shall be made so that the holders of the Series E
Convertible Preferred Stock shall thereafter be entitled to receive upon
conversion of the Series E Convertible Preferred Stock, the number of
shares of stock or other securities or property of the Corporation, or of
the successor corporation resulting from such merger, to which holders of
the Common Stock deliverable upon conversion of the Series E Convertible
Preferred Stock would have been entitled on such capital reorganization,
merger or sale if the Series E Convertible Preferred Stock had been
converted immediately before that capital reorganization, merger or sale to
the end that the provisions of this paragraph (b)(2) (including adjustment
of the Conversion Rate then in effect and number of shares purchasable upon
conversion of the Series E Convertible Preferred Stock) shall be applicable
after that event as nearly equivalently as may be practicable.
(3) Any adjustments made pursuant to this paragraph (b) shall become
effective at the close of business on the day upon which such capital
reorganization, reclassification, reorganization, merger, consolidation,
sale or assets or other event becomes effective.
(c) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, merger, dissolution or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 5 and in taking
5
<PAGE>
all such action as may be necessary or appropriate in order to protect the
conversion rights of the Holders against impairment.
(d) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the Conversion Rate for any shares of Series E Convertible
Preferred Stock, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each Holder effected thereby a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any Holder, furnish or cause to be furnished to such
Holder a like certificate setting forth (i) such adjustment and readjustments,
(ii) the Conversion Rate at the time in effect and (iii) the number of shares of
Common Stock and the amount, if any, of other property which at the time would
be received upon the conversion of such Holder's shares of Series E Convertible
Preferred Stock.
(e) Notices of Record Date. In the event of the establishment by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
distribution, the Corporation shall mail to each holder of Series E Convertible
Preferred Stock at least twenty (20) days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purposes of such distribution and the amount and character of such distribution.
(f) Reservation of Stock Issuable Upon Conversion. The Corporation shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of Series E Convertible Preferred Stock such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all then outstanding shares of the Series E Convertible Preferred Stock; and
if ant any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then outstanding shares
of Series E Convertible Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose.
(g) Notices. Any notices required by the provisions of this Section 5 to
be given to the Holders of shares of Series E Convertible Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each Holder at such Holder's address appearing on the books of the
Corporation.
6. Voting Provisions. Except as otherwise expressly provided or required
-----------------
by law, the Series E Convertible Preferred Stock shall not entitle the holders
thereof to any voting rights, and the consent of the Holders thereof shall not
be required for the taking of any corporate action.
6
<PAGE>
7. Required Shares. Any shares of Series E Convertible Preferred Stock
---------------
converted, purchased or otherwise acquired by the Company in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof, and, if necessary, to provide for the lawful purchase of such shares,
the capital represented by such shares shall be reduced in accordance with the
Delaware General Corporation Law. All such shares upon their cancellation shall
become authorized but unissued shares of Preferred Stock, $.001 par value, of
the Company and may be reissued as part of another series of Preferred Stock,
$.001 par value, of the Company.
8. Certain Definitions. For the purposes of the Certificate of
-------------------
Designation of Series E Convertible Preferred Stock which embodies this
resolution:
"business day" means any day other than a Saturday, Sunday, or a day on
which banking institutions in the States of Delaware or Texas are authorized or
obligated by law or executive order to close; and
"trading day" means a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of business or, if the Common Stock is not listed or admitted to
trading on any national securities exchange any day other than a Saturday,
Sunday, or a day on which banking institutions in the States of Delaware or
Texas are authorized or obligated by law or executive order to close.
IN WITNESS WHEREOF, the Company has caused this Certificate of Designation
of Series E Convertible Preferred Stock to be duly executed by its President and
attested to by its Secretary and has caused its corporate seal to be affixed
hereto, this 6th day of February, 1996.
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Date: February 6, 1996 /s/Tim B. Tarrillion
-------------------------------------
Tim B. Tarrillion
President and Chief Executive Officer
Date: February 6, 1996 /s/David M. Daniels
-------------------------------------
David M. Daniels
Secretary
7
<PAGE>
EXHIBIT A
FORM OF CONVERSION NOTICE
[Please Type or Print]
North American Technologies Group, Inc. Date: ___________________________
4710 Bellaire Blvd., Suite 301
Bellaire, Texas 77401 USA
Attention: Corporate Secretary
Facsimile No.: (713) 662-3728 [Note: if telecopied, deliver the original
form and Series E Convertible Preferred Stock
Certificate(s) by mail to the Company.]
Name: ______________________________________________________
Address: ______________________________________________________
______________________________________________________
______________________________________________________
Telephone: ____________________ Telecopier: _____________________
Taxpayer Identification No. (if applicable):_______________________________
The undersigned holder of the following shares of Series E Convertible Preferred
Stock of North American Technologies Group, Inc., a Delaware corporation (the
"Company"), hereby requests that such shares be converted into __________ shares
of common stock, par value $.001 per share, of the Company in accordance with
the terms of such Series E Convertible Preferred Stock.
SHARES OF SERIES E CONVERTIBLE PREFERRED STOCK TO BE CONVERTED
<TABLE>
<CAPTION>
Number of Shares of Series E Name and Address for Issuance
Convertible Preferred Stock of Shares of Common Stock
Certificate No. to be Converted (if different from above)
<S> <C> <C>
__________________________________________________________________________________________________
_______________________________
_______________________________
_______________________________
Printed or Typed
Name of Holder: _________________________________________ (Must be signed by
By (execute here): _________________________________________ registered holder)
Title: _________________________________________
(If signature is by a spouse, administrator, guardian, attorney-in-fact, officer
of a corporation or other officer or capacity, please specify such capacity.)
</TABLE>
8
<PAGE>
EXHIBIT 4.9
CERTIFICATE OF DESIGNATION
Tim B. Tarrillion and Judith Knight Shields do hereby certify that
they are the President and Assistant Secretary, respectively, of NORTH AMERICAN
TECHNOLOGIES GROUP, INC., a Delaware corporation (hereinafter referred to as the
"Corporation" or the "Company"); that, pursuant to the Corporation's Certificate
of Incorporation and Section 151 of the Delaware General Corporation Law, the
Board of Directors of the Corporation adopted the following resolutions on April
5, 1996; and that none of the Series F Cumulative Convertible Preferred Stock
has been issued.
A. SERIES F CONVERTIBLE PREFERRED STOCK. There is hereby created a
------------------------------------
series of preferred stock designated as Cumulative Convertible Preferred Stock,
Series F (the "Series F Preferred"), which will consist of 150,000 shares and
will have the designations, preferences, voting powers, relative, participating,
optional or other special rights and privileges, and the qualifications,
limitations and restrictions as follows:
(1) DIVIDENDS AND DISTRIBUTIONS.
---------------------------
(a) The holders of shares of Series F Preferred shall be entitled
to receive dividends at a rate of thirteen and one-half percent (13.5%) of the
Series F Conversion Value (as defined in SECTION A(3)(A) below) per annum per
share of Series F Preferred, which shall be fully cumulative, prior and in
preference to any declaration or payment of any dividend (payable other than in
Common Stock) or other distribution on any other class or series of Preferred
Stock or the Common Stock of the Corporation other than with respect to
dividends declared or paid with respect to shares of the Corporation's Series D
Convertible Preferred Stock (the "Series D Preferred"), (and excluding any stock
splits and subdivisions for which an adjustment is made under SECTION
A(3)(D)(VI)(1) below). The dividends on the Series F Preferred shall accrue from
the date of issuance of each share and shall be payable semi-annually on June 30
and December 31 of each year (each a "Dividend Date") commencing on June 30,
1996, except that if any such date is a Saturday, Sunday or legal holiday (a
"Non-Business Day") then such dividend shall be payable on the next day that is
not a Saturday, Sunday or legal holiday on which banks in the State of Texas are
permitted to be closed (a "Business Day") to holders of record as they appear on
the stock books of the Corporation on the applicable record date, which shall be
not more than 60 nor less than 10 days preceding the payment date for such
dividends, as fixed by the Board of Directors (the "Record Date"). The dividends
on the Series F Preferred shall be payable only when, as and if declared by the
Board of Directors out of funds legally available therefor. The dividends shall,
at the option of the Corporation, either (1) be payable in cash, or (2) accrue,
if prior to the third anniversary of the Series F Original Issue Date (as
defined herein), and thereafter shall be payable in cash. Subject to the
provisions of the preceding sentence and the next paragraph, in the absence of
an election by the Board of Directors within 10 days of each Dividend Date to
pay dividends in cash, the dividends shall accrue. The amount of dividends
payable for any period that is shorter or longer than a full dividend shall be
computed on the basis of a 360-day year of twelve 30-day months. All accrued but
unpaid dividends shall accrue interest after each Dividend Date at a rate of
thirteen and one-half percent (13.5%) per annum
<PAGE>
(compounded on a semi-annual basis) from each Dividend Date, computed on the
basis of a 360-day year of twelve 30-day months.
(b) Each holder of Series F Preferred may, by written notice to the
Corporation, within twenty (20) days of each Dividend Date, elect (the "Series F
Dividend Election") to receive the dividends which, pursuant to the preceding
paragraph, have not been paid in cash but have accrued for such period on such
Dividend Date, in shares of Series F Preferred (the "Series F Payments-in-Kind")
rather than have such dividends accrue. A Series F Dividend Election for any
particular Dividend Date shall operate only for such Dividend Date. Series F
Payments-in-Kind shall be payable as of the Dividend Date of each period for
which the election is made, except that if such date is a Non-Business Day then
such Series F Payment-in-Kind shall be payable as of the next Business Day to
holders of record as they appear on the stock books of the Corporation on the
applicable Record Date. Each Series F Payment-in-Kind shall be equal in amount
to that number of shares of Series F Preferred that is equal in number to the
aggregate cash dividends payable on any such dividend date divided by the Series
F Conversion Value (as defined in SECTION A(3)(A) below), and shall be payable
to each holder who makes a Series F Divided Election. Certificates representing
the shares of Series F Preferred issuable on payment of any Series F Payment-in-
Kind shall be delivered to each holder entitled to receive such Series F
Payment-in-Kind (in appropriate denominations) on or before the forty-fifth
(45th) day following the Dividend Date for which such Series F Payment-in-Kind
is elected to be received hereunder. If a Series F Payment-in-Kind is not made
in compliance with the terms hereof, the Corporation shall be obligated to pay
the cash dividends under the procedures in the previous paragraph.
(2) LIQUIDATION RIGHTS. In the event of any liquidation, dissolution
------------------
or winding up of the Corporation, whether voluntary or involuntary,
distributions shall be made to the holders of Series F Preferred in respect of
such Series F Preferred, in the following manner:
(A) SERIES F PREFERRED. Subject to the rights of holders of Series
------------------
D Preferred, the holders of the Series F Preferred and the Series E Preferred
Convertible Stock of the Corporation (the "Series E Preferred") shall be
entitled to be paid first out of the assets of the Corporation available for
distribution to holders of its capital stock, on a pro rata basis, in proportion
to the consideration paid for such shares by each holder thereof to the
aggregate consideration paid for all such shares by all holders thereof (in
contrast to distributions made by numbers of shares, due to the difference in
the price per share of each series), to the maximum extent allowable by law,
including all enforceable waivers and agreements. The Series F Preferred
liquidation preference shall be equal to (i) the Series F Conversion Value (as
defined in SECTION A(3)(A) below), as appropriately adjusted to reflect any
stock split, stock dividend, combination, recapitalization and the like
(collectively a "Recapitalization") of the Series F Preferred, plus (ii) all
accrued or declared but unpaid dividends (including any interest accrued thereon
calculated through the date of liquidation). The amount of the Series E
Preferred liquidation preference shall be as stated in its Certificate of
Designations. If, upon the occurrence of a liquidation, dissolution or winding
up, the assets and funds thus distributed among the holders of the Series F
Preferred and Series E Preferred shall be insufficient to permit the payment to
such holders of their full liquidation preferences, then the entire assets and
funds of the Corporation
2
<PAGE>
legally available for distribution to the holders of capital stock shall be
distributed ratably among the holders of the Series F Preferred and Series E
Preferred in the manner described above, subject to the rights of the holders of
the Series D Preferred.
(B) REMAINING ASSETS. If assets are remaining after payment of the
----------------
full preferential amount with respect to the Series F Preferred, Series E
Preferred and Series D Preferred set forth in SECTION A(2)(A) above, then the
holders of any other class or series of Preferred Stock, if any, shall be
entitled to their respective preferential amounts on liquidation, and thereafter
the holders of the Common Stock shall be entitled to share ratably in all such
remaining assets and surplus funds based on the number of shares of Common Stock
held by each.
(C) EVENTS DEEMED A LIQUIDATION. For purposes of this SECTION A(2),
---------------------------
the holders of a majority of the Series F Preferred then outstanding, voting
together as a class, may elect to have treated as a liquidation, dissolution or
winding up of the Corporation the consolidation or merger of the Corporation
with or into any other corporation or the sale or other transfer in a single
transaction or a series of related transactions of all or substantially all of
the assets of the Corporation, or any other reorganization of the Corporation.
(D) VALUATION OF SECURITIES AND PROPERTY. In the event the
------------------------------------
Corporation proposes to distribute assets other than cash in connection with any
liquidation, dissolution or winding up of the Corporation, the value of the
assets to be distributed to the holders of shares of Series F Preferred shall be
determined in good faith by the Board of Directors. Any securities not subject
to investment letter or similar restrictions on free marketability shall be
valued as follows:
(i) If traded on a national securities exchange or the NASDAQ
National Market System ("NASDAQ/NMS"), the value shall be deemed to be the
average of the security's closing prices on such exchange or NASDAQ/NMS
over the thirty (30) day period ending three (3) days prior to the
distribution;
(ii) If actively traded over-the-counter (other than NASDAQ/NMS),
the value shall be deemed to be the average of the closing bid prices over
the thirty (30) day period ending three (3) days prior to the distribution;
and
(iii) If there is no active public market, the value shall be
the fair market value thereof as determined in good faith by the Board of
Directors.
The method of valuation of securities subject to investment letter or other
restrictions on free marketability shall be adjusted to make an appropriate
discount from the market value determined as above in CLAUSES (I), (II) or (III)
to reflect the fair market value thereof as determined in good faith by the
Board of Directors. The holders of at least 50% of the outstanding Series F
Preferred shall have the right to challenge any determination by the Board of
Directors of fair market value pursuant to this SECTION A(2)(D), in which case
the determination of fair market value shall be
3
<PAGE>
made by an independent appraiser selected jointly by the Board of Directors and
the challenging parties, the cost of such appraisal to be borne equally by the
Corporation and the challenging parties.
(3) CONVERSION. The holders of the Series F Preferred have conversion
----------
rights as follows (the "Conversion Rights"):
(A) RIGHT TO CONVERT.
----------------
(i) Each share of Series F Preferred shall initially be
convertible, at the option of the holder thereof, at any time at the principal
office of the Corporation or any transfer agent for the Series F Preferred, into
the number of fully paid and nonassessable shares of Common Stock which results
from dividing the Series F Conversion Price (as hereinafter specified) per share
in effect for such series at the time of conversion into the per share Series F
Conversion Value (as hereinafter specified) of such series. The initial
Conversion Price of the Series F Preferred (the "Series F Conversion Price")
shall be $1.00 per share, and the Conversion Value of the Series F Preferred
(the "Series F Conversion Value") shall be $100.00 per share. The initial Series
F Conversion Price shall be subject to adjustment from time to time as provided
in SECTION A(3)(C) hereof. The Series F Conversion Value shall not be subject to
adjustment (except in connection with a Recapitalization). Upon conversion, all
accrued or declared but unpaid dividends (including any interest accrued thereon
calculated as of the date of conversion) on the Series F Preferred shall either
be paid in cash, to the extent permitted by applicable law or, at the option of
the holder of the Series F Preferred, converted into the number of fully paid
and nonassessable shares of Common Stock which results from dividing the Series
F Conversion Price in effect at such time into the aggregate of all such accrued
or declared but unpaid dividends (including any interest accrued thereon
calculated as of the date of conversion).
(ii) On and after the fifth anniversary of the Series F Original Issue
Date, each share of Series F Preferred shall be convertible, at the option of
the holder thereof, at any time at the principal office of the Corporation or
any transfer agent for the Series F Preferred, into the number of fully paid and
nonassessable shares of Common Stock which results from dividing the lower of
(1) the then applicable Series F Conversion Price and (2) ninety percent (90%)
of the applicable Market Price (as defined herein) per share of Common Stock
into the per share Series F Conversion Value of such series. Upon conversion,
all accrued or declared but unpaid dividends (including any interest accrued
thereon calculated as of the date of conversion) on the Series F Preferred shall
either be paid in cash, to the extent permitted by applicable law or, at the
option of the holder of the Series F Preferred, converted into the number of
fully paid and nonassessable shares of Common Stock which results from dividing
the lower of (1) and (2) above in effect at such time into the aggregate of all
such accrued or declared but unpaid dividends (including any interest accrued
thereon calculated as of the date of conversion). The "Market Price" per share
of Common Stock shall be the average closing bid price per share of Common Stock
during the twenty (20) trading days immediately preceding the date of such
conversion, as such bid price is reported by NASDAQ/NMS, or the average closing
bid price in the over-the-counter market if other than NASDAQ/NMS, or in the
event the Common Stock is
4
<PAGE>
listed on a stock exchange, the Market Price shall be the average closing bid
price on such exchange, as reported in the Wall Street Journal.
(iii) Notwithstanding anything else contained herein to the
contrary, in the event that the Corporation shall default in its obligations
pursuant to the terms of Section 4.16 of that certain Stock and Warrant Purchase
Agreement pursuant to which the shares of Series F Preferred were issued (as the
same may be amended, modified or restated from time to time, the "Series F Stock
Purchase Agreement"), then during the term of such default each share of Series
F Preferred shall be convertible, at the option of the holder thereof, at any
time at the principal office of the Corporation or any transfer agent for the
Series F Preferred, into the number of fully paid and nonassessable shares of
Common Stock which results from dividing the lower of (1) the then applicable
Series F Conversion Price and (2) seventy-five percent (75%) of the applicable
Market Price per share of Common Stock, into the per share Series F Conversion
Value. Upon conversion, all accrued or declared but unpaid dividends (including
any interest accrued thereon calculated as of the date of conversion) on the
Series F Preferred shall either be paid in cash, to the extent permitted by
applicable law or, at the option of the holder of the Series F Preferred,
converted into the number of fully paid and nonassessable shares of Common Stock
which results from dividing the lower of (1) and (2) above in effect at such
time into the aggregate of all such accrued or declared but unpaid dividends
(including any interest accrued thereon calculated as of the date of
conversion).
(iv) Notwithstanding anything else contained herein to the contrary,
in the event that the Corporation shall default in either of its obligations
pursuant to the terms of Section 4.20 of the Series F Stock Purchase Agreement,
the Series F Conversion Price shall be reduced to an amount equal to ninety five
percent (95%) of the Series F Conversion Price then in effect.
(B) MECHANICS OF CONVERSION. Before any holder of Series F Preferred
-----------------------
shall be entitled to convert the same into shares of Common Stock and to receive
certificates therefor, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the principal office of the Corporation
or of any transfer agent for the Series F Preferred, and shall give written
notice to the Corporation at such office that such holder elects to convert the
same. The Corporation shall, as soon as practicable after such delivery, issue
and deliver at such office to such holder of Series F Preferred, a certificate
or certificates for the number of shares of Common Stock to which such holder
shall be entitled as aforesaid and a check payable to such holder in the amount
of any unconverted accrued or declared but unpaid dividends (including any
interest accrued thereon calculated as of the date of conversion) payable
pursuant to SECTION A(1) hereof, if any. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Series F Preferred to be converted, and the holder or
holders entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date. If the Corporation fails to pay all
such dividends (and interest thereon), if any, within twenty (20) days of the
date of conversion, the holder entitled to such dividends (and interest thereon)
may elect to have the Corporation issue to such holder, in lieu of such cash
5
<PAGE>
payment, additional shares of Common Stock calculated by dividing the total
amount payable on such date by the applicable Series F Conversion Price,
determined pursuant to SECTION A(3)(A) above.
(C) ADJUSTMENTS TO SERIES F CONVERSION PRICE.
----------------------------------------
(i) SPECIAL DEFINITIONS. For purposes of this SECTION A(3)(C),
-------------------
the following definitions shall apply:
(1) "OPTIONS" shall mean rights, options or warrants to subscribe
-------
for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(2) "CONVERTIBLE SECURITIES" shall mean any evidences of
----------------------
indebtedness, shares or other securities convertible into or exchangeable
for Common Stock.
(3) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of
---------------------------------
Common Stock issued (or, pursuant to SECTION 3(C)(III), deemed to be
issued) by the Corporation after the Series F Original Issue Date, other
than shares of Common Stock issued or issuable:
(A) upon conversion of shares of Series F Preferred;
(B) pursuant to a stock grant, option plan or purchase plan,
other employee stock incentive program or agreement approved by the Board
of Directors and pursuant to the terms of Section 4.13 of the Series F
Stock Purchase Agreement (as adjusted for Other Adjustments under SECTION
3(C)(VI)) (the "Option Pool");
(C) in a transaction described in SECTION A(3)(C)(VI);
(D) pursuant to the terms of any stock grant, option,
warrant, employment agreement or other written obligation, agreement or
commitment to which the Company was a party as of the Series F Original
Issue Date and which was disclosed in Schedule 2.5 of the Series F Stock
Purchase Agreement;
(E) in connection with the acquisition of the remaining
shares of the capital stock of North American Environmental Group, Inc., or
(F) by way of dividend or other distribution on shares of
Common Stock excluded from the definition of Additional Shares of Common by
the foregoing clauses (A), (B), (C), (D), (E) or this clause (F).
6
<PAGE>
(4) "SERIES F ORIGINAL ISSUE DATE" shall mean the date on which
----------------------------
the first share of Series F Preferred was issued.
(ii) NO ADJUSTMENT OF SERIES F CONVERSION PRICE. No adjustment in the
------------------------------------------
Series F Conversion Price of the Series F Preferred shall be made in
respect of the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued or
deemed to be issued by the Corporation is less than the Series F Conversion
Price for the Series F Preferred in effect on the date of, and immediately
prior to, such issue.
(iii) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK.
-------------------------------------------------
(1) OPTIONS AND CONVERTIBLE SECURITIES. In the event the
----------------------------------
Corporation at any time or from time to time after the Series F Original
Issue Date shall issue any Options (other than the issuance of Options
pursuant to the Option Pool) or Convertible Securities or shall fix a
record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities, then the
maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent
adjustment of such number) of Common Stock issuable upon the exercise of
such Options or, in the case of Convertible Securities and Options
therefor, the exercise of such Options and conversion or exchange of such
Convertible Securities shall be deemed to be Additional Shares of Common
Stock issued as of the time of such issue or, in case such a record date
shall have been fixed, as of the close of business on such record date,
provided that Additional Shares of Common Stock shall not be deemed to have
been issued unless the consideration per share (determined pursuant to
SECTION A(3)(C)(V) hereof) of such Additional Shares of Common Stock would
be less than the Series F Conversion Price in effect on the date of and
immediately prior to such issue, or such record date, as the case may be,
and provided further that in any such case in which Additional Shares of
Common Stock are deemed to be issued:
(A) except as provided in SECTION A(3)(C)(III)(1)(B),
no further adjustment in the Series F Conversion Price shall be made upon
the subsequent issue of Convertible Securities or shares of Common Stock
upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(B) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any change in the
consideration payable to the Corporation, or change in the number of shares
of Common Stock issuable, upon the exercise, conversion or exchange thereof
(other than under or by reason of provisions designed to protect against
dilution), the Series F Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto) and
any subsequent adjustments based thereon, shall, upon any such increase or
7
<PAGE>
decrease becoming effective, be recomputed to reflect such increase or
decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities; and
(C) no readjustment pursuant to CLAUSE (B) above shall
have the effect of increasing the Series F Conversion Price to an amount
which exceeds the lower of (1) the Series F Conversion Price on the
original adjustment date or (2) the Series F Conversion Price that would
have resulted from any issuance of Additional Shares of Common Stock
between the original adjustment date and such readjustment date.
(iv) ADJUSTMENT OF SERIES F CONVERSION PRICE UPON ISSUANCE OF
--------------------------------------------------------
ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation shall
---------------------------------
issue Additional Shares of Common Stock (including, without limitation,
Additional Shares of Common Stock deemed to be issued pursuant to SECTION
A(3)(C)(III) or Additional Shares of Common Stock issued upon conversion of
shares of Series D Preferred, the Series E Preferred and shares of Common
Stock issued to Corporate Investors Relations, Inc. ("CIR"), pursuant to
that certain written agreement, as the same may be amended from time to
time (the "CIR Agreement"), by and between the Corporation and CIR) without
consideration or for a consideration per share less than the Series F
Conversion Price in effect on the date of and immediately prior to such
issue, then and in each such event the Series F Conversion Price shall be
reduced to a price (calculated to the nearest cent) determined by
multiplying such Series F Conversion Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of shares of Common Stock which the
aggregate consideration received by the Corporation for the total number of
Additional Shares of Common Stock so issued would purchase at such Series F
Conversion Price; and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued.
(v) DETERMINATION OF CONSIDERATION. For purposes of this SECTION
------------------------------
A(3)(C), the consideration received by the Corporation for the issuance of
any Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY: Such consideration shall:
-----------------
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation;
(B) insofar as it consists of property other than cash,
be computed at the fair value thereof at the time of such issue, as
determined by the Board of Directors in the good faith exercise of its
reasonable business judgment; and
8
<PAGE>
(C) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in CLAUSES (A) and (B)
above, as determined by the Board of Directors in the good faith exercise
of its reasonable business judgment.
(2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per
----------------------------------
share received by the Corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to SECTION A(3)(C)(III)(1), relating to
Options and Convertible Securities, shall be determined by dividing
(A) the total amount, if any, received or receivable
by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without
regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise of such
Options or the conversion or exchange of such Convertible Securities, or in
the case of Options for Convertible Securities, the exercise of such
Options for Convertible Securities and the conversion or exchange of such
Convertible Securities, by
(B) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of
such Convertible Securities.
(vi) OTHER ADJUSTMENTS.
-----------------
(1) SUBDIVISIONS, COMBINATIONS, OR CONSOLIDATIONS OF COMMON
-------------------------------------------------------
STOCK. In the event the outstanding shares of Common Stock shall be
------
subdivided, combined or consolidated, by stock split, stock dividend,
combination or like event, into a greater or lesser number of shares of
Common Stock, the Series F Conversion Price in effect immediately prior to
such subdivision, combination, consolidation or stock dividend shall,
concurrently with the effectiveness of such subdivision, combination or
consolidation, be proportionately adjusted.
