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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB/A-1
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) [No Fee Required]
OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------
For the fiscal year ended March 28, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) [No Fee Required]
OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------
For the transition period from ___________________ to ________________________
Commission file number 0-25528
ENVIROQ CORPORATION
(Name of small business issuer in its charter)
Delaware 59-3290346
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3918 Montclair Road, Suite 206
Birmingham, Alabama 35213
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (205) 870-0588
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of class)
Check whether the issuer: (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 period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
As of June 4, 1998, the aggregate market value of the voting stock of
the Registrant held by non-affiliates was approximately $1,379,414, based on
$3.25 per share being an average of the bid and asked prices listed on the OTC
Bulletin Board system.
State issuer's revenues for its most recent fiscal year: $1,304,357
As of June 4, 1998, the Registrant had issued 1,009,377 shares of
Common Stock, par value $0.01.
Transitional Small Business Disclosure Format YES NO X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT: HISTORY.
Enviroq Corporation, a Delaware corporation (the "Company"),
was incorporated on February 9, 1995. At the time of its
incorporation, the Company was a wholly-owned subsidiary of a Delaware
corporation formerly named Enviroq Corporation ("Old Enviroq"). Prior
to April 18, 1995, the Company was named New Enviroq Corporation ("New
Enviroq"). On April 18, 1995, Old Enviroq distributed all of the issued
and outstanding capital stock of New Enviroq to the holders of the
common stock of Old Enviroq (the "Distribution"). Following the
Distribution, the Company changed its name from New Enviroq Corporation
to Enviroq Corporation. Also following the Distribution, Old Enviroq
merged (the "Insituform Merger") with a subsidiary of Insituform
Mid-America, Inc. ("IMA") and changed its name to Insituform Southeast,
Inc. ("Insituform Southeast"). In a transaction subsequent to and
unrelated to the Insituform Merger, IMA was acquired by Insituform
Technologies, Inc.
The Company's principal executive office is located at 3918
Montclair Road, Suite 206, Birmingham, Alabama 35213, and its
telephone number is (205) 870-0588. The Company's mailing address is
P. O. Box 130062, Birmingham, Alabama 35213.
BUSINESS AND BUSINESS STRATEGY OF ISSUER.
The Company is currently principally engaged in the
development, commercialization, formulation and marketing of
spray-applied resinous products, and in the treatment of municipal
wastewater biosolids. The Company's operations are conducted primarily
through Sprayroq(R), Inc., a Florida corporation of which the Company
owns 50% of the outstanding capital stock ("Sprayroq"). Sprayroq is
engaged in the development, commercialization, manufacture and
marketing of spray-applied resinous materials. The Company also owns
100% of the outstanding capital stock of Synox(R) Corporation, a
Delaware corporation ("Synox"). Synox has been engaged in the
research, development and marketing of a process for the treatment of
municipal wastewater biosolids. During the fiscal year ended March 30,
1996, management of the Company elected to minimize the activities of
Synox and to write off substantially all of the assets of Synox.
During the fiscal year ended March 28, 1998, the Synox demonstration
facility in Jacksonville, Florida was dismantled. As of March 28,
1998, all remaining assets of Synox had been fully depreciated. See
"Description of Business -- Background on Operations of Synox
Corporation." Accordingly, during the fiscal year ended March 28,
1998, most of the income and gross profit of the Company was
attributable to the operations of Sprayroq.
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Pursuant to the Insituform Merger, the Company and IMA
entered into several related agreements which included the Subordinated
Promissory Note (the "Note"), the Covenant Not to Compete Agreement
(the "Covenant'), and the Consulting Agreement. On March 12, 1996, the
Company and IMA executed an agreement (the "Settlement Agreement") to
settle all claims and counterclaims made, or that could have been made,
by the parties to related lawsuits between the parties with respect to
several matters arising out of the Insituform Merger, including the
Subordinated Promissory Note. The Company received $3,335,000 as
payment in full under the Settlement Agreement, which includes the Note
and the Consulting Agreement. In the Settlement Agreement, the parties,
which included the Company, IMA, and Insituform Technologies, Inc.,
released each other, subject to limited exceptions, from all claims
that the parties had or may have had or may have arising out of the
Note, the Merger Agreement (including the Expense Deficit as defined in
the Merger Agreement) and the related lawsuits. In the Settlement
Agreement, the Company was not released from certain obligations under
the related agreements including, without limitation, the Covenant.
RECENT DEVELOPMENTS
The management of the Company believes the strong financial
position of the Company, along with its status as a public company, may
offer opportunities for growth or other strategic alliances, and has
been searching for opportunities to leverage the Company's advantages
to bring additional value to its shareholders. On April 23, 1998,
Enviroq announced that its board of directors has approved entering
into an Agreement and Plan of Reorganization (the "Reorganization
Plan") by which Enviroq will merge with a subsidiary of Intrepid
Capital Corporation ("Intrepid"), a newly-formed corporation. The
merger would be consummated through a transaction in which Enviroq
stockholders would receive shares of Intrepid common stock, as well as
cash. See Item 6, "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The business of Intrepid may or
may not involve the Company's traditional business and markets. The
Reorganization Plan and related transactions are subject to a number of
conditions including, without limitation, the approval of the
stockholders of Enviroq, and there can be no assurance that these
conditions will be fulfilled.
