S-1/A 1 rss1a1.txt AMENDMENT NO. 1 1 Date Filed: September 12, 2000 SEC File No. 333-40296 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Amendment No. 1 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. 2681 Parleys Way, Suite 203 Attorneys and Counselors at Law Salt Lake City, UT 84109 2681 Parleys Way, Suite 203 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.

Footnotes appear on next page 2 (1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457. This amount is based upon the closing price ($0.10) of the common stock of the Registrant as reported on the NASD's OTC Bulletin board on June 27, 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. 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 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 5 [FRONT COVER PAGE] PROSPECTUS SUBJECT TO COMPLETION -- DATED JUNE __, 2000 21,900,000 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 $4,306,400 in proceeds from the exercise of warrants to purchase up to 12,300,000 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 June 27, 2000, the last reported sales price of the Common Stock was $0.10 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 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. 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................ 9,600,000 shares of Common Stock 12,300,000 Warrant Shares Shares Outstanding as of Prospectus Date.................... Common Stock: 45,900,683 Preferred Stock: -0- Shares Outstanding after Offering... Common Stock: 67,800,683 (1) Preferred Stock: -0- ------------------------ (1) Assuming the outstanding Warrants to purchase up to 12,300,000 Warrant Shares are exercised and no other shares of Common Stock have been issued by the Company. 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 12,300,000 Warrant Shares, the Company could receive up to $4,306,400 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.

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 $232,487 for the threee month period ended March 31, 2000. After taking into account $8,267 of other income, $14,122 in interest expense and a loss of $9,262 in foreign currency adjustments, we had a net comprehensive loss of $247,604. 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 $(23,046,829)at March 31, 2000, we have a working capital deficit and limited internal financial resources, the report of the Company's auditor at December 31, 1999 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. 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 48% 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 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. 12 PLAN OF DISTRIBUTION Selling Shareholders The Selling Shareholders may sell up to 21,900,000 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. The Selling Shareholders, including Mr. Crowe and Mr. Reynoso who are or may be considered affiliates of broker-dealers, have represented that they purchased the Common Stock and warrants in the ordinary course of business and at the time of purchase had no agreements or understandings, directly or indirectly, with any person to distribute the securities. 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 certain Selling Shareholders 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 Warrants). 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 24, 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 9.80 (1) Warrant Shares(3) 4,500,000 8.93 (2) Everett P. Hailey Common Stock 2,250,000 4.90 (1) Warrant Shares (3) 2,250,000 4.67 (2) William Hagerman Common Stock 150,000 0.33 (1) Warrant Shares (3) 150,000 0.32 (2) Core Financial, LLC Common Stock 300,000 0.65 (1) Warrant Shares (3) 600,000 1.29 (2) Marte Anderson Common Stock 600,000 1.31 (1) Warrant Shares (3) 1,200,000 2.55 (2) Deron Nardo Common Stock 600,000 1.31 (1) Warrant Shares (3) 1,200,000 2.55 (2) Joseph Reynoso Common Stock 600,000 1.31 (1) Warrant Shares (3) 1,200,000 2.55 (2) Jon Porricelli Common Stock 600,000 1.31 (1) Warrant Shares (3) 1,200,000 2.55 (2) ------------ ---------------- Totals Common Stock 9,600,000 20.91 (1) ============ ================ Warrant Shares 12,300,000 21.13 (2) ============ ================ (1) Based on the number of issued and outstanding shares of Common Stock at June 16, 2000. (2) Based on the number of issued and outstanding shares of Common Stock at June 16, 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 14 MARKET FOR SECURITIES At June 27, 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 Ending December 31, 2000 High Bid Low Bid ----------------------------------- -------- -------- First Quarter $0.50 $0.05 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 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 *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 June 27, 2000 there were approximately 465 shareholders of record of the Company's common stock and the reported bid or asked prices for the Company's common stock was $0.10 and $0.10, respectively. As of June 27, 2000, the Company has issued and outstanding 45,900,683 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. 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. The Company is including this cautionary statement for the express purpose of availing itself of the protections of the safe harbor provided by the Private Securities Litigation Reform Act of 1995 with respect to all such forward-looking statements. Examples of forward-looking statements include, but are not limited to: (a) projections of revenues, capital expenditures, growth, prospects, dividends, capital structure and other financial matters; (b) statements of plans and objectives of the Company or its management or Board of Directors; (c) statements of future economic performance; (d) statements of assumptions underlying other statements and statements about the Company and its business relating to the future; and (e) any statements using the words "anticipate," "expect," "may," "project," "intend" or similar expressions. Year 2000 Disclosure -------------------- The Company did not experience any year 2000 problems. Agreement of Merger ------------------- On June 30, 2000 (the "Effective Date"), the "Company") signed an Agreement of Merger with ROP Merger Corp., a Missouri corporation, in order to accomplish the transactions contemplated in a Rights Agreement dated December 31, 1998, wherein JFJ Ecosystems, LLC ("JFJ"), the Company's joint venture partner, had the right on or prior to December 31, 2000 to sell its 50% membership interest in the joint venture, ROP North America, LLC (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 received a total of 17,107,408 shares of the Company's Common Stock, plus an option to acquire an additional 2,261,334 shares of Common Stock at an exercise price of $0.09 per share, the five day trailing average of the Company's stock prior to the Effective Date. In exchange for the shares and options: 1. The Company received all of JFJ's interest in the JV, and the resulting wholly-owned subsidiary was merged into the Company; 2. JFJ converted its loan of $750,000 and accrued interest (advanced to the Company in connection with the Rights Agreement); and 3. JFJ converted an additional $57,695 in principal and interest loaned to the JV. The Agreement of Merger also provided for the issuance of 1,592,522 shares to John P. Crowe, an affiliate of the Company and a principal of JFJ, in settlement of a total of $191,550 in principal and interest loaned to the JV. The complete Agreement of Merger, which details the share and option issuances outlined above, is included as an Exhibit to the Current Report on Form 8-K, filed with the Commission on July 14, 2000. 16 Results of Operations --------------------- General ------- The Company's revenues are generated primarily by its business operations in the United States through its wholly owned subsidiary Environmental Protection Company ("EPC"). Since March, 1998, the Company has pursued the development of ROP North America, LLC ("ROP"), through the Company's wholly owned Canadian subsidiary, IEI Canada which held a 50% interest in ROP. At June 30, 2000, the Company acquired all of IEI Canada's interest in ROP, and the remaining 50% interest in ROP, and effected a merger of ROP into the Company. Since the transaction was accounted for as a purchase at June 30,2000, the consolidated balance sheet includes the accounts of ROP North America, Inc., but the consolidated statement of operations for the six and three months ended June 30, 2000, do not include the operations of the subsidiary for those time periods. For the six months ended June 30, 2000, the functional currency for the Company's foreign subsidiary (IEI Canada and its subsidiaries) has been determined to be the Canadian Dollar. Any applicable assets and liabilities have been translated at period end exchange rates and operating statement items are translated at average exchange rates prevailing during the period. For the six month period ended June 30, 2000, the Company had a loss of $3,482 as a result of foreign currency translation adjustment. Six Month Period ended June 30, 2000 compared to June 30, 1999 -------------------------------------------------------------- Substantially all revenue during the six month period ended June 30, 2000 was derived from EPC's operations, with total revenues of $133,940 and direct costs of $150,107 or approximately 112% of revenues. Total revenues for the six month period ended June 30, 1999 were $334,892 with direct costs of $212,107, or approximately 63% of revenue. The significant decrease in revenues for the period ended June 30, 2000 compared to same period in the preceding year is primarily attributable to the fact that remediation revenues from Amoco, EPC's principal customer, dropped significantly. During 1999, Amoco merged with British Petroleum (now "BP-Amoco"), and has since 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 EPC's anticipated bioremediation work during the current period has been delayed or canceled. The cost of EPC's bioremediation work for BP-Amoco has generally been 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 fiscal year 1999 and continuing through the current period bioremediation revenues from BP-Amoco have significantly decreased. Management of the Company hopes that this trend will reverse for balance of fiscal year 2000, but has not received any assurances or commitments from BP-Amoco. 