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As filed with the Securities and Exchange Commission on November 5, 1999
Registration No. 0-29838
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
INDUSTRIAL ECOSYSTEMS, INC.
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(Name of Small Business Issuer in its Charter)
Utah 94-3200034
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 Dondee Way, Suite 10, Pacifica, CA 94044
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (650) 355-4050
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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N/A N/A
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $0.001 per share
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(Title of Class)
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INDUSTRIAL ECOSYSTEMS, INC.
FORM 10-SB
TABLE OF CONTENTS
PART 1 Page
Item 1. Description of Business ..................................... 3
Item 2. Management's Discussion and Analysis or Plan of Operation ... 9
Item 3. Description of Property...................................... 18
Item 4. Security Ownership of Certain Beneficial Owners
and Management.............................................. 19
Item 5. Directors, Executive Officers, Promoters
and Control Persons......................................... 21
Item 6. Executive Compensation....................................... 22
Item 7. Certain Relationships and Related Transactions............... 27
Item 8. Description of Securities.................................... 30
PART II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters................. 32
Item 2. Legal Proceedings............................................ 33
Item 3. Changes in and Disagreements with Accountants................ 34
Item 4. Recent Sales of Unregistered Securities...................... 34
Item 5. Indemnification of Directors and Officers.................... 36
PART F/S
Financial Statements......................................... 39
PART III
Item 1. Index to Exhibits............................................ 72
Signatures................................................... 72
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Corporate History
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General
The Company was incorporated in the state of Utah in July 1993 under the
name Agri World Development Corp. In January 1994, the name was changed to
Industrial Ecosystems, Inc. (hereinafter "IEI" or the "Company"). In March
1994, IEI acquired 100% of the equity securities of Environmental Protection
Company, a New Mexico corporation ("EPC") in exchange for shares of IEI's
Common Stock. Until the acquisition of EPC, IEI had no operating activities.
Also, the exchange of IEI's Common Stock for the Common Stock of EPC resulted
in the former stockholders of EPC obtaining control of IEI. Accordingly, EPC
became the continuing entity for accounting purposes, and the transaction was
accounted for as a recapitalization of EPC with no adjustment to the basis of
EPC's assets acquired or liabilities assumed. For legal purposes, IEI was the
surviving entity. EPC is in the excavation and bioremediation business and
operates principally in the Farmington, New Mexico area.
In June 1994, IEI, through IEI's wholly-owned Canadian subsidiary, IEI
Canada, Inc. ("IEI Canada"), acquired 100% of I.T.E. Ecosystems, Inc., Amlin
Grain Roasting, Inc. and a minority interest in N-Viro Systems Canada, Inc.
The operations of I.T.E. Ecosystems, Inc. and Amlin Grain Roasting, Inc. were
discontinued during 1994. In September 1994, IEI incorporated three separate
wholly-owned subsidiaries, RFP Management & Development Corp., ROP Management
& Development Corp. and IEI Canada, Inc. In December 1996, IEI incorporated
another wholly owned subsidiary, ROP Liquid Feed Corp. with the intent of
separating various business activities into different entities. Thereafter, in
March 1998, IEI created a Canadian entity (merger company) for the purpose of
consolidating IEI Canada, Inc., ROP Liquid Food Corp, ROP Management &
Development Corp. and RFP Management and Development Corp. into the merger
company. The resulting consolidated entity was named IEI Canada, Inc. The
assets and certain liabilities of all of these companies were later assumed by
ROP North America, LLC, a joint venture company formed in March, 1998 (the
"JV"), and the consolidated companies' operations were discontinued.
In June 1998, the Company incorporated two wholly-owned Canadian
subsidiaries, 1297833 Ontario Ltd. and 1303873 Ontario, Ltd. The Company
anticipated that these subsidiaries would enable it to carry out certain
proposed remediation and waste processing operations which never materialized.
Management believed that development loans for these operations might be
available only to Canadian corporations. The Company is now in the process of
assessing the merits of maintaining or closing these subsidiaries which have
never had any business operations.
In January 1999, due to the need for working capital for both the JV and
the Company, the terms of the joint venture agreement were renegotiated, as
described more fully below. See CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS: Restructure of Interest in ROP. At the request of the JFJ
Ecosystems, Inc. ("JFJ"), the terms of the restructuring were presented to and
ratified by the Company's shareholders at a Special Meeting in April 1999.
JFJ also requested that the Company complete a formal election of directors,
but did not suggest or influence the Company's choice of nominees.
Accordingly, at the same Special Meeting, a slate of directors was nominated
and elected by shareholder vote.
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Aborted Change of Domicile to Delaware
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In February 1996, IEI filed incorporation documents in Delaware in the
name of Industrial Ecosystems, Inc., intending to accomplish a change of
domicile merger for the Utah corporation into Delaware. This merger was never
effected, due to then-current management's misunderstanding of the merger
process and consequent failure to complete and file the necessary change of
domicile merger documentation. The Company was informed by counsel in July
1998 that the merger was not effected. The business decision to accomplish
the merger was reevaluated and the Company has been notified that the inactive
Delaware corporation will shortly be involuntarily dissolved. The Delaware
corporation has never had any operations. However, due to some confusion
between the IEI and its then transfer agent, certain share certificates were
mistakenly issued designating Delaware as the state of incorporation instead
of Utah. A total of 383 certificates were issued to approximately 375
individuals, representing 30,987,262 shares of post-split common stock.
Certificates with the Delaware designation were issued during the period
January 1, 1998 to March 31, 1999. At July 7, 1999, there were outstanding
168 Delaware certificates held by approximately 160 individuals representing
29,532,631 shares of post-split common stock. Shareholders of the Company
were informed of the aborted change of domicile and the mistaken issuance of
the Delaware certificates in the Proxy Statement accompanying the Notice of
Special Meeting mailed to all shareholders on or about March 30, 1999. All
shareholders holding such Delaware certificates were advised in the Proxy
Statement that the certificates may be returned to the Company's transfer
agent for reissue of the correct Utah certificates at the Company's expense.
All certificates issued with the Delaware designation have been treated by the
IEI and its transfer agent as validly issued certificates of IEI, a Utah
corporation. Any shareholder who holds a certificate with the Delaware
designation may, at IEI's sole expense, submit the certificate to IEI's
transfer agent for reissue with the correct Utah designation, however
shareholders are not required to do so.
Revocation of Utah Charter and Subsequent Reinstatement
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IEI's Utah charter was involuntarily dissolved in October 1995 for
failure to file an annual report in the state of Utah. This failure to file
timely was the result of irregularities perpetrated by IEI's then registered
agent and its incorporator. No notices of the dissolution were ever sent to
IEI's principal office, nor were any of IEI's officers ever notified of the
dissolution by the state of Utah. No annual reports were filed in Utah by the
Company between the administrative dissolution and the reinstatement. The
Company did not attempt to obtain a certificate of good standing for the Utah
corporation in the process of the attempted change of domicile to Delaware.
The Company was acting without counsel in pursuing the attempted change of
domicile and did not realize that merger documents would have to be filed or
that good standing would have to be established. As a result, the Company
incurred tax liabilities and penalties totaling $458 for Utah state franchise
taxes for the years 1995 through 1997, and a $50 fee for the reinstatement
application.
IEI discovered the revocation in June 1998, and retained legal counsel to
petition the state of Utah for reinstatement. The reinstatement of IEI's
charter was successfully accomplished by court order in October 1998. The
effect of the reinstatement is that the Company's status is fully restored as
if the dissolution had never occurred. The Company is now in good standing in
the state of Utah.
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Summary of Business Operations
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Environmental Protection Company
As indicated above, the Company operates a wholly owned subsidiary, EPC,
which, among other things, utilizes a unique bioremediation process to reclaim
contaminated soil. A majority of the Company's excavating and soil
remediation jobs are done on sites owned and operated by Amoco Production
Company ("Amoco"), in and around the Farmington, New Mexico area. If timing
and logistics dictate, the contaminated soil is excavated and transported from
the Amoco site to a ten acre parcel of land located five miles from
Farmington, New Mexico. This parcel which is owned and operated by EPC is
permitted to receive and bio-convert hydrocarbon impacted soils. EPC's
agreement with Amoco allows for the bioremediation of only Amoco soil on the
EPC parcel. In 1998, approximately 20% of the Amoco remediation jobs were
performed on site by treatment of contaminated soil. For the remaining jobs,
contaminated soil was removed to EPC's treatment site, then returned to AMOCO
following treatment.
EPC engages in soil remediation of hydrocarbon spills using proprietary
biotechnology knowhow. The EPC process involves the use of a matrix of
bacteria. These bacteria are acquired from a number of different media which
are controlled by EPC. These bacteria, along with certain enzymes which are
produced by the bacteria, aid in the remediation of the contaminated soil.
When soils are treated using the bioconversion process, enzymatic metabolism
of the hydrocarbons can begin immediately. The bioconversion process causes
the breakdown and emulsification of hydrocarbon at the hydrocarbon/aqueous
interface. Once the hydrocarbons are emulsified, they are readily accessible
to the large number of naturally occurring bacteria present in the
biopreparation. Bacterial enzymes bind to the hydrocarbons forming enzyme-
substrate complexes which subsequently serve to breakdown the hydrocarbons.
The biopreparation itself is believed to be non-toxic.
Customers
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EPC's chief revenue source has been and continues to be its work for
Amoco. During fiscal year 1998, 100% of EPC's revenues were derived from
Amoco. At June 30, 1999, the Company had no significant revenues from sources
other than AMOCO's New Mexico sites, but the Company intends to continue its
efforts to expand its customer and revenue base. However, EPC and the Company
are highly dependent on Amoco as a customer. Even though AMOCO has provided
EPC with a fairly steady flow of business over the years, AMOCO is under no
obligation to continue as such in the future. The recent British Petroleum
("BP") merger with AMOCO has not financially impacted EPC, however, there can
be no assurance that EPC's business with AMOCO will continue as it has in the
past. In an effort to broaden its customer base in the New Mexico area, EPC
recently signed an excavation and remediation agreement with Public Service
Company of New Mexico ("PSCNM"), a local public utility. The financial impact
of this agreement is not as yet known. The Company estimates that 90% of the
PSCNM jobs will be on-site treatment through commercially acceptable land-
farming and spreading operations and the remainder will require excavating.
The excavated soil will be transported, per the agreement, to other
commercial landfarming or composting operations.
Outside of New Mexico, the Company has had little success to date
marketing its bioremediation service. The Company is, however, presently
preparing to conduct a demonstration of its bioremediation technology for the
U.S. Navy at the Pt. Molate naval fuel depot in Richmond, California. Should
the demonstration prove to be successful, the Company believes that demand for
its bioremediation technology will increase. In order to enjoy the possible
benefit associated therewith, the Company plans to license its bioremediation
technology to contractors that may be better positioned to garner contracts
than the Company.
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In an effort to expand the Company's revenues, the Company may look to
form a strategic alliance or business combination with an operating company in
a similar or substantially related industry. The Company intends to utilize
various sources in its search for potential relationships, including its
officers and directors, venture capitalists, and others who may present
management with unsolicited proposals. To date, the Company has not engaged
or entered into any discussions, negotiations, agreements or understandings
regarding any potential alliances or business combinations, nor has management
engaged any consultants to specifically assist the Company for such purposes.
Raw Materials and Suppliers
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All of the raw materials needed for EPC's bioremediation work are
available from a wide variety of local suppliers. Raw materials are obtained
on an as-needed basis and the Company does not anticipate any problems with
obtaining all necessary materials in the future.
Research and Development
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In the past two fiscal years, EPC has not spent any significant sums on
research and development, because its bioremediation process has not required
any substantial changes. Therefore, there have been no research and
development costs to pass on to customers.
Competition
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Traditional hydrocarbon spill remediation methods have been based on
conventional civil engineering techniques such as excavation and removal to
landfill. These methods can be expensive because of cost of transporting large
volumes of material. The excavation and disposal methods are under increasing
regulatory scrutiny as landfill standards are tightened and disposal costs
rise. These traditional methods are being replaced by newer methods which use
a variety of physical, biological and chemical methods to either immobilize or
destroy contaminants.
Traditional remediation services are predominantly provided by
environmental firms, construction contractors and environmental engineering
firms. Numerous small companies are offering newer remediation services with
varying degrees of success in treating a wide array of contaminated soils.
These small companies generally have operations like EPC's New Mexico
operations which are relatively local in scope.
EPC's technology has only been utilized for the bioremediation of
hydrocarbon contamination and management does not know if it is appropriate or
effective for multiple contaminants. Direct competition in the limited area
of hydrocarbon contamination is primarily from landfill and land-spreading
operations permitted to handle soils contaminated with hydrocarbons. Because
EPC has access only to the Company's existing remediation site for AMOCO soil,
it cannot remediate contaminated soil from any other customers if the soil
must be physically removed immediately from the customers' sites for health
and/or safety reasons, such as proximity to residential housing. Certain of
the PSCNM sites fall into this category, for instance, so that EPC becomes
essentially a waste hauler transporting contaminated soil to third party
landfill and land-spreading operations.
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In essence, the Company's lack of an open site for remediation of
contaminated soils puts it at a competitive disadvantage with landfill and
land-spreading operations which can accept contaminated soils from any
potential customer. The Company's remediation opportunities are, therefore,
limited to those customers for whom the Company can perform on-site work. The
Company is in the process of assessing whether this disadvantage merits the
acquisition of another remediation site, but has not yet attempted to locate
any potential sites.
Government Regulation
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Various environmental protection laws have been enacted and amended
during recent decades in response to public concern over the environment. The
Company's bioremediation operations may be subject to these evolving laws and
the implementing regulations. The Company believes, however, that the
requirements of these laws may ultimately contribute, in a number of respects,
to the demand for its services. The United States environmental laws which the
Company believes are or may be, applicable to EPC's bioremediation operations
include the Resource Conservation and Recovery Act ("RCRA"), as amended by the
Hazardous and Solid Waste Amendments of 1984 ("HSWA"), the Federal Water
Pollution Control Act of 1972 (the "Clean Water Act"), the Clean Air Act of
1970, as amended (the "Clean Air Act"), Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the Pollution Prevention Act of
1990 and the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA").
These laws regulate the management and disposal of wastes, control the
discharge of pollutants into the air and water, provide for the investigation
and remediation of contaminated land and groundwater resources and establish a
pollution prevention program. Various states in the United States have
implemented environmental protection laws that are similar to the applicable
federal laws and, in addition, states may require, among other things, permits
to maintain existing or construct additional EPC facilities, if necessary.
EPC's remediation work to date has only been performed on sites permitted
through either AMOCO or PSCNM. The Company has, therefore, not been subject
to any specific regulations other than the New Mexico State Contractor's
License and the Federal Heavy Highway Usage permits for its hauling work, and
the OSHA Hazardous Materials regulations which require the training of
employees addressed below. Therefore, there have been no significant costs or
effects of compliance with regulations on the Company's remediation business.
If the Company decides to acquire its own remediation site, it will be
required to obtain permits and meet federal and state environmental compliance
standards. The costs of obtaining permits and complying with such standards
could be significant and might have a material adverse effect on the viability
of expanded remediation operations.
Employees
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As of June 30, 1999, EPC had seven full-time employees, all of whom are
employees-at-will. EPC hires additional part-time employees on an as-needed
basis. All employees receive special training in the handling of contaminated
materials related to the EPC's bioremediation process.
As of June 30, 1999, IEI had four full-time employees in its executive
office in Pacifica, California, all of whom are employees-at-will.
IEI Canada has no employees.
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ROP North America, LLC
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As indicated above, the Company's Canadian subsidiary IEI Canada, Inc.,
owns a 50% membership interest in ROP North America, LLC (the "JV"). The JV,
through its wholly owned subsidiary, ROP North America, Inc.("ROP"), operates
a blending/processing plant in Amherstberg, Ontario, Canada to convert organic
by-products from commercial food processors, such as potato skins and corn by-
products, and certain organic material from other commercial, industrial and
institutional sources, such as the syrup from ethanol production, into a
livestock feed ingredient.
The benefits of the blending/processing plant include the diversion of
waste from landfills and the reduction of the use of other environmentally
unsuitable disposal methods. The availability of such waste processing offers
reduced disposal costs to food processors and other waste generators. To the
extent energy conversion and increased handling/transportation costs can be
minimized, blended/processed waste provides an economical alternative for the
livestock feed industry.
In addition to blending/producing a liquid livestock feed-ingredient, ROP
also operates a facility in Amherstberg Ontario in which approximately 3,000
pigs per cycle (up to 3 cycles per year) are raised for a local pig producer.