BACKGROUND ON OPERATIONS OF SPRAYROQ, INC.
Sprayroq, Inc. was initially organized in January, 1991 as
Enviroq Resin Development, Inc., a Florida corporation, to be a member
of a joint venture to develop, commercialize, manufacture and market
technology and know-how relating to the spray application of chemicals
and additives in the rehabilitation, repair and reconstruction of
certain pipes, pipelines, manholes, wetwells, drains and wastewater
treatment facilities. The other member of this joint venture was
Replico Development Company, Inc., a Pennsylvania corporation
("Replico"). In February, 1992, the name of Enviroq Resin Development,
Inc. was changed to Sprayroq, Inc. In March, 1992, Replico contributed
all of its rights and interests in the joint venture to Sprayroq in
exchange for 50% of the outstanding common stock of Sprayroq, which
resulted in the Company and Replico each owning fifty percent of the
outstanding capital stock of Sprayroq. Pursuant to the Stockholder
Agreement dated as of March 25, 1992 between the Company (as a
successor to Old Enviroq), Sprayroq and Replico (the "Stockholder
Agreement"), the parties agreed to vote their respective shares to
elect three directors designated by the Company and two directors
designated by Replico. At this same time, Sprayroq assumed all of the
obligations of the joint venture, including the payment
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obligations of the joint venture pursuant to a promissory note dated
March 25, 1992 from the joint venture to the Company in the principal
amount of $181,143.29. The Stockholder Agreement also provides that
the stockholders of Sprayroq may make loans to Sprayroq for legitimate
business purposes.
Since its organization, Sprayroq has engaged in the
development, commercialization, formation and marketing of
spray-applied resinous materials. At the present time, Sprayroq has
developed two products; SprayWall(R) and SprayShield(R). Sprayroq has
also developed additional materials utilizing polyureas, epoxies and
other resin technologies which may have future commercial application.
Sprayroq has entered into licensing agreements with seven installers
to provide for the promotion, sale and installation of SprayWall, and
two installers for the promotion, sale and installation of
SprayShield. Both SprayWall and SprayShield have significant corrosion
and abrasion resistance. SprayWall is a spray-applied resinous
material that can achieve structural strength and is relatively rigid.
SprayWall was initially developed to be utilized for the
reconstruction of manholes. Other SprayWall applications include the
reconstruction of vaults, underground tanks, as a corrosion resistant
lining for underground pipe, etc. SprayShield is a pliable,
spray-applied elastomeric material for waterproofing use in flumes and
tanks, and has also been installed in truck beds of truck trailers for
containment of potential spillage, during shipment, of hazardous
materials. Other uses of SprayShield include installation inside the
bodies of dump trucks to reduce damage from abrasion and the lining of
pipes for corrosion protection.
Sprayroq was organized with minimum capital, and has obtained
operating funds primarily from the Company. Of the total amount owed
to the Company by Sprayroq, $547,219 was loaned by the Company
pursuant to written promissory notes made by Sprayroq to the Company
(collectively, the "Sprayroq Notes"). The Sprayroq Notes became due on
April 1, 1995. On October 15, 1996, the board of directors of Sprayroq
voted to restructure and consolidate this debt with the Company, and a
Consolidated Note evidencing the restructured debt was executed on
October 21, 1996, by Sprayroq. The principal amount of the debt as of
October 21, 1996 was approximately $840,000. The rate of interest on
the debt is 7% per annum, and the debt will be amortized over a
30-year period, with the balance of the principal due, in the form of
a "balloon" payment, on October 1, 2001. As of March 28, 1998, the
balance owed under the Consolidated Note was approximately $492,000.
Under the Stockholder Agreement between the Company and
Replico, the Company is given certain rights of control over Sprayroq,
including the right to designate its executive officers and to elect a
majority of the board of directors. Since the formation of Sprayroq,
the chief executive officer of Sprayroq has also been the chief
executive officer of the Company. Nevertheless, from time to time
during fiscal year 1998 and continuing to the present, one or more of
the principals of Replico has, either on their own behalf or on the
behalf of Replico, raised issues or otherwise questioned the Company's
management of and designation of officers of Sprayroq. Among such
issues and questions is the suggestion of a conflict of interest, as
yet undefined, in connection with the election of William J. Long as
the chief executive officer of both Sprayroq and the Company. Another
such issue relates to the assertion that Replico and/or certain
affiliates of Replico should be free to engage in certain
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ventures that may present opportunities for Sprayroq and/or be
competitive with Sprayroq, or that utilize certain technology and/or
technology rights belonging to Sprayroq, and that the corresponding
responses of Sprayroq's management to Replico might somehow be
improper. Management of the Company believes that all actions taken
have been entirely within the terms and the spirit of the Stockholder
Agreement with respect to the management of Sprayroq, and Sprayroq's
responses to the questions and issues raised by Replico and or its
principals. However, no assurances can be given that Replico or its
affiliates will not pursue claims against Sprayroq, the Company,
and/or their respective affiliates, or that the outcome of such
matters will be favorable to the Company.
BACKGROUND ON OPERATIONS OF SYNOX CORPORATION.
