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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, 1999
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
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
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(Exact name of small business issuer in its charter)
DELAWARE 33-0041789
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
14315 West Hardy Road
Houston, Texas 77060
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(address of principal executive offices) (Zip Code)
Registrant's telephone number: (281) 847-0029
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. __
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State issuer's revenues for its most recent fiscal year: $ 170,107
The aggregate market value of the common voting stock held by non-
affiliates computed by reference to the price at which the stock was sold as of
March 10, 2000 was $11,500,000. 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 March 10, 2000, there were 4,908,813 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, the risk factors described under Item 1 in this Annual Report.
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. DESCRIPTION OF BUSINESS
General Development of Business
General Business Strategy. As used in this report, "the Company" refers
to North American Technologies Group, Inc. ("NATK") and its subsidiaries. NATK
was incorporated December 24, 1986 in the State of Delaware. The Company's
historic business strategy had been to acquire and/or internally develop
businesses that are based on proprietary technologies, proprietary manufacturing
processes and/or defensible market niches. During 1997 and 1998, the Company
evaluated the businesses and/or technologies that had been acquired during prior
years to determine the optimum course to be pursued given the level of resources
available to the Company. As a result of this review, the Company decided to
concentrate its resources on the commercialization of its TieTek composite
railroad crosstie. Accordingly, the Company has sold or licensed certain of its
businesses and technologies that had been sufficiently commercialized and which
might be better developed by outside interests with resources or capabilities in
specific areas related to those businesses.
Acquisition of TieTek. In December 1995, the Company acquired
substantially all of the assets of GAIA Technologies, Inc. ("GAIA"), including a
number of patented and proprietary technologies and other business assets
relating to the use of recycled rubber and plastics for the manufacture of
synthetic construction materials, porous pipe, and certain other products with
advanced structural properties.
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 was controlled by three
individuals, including an officer and director of the Company. In 1995, the
Company licensed to TieTek the rights to use certain of GAIA's patented and
proprietary technologies to develop composite railroad crossties and certain
other related products. The Company also agreed to lend up to $1,500,000 (the
"Crosstie Loan") to TieTek, the proceeds of which loan were to be used in
connection with developing the composite railroad crossties. The Crosstie Loan
was collateralized by a pledge of, and lien on, all of TieTek's assets and the
capital stock, and certain shares of the Company's Common Stock which had been
issued in connection with the acquisition of GAIA. Under the Crosstie Purchase
Option and Loan Agreement, the Company had until December 29, 1998 to acquire
100% of the capital stock of TieTek.
In December 1997, the Company exercised its option to acquire TieTek, which
as a result became a wholly-owned subsidiary of NATK. The Company's
consideration for the exercise of the option consisted of the assumption of
TieTek's liabilities (totaling $1,470,770, of which $1,463,800 represented the
outstanding balance on the Crosstie Loan between NATK and TieTek, and as such
was eliminated in the consolidation of the Company's financial statements), the
release as collateral of shares of Company Common Stock owned by the former
shareholders of GAIA, and the execution of a Royalty Agreement providing for
certain royalty payments calculated on the gross profit of TieTek for a fifteen
year period. The Royalty Agreement also provides for certain minimum payments
in the event the Company does not commit to certain financial obligations
relating to the operation of a manufacturing facility with the capacity to
fulfill the demonstrated market demand, as defined, for TieTek's composite
railroad crosstie. The Company believes it has fulfilled the required financial
commitments, and therefore no minimum payments are due. In October 1999, the
Company was informed by certain royalty holders that they disagree with the
Company's interpretation of the royalty agreement and believe that an alternate
minimum royalty is due and have requested that it be paid. The company is in
discussions with representatives of the royalty holders and is attempting to
reach an amicable resolution of the issue.
Other Businesses. As a result of the periodic evaluation of its
technologies, during 1997 and early 1998 the Company sold or licensed certain of
its businesses and technologies that had been sufficiently commercialized and
which might be better developed by outside interests with resources or
capabilities in specific areas related to those businesses. The management and
Board of Directors of the Company believed that executing such a plan would
benefit the Company because cash would be generated to further develop the
Company's remaining technologies,
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management could focus its efforts on a fewer number of businesses, and overhead
costs would be significantly reduced. As a result, during 1997 and 1998 several
of the Company's businesses and/or technologies had been either licensed or
sold, as described more fully below. In addition, the reduction in the number of
technologies allowed the Company to focus its resources on the commercialization
of the TieTek composite railroad crosstie.
EET. In March 1995, the Company acquired by merger EET, Inc. ("EET"), a
company formed in 1993 when it purchased certain patents and proprietary
technologies and processes from EnClean, Inc. EET, Inc. was principally engaged
in the commercialization of EET's patented TECHXTRACT(R) technology for the
environmental decontamination of buildings and equipment, removal of stains from
concrete, and the descaling of industrial deposits. Prior to its acquisition by
the Company, EET was owned by approximately forty shareholders, including a
former CEO and President of the Company, and a former Senior Vice President of
the Company. EET and the Company were not affiliated prior to the acquisition
of EET.
In October 1997, the Company sold certain assets of EET that were used by
its Waste Management Services division in Austin, Texas to an unrelated company
in the environmental services industry. The Company received $55,000 in cash as
consideration, and recognized a gain of approximately $20,000.
On March 30, 1998 the Company completed the sale of certain assets of EET
that related to its patented TECHXTRACT(R) technology to an unrelated company.
The purchase price consisted of a cash payment of $200,000, two promissory notes
and the assumption by the purchaser of certain contractual obligations. The
first such promissory note is in the principal amount of $363,436, bears
interest at a per annum rate of six percent (6%) and is payable in twelve (12)
quarterly payments, the first such payment being due and payable on September
30, 1998. The second such promissory note is in the principal amount of
$436,835, bears interest at a per annum rate of nine and one-half percent
(9 1/2%) and is payable in twelve (12) annual payments, the first such payment
being due and payable on September 30, 2001. The purchase price was based
primarily on the expected market value of the technology included in the assets.
The Company recognized a gain of approximately $440,000 on this transaction in
1998. In September 1999, the borrower paid interest when due but failed to make
the required principal payment and also failed to make the required December
1999 principal payment. The borrower and the Company are presently negotiating a
restructuring of the notes. The borrower has agreed to increase the interest
rate on the first note to 9% beginning October 1, 1999 and has paid interest at
that rate through December 31, 1999. In addition, the borrower has verbally
offered $80,000 to settle the outstanding balance due on the first note. Because
of the uncertainty of collection, the Company provided an allowance of $681,900
as of December 31, 1999, of which $380,950 was provided as of September 30,
1999.
Industrial Pipe Fittings, Inc. In June 1995, the Company acquired by
merger Industrial Pipe Fittings, Inc. ("IPF"), a Houston, Texas-based
manufacturer and distributor of proprietary and standard thermoplastic fittings
for the mining, environmental and water works industries from a former director
and officer of the Company, and two other unrelated individuals.
In October 1997, the Company sold the net assets of IPF to an unrelated
company. As consideration, the Company received $900,694 in cash and a six-
month non-interest bearing note with an original face amount of $50,000. The
Company recognized a loss of approximately $100,000 on the transaction.
GAIA Technologies, Inc. In June 1997, the Company sold the technology for
manufacturing air-conditioner support pads which had been acquired from GAIA,
along with certain related equipment to an unrelated manufacturing company. As
consideration, the Company received $25,000 cash, a note receivable of $550,000,
and future royalty payments through June 2007. There was no gain or loss
recognized on this transaction. In September 1998, the Company discounted this
five-year note receivable with a then outstanding principal balance $525,000 for
a cash payment of $420,000 in full settlement of all outstanding obligations
between the parties.
The Company decided to suspend the ongoing operations associated with the
porous pipe product line and pursue possible licensing arrangements. During the
year ended December 31, 1997, the Company recognized an impairment in the value
of the porous pipe assets of approximately $1,100,000, representing
substantially all the assets associated with this product line.
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Riserclad International, Inc. In June 1996, the Company, through a newly
formed subsidiary, Riserclad International Inc. ("RII"), acquired the rights to
a patented corrosion protection technology known as "Riserclad" from an
unrelated company. The Riserclad technology protects steel surfaces in the
"splash zone" of marine structures such as offshore oil platforms, and bridge
pilings and supports.
In November 1997, the Company licensed its Riserclad technology and sold
certain net assets to a company owned by the former President of RII and other
unrelated individuals. As consideration, the Company received $150,000 cash,
two notes receivable of $301,960 and $100,000, and future royalty payments
calculated as a percentage of net revenues, as defined, above a specified
minimum. The Company recognized a gain of approximately $20,000 on the
transaction. In 1998, the remaining balance of the $301,960 note was fully
reserved, and in 1999, a valuation adjustment of $163,210 was recognized to
write-down the Riserclad technology and non-compete agreements carrying values
to approximately $99,000.
GENERAL DESCRIPTION OF BUSINESS
The Company's principal business is the manufacture and marketing of the
TieTek composite railroad crosstie through its TieTek subsidiary. The TieTek
crosstie was conceived as a direct substitute for wood crossties, but with a
longer life and with several environmental advantages. It has been successfully
tested by a number of U.S. railroads and independent laboratories. Since the
first track installation in March 1996, several thousand TieTek crossties have
been installed under track in a variety of load and environmental conditions
where they continue to meet performance expectations. NATK is now executing a
manufacturing strategy which will support the commercial market entry of the
TieTek crosstie during 2000.
Description of the Market. A railroad track is a total system consisting
of two steel rails which are held in place at a fixed distance apart by steel
plates which, in turn, are fastened to crossties. The crossties are supported
by ballast on an improved roadbed. Each component of the track contributes to
maintaining the rail "gauge" or spacing and to supporting and distributing the
forces of the loaded train. Although different types of "crossties" have been
used throughout the history of railroad construction, the wooden crosstie has
been the dominant product. Hardwood ties are relatively strong in tension (to
hold the rails the correct distance apart or "in gauge"), in bending (to
uniformly distribute the load to the ballast), and in compression (to support
the rail) while providing enough flexibility to cushion the impact of the wheels
on the rail. In addition, the "nailability" of wood allows the rail and plate
to be attached to the tie with simple and cost effective steel spikes.
The demand for new ties comes from two sectors: construction of new rail
lines and replacement of worn out or decayed ties under existing track. The
construction of new track is dictated by the stage of industrialization and
corresponding economic growth in any particular region. As is the case in most
industrialized nations, the demand for ties in new construction in the United
States has been minimal in recent years given the lack of expansion of the
current track system. Thus, most of the demand for new ties in the U.S. is for
the replacement of old ties. Current demand for new ties in North America is
estimated by the Company, based on industry reference materials, to exceed 15
million ties per year while demand in the rest of the world is estimated to be
more than 60 million ties per year.
The worldwide supply of crossties falls into four primary categories: wood,
concrete, steel, and other alternatives. According to industry statistics,
wooden ties dominate the market, providing about 86% of U.S. demand and about 75
- - 80% in the rest of the world. In the U.S., concrete holds approximately a 10%
market share, with steel and other alternate materials representing
approximately 1-3% of the market. In Western Europe, concrete and steel are
more widely used, each exceeding a 10% market share.
While there are no absolute standards for railroad ties, the performance
for all ties is usually established relative to wooden ties. Generally, the
technical requirements of a railroad crosstie are described as follows:
. The tie must be able to support the weight and dynamic forces of the rail and
train without damage to the tie or the rail.
. The tie must be able to interact with the ballast and distribute the weight
of the train to the underlying roadbed.
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. The tie must be able to maintain the gauge of the track on straight runs and
curves and prevent the rail from "rolling over" on curves.
. The rail should be able to be fastened to the tie cheaply and efficiently. If
spikes are used, the tie must be able to hold the spike for the life of the
tie.
. The tie must be stiff enough to support the load, but flexible enough to
absorb the impact and vibration of passing trains with minimal damage to the
track, the train and the tie.
. The tie should resist decay with minimal degradation of original properties
over time.
. The tie must not conduct electrical impulses between the rails.
Over the years, these requirements have been evaluated by laboratory tests
and measurements, with hardwood ties setting the relative standard. Alternate
crossties can be compared to wooden ties in these critical areas, but the
ultimate test is performance under load on actual track. TieTek's crossties
continue to perform successfully against these standards.
Technology Development. The specific TieTek crosstie technology is based
on the Company's technology and know-how to combine rubber and plastic to create
products with unique capabilities. TieTek determined that rubber and plastic
alone could not meet all the required performance criteria for railroad
crossties, and after years of product development, TieTek has discovered a
combination of several different components that produce a composite crosstie
with the desired properties.
The TieTek crosstie formula is a proprietary mixture of rubber from
recycled tires, plastics, other waste materials, additives, fillers and
reinforcement agents. The current formulation was developed after extensive
theoretical, laboratory, pilot plant and full-scale production testing to
achieve a balance of flexibility, strength, hardness, weight, density,
nailability and other properties of wood. The product development effort
recognized the need to be competitive with the price of wood by using lower cost
raw materials. The Company believes the current formulation meets these
objectives. While the primary focus of the Company is clearly to produce ties
based on the established technology, research will continue to further optimize
the performance and cost characteristics of the TieTek crosstie and to evaluate
other applications of the technology. The exact formulation of TieTek crossties
is proprietary and is covered under a current patent.
The Company believes the TieTek crosstie meets the product characteristic
objectives that were initially established by market requirements. The current
crossties have consistent shape and dimensions and are tough and durable in use
under load. Unlike wooden ties, every TieTek crosstie is essentially the same,
and has consistent quality and properties. The physical properties are
comparable to wooden ties that have been in service just a few years and tests
have shown that the TieTek crosstie should maintain its properties far longer
than most wood ties. The TieTek crosstie can be installed either manually or
with automated equipment and can be fastened with cut spikes or other systems.
They contain no toxic preservatives and are resistant to decay and bug
infestation.
Independent Product Testing. The TieTek crosstie has undergone a range of
tests conducted at several independent testing facilities. The TieTek crosstie
was evaluated for compression strength, hardness, stiffness, and three measures
of spike performance in the tie (measuring resistance to spike drive, spike pull
and lateral movement) at The Wood Science Laboratory at the University of
Illinois under the direction of Dr. Poo Chow. The Laboratory is partially
funded by the American Association of Railroads ("AAR"), and is highly credible
with the railroad industry. In this series of tests, the TieTek crosstie's
performance was comparable to that of wooden ties in service only a few years.
The laboratory also conducted accelerated aging tests which showed the TieTek
crosstie had a slower rate of degradation of its properties than is common with
wooden ties. These tests indicate that the TieTek crosstie can be used
interchangeably with wood and will last longer than most creosote-treated wooden
ties.
TieTek has also tested its crosstie at the Transportation Technology Center
(TTCI) testing facility in Pueblo, Colorado. As a subsidiary of the AAR, this
independent industry facility tests new technologies concerning track, ties,
rails, fasteners, locomotives, and cars used in the U.S. railroad industry.
TieTek's crossties at Pueblo have experienced more than 250 million gross tons
of load (this test is ongoing), as well as 2 million vibrations in an
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accelerated wear test with no problems of any kind. The TTCI tests confirm that
the TieTek tie has met the requirements of the industry.
Approximately 6,000 TieTek crossties have been produced since the
development program began. Of these, more than 3,000 crossties are in rail
service in the U.S. and over 2,500 crossties were exported for use in a marine
application. The first two test ties were placed in service in March 1996 on a
mainline track near Conroe, Texas and continue to perform well. Since then,
TieTek crossties have been installed in five other locations in Texas, as well
as in Louisiana, California, Arizona, Colorado, Illinois, New York, Virginia and
Kansas.
These installations provide a wide range of operating conditions with
extremes of temperature and moisture, on soft track beds, with very heavy loads,
and in both curved and straight track. The TieTek crossties installed to date
have experienced no performance problems and the Company markets the tie as a
commercial product.
Manufacturing. There are four basic functions in the TieTek manufacturing
process:
. Raw Material Selection and Handling - There are several components in the
crosstie formula. The process requires specifying, blending and mixing raw
materials into a consistent feed to the downstream units. The know-how to
achieve this consistent supply of low cost raw materials combines known
industry equipment and practice with proprietary trade secrets that are
critical to the technology.
. Compounding and Mixing - Mixing, melting, and compounding the raw material
components into consistent and homogeneous intermediate materials is required
to achieve a final product with the desired performance characteristics. The
raw materials have very different physical properties including weight,
density, melting, and flow characteristics as well as several components that
do not melt (non-melts). The process to mix all raw materials in optimal
sequence to achieve target weight, consistent internal structure and
specified physical properties required significant development work. The
formulae and sequence of the mixing process is integral to the TieTek
technology and includes patented and other proprietary techniques that the
Company believes are unique to the TieTek crosstie.
. Shaping, Forming and Cooling - The tie forming process needs to be feedstock
tolerant and easily operated and controlled to produce a product that is both
dimensionally consistent and structurally sound. The TieTek crosstie
technology produces a crosstie that closely resembles a wooden tie, with
dimensions of 7" x 9" x 9' (which can be modified to special order), and
without unwanted twisting or warping. The process forms and cools the molten
raw material formula into essentially identical, ready-to-ship crossties.
. Quality Assurance - TieTek has established a series of quality control steps
to verify the structural integrity of each crosstie produced. The testing is
non-destructive and provides a record of each crosstie for complete quality
control of the manufacturing system, as well as improved customer confidence.
The data provides process information for improved operation and continued
product development.
Production. Approximately 6,000 TieTek crossties have been manufactured
and installed to date. Based on the production and product experience, the
Company has designed its first commercial scale automated production line. All
the critical elements of the process have been tested and evaluated, and the
major components have been ordered and are on site or will be ready for delivery
in the second quarter of 2000. The completion of the first automated
manufacturing line will provide an ongoing source of TieTek crossties to meet
established demand. Obviously, there cannot be total assurance that the Company
will be able to install this production equipment on schedule or that the
Company will not encounter some manufacturing difficulties which could have an
adverse effect on the timing or economics of initial production.
Raw Materials. The raw materials used in the Company's product have been
readily available from multiple suppliers. The Company has been successful in
acquiring more than one million pounds of raw materials during the initial
production of approximately 6,000 crossties at prices comparable to the forecast
for the Houston commercial plant. The availability, and more specifically the
price, of key raw materials will be critical to the cost of the TieTek crosstie.
Recycled plastic is a major raw material component whose price and availability
can fluctuate significantly. High prices and tight supply could seriously
affect the economics of manufacturing TieTek's crossties, particularly during
product introduction when it would be difficult to pass raw material price
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increases through to final product sales price. Similarly, lower prices would
lead to higher margins. Recognizing this sensitivity, TieTek has focused on
using a variety of low-grade sources of recycled plastic that will be readily
available and priced below other materials. The TieTek technology and process
design has been specifically configured to readily accept recycled plastic that
could not be processed into solid parts or film using more conventional
equipment. The flexibility of the manufacturing process can therefore mitigate
the impact of the recycled plastics market to some extent. The company will
continue development efforts to broaden the raw material slate without impacting
the performance properties of the finished crossties. Raw material supply and
pricing will obviously have a direct effect on the cost structure of this
product line and the ultimate market price of the crosstie and profitability.
Marketing. TieTek believes there are significant trends in the worldwide
market for crossties that are leading the railroad companies to actively search
for a functional composite tie that can economically serve as a replacement for
wooden creosote-treated ties. Factors affecting these trends are:
. The railroad infrastructure in North America is mature and requires constant
maintenance. The great majority of the more than 15 million ties purchased
each year are replacements for aged wooden ties.
. The ongoing trend to heavier loads and higher speeds will exacerbate the rate
of failure of wooden ties.
. There is a strong economic motivation to use longer life ties because the
replacement and disposal of an old tie actually costs several times the cost
of the new tie alone. In addition, the maintenance process can impact the
freight carrying (and revenue producing) capacity of the track.
. Quality hardwoods are in tight supply with declining areas of mature forests
and environmental pressure to protect trees.
. Wood ties must be protected with preservatives to achieve even a tolerable
economic life. Creosote and other preservatives are toxic and potentially
carcinogenic chemicals that pose a potential liability for the railroads.
Environmentally sensitive areas have already questioned the ongoing impact of
creosote treated wood crossties.
. Wood ties are inconsistent with physical properties and quality varying from
sawmill to sawmill.
The TieTek crosstie is consistent, interchangeable with wood, resists water
and insect damage without preservatives and is produced from recycled raw
materials. Because of these advantages, the TieTek crosstie has been
successfully marketed as a premium alternative and replacement for wood ties.
Management believes that treated wooden ties cost between $25 and $40 in the
United States and substantially more in the rest of the world. The TieTek tie
has been sold at a significant premium over wood because it can be installed as
a direct replacement for wood with the same equipment, the same fasteners, the
same procedures and superior life-of-the-tie economics. TieTek ties have
already been sold to Class I, Short Line, Municipal and Transit railroads and
TieTek has recently entered into a $10 Million, two year strategic supply
contract with the Union Pacific Railroad. As a result, the first production
line of the Houston plant is basically sold out, and production from the second
line will be sold to a wide spectrum of railroad customers including the Union
Pacific Railroad.
TieTek anticipates that, in addition to direct sales by Company employees,
it will employ a combination of marketing representatives, licensees, joint
venture partners, and other business combinations to manufacture, market and
distribute the product in both the United Sates and throughout the world. As of
the date of this Report, the Company has sold its ties directly and is
negotiating several potential licensing arrangements outside of the United
States, but no formal agreements have been concluded. The Company has begun
advertising in trade journals and has presented several papers to railroad
industry groups. In addition, the TieTek crosstie has been discussed in several
articles appearing in the railroad industry trade press.