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. The Company has started work on some BP-Amoco Colorado projects, but there is no guarantee that the Company's BP-Amoco 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 BP-Amoco remediation operations. BP- Amoco has told management that they have a 5 year plan for remediation in New Mexico and a 3 year plan for Colorado, but has made no commitments to the Company on specific amounts of work in either state. 17 In addition to the overall decrease in revenues during the current period, the Company performed a greater number of general roustabout jobs, including some jobs for Public Service Company of New Mexico, with lower revenues and higher direct costs as opposed to remediation jobs with higher revenue and lower direct costs. The substantial increase in direct costs for the six month period ended June 30, 2000 as a percent of sales compared to the same period in the preceding year is attributable to both the increase in jobs with higher direct costs and the need to maintain a minimum workforce and operation in spite of lower overall revenues. In an attempt to expand its revenue base for fiscal year 2000, the Company has been 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, now completed, was originally expected to be from five to six months after the demonstration commenced, but was extended in order for the Department of Defense and others to fully evaluate the results of the demonstration. The final evaluations have deemed the remediation to be a success, and management hopes that the Company's technology and process could become, given certain site characteristics, the preferred method for reducing hydrocarbon contamination in soil. However, the Company has not signed or been promised any contracts as a result of the successful demonstration. Corporate Expense. For the six months ended June 30, 2000 total operating expenses were $473,174, consisting of general and administrative expenses of $446,045 and depreciation and amortization expenses of $27,129, resulting in a loss from operations of $489,341. For the six months ended June 30, 1999 total operating expenses were $597,040, consisting of general and administrative expenses of $547,512 and depreciation and amortization expenses of $49,528, resulting in a loss from operations of $474,255. The operating expenses for the six months ended June 30, 2000 represent a substantial reduction in overall operating expenses (approximately 21%) compared to the Company's operating expenses incurred for the six months ended June 30, 1999. The reduction in operating expenses for the six months just ended is a result of the efforts the Company has undertaken to reduce cash outflows in non-revenue producing areas and the reduction in workforce to the minimum possible level. Interest Expense. Interest expense for the six months ended June 30, 2000 was $29,757, compared to $24,739 for the same period in the preceding year, which is primarily attributed to the line-of-credit obtained from a related party. At June 30, 2000, the Company issued 6,235,402 shares in satisfaction of the principal and interest on the line-of-credit as part of the Agreement of Merger described above. Other Income and Expense. Other income for the six months ended June 30, 2000 was $22,205. Other income for the six months ended June 30, 1999 was $32,499, of which, substantially all was represented by the balance of the income derived from the one-year consulting agreement with ROP. As a result of the Agreement of Merger, the Company recognized a one-time impairment of goodwill expense of $379,981 (see Note 7 to the Financial Statements). Total other expense for the current six month period was $387,533 compared to other income of $7,875 for the prior period. 18 Extraordinary Item. The Company had no extraordinary items of income or expense during the six month period ended June 30, 1998. During the six months ended June 30, 1999 the Company recognized income from the forgiveness of $374,528 in debt by certain creditors of the Company. See Note 8 to the Financial Statements. For the six months ended June 30, 2000, the Company had a net comprehensive loss of $880,356 and basic loss per share was $0.02. Including the extraordinary item the Company had net comprehensive loss of $85,183 for the six months ended June 30, 1999, and basic loss per share for the period was $0.00. 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. In the six month period ended June 30, 2000, the Company raised a total of $550,480 through the sale of common stock and the exercise of outstanding options. See PART II, ITEM 2, CHANGES IN SECURITIES. The Company had a working capital deficit of $337,760. Cash used in operations for the six month period was $(524,487)and was derived primarily from cash received from the sale of shares. The Company's balance sheet reflects cash and cash equivalents of $-0-, and a bank overdraft liability of $2,485, as a net result of the consolidation of the Company's balance sheet with the accounts of ROP North America, Inc., which took into account checks entered into the general ledger but not yet mailed to vendors at period end. Because the Company has an accumulated deficit of $(23,685,361), has a working capital deficit and limited internal financial resources, the report of the Company's auditor at December 31, 1999 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. Subsequent to the period end, the Company obtained a commitment from John P. Crowe to establish an additional credit line up to $125,000, secured against EPC's equipment. Management intends to rely on additional equity financing if required to sustain operations until revenues are adequate to cover costs, either through the exercise of outstanding options and warrants, or the sale of additional equity securities. The Company has filed an S-1 Registration Statement to register on behalf of certain shareholders, including John P. Crowe (collectively, the "Selling Shareholders") shares and shares issuable on the exercise of warrants sold to such individuals during the period from November 1999 through June 2000. The Registration Statement is not yet effective. It is possible the Company could receive proceeds from exercise of the warrants. However, the Company has not received any commitments from the Selling Shareholders, nor has it begun any exploration of the possible sale of additional securities. At June 30, 2000, the Company has recorded $305,360 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. A settlement has been reached with the state of New Mexico for the sales tax owed and the Company is current with the settlement 19 arrangements as of June 30, 2000. During the year ended December 31, 1999 the Company extended a preliminary settlement offer to the IRS on Form 433. The settlement offer to the IRS was based on the Company's anticipated need to raise additional working capital without exposing such capital to potential seizure by the IRS. The terms of the preliminary settlement offer are based on the trustee portion (the amount the Company withheld from its Employees' W- 2 wages) of tax due and contingent on the IRS finalizing its examination confirming the financial condition of the Company and the financial condition of those officers and directors of the Company during the time that the tax liability arose (the "Responsible Parties"). The trustee portion due is approximately $90,000 and will require the Company to make installment payments to the IRS of approximately $5,000 per month over 24 months. Upon payment in full of the settled amount the IRS will provide the Company and any Responsible Parties with a full release from liability. Should the Company fail to maintain the monthly payments to the IRS, the IRS will have the right to collect from the individual Responsible Parties as well as the Company. To finalize the settlement offer with the IRS, the Company has provided