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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
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 small business issuer 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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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. X
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State issuer's revenues for its most recent fiscal year: $4,494,257
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of February 28, 1997 was
$12,314,851. The information provided shall in no way be construed as an
admission that any person whose holdings are excluded from the figure is an
affiliate or that any person whose holdings are included is not an affiliate,
and any such admission is hereby disclaimed. The information provided is solely
for record keeping purposes of the Securities and Exchange Commission.
Applicable Only to Corporate Registrants
As of February 28, 1997, there were 28,102,618 shares of Common Stock,
par value $.001 per share, outstanding.
Transitional Small Business Disclosure Format (check one)
_____ YES X NO
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PRIVATE SECURITIES LITIGATION
REFORM ACT SAFE HARBOR STATEMENT
When used in this Annual Report on Form 10-KSB and in other public
statements by the Company and Company officers, the words "expect", "estimate",
"project", "intend", and similar expressions are intended to identify forward-
looking statements regarding events and financial trends which may affect the
Company's future operating results and financial condition. Such statements are
subject to risks and uncertainties that could cause the Company's actual results
and financial condition to differ materially. Such factors include, among
others: (i) the Company's ability to identify appropriate acquisition
candidates, complete acquisitions on satisfactory terms, or successfully
integrate acquired businesses; (ii) the Company's ability to overcome technical
and other obstacles to the commercialization of the Company's products; (iii)
the Company's ability to obtain financing on satisfactory terms and the degree
to which the Company is leveraged, including the extent to which currently
outstanding options, warrants and other convertible securities are exercised;
(iv) the sensitivity of the Company's business to general economic conditions;
(v) the performance of suppliers and subcontractors; (vi) the timing of
completion of projects; (vii) the Company's ability to remain in compliance with
the numerous environmental, health and safety requirements to which it is
subject; (viii) changes in accounting principles, policies or guidelines, and
(ix) other economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and prices.
Additional factors are described in the Company's other public reports filed
with the Securities and Exchange Commission. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date made. The Company undertakes no obligation to publicly release the result
of any revision of these forward-looking statements to reflect events or
circumstances after the date they are made or to reflect the occurrence of
unanticipated events.
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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 five principal business groups: EET, Inc. (manufactures,
distributes and uses chemical extraction products for the environmental
decontamination of buildings and equipment, removal of stains from concrete, and
the descaling of industrial deposits utilizing EET's patented TECHXTRACT(R)
technology), Industrial Pipe Fittings, Inc. (manufactures and distributes
transition fittings for high-density polyethylene ("HDPE") pipe), GAIA
Technologies, Inc. (manufactures and distributes products made from recycled
plastics and rubber), Riserclad International, Inc. (formulates and markets a
corrosion protection system for steel structures in marine applications), and
other businesses/technologies owned by NATK but not separated into distinct
subsidiaries (development of a proprietary hydrocarbon upgrading technology and
other environmentally related 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 Mail Boxes
Coast to Coast, Inc. as of December 24, 1986 under the laws of the State of
Delaware and in 1993 changed its name to its present name following divestiture
of its predecessor business.
Prior to the acquisitions of EET, IPF and GAIA in 1995, and the Riserclad
technology in 1996, 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.
However, the acquisitions accomplished by the Company and the resulting change
in strategic focus have reduced the Company's dependence on any one industry,
and in particular has substantially reduced its involvement in the environmental
services and remediation industry.
The business of the Company was expanded during the first quarter of 1995
with the Company's acquisition by merger of EET. EET was formed in 1993 when it
purchased certain patents and proprietary technologies and processes from
EnClean, Inc. ("EnClean"). 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. The acquisition of EET by NATK was
accounted for as a "pooling of interests."
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
acquisition of IPF by NATK was accounted for as a "pooling of interests."
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On 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
consisted 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. In conjunction
with the acquisition of GAIA, 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. One of these
individuals is a former director of the Company and another is an officer of
GAIA.
Under this Crosstie Purchase Option and Loan Agreement, the Company may
exercise the Crosstie Purchase Option during a two-year period expiring December
29, 1997 (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, 1996, the Company has lent to
TieTek an aggregate of approximately $800,000 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 was 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).
On June 18, 1996, the Company, through a newly formed subsidiary, Riserclad
International Inc., acquired the rights to a patented corrosion protection
technology known as "Riserclad." The technology was purchased from a private
company, MPT Services Inc., for $275,000 in cash and future royalty payments
which will be based on a percentage of the future gross profits of the Riserclad
International Inc. The Riserclad technology protects steel surfaces in the
"splash zone" of marine structures such as offshore oil platforms, and bridge
pilings and supports. The acquisition of the Riserclad technology was accounted
for under the purchase method of accounting with the results of operations of
Riserclad International, Inc. included in the consolidated results of operations
of the Company from the effective date of the acquisition (June 18, 1996).
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
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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.
In addition to the executives that joined NATK as a result of the EET
acquisition, Mr. Tarrillion hired two individuals (Donovan Boyd, Chief Operating
Officer, and Judith Knight Shields, Chief Financial Officer) who had worked with
him when he was President and Chief Operating Officer of EnClean. EnClean was a
publicly traded industrial and environmental services company that Mr.
Tarrillion had co-founded in 1984 which grew to over $100 million in revenues by
1992. EnClean was acquired by Rust International in 1993. Most of NATK's new
management team has worked for EET, EnClean, or both. In addition, the NATK
management team includes David Daniels, who was a member of NATK's management
team prior to 1995, as a director and Executive Vice President of the Company,
as well as President of IPF.
DESCRIPTION OF BUSINESS AND TECHNOLOGIES
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The Company's strategy is to acquire and/or 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
customers in a range of separate and distinct industries. In addition to its
current set of products and services, it is the Company's intent to continue to
identify new products and applications that can be derived through the
development of its current technologies or new technologies or businesses that
may be acquired by the Company in the future. The Company will also from time
to time divest of, spin-off, or suspend commercialization efforts for, certain
technologies or product lines if the market or available opportunities so
dictate.
Currently, certain of the Company's businesses and products have been
commercialized to varying extents, others remain in the development stage, and
others have had their commercial development efforts suspended. EET's
TECHXTRACT(R) and waste management businesses, IPF's manufacturing and
distribution of transition and related fittings businesses, GAIA's porous pipe
and air conditioner condenser support pad businesses, and Riserclad's products
are currently contributing to the revenue growth of the Company. 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. In addition, NATK is attempting to develop certain new products based on
the TECHXTRACT(R), GAIA and Riserclad technologies. Management expects that
these new products could make a significant contribution to the Company's
revenues in the future.
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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<TABLE>
<CAPTION>
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BUSINESSES AND TECHNOLOGIES FUNCTION STAGE OF COMMERCIALIZATION
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<S> <C> <C>
EET's TECHXTRACT(R) Extraction of Technology is patented
Process radionuclides, PCB's, and proven, and
heavy metals and other commercial projects are
toxic materials to on-going. Market
decontaminate development is shifting
buildings and from providing the
equipment for reuse. technology on a
full-service basis to
supplying chemical
formulations to third
party applicators.
Removal of oil, rust Products are being tested
and other stains in specific markets.
from concentrate Marketing plan for retail
surfaces in commercial product is being
building, parking lots, developed.
and residential garages
driveways.
Reduction of scale Product has been
buildup in oil well laboratory tested by
production lines. major oil service firm.
Field tests are being
scheduled to verify
laboratory results.
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EET's Waste Management Specialized waste Group has an established
Services Group management and customer base in central
remediation services. Texas market.
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Industrial Pipe Fittings Manufactures and Products are being
distributes transition manufactured and sold.
pipe fittings, tapping Facilities were expanded
saddles and fabricated in 1996 to allow for
large diameter elbows, manufacture and
tees, and wyes. distribution of new
product lines.
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GAIA Technologies Porous Markets porous pipe Currently selling product
Pipe made from recycled into segments of the
rubber from discarded international irrigation
automobile tires and market.
plastic to world wide
agricultural market
for use in commercial
irrigation systems.
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</TABLE>
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<TABLE>
<CAPTION>
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BUSINESSES AND TECHNOLOGIES FUNCTION STAGE OF COMMERCIALIZATION
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<S> <C> <C>
GAIA Technologies A/C Pads Markets rigid support Currently selling
pads for outside air products through
conditioning manufacturer's
condensers and other representatives in the
equipment. Product is established U.S. air
made from recycled conditioning supply
rubber from discarded industry. Products are
automobile tires and currently being made by a
recycled plastics. third party manufacturer.
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GAIA Technologies Railroad Development of (in Under option to the
Crossties conjunction with Company. Working
TieTek) and, if and prototypes are in place
when proven under operating railroad
commercially viable, lines. Manufacturing
ultimate manufacture system is being designed,
of a synthetic and arrangements are
railroad crosstie from currently underway for
recycled rubber, the production of 2,000
plastic and other ties. When produced,
material. these prototypes will be
shipped to several
railroads for
installation and service
tests.
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Riserclad(TM) Corrosion protection Technology is patented
of steel surfaces of and proven. Market
marine structures. development is on-going,
Technology is also and commercial sales are
being developed for being realized. New
the protection of product applications are
other services in being developed and
marine applications tested.
and other corrosive
environments.
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BioKatT(TM) Hydrocarbon Treatment and Laboratory verification
Process upgrading of crude and testing have been
oils. completed and based upon
these results the Company
is proceeding with a
joint research project
with a major oil company.
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EET'S TECHXTRACT(R) PROCESS
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During March 1995, the Company acquired a decontamination process known as
TECHXTRACT(R) in connection with its acquisition of EET. TECHXTRACT(R) 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
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(destructive) processes are unacceptable or uneconomical. Management also
believes the technology has applications in removing deep stains from porous
concrete surfaces and in removing hard scales from the inner surfaces of oil
well production piping.
The TECHXTRACT(R) 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
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, for industrial applications,
and cosmetic cleaning purposes.
The technology was originally developed for 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 cm2. Areas and equipment that have
been cleaned using the TECHXTRACT(R) 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 further developed TECHXTRACT(R) to extract radioactive contaminants
for the Department of Energy and several other customers. EET has 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 other EPA listed hazardous constituents,
including certain heavy metals, pesticides and solvents. As with the other
contaminants, the process is most attractive when reduction to below regulatory
levels will result in substantial economic benefits to the customer due to
opportunities for "delisting" or nonhazardous disposal.
When TECHXTRACT(R) is used in its environmental and radioactivity
decontamination applications, liability is reduced for the ultimate 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(R) 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(R) 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(R) process has been in the past included in the remediation plan
relating to a consent decree to cleanup PCBs from a
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series of gas compressor stations owned and operated a major U.S. gas
transmission company.
Management believes the TECHXTRACT(R) process compares favorably to
competing environmental decontamination processes. The chemicals used in some
surface cleaning processes are inherently hazardous, tend to require much higher
volumes, and are ineffective on subsurface contamination. Scarification and
other physical processes produce large volumes of waste (particularly if there
is significant subsurface contamination), create airborne hazards, and
therefore, only move the problem to another location.
The TECHXTRACT(R) process has been employed in a number of commercial
environmental projects. Prior to its acquisition by the Company, the
TECHXTRACT(R) 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(R) 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 patent application for the
TECHXTRACT(R) process received approval from the United States Patent and
Trademark Office in June 1995. In addition, EET received a patent on one of its
chemical formulations in April 1996, and is seeking patent protection for
several other chemical formulations associated with the TECHXTRACT(R) process.
See "Patents and Proprietary Rights."
In the past, EET has provided the TECHXTRACT(R) process to its customers
almost exclusively on a full-service basis. That is, EET provided the
materials, personnel and equipment to completely remove all contaminants to an
acceptable level on a turn-key basis. This strategy was employed to ensure the
proper application of the material and technology as the commercialization and
development of the technology was evolving. However, as EET has become more
confident in the capabilities of the technology, it is now shifting to a
strategy of providing the chemical formulations and operating instructions to
third party applicators and individual plant operating crews. Concurrently, EET
is reducing its full-service capabilities and shifting to a technical support
role for the users of the technology and its products. Management believes this
strategy will ultimately result in more widespread use of the technology, higher
gross revenues, and lower operating costs for EET. However, this strategy will
be dependent on proper application and use of the chemicals. If not properly
applied or handled, the effectiveness of the technology could be negatively
affected and damage or harm to personnel and property could be possible. EET
includes and stresses proper handling and application procedures with all
deliveries of products. As this shift has only recently been initiated, the
full effect of these changes on EET's business and the technology is not yet
known.
EET is also developing this technology and its related products for the
cleaning and removal of deep, subsurface stains in concrete surfaces made from
oil, grease, rust and other materials. Management believes that the technology
has many applications for the complete restoration of stained concrete, as the
product has the capability of restoring the concrete to close to its original
appearance. Applications for this product include cleaning the concrete
surfaces in commercial facilities, such as automobile repair shops and service
stations, parking lots, and
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residential garages and driveways. Test markets are being established in both
the commercial and retail sectors, and a retail marketing strategy is being
developed.
EET is also working with a major oil service firm for use of the
TECHXTRACT(R) process for the removal of scale from the inside surfaces of oil
well production lines. Initial testing has shown that certain TECHXTRACT(R)
formulations are particularly effective in reducing scale that has been very
difficult if not impossible to remove with traditional chemical cleaning
techniques. Laboratory tests that simulate field conditions have indicated very
positive removal rates and potential economic benefits. EET intends to field
test its formulations in a number of situations during the first half of 1997.
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 WMS field
personnel can also provide technical assistance and field support in the
TECHXTRACT(R) business of EET, when necessary.
The need for WMS services originates with the Resource Conservation and
Recovery Act ("RCRA"), enacted in 1976 and amended in 1984. RCRA is the
fundamental driving force behind proper handling and disposal of wastes, and the
associated civil and criminal penalties causing manufacturing companies to
consider its requirements seriously. RCRA created numerous service industries,
including the range of services currently provided by WMS. In general, waste
management service companies, like WMS, were formed with the knowledge required
for compliance and handling of hazardous waste, and to assist smaller waste
generators in the complex analytical and documentation requirements of waste
disposal. It is management's belief that EET's WMS enjoys a defendable niche
and a set of distinctive competencies in the central Texas waste management
business.
EET's WMS group also has a research laboratory and staff that performs
research and analysis to support other EET/NATK project activities. This group
can also employ other technologies based on processes for the reduction, removal
and stabilization of environmental contaminants in soil, wastewater or
groundwater. In this regard, EET has four water and soil treatment patents
which have not yet been commercialized to any great extent. However, one
commercial system, based on one of these EET patents, for removing metals from a
waste stream generated by a plating facility, is currently in use. Nonetheless,
as NATK de-emphasizes its efforts in the environmental remediation markets, it
is unlikely that EET or NATK will realize any potential revenues from these
uncommercialized technologies. Finally, EET's research staff is also used for
internal and government-funded research projects relating to NATK's current and
future technologies, such as EET's current $744,000 research contract for the U.
S. Department of Energy designed to test the TECHXTRACT(R) technology for the
decontamination of
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radioactive scrap metal material.
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 ("HDPE") pipe business. 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.
IPF manufactures and distributes products that relate primarily to the 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
adapter fittings. IPF also stocks and distributes related thermoplastic
products which complement the use of its existing line of manufactured fittings.
During 1996, IPF completed the expansion of 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.
IPF currently markets its products within a two tier plan. First, IPF has
alliances with approximately 100 distributors throughout 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 a competitive advantage on
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.