Major Customers. For the year ended December 31, 1999, the Company had
sales to three customers that represented 41%, 29% and 18% of total revenues,
respectively. For the year ended December 31, 1998, the Company had sales to
one customer that represented 80% of total revenues.
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Competition. The Company views the hardwood tie as its true competition.
The treated wood tie industry is very mature and entrenched with such large and
well capitalized suppliers as Allied Signal, Kerr McGee, Mellott Wood Preserving
Company, Western Tar Products Corporation and many others. The Company believes
that the wood tie will continue to be the dominant factor in the market for many
years. The TieTek tie is well positioned as an alternative tie that can be used
as a direct maintenance replacement for wood. Neither concrete nor steel can be
used in a mixed maintenance program with wood because the physical properties
are drastically different from wood. The Company believes that the primary
market niche for the TieTek crosstie is a share of the wood tie replacement
market. Even a ten percent share of this segment would require 10 TieTek
production lines in multiple plant locations.
Concrete and steel ties require special fasteners as well as dedicated
installation equipment and procedures. The Company believes that concrete and
steel ties will continue to be used for new track (where incompatibility with
wood is not a problem) and other special situations, but that they will not
replace the wooden crosstie as the dominant technology. The TieTek crosstie may
compete well with steel and concrete, particularly because the TieTek tie has a
cost advantage, but the largest and most logical market target for the Company
is to earn a share of the dominant wood tie segment.
There have been many technical approaches to commercialize alternate ties
over the years. For example, Cedrite, Inc. attempted to produce a crosstie made
from epoxy resin and wood chips, but the ties failed for technical reasons.
Several companies are currently attempting to create crossties made from plastic
(Polywood), plastic and glass fiber (U.S. Plastic Lumber), gypsum rock and
plastic (Polysum), and steel/concrete/rubber/plastic (Primix). The Company
believes that it has a more salable, more proven and more accepted product and
technology than any competitor. While there can be no absolute guarantee that a
new and competing technology cannot be developed to produce a crosstie that will
be successful in the marketplace, the Company intends to extend its unique
position by producing and marketing large volumes of TieTek crossties, by
achieving strategic partnerships with licensees, suppliers and customers, by
ongoing testing and reporting, by product and process improvements, and by being
a strategic supplier to the railroad industry. The Company realizes the
advantages and obligations of being the sole supplier of a new product to a
mature industry and plans to move quickly to consolidate its business position.
Patents and Proprietary Protection. The Company received a broad patent
protecting the formula and range of compositions of the TieTek technology (U.S.
Patent #5,886,078, dated March 23, 1999). The patent is filed for extensive
international registration under the procedures of the International Patent
Treaty.
In addition, the Company is working with patent counsel to prepare several
other patent applications covering aspects of the product and process
technology. Furthermore, the Company intends to apply for patents for any new
technologies as they are developed or extended, if such patent production is
available and advantageous to the Company.
Beyond these current or future patents, and patents relating to the
Company's Riserclad technology (which has been licensed) and its porous pipe
technology, there is currently no patent protection for any other of the
Company's products or technologies. 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. The Company can make no assurance that
any future patent applications will result in issued patents or that any patents
issued will be held valid and enforceable if challenged. There can be no
assurance that the Company will have the financial resources available to
enforce and defend the intellectual property rights of the Company should they
be challenged. 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.
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, 1997 the Company incurred $57,489
in research and development expenses. Research and development expense incurred
during 1998 and 1999 was not significant.
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Human Resources. The Company currently employs five employees. None of
its employees are covered by collective bargaining agreements. The Company
believes that its relations with its employees are good.
RISK FACTORS
The following factors, along with the other matters discussed or
incorporated by reference into this Annual Report on Form 10-KSB, could have a
material effect on the future operations, financial results and financial
condition of the Company and should be carefully reviewed and considered in
connection with the other matters discussed herein.
Lack of Operating Revenue and Profits The Company has incurred an
accumulated deficit from its inception to December 31, 1999 of $40,744,631.
Until the Company is able to generate revenues from the commercialization of its
TieTek crosstie, profitable operation will not be attained. Should losses
continue at their historic rate, there can be no assurances that the Company can
remain viable as a going concern for more than the short term.
Capital Needs; Going Concern Explanatory Paragraph For the year ended
December 31, 1999 the Company incurred a net loss of $3,049,600, with a cash
flow deficit averaging $100,000 to $200,000 per month. This cash flow deficit
will likely increase in 2000 during the start-up phase for the production of its
TieTek Crossties. This deficit will likely continue until commercial sales of
these crossties begin to provide cash to the Company. 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 notes, and the proceeds from the sale or license of its
technologies. Because of these recurring losses, the Company will require
additional working capital to continue the commercialization of its TieTek
Crosstie until the Company either achieves a level of revenues adequate to
generate sufficient cash flows from operations, or receives additional financing
necessary to support the Company's working capital requirements.
In 1999, the Company raised $879,000 from the sale of its Series G
Subseries III convertible preferred stock. In addition, the Company borrowed
$567,500 from investors by issuing three unsecured convertible notes bearing
interest at 10%, and maturing one year from date of issuance. In June 1999,
shareholders of the Company approved the issuance and sale of up to $5,000,000
of equity or debt in order to construct a plant to produce TieTek crossties and
provide necessary working capital. In February 2000, the Company engaged an
investment banker to assist in raising the required capital. As of the date of
this Report, the Company has no commitments for additional financing and there
can be no assurances that the Company will be able to obtain financing on terms
reasonably attractive to the Company, if at all. Separately, in March 2000, the
Company issued 5,970 shares of its Series H Cumulative Convertible Preferred
Stock raising $697,000. The Series H Preferred ranks pari parsu with the Series
F and G Preferred, earns dividends at 10% per year and is convertible at the
option of the holder and redeemable by the Company at $1.85 per share subject to
certain adjustments.
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.
Due to these uncertainties, the reports of the Company's independent
auditors for the years ended December 31, 1999 and 1998 contain 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.
Substantial Dilution from Convertible Securities The Company is presently
authorized to issue 50,000,000 shares of Common Stock, of which 4,908,813 shares
are outstanding as March 10, 2000 and up to 10,000,000 shares of "blank check"
preferred stock which could be convertible into common stock. The Company may
in the future be caused to issue up to approximately 7.8 million additional
shares of its Common Stock upon the conversion of its outstanding Series F
Convertible Preferred Stock (the "Series F Shares"), the Series G
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Convertible Preferred Stock (the "Series G Shares"), the convertible notes and
upon the exercise of its outstanding options and warrants. This could
conceivably result in an increase in the Company's outstanding shares of Common
Stock to 12.7 million or more. Issuance of this many shares will have a dilutive
effect upon the existing stockholders. Furthermore, sales of substantial amounts
of the Company's common stock in the public market could have an adverse effect
upon the market price of the Company's Common Stock and make it more difficult
for the Company to sell its equity securities in the future and at prices its
deems appropriate.
Volatility of Share Price - Recent Decline in Market Value The market
prices of securities of technology companies, including those of the Company,
have been historically volatile. Future announcements concerning the Company or
its competitors, including the results of testing, technological innovations or
commercial products, government regulations, developments concerning proprietary
rights, litigation and public concern as to the safety of the Company's products
may have a significant impact on the market price of the shares of the Company
Common Stock. In addition, the Company's share price may be affected by sales
by existing stockholders. Because of these factors, the market price of the
Company's Common Stock may be highly volatile.
Effect of Outstanding Preferred Shares, Options and Warrants The holders of
the Series F Shares, Series G Shares, and Series H Shares, the convertible
notes, and the outstanding options and warrants are given an opportunity to
profit from a rise in the trading price of the Company's Common Stock, with a
resulting dilution in the interest of the other stockholders. The holders of
such preferred stock and convertible notes may choose to exercise their rights
of conversion and the holders of such options and warrants may chose to exercise
these instruments, each at prices below the current trading price of the
Company's Common Stock and at a time when the Company might be able to obtain
additional capital through a new offering of securities at prevailing market
prices. The terms on which the Company may obtain additional financing during
this period may be adversely affected by the existence of such below market
convertible securities.
Competition and Risk of Technological Obsolescence The industries in
which the Company participates are highly competitive and subject to rapid and
significant technological change. Others may independently develop technologies
similar or superior to those of the Company, which may result in the Company's
processes or systems becoming less competitive or obsolete. Competition from
other companies, as well as universities, research institutions and others may
increase as advances in technology are made. Most of the Company's competitors
have substantially greater financial and marketing resources and capabilities
than the Company.
Technology Rights Although the Company owns patents on its
technologies, the Company intends to rely primarily on confidentiality
agreements to maintain the proprietary nature of its technology. In addition,
the Company may also seek patent protection in certain situations in the future,
but the Company does not believe that patents are uniquely critical to the
successful development of commercially viable processes. In general, the
application of the patent laws to the Company's potential products is a
developing and evolving process, and due to the difficulty and expense of
enforcing patents, the Company may not be able to protect those patents which
have been issued. If the Company is unable to maintain the proprietary nature of
its technologies, the Company's financial condition and results of operations
could be materially and adversely affected.
In addition, the Company may seek licenses to other parties' technology in
order to develop, manufacture and market certain technologies in the future.
However, the Company may not be able to obtain necessary licenses or such
licenses may not be available on commercially acceptable terms. Even if such
licenses are available, the patents or proprietary rights underlying the
licenses may prove to be invalid or unenforceable.
Dependence on Third Parties; Manufacturing Difficulties To date, the
Company has contracted with a third party manufacturer to use facilities and
staff in conjunction with the Company's personnel and proprietary equipment to
produce its TieTek crosstie. The Company has entered into a lease agreement for
a manufacturing facility in Houston, Texas which will replace the third party
manufacturer. While the Company's personnel have worked closely with the third
party manufacturer, there can be no assurance that the Company will not
experience delays and/or cost overruns which may have a material adverse effect
on its financial condition or future results of operations.
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Sales and Marketing The Company intends to market the TieTek Crosstie and
other related products in the United States as well as other parts of the world.
To do so, the Company must either develop a sales force with technical expertise
or license distribution rights to third parties with such expertise. There can
be no assurance that the Company will be able to build such a sales force or
find appropriate licensees or that sales and marketing efforts will be
successful.
Dependence on Key Personnel To a material extent, the Company's future
success is dependent upon the continued efforts of its President and Chief
Executive Officer, Dr. Henry W. Sullivan. The Company does not have an
employment agreement with Dr. Sullivan. The loss of the services of Dr.
Sullivan would likely have a material adverse effect on the Company's business.
The Company maintains keyman life insurance in the amount of $3,000,000 naming
the Company as the beneficiary on Dr. Sullivan.
Dividend Policy To date, the Company has paid no dividends on its shares of
Common Stock and does not intend to pay dividends in the foreseeable future.
Classified Board; Delaware Anti-Takeover Law The Company has classified
the Board of Directors into three classes, with the members of one class (or
approximately one-third of the Board) elected each year to serve a three-year
term. A director may be removed only for cause by a vote of the holders of two-
thirds of the voting power of the Company's outstanding securities. The
classified Board of Directors makes it more difficult to change majority control
of the Board, which may discourage attempts by third parties to make a tender
offer or otherwise obtain control of the Company, even if such attempt would be
beneficial to the Company and its stockholders.
The Company is governed by the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "GCL"), an anti-takeover law. In
general, the law prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together with its affiliates and associates, owns
(or, within three years, did own) 15% or more of the corporation's voting stock.
The supermajority voting provisions in the Company's bylaws and the provisions
regarding certain business combinations under the GCL could have the effect of
delaying, deferring or preventing a change in control of the Company or the
removal of existing management. A takeover transaction frequently affords
stockholders the opportunity to sell their shares at a premium over current
market prices.
Authorization and Discretionary Issuance of Preferred Stock The Company's
Certificate of Incorporation authorizes the issuance of up to an aggregate of
10,000,000 shares of "blank check" preferred stock with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which would adversely affect the voting power
or other rights of the holders of the Company's Common Stock. In the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company, which could have the effect of discouraging bids for the Company and
thereby prevent stockholders from receiving the maximum value for their shares.
The Company has no present intention or need to issue such shares. However,
there can be no assurance that additional shares of preferred stock of the
Company will not be issued at some time in the future.
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Uncertainty Due to the Year 2000 Issue Like other companies, the Company
could be adversely affected if the computer systems the Company, its suppliers
or customers use do not properly process and calculate date-related information
and data from the period surrounding and including January 1, 2000. This is
commonly known as the "Year 2000" or "Y2K" issue. Additionally, this issue
could impact non-computer devices such as production equipment, elevators, etc.
While the Company's project to assess and correct Y2K related issued has been
completed, and the Company has not experienced any Y2K related events,
interactions with other companies' systems make it difficult to conclude that
there will not be future effects. Consequently, at this time, management cannot
provide assurances that the Year 2000 issue will not have an impact on the
Company's future operations. Through the date of this report, the Company has
had no material impact from the Y2K issue.
ITEM 2. DESCRIPTION OF PROPERTY
In November 1998, the Company entered into a lease agreement for a 23,000
square foot manufacturing facility on three acres of land in Houston, Texas to
be used for the production of the TieTek Crossties. The lease is renewable at
the Company's option for ten consecutive periods of five years each. The
monthly rental is $14,819. The lease provides for a CPI adjustment to the
monthly rental after 2-1/2 years of the initial term and at the beginning of
every renewal period. The Company has an option to lease an additional 2-1/2
acres and up to 50,000 square feet of additional building space through December
31, 2001. The lessor has the obligation to construct a facility within six
months of the Company's notice to exercise the option.
The Company relocated its corporate headquarters into the offices at the
manufacturing facility in August 1999. During 1998, the Company subleased a
portion of its former corporate office space. However, as of December 31, 1999,
the Company had been unable to sublease the remaining office space which
provides for monthly lease payments of approximately $8,000 through September
2000. An accrual of $119,978 for the termination of the existing lease and
related expenses is included in accrued liabilities.
In the opinion of management, the Company's facilities are adequate for
their intended use and are adequately insured.
ITEM 3. LEGAL PROCEEDINGS
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
previous name 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. In August 1998 the plaintiff filed a lawsuit to include North
American Technologies Group, Inc. in the proceedings. Discovery is ongoing, and
management cannot evaluate the Company's exposure at this time.
From time to time the Company may be involved in various legal actions
arising in the normal course of business relating to product liability issues
for which the Company maintains insurance. There is currently one such action
involving the performance of certain products sold by IPF. This claim is
currently being handled by the Company's insurance company, and management
believes its outcome will not have a material adverse effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the NASDAQ SmallCap Market 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 NASDAQ.
High Bid Low Bid
------- -------
1999
- ----
First Quarter $ 3.50 $ 1.375
Second Quarter $ 3.25 $ 1.563
Third Quarter $ 4.188 $ 2.00
Fourth Quarter $ 3.00 $ 2.00
1998
- ----
First Quarter $ 2.81 $ .84
Second Quarter $ 2.53 $ .78
Third Quarter $ 1.00 $ .62
Fourth Quarter $ 4.62 $ .69
- --------------------------
The high and low bid prices for the Company's Common Stock are inter-dealer
prices without retail mark-ups or commissions and may not represent actual
transactions.
All stock prices for trading periods before May 13, 1998 have been adjusted
to reflect the Company's 9 for 1 reverse stock split that was effective as of
that date.
HOLDERS
Records of the Company's stock transfer agent indicate that as of
December 31, 1999, the Company had approximately 400 record holders of its
Common Stock. Over 80% of the Common shares of the transfer are held in "street
name" which leads management to believe that it is likely that the Company has a
significant number of beneficial holders.
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, Series
G, and Series H Cumulative Convertible Preferred Stock.
RECENT SALES OF UNREGISTERED SECURITIES
During 1999, the Company sold securities that were exempt from registration
under the Securities Act. These transactions are described 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 1999:
Series G Cumulative Convertible Preferred Stock - Subseries III
In 1999, the Company issued 9,000 shares of its Series G Cumulative
Convertible Preferred Stock - Subseries III for cash proceeds of $879,000
and payment to financial advisors of $21,000. These securities were issued
to accredited
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investors in reliance upon section 4(2) of the Securities Act
and/or Regulation D thereunder. The Company did not pay any brokerage
commissions in connection with these transactions.
Convertible Notes Also in 1999, the Company borrowed $567,500 from
investors in three separate transactions and issued three unsecured
convertible notes bearing interest at 10% and maturing in one year from
date of issuance. These securities were issued to accredited investors in
reliance upon section 4(2) of the Securities Act and/or Regulation D
thereunder. The company did not pay any brokerage commissions in
connection with these transactions.
Common Stock In 1999, the Company issued 248,647 shares of Common Stock
upon conversion of 10,560 shares of Series F Cumulative Convertible
Preferred Stock and 196,558 shares of Common Stock upon conversion of 2,542
shares of Series G Cumulative Convertible Preferred Stock. These
securities were issued to institutional and other accredited investors in
reliance upon section 3(a)(9) and 4(2) of the Securities Act and/or
Regulation D thereunder. The Company did not pay any brokerage commissions
in connection with these transactions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND AND BASIS OF PRESENTATION
North American Technologies Group, Inc. ("NATK") was incorporated on
December 24, 1986 in the State of Delaware. The accompanying consolidated
financial statements include the accounts of NATK and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. North American Technologies Group, Inc. and its subsidiaries are
referred to herein as the Company.
The Company's historic business strategy had been to acquire and/or
internally develop businesses that are based on proprietary technologies,
proprietary manufacturing processes and/or defensible market niches. During
1997 and 1998, the Company evaluated the businesses and/or technologies that had
been acquired during the prior years to determine the optimum course to be
pursued given the level of resources available to the Company. As a result of
this review, the Company decided to concentrate its resources on the
commercialization of its TieTek composite railroad crosstie. Accordingly, the
Company has sold or licensed certain of its businesses and technologies that had
been sufficiently commercialized and which might be better developed by outside
interests with resources or capabilities in specific areas related to those
businesses.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1999, the Company incurred a net loss
of $3,049,600. This net loss principally reflected the start-up operations of
the TieTek composite railroad crosstie business and corporate overhead. As of
December 31, 1999, the Company had a net working capital deficit of $580,977,
including a cash balance of $284,498. During 1999, the Company incurred a cash
flow deficit averaging $100,000 to $200,000 per month. This cash flow deficit
will likely increase in 2000 during the start-up phase for the production of its
TieTek crossties. The deficit will likely continue until commercial sales of
these crossties begin to provide cash to the Company. 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 notes, and the proceeds from the sale or license of its
technologies. Because of these recurring losses, the Company will require
additional working capital to continue the commercialization of its TieTek
crosstie until the Company either achieves a level of revenues adequate to
generate sufficient cash flows from operations, or receives additional financing
necessary to support the Company's working capital requirements. Due to these
uncertainties, the report of the Company's independent public accountants for
the year ended December 31, 1999 and 1998 contains an explanatory paragraph as
to the substantial doubt about the Company's ability to continue as a going
concern.
For the year ended December 31, 1998, the Company incurred a net loss
of $2,732,861. This net loss principally reflected the pre-commercial
operations of the TieTek composite railroad crosstie business and corporate
overhead. As of December 31, 1998, the Company had a net working capital
deficit of $318,629, including a cash balance of $719,212.
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During 1999 and 1998, the Company made significant progress towards
commercial production of the TieTek crosstie, including the production of
approximately 5,000 crossties during the fourth quarter of 1998 and
approximately 1,000 in early 1999, and the signing of a two year supply contract
with Union Pacific Railroad.
Historically, the Company has met its working capital requirements
through financing transactions involving the private placement of equity
securities or equity equivalents, the issuance of convertible notes, and the
proceeds from the sale or license of its technologies.
Over the past four years, the Company's principal source of capital
has been through the issuance of Cumulative Convertible Preferred Stock as
follows:
. In April and May 1996, the Company issued shares of Series F Cumulative
Convertible Preferred Stock ("Series F Shares") and warrants for net cash
proceeds of $6,550,000.
. In March 1997, the Company issued shares of Series G Cumulative Convertible
Preferred Stock, Subseries I (the "Series G-I Shares") for net cash proceeds
of $1,640,000.
. In 1998, the Company issued shares of Series G Cumulative Convertible
Preferred Stock, Subseries II (the "Series G-II Shares") for net cash
proceeds of $1,975,000 and professional services of $25,000.
. In March 1999, the Company issued shares of Series G Cumulative Convertible
Preferred Stock, Subseries III (the "Series G-III Shares") for net cash
proceeds of $419,000.
. In May 1999, the Company issued an additional 4,810 Series G-III Shares for
$460,000 in proceeds.
The Series F Shares, Series G-I Shares, Series G-II Shares, and Series
G-III Shares (collectively the "Series F and G Shares") are entitled to an
annual cumulative dividend of 13.5% and are convertible into shares of the
Company's Common Stock at converison prices, as of March 10, 2000, of $3.94,
$2.40, $.87, and $1.50 per share, respectively. In accordance with the
certificates of designation for the Series F and G Shares, the Company has
deferred all preferred stock dividends, or satisfied such dividends through the
issuance of additional shares of preferred stock. However, pursuant to the terms
of the Series F and G Shares, the Company cannot defer dividends after April 5,
1999. In circumstances where the preferred is converted into common stock, the
Company's Board of Directors has authorized the issuance of common stock in
payment of dividends in arrears. Given the Company's financial condition, it is
unlikely the Company will be in a position to pay cash dividends in the near
future. Therefore, these dividends will accumulate, and must be paid prior to
the payment of any distributions to the common stockholders. The Company does
not anticipate any such distributions in the foreseeable future.