(2) RECLASSIFICATIONS. In the case, at any time after the
-----------------
date hereof, of any capital reorganization or any reclassification of the
stock of the Corporation (other than as a result of a stock dividend or
subdivision, split-up or combination of shares), or the consolidation or
merger of the Corporation with or into another person (other than a
consolidation or merger (A) in which the Corporation is the continuing
entity and which does not result in any change in the Common Stock or (B)
which is treated as a liquidation pursuant to SECTION A(2)(C)), the shares
of the Series F Preferred shall, after such reorganization,
reclassification, consolidation or merger be convertible into the kind
9
<PAGE>
and number of shares of stock or other securities or property of the
Corporation or otherwise to which such holder would have been entitled if
immediately prior to such reorganization, reclassification, consolidation
or merger such holder had converted its shares of the Series F Preferred
into Common Stock. The provisions of this SECTION A(3)(C)(VI)(3) shall
similarly apply to successive reorganizations, reclassifications,
consolidations or mergers.
(D) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Series F Conversion Price pursuant to this
SECTION A(3), the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of Series F Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series F Preferred, furnish or cause to be furnished to
such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Series F Conversion Price at the time in effect, and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of the Series F
Preferred.
(E) STATUS OF CONVERTED STOCK. In case any shares of Series F
-------------------------
Preferred shall be converted pursuant to SECTION 3 hereof, the shares so
converted shall, at the option of the Corporation, be canceled, and, if not
cancelled, shall not be reissuable as shares of Series F Preferred but shall be
part of the authorized but unissued capital stock of the Corporation.
(F) FRACTIONAL SHARES. In lieu of any fractional shares to which the
-----------------
holder of Series F Preferred would otherwise be entitled upon conversion, the
Corporation shall pay cash equal to such fraction multiplied by the fair market
value of one share of Common Stock as determined by the Board of Directors in
the good faith exercise of its reasonable business judgment.
(G) MISCELLANEOUS.
-------------
(i) All calculations under this SECTION A(3) shall be made to the
nearest cent or to the nearest one hundredth (1/100) of a share, as the
case may be.
(ii) The holders of at least 50% of the outstanding Series F
Preferred shall have the right to challenge any determination by the Board
of Directors of fair market value pursuant to this SECTION A(3), in which
case such determination of fair market value shall be made by an
independent appraiser selected jointly by the Board of Directors and the
challenging parties, the cost of such appraisal to be borne equally by the
Corporation and the challenging parties.
(iii) No adjustment in the Series F Conversion Price need be
made if such adjustment would result in a change in such Series F
Conversion Price of less than
10
<PAGE>
$0.01. Any adjustment of less than $0.01 which is not made shall be carried
forward and shall be made at the time of and together with any subsequent
adjustment which, on a cumulative basis, amounts to an adjustment of $0.01
or more in the Series F Conversion Price.
(H) NO IMPAIRMENT. The Corporation will not through any
-------------
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation, but will at all times in
good faith assist in the carrying out of all the provisions of this SECTION A(3)
and in the taking of all such action as may be necessary or appropriate in order
to protect the conversion rights of the holders of Series F Preferred against
impairment.
(I) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of Series F Preferred, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series F Preferred. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series F Preferred, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
(4) REDEMPTION.
----------
(a) The Corporation may redeem, on the first day subsequent to the
eighth anniversary of the Series F Original Issue Date, all or a portion of the
shares of Series F Preferred then outstanding on the Redemption Date (as defined
below) out of funds legally available therefor, pro rata on the basis of the
number of shares held by each holder. The Corporation shall pay in cash
therefor a sum per share equal to one hundred dollars ($100) together with all
accrued or declared but unpaid dividends (including any interest accrued
thereon) calculated as of the Redemption Date (collectively the "Redemption
Value").
(b) Any notice of redemption (the "Notice of Redemption") given by the
Corporation shall be delivered by mail, first class postage prepaid, to each
holder of record (at the close of business on the business day preceding the day
on which notice is given) of Series F Preferred, at the address last shown on
the records of the Corporation for such holder or given by the holder to the
Corporation, for the purpose of notifying such holder of the redemption to be
effected. The Notice of Redemption shall specify a date (the "Redemption Date")
between 45 and 75 days after the mailing of the Notice of Redemption on which
the Series F Preferred then outstanding shall be redeemed and the place at which
payment may be obtained, which shall be the principal offices of the Corporation
or such other place as shall be mutually agreeable to the Corporation and
holders of a majority in interest of the Series F Preferred. The Notice of
Redemption shall call upon each holder of Series F Preferred to either (i)
surrender to the
11
<PAGE>
Corporation, in the manner and at the place designated, such holder's
certificate or certificates representing the shares to be redeemed or (ii)
convert such Series F Preferred into Common Stock prior to the Redemption Date
in accordance with the provisions of SECTION 3 above; provided, however, that if
the Market Price as of the Redemption Date is greater than or equal to the then
applicable Series F Conversion Price (without regard to the adjustments to be
made to the Series F Conversion Price pursuant to the terms of SECTION
A(3)(A)(II)), then the holders of Series F Preferred shall have the absolute
right to convert such Series F Preferred into Common Stock prior to the
Redemption Date in accordance with the provisions of SECTION A(3), and;
provided, further, however, that if the Market Price as of the Redemption Date
is less than the then applicable Series F Conversion Price (without regard to
the adjustments to be made to the Series F Conversion Price pursuant to the
terms of SECTION (A)(3)(A)(II)), then the Corporation shall have the absolute
right to redeem the Series F Preferred in accordance with the provisions of this
SECTION A(4). If the Corporation elects to redeem shares pursuant to this
SECTION A(4) and defaults or fails to perform its redemption obligations
pursuant to SECTION A(4)(C) in connection therewith, the holders of Series F
Preferred shall then have the absolute right to convert such Series F Preferred
into Common Stock in accordance with the provisions of SECTION A(3).
(c) On the Redemption Date, the Corporation shall pay by cash or check
to the order of the person whose name appears on the certificate or certificates
of the Series F Preferred that (i) shall not have been converted pursuant to
SECTION A(3) hereof and (ii) shall have been surrendered to the Corporation in
the manner and at the place designated in the Notice of Redemption, the
Redemption Value, and thereupon each surrendered certificate shall be canceled.
(d) If the funds of the Corporation legally available for redemption
of the Series F Preferred are insufficient to redeem the total number of shares
of Series F Preferred outstanding on the Redemption Date, the Series F Preferred
shall be redeemed (on a pro rata basis from the holders of the Series F
Preferred from time to time), to the extent the Corporation is legally permitted
to do so, and the redemption obligations of the Corporation hereunder will be a
continuing obligation until the Corporation's redemption of all the Series F
Preferred.
(e) From and after the Redemption Date, unless there shall have been
a default in payment of the Redemption Value, all rights of the holders of
shares of Series F Preferred (except the right to receive the Redemption Value
subsequent to the Redemption Date upon surrender of their certificate or
certificates) shall cease with respect to such shares redeemed, and such shares
shall not thereafter be transferred on the books of the Corporation or be deemed
to be outstanding for any purpose whatsoever.
(5) VOTING RIGHTS.
-------------
(A) GENERAL. Except as otherwise required by law or by SECTION A(8),
-------
the holders of all Series F Preferred issued and outstanding, in the aggregate,
shall be entitled to the number of votes equal to the number of shares of Common
Stock into which shares of Series F Preferred are convertible on any record
date, or, if no such record date is established, at the date
12
<PAGE>
such vote is taken or any written consent of stockholders is solicited, such
votes to be counted together with all other shares of stock of the Corporation
having general voting power and not separately as a class. Fractional votes by
the holders of Series F Preferred shall not, however, be permitted, and any
fractional voting rights shall (after aggregating all shares into which shares
of Series F Preferred held by each holder could be converted) be rounded to the
nearest whole number. Notwithstanding the foregoing, the holders of Series F
Preferred shall have the rights under and be subject to the terms of Section
4.11 of the Series F Stock Purchase Agreement.
(6) NOTICES OF RECORD DATE. In the event of any taking by the Corporation
----------------------
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a required dividend on the Series D Preferred) or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right, the
Corporation shall mail to each holder of Series F Preferred, at least twenty
(20) days prior to the date specified therein, a notice specifying the date on
which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
(7) NOTICES. Any notice required by the provisions of the Certificate to
-------
be given to the holders of Series F Preferred shall be deemed given when
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his or her address appearing on the books of the
Corporation, or upon actual receipt when personally delivered or sent by
overnight or other courier delivery.
(8) PROTECTIVE PROVISIONS. So long as any shares of Series F Preferred are
---------------------
outstanding, the Corporation shall not, without first obtaining the approval of
the holders of at least a majority in interest of the Series F Preferred then
outstanding, voting as a separate class, take any action that:
(I) alters the rights, preferences or privileges of the Series F
Preferred;
(II) increases or decreases the authorized number of shares of Series
F Preferred of the Corporation;
(III) creates any new class or series of shares that has a
preference over or is on a parity with the Series F Preferred with respect to
voting, dividends or liquidation preferences, or any other rights and/or
remedies;
13
<PAGE>
(IV) reclassifies stock into shares having a preference over or parity
with the Series F Preferred with respect to voting, dividends or liquidation
preferences, or any other rights and/or remedies; or
(V) authorizes any dividend or other distribution other than with
respect to the Series F Preferred (except as required pursuant to the terms of
the Series D Preferred).
(9) SPECIFIC ENFORCEMENT. The Company agrees that the rights created by
--------------------
this designation are unique, and that the loss of any such right is not
susceptible to monetary quantification. Consequently, the Company agrees that
an action for specific performance (including for temporary and/or permanent
injunctive relief) of the obligations created by this designation is a proper
remedy for the breach of the provisions of this designation, without the
necessity of proving actual damages. If any holder of Series F Preferred is
forced to institute legal proceedings to enforce its rights in accordance with
the provisions hereof, such holder, if he prevails, shall be entitled to recover
from the Company his reasonable expenses, including attorneys' fees, incurred in
connection with any such action.
IN WITNESS WHEREOF, the Company has caused this Certificate of Designation
to be duly executed by its President and attested to by its Assistant Secretary
and has caused its corporate seal to be affixed hereto, this 5th day of April,
1996.
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
/s/ Tim B. Tarrillion
Date: April 5, 1996 -------------------------------------------
Tim B. Tarrillion
President and Chief Executive Officer
/s/ Judith Knight Shields
Date: April 5, 1996 -------------------------------------------
Judith Knight Shields
Assistant Secretary
14
<PAGE>
EXHIBIT 10.7
AMENDMENT NO. 1 TO STOCK OPTION AGREEMENT
THIS AMENDMENT NO. 1 TO STOCK OPTION AGREEMENT, dated as of December 1,
1995, is by and between NORTH AMERICAN TECHNOLOGIES GROUP, INC., a Delaware
corporation (the "Company"), and TIM B. TARRILLION ("Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into that certain Stock Option
Agreement, dated as of February 7, 1995 (the "Stock Option Agreement"), pursuant
to which, among other things, the Company granted to Employee an option to
purchase 400,000 shares of Common Stock (as defined in the Stock Option
Agreement) of the Company, on the terms and conditions set out in such Stock
Option Agreement; and
WHEREAS, the Company desires to grant to Employee an option to acquire an
additional 100,000 shares of Common Stock at an exercise price of $1.00 per
share of Common Stock, on the terms and conditions set out or referred to below;
NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, the receipt and
sufficiency of which are hereby acknowledged, the Company and Employee hereby
agree as follows:
1. GRANT OF OPTION TO ACQUIRE 100,000 SHARES OF COMMON STOCK. The
Company hereby grants to Employee an option to acquire an additional 100,000
shares of Common Stock at an exercise price of $1.00 per share of Common Stock,
upon the terms and conditions set out or referred to below.
2. AMENDMENTS TO STOCK OPTION AGREEMENT. In order to evidence the grant
of the option to acquire such 100,000 shares of Common Stock, and the terms and
conditions thereof, the Stock Option Agreement is hereby amended as follows:
Section 1 of the Stock Option Agreement shall be deleted in its entirety and
replaced with the following:
<PAGE>
"1. GRANT OF OPTION; VESTING SCHEDULE.
"(a) Grant of Option. The Company hereby grants to Employee an option the
("Option") to purchase, subject to the terms and conditions hereof, from the
Company an aggregate of five hundred thousand (500,000) shares (the "Option
Shares") of Common Stock, par value $0.001 per share, of the Company (the
"Common Stock") beginning on the Commencement Date (as defined below) and ending
at 5:00 p.m. Eastern Standard Time, on March 31, 2004 (the "Termination Date"),
one hundred thousand (100,000) of which Option Shares shall be at an exercise
price equal to $1.00 per share of Common Stock, and four hundred thousand
(400,000) of which Option Shares shall be at an exercise price equal to $2.50
per share of Common Stock. As used herein, the term "Commencement Date" shall
mean the date first set out above. The number of Option Shares and the exercise
price per share shall be subject to adjustment from time to time upon the
occurrence of certain events as set forth below. The shares of Common Stock or
any other shares or other units of stock or other securities or property, or any
combination thereof then receivable upon exercise of the Option, as adjusted
from time to time, are sometimes referred to hereinafter as "Exercise Shares."
The exercise price per share as from time to time in effect with respect to any
Option Shares is referred to hereinafter as the "Exercise Price."
The Option is not an "incentive stock option" as described in Section 422A of
the Internal Revenue Code of 1986, as amended.
"(b) Vesting Schedule. Following the Commencement Date, the Option shall
vest and be exerciseable (unless earlier terminated as provided herein) on March
31 in the years set forth below and in the amounts set forth below:
<TABLE>
<CAPTION>
NUMBER OF SHARES AT NUMBER OF SHARES AT
MARCH 31 EXERCISE PRICE OF $1.00 PER SHARE EXERCISE PRICE OF $2.50 PER SHARE
<S> <C> <C>
1996 100,000 100,000
1997 100,000
1998 100,000
1999 100,000
------- -------
Total 100,000 400,000
</TABLE>
; provided, however, that (i) the Option to acquire such shares shall vest on
the date set forth above only in the event that Employee is in the employ of the
Company or any of its subsidiaries in any capacity on such date and (ii) the
Option to acquire any Exercise Shares, if not earlier terminated by the terms of
this Agreement, shall terminate on the 5th annual anniversary date of the date
on which the Option to acquire such Exercise Shares vested as provided in this
clause (b). The period beginning on the Commencement Date and ending on the
Termination Date is sometimes referred to herein as the Option Period. If
Employee is not in the employ of the Company or any of its subsidiaries in any
capacity on any of the various vesting dates set forth above, regardless of the
reason therefore, then the Option with respect to such year shall not vest."
2
<PAGE>
3. MISCELLANEOUS. Except as provided in this Amendment No. 1 to Stock
Option Agreement, the Stock Option Agreement is hereby ratified and confirmed in
all respects by the parties hereto. Capitalized terms used herein and not
otherwise defined have the meanings given them in the Stock Option Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
Stock Option Agreement to be duly executed as of the day and year first set out
above.
"Company" NORTH AMERICAN TECHNOLOGIES
GROUP, INC.
/s/ David M. Daniels
By:____________________________________
David M. Daniels
Executive Vice President, Secretary
and Director
"Employee" TIM B. TARRILLION
/s/ Tim B. Tarrillion
_________________________________________
3
<PAGE>
EXHIBIT 10.8
AMENDMENT NO. 1 TO STOCK OPTION AGREEMENT
THIS AMENDMENT NO. 1 TO STOCK OPTION AGREEMENT, dated as of December 1,
1995, is by and between NORTH AMERICAN TECHNOLOGIES GROUP, INC., a Delaware
corporation (the "Company"), and DONOVAN BOYD ("Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into that certain Stock Option
Agreement, dated as of February 28, 1995 (the "Stock Option Agreement"),
pursuant to which, among other things, the Company granted to Employee an option
to purchase 200,000 shares of Common Stock (as defined in the Stock Option
Agreement) of the Company, on the terms and conditions set out in such Stock
Option Agreement; and
WHEREAS, the Company desires to grant to Employee an option to acquire an
additional 100,000 shares of Common Stock at an exercise price of $1.00 per
share of Common Stock, on the terms and conditions set out or referred to below;
NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, the receipt and
sufficiency of which are hereby acknowledged, the Company and Employee hereby
agree as follows:
1. GRANT OF OPTION TO ACQUIRE 100,000 SHARES OF COMMON STOCK. The
Company hereby grants to Employee an option to acquire an additional 100,000
shares of Common Stock at an exercise price of $1.00 per share of Common Stock,
upon the terms and conditions set out or referred to below.
2. AMENDMENTS TO STOCK OPTION AGREEMENT. In order to evidence the grant
of the option to acquire such 100,000 shares of Common Stock, and the terms and
conditions thereof, the Stock Option Agreement is hereby amended as follows:
Section 1 of the Stock Option Agreement shall be deleted in its entirety and
replaced with the following:
<PAGE>
"1. GRANT OF OPTION; VESTING SCHEDULE.
"(a) Grant of Option. The Company hereby grants to Employee an option the
("Option") to purchase, subject to the terms and conditions hereof, from the
Company an aggregate of three hundred thousand (300,000) shares (the "Option
Shares") of Common Stock, par value $0.001 per share, of the Company (the
"Common Stock") beginning on the Commencement Date (as defined below) and ending
at 5:00 p.m. Eastern Standard Time, on March 31, 2004 (the "Termination Date"),
one hundred thousand (100,000) of which Option Shares shall be at an exercise
price equal to $1.00 per share of Common Stock, and two hundred thousand
(200,000) of which Option Shares shall be at an exercise price equal to $2.50
per share of Common Stock. As used herein, the term "Commencement Date" shall
mean the date first set out above. The number of Option Shares and the exercise
price per share shall be subject to adjustment from time to time upon the
occurrence of certain events as set forth below. The shares of Common Stock or
any other shares or other units of stock or other securities or property, or any
combination thereof then receivable upon exercise of the Option, as adjusted
from time to time, are sometimes referred to hereinafter as "Exercise Shares."
The exercise price per share as from time to time in effect with respect to any
Option Shares is referred to hereinafter as the "Exercise Price."
The Option is not an "incentive stock option" as described in Section 422A of
the Internal Revenue Code of 1986, as amended.
"(b) Vesting Schedule. Following the Commencement Date, the Option shall
vest and be exerciseable (unless earlier terminated as provided herein) on March
31 in the years set forth below and in the amounts set forth below:
<TABLE>
<CAPTION>
NUMBER OF SHARES AT NUMBER OF SHARES AT
MARCH 31 EXERCISE PRICE OF $1.00 PER SHARE EXERCISE PRICE OF $2.50 PER SHARE
<S> <C> <C>
1996 100,000 50,000
1997 50,000
1998 50,000
1999 50,000
------- -------
Total 100,000 200,000
</TABLE>
; provided, however, that (i) the Option to acquire such shares shall vest on
the date set forth above only in the event that Employee is in the employ of the
Company or any of its subsidiaries in any capacity on such date and (ii) the
Option to acquire any Exercise Shares, if not earlier terminated by the terms of
this Agreement, shall terminate on the 5th annual anniversary date of the date
on which the Option to acquire such Exercise Shares vested as provided in this
clause (b). The period beginning on the Commencement Date and ending on the
Termination Date is sometimes referred to herein as the Option Period. If
Employee is not in the employ of the Company or any of its subsidiaries in any
capacity on any of the various vesting dates set forth above,
2
<PAGE>
regardless of the reason therefore, then the Option with respect to such year
shall not vest."
3. MISCELLANEOUS. Except as provided in this Amendment No. 1 to Stock
Option Agreement, the Stock Option Agreement is hereby ratified and confirmed in
all respects by the parties hereto. Capitalized terms used herein and not
otherwise defined have the meanings given them in the Stock Option Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
Stock Option Agreement to be duly executed as of the day and year first set out
above.
"Company" NORTH AMERICAN TECHNOLOGIES
GROUP, INC.
/s/ Tim B. Tarrillion
By:_______________________________________
Tim B. Tarrillion
President and Chief Executive Officer
"Employee" DONOVAN BOYD
/s/ Donovan Boyd
__________________________________________
3
<PAGE>
EXHIBIT 10.9
AMENDMENT NO. 1 TO STOCK OPTION AGREEMENT
THIS AMENDMENT NO. 1 TO STOCK OPTION AGREEMENT, dated as of December 1,
1995, is by and between NORTH AMERICAN TECHNOLOGIES GROUP, INC., a Delaware
corporation (the "Company"), and JUDITH KNIGHT SHIELDS ("Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into that certain Stock Option
Agreement, dated as of February 23, 1995 (the "Stock Option Agreement"),
pursuant to which, among other things, the Company granted to Employee an option
to purchase 200,000 shares of Common Stock (as defined in the Stock Option
Agreement) of the Company, on the terms and conditions set out in such Stock
Option Agreement; and
WHEREAS, the Company desires to grant to Employee an option to acquire an
additional 100,000 shares of Common Stock at an exercise price of $1.00 per
share of Common Stock, on the terms and conditions set out or referred to below;
NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, the receipt and
sufficiency of which are hereby acknowledged, the Company and Employee hereby
agree as follows:
1. GRANT OF OPTION TO ACQUIRE 100,000 SHARES OF COMMON STOCK. The
Company hereby grants to Employee an option to acquire an additional 100,000
shares of Common Stock at an exercise price of $1.00 per share of Common Stock,
upon the terms and conditions set out or referred to below.
2. AMENDMENTS TO STOCK OPTION AGREEMENT. In order to evidence the grant
of the option to acquire such 100,000 shares of Common Stock, and the terms and
conditions thereof, the Stock Option Agreement is hereby amended as follows:
Section 1 of the Stock Option Agreement shall be deleted in its entirety and
replaced with the following:
<PAGE>
"1. GRANT OF OPTION; VESTING SCHEDULE.
"(a) Grant of Option. The Company hereby grants to Employee an option the
("Option") to purchase, subject to the terms and conditions hereof, from the
Company an aggregate of three hundred thousand (300,000) shares (the "Option
Shares") of Common Stock, par value $0.001 per share, of the Company (the
"Common Stock") beginning on the Commencement Date (as defined below) and ending
at 5:00 p.m. Eastern Standard Time, on March 31, 2004 (the "Termination Date"),
one hundred thousand (100,000) of which Option Shares shall be at an exercise
price equal to $1.00 per share of Common Stock, and two hundred thousand
(200,000) of which Option Shares shall be at an exercise price equal to $2.50
per share of Common Stock. As used herein, the term "Commencement Date" shall
mean the date first set out above. The number of Option Shares and the exercise
price per share shall be subject to adjustment from time to time upon the
occurrence of certain events as set forth below. The shares of Common Stock or
any other shares or other units of stock or other securities or property, or any
combination thereof then receivable upon exercise of the Option, as adjusted
from time to time, are sometimes referred to hereinafter as "Exercise Shares."
The exercise price per share as from time to time in effect with respect to any
Option Shares is referred to hereinafter as the "Exercise Price."
The Option is not an "incentive stock option" as described in Section 422A of
the Internal Revenue Code of 1986, as amended.
"(b) Vesting Schedule. Following the Commencement Date, the Option shall
vest and be exerciseable (unless earlier terminated as provided herein) on March
31 in the years set forth below and in the amounts set forth below:
<TABLE>
<CAPTION>
NUMBER OF SHARES AT NUMBER OF SHARES AT
MARCH 31 EXERCISE PRICE OF $1.00 PER SHARE EXERCISE PRICE OF $2.50 PER SHARE
<S> <C> <C>
1996 100,000 50,000
1997 50,000
1998 50,000
1999 50,000
------- -------
Total 100,000 200,000
</TABLE>
; provided, however, that (i) the Option to acquire such shares shall vest on
the date set forth above only in the event that Employee is in the employ of the
Company or any of its subsidiaries in any capacity on such date and (ii) the
Option to acquire any Exercise Shares, if not earlier terminated by the terms of
this Agreement, shall terminate on the 5th annual anniversary date of the date
on which the Option to acquire such Exercise Shares vested as provided in this
clause (b). The period beginning on the Commencement Date and ending on the
Termination Date is sometimes referred to herein as the Option Period. If
Employee is not in the employ of the Company or any of its
2
<PAGE>
subsidiaries in any capacity on any of the various vesting dates set forth
above, regardless of the reason therefore, then the Option with respect to such
year shall not vest."
3. MISCELLANEOUS. Except as provided in this Amendment No. 1 to Stock
Option Agreement, the Stock Option Agreement is hereby ratified and confirmed in
all respects by the parties hereto. Capitalized terms used herein and not
otherwise defined have the meanings given them in the Stock Option Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
Stock Option Agreement to be duly executed as of the day and year first set out
above.
"Company" NORTH AMERICAN TECHNOLOGIES
GROUP, INC.
/s/ Tim B. Tarrillion
By:_______________________________________
Tim B. Tarrillion
President and Chief Executive Officer
"Employee" JUDITH KNIGHT SHIELDS
/s/ Judith Knight Shields
--------------------------------------------
3
<PAGE>
EXHIBIT 10.16
THE SECURITIES PURCHASED PURSUANT TO THE TERMS OF THIS AGREEMENT HAVE NOT BEEN
REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"),
OR APPLICABLE STATE SECURITIES LAWS (THE "STATE ACTS"), AND SHALL NOT BE SOLD,
PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED (WHETHER OR NOT FOR
CONSIDERATION) BY THE HOLDER EXCEPT BY REGISTRATION OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UPON THE ISSUANCE TO THE COMPANY OF A FAVORABLE OPINION OF
COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT
THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE 1933 ACT AND THE STATE
ACTS.
STOCK AND WARRANT PURCHASE AGREEMENT
------------------------------------
North American Technologies Group, Inc., a Delaware corporation (the
"Company"), its Operating Subsidiaries (as defined herein) signatory hereto (for
purposes of SECTION 2 only), NationsBanc Capital Corporation, a Texas
corporation ("NBCC"), and the other parties signatory hereto (each an "Investor"
and, with NBCC, collectively, the "Investors") enter into this Agreement, dated
April 5, 1996, relating to the issuance by the Company of certain of its
securities.
SECTION 1. DESCRIPTION OF TRANSACTION
--------------------------
1.1 DESCRIPTION OF SECURITIES. The Company agrees to issue to the
-------------------------
Investors, and the Investors severally but not jointly agree to purchase from
the Company, shares of the Company's authorized but unissued Series F Preferred
Stock, $.001 par value per share (the "Preferred Shares", which shall include
any shares of Series F Preferred Stock issued as stock dividends and/or
payments-in-kind), as indicated on Exhibit A. The Preferred Shares will be
convertible into shares of the Company's Common Stock, $.001 par value per share
(the "Common Stock"), as provided in Exhibit B. In connection with the issuance
of the Preferred Shares, the Company will also issue to the Investors warrants
exercisable into shares of the Company's Common Stock (the "Warrants"). Any
securities of the Company issued or issuable upon conversion of the Preferred
Shares (and any Common Stock issued as stock dividends and/or payments-in-kind
on the Preferred Shares) are referred to as "Conversion Shares." Any securities
of the Company issued or issuable upon exercise of the Warrants are referred to
as "Warrant Shares."