the IRS with a narrative description of the Company's current plan of business operations and a logical reason for the offer and compromise. In addition, the IRS is conducting an investigation of the assets of the Responsible Parties to determine whether or not the Responsible Parties have sufficient liquid assets to satisfy the trustee portion of the tax due. The Company has reserved and recorded possible contingent liabilities to individuals who claim they are still owed money by the Company although the Company has issued shares of its common stock to such individuals as payment of such debts or because the Company is uncertain as the whether the creditors are holding the Company responsible to certain debts incurred by former officers and directors of the Company. At June 30, 1999, the Company has recorded total contingent liabilities of $582,336, the same as at December 31, 1999. Impact of Inflation ------------------- The Company does not anticipate that inflation will have a material impact on its current or proposed operations. Seasonality ----------- The Company's bioremediation business operations tend to have varying degrees of seasonality. A majority of the Company's bioremediation jobs are done on sites in and around Farmington, New Mexico, during the warm weather months. Since many of the clean-up sites are located in rural areas and accessible only over dirt or unimproved roads, the Company's ability to excavate and remove contaminated soil can be restricted during inclement weather. In addition, soil is difficult or impracticable to dig and turn when the ground is frozen, the bioremediation process requires above freezing temperatures to be effective. 20 Year ended December 31, 1999 compared to December 31, 1998 ------------------------------------------------------------------------- Substantially all revenue during year ended December 31, 1999 was derived from EPC's operations, with net sales being $472,865 and direct costs associated therewith being $405,100 or approximately 85.7% of revenues. Net sales for the year ended December 31, 1998 were $626,545 and direct costs associated therewith were $405,787, or approximately 64.8% of revenues. The direct costs for the year ended December 31, 1999 as a percent of sales was approximately 20% 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 lower revenues and higher direct costs as opposed to remediation jobs with higher revenue and 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 year 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 reverse for fiscal 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 year ended December 31, 1999 for Public Service Company of New Mexico. In addition, to expand its revenue base for fiscal year 2000, 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 year ended December 31, 1999 total operating expenses were $1,186,833, consisting of general and administrative expenses of $1,089,270 and depreciation and amortization expenses of $97,563, resulting in a loss from operations of $1,119,068. For the year ended December 31, 1998 total operating expenses were $1,714,528, 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 $1,493,770. The operating expenses for the year ended December 31, 1999, represent a reduction of $527,695 in overall operating expenses (approximately 30%) compared to the Company's operating expenses 21 incurred for the year ended December 31, 1998. This is particularly important in lieu of the Company's approximately 25% reduction in net sales for the 1999 fiscal year as compared to the 1998 fiscal year. The reduction in operating expenses for the fiscal year 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 year ended December 31, 1999 was $94,065, more than double that of fiscal 1998, which is attributed to the line-of-credit obtained from a related party. Interest expense for the year ended December 31, 1998 was $40,236, and is attributed to corporate borrowing during the normal course of business. Other Income. Other income for the year ended December 31, 1999 was $55,155, which represents a decrease over other income of $95,118 for the year ended December 31, 1998. During the year ended December 31, 1998, the Company had expenses of $-0- and $353,117, associated with loss on investment in the joint venture and disposition of assets, respectively, so that total other expenses for the 1999 fiscal year was $46,487 compared to $400,979 in the 1998 fiscal year. Extraordinary Item. During the year ended December 31, 1999 the Company recognized income from the forgiveness of $350,957 in debt by certain creditors of the Company. The Company had no extraordinary items of income or expense during the year ended December 31, 1998. Including the extraordinary item the Company had net comprehensive loss of $826,257 for the year ended December 31, 1999. The basic loss per share for the period before extraordinary items was $0.02. For the year ended December 31, 1998, the Company had a net comprehensive loss of $1,880,085 and a basic lose per share of $0.06, for a reduction in net comprehensive loss of $1,053,728 in fiscal year 1999 over fiscal year 1998. Impact of Inflation ------------------- The Company does not anticipate that inflation will have a material impact on its current or proposed operations. Seasonality ----------- The Company's bioremediation business operations tend to have varying degrees of seasonality. A majority of the Company's bioremediation jobs are done on sites in and around Farmington, New Mexico, during the warm weather 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. 22 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. In March 1994, IEI acquired 100% of the equity securities of Environmental Protection Company, a New Mexico corporation ("EPC") in exchange for shares of IEI's Common Stock. Until the acquisition of EPC, IEI had no operating activities. Also, the exchange of IEI's Common Stock for the Common Stock of EPC resulted in the former stockholders of EPC obtaining control of IEI. Accordingly, EPC became the continuing entity for accounting purposes, and the transaction was accounted for as a recapitalization of EPC with no adjustment to the basis of EPC's assets acquired or liabilities assumed. For legal purposes, IEI was the surviving entity. EPC is in the excavation and bioremediation business and operates principally in the Farmington, New Mexico area. In June 1994, IEI, through IEI's wholly-owned Canadian subsidiary, IEI Canada, Inc. ("IEI Canada"), acquired 100% of I.T.E. Ecosystems, Inc., Amlin Grain Roasting, Inc. and a minority interest in N-Viro Systems Canada, Inc. The operations of I.T.E. Ecosystems, Inc. and Amlin Grain Roasting, Inc. were discontinued during 1994. In September 1994, IEI incorporated three separate wholly-owned subsidiaries, RFP Management & Development Corp., ROP Management & Development Corp. and IEI Canada, Inc. In December 1996, IEI incorporated another wholly owned subsidiary, ROP Liquid Feed Corp. with the intent of separating various business activities into different entities. Thereafter, in March 1998, IEI created a Canadian entity (merger company) for the purpose of consolidating IEI Canada, Inc., ROP Liquid Food Corp, ROP Management & Development Corp. and RFP Management and Development Corp. into the merger company. The resulting consolidated entity was named IEI Canada, Inc. The assets and certain liabilities of all of these companies were later assumed by ROP North America, LLC, a joint venture company formed in March, 1998 (the "JV"), and the consolidated companies' operations were discontinued. In June 1998, the Company incorporated two wholly-owned Canadian subsidiaries, 1297833 Ontario Ltd. and 1303873 Ontario, Ltd. The Company anticipated that these subsidiaries would enable it to carry out certain proposed remediation and waste processing operations which never materialized. Management believed that development loans for these operations might be available only to Canadian corporations. The Company is now in the process of assessing the merits of maintaining or closing these subsidiaries which have never had any business operations. In January 1999, due to the need for working capital for both the JV and the Company, the terms of the joint venture agreement were renegotiated, as described more fully below. See CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: Restructure of Interest in ROP. At the request of 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. 23 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 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. 24 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. 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 25 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. 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 June 27, 2000, EPC had three 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. 26 As of June 27, 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. 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, 27 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. 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. 28 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. 29 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

