-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ULa1ebxuavKJKLR8nLGjS8Q9pdr3opN4sULKWtTN3f7PyQL+qmiRg56Ghlcf6XyS EpvoWB+NMOlKsPKVISvNTA== 0000950144-97-007400.txt : 19970630 0000950144-97-007400.hdr.sgml : 19970630 ACCESSION NUMBER: 0000950144-97-007400 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970329 FILED AS OF DATE: 19970627 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENVIROQ CORP /DE/ CENTRAL INDEX KEY: 0000937256 STANDARD INDUSTRIAL CLASSIFICATION: SANITARY SERVICES [4950] IRS NUMBER: 593290346 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-25528 FILM NUMBER: 97631528 BUSINESS ADDRESS: STREET 1: 100 UNION HILL DRIVE SUITE 100 STREET 2: P.O. BOX 11169 CITY: BIRMINGHAM STATE: AL ZIP: 35202 BUSINESS PHONE: 2052512400 MAIL ADDRESS: STREET 1: 100 UNION HILL DR SUITE 100 STREET 2: P O BOX 11169 CITY: BURMINGHAM STATE: AL ZIP: 35202-1169 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENVIROQ CORP DATE OF NAME CHANGE: 19950811 10KSB40 1 ENVIROQ CORP 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-KSB (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 29, 1997 [ ] 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 ---- ---- Securities registered under Section 12(g) of the Exchange Act: Common Stock ------------ (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 6, 1997, the aggregate market value of the voting stock of the Registrant held by non-affiliates was approximately $849,000, based on $2.00 per share being an average of the bid and asked prices listed on the NASD "Bulletin Board" system. State issuer's revenues for its most recent fiscal year: $1,338,807 As of June 25, 1997, the Registrant had issued 1,009,377 shares of Common Stock, par value $0.01. Transitional Small Business Disclosure Format YES NO X ---- ---- 2 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 "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 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 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"). The Company also owns 100% of the outstanding capital stock of Synox(R) Corporation, a Delaware corporation ("Synox"). Sprayroq is engaged in the development, commercialization, manufacture and marketing of spray-applied resinous materials. 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. See "Description of Business -- Background on Operations of Synox Corporation." The strong financial position of the Company, along with its status as a public company, may offer opportunities for growth or other strategic alliances. The management of the Company is therefore searching for opportunities to leverage the Company's advantages to bring additional value to its Shareholders. Such opportunities may or may not involve the Company's traditional business and markets. There can be no assurances, however, that the Company will be successful in locating or capitalizing on any such opportunities. During the fiscal year ended March 29, 1997, most of the income and gross profit of the Company was attributable to the operations of Sprayroq. BACKGROUND ON OPERATIONS OF SPRAYROQ, INC. Sprayroq, Inc. was initially organized in January, 1991 as Enviroq Resin Development, 2 3 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 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 3 4 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 29, 1997, the Company had made loans to Sprayroq in the aggregate amount of approximately $837,000. 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 1997 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 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 sprit 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 assuarances 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. The focus of the municipal wastewater treatment industry over the past 20 years has been to meet stricter effluent discharge standards by achieving higher levels of wastewater treatment. One of the primary goals of wastewater treatment is the removal from the wastewater of suspended solids and nutrients. Typically, a municipal wastewater treatment plant concentrates the solids generated by this removal into a slurry or sludge which is still essentially liquid, but which contains approximately 2%-6% solids by weight (known in the industry and referred to hereafter as "biosolids"). Synox was organized as a Delaware corporation on May 23, 1986, and was acquired by the Company on September 30, 1991. Synox has licensed 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 Synox Process utilizes ozone along with supplemental physical and chemical treatment steps to disinfect, deodorize and thicken municipal wastewater biosolids. Dewatering and pelletizing techniques developed by Synox combine treated biosolids with other recyclable materials to yield an end-product that has the potential to be used as a soil amendment or burned as a fuel. The research and development activities of Synox have 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. It is expected that the demonstration plant will be 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 4 5 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. The Synox Process. The Synox Process for treating municipal wastewater biosolids is a four step process: (1) conditioning, (2) ozonation, (3) thickening, and (4) nitrite disinfection. Processing begins with raw biosolids pumped into a conditioning tank. In this tank, sulfuric acid is mixed with the biosolids to lower the Ph of the biosolids. The conditioning step can also include adjusting the thickness of the biosolids and heating the biosolids if necessary. The conditioned biosolids are then pumped into the Synox vessel for ozonation. The Synox vessel is designed to facilitate mixing the biosolids with an ozone rich gas. This is achieved by constantly recirculating and dispersing the biosolids through the vessel while injecting an ozone rich gas into the biosolids and operating the system under pressure. The ozone rich gas is produced by passing oxygen through an ozone generator. The ozonation step takes about 60 minutes and deodorizes and partially disinfects the biosolids. After ozonation, the biosolids are transferred to a separation tank. In this tank, the biosolids are thickened by flotation as gas dissolved into the biosolids under pressure is released from solution at atmospheric pressure. Additional thickening may be required. In the final processing step, further disinfection is achieved in about 10 hours by adding sodium nitrite to the thickened biosolids. The Synox Process yields a deodorized, thickened and disinfected end-product. Management believes that the Synox Process has relatively moderate capital and operating costs; generally higher than alkaline processes and lower than composing and heat drying processes. The system can be accommodated in a relatively small space. Proper operation of the Synox Process is relatively easy to control and document, does not generate odors and yields an end-product free from putrid odors, which, according to the existing regulations promulgated by the EPA (the "EPA Regulations"), can be beneficially reused either agriculturally or as a fuel. The Synox Process does not make biosolids chemically stable for long-term storage, and the Synox Process must be preceded or followed by a volatile solids reducing process or followed by a dewatering process if long-term storage is required. 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. In March of 1993, the Company received notification from the EPA that a committee 5 6 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. 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. These regulations contain provisions generally to set standards and/or guidelines for the disinfection and subsequent use or disposal of municipal wastewater biosolids, and which regulate the treatment, disposal and utilization of sewage biosolids. These regulations govern three biosolids use and disposal practices: land application, surface disposal, and incineration. The regulations are implemented through permits issued by appropriate state authorities and/or the EPA to each plant or facility treating or otherwise handling municipal biosolids. Current EPA Regulations impose standards for the reduction of pathogens (disinfection) and attraction of disease vectors (rodents, flies, etc.). These standards apply to publicly and privately owned treatment works that generate or treat domestic sewage biosolids, as well as to any person who uses or disposes of sewage biosolids from such treatment works. The EPA has also set performance standards for owners and operators of sewage treatment works. The pathogen reduction standards set forth in the EPA Regulations classify three levels of sewage treatment. Class A treatment reduces the level of pathogenic organisms to below detectable limits. Class B and C treatment levels require restricted access and restricted use of lands upon which Class B or C sewage biosolids are applied for specific periods. Under the EPA Regulations, the EPA also requires owners and operators to reduce vector attraction. These standards require the elimination of odors, moisture, and other characteristics of sewage biosolids that attract disease vectors, such as rodents, flies and mosquitoes. Under existing EPA Regulations, unlike regulations in place prior to February 19, 1993, a specific level of treatment performance is required. Specific indicators must be 6 7 monitored regularly by sewage treatment works and corresponding reports must be filed, certifying that a particular level of treatment has been achieved. The Company believes that these performance standards, combined with restrictive permitting requirements governing the utilization of Class B or C biosolids in the most populous states, may eventually encourage owners and operators of sewage biosolids treatment works to favor Class A capable processes. Unlike the regulations in place prior to February 19, 1993, existing EPA Regulations measure the effectiveness of the treatment method itself, rather than simply requiring owners and operators to have in place the necessary process equipment and procedures to provide a desired level of treatment. In addition, owners and operators are now subject to fines and other sanctions in the event that a permitted performance standard is not achieved. Further, owners and operators must still meet other federal, state, and local regulations for the treatment, disposal, and utilization of sewage biosolids. 