CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report ...........April 30, 1997
Earth Sciences, Inc.
(Exact name of registrant as specified in its charter)
Colorado 0-6088
(State of incorporation) (Commission File Number)
84-0503749
(IRS Employer Identification No.)
910 12th Street, Golden, Colorado 80401
(Address of principal executive offices, including Zip Code)
(Registrant's telephone number, including area code): (303) 279-7641
Item 2. Acquisition or Disposition of Assets.
On April 30, 1997, Registrant acquired a 51% interest in ADA Environmental
Solutions LLC ("ADA") through the purchase of an additional 46.2% interest
from ADA. Registrant had previously purchased a 4.8% interest in ADA in
February 1997 by payment to ADA of $400,000. The 46.2% interest was
purchased by payment to ADA of $500,000 and a non-interest bearing promissory
note in the amount of $1,600,000. The purchase price for the transaction was
negotiated among Registrant and ADA based on the future anticipated earnings
and cash flow of ADA. Funds for the purchase were from Registrant's working
capital. Registrant also obtained an option to acquire the remaining 49%
interest in ADA exercisable for a six month period commencing May 1, 1998.
The option is exercisable by issuance of 1,715,600 shares of Registrant's
common stock in exchange for all the outstanding stock of ADA-ES, Inc., a
Colorado corporation, whose only asset is the remaining 49% interest in ADA.
ADA's only significant asset is its proprietary technology designed to reduce
particulate emissions from coal-fired boilers. Registrant's management
believes ADA's proprietary non-toxic chemical conditioner offers both
technical and economic advantages over the hazardous chemicals currently
being used. Michael D. Durham of ADA has been elected to Registrant's
Board of Directors as part of the transaction.
The operating Agreement of ADA provides that a member's percentage interests
for purposes of voting and ownership of assets is to be based on the ratio of
its capital contributions to the total capital contributions in ADA. In
accordance with such provisions, Registrant has an 83% voting and ownership
interest in ADA, but a 51% interest in ADA's net profits.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The audited financial statements of ADA Environmental Solutions LLC dated
December 31, 1996 are filed herewith as Exhibit 99.1.
(b) Pro Forma Financial Information.
The following unaudited pro forma combined condensed balance sheets as of
December 31, 1996, show the effect on the historical balance sheet of
Registrant (ESI) as if the acquisition of its interest in ADA Environmental
Solutions LLC (ADA) had occurred on December 31, 1996. The unaudited pro
forma combined condensed statements of operations combines the operations of
ESI and ADA as if the acquisitions were completed at January 1, 1996.
Activities for ADA commenced in March 1996 (the date ADA was established).
These statements are not necessarily indicative of future operations or
actual results that would have occurred had the acquisition been consummated
at the beginning of the period indicated.
The unaudited pro forma combined condensed financial statements should be
read in conjunction with the historical financial statements and notes
thereto, included either elsewhere in this document or in Registrant's
December 31, 1996 Form 10-KSB.
<TABLE>
<CAPTION>
PRO FORMA COMBINED CONDENSED BALANCE SHEET (Amounts in 000's)
December 31, 1996 (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS Pro Pro
ESI ADA Forma Forma
Adjustme Combi
nts ned
Current assets $ 2,039 26 2,065
Property, plant and equipment 17,198 340 17,538
Less accumulated depreciation (5,043) (2) (5,045)
Other assets 207 0 772 (1) 979
------ ----- ----- ------
Total assets $ 14,401 364 772 15,537
====== ===== ===== ======
LIABILITIES AND EQUITY
Current liabilities $ 278 791 1,069
Long-term liabilities 9,943 0 9,943
Minority interest 0 0 346 (2) 346
Stockholders' equity 4,180 (427) 426 (2) 4,179
------ ----- ----- ------
shareholders' equity $ 14,401 364 772 15,537
====== ===== ===== ======
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (Amounts in 000's except per
share amounts) For the Year Ended December 31, 1996 (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Pro Forma Pro
ESI ADA Adjustments Forma
Combin
ed
Revenues $ 798 75 0 873
Expenses 1,336 501 129 (3) 1,966
----- ----- ----- ------
Loss from operations (538) (426) (129) (1,093)
Minority interest 0 0 209 (4) 209
Income tax benefit 159 0 0 159
------- ------ ------- ------
Loss before extraordinary item (379) (426) 80 (725)
item
Extraordinary gain 371 0 0 371
------- ------ ------- ------
Net loss $ (8) (426 80 (354)
====== ====== ====== ======
Net loss per common share: $ .00 N/A (.05)
====== ====== ======
</TABLE>
See accompanying notes.
Notes to Pro Forma Financial Statements.
1. To record the goodwill associated with the acquisition of ESI's interest
in ADA.
2. To reflect the minority interest in ADA after the acquisition.
3. To record the additional expenses associated with amortization of
goodwill recorded.
4. To reflect the minority interest in the loss of ADA for the period ended
December 31, 1996.
(c) Exhibits. The following Exhibits are filed herewith.
No. Description
2.1 Stock Option and Exchange Agreement among Earth Sciences,
Inc. and ADA-ES, Inc., ADA Environmental Solutions LLC, ADA Technologies,
Inc., C. Jean Bustard, John F. Wurster, Kenneth E. Baldrey and Cameron E.
Martin dated April 30, 1997. Exhibits and Schedules to the agreement are as
follows: (such exhibits and Schedules have been omitted and will be provided
to the Commission upon request.)
EXHIBITS
Exhibit A Promissory Note
Exhibit B Exercise Notice
Exhibit C Certificate of Earth Sciences
Exhibit D Certificate of ADA Technologies, Inc.
Exhibit E Voting Agreement
Exhibit F Registration Rights Agreement
SCHEDULES
Schedule 3.5 Financial Statements
Schedule 3.7 Title and Related Matters
Schedule 3.8 Intellectual Property
Schedule 3.9 Litigation
Schedule 3.10 Insurance Policies and Surety Bonds
Schedule 3.11 Compliance with Laws
Schedule 3.17 Contracts and Commitments
Schedule 5.1 Information Regarding Russ Farmer
Schedule 6.15(a) ERISA
Schedule 10.1(b) Accrued Incentives
2.2 Amended and Restated Operating Agreement of ADA Environmental
Solutions LLC, a Colorado Limited Liability Company, April 30, 1997
99.1 Financial Statements of ADA Environmental Solutions LLC, December
31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf by the
undersigned hereunto duly authorized.
Earth Sciences, Inc.
-----------------------
(Registrant)
Date: May 12, 1997 /s/ Mark H. McKinnies
----------------------------
Mark H. McKinnies, President
<PAGE>
EXHIBIT 2.1
STOCK OPTION AND EXCHANGE AGREEMENT
among
EARTH SCIENCES, INC.
and
ADA-ES, INC.
ADA ENVIRONMENTAL SOLUTIONS LLC
ADA TECHNOLOGIES, INC.
C. JEAN BUSTARD
JOHN F. WURSTER
KENNETH E. BALDREY
and
CAMERON E. MARTIN
Dated
APRIL 30, 1997
<PAGE>
TABLE OF CONTENTS
Page
RECITALS 1
ARTICLE 1. INVESTMENT AND OPTION GRANTS 1
Section 1.1. Additional Investment in ADA-LLC 1
Section 1.2. Grant of Option 2
Section 1.3. Exchange of Shares 2
Section 1.4. Option Closing 2
Section 1.5. Repurchase Options 2
ARTICLE 2. EXCHANGE 3
Section 2.1. Exchange Closing 3
Section 2.2. Exchange 3
Section 2.3. Issuance of Earth Sciences Common Stock to
Each Shareholder 4
Section 2.4. Earth Sciences Delivery to the Shareholders 4
Section 2.5. Shareholders Delivery to Earth Sciences 4
Section 2.6. Further Assurances 4
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF ADA 5
Section 3.1. Organization 5
Section 3.2. Authorization 5
Section 3.3. Capitalization 5
Section 3.4. Consents and Approvals; No Violations 6
Section 3.5. Financial Statements 6
Section 3.6. Taxes 6
Section 3.7. Title and Related Matters 7
Section 3.8. Patents, Trademarks and Other Intellectual
Property 7
Section 3.9. Litigation 7
Section 3.10.Insurance and Surety Bonds 7
Section 3.11.Compliance with Laws 8
Section 3.12.Employee Benefit Plans 8
Section 3.13.Employment Related Agreements 8
Section 3.14.Labor Agreements and Controversies 8
Section 3.15.Environmental Matters 8
Section 3.16.Certain Fees 9
Section 3.17.Contracts and Commitments 9
Section 3.18.No Other Representations 10
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF OTHER
SHAREHOLDERS 10
Section 4.1. Authorization 10
Section 4.2. Shares 10
Section 4.3. Consents and Approvals; No Violations 11
Section 4.4. No Other Representations 11
ARTICLE 5. INVESTMENT REPRESENTATIONS OF THE
SHAREHOLDERS 11
Section 5.1. Purchaser Representative 11
Section 5.2. State of Residence or Business 11
Section 5.3. Tax Consequences 11
Section 5.4. Investment Intent 11
Section 5.5. Transfer Restrictions 12
Section 5.6. Ability to Accept Risk of Investment 12
Section 5.7. Review of Earth Sciences Documents 12
Section 5.8. Restricted Securities 13
Section 5.9. Disposition of Earth Sciences Common Stock 13
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF EARTH
SCIENCES 13
Section 6.1. Organization, Standing and Power 13
Section 6.2. Capital Structure 13
Section 6.3. Authority; Non-Contravention 14
Section 6.4. SEC Documents 15
Section 6.5. Earth Sciences Disclosure Material 15
Section 6.6. Absence of Material Adverse Change 15
Section 6.7. Reorganization 15
Section 6.8. Tax Representations 15
Section 6.9. Title and Related Matters 16
Section 6.10.Agreements 16
Section 6.11.Litigation 16
Section 6.12.Patents, Trademarks and Other Intellectual
Property 16
Section 6.13.Insurance and Surety Bonds 17
Section 6.14.Compliance with Laws 17
Section 6.15.Employee Benefit Plans 17
Section 6.16.Environmental Matters 18
Section 6.17.Certain Fees 18
Section 6.18.No Other Representations 18
ARTICLE 7. COVENANTS OF EARTH SCIENCES PRIOR TO THE
EXCHANGE CLOSING 18
Section 7.1. Operation in Usual Manner; Access for the
Shareholders 18
Section 7.2. Corporate Existence, Rights and Franchises 18
Section 7.3. Nasdaq Listing 19
Section 7.4. Corporate Action and Consents 19
Section 7.5. Conditions to be Satisfied 19
Section 7.6. Regulatory Approvals 19
Section 7.7. Additional Funding and Payment to ADA 19
Section 7.8. Seat on Earth Sciences Board of Directors 19
Section 7.9. Tax-Free Exchange 19
Section 7.10.Guarantee of Leases 20
ARTICLE 8. COVENANTS OF ADA AND THE OTHER SHAREHOLDERS
PRIOR TO THE EXCHANGE CLOSING 20
Section 8.1. Operation in Usual Manner; Access for Earth
Sciences 20
Section 8.2. Existence, Rights and Franchises 20
Section 8.3. Action and Consents 20
Section 8.4. Conditions to be Satisfied 20
Section 8.5. Regulatory Approvals 21
Section 8.6. No Encumbrances 21
Section 8.7. Actions to Impair Value of ADA-ES 21
ARTICLE 9. CERTAIN AGREEMENTS OF THE PARTIES 21
Section 9.1. Tax Matters 21
Section 9.2. Public Announcements 21
Section 9.3. Notification of Certain Matters 21
Section 9.4. Reorganization 22
Section 9.5. Shareholder Approval 22
Section 9.6. Earth Sciences Disclosure Material. 22
Section 9.7. Fees and Expenses 22
Section 9.8. No Distribution of ADA's Earth Science
Common Stock 22
Section 9.9. Reasonable Efforts 22
Section 9.10.Expiration of Representations and Warranties 23
ARTICLE 10. CONDITIONS TO THE OPTION CLOSING 23
Section 10.1.Conditions to the Obligations of the
Shareholders and Earth Sciences 23
Section 10.2.Additional Conditions to the Obligations of
Earth Sciences 24
Section 10.3.Additional Conditions to the Obligations of
the Shareholders 24
ARTICLE 11. TERMINATION AND ABANDONMENT 25
Section 11.1.Termination 25
Section 11.2.Procedure and Effect of Termination 26
ARTICLE 12. INDEMNIFICATION 26
Section 12.1.Indemnification by the Shareholders. 26
Section 12.2.Indemnification by Earth Sciences. 26
Section 12.3.Notice of Claims for Indemnification. 26
Section 12.4.Securities Law Indemnification; Contribution.27
ARTICLE 13. GENERAL 28
Section 13.1.Amendment and Modification 28
Section 13.2.Waiver of Compliance; Consents 28
Section 13.3.Notices 28
Section 13.4.Assignability and Parties in Interest 30
Section 13.5.Governing Law 30
Section 13.6.Counterparts 30
Section 13.7.Signatures on Behalf of Corporation 30
Section 13.8.Complete Agreement 31
Section 13.9.Interpretation 31
Section 13.10. Severability 31
Section 13.11. Knowledge 31
Section 13.12. Submission to Jurisdiction 31
Section 13.13. Arbitration 31
EXHIBITS
Exhibit A Promissory Note
Exhibit B Exercise Notice
Exhibit C Certificate of Earth Sciences
Exhibit D Certificate of ADA Technologies, Inc.
Exhibit E Voting Agreement
Exhibit F Registration Rights Agreement
SCHEDULES
Schedule 3.5 Financial Statements
Schedule 3.7 Title and Related Matters
Schedule 3.8 Intellectual Property
Schedule 3.9 Litigation
Schedule 3.10 Insurance Policies and Surety Bonds
Schedule 3.11 Compliance with Laws
Schedule 3.17 Contracts and Commitments
Schedule 5.1 Information Regarding Russ Farmer
Schedule 6.15(a) ERISA
Schedule 10.1(b) Accrued Incentives
<PAGE>
STOCK OPTION AND EXCHANGE AGREEMENT
This STOCK OPTION AND EXCHANGE AGREEMENT (this "Agreement") is entered
into as of April 30, 1997, among Earth Sciences, Inc., a Colorado corporation
("Earth Sciences"), on the one hand, and ADA-ES, Inc., a Colorado corporation
("ADA-ES"), ADA Environmental Solutions LLC, a Colorado limited liability
company ("ADA-LLC"), ADA Technologies, Inc., a Colorado corporation ("ADA"),
C. Jean Bustard, John F. Wurster, Kenneth E. Baldrey and Cameron E. Martin
(ADA and these individuals being hereinafter collectively called the
"Shareholders"), on the other hand.
RECITALS:
1. The Shareholders own all of the issued and outstanding shares of
Common Stock of ADA-ES, and ADA-ES owns 95.2% of the membership interest of
ADA-LLC.
2. ADA-ES and ADA-LLC seek funding to accomplish the business plan as
set forth in the document entitled "Business Plan for ADA Environmental
Solutions Flue Gas Conditioning Technology for Cost Effective Enhancement of
ESPs and Baghouses," dated March 1996 (the "Business Plan"), that, among
other matters, discusses the use of phosphoric acid for treatment of flue gas
particulates.
3. Earth Sciences' wholly-owned subsidiary intends to produce
phosphoric acid at its facility in Calgary.
4. Prior to the date of this Agreement, Earth Sciences has invested
$400,000 in ADA-LLC in exchange for a 4.8% membership interest in ADA-LLC.
5. Earth Sciences desires to acquire (i) an additional 46.2% interest
in ADA-LLC in exchange for $500,000 in cash and a non-interest bearing note
in the amount of $1,600,000 and (ii) an option to acquire 100% of the equity
of ADA-ES.
6. If and when such option is exercised, Earth Sciences and the
Shareholders desire to exchange 1,715,600 shares of Earth Sciences common
stock, $.01 par value per share (the "Earth Sciences Common Stock"), for all
of the issued and outstanding shares of ADA-ES (the "Shares") held by the
Shareholders.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises and the mutual promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE 1.INVESTMENT AND OPTION GRANTS
Section 1.1. Additional Investment in ADA-LLC.
On the Option Closing Date (as defined below), Earth Sciences shall
purchase an additional 46.2% membership interest in ADA-LLC from ADA-LLC (the
"Additional Investment") in exchange for $500,000 in cash and a note in the
amount of $1,600,000 (the "Note") in the form attached hereto as Exhibit A.
Section 1.2. Grant of Option.
On the terms and subject to the conditions set forth herein, the
Shareholders hereby grant Earth Sciences an irrevocable option to purchase
all of their Shares in exchange for an aggregate of 1,715,600 shares of Earth
Sciences Common Stock (the "Option"). The Option shall be exercisable during
the period commencing at 12:00 a.m., Denver time, on May 1, 1998 and ending
at 11:59 p.m., Denver time, on October 31, 1998 (the "Exercise Period") and
may not be exercised prior to or after the Exercise Period. The Option may
not be exercised for fewer than all of the Shares held by the Shareholders.
Exercise of the Option shall be effected by Earth Sciences giving written
notice to each of the Shareholders (the "Exercise Notice") (in the form
attached hereto as Exhibit B) which shall state that the Option is thereby
being exercised. The Exercise Notice shall be signed by a duly authorized
officer of Earth Sciences.
Section 1.3. Exchange of Shares.
At the Exchange Closing (defined below), each Shareholder shall transfer,
convey, assign and deliver to Earth Sciences, free and clear of all liens,
pledges, encumbrances and claims whatsoever, the Shares in exchange for the
Earth Sciences Common Stock, and Earth Sciences shall accept the Shares in
exchange for the Earth Sciences Common Stock (the "Exchange"). The
Shareholders shall deliver to Earth Sciences certificates representing the
Shares, duly endorsed for transfer at the Exchange Closing.
Section 1.4. Option Closing.
Subject to the provisions of this Agreement, the additional investment by
Earth Sciences in ADA-LLC and the grant of the Option as contemplated by this
Agreement (the "Option Closing") shall take place at the offices of Baker &
Hostetler LLP and be effective as of 10:00 a.m., Denver time, on the date two
days after the conditions to the Option Closing have been satisfied (the
"Option Closing Date"). At the Option Closing, Earth Sciences and the
Shareholders will deliver or cause to be delivered the certificates,
documents and instruments contemplated by Article 10. All actions taken and
all documents delivered at the Option Closing shall be deemed to have
occurred simultaneously.
Section 1.5. Repurchase Options.
(a) If the Exchange Closing does not occur, if Earth Sciences does not
exercise the Option or if Earth Sciences issues the Exercise Notice but fails
to consummate the Exchange within the time frame specified in Section 2.1
hereof, ADA-LLC shall have the option from and after November 1, 1998 for a
period of 90 days to repurchase all of the membership interest in ADA-LLC
owned by Earth Sciences for a purchase price equal to the total cash
contribution made by Earth Sciences to ADA-LLC as of that date plus any
amount paid by Earth Sciences on the Note (the "First Repurchase Option").
Within seven days after the exercise of the First Repurchase Option Earth
Sciences shall deliver all of its membership interest in ADA-LLC to ADA-LLC,
and ADA-LLC shall execute a note in the amount of the repurchase price. Such
note shall be paid over a three-year period in equal monthly installments
with interest at a compound rate of 8% per annum and shall be secured (on a
basis reasonably satisfactory to Earth Sciences) by the ADA-LLC membership
interest repurchased from Earth Sciences by, and then held by, ADA-LLC (the
"Repurchase Note"). Upon the exercise of the First Repurchase Option, the
Note shall be cancelled in full.
(b) If Earth Sciences shall default on any payments on the Note, the
Shareholders may terminate the Option, and, if so terminated, ADA-LLC shall
have the option, after such default for a period of 90 days to repurchase all
of the membership interest in ADA-LLC owned by Earth Sciences for a purchase
price equal to $900,000 plus any amounts paid by Earth Sciences on the Note
(the "Second Repurchase Option"). Within seven days after the exercise of
the Second Repurchase Option, Earth Sciences shall deliver all of its
membership interest in ADA-LLC to ADA-LLC, and ADA-LLC shall execute the
Repurchase Note (secured as described in subparagraph (a) above. Upon the
exercise of the Second Repurchase Option, the Note shall be cancelled in
full.
(c) If the Option Closing does not occur on or before May 31, 1997,
Earth Sciences shall have the option of, on or before June 15, 1997,
requiring ADA-LLC to repurchase Earth Sciences' 4.8% membership interest in
ADA-LLC for a purchase price equal to $400,000 (the "Earth Sciences Put").
Within seven days after the exercise of the Earth Sciences Put, Earth
Sciences shall deliver all of its membership interest in ADA-LLC to ADA-LLC,
and ADA-LLC shall execute a note in the amount of the repurchase price. Such
note shall be paid over a two year period, commencing no later than May 31,
1998, in equal monthly installments with interest at a compound rate of 8%
per annum and shall be secured (on a basis reasonably satisfactory to Earth
Sciences) by the ADA-LLC membership interest repurchased from Earth Sciences
by, and then held by, ADA-LLC.