These pigs are fed the ROP liquid feed-ingredient as part of their regular
diet. Once the pigs have reached the specified weight, the pigs are picked up
by the producer and replaced by new piglets.
The ROP liquid feed-ingredient which is produced at the Amherstberg
facility is also marketed in limited quantities to other producers in Western
Ontario. The market for the ROP liquid feed-ingredient is limited to pig
producers who employ liquid feed distribution systems. There are currently
under 100 pig farmers in the Western Ontario area who utilize liquid-feed
systems. Because of a limited customer base, logistical and economic factors
associated with obtaining raw materials for conversion and the costs
associated with converting and transporting the liquid feed-ingredient, there
may be limited cost-effective opportunities to expand ROP's current liquid
feed-ingredient product.
Management believes the best strategy for expanding ROP's business
involves obtaining, blending and processing of: (i) high value dry feed raw
material from commercial food processors and (ii) liquid and dry food by-
product waste steams. To accomplish this strategy ROP plans to: (i) obtain the
specific permits required to process food by-product waste steams; (ii)
utilize its cooking and stabilizing system (called the proto-flow system),
which ROP owns; and (iii) establish distribution/transportation relationships
with waste haulers in order to obtain appropriate high value waste steams.
The JV is governed by a three person Board of Managers, two of whom were
appointed by JFJ Ecosystems, LLC (the Company's JV partner) and one of whom
was appointed by IEI Canada. Tom Jarnagin, the Company's President, has been
appointed by IEI Canada to serve as the Company's representative on the Board
of Managers. In connection with the formation of the JV, the JV entered into a
consulting agreement with the Company by which the JV agreed to pay the
Company certain consulting fees if the JV's income and expenses matched
certain financial projections established by the Company for the JV. The
Company received $100,000 after formation of the JV and was to receive
$100,000 on December 31, 1998, if the projections were met. The projections
were not attained on December 31, 1998, and the Company will not receive the
additional $100,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Regarding Forward-looking Statements
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This report may contain "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
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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.
State of Readiness
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The Company has completed a preliminary assessment of its operations. As
far as its information technology systems ("IT"), the Company uses newer model
desktop PCs in its Pacifica executive office, EPC's New Mexico operations, and
IEI Canada's joint venture operations. These PCs are all running commercial
software with the patches and updates added as they are available.
Certain non-IT microprocessors are used in the IEI Canada joint venture
waste management and blending operations, but the internal software which
drives these systems has been assessed and changed where necessary. The
Company does not utilize any other non-IT systems which could be affected by
the Y2K problem.
The Company has made inquiries to its major customers (Amoco, PSCNM) and
suppliers (FritoLay) concerning their respective Y2K preparedness. At this
time, the Company has not received any responses suggesting a significant
impact to the Company's business operations.
Costs of Y2K
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The Company has gradually replaced its IT systems in the ordinary course
of business and therefore cannot attribute specific costs of such upgrades to
Y2K. The costs of assessing potential non-IT problems have involved various
<PAGE> 10
supervisors' evaluation time which has likewise been incorporated into
ordinary business costs. There have been no significant hardware costs
directly attributable to Y2K.
Risks of Y2K
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The Company does not anticipate that Y2K problems pose substantial risks
to its current operations, unless Y2K causes catastrophic systemic failures of
the power grid, for instance, or EPC's major customers, Amoco and PSCNM,
experience severe operations failures. The worst case scenario contemplated
to date would involve a temporary suspension of EPC's remediation activities
while its principal customers resolved their problems. Any such suspension of
operations might have a significant adverse impact on the Company's overall
revenues.
Contingency Plans
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The Company does not have any contingency plans at this time and does not
intend to prepare any such plan because the most critical factors in its worst
case scenario are essentially beyond the Company's control. The Company
intends to continue its maintenance and upgrades of its internal systems, and
will continue to query its major customers concerning their respective states
of readiness.
Results of Operations
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General
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The Company's revenues are generated primarily by its business operations
in the United States through EPC. For the Registrant's fiscal year ended
December 31, 1998, the Registrant's revenues were allocated as follows: EPC,
$564,966; IEI $33,430; and IEI Canada, $28,149. Since March, 1998, the
Company has pursued the development of ROP, through the Company's Canadian
subsidiary, IEI Canada, which at December 31, 1998, was still in the stages of
development. The Company's results of operations include the costs of its
investment in ROP.
For fiscal years ended December 31, 1998 and 1997, the functional
currency for the Company's foreign subsidiary (IEI Canada and its
subsidiaries) has been determined to be the Canadian Dollar. Assets and
liabilities have been translated at year end exchange rates and operating
statement items are translated at average exchange rates prevailing during the
year. For the fiscal years ended December 31, 1998 and 1997, the Company had
a foreign currency translation adjustment of $23,755 and $14,664,
respectively.
For the six months ended June 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 six month period ended June 30, 1999, the Company had a gain of $6,669
as a result of foreign currency translation adjustment.
<PAGE> 11
Six Month Period ended June 30, 1999 compared to June 30, 1998
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Substantially all revenue during the six month period ended June 30, 1999
was derived from EPC's operations, with total revenues being $334,892 and
direct costs associated therewith being $212,107 or approximately 63.3% of
revenues. Total revenues for the six month period ended June 30, 1998 were
$255,584 and direct costs associated therewith were $163,844, or approximately
64.1% of revenue. The direct costs for the six month period ended June 30,
1999 as a percent of sales was 0.8% lower than the direct costs as a
percentage of sales realized by the Company same period in the preceding year.
The slight decrease in direct costs as a percent of revenues for the current
period as compared to the prior comparative period can not be attributed to
any one particular factor. 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 bio-remediation
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 six months ended June 30, 1999 total
operating expenses were $597,040, consisting of general and administrative
expenses of $547,512 and depreciation and amortization expenses of $49,528,
resulting in a loss from operations of $(474,255). For the six months ended
June 30, 1998 total operating expenses were $1,081,734, consisting of general
and administrative expenses of $1,026,008 and depreciation and amortization
expenses of $55,726, resulting in a loss from operations of $(989,994). The
operating expenses for the six months ended June 30, 1999 represent a
substantial reduction in overall operating expenses (approximately 44.81%)
compared to the Company's operating expenses incurred for the six months ended
June 30, 1998. The reduction in operating expenses for the six 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 six months ended June 30,
1999 was $24,739, which is attributed to the line-of-credit obtained from a
related party (See Note 6 to the Financial Statements). Interest expense for
the six months ended June 30, 1998 was $17,166, and is attributed to corporate
borrowing during the normal course of business.
<PAGE> 12
Other Income. Other income for the six months ended June 30, 1999 was
$32,499, of which, substantially all was represented by the balance of the
income derived from the one-year consulting agreement with ROP (see Note 1(f)
to the Financial Statements), which represents a decrease over other income of
$41,463 for the six month period ended June 30, 1998. During the six month
period ended June 30, 1998, the Company had expenses of $71,071 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 six
month period was $(60,861) compared to $7,875 for the current quarter.
Extraordinary Item. During the six months ended June 30, 1999 the
Company recognized income from the forgiveness of $374,528 in debt by certain
creditors of the Company. (See Note 8 to the Financial Statements.) 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 $85,183 for the six months ended June 30, 1999. The basic loss per share
for the period before extraordinary items was $(0.01), while the Company
experienced basic income per share of $0.01 after taking into account
extraordinary items. The fully diluted earnings per share was $0.00. For the
six months ended June 30, 1998, the Company had a net comprehensive loss of
$(1,050,855) and fully diluted loss per share was $(0.04).
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 $(17,190), cash and cash
equivalents of $231,981 and restricted cash deposits of $42,431 at June 30,
1999. Cash used in operations for the six month period was $(712,885)and was
derived primarily from cash received from accounts receivable and the sale of
share, borrowing against the line-of-credit, the recovery of common stock
previously issued and the issuance of common stock for the conversion of debt.
Because the Company has an accumulated deficit of $(21,933,889), 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
<PAGE> 13
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
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 June 30, 1999, the Company had recorded $340,216 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 June 30, 1999, the Company has
recorded total contingent liabilities of $500,232, a reduction from $747,819
recognized at December 31, 1998.
Year ended December 31, 1998 compared to year ended December 31, 1997
---------------------------------------------------------------------
Total revenues for the year ended December 31, 1998 was $625,545 compared
to $569,983 for the same period in 1997, an increase of 9.75%. This increase
in revenues is attributable to an increase in general excavation and hauling
<PAGE> 14
work for Amoco. Direct costs for the year ended December 31, 1998 were
$405,787, or 64.7% of sales as compared to $360,569, or 63.3% of sales for the
year ended December 31, 1997. The slight increase in the direct cost of sales
as a percent of sales for fiscal year 1998 compared to fiscal year 1997 is not
directly attributable to any particular factors. EPC's work for Amoco is
allocated between routine site maintenance and emergency clean-up, and,
therefore, 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. Amoco has recently completed a merger with
British Petroleum which could possibly affect the amount of work Amoco makes
available to EPC, although management has no indication, as yet, of any
decline.
In March 1998, the Company, through IEI Canada, the Company's Canadian
subsidiary, entered into the JV with JFJ Ecosystems, L.L.C., wherein the
Company contributed the leasehold, contracts, equipment, personal property,
tools, furnishings, supplies, and tangible properties, inventories and
miscellaneous property constituting the Amherstberg, Ontario, Canada recovered
organic product facilities. This transfer of assets and liabilities to the JV
had no effect on the Company's revenues in that the Company was not deriving
any income from the assets at the time of transfer.
Corporate Expense. For fiscal 1998, total operating expenses were
$1,694,726, consisting of general and administrative expenses of $1,586,049,
bad debt expense of $19,802, and depreciation and amortization expenses of
$108,677, resulting in a loss from operations of $1,437,770. Total expenses
for fiscal 1997 were $2,251,844, consisting of general and administrative
expenses of $2,042,502, bad debt expense of $7,325, and depreciation and
amortization expenses of $202,017, resulting in a loss from operations of
$2,042,430. The reduction in the general and administrative expenses (23.7%)
during fiscal year 1998 can be attributed to a reduction in ROP related
expenses that are now allocated between the members
of the JV, while the reduction in the depreciation and amortization expenses
(46.20%) during the same period is a direct result of assets conveyed to the
JV.
Interest Expense. Interest expense for fiscal 1998 was $40,236 as
compared to $78,835 in fiscal 1997. The decline is attributed to (a) the
conversion of a substantial amount of debt to equity in the second quarter of
1998.
Other Expense. Other expense for fiscal 1998 was a net $360,743, of
which, substantially all was represented by loss on the Company's investment
in the JV and the disposition of certain assets. Other expense for fiscal
1997 was a net $36,439, of which substantially all was represented by loss on
the disposition of assets during the period.
The Company experienced a comprehensive loss of $1,880,085 for the year
ended December 31, 1998 compared with a comprehensive loss of $2,133,949 for
the same period in 1997, a decrease of 11.89%. The basic loss per share for
fiscal 1998 was $0.06 as compared to $0.10 for fiscal 1997, based on the
weighted average number of shares outstanding for the respective periods.
Liquidity and Capital Resources
- -------------------------------
In March 1998, the Company, through IEI Canada, the Company's Canadian
subsidiary, entered into the JV with JFJ Ecosystems, L.L.C., wherein the
<PAGE> 15
Company contributed the leasehold, contracts, equipment, personal property,
tools, furnishings, supplies, and tangible properties, inventories and
miscellaneous property constituting the Amherstberg, Ontario, Canada recovered
organic product facilities. JFJ contributed $2,000,000 in cash, $1,000,000 of
which was held in escrow and was not to be released to the JV until June 30,
1999. If JFJ failed to release the $1,000,000 to the JV by June 30, 1999, it
forfeited its entire membership interest in the JV; however, if it properly
released the escrowed funds, its 50% membership interest in the JV would vest
in full. The original purpose of the escrow of funds in the original joint
venture agreement was to allow the joint venture partner the opportunity to
withdraw from the agreement without placing its entire two million dollar
investment at risk all at one time, while assuring the Company that the
remaining investment capital was actually available. The terms of the
original JV agreement have been modified as described more fully below.
In connection with the formation of the JV, the JV entered into a
consulting agreement with the Company by which the JV agreed to pay the
Company certain consulting fees if the JV's income and expenses matched
certain financial projections established by the Company for the JV. The
Company received $100,000 after formation of the JV and was to receive
$100,000 on December 31, 1998, if the projections were met. The projections
were not attained on December 31, 1998, and the Company will not receive the
additional $100,000.
The Company subleases a liquid feed distribution system to the JV for
$4,414 per month. The Company's lease payment is $4,414 per month and is
through an unrelated third party. The lease term expires in March, 2005.
During 1998, the Company completed the private placement of 2,865,701
shares of common stock at an average price of $0.35 per share for aggregate
cash proceeds of $1,000,922. Shares totaling 5,341,330 were issued in lieu of
debt at an average price of $0.16 per share for a total value of $836,067. In
addition, 99,999 shares were issued for services rendered to the Company at an
average of $0.21 per share for a total value of $21,425.
The issuances of common stock have been utilized for working capital,
conversion of debt, payment of professional services, the expansion capital
required for the newly formed JV, and for the continued development activities
of the Company; however, the Company will require additional capital to
continue its strategy with the JV. The Company plans to seek additional
capital for the JV through existing and/or traditional debt financing once the
JV reaches a break even point in its operations.
The Company had a working capital deficit of $(714,199) at December 31,
1998. The Company had cash and cash equivalents of $12,552 and restricted
cash deposits of $40,669 at December 31, 1998. Cash used in operations for
the year ended December 31, 1998 was $(1,253,800) and $(1,196,926) for the
year ended December 31, 1997. Cash used in operations for the year ended
December 31, 1998 was funded primarily by cash received from notes payable,
capital contributions and the issuance of common stock for cash.
Because the Company has an accumulated deficit of $(21,993,889), has a
working capital deficit and limited internal financial resources, the report
of the Company's auditor contains 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 through
the issuance of additional shares of common stock for cash, services and
conversion of debt. The Company has implemented a cash flow plan and has
<PAGE> 16
developed an overall strategy and certain financing options which the Company
believes will meet its ongoing need through December 31, 1999.
In May 1999, the Company issued 2,500,000 shares of restricted Common
Stock in a private placement for cash at $0.10 per share to John Crowe and
five of his relatives and/or affiliates, for total of $250,000. The Company
anticipates that this infusion of capital will be sufficient to meet its needs
through December 31, 1999.
Due to the need for working capital for both the Company and the JV, JFJ,
the Company, and IEI Canada have agreed to restructure the JV to provide for
(a) the release of part of the funds escrowed pursuant to the Original JV
Agreement; (b)establishment of a line of credit to the Company; (c) the grant
of certain rights to the Company to acquire JFJ's membership interest in the
JV; (d) the grant of certain rights to JFJ to sell its membership interest in
the JV to the Company; (e) the release by JFJ and its members and affiliates
of any and all claims against the Company, IEI Canada, the Company's
subsidiaries, their affiliates and officers and directors and shareholders for
any misrepresentations made to induce JFJ to enter into the Original JV
Agreement; and (f) the grant to the Company of a right to first refusal on JV
borrowing.
IEI Canada and JFJ have restructured the Original JV Agreement to provide
that JFJ would immediately release $250,000 of the $1,000,000 escrow to meet
immediate cash flow needs of the JV. The remaining $750,000 was then loaned by
JFJ to the Company through the establishment of a line of credit. The
original Agreement called for the vesting of JFJ's 50% membership interest
only upon the release of $1 million held in escrow. It also contained a
provision allowing IEI Canada to contribute additional capital in exchange for
a portion of JFJ's unvested membership interest (31% of the total membership).
Upon the restructuring, JFJ became 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. Pursuant to the restructuring, the Company holds rights to
acquire, and JFJ holds rights to sell, JFJ's membership interest as described
more fully in CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - "Restructure of
Interest in ROP" below.
In connection with the restructuring of the JV, JFJ has extended a
$750,000 line of credit to the Company. 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
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. All disbursements from the
line of credit are subject to the prior review of an independent Credit
Committee appointed by the Company's Board of Directors.
At December 31, 1998, the Company had recorded $323,755 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. Subsequent to December 31, 1998, and prior to the date of
this filing, the Company extended a preliminary settlement offer to the IRS.
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
<PAGE> 17
on the trustee portion (the amount the registrant 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 portion due is approximately
$90,000 and, in order to pay such amount, the Company will be required 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. Finalizing the settlement offer with the IRS will require the
Company to provide the IRS with a narrative description of the Company's
current plan of business operations and a logical reason for the compromise.