1.2 CLOSING.
-------
(a) The closing (the "Closing") of the sale of the Preferred Shares and the
Warrants will take place at the offices of Jenkens & Gilchrist, a Professional
Corporation, Houston, Texas, counsel for the Investors, at 1:00 p.m., on the
date of this Agreement, or such other time and place as agreed to by the parties
(the "Closing Date"). At the Closing, the Company will deliver the Preferred
Shares and the Warrants being acquired by the Investors upon payment of the
<PAGE>
purchase price by the Investors to the Company by either (a) wire transfer,
(b) certified or bank cashier's check, (c) surrender for cancellation by the
holders thereof of those certain 13 1/2% Convertible Subordinated Notes, due
September 22, 2000 (the "Notes"), and those certain Stock Purchase Warrants (the
"Purchase Warrants"), both issued pursuant to that certain Investment Agreement,
dated as of September 22, 1995 (the "Investment Agreement"), by and among the
Company and the signatories thereto, or (d) other form of payment acceptable to
the Company, as shown on Exhibit A. The Company will not be obligated to issue
any Preferred Shares or Warrants unless the Investors purchase all the Preferred
Shares and Warrants indicated on Exhibit A to be purchased at the Closing, and
the Company will pay to each holder of a surrendered Note the amount of the
accrued and unpaid interest on such Note to the Closing Date, in accordance with
the terms of such Note.
(b) In the event the Company does not at the Closing sell and issue, and/or
receive commitments to purchase, all 100,000 Preferred Shares authorized herein
to be issued and sold to the Investors, the Company may sell and issue
additional Preferred Shares at a subsequent closing (hereinafter referred to as
the "Deferred Closing"); provided, that (i) the aggregate purchase price paid
for Preferred Shares at the Closing referred to in SECTION 1.2(A) is at least
$7,700,000 ($2,700,000 of which shall have come from the surrender and
cancellation of the Notes and Purchase Warrants), (ii) such sales occur on or
prior to [MAY 15], 1996 at the same price and on the same terms and conditions
set forth herein, (iii) each purchaser at the Deferred Closing executes the
Stockholders' Agreement (as defined herein) and (iv) the aggregate number of
Preferred Shares sold at the Closing and the Deferred Closing do not exceed the
number of Preferred Shares authorized to be sold at the Closing; and provided,
further, that, for purposes of such Deferred Closing, each of the conditions
precedent set forth in SECTION 1.3 hereof shall be deemed to have been met
without any further action necessary on the part of the Company or its counsel.
At the Deferred Closing, upon execution of this Agreement and the Stockholders'
Agreement, a purchaser shall become a party hereto and shall be included within
the meaning of "Investor" hereunder, the shares of Series F Preferred so issued
shall be included within the term "Preferred Shares" hereunder, the warrants so
issued shall be included within the term "Warrants" hereunder and Exhibit A
shall be amended to include such Investors, without any further consent or
action on the part of the initial Investors. Each Investor irrevocably waives
any and all rights of first refusal or other rights in respect of any Preferred
Shares and/or Warrants purchased at a Deferred Closing.
1.3 CONDITIONS TO CLOSING. The obligation of each Investor to purchase
---------------------
and pay for the Preferred Shares to be purchased by each Investor at the Closing
is subject to the satisfaction at or prior to the Closing of each of the
following conditions:
(a) the Company shall have duly authorized and filed a Certificate of
Designations (the "Designations") with the Secretary of State of the State of
Delaware substantially in the form attached hereto as Exhibit B;
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(b) each of the parties listed on the signature page hereto shall have
entered into a Stockholders' Agreement (the "Stockholders' Agreement"),
substantially in the form attached hereto as Exhibit C;
(c) the Company shall have issued the Warrants to be acquired by the
Investors, substantially in the form attached hereto as Exhibit D;
(d) Theodore J. Lee, counsel for the Company, shall have delivered to each
Investor a legal opinion, dated as of the Closing Date, in form and substance
reasonably satisfactory to the Investors;
(e) the Company shall have delivered to NBCC the information required by
the Small Business Administration (the "SBA"), including SBA Forms 480 (Size
Status Declaration), 652 (Assurance of Compliance for Nondiscrimination) and
1031 (Portfolio Financing Report), that is requested by NBCC;
(f) the Company shall have obtained key man term life insurance with
insurer(s) of recognized responsibility in the amount of $1,000,000 (and an
additional $1,000,000 shall have been applied for) on Tim B. Tarrillion,
$500,000 on each of Donovan W. Boyd (and an additional $500,000 shall be
promptly after the Closing Date applied for), Judith Knight Shields and Michael
Bonem, and $1,700,000 on Ron Borah during the respective period or periods that
each such person is employed by the Company or any Subsidiary (as defined
herein), with the Company as the sole beneficiary of the proceeds of the
policies described herein (the "Key Man Insurance");
(g) the Company shall have delivered to each Investor the financial
statements referred to in SECTION 2.7 below (with a draft audit letter from the
Company's independent auditor); and
(h) the Company shall have delivered to each Investor:
(i) the Certificate of Incorporation of the Company and all
amendments thereto, certified by the Secretary of State of Delaware;
(ii) (A) copies of the Company's and each Operating Subsidiary's
resolutions of the Board of Directors authorizing and approving this
Agreement and all of the transactions and agreements contemplated hereby
and thereby, (B) the Bylaws of the Company and (C) the names of the officer
or officers of the Company and each Operating Subsidiary authorized to
execute this Agreement and any and all documents, agreements and
instruments contemplated herein, all certified by the Secretary of the
Company to be true, correct, complete and in full force and effect and
unmodified as of the Closing Date;
(iii) a good standing certificate for the Company and each Operating
Subsidiary from the Secretary of State of the jurisdiction of organization
of each and a certificate from each state where the Company and each
Operating Subsidiary is required (as provided in
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SECTION 2.1 hereof) to be qualified as a foreign corporation showing such
qualification, dated as of a date within ten (10) days of the Closing Date;
(iv) the consolidated budget/operating forecast of the Company and the
Subsidiaries;
(v) a certificate of the President of the Company, dated as of the
Closing Date, stating that the conditions specified in SECTIONS 1.3(A)-(G)
above have been fully satisfied; and
(vi) such other documents, instruments, and certificates as the
Investors may reasonably request.
SECTION 2. REPRESENTATIONS OF THE COMPANY
------------------------------
As part of the basis of this Agreement, the Company (which such
representations of the Company for the purposes of this SECTION 2 shall be
deemed to be both with respect to the Company itself and with respect to the
Company and the Subsidiaries, taken as a whole) and each Operating Subsidiary
signatory hereto, jointly and severally, represent to the Investors that:
2.1 ORGANIZATION. Each of the Company and EET, Inc., Industrial Pipe
------------
Fittings, Inc., GAIA Technologies, Inc. and North American Environmental Group,
Inc. (collectively, the "Operating Subsidiaries" and each an "Operating
Subsidiary" and, with the other entities listed in Schedule 2.16 hereto,
collectively, the "Subsidiaries" and each a "Subsidiary") is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, and except as described in Schedule 2.1, is
not required to be qualified to do business as a foreign corporation in any
other jurisdiction where the failure to so qualify would have a material adverse
effect on the Company and the Operating Subsidiaries. Schedule 2.1 sets forth
the jurisdictions in which the Company and each Operating Subsidiary is
qualified.
2.2 CORPORATE POWER. The Company and each Operating Subsidiary have all
---------------
required corporate power and authority to own their respective properties and to
carry on their respective businesses as presently conducted and as proposed to
be conducted. The Company and each Operating Subsidiary have all required
corporate power and authority to enter into, deliver and perform this Agreement
and to fully carry out the transactions contemplated by this Agreement. The
copies of the Certificate or Articles, as applicable, of Incorporation and
Bylaws of the Company and each Operating Subsidiary, as amended to date, which
have been furnished to counsel for the Investors, are true, correct and
complete.
2.3 AUTHORIZATION. This Agreement and all documents executed pursuant to
-------------
this Agreement are valid and binding obligations of the Company and the
Operating Subsidiaries, as the case may be, enforceable according to their
terms, except as may be limited by (a) applicable bankruptcy, insolvency,
reorganization or other similar laws of general application relating to or
4
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affecting the enforcement of creditor rights, (b) laws and judicial decisions
regarding indemnification for violations of federal securities laws, and (c) the
availability of specific performance or other equitable remedies. The execution,
delivery and performance of this Agreement and the issuance of the Preferred
Shares, the Warrants, the Conversion Shares and zero (0) of the Warrant Shares
have been duly authorized by all necessary corporate action of the Company and
the Operating Subsidiaries, as the case may be.
2.4 GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS. No approval,
------------------------------------------------
consent, exemption, authorization, or other action by, or notice to, or filing
with, any governmental authority or any other individual, corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
joint stock company, government (or an agency or political subdivision thereof)
or other entity of any kind is necessary or required in connection with the
execution, delivery, performance or enforcement against the Company and the
Operating Subsidiaries of this Agreement, or any other documents executed
pursuant to this Agreement, except for federal and state securities filings.
2.5 CAPITALIZATION. The authorized and issued capital stock of the
--------------
Company and each Operating Subsidiary is as set forth in Schedule 2.5. All of
the presently outstanding shares of capital stock of the Company and each
Subsidiary have been validly authorized and issued and are fully paid and
nonassessable. The Preferred Shares have been validly authorized and, when
delivered and paid for pursuant to this Agreement, will be validly issued, fully
paid and nonassessable, and free of all encumbrances and restrictions, except
restrictions on transfer imposed by applicable securities laws, the Certificate
of Incorporation, the Stockholders' Agreement and/or this Agreement. The
relative rights, preferences, restrictions and other provisions relating to the
Preferred Shares are as set forth in Exhibit B. The Company has authorized and
reserved for issuance upon conversion of the Preferred Shares not less than
15,000,000 shares of its Common Stock and upon exercise of the Warrants zero (0)
shares of its Common Stock (which as of the date hereof is not sufficient to
allow exercise of all of the Warrants purchased hereunder), and the Conversion
Shares and the Warrant Shares will be, when and if issued, validly authorized
and issued, fully paid and nonassessable, and free of all encumbrances and
restrictions, except restrictions on transfer imposed by applicable securities
laws, the Certificate of Incorporation, the Stockholders' Agreement and/or this
Agreement. Except as provided in Schedule 2.5, neither the Company nor any
Subsidiary has issued any other shares of its capital stock and there are no
outstanding subscriptions, warrants, options, calls, commitments, or other
rights to purchase or acquire, or securities convertible into or exchangeable
for, any capital stock of the Company or any Subsidiary. Except as disclosed on
Schedule 2.5 or as contemplated under this Agreement (and the other agreements
executed in connection herewith), there are no agreements to which the Company
or any Subsidiary is a party or has knowledge regarding the issuance,
registration, voting, transfer of or obligation (contingent or otherwise) of the
Company or any Subsidiary to repurchase or otherwise acquire or retire or redeem
any of its outstanding shares of capital stock.
2.6 PREEMPTIVE RIGHTS. There are no preemptive rights affecting the
-----------------
issuance or sale of the Company's capital stock, except as described in SECTION
7 hereof.
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2.7 FINANCIAL STATEMENTS. Schedule 2.7 contains the following financial
--------------------
statements of the Company:
its unaudited financial statements (consolidated balance
sheet and statements of income, retained earnings and cash flows,
including notes thereto) at December 31, 1995, and for the fiscal year
then ended (the balance sheet included therein being the "Base Balance
Sheet"), and its unaudited financial statements (consolidated balance
sheet and statements of income, retained earnings and cash flow) as at
and for the period from January 1, 1996 through and until February 29,
1996 (collectively, the "Financial Statements").
The Financial Statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis throughout
the periods indicated and with each other, except that the unaudited interim
Financial Statements do not contain footnotes required by GAAP. The Financial
Statements fairly present the consolidated financial condition and operating
results of the Company as of the dates, and for the periods, indicated therein,
subject in the case of the unaudited Financial Statements to normal year-end and
quarter-end adjustments. Except as set forth in the Base Balance Sheet, neither
the Company nor any Operating Subsidiary has any liabilities, contingent or
otherwise, other than (a) obligations under contracts and commitments incurred
in the ordinary course of business and not required under GAAP to be reflected
in the Base Balance Sheet and which, individually or in the aggregate, are not
material to the financial condition or operating results of the Company or any
Operating Subsidiary or (b) as set forth on Schedule 2.7 hereto or as otherwise
disclosed in this SECTION 2 or any schedule hereto. Except as disclosed in the
Financial Statements, on Schedule 2.7 hereto and for inter-company transactions
with or between Operating Subsidiaries, neither the Company nor any Subsidiary
has any indebtedness for borrowed money and none of them are a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation. The
Company and the Subsidiaries maintain and will continue to maintain a standard
system of accounting established and administered in accordance with GAAP.
2.8 ABSENCE OF CERTAIN DEVELOPMENTS. Except as disclosed in Schedule 2.8
-------------------------------
or in the Financial Statements, since the date of the Base Balance Sheet, (a)
there has been no material adverse change in the financial condition of either
the Company or any of the Operating Subsidiaries, (b) neither the Company nor
any Operating Subsidiary has incurred any material liabilities or material
contingent liabilities, (c) the Company has not declared any dividends or
purchased any of its capital stock, other than as required by the terms of the
Series D Preferred Stock of the Company, (d) neither the Company nor any
Operating Subsidiary has entered into any material transactions outside the
ordinary course of business, (e) neither the Company nor any Operating
Subsidiary has waived a valuable right or cancelled any debt or claim held by
the Company or any Operating Subsidiary, (f) neither the Company nor any
Operating Subsidiary has made a loan to any officer, director, employee or
shareholder of the Company, or any agreement or commitment therefor, (g) neither
the Company nor any Operating Subsidiary has had or committed to any increase,
direct or indirect, in the compensation paid or payable to any officer,
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director, employee or agent of the Company or any Operating Subsidiary,
except as required by written employment agreements to which the Company or any
Operating Subsidiary is a party (and which such increases are described in
Schedule 2.8), (h) neither the Company nor any Operating Subsidiary has had any
material loss, destruction or damage to any property, whether or not insured,
(i) neither the Company nor any Operating Subsidiary has had any change in
personnel or the terms and conditions of their employment, (j) neither the
Company nor any Operating Subsidiary has had any acquisition or disposition of
any assets (or any contract or arrangement therefor), or any other transaction
otherwise than for fair value in the ordinary course of business, and (k)
neither the Company nor any Operating Subsidiary has committed itself to any of
(a) through (j) above.
2.9 TAX MATTERS. All required tax returns of the Company and each
-----------
Subsidiary have been accurately prepared in all material respects and filed
(including applicable extensions), and all taxes and penalties required to be
paid with respect to the periods covered by such returns have been timely paid.
Neither the Company nor any Subsidiary is delinquent in the payment of any tax,
assessment or governmental charge, has had any tax deficiency proposed or
assessed against it that is still outstanding, or has executed any waiver still
in effect of any statute of limitations on the assessment or collection of any
tax. None of the federal or state income tax returns or state franchise tax
returns of either the Company or any Subsidiary has ever been audited by
governmental authorities. There is no pending dispute with any taxing authority
that, if determined adversely to the Company or any Operating Subsidiary, would
result in the assertion by any taxing authority of any material tax deficiency,
and neither the Company nor any Operating Subsidiary has any knowledge of a
proposed liability for any tax to be imposed upon the Company's or any
Subsidiary's properties or assets for which there is not an adequate reserve
reflected in the Financial Statements.
2.10 TITLE TO ASSETS; CONDITION OF ASSETS. Except as disclosed in the
------------------------------------
notes to the Financial Statements and on Schedule 2.10, the Company and the
Operating Subsidiaries have good and indefeasible title to their respective
assets, including, without limitation, those reflected on the Base Balance Sheet
(other than those since disposed of in the ordinary course of business), free
and clear of all security interests, liens, charges and other encumbrances,
except for (a) liens for taxes not yet due and payable or being contested in
good faith in appropriate proceedings, and (b) encumbrances that are incidental
to the conduct of their respective businesses or ownership of property, not
incurred in connection with the borrowing of money or the obtaining of credit,
and which do not in the aggregate materially detract from the value of the
assets affected or materially impair their use by the Company or such Operating
Subsidiary, as the case may be. With respect to the assets of the Company and
each Operating Subsidiary that are leased, the Company or such Operating
Subsidiary, as the case may be, is in compliance with all material provisions of
such leases. The equipment and other tangible assets of the Company and the
Operating Subsidiaries are in good operating condition (except for reasonable
wear and tear), and have been reasonably maintained.
2.11 PROPRIETARY RIGHTS. Except as set forth in Schedule 2.11, the Company
------------------
and the Subsidiaries have ownership of all material copyrights, trademarks,
service marks and other
7
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proprietary rights used in their respective businesses (collectively the
"Intellectual Property"). Such copyrights, trademarks, service marks and other
proprietary rights are sufficient for its business as now conducted and as
proposed to be conducted without any conflict with, or infringement of, the
rights of others. The present products and services of the Company and the
Operating Subsidiaries do not infringe any patent, copyright, trademark or other
proprietary rights of others, neither the Company nor any Operating Subsidiary
believes the Company or any Operating Subsidiary is utilizing the inventions of
any employee (or person currently intended to be hired) created prior to his
employment with the Company or such Operating Subsidiary, as the case may be,
which the Company or such Operating Subsidiary, as the case may be, does not
have rights to use, and neither the Company nor any Operating Subsidiary has
received any notice from any third party of any such alleged infringement by the
Company or such Operating Subsidiary. The Company and the Operating Subsidiaries
have taken all necessary steps to establish and preserve their respective
ownership, licenses or rights of use of all material trademarks, service marks,
copyrights, trade secrets and other proprietary rights with respect to their
products, services and technology. Neither the Company nor any Operating
Subsidiary is aware of any infringement by others of its respective Intellectual
Property. Except as set forth on Schedule 2.11, there are no outstanding
options, licenses, or agreements of any kind relating to the Intellectual
Property, nor is the Company or any Operating Subsidiary bound by or a party to
any options, licenses, or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information and proprietary rights and processes of any other person or entity.
None of the agreements referred to in Schedule 2.11 gives the other parties
thereto any rights or interests in or to the Intellectual Property of the
Company or any Operating Subsidiary other than to use such Intellectual Property
solely in connection with the internal operations of their business and neither
they nor any other third party have the right to license, sublicense, distribute
or market all or part of the Company's or any Operating Subsidiary's products,
except as described on Schedule 2.11. Neither the execution nor delivery of this
Agreement, nor the carrying on of the Company's and each Operating Subsidiary's
business by the employees of the Company and each Operating Subsidiary, nor the
conduct of the Company's and each Operating Subsidiary's business as proposed,
will, to the best of the Company's and each Operating Subsidiary's knowledge,
conflict with or result in a material breach of the terms, conditions, or
provisions of, or constitute a material default under, any contract, covenant or
instrument under which any such employee is now obligated.
2.12 MANUFACTURING AND MARKETING RIGHTS. Except as set forth in Schedule
----------------------------------
2.12, neither the Company nor any Operating Subsidiary has granted rights to
manufacture, produce, assemble, license, market or sell its products to any
other person and is not bound by any agreement that affects the Company's or any
Operating Subsidiary's exclusive right to develop, manufacture, assemble,
distribute, market or sell its products.
2.13 EFFECT OF TRANSACTIONS; COMPLIANCE WITH OBLIGATIONS. The Company's
---------------------------------------------------
and each Operating Subsidiary's execution and delivery of this Agreement, and
its performance of the transactions contemplated by this Agreement, will not
violate any judgment, decree or order, or any material contract or obligation of
the Company or any Operating Subsidiary, as the case may be, or, to such
entity's knowledge, any statute, rule or regulation of any federal, state or
local
8
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government or agency applicable to the Company or any Operating Subsidiary, or
any material contract to which any employee of the Company or any Operating
Subsidiary is bound. Based upon the representations of the Investors, the offer
and sale of the Preferred Shares and the Warrants will be in compliance with all
applicable federal and state securities laws. No consent, approval or filing
with any regulatory agency is required to be taken by the Company or any
Operating Subsidiary in connection with the transactions contemplated by this
Agreement, except those which the Company or any Operating Subsidiary has
obtained or made in a timely manner, and except for any filing of Form D or any
applicable state blue sky filing that may be made by the Company after the
Closing.
2.14 LITIGATION. Except as disclosed in the Company's Commission Documents
----------
(as defined herein) and/or the Financial Statements, there is no litigation,
arbitration or governmental proceeding or investigation pending or, to the
knowledge of the Company or any Operating Subsidiary, threatened (a) against the
Company or any Subsidiary, (b) affecting any of the properties or assets of the
Company or any Subsidiary, (c) that questions the validity of this Agreement, or
the right of the Company or any Operating Subsidiary to enter into this
Agreement or to consummate the transactions contemplated hereby, or (d) against
any officer, director, shareholder or employee of the Company or any Subsidiary
in such capacity or relating to his prior employment relationships. Neither the
Company nor any Operating Subsidiary is aware of any unasserted claim that is
likely to result in any litigation, arbitration or legal or administrative
proceeding against it or any other Subsidiary.
2.15 LEGAL COMPLIANCE. The Company and the Operating Subsidiaries have all
----------------
material franchises, permits, licenses and other rights and privileges necessary
to permit them to own their respective properties and to conduct their
respective businesses as presently conducted and as proposed to be conducted.
The business and operations of the Company and each Operating Subsidiary have
been, are being and will be conducted in all material respects in accordance
with all applicable laws, rules and regulations, and neither the Company nor any
Operating Subsidiary is in violation of any judgment, or to such entity's
knowledge, any law or regulation, the violation of which could reasonably be
expected to result in a material adverse effect on the Company or such Operating
Subsidiary.
2.16 SUBSIDIARIES; JOINT VENTURES. Except as described in Schedule 2.16
----------------------------
hereto, the Company does not have any direct or indirect subsidiaries, nor any
interests in partnerships, joint ventures, limited liability companies, or other
business entities. The Operating Subsidiaries are the only Subsidiaries of the
Company which either individually or in the aggregate, have any material assets,
liabilities or operations and which constitute "significant subsidiaries" as
defined in Rule 1-02 of Regulation S-X promulgated under the Securities Act of
1933, as amended (the "Securities Act"). Each Subsidiary named in Schedule 2.16
hereto is wholly owned by the Company, except as set forth in Schedule 2.16
hereto, and the Company has no present intention of (a) disposing of any of the
capital stock of any such Subsidiary presently owned by the Company or (b)
allowing any Subsidiary to sell or otherwise dispose of any material portion of
such Subsidiary's assets, except for normal dispositions in the ordinary course
of business.
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2.17 NO DEFAULTS; MATERIAL CONTRACTS. The Company and the Operating
-------------------------------
Subsidiaries have in all respects performed all obligations required to be
performed by them and are not in default under any contract, commitment or
instrument, and no event or condition has occurred which, with the giving of
notice or passage of time, or both, would constitute such a default, except
where the failure to perform any such obligation, or except where any such
default, would not reasonably be expected to have a material adverse effect on
the business assets, results of operations, condition (financial or otherwise),
or prospects of the Company and its Operating Subsidiaries taken as a whole.
Schedule 2.17 contains an accurate list of all agreements, and any contracts or
commitments, oral or written, of the Company and each Operating Subsidiary, that
require the expenditure by the Company or such Operating Subsidiary of more than
$100,000 over the term of such contract or commitment, or that are not
terminable by the Company or such Operating Subsidiary without penalty prior to
the first anniversary of this Agreement. Except as indicated on Schedule 2.17,
(a) neither the Company nor any Operating Subsidiary is under any material
obligation that cannot be performed by it on time and without substantial or
unusual expenditure of money and effort, or (b) any party having material
contracts with the Company or any Operating Subsidiary are, to the knowledge of
such entity, in compliance with such agreements in all material respects.
2.18 INSURANCE. The Company and the Subsidiaries maintain insurance
---------
coverages which are adequate for the businesses being conducted, and the
properties owned or leased, by the Company and the Subsidiaries. The Company
has provided access to the Investors to correct and complete copies of all such
insurance policies of the Company and the Subsidiaries.
2.19 EMPLOYEE MATTERS; AFFILIATE TRANSACTIONS. Except as disclosed in
----------------------------------------
Schedule 2.19 or described in this Agreement, (a) neither the Company nor any
Operating Subsidiary has in effect or any obligation to put into effect any
employment agreements, deferred compensation, pension or retirement agreements
or arrangements, bonus, incentive or profit-sharing plans or arrangements, or
labor or collective bargaining agreements, (b) there are no existing or proposed
loans, leases, licenses or other such agreements or arrangements between the
Company or any Operating Subsidiary, on the one hand, and any officer, director
or stockholder of the Company or any Operating Subsidiary, on the other hand and
(c) neither the Company nor any Operating Subsidiary (i) is a party to any
contract with any labor union or organization representing any employee, or any
other employee representative, or (ii) has had at any time during the past five
years, nor to the knowledge of such entity is there now threatened, any walkout,
strike, picketing, work stoppage or any other similar occurrence which has had
or would have a material adverse effect on the assets, business, prospects or
operations of the Company and the Operating Subsidiaries. The Company has made
available to the Investors a true and correct summary of the policies, if any,
followed by the Company and each Operating Subsidiary regarding confidentiality
of sensitive information and ownership of patents, know-how and other such
matters relating to the business of the Company and each Operating Subsidiary.
Except as disclosed in Schedule 2.19, to the knowledge of the Company and the
Operating Subsidiaries, (A) no officer or other key employee of the Company or
any Operating Subsidiary has any present intention of terminating his employment
with the Company or such Operating Subsidiary, and (B) no key employee is bound
by any agreement with any other employer (past or present) that adversely
10
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affects the performance of his duties as an employee of the Company or any such
Operating Subsidiary or the businesses of the Company or any such Operating
Subsidiary.
2.20 BROKERAGE. Except as listed in Schedule 2.20, there are no claims for
---------
brokerage commissions, finder's fees or similar compensation in connection with
the transactions contemplated by this Agreement based on any arrangement or
agreement made by the Company or any Subsidiary, for which any of the Investors
are or could under any circumstance be liable.
2.21 DISCLOSURE. This Agreement, including the exhibits and schedules
----------
hereto, and the other documents and certificates furnished by the Company and/or
any Subsidiary to the Investors or their counsel do not contain any untrue
statement of material fact or, when taken as a whole, omit any material fact
necessary in order to make the statements not misleading. There is no fact
known to the Company or any Operating Subsidiary that has not been disclosed in
the Commission Documents (as defined herein) or that the Company and the
Operating Subsidiaries have not disclosed to the Investors prior to the date of
this Agreement that materially adversely affects the business, assets,
properties, prospects or condition (financial or otherwise) of the Company or
any Operating Subsidiary or the ability of the Company or any Operating
Subsidiary to perform under this Agreement or to consummate the transactions
contemplated hereby.