(d) If the Option Closing does not occur before May 31, 1997 and Earth
Sciences has not, on or before June 15, 1997, exercised the Earth Sciences
Put, ADA-LLC shall have the right, on or before July 15, 1997, to repurchase
such 4.8% membership interest (the "ADA Call"). Within seven days after the
exercise of the ADA Call, Earth Sciences shall deliver all of its membership
interest in ADA-LLC to ADA-LLC, and ADA-LLC shall execute a note in the
amount of the repurchase price. Such note shall be paid over a one year
period, commencing no later than May 31, 1998, in equal monthly installments
with interest at a compound rate of 8% per annum and shall be secured (on a
basis reasonably satisfactory to Earth Sciences) by the ADA-LLC membership
interest repurchased from Earth Sciences by, and then held by, ADA-LLC.
(e) The exercise of the options referred to in (a) and (b) above shall
be effective (the "Effective Date") two days after the mailing of the notice
of exercise by certified mail, return receipt requested, to the address of
Earth Sciences set forth in Section 12.3(b) hereof.
ARTICLE 2.EXCHANGE
Section 2.1. Exchange Closing.
If Earth Sciences exercises the Option during the Exercise Period, the
consummation of the exchange of shares contemplated hereby (the "Exchange
Closing") shall occur at the offices of Baker & Hostetler LLP and be
effective as of 10:00 a.m., Denver time, within 14 days of receipt by all
Shareholders of the Exercise Notice, or at such other place and/or on such
other date as the parties hereto may agree upon in writing (the "Exchange
Closing Date"). If the Exchange Closing fails to occur by the Exchange
Closing Date, or by such later date to which the Exchange Closing may be
extended as provided herein, the Option may be terminated by the Shareholders
as described above; provided, however, that no such termination shall
constitute a waiver by any party or parties which is not in material default
of any of its or their respective representations, warranties or covenants
herein of any rights or remedies it or they might have at law if any other
party or parties is in default of any of its or their respective
representations, warranties or covenants under this Agreement.
Section 2.2. Exchange.
At the Exchange Closing, Earth Sciences will transfer, and the
Shareholders will accept from Earth Sciences, the aggregate number of
authorized and newly issued shares of Earth Sciences Common Stock set forth
in Section 2.3 below. In consideration for the issuance and delivery of the
Earth Sciences Common Stock to the Shareholders, and as payment in full of
the purchase price for the Earth Sciences Common Stock to be issued to each
of the Shareholders, at the Exchange Closing the Shareholders shall deliver
to Earth Sciences the certificates evidencing that respective number of
Shares owned by each Shareholder which is set forth opposite his, her or its
name on the signature page hereof.
Section 2.3. Issuance of Earth Sciences Common Stock to Each Shareholder.
Each Shareholder shall receive the number of shares of Earth Sciences
Common Stock in the Exchange that is equal to (i) the number of shares of ADA-
ES held by such Shareholder divided by the total issued and outstanding
Shares multiplied by (ii) 1,715,600. Upon such issuance, any and all shares
of Earth Sciences Common Stock issued to the Shareholders as provided herein
will be fully paid and nonassessable. No fractions of shares of Earth
Sciences Common Stock shall be issued to the Shareholders. At the Exchange
Closing, a Shareholder otherwise entitled to receive fractions of shares of
Earth Sciences Common Stock shall receive from Earth Sciences an amount in
cash equal to (i) the fractional share to which such Shareholder would
otherwise be entitled, multiplied by (ii) the closing price of one share of
Earth Sciences Common Stock as quoted on the Nasdaq SmallCap Market on the
date Earth Sciences delivers the Exercise Notice to the Shareholders.
Section 2.4. Earth Sciences Delivery to the Shareholders.
At the Exchange Closing, as conditions thereto, Earth Sciences shall
deliver, or cause to be delivered, to the Shareholders:
(a) Certificates for the shares of Earth Sciences Common Stock
being received for their respective accounts and issuable at the Exchange
Closing as provided in this Article 2, in form and substance satisfactory to
the Shareholders and their counsel; and
(b) A certificate on behalf of Earth Sciences substantially in the
form of Exhibit C indicating that Earth Sciences has complied with all of the
covenants set forth in Article 7 hereto and attaching the certified copies of
resolutions of Earth Sciences' Board of Directors approving the exercise of
the Option.
Section 2.5. Shareholders Delivery to Earth Sciences.
At the Exchange Closing, as conditions thereto, the Shareholders shall
deliver to Earth Sciences:
(a) Stock certificates evidencing the ownership of each Shareholder
of all Shares owned by them, duly endorsed for transfer to Earth Sciences;
(b) The certificate of ADA substantially in the form of Exhibit D;
(c) The minute book and all other corporate records and documents
of ADA-ES; and
(d) Executed resignations of all the directors of ADA-ES.
Section 2.6. Further Assurances.
From time to time after the Exchange Closing, the Shareholders and Earth
Sciences, and each of their respective affiliates, will execute and deliver
to the other such instruments of sale, transfer, conveyance, assignment and
delivery, consents, assurances, powers of attorney and other instruments as
may be reasonably requested by counsel for Earth Sciences or the Shareholders
in order to vest in Earth Sciences all right, title and interest of the
Shareholders in and to the Shares and in order to vest in the Shareholders
all right, title and interest in and to the Earth Sciences Common Stock and
otherwise to carry out the purpose and intent of this Agreement.
ARTICLE 3.REPRESENTATIONS AND WARRANTIES OF ADA
ADA represents and warrants to Earth Sciences that:
Section 3.1. Organization.
Each of ADA and ADA-ES is a corporation, duly organized, validly existing
and in good standing under the laws of the State of Colorado with all
requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as now being conducted, and is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which its ownership or leasing of property or conduct of
business requires such licensing or qualification, except where the failure
to be so qualified would not have a material adverse effect on ADA-ES. ADA-
LLC is a limited liability company, duly organized, validly existing and in
good standing under the laws of the State of Colorado with all requisite
power and authority to own, operate and lease its properties and to carry on
its business as now being conducted, and is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which its ownership
or leasing of property or conduct of business requires such licensing or
qualification, except where the failure to be so qualified would not have a
material adverse effect on ADA-LLC. ADA has delivered to Earth Sciences
complete and correct copies of the Articles of Incorporation, By-Laws and
other minute book documents (including stock transfer records) of ADA-ES and
the Articles of Organization, the Operating Agreement and other minute book
documents of ADA-LLC, as in effect on the date hereof.
Section 3.2. Authorization.
ADA has taken all corporate action necessary to enter into and perform
this Agreement, except that ADA's shareholders need to approve the
transactions contemplated by this Agreement. The Board of Directors of ADA
has declared the Option and the Exchange fair to and advisable and in the
best interest of ADA's shareholders. The Shareholders have the requisite
power and authority to enter into this Agreement and to carry out their
obligations hereunder. Except as represented above in this Section, the
execution and delivery by the Shareholders of this Agreement, the performance
by the Shareholders of their obligations hereunder and the consummation by
the Shareholders of the transactions contemplated hereby have, to the extent
necessary, been duly authorized by the appropriate corporate or other action,
and no other proceeding on the part of the Shareholders is necessary for the
execution and delivery hereof and the performance of their obligations
hereunder. Assuming the valid authorization, execution and delivery of this
Agreement by Earth Sciences and except as represented above in this Section
with respect to ADA, this Agreement is a legal, valid and binding obligation
of the Shareholders, ADA-ES and ADA-LLC, enforceable in accordance with its
terms, except to the extent enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other similar
laws of general applicability relating to or affecting the enforcement of
creditors' rights and by the effect of general principles of equity
(regardless of whether enforceability is considered in a proceeding in equity
or at law).
Section 3.3. Capitalization.
All of the membership interests in ADA-LLC, not owned by Earth Sciences,
are owned by ADA-ES, and all of the issued and outstanding shares of ADA-ES
are owned by the Shareholders. All of such interests and shares have been
duly and validly issued, were not issued in violation of any preemptive
rights and are fully paid and non-assessable. Except as set forth in this
Agreement, there are no options, warrants, subscriptions, conversion or other
rights, agreements, commitments, arrangements or understandings with respect
to (i) the issuance of interests in ADA-LLC or any other securities
convertible into, exchangeable for or evidencing the right to subscribe for
any such interests in ADA-LLC or (ii) the issuance of shares of capital stock
of ADA-ES or any other securities convertible into, exchangeable for or
evidencing the right to subscribe for any such shares in ADA-ES.
Section 3.4. Consents and Approvals; No Violations.
Neither the execution, delivery or performance of this Agreement by the
Shareholders nor the consummation of the transactions contemplated hereby
will (i) conflict with or result in any breach of any provisions of the
Articles of Incorporation or By-laws of ADA or ADA-ES or the Articles of
Organization or the Operating Agreement of ADA-LLC, (ii) require any filing
with, or permit, authorization, consent or approval of, any court, arbitral
tribunal, administrative agency or commission unless the failure to obtain
such permits, authorizations, consents or approvals or to make such filings
would not prevent consummation of the Exchange and would not, to ADA's
knowledge, individually or in the aggregate, have a material adverse effect
on ADA, ADA -ES or ADA-LLC, (iii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default
(or give rise to any right of termination, amendment, cancellation or
acceleration) under, or result in the creation of any lien or other
encumbrance on any property or asset of ADA, ADA-ES or ADA-LLC pursuant to,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or
obligation to which any of ADA, ADA-ES or ADA-LLC is a party or by which any
of them or their properties or assets may be bound or (iv) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to any of
ADA, ADA-ES or ADA-LLC or by which any property or asset of any of them is
bound, except, in the case of clauses (iii) and (iv), for violations,
breaches, defaults or other occurrences which would not prevent consummation
of the Exchange and would not, in the aggregate, have a material adverse
effect on ADA, ADA-ES or ADA-LLC.
Section 3.5. Financial Statements.
The financial statements of ADA-ES and ADA-LLC, included herein as
Schedule 3.5, have been prepared in accordance with generally accepted
accounting principles, applied on a consistent basis during the periods
involved (except as may be indicated therein or in the notes thereto) and
fairly present the financial position of ADA-ES and ADA-LLC as at the dates
thereof and the results of their operations and changes in financial position
for the periods then ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments and to any other adjustments described
therein). There is no liability or obligation of any kind, whether accrued,
absolute, fixed or contingent, of ADA-ES or ADA-LLC which is required by
generally accepted accounting principles to be reflected or reserved against
or otherwise disclosed in the financial statements in Schedule 3.5 of ADA-ES
and ADA-LLC, which is not so reflected or reserved against, that individually
or in the aggregate would have a material adverse effect on ADA-ES and ADA-
LLC. Except as set forth in Schedule 3.5 hereto, there has not been any
material adverse change with respect to ADA-ES or ADA-LLC since the dates of
such financial statements, and ADA, ADA-ES and ADA-LLC have not incurred any
material obligation or liability of any kind outside of the ordinary course
of business since the dates of such financial statements except as previously
disclosed to Earth Sciences.
Section 3.6. Taxes.
Each of ADA, ADA-ES and ADA-LLC has filed on a timely basis all material
tax returns required to have been filed by it and has paid on a timely basis
all material taxes required to be shown thereon. All such tax returns were
true, complete and correct in all material respects. Each of ADA, ADA-ES and
ADA-LLC has made adequate provision for all material taxes in their
respective financial statements and in their respective accounting records.
No material liability for taxes has been incurred by ADA, ADA-ES or ADA-LLC
other than in the ordinary course of business. None of ADA, ADA-ES nor ADA-
LLC has received notice of any pending or threatened action that could result
in a liability for taxes in excess of those shown in their respective
financial statements. None of ADA, ADA-ES nor ADA-LLC has received notice
that any taxing authority has commenced or intends to commence an audit or
other examination with respect to taxes or tax returns, or has asserted
against ADA, ADA-ES or ADA-LLC any deficiency or claim for additional taxes,
and no material issues have been raised by any taxing authority that have not
been finally settled. None of ADA, ADA-ES nor ADA-LLC is a party to an income
tax allocation or sharing agreement with respect to a group of corporations
filing tax returns on a combined, consolidated or unitary basis. ADA-LLC is
treated as a partnership for tax purposes.
Section 3.7. Title and Related Matters.
ADA-ES and ADA-LLC have good and valid title to all of their material
assets reflected on the financial statements of ADA-ES and ADA-LLC (and which
are listed on Schedule 3.7 hereto), and all such material assets are free and
clear of material claims, burdens or rights of other persons.
Section 3.8. Patents, Trademarks and Other Intellectual Property.
Except as set forth in Schedule 3.8, ADA-ES and ADA-LLC possess or have
the right to use, to the extent they are now using, all proprietary rights
(including, without limitation, patents, trade secrets, technology, know-how,
copyrights, trademarks, trade names and rights to any of the foregoing), the
failure to possess which would have a material adverse effect on ADA-ES or
ADA-LLC or would prevent either from carrying on its business ("Subsidiary
Proprietary Rights"), and the consummation of the transactions contemplated
hereby will not alter or impair any such rights. Set forth in Schedule 3.8
is a list of all Subsidiary Proprietary Rights consisting of patents, patent
applications, trademarks, trademark applications, trade names and service
marks owned or utilized by ADA-ES and ADA-LLC. Schedule 3.8 also lists all
licenses or other contracts related thereto. With respect to such Subsidiary
Proprietary Rights, and except as set forth in Schedule 3.8, none of ADA, ADA-
ES or ADA-LLC has knowledge (i) of any claim asserted by any person
challenging such Subsidiary Proprietary Rights which could have a material
adverse effect on its business, (ii) that any of the Subsidiary Proprietary
Rights infringes or otherwise violates any valid rights of others or is being
infringed by others, and (iii) of, except for sales and licenses in the
ordinary course of business, any licenses, sublicenses or agreements
pertaining to any of the Subsidiary Proprietary Rights granted by ADA, ADA-ES
or ADA-LLC.
Section 3.9. Litigation.
Except as set forth in Schedule 3.9, there is no Proceeding (as defined
below) pending or, to the knowledge of the executive officers of ADA,
threatened against ADA, ADA-ES or ADA-LLC before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, or before any arbitrator of any
kind, that would have a material adverse effect on ADA, ADA-ES or ADA-LLC or,
with respect to such matters that are pending or threatened as of the date
hereof, materially impair the ability of ADA, ADA-ES or ADA-LLC to perform
its obligations hereunder or to consummate the transactions contemplated
hereby, and there is no judgment, decree, injunction, rule or order of any
court, governmental department, commission, board, bureau, agency,
instrumentality or arbitrator to which ADA, ADA-ES, ADA-LLC or any of their
Subsidiaries is subject that would have a material adverse effect on ADA, ADA-
ES or ADA-LLC or, with respect to such items that are outstanding and
applicable as of the date hereof, materially impair the ability of ADA, ADA-
ES or ADA-LLC to perform their obligations hereunder or to consummate the
transactions contemplated hereby. As used in this Agreement, "Proceeding"
means any action, suit, hearing, arbitration or governmental investigation
(whether public or private).
Section 3.10.Insurance and Surety Bonds.
All material policies of fire, liability, workmen's compensation and
other similar forms of insurance and surety bonds owned or held by ADA, ADA-
ES or ADA-LLC (copies of which have been provided to Earth Sciences) are in
full force and effect, and no notice of cancellation or termination has been
received with respect to any such policy. Such policies and bonds are valid,
outstanding and enforceable policies, and except as set forth in Schedule
3.10, will not be affected by, or terminate or lapse by reason of, the
transactions contemplated by this Agreement.
Section 3.11.Compliance with Laws.
ADA, ADA-ES and ADA-LLC have complied in all material respects with the
laws and regulations of federal, state, local and foreign governments and all
agencies thereof which are applicable to the business or properties of ADA,
ADA-ES and ADA-LLC, except for violations of which would not result in a
material adverse effect on ADA, ADA-ES or ADA-LLC. ADA, ADA-ES and ADA-LLC
hold such licenses, permits, consents, authorizations and orders of such
governmental or regulatory authorities as are necessary to carry on their
respective businesses as currently being conducted and as anticipated to be
conducted (a list of applicable licenses, permits, consents, authorizations
and orders are set forth on Schedule 3.11 hereto), the failure to hold which
could have a material adverse effect on ADA, ADA-ES or ADA-LLC, and such
licenses, permits, consents, authorizations and orders are in full force and
effect and have been and are being complied with by ADA, ADA-ES and ADA-LLC
in all material respects.
Section 3.12.Employee Benefit Plans.
Neither ADA-ES nor ADA-LLC nor any entity that together with either of
ADA-ES or ADA-LLC is treated as a single employer pursuant to Section 414(b)
or (c) of the Internal Revenue Code of 1986 (the "Code") or Section 3(5) or
4001(b) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), maintains or in the past has maintained any Employee Benefit Plan,
as defined in Section 3(3) of ERISA, under which any present or former
employee of either ADA-ES or ADA-LLC has any present or future rights to
benefits.
Section 3.13.Employment Related Agreements.
Neither ADA-ES nor ADA-LLC has ever had any employees or is a party to
any bonus, profit sharing, stock option, incentive, pension, retirement,
deferred compensation, consulting, severance, indemnification, employment or
similar arrangement or agreement with officers, directors, managers or
employees of ADA-ES or ADA-LLC.
Section 3.14.Labor Agreements and Controversies.
Neither ADA-ES nor ADA-LLC is a party to any collective bargaining
agreement nor are there any union representation proceedings or labor
controversies pending or, to the knowledge of ADA, threatened against either
ADA-ES or ADA-LLC.
Section 3.15.Environmental Matters.
ADA, ADA-ES and ADA-LLC are in material compliance with all laws, rules,
regulations and other legal requirements relating to the environment, and
ADA, ADA-ES and ADA-LLC possess all material permits, licenses and similar
authorizations required thereunder. There is no physical condition existing
on any property owned or operated by ADA-ES or ADA-LLC or any physical
conditions existing on any other property that may have been impacted by
operation of their businesses which could reasonably be expected to give rise
to any material remedial obligation under any environmental law or which
could reasonably be expected to result in any material liability to any third
party claiming damage to person or property as a result or consequence of
said physical conditions.
<PAGE>
Section 3.16.Certain Fees.
No broker, investment broker or other person is entitled to any broker's,
finder's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by
or on behalf of the Shareholders.
Section 3.17.Contracts and Commitments.
Except as set forth on Schedule 3.17 or on another Schedule to this
Agreement, neither ADA-ES nor ADA-LLC is, at the date of this Agreement, a
party to any written or oral
(a) contract with any labor union,
(b) bonus, pension, profit-sharing, retirement, stock purchase,
stock option, hospitalization, insurance or similar plan relating to any
employees of ADA-ES, ADA-LLC or their Subsidiaries,
(c) employment contract, consulting contract or retainer,
(d) lease with respect to any property, real or personal,
whether as lessor or lessee,
(e) loan agreement or other instrument relating to indebtedness
for borrowed money,
(f) contract or arrangement for insurance, including life
insurance and fidelity bonds covering officers or employees or agents
including, without restricting the generality of the foregoing, those
covering their respective properties, buildings, machinery, equipment, furni
ture, fixtures and operations,
(g) contract containing covenants by ADA-ES, ADA-LLC or any
other person not to compete in any line of business,
(h) patent, patent application, trademark, trademark
registration or application therefor, trade name, copyright, or copyright
registration or application therefor, or any patent, trademark or copyright
license or agreement,
(i) joint venture agreements,
(m) distributorship, agency or brokerage contracts, or
(n) any other material contract.
ADA has furnished or made available to Earth Sciences the original or a true
and complete copy of each document (or a summary of the material provisions
in the event a formal document does not exist) referred to in Schedule 3.17.
Neither ADA-ES nor ADA-LLC nor, to ADA's knowledge, any other party thereto
is in default, nor, but for a requirement that notice be given or that a
period of time elapse, or both, would ADA-ES, ADA-LLC, or, to ADA's
knowledge, any other party thereto be in default, in any material respect,
under any contract or commitment referred to above.
<PAGE>
Section 3.18. No Other Representations.
ADA is not making any representation or warranty, express or implied, of
any nature whatsoever, except as specifically set forth in this Agreement.
ARTICLE 4.REPRESENTATIONS AND WARRANTIES OF OTHER SHAREHOLDERS
Each of the Shareholders, other than ADA, represents and warrants
severally to Earth Sciences that:
Section 4.1. Authorization.
Such Shareholder has taken all action necessary to enter into and
perform this Agreement. Such Shareholder has the requisite power and
authority to enter into this Agreement and to carry out his, her or its
obligations hereunder. Assuming the valid authorization, execution and
delivery of this Agreement by Earth Sciences and the other Shareholders and
except as represented above with respect to ADA, this Agreement is a legal,
valid and binding obligation of such Shareholder, enforceable in accordance
with its terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or
other similar laws of general applicability relating to or affecting the
enforcement of creditors' rights and by the effect of general principles of
equity (regardless of whether enforceability is considered in a proceeding in
equity or at law).
Section 4.2. Shares.
To the best of such Shareholder's knowledge, all of the Shares owned by
such Shareholder have been duly and validly issued, were not issued in
violation of any preemptive rights and are fully paid and non-assessable.
Such Shareholder holds no options, warrants, subscriptions, conversion or
other rights, agreements, commitments, arrangements or understandings with
respect to the issuance of shares of capital stock of ADA-ES or any other
securities convertible into, exchangeable for or evidencing the right to
subscribe for any such shares in ADA-ES. Such Shareholder is the lawful
owner, of record and beneficially, of the number of Shares set forth below
his, her or its name on the signature page hereto and has, and will transfer
to Earth Sciences at the Exchange Closing, if Earth Sciences exercises the
Option, good and marketable title to such Shares, free and clear of any
security interests, liens, pledges, claims, charges, escrows, encumbrances,
options, rights of first refusal, mortgages, indentures, security agreements
or other agreements, arrangements, contracts, commitments, understandings or
obligations, whether written or oral and whether or not relating in any way
to credit or the borrowing of money ("Encumbrances"). There are no
restrictions on the voting rights and the other incidents of record and
beneficial ownership pertaining thereto. There are no agreements or
understandings between any Shareholder and any other Shareholder or any other
person with respect to the voting of any of the Shares or any other matters
affecting the Shares.
