Edgar Filing: LIQUITEK ENTERPRISES INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB
(MARK ONE)

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2000

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For transition period from ___________ to ____________

Commission File Number 02-99110

LIQUITEK ENTERPRISES, INC.
(Name of Small Business issuer in its charter)

NEVADA 91-1499978
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

1350 Draper Parkway
DRAPER, UTAH 84020
(Address of Principal Executive Office) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (801) 553-8785

-----------------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Name of each exchange
Title of each class on which registered:
------------------- ---------------------
None None

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK -- $.001 PAR VALUE
(Title of class)

Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter 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 pursuant to Item 405
of Regulation S-B contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-KSB. /X/

The registrant had net revenues for the fiscal year ended December 31,
2000, of $979,354.

The aggregate market value of the Common Stock held by non-affiliates of
the registrant on December 31, 2000 was approximately $34.6 million based upon
the average of the bid and asked prices of the Common Stock, as reported by the
National Quotation Bureau, LLC.

The number of shares of Common Stock of the registrant outstanding as of
December 31, 2000 was 38,126,737. Another 11,359,593 restricted shares of
Common Stock of the registrant have been issued in connection with the
exchange of shares with common stockholders of Distech Limited in a tax-free,
stock-for-stock reorganization, but such issuance has not been reflected in
the registrant's December 31, 2000 financial statements because of
contingencies in the acquisition transaction. Subsequent to December 31,
2000, the registrant issued 4,840,407 additional restricted shares of Common
Stock in acquiring the remaining 29% interest in Distech Limited.

DOCUMENTS INCORPORATED BY REFERENCE

Our Proxy Statement is hereby incorporated by reference into Part III
hereof. We anticipate that this document will be filed within 120 days from the
close of our fiscal year for 2000.

Transitional Small Business Disclosure Format (check one):

Yes / / No /X/

PART I

All statements, other than statements of historical fact, included in this
Form 10-KSB, including the statements under "Management's Discussion and
Analysis," are, or may be deemed to be, "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). Such forward-looking statements involve assumptions, known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performance, or achievements expressed or implied by such statements
contained in this Form 10-KSB. Such potential risks and uncertainties include,
without limitation, competitive technology advancements and other pressures from
competitors, economic conditions generally and in our research and development
efforts, availability of capital, cost of labor (foreign and domestic), cost of
raw materials, occupancy costs, and other risk factors detailed herein and in
our filings with the Securities and Exchange Commission. We assume no obligation
to update the forward-looking statements or to update the reasons actual results
could differ from those projected in such statements. Readers are cautioned not
to place undue reliance on these forward-looking statements.

Note that some of our previous SEC filings for VitriSeal, Inc. are listed
in the Edgar database (www.sec.gov) under VitroSeal rather than VitriSeal.

ITEM 1. BUSINESS

Description of Business

The Company's operations changed dramatically in 2000. Prior thereto, we
had been focused exclusively on developing a new coating for aluminum and other
metals. With a series of acquisitions during the year, operations were
diversified to include antifreeze recycling and water treatment systems for
purification, reclamation and decontamination. A more detailed description of
each of these businesses is presented below, and a detailed description of each
acquisition is presented below under the heading "Acquisitions and Name
Changes."

A further major change during the year was accomplished through the hiring
of Lester W. B. Moore as Chief Executive Officer. Mr. Moore came to the Company
with successful top executive experience in operating several businesses, among
them the most popular tourist attraction in the state of Hawaii and a major
food service company. Mr. Moore implemented a strong planning regimen upon
coming aboard in August 2000. He also brought about changes in top level
management personnel for the Company's subsidiaries.

Reorganization

The legal entity today known as Liquitek Enterprises, Inc. (the "Company"
or "LEI") has existed under three names over the past few years. The present
name was adopted in July 2000 after the acquisitions of Thermoflow Corporation
("Thermoflow") and Liquitek Corporation ("LC") when the predecessor name,
VitriSeal, Inc., was deemed no longer descriptive of a company with operations
more broadly based than just metals coating. See "Acquisitions and Name Changes"
below. The name VitriSeal, Inc., in turn, had been adopted in 1999 upon
completion of a "reverse acquisition" of Dancor, Inc. ("Dancor"), a Delaware
corporation, by AXR Development Corporation, Inc. ("AXR"), a Nevada corporation.

The acquisition of Dancor by AXR, consummated on March 18, 1999, was
accomplished through a tax-free, stock-for-stock reorganization. At that time,
AXR was a dormant entity with no material assets, no

significant operations and no revenues since 1989. Dancor was a development
stage company engaged in research and development of a new coating process for
aluminum and other metals. The acquisition was accounted for as a capital stock
transaction as opposed to a "business combination" as that term is defined by
generally accepted accounting principles. Thus, the reorganization is reported
in the financial statements as a re-capitalization with Dancor considered the
acquirer for accounting purposes and AXR the acquirer for legal entity purposes
(a "reverse acquisition"). Until March 18, 2000, the stock issued to the
shareholders in Dancor, Inc. was restricted as "Rule 144 stock" as it is not
registered under the Securities Act.

The Company's common stock trades on the Nasdaq OTC Bulletin Board under
the symbol "LQTK."

Metal Coating Business

When the name of the publicly traded company was changed to Liquitek
Enterprises, Inc., the former name, VitriSeal, Inc., was adopted by the
wholly-owned subsidiary previously known as Dancor. VitriSeal, Inc.
("VitriSeal") now refers to the Company's subsidiary corporation engaged in the
metal coating business.

VitriSeal's focus is exclusively on the VitriSeal(TM) process, a patented
process based on inorganic silicate chemistry that makes bright, clear,
corrosion-protective coatings on metal surfaces at a lower cost than other clear
coatings. VitriSeal(TM), a waterborne coating, has little to no organic vapor
emissions and creates minimal waste during the normal process operation.
Accordingly there are no abnormal regulatory impacts or special governmental
approval requirements on the VitriSeal(TM) application process, either in our
facility or in potential licensees' facilities. We believe that existing
products in the market are inferior in terms of performance, cost, and
environmental impacts, giving VitriSeal a significant competitive advantage.

The VitriSeal(TM) coating combines many of the attributes of other types of
coatings, e.g., anodizing, chrome plating and painting. When applied to polished
aluminum, VitriSeal(TM) chemically bonds to the surface. It is hard and shiny,
similar to chrome plating. It has corrosion and weathering resistance comparable
to organic paint coatings. Further, it does not delaminate, or "creep back,"
from damage locations as chrome plating and painting do. Because this unique
combination of properties in one product has not previously been available in
the market place, and because the Company has endeavored to protect its
interests through the pursuit of appropriate patents, management believes the
VitriSeal(TM) process has substantial commercial potential.

Market opportunities in the coatings industry are vast and encompass a wide
variety of areas. Recently passed environmental regulations, escalating costs of
organic chemical raw materials, heightened expectations for performance, and
increased demand for all types of coatings have forced the industry to search
for new technologies to answer the toughest question it faces - whether or not
the industry can find a coating that simultaneously provides high performance,
low cost, and environmental friendliness. These external conditions acting on
the industry are causing an internal industry revolution that adds to the
potential for our technology.

In July 2000, we established a pilot production facility near Detroit,
Michigan, wherein automotive wheels and other aluminum products would be coated.
We also worked with an automotive after-market wheel manufacturer, which is a
leading producer of bright, polished, one-piece forged aluminum wheels, to
further refine the chemistry of the process and the mechanics of applying the
coating. These efforts led to what we believe will be a commercially viable
application process featuring uniform quality of the product and competitive
economics. The wheel manufacturer has announced its intentions to start
marketing the availability of VitriSeal(TM)-coated wheels. It has also committed
to manufacturing an initial lot of wheels to be sent to the Detroit facility for
coating. We expect this will result in the first contract-

coating revenue to the Company in the second quarter of calendar 2001. Their
announcement has stimulated inquiries from other wheel manufacturers to whom we
plan to make the process available, either on the basis of contract-coating or
on the basis of a license for use of our technology in their own production
operations.

Beyond after-market automotive wheels, we expect to provide
contract-coating services to refurbishers of medium and heavy duty truck wheels,
fabricated aluminum products, extruded aluminum products and sheet/coil aluminum
products. Over the longer term, we expect to license the use of our technology
and the trademarked "VitriSeal" name in these same industries plus the original
equipment manufacturers who supply wheels to automobile manufacturers.

The improvements and refinements in the VitriSeal(TM) process that resulted
from our on-going laboratory research during the past year afforded us the
opportunity to file in July 2000 additional patent applications that covered
state-of-matter claims. The research and development program defined for 2001
includes further support of these patent applications and other process and/or
state-of-matter applications that would incorporate what is learned during the
research process. VitriSeal has been almost exclusively a research and
development company, though we expect to commence revenue-generating activities
in 2001. Research and development expenditures over the past two fiscal years
have amounted to $719,008 in 2000 and $650,194 in 1999.

In January 1997, we retained the services of Hamlin M. Jennings, Ph.D.,
a professor at Northwestern University, as an independent contractor on a
month-to-month basis as a technical specialist to perform development work to
enable VitriSeal(TM) to be sufficiently elastomeric, or flexible, for
commercialization and to research the properties of VitriSeal(TM) and prior
art to develop a scientific explanation of the VitriSeal(TM) process. The
Company has decided to bring its research and development activities in house
and move its laboratory to the Detroit facility. Dr. Changle Liu has been
hired as an employee (see below), and Dr. Jennings has been notified that his
services as a consultant will be terminated as of April 30, 2001.

In February 2000, we hired Paul G. Kokx as Executive Vice-President and
General Manager of VitriSeal, Inc. He has an extensive background in the
automotive and aluminum industries and most recently was the operations manager
for the after-market wheel manufacturer with whom we are introducing
VitriSeal(TM) coated wheels to the market. Mr. Kokx's initial assignment was the
development of the production facility near Detroit. He was appointed President
of VitriSeal, Inc. in October 2000.

In March 2001, we added Changle Liu, Ph.D., and an additional full-time
technician to our technical staff to accelerate the realization of commercial
success from our research and development activities. Dr. Liu has extensive
experience in silicate chemistry and will head VitriSeal's research and
development activities. Through employees and contractors, we now have six
full-time and two part-time staff working for VitriSeal. None of the
employees is represented by a labor union, and we consider our relations with
our employees to be excellent.

Antifreeze Recycling Business

Through the acquisitions of Thermoflow Corporation ("Thermoflow") on May
26, 2000 and Interfluid Recycling, Inc.,a California corporation, on July 1,
2000, and the incorporation of Interfluid Environmental Services, Inc., a
Nevada corporation, on April 17, 2000, the Company entered the antifreeze
recycling business. Thermoflow operates a recycling plant in Las Vegas,
Nevada, that makes use of gravity separation, physical-chemical separation,
filtration, electro-dialysis and distillation technologies to recover
ethylene glycol ("EG") from waste antifreeze. The recovered EG is diluted to
50/50 strength with de-ionized distilled water, then mixed with corrosion
inhibitors and packaged for sale. The end product is a reformulated
antifreeze virtually indistinguishable from antifreeze made from virgin
materials. Most of the end product is sold in bulk to mines and other
large-scale

users. Product is also sold in 55-gallon drums and in one-gallon bottles for
retail distribution.

The technology employed in Thermoflow's operations was developed by one of
the founders of that company, who is now retired, but two of his sons who were
instrumental in building the business remain employed with Liquitek Corporation
(see "Water Treatment Business" below). Both Thermoflow and Liquitek operate
under a license granted by the retired founder. The license runs through the
year 2020 whereupon the technology becomes fully owned by the Company. The
license bears a royalty of .5% of sales based on the technology with a minimum
royalty of $5,000 per month.

Interfluid Recycling's business prior to the acquisition was a closed-loop
recycling service in the San Diego, California area. With a large and expanding
client base, Interfluid Recycling picked up waste antifreeze from and delivered
recycled product to auto repair shops, oil change shops, fleet operators, and
other customers. Interfluid Recycling had been owned principally by Rodney L.
Schaefer, who was also the operator of that business. Interfluid Environmental
was organized in advance of, but in anticipation of, the Interfluid Recycling
acquisition to function as the transportation arm of the antifreeze recycling
business. Since the acquisition on July 1, 2000 of Interfluid Recycling, that
company and Interfluid Environmental have been operationally one and the same
(Interfluid Recycling and Interfluid Environmental are collectively referred to
as "Interfluid"). Upon the acquisition of his company, Mr. Schaefer became the
President of Thermoflow Corporation as well as remaining President of
Interfluid.

