<PAGE> 1
Date Filed: March 1, 2000 SEC File No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
INDUSTRIAL ECOSYSTEMS, INC.
----------------------------------------------
(Name of small business issuer in its Charter)
Utah 94-3200034
- ------------------------------ ----------------------
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2040 West Broadway, Bloomfield, NM 87413 (505)632-1786
-------------------------------------------------------------
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
4955
--------------------------------------------------------
(Primary Standard Industrial Classification Code Number)
Copies to: Registered Agent:
Elliott N. Taylor, Esq. Taylor and Associates, Inc.
John C. Thompson, Esq. Attorneys and Counselors at Law
Taylor and Associates, Inc. 3090 East 3300 South, Suite 400
Attorneys and Counselors at Law Salt Lake City, UT 84109
3090 East 3300 South, Suite 400 Phone: (801) 463-6080
Salt Lake City, Utah 84109 Fax: (801) 463-6085
Phone: (801) 463-6080 ------------------------------------
Fax: (801) 463-6085 (Name, address, including zip code,
and telephone number, including area
code, of agent for service)
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Each Proposed Maximum Proposed Maximum Amount of
Class of Securities Amount to Offering Price Aggregate Offering Registration
to be Registered be Registered per Share (1) Price (1) Fee
- ------------------- ------------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C>
Shares of Common
Stock, $0.001 par
value 13,800,000 Shares $ 0.125 $ 1,725,000 $ 448.50
<FN>
(1) 6,900,000 Shares currently held by Selling Shareholders and 6,900,000 Shares issuance on
the exercise of warrants held by the Selling Shareholders See DESCRIPTION OF CAPITAL STOCK.
</FN>
</TABLE>
Footnotes appear on next page
<PAGE> 2
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457. This amount is based upon the closing price ($0.125) of
the common stock of the Registrant as reported on the NASD's OTC Bulletin
board on February 28, 2000.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
The Registrant hereby amends this registration statement on such dates as may
be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section
8(a), may determine.
<PAGE>
<PAGE> 3
INDUSTRIAL ECOSYSTEMS, INC.
Cross Reference Sheet Pursuant to Rule 404(a)
Cross reference between items of Part I of Form S-1 and the Prospectus filed
by Industrial Ecosystems, Inc., as part of the Registration Statement.
REGISTRATION STATEMENT ITEM NUMBER AND HEADING PROSPECTUS HEADING
- ---------------------------------------------- ------------------
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... FRONT COVER
2. Inside Front and Outside Back Cover Page
of Prospectus...................................... INSIDE FRONT COVER AND
OUTSIDE BACK COVER
3. Summary Information; Risk Factors; and Ratio of
Earnings to Fixed Charges.......................... PROSPECTUS SUMMARY;
RISK FACTORS; Not
Applicable
4. Use of Proceeds..................................... USE OF PROCEEDS
5. Determination of Offering Price..................... Not Applicable
6. Dilution............................................ DILUTION
7. Selling Security Holders............................ SELLING SHAREHOLDERS
8. Plan of Distribution................................ PLAN OF DISTRIBUTION
9. Description of Securities to be Registered.......... DESCRIPTION OF
SECURITIES
10. Interest of Named Experts and Counsel.............. EXPERTS and LEGAL
MATTERS
11. Information with Respect to the Registrant
(a) Description of Business........................ BUSINESS
(b) Description of Property........................ PROPERTIES
(c) Legal Proceedings.............................. LITIGATION
(d) Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters.. MARKET FOR
SECURITIES
(e) Financial Statements........................... FINANCIAL STATEMENTS
(f) Selected Financial Data........................ SELECTED FINANCIAL
DATA
(g) Supplementary Financial Information............ Not Applicable
(h) Management's Discussion and Analysis of Financial
Condition and Results of Operations........... MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS
(i) Disagreements with Accountants on Accounting
and Financial Disclosure...................... Not Applicable
(j) Quantitative and Qualitative Disclosures About
Market Risk................................... Not Applicable
(k) Directors and Executive Officers............... MANAGEMENT
<PAGE> 4
INDUSTRIAL ECOSYSTEMS, INC.
Cross Reference Sheet Pursuant to Rule 404(a)(Continued)
Cross reference between items of Part I of Form S-1 and the Prospectus filed
by Industrial Ecosystems, Inc., as part of the Registration Statement.
REGISTRATION STATEMENT ITEM NUMBER AND HEADING PROSPECTUS HEADING
- ---------------------------------------------- ------------------
(l) Executive Compensation......................... EXECUTIVE COMPENSATION
(m) Security Ownership of Certain Beneficial Owners
and Management................................ PRINCIPAL SHAREHOLDERS
(n) Certain Relationships and Related Transactions. CERTAIN TRANSACTIONS
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.... UNDERTAKINGS
13. Other Expenses of Issuance and Distribution ....... OTHER EXPENSES OF
ISSUANCE AND
DISTRIBUTION
14. Indemnification of Directors and Officers.......... UNDERTAKINGS
15. Recent Sales of Unregistered Securities............ RECENT SALES OF
UNREGISTERED
SECURITIES
16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES........ EXHIBITS; Not
Applicable
17. Undertakings....................................... UNDERTAKINGS
<PAGE>
<PAGE> 5
[FRONT COVER PAGE]
PROSPECTUS
SUBJECT TO COMPLETION -- DATED MARCH __, 2000
13,800,000 Shares
INDUSTRIAL ECOSYSTEMS, INC.
Common Stock
All of the shares of Common Stock offered hereby are being sold by certain
shareholders of the Company (the"Selling Shareholders"). See SELLING
SHAREHOLDERS. The Company will not receive any proceeds from the sale of the
shares offered hereby. However, the Company could receive up to $931,400 in
proceeds from the exercise of warrants to purchase up to 6,900,000 shares of
Common Stock (the "Warrant Shares"), which are currently held by the Selling
Shares. See USE OF PROCEEDS.
The Company's Common Stock is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers, Inc. OTC Bulletin
Board (the "OTC Bulletin Board") under the symbol "IECS". On February 17,
2000, the last reported sales price of the Common Stock was $0.16 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION; NOR HAS THE COMMISSION
PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING; NOR HAS ANY STATE
SECURITIES DIVISION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
==============================================================================
Price to Underwriting Proceeds to Selling
Public Discounts (1) Shareholders (1)
- ------------------------------------------------------------------------------
Per Share............... $ $0.00 $
Total................... $ $0.00 $
==============================================================================
(1) Any commissions or discounts paid in connection with the sale of the
Common Stock will be paid by the Selling Shareholders and will be determined
through negotiations between them and the broker-dealer through or to which
the shares are sold and may vary depending on the broker-dealer's fee
schedule, the size of the transaction, and other factors. The Selling
Shareholders and any broker, dealer, or agent that participates with the
Selling Shareholders in the sale of the Common Stock may be deemed
"underwriters" within the meaning of the Securities Act of 1933, as amended
(the "Securities Act") and any commissions or discounts received by them and
any profit on the resale of the Common Stock purchased by them may be deemed
to be underwriting commissions under the Securities Act. See PLAN OF
DISTRIBUTION.
The date of this Prospectus is __________, 2000
<PAGE>
<PAGE> 6
No person has been authorized in connection with any offering made hereby to
give any information or to make any representation not contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
security other than the Common Stock offered by this Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer to buy any Common
Stock offered hereby to any person in any jurisdiction where it is unlawful to
make such an offer or solicitation to such person. Neither the delivery of
this Prospectus nor any sale hereunder shall under any circumstances create
any implication that information contained herein is correct as of any time
subsequent to the date hereof.
Changes in the Offering which occur after the date hereof, if any, will
necessitate the filing with the Securities and Exchange Commission (the
"Commission") of an amendment to the registration statement of which this
Prospectus forms a part (the "Registration Statement") and review and
declaration of effectiveness by the Commission of such amendment. There can
be no assurance that any such amendment will become effective. Should the
Company file a post-effective amendment and such amendment is not declared
effective by the Commission, Selling Shareholders will be precluded from
making offers and from selling the Shares of Common Stock.
<PAGE>
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus.
THE COMPANY
Industrial Ecosystems, Inc. (hereinafter referred to as "IEI" or "Company")
was incorporated in the state of Utah in July 1993. In March 1994, the Company
acquired 100% of the equity securities of Environmental Protection Company, a
New Mexico corporation ("EPC") in exchange for shares of IEI's Common Stock.
EPC is in the excavation and bioremediation business and operates principally
in the Farmington, New Mexico area.
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 BP-Amoco Production
Company ("BP-Amoco"), in and around the Farmington, New Mexico area. EPC
engages in soil remediation of hydrocarbon spills using proprietary
biotechnology knowhow.
ROP North America, Inc.
- -----------------------
The Company, through a wholly owned 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"), has a
small pig-farming operation, as well as the equipment to operate a
blending/processing plant in Amherstburg, Ontario, Canada to convert organic
by-products from commercial food processors, such as potato 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 Company's principal offices are located at 2040 West Broadway, Bloomfield,
NM 87413. The Company's telephone number is (505) 632-1796. See RISK FACTORS
and BUSINESS.
THE OFFERING
Selling Shareholders................ 6,900,000 shares of Common Stock
6,900,000 Warrant Shares
Shares Outstanding as of
Prospectus Date.................... Common Stock: 42,641,683
Preferred Stock: -0-
Shares Outstanding after Offering... Common Stock: 49,541,683 (1)
Preferred Stock: -0-
- ------------------------
(1) Assuming the outstanding Warrants to purchase up to 6,900,000 Warrant
Shares are exercised and no other shares of Common Stock have been issued by
the Company.
<PAGE> 8
Use of Proceeds..................... The Company will not receive any proceeds
from the sale of the Common Stock by the
Selling Shareholders. In the event the
Selling Shareholders exercise warrants to
purchase up to 6,900,000 Warrant Shares,
the Company could receive up to $931,400
in proceeds, which funds will be used by
the Company for general working capital.
See USE OF PROCEEDS and DESCRIPTION OF
SECURITIES.
Risk Factors........................ There are certain substantial risks
associated with an investment in the
Common Stock, including among others,
risks associated with the absence of
operating revenues or profitable
operations. See RISK FACTORS.
OTC Bulletin Board Symbol........... Common Stock: IECS
Summary Financial Information
- -----------------------------
The following table sets forth selected summarized financial data for the
Company at the dates and for the periods indicated. The data should be read
in conjunction with the financial statements and notes thereto set forth
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
For the Three For the Nine For the
Months Ended Months Ended Years Ended
September 30, September 30, December 31,
------------------ ----------------- -------------------
1999 1998 1999 1998 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
- -----------------------------
Net Sales...................... $ 83,414 $ 269,662 $ 418,206 $ 525,246 $ 626,545 $ 569,983
Operating Expenses............. $ 255,487 $ 373,912 $ 852,527 $ 1,455,646 $ 1,714,528 $ 2,251,844
Other Income (Expenses)........ $ (5,892) $ (136,232) $ 1,983 $ (197,093) $ (400,979) $ (115,274)
Net (Loss)..................... $ (288,893) $ (405,998) $ (755,273) $(1,456,853) $(1,894,749) $(2,157,704)
Extraordinary Gain............. $ - $ - $ 374,528 $ - $ - $ -
Foreign Currency Adjustments....$ (400) $ - $ 6,269 $ - $ 14,664 $ 23,755
Net Gain (Loss) per Share.......$ (0.01) $ (0.01) $ 0.01 $ (0.05) $ (0.06) $ (0.10)
Weighted Average Number
of Shares Outstanding.......... 35,500,905 33,000,905 35,500,905 33,000,905 30,111,107 22,262,795
Actual as of
------------
September 30, December 31,
------------- ------------
1999 1998
------------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
- ------------------
Total Current Assets............. $ 184,447 $ 88,300
Total Assets..................... $ 426,805 $ 375,013
Total Current Liabilities $ 500,205 $ 802,499
Working Capital (Deficit)........ $ (315,758) $ (714,199)
Long Term Debt................... $ 887,195 $ 157,405
Commitments and Contingencies.... $ 496,591 $ 747,819
Shareholders' (Deficit).......... $ (1,457,186) $ (1,332,710)
</TABLE>
<PAGE> 9
RISK FACTORS
THE PURCHASE OF THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER, IN ADDITION TO THE NEGATIVE
IMPLICATIONS OF ALL MATERIAL SET FORTH HEREIN, THE FOLLOWING RISK FACTORS.
RISK FACTORS RELATING TO THE BUSINESS OF THE COMPANY
No Assurance of Profitability and Working Capital Deficit
- ---------------------------------------------------------
We had an operating loss of $757,256 for the nine month period ended September
30, 1999. After taking into account $1,983 of other income and an
extraordinary gain of $374,528 relating to debt forgiveness during the period,
we had a net comprehensive loss of $374,476. Therefore, there can be no
assurance we will be able to develop into a successful or profitable business.
See BUSINESS.
Ability of Company to Continue as a Going Concern
- -------------------------------------------------
Because we have an accumulated deficit of $(22,374,634)at September 30, 1999,
we have 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 the
fiscal year ended December 31, 1999, we effected measures to reduce cash
outflows and increase working capital thru the issuance of equity securities
for cash and conversion of debt. We are aware of our ongoing cash
requirements and have implemented a cash flow plan, including continued
reduction in our general and administrative expenses. See MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Dependence on Certain Customers
- --------------------------------
Historically, our revenues have been derived through our subsidiary EPC. EPC
has one major customer, BP-Amoco Production Company. In an effort to increase
our revenue base we plan to increase marketing through independent sales
representatives and develop partner alliances with environmental engineering
companies and environmentally focused construction firms. We also plan to
directly market our product and services to other oil companies and to
government agencies. See BUSINESS: Customers.
Competition
- -----------
We compete against numerous other companies, both large and small, that are
more established and better financed than we are. Due to the competitive
nature of our business and better financed and larger competitors, it may be
difficult for us to obtain a significant market share. See BUSINESS:
Competition.
Governmental or Other Regulation
- --------------------------------
During the course of conducting our business, our operations may be subject to
one or more environmental protection laws that have been enacted and amended
during recent decades in response to public concern over the environment. We
believe that we will be able to operate in compliance with such regulations.
While we have not had to make significant capital expenditures relating to
environmental compliance, we cannot predict with any certainty our future
capital expenditure requirements relating to environmental compliance because
of our limited operations and continually changing compliance standards and
technology. See BUSINESS: Government Regulation.
<PAGE> 10
Certain Transactions
- --------------------
From time to time we have entered into transactions that may be material to
the potential purchaser of the Company's common stock in light of all the
circumstances of the particular case. The significance of the transactions
may be evaluated by each potential purchaser after taking into account the
relationship of the parties to the transactions and the amounts involved in
the transactions. See CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Transactions with Management and Others.
Risks Involved in Litigation
- ----------------------------
We are currently involved in litigation with various third parties relating to
disputes arising over certain transactions with a supplier, a former
acquisition candidate, and a purported secured creditor. Therefore, we are
subject to the risks of any liability that may result from the subsequent
disposition of these claims. Potential purchasers should evaluate their
investment in light of these uncertainties. See LITIGATION.
Lack of Dividends
- -----------------
The Company has not paid, and does not plan to pay, dividends in the
foreseeable future even if the Company is profitable. Earnings, if any, are
expected to be used to expand the Company's operations and for general
corporate purposes, rather than to make distributions to Shareholders.
Possible Sale of Common Stock Pursuant to Rule 144
- --------------------------------------------------
The Company has previously issued shares of Common Stock that constitute
"restricted securities" as that term is defined in Rule 144 adopted under the
Securities Act. Subject to certain restrictions, such securities may
generally be sold in limited amounts one year after their acquisition.
Securities held for two years may be sold by nonaffiliates without limitation.
See PRINCIPAL SHAREHOLDERS and DESCRIPTION OF CAPITAL STOCK.
Concentration of Ownership
- --------------------------
Because ownership is concentrated, you and other investors will have
minimal influence on shareholder decisions. Our officers, directors and
significant shareholders will beneficially own approximately 66% of the shares
if the minimum amount of shares is sold in this offering. As a result,
they will be able to exercise control over most matters requiring
shareholder approval, and you and other investors will have minimal
influence over the election of directors or other shareholder actions.
These shareholders may also approve or cause us to take actions of which
you disapprove or that are contrary to your interests.
Single Technology/Limited Application
- -------------------------------------
Our revenues depend on a single product which makes us vulnerable to changes
in market demand. Our remediation product is based upon a single formula, is
currently our only remediation product, and is expected to account for
substantially all of our revenues for the foreseeable future. The
effectiveness of our product has only been established in limited applications
for a specific treatment of a specific contaminant in a particular soil type
in a particular climate region. Expanding our bioremediation treatment beyond
its present application may not be successful. In addition, while we are not
aware of any developments in the remediation industry which would render our
<PAGE> 11
current or planned products less competitive or obsolete, there can be no
assurance that future technological changes or the development of new or
competitive products by others will not do so. Because our system represents
our sole product focus, obsolescence of our system would have a significant
adverse effect.
Dependence on Strategic Relationships
- -------------------------------------
We believe that our success in expanding our target markets depends in part on
our ability to develop and maintain strategic relationships with key
consultants and new customers. We believe these relationships are important in
order to validate our technology, facilitate increased market acceptance of
our products, and enhance our marketing and sales capabilities. We are
developing such relationships at this time. If we are unable to develop key
relationships or maintain and enhance existing relationships, we may have
difficulty selling our products and services.
Need to Manage Changing Operations
- ----------------------------------
Our ability to successfully offer products and services and implement our
business plan in an evolving market requires an effective planning and
management process. We hope to continue to increase the scope of our
operations and, if successful, will need to grow our personnel levels
substantially. This growth will place a significant strain on our management
systems and resources. We expect that we will need to continue to improve our
financial and managerial controls and reporting systems and procedures, and
will need to continue to expand, train and manage our work force. Furthermore,
we expect that we will be required to manage multiple relationships with
various customers and other third parties.
Possible Volatility of Stock Price
- ----------------------------------
The stock market has from time to time experienced significant price and
volume fluctuations that may be related or unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. In addition,
the market price of the shares of Common Stock of the Company may be highly
volatile. Factors such as the size of the market float, fluctuations in the
Company's operating results, failure to meet analysts' expectations,
announcements of major developments by the Company or its competitors,
developments with respect to the Company's markets, changes in stock market
analyst recommendations regarding the Company, its competitors or the industry
generally, and general market conditions may have a significant effect on the
market price of the Company's Common Stock.
<PAGE>
<PAGE> 12
PLAN OF DISTRIBUTION
Selling Shareholders
The Selling Shareholders may sell up to 13,800,000 shares of Common Stock from
time to time directly to purchasers. Alternatively, the Selling Shareholders
may, from time to time, offer the Common Stock to underwriters, dealers, or
agents, which may receive compensation in the form of underwriting discounts,
concessions, or commissions from the Selling Shareholders and/or the
purchasers of the Common Stock from whom they may act as agent, as the case
may be. The Selling Shareholders and any underwriters, dealers, or agents
that participate in the distribution of such securities, may be deemed to be
"underwriters," and any profits on the sale of these securities by them and
any discounts, commissions, or concessions received by any underwriters,
dealers, or agents may be deemed to be underwriting discounts and commissions
under the Securities Act.
The Common Stock may be sold by the Selling Shareholders, as the case may be,
from time to time, in one or more transactions at a fixed offering price,
which may be changed, or at varying prices determined at the time of sale or
at negotiated prices. The Company does not intend to enter into any
arrangements with any securities dealers concerning solicitation of offers to
purchase the Common Stock. The Selling Shareholders will pay all separate
expenses incurred by them incident to the offer and sale of the Common Stock,
including commissions and discounts to broker-dealers.
Commissions and discounts paid in connection with the sale of the Common Stock
by the Selling Shareholders will be determined through negotiations between
them and the broker-dealers through or to which the securities are to be sold
and may vary, depending on the broker-dealers fee schedule, the size of the
transaction, and other factors. The separate costs of the Selling
Shareholders will be borne by them. The Selling Shareholders and any broker-
dealer or agent that participates with the Selling Shareholder in the sale of
the Common Stock by them may be deemed "underwriters" within the meaning of
the Securities Act, and any commissions or discounts received by them and any
profits on the resale of Common Stock purchased by them may be deemed to be
underwriting commissions under the Securities Act.
The Company and the Selling Shares have agreed to share the expenses incurred
by the Company in registering the Common Stock for resale by the Selling
Shareholders as follows:
Shareholder Share of Registration Expense
---------------- -----------------------------
John P. Crowe 50%
Everett P. Hailey the lesser of 22.5% or $2,250
William Hagerman the lesser of 2.5% or $250
In addition, the Company has agreed to utilize its best efforts to keep the
registration statement effective until the sooner of: (a) two-years following
the Closing; or (b) until all of the Common Stock and Warrant Shares have been
sold by the Investor, provided, however, that the Company is under no
obligation to keep the registration statement effective if no Warrants have
been exercised prior to the expiration date of the First Exercise Period (as
defined in the Warrant).
<PAGE>
<PAGE> 13
SELLING SHAREHOLDERS
The following table provides certain information with respect to the
Common Stock held by each Selling Shareholder. Mr. Crowe, one of the Selling
Shareholders, has had a material relationship with the Company. (See PRINCIPAL
SHAREHOLDERS and CERTAIN TRANSACTIONS. The percent of Common Stock is
calculated on the number of the Company's shares issued and outstanding as of
the date of this Prospectus. None of the shares of Common Stock may be
offered and sold by the Selling Shareholders after January 11, 2002. The
Common Stock offered by the Selling Shareholders under this Prospectus may be
offered from time to time by the following persons:
Name of Shareholder Number of Shares % of Common Stock
- ------------------- ---------------- -----------------
John P. Crowe Common Stock 4,500,000 10.55 (1)
Warrant Shares(3) 4,500,000 9.55 (2)
Everett P. Hailey Common Stock 2,250,000 5.28 (1)
Warrant Shares (3) 2,250,000 5.01 (2)
William Hagerman Common Stock 150,000 0.35 (1)
Warrant Shares (3) 150,000 0.35 (2)
------------ ----------------
Totals Common Stock 6,900,000 16.18
============ ================
Warrant Shares 6,900,000 13.93
============ ================
(1) Based on the number of issued and outstanding shares of Common Stock at
February 17, 2000.
(2) Based on the number of issued and outstanding shares of Common Stock at
February 17, 2000, after giving effect to the exercise of the Warrants held by
the Selling Shareholder and the issuance of the underlying Warrant Shares.
(3) See DESCRIPTION OF SECURITIES: Warrants
<PAGE>
<PAGE> 14
MARKET FOR SECURITIES
At February 17, 2000, 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
Second Quarter $0.28 $0.14
Third Quarter $0.26 $0.14
Fourth Quarter $0.19 $0.04
*Effective March 31, 1998, the Company effected a 2-for-3 share reverse split
of its issued and outstanding shares of common stock.
As of February 17, 2000 there were approximately 460 shareholders of record of
the Company's common stock and the reported bid or asked prices for the
Company's common stock was $0.16 and $0.17, respectively.
As of February 17, 2000, the Company has issued and outstanding 42,641,683
shares 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.
<PAGE>
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-looking Statements
- ---------------------------------------------------------
This report may contain "forward-looking" statements. Examples of forward-
looking statements include, but are not limited to: (a) projections of
revenues, capital expenditures, growth, prospects, dividends, capital
structure and other financial matters; (b) statements of plans and objectives
of the Company or its management or Board of Directors; (c) statements of
future economic performance; (d) statements of assumptions underlying other
statements and statements about the Company and its business relating to the
future; and (e) any statements using the words "anticipate," "expect," "may,"
"project," "intend" or similar expressions.
Year 2000 Disclosure
- --------------------
The Company believes it has resolved 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 completed its
assessment, and currently believes that costs of addressing this issue have
not and will not have a material adverse impact on the Company's financial
position. However, if the Company and third parties upon which it relies
experience further effects from this problem, it could result in a material
financial risk to the Company. In order to assure that this does not occur,
the Company plans to continue to monitor its computer systems.
State of Readiness
- ------------------
The Company has completed an assessment of its operations. As far as its
information technology systems ("IT"), the Company uses newer model desktop in
its operations and all 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 (BP-Amoco, PSCNM) and
suppliers (FritoLay) concerning their respective experience with Y2K problems.
At this time, the Company has not received any responses suggesting a
significant impact to the Company's business operations.
Costs of Y2K
- ------------
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
supervisors' evaluation time which has likewise been incorporated into
ordinary business costs. There have been no significant hardware costs
directly attributable to Y2K.
<PAGE>
<PAGE> 16
Risks of Y2K
- ------------
The Company does not anticipate that Y2K problems pose substantial risks to
its current operations, unless as yet unresolved Y2K problems cause EPC's
major customers, BP-Amoco and PSCNM, to 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. At the date of
this registration, the Company considers that any such event is unlikely.
Contingency Plans
- -----------------
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
experiences with Y2K problems.
Results of Operations
- ---------------------
General
- -------
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 nine months ended September 30, 1999, the functional currency for the
Company's foreign subsidiary (IEI Canada and its subsidiaries) has been
determined to be the Canadian Dollar. Any applicable assets and liabilities
have been translated at period end exchange rates and operating statement
items are translated at average exchange rates prevailing during the period.
For the nine month period ended September 30, 1999, the Company had a gain of
$6,269 as a result of foreign currency translation adjustment.
<PAGE>
<PAGE> 17
Nine Month Period ended September 30, 1999 compared to September 30, 1998
- -------------------------------------------------------------------------
Substantially all revenue during the nine month period ended September 30,
1999 was derived from EPC's operations, with total revenues being $418,206 and
direct costs associated therewith being $322,935 or approximately 77.2% of
revenues. Total revenues for the nine month period ended September 30, 1998
were $525,246 and direct costs associated therewith were $329,360, or
approximately 62.7% of revenue. The direct costs for the nine month period
ended September 30, 1999 as a percent of sales was 14.5% higher than the
direct costs as a percentage of sales realized by the Company same period in
the preceding year. The increase in direct costs as a percent of revenues for
the current period as compared to the prior comparative period can be
attributed to the fact that, during the current period, the Company performed
a greater number of general roustabout jobs with higher direct costs as
opposed to remediation jobs with lower direct costs. EPC's bioremediation
work for BP-Amoco is allocated between routine site maintenance and emergency
clean-up. In the past, substantially all of the Company's revenues have been
derived from bioremediation work performed for BP-Amoco. During the reporting
period revenues from BP-Amoco began to decrease. Amoco recently merged with
British Petroleum (now "BP-Amoco")and has been undergoing a review of all of
its operations, including those in the Farmington, New Mexico area. As a
result of BP-Amoco's review, much of the anticipated bioremediation work
during 1999 has been delayed. Management of the Company expects this trend to
continue through the balance of the 1999 calendar year, but to reverse
beginning in the year 2000. The Company's relationship with BP-Amoco provides
for the Company to provide bioremediation work for BP-Amoco sites in Colorado
and New Mexico on an as needed basis. There is no specific time limit,
guaranteed dollar amount of work, or term for the agreement. In addition,
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.
The Company has performed general contracting work during the nine month
period for Public Service Company of New Mexico. In addition, to expand its
revenue base the Company is conducting a bioremediation demonstration for the
Department of Defense at the U.S. Navy's Pt. Molate Fuel Depot in Richmond,
California. This technical demonstration represents the culmination of years
of effort. The demonstration was sponsored by the Bay Area Defense Conversion
Action Team (BADCAT), a public private partnership of: Bay Area Economic Forum
(BAEF), Bay Area Regional Technology Alliance (BARTA), California
Environmental Protective Agency (CAL EPA), Chevron Research and Technology
Company, Engineering Field Activity West, Naval Facilities Engineering Command
(EFA West), Naval Facilities Engineering Service Center (NFESC), San Francisco
State University Center for Public Environmental Oversight (CPEO) and the
U.S. Environmental Protection Agency (US EPA). The evaluation period,
originally expected to be from five to six months after the demonstration
commenced, has been extended in order for the Department of Defense and others
to fully evaluate the results of the demonstration. Should this evaluation be
favorable, the Company's technology and process could become, given certain
site characteristics, the preferred method for reducing hydrocarbon
contamination in soil.
Corporate Expense. For the nine months ended September 30, 1999 total
operating expenses were $852,527, consisting of general and administrative
expenses of $778,134 and depreciation and amortization expenses of $74,393,
resulting in a loss from operations of $(757,256). For the nine months ended
September 30, 1998 total operating expenses were $1,455,646, consisting of
general and administrative expenses of $1,351,703, bad debt expense of
$19,802, and depreciation and amortization expenses of $84,141, resulting in a
<PAGE> 18
loss from operations of $(1,259,760). The operating expenses for the nine
months ended September 30, 1999 represent a substantial reduction in overall
operating expenses (approximately 41.4%) compared to the Company's operating
expenses incurred for the nine months ended September 30, 1998. The reduction
in operating expenses for the nine months just ended is a direct result of the
efforts the Company has undertaken to reduce cash outflows in non-revenue
producing areas.
Interest Expense. Interest expense for the nine months ended September 30,
1999 was $35,989, which is attributed to the line-of-credit obtained from a
related party. Interest expense for the nine months ended September 30, 1998
was $30,374, and is attributed to corporate borrowing during the normal course
of business.
Other Income. Other income for the nine months ended September 30, 1999 was
$37,857, of which, substantially all was represented by the balance of the
income derived from the one-year consulting agreement with ROP, which
represents a decrease over other income of $73,238 for the nine month period
ended September 30, 1998. During the nine month period ended September 30,
1998, the Company had expenses of $226,071 and $14,311, associated with loss
on investment in the joint venture and disposition of assets, respectively, so
that total other income (expense) for the prior nine month period was
$(197,093) compared to $1,983 for the current nine month period.
Extraordinary Item. During the nine months ended September 30, 1999 the
Company recognized income from the forgiveness of $374,528 in debt by certain
creditors of the Company. The Company had no extraordinary items of income or
expense during the six month period ended June 30, 1998.
Including the extraordinary item the Company had net comprehensive loss of
$405,988 for the nine months ended September 30, 1999. The basic loss per
share for the period before extraordinary items was $(0.02), while the Company
experienced basic income per share of $0.01 after taking into account
extraordinary items. The fully diluted earnings per share was $0.01. For the
nine months ended September 30, 1998, the Company had a net comprehensive loss
of $(1,456,853) and fully diluted loss per share was $(0.05).
Liquidity and Capital Resources
- -------------------------------
Historically, the issuance of common stock has been utilized by the Company
for working capital, conversion of debt, payment of professional services, the
expansion capital required by ROP and for the continued development activities
of the Company.
The Company had a working capital deficit of $(315,758), cash and cash
equivalents of $3,315 and restricted cash deposits of $43,083 at September 30,
1999. Cash used in operations for the nine month period was $(921,607)and was
derived primarily from cash received from accounts receivable and the sale of
shares, borrowing against the line-of-credit, and the issuance of common stock
for the conversion of debt. The Company's accounts receivable increased from
$35,079 at December 31, 1998 to $94,520 at September 30, 1999 due in large
part to services performed for Public Service Company of New Mexico. However,
due to inclement weather in the Farmington, New Mexico area during August and
September 1999, the Company moved around between 15 different sites and the
jobs could not be completed in sequence. Therefore, at September 30, 1999,
several of these job sites were still open. The Company expects to receive
payment from Public Service Company of New Mexico as the jobs are completed.
<PAGE> 19
Because the Company has an accumulated deficit of $(22,374,634)at September
30, 1999, has a working capital deficit and limited internal financial
resources, the report of the Company's auditor at December 31, 1998 contained
a going concern modification as to the ability of the Company to continue.
During fiscal 1998, the Company began to effect measures to reduce cash
outflows and increase working capital thru the issuance of additional shares
of common stock for cash, services and conversion of debt. The Company is
aware of its ongoing cash requirements and has implemented a cash flow plan,
including continued reduction in its general and administrative expenses.
Additionally, the Company has developed an overall strategy and certain
financing options to meet its ongoing need through December 31, 1999.
Due to the need for working capital for both the Company, IEI Canada and its
JV partner, JFJ Ecosystems, Inc. ("JFJ") restructured the JV to provide
among other things, the establishment of a $750,000 line-of-credit for the
Company from JFJ. As a result of the restructuring, JFJ has an equal 50%
member of the JV with IEI Canada and IEI Canada's option to reduce JFJ's
membership interest to 19% was terminated. The line-of-credit bears interest
at 6% per annum until December 31, 2000, at which time all principal advanced
under the line of credit, and any interest accrued thereon, will be due and
payable in full. As security for the line of credit, the Company caused IEI
Canada to pledge as security IEI Canada's 50% membership interest in the JV.
If the line of credit is not timely repaid in full, IEI Canada's membership
interest in the JV shall be conveyed to JFJ in satisfaction of the line of
credit, thus making JFJ the 100% owner of the JV. At June 30, 1999, the
Company had drawn the entire $750,000 against the line-of-credit. In
addition, in May 1999, the company sold 2,500,000 shares of the Company's
common stock at $0.10 per share to affiliates of JFJ for $250,000 cash.
At September 30, 1999, the Company had recorded $356,890 in accrued expenses
consisting primarily of accrued interest and unpaid payroll taxes,
unemployment taxes, sales taxes and gross receipts taxes due both the federal
and state taxing authorities, including reasonable interest and penalties for
delinquent filings. During the period the Company extended a preliminary
settlement offer to the IRS on Form 433. The settlement offer to the IRS was
based on the Company's anticipated need to raise additional working capital
without exposing such capital to potential seizure by the IRS. The terms of
the preliminary settlement offer are based on the trustee portion (the amount
the Company withheld from its Employees' W-2 wages) of tax due and contingent
on the IRS finalizing its examination confirming the financial condition of
the Company and the financial condition of those officers and directors of the
Company during the time that the tax liability arose (the "Responsible
Parties"). The trustee portion due is approximately $90,000 and will require
the Company to make installment payments to the IRS of approximately $5,000
per month over 24 months. Upon payment in full of the settled amount the IRS
will provide the Company and any Responsible Parties with a full release from
liability. Should the Company fail to maintain the monthly payments to the
IRS, the IRS will have the right to collect from the individual Responsible
Parties as well as the Company.
To finalize the settlement offer with the IRS, the Company has provided the
IRS with a narrative description of the Company's current plan of business
operations and a logical reason for the offer and compromise. In addition,
the IRS is conducting an investigation of the assets of the Responsible
Parties to determine whether or not the Responsible Parties have sufficient
liquid assets to satisfy the trustee portion of the tax due.
<PAGE> 20
The Company has reserved and recorded possible contingent liabilities to
individuals who claim they are still owed money by the Company although the
Company has issued shares of its common stock to such individuals as payment
of such debts or because the Company is uncertain as the whether the creditors
are holding the Company responsible to certain debts incurred by former
officers and directors of the Company. At September 30, 1999, the Company has
recorded total contingent liabilities of $496,591, a reduction from $747,819
recognized at December 31, 1998.
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
work for BP-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 BP-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 Amherstburg, 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.
<PAGE> 21
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
Company contributed the leasehold, contracts, equipment, personal property,
tools, furnishings, supplies, and tangible properties, inventories and
miscellaneous property constituting the Amherstburg, 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.
<PAGE> 22
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
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 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.
<PAGE>
<PAGE> 23
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
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.
<PAGE>
<PAGE> 24
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.
BUSINESS
Corporate History
- -----------------
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. n 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.
<PAGE> 25
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 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.
Summary of Business Operations
- ------------------------------
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 BP-Amoco, in and
around the Farmington, New Mexico area. If timing and logistics dictate, the
contaminated soil is excavated and transported from the BP-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 BP-Amoco allows for
the bioremediation of only BP-Amoco soil on the EPC parcel. In 1998,
approximately 20% of the BP-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 BP-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
- ---------
EPC's chief revenue source has been and continues to be its work for BP-Amoco.
During fiscal year 1998, 100% of EPC's revenues were derived from BP-Amoco.
At June 30, 1999, the Company had no significant revenues from sources other
than BP-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 BP-Amoco as a customer. Even though BP-Amoco has
provided EPC with a fairly steady flow of business over the years, BP-Amoco is
under no obligation to continue as such in the future. The recent British
Petroleum merger with Amoco has not financially impacted EPC, however, there
can be no assurance that EPC's business with BP-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
<PAGE> 26
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 conducting 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.
In an effort to increase the Company's revenues the Company has entered into
an independent sales representative agreement with a third party to market the
Company's product and services. The Company is in the process of negotiating
other similar agreements.
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
- ---------------------------
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
- ------------------------
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
- -----------
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.
<PAGE> 27
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 BP-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.
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.
Government Regulation
- ---------------------
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 BP-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.
<PAGE> 28
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
- ---------
As of February 15, 2000, EPC had six 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 February 15, 2000, IEI had three full-time employees in its executive
office, all of whom are employees-at-will.
IEI Canada has no employees.
ROP North America, LLC
- ----------------------
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"), has the equipment
to operate a blending/processing plant in Amherstburg, 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 potential 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.
ROP currently operates a facility in Amherstburg Ontario in which
approximately 3,000 pigs per cycle (up to 3 cycles per year) are raised for a
local pig producer. Once the pigs have reached the specified weight, the pigs
are picked up by the producer and replaced by new piglets.
On January 26, 2000, JFJ gave the Company written notice of its intent to
exercise its Sale Rights. In light of this notice, Management is currently
reassessing the best strategy for expanding ROP's business.
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.
<PAGE> 29
PROPERTIES
Executive office
- ----------------
The Company's principal executive office is located in Bloomfield, New Mexico,
in a building owned by EPC. The building is a wood-framed mobile building of
approximately 660 square feet. 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 BP-Amoco. The site is fenced and configured to
safely handle storm runoff.
The property is used as a staging area to which BP-Amoco's contaminated soil
is brought for treatment and then returned to either the original site or
another site designated by BP-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.
MANAGEMENT
Directors and Executive Officers
- --------------------------------
The following table sets forth the name, age, and position of each executive
officer and director and the term of office of each Director of the Company.
Name Age Position Held Position Since
- ---- --- -------- -------------------
Tom Jarnagin 57 President/Director April 1999
Joseph Knox 38 Vice President June 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.
<PAGE> 30
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
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.
Joseph Knox - Mr. Knox, age 38, joined the Company as its vice-president in
June 1999. Prior to joining the Company, from 1998 to 1999, Mr. Knox was
Vice-president of Western Operations for the EA Companies, spearheading a
turnaround for their management consulting services. From 1995 to 1998, Mr.
Knox was regional manager for Tetra Tech, Inc., first for northeast operations
(1995 to 1997) and then for western operations (1997 to 1998), during which
time he developed and executed marketing strategies, managed operations for
all consulting services, and directed all aspects of regional financial
management. From 1990 to 1994, Mr. Knox was office manager for PRL, Inc., an
information technology subsidiary of Black and Decker Corporation. Mr. Knox
earned a BA in Geology and Economics from the University of Rochester in 1985,
and an MPA from George Mason University in 1989.
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.
<PAGE>
<PAGE> 31
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 $100,000 during such period (as determined at December 31, 1999 the
end of the Registrant's last completed fiscal year). During the periods
covered by the table, Walter Kolbe served as President of the Company. Mr.
Kolbe resigned all positions effective April 19, 1999. During the periods
covered by the table, Gerard Amlin served as Vice-President of the Company,
and President of IEI Canada. Mr. Amlin was also President of the two Canadian
subsidiaries incorporated in July 1998. Mr. Amlin resigned all positions
effective September 1998. Mr. Jarnagin was appointed as President effective
April 19, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
Other Restricted
Name and Annual Stock Options LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards /SARs Payout Compensation
- ------------------ ---- ------ -------- ------------ ------ ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tom Jarnagin 1999 $ 36,833 -0- -0- -0- -0- -0- -0-
President 1998 $ -0- -0- -0- -0- -0- -0- -0-
1997 $ -0- -0- -0- -0- -0- -0- -0-
Walter Kolbe 1999 $ -0- -0- -0- -0- -0- -0- -0-
President 1998 $ 103,002 -0- -0- -0- -0- -0- -0-
1997 $ 28,037 -0- -0- -0- -0- -0- -0-
Gerard Amlin 1999 $ -0- -0- -0- -0- -0- -0- -0-
Vice-President 1998 $ 131,152 -0- -0- -0- -0- -0- -0-
1997 $ 17,298 -0- -0- -0- -0- -0- -0-
</TABLE>
Additional Executive Compensation
- ---------------------------------
Tom Jarnagin, the Company's President, has been 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
forth in the operating plan currently being prepared. In 1999, no bonus was
earned or paid. 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.
Joseph Knox, the Company's vice-president, has been employed by the Company
since June 6, 1999, at a salary of $7,500 per month. Mr. Knox was also granted
options pursuant to the Company's 1999 Stock Option and Award Plan, to
purchase up to 400,000 shares of the Company's common stock for an exercise
price of $0.20 per share. The options vest over a two year period from the
date of his employment.
<PAGE> 32
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. At December 31, 1999, each board member had
received payment for one board meeting in April, and were each entitled to
payment for one additional board meeting held in August.
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, 1,300,000 options have been
awarded under this plan, of which 609,000 are currently exercisable.
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>
<PAGE> 33
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.
<PAGE>
<PAGE> 34
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 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
<PAGE> 35
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 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.
Options/SAR Grants in Last Fiscal Year
- --------------------------------------
The following tables contain information regarding the Plan Options granted to
the Company's named executive officers as of the date of this Prospectus:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees Base Price Expiration
Name Granted in Fiscal Year ($/Share) Date
- ------------------- ------------ -------------- ----------- ----------
Tom Jarnagin, CEO 400,000 sh 35.56% $0.16 4/30/04
Walter Kolbe N/A N/A N/A N/A
Gerard Amlin N/A N/A N/A N/A
Aggregate Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End(#) at FY-End($)
Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexerciable
- ------------------- ------------- ------------- ------------ ------------
Tom Jarnagin, CEO -0- -0- 320,000/80,000 N/A
Walter Kolbe N/A N/A N/A N/A
Gerard Amlin N/A N/A N/A N/A
Pension Table
- -------------
Not Applicable.
Other Compensation
- ------------------
None.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- -------------------------------------------------
The Company believes that under the SEC's rules for reporting of securities
transactions by directors and executive officers, all required reports have
been timely filed.
<PAGE>
<PAGE> 36
PRINCIPAL SHAREHOLDERS
The following table sets forth as of February 17, 2000 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 42,641,683
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 5,325,667 shares of Common Stock for
issuance pursuant to outstanding options.
Principal Shareholders: % of Class
Assuming the
Beneficial % of Exercise of all
Class Name and Address Ownership Class Warrants
- ------ ---------------- ---------------- ------- -------------
Common JFJ Ecosystems, LLC 18,864,359 (1) 30.67 27.58
1015 West 54th Street
Kansas City, MO 64112
Common John P. Crowe 31,449,581 (2) 51.13 45.97
1015 West 54th Street
Kansas City, MO 64112
Common Tom Jarnagin 3,892,988 (3) 9.13 7.86
Industrial Ecosystems, Inc.
2040 W. Broadway
Bloomfield, NM 87413
Officers and Directors: % of Class
Assuming the
Beneficial % of Exercise of all
Class Name and Address Ownership Class Warrants
- ------ ---------------- ---------------- ------- -------------
Tom Jarnagin -see above-
Common Magaly Bianchini 735,888 (5) 1.73 1.49
Industrial Ecosystems, Inc.
2040 W. Broadway
Bloomfield, NM 87413
Common Steven C. Justus 2,000,000 (4) 4.69 4.04
Industrial Ecosystems, Inc.
2040 W. Broadway
Bloomfield, NM 87413
Common Officers and Directors
as a group (3 persons) 6,628,876 15.55 13.38
- --------------------------------
Notes to this table appear on the following page
<PAGE>
<PAGE> 37
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 7,251,889 shares and 4,500,000 warrants for 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.
(4) 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.
(5) 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> 38
CERTAIN 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 September 30, 1999 of $496,591,
reduced from $747,819 recorded at December 31, 1998 through a combination of
direct payments to Bernard Amlin, and settlement and release agreements
obtained from Christine Amlin and Ron Burns. Bernard Amlin, Christine Amlin
and Ron Burns are all relatives of Gerard Amlin, a former officer and director
of the Company. 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.
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.
In December 1999, the Company issued to John P. Crowe, a major shareholder of
the Company and a principal of the Company's joint venture partner, 4,500,000
Units at a purchase price of $0.0675 per Unit, each Unit consisting of one
share of common stock and one warrant to purchase common stock at exercise
prices and for the periods according to the following schedule:
Amount Price Exercisable
---------- -------- ---------------------
850,000 $ 0.07 11/14/99 - 11/14/00, or 120 days after registration
850,000 $ 0.11 11/14/99 - 11/14/00, or 180 days after registration
2,000,000 $ 0.15 11/14/99 - 11/14/00, or 240 days after registration
800,000 $ 0.19 11/14/99 - 11/14/00, or one year after registration
<PAGE> 39
The Unit Shares carry registration rights committing the Company, on a best
efforts basis, to file a registration statement on Form S-1 for the purpose of
registering the Units for resale by the holder as a selling shareholder, with
a concomitant reduction in the exercise period upon the effectiveness of the
registration. Mr. Crowe will pay 50% of the expenses for the registration.
The Warrants are subject to a call provision which permits the Company to
require the exercise or forfeit of the warrants, within 10 days of the call
notice, if the ten day average closing price of the Company's common stock
exceeds the respective exercise prices of the warrants by 250%, 200%, 175% and
150%, respectively. The call provision is only effective if the Warrant
Shares subject to the call provision have been registered by the Company under
an effective Securities Act registration.
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.
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.
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. A total of 581,192 shares were issued to
relatives of Gerard Amlin, who was an officer and director at the time of the
issuances. A total of 2,981,500 shares were issued to Tom Jarnagin and his
spouse, and an additional 685,888 shares were issued to Magaly Bianchini. Mr.
Jarnagin and Ms. Bianchini were unaffiliated at the time of the share
issuances, but have been serving as officers and directors since April 1999.
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. Of these shares, a total of
1,686,560 shares were issued to Gerard Amlin, an officer and director.
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. 166,667 of the shares were
issued to Leonard Amlin, a relative of Gerard Amlin, an officer and director.
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
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.
<PAGE> 40
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;
(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-
<PAGE> 41
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.
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"). On
January 26, 2000, JFJ gave the Company written notice of its intent to
exercise its 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. However, the shares issuable
to JFJ have not been included as part of this registration statement.
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;
(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.
<PAGE>
<PAGE> 42
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.
DESCRIPTION OF CAPITAL STOCK
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 million
shares of preferred stock, par value $0.001 per share (the "Preferred Stock").
The Company has 42,641,583 shares of Common Stock and no shares of Preferred
Stock issued and outstanding at February 17, 2000. 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.
<PAGE>
<PAGE> 43
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.
Warrants
- --------
The Company has issued 6,900,000 warrants to purchase an aggregate of
6,900,000 shares of Common Stock (the "Warrants") to the Selling Shareholders,
and has reserved an equivalent number of shares for issuance on exercise of
the Warrants. The Warrants are subject to varying exercise prices and other
restrictions, including a call provision as follows:
(a) First Exercise Period: 850,000 of the Warrant Shares will become
exercisable ten (10) days following the November 3, 1999 Closing Date, and
440,000 of the Warrant Shares will become exercisable following the January
10, 2000 Closing Date (aggregate 1,290,000 Warrant Shares exercisable in the
First Exercise Period, hereinafter the First Tranche). The First Exercise
Period for the First Tranche shall expire on the sooner of: (a) One-year
following the respective Closing Dates; or (b) 120 days following the
effective date of the S-1 Registration Statement referenced in paragraph 2
below; or (c) 10 days following Holder's receipt of a Call notification. If
the First Tranche or any portion thereof is not exercised within the First
Exercise Period, the option to exercise the First Tranche or the unexercised
balance thereof shall irrevocably expire. The Exercise Price for the First
Tranche shall be seven cents ($0.07) per share; and
<PAGE> 44
(b)Second Exercise Period: 850,000 of the Warrant Shares will become
exercisable ten (10) days following the November 3, 1999 Closing Date, and
440,000 of the Warrant Shares will become exercisable following the January
10, 2000 Closing Date (aggregate 1,290,000 Warrant Shares exercisable in the
Second Exercise Period, hereinafter the Second Tranche). The Second Exercise
Period for the Second Tranche shall expire on the sooner of: (a) One-year
following the respective Closing Dates; or (b) 180 days following the
effective date of the S-1 Registration Statement referenced in paragraph 2
below; or (c) 10 days following Holder's receipt of a Call notification. If
the Second Tranche or any portion thereof is not exercised within the Second
Exercise Period, the option to exercise the Second Tranche or the unexercised
balance thereof shall irrevocably expire. The Exercise Price for the Second
Tranche shall be eleven cents ($0.11) per share; and
(c) Third Exercise Period: 2,000,000 of the Warrant Shares will become
exercisable ten (10) days following the November 3, 1999 Closing Date, and
1,040,000 of the Warrant Shares will become exercisable following the January
10, 2000 Closing Date (aggregate 3,040,000 Warrant Shares exercisable in the
Third Exercise Period, hereinafter the Third Tranche). The Third Exercise
Period for the Third Tranche shall expire on the sooner of: (a) One-year
following the Closing Date; or (b) 240 days following the effective date of
the S-1 Registration Statement referenced in paragraph 2 below; or (c) 10 days
following Holder's receipt of a Call notification. If the Third Tranche or
any portion thereof is not exercised within the Third Exercise Period, the
option to exercise the Third Tranche or the unexercised balance thereof shall
irrevocably expire. The Exercise Price for the Third Tranche shall be fifteen
cents ($0.15) per share; and
(d) Fourth Exercise Period: 800,000 of the Warrant Shares will become
exercisable ten (10) days following the November 3, 1999 Closing Date, and
480,000 of the Warrant Shares will become exercisable following the January
10, 2000 Closing Date (aggregate 1,280,000 Warrant Shares exercisable in the
Fourth Exercise Period, hereinafter the Fourth Tranche). The Fourth Exercise
Period for the Fourth Tranche shall expire on the sooner of: (a) One-year
following the Closing Date; or (b) one year following the effective date of
the S-1 Registration Statement referenced in paragraph 2 below; or (c) 10 days
following Holder's receipt of a Call notification. If the Fourth Tranche or
any portion thereof is not exercised within the Fourth Exercise Period, the
option to exercise the Fourth Tranche or the unexercised balance thereof shall
irrevocably expire. The Exercise Price for the Fourth Tranche shall be
nineteen cents ($0.19) per share.
(e) Call Provision: The Company reserves the right to require the Investors to
exercise, or forfeit the right to exercise, any and all of the above
referenced Warrants (collectively, (a) through (d) above) as described herein.
Provided the Company is successful in obtaining an effective date for the S-1
Registration Statement from the Commission (and subject to there being more
than ten days remaining during any of the above referenced warrant periods),
the Company shall have the right to require the Investor to either exercise
the Warrants pursuant to the Exercise Periods above, or force the expiration
of such. If the ten-day average closing price of the Company's common stock
equals or exceeds the Call Provision price referenced below for each Tranche,
then the Company shall have the right to provide the Investor with a written
"Call Notification". The Call Provision price shall be based on the ten day
trailing closing average price of the Company's shares, provided however, that
in calculating such average, only those days in which 50,000 or more of the
Company's shares trade will be counted. Upon receipt of the Call Notification,
the Investor shall have up to ten days to either: exercise all or a portion of
<PAGE> 45
the warrants referenced in the particular Exercise Period or irrevocably
forfeit the right to exercise the warrants referenced in that particular
Exercise Period. The Call Provision for the First Tranche warrants shall be
set at $0.175 per share (250% times the strike price). The Call Provision for
the Second Tranche shall be set at $0.22 per share (200% times the strike
price). The Call Provision for the Third Tranche shall be set at $0.2625 per
share (175% times the strike price). The Call Provision for the Fourth
Tranche warrants shall be set at $0.285 per share (150% times the strike
price).
Shares Eligible for Future Sale
- -------------------------------
The Company has 42,641,683 shares of Common Stock issued and outstanding at
February 17, 2000. All of the 13,800,000 shares of Common Stock registered to
be sold by Selling Shareholders will be freely transferable by persons other
than "affiliates" of the Company, as that term is defined under the Securities
Act, without further registration under the Securities Act.
The Company has previously issued shares of Common Stock that constitute
"restricted securities" as that term is defined in Rule 144 adopted under the
Securities Act. Subject to certain restrictions, such securities may
generally be sold in limited amounts one year after their acquisition. The
shares issued in excess of 12 months ago are currently eligible for resale
under Rule 144. Securities held for two years may be sold by nonaffiliates
without limitation. See PRINCIPAL SHAREHOLDERS.
The Company is unable to estimate the total number of shares that may be sold
in the future by its existing Shareholders or the effect, if any, that sales
of shares by such Shareholders will have on the market price of the Common
Stock prevailing from time to time. Sales of substantial amounts of Common
Stock by existing Shareholders could adversely affect prevailing market
prices.
Transfer and Warrant Agent
- --------------------------
The Company's transfer agent is Atlas Stock Transfer, Atlas Stock Transfer
Corporation, 5899 South State Street, Salt Lake City, Utah 84107, Telephone
(801) 266-7151 and Facsimile (801) 262-0907.
LITIGATION
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. A judgment against the
Company has been rendered, but no final amount of judgment has been reached.
The total amount in dispute is approximately $75,000.
<PAGE>
<PAGE> 46
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 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. However, neither failure by Middlemarch to register its
claim, nor transfer of the property by IEI Canada would serve to cancel the
underlying debt, if such claim is found to be valid.
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.
<PAGE> 47
LEGAL MATTERS
Taylor and Associates, Inc., Attorneys and Counselors at Law, Salt Lake City,
Utah, counsel to the Company, will render an opinion that the Common Stock
being offered hereby, has been fully paid and nonassessable under the
corporate laws of the state of Utah.
EXPERTS
The financial statements included herein and elsewhere in this Registration
Statement, to the extent and for the periods indicated in its report, have
been included in this Prospectus and the Registration Statement, in reliance
on the report of Jones, Jensen & Company, Certified Public Accountants, Salt
Lake City, Utah, given on the authority of said firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed this Registration Statement on Form S-1 under the
Securities Act with the Commission with respect to the securities offered by
this Prospectus. This Prospectus omits certain information contained in the
Registration Statement. For further information, reference is made to the
Registration Statement and to the exhibits and other schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and where
such contract or document is an exhibit to the Registration Statement, each
such statement is deemed to be qualified and amplified in all respects by the
provisions of the exhibit. Copies of the complete Registration Statement,
including exhibits, may be examined without charge at the Commission's
principal offices in Washington, D.C., and copies of all or any part of the
filed materials may be obtained from the Public Reference Section of the
Commission, at 450 Fifth Street, N.W., Washington, D.C. 20549, on payment the
ususal fees for reproduction, or may be obtain from the Commission's EDGAR
Database at http://www.sec.gov
<PAGE>
<PAGE> 48
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Title to Document Page
- ----------------- ----
Independent Auditors' Report of Jones, Jensen & Company 49
Consolidated Balance Sheet at December 31, 1998 50
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 52
Consolidated Statements of Stockholders' Equity (Deficit) 53
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 54
Notes to the Consolidated Financial Statements 56
Consolidated Balance Sheet at September 30, 1999 (Unaudited) and
December 31, 1998 66
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998 (Unaudited) 68
Consolidated Statements of Stockholders' Equity (Deficit) 70
Consolidated Statements of Cash Flows for the Three and Nine Months
Ended September 30, 1999 and 1998 (Unaudited) 71
Notes to the Consolidated Financial Statements 72
<PAGE>
<PAGE> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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.
<PAGE> 65
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998
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
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> 66
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
------
September 30, December 31,
1999 1998
------------ ------------
(Unaudited) (As Restated
See Note 12)
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 3,315 $ 12,552
Restricted cash (Note 1) 43,083 40,669
Accounts receivable (Note 1) 94,520 35,079
Prepaid expenses (Note 1) 43,529 -
------------ ------------
Total Current Assets 184,447 88,300
------------ ------------
PROPERTY AND EQUIPMENT (Net)(Notes 1 and 2) 220,714 275,973
------------ ------------
OTHER ASSETS
Investment in joint venture (Note 7) - -
Deposits 21,644 10,740
------------ ------------
Total Other Assets 21,644 10,740
------------ ------------
TOTAL ASSETS $ 426,805 $ 375,013
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 67
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
September 30, December 31,
1999 1998
------------ ------------
(Unaudited) (As Restated
See Note 12)
CURRENT LIABILITIES
Accounts payable $ 99,045 $ 356,890
Accrued expenses (Note 4) 356,130 323,755
Unearned revenue (Note 1) - 21,666
Due to related party (Note 3) - 14,286
Notes payable, current portion (Note 5) 45,030 85,902
------------ ------------
Total Current Liabilities 500,205 802,499
------------ ------------
LONG-TERM DEBT
Note payable, related party (Note 6) 750,000 -
Notes payable (Note 5) 137,195 157,405
------------ ------------
Total Long-Term Debt 887,195 157,405
------------ ------------
Total Liabilities 1,387,400 959,904
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8) 496,591 747,819
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; 100,000,000 shares authorized
of $0.001 par value, 35,500,905 and
33,000,905 shares issued and outstanding,
respectively 35,501 33,001
Additional paid-in capital 20,837,259 20,589,759
Other comprehensive income 44,688 38,419
Accumulated deficit (22,374,634) (21,993,889)
------------ ------------
Total Stockholders' Equity (Deficit) (1,457,186) (1,332,710)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 426,805 $ 375,013
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 68
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Net sales $ 83,314 $ 269,662 $ 418,206 $ 525,246
Direct costs 110,828 165,516 322,935 329,360
---------- ---------- ---------- ----------
Gross Profit (27,514) 104,146 95,271 195,886
---------- ---------- ---------- ----------
EXPENSES
General and administrative 230,622 325,695 778,134 1,351,703
Bad debt expense - 19,802 - 19,802
Depreciation and amortization 24,865 28,415 74,393 84,141
---------- ---------- ---------- ----------
Total Expenses 255,487 373,912 852,527 1,455,646
---------- ---------- ---------- ----------
Loss From Operations (283,001) (269,766) (757,256) (1,259,760)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Other income 5,358 31,775 37,857 73,238
Interest income - 201 115 425
Interest expense (11,250) (13,208) (35,989) (30,374)
Loss on investment in joint venture - (155,000) - (226,071)
Loss on disposition of assets - - - (14,311)
---------- ---------- ---------- ----------
Total Other Income (Expense) (5,892) (136,232) 1,983 (197,093)
---------- ---------- ---------- ----------
NET LOSS BEFORE EXTRAORDINARY ITEMS (288,893) (405,998) (755,273) (1,456,853
---------- ---------- ---------- ----------
EXTRAORDINARY ITEMS
Debt forgiveness (Note 8) - - 374,528 -
---------- ---------- ---------- ---------
Total Extraordinary Items - - 374,528 -
---------- ---------- ---------- ----------
NET LOSS $ (288,893) $ (405,998) $ (380,745) $(1,456,853)
========== ========== ========== ==========
OTHER COMPREHENSIVE INCOME
Foreign currency adjustments (400) - 6,269 -
---------- ---------- ---------- ----------
NET COMPREHENSIVE LOSS $ (289,293) $ (405,998) $ (374,476) $(1,456,853)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 69
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Before extraordinary items $ (0.01) $ (0.01) $ (0.02) $ (0.05)
Extraordinary items 0.00 - 0.01 -
---------- ---------- ---------- ----------
BASIC EARNINGS (LOSS) PER SHARE $ (0.01) $ (0.01) $ 0.01 $ (0.05)
========== ========== ========== ==========
FULLY DILUTED EARNINGS (LOSS) PER SHARE
Before extraordinary items $ (0.01) $ (0.01) $ (0.02) $ (0.05)
Extraordinary items 0.00 - 0.03 -
---------- ---------- ---------- ----------
FULLY DILUTED EARNINGS (LOSS) PER SHARE $ (0.01) $ (0.01) $ 0.01 $ (0.05)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 70
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Additional Other
Common Stock Paid-In Comprehensive Accumulated
Shares Amount Capital Income Deficit
----------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 24,693,875 $ 24,694 $ 18,353,541 $ 23,755 $ (20,009,140)
(Previously reported)
Common stock issued for cash
at an average price of $0.35
per share 2,865,701 2,866 998,056 - -
Common stock issued in lieu
of debt at an average price
of $0.16 per share 5,341,330 5,341 830,726 - -
Common stock issued for
services rendered at an
average of $0.21 per share 99,999 100 21,325 - -
Additional capital contributed - - 386,111 - -
Currency translation adjustment - - - 14,664 -
Net loss for the year ended
December 31, 1998 - - - - (1,894,749)
----------- -------- ------------ ----------- ------------
Balance, December 31, 1998 33,000,905 33,001 20,589,759 38,419 (21,993,889)
Common stock issued for cash
at $0.10 per share 2,500,000 2,500 247,500 - -
Currency translation adjustment
(Unaudited) - - - 6,269 -
Net loss for the nine
months ended Sept. 30, 1999
(Unaudited) - - - - (380,745)
----------- -------- ------------ ----------- ------------
Balance, June 30, 1999
(Unaudited) 35,500,905 $ 35,501 $ 20,837,259 $ 44,688 $(22,374,634)
=========== ======== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 71
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (288,893) $ (405,998) $ (380,745) $(1,456,853)
Adjustments to reconcile net income to net
cash (used) by operating activities:
Debt forgiveness - - (374,528) -
Loss on investment in joint venture - 155,000 226,071
Loss on disposition of assets - - - 14,311
Depreciation and amortization 24,865 28,415 74,393 84,141
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 29,038 (160,380) (59,441) (176,423)
(Increase) decrease in deposits and prepaid
expenses (38) 4,996 (54,433) (4,404)
Increase (decrease) in accounts payable 14,033 (135,839) (267,531) (661,092)
Increase (decrease) in unearned revenue - (24,999) (21,666) (24,999)
Increase (decrease) in contingent liabilities (3,641) 517,885 129,969 594,553
Increase (decrease) in accrued expenses 15,914) 143,867 32,375 194,353
---------- ---------- ---------- ----------
Net Cash (Used) by Operating Activities (208,722) 122,947 (921,607) (1,210,342)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (303) (21,505) (19,134) (125,569)
---------- ---------- ---------- ----------
Net Cash (Used) by Investing Activities (303) (21,505) (19,134) (125,569)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for cash - - 250,000 1,000,992
Additional capital contributed - - - 386,111
Proceeds from notes payable - - 750,000 100,341
Principle payments on notes payable (18,989) (24,203) (66,082) (41,179)
---------- ---------- ---------- ----------
Net Cash Provided by Financing Activities (18,989) (24,203) 933,318 1,446,195
========== ========== ========== ==========
NET INCREASE (DECREASE) IN CASH (228,014) 77,239 (6,823) 110,284
CASH, BEGINNING OF PERIOD 274,412 47,504 53,221 14,459
---------- ---------- ---------- ----------
CASH, END OF PERIOD $ 46,398 $ 124,743 $ 46,398 $ 124,743
========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ - $ 9,425 $ 28,639 $ 28,365
Income taxes $ - $ - $ - $ -
NON-CASH FINANCING ACTIVITIES:
Common stock issued for services $ - $ - $ - $ -
Common stock issued on conversion
debt to common stock $ - $ - $ - $ 240,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 72
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 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> 73
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 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
September 30, 1999 and December 31, 1998, respectively.
<PAGE>
<PAGE> 74
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 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 September 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> 75
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 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. Prepaid Expenses
The Company follows the policy of capitalizing prepaid costs and amortizing
the costs over the periods benefitted. Prepaid expenses of $43,529 and $-0-
as of September 30, 1999 and December 31, 1998, respectively, consist of
advanced legal and accounting fees and are charged to operations as the
services are performed.
p. 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> 76
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Furniture and fixtures $ 35,838 $ 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
------------ ------------
626,255 607,121
Accumulated depreciation (405,541) (331,148)
------------ ------------
Net property and equipment $ 220,714 $ 275,973
============ ============
NOTE 3 - RELATED PARTY TRANSACTIONS
As of September 30, 1999 and December 31, 1998, the Company owed $-0- 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
September 30, 1999 and December 31, 1998, the Company owed its transfer agent
a 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.
<PAGE> 77
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 3 - RELATED PARTY TRANSACTIONS (Continued)
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 September 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 September 30, 1999 and December 31,
1998. Following is the breakout of accrued expenses as of September 30, 1999
and December 31, 1998:
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Accrued payroll $ 28,115 $ 12,411
Accrued payroll taxes, penalties and interest 193,282 198,282
Accrued interest 33,750 26,400
Other 100,983 86,662
------------ ------------
$ 356,130 $ 323,755
============ ============
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following:
September 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. $ 139,510 $ 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. 42,715 82,058
Other obligations - 4,999
------------ ------------
Total Notes Payable 182,225 243,307
Less: Current Portion (45,030) (85,902)
------------ ------------
Long-Term Notes Payable $ 137,195 $ 157,405
============ ============
<PAGE>
<PAGE> 78
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 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 nine months ended September 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 September 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> 79
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 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 September 30, 1999 and December 31, 1998 of $496,591
and $747,819, respectively. During the nine months ended September 30, 1999,
$29,603 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 nine months ended September 30, 1999. Additional
contingent liabilities of $152,903 were recorded by the Company during the
nine months ended September 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> 80
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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 September 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.
<PAGE> 81
INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 10 - STOCK OPTIONS (CONTINUED)
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.
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 - 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> 82
[BACK COVER PAGE]
INDUSTRIES ECOSYSTEMS, INC.
___________ Shares
Common Stock
PROSPECTUS
MARCH __, 2000
No dealer, salesman or any other person has been authorized to give
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company. Neither the delivery
of the Prospectus nor any sale made hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Company since the date hereof. This Prospectus does not constitute an offer
to sell or the solicitation of an offer to buy any securities covered by this
Prospectus in any state or other jurisdiction to any person to whom it is
unlawful to make such offer in such state or jurisdiction.
Table of Contents
Section Page
- ------- ----
PROSPECTUS SUMMARY.........................................................
RISK FACTORS...............................................................
PLAN OF DISTRIBUTION.......................................................
SELLING SHAREHOLDERS.......................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................
BUSINESS...................................................................
PROPERTY...................................................................
MANAGEMENT.................................................................
EXECUTIVE COMPENSATION.....................................................
PRINCIPAL SHAREHOLDERS.....................................................
CERTAIN TRANSACTIONS.......................................................
DESCRIPTION OF CAPITAL STOCK...............................................
LITIGATION.................................................................
LEGAL MATTERS..............................................................
EXPERTS....................................................................
ADDITIONAL INFORMATION.....................................................
INDEX TO FINANCIAL STATEMENTS..............................................
FINANCIAL STATEMENTS.......................................................
Until ___________, 2001, all dealers effecting transactions in the Common
Stock, whether or not participating in the distribution, may be required to
deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
<PAGE> 83
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. 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
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
<PAGE> 84
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.
The Registrant's articles 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> 85
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 Utah Revised Business
Corporation Act 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.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses(*) to the Company
in connection with the offering described in the Registration Statement:
Registration Fee............................................$ 500.00*
Accounting Fees and Expenses................................ 2,500.00*
Legal Fees and Expenses..................................... 20,000.00*
Blue Sky Fees............................................... 2,500.00*
Printing and Engraving...................................... 3,500.00*
Transfer Agent Fees......................................... 1,000.00*
----------
Total Expenses..............................................$30,000.00
==========
(*) All figures are estimates.
<PAGE>
<PAGE> 86
ITEM 26. 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 November 1999, the Company issued to John P. Crowe, a major shareholder of
the Company and a principal of the Company's joint venture partner, 4,500,000
Units at a purchase price of $0.0675 per Unit, each Unit consisting of one
share of common stock and one warrant to purchase common stock at exercise
prices and for the periods according to the following schedule:
Amount Price Exercisable
---------- -------- ---------------------
850,000 $ 0.07 11/14/99 - 11/14/00, or 120 days after registration
850,000 $ 0.11 11/14/99 - 11/14/00, or 180 days after registration
2,000,000 $ 0.15 11/14/99 - 11/14/00, or 240 days after registration
800,000 $ 0.19 11/14/99 - 11/14/00, or one year after registration
In January 2000, the Company issued to two unaffiliated investors, 2,400,000
Units at a purchase price of $0.0675 per Unit, each Unit consisting of one
share of common stock and one warrant to purchase common stock at exercise
prices and for the periods according to the following schedule:
Amount Price Exercisable
---------- -------- ---------------------
440,000 $ 0.07 1/21/00 - 1/21/01, or 120 days after registration
440,000 $ 0.11 1/21/00 - 1/21/01, or 180 days after registration
1,040,000 $ 0.15 1/21/00 - 1/21/01, or 240 days after registration
480,000 $ 0.19 1/21/00 - 1/21/01, or one year after registration
The Unit Shares carry registration rights committing the Company, on a best
efforts basis, to file a registration statement on Form S-1 for the purpose of
registering the Units for resale by the holder as a selling shareholder, with
a concomitant reduction in the exercise period upon the effectiveness of the
registration. Expenses for the registration will be shared by the Holders and
the Company. The Warrants are subject to a call provision which permits the
Company to require the exercise or forfeit of the warrants, within 10 days of
the call notice, if the ten day average closing price of the Company's common
stock exceeds the respective exercise prices of the warrants by 250%, 200%,
175% and 150%, respectively. 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.
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.
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.
<PAGE> 87
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.
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.
<PAGE> 88
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.
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.
<PAGE> 89
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.
ITEM 27. EXHIBITS
Copies of the following documents have been included as exhibits to this
Registration Statement, pursuant to Item 601 of Regulation S-B.
SEC
Exhibit Reference
No. No. Title of Document Location
- ------- --------- ----------------- --------
1 3(i) Articles of Incorporation and Amendments Incorporated by
Reference (1)
2 3(ii) Bylaws Incorporated by
Reference (1)
3 5 Opinion of Taylor and Associates, Inc.
Attorneys and Counselors at Law This Filing
4 23 Consent of Jones, Jensen & Company,
Certified Public Accountants This Filing
5 23 Consent of Taylor and Associates, Inc.,
Attorneys and Counselors at Law This Filing
(1) Incorporated by reference to the Company's registration statement on Form
10-SB, SEC file no. 0-29838, and all amendments thereto.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to (i) include any
Prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in
the Prospectus any facts or events which, individually or in the aggregate,
represent a fundamental change to the information in the Registration
Statement; and (iii) include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) For the purpose of determining liability under the Securities Act,
each post-effective amendment will be treated as a new Registration Statement
of the securities offered, and the offering of the securities at that time
shall be the initial bona fide offering.
(3) If, applicable, file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised 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.
<PAGE> 90
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person in connection with the securities being
registered), the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by the
Registrant is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant under Rule 424(b)(1), or (4), or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, each post
effective amendment that contains a form of Prospectus will be treated as a
new Registration Statement for the securities offered in the Registration
Statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned,
thereunder duly authorized, in the city of Bloomfield, State of New Mexico, on
the 29th day of February 2000.
INDUSTRIAL ECOSYSTEMS, INC.
/S/ Tom Jarnagin, President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person who signature appears below
constitutes and appoints Tom Jarnagin, with power of substitution, as his or
her attorney-in-fact for him or her, in all capacities, to sign any amendment
to this registration statement and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact or
his or her substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
- -----------------------------
/S/ Tom Jarnagin Director February 29, 2000
- -----------------------------
/S/ Magaly Bianchini Director February 29, 2000
- -----------------------------
/S/ Steven C. Justus Director February 29, 2000
<PAGE>
EXHIBIT NO. 3 & 5
TAYLOR AND ASSOCIATES, INC.
3090 East 3300 South, Suite 400
Salt Lake City, UT 84109
February 29, 2000
Board of Directors
Industrial Ecosystems, Inc.
2040 West Broadway
Bloomfield, NM 87413
Re: Industrial Ecosystems, Inc.
Registration Statement on Form S-1
Gentlemen:
We have been retained by Industrial Ecosystems, Inc. (the "Company") in
connection with the registration statement (the "Registration Statement") on
Form S-1 to be filed by the Company with the Securities and Exchange
Commission relating to the securities of the Company. You have requested that
we render our opinion as to whether or not the securities proposed to be sold
by the Seller Shareholders on the terms set forth in the Registration
Statement have been validly issued, fully paid, and nonassessable.
In connection with this request, we have examined the following:
1. Articles of Incorporation of the Company, and amendments thereto;
2. Bylaws of the Company;
3. Unanimous consent resolutions of the Company's board of directors;
4. The Registration Statement; and
5. The Stock Subscription Documents and related Warrants prepared by
the Company and executed by the Selling Shareholders in connection
with their purchase of the securities from the Company.
We have examined such other corporate records and documents and have
made such other examinations as we have deemed relevant.
Based on the above examination, we are of the opinion that the securities of
the Company to be sold by the Selling Shareholders pursuant to the
Registration Statement have been validly authorized and issued, fully paid,
and nonassessable under corporate laws of the state of Utah.
This opinion is limited in scope to the shares being sold by the Selling
Shareholders pursuant to the Registration Statement and does not cover
subsequent issuance of shares to be made in the future. Such transactions are
required to be included in either a new registration statement or a
post-effective amendment to the Registration Statement, including updated
opinions concerning the validity of issuance of such shares.
Further, we consent to our name, Taylor and Associates, Inc. being included in
the Registration Statement as having rendered the foregoing opinion and as
having represented the Company in connection with the Registration Statement.
Sincerely,
TAYLOR AND ASSOCIATES, INC.
/S/Elliott N. Taylor, Esq.
<PAGE>
EXHIBIT NO. 5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 19, 1999,
relating to the consolidated financial statements of Industrial Ecosystems,
Inc., a Utah corporation, which appear in such Prospectus. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
/S/ JONES, JENSEN & COMPANY
Salt Lake City, Utah
February 29, 2000