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. SALES AND MARKETING. The Company's organization includes operations for sales and marketing. At the present time, Synox Corporation relies on the senior officers of the Company to coordinate sales activities with independent sales representatives throughout the United States. 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. Both Synox and Sprayroq conduct marketing activities, which typically include: (i) identifying new markets and market strategies, trade shows, advertising, direct mail, news 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. 7 8 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 81% of Sprayroq's sales for fiscal year 1997 were made to two customers which amounted to sales totalling approximately $694,000 and $391,000 to Insituform Southeast, Inc. and Southwestern Underground, 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. 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. Management believes that there are over 16,000 publicly owned treatment works ("POTW") in the United States. Over 90% of these plants treat less than 1 million gallons of wastewater per day ("MGD") and are likely to be too small to require a biosolids treatment alternative like the Synox Process. Synox believes its market is primarily the municipalities which operate approximately 1,000 POTW treating more than 5 MGD. These 1,000 POTW process about 70% of the 30,000 MGD of wastewater treated each day in the United States and generate about 70% of the biosolids. With these 1,000 POTW, the same distribution pattern in relation to plant size holds true; that is, there are relatively few very large plants (less than 100 POTW process more than 50 MGD) and many small and medium-sized plants. The average size of these 1,000 POTW is about 20 MGD, and the median size is approximately 10 MGD. 8 9 The Company believes that, over the next few years, if existing regulations governing the treatment and disposal of biosolids are vigorously enforced and if the required capital is located to fund necessary improvements, increased wastewater flow and more efficient wastewater treatment (which generates more biosolids) may encourage many of these plants to change or upgrade their biosolids treatment processes. At the present time, however, such regulations are not being vigorously enforced and, therefore, are having little impact on the market. Consequently, no assurance can be given that vigorous regulatory enforcement will occur or that it will positively effect Synox or the Company. See "Description of Business -- Background on Operations of Synox Corporation." 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. 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, 9 10 particularly in the lining of manholes. Synox. Synox faces 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, and December 20, 1996, 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. 10 11 The patents and patent applications covered by the License Agreement, and their expiration dates are listed below:
Number Name Description Expiration ------------------------------------------------------------------------------------ 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
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. Long Enterprises has also granted Synox an option to extend the territory under the License Agreement to include the entire United States, its possessions and Puerto Rico. This option may be exercised in its entirety by payment by the Company to Long Enterprises of an exercise fee of $500,000. Alternatively, Synox may exercise the option only with respect to the Northeast Territory (consisting of the states of New Jersey, New York, Massachusetts, Connecticut, Rhode Island, Vermont, New Hampshire and Maine) for an exercise payment of $137,522.72; or with respect to the West Central Territory (consisting of the states of Washington, Oregon, Nevada, Idaho, Utah, Montana, Wyoming, Colorado, North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Minnesota, Iowa, Missouri, Arkansas, Louisiana, Mississippi, Wisconsin, Illinois, Michigan, Indiana, Ohio, Pennsylvania, Hawaii, Alaska and the possessions of the United States) for an exercise payment of $362,477.28. This option will expire on December 31, 1997. Long Enterprises has agreed to allow Synox to market the Synox Process in the extended territory without exercising its option with the understanding that, upon any sale pursuant to the License Agreement, Synox would 11 12 exercise its option on the extended territory. As amended, the License Agreement expires on September 28, 2010, 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 will 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. Minimum annual royalties (based on retaining the existing territory of 15 states listed above) are due each January 1, beginning January 1, 1995, for the ensuing calendar year through the Long License Expiration. On January 1, 1995, a minimum royalty payment of $45,168 was made. The License Agreement was amended on December 20, 1996 to change the expiration date of the license and to provided that no minimum royalty payment would be due on January 1, 1997, but that such minimum royalty payments would resume on January 1, 1998, in accordance with the following schedule:
Date Due Amount -------------------------------------------------------------------- January 1, 1998 $ 90,335.51 January 2, 1999 $ 180,671.02 January 1, 2000 $ 180,671.02 January 1, 2001, and on each January 1 through Long License Expiration $ 225,838.77
Minimum annual royalties will be increased if Synox exercises the option to extend its territory, based on a formula which takes into account the population (based on a 1980 Census) of the additional territory. 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, 12 13 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 supplier of the chemicals, and Sprayroq instructs all licensees to follow the procedures set forth in this documentation. Sprayroq's supplier 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. Sprayroq's licensee in Denmark has reported that the spraying of diisocyanates in a confined space is not allowed according to a regulatory agency of the Danish government. 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 believes that the objections of the Danish regulatory agency will eventually be overcome, 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 Synox and Sprayroq of approximately $23,000 in the year ended March 29, 1997 and $28,000 in the year ended March 30, 1996. EMPLOYEES. As of June 25, 1997, the Company had five full-time employees and two part-time employees. 13 14 ITEM 2. PROPERTIES (a) The Company owns approximately 10.6 acres of real estate adjacent to Old Enviroq's facilities at 11511 Phillips Highway South in Jacksonville, Florida. At the present time, this acreage is undeveloped and is zoned industrial light and light industrial. The Company currently has no plans to improve or develop the property and has advertised the property for sale. The Company leases, on a month-to-month basis, approximately 1,300 square feet of office space located at 3918 Montclair Road, Birmingham, Alabama 35213. This leased space serves as the principal executive offices of the Company and, after the initial year of the lease, may be canceled upon 90 days notice. The Company believes that these executive offices are adequate for the conduct of the business of the Company. The Company also leases, on a month-to-month basis, approximately 200 square feet of office space and three mobile trailers which serve as production facilities for Sprayroq located at Old Enviroq's facilities at 11511 Phillips Highway South, Jacksonville, Florida. The Company's Jacksonville facilities are leased by the Company from Insituform Southeast for an aggregate monthly rental of $600. The Company anticipates relocating the Jacksonville facilities to Birmingham, Alabama during the fiscal year ending March, 1998. The Company also owns certain equipment, fixtures and other personal