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. 30 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. 31 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. 32 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 33 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. 34 PRINCIPAL SHAREHOLDERS The following table sets forth as of June 16, 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 45,900,683 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 31,822 shares of Common Stock for 31,822 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 18,889,073 (1) 29.15 24.50 1015 West 54th Street Kansas City, MO 64112 Common John P. Crowe 31,474,295 (2) 48.58 40.82 1015 West 54th Street Kansas City, MO 64112 Common Tom Jarnagin 2,962,833 (3) 6.34 3.79 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) 1.60 0.95 Industrial Ecosystems, Inc. 2040 W. Broadway Bloomfield, NM 87413 Common Steven C. Justus 2,000,000 (4) 4.21 2.54 Industrial Ecosystems, Inc. 2040 W. Broadway Bloomfield, NM 87413 Common Officers and Directors as a group (3 persons) 5,698,721 11.84 7.17 -------------------------------- Notes to this table appear on the following page 35 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 16,627,739 shares and 2,261,334 options to purchase shares at an exercise price of the lower of $0.225 per share or market price of the Company's shares at the date of grant, 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 16,627,739 shares and 2,261,334 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 2,562,833 shares held by Tom Jarnagin, and 400,000 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. 36 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 37 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. 38 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 2,261,334 shares of the Company's Common Stock at the lower of $0.225 per share or market price on the date of grant for a term of five (5) years. These options preserve JFJ from dilution by way of the exercise of outstanding options. Upon exercise of the Company's Acquisition Rights, the Company will grant JFJ options equal to one- 39 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. 40 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 45,900,683 shares of Common Stock and no shares of Preferred Stock issued and outstanding at June 16, 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. 41 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 - Private Placement 1 ------------------------------ 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 who participated in the first private placement, 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 42 (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 43 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). Warrants - Private Placement 2 ------------------------------ The Company has issued 12,300,000 warrants to purchase an aggregate of 12,300,000 shares of Common Stock (the "Warrants") to the Selling Shareholders who participated in the second private placement, 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: 1,350,000 of the Warrant Shares will become exercisable ten (10) days following the January 24, 2000 Closing Date (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 ($0.25) per share; and (b)Second Exercise Period: 1,350,000 of the Warrant Shares will become exercisable ten (10) days following the January 24, 2000 Closing Date (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 ($0.50) per share; and (c) Third Exercise Period: 1,350,000 of the Warrant Shares will become exercisable ten (10) days following the January 24, 2000 Closing Date (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 ($0.75) per share; and (d) Fourth Exercise Period: 1,350,000 of the Warrant Shares will become exercisable ten (10) days following the January 24, 2000 Closing Date (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 44 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 ($1.00) 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 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 $0.50 per share (200% times the strike price). The Call Provision for the Second Tranche shall be set at $0.75 per share (150% times the strike price). The Call Provision for the Third Tranche shall be set at $0.94 per share (approximately 125% times the strike price). The Call Provision for the Fourth Tranche warrants shall be set at $1.10 per share (110% times the strike price). Shares Eligible for Future Sale ------------------------------- The Company has 45,900,683 shares of Common Stock issued and outstanding at June 16, 2000. All of the 21,900,000 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. Shares included in this registration which are held by affiliates will be subject to the resale provisions of 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. 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. 45 LITIGATION The Company was involved in certain litigation during 1998 and 1999 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 contended that they had never ordered the product delivered and that the distribution agreement was breached. On January 3, 2000, a judgment was entered into ordering the Company to pay a total of $31,991 plus attorney fees of approximately $12,000. This total amount has been included in accounts payable as of at March 31, 2000 and December 31, 1999. The Company has been making the required payments pursuant to the judgment and is current as of March 31, 2000. The Company is also involved in 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 $582,336 at March 31, 2000 and December 31, 1999). If Middlemarch proceeds with its claim, the Company may be involved in litigation with regard to the circumstances surrounding the creation of the claimed interest and the payment of the debt. 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 Company claims that negotiations were never consummated, and no contract was every 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 Canadian for breach of contract and detrimental reliance, $1 million to Diamond Measure, Inc., and $500,000 to Ronald McGuire. The Company claims no agreement was ever reached and no written contract signed, the Company believes that the action is without merit. 46 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 47 FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS Title to Document Page ----------------- ---- Independent Auditors' Report of Jones, Jensen & Company 47 Consolidated Balance Sheet at December 31, 1999 48 Consolidated Statements of Operations for the Years Ended December 31, 1999 and 1998 50 Consolidated Statements of Stockholders' Equity (Deficit) 51 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999 and 1998 52 Notes to the Consolidated Financial Statements 54 Consolidated Balance Sheet at June 30, 2000 (Unaudited) and December 31, 1999 63 Consolidated Statements of Operations for the Six Months Ended June 30, 2000 and 1999 (Unaudited) 65 Consolidated Statements of Stockholders' Equity (Deficit) 66 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 (Unaudited) 67 Notes to the Consolidated Financial Statements 68 48 INDEPENDENT AUDITORS' REPORT The Board of Directors Industrial Ecosystems, Inc. and Subsidiaries Bloomfield, New Mexico We have audited the accompanying consolidated balance sheet of Industrial Ecosystems, Inc. and Subsidiaries as of December 31, 1999 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years ended December 31, 1999 and 1998. 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, 1999, and the consolidated results of their operations and their cash flows for the years ended December 31, 1999 and 1998, 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 11 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 11. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Jones, Jensen & Company Salt Lake City, Utah March 14, 2000 49 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheet ASSETS ------ December 31, 1999 ------------ CURRENT ASSETS Cash and cash equivalents (Note 1) $ 44,277 Restricted cash (Note 1) 43,306 Accounts receivable (Note 1) 9,902 Prepaid expenses 7,500 ------- Total Current Assets 104,985 ------- PROPERTY AND EQUIPMENT (Net) (Notes 1 and 2) 191,884 ------- OTHER ASSETS Investment in joint venture (Note 7) - ------- Total Other Assets - ------ TOTAL ASSETS $ 296,869 ======= The accompanying notes are an integral part of these consolidated financial statements. 50 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheet (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- December 31, 1999 ------------ CURRENT LIABILITIES Accounts payable $ 85,680 Accrued expenses (Note 4) 326,346 Note payable, related party (Note 6) 750,000 Notes payable, current portion(Note 5) 49,458 ------------ Total Current Liabilities 1,211,484 ------------ LONG-TERM DEBT Notes payable (Note 5) 108,266 ------------ Total Long-Term Debt 108,266 ------------ Total Liabilities 1,319,750 ------------ COMMITMENTS AND CONTINGENCIES (Note 8) 582,336 ------------ STOCKHOLDERS' EQUITY (DEFICIT) Common Stock; 100,000,000 shares authorized of $0.001 par value 40,241,683 shares issued and outstanding 40,242 Additional paid-in capital 21,136,268 Other comprehensive income 26,760 Accumulated deficit (22,808,487) ----------- Total Stockholders' Equity (Deficit) (1,605,217) ----------- TOTAL LIABILITIES AND STOCK HOLDERS' EQUITY (DEFICIT) $ 296,869 =========== The accompanying notes are an integral part of these consolidated financial statements. 