Also in 1999, the Company borrowed $567,500 from investors in three
separate transactions and issued three unsecured convertible notes bearing
interest at 10% and maturing in one year from date of issuance. Two of the
notes payable totaling $317,500 are convertible at the lender's or borrower's
option into shares of the Company's common stock at $1.85. The other note
payable for $250,000 is convertible at the lender's option at the lesser of:
$1.85 or the market value on the date of notice of conversion, or the average
market value for the twenty trading days preceding notice of conversion, but not
less than $.40. Additionally, it can be converted, at the lender's option, into
any preferred issued by the Company that is convertible into common shares of
the Company. The lender of the $250,000 is an individual that has a
representative on the Board of Directors of the Company.
In March 2000, the Company issued 7,570 shares of its Series H Cumulative
Convertible Preferred Stock raising $757,000. The Series H Preferred ranks pari
parsu with the Series F and G Preferred, earns dividends at 10% per year and is
convertible at the option of the holder and redeemable by the Company at $1.85
per share subject to certain adjustments.
During 1998, the Company received cash proceeds of $200,000 from the sale
or license of its technologies. The Company also received payments of
approximately $600,000 on its notes receivable during 1998, including a
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payment of $420,000 in full settlement of a five-year note receivable with an
outstanding principal balance of $525,000.
The Company anticipates that its first automated manufacturing line, with
a capacity of approximately 10,000 crossties per month, will require additional
capital expenditures of $2,000,000 and additional working capital of up to
$1,500,000. As of December 31, 1999, the Company had made payments totaling
approximately $875,000 for manufacturing equipment, and had open purchase
commitments of an additional $237,000. In March 1999, the Company raised
$419,000 through the sale of its Series G Subseries III convertible preferred
stock and in May 1999, raised an additional $460,000 from the sale of Series G
Subseries III preferred stock. Additional financing, however, will be necessary
in order to commence manufacturing operations. In June 1999, shareholders of
the Company approved the issuance and sale of up to $5,000,000 of equity or debt
in order to construct a plant to produce TieTek Crossties and provide necessary
working capital. In February 2000, the Company engaged an investment banker to
assist in raising the required capital. Also in February 2000, the Company
signed a two year contract with the Union Pacific Railroad for the supply of its
TieTek composite railroad crossties. The contract represents potential revenues
of more than $10,000,000 to the Company. As of the date of this Report,
however, the Company has no commitments for financing and there can be no
assurance that the Company will be able to obtain financing on terms acceptable
to the Company, if at all. If the Company is unsuccessful in obtaining
financing for its initial facility, the Company will attempt to contract for the
continued manufacture of its crossties from third parties.
During 1999, the Company used $1,657,528 in cash for its operating
activities, reflecting primarily the net loss for the year of $3,049,600
adjusted for net non-cash expenses which were approximately $1,400,000.
During 1998, the Company used $1,686,157 in cash for its operating
activities, reflecting primarily the net loss for the year of $2,732,861
adjusted for net non-cash expenses which were approximately $800,000.
In 1999, the Company used $201,104 in investing activities primarily for
the purchase of equipment.
Investing activities provided net cash to the Company of $121,431 during
1998. These funds were generated primarily from cash received of $602,642 from
the repayment of notes issued in connection with the sale of certain of the
Company's businesses, and $338,538 received from the sale or disposition of
certain assets. Most of these cash proceeds were offset by capital expenditures
of $805,546 relating to the Company's first manufacturing line.
Financing activities provided net cash to the Company of $1,423,918
during 1999. These funds were generated primarily by the sale of 9,000 shares
of Series G-III Shares for cash proceeds of $879,000 and services rendered of
$21,000 and short term convertible notes payable of $567,500.
Financing activities provided net cash to the Company of $1,934,947 during
1998. These funds were generated primarily by the sale of 20,000 shares of
Series G-II Shares for cash proceeds of $1,975,000 and services rendered of
$25,000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. The statement generally provides for matching the timing of gain
or loss recognition on the hedging instrument with the recognition of (a) the
changes in fair value of hedged asset or liabilities that are attributed to the
hedged risk or (b) the earnings effect of the hedged forecasted transaction.
The statement is effective for all fiscal quarters for all fiscal years
beginning after June 15, 2000, with early application encouraged, and shall not
be applied retroactively to financial statements of prior periods. Adoption of
SFAS 133 is expected to have no effect on the Company's financial statements.
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RESULTS OF OPERATIONS
ANALYSIS OF YEARS ENDED DECEMBER 31, 1999 ("1999") AND DECEMBER 31, 1998
("1998")
The net loss of $3,049,600 for 1999 reflects an increase of $316,739 from
the net loss of $2,752,861 in 1998. This increase is primarily a result of (1)
the provision of a $682,000 reserve for the uncertainty of collection of a note
receivable as discussed in Note 5 of the Notes to Consolidated Financial
Statements and (2) recognition of deemed interest of $246,000 in 1999 on the
issuance of debt which is convertible into shares of the Company's common stock
at a price less than market price on the date of issuance (see Note 10 of the
Note the Consolidated Financial Statements); offset by a decrease in 1999 of
approximately $1,100,000 in selling, general and administrative expenses. In
addition, in 1998 the Company recognized a gain of $440,000 on the sale of
assets.
The net loss of $2,732,861 for 1998 reflects a decrease of $1,598,430 from
the net loss of $4,331,291 in 1997. This decrease is a result of the reduction
of $1,381,970 in selling, general and administrative expenses and the
recognition in 1997 of an impairment in the value of certain long-lived assets
of $1,202,628. These reductions in expenses were offset by the decrease in
gross profits from $1,116,856 in 1997 to a loss of $153,215 in 1998. In
addition, in 1998, the Company recognized net other income of $321,309, whereas
in 1997, the Company recognized net other income of $37,406.
REVENUES
The Company focused its resources in 1999 and 1998 on the
commercialization of the TieTek composite railroad crosstie. Substantially all
of the Company's revenues in 1999 and 1998 of $170,000 and $139,000,
respectively, resulted from the sale of the TieTek Crossties. As of December
31, 1998 the Company had 2,200 crossties in inventory that were sold in early
1999. As of year end 1999, the inventory of finished crossties was not
significant.
COSTS AND GROSS MARGIN
The 1999 and 1998 gross loss consists of the loss incurred from the sales
of the TieTek Crosstie. This loss reflects the costs associated with the
production run that produced approximately 5,000 TieTek Crossties in 1998 and
approximately 1,000 in 1999. The negative margin reflects the start-up costs,
the small scale of the manufacturing run, the fee paid to a third party
manufacturer, and the inability to make volume purchases of raw materials. The
Company anticipated these losses, but believed the costs were necessary in order
to allow the Company to demonstrate its ability to meet customer demand and to
prepare the market for future purchase orders. In addition, the production run
provided valuable design and operational information for the Company's
manufacturing facility. The Company's ability to improve its gross margin
depends upon its ability to increase production efficiencies and manage raw
material purchases. To address these needs, the Company has designed its new
manufacturing line to utilize an automated molding system, and has hired an
experienced purchasing manager. These actions are expected to result in
acceptable margins once full-scale commercial production commences.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $1,144,777 to
$1,756,178 in 1999 from $2,900,955 in 1998. This decrease reflects primarily
the reduction of $538,582 in salary and other employee related costs which were
made possible by the continued implementation of the Company's strategy to focus
its resources on the commercialization of the TieTek crosstie. As this strategy
was implemented and certain of the Company's other technologies were licensed or
sold, the administrative costs associated with those technologies were reduced
or eliminated. Decreases in 1999 were experienced in amortization - $126,111;
bad debt expense - $203,474 and lease expense - $210,882. The Company
anticipates that selling, general and administrative expense will increase in
the future as warranted to coincide with the continued commercialization of the
TieTek Crosstie.
Selling, general and administrative expenses decreased $1,381,970 to
$2,900,955 in 1998 from $4,282,925 in 1997. This decrease reflects primarily
the reduction in salary and other employee related costs which were made
possible by the implementation of the Company's strategy to focus its resources
on the commercialization of the TieTek crosstie.
19
<PAGE>
The Company's decrease in selling, general and administrative expenses
during 1998 was partially offset by the recognition of the following expenses:
a) an accrual of $200,000 for the termination of the corporate office lease in
Houston, Texas; b) an accrual of $150,000 relating to the settlement of the
employment contract of the Company's former Chairman, President and Chief
Executive Officer; and c) the recognition of $100,000 in compensation expense
resulting from the repricing of certain options that had been issued to the
Company's former Chairman, President and Chief Executive Officer.
IMPAIRMENT OF CERTAIN LONG-LIVED ASSETS
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"), management reviews long-lived and
intangible assets whenever events or changes in circumstances indicate the
carrying amount of an asset may not be fully recoverable. In November 1997, the
Company licensed its Riserclad technology and sold certain Riserclad related
assets to an unrelated third party. As part of the consideration for the
transaction, the Company is to receive a royalty on sales of the technology by
the third party. During the fourth quarter of 1999, the Company determined,
based on the first full year royalty calculation and an analysis of expected
future minimum royalty payments, that an impairment of the Company's Riserclad
technology and associated non-compete agreements had occurred. Accordingly, a
valuation adjustment of $163,210 was recognized for the the year ended December
31, 1999 to write-down the Riserclad technology and non-compete agreements
carrying values to approximately $99,000.
OTHER INCOME (EXPENSE)
Other income/expense decreased $1,303,924 to a net other expense of
$982,615 in 1999 from a net other income of $321,309 in 1998. This decrease is
a result of (1) the provision of a $682,000 reserve for the uncertainty of
collection of a note receivable as discussed in note 5 of the Notes to
Consolidated Financial Statements and (2) recognition of deemed interest of
$246,000 in 1999 on the issuance of debt which is convertible into shares of the
Company's common stock at a price less than market price on the date of issuance
(see Note 10 of the Notes to Consolidated Financial Statements) (3) recognition
of a gain in 1998 of $440,000 on the sale of assets.
INCOME TAXES
The Company adjusts the deferred tax asset valuation allowance based on
judgements as to the future realization of the deferred tax benefits supported
by demonstrated trends in the Company's operating results. At December 31, 1999
and 1998, 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.
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.
20
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Executive Officers of the Company are listed below.
Name Age Position
- ----- ----- ----------
Douglas C. Williamson 48 Chairman of the Board; Director
for term expiring 2002
Henry W. Sullivan 60 President and Chief Executive
Officer of the Company; Director
for term expiring 2001
Edwin H. Knight 46 Director for term expiring 2000
William C. Thompson 45 Director for term expiring 2002
Russell L. Allen 55 Treasurer and Chief Financial
Officer 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 and
employees hold office at the pleasure of the Board of Directors. The Board of
Directors met three times during 1999. All directors attended in 1999 at least
75% of the meetings of the Board and committees of which they are a member.
BOARD MEETINGS AND COMMITTEES
The Board of Directors has established two committees to allow the Board
to focus specific attention on critical areas of the Board's management and
monitoring of the Company's business. From time to time, the committees will
make recommendations to the Board as necessary. The committees that were
established and the current directors assigned to each committee are as follows:
Financial Audit:
Douglas C. Williamson
Edwin H. Knight
Compensation:
Douglas C. Williamson
Edwin H. Knight
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
21
<PAGE>
recommend the selection of independent auditors. The primary responsibilities of
this committee include: reviewing with the Company's Chief Financial Officer the
adequacy of quarterly and annual SEC filings; reviewing and consulting with the
Company's independent auditors regarding 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; recommending to the
Board of Directors the selection of the Company's auditors for the upcoming
year; and monitoring compliance by the Company's management and employees with
major Company policies and financial controls.
The membership of the Financial Audit Committee is designed to include a
minimum of two directors. 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. The Financial Audit Committee met once during
1999.
The purpose of the Compensation Committee is to recommend compensation
policies for the Company's senior management and to establish and administer the
Company's stock-based compensation plans. 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 the Compensation Committee is designed to include at
least two outside (non-employee) directors. The Compensation Committee did not
meet during 1999.
DIRECTORS' COMPENSATION
Mr. Thompson receives $1,000 for each regularly scheduled Board meeting
and $500 for each teleconference Board meeting, special or committee meeting.
All other directors of the Company receive no cash compensation in connection
with their services as director. See Item 11 - Security Ownership of Certain
Beneficial Owners and Management for stock options granted to Directors.
BIOGRAPHIES
DOUGLAS C. WILLIAMSON
Mr. Williamson was elected to the Board of Directors in 1996. Mr.
Williamson is currently a Managing Director and Senior Vice President of Bank of
America Capital Investors (BCI) (one of the equity investment groups affiliated
with the recently merged NationsBank/Bank of America organization, including
NationsBanc Capital Corporation). Mr. Williamson joined NationsBanc Capital
Corporation in 1989. Prior to that, he had eight years of experience in senior
management with two operating companies (including roles as president) and six
years of experience in corporate finance and corporate lending with Rotan Mosle,
W.R. Grace and Cleveland Trust. Mr. Williamson serves on the boards of
directors of the following companies: CallWare Technologies, Inc. (develops and
markets open architecture computer telephony software solutions); Empirical
Software, Inc. (develops software targeted for the market of client/server
performance and reliability management tools); GX Technology Corporation
(software developer and imaging services company that is a leading independent
supplier of 2D and 3D seismic modeling, imaging software products, and imaging
services used in oil and gas exploration); HAHT Software, Inc. (provides
enterprise Web application software development solutions); Med Solutions, Inc.
(provides radiology utilization management services for the health care
industry); Memorial Operations Company (acquires and manages cemeteries and
funeral homes); Takeout Taxi Holdings, Inc. (provides restaurant delivery
services through company-owned and franchised stores); and Z-Tel Technologies,
Inc. (provider of telephony-related services to retail customers, such as
inexpensive long-distance, voice-mail and "follow-me" services). Mr. Williamson
earned his MBA from Columbia University and his BA from Denison University and
later earned his CPA. Mr. Williamson serves on the Company's Board of Directors
as a nominee of the holders of the Series F, G-I and G-II Shares.
22
<PAGE>
HENRY W. SULLIVAN
Dr. Sullivan was elected to the Board of Directors in April 1997. Dr.
Sullivan became Vice President of Technology of the Company in July 1996 and
President of TieTek, Inc. in December 1997. In January 1999, Dr. Sullivan
assumed the additional positions of President and Chief Executive Officer of the
Company. Prior to joining the Company, Dr. Sullivan was employed by Shell Oil
Company where he spent twenty-three years in various positions and, in 1984, was
named Vice President of Shell Chemical Company. Dr. Sullivan joined Huntsman
Petrochemical Corporation in 1988 as its President, and became Vice Chairman of
its parent company, Huntsman Chemical Corporation, a year later. From 1991 to
1995 he was President and Chief Executive Officer of GAIA Holdings, Inc., until
joining the Company as President of GAIA Technologies, Inc. and later TieTek,
Inc. Dr. Sullivan has served as Chairman and Director of several companies and
organizations in manufacturing and polymer technology, including the Executive
Committee of the Society of the Plastics Industry. He currently serves as a
Director of the Sarkeys Energy Center at the University of Oklahoma. Dr.
Sullivan holds a Bachelor's degree in Chemical Engineering from Cooper Union and
Master's and Ph.D. degrees in Chemical Engineering from New York University.
EDWIN H. KNIGHT
Mr. 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. He has managed Harrison Interests, Ltd. for fourteen years
and holds a Bachelor's Degree from Louisiana State University and is a Certified
Public Accountant. Mr. Knight serves on the Company's Board of Directors as a
nominee of the holders of the Series F, G-I and G-II Shares.
WILLIAM C. THOMPSON
Mr. Thompson was elected to the Board of Directors in 1999. In January
1999, Mr. Thompson was appointed Senior Director of Derailment Prevention for
Union Pacific Railroad Company after having completed one year as a Director of
Derailment Prevention. Prior to these appointments, Mr. Thompson served as
Director of Engineering Research for about 10 years. He has been active in many
industry organizations, serving as the Chairman of the National Transportation
Research Board's Committee on Railway Maintenance and on the Board of Directors
of the American Railway Engineering and Maintenance-of-Way Association. Mr.
Thompson holds Bachelor of Science degrees in Civil Engineering and
Environmental Engineering from the University of Wisconsin.
RUSSELL L. ALLEN
Mr. Allen is a management advisor to the Company and in that capacity has
served as Treasurer and Chief Financial Officer since August 1999. Prior to
that time, Mr. Allen served various clients in the capacity of independent
management advisor. Mr. Allen holds a Bachelors and Masters Degree in
Accounting from the University of Texas at Austin and is a Certified Public
Accountant.
AGREEMENTS WITH HOLDERS OF PREFERRED STOCK
Pursuant to agreements relating to the purchase of the Preferred Stock
(the "Purchase Agreements") between the Company, BCI and certain other investors
(collectively, with BCI, the "Investors"), the Company has agreed to nominate to
the Board of Directors, for so long as the Preferred Stock is owned by the
Investors or permitted assignees or permitted transferees, (i) four (4) members
designated by the holders of a majority in interest of the Preferred Stock taken
together as a group, at least one (1) of whom shall be designated by BCI so long
as BCI owns at least fifty percent (50%) of the Preferred Stock; (ii) four (4)
members designated by the holders of Common Stock; and (iii) one (1) member
designated by the holders of Common Stock and the holders of a majority in
interest of the Preferred Stock taken together as a group. The requisite
holders of the Preferred Stock have agreed
23
<PAGE>
that for so long as the number of Directors constituting the Board shall be six,
three (3) directors will be designated by the Investors and three (3) will be
designated by the holders of the Common Stock. Currently, pursuant to the
Purchase Agreements, the Investors' nominees are: Douglas C. Williamson and
Edwin H. Knight. As a result of the recent changes to the Board of Directors,
the Company and the principal holders of the Preferred Stock are in discussions
regarding revisions to this agreement, although as of the date of this report,
no such revised agreement as been reached.
If the Company shall breach any of the covenants or obligations set forth
in the Purchase Agreements and such breach remains uncured, the holders of a
majority in interest of the Preferred Stock taken together as a group shall be
entitled then and thereafter to nominate and elect a majority of directors to
the Company's Board of Directors, at least two (2) of which majority shall be
designees of BCI.
CHANGES IN CONTROL
If the Company breaches any of its covenants or obligations set forth in
the Purchase Agreements and such breach were to remain uncured, the holders of a
majority in interest of the Preferred Stock taken together as a group would be
entitled then and thereafter to nominate and elect a majority of directors to
the Company's Board of Directors, at least two (2) of which majority shall be
designees of BCI.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid or
accrued for the fiscal years ended December 31, 1997, 1998 and 1999 by the
Company to or for the benefit of its President and Chief Executive Officer.
No other executive officer's compensation exceeded $100,000 for the year ended
December 31, 1999.
<TABLE>
<CAPTION>
===================================================================================================================================
Long Term Compensation
---------------------------------------------------------
Annual Compensation Awards Payouts
- -----------------------------------------------------------------------------------------------------------------------------------
Name Other
and Annual Restricted Stock All Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year(s) Salary($) Bonus($) sation($) Award(s)($) SARS (#) Payouts($) sation($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Henry W. 1999 92,481 40,000 3,952/(2)/
Sullivan 1998 91,336 2,859/(2)/
Chief 1997 90,000 2,970/(2)/
Executive
Officer and
President
==================================================================================================================================
Tim B. 1999 175,318 - - - - - 2,336/(2)/
Tarrillion 1998 193,275 - - - - - 3,504/(2)/
Former Chief 1997 184,833 - - - 44,444/(1)/ - 6,951/(2)/
Executive
Officer and
President
===================================================================================================================================
</TABLE>
24
<PAGE>
/(1)/ Consists of options granted during fiscal year ended December 31, 1995
which were repriced as of July 10, 1997.
/(2)/ Represents life insurance premiums paid by the Company on policies on the
executives' lives and matching contributions to the Company's 401-K plan.
STOCK OPTIONS
The following table sets forth options granted during the year ended 1999
to the named executive officer. No stock appreciation rights (SARs) have been
granted.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
- ---------------------------------------------------------------------------------------------------
Number of
Securities Percent Of Total
Underlying Options/SARs
Options/SARs Granted To Exercise or
Granted Employees In Base Price Expiration
Name (#) Fiscal Year ($/Sh) Date
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Henry W. Sullivan 40,000 48% $3.00 2/22/09
- ---------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth for the named executive officer information
regarding stock options exercised by such officer during the 1999 fiscal year,
together with the number and value of stock options held at 1999 fiscal year-
end, each on an aggregated basis.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Aggregated Option Exercises in the 1999 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
Number of ---------------- ---------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable/ (1)/
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Henry W. Sullivan None -- 32,222/30,000 $0/$0
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------
/(1)/ The last sales price of the Company's Common Stock as reported on the
NASDAQ SmallCap Market on December 31, 1999 was $2.938 which was lower
than the exercise price of the options.
EMPLOYMENT AGREEMENTS
- ---------------------
Effective December 23, 1998 the Company entered into an agreement with Mr.
Tarrillion in full settlement of his employment contract. The agreement
provides for the resignation of Mr. Tarrillion's officer positions as of January
22, 1999, with the continuation of his employment as a full-time consultant
through March 31, 1999. From April 1 through December 31, 1999, Mr. Tarrillion
was available on an "as-needed" basis and his salary
25
<PAGE>
and benefits continued through such later date. As part of the agreement, the
exercise price of 55,555 options was reduced from $9.00 to $4.50. All of these
options are currently vested. In addition, Mr. Tarrillion agreed that he would
not seek re-election to the Board of Directors when his term expired at the 1999
Annual Meeting of Stockholders.