Mr. Schaefer's primary task has been to develop and expand a stable supply
of waste antifreeze for the Thermoflow plant, then to generate additional sales
contracts to provide profitable sales outlets for the additional recycled
product. Interfluid, itself, helped on both of these fronts by directing the
waste it collected to the Thermoflow plant and by buying its recycled product
for the San Diego market from Thermoflow. Thermoflow's marketing efforts are
focused on expanding its sources of waste to be treated and outlets for its
recycled products.

Several physical changes at the Thermoflow facility were necessary to
increase revenues. In addition to acquiring the closed-loop operation, we
acquired two over-the-road trucks and four trailers (5,000 gallon tankers) to
accommodate the hauling of waste and finished product, which makes us more
competitive in both markets. Further, we expanded the storage at the Las Vegas
plant for both waste and finished product, thus allowing continuous production
flow through the plant. Finally, we added a tanker washout facility on the plant
premises to alleviate a threat to our business from the potential shutdown (for
infringement of environmental regulations) of a nearby truck stop.

The Thermoflow plant is also capable of treating/recycling other
contaminated liquids, including wastewater. Management is exploring the
possibility of treating wastewater at the Las Vegas facility in a manner that
uses the capacity of the physical-chemical (PC) equipment while the slower
throughput electro-dialysis equipment is processing antifreeze that has already
been processed through the PC system.

With the foregoing advances in the state of Thermoflow's operations, we are
becoming more competitive throughout a broad region. There are no other
antifreeze recycling processors in the Las Vegas area, but there are major
processors in the Los Angeles and San Francisco areas. We have to compete for
both product and customers in those areas where competition is intense. Our
transportation arm has allowed us to compete more effectively. We also attempt
to differentiate ourselves from competition on the bases of higher quality end
product, environmental friendliness in our operations and better service to our
customers.

Thermoflow has an excellent record with the State of Nevada for maintaining
compliance with environmental regulation. We are closely monitored with periodic
inspections of our operations, none of which has given rise to any negative
consequences. By the nature of its business, Thermoflow not only operates clean
itself, but also makes an important

contribution to improving the environment and fostering beneficial re-use of
resources. For the long-term expansion plans of the business, further
development of government regulation of antifreeze disposal is likely to expand
the opportunities for our business.

While our other businesses have been and remain highly oriented to research
and development, Thermoflow has gone beyond that stage. Its expenditures for
research and development over the past two fiscal years have been immaterial.
While there will be some testing of minor modifications to the electro-dialysis
process in 2001, research and development expenditures are again expected to
play a very minor role in the financial results.

Thermoflow and Interfluid together employ 14 people full time, none of whom
is represented by a labor union. We consider our relations with our employees to
be excellent.

Water Treatment Business

The Company's initial venture into the water treatment business came with
the acquisition of Liquitek Corporation ("LC") on May 26, 2000. LC was
previously owned 50% by Thermoflow and 50% by EET Corporation, an environmental
health, safety and information service consultancy based in Knoxville,
Tennessee. As noted for Thermoflow, some of LC's technologies are being used
under a license granted by a founder of the business. The $5,000 per month
minimum royalty noted above is being shared equally by the two subsidiaries.

LC has licensed a proprietary oily wastewater treatment system to Hawaii's
largest oil recycling company. LC has also developed a proprietary, small-scale
system for reclaiming water from car washes, laundries and parts cleaning
applications. In conjunction with a Japanese customer, this system is being
tested for use in an environment where water conservation is of great regulatory
importance. Finally, LC is working with a paper recycling plant in Mexico to
develop a water treatment system that will minimize the draw of fresh water from
a river for plant operations and decontaminate the waste that is dumped
downstream back into the river.

The foregoing examples demonstrate the offerings that LC has for its
customers: (1) licenses and equipment sales for technologies that treat large
volumes of contaminated fluids, (2) sales of standardized equipment packages for
smaller volumes of contaminated fluids, and (3) engineering services for
solutions to non-standard applications. They also exemplify LC's contributions
to solving environmental problems rather than creating them.

With the present on-going revenue stream for LC limited to just the Hawaii
license, there is clearly an existing dependence on a very small customer base.
The Company's 2001 Operating Plan is oriented to alleviating that condition. The
Hawaii system can be replicated in other waste processing facilities anywhere in
the world, and the other systems also have the potential for world-wide
application. Management believes 2001 will be a breakthrough year with sales of
multiple products and services to a variety of customers.

The technologies employed by LC are largely derived from those used by
Thermoflow in the antifreeze recycling business: gravity separation,
physical-chemical separation, filtration, electro-dialysis and distillation.
These technologies, plus the Distech technology described below, constitute
complementary solutions to a variety of liquid separation and purification
problems, including industrial wastewater, drinking water, ultra-pure water and
desalination.

The operation of the larger scale water treatment systems is usually
subject to regulation by state and/or local authorities. As the end products are
dry solids that can be burned or incorporated into road beds and relatively
clean water that can be disposed of through sewer systems, regulation of our
operations has not been a threat to the well being of our business. Again, we
are a contributor to a healthy environment, not a cause of an unhealthy
environment.

A second venture into the water treatment business has come through the
acquisition of Distech Limited, a New Zealand corporation ("Distech"). Distech
has developed unique, fail-safe, state-of-the-art, sub-atmospheric water
distillation technology. The equipment incorporates vacuum distillation for low
temperature evaporation and vapor compression for efficient recycling of heat
energy. The result is a cost-efficient system for producing high-purity water in
commercial quantities. Several of Distech's technical innovations are protected
by international patents. Management believes that features such as automatic
clean-in-place (to protect against the adversities of scaling), remote system
management over telecommunication links, minimal pre-treatment requirements,
compact size, small footprint and competitive pricing portend a strong position
for this equipment.

The Distech technology is expected to be useful in water bottling,
recycling, desalination and ultra-pure water situations. Perhaps the biggest
potential for the equipment rests with groundwater remediation applications.
Late last year, the equipment was tested by a nationally recognized laboratory
to assess its efficacy in removing MTBE, other fuel oxygenates, TCE, PCE and
other contaminants where leaks have occurred that threaten contamination of
public drinking water supplies. Laboratory tests were very favorable. Using an
artificially created test solution with an abnormally high contaminant content,
the Distech equipment removed approximately 99% of the contaminant. Additional
testing is underway with samples from a live contamination site being processed
in the laboratory and preparations for field testing at the contamination site
being completed. The equipment may provide significant cost savings in cleaning
up contaminated sites that plague municipalities, oil companies and service
station operators wherever MTBE has been used.

Research and development activities continue to be an important part of the
business of this subsidiary. Over the past two years, nearly all of Distech's
operations have been focused on research and development. The Company's 2001
Operating Plan calls for further investment in research and development on the
order of $1.4 million. These funds will be used to broaden the product line, and
thereby the range of potential customers, as well as to adapt existing equipment
designs to specific applications for which minor modifications are necessary.

There is an obvious overlap of markets between LC and Distech. The suite of
complementary technologies is expected to offer us a competitive solution for
multiple water treatment situations. It is expected that eventually the two
companies will be merged into a single legal entity. In the meantime, both
companies are under the operational direction of a single President, Kent H.
Price. Mr. Price has had extensive general management and international business
experience in a variety of industries with privately held and Fortune 100
companies. He is a certified manufacturing engineer with a strong background in
manufacturing operations.

The water treatment companies together employ 16 full-time personnel. They
also make use of an extensive network of consultants in various capacities. The
in-house staff is primarily dedicated to research and development work and some
final assembly production. Fabrication of components is subcontracted to
suppliers until sales volumes warrant a change. None of these employees is
represented by a labor union. We consider our relations with our employees to be
excellent.

Acquisitions and Name Changes

On May 26, 2000, we completed the acquisitions of Thermoflow Corporation
and Liquitek Corporation. In conjunction with the acquisitions, we issued
9,661,500 shares of restricted common stock for all the shares of Thermoflow
Corporation and 5,000,000 restricted shares for the 50% of the shares of
Liquitek Corporation not owned by Thermoflow Corporation. In addition, we issued
398,500 common stock purchase warrants in

replacement of outstanding Thermoflow Corporation warrants. Thereupon,
Thermoflow Corporation and Liquitek Corporation became wholly owned subsidiaries
of the Company.

On July 1, 2000, we completed the acquisition of Interfluid Recycling, Inc.
In conjunction with that acquisition, we issued 200,000 shares of restricted
common stock and paid $50,000 cash in exchange for all of the outstanding shares
of Interfluid Recycling, Inc. Thereupon, Interfluid Recycling, Inc. became a
wholly owned subsidiary of the Company. In connection with this tax-free
transaction, the Company executed an employment agreement with Mr. Schaefer, the
former majority stockholder of Interfluid Recycling, Inc. The employment
agreement, which is scheduled to expire in June 2003, provides for a minimum
annual salary of $120,000 plus certain benefits. During the period ending two
years after termination of his employment, Mr. Schaefer has agreed to comply
with certain non-compete covenants included in the employment agreement.

On July 31, 2000, we changed our name from VitriSeal, Inc. to Liquitek
Enterprises, Inc. because of our recent expansion through the aforementioned
acquisitions of Thermoflow Corporation, Liquitek Corporation and Interfluid
Recycling, Inc. Our stock symbol was also changed from "VTSL" to "LQTK" in
conjunction with the name change. The name change was implemented to reflect our
ownership of a suite of complementary technologies we can use to solve a variety
of liquid separation and purification problems, including industrial wastewater,
drinking water, ultra pure water, and desalination solutions. We also changed
the name of Dancor, Inc., one of our wholly-owned subsidiaries, to VitriSeal,
Inc. to identify with its VitriSeal(TM)-branded coating process.

Except for certain contingencies that remain unfulfilled as of the date of
this filing, on November 30, 2000, Liquitek Enterprises, Inc. acquired from six
shareholders of Distech Limited, holding among them 71% of the equity securities
issued by Distech Limited, all of their interests in Distech Limited on the
basis of three Liquitek Enterprises, Inc. restricted securities for every one
Distech Limited security. A subsequent takeover offer was extended to the
remaining shareholders, as required under New Zealand securities law, on the
same terms. This offer was accepted by the remaining shareholders by February
12, 2001. Hence, Liquitek Enterprises, Inc. now owns 100% of the equity
securities of Distech Limited. The acquisition has not been reflected, either at
December 31, 2000 or subsequent thereto, in the records of Liquitek Enterprises,
Inc. because of the aforementioned contingencies. In particular, the former
Distech Limited shareholders have the right to rescind their stock exchanges if
Liquitek Enterprises, Inc. does not raise US$5,000,000 of fresh equity by
September 30, 2001. So long as this contingency remains, Liquitek Enterprises,
Inc. will control the operations of Distech Limited, but will not record the
acquisition nor consolidate Distech's results with its other operations in its
financial reporting. As of December 31, 2000, the Company had advanced $620,000
in working capital to Distech. A receivable for these advances is shown in the
financial statements included with this report.

Another element of contingency with respect to the Distech acquisition
concerns approximately 1,640,000 shares of the Company's restricted common
stock that are included in the 16,200,000 share consideration for 100% of the
equity interests in Distech, but are being held in escrow as collateral for
an indemnity agreement provided to the Company by a former Distech
stockholder/officer/director. The indemnity agreement regards any losses or
claims that may arise within a specified time period concerning Distech's
intellectual property. Under certain circumstances, these escrowed shares may
be released in December 2001 and December 2002.

Insurance

Liquitek Enterprises, Inc. maintains general liability, umbrella, directors
and officers liability, property and vehicle insurance policies. Management
believes that the insurance in place will be adequate for our anticipated
immediate and near future needs.

ITEM 2. DESCRIPTION OF PROPERTY

The Company's principal executive offices are located at 1350 East
Draper Parkway, Draper, Utah. We share offices with HydroMaid International,
Inc., Lighthouse, Inc. and other interests of Culley W. Davis, the Chairman
of the Company and owner of the property where the offices are located. Our
present occupancy is for approximately 3,600 square feet of fully furnished
offices at a monthly rental of $7,200.

We renewed a lease that now expires April 15, 2001, for a business office
located at 1101 Dove Street, Suite 235, Newport Beach, California, containing
approximately 720 square feet with a monthly rental of $1,291. We have advised
the landlord that we will not be renewing this lease after its expiration.
Nevertheless, we believe we have a good relationship with the landlord and can
remain in the facility for the term of the lease.