Synox was organized as a Delaware corporation on May 23,
1986, and was acquired by the Company on September 30, 1991. The
primary purpose of Synox was to perform research and development with
respect to processes and methods related to municipal wastewater
treatment, particularly suspended solids and nutrients (known in the
industry and referred to hereafter as "biosolids"). Synox has obtained
a license to utilize technology relating to a process for the
treatment of municipal wastewater biosolids (the "Synox Process(R)"),
and other related processes for producing and managing usable end
products from wastewater biosolids. The intellectual property and
know-how underlying the Synox Process is licensed to Synox by Long
Enterprises, Inc., an Alabama corporation controlled by Charles A.
Long, Jr., a Director of the Company and the father of William J.
Long, the President, Chief Executive Officer and a Director of the
Company ("Long Enterprises").
The research and development activities of Synox included the
creation of a mobile pilot testing unit, as well as efforts to achieve
processes that meet the highest treatment standards of the U.S.
Environmental Protection Agency (the "EPA"). Such processes are known
as Processes that Further Reduce Pathogens ("PFRP"). Synox also
invested approximately $995,000 in the design and construction of a
full scale demonstration plant located in Jacksonville, Florida.
As a result of the lack of activity in the markets addressed
by the Synox Process, the Company elected, during fiscal year 1996, to
reduce substantially the operations at Synox in order to minimize
expense. The two full-time employees of Synox were terminated and the
full scale demonstration plant of Synox located in Jacksonville,
Florida was closed. Substantially all of the assets of Synox were
written off during fiscal year 1996. The demonstration plant was
dismantled during fiscal year 1998. Nevertheless, management of the
Company believes that the Synox Process may become valuable in the
future, provided that, among other factors, a full implementation and
vigorous enforcement of the existing EPA Regulations is realized;
funding becomes available to municipalities to enable municipalities
to implement processes such as the Synox Process; the Synox Process,
at such time in the future, is competitive and viable; and, at such
time in the future, the beneficial use of Class A biosolids is
generally accepted.
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In March of 1993, the Company received notification from the
EPA that a committee of the EPA has recommended PFRP equivalency for
the Synox Process, which means that the Synox Process achieves the
EPA's "Class-A" standard of treatment of municipal wastewater
biosolids (sludge). Under the EPA Regulations, the EPA has reserved
the "Class-A" designation for those processes that can achieve the
highest standards of treatment, allowing beneficial re-use of
biosolids with minimal regulation. The Company believes that the
patented Synox Process is the only "Class-A" designated process that
treats biosolids in a liquid form, is non-biological and does not
require heat or the addition of alkaline materials for disinfection,
resulting in several important advantages. The Synox Process is
relatively fast, achieving Class-A treatment in less than a day. Other
processes may require from several days to several weeks. Unlike most
other processes, Synox treats biosolids in liquid form and does not
require an odor-causing dewatering step prior to treatment. In
addition, the Synox in-vessel process is designed to provide for
pathogen kill and to control objectionable odors.
EPA REGULATIONS.
The treatment and disposal of municipal biosolids are
regulated by the EPA, under authority of Section 405(d) of the Clean
Water Act, as amended (the "CWA"). On February 19, 1993, the EPA
published new regulations relating to the treatment, disposal and
usage of biosolids. These new regulations were, the Company believes,
the result of a major effort by the EPA to develop regulations
containing guidelines for the use and disposal of biosolids, including
standards that are intended to adequately protect public health and
the environment from reasonably anticipated adverse effects from the
use and disposal of biosolids. The EPA has also set performance
standards for owners and operators of sewage treatment works. The EPA
Regulations also provide for other standards such as performance,
long-term storage, vector attraction, reporting, etc.
Management has observed that, to date, the adoption by the
EPA of its new regulations on February 19, 1993 has not resulted in a
meaningful increase in the sales of biosolids equipment. Management
believes that this lack of market activity is primarily the result of
a lack of funding for improvements, required by the new regulations,
to municipal treatment works. Management also believes that full
implementation and vigorous enforcement of the new regulations must be
realized before a potential market for the Synox Process may be
developed. There can be no assurance, however, that vigorous
regulatory enforcement will occur or will lead to a developed market
for the Synox Process or otherwise benefit Synox or the Company.
Management of the Company has seen a trend towards a general reduction
in emphasis (primarily politically) in these regulations which could
adversely impact any future value of the Synox Process.
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SALES AND MARKETING.
The Company's organization includes operations for sales and
marketing. At the present time, Synox Corporation is conducting no
full-time sales and marketing programs, and relies on the senior
officers of the Company to monitor market developments that might
result in potential sales of the Synox Process. Sprayroq Corporation
employs one salesperson to coordinate activities among Sprayroq's
licensees and to secure new licensees. From time to time, the
Company's senior officers and directors also participate in sales and
marketing of the Company's products and services.
The Company and Sprayroq conduct marketing activities, which
typically include: (i) identifying new markets and market strategies,
trade shows, advertising, new releases and other promotional
activities; (ii) brochures, video, Internet "Web" pages, and slide
presentations; and (iii) other sales aids and investor relations.
Sales and marketing activities are directed to potential licensees,
engineers (both in the municipal and industrial sectors), public works
officials, consulting engineers, mayors, and other public officials to
introduce them to, and educate them about, the products and services
offered by the Company.
CUSTOMERS.