During late 1995 and early 1996, IPF completed the expansion of its
manufacturing facilities by adding two more buildings, thus tripling the size of
its operations. One building houses all inventoried items, and the other
building adds 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 the
YTL machine gives 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.
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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 two 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 are
also being used to develop 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 because of its high quality
manufacturing process, GAIA's porous pipe has unique physical, structural and
fluid dynamic properties. When used in underground irrigation systems, porous
pipe promotes increased crop yield, 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 management believes that GAIA's
porous pipe provides more even flow of water across the entire length of the
pipe and thereby provides a much more consistent delivery of water and other
nutrients to the roots of agricultural products.
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. GAIA's manufacturing process and quality
control system enable it to produce a very high quality product with very
consistent flow patterns across the length of the pipe.
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
12
<PAGE>
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 30 million feet of porous pipe over the past six years
for use in subsurface irrigation systems in the domestic and international
markets. GAIA has licensing agreements for the manufacture and sale 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 used in commercial
landscaping projects. International sales of the product are currently handled
through sales agents in target countries and markets.
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 enhanced
performance characteristics of GAIA's synthetic products, the potential
application of the technology to make a range of products, and the almost
unlimited number of product possibilities. Currently, GAIA has mold designs and
compositions for its first product in this category -- support pads for outside
air conditioning condenser units ("A/C pads"). GAIA is also investigating the
potential market for a similar product for use as a transformer base pad in
residential underground electric utility systems.
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. 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, including lower weight, less breakage, sound-deadening qualities,
and use of recycled materials. Distribution agreements are already in place for
this product in Texas, Oklahoma and Arkansas, and in the southeastern U.S.
market.
During 1996, this product was manufactured for GAIA by a company in St.
Francisville, Louisiana pursuant to a tolling agreement. Continuing problems
with both the design of the manufacturing system and the manufacturing expertise
of the toll manufacturer led to several production shutdowns for this product
line during 1996 and, therefore, an inability of GAIA to meet product demand.
These production problems had a significant impact on GAIA's ability to
penetrate and establish a market for this product, and had a direct negative
effect on the operating profits of NATK. In November of 1996, GAIA entered into
a new manufacturing agreement with
13
<PAGE>
a company in Mississippi. Under terms of the agreement, GAIA sold to this
company its existing manufacturing system, parts of which were incorporated into
a newly designed manufacturing system. This vendor produced and shipped A/C pads
in January and February 1997. However, in late February GAIA became aware that
the vendor was experiencing financial difficulties and became concerned about
its ability to manufacture the A/C pads over the long-term. To address these
concerns, GAIA obtained a financial commitment from a related party of this
vendor to ensure that 25,000 A/C pads would be produced by an alternate
supplier. Production of these pads, which began in March 1997, should provide
sufficient quantities to meet shipments for 60 to 90 days. This interim
arrangement will provide GAIA with production capacity while it explores other
manufacturing arrangements, or the vendor in Mississippi obtains additional
funding. See also Liquidity and Capital Resources.
GAIA continues to experience a strong demand for this product, in spite of
occasional product unavailability, and recent design changes incorporated by the
vendor in Mississippi have enhanced the product further. In 1997, GAIA plans to
expand its product offerings to include larger pads for the heat pump base pad
market in the southeastern United States, and the electric utility transformer
pad market, if the latter can be developed. Assuming that the interim
production arrangement can produce 25,000 A/C pads, and that a resolution of the
manufacturing issues can be made in the near-term, management anticipates that
the A/C product line will contribute positively to NATK's revenue growth and
operating profits in 1997. See discussion in Liquidity and Capital Resources.
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, and marine decking.
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 develop the product. The railroad has deployed eight
prototype ties under its own tracks and has conducted a battery of independent
tests on the prototype ties, including
14
<PAGE>
accelerated aging tests. Many of these tests were conducted by an independent
testing facility at the University of Illinois at Urbana. Based on the results
of these tests and the current performance of the ties in actual use in their
track system, the railroad has indicated a desire to purchase and install
several hundred of these prototype crossties in a variety of locations,
examining their performance under heavy, light and turning traffic.
In order to produce the number of ties necessary to meet the requirements
of this railroad, and to begin marketing the product to other railroads both in
the United States and internationally, GAIA/TieTek have tested various raw
material formulations and manufacturing systems. This development work has
increased GAIA's management's confidence that raw materials are available for
this product in sufficient quantities and reasonable prices, and that a high
quality, consistent product can be manufactured economically in large
quantities. Test manufacturing runs that were completed at the end of 1996 on
both raw material formulations and manufacturing processes further increased
management's confidence in the commercial viability of this product. GAIA, in
conjunction with TieTek, is in the process of setting up a pilot plant capable
of producing approximately 2,000 ties at an independent manufacturer's site.
These ties will be tested by the railroad and will also be sent to other
railroads that have already expressed, or are soon expected to express, interest
in this product. Assuming that these 2,000 ties meet with industry acceptance,
GAIA and TieTek anticipate the first commercial production line would be built
sometime during 1997. GAIA's exercise of its option to purchase TieTek and
full-scale production of this product would be predicated on the manufacturing
and marketing success of this first commercial line.
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, fence posts, 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 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.
RISERCLAD TECHNOLOGY
On June 18, 1996, NATK, through a newly formed subsidiary, Riserclad
International, Inc., acquired the rights to a patented corrosion protection
technology known as "Riserclad." The technology was purchased from a private
company, MPT Services Inc., for $275,000 in cash and future royalty payments
based on a percentage of the gross profits of Riserclad International. The
technology is designed to protect steel surfaces in the "splash zone" of marine
structures such as offshore oil platforms and bridge pilings and supports. The
acquisition of the Riserclad technology was accounted for under the purchase
method of accounting with the results of operations of Riserclad International
included in the consolidated results of operations of the Company from the
effective date of the acquisition (June 18, 1996).
15
<PAGE>
The Riserclad technology was originally developed to protect metal surfaces
left unprotected in the "splash zone" of offshore platforms. The "splash zone"
is an area affected by wave and tidal action in marine environments. This zone
cannot be protected by cathodic protection systems that operate below the water
line, nor can it be protected for any extended period of time by paint or
coating systems that may work well above the waterline. The Riserclad
technology uses a patented epoxy coating, known as "Riserbond," that can be
applied on any surface above and below the water line and chemically bonds to
unprotected steel surfaces. The technology further provides a hard outer shell,
known as "Riserclad," which is placed over the metal and epoxy, and also
chemically bonds to the epoxy. The hard shell protects the epoxy from damage
caused by floating debris, wave action, and marine vessels. The hard shell is
initially held in pace with "Riserclamps," but once the epoxy cures, the
Riserclad, the Riserbond and the metal surface become a continuous, impervious
system that completely protects the metal surface from any additional external
corrosion. Riserclad has been used in over 50 different commercial projects to
protect the external surfaces of risers, conductors, jacket legs, and other
structural members on offshore oil and gas production platforms. The technology
also has applications for pipelines, both onshore and offshore, and for
concrete, steel and timber piers and pilings in structures built on inland and
coastal waterways.
The management of Riserclad International believes that the Riserclad
technology offers unique advantages in the protection against "splash zone"
corrosion. It has been tested and evaluated by an independent laboratory on
behalf of a consortium of major oil companies and was cited as the best of the
eight systems tested for splash zone corrosion protection. The technology has
been widely used in the Gulf of Mexico and internationally. The technology's
advantages include its ability to be applied in place above and below the water
line, the fact that it is applied with minimal special handling and application
equipment, and that it can offer up to twenty years of continuous protection
with little or no maintenance. When installed properly, it prolongs the life
and economic value of the structure, it can eliminate periodic replacement of
materials, and can help operators avoid possible production losses and
environmental spills.
Currently, Riserclad International sells Riserclad products to the offshore
platform operating divisions of the major oil companies in various regions
worldwide. In addition, Riserclad International will also provide on-site
training and technical supervision of the installation, but the customer is
required to provide its own diving/installation crews, or hire an independent
diving company, to install the Riserclad system. The technology's predominant
use to date has been on marine structures in shallow ocean waters of equatorial
regions of the globe, where hot temperatures and high salinity of the water
create highly corrosive atmospheres for unprotected steel components. Riserclad
International employs three full time salesmen who market directly to the major
oil companies worldwide and is attempting to establish a network of agents
representing its interests in different markets internationally.
OTHER NATK TECHNOLOGIES
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 sulfur and metal content of
16
<PAGE>
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. During 1995 and
1996, NATK set out to reverify this technology with its own laboratory
facilities and staff at EET's WMS laboratories. These tests established that
certain crude oils were positively affected by the BioKatT(TM) process and that
the altered characteristics of the oils were both reproducible and "permanent."
This battery of tests also gave NATK the data it needed to approach several
major oil companies concerning a joint research and commercialization project
for this technology.
Given the potential positive effects of the BioKatT(TM) technology on the
crude oils tested, NATK has recently signed an agreement with a major
international oil company to further test the effectiveness of this technology.
Under this program and under the supervision of the oil company's
representatives, NATK will produce a certain amount of "upgraded" crude oils and
will be reimbursed by the oil company for the time and expense of these
production runs. The oil company will select two or more crude oils for testing
which would have a commercial "need" for this technology if it can be fully
developed. After the "upgraded" crude oils are produced in sufficient
quantities in NATK's laboratory, the oil company will run a battery of analyses
on the altered crude to verify the extent and nature of the physical and
chemical changes to the properties of the oils. Both NATK and the oil company
will have complete access to the results of all test and analyses, and both
parties are bound by confidentiality agreements.
If the results of these analyses indicate that changes are real and
reproducible, NATK and the oil company would then enter into discussions
concerning the potential joint commercialization of the technology, but the oil
company is not obligated to enter into any subsequent agreements. If the
technology can be successfully commercialized with this partner, it is
anticipated that NATK would receive a small royalty from the oil company's
internal use of the technology, but NATK would also 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.
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 was developed by Exxon Research and Engineering Corp.
("Exxon") in conjunction with SEREP, a French engineering company. During 1995,
the
17
<PAGE>
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 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. In addition, the Company developed mechanical drawings
for these systems, built several prototypes, and actively marketed this product
to potential customers over the past two years.
Despite these efforts, and several potentially interested buyers, the
Company has not had any success in selling any Oleofilter(TM) Systems so far.
Management believes that the Oleofilter(TM) System can accomplish its stated
technical objectives and does have a market in the United States, but it must be
sold as part of an integrated water treatment system and not on a stand-alone
basis. Given the size of the potential market for Oleofilter(TM) and the other
potential opportunities facing NATK, management feels that it would be in the
best interest of the company to sell its rights to the Oleofilter(TM), and
associated assets, to a company that is already marketing fully integrated water
treatment systems. As such, NATK is actively seeking a purchaser for its rights
to the Oleofilter(TM) technology, and associated assets, to a company that
currently markets a wider range of water treatment systems.
COMPETITION
- -----------
The Company and its operating groups operate in many different segments of a
range of industries. Essentially all of the segments in which the Company
operates are highly competitive and all of the Company's products and
technologies compete with products already being used in the market place. 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, and must convince
customers to purchase NATK's products instead of those they are currently
buying. Although the price of the products is always a consideration, NATK
generally prices its products higher relative to the competing products, but
stresses the unique features and/or improved performance of its products. The
competitors and competitive products are different for each of the Company's
products or technologies. Many of the competitors are local operations
servicing a limited markets and/or geographic areas; however, in various service
lines, there are a few large national and regional competitors which have
significantly greater resources than the Company. The following table provides
an overview of the types of products that NATK's technologies compete with and
typical competitors:
18
<PAGE>
<TABLE>
<CAPTION>
================================================================================
NATK PRODUCTS/TECHNOLOGIES TYPICAL COMPETING TYPICAL/DOMINANT
PRODUCTS COMPETITOR
- --------------------------------------------------------------------------------
<S> <C> <C>
EET's TECHXTRACT(R)
Process
--Environmental Various acids, solvents Chemical manufacturers
Applications and surfactants, or blenders such as
including brand name Integrated Chemistries,
products such as "Less Inc. and Chemical
Than Ten," "Capsur," Solutions International
and others. Corp., and remediation
contractors such as OHM
Corp., ENSR Corp., and
International Technology
Corp.
--Scale Removal Products Various concrete Various chemical
cleaning products that blenders and
contain various acids, distributors including
solvents and Spartan Chemicals, Zep
surfactants, including Manufacturing, Aldon
"Drive-Away," "Simple Chemical and many other
Green," "SC-200," and small chemical companies.
"Seal Treat Driveway
Cleaner."
--Scale Removal Products Various oilfield Various oilfield chemical
chemiclas containing companies, such as Baker
acids, solvents, Performance Chemical
chelants or surfactants, Group, Halliburton, and
including "Barrage," Petrolite; and chemical
and "Liquid Scale divisions of major oil
Disintegrator (LSD)." companies including
Mobil and Exxon.
- --------------------------------------------------------------------------------
EET's Waste Management On-site waste Service divisions of
Group management and major waste disposal
specialized remediation companies, such as
services. Chemical Waste
Management, Rollins and
BFI; and both local and
national remediation
companies such as OHM
Corp., Laidlaw, and
Geraghty & Miller.
- --------------------------------------------------------------------------------
Industrial Pipe Fittings, Range of metal, Major competitors
Inc. plastic, or combination include large
fittings for use in manufacturing companies
plastic piping systems. such as Central
Plastics, Inc. and
Upinor; and many smaller
companies such as
Poly-Cam, Inc. and
Cruway. In addition,
some manufacturers of
plastic pipe make a
limited range of
fittings as well.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
<S> <C> <C>
GAIA Technologies Porous Traditional above Valmont, Toro and many
Pipe ground sprinkling others for sprinkler
systems, drip systems; Groflow and
irrigation systems and Drip In for drip
competing underground systems; and Precision
porous pipe products. Porous and Aquapore for
porous pipe or
underground systems.
- -------------------------------------------------------------------------------
GAIA Technologies A/C Pads Predominantly poured Diversitech, Inc. and
concrete pads, and, to various local
a lesser extent, manufacturers for
various plastic pads. concrete pads, and
several specialty
plastic manufacturers.
- -------------------------------------------------------------------------------
GAIA Technologies Railroad Mainly chemically All major timber
Crossties treated wooden ties companies provide raw
and, to a lesser ties to chemical
extent, concrete and treating (creosote)
steel ties. companies. Providers of
treated wooden ties to
U. S. major railroads
include Koppers,
Kerr-McGee and BPB.
Steel and concrete ties
are made by several
small manufacturers that
make similar products.
- --------------------------------------------------------------------------------
Riserclad Various protective Various suppliers and
coating systems manufacturers including
including Armawrap, NICC, Master Builder,
Advanced Pile Fox Industries, Pilecap,
Encapsulation, FX-70, Thin film Technology,
Biocap 225, Bio-Gard and Central Plastics.
251, and Splash-Pro.
- --------------------------------------------------------------------------------
BioKatT(TM) Hydrocarbon Various hydrocarbon Major catalyst companies
Process upgrading processes including Criterion
based on both metal and Catalysts, American
biological catalysts. Cyanamid, Girdler,
Haldor Topsoe and many
others; and many
biocatalyst companies
including Energy
Biosystems, Inc.
================================================================================
</TABLE>
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 since that time. 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
20
<PAGE>
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(R)
Process
--Environmental Remediation Companies, Direct Sales, Licensees,
Applications 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.
--Stain Removal Products Commercial and Retail Establishing Regional
Customers Nationwide. Chemical Distributors
Partner with a Major
Distributor Or Retail
Chain in Automotive
and/or Home Improvement
Market.