We relocated the laboratory facility at Northwestern University to leased
premises at 1880 Oak Avenue, Evanston, Illinois. The new facility contains
approximately 4,017 square feet and bears a monthly rental, all costs included,
of $11,524. This lease expires May 31, 2005. With the termination of the
consulting services of Dr. Hamlin Jennings noted above (see Item 1, "Business -
Metal Coating Business"), the Company will put this space on the market and
consolidate its laboratory and pilot production facilities in the Detroit area.

VitriSeal, Inc. also leased new space at 3170 Oakley Park Road, Commerce
Township, Michigan in the Detroit area for the pilot production plant undertaken
in 2000. This facility contains approximately 6,000 square feet and bears a
monthly rental of $3,750. This lease expires June 30, 2005.

Thermoflow Corporation owns adjoining properties at 4000 Arcata Way and
4020 Arcata Way, North Las Vegas, Nevada. The property at 4000 Arcata Way houses
the Thermoflow plant and administrative offices in a 9,228 square foot light
industrial building, which is owned free and clear. The property at 4020 Arcata
Way has a 3,844 square foot warehouse situated thereon and is also owned free
and clear. The property at 4000 Arcata Way was purchased in December 2000 by
exercising an option that was part of the then-prevailing lease on that
property. The exercise price on the option was $534,100. The building was deemed
to have a market value more than $100,000 in excess of that price at that time.

Liquitek Corporation operates in leased space at 4040 Arcata Way, North Las
Vegas, Nevada. The property contains a 7,294 square foot industrial building
used for administrative offices, warehouse space and assembly production space.
The monthly rental on this property is $2,856. This lease expires May 31, 2005.

Distech Limited operates in leased space at 62 Lunn Avenue, Mt. Wellington,
Auckland, New Zealand. The rental property consists of a 6,308 square foot unit
within a light industrial complex, together with common area rights. It is used
for administrative offices, a research facility and final assembly. The monthly
rental on this property is approximately US$2,180 plus the New Zealand GST
(i.e., Goods & Services Tax, a value added tax). The lease expires January 15,
2003.

Liquitek Corporation is the sub-sub-lessee of space in Building K-1035 of
the East Tennessee Technology Park in Oak Ridge, Tennessee. This building is
owned by the U. S. Department of Energy and is leased to the Community Reuse
Organization of East Tennessee (CROET). CROET

sub-leased space to EET Corporation, the former owner of 50% of Liquitek
Corporation, and EET sub-sub-leased 17,600 square feet to Liquitek Corporation
at a time when they planned to build a Thermoflow-type plant in this facility.
The monthly rent is $4,400. Current plans do not call for any of the Company's
operations to use this space. We are working with CROET and EET to re-lease this
space and to eliminate any further obligations for the Company and/or any of its
subsidiaries.

ITEM 3. LEGAL PROCEEDINGS

We are unaware of any actual, threatened, or planned legal actions against
us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to the stockholders for vote during the fourth
quarter of 2000.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Common Stock

The following table sets forth, for the period from February, 1999, through
March 19,2001, the high and low bid quotations each quarter for the Common Stock
as reported by National Quotation Bureau, LLC. Our stock was not actively traded
during the two years before March, 1999, but now trades on the NASDAQ OTC
Bulletin Board under the symbol "LQTK." The prices represent quotations between
dealers, without adjustment for retail markup, mark down or commission, and do
not necessarily represent actual transactions.

Common Stock Price

High Low
---- ---

2001
----
1st Quarter $1.8125 $1.0000

2000
----
1st Quarter 9.5000 2.0000
2nd Quarter 3.6250 1.1250
3rd Quarter 3.4375 1.7500
4th Quarter 3.0625 1.0000

1999
----
1st Quarter 3.7500 1.8750
2nd Quarter 2.8750 1.7500
3rd Quarter 1.9375 0.8750
4th Quarter 2.3750 0.7500

We have not paid any cash dividends on our Common Stock since our
incorporation and anticipate that, for the foreseeable future, earnings, if any,
will continue to be retained for use in our business. As of December 31, 2000,
we had approximately 708 shareholders of record.

Recent Sales of Unregistered Securities

Since the March 18, 1999 reorganization described in Item 1, Business -
Reorganization, the Company has issued securities as described below.

On January 5, 2000, 285,714 shares of restricted common stock were issued
to Culley W. Davis, the CEO of the Company at that time, for a cash payment of
$500,000 in a private placement transaction. The pricing for this transaction
represented a 15% discount from the prevailing market price on the date of the
transaction.

To bring further cash into the Company in anticipation of the acquisitions
we expected to be completing within the next few months, we undertook a private
offering. This offering was for up to 2,500,000 restricted shares of our common
stock at the price of $3.00 per share. The offering was made pursuant to an
exemption under Rule 506 of Regulation D of the Securities Act of 1933. From
January through March 2000, the offering yielded approximately $5.5 million net
on the sale of approximately 2.1 million shares.

In December 2000, in an agreement to eliminate the Company's obligation for
a 1% royalty on sales based on the VitriSeal technology, 35,000 shares of
restricted common stock were issued to Dr. Rodney Hanneman, a consultant to
VitriSeal, out of the 100,000 shares for which he held vested options, with the
Company forgiving the $1.75 exercise price on the issued shares in consideration
of the elimination of the royalty.

As noted in Item 1, Business - Acquisitions and Name Changes, additional
shares of the common stock of the Company were issued in connection with the
reorganizations whereby Thermoflow Corporation, Liquitek Corporation,
Interfluid Recycling, Inc. and Distech Limited were acquired. The Thermoflow
and Liquitek acquisitions, which occurred in May 2000, resulted in the
issuance of 14,661,500 shares of restricted common stock and 398,500 warrants
to purchase additional shares of stock. The Interfluid acquisition, which
occurred in July 2000, resulted in the issuance of 200,000 shares of
restricted common stock. The first phase of the Distech acquisition, whereby
approximately 71% of the equity interests in Distech were acquired from six
of its shareholders, was completed on November 30, 2000 and resulted in the
issuance of 11,359,593 shares of restricted common stock plus 144,066
warrants for the purchase of additional shares of restricted common stock.
The offering to the remaining Distech shareholders was 100% subscribed as of
February 12, 2001 and resulted in the issuance of 3,980,511 shares of
restricted common stock, 646,830 warrants and 69,000 options for the purchase
of additional shares of restricted common stock. None of the Distech-related
issuances is reflected in the December 31, 2000 financial statements as they
are subject to rescission until certain contingencies are removed.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this report.

Results of Operations

The comparisons of fiscal year 2000 and fiscal year 1999 presented in this
section must be understood in the context of the acquisitions accomplished in
2000. The year 2000 includes twelve months' operations of VitriSeal, Inc., seven
months' operations for Thermoflow Corporation

and Liquitek Corporation plus six months' operations for Interfluid Recycling,
Inc. The year 1999 includes only VitriSeal, Inc. operations.

Consolidated net revenues for the year ended December 31, 2000, were
$979,354 compared to zero net revenues for the year earlier period. Ninety-five
percent of the year 2000 revenues came from Thermoflow's and Interfluid's
antifreeze recycling business, while the remainder came from Liquitek's
technology license with the Hawaiian oily wastewater treatment facility.
Consolidated costs of sales were $686,430 for the year ended December 31, 2000,
and zero for the year earlier period. Accordingly, the gross margin for the year
ended December 31, 2000, was 30% while that for the year ended December 31,
1999, was zero.

Consolidated operating expenses for 2000 were $4,909,764 compared to
$1,613,507 for 1999. The increase came from (1) more aggressive development
of the VitriSeal(TM) technology, (2) the incorporation of operating expenses
from the acquired companies, and (3) the amortization of intangibles recorded
in connection with the acquisitions (approximately $489,000).

The Company experienced a consolidated net loss and corresponding loss per
share of $5,502,430 and $0.17, respectively, for year 2000 and $1,594,364 and
$0.08 for year 1999. These losses are apportioned to our various businesses as
follows:

2000 1999
---- ----

Metal coating technology $1,595,000 $1,594,364
Wastewater treatment 1,546,000
Antifreeze recycling 407,000
Unallocated 1,954,430
---------- ----------
Total $5,502,430 $1,594,430
========== ==========

Plan of Operation

With the recent acquisitions described herein, and with the changes in
management personnel also described herein, the primary thrust of our operating
plans for 2001 is to accomplish the transition from development stage businesses
to commercial operations with production, sales and revenue. For the first time,
the operating companies have gone through the development of long range
strategic plans and operating plans. Control mechanisms are being put in place
to monitor adherence to these plans. Additional acquisitions may occur, but only
under compelling circumstances that would enhance the performance of the
businesses already owned.

The 2001 Operating Plan for VitriSeal, Inc. contemplates revenue from
contract coating in our Detroit plant for a variety of forged, fabricated,
extruded and sheet aluminum products. Over the ensuing three years, we expect
to enlarge the volumes of these contract-coating services and license the use
of our

technology in the plants of customers. The ongoing research and development
program will address definition of the characteristics of the coating, applying
the coating to different forms of aluminum and experimenting with coatings for
other metals.

The 2001 Operating Plan for Thermoflow Corporation calls for significant
growth in the utilization of the capacity of the Las Vegas plant. We will
explore the possibility of combining waste water treatment with waste antifreeze
treatment in the Las Vegas facility. We expect to be at 100% of practical
capacity sometime in 2002. We also expect to start building a second plant in
2002 and additional plants as we achieve capacity operations in each
successive plant.

The Liquitek Corporation 2001 Operating Plan envisages revenues from the
sale and/or engineering of small-, intermediate-, and large-scale fluid
treatment systems using the Company's technologies. Growth through the next
three years is expected to come from these same product lines with greater
volumes following a reputation for successful implementations through earlier
years' sales.

The Distech Limited 2001 Operating Plan provides for sales of the D-50
model and derivatives therefrom, models producing approximately 50 U.S. gallons
of treated water per hour, in remediation, water bottling, desalination,
closed-loop recycling and institutional markets. The research and development
program will support these sales objectives and will expand the product line
through development of larger scale equipment. Future years' sales will grow as
the product reputation spreads and will be augmented by products in the D-1000
and D-3000 series, models that will produce 1,000 and 3,000 U.S. gallons of
treated water per hour, respectively.

A critical part of the operating plans for 2001 at the parent company level
as well as at the operating subsidiaries level is the addition of qualified
management personnel, particularly in the marketing and selling functions. We
will seek to find people with relevant industry experience as well as necessary
functional qualifications.

The operating plans for 2001 project that all of our businesses will
generate revenue, some for the first time. There are clearly risks associated
with these assessments. We cannot know for certain at this point that the market
will accept our product offerings, particularly when several of the products
previously have not even been offered for sale. Nevertheless, management
believes that the efficacy and consumer economics of these products will allow
us to reach our goals.

All Distech sales, financing and other significant transactions will be
transacted in U.S. dollars. As such, the Company does not foresee any
significant risks arising out of fluctuations of foreign currency exchange
rates.

Acquisitions of Thermoflow, Liquitek, Interfluid and Distech

The Thermoflow, Liquitek and Interfluid shareholders were given the option
to participate in a registration statement to be filed under the Securities Act
within four months of the closing of the acquisitions on Form S-3 (the
"Registration Statement"). Any of the shares that are

included in the Registration Statement shall be subject to lock-up agreements
between the participating shareholders and Liquitek Enterprises providing that
the participating shareholders will be permitted to sell no more than 25% of
their shares received in the exchange ("Exchange Shares") in the six months
following the effective date (the "Effective Date") of the Registration
Statement, no more than 25% of their Exchanged Shares during the period
beginning six months after the Effective Date until 12 months after the
Effective Date, and no more than 25% of their Exchanged Shares during the period
beginning 18 months after the Effective Date until 24 months after the Effective
Date. No further restrictions shall apply to the Exchanged Shares held by
shareholders participating in the Registration Statement 24 months after the
Effective Date. By the time of the anticipated filing of the Registration
Statement, the Company had announced its intent to acquire Distech Limited. The
Registration Statement would have required audited data on Distech that was not
then available. One alternative, unacceptable to the Company, was to renounce
the Distech acquisition. Another was to defer the S-3 filing. The Company chose
the latter, then extended to the participating shareholders the right to opt out
of the registration/lock-up agreement, thereby letting their restrictions revert
to the Rule 144 procedures.