Sprayroq's sales are almost exclusively to its licensees. The
majority of Sprayroq's revenues are derived from the sale of resinous
materials, principally SprayWall and SprayShield. Additional revenues
are derived from fees arising out of license agreements, along with
related sales of equipment, spare parts, and technical support. These
licensees market, sell and install Sprayroq products primarily to
municipal and industrial customers. An aggregate of 89% of Sprayroq's
sales for fiscal year 1998 were made to two customers which amounted
to sales totaling approximately $1,007,000 and $151,000, to Insituform
Southeast, Inc. and Slaughter Construction Company, Inc.,
respectively. Synox Corporation currently has no customers.
MARKETS.
Sprayroq.
Sprayroq currently intends to continue to market its products
though its licensed installers and to continue to attempt to obtain
additional licensees for the current Sprayroq products. If additional
products are developed by Sprayroq, such products may be marketed
through existing or new licensed installers. Since Sprayroq products
may be utilized in various ways by various industries, existing
licensed installers may or may not be appropriate to market certain
new Sprayroq products. Depending upon the background and expertise of
any particular licensed installer, Sprayroq may elect to allow that
licensee to market new products, elect to find another organization
which is more suitable, or pursue the marketing of the product
directly.
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The Company believes that the market for spray-applied
resinous materials is large. Any municipality and any larger
industrial plant are among potential customers for Sprayroq products.
In addition, the Company has identified significant potential markets
in the lining of truck beds, containment vessels and/or structures and
subterraneous vaults.
Synox.
The Company decided to minimize the operations of Synox
during fiscal year ended March 30, 1996. If, however, at any time in
the future, the Company determines that it is in the best interest of
the Company to develop and increase the operations of Synox, its
market is likely to primarily consist of 1,000 publicly owned
treatment works treating more than 5 million gallons of wastewater per
day, operated by municipalities in the United States.
COMPETITION.
Sprayroq.
Sprayroq faces competition, either directly from companies
marketing similar resin products, or indirectly, from other techniques
and technologies which accomplish similar results in a different
manner. Other companies provide resin materials which may be
spray-applied, or are similar but which are applied in a different
manner, or are not similar but which provide similar results.
The SprayWall product was developed specifically for use in
the reconstruction of manholes and related structures. Management is
unaware of any product that offers a similar combination of spray
application of polyurethanes, long-term structural performance, and
high resistance to corrosion. There are, however, a number of products
which are utilized in the refurbishment or reconstruction of manholes.
Many of these products are less expensive and offer viable
competition.
The Company is also aware of other products which exhibit
certain of the qualities of SprayShield. The Company believes that
SprayShield has significant adhesive qualities combined with corrosion
and abrasion resistance. Various paints and thin coatings are
available that are easily spray-applied and offer corrosion
protection. The Company is aware of other products which offer similar
abrasion resistance, but is unaware, however, of any product which
offers all of the qualities of SprayShield.
The development of products utilizing urethane, polyesters,
and epoxies is growing rapidly, with the announcement of new products
occurring frequently. Sprayroq's products are not patented and are
protected only to the extent offered as know-how and trade secrets.
There can be no assurance that other competitors will not develop
products similar or superior to those of Sprayroq.
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Management is aware of other processes which may become
significant future competitors of the Company's products. Among such
processes are those that involve techniques based on in-pipe curing or
spray-applied lining. In addition, there are other types and methods
of applied linings and coatings which are competitive to the Company's
products, particularly in the lining of manholes.
Synox.
If the Company determines to develop and increase the
operations of Synox, Synox would be likely to face competition from a
number of suppliers employing more traditional, well-known and
accepted methods of wastewater biosolids treatment. All biosolids
treatment processes, including the Synox Process, have strengths and
weaknesses and no one process is the best choice in all situations.
Competing biosolids treatment processes include alkaline
stabilization/fixation, heat drying/pelletizing, and composting. For
some potential customers, more conventional treatment methods will be
adequate. There are a number of companies marketing specific
technologies that offer many of the same advantages as the Synox
Process over conventional wastewater biosolids treatment techniques.
Many of these companies employ techniques that may produce soil
amendment products or fuel from the treated biosolids. These
companies, which are well established and better financed than Synox,
constitute substantial, direct competition for Synox. See "Description
of Business -- Background on Operations of Synox Corporation."
PATENTS AND LICENSES.
Sprayroq.
Sprayroq currently has not pursued registering any patents
with respect to its products. Management believes that the
formulations of the SprayWall and SprayShield products are proprietary
to Sprayroq and are protected as know-how and trade secrets. Sprayroq
has licensed the formulation of the SprayWall product to Mitsui
Chemical and Toa Grout, Inc. of Japan.
Synox.
Synox is the exclusive licensee under a license agreement
dated May 27, 1986, as amended on May 16, 1991, October 5, 1994,
December 20, 1996, and December 22, 1997 between Synox and Long
Enterprises (the "License Agreement"), pursuant to which Synox has
obtained rights to six U.S. patents relating to the Synox Process.