property located on real property owned by the city of Jacksonville, Florida. This personal property was used in connection with a full-scale demonstration plant for the Synox Process. The Company anticipates removing this facility during the fiscal year ending March, 1998. (b) The Company does not typically invest in real estate, real estate mortgages or related securities. There is no policy of the Company which places restrictions or limitations on the percentage of assets which may be invested or the type of investment, and this policy may be changed without the vote of the Company's shareholders. It is not the policy of the Company to acquire assets primarily for possible capital gain or primarily for income. Management believes that the foregoing properties are adequately insured. ITEM 3. LEGAL PROCEEDINGS The Company is involved, from time to time, in various legal proceedings incidental to the conduct of its business. The Company is not currently engaged in any legal proceedings that are presently expected to have a material adverse effect on the Company. The Company filed suit (the "Lawsuit") against Insituform Mid-America, Inc. on August 1, 1995 in the Circuit Court of Jefferson County, Alabama (the "Court") to enforce the 14 15 Company's rights under the Subordinated Promissory Note issued by IMA to the Company on April 12, 1995 (the "Note"). In the Lawsuit, the Company alleged that the entire principal balance of the Note was accelerated and due and payable immediately as a result of the failure of IMA to make the first interest payment due under the Note to the Company on a timely basis. Also, in the Lawsuit, IMA asserted that it may be entitled to set-off certain amounts against the Note and a related consulting agreement between the parties dated April 18, 1995 (the "Consulting Agreement"). On November 16, 1995, a non-final summary judgment order was entered by the Court in favor of the Company against IMA in the amount of $3,101,109.45. In this order, the Court directed IMA to assert any claims of set-off which IMA might have against the Company. As directed by the Court, IMA filed an Answer and Counterclaim on December 18, 1995 which, among other things, asserted set-off claims, on its own behalf and on behalf of its subsidiary, for certain expenses allegedly owed to its subsidiary (alleged by IMA to total approximately $913,000). IMA also asserted that the Company had breached the Note by enforcing the Note at the time that the Company did, and, therefore, that the Company was required to indemnify IMA pursuant to the Merger Agreement dated April 18, 1995, between the Company, IMA and certain other parties (the "Merger Agreement") for any damages which might have resulted from the alleged breach. 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 in the Lawsuit. 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 Company released IMA and Insituform Technologies, Inc. ("ITI"), subject to limited exceptions, from all claims that the Company had or may have had or may have against IMA or ITI arising out of the Note or the Merger Agreement, and claims that were or could have been asserted by the Company in the Lawsuit. In the Settlement Agreement, IMA and ITI released the Company, subject to limited exceptions, from all claims that they had or may have had or may have against the Company arising out of the Note or the Merger Agreement, including any claim with respect to the Expense Deficit (as defined in the Merger Agreement) and claims that were or could have been asserted by IMA or ITI in the Lawsuit. The Settlement Agreement also provided for the dismissal, with prejudice, of the Lawsuit and the associated non-final order of summary judgment entered by the Court on November 16, 1995. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's shareholders during the period covered by this Item 4. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 15 16 At the present time, the common stock of the Company is traded in the over-the-counter markets, and bid/asked quotations may be found on the NASD "Bulletin Board" under the symbol "ENVQ." As the common stock of the Company does not currently trade on any established exchange, management has no reliable source of information concerning historical trading prices per share of the Company's common stock. There were 372 shareholders of record as of June 25, 1997, which number does not include shareholders whose shares were held of record by brokers, but does include each brokerage firm holding stock as a nominee. The Company has not paid any cash dividends on its common stock since its organization, and currently intends to retain any earnings of the Company for the Company's operations and the expansion of its business. Other than state corporate law limitations, there are no restrictions on the Company's ability to pay dividends. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere herein. RESULTS OF OPERATIONS. Revenue. 16 17 Revenues for the fiscal year ended March 29, 1997 were approximately $1,339,000 as compared to approximately $1,117,000 for fiscal year ended March 30, 1996, an increase of 10%. The increase in revenue for fiscal year 1997 was primarily attributable to increased sales of resin equal to approximately $994,000 by Sprayroq, fees relating to three licenses by Sprayroq equal to $186,000, and additional revenue arising from the sale of equipment, spare parts, training, etc. by Sprayroq equal to approximately $151,000 during fiscal year 1997. Gross Profit. For fiscal year 1997, the Company's gross profit margin was 45%, as compared to 37% for fiscal year 1996. The increased gross profit margin over fiscal year 1996 is due primarily to the increase in resin sales by Sprayroq and fees relating of three licenses by Sprayroq during fiscal year 1997. Selling, General and Administrative Expenses. Selling, General and Administrative expenses ("S,G&A") for fiscal year 1997 were approximately $759,000 as compared to approximately $931,000 for fiscal year 1996, a decrease of 23%. The decrease in S,G&A for fiscal year 1996 as compared to fiscal year 1995 is primarily attributable to reductions in expenses and the writedown of substantially all of the assets of Synox. Net Income/(Loss). For fiscal year 1997, the Company had net income of approximately $54,000, as compared to a net income of approximately $1,068,000 for fiscal year 1996. The decrease in net income is primarily attributable to the settlement of a lawsuit with IMA during fiscal year 1996. Net income for the fiscal year 1997 was also increased by an income tax benefit of approximately $72,000, which offset the net loss before income taxes of approximately ($18,000). Financial Condition. Total assets, stockholders' equity, and working capital decreased during fiscal year 1997, as compared to an increase during fiscal year 1996. The decrease during fiscal year 1997 was primarily the result of the payment of income taxes related to the settlement of the Company's lawsuit with IMA. The increase during fiscal year 1996 was primarily the result of the settlement of the Company's lawsuit with IMA, as well as the increase in net income. At March 29, 1997, the Company had approximately $2,784,000 in working capital and a current ratio of 32.2-to-1, as compared to $2,705,000 in working capital and a current ratio of 3.2-to-1 at March 30, 1996. 17 18 The Company's cash and cash equivalents totaled approximately $2,380,000 at March 29, 1997. The Company used cash in operating activities of approximately $1,247,000, as compared to cash provided by operating activities of approximately $3,098,000 in cash in operating activities in fiscal year 1996. Cash in the amount of approximately $3,000 was used in investing activities during fiscal year 1997, as compared to cash of approximately $26,000 provided by investing activities in fiscal year 1996. In fiscal years 1997 and 1996, approximately $5,000 and $18,000, respectively, was expended for capital assets. Depreciation and amortization expense was approximately $27,000 in fiscal year 1997, and $179,000 in fiscal year 1996. During fiscal year 1996, the Company elected to write off certain assets of Synox, resulting in an impairment of long-term assets of approximately $1,331,000. Net fixed assets were approximately $330,000 at the end of fiscal year 1997, as compared to approximately $334,000 at the end of fiscal year 1996, a decrease of 1%. This decrease is primarily attributable the additional writedown of assets at Synox, along with the accumulated depreciation offsetting the purchase of equipment. The Company does not believe that there is any appreciable seasonal impact on the business of the Company, although extreme cold weather may impair installation of spray-applied materials, which may result in decreased resin sales by Sprayroq. The Company's undeveloped property in Jacksonville, Florida (approximately 10.6 acres) is currently being offered for sale, which may result in an increase in the Company's cash. Other than normal trade accounts payable, taxes and normal accrued expenses incurred in the ordinary course of business, the Company is not currently aware of other material commitments. Operating cash flow combined with available cash are currently expected to provide resources for the Company's working capital needs for the foreseeable future. To the extent that the Company is not able to meet its financial goals, however, the Company's revenues may not be sufficient to satisfy the Company's working capital needs. Consequently, no assurance can be given that the Company's revenues will be sufficient to adequately fund the Company's future working capital requirements. The operating results and financial statements of the Company include all of the operating results of Sprayroq, without discount or reduction based upon the fact that the Company owns 50% of the outstanding capital stock of Sprayroq. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company as of March 29, 1997 and other 18 19 information required by Item 310(a) of Regulation S-B are set forth on pages F-1 through F-11 hereof. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with the Company's accountants regarding accounting procedures or financial disclosure. 19 20 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE COMPANY; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Executive officers and directors of the Company as of the date hereof are as follows:
DIRECTOR POSITIONS WITH NAME AGE SINCE THE COMPANY - ---- --- ----- ----------- Antonio M. Marinelli 77 1995 Chairman of the Board and Director William J. Long 45 1995 President, Chief Executive Officer and Director Orlando M. Marinelli 72 1995 Vice President, Secretary- Treasurer and Director Charles A. Long, Jr. 69 1995 Director Michael X. Marinelli 38 1995 Director W. T. Goodloe Rutland 70 1995 Director Alexander P. Zechella 76 1995 Director
Antonio M. Marinelli has been Chairman of the Board and a Director of the Company since April 1995. Prior to April 1995, Mr. Marinelli had been Chairman of the Board of Old Enviroq since 1981. Mr. Marinelli is, and has been for over five years, Vice Chairman of the Board and a Director of Intercounty Construction Company of Florida, Inc. ("Intercounty"), a heavy construction contractor and a wholly-owned subsidiary of Micam Industries, Inc. ("Micam"). William J. Long has been President, Chief Executive Officer and a Director of the Company since April 1995. Prior to April 1995, Mr. Long had been Vice President-Marketing and a Director of Old Enviroq since October 1984. Since May 25, 1995, Mr. Long has been Chairman of the Board and a Director of Sullivan, Long & Hagerty, an Alabama corporation ("SLH"), a heavy construction contractor, which is the parent of SCE, Incorporated, an Alabama corporation ("SCE"), a heavy construction contractor. Prior to October, 1995, Mr. Long had been Chief Executive Officer of SCE and SLH. Prior to May 25, 1995, Mr. Long had been a Director and Senior Vice President of SCE, and a Director 20 21 and Senior Vice President of SLH, for over five years. Orlando M. Marinelli has been Secretary-Treasurer of the Company since April, 1996, and has been Vice President and a Director of the Company since April 1995. Prior to April 1995, Mr. Marinelli had served as Vice President and a Director of Old Enviroq since October 1981. He has served as Chairman of the Board of Intercounty for more than the last five years. Charles A. Long, Jr., has been a Director of the Company since April 1995. Prior to April, 1996, Mr. Long had served as Secretary-Treasurer of the Company. Prior to April 1995, Mr. Long had served as Secretary-Treasurer and a Director of Old Enviroq since October 1981. Prior to May 25, 1995, Mr. Long also served since 1970 as the Chairman of the Board and Chief Executive Officer of SCE and SLH and is currently a director of both SCE and SLH. Michael X. Marinelli is an associate with the Washington, D.C. law firm of Baker & Botts. He graduated from Catholic University Law School in 1989. Mr. Marinelli served as Assistant Secretary of the Company from January 1987 to July 1987. He served as Special Assistant to the General Manager of Insituform East, Inc., from February 1986 to August 1986. From October 1985 to February 1986, Mr. Marinelli served as assistant to the President of the Company, and from October 1984 to October 1985, he was a sales representative for the Company. He has served as a Director of the Company since April 1995. Prior to April 1995, he had served as a Director of Old Enviroq since October 1984. W. T. Goodloe Rutland served as Chairman of the Board of Directors, President, Treasurer, and Chief Executive Officer of SouthTrust Mortgage Corporation, a mortgage banking firm, from May 1975 until his retirement in June 1982. Since June 1982, Mr. Rutland has been engaged in the management of personal investments and real estate development. He has served as a Director of the Company since April 1995. Prior to April 1995, he served as a Director of Old Enviroq since April 1987. Alexander P. Zechella served from September 1983 to April 1984, as Chairman of Charter Oil Company and Executive Vice President of The Charter Company ("Charter"). From April 1984 until his retirement in December, 1985 Mr. Zechella served as President, Chief Executive Officer, and Chief Operating Officer of Charter. In April 1984, Charter and certain of its subsidiaries, including Charter Oil, filed for protection under Chapter 11 of the United States Bankruptcy Code. In December 1986, a plan of reorganization was confirmed by the bankruptcy court for Charter and certain of its subsidiaries, including Charter Oil. In March 1987, the plans of reorganization for Charter and certain of its subsidiaries, including Charter Oil, were implemented and such entities were discharged from bankruptcy. Mr. Zechella has served as a Director of the Company since April 1995. Prior to April 1995, he had served as a Director of Old Enviroq since April 1987. Marinelli Securities Associates, a Florida general partnership ("MSA"), is the record 21 22 owner of 294,900 shares. William J. Long, a Director and Executive Officer of the Company, is the son of Charles A. Long, Jr., also a Director of the Company. Antonio M. Marinelli, a Director of the Company, is the brother of Orlando M. Marinelli, a Director and Executive Officer of the Company. Michael X. Marinelli, a Director of the Company, is the son of Antonio M. Marinelli. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required by those persons, the Company believes that, during the fiscal year ended March 29, 1997, all filing requirements applicable to its officers, directors, and greater-than-10% beneficial owners have been complied with. 22 23 ITEM 10. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth certain information respecting the compensation paid to the Chief Executive Officer of the Company during the fiscal year ended March 29, 1997 and relevant preceding fiscal years: SUMMARY COMPENSATION TABLE
Compensation Awards Annual ------------------- ------ Name and All Other Principal Salary Compensation Position Year ($) ($) --------- ---- ------ ------- William J. Long 1997 $84,133 ------- President and 1996 $58,333 ------- Chief Executive 1995 $50,000 $757.20(1) Officer
(1) Amount shown for 1995 consists of $102 for group term life insurance and $655.20 for contributions by the Company to Mr. Long's 401(k). Directors' Compensation. Non-employee directors of the Company are paid $1,000 per quarter for a maximum of six meetings of the Board of Directors and Committees of the Board. In the event that additional meetings of the Board of Directors are required, the non-employee Directors are compensated at a rate of $1,000 per meeting. All Directors and Officers are reimbursed for travel expenses incurred in connection with their attendance at meetings of the Board of Directors. In addition, 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 to grant options to non-employee directors for a price of not less than eighty-five percent (85%) 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 (5) 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 (2) years from the date of exercise or three (3) 23 24 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 such option will be adjusted for stock splits, stock dividends or other similar changes in the Company's capital structure. No options were issued during fiscal year 1997 under the Directors' Plan. Incentive Stock Option Plan. Options may be granted under the Company's Incentive Stock Option Plan (the "ISO Plan"), 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 ISO Plan is administered by the Stock Option Committee of the Board of Directors (the "Committee"). As of June 20, 1996, the Committee was 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 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 were issued during fiscal 1997 to executive officers of the Company under the ISO Plan. Compensation Committee Interlocks and Insider Participation. W.T. Goodloe Rutland, Antonio M. Marinelli and Alexander P. Zechella serve on the Compensation Committee of the Board of Directors. 24 25 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The table set forth below presents certain information regarding the beneficial ownership as of May 30, 1997 by (i) each shareholder known to the Company to own more than five percent of any class of the Company's outstanding securities entitled to vote; (ii) directors of the Company; and (iii) all executive officers and directors of the Company as a group.