2.22 EMPLOYEE BENEFIT PLANS. Except as set forth in Schedule 2.22 hereto,
----------------------
neither the Company nor any Operating Subsidiary maintains, sponsors, or
contributes to any program or arrangement that is an "employee pension benefit
plan," an "employee welfare benefit plan," or a "multiemployer plan," as those
terms are defined in Sections 3(2), 3(1), and 3(37) of the Employee Retirement
Security Act of 1974, as amended. Except as listed in Schedule 2.22, neither
the Company nor any Operating Subsidiary has any incentive or benefit
arrangements.
2.23 ENVIRONMENTAL.
-------------
(a) Except for items which could not reasonably be expected to have a
material adverse effect on the Company or any Subsidiary, no part of the
Company's or any of its Subsidiaries' assets, including, without limitation, any
real property owned or, to the knowledge of such entity after diligent and
appropriate inquiry by the officers of such entity, leased by any such entity,
is contaminated by any substance or material presently identified to be toxic, a
pollutant, a contaminant or a hazardous substance according to any Applicable
Environmental Law. Neither the Company nor any Subsidiary has caused or
suffered to occur any material discharge, release, spillage, emission,
uncontrolled loss, seepage or filtration of oil or petroleum or chemical liquids
or solids, liquid or gaseous products or hazardous waste or hazardous substance
at, from, upon, and under or within any real property owned or leased by the
Company or any Subsidiary, or any contiguous real property. Neither the Company
nor any Subsidiary has been and none of such entities has committed any acts or
omissions which could reasonably be expected to lead to the imposition on the
Company or any Subsidiary of material liability, or creation of a lien on the
Company's or any Subsidiary's assets, under any Applicable Environmental Law.
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(b) For purposes of this Section, "Applicable Environmental Law and Laws"
shall mean any law affecting real or personal property owned, operated or leased
by the Company or any Subsidiary or any other operation of the Company or any
Subsidiary in any way pertaining to health, safety, or the environment,
including, without limitation, (i) the Comprehensive Environmental Response,
Conservation and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986 (as amended from time to time, herein referred
to "CERCLA"), (ii) the Resource Compensation and Recovery Act of 1976, as
amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act of
1980, and the Hazardous and Solid Waste Amendments of 1984 (as amended from time
to time, herein referred to as "RCRA"), (iii) the Safe Drinking Water Act, as
amended from time to time, (iv) the Toxic Substances Control Act, as amended
from time to time, (v) the Clean Air Act, as amended from time to time, (vi) the
Occupational Safety and Health Act, as amended from time to time, and (vii) any
laws which may now or hereafter require removal of asbestos or other hazardous
wastes or impose any liability related to asbestos or other hazardous wastes.
The terms "hazardous substance", "petroleum", "release", and "threatened
release" have the meanings specified in CERCLA, and the terms "solid waste" and
"disposal" (or "disposed") have the meanings specified in RCRA; provided,
however, that in the event either CERCLA or RCRA is amended so as to broaden the
meaning of any term defined thereby, such broader meaning shall apply subsequent
to the effective date of such amendment with respect to all provisions of this
Agreement; and provided, further, however, that to the extent the laws of any
nation, province, state or political subdivision thereof in which any real or
personal property owned, operated or leased by the Company or any Subsidiary is
located or in which the Company or any Subsidiary conducts operations establish
a meaning for "hazardous substance", "petroleum", "release", "solid waste" or
"disposal" which is broader than that specified in either CERCLA or RCRA such
broader meaning shall apply.
2.24 AFFILIATED TRANSACTIONS. Schedule 2.24 hereto contains a complete
-----------------------
listing of all compensation and other agreements of the Company and each
Subsidiary with or for the benefit of any of their respective affiliates, any
shareholder of the Company and the Subsidiaries, respectively, or any affiliate
of any shareholder of the Company and the Subsidiaries, respectively, other than
inter-company transactions with or between Operating Subsidiaries. Except for
the employment contracts listed on Schedule 2.24 hereto, copies of which have
been provided to the Investors, neither the Company nor any Operating Subsidiary
have, as of the Closing Date, any written employment contracts.
2.25 PRIVATE OFFERING. Neither the Company nor anyone acting on its behalf
----------------
has offered or will offer shares of the Company or any part thereof or any
similar securities for issuance or sale to, or solicit any offer to acquire any
of the same from, anyone so as to make the issuance and sale of the Preferred
Shares and the Warrants not exempt from the registration requirements of Section
5 of the Securities Act; provided, however, that with respect to the offer and
sale thereof to the Investors, the Company is relying on the representations,
warranties and agreements of the Investors set forth herein. All shares of
capital stock of the Company have been offered and sold in compliance with all
applicable federal and state securities laws. Assuming that the Investors
representations and warranties contained in SECTION 3 of this Agreement are true
and correct at the Closing and the Deferred Closing, the offer, issuance and
sale of the Preferred
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Shares and the Warrants are and will be exempt from the registration and
prospectus delivery requirements of the Securities Act, as currently in effect,
and have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws, as currently in effect.
2.26 COMMISSION DOCUMENTS. The Company has filed all registration
--------------------
statements, proxy statements, reports and other documents required to be filed
by it under the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and all amendments thereto; and the Company has
furnished the Investors copies of all of such documents, each as filed with the
Securities and Exchange Commission (the "Commission"), other than all exhibits
thereto, since January 1, 1994 (collectively, the "Commission Documents"), and
has furnished access to all other Commission Documents, and all exhibits
thereto; provided, however, that with respect to the Company's Proposed
Registration Statement on Form S-4 relating to its proposed acquisition of the
remaining shares of the capital stock of North American Environmental Group,
Inc., the Company has furnished all filed amendments to such Form S-4, which
such Form S-4 is not complete. Each Commission Document (as finally amended)
was true and accurate in all material respects and, except for such Form S-4
which is not complete, was in material compliance with the requirements of its
respective report form at the time such document was filed.
2.27 HOLDING COMPANY AND INVESTMENT COMPANY STATUS. Neither the Company
---------------------------------------------
nor any Subsidiary is a "holding company," or a "subsidiary company" of a
"holding company,' or an "affiliate" of a "holding company," or a "public
utility," within the meaning of the Public Utility Holding Company Act of 1935,
as amended, or a "public utility" within the meaning of the Federal Power Act,
as amended. Neither the Company nor any Subsidiary is an "investment company"
or a company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, or an "investment adviser" within
the meaning of the Investment Advisers Act of 1940, as amended.
SECTION 3. REPRESENTATIONS OF THE INVESTORS
--------------------------------
As part of the basis of this Agreement, each Investor, severally and not
jointly, hereby represents that on the date hereof:
3.1 AUTHORIZATION. The execution of this Agreement and the documents
-------------
executed by the Investor pursuant to this Agreement have been authorized by all
necessary action on the part of the Investor, have been executed and delivered,
and constitute valid, legal, binding and enforceable agreements of the Investor.
Each Investor acquiring Preferred Shares in exchange for a Note and Purchase
Warrant represents and warrants, severally but not jointly, that such Investor
is the sole legal and beneficial owner of all interests in such Note and
Purchase Warrants, free and clear of all liens, claims, charges, security
interests or other encumbrances of any kind or nature, and that, upon the
delivery of the Note and Purchase Warrants to the Company at the Closing, all
legal and beneficial interests in the Note and Purchase Warrants will have been
surrendered for cancellation to the Company, free and clear of any such liens,
claims, charges,
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security interests or other encumbrances. No consent, waiver or other
authorization from any third party is required in order for the Investor to
surrender for cancellation such Note and Purchase Warrants to the Company.
3.2 INVESTMENT PURPOSE. The Investor is acquiring the Preferred Shares
------------------
and the Warrants for its own account, for investment, and not with a view to any
"distribution" within the meaning of the Securities Act. The Investor has no
present intention to make any transfer of the Preferred Shares or the Warrants.
No broker-dealer acted on behalf of the Investor in connection with the offer or
sale of the Preferred Shares or the Warrants.
3.3 RESTRICTIONS ON TRANSFERABILITY. The Investor understands that
-------------------------------
because the Preferred Shares and the Warrants have not been registered under the
Securities Act and applicable state securities laws (based in part on the
representations, warranties and agreements of the Investor contained herein), it
cannot dispose of any of the Preferred Shares, Conversion Shares, Warrants or
Warrant Shares unless they are subsequently registered under the Securities Act
or exemptions from registration are available, and that the Investor must bear
the economic risk of an investment in such securities as a result thereof. The
Investor acknowledges and understands that, except as provided in SECTION 5 of
this Agreement, it has no registration rights. Although it may be possible in
the future to make limited public sales of the Preferred Shares and/or
Conversion Shares and/or the Warrants and/or the Warrant Shares without
registration under the Securities Act, Rule 144 is not now available and there
is no assurance that it will become available for such purpose. By reason of
these restrictions, the Investor understands that it may be required to hold the
Preferred Shares, the Conversion Shares, the Warrants and the Warrant Shares for
an indefinite period of time. The Investor understands that each certificate
representing the Preferred Shares, Conversion Shares, Warrants and Warrant
Shares, will bear appropriate state "blue sky" legends and a legend
substantially to the effect that:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE
SECURITIES MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR
SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE CORPORATION
THAT REGISTRATION IS NOT REQUIRED UNDER APPLICABLE SECURITIES LAWS."
The Investor also acknowledges that appropriate stop transfer orders will be
noted on the Company's stock records for the securities bearing such legend.
3.4 STATUS OF INVESTOR. The Investor is knowledgeable and experienced in
------------------
making venture capital investments, including investments similar to those
securities to be acquired by it pursuant to this Agreement, and is able to bear
the economic risk of loss of its investment in the Company. The Investor is an
"accredited investor," as that term is defined in Rule 501(a) of Regulation D
under the Securities Act or is a "purchaser," as that term is defined in Rule
506 (b)
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(2) (ii) of Regulation D of the Securities Act. The Investor's state of
incorporation, organization or residence and principal place of business, are
listed on Exhibit A, and the Investor has not been organized for purposes of
investing in the Company.
3.5 BROKERAGE. There are no claims for brokerage commissions, finder's
---------
fees or similar compensation in connection with the transactions contemplated by
this Agreement based on any arrangement or agreement made by the Investor,
except as may otherwise be provided in Exhibit A, all of which such claims shall
be paid entirely by such Investor.
3.6 OWN ACCOUNT. The Investor is acting on its own behalf in connection
-----------
with the investigation and examination of the Company and its decision to
execute these documents.
3.7 RECEIPT OF INFORMATION. The Investor has received and reviewed with
----------------------
such investment, legal, financial and other advisors as the Investor has elected
a copy of each of the documents furnished to the Investor pursuant to SECTION
2.26 hereof. The Investor believes it has received all the information it
considers necessary or appropriate for deciding whether to purchase the
Preferred Shares and the Warrants. The Investor further represents that it has
had an opportunity to ask questions and receive answers from the Company and
each Subsidiary regarding the terms and conditions of the offering of the
Preferred Shares and the Warrants and the business, properties, prospects, and
financial condition of the Company and each Subsidiary and to obtain additional
information (to the extent the Company or any such Subsidiary possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify the accuracy of any information furnished to it or to which
it had access. The foregoing, however, does not limit or modify the
representations and warranties in SECTION 2 of this Agreement or the right of
the Investor to rely thereon.
SECTION 4. COVENANTS OF THE PARTIES.
------------------------
The Company hereby covenants that, except as provided for below, for so
long as (a) the Investors hold at least twenty percent (20%) of the Preferred
Shares, with respect to the covenants contained in SECTIONS 4.4 through 4.22,
excluding 4.7, and (b) the Investors hold any of the Preferred Shares with
respect to the covenants contained in SECTIONS 4.1 through 4.3 and 4.7, unless
waived by at least two (2) holders of Preferred Shares holding in the aggregate
at least a two-thirds interest in the Preferred Shares then outstanding, the
Company will and will cause its Subsidiaries to comply with the provisions of
this SECTION 4.
4.1 FINANCIAL INFORMATION. The Company will maintain a system of accounts
---------------------
in accordance with GAAP and procedures, keep full and complete financial records
and the Company will furnish to the Investors the following reports:
(a) within fifty-five (55) days after the end of each quarterly fiscal
period in each fiscal year of the Company (other than the last quarterly fiscal
period of each such fiscal year), duplicate copies of,
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(i) a consolidated balance sheet of the Company and its
Subsidiaries as at the end of such quarter, and
(ii) consolidated statements of income, changes in shareholders'
equity and cash flows of the Company and its Subsidiaries, for such
quarter,
setting forth in each case in comparative form the figures for the corresponding
periods in the previous fiscal year, all in reasonable detail, prepared in
accordance with GAAP applicable to quarterly financial statements generally, and
certified by a senior financial officer of the Company as fairly presenting, in
all material respects, the financial position of the companies being reported on
and their results of operations and cash flows, subject to changes resulting
from year-end adjustments; provided, that delivery within the time period
specified above of copies of the Company's Quarterly Report on Form 10-Q (or, if
the Company files with the Commission a Form 12b-25 with respect to a particular
10-Q in accordance with the Exchange Act, no later than fifteen (15) days after
the filing of such Form) prepared in compliance with the requirements therefor
and filed with the Commission shall be deemed to satisfy the requirements of
this Section;
(b) within one hundred (100) days after the end of each fiscal year of the
Company, duplicate copies of,
(i) a consolidated balance sheet of the Company and its
Subsidiaries, as at the end of such year, and
(ii) consolidated statements of income, changes in shareholders'
equity and cash flows of the Company and its Subsidiaries, for such year,
setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail, prepared in accordance with GAAP and
accompanied by an opinion thereon of independent certified public accountants of
recognized national standing, which opinion shall state that such financial
statements present fairly, in all material respects, the financial position of
the companies being reported upon and their results of operations and cash flows
and have been prepared in conformity with GAAP, and the examination of such
accountants in connection with such financial statements has been made in
accordance with generally accepted auditing standards, and that such audit
provides a reasonable basis for such opinion in the circumstances; provided,
that delivery within the time period specified above (or, if the Company files
with the Commission a Form 12b-25 with respect to a particular 10-K in
accordance with the Exchange Act, no later than fifteen (15) days after the
filing of such Form) of the Company's Annual Report on Form 10-K for such fiscal
year, together with the Company's annual report to shareholders, if any,
prepared pursuant to Rule 14a-3 under the Exchange Act, prepared in accordance
with the requirements therefor and filed with the Commission, shall be deemed to
satisfy the requirements of this Section;
(c) promptly upon their becoming available, one copy of (i) each financial
statement, report, notice or proxy statement sent by the Company or any
Subsidiary to public securities
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holders generally, and (ii) each regular or periodic report, each final
registration statement (without exhibits except as expressly requested by such
holder), and each final prospectus and all amendments thereto filed by the
Company or any Subsidiary with the Commission and of all press releases and
other statements made available generally by the Company or any Subsidiary to
the public concerning developments that are material;
(d) promptly, and in any event within ten (10) days after a Responsible
Officer (as defined below) becoming aware of the existence of any default in the
performance of any covenant, obligation or agreement of the Company hereunder or
pursuant to any other document executed pursuant to the terms of this Agreement
or any material breach of any representation made by the Company or any
Operating Subsidiary hereunder (each, an "Event of Default") or that any person
has given any notice or taken any action with respect to a claimed Event of
Default, a written notice specifying the nature and period of existence thereof
and what action the Company is taking or proposes to take with respect thereto
(as used herein, the terms "Responsible Officer" shall mean any of the following
officers of the Company: the Chairman, the President, the Chief Executive
Officer, the Chief Operating Officer, the Chief Financial Officer, the
Treasurer, and Senior or Executive Vice Presidents and the controller or the
chief accounting officer (and any person who performs one of the same functions
under a different title));
(e) promptly, and in any event within thirty (30) days of receipt thereof,
copies of any notice to the Company or any Subsidiary from any government entity
relating to any order, ruling, statute or other law or regulation that would
reasonably be expected to have a material adverse effect on the business,
assets, results of operations, condition (financial or otherwise), or prospects
of the Company and its Subsidiaries considered as a whole; and
(f) with reasonable promptness, such other data and information relating to
the business, operations, affairs, financial condition, assets or properties of
the Company or any Subsidiary or relating to the ability of the Company or any
Subsidiary to perform its obligations hereunder as from time to time may be
reasonably requested by any Investor.
4.2 ACCESS TO INFORMATION. The Company will permit any Investor to
---------------------
inspect at the Investor's expense any of the properties or books and records of
the Company and any Subsidiary, to make copies of extracts from such books and
records at the Investor's expense and to discuss the affairs and condition of
the Company and the Subsidiaries with representatives of the Company and such
Subsidiaries, all to such reasonable extent and at such reasonable times and
intervals as such Investor may reasonably request. If any Investor exercises
the right to inspection it must, unless otherwise required by law, at the
request of the Company or a Subsidiary, as appropriate, sign an agreement to
hold in confidence any confidential information received as a result of such
inspection under circumstances indicating the confidentiality of such
information until such information has been publicly disclosed or until
disclosure is required by law or by court order.
4.3 USE OF PROCEEDS. The Company shall timely report to the SBA the use
---------------
of proceeds from the sale of the Preferred Shares and the Warrants on SBA Form
1031 and will provide
17
<PAGE>
NBCC with a copy of such report as soon as practicable after its filing with the
SBA. In addition, the Company shall promptly provide to NBCC or the SBA, as the
case may be, all such information specified in (S)610 of the SBA regulations.
The Company and each Subsidiary shall provide NBCC (in addition to the rights
granted pursuant to SECTION 4.2 hereof) and/or the SBA, upon written request
from NBCC or the SBA, as the case may be, access to the Company's and each
Subsidiary's, as the case may be, books and records to confirm the use of
proceeds reported by the Company to the SBA on SBA Form 1031. The Company will
use the proceeds from the sale of the Preferred Shares and the Warrants for only
those purposes specified in such SBA Form 1031 and, notwithstanding anything
else to the contrary contained herein or therein, the Company shall not use the
proceeds from the sale of the Preferred Shares or the Warrants for any
restricted or ineligible purpose, as set forth in (S)720 of the SBA regulations.
4.4 KEY MAN INSURANCE. The Company shall maintain the Key Man Insurance.
-----------------
4.5 INTELLECTUAL PROPERTY. From the date hereof, the Company and each
---------------------
Subsidiary will use all reasonable efforts to keep confidential all know-how,
trade secrets, proprietary rights and other confidential intellectual property
and information which is material to the respective businesses or prospective
businesses of the Company and the Subsidiaries, and to provide the Company
and/or each Subsidiary with sufficient title to, ownership of, or rights to such
intellectual property as is or may become necessary for the conduct of their
respective businesses. From the date hereof, the Company and each Subsidiary
will use its best efforts to enter into such agreements with its respective
employees, consultants, licensees, customers and other third parties as may be
reasonably required to carry out its obligations under this SECTION 4.5.
4.6 PRESERVATION OF CORPORATE EXISTENCE AND PROPERTY. Except as otherwise
------------------------------------------------
determined by the Board of Directors to be in the best interests of the Company,
the Company and each Subsidiary will preserve, protect, and maintain, (a) its
corporate existence, and (b) all rights, franchises, accreditation, privileges,
and properties the failure of which to preserve, protect, and maintain would
reasonably be expected to have a material adverse effect on the business,
affairs, assets, prospects, operations, or condition, financial or otherwise, of
the Company and its Subsidiaries.
4.7 SBA REPORTS. Within twenty (20) days after NBCC shall have made a
-----------
request therefor, the Company and each Subsidiary will furnish to NBCC in
writing all information reasonably available to the Company and the Subsidiaries
that NBCC shall request with respect to the Company, the Subsidiaries, or any
firm or corporation in which the Company or any Subsidiary may from time to time
have or have had any interest, which is needed in connection with the
preparation of SBA forms or any other report or form that NBCC may be required
to make to any governmental agency or regulatory authority in connection with
its purchase and/or ownership of Preferred Shares, the Warrants, the Conversion
Shares and/or the Warrant Shares hereunder.
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<PAGE>
4.8 LIABILITY INSURANCE. The Company will use its best efforts to
-------------------
maintain comprehensive liability insurance (including automobile liability
coverage) at regular premium rates with insurer(s) of recognized responsibility
in an amount which is commercially reasonable for the benefit of itself and the
Subsidiaries.
4.9 NO IMPAIRMENT. The Company and the Subsidiaries will observe and
-------------
honor in good faith all rights of the Investors, under the terms of this
Agreement or any other documents executed in connection herewith, and will take
no action that would impair or otherwise prejudice such rights.
4.10 BOARD MEETINGS. The Company's Board of Directors shall meet at least
--------------
once in every fiscal quarter ending on the last day of March, June, September
and December of each year, beginning with the quarter ending on June 30, 1996.
The Chairman of the Board of Directors shall meet with the representatives of
the Investors on the Board of Directors in a separate meeting to be held
immediately subsequent to each quarterly meeting of the Board of Directors of
the Company. The Board of Directors shall appoint a Compensation Committee at
or prior to June 30, 1996.
4.11 BOARD OF DIRECTORS.
------------------
(a) The Board of Directors of the Company shall, on the earlier of June
30, 1996, or the 5th day following notice to the Company from holders of at
least two-thirds interest in the Preferred Shares then outstanding, consist of
no more than nine (9) members, composed of (i) four (4) members (three (3)
members at such time as at least one-third of the Preferred Shares issued at the
Closing, or any Deferred Closing, are no longer issued and outstanding)
designated by the holders of a majority in interest of the Preferred Shares (at
least one (1) of which shall be designated by NBCC so long as NBCC owns at least
fifty percent (50%) of the Preferred Shares purchased by it pursuant to the
terms hereof), (ii) four (4) members designated by the holders of Common Stock
(five (5) members at such time as the holders of the Preferred Shares are
entitled to designate three (3) members pursuant to the terms of clause (i)
above) and (iii) one (1) member designated jointly by the holders of the Common
Stock and the holders of a majority in interest of the Preferred Shares. The
size and composition of the Board is subject to the right of the Investors to
elect a majority of the Board as provided hereunder.
(b) Except as provided below in SECTION 4.11 (D), at any time that the
Company increases the size of its Board of Directors to a number greater than
nine (9), the holders of a majority in interest of the Preferred Shares then
issued and outstanding and the holders of the Common Stock shall each designate
the same number of additional new directors to fill any newly created vacancies
on the Board of Directors subsequent to the date of this Agreement.
(c) The Company agrees to propose the designees of the holders of a
majority in interest of the Preferred Shares (and the designee(s) of NBCC) for
election to its Board of Directors and to take all such action to effect such
election as are within its power. The rights and obligations under this SECTION
4.11 shall terminate at such time as at least two-thirds of the
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<PAGE>
Preferred Shares issued at the Closing, and any Deferred Closing, are no longer
issued and outstanding; provided, however, that the majority in interest of the
Preferred Shares then outstanding shall continue to have the right to designate
one (1) member of the Board of Directors of the Company so long as at least ten
percent (10%) of the Preferred Shares issued at the Closing, or any Deferred
Closing, remain outstanding (which shall be the designee of NBCC in the event
NBCC owns any of such remaining ten percent (10%)).
(d) If the Company shall breach any of the covenants or obligations set
forth in the Designations or any of its obligations, covenants and/or agreements
contained in (a) Sections 4.1 through 4.14, 4.17, 4.18, 4.19, 4.21, Section 5,
Section 6, Section 7, or Section 8 herein, and such breach remains uncured or
unremedied for a period of ninety (90) days, (b) Section 4.17 herein, and such
breach remains uncured or unremedied for thirty (30) days, (c) Section 4.15
herein, and such breach remains uncured for a period of fifteen (15) days or (d)
Section 4.22, then in any such event, the holders of a majority in interest of
the Preferred Shares shall be entitled then and thereafter to nominate and elect
a majority of directors to the Company's Board of Directors (at least two (2) of
which shall be designees of NBCC). Any vacancy on the Board of Directors
occurring because of the death, resignation or removal of a director elected by
the holders of the Preferred Shares shall be filled by the vote or written
consent of the holders of a majority in interest of the Preferred Shares;
provided, however, that any designee of a particular holder of Preferred Shares
shall be replaced by such holder. A director may be removed from the Board of
Directors with or without cause by the vote or consent of the holders of the
outstanding class with voting power entitled to elect him or her in accordance
with the Delaware General Corporation Law. Any such additional directors
appointed pursuant to the terms of this Section 4.11(d) shall resign from the
Board of Directors at the first regularly scheduled annual meeting of the
shareholders of the Company subsequent to the cure or remedy of the breach
giving use to the holders of the majority in interest of the Preferred Shares
having the right to nominate and elect a majority of the directors of the Board
of Directors of the Company pursuant to this Section.
(e) In the event that the Investors are entitled to a majority of seats on
the Company's Board of Directors, the Company agrees promptly to take all
actions necessary or appropriate (including, if necessary, amending the
Company's Certificate of Incorporation or Bylaws to increase the number of seats
on the Board of Directors) to nominate to the Company's Board of Directors, such
number of additional nominees designated by the holders of a majority in
interest of the Preferred Stock as are required to give such designees of the
Investors (and/or NBCC, as applicable) a majority of seats on the Board of
Directors.
(f) Any designees of the Investors serving on the Board of Directors
pursuant to this SECTION 4.11 shall have the right to be reimbursed, upon
reasonable notice and documentation of such costs and expenses to the Company,
for his or her reasonable costs of travel and out-of-pocket expenses incurred in
connection with his or her service on the Board of Directors.
4.12 DIRECTORS AND OFFICERS INSURANCE; INDEMNITY. On or prior to June 30,
-------------------------------------------
1996, and upon the request of the holders of a majority in interest of the
Preferred Shares, the Company will
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<PAGE>
use its best efforts to obtain directors and officers insurance at regular
premium rates with insurers of recognized responsibility in amounts and on terms
comparable to other companies in the same industry as the Company. The Company
shall enter into indemnification agreements with the designees of the Investors
to the Company's Board of Directors, in form and substance acceptable to such
designees, on or prior to such designees becoming members of the Board of
Directors of the Company.
4.13 OPTION POOL. The Company shall not establish a stock grant, option
-----------
plan or purchase plan, other employee stock incentive program or agreement that
in the aggregate exceeds five percent (5%) of the fully diluted Common Stock of
the Company (excluding options and warrants in existence on the Closing Date) at
the later of the Closing or the Deferred Closing (the "Option Pool"). Any
options granted pursuant to such plan at the Closing or within six (6) months of
the Closing Date shall have an exercise price of at least $1.00 per share. The
provisions of this SECTION 4.13 shall be in addition to, and not in any manner
limit, obligations pursuant to any option, warrant, employment agreement or
other written obligation, agreement or commitment of the Company or any
Operating Subsidiary as of the date of this Agreement (which such obligations
shall be disclosed in Schedule 2.5).