<PAGE>
Section 4.3. Consents and Approvals; No Violations.
Neither the execution, delivery or performance of this Agreement by such
Shareholder nor the consummation by such Shareholder of the transactions
contemplated hereby will require, with respect to such Shareholder, any
filing with, or permit, authorization, consent or approval of, any court,
arbitral tribunal, administrative agency or commission.
Section 4.4. No Other Representations.
Such Shareholder is not making any representation or warranty, express
or implied, of any nature whatsoever, except as specifically set forth in
this Agreement.
ARTICLE 5.INVESTMENT REPRESENTATIONS OF THE SHAREHOLDERS
Section 5.1. Purchaser Representative.
Each Shareholder represents and warrants that he, she or it has duly
appointed Russ Farmer (the "Purchaser Representative") to serve as their
purchaser representative in connection with their evaluation of the risks and
merits of granting the Option to Earth Sciences pursuant to this Agreement
and their potential acquisition of Earth Sciences Common Stock in connection
with an exercise of the Option. Each Shareholder also represents and
warrants that the Shareholder, together with the Purchaser Representative,
has the requisite knowledge and experience in financial and business matters
for properly evaluating the risks of an investment in Earth Sciences. Each
Shareholder acknowledges that the Purchaser Representative will be reimbursed
by ADA for any expenses in connection with such appointment. Each
Shareholder also acknowledges that he, she or it is aware of the
transactions, listed on Schedule 5.1, that have occurred between Purchaser
Representative and ADA, ADA-ES and ADA-LLC.
Section 5.2. State of Residence or Business.
Each Shareholder who is an individual represents and warrants that the
Shareholder is a resident of the State of Colorado. Each Shareholder that is
a corporation represents and warrants that its principal place of business is
located in the State of Colorado.
Section 5.3. Tax Consequences.
Each Shareholder represents and warrants that the Shareholder
understands that Earth Sciences has made no representation or warranty
regarding the tax consequences to any Shareholder of the Exchange.
Section 5.4. Investment Intent.
Each Shareholder represents and warrants that the Shareholder will
acquire the Earth Sciences Common Stock issuable to the Shareholder upon the
exercise of the Option solely for the Shareholder's own account for
investment and not with a view to or for sale or distribution of the Earth
Sciences Common Stock or any portion thereof and not with any present
intention of selling, offering to sell or otherwise disposing of or
distributing the Earth Sciences Common Stock or any portion thereof in any
transaction, other than a transaction registered under the Securities Act of
1933, as amended (the "Securities Act"), or a transaction exempt from the
registration requirements under the Securities Act. Each Shareholder also
represents that the entire legal and beneficial interest of the Earth
Sciences Common Stock the Shareholder may acquire would be acquired for, and
would be held for the account of, the Shareholder only and neither in whole
nor in part for any other person.
Section 5.5. Transfer Restrictions.
Each Shareholder represents and warrants that the Shareholder
understands that:
(a) neither the sale of the Earth Sciences Common Stock which the
Shareholder may acquire nor the shares of Earth Sciences Common Stock
themselves have been registered under the Securities Act or any state
securities laws, and the Earth Sciences Common Stock must be held
indefinitely unless subsequently registered under the Securities Act or an
exemption from such registration is available; and
(b) the share certificate representing the Earth Sciences Common
Stock will be stamped with the following legend (or substantially equivalent
language) restricting transfer:
"The securities represented by this certificate have not been registered
under the Securities Act of 1933 or the laws of any state and have been
issued pursuant to an exemption from registration pertaining to such
securities and pursuant to a representation by the security holder named
hereon that said securities have been acquired for purposes of investment and
not for purposes of distribution. These securities may not be offered, sold,
transferred, pledged or hypothecated in the absence of registration, or the
availability of an exemption from such registration. Furthermore, no offer,
sale, transfer, pledge or hypothecation is to take place without the prior
written approval of counsel to the issuer being affixed to this certificate.
The stock transfer agent has been ordered to effectuate transfers of this
certificate only in accordance with the above instructions."
Section 5.6. Ability to Accept Risk of Investment.
EACH SHAREHOLDER REPRESENTS AND WARRANTS THAT SUCH SHAREHOLDER REALIZES
THAT SHAREHOLDER'S ACQUISITION OF THE EARTH SCIENCES COMMON STOCK WILL BE A
HIGHLY SPECULATIVE INVESTMENT AND THAT SHAREHOLDER IS ABLE, WITHOUT IMPAIRING
THE SHAREHOLDER'S FINANCIAL CONDITION, TO HOLD THE EARTH SCIENCES COMMON
STOCK FOR AN INDEFINITE PERIOD OF TIME AND TO SUFFER A COMPLETE LOSS OF THE
SHAREHOLDER'S INVESTMENT.
Section 5.7. Review of Earth Sciences Documents.
Each Shareholder acknowledges that, to such Shareholder's satisfaction
and the satisfaction of the Purchaser Representative, (i) the Shareholder and
Purchaser Representative have either had access to or have been furnished
with all the information regarding Earth Sciences (including without
limitation Earth Sciences' Form 10-KSB for the year ended December 31, 1996
filed with the Securities and Exchange Commission (the "SEC")) and the terms
of Shareholder's potential investment in Earth Sciences to the satisfaction
of Shareholder and the Purchaser Representative, (ii) the Shareholder and the
Purchaser Representative have discussed the entire investment transaction and
the information described in clause (i) above with representatives of Earth
Sciences, (iii) the Shareholder and the Purchaser Representative have been
provided the opportunity to ask questions concerning this investment
transaction and the terms and conditions thereof and all such questions have
been answered to the satisfaction of the Shareholder and the Purchaser
Representative, (iv) the Shareholder and the Purchaser Representative have
obtained all additional information which they deem necessary to verify the
accuracy of the information previously disclosed or provided to them and (v)
the Shareholder and the Purchaser Representative have had ready access to and
an opportunity to review any and all documents which they deem relevant to
this transaction, and no information, oral or written, that they have
requested has been withheld by Earth Sciences.
Section 5.8. Restricted Securities.
Each Shareholder represents and warrants that such Shareholder
understands that the Earth Sciences Common Stock he, she or it may receive
will be restricted securities within the meaning of Rule 144 promulgated
under the Securities Act; that the exemption from registration under Rule 144
will not be available in any event for at least one year from the date of
acquisition of the Earth Sciences Common Stock by such Shareholder, and even
then will not be available unless (i) a public trading market then exists for
the Earth Sciences Common Stock, (ii) adequate information concerning Earth
Sciences is then available to the public and (iii) other terms and conditions
of Rule 144 are complied with; and that any sale of the Earth Sciences Common
Stock may be made by such Shareholder only in limited amounts in accordance
with such terms and conditions.
Section 5.9. Disposition of Earth Sciences Common Stock.
Without in any way limiting the Shareholder's representations set forth
above, each Shareholder further agrees that such Shareholder shall in no
event make any disposition of all or any portion of the Earth Sciences Common
Stock which such Shareholder may acquire unless and until:
(a) there is then in effect a registration statement under the
Securities Act covering such proposed disposition, and such disposition is
made in accordance with said registration statement; or
(b) (i) such Shareholder shall have notified Earth Sciences of the
proposed disposition and shall have furnished Earth Sciences with a detailed
statement of the circumstances surrounding the proposed disposition, (ii)
such Shareholder shall have furnished Earth Sciences with an opinion of
Shareholder's own counsel to the effect that such disposition will not
require registration of such shares under the Securities Act and (iii) such
opinion of such Shareholder's counsel shall have been reasonably concurred in
by counsel for Earth Sciences, and Earth Sciences shall have advised
Shareholder of such concurrence.
ARTICLE 6.REPRESENTATIONS AND WARRANTIES OF EARTH SCIENCES
Earth Sciences represents and warrants to the Shareholders that:
Section 6.1. Organization, Standing and Power.
Earth Sciences is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Colorado and has the
requisite corporate power and authority to carry on its business as now being
conducted. Earth Sciences is duly qualified to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified would not,
individually or in the aggregate, have a material adverse effect on Earth
Sciences.
Section 6.2. Capital Structure.
The authorized capital stock of Earth Sciences consists of 25,000,000
shares of Earth Sciences Common Stock. At the close of business on April 18,
1997, (i) 8,620,071 shares of Earth Sciences Common Stock were issued and
outstanding, (ii) 739,000 shares of Earth Sciences Common Stock were reserved
for issuance upon the exercise of then outstanding Earth Sciences stock
options, (iii) 69,900 shares of Earth Sciences Common Stock were reserved for
issuance upon exercise of Earth Sciences stock options which may be granted
in the future under currently existing stock option plans, (iv) 1,224 shares
of Earth Sciences Common Stock were held by Earth Sciences in its treasury
and (v) 4,979,824 shares of Earth Sciences Common Stock were reserved for
issuance upon the conversion of conversion rights or convertible securities.
The number of shares reserved for convertible securities includes an
estimated 4,616,667 shares reserved for issuance upon the conversion of
convertible debentures (the "Debentures") and represents a sufficient number
of shares for an average conversion rate of $1.27 per share. Under the terms
of the Debentures, Earth Sciences may be required to issue further shares
under certain market conditions.
All outstanding shares of capital stock of Earth Sciences are validly
issued, fully paid and nonassessable and not subject to preemptive rights.
Except as set forth above, as of the date of this Agreement, there are no
options, warrants, rights, commitments, agreements, arrangements or
undertakings of any kind to which Earth Sciences is a party or by which it is
bound obligating Earth Sciences to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or other voting
securities of Earth Sciences.
Section 6.3. Authority; Non-Contravention.
The Board of Directors of Earth Sciences has declared the Exchange fair
to and advisable and in the best interest of the shareholders of Earth
Sciences (the "Earth Sciences Shareholders"). Earth Sciences has all
requisite power and authority to enter into this Agreement and to consummate
the transactions contemplated hereby. No approval by the shareholders of
Earth Sciences is required in connection with any of the transactions
contemplated hereby. The execution and delivery of this Agreement by Earth
Sciences and the consummation by Earth Sciences of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Earth Sciences. This Agreement has been duly executed
and delivered by Earth Sciences and (assuming the valid authorization,
execution and delivery of this Agreement by the Shareholders) constitutes a
valid and binding obligation of Earth Sciences enforceable against Earth
Sciences in accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer or other similar laws of general applicability relating
to or affecting the enforcement of creditors' rights and by the effect of
general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law). The execution and delivery
of this Agreement do not, and the consummation of the transactions
contemplated hereby and compliance with the provisions hereof will not,
conflict with, or result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to the loss of
a material benefit under, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets of Earth
Sciences under, any provision of (i) the Certificate of Incorporation or By-
laws of Earth Sciences (true and complete copies of which as of the date
hereof have been delivered to the Shareholders), (ii) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to Earth
Sciences or (iii) any judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to Earth Sciences or any of its respective
properties or assets, other than, in the case of clauses (ii) or (iii), any
such conflicts, violations, defaults, rights, liens, losses, security
interests, charges or encumbrances that, individually or in the aggregate,
would not have a material adverse effect on Earth Sciences, materially impair
the ability of Earth Sciences to perform its obligations hereunder or prevent
the consummation of any of the transactions contemplated hereby. No filing
or registration with, or authorization, consent or approval of, any
governmental entity is required by or with respect to Earth Sciences in
connection with the execution and delivery of this Agreement by Earth
Sciences or is necessary for the consummation by Earth Sciences of the
Exchange and the other transactions contemplated by this Agreement, except
for (i) in connection, or in compliance, with the provisions of the
Securities Act, and the Securities Exchange Act of 1934 (the "Exchange Act"),
(ii) such filings as may be required in connection with applicable taxes, and
(iii) such other consents, approvals, orders, authorizations, registrations,
declarations and filings the failure of which to be obtained or made would
not, individually or in the aggregate, have a material adverse effect on
Earth Sciences, materially impair the ability of Earth Sciences to perform
its obligations hereunder or prevent the consummation of any of the
transactions contemplated hereby.
Section 6.4. SEC Documents.
Earth Sciences has filed all required documents with the SEC (the "Earth
Sciences SEC Documents"). As of their respective dates, the Earth Sciences
SEC Documents complied in all material respects with the requirements of the
Securities Act, or the Exchange Act, as the case may be, and none of the
Earth Sciences SEC Documents, as of its date, contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Earth Sciences included in the Earth Sciences SEC Documents
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with generally accepted accounting
principles (except, in the case of unaudited statements, as permitted by Form
10-QSB of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated therein or in the notes thereto) and fairly
present the financial position of Earth Sciences as at the dates thereof and
the results of operations and changes in financial position for the periods
then ended (subject, in the case of unaudited statements, to normal year-end
audit adjustments and to any other adjustments described therein). There is
no liability or obligation of any kind, whether accrued, absolute, fixed or
contingent, of Earth Sciences of which the executive officers of Earth
Sciences have knowledge and which is required by generally accepted
accounting principles to be reflected or reserved against or otherwise
disclosed in the most recent financial statements of Earth Sciences included
in the Earth Sciences SEC Documents which is not so reflected or reserved
against that individually or in the aggregate would have a material adverse
effect on Earth Sciences.
Section 6.5. Earth Sciences Disclosure Material.
The Earth Sciences Disclosure Material (defined below) will not, at the
time of the ADA Shareholder Meeting and the ADA-ES Shareholder Meeting
(defined below), contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under which
they are made, not misleading.
Section 6.6. Absence of Material Adverse Change.
Except as specifically disclosed in the Earth Sciences SEC Documents
filed with the SEC prior to the date hereof, there has not been any material
adverse change with respect to Earth Sciences.
Section 6.7. Reorganization.
To the knowledge of Earth Sciences, Earth Sciences has not taken any
action or failed to take any action which action or failure to take action
would jeopardize the qualification of the Exchange as a reorganization within
the meaning of Section 368(a)(1)(B) of the Code (a "Reorganization");
provided, however, Earth Sciences makes no representation or warranty that
the Exchange will qualify as a reorganization within the meaning of Section
368(a)(1)(B) of the Code.
Section 6.8. Tax Representations.
All material tax returns required to be filed by Earth Sciences (the "ES
Tax Returns") have been filed or extensions have been obtained. The ES Tax
Returns are true and correct in all material respects and have been completed
in all material respects in accordance with applicable laws. All taxes shown
to be due on the ES Tax Returns have been timely paid or extensions have been
duly obtained, or such taxes have been adequately provided for on Earth
Sciences' latest balance sheet or are being timely and properly contested.
Earth Sciences has not waived any statute of limitations in respect of taxes
of Earth Sciences. No issues that have been raised in writing by the
relevant taxing authority in connection with the examination of the ES Tax
Returns are currently pending. All deficiencies asserted or assessments made
as a result of any examination of the ES Tax Returns by a taxing authority
have been paid in full or adequately provided for on Earth Sciences' latest
balance sheet or are being timely and properly contested. Earth Sciences is
not a party to an income tax allocation or sharing agreement with respect to
a group of corporations filing tax returns on a combined, consolidated or
unitary basis.
Section 6.9. Title and Related Matters.
Earth Sciences has good title to all of the material assets reflected on
the financial statements of Earth Sciences included in the Earth Sciences SEC
Documents as being owned by it and all of the material assets thereafter
acquired by it (except to the extent that such assets have thereafter been
disposed of in the ordinary course of business consistent with past
practice), subject to no material liens, except for (i) liens for taxes not
yet delinquent or the validity of which is being contested in good faith,
(ii) any liens arising by operation of law securing obligations not yet
overdue, (iii) liens disclosed in Earth Sciences SEC Documents and (iv) liens
otherwise specifically disclosed in writing to the Shareholders.
Section 6.10. Agreements.
Earth Sciences is not bound by any material contract (as defined in Item
601(b)(10) of SEC Regulation S-K) to be performed after the date hereof that
has not been filed with or incorporated by reference in the Earth Sciences
SEC Documents filed with the SEC prior to the date of this Agreement or
otherwise specifically disclosed in writing to the Shareholders.
Section 6.11. Litigation.
Except as disclosed prior to the date hereof in the Earth Sciences SEC
Documents, there is no Proceeding pending or, to the knowledge of the
executive officers of Earth Sciences, threatened against Earth Sciences
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, or
before any arbitrator of any kind, that would have a material adverse effect
on Earth Sciences or, with respect to such matters that are pending or
threatened as of the date hereof, materially impair the ability of Earth
Sciences to perform its obligations hereunder or to consummate the
transactions contemplated hereby, and there is no judgment, decree,
injunction, rule or order of any court, governmental department, commission,
board, bureau, agency, instrumentality or arbitrator to which Earth Sciences
or any of its Subsidiaries is subject that would have a material adverse
effect on Earth Sciences or, with respect to such items that are outstanding
and applicable as of the date hereof, materially impair the ability of Earth
Sciences to perform its obligations hereunder or to consummate the
transactions contemplated hereby.
Section 6.12. Patents, Trademarks and Other Intellectual Property.
Earth Sciences possesses or has the right to use to the extent it is now
using, all proprietary rights (including, without limitation, patents, trade
secrets, technology, know-how, copyrights, trademarks, trade names and rights
to any of the foregoing), the failure to possess which would have a material
adverse effect on Earth Sciences or would prevent it from carrying on its
business ("ES Proprietary Rights"), and the consummation of the transactions
contemplated hereby will not alter or impair any such rights. With respect
to such ES Proprietary Rights, Earth Sciences has no knowledge (i) of any
claim asserted by any person challenging such ES Proprietary Rights which
could have a material adverse effect on its business, (ii) that any of the ES
Proprietary Rights infringes or otherwise violates the rights of others or is
being infringed by others and (iii) except for sales and licenses in the
ordinary course of business, no licenses, sublicenses or agreements
pertaining to any of the ES Proprietary Rights have been granted by Earth
Sciences.
Section 6.13. Insurance and Surety Bonds.
All material policies of fire, liability, workmen's compensation and
other forms of insurance and surety bonds owned or held by Earth Sciences are
in full force and effect, and no notice of cancellation or termination has
been received with respect to any such policy. Such policies and bonds are
valid, outstanding and enforceable policies and will not be affected by, or
terminate or lapse by reason of, the transactions contemplated by this
Agreement. Such policies and surety bonds, and such other policies and
reserves added since such date, provide, to the knowledge of Earth Sciences,
insurance coverage that is adequate for the assets and operations of Earth
Sciences. Earth Sciences has been and is covered by insurance in scope and
amount customary and reasonable for the business in which it is engaged.
Section 6.14. Compliance with Laws.
Earth Sciences has complied in all material respects with the laws and
regulations of federal, state, local and foreign governments and all agencies
thereof which are applicable to the business or properties of Earth Sciences,
except for violations of which would not result in a material adverse effect
on Earth Sciences. Earth Sciences hold such licenses, permits, consents,
authorizations and orders of such governmental or regulatory authorities as
are necessary to carry on its business as currently being conducted and as
anticipated to be conducted, the failure to hold which could have a material
adverse effect on Earth Sciences, and such licenses, permits, consents,
authorizations and orders are in full force and effect and have been and are
being fully complied with by Earth Sciences.
Section 6.15. Employee Benefit Plans.
(a) Except as set forth in Schedule 6.15(a), (i) neither Earth
Sciences nor an ERISA Affiliate maintains or in the past has maintained any
Employee Benefit Plan, as defined in Section 3(3) of ERISA, under which any
present or former employee of Earth Sciences has any present or future rights
to benefits, (ii) to its knowledge each such Employee Benefit Plan has been
administered in accordance with the applicable material requirements of ERISA
and the Code, (iii) to its knowledge all material reports and information
required to be filed with the United States Department of Labor, Internal
Revenue Service or Pension Benefit Guaranty Corporation, or distributed to
participants and their beneficiaries with respect to each such Employee
Benefit Plan, has been timely filed or distributed and, with respect to each
Employee Benefit Plan for which an Annual Report has been filed, no change
has occurred with respect to the matters covered by the Annual Report since
the date of the most recent such Annual Report which could reasonably be
expected to have a material adverse effect on Earth Sciences and (iv) there
have been no non-exempt "prohibited transactions" (as that term is defined in
the Code or in ERISA) with respect to any such Employee Benefit Plan and no
material penalty or tax under ERISA or the Code has been imposed upon Earth
Sciences and there are no pending or, to Earth Sciences' knowledge,
threatened claims by or on behalf of any such Employee Benefit Plan, by any
employee or beneficiary covered by such Employee Benefit Plan, or otherwise
involving such Employee Benefit Plan, other than claims for benefits in the
ordinary course.
(b) Each such Employee Benefit Plan which is an "employee pension
benefit plan," as defined in ERISA and which is intended to be "qualified"
within the meaning of Section 401(a) of the Code, is so qualified and a
favorable determination letter has been issued by the Internal Revenue
Service with respect to the prototype of such plan and no such prototype plan
has been amended since the issuance of the most recent determination letter
issued by the Internal Revenue Service with respect thereto. No such
Employee Benefit Plan is subject to Title IV of ERISA or Section 412 of the
Code.