1999 STOCK INCENTIVE PLAN AND REPRICING OF CERTAIN OUTSTANDING OPTIONS
At the annual meeting of the Company in 1999, stockholders approved the
Company's 1999 Stock Incentive Plan (the "Plan"). The Plan authorizes the
Compensation Committee to grant options in the maximum amount of 10% of the
total issued and outstanding shares of the Company or reserved for issuance upon
the conversion or exercise of outstanding convertible securities. Of these
options, up to a maximum of 1,000,000 shares may be issued pursuant to incentive
stock options granted under the Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following tables set forth as of March 10, 2000 certain information
with respect to the beneficial ownership of the Company's Common Stock and
Series F, Series G-I, Series G-II and Series G-III Shares by any person
(including any "group" as that term is used in Section 13(d)-3(d) of the
Exchange Act) known by the Company to be the beneficial owner of more than five
percent (5%) of any class of the Company's voting securities based upon filings
with the Securities and Exchange Commission. As of March 10, 2000, there were
4,908,813 outstanding shares of Common Stock, 87,644 outstanding Series F
Shares, 14,846 outstanding Series G-I Shares, 20,004 outstanding Series G-II
Shares and 8,507 outstanding Series G-III Shares. Does not include Series H
Cumulative Convertible Preferred Shares issued March 14, 2000.
26
<PAGE>
COMMON STOCK
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percentage
Name and Address of Beneficial Owner Ownership/(1)/ of Class/(1)/
- ------------------------------------ ---------------- -------------
<S> <C> <C>
Bank of America Capital Investors 4,282,185/(2)/ 46.6%
901 Main Street, 22nd Floor
Dallas, Texas 75202
CCG Charitable 508,944/(3)/ 10.2%
Remainder Unitrust #1
14405 Brown Road
Tomball, Texas 77375
David S. Holland 373,816/(4)/ 7.1%
1 Riverway, Suite 1700
Houston, Texas 77056
Harrison Interests, Ltd. 297,680/(5)/ 5.7%
Chase Bank Bldg.
712 Main, Suite 1900
Houston, Texas 77002
Henry W. Sullivan 298,496/(6)/ 5.9%
14315 West Hardy Road
Houston, Texas 77060
Pecaut Capital Investors, LP 251,544/(7)/ 5.1%
511 6th Street
Sioux City, Iowa 51101
</TABLE>
- --------------------
/(1)/ Calculated in accordance with Item 403 of Regulation S-B and Rule 13d-
3(d) as promulgated under the Exchange Act. Includes shares of Common
Stock which the holder has the right to acquire upon exercise or
conversion of outstanding options, warrants or other convertible
securities (such as the Series F, Series G-I, G-II and G-III Shares)
within sixty (60) days of March 10, 2000. Calculations were made using
the conversion prices as of March 10, 2000 as follows: Series F -
$3.941315; Series G-I - $2.4030824; Series G-II - $.86625; Series G-III -
$1.50.
/(2)/ Includes 3,716,130 shares of Common Stock issuable upon conversion of
Series F, Series G-I and Series G-II Shares. Includes 555,556 shares of
Common Stock which may be acquired upon exercise of Common Stock purchase
warrants and 10,499 shares of Common Stock which may be acquired on the
exercise of options. Does not include 19,501 shares of Common Stock
issuable upon exercise of options granted to
27
<PAGE>
Mr. Williamson in his capacity as Director which were assigned to Bank of
America Capital Investors and which will vest periodically through
January 31, 2003.
/(3)/ Includes 83,333 shares of Common Stock which may be acquired upon
exercise of Common Stock purchase warrants.
/(4)/ Includes 373,816 shares of Common Stock issuable upon conversion of
Series G-II and Series G-III Shares.
/(5)/ Includes 242,124 shares of Common Stock issuable upon conversion of
Series F and Series G-I Shares. Includes 55,556 shares of Common Stock
which may be acquired upon exercise of Common Stock purchase warrants.
/(6)/ Dr. Sullivan is deemed to beneficially own 176,851 shares of Common Stock
by virtue of his position as a principal executive officer of GAIA
Holdings, Inc., which owns 61,728 shares of Common Stock, and Thor
Ventures, L.C. which owns 115,123 shares of Common Stock. Includes 30,505
shares of Common Stock issuable upon the conversion of Series G-II
Shares. Includes 4,585 shares owned through a profit sharing plan for the
benefit of Dr. Sullivan and 68,222 shares which may be acquired upon
exercise of options. Does not include 84,000 shares issuable upon
exercise of options which vest periodically through February 21, 2003.
Includes 16,000 shares of a common stock grant dated January 31, 2000;
does not include 24,000 shares of the grant that vest ratably over a
three-year period commencing January 1, 2000.
/(7)/ Includes 44,444 shares of common stock which may be acquired upon
exercise of Common Stock purchase warrants.
28
<PAGE>
SERIES F AND SERIES G SUBSERIES I PREFERRED STOCK
<TABLE>
<CAPTION>
Amount and
Amount and Nature of
Nature of Series G
Name and address of Series F Percentage Subseries I Percentage
Beneficial Owner Ownership of Class Ownership Of Class
------------------ -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Bank of America Capital 74,069 84.5% 13,023 87.7%
Investors
901 Main Street, 22nd Floor
Dallas, Texas 75202
Harrison Interests, Ltd. 7,407 8.5% 1,302 8.8%
Chase Bank Bldg.
712 Main, Suite 1900
Houston, Texas 77002
</TABLE>
29
<PAGE>
SERIES G SUBSERIES II AND SERIES G SUBSERIES III PREFERRED STOCK
<TABLE>
<CAPTION>
Amount and Amount and
Nature of Nature of
Series G Series G
Name and address of Subseries II Percentage Subseries III Percentage
Beneficial Owner Ownership of Class Ownership Of Class
------------------ -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Bank of America Capital Investors 11,217 56.0% - -
901 Main Street, 22nd Floor
Dallas, Texas 75202
Dan J. Harrison III 1,055 5.3% - -
Chase Bank Bldg.
712 Main, Suite 1900
Houston, Texas 77002
David S. Holland 2,804 14.0% 751 8.8%
1 Riverway, Suite 1700
Houston, Texas 77056
Bruce F. Harrison, as Trustee 1,110 5.5% - -
Chase Bank Bldg.
712 Main, Suite 1900
Houston, Texas 77002
Richard M. Cutler, Jr. - - 561 6.6%
50 1/2 Legare Street
Charleston, South Carolina 29401
Michael T. Finch - - 1,502 17.7%
Route 1, Box 133
Allendale, South Carolina 29810
David S. Holland Jr. - - 501 5.9%
906 East 5th Street, Suite 202
Austin, Texas 78702
</TABLE>
CONTINUED......
30
<PAGE>
SERIES G SUBSERIES II AND SERIES G SUBSERIES III PREFERRED STOCK (CONTINUED)
<TABLE>
<CAPTION>
Amount and Amount and
Nature of Nature of
Series G Series G
Name and address of Subseries II Percentage Subseries III Percentage
Beneficial Owner Ownership of Class Ownership of Class
---------------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
William I. Franklin - - 1,150 13.5%
5804 Wedgmont Circle N.
Fort Worth, Texas 76133
John H. Wiegman - - 500 5.9%
c/o Founders Capital Management
5 Post Oak Park, Suite 2150
Houston, Texas 77025
</TABLE>
31
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
- --------------------------------
The following table sets forth as of March 10, 2000 the beneficial
ownership of the Company's Common Stock by (i) the executive officer identified
in the Summary Compensation Table appearing herein; (ii) each director and
nominee for director; and (iii) all directors and executive officers as a group.
As of March 10, 2000, there were 4,908,813 outstanding shares of Common Stock,
87,644 outstanding Series F Shares, 14,846 outstanding Series G- I Shares,
20,004 outstanding Series G-II Shares and 8,507 outstanding Series G-III shares.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percentage
Name and Address of Beneficial Owner Ownership(1) of Class(1)
- ----------------------------------- -------------------- -----------
<S> <C> <C>
Henry W. Sullivan 298,496/(2)/ 5.9%
14315 W. Hardy Road
Houston, Texas 77060
William C. Thompson 12,498/(3)/ -
1416 Dodge
Omaha, Nebraska 68179
Douglas C. Williamson -/(4)/ -
901 Main Street, 22nd Floor
Dallas, Texas 75202
Edwin H. Knight 10,499-/(5)/ -
707 Travis, Suite 1900
Houston, Texas 77002
All Officers and Directors as a Group 350,563 6.9%
(5) persons
</TABLE>
- ---------------
/(1)/ Calculated in accordance with Item 403 of Regulation S-B and Rule 13d-
3(d) as promulgated under the Exchange Act. Includes shares of Common
Stock which the holder has the right to acquire upon exercise or
conversion of outstanding options, warrants or other convertible
securities (such as the Series F, Series G-I, Series G-II and Series G-
III Shares) within sixty (60) days of March 10, 2000. Calculations were
made using the conversion prices as of March 10, 2000 as follows: Series
F - $3.941315; Series G-I -$2.4030824; Series G-II - $.86625; Series G-
III - $1.50.
/(2)/ Dr. Sullivan is deemed to beneficially own 176,851 shares of Common Stock
by virtue of his position as a principal executive officer of GAIA
Holdings, Inc., which owns 61,728 shares of Common Stock, and Thor
Ventures, L.C. which owns 115,123 shares of Common Stock. Includes 30,505
shares of Common Stock issuable upon the conversion of Series G-II
Shares. Includes 4,585 shares owned through a profit sharing plan for the
benefit of Dr. Sullivan and 68,222 shares which may be acquired upon
exercise of options. Does not include 84,000 shares issuable upon
exercise of options which vest periodically through February 21, 2003.
Includes 16,000 shares of a common stock grant dated January 31, 2000;
does not include 24,000 shares of the grant that vest ratably over a
three-year period commencing January 1, 2000.
/(3)/ Includes shares which may be acquired upon exercise of options. Does not
include 37,502 shares issuable upon exercise of options which do not vest
until May 17, 2002 or sooner based on attendance at future Board
meetings.
32
<PAGE>
/(4)/ Mr. Williamson is a Senior Vice President at Bank of America Capital
Investors ("BCI"). Does not include 3,716,130 shares of Common Stock
issuable to BCI upon conversion of its holdings of Series F, Series G-I
and Series G-II Shares. Does not include 555,555 shares of Common Stock
which may be acquired by BCI upon exercise of Common Stock purchase
warrants. Does not include 30,000 shares of Common Stock issuable upon
the exercise of options granted to Mr. Williamson in his capacity as
Director which were assigned to Bank of America Capital Investors and
which will vest periodically through January 31, 2003.
/(5)/ Includes shares which may be acquired on exercise of options. Mr. Knight
manages Harrison Interests Ltd. Does not include 492,067 shares of Common
Stock issuable to Harrison Interests, Ltd., Bruce F. Harrison, Trustee
and Mr. Dan J. Harrison III, upon conversion of their holdings of Series
F, Series G-I and Series G-II Shares. Does not include 135,135 shares of
Common Stock issuable to Bruce Harrison on conversion of his $250,000
convertible note. Does not include 55,556 shares of Common Stock which
may be acquired by Harrison Interests, Ltd. upon exercise of Common Stock
purchase warrants. Does not include 19,501 shares of Common Stock
issuable upon the exercise of options granted to Mr. Knight in his
capacity as Director which will vest periodically through January 31,
2003.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1999, the company borrowed $250,000 from an individual that has
a representative on the Board of Directors of the Company and issued a note
payable convertible at the lender's option. The note is convertible at the
lesser of: $1.85 or the market value on the date of notice of conversion, or
the average market value for the twenty trading days preceding notice of
conversion, but not less than $0.40. Additionally, it can be converted, at the
lender's option, into any preferred shares issued by the Company that is
convertible into common shares of the Company.
In July 1999, the Company entered into a Professional Services Agreement
with Mr. Allen whereby he provides financial advice to the Company and serves
as its Treasurer and Chief Financial Officer. Mr. Allen is compensated on an
hourly basis and is paid 40% in cash and 60% in common stock of the Company.
The term of the agreement ends on March 31, 2000, but may be extended on a
month-to-month basis. At December 31, 1999, Mr. Allen was due 19,507 shares of
the Company's common stock.
In May 1998, Bank of America Capital Investors purchased 10,000 Series G-II
Shares for cash proceeds of $1,000,000. Mr. Williamson, Chairman of the Board
and Director of the Company is a Managing Director and Senior Vice President of
BCI. In November 1998, Mr. Sullivan and Mr. Tarrillion purchased 250 and 250
shares of the Company's Series G-II Shares for cash proceeds of $25,000, and
$25,000, respectively. These transactions were completed on terms identical to
those negotiated with third-party investors.
Effective December 23, 1998 the Company entered into an agreement in full
settlement of Mr. Tarrillion's employment contract. See "Executive Compensation
- - Employment Agreements."
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
- -------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors and certain officers of the Company, as well as persons who own more
than 10% of a registered class of the Company's equity securities ("Reporting
Persons"), to file reports with the Securities and Exchange Commission. The
Company believes that during the years ended December 31, 1999 and 1998, all
Reporting Persons timely complied with all filing
33
<PAGE>
requirements applicable to them, except for a Form 4 in 1998 for Mr. Tim B.
Tarrillion in connection with the repricing of certain options which was
subsequently filed with the Securities and Exchange Commission.
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.
<TABLE>
<CAPTION>
C. EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT MANNER OF FILING
<C> <S> <C>
PLAN OF ACQUISITION, REORGANIZATION,
ARRANGEMENTS, LIQUIDATION OR SUCCESSION:
2.3 Asset Purchase Agreement between Gaia Incorporated by reference to the Current Report on
Technologies, Inc., Gaia Holdings, Inc., Form 8-K filed January 12, 1996 ("January 12, 1996
Thor Ventures, L.C. and Thor Industries, 8-K")
Inc. and the Company dated December 29,
1995
3.1 Certificate of Amendment to the Restated Incorporated by reference to the Company's Form
Certificate of - Incorporation of the 10-QSB for the six months ended June 30, 1998 ("June
Company 30, 1998 10-QSB")
INSTRUMENTS DEFINING THE RIGHTS OF
SECURITY HOLDERS:
4.1 Restated Certificate of Incorporation Incorporated by reference to the Company's 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 of the
Company, SEC File No. 33-82112, (the "Form S-4")
4.3 Master Certificate of Designation of Incorporated by reference to the Form S-3 of the
Cumulative Preferred Stock Series G Company, SEC File No. 333-26347, (the "Form S-3")
4.4 Certificate of Designation of Cumulative Incorporated by reference to the Form S-3
Convertible Preferred Stock, Series G -
Subseries I
4.5 Certificate of Designation of Cumulative Incorporated by reference to the June 30, 1998 10-QSB
Convertible Preferred Stock, Series G -
Subseries II
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT MANNER OF FILING
<C> <S> <C>
4.6 Certificate of Designation of Cumulative Filed herewith
Convertible Preferred Stock, Series G -
Subseries III
4.7 Certificate of Designation of Cumulative Filed herewith
Convertible Preferred Stock, Series H
MATERIAL CONTRACTS:
<C> <S> <C>
10.1 Stock Option Agreement between Tim B. Incorporated by reference to the Form S-4
Tarrillion and the Company dated
February 7, 1995
10.2 Stock Option Agreement between David Incorporated by reference to the Form S-4
Daniels and the Company dated
February 7, 1995
10.3 Stock Option Agreement between Judith Incorporated by reference to the Form S-4
Shields and the Company dated
February 23, 1995
10.4 Stock Option Agreement between the Incorporated by reference to the Form S-4
Company and Donovan W. Boyd dated
February 23, 1995
10.5 EET 401(k) Plan Incorporated by reference to the Form S-4
10.6 Amendment to Stock Option Agreement of Incorporated by reference to the Company's Annual
Tim Tarrillion Report on Form 10-K for the fiscal year ended
December 31, 1995 (the "1995 Form 10-K")
10.7 Amendment to Stock Option Agreement of Incorporated by reference to the 1995 Form 10-K
Donovan W. Boyd
10.8 Amendment to Stock Option Agreement of Incorporated by reference to the 1995 Form 10-K
Judith Shields
10.9 Employment Agreement of Tim Tarrillion Incorporated by reference to the March 22, 1995 8-K
dated February 7, 1995
10.14 Agreement between the Company and David Incorporated by reference to the 1997 Form 10-KSB
M. Daniels dated as of December 31, 1997
10.15 GAIA/Thor Royalty Agreement, entered into Incorporated by reference to January 12, 1996 8-K
as of December 29, 1995, by and among
GAIA Technologies, Inc., GAIA Holding,
Inc., Thor Ventures, L.C. and the Company
10.16 GAIA-TieTek License Agreement, entered Incorporated by reference to January 12, 1996 8-K
into as of December 29, 1995, by and
between GAIA Technologies, Inc. and
TieTek, Inc.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. DESCRIPTION OF EXHIBIT MANNER OF FILING
<C> <S> <C>
10.17 Employment Agreement, entered into as of Incorporated by reference to January 12, 1996 8-K
December 29, 1995, between GAIA
Technologies, Inc. and Henry W. Sullivan
10.18 Stock Option Agreement between Henry W. Incorporated by reference to January 12, 1996 8-K
Sullivan and the Company dated
December 29, 1995
10.19 Crosstie Purchase Option and Loan Incorporated by reference to January 12, 1996 8-K
Agreement by and among the Company and
TieTek, Inc., William T. Aldrich, J.
Denny Bartell and Henry W. Sullivan dated
December 29, 1995
10.21 Stock and Warrant Purchase Agreement with Incorporated by reference to the 1995 Form 10-K
respect to the Series F Convertible
Preferred Stock
10.22 Stockholders' Agreement between the Incorporated by reference to the 1995 Form 10-K
Company, certain members of its
management, and the Series F Holders
10.23 Form of Warrant dated as of April 5, 1996 Incorporated by reference to the 1995 Form 10-K
issued to the Series F Holders
10.24 Stock Purchase Agreement dated March 31, Incorporated by reference to the Form S-3
1997 between the Company, NationsBanc
Capital Corporation and Certain Investors
10.25 Amendment to Stockholders' Agreement Incorporated by reference to the Form S-3
10.31 Form of Joinder to Stockholders' Agreement Incorporated by reference to the June 30, 1998 10-QSB
10.32 Form of Stock Purchase Agreement for an Incorporated by reference to the June 30, 1998 10-QSB
Additional Closing dated as of May 21,
1998 by and among the Company, its
operating subsidiaries, NationsBanc
Capital Corporation and certain other
Investors
10.33 Agreement between the Company and Tim B. Incorporated by reference to the 1998 Form 10-KSB
Tarrillion dated as of December 23, 1998
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT MANNER OF FILING
<C> <S> <C>
10.34 Amended and Restated Stock Option Incorporated by reference to the 1998 Form 10-KSB
Agreement between Henry W. Sullivan and
the Company dated December 29, 1995
10.35 Amended and Restated Stock Option Incorporated by reference to the 1998 Form 10-KSB
Agreement between Judith Shields and the
Company dated February 23, 1995
10.36 1999 Stock Incentive Plan Incorporated by reference to the 1998 Form 10-KSB
10.37 Incentive Stock Option Agreement between Incorporated by reference to the 1998 Form 10-KSB
Henry W. Sullivan and the Company dated
February 22, 1999
10.39 Professional Services Agreement between Filed herewith
the Company and Russell L. Allen dated as
of July 12, 1999
10.40 Purchase Contract between the Company and Filed herewith*
the Union Pacific Railroad dated as of
January 31, 2000
22 Subsidiaries of Registrant Incorporated by reference to the Form S-4
23.1 Consent of BDO Seidman LLP Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
- -------------
* Confidential treatment requested with respect to portions thereof. Such
portions have been separately filed with the Securities and Exchange Commission.
D. REPORTS ON FORM 8-K
There were no Current Reports on Form 8-K during the quarter ended
December 31, 1999.
37
<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 29, 2000
By:/s/ Henry W. Sullivan
---------------------
Henry W. Sullivan
Chief Executive Officer
By:/s/Russell L. Allen
-------------------
Russell L. Allen
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ------- -------
<S> <C> <C>
/s/ Douglas C. Williamson Chairman and Director March 29, 2000
- --------------------------
Douglas C. Williamson
/s/ Henry W. Sullivan Chief Executive Officer, March 29, 2000
- ----------------------- President and Director
Henry W. Sullivan
/s/ Edwin H. Knight Director March 29, 2000
- ------------------------
Edwin H. Knight
/s/ William C. Thompson Director March 29, 2000
- ------------------------
William C. Thompson
</TABLE>
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NORTH AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998...... F-3
Consolidated Statements of Loss for the Years
Ended December 31, 1999 and 1998............................... F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1999 and 1998................. F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999 and 1998......................... F-6
Notes to Consolidated Financial Statements........................ F-7 - F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
North American Technologies Group, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of North American
Technologies Group, Inc. as of December 31, 1999 and 1998, 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, 1999 and 1998, 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 experienced recurring losses
from operations and will require additional financing for capital expenditures
and working capital to complete its production facility and support its crosstie
business until the Company achieves a level of revenues adequate to generate
sufficient cash flows from its operations. These conditions raise 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 5, 2000
F-2
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash................................................................ $ 284,498 $ 719,212
Accounts receivables................................................ 132 5,617
Inventories (Note 4)................................................ 41,159 186,783
Current portion of notes receivable (Note 5)........................ 20,000 105,000
Prepaid expenses and other.......................................... 49,732 84,341
------------ ----------
Total Current Assets.............................................. 395,521 1,100,953
Notes Receivable, Less Current Portion and Allowance (Note 5 )....... 120,000 761,639
Property and Equipment, Less Accumulated.............................