The Distech acquisition, as noted above, is subject to a right of
rescission for the Distech shareholders until such time as Liquitek Enterprises,
Inc. raises US$5,000,000 in equity infusion. Liquitek must accomplish this by
September 30, 2001, in order to remove this condition from the transaction.
Further, the Distech shareholders were also given the option to participate in a
registration statement/lock-up agreement akin to that described above. These
lock-up agreements will apply from the earlier of the effective date of the
Registration Statement or the date three months after the completion of the
audit of Distech's financial statements that is necessary for filing with the
Registration Statement (the "Commencement Date"). Under the lock-up agreements,
25% of the registered shares may be sold within 180 days of the Commencement
Date, another 25% in the 181 days to 365 days period, a third 25% in the 366
days to 545 days period and the remaining 25% thereafter.

It is anticipated that the Registration Statements pertaining to these
provisions will be filed in May 2001.

Liquidity and Capital Resources

As noted above, Liquitek Enterprises, Inc. is under obligation, by the
terms of the Distech Limited acquisition, to raise at least US$5,000,000 in
equity infusion not later than September 30, 2001. The 2001 Operating Plan for
the Company calls for raising US$15,000,000 by the end of the year through
private placement. Success in raising the lesser number, though not certain in
present equity market conditions, is expected to carry the company through to
self-sustaining cash flows. The larger number affords additional opportunities
for synergistic acquisitions, faster-paced development of product enhancements
and better protection against the vicissitudes of the economy.

ITEM 7. FINANCIAL STATEMENTS

The financial statements listed in the accompanying Index to Financial
Statements are attached hereto and filed as a part of this Report under Item 13.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

In conjunction with the merger and reorganization of Dancor, Inc., and at
the recommendation of the Audit Committee, the Board of Directors approved a
change in auditors in April 1999. Our former accountants, Jones, Jensen & Co.,
were dismissed effective May 3, 1999, and Squar, Milner, Reehl & Williamson,
LLP, ("SMRW") were appointed as

our principal independent accountants. There were no disagreements with the
former accountant, and there are no disagreements with the current accountant on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.

During the two most recent fiscal years, there have been no disagreements
with the former or current accountants on any matters of accounting principles
or practices, financial statement disclosure or auditing scope or procedure or
any reportable event, no adverse opinions, no disclaimers of opinion and no
modifications of the accountant's report as to audit scope or accounting
principles. SMRW's reports on the Company's December 31, 2000 and 1999 financial
statements included an explanatory paragraph expressing substantial doubt about
the Company's ability to continue as a going concern. On May 3, 1999, we filed a
Form 8-K, which is incorporated herein by reference concerning the change of
accountants.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

Incorporated by reference from our Proxy Statement, which we expect to be
filed within 120 days from the close of our fiscal year 2000.

ITEM 10. EXECUTIVE COMPENSATION

Incorporated by reference from our Proxy Statement, which we expect to be
filed within 120 days from the close of our fiscal year 2000.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from our Proxy Statement, which we expect to be
filed within 120 days from the close of our fiscal year 2000.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from our Proxy Statement, which we expect to be
filed within 120 days from the close of our fiscal year 2000.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report on Form 10-KSB:

1. Financial Statements for the years ended December 31, 2000 and 1999:

Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

2. Exhibits

The following exhibits are being filed with this Annual Report on Form
10-KSB and/or are incorporated by reference therein in accordance with the
designated footnote references:

2.1 Letter of Intent dated December 15, 1998, regarding proposed
reorganization between A.X.R. Development Corporation, Inc. and
Dancor, Inc.(1)

2.2 Plan of Reorganization between VitriSeal, Inc. and Dancor, Inc.
dated March 18, 1999. (2)

3.1 Articles of Incorporation dated July 10, 1985. (3)

3.2 Certificate of Amendment to the Articles of Incorporation
respecting name change to "Advanced Coating Technologies, Inc."
and effecting a reverse split of the outstanding shares. (2)

3.3 Certificate of Amendment to the Articles of Incorporation
respecting name change to "VitroSeal, Inc." (2)

3.4 Certificate of Amendment to the Articles of Incorporation of the
Company respecting name change to "VitriSeal, Inc." (2)

3.5 Bylaws, as amended, of the Company, a Nevada Corporation.(4)

10.1 Agreement and Plan of Reorganization for the Acquisition of All
of the Outstanding Shares of Common Stock of Thermoflow
Corporation by Vitriseal, Inc. dated May 25, 2000. (5)

10.2 Agreement and Plan of Reorganization for the Acquisition of All
of the Outstanding Shares of Common Stock of Liquitek Corporation
by Vitriseal, Inc. dated May 25, 2000.(5)

10.3 Agreement for the Acquisition of Certain Ordinary Shares and
Rights of Distech Limited by Liquitek Enterprises, Inc. (6)

10.4 Takeover Offer by Liquitek Enterprises, Inc. to Purchase all the
Shares in Distech Limited. (6)

10.5 Promissory note dated November 8, 2000 payable to Lighthouse,
Inc.

10.6 Promissory note dated December 20, 2000 payable to HydroMaid
International, Inc.

10.7 Promissory note dated December 22, 2000 payable to Lighthouse,
Inc.

10.8 Employment Agreement for Paul G. Kokx

10.9 Employment Agreement for Rodney L. Schaefer

--------------

(1) Incorporated by reference to Form 8-K filed December 17, 1998
under the Company's former name, A.X.R. Development Corporation,
Inc.

(2) Incorporated by reference to Form10-KSB filed by the Company on
April 14, 1999.

(3) Incorporated by reference to Form10-KSB filed by the Company on
October 8, 1998 under the Company's former name, A.X.R.
Development Corporation, Inc.

(4) Incorporated by reference to Form 8-A 12G filed by the Company on
September 19, 2000.

(5) Incorporated by reference to Form 8-K filed by the Company on
June 12, 2000.

(6) Incorporated by reference to Form 8-K filed by the Company on
February 26, 2001.

(b) Reports on Form 8-K.

Form 8-K filed May 3, 1999, as amended, regarding change of accountants.

Form 8-K filed June 12, 2000, as amended, regarding the acquisitions of
Thermoflow Corporation and Liquitek Corporation

Form 8-K filed February 27, 2001, regarding the acquisition of Distech
Limited.

VitriSeal, Inc., a Delaware corporation.

Thermoflow Corporation, a Nevada corporation.

Liquitek Corporation, a Nevada corporation.

Interfluid Environmental Services, Inc., a Nevada corporation.

Interfluid Recycling, Inc., a California corporation.

Distech Limited, a New Zealand corporation. *

Distech USA, Inc., a Delaware corporation and second-tier subsidiary
wholly-owned by Distech Limited. *

* Unconsolidated as of December 31, 2000.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, we caused this
report to be signed on our behalf by the undersigned, thereunto duly authorized,
in the City of Draper, State of Utah, on the 16th day of April 2001.

By: /s/LESTER W. B. MOORE
-------------------------------------------
Lester W. B. Moore, Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

SIGNATURE TITLE DATE

/s/ CULLEY W. DAVIS Chairman of the Board, April 16, 2001
---------------------- Director
Culley W. Davis

/s/ LESTER W. B. MOORE Chief Executive Officer, April 16, 2001
---------------------- Director
Lester W. B. Moore

/s/ ROBERT C. GAY Director April 16, 2001
----------------------
Robert C. Gay

/s/ ROBERT D. PETERSEN Director April 16, 2001
----------------------
Robert D. Petersen

/s/ DAVID A. DATTILO Director April 16, 2001
----------------------
David A. Dattilo

/s/ DUDLEY E. J. WARD Director April 16, 2001
----------------------

Dudley E. J. Ward

/s/ O. GUY EADY Director April 16, 2001
----------------------
O. Guy Eady

/s/ JOHN W. NAGEL Chief Financial Officer April 16, 2001
---------------------- (Principal Financial Officer
John W. Nagel and Principal Accounting Officer)

LIQUITEK ENTERPRISES, INC.
AND SUBSIDIARIES
(FORMERLY VITRISEAL, INC.)

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2000 AND 1999

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors' Report................................................ 1

Consolidated Balance Sheets................................................. 2

Consolidated Statements of Operations....................................... 3

Consolidated Statements of Stockholders' Equity............................. 4

Consolidated Statements of Cash Flows....................................... 5

Notes to Consolidated Financial Statements.................................. 7

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
Liquitek Enterprises, Inc. and Subsidiaries (formerly VitriSeal, Inc.)

We have audited the accompanying consolidated balance sheets of Liquitek
Enterprises, Inc. and subsidiaries (the "Company") as of December 31, 2000 and
1999 and the related consolidated statements of operations, 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Liquitek
Enterprises, Inc. and subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced a loss of approximately $11 million for the period from April 16,
1992 (inception) through December 31, 2000. As discussed in Note 12 to the
financial statements, a significant amount of additional capital will be
necessary to advance the development of the Company's products to the point
at which they may become commercially viable. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are also described in Note 12. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

Squar, Milner, Reehl & Williamson, LLP

March 9, 2001 (except for the fourth paragraph of Note 17, as to which the date
is April 6, 2001)
Newport Beach, California

--------------------------------------------------------------------------------
LIQUITEK ENTERPRISES, INC. AND SUBSIDIARIES
(FORMERLY VITRISEAL, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999

--------------------------------------------------------------------------------

2000 1999
----------- -----------
ASSETS

CURRENT ASSETS
Cash $ 23,865 $ 366,566
Accounts receivable, net 200,575 --
Advance to related party 620,000 --
Inventory 67,245 --
Prepaid expenses 46,584 26,023
------------ ------------
958,269 392,589

PROPERTY, PLANT AND EQUIPMENT, NET 3,153,130 64,249

NON-CURRENT ASSETS
Deposits and other assets 297,185 946
Prepaid royalties to related party 150,000 --
Patents, net 172,973 151,392
Goodwill, net 10,022,918 --
Acquired completed technology, net 10,557,300 --
Other intangible assets, net 675,124 --
Deferred tax asset, net of valuation allowance -- --

------------ ------------
21,875,500 152,338
------------ ------------

$ 25,986,899 $ 609,176
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued expenses $ 587,915 $ 55,207

DUE TO RELATED PARTIES 967,079 --

DEFERRED INCOME TAXES 3,827,213 --

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, par value $0.001 per share, 100,000,000 shares authorized;
48,649,185 shares issued and 38,126,737 shares outstanding at December
31, 2000; 31,361,639 shares issued and 20,839,191 shares outstanding at
December 31, 1999 38,126 20,839
Additional paid-in capital 30,204,561 5,799,936
Stock options, warrants and deferred compensation 1,356,241 225,000
Accumulated deficit (10,994,236) (5,491,806)
------------ ------------
20,604,692 553,969
------------ ------------
$ 25,986,899 $ 609,176
============ ============
$ 25,986,899 $ 609,176
============ ============

--------------------------------------------------------------------------------
PAGE 2 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL
STATEMENTS.

--------------------------------------------------------------------------------

2000 1999
------------ ------------

REVENUES
Sales $ 989,700 $ --
Less discounts and allowances (10,346) --
------------ ------------
979,354 --

COST OF SALES 686,430 --
------------ ------------

GROSS PROFIT 292,924 --

OPERATING EXPENSES
Selling and distribution costs 372,975 --
General and administrative costs 3,729,139 963,313
Research and development 807,650 650,194
----------- ------------
4,909,764 1,613,507
----------- ------------
LOSS BEFORE OTHER INCOME (EXPENSE) AND TAXES (4,616,840) (1,613,507)

OTHER INCOME (EXPENSE)
Interest income, net 95,005 19,143
Write-off of acquired in-process research
and development costs (970,000) --
Loss on disposal of equipment (10,595) --
------------ ------------
(885,590) 19,143
------------ ------------
LOSS BEFORE TAXES (5,502,430) (1,594,364)

INCOME TAX BENEFIT
Current -- --
Deferred 1,400,000 515,000
------------ ------------
1,400,000 515,000
Less valuation allowance (1,400,000) (515,000)
------------ ------------
-- --
------------ ------------

NET LOSS $ (5,502,430) $ (1,594,364)
============ ============

Basic and diluted loss per common share $ (0.17) $ (0.08)
============ ============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
DURING THE YEAR 31,834,000 20,627,000
============ ============

--------------------------------------------------------------------------------
PAGE 3 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL
STATEMENTS.