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The patents and patent applications covered by the License
Agreement, and their expiration dates are listed below:
<TABLE>
<CAPTION>
Number Name Description Expiration
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
4,487,699 Long Sewage Biosolids Treatment Dec. 11, 2001
Apparatus and Process
4,582,612 Long Improved Sewage Biosolids Apr. 15, 2003
Treatment Apparatus
4,659,464 Long Apparatus for Dispersing Apr. 21, 2004
Biosolids With Gas Impingement
4,695,388 Long Apparatus and Process for Sept. 22, 2004
Rapid Sewage Biosolids Separation
4,936,983 Long Sewage Biosolids Treatment June 26, 2007
with Gas Injection
5,147,563 Long Improved Sewage Sludge Treatment Sept. 29, 2009
With Gas Injection
</TABLE>
The License Agreement grants to Synox exclusive rights to
license the Synox Process in the following territory comprising the
states of Maryland, Delaware, Virginia, West Virginia, North Carolina,
South Carolina, Florida, Georgia, Alabama, Kentucky, Tennessee,
California, Texas, Arizona, New Mexico and the District of Columbia.
As amended, the License Agreement expires on September 28,
2011 or the later date of termination of the last to expire of any
patent issued pursuant to the patent applications and continuations in
part relating to the subject matter of the License Agreement in
existence on May 16, 1991, and thereafter prosecuted by the licensor
or its assignor, Charles A. Long, Jr. (the "Long License Expiration").
Under the License Agreement, Synox is obligated to pay
royalties of 4% of the total contract value of each Synox Process
installation (which begins with a storage unit for thickened biosolids
and ends with biosolids thickening and chemical contact), less
allowable deductions, such as the building, site preparation, paving,
land and landscape. No such installations have been completed or are
currently contemplated.
Minimum annual royalties (based on retaining the existing
territory of 15 states listed above) are due each January 1, for the
ensuing calendar year through the Long License Expiration. On January
1, 1995, a minimum royalty payment of $45,168 was made, and the
minimum royalty payments for 1996 and 1997 were waived as the result
of amendments to the License Agreement. The License Agreement was
amended on December 22 1997 to change the expiration date of the
license and to provide that no minimum royalty payment would be due on
January 1, 1998 but that such minimum royalty payments would resume on
January 1, 1999 in accordance with the following schedule:
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<TABLE>
<CAPTION>
Date Due Amount
----------------------------------------------------------------------
<S> <C>
January 1, 1999 $ 90,335.51
January 2, 2000 $ 180,671.02
January 1, 2001 $ 180,671.02
January 1, 2002 and on each January 1
through Long License Expiration $ 225,838.77
</TABLE>
SUPPLIERS.
The Company purchases raw materials and other supplies from a
variety of sources and is not dependent upon any one source. While
Sprayroq does utilize a third party to blend its products, other
companies provide similar blending services. In addition, Sprayroq has
performed such blending in the past and would be able to resume
blending quickly, if required.
OPERATIONAL RISKS AND INSURANCE.
To cover various insurable risks, the Company has in force
$2,000,000 in general liability insurance ($1,000,000 per occurrence),
$1,000,000 in automobile liability insurance, and $1,000,000 in
"umbrella" coverage. In addition, the Company carries various property
coverages and worker's compensation policies as required by each
jurisdiction in which it does business.
At the present time, Sprayroq's principal products are
characterized as polyurethanes and utilize several chemicals,
including diisocyanates. Diisocyanates have been in general use for
many years, in many applications including automobile parts,
insulation, floor coverings, and roofing. Guidelines regarding the use
of diisocyanates were published by the U.S. Department of Health,
Education and Welfare, Public Health Service, Center for Disease
Control, and National Institute for Occupational Safety and Health
(NIOSH) in September, 1978. Additional documentation regarding
recommended precautions and procedures to be used with such chemicals
has been provided by the suppliers of the chemicals, and by Sprayroq,
and Sprayroq instructs all licensees to follow the procedures set
forth in this documentation. Sprayroq's current supplier of
diisocyanates reports that diisocyanates and other such chemicals have
been in general use for more than fifty years, and that the issues
relating to their safe use are well known. There can be no assurance,
however, that NIOSH or other regulatory organizations, governmental
agencies, etc. might, in the future, determine that such chemicals are
hazardous or otherwise harmful, or might otherwise regulate or prevent
their use.
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Sprayroq's licensee in Denmark had previously reported that
the spraying of diisocyanates in a confined space is not allowed
according to a regulatory agency of the Danish government. During
fiscal year 1997, this licensee reported that the spraying of
diisocyanates was permitted in Denmark. The management of Sprayroq is
not aware of any other similar prohibition of the use of diisocyanates
in other countries. While the management of Sprayroq understands that
the previous objections of the Danish regulatory agency are apparently
no longer in effect, there can be no assurance that such objection
will not persist, nor can assurance be given that similar objections
will not occur in the future in other countries, geographical and/or
political divisions.
EQUIPMENT.
The Company owns or leases a number of trailers, vans, and
other equipment which are necessary to the operations of the Company.
RESEARCH AND DEVELOPMENT.
The Company engages in research and development ("R&D")
efforts to develop new products, improve existing products, reduce its
costs and expand potential applications. The Company incurred R&D
expenses with respect to Sprayroq of approximately $5,000 in the year
ended March 28, 1998 and $23,000 in the year ended March 29, 1997.
EMPLOYEES.