In addition, the IRS will conduct 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
for 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 December 31, 1998, the
Company has recorded total contingent liabilities of $747,819. As of March
31, 1999, the Company has been able to obtain releases from certain of the
individuals and/or creditors relating to a reduction in the contingent
liabilities of $299,575, and a reduction in accrued expenses of $26,400, for
an aggregate amount of $325,975.
None of the Company's subsidiaries have ever declared any dividends.
However, there are no provisions in the subsidiaries' articles or bylaws, or
any contracts or agreements that limit the subsidiaries' ability to pay
dividends to the Company should such subsidiaries have the financial resources
to pay dividends and elect to do so.
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
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.
<PAGE>
<PAGE> 18
ITEM 3. DESCRIPTION OF PROPERTY
Executive offices
- -----------------
The Company leases its principal executive office in Pacifica,
California. In December 1998, the Company reduced the size of the office by
approximately 25%, and renegotiated the lease on a month to month basis. The
current office is approximately 1,500 square feet at a rate of $1,894 per
month.
EPC owns a wood-framed mobile building of approximately 660 square feet
which it uses for an office. The building is located at 2040 West Broadway,
Bloomfield, New Mexico, on land leased at a rate of $300 per month. The lease
is on a month to month basis.
The Company owns a ten acre parcel of land five miles from Farmington,
New Mexico, which it uses to receive and bioconvert hydrocarbon impacted
soils, based on a joint permit with Amoco. The site is fenced and configured
to safely handle storm runoff.
The property is used as a staging area to which Amoco's contaminated soil
is brought for treatment and then returned to either the original site or
another site designated by Amoco to receive the treated soil. The site is
large enough to handle all current and future anticipated contaminated soil,
and the nature of the remediation is such that the site can be used over and
over as treated soil is removed.
[the remainder of this page is intentionally left blank]
<PAGE>
<PAGE> 19
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of October 25, 1999 the name and
address and the number of shares of the Company's Common Stock, par value
$0.001 per share, held of record or beneficially by each person who held of
record, or was known by the Company to own beneficially, more than 5% of the
35,518,931 shares of Common Stock issued and outstanding, and the name and
shareholdings of each director and of all officers and directors as a group.
The Company has reserved 254,573 shares of Common Stock for 254,573 shares of
IEI Canada, Inc. Class A Special Shares which are convertible into an equal
number of shares of the Company's Common Stock, and 4,297,667 shares of Common
Stock for issuance pursuant to outstanding options.
Principal Shareholders:
Class Name and Address Beneficial Ownership % of Class
- ------ ---------------- -------------------- ----------
Common JFJ Ecosystems, LLC 18,864,359 (1) 34.69
1015 West 54th Street
Kansas City, MO 64112
Common John P. Crowe 22,449,581 (2) 41.28
1015 West 54th Street
Kansas City, MO 64112
Common Tom Jarnagin 3,892,988 (3) 10.87
Industrial Ecosystems, Inc.
450 Dondee Way, Suite 10
Pacifica, CA 94044
Common Steven C. Justus 2,000,000 (4) 5.39
Industrial Ecosystems, Inc.
450 Dondee Way, Suite 10
Pacifica, CA 94044
Officers and Directors:
Class Name and Address Beneficial Ownership % of Class
- ------ ---------------- -------------------- ----------
Tom Jarnagin -see above-
Common Magaly Bianchini 735,888 (5) 2.07
Industrial Ecosystems, Inc.
450 Dondee Way, Suite 10
Pacifica, CA 94044
Steven C. Justus -see above-
Common Officers and Directors
as a group (3 persons) 6,628,876 (6) 17.71
- --------------------------------
Notes to this table appear on the following page
<PAGE>
<PAGE> 20
In the preceding table:
For JFJ Ecosystems:
- - shares and options listed for JFJ Ecosystems, LLC, are unissued;
- - beneficial ownership share numbers assume the issuance of the shares and
exercise of options;
- - % of Class assumes the issuance of shares and exercise of options and is
calculated based on the concomitant increase in the number of issued and
outstanding shares.
For the remaining listed parties:
- - beneficial ownership share numbers assume the exercise of options;
- - % of Class assumes the exercise of options and is calculated based on the
concomitant increase in the number of issued and outstanding shares.
In addition, the following numbered notes referenced in the table apply:
(1) Represents 16,798,452 shares and 2,065,906 options to purchase shares at
an exercise price of $0.225 per share exercisable through 1/4/04. None of the
shares and options have been issued, but may be issued pursuant to the JV
Agreement, as amended, as described more fully in CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.
(2) Represents 2,751,889 shares held by John P. Crowe, 833,333 shares held by
Four C's Development, LLC, an entity controlled by John P. Crowe, plus shares
and options which may be issued to JFJ Ecosystems, LLC, pursuant to the JV
Agreement, as amended (see Footnote (1) above). Should JFJ exercise its right
to sell, or the Company exercise its right to acquire JFJ's membership
interest in the JV, JFJ will receive 16,798,453 shares and 2,065,906 options
to purchase additional shares of the Company's Common Stock, and John Crowe
may be deemed to have indirect beneficial ownership of such shares because he
is a principal Member and Manager of JFJ.
(3) Represents 2,536,083 shares held by Tom Jarnagin, 1,056,905 shares held by
Francine Jarnagin, Tom Jarnagin's spouse, of which Mr. Jarnagin may be deemed
to have beneficial ownership, and 300,000 options granted to Mr. Jarnagin
pursuant to the Company's ISO plan at an exercise price of $0.16 per share
exercisable 4/30/99 to 4/30/04.
(3) Represents 450,000 shares held by Steven Justus, 1,500,000 options granted
to Mr. Justus for consulting services prior to his election to the Company's
board, at an exercise price of $.22 per share exercisable 3/13/98 to 3/13/05,
and 50,000 options granted to Mr. Justus pursuant to the Company's ISO plan at
an exercise price of $0.16 per share exercisable 4/30/99 to 4/30/04.
(4) Represents 685,888 shares held by Magaly Bianchini and 50,000 options
granted to Ms. Bianchini pursuant to the Company's ISO plan at an exercise
price of $0.16 per share exercisable 4/30/99 to 4/30/04.
<PAGE>
<PAGE> 21
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The names of the Registrant's executive officers and directors and the
positions held by each of them are set forth below:
Name Age Position Held Position Since
- ---- --- -------- -------------------
Tom Jarnagin 57 President/Director April 1999
Magaly Bianchini 43 Director April 1999
Steven C. Justus 40 Director April 1999
The term of office of each director is one year and until his or her
successor is elected at the Registrant's annual shareholders' meeting and is
qualified, subject to removal by the shareholders. The term of office for
each officer is for one year and until a successor is elected at the annual
meeting of the board of directors and is qualified, subject to removal by the
board of directors.
Biographical Information
Set forth below is certain biographical information with respect to each
of the Registrant's officers and directors.
Tom Jarnagin - Until December 1995, Mr. Jarnagin, age 57, was the General
Manager in charge of Coal Operations for the Burlington Northern Railroad
Company. Since 1995, he has been involved in real estate development and new
business development as an independent investor and consultant. Mr. Jarnagin
earned a B.A. in economics from the University of Denver in 1967. He received
awards as Outstanding Safety Leader from Burlington Northern in 1993 and 1995.
He has been active in various community service and charitable organizations
such as the Lincoln, Nebraska Chamber of Commerce, Leadership Lincoln, and the
United Way.
Magaly Bianchini - Since 1986, Ms. Bianchini, age 43, is a residential
real estate developer. She is currently employed by Leader Capital
Corporation, a publicly traded company specializing in residential development
and home building in Ontario and Quebec. Ms. Bianchini is an officer and
director of Leader Capital Corporation, which is listed on the Canadian
Dealing Network under the symbol LEDR. Ms. Bianchini earned a B.A. in
political science and philosophy from the University of Toronto in 1977. She
is a partner in Diamante Development Corporation, developers of various
condominium projects in Toronto. She is managing partner for a
commercial/residential project in Gatineau, Quebec, and has been responsible
for all aspects of project administration, including planning, development and
sales. Ms. Bianchini is also a board member of Senior Living Management, a
company which owns and operates retirement homes across Canada.
Steven Justus - Since 1993, Steven Justus, age 40, has been President and
Owner of Steven C. Justus, Inc., a floor execution and brokerage firm at the
Chicago Mercantile Exchange, where he has been a member since 1988. Mr.
Justus also acts as an independent consultant for the brokerage industry.
From 1995 to 1997, Mr. Justus was a director of Stellaris Financial Services,
serving on the Executive Committee which formed company strategy. In 1995, he
was a director of Trine, Ltd., for which he formulated trading strategies,
raised funds and trained marketers. Mr. Justus holds a B.S. degree in Human
<PAGE> 22
Resource Management from Drake University. He is a former member of both the
Chicago Board of Trade and the Chicago Board Options Exchange. Mr. Justus
holds six securities industries licenses.
Key Employee
- ------------
James Hatcher , the general manager of EPC, has extensive experience in
bioremediations. From 1997 to the present, Mr. Hatcher has been involved in
the management of bioremediation and reclamation of hydrocarbon contaminated
soil for more than 250 sites in New Mexico and Colorado. From 1983 to 1996,
Mr. Hatcher was involved as a consultant in planning, permitting, and various
environmental issues for a number of oil companies operating in the southwest.
From 1972 to 1982, Mr. Hatcher worked on drilling and operations of oil and
gas wells in Utah, Wyoming, Colorado, Arizona and New Mexico. Mr. Hatcher has
completed certification in programs for HAZMET, Hazardous Waste Operations and
Emergency Response, and Hazardous Waste Operations Manager and Supervisor.
ITEM 6. EXECUTIVE COMPENSATION
The following tables set forth certain summary information concerning the
compensation paid or accrued for each of the Registrant's last three completed
fiscal years to the Registrant's or its principal subsidiaries chief executive
officer and each of its other executive officers that received compensation in
excess of $100,000 during such period (as determined at December 31, 1998 the
end of the Registrant's last completed fiscal year). During the periods
covered by the table, Walter Kolbe served as President of the Company. Mr.
Kolbe resigned all positions effective April 19, 1999. During the periods
covered by the table, Gerard Amlin served as Vice-President of the Company,
and President of IEI Canada. Mr. Amlin was also President of the two Canadian
subsidiaries incorporated in July 1998. Mr. Amlin resigned all positions
effective September 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
Other Restricted
Name and Annual Stock Options LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards /SARs Payout Compensation
- ------------------ ---- ------ -------- ------------ ------ ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Walter Kolbe 1998 $ 103,002 -0- -0- -0- -0- -0- -0-
President 1997 $ 28,037 -0- -0- -0- -0- -0- -0-
1996 $ -0- -0- -0- -0- -0- -0- -0-
Gerard Amlin 1998 $ 131,152 -0- -0- -0- -0- -0- -0-
Vice-President 1997 $ 17,298 -0- -0- -0- -0- -0- -0-
1996 $ 26,440 -0- -0- -0- -0- -0- -0-
</TABLE>
Additional Executive Compensation
Tom Jarnagin, the Company's President, will be employed by the Company as
an employee-at-will, beginning April 19, 1999, at a salary of $5,000 per month
(pro-rata in the first month), plus a quarterly performance bonus of up to
$15,000 per quarter based on meeting certain per share earnings criteria set
<PAGE>
<PAGE> 23
forth in the operating plan currently being prepared. Mr. Jarnagin's
compensation includes management responsibilities for ROP. The Company has no
other employment agreements with members of management and or any other
personnel. All employees are treated as employees-at-will. The Company
reimburses each officer for expenses incurred in connection with the Company's
business.
Board Compensation
As of December 31, 1998, the Company's directors receive no compensation
for attendance at board meetings. Subsequent to December 31, 1998, the
Company's directors have adopted a resolution providing for the payment of
$1,000 to each director per meeting attended up to a maximum of $1,000 per
quarter or $4,000 per year. In addition, board members will be reimbursed for
all reasonable out-of-pocket expenses incurred by them in connection with
their attendance at the board meetings.
Options/SAR Grants in Last Fiscal Year
No individual grants of stock options (whether or not in tandem with
SARs), or freestanding SARs were made during the last completed fiscal year to
any of the named executive officers.
Bonuses and Deferred Compensation
There are no compensation plans or arrangements, including payments to be
received from the Company, with respect to any person named as a director,
executive officer, promoter or control person above which would in any way
result in payments to any such person because of his resignation, retirement,
or other termination of such person's employment with the Company or its
subsidiaries, or any change in control of the Company, or a change in the
person's responsibilities.
Compensation Pursuant to Plans
Effective March 19, 1999, the Board of Directors of the Company approved
the terms of the 1999 Stock Option and Award Plan (the "Award Plan"). The
Award Plan was approved by the stockholders of the Company at a Special
Meeting on April 19, 1999. As of the date of this filing, no awards have been
made under this plan.
The following summary of the Award Plan is qualified in its entirety by
the specific provisions of the Award Plan.
Award Plan Summary
The Board of Directors of the Company believes that it is important that
employees and other individuals who contribute to the success of the Company
have a stake in the enterprise as shareholders. Consistent with this belief,
the award of stock options has been and will continue to be an important
element of the Company's compensation program.
The Award Plan is intended to (a) attract competent directors, executive
personnel, and other employees, (b) the retention of the services of existing
directors, executive personnel, and employees, and (c) provide incentives to
all of such personnel to devote the utmost effort and skill to the advancement
and betterment of the appropriate corporation by permitting them to
participate in ownership and thereby permitting them to share in increases in
the value which they help produce.
<PAGE> 24
The Award Plan is to be administered either by the Board of Directors or
by a committee (the "Committee") to be appointed from time to time by such
Board of Directors. Awards granted under the Award Plan may be incentive stock
options ("ISOs") as defined in the Internal Revenue Code of 1986, as amended
(the "Code"), appreciation rights, options which do not qualify as ISOs, or
stock bonus awards which are awarded to employees, including officers and
directors, who, in the opinion of the board or the Committee, have
contributed, or are expected to contribute, materially to the success of the
Company. In addition, at the discretion of the Board of Directors or the
Committee, options or bonus stock may be granted to individuals who are not
employees but contribute to the success of the Company.
The exercise price of options granted under the Award Plan will be based
on the fair market value of the underlying Common Stock at the time of grant
and, in the case of ISOs may not be less than 100% of the fair market value of
such capital stock on the date the option is granted (110% of the fair market
value in the case of 10% stockholders). Options granted under the Award Plan
shall expire no later than ten years after the date of grant (five years in
the case of ISOs granted to 10% stockholders). The option price may be paid by
cash or, at the discretion of the Board of Directors or Committee, by delivery
of a promissory note or shares of Common Stock of the Company already owned by
the optionee (valued at their fair market value at the date of exercise), or a
combination thereof.
All of the employees, officers, and directors of the Company are eligible
to participate under the Award Plan. A maximum of 3,000,000 shares are
available for grant under the Award Plan. The identification of individuals
entitled to receive awards, the terms of the awards, and the number of shares
subject to individual awards, are determined by the Board of Directors or the
Committee, in their sole discretion: provided, however, that in no event may
the aggregate fair market value of shares for which an ISO is first
exercisable in any calendar year by any eligible employee exceed $100,000.
The aggregate number of shares with respect to which options or stock
awards may be granted under the Award Plan, the number of shares covered by
each outstanding option, and the purchase price per share, shall be adjusted
for any increase or decrease in the number of issued shares resulting from a
recapitalization, reorganization, merger, consolidation, exchange of shares,
stock dividend, stock split, reverse stock split, or other subdivision or
consolidation of shares.
The Board of Directors or the Committee may from time to time alter,
amend, suspend, or discontinue the Award Plan with respect to any shares as to
which options or stock awards have not been granted. However, no such
alteration or amendment (unless approved by the stockholders) shall (a)
increase (except adjustment for an event of dilution) the maximum number of
shares for which options or stock awards may be granted under the Award Plan
either in the aggregate or to any eligible employee; (b) reduce (except
adjustment for an event of dilution) the minimum option prices which may be
established under the Award Plan; (c) extend the period or periods during
which options may be granted or exercised; (d) materially modify the
requirements as to eligibility for participation in the Award Plan; (e) change
the provisions relating to events of dilution; or (f) materially increase the
benefits accruing to the eligible participants under the Award Plan.