AMOUNT AND NATURE PERCENT OF CLASS NAME AND ADDRESS OF OF SECURITIES (EXCLUDING BENEFICIAL OWNER BENEFICIAL OWNER(1) TREASURY SHARES)(2) ---------------- ------------------- ------------------- Insituform of North America, Inc. 73,800 shares 7.3% 3315 Democrat Road of common stock Memphis, Tennessee 38118 Marinelli Securities Associates (3) 294,900 shares 29.2% 2100 North Dixie Highway of common stock Fort Lauderdale, Florida 33305 Charles A. Long, Jr. (4) 5,686 shares 0.6% P. O. Box 12887 of common stock Birmingham, Alabama 35202 William J. Long (4)(5) 263,389 shares 26.1% 3918 Montclair Road, Suite 206 of common stock Birmingham, Alabama 35213 Antonio M. Marinelli (3)(6) 299,559 shares 29.7% of common stock Michael X. Marinelli (3)(7) 295,420 shares 29.3% of common stock Orlando M. Marinelli (3) 299,559 shares 29.7% of common stock W.T. Goodloe Rutland 14,061 shares 1.4% 191 Pine Ridge Circle of common stock Birmingham, Alabama 35213 Alexander P. Zechella 4,221 shares 0.4% 1000 Vicar's Landing Way, #F-109 of common stock Ponte Vedra Beach, Florida 32082 All officers and directors 584,942 shares 58.0% as a group (7 persons) of common stock
25 26 (1) Included in such beneficial ownership are shares of common stock issuable upon the exercise of certain options exercisable immediately or within 60 days of June 16, 1997, as follows: None. (2) The percentages represent the total of the shares listed in the adjacent column divided by the issued and outstanding shares of common stock as of June 16, 1997, plus any options exercisable immediately or within 60 days. (3) Marinelli Securities Associates ("MSA") is a Florida general partnership and is the record owner of 294, 900 shares. The partners of MSA are Micam Industries, Inc. ("Micam") (41.16%), Orlando M. Marinelli (7.65%), Marion Marinelli (7.65%), Antonio M. Marinelli (7.65%), Phyllis Marinelli (7.65%), Michelle Marinelli (7.06%), Kim Vreeland (7.06%), Michael X. Marinelli (7.06%), and Michael J. Marinelli (7.06%). Both Antonio M. Marinelli and Orlando M. Marinelli are directors and officers of the Company, are partners in Micam, and are directors and executive officers of Micam. Michael X. Marinelli, a director of the Company, is a partner in MSA. Accordingly, the shares owned by MSA may be deemed to be beneficially owned by each of them. The address of each of the above-named partners is the same as the address of MSA. (4) Charles A. Long, Jr. is the record owner of 3,312 shares. Also includes 2,374 shares owned of record by Long Enterprises, Inc. Both Charles A. Long, Jr., and William J. Long are directors, executive officers, and controlling shareholders of Long Enterprises, Inc. (5) William J. Long is the record owner of 257,975 shares. Also includes an aggregate of 3,040 shares owned of record by William J. Long's wife and children, and 2,374 shares owned by Long Enterprises, Inc., of which William J. Long is a director, executive officer, and controlling shareholder. Mr. Long has pledged 257,706 shares to First Commercial Bank as security for a loan. (6) Antonio M. Marinelli is the record owner of 4,659 shares. (7) Michael X. Marinelli is the record owner of 120 shares. Also includes 400 shares owned of record by Michael X. Marinelli's sons. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Directors Charles A. Long, Jr., and William J. Long, and other members of the Long family may be deemed to be in control of Assurance Agency, Inc., an Alabama corporation and an insurance broker ("Assurance"), Long Technologies, Inc., a research and development company, Integrid, Inc., a consulting company, Sullivan, Long & Hagerty, and Long Enterprises, Inc. The Company has had a number of transactions, which are described below, with the businesses named above. The Company believes that the transactions were or are on terms that are no less favorable to the Company than those which could reasonably have been obtained from an unaffiliated party. In April, 1996, Assurance sold its book of business and certain other assets to LMJ Corporation. Among other of the terms relating to this sale was the right of Assurance to receive a percentage of future commissions arising out of the book of business sold to LMJ by Assurance. With respect to insurance purchased by Enviroq from LMJ, LMJ pays 22% of the commissions from such business to Assurance. During fiscal year 1997, all of the Company's 26 27 insurance (other than its employee insurance) was provided through LMJ Corporation. For fiscal year 1997, the Company paid LMJ approximately $66,000 for certain insurance needs. For fiscal years 1995 and 1996, Old Enviroq paid Assurance approximately $1,027,000 and $58,000, respectively. The payment in 1995 was made by Old Enviroq with respect to its business operations prior to the Distribution, including primarily those business operations now conducted by Insituform Southeast, rather than the Company. In April, 1997, much of the Company' insurance was purchased from an unaffiliated third party, although LMJ retained the portion of insurance relating to workers' compensation. Management believes that the Company will make payments to LMJ during fiscal year 1998 for certain insurance needs equal to approximately $5,000. Synox is a party to the License Agreement with Long Enterprises. Pursuant to the License Agreement, Synox has obtained from Long Enterprises rights to five U.S. patents relating to the Synox Process. During fiscal years 1995, 1996 and 1997 the Company paid $45,167.76, $0 and $0 respectively, to Long Enterprises pursuant to the License Agreement. See "Description of Business -- Patents and Licenses." During fiscal years 1997, 1996 and 1995, the Company paid approximately $13,000, $2,800 and $66,000, respectively, to Market Potential, Inc., a company controlled by Patricia L. Ford, for marketing and public relations services performed for the Company. Ms. Ford is the sister of William J. Long and the daughter of Charles A. Long, Jr. Market Potential, Inc. sub-let offices, through August, 1996, to the Company. Pursuant to this arrangement, the Company paid approximately $1,000 to Market Potential, Inc. during fiscal year 1997. Market Potential, Inc. sub-leases office space from the Company, and paid approximately $3,000 for this space during fiscal year 1997. Charles A. Long, Jr. sub-leases office space from the Company, and paid the Company approximately $1,400 for this space during fiscal year 1997. Integrid, Inc., a company owned by William J. Long, sub-leases office space from the Company, and paid the Company approximately $800 for this space during fiscal year 1997. Old Enviroq acquired all of the outstanding common stock of Synox from its existing stockholders on September 30, 1991. The stockholders of Synox at the time of that merger received shares of Old Enviroq 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. The right to receive these additional shares was represented by certificates of contingent shares of Old Enviroq ("Contingent Share Certificates"). In addition to other past stockholders of Synox, certain directors of the Company or their affiliates, including Long Enterprises, Inc., and Sullivan, Long & Hagerty, Inc., Orlando M. Marinelli, Antonio M. Marinelli, W. T. Goodloe Rutland, and Alexander P. Zechella, held Contingent Share Certificates. The Company has issued replacement contingent share certificates representing the 27 28 contingent right to receive shares of the common stock of the Company ("New Contingent Share Certificates"), partly in consideration of the agreement of the holders of the Contingent Share Certificates to surrender their Contingent Share Certificates. The New Contingent Share Certificates have rights and privileges substantially similar to those afforded by the Contingent Share Certificates except that (i) any shares to be issued pursuant to the New Contingent Share Certificates will be shares of the common stock of the