<PAGE>
Section 6.16. Environmental Matters.
Earth Sciences is in material compliance with all laws, rules,
regulations and other legal requirements relating to the environment. Earth
Sciences possesses all material permits, licenses, and similar authorizations
required thereunder. There is no physical condition existing on any property
owned or operated by Earth Sciences or any physical conditions existing on
any other property that may have been impacted by operation of its business
which could reasonably be expected to give rise to any material remedial
obligation under any environmental law or which could reasonably be expected
to result in any material liability to any third party claiming damage to
person or property as a result or consequence of said physical conditions.
Section 6.17. Certain Fees.
No broker, investment banker or other person is entitled to any
broker's, finder's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by
or on behalf of Earth Sciences.
Section 6.18. No Other Representations.
Earth Sciences is not making any representation or warranty, express or
implied, of any nature whatsoever, except as specifically set forth in this
Agreement.
ARTICLE 7.COVENANTS OF EARTH SCIENCES PRIOR TO THE EXCHANGE CLOSING
Upon the execution and delivery of this Agreement, Earth Sciences hereby
covenants that, prior to and at the Exchange Closing:
Section 7.1. Operation in Usual Manner; Access for the Shareholders.
Earth Sciences shall (i) continue to conduct its business in its usual
manner and (ii) give the Shareholders' representatives full access, during
normal business hours, and upon reasonable notice, to all of Earth Sciences'
assets, properties, books, records, agreements and commitments and furnish
the Shareholders' representatives during such period with all such
information concerning Earth Sciences as the Shareholders may reasonably
request; provided, however, that any furnishing of such information to the
Shareholders or any investigation by the Shareholders shall not affect the
Shareholders' right to rely on the representations and warranties made by
Earth Sciences in this Agreement, and, provided further, that the
Shareholders will hold in strict confidence all documents and information
concerning Earth Sciences so furnished, and, if the transactions contemplated
in this Agreement shall not be consummated, such confidence shall be
maintained and all such documents shall immediately thereafter be returned to
Earth Sciences.
Section 7.2. Corporate Existence, Rights and Franchises.
Earth Sciences shall take all necessary actions to maintain in full
force and effect its corporate existence, rights, franchises and good
standing.
<PAGE>
Section 7.3. Nasdaq Listing.
Earth Sciences shall take all actions necessary to ensure that the Earth
Sciences Common Stock is quoted on the Nasdaq SmallCap Market.
Section 7.4. Corporate Action and Consents.
Earth Sciences shall take all necessary corporate and other action and
use its best efforts to obtain all consents and approvals required to enable
it to carry out the transactions contemplated by this Agreement.
Section 7.5. Conditions to be Satisfied.
Earth Sciences shall use its best efforts to cause all the conditions to
the obligations of the Shareholders under this Agreement to be satisfied
prior to the Exchange Closing.
Section 7.6. Regulatory Approvals.
Earth Sciences shall take all necessary actions to obtain any and all
permits, approvals and qualifications of, and there shall have been made or
completed all filings, proceedings and waiting periods, required by, any
governmental body, agency or regulatory authority which, in the reasonable
opinion of counsel to the Shareholders are required for the consummation of
the transactions contemplated hereby and the operation of Earth Sciences for
its intended purpose.
Section 7.7. Additional Funding and Payment to ADA.
(a) The additional funding needed to pay the Note is or will be
available to Earth Sciences at the times required; and
(b) On April 30, 1997 and on June 30, 1997, (i) $400,000 and (ii) an
amount not to exceed $380,000, respectively, will be used to repay all
outstanding indebtedness owed by ADA-LLC to ADA incurred for operating
expenses of ADA-LLC. Earth Sciences agrees to cause ADA-LLC to make such
payments.
Section 7.8. Seat on Earth Sciences Board of Directors.
Earth Sciences shall use its best efforts to make available one seat on
the Earth Sciences Board of Directors for a representative of the
Shareholders between the Option Closing and the Exchange Closing and for so
long thereafter as, in the aggregate, the Shareholders own no less than
1,000,000 shares of Earth Sciences Common Stock. Earth Sciences shall
nominate an individual designated by the Shareholders for such seat,
provided, however, that such individual shall agree to recuse himself or
herself from any matters relating to the decision whether or not to exercise
the Option. Management shareholders of Earth Sciences shall enter into
voting agreements, substantially in the form of Exhibit E, agreeing to vote
their shares of Earth Sciences Common Stock in favor of one individual
designated by the Shareholders for such seat.
Section 7.9. Tax-Free Exchange.
Subject to the proviso to the first sentence of Section 6.7 hereof,
Earth Sciences will not take any action or fail to take any action which
action or failure to take action, to its knowledge, would jeopardize the
qualification of the Exchange as a Reorganization.
<PAGE>
Section 7.10. Guarantee of Leases.
Earth Sciences shall use its best efforts to execute and deliver a
guaranty of all leases for operating equipment used by ADA-LLC and currently
guaranteed by ADA. Earth Sciences shall use its best efforts to make such
guaranty effective on the Option Closing and, after the Option Closing, to
provide that ADA shall be released from all obligations under its current
guaranty of such leases.
ARTICLE 8.COVENANTS OF ADA AND THE OTHER SHAREHOLDERSPRIOR TO THE EXCHANGE
CLOSING
ADA and the other Shareholders (except as otherwise specifically
indicated below) hereby covenant that from the date hereof until and at the
Exchange Closing:
Section 8.1. Operation in Usual Manner; Access for Earth Sciences .
ADA will cause ADA-ES and ADA-LLC to (i) continue to conduct their
business in their usual manner, except as otherwise contemplated by this
Agreement and (ii) give Earth Sciences' representatives full access, during
normal business hours, and upon reasonable notice, to all of ADA-LLC's and
ADA-ES's assets, properties, books, records, agreements and commitments and
furnish Earth Sciences' representatives during such period with all such
information concerning ADA-LLC and ADA-ES as Earth Sciences may reasonably
request; provided, however, that any furnishing of such information to Earth
Sciences or any investigation by Earth Sciences shall not affect Earth
Sciences' right to rely on the representations and warranties made by ADA and
the Shareholders in this Agreement, and, provided further, that Earth
Sciences will hold in strict confidence all documents and information
concerning ADA-ES and ADA-LLC so furnished, and, if the transactions
contemplated in this Agreement shall not be consummated, such confidence
shall be maintained and all such documents shall immediately thereafter be
returned to ADA-ES or ADA-LLC.
Section 8.2. Existence, Rights and Franchises.
The Shareholders and current officers, directors and managers of ADA-ES
and ADA-LLC shall each take all necessary actions to cause their respective
entity to maintain in full force and effect its corporate or other existence,
rights, franchises and good standing and shall not cause or permit to be made
any change in the Articles or Bylaws of ADA-ES or the Articles of
Organization or Operating Agreement of ADA-LLC, except as otherwise
contemplated by this Agreement.
Section 8.3. Action and Consents.
ADA and the Shareholders shall take all necessary action and use their
respective best efforts to obtain all consents and approvals required to
enable the Shareholders to carry out the transactions contemplated by this
Agreement.
Section 8.4. Conditions to be Satisfied.
ADA and the Shareholders shall use their respective best efforts to
cause all the conditions to the obligations of Earth Sciences under this
Agreement to be satisfied prior to the Exchange Closing.
<PAGE>
Section 8.5. Regulatory Approvals.
ADA and the Shareholders shall take all necessary actions to cause ADA-
ES and ADA-LLC to obtain any and all permits, approvals and qualifications
of, and there shall have been made or completed all filings, proceedings and
waiting periods required by, any governmental body, agency or regulatory
authority which, in the reasonable opinion of counsel to Earth Sciences are
required for the consummation of the transactions contemplated hereby and the
operation of ADA-ES and ADA-LLC for their intended purpose.
Section 8.6. No Encumbrances.
The ADA-ES Shareholders shall keep the Shares free and clear of any
Encumbrances.
Section 8.7. Actions to Impair Value of ADA-ES.
The Shareholders covenant to cause ADA-ES, and ADA-ES hereby
covenants, not to (i) acquire or dispose of any material asset, (ii) incur
any material indebtedness or other obligation, (iii) make any distributions
on its capital stock or (iv) issue any securities or take any other material
action which would materially impair the value of ADA-ES (except as
previously disclosed).
ARTICLE 9.CERTAIN AGREEMENTS OF THE PARTIES
Section 9.1. Tax Matters.
After the Option Closing, Earth Sciences and each Shareholder shall make
available to the other parties hereto, as reasonably requested, all
information, records or documents relating to the liability for taxes of
Earth Sciences, ADA-ES, ADA-LLC and the Shareholders with respect to the
transactions contemplated hereby and shall preserve such information, records
or documents until the expiration of any applicable statute of limitations or
extensions thereof.
Section 9.2. Public Announcements.
Earth Sciences and the Shareholders shall consult with each other before
issuing any press release or otherwise making any public statements with
respect to this Agreement or the transactions contemplated hereby and will
not issue any such press release or make any such public statement prior to
such consultation. Notwithstanding the foregoing, the Shareholders and Earth
Sciences shall not be prohibited from issuing any press release or making any
public statement as may be required under applicable law, but, in any such
event, the Shareholders or Earth Sciences, as the case may be, shall notify
the other party prior to taking such action.
Section 9.3. Notification of Certain Matters.
Earth Sciences and the Shareholders shall give prompt notice to one
another of (i) prior to the Option Closing, the occurrence, or failure to
occur, of any event which occurrence or failure would or would be likely to
cause any of their respective representations or warranties contained in this
Agreement to be untrue or inaccurate in any material respect or would or
would likely cause any condition to become impossible to fulfill and (ii)
prior to the Exchange Closing, any failure on their part or on the part of
any of their respective officers, directors, employees, representatives or
agents to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by them under this Agreement; provided, however,
that no such notification will alter or otherwise affect such
representations, warranties, covenants, conditions or agreements.
Section 9.4. Reorganization.
(a) Intention of Parties. The parties intend that the Exchange
qualify as a Reorganization.
(b) Books, Records and Tax Information. Both prior to and after the
Exchange Closing Date, all books and records will be maintained, and all tax
returns and schedules thereto will be filed, in a manner consistent with the
Exchange being treated as a Reorganization. Each party will provide to each
other party such tax information, reports, returns or schedules as may be
reasonably required to assist such party in accounting for and reporting the
Exchange as a Reorganization.
(c) Actions by Parties. During the period from the date of this
Agreement through the Exchange Closing Date, unless otherwise agreed in
writing, none of the parties to this Agreement shall knowingly take or fail
to take any action which action or failure to act would jeopardize the
treatment of the Exchange as a reorganization within the meaning of Section
368(a)(1)(B) of the Code.
Section 9.5. Shareholder Approval.
ADA shall promptly call a meeting of the shareholders of ADA (the "ADA
Shareholder Meeting") for the purpose of voting upon the Exchange and
Additional Investment and shall use its reasonable best efforts to obtain
shareholder approval of the Exchange and Additional Investment. ADA-ES shall
promptly call a meeting of the shareholders of ADA-ES (the "ADA-ES
Shareholder Meeting") for the purpose of voting upon the Additional
Investment and the terms and conditions of the Exchange. The ADA Shareholder
Meeting and the ADA-ES Shareholder Meeting shall be held as soon as
practicable, and ADA and ADA-ES will, through their respective Boards of
Directors, recommend to their shareholders the approval of such matters.
Section 9.6. Earth Sciences Disclosure Material.
Earth Sciences shall provide ADA in a timely manner with Earth Sciences'
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996, and
other recent reports and registration statements filed with the SEC (the
"Earth Sciences Disclosure Material") for mailing to the ADA Shareholders and
the ADA-ES Shareholders in connection with their respective shareholder
meetings.
Section 9.7. Fees and Expenses.
Whether or not the Exchange is consummated, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such costs and expenses.
Section 9.8. No Distribution of ADA's Earth Science Common Stock.
For a period of one year following the Exchange Closing, ADA shall not
distribute any shares of Earth Sciences Common Stock held by it to
shareholders of ADA.
Section 9.9 No Material Changes.
For a period of one year following the Option Closing, ADA shall not (i)
dissolve or liquidate, (ii) distribute or dispose of a substantial portion of
its assets outside the ordinary course of its business or (iii) incur any
material liabilities outside the ordinary course of its business, provided,
however, that ADA may take any action described in this Section 9.9 outside
the ordinary course of its business so long as ADA receives the written
consent of Earth Sciences to such action, which consent shall not be
unreasonably withheld.
Section 9.10. Reasonable Efforts.
Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use all reasonable efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Exchange and the other transactions contemplated by
this Agreement and the prompt satisfaction of the conditions hereto,
including (a) the obtaining of all necessary actions or non-actions, waivers,
consents and approvals from governmental entities and the making of all
necessary registrations and filings and the taking of all reasonable steps as
may be necessary to obtain an approval or waiver from, or to avoid an action
or proceeding by, any governmental entity, (b) the obtaining of all necessary
consents, approvals or waivers from third parties, (c) the defending of any
lawsuits or other legal proceedings, whether judicial or administrative,
challenging this Agreement or the consummation of the transactions
contemplated hereby, including seeking to have any stay or temporary
restraining order entered by any court or other governmental entity vacated
or reversed and (d) the execution and delivery of any additional instruments
necessary to consummate the transactions contemplated by this Agreement.
Section 9.11. Expiration of Representations and Warranties.
The respective representations and warranties contained herein and in
any other document or instrument delivered by or on behalf of Earth Sciences
or the Shareholders shall survive the Option Closing for a period of one full
year and thereupon expire and be of no further force and effect. Nothing
contained in this Section shall in any way affect any obligations of any
party under this Agreement that are to be performed, in whole or in part, at
any time after the Option Closing, nor shall it prevent or preclude any party
from pursuing any and all available remedies at law or in equity for actual
fraud in the event that, prior to the Option Closing, any other party had
actual knowledge of any material breach of any of its representations and
warranties herein but failed to disclose to or actively concealed such
knowledge prior to the Option Closing from the other party(ies) to whom the
representations and warranties were made.
ARTICLE 10.CONDITIONS TO THE OPTION CLOSING
Section 10.1. Conditions to the Obligations of the Shareholders and Earth
Sciences.
The respective obligations of the Shareholders and Earth Sciences to
effect the Option Closing are subject to fulfillment at or prior to the
Option Closing Date of the following conditions:
(a) ADA-LLC shall have entered into employment contracts for the
continued employment of certain individuals, satisfactory in form and
substance to the Shareholders and Earth Sciences.
(b) Earth Sciences shall have entered into a contract pursuant to
which it satisfies certain accrued incentives listed on Schedule 10.1(b) by
issuance of 36,305 shares of Earth Sciences Common Stock. The issuance of
such shares of Earth Sciences Common Stock shall be registered on a
registration statement on Form S-8 filed with the SEC within 40 days after
the Option Closing.
(c) No order, statute, rule, regulation, executive order, stay,
decree, judgment, or injunction shall have been enacted, entered, issued,
promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Option Closing.
(d) No governmental action or proceeding shall have been commenced or
threatened seeking any injunction, restraining or other order which seeks to
prohibit, restrain, invalidate or set aside the effectuation of the Option
Closing.
(e) All consents required for the consummation of the transactions
contemplated by this Agreement shall have been obtained.
Section 10.2. Additional Conditions to the Obligations of Earth Sciences.
The obligations of Earth Sciences to effect the Option Closing are also
subject to the fulfillment at or prior to the Option Closing Date of the
following additional conditions:
(a) The Shareholders shall have performed and complied in all
material respects with the agreements and obligations contained in this
Agreement that are required to be performed and complied with by them at or
prior to the Option Closing Date.
(b) The representations and warranties of the Shareholders contained
in this Agreement shall be true and correct in all material respects as of
the date hereof and shall be deemed to have been made again at and as of the
Option Closing Date and shall then be true and correct in all material
respects.
(c) All actions on the part of the Shareholders necessary to
authorize the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby or thereby shall have
been duly and validly taken.
(d) Earth Sciences shall have received such certificates of officers
of ADA-ES and ADA-LLC and such certificates of others to evidence compliance
with the conditions set forth in this Section 10.2 and in Section 10.1 as may
be reasonably requested by Earth Sciences.
(e) Earth Sciences shall agree, in its reasonable judgment, that the
nature and prospects of ADA-LLC are, in all material respects, as set forth
in the Business Plan and financial statements that have been provided to
Earth Sciences, and that there has been no material adverse change in ADA-
LLC's business from what is set forth therein.
(f) Earth Sciences shall have received an opinion from Baker &
Hostetler, LLP, counsel to ADA-ES and ADA-LLC, dated the Option Closing Date,
in form and substance reasonably satisfactory to Earth Sciences.
(g) The Shareholders and Earth Sciences shall have entered into an
agreement providing for certain registration rights for the shares of Earth
Sciences Common Stock issuable pursuant to this Agreement in the form
attached hereto as Exhibit F (the "Registration Rights Agreement").
Section 10.3. Additional Conditions to the Obligations of the
Shareholders.
The obligations of the Shareholders to effect the Option Closing are
also subject to the fulfillment at or prior to the Option Closing Date of the
following additional conditions:
(a) Earth Sciences shall have performed and compiled in all material
respects with the agreements and obligations contained in this Agreement that
are required to be performed and compiled with by it at or prior to the
Option Closing Date.
(b) The representations and warranties of Earth Sciences contained in
this Agreement shall be true and correct in all material respects as of the
date hereof and shall be deemed to have been made again at and as of the
Option Closing Date and shall then be true and correct in all material
respects.
(c) All corporate actions on the part of Earth Sciences necessary to
authorize the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby and thereby shall have
been duly and validly taken.
(d) The Shareholders shall have received such certificates of
officers of Earth Sciences and such certificates of others to evidence
compliance with the conditions set forth in this Section 10.3 and in Section
10.1 as may be reasonably requested by the Shareholders.
(e) ADA shall agree, in its reasonable judgment, that the nature and
prospects of Earth Sciences are, in all material respects, as set forth in
Earth Sciences' 1996 Annual Report on Form 10-KSB, and other materials that
have been or may be provided to ADA, and that there has been no material
adverse change in Earth Sciences' business from what is set forth therein.
(f) The Shareholders shall have received an opinion from Parcel,
Mauro, Hultin & Spaanstra, PC, counsel to Earth Sciences, dated the Option
Closing Date, in form and substance reasonably satisfactory to the
Shareholders.
(g) The Shareholders and Earth Sciences shall have entered into the
Registration Rights Agreement.
(h) Earth Sciences shall have caused Michael D. Durham to be elected
to the Board of Directors of Earth Sciences.
ARTICLE 11.TERMINATION AND ABANDONMENT
Section 11.1. Termination.
The transactions contemplated herein may be terminated and abandoned at
any time prior to the Option Closing:
(a) after 30 days after the date of execution and delivery of this
Agreement by the Shareholders or Earth Sciences, if the Option Closing has
not occurred for any reason other than a breach of this Agreement by the
terminating party;
(b) by Earth Sciences, if there has been a material breach by any of
the Shareholders of any agreement, representation or warranty contained in
this Agreement, which has rendered the satisfaction of any condition to the
obligations of Earth Sciences impossible and such breach has not been waived
in writing by Earth Sciences, which would have a material and adverse effect
on the financial condition, business or operations of ADA-ES or ADA-LLC,
taken as a whole, on a going forward basis;
(c) by the Shareholders, if there has been a material breach by Earth
Sciences of any agreement, representation or warranty contained in this
Agreement which has rendered the satisfaction of any condition to the
obligations of the Shareholders impossible and such breach has not been
waived in writing by the Shareholders, which would have a material and
adverse effect on the financial condition, business or operation of Earth
Sciences, on a going forward basis;
(d) by Earth Sciences or the Shareholders, if a court of competent
jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any other
action (which Earth Sciences and the Shareholders agree to use all reasonable
efforts to terminate), in each case permanently restraining, enjoining or
otherwise prohibiting the Option Closing; and
(e) by mutual consent of Earth Sciences and all of the Shareholders.
Section 11.2. Procedure and Effect of Termination.
In the event of termination and abandonment of the transactions
contemplated herein by Earth Sciences or the Shareholders pursuant to Section
11.1, written notice thereof shall forthwith be given to the other and this
Agreement shall terminate and the transactions contemplated herein shall be
abandoned, without further action by either Earth Sciences or the
Shareholders. If this Agreement is terminated as provided herein there shall
be no liability or further obligation hereunder on the part of Earth Sciences
or the Shareholders, except as set forth in this Section 11.2 and in Articles
12 and 13 and except that the options specified in Section 1.5 shall survive
any such termination. Nothing in this Section 11.2 shall relieve any party
to this Agreement of liability for breach of this Agreement.
ARTICLE 12.INDEMNIFICATION
Section 12.1. Indemnification by the Shareholders.
The Shareholders severally agree to indemnify and hold Earth Sciences
harmless against and in respect of (a) any and all damages resulting from any
misrepresentation, breach of representation or warranty or nonfulfillment of
any agreement on the part of the Shareholders under this Agreement or from
any misrepresentations in or omission from any certificate furnished by the
Shareholders hereunder; and (b) any and all actions, suits, proceedings,
demands, assessments, judgments, costs and other expenses (including
reasonable legal fees) incident to any of the foregoing.
Section 12.2. Indemnification by Earth Sciences.