As of May 28, 1998, the Company had three full-time employees
and three part-time employees.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ENVIROQ CORPORATION
Date: September 9, 1998 By: /s/ William J. Long
-----------------------------------------
William J. Long, President
and Chief Executive Officer
13
<PAGE> 14
ENVIROQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 28, 1998 AND MARCH 29, 1997
AND INDEPENDENT AUDITORS' REPORT
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of
Enviroq Corporation:
We have audited the accompanying consolidated balance sheets of Enviroq
Corporation and subsidiaries as of March 28, 1998 and March 29, 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Enviroq Corporation and
subsidiaries as of March 28, 1998 and March 29, 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Birmingham, Alabama
May 11, 1998
<PAGE> 16
ENVIROQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 28, 1998 AND MARCH 29, 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,545,100 $ 2,379,613
Accounts receivable (Note 6) 78,404 314,772
Inventories 168,184 52,830
Refundable income taxes 63,470 100,189
Prepaid expenses and other assets 36,884 24,494
----------- -----------
Total current assets 2,892,042 2,871,898
----------- -----------
OTHER ASSETS:
Employee notes receivable 11,858 13,819
Deferred taxes (Note 2) 10,650
----------- -----------
Total other assets 22,508 13,819
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 310,135 310,135
Operating equipment 44,160 25,563
Other equipment and vehicles 57,917 40,241
----------- -----------
412,212 375,939
Less accumulated depreciation 53,279 45,506
Property, plant and equipment, net 358,933 330,433
----------- -----------
TOTAL $ 3,273,483 $ 3,216,150
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 46,733 $ 69,292
Salaries, wages and related taxes 25,203 18,824
----------- -----------
Total liabilities 71,936 88,116
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY (Note 3):
Common stock (par value $.01 per share, authorized
10,000,000 shares, issued and outstanding 1,009,377 shares) 10,094 10,094
Additional paid-in capital 6,190,647 6,190,647
Accumulated deficit (2,999,194) (3,072,707)
----------- -----------
Total stockholders' equity, net 3,201,547 3,128,034
----------- -----------
TOTAL $ 3,273,483 $ 3,216,150
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 17
ENVIROQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 28, 1998 AND MARCH 29, 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
REVENUES (Note 6):
Net revenues from sales and support $ 1,284,357 $ 1,152,972
Revenues from licenses 20,000 185,835
----------- -----------
Total revenues 1,304,357 1,338,807
COST OF REVENUES 605,940 738,666
----------- -----------
GROSS PROFIT 698,417 600,141
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Note 5) 761,199 759,418
----------- -----------
LOSS FROM OPERATIONS (62,782) (159,277)
----------- -----------
OTHER INCOME:
Interest 124,113 136,958
Other, net 33,017 4,587
----------- -----------
157,130 141,545
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 94,348 (17,732)
INCOME TAX (EXPENSE) BENEFIT (Note 2) (20,835) 71,799
----------- -----------
NET INCOME $ 73,513 $ 54,067
=========== ===========
BASIC AND DILUTED NET INCOME PER SHARE $ 0.07 $ 0.05
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,009,377 1,009,377
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 18
ENVIROQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 28, 1998 AND MARCH 29, 1997
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
<S> <C> <C> <C> <C>
BALANCE, MARCH 25, 1996 $10,094 $6,190,647 $(3,126,774) $3,073,967
Net income 54,067 54,067
------- --------- ---------- ---------
BALANCE, MARCH 29, 1997 10,094 6,190,647 (3,072,707) 3,128,034
Net income 73,513 73,513
-------- --------- --------- ---------
BALANCE, MARCH 28, 1998 $10,094 $6,190,647 $(2,999,194) $3,201,547
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 19
ENVIROQ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 28, 1998 AND MARCH 29, 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 73,513 $ 54,067
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 7,774 8,715
Amortization 17,989
Gain on sale of property, plant and equipment (2,000)
Provision for uncollectible notes receivable 10,000
Changes in assets and liabilities provided (used) cash:
Accounts receivable 236,368 (188,375)
Interest receivable 7,890
License fees receivable 4,030
Inventories (115,354) 65,560
Income taxes 36,719 (1,140,693)
Prepaid expenses and other assets (12,391) 514
Other assets (8,689) 3,181
Accounts payable and accrued expenses (22,559) (96,462)
Salaries, wages and related taxes 6,379 9,010
----------- ----------
Net cash provided by (used in) operating activities 201,760 (1,246,574)
----------- ----------
INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment 2,000
Additions to property, plant and equipment (36,273) (4,803)
----------- ----------
Net cash used in investing activities (36,273) (2,803)
----------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 165,487 (1,249,377)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,379,613 3,628,990
----------- ----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 2,545,100 $2,379,613
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 20
ENVIROQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Enviroq Corporation (the "Company") was incorporated on
February 9, 1995. Prior to April 18, 1995, the Company was named "New
Enviroq." The Company was initially a wholly-owned subsidiary of a
predecessor company which was named Enviroq Corporation (hereafter
referred to as "Old Enviroq"). On April 18, 1995, a transaction was
completed in which all of the outstanding shares of New Enviroq were
distributed to the shareholders of Old Enviroq (the "Distribution"), and
the name of Old Enviroq was changed to Insituform Southeast, Inc.