51 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Years Ended December 31, ---------------------- 1999 1998 --------- --------- REVENUES Net sales $ 472,865 626,545 Direct costs 405,100 405,787 ---------- ------- Gross Profit 67,765 220,758 ---------- ------- EXPENSES General and administrative 1,089,270 1,586,049 Bad debt expense - 19,802 Depreciation and amortization 97,563 108,677 --------- --------- Total Expenses 1,186,833 1,714,528 --------- --------- Loss From Operations (1,119,068) (1,473,770) --------- --------- OTHER INCOME (EXPENSE) Other income 55,155 95,118 Interest income - 1,362 Interest expense (94,065) (40,236) Loss on investment in joint venture - (353,117) Loss on disposition of assets (7,577) (104,106) --------- --------- Total Other Income (Expense) (46,487) (400,979) --------- --------- NET LOSS BEFORE EXTRAORDINARY ITEMS (1,165,555) (1,894,749) --------- --------- EXTRAORDINARY ITEMS Debt forgiveness (Note 8) 350,957 - --------- --------- Total Extraordinary items 350,957 - ========= ========== NET LOSS $ (814,598) $(1,894,749) ========= ========== OTHER COMPREHENSIVE INCOME Gain (loss) on foreign currency adjustments (11,659) 14,664 --------- ----------- NET COMPREHENSIVE LOSS $(826,257) $(1,880,085) ========= =========== BASIC LOSS PER SHARE $ (0.02) $ (0.06) ========= =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 35,136,383 30,111,107 ========== =========== The accompanying notes are an integral part of these consolidated financial statements. 52 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit)

The accompanying notes are an integral part of these consolidated financial statements. 53 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, ------------------------ 1999 1998 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (814,598) $(1,894,749) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 97,563 108,677 Stock issued for services - 21,425 Loss on investment in joint venture - 305,117 Loss on disposition of assets 7,577 104,106 Debt forgiveness (350,957) - Changes in assets and liabilities: (Increase) decrease in accounts receivable 25,177 6,318 (Increase) decrease in deposits and prepaid expenses 3,240 (10,740) (Increase) decrease in restricted cash (2,637) (40,669) Increase (decrease) in accounts payable (219,431) (82,952) Increase (decrease) in unearned revenue (21,666) 21,666 Increase (decrease) in accrued expenses 28,991 208,001 Increase (decrease) in contingent liabilities 32,650 - --------- --------- Net Cash (Used) by Operating Activities (1,214,091) (1,253,800) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Sale of fixed assets 2,500 - Purchase of fixed assets (23,551) (41,283) ------ ------- Net Cash (Used) by Investing Activities (21,051) (41,283) ------ ------- CASH FLOWS FROM FINANCING ACTIVITIES Principle payments on notes payable (36,883) (93,857) Cash received from notes payable 750,000 - Additional capital contributed - 386,111 Issuance of common stock for cash 553,750 1,000,922 --------- --------- Net Cash Provided by Financing Activities 1,266,867 1,293,176 --------- --------- NET INCREASE (DECREASE) IN CASH 31,725 (1,907) CASH AT BEGINNING OF PERIOD 12,552 14,459 ------ ------ CASH AT END OF PERIOD $ 44,277 $ 12,552 ====== ====== The accompanying notes are an integral part of these consolidated financial statements. 54 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Continued) For the Years Ended December 31, ------------------------ 1999 1998 ----------- ---------- SUPPLEMENTAL CASH FLOW INFORMATION CASH PAID FOR: Interest $ 63,138 $ 67,223 Income taxes - - NON-CASH FINANCING ACTIVITIES: Stock issued for services $ - $ 21,425 Stock issued in conversion of debt to common stock $ - $836,067 The accompanying notes are an integral part of these consolidated financial statements. 55 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 1999 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. 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 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 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. 56 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 1999 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 1999 1998 ------------ ------------ Loss (numerator) $ (814,598) $ (1,894,749) Shares (denominator) 35,136,383 30,111,107 Per share amount $ (0.02) $ (0.06) 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 Financial Accounting Standards Board has issued certain new standards, including standards on earning per share (SFAS 128), capital structure (SFAS 129), comprehensive income (SFAS 130), operating segments (SFAS 131) and postretirement benefits (SFAS 132). The adoption of these standards did not have a material impact on the Company's consolidated financial statements. 57 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) f. 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 g. Restricted Cash The Company holds a certificate of deposit with a Canadian bank in the amount of $43,306 as of December 31, 1999 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. h. 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. i. Provision For Taxes At December 31, 1999, the Company has an accumulated deficit of $22,808,487 which includes net operating loss carryforwards that may be offset against future taxable income through 2019. 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 expire unused. Accordingly, the potential tax benefits of the net operating loss carryforwards are offset by a valuation allowance of the same amount. j. 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. 58 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) k. Statement of Cash Flows The Company's foreign subsidiary, (IEI Canada and its subsidiaries), uses the local currency as its functional 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 rate adjustments resulting from foreign currency transactions are included in the determination of net loss. 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. l. 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. m. Advertising The Company follows the policy of charging the costs of advertising to expense as incurred. n. Revenue Recognition Revenue is recognized as billings are submitted to the customer for the bioremediation process. Billings are submitted once the jobs are substantially complete. NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 1999: Furniture and fixtures $ 26,853 Machinery and equipment 435,005 Computers 14,875 Vehicles 76,000 Leasehold improvements 11,671 Building 14,905 Land 31,561 ------- 610,870 Accumulated depreciation (418,986) ------- Net property and equipment $ 191,884 ======= Depreciation expense for the years ended December 31, 1999 and 1998 was $97,563,and $108,677, respectively. 59 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 1999 NOTE 3 - RELATED PARTY TRANSACTIONS The Company 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 former officers and directors of the Company, relatives of these former officers and directors and companies owned by these former officers and directors. The majority of these stock issuances have been 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 have been recorded by the Company as compensation to the related parties. 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 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. NOTE 4 - ACCRUED EXPENSES Accrued expenses as of December 31, 1999 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, 1999. The following summarizes accrued expenses as of December 31, 1999: Accrued payroll taxes, penalties and interest $213,388 Accrued interest 45,000 Gross receipts taxes payable 64,958 Other 3,000 -------- Total $326,346 ======== NOTE 5 - NOTE PAYABLE Notes payable consisted of the following at December 31, 1999: SBA note payable to a bank, interest at prime +3% per annum, $ 129,919 requires monthly payments of $1,860 plus interest, matures in December 2005, secured by machinery, equipment and certificate of deposit. Note payable to a company, interest at 11.5% per annum, pricipal 27,805 and interest of $5,002 due monthly, matures in June 2000, secured by equipment. --------- Total Notes Payable 157,724 Less: Current Portion (49,458) -------- Long-Term Notes Payable $ 108,266 ========== 60 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 1999 NOTE 5 - NOTE PAYABLE (Continued) The aggregate principle maturities of notes payable are as follows: Year Ended December 31, Amount ----------------------- -------- 2000 $ 49,458 2001 22,320 2002 22,320 2003 22,320 2004 22,320 2005 and thereafter 18,986 ------- Total $ 157,724 ======== NOTE 6 - NOTE PAYABLE - RELATED PARTY During the year ended December 31, 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 were authorized by an independent credit committee on a case-by-case basis. Amounts due on the line-of-credit at December 31, 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, 1999, 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 significant losses of the JV, the investment is recorded at $-0- as of December 31, 1999. 