<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarter Ended: September 30, 1999
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period from _____________ to ____________
Commission File Number 0-29838
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INDUSTRIAL ECOSYSTEMS, INC.
----------------------------------------------
(Name of Small Business Issuer in its charter)
Utah 94-3200034
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
2040 West Broadway, Bloomfield, New Mexico, 87413
-----------------------------------------------------
(Address of principal executive offices and Zip Code)
505-632-1786
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(1) Yes X No (2) Yes X No
--- --- --- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, Par Value $0.001 35,500,905
- -------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of September 30, 1999
<PAGE>
<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDUSTRIAL ECOSYSTEMS, INC.
FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying financial statements have been prepared by the
Company, without audit, in accordance with the instructions to Form 10-QSB
pursuant to the rules and regulations of the Securities and Exchange
Commission and, therefore may not include all information and footnotes
necessary for a complete presentation of the financial position, results of
operations, cash flows, and stockholders' equity in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments
(which include only normal recurring accruals) necessary to present fairly the
financial position and results of operations for the periods presented have
been made. These financial statements should be read in conjunction with the
accompanying notes, and with the historical financial information of the
Company.
<PAGE>
<PAGE> 3
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
------
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 3,315 $ 12,552
Restricted cash 43,083 40,669
Accounts receivable 94,520 35,079
Prepaid expenses 43,529 -
------------ ------------
Total Current Assets 184,447 88,300
------------ ------------
PROPERTY AND EQUIPMENT (Net) 220,714 275,973
------------ ------------
OTHER ASSETS
Investment in joint venture - -
Deposits 21,644 10,740
------------ ------------
Total Other Assets 21,644 10,740
------------ ------------
TOTAL ASSETS $ 426,805 $ 375,013
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 4
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 99,045 $ 356,890
Accrued expenses 356,130 323,755
Unearned revenue - 21,666
Due to related party - 14,286
Notes payable, current portion 45,030 85,902
------------ ------------
Total Current Liabilities 500,205 802,499
------------ ------------
LONG-TERM DEBT
Note payable, related party 750,000 -
Notes payable 137,195 157,405
------------ ------------
Total Long-Term Debt 887,195 157,405
------------ ------------
Total Liabilities 1,387,400 959,904
------------ ------------
COMMITMENTS AND CONTINGENCIES 496,591 747,819
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; 100,000,000 shares authorized
of $0.001 par value, 35,500,905 and
33,000,905 shares issued and outstanding,
respectively 35,501 33,001
Additional paid-in capital 20,837,259 20,589,759
Other comprehensive income 44,688 38,419
Accumulated deficit (22,374,634) (21,993,889)
------------ ------------
Total Stockholders' Equity (Deficit) (1,457,186) (1,332,710)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 426,805 $ 375,013
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PAGE> 5
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Net sales $ 83,314 $ 269,662 $ 418,206 $ 525,246
Direct costs 110,828 165,516 322,935 329,360
---------- ---------- ---------- ----------
Gross Profit (27,514) 104,146 95,271 195,886
---------- ---------- ---------- ----------
EXPENSES
General and administrative 230,622 325,695 778,134 1,351,703
Bad debt expense - 19,802 - 19,802
Depreciation and amortization 24,865 28,415 74,393 84,141
---------- ---------- ---------- ----------
Total Expenses 255,487 373,912 852,527 1,455,646
---------- ---------- ---------- ----------
Loss From Operations (283,001) (269,766) (757,256) (1,259,760)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Other income 5,358 31,775 37,857 73,238
Interest income - 201 115 425
Interest expense (11,250) (13,208) (35,989) (30,374)
Loss on investment in joint venture - (155,000) - (226,071)
Loss on disposition of assets - - - (14,311)
---------- ---------- ---------- ----------
Total Other Income (Expense) (5,892) (136,232) 1,983 (197,093)
---------- ---------- ---------- ----------
NET LOSS BEFORE EXTRAORDINARY ITEMS (288,893) (405,998) (755,273) (1,456,853
---------- ---------- ---------- ----------
EXTRAORDINARY ITEMS
Debt forgiveness - - 374,528 -
---------- ---------- ---------- ---------
Total Extraordinary Items - - 374,528 -
---------- ---------- ---------- ----------
NET LOSS $ (288,893) $ (405,998) $ (380,745) $(1,456,853)
========== ========== ========== ==========
OTHER COMPREHENSIVE INCOME
Foreign currency adjustments (400) - 6,269 -
---------- ---------- ---------- ----------
NET COMPREHENSIVE LOSS $ (289,293) $ (405,998) $ (374,476) $(1,456,853)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 6
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Before extraordinary items $ (0.01) $ (0.01) $ (0.02) $ (0.05)
Extraordinary items 0.00 - 0.01 -
---------- ---------- ---------- ----------
BASIC EARNINGS (LOSS) PER SHARE $ (0.01) $ (0.01) $ 0.01 $ (0.05)
========== ========== ========== ==========
FULLY DILUTED EARNINGS (LOSS) PER SHARE
Before extraordinary items $ (0.01) $ (0.01) $ (0.02) $ (0.05)
Extraordinary items 0.00 - 0.03 -
---------- ---------- ---------- ----------
FULLY DILUTED EARNINGS (LOSS) PER SHARE $ (0.01) $ (0.01) $ 0.01 $ (0.05)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 7
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Additional Other
Common Stock Paid-In Comprehensive Accumulated
Shares Amount Capital Income Deficit
----------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 24,693,875 $ 24,694 $ 18,353,541 $ 23,755 $ (20,009,140)
(Previously reported)
Common stock issued for cash
at an average price of $0.35
per share 2,865,701 2,866 998,056 - -
Common stock issued in lieu
of debt at an average price
of $0.16 per share 5,341,330 5,341 830,726 - -
Common stock issued for
services rendered at an
average of $0.21 per share 99,999 100 21,325 - -
Additional capital contributed - - 386,111 - -
Currency translation adjustment - - - 14,664 -
Net loss for the year ended
December 31, 1998 - - - - (1,894,749)
----------- -------- ------------ ----------- ------------
Balance, December 31, 1998 33,000,905 33,001 20,589,759 38,419 (21,993,889)
Common stock issued for cash
at $0.10 per share 2,500,000 2,500 247,500 - -
Currency translation adjustment
(Unaudited) - - - 6,269 -
Net loss for the nine
months ended Sept. 30, 1999
(Unaudited) - - - - (380,745)
----------- -------- ------------ ----------- ------------
Balance, June 30, 1999
(Unaudited) 35,500,905 $ 35,501 $ 20,837,259 $ 44,688 $(22,374,634)
=========== ======== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 8
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (288,893) $ (405,998) $ (380,745) $(1,456,853)
Adjustments to reconcile net income to net
cash (used) by operating activities:
Debt forgiveness - - (374,528) -
Loss on investment in joint venture - 155,000 226,071
Loss on disposition of assets - - - 14,311
Depreciation and amortization 24,865 28,415 74,393 84,141
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 29,038 (160,380) (59,441) (176,423)
(Increase) decrease in deposits and prepaid
expenses (38) 4,996 (54,433) (4,404)
Increase (decrease) in accounts payable 14,033 (135,839) (267,531) (661,092)
Increase (decrease) in unearned revenue - (24,999) (21,666) (24,999)
Increase (decrease) in contingent liabilities (3,641) 517,885 129,969 594,553
Increase (decrease) in accrued expenses 15,914) 143,867 32,375 194,353
---------- ---------- ---------- ----------
Net Cash (Used) by Operating Activities (208,722) 122,947 (921,607) (1,210,342)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (303) (21,505) (19,134) (125,569)
---------- ---------- ---------- ----------
Net Cash (Used) by Investing Activities (303) (21,505) (19,134) (125,569)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for cash - - 250,000 1,000,992
Additional capital contributed - - - 386,111
Proceeds from notes payable - - 750,000 100,341
Principle payments on notes payable (18,989) (24,203) (66,082) (41,179)
---------- ---------- ---------- ----------
Net Cash Provided by Financing Activities (18,989) (24,203) 933,318 1,446,195
========== ========== ========== ==========
NET INCREASE (DECREASE) IN CASH (228,014) 77,239 (6,823) 110,284
CASH, BEGINNING OF PERIOD 274,412 47,504 53,221 14,459
---------- ---------- ---------- ----------
CASH, END OF PERIOD $ 46,398 $ 124,743 $ 46,398 $ 124,743
========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ - $ 9,425 $ 28,639 $ 28,365
Income taxes $ - $ - $ - $ -
NON-CASH FINANCING ACTIVITIES:
Common stock issued for services $ - $ - $ - $ -
Common stock issued on conversion
debt to common stock $ - $ - $ - $ 240,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 9
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at September 30, 1999
and 1998 an for all periods presented have been made.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's December 31,
1998 audited consolidated financial statements. The results of operations for
the periods ended September 30, 1999 and 1998 are not necessarily indicative
of the operating results for the full years.
<PAGE>
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-looking Statements
- ---------------------------------------------------------
This report may contain "forward-looking" statements. The Company is
including this cautionary statement for the express purpose of availing itself
of the protections of the safe harbor provided by the Private Securities
Litigation Reform Act of 1995 with respect to all such forward-looking
statements. Examples of forward-looking statements include, but are not
limited to: (a) projections of revenues, capital expenditures, growth,
prospects, dividends, capital structure and other financial matters; (b)
statements of plans and objectives of the Company or its management or Board
of Directors; (c) statements of future economic performance; (d) statements of
assumptions underlying other statements and statements about the Company and
its business relating to the future; and (e) any statements using the words
"anticipate," "expect," "may," "project," "intend" or similar expressions.
Year 2000 Disclosure
- --------------------
The Company is working to resolve the potential impact of the year 2000
on the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures. The Company utilizes a minimum
number of computer programs in its operations. The Company has not completed
its assessment, but currently believes that costs of addressing this issue
will not have a material adverse impact on the Company's financial position.
However, if the Company and third parties upon which it relies are unable to
address this issue in a timely manner, it could result in a material financial
risk to the Company. In order to assure that this does not occur, the Company
plans to devote all resources required to resolve any significant year 2000
issues in a timely manner.
Results of Operations
- ---------------------
General
-------
The Company's revenues are generated primarily by its business operations
in the United States through its wholly owned subsidiary Environmental
Protection Company ("EPC"). Since March, 1998, the Company has pursued the
development of ROP North America, LLC ("ROP"), through the Company's wholly
owned Canadian subsidiary, IEI Canada, which at September 30, 1999, was still
in the development stage. The Company's results of operations include the
costs of its investment in ROP.
For the nine months ended September 30, 1999, the functional currency for
the Company's foreign subsidiary (IEI Canada and its subsidiaries) has been
determined to be the Canadian Dollar. Any applicable assets and liabilities
have been translated at period end exchange rates and operating statement
items are translated at average exchange rates prevailing during the period.
For the nine month period ended September 30, 1999, the Company had a gain of
$6,269 as a result of foreign currency translation adjustment.
<PAGE>
<PAGE> 11
Nine Month Period ended September 30, 1999 compared to September 30, 1998
-------------------------------------------------------------------------
Substantially all revenue during the nine month period ended September
30, 1999 was derived from EPC's operations, with total revenues being $418,206
and direct costs associated therewith being $322,935 or approximately 77.2% of
revenues. Total revenues for the nine month period ended September 30, 1998
were $525,246 and direct costs associated therewith were $329,360, or
approximately 62.7% of revenue. The direct costs for the nine month period
ended September 30, 1999 as a percent of sales was 14.5% higher than the
direct costs as a percentage of sales realized by the Company same period in
the preceding year. The increase in direct costs as a percent of revenues for
the current period as compared to the prior comparative period can be
attributed to the fact that, during the current period, the Company performed
a greater number of general roustabout jobs with higher direct costs as
opposed to remediation jobs with lower direct costs. EPC's bioremediation
work for Amoco is allocated between routine site maintenance and emergency
clean-up. Although substantially all of the Company's revenues are derived
from bioremediation work performed for Amoco there is no guarantee that the
Company's revenues will continue and the Company cannot predict what events or
uncertainties may be reasonably expected to have a material impact on the net
sales revenues or income from continuing operations.
To expand its revenue base the Company has conducted a bioremediation
demonstration for the Department of Defense at the U.S. Navy's Pt. Molate Fuel
Depot in Richmond, California. This technical demonstration represents the
culmination of years of effort. The demonstration was sponsored by the Bay
Area Defense Conversion Action Team (BADCAT), a public private partnership of:
Bay Area Economic Forum (BAEF), Bay Area Regional Technology Alliance (BARTA),
California Environmental Protective Agency (CAL EPA), Chevron Research and
Technology Company, Engineering Field Activity West, Naval Facilities
Engineering Command (EFA West), Naval Facilities Engineering Service Center
(NFESC), San Francisco State University Center for Public Environmental
Oversight (CPEO) and the U.S. Environmental Protection Agency (US EPA). The
Company expects that it will take five to six months after the demonstration
commences for the Department of Defense and others to fully evaluate the
results of the demonstration. Should this evaluation be favorable, the
Company's technology and process could become, given certain site
characteristics, the preferred method for reducing hydrocarbon contamination
in soil.
Corporate Expense. For the nine months ended September 30, 1999 total
operating expenses were $852,527, consisting of general and administrative
expenses of $778,134 and depreciation and amortization expenses of $74,393,
resulting in a loss from operations of $(757,256). For the nine months ended
September 30, 1998 total operating expenses were $1,455,646, consisting of
general and administrative expenses of $1,351,703, bad debt expense of
$19,802, and depreciation and amortization expenses of $84,141, resulting in a
loss from operations of $(1,259,760). The operating expenses for the nine
months ended September 30, 1999 represent a substantial reduction in overall
operating expenses (approximately 41.4%) compared to the Company's operating
expenses incurred for the nine months ended September 30, 1998. The reduction
in operating expenses for the nine months just ended is a direct result of the
efforts the Company has undertaken to reduce cash outflows in non-revenue
producing areas.
Interest Expense. Interest expense for the nine months ended September
30, 1999 was $35,989, which is attributed to the line-of-credit obtained from
a related party. Interest expense for the nine months ended September 30,
1998 was $30,374, and is attributed to corporate borrowing during the normal
course of business.
<PAGE> 12
Other Income. Other income for the nine months ended September 30, 1999
was $37,857, of which, substantially all was represented by the balance of the
income derived from the one-year consulting agreement with ROP, which
represents a decrease over other income of $73,238 for the nine month period
ended September 30, 1998. During the nine month period ended September 30,
1998, the Company had expenses of $226,071 and $14,311, associated with loss
on investment in the joint venture and disposition of assets, respectively, so
that total other income (expense) for the prior nine month period was
$(197,093) compared to $1,983 for the current nine month period.
Extraordinary Item. During the nine months ended September 30, 1999 the
Company recognized income from the forgiveness of $374,528 in debt by certain
creditors of the Company. The Company had no extraordinary items of income or
expense during the six month period ended June 30, 1998.
Including the extraordinary item the Company had net comprehensive loss
of $405,988 for the nine months ended September 30, 1999. The basic loss per
share for the period before extraordinary items was $(0.02), while the Company
experienced basic income per share of $0.01 after taking into account
extraordinary items. The fully diluted earnings per share was $0.01. For the
nine months ended September 30, 1998, the Company had a net comprehensive loss
of $(1,456,853) and fully diluted loss per share was $(0.05).
Liquidity and Capital Resources
- -------------------------------
Historically, the issuance of common stock has been utilized by the
Company for working capital, conversion of debt, payment of professional
services, the expansion capital required by ROP and for the continued
development activities of the Company.
The Company had a working capital deficit of $(315,758), cash and cash
equivalents of $3,315 and restricted cash deposits of $43,083 at September 30,
1999. Cash used in operations for the nine month period was $(921,607)and was
derived primarily from cash received from accounts receivable and the sale of
shares, borrowing against the line-of-credit, and the issuance of common stock
for the conversion of debt.
Because the Company has an accumulated deficit of $(22,374,634)at
September 30, 1999, has a working capital deficit and limited internal
financial resources, the report of the Company's auditor at December 31, 1998
contained a going concern modification as to the ability of the Company to
continue. During fiscal 1998, the Company began to effect measures to reduce
cash outflows and increase working capital thru the issuance of additional
shares of common stock for cash, services and conversion of debt. The Company
is aware of its ongoing cash requirements and has implemented a cash flow
plan, including continued reduction in its general and administrative
expenses. Additionally, the Company has developed an overall strategy and
certain financing options to meet its ongoing need through December 31, 1999.
Due to the need for working capital for both the Company, IEI Canada and
its JV partner, JFJ Ecosystems, Inc. ("JFJ") restructured the JV to provide
among other things, the establishment of a $750,000 line-of-credit for the
Company from JFJ. As a result of the restructuring, JFJ has an equal 50%
member of the JV with IEI Canada and IEI Canada's option to reduce JFJ's
membership interest to 19% was terminated. The line-of-credit bears interest
at 6% per annum until December 31, 2000, at which time all principal advanced
under the line of credit, and any interest accrued thereon, will be due and
<PAGE> 13
payable in full. As security for the line of credit, the Company caused IEI
Canada to pledge as security IEI Canada's 50% membership interest in the JV.
If the line of credit is not timely repaid in full, IEI Canada's membership
interest in the JV shall be conveyed to JFJ in satisfaction of the line of
credit, thus making JFJ the 100% owner of the JV. At June 30, 1999, the
Company had drawn the entire $750,000 against the line-of-credit. In
addition, in May 1999, the company sold 2,500,000 shares of the Company's
common stock at $0.10 per share to affiliates of JFJ for $250,000 cash.
At September 30, 1999, the Company had recorded $356,890 in accrued
expenses consisting primarily of accrued interest and unpaid payroll taxes,
unemployment taxes, sales taxes and gross receipts taxes due both the federal
and state taxing authorities, including reasonable interest and penalties for
delinquent filings. During the period the Company extended a preliminary
settlement offer to the IRS on Form 433. The settlement offer to the IRS was
based on the Company's anticipated need to raise additional working capital
without exposing such capital to potential seizure by the IRS. The terms of
the preliminary settlement offer are based on the trustee portion (the amount
the Company withheld from its Employees' W-2 wages) of tax due and contingent
on the IRS finalizing its examination confirming the financial condition of
the Company and the financial condition of those officers and directors of the
Company during the time that the tax liability arose (the "Responsible
Parties"). The trustee portion due is approximately $90,000 and will require
the Company to make installment payments to the IRS of approximately $5,000
per month over 24 months. Upon payment in full of the settled amount the IRS
will provide the Company and any Responsible Parties with a full release from
liability. Should the Company fail to maintain the monthly payments to the
IRS, the IRS will have the right to collect from the individual Responsible
Parties as well as the Company.
To finalize the settlement offer with the IRS, the Company has provided
the IRS with a narrative description of the Company's current plan of business
operations and a logical reason for the offer and compromise. In addition,
the IRS is conducting an investigation of the assets of the Responsible
Parties to determine whether or not the Responsible Parties have sufficient
liquid assets to satisfy the trustee portion of the tax due.
The Company has reserved and recorded possible contingent liabilities to
individuals who claim they are still owed money by the Company although the
Company has issued shares of its common stock to such individuals as payment
of such debts or because the Company is uncertain as the whether the creditors
are holding the Company responsible to certain debts incurred by former
officers and directors of the Company. At September 30, 1999, the Company has
recorded total contingent liabilities of $496,591, a reduction from $747,819
recognized at December 31, 1998.
Impact of Inflation
-------------------
The Company does not anticipate that inflation will have a material
impact on its current or proposed operations.
Seasonality
-----------
The Company's bioremediation business operations tend to have varying
degrees of seasonality. A majority of the Company's bioremediation jobs are
done on sites in and around Farmington, New Mexico, during the warm weather
<PAGE> 14
months. Since many of the clean-up sites are located in rural areas and
accessible only over dirt or unimproved roads, the Company's ability to
excavate and remove contaminated soil can be restricted during inclement
weather. In addition, soil is difficult or impracticable to dig and turn when
the ground is frozen, the bioremediation process requires above freezing
temperatures to be effective.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. LEGAL PROCEEDINGS
The Company is involved in litigation with 54GO Products, a New Mexico
limited liability company ("54GO"), regarding an open account and a
distribution agreement between 54GO and the Company's subsidiary Environmental
Protection Company, a New Mexico corporation ("EPC"). 54GO filed a complaint
in July 1997 in the Eleventh District Court of San Juan County, New Mexico,
alleging that the Company owed money on an open account for products delivered
by 54GO to EPC, and also for products to be delivered pursuant to the
distribution agreement. In August 1997, the Company filed an answer to the
complaint in which the Company contends that the products delivered by 54GO
were not ordered by EPC, that EPC specifically requested the products not be
delivered, and that 54GO refused to take the products back. The Company also
contends that the distribution agreement was breached by 54GO before it became
operational and that any obligation to purchase products under the agreement
was negated by the failure of conditions precedent. The case has been tried
and a decision is now pending before the Court. The Company has recorded a
contingent liability of $75,000 and $30,000 (included in contingent
liabilities of $496,591 and $747,819 at September 30, 1999 and December 31,
1998 respectively) in connection with the litigation.
On March 17, 1999, the Company received a letter from Canadian counsel
threatening litigation on behalf of Diamond Measure, Inc., a Canadian
corporation with which the Company engaged in discussions about a possible
acquisition during 1994. The negotiations were never consummated, and no
contract was ever signed. On August 6, 1999, the Company's Canadian counsel
was served with a Statement of Claim filed in the Superior Court of Justice in
Windsor Ontario on August 4, 1999, by Diamond Measure, Inc. and Ronald
McGuire, against the Company. The claim is for a total of $1.5 million
dollars Canadian for breach of contract and detrimental reliance, $1 million
to Diamond Measure, Inc., and $500,000 to Ronald McGuire. Because no
agreement was ever reached and no written contract signed, the Company
believes that the action is without merit.
On April 13, 1999, ROP received a letter from Canadian counsel
representing Middlemarch Farms, Ltd., a Canadian company ("Middlemarch"),
claiming a security interest in certain property transferred to ROP from IEI
Canada in March 1998 as part of the transaction creating the JV. This claimed
security interest was purportedly created in 1992, in connection with a loan
transaction between Middlemarch and a precursor company to a former IEI Canada
subsidiary.
Middlemarch claims that at March 29, 1999, there is an outstanding
balance due on the loan of $230,299.79, plus accrued interest and costs
forward from that date. The property subject to the security interest is all
of the assets, liabilities, property and equipment which was transferred to
ROP per the JV Agreement.
<PAGE> 15
The claim is apparently based on the premise that there are monies owing
to Middlemarch. The Company believes that the debt was fully satisfied in
April 1996 through an oral agreement between the Company and Middlemarch
converting debt to equity, represented by the Company's issuance to
Middlemarch of 400,000 shares of the Company's common stock, plus cash payment
of all outstanding interest. If Middlemarch proceeds with its claim, the
Company may be involved in litigation in regards to the circumstances
surrounding the creation of the claimed security interest and the payment of
the debt.
On May 19, 1999, the Company received from Middlemarch a copy of a
"Security Agreement" referring to the above property. The Security Agreement
required payment in full by July 1994. The Company has not found evidence in
its records or through a PPSA search of the registration of such a security
interest, nor has any evidence of registration been provided by Middlemarch
despite repeated requests.
The Company has letters dated April 1996 from A. Spangenberg, a principal
of Middlemarch, and Pensa and Associates, counsel for Middlemarch, referencing
receipt of a $400,000 principal payment and stating that a remaining balance
was owing of approximately $21,500. The Company paid the balance owing by
check. Based on the above, the Company believes that the debt on which the
claimed security interest is based has been fully satisfied. Therefore, the
Company believes that this threatened claim has no merit.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
None.
<PAGE>
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INDUSTRIAL ECOSYSTEMS, INC.
[Registrant]
Dated: November 11, 1999 By/S/Tom Jarnigan, President and
Director
<TABLE> <S> <C>
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<CIK> 0000930764
<NAME> INDUSTRIAL ECOSYSTEMS, INC.
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
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0
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