--Scale Removal Products Oil Service Companies Developing Primary
and Oil Well Operators. Partnership with Major
Oil Service Firm.
- --------------------------------------------------------------------------------
EET's Waste Management Light Industrial Direct Sales, Direct
Services 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>
21
<PAGE>
<TABLE>
<CAPTION>
================================================================================
BUSINESSES AND TECHNOLOGIES TARGET SALES AND MARKETING
MARKETS/INDUSTRIES EFFORTS
- --------------------------------------------------------------------------------
<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.
- --------------------------------------------------------------------------------
GAIA Technologies Railroad Major U.S. and Awaiting production of
Crossties International first 2000 ties. Will
Railroads, Railroad market directly to major
Maintenance Companies. railroads domestically
and internationally once
prototypes are available.
- --------------------------------------------------------------------------------
Riserclad International Major oil companies Direct Sales,
operating offshore oil International Agents,
and gas production Video, Trade Shows,
platforms. Industry Alliances.
- --------------------------------------------------------------------------------
BioKatT(TM) Hydrocarbon Heavy Crude Oil Working with Joint
Process Production Companies. Venture Partner.
================================================================================
</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
willingness to commit financial resources to more professional marketing has
allowed the Company to begin 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
unlikely any of its future revenues will be generated by its previous joint
ventures. However, new joint ventures may be developed in the future, when, and
if, deemed favorable for the Company.
In addition, the Company's joint ventures and teaming arrangements, in the
past, were motivated as a financing strategy. In certain instances, joint
venture partners paid the Company for the exclusive right to market its
technologies in specified areas. Since the Company's resources were 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
22
<PAGE>
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 TECHXTRACT(R)
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 two 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. As part of the purchase of the
Riserclad technology, the Company purchased the rights to two patents covering
the epoxy formulations and the Riserclad system. 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. A substantial number of
patents have been issued in the markets in which the Company competes and
competitors may have filed applications for, or may have been issued patents or
may obtain additional patents and proprietary rights relating to, products or
processes which are competitive with those of the Company. Although the Company
does not believe that its products and processes infringe the patent rights of
others, the Company has not obtained a complete patent search with respect to
all of its proprietary technologies and there can be no assurance that other
issued patents might need to be licensed or circumvented. 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, products, 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 has in the past provided its TECHXTRACT(R) services on a
"guaranteed results" basis. That is, EET agreed to 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. Since EET is now limiting
the amount of service work it will provide and shifting to selling the
TECHXTRACT(R) products to third party applicators, management anticipates less
use of this
23
<PAGE>
"guaranteed results" approach.
For GAIA, Riserclad, TECHXTRACT(R) and IPF products, the Company does
assume some responsibility that the products they manufacture will perform as
indicated in company literature. If the products are used as instructed and
fail, the Company, at times, will replace the product at no cost to the
customer. To date, such replacement of failed or discarded products has not
been significant. In addition, the Company carries product liability insurance
when it is deemed necessary. Management believes its product liability
insurance is sufficient for its purposes and warranty issues are not
significant.
RAW MATERIALS
- -------------
The raw materials used in the Company's products are readily available from
several sources of suppliers. The Company has not experienced any significant
raw material price increases.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company is engaged in continuing research and development with respect
to the expansion of the commercial opportunities of its products. During the
year ended December 31, 1996 and 1995, respectively, the Company incurred
$263,936 and $595,771 in research and development expenses.
HUMAN RESOURCES
- ---------------
The Company currently employs 51 full-time employees and three part-time
employees. Eight of the employees are in management, twelve in administrative
and accounting, two in research and development, ten in sales, and twenty-two 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.
GOVERNMENTAL REGULATIONS
- ------------------------
State and federal governments have enacted and amended numerous
environmental protection laws in response to public concerns about the
environment. The operations of the Company and its customers are subject to
these evolving laws and related regulations. The principal federal
environmental laws that the Company believes are applicable to itself and its
customers include The Clean Water Act, The Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 ("CERCLA"), The Resource Conservation
and Recovery Act of 1976 ("RCRA"), The Pollution Prevention Act of 1990, and the
Superfund Amendments and Reauthorization Act ("SARA"). Most of these laws have
state counterparts which are generally at least as stringent as federal laws.
The Company believes that this regulatory framework creates the demand for
products that control the release of hazardous substances into the environment
or facilitate the clean-up of contaminated soils and waters.
24
<PAGE>
The Clean Water Act or its state counterparts permit the discharge of
pollutants into the waters of the United States only in accordance with the
terms of a National Pollutant Discharge Elimination System Permit. Similarly,
the discharge of pollutants by generators into a sanitary sewer system that
leads to a local Publicly Owned Treatment Works ("POTW") is regulated by state
and local laws and by local permitting requirements, as are the discharges by
the POTW's themselves of their waste streams onto land or into surface water
bodies.
RCRA provides a comprehensive framework for the regulation of the
generation and transportation of solid and hazardous waste, as well as for the
treatment, storage and disposal of such waste. RCRA is intended to provide a
"cradle to grave" system for the control of hazardous waste; that is, regulation
of wastes from the time they are generated until they are properly disposed of.
Both civil and criminal liability may be imposed on parties that fail to comply
with RCRA's requirements. RCRA requires that hazardous waste generators,
transporters or operators of hazardous waste treatment, storage and disposal
facilities, meet strict standards set by governmental agencies, and in certain
instances, obtain and comply with RCRA permits.
The Pollution Prevention Act of 1990 establishes pollution prevention as a
national objective, naming it a primary goal wherever feasible. According to
this Act, where pollution cannot be prevented, material should be recycled,
reduced or minimized in an environmentally safe manner.
CERCLA and SARA (the "Superfund" laws) provide for the investigation and
remediation of hazardous waste sites. Under Superfund, parties who own or
operate sites or facilities contaminated by hazardous substances or who have
generated hazardous substances or which have arranged for the transportation or
disposal of hazardous substances may be subject to strict, joint and several
liability for the investigation and remediation of contamination associated with
those hazardous substances. Superfund's remedy selection process includes a
preference for innovative technology as well as technology which reduces the
volume of waste materials. Regulations under Superfund require that any
hazardous substances remaining on-site meet: (i) applicable; and (ii) relevant
and appropriate regulatory requirements. This may create an incentive to
utilize technologies that can potentially recycle hazardous waste, transform
such waste into non-hazardous by-products or reduce waste volumes. Under SARA,
parties engaged in Superfund or RCRA remedial actions may, in certain
circumstances, be able to use an environmental technology without the need to
conform with all aspects of the permit application procedures that would
otherwise be required under RCRA, the Clean Air Act, or other applicable
environmental laws.
Many of the same federal and state laws and regulations that affect the
Company's customers may also directly regulate the Company's own operations or
create potential liabilities for the Company. With respect to permits and
permitting requirements, the Company's own operations include the use of small
amounts of various hazardous substances, both in the use of its processes and
the testing of those processes on various waste streams and the testing and
maintenance of the Company's processes and technologies in the field. Because
the handling, use, treatment and storage of disposal of hazardous substances and
waste are a highly regulated activity, many of these activities require the
procurement of federal, state or local government permits and approvals.
25
<PAGE>
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. Given the current scope of
the Company's operations, the cost of compliance at this point for the Company
is minimal.
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 three of its
subsidiaries, EET, GAIA and
26
<PAGE>
Riserclad. This lease expires in September 2000, and has monthly rent
obligations of $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 $900.
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. These facilities are owned by a director and officer of
the Company, and are occupied by IPF pursuant to a verbal lease agreement.
In the opinion of management, the Company's facilities are adequate for
their intended use and are adequately insured.
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 in connection with a divested
business 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, and also by filing a Notice of Appeal.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
27
<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.
High Bid Low Bid
-------- -------
1995
- ----
First Quarter $3.13 $1.62
Second Quarter 1.94 .94
Third Quarter 1.50 .81
Fourth Quarter 1.03 .46
1996
- ----
First Quarter $1.00 $ .50
Second Quarter 1.50 .56
Third Quarter 1.13 .69
Fourth Quarter .81 .47
- --------------------------
The high and low bid prices for the Company's Common Stock are rounded
to the nearest 1/32. Such prices are inter-dealer prices without retail mark-
ups or commissions and may not represent actual transactions.
HOLDERS
- -------
Records of the Company's stock transfer agent indicate that as of December
31, 1996, the Company had approximately 432 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 2,500 stockholders.
DIVIDENDS
- ---------
The Company has not paid any cash dividends on its Common Stock 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. The Company is precluded from paying
dividends on the common stock by the terms of its outstanding Series F
convertible preferred stock.
28
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
- ---------------------------------------
During 1996, the Company sold securities in a number of transactions
which were exempt from registration under the Securities Act of 1933, as amended
(the "Securities Act). These transactions are described in detail under Item 6,
Management's Discussion and Analysis of Financial Condition and Capital
Resources-Liquidity and Capital Resources, which is incorporated herein by
reference. The following provides a description of the exemptions from
registration for the issuances of securities in 1996:
SERIES E CONVERTIBLE PREFERRED STOCK
------------------------------------
In February and March 1996, the Company issued 50 shares of Series E
Preferred Stock for aggregate consideration of $1,250,000. These shares were
issued to institutional investors in Europe in reliance upon Regulation S under
the Securities Act. The Company paid $31,250 to Alpha Securities AG as
brokerage commissions in connection with this transaction. Subsequently, 37 of
these shares were converted into 2,432,330 shares of Common Stock in reliance
upon section 3(a)(9) of the Securities Act and/or Regulation S thereunder.
SERIES F CONVERTIBLE PREFERRED STOCK AND ASSOCIATED COMMON STOCK PURCHASE
-------------------------------------------------------------------------
WARRANTS
--------
In April and May 1996, the Company issued 92,500 shares of Series F
Convertible Preferred Stock and 9,250,000 associated common stock purchase
warrants (the "Series F Warrants") for $6,550,000 in cash and cancellation of
notes, with a principal balance of $2,700,000, and their associated 2,700,000
common stock purchase warrants. These securities were issued to institutional
investors in reliance upon section 4(2) of the Securities Act and/or Regulation
D thereunder. The Company paid $57,000 to Cureton & Company, along with 100,000
Series F Warrants as brokerage commissions in connection with this transaction.
COMMON STOCK
------------
In January 1996 the Company issued 248,131 shares of Common Stock upon
conversion of a note in the amount of $158,183, including accrued interest.
These shares were issued to an institutional investor in Europe in reliance upon
Regulation S under the Securities Act. No brokerage or underwriting commissions
were paid in connection with this transaction.
In March 1996, the Company issued 100,000 shares of Common Stock in
satisfaction of a legal dispute with an individual. These securities were
issued in reliance upon section 4(2) of the Securities Act and/or Regulation D
thereunder. No brokerage or underwriting commissions were paid in connection
with this transaction.
In July 1996, the Company issued 750,000 shares of Common Stock and
750,000 associated Common Stock Purchase Warrants for aggregate consideration of
$750,000. These shares were issued to an institutional investor in Europe in
reliance upon Regulation S under the Securities Act. No brokerage or
underwriting commissions were paid in connection with this transaction.
29
<PAGE>
ITEM 6. 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 the
acquisitions it made in 1995. On March 7, 1995 and June 30, 1995, respectively,
the Company acquired 100% of the outstanding stock of EET, Inc. ("EET") and
Industrial Pipe Fittings, Inc. ("IPF"). On December 29, 1995, the Company
acquired certain assets of GAIA Technologies, Inc. and its affiliates
(collectively "GAIA"). In addition, on June 18, 1996, the Company, through its
wholly-owned subsidiary, Riserclad International, Inc. ("Riserclad"), acquired
certain assets of MPT Services, Inc.
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.
Riserclad paid $275,000 in cash to acquire certain assets of MPT Services, Inc.
The acquisitions of EET and IPF have been accounted for as poolings-of-
interests. Accordingly, the Company's consolidated financial statements have
been restated to include the accounts of EET and IPF from their respective dates
of inception, August 1993 and January 1994. The acquisitions of GAIA and MPT
Services, Inc. have been accounted for using the purchase method of accounting.
Accordingly, the results of those companies' operations are included from their
respective acquisition dates, December 29, 1995 and June 18, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Through the year ended December 31, 1996, the Company incurred
operating losses which are anticipated to continue for the near term at expected
levels of between $250,000 and $300,000 per month. The Company has historically
met its working capital requirements through financing transactions involving
the private placement of equity securities or equity equivalents, the issuance
of convertible debentures, and through the license of its technologies.
Operating revenues have not historically provided a meaningful source of working
capital for the Company. As of December 31, 1996 the Company had working
capital of $2,026,482 including a cash balance of $1,126,912.
30
<PAGE>
Management is currently in negotiations with the existing holders of
the Company's Series F convertible preferred stock ("Series F Holders")
regarding an additional investment in the Company. The preliminary discussions
have indicated that the Series F Holders, through a new series of preferred
stock, would fund before the end of April 1997 up to $1,850,000. In addition,
the agreement would provide for additional funding in amounts and at times
mutually agreed upon between the Company and the Series F Holders. The new
series of preferred stock would have approximately the same terms as the Series
F convertible preferred stock issued in 1996, except that there would not be any
warrants issued in connection with the transaction, and the conversion price
would be based upon arms-length negotiations between the Company and the Series
F Holders. As of the date of this Report, no definitive agreement has been
reached with the Series F Holders, and there can be no assurances that the
transaction will be completed or that the Series F Holders will approve
subsequent fundings. Due to these uncertainties, the report of the Company's
independent auditors for the year ended December 31, 1996 contains an
explanatory paragraph as to the substantial doubt about the Company's ability to
continue as a going concern. The Company's long-term viability and growth will
depend upon the successful commercialization of its technologies and its ability
to obtain adequate financing, as to which there can be no assurances.
During 1996 the Company continued to use the private placement of
equity securities to generate the cash needed to fund its operating losses and
capital requirements, and to repay the note that arose from the acquisition of
GAIA. Specifically, during 1996 the Company used net cash of $4,993,964 for
operating activities and $1,314,600 for investing activities, while the net cash
proceeds from financing activities was $7,102,150. The debt and equity
transactions for 1996 are described below.
13 1/2% CONVERTIBLE SUBORDINATED NOTES
- --------------------------------------
In September 1995, the Company received cash proceeds of $2,700,000
from the placement of its 13.5% convertible subordinated notes (the "Notes") and
warrants to acquire 2,700,000 shares of the Company's Common Stock (the "Note
Warrants"). In April 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, pursuant to the Note
agreement, to defer the interest payment relating to the Notes that was due on
March 22, 1996. However, interest of approximately $198,000 (which includes the
deferred interest) was paid to the note holders on April 8, 1996 in conjunction
with the conversion into the Series F Shares.
Approximately $1,035,000 of the net proceeds received from the Notes
was used to fund a loan to GAIA prior to its acquisition on December 29, 1995.
This loan was forgiven as part of the purchase price consideration.
SERIES D CONVERTIBLE PREFERRED STOCK
- ------------------------------------
On December 28, 1995, the Company received net proceeds of $750,000
from the issuance of 30 shares of Series D Convertible Preferred Stock ("Series
D Shares"). During 1996, these shares were converted into 1,249,313 shares of
the Company's Common Stock.
31
<PAGE>
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 proceeds of $1,250,000
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. During 1996, 25 Series E shares were converted into 1,441,209
shares of the Company's Common Stock. In February 1997, twelve Series E shares
were converted into 991,121 shares of the Company's Common Stock. The remaining
13 shares become convertible in May 1997.