4.14 REVERSE STOCK SPLIT. Subsequent to five (5) years from the Closing
-------------------
Date and upon the request of the holders of a majority in interest of the then
outstanding Preferred Shares, the Company shall use its best efforts (which
shall include, if required by law, submitting such proposal to the stockholders
of the Company) to implement a reverse stock split which would, if consummated,
create a Common Stock price in excess of $12.00 per share, assuming that the
average of the price earnings ratio for the Company's Common Stock over the
sixty (60) days prior to the consummation of such reverse stock split is
projected to remain unchanged or improve after such reverse stock split.
4.15 RESTRICTED CORPORATE ACTIONS. Neither the Company nor any of the
----------------------------
Subsidiaries will, without the approval of the holders of a majority in interest
of the Preferred Shares, take any of the following actions:
(a) make any loans or advances to any officers, directors or affiliates of
the Company or any Subsidiary, other than travel or miscellaneous cash advances
in the ordinary course of business and as provided for in existing employment
agreements;
(b) incur any obligation, contingent or otherwise, to guarantee the debt or
any other obligations or liabilities of any other person or entity other than in
the normal and ordinary course of business (not including inter-company
transactions with or between Operating Subsidiaries);
(c) mortgage, pledge, hypothecate or otherwise encumber any assets or
properties if, as a result thereof, more than fifty percent (50%) of the
aggregate book value of the assets of the Company or such Subsidiary would be
subject to a mortgage, pledge, hypothecation or other encumbrance;
21
<PAGE>
(d) create any new non-wholly owned subsidiary, or permit any Subsidiary to
issue any equity securities to anyone other than the Company or a wholly owned
Subsidiary of the Company;
(e) engage in any line or lines of business activity other than the
businesses in which they are engaged on the Closing Date and lines of business
reasonably related thereto;
(f) directly or indirectly acquire (whether by acquisition of stock, assets
or license rights, or by entering into a joint venture, development agreement or
otherwise) the business or operations of any other corporation, person, or
entity;
(g) repurchase any shares of any employee or stockholder that would cause
the Investors not to qualify their Conversion Shares and/or Warrant Shares under
Section 1202 of the Internal Revenue Code of 1986, as amended, as qualified
small business stock;
(h) enter into any transaction, including, without limitation, the
purchase, sale, or exchange of property or the rendering of any service, with
any affiliate of the Company or such Subsidiary (not including inter-company
transactions with or between Operating Subsidiaries), except in the ordinary
course of and pursuant to the reasonable requirements of the Company's or such
Subsidiary's business and upon fair and reasonable terms no less favorable to
the Company or such Subsidiary than would be obtained in a comparable arms-
length transaction with a person not an affiliate of the Company or such
Subsidiary;
(i) incur any additional Debt (as defined below) if, immediately upon the
incurrence of such Debt, the ratio of Consolidated Debt (as defined below) to
Consolidated Net Worth (as defined below) would be equal to or greater than 1.0
to 1.0. As used in this SECTION 4.15(I), the term "Consolidated Debt" shall
mean, as of the date of determination, the total of all Debt of the Company and
its Subsidiaries outstanding on such date, after eliminating all offsetting
debits and credits between the Company and its Subsidiaries and all other items
required to be eliminated in the course of the preparation of consolidated
financial statements of the Company and its Subsidiaries in accordance with
GAAP. Notwithstanding anything contained herein to the contrary, Consolidated
Net Worth shall be deemed to include the shares outstanding from time to time of
the Company's Series D Convertible Preferred Stock and Series E Convertible
Preferred Stock, the Preferred Shares and any series of preferred stock issued
subsequent to the date hereof. As used in this SECTION 4.15(I), the term
"Consolidated Net Worth" shall mean, as of the date of determination, the total
assets of the Company and its Subsidiaries which would be shown as assets on a
consolidated balance sheet of the Company and its Subsidiaries as of such time
prepared in accordance with GAAP, after eliminating all amounts properly
attributable to minority interests, if any, in the stock and surplus of
Subsidiaries, minus the total liabilities of the Company and its Subsidiaries
which would be shown on a consolidated balance sheet of the Company and its
Subsidiaries as of such time prepared in accordance with GAAP. As used in this
SECTION 4.15(I), the term "Debt" shall mean, with respect to a particular
person, without duplication, (i) its liabilities for borrowed money, (ii) its
liabilities for the deferred purchase price of property acquired by such person
(including, without limitation, all liabilities created or arising
22
<PAGE>
under any conditional sale or other title retention agreement with respect to
such property), (iii) the amount of any obligation under a capital lease which
would, under GAAP, appear as a liability on the balance sheet of such person,
(iv) all liabilities for borrowed money secured by a lien with respect to any
property owned by such a person (whether or not it has assumed or otherwise
become liable for such liabilities), (v) accrued but unpaid interest on any of
the liabilities of the type described in CLAUSES (I) through (IV) above, and
(vi) any guaranty of such person with respect to the liabilities of the type
described in CLAUSES (I) through (V) above;
(j) increase the number of shares under all stock option plans above
2,500,000 shares of Common Stock (on a fully diluted basis and as appropriately
adjusted for recapitalizations, stock splits and the like), excluding shares of
Common Stock issued or to be issued pursuant to obligations of the Company under
any option, warrant, employment agreement or other written obligation of the
Company or any Subsidiary as of the date hereof (which such obligations shall be
disclosed in Schedule 2.5);
(k) sell, lease, transfer, assign, license or pledge any material license,
intellectual property right, patent or trade secret, except in the ordinary
course of business to end users, manufacturers or distributors of its products
or services and except for security interests granted to lenders for money
borrowed;
(l) repurchase, redeem or retire any shares of capital stock of the Company
other than pursuant to (i) the Stockholder's Agreement, (ii) this Agreement,
(iii) as required by the Series D Convertible Preferred Stock or Series E
Convertible Preferred Stock Certificate of Designations or as permitted by the
Preferred Shares Certificate of Designation, (iv) any contractual rights to
repurchase shares of Common Stock held by employees, directors or consultants of
the Company or the Subsidiaries upon termination of their employment or
services, (v) pursuant to the exercise of a contractual right of first refusal
held by the Company existing as of the date of this Agreement or (vi)
subsequently issued in connection with the Option Pool, or as contemplated by
SECTION 6 hereof; or
(m) consolidate or merge with or into any other business entity or sell or
transfer in a single transaction or a series of related transactions of all or
substantially all of the assets of the Company (or stock or assets of any
Subsidiary), or otherwise reorganize the Company (or any Subsidiary), unless
upon consummation of such merger or consolidation, the holders of voting
securities of the Company own directly or indirectly 51% or more of the voting
power to elect directors of the surviving, acquiring or consolidated
corporation, partnership or other entity, other than the possible sale of EET,
Inc.'s Austin operations as described on the Schedules hereto.
4.16 MINIMUM NET WORTH. The consolidated net worth of the Company, as
-----------------
shown on the audited financial statements of the Company for the fiscal year
ended December 31, 2000, determined in accordance with GAAP, shall be greater
than or equal to $45,000,000.
4.17 RESERVATION OF SHARES. The Company shall use its best efforts to
---------------------
promptly (which shall include among other efforts, holding a shareholders'
meeting with respect thereto not later
23
<PAGE>
than December 31, 1996) cause its Certificate of Incorporation to be amended, or
other required related action to be taken, so as to cause a sufficient number of
shares of Common Stock to be available and to be reserved to permit the (a)
conversion in full of all Preferred Shares in accordance with the terms of this
Agreement and the Designations, and (b) exercise in full of all of the Warrants
issued in connection with this Agreement. In the event that, on the date an
Investor exercises its right to receive shares of Common Stock in accordance
with the terms of the Preferred Shares or a Warrant, there is not then available
a sufficient number of unreserved shares of Common Stock or shares reserved for
issuance in connection with the Preferred Shares or such Warrant to permit such
conversion or exercise, then the Company shall, in lieu thereof, issue as many
shares of Common Stock so to be received as are then available for conversion or
exercise of the Preferred Shares or such Warrant and immediately pay to such
exercising Investor in cash, an amount equal to the product of: (i) the then
current fair market value of a share of Common Stock less the then existing
exercise price for those shares of Preferred Stock or Warrants which could not
be converted or exercised , multiplied by (ii) the number of shares of Common
Stock that would otherwise be required to have been delivered by the Company
upon such conversion or exercise but are then unavailable.
4.18 AUDITED FINANCIAL STATEMENTS. Within thirty (30) days of the date of
----------------------------
this Agreement, the Company shall deliver to the Investors its audited financial
statements as at and for the year ended December 31, 1995, which shall not be
materially different from those in Schedule 2.7.
4.19 ADDITIONAL KEY MAN INSURANCE. Within ninety (90) days of the date of
----------------------------
this Agreement, the Company shall have obtained, and delivered evidence of, the
additional life insurance applied for with respect to Tim B. Tarrillion and
Donovan W. Boyd, as referenced in SECTION 1.3(F).
4.20 OTHER PREFERRED STOCK. (a) On or prior to July 31, 1996, all of the
---------------------
shares of the Company's Series D Convertible Preferred Stock shall have been
converted into shares of Common Stock. (b) On or prior to July 31, 1996, the
holders of all of the shares of the Company's Series E Convertible Preferred
Stock shall have entered into an agreement, in form and substance reasonably
acceptable to the holders of a majority in interest of the Preferred Shares,
whereby the rights of the holders of the Company's Series E Convertible
Preferred Stock in the event of a liquidation or a redemption shall be pari
passu with the rights of the holders of the Preferred Shares.
4.21 DELISTING. The Company shall use its best efforts not to allow the
---------
shares of Common Stock to be delisted such that they are no longer listed on any
national securities exchange (including among others the NASDAQ Small-Cap
market).
4.22 CHANGE OF CONTROL. The Company shall not allow one or more persons
-----------------
acting in concert, together with all affiliates, to acquire in one or more
related transactions, more than fifty
24
<PAGE>
percent (50%) of the shares of capital stock of the Company that are then
entitled to vote for the election of the directors of the Company.
SECTION 5. REGISTRATION RIGHTS
- ---------- -------------------
5.1 DEFINITIONS. When used in this Section, unless otherwise defined
-----------
herein, the following terms shall have the respective meanings assigned to them
in this Section or in the sections, subsections or other subdivisions or other
documents referred to below:
"Demand Registration" shall have the meaning assigned to it in SECTION 5.2.
-------------------
"Holder" shall mean any Person that holds Registrable Securities.
------
"Lockup Period" shall mean the six-month period following the Closing Date.
-------------
"Person" shall mean any individual, corporation, partnership, joint
------
venture, limited partnership, limited liability company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Piggyback Registration" shall have the meaning assigned to it in SECTION
----------------------
5.3.
"Registrable Securities" shall mean (i) the Conversion Shares, (ii) the
----------------------
Warrant Shares, and (iii) any securities issued or issuable with respect to the
foregoing shares by way of a stock dividend or stock split or in connection with
a combination of shares, recapitalization, merger, consolidation or other
reorganization.
"Registration Expenses" shall mean (i) all expenses incident to the
---------------------
Company's performance of or compliance with the registration rights granted
hereunder, including (without limitation) all registration and filing fees, fees
and expenses of compliance with securities and blue sky laws, printing and
engraving expenses, messenger, telephone and delivery expenses, and fees and
disbursements of counsel for the Company, all independent certified public
accountants and underwriters (excluding discounts and commissions) and (ii) in
connection with each registration hereunder, the reasonable fees and
disbursements of no more than one counsel chosen by the holders of a majority of
the Registrable Securities included in such registration in an amount not to
exceed $10,000; provided, that, Registration Expenses shall not include any
Selling Expenses.
"Registration Request" shall have the meaning assigned to it in SECTION
--------------------
5.2.
"Registration Rights Expiration Point" shall mean the expiration of an
------------------------------------
eight-year period commencing as of the Closing Date.
"Selling Expenses" shall mean underwriting discounts or commissions and any
----------------
selling commissions attributable to sales of Registrable Securities.
25
<PAGE>
5.2 MANDATORY REGISTRATION. If, on or after the Lockup Period but prior
----------------------
to the Registration Rights Expiration Point, and provided that at least one year
has elapsed since the most recent Registration Request (as defined below), (a)
Holders of at least twenty-five percent (25%) of the Registrable Securities not
theretofore registered pursuant to this SECTION 5, so long as the aggregate
gross proceeds to be received from such proposed offering is expected to be not
less than $500,000, or (b) Holders of at least fifty percent (50%) of the
Registrable Securities not theretofore registered pursuant to this SECTION 5, so
long as the aggregate gross proceeds to be received from such proposed offering
is expected to be not less than $1,000,000, request in writing that the Company
register under the Securities Act at least 25% of the Registrable Securities not
theretofore registered pursuant to this SECTION 5 (a "Registration Request"),
the Company shall promptly give written notice of such Registration Request to
all holders of Registrable Securities and will, as expeditiously as possible,
use its best efforts to effect the registration under the Securities Act of (i)
the Registrable Securities which the Company has been requested to register for
disposition in accordance with the intended method of disposition described in
the Registration Request and (ii) the Registrable Securities of any Holder that
elects to join in the Registration Request within twenty (20) days after receipt
of the above written notice from the Company. The Company may include in any
such registration (x) similar securities held by other parties with registration
rights and (y) similar securities that the Company desires to register;
provided, that, in connection with an underwritten offering, such additional
similar securities shall be reduced to a number, if any, that in the reasonable
opinion of the managing underwriters of such offering would not adversely affect
the marketability or offering price of the Registrable Securities to be included
in such offering. Notwithstanding anything herein to the contrary, any
registration requested pursuant to this SECTION 5.2 (a "Demand Registration")
will not be deemed to have been effected unless it has become effective and
remained effective no less than one hundred and eighty (180) days; provided,
further, that any such registration which does not become effective after the
Company has filed a registration statement in accordance with the provisions of
this SECTION 5.2 solely by reason of the refusal to proceed of the Holder or
Holders that have made or joined in the Registration Request, including failure
to comply with the provisions of this Agreement (other than any refusal to
proceed based upon the advice of counsel to such Holder or Holders that the
registration statement, or the prospectus contained therein, contains an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing, or that such registration statement or
such prospectus, or the distribution contemplated thereby, otherwise violates or
would, if such distribution using such prospectus took place, violate any
applicable state or federal securities law) shall be deemed to have been
effected by the Company at the request of such Holder or Holders. This SECTION
5.2 shall not apply to a request for registration on Form S-3 (or successor
form) which shall be governed by SECTION 5.4. The Holders of Registrable
Securities may make one (1) Demand Registration pursuant to the terms of clause
(a) above and two (2) Demand Registrations pursuant to the terms of clause (b)
above.
5.3 OPTIONAL REGISTRATIONS. If, on or after the Lockup Period but prior
----------------------
to the Registration Rights Expiration Point, the Company proposes to register
any of its securities under
26
<PAGE>
the Securities Act other than (a) under employee compensation or benefit
programs, (b) an exchange offer or an offering of securities solely to the
existing stockholders or employees of the Company, (c) pursuant to the
acquisition by the Company of the remaining shares of the capital stock of North
American Environmental Group, Inc. that the Company does not own as of the date
of this Agreement, and (d) any registration conducted solely in connection with
a proposed acquisition by the Company or any of its Subsidiaries, and the
registration form to be used may be used for the registration of Registrable
Securities, the Company will give prompt written notice to all holders of
Registrable Securities of its intention to effect such a registration and will
include in such registration all Registrable Securities with respect to which
the Company has received written requests for inclusion therein within twenty
(20) days after the receipt of the Company's notice (a "Piggyback
Registration"). The Company shall use its best efforts to cause the managing
underwriters of a proposed underwritten offering to permit the Registrable
Securities requested to be included in the registration statement (or
registration statements) for such offering to be included therein on the same
terms and conditions as any similar securities of the Company included therein.
Notwithstanding the foregoing, if the Company gives notice of such a proposed
registration, the total number of Registrable Securities which shall be included
in such registration shall be reduced pro rata to such number, if any, as in the
reasonable opinion of the managing underwriters of such offering would not
adversely affect the marketability or offering price of all of the securities
proposed to be offered by the Company in such offering; provided, however, that
(i) if such Piggyback Registration is incident to a primary registration on
behalf of the Company, and to the extent not prohibited by any registration
rights agreements existing as of the date hereof, the securities to be included
in the registration statement (or registration statements) for any person other
than the Holders and the Company shall be first reduced prior to any such pro
rata reduction, and (ii) if such Piggyback Registration is incident to a
secondary registration on behalf of holders of securities of the Company, the
securities to be included in the registration statement (or registration
statements) for any person not exercising "demand" registration rights other
than the Holders shall be first reduced prior to any such pro rata reduction.
5.4 FORM S-3. If, on or after the Lockup Period but prior to the
--------
Registration Rights Expiration Point, the Company is eligible to effect a
registration of its securities under Form S-3 (or a successor form), the Holders
will have the right to request and have effected unlimited registrations of
shares of Registrable Securities on Form S-3 as long as the aggregate proposed
offering price is not less than $500,000 for such registration. Upon written
request of a Holder delivered to the Company, the Company will use all
reasonable efforts to cause the registration of all shares of Registrable
Securities on Form S-3 or such successor form to the extent requested by the
Holder. All expenses incurred in connection with such registration requested
pursuant to this SECTION 5.4 shall be borne by the Holder; provided, however,
that if the Company for its own account or any other holder of shares elects to
register its shares as permitted below, the expenses of such registration shall
be borne pro rata by all parties to the registration based upon the ratio that
the number of such shares registered by such entity bears to the total number of
shares to be registered. In connection with any such registration pursuant to
this SECTION 5.4, the Company will in good faith use its best efforts to keep
such expenses to be incurred by the Holders at a reasonable level (consistent
with registrations of a similar nature and form). Any registration statement
filed pursuant to this SECTION 5.4 may include other securities of the Company,
with
27
<PAGE>
respect to which "piggy back" registration rights have been granted, and may
include securities of the Company being sold for the account of the Company;
provided, however, that any cutback shall be dealt with in the same manner as
provided in SECTION 5.3.
5.5 PROCEDURE FOR REGISTRATION. In connection with any request that any
--------------------------
Registrable Securities be registered pursuant to this Agreement, the Company
will use its best efforts to effect the registration of the Registrable
Securities in accordance with the intended method of disposition thereof, and
pursuant thereto the Company will use its best efforts to as expeditiously as
possible:
(a) prepare and file with the Commission a registration statement on the
appropriate form with respect to such Registrable Securities and use its best
efforts to cause such registration statement to become effective (provided that
before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company will furnish to the counsel, if any, selected
by the Holders of a majority of the Registrable Securities covered by such
registration statement copies of all such documents proposed to be filed)
(provided, however, that in connection with a Demand Registration, the Company
shall be deemed to have met its obligations under this PARAGRAPH (A) so long as
it files a registration statement within six (6) months of a Registration
Request);
(b) prepare and file with the Commission such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective for a period of
not less than six (6) months or such shorter period which will terminate when
Registrable Securities covered by such registration statement have been sold
(but not before the expiration of the applicable prospectus delivery period) and
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such registration statement;
(c) furnish to each seller of Registrable Securities such number of copies
of such registration statement, each amendment and supplement thereto, the
prospectus included in such registration statement (including, without
limitation, each preliminary prospectus) and such other documents as such seller
may reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such seller;
(d) use its best efforts to register or qualify such Registrable Securities
under such other securities or blue sky laws of such jurisdictions within the
United States as any seller reasonably requests and do any and all other acts
and things which may be reasonably necessary or advisable to enable such seller
to consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller (provided that the Company will not be required
to qualify generally to do business or subject itself to any general service of
process in any jurisdiction where it is otherwise not then so subject);
(e) notify each seller of such Registrable Securities, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event
28
<PAGE>
of which the Company becomes aware which requires the making of any change in
the prospectus included in such registration statement so that such document
will not contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and, at the request of any such seller, the Company will
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus will
not contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading;
(f) use its best efforts to cause all such Registrable Securities to be
listed on each securities exchange or exchanges, automated quotation system or
over-the-counter market upon which securities of the Company of the same class
are then listed;
(g) enter into such customary agreements (including, without limitation,
underwriting agreements in customary form, substance, and scope) and take all
such other actions as the Holders of a majority of the Registrable Securities
being sold or the underwriters, if any, reasonably request in order to expedite
or facilitate the disposition of such Registrable Securities;
(h) otherwise use its best efforts to comply with all applicable rules and
regulations of the Commission and make generally available to its security
holders an earnings statement no later than ninety (90) days after the end of
the 12-month period beginning with the first day of the Company's first full
calendar quarter after the effective date of the registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder;
(i) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the disqualification
of any common stock included in such registration statement for sale in any
jurisdiction, the Company will use its best efforts promptly to obtain the
withdrawal of such order; and
(j) use its best efforts to cause such Registrable Securities covered by
such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the sellers
thereof to consummate the disposition of such Registrable Securities.
5.6 REGISTRATION EXPENSES. The Company shall pay all Registration
---------------------
Expenses in connection (a) the first three (3) Demand Registrations and (b) each
registration effected pursuant to SECTION 5.3 and, in any event, shall pay its
internal expenses (including, without limitation, all salaries and expenses of
its officers and employees performing legal and accounting duties, but subject
to the last sentence of this SECTION 5.6), the expense of any annual audit and
the fees and expenses incurred in connection with the listing of the securities
to be registered on each securities exchange on which similar securities issued
by the Company are then listed. All Registration Expenses in connection with a
Demand Registration other than the first three (3) Demand
29
<PAGE>
Registrations shall be borne by the seller or sellers of Registrable Securities
pro rata based upon the number of Registrable Securities included in such
registration. All Selling Expenses incurred in connection with a registration
effected pursuant to the terms hereof shall be borne by the seller or sellers of
Registrable Securities pro rata based upon the number of Registrable Securities
included in such registration. Notwithstanding the foregoing, however, if, in
connection with any Demand Registration effected other than the first three (3)
Demand Registrations, the Company in good faith determines it is necessary to
hire or engage additional temporary employees or consultants in connection with
the preparation and consummation of such registration, the reasonable fees,
costs and expenses of such employees or consultants incurred by the Company
shall be borne by the seller or sellers of Registrable Securities pro rata based
upon the number of Registrable Securities included in such registration.
5.7 INDEMNIFICATION.
---------------
(a) The Company shall indemnify and hold harmless, with respect to any
registration statement filed by it, to the full extent permitted by law, each
holder of Registrable Securities covered by such registration statement, and
each other Person, if any, who controls such holder within the meaning of
Section 15 of the Securities Act (collectively, "Holder Indemnified Parties")
against all losses, claims, damages, liabilities and expenses, joint or several
to which any such Holder Indemnified Party may become subject under the
Securities Act, the Exchange Act, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon (i) any untrue statement or alleged untrue statement of a material fact
contained in any registration statement in which such Registrable Securities
were included as contemplated hereby or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, (ii) any untrue statement or alleged
untrue statement of a material fact contained in any preliminary, final or
summary prospectus, together with the documents incorporated by reference
therein (as amended or supplemented if the Company shall have filed with the
Commission any amendment thereof or supplement thereto), or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or (iii) any violation
by the Company of any federal, state or common law rule or regulation applicable
to the Company and relating to action of or inaction by the Company in
connection with any such registration; and in each such case, the Company shall
reimburse each such Holder Indemnified Party for any reasonable legal or other
expenses incurred by any of them in connection with investigating or defending
any such loss, claim, damage, liability, expense, action or proceeding;
provided, however, that the Company shall not be liable to any such Holder
Indemnified Party in any such case to the extent, that any such loss, claim,
damage, liability or expense (or action or proceeding, whether commenced or
threatened, in respect thereof) arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement or amendment thereof or supplement thereto or in any
such preliminary, final or summary prospectus in reliance upon and in conformity
with written information furnished to the Company by or on behalf of any such
Holder Indemnified Party for use in the preparation thereof. Such indemnity and
reimbursement
30
<PAGE>
of expenses and other obligations shall remain in full force and effect
regardless of any investigation made by or on behalf of the Holder Indemnified
Parties and shall survive the transfer of such securities by such Holder
Indemnified Parties.
(b) Each holder of Registrable Securities participating in any registration
hereunder shall severally (and not jointly or jointly and severally) indemnify
and hold harmless, to the fullest extent permitted by law, the Company, its
directors, officers, employees and agents, and each Person who controls the
Company (within the meaning of Section 15 of the Securities Act) (collectively,
"Company Indemnified Parties") against all losses, claims, damages, liabilities
and expenses to which any Company Indemnified Party may become subject under the
Securities Act, the Exchange Act, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions or proceedings,
whether commenced or threatened, in respect thereof) are caused by (i) any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement in which such holder's Registrable Securities were
included or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary, final or summary prospectus, together with
the documents incorporated by reference therein (as amended or supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading to the extent in the cases described in CLAUSES (I) and
(II), that such untrue statement or omission was furnished in writing by such
holder for use in the preparation thereof, or (iii) any violation by such holder
of any federal, state or common law rule or regulation applicable to such holder
and relating to action of or inaction by such holder in connection with any such
registration. Such indemnity obligation shall remain in full force and effect
regardless of any investigation made by or on behalf of the Company Indemnified
Parties (except as provided above) and shall survive the transfer of such
securities by such holder.
(c) Promptly after receipt by an indemnified party under SECTION 5.7(A) or
SECTION 5.7(B) of written notice of the commencement of any action, suit,
proceeding, investigation or threat thereof made in writing with respect to
which a claim for indemnification may be made pursuant to this SECTION 5, such
indemnified party shall, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the indemnifying party of the threat
or commencement thereof; provided, however, that the failure to so notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party except to the extent that the indemnifying party is
actually prejudiced by such failure to give notice. If any such claim or action
referred to under SECTION 5.7(A) or SECTION 5.7(B) is brought against any
indemnified party and it then notifies the indemnifying party of the threat or
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it wishes, jointly with any other indemnifying
party similarly notified, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. After notice from the indemnifying
party to such indemnified party of its election so to assume the defense of any
such claim or action, the indemnifying party shall not be liable to such
indemnified party under this
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SECTION 5 for any legal expenses of counsel or any other expenses subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation unless the indemnifying party has failed
to assume the defense of such claim or action or to employ counsel reasonably
satisfactory to such indemnified party. Under no circumstances will the
indemnifying party be obligated to pay the fees and expenses of more than one
law firm for all indemnified parties. The indemnifying party shall not be
required to indemnify the indemnified party with respect to any amounts paid in
settlement of any action, proceeding or investigation entered into without the
written consent of the indemnifying party, which consent shall not be
unreasonably withheld. No indemnifying party shall consent to the entry of any
judgment or enter into any settlement without the consent of the indemnified
party unless (i) such judgment or settlement does not impose any obligation or
liability upon the indemnified party other than the execution, delivery or
approval thereof, and (ii) such judgment or settlement includes as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a full release and discharge from all liability in respect
of such claim for all persons that may be entitled to or obligated to provide
indemnification or contribution under this SECTION 5.