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 in the agreement between the Company and JFJ Ecosystems, Inc. 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 form 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 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. INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 1999 NOTE 8 - COMMITMENTS AND CONTINGENCIES The Company 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 contingent liabilities at December 31, 1999 of $582,336. During the year ended December 31, 1999, a total of $350,957 of contingent liabilities were settled through a full release by the respective creditors. Corresponding income from the debt of forgiveness has been recorded by the Company in the accompanying consolidated financial statements for the year ended December 31, 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 debts as contingent liabilities. The Company was involved in certain litigation during 1998 and 1999 with a New Mexico limited liability company regarding an open account and a distribution agreement. A complain against the Company was filed in July 1997. The Company contended that they had never ordered the product delivered and that the distribution agreement was breached. On January 3, 2000, a judgment was entered into ordering the Company to pay a total of $31,991 plus attorney fees of approximately $12,000. This total amounts has been included in accounts payable as of December 31, 1999. The Company is also involved in 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 $582,336 at December 31, 1999). If Middlemarch proceeds with its claim, the Company may be involved in litigation with regard to the circumstances surrounding the creation of the claimed interest and the payment of the debt. 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 Company claims that negotiations were never consummated, and no contract was every 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. The Company claims no agreement was ever reached and no written contract signed, the Company believes that the action is without merit. 62 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 1999 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 IEI Canada, Inc., a wholly-owned subsidiary of the Company (by virtue of voting rights anc 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. During the year ended December 31, 1999, the Company issued 222,752 shares of its outstanding common stock to convert a total of 283,841 of the class A- special shares. At December 31, 1999, 40,549 class A-special shares remain outstanding that are convertible at the holders option into 31,822 shares of the Company's common stock. These shares have been included in additional paid-in capital of the Company until they are converted in IEI shares. NOTE 10 - STOCK OPTIONS AND WARRANTS 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. These options expire on July 23, 2002. 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. 591,000 of these options will expire if not exercised by March 13, 2002. The remaining 3,540,000 options are "cashless" options and will expire if not exercised by March 13, 2005. 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. In July 1999, the Company issued an additional 100,000 options exercisable at $0.21 per share and expiring on July 28, 2004. In December 1999, the Company issued an additional 80,000 options exercisable at $0.06 per share and expiring on December 1, 2004. The 720,000 options, the 400,000 options, the 100,000 options and the 80,000 options 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. 63 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 1999 NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued) As of December 31, 1999, an aggregate of 5,822,667 options to purchase common shares were outstanding with exercise prices ranging from $0.06 to $1.00 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. Pursuant to a certain stock issuance for cash during the year ended December 31, 1999, the Company issued a total of 4,500,000 warrants to purchase shares of common stock. The warrants are exercisable at in blocks at prices ranging from $0.07 to $0.19 per share and expire on November 3, 2000. 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 $22,808,487 at December 31, 1999, 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 recover ability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty. During 1999 and 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 revenue are adequate to cover the costs. NOTE 12 - SUBSEQUENT EVENT On January 10, 2000, the Company completed a private offering that included the issuance of 2,400,000 shares of its outstanding common stock and the granting of 2,400,000 warrants for a total of $162,000 cash. The warrants are exercisable at prices ranging from $0.07 to $0.19 per share and expire on January 10, 2000. On January 10, 2000, the Company completed a second private offering that included the issuance of 3,000,000 shares of its outstanding common stock and the granting of 6,000,000 warrants for a total of $300,000 cash. The warrants are exercisable at prices ranging from $0.25 to $1.00 per share and expire on January 24, 2000. 64 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheet ASSETS ------ June 30, December 31, 2000 1999 ------------ ------------ CURRENT ASSETS (Unaudited) Cash and cash equivalents $ - $ 44,277 Restricted cash (Note 1) 43,000 43,306 Accounts receivable (Note 1) 22,051 9,902 Prepaid expenses - 7,500 ------------ ------------ Total Current Assets 65,051 104,985 ------------ ------------ PROPERTY AND EQUIPMENT (Net) (Notes 1 and 2) 767,164 191,884 ------------ ------------ TOTAL ASSETS $ 832,215 $ 296,869 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- CURRENT LIABILITIES Accounts payable $ 84,216 $ 85,680 Accrued expenses (Note 4) 305,360 326,346 Bank overdraft 2,485 - Note payable, related party (Noted 6) - 750,000 Notes payable, current portion (Note 5) 10,750 49,458 ------------ ------------ Total Current Liabilities 402,811 1,211,484 ------------ ------------ LONG-TERM DEBT Notes payable (Note 5) 107,500 108,266 ------------ ------------ Total Long-Term Debt 107,500 108,266 ------------ ------------ Total Liabilities 510,311 1,319,750 ------------ ------------ COMMITMENTS AND CONTINGENCIES (NOTE 8) 582,336 582,336 ------------ ------------ STOCKHOLDERS' EQUITY (DEFICIT) Common stock; 100,000,000 shares authorized of $0.001 par value, 64,600,613 and 40,241,683 shares issued and outstanding, respectively 64,601 40,242 Additional paid-in capital 23,345,383 21,136,268 Prepaid services (8,333) - Other comprehensive income 23,278 26,760 Accumulated deficit (23,685,361) (22,808,487) ------------ ------------ Total Stockholders' Equity (Deficit) (260,432) (1,605,217) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 832,215 $ 296,896 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 65 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 66 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit)

The accompanying notes are an integral part of these consolidated financial statements. 67 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 68 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2000 and December 31, 1999 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 operations. On June 30, 2000, the Company acquired the remaining 50% interest in ROP North America, Inc. through a series of transactions by issuing 18,699,930 shares of its outstanding common stock valued at $1,682,994. This 50% interest was recorded as a purchase on June 30, 2000 (see Note 7). ROP North America, Inc. is a 100% owned subsidiary at June 30, 2000. Since the transaction was accounted for as a purchase at June 30,2000, the consolidated balance sheet includes the accounts of ROP North America, Inc., but the consolidated statement of operations for the six and three months ended June 30, 2000, do not include the operations of the subsidiary for those time periods. 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. 69 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2000 and December 31, 1999 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 Financial Accounting Standards Board has issued certain new standards, including standards on earnings per share (SFAS 128), capital structure (SFAS 129), comprehensive income (SFAS 130), operating segments (SFAS 131) and postretirement benefits (SFAS 132). The adoption of these standards did not have a material impact on the Company's consolidated financial statements. f. 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 g. Restricted Cash The Company holds a certificate of deposit with a Canadian bank in the amount of $43,000 and $43,306 as of June 30, 2000 and December 31, 1999, 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. h. 