Certain Tax Matters
For tax purposes, a participant to whom a non-qualified option is granted
will not realize income at the time of the grant if the exercise price is
equal to the then current market price. Upon exercise of the option, the
<PAGE> 25
excess of the fair market value of the stock on the date of exercise over the
exercise price will be taxable to the optionee as ordinary income. The tax
basis to the optionee for the stock acquired is the exercise price plus the
amount recognized as income. The Company will be entitled to a deduction equal
to the amount of the ordinary income realized by the optionee in the taxable
year which includes the end of the optionee's taxable year in which he
realizes the ordinary income. When shares acquired pursuant to the exercise of
the option are disposed of, the holder will realize additional capital gain or
loss equal to the difference between the sales proceeds and his or her tax
basis in the stock.
If a participant to whom an option is granted exercises such option by
payment of the exercise price in whole or in part with previously owned
shares, the optionee will not realize income with respect to the number of
shares received on exercise which equals the number of shares delivered by the
optionee. The optionee's basis for the delivered shares will carry over to the
option shares received. With regard to the number of non-qualified option
shares received which exceeds the number of shares delivered, the optionee
will realize ordinary income at the time of exercise; the optionee's tax basis
in these additional option shares will equal the amount of ordinary income
realized plus the amount of any cash paid.
Recipients of ISOs will not be required to recognize income at the time
of the grant of the options or at the time of exercise of the options as long
as the stock received on exercise is held for at least two years from the date
of the grant of the ISOs or one year from the date of exercise (although the
difference between the fair market value of the stock and the exercise price
paid at the time of exercise must be taken into account for alternative
minimum tax purposes). If the stock received upon exercise of an ISO is
disposed of prior to the expiration of either of such time periods, the
optionee will be required to recognize as ordinary income the amount by which
the fair market value of the stock received at the time of exercise exceeds
the exercise price of the ISOs.
Under the Award Plan, stock appreciation rights ("SARs") can be granted
at the time an option is granted with respect to all or a portion of the
shares subject to the related option. SARs can only be exercised to the extent
the related option is exercisable and cannot be exercised for the six-month
period following the date of grant, except in the event of death or disability
of the optionee. The exercise of any portion of either the related option or
the tandem SARs will cause a corresponding reduction in the number of shares
remaining subject to the option or the tandem SARs thus maintaining a balance
between outstanding options and SARs. SARs permit the holder to receive an
amount (in cash, shares, or a combination of cash and shares, as determined by
the Board of Directors at the time of grant) equal to the number of SARs
exercised multiplied by the excess of the fair market value of the shares on
the exercise date over the exercise price of the related options.
Under the terms of the Award Plan, the Board of Directors or the
Committee may also grant stock awards which may, at the discretion of the
Board of Directors or Committee, be subject to forfeiture under certain
conditions. Recipients of stock awards will realize ordinary income at the
time of the lapse of any forfeiture provisions equal to the fair market value
of the shares less any amount paid in connection with the issuance (the Board
of Directors or the Committee can require the payment of par value at the time
of the grant). The appropriate corporation will realize a corresponding
compensation deduction. The holder will have a basis in the shares acquired
equal to any amount paid on exercise plus the amount of any ordinary income
<PAGE> 26
recognized by the holder. On sale of the shares, the holder will have a
capital gain or loss equal to the sale proceeds minus his or her basis in the
shares.
Pension Table
Not Applicable.
Other Compensation
None.
[the remainder of this page is intentionally left blank]
<PAGE>
<PAGE> 27
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
- ---------------------------------------
The information set forth below is provided by the Company based on what
the Company believes may be material to the shareholders in light of all the
circumstances of the particular case. The significance of the transactions
disclosed may be evaluated by each shareholder after taking into account the
relationship of the parties to the transactions and the amounts involved in
the transactions.
Since inception, the Company has made periodic cash disbursements and
issued shares of its Common Stock to certain officers and directors of the
Company, relatives of these officers and directors, and other companies
controlled by these officers and directors, although some of those individuals
are no longer officers or directors of the Company. Most of these
disbursements have been made for services rendered or for payments related to
construction of the Company's facilities and equipment. Any payments made
that could not be substantiated have been recorded by the Company as
additional compensation to those officers and directors.
The Company has reserved and recorded possible contingent liabilities to
individuals, some of whom are related to or associated with certain former
officers and directors, who have made loans or advances to the Company and
still claim they are owed, although the Company believes it issued shares of
Common Stock in full and complete payment of these amounts. The Company has
recorded a total of contingent liabilities at December 31, 1998 of $747,819.
It is uncertain as to whether or not the amounts claimed to be owed will be
paid in the future and the Company intends to vigorously contest any claim
that is made. It is reasonably possible, however, that, despite the Company's
belief that these contingent liabilities have been paid, the Company may have
to pay all or a portion of these amounts and, therefore, management has
recorded these possible debts as contingent liabilities.
From time to time, the Company has also incorporated subsidiaries for the
purpose of transacting business for a specific business purpose. These
subsidiaries may have incurred various debts for which the Company could be
deemed liable. The Company could also be construed to be liable for certain
debts incurred by its former officers and directors that were intended to be
personal debts. The Company is uncertain as to whether the potential
creditors are holding the Company responsible for these debts. The Company
believes that the provision for commitments and contingencies adequately
covers the potential liabilities for which the Company may ultimately be held
responsible.
Walter Kolbe, the Company's former president, from time to time, received
payments in the form of loans that have been repaid without interest. Mr.
Kolbe also advanced funds to the Company from time to time in order for the
Company to meet its ongoing needs. These advances were also repaid without
interest. At December 31, 1998, there were no loans or advances outstanding.
Restructure of Interest in ROP
------------------------------
The Company, through its subsidiary, IEI Canada, owns a 50% membership
interest in ROP. The other 50% membership interest is owned by JFJ Ecosystems
L.L.C., a Missouri limited liability company, ("JFJ"), controlled by John
Crowe, a 5% shareholder of the Company. The JV has been governed by a three
<PAGE> 28
person Board of Managers, two of whom were appointed by JFJ and one of whom
was appointed by IEI Canada. Fred Rice and John Crowe serve as the two JFJ
Managers, with John Crowe serving as the Chairman of the Board of Managers.
Walter Kolbe, the Company's former President, was appointed by IEI Canada to
serve as the Company's representative on the Board of Managers. That position
is now occupied by Tom Jarnagin, the Company's current President.
Due to the need for working capital for both the JV and the Company, JFJ,
the Company, and IEI Canada restructured the JV to (a) provide for a quicker
release of part of the funds escrowed pursuant to the Original JV
Agreement;(b) establish a line of credit to the Company; (c) grant certain
rights to the Company to acquire JFJ's membership interest in the JV; (d)
grant certain rights to JFJ to sell its membership interest in the JV to the
Company; (e) obtain releases from JFJ and its members of any and all claims
against the Company, IEI Canada, the Company's subsidiaries, their affiliates
and officers and directors and shareholders for any misrepresentations made to
induce JFJ to enter into the Original JV Agreement; and (f) grant to the
Company of a right to first refusal on JV borrowing.
On January 4, 1999, IEI Canada and JFJ restructured the Original JV
Agreement to provide for the release of $250,000 of the $1,000,000 escrow to
meet immediate cash flow needs of the JV. The remaining $750,000 was then
loaned by JFJ to the Company through the establishment of a line of credit.
Following the restructuring, JFJ became 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
------------------
JFJ has extended a $750,000 line of credit to the Company. 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 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.
The Company's Right to Acquire JFJ's Membership Interest in the JV
------------------------------------------------------------------
The Company has the right on or prior to December 31, 2000 (the line of
credit due date) to acquire JFJ's 50% membership interest in the JV by issuing
to JFJ shares of the Company's restricted Common Stock in exchange for JFJ's
membership interest in the JV (the "Acquisition Rights"). The following are
conditions that must be fulfilled prior to the Company's exercise of its
Acquisition Rights:
(a) Repayment to JFJ of the outstanding principal and accrued interest
on the line of credit;
(b) Issuance to JFJ of that number of shares of the Company's
restricted Common Stock that represents one-half (1/2) of the issued and
outstanding shares (all classes) in the Company as of December 31, 1998. The
issuance of the shares to JFJ would give JFJ ownership of approximately one-
third (1/3) of the Company's issued and outstanding shares of Common Stock,
not including other shares independently owned by JFJ, if any. The percentage
ownership ultimately held by JFJ could be subject to dilution by the issuance
of any additional shares of Common Stock after the date of the restructuring;
<PAGE> 29
(c) Issuance of JFJ of options to purchase 2,065,500 shares of the
Company's Common Stock at $0.225 per share for a term of five (5) years. These
options preserve JFJ from dilution by way of the exercise of 4,131,000
outstanding options at an exercise price of $.225. Upon exercise of the
Company's Acquisition Rights, the Company will grant JFJ options equal to one-
half (1/2) of all options granted by the Company after December 31, 1998 and to
the date of exercise of the Acquisition Rights. Such options will be granted
to JFJ on substantially similar terms as are extended to other option holders.
These options are intended to preserve JFJ from subsequent dilution through
the granting of options and will be construed accordingly.
(d) Execution by the Company and JFJ of a Registration Rights Agreement
by which the Company agrees to register the restricted stock issued to JFJ in
the Acquisition upon JFJ's request;
(e) The Company shall complete and file with the Securities and
Exchange Commission a Form 10-SB, General Form for Registration of Securities
under Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and file any other periodic reports required to be filed
under Section 13 or 15(d) of the Exchange Act (the "Periodic Reports").
(f) The Company's Board of Directors will be duly authorized and
elected pursuant to a vote of the Company's shareholders at a Special or
Annual Meeting of the Company's shareholders; and
(g) Following the exercise of the Acquisition Rights, the surviving
company will affirm and agree to assume any JV obligations to either JFJ or
the Company or third parties, including but not limited to, the $50,000 notes
to the Company and JFJ, and the $100,000 note to John P. Crowe & Co. These
notes or other obligations are to be paid in accordance with their terms.
Management does not currently anticipate that the Company will exercise
its right to acquire JFJ's Membership Interest.
JFJ's Right to Sell its Membership Interest in the JV to the Company
--------------------------------------------------------------------
JFJ has the right on or prior to December 31, 2000 to sell its 50%
membership interest in the JV to the Company through a share exchange, wherein
the Company would issue to JFJ shares of the Company's restricted Common Stock
in exchange for JFJ's membership interest in the JV (the "Sale Rights"). In
consideration for JFJ exercising its Sale Rights, JFJ shall receive that
number of shares of the Company's restricted Common Stock that represents one
half (1/2)of the issued and outstanding shares of the Company at December 31,
1998. The method of exact determination of the number of shares and options
issued hereunder is the same as described in the preceding paragraph. The
shares would be subject to the same Registration Rights Agreement discussed
above.
The following are conditions that must be fulfilled prior to JFJ's
exercise of its Sale Rights:
(a) JFJ will forgive the outstanding principal and accrued interest
borrowed by the Company under the line of credit or assign its interest as the
Creditor in the line of credit to the JV prior to exercising its Sale Rights,
whichever it may so elect;
<PAGE> 30
(b) If not previously paid in full, JFJ and John P. Crowe & Co. will
not be required to forgive any outstanding loan balances to the JV which loan
balances shall be repaid by the JV or surviving company in accordance with
their terms; provided, however, that JFJ will release its security interest in
the JV assets.
JFJ's Right of First Refusal to Participate in Future Debt or Equity
--------------------------------------------------------------------
Financing
---------
The Company has granted JFJ a right of first refusal on any public
offering or private placement of any debt or equity securities or other
capital sourcing which could result in the issuance of The Company's
securities. JFJ's right of first refusal shall be a ten (10) day right of
first refusal on the same terms and conditions as are offered to the third
party interested in investing in or lending to The Company. The right of first
refusal shall extend until December 31, 2000. JFJ can assign its right of
first refusal to John P. Crowe & Co. or another related entity or person in
its sole discretion.
The Company's Right of First Refusal on JV Borrowing
----------------------------------------------------
The Company has the right of first refusal to provide financing to the JV
through December 31, 2000. Before borrowing any money from a third party or a
related entity, the JV shall provide notice of a bona fide financing proposal
specifying the terms and security that will govern the borrowing, including
the proposed lender. The Company has the right to lend the money to the JV on
the terms proposed by providing the JV notice of acceptance within ten (10)
days of receipt of the proposal. The JV shall be free to borrow on the
proposed terms from the proposed lender absent timely receipt of the notice of
acceptance from The Company.
Consent and Approval by the Company's Shareholders
--------------------------------------------------
At the request of JFJ, prior to the signing of the definitive agreements
members of management and disinterested principal shareholders who,
collectively, hold in excess of 51% of the Company's issued and outstanding
shares provided the Company with their written consent to the terms of the
agreements. The Agreements were ratified by a majority of all the
Shareholders at a Special Meeting of the Shareholders on April 19, 1999.
Subsequent Events
- -----------------
In May 1999, the Company issued 2,500,000 shares of restricted Common
Stock in a private placement for cash at $0.10 per share to John Crowe, a
major shareholder of the Company and a principal of the Company's joint
venture partner, and five of his relatives and/or affiliates.
ITEM 8. DESCRIPTION OF SECURITIES
General
- -------
The Registrant is authorized to issue one hundred million shares of
common stock, par value $0.001 per share (the "Common Stock")and twenty-five
<PAGE> 31
million shares of preferred stock, par value $0.001 per share (the "Preferred
Stock"). The Company has 35,518,931 shares of Common Stock and no shares of
Preferred Stock issued and outstanding at October 25, 1999. Although the
Company's Board of Directors has no present intention to do so, the Board of
directors has authority, without action by or vote of the Company's
Shareholders, to issue all or part of the authorized but unissued shares. In
addition, the Company's Board of Directors has authority, without action by or
vote of the Company's Shareholders, to fix and determine the rights,
preferences, and privileges of the Preferred Stock, which may be given voting
rights superior to that of the Common Stock, which power may be used to hinder
or deter a takeover proposal, should any occur. Any issuance of additional
shares of Common Stock or Preferred Stock will dilute the percentage ownership
interest of Shareholders and may further dilute the book value of the
Company's shares.
Common Stock
- ------------
The holders of Common Stock are entitled to one vote per share on each
matter submitted to a vote at any meeting of shareholders. Shares of Common
Stock do not carry cumulative voting rights and, therefore, a majority of the
shares of outstanding Common Stock will be able to elect the entire board of
directors and, if they do so, minority shareholders would not be able to elect
any persons to the board of directors. The Registrant's bylaws provide that a
majority of the issued and outstanding shares of the Registrant constitutes a
quorum for shareholders' meetings, except with respect to certain matters for
which a greater percentage quorum is required by statute or the bylaws.
Shareholders of the Registrant have no preemptive rights to acquire
additional shares of Common Stock or other securities. The Common Stock is
not subject to redemption and carries no subscription or conversion rights.
In the event of liquidation of the Registrant, the shares of Common Stock are
entitled to share equally in corporate assets after satisfaction of all
liabilities.
Holders of Common Stock are entitled to receive such dividends as the
board of directors may from time to time declare out of funds legally
available for the payment of dividends. The Registrant seeks growth and
expansion of its business through the reinvestment of profits, if any, and
does not anticipate that it will pay dividends in the foreseeable future.
Preferred Stock
- ---------------
The authority to issue the Preferred Stock is vested in the board of
directors of the Company, which has authority to fix and determine the powers,
qualifications, limitations, restrictions, designations, rights, preferences,
or other variations of each class or series within each class which the
Company is authorized to issue. The above described authority of the Board of
Directors may be exercised by corporate resolution from time to time as the
Board of directors sees fit.
<PAGE>
<PAGE> 32
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters
At March 19, 1999, the Company's common stock was quoted on the NASD's
OTC Bulletin Board under the symbol "IECS". The table below sets forth, for
the respective periods indicated, the prices of the Company's common stock in
the over-the-counter market as reported by the NASD's OTC Bulletin Board. The
bid prices represent inter-dealer quotations, without adjustments for retail
markups, markdowns or commissions and may not necessarily represent actual
transactions.
Fiscal Year Ended December 31, 1997 High Bid Low Bid
- ----------------------------------- -------- --------
First Quarter $0.37 $0.08
Second Quarter $0.13 $0.04
Third Quarter $0.17 $0.06
Fourth Quarter $0.35 $0.11
Fiscal Year Ended December 31, 1998 High Bid Low Bid
- ----------------------------------- -------- --------
First Quarter $0.31 $0.13
Second Quarter $0.94 $0.19
Third Quarter $0.81 $0.31
Fourth Quarter $0.38 $0.13
Fiscal Year Ended December 31, 1999 High Bid Low Bid
- ----------------------------------- -------- --------
First Quarter $0.20 $0.15
As of March 19, 1999 there were approximately 400 shareholders of record
of the Company's common stock and the reported bid or asked prices for the
Company's common stock was $0.165 and $0.18, respectively.