(d) Indemnification similar to that specified in the preceding subsections
of this SECTION 5 (with appropriate modifications) shall be given by the Company
and each seller of Registrable Securities with respect to any required
registration or qualification of securities under any state securities or blue
sky laws.
(e) If the indemnification provided for in this SECTION 5 is unavailable to
or insufficient to hold harmless an indemnified party under SECTION 5.7(A) or
SECTION 5.7(B), then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of the losses, claims, damages,
liabilities or expenses (or actions or proceedings in respect thereof) referred
to in SECTION 5.7(A) or SECTION 5.7(B) in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and the
indemnified party on the other in connection with the statements, omissions,
actions or inactions which resulted in such losses, claims, damages, liabilities
or expenses as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or the
indemnified party, any action or inaction by any such party, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement, omission, action or inaction. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
liabilities or expenses (or actions or proceedings in respect thereof) pursuant
to this SECTION 5.7(E) shall be deemed to include, without limitation, any
reasonable legal or other expenses incurred by such indemnified party in
connection with investigating or defending any such action or claim (which shall
be limited as provided in SECTION 5.7(C) if the indemnifying party has assumed
the defense of any such action in accordance with the provisions thereof) which
is the subject of this SECTION 5.7(E). No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
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shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Promptly after receipt by an indemnified party
under this SECTION 5.7(E) of written notice of the commencement of any action,
suit, proceeding, investigation or threat thereof made in writing with respect
to which a claim for contribution may be made against an indemnifying party
under this SECTION 5.7(E), such indemnified party shall, if a claim for
contribution in respect thereof is to be made against an indemnifying party,
give written notice to the indemnifying party of the commencement thereof (if
the notice specified in SECTION 5.6(C) has not been given with respect to such
action); provided, however, that the failure to so notify the indemnifying party
shall not relieve it from any obligation to provide contribution which it may
have to any indemnified party under this SECTION 5 except to the extent that the
indemnifying party is actually prejudiced by the failure to give notice. The
parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section were determined by pro rata allocation or by any other
method of allocation which does not take account the equitable considerations
referred to in this paragraph. If indemnification is available under this
SECTION 5, the indemnifying parties shall indemnify each indemnified party to
the fullest extent provided in SECTIONS 5.7(A) and 5.7(B), without regard to the
relative fault of said indemnifying party or any other equitable consideration
provided for in this paragraph. The provisions of this paragraph shall be in
addition to any other rights to indemnification or contribution which any
indemnified party may have pursuant to law or contract, shall remain in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party, and shall survive the transfer of securities by any such
party. In connection with any underwritten offering contemplated by this
Agreement which includes Registrable Securities, the Company and all sellers of
Registrable Securities included in any registration statement shall agree to
customary provisions for indemnification and contribution (consistent with the
other provisions of this SECTION 5) in respect of losses, claims, damages,
liabilities and expenses of the underwriters of such offering.
5.8 UNDERWRITING. If any registration effected pursuant to SECTION 5.2 is
------------
an underwritten offering, or a best efforts underwritten offering, the
investment banker or investment bankers and manager or managers that will
administer the offering shall be mutually agreed upon by the Company and the
holders of a majority of the Registrable Securities to be included in such
offering. If any Piggyback Registration is an underwritten offering, the
Company shall have the right to select the investment banker or investment
bankers and manager or managers to administer the offering; provided, that such
investment bankers and managers must be reasonably satisfactory to the holders
of a majority of the Registrable Securities to be registered in such Piggyback
Registration, if any Person (other than the Company) has the right, in the case
of an underwritten secondary offering, to select the same.
5.9 RULE 144 REQUIREMENTS. The Company covenants to each Holder that, to
---------------------
the extent that the Company shall be required to do so under the Exchange Act,
the Company shall (a) timely file the reports required to be filed by it under
the Exchange Act or the Securities Act (including, but not limited to, the
reports under Sections 13 and 15(d) of the Exchange Act referred to in
subparagraph (c)(1) of Rule 144 adopted by the Commission under the Securities
Act) and the rules and regulations adopted by the Commission thereunder, and (b)
take such
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further action as any Holder may reasonably request, all to the extent
required from time to time to enable such Holder to sell Registrable Securities
without registration under the Securities Act within the limitations of the
exemption provided by Rule 144 under the Securities Act, as such Rule may be
amended from time to time, or any similar rule or regulation hereafter adopted
by the Commission. Upon the request of any Holder, the Company shall deliver to
such Holder a written statement as to whether it has complied with such
requirements.
5.10 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the
---------------------------------------------
date of this Agreement, the Company will not enter into any agreement with
respect to its securities which is inconsistent with or violates the rights
granted to the holders of Registrable Securities in this Agreement.
5.11 OBLIGATIONS OF HOLDERS IN A REGISTRATION. Each Holder agrees as
----------------------------------------
follows:
(a) If any Registrable Securities are included in a registration statement,
the holder thereof will not (until further notice) effect sales thereof after
receipt of telegraphic or written notice from the Company to suspend sales to
permit the Company to correct or update a registration statement or prospectus;
provided, that the obligations of the Company with respect to maintaining any
registration statement current and effective shall be extended by a period of
days equal to the period said suspension is in effect.
(b) If any Registrable Securities are being registered in any registration
pursuant to this Agreement, the holder thereof will comply with all anti-
stabilization, manipulation and similar provisions of Section 10 of the Exchange
Act, as amended, and any rules promulgated thereunder by the Commission and, at
the request of the Company, will execute and deliver to the Company and to any
underwriter participating in such offering, an appropriate agreement to such
effect.
(c) At the end of any period during which the Company is obligated to keep
a registration statement current and effective as described herein, the holders
of Registrable Securities included in the registration statement shall
discontinue sales thereof pursuant to such registration statement.
(d) If any Registrable Securities are included in a registration statement,
the holder thereof will (i) furnish to the Company in writing such information
as is reasonably requested by the Company for use in the registration statement
(or any prospectus included therein), (ii) complete and execute all customary
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required by an underwriter relating to the terms of the
underwriting agreements and (iii) only sell such Registrable Securities on the
basis provided in any such underwriting agreements.
5.12 MISCELLANEOUS. In connection with its obligations under this SECTION
-------------
5, the Company shall have no obligation (a) to assist or cooperate in the
offering or disposition of the Registrable Securities or (b) to obtain a
commitment from an underwriter relative to the sale of the Registrable
Securities.
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SECTION 6. DEFAULT REMEDIES.
----------------
6.1 REMEDIES. At any time after an Event of Default (as defined in
--------
SECTION 4.1(D) other than an Event of Default relating to SECTIONS 4.16, 4.20 or
4.22), unless waived pursuant to the terms of SECTION 9.1, the Investors shall
have the right to sell ("Remedy") to the Company all or part of the Preferred
Shares held by such Investors on the Remedy Date (as defined below) (the "Remedy
Securities") pursuant to the following terms:
(a) In the event Investors wish to exercise their right to sell the Remedy
Securities, the Investors shall notify the Company at least sixty (60) days
prior to the effective Remedy Date of their intention to exercise their Remedy
right, the number of the Remedy Securities, and their intended Remedy Date,
which date shall be no more than one hundred twenty (120) days from the date of
the notice; provided, however, that if a "fair market value" determination made
pursuant to SECTION 6.1(B) below extends beyond the effective Remedy Date as
specified in the notice above, then such effective Remedy Date shall be ten (10)
days after such "fair market value" determination. For purposes of this SECTION
6, the term "Remedy Date" shall mean each date on which Investors exercise their
right to Remedy pursuant to this SECTION 6, and Investors shall be deemed to
have exercised a Remedy right only upon the closing of such Remedy right as
specified in SECTION 6.1(E) hereto.
(b) The purchase price per share (the "Remedy Price") of the Remedy
Securities shall be the greater of (x) the "fair market value" (plus, if not
taken into account by the party or parties determining the fair market value
pursuant to (B)(I), (B)(II) or (B)(III) below, (A) any accrued or declared but
unpaid dividends payable on each of the Remedy Securities and (B) interest, if
any) of each of such Remedy Securities or (y) the initial purchase price per
Preferred Share hereunder (plus any accrued or declared but unpaid dividends
payable on the Remedy Securities, plus interest, if any). For purposes of this
SECTION 6, the term "fair market value" shall mean the fair market value of such
security on the Remedy Date, determined as follows:
(i) by written agreement of the Company and the Investors exercising
such Remedy right; or
(ii) if the Company and the Investors exercising such Remedy right
fail to reach a written agreement within thirty (30) days after the notice
given by the Investors exercising such Remedy right pursuant to SECTION
6.1(A) above, the Company and the Investors exercising such Remedy right
shall together appoint an independent appraiser to determine the "fair
market value" of the Remedy Securities, which shall be binding on the
parties; or
(iii) if (x) the Company and the Investors are unable to agree upon
the choice of an independent appraiser under (ii) hereof within forty (40)
days after the notice given by the Investors pursuant to SECTION 6.1(A) or
(y) such appraiser, after being duly selected, fails to determine the "fair
market value" within thirty (30) days of being selected, then
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<PAGE>
the Company, on the one hand, and the Investors exercising such Remedy
right, on the other hand, shall each appoint, within ten (10) days
following the expiration of the applicable time period under (x) or (y)
above, an independent appraiser, and the two appraisers together shall
determine the "fair market value." If only one appraiser is appointed
during the 10-day period referred to above, then such appraiser shall alone
determine the "fair market value," which determination shall be binding on
the Company and the Investors exercising such Remedy right. If both
appraisers are appointed within such 10-day period, and within thirty (30)
days after the appointment of the second of the two appraisers, they cannot
agree on the "fair market value" of the Remedy Securities, then each
appraiser shall prepare a separate appraisal report of the fair market
value ("FMV") of the Company and the "fair market value" of the Remedy
Securities within sixty (60) days after the appointment of the second of
the two appraisers, and if the lower of the two FMVs of the Company is
equal to at least 85% of the higher FMV of the Company, then the "fair
market value" of the Remedy Securities shall be the average of the "fair
market value" of the Remedy Securities as determined by the two appraisers.
If only one of the appraisers submits an appraisal report on or before such
60th day, then the "fair market value" of the Remedy Securities shall be
the "fair market value" of the Remedy Securities as determined by such
report; or
(iv) if neither of the appraisers submits an appraisal request on or
before such 60th day, or if both appraisers submit an appraisal report but
the averaging requirements set forth in (iii) above are not met, then the
two appraisers shall promptly appoint a third appraiser who shall determine
the "fair market value" of the Remedy Securities. If the two appraisers
fail to appoint a third appraiser as required hereunder, either party shall
have the right to submit the determination to arbitration under the rules
and procedures of the American Arbitration Association.
(c) The appraisers and arbitrators shall have access to all books and
records of the Company and the Subsidiaries and shall have the right to examine
all of its accounts, books, assets and equipment and do all things fully and
completely to enable them to arrive at the FMV of the Company and the "fair
market value" of the Remedy Securities. The cost of any appraisal proceedings
shall be paid one-half ( 1/2) by the Company and one-half ( 1/2) by the
Investors exercising such Remedy Right (pro rata). An appraiser making an
appraisal pursuant to this Agreement shall assume an all cash sale with respect
to the subject Remedy Securities and shall assume that the restrictions on
transfer specified in this Agreement, the Stockholders' Agreement and/or any
applicable federal or state securities law restrictions on transfer are not
applicable to such Remedy Securities. All appraisers appointed shall be
experienced and knowledgeable in the industry or industries in which the Company
does business. The "fair market value" determination pursuant to SECTION
6.1(B)(III) or SECTION 6.1(B)(IV) hereof, as the case may be, shall be binding
on the Company and the Investors exercising such Remedy Right.
(d) If the Company is unable to purchase all Remedy Securities required to
be purchased on a Remedy Date due to federal or state law restrictions or due to
any restriction imposed by any listing agreement with any securities exchange to
which the Company is then a
36
<PAGE>
party, Remedy Securities shall be repurchased (on a pro rata basis from the
holders of the Remedy Securities based upon the Common Stock equivalents) from
time to time, to the extent the Company is legally permitted to do so, and the
Remedy obligations of the Company under this SECTION 6 will be a continuing
obligation until the Company's repurchase of all such Remedy Securities.
(e) On each Remedy Date (including any subsequent purchase closing date if
multiple purchases result from the application of SECTION 6.1(D)), the Remedy
closing shall occur at the Company's principal office. At the Remedy closing, to
the extent applicable, the Investors exercising such Remedy Right shall deliver
the Remedy Securities being sold, duly endorsed in blank, accompanied by such
supporting documents as may be necessary to pass to the Company good title to
the Remedy Securities, free and clear of all liens (other than restrictions
under applicable securities laws and/or the Stockholders' Agreement). In
consideration therefor, the Company shall deliver to each of the Investors
exercising such Remedy Right (i) payment, by certified check, cashier's check or
wire transfer, of the aggregate Remedy Price or (ii) at the option of the
Company, a full recourse promissory note or notes evidencing the aggregate
Remedy Price (the "Remedy Notes"). Each Remedy Note shall be secured by a pledge
from the Company of the Remedy Securities for which the Remedy Note is executed,
and the Company hereby agrees to take all actions and execute all documents (in
form reasonably satisfactory to the Investors exercising such Remedy Right)
necessary or appropriate to properly and fully secure each Remedy Note with the
Remedy Securities transferred in exchange therefor. In addition, each Remedy
Note shall be in form reasonably satisfactory to the Investors exercising such
Remedy Right and shall in any case, unless otherwise agreed to by the parties,
(i) have a term of three (3) years, (ii) provide for repayment of the aggregate
Remedy Price at a rate of no less than one-third per year, with principal and
interest payable in equal semi-annual installments, (iii) provide that the
unpaid balance of the Remedy Note shall accrue simple interest at the rate of
13.5% per annum from the date of issuance until full payment of the aggregate
Remedy Price is made and (iv) provide that all amounts due under such Remedy
Note may be accelerated and declared immediately payable upon a default in any
payment by the Company under such Remedy Note, which is not cured within sixty
(60) days.
6.2 TRANSFER OF REMEDY RIGHT. The Remedy Right granted hereunder is not
------------------------
assignable except by an Investor to any party who acquires at least fifty
percent (50%) of the Preferred Shares originally issued to such Investor
hereunder (appropriately adjusted for recapitalizations, stock splits and the
like).
SECTION 7. RIGHT OF FIRST REFUSAL ON ISSUANCE OF NEW SECURITIES
----------------------------------------------------
7.1 GRANT OF RIGHT. The Company hereby grants to each Investor, for so
--------------
long as the Investors hold at least twenty percent (20%) of the Preferred
Shares, the right of first refusal to purchase its Pro Rata Share (as defined
below) of New Securities (as defined below) which the Company may, from time to
time, propose to sell and issue. A "Pro Rata Share," for purposes of this right
of first refusal, is the ratio that (a) the sum of the total number of shares of
Common Stock which are then held or obtainable by the Investor (including those
which each such Investor
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<PAGE>
has the right to obtain pursuant to exercise or conversion of any option,
warrant, right or convertible security) bears to (ii) the sum of the total
number of shares of Common Stock then outstanding and which are issuable
pursuant to exercise or conversion of any then outstanding options, warrants,
rights or convertible securities.
7.2 NEW SECURITIES. Except as set forth below, "New Securities" shall
--------------
mean any shares of capital stock of the Company, including Common Stock and any
series of preferred stock, whether now authorized or not, and rights, options or
warrants to purchase said shares of Common Stock or preferred stock, and
securities of any type whatsoever that are, or may become, convertible into or
exchangeable for said shares of Common Stock or preferred stock. Notwithstanding
the foregoing, the term "New Securities" does not include (a) the Conversion
Shares, (b) Warrant Shares, (c) securities issued pursuant to the acquisition of
another corporation by the Company by merger, purchase of all or substantially
all of the assets or other reorganization whereby the Company or its
stockholders own more than seventy-five percent (75%) of the voting power of the
surviving or successor corporation, (d) securities issued or sold in connection
with the Option Pool, (e) securities issued pursuant to any rights, agreements
or convertible securities, including, without limitation, options and warrants,
provided that the rights of first refusal established by this SECTION 7 applied
with respect to the initial sale or grant by the Company of such rights,
agreements or convertible securities, (f) securities issued pursuant to the
conversion of shares of the Company's Series D Preferred Stock or Series E
Preferred Stock, (g) securities issued pursuant to any warrant, option,
agreement or convertible security of the Company outstanding as of the date of
this Agreement (and disclosed in Schedule 2.5), (h) securities exempt from the
registration requirements of the Securities Act as a result of Regulation S
promulgated under the Securities Act, (i) securities issued in connection with
the acquisition of the remaining shares of the capital stock of North American
Environmental Group, Inc. by the Company or (j) securities issued in connection
with any stock split, stock dividend or recapitalization by the Company not
involving new financing.
7.3 NOTICE. In the event the Company proposes to undertake an issuance or
------
sale of New Securities, it shall give the Investors written notice of its
intention, describing the amount and type of New Securities, and the price and
general terms upon which the Company proposes to issue the same. Each Investor
shall have thirty (30) days from the date of receipt of any such notice to agree
to purchase up to its respective Pro Rata Share of such New Securities for the
price and upon the general terms specified in the notice by giving written
notice to the Company and stating therein the quantity of New Securities to be
purchased.
7.4 ELIGIBLE SALES TO THIRD PARTIES. After giving the notice and
-------------------------------
opportunity for each Investor to participate as required under SECTION 7.3
above, the Company shall have one hundred and twenty (120) days thereafter to
issue and sell the New Securities not elected nor eligible to be purchased by
the Investors at the price and upon the terms no more favorable to the
purchasers of such securities than specified in the Company's notice under
SECTION 7.3. In the event the Company has not sold such New Securities within
said one hundred and twenty (120) day period,
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the Company shall not thereafter issue or sell any New Securities without first
offering such securities in the manner provided above.
7.5 ASSIGNMENT. The right of first refusal hereunder is not assignable
----------
except by any Investor to any party who acquires at least fifty percent (50%) of
the Preferred Shares originally issued to such Investor hereunder and/or
Conversion Shares and the Warrant Shares (appropriately adjusted for
recapitalizations, stock splits and the like).
7.6 ACCREDITED INVESTOR. The rights granted to the Investors pursuant to
-------------------
this Section 7 shall only be exercisable by an Investor who demonstrates, at the
time of exercise of such rights, to the reasonable satisfaction of the Company,
that (a) such Investor is an "accredited investor," as defined in Regulation D
promulgated under the Securities Act or (b) another exemption from the
registration requirements of the Securities Act is available.
SECTION 8. SPECIAL DEFAULT.
---------------
8.1 VIOLATION IN USE OF PROCEEDS. Notwithstanding anything herein to the
----------------------------
contrary, any breach by the Company of the reported use of proceeds pursuant to
SECTION 4.3 hereof (without the prior written consent of NBCC) shall give each
Investor the right, in its sole and absolute discretion, to demand (and receive,
upon thirty (30) days' notice of such demand) repayment by the Company of the
amounts paid by such Investor to the Company hereunder (plus interest thereon at
the highest legal rate permitted under applicable law or SBA regulation). All
such amounts due hereunder shall be paid to such Investor by certified check,
cashier's check or wire transfer. In the event an Investor demands and receives
such repayment, the Preferred Shares and Warrants issued to such Investor
pursuant to this Agreement (and the Conversion Shares and Warrant Shares into
which such Preferred Shares or Warrants may from time to time have been
converted or exercised for) shall be surrendered by such Investor to the
Company, duly endorsed in blank, accompanied by such supporting documents as may
be necessary to pass to the Company good title to such securities, free and
clear of all liens (other than restrictions under applicable securities laws
and/or the Stockholders' Agreement) and, at the option of the Company, canceled
by the Company. Notwithstanding the foregoing, however, to the extent that SBA
regulations permit the Company to cure any default under this SECTION 8.1, the
Company may cure such default prior to the expiration of the 30-day notice
period above, and in such case the rights of the Investors to require the
Company to repurchase any of their Preferred Shares, Warrants, Conversion Shares
and Warrant Shares to the Company under this SECTION 8.1 shall cease with
respect to such default. Any such cure shall in no way be deemed to limit an
Investor's rights under this SECTION 8.1 with respect to any subsequent default.
Nothing in this SECTION 8.1 shall be construed to restrict or otherwise limit an
Investor's right to seek all other remedies available to it as provided
hereunder, or at law or in equity, including the remedy of specific performance.
The provisions of this SECTION 8.1 shall expire upon evidence satisfactory to
NBCC that the Company has utilized the proceeds received pursuant to this
Agreement in a manner that is consistent with their use reported to the SBA on
SBA Form 1031. The rights of an Investor
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<PAGE>
pursuant to this SECTION 8 shall not be transferrable or assignable except to an
affiliate of such Investor.
SECTION 9. GENERAL.
-------
9.1 AMENDMENTS, WAIVERS AND CONSENTS. Except as otherwise provided
--------------------------------
herein, any consents required and any waiver, amendment or other action of the
Investors or holders of the Preferred Shares and Warrants (or Conversion Shares
and Warrant Shares) may be made by consent(s) in writing signed by at least two
(2) holders of Preferred Shares holding in the aggregate at least two-thirds of
the Preferred Shares and Warrants (including, for such purposes, any Conversion
Shares or Warrant Shares into which any of the Preferred Shares or Warrants have
been converted into or exercised for that have not been sold to the public).
Any amendment or waiver made according to this paragraph will be binding upon
each holder of any securities purchased under this Agreement at the time
outstanding (including securities into which such securities have been
converted) and each future holder. Any amendment or waiver by the Company must
be made in writing.
9.2 SURVIVAL; ASSIGNABILITY OF RIGHTS. All representations of the parties
---------------------------------
made in this Agreement and in the certificates, exhibits, schedules or other
written information delivered or furnished by one party to the other in
connection with this Agreement will survive the delivery of the Preferred Shares
for a period of three (3) years. Except as otherwise expressly provided for
herein, all covenants and agreements made in this Agreement will survive
Closing, and will bind and inure to the benefit of the parties' successors and
assigns.
9.3 GOVERNING LAW. THIS AGREEMENT IS TO BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO THE
CHOICE OF LAW PROVISIONS THEREOF.
9.4 COUNTERPARTS. This Agreement may be executed simultaneously in any
------------
number of counterparts, each of which will be taken to be an original, but such
counterparts will together constitute one document.
9.5 NOTICES AND DEMANDS. Any notice or demand which is permitted or
-------------------
required hereunder will be deemed to have been sufficiently received (except as
otherwise provided herein) (a) upon receipt when personally delivered, (b) one
(1) day after sent by overnight delivery or telecopy providing confirmation or
receipt of delivery, or (c) three (3) days after being sent by certified or
registered mail, postage and charges prepaid, return receipt requested to the
following addresses: if to the Company or an Operating Subsidiary, at the
address as shown on the signature page of this Agreement, or at any other
address designated by such corporation to the Investors in writing; if to the
Investors, at its mailing address as shown on Exhibit A, or at any other address
designated by the Investors to the Company in writing.
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9.6 SEVERABILITY. If any provision of this Agreement is held invalid
------------
under applicable law, such provision will be ineffective to the extent of such
invalidity, and such invalid provision will be modified to the extent necessary
to make it valid and enforceable. Any such invalidity will not invalidate the
remainder of this Agreement.
9.7 EXPENSES; SPECIFIC ENFORCEMENT. The Company will pay (a) all costs
------------------------------
and expenses that it incurs with respect to the negotiation, execution, delivery
and performance of this Agreement, and (b) the reasonable out-of-pocket expenses
of the Investors and the reasonable legal fees and disbursements incurred by one
counsel for the Investors (up to a maximum of $25,000) with respect to this
Agreement and the transactions contemplated hereby. The Investors, other than
Pecaut Capital Investors, L.P. and Pecaut Partners, a limited partnership,
designate Jenkens & Gilchrist, a Professional Corporation, as their counsel for
this transaction. The parties agree that the rights created by this Agreement
are unique and that the loss of any such right is not susceptible to monetary
quantification. Consequently, the parties agree that an action for specific
enforcement (including for temporary and/or permanent injunctive relief) is a
proper remedy for the breach of the provisions of this Agreement, without the
necessity of proving actual damages. If either party is required to take any
action to enforce its rights under this Agreement, the prevailing party shall be
entitled to its reasonable expenses, including attorneys' fees, in connection
with any such action.
9.8 ENTIRE AGREEMENT. This Agreement (including the schedules and
----------------
exhibits hereto) and the agreements referenced as exhibits to this Agreement
constitute the entire agreement of the parties, and supersede any prior
agreements.
41
<PAGE>
The undersigned have executed this Agreement as of the day and year first
written above.
COMPANY:
NORTH AMERICAN TECHNOLOGIES GROUP,
INC.
/s/ Tim B. Tarrillion,
By: ------------------------------------------
Tim B. Tarrillion, President and Chief
Executive Officer
Address for notices:
4710 Bellaire Boulevard
Suite 301
Bellaire, TX 77401
Telephone: (713) 662-2699
Telecopy: (713) 662-2378
Attention: Tim B. Tarrillion
OPERATING SUBSIDIARIES:
EET, Inc.
/s/ Tim B. Tarrillion
By: ------------------------------------------
Tim B. Tarrillion, Vice President
Address for notices:
4710 Bellaire Boulevard
Suite 301
Bellaire, TX 77401
Telephone: (713) 662-2699
Telecopy: (713) 662-2378
Attention: Tim B. Tarrillion
<PAGE>
Industrial Pipe Fittings, Inc.
/s/ Tim B. Tarrillion
By: ------------------------------------------
Tim B. Tarrillion, Vice President
Address for notices:
4710 Bellaire Boulevard
Suite 301
Bellaire, TX 77401
Telephone: (713) 662-2699
Telecopy: (713) 662-2378
Attention: Tim B. Tarrillion
GAIA Technologies, Inc.
/s/ Tim B. Tarrillion
By: ------------------------------------------
Tim B. Tarrillion, Vice President
Address for notices:
4710 Bellaire Boulevard
Suite 301
Bellaire, TX 77401
Telephone: (713) 662-2699
Telecopy: (713) 662-2378
Attention: Tim B. Tarrillion
<PAGE>
North American Environmental Group, Inc.
/s/ Tim B. Tarrillion
By: ------------------------------------------
Tim B. Tarrillion, Vice President
Address for notices:
4710 Bellaire Boulevard
Suite 301
Bellaire, TX 77401
Telephone: (713) 662-2699
Telecopy: (713) 662-2378
Attention: Tim B. Tarrillion
<PAGE>
NBCC:
NATIONSBANC CAPITAL CORPORATION
/s/ Douglas C. Williamson
By: ------------------------------------------
Name: Douglas C. Williamson
Title: Senior Vice President
Address for notices:
901 Main Street, 66th Floor
Dallas, Texas 75202-2911
Telephone: 214-508-0979
Facsimile: 214-508-0604
Attention: Douglas C. Williamson
INVESTORS:
R. CHANEY & PARTNERS-1993 L.P.
By: R. CHANEY & CO., INC.