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. 70 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2000 and December 31, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) i. Provision For Taxes At December 31, 1999, the Company has an accumulated deficit of $22,808,487 which includes net operating loss carryforwards that may be offset against future taxable income through 2019. 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. j. 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. k. 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). 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. l. 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. m. Advertising The Company follows the policy of charging the costs of advertising to expense as incurred. n. Revenue Recognition Revenue is recognized as billings are submitted to the customer for the bioremediation process. Billings are submitted once the jobs are substantially completed. 71 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2000 and December 31, 1999 NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment consists of the following: June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) Furniture and fixtures $ 33,185 $ 26,853 Machinery and equipment 1,070,466 435,005 Computers 14,875 14,875 Vehicles 105,718 76,000 Leasehold improvements 232,435 11,671 Building 14,905 14,905 Land 31,561 31,561 ------------ ------------ 1,503,145 610,870 Accumulated depreciation (735,981) (418,986) ------------ ------------ Net property and equipment $ 767,164 $ 191,884 ============ ============ NOTE 3 - RELATED PARTY TRANSACTIONS 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 former officers and directors of the Company, relatives of these former officers and directors and companies owned by these former officers and directors. The majority of these stock issuances have been 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 have been recorded by the Company as compensation to the related parties. 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. NOTE 4 - ACCRUED EXPENSES Accrued expenses as of June 30, 2000 and December 31, 1999 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. A settlement has been reached with the State of New Mexico for sales tax owed and the Company is current with the settlement arrangements as of June 30, 2000. Reasonable interest and penalties have also been accrued as of June 30, 2000 and December 31, 1999. 72 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 1999 and December 31, 1998 NOTE 5 - NOTES PAYABLE Notes payable consisted of the following: June 30, December 31, 2000 1999 ----------- ------------ (Unaudited) 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. $ 118,250 $ 129,919 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. - 27,805 ----------- ------------ Total Notes Payable 118,250 157,724 Less: Current Portion (10,750) (49,458) ----------- ------------ Long-Term Notes Payable $ 107,500 $ 108,266 =========== ============ The aggregate principle maturities of notes payable are as follows: Year Ended December 31, Amount ------------ ------------ 2000 $ 49,458 2001 22,320 2002 22,320 2003 22,320 2004 22,320 2005 and thereafter 18,986 ------------ Total $ 157,724 ============ NOTE 6 - NOTE PAYABLE - RELATED PARTY During the year ended December 31, 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 were authorized by an independent credit committee on a case-by-case basis. Amounts due on the line-of-credit at June 30, 2000 and December 31, 1999 was $-0- and $750,000, respectively. On June 30, 2000, the Company acquired the remaining interest in the joint venture and as part of the transaction, 6,235,402 shares were issued in lieu of the $750,000 (see Note 7). 73 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2000 and December 31, 1999 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.(JFJ) 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, 1999, IEI Canada, Inc. had a 50% equity interest in the JV but did not have management control. Therefore, at December 31, 1999, the investment was being recorded under the equity method of accounting. The Company had the right to acquire the remaining 50% interest in the JV on or prior to December 31, 2000 conditional on meeting certain requirements established in the agreement between the Company and JFJ Ecosystems, Inc. On June 30, 2000, the Company signed an Agreement of Merger to acquire the remaining 50% ownership of the JV. On June 30, 2000, the Company issued a total of 18,699,930 shares of its outstanding common stock in lieu of debt and to acquire JFJ's 50% interest in the joint venture through a series of transactions as follows: 1. 10,392,337 shares issued to acquire JFJ's 50% membership interest in the joint venture and the resulting wholly-owned subsidiary was merged into the Company. 2. 6,715,071 shares issued to JFJ in lieu of the outstanding line-of- credit due of $750,000 plus interest, plus an additional $57,695 that was owed to JFJ by the joint venture (see Note 6). 3. 1,592,522 shares issued in lieu of debt owed by the joint venture to an affiliate of the Company and a principal of JFJ of $191,550 in principal and interest. 4. JFJ also received options to acquire and additional 2,261,334 shares of the Company's common stock at an exercise price of $0.09 per share (see Note 10). As part of the transaction, ROP North America, LLC was dissolved leaving ROP North America, Inc. as the surviving operating entity. In addition, IEI Canada, Inc. transferred its ownership interest in ROP North America, Inc. to the parent company, IEI. Therefore, at June 30, 2000, ROP North America, Inc. became a wholly-owned subsidiary of IEI. As part of the transaction, goodwill of $379,981 was recorded which consisted of the excess of the purchase price over the fair value of net tangible assets of the purchased subsidiary. For the six months ended June 30, 2000, an impairment loss on goodwill of $379,981 was recorded since the Company was unable to determine the present value of the future cash flows of the purchased subsidiary. ROP North America, Inc. was established to transform organic by-product from commercial waste streams into livestock feed. This process is accomplished in part, through a liquid feed system. ROP North America, Inc. also raises approximately 15,000 hogs under contract. In addition, the hog farm is a beta-site for liquid feed products. 74 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2000 and December 31, 1999 NOTE 8 - COMMITMENTS AND CONTINGENCIES The Company 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 contingent liabilities at June 30, 2000 and December 31, 1999 of $582,336 and $582,336, respectively. During the year ended December 31, 1999, $350,957 of contingent liabilities were settled through a full release by the respective creditors. Corresponding income from the debt forgiveness was recorded by the Company for the year ended December 31, 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 debts as contingent liabilities. The Company was involved in certain litigation during 1998 and 1999 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 contended that they had never ordered the product delivered and that the distribution agreement was breached. On January 3, 2000, a judgment was entered into ordering the Company to pay a total of $31,991 plus attorney fees of approximately $12,000. This total amounts has been included in accounts payable as of June 30, 2000 and December 31, 1999. The Company has been making the required payments pursuant to the judgment and is current as of June 30, 2000. The Company is also involved in 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 $582,336 at June 30, 2000 and December 31, 1999). If Middlemarch proceeds with its claim, the Company may be involved in litigation with regard to the circumstances surrounding the creation of the claimed interest and the payment of the debt. 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 Company claims that 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. The Company claims no agreement was ever reached and no written contract signed, the Company believes that the action is without merit. 75 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2000 and December 31, 1999 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-special shares were originally issued. During the year ended December 31, 1999, the Company issued 222,752 shares of its outstanding common stock to convert a total of 283,841 of the class A- special shares. At June 30, 2000 and December 31, 1999, 40,549 class A- special shares remain outstanding that are convertible at the holders option into 31,822 shares of the Company's common stock. These shares have been included in additional paid-in capital of the Company until they are converted in IEI shares. NOTE 10 - STOCK OPTIONS AND WARRANTS 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. These options expire on July 23, 2002. 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. 591,000 of these 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. During the six months ended June 30, 2000, a total of 484,000 of the options were exercised for $106,480. 