Earth Sciences agrees to indemnify and hold each of the Shareholders
harmless against and in respect of (a) any and all damages resulting from any
misrepresentation, breach of any representation or warranty or nonfulfillment
of any agreement on the part of Earth Sciences under this Agreement or from
any misrepresentations in or omission from any certificate furnished by Earth
Sciences hereunder; and (b) any and all actions, suits, proceedings, demands,
assessments, judgments, costs and other expenses (including reasonable legal
fees) incident to the foregoing.
Section 12.3. Notice of Claims for Indemnification.
Notice of any claims desired to be asserted by a party seeking
indemnification ("Indemnitee") against the other party ("Indemnitor") with
respect to any matter for which Indemnitee claims indemnification pursuant to
this Section 12 shall be served by Indemnitee upon the Indemnitor promptly.
Any such notice shall set forth in reasonable detail the basis for the claim
asserted. Within 20 days following its receipt of such notice, the
Indemnitor shall send written notice to the Indemnitee stating:
(a) Whether in its view the claim is one for which the
Indemnitee is entitled to indemnification (a "Covered Claim"), and
(b) If it acknowledges that the claim is a Covered Claim whether
they chooses to dispute its validity by participating in any defense of any
action brought by a third party with respect to such claim.
If the Indemnitor fails to furnish such notice within such 20-day period,
such failure shall constitute its agreement that the claim is a Covered Claim
and its election not to participate in the defense of any action on the
Claim.
If Indemnitor fails to furnish such notice or states in such
notification that the claim is not a Covered Claim or that it declines to
dispute the validity of said claim, the Indemnitee may defend or settle the
claim without the participation of Indemnitor, reserving any rights it might
have with respect to indemnification. If Indemnitor acknowledges that the
claim is a Covered Claim, then Indemnitor may participate, at its own cost
and expense, in any discussions and proceedings relating thereto, provided
that it has so notified the Indemnitee of its intention to do so in such
notice. If Indemnitor does participate in any discussions and proceedings,
Indemnitor shall pay its own costs and expenses in connection therewith.
Any settlement or compromise made by the Indemnitee in accordance with
this Section 12.3 without the participation of the Indemnitor or any final
judgment or decree entered in any claim, suit or action defended only by the
Indemnitee alone shall be deemed to have been consented to by, and shall be
obligatory and binding upon, the Indemnitor as fully as if the Indemnitor
alone had assumed the defense thereof and a final judgment or decree had been
entered in such suit or action, or with regard to such claim by a court of
competent jurisdiction for the amount of such settlement or compromise,
satisfaction, judgment or decree, subject only to the right of the Indemnitor
to dispute that any such claim is a Covered Claim if, but only if, the
Indemnitor has served the proper notice within the proper time asserting that
the claim is not a Covered Claim.
Section 12.4. Securities Law Indemnification; Contribution.
(a) Indemnification by Earth Sciences. Earth Sciences agrees to
indemnify, to the full extent permitted by law, the Shareholders, and any of
their officers and directors and each person who controls, is controlled by
or under common control with (within the meaning of the Securities Act) such
Persons against all losses, claims, damages, liabilities and expenses
(including attorneys' fees and other expenses incurred in connection with
investigating or defending any such claims) caused by any untrue or alleged
untrue statement of material fact contained in the Disclosure Material, or
any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as the same are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information
furnished in writing to Earth Sciences by or on behalf of the Shareholders
expressly for use therein.
(b) Conduct of Indemnification Proceedings. Any person entitled to
indemnification hereunder agrees to give prompt written notice to the
indemnifying party after the receipt by such person of any written notice of
the commencement of any action, suit, proceeding or investigation or threat
thereof made in writing for which such person will claim indemnification or
contribution pursuant to this Agreement and, unless in the reasonable
judgment of such indemnified party a conflict of interest may exist between
such indemnified party and the indemnifying party with respect to such claim,
permit the indemnifying party to assume the defense of such claim with
counsel reasonably satisfactory to such indemnified party. If the
indemnifying party is not entitled to, or elects not to, assume the defense
of a claim, it will not be obligated to pay the fees and expenses of more
than one counsel with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between
such indemnified party and any other of such indemnified parties with respect
to such claim, in which event the indemnifying party shall be obligated to
pay the fees and expenses of such additional counsel or counsels. The
indemnifying party will not be subject to any liability for any settlement
made without its consent.
(c) Contribution. If the indemnification provided for in this
Section from the indemnifying party is unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then the indemnifying party, in lieu of indemnifying
such indemnified party, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and indemnified parties in
connection with the actions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue
statement of a material fact, has been made by, or relates to information
supplied by, such indemnifying party or indemnified parties, and the parties'
relative intent, knowledge, access to information and opportunity to correct
or prevent such action. The amount paid or payable by a party as a result of
the losses, claims, damages, liabilities and expenses referred to above shall
be deemed to include any legal or other fees or expenses reasonably incurred
by such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section were determined by pro rata allocation
or by any other method of allocation which does not take into account the
equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
If indemnification is available under this Section, the indemnifying
party shall indemnify each indemnified party to the full extent provided in
subsection (a) hereof without regard to the relative fault of said
indemnifying party or indemnified party or any other equitable consideration
provided for in this subsection (c).
ARTICLE 13.GENERAL
Section 13.1. Amendment and Modification.
This Agreement may be amended, modified or supplemented only by written
agreement of all of the Shareholders and Earth Sciences.
Section 13.2. Waiver of Compliance; Consents.
Any failure of Earth Sciences, on the one hand, or the Shareholders, on
the other hand, to comply with any obligation, covenant, agreement or
condition herein may be waived in writing by Earth Sciences or all of the
Shareholders, respectively, but such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits consent by or on behalf
of Earth Sciences or all of the Shareholders, such consent shall be given in
writing in a manner consistent with the requirements for a waiver of
compliance as set forth in this Section.
Section 13.3. Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed given on the date of delivery, if delivered personally or
faxed during normal business hours of the recipient, or three days after
deposit in the U.S. Mail, postage prepaid, if mailed by registered or
certified mail (return receipt requested) as follows:
(a) If to the Shareholders, to:
ADA Technologies, Inc.
304 Inverness Way South
Suite 365
Englewood, CO 80112
Attention: Judith A. Armstrong
Telephone: (303) 792-5615
Fax: (303) 792-5633
Kenneth E. Baldrey
2746 W. Yale Ave.
Denver, CO 80219
Telephone: (303) 761-6764
C. Jean Bustard
9193 Buffalo Dr.
Littleton, CO 80127
Telephone: (303) 933-3401
Cameron E. Martin
966 S. York St.
Denver, CO 80209
Telephone: (303) 777-0442
John F. Wurster
3815 Spring Valley Trail
Evergreen, CO 80439
Telephone: (303) 670-1343
in each case with a copy to:
Baker & Hostetler
303 East 17th Avenue, Suite 1100
Denver, Colorado 80203
Attention: Alfred C. Chidester
Telephone: (303) 861-0600
Fax: (303) 861-2307
(b) If to Earth Sciences, to:
Earth Sciences, Inc.
910 12th Street
Golden, CO 80401
Attention: Mark McKinnies
Telephone: (303) 279-7641
Fax: (303) 279-1180
with a copy to:
Scott M. Reed
Parcel, Mauro, Hultin & Spaanstra, P.C.
1801 California Street, Suite 3600
Denver, CO 80202-2636
Telephone: (303) 293-6522
Fax: (303) 295-3040
(c) If to ADA-ES, to:
ADA-ES, Inc.
304 Inverness Way South, Suite 365
Englewood, Colorado 80112
Attention: Michael D. Durham
Telephone: (303) 792-5615
Fax: (303) 792-5633
(d) If to ADA-LLC, to:
ADA Environmental Solutions LLC
304 Inverness Way South, Suite 365
Englewood, Colorado 80112
Attention: Michael D. Durham
Telephone: (303) 792-5615
Fax: (303) 792-5633
Section 13.4. Assignability and Parties in Interest.
This Agreement may not be assigned. This Agreement shall inure to the
benefit of and be binding upon Earth Sciences and each of the Shareholders
and their respective successors. Nothing in this Agreement, express or
implied, is intended to confer upon any other person any rights or remedies
of any nature whatsoever under or by reason of this Agreement.
Section 13.5. Governing Law.
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF COLORADO APPLICABLE TO CONTRACTS
MADE AND TO BE PERFORMED ENTIRELY WITHIN THAT STATE.
<PAGE>
Section 13.6. Counterparts.
This Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
shall constitute but one and the same instrument.
Section 13.7. Signatures on Behalf of Corporation.
Any individual signing this Agreement or any other document related
hereto on behalf of a corporation, in his or her capacity as an officer of
such corporation, is acting solely in his or her capacity as an officer of
the corporation and shall not assume, and shall not be deemed to assume, any
personal liability when acting in that capacity.
Section 13.8. Complete Agreement.
This Agreement, the Exhibits hereto, the Schedules hereto and the
documents delivered pursuant to this Agreement contain or will contain the
entire agreement between the parties hereto with respect to the transactions
contemplated herein and shall supersede all previous oral and written and all
contemporaneous oral negotiations, commitments and understandings.
Section 13.9. Interpretation.
The headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this
Agreement.
Section 13.10. Severability.
Any provision of this Agreement which is invalid, illegal, or
unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity, illegality, or
unenforceability, without affecting in any way the remaining provisions
hereof in such jurisdiction or rendering that or any other provision of this
Agreement invalid, illegal, or unenforceable in any other jurisdiction.
Section 13.11. Knowledge.
All representations and warranties contained herein which are made to
the "knowledge" of ADA, the Shareholders or Earth Sciences shall mean to the
actual present knowledge of the Shareholders or ADA's or Earth Sciences'
executive officers, respectively.
Section 13.12. Submission to Jurisdiction.
Each of the parties hereto irrevocably consents that any legal action or
proceeding against it or any of its property with respect to this Agreement
or any other agreement executed in connection herewith may be brought in any
court of the State of Colorado, any Federal court of the United States of
America located in Denver, Colorado, or both, and by the execution and
delivery of this Agreement each party hereto hereby accepts with regard to
any such action or proceeding for itself and in respect of its property,
generally and unconditionally, the jurisdiction of the aforesaid courts.
Section 13.13. Arbitration.
Any controversy, dispute or claim arising out of, in connection with or
in relation to, the interpretation, performance or breach of this Agreement,
including, without limitation, the validity, scope, and enforceability of
this Section shall be solely and finally settled by arbitration conducted in
Denver, Colorado, by and in accordance with the then existing rules for
commercial arbitration of American Arbitration Association, or any successor
organization. Judgment upon any award rendered by the arbitrator(s) may be
entered by the State or Federal Court having jurisdiction thereof. Any of
the parties may demand arbitration by written notice to the other and to the
American Arbitration Association ("Demand for Arbitration"). The arbitrators
shall conduct the arbitration in a manner in accordance with the Federal
Arbitration Act U.S.C. 1 et seq. and the rules of the American Arbitration
Association. The arbitrators may only award compensatory and punitive
damages. The parties intend that this agreement to arbitrate be valid,
enforceable and irrevocable.
IN WITNESS WHEREOF, the undersigned duly execute this Agreement as of
the date first written above.
EARTH SCIENCES, INC.
Date: April 30, 1997 By:/s/ Mark H. McKinnies
Name: Mark H. McKinnies
Title: President
ADA-ES, INC.
Date: April 30, 1997 By: /s/ Michael D. Durham
Name: Michael D. Durham
Title: President, Chief Executive Officer
and Director
ADA ENVIRONMENTAL SOLUTIONS LLC
Date: April 30, 1997 By: /s/ Michael D. Durham
Name: Michael D. Durham
Title: Manager
Date: April 30, 1997 By: /s/ Judith A. Armstrong
Name: Judith A. Armstrong
Title: Manager
Date: April 30, 1997 By: /s/ Mark H. McKinnies
Name: Mark McKinnies
Title: Manager
SHAREHOLDERS:
ADA TECHNOLOGIES, INC.,
Owning 8,171 shares of ADA-ES Common Stock
Date: April 30, 1997 By: : /s/ Judith A. Armstrong
Name: Judith A. Armstrong
Title: President and Chief Executive Officer
Date: April 30, 1997 By: : /s/ Michael D. Durham
Name: Michael D. Durham
Title: Executive Vice President
Date: April 30, 1997 By: /s/ John F. Wurster
Name: John F. Wurster
Title: Vice President, Sales and Marketing
Date: April 30, 1997 By: /s/ C. Jean Bustard
Name: C. Jean Bustard
Title: Vice President, Projects Management
C. JEAN BUSTARD
Date: April 30, 1997 /s/ C. Jean Bustard
Owning 549 shares of ADA-ES Common Stock
JOHN F. WURSTER
Date: April 30, 1997 /s/ John F. Wurster
Owning 1,006 shares of ADA-ES Common Stock
KENNETH E. BALDREY
Date: April 30, 1997 /s/ Kenneth E. Baldrey
Owning 183 shares of ADA-ES Common Stock
CAMERON E. MARTIN
Date: April 30, 1997 /s/ Cameron E. Martin
Owning 91 shares of ADA-ES Common Stock
<PAGE>
EXHIBIT 2.2 AMENDED AND RESTATED OPERATING AGREEMENT OF ADA ENVIRONMENTAL
SOLUTIONS LLC, A COLORADO LIMITED LIABILITY COMPANY, APRIL 30, 1997
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
ADA ENVIRONMENTAL SOLUTIONS LLC
A Colorado Limited Liability Company
April 30, 1997
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I FORMATION 1
1.1Member(s) 1
1.2Name
1.3Principal Place of Business 2
1.4Term of the Company 2
ARTICLE II BUSINESS OF THE COMPANY 2
2.1Permitted Business 2
2.2Authority 2
ARTICLE IIIGENERAL ACCOUNTING MATTERS; BOOKS AND RECORDS 2
3.1Books of Account 2
3.2Location of Books and Records 2
3.3Inspection of Records 3
3.4Tax Returns 3
3.5Reports 3
(a)Preparation of Reports 3
(b)Reports to Members 4
ARTICLE IV CAPITAL ACCOUNTS 4
4.1Capital Contributions and Percentage Interest 4
(a)Permitted Contributions 4
(b)Percentage Interest 4
4.2Capital Accounts 5
(a)Maintenance of Capital Accounts 5
(b)Transfer of Capital Account 5
(c)No Interest Accrual 5
(d)Computation of Capital Account Adjustments 5
4.3Basis-Adjustment Election 5
4.4Withdrawal or Reduction of Capital Contributions 5
4.5Additional Capital 6
ARTICLE V INCOME AND DISTRIBUTION 6
5.1Profits and Losses 6
5.2Distributions 7
ARTICLE VI RIGHTS AND DUTIES OF MANAGERS 7
6.1Management 7
6.2Number, Tenure and Qualifications 7
6.3Certain Powers of Manager 7
6.4Liability for Certain Acts 9
6.5Managers and Members Have No Exclusive Duty to Company 9
6.6Bank Accounts 9
6.7Indemnity of the Managers, Employees and Other Agents 9
6.8Resignation 10
6.9Removal 10
6.10 Vacancies 10
6.11 Compensation, Reimbursement, Organization Expenses 10
6.12 Right to Rely on the Manager(s) 10
6.13 Tax Matters Partner 11
(a) Designation 11
(b) Limitations on Extending Statute of Limitations 11
(c) Filing Petitions in Tax Court 11
(d) Accountants and Lawyers 11
ARTICLE VIIMEMBERS' LIABILITY, RIGHTS AND DUTIES 11
7.1Limitation of Liability 11
7.2Company Debt Liability 11
7.3Priority and Return of Capital 12
7.4Approval of Sale of All Assets 12
ARTICLE VIII GENERAL RESTRICTIONS ON TRANSFER OF A MEMBERSHIP
INTEREST 12
8.1Restrictions 12
8.2Transfers 12
8.3Exceptions 12
ARTICLE IX VOLUNTARY OR INVOLUNTARY TRANSFER 13
9.1Notice of Intention to Transfer 13
9.2Third Party Offers 13
9.3Option to Purchase 13
9.4Election to Dissolve Company 13
9.5Purchase Price 13
9.6Release from Restriction 14
9.7Changed Offer 14
9.8Form of Offer 14
9.9Substituted Member 14
9.10 Option on the Part of Company 15
9.11 Termination of Employment 15
ARTICLE X PURCHASE PRICE AND TERMS 15
10.1 Purchase Price 15
10.2 Appraisal 15
10.3 Terms of Purchase Price 16
10.4 Payment in Cash 16
10.5 Closing 16
(a) Time and Place of Closing 16
(b) Conditions to Closing 16
ARTICLE XI TERMINATION AND DISSOLUTION 16
11.1 Grounds for Dissolution 16
11.2 Continuation of Business Notwithstanding
Dissolution 17
11.3 Dissolution Procedure 17
11.4 Distributions in Liquidation 17
(a) Priority of Distributions 17
(c) Definitions 18
11.5 Waiver of Partition - Dissolution and Withdrawal 18
ARTICLE XIIARBITRATION 19
ARTICLE XIII INVESTMENT REPRESENTATIONS 19
13.1 Interests Not Registered 19
13.2 Investment Representation 19
13.3 Further Representations 20
ARTICLE XIVGENERAL MATTERS 20
14.1 Governing Law 20
14.2 No Waiver 20
14.3 Amendment 20
14.4 Binding Effect 20
14.5 Construction; Definitions 20
14.6 Text To Control 21
14.7 Severability 21
14.8 Notices 21
14.9 Entire Agreement 21
14.10 Counterparts 21
SCHEDULE ASA-1
SCHEDULE BSB-1
Part A. Special Allocation Provisions SB-1
Part B. Capital Account Adjustments and 704(c) Tax
Allocations SB-2
Part C. Definitions SB-4
<PAGE>
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
ADA ENVIRONMENTAL SOLUTIONS LLC
(a Colorado Limited Liability Company)
ADA Technologies, Inc., C. Jean Bustard, Kenneth E. Baldrey, Cameron E.
Martin and John F. Wurster (the "Original Members") executed that certain
Operating Agreement of ADA Environmental Solutions LLC (the "Company") dated
September 20, 1996 (the "Agreement"), relating to the Company. Pursuant to
the Agreement, the Original Members were the only members of the Company. On
February 17, 1997, the Original Members contributed their membership
interests in the Company to ADA-ES, Inc., a Colorado corporation ("ADA-ES")
in exchange for all of the issued and outstanding common stock of ADA-ES.
Simultaneously therewith, the Original Members and ADA-ES executed that
certain Amendment No. 1 to the Agreement, making ADA-ES the sole member of
the Company. On February 18, 1997, Earth Sciences, Inc., a Colorado
corporation ("Earth Sciences") became an additional Member of the Company by
contributing $400,000 cash to the Company in exchange for a 4.8% membership
interest in the Company. Simultaneously therewith, ADA-ES and Earth Sciences
executed that certain Amendment No. 2 to the Operating Agreement dated
February 18, 1997, making ADA-ES and Earth Sciences the only Members of the
Company. ADA-ES and Earth Sciences have agreed that Earth Sciences will
contribute an additional $500,000 in cash and a non-interest bearing
promissory note in the principal amount of $1,600,000 to the Company in
exchange for an additional 46.2% membership interest in the LLC (the
"Additional Contribution"). Upon consummation of the Additional
Contribution, Earth Sciences will own a 51% membership interest in the
Company and ADA-ES will own a 49% membership interest in the Company.
The following are the amended and restated terms of the Company's
Operating Agreement:
ARTICLE I FORMATION
1.1 Member(s). The current Member or Members of the Company,
pursuant to the provisions of the Colorado Limited Liability Company Act,
including any amendments thereto (the "Act"), are listed on Schedule A of
this Amended and Restated Operating Agreement (this "Agreement"). (The term
"Member" shall include, in addition to the current member or members, each of
the parties who may hereafter become a Member of the Company). The Company
shall have no fewer than one Member at any time. The Articles of
Organization filed with respect to the Company have been adopted and are
incorporated by reference in this Agreement.
1.2 Name. The name of the Company shall be ADA Environmental
Solutions LLC.
1.3 Principal Place of Business. The principal office and principal
place of business of the Company in Colorado shall be 304 Inverness Way
South, Suite 365, Englewood, Colorado 80112.
1.4 Term of the Company. The Company shall commence on the date that
the Articles of Organization are filed with the Colorado Secretary of State.
The Company shall continue for a period of 21 years unless earlier dissolved
as provided in this Agreement.
ARTICLE II BUSINESS OF THE COMPANY
2.1 Permitted Business. The business of the Company shall be to conduct
all lawful business which may be perform by a limited liability company under
Colorado law.
2.2 Authority. The Company shall have the powers set forth in the Act,
including the authority to borrow and loan money and the authority to
purchase, lease or in any manner hold, own, improve, sell, exchange, or lease
any property in connection with its business. The Company shall have the
power and authority to enter into and engage in any lawful business agreed to
by the Members and not prohibited by the Act.
ARTICLE III GENERAL ACCOUNTING MATTERS; BOOKS AND RECORDS
3.1 Books of Account. True and proper books, records, reports and
accounts of the Company shall be maintained by the Company at all times in
accordance with generally accepted accounting principles consistently
applied, or such alternate, consistently-applied accounting principles as
shall accurately reflect the income, gain, loss and financial condition of
the Company. All transactions of the Company shall be entered fully and
accurately on the books and records of the Company.