SERIES F CONVERTIBLE PREFERRED STOCK
- ------------------------------------
In April and May 1996, the Company issued 92,500 share of Series F
Convertible Preferred Stock ("Series F Shares") and warrants to acquire
9,250,000 shares of the Company's Common Stock (the "Series F Warrants"). Cash
proceeds of $6,550,000 was received for 65,500 Series F Shares and 6,550,000
Series F Warrants. The remaining 27,000 Series F Shares and 2,700,000 Series F
Warrants were issued in exchange for the surrender of the Notes and the Note
Warrants. See discussion above. The Series F Warrants were issued with an
original exercise price of $1.00 per share, subject to certain adjustments, and
expire on April 8, 2004. The adjusted exercise price as of December 31, 1996
was $.95 per share.
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. The adjusted conversion rate as of December
31, 1996 was $.95 per share. On or after April 8, 2001, the Series F Shares can
be converted at the holder's option at the lower of (a) the then-current
conversion price, or (b) a calculated value utilizing a discount to the market
price, as defined, of the Company's Common Stock. The Company may redeem the
Series F Shares at face value on or after April 8, 2004.
Each Series F Share entitles the holder thereof to the number of votes
equal to the number of shares of Common Stock into which such Series F Share may
be converted from time to time. In addition, the Company has increased its
Board of Directors to nine positions, four of which may be filled by nominees
selected by the holders of the Series F Shares.
The preferred stock purchase agreement and the certificate of designation
for the Series F Shares contain certain covenants which, if breached by the
Company, provide for certain remedies. Certain of these covenants are
considered outside of the Company's control. These covenants include, among
other things, that the Company obtain a minimum net worth, as defined
32
<PAGE>
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.
COMMON STOCK
- ------------
In July 1996, the Company received net proceeds of $750,000 from the
issuance of 750,000 shares of Common Stock and warrants to purchase 750,000
shares of Common Stock. The warrants have an exercise price of $1.00 and expire
in July 1999.
Effective August 15, 1996, the Company acquired the outstanding
minority interest of its subsidiary, North American Environmental Group, Inc.
("NAEG"), by merging it into another wholly-owned subsidiary which was then
renamed NAEG. The 1,382,071 previously outstanding shares of NAEG were
converted on a one-for-one basis into shares of the Company's common stock.
This transaction was accounted using the purchase method of accounting, with the
issuance by the Company of 1,382,071 shares for goodwill of $621,900, which will
be amortized over a three-year period.
TRANSACTIONS RELATING TO EURO SCOTIA FUNDING LIMITED
- -----------------------------------------------------
Effective December 31, 1994, the Company renegotiated the terms of a note
receivable from Euro Scotia Funding Limited ("ESF"), which arose from prior
transactions with ESF. At December 31, 1994, the face value of the note plus
accrued interest receivable totaled $3,278,857. 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 borrowings under
the line of credit plus accrued interest payable totaled $356,473, and amounts
owed to ESF for services totaled $121,621. The net balance of $2,800,763 was
reflected on the consolidated balance sheet at December 31, 1994.
33
<PAGE>
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. Treasury obligations,
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 was not paid by ESF. During the
fourth quarter of 1995, the Company learned that the brokerage firm that held
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 a demand for payment of the ESF note, and has
consulted with counsel regarding its legal remedies against ESF and others
involved with the transaction. In the event the Company pursues its claim
against ESF or others in the future by participating in legal proceedings, there
is the possibility that the Company may be required to defend any related
actions which might be brought against the Company.
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 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.
34
<PAGE>
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. One of these individuals
is a former director of the Company and another is an officer of GAIA. 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. The balance on the Crosstie Loan, as of December
31, 1996 and 1995 was $764,843 and $219,592, respectively. 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 Company Common Stock.
In June 1996 the Company, through its wholly-owned subsidiary
Riserclad International, Inc. acquired certain assets of MPT Services, Inc. for
$275,000 in cash.
A/C PAD MANUFACTURING AGREEMENT
- -------------------------------
In November 1996, GAIA sold the equipment used in the manufacture of
A/C pads for $575,000 to a toll manufacturing vendor located in Mississippi. As
payment for the equipment, GAIA received cash of $25,000 and a note for
$550,000. The note bears interest at 10% per annum, matures November 20, 2001
and is collateralized by equipment. The note provides for repayment through
credits of $.25 to $1.00 per pad against the prices charges to GAIA for the A/C
pads produced by the vendor. In addition, if the vendor fails to timely
manufacture and deliver the products ordered by GAIA, an annual payment of
$110,000 is required. Alternatively, if GAIA fails to purchase a minimum of
36,000 pads during each consecutive six month period during the term of the
agreement, GAIA will allow a reduction of $12.00 for each pad below the required
purchase quantity. A loss of approximately $50,000 relating to previously
capitalized installation costs was recorded on the sale of the equipment.
In January and February 1997 the vendor in Mississippi has produced
and shipped A/C pads pursuant to this agreement. However, the vendor has
experienced financial difficulties which has caused a concern by the Company as
to the vendor's ability to manufacture the A/C pads over the long-term. To
address these concerns, the Company obtained a financial commitment from a
related party of this vendor to ensure that 25,000 pads would be produced by an
alternate supplier under the pricing terms of the original agreement.
Production of these 25,000 pads, which began in March 1997, should provide
sufficient quantities to meet shipments for 60 to 90 days, and will provide
credits to the note receivable pursuant to the terms of the original agreement.
The Company at this time is continuing to explore its options
regarding the future manufacturing arrangement for this product. The existing
vendor is attempting to obtain the
35
<PAGE>
necessary funding to overcome its financial difficulties. In addition, the
Company has had preliminary discussions with one company, and inquiries from two
others, regarding an assumption of the responsibilities of the toll
manufacturer's agreement or a purchase of the A/C pad business. These
preliminary discussions indicate that the asset values, as discussed below,
reflected on the Company's financial statements at December 31, 1996 relating to
the A/C pad business would not be impaired. As of the date of this Report,
however, no formal agreement has been reached, nor can any assurance be made
that a final agreement will be reached. The Company believes that a timely
resolution of this issue can be achieved without an interruption of production
capacity. However, if the resolution of this issue becomes delayed, there may be
an interruption of production, and therefore revenues, in the short-term.
The Company currently has a secured note receivable for $550,000
relating to A/C pad equipment. In addition, at December 31, 1996 the Company had
approximately $2,997,000, net of accumulated amortization, in patents, purchased
technologies and goodwill that relates to all of the product lines of GAIA (A/C
pads, porous pipe, and the TieTek purchase option). In the event a) the
existing toll manufacturing vendor for A/C pads is unable to obtain additional
financing, or b) the Company is unable to complete a transaction whereby another
vendor would either assume the responsibilities and privileges of the existing
toll agreement or purchase the A/C pad business, it is reasonably likely that an
impairment of a portion of these asset values may occur in the near-term.
Management would use its judgment at that time to determine the amount of such
impairment, and the appropriate adjustment would be made and recorded in the
continuing operations for that period. The amount of such non-cash adjustment,
given the uncertainty of future events, cannot be estimated at this time;
however, it is possible that such an impairment could be material to the
operating results and financial condition of the Company.
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.
In the second quarter the Company repaid upon maturity one of its
outstanding convertible notes, with a principal balance of $250,000 and accrued
interest totaling $101,173.
The Company entered into an agreement with its former Chairman of the
Board in July 1995, as amended in December 1995, which provided for, among other
things, a payment of $250,000 in settlement of his five-year employment
contract. This obligation was accrued as of December 31, 1995 and paid during
1996.
36
<PAGE>
RESULTS OF OPERATIONS
ANALYSIS OF YEARS ENDED DECEMBER 31, 1996 ("1996") AND DECEMBER 31, 1995
("1995")
The total net loss of $4,296,396 for 1996 reflects a decrease of
$3,043,844 from the 1995 net loss of $7,340,240. This decrease in net loss
occurred due to an increase of $1,851,522 in revenues, a decrease of $218,343 in
operating expenses and a decrease of $2,708,477 in other expense. These
fluctuations are described in detail below.
REVENUES
- --------
Revenues increased to $4,494,257 in 1996 representing a 70% increase
over revenues in 1995. This increase is the result of increased sales from IPF,
and revenues generated from the new product lines of GAIA (A/C pads and porous
pipe) and Riserclad.
Contributing to IPF's increase in revenues in 1996 was the completion
of a large order for a pipeline system in the second quarter that contributed
$414,000 in revenues. IPF's revenues continued to increase during the last two
quarters of 1996 by $395,259, or 86%, over the same period of the previous year.
Shipments of GAIA's A/C pads began in February 1996. However, the
Company experienced start-up related production issues that limited revenues
and reduced gross profits during the first two quarters. The Company entered
into a new agreement on July 1, 1996 with the manufacturing facility that
produced GAIA's products. Gross profits improved during the third quarter,
however, in mid-September the A/C pad production line was halted because of
continued problems with certain critical components of the line and other
production rate issues. Sales during the fourth quarter were from the inventory
on-hand prior to the production shut-down. In November 1996 the Company sold its
production line to and entered into a new tolling agreement with a separate
manufacturer, and shipments of inventory produced by this new vendor began in
the first quarter of 1997. In late February 1997 the Company became aware that
this new vendor was experiencing financial difficulties, and therefore entered
into an interim arrangement to ensure the production of 25,000 A/C pads. See
additional discussion under Liquidity and Capital Resources.
GROSS PROFIT
- ------------
The gross profit percentage for 1996 decreased to 22% from 35% in
1995. This erosion in the gross profit percentage was primarily the result of
(i) the manufacturing operations of GAIA, as discussed below, (ii) IPF's
completion of its pipeline system order for revenue of $414,000 at margins that
were bid lower than IPF's recurring product sales, and (iii) a decrease in gross
profits from EET due to a large project that was completed in the third quarter
of 1995 at favorable margins, and the completion of some lower margin projects
in early 1996.
The gross profit percentage increased to 19% for the third quarter of
1996 and to 37% for the fourth quarter of 1996 (from 5% for the second quarter
of 1996) reflecting improved margins at IPF and EET, and the contribution of
revenue and gross profits from Riserclad in the fourth
37
<PAGE>
quarter despite continued low margins in GAIA's businesses as discussed below.
During the second quarter of 1996, the Company operated the
manufacturing activities of GAIA under a cost-sharing arrangement with a
manufacturing facility in St. Francisville, Louisiana. This arrangement,
coupled with lower than expected production rates, resulted in increased
manufacturing costs. Additionally, an unscheduled shut-down of production
occurred during the second quarter to effect renovations and repairs to major
pieces of equipment. The combination of higher manufacturing costs and
unanticipated renovation expenses increased costs by approximately $200,000,
which in turn eliminated any gross profit for GAIA in the second quarter.
In order to alleviate any future erosion of GAIA's gross profits,
effective July 1, 1996, the Company entered into a new tolling arrangement with
the same manufacturing facility in St. Francisville whereby the Company paid a
set price per pound of product shipped. This arrangement improved the gross
profit percentage for GAIA during the third quarter. However, continuing
problems with this manufacturing vendor and the dependability of the
manufacturing system halted all production in mid-September which again affected
both revenues and margins of the A/C pad business in the fourth quarter. In
November 1996, the Company entered into a new tolling agreement with a different
manufacturing vendor located in Mississippi and sales of product from this new
arrangement began in January 1997. In late February 1997 the Company became
aware that this new vendor was experiencing financial difficulties, and
therefore entered into an interim arrangement to ensure the production of 25,000
A/C pads. See additional discussion under Liquidity and Capital Resources.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling general and administrative expenses in 1996 decreased $293,343
as compared with 1995. This is a result of (i) a decrease of $1,417,620 in the
Company's corporate expenses, caused primarily by reductions in salaries and
legal and professional fees, and (ii) a decrease of $331,835 in research and
development expenses caused by the completion or termination of various
consulting arrangements during the first six months of 1996. These decreases
were offset (i) by the additional selling general and administrative expenses of
GAIA and Riserclad totaling $1,259,151 which were not included in the 1995
financial statements of the Company since these acquisitions occurred on
December 29, 1995 and June 18, 1996, respectively, and have been accounted for
using the purchase method, and (ii) a significant increase in direct marketing
expenses to enhance the future revenue growth of the Company.
OTHER INCOME AND EXPENSE
- ------------------------
Other expense decreased $2,708,477 for the year ended December 31,
1996 as compared with the year ended December 31, 1995. This difference is
primarily due to the write-off in 1995 of the ESF note receivable and its
related accrued interest totaling $3,084,729. See Liquidity and Capital
Resources for discussion relating to the ESF note receivable.
38
<PAGE>
ITEM 7. 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 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
The Directors and Executive Officers of the Company are listed below.
Name Age Position
- ---- --- --------
Tim B. Tarrillion 46 Chief Executive Officer,
President and Director of
the Company for term
expiring 1999
Donovan W. Boyd 43 Senior Vice President, Chief
Operating Officer and
Director of the Company for
term expiring 1998
David M. Daniels 39 Executive Vice President,
Secretary and Director of
the Company for term
expiring 1997; and President
of IPF
Edwin H. Knight 43 Director of the Company for
term expiring 1997
Mark E. Leyerle 31 Director of the Company for
term expiring 1998
Christopher W. Roser 38 Director of the Company for
term expiring 1998
Douglas C. Williamson 45 Director of the Company for
term expiring 1999
Robert H. Chaney 37 Director of the Company for
term expiring 1999
Judith Knight Shields 39 Senior Vice
President-Finance, Chief
Financial Officer and
Treasurer of the Company
All directors of the Company hold office for a term of three years or until
their successors are duly elected and qualified. Executive officers hold office
at the pleasure of the Board of Directors. The Board of Directors met four
times during 1996. All directors attended in 1996 at least 75% of the meetings
of the Board and committees of which they are a member.
40
<PAGE>
In late 1996, the Board of Directors decided to establish three
standing committees to allow the board to focus specific attention of critical
areas of the Board's management and monitoring of the company's activities.
From time to time, the committees will make recommendations to the Board as
necessary. The three committees that were established and the current board
members assigned to the committees are as follows:
Financial Audit:
Chris Roser
Ed Knight
Merger and Acquisition Review:
Donovan Boyd
Mark Leyerle
David Daniels
Compensation:
Tim Tarrillion
Robert Chaney
Doug Williamson
The purpose of the Financial Audit Committee is to oversee the
financial reporting procedures of the Company, insure adequate financial and
internal controls, review the scope of the Company's annual audit, and recommend
the selection of independent auditors. The primary responsibilities of this
committee include; meeting with the Company's Chief Financial Officer on a
quarterly basis to review the adequacy of quarterly and annual SEC filings,
reviewing in consultation with the independent auditors their reports of audit
and accompanying management letters, reviewing all financial statements,
financial controls, internal controls and accounting practices of the Company,
evaluating the performance and cost of the Company's independent auditors and
recommending to the Board of Directors the selection of the next year's
auditors, and monitoring compliance by the Company's management and employees
with major company policies and financial controls. The membership of this
committee is designed to include a minimum of three directors. The Company
intends to fill the vacancy on the Financial Audit Committee as soon as
practicable. The Company's Chief Financial Officer serves as an ex-officio
member of the committee and attends all meetings except the annual review of the
Company's financial controls and accounting procedures with the Company's
independent auditors. Regular meetings of the committee are held once per
quarter just prior to the regularly scheduled Board meetings. The Audit
committee met once during 1996.