--------------------------------------------------------------------------------

Stock Options,
Common Stock Additional Warrants and
------------------------------ Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
--------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 1998 6,425,381 $ 6,425 $ 4,000,284 $ -- $ (3,792,376) $ 214,333
Common stock issued for cash 154,000 154 1,539,846 -- -- 1,540,000
Common stock issued to settle related
party advances 28,167 28 168,972 -- -- 169,000
Common stock issued in connection with
the Reorganization 14,231,643 14,232 90,834 -- (105,066) --
Stock options outstanding -- -- -- 225,000 -- 225,000
Net loss -- -- -- -- (1,594,364) (1,594,364)
--------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 1999 20,839,191 20,839 5,799,936 225,000 (5,491,806) 553,969
Common stock issued for cash, net of
offering costs of $798,580 2,391,046 2,391 6,026,029 -- -- 6,028,420
Stock options exercised 35,000 35 50,277 -- -- 50,312
Common stock and warrants issued in
connection with Thermoflow and
Liquitek acquisitions 14,661,500 14,661 18,073,525 336,731 -- 18,424,917
Common stock issued in connection with
Interfluid acquisition 200,000 200 254,794 -- -- 254,994
Deferred compensation -- -- -- (1,350,000) -- (1,350,000)
Stock options outstanding -- -- -- 2,144,510 -- 2,144,510
Net loss -- -- -- -- (5,502,430) (5,502,430)
--------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 2000 38,126,737 $ 38,126 $ 30,204,561 $ 1,356,241 $(10,994,236) $20,604,692
========== ============ ============ ============ ============ ===========

--------------------------------------------------------------------------------
PAGE 4 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL
STATEMENTS.

--------------------------------------------------------------------------------

2000 1999
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,502,430) $(1,594,364)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 149,285 15,483
Amortization 488,477 --
Write-off of acquired in-process research
and development costs 970,000 --
Abandonment of patents pending -- 50,627
Stock options expense 794,510 225,000
Loss on disposal of equipment 10,595 --
Expenses paid by related party -- 169,000
Changes in current assets and liabilities
Accounts receivable (145,919) --
Inventory (8,409) --
Prepaid expenses (20,561) (26,023)
Deposits and other assets (256,031) --
Accounts payable and accrued expenses (57,485) 22,463
Due to related parties 22,079 --
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (3,555,889) (1,137,814)

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (1,528,799) (29,184)
Proceeds from sale of equipment 54,000 --
Patent costs (26,881) (35,336)
Advances to related party (620,000) --
Advances to Thermoflow and Liquitek, prior to acquisition (666,000) --
Cash acquired through subsidiary acquisitions 70,867 --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,716,813) (64,520)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of offering costs 6,078,732 1,540,000
Advances from related party 945,000 --
Payment of related party advances acquired from subsidiaries (29,194) --
Payment of notes payable acquired from subsidiaries (1,064,537) --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,930,001 1,540,000
----------- -----------

(continued)

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PAGE 5 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL
STATEMENTS.

--------------------------------------------------------------------------------

2000 1999
------------ ------------

NET (DECREASE) INCREASE IN CASH (342,701) 337,666

CASH - beginning of year 366,566 28,900
------------ ------------

CASH - end of year $ 23,865 $ 366,566
============ ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Conversion of advances from related party to common stock $ -- $ 169,000
============ ============
Reorganization $ -- $ 105,066
============ ============

Subsidiary net assets acquired for stock and warrants $ 18,679,911 $ --
============ ============

Advances to subsidiaries prior to acquisitions, eliminated
by acquisitions $ 666,000 $ --
============ ============

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PAGE 6 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL
STATEMENTS.

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LIQUITEK ENTERPRISES, INC. AND SUBSIDIARIES
(FORMERLY VITRISEAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999

--------------------------------------------------------------------------------

1. NATURE OF BUSINESS AND REORGANIZATION

NATURE OF BUSINESS

Liquitek Enterprises, Inc. (the "Company," formerly known as VitriSeal, Inc.)
was incorporated in Delaware on April 16, 1992. Until the acquisitions described
below occurred in mid-2000, the Company focused exclusively on developing a new
coating for aluminum and other metals. With the acquisitions, operations were
diversified to include antifreeze recycling and water treatment systems for
purification, reclamation and decontamination. Another acquisition currently in
process (see Note 17) will add another technology to the water treatment segment
of the Company's business. Through December 31, 1999, the Company was in the
development stage. Due to the acquisitions of operating subsidiaries in 2000,
as described below, the Company is considered an operating company and is no
longer in the development stage.

On May 26, 2000, the Company completed the acquisitions of Thermoflow
Corporation ("Thermoflow") and Liquitek Corporation ("Liquitek"). In
conjunction with these tax-free acquisitions, the Company issued 9,661,500
shares of restricted common stock for all the shares of Thermoflow and
5,000,000 shares of restricted common stock for the 50% of the shares of
Liquitek not owned by Thermoflow. In addition, the Company issued 398,500
common stock purchase warrants in replacement of outstanding Thermoflow
warrants (see Note 15). Thereupon, Thermoflow and Liquitek became
wholly-owned subsidiaries of the Company. These transactions are sometimes
collectively referred to herein as "the Merger."

On July 1, 2000, the Company completed the acquisition of Interfluid Recycling,
Inc. ("Interfluid"). In conjunction with this tax-free acquisition, the Company
issued 200,000 shares of restricted common stock and paid $50,000 cash in
exchange for all of the outstanding shares of Interfluid. Thereupon, Interfluid
became a wholly-owned subsidiary of the Company.

On July 31, 2000, the Company changed its name from VitriSeal, Inc. to Liquitek
Enterprises, Inc. because of the expansion through the acquisitions described
above. Our stock symbol changed from "VTSL" to "LQTK" in conjunction with the
name change. The name change was implemented to reflect the Company's ownership
of a suite of complementary technologies that can be used to solve a variety of
liquid separation and purification problems, including industrial wastewater,
drinking water, ultra-pure water, and desalination solutions. The Company also
changed the name of Dancor, Inc., a wholly-owned subsidiary, to VitriSeal, Inc.
(hereafter referred to as "VitriSeal") to coincide with its VitriSeal(TM)
coating process.

Thermoflow owns and operates a proprietary antifreeze recycling facility in Las
Vegas, Nevada. The Thermoflow technology allows recycling of antifreeze to
produce fully reformulated antifreeze indistinguishable from antifreeze made
from virgin materials. The Thermoflow technology and subsets thereof are capable
of economically treating/recycling many other contaminated liquids, including
wastewater. Management believes that this technology, which is licensed from a
stockholder of the Company (Note 7), is not currently the subject of any active
patents.

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Page 7

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1. NATURE OF BUSINESS AND REORGANIZATION (continued)

NATURE OF BUSINESS (continued)

Interfluid operates a closed-loop waste antifreeze collection and recycled
antifreeze distribution system in the San Diego, California area. Subsequent to
the acquisition, the Company added to Interfluid's operations a transfer station
for the collection of waste antifreeze and long-haul trucking for bulk
transportation of both waste and recycled antifreeze. This company is an
integral part of the Thermoflow operation, but is a separate legal entity to
isolate higher risk operations.

Liquitek has licensed a proprietary oily wastewater treatment system to Hawaii's
largest recycling company. Liquitek has also developed a proprietary system for
recycling carwash, laundry and aqueous solvent wastewater. The Company has
tested the system in Japan and is presently negotiating sales with a Japanese
distributor. Liquitek plans to introduce a similar system in the United States
upon the completion of such testing.

VitriSeal owns the rights to a series of patented processes and proprietary
know-how called VitriSeal(TM). The process is based on inorganic silicate
chemistry that makes superior, hard, bright, clear, corrosion-protective
coatings on metal surfaces at a fraction of the cost of other clear coatings.

REORGANIZATION

In March 1999, the Company's predecessor entity, Dancor, Inc., completed a
reverse acquisition with a publicly traded company; such merger is hereinafter
referred to as the "Reorganization."

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies of the Company presented below
is designed to assist the reader in understanding the Company's consolidated
financial statements. Such financial statements and these notes are the
representations of Company management, which is responsible for their
integrity and objectivity. These accounting policies conform to accounting
principles generally accepted in the United States ("GAAP") in all material
respects, and have been consistently applied in preparing the accompanying
consolidated financial statements.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Liquitek Enterprises, Inc. and its wholly owned subsidiaries. The operations of
the subsidiaries acquired on May 26, 2000 and July 1, 2000 are included in the
accompanying consolidated statements of operations from such dates. All
significant intercompany balances and transactions have been eliminated in
consolidation.

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PAGE 8

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

GOVERNMENT REGULATION

Thermoflow's facility is subject to certain government regulations regarding
hazardous waste management, primarily related to the recycling of ethylene
glycol (spent antifreeze) and storage of other hazardous materials used in the
recycling process. Compliance with these provisions has not had, nor does the
Company expect such compliance to have, any material adverse effect upon the
capital expenditures, operations, financial condition or competitive position of
the Company. Management believes that its current practices and procedures
comply with applicable requirements.

Thermoflow is also subject to annual inspections by the Nevada Department of
Conservation and Natural Resources, a Division of Environmental Protection (the
"Department"), which evaluates Thermoflow's compliance with applicable hazardous
waste management regulations. No violations were reported by the Department
during the January 2000 and 1999 inspections. In addition, Thermoflow has an
active Nevada hazardous materials storage permit that expired on February 28,
2001, but is being renewed. While the agency that issues these permits has not
yet delivered the renewal certificate, there is no indication that they will not
do so. Finally, the water discharge permit with the City of North Las Vegas has
been amended subsequent to December 31, 2000 to allow the processing of waste
water in the Thermoflow facility to render it harmless for disposal to the sewer
system, a potential new line of business for the Thermoflow plant.

As primarily a transportation operation, Interfluid is subject to the normal
regulatory processes of the U.S. Department of Transportation and various
state highway departments. With the closed-loop operating facility in San
Diego, Interfluid is also subject to the regulations and inspections
administered by the Health Department of San Diego County and the California
Department of Toxic Substances Control. These agencies have discretionary
authority to inspect operations and investigative authority in the event of
complaints. Interfluid has had no complaints or violations of any of the
regulations to which they are subject, and management believes that
compliance with such regulations will not have any material adverse effect
upon the capital expenditures, operations, financial condition or competitive
position of the Company.

USE OF ESTIMATES

Management uses estimates and assumptions in preparing financial statements in
accordance with GAAP. Such estimates and assumptions affect the reported amounts
of certain assets and liabilities, disclosures relating to any contingent assets
and liabilities, and the reported amounts of certain expenses. Actual results
could vary from the estimates used to prepare the accompanying consolidated
financial statements.

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PAGE 9

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

CONCENTRATIONS

Financial instruments that may subject the Company to credit risk principally
consist of uninsured cash-in-bank balances. The Company currently maintains
substantially all of its cash with several major financial institutions. At
times, cash balances may be in excess of the amounts insured by the Federal
Deposit Insurance Corporation.

The Company extends credit to its customers based upon an evaluation of each
customer's financial condition and credit history. The Company generally does
not require collateral from its customers. Should a customer be unable to meet
its obligation to the Company, the accounting loss would equal the recorded
account receivable.

Management periodically reviews accounts receivable and establishes an allowance
for accounts deemed uncollectible. At December 31, 2000, management considers an
allowance for doubtful accounts of approximately $2,000 to be adequate to
provide for losses that may be sustained in the realization of these accounts.

At December 31, 2000, three customers accounted for approximately 45% of
consolidated accounts receivable; no other individual customer accounted for
more than 10% at that date. One customer accounted for all of the revenues of
Liquitek for the year ended December 31, 2000, and three customers accounted for
approximately 68% of the net sales of Thermoflow for the year then ended. On a
combined basis, the customers described in the preceding sentence represent
approximately 56% of consolidated revenues for the year ended December 31,
2000. No other customers accounted for more than 10% of subsidiary or
consolidated net sales for the year ended December 31, 2000.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Management believes that the carrying amounts of the Company's financial
instruments approximate their fair value at December 31, 2000 and 1999.

INVENTORY

Inventory, which approximated $67,000 at December 31, 2000, is carried at the
lower of cost (using the first-in, first-out method) or estimated market value.
Inventory consists primarily of supplies and finished goods (Note 6), and is
stored at Thermoflow's facility.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Major renewals and
improvements are capitalized, while replacements, maintenance and repairs that
do not significantly improve or extend the useful life of the asset are expensed
when incurred.

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PAGE 10

--------------------------------------------------------------------------------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

PROPERTY, PLANT AND EQUIPMENT (continued)

Factory plant and equipment and buildings are generally depreciated using the
straight-line method over their estimated useful lives ranging from 12 to 20
years. Furniture, fixtures, equipment and vehicles are depreciated using the
straight-line method over the estimated useful lives of the assets, which range
from five to ten years. Leasehold improvements are amortized over the shorter of
the estimated useful life of the asset or the remaining lease term.