3.2 Location of Books and Records. The books and records of the Company
shall be kept at the Company's principal place of business. Such books and
records shall include (a) a current list of the full name and last known
mailing address of each past and present Member and Manager set forth in
alphabetical order; (b) a copy of the Articles of Organization and all
amendments thereto, together with executed copies of any powers of attorney
pursuant to which any amendment has been executed; (c) copies of the
Company's federal, state and local income tax returns and reports, if any,
for the three most recent years; (d) copies of this Agreement and any
amendments thereto; (e) the accounting books and records and copies of the
financial statements of the Company for the three most recent years; (f)
minutes of every annual and special meeting of the Members and Managers and
of any meeting ordered pursuant to the Act; (g) any written consents of the
Members obtained pursuant to the Act; (h) all other documents and records
pertaining to the Company; and (i) any and all other documents and records
required to be maintained by the Company pursuant to the Act. In addition to
the documents and records described above, the Company shall also prepare and
update and the Members shall certify as accurate a statement describing (1)
the amount of cash and a description and statement of the agreed value of
property or services contributed to the Company by each Member, and which
each Member has agreed to contribute in the future; (2) the times at which or
events on the happening of which any additional contributions agreed to be
made by each Member are to be made; (3) if agreed upon, the time at which or
events on the happening of which a Member may terminate such Member's
membership in the Company and the amount of, or the method of determining,
the distribution to which such Member may be entitled respecting such
Member's membership interest and the terms and conditions of the termination
and distribution; and (4) any right of a Member to receive distributions
which include any return of all or part of such Member's contribution.
3.3 Inspection of Records. All books, records, reports and accounts of
the Company shall be open to inspection by any Member or such Member's duly
authorized representative on reasonable notice and at any reasonable time
during business hours, and each Member or representative shall have the
further right to make copies thereof, so long as such inspection or
duplication does not materially interfere with the duties of any Company
employee or agent. The cost of copying shall be borne by the Member. The
Member also has the right to obtain from the Company upon written request:
(a) true and full information regarding the state of the business
and financial condition of the Company and any other information regarding
the affairs of the Company;
(b) promptly after they become available, copies of the Company's
federal, state and local income tax returns for each year; and
(c) a list showing the names, addresses and Percentage Interests
(defined in Section 4.1) of all Members.
3.4 Tax Returns. The Company shall prepare, sign and file all federal,
state, and local tax returns required to be filed by the Company.
3.5 Reports.
(a) Preparation of Reports. The Company's accounting books shall
be closed annually, and financial statements shall be prepared by the
Company's accountants. The financial statements shall include a balance
sheet, a statement of profits and losses, a statement of cash flow, a
statement of each Member's capital account and such other supporting
statements as the Members may deem appropriate. The financial statements
shall be prepared in accordance with the accounting principles set forth in
Section 3.1 of this Agreement. Neither the Company nor any Member shall be
obligated to cause any financial statements of the Company to be audited.
However, any Member may request that the financial statements for a
particular year be audited and the costs of such audit shall be borne by the
requesting Member, unless the Members agree that such costs shall be an
expense of the Company.
(b) Reports to Members. No later than March 31 of every year, the
following shall be mailed to each person who was a Member or a transferee of
a Membership Interest in the Company at any time during the prior year: (1)
a true and correct photocopy of the financial statements referred to in
Section 3.5(a); (2) all tax information relating to the Company which is
necessary for the preparation of such person's federal, state and local
income tax returns; and (3) any other information regarding the Company and
its operations during the prior year which is material or significant to such
person.
ARTICLE IV CAPITAL ACCOUNTS
4.1 Capital Contributions and Percentage Interest.
(a) Permitted Contributions. The contributions to capital of a
Member shall consist of cash or other property or a promissory note or other
obligation to contribute cash or property. The original contribution of each
Member to the capital of the Company is listed on Schedule A of this
Agreement. Schedule A shall list the adjusted basis (as that term is defined
in Section 1011 of the Internal Revenue Code of 1986, as amended (the
"Code")), of any property contributed to the Company, the Member who
contributed the property, and the fair market value of the property. The
fair market value of contributed property shall be agreed to by all Members.
If the Members cannot agree upon the fair market value of the contributed
property, the fair market value shall be determined by the written appraisal
of a qualified appraiser agreed upon by the parties. If the parties cannot
agree upon such an appraiser within 30 days, the appraiser shall be selected
and the fair market value of the contributed property shall be determined in
the same manner as set forth in Section 10.2.
(b) Percentage Interest. The Members' original Percentage
Interests shall be reflected on Schedule A and shall be adjusted from time to
time to reflect additional contributions or withdrawals of capital from the
Company and any other adjustments made to the capital accounts of the
Members; provided, however, that for voting purposes, the term "Percentage
Interest" shall mean the percentage of each Member's capital contribution to
the total capital contributions of all Members entitled to vote. To the
extent that a Member's Percentage Interest exceeds the percentage of the fair
market value of that Member's capital contributions to the fair market value
of the total capital contribution of all Members, such Member shall not be
treated as having an ownership interest in the Company's assets other than
with respect to such Member's entitlement to share in the Company's net
profits.
4.2 Capital Accounts.
(a) Maintenance of Capital Accounts. A capital account shall be
maintained for each Member in accordance with this Section 4.2 and the
principles set forth in Schedule B. The amount of cash or the fair market
value of other property contributed to the Company by each Member, net of
liabilities assumed by the Company or to which any such contributed property
is subject, shall be credited to such Member's capital account, and from time
to time, but not less often than annually, the share of each Member in
profits, losses and fair market value of distributions shall be credited or
charged to such Member's capital account. The determination and maintenance
of the Members' capital accounts, and any adjustments thereto, shall be made
consistent with tax accounting and other principles set forth in Section
704(b) of the Code and Treasury Regulations promulgated thereunder.
(b) Transfer of Capital Account. Immediately following the
transfer of any portion of a Membership Interest in the Company, the capital
account of the transferee shall be equal to the capital account of the
transferor attributable to the transferred interest. Such capital account
shall not be adjusted to reflect any basis adjustment under Section 743 of
the Code unless the Members make an election under Section 754 of the Code
pursuant to Section 4.3 below.
(c) No Interest Accrual. No interest shall be paid or accrued by
the Company on balances in Members' capital accounts.
(d) Computation of Capital Account Adjustments. For purposes of
computing the amount of any item of income, gain, deduction or loss to be
reflected in the Members' capital accounts, the determination, recognition
and classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes, taking into
account any adjustments required pursuant to Section 704(b) of the Code and
the Treasury Regulations promulgated thereunder as more fully described in
Schedule B.
4.3 Basis-Adjustment Election. The Members shall elect pursuant to
Section 754 of the Code to adjust the basis of the Company's assets for all
transfers of Company interests or distributions of property to Members if
such election would benefit any Member or the Company.
4.4 Withdrawal or Reduction of Capital Contributions. A Member shall
not receive out of the Company's property any part of such Member's capital
contributions unless:
(a) all liabilities of the Company, except liabilities to Members
on account of their capital contributions, have been paid, or there remains
sufficient Company property to pay them; and
(b) either the consent of all Members is obtained, or the Member
may rightfully demand the return of the capital contributions pursuant to the
Act.
4.5 Additional Capital. If the Managers determine that the Company
requires additional capital for any purpose reasonably related to its
business, the Company may:
(a) borrow all or part of such additional capital by obtaining
loans either from Members or from third parties;
(b) call for voluntary additional capital contributions to the
Company from each Member in proportion to that Member's Percentage Interest;
the additional capital contributions can consist of cash or a Promissory Note
providing for the same terms as those set forth in Section 10.3(b)(i) and
(ii); in the event any Member declines to make a voluntary additional capital
contribution in cash or by Promissory Note (a "Noncontributing Member"), the
other Members shall have the right, in proportion to their relative
Percentage Interests in the Company (excluding the Percentage Interests held
by the Noncontributing Members), to make such additional capital
contributions in cash or by Promissory Note, and after any such voluntary
additional capital contributions have been made by one or more Members, the
Percentage Interests of all Members shall be adjusted according to the
provisions of Section 4.1(b);
(c) combine any of the above-described methods of obtaining
financing as the Managers may deem appropriate.
ARTICLE V INCOME AND DISTRIBUTION
5.1 Profits and Losses.
(a) The net profit and losses, if any, of the Company from
operations, exclusive of any profit or loss from the capital transactions
described in Section 5.1(b), shall be credited or charged to the Members in
proportion to their respective Percentage Interests.
(b) The amount realized (and any accompanying profit) by the
Company from the sale, exchange or other disposition of the capital assets
contributed by any Member reflected in Exhibit A in excess of the fair market
value of such capital assets on the date of contribution shall be credited to
the Members in accordance with their Percentage Interests.
(c) Notwithstanding any provision of this Agreement to the
contrary, to the extent required by law, income, gain, loss and deduction
attributable to property contributed to the Company by a Member shall be
shared among the Members so as to take into account any variation between the
basis of the property and the fair market value of the property at the time
of contribution in accordance with requirements of Section 704(c) of the Code
and the Treasury Regulations promulgated thereunder, as more fully described
in Schedule B.
5.2 Distributions. All distributions shall be made among the Members in
proportion to their respective Percentage Interests. Notwithstanding the
foregoing, no Member shall be entitled to receive distributions with respect
to such Member's profits interest as established under Section 4.1(b) above
in excess of the amount by which the aggregate profits and amount realized
credited to such Member under Section 5.1(a) and (b) above exceed the
aggregate distributions received by such Member from the commencement of the
Company's operations.
ARTICLE VI RIGHTS AND DUTIES OF MANAGERS
6.1 Management. The business and affairs of the Company shall be
managed by its Managers. The Managers shall direct, manage and control the
business of the Company to the best of their ability. Except for situations
in which the approval of the Members is expressly required by this Operating
Agreement or by non-waivable provisions of applicable law, the Managers shall
have full and complete authority, power and discretion to manage and control
the business, affairs and properties of the Company, to make all decisions
regarding those matters and to perform any and all other acts or activities
customary or incident to the management of the Company's business. At any
time when there is more than one Manager, any action permitted to be taken by
the Managers, shall require the approval or consent of all Managers;
provided, however, that the Managers may appoint an Executive Manager who
shall have such authority as shall be set forth in a resolution adopted by
all Managers.
6.2 Number, Tenure and Qualifications. The Company shall have three
Managers. The number of Managers of the Company shall be fixed from time to
time by the affirmative vote of Members holding at least two-thirds of the
Percentage Interests, but in no instance shall there be less than one
Manager. Managers need not be residents of the State of Colorado or Members
of the Company. Upon the effective date of this Agreement, the Managers of
the Company shall be ADA Technologies, Inc., Earth Sciences and Michael D.
Durham.
6.3 Certain Powers of Manager.
(a) Without limiting the generality of Section 6.1, the Managers
shall have power and authority, on behalf of the Company:
(i) To acquire property from any person as the Managers may
determine. The fact that a Manager or a Member is directly or indirectly
affiliated or connected with any such person shall not prohibit the Managers
from dealing with that person;
(ii) To borrow money for the Company from banks, other lending
institutions, the Managers, Members, or affiliates of the Managers or Members
on such terms as the Managers deem appropriate, and in connection therewith,
to hypothecate, encumber and grant security interests in the assets of the
Company to secure repayment of the borrowed sums. No debt shall be
contracted or liability incurred by or on behalf of the Company except by the
Managers, or to the extent permitted under the Act, by agents or employees of
the Company expressly authorized to contract such debt or incur such
liability by the Managers;
(iii) To purchase liability and other insurance to protect the
Company's property and business;
(iv) To hold and own any Company real and/or personal properties in
the name of the Company;
(v) To invest any Company funds temporarily (by way of example but
not limitation) in time deposits, short-term governmental obligations,
commercial paper or other investments;
(vi) Upon the affirmative vote of the Members holding at least two-
thirds of the Percentage Interests, to sell or otherwise dispose of all or
substantially all of the assets of the Company as part of a single
transaction or plan provided, however, that the affirmative vote of the
Members shall not be required with respect to any sale or disposition of the
Company's assets in the ordinary course of the Company's business;
(vii) To execute on behalf of the Company all instruments and
documents, including, without limitation, checks; drafts; notes and other
negotiable instruments; mortgages or deeds of trust; security agreements;
financing statements; documents providing for the acquisition, mortgage or
disposition of the Company's property; assignments; bills of sale; leases;
partnership agreements, operating agreements of other limited liability
companies; and any other instruments or documents necessary, in the opinion
of the Managers, to the business of the Company;
(viii) To employ accountants, legal counsel, managing agents or
other experts to perform services for the Company and to compensate them from
Company funds;
(ix) To enter into any and all other agreements on behalf of the
Company, with any other Person for any purpose, in such forms as the Managers
may approve; and
(x) To do and perform all other acts as may be necessary or
appropriate to the conduct of the Company's business.
Unless authorized to do so by this Operating Agreement or by a Manager or
Managers of the Company, no attorney-in-fact, employee or other agent of the
Company shall have any power or authority to bind the Company in any way, to
pledge its credit or to render it liable pecuniarily for any purpose. No
Member shall have any power or authority to bind the Company unless the
Member has been authorized by the Managers to act as an agent of the Company
in accordance with the previous sentence.
6.4 Liability for Certain Acts. Each Manager shall perform his duties
as Manager in good faith, in a manner he reasonably believes to be in the
best interests of the Company, and with such care as an ordinarily prudent
person in a like position would use under similar circumstances. A Manager
who so performs the duties as Manager shall not have any liability to the
Company or the other Members by reason of being or having been a Manager of
the Company.
6.5 Managers and Members Have No Exclusive Duty to Company. The Manager
shall not be required to manage the Company as his sole and exclusive
function and he (and any Manager and/or Member) may have other business
interests and may engage in other activities in addition to those relating to
the Company. Neither the Company nor any Member or economic interest owner
shall have any right, by virtue of this Operating Agreement, to share or
participate in such other investments or activities of the Manager and/or
Member or economic interest owner or to the income or proceeds derived
therefrom. Neither the Manager nor any Member or economic interest owner
shall incur any liability to the Company or to any of the Members or economic
interest owners as a result of engaging in any other business or venture;
provided that the Manager (and/or Member) shall devote such time to the
Company as is necessary for the conduct of the Company's business, and
further provided that where conflicts arise between the Company and the
Manager's (and/or Member's) other business interests, each Manager (and/or
Member) shall endeavor to treat the Company no less favorably than other
interests of that Manager (and/or Member).
6.6 Bank Accounts. The Managers may from time to time open bank
accounts in the name of the Company, and the Managers shall be the sole
signatory thereon, unless the Managers determine otherwise.
6.7 Indemnity of the Managers, Employees and Other Agents. The Company
shall indemnify the Managers and make advances for expenses to the maximum
extent permitted under the Act. The Company shall indemnify its employees
and other agents who are not Managers to the fullest extent permitted by law,
provided that such indemnification in any given situation is approved by
Members owning at least two-thirds of the Percentage Interests.
Notwithstanding any other provision of this Operating Agreement, no
Manager shall be liable to any Member or economic interest owner or the
Company with respect to any act performed or neglected to be performed in
good faith and in a manner which such Manager believed to be necessary or
appropriate in connection with the ordinary and proper conduct of the
Company's business or the preservation of its property, and consistent with
the provisions of this Agreement. The Company shall indemnify the Managers
for and hold them harmless from any liability, whether civil or criminal, and
any loss, damage, or expense, including reasonable attorneys' fees, incurred
in connection with the ordinary and proper conduct of the Company's business
and the preservation of its business and property, or by reason of the fact
that such person is or was a Manager; provided the Manager to be indemnified
acted in good faith and in a manner such Manager believed to be consistent
with the provisions of this Agreement; and provided further that with respect
to any criminal action or proceeding, the Manager to be indemnified had no
reasonable cause to believe the conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent shall not of itself create a
presumption that indemnification is not available hereunder. The obligation
of the Company to indemnify any Manager hereunder shall be satisfied out of
Company assets only, and if the assets of the Company are insufficient to
satisfy its obligation to indemnify any Manager, such Manager shall not be
entitled to contribution from any Member.
6.8 Resignation. Any Manager of the Company may resign at any time by
giving written notice to the Members of the Company. The resignation of any
Manager shall take effect upon receipt of notice thereof or at such later
time as shall be specified in such notice; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective. The resignation of a Manager who is also a Member or economic
interest owner shall not affect the Manager's rights as a Member or economic
interest owner and shall not constitute a withdrawal of a Member or economic
interest owner.
6.9 Removal. At a meeting called expressly for that purpose, all or any
lesser number of Managers may be removed at any time, with or without cause,
by the affirmative vote of Members holding at least two-thirds of the
Percentage Interests. The Manager shall be entitled to vote his Percentage
Interest, if any, on such matter. The removal of a Manager who is also a
Member shall not affect the Managers rights as a Member and shall not
constitute a withdrawal of a Member.
6.10 Vacancies. Any vacancy occurring for any reason in the number of
Managers of the Company shall be filled by the affirmative vote of Members
holding at least two-thirds of the Percentage Interests. Any Manager's
position to be filled by reason of an increase in the number of Managers
shall be filled by the affirmative vote of at least two-thirds of the
Percentage Interests.
6.11 Compensation, Reimbursement, Organization Expenses. No Manager
shall be entitled to compensation from the Company for services rendered to
the Company as such. Upon the submission of appropriate documentation each
Manager shall be reimbursed by the Company for reasonable out-of-pocket
expenses incurred by such Manager on behalf of the Company or at the
Company's request.
6.12 Right to Rely on the Manager(s).
(a) Any person dealing with the Company may rely (without duty of
further inquiry) upon a certificate signed by any Manager as to:
(i) The identity of any Manager, Member or Economic Interest Owner;
(ii) The existence or nonexistence of any fact or facts which
constitute a condition precedent to acts on behalf of the Company by any
Manager or which are in any other manner germane to the affairs of the
Company;
(iii) The persons who are authorized to execute and deliver
any instrument or document of the Company; or
(iv) Any act or failure to act by the Company or any other matter
whatsoever involving the Company or any Member or economic interest owner.
6.13 Tax Matters Partner.
(a) Designation. Earth Sciences, Inc. is hereby designated the Tax
Matters Partner for any taxable year of the Company in which the Company
fails to qualify for the exception for small partnerships under Section
6231(a)(1)(B) of the Code.
(b) Limitations on Extending Statute of Limitations. Without the
unanimous consent of the other Members, the Tax Matters Partner shall have no
right to extend the statute of limitations for assessing or computing any tax
liability against the Company or the amount of any Company tax item.
(c) Filing Petitions in Tax Court. If the Tax Matters Partner
elects to file a petition for adjustment of any Company tax item (in
accordance with 6226(a) of the Code), such petition shall, unless Members
holding at least a majority of the Percentage Interests determine otherwise,
be filed in the United States Tax Court.
(d) Accountants and Lawyers. Any reasonable costs incurred by the
Tax Matters Partner for retaining accountants or lawyers on behalf of the
Company in connection with any Internal Revenue Service audit of the Company
shall be expenses of the Company.
ARTICLE VII MEMBERS' LIABILITY, RIGHTS AND DUTIES
7.1 Limitation of Liability. Each Member's liability shall be limited
as set forth in the Act, other applicable law and this Agreement.
7.2 Company Debt Liability. Except as otherwise provided by law, a
Member will not personally be liable for any debts or losses of the Company
beyond such Member's respective capital contribution.
7.3 Priority and Return of Capital. No Member shall have priority over
any other Member, either as to the return of capital contributions or as to
net profits, net losses or distributions; provided that this Section shall
not apply to loans (as distinguished from capital contributions) which a
Member has made to the Company.
7.4 Approval of Sale of All Assets. The Members shall have the right,
by the affirmative vote of Members holding at least two-thirds of the
Percentage Interests, to approve the sale, exchange or other disposition of
all, or substantially all, of the Company's assets (other than in the
ordinary course of the Company's business) which is to occur as part of a
single transaction or plan.
ARTICLE VIII GENERAL RESTRICTIONS ONTRANSFER OF A MEMBERSHIP INTEREST
8.1 Restrictions. While this Agreement is in force, no Member may
directly or indirectly transfer all or any part of his ownership interest in
the Company (a "Membership Interest"), whether now owned or hereafter
acquired, without first complying with the terms and conditions of this
Agreement. Any attempted transfer in contravention of this Agreement shall
be null and void.
8.2 Transfers. For purposes of this Agreement, a transfer shall mean
any direct or indirect act, whether voluntary, involuntary, or by operation
of law, which causes a disposition or encumbrance of all or any part of a
Membership Interest, including but not limited to a sale, foreclosure,
assignment, gift, exchange, pledge, hypothecation, bequest or attachment.
Further, the following events shall be deemed to cause a transfer for
purposes of this Agreement:
(a) A Member is adjudicated a bankrupt, whether voluntary or
involuntary;
(b) A Member makes an assignment for the benefit of such Member's
creditors;
(c) The termination of employment of a Member with the Company by
voluntary act of the Member ("Termination of Employment"); or
(d) The death of a Member after the fifth anniversary date of this
Agreement ("Death").
8.3 Exceptions. Notwithstanding the foregoing, a Member may transfer
all or part of his Membership Interest at any time to one or more revocable
living trusts that have been established by the Member whose interest is
being transferred or such Member's nominee. The trustees and their
successors in trust shall be subject to all of the provisions of this
Agreement. If the interest is subsequently assigned by the trust to anyone
other than the Member who created the trust, the assignment shall be
effective only upon the consent of all the other Members.