As of March 19, 1999, the Company has issued and outstanding 33,596,906
of common stock.
Dividend Policy
- ---------------
The Company has not declared or paid cash dividends or made distributions
in the past, and the Company does not anticipate that it will pay cash
dividends or make distributions in the foreseeable future. The Company has
not entered into any credit or other agreements that would restrict its
ability to pay dividends, however, the Company currently intends to retain and
reinvest future earnings, if any, to finance its operations.
Transfer Agent
- --------------
As of April 1, 1999, the transfer agent for the Company's common stock is
Atlas Stock Transfer, 5899 South State Street, Salt Lake City, Utah 84107.
The Company's transfer agent for the prior year was American Transfer and
Trust, Inc., 1172 South Dixie Highway, Suite 448, Coral Gables, Florida 33146.
<PAGE> 33
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 dispute is still in
the discovery stage and no trial date has been set. The total amount in
dispute is approximately $75,000.
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 in March 1998.
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
<PAGE> 34
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. Although such registration is not required to
enforce Middlemarch's claim, its priority as a secured creditor is dependent
on registration, and a subsequent purchaser who has no notice of the claim may
take free of the unregistered claim.
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 in April 1996. 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 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The Registrant has not changed nor had any disagreements with its
independent certified accountants.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
With respect to the following discussion relating the to recent issuance
of unregistered securities, all share amounts give effect to a 3-for-2 reverse
split of the Company's issued and outstanding shares effective April 30, 1998.
In 1998, the Company issued 2,865,701 shares of Common Stock in a private
placement for cash at an average price of $0.35 per share to certain
investors. A total of 2,015,701 shares were issued to John Crowe, a major
shareholder of the Company and a principal of the Company's joint venture
partner, and certain of his relatives and/or affiliates. The remaining
850,000 shares were issued to a two unaffiliated investors. No underwriter or
placement agent was used by the Company and no commissions were paid. No
general advertising or solicitation was used in connection therewith.
In 1998, the Company issued 5,341,330 shares of Common Stock to certain
creditors of the Company for conversion of outstanding indebtedness at an
average price of $0.16 per share.
In 1998, the Company issued 99,999 shares of Common Stock to various
individuals for professional services relating to the Company's business plan
and providing technical services. The value for the services was placed at an
average of $0.21 per share. No cash consideration was received by the issuer
and the aggregate offering price for the securities (approximately $21,000)
was determined to be the fair market value for the consulting services
provided. None of the purchasers were officers and/or directors of the issuer
at the time of issuance of the securities or currently hold such positions
with the issuer.
In 1998, the Company issued options to various individuals who have
provided and may continue to provide consulting and other services to the
Company. Stock options for a total of 4,131,000 (post-split) shares of common
stock were granted at an exercise price of $0.225 per share. At the time the
options were granted, the exercise price was equal to or greater than the
prior 10 day average trading price of the Company's shares. 591,000 of the
options will expire if not exercised by March 13, 2003. The remaining
3,540,000 options will expire if not exercised by March 13, 2005.
<PAGE> 35
In 1997, the Company issued 3,533,335 shares of Common Stock for cash in
a private placement at an average price of $0.21 per share to certain
unaffiliated investors. No underwriter or placement agent was used by the
Company and no commissions were paid. No general advertising or solicitation
was used in connection therewith.
In 1997, the Company issued 2,188,143 shares of Common Stock to various
individuals for professional and consulting services. 200,000 of the shares
were issued to Robert Moore, a former officer, for services as an employee and
in settlement of his termination by the Company. The remaining shares were
issued for services relating to conducting market research, development of the
Company's marketing research and business plan, and providing legal and
technical services. The value for the services provided was placed at an
average of $0.18 per share. No cash consideration was received by the issuer
and the aggregate offering price for the securities (approximately $394,000)
was determined to be the fair market value for the employee and consulting
services provided. None of the purchasers were officers and/or directors of
the issuer at the time of issuance of the securities or currently hold such
positions with the issuer.
In 1997, the Company issued 2,163,917 shares of Common Stock in exchange
for the conversion of 2,163,917 shares of Class-A Special Shares of IEI Canada
which were issued in connection with: a Global Share Purchase Agreement
executed by and between Industrial Ecosystems, Inc., ITE Ecosystems, Inc., and
ITE Ecosystems, Inc. shareholders; and a Share Exchange Agreement executed by
and between Industrial Ecosystems, Inc., ITE Ecosystems, Inc. shareholders and
IEI, Canada, Inc., both dated June 28, 1994. The above Agreements were
executed to effect the purchase of all the outstanding shares of ITE
Ecosystems, Inc. common stock. Each ITE shareholder executed an individual
Share Purchase Agreement in which each share of ITE common stock was exchanged
for a designated number of shares of IEI, Canada "Special Class A" shares. In
addition, each ITE shareholder received a warrant permitting the exchange of
the IEI, Canada "Special Class A" shares for an equal number of Industrial
Ecosystems, Inc. pre-split shares at any time until 2015. A total of
4,000,000 Special Class A shares were issued. At December 31, 1998, 324,390
shares were outstanding that are convertible at the holder's option into
254,573 post-split shares of the Company's Common Stock.
In 1997, the Company issued an option to purchase 166,667 (post-split)
shares of common stock at an exercise price of $0.15 per share to an entity
that provided a loan to the Company. At the time the options were granted,
the exercise price was equal to or greater than the prior 10 day average
trading price of the Company's shares. These options will expire if not
exercised by July 23, 2002.
In 1996, the Company issued 538,499 shares of Common Stock for cash in a
private placement at an average price of $0.70 per share to certain
unaffiliated investors. No underwriter or placement agent was used by the
Company and no commissions were paid. No general advertising or solicitation
was used in connection therewith.
In 1996, the Company issued 1,159,295 shares of Common Stock to various
individuals for professional and consulting services relating to conducting
market research, development of the Company's marketing research and business
plan, and providing legal and technical services. The value for the services
provided was placed at an average of $0.76 per share. No cash consideration
was received by the issuer and the aggregate offering price for the securities
(approximately $881,695) was determined to be the fair market value for the
consulting services provided. None of the purchasers were officers and/or
directors of the issuer at the time of issuance of the securities or currently
hold such positions with the issuer.
<PAGE> 36
In 1996, the Company issued 4,613,340 shares of Common Stock to certain
creditors of the Company for conversion of outstanding indebtedness at an
average price of $0.87 per share.
In 1996, the Company issued 333,335 shares of Common Stock in connection
with negotiations with certain individuals and companies for acquisitions or
business deals which were never consummated at an average price of $0.78 per
share.
In 1996, the Company issued 2,734 shares of Common Stock in to certain
individuals in lieu of salary at an average value of $0.59 per share.
In 1996, the Company issued 366,667 shares in a private placement to
certain individuals from whom consideration was never received at an average
price of $0.60 per share. The certificates representing these shares have
subsequently been canceled and a corresponding adjustment to shareholders'
equity has been made to reflect the cancellation.
In 1996, the Company issued 221,370 shares of Common Stock in exchange
for the conversion of 221,370 shares of Class-A Special Shares of IEI Canada
which were issued in connection with: a Global Share Purchase Agreement
executed by and between Industrial Ecosystems, Inc., ITE Ecosystems, Inc., and
ITE Ecosystems, Inc. shareholders; and a Share Exchange Agreement executed by
and between Industrial Ecosystems, Inc., ITE Ecosystems, Inc. shareholders and
IEI, Canada, Inc., both dated June 28, 1994. The above Agreements were
executed to effect the purchase of all the outstanding shares of ITE
Ecosystems, Inc. common stock. Each ITE shareholder executed an individual
Share Purchase Agreement in which each share of ITE common stock was exchanged
for a designated number of shares of IEI, Canada "Special Class A" shares. In
addition, each ITE shareholder received a warrant permitting the exchange of
the IEI, Canada "Special Class A" shares for an equal number of Industrial
Ecosystems, Inc. pre-split shares at any time until 2015. A total of
4,000,000 Special Class A shares were issued.
Securities issued in the foregoing transactions were issued in reliance
on the exemption from registration and the prospectus delivery requirements of
the Securities Act of 1933, as amended (the "Securities Act"), set forth in
Section 3(b) and/or Section 4(2) of the Securities Act and the regulations
promulgated thereunder.
Subsequent Events
- -----------------
In May 1999, the Company issued 2,500,000 shares of restricted Common
Stock in a private placement for cash at $0.10 per share to John Crowe and
five of his relatives and/or affiliates, all of whom executed suitability and
investment letters stating that they were accredited investors. The sale of
shares was made pursuant to an exemption from registration and the prospectus
delivery requirements of the Securities Act set forth in Regulation D, Rule
506.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 16-10a-901 through 909 of the Utah Revised Business Corporation
Act provides in relevant parts as follows:
(1) A corporation shall have power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending, or
<PAGE> 37
completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by or in the right of
the corporation) by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, conviction, or on
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(2) A corporation shall have power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation unless and only
to the extent that the court in which such action or suit was brought shall
determine on application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.
(3) To the extent that a director, officer, employee, or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit, or proceeding referred to in 1) or (2) of this subsection, or in
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him
in connection therewith.
(4) The indemnification provided by this section shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to
a person who has ceased to be a director, officer, employee, or agent and
shall inure to the benefit of the heirs, executors, and administrators of such
a person.
The foregoing discussion of indemnification merely summarizes certain
aspects of indemnification provisions and is limited by reference to the above
discussed sections of the Utah Revised Business Corporation Act.
<PAGE>
<PAGE> 38
The Registrant's certificate of incorporation and bylaws provide that the
Registrant "may indemnify" to the full extent of its power to do so, all
directors, officers, employees, and/or agents. It is anticipated that the
Registrant will indemnify its officers and directors to the full extent
permitted by the above-quoted statute.
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to officers and directors of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant
is aware that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
Limitations on Liability
- ------------------------
Subsequent to the Company's incorporation, the state of Utah enacted a
statute limiting the liability of officers and directors of the Company and
its shareholders in certain circumstances. Management has determined that it
would be advantageous for the Company to amend its Articles of Incorporation
to include the protections provided to officers and directors of the Company
pursuant to Section 16-10a-841 of the Utah Revised Business Corporation Act.
The amendment to the Articles of Incorporation would eliminate the
personal liability of a director to the Company or its shareholders for
monetary damages for any action taken or any failure to take any action, as a
director, except liability for (a) the amount of a financial benefit received
by a director to which he is not entitled; (b) an intentional infliction of
harm to the corporation or the shareholders; (c) an unlawful distribution; or
(d) an intentional violation of a criminal law.
It should be noted that the provisions eliminating liability of directors
limit the remedies available to a shareholder dissatisfied with a Board
decision which is protected by the provision. An aggrieved shareholder's only
remedy in such a circumstance is to sue to stop the completion of the Board's
action. In many situations, this remedy may not be effective. Shareholders,
for example, may not be aware of a transaction or an event until it is too
late to prevent it. In these cases, the shareholders and the Company could be
injured by a careless Board decision and yet have no effective remedy.
Management believes that limiting director's liability is in the best
interest of the shareholders and the Company, as it should enhance the
Company's ability to attract and retain qualified individuals to serve as
directors of the Company by assuring directors ( and potential directors) that
their good faith decisions will not be second-guessed by a court evaluating
decisions with the benefit of hindsight. This is particularly applicable,
management believes, in the recruitment of outside directors who are not
employees of the Company and who may, therefore, bring additional objectivity
and experience to the Board of Directors. Management believes that the
diligence exercised by directors stems primarily from their desire to act in
the best interest of the Company and not from a fear of monetary damage
awards. Consequently, management believes that the level of scrutiny and care
exercised by directors will not be lessened by this provision of the Articles
of Incorporation.
<PAGE>
<PAGE> 39
Indemnification of Officers, Directors and Others
- -------------------------------------------------
This Article has been added to provide that the Company shall indemnify
directors to the fullest extent permitted by the RBCA and that the Company may
indemnify officers, employees, or agents as authorized by the bylaws and the
Board of Directors. The Board of Directors believes that indemnification for
directors is important to enable the Company to attract and retain competent
directors. The Board of Directors believes that permissive indemnification
for others, as determined by the Board of Directors, is important because it
permits indemnification in appropriate circumstances.
The indemnification provisions in the Amended Articles may require the
Company to indemnify individuals against expenses, including attorney's fees,
judgments, fines and amounts paid in settlement, that may arise by reason of
their status or service as directors, officers, or agents (other than
liabilities arising from willful misconduct of a culpable nature) and to
advance expense incurred as a result of any proceeding against them as to
which they could be indemnified. As a result of such indemnification
limitations, any large damage awards that are not compensated by insurance
will come directly from the Company's treasury.
Subsequent to shareholder approval of the above Amended Articles in April
1999, the board of directors adopted revisions to the Company's Bylaws to
include Article V, Indemnification of Directors, Officers, Agents and
Employees. This Article parallels the provisions adopted in the Amended
Articles of Incorporation.
PART F/S
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated balance sheets of Industrial Ecosystems, Inc.
and Subsidiaries as of December 31, 1998 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
the years ended December 31, 1998 and 1997, have been examined to the extent
indicated in their reports by Jones, Jensen & Company, independent certified
accountants, and have been prepared in accordance with generally accepted
accounting principles and pursuant to Regulation S-B as promulgated by the
Securities and Exchange Commission and are included herein.
FINANCIAL STATEMENTS AT JUNE 30, 1999
(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> 40
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Industrial Ecosystems, Inc. and Subsidiaries
Pacifica, California
We have audited the accompanying consolidated balance sheet of Industrial
Ecosystems, Inc. and Subsidiaries as of December 31, 1998 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years ended December 31, 1998 and 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Industrial Ecosystems, Inc. and Subsidiaries as of December 31, 1998, and the
consolidated results of their operations and their cash flows for the years
ended
December 31, 1998 and 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
consolidated financial statements, the Company has suffered recurring losses to
date, which raises substantial doubt about its ability to continue as a going
concern. Management's plans with regard to these matters are also described in
Note 10. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 12 to the consolidated financial statements, an error
resulting in the overstatement of previously reported amounts in Additional
Paid-In Capital and Accumulated Deficit as of December 31, 1998, was discovered
by management of the Company during the current year. Accordingly, an
adjustment has been made to the above-mentioned accounts as of December 31,
1998 to correct the error. This error has no effect on the net loss for the
years ended December 31, 1998 or 1997.
Jones, Jensen & Company
Salt Lake City, Utah
February 19, 1999
<PAGE>
<PAGE> 41
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
------
December 31,
1998
------------
(As Restated, See Note 12)
CURRENT ASSETS
Cash and cash equivalents $ 12,552
Restricted cash (Note 1) 40,669
Accounts receivable (Note 1) 35,079
------
Total Current Assets 88,300
------
PROPERTY AND EQUIPMENT (Net) (Notes 1 and 2) 275,973
-------
OTHER ASSETS
Investment in joint venture (Note 6) -
Deposits 10,740
------
Total Other Assets 10,740
------
TOTAL ASSETS $ 375,013
=======
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 42
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
December 31,
1998
------------
(As Restated, See Note 12)
CURRENT LIABILITIES
Accounts payable $ 356,890
Accrued expenses (Note 4) 323,755
Unearned revenue (Note 1) 21,666
Due to related party (Note 3) 14,286
Notes payable, current portion (Note 5) 85,902
-------
Total Current Liabilities 802,499
-------
LONG-TERM DEBT
Notes payable (Note 5) 157,405
-------
Total Long-Term Debt 157,405
-------
Total Liabilities 959,904
-------
COMMITMENTS AND CONTINGENCIES (NOTE 7) 747,819
-------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; 100,000,000 shares authorized of $0.001
par value, 33,000,905 shares issued and outstanding 33,001
Additional paid-in capital 20,589,759
Other comprehensive income 38,419
Accumulated deficit (21,993,889)
----------
Total Stockholders' Equity (Deficit) (1,332,710)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 375,013
==========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 43
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended
December 31,
1998 1997
--------- ---------
REVENUES
Net sales $ 626,545 $ 569,983
Direct costs 405,787 360,569
------- -------
Gross Profit 220,758 209,414
------- -------
EXPENSES
General and administrative 1,586,049 2,042,502
Bad debt expense 19,802 7,325
Depreciation and amortization 108,677 202,017
--------- ---------
Total Expenses 1,714,528 2,251,844
--------- ---------
Loss From Operations (1,473,770) (2,042,430)
--------- ---------
OTHER INCOME (EXPENSE)
Other income 95,118 300
Interest income 1,362 59
Interest expense (40,236) (78,835)
Loss on investment in joint venture (353,117) -
Loss on disposition of assets (104,106) (36,798)
------- ------
Total Other Income (Expense) (400,979) (115,274)
------- -------
NET LOSS (1,894,749) (2,157,704)
--------- ---------
OTHER COMPREHENSIVE INCOME
Foreign currency adjustments 14,664 23,755
------ ------
COMPREHENSIVE LOSS $(1,880,085) $(2,133,949)
========= =========
BASIC LOSS PER SHARE $ (0.06) $ (0.10)
==== ====
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 30,111,107 22,262,795
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 44
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, 1996 17,404,481 $17,405 $17,759,504 $ - $(18,469,043)
(Previously reported)
Correction of Error (Note 12) 596,001 596 (527,011) - 527,607
Restated balance,
December 31, 1996 16,808,480 16,809 17,232,493 - -
Common stock issued for cash
at an average price of $0.21
per share 3,533,335 3,533 726,467 - -
Conversion of IEI Canada, Inc.