PATENTS

The Company capitalizes the cost of domestic and foreign patents and patents
pending, and amortizes such costs over the shorter of the remaining legal life
or their estimated economic life. Amortization expense for the years ended
December 31, 2000 and 1999 approximated $5,000. The unamortized cost of patent
applications is written off when management determines there is no future
benefit. In 1999, the Company wrote off patent pending costs of approximately
$51,000. No such write-offs were recorded in 2000. Accumulated amortization of
patents approximated $14,000 and $9,000 at December 31, 2000 and 1999,
respectively.

GOODWILL

Goodwill, which resulted from the purchase of Thermoflow, Liquitek and
Interfluid, is amortized using the straight-line method over 20 years.
Accumulated amortization of goodwill approximated $254,000 at December 31, 2000.

ACQUIRED COMPLETED TECHNOLOGY

Completed technology that was acquired with the purchase of Thermoflow and
Liquitek is amortized using the straight-line method over 20 years. Accumulated
amortization of acquired completed technology approximated $271,000 at December
31, 2000.

OTHER INTANGIBLE ASSETS

In connection with the acquisitions of Thermoflow, Liquitek, and Interfluid,
amounts were allocated to non-compete covenants, established customer base,
assembled work force, and acquired license agreement. Non-compete covenants,
provided by former owners and certain employees of the acquired companies, are
amortized using the straight-line method over the terms of the agreements
containing such covenants. Other intangible assets are amortized using the
straight-line method over their estimated useful lives ranging from three to ten
years. Accumulated amortization of other intangible assets approximated $95,000
at December 31, 2000.

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PAGE 11

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstance indicate that the carrying amount of the assets may not be
recoverable. If the cost basis of a long-lived asset is greater than the
projected future undiscounted net cash flows from such asset (excluding
interest), an impairment loss is recognized. Impairment losses are calculated as
the difference between the cost basis of an asset and its estimated fair value.
Any long-lived assets held for disposal are reported at the lower of their
carrying amounts or fair values less costs to sell. During the years ended
December 31, 2000 and 1999, no valuation adjustments were required. As such, the
Company's long-lived assets are stated at cost less accumulated depreciation and
amortization.

REVENUE RECOGNITION

Revenue is recognized when products are shipped to customers.

SELLING AND DISTRIBUTION COSTS

Selling expenses include advertising costs, marketing salaries and antifreeze
distribution costs. Advertising costs are expensed as incurred.

GENERAL AND ADMINISTRATIVE COSTS

General and administrative costs include salaries and related costs, rent
expense, professional services, depreciation and amortization, utilities and
other operating expenses.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred. Such costs include
scientific research and laboratory testing related to the VitriSeal(TM)
process and the development of products for Liquitek Corporation.

INCOME TAXES

Using the liability method required by Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," the estimated tax
effects of temporary differences between financial and income tax reporting are
recorded in the period in which the events occur. Such differences between the
financial and tax bases of assets and liabilities result in future tax
deductions or taxable income (see Note 10).

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PAGE 12

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

INCOME TAXES (continued)

Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes, and (b) tax credit
carryforwards. The Company records a valuation allowance for deferred income tax
assets when, based on management's best estimate of taxable income in the
foreseeable future, it is more likely than not that some portion of the deferred
income tax assets may not be realized.

STOCK-BASED COMPENSATION

The Company has implemented the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and measures compensation expense for
its stock-based compensation awards to employees and directors using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." The Company
accounts for stock options issued to outside consultants using SFAS No. 123.
See Note 14 for additional information.

LOSS PER COMMON SHARE

In accordance with SFAS No. 128, "Earnings per Share," basic loss per common
share is computed by dividing the loss attributable to common stockholders by
the weighted average number of common shares outstanding during the period.
Diluted loss per common share reflects the amount that would have resulted if
certain dilutive potential common stock had been issued. Because the Company has
experienced losses from inception, the stock options described in Note 14 and
warrants described in Note 15 are antidilutive. Therefore, if such options had
been granted prior to January 1, 1999, they would not have impacted the weighted
average number of common shares outstanding in 2000 or 1999.

The weighted average number of common shares outstanding for the years ended
December 31, 2000 and 1999 includes approximately 83,000 shares and 99,000
shares, respectively, of Dancor, Inc. stock owned by persons who had not yet
executed an agreement to convert such shares to Company stock. The outstanding
shares of common stock reported in the accompanying consolidated balance sheets
also include these shares, which represent less than 1% of the shares
outstanding.

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PAGE 13

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

OWNERSHIP OF NON-CONVERTING STOCKHOLDERS

The ownership attributable to the non-converting Dancor, Inc. stockholders who
have not yet executed an agreement to convert their shares to Company stock is
considered immaterial by Company management. As such, this amount has not been
segregated in the accompanying consolidated balance sheets.

ELEMENTS OF OTHER COMPREHENSIVE INCOME

For the years ended December 31, 2000 and 1999, the Company did not have any
elements of other comprehensive income as defined by SFAS No. 130, "Reporting
Comprehensive Income." Therefore, statements of comprehensive income have not
been presented.

RECENT ACCOUNTING PRONOUNCEMENTS

In the year ended December 31, 2001, the Company will be required to adopt
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), as amended. Management does
not believe that the Company engages in any of the activities described under
SFAS 133. As such, no impact is expected to the Company's financial position or
results of operations from adopting this standard.

3. ACQUISITION OF SUBSIDIARIES

ACQUISITION OF THERMOFLOW AND LIQUITEK

The Company has accounted for the acquisitions of Thermoflow and Liquitek, as
described in Note 1, using the purchase method of accounting. The total purchase
consideration of approximately $18,425,000 was allocated as follows, based on
the May 26, 2000 estimated fair value of the net assets acquired:

Completed technology $10,828,000
Goodwill 10,347,000
Other intangible assets 436,000
In-process research and development (written off) 970,000
Property, plant and equipment 1,755,000
Other, net (284,000)
Debt assumed (1,663,000)
Deferred income taxes (3,964,000)
-----------
$18,425,000
===========

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PAGE 14

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3. ACQUISITION OF SUBSIDIARIES (continued)

ACQUISITION OF THERMOFLOW AND LIQUITEK (continued)

The purchase price allocation set forth above is based in part on an
independent third-party valuation of the estimated fair value of the
Company's restricted common stock issued in the Merger. Such value has been
estimated at $1.23 per share, considering blockage and restrictions on the
sale of such stock.

As disclosed above, $970,000 of in-process research and development was
recorded as an acquired intangible asset in 2000. This amount was
concurrently written off to expense in accordance with GAAP requiring the
write-off of such expenses upon purchase when the related technology is not
expected to have any alternative future uses.

ACQUISITION OF INTERFLUID

The Company has accounted for the acquisition of Interfluid using the purchase
method of accounting. The total purchase consideration of approximately $305,000
was allocated as follows, based on the July 1, 2000 estimated fair value of the
net assets acquired:

Non-compete covenant $ 25,000
Established customer base 309,000
Property and equipment 69,000
Other, net (1,000)
Debt assumed (97,000)
--------
$305,000
========

The Interfluid purchase price allocation is preliminary and is based only on
management's estimates; thus, it is subject to adjustment during the one-year
allocation period.

The Interfluid purchase price is based in part on the estimated fair value of
the Company's restricted common stock issued in the acquisition in conformity
with the valuation concepts used for the Thermoflow and Liquitek acquisitions.
Such value has been estimated at $1.27 per share, considering blockage and
restrictions on the sale of such stock.

PRO FORMA INFORMATION

The table below reflects certain pro forma information as though the Interfluid,
Thermoflow and Liquitek acquisitions occurred at the beginning of each period
presented:

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PAGE 15

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3. ACQUISITION OF SUBSIDIARIES (continued)

PRO FORMA INFORMATION (continued)

(Amounts in thousands, except
per share data)

Year Ended December 31
2000 1999
------------- -------------

Sales $ 1,575 $ 1,075
============= =============

Loss from continuing operations/net loss $ 5,730 $ 3,595
============= =============

Loss per common share, basic and diluted $ 0.15 $ 0.10
============= =============

4. RELATED PARTY TRANSACTIONS AND RELATIONSHIPS

The names and relationships of related parties referred to in these notes are
set forth below (Company stock ownership percentages, which are as of December
31, 2000, include beneficial ownership):

o Culley W. Davis: Chairman of the Board of Directors; 4.5% stockholder,
including ownership through Family Legacy Ltd. ("FL"), which is controlled
by Culley W. Davis or a member of his immediate family; sole owner and CEO
of Lighthouse, Inc. ("LI"), formerly Pinnacle Enterprises, Inc. ("PEI"), a
creditor of the Company; and a stockholder, CEO and Chairman of the Board
of Directors of HydroMaid, International, Inc. ("HMI"), a creditor of the
Company. The Company moved into office space owned by LI in September
2000. The Company pays rent to LI on a month-to-month basis. Rent expense
paid to LI in 2000 approximated $29,000.

o Bruce H. Haglund, Esq.: corporate secretary and a former director of the
Company; the brother-in-law of the Company's Chief Financial Officer; and
a less than 1% stockholder of the Company. Bruce Haglund is a partner in
the law firm of Gibson, Haglund & Paulsen ("GHP"), the Company's legal
counsel. For the years ended December 31, 2000 and 1999, the Company paid
or incurred legal fees to GHP of approximately $285,000 and $119,000,
respectively.

o Daniel L. Corbin: President until October 31, 2000; 3.4% stockholder; and
brother-in-law of Culley W. Davis.

o Dennis A. Repp: Director until October 20, 2000.

o Lester W.B. Moore: President and CEO.

o John W. Nagel: Chief Financial Officer.

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PAGE 16

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4. RELATED PARTY TRANSACTIONS AND RELATIONSHIPS (continued)

Because the Company, HMI, LI, PEI, FL and other entities have commonality of
ownership and are under common management control, reported operating results
and/or financial position of the Company could significantly differ from what
would have been obtained if such entities were autonomous (Notes 9 and 13).

Other related party transactions are discussed elsewhere in these notes to the
consolidated financial statements.

5. ADVANCES TO RELATED PARTY

In connection with the acquisition of Distech (Note 17), the Company advanced
$620,000 to Distech during the year ended December 31, 2000. These advances are
due on demand and are non-interest bearing.

6. INVENTORY

Inventory consists of the following at December 31, 2000:

Additives $ 55,002
Packaging 3,811
Finished goods 8,432
--------

$ 67,245
========

7. PREPAID ROYALTIES TO RELATED PARTY

In April 1999, Thermoflow entered into an Exclusive World-wide Technology and
Know-how Licensing Agreement (the "Licensing Agreement") with a then Thermoflow
stockholder, who is now a stockholder of the Company. Under the terms of the
Licensing Agreement, the technology described in Note 1 was licensed to
Thermoflow in exchange for an annual royalty equal to the greater of $60,000 or
0.5% of net sales (as defined) through December 31, 2020. At that time, absent
earlier termination, all of the rights to and interest in such technology will
vest in Thermoflow.

At December 31, 2000, prepaid royalties to such stockholder were $150,000.

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PAGE 17

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8. FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment consist of the following at December 31:

2000 1999
--------------- ---------------

Land $ 341,590 $ --
Buildings 504,360 --
Plant, machinery and equipment 1,552,298 --
Equipment licensed to others 183,890 --
Vehicles and trailers 375,462 --
Computer equipment and software 36,603 3,738
Furniture and fixtures 61,457 18,163
Testing equipment 196,655 76,897
Leasehold improvements 87,128 2,477
--------------- ---------------
3,339,443 101,275
Accumulated depreciation and amortization (186,313) (37,026)
--------------- ---------------

$ 3,153,130 $ 64,249
=============== ===============

9. DUE TO RELATED PARTIES

On December 20, 2000, the Company received $525,000 from HMI in exchange for
a note payable bearing interest at 6.2% per annum. This loan was made to
enable the Company to execute an option to purchase land and a building that
Thermoflow had previously been leasing. Principal and unpaid interest are due
on demand. Accrued interest approximated $1,000 at December 31, 2000 and is
included in accounts payable and accrued expenses in the accompanying
consolidated balance sheet. Culley W. Davis controlled approximately 12% of
HMI's outstanding common stock at December 31, 2000.

In November and December 2000, the Company borrowed a total of $420,000 from LI
in exchange for notes payable bearing interest at 6.2% per annum. Principal and
unpaid interest are due on December 22, 2001. Accrued interest approximated
$3,000 at December 31, 2000 and is included in accounts payable and accrued
expenses in the accompanying consolidated balance sheet.