Depreciation (Note 6)............................................... 1,024,404 841,998
Patents and Purchased Technologies, Less Accumulated
Amortization of $153,113 and $131,551............................... 1,390,567 1,586,017
Goodwill, Less Accumulated Amortization of $1,053,073 and $815,717... 1,726,945 1,964,301
Other................................................................ 73,056 123,498
------------ ----------
$ 4,730,493 $ 6,378,406
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt (Note 7)....................... $ - $ 500,000
Notes Payable (Note 8).............................................. 567,500 -
Accounts payable.................................................... 155,938 208,202
Accrued expenses (Notes 9 and 13)................................... 253,060 519,453
Deferred dividends payable on preferred stock,
including accrued interest (Note 10).............................. - 191,927
------------ ------------
Total Current Liabilities......................................... 976,498 1,419,582
Long-term Debt, Less Current Maturities (Note 7)..................... - -
Deferred dividends payable on preferred stock, including
accrued interest (Note 10)......................................... 164,851 163,553
------------ ------------
Total Liabilities................................................. 1,141,349 1,583,135
------------ ------------
Commitments and Contingencies (Note 13)
Stockholders' Equity (Note 10):
Cumulative convertible preferred stock, $.001 par value, 10,000,000
shares authorized; 148,585 and 147,468 shares issued.............. 14,858,477 14,746,815
Common stock, $.001 par value, 50,000,000 shares
authorized; 4,260,275 and 3,558,502 shares issued................. 4,261 3,559
Additional paid-in capital.......................................... 29,471,037 26,979,759
Deficit............................................................. (40,744,631) (36,934,862)
------------ ------------
Total Stockholders' Equity.......................................... 3,589,144 4,795,271
------------ ------------
$ 4,730,493 $ 6,378,406
============ ============
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenues (Notes 3 and 15)............................................ $ 170,107 $ 138,828
Cost of Revenues..................................................... 317,704 292,043
----------- -----------
Gross Loss........................................................ (147,597) (153,215)
Selling, General and Administrative Expenses......................... 1,756,178 2,900,955
----------- -----------
Operating loss before valuation adjustment........................ (1,903,775) (3,054,170)
Impairment of certain long-lived assets (Note 16).................... (163,210) -
----------- -----------
Operating loss.................................................... (2,066,985) (3,054,170)
----------- -----------
Other Income (Expense):
Interest income..................................................... 43,056 67,494
Interest expense (Note 8)........................................... (342,687) (193,433)
Gain (loss) on disposition of equipment and other assets (Note 3)... (1,950) 349,088
Royalty income (Note 3)............................................. 2,406 98,160
Other (Note 5)..................................................... (683,440) -
----------- -----------
Total Other Income (Expense) - Net................................... (982,615) 321,309
----------- -----------
Net Loss............................................................. $(3,049,600) $(2,732,861)
=========== ===========
Net Loss Per Share (Notes 1 and 10):
Net Loss Per Common Share - Basic and Assuming Dilution............. $(1.44) $(1.36)
=========== ===========
Weighted Average Number of Common
Shares Outstanding................................................ 3,671,913 3,490,146
=========== ===========
</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, 1999 AND 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
----------------------- ------------------ Paid-In
Shares Amount Shares Amount Capital Deficit Total
-------- ------------ --------- ------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997.............. 115,364 $11,536,406 3,479,858 $3,480 $26,214,731 $(32,180,115) $ 5,574,502
Sale of Series G preferred stock........ 20,000 2,000,000 - - - - 2,000,000
Issuance of common stock upon conversion
of Series F preferred stock.......... (4,000) (400,000) 78,644 79 399,921 - -
Issuance of preferred stock in lieu of
cash dividend........................ 16,104 1,610,409 - - - (1,610,409) -
Dividends on preferred stock............ - - - - - (113,295) (113,295)
Deemed dividends on preferred stock..... - - - - 298,182 (298,182) -
Costs associated with equity
transactions........................... - - - - (33,075) - (33,075)
Compensation costs associated with
repricing of stock options........... - - - - 100,000 - 100,000
Net loss for the year................... - - - - - (2,732,861) (2,732,861)
------- ----------- --------- ------ ----------- ------------ -----------
BALANCE, December 31, 1998.............. 147,468 14,746,815 3,558,502 3,559 26,979,759 (36,934,862) 4,795,271
Sale of Series G preferred stock........ 9,000 900,000 - - - - 900,000
Issuance of common stock upon
conversion of Series F and
G preferred stock.................... (13,102) (1,310,204) 445,205 445 1,309,759 - -
Issuance of preferred stock in lieu of
cash dividends....................... 5,219 521,866 - - - (521,866) -
Dividends on preferred stock............ - - - - - (10,276) (10,276)
Issuance of common stock upon
conversion of dividends
in arrears........................... - - 35,552 36 96,746 (96,782) -
Issuance of common stock upon
conversion of note payable
and accrued interest................. - - 182,875 183 505,788 - 505,971
Issuance of common stock upon
conversion of deferred dividends
and accrued interest................. - - 38,141 38 244,838 - 244,876
Deemed dividends on preferred stock..... - - - - 131,245 (131,245) -
Costs associated with equity
transactions........................... - - - - (43,582) - (43,582)
Deemed interest on convertible notes.... - - - - 246,484 - 246,484
Net loss for the year................... - - - - - (3,049,600) (3,049,600)
------- ----------- --------- ------ ----------- ------------ -----------
BALANCE, December 31, 1999.............. 148,585 $14,858,477 4,260,275 $4,261 $29,471,037 $(40,744,631) $ 3,589,144
======= =========== ========= ====== =========== ============ ===========
</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, 1999 AND 1998
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $(3,049,600) $(2,732,861)
Adjustments to reconcile net loss to
net cash used in operating activities:
Impairment of long-lived assets............................ 163,210 -
Depreciation and amortization.............................. 388,225 578,847
Valuation allowance on inventory........................... (47,580) 50,000
Compensation expense....................................... - 100,000
Discount on note receivable................................ - 105,000
(Gain) loss on disposition of equipment and other assets... 1,950 (349,088)
Provision for bad debts.................................... 681,900 189,950
Interest on converted note payable......................... 5,971 -
Deemed interest, convertible notes payable................. 246,484 -
Accrued interest payable on deferred dividends............. 43,971 34,752
Changes in assets and liabilities:
Accounts receivable....................................... 5,485 298,006
Inventories............................................... 193,204 (232,802)
Prepaid expenses and other current assets................. 34,609 43,746
Other assets.............................................. (6,700) 16,302
Accounts payable and accrued expenses..................... (318,657) 211,991
----------- -----------
Net cash used in operating activities..................... (1,657,528) (1,686,157)
----------- -----------
Cash flows from investing activities:
Cash received from disposition of net assets,
equipment and other assets................................... - 338,538
Decrease in notes receivable.................................. 44,739 602,642
Payments relating to patents.................................. (40,186) (14,203)
Purchase of property and equipment............................ (205,657) (805,546)
----------- -----------
Net cash provided by (used in) investing activities....... (201,104) 121,431
----------- -----------
Cash flows from financing activities:
Issuance of preferred stock................................... 879,000 1,975,000
Proceeds from convertible notes payable....................... 567,500 -
Repayment of notes payable and long-term debt................. - (6,978)
Payment for costs and fees of equity issuances................ (22,582) (33,075)
----------- -----------
Net cash provided by financing activities................. 1,423,918 1,934,947
----------- -----------
Net increase (decrease) in cash................................ (434,714) 370,221
Cash beginning of year......................................... 719,212 348,991
----------- -----------
Cash end of year............................................... $ 284,498 $ 719,212
=========== ===========
</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
North American Technologies Group, Inc. ("NATK"), was incorporated on
December 24, 1986 in the State of Delaware. The accompanying consolidated
financial statements include the accounts of NATK and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. North American Technologies Group, Inc. and its subsidiaries are
referred to herein as the Company.
The Company's historic business strategy had been to acquire and/or
internally develop businesses that are based on proprietary technologies,
proprietary manufacturing processes and/or defensible market niches. During 1997
and 1998, the Company evaluated the businesses and/or technologies that had been
acquired during the prior years to determine the optimum course to be pursued
given the level of resources available to the Company. As a result of this
review, the Company decided to concentrate its resources on the
commercialization of its TieTek composite railroad crosstie. Accordingly, the
Company has sold or licensed certain of its businesses and technologies that had
been sufficiently commercialized and which might be better developed by outside
interests with resources or capabilities in specific areas related to those
businesses.
INVENTORIES
Inventories consist of composite railroad crossties and raw materials and
are valued at the lower of cost (first-in, first-out) or market. Costs includes
material costs, direct labor, and applied overhead.
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.
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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. 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 bases of assets and liabilities. 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.
F-7
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT
Expenditures for research and development of products and processes and for
the operation of pilot projects are charged to expense as incurred. For the
years ended December 31, 1999 and 1998, the Company's research and development
expenses were not significant.
LOSS PER COMMON SHARE
The Company provides basic and dilutive loss per common share information
for each year presented. The basic net 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. 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 at the
date of issuance is less than the market price of the Company's common stock.
For the years ended December 31, 1999 and 1998, net loss applicable to common
stockholders is as follows:
1999 1998
----------- -----------
Net loss..................................... $(3,049,600) $(2,732,861)
Dividends on preferred stock................. (628,924) (1,723,704)
Accumulated dividends in arrears............. (1,474,271) -
Deemed dividends on preferred stock.......... (131,245) (298,182)
----------- -----------
Net loss applicable to common stockholders... $(5,284,040) $(4,754,747)
=========== ===========
Diluted net loss per common share is computed by dividing the net loss,
adjusted on an "as if converted" basis, by the weighted average number of common
shares outstanding plus potential dilutive securities. For the years ended
December 31, 1999 and 1998, potential dilutive securities had an anti-dilutive
effect and were not included in the calculation of diluted net loss per common
share. For the year ended December 31, 1999, these securities include options
and warrants on 1,508,888 shares of common stock, convertible debt and preferred
stock convertible into 306,756 and 6,243,369 shares of common stock,
respectively. For the year ended December 31, 1998, these securities included
options and warrants on 1,708,306 shares of common stock, convertible debt and
preferred stock convertible into 37,037 and 5,396,138 shares of common stock,
respectively.
REVENUE RECOGNITION
Product revenues are recognized when the products are shipped. Royalty
revenues are recognized when earned.
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 SFAS Statement No. 123,
"Accounting for Stock-Based Compensation."
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
F-8
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999, the Company's cash in a financial institution exceeded
the federally insured deposit limit by $176,608. Through the year ended
December 31, 1998, the Company extended credit to its customers in various
industries, including petrochemical, construction, mining, waterworks and
environmental, and there was no concentration of credit risk. For the year
ended December 31, 1999 and thereafter, the Company will extend credit to its
customers primarily in the railroad industry.
RECLASSIFICATIONS
Certain 1998 balances have been reclassified to conform to the 1999
financial statement presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), as amended by SFAS 137. This statement
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. The statement generally provides for matching the timing of gain or loss
recognition on the hedging instrument with the recognition of (a) the changes in
fair value of hedged asset or liabilities that are attributable to the hedged
risk or (b) the earnings effect of the hedged forecasted transaction. The
statement is effective for all fiscal quarters for all fiscal years beginning
after June 15, 2000 with early application encouraged, and shall not be applied
retroactively to financial statements of prior periods. Adoption of SFAS 133 is
expected to have no effect on the Company's financial statements.
NOTE 2 - FINANCIAL CONDITION AND GOING CONCERN
For the years ended December 31, 1999 and 1998, the Company incurred net
losses of $3,049,600 and $2,732,861, respectively, and had an accumulated
deficit of $40,744,631 at December 31, 1999. Because of these recurring losses,
the Company will require additional financing for capital expenditures and
working capital to complete its production facility and support its crosstie
business until the Company achieves a level of revenues adequate to generate
sufficient cash flows from its operations. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Management is currently in negotiations with certain potential investors
regarding an investment in the Company. As of the date of this report, no
definitive agreement has been reached and there can be no assurance that the
transaction will be completed.
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.
F-9
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SALE OF CERTAIN ASSETS AND ROYALTY AGREEMENTS
In March 1998, the Company sold certain assets to an unrelated company.
The assets sold related primarily to the Company's patented TechXTract
technology used to provide on-site decontamination of buildings and equipment
contaminated with polychlorinated biphenyls, radioactive isotopes or other toxic
materials. The Company received consideration of $200,000 cash and two notes
receivable totaling $800,271. See Note 5 for terms of the notes receivable.
The Company recognized a gain of approximately $440,000 on the transaction. Net
revenues and gross profits were $17,086, and $6,331, respectively, for the
TechXTract product line for the years ended December 31, 1998.
The Company has royalty agreements from the sale and licensing of certain
technology prior to year end 1998. During the years ended December 31, 1999 and
1998, the Company earned approximately $2,000 and $98,000, respectively, in
accordance with these agreements.
NOTE 4 - INVENTORIES
At December 31, inventories consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Raw materials...................................................... $ 36,682 $ 68,560
Finished goods..................................................... 4,477 118,223
---------- ----------
$ 41,159 $ 186,783
========== ==========
</TABLE>
At December 31, 1999 and 1998, the Company provided a valuation allowance
of approximately $2,420 and $50,000, respectively, to reduce inventory to its
estimated market value.
NOTE 5 - NOTES RECEIVABLE
At December 31, notes receivable consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Notes receivable from the sale of certain assets of EET, net (a)... $ 761,900 $ 786,639
Notes receivable from sale of certain assets of RII, net (b)....... 250,860 270,680
---------- ----------
1,012,760 1,057,319
Less allowance..................................................... 872,760 190,680
---------- ----------
140,000 866,639
Less current portion............................................... 20,000 105,000
---------- ----------
$ 120,000 $ 761,639
========== ==========
</TABLE>
(a) In March 1998, the Company sold certain assets to an unrelated
company. As a part of the consideration for this transaction the Company
received two notes with original principal balances totaling $800,271, which are
secured by the technology sold. The first promissory note has an original
principal balance of $363,436, bears interest at 6% per annum, and is payable in
twelve quarterly payments beginning September 30, 1998. The second promissory
note has an original principal balance of $436,835, bears interest at 9-1/2% per
annum, and is payable in twelve annual payments beginning September 30, 2001.
In addition to the regularly scheduled quarterly payments, the purchaser is
required to make payments equal to 10% of amounts it has invoiced in any quarter
in excess of $100,000. In September 1999, the borrower paid interest when due
but failed to make the required principal payment and also failed to make the
required December 1999 principal payment. The borrower and the Company are
presently negotiating a restructuring of the notes. The borrower has agreed to
increase the interest rate on the first note to 9% beginning October 1, 1999 and
has paid interest at that rate through December 31, 1999. In addition, the
borrower has verbally offered $80,000 to settle the outstanding balance due on
the first note. Because of the uncertainty of collection, the Company provided
an allowance of $681,900 as of December 31, 1999, of which $380,950 was provided
as of September 30, 1999.
F-10
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) In November 1997, the Company sold certain assets and licensed its
Riserclad technology to an unrelated company which included the former president
of RII. As a part of the consideration for this transaction, the Company
received (i) a note receivable in the principal amount of $301,960, and (ii) a
note receivable in the principal amount of $100,000.
The note receivable with an original principal balance of $301,960 is non-
interest bearing for two years, and bears interest at 6% per annum thereafter.
The note is secured by the rights under the license agreement and a certain
account receivable of equal dollar amount. Any payments received by the
purchaser from this account receivable will be remitted in total to the Company
as payment against the note. Any portion of the principal that remains unpaid
as of December 1999 becomes payable in eight equal annual installments, plus any
accrued and unpaid interest, beginning in December 2000. During 1998 the
Company received payments of $111,100 relating to this note. At December 31,
1998, the remaining principal balance of $190,860 was fully reserved because the
ultimate collection of the amount is primarily dependent on the sale of certain
inventories by the purchaser which have been located for over one year in a
foreign country that is experiencing political unrest.
The note receivable with an original principal balance of $100,000 bears
interest at 6% per annum and is payable in five equal annual installments of
$20,000, plus interest, beginning in December 1998. The note is secured by the
rights under the license agreement.
(c) In September 1998, the Company discounted a five-year note receivable
with a then outstanding principal balance of $525,000 for a cash payment of
$420,000 in full settlement of all obligations between the parties. The
discount of $105,000 has been included in interest expense for the year ended
December 31, 1998.
NOTE 6 - PROPERTY AND EQUIPMENT
At December 31, major classes of property and equipment consisted of:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Machinery and equipment............................................................................. $1,086,429 $ 885,585
Furniture and fixtures.............................................................................. 122,398 123,444
---------- ----------
1,208,827 1,009,029
Less accumulated depreciation....................................................................... 184,423 167,031
---------- ----------
$1,024,404 $ 841,998
========== ==========
At December 31, 1999, the Company's machinery and equipment were waiting to be placed in service.
NOTE 7 - LONG-TERM DEBT
At December 31, long-term debt was as follows:
1999 1998
---------- ----------
8% Note Payable due August 1999..................................................................... $ - $ 500,000
Less current maturities............................................................................. - (500,000)
---------- ----------
$ - $ -
========== ==========
</TABLE>
In August 1994, the Company borrowed $500,000, which bore interest at 8%
per annum, from an individual lender. The loan matured in August 1999. In
November 1999, the Company and the Lender entered into an agreement to convert
the loan and accrued interest into 182,875 shares of the Company's common stock.
F-11
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - NOTES PAYABLE
In 1999, the Company borrowed $567,500 from investors in three separate
transactions and issued three unsecured convertible notes bearing interest at
10% and maturing one year from date of issuance. The notes payable mature as
follows (1) $167,500 on September 9, 2000; (2) $150,000 on October 1, 2000 and
(3) $250,000 on December 31, 2000. Two of the notes payable totaling $317,500
are convertible at the lender's or borrower's option into shares of the
Company's common stock at $1.85. The other note payable for $250,000 is
convertible at the lender's option at the lesser of: $1.85 or the market value
on the date of notice of conversion, or the average market value for the twenty
trading days preceding notice of conversion, but not less than $.40.
Additionally, it can be converted, at the lenders option, into any preferred
issued by the Company that is convertible into common shares of the Company.
The lender of the $250,000 is an individual that has a representative on the
Board of Directors of the Company (see Note 9).
See Note 10 for discussion regarding the recording of deemed interest due
to the beneficial conversion rate of the notes payable issued during 1999.
NOTE 9 - RELATED PARTY TRANSACTIONS
In December, 1999 the Company borrowed $250,000 from an investor group that
has one representative on the Company's Board of Directors. The Company issued
a note with a maturity of one year at 10% interest. The note is convertible at
the lenders option at the lesser of: $1.85 or the market value on the date of
conversion, or the average market value for the twenty trading days preceding
notice of conversion, but not less than $.40. Additionally, it can be
converted, at the lenders option, into any preferred stock issued by the Company
that is convertible into common shares of the Company.
In November 1998, certain officers and directors of the Company purchased
700 shares of the Series G, Subseries II, convertible preferred stock for cash
proceeds of $70,000 on the same terms as other third party investors.
In November 1998, the Company entered into an agreement with the lessor of
the manufacturing and office facility that had been formerly used for IPF's
operations. As a result of this agreement, all obligations under the lease
terminated for a cash payment of approximately $30,000. For the year ended
December 31, 1998, rent expense under this agreement, net of sublease rental
income, was approximately $23,400. The lessor of these facilities had been an
officer and director of the Company prior to 1998.
Effective December 23, 1998, the Company entered into an agreement with the
President and Chief Executive Officer of the Company, in full settlement of his
employment contract. The agreement provides for the resignation of this
individual's officer positions as of January 22, 1999, with the continuation of
his employment as a full-time consultant through March 31, 1999. From April 1
through December 31, 1999, the individual will be available on an "as needed"
basis and his salary and benefits will continue through such date. As part of
the agreement, the exercise price of 55,555 common stock options was reduced
from $9.00 to $4.50. Of these options, 44,444 were currently vested and 11,111
vested on December 31, 1999. As of December 31, 1998, the Company had
recognized an accrual of $150,000 for compensation costs for the period April 1,
1999 through December 31, 1999. In addition, the Company recognized
compensation expense associated with the changes made to the terms of the
options of $100,000.
F-12
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY
In June 1999, the Company's stockholders approved an amendment to the
Company's Restated Certificate of Incorporation reducing the number of
authorized shares of the Company's common stock from 100,000,000 to 50,000,000.
Reverse Stock Split
In May 1998, the stockholders of the Company approved a 9 for 1 reverse
stock split. Accordingly, all outstanding common stock and all per share data
have been retroactively adjusted to reflect the reverse stock split. In
addition, all outstanding common stock options and warrants and their exercise
prices, along with the preferred stock conversion prices, have been adjusted
accordingly to reflect the reverse stock split .
Series F and G Cumulative Convertible 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
1,027,778 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
727,778 Series F Warrants. The remaining 27,000 Series F shares and 300,000
Series F Warrants were issued in exchange for the surrender of 13.5% convertible
subordinated debentures with a principal balance of $2,700,000 that were issued
in 1995, and their associated warrants. The Series F Warrants were issued with
an original exercise price of $9.00 per share, subject to certain adjustments,
and expire on April 8, 2004. As of December 31, 1999, the adjusted warrant
exercise price was $4.00 per share.
In March 1997, the Company issued 16,400 shares of Series G, Subseries I,
convertible preferred stock ("Series G Subseries I") for cash proceeds of
$1,640,000. In May through November 1998, the Company issued 20,000 shares of
Series G, Subseries II, convertible preferred stock ("Series G Subseries II")
for cash proceeds of $1,975,000 and services rendered of $25,000. In 1999, the
Company issued 9,000 shares of Series G, Subseries III, convertible preferred
stock ("Series G Subseries III") for cash proceeds of $879,000 and payments to
financial advisors of $21,000.