Class A-special shares into
IEI common shares (Note 8) 2,163,917 2,164 (2,164) - -
Common stock issued for
services rendered at an
average price of $0.18 per
share 2,188,143 2,188 384,602 - -
Additional capital contributed - - 12,143 - -
Currency translation adjustment - - - 23,755 -
Net loss for the year ended
December 31, 1997 - - - - (2,157,704)
---------- ------- ---------- ------ ----------
Balance, December 31, 1997 24,693,875 24,604 18,353,541 23,755 (20,099,140)
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)
========== ====== ========== ====== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 45
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
1998 1997
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,894,749) $(2,157,704)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 108,677 202,017
Stock issued for services 21,425 386,790
Loss on investment in joint venture 305,117 -
Loss on disposition of assets 104,106 36,798
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 6,318 (40,841)
(Increase) decrease in deposits and
prepaid expenses (10,740) 10,842
(Increase) decrease in restricted cash (40,669) -
Increase (decrease) in accounts payable (82,952) 188,809
Increase (decrease) in unearned revenue 21,666 -
Increase (decrease) in accrued expenses 208,001 94,001
Increase (decrease) in contingent
liabilities - 82,362
--------- ---------
Net Cash (Used) by Operating Activities (1,253,800) (1,196,926)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (41,283) (424,398)
------ -------
Net Cash (Used) by Investing Activities (41,283) (424,398)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principle payments on notes payable (93,857) (115,720)
Cash received from notes payable - 983,396
Capital contributions 386,111 12,143
Issuance of common stock for cash 1,000,922 730,000
--------- ---------
Net Cash Provided by Financing Activities 1,293,176 1,609,819
NET INCREASE (DECREASE) IN CASH (1,907) (11,505)
CASH AT BEGINNING OF YEAR 14,459 25,964
------ ------
CASH AT END OF YEAR $ 12,552 $ 14,459
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 46
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Years Ended
December 31,
1998 1997
----------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ 67,223 $ 25,448
Income taxes $ - $ -
NON-CASH FINANCING ACTIVITIES:
Stock issued for services $ 21,425 $ 386,790
Stock issued in conversion of debt
to common stock $ 836,067 $ -
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 47
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The consolidated financial statements presented are those of Industrial
Ecosystems, Inc.(IEI) and its wholly-owned subsidiaries, Environmental
Protection
Company (EPC), I.E.I. Canada, Inc. (IEI Canada) and 1297833 Ontario, Ltd.
(Ontario). Collectively, they are referred to herein as the "Company". IEI was
incorporated in January, 1994 through the acquisition of Agri World Development
Corp., a dormant public company. Agri World Development Corp. later changed its
name to Industrial Ecosystems, Inc. IEI is principally a holding company but
pays operating expenses for the bioremediation business.
In March 1994, IEI acquired 100% of EPC in exchange for 7,017,300 shares of its
outstanding common stock. At the time of this acquisition, IEI was essentially
inactive. Also, the exchange of IEI's common stock for the common stock of EPC
resulted in the former stockholders of EPC obtaining control of IEI.
Accordingly, EPC became the continuing entity for accounting purposes, and the
transaction was accounted for as a recapitalization of EPC with no adjustment to
the basis of EPC's assets acquired or liabilities assumed. For legal purposes,
IEI was the surviving entity. EPC is in the bioremediation business and
operates principally in New Mexico.
EPC held a minority interest in Analytica Environmental Laboratory. Analytica
Environmental Laboratory was later dissolved. Subsequently, EPC voluntarily
chose to satisfy some of the outstanding payroll liabilities of Analytica
Environmental Laboratory.
Effective June 30, 1994, IEI, through its wholly-owned subsidiary, IEI Canada,
Inc. (a Canadian Corporation) acquired 100% of I.T.E. Ecosystems, Inc., Amlin
Grain Roasting, Inc. and a minority interest in N-Viro Systems Canada, Inc. The
operations of I.T.E. Ecosystems, Inc. and Amlin Grain Roasting, Inc. were
discontinued during 1994. In September 1994, IEI incorporated three wholly
- -owned
subsidiaries called RFP Management & Development Corp., ROP Management &
Development Corp. and IEI Canada, Inc. In December of 1996, IEI incorporated a
separate wholly-owned subsidiary called ROP Liquid Feed Corp. In March 1998,
IEI
created an entity (merger company) for the purpose of merging IEI Canada, Inc.,
ROP Liquid Feed Corp., ROP Management & Development Corp. and RFP Management &
Development Corp. into that entity. At the same time, the merger company was
merged into a new entity named IEI Canada, Inc. The assets and certain
liabilities of all of these companies were assumed by ROP North America, LLC, a
joint venture company formed in March, 1998 (see Note 6), and the companies
operations were discontinued. The assets and liabilities were transferred to
the joint venture at the related companies' book value.
During 1998, IEI Canada, Inc. incorporated two separate wholly-owned
subsidiaries
called 1297833 Ontario, Ltd. and 1303873 Ontario, Ltd. 1297833 Ontario, Ltd.
was
organized to be in the bioremediation business. Neither 1297833 Ontario, Ltd.
or 1303873 Ontario, Ltd. have had operations.
b. Accounting Methods
The Company's consolidated financial statements are prepared using the accrual
method of accounting. The Company has elected a December 31, year end.
<PAGE>
<PAGE> 48
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
c. Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with maturities
of three months or less at the time of acquisition.
d. Basic Loss Per Share
The computations of basic loss per share of common stock are based on the
weighted average number of common shares outstanding during the period of the
consolidated financial statements. Common stock equivalents, consisting of
stock
options and the IEI Canada Inc. class A-special shares, have not been included
in the calculation as their effect is antidilutive for the periods presented.
e. Change in Accounting Principle
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income" during the year ended December 31, 1998. SFAS
No. 130 established standards for reporting and display of comprehensive income
(loss) and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. This statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a balance sheet. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Company has retroactively applied the
provisions of this new standard by showing the other comprehensive income (loss)
for all years presented.
f. Unearned Revenue
The Company entered into a one-year consulting agreement with the JV (see Note
6) whereby the Company would receive a total of $200,000 for management
consulting. During 1998, the Company received a payment of $100,000 under the
consulting agreement. The balance was payable based on meeting certain
performance standards. At December 31, 1998, the Company had not met the
performance standards and was not entitled to the additional $100,000 under the
consulting agreement. Because the term of the agreement went from March, 1998
to March, 1999, the Company had unearned revenue of $21,666 as of December 31,
1998.
<PAGE>
<PAGE> 49
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
g. Property and Equipment
Property and equipment is recorded at cost. Major additions and improvement are
capitalized. The cost and related accumulated depreciation of equipment retired
or sold are removed from the accounts and any differences between the
undepreciated amount and the proceeds from the sale are recorded as gain or loss
on sale of equipment. Depreciation is computed using the straight-line method
over the estimated useful life of the assets as follows:
Description Estimated Useful Life
------------------------ ---------------------
Furniture and fixtures 3 to 7 years
Machinery and equipment 5 to 7 years
Computers 5 years
Vehicles 5 years
Leasehold improvements 15 years
Buildings 15 years
h. Restricted Cash
The Company holds a certificate of deposit with a Canadian bank in the amount of
$40,669 which is being used as security and collateral on a demand note with the
same bank. The cash cannot be withdrawn from the CD until after the demand note
is paid in full.
I. Accounts Receivable
Accounts receivable consists almost entirely of amounts due from a major oil
company. Those outstanding invoices are considered to be fully collectible and
no allowance for doubtful accounts has been recorded.
j. Provision For Taxes
At December 31, 1998, the Company has an accumulated deficit of $21,993,889
which
includes net operating loss carryforwards that may be offset against future
taxable income through 2013. No tax benefit has been reported in the
consolidated financial statements because the Company believes there is a 50% or
greater chance the net operating loss carryforwards will not be used.
Accordingly, the potential tax benefits of the net operating loss carryforwards
are offset by a valuation allowance of the same amount.
k. Principles of Consolidation
The consolidated financial statements include those of Industrial Ecosystems,
Inc. and its wholly-owned subsidiaries.
All material intercompany accounts and transactions have been eliminated.
<PAGE>
<PAGE> 50
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
l. Statement of Cash Flows
For the Company's foreign subsidiary, (IEI Canada and its subsidiaries), the
functional currency has been determined to be the local currency. Accordingly,
assets and liabilities are translated at year-end exchange rates, and operating
statement items are translated at average exchange rates prevailing during the
year. The resultant cumulative translation adjustments to the assets and
liabilities are recorded as a separate component of stockholders' equity.
Exchange adjustments resulting from foreign currency transactions are included
in the determination of net income (loss). Such amounts are immaterial for all
years presented.
In accordance with Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows, " cash flows from the Company's foreign subsidiaries
are calculated based upon the local currencies. As a result, amounts related to
assets and liabilities reported on the consolidated statements of cash flows
will not necessarily agree with changes in the corresponding balances on the
balance sheets.
m. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
n. Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998:
Furniture and fixtures $ 35,535
Machinery and equipment 429,005
Computers 14,875
Vehicles 70,900
Leasehold improvements 10,340
Building 14,905
Land 31,561
-------
607,121
Accumulated depreciation (331,148)
-------
Net property and equipment $ 275,973
=======
Depreciation expense for the years ended December 31, 1998 and 1997 was $108,677
and $202,017, respectively.
<PAGE>
<PAGE> 51
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998
NOTE 3 - RELATED PARTY TRANSACTIONS
As of December 31, 1998, the Company owed $14,286 to an employee of the joint
venture. This amount represents an advance made to the Company during 1996. The
amount is non-interest bearing and due on demand.
The Company also has been involved in a number of related party transactions.
The most significant of those transactions are summarized as follows:
The Company has made disbursements and issued shares of its common stock to
certain officers and directors of the Company, relatives of these officers and
directors and companies owned by these officers and directors, although those
individuals are no longer officers or directors of the Company. Most of these
funds have been paid for services rendered or for payments related to
construction of the Company's facilities and equipment. Any disbursements made
to related parties for which there was no supporting documentation were recorded
by the Company as compensation to the related parties.
The Company's president, from time to time, received payments in the form of
loans that have been repaid without interest. The Company's president also
advanced funds to the Company from time to time in order for the Company to meet
its ongoing needs. These advances were also repaid without interest.
The Company's transfer agent as of December 31, 1998, is controlled by a
minority
shareholder who has received options, recorded at their fair market value on the
date of issuance, from the Company for consulting services. As of December 31,
1998, the Company owed its transfer agent a total of $25,000. The minority
shareholder has played a significant role in obtaining professional consulting,
accounting and legal services for the Company in helping the Company try to
become fully reporting with the SEC.
A former director of the Company has also controlled an entity that served as
the Company's transfer agent prior to the current transfer agent taking over.
NOTE 4 - ACCRUED EXPENSES
Accrued expenses as of December 31, 1998 consist primarily of accrued interest
and unpaid payroll taxes, unemployment taxes, sales taxes and gross receipts
taxes due both the federal and state taxing authorities. The Company has been
delinquent on filing these tax forms and has unfiled taxes for both the 1997 and
1998 tax years. Reasonable interest and penalties have also been accrued as of
December 31, 1998. The following is a breakout of accrued expenses as of
December 31, 1998:
Accrued payroll $ 12,411
Accrued payroll taxes, penalties and interest 198,282
Accrued interest 26,400
Other 86,662
-------
Total $323,755
=======
<PAGE>
<PAGE> 52
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following at December 31, 1998:
December 31,
1998
------------
SBA note payable to a bank, interest at prime + 3%
per annum, requires monthly payments of $1,860
plus interest, matures in December, 2005,
secured by machinery, equipment and certificate
of deposit. $ 156,250
Note payable to a company, interest at 11.5% per
annum, principle and interest of $ 5,002 due
monthly, matures in June, 2000, secured by
equipment. 82,058
Other obligations 4,999
--------
Total Notes Payable 243,307
Less: Current Portion (85,902)
--------
Long-Term Notes Payable $ 157,405
========
The aggregate principal maturities of notes payable are as follows:
Year Ended
December 31, Amount
------------ ---------
1999 $ 85,902
2000 45,795
2001 22,320
2002 22,320
2003 22,320
2004 and thereafter 44,650
=======
Total $ 243,307
=======
<PAGE>
<PAGE> 53
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998
NOTE 6 - INVESTMENT IN JOINT VENTURE
During March, 1998, IEI Canada, Inc., a wholly-owned subsidiary of IEI, entered
into a joint venture agreement with JFJ Ecosystems, Inc. to form ROP North
America, LLC (the JV). The JV created a wholly-owned subsidiary called ROP
North
America, Inc. (an Ontario Corporation) which became the operating entity. As of
December 31, 1998, pursuant to a subsequent transaction, IEI Canada, Inc. has a
50% equity interest in the JV but does not have management control. The
investment is being recorded under the equity method of accounting. Because of
a significant first year loss of the JV, the investment is being recorded at
$-0-
as of December 31, 1998. The Company has the right to acquire the remaining 50%
interest in the JV on or prior to December 31, 2000 conditional on meeting
certain requirements established by the JV.
The joint venture was established to transform organic by-product from
commercial waste streams into livestock feed. This process is accomplished in
part, through the joint venture's liquid feed system. The joint venture also
raises approximately 3,000 hogs under contract. In addition, the hog farm is a
beta-site for the joint venture's liquid feed products.
On March 20, 1998, the Company entered into an equipment lease agreement with
the JV whereby the JV has agreed to lease from the Company a certain liquid feed
distribution system for $4,414 per month for a term of seven years.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
During 1997, the Company entered into a lease agreement for its office
facilities
in Pacifica, California effective May 1, 1997 and expiring May 1, 2000. The
monthly rental payment is $2,350.
The Company also has reserved and recorded contingent liabilities to individuals
who claim they are still owed although the Company issued shares of common stock
in payment of the debts. The Company has recorded a total of contingent
liabilities at December 31, 1998 of $747,819. It is currently uncertain as to
whether or not the amounts will be paid in the future and management of the
Company intends on vigorously contesting any claim that is made. It is
reasonably possible, however, that the Company will have to pay the amounts and
to be conservative, management has recorded these debts as contingent
liabilities.
Management of the Company has also incorporated numerous subsidiaries over the
past years with no real business purpose. These subsidiaries incurred various
debts that the Company may be held liable for. The Company may also be
responsible to cover certain debts incurred by the former officers and directors
of the Company that were intended to be personal debts. Current management of
the Company is uncertain as to whether the debtors are holding the Company
responsible for these debts. Management believes that the provision for
commitments and contingencies adequately covers the potential liabilities that
the Company may be held responsible for, although no accrual has been recorded
by the company as a result of the potential debts from these former officers and
directors. Management is unable to accurately estimate the potential loss and
considers the potential loss to be remote.
<PAGE>
<PAGE> 54
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
There are also certain individuals and entities that claim they have lien rights
on some or all of the Company's fixed assets. Management of the Company is
currently uncertain as to whether these individuals have a legitimate claim or
the potential liability related to these claims.
The Company is involved in certain litigation with a New Mexico limited
liability
company regarding an open account and a distribution agreement. A complaint
against the Company was filed in July 1997. The Company contends that they had
never ordered the product delivered and that the distribution agreement was
breached. The dispute is still in the discovery stage. The Company has
recorded
a contingency of $30,000 (included in the contingent liabilities of $747,819 at
December 31, 1998), although management intends on vigorously contesting the
claim.