The purpose of the Merger and Acquisition Review Committee is to
monitor and review the Company's policies and strategies regarding mergers and
acquisitions, and review the structure and terms of acquisitions proposed and
negotiated by the Company's senior management. The primary responsibilities of
this committee include: establishing key criteria for the Company's acquisition
strategy, advising management in recommended structure and terms for proposed
acquisitions, reviewing proposed acquisitions and making recommendations to the
Board of Directors for approval or rejection of proposals, monitoring the
assimilation of completed acquisitions into the Company and making
recommendations to management for improvements when needed, and establishing
policies and procedures for merger and tender offers
41
<PAGE>
received by the Company. The committee membership is designed to include the
Company's Chief Operating Officer and at least two additional directors.
Meetings are held as needed to meet the schedule of proposed acquisitions. No
meetings of this committee were held in 1996.
The purpose of the Compensation Committee is to recommend
compensation policies for Company's senior management and to establish and
administer the Company's stock-based compensation plans and employee stock
purchase plan. The primary responsibilities of this committee include:
reviewing all new employment agreements with senior management and key employees
of the Company, establishing criteria for annual incentive bonus plans for the
Company and senior management (in concert with the recommendations of the
Company's Chief Executive Officer) and recommending amounts and payment of
annual bonuses earned in accordance with those criteria, recommending the
issuance of incentive stock options to key management personnel, assisting with
and reviewing the establishment of an employee stock option plan and director
stock option plan when and if requested by the Board of Directors, and
monitoring and reviewing the Company's compensation policies for all employees.
The membership of this committee is designed to include the Chairman of the
Board and at least two outside (non-employee) directors. This committee will
meet at least once per year beginning in 1997 to establish annual bonus plans
and criteria for each new fiscal year.
BIOGRAPHIES
- -----------
TIM B. TARRILLION
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. EnClean provided industrial
and environmental cleaning services to companies in the refining, petrochemical,
steel, paper and utility industries and was acquired by 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 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
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. He
holds a Bachelor's Degree in Chemical Engineering from Tulane University and an
MBA from Harvard University.
42
<PAGE>
DAVID M. DANIELS
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 eight years. Mr. Daniels holds a Bachelors Degree in
Finance from the University of Houston, as well as an Associate Degree from
Georgia Military Academy.
EDWIN H. KNIGHT
Edwin H. Knight was elected to the Board of Directors in 1996. Mr.
Knight manages Harrison Interests, Ltd., a privately held Texas limited
partnership whose lines of business are oil and gas exploration and production,
real estate and cattle ranching. Mr. Knight has managed Harrison Interests,
Ltd. for thirteen years and holds a Bachelor's Degree from Louisiana State
University and is a certified public accountant.
MARK E. LEYERLE
Mark E. Leyerle was elected to the Board of Directors in 1996. Mr.
Leyerle is a principal of CCG Venture Partners, LLC, a private investment firm.
Prior to his current position, Mr. Leyerle was an investment banker at Simmons &
Co. International (1991 to 1993), where he advised oilfield service and
equipment companies, and a commercial banker with Texas Commerce Bancshares. He
holds a BBA degree from Baylor University and an MBA from Harvard University.
CHRISTOPHER W. ROSER
Christopher W. Roser was elected to the Board of Directors in 1996.
Mr. Roser has been a general partner of the Roser Partnership, Ltd., and The
Roser Partnership II, Ltd., privately held venture capital funds, since 1987.
Prior to that, Mr. Roser was a technology research analyst and corporate finance
associate for Ladenburg Thalmann & Co., Inc. and a staff public accountant for
Main Hurdman KMG. He currently serves on the Board of Directors of various
privately held companies, as well as on the Board of Directors of Hauser
Chemical Research, Inc. (NASD-HAUS). Mr. Roser holds an MBA in Finance from New
York University Graduate School of Business Administration.
DOUGLAS C. WILLIAMSON
Douglas C. Williamson was elected to the Board of Directors in 1996.
Mr. Williamson is the Senior Vice President of NationsBanc Capital Corporation
("NBCC"), a position he has held since 1989. In this position, Mr. Williamson
manages venture capital investments. Mr. Williamson earned his MBA from
Columbia University and his Bachelor's Degree from Denison University.
43
<PAGE>
ROBERT H. CHANEY
Robert H. Chaney was elected to the Board of Directors in 1996. Mr.
Chaney currently holds the positions of Chairman and Chief Executive Officer of
R. Chaney and Co., an investment management firm, a position he has held since
1993. Prior thereto, Mr. Chaney was the President and Chief Executive Officer
of Paramount Petroleum Company.
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. Her ten years of experience prior to
joining EnClean 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.
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.
44
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth a summary of the compensation paid or
accrued for the years 1994 through 1996 by the Corporation to or for the benefit
of the named executive officers.
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>
Tim B. Tarrillion(2) 1996 185,903 - - - 5,940(3)
Chief Executive Officer, 1995 146,537 - 25,000(4) - 500,000 -
President and Director 1994 - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Donovan W. Boyd 1996 139,178 - - - - - 3,543(3)
Senior Vice President, COO 1995 98,655(5) - - - 300,000 - 26,417(6)
1994 - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
David M. Daniels(7) 1996 137,928 - - - - - 2,654(3)
Executive Vice President, 1995 130,529 - - - 200,000 - -
Secretary and Director 1994 125,000 - - - 300,000 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Judith K. Shields 1996 122,602 - - - - - 2,662(3)
Senior Vice 1995 92,308(8) - - - 300,000 - -
President-Finance, CFO 1994 - - - - - - -
and Treasurer
====================================================================================================================================
</TABLE>
(1) Based upon the fiscal years ended December 31, 1996, 1995 and 1994.
(2) Mr. Tarrillion became Chief Executive Officer, President and a Director of
the Company on March 7, 1995.
(3) Represents life insurance premiums paid by the Company on policies on the
executives' lives and matching contributions to the Company's 401K plan.
(4) Payments received in January and February 1995 as a consultant to the
Company.
(5) Mr. Boyd's employment began on April 1, 1995.
(6) Payments made to relocate Mr. Boyd to Houston, Texas.
(7) Mr. Daniels became a Director during August 1994 and became an Executive
Vice President, and Secretary of the Company during January 1995.
(8) Ms. Shield's employment began on March 20, 1995.
45
<PAGE>
STOCK OPTIONS
During the 1996 fiscal year, the Company did not grant any stock options to
any of the named executive officers. No stock appreciation rights have been
granted to employees.
The following table sets forth for each of the named executive officers
information regarding stock options exercised by such officers during the 1996
fiscal year, together with the number and value of stock options held at 1996
fiscal year-end, each on an aggregated basis.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Aggregated Option Exercises in the 1996 Fiscal Year
and Fiscal Year-End Option Value
- ------------------------------------------------------------------------------------
Value of
Unexercised
Number of In-the-Money
Unexercised ------------------
Options at Options at
Fiscal Year-End Fiscal Year-End(1)
Number of --------------- ------------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tim B. Tarrillion -- -- 200,000/300,000 --
David M. Daniels -- -- 230,000/270,000 --
Donovan W. Boyd -- -- 150,000/150,000 --
Judith K. Shields -- -- 150,000/150,000 --
- ------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Market value of underlying securities at year-end ($.56), 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
46
<PAGE>
Common Stock which vest over a period of four years commencing March 31, 1996.
His agreement has a term of five years.
Ms. Shields' employment agreement provides for a base salary of $120,000,
plus bonuses and cost of living increases, as well as options to purchase
300,000 shares of the Company's Common Stock which vest over a period of four
years, commencing on March 31, 1996. Her agreement is for a term of five years.
STOCK OPTIONS AND WARRANTS
- --------------------------
The Company presently has no formal stock option plan. However, through
December, 1996 the Company has outstanding options to purchase 4,225,000 shares
of the Company's Common Stock. Of these 3,350,000 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 $1.50 and
expire September 1997 through September 1999.
Included in these options to employees are 1,800,000 granted to current or
former directors of the Company and 300,000 granted to other executive officers
of the Company.
DIRECTORS' FEES
- ---------------
The directors of the Company receive no fees or other compensation in
connection with their service as directors.
ITEM 11. 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 and
Series F Preferred Stock as of February 28, 1997.
47
<PAGE>
COMMON STOCK
Amount and Nature
of Beneficial Percentage
Ownership of Class(1)
Name and Address of Beneficial Owner ----------------- -------------
- ------------------------------------
NationsBanc 10,780,263 27.7%
Capital Corporation(2)
901 Main Street
66th Floor
Dallas, Texas 75202
Robert H. Chaney(3) 2,695,066 8.8%
R. Chaney & Partners, 1993 L.P.
909 Fannin, Suite 1275
Two Houston Center
Houston, Texas 77010-1006
The CCG Charitable 1,617,039 5.4%
Remainder Unitrust #1(4)
14450 T.C. Jester Boulevard
Suite 170
Houston, Texas 77014
William T. Aldrich(5) 1,791,667 6.3%
10406 Memorial Drive
Houston, Texas 77024
- ---------------------
(1) Calculated in accordance with the General Rules and Regulations of the
Securities and Exchange Commission, and includes shares of Common Stock
which can be acquired upon exercise of conversion of outstanding options,
warrants or other convertible securities (such as the Series F Preferred
Stock) which are exercisable within sixty days of February 28, 1997.
(2) Includes 5,780,263 shares of Common Stock issuable upon conversion of
shares of Series F Preferred Stock and 5,000,000 shares of Common Stock
which may be acquired upon exercise of Common Stock purchase warrants.
(3) Includes 1,445,066 shares of Common Stock issuable upon conversion of
shares of Series F Preferred Stock and 1,250,000 shares of Common Stock
which may be acquired upon exercise of Common Stock purchase warrants.
(4) Includes 867,039 shares of Common Stock issuable upon conversion of shares
of Series F Preferred Stock and 750,000 shares of Common Stock which may be
acquired upon exercise of Common Stock purchase warrants.
(5) Mr. Aldrich is a former director of the Company who is employed by the
Company
48
<PAGE>
through March 31, 1997. Mr. Aldrich is also deemed the beneficial owner of
1,666,667 shares of Common Stock by virtue of his position as the principal
executive officer of Thor Ventures, L.C. ("Thor") which owns 1,111,111
shares of Common Stock and GAIA Holdings, Inc. which owns 555,556 shares of
Common Stock. By virtue of his personal and family holdings in Thor and
GAIA Holdings, Inc., Mr. Aldrich and his family have a direct pecuniary
interest in 397,633 shares of Common Stock and disclaim beneficial
ownership of all remaining shares. Also includes options to purchase
125,000 shares of Common Stock.
SERIES F PREFERRED STOCK
Amount and Nature
of Beneficial Percentage
Ownership of Class
Name and Address of Beneficial Owner -------------------- -----------
- ------------------------------------
NationsBanc 54,912 54.1%
Capital Corporation
901 Main Street
66th Floor
Dallas, Texas 75202
Robert H. Chaney 13,728 13.5%
R. Chaney & Partners, 1993 L.P.
909 Fannin, Suite 1275
Two Houston Center
Houston, Texas 77010-1006
The CCG Venture Partners, LLC 8,237(1) 8.1%
14450 T.C. Jester Boulevard
Suite 170
Houston, Texas 77014
Harrison Interests, Ltd. 5,491 5.4%
Texas Commerce Bank Bldg.
Suite 1900
Houston, Texas 77002
- ---------------------
(1) Registered in the name of The CCG Charitable Remainder Unitrust No. 1 for
which CCG Venture Partners, LLC provides investment management services.
CCG Venture Partners, LLC disclaims beneficial ownership of these shares.
The following table sets forth the beneficial ownership of all of the
Company's outstanding Common Stock as of such date by all officers and
directors, individually and as a group.
49
<PAGE>
Amount and Nature
of Beneficial Percentage
Ownership of Class(1)
Name and Address of Beneficial Owner ----------------- -------------
- ------------------------------------
Tim B. Tarrillion(2) 981,630 3.5%
10102 Cedar Creek
Houston, Texas 77042
Donovan W. Boyd(3) 201,959 *
4710 Bellaire Boulevard, Suite 301
Houston, Texas 77401
David M. Daniels(4) 1,115,164 3.9%
5717 Hogue Street
Houston, Texas 77087
Robert H. Chaney(5) 2,695,066 8.8%
R. Chaney & Partners, 1993 L.P.
909 Fannin, Suite 1275
Two Houston Center
Houston, Texas 77010
Mark E. Leyerle(6) 1,617,039 5.4%
14450 T.C. Jester Boulevard
Suite 170
Houston, Texas 77014
Douglas C. Williamson(7) 0 -
901 Main Street
66th Floor
Dallas, Texas 75202
Edwin H. Knight(8) 0 -
707 Travis
Suite 1900
Houston, Texas 77002
Christopher Roser(9) 1,072,303 3.7%
1105 Spruce Street
Boulder, Colorado 80302
Judith Knight Shields(10) 217,500 *
4710 Bellaire Boulevard, Suite 301
Houston, Texas 77401
All officers and directors as a group 7,900,661 22%
(9) persons
50
<PAGE>
- ---------------------
* Less than 1%.
(1) Calculated in accordance with the General Rules and Regulations of the
Securities and Exchange Commission, and includes shares of Common Stock
which can be acquired upon exercise of conversion of outstanding options,
warrants or other convertible securities (such as the Series F Preferred
Stock) which are exercisable within sixty days of February 28, 1997.
(2) Includes 530,500 shares of Common Stock 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. Includes 91,130
shares owned through a profit sharing plan for the benefit of Mr.
Tarrillion. Includes options to purchase 300,000 shares of Common Stock.
Does not include options to purchase 200,000 shares which do not commence
vesting until March 31, 1998. 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 1,959 shares of Common Stock owned through a profit sharing plan
for the benefit of Mr. Boyd. Includes options to purchase 200,000 shares
of Common Stock. Does not include options to purchase 100,000 shares which
do not commence vesting until March 31, 1998.
(4) Includes 600,000 shares of Common Stock received by Mr. Daniels in
conjunction with a merger transaction between the Company and IPF in June
1995. Includes 10,164 shares of Common Stock owned through a profit
sharing plan for the benefit of Mr. Daniels. Includes options to purchase
340,000 shares of Common Stock. Does not include options to purchase
60,000 shares which do not commence vesting until January 1, 1998 or
options to purchase 100,000 shares that do not commence vesting until March
31, 1998.
51
<PAGE>
(5) Includes 1,445,066 shares of Common Stock issuable upon conversion of
shares of Series F Preferred Stock and 1,250,000 shares of Common Stock
which may be acquired upon exercise of Common Stock purchase warrants.
(6) Includes 867,039 shares of Common Stock issuable to The CCG Charitable
Remainder Unitrust No. 1 upon conversion of shares of Series F Preferred
Stock and 750,000 shares of Common Stock which may be acquired by The CCG
Charitable Remainder Unitrust No. 1 upon exercise of Common Stock purchase
warrants. CCG Venture Partners, LLC provides investment management
services to CCG Charitable Remainder Unitrust No. 1. Mr. Leyerle, a
principal of CCG Venture Partners, LLC, disclaims any beneficial ownership
of these shares.
(7) Does not include 5,780,263 shares of Common Stock issuable to NBCC upon
conversion of shares of Series F Preferred Stock and 5,000,000 shares of
Common Stock which may be acquired by NBCC upon exercise of Common Stock
purchase warrants.