Insituform Southeast, Inc. was then merged (the "Merger") into a
subsidiary of Insituform MidAmerica ("IMA"), after which the name of New
Enviroq was then changed to Enviroq Corporation. Also on April 18, 1995,
the stock of Synox Corporation ("Synox"), a wholly-owned subsidiary of Old
Enviroq, and Sprayroq, Inc. ("Sprayroq"), a 50% owned subsidiary of Old
Enviroq, approximately 11 acres of unimproved land and $500,000 in cash
were transferred to the Company, a newly formed public entity effective
April 18, 1995, at their respective book values. Each share of common
stock of Old Enviroq issued and outstanding was converted into a right to
receive a cash payment equal to the pro-rata portion of the merger
consideration of $15,250,000.
NATURE OF OPERATIONS - The Company's operations are conducted primarily
through Sprayroq. Sprayroq is engaged in development, commercialization,
manufacture and marketing of spray-applied resinous materials.
FISCAL YEAR - The Company's 1998 and 1997 fiscal years ended on March 28,
1998 and March 29, 1997, respectively. Fiscal years 1998 and 1997 included
52 weeks.
PRINCIPLES OF CONSOLIDATION - These consolidated financial statements
include the accounts of the Company and its subsidiaries, Synox and
Sprayroq. All significant intercompany transactions are eliminated in
these consolidated financial statements. The Company controls the
operations and activities of Sprayroq. There is no recognition of the
minority interest in this subsidiary because of its accumulated deficit
position.
ACCOUNTING ESTIMATES - 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 reporting periods. Actual
results could differ from those estimates.
CASH EQUIVALENTS - Cash equivalents consist of highly liquid investments
purchased with an original maturity of three months or less.
INVENTORIES - Inventories, consisting of raw materials and supplies, are
valued at the lower of cost (first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is carried
at cost, less accumulated depreciation. Depreciation is provided
principally on the straight-line method over the estimated useful lives of
the assets, which range from three to twenty years. Repairs and
maintenance costs are charged to expense as incurred.
F-6
<PAGE> 21
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
expensed as incurred. Such costs were $5,170 (1998) and $22,798 (1997).
LICENSES - Sprayroq licenses its technology for use within certain
geographic regions. These licenses allow the licensee use of the
proprietary technology within their territory and are subject to
restrictions as specified in the individual agreements.
REVENUE RECOGNITION - The Company recognises revenue on sales of
materials upon shipment and on support services when the service is
rendered. Revenue on licenses is recognized based on the terms of the
agreement.
NET INCOME PER SHARE - In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share. SFAS No. 128 replaces the
presentation of primary earnings per share with a presentation of basic
earnings per share, requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all entities
with complex capital structures, and provides guidance on other
computational changes. The Company adopted this statement for all periods
presented in the accompanying consolidated statements of income.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the FASB issued SFAS
No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information, both of which
will be effective for the Company in fiscal year 1999. Management does not
expect the adoption of these Statements to have a material impact on the
Company's financial statements and disclosures.
RECLASSIFICATIONS - Reclassifications have been made to certain 1997
amounts to conform with the 1998 presentation.
2. INCOME TAXES
Income tax (expense) benefit for the years ended March 28, 1998 and March
29, 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current:
Federal $ (16,789) $ 73,342
State (14,696) (1,543)
--------- --------
Total current (31,485) 71,799
Deferred - Federal 10,650
--------- --------
$ (20,835) $ 71,799
========= ========
</TABLE>
The differences between the income tax (expense) benefit and income taxes
computed using the federal statutory rate are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Income tax (expense) benefit at federal statutory rate $ (33,268) $ 5,059
State income taxes, net of federal tax benefit (4,214) (1,019)
Benefit of operating loss carryback 71,796
Nondeductible expenses (6,116)
Benefit from lower tax brackets 17,191 3,209
Other (544) (1,130)
--------- --------
Income tax (expense) benefit $ (20,835) $ 71,799
========= ========
</TABLE>
F-7
<PAGE> 22
The types of temporary differences and their related tax effects are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets (long-term):
Net operating loss and credit carryforwards $ 37,238 $ 25,803
Valuation allowance (26,588) (25,803)
-------- --------
Deferred tax assets $ 10,650 $ --
-------- --------
</TABLE>
A valuation allowance has been established against the net deferred income
tax asset. Such valuation allowance can be adjusted in future periods as
the probability of realization of the net deferred tax asset increases.
During 1996, Enviroq elected to waive its right to all but $79,000 of
future use of Synox's net operating loss carryforwards. At March 28, 1998,
Synox had a remaining net operating loss carryforward of approximately
$75,000 which, if not utilized, will expire in 2010. The Company also has
a general business credit carryforward of approximately $9,000 at March
28, 1998, which will expire in March 2009, if not utilized.
3. RETIREMENT AND INCENTIVE PLANS
The Company has a retirement plan for its employees pursuant to Section
401(k) of the Internal Revenue Code. Participants may make contributions
by salary reduction pursuant to Section 401(k) of the Internal Revenue
Code.