Company rather than Old Enviroq, and (ii) the arbitration provisions contained in the Contingent Share Certificates giving the holders thereof the right to arbitrate the reasonableness of the decision to abandon the Synox Process are not contained in the New Contingent Share Certificates. Synox has issued certain promissory notes to certain directors and officers of the Company and certain of their affiliates. The aggregate amount of such indebtedness as of June 25, 1997 was approximately $1,091,179. These notes provide that interest will be deferred and paid only if and after Synox has after-tax net income and then only to the extent that the amount of interest paid does not exceed the amount of such after-tax net income; and principal will be paid after Synox has accumulated retained earnings, and then only to the extent that the payment of such indebtedness does not exceed the amount of such retained earnings. Any future transactions with officers, directors, principal stockholders, or affiliates of any officers, directors, or principal stockholders will be on terms which management believes are no less favorable to the Company than those which could reasonably be obtained from an unaffiliated party and will be subject to the approval of a majority of the disinterested directors. 28 29 ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following financial statements are filed with this report on Form 10-KSB:
Page Reference --------- Independent Auditors' Report F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7
(b) No financial statement schedules are filed with this report on Form 10-KSB. (c) The Company filed no reports on Form 8-K during the last quarter of the period covered by this report. [remainder of this page intentionally left blank] 29 30 ENVIROQ CORPORATION CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996 AND INDEPENDENT AUDITORS' REPORT 31 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 29, 1997 and March 30, 1996, 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 29, 1997 and March 30, 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE, LLP Birmingham, Alabama May 21, 1997 32 ENVIROQ CORPORATION CONSOLIDATED BALANCE SHEETS MARCH 29, 1997 AND MARCH 30, 1996
1997 1996 ASSETS CURRENT ASSETS: Cash and cash equivalents $2,379,613 $3,628,990 Accounts receivable (Note 6) 314,772 126,397 Interest receivable 7,890 License fees receivable 930 4,960 Inventories 52,830 118,390 Refundable income taxes 101,147 Prepaid expenses and other assets 23,564 34,078 ---------- ---------- Total current assets 2,872,856 3,920,705 ---------- ---------- OTHER ASSETS: Employee notes receivable 13,819 17,000 Other 17,989 ---------- ---------- Total other assets 13,819 34,989 PROPERTY, PLANT AND EQUIPMENT (Note 8): Land 310,135 310,135 Operating equipment 25,563 25,563 Other equipment and vehicles 40,241 55,048 ---------- ---------- 375,939 390,746 Less accumulated depreciation 45,506 56,402 ---------- ---------- Property, plant, and equipment, net 330,433 334,344 ---------- ---------- TOTAL $3,217,108 $4,290,038 ========== ==========
F-2 33 ENVIROQ CORPORATION CONSOLIDATED BALANCE SHEETS MARCH 29, 1997 AND MARCH 30, 1996
1997 1996 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LAIBILITIES: Accounts payable and accrued expenses $ 69,292 $ 165,753 Salaries, wages and related taxes 18,824 9,814 Income taxes payable (Note 2) 958 1,040,504 ----------- ------------ Total liabilities 89,074 1,216,071 ----------- ------------ COMMITMENTS AND CONTINGENCIES (Note 4) STOCKHOLDERS' EQUITY (Notes 1 and 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 (3,072,707) (3,126,774) ----------- ------------ Total stockholders' equity, net 3,128,034 3,073,967 ----------- ------------ TOTAL $ 3,217,108 $ 4,290,038 =========== ============
See notes to consolidated financial statements. F-3 34 ENVIROQ CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996
1997 1996 REVENUES (Note 6) $ 1,338,807 $ 1,116,930 COST OF REVENUES 738,666 698,498 ----------- ----------- GROSS PROFIT 600,141 418,432 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 5) 759,418 931,151 IMPAIRMENT OF LONG-TERM ASSETS (Note 8) 1,331,048 ----------- ----------- LOSS FROM OPERATIONS (159,277) (1,843,767) ----------- ----------- OTHER INCOME: Interest 136,958 67,780 Gain on settlement of litigation (Note 7) 3,852,000 Other, net 4,587 32,997 ----------- ----------- 141,545 3,952,777 ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (17,732) 2,109,010 INCOME TAX (EXPENSE) BENEFIT (Note 2) 71,799 (1,040,504) ----------- ----------- NET INCOME $ 54,067 $ 1,068,506 =========== =========== NET INCOME PER SHARE $ 0.05 $ 1.06 =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING 1,009,377 1,009,377 =========== ===========
See notes to consolidated financial statements F-4 35 ENVIROQ CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996
Additional Common Paid-In Accumulated Stock Capital Deficit Total BALANCE, MARCH 25, 1995 $ 10,094 $6,190,647 $(4,195,280) $2,005,461 Net income 1,068,506 1,068,506 ---------- ---------- ----------- ---------- BALANCE, MARCH 30, 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 ========== ========== =========== ==========
See notes to consolidated financial statements. F-5 36 ENVIROQ CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996
1997 1996 OPERATING ACTIVITIES: Net income $ 54,067 $ 1,068,506 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 8,715 92,549 Amortization 17,989 86,002 Impairment of long-term assets 1,331,048 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 (188,375) (108,026) Interest receivable 7,890 (7,890) License fees receivable 4,030 19,100 Inventories 65,560 (24,014) Refundable income taxes (101,147) Prepaid expenses and other assets 514 12,621 Employee notes receivable 3,181 Accounts payable and accrued expenses (96,462) 125,457 Salaries, wages and related taxes 9,010 4,208 Income taxes payable (1,039,546) 1,040,504 Accrued organizational costs (517,000) Other (25,052) ----------- ---------- Net cash provided by (used in) operating activities (1,246,574) 3,098,013 ----------- ----------- INVESTING ACTIVITIES: Decrease in other assets 43,865 Proceeds from sale of property, plant and equipment 2,000 Additions to property, plant and equipment (4,803) (18,057) ----------- ---------- Net cash provided by (used in) investing activities (2,803) (25,808) ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,249,377) 3,123,821 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,628,990 505,169 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,379,613 $3,628,990 =========== ===========
See notes to consolidated financial statements. F-6 37 ENVIROQ CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - Enviroq Corporation was incorporated on February 9, 1995 (the "Company"). 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. The Synox process relates to the treatment of municipal wastewater biosolids. During fiscal 1996, management elected to minimize the development stage activities of Synox (see Note 8). FISCAL YEAR - The Company's 1997 and 1996 fiscal years ended on March 29, 1997 and March 30, 1996, respectively. Fiscal years 1997 and 1996 included 52 weeks. PRINCIPLES OF CONSOLIDATION - These consolidated financial statements are presented as if the Company had existed as of March 1994. These financial statements include the historical financial statements of Synox and Sprayroq, wholly-owned and 50% owned subsidiaries of the Company effective April 18, 1995, respectively, as if the operations included herein had been operating as one entity for the periods presented. They include, at their historical amounts, the assets, liabilities, revenues and expenses directly related and those allocated to the businesses which comprise the Company's operations. Any transactions between Synox and Sprayroq are eliminated in these consolidated financial statements. 