/s/ Robert H. Chaney
By: -------------------------------------
Robert H. Chaney, President & CEO
Address for notices:
909 Fannin, Suite 1275
Two Houston Center
Houston, TX 77010-1006
Telephone: 713-753-1315
Facsimile: 713-750-0021
Attention: Robert H. Chaney
<PAGE>
THE CCG CHARITABLE REMAINDER
UNITRUST #1
By: CCG VENTURE PARTNERS, LLC
/s/ Mark E. Leyerle
By: --------------------------------------
Mark E. Leyerle, Manager
Address for notices:
14450 T.C. Jester Blvd., #170
Houston, TX 77014
Telephone: 713-893-8331
Facsimile: 713-893-2420
Attention: Mark E. Leyerle
HARRISON INTERESTS, LTD.
/s/ Ed Knight
By: ------------------------------------------
Ed Knight, Attorney-in-Fact
Address for notices:
Texas Commerce Bank Bldg., Suite 1900
Houston, TX 77002-3299
Telephone: 713-228-5911
Facsimile: 713-225-1565
Attention:
-----------------------------------
<PAGE>
/s/ Robert L. Zinn
---------------------------------------------
Robert L. Zinn
Address for notices:
c/o Zinn Petroleum Co.
1200 Smith, Suite 2910
Houston, TX 77002
Telephone: 713-655-9521
Facsimile: 713-655-9525
Attention:
----------------------------------
/s/ Robert L. Zinn
---------------------------------------------
Robert L. Zinn, as Attorney and
Agent-in-Fact for Natalie Z. Haar
Address for notices:
c/o Zinn Petroleum Co.
1200 Smith, Suite 2910
Houston, TX 77002
Telephone: 713-655-9521
Facsimile: 713-655-9525
Attention:
----------------------------------
ESTATE OF WILLIAM G. HELIS,
A LOUISIANA PARTNERSHIP
By: /s/ David A. Kerstein
-----------------------------------------
David A. Kerstein, General Agent
Address for notices:
228 St. Charles Avenue, Suite 912
New Orleans, LA 70130
Telephone: 504-523-1831
Facsimile: 504-522-6486
Attention:
----------------------------------
PECAUT CAPITAL INVESTORS, L.P.
<PAGE>
By: /s/ Daniel Pecaut
------------------------------------------
Daniel Pecaut, General Partner
Address for notices:
511 6th Street
Sioux City, Iowa 51101
Telephone: 1-800-779-7326
Facsimile: 212-252-4996
Attention:
-----------------------------------
PECAUT PARTNERS,
A LIMITED PARTNERSHIP
By: /s/ Daniel Pecaut
------------------------------------------
Daniel Pecaut, General Partner
Address for notices:
511 6th Street
Sioux City, Iowa 51101
Telephone: 1-800-779-7326
Facsimile: 212-252-4996
Attention:
-----------------------------------
<PAGE>
EXHIBIT 10.17
STOCKHOLDERS' AGREEMENT
This Stockholders' Agreement (this "Agreement") is made and entered into as
of this 5th day of April 1996, by and among North American Technologies Group,
Inc., a Delaware corporation (the "Company"), Tim B. Tarrillion, Judith Knight
Shields, David M. Daniels and Donovan W. Boyd (each, a "Management Stockholder",
and collectively, the "Management Stockholders"), and certain other stockholders
of the Company listed on the signature pages hereto (each, an "Investor", and
collectively, the "Investors" and, together with the Management Stockholders,
the "Stockholders"). Additional persons may be added to this Agreement as
"Stockholders" if they so consent, which consent shall be evidenced by execution
of a signature page hereto.
R E C I T A L S:
---------------
A. Each of the Stockholders is now or may hereafter be the owner of shares
of the Company's Common Stock, $.001 par value per share (the "Common Stock"),
Series F Preferred Stock, $.001 par value per share (the "Preferred Stock"),
and/or Warrants (as defined herein).
B. The Investors and the Company are parties to that certain Stock and
Warrant Purchase Agreement, dated as of the date hereof (the "Purchase
Agreement").
C. The obligations of the Company and the Investors under the Purchase
Agreement are conditioned, among other things, upon the execution and delivery
of this Agreement by the Company, the Management Stockholders and the Investors.
D. The Company, the Management Stockholders and the Investors desire to be
granted the rights created herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the undersigned parties hereto
agree as follows:
1. DEFINITIONS.
-----------
(a) All capitalized terms used and not otherwise defined herein shall
have the meanings given them in the Purchase Agreement.
(b) A "Permitted Transferee" shall mean a Stockholder's or any
--------------------
Permitted Transferee's, as the case may be, Affiliate (as defined herein),
spouse, siblings, ancestors and descendants (whether natural or adopted), any
spouses of such siblings, ancestors or descendants, or any trust for the benefit
of such person or persons, provided that such Permitted Transferee agrees to be
bound by the terms of this Agreement.
<PAGE>
(c) An "Affiliate" shall mean, with respect to any corporation,
---------
limited liability company, partnership, limited partnership, joint venture,
joint stock company, firm, company, syndicate, trust, estate, association,
governmental authority, business, organization or any other incorporated or
unincorporated entity (each a "Person"), any other Person that directly or
indirectly, through one or more intermediaries, controls or is controlled by, or
is under common control with, such Person.
(d) A "Remaining Pro Rata Share" shall mean the ratio that (i) the sum
------------------------
of the number of shares of Common Stock then held by each Eligible Offeree (as
defined below) and the number of shares of Common Stock issuable upon exercise
of any options and warrants (including, without limitation, the Warrants) and
upon conversion of shares of Preferred Stock then held by such Eligible Offeree
bears to (ii) the sum of the total number of shares of Common Stock then held by
all Eligible Offerees and the number of shares of Common Stock issuable upon
exercise of any options and warrants (including, without limitation, the
Warrants) and upon conversion of all shares of then outstanding Preferred Stock
held by all Eligible Offerees.
(e) A "Co-Sale Pro Rata Share" shall mean the ratio that (i) the sum
----------------------
of the number of shares of Common Stock then held by the Eligible Seller (as
defined below) and the number of shares of Common Stock issuable upon exercise
of any options and warrants (including, without limitation, the Warrants) and
upon conversion of shares of Preferred Stock then held by such Eligible Seller
bears to (ii) the sum of the total number of shares of Common Stock then held by
all Eligible Sellers and the number of shares of Common Stock issuable upon
exercise of any options and warrants (including, without limitation, the
Warrants) and upon conversion of all shares of then outstanding Preferred Stock
held by all Eligible Sellers plus the number of shares of Common Stock then held
by the Stockholder or Permitted Transferee proposing to sell his or its shares
of Common Stock or Preferred Stock or Warrants.
(f) "Warrants" shall mean the Warrants exercisable for shares of the
--------
Company's Common Stock, issued or issuable pursuant to the Purchase Agreement.
(g) A "Public Market Transaction" shall mean a sale, transfer or
-------------------------
assignment that complies with the "manner of sale" provisions set out in Rule
144(f), as amended from time to time, promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, as amended from time to time.
2. RIGHT OF FIRST REFUSAL.
----------------------
(a) Subject to the provisions of SECTION 5, in the event that (i) a
Management Stockholder (or his Permitted Transferee) or (ii) an Investor (or his
Permitted Transferee) owning in the aggregate one percent (1%) or more of the
Common Stock of the Company, including shares of Common Stock issuable upon
conversion of shares of Preferred Stock or upon exercise of any Warrants (on a
fully diluted basis and as adjusted to reflect any stock split, stock dividend,
recapitalization and the like), proposes to transfer any of his or its shares of
Common Stock or Preferred Stock or Warrants (or shares of Common Stock issuable
upon exercise of any
2
<PAGE>
Warrants), such Management Stockholder, Investor or Permitted Transferee shall
give the Company written notice of the price, terms and conditions of the
proposed sale. The Company shall have fifteen (15) days from the date of receipt
of any such notice to agree to purchase up to all of such securities, for the
price and upon the terms and conditions specified in the notice, by delivering
written notice to such Management Stockholder, Investor or Permitted Transferee
stating therein the quantity of securities to be purchased up to all of such
securities.
(b) In the event that the Company determines not to purchase all of
such securities that such Management Stockholder, Investor or Permitted
Transferee proposes to transfer within the fifteen (15) day period specified in
SECTION 2(A) hereof, such Management Stockholder, Investor or Permitted
Transferee shall then give the remaining Investors and/or the remaining
Investors' Permitted Transferees or Permitted Assigns (as defined in SECTION 10)
(collectively, the "Eligible Offerees") written notice of the price, terms and
conditions of the proposed sale (which shall be the same price, terms and
conditions specified in the notice to the Company pursuant to SECTION 2(A)
above). Each Eligible Offeree shall have fifteen (15) days from the date of
receipt of any such notice to agree to purchase up to his or its Remaining Pro
Rata Share of such securities, for the price and upon the terms and conditions
specified in the notice, by giving written notice to such Management
Stockholder, Investor or Permitted Transferee stating therein the quantity of
securities to be purchased up to his or its Remaining Pro Rata Share. If any
Eligible Offeree fails to agree to purchase his or its full Remaining Pro Rata
Share within such fifteen (15) day period, the Management Stockholder, Investor
or Permitted Transferee selling such securities will then give the Eligible
Offerees who did so agree (the "Electing Offerees") notice of the number and
amount of such securities which were not subscribed for. Such notice may be by
telephone if followed by written confirmation within two (2) days. The Electing
Offerees shall have five (5) days from the date of such second notice to agree
to purchase his or its Remaining Pro Rata Share (or such greater amount as such
Electing Offerees agree upon) of all or any part of the securities not purchased
by such other Eligible Offerees. For purposes of the second election under this
SECTION 2(B), securities held by Eligible Offerees other than Electing Offerees
shall be excluded from SECTION 1(D)(II) for the definition of a "Remaining Pro
Rata Share."
(c) Notwithstanding anything to the contrary in this SECTION 2, the
Company and the Eligible Offerees may not exercise the rights set forth in this
SECTION 2 unless they, individually or in the aggregate, purchase all and not
less than all, of the securities proposed to be transferred pursuant to the
notice to the Company pursuant to SECTION 2(A) above.
(d) Subject to the provisions of SECTION 3, in the event the Company
and the Eligible Offerees fail to purchase all of the securities proposed to be
transferred within the said fifteen (15) day period in the case of the Company,
plus the fifteen (15) day period and the five (5) day period specified above in
the case of the Eligible Offerees and Electing Offerees, respectively, such
Management Stockholder, Investor or Permitted Transferee shall have ninety (90)
days thereafter to sell the securities proposed to be transferred at the price
and upon the terms and conditions no more favorable to the purchasers of such
securities than specified in the notice
3
<PAGE>
to the Company pursuant to SECTION 2(A) above. In the event such Management
Stockholder, Investor or Permitted Transferee has not sold the securities within
said ninety (90) day period, such Management Stockholder, Investor or Permitted
Transferee shall not thereafter sell any of his or its securities without first
offering such securities in the manner provided above.
3. RIGHT OF PARTICIPATION. Subject to the provisions of SECTION 5 and,
----------------------
notwithstanding the foregoing SECTION 2(D), during the term of this Agreement,
no Management Stockholder or Permitted Transferee of a Management Stockholder
(whether the first or a subsequent Permitted Transferee) and no Investor or
Permitted Transferee of an Investor (whether the first or a subsequent Permitted
Transferee) may sell, assign or transfer any of their shares of Common Stock or
Preferred Stock or any Warrants (or shares of Common Stock issuable upon
exercise of any Warrants) until the Investors and the Investors' Permitted
Transferees and Permitted Assigns (the "Eligible Sellers") shall have been given
the opportunity, exercisable within twenty (20) days from the date of notice to
the Eligible Sellers by such Management Stockholder, Investor or such Permitted
Transferee, to sell to the proposed transferee or transferees, upon the same
terms and conditions offered to the Management Stockholder, Investor or such
Permitted Transferee, its Co-Sale Pro Rata Share of the securities proposed to
be sold. If an Eligible Seller fails to notify the Management Stockholder,
Investor or such Permitted Transferee within[twenty (20) days after the notice
given pursuant hereto, it shall be deemed to have waived its right under this
SECTION 3. Any sale or transfer made pursuant to this SECTION 3 shall be
consummated within ninety (90) days of the date of the notice given pursuant to
SECTION 2(B) above and shall be conditioned upon the agreement of the proposed
transferee or transferees that such proposed transferee or transferees will
purchase each Eligible Seller's Co-Sale Pro Rata Share of the securities
proposed to be sold. The provisions of this SECTION 3 shall not be applicable
to any Public Market Transaction.
4. Voting Agreement.
----------------
(a) Investor Nominees. For so long as the Investors and the
-----------------
Investors' Permitted Transferees or Permitted Assigns own any shares of
Preferred Stock, the Company agrees to nominate to, and the Management
Stockholders and their Permitted Transferees agree to use their best efforts to
cause to be elected to, the Company's Board of Directors, such designees as are
provided for in Section 4.11 of the Purchase Agreement.
(b) VOTING. In causing nominees to be elected to the Company's Board
------
of Directors in accordance with this SECTION 4, the Investors, the Management
Stockholders and their Permitted Transferees, shall vote all of their shares of
Common Stock, Preferred Stock, Conversion Shares and/or Warrant Shares, if any,
then owned beneficially (to the maximum extent that such person has the right to
vote or direct the vote of such shares) by such person in favor of electing the
nominees designated pursuant to SECTION 4(A) to the Company's Board of
Directors.
4
<PAGE>
(c) BOARD OF DIRECTORS. Each Management Stockholder and each
------------------
Permitted Transferee of a Management Stockholder hereby covenants and agrees
that, except as consistent with the terms of SECTION 4(A), he or it shall take
no action to decrease the number of members on the Board of Directors to less
than nine (9).
5. EXCEPTIONS; PROHIBITIONS.
------------------------
(a) Each Stockholder may transfer any shares of Common Stock,
Preferred Stock or the Warrants (or shares of Common Stock issuable upon
exercise of any Warrants) to a Permitted Transferee provided that such Permitted
Transferee agrees to be bound by this Agreement, with respect to such
transferred shares of Common Stock, Preferred Stock or the Warrants (or shares
of Common Stock issuable upon exercise of any Warrants). Such transfers shall
not be subject to the provisions of SECTION 2 or SECTION 3.
(b) Except as otherwise provided in SECTION 5(C) below, and
notwithstanding anything in this Agreement to the contrary, the provisions of
this Agreement shall not apply to the sale, transfer or assignment of shares of
Common Stock by a Management Stockholder (and a Management Stockholder may sell,
transfer or assign shares of Common Stock without complying with any of the
terms of this Agreement), so long as both of the following conditions are met:
(i) the number of shares of Common Stock included in such sale,
transfer or assignment, when aggregated with all other sales,
transfers and assignments made pursuant to this SECTION 5(B) during
the same calendar year by such Management Stockholder, does not exceed
the greater of (x) 15% of the number of shares of Common Stock
(determined on a fully diluted basis, including all shares of Common
Stock into which any warrant, option or convertible security may be
exercised, exchanged or converted, as applicable) owned by such
Management Stockholder on the first day of such year or (y) 30,000
shares of Common Stock; and
(ii) such sale, transfer or assignment is either (x) a sale,
transfer or assignment to one or more of such Management Stockholders'
spouse, siblings, ancestors or descendants (whether natural or
adopted), any spouse of such siblings, ancestors or descendants, or
any trust for the benefit of one or more of such persons, or to any
charitable or tax-exempt organization, foundation or educational
institution or (y) a Public Market Transaction.
Notwithstanding anything in this Agreement to the contrary, any shares of Common
Stock so sold, transferred or assigned as described above shall not be subject
to the restrictions, nor shall they be entitled to the rights, set out in this
Agreement, and the party or parties to whom such shares are sold, transferred or
assigned shall not be subject to the provisions, nor shall they be entitled to
the rights, set out in this Agreement with respect to such shares.
5
<PAGE>
(c) In addition to (and not by way of limitation of) the other
provisions of this Agreement, without the prior written consent of the holders
of a majority in interest of the total number of shares of Common Stock,
Preferred Stock and Warrants (counted on an as-converted into Common Stock
basis) then held by the Investors and the Investors' Permitted Assigns, no
Management Stockholder may sell, transfer or assign in the aggregate (together
with all other sales, transfers or assignments during the term of this Agreement
by such Management Stockholder) during the term of this Agreement a number of
shares of Common Stock that exceeds 50% of the number of shares of Common Stock
(determined on a fully diluted basis, including all shares of Common Stock into
which any warrant, option or convertible security may be exercised, exchanged or
converted, as applicable) owned of record or beneficially on the date of this
Agreement by such Management Stockholder. The provisions of this SECTION 5(C) do
not apply to any sale, transfer or assignment made pursuant to SECTION 5(A),
5(E) or 5(F) hereof.
(d) Notwithstanding anything in this Agreement to the contrary, the
provisions of this Agreement shall not apply to any shares of Common Stock or
options, warrants or rights to acquire shares of Common Stock sold, transferred
or assigned by a Management Stockholder prior to the date of this Agreement,
regardless of whether or not such shares are held by a Permitted Transferee of
such Management Stockholder; and any Permitted Transferee of such Management
Stockholder shall not be bound by the provisions of this Agreement with respect
to any such shares, options, warrants or rights that were so sold, transferred
or assigned to such Permitted Transferee prior to the date of this Agreement.
(e) Notwithstanding any other provision of this Agreement to the
contrary, the provisions of this Agreement shall not apply to any shares of
Common Stock acquired by a Management Stockholder after the date hereof in a
Public Market Transaction; and such shares so acquired shall not be counted in
the number of shares held by such Management Stockholder for the purposes of
this Agreement, and such Management Stockholder shall not be subject to the
provisions or entitled to the rights set out in this Agreement with respect to
such shares.
(f) Notwithstanding anything in this Agreement to the contrary, the
provisions of this Agreement shall not apply to the sale, transfer or assignment
to the Company of any right to acquire shares of Common Stock by a Management
Stockholder in connection with a so-called "cashless" exercise of an employee-
related option agreement.
6. PROHIBITED STOCK SALES. Notwithstanding anything else to the contrary
----------------------
in this Agreement, no Management Stockholder, Investor or Permitted Transferee
shall transfer any shares of Common Stock, Preferred Stock or the Warrants (or
shares of Common Stock issuable upon exercise of any Warrants) to any person or
entity reasonably determined by a majority of the Board of Directors to be a
competitor of the Company. The provisions of this SECTION 6 shall not apply to
any sale, transfer or assignment that constitutes a Public Market Transaction.
7. CHANGES IN STOCK. If, from time to time during the term of this
----------------
Agreement:
6
<PAGE>
(a) there is a dividend of any security, stock split or other change
in the character or amount of any of the outstanding securities of the Company,
or
(b) there is any consolidation or merger immediately following which
stockholders of the Company hold more than 50% of the voting equity securities
of the surviving corporation,
then, in such event, any and all new, substituted or additional securities or
other property (other than cash) to which any Management Stockholder, the
Investors or any holder of Preferred Stock, Conversion Shares or Warrant Shares
is entitled by reason of his ownership of the Preferred Shares, Conversion
Shares or Warrant Shares shall be immediately subject to the provisions of this
Agreement and be included for all purposes of this Agreement with the same force
and effect as the shares of Common Stock, Preferred Stock or the Warrants
presently subject to this Agreement and with respect to which such securities or
property were distributed.
8. LEGENDS. All certificates of the Management Stockholders (other than
--------
certificates representing shares of Common Stock currently held in broker
accounts, all of which shall nonetheless remain subject to the other provisions
of this Agreement, and such Management Stockholder owning the same shall
indemnify the Company and the other parties to this Agreement for any loss, cost
or damage suffered as a result of the failure of any such certificate to have a
legend placed on it as described in this SECTION 8) and the Investors
representing any shares of Common Stock or Preferred Stock or the Warrants (and
any of the same transferred on or after the date hereof by any such party to a
Permitted Transferee) subject to the provisions of this Agreement shall have
endorsed thereon a legend to substantially the following effect:
"THE RIGHT TO SELL, TRANSFER OR OTHERWISE DISPOSE OF OR PLEDGE THE
SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO CERTAIN
RESTRICTIONS, WHICH INCLUDE CO-SALE AND RIGHT OF FIRST REFUSAL RESTRICTIONS
ON THE SALE OF THE SECURITIES AND A VOTING AGREEMENT, SET FORTH IN A
STOCKHOLDERS' AGREEMENT. A COPY OF SUCH AGREEMENT IS ON FILE AT THE
CORPORATION'S PRINCIPAL PLACE OF BUSINESS AND ITS REGISTERED OFFICE."
9. TRANSFER OF STOCK. The Company shall not: (a) permit any transfer on
-----------------
its books of any shares of Common Stock or Preferred Stock or the Warrants which
shall have been sold or transferred in violation of any of the provisions set
forth in this Agreement or (b) treat as an owner of such shares of Common Stock
or Preferred Stock or the Warrants or accord the right to vote as an owner or to
pay dividends to any transferee to whom such shares of Common Stock or Preferred
Stock or the Warrants shall have been sold or transferred in violation of any of
the provisions set forth in this Agreement.
10. TRANSFER OF RIGHTS. The rights set forth in SECTION 2, SECTION 3 and
------------------
SECTION 4 are assignable or transferable by the Investors to any party (upon the
transfer of any shares of
7
<PAGE>
Preferred Stock, Conversion Shares, Warrants and/or Warrant Shares by Investors
to such party, an "Investor's Permitted Assign") in connection with the sale of
such securities to such party, so long as such Investor's Permitted Assign
agrees, in a written instrument to be bound by the terms and provisions of this
Agreement as if such party were an Investor.
11. TERMINATION. Except as otherwise provided herein, this Agreement
-----------
shall terminate upon the earliest to occur of:
(a) an agreement in writing by the Company, the Management
Stockholders (and/or their Permitted Transferees, as the case may be), and the
holders of a majority in interest of the Common Stock, Preferred Stock and
Warrants (counted on an as-converted into Common Stock basis) then held by the
Investors and the Investors' Permitted Transferees; or
(b) the consolidation, merger (but only with respect to a
consolidation or merger pursuant to which stockholders of the Company
(determined prior to such consolidation or merger) hold less than 50% of the
voting equity of the surviving corporation) or sale of all or substantially all
of the assets of the Company; or
(c) on the anniversary date of this Agreement in the year 2004; or
(d) in addition (and not by way of limitation of the foregoing), all
rights and obligations of any Management Stockholder and his or her Permitted
Transferees under this Agreement shall immediately terminate and be of no
further force or effect upon the termination of such Management Stockholder's
employment in all capacities with the Company and its wholly-owned subsidiaries,
regardless of the cause of such termination.
12. AMENDMENT. Any provision of this Agreement may be amended or the
---------
observance thereof may be waived (either generally or in a particular instance
and either retroactively or prospectively) only with the written consent of the
Company, the Management Stockholders and their Permitted Transferees holding a
majority in interest of the shares of Common Stock then held by such Management
Stockholders or their Permitted Transferees on any applicable date and the
holders of a majority in interest of the total number of shares of Common Stock,
Preferred Stock and Warrants (counted on an as-converted into Common Stock
basis) then held by the Investors and the Investors' Permitted Transferees. Any
amendment or waiver effected in accordance with this SECTION 12 shall be binding
upon the Investors, each Management Stockholder, each Permitted Transferee and
the Company.
13. GOVERNING LAW. This Agreement and the legal relations between the
-------------
parties arising hereunder shall be governed by and interpreted in accordance
with the laws of the State of Delaware. The parties hereto agree to submit to
the jurisdiction of the federal and state courts of the State of Texas with
respect to the breach or interpretation of this Agreement or the enforcement of
any and all rights, duties, liabilities, obligations, powers, and other
relations between the parties arising under this Agreement.
8
<PAGE>
14. ENTIRE AGREEMENT. This Agreement, and the Purchase Agreement,
----------------
including all exhibits, schedules and attachments thereto, constitute the full
and entire understanding and agreement between the parties regarding the matters
set forth herein. Except as otherwise expressly provided herein, the provisions
hereof shall inure to the benefit of, and be binding upon the successors,
assigns, heirs, executors and administrators of the parties hereto.
15. NOTICES, ETC. Except as otherwise specifically provided herein, all
-------------
notices and other communications required or permitted hereunder shall be in
writing and shall be deemed effectively given upon personal delivery to the
party to be notified or three (3) days after deposit with the United States
mail, by registered or certified mail, postage prepaid, addressed (a) if to an
Investor, at such Investor's address as set forth on EXHIBIT A attached to the
Purchase Agreement, or at such other address as such Investor shall have
furnished to the Company in writing in accordance with this SECTION 15, (b) if
to a Management Stockholder, at such address as such Management Stockholder
shall have last furnished the Company in writing, or (c) if to the Company, at
its principal office.
16. COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
17. SPECIFIC PERFORMANCE. The Company, the Management Stockholders and
--------------------
the Investors agree that the rights created by this Agreement are unique, and
that the loss of any such right is not susceptible to monetary quantification.
Consequently, the parties agree that an action for specific performance
(including for temporary and/or permanent injunctive relief) of the obligations
created by this Agreement is a proper remedy for the breach of the provisions of
this Agreement, without the necessity of proving actual damages. If the parties
hereto are forced to institute legal proceedings to enforce their rights in
accordance with the provisions of this Agreement, the prevailing party shall be
entitled to recover its reasonable expenses, including attorneys' fees, in
connection with any such action.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
"COMPANY"
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
a Delaware corporation
By: /s/ Tim B. Tarrillion
------------------------------------
Tim B. Tarrillion, President
and Chief Executive Officer
"MANAGEMENT STOCKHOLDERS"
/s/ Tim B. Tarrillion
- -----------------------------
Name: Tim B. Tarrillion
/s/ Judith Knight Shields
- -----------------------------
Name: Judith Knight Shields
/s/ David M. Daniels
- -----------------------------
Name: David M. Daniels
/s/ Donovan W. Boyd
- -----------------------------
Name: Donovan W. Boyd
<PAGE>
"INVESTORS"
NATIONSBANC CAPITAL CORPORATION,
a Texas corporation
By: /s/ Douglas C. Williamson
-------------------------------
Name: Douglas C. Williamson
Title: Senior Vice President
R. CHANEY & PARTNERS - 1993 L.P.
By: R. Chaney & Co., Inc.
By: /s/ Robert H. Chaney
--------------------------
Robert H. Chaney, President & CEO
THE CCG CHARITABLE REMAINDER UNITRUST #1
By: CCG Venture Partners, LLC
By: /s/ Mark E. Leyerle
--------------------------
Mark E. Leyerle, Manager
HARRISON INTERESTS, LTD.