ARTICLE IX VOLUNTARY OR INVOLUNTARY TRANSFER
9.1 Notice of Intention to Transfer. If a Member desires to transfer or
is deemed to have transferred (within the meaning of Article VIII hereof) all
or any part of his Membership Interest, such Member or such Member's legal
representative (the "Transferring Member") shall give written notice (the
"Notice") to the other Members of such desire or of the event causing the
transfer, except in the case of a Termination of Employment where the act of
such termination shall be deemed the required Notice and the Company shall so
notify the remaining Members. The Notice shall specify the interest to be
transferred (the "Offered Interest") and the nature of all other material
terms of the transfer. The Notice shall constitute an offer to sell the
Offered Interest to the other Members, in proportion to their Percentage
Interests, on the terms and conditions of Section 9.5 (the "Offer"). The
terms of this Section 9.1 shall not apply to any pledge, conveyance or
encumbrance of a Membership Interest where such pledge, conveyance or
encumbrance is made for the purpose of obtaining financing for the Company's
operations.
9.2 Third Party Offers. In the event the Transferring Member has
received a bona fide offer from a third party to purchase the Transferring
Member's Membership Interest ("Third Party Offer"), the Notice also shall
identify the third party and the purchase price, terms and conditions of the
Third Party Offer. A bona fide offer shall mean a legally enforceable offer
from a person or entity financially capable of carrying out its terms,
accompanied by a certified or cashier's check for at least 10% of the
purchase price.
9.3 Option to Purchase. For 30 days after the receipt of the Offer, the
Members shall determine whether or not they desire to purchase the Offered
Interest for the purchase price, terms and conditions provided for in Section
9.5. If some or all of the Members elect to purchase the Offered Interest,
the purchasing Members may divide the Offered Interest in any manner upon
which they all agree. In the absence of unanimous agreement, the Offered
Interest shall be divided among the purchasing Members in proportion to their
Percentage Interests.
9.4 Election to Dissolve Company. In lieu of exercising their option to
purchase the Offered Interest, the other Members may, by unanimous consent
and written notice to the Transferring Member, elect to dissolve the Company
voluntarily. If the Members elect to dissolve the Company, its business and
affairs shall be wound up and all its properties distributed in liquidation
under the provisions of Article XI.
9.5 Purchase Price. The purchase of the Offered Interest shall be upon
one of the following alternatives:
(a) The same terms, conditions and consideration set forth in the
Third Party Offer; or
(b) If the transfer pursuant to a Third Party Offer does not
involve the receipt by the Transferring Member of money or a promissory note
to pay money, the purchasing Member(s) may purchase the Offered Interest for
cash equal to the Transferring Member's capital account value.
(c) If there is no Third Party Offer, upon the terms and conditions
and at a purchase price set forth in the Offer (except upon Death or a
Termination of Employment) or, at the purchasing Member(s) option, as
determined in accordance with Article X.
(d) Upon Death or a Termination of Employment, as determined in
accordance with Article X.
9.6 Release from Restriction. If the Transferring Member offers to sell
the Offered Interest in connection with a Third Party Offer and the other
Members do not elect to purchase the Offered Interest or to dissolve the
Company, then the Transferring Member may sell the Offered Interest to the
bona fide third party who made the Third Party Offer at a price equal to or
greater than the price originally offered to the other Members, provided it
is upon the exact terms and conditions originally contained in the Third
Party Offer (except for changes in size of payments required to accommodate a
greater price), and provided further that such sale is completed within 60
days after the last Offer has been rejected by all of the Members or expires,
whichever first occurs.
9.7 Changed Offer. If a Transferring Member thereafter desires to sell
the Offered Interest at a price which is less than the price originally
offered to the other Members, or upon different terms or conditions than
those which were contained in the original Third Party Offer, or at a time
which is more than 60 days after the rejection or expiration of the last
Offer, the Transferring Member must first reoffer the Offered Interest to the
other Members at the price and upon the terms and conditions which the
Transferring Member was willing to accept from the bona fide third party.
The new Offer shall be made to the other Members in the same manner and in
accordance with the same procedures as provided for in this Article IX.
9.8 Form of Offer. Offers and acceptances shall be in writing and shall
be served either by personal service or by certified mail, return receipt
requested, addressed to each of the Members at the last known address as
shown by the records of the Company.
9.9 Substituted Member. Any assignee or transferee of an Offered
Interest who is not now a Member shall become a Member only if (a) all of the
other Members unanimously consent in writing to the admission of the assignee
or transferee as a Member, and (b) such assignee or transferee agrees (1) to
become a Member, (2) to execute and acknowledge such instruments in form and
substance satisfactory to the other Members as are required to effectuate
such admission to the Company, (3) to be bound by all of the terms and
conditions of this Agreement, as it may be amended from time to time, and (4)
to pay all reasonable expenses connected with such assignee's or transferee's
admission, including reasonable attorneys' fees required for the preparation
of such instruments to effect such admission to the Company. If all of the
other Members do not unanimously approve of the assignee or transferee of an
Offered Interest becoming a Member, such assignee or transferee shall only be
entitled to receive the share of profits or other compensation by way of
income and the return of contributions to which the Transferring Member would
have been entitled, but shall have no right to participate in the management
of the business and affairs of the Company or to become a Member.
9.10 Option on the Part of Company. Upon the unanimous vote of the
Members owning all of the Percentage Interests in the Company other than the
Transferring Member, the Company itself may elect to acquire the interest of
a Transferring Member and to liquidate such Transferring Member's Membership
Interest in the Company for the amount determined under Section 9.5 of this
Agreement. In the event that the Company chooses to liquidate the
Transferring Member's Membership Interest, then the payments shall be deemed
to be made under Section 736(a) of the Code, and appropriate adjustment shall
be made to the amount of the payments to equalize the economic interests of
the parties.
9.11 Termination of Employment.
In the event that the remaining Members and the Company do not
exercise their options to acquire a Member's Membership Interest upon such
Member's Termination of Employment, such Member shall automatically, and
without further action of the Company or such Member, cease to be a Member of
the Company but shall continue to be entitled to receive the share of profits
or other compensation by way of income and the return of contributions to
which he was entitled, but shall have no right to participate in the
management of the business and affairs of the Company or to be a Member.
ARTICLE XPURCHASE PRICE AND TERMS
10.1 Purchase Price. If so elected by the purchasing Member(s) pursuant
to Sections 9.5(c) or 9.5(d), the purchase price hereunder shall be
determined by appraisal as set forth in this Article.
10.2 Appraisal. The fair value of the Offered Interest shall be
determined by the written appraisal of a qualified appraiser agreed upon by
the parties. If the parties cannot agree upon such an appraiser within 30
days after the purchaser is required to purchase the Interest, the
Transferring Member and the purchaser shall each select an appraiser, the two
appraisers shall agree upon a third appraiser, and the three appraisers shall
determine the value of the Offered Interest being purchased. If the three
appraisers cannot agree upon a value, the fair value of the Offered Interest
shall be determined by averaging the value determined by each appraiser, and
this value will be final, binding and conclusive upon the parties. The cost
of any such appraisal shall be shared equally by the purchaser and the
Transferring Member (or the Transferring Member's legal representative).
10.3 Terms of Purchase Price. Subject to the provisions of Section 10.4,
the purchase price determined in this Article shall be paid as the parties
shall agree, and if the parties cannot agree, shall be payable as follows:
(a) 10% in cash or certified funds; and (b) the balance by a negotiable
promissory note made by the Member or the Company, providing for (i) interest
at a floating rate which is one percentage point higher than the "Prime Rate"
published by the Wall Street Journal as the base rate on corporate loans of
large U.S. money center commercial banks; and (ii) equal monthly payments of
principal plus accrued interest shall be payable over thirty-six months,
with the first payment due 30 days from the date of closing.
10.4 Payment in Cash. Any payment required to be made by the Company
under this Article may, at the sole discretion of the Company, be satisfied
by delivery of cash or certified funds, payable as set forth in Section 10.3
above, delivered at the closing described in Section 10.5 below.
10.5 Closing.
(a) Time and Place of Closing. The closing of any purchase and
sale of an Offered Interest pursuant to this Agreement shall be held at the
time and place and in such manner mutually agreeable to the parties to the
purchase. In the absence of agreement, the closing shall be held at the
principal office of the Company 60 days after the expiration of the last
option to purchase under the provisions of Article IX.
(b) Conditions to Closing. The closing of any purchase and sale of
an Offered Interest hereunder is expressly conditioned upon compliance with
all applicable terms and provisions of this Agreement, including without
limitation those specified in Articles VIII, IX, and XIII.
ARTICLE XI TERMINATION AND DISSOLUTION
11.1 Grounds for Dissolution. The Company shall be dissolved upon the
occurrence of any of the following events:
(a) expiration of the period fixed for the duration of the Company;
(b) the unanimous written agreement of the Members;
(c) a decree of a court having competent jurisdiction;
(d) operation of law;
(e) total liquidation of all Company assets;
(f) upon the death, retirement, resignation, expulsion, bankruptcy,
dissolution or determination of incompetency of a Member, or the occurrence
of any other act of a Member that terminates the continued membership of a
Member in the Company (a "Withdrawal Event"), unless the remaining Members
holding a majority of the Percentage Interests consent in writing within 90
days after the Withdrawal Event to continue the Company; or
(g) upon an election of Members as provided in Section 9.4.
11.2 Continuation of Business Notwithstanding Dissolution. While the
foregoing Section describes events causing dissolution of the Company, the
same shall in no way prevent any of the Members, not directly responsible for
the occurrence of such event, from forming a new limited liability company in
order to benefit by the continuation of the terms and conditions set forth in
this Agreement.
11.3 Dissolution Procedure. The procedure to be followed after the
occurrence of one of the events causing dissolution, and the failure of all
of the remaining Members to consent to continue the Company as provided in
Section 11.1(f), shall be as follows:
(a) the Company shall execute a Statement of Intent to Dissolve,
duplicate originals of which shall be delivered to the Colorado Secretary of
State as provided by the Act, whereupon the Company shall cease to carry on
its business, except to the extent necessary to wind up its business and
affairs;
(b) all Company assets shall be marshalled;
(c) all outstanding debts, expenses and liabilities to third
parties shall be paid;
(d) all debts to Members other than capital and profits shall be
paid;
(e) after payment of all of the foregoing debts, expenses and
liabilities, Members shall be paid in accordance with the provisions of
Section 11.4; and
(f) the Company shall execute Articles of Dissolution, duplicate
originals of which shall be filed in the office of the Colorado Secretary of
State as provided by the Act.
<PAGE>
11.4 Distributions in Liquidation.
(a) Priority of Distributions. Upon liquidation of the Company or
(except as provided in Treasury Regulation 1.704-1(b)(2)(ii)(b)) upon the
liquidation of any Member's Membership Interest in the Company, all
distributions shall be made first in accordance with the Members' positive
capital account balances, as determined after taking into account all
adjustments to capital accounts for the Company's taxable year in which the
liquidation occurs, other than adjustments made pursuant to this Section
11.4, and to the extent the distributions exceed the aggregate positive
balances in the Members' capital accounts, then, among all of the Members pro
rata in proportion to their respective Percentage Interests. Notwithstanding
the foregoing or any other provision of this Agreement unless required by
Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder, no Member shall be entitled to receive a liquidating distribution
with respect to such Member's profits interest as established under Section
4.1(b) above in excess of the amount by which the aggregate profits and
amount realized credited to such Member under Sections 5.1(a) and (b) above
exceed the aggregate distributions received by such Member from the
commencement of the Company's operations.
(b) All distributions under this Section shall be made by the later
of (1) the end of the taxable year of the Company in which the liquidation of
the Company, or any Member's interest, occurs, or (2) within 90 days after
the date of the liquidation. Notwithstanding anything to the contrary in
this Agreement, upon a liquidation within the meaning of Section 1.704-
1(b)(2)(ii)(g) of the Treasury Regulations, if any Member's capital account
has a negative balance (after giving effect to all contributions,
distributions, allocations and other capital account adjustments for all
taxable years, including the year during which such liquidation occurs), such
Member shall have no obligation to make any capital contribution, and the
negative balance of such Member's capital account shall not be considered a
debt owed by such Member to the Company or to any other person for any
purpose whatsoever.
(c) Definitions. For purposes of this Section:
(1) the taxable year of the Company shall be determined
without regard to Section 706(c)(2)(A) of the Code;
(2) a liquidation of a Member's interest in the Company shall
be deemed to occur on the earlier of (A) the date upon which there is a
liquidation of the Company, or (B) the date upon which there is a liquidation
of the Members' interest in the Company under Treasury Regulation 1.761-
1(d); and
(3) a liquidation of the Company shall be deemed to occur upon
the earlier of (A) the date upon which the Company is terminated under
708(b)(1) of the Code, or (B) the date upon which the Company ceases to be
a going concern (even though it may continue in existence for the purpose of
winding up its affairs, paying its debts, and distributing any remaining
balance to the Members).
11.5 Waiver of Partition - Dissolution and Withdrawal. Each of the
Members hereby waives any and all right that each such Member may have to
maintain any action for partition with respect to his Membership Interest or
any right such Member may have to force or compel dissolution of the Company
except in accordance with this Agreement. Each Member specifically waives
any rights such Member may now have or hereafter acquire to withdraw from the
Company, and if, notwithstanding such waiver, a Member withdraws in violation
of this Agreement, the Company may, in addition to exercising any other
remedies at law or in equity, recover damages for breach of this Agreement
and offset such damages against amounts otherwise distributable to the
withdrawing Member.
ARTICLE XII ARBITRATION
The Members agree to submit all controversies, claims and matters of
difference to arbitration in Denver, Colorado, according to the rules and
practices of the American Arbitration Association from time to time in force,
except that if such rules and practices differ from the state rules of civil
procedure or any other provisions of state law then in effect, such state
rules and law shall govern. This submission and agreement to arbitrate shall
be specifically enforceable. Arbitration may proceed in the absence of one
party if notice of the proceeding has been given to such party. The parties
agree to abide by all awards rendered in such proceedings. Such awards shall
be final and binding on all parties to the extent and in the manner provided
by the state rules of civil procedure. All awards may be filed with the
clerk of one or more courts, state or federal, having jurisdiction over the
party against whom such award is rendered or such party's property, as a
basis of judgment and of the issuance of execution for its collection. No
party shall be considered in default hereunder during the pendency of
arbitration proceedings relating to such default.
ARTICLE XIII INVESTMENT REPRESENTATIONS
13.1 Interests Not Registered. The Members understand that (a) the
Membership Interests evidenced by this Agreement have not been registered
under the Securities Act of 1933, as amended, the Colorado Securities Act, as
amended, or any other state or foreign securities laws (collectively, the
"Securities Acts") because the Company is issuing such Membership Interests
in reliance upon the exemptions from the registration requirements of the
Securities Acts providing for issuance of securities not involving a public
offering, (b) the Company has relied upon the fact that such Membership
Interests are to be held by each Member for investment, and (c) exemption
from registrations under the Securities Acts would not be available if such
Membership Interests were acquired by a Member with a view to distribution.
13.2 Investment Representation. Each Member hereby confirms to the
Company that such Member is acquiring the Membership Interests in the Company
for such own Member's account, for investment, and not with a view to the
resale or distribution thereof. Each Member agrees not to transfer, sell or
offer for sale any portion of his Membership Interest in the Company unless
there is an effective registration or other qualification relating thereto
under the Securities Act of 1933, as amended (the "'33 Act"), and under any
applicable state or foreign securities laws or unless the holder of such
Membership Interest in the Company delivers to the Company an opinion of
counsel, satisfactory to the Company, that such registration or other
qualification under the '33 Act and applicable state or foreign securities
laws is not required in connection with such transfer, sale or offer. Each
Member understands that the Company is under no obligation to register the
Membership Interests in the Company or to assist such Member in complying
with any exemption from registration under the Securities Acts if such Member
should at a later date wish to dispose of his Membership Interest in the
Company. Each Member recognizes that exemptions from registration, in any
case, are limited and may not be available when the Member may wish to sell,
transfer or otherwise dispose of any of the Member's Membership Interests in
the Company.
13.3 Further Representations. Prior to acquiring a Membership Interest
in the Company, each Member has made an investigation of the Company and its
business and acknowledges that the Company has made available to each such
Member all information with respect thereto which such Member needed to make
an informed decision to acquire his Membership Interest. Each Member
represents that he possesses the experience and sophistication as an investor
which are adequate for the evaluation of the merits and risks of such
Member's investment in the Company as a Member.
ARTICLE XIV GENERAL MATTERS
14.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado.
14.2 No Waiver. No provision of this Agreement may be waived except by
an agreement in writing signed by the waiving Member. A waiver of any term
or provision shall not be construed as a waiver of any other term or
provision.
14.3 Amendment. This Agreement may be amended, altered or revoked at any
time, in whole or in part, by filing with this Agreement a written instrument
setting forth such amendment, alteration or revocation signed by all of the
Members.
14.4 Binding Effect. This Agreement shall be binding upon the Members
and their respective heirs, personal representatives, successors and assigns.
14.5 Construction; Definitions. Throughout this Agreement the singular
shall include the plural, the plural shall include the singular, and the use
of any gender shall include all genders, wherever the context so requires.
Terms used, but not defined, in any Schedule to this Agreement shall have the
meanings assigned to such terms in this Agreement.
14.6 Text To Control. The headings of articles and sections are included
solely for convenience of reference. If any conflict between any heading and
the text of this Agreement exists, the text shall control.
14.7 Severability. If any provision of this Agreement is declared by any
court of competent jurisdiction to be invalid for any reason, such invalidity
shall not affect the remaining provisions. Such remaining provisions shall
be fully severable, and this Agreement shall be construed and enforced as if
such invalid provisions never had been inserted in this Agreement.
14.8 Notices. Except as expressly provided otherwise in this Agreement,
all notices required or permitted by this Agreement shall be in writing and
shall be served either by personal delivery or by certified or registered
mail, return receipt requested, addressed as set forth on the signature page
hereof as to each Member (except that any Member may from time to time give
notice in accordance with this provision to the Company changing such
Member's address for that purpose) and as set forth in Section 1.3 as to the
Company. Such notice shall be effective on the date of personal delivery or
on the third day after mailing.
14.9 Entire Agreement. This Agreement embodies the entire understanding
and agreement among the parties concerning the Company and supersedes any and
all prior negotiations, understandings or agreements in regard thereto.
14.10 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same instrument.
The parties hereby execute this Agreement on the respective dates set
forth next to their signatures below, effective as of September 20, 1996.
MEMBERS:
ADA-ES, INC.
April 30, 1997 By: /s/ Michael D. Durham
Address: 304 Inverness Way South, Suite 365
Englewood, Colorado 80112
EARTH SCIENCES, INC.
April 30, 1997 By: /s/ Mark H. McKinnies
Address: 910 12th Street
Golden, Colorado 80401
<PAGE>
SCHEDULE A
TO OPERATING AGREEMENT OF
ADA ENVIRONMENTAL SOLUTIONS LLC
The capital contribution by each Member to the Company as of the
execution of this Amended and Restated Operating Agreement is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Member Cash Promissory Adjusted Fair Fair Percen
Capital Note Basis of Market Market tage
Contribut Contribut Value of Value of Inter
ion ed Contributed Capital est
Property Property Contribution
ADA-ES, Inc. $ 20.00 $ 0.00 $0.00 $500,000.00 $ 500,020.00 49%
Earth Sciences,
Inc. 900,000.00 1,600,000.00 0.00 0.00 $2,500,000.00 51%
</TABLE>
<PAGE>
SCHEDULE B
TO OPERATING AGREEMENT OF
ADA ENVIRONMENTAL SOLUTIONS LLC
For purposes of interpreting and implementing Article V of the Operating
Agreement of ADA Environmental Solutions LLC (the "Agreement"), and except as
otherwise required under Section 704(b) of the Code and the Treasury
Regulations promulgated thereunder, the following rules shall apply and shall
be treated as part of the terms of the Agreement:
Part A. Special Allocation Provisions.
1. For purposes of determining the amount of gain or loss to be
allocated pursuant to Article V of the Agreement, any basis adjustments
permitted pursuant to Section 743 of the Code shall be disregarded.
2. Company income, loss, deductions, and credits shall be
allocated to the Members in accordance with the portion of the year during
which the Members have held their respective interests. All items of income,
loss, deductions, and credits shall be considered to have been earned ratably
over the period of the fiscal year of the Company, except that gains and
losses arising from the disposition of assets shall be taken into account as
of the date hereof.
3. Notwithstanding any other provision of the Agreement, to the
extent required by law, income, gain, loss, and deduction attributable to
property contributed to the Company by a Member shall be shared among the
Members so as to take into account any variation between the basis of the
property and the fair market value of the property at the time of
contribution in accordance with the requirements of Section 704(c) of the
Code and the applicable Treasury Regulations promulgated thereunder as more
fully described in Part B hereof.
4. Notwithstanding any other provision of the Agreement, in the
event the Company is entitled to a deduction for interest imputed under any
provision of the Code on any loan or advance from a Member (whether such
interest is currently deducted, capitalized, or amortized), such deduction
shall be allocated solely to such Member.
5. Notwithstanding any provision of the Agreement to the contrary,
to the extent any payments made to a Member and deducted by the Company in
reliance on Section 707(a) or 707(c) of the Code are treated as distributions
to a Member for federal income tax purposes, there will be a gross income
allocation to such Member in the amount of such distribution.
6. (a) Notwithstanding any provision of the Agreement to the
contrary and subject to the exceptions set forth in Section 1.704-2(f) (2) -
(5) of the Treasury Regulations, if there is a net decrease in Partnership
Minimum Gain during any fiscal year of the Company, each Member shall be
specially allocated items of Company income and gain for such year (and, if
necessary, subsequent years) in an amount equal to such Member's share of the
net decrease in Partnership Minimum Gain determined in accordance with
Section 1.704-2(g)(2) of the Treasury Regulations. Allocations pursuant to
the previous sentence shall be made in proportion to the respective amounts
required to be allocated to each Member pursuant thereto. The items to be so
allocated shall be determined in accordance with Sections 1.704-2(f) and
1.704-2(j) of the Treasury Regulations. This paragraph 6(a) is intended to
comply with the minimum gain chargeback requirement in Section 1.704-2(f) of
the Treasury Regulations and shall be interpreted consistently therewith. To
the extent permitted by such Section of the Treasury Regulations and for
purposes of this paragraph 6(a) only, each Member's Adjusted Capital Account
Balance shall be determined prior to any other allocations pursuant to
Article V of the Agreement with respect to such fiscal year and without
regard to any net decrease in Partner Minimum Gain during such fiscal year.
(a) Notwithstanding any provision of the Agreement to the
contrary, except paragraph 6(a) of this Schedule, and subject to the
exceptions set forth in Section 1.704-2(i)(4) of the Treasury Regulations, if
there is a net decrease in Partner Nonrecourse Debt Minimum Gain during any
fiscal year, each Member who has a share of the Partner Nonrecourse Debt
Minimum Gain, determined in accordance with Section 1.704-2(i)(5) of the
Treasury Regulations, shall be specially allocated items of Company income
and gain for such year (and, if necessary, subsequent years) in an amount
equal to such Member's share of the net decrease in Partner Nonrecourse Debt
Minimum Gain, determined in accordance with Section 1.704-2(i)(5) of the
Treasury Regulations. Allocations pursuant to the previous sentence shall be
made in proportion to the respective amounts required to be allocated to each
Member pursuant thereto. The items to be so allocated shall be determined in
accordance with Sections 1.704-2(i)(4) and 1.704-2(j) of the Treasury Regula
tions. This paragraph 6(b) is intended to comply with the minimum gain
chargeback requirement in Section 1.704-2(i)(4) of the Treasury Regulations
and shall be interpreted consistently therewith. Solely for purposes of the
paragraph 6(b), each Member's Adjusted Capital Account Balance shall be
determined prior to any other allocations pursuant to Article V of the
Agreement with respect to such fiscal year, other than allocations pursuant
to 6(a) hereof.
7. Notwithstanding any provision of the Agreement to the contrary,
in the event any Members unexpectedly receive any adjustments, allocations,
or distributions described in Treasury Regulation Section
1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6),
items of Company income and gain shall be specially allocated to such Members
in an amount and manner sufficient to eliminate the deficits in their
Adjusted Capital Account Balances created by such adjustments, allocations,
or distributions as quickly as possible. This paragraph 7 is intended to
comply with the Qualified Income Offset provisions of the aforementioned
Treasury Regulations.
8. No net loss shall be allocated to any Member to the extent that
such allocation would result in a deficit Adjusted Capital Account Balance in
such Member's capital account while any other Member continues to have a
positive capital account balance; in such event, net losses shall first be
allocated to any Members with positive Adjusted Capital Account Balances, and
in proportion to such positive balances, to the extent necessary to reduce
their positive Adjusted Capital Account Balances to zero.
9. Any special allocations of items pursuant to this Part A shall
be taken into account in computing subsequent allocations so that the net
amount of any items so allocated and the remaining profits, losses, and all
other items allocated to each such Member pursuant to Article V of the
Agreement shall, to the extent possible, be equal to the net amount that
would have been allocated to each such Member pursuant to the provisions of
Article V of the Agreement if such special allocations had not occurred.
10. Notwithstanding any provision of the Agreement to the contrary,
Nonrecourse Deductions for any fiscal year or other period shall be specially
allocated to the Members in accordance with their Percentage Interests.
11. Notwithstanding any provision of the Agreement to the contrary,
any Partner Nonrecourse Deduction for any fiscal year shall be specially
allocated to the Member who bears the economic risk of loss with respect to
the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are
attributable in accordance with Section 1.704-2(i) of the Treasury
Regulations.
Part B. Capital Account Adjustments and 704(c) Tax Allocations.
1. For purposes of computing the amount of any item of income,
gain, deduction, or loss to be reflected in the Members' capital accounts,
the determination, recognition, and classification of any such item shall be
the same as its determination, recognition, and classification for federal
income tax purposes; provided, however, that:
(a) Any deductions for depreciation, cost recovery, or
amortization (other than depletion under Section 611 of the Code)
attributable to a Contributed Property shall be determined as if the adjusted
basis of such property on the date it was acquired by the Company was equal
to the Agreed Value of such property. Upon an adjustment to the Carrying
Value of any Company property, except property subject to depletion under
Section 611 of the Code, further deductions for such depreciation, cost
recovery, or amortization attributable to such property shall be determined
as if the adjusted basis of such property was equal to the Carrying Value of
such property immediately following such adjustment.
(b) Any income, gain, or loss attributable to the taxable
disposition of any property (including any property subject to depletion
under Section 611 of the Code) shall be determined by the Company as if the
adjusted basis of such property as of such date of disposition was equal in
amount to the Company's Carrying Value with respect to such property as of
such a date.
(c) If the Company's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 50(c)(1) of the Code, the amount of such reduction shall, solely for
purposes hereof, be deemed to be an additional depreciation or cost recovery
deduction in the year such property is placed in service and shall be
allocated among the Members pursuant to Article V of the Agreement. Any
restoration of such basis pursuant to Section 50(c)(2) of the Code shall be
allocated in the same manner to the Members to whom such deemed deduction was
allocated.
(d) The computation of all items of income, gain, loss, and
deduction shall be made by the Company and, as to those items described in
Section 705(a)(1)(B) or Section 705(a)(2)(B) of the Code, without regard to
the fact that such items are not includable in gross income or are neither
currently deductible nor capitalizable for federal income tax purposes.
2. A transferee of a Member's interest will succeed to the capital
account relating to the Member's interest transferred; provided, however,
that if the transfer causes a termination of the Company under Section
708(b)(1)(B) of the Code, the Company properties shall be deemed to have been
distributed in liquidation of the Company to the Members (including the
transferee of an interest) and recontributed by such Members and transferees
in reconstitution of the Company. The capital accounts of such reconstituted
Company shall be maintained in accordance with the principles set forth
herein.
3. Upon an issuance of any additional interests in the Company for
cash or Contributed Property, the capital accounts of all Members (and the
Carrying Values of all Company properties) shall, immediately prior to such
issuance, be adjusted (consistent with the provisions hereof) upward or
downward to reflect any unrealized gain or unrealized loss attributable to
each Company property (as if such unrealized gain or unrealized loss had been
recognized upon an actual sale of such property at the fair market value
thereof, immediately prior to such issuance, and had been allocated to the
Members, at such time, pursuant to Article V of the Agreement). In
determining such unrealized gain or unrealized loss attributable to the
properties, the fair market value of Company properties shall be determined
by the Members using such reasonable methods of valuation as the Members may
adopt.
4. Immediately prior to the distribution of any Company property
in liquidation of the Company, the capital accounts of all Members (and the
Carrying Values of all Company properties) shall be adjusted (consistent with
the provisions hereof and Section 704 of the Code) upward or downward to
reflect any unrealized gain or unrealized loss attributable to each Company
property (as if such unrealized gain or unrealized loss had been recognized
upon an actual sale of each such property, immediately prior to such
distribution, and had been allocated to the Members, at such time, pursuant
to Article V of the Agreement). In determining such unrealized gain or
unrealized loss attributable to the properties, the fair market value of
Company properties shall be determined by the Members using such reasonable
methods of valuation as the Members may adopt.
5. In accordance with Section 704(c) and the Treasury Regulations
promulgated thereunder, income, gain, loss, and deduction with respect to any
Contributed Property shall, solely for tax purposes, be allocated among the
Members so as to take account of any variation between the adjusted basis of
such property to the Company for federal income tax purposes and its Agreed
Value.
6. In the event the Agreed Value of any Company asset is adjusted
as described in paragraph 3 or 4 of this Part B above, subsequent allocations
of income, gain, loss, and deduction with respect to such asset shall take
account of any variation between the adjusted basis of such asset for federal
income tax purposes and its Agreed Value in the same manner as under Section
704 (c) of the Code and the Treasury Regulations promulgated thereunder. Any
unrealized income or deduction with respect to accounts receivable, accounts
payable, and any other accrued but unpaid items that a Member contributes to
the Company shall be allocated to such Member to the extent required by
Sections 704(c) of the Code and the Treasury Regulations promulgated under
Sections 704(b) and 704(c) of the Code.
7. Any elections or other decisions relating to any federal income
tax matters shall be made by the Members in any manner that reasonably
reflects the purpose and intention of the Agreement.
Part C. Definitions. For the purposes of this Schedule, the following terms
shall have the meanings indicated unless the context clearly indicates
otherwise:
"Adjusted Capital Account Balance" means the balance, if any, in the
capital account balance of a Member as of the end of the relevant fiscal year
of the Company, after giving effect to the following: (a) credit to such
capital account any amounts the Member is obligated to restore, pursuant to
the terms of this Agreement or otherwise or is deemed obligated to restore
pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-
2(i)(5) of the Treasury Regulations and (b) debit to such capital account the
items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5), and (6) of the
Treasury Regulations.
"Agreed Value" means the fair market value of Contributed Properties
as agreed to by the contributing Member and the Company, using such
reasonable method of valuation as they may adopt.
"Carrying Value" means (a) with respect to Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all
amortization, depreciation, and cost recovery deductions charged to the
Members' capital accounts with respect to such property, as well as any other
charges for sales, retirements, and other dispositions of assets included in
a Contributed Property, as of the time of determination, and (a) with respect
to any other property, the adjusted basis of such property for federal income
tax purposes as of the time of determination. The Carrying Value of any
property shall be adjusted in accordance with the principles set forth
herein.
"Contributed Property" means each Member's interest in property or
other consideration (excluding services and cash) contributed to the Company
by such Member.
"Nonrecourse Deductions" shall have the meaning set forth in Section
1.704-2(b)(1) of the Treasury Regulations. The amount of Nonrecourse
Deductions for a fiscal year of the Company equals the excess, if any, of the
net increase, if any, in the amount of Partnership Minimum Gain during that
fiscal year over the aggregate amount of any distributions during that fiscal
year of proceeds of a Nonrecourse Liability that are allocable to an increase
in Partnership Minimum Gain, determined according to the provisions of
Section 1.704-2(c) of the Treasury Regulations.
"Nonrecourse Liability" shall have the meaning set forth in Section
1.704-2(b)(3) of the Treasury Regulations.
"Partner Minimum Gain" means an amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Section 1.704-2(i) of the Treasury Regulations.
"Partner Nonrecourse Debt" shall have the meaning set forth in
Section 1.704-2(b)(4) of the Treasury Regulations.
"Partner Nonrecourse Debt Minimum Gain" means an amount, with
respect to each Partner Nonrecourse Debt, determined in accordance with
Section 1.704-2(i) of the Treasury Regulations.
"Partner Nonrecourse Deductions" shall have the meaning set forth in
Section 1.704-2(i)(1) of the Treasury Regulations. For any Company taxable
year, the amount of Partner Nonrecourse Deductions with respect to a Partner
Nonrecourse Debt equals the net increase during the year, if any, in the
amount of Partner Nonrecourse Debt Minimum Gain reduced (but not below zero)
by proceeds of the liability that are both attributable to the liability and
allocable to an increase in the Partner Nonrecourse Debt Minimum Gain.
"Partnership Minimum Gain" shall have the meaning set forth in
Sections 1.704-2(b)(2) and 1.704-2(d) of the Treasury Regulations.
For purposes of this Schedule, all other capitalized terms will have the
same definition as in the Agreement.
This Schedule B is intended to comply with Section 704(b) of the Code and
the Treasury Regulations promulgated thereunder and shall be construed and
interpreted consistently therewith. To the extent that any of the provisions
of this Schedule B are inconsistent (whether now or in the future) with
Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder, the provisions of such Section of the Code and such Treasury
Regulations shall control, and all allocations and capital account
adjustments made under this Schedule B and the Agreement shall be made in a
manner necessary to comply with Section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
<PAGE>
EXHIBIT 99.1 FINANCIAL STATEMENTS OF ADA ENVIRONMENTAL SOLUTIONS
LLC,DECEMBER 31, 1996
ADA ENVIRONMENTAL SOLUTIONS LLC
(A DEVELOPMENT STAGE COMPANY)
table of contents
Page
Independent Auditors' Report 3
Balance Sheet 4
Statement of Operations and Members' Deficit 5
Statement of Cash Flows 6
Notes to Financial Statements 7
<PAGE>
BDO Seidman, LLP
Accountants and Consultants
17th & Grant Building
303 East Seventeenth Avenue, Suite 600
Denver, Colorado 80203-9682
Telephone: (303) 830-1120
Fax: (303) 830-8130
INDEPENDENT AUDITORS' REPORT
ADA Environmental solutions LLC
Englewood, Colorado
We have audited the accompanying balance sheet of ADA Evironmental Solutions
LLC (a development stage company) as of December 31, 1996 and the related
statement of operations, members' deficit and cash flows for the ten months
hen ended. These financial statement are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ADA Environmental Solutions
LLC (a development stage company) as of December 31, 1996 and the results of
its operation and cash flows for the ten months then ended, in conformity
with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Denver, Colorado
April 10, 1997
<PAGE>
<TABLE>
<CAPTION>
ADA Environmental Solutions LLC
(A Development Stage Company)
Balance Sheet
December 31, 1996
<S> <C>
ASSETS
Cash $ 11,950
Trade receivables (Notes 2 and 3) 11,355
Prepaid assets 2,559
------
Total currents assets 25,864
Preproduction costs 324,008
Furniture and equipment (Note 3),
net of $1,154 accumulated
depreciation 14,448
Other assets 729
------
Total Assets $365,049
=======
LIABILITIES
Accounts payable $ 11,217
Note payable - member (Note 3) 779,443
-------
Total Liabilities 790,660
Commitments (Note 8)
MEMBERS' DEFICIT (425,611)
-------
Total Liabilities and Members' Deficit $365,049
=======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
ADA Environmental Solutions LLC
(A Development Stage Company)
Statement of Operations and Members' Deficit
Ten Months Ended December 31, 1996
<S> <C>
Revenues (Note 4) $ 75,487
Costs and Expenses:
Direct cost of revenue 53,977
Indirect expenses 413,085
-------
Loss from operations (391,575)
Interest expense (34,056)
-------
Net loss (425,631)
Beginning members' equity 0
Members' contribution 20
-------
Ending members' deficit ($425,611)
=======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
ADA Environmental Solutions LLC
(A Development Stage Company)
Statement of Cash Flows
Ten Months Ended December 31, 1996
<S> <C>
Cash flows from operating activities:
Cash received from $ 64,132
Cash paid to suppliers and employees (454,691)
Cash paid for prepaid expenses (2,559)
Interest paid (34,056)
-------
Net cash used in operating activities (427,174)
Cash flows from investing activities:
Capital expenditures (15,602)
Preproduction costs (324,008)
Increase in other assets (729)
-------
Net cash used in investing activities (340,339)
Cash flows from financing activities:
Borrowings from member 779,443
Members contribution 20
-------
Net cash provided by financing activities 779,463
Net increase in cash 11,950
Cash, beginning of period -0-
-------
Cash, end of period $ 11,950
=======
Reconciliation of net loss to net
cash used in operating activities:
Net loss ($425,631)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 1,154
Change in assets and liabilities -
Increase in trade receivables (11,355)
Increase in accounts payable and
accrued liabilities 11,217
Increase in prepaid expenses (2,559)
------
Net cash used in operating activities ($427,174)
=======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
In March 1996, ADA Environmental Solutions LLC ("ADA ES" or the "Company")
was established to evaluate, design, install, and operate/maintain certain
pollution control equipment and chemical additive systems primarily for use
in the power utility industry.
Owners and Limited Liability Companies are referred to as "members" and the
company executives are referred to as "managers". The managers receive
authority to act from Operating Agreements which are signed by all members.
In 1996, ADA ES was considered a Development Stage Company producing
insignificant revenue while developing the necessary scale-up processes and
structure to sustain planned full scale operations.
Furniture and Equipment
Furniture and equipment are recorded at cost. Provisions for depreciation are
computed using an accelerated method over estimated useful lives of three to
seven years.
Use of Estimates
The preparation of the Company's financial statements, in conformity with
generally accepted accounting principles, requires the Company's management
to make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ
from those estimates.
PREPRODUCTION COSTS
The Company capitalized costs of $324,000 in 1996 associated with full scale
production process development for ADA Environmental Solutions LLC. These
costs include scale-up development, production designs, and vendor
establishment/evaluations, and will start being amortized over 5 years once
full scale systems are in place and operational.
CONCENTRATION OF RISK
Profitable operations of the Company are contingent upon a single proprietary
process. This process has been proven successful in both laboratory and
extended full-scale demonstration operations. Should this technology be
obsoleted or be caused to be unsuccessful, the ability of the Company to
succeed would be at risk.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
Billed $ 6,981
Unbilled 4,374
------
$11,355
======
Unbilled accounts receivable consist of revenue which has been recognized but
which, because of the terms of the contract, has not yet been billed.
NOTE 3 -NOTE PAYABLE-MEMBER
AT DECEMBER 31, 1996, THE COMPANY HAD A LINE OF CREDIT FROM A MEMBER TOTALING
$850,000. THIS LINE IS SUBJECT TO RENEWAL ON MAY 10, 1997. AT DECEMBER 31,
1996, THE COMPANY HAD $779,443 OUTSTANDING AGAINST THIS LINE OF CREDIT.
INTEREST ACCRUES AT 1% ABOVE A LOCAL BANK'S PRIME RATE. INTEREST ACCRUES
MONTHLY. AT DECEMBER 31, 1996, THE INTEREST RATE WAS 9.25%. BORROWINGS
OUTSTANDING UNDER THE AGREEMENT ARE SECURED BY UNDIVIDED INTERESTS IN ALL THE
COMPANY'S FIXED ASSETS AND ACCOUNTS RECEIVABLE.
NOTE 4 - DEVELOPMENT STAGE OPERATIONS
The Company commenced development stage operations when ADA Technologies,
Inc. (ADA), the parent company, contributed technology in exchange for rights
to the first $500,000 of profits, all the losses and 80% of the equity in the
Company. The remaining 20% equity was obtained by key employees at a nominal
amount. During 1996 the Company was devoted to scale-up development,
production engineering, and supplier establishment/evaluation. The Company
expects to commence production operations in 1997.
NOTE 5 - INCOME TAXES
ADA ES is a Limited Liability Company which elected to be taxed as a
partnership under provisions of the Internal Revenue Code. Accordingly,
income tax provisions (and benefits) are not reflected in the financial
statements since the Company's results of operations will be reported in the
income tax returns of the members.
NOTE 6 - INCOME/LOSS ALLOCATIONS
The Limited Liability Operating Agreement provides for ADA to be allocated
all losses of the Company and initial profits up to $500,000. Minority
interest members receive proportionate interests in all profits, after ADA
has received the first $500,000.
NOTE 7 - RELATED PARTY TRANSACTIONS
ADA employs the entire work force for the Company and loans the employees to
ADA ES at costs which are fully burdened as computed from the parent
company's books and records. The parent company provided all the necessary
working capital financing for ADA ES (see Note 3).
NOTE 8 - COMMITMENTS
The Company has non-cancelable long-term lease agreements for demonstration
and production equipment. Rent expense was approximately $10,000 in 1996.
Future minimum lease payments required under long-term operating leases in
effect at December 31, 1996, require the following payments:
1997 $ 63,000
1998 $ 63,000
1999 $ 61,000
2000 $ 59,000
2001 $ 49,000
NOTE 9 - SUBSEQUENT EVENT
IN FEBRUARY 1997, THE COMPANY AND ITS MEMBERS ENTERED INTO AN AGREEMENT WITH
EARTH SCIENCES, INC. ("ESI"), A PUBLICLY HELD CORPORATION, WHICH PROVIDED FOR
ESI TO PURCHASE EQUITY IN ADA ES. THE TOTAL INVESTMENT IN ADA ES BY ESI WILL
BE UP TO $2.5 MILLION IN CASH CONTRIBUTIONS AND LOANS. THIS SAME AGREEMENT
PROVIDES FOR ESI TO ACQUIRE, DIRECTLY OR INDIRECTLY, ALL THE EQUITY IN ADA ES
FOR 1,715,600 SHARES OF ESI STOCK HAVING A MARKET VALUE AT MARCH 31, 1997 OF
APPROXIMATELY $5.1 MILLION. THIS TRANSACTION IS PLANNED TO BE COMPLETED IN
1998.
TO FACILITATE THE ACQUISITION, A CORPORATION (ADA-ES, INC.) WAS ESTABLISHED
IN MARCH 1997. ALL THE MEMBERSHIP INTERESTS IN ADA ES WERE EXCHANGED FOR
SHARES OF STOCK IN ADA-ES, INC.