Non-employee Directors are entitled to receive options to purchase shares
of the Company's common stock pursuant to a Non-Employee Directors Stock
Option Plan (the "Directors' Plan"). Options for up to 100,000 shares of
common stock are authorized to be issued under the Directors' Plan. The
Directors' Plan allows the Company's Stock Option Committee (the
"Committee") to grant options to non-employee Directors for a price of not
less than eighty-five percent of the fair market value of the Company's
common stock on the dates that the options are granted. Options are
exercisable in whole or in part, from time to time, until five years from
the date of grant, except that, absent a change in control of the Company,
each option terminates upon the discontinuance of the option holder's
service as a Director of the Company for any reason except death or
disability. Sale of common stock purchased upon exercise of an option is
prohibited for two years from the date of exercise or three years from the
date of grant, whichever is later, unless there is a change in control of
the Company or in the event of the Director's death. Each option agreement
under the Directors' Plan provides, among other things, that shares of
Common Stock will be issued and delivered to the Director upon payment to
the Company of the exercise price of such shares and that the option price
and number of shares subject to option will be adjusted for stock splits,
stock dividends or other similar changes in the Company's capital
structure.
The Company also has an Incentive Stock Option Plan (the "ISO Plan")
administered by the Committee which provides for the issuance to key
employees of incentive stock options ("ISOs") within the meaning of
Section 422A of the Internal Revenue Code of 1986, as amended. The
Committee is authorized to issue up to 100,000 shares of common stock
pursuant to the exercise of the ISOs. The option price of each ISO granted
is 100% of the fair market value of the common stock on the date of grant.
If an ISO is granted to an optionee who holds more than 10% of the
combined voting power of all classes of the Company's stock at the date of
the grant, the option price is 110% of fair market value of the common
stock on the date of grant. The ISO Plan provides for the exercise of ISOs
at the maximum rate of 25% in the first 12 months after grant and 25% in
each 12-month period thereafter. To the extent not exercised, an optionee
may accumulate
F-8
<PAGE> 23
his or her ISOs and exercise them, in whole or in part, in any subsequent
period but not later than 10 years from the date on which the option was
granted.
No options have been issued by the Company under the Directors' Plan or
the ISO Plan.
4. COMMITMENTS AND CONTINGENCIES
Synox is the exclusive licensee of certain technology and know-how under a
license agreement with a company controlled by certain affiliates of the
Company. The agreement currently covers 15 states in the license
territory. Under the terms of its license agreement (as amended), Synox is
subject to minimum royalty provisions and to the maintenance of a $50,000
net worth and the performance of other material provisions of the license
agreement. Minimum annual royalties (based upon retaining the 15 states
currently under the agreement) are due each January 1, for the ensuing
calendar year through the license expiration. The license agreement was
amended on December 22, 1997 to change the expiration date of the license
and to provide that no minimum royalty payment would be due on January 1,
1998, but that such minimum royalty payments would resume on January 1,
1999, in accordance with the following schedule.
<TABLE>
<CAPTION>
DUE DATE AMOUNT
<S> <C>
January 1, 1999 $ 90,336
January 1, 2000 180,671
January 1, 2001 180,671
January 1, 2002 through 2009 225,839
</TABLE>
Pursuant to the merger agreement between Old Enviroq and Synox, the
stockholders of Synox at the time of the merger received Old Enviroq
shares valued at $672,000 in the aggregate plus the right to receive
additional shares of Old Enviroq, dependent on the earnings of Synox, up
to a maximum value of $2,017,000. In addition, the then existing
obligations of Synox under promissory notes to certain shareholders
amounting to $767,376 plus additional interest at 7.66%) shall become
payable by Synox in cash only after such time as (i) all the contingent
shares have been issued and (ii) accumulated retained earnings are
available for such payment. Interest shall become payable only to the
extent of available net earnings. Management believes it is unlikely that
Synox will achieve the required levels of retained earnings. Therefore,
these promissory notes are not recorded as liabilities in the accompanying
consolidated balance sheets. As a result of the Distribution of Company
shares referred to in Note 1, the obligation to issue contingent shares
became an obligation of the Company to issue its shares in lieu of Old
Enviroq shares. To the extent additional, contingent shares become
issuable in the future or additional obligations become payable in the
future, such consideration will be recorded at that time at its fair value
and accounted for as additional intangible assets.
5. RELATED PARTY TRANSACTIONS
During fiscal years 1998 and 1997, the Company paid approximately $29,000
and $13,000, respectively, to a marketing and public relations company
controlled by a family member of certain stockholders of the Company.
During fiscal 1997, the Company paid approximately $58,000 to an insurance
agency controlled by stockholders of the Company.
6. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company had sales transactions with two and four unrelated customers
which accounted for approximately 89% and 92% of total sales in fiscal
1998 and 1997, respectively. Trade accounts
F-9
<PAGE> 24
receivable included approximately $77,445 and $303,000 due from these
customers at March 28, 1998 and March 29, 1997, respectively.
7. SUBSEQUENT EVENT
On April 22, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with Institutional Asset
Management, Inc. ("IAM"), a Florida corporation, Capital Research
Corporation ("CRC"), a Florida corporation, Intrepid Capital Corporation
("Intrepid Capital"), a newly formed Delaware corporation and a subsidiary
of the Company, and three wholly-owned subsidiaries of Intrepid Capital
formed to effect the transactions contemplated in the Merger Agreement.
Subject to the terms and conditions of the Merger Agreement, including
without limitation the approval of the stockholders of the Company, the
Company will be merged into a wholly-owned subsidiary of Intrepid Capital,
which will occur simultaneously with similar mergers between wholly-owned
subsidiaries of Intrepid Capital and each of CRC and IAM. As a result of
the simultaneous mergers, the Company, CRC and IAM will become
wholly-owned subsidiaries of Intrepid Capital.
* * * * *
F-10