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. F-7 38 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. Repairs and maintenance costs are charged to expense as incurred. RESEARCH AND DEVELOPMENT COSTS - Research and development costs are expensed as incurred. Such costs were $22,798 (1997) and $28,172 (1996). LICENSE FEES - 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. NET INCOME PER SHARE - The Company's net income per share is based on the weighted average number of shares of common stock outstanding during the year. NEW ACCOUNTING STANDARDS NOT YET ADOPTED - Statement of Financial Accounting Standards No. 128, Earnings Per Share, will require the presentation of basic and diluted net income per share. Basic net income per share excludes common stock equivalents such as options, while diluted net income per share considers the possible effect of all common shares which can be potentially issued. The Statement will be effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Early adoption of this Statement is not permitted. The Company expects the impact of this Statement to be immaterial. 2. INCOME TAXES Income tax (expense) benefit for the years ended March 29, 1997 and March 30, 1996 is current. The differences between the income tax (expense) benefit and income taxes computed using the federal statutory rate are as follows:
1997 1996 Income tax (expense) benefit as federal statutory rate $ 5,059 $ (717,000) State income taxes, net of federal tax benefit (1,019) (85,000) Losses producing no current tax benefit Write-down of Synox intangible producing no tax benefit (318,000) Benefit of operating loss carryforwards 71,796 66,000 Nondeductible expenses (6,116) (3,000) Other 2,079 16,496 ------- ----------- Income tax (expense) benefit $71,799 $(1,040,504) ======= ===========
The types of temporary differences and their related tax effects are summarized as follows:
1997 1996 Long-term asset: Net operating loss carryforwards $ 25,803 $ 75,000 Valuation allowance (25,803) (75,000) -------- --------- Net asset $ - $ - ======== =========
F-8 39 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. In accordance with provisions of the Internal Revenue Code, this treatment allowed Old Enviroq to avoid taxable gains on the merger transaction (see Note 1). At March 29, 1997, Synox had a remaining net operating loss carryforward of approximately $75,000 which, if not utilized, will expire in 2010. 3. RETIREMENT AND INCENTIVE PLANS Subsequent to April 18, 1995, the Company formed a retirement plan for its employees pursuant to Section 401(k) of the Internal Revenue Code. Certain previous participants of the Old Enviroq 401(k) retirement plan rolled over into this plan. 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 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. F-9 40 4. COMMITMENTS AND CONTINGENCIES Synox is the exclusive licensee of certain technology and know-how under a license agreement with an organization controlled by a stockholder of the Company. The agreement currently covers 15 states in the license territory and grants an option to acquire additional territory on a payment of a prepaid royalty. The option rights expire December 31, 1997. Under the terms of its license agreement, 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. On December 20, 1996, the license agreement was amended to change the expiration date of the license and to provide that no minimum royalty payment would be due on January 1, 1997. The minimum annual royalties (based upon retaining the 15 states currently under the agreement) resume on January 1, 1998 in accordance with the following schedule: Due Date Amount January 1, 1998 90,336 January 1, 1999 180,671 January 1, 2000 through 2007 180,671 January 1, 2001 through 2008 225,839 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 ($767,376 at September 30, 1991 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. 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 The Company's insurance (other than its employee insurance) is provided through an insurance agency controlled by stockholders of the Company. For fiscal years 1997 and 1996, the Company paid this agency approximately $2,000 and $58,000, respectively. During fiscal years 1997 and 1996, the Company paid approximately $8,000 and $4,000, respectively, to a marketing and public relations company controlled by a family member of stockholders of the Company. 6. SIGNIFICANT CUSTOMERS The Company had sales transactions with four unrelated customers which accounted for approximately 92% and 95% of total sales in fiscal 1997 and 1996, respectively. Trade accounts receivable included approximately $303,000 and $114,000 due from these customers at March 29, 1997 and March 30, 1996, respectively. F-10 41 7. LITIGATION SETTLEMENT In March, 1996 the Company reached an agreement (the "Settlement Agreement") with Insituform MidAmerica, Inc. ("IMA") and Insituform Technologies, Inc. ("ITI") to settle all claims and counterclaims made, or that could have been made, by the parties in the lawsuit filed by the Company against IMA (the "Lawsuit"). Enviroq received $3,335,000 in cash and was relieved of its $517,000 note payable to IMA as payment in full for the Settlement Agreement, which includes the Subordinated Promissory Note ("Note") and the Consulting Agreement dated April 18, 1995 between Enviroq and IMA. The Note and the Consulting Agreement, which arose out of the merger agreement between the Company and IMA (the "Merger Agreement"), had not been recorded by the Company because of their contingent and uncertain nature. In the Settlement Agreement, Enviroq released IMA and ITI, subject to limited exceptions, from all claims that Enviroq had or may have had or may have against IMA or ITI arising out of the Note or the Merger Agreement, and claims that were or could have been asserted by Enviroq in the Lawsuit. In the Settlement Agreement, IMA and ITI released Enviroq, subject to limited exceptions, from all claims that they had or may have against Enviroq arising out of the Note or the Merger Agreement, including any claim with respect to the Expense Deficit (as defined in the Merger Agreement) and claims that were or could have been asserted by IMA or ITI in the Lawsuit. Accordingly, the Company's 1996 consolidated statement of income includes a $3.85 million gain as a result of this settlement. 8. IMPAIRMENT OF ASSETS During the fourth quarter of fiscal 1996, management elected to minimize the development stage activities of the Synox subsidiary. This decision was based in part on the fact that future cash flows cannot be anticipated in the current environment. Accordingly, the Company recorded a write-down of $1,331,048 related to impairment of the long-term assets of Synox. The excess of Old Enviroq's basis in Synox over the underlying net asset value had been pushed down to Synox and recorded as an intangible, which was being amortized over 15 years using the straight-line method. This impairment includes a write-off of the entire unamortized intangible balance of $586,012 and a $745,036 write-down of property, plant and equipment. * * * * * F-11 42 The following exhibits are filed as part of this Form 10-K or are incorporated herein by reference, and this list comprises the Exhibit Index. Description of Exhibit Item 3.01 Certificate of Incorporation of New Enviroq Corporation. Exhibit 3.01 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 3.02 Certificate of Amendment to Certificate of Incorporation of New Enviroq Corporation. Exhibit 3.02 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 3.03 Bylaws of New Enviroq Corporation. Exhibit 3.03 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 4.01 Certificate of Designation of Rights and Preferences of Series A Preferred Stock. Exhibit 4.01 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995 , is incorporated herein by reference (Commission File No. 0-25528). 