Dividends accrue on the Series F and G shares at a per annum rate of $13.50
per share and are payable semi-annually. Until April 5, 1999, the Company could
elect to defer the payment of dividends, in which case, each holder could 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 or G shares. After April 5, 1999, the dividends, if declared, must be
paid in cash. The dividends are payable only when declared by the Board of
Directors out of funds legally available. No dividends have been declared since
April 5, 1999. At December 31, 1999 dividends in arrears on preferred stock
were $1,474,271 and during 1999 $96,782 of dividends in arrears had been paid in
common stock of the Company on conversion of the underlying preferred stock.
During 1999, the Company paid dividends (i) on the Series F shares totaling $
393,622 of which $ 384,843 was paid by issuance of 3,849 shares of Series F
preferred stock, and $8,778 was deferred as a dividend payable, and (ii) on the
Series G shares totaling $ 138,521, of which $137,023 was paid by issuance of
1,370 shares of Series G preferred stock, and $1,498 was deferred as a dividend
payable. During 1998, the Company paid dividends (i) on the Series F shares
totaling $1,383,581, of which $1,275,962 was paid by issuance of 12,760 shares
of Series F preferred stock, and $107,619 was deferred as a dividend payable,
and (ii) on the Series G shares totaling $340,123, of which $334,447 was paid by
issuance of 3,344 shares of Series G preferred stock, and $5,676 was deferred as
a dividend payable.
F-13
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The holders of the Series F and G shares have certain liquidation
preferences. The Series F, Series G Subseries I, Series G Subseries II and
Series G Subseries III 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 $4.00, $2.42, $.87 and $1.50 per share, respectively. In 1999,
holders of 10,560 Series F shares with a face amount of $1,055,969 converted
their holdings in 248,647 shares of the Company's common stock and holders of
2,542 Series G shares with a face amount $254,235 converted their holdings into
196,558 shares of the Company's common stock. In November 1998, holders of 4,000
Series F shares with a face value of $400,000 converted their holdings into
78,644 shares of Company common stock. In November 1997, the holder of 13,754
Series F shares with a face value of $1,375,407, and 2,500 Series G shares with
a face value of $250,000 converted its holdings into 179,174 and 62,413 shares
of Company common stock, respectively. In conjunction with this transaction,
deferred dividends of $191,927 were classified as a current liability. In 1999
the holder converted the deferred dividends into common stock. On or after April
8, 2001, the Series F and G 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 and G shares at a face
value on or after April 8, 2004.
Each Series F and G share entitles the holder to voting privileges equal to
the number of shares of common stock into which such share may be converted from
time to time. In addition, the F and G holders have the right to nominate four
positions to a nine-member board of directors.
The preferred stock purchase agreements and the certificates of designation
for the Series F and G shares contain covenants which, if breached by the
Company, provide for certain remedies. Certain of these covenants are
considered outside of the Company's control. These covenants include, among
other things, that the Company obtain a minimum net worth, as defined in the
agreement, by December 31, 2000. For breach of these covenants the remedy
allows the Series F and G 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. The stock purchase agreement also
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 the remedies allow the Series F and G 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 and G 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.
Preferred Stock and Debt Convertible at a Discount to Market
The Company has issued preferred stock and debt which is convertible into
shares of the Company's common stock at a price less than market price on the
date of issuance. As a result the Company has recorded, at the time of
issuance, "deemed dividends" and "deemed interest" equal to the amount of the
discount. The deemed dividends and interest are computed by taking the
difference between the conversion rate, as defined, and the per share market
value of the Company's common stock on the date of the issuance. The Company
recognized deemed dividends totaling $131,245 and $298,182 during the years
ended December 31, 1999 and 1998, respectively and $246,484 of deemed interest
in 1999.
F-14
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999, the Company had common stock reserved for future
issuance as follows:
Shares
---------
Conversion of preferred stock................................ 6,243,369
Stock warrants outstanding................................... 1,038,889
Stock options outstanding.................................... 469,999
Conversion of convertible debt............................... 306,756
---------
8,059,013
=========
NOTE 11 - STOCK OPTIONS AND WARRANTS
In May 1999 shareholders approved the adoption of the 1999 Stock Incentive
Plan. This plan authorizes the Compensation Committee to grant options to
attract, retain and reward persons providing services to the Company. The
Company may issue up to a maximum of 10% of the total issued and outstanding and
reserved common shares of which a maximum of 1,000,000 may be incentive stock
options. The Company granted 153,610 options during 1999 under the 1999 Plan,
of which 143,610 remained outstanding at December 31, 1999. Also outstanding at
December 31, 1999 were 326,389 options previously granted by the Board of
Directors and 1,038,889 warrants issued in connection with financing
transactions.
The Company accounts for stock options issued to employees and independent
directors in accordance with APB opinion 25, "Accounting for Stock Issued to
Employees".
SFAS Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") 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 SFAS 123. The Company estimates the fair
value of each stock option at the grant date using the Black-Scholes option-
pricing model with the following weighted-average assumptions used for grants in
1999 and 1998 as follows:
1999 1998
-------- --------
Dividend yield........................................ 0% 0%
Expected volatility................................... 73% 95.0%
Risk free interest.................................... 5% 5.92%
Expected lives........................................ 4 years 4 years
During 1999 and 1998, certain options previously granted had a modification
of their exercise price which constitutes a new issuance of options in
accordance with SFAS 123. Accordingly, these options were revalued at the date
of the modifications in accordance with SFAS 123. The modified exercise price
equaled or exceeded the market price per share at the modification date,
accordingly, no compensation was recorded.
Under the accounting provisions of SFAS 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:
1999 1998
----------- -----------
Net loss applicable to common stockholders
As reported (Note 1)....................... $(5,284,040) $(4,754,747)
=========== ===========
Pro forma.................................. $(5,321,825) $(4,767,497)
=========== ===========
Loss per share
As reported................................ $ (1.44) $ (1.36)
=========== ===========
Pro forma.................................. $ (1.45) $ (1.36)
=========== ===========
F-15
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Due to the fact that the Company's stock option programs vest over many
years and additional awards may be made each year, the above pro forma numbers
are not indicative of the financial impact had the disclosure provisions of SFAS
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 1999 and
1998.
A summary of the status of the Company's stock options to employees and
directors as of December 31, 1999 and 1998, and changes during the years ending
on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 330,556 $ 8.38 330,556 $ 9.13
Granted.................................. 153,610 3.11 55,555 4.50
Exercised................................ - - - -
Forfeited................................ (14,167) (4.76) (55,555) (9.00)
-------- ------ ------- ------
Outstanding at end of year............... 469,999 $ 6.23 330,556 $ 8.38
======== ====== ======= ======
Options exercisable at year-end.......... 344,996 $ 7.37 298,611 $ 8.48
======== ====== ======= ======
Weighted-average fair value of options
granted during the year................. $ 1.44 $ 1.80
======= =======
</TABLE>
The following table summarizes information about fixed stock options
outstanding to current or former employees and directors at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Exercise Outstanding Life Exercise Exercisable Exercise
Price at 12/31/99 (Years) Price at 12/31/99 Price
-------- ----------- ------------ -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 3.00 132,500 9.29 $ 3.00 14,164 $ 3.00
$ 4.50 122,221 6.74 $ 4.50 115,554 $ 4.50
$ 6.75 33,333 3.00 $ 6.75 33,333 $ 6.75
$ 9.00 136,112 6.50 $ 9.00 136,112 $ 9.00
$ 11.25 44,444 1.25 $ 11.25 44,444 $11.25
$ 22.50 1,389 5.00 $ 22.50 1,389 $22.50
------------- ------- ---- ------- ------- ------
$3.00 - 22.50 469,999 6.60 $ 6.23 344,996 $ 7.37
============= ======= ==== ======= ======= ======
</TABLE>
In connection with the stock warrants issued primarily in connection with
financing transactions, the Company had 1,038,889 stock warrants outstanding at
December 31, 1999, of which all are currently exercisable. These warrants have
exercise price of $4.00 or as adjusted, which equaled or exceeded the market
price per share at the date of grant, and expire in 2004.
F-16
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES
Deferred taxes are determined based on the temporary differences between
the financial statement and income tax bases 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, were as
follows:
DECEMBER 31, 1999 1998
------------ ----------- -----------
Deferred tax assets
Net operating loss carryforward....... $ 9,158,000 $ 8,326,000
Impairment of long-lived assets....... 335,000 280,000
Bad debt provisions................... 296,000 65,000
Other................................. 97,000 123,000
----------- -----------
Gross deferred tax assets............... 9,886,000 8,794,000
Valuation allowance..................... (9,886,000) (8,794,000)
----------- -----------
Net deferred tax assets................. $ - $ -
=========== ===========
At December 31, 1999 and 1998, 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, 1999, the Company has net operating loss carryforwards for
federal income tax purposes totaling approximately $26,774,000 which, if not
utilized, will expire as follows:
YEAR ENDED
DECEMBER 31, AMOUNT
------------ -----------
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.............................................. 3,798,000
2011.............................................. 4,469,000
2012.............................................. 6,294,000
2018.............................................. 2,422,000
2019.............................................. 2,449,000
-----------
$26,774,000
===========
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-17
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company rents equipment and facilities under operating leases on both
long and short-term basis. Rent expense for the years ended December 31, 1999
and 1998 total approximately $194,000 and $400,000, respectively. Rent expense
for the year ended December 31, 1998 included an accrual of $200,000 for the
termination of the current corporate office lease agreement as described below.
During November 1998, the Company entered into a lease agreement for a
23,000 square foot manufacturing and office facility in Houston, Texas to be
used for the production of the TieTek Crossties. The lease is renewable at the
Company's option for ten consecutive periods of five years each. The monthly
rental is currently $14,819. The lease provides for a CPI adjustment to the
monthly rental after 2-1/2 years of the initial term and at the beginning of
every renewal period. The Company has an option to lease an additional 2-1/2
acres and up to 50,000 square feet of additional building space through December
31, 2001.
The Company relocated its corporate headquarters into the offices at the
manufacturing facility in August 1999. During 1998, the Company subleased a
portion of its former corporate office space. However, as of December 31, 1999,
the Company had been unable to sublease the remaining office space which
provides for monthly lease payments of approximately $8,000 through September
2000. An accrual of $119,978 for the termination of the existing lease and
related expenses is included in accrued liabilities.
Minimum annual rentals under non-cancelable operating leases of more than
one year in duration are as follows:
Year Ending December 31, AMOUNT
------------------------ --------
2000.............................. $258,840
2001.............................. 182,840
2002.............................. 182,840
2003.............................. 182,840
2004.............................. 49,460
--------
$856,820
========
At December 31, 1999, the Company had outstanding purchase commitments for
manufacturing equipment of approximately $237,000.
In December 1997, in association with the acquisition of TieTek, Inc., the
Company entered into a fifteen-year royalty agreement (TieTek Royalty Agreement)
providing for royalty payments calculated on gross profits of TieTek payable to
the former owners of TieTek. One of the former owners is a director and officer
of the Company and another is a former director of the Company.
The TieTek Royalty Agreement provides for the payment of an alternate
minimum royalty beginning March 1999 in the event the Company does not
expeditiously proceed with the construction of a plant as defined in the royalty
agreement. The alternate minimum royalty obligation is $162,500 per calendar
quarter until the Company begins commercial sales of product. Management
believes that it has complied with the terms of the agreement and no minimum
royalty is due. The Company has therefore neither paid nor accrued any
alternative minimum royalty.
In October 1999, the Company was informed by certain royalty holders that
they disagree with the Company's interpretation of the royalty agreement and
believe that an alternate minimum royalty is due and have requested that it be
paid. The Company is in discussions with representatives of the royalty holders
and is attempting to reach an amicable resolution of the issue.
F-18
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
From time to time the Company may be involved in various legal actions
arising in the normal course of business relating to product liability issues
for which the Company maintains insurance. There is currently one such action
involving the performance of certain products sold by IPF. This claim is
currently being handled by the Company's insurance company, and management
believes its outcome will not have a material adverse effect on the Company's
financial position or results of operations.
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended December 31, 1999 and 1998, the Company paid
interest totaling approximately $53,000 and $50,000.
During the year ended December 31, 1999, the Company had the following non-
cash transactions:
(a) The holders of Series F shares totaling 10,560 shares, with face value
of $1,055,969, converted their holdings into 248,647 shares of the
Company's common stock.
(b) The holders of Series G shares totaling 2,542 shares, with face value
of $254,235, converted their holdings into 196,558 shares of the
Company's common stock.
(c) The Company issued 3,849 Series F shares in payment of dividends
totaling $384,843.
(d) The Company issued 1,370 Series G shares in payment of dividends
$137,023.
(e) The Company recognized deemed dividends of $131,245 on its Series G
Subseries III preferred stock.
(f) The Company accrued dividends totaling $10,276 on its Series F and
Series G shares.
(g) The Company issued 182,875 shares of the Company's common stock for
conversion of a note payable and accrued interest totaling $505,971.
(h) Dividends in arrears totaling $96,782 were converted to 35,552 shares
of the Company's common stock.
(i) Deferred dividends and accrued interest for Series F and G totaling
$244,876 were converted to 38,141 shares of the Company's common
stock.
(j) The Company recognized deemed interest of $246,484 on its convertible
notes payable.
(k) The Company issued 210 shares of Series G, Subseries III, preferred
stock for $21,000 of professional fees.
F-19
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 1998, the Company had the following non-
cash transactions:
(a) The holders of Series F shares totaling 4,000 shares, with face value
of $400,000, converted their holdings into 78,644 shares of the
Company's common stock.
(b) The Company issued 12,760 Series F shares in payment of dividends
totaling $1,275,962.
(c) The Company issued 3,344 Series G shares in payment of dividends
totaling $334,447.
(d) The Company recognized deemed dividends of $298,182 on its Series G
Subseries II preferred stock.
(e) The Company accrued dividends totaling $113,295 on its Series F and
Series G shares.
(f) The Company received notes receivable totaling $800,271 as a portion
of the consideration for the sale of EET's TechXTract technology. In
association with the sale the Company accrued a liability of $60,000
for a lawsuit settlement.
(g) The Company issued 250 Series G, Subseries II, preferred stock for
$25,000 of professional services rendered.
(h) The Company disposed of other assets with a net book value of $39,681.
NOTE 15 - MAJOR CUSTOMERS
For the year ended December 31, 1999, the Company had sales to three
customers that represented 41%, 29% and 18% of total revenues, respectively.
For the year ended December 31, 1998, the Company had sales to one customer that
represented 80% of total revenues.
NOTE 16 - IMPAIRMENT OF CERTAIN LONG-LIVED ASSETS
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"), management reviews long-lived and
intangible assets whenever events or changes in circumstances indicate the
carrying amount of an asset may not be fully recoverable. During the fourth
quarter of 1999, the Company determined based on an analysis of expected future
minimum royalty payments that an impairment of the Company's Riserclad
technology and associated non-compete agreements had occurred. Accordingly, a
valuation adjustment of $163,210 has been recognized in the accompanying
statement of loss for the year ended December 31, 1999 to write-down the
Riserclad technology and non-compete agreements carrying values to approximately
$99,000.
NOTE 17 - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1999, the Company recorded (1) an allowance of
$380,950 on a note receivable (see Note 5a) and (2) an impairment loss of
$163,210 for the write-down of certain technology and associated non-compete
agreements (see Note 16).
F-20
<PAGE>
CERTIFICATE OF DESIGNATION OF CUMULATIVE CONVERTIBLE
PREFERRED STOCK, SERIES G--SUBSERIES III
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Henry W. Sullivan and Judith Knight Shields do hereby certify that they are
the President and Secretary, respectively, of North American Technologies Group,
Inc., a Delaware corporation (hereinafter referred to as the "Corporation" or
the "Company"); that, pursuant to the Corporation's Restated Certificate of
Incorporation, Section 151 of the Delaware General Corporation Law and the
Master Certificate of Designation relating to the Company's Cumulative
Convertible Preferred Stock, Series G (the "Master Certificate of Designation"),
the Board of Directors of the Corporation adopted the following resolutions on
March 22, 1999, and that none of the Series G Cumulative Convertible Preferred
Stock--Subseries III has been issued.
Pursuant to the terms of the Master Certificate of Designation, there is
hereby created a subseries of Preferred Stock designated as Cumulative
Convertible Preferred Stock, Series G--Subseries III (the "Series G Preferred--
Subseries III Shares"), which shall consist of 11,000 shares. The Series G
Preferred--Subseries III Shares shall have the preferences, voting powers,
relative, participating, optional or other special rights and privileges, and
the qualifications, limitations and restrictions as provided below and as
provided in the Master Certificate of Designation.
The initial conversion price (the "Subseries Conversion Price") of the
Series G Preferred--Subseries III Shares shall be $1.50 and notwithstanding
anything contained herein or in the Master Certificate of Designation to the
contrary: (i) the Subseries Conversion Price shall not be subject to any
adjustment pursuant to Section 3(c)(iv) of the Master Certificate of Designation
to an amount below $1.25; and (ii) the Series G Preferred--Subseries III Shares
shall not be converted into shares of Common Stock pursuant to Section 3(a)(ii)
of the Master Certificate of Designation utilizing a divisor of less than $1.25
unless due to an adjustment to the Subseries Conversion Price pursuant to
Section 3(c)(vi) thereof. Holders of the Subseries III Shares shall not transfer
any beneficial ownership interest in such shares unless such transferee agrees
to the provisions of that certain Stock Purchase Agreement For An Additional
Closing dated as of March 22, 1999 which is on file at the principal office of
the Corporation.
IN WITNESS WHEREOF, the Company has caused this Certificate of Designation
of Subseries to be duly executed by its President and attested to by its
Secretary, this 22nd of March, 1999.
NORTH AMERICAN TECHNOLOGIES, GROUP, INC.
DATE: /s/ Henry W. Sullivan
- ---------------------- -------------------------------------
Henry W. Sullivan, President and Chief
Executive Officer
DATE: /s/ Judith Knight Shields
- ---------------------- -------------------------------------
Judith Knight Shields, Secretary
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CERTIFICATE OF DESIGNATION
SERIES H CONVERTIBLE PREFERRED STOCK
HENRY W. SULLIVAN and JOSEPH P. GALDA do hereby certify that they are the
Chief Executive Officer and Secretary, respectively, of NORTH AMERICAN
TECHNOLOGIES GROUP, INC., a Delaware corporation (hereinafter referred to as the
"Corporation"); that, pursuant to the Corporation's Certificate of Incorporation
and Section 151 of the Delaware General Corporation Law, the Board of Directors
of the Corporation adopted the following resolutions on March 13, 2000:
WHEREAS, the Corporation has determined to designate a new Series H
Convertible Preferred Stock pursuant to the authority granted in its Certificate
of Incorporation and Section 151 of the Delaware General Corporation Law.
NOW, THEREFORE, the Corporation's Series H Preferred shall have the rights
and preferences set forth below:
SERIES H CONVERTIBLE PREFERRED STOCK. There is hereby created a series of
preferred stock designated as Convertible Preferred Stock, Series H (the "Series
H Preferred"), which will consist of 10,000 shares. The Series H Preferred
shall have the preferences, voting powers, relative, participating, optional or
other special rights and privileges, and the qualifications, limitations and
restrictions as provided below:
1. DIVIDENDS AND DISTRIBUTIONS. Beginning on the date of the issuance of
the Series H Preferred, the holders of shares of Series H Preferred shall be
entitled to receive dividends at a rate of 10% per annum of the Stated Value (as
defined below). Dividends shall be fully cumulative, prior and in preference to
any declaration or payment of any dividend or other distribution on the
Corporation's common stock, par value $0.001 per share ("Common Stock").
Payments of dividends or any other distributions on account of the Series H
Preferred shall be at all times equal in right to the rights of the holders of
the Corporation's Series F Convertible Preferred Stock ("Series F Preferred")
and Series G Convertible Preferred Stock ("Series G Preferred"). The dividends
on the Series H Preferred shall accrue from the date of issue and shall be
payable semi-annually on June 30 and December 31 of each year (each a "Dividend
Date"), commencing on June 30, 2000 except that if any such date is a Saturday,
Sunday or legal holiday (a "Non-Business Day") then such dividend shall be
payable on the next day that is not a Saturday, Sunday or legal holiday on which
banks in the State of Delaware are permitted to be closed (a "Business Day") to
holders of record as they appear on the stock books of the Corporation on the
applicable record date, which shall be not more than 60 nor less than 10 days
preceding the payment date for such dividends, as fixed by the Board of
Directors (the "Record Date"). The dividends on the Series H Preferred shall be
payable only when, as and if declared
<PAGE>
by the Board of Directors out of funds legally available therefor. The dividends
shall, at the option of the Corporation, either (1) be payable in cash, or (2)
accrue, and thereafter shall be payable in cash, provided, however, that at the
option of the Corporation, dividends may be paid in cash or in shares of the
Corporation's Series H Preferred Stock at a rate of one share of Series H
Preferred Stock for accrued dividends equal to the Stated Value (defined below).
Subject to the provisions of the preceding sentence and the next paragraph, in
the absence of an election by the Board of Directors within 10 days of each
Dividend Date to pay dividends in cash, the dividends shall accrue. The amount
of dividends payable for any period that is shorter or longer than a full half-
year shall be computed on the basis of a 360-day year of twelve 30-day months.
2. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, distributions
shall be made to the holders of Series H Preferred in respect of such Series H
Preferred, in the following manner:
(a) SERIES H PREFERRED LIQUIDATION PREFERENCE. The holders of the
Series H Preferred shall be entitled to be paid all amounts payable hereunder on
account of the liquidation of the Corporation, in parity with the holders of the
Series F Preferred and Series G Preferred, but prior to the payment of any
amounts on account of the liquidation of the Corporation to the holders of any
other class or Series of preferred stock or common stock of the Corporation, out
of the assets of the Corporation available for distribution to holders of its
capital stock, a preferred distribution as set forth below. The liquidation
preference payable to the holders of the Series H Preferred shall be equal to
the sum of (i) $100.00 per share (the "Stated Value"), as appropriately adjusted
to reflect any stock split, stock dividend, combination, recapitalization and
the like (collectively a "Recapitalization") of the Series H Preferred, plus
(ii) all accrued or declared but unpaid dividends (including any interest
accrued thereon calculated through the date of liquidation) (the sum of (i) and
(ii) being collectively referred to as the "Series H Liquidation Preference").
If, upon the occurrence of a liquidation, dissolution or winding up, the assets
and funds thus distributed among the holders of the Series H Preferred, shall be
insufficient to permit the payment to such holders of their full liquidation
preferences, then the entire assets and funds of the Corporation legally
available for distribution to the holders of capital stock shall be distributed
to the holders of the Series H Preferred.
(b) REMAINING ASSETS. If assets are remaining after payment in full
of the Series H Liquidation Preference to all holders of the Series H Preferred,
then the holders of any other class or series of Preferred Stock (other than the
holders of the Series F Preferred and Series G Preferred, which series have a
liquidation preference in parity with the Series H Preferred), if any, shall be
entitled to their respective preferential amounts on liquidation, and thereafter
the holders of the Common Stock shall be entitled to share ratably in all such
remaining assets and surplus funds based on the number of shares of Common Stock
held by each.
(c) VALUATION OF SECURITIES AND PROPERTY. In the event the
Corporation proposes to distribute assets other than cash in connection with any
liquidation, dissolution or winding up of the Corporation, the value of the
assets to be distributed to the holders of shares of
2
<PAGE>
Series H Preferred shall be determined in good faith by the Board of Directors.
Any securities not subject to the terms of an investment letter or similar
restrictions on free marketability shall be valued as follows:
(i) If traded on a national securities exchange or the NASDAQ
National Market System ("NASDAQ/NMS"), the value shall be deemed to be the
average of the security's closing prices on such exchange or NASDAQ/NMS
over the thirty (30) calendar day period ending three (3) days prior to the
distribution;
(ii) If actively traded over-the-counter (other than NASDAQ/NMS),
the value shall be deemed to be the average of the closing prices over the
thirty (30) calendar day period ending three (3) days prior to the
distribution; and
(iii) If there is no active public market, the value shall be
the fair market value thereof as determined in good faith by the Board of
Directors.
The method of valuation of securities subject to investment letter or other
restrictions on free marketability shall be adjusted to make an appropriate
discount from the market value determined as above in clauses (i), (ii) or (iii)
to reflect the fair market value thereof as determined in good faith by the
Board of Directors.
3. CONVERSION. The Series H Preferred is subject to conversion at the
times and on the terms set forth in this Section 3:
(a) RIGHT OF HOLDER TO CONVERT.
(i) Election to Convert. The Series H Preferred shall initially be
convertible, at the option of the holder thereof, at any time at the principal
office of the Corporation or any transfer agent for the Series H Preferred, into
that number of fully paid and nonassessable shares of Common Stock as would
equal, (1) the aggregate Stated Value of the Series H Preferred shares to be
converted, divided by (2) $1.85 per share (the "Conversion Price"). Upon such a
conversion, the aggregate amount of all accrued or declared but unpaid dividends
(including any interest, if any, accrued thereon calculated as of the date of
conversion) on the Series H Preferred shall also be converted and converted into
Common Stock at the Conversion Price.
(ii) Mechanics of Conversion. Before a holder of Series H Preferred
shall be entitled to convert the same into shares of Common Stock and to receive
certificates therefor, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the principal office of the Corporation
or of any transfer agent for the Series H Preferred, and shall give written
notice to the Corporation at such office that such holder elects to convert the
same. The Corporation shall, as soon as practicable after such delivery, issue
and deliver to such holder of the Series H Preferred, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid and a check payable to such holder on account of any
fractional share, if any. Such conversion shall be deemed to have been made
immediately
3
<PAGE>
prior to the close of business on the date of such surrender of the shares of
the Series H Preferred to be converted, and the holder or holders entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date.
(b) ADJUSTMENT OF CONVERSION PRICE.
(i) Subdivisions, Combinations, or Consolidations of Common Stock. In
the event the outstanding shares of Common Stock shall be subdivided, combined
or consolidated, by stock split, stock dividend, combination or like event, into
a greater or lesser number of shares of Common Stock, the Conversion Price in
effect immediately prior to such subdivision, combination, consolidation or
stock dividend shall, concurrently with the effectiveness of such subdivision,
combination or consolidation, be proportionately adjusted.
(ii) Reclassifications. In the case, at any time after the date
hereof, of any capital reorganization or any reclassification of the stock of
the Corporation (other than as a result of a stock dividend or subdivision,
split-up or combination of shares), or the consolidation or merger of the
Corporation with or into another person (other than a consolidation or merger in
which the Corporation is the continuing entity and which does not result in any
change in the Common Stock), the shares of the Series H Preferred shall, after
such reorganization, reclassification, consolidation or merger be convertible
into the kind and number of shares of stock or other securities or property of
the Corporation or otherwise to which such holder would have been entitled if
immediately prior to such reorganization, reclassification, consolidation or
merger such holder had converted its shares of the Series H Preferred Stock into
Common Stock.
(iii) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 3,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
the Series H Preferred so adjusted a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of a the Series H Preferred, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price at the time in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of the Series H Preferred.
(c) ADDITIONAL ADJUSTMENTS TO CONVERSION PRICE.
(i) Special Definitions For purposes of this Section (3)(c), the
following definitions shall apply:
(1) "Options" shall mean rights, options or warrants to subscribe for
purchase or otherwise acquire either Common Stock or Convertible Securities.
4
<PAGE>
(2) "Convertible Securities" shall mean any evidences of indebtedness,
shares or other securities convertible into or exchangeable for Common Stork.
(3) "Additional Shares of Common Stock" shall mean any shares of
Common Stock issued (or, pursuant to Section 3(c)(iii), deemed to be issued) by
the Corporation after the Series H Original Issue Date (as defined herein),
other than shares of Common Stock issued or issuable:
(A) upon conversion of shares of Series F Preferred and
Series G Preferred (regardless of Subseries);
(B) pursuant to a stock grant, option plan or purchase plan,
other employee stock incentive program or agreement approved by the Board of
Directors (as adjusted under Section 3(b)) (the "Option Pool");
(C) in a transaction described in Section (3) (b);
(D) pursuant to the terms of any stock grant, option, warrant,
employment agreement or other written obligation, agreement or commitment to
which the Company was a party as of the Series H Original Issue Date; or
(E) by way of dividend or other distribution on shares of Common
Stock excluded from the definition of Additional Shares of Common Stock by the
foregoing clauses (A), (B), (C) or (D).
(4) "Series H Original Issue Date" shall mean the date on which the
first share of Series H Preferred was issued.
(ii) No Adjustment of Conversion Price. No adjustment in the
Conversion Price shall be made in respect of the issuance of Additional Shares
of Common Stock under this Subsection 3(c) unless (A) the Additional Share of
Common Stock is issued in a transaction in which the Corporation receives gross
offering proceeds of not less than $3,000,000 from the issuance of Additional
Shares of Common Stock, and (B) the consideration per share for an Additional
Share of Common Stock issued in such transaction by the Corporation is less than
$1.85 per share. Furthermore, in the event of any adjustment of the Conversion
Price under this Subsection 3(c), no such adjustment shall result in an
adjustment to the Conversion Price to a price below $1.25 per share (subject to
adjustment under Subsection 3(b) hereof).
(iii) Deemed Issue of Additional Shares of Common Stock
(1) Options and Convertible Securities. In the event the Corporation
at any time or from time to time after the Series H Original Issue Date shall
issue any Options (other than the issuance of Options pursuant to the Option
Pool) or Convertible Securities or shall fix a record date for the determination
of holders of any class of securities entitled to receive any such Options or
Convertible Securities, then the maximum number of
5
<PAGE>
shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number) of
Common Stork issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the exercise of such Options and
conversion or exchange of such Convertible Securities shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided that Additional Shares of Common Stock shall not be
deemed to have been issued unless the consideration per share (determined
pursuant to Section (3)(c)(v) hereof) of such Additional Shares of Common Stock
would be less than $1.85 per share (subject to adjustment under Subsection 3(b)
hereof) on the date of and immediately prior to such issue, or such record date,
as the case may be, and provided further that in any such case in which
Additional Shares of Common Stock are deemed to be issued:
(A) except as provided in Section (3)(c)(iii)(1)(B), no further
adjustment in the Conversion Price shall be made upon the subsequent issue of
Convertible Securities or shares of Common Stock upon the exercise of such
Options or conversion or exchange of such Convertible Securities;
(B) if such Options or Convertible Securities by their terms provide,
with the passage of time or otherwise, for any change in the consideration
payable to the Corporation, or change in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof (other than under or
by reason of provisions designed to protect against dilution), the Subseries
Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto) and any subsequent adjustments
based thereon, shall, upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities; and
(C) no readjustment pursuant to clause (B) above shall have the effect
of increasing the Conversion Price to an amount which exceeds the lower of (1)
the Conversion Price on the original adjustment date or (2) the Conversion Price
that would have resulted from any issuance of Additional Shares of Common Stock
between the original adjustment date and such readjustment date.
(iv) Adjustment of Conversion Price Upon issuance of Additional Shares
of Common Stock. In the event the Corporation shall issue Additional Shares of
Common Stock for consideration per share less than $1.85 (subject to Section
3(c)(ii) hereof, and subject to further adjustment under Subsection 3(b)
hereof), then and in each such event the Conversion Price shall be reduced to a
price (calculated to the nearest cent) determined by multiplying such Conversion
Price by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of
shares of Common Stork which the aggregate consideration received by the
Corporation for the total number of Additional Shares of Common Stock so issued
would purchase at such Conversion Price, and the denominator of which shall be
the number of shares of Common Stock outstanding
6
<PAGE>
immediately prior to such issue plus the number of such Additional Shares of
Common Stock so issued.
(v) Determination of Consideration. For purposes of this Section
(3)(c), the consideration received by the Corporation for the issuance of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Such consideration shall:
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation;
(B) insofar as it consists of property other than cash,
be computed at the fair value thereof at the time of such issue.
as determined by the Board of Directors in the good faith
exercise of its reasonable business judgment; and
(C) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets
of the Corporation for consideration which covers both, be the
proportion of such consideration so received, computed as
provided in clauses (A) and (B) above, as determined by the
Board of Directors in the good faith exercise of its reasonable
business judgment.
(2) Option and Convertible Securities. The consideration per share
received by the Corporation for Additional Shares of Common Stock deemed to have
been issued pursuant to Section (3)(c)(iii)(1), relating to Options and
Convertible Securities, shall be determined by dividing.
(A) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation upon the exercise of such Options or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by
(B) the maximum number of shares of Common Stock (as set forth in the
instruments relating thereto, without regard to any provision contained therein
for a subsequent adjustment of such number) issuable upon the exercise of such
Options or the conversion or exchange of such Convertible Securities.
(d) STATUS OF CONVERTED STOCK. In case any shares of the Series
H Preferred shall be converted pursuant to Section 3 hereof, the shares
so converted shall, at the option of the Corporation, be canceled, and,
if not canceled, shall not be reissuable as shares of Series H Preferred
but shall be part of the authorized but unissued capital stock of the
Corporation.
7
<PAGE>
(e) MISCELLANEOUS. All calculations under this Section 3 shall
be made to the nearest cent or to the nearest whole share, as the case
may be.
(f) NO IMPAIRMENT. The Corporation will not, through any
reorganization, recapitalization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the
provisions of this Section 3 and in the taking of all such action as may
be necessary or appropriate in order to protect the conversion rights of
the holders of Series H Preferred against impairment.
(g) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose
of effecting the conversion of the shares of the Series H Preferred,
such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of the
Series H Preferred. If at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Series H Preferred, the
Corporation will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares
of Common Stock to such number of shares as shall be sufficient for such
purpose.
4. RIGHT OF CORPORATION TO REDEEM.
(a) Election to Redeem. The Series H Preferred shall redeemable at the
option of the Corporation, at the principal office of the Corporation or any
transfer agent for the Series H Preferred, upon issuance to the holder or
holders thereof of that number of fully paid and nonassessable shares of Common
Stock as would equal, (1) the aggregate Stated Value of the Series H Preferred
shares to be converted, plus (2) an amount, if any, equal to the difference
between (A) the amount of dividends that would be payable in respect of such
shares from the date of issuance of such shares to the first anniversary of such
date and (B) the amount of all dividends declared or accrued with respect to
such shares as of such date, divided by (3) the Conversion Price as of the date
of redemption. Upon such a redemption, the aggregate amount of all accrued or
declared but unpaid dividends (including any interest, if any, accrued thereon
calculated as of the date of redemption) on the Series H Preferred shall be
converted into Common Stock at the Conversion Price.
(b) Before the Corporation shall be entitled to convert some or all of
the Series H Preferred into shares of Common Stock, the Corporation shall
provide ten (10) days' written notice to the holders thereof, at the current
address of such holders as shown in the Corporation's stock records, that the
Corporation elects to convert the same. The aforesaid notice shall include the
number of shares such holder shall be entitled to receive upon the conversion
and the effective date of such conversion. The Corporation shall, as soon as
practicable after the effective date specified in such written notice, issue and
deliver to the holder or holders of the Series H Preferred receiving such a
conversion notice, a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled as aforesaid and a check
8
<PAGE>
payable to such holder on account of any fractional share, if any. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of the Series H Preferred
to be converted, and the holder or holders entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on such date.
5. VOTING RIGHTS. Except as otherwise required by law or by Section 7,
the holders of all of the Series H Preferred issued and outstanding, in the
aggregate, shall be entitled to the number of votes equal to the number of
shares of Common Stock into which shares of Series H Preferred are convertible
on any record date, or, if no such record date is established, at the date such
vote is taken or any written consent of stockholders is solicited, such votes to
be counted together with all other shares of stock of the Corporation having
general voting power and not separately as a class. Fractional votes by the
holders of the Series H Preferred shall not, however, be permitted, and any
fractional voting rights shall (after aggregating all shares into which shares
of Series H Preferred held by each holder could be converted) be rounded to the
nearest whole number.
6. NOTICES OF RECORD DATE. In the event of any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Corporation shall mail to each holder of the Series
H Preferred, at least twenty (20) days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend distribution or right.
7. NOTICES. Any notice required by the provisions of the Certificate to
be given to the holders of the Series H Preferred shall be deemed given when
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his or her address appearing on the books of the
Corporation, or upon actual receipt when personally delivered or sent by
overnight or other courier delivery.
8. PROTECTIVE PROVISIONS. So long as any shares of the Series H Preferred
are outstanding, the Corporation shall not, without first obtaining the approval
of the holders of at least a majority in interest of the Series H Preferred then
outstanding, voting as a separate class, take any action that:
(i) alters the rights, preferences or privileges of the Series H
Preferred;
(ii) increases or decreases the authorized number of shares of
Series H Preferred of the Corporation;
(iii) creates any new class or series of shares that has a
preference over the Series H Preferred with respect to voting, dividends
or liquidation preferences; or
9
<PAGE>
(iv) reclassifies stock into shares having a preference over the
Series H Preferred with respect to voting, dividends or liquidation
preferences.
This Certificate may be delivered by facsimile and executed in one or more
counterparts, each of which shall constitute an original and all of which taken
together shall constitute one and the same Consent.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be duly executed by its President and attested to by its
Secretary and the corporate seal to be affixed hereto, this 13th day of March
2000.
NORTH AMERICAN TECHNOLOGIES
GROUP, INC.
Date: March 13, 2000 /s/ Henry W. Sullivan
____________________________________
Henry W. Sullivan
President and Chief Executive Officer
Date: March 13, 2000 /s/ Joseph P. Galda
_____________________________________
Joseph P. Galda
Secretary
10
<PAGE>
PROFESSIONAL SERVICES AGREEMENT
THIS PROFESSIONAL SERVICES AGREEMENT ("Agreement") dated as of July 12,
1999 is between Russell L. Allen ("Consultant") and North American Technologies
Group, Inc. ("Company").
BACKGROUND
A. The Consultant is a certified public accountant and an experienced
financial professional.
B. The Company desires to retain the services of the Consultant for
business and financial advice, and the Consultant desires to perform such
services in such position on the terms set forth below.
NOW, THEREFORE, intending to be legally bound hereby, the parties agree as
follows:
1. Term.
(a) This Agreement shall be for a period of time ("Consulting Term")
commencing on July 12, 1999 and ending on March 31, 2000. Thereafter, the
Agreement may be extended on a month-to-month basis upon the mutual agreement of
both parties.
(b) The Consulting Term shall terminate on the date of Consultant's
death, in which event compensation owing to Consultant through the date of
Consultant's death shall be paid to his estate. Consultant's estate will not be
entitled to any other compensation under this Agreement.
2. Duties. Consultant shall provide business and financial consultation
services as more fully described on Exhibit A hereto.
3. Compensation. During the Consulting Term, the Company shall compensate
Consultant as set forth on Exhibit B hereto.
4. Agreement not to Solicit Consultants.
(a) Consultant will not, while at any time during the term of this
Agreement and for a period of twelve (12) months following the termination of
such Agreement, whether as an individual, or in any capacity, directly or
indirectly, solicit, employ, contract or retain any employee of the Company
without its written consent.
(b) Consultant agrees that the remedy at law for any breach of this
Paragraph 4 would be inadequate and that the Company, its affiliates and
subsidiaries, shall be entitled to injunctive relief in addition to any other
remedy it may have upon breach of any provision of this Paragraph 4.
<PAGE>
5. Proprietary Information.
(a) Consultant acknowledges that Consultant will have access to
certain proprietary and confidential information of the Company, as well as its
affiliates, subsidiaries, and their clients, which confidential and proprietary
information includes, but is not limited to, contemplated new products and
services, marketing and advertising campaigns, sales projections, creative
campaigns and themes, and financial information of the Company. Consultant
agrees to hold in confidence any such knowledge and information of a secret or
confidential nature with respect to the Company, as well as its affiliates,
subsidiaries and their clients during the Consulting Term or thereafter, other
than in connection with performing Consultant's services for the Company in
accordance with this Agreement, except to the extent that such information shall
have become public knowledge other than as a result of a violation of this
Agreement by the Consultant or of a breach by any other persons who have agreed
not to discuss, publish or make use of such information.
(b) The Consultant agrees that the remedy at law for any breach of
this Paragraph 5 would be inadequate and that the Company, its affiliates and
subsidiaries, shall be entitled to injunctive relief in addition to any other
remedy it may have upon breach of any provision of this Paragraph 5.
6. Representations and Warranties of Consultant. Consultant hereby
represents and warrants to the Company as follows: (i) Consultant has the legal
capacity and unrestricted right to execute and deliver this Agreement and to
perform all of his obligations hereunder; (ii) the execution and delivery of
this Agreement by Consultant and the performance of his obligations hereunder
will not violate or be in conflict with any fiduciary or other duty, instrument,
agreement, document, arrangement, or other understanding to which Consultant is
a party or by which he is or may be bound or subject; and (iii) Consultant is
not a party to any instrument, agreement, document, arrangement, or other
understanding with any person (other than the Company) requiring or restricting
the use or disclosure of any confidential information or the provision of any
employment, consulting or other services that would prohibit the Consultant from
performing the services contemplated by this Agreement.
7. Limitation or Remedies. Except as specifically provided in Paragraph
4(b) and Paragraph 5(b) hereof, Consultant's entire liability and Company's
exclusive remedy for damages from any cause whatsoever, including, but not
limited to, non-performance or misrepresentation, and regardless of the form of
actions, shall be limited to the amount which has been paid to Consultant by the
Company for performance hereunder. In no event will Consultant be liable for
damages caused by the Company's negligence, or for special, incidental or
consequential damages, lost profits, lost use of equipment, loss of stored
memory, cost of substitute equipment or other down-time costs, even if
Consultant has been advised of the possibility of such damages, or for any claim
against the Company by any other party. No action rising out of this Agreement,
regardless of the form of action, may be brought by Consultant more than one
year after the action has occurred.
8. Termination with Cause. If either Party breaches this Agreement, the
other Party may terminate the Agreement or the Exhibit upon ten (10) business
days written notice to the
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<PAGE>
other, unless the breach is cured, to the satisfaction of the non-breaching
Party, within the notice period.
9. Termination without Cause. Consultant or the Company may terminate
this Agreement, in whole or in part, at any time without cause following thirty
(30) day written notice to the other Party.
10. Force Majeure. Either party shall be excused for delay in the
performance of any obligations hereunder when such delay is the result of or
attributable to the elements, acts of God, governmental authority,
unavailability of parts from manufacturer, delays in transportation or any other
cause beyond their reasonable control.
11. Choice of Law. This Agreement shall be construed, interpreted and the
rights of the parties determined in accordance with the laws of the State of
Texas.
12. Successors and Assigns. Neither this Agreement, nor any of
Consultant's rights, powers, duties or obligations hereunder, may be assigned by
Consultant. This Agreement shall be binding upon and inure to the benefit of
Consultant and his heirs and legal representatives and the Company and its
successors. Successors of the Company shall include, without limitation, any
company or companies acquiring, directly or indirectly, all or substantially all
of the assets of the Company, whether by merger, consolidation, purchase, lease
or otherwise. Any such successor referred to in this paragraph shall thereafter
be deemed "the Company" for the purpose hereof.