By: /s/ Ed Knight
-------------------------------
Ed Knight, Attorney-in-Fact
/s/ Robert L. Zinn
- ----------------------------------
Robert L. Zinn
/s/ Robert L. Zinn
- ----------------------------------
Robert L. Zinn, as Attorney and
Agent-in-Fact for Natalie Haar
<PAGE>
ESTATE OF WILLIAM G. HELIS, A
LOUISIANA PARTNERSHIP
By: /s/ David A. Kerstein
------------------------------------
David A. Kerstein, General Agent
PECAUT CAPITAL INVESTORS, L.P.
By: /s/ Daniel Pecaut
------------------------------------
Daniel Pecaut, General Partner
PECAUT PARTNERS, A LIMITED PARTNERSHIP
By: /s/ Daniel Pecaut
------------------------------------
Daniel Pecaut, General Partner
<PAGE>
EXHIBIT 10.18
THIS WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"),
OR APPLICABLE STATE SECURITIES LAWS (THE "STATE ACTS"), AND SHALL NOT BE SOLD,
PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED (WHETHER OR NOT FOR
CONSIDERATION) BY THE HOLDER EXCEPT BY REGISTRATION OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UPON THE ISSUANCE TO THE COMPANY OF A FAVORABLE OPINION OF
COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT
THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE 1933 ACT AND THE STATE
ACTS.
THE RIGHT TO SELL, TRANSFER OR OTHERWISE DISPOSE OF OR PLEDGE THIS WARRANT AND
THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO CERTAIN
RESTRICTIONS, WHICH INCLUDE CO-SALE AND RIGHT OF FIRST REFUSAL RESTRICTIONS ON
THE SALE OF THE SECURITIES AND A VOTING AGREEMENT, SET FORTH IN A STOCKHOLDERS'
AGREEMENT. A COPY OF SUCH AGREEMENT IS ON FILE AT THE CORPORATION'S PRINCIPAL
PLACE OF BUSINESS AND ITS REGISTERED OFFICE.
_________ Shares of Common Stock Warrant No. 1996-___
WARRANT
To Purchase the Common Stock of
North American Technologies Group, Inc.
1. GRANT OF WARRANT. THIS IS TO CERTIFY THAT _____________________, a
----------------
____________________, or its permitted registered assigns ("Holder"), is
entitled to exercise this Warrant to purchase from North American Technologies
Group, Inc., a Delaware corporation ("Company"), ___________________ (_______)
shares of common stock, par value $0.001 per share, of the Company (the "Common
Stock"), all on the terms and conditions and pursuant to the provisions
hereinafter set forth. This Warrant is being granted pursuant to the terms of
that certain Stock and Warrant Purchase Agreement, of even date herewith (the
"Agreement"), by and among the Company, Holder and certain other parties, and
the Company and Holder intend to be bound hereby and thereby. Any capitalized
terms not defined herein will have the meanings set forth in the Agreement.
2. EXERCISE PRICE. The exercise price per share of Common Stock shall be
--------------
$1.00 (the "Exercise Price"). Such Exercise Price and the number of shares of
Common Stock into which this Warrant is exercisable are subject to adjustment
from time to time as provided herein.
<PAGE>
3. EXERCISE PERIOD. This Warrant is exercisable at any time or from time
---------------
to time on or before April 8, 2004 (the "Expiration Date"), subject to the
remaining provisions of this SECTION 3. If, prior to the Expiration Date, the
Company gives written notice to Holder to the effect that (a) the average of the
last reported sale prices of Common Stock for the Trading Days (as defined
herein) included within a six-month period ending immediately prior to the date
of such notice (the "Subject Period") is equal to or greater than $5.00 per
share and (b) during the Subject Period, Holder could have exercised its rights
to effect a "Demand Registration", a "Piggyback Registration", or a registration
on Form S-3, as such terms are defined or used in SECTION 5 of the Agreement,
then Holder must, within thirty (30) days after receipt of such notice, elect to
exercise its right hereunder to purchase Common Stock in an amount equal to X
minus Y (but not less than zero), where "X" is equal to forty percent (40%) of
the total number shares of Common Stock which Holder may purchase as of the date
of the original issuance of this Warrant, and where "Y" is equal to the
aggregate number of shares of Common Stock which Holder has previously elected
to purchase pursuant to the terms of this Warrant. The failure of Holder to
exercise its right to purchase such shares of Common Stock within the
aforementioned 30-day period shall mean that Holder shall have waived forever
its rights hereunder to so purchase such shares of Common Stock, and such right
to purchase such shares shall automatically terminate. As used above in this
SECTION 3 with respect to Common Stock, the last reported sales price per share
shall mean the reported closing sales price per share on the principal national
securities exchange on which the shares of Common Stock are at the time listed
on such day, or, if no such sale takes place on a day, the average of the
reported closing bid and asked prices, or, if the shares of Common Stock shall
not be so listed, the average of the high bid and low ask prices in the
over-the-counter market as report by the National Association of Securities
Dealers' Automated Quotation System, or, if not so reported, as reported by the
National Quotation Bureau, Inc., or any successor thereof, or, if not so
reported, the average of the closing bid and asked prices as furnished by any
member of the National Association of Securities Dealers, Inc. selected from
time to time by the Company for that purpose. As used in this SECTION 3, the
term "Trading Days" shall mean (i) if the Common Stock is listed or admitted for
trading on any national securities exchange, days on which such national
securities exchange is open for business or (ii) if the Common Stock is quoted
on the National Association of Securities Dealers' Automated Quotation System or
any similar system of automated dissemination of quotations of securities
prices, days on which trades may be made on such system.
4. EXERCISE PROCEDURE.
------------------
(a) In order to exercise this Warrant, in whole or in part, Holder
shall deliver to the Company at its principal office at 4710 Bellaire
Blvd., Suite 301, Bellaire, Texas 77401, or at such other office as shall
be designated by the Company pursuant to the Agreement:
(i) written notice of Holder's election to exercise this
Warrant, which notice shall specify the number of shares of Common
Stock to be purchased pursuant to such exercise;
2
<PAGE>
(ii) either (A) cash payable to the order of the Company, or
(B) notice that the exercise price is satisfied by reduction of the
number of shares to be received by Holder upon exercise of this
Warrant as provided in SECTION 5 below, with the amount of such
reduction of shares specified in such notice; in each case such cash
payment or reduction of shares to be in an amount equal to the
aggregate purchase price for all shares of Common Stock to be
purchased pursuant to such exercise; and
(iii) this Warrant, properly indorsed.
(b) Upon receipt thereof, the Company shall, as promptly as
practicable, and in any event within ten (10) days thereafter, execute and
deliver or cause to be executed and delivered to such Holder a certificate
or certificates representing the aggregate number of full shares of Common
Stock issuable upon such exercise. The stock certificate or certificates
so delivered shall be registered in the name of such Holder, or, subject to
the restrictions set forth in the Agreement, such other name as shall be
designated in said notice.
(c) This Warrant shall be deemed to have been exercised and such
certificate or certificates shall be deemed to have been issued, and such
Holder or any other person so designated to be named therein shall be
deemed to have become a Holder of record of such shares for all purposes,
as of the date that said notice, together with said payment and this
Warrant, is received by the Company as aforesaid. The Holder of this
Warrant shall not, by virtue of its ownership of this Warrant, be entitled
to any rights of a shareholder in the Company, either at law or in equity;
provided, however, such Holder shall, for all purposes, be deemed to have
become the Holder of record of such shares on the date on which this
Warrant is surrendered to the Company in the immediately preceding
sentence. If the exercise is for less than all of the shares of Common
Stock issuable, as provided in this Warrant, the Company will issue a new
Warrant of like tenor and date for the balance of such shares issuable
hereunder to Holder. The Holder of this Warrant, by its acceptance hereof,
consents to and agrees to be bound by and to comply with all of the
provisions of this Warrant.
(d) The Company shall use its best efforts to promptly cause its
Certificate of Incorporation to be amended, or other required related
action to be taken, so as to cause a sufficient number of shares of Common
Stock to be available and to be reserved to permit the exercise in full of
this Warrant and all other warrants of like tenor issued in connection with
the Agreement. In the event that, on the date the Holder exercises its
right to purchase shares of Common Stock in accordance with the terms
hereof, there is not then available a sufficient number of unreserved
shares of Common Stock or shares reserved for issuance in connection with
this Warrant to permit such exercise, then the Company shall, in lieu
thereof, issue as many shares of Common Stock so to be purchased as are
then available for exercise of this Warrant and pay to such exercising
Holder in cash, an amount equal to the product of: (i) the then current
fair market value of a share
3
<PAGE>
of Common Stock less the then existing Exercise Price of this Warrant (as
determined in accordance with the provisions of SECTION 9(E) of this
Warrant), multiplied by (ii) the number of shares of Common Stock that
would otherwise be required to have been delivered by the Company upon such
exercise but are then unavailable.
5. TAXES. The issuance of any capital stock or other certificate upon
-----
the exercise of this Warrant shall be made without charge to the registered
Holder hereof, or for any tax in respect of the issuance of such certificate;
provided, however, that the Company shall not be required to pay any tax which
results from the issuance and delivery of any capital stock or other certificate
upon the exercise of this Warrant in a name other than the Holder of this
Warrant.
6. TRANSFER.
--------
(a) Except as otherwise provided in the Agreement and the
Stockholders' Agreement, this Warrant and all options and rights hereunder
are transferable, as to all or any part of the number of shares of Common
Stock purchasable upon its exercise, by Holder hereof in person or by duly
authorized attorney on the books of the Company upon surrender of this
Warrant at the principal offices of the Company, together with the form of
transfer authorization attached hereto duly executed. The Company shall
deem and treat the registered Holder of this Warrant at any time as the
absolute owner hereof for all purposes and shall not be affected by any
notice to the contrary. If this Warrant is transferred in part, the
Company shall at the time of surrender of this Warrant, issue to the
transferee a Warrant covering the number of shares of Common Stock
transferred and to the transferor a Warrant covering the number of shares
of Common Stock not transferred.
(b) Anything in this Warrant to the contrary notwithstanding, if, at
the time of the surrender of this Warrant in connection with any exercise,
transfer, or exchange of this Warrant, this Warrant shall not be registered
under the Securities Act of 1933, as amended, and under applicable state
securities or blue sky laws, the Company may require, as a condition of
allowing such exercise, transfer, or exchange, that (i) the Holder or
transferee of this Warrant, as the case may be, furnish to the Company a
written opinion of counsel, which opinion of counsel is reasonably
acceptable to the Company, to the effect that such exercise, transfer, or
exchange may be made without registration under said Act and under
applicable state securities or blue sky laws and (ii) the Holder or
transferee execute and deliver to the Company an investment letter in form
and substance reasonably acceptable to the Company. The first Holder of
this Warrant, by taking and holding the same, represents to the Company
that such Holder is acquiring this Warrant for investment and not with a
view to the distribution thereof.
7. CASH IN LIEU OF FRACTIONAL SHARES. The Company shall not be required
---------------------------------
to issue fractional shares upon the exercise of this Warrant. If Holder of this
Warrant would be entitled on the exercise of any rights evidenced hereby, to
receive a fractional interest in a share, the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise
4
<PAGE>
be issuable in an amount equal to the same fraction of the current market value
of a share of Common Stock, which current market value shall be the last
reported sale price (determined as provided in SECTION 9(E) hereof) on the
Trading Day immediately preceding the date of the exercise.
8. REGISTRATION RIGHTS. The Common Stock into which this Warrant is
-------------------
exercisable is subject to registration rights as provided in the Agreement.
9. ADJUSTMENTS. If any of the following events shall occur at any time
-----------
or from time to time prior to the Expiration Date, the following adjustments
shall be made in the Exercise Price and/or the number of shares then purchasable
upon the exercise of this Warrant, as appropriate:
(a) In case the Company shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, the Exercise Price
in effect immediately prior to such subdivision shall be proportionately
reduced and the number of shares purchasable under this Warrant shall be
proportionately increased; and conversely, in case the Common Stock of the
Company shall be combined into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination shall be
proportionately increased and the number of shares purchasable hereunder
shall be proportionately reduced.
(b) If the Company shall declare a dividend on its Common Stock
payable in capital stock or other securities of the Company or of any other
corporation, or in cash or other property, to holders of record of Common
Stock as of a date prior to the date of exercise of this Warrant, Holder
shall, without additional cost, be entitled to receive upon the exercise of
this Warrant, in addition to the Common Stock to which Holder is otherwise
entitled upon such exercise, the number of shares of Common Stock or other
securities, cash or property that Holder would have been entitled to
receive if Holder had been a holder of the number of shares of Common Stock
that Holder actually receives upon exercise of this Warrant on such record
date.
(c) In case of any capital reorganization or reclassification of the
Common Stock, or the consolidation or merger of the Company with or into
another corporation, or any sale of all or substantially all of the
Company's property or assets, or any liquidation of the Company, Holder,
upon the exercise of this Warrant on or before the record date for
determination of shareholders entitled thereto, shall receive, in lieu of
any shares of Common Stock, the proportionate share of all stock,
securities or other property issued, paid or delivered for or on all of the
Common Stock as is allocable to the shares of Common Stock then exercisable
under this Warrant.
(d) The number of shares into which this Warrant is exercisable shall
also be subject to adjustments from time to time as follows:
5
<PAGE>
(i)(A) If the Company shall issue any Additional Shares of
Common Stock (as defined in the Certificate of Designations for the
Series F Preferred), without consideration or for a consideration per
share less than $1.00 (as may be adjusted upwards or downwards from
time to time to reflect the events under SECTION 9(A)) (the "Threshold
Price"), then and in each such event the Exercise Price shall be
reduced to a price (calculated to the nearest cent) determined by
multiplying the Exercise Price by a fraction (I) the numerator of
which shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of the Additional Shares of Common
Stock plus the number of shares of Common Stock which the aggregate
consideration for the total number of such Additional Shares of Common
Stock so issued (determined in the manner provided for in PARAGRAPHS
(D)(II) and (D)(III) of this SECTION 9) would purchase at the
Threshold Price and (II) the denominator of which shall be the number
of shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock plus the number of
such Additional Shares of Common Stock so issued. For purposes of the
foregoing sentence, the total number of shares of Common Stock
outstanding shall be deemed to include the number of shares of Common
Stock that would be outstanding if all outstanding securities
exercisable for or convertible into Common Stock were so exercised or
converted, and all securities exercisable for or convertible into
securities exercisable for or convertible into Common Stock were
exercised or converted, as applicable, and then converted or
exercised, as applicable.
(B) If the Company shall issue options to purchase or rights to
subscribe for Additional Shares of Common Stock, or securities
convertible or exchangeable into Additional Shares of Common Stock,
the following shall be taken into account in making the adjustments
set forth in SECTION 9(D)(I)(A):
(I) The aggregate maximum number of Additional Shares of
Common Stock deliverable upon exercise of such options to
purchase or rights to subscribe for Additional Shares of Common
Stock shall be deemed to have been issued at the time such
options or rights were issued and for a consideration equal to
the consideration (determined in the manner provided in
PARAGRAPHS (D)(II) and (D)(III) of this SECTION 9), if any,
received by the Company upon the issuance of such options or
rights plus the minimum purchase price provided in such options
or rights for the Additional Shares of Common Stock covered
thereby; and
(II) The aggregate number of shares of Common Stock
deliverable upon conversion of or in exchange for any such
convertible or exchangeable securities or upon the exercise of
options to purchase or rights to subscribe for such convertible
or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such
securities were issued or such options or rights were
6
<PAGE>
issued and for a consideration equal to the consideration, if
any, received by the Company for any such securities and related
options or rights (excluding any cash received on account of
accrued interest or accrued dividends), plus the additional
consideration, if any, to be received by the Company upon the
conversion or exchange of such securities or the exercise of any
related options or rights (the consideration in each case to be
determined in the manner provided in PARAGRAPHS (D)(II) and
(D)(III) of this SECTION 9); and
(III) In the event of any change in the number of shares of
Common Stock deliverable upon exercise of such options or rights
or upon conversion of or in exchange for such convertible or
exchangeable securities, including, but not limited to, a change
resulting from the antidilution provisions thereof, the number of
shares into which this Warrant is exercisable in effect at the
time shall forthwith be readjusted to the number of shares as
would have been obtained had the adjustment that was made upon
the issuance of such options, rights or securities not converted
prior to such change (or the options or rights related to such
securities not converted prior to such change) been made upon the
basis of such change; and
(IV) No further adjustment of the number of shares into
which this Warrant is exercisable, if such number was previously
adjusted under this SECTION 9(D), shall be made for the actual
issuance of Common Stock (or the issuance of securities
convertible into Common Stock upon the exercise of any such
options or rights) upon the exercise of any such options or
rights or the conversion or exchange of such securities after the
adjustments have been made under this PARAGRAPH (D)(I)(B) of this
SECTION 9.
(C) Notwithstanding anything else contained herein to the
contrary, if the Company shall default in its obligations pursuant to
the terms of Section 4.16 of the Agreement, then during the term of
such default the Exercise Price hereunder shall be the lower of (i)
the then applicable Exercise Price and (ii) seventy five percent (75%)
of the applicable Market Price per share of Common Stock. The "Market
Price" per share of Common Stock shall be the average closing bid
price per share of Common Stock during the twenty (20) trading days
immediately preceding the date of such exercise, as such bid price is
reported by NASDAQ/NMS, or the average closing bid price in the over-
the-counter market if other than NASDAQ/NMS, or in the event the
Common Stock is listed on a stock exchange, the Market Price shall be
the average closing bid price on such exchange, as reported in the
Wall Street Journal.
7
<PAGE>
(D) Notwithstanding anything else contained herein to the
contrary, in the event that the Company shall default in either of its
obligations pursuant to the terms of Section 4.20 of the Agreement,
then the Exercise Price shall be reduced to an amount equal to ninety
five percent (95%) of the Exercise Price then in effect.
(ii) In the case of the issuance of Additional Shares of
Common Stock for cash, the consideration shall be deemed to be the
amount of cash paid therefor before deducting any reasonable
discounts, commissions or other expenses allowed, paid or incurred by
the Company for any underwriting or otherwise in connection with the
issuance and sale thereof.
(iii) In the case of the issuance of Additional Shares of
Common Stock for a consideration in whole or in part other than cash,
the amount of the consideration other than cash received by the
Company therefor shall be deemed to be the fair value of such
consideration as determined in good faith by the Board of Directors of
the Company, except where such consideration consists of securities,
in which case the amount of consideration received by the Company
shall be the market price thereof (determined as provided in SECTION 9
hereof) as of the date of receipt, but in each such case without
deduction therefrom of any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Company in
connection therewith. In computing the market price of a note or
other obligation that is not listed or admitted to trading on any
securities exchange or quoted in the National Association of
Securities Dealers' Automated Quotation System or reported by the
National Quotation Bureau, Inc. or a similar reporting organization,
the total consideration to be received by the Company thereunder
(including interest) shall be discounted to present value at the prime
rate of interest of NationsBank of Texas, N.A. in effect at the time
the note or obligation is deemed to have been issued. In case any
Additional Shares of Common Stock shall be issued in connection with
any merger of another corporation into the Company, the amount of
consideration therefor shall be deemed to be the fair value as
determined in good faith by the Board of Directors of the Company of
such portion of the assets of such merged corporation as the Board of
Directors shall determine to be attributable to such Additional Shares
of Common Stock.
(e) For the purposes of any computation under SECTION 9(B) or 9(D) of
this Warrant, the market price of the security in question on any day shall
be valued as follows:
(i) If traded on a national securities exchange or the
NASDAQ National Market System ("NASDAQ/NMS"), the value shall be
deemed to be the average of the security's closing prices on such
exchange or NASDAQ/NMS over the thirty (30) day period ending three
(3) days prior to the distribution;
8
<PAGE>
(ii) If actively traded over-the-counter (other than
NASDAQ/NMS), the value shall be deemed to be the average of the
closing bid prices over the thirty (30) day period ending three (3)
days prior to the distribution; and
(iii) If there is no active public market, the value shall be
the fair market value thereof as determined in good faith by the Board
of Directors.
The method of valuation of securities subject to investment letter or
other restrictions on free marketability shall be adjusted to make an
appropriate discount from the market value determined as above in CLAUSES
(I), (II) or (III) to reflect the fair market value thereof as determined
in good faith by the Board of Directors. The Holders of this Warrant shall
have the right to challenge any determination by the Board of Directors of
fair market value pursuant to this SECTION 9(E), in which case the
determination of fair market value shall be made by an independent
appraiser selected jointly by the Board of Directors and the challenging
party, the cost of such appraisal to be borne equally by the Corporation
and the challenging party.
(f) No adjustment of the Exercise Price shall have the effect of
increasing the Exercise Price to an amount which exceeds the lower of (i)
the Exercise Price on the original adjustment date, or (ii) the Exercise
Price that would have resulted from any actual issuance of Additional Stock
between the original adjustment date and such readjustment date.
10. NOTICES OF CERTAIN EVENTS.
-------------------------
(a) In the event of (i) any setting by the Company of a record date
with respect to the holders of any class of securities of the Company for
the purpose of determining which of such holders are entitled to dividends
(other than a required dividend on shares of the Company's Series D
Convertible Preferred Stock) or other distributions, or any right to
subscribe for, purchase or otherwise acquire any shares, options,
interests, participation or other equivalents (howsoever designated) of or
in the Company, whether voting or nonvoting, including without limitation,
common stock, warrants, preferred stock, convertible debentures and all
agreements, instruments and documents convertible, in whole or in part,
into any one or more or all of the foregoing ("Stock") or any other
securities or property, or to receive any other right, or (ii) any capital
reorganization of the Company, or reclassification or recapitalization of
the Stock of the Company or any transfer of all or substantially all of the
assets of the Company to, or consolidation or merger of the Company with or
into, any other entity or person, or (iii) any voluntary dissolution or
winding up of the Company, or (iv) any proposed issue or grant by the
Company of any Additional Shares of Common Stock or any other securities,
or any right or option to subscribe for, purchase or otherwise acquire any
Additional Shares of Common Stock or any other securities of the Company
(other than Common Stock issued pursuant to exercise of this Warrant) then
and in each such event the Company will mail
9
<PAGE>
or cause to be mailed to Holder of this Warrant at the time outstanding a
notice specifying, as the case may be, (A) the date on which any such
record is to be set for the purpose of such dividend, distribution or
right, and stating the amount and character of such dividend, distribution,
or right; (B) the date as of which the holders of record shall be entitled
to vote on any reorganization, reclassification, recapitalization,
transfer, consolidation, merger, conveyance, dissolution, liquidation, or
winding-up; (C) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
conveyance, dissolution, liquidation, or winding-up is to take place and
the time, if any is to be fixed, as of which the holders of record of
Common Stock (or such other Stock or securities receivable upon the
exercise of this Warrant) shall be entitled to exchange their shares of
Common Stock (or such other Stock or securities) for securities or other
property deliverable upon such event; or (D) the amount and character of
any Stock or Additional Shares of Common Stock or other securities, or
rights or options with respect thereto, proposed to be issued or granted,
the consideration to be received therefor and, in the case of rights or
options, the exercise price thereof, and the date of such proposed issue or
grant and the persons or class of persons to whom such proposed issue or
grant will be offered or made. Any such notice shall be given as provided
in SECTION 9.5 of the Agreement, at least twenty (20) days prior to the
date therein specified and the Holder of this Warrant may exercise this
Warrant within the thirty (30) day period from the date of mailing of such
notice.
(b) If there shall be any adjustment as provided in SECTION 9, or if
securities or property other than shares of Common Stock of the Company
shall become purchasable in lieu of shares of such Common Stock upon
exercise of this Warrant, the Company at its expense shall promptly compute
such adjustment or readjustment in accordance with the terms hereof and
furnish to the Holder a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any
time of Holder, furnish or cause to be furnished to Holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Exercise Price at the time in effect, and (iii) the number of shares of
Common Stock and the amount, if any, of other property which at the time
would be received upon the exercise of this Warrant. At the request of
Holder and upon surrender of this Warrant, the Company shall reissue this
Warrant in a form conforming to such adjustments.
11. LOST, STOLEN, MUTILATED, OR DESTROYED WARRANT. If this Warrant shall
---------------------------------------------
become mutilated or destroyed, the Company shall, on such reasonable terms as to
indemnity, including, without limitation, the delivery by the Holder to the
Company (at the Holder's expense) of an affidavit of lost instrument and an
indemnity agreement, issue a new Warrant of like denomination, tenor, and date
as the Warrant so lost, stolen, mutilated or destroyed. The Holder agrees to
pay the reasonable expenses incurred by the Company in connection with such
reissuance. Any such new Warrant shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen, mutilated,
or destroyed Warrant shall be at any time enforceable by anyone.
10
<PAGE>
12. APPLICABLE LAW. THIS WARRANT SHALL BE INTERPRETED AND THE RIGHTS OF
--------------
THE PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS OF THE UNITED STATES
APPLICABLE THERETO AND THE INTERNAL LAWS OF THE STATE OF DELAWARE.
13. SUCCESSORS AND ASSIGNS. This Warrant and the rights evidenced hereby
----------------------
shall inure to the benefit of and be binding upon the successors and assigns of
the Holder hereof and, shall be enforceable by any such Holder.
14. HEADINGS. Headings of the paragraphs in this Warrant are for
--------
convenience and reference only and shall not, for any purpose, be deemed a part
of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and issued.
DATED as of April ___, 1996.
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
By:
------------------------------------
Tim B. Tarrillion, President and
Chief Executive Officer
11
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<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1995 JAN-01-1994
<PERIOD-END> DEC-31-1995 DEC-31-1994
<CASH> 533,326 3,266,518
<SECURITIES> 0 0
<RECEIVABLES> 660,146 531,328
<ALLOWANCES> 34,000 30,000
<INVENTORY> 329,902 64,254
<CURRENT-ASSETS> 1,863,997 3,933,576
<PP&E> 1,673,874 733,554
<DEPRECIATION> 272,240 140,696
<TOTAL-ASSETS> 7,884,719 8,190,677
<CURRENT-LIABILITIES> 3,245,960 2,348,922
<BONDS> 3,535,461 500,000
0 0
750,000 0
<COMMON> 23,927 18,692
<OTHER-SE> 312,883 4,988,751
<TOTAL-LIABILITY-AND-EQUITY> 7,884,719 8,190,677
<SALES> 2,642,735 1,945,697
<TOTAL-REVENUES> 2,642,735 1,945,697
<CGS> 1,716,715 1,151,056
<TOTAL-COSTS> 1,716,715 1,151,056
<OTHER-EXPENSES> 5,153,720 4,750,931
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 157,725 121,986
<INCOME-PRETAX> (7,340,240) (4,819,913)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,340,240) (4,819,913)
<DISCONTINUED> 0 (116,417)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,340,240) (4,936,330)
<EPS-PRIMARY> (.40) (.35)
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