4.02 Form of Certificate of Common Stock. Exhibit 4.02 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 4.03 Form of Certificate of Series A Preferred Stock. Exhibit 4.03 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.01 Merger Agreement between Enviroq Corporation, New Enviroq Corporation, Insituform Mid-America, Inc. and IMA Merger Sub, Inc. dated as of November 2, 1994. Exhibit 10.01 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.02 Form of Consulting Agreement between New Enviroq Corporation and Insituform Mid-America, Inc. Exhibit 10.02 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 30 43 10.03 Form of Covenant Not to Compete Agreement between New Enviroq Corporation, Insituform Mid-America, Inc., Marinelli Securities Associates, and SCE, Inc. Exhibit 10.03 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.04 License Agreement between Synox Corporation and Long Enterprises, Inc. dated May 26, 1986, together with amendments dated May 16, 1991 and October 5, 1994. Exhibit 10.05 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.05 Shareholder Agreement between Sprayroq, Inc. Enviroq Corporation, and Replico Development Company, Inc. dated March 25, 1992. Exhibit 10.06 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.06 License Agreement dated May 22, 1992, between Sprayroq, Inc. and Enviroq Services, Inc. Exhibit 10.07 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.07 License Agreements dated June 12, 1994, between Sprayroq, Inc., Toa Grout Kogyo Company, LTD., and Sprayroq, Inc., and Mitsui Toatsu Chemicals, Inc. Exhibit 10.08 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.08 Amended and Restated Promissory Notes dated September 27, 1991 and issued by Synox Corporation in favor of Charles A. Long, Jr. in the principal amounts of $6,000, $6,000, $6,000, $3,000, $6,000, and $6,000, respectively. Exhibit 10.09 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.09 Amended and Restated Promissory Notes dated September 27, 1991 and issued by Synox Corporation in favor of Long Enterprises, Inc. in the principal amount of $3,000. Exhibit 10.10 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.10 Amended and Restated Promissory Notes dated September 27, 1991 and issued by Synox Corporation in favor of Sullivan, Long and Hagerty, Inc. in the principal amounts of $132,000, $17,020, $22,000, $11,000, $11,000 31 44 $11,000 $22,000, $11,000, $22,000, and $22,000, respectively. Exhibit 10.11 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.11 Amended and Restated Promissory Notes dated September 27, 1991 and issued by Synox Corporation in favor of Orlando M. Marinelli in the principal amounts of $66,000, $8,510, $11,000, $5,500, and $1,000, respectively. Exhibit 10.12 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.12 Amended and Restated Promissory Notes dated September 27, 1991 and issued by Synox Corporation in favor of Antonio M. Marinelli in the principal amounts of $66,000, $8,510, $11,000, $5,500, and $1,000, respectively. Exhibit 10.13 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.13 Amended and Restated Promissory Notes dated September 27, 1991 and issued by Synox Corporation in favor of Road Machinery, Inc., in the principal amounts of $22,000, $11,000, $11,000, $11,000 and $10,000, respectively. Exhibit 10.14 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.14 Amended and Restated Promissory Notes dated September 27, 1991 and issued by Synox Corporation in favor of Micam Industries, Inc., in the principal amounts of $11,000, and $11,000 respectively. Exhibit 10.15 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.15 Amended and Restated Promissory Notes dated September 27, 1991 and issued by Synox Corporation in favor of Marinelli Securities Associates in the principal amount of $10,000. Exhibit 10.16 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.16 Non-Employee Director Stock Option Plan of the Company, as amended. Exhibit 10.17 to the Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.17 Incentive Stock Option Plan of the Company. Exhibit 10.18 to the 32 45 Company's Registration Statement on Form 10-SB/A2 dated April 12, 1995, is incorporated herein by reference (Commission File No. 0-25528). 10.18 Mutual Release and Settlement Agreement dated March 12, 1996 by and between the Company, Insituform Mid-America, Inc. and Insituform Technologies, Inc. Exhibit 10.18 to the Company's annual report on Form 10-KSB dated June 26, 1996 is incorporated herein by reference (Commission File No. 0-25528). 10.19 Promissory Note dated March 27, 1993 in the aggregate principal sum of $206,203.46 made by Sprayroq, Inc. in favor of the Company. Exhibit 10.19 to the Company's annual report on Form 10-KSB dated June 26, 1996 is incorporated herein by reference. (Commission File No. 0-25528). 10.20 Promissory Note dated March 26, 1994 in the aggregate principal sum of $159,872.95 made by Sprayroq, Inc. in favor of the Company. Exhibit 10.20 to the Company's annual report on Form 10-KSB dated June 26, 1996 is incorporated herein by reference. (Commission File No. 0-25528). 10.21 SprayWall System License Agreement dated December 1, 1993, between Sprayroq, Inc., a Florida corporation, and Southwestern Underground Supply and Environmental Services, Inc., a Texas corporation. Exhibit 10.21 to the Company's annual report on Form 10-KSB dated June 26, 1996 is incorporated herein by reference. (Commission File No. 0-25528). 10.22 Form of SprayWall License Agreement dated January 1, 1996, between Sprayroq, Inc., a Florida corporation and Per Aarsleff A/S, a corporation organized and existing under the laws of Denmark. Exhibit 10.22 to the Company's annual report on Form 10-KSB dated June 26, 1996 is incorporated herein by reference. (Commission File No. 0-25528). 10.23 Consolidated Note dated October 21, 1996 and issued by Sprayroq, Inc. in favor of the Company in aggregate principal sum of $840,249. Exhibit 10.01 to the Company's quarterly report on Form 10-QSB dated November 5, 1996 is incorporated herein by reference (Commission File No. 0-25528). 10.24 Further Amended Agreement as of December 20, 1996 by and between Long Enterprises, Inc. and Synox Corporation. Exhibit 10.01 to the Company's quarterly report on Form 10-QSB dated February 11, 1997 is incorporated herein by reference (Commission File No. 0-25528). 21.0 Subsidiaries: 1. Synox Corporation, a Delaware corporation (100%). 2. Sprayroq, Inc., a Florida corporation (50%). 27 Financial Data Schedule 33 46 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. ENVIROQ CORPORATION Date: June 27, 1997 By: /s/ William J. Long -------------------------------- William J. Long, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ William J. Long President, Chief June 27, 1997 ------------------------------------ Executive Officer and William J. Long Director (Principal Executive Officer and Principal Financial and Accounting Officer) /s/ Charles A. Long, Jr. Director June 27, 1997 ------------------------------------ Charles A. Long, Jr. Chairman of the Board ------------------------------------ of Directors, Director, Antonio M. Marinelli Secretary/Treasurer Vice President, ------------------------------------ Orlando M. Marinelli Director /s/ Michael X. Marinelli Director June 27, 1997 ------------------------------------ Michael X. Marinelli /s/ W.T. Goodloe Rutland Director June 27, 1997 ------------------------------------ W.T. Goodloe Rutland Director ------------------------------------ Alexander P. Zechella
34 EX-27 2 FINANCIAL DATA SCHEDULE
5 U.S. DOLLARS YEAR MAR-29-1997 MAR-31-1996 MAR-29-1997 1 2,379,613 0 314,722 0 52,830 2,872,856 375,939 45,506 3,217,108 89,074 0 0 0 10,094 3,117,940 3,217,108 1,338,807 1,338,807 738,666 759,418 0 0 (136,958) (17,732) (71,799) 54,067 0 0 0 54,067 0.05 0.05
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