13. Waiver. Any waiver or consent from the Company or Consultant with
respect to any term or provision of this Agreement or any other aspect of the
Company's or Consultant's conduct or services hereunder shall be effective only
in the specific instance and for the specific purpose for which given and shall
not be deemed, regardless of frequency given, to be a further or continuing
waiver or consent. The failure or delay of the Company or Consultant at any
time or times to require performance of, or to exercise any of its powers,
rights or remedies with respect to any term or provision of this Agreement or
any other aspect of the Company's or Consultant's conduct or services hereunder
in no manner (except as otherwise expressly provided herein) shall affect the
Company's or Consultant's right at a later time to enforce any such term or
provision.
14. Savings Clause. The failure of the Company or the Consultant to at
any time enforce any provision hereof shall never be construed to be a waiver of
such provision or of the Company or the Consultant to enforce each and every
provision hereof at any time. In the event any paragraph, provision or clause,
or any combination of same hereof shall be found or held to be unenforceable at
law or in equity, or under any ordinance, statute or regulation, such findings
or holdings shall not in any way affect the other paragraphs, provisions and
clauses which shall remain in full force and effect, and which shall, to the
extent possible, be interpreted and applied so as to effectuate the intent of
the paragraphs, provisions or clauses held to be unenforceable.
15. Miscellaneous.
(a) This Agreement and any exhibits attached hereto represent the
entire agreement between the Parties. Any modification to this Agreement may be
made only in
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<PAGE>
writing executed by the duly authorized representatives of Consultant and the
Company. Exhibits, attachments and amendments to this Agreement shall take
precedence in case of conflicting terms between the terms of the Agreement, and
those of the exhibits, attachment or amendment.
(b) Consultant represents and agrees that he fully understands his
rights to discuss all aspects of this Agreement with his private attorney, that
to the extent he desires, he availed himself of this right, that he has
carefully read and fully understands all of the provisions of the Agreement,
that he is competent to execute this Agreement, that his decision to execute
this Agreement has not been obtained by any duress and that he freely and
voluntarily enters into this Agreement, and that he has read this document in
its entirety and fully understands the meaning, intent, and consequences of this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Professional Services
Agreement as of the date first above written.
NORTH AMERICAN TECHNOLOGIES
GROUP, INC.
By: /s/ Henry W. Sullivan
--------------------------------
Henry W. Sullivan
President and Chief Executive Officer
/s/ Russell L. Allen
--------------------------------
Russell L. Allen
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<PAGE>
EXHIBIT A
DESCRIPTION OF SERVICES TO BE PROVIDED BY CONSULTANT
Consultant shall be elected to the position of Treasurer and Chief Financial
Officer of North American Technologies Group, Inc. Acting in this capacity,
Consultant will provide financial, business and management advice to the Board,
President, Officers and staff of the Company as required. He will take
responsibility for all accounting, tax, financial reporting and cash management
requirements of the Company. He will direct and take responsibility for all
filings, reports and other matters pertaining to compliance with the SEC rules
and regulations governing operation of the Company. He will handle all
negotiations with banks and other financial institutions as required in the
normal course of company business. He will assist and advise in matters of
strategy as regards the ongoing development of company business as his
experience allows. Consultant's services will be made available on an as-needed
basis and Consultant will guarantee to make not less than one-half of his
professional time available to the Company if required.
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<PAGE>
EXHIBIT B
COMPENSATION SCHEDULE
Consultant's services will be billed to the Company on a monthly basis at the
rate of $200.00/hour actually worked. Company will pay for these services with
a combination of cash and Common Stock in the Company as follows:
. Part A - $80.00/hour paid in cash
. Part B - The equivalent of $120.00/hour in shares of the Company's
Common Stock. The number of shares shall be determined by dividing
amounts earned at the rate of $120.00/hour by the average of the closing
stock prices for the month worked.
Invoices will be paid within 5 days of their acceptance. The Company will
endeavor to have stock certificates issued as quickly as is possible. The
responsibility for all other taxes on monies or stock delivered to the
Consultant will be the sole responsibility of the Consultant. Consultant will,
however, be reimbursed for normal business expenses in accordance with Company
policy.
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<PAGE>
AGREEMENT
UNION PACIFIC RAILROAD COMPANY
AND
TIETEK, INC.
Confidential treatment has been requested for portions of this exhibit. The
copy filed here omits the information subject to the confidentiality request.
Omissions are designated as XXXXX. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
AGREEMENT
This Agreement (the "Agreement") is made by and between TIETEK, INC.
("TieTek") and UNION PACIFIC RAILROAD COMPANY ("UP" or "Railroad"). TieTek and
UP are collectively referred to as "Parties" and sometimes individually referred
to as a "Party".
WHEREAS, UP desires to purchase from TieTek, and TieTek desires to
sell to UP, certain composite cross ties ("Cross Ties") manufactured by TieTek
at its facility at 14315 West Hardy Road, Houston, TX (the "Facility").
NOW, THEREFORE, the Parties herein agree to the following terms and
conditions:
1. CROSS TIES.
Each Cross Tie will be a 7"x9"x9' product manufactured according to the
specifications and minimum technical data set forth in Schedule A, attached
hereto and by this reference made a part hereof, as modified from time to time
by written mutual agreement of the Parties (the "Specifications").
2. QUALITY.
The following actions will be taken in an effort to improve, during the
term of this Agreement, the quality of Cross Ties sold to UP by TieTek
hereunder:
(1) TieTek will provide to UP a quality assurance process, including
written confirmation that Specifications have been met for each Cross
Tie sold to UP;
(2) The Facility will be accessible to UP quality control personnel upon
reasonable request during normal business hours and will inform UP of a
need for inspection once agreed upon number of ties have been
manufactured; and
(3) TieTek will seek ISO 9000 Quality Certification for the Facility and
manufacturing process, working with UP's Engineering and Supply
Departments during the term of this Agreement.
3. TERM.
Except as otherwise provided herein, the initial term of this Agreement
shall be from March 1, 2000 through February 28, 2002 (the "Initial Term");
provided, however, that UP shall have the option to extend this Agreement for a
period of two (2) years beyond the Initial Term (the "Extension"), subject only
to the Parties' agreement upon the purchase price per Cross Tie and the Cross
Tie production schedule during the Extension; and, provided, further, that
either Party may terminate this Agreement at any time during the Initial Term or
the Extension upon the giving of one (1) year's prior written notice of
termination to the other Party.
<PAGE>
4. PRICE.
The purchase price per Cross Tie during the Initial Term shall be as set
forth below; provided, however, that in recognition of the special relationship
and development history between UP and TieTek, the purchase price per Cross Tie
charged UP hereunder shall not exceed the purchase price per Cross Tie charged
by TieTek to any other of its customers during the term of this Agreement. Each
volume level must be completed before the next volume level pricing is
effective.
QUANTITY DURING TERM OF AGREEMENT PURCHASE PRICE PER CROSS TIE
- ---------------------------------------------------------------------
XXXXX Ties $XXXXX
- ---------------------------------------------------------------------
XXXXX Ties $XXXXX
- ---------------------------------------------------------------------
XXXXX Ties $XXXXX
- ---------------------------------------------------------------------
XXXXX Ties $XXXXX
- ---------------------------------------------------------------------
XXXXX Ties $XXXXX
- ---------------------------------------------------------------------
XXXXX XXXXX
- ---------------------------------------------------------------------
5. PRODUCTION SCHEDULE; PERFORMANCE.
TIETEK CROSS TIE PRODUCTION SCHEDULE
--------------------------------------------
YEAR 2000 UP
--------------------------------------------
January 2000 XXXXX
--------------------------------------------
February 2000 XXXXX
--------------------------------------------
March 2000 XXXXX
--------------------------------------------
April 2000 XXXXX
--------------------------------------------
May 2000 XXXXX
--------------------------------------------
June 2000 XXXXX
--------------------------------------------
July 2000 XXXXX
--------------------------------------------
August XXXXX
--------------------------------------------
September 2000 XXXXX
--------------------------------------------
October 2000 XXXXX
--------------------------------------------
November 2000 XXXXX
--------------------------------------------
December 2000 XXXXX
--------------------------------------------
TOTAL: XXXXX
--------------------------------------------
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<PAGE>
--------------------------------------------
YEAR 2001 UP
--------------------------------------------
January 2001 XXXXX
--------------------------------------------
February 2001 XXXXX
--------------------------------------------
March 2001 XXXXX
--------------------------------------------
April 2001 XXXXX
--------------------------------------------
May 2001 XXXXX
--------------------------------------------
June 2001 XXXXX
--------------------------------------------
July 2001 XXXXX
--------------------------------------------
August 2001 XXXXX
--------------------------------------------
September 2001 XXXXX
--------------------------------------------
October 2001 XXXXX
--------------------------------------------
November 2001 XXXXX
--------------------------------------------
December 2001 XXXXX
--------------------------------------------
TOTAL: XXXXX
--------------------------------------------
2-YEAR TOTAL: XXXXX
--------------------------------------------
TieTek shall meet the following minimum performance requirements; provided,
however, that TieTek will not be required to exceed the production schedule set
forth above. TieTek shall use all reasonable efforts to exceed such minimum
performance requirements if so requested by the UP Representative (as such term
is defined below):
(1) Band XXXXX Cross Ties/Week during 2000: Band XXXXX Cross Ties/Week
during 2001.
(2) Load XXXXX Cross Ties/Week during 2000; Load XXXXX Cross Ties/Week
during 2001.
(3) XXXXX
(4) XXXXX
6. FORECAST FOR CAPITAL EXPENDITURES.
TieTek will spend a minimum of $1.5 million at the Facility from November
1999 to February 28, 2002 to provide the Facility with on-going safety, quality
and productivity improvements which will ensure that TieTek will meet or exceed
the minimum technical data set forth in Schedule A.
7. UNION PACIFIC REPRESENTATIVE.
UP, in its sole discretion, shall assign to the Facility, as needed on a
full or part time basis, one or more representatives (each, a "UP
Representative") to accept or reject Cross Ties in a timely manner and to
otherwise act on behalf of UP in all matters pertaining to this Agreement.
TieTek shall, without cost to UP, furnish any such UP Representative with
suitable office space
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<PAGE>
with telephone and necessary computer equipment (fax, PC, keyboard and printer)
at the Facility. TieTek to bill cars using UP Internet billing procedures.
8. RIGHT TO REJECTION AND INSPECTION.
UP shall have the right, through the UP Representative(s), to reject, prior
to shipment from the Facility, any Cross Ties not meeting the requirements of
Schedule A of this Agreement, the right of access to the Facility, the right to
inspect and test the Cross Ties at the Facility and the right to inspect the
handling of all Cross Ties. The basic records of TieTek, insofar as they relate
to this Agreement, shall be open at all reasonable times to inspection by the UP
Representative(s) during regular office hours.
9. FORCE MAJEURE.
In the event of fire, flood, drought, earthquake, windstorm, accident,
explosion, war, civil commotion, act of governmental authority, labor trouble,
embargo, transportation failure, reduced supply of materials, breakage of
machinery or apparatus, inability to obtain from regular sources of supply any
commodity necessary or customarily used in the performance of this Agreement, or
any other circumstances beyond the reasonable control of a Party hereto,
preventing such affected Party from fulfilling, in whole or in part, its
obligations hereunder, such obligations shall be so suspended during the period
of such occurrence without liability on the part of the affected Party, but this
Agreement shall otherwise remain unaffected,
10. XXXXX
XXXXX.
11. ENVIRONMENTAL AND OTHER CONCERNS.
Nothing contained herein shall be construed or interpreted as making UP a
generator of hazardous substances or wastes or an operator of a treatment,
storage or disposal facility pursuant to the provisions of the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), the Resource
Conservation Recovery Act (RCRA), or any state statute governing the generation,
treatment, storage and disposal of hazardous substances or wastes.
TieTek shall assume and be responsible for all compliance with the
provisions of RCRA, CERCLA and any state statute governing the generation and
handling of hazardous substances or wastes at the Facility,
If, notwithstanding the provisions of this Section, UP shall be interpreted
to be a hazardous substance or waste generator or operator of a treatment,
storage or disposal facility under RCRA, CERCLA or any state statute governing
the treatment, storage and disposal of hazardous waste, as a result of the
activities provided for hereunder which occur at the Facility, TieTek agrees to
indemnify, hold harmless and defend UP for any and all costs, damages or
expenses of any sort resulting from such an interpretation.
5
<PAGE>
12. SHIPPING.
Cross ties will be banded in 15-piece bundles and will be priced FOB the
Facility, loaded in gondola cars or equivalent. During the initial period of
operation until and if a rail spur and siding is constructed, TieTek will load
the Cross Ties in railcars on the UP freight track in Houston, Aldine Team Track
third track, not mainline, opposite the Facility. TieTek will execute a UP
"Contractor's Release of Liability" form prior to commencing loading of ties at
the Aldine Team Track. XXXXX. XXXXX.
XXXXX.
TieTek and UP will work cooperatively in good faith to expedite the
construction of a rail spur and siding into the Facility. XXXXX. XXXXX.
Responsibility for cost of rail, ballast and switch(es) will be negotiated at
the time a final decision is made on rail spur and siding.
13. TERMS OF SALE.
This Agreement will serve as the basis for purchase orders from UP. TieTek
will invoice UP, under such purchase orders, when Cross Ties are shipped to UP
from the Facility. TieTek's invoice will reflect Cross Ties shipped FOB the
Facility loaded in UP contracted trucks or UP railcars and will be due and
payable in thirty (30) days after receipt, in UP's Accounting Department, Omaha,
NE, of correct invoice and signed shipping document indicating car numbers or
truck numbers. TieTek to be EDI purchase order and invoice ready by March 1,
2000.
14. TECHNICAL ASSISTANCE.
TieTek will provide field support for handling and installation of Cross
Ties when requested by UP Supply and/or Engineering Departments.
15. TIETEK CROSS TIE DISPOSAL.
TieTek will accept Cross Ties discarded or replaced by UP. TieTek will
credit UP with a recycling payment of XXXXX Dollars ($XXXXX) per Cross Tie
delivered to TieTek's Facility or other mutually agreeable location.
16. GOVERNING LAW.
The construction and Interpretation of this Agreement shall be in
accordance with the laws of the State of Nebraska and the applicable laws of the
United States.
17. NOTICE.
Any notice required or permitted hereunder shall be deemed to have been
properly given when made in writing and delivered personally to an officer of
the party for whom it is intended or upon mailing the notice by registered or
certified mail to the following address:
6
<PAGE>
If to TieTek: TieTek, Inc.
14315 West Hardy Road
Houston, Texas 77060
ATTN.: Henry W. Sullivan
FAX: 281-847-1791
If to UP: Union Pacific Railroad Company
Supply Department
1416 Dodge Street, Room 200
Omaha, Nebraska 68179-0200
ATTN.: Gary L. Hunter
FAX: 402-271-3245
18. AMENDMENTS.
This Agreement shall not be modified, amended or otherwise varied by any
oral agreement or representation, and all modifications, amendments and
variations shall be by an instrument in writing executed by the Parties hereto.
19. ASSIGNMENT.
This Agreement may not be assigned, in whole or in part, by either Party
without the prior written consent of the other Party, which consent shall not be
unreasonably withheld.
20. NO PARTNERSHIP.
Nothing in this Agreement shall in any way be construed to make the Parties
partners, joint venturers, agents, servants or employees of one another and no
such relationship is intended.
21. CONFIDENTIALITY.
During the performance of each Party's obligation under this Agreement,
each Party may obtain confidential and/or proprietary information from the other
Party which is identified in writing as such. Each Party agrees that all such
information, whether technical, financial, business or other nature, shall be
held in confidence and not used to the detriment of the disclosing Party by the
non-disclosing Party. This Section shall not apply to any information which (a)
is now or hereafter (by operation of law) becomes information in the public
domain, (b) can be shown by a Party to have received on a non-confidential basis
from a third Party who did not acquire same, directly or indirectly, from the
other party, (c) can be shown by a Party to have been developed without access
to any confidential information otherwise covered by this Section, (d) is
required to be disclosed as a matter of law, or (e) is required to be disclosed
pursuant to written agreement between the Parties.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement this 31
day of January, 2000.
TIETEK, INC.
By: /s/ Henry W. Sullivan
--------------------------
Name: Henry W. Sullivan
-----------------------
Title: President
-----------------------
UNION PACIFIC RAILROAD COMPANY
By: /s/ Ike Evans
--------------------------
Name: Ike Evans
-----------------------
Title: President
-----------------------
8
<PAGE>
SCHEDULE A
(PAGE 1 OF 3)
SPECIFICATIONS
1. Material: Polymer (plastic) component consisting of polyolefins, vulcanized
rubber polymeric component, reinforcements, additives, fillers and not toxic
preservatives,
2. Dimensions: 7"x9"x9' Cross Ties will have the following characteristics:
a. Width/thickness (-0" + 1/2") of specified size.
b. Length: (-1/2" + 2") of specified size.
c. Flatness in the rail seat area: XXXXX" concave and/or XXXXX" convex
maximum.
3. General Quality: Every Cross Tie will be inspected visually and by
nondestructive test methods to detect any defects that will affect their
strength, utilization or durability as Cross Ties such as: dimensions,
surface imperfections and manufacturing defects. XXXXX.
4. Inspection:
a. Facility: Cross ties, process and procedures will be open to inspection
and review during normal business hours, subject to the terms of
confidentiality under Article 21 of this Agreement.
b. No void greater than 1/2" in diameter and 6" long will be allowed within
1 1/2" of any surface of the Cross Tie.
c. XXXXX.
5. Straightness/Twisting Defects: Any Cross Tie which does not meet the
following characteristics of good manufacturing will be rejected:
No Cross Tie will deviate from straightness by more than 1" along its
length. Straightness will be measured from any edge of a Cross Tie to a
straight line parallel to the edge of the Cross Tie. This will be true for
the top to bottom of the Cross Tie, as well as from side to side of the
Cross Tie.
6. Any Cross Tie not meeting the above Specifications will be rejected.
7. XXXXX.
<PAGE>
SCHEDULE A
(PAGE 2 OF 3)
8. Shipping:
a. Trucked Cross Ties - All trucked Cross Ties will have a prenumbered
shipping ticket accompanying each truckload. Each load will have
adequate dunnage to allow forklift unloading
b. Rail Cross Ties - All Cross Ties will be loaded securely in gondolas or
centerbeam cars, with each car loaded to the maximum practical capacity.
c. All Cross Ties will be bundled in groups of 15 and banded (2 each) with
1 1/4" .029 high tensile banding.
2
<PAGE>
SCHEDULE A
(PAGE 3 OF 3)
MINIMUM TECHNICAL DATA
----------------------------------------------------------------
APPEARANCE Gray to matte black
----------------------------------------------------------------
SIZE 7"x9"x9'(other sizes by special order)
----------------------------------------------------------------
WEIGHT 235 to 260 lbs. For standard size
----------------------------------------------------------------
SURFACE HARDNESS XXXXX
----------------------------------------------------------------
DENSITY XXXXX
----------------------------------------------------------------
THERMAL EXPANSION XXXXX
----------------------------------------------------------------
MODULUS OF RUPTURE XXXXX
----------------------------------------------------------------
MODULUS OF ELASTICITY XXXXX
----------------------------------------------------------------
COMPRESSION XXXXX
----------------------------------------------------------------
SPIKE INSERTION XXXXX
----------------------------------------------------------------
SPIKE LATERAL XXXXX
----------------------------------------------------------------
SPIKE WITHDRAWAL XXXXX
----------------------------------------------------------------
RESISTIVITY XXXXX
----------------------------------------------------------------
SINGLE TIE PUSH XXXXX
----------------------------------------------------------------
XXXXX XXXXX
----------------------------------------------------------------
XXXX
XXXX
3
<PAGE>
23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
North American Technologies
Group, Inc.
Houston, Texas
We hereby consent to the incorporation by reference in Registration Statement
No. 333-26347 on Form S-3 and Registration Statement No. 333-01141 and 333-16549
on Form S-8 of our report dated February 5, 2000, relating to the consolidated
financial statements of North American Technologies Group, Inc. appearing in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
Our report contains an explanatory paragraph regarding the Company's ability to
continue as a going concern.
BDO Seidman, LLP
Houston, Texas
March 27, 2000
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1999 AND 1998.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 284,498 719,212
<SECURITIES> 0 0
<RECEIVABLES> 132 0
<ALLOWANCES> 0 0
<INVENTORY> 41,159 186,783
<CURRENT-ASSETS> 395,521 1,100,953
<PP&E> 1,208,827 1,009,029
<DEPRECIATION> 184,423 167,031
<TOTAL-ASSETS> 4,730,493 6,378,406
<CURRENT-LIABILITIES> 976,498 1,419,582
<BONDS> 0 0
0 0
14,858,477 14,746,815
<COMMON> 4,261 3,559
<OTHER-SE> (11,273,594) (9,955,103)
<TOTAL-LIABILITY-AND-EQUITY> 4,730,493 6,378,406
<SALES> 170,107 138,828
<TOTAL-REVENUES> 170,107 138,828
<CGS> 317,704 292,043
<TOTAL-COSTS> 2,073,882 3,192,998
<OTHER-EXPENSES> 982,615 (321,309)
<LOSS-PROVISION> 681,900 0
<INTEREST-EXPENSE> 342,687 183,433
<INCOME-PRETAX> (3,049,600) (2,732,861)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,049,600) (2,732,861)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,049,600) (2,732,861)
<EPS-BASIC> (1.44) (1.36)
<EPS-DILUTED> (1.44) (1.36)
</TABLE>