NOTE 8 - CLASS A-SPECIAL SHARES
During 1997, the Company issued 2,163,917 shares of common stock in exchange for
the conversion of 2,163,917 shares of class A-special shares of IEI Canada,
Inc.,
a wholly-owned subsidiary of the company (by virtue of voting rights and common
stock shares). The class A-special shares were originally issued in connection
with a Global Share Purchase Agreement during 1994. Each of the original
shareholders of the class A-special shares received a warrant permitting the
exchange of the shares for an equal number of shares of the Company at any time
until 2015. A total of 4,000,000 class A-special shares were originally issued.
At December 31, 1998, 324,390 class A-special shares remain outstanding that are
convertible at the holder's option into 254,573 (post-split) shares of the
Company's common stock. These shares have been included in additional paid-in
capital of the Company until they are converted into IEI shares.
NOTE 9 - STOCK OPTIONS
On July 23, 1997, the Board of Directors agreed to issue an option to purchase
166,667 (post-split) shares of common stock at an exercise price of $0.15 per
share to an entity that provided a loan to the Company. At the time the options
were granted, the exercise price was equal to, or greater than, the prior 10-day
average trading price of the Company's shares.
On March 13, 1998, the Board of Directors agreed to issue options to various
individuals who have provided and may continue to provide consulting and other
services to the Company. Stock options for a total of 4,131,000 (post-split)
shares of common stock were granted at an exercise price of $0.225 per share.
At the time the options were granted, the exercise price was equal to, or
greater than, the prior 10-day average trading price of the Company's shares.
As of December 31, 1998, an aggregate of 4,297,667 options to purchase common
shares were outstanding with exercise prices ranging from $0.15 to $0.225 per
share. At the time the options were granted, the exercise price was equal to or
greater than the prior 10 day average trading price of the Company's shares.
<PAGE>
<PAGE> 55
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998
NOTE 9 - STOCK OPTIONS (Continued)
166,667 of the options will expire if not exercised by July 23, 2002 and 591,000
of the options will expire if not exercised by March 13, 2003. The remaining
3,540,000 options are "cashless" options and will expire if not exercised by
March 13, 2005. 3,277,667 of the options were exercisable on December 31, 1998
and the remaining 1,020,000 options become exercisable if the Company
successfully files Form 10SB with the Securities and Exchange Commission prior
to December 31, 1999.
NOTE 10 - GOING CONCERN
The Company's consolidated financial statements are prepared using generally
accepted accounting principles applicable to a going concern which contemplates
the realization of assets and liquidation of liabilities in the normal course of
business. The Company has historically incurred significant losses which have
resulted in an accumulated deficit of $21,993,889 at December 31, 1998, the
Company has a working capital deficit and limited internal financial resources.
These factors combined raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities that
might result from the outcome of this uncertainty. The Company is in the process
of trying to obtain new directors and management and focusing on additional
avenues of generating revenues sufficient to cover the operating costs. During
1998, the Company began to effect measures to reduce cash outflows and increase
working capital through the issuance of additional shares of common stock for
cash, services and conversion of debt. The Company has implemented a cash flow
plan and has developed an overall strategy and certain financing options to meet
its ongoing needs. It is the intent of management to rely upon additional equity
financing if required to sustain operations until revenues are adequate to cover
the costs.
NOTE 11 - SUBSEQUENT EVENT
Subsequent to December 31, 1998, the Company obtained a line-of-credit with a
related party for up to $750,000 at 6% interest per annum. Withdrawals from the
line-of-credit are to be authorized by an independent credit committee on a case
by case basis. Total advances from the line-of-credit through the date of our
audit report was $362,402. The line-of-credit is secured by the Company's
interest in the JV and is due and payable in full by December 31, 2000.
The Company also entered into an agreement with the JV on January 4, 1999,
whereby the joint venture partner received an immediate vesting of its 50%
membership interest in the JV and the termination of the Company's option to
reduce the joint venture partners membership interest to 19%. The joint venture
partner was also granted certain rights, subject to certain conditions, to
exercise an option to exchange their membership interest in the JV for that
number of shares of the Company's common stock which would make the joint
venture
partner a 33.3% owner of the total outstanding common shares of the Company's
stock issued and outstanding at the time of exercise.
NOTE 12 - CORRECTION OF AN ERROR
Subsequent to the issuance of the December 31, 1998 consolidated financial
statements, the Company was able to recover a total of 596,001 shares of its
<PAGE> 56
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998
NOTE 12 - CORRECTION OF AN ERROR(Continued)
outstanding common stock that had originally been recorded by the Company during
1995 and 1996 at a total cost of $527,607. The shares were determined to have
been issued in error in that no consideration was ever received for the shares.
The Company is treating these shares now as having never been issued.
Consequently, an adjustment has been made to correctly reflect the total
outstanding shares as of December 31, 1998. The adjustment has been reflected
in the accompanying consolidated financial statements although the correction
had no effect on the net loss for the years ended December 31, 1998 or 1997.
[the remainder of this page is intentionally left blank]
<PAGE>
<PAGE> 57
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
------
June 30, December 31,
1999 1998
------------ ------------
(Unaudited) (As Restated
CURRENT ASSETS See Note 13)
Cash and cash equivalents $ 231,981 $ 12,552
Restricted cash (Note 1) 42,431 40,669
Accounts receivable (Note 1) 123,558 35,079
Prepaid expenses 43,529 -
------------ ------------
Total Current Assets 441,499 88,300
------------ ------------
PROPERTY AND EQUIPMENT (Net) (Notes 1 and 2) 245,276 275,973
------------ ------------
OTHER ASSETS
Investment in joint venture (Note 7) - -
Deposits 21,606 10,740
------------ ------------
Total Other Assets 21,606 10,740
------------ ------------
TOTAL ASSETS $ 708,381 $ 375,013
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 58
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
June 30, December 31,
1999 1998
------------ ------------
(Unaudited) (As Restated
CURRENT LIABILITIES See Note 13)
Accounts payable $ 75,326 $ 356,890
Accrued expenses (Note 4) 340,216 323,755
Unearned revenue (Note 1) - 21,666
Due to related party (Note 3) 9,286 14,286
Notes payable, current portion (Note 5) 33,861 85,902
------------ ------------
Total Current Liabilities 458,689 802,499
------------ ------------
LONG-TERM DEBT
Note payable, related party (Note 6) 750,000 -
Notes payable (Note 5) 167,353 157,405
------------ ------------
Total Long-Term Debt 917,353 157,405
------------ ------------
Total Liabilities 1,376,042 959,904
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 8) 500,232 747,819
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; 100,000,000 shares authorized
of $0.001 par value, 33,000,905 and
33,596,906 shares issued and outstanding,
respectively 35,501 33,001
Additional paid-in capital 20,837,259 20,589,759
Other comprehensive income 45,088 38,419
Accumulated deficit (22,085,741) (21,993,889)
------------ ------------
Total Stockholders' Equity (Deficit) (1,167,893) (1,332,710)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 708,381 $ 375,013
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PAGE> 59
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C>(As Restated <C>
REVENUES See Note 13)
Net sales $ 204,059 $ 79,956 $ 334,892 $ 255,584
Direct costs 125,390 58,869 212,107 163,844
---------- ---------- ---------- ----------
Gross Profit 78,669 21,087 122,786 91,740
---------- ---------- ---------- ----------
EXPENSES
General and administrative 311,446 198,070 547,512 1,026,008
Depreciation and amortization 24,865 27,784 49,528 55,726
---------- ---------- ---------- ----------
Total Expenses 336,311 225,854 597,040 1,081,734
---------- ---------- ---------- ----------
Loss From Operations (257,642) (204,767) (474,255) (989,994)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Other income 5,630 38,130 32,499 41,463
Interest income 3 103 115 224
Interest expense (15,715) (7,705) (24,739) (17,166)
Loss on investment - (32,013) - (71,071)
Loss on disposition of assets - - - (14,311)
---------- ---------- ---------- ----------
Total Other Income (Expense) (10,082) (1,485) 7,875 (60,861)
---------- ---------- ---------- ----------
NET LOSS BEFORE EXTRAORDINARY ITEMS (267,724) (206,252) (466,380) (1,050,855)
---------- ---------- ---------- ----------
EXTRAORDINARY ITEMS
Debt forgiveness (Note 8) 48,571 - 374,528 -
---------- ---------- ---------- ---------
Total Extraordinary Items 48,571 - 374,528 -
---------- ---------- ---------- ----------
NET LOSS $ (219,153) $ (206,252) $ (91,852) $(1,050,855)
========== ========== ========== ==========
OTHER COMPREHENSIVE INCOME
Foreign currency adjustments 3,321 - 6,669 -
---------- ---------- ---------- ----------
NET COMPREHENSIVE LOSS $ (215,832) $ (206,252) $ (85,183) $(1,050,855)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 60
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(As Restated
See Note 13)
BASIC EARNINGS (LOSS) PER SHARE
Before extraordinary items $ (0.00) $ (0.01) $ (0.01) $ (0.04)
Extraordinary items 0.00 - 0.01 -
---------- ---------- ---------- ----------
BASIC EARNINGS (LOSS) PER SHARE $ 0.00 $ (0.01) $ 0.00 $ (0.04)
========== ========== ========== ==========
FULLY DILUTED EARNINGS (LOSS) PER SHARE
Before extraordinary items $ (0.00) $ (0.01) $ (0.01) $ (0.04)
Extraordinary items 0.00 - 0.01 -
---------- ---------- ---------- ----------
FULLY DILUTED EARNINGS (LOSS) PER SHARE $ 0.00 $ (0.01) $ 0.00 $ (0.04)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 61
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 25,289,876 $ 25,290 $ 18,880,552 $ 23,755 $ (20,626,747)
(Previously reported)
Correction of Error (Note 13) 596,001 596 (527,011) - 527,607
Restated balance,
December 31, 1997 24,693,875 24,694 18,353,541 23,755 (20,099,140)
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 33,597 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) - - - 6,669 -
Net loss for the six
months ended June 30, 1999
(Unaudited) - - - - (91,852)
----------- -------- ------------ ----------- ------------
Balance, June 30, 1999
(Unaudited) 35,500,905 $ 35,501 $ 20,837,259 $ 45,088 $(22,085,741)
=========== ======== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 62
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(As Restated
See Note 13)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (219,153) $ (206,252) $ (91,852) $(1,050,855)
Adjustments to reconcile net income to net
cash (used) by operating activities:
Debt forgiveness (48,571) - (374,528) -
Loss on investment in joint venture - 32,013 - 71,071
Loss on disposition of assets - - - 14,311
Depreciation and amortization 24,865 27,784 49,528 55,726
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (25,455) (112,710) (88,479) (16,043)
(Increase) decrease in deposits and prepaid
expenses (10,666) 104,906 (54,395) (9,400)
Increase (decrease) in accounts payable (81,787) (173,786) (281,564) (525,253)
Increase (decrease) in unearned revenue - - (21,666) -
Increase (decrease) in contingent liabilities 158,816 207,574 133,610 76,668
Increase (decrease) in accrued expenses (34,293) 250,735 16,461 50,486
---------- ---------- ---------- ----------
Net Cash (Used) by Operating Activities (236,244) 130,264 (712,885) (1,333,289)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets - (70,141) (18,831) (104,064)
---------- ---------- ---------- ----------
Net Cash (Used) by Investing Activities - (70,141) (18,831) (104,064)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for cash 250,000 - 250,000 1,000,992
Additional capital contributed - - - 386,111
Proceeds from notes payable 192,463 4,271 750,000 100,341
Principle payments on notes payable (12,936) (16,976) (47,093) (16,976)
---------- ---------- ---------- ----------
Net Cash Provided by Financing Activities 429,527 (12,705) 952,907 1,470,398
========== ========== ========== ==========
NET INCREASE (DECREASE) IN CASH 193,283 47,418 221,191 33,045
CASH, BEGINNING OF PERIOD 81,120 86 53,221 14,459
---------- ---------- ---------- ----------
CASH, END OF PERIOD $ 274,412 $ 47,504 $ 274,412 $ 47,504
========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ 19,615 $ 10,871 $ 28,639 $ 18,940
Income taxes $ - $ - $ - $ -
NON-CASH FINANCING ACTIVITIES:
Common stock issued for services $ - $ - $ - $ -
Common stock issued on conversion
debt to common stock $ - $ 240,000 $ - $ 240,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 63
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The consolidated financial statements presented are those of Industrial
Ecosystems, Inc.(IEI) and its wholly-owned subsidiaries, Environmental
Protection
Company (EPC), I.E.I. Canada, Inc. (IEI Canada) and 1297833 Ontario, Ltd. and
1303873 Ontario, Ltd. Collectively, they are referred to herein as the
"Company".
IEI was incorporated in January, 1994 through the acquisition of Agri World
Development Corp., a dormant public company. Agri World Development Corp. later
changed its name to Industrial Ecosystems, Inc. IEI is principally a holding
company but pays operating expenses for the bioremediation business.
In March 1994, IEI acquired 100% of EPC in exchange for 7,017,300 shares of its
outstanding common stock. At the time of this acquisition, IEI was essentially
inactive. Also, the exchange of IEI's common stock for the common stock of EPC
resulted in the former stockholders of EPC obtaining control of IEI.
Accordingly, EPC became the continuing entity for accounting purposes, and the
transaction was accounted for as a recapitalization of EPC with no adjustment to
the basis of EPC's assets acquired or liabilities assumed. For legal purposes,
IEI was the surviving entity. EPC is in the bioremediation business and operates
principally in New Mexico.
Effective June 30, 1994, IEI, through its wholly-owned subsidiary, IEI Canada,
Inc. (a Canadian Corporation) acquired 100% of I.T.E. Ecosystems, Inc., Amlin
Grain Roasting, Inc. and a minority interest in N-Viro Systems Canada, Inc. The
operations of I.T.E. Ecosystems, Inc. and Amlin Grain Roasting, Inc. were
discontinued during 1994. In September 1994, IEI incorporated three wholly-owned
subsidiaries called RFP Management & Development Corp., ROP Management &
Development Corp. and IEI Canada, Inc. In December of 1996, IEI incorporated a
separate wholly-owned subsidiary called ROP Liquid Feed Corp. In March 1998, IEI
created an entity (merger company) for the purpose of merging IEI Canada, Inc.,
ROP Liquid Feed Corp., ROP Management & Development Corp. and RFP Management &
Development Corp. into that entity. At the same time, the merger company was
merged into a new entity named IEI Canada, Inc. Certain assets and certain
liabilities of all of these companies were assumed by ROP North America, LLC, a
joint venture company formed in March, 1998 (see Note 7), and the companies
operations were discontinued. The assets and liabilities were transferred to the
joint venture at the related companies' book value.
During 1998, IEI Canada, Inc. incorporated two separate wholly-owned
subsidiaries
called 1297833 Ontario, Ltd. and 1303873 Ontario, Ltd. 1297833 Ontario, Ltd. was
organized to be in the bioremediation business. Neither 1297833 Ontario, Ltd.
or 1303873 Ontario, Ltd. have had any revenue since organization.
b. Accounting Methods
The Company's consolidated financial statements are prepared using the accrual
method of accounting. The Company has elected a December 31, year end.
<PAGE>
<PAGE> 64
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
c. Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with maturities
of three months or less at the time of acquisition.
d. Basic and Fully Diluted Earnings (Loss) Per Share
The computations of basic earnings (loss) per share of common stock are based on
the weighted average number of common shares outstanding during the period of
the consolidated financial statements. Common stock equivalents, consisting of
stock options and the IEI Canada Inc. class A-special shares, have been included
in the fully diluted earnings (loss) per share for the periods presented.
e. Change in Accounting Principle
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share" during the year ended December 31, 1998. In accordance with
SFAS No. 128, diluted earnings per share must be calculated when an entity has
convertible securities, warrants, options, and other securities that represent
potential common shares. The purpose of calculating diluted earnings (loss) per
share is to show (on a pro forma basis) per share earnings or losses assuming
the exercise or conversion of all securities that are exercisable or convertible
into common stock and that would either dilute or not affect basis EPS. As
permitted by SFAS No. 128, the Company has retroactively applied the provisions
of this new standard by showing the fully diluted earnings (loss) per common
share for all periods presented.
The Company also adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income" during the year ended December 31, 1998.
SFAS No. 130 established standards for reporting and display of comprehensive
income (loss) and its components (revenues, expenses, gains and losses) in a
full
set of general purpose financial statements. This statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a balance sheet. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Company has retroactively applied the
provisions of this new standard by showing the other comprehensive income (loss)
for all periods presented.
f. Unearned Revenue
The Company entered into a one-year consulting agreement with the JV (see Note
7) whereby the Company would receive a total of $200,000 for management
consulting. During 1998, the Company received a payment of $100,000 under the
consulting agreement. The balance was payable based on meeting certain
performance standards. At December 31, 1998, the Company had not met the
performance standards and was not entitled to the additional $100,000 under the
consulting agreement. Because the term of the agreement went from March, 1998
to March, 1999, the Company had unearned revenue of $0 and $21,666 as of June
30, 1999 and December 31, 1998, respectively.