The Company reimburses HMI for certain allocated administrative expenses. These
expenses generally consist of salaries and related benefits paid to HMI
personnel who perform services for the Company. Allocations of personnel costs
have been based primarily on actual time spent by HMI employees. Management
believes that such allocation methods are reasonable. Amounts charged to the
Company by HMI for

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PAGE 18

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9. DUE TO RELATED PARTIES (continued)

operating expenses approximated $118,000 and $21,000 for the years ended
December 31, 2000 and 1999, respectively. Included in due to related parties at
December 31, 2000 in the accompanying consolidated balance sheet is
approximately $22,000 payable to HMI for allocated administrative expenses.

The Company reimburses LI for certain allocated overhead expenses related to
its office space (Note 4). LI has charged approximately $59,000 and $32,000
to the Company for such expenses for the years ended December 31, 2000 and
1999, respectively.

10. INCOME TAXES

The Company was considered a start-up entity for federal and state income tax
purposes from its 1992 inception through December 31, 1999. As a result,
start-up expenses, including research and development, were capitalized during
such period for tax purposes, while such costs were expensed as incurred for
financial reporting purposes. The Company also has a tax net operating loss
carryforward of approximately $4,300,000 at December 31, 2000, which principally
expires in 2020.

The Company's deferred tax asset approximated $3,200,000 and $1,800,000 at
December 31, 2000 and 1999, respectively. Because there is no reasonable
assurance that such asset will be realized in future years, the Company has
recorded a 100% valuation allowance against this deferred tax asset.

A summary of the deferred tax benefit and related 100% valuation allowance
for the years ended December 31, 2000 and 1999 follows:

Balance - December 31, 1998 $ 1,285,000

Deferred benefit for 1999 515,000
-----------------

Balance - December 31, 1999 1,800,000

Deferred benefit for 2000 1,400,000
-----------------

Balance - December 31, 2000 $ 3,200,000
=================

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PAGE 19

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10. INCOME TAXES (continued)

The components of the deferred tax asset are as follows at December 31:

2000 1999
----------- -----------

Tax net operating loss carryforward $ 1,580,000 $ 80,000
Deferred start-up costs 1,340,000 1,680,000
Stock options and other 280,000 40,000
----------- -----------
Deferred tax asset 3,200,000 1,800,000
Less valuation allowance (3,200,000) (1,800,000)
----------- -----------

Net deferred tax asset $ -- $ --
=========== ===========

For the year ended December 31, 2000, additional income tax benefit (and an
equal amount of valuation allowance) of approximately $500,000 was allocated to
items charged directly to stockholders' equity.

The income tax benefit, before valuation allowance, for the years ended
December 31, 2000 and 1999 differs from the amount that would result from
applying the federal statutory rate to the pre-tax loss as follows:

2000 1999
------------------ -------------------

Effective tax benefit by applying the federal
statutory rate to pre-tax loss $ 1,870,000 $ 545,000

Amortization of basis step up in purchase of
subsidiaries (495,000) --

State income taxes and other 25,000 (30,000)
------------------ -------------------

Benefit for income taxes before valuation
allowance $ 1,400,000 $ 515,000
================== ===================

The Company's income tax returns for the open years are subject to examination
and adjustment by the applicable taxing authorities.

The acquisitions of subsidiaries discussed in Note 3 were accounted for as stock
purchase acquisitions for income tax reporting purposes under the Internal
Revenue Code. As a result, for income tax reporting purposes, unlike GAAP, the
Company is not allowed to employ purchase accounting to the assets and
liabilities of the entities acquired. Such differences between the book and tax
bases of assets and liabilities acquired resulted in a deferred tax liability of
approximately $3,964,000 at the acquisition date. Such deferred tax liability
has a balance of approximately $3,827,000 at December 31, 2000.

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11. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases certain of its facilities under noncancelable operating lease
agreements that expire at various dates through 2007. Certain leases require the
payment of property taxes, utilities and insurance, are subject to annual
adjustments for inflation, and provide options to extend the lease term.

Future minimum lease payments under noncancelable operating leases are
approximately as follows for the years ending December 31:

2001 $ 241,000
2002 240,000
2003 243,000
2004 247,000
2005 167,000
Thereafter 70,000
-----------

$ 1,208,000
===========

For the years ended December 31, 2000 and 1999, rent expense approximated
$163,000 and $53,000, respectively.

RESEARCH AND CONSULTING CONTRACTS

In January 1997, the Company entered into a month-to-month consulting contract
(the "Jennings Contract") to engage Hamlin Jennings, Ph. D. ("Jennings") as an
independent contractor to provide technical consulting services on a
best-efforts basis relating to (1) product research/development, technology, and
commercialization and (2) patent completion and processing. At December 31,
2000, payments being made under the Jennings Contract for Jennings and his staff
were $35,000 per month. Subsequent to December 31, 2000, these payments were
reduced to $25,000 per month. The performance of services under the Jennings
Contract is neither transferable nor assignable without the Company's written
consent. The Company paid approximately $420,000 and $451,000 to Jennings during
the years ended December 31, 2000 and 1999, respectively.

The Jennings Contract also requires the Company to allocate a portion of its
revenues from all sources to a deferred compensation plan. The terms of such
deferred compensation plan are set forth below under "Royalty Agreements."

Jennings has provided a covenant not to compete prohibiting him from engaging in
any activities that are competitive with or adverse to the Company's business
during the term of the Jennings Contract. In accordance with the month-to-month
nature of the Jennings

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11. COMMITMENTS AND CONTINGENCIES (continued)

RESEARCH AND CONSULTING CONTRACTS (continued)

Contract, the Company has notified Jennings that his services will be terminated
on April 30, 2001, and that the termination process and post-termination
non-compete provisions of his agreements with the Company will be followed. The
Company has replaced his consulting services with those of a scientist who will
carry on the Company's research and development program as an employee.

In September 1998, the Company entered into a consulting contract (the "Hanneman
Contract") with Rodney Hanneman to provide management, marketing, and technical
services in return for a $10,000 annually renewable retainer and hourly
consulting fees. For the years ended December 31, 2000 and 1999, the Company
paid approximately $29,000 each year under the Hanneman Contract.

The Hanneman Contract also provides that Rodney Hanneman will receive (a)
incentive and performance payments of 1% of the Company's gross revenue from
1999 through 2005 payable quarterly; or (b) 1% of the selling price of the
Company, or 1% of the value of any initial public offering, if either
transaction occurs before December 31, 2005.

In September 2000, the Company entered into a new consulting contract with
Rodney Hanneman for a term of three years. The terms of such contract are
substantially the same as the 1998 Hanneman Contract except that the portion of
the 1998 contract related to incentive and performance payments, as well as the
provisions related to receiving 1% of the proceeds from any initial public
offering (see the preceding paragraph), were rescinded. In consideration for
Rodney Hanneman's agreement to rescind these provisions, the Company issued to
him 35,000 shares of its common stock without requiring payment of the $1.75 per
share exercise price required by his non-statutory stock option agreement dated
May 12, 1999 (Note 14).

ROYALTY AGREEMENTS

In February 1997, the Company entered into separate royalty agreements with
Dennis Repp ("Repp") and Daniel Corbin ("Corbin") whereby Repp and Corbin shall
each receive a 2% royalty on all revenues or other proceeds earned by the
Company resulting from the VitriSeal process, including licensing fees, product
and technology sales, royalty income, and asset sales. The royalty agreements
provide that such payments will continue until the termination of the
recipient's services to the Company in connection with the development and
commercialization of the VitriSeal(TM) process. As of December 31, 2000, no such
revenues had been earned by the Company. In February 2001, Repp and Corbin
mutually agreed with the Company to rescind their royalty agreements in exchange
for 100,000 shares each of the Company's common stock. As a result of such
rescission agreements, the Company, Repp and Corbin were released from all
duties and obligations under the original royalty agreements.

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11. COMMITMENTS AND CONTINGENCIES (continued)

ROYALTY AGREEMENTS (continued)

In February 1997, the Company also entered into a royalty agreement with
Jennings identical to those with Repp and Corbin as set forth above. On July
15, 1998, the Jennings royalty agreement was amended to provide for a 3%
royalty; all other provisions of such agreement remain in effect.

On November 23, 1998, the Company entered into a royalty agreement with
Culley W. Davis ("Davis") whereby Davis shall receive a 2% royalty on all
revenues or other proceeds earned by the Company resulting from the
VitriSeal(TM) process, including licensing fees, product and technology
sales, royalty income, and asset sales. On June 24, 1999, the Davis royalty
agreement was mutually canceled as additional consideration for 164,548
shares of common stock issued in settlement of advances payable to PEI in
1998 and 1999.

As stated in Note 1, Liquitek has licensed a proprietary oily wastewater
treatment system to a recycling company in Hawaii. Under this licensing
agreement, the recycling company is required to pay Liquitek each month the
greater of (a) 40% of monthly gross revenues invoiced for waste water treatment
or (b) $6,000. Additionally, the recycling company is to pay Liquitek $0.10 per
gallon for oily water generated each month. This agreement commenced November 9,
1998, has a scheduled term of five years, and may be extended an additional five
years at the option of the recycling company.

EMPLOYMENT AGREEMENTS

Effective August 1, 2000, the Company entered into an employment agreement (the
"Moore Agreement") with Lester W.B. Moore ("Moore") to hire Moore as president
and CEO of the Company at a minimum annual salary of $225,000 plus certain
benefits. Under the Moore Agreement, the Company has agreed to grant to Moore
non-statutory options to acquire 200,000 shares of its common stock (Note 14).
The Moore Agreement, which is cancelable by either party upon sixty days notice,
will be in effect until Moore retires or ceases to be employed by the Company.
At the conclusion of Moore's employment with the Company, he will receive a
salary continuation payment in the amount of at least six months' base salary.

In connection with the acquisition of Interfluid (Note 1), the Company executed
an employment agreement (the "Schaefer Agreement") with Rodney L. Schaefer, a
former Interfluid stockholder. The Schaefer Agreement prohibits Schaefer from
competing with the Company during such employment and for a period of two years
after termination of his employment with the Company. This agreement, which is
scheduled to expire in June 2003, provides for a minimum annual salary of
$120,000 plus certain benefits.

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11. COMMITMENTS AND CONTINGENCIES (continued)

EMPLOYMENT AGREEMENTS (continued)

Effective February 1, 2000, the Company entered into an employment agreement
(the "Kokx Agreement") with Paul Kokx ("Kokx") to hire Kokx as an officer of
VitriSeal at a minimum annual salary of $175,000 plus certain benefits. The Kokx
Agreement prohibits Kokx from competing with the Company in any country where
the Company has protected business interests for the period beginning February
1, 2000 and ending two years after the termination of his employment.
Additionally, Kokx was granted a non-statutory option to purchase 500,000
shares of Company common stock at $2.00 per share (Note 14). Unless the Kokx
Agreement is terminated early, the employment of Kokx will continue until
January 31, 2004.

12. GOING CONCERN/LIQUIDITY CONSIDERATIONS

As discussed in Note 1, the Company is engaged in three businesses: developing
a metal coating process known as "VitriSeal(TM)," recycling antifreeze, and
processing other contaminated fluids to recycle them or render them harmless to
the environment. The Company has not generated significant revenues in the past.
Management expects that the Company will require significant additional capital
to advance the development of these operations to the point at which they
generate positive operating cash flow. The acquisition of Distech (see Note 17)
will require expansion of the Company's capital resources. Because of that
acquisition, the Company is presently seeking equity investment through a
private placement offering.

The effort to raise additional capital has been founded on major revisions in
management personnel and practices during 2000. Lester W.B. Moore became the
CEO in August, Rodney L. Schaefer became President of the Thermoflow
subsidiary in July, Paul G. Kokx became the President of the VitriSeal
subsidiary in October and Kent H. Price became the President of the Liquitek
subsidiary on January 1, 2001. All of these seasoned executives, plus John W.
Nagel, the Chief Financial Officer, were heavily involved in the latter part
of 2000 and early part of 2001 in developing very detailed long-range
strategic plans and 2001 operating plans for their respective companies.
Management control systems are being put in place to enhance the likelihood
of achieving the plans. The plans substantiate the need for additional
capital, but they also demonstrate the prospects for self-sustaining
operations in the foreseeable future. Based on the planning and the personnel
responsible for the execution of those plans, management believes that the
additional equity investment is not only needed, but justified in order to
secure sustainable competitive advantages for all of the Company's operations.