(8) Does not include 578,026 shares of Common Stock issuable to Harrison
Interests, Ltd. upon conversion of shares of Series F Preferred Stock and
500,000 shares of Common Stock which may be acquired by Harrison Interests,
Ltd. upon exercise of Common Stock purchase warrants.
(9) Includes 572,303 shares of Common Stock issuable to The Roser Partnership
II Ltd. upon conversion of shares of Series F Preferred Stock and 500,000
shares of Common Stock which may be acquired by The Roser Partnership II
Ltd. upon exercise of Common Stock purchase warrants. Mr. Roser, a general
partner of The Roser Partnership II Ltd., disclaims beneficial ownership of
these shares.
(10) Includes 10,000 shares received by Ms. Shields and her husband in
connection with the merger transaction between the Company and EET in
March, 1995. Includes options to purchase 200,000 shares of Common Stock.
Does not include options to purchase 100,000 shares that do not commence
vesting until March 31, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 provided that Mr. Parrott
would provide advice to the Company with respect to the Company's transition in
management and certain litigation and financing matters through December 31,
1995. In addition, the Company agreed to indemnify Mr. Parrott for any
liabilities he may have as a result of his tenure as an officer of the Company,
to the fullest extent permitted by law. Pursuant to the Consulting Agreement,
Mr. Parrott received $15,000 a month through December 31, 1995 for his
consulting services, and payments during 1996 in settlement of his five-year
employment contract totaling $250,000.
52
<PAGE>
TRANSACTIONS WITH DIRECTORS, OFFICERS AND CERTAIN AFFILIATES
- ------------------------------------------------------------
In January 1996, Mr. Tarrillion loaned $250,000 to IPF under the terms of a
promissory note. The note bears interest at 13% per annum, requires monthly
payments of $5,700 and matures in January 1999. During 1996 IPF paid $13,200 in
interest to Mr. Tarrillion in respect of this note. Proceeds from the note were
used by IPF to purchase a machine for fabricating wyes, tees and els. The
equipment purchased serves as collateral for the note.
In 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, 1998.
The balance at December 31, 1996 was $120,000. During 1996 IPF paid $28,158 in
interest to Mr. Tarrillion in respect of this note. 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.
The manufacturing facilities of IPF are owned by Mr. David Daniels, a
director and officer of the Company. IPF occupies these facilities pursuant to
a verbal lease agreement and pays rentals of $2,900 per month.
ITEM 13. 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.
53
<PAGE>
C. EXHIBITS
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 22, 1995 (the "March 22, 1995 8-K")
2.2 Agreement and Plan of Incorporated by reference to the Company's
Merger between Industrial Form S-4, Commission File No. 33-82112 (the
Pipe Fittings, Inc. and "Form S-4")
the Company dated June 22,
1995
2.3 Asset Purchase Agreement Incorporated by reference to the Current
between Gaia Technologies, Report on Form 8-K filed January 12, 1996
Inc., Gaia Holdings, Inc., ("January 12, 1996 8-K")
Thor Ventures, L.C. and
Thor Industries, Inc. and
the Company dated December
29, 1995
INSTRUMENTS DEFINING THE
RIGHTS OF SECURITY HOLDERS:
4.1 Restated Certificate of Incorporated by reference to the Company's
Incorporation Form 10-QSB for the six months ended June
30, 1996.
4.2 Amended and Restated Bylaws Incorporated by reference to the Form S-4
MATERIAL CONTRACTS:
10.1 Amended Line of Credit Incorporated by reference to the Form S-4
Agreement with ESF
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
54
<PAGE>
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 Incorporated by reference to the Company's
Agreement of Tim Tarrillion Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 (the "1995
Form 10-K")
10.8 Amendment to Stock Option Incorporated by reference to the 1995 Form
Agreement of Donovan W. 10-K
Boyd
10.9 Amendment to Stock Option Incorporated by reference to the 1995 Form
Agreement of Judith Shields 10-K
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 Form S-4
Donovan W. Boyd
10.15 Consulting Agreement with Incorporated by reference to the Form S-4
John W. Parrott dated July
28, 1995
55
<PAGE>
10.16 Promissory Note, Security Incorporated by reference to January 12,
Agreement and Pledge, in 1996 8-K
the principal amount of
$1,050,000, issued by the
Company and GAIA
Technologies, Inc. in
favor of GAIA Holdings,
Inc., dated December 29,
1995
10.17 GAIA/Thor Royalty Incorporated by reference to January 12,
Agreement, entered into as 1996 8-K
of December 29, 1995, by
and among GAIA
Technologies, Inc., GAIA
Holding, Inc., Thor
Ventures, L.C. and the
Company
10.18 GAIA-TieTek License Incorporated by reference to January 12,
Agreement, entered into as 1996 8-K
of December 29, 1995, by
and between GAIA
Technologies, Inc. and
TieTek, Inc.
10.19 Employment Agreement, Incorporated by reference to January 12,
entered into as of 1996 8-K
December 29, 1995, between
GAIA Technologies, Inc.
and Henry W. Sullivan
10.20 Employment Agreement, Incorporated by reference to January 12,
entered into as of 1996 8-K
December 29, 1995, between
GAIA Technologies, Inc.
and William T. Aldrich
10.21 Stock Option Agreement Incorporated by reference to January 12,
between Henry W. Sullivan 1996 8-K
and the Company dated
December 29, 1995
10.22 Stock Option Agreement Incorporated by reference to January 12,
between William T. Aldrich 1996 8-K
and the Company dated
December 29, 1995
56
<PAGE>
10.23 Crosstie Purchase Option Incorporated by reference to January 12,
and Loan Agreement by and 1996 8-K
among the Company and
TieTek, Inc., William T.
Aldrich, J. Denny Bartell
and Henry W. Sullivan
dated December 29, 1995
10.24 Promissory Note, Security Incorporated by reference to January 12,
Agreement and Pledge in 1996 8-K
the principal amount of
$1,500,000, issued by
TieTek, Inc. in favor of
the Company, dated
December 29, 1995
10.25 Stock and Warrant Purchase Incorporated by reference to the 1995 Form
Agreement with respect to 10-K
the Series F Convertible
Preferred Stock
10.26 Stockholders' Agreement Incorporated by reference to the 1995 Form
between the Company, 10-K
certain members of its
management, and the Series
F Holders
10.27 Form of Warrant dated as Incorporated by reference to the 1995 Form
of April 5, 1996 issued to 10-K
the Series F Holders
22 Subsidiaries of Registrant Incorporated by reference to the Form S-4
27 Financial Data Schedule Filed herewith
D. REPORTS ON FORM 8-K
Not applicable.
57
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Dated: March 24, 1997
By:/s/ Tim B. Tarrillion
---------------------
Tim B. Tarrillion
Chief Executive Officer
By:/s/ Judith Knight Shields
-------------------------
Judith Knight Shields
Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-KSB has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
58
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Tim B. Tarrillion Chairman, President March 24, 1997
- --------------------------- and Director
Tim B. Tarrillion
/s/ David M. Daniels Executive Vice President, Secretary and March 24, 1997
- --------------------------- Director
David M. Daniels
/s/ Donovan W. Boyd Senior Vice President and Director March 24, 1997
- ---------------------------
Donovan W. Boyd
/s/ Robert H. Chaney Director March 24, 1997
- ---------------------------
Robert H. Chaney
/s/ Mark E. Leyerle Director March 24, 1997
- ---------------------------
Mark E. Leyerle
/s/ Edwin H. Knight Director March 24, 1997
- ---------------------------
Edwin H. Knight
/s/ Douglas C. Williamson Director March 24, 1997
- ---------------------------
Douglas C. Williamson
/s/ Christopher W. Roser Director March 24, 1997
- ---------------------------
Christopher W. Roser
</TABLE>
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants............ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995.. F-3
Consolidated Statements of Loss for the Years Ended
December 31, 1996 and 1995................................... F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996 and 1995............................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995................................... F-6
Notes to Consolidated Financial Statements.................... F-7 - F-26
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, 1996 and 1995, and the related
consolidated statements of loss, stockholders' equity and cash flows for each of
the years then ended. 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, 1996 and 1995, and the results
of its operations and its cash flows for each of the years then ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and will require additional working capital to develop and
support its technologies and businesses until the Company either (1) achieves a
level of revenues adequate to generate sufficient cash flows from operations; or
(2) receives additional financing necessary to support the Company's working
capital requirements. This condition raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to this matter are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
Houston, Texas
February 7, 1997, except
for Note 5(a), which
is as of March 14, 1997
F-2
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
ASSETS
--------
Current Assets:
Cash and cash equivalents.................................. $ 1,126,912 $ 333,326
Certificates of deposit.................................... -- 200,000
Accounts receivables, less allowance for
doubtful accounts of $125,000 and $34,000................ 997,411 626,146
Inventories (Note 4)....................................... 585,615 329,902
Prepaid expenses and other................................. 270,200 374,623
----------- ------------
Total Current Assets..................................... 2,980,138 1,863,997
Notes Receivable (Note 5)................................... 1,374,843 248,967
Property and Equipment, Less Accumulated
Depreciation (Notes 6 and 8)............................... 1,060,705 1,401,634
Patents and Purchased Technologies, Less Accumulated
Amortization of $320,853 and $155,361...................... 1,412,739 1,224,777
Goodwill, Less Accumulated Amortization of $264,890
and $55,553................................................ 2,991,293 2,576,481
Other Intangible Assets, Less Accumulated
Amortization of $79,570 and $38,900........................ 224,202 144,872
Other....................................................... 277,799 423,991
----------- ------------
$10,321,719 $ 7,884,719
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
Current Liabilities:
Short-term borrowings (Note 7)............................. $ -- $ 1,111,658
Current maturities of long-term debt (Note 8).............. 79,288 264,396
Accounts payable........................................... 586,418 974,400
Accrued expenses (Note 9).................................. 287,950 895,506
----------- ------------
Total Current Liabilities................................ 953,656 3,245,960
Long-term Debt, Less Current Maturities (Note 8)............ 821,631 3,535,461
Minority Interest........................................... -- 16,488
----------- ------------
Total Liabilities........................................ 1,775,287 6,797,909
----------- ------------
Commitments and Contingencies (Note 14)
Stockholders' Equity (Note 10):
Convertible preferred stock, $.001 par value, 10,000,000
shares authorized; 101,429 and 30 shares issued.......... 10,765,447 750,000
Common stock, $.001 par value, 100,000,000 shares
authorized; 27,111,497 and 23,927,285 shares issued...... 27,114 23,927
Additional paid-in capital................................. 23,809,619 20,270,015
Accumulated deficit........................................ (25,902,116) (19,794,812)
Treasury stock, at cost, 450,000 shares.................... -- (16,488)
Less notes receivable for sale of stock.................... (153,632) (145,832)
----------- ------------
Total Stockholders' Equity............................... 8,546,432 1,086,810
----------- ------------
$10,321,719 $ 7,884,719
=========== ============
</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, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenues (Note 17)............................ $ 4,494,257 $ 2,642,735
Cost of Revenues.............................. 3,526,213 1,716,715
----------- -----------
Gross Profit............................... 968,044 926,020
Selling, General and Administrative Expenses.. 4,860,377 5,153,720
----------- -----------
Operating Loss............................. (3,892,333) (4,227,700)
----------- -----------
Other Income (Expense):
Interest income (Note 13).................... 163,280 354,665
Interest expense (Note 9).................... (260,289) (157,725)
Loss on sale of equipment and other assets... (138,958) --
Loss on write-off of investment (Note 13).... -- (3,084,729)
Other........................................ (168,096) (224,751)
----------- -----------
Total Other Expense........................... (404,063) (3,112,540)
----------- -----------
Net Loss...................................... $(4,296,396) $(7,340,240)
=========== ===========
Net Loss Per Share (Notes 1 and 10)........... $(.25) $(.40)
=========== ===========
Weighted Average Number of Common
Shares Outstanding........................... 24,264,695 18,199,474
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Preferred Common Stock
----------------------- -----------------------
Shares Amount Shares Amount
-------- ------------- ------------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994...................... 80 $ -- 18,692,489 $18,692
Interest on notes receivable from stockholders.. -- -- -- --
Sale of EET shares (401k) plan.................. -- -- 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 treasury 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
Sale of common stock............................ -- -- 750,000 750
Stock issued for services....................... -- -- 363,488 364
Issuance of common stock upon conversion
of convertible debt............................ 248,131 249
Sale of Series E and F preferred stock.......... 65,550 7,800,000 -- --
Issuance of Series F preferred stock in
exchange for notes payable surrendered......... 27,000 2,700,000 -- --
Issuance of common stock upon conversion
of Series D and E preferred stock.............. (55) (1,375,000) 2,690,522 2,692
Issuance of common stock to acquire
minority interest of subsidiary............... -- -- 1,382,071 1,382
Issuance of preferred stock in
lieu of cash dividends......................... 8,904 890,447 -- --
Cancellation of common and treasury stock....... -- -- (2,250,000) (2,250)
Costs associated with equity transactions....... -- -- -- --
Interest on notes receivable from
stockholders................................... -- -- -- --
Dividends on preferred stock.................... -- -- -- --
Deemed dividends on preferred stock............. -- -- -- --
Net loss for the year........................... -- -- -- --
------- ----------- ---------- -------
BALANCE, December 31, 1996...................... 101,429 $10,765,447 27,111,497 $27,114
======= =========== ========== =======
</TABLE>
<TABLE>
<CAPTION>
Additional Treasury Stock Notes
Paid-In Accumulated --------------------------- Receivable
Capital Deficit Shares Amount Stockholder Total
------------- ------------ ------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$17,613,667 $(12,454,572) 803,000 $(32,312) $(138,032) $ 5,007,443
-- -- -- -- (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
749,250 -- -- -- -- 750,000
274,636 -- -- -- -- 275,000
157,934 -- -- -- -- 158,183
-- -- -- -- -- 7,800,000
-- -- -- -- -- 2,700,000
1,372,308 -- -- -- -- --
620,518 -- -- -- -- 621,900
-- (890,447) -- -- -- --
2,250 -- (450,000) 16,488 -- 16,488
(515,375) -- -- -- -- (515,375)
-- -- -- -- (7,800) (7,800)
-- (42,378) -- -- -- (42,378)
878,083 (878,083) -- -- -- --
-- (4,296,396) -- -- -- (4,296,396)
----------- ------------ ----------- -------- --------- -----------
$23,809,619 $(25,902,116) -- $ -- $(153,632) $ 8,546,432
=========== ============ =========== ======== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(4,296,396) $(7,340,240)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization....................... 638,908 283,884
Loss on sale of equipment and other assets.......... 138,958 --
Equity in net loss of joint venture................. 90,869 231,712
Provision for bad debts............................. 89,040 78,002
Accrued interest on notes receivable, stockholders.. (7,800) (7,800)
Stock issued for services........................... 200,000 55,000
Loss on write-off of note receivable................ -- 3,084,729
Changes in assets and liabilities, net of
purchase of GAIA:
Accounts receivable................................ (460,305) (199,820)
Inventories........................................ (216,850) (248,401)
Prepaid expenses and other current assets.......... (116,954) (187,876)
Other assets....................................... (141,081) (201,304)
Accounts payable and accrued expenses.............. (912,353) 119,235
----------- -----------
Net cash used in operating activities.......... (4,993,964) (4,332,879)
----------- -----------
Cash flows from investing activities:
Redemption (purchase) of certificates of deposit....... 200,000 (200,000)
Increase in note receivable............................ (575,876) (326,217)
Purchase of businesses................................. -- (2,297,914)
Investment in joint venture............................ -- (210,829)
Collection of notes receivable......................... -- 106,895
Purchase of technology and patents..................... (355,705) (112,608)
Payment for non-compete agreement...................... (120,000) (105,000)
Purchase of property and equipment..................... (548,019) (294,936)
Cash received from sale of equipment and other assets.. 85,000 --
----------- -----------
Net cash used in investing activities............ (1,314,600) (3,440,609)
----------- -----------
Cash flows from financing activities:
Issuance of preferred stock............................ 7,800,000 750,000
Issuance of common stock............................... 750,000 2,109,583
Issuance of note payable to stockholder................ 250,000 6,698
Repayment of notes payable and long-term debt.......... (1,410,596) (456,151)
Payment for costs of issuing equity.................... (244,876) --
Payment of preferred dividends......................... (42,378) --
Issuance of notes payable and long-term debt........... -- 3,035,166
Line of credit borrowings (repayments)................. -- (300,000)
Redemption of preferred stock.......................... -- (305,000)
----------- -----------
Net cash provided by financing activities...... 7,102,150 4,840,296
----------- -----------
Net increase (decrease) in cash and cash equivalents.... 793,586 (2,933,192)
Cash and cash equivalents, beginning of year............ 333,326 3,266,518
----------- -----------
Cash and cash equivalents, end of year.................. $ 1,126,912 $ 333,326
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<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") which were
accounted for as a pooling-of-interests (see Note 3(b)). In December 1995, the
Company acquired certain assets of GAIA Technologies, Inc. and its affiliates
(collectively "GAIA") (see Note 3(a)). In addition, in June 1996, the Company,
through its wholly-owned subsidiary, Riserclad International, Inc.
("Riserclad"), acquired certain assets of MPT Services, Inc.
NATK was incorporated on 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 its subsidiary NAT (see Note
10). This transaction was recorded at book value of MBCC. Effective August
15, 1996, the Company acquired the remaining 11.1% minority interest of its
subsidiary, North American Environmental Group, Inc. ("NAEG") (see Note 3(c)).
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 condenser support pads
("A/C pads"), made from recycled rubber and thermoplastic. Riserclad
reformulates and markets a corrosion protection system for steel structures in
marine applications. 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-7
<PAGE>
PATENTS, PURCHASED TECHNOLOGIES AND INTANGIBLE ASSETS
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.
Goodwill represents the excess of the purchase price over the fair market
value of net assets received in business combinations accounted for by the
purchase method. Goodwill is being amortized by the straight-line method over
three to 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, three to ten years. The organization costs are being
amortized by the straight-line method over five years.
In accordance with FAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", management reviews long-
lived assets and intangible assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be fully
recoverable. As part of this assessment, management prepares an analysis of the
undiscounted cash flows for each product that has significant long-lived or
intangible asset values associated with it. This analysis for the asset values
as of December 31, 1996 indicated there was no impairment to these assets'
carrying values. Inherent in this analysis is an estimate of both future
revenues and profitability for these products. Management uses a wide variety
of information when preparing these estimates, including items such as the
product's market demand as exhibited by purchase orders, estimates of the market
size, current raw material availability and pricing, as well as management's
ability and willingness to fund the commercialization of the product. Given the
early stages of these products' commercialization, these estimates are subject
to revision in the future as additional information becomes available. It is
reasonably likely that a revision of an estimate could occur that would result
in an adjustment to the carrying value of an asset and such adjustment could be
material to the operating results and financial position of the Company. Any
such adjustment would be included in the continuing operations for that period.
See Note 5(a).
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.
At December 31, 1996 and 1995, the Company's investment in the joint venture
totalled approximately $87,000 and $179,000, respectively, and its share of
operating losses totalled approximately $91,000 and $232,000, respectively, for
the years then ended. In December 31, 1995, the Company suspended any
additional funding until the development of waste streams sufficient to justify
further investment. As of December 31, 1996, the joint venture's operating
activities consisted of leasing its equipment to a third party. For the years
ended 1996 and 1995, the accompanying financial statements do not include
separate condensed financial statements of the joint venture because the
financial position and operating results of the joint venture are not material
to the Company.
F-8
<PAGE>
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 12). 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. For the
years ended December 31, 1996 and 1995, the company incurred research and
development expenses totalling $263,936 and $595,771, respectively.
LOSS PER COMMON SHARE
The loss per common share is computed by dividing the net loss, plus the
dividends on preferred stock, by the weighted average number of common shares
outstanding and common stock equivalents, if dilutive. Preferred stock
dividends include: (i) dividends stated in the respective certificate of
designations; and (ii) dividends deemed to have been issued by virtue of a
conversion price that is computed at the date of conversion using a discount to
the market price of the Company's common stock. For the years ended December
31, 1996 and 1995, net loss applicable to common stockholders is as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net loss.................................... $(4,296,396) $(7,340,240)
Dividends on preferred stock................ (932,825) --
Deemed dividends on preferred stock......... (878,083) --
----------- -----------
Net loss applicable to common stockholders.. $(6,107,304) $(7,340,240)
=========== ===========
</TABLE>
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.
STOCK OPTIONS AND WARRANTS
The Company accounts for stock options and warrants issued to
employees in accordance with APB 25, "Accounting for Stock Issued to Employees."
For financial statement disclosure purposes and issuance of options and warrants
to non-employees for services rendered, the Company follows FASB Statement 123,
"Accounting for Stock-Based Compensation."
F-9
<PAGE>
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.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include notes receivable and notes
payable. The carrying values of these instruments approximate market values
because the rates of return and borrowing rates are similar to other financial
instruments with similar credit risks and terms.
CONCENTRATION OF CREDIT RISK
At December 31, 1996, the Company's cash in a financial institution
exceeded the federally insured deposit limit by $935,776. 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.
RECLASSIFICATIONS
Certain 1995 balances have been reclassified to conform to the 1996
financial statement presentation.
NOTE 2 - FINANCIAL CONDITION AND GOING CONCERN
For the years ended December 31, 1996 and 1995, the Company incurred
net losses of $4,296,396 and $7,340,240, respectively, and had an accumulated
deficit of $25,902,116 at December 31, 1996. Because of these recurring losses,
the Company will require additional working capital to develop and support its
technologies and businesses until the Company either (1) achieves a level of
revenues adequate to generate sufficient cash flows from operations; or (2)
receives additional financing necessary to support the Company's working capital
requirements.
Management is currently in negotiations with the existing holders of
the Company's Series F convertible preferred stock ("Series F Holders")
regarding an additional investment in the Company. The preliminary discussions
have indicated that the Series F Holders, through a new series of preferred
stock, would fund before the end of April 1997, up to $1,850,000. In addition,
the agreement would provide for additional funding in amounts and at times
mutually agreed upon between the Company and the Series F Holders. The new
series of preferred stock would have approximately the same terms as the Series
F convertible preferred stock issued in 1996 (see Note 10), except that there
would not be any warrants issued in connection with the transaction, and the
conversion price would be based upon arms-length negotiations between the
Company and the Series F Holders. As of February 7, 1997, no definitive
agreement has been reached with the Series F Holders and there can be no
assurance that the transaction will be completed or that the Series F Holders
will approve subsequent fundings.
F-10
<PAGE>
To the extent that funds generated from operations, existing working
capital resources and the proposed financing discussed above are insufficient,
the Company will have to raise additional working capital. No assurance can be
given that additional financing will be available, or if available, will be on
terms acceptable to the Company. If adequate working capital is not available,
the Company may be required to curtail its operations.
This condition raises substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
NOTE 3 - 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) transaction 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 did not manufacture any products subject to the royalty provisions
during the years ended December 31, 1996 and 1995.
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, including one who is a former
director of the Company and one who is an officer of the Company's subsidiary,
GAIA. The Company has an exclusive right and option to purchase TieTek through
1998, if the Company satisfies certain funding obligations, as defined. 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 5 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>
F-11
<PAGE>
The operating results of GAIA are not included in the accompanying
statements of loss for the year ended December 31, 1995, 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, as if the
purchase had occurred at the beginning of 1995, after giving effect to certain
adjustments, including depreciation, amortization, interest expense and legal
expense, penalties and other expense associated with liabilities not assumed.
1995
----
Revenues $ 2,869,000
============
Loss from continuing operations $(8,138,000)
============
Net loss $(8,138,000)
============
Net loss per share $ (.45)
=============
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.
(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 owned 50% by a director of the Company, 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 poolings-of-interest.
(c) Effective August 15, 1996, the Company acquired the outstanding
minority interest of its subsidiary, North American Environmental Group, Inc.
("NAEG"), by merging it into another wholly-owned subsidiary. The 1,382,071
previously outstanding shares of NAEG were converted on a one-for-one basis into
shares of the Company's common stock. This transaction was accounted for using
the purchase method of accounting, with the issuance by the Company of 1,382,071
shares of common stock for goodwill of $621,900, which will be amortized over a
three-year period.
NOTE 4 - INVENTORIES
At December 31, 1996 and 1995, inventories consisted of the following:
1996 1995
-------- --------
Raw materials............... $119,270 $ 40,938
Work-in-process............. 15,271 11,796
Finished goods.............. 451,074 277,168
-------- --------
$585,615 $329,902
======== ========
F-12
<PAGE>
NOTE 5 - NOTES RECEIVABLE
At December 31, 1996 and 1995, notes receivable consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Note receivable from sale of equipment (a)........ $ 550,000 --
Note receivable from TieTek, a related party (b).. 764,843 219,592
Other............................................. 60,000 29,375
---------- --------
$1,374,843 $248,967
========== ========
</TABLE>
(a) In November 1996, GAIA sold the equipment used in the manufacture of
A/C pads for $575,000 to its new toll manufacturing vendor located in
Mississippi. As payment for the equipment, GAIA received cash of $25,000 and a
note for $550,000. The note bears interest at 10% per annum, matures November
20, 2001 and is collateralized by equipment. The note provides for repayment
through credits of $.25 and $1.00 per pad against the prices charged to GAIA for
the A/C pads produced by the vendor. In addition, if the vendor fails to timely
manufacture and deliver the products ordered by GAIA, an annual payment of
$110,000 is required. Alternatively, if GAIA fails to purchase a minimum of
36,000 pads during each consecutive six month period during the term of the
agreement, GAIA will allow a reduction of $12.00 for each pad below the required
purchase quantity. All unpaid principal and interest is due November 2001. A
loss of approximately $50,000 relating to previously capitalized installation
costs was recorded on the sale of this equipment.
In January and February 1997, the vendor in Mississippi has produced and
shipped A/C pads pursuant to this agreement. However, the vendor has
experienced financial difficulties which has caused a concern by the Company as
to the vendor's ability to manufacture the A/C pads over the long-term. To
address these concerns, the Company obtained a financial commitment from a
related party of this vendor to ensure that 25,000 pads would be produced by an
alternate supplier under the pricing terms of the original agreement.
Production of these 25,000 pads, which began in March 1997, will provide
sufficient quantities to meet shipments for 60 to 90 days and will provide
credits to the note receivable pursuant to the terms of the original agreement.
The Company at this time is continuing to explore its options regarding the
future manufacturing arrangements for this product. The existing vendor is
attempting to obtain the necessary funding to overcome its financial
difficulties. In addition, the Company has had preliminary discussions with one
company and inquiries from two others, regarding an assumption of the
responsibilities of the toll manufacturer's agreement or a purchase of the A/C
pad business. These preliminary discussions indicate that the asset values, as
discussed below, reflected in the Company's financial statements at December 31,
1996, relating to the A/C pad business would not be impaired. As of March 14,
1997, however, no formal agreement had been reached, nor can any assurance be
made that a final agreement will be reached. The Company believes that a timely
resolution of this issue can be achieved without interruption of production
capacity. However, if the resolution of this issue becomes delayed, there may
be an interruption of production, and therefore revenues, in the short-term.
F-13
<PAGE>
The Company currently has a secured note receivable for $550,000 relating
to A/C pad equipment, which has been classified as long-term in the accompanying
financial statements. In addition, at December 31, 1996, the Company had
approximately $2,997,000 net of accumulated amortization, in patents, purchased
technologies and goodwill that relates to all of the product lines of GAIA (A/C
pads, porous pipe and the TieTek purchase option). In the event: a) the
existing toll manufacturing vendor for A/C pads is unable to obtain additional
financing; or b) the Company is unable to complete a transaction whereby another
vendor would either assume the responsibilities and privileges of the existing
toll agreement or purchase the A/C pad business, it is reasonably likely that an
impairment of a portion of these assets may occur in the near term. Management
would use its judgment at that time to determine the amount of such impairment,
and the appropriate adjustment would be made and recorded in continuing
operations for that period. The amount of such non-cash adjustment, given the
uncertainty of future events, cannot be estimated at this time; however, it is
possible that such an impairment could be material to the operating results and
financial position of the Company.
(b) On December 29, 1995, the Company, in association with the acquisition
of GAIA (see Note 3(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 6 - PROPERTY AND EQUIPMENT
At December 31, 1996 and 1995, major classes of property and equipment
consist of:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Machinery and equipment............... $1,141,556 $1,433,223
Automobiles........................... 81,232 81,232
Furniture and fixtures................ 182,120 110,387
Leasehold improvements................ 30,955 49,032
---------- ----------
1,435,863 1,673,874
Less: Accumulated
depreciation......................... (375,158) (272,240)
---------- ----------
$1,060,705 $1,401,634
========== ==========
</TABLE>
NOTE 7 - SHORT-TERM BORROWINGS
At December 31, 1996 and 1995, short-term borrowing were as follows:
1996 1995
---------- ----------
12% note payable, due
April 1996 (a).......... $ -- $1,050,000
Other.................... -- 61,658
---------- ----------
$ -- $1,111,658
========== ==========
(a) The Company issued the note payable in association with the purchase of GAIA
(see Note 3(a)). The note was due April 1996, including interest at 12%, and
was paid in full upon the issuance of the Series F convertible preferred
stock in April 1996 (see Note 10).
F-14
<PAGE>
The Company's weighted average short-term borrowing rate for the years
ended December 31, 1996 and 1995 were 11.8% and 10.2%, respectively.
NOTE 8 - LONG-TERM DEBT
At December 31, 1996 and 1995, long-term debt is as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<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%,
paid June 1996....................................... -- 250,000
8% convertible debenture, due August
1999 (c)............................................. 500,000 500,000
12% note payable to officer and director, due
January 31, 1997 (d)................................. 120,000 120,000
13%, note payable to officer and director, due
January 1999 (e)..................................... 215,458 --
Other.................................................. 65,461 79,857
--------- -----------
900,919 3,799,857
Less current maturities................................ (79,288) (264,396)
--------- -----------
$ 821,631 $3,535,461
========= ===========
</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. 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 27,000 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 10).
(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 was classified as long-
term at December 31, 1995.
(c) 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.
(d) The note payable to an officer and director of the Company is
unsecured, bears interest at 12% payable monthly, and is due on January 31,
1997. At January 31, 1997, the note was renewed whereby $20,000 is due April
1997 with the remaining balance due January 31, 1998. Accordingly, at December
31, 1996 $100,000 of the note has been reclassified as long-term.
F-15
<PAGE>
(e) 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.
NOTE 9 - RELATED PARTY TRANSACTIONS
On June 30, 1995, the Company acquired IPF, a company owned 50% by a
director of the Company, by issuance of 1,300,000 shares of the Company's common
stock (see Note 3(b)).
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
was paid during 1996. From July 1995 through December 1995, the former Chairman
was a consultant to the Company and was paid $15,000 a month.