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. In July 1999, the Company issued an additional 100,000 options exercisable at $0.21 per share and expiring on July 28, 2004. In December 1999, the Company issued an additional 80,000 options exercisable at $0.06 per share and expiring on December 1, 2004. The 720,000 options, the 400,000 options, the 100,000 options and the 80,000 options 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. During the six months ended June 30, 2000, 75,000 options were exercised at $0.16 per share for $12,000. 76 INDUSTRIAL ECOSYSTEMS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements June 30, 2000 and December 31, 1999 NOTE 10 -STOCK OPTIONS AND WARRANTS (Continued) On June 30, 2000, pursuant to the acquisition agreement with JFJ Ecosystems, Inc., the Company issued 2,261,334 options to JFJ exercisable at $0.09 per share and expiring on June 30, 2005 (see Note 7). The exercise price of the options is equal to or greater than the prior 10-day average trading price of the Company's shares. As of June 30, 2000 and December 31, 1999, an aggregate of 7,525,001 and 5,822,667 options to purchase common shares were outstanding, respectively, with exercise prices ranging from $0.06 to $1.00 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. Pursuant to a certain stock issuance for cash during the year ended December 31, 1999, the Company issued a total of 4,500,000 warrants to a related party to purchase shares of common stock. The warrants are exercisable in blocks at prices ranging from $0.07 to $0.19 per share and expire on November 3, 2000. Pursuant to certain stock issuances for cash during the six months ended June 30, 2000, the Company issued a total of 6,150,000 warrants to purchase shares of common stock. The warrants are exercisable in blocks at prices ranging from $0.07 to $1.00 per share. 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 $22,808,487 at December 31, 1999, 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. During 1999 and 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. 77 [BACK COVER PAGE] INDUSTRIES ECOSYSTEMS, INC. ___________ Shares Common Stock PROSPECTUS JUNE __, 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. 78 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 79 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. 80 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. 81 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. Also in January 2000, the Company issued to five unaffiliated investors, 2,700,000 Units at a purchase price of $0.10 per Unit, each Unit consisting of one share of common stock and two warrants to purchase common stock at exercise prices and for the periods according to the following schedule: Amount Price Exercisable ---------- -------- --------------------- 1,350,000 $ 0.25 2/3/00 - 2/3/01, or 120 days after registration 1,350,000 $ 0.50 2/3/00 - 2/3/01, or 180 days after registration 1,350,000 $ 0.75 2/3/00 - 2/3/01, or 240 days after registration 1,350,000 $ 1.00 2/3/00 - 2/3/01, 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 82 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. 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 83 technical services. The value for the services provided was placed at an average of $0.18 per share. No cash consideration was received by the issuer and the aggregate offering price for the securities (approximately $394,000) was determined to be the fair market value for the employee and consulting services provided. None of the purchasers were officers and/or directors of the issuer at the time of issuance of the securities or currently hold such positions with the issuer. In 1997, the Company issued 2,163,917 shares of Common Stock in exchange for the conversion of 2,163,917 shares of Class-A Special Shares of IEI Canada which were issued in connection with: a Global Share Purchase Agreement executed by and between Industrial Ecosystems, Inc., ITE Ecosystems, Inc., and ITE Ecosystems, Inc. shareholders; and a Share Exchange Agreement executed by and between Industrial Ecosystems, Inc., ITE Ecosystems, Inc. shareholders and IEI, Canada, Inc., both dated June 28, 1994. The above Agreements were executed to effect the purchase of all the outstanding shares of ITE Ecosystems, Inc. common stock. Each ITE shareholder executed an individual Share Purchase Agreement in which each share of ITE common stock was exchanged for a designated number of shares of IEI, Canada "Special Class A" shares. In addition, each ITE shareholder received a warrant permitting the exchange of the IEI, Canada "Special Class A" shares for an equal number of Industrial Ecosystems, Inc. pre-split shares at any time until 2015. A total of 4,000,000 Special Class A shares were issued. At December 31, 1998, 324,390 shares were outstanding that are convertible at the holder's option into 254,573 post-split shares of the Company's Common Stock. In 1997, the Company issued an option to purchase 166,667 (post-split) shares of common stock at an exercise price of $0.15 per share to an entity that provided a loan to the Company. At the time the options were granted, the exercise price was equal to or greater than the prior 10 day average trading price of the Company's shares. These options will expire if not exercised by July 23, 2002. In 1996, the Company issued 538,499 shares of Common Stock for cash in a private placement at an average price of $0.70 per share to certain unaffiliated investors. No underwriter or placement agent was used by the Company and no commissions were paid. No general advertising or solicitation was used in connection therewith. In 1996, the Company issued 1,159,295 shares of Common Stock to various individuals for professional and consulting services relating to conducting market research, development of the Company's marketing research and business plan, and providing legal and technical services. The value for the services provided was placed at an average of $0.76 per share. No cash consideration was received by the issuer and the aggregate offering price for the securities (approximately $881,695) was determined to be the fair market value for the consulting services provided. None of the purchasers were officers and/or directors of the issuer at the time of issuance of the securities or currently hold such positions with the issuer. 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. 84 In 1996, the Company issued 2,734 shares of Common Stock in to certain individuals in lieu of salary at an average value of $0.59 per share. In 1996, the Company issued 366,667 shares in a private placement to certain individuals from whom consideration was never received at an average price of $0.60 per share. The certificates representing these shares have subsequently been canceled and a corresponding adjustment to shareholders' equity has been made to reflect the cancellation. In 1996, the Company issued 221,370 shares of Common Stock in exchange for the conversion of 221,370 shares of Class-A Special Shares of IEI Canada which were issued in connection with: a Global Share Purchase Agreement executed by and between Industrial Ecosystems, Inc., ITE Ecosystems, Inc., and ITE Ecosystems, Inc. shareholders; and a Share Exchange Agreement executed by and between Industrial Ecosystems, Inc., ITE Ecosystems, Inc. shareholders and IEI, Canada, Inc., both dated June 28, 1994. The above Agreements were executed to effect the purchase of all the outstanding shares of ITE Ecosystems, Inc. common stock. Each ITE shareholder executed an individual Share Purchase Agreement in which each share of ITE common stock was exchanged for a designated number of shares of IEI, Canada "Special Class A" shares. In addition, each ITE shareholder received a warrant permitting the exchange of the IEI, Canada "Special Class A" shares for an equal number of Industrial Ecosystems, Inc. pre-split shares at any time until 2015. A total of 4,000,000 Special Class A shares were issued. Securities issued in the foregoing transactions were issued in reliance on the exemption from registration and the prospectus delivery requirements of the Securities Act of 1933, as amended (the "Securities Act"), set forth in Section 3(b) and/or Section 4(2) of the Securities Act and the regulations promulgated thereunder. 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 Original Filing 4 23 Consent of Jones, Jensen & Company, Certified Public Accountants Original Filing 5 23 Consent of Taylor and Associates, Inc., Attorneys and Counselors at Law Original Filing (1) Incorporated by reference to the Company's registration statement on Form 10-SB, SEC file no. 0-29838, and all amendments thereto. 85 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. 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. 86 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 19th day of June 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 September 12, 2000 ----------------------------- /S/ Magaly Bianchini Director September 12, 2000 ----------------------------- /S/ Steven C. Justus Director September 12, 2000

INDUSTRIAL ECOSYSTEMS INC S-1/A