13. ADVANCES FROM RELATED PARTIES AND COMMON STOCK TRANSACTIONS

PEI and other related parties periodically make cash advances to the Company
and/or directly fund the Company's research/development and operating expense
requirements. The Company repaid certain advances made in 1999 with the issuance
of 28,167 shares of common stock representing $169,000. The Company recorded
this transaction as a reduction of advances payable to related party with a
corresponding increase of additional paid-in capital. Because the parties agreed
that the original terms of such advances included a conversion privilege, no
gain or loss was recognized on the transaction.

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14. STOCK OPTIONS

STOCK OPTION ISSUANCES

On May 12, 1999, the Company granted non-statutory options to purchase 1,225,000
post-Reorganization shares of its common stock, exercisable at $1.75 per share
on the date of grant and expiring ten years from such date, to certain
employees, directors and outside consultants as follows:

Culley W. Davis, as an employee and director 300,000
Employees and directors (other than Culley W. Davis) 675,000
Non-employees 250,000
-----------

1,225,000
===========

In connection with the Kokx Agreement (Note 11), the Company has granted Paul
Kokx a non-statutory option to purchase 500,000 shares of its common stock at
$2.00 per share. The grant-date closing market price of the Company's stock
approximated $5.00 per share. Such option expires on January 31, 2010 and
generally vests as follows:

Number of
Shares
----------------

December 31, 2000 50,000
December 31, 2001 100,000
December 31, 2002 150,000
December 31, 2003 200,000
----------------

500,000
================

Accelerated vesting is available based on executed wheel-coating process license
agreements and royalty revenue received by the Company under such agreements.
Any unvested options immediately vest and become exercisable upon a change in
control of the Company.

In connection with the Thermoflow and Liquitek acquisitions (Note 3), the
Company granted non-statutory options to purchase 775,000 of its common stock,
exercisable at $2.00 per share on May 26, 2000 and expiring ten years from such
date, as follows:

Culley W. Davis, as an employee 275,000
Bruce H. Haglund, as an employee 250,000
Allen P. Kirschbaum, as a non-employee 250,000
---------
775,000
=========

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14. STOCK OPTIONS (continued)

STOCK OPTION ISSUANCES (continued)

On December 28, 2000, the Company granted non-statutory options to purchase
1,659,500 shares of its common stock to certain employees, directors and outside
consultants as follows:

Culley W. Davis, as an employee, exercisable at $1.00
per share in three equal installments ending
December 31, 2002, and expiring ten years from the
date of grant. 500,000
Employees (other than Culley W. Davis), exercisable at
$1.00 per share in three equal installments ending
December 31, 2002, and expiring ten years from the
date of grant. 559,500
Directors, exercisable at $1.00 per share on the date
of grant, and expiring ten years from such date. 125,000
Non-employees, exercisable at $1.00 per share on the
date of grant, and expiring ten years from such
date. 475,000
----------

1,659,500
==========

As of March 9, 2001, the Company had not adopted a formal stock option plan.

STOCK OPTION ACTIVITY

A summary of the aggregate stock option activity for the years ended December
31, 2000 and 1999 is presented below (1999 activity is presented in
post-Reorganization shares):

2000 1999
----------------- -----------------

Options outstanding - beginning of year 1,225,000 -
Options granted 2,934,500 1,225,000
Options forfeited - -
Options exercised (35,000) -
----------------- -----------------

Options outstanding - end of year 4,124,500 1,225,000
================= =================

Weighted average exercise price of options
outstanding at end of year $ 1.53 $ 1.75
================= =================
Weighted average grant-date fair value of
options granted during the year $ 1.46 $ 0.89
================= =================
Weighted average fair value of options
granted during the year when exercise
price exceeded the grant-date market
price $ 0.90 $ 0.89
================= =================
Exercisable options - end of year 2,968,167 1,225,000
================= =================
Weighted average remaining contractual
life of options outstanding at end of
year 9 10
================= =================

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14. STOCK OPTIONS (continued)

STOCK OPTION ACTIVITY (continued)

Options exercisable at December 31, 2000 consist of the following:

EXERCISE PRICE SHARES
--------------- -------------

$1.00 953,167
1.75 1,190,000
2.00 825,000
-------------

2,968,167
=============

On January 1, 2001, no additional options became exercisable.

OTHER MATTERS

The disclosures in this paragraph apply to all options granted. The fair
value of options granted is amortized to expense over the options' vesting
periods and has been estimated using the Black-Scholes stock option pricing
model based on the exercise price per share, the market price of the
Company's common stock, and the weighted-average assumptions set forth below
for issuances in the following years:

2000 1999
----------- -----------

Expected life 2.4 years 2.2 years
Estimated volatility 144% 90%
Risk-free interest rate 5.3% 5.2%
Dividends Zero Zero

STOCK-BASED COMPENSATION AND OTHER EXPENSES

As discussed in Note 2, compensatory stock options and similar equity
instruments issued to non-employees are accounted for using the fair value
method of SFAS 123. The Company recognized compensation expense related to
such equity instruments of approximately $695,000 and $225,000 for the years
ended December 31, 2000 and 1999, respectively. The expenses incurred in 2000
and 1999 represent costs associated with services performed by non-employees.

Incentive stock options granted to employees are accounted for using the
intrinsic value method of APB 25. Estimated compensation expense related to such
options approximated $150,000 for the year ended December 31, 2000. In
accordance with APB 25, no such expense was recorded for the year ended December
31, 1999. If the fair value

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14. STOCK OPTIONS (continued)

STOCK-BASED COMPENSATION AND OTHER EXPENSES (continued)

method of accounting had been applied to such options, the Company's reported
net loss and loss per share would have been as follows for the years ended
December 31:

(In thousands, except per
share data)

2000 1999
---------- -----------

Net loss, as reported $ (5,502) $ (1,594)
========== ===========

Net loss, pro forma $ (6,588) $ (2,470)
========== ===========

Basic and diluted loss per share, as reported $ (0.17) $ (0.08)
========== ===========

Basic and diluted loss per share, pro forma $ (0.21) $ (0.12)
========== ===========

The above pro forma effects of applying SFAS 123 are not necessarily
representative of the impact on reported net loss for future years.

15. WARRANTS

In connection with the acquisition of Thermoflow (Note 3), warrants to purchase
398,500 shares of the Company's stock, exercisable immediately, were issued to
Thermoflow warrant holders in exchange for their warrants to purchase 79,700
shares of Thermoflow. The warrants allow their owners to purchase 360,000 shares
of the Company's restricted common stock at $1.00 per share and 38,500 shares of
such stock at $2.50 per share. Such warrants expire in May 2002. None of these
warrants had been exercised, forfeited or expired as of December 31, 2000.

The fair value of warrants granted was included in the purchase price
allocation (Note 3) and has been estimated using the Black-Scholes stock option
pricing model based on the exercise price per share, the market price of the
Company's common stock, and the weighted-average assumptions set forth below:

Expected life 2 years
Estimated volatility 130%
Risk-free interest rate 6.5%
Dividends Zero

The weighted average exercise price of warrants exercisable at December 31, 2000
was $1.14 per share.

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16. SEGMENT INFORMATION

Prior to the acquisitions discussed in Note 1, the Company operated in only one
segment - metal coating, which is in the development stage. As of approximately
June 1, 2000, the Company had three reportable segments; see the table below.
Except as set forth in the next sentence, the segments' significant accounting
policies are the same as those described in Note 2. Interest income and parent
company overhead are not allocated to individual operating segments when
determining segment profit or loss. The Company evaluates performance based on
profit or loss from operations before interest, income taxes and non-recurring
gains and losses.

The Company's reportable segments are strategic business units that offer
different products and services. Each segment is managed separately because they
use different technologies and/or market to distinct classes of customers.

The following table, which sets forth certain information as of December 31,
2000 or for the year then ended, includes operations of the revenue-producing
segments only for the months of June through December 2000 (see "Principles
of Consolidation" in Note 2).

(Amounts in thousands)

Metal Waste
Coating Water Antifreeze
Process Treatment Recycling Unallocated Total
------- --------- --------- ----------- -----

Sales to external
customers $ - $ 49 $ 930 $ - $ 979

Interest income
(expense), net (2) - - 97 95

Depreciation and
amortization 49 288 301 - 638

Segment loss 1,595 1,546 407 1,954 5,502

Segment assets 564 12,905 11,499 25,487 50,455

Expenditures for assets 413 51 1,062 3 1,529

Long-lived assets
acquired for stock - 14,191 10,428 - 24,619

Net assets acquired for
stock - 12,283 6,397 - 18,680

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16. SEGMENT INFORMATION (continued)

Unallocated segment assets consist primarily of investments in subsidiaries
(approximately $18.7 million), subsidiary payables to the Company (approximately
$5.7 million) and other assets (approximately $1 million). The two former
amounts were eliminated in consolidation.

Following are reconciliations to corresponding totals in the accompanying
consolidated financial statements (in thousands):

REVENUES

Total revenues for reportable segments $ 979
===============

SEGMENT LOSS
Total loss for reportable segments $ 3,548
Unallocated corporate expenses 1,954
---------------

Total $ 5,502
===============

ASSETS
Total assets for reportable segments $ 24,968
Other assets 25,487
Elimination of receivables from corporate
headquarters (5,738)
Elimination of corporate investment in subsidiaries (18,730)
---------------

Total $ 25,987
===============

OTHER SIGNIFICANT ITEMS

Segment Consolidated
Totals Adjustments Totals
------ ----------- ------

Interest income (expense), net $ (2) $ 97 $ 95
Depreciation and amortization 638 - 638
Expenditures for long-lived assets 1,526 3 1,529
Long-lived assets acquired for stock 24,619 - 24,619
Net assets acquired for stock 18,680 - 18,680

The adjustment for interest income (expense) relates to interest earned on a
corporate money market account. The adjustment for long-lived asset expenditures
relates to corporate computer purchases in 2000.

See the "Concentrations" section of Note 2 for information regarding major
customers of the above segments.

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17. SUBSEQUENT EVENTS (UNAUDITED)

ACQUISITION OF DISTECH LIMITED

On February 12, 2001, the Company completed the acquisition of all the
outstanding ordinary stock of Distech Limited, a New Zealand corporation
("Distech"). Distech owns patented, state-of-the-art vacuum distillation
technology capable of producing purified water from sources containing harmful
chemicals. In the first phase of this transaction, which was effective November
30, 2000, the Company acquired approximately 71% of Distech's equity securities
in exchange for a total of approximately 11,360,000 shares, options and warrants
of the Company at a 3:1 exchange ratio. In accordance with New Zealand law, the
Company subsequently made a successful tender offer at the same exchange ratio
for the remaining 1.6 million Distech equity securities in exchange for a total
of approximately 4.8 million Company shares, options and warrants.

Unless the Company raises $5 million of fresh equity capital by September 30,
2001, the former Distech stockholders have the right to rescind the transaction
described in the preceding paragraph. Because of this contingency, the Distech
acquisition has not been recorded in the accompanying December 31, 2000
financial statements. In addition, as of March 9, 2001, approximately 1,640,000
shares of the Company's common stock (which are included in the above amounts)
have not been issued. These shares are being held in escrow as collateral for an
indemnity agreement (regarding any losses or claims relating to Distech's
intellectual property) provided to the Company by a former Distech
stockholder/officer. Under certain circumstances, such escrowed shares may be
released in December 2001 and December 2002.

The terms of the Company options and warrants issued to the former Distech
stockholders are summarized as follows:

Options to acquire 69,000 shares of the Company's common stock for NZ$1.67
per share, expiring on December 31, 2005; and

Warrants to acquire approximately 791,000 shares of the Company's common
stock for NZ$1.67 per share, expiring on May 1, 2001.

As of April 1, 2001, the private placement of a $5 million equity investment in
Liquitek Enterprises, Inc. had been fully subscribed by Accelerated Technologies
Fund LLC ("ATF"), a venture capital fund organized by Culley W. Davis, the
Chairman of the Board of the Company. ATF is committed to funding startup
businesses including ventures in oil and gas projects, real estate development,
a "virtual fiber optic" technology, catalytic devices, soap-less laundry
technology and others. ATF is seeking to raise $45 million through private
placement of LLC shares. As of April 6, 2001, ATF had received cash investments
for approximately $8.1 million and had advanced to the Company approximately
$1.5 million toward the $5 million equity investment.

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17. SUBSEQUENT EVENTS (UNAUDITED) (continued)

LOANS FROM RELATED PARTY

Subsequent to December 31, 2000, the Company borrowed approximately $765,000
from Lighthouse, Inc. in exchange for notes payable bearing interest at 6.2% per
annum. Principal and unpaid interest are due in 2002.

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