Interest expense incurred on notes payable to an officer and director of
the Company totalled approximately $45,000 and $9,100 for the years ended
December 31, 1996 and 1995, respectively (see Note 8).
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 3(a), for note payable and other transactions with GAIA in association with
the purchase of certain assets.
NOTE 10-- STOCKHOLDERS' EQUITY
Series A, B and C Preferred 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.
Series D Preferred Stock
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. During 1996, the Series D shares
were converted into 1,249,313 shares of the Company's common stock. The Company
paid dividends on the Series D shares during 1996 totalling $35,994.
F-16
<PAGE>
Series E Preferred Stock
In February and March 1996, the Company issued 50 shares of Series E
convertible preferred stock ("Series E") for proceeds of $1,250,000. 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. During 1996, 25 Series E shares were
converted into 1,441,209 shares of the Company's common stock. In February 1997
through May 1997, the remaining Series E shares will become available for
conversion. In addition, the Company at its option may redeem any of the Series
E preferred stock still outstanding on or after February 16, 1999 at $25,000 per
share.
Series F Preferred Stock
In April and May 1996, the Company issued 92,500 shares of Series F
convertible preferred stock ("Series F") and stock purchase warrants to purchase
9,250,000 shares of the Company's common stock ("Series F Warrants"). Cash
proceeds of $6,550,000 were received for issuance of 65,500 Series F shares and
6,550,000 Series F Warrants. The remaining 27,000 Series F shares and 2,700,000
Series F Warrants were issued in exchange for the surrender of the 13.5%
convertible subordinated debentures and the warrants (see Note 8(a)). The
Series F Warrants were issued with an original exercise price of $1.00 per
share, subject to certain adjustments, and expire on April 8, 2004. As of
December 31, 1996, the adjusted exercise price was $.95 per share.
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 the
dividend payments during the first three years, in which case, each holder may
elect to either: (i) have such deferred dividends accrue interest at a per annum
rate of 13.5%, or; (ii) receive payment of the dividend in the form of
additional Series F shares. During 1996, the Company paid dividends on Series F
shares totalling $896,831, of which $890,447 was paid by issuance of 8904 shares
of Series F preferred stock and $6,384 in cash.
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. As of December 31, 1996, the adjusted conversion rate was $.95
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.
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 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.
F-17
<PAGE>
The preferred stock purchase agreement and the certificate of designation
for the Series F shares contain certain covenants which, if breached by the
Company, provide for certain remedies. Certain of these covenants are
considered outside of the Company's control. These covenants include, among
other things, that the Company obtain a minimum net worth, as defined in the
agreement, by December 31, 2000. For breach of these covenants that are outside
of the Company's control the remedy allows the Series F holders to convert their
shares into the Company's common stock using a conversion rate computed as the
lesser of (a) the applicable 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.
Other Preferred Stock
During 1995, 3,500 shares of $3.50 convertible preferred stock of the
Company's majority-owned subsidiary 522728 Alberta, Ltd. were converted into
350,000 shares of the Company's common stock which was issued from treasury
stock.
Deemed Dividends on Series D and E Preferred Stock
As a result of the conversion privilege and certain other terms of the
Series D and E shares, on issuance of the Series D and E shares the Company
incurred deemed (non-cash) dividends totalling $1,135,323. The deemed dividends
are computed by taking the difference between the discount to market conversion
rate, as defined, and the per share market price of the Company's common stock
on the date of the preferred stock issuance. The Company records the non-cash
deemed dividend on a pro-rata basis over the conversion period, only impacting
the loss per share calculation (see Note 1). During the year ended December 31,
1996, the Company recognized deemed dividends totalling $878,083, with the
remaining to be recognized in the first and second quarters of 1997.
Common Stock
In association with the Company's purchase in 1993, of the remaining
minority interest of its subsidiary, North American Technologies, Inc.,
3,425,000 shares were issued subject to certain escrow provisions. The
provisions relating to these shares were not met, and 1,625,000 and 1,800,000
shares were retired effective December 31, 1994 and 1996, respectively. These
shares were treated as contingent shares, and accordingly, have been excluded
from weighted average shares in the computation of loss per common share.
F-18
<PAGE>
At December 31, 1996, the Company had common stock reserved for future
issuance as follows:
<TABLE>
<CAPTION>
SHARES
----------
<S> <C>
Conversion of convertible debt........... 333,333
Conversion of preferred stock............ 12,200,000
Stock options outstanding................ 4,225,000
Stock warrants outstanding............... 12,778,916
----------
29,537,249
==========
</TABLE>
NOTE 11 - STOCK OPTIONS AND WARRANTS
The Company has not adopted a formal stock option plan, however, as of
December 31, 1996, by approval of the Board of Directors, the Company has
granted the following stock options; approximately 3,350,000 options to
directors, who are also employees, officers and employees and approximately
875,000 options to consultants and in connection with the financing
transactions. In addition, the Company had issued stock warrants totalling
12,778,916 primarily in connection with financing transactions.
The Company has elected to continue to account for stock options issued to
employees in accordance with APB opinion 25, "Accounting for Stock Issued to
Employees". During the years ended December 31, 1996 and 1995, all options
issued to directors, who are also employees, officers and employees were granted
at an exercise price which equalled or exceeded the market price per share at
date of grant, accordingly, no compensation was recorded.
Effective for the year ended December 31, 1996, the Company was required to
adopt the disclosure portion of FASB Statement 123, "Accounting for Stock-Based
Compensation". This statement requires the Company to provide pro forma
information regarding net loss applicable to common stockholders and loss per
share as if compensation cost for the Company's stock options granted had been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995 as follows:
dividend yield of 0% for all years; expected volatility ranging from 67.59% to
94.78%; risk-free interest rates ranging from 5.21% to 7.14%; and expected lives
ranging from 3.67 to 4.5 years.
Under the accounting provisions of FASB Statement 123, the Company's net
loss applicable to common stockholders and loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Net loss applicable to
common stockholders
As reported.................. (6,107,304) $(7,340,240)
---------- -----------
Pro forma.................... (7,039,304) $(7,340,240)
---------- -----------
Loss per share
As reported.................. (.25) $ (.40)
---------- -----------
Pro forma.................... (.29) $ (.40)
---------- -----------
</TABLE>
Due to the fact that the Company's stock option programs vest over many
years and additional awards are made each year, the above pro forma numbers are
not indicative of the financial impact had the disclosure provisions of FASB
Statement 123 been applicable to all years of previous options grants. The
above numbers do not include the effect of options granted prior to 1995 vested
in 1995 and 1996.
F-19
<PAGE>
A summary of the status of the Company's stock options to employees as of
December 31, 1996 and 1995, and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1996 1995
------------------------ ----------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.................................................. 3,550,000 $1.99 1,100,000 $1.25
Granted........................................................................... 200,000 2.50 2,450,000 2.32
Exercised......................................................................... -- -- -- --
Forfeited......................................................................... (400,000) 1.25 -- --
--------- ----- --------- ---------
Outstanding at end of year........................................................ 3,350,000 $2.10 3,550,000 $1.99
========= ===== ========= =========
Options exercisable at year-end................................................... 1,442,500 $1.69 720,000 $1.25
========= ===== ========= =========
Weighted-average fair value of options
granted during the year.......................................................... $ .46 $1.36
===== =========
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
Weighted
Average
Remaining
Number Contractual Number
Exercise Outstanding Life Exercisable
Price at 12/31/96 (Years) at 12/31/96
--------- ------------- ------------- --------------
$1.00 300,000 5.25 300,000
$1.25 700,000 4.86 580,000
$2.50 2,350,000 7.54 562,500
For the year ended December 31, 1996, in accordance with FASB Statement
123, the Company is required to account for options issued to non-employees for
services rendered at the fair value based method over their vesting period.
In connection with the options granted to consultants and in connection
with debt issuances, the Company has 875,000 options outstanding at December 31,
1996, of which 775,000 are exercisable at December 31, 1996. These options have
exercise prices ranging from $.75 to $2.50 and expire from September 1997 to
September 1999. Of these options outstanding, 150,000 were granted to
consultants for services rendered during the year ended December 31, 1996, with
minimal compensation expense recorded based on the fair value of the options at
the grant date as calculated using the Black-Scholes option-pricing model.
In connection with the stock warrants issued primarily in connection with
financing transactions, the Company has 12,778,916 stock warrants outstanding at
December 31, 1996, of which all are currently exercisable. These warrants have
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 2004.
F-20
<PAGE>
NOTE 12 - 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, 1996 and 1995,
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- ----------------------------------- ----- -----
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward.. $ 5,403,000 $ 3,886,000
Bad debt reserves................ 1,084,000 1,076,000
Other............................ 252,000 125,000
--------- ---------
Gross deferred tax assets.......... 6,739,000 5,087,000
Valuation allowance................ (6,739,000) (5,087,000)
----------- -----------
Net deferred tax assets............ $ -- $ --
=========== ===========
</TABLE>
At December 31, 1996 and 1995, the Company provided a 100% valuation
allowance for the deferred tax asset because it could not determine whether it
was more likely than not that the deferred tax asset would be realized.
At December 31, 1996, the Company has net operating loss carryforwards
for federal income tax purposes totalling approximately $15,891,000 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
2011.............................. 4,462,000
-----------
$15,891,000
===========
</TABLE>
The figures above are stated on a consolidated basis. Federal tax
laws only permit the use of net operating loss carryforwards by the individual
entities that originally sustained the losses.
F-21
<PAGE>
NOTE 13 - LOSS ON INVESTMENT
Effective December 31, 1994, the Company renegotiated the terms of a
note receivable from Euro Scotia Funding Limited ("ESF"), which arose from prior
transactions with ESF. At December 31, 1994, the face value of the note plus
accrued interest receivable totalled $3,278,857. 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 borrowings under
the line of credit plus accrued interest payable totalled $356,473, and amounts
owed to ESF for services totalled $121,621, for a net balance due from ESF of
$2,800,763.
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 a demand for payment of the ESF note and has
consulted with counsel regarding its legal remedies against ESF and others
involved with the transaction. In the event the Company pursues its claim
against ESF or others in the future by participating in legal proceedings, there
is the possibility that the Company may be required to defend any related
actions which might be brought against the Company.
F-22
<PAGE>
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company rents equipment and office space under operating leases on
both long and short-term basis. Rent expense for the years ended December 31,
1996 and 1995 totalled approximately $237,000 and $168,000, 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>
1997......................... $170,000
1998......................... 126,000
1999......................... 126,000
2000......................... 94,000
--------
$516,000
========
</TABLE>
At December 31, 1996, the Company had employment contracts that provide
for payments of approximately $930,000 annually through 1999.
GAIA has a manufacturing agreement with a vendor for the production of
its A/C pads and its porous pipe. The A/C pad agreement provides that GAIA will
purchase a minimum of 36,000 pads in each consecutive six month period. If GAIA
fails to do so, a credit of $12.00 per pad below the required purchase quantity
is allowed against the vendor's note owed to GAIA (see Note 5).
In association with the purchase of certain assets of MPT Services,
Inc., the Company entered into a royalty agreement whereby the Company is
obligated to pay a royalty equal to 10% of gross profits in excess of certain
levels, as defined by the agreement, through the year 2000. Thereafter, the
Company is obligated to pay royalties equal to 5% of earnings before income
taxes, as defined, through the year 2014. During the year ended December 31,
1996, the Company accrued royalties totalling approximately $9,000.
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, and also by
filing a Notice of Appeal. The Company intends to vigorously defend itself
against this action.
In July 1993, an individual brought action against North American Gold
Corp. (the 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. Discovery is ongoing, and management cannot evaluate the Company's
exposure at this time. The Company intends to vigorously defend itself against
this action.
F-23
<PAGE>
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended December 31, 1996 and 1995, the Company paid
interest totalling approximately $378,000 and $25,000, respectively.
During the year ended December 31, 1996, the Company had the following
non-cash transactions:
(a) The Company transferred property and equipment with a net book
value of $38,863 to inventory.
(b) The Company sold equipment with a net book value of $626,676 for
cash of $25,000 and a note of $550,000.
(c) The Company issued 1,382,071 shares of its common stock for the
outstanding minority interest of NAEG and recorded goodwill totalling
$621,900. In association with the transaction, the Company
reclassified deferred offering costs totalling $221,377 incurred prior
to the year ended December 31, 1995 to additional paid-in capital.
(d) The Company issued 363,488 shares of its common stock, of which
100,000 shares were in payment of accrued liabilities at December 31,
1995 totalling $75,000 and 263,488 shares issued for services provided
during 1996, totalling $200,000.
(e) The holder of a $150,000 note payable converted the note and
accrued interest totalling $8,185 into 248,131 shares of the Company's
common stock.
(f) The holders of the 13.5% convertible subordinated debentures
totalling $2,700,000 surrendered their notes in exchange for 27,000 of
the Company's Series F shares. In association with this transaction,
net deferred offering costs totalling $49,122 were reclassified to
additional paid-in capital.
(g) The company cancelled 1,800,000 shares of common stock that were
held in escrow at December 31, 1995.
(h) The holders of Series D and E shares totalling 30 and 25 shares,
respectively, with original face values totalling $1,375,000,
converted their holdings into 1,249,313 and 1,441,209 shares of the
Company's common stock.
(i) The Company issued 8,904 Series F shares in payment of dividends
totalling $890,447.
(j) The Company cancelled 450,000 shares of treasury stock that was
recorded as minority interest at December 31, 1995.
F-24
<PAGE>
During the year ended December 31, 1995, the Company had the following
non-cash transactions:
(a) 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 3(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 prior to the year ended
1995.
(b) 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.
(c) The Company contributed equipment with a book value totalling
$200,000 to a 50% owned joint venture.
(d) The Company issued 125,000 shares of the Company's common stock for
services provided totalling $55,000.
NOTE 16 - 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.
Formulates and markets corrosion protection systems for steel structures in
marine applications.
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Revenues from unaffiliated customers:
Environmental........................ $ 1,270,259 $ 1,725,384
Manufacturing and Distribution....... 3,223,998 917,351
----------- -----------
Total revenues..................... $ 4,494,257 $ 2,642,735
=========== ===========
Operating loss:
Environmental........................ $ (780,599) $(1,943,874)
Manufacturing and Distribution....... (1,075,441) (4,088)
Other................................ (2,036,293) (2,279,738)
----------- -----------
Total operating loss............... $(3,892,333) $(4,227,700)
=========== ===========
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
Identifiable assets:
Environmental........................ $ 2,051,735 $ 1,827,628
Manufacturing and Distribution....... 7,114,584 5,012,144
Other................................ 1,155,400 1,044,947
----------- -----------
$10,321,719 $ 7,884,719
=========== ===========
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Capital expenditures:
Environmental........................ $ 2,103 $ 150,297
Manufacturing and distribution....... 516,095 991,004
Other................................ 29,821 19,019
----------- -----------
$ 548,019 $ 1,160,320
=========== ===========
Depreciation and amortization:
Environmental........................ $ 311,779 $ 230,851
Manufacturing and Distribution....... 312,139 27,236
Other................................ 14,990 25,797
----------- -----------
$ 638,908 $ 283,884
=========== ===========
</TABLE>
NOTE 17-- FOREIGN SALES
Export sales by the manufacturing and distribution group to foreign
countries totalled $985,000 for the year ended December 31, 1996, of which
approximately $415,000, $293,000 and $277,000 were to Kuwait, Nigeria and other
foreign countries, respectively. Export sales for 1995 were less than 10% of
net sales.
F-26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
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0
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