SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-23897
EARTHFIRST TECHNOLOGIES, INCORPORATED
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(Exact name of registrant as specified in charter)
FLORIDA 59-3462501
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1226 TECH BLVD.
TAMPA, FLORIDA 33619
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 635-2050
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X]
State issuer's revenues for its most recent reporting period December 31,
2000........$8,363,810.
Aggregate market value of the voting stock held by non-affiliates of the
registrant computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of March 29, 2001 was
$28,667,470.
The number of shares outstanding as of April 12,2001 was 100,587,617.
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(Former name or former address, if changed since last report)
PART I
PAGE
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Item 1. Description of Business ........................................................ 3
Item 2. Description of Properties....................................................... 12
Item 3. Legal Proceedings............................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders............................. 13
PART II
Item 5. Market of the Registrant's Securities and Related Stockholder Matters........... 13
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................... 17
Item 7. Financial Statements and Supplementary Data..................................... 20
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures....................................................... 21
PART III
Item 9. Directors and Executive Officers of the Registrant.............................. 21
Item 10. Executive Compensation.......................................................... 23
Item 11. Security Ownership of Certain Beneficial Owners and Management.................. 26
Item 12. Certain Relationships and Related Transactions.................................. 27
Item 13. Exhibits, Consolidated Financial Statements,
Schedules and Reports on Form 8-K............................................... 28
Signatures...................................................................... 30
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PART I
The information set forth in this Report on Form 10-KSB under the
Sections "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Description of Business" and elsewhere relate to future
events and expectations and as such constitute "Forward-Looking Statements"
within the meaning of the Private Securities Litigation Act of 1995. The words
"believes," "anticipates," "plans," "expects," and similar expressions in this
report are intended to identify forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements and to vary
significantly from reporting period to reporting period. Such factors include,
among others, those listed under Item 1 below and other factors detailed from
time to time in the Company's other filings with the Securities and Exchange
Commission. Although management believes that the assumptions made and
expectations reflected in the forward-looking statements are reasonable, there
is no assurance that the underlying assumptions will, in fact, prove to be
correct or that actual future results will not be different from the
expectations expressed in this report.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
EarthFirst Technologies, Incorporated ("EarthFirst" or the "Company"),
formerly known as Toups Technology Licensing, Incorporated, is a corporation
engaged in the research, development and commercialization of technologies for
the production of alternative sources of fuel and the treatment and remediation
of liquid and solid wastes. The Company is also engaged in the business of
recycling of metals and other materials and the demolition of structures such as
buildings and bridges. The Company conducts its operations through its
subsidiaries.
RECENT DEVELOPMENTS
On December 15, 1999, the Company entered into an Exclusive Licensing Agreement
to license the rights to a technology ("Waste To Energy") to efficiently convert
waste products, such as tires, animal waste, and similar products, into reusable
raw materials and fuels. During 2000, the Company and the licensor of the Waste
to Energy technology have cooperated to further develop this technology with the
construction and operation of a prototype plant located in Port Gibson,
Mississippi. On January 13, 2001, the Company and the licensor of this
technology entered into an agreement to form EarthFirst Waste To Energy,
Incorporated ("EFWE") to further develop and market commercial products from
this technology. The Company owns a 51% interest in this new entity and is
funding the current capital requirements for EFWE.
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BACKGROUND
EarthFirst was incorporated in Florida on July 28, 1997. Since its
inception, the Company has acquired rights to technologies it believes could be
developed into commercially viable applications. Among the technologies the
Company has pursued is the development of processes intended to treat
environmentally contaminated liquid wastes and convert such wastes into energy.
The Company has also pursued development of a process intended to recycle and
process solid waste products. The Company's Alternative Fuels / Environmental
Solutions division comprises the technologies associated with the development of
such alternative sources of energy.
During 1998, EarthFirst acquired rights to develop and market the
Balanced Oil Recovery System Lift, or BORS Lift, a device that extracts oil from
shallow, low-volume "stripper" wells.
In 1998, the Company acquired substantially all of the operating assets
of an entity engaged in the business of micro-welding and metal fabrication
creating the core of its Manufactured Products division. The Manufactured
Products division produced the BORS Lift in addition to other manufactured
products on a contract basis for unrelated parties.
The Company also acquired the stock of InterSource Health Care, Inc.
("InterSource") in November 1998 creating its Healthcare Products division. The
Healthcare Products division sought to match purchasers and sellers of new and
refurbished medical equipment and supplies.
On May 15, 2000, the Company acquired SAC-1, Inc. ("SAC-1"), an entity
engaged in the demolition of structures such as buildings and bridges; recycling
metals and other materials; and government procurement contracting. In
connection with the acquisition, all of the Company's officers and members of
the Board of Directors resigned, with the exception of Phillip M. Rappa. John D.
Stanton, Chairman of the Board and Chief Executive Officer of SAC-1, was
appointed to the Company's Board as Chairman and also assumed the duties of the
Chief Executive Officer of EarthFirst.
After consummation of the acquisition of SAC-1, new management
determined that the Company should focus its efforts and resources on the
development of the technologies related to environmental solutions and
alternative fuels. The Company's other business segments were discontinued. The
Environmental Solutions and Alternative Fuels division is reflected as a
continuing business segment of the Company.
THE BUSINESS
The Company conducts business through three separate business segments,
which include (1) the Environmental Solutions / Alternative Fuel segment; (2)
the Demolition / Recycling segment; and (3) the Government Contract segment.
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ENVIRONMENTAL SOLUTIONS / ALTERNATIVE FUEL DIVISION
The Environmental Solutions / Alternative Fuel division comprises two
separate operations. The first is carried out in the United States through
USMagneGas, Inc. ("USMagneGas"), an entity in which the Company owns an 80%
interest. Separate newly formed entities in which the Company also owns an 80%
interest will carry out similar operations overseas. The second is the Waste to
Energy sector.
MAGNEGAS(TM)
USMagneGas was formed in June of 2000 to further develop technologies
that process various forms of liquid waste. By-products of this process include
Santilli MagneGas(TM), or MagneGas(TM). MagneGas(TM) is a combustible fuel.
On July 5, 2000, the Company and USMagneGas entered into several
agreements with Dr. Ruggero Santilli, the research physicist responsible for
development of this technology licensed by USMagneGas, and several entities
related to Dr. Santilli, to perfect the Company's exclusive world-wide licensing
rights to this technology. Dr. Santilli has worked with the Company since 1998
in the development of this technology. Under the July 2000 agreement, Dr.
Santilli agreed to serve as the Director of Research and Development for
USMagneGas and head the development of commercially viable applications of this
technology.
The MagneGas(TM) technology permits fuel production with a sufficient
energy density to be used as a combustible fuel in a compressed form. The
Company believes that MagneGas(TM) can be cost competitive to other liquid fuels
when produced in large quantities. The Company expects that revenues can also be
generated from both the elimination and processing of liquid waste. It is
intended that MagneGas(TM) be sold for any fuel application including metal
cutting, automotive, electric generators, cooking and heating.
MagneGas(TM) is produced by processing liquid wastes of fossil or
biomass origin utilizing PlasmaArcFlow(TM) reactors. These reactors flow liquids
through a submerged electric arc. The arc essentially decomposes the liquid
molecules into a plasma at 7,000 to 10,000 degrees Farenheit ("F") composed of
ionized hydrogen (H), oxygen (O) and carbon (C) atoms, plus solid precipitates.
The technology then controls the recombination of H, O and C into clusters of
molecules under new internal bonds. This new chemical structure is described
more fully by Dr. Santilli in a recent monograph "Foundations of Hadronic
Chemistry."
MagneGas(TM) is currently produced with the following prototype
reactors:
1. Total Recyclers for the complete destruction/recycling of
antifreeze and waste oil, cooking oil, crude oil, etc. to produce
MagneGas(TM)and usable heat;
2. Linear Recyclers for the termination of bacteriological activity
in sewage to produce MagneGas(TM), irrigation water and
fertilizer; and
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3. Hadronic Reactor for the production of heat/steam suitable for
environmentally acceptable production of electricity.
We believe the PlasmaArcFlow(TM) technology achieves a large commercial
energy efficiency as given by the ratio between the total energy produced (gas
and heat) divided by the electrical energy required for production. According to
independent tests, the ratio is much greater than 1.0, thus establishing that
the PlasmaArcFlow(TM) reactors achieve a positive energy balance.
In operation, MagneGas(TM) has an energy density sufficient for
automotive use in an ordinary compressed form. USMagneGas has converted a 1980
Ferrari 308GTSi and two Honda Civics to operate on compressed MagneGas(TM).
Emissions tests conducted at an independent EPA certified laboratory have
established MagneGas(TM) significantly surpassed Environmental Protection Agency
("EPA") emission requirements without the use of a catalytic converter, plus
emitting 12% - 15% breathable oxygen in the exhaust, emitting no carcinogenic or
toxic substances and a 50% reduction in carbon dioxide compared to gasoline. We
believe the gas also has a number of safety benefits over other fuels including
its own natural, distinct odor for detection, the gas is lighter than air thus
dissipating quickly, and the composite material storage tanks used for
MagneGas(TM) are much safer than traditional gasoline tanks in current
automotive use.
Hadronic Press, Inc. ("HPI"), the licensor of the technology rights to
USMagneGas, has filed for patent protection at the following levels: (1)
equipment and process, (2) new chemical structure of the gas, (3) new chemical
structure of the liquid waste used for the production of gas, and (4) foreign
patent coverage in 104 countries. Of the various existing patent applications, a
first patent has been allowed and is currently in print at the US Patent Office.
USMagneGas has identified several target markets and established an
initial strategy of teaming with partners to develop certain specialized market
applications. No partnerships have yet been formalized and there have been no
revenues derived from MagneGas(TM). For the automotive applications, USMagneGas
is preparing a formal application to the US Department of Energy for the
Alternative Fuel Designation of MagneGas(TM) and is seeking the collaboration of
an automotive manufacturer.
All systematic measurements were made using calibrated instruments to
arrive at the results. Additional information, including equipment descriptions
and certifications, can be found at the Company's web site at
http://www.magnegas.com
WASTE TO ENERGY
The Waste To Energy technologies involve the destructive distillation
or pyrolysis of waste materials and the recovery of useful products. We believe
that this technology may be superior to previous pyrolysis techniques because
the destructive distillation takes place in an insulated atmospherically sealed
vacuum distillatory reactor into which the waste materials are loaded at a
predetermined rate, pyrolyzed, and the solid residue is
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discharged. A proprietary catalyst is used in the reactor chamber to carry out
the pyrolysis at relatively low temperatures (400 to 650 degrees F). The waste
materials enter the reactor chamber through an inlet airlock where a vacuum is
created. The inlet airlock removes the air from the system to create a vacuum.
The waste materials pass into an intake auger unit and the waste materials are
compressed and discharged into the reactor chamber. In the absence of oxygen in
the vacuum, the waste materials are heated in a process sometimes referred to as
"pyrolysis" or "distructive distillation". This process yields gases heavily
laden with hydrogen, oxygen, water vapor, and other forms of hydrocarbon gases
at temperatures of up to 650 degrees F. The vacuum created in the system results
in pyrolysis at increased pressure, resulting in increased effective reactor
temperature (approximately 3000 degrees F) without the application of heat that
would otherwise be needed to reach this temperature.
Activity currently is concentrated at a plant in Mississippi that has
been operated as a "proof of concept" facility to process tire shreds, municipal
solid waste, and bone and meat meal.
On December 15, 1999, the Company entered into an exclusive license
agreement with John Rivera ("Rivera") and Tomorrows Innovative Technology Today,
Inc. ("TI Tech") to license this technology. During 2000, the Company and the
licensor of rights to the Waste To Energy technology have cooperated on
furthering the development this technology with the construction and operation
of the proof of concept facility located in Port Gibson, Mississippi.
On January 13, 2001, the Company, Marilyn Chirinsky ("Chirinsky"),
Rivera, and TI Tech entered into an agreement to develop commercial applications
of the technologies. This agreement resulted in the formation of a new entity
named EarthFirst Waste To Energy, Inc. ("EFWE") to develop and commercialize the
Waste To Energy technology.
The Company received a 51% interest in EFWE in exchange for
transferring all of its rights under the exclusive license agreement entered
into on December 15, 1999. In addition, until such time as EFWE is profitable,
the Company is required to fund all operating expenses of EFWE. The Company is
also required to provide all financial record keeping and administration for
EFWE, as well as provide assistance with the coordination of grant applications
on behalf of EFWE.
BALANCED OIL RECOVERY SYSTEM LIFT
The Balanced Oil Recovery System Lift, or BORS Lift, is a device that
extracts oil from shallow, low-volume "stripper" wells, which are defined as
those wells which produce up to 10 barrels per day. By lifting oil rather than
pumping, the BORS Lift eliminates conventional rods, tubing, downhole pumps or
pumping units and related maintenance costs typically associated with
conventional methods. The operating concept is based on a balanced technology of
extracting oil at the same rate as its
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recovery through the collection tube and discharging it into a collection tank
without collecting water.
Subsequent to the acquisition of SAC-1 on May 15, 2000, new management
determined that the Company should focus its efforts and resources on the
development of the technologies related to environmental solutions and
alternative fuels. Consistent with this decision, on June 16, 2000, the Company
entered into an agreement to license the BORS Lift technology to an unrelated
entity. The Company is no longer involved with the BORS Lift technology other
than as the licensor of its rights in the technology.
The Company made its decision to license the BORS Lift technology
because management realized that additional efforts were needed to perfect the
technology and generate profitable sales. The Company will receive a royalty
equal to 2% of the gross sales generated by the BORS Lift technology. As of
December 31, 2000, the licensee has reported no sales and therefore no royalties
have been received.
DEMOLITION AND RECYCLING
The Demolition and Recycling operations are conducted through a
wholly-owned subsidiary, SAC-1, Inc. ("SAC-1"), (a.k.a. Strategic Acquisition
Corporation). SAC-1 was formed on September 20, 1999 for the purpose of engaging
in the business of demolition and recycling. SAC-1 acquired certain assets from
several entities engaged in demolition and recycling businesses as well as
certain related assets from other parties.
SAC-1's headquarters are in Gibsonton, Florida. During 2000, SAC-1's
management oversaw both the demolition and recycling operations and the
operations shared resources including office space, accounting, and billing
resources. SAC-1 enters into fixed-price contracts to demolish structures such
as buildings, bridges, and other structures. Services are rendered primarily in
Florida. SAC-1 conducted these operations as a combined unit. For these reasons,
the combined demolition and recycling operations are reported as a single
business segment.
GOVERNMENT CONTRACTS
On May 15, 2000, SAC-1 acquired the accounts receivable and accounts
payable associated with the government contract business conducted by Octofoil
International Group, Inc. ("Octofoil"). Octofoil is owned by the two individuals
who were the primary shareholders of SAC-1 at the time of the May 15th
acquisition.
The Government Contract division of SAC-1 enters into contracts with
various departments and agencies of the federal government, and a limited number
of state and local governments, to procure various products. SAC-1 fulfills
these contracts working with third parties and arranges for the goods to be
delivered to the governmental buying entity at the specified location. While
most goods are delivered inside the United States, some goods are shipped to
locations around the world. The general characteristics of the government
contracts do not differ by geographic region.
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COMPETITION
MAGNEGAS(TM)
The alternative fuel industry is a very competitive industry consisting
of potential competitors who might have superior financing, experienced
management, advantageous strategic relationships and more mature technologies
than our products under development. Despite the formidable competition in the
alternative fuel industry, we intend to continue to develop and market
MagneGas(TM), which we believe is among the cleanest, most efficient and safest
of the alternative fuel sources available. We also believe that, because
MagneGas(TM) is the product of a versatile waste treatment process that can
support or be the primary income source, MagneGas(TM) might have significant
inherent economic advantages over competitive products. MagneGas(TM) has
significantly fewer pollutants than many traditional fuel sources and certain
alternative fuel sources and can be easily and safely produced, transported and
stored. In addition, we have identified numerous potential commercial
applications for MagneGas(TM) and its primary process, PlasmaArcFlow(TM), which
treats a wide variety of liquid wastes. There can be no assurance that
MagneGas(TM) will prove profitable when introduced to the marketplace, and more
economical and / or more environmentally efficient alternative fuels or waste
treatment processes could be developed by competitors in the industry.
WASTE TO ENERGY
There are many competitors seeking to develop more efficient means of
recycling and disposing of various forms of solid wastes. The effect of numerous
federal and state environmental regulations has been to encourage the
originators of the waste, governmental entities, and entrepreneurial enterprises
to seek to develop more effective and efficient solutions. We have continued our
efforts to develop a technology that will provide a better solution to the
problems associated with the disposal of various forms of solid wastes that can
be harnessed into commercially viable enterprises. Successful development of
this technology would offer numerous potential customers solutions to their
environmental problems. The Company's efforts to develop this technology
continue in the research and development stage. There can be no assurance that a
commercially successful process can be developed. There are numerous other
parties seeking to develop alternative solutions to the problems associated with
solid wastes and there can be no assurance that a more effective and efficient
process will not be developed by one or more of these parties.
DEMOLITION AND RECYCLING
Competition in the demolition and recycling industries is intense with
very few barriers to entry. The recycling of metals and similar products
involves the purchase and resale of commodities and is heavily dependent upon
location. Demolition projects are generally subject to a competitive bidding
process.
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GOVERNMENT CONTRACTS
Competition in the government contract business is also very intense
with few barriers to entry.
INTELLECTUAL PROPERTY
The Company has obtained substantially all of the intellectual rights
to its technologies through licensing agreements, the most significant of which
are described below.
MAGNEGAS(TM)
On July 5, 2000, the Company entered into a World-Wide Exclusive
Agreement, License and Royalty Agreement (the "MagneGas Agreement") with
Hadronic Press, Inc. ("HPI").
WASTE TO ENERGY
Pursuant to the terms of a license agreement between Rivera, TI Tech,
and the Company dated December 15, 1999, the Company holds an exclusive
world-wide license to certain pyrolytic carbon extraction technology, which is a
technology used to convert solid hydrocarbon-based waste into a multi-use fuel
in the form of a combustible gas while significantly reducing the waste volume.
We believe that appropriate steps have been taken to protect the
intellectual property rights of the Company. However, the steps taken may not
prove sufficient to prevent misappropriation of the Company's technology rights
or deter independent third-party development of similar technologies. The laws
of certain foreign countries might not protect services or intellectual property
rights to the same extent as do the laws of the United States. The Company
relies on certain technologies that are licensed from third parties. These
third-party technology licenses might not continue to be available on
commercially attractive terms. The loss of the ability to use such technology
could require the Company to obtain the rights to use substitute technology,
which could be more expensive or offer lower quality or performance, and
therefore have a material adverse effect on the Company's business, financial
condition or results of operations.
Third parties could claim infringement by the Company with respect to
current or future uses. As the number of entrants into the market increases, the
possibility of an infringement claim against the Company may increase, and the
possibility exists that the Company could, either now or in the future,
inadvertently infringe on a third-party's patent. In addition, because patent
applications can take many years for approval, it is possible that the Company
could, now or in the future, infringe upon a third-party's patent application
now pending of which we are unaware. Any infringement claim, whether meritorious
or not, could consume a significant amount of management's time and attention,
result in costly litigation, cause service delays or require the Company to
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enter into royalty or licensing agreements which might or might not be available
on commercially acceptable terms, if at all. As a result, any claim of
infringement against the Company could have a material adverse effect upon our
business, financial condition or results of operations.
RESEARCH AND DEVELOPMENT
The Company licenses its technologies from the developers of the
technologies. Additional research and development of these technologies are then
funded internally. Notwithstanding our efforts in this regard, we are uncertain
whether any of the technologies will ever develop to the point of commercial
viability.
Research and development costs incurred in 2000 and 1999 aggregated
$1,588,600 and $2,457,825, respectively, and involved the following
technologies:
MAGNEGAS(TM)
As described above, we are actively developing applications for this
technology and are seeking outside partners and customers.
WASTE TO ENERGY
During 2000, the licensor of the Company's rights to the technologies
and the Company worked together on developing commercial applications of the
technologies including the development of a "proof of concept" facility in
Mississippi. The Company made expenditures totaling approximately $306,000 in
connection with this effort.
OTHER RESEARCH AND DEVELOPMENT PROJECTS
During 1999, we performed research and development on AquaFuel and
Pyrolytic Carbon Extraction, or "PCE", liquid and solid waste treatment
processes, respectively. We declined to renew the licenses under which we
utilized the technology because we believed that our resources were better spent
pursuing the commercialization of other technologies.
EMPLOYEES
As of December 31, 2000, EarthFirst and its subsidiaries had 73
full-time employees. Approximately 12 employees are engaged in the Environmental
Solutions / Alternative Fuels division, 53 employees are engaged in the
Demolition / Recycling division, and 8 employees are engaged in government
contracting. Management considers its relations with its employees to be
satisfactory. None of the employees are represented by a union.
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WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly, and special reports, and other
information with the Securities and Exchange Commission ("SEC"). SEC filings are
available to the public over the Internet at the SEC's web site at
HTTP://WWW.SEC.GOV. You may also read and copy any document at the SEC's public
reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms.
ITEM 2. DESCRIPTION OF PROPERTIES
USMagneGas maintains a 10,000 square-foot facility in Largo, Florida at
which it conducts its research and development activities. This facility is
subject to two consecutive one-year lease terms commencing November 1998. The
Company extended the lease on this facility for an additional one-year period
through November 2001. The annual base rent is approximately $40,800.
The headquarters for SAC-1 is located on a parcel of real property
located in Gibsonton, Florida. The recycling operations are conducted at the
Gibsonton property. The facility in Gibsonton includes a single story brick
structure that houses offices for the demolition and recycling operations.
Machinery and equipment utilized in processing scrap purchased by the Recycling
division is also located at this site. Two temporary trailers are located at
this site as office space for SAC-1. SAC-1 also utilizes a parcel of real
property near Brooksville, Florida as a collection center for the recycling
operations. SAC-1 recently leased a site near Auburndale, Florida to function as
a collection center for its recycling operations.
The government contracting operations are headquartered at a location
on Falkenburg Road in Tampa, Florida that is owned by an entity controlled by
John Stanton, the Chief Executive Officer of EarthFirst. The related entity also
uses this location as its headquarters.
EarthFirst has its corporate office at 1226 Tech Blvd., Tampa, Florida.
This location is leased by another entity in which Mr. Stanton and several other
EarthFirst shareholders have an interest. The other entity uses this location as
its headquarters and center of operations.
INVESTMENT POLICIES
The Company does not have any limitations on the amounts that may be
invested in any one investment or type of investment. The Company has no
holdings in real estate, except as described above, or real estate mortgages and
similar securities or publicly traded securities. The Company does not have any
investments in persons or companies primarily devoted to such investments, and
it is not the policy of the Company to make investments for the purpose of
capital gain or passive income. Presently, all available monies fund day-to-day
operations.
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ITEM 3. LEGAL PROCEEDINGS
SEC ENFORCEMENT INQUIRY
In a letter dated November 19, 1999, the Company was notified that the
Securities and Exchange Commission was conducting an informal inquiry in
connection with matters relating to the Company's financial statements and
periodic reports, including matters addressed by the restatement of financial
results disclosed in the Company's 1999 Form 10-KSB. The Commission indicated
that its inquiry should not be construed as any indication by the Commission or
its staff that any violation of law has occurred, nor as an adverse reflection
upon any person, entity or security. The Company has not had any communication
from the Commission regarding this matter subsequent to the release of the 1999
Form 10-KSB. At this time, the outcome of this inquiry cannot be determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
EarthFirst shares trade on The National Association of Securities
Dealers ("NASD") OTC Bulletin Board (the "Bulletin Board") under the trading
symbol "EFTI". EarthFirst shares commenced trading in June 1998, prior to which
time there was no public market for these securities. The following table sets
forth, for the periods indicated, the range of high and low closing bid
quotations as reported by the Bulletin Board for each quarter during the last
two fiscal years. The bid quotations set forth below reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and may not necessarily
represent actual transactions.
HIGH LOW
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Fiscal Year Ended December 31, 1999
First Quarter.................................. $ 2.437 $ 1.375
Second Quarter................................. 2.437 .906
Third Quarter.................................. 1.187 .375
Fourth Quarter................................. .687 35
Fiscal Year Ended December 31, 2000
First Quarter.................................. 1.72 .38
Second Quarter................................. 1.38 .28
Third Quarter.................................. .52 .28
Fourth Quarter................................. .34 .094
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On March 29, 2001, the last reported sales price for EarthFirst shares
on the Bulletin Board was $0.29 per share. At March 29, 2001, the Company had
449 stockholders of record. The Company estimates that there are approximately
2,659 beneficial owners of its common stock.
The Company has never paid cash dividends on its common stock and it is not
expected that any such dividends will be paid in the foreseeable future. The
Company currently intends to retain any future earnings for use in the business.
The payment of any future dividends on EarthFirst common stock will be
determined by the Board of Directors in light of future conditions then
existing, including the financial condition of the Company, funding requirements
for activities, future prospects, restrictions in financing agreements, business
conditions and other factors deemed relevant by the Board.
RECENT SALES OF UNREGISTERED SECURITIES
The securities described below were issued by the Company during the
period covered by this report and were not registered under the Securities Act
of 1933, as amended. Each of the transactions is claimed to be exempt from
registration pursuant to Section 4 (2) of the Securities Act as transactions not
involving a public offering. All of such securities are deemed to be restricted
securities for the purposes of the Securities Act. All certificates representing
such issued and outstanding restricted securities have been properly legended,
and "stop transfer" instructions have been issued to the transfer agent with
respect to such securities. Except as noted, no commissions were paid in
connection with any of the issuances.
STOCK ISSUANCES FOR CASH
During fiscal 2000, the Company issued an aggregate of 7,161,306 shares
of its common stock in various capital raising transactions. The aggregate
amount of funds raised by these issuances totaled $2,037,411, net of stock
offering costs. The stock issuances included the transactions described below.
Included among these transactions was a private placement conducted
from August through October of 2000, in which the Company offered and sold an
aggregate of 774 shares of convertible preferred stock at a $1,000 stated value
to 22 accredited investors at a per share price of $1.00 per share. Each
investor immediately elected to convert their preferred shares into common
shares at a per share price ranging from $0.1547 to $0.4533 for preferred shares
(1,097,561 shares of common stock). The conversion rate was equal to 90% of the
bid price of registered shares on the date of the conversion. The investors also
received a warrant to purchase a like number of common shares at a price equal
to 120% of the price at which the conversion was made. These warrants are
effective for a period of two years.
14
On August 7, 2000, the Company issued 500 shares of $1 par, $1,000
stated value convertible preferred stock to John Stanton, and three individuals
employed by an affiliate of the Company in exchange for cash payments totaling
$500,000. The individuals immediately exercised the conversion feature and
received 1,683,502 shares of common stock, and corresponding warrants, under the
same terms and conditions offered to other investors as described above.
STOCK ISSUANCES FOR SERVICES
In fiscal 2000, the Company issued an aggregate of 4,875,441 shares of
common stock in consideration for various services provided to the Company. This
included the issuance of 1,500,000 shares issued pursuant to a World-Wide
Exclusive Assignment, License, and Royalty Agreement entered into effective July
5, 2000. During the second quarter of 2000, the Company also issued 1,600,000
shares of common stock to its legal counsel and 500,000 shares in connection
with the licensing of the BORS Lift technology and the assumption of certain
liabilities. Shares were also issued to employees, independent contractors, and
in connection with certain licensing agreements.
In December 2000, the Company adopted a stock option plan for the
benefit of its employees. Pursuant to this plan, members of management have been
granted incentive stock options, as contemplated under Section 422 of the
Internal Revenue Code (the "Code"), to acquire an aggregate of 5,500,000 shares
of the Company's common stock at prices ranging from $0.11 to $1.00 per share.
The options vest in 2000 and 2001.
ACQUISITION OF SAC-1, INC.
On May 15, 2000, the Company executed an Acquisition and Stock Exchange
Agreement to acquire all of the outstanding stock of SAC-1, Inc. in exchange for
26,500,000 shares of the Company's common stock.
CONVERSION OF SERIES 1999-A CONVERTIBLE NOTES
In February 1999, the Company issued and sold $750,000 of Series 1999-A
Eight Percent (8%) Convertible Notes due January 2002 to an accredited investor.
The notes are convertible into common stock after a period of 90 days from the
date of the note at a conversion price equal to the lesser of (1) 100% of the
lowest of the closing bid prices for the Company's common stock for the five
trading days immediately preceding the date of the note; or (2) eighty percent
(80%) of the lowest of the closing bid prices for the Company's common stock for
the five trading days immediately preceding the conversion date as defined.
During 2000, the investor converted all of the principle balance of the notes,
plus accrued interest and liquidated damages for failure to obtain certain
registration rights, into 2,199,284 shares of the Company's common stock.
15
ISSUANCE OF CONVERTIBLE NOTES
In March 2000, the Company issued and sold $700,000 of Series 2000-A
Eight Percent (8%) Convertible Notes due March 31, 2002 to this same accredited
investor. The notes are convertible into common stock after a period of 90 days
from the date of the note at a conversion price equal to the lesser of (1) $.75;
or (2) eighty percent (80%) of the lowest of the closing bid prices for the
Company's common stock for the five (5) trading days immediately preceding the
conversion date, as defined.
In connection with the issuance of the convertible notes, the Company
and the investor executed a Registration Rights Agreement regarding the
registration of these securities under the Securities Act of 1933, as amended.
The Company was unable to fulfill its obligation under this agreement. As
liquidated damages, the Registration Rights Agreement provides for liquidated
damages equal to 1.5% per month of the amount invested.
In connection with the issuance of the convertible notes, the Company issued the
investor warrants to purchase 70,000 shares of the Company's common stock at a
purchase price of $1.54 per share. The warrants may be exercised on or before
March 30, 2003.
COMMON STOCK ISSUED ON CONVERSION OF PREFERRED SHARES
In March 1999, the Company issued 750 shares of convertible Series A 7%
Preferred Stock to an accredited investor for $750,000. The Series A Preferred
Stock generally is convertible into EarthFirst common stock at 75% of the
average closing bid of the common stock of any two days during the 20 trading
days immediately prior to the date on which notification of the conversion is
provided to the Company. During 2000, the holder of the Preferred Stock elected
to convert 289 preferred shares, plus accrued dividends, into 1,233,549 common
shares. In January 2001, the preferred shareholder elected to convert an
additional 120 shares of preferred stock, plus accrued dividends, into 1,600,000
common shares.
DEBT CONVERSIONS OF SHAREHOLDER LOANS
On September 8, 2000, John Stanton and an individual employed by an
affiliated entity, converted debt owed by the Company and SAC totaling
$2,100,000, into a total of 8,235,294 shares of common stock at a conversion
price of $.255 per share. No warrants or any similar rights were issued in
connection with this transaction.
16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
results of operations and financial condition. The discussion should be read in
conjunction with the audited consolidated financial statements and notes
thereto.
We are continuing to develop and refine the MagneGas(TM) and Waste To
Energy technologies and have had discussions with various potential end users of
the technology and possible joint venture partners. No revenues were derived
from these technologies during 2000. We believe that the MagneGas(TM) technology
has potential applications in both the remediation of environmentally harmful
waste products and in use as a clean burning fuel. We believe that the Waste To
Energy technology has the potential for solving serious problems for the
disposal and reclamation of solid waste products. Although we believe that sales
resulting from these technologies will contribute to our revenues in the future,
there can be no assurances that such revenues will be generated. Both
technologies will require further development in the future in order to
determine whether commercially viable applications can be developed.
During the next 12 months, we plan to continue to focus on developing
commercially viable applications of the MagneGas(TM) and Waste To Energy
technologies. We believe that there are applications of both technologies that
can, in the short-term, be developed to provide solutions for the disposal,
reclamation, or treatment of various forms of environmentally harmful liquid and
solid waste. We have developed the sewage treatment and animal waste processing
capability of the MagneGas technology to a level where sterilization is
consistent and effective. We are hopeful that contracts can be entered into in
the near future that will allow us to prove the concepts for both technologies
during fiscal 2001 in a manner that is profitable to the Company. Additional
research and testing will be necessary to develop the technologies for these
applications and there can be no assurances that these efforts will produce a
commercially viable solution.
We believe that the development of MagneGas(TM) as a commercially
acceptable clean burning fuel is a longer-term endeavor that will ultimately
require the Company to enter into a joint venture partnership with one or more
major companies in the automotive or petroleum industries. In addition, the
attributes of MagneGas for application to the fuel cell industry look promising.
While we are optimistic about the performance results we have achieved thus far
in our testing of MagneGas(TM) as an alternative fuel, there remain many
technical and logistical issues that must be resolved, including creating the
ability to produce MagneGas(TM) on a large scale, before this technology can be
adapted into a commercially viable process. Significant additional research will
be needed, and significant additional expenditures will need to be incurred, to
address these issues. There can be no assurances that these technical and
logistical issues can be overcome on a commercially viable basis or that an
agreement with a joint venture partner can be obtained.
17
We believe that the waste to energy plant in Mississippi has
demonstrated that solid wastes can be processed into usable materials. To
capitalize on this technology, we have designed enhancements that we believe
will support the development of a distributed generation of power system by
producing electricity from the by-products of the pyrolysis process. We are
currently working with an engineering company to produce a turnkey engineered,
manufactured and installed plant for sale to end users.
During 2000, revenues from continuing operations were derived from
demolition contracts and sales of scrap ($6,229,130), and government contracts
($2,134,680).
During 2000, we experienced losses on several demolition contracts that
significantly contributed to the overall loss from this segment. These losses
resulted from inaccurate estimating of job costs, problems in the execution of
certain demolition projects, and job overruns. We are taking steps to negotiate
additional billings on certain demolition projects for cost overruns
attributable to additional work not contemplated in the original bids. There can
be no assurances that these negotiations will be successful and if successful,
to what extent these additional billings can be recovered.
The Company's government contract operations during fiscal 2000
reflected a slight profit from operations. This profit has not been reduced for
any expenditures incurred by the home office on behalf of this segment. We
believe that our efforts in the government contract segment cannot be leveraged
on the scale necessary to achieve significant growth and profitability. During
the next 12 months, we plan to reduce the level of activity in the government
contract segment and focus our resources on the development of the MagneGas(TM)
and Waste To Energy technologies. We believe that these technologies provide the
most promise for the maximization of shareholder value and therefore warrant
these additional resources.
FISCAL 2000 COMPARED TO FISCAL 1999
Revenues, cost of sales, and gross profits for the years ended December
31, 2000 and 1999 were not comparable because the businesses that generated
revenues in 1999 were discontinued during 1999 and 2000. Accordingly, the
results of these operations are included under the Discontinued Operations
section of the Consolidated Statements of Operations. In addition, the business
segments that produced revenues during fiscal 2000 were acquired on May 15, 2000
and consequently did not impact the fiscal 1999 amounts.
Selling, general and administrative expenses for the year ending
December 31, 2000 are also not comparable to the year ending December 31, 1999
for the reasons stated above. Selling, general and administrative expenses for
the year ending December 31, 2000 are related primarily to the business
operations of SAC-1, accounting and legal fees, and amounts paid to other
professional services providers.
18
Direct research and development expenses declined from $2,457,835 in
fiscal 1999 to $1,588,600 in fiscal 2000, a 35% decrease. The decline is
attributable to non-cash charges relating to research-related stock-based
compensation and licensing agreements that totaled approximately $1,600,000
during fiscal 1999 as compared to approximately $600,000 during fiscal 2000.
Cash expenditures for research during 2000 increased over the prior year due to
increased activity in the development of both the MagneGas(TM) and Waste To
Energy technologies.
Interest expense increased during fiscal 2000 over that in the prior
year due principally to the beneficial conversion feature of convertible
debentures issued during 2000 that resulted in non-cash interest expense of
$641,200. Additional interest expense was incurred in connection with delinquent
payroll tax liabilities and from the liabilities of SAC-1 acquired on May 15,
2000.
Losses from continuing operations increased approximately $1,980,000
from $3,663,358 to $5,645,661 during fiscal 2000 as compared to fiscal 1999.
This was caused primarily by the increased overhead associated with the
businesses acquired in May 2000.
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues, cost of sales, and gross profits for the years ending
December 31, 1999 and 1998 were not comparable because the businesses that
generated revenues in both years were discontinued in 1999 and 2000. The results
of these operations are included under the Discontinued Operations section of
the Consolidated Statements of Operations. Similarly, selling, general and
administrative expenses for the years ending December 31, 1999 and 1998 are also
not comparable for the reasons stated above.
Research and development expenses increased approximately 107% from
$1,184,848 in fiscal 1998 to $2,457,835 in fiscal 1999. Of this increase,
$930,000 was attributable to increases in non-cash charges relating to
research-related stock-based compensation and licensing agreements.
We experienced a net loss of $12,062,668 or ($0.43) per share for the
fiscal year ended December 31, 1999, a 112% increase over the net loss for
fiscal 1998. Due the increase in the weighted average shares outstanding at the
end of fiscal 1999, however, the net loss per share was 12% lower than the net
loss per share in fiscal 1998. Total non-cash charges to the Company were
$4,980,247 or 42% of the net loss for fiscal 1999.
Interest expense was up from $21,234 during fiscal 1998 to $290,618
during fiscal 1999 due to higher levels of borrowings during the year, primarily
from the convertible notes issued in February 1999.
A $375,706 investment in a joint venture in the Dominican Republic was
written off during 1999. The joint venture was formed with parties in the
Dominican Republic to construct and operate an alternative fuel production
facility. Subsequently,
19
the other parties failed to perform under the terms of the proposed joint
venture agreement, and the joint venture did not proceed.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced recurring net losses since inception and,
as such has experienced negative operating cash flows in both fiscal 2000
($5,340,360) and fiscal 1999 ($5,747,271). The Company continues to experience
negative operating cash flows during the first quarter ending March 31, 2001.
The Company has historically funded these negative operating cash flows with
proceeds from sales of common and preferred stock, notes and convertible
debentures payable, and equipment sale/leaseback transactions.
During 2000, John Stanton and certain entities related to Mr. Stanton
advanced the Company funds for operations. In December 2000, the Company entered
into a revolving credit line agreement with an entity related to Mr. Stanton
secured by all of the assets of the Company. As of December 31, 2000, the
Company owed $3,772,689 pursuant to this agreement.
The amount received during 2000 from the sources described above
totaled approximately $7,025,000. The Company currently has negative working
capital of approximately $1,210,000 as of December 31, 2000.
INCOME TAXES
The Company has a net operating loss carry forward for federal income
tax purposes of approximately $19,900,000 that is available to offset federal
taxable income through fiscal 2020. A portion of this carry forward is limited
under Section 382 of the Internal Revenue Code ("Code") due to the occurrence of
an ownership change as defined in the Code. A 100% valuation allowance has been
provided on deferred tax assets resulting from the net operating loss carry
forwards discussed above.
EFFECTS OF INFLATION
Management does not believe that inflation has had a significant impact
on the financial position or results of operations of the Company since its
inception.
ITEM 7. FINANCIAL STATEMENTS
The consolidated 2000 financial statements for the Company, including
the notes thereto, together with the report thereon of Aidman, Piser & Company,
P.A. is presented with the audited financial statements.
20
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting and financial disclosure issues with respect to any financial
statements for the Company for 1999 or 2000. As previously disclosed, on January
5, 2000, Harper, Van Scoik & Company, LLP, the independent accountant who
audited the 1998 financial statements, resigned. Aidman, Piser & Company, P.A.
has served as the independent public accountant for the Company for the 1999 and
2000 audited financial statements.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The executive officers, directors and other significant employees of
the Company, and their ages and positions, are as follows:
NAME OF INDIVIDUAL AGE POSITION
- ------------------ --- --------
John Stanton 52 President and Chief Executive Officer
Chairman of the Board of Directors
Leon Toups 62 Secretary, Executive Vice-President
Philip Rappa 53 Vice-President of Operations and Director
Tim Klace 41 Chief Financial Officer
The following is a brief description of the professional experience and
background of the directors and officers.
John D. Stanton assumed the role of Chairman of the Board of Directors,
President and Chief Executive Officer on May 15, 2000 in connection with the
acquisition of SAC-1. From 1987 through the present, Mr. Stanton has served as
the President and Chief Executive Officer of Florida Engineered Construction
Products, Corporation. Since the early 1990's, Mr. Stanton has been, and
continues to be, involved in turn-around management for financially distressed
companies, providing both management guidance and financing. In 1981, Mr.
Stanton assumed the role of Chief Financial Officer for Florida Engineered
Construction Products, Corporation, a privately held manufacturer of residential
and commercial construction products, located in Tampa, Florida. Mr. Stanton
worked as an auditor with the international professional services firm that is
now known as Ernst & Young, LLP from 1973 through 1981. Mr. Stanton, a Vietnam
veteran of the United States Army, graduated from the University of South
Florida with a Bachelors Degree in Marketing and Accounting in 1972, and with
21
an MBA in 1973. Mr. Stanton earned the designation of Certified Public
Accountant in 1974 and was a Sells Award winner in the CPA examination.
Leon H. Toups was the Chairman of the Board, President and Chief Executive
Officer from the inception of the Company through May 15, 2000. Mr. Toups
currently serves as the Executive Vice-President for Research and Development
for EarthFirst. Mr. Toups also serves as the President of USMagneGas, Inc., the
President of EuroMagneGas, Inc., and the President of EarthFirst Waste To
Energy, Inc. From 1980 to the present, Mr. Toups has served as President and
Chairman of the Board of Directors of DMV, Inc., a real estate holding company
located in Clearwater, Florida. From 1973 through 1980, Mr. Toups served as
President and Chief Operating Officer, as a member of the Board of Directors and
as a member of the Executive Committee of Chromalloy American Corporation, a New
York Stock Exchange traded company located in St. Louis, Missouri, and as
President of Chromalloy Natural Resources Company, in Houma, Louisiana. Mr.
Toups was a test conductor with NASA from 1965 to 1970 and was with Boeing
Corporation from 1970 through 1973. Mr. Toups holds the following degrees: M.S.
Aerospace Engineering, University of Florida; M.S. Mechanical Engineering,
Georgia Tech; B.S. Mechanical Engineering, Georgia Tech and E.A.A. from
Massachusetts Institute of Technology.
Philip Rappa has served as Vice President of Operations, General Manager, and a
director, since September 1999. Mr. Rappa was the President and Chief Executive
Officer of SuperPower, Inc., located in St. Paul, Minnesota from 1993 to 1996.
Mr. Rappa served as Vice President of national / international sales and
marketing of ABB CEAG Power Supplies, Inc., of Palm Coast, Florida. In addition,
Mr. Rappa served as manufacturing/test manager at Applied Digital Data Systems
in Hauppauge, New York and director of manufacturing for Siemens Corporation,
also in Hauppauge. Mr. Rappa has 26 years of experience in the design,
manufacture and marketing of high- and low-voltage systems for the computer,
industrial and telecommunication industries. He earned a Bachelors degree in
Business from the University of Texas El Paso, an MBA from Central Florida
University and a BSEE from the New York Institute of Technology.
Tim Klace assumed the role of Chief Financial Officer in August 2000. Mr. Klace
worked as a tax consultant with Ernst & Young, LLP from 1982 through August
2000. He has over 18 years of experience in advising public and private
companies of all sizes in a wide range of tax and accounting matters. Mr. Klace
currently works with Mr. Stanton in providing financial and management services
to other companies that are in financial distress. Mr. Klace is a Certified
Public Accountant and a past president of the West Coast Chapter of the Florida
Institute of Certified Public Accountants. Mr. Klace graduated from the
University of Florida in 1982 with a Masters Degree in Accounting.
AUDIT COMMITTEE
The Company's Board of Directors currently does not have an Audit
Committee.
22
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
Section 16 (a) of the Securities Exchange Act of 1934 requires a
company's officers, directors and persons who own more than ten percent of a
registered class of such company's equity securities to file reports of
ownership and changes in ownership with the SEC. Officers, directors and ten
percent stockholders are required by regulation to furnish the Company with
copies of all Section 16 (a) forms they file. Based on its records, Management
believes that all required filings have been made by the Company's officers,
directors, and ten percent beneficial owners.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information for each of the fiscal years
ended December 31, 2000, 1999, and 1998 concerning the compensation paid and
awarded to our Chief Executive Officer and our Secretary/Executive Vice
President. Neither individual received any other annual compensation from the
Company. There were no other executive officers or key employees whose total
annual salary and bonus exceeded $100,000 for these periods.
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
--------------------------- AWARDS PAYOUTS
------------------------ -------
RESTRICTED SECURITIES ALL
NAME AND STOCK UDERLYING LTIP OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARD OPTIONS PAYOUTS COMP
- ------------------ ---- -------- ----- ----------- ----------- ------- -----
John D. Stanton 2000 $ 0 $0 $ 0 2,000,000(2) $ 0 $ 0
Chief Executive 1999 $ 0 $0 $ 0 0 $ 0 $ 0
Officer and 1998 $ 0 $0 $ 0 0 $ 0 $ 0
President (1)
Leon H. Toups (3) 2000 $ 96,000 $0 $ 0 0 $ 96,000
Secretary and 1999 $112,000 $0 $ 0 650,000(3) $112,000
Executive 1998 $ 63,666 $0 $ 415,350 (3) 0 $479,016
Vice-President (4)
(1) Mr. Stanton assumed the role of Chief Executive Officer and President as of
May 16, 2000. Prior to this date, Mr. Stanton was not employed by the
Company.
(2) Mr. Stanton was granted options to acquire 2,000,000 shares of the
Company's Common stock at a price of $1.00 per share. Half of these options
vested immediately and the remaining options vest on May 15, 2001.
23
(3) In lieu of 650,000 common shares previously issued and rescinded, Mr. Toups
was granted an option to purchase a like number of shares at an exercise
price of $1.10 per share.
(4) Mr. Toups was the Chief Executive Officer from the inception of the Company
through May 15, 2000.
The following table sets forth, for the individuals named in the
Summary Compensation Table above, certain information concerning stock options
granted during 2000. The Company has never issued stock appreciation rights.
Options were granted at an exercise price above the fair market value of the
common stock at the date of grant. The term of the options granted is five years
from the date of grant.
POTENTIAL REALIZABLE
PERCENTAGE EXERCISE VALUE AT ASSUMED RATES
OF TOTAL OR BASE MARKET OF STOCK PRICE
OPTIONS PRICE PER PRICE ON APPRECIATION FOR
OPTIONS GRANTED SHARE DATE OF EXPIRATION OPTION TERM (1)
NAME GRANTED IN 2000 ($/SH) GRANT DATE 5% 10%
- -------------------- ------- --------- --------- -------- ---------- -------------------------
John Stanton 2,000,000 25% $1.00 $0.11 Dec. 2005 $ 1,158 $ 1,331
(1) The dollar amounts under this column are the result of calculations
at the 5% and 10% rates set by the Commission and therefore are not intended to
forecast possible future appreciation, if any, of the stock price of our common
stock. If the price of the Company's stock were in fact to appreciate at the
assumed 5% or 10% annual rate for the three-year term of this option, a $1,000
investment in the Common Stock would be worth $1,158 and $1,331, respectfully,
at the end of the term.
The following table sets forth, for the executives named in the
Summary Compensation Table, certain information concerning the options exercised
during fiscal 2000 and the number of shares subject to exercisable and
unexercisable stock options as of December 31, 2000. The values for
"in-the-money" options are calculated by determining the difference between the
fair market value of the securities underlying the options as of December 31,
2000 and the exercise price of the options.
24
NUMBER OF NUMBER OF SECURITIES UNDERLYING
SHARES UNEXERCISED OPTIONS AT
ACQUIRED VALUE DECEMBER 31, 2000
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
- --------------- ----------- -------- ----------- -------------
John D. Stanton None $ 0 1,000,000 1,000,000
Leon H. Toups None $ 0 650,000 None
VALUE OF UNEXERCISED "IN THE MONEY"
OPTIONS AT DECEMBER 31, 2000
EXERCISABLE UNEXERCISABLE
----------- -------------
(1)
N/A N/A
N/A N/A
(1) None of the above options were "in-the-money" at December 31, 2000.
DIRECTORS' COMPENSATION
The Company does not pay compensation to directors for serving on the
Board.
EMPLOYMENT AGREEMENTS
The Company and John Stanton executed an employment agreement effective
May 15, 2000. The term of the agreement is for a period of two years ending on
May 15, 2002. At this time, Mr. Stanton has agreed to receive no cash
compensation for his services as the President and Chief Executive Officer for
the Company. The Company's Board of Directors may provide for cash compensation
in the future based upon changing business conditions for the Company. Such
future adjustment can include compensation for services prior to the adjustment.
As part of the agreement, the Company issued Mr. Stanton options to acquire
2,000,000 shares of the Company's common stock at an exercise price of $1.00 per
share. One half of these options vested on May 15, 2000 and the remaining
options vest on May 15, 2001.
25
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding
ownership of the Company's common stock as of March 12, 2001 by each person
known to us to own beneficially more than 5% of the outstanding common stock of
the Company, by each person who is a director, by each person listed in the
Summary Compensation Table and by all directors and officers as a group.
The information reflected in the following table was furnished by the
persons listed therein. The calculations of the percent of shares beneficially
owned are based on 100,587,617 shares of common stock outstanding on March 22,
2001 plus, with respect to each such person, the number of additional shares
that will be outstanding upon exercise of the warrants and options exercisable
within sixty (60) days set forth herein.
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE
BENEFICIAL OWNER OWNERSHIP OF CLASS
- ---------------------------- -------------- ----------
John D. Stanton 34,348,513 (1) 34.11%
P.O. Box 172117
Tampa, Florida 33672
Leon H. Toups 4,006,680 (2) 3.98%
418 Harbor View Lane
Largo, Florida 33770
Philip M. Rappa 1,475,000 (3) 1.46%
5333 Wellfield Road
Newport Richey, Florida 34655
Ralph W. Hughes 11,683,386 11.60%
P.O. Box 24567
Tampa, Florida 33623
The Michigan Trust 5,000,000 4.97%
Joel Perlman, Trustee
1101 Belcher Road, S, Ste B
Largo, Florida 33771
All Officers and Directors 40,830,193 40.55%
(Four persons)
(1) Includes options to purchase 2,000,000 shares of Common Stock at an
exercise price of $1.00 per share.
26
(2) Includes options to purchase 650,000 shares of Common Stock at an
exercise price of $1.10 per share.
(3) Includes options to purchase 1,400,000 shares of Common Stock at an
exercise price of $.30.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Commencing shortly after the acquisition of SAC-1 on May 15, 2000, John
Stanton and Ralph Hughes, and entities related to these individuals, made loans
to the Company and its subsidiaries to provide funding for the research and
development efforts of EarthFirst and USMagneGas as well as to provide working
capital for both EarthFirst, USMagneGas, and SAC-1. Funding was also provided to
compromise and otherwise satisfy numerous debt obligations of EarthFirst that
existed as a result of activities occurring on or before May 15, 2000. As
previously disclosed, a portion of the debt owed to Mr. Stanton and Mr. Hughes
was converted into EarthFirst common stock on September 8, 2000.
On December 15, 2000, EarthFirst and Florida Engineered Construction
Products, Corporation ("FECP Corporation") executed a Revolving Line of Credit
Promissory Note and a related Security Agreement. At the same time, SAC-1 and
FECP Corporation also executed a similar Revolving Line of Credit Promissory
Note and a related Security Agreement. Collectively, Mr. Stanton and Mr. Hughes
own over 80% of the outstanding common stock of FECP Corporation and are the
President and Chairman of the Board, respectively, for FECP Corporation. Both
Promissory Notes are payable on demand. The promissory note executed by SAC-1
bears interest at the rate of 10% per annum while the promissory note executed
by EarthFirst bears interest at the rate of 9.9% per annum. As of December 31,
2000, the balance owed to FECP Corporation was $3,772,689. A total of $1,500,000
of the balance owed to FECP Corporation was converted into 13,793,103 shares of
the Company's common stock in January of 2001.
FECP Corporation has provided assistance to EarthFirst, USMagneGas, and
SAC-1 subsequent to the May 15, 2000 acquisition of SAC-1. Employees of FECP
Corporation provide a variety of services to the Company, including assistance
with financial accounting, human resources, engineering, preparation of income
and property tax returns, and purchasing. All of these services have been
provided at a nominal cost. FECP Corporation has also made purchases on behalf
of the Company in connection with its research and development efforts for which
it has not yet been reimbursed.
In June 1999, the Company borrowed $65,000 from DMV, Inc., a company
100% owned by Leon H. Toups. This indebtedness is evidenced by a promissory note
which bears interest at a rate of 12% per annum, is for a term of two years and
requires 24 monthly payments of principal and interest payments of $3,060. The
note is secured by certain accounts receivable, inventory, and equipment. During
2000, payments aggregating $12,791 were made on this note. In March 2001, the
note was converted to 346,410 shares of the Company's common stock.
27
In July 1999, the Company borrowed $75,000 from Leon H. Toups. This
indebtedness is evidenced by a promissory note which bears interest at a rate of
12% per annum, is for a term of two years, and requires 24 monthly payments of
principal and interest of $3,530.51. The note is secured by certain accounts
receivable, inventory, and equipment. During 2000, a payment of $14,613 was made
on this note. During March 2001, the note was converted to 282,826 shares of the
Company's common stock.
The transactions described above are on terms no less favorable to the
Company than those that could have been obtained from independent third parties
in arms-length negotiations.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 10-KSB.
(a) Exhibits
3.1 Certificate of Incorporation of the Company. (*)
3.2 By-Laws of the Company. (*)
3.3 Articles of Amendment to Articles of Incorporation filed with the
Florida Secretary of State on November 24, 1998. (**)
3.4 Articles of Amendment to Articles of Incorporation filed with the
Florida Secretary of State on March 30, 1999. (**)
3.5 Articles of Amendment to Articles of Incorporation filed with the
Florida Secretary of State on June 26, 2000. (+)
3.6 Articles of Amendment to Articles of Incorporation filed with the
Florida Secretary of State on February 28, 2001. (+)
4.1 Series 2000-A Eight Percent (8%) Convertible Note due March 31, 2002
given to The Augustine Fund, L.P. by the Company, dated March 30, 2000.
(+)
4.2 Registration Rights Agreement by and between The Augustine Fund, L.P.
and the Company, dated March 30, 2000. (+)
10.1 Exclusive License Agreement by and between the Company, John Rivera, and
Tomorrows Innovative Technology Today, Inc. dated December 15, 1999.
(+)
10.2 Formation Agreement by and among the Company, Marilyn Chirinsky, John
Rivera, and Tomorrows Innovative Technology Today, Inc. dated January
13, 2001, including the Exhibits F and G referred to in the agreement.
(+)
10.3 World-Wide Exclusive Assignment, License and Royalty Agreement by and
between the Company and Hadronic Press, Inc. entered into on July 5,
2000. (+)
10.4 The Technology Exclusive License and Royalty Agreement between
USMagneGas and Hadronic Press, Inc. entered into on July 5, 2000. (+)
10.5 Letter of Intent relating to the formation of EuroMagneGas and
AsiaMagneGas between USMagneGas and Hadronic Press. (+)
28
10.6 Consulting Agreement by and between USMagneGas, Dr. Ruggero Maria
Santilli, and the Institute for Basic Research, Inc. entered into on
July 7, 2000. (+)
10.7 Santilli Technology Exclusive Assignment and Royalty Agreement by and
among Hadronic Press, Inc., The Institute for Basic Research, Inc.,
Ruggero Maria Santilli, and the Company, dated February 3, 2000. (**)
10.8 Scientific Consulting Agreement by and between Ruggero Maria Santilli
and the Company dated January 1999. (**)
10.9 Technology Assignment and Royalty Agreement by and between the Company,
Ennotech, Inc., and BORS International, L.L.C. entered into on June 16,
2000. (+)
10.10 Royalty Agreement by and between the Company and BORS International,
L.L.C. entered into on June 16, 2000. (+)
10.11 Revolving Line Of Credit Promissory Note dated December 15, 2000 by and
between the Company and Florida Engineered Construction Products,
Corporation and related Security Agreement. (+)
10.12 Revolving Line Of Credit Promissory Note dated December 15, 2000 by and
between SAC-1, Inc., Eagle Amalgamated Services, Inc. and Florida
Engineered Construction Products, Corporation and related Security
Agreement. (+)
10.13 The Company's Equity Incentive Plan. (+)
10.14 Acquisition and Stock Exchange Agreement dated May 15, 2000 for the
acquisition of SAC-1, Inc. (***)
21 List of Subsidiaries.
* Previously filed as Exhibits to, and incorporated by reference from, the
Company's Form 10-SB on March 11, 1998.
** Previously filed as Exhibits to, and incorporated by reference from, the
Company's 1999 Form 10-KSB on May 12, 2000.
*** Previously, filed with Form 8-K on May 30, 2000.
+ Filed herewith.
(b) The following reports on Form 8-K were filed during fiscal 2000:
(i) On May 30, 2000, Form 8-K was filed for the purpose of reporting the
acquisition of SAC-1, Inc. on May 15, 2000.
29
INDEPENDENT AUDITORS' REPORT
Board of Directors
EarthFirst Technologies, Incorporated
Tampa, Florida
We have audited the accompanying consolidated balance sheet of EarthFirst
Technologies, Incorporated and Subsidiaries (the "Company"), (formerly known as
Toups Technology Licensing, Incorporated) as of December 31, 2000, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years ended December 31, 2000 and 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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
EarthFirst Technologies, Incorporated and Subsidiaries, at December 31, 2000,
and the consolidated results of their operations and their cash flows for the
years ended December 31, 2000 and 1999 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 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency which raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Aidman, Piser & Company, P.A.
March 15, 2001
Tampa, Florida
F-1
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
ASSETS
Current assets:
Cash $ 1,518,721
Accounts receivable:
Trade (net of $525,000 allowance for future returns) 1,961,421
Retainage 195,255
Inventories 694,304
Costs and estimated earnings in excess of
billings on uncompleted contracts 515,804
Prepaid expenses and other current assets 1,208
-----------
Total current assets 4,886,713
Property and equipment, net 2,235,440
Goodwill, net 4,210,651
Other assets 820
-----------
$11,333,624
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes and other payables, related parties $ 232,636
Current maturities of long-term debt 342,566
Accounts payable 3,646,379
Accrued expenses 1,312,151
Lease obligations 381,102
Dividends payable 81,760
Billings in excess of costs and estimated
earnings on uncompleted contracts 101,206
-----------
Total current liabilities 6,097,800
Notes and other payables, related parties, less current maturities 3,772,689
Long-term debt, less current maturities 371,338
Convertible debentures 700,000
-----------
Total liabilities 10,941,827
-----------
Commitments and contingencies --
Stockholders' equity:
Series A preferred stock, par value $1, 10,000,000
shares authorized, 461 shares issued and outstanding 461
Common stock, par value $.0001, 250,000,000
shares authorized, 84,834,825 shares issued and outstanding 8,484
Additional paid-in capital 30,479,037
Accumulated deficit (28,828,125)
-----------
1,659,857
Less treasury stock (1,950,000 shares at cost) (1,268,060)
-----------
Total stockholders' equity 391,797
-----------
$11,333,624
See notes to consolidate financial statements.
F-2
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------ -----------
Revenue $ 8,363,810 $ --
Cost of sales 7,971,479 --
------------ -----------
Gross profit 392,331 --
Selling, general and administrative expenses 3,415,819 515,000
Research and development expenses 1,588,600 2,457,835
------------ -----------
Loss from continuing operations before income
taxes and other items (4,612,088) (2,972,835)
------------ -----------
Other income (expenses):
Interest expense (1,052,205) (290,618)
Loss on sale of property and equipment -- (41,826)
Write-off of investment in joint venture -- (375,706)
Other income 18,632 17,627
------------ -----------
(1,033,573) (690,523)
------------ -----------
Loss from continuing operations (5,645,661) (3,663,358)
Discontinued operations:
Loss from discontinued operations (no applicable
income taxes) (3,311,528) (8,096,107)
Loss on disposal of discontinued business segment
(no applicable income taxes) (2,565,048) (303,203)
------------ -----------
Loss before extraordinary item (11,522,237) (12,062,668)
Extraordinary gain on extinguishments of
debt (no applicable income taxes) 869,847 --
------------ -----------
Net loss (10,652,390) (12,062,668)
Preferred stock dividends (129,250) (289,375)
------------ -----------
Net loss attributable to common stockholders ($10,781,640) ($12,352,043)
============ ===========
Loss per common share attributable to common
stockholders:
Continuing operations $ (.09) $ (.14)
Discontinued operations (.09) (.29)
Extraordinary gain .01 --
------------ -----------
Net loss $ (.17) $ (.43)
============ ===========
Weighted average shares outstanding 62,187,066 28,935,217
============ ===========
See notes to consolidated financial statements.
F-3
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2000 AND 1999
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS
---------------- ------------------ PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) STOCK TOTAL
------ ------ ---------- -------- ----------- ------------ --------- ------------
Balances, January
1999 22,217,299 $ 22,217 $ 8,892,522 $ (5,694,442) $ $ 3,220,297
Preferred stock issued
for cash 750 750 749,250 750,000
Common stock issued
for cash 5,865,303 5,865 2,521,535 2,527,400
Common stock issued for
services/ asset
purchases:
Employees and
consultants 1,466,765 1,467 850,773 852,240
Equipment purchases 25,000 25 9,913 9,938
License fees 2,075,000 2,075 1,512,866 1,514,941
Investment in joint
venture 500,000 500 375,206 375,706
Warrants issued in
connection with:
Preferred stock 45,885 45,885
Less stock issuance
costs (45,885) (45,885)
Financial advisory
services 877,420 877,420
Loan costs 70,900 70,900
Conversion of debt
to equity 1,141,581 1,142 422,608 423,750
Stock recission 1,268,060 (1,268,060)
Preferred stock
dividends (39,375) (39,375)
Preferred stock
beneficial conversion
feature (dividend) 250,000 (250,000)
Convertible debenture
beneficial
conversion
feature
(interest expense) 187,500 187,500
Net loss for the year (12,062,668) (12,062,668)
------- ----- ---------- -------- ------------ ------------- ------------- --------------
Balances,
December 31, 1999 750 $ 750 33,290,948 $ 33,291 $ 17,988,553 $(18,046,485) $ (1,268,060) $ (1,291,951)
======= ===== ========== ======== ============ ============= ============= ==============
See notes to consolidated financialstatements.
F-4
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 2000 AND 1999
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
- ----------------------------------------------------------------------------------------------------------------
Balances, January 1, 2000 750 $ 750 33,290,948 $ 33,291 $ 17,988,553
Warrants issued in connection with loan costs 38,347
Stock based compensation (options) 88,230
Common stock issued for cash, net
of stock offering costs ($13,125) 4,380,243 4,380 1,285,531
Preferred stock issued for cash, net of
stock offering costs ($26,500) 774 774 746,726
Stock issued for:
Research and development expense 1,500,000 150 492,038
Employee/non-employee services 710,000 710 181,590
Loan costs 15,441 15 4,618
Legal services 1,600,000 1,600 398,400
In connection with segment disposal
and warranty assumption 500,000 500 124,500
Other 550,000 550 133,325
Conversion of debt to equity 11,773,581 3,314 3,332,890
Preferred stock dividends
Convertible debenture beneficial
conversion feature (interest expense) 641,200
Convertible preferred stock beneficial
conversion feature (dividend) 86,000
Conversion of preferred stock to common (1,063) (1,063) 4,014,612 4,015 (2,952)
Acquisition of SAC-1, Inc. 26,500,000 26,500 4,873,500
Net loss for the year
Change in par value (66,541) 66,541
------ ------- ---------- -------- ------------
Balances, December 31, 2000 461 $ 461 84,834,825 8,484 30,479,037
====== ======= ========== ======== ============
ACCUMULATED TREASURY
DEFICIT STOCK TOTAL
-------------------------------------------
Balances, January 1, 2000 (18,046,485) (1,268,060) $ (1,291,951)
Warrants issued in connection with loan costs 38,347
Stock based compensation (options) 88,230
Common stock issued for cash, net
of stock offering costs ($13,125) 1,289,911
Preferred stock issued for cash, net of
stock offering costs ($26,500) 747,500
Stock issued for:
Research and development expense 492,188
Employee/non-employee services 182,300
Loan costs 4,633
Legal services 400,000
In connection with segment disposal
and warranty assumption 125,000
Other 133,875
Conversion of debt to equity 3,336,204
Preferred stock dividends (43,250) (43,250)
Convertible debenture beneficial
conversion feature (interest expense) 641,200
Convertible preferred stock beneficial
conversion feature (dividend) (86,000) --
Conversion of preferred stock to common
Acquisition of SAC-1, Inc. 4,900,000
Net loss for the year (10,652,390) (10,652,390)
Change in par value --
----------- ---------- ------------
Balances, December 31, 2000 (28,828,125) (1,268,060) 391,797
=========== ========== ============
See notes to consolidated financial statements.
F-5
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
Cash flows from operating activities:
Net loss $(10,652,390) $(12,062,668)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 145,089 577,316
Amortization of goodwill 284,235 59,142
Extraordinary gain on extinguishment of debt (869,847) --
Other non-cash charges -- 59,341
Write-down of assets in connection with
discontinued operations and loss on disposal 2,565,048 41,826
Stock based compensation 1,464,573 3,244,601
Beneficial conversion feature of convertible debenture 641,200 187,500
Write-off of investment in joint venture -- 375,706
Write-off of goodwill -- 313,203
Increase (decrease) in cash due to changes in:
Accounts receivable (441,849) 255,498
Inventories (479,915) 240,406
Prepaid expenses (265) 65,834
Other assets -- (3,360)
Costs and earnings in excess of billings (293,338) --
Accounts payable 1,816,901 92,470)
Accrued expenses 604,194 763,426
Customer deposits -- 227,428
Other liabilities (4,697) --
Billings in excess of costs and earnings (119,299) --
------------ ------------
Net cash used in operating activities (5,340,360) (5,747,271)
------------ ------------
Cash flows from investing activities:
Cash received in business acquisition 499,053 --
Repayments from related parties 102,663 87,485
Acquisition of property and equipment (109,270) (453,598)
------------ ------------
Net cash provided by (used in) investing activities 492,446 (366,113)
------------ ------------
Cash flows from financing activities:
Proceeds from sale/leaseback of property and equipment -- 250,000
Proceeds from (repayments of) notes payable, bank (730,855) 134,489
Proceeds from sale of capital stock 2,037,411 3,277,400
Principal repayments on capital lease obligations -- (183,401)
Proceeds from convertible debentures 700,000 750,000
Proceeds from related party notes payable 4,287,855 1,208,250
Repayments on related party notes payable -- (23,210)
------------ ------------
Net cash provided by financing activities 6,294,411 5,413,528
------------ ------------
(Continued)
F-6
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
---------- ---------
Increase (decrease) in cash 1,446,497 (699,856)
Cash, beginning of year 72,224 772,080
---------- ---------
Cash, end of year $1,518,721 $ 72,224
========== =========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 182,299 $ 31,769
========== =========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
During 2000, the Company:
o Acquired 100% of the outstanding stock of SAC-1, Inc. in exchange for the
issuance of 26,500,000 shares of common stock in a transaction valued at
$4,900,000
o Incurred $42,980 of loan costs in connection with the issuance of a
convertible debenture through the issuance of 15,441 shares of common stock
and 75,000 warrants
o During 2000, 774 shares of Class A preferred stock were, simultaneous upon
their issuance, converted to 2,781,063 shares of common stock.
o Converted 289 shares of preferred shares outstanding at beginning of year
to 1,233,549 shares of common stock
o Converted $750,000 of convertible debentures along with accrued interest of
$152,204 to 2,202,287 shares of common stock
o Converted $2,434,000 of related party debt to 9,571,294 shares of common
stock
During 1999, the Company:
o Incurred $70,900 of loan costs through the issuance of common stock
warrants
o Acquired equipment with a cost of $341,200 and $7,514 through capital lease
obligations and the issuance of 10,000 shares of common stock, respectively
o Incurred joint venture investment costs of $375,706 through the issuance of
500,000 shares of common stock
o Converted $423,750 in debt to 1,141,581 shares of common stock
o Acquired equipment with a cost of $668,435 and $9,938 through capital lease
obligations and the issuance of 25,000 shares of common stock, respectively
o Incurred joint venture investment costs of $375,706 through the issuance of
500,000 shares of common stock
See notes to consolidated financial statements.
F-7
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
NATURE OF BUSINESS:
EarthFirst Technologies, Incorporated, formerly known as Toups
Technology Licensing, Incorporated (the "Company" or "EarthFirst"), a
Florida corporation, was formed to facilitate market applications
through the licensing of late-stage technologies.
Prior to May 15, 2000, the Company had four separate operating
segments. These segments were 1) Technology Development for
Environmental Solutions and Alternative Fuels, 2) manufacture and sale
of the Balanced Oil Recovery System (BORS) Lift, 3) Contract
Manufacturing, and 4) Sales of medical equipment (Health Care market).
During 1999, the Company also had another operating segment that was
discontinued during the third quarter of 1999 (see Note 5).
On May 15, 2000, the Company entered into an acquisition agreement (the
"SAC Agreement") with the shareholders of SAC-1, Inc. ("SAC") pursuant
to which the Company exchanged 26,500,000 shares of its common stock
for all of the issued and outstanding shares of SAC (see Note 3).
Pursuant to the SAC Agreement, all of the Company's officers and
members of the Company's Board of Directors resigned, with the
exception of Philip M. Rappa. John D. Stanton, Chairman of the Board
and Chief Executive Officer of SAC, was appointed to the Company's
Board as Chairman. Mr. Stanton also assumed the duties of the Chief
Executive Officer of the Company.
Upon consummation of the acquisition, new management determined that,
with respect to EarthFirst operations, the Company should focus its
efforts and resources on the development of the technologies related to
environmental solutions and alternative fuels. Accordingly, the
Environmental Solutions and Alternative Fuels Division is the only
pre-May 15, 2000 continuing business segment of the Company.
There are two technologies under development in the Environmental
Solutions and Alternative Fuels segment of EarthFirst. One technology
is the development of the Plasma Arc Flow (TM) Reactor. This process
creates an alternative fuel called MagneGas. As discussed in Note 4,
commencing July 5, 2000, the Environmental Solutions and Alternative
Fuels segment has been conducted through USMagneGas, Inc.
("USMagneGas"), an 80% owned subsidiary of the Company.
F-8
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED):
NATURE OF BUSINESS (CONTINUED):
The second technology is the development of a process to efficiently
convert waste products, such as tires, animal waste, and similar
products, into reusable raw materials and fuels.
The two business segments acquired in the SAC acquisitions are: 1)
demolition and recycling and 2) government contracts. In its demolition
operations, SAC enters into fixed-price contracts to demolish structures
such as buildings and bridges. Services are rendered primarily within the
State of Florida.
In its recycling operations, SAC operates scrap yards at locations in
Gibsonton and Brooksville, Florida. SAC acquires scrap metal and other
items from unrelated parties and from its demolition business. Scrap
acquired is processed ultimately for resale to mills.
In its government contracts segment, SAC enters into contractual
arrangements to procure various products. Substantially all of the sales
made by the government contract segment are made to agencies of the
federal government. SAC acquired the business operations for the
government contract segment on May 15, 2000, from an entity related to
SAC.
REVENUE RECOGNITION:
Revenues are recognized as follows:
Demolition Contracts: Revenues for demolition contracts are recognized
based upon the percentage of completion method of accounting. Under this
method, contract revenue is computed as that percentage of estimated
total revenue that costs incurred bear to total estimated costs to
complete. Revisions in costs and revenue estimates are reflected in the
period in which the revisions are determined. Provisions for estimated
losses on uncompleted contracts are made in the period in which such
losses are determined without regard to the percentage-of-completion.
Because of the inherent uncertainties in estimating costs, it is at least
reasonably possible that the estimates used will change within the near
term.
Recycling Operations: Revenues from recycling operations are recognized
at the time assets are sold to third parties and either cash or a bona
fide receivable is received.
F-9
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED):
Government Contracts: Revenues are recognized when goods are shipped to
the ultimate customer. Allowances for estimated future returns are made
at the time goods are shipped.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its subsidiaries, some of which are inactive at December 31, 2000.
Those subsidiaries are as follows: SAC-1, Inc., Gibsonton Properties,
Inc., InterSource Healthcare, Inc., Brounley Associates, Inc.,
USMagneGas, Inc., EuroMagneGas, Ltd., and AsiaMagneGas, Ltd.
Significant intercompany accounts and transactions have been eliminated
in consolidation.
CASH AND CASH EQUIVALENTS:
The Company places its cash and cash equivalents with high credit quality
institutions. At December 31, 2000, cash exceeded federally insured
limits by approximately $1,418,000.
INVENTORIES:
Inventories at December 31, 2000 consist entirely of purchased scrap
aluminum, steel, copper, and lesser amounts of various other recyclable
metals and are stated at the lower of cost or market. Cost is determined
generally on a first-in, first-out method.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is provided on
the straight-line method over (1) the estimated useful lives of the
assets, which range from 7-12 years for machinery, equipment, computers,
office equipment and furniture and 39 years for depreciable real property
or (2) the lease term for assets subject to capital lease if the lease
term is shorter than the assets' estimated useful lives.
LICENSE FEES:
The Company has charged costs incurred for the acquisition of license
rights (primarily resulting from the issuance of common stock) to
operations as incurred (research and development expense) since the
commercialization of the technologies is still in the development stage
and such technologies have been purchased for a particular development
project and have no current known alternative uses.
F-10
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED):
ADVERTISING COSTS:
The costs associated with producing and communicating advertising are
expensed in the period incurred. Advertising costs were approximately,
$20,000 and $35,000 during 2000 and 1999, respectively.
USE OF ESTIMATES:
Preparation of these 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 dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
STOCK-BASED COMPENSATION:
The Company accounts for compensation costs associated with stock options
issued to employees under the provisions of Accounting Principles Board
Opinion No. 25 ("APB 25") whereby compensation is recognized to the
extent the market price of the underlying stock at the date of grant
exceeds the exercise price of the option granted. Stock-based
compensation to non-employees is accounted for using the fair-value based
method prescribed by Financial Accounting Standard No. 123., ("FAS 123")
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
The Company accounts for unregistered common stock issued for services or
asset acquisitions at the estimated fair value of the stock issued. Fair
value is determined based substantially on the average cash price of
recent sales of the Company's unregistered common stock.
F-11
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED):
INCOME TAXES:
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. This method also requires the recognition of future
tax benefits such as net operating loss carryforwards, to the extent that
realization of such benefits is more likely than not. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The deferred tax assets are reviewed
periodically for recoverability and valuation allowances are provided, as
necessary.
NET LOSS PER SHARE:
Net loss per share was computed based on the weighted average number of
shares outstanding during the periods presented.
Diluted earnings per share is considered to be the same as basic earnings
per share since the effect of common stock options and warrants and
convertible debentures and preferred stock is anti-dilutive.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS
TO BE DISPOSED OF:
On a quarterly basis, the Company evaluates the projected undiscounted
cash flows of each business unit to determine, when indicators of
impairment are present, whether or not there has been permanent
impairment of its long-lived assets, and accrues expenses for the amount,
if any, determined to be permanently impaired. During 2000 the Company
recognized an impairment loss of approximately $2,000,000 for the
write-down of long-lived assets which were associated with discontinued
operations.
F-12
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2. MANAGEMENT'S PLANS REGARDING LIQUIDITY AND CAPITAL RESOURCES:
The Company has experienced recurring net losses since its inception and,
as such, experienced negative operating cash flows through December 31,
2000. Historically, negative operating cash flows have been funded with
proceeds from sales of common and preferred stock, notes and convertible
debentures payable and equipment financing transactions. In addition, a
principal stockholder has provided an aggregate $5,000,000 in revolving
lines of credit to fund operating deficits, $1,500,000 of which was
converted to equity subsequent to December 2000. The total amount
received from these sources approximated $7,025,000 during 2000 and
$5,500,000 during 1999. Notwithstanding the proceeds of these financing
sources, the Company had negative working capital of approximately
$1,200,000 at December 31, 2000.
During the second quarter of 2000, the Company made significant changes
in its operations including discontinuing three of its four previously
existing business segments in order to reduce cash outflows and reduce
outstanding debt. Management has refocused the attention of the Company
on developing the technologies owned or licensed in the alternative fuel
industry. These technologies are currently in the research and
development stage and consequently had not produced revenue as of the end
of 2000. Additional expenditures will be required to further develop its
technologies. Furthermore, entities acquired in 2000 are generating
losses due to problems associated with the execution of certain
demolition contracts and job overruns.
The Company is negotiating additional billings on certain demolition
contracts and is working to restructure the organization overall to
reduce costs and maximize profits. However, there can be no assurance
that the Company will be successful in negotiating additional billings or
that the restructuring will achieve its objectives. The Company will
continue to require additional equity or debt financing in order to
provide for its cash requirements and continue as a going concern.
Management believes it will be successful in these financing efforts, but
there can be no assurance to that effect.
F-13
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
3. BUSINESS COMBINATION:
As discussed in Note 1, on May 15, 2000 the Company acquired 100% of the
outstanding stock of SAC in exchange for the issuance of 26,500,000
shares of the Company's common stock in a transaction accounted for as a
purchase. Accordingly, the results of operations of SAC are included in
the accompanying financial statements from May 15 through December 31,
2000. The $4,900,000 recorded cost of this acquisition was based upon the
estimated fair value of the common stock issued. The Company allocated
the purchase price based on the fair value of the assets acquired over
the liabilities assumed. Assets acquired and liabilities assumed are as
follows:
Cash $ 499,053
Accounts receivable 1,695,329
Property and equipment 2,221,259
Other current assets 540,462
Goodwill 4,494,886
------------
Assets acquired 9,450,989
------------
Accounts payable 1,702,842
Notes payable 889,358
Other current liabilities 318,607
Due to related parties 1,640,182
------------
Liabilities assumed (4,550,989)
------------
Value of SAC $ 4,900,000
============
Goodwill of $4,494,886 resulting from this acquisition will be amortized
over ten years using the straight-line method. Amortization expense of
$284,235 was recognized through December 31, 2000.
F-14
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
3. BUSINESS COMBINATION (CONTINUED):
Pro-forma results of operations for the year ended December 31, 2000 and
1999 as though SAC had been acquired at January 1, 1999 are as follows:
YEARS ENDED DECEMBER 31,
2000 1999
--------------- ---------------
Revenues $ 12,426,805 $ 5,673,142
Loss from continuing operations (5,951,780) (3,614,436)
Discontinued operations (5,876,576) (8,399,310)
Loss before extraordinary items $ (11,828,356) $ (12,013,746)
Net loss attributable to common stockholders $ (11,087,759) $ (12,303,121)
Net loss per share $ (.15) $ (.22)
4. EXECUTION OF WORLD-WIDE EXCLUSIVE ASSIGNMENT, LICENSE AND ROYALTY
AGREEMENT AND RELATED DOCUMENTS:
In order to cure alleged defaults in previous agreements with Hadronic
Press, Inc. ("HPI") and to secure the rights to other intellectual
properties needed to develop MagneGas, on July 5, 2000, EarthFirst
entered into a World-Wide Exclusive Agreement, License and Royalty
Agreement (the "MagneGas Agreement") with HPI. Under the MagneGas
Agreement, EarthFirst acquired 80% of the capital stock of USMagneGas,
Inc. ("USMagneGas"), a Florida corporation formed on June 15, 2000, in
return for EarthFirst's assignment of certain rights to technological
processes related to MagneGas (that had no asset cost basis) to HPI and
agreeing to certain other contractual requirements. HPI simultaneously
licensed its interests in these technological rights, as well as its
rights to other technology, to USMagneGas pursuant to a royalty agreement
executed between HPI and USMagneGas. Pursuant to the MagneGas Agreement,
EarthFirst is obligated to provide financing, facilities and resources to
facilitate a program of research and development for the MagneGas
technology conducted by USMagneGas.
In addition, EarthFirst issued 1,500,000 shares of its common stock and
certain stock options to HPI in return for HPI entering into the MagneGas
Agreement and procurement of future patents by HPI which patents will
become subject to this agreement. The $492,188 estimated fair value of
the 1,500,000 shares of common stock issued in connection with this
transaction has been recognized as research and development expense
during 2000.
F-15
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
4. EXECUTION OF WORLD-WIDE EXCLUSIVE ASSIGNMENT, LICENSE AND ROYALTY
AGREEMENT AND RELATED DOCUMENTS (CONTINUED):
Furthermore, in a Letter of Intent executed between HPI and USMagneGas,
it was agreed that two new entities would be formed and that HPI would
license certain foreign rights to these new entities. EuroMagneGas, Ltd.
received the licensing rights for the MagneGas technology in Europe.
AsiaMagneGas, Ltd. received the licensing rights for the MagneGas
technology in Asia. EuroMagneGas, Ltd. and AsiaMagneGas, Ltd. are owned
80% by EarthFirst and 20% by HPI. Both EuroMagneGas, Ltd. and
AsiaMagneGas, Ltd. were formed prior to December 31, 2000, however,
neither had commenced operations.
5. DISCONTINUED OPERATIONS:
Contemporaneous with entering into the SAC Agreement (see Note 1), new
management decided to discontinue the BORS Lift, healthcare, and contract
manufacturing operations previously conducted by the Company. New
management believes that the technological processes developed or
licensed in connection with the Company's Environmental Solutions and
Alternative Fuels operations have significant potential for profitable
commercial development and presents the best long-term prospects for the
Company. Given the Company's limited resources, as well as many other
factors, new management believes that it is in the best interest of the
Company to focus its resources on the further development and
exploitation of the technology rights owned by the Environmental
Solutions and Alternative Fuels segment. As a result, the Company
discontinued its other operations.
During 2000, the Company liquidated the assets used in the discontinued
segments and used the proceeds to settle or reduce the liabilities
associated with these operations. An auction was held on August 29, 2000
at which time substantially all of the remaining machinery and equipment
used in the discontinued operations were sold. Proceeds received from the
auction were used to repay related debt obligations involving the assets
sold. Results from operations of the discontinued business segments have
been classified as discontinued operations for the years ended December
31, 2000 and December 31, 1999.
BORS:
On June 16, 2000, a Technology Assignment and Royalty Agreement (the
"BORS Agreement") was entered into by and among EarthFirst, its
wholly-owned subsidiary, Ennotech, Inc., (collectively referred to as the
"Company") and BORS International L.L.C. ("BIL"). Under the BORS
Agreement, the Company transferred to BIL its rights to the "BORS Lift"
technology for lifting oil from shallow wells.
F-16
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
5. DISCONTINUED OPERATIONS (CONTINUED):
BORS (CONTINUED):
As part of the agreement, the Company sold its BORS Lift inventory,
equipment, and tooling for a purchase price of $324,921. The proceeds
received from the sale were utilized to repay a promissory note in the
amount of $375,000 owed to one of the principles of BIL who was also a
shareholder of the Company. The remaining balance owed on this note is to
be paid from the proceeds of the monthly royalty payments due under the
royalty agreement described below.
BIL assumed all actual or implied warranty and service obligations of the
Company in connection with all BORS Lift units and related equipment
services previously provided by the Company to any customer. In
consideration of this assumption, BIL received 500,000 shares of the
Company's unregistered common stock.
In connection with the BORS Agreement, the parties executed a Royalty
Agreement that requires BIL to pay the Company an amount equal to 2% of
the collected gross revenues of BIL, as defined in the contract, on a
monthly basis. As of March 15, 2001, EarthFirst had not received any
royalties under this agreement.
The royalty agreement provides that, at any time after 42 months from
entering into the agreement, BIL can satisfy and terminate all future
royalties due under the royalty agreement by making a cash payment equal
to 300% of the total royalty payments received by the Company in the
prior 12 months. The parties agreed that this termination payment, when
added to all prior monthly royalty payments, must total at least
$3,000,000.
HEALTHCARE:
The Company's healthcare operations were conducted through InterSource
Health Care, Inc. (InterSource), a wholly-owned subsidiary. Prior to
termination of operations, InterSource acquired and refurbished used
medical equipment for resale, sold pharmaceutical products and provided
services for medical facility development.
During 1999 and 2000, InterSource realized significant losses from
operations. Upon the acquisition of SAC on May 15, 2000, the decision was
made to suspend activity in the Healthcare business segment. All assets
owned by InterSource have been sold or disposed of and the proceeds used
to pay creditors.
F-17
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
5. DISCONTINUED OPERATIONS (CONTINUED):
CONTRACT MANUFACTURING:
The Company's contract manufacturing operations consisted principally of
micro welding, custom metal fabricating and production of equipment for
the BORS Lift operations.
As a result of the decision to terminate the BORS Lift operations, new
management determined that the continued operation of the contract
manufacturing operation was no longer prudent. Substantially all of the
assets of the contract manufacturing operations have been sold or
disposed of and the proceeds generated have been used to retire related
debt obligations.
OTHER:
During 1999, the Company was also engaged in the business of the design,
manufacture and sale of radio frequency generators. During 1999, after an
evaluation of this business unit's performance, management elected to
discontinue these operations and substantially all of the assets used in
this segment have been sold or otherwise disposed of and proceeds
received have been used to repay related debt obligations.
Results of operations of all discontinued business segments have been
classified as discontinued operations for the years ended December 31,
2000 and 1999. Unamortized goodwill associated with the 1999 discontinued
operations was evaluated, deemed to have no continuing value and,
therefore, written-off and is included in loss on disposal of
discontinued operations in the accompanying 1999 statement of operations.
Components of loss from all discontinued operations are as follows:
2000 1999
------------ ------------
Revenues $ 383,306 $ 1,100,528
Costs and expenses (3,694,834) (9,196,635)
------------ ------------
Operating losses (3,311,528) (8,096,107)
Income taxes -- --
------------ ------------
Loss from discontinued operations $(3,311,528) $(8,096,107)
============ ============
F-18
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
6. MAJOR CUSTOMER INFORMATION, FAIR VALUE OF FINANCIAL INSTRUMENTS AND
CONCENTRATIONS OF CREDIT RISK:
MAJOR CUSTOMER INFORMATION:
During the year ended December 31, 2000 the Company derived revenues from
one customer in the demolition segment which approximated 17% of total
revenues.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
All financial instruments are held or issued for purposes other than
trading. The carrying amount of cash, accounts receivable, accounts
payable and other current liabilities approximates fair value because of
their short maturity. The carrying amount of notes payable, related party
notes payable, convertible debentures and lease obligations approximates
their fair value based on current market interest rates offered to the
Company.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of receivables arising
from demolition contracts and a relatively small amount of trade accounts
receivable arising in the recycling operations. Receivables generated in
the government contracting segment are believed to not have any credit
risk since the obligors are primarily agencies of the United States
Government and the Company makes a provision for estimated future returns
associated with these receivables.
In its demolition operations, the Company performs services for companies
in the United States. Management assesses the financial stability of each
of its major customers prior to contract negotiations and establishes
credit limits for smaller customers to limit its risk. The Company does
not require collateral or other security to support customer receivables
other than that arising under operation of law. Because the Company has
significant receivables owed to it pursuant to contracts with major
customers, if the financial condition and operations of these customers
deteriorate below critical levels, the Company's operating results could
be adversely affected.
F-19
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
7. SEGMENT REPORTING:
Key segment information for 2000 is summarized as follows:
ALTERNATIVE FUELS/
ENVIRONMENTAL DEMOLITION GOVERNMENT
SOLUTIONS & RECYCLING CONTRACTING CONSOLIDATED
------------------ ----------- ----------- -----------
Revenue from
external customers $ -0- $6,229,130 $2,134,680 $ 8,363,810
Cost of sales -0- 6,164,154 1,807,325 7,971,479
Gross profit -0- 64,976 327,355 392,331
Research &
Development 1,588,600 -0- -0- 1,588,600
Segment Assets 50,000 9,842,491 1,441,133 11,333,624
The following summarizes key segment information for 1999:
ALTERNATIVE FUELS/
ENVIRONMENTAL DEMOLITION GOVERNMENT
SOLUTIONS & RECYCLING CONTRACTING CONSOLIDATED
------------------ ----------- ------------ -------------
Revenue from
external customers $ -0- $ -0- $ -0- $ -0-
Cost of sales -0- -0- -0- -0-
Gross profit -0- -0- -0- -0-
Research &
Development 2,457,835 -0- -0- 2,457,835
F-20
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
8. INVENTORIES:
Inventories consist of the following:
Purchased scrap metal $ 205,314
Commodities purchased for resale to government entities 488,990
------------
$ 694,304
============
9. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
Costs and estimated earnings on uncompleted contracts are summarized as
follows:
Costs incurred on uncompleted contracts $ 5,141,766
Estimated losses (934,246)
-------------
4,207,520
Less billings to date (3,792,922)
------------
$ 414,598
=============
The amounts are reported in the accompanying 2000 balance sheet under the
following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 515,804
Billings in excess of costs and estimated
earnings on uncompleted contracts (101,206)
------------
$ 414,598
============
10. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 2000 consists of the following:
Land $ 698,630
Buildings 16,165
Machinery and equipment 1,651,365
Office furniture and equipment 50,000
-----------
2,416,160
Accumulated depreciation (180,720)
------------
$ 2,235,440
===========
F-21
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
11. PAYROLL TAX LIABILITIES:
The Company is delinquent with respect to payment of certain fourth
quarter 1999 payroll taxes (approximately $232,000, including interest
and penalties, which are included in accrued expenses at December 31,
2000). Management entered into a payment stipulation agreement with the
Internal Revenue Service (IRS) whereby the Company has agreed to make
payments of $50,000 per month until this liability is paid. All payments
required under the agreement with the IRS have been paid.
12. LEASE OBLIGATIONS:
The Company had previously entered into numerous lease arrangements and
has defaulted on substantially all of those obligations. In connection
therewith, through its attorney, the Company has auctioned off equipment
and negotiated settlements with the lessors. The amounts reflected at
December 31, 2000 represent amounts due prior to default less auction
proceeds and settlement amounts.
13. LONG-TERM DEBT:
Long-term debt consists of the following:
Bank notes, payable in monthly installments aggregating $2,377 (including
interest), maturing through 2003: interest at rates varying from 9.5% to
10.25%, collateralized by equipment. $ 65,328
Various vehicle loans with a financing company with interest rates
ranging from 1.9% to 9.9%, with varying monthly payments and maturity
dates through 2002. 63,181
Various equipment loans with financing companies with interest rates
ranging from 7.9% to 10.1%, with varying monthly payments and maturity
dates ranging from January 2001 to June 15, 2004. 585,395
----------
713,904
Less current maturities 342,566
----------
Total long-term $ 371,338
==========
F-22
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
13. LONG-TERM DEBT (CONTINUED):
Future maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31,
------------------------
2001 342,566
2002 267,317
2003 75,515
2004 28,506
------------
$ 713,904
============
14. NOTES AND OTHER PAYABLES, RELATED PARTIES:
Notes and other payables, related parties consists of the following:
Note payable to an entity controlled by the Company's Chief Executive
Officer pursuant to a $2,500,000 revolving line of credit, interest at an
effective rate of 9.9%; not repayable prior to January 1, 2002; secured
by all of the assets of EarthFirst. $1,272,689
Note payable to an entity controlled by the Company's Chief Executive
Officer pursuant to a $2,500,000 revolving line of credit, interest at an
effective rate of 10%; not repayable prior to January 1, 2002; secured by
all of the assets of SAC. (a) 2,500,000
Unsecured non-interest bearing advances from several stockholders, due
demand 138,250
Notes payable to the former Chief Executive Officer and an affiliate
thereof, due in monthly installments of $6,591, including interest at
12%, through 2001; secured by accounts receivable, inventory and
equipment of EarthFirst. 94,386
------------
4,005,325
Less current maturities 232,636
------------
$ 3,772,689
============
(a) Subsequent to December 31, 2000, $1,500,000 of this loan was converted to
equity.
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
14. NOTES AND OTHER PAYABLES, RELATED PARTIES (CONTINUED):
The annual maturities of notes and other payables, related parties are
as follows:
YEAR ENDING DECEMBER 31,
2001 $ 232,636
2002 3,772,689
------------
$ 4,005,325
============
15. CONVERTIBLE DEBENTURES:
1999 ISSUANCE:
In February 1999, the Company sold $750,000 of Series 1999-A 8%
convertible notes due January 2002. The notes were convertible to common
stock of the Company at the conversion price for each share of common
stock equal to the lesser of (1) the lowest closing bid prices for the
common stock for the five trading days immediately preceding the Closing
Date; or (2) 80% of the lowest closing bid prices for the common stock
for the five trading days immediately preceding the Conversion Date.
Additionally, the investor was issued a warrant to purchase 75,000 shares
of the Company's common stock exercisable at $2.3375 per share through
February 2002.
The agreements contained demand registration rights with respect to the
warrants and the stock subject to conversion and underlying the warrants.
The Company was unable to provide these registration rights and accrued
an additional 1.5% per month on the outstanding note balance as
liquidated damages pursuant to the agreement.
During 2000, the investor converted the $750,000 principal balance of the
notes, as well as $152,204 of accrued interest and accrued liquidated
damages, into 2,202,287 shares of the Company's common stock.
2000 ISSUANCE:
On March 30, 2000, the investor loaned the Company an additional $700,000
through the purchase of the second installment of the 8% convertible
notes (the March 31, 2002). The investor in these notes may elect to
convert all or a portion of the notes into shares of the Company's common
stock at a conversion price for each common share equal to the lesser of
(1) $.75; or (2) eighty percent (80%) of the lowest of the closing bid
prices for the common stock for the five trading days immediately
preceding the conversion date.
F-24
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
15. CONVERTIBLE DEBENTURES (CONTINUED):
2000 ISSUANCE (CONTINUED):
As part of the Series 2000-A 8% Convertible Notes, the Company executed a
Registration Rights Agreement with the investor. Under this agreement,
the Company was required to use its best efforts to file with the
Securities and Exchange Commission a registration statement for these
securities. The Company has been unable to file the required registration
statements. The agreement provides for liquidated damages in the amount
of 1.5% per month of the note balance for each month such registration
rights cannot be granted. As of December 31, 2000, the financial
statements reflect the accrual of $105,345 of interest expense and
liquidated damages under the Series 2000-A 8% Convertible Notes.
In connection with the 2000 issuance, the Company granted the investor
additional warrants to purchase 75,000 shares of common stock under terms
similar to those granted in 1999. No portion of the $700,000 note has
been converted into common stock as of the end of 2000.
BENEFICIAL CONVERSION INTEREST:
Since the investor did not convert the notes on the day of the closing,
the Company is required to recognize as interest expense the beneficial
conversion terms of the 2000 and 1999 notes. This additional interest of
$641,200 and $187,500 in 2000 and 1999, respectively, was amortized over
the periods from closing through the first date on which the notes could
have been converted.
16. STOCKHOLDERS' EQUITY:
On December 20, 2000, the Company amended its articles of incorporation
to increase the authorized shares to 250,000,000 at $.0001 par value per
share.
SERIES A PREFERRED STOCK, 1999 ISSUANCE:
On March 30, 1999, the Company executed a series of agreements and
amended its articles of incorporation in order to complete the placement
of $750,000 of its Series A 7% Preferred Stock ($1 par value; $1,000
stated value) with an investor. Under the terms of the Series A Preferred
Stock, at December 31, 1999 the holder may convert the preferred stock
into common stock at 75% of the common stock closing price anytime
through March 30, 2004. In that regard, the Company recorded a dividend
of $250,000 during 1999 to account for this beneficial conversion
feature. The Company also issued 93,750 warrants exercisable at $2.40 per
share to the investor in connection with the sale of the Preferred Stock.
The Company also issued 50,000 warrants as a finders fee exercisable at
$2.40 per share through March 30, 2004.
F-25
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
16. STOCKHOLDERS' EQUITY (CONTINUED):
SERIES A PREFERRED STOCK, 1999 ISSUANCE (CONTINUED):
The agreements contain demand registration rights with respect the
warrants and the stock subject to conversion and underlying the warrants.
The Series A Preferred Stock has a liquidation preference of $1,300 per
share plus accrued and unpaid dividends. Accrued and unpaid dividends
were $81,760 at December 31, 2000.
During 2000, the holder of the preferred stock elected to convert 289
shares of the preferred stock into 1,233,549 shares of common stock.
Holders of common stock are entitled to one vote per share. To the extent
that holders of the Series A Preferred Stock are entitled under the
Florida Business Corporation Act to vote on a matter with holders of
common stock, voting together as one class, each share of Series A
Preferred Stock shall be entitled to a number of votes equal to the
number of shares of common stock into which it is then convertible.
PREFERRED STOCK, 2000 ISSUANCE:
During 2000, the Company issued 774 shares of 8% convertible preferred
stock in a series of private placements ($774,000 stated value). Each
unit consisted of one share of preferred stock, convertible into common
at 90% of the fair market value of the stock on the conversion date, and
one warrant to acquire one share of common at 120% of the fair market
value on the conversion date, exercisable two years from the date of
conversion. All preferred shares issued in 2000 were immediately
converted to common stock.
Because of the beneficial conversion feature contained in these equity
instruments, in 2000 the Company has recorded a dividend of $86,000 (the
difference between the price paid and the fair market value of the
stock).
F-26
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
16. STOCKHOLDERS' EQUITY (CONTINUED):
RECISSION OF STOCK AND STOCK OPTION:
During June 1999, certain officers of the Company offered to rescind the
receipt of 1,950,000 shares of stock previously issued to them in 1998 as
compensation. The Company accepted the recission offer. Under the terms
of the recission, the officers were to receive three year stock options
to purchase 1,950,000 shares of the Company's stock at the 5-day trailing
average of the market price at the date of grant. The Company completed
the recission and option transactions in December 1999.
The Company treated the reacquired (returned) shares as treasury stock,
and recorded the shares at a cost of $1,246,050, the compensation cost
attributed and recorded for the original issuance of the shares in 1998,
as an increase in Paid-in Capital. The options were granted at an
exercise price of $1.10 per share, (the 5-day trailing average high of
the market price at the date the transaction was initially considered by
the Board in June 1999), representing an exercise price considerably
higher than the market price of the Company's common stock on the date
the option was granted in December 1999 and were fully vested at December
31, 1999. Accordingly, no compensation expense was recognized in the
financial statements for these options (the only options issued or
outstanding at December 31, 1999 and the year then ended). Had the
accounting provisions of FAS 123 been adopted, compensation of
approximately $832,000 would have been recorded in 1999 based on the
Black-Scholes option pricing model, and 1999 net loss and net loss per
share would have been ($12,894,868) and ($.45), respectively.
STOCK OPTION PLAN:
On December 15, 2000, the Board of Directors approved an Employee Stock
Option Plan for the purpose of competing successfully in attracting,
motivating, retaining employees with outstanding abilities. The total
number of shares to which options may be granted under the plan is
9,000,000 shares. Generally, the exercise price is fixed at no less than
100% of the fair market value of the shares at the date the option is
granted and expire on the earlier of three months after termination of
employment or ten years from the date of grant.
During 2000, the Company issued 7,530,000 common stock options to
officers and key employees, of which 5,500,000 were granted under the
aforementioned stock option plan, pursuant to which such options vested
immediately, except for 1,000,000 options that vested over a 6-month
period and contained a $1 exercise price.
F-27
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
16. STOCKHOLDERS' EQUITY (CONTINUED):
STOCK OPTION PLAN (CONTINUED):
The Company has recognized compensation expense of $57,000 associated
with 1,400,000 options that were granted at an exercise price of $.30 per
share when the fair market value of the stock approximated $.34. Had the
accounting provisions of FAS 123 been adopted, compensation of
approximately $100,000 would have been recorded in 2000 based on the
Black-Scholes option pricing model, and 2000 net loss and net loss per
share would have been ($10,752,390) and ($.17), respectively.
An additional 750,000 options were issued to consultants in connection
with research and development arrangements and were granted at exercise
prices ranging from $.375 to $1.00. These options, which were fully
vested at December 31, 2000, expire 3 years from the date of the grant.
Stock-based compensation expense of $32,230 has been determined based on
the Black-Scholes option pricing model and is included in research and
development expense in the accompanying 2000 statement of operation.
Options are generally issued at exercise prices based on fair values of
the stock on the date of issuance.
F-28
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
16. STOCKHOLDERS' EQUITY (CONTINUED):
STOCK OPTION PLAN (CONTINUED):
A summary of the status of the Company's outstanding stock options as of
December 31, 2000 and 1999, and the changes during the years ending on
those dates, is presented below:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Options outstanding, January 1, 1999 -- $ --
Options granted 1,950,000 1.10
Options expired and exercised -- --
---------- --------
Options outstanding, December 31, 1999 1,950,000 1.10
Options granted to employees 7,530,000 .40
Options granted to consultants 750,000 .50
Options expired and excercised -- --
---------- --------
Options outstanding, December 31, 2000 10,230,000 $ .54
========== ========
COMMON STOCK WARRANTS:
The following table summarizes information for stock warrants outstanding
and exercisable at December 31, 2000, all of which were granted in 1999
and 2000.
WARRANTS OUTSTANDING AND EXERCISABLE
------------------------------------------------------------------------------------------
RANGE OF WEIGHTED AVG. WEIGHTED AVG.
PRICES NUMBER REMAINING LIFE EXERCISE PRICE
------------------ -------------------- ---------------------- ----------------------
$ 2.34-2.40 218,750 30 months $ 2.38
$ .70 25,000 19 months .70
$ .40 3,800,000 46 MONTHS .40
------------------ -------------------- ---------------------- ----------------------
Issued and outstanding 4,043,750 $ .53
December 31, 1999 -------------------- ----------------------
$ 1.54 70,000 27 months 1.54
$ .52 95,274 28 months .52
$ .54 319,346 28 months .54
$ .47 1,683,502 20 months .47
$ .36 274,000 22 MONTHS .36
------------------ -------------------- ---------------------- ----------------------
Issued in 2000 2,442,122 $ .51
Outstanding -------------------- ----------------------
December 31, 2000 $ 6,485,872 36 months
==================== =====================
The weighted average grant-date fair value of warrants granted during
2000 and 1999 was $.51 and $.53 per share, respectively.
F-29
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
16. STOCKHOLDERS' EQUITY (CONTINUED):
The fair value of these warrants, exclusive of warrants issued in
connection with preferred and common stock discussed above, has been
recorded in the financial statements as follows:
2000 1999
-------- --------
Loan costs (capitalized and amortized
over life of loan) $ 38,347 $ 70,900
Stock issuance costs 39,625 45,885
Financial advisory service compensation (1) -- 877,420
-------- --------
$ 77,972 $994,205
======== ========
(1)This warrant agreement contains demand registration rights with
respect to the warrants and the common stock underlying the warrants.
The fair value of the options and the warrants granted were estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
2000 1999
-------- --------
Expected life of options 2-3 years 3-5 years
Risk free interest rate 6% 5.458%
Expected volatility 50% 50%
Expected dividend yield 0% 0%
STOCK ISSUANCES FOR SERVICES:
During 2000 and 1999, the Company issued 4,875,441 and 4,066,765 shares
of unregistered common stock to attract and retain key employees and for
other business purposes. These shares have been valued at prices which
approximate prices for cash sales of similar stock to others during the
same periods. Costs recognized in connection with these stock issuances
are as follows:
2000 1999
---------- ----------
Employee compensation $ 182,300 $ 316,570
Legal and consulting 404,633 535,670
Licenses fees (expensed) -- 1,514,941
Equipment purchases -- 9,938
Segment disposal and warranty assumption 125,000 --
Settlements 133,875 --
Research and development 492,188 --
Investment in joint venture -- 375,706
$1,337,996 $2,752,825
========== ==========
F-30
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
17. INCOME TAXES:
Deferred tax assets consist of the following at December 31, 2000:
Net operating loss carryover $ 7,451,000
Deferred tax asset valuation allowance (7,451,000)
-----------
$ --
===========
Income tax (expense) benefit consists of the following:
2000 1999
------------ ------------
Current:
Federal $ -- $ --
------------ -----------
Deferred:
Deferred (64,000) 64,000
Benefit of net operating loss carryover 3,751,000 2,918,000
Change in deferred tax asset valuation allowance (3,687,000) (2,982,000)
----------- -----------
-- --
------------ ------------
$ -- $ --
============ ===========
The expected income tax benefit at the statutory tax rate differed from
income taxes in the accompanying statements of operations as follows:
PERCENTAGE OF LOSS BEFORE
INCOME TAXES
-------------------------
2000 1999
------------ ----------
Statutory tax rate 34.0% 34.0%
State tax, net of federal benefit 3.5% 3.5%
Change in deferred tax asset
valuation allowance (7.5%) (7.5%)
------------ -----------
Effective tax rate in accompanying
statement of operations 0% 0%
=========== ==========
The Company has net operating loss carryovers of approximately
$19,900,000 at December 31, 2000. The net operating loss carryover
principally expires from 2018-2020.
F-31
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
18. RELATED PARTY TRANSACTIONS:
During 2000, the Company obtained short-term non-interest bearing loans
from four employee / shareholders aggregating $2,434,000, which were
converted into 9,571,294 shares of common stock, in August and September
of 2000.
During 1999, the Company obtained short-term, non-interest bearing loans
from four existing minority shareholders aggregating $423,750, which were
converted into 1,141,581 shares of common stock.
19. GAIN ON EXTINGUISHMENT OF DEBT:
During 2000, management entered into negotiations with many of its
vendors in an attempt to settle vendor claims at reduced amounts.
Management was successful in many instances and has therefore reflected
the negotiated payable reductions as gain on extinguishment of debt.
There were no applicable income taxes since operating loss carryforwards
had been fully reserved.
20. EMPLOYEE BENEFIT PLAN:
SAC has a 401(k) plan that covers all full-time employees who are 21
years of age and have completed one year of service. The employees can
contribute up to 15% of their annual compensation to the plan. The amount
of SAC's annual contribution is determined on a discretionary basis. The
Company contributed approximately $6,400 to the plan during the period
ended December 31, 2000.
21. COMMITMENTS AND CONTINGENCIES:
LICENSE AGREEMENTS AND ROYALTIES:
The Company has entered into the following licensing agreements granting
the Company the use of certain proprietary information, technology and
patents:
o Under the MagneGas Agreement (see note 4), EarthFirst is obligated to
provide financing, facilities and resources to facilitate a program
of research and development for the MagneGas technology conducted by
USMagneGas. EarthFirst is also obligated to provide USMagneGas with
sufficient funds to permit all advance royalty payments provided for
in the MagneGas Royalty Agreement to be timely paid. Pursuant to the
MagneGas Agreement, USMagneGas may not enter any debt financing.
F-32
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
21. COMMITMENTS AND CONTINGENCIES (CONTINUED):
LICENSE AGREEMENTS AND ROYALTIES (CONTINUED):
o Under the MagneGas Royalty Agreement (see note 4), USMagneGas is
required to pay the licensor, on a quarterly basis, royalty
payments equal to 3% of the gross proceeds of all that USMagneGas
receives for leasing, servicing, selling or otherwise
commercializing the technology subject to the MagneGas Agreement
within the territory for which it holds an exclusive license. The
MagneGas Agreement requires the USMagneGas to pay minimum royalties
of $10,000 per month for the first twelve months of the MagneGas
Agreement; $20,000 per month for the second twelve months; and
$30,000 per month for the subsequent three years. The Company paid
$60,000 during 2000 in connection with this agreement.
o Under the MagneGas Agreement, EuroMagneGas, Ltd. and AsiaMagneGas,
Ltd. are required to pay the licensor royalties, including advance
royalties, on terms similar to conditions to which US MagneGas,
Ltd. is subject after two years.
o An exclusive World-Wide Right and License to Use, Commercialize,
and Exploit a solid waste-to-energy technology was entered into
with the owner of the rights to the technology. The agreement
effective from December 15, 1999 for 20 years, obligates the
Company to pay: (1) a minimum annual royalty of $150,000 with the
first payment due upon receipt of payment for any device or service
related to the technology subject to the agreement, (with an equal
50/50 division of the profits received from such initial sale) and
future minimum royalty payments due on January 1st of each
succeeding year; (2) 50% of all initial sublicense fees with a
sublicense of the technology is sold; and (3) 50% of all royalties
and profits derived from the sale of the technology. There was no
royalty expense associated with this agreement in 2000 or 1999.
This agreement was modified by an agreement entered into in 2001
that is described in Note 20. Under the original agreement,
2,000,000 shares of previously issued common stock were deemed
earned by an individual associated with the licensor as a finder's
fee for arranging the license agreement. The Company recognized the
estimated fair value of these shares ($1,502,820) as a charge to
1999 operations.
F-33
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
21. COMMITMENTS AND CONTINGENCIES (CONTINUED):
CONSULTING AGREEMENTS:
The Company has a consulting agreement (the "Consulting Agreement") with
the Director of Research and Development for USMagneGas. The Consulting
Agreement requires USMagneGas to pay $10,000 per month for the three-year
term of the agreement and also provides for the grant of options to
acquire 100,000 shares of the Company's stock at the end of each research
and development program as defined by the USMagneGas Board of Directors,
with a limit of one such grant each year. In addition, if the minimum
sales levels set forth in the MagneGas Royalty Agreement are exceeded,
the number of options granted shall be doubled. No programs were
completed and therefore no options were issued pursuant to this
arrangement during 2000.
EMPLOYMENT AGREEMENTS:
The Company has an employment agreement with its chief executive officer.
The agreement provides for no annual cash compensation at this time.
Pursuant to the agreement, the Chief Executive Officer was granted
options to acquire 2,000,000 shares of the Company's common stock at an
exercise price of $1.00 per share, which were issued under the stock
option plan discussed in Note 15. One-half of these options vested in
2000 and the remainder vest on May 15, 2001.
BORS LIFT:
As part of the Technology Assignment and Royalty Agreement entered into
between BORS International, L.L.C. ("BIL"), Ennotech, Inc., and the
Company on June 16, 2000, as an incentive to BIL to maximize its
collected gross revenues, the Company agreed to issue stock options to
BIL which will be granted upon the occurrence of certain performance
standards. Upon BIL's achieving $10,000,000 in collected gross revenues
by December 31, 2001, the Company shall grant BIL options to acquire
833,333 shares of the Company's common stock at an exercise price of $.30
per share. Upon BIL's achieving $20,000,000 in collected gross revenues
between January 1, 2002 and December 31, 2002, the Company shall grant
BIL options to acquire 833,333 shares of the Company's common stock at an
exercise price of $.40 per share. In addition, upon BIL's achieving
$40,000,000 in collected gross revenues between January 1, 2003 and
December 31, 2003, the Company shall grant BIL options to acquire 833,333
shares of the Company's common stock at an exercise price of $.50 per
share. In lieu of achieving the collected gross revenue targets, BIL will
be granted any of the options contemplated above upon paying the Company
an amount equal to the royalty due had the gross collected revenue target
for the period been reached.
F-34
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
21. COMMITMENTS AND CONTINGENCIES (CONTINUED):
BORS LIFT (CONTINUED):
If this alternative is elected, BIL would be issued the above options in
return for total payments of royalties of $200,000 in 2001; $400,000 in
2002; and $800,000 in 2003.
LEGAL PROCEEDINGS:
LITIGATION:
The Company is involved in routine litigation incident to its business as
well as lawsuits instituted by vendors for payments of past due amounts.
The Company has accrued minimum estimated losses ($50,000) in connection
with pending litigation at December 31, 2000 and past due amounts related
to the suits are included in accounts payable and lease obligations
payable in the accompanying 2000 balance sheet. In the Company's opinion,
none of these proceedings will have a material