<PAGE>
<PAGE> 65
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
g. Property and Equipment
Property and equipment is recorded at cost. Major additions and improvement are
capitalized. The cost and related accumulated depreciation of equipment retired
or sold are removed from the accounts and any differences between the
undepreciated amount and the proceeds from the sale are recorded as gain or loss
on sale of equipment. Depreciation is computed using the straight-line method
over the estimated useful life of the assets as follows:
Description Estimated Useful Life
------------------------ ---------------------
Furniture and fixtures 3 to 7 years
Machinery and equipment 5 to 7 years
Computers 5 years
Vehicles 5 years
Leasehold improvements 15 years
Buildings 15 years
h. Restricted Cash
The Company holds a certificate of deposit with a Canadian bank in the amount of
$42,431 and $40,669 as of June 30, 1999 and December 31, 1998, respectively,
which is being used as security and collateral on a demand note with the same
bank. The cash cannot be withdrawn from the CD until after the demand note is
paid in full.
i. Accounts Receivable
Accounts receivable consists almost entirely of amounts due from a major oil
company. Those outstanding invoices are considered to be fully collectible and
no allowance for doubtful accounts has been recorded.
j. Provision For Taxes
At December 31, 1998, the Company has an accumulated deficit of $21,993,889
which
includes net operating loss carryforwards that may be offset against future
taxable income through 2013. No tax benefit has been reported in the
consolidated financial statements because the Company believes there is a 50% or
greater chance the net operating loss carryforwards will not be used.
Accordingly, the potential tax benefits of the net operating loss carryforwards
are offset by a valuation allowance of the same amount.
k. Principles of Consolidation
The consolidated financial statements include those of Industrial Ecosystems,
Inc. and its wholly-owned subsidiaries.
All material intercompany accounts and transactions have been eliminated.
<PAGE>
<PAGE> 66
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1998 and December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
l. Statement of Cash Flows
For the Company's foreign subsidiary, (IEI Canada and its subsidiaries), the
functional currency has been determined to be the local currency. Accordingly,
assets and liabilities are translated at year-end exchange rates, and operating
statement items are translated at average exchange rates prevailing during the
year. The resultant cumulative translation adjustments to the assets and
liabilities are recorded as a separate component of stockholders' equity.
Exchange adjustments resulting from foreign currency transactions are included
in the determination of net income (loss). Such amounts are immaterial for all
periods presented.
In accordance with Statement of Financial Accounting Standards No. 95,
"Statement
of Cash Flows," cash flows from the Company's foreign subsidiaries are
calculated
based upon the local currencies. As a result, amounts related to assets and
liabilities reported on the consolidated statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheets.
m. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
n. Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred.
o. Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements include all of the
adjustments which, in the opinion of management, are necessary for a fair
presentation. Such adjustments are of a normal, recurring nature.
<PAGE>
<PAGE> 67
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Furniture and fixtures $ 35,535 $ 35,535
Machinery and equipment 435,005 429,005
Computers 14,875 14,875
Vehicles 81,400 70,900
Leasehold improvements 4,033 10,340
Building 14,905 14,905
Land 40,199 31,561
------------ ------------
625,952 607,121
Accumulated depreciation (380,676) (331,148)
------------ ------------
Net property and equipment $ 245,276 $ 275,973
============ ============
NOTE 3 - RELATED PARTY TRANSACTIONS
As of June 30, 1999 and December 31, 1998, the Company owed $9,286 and $14,286,
respectively, to an employee of the joint venture. This amount represents an
advance made to the Company during 1996. The amount is non-interest bearing and
due on demand.
The Company also has been involved in a number of related party transactions.
The most significant of those transactions are summarized as follows:
The Company has made disbursements and issued shares of its common stock to
certain officers and directors of the Company, relatives of these officers and
directors and companies owned by these officers and directors, although those
individuals are no longer officers or directors of the Company. Most of these
funds have been paid for services rendered or for payments related to
construction of the Company's facilities and equipment. Any disbursements made
to the related parties for which there was no supporting documentation were
recorded by the Company as compensation to the related party.
The Company's former president, from time to time, received payments in the form
of loans that have been repaid without interest. The Company's former president
also advanced funds to the Company from time to time in order for the Company to
meet its ongoing needs. These advances were also repaid without interest.
The Company's transfer agent as of December 31, 1998, was controlled by a
minority shareholder who has received options recorded at their fair market
value
on the date of issuance from the Company for consulting services. As of June 30,
1999 and December 31, 1998, the Company owed its transfer agent a
<PAGE>
<PAGE> 68
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 3 - RELATED PARTY TRANSACTIONS (Continued)
total of $0 and $25,000, respectively. The minority shareholder has played a
significant role in obtaining professional consulting, accounting and legal
services for the Company in helping the Company try to become fully reporting
with the SEC.
From inception through mid 1996, a former director of the Company had also
controlled an entity that served as the Company's transfer agent. At April 1,
1999, the Company engaged Atlas Stock Transfer, Salt Lake City, Utah, as its
transfer agent.
NOTE 4 - ACCRUED EXPENSES
Accrued expenses as of June 30, 1999 and December 31, 1998 consist primarily of
accrued interest and unpaid payroll taxes, unemployment taxes, sales taxes and
gross receipts taxes due both the federal and state taxing authorities. The
Company has been delinquent on filing these tax forms and has unfiled taxes for
both the 1997 and 1998 tax years. Reasonable interest and penalties have also
been accrued as of June 30, 1999 and December 31, 1998.
Following is the breakout
of accrued expenses as of June 30, 1999 and December 31, 1998:
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Accrued payroll $ 34,542 $ 12,411
Accrued payroll taxes, penalties and interest 198,282 198,282
Accrued interest 22,500 26,400
Other 89,892 86,662
------------ ------------
$ 340,216 $ 323,755
============ ============
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following:
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Note payable to a bank, interest at prime + 3%
per annum, requires monthly payments of $1,860
plus interest, matures in December, 2005,
secured by machinery, equipment and certificate
of deposit. $ 145,090 $ 156,250
Note payable to a company, interest at 11.5% per
annum, principle and interest of $ 5,002 due
monthly, matures in June, 2000, secured by
equipment. 56,124 82,058
Other obligations - 4,999
------------ ------------
Total Notes Payable 201,214 243,307
Less: Current Portion (33,861) (85,902)
------------ ------------
Long-Term Notes Payable $ 167,353 $ 157,405
============ ============
<PAGE> 69
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
The aggregate principal maturities of notes payable are as follows:
Year Ended
December 31, Amount
------------ ---------
1999 $ 85,902
2000 45,795
2001 22,320
2002 22,320
2003 22,320
2004 and thereafter 44,650
--------
Total $ 243,307
========
NOTE 6 - NOTES PAYABLE - RELATED PARTY
During the six months ended June 30, 1999, the Company obtained a line-of-credit
with a related party for up to $750,000 at 6% interest per annum. Withdrawals
from the line-of-credit are to be authorized by an independent credit committee
on a case-by-case basis. Total advances from the line-of-credit through June 30,
1999 was $750,000. The line-of-credit is secured by the Company's interest in
the JV and is due and payable in full by December 31, 2000.
NOTE 7 - INVESTMENT IN JOINT VENTURE
During March, 1998, IEI Canada, Inc., a wholly-owned subsidiary of IEI, entered
into a joint venture agreement with JFJ Ecosystems, Inc. to form ROP North
America, LLC (the JV). The JV created a wholly-owned subsidiary called ROP North
America, Inc. (an Ontario Corporation) which became the operating entity. As of
December 31, 1998, pursuant to a subsequent transaction, IEI Canada, Inc. has a
50% equity interest in the JV but does not have management control. The
investment is being recorded under the equity method of accounting. Because of
a significant first year loss of the JV, the investment is being recorded at
$-0-
as of December 31, 1998. The Company has the right to acquire the remaining 50%
interest in the JV on or prior to December 31, 2000 conditional on meeting
certain requirements established by the JV.
The joint venture was established to transform organic by-product from
commercial
waste streams into livestock feed. This process is accomplished in part, through
the joint venture's liquid feed system. The joint venture also raises
approximately 3,000 hogs under contract. In addition, the hog farm is a beta-
site for the joint venture's liquid feed products.
On March 20, 1998, the Company entered into an equipment lease agreement with
the JV whereby the JV has agreed to lease from the Company a certain liquid feed
distribution system for $4,414 per month for a term of seven years.
The Company also entered into an agreement with the JV on January 4, 1999,
whereby the joint venture partner received an immediate vesting of its 50%
membership interest in the JV and the termination of the Company's option to
reduce the joint venture partners membership interest to 19%. The joint
<PAGE>
<PAGE> 70
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 7 - INVESTMENT IN JOINT VENTURE (CONTINUED)
venture partner was also granted certain rights, subject to certain conditions,
to exercise an option to exchange their membership interest in the JV for that
number of shares of the Company's common stock which would make the joint
venture
partner a 33.3% owner of the total outstanding common shares of the Company's
stock issued and outstanding at January 4, 1999.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Currently, the Company entered into a month to month lease agreement for its
office facilities in Pacifica, California. The monthly rental payment is $1,900.
The Company also has reserved and recorded contingent liabilities to individuals
who claim they are still owed although the Company issued shares of common stock
in payment of the debts. The Company has recorded a total of contingent
liabilities at June 30, 1999 and December 31, 1998 of $500,232 and $747,819,
respectively. During the six months ended June 30, 1999, $25,962 was paid by the
Company and $374,528 of the contingent liabilities were settled through a full
release by the respective creditors. Corresponding income from the debt
forgiveness has been recorded in the accompanying financial statements for the
six months ended June 30, 1999. Additional contingent liabilities of $152,903
were recorded by the Company during the six months ended June 30, 1999. It is
currently uncertain as to whether or not the remaining amounts will be paid in
the future and management of the Company intends on vigorously contesting any
claim that is made. It is reasonably possible, however, that the Company will
have to pay the amounts and to be conservative, management has recorded these
possible debts as contingent liabilities.
The Company is involved in certain litigation with a New Mexico limited
liability
company regarding an open account and a distribution agreement. A complaint
against the Company was filed in July 1997. The Company contends that they had
never ordered the product delivered and that the distribution
agreement was breached. The Company has recorded a contingency of $75,000 and
$30,000 (included in contingent liabilities of $500,232 and $747,819 at June 30,
1999 and December 31, 1998, respectively), although management intends on
vigorously contesting the claim.
The Company is also involved in threatened litigation with Middlemarch Farms,
Ltd. (Middlemarch), a Canadian company, whereby Middlemarch is claiming a
security interest in certain property transferred to the joint venture during
March 1998. Middlemarch is claiming that there is an outstanding balance due of
$230,300 plus interest. The property subject to the security interest is
comprised of the assets and liabilities which were transferred to the joint
venture in March 1998.
The Company claims that the amount has been paid but has recorded a contingent
liability for the claimed amount (included in contingent liabilities of $500,232
and $747,819 at June 30, 1999 and December 31, 1998, respectively). If
Middlemarch proceeds with its claim, the Company may be involved in litigation
in regards to the circumstances surrounding the creation of the claimed interest
and the payment of the debt.
<PAGE>
<PAGE> 71
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 9 - CLASS A-SPECIAL SHARES
During 1997, the Company issued 2,163,917 shares of common stock in exchange for
the conversion of 2,163,917 shares of class-A special shares of IEI Canada,
Inc.,
a wholly owned subsidiary of the Company (by virtue of voting rights and common
stock shares). The class-A special shares were originally issued in connection
with a Global Share Purchase Agreement during 1994. Each of the original
shareholders of the class-A special shares received a warrant permitting the
exchange of the shares for an equal number of shares of the Company at any time
until 2015. A total of 4,000,000 class-A shares were originally issued.
At June 30, 1999 and December 31, 1998, 324,390 class A-special shares remain
outstanding that are convertible at the holder's option into 254,573 (post
split)
shares of the Company's common stock. These shares have been included in
additional paid-in capital of the Company until they are converted into IEI
shares.
NOTE 10 - STOCK OPTIONS
On July 23, 1997, the Board of Directors agreed to issue an option to purchase
166,667 (post-split) shares of common stock at an exercise price of $0.15 per
share to an entity that provided a loan to the Company. At the time the options
were granted the exercise price was equal to or greater than the prior 10-day
average trading price of the Company's shares.
On March 13, 1998, the Board of Directors agreed to issue options to various
individuals who have provided and may continue to provide consulting and other
services to the Company. Stock options for a total of 4,131,000 (post-split)
shares of common stock were granted at an exercise price of $0.225 per share. At
the time the options were granted, the exercise price was equal to or greater
than the prior 10 day average trading price of the Company's shares.
As of December 31, 1998, an aggregate of 4,297,667 options to purchase common
shares were outstanding with exercise prices ranging from $0.15 to $0.225 per
share. At the time the options were granted, the exercise price was equal to or
greater than the prior 10 day average trading price of the Company's shares.
166,667 of the options will expire if not exercised by July 23, 2002 and 591,000
of the options will expire if not exercised by March 13, 2003. The remaining
3,540,000 options are "cashless" options and will expire if not exercised by
March 13, 2005. 3,277,667 of the options were exercisable on December 31, 1998
and the remaining 1,020,000 options became exercisable if the Company
successfully files Form 10SB with the Securities and Exchange Commission prior
to December 31, 1999.
In May 1999, the Board of Directors of the Company agreed to issue 225,000
options, exercisable at $1.00 per share and expiring on May 31, 2003, to an
unaffiliated third party in settlement of an outstanding lease obligation for
one of its Canadian subsidiaries. The exercise price for the options was
determined by negotiations between the parties.
In April 1999 the Company issued 720,000 options exercisable at $0.16 per share
and expiring on April 30, 2004. In June 1999, the Company issued an additional
400,000 options exercisable at $0.20 per share and expiring on June 3, 2004. The
720,000 options and the 400,000 shares were issued pursuant to the Company's
1999
Stock Option and Award Plan and the exercise price of the respective options is
equal to or greater than the prior 10 day average trading price of the Company's
shares.
<PAGE>
<PAGE> 72
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 11 - GOING CONCERN
The Company's consolidated financial statements are prepared using generally
accepted accounting principles applicable to a going concern which contemplates
the realization of assets and liquidation of liabilities in the normal course of
business. The Company has historically incurred significant losses which have
resulted in an accumulated deficit of $21,993,889 at December 31, 1998, a
working
capital deficit and limited internal financial resources. These factors combined
raise substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result from
the outcome of this uncertainty. It is the intent of management to rely upon
additional equity financing if required to sustain operations until revenues are
adequate to cover the costs. During 1998, the Company began to effect measures
to reduce cash outflows and increase working capital through the issuance of
additional shares of common stock for cash, services, and conversion of debt.
The Company has implemented a cash flow plan and has developed an overall
strategy and certain financing options to meet its ongoing needs. It is the
intent of management to rely upon additional equity financing if required to
sustain operations until revenues are adequate to cover the costs.
NOTE 12 - SUBSEQUENT EVENTS
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 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.
NOTE 13 - CORRECTION OF AN ERROR
Subsequent to the issuance of the December 31, 1998 consolidated financial
statements, the Company was able to recover a total of 596,001 shares of its
outstanding common stock that had originally been recorded by the Company during
1995 and 1996 at a total cost of $527,607. The shares were determined to have
been issued in error in that no consideration was ever received for the shares.
The Company is treating these shares now as having never been issued.
Consequently, an adjustment has been made to correctly reflect the total
outstanding shares as of December 31, 1998, and to correctly reflect the net
income (loss) for the six months ended June 30, 1999.
<PAGE>
<PAGE> 73
PART III
ITEM 1. INDEX TO EXHIBITS
Copies of the following documents are included as exhibits to this amended
Form 10SB pursuant to Item 601 of Regulation SB.
SEC
Exhibit Reference
No. No. Title of Document
- ------- --------- -----------------
27 27 Financial Data Schedule
ITEM 2. SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
INDUSTRIAL ECOSYSTEMS, INC.
DATED: November 5, 1999 /S/ Tom Jarnagin, President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,552
<SECURITIES> 0
<RECEIVABLES> 35,079
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 88,300
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0
0
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<CHANGES> 14,664
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<EPS-BASIC> (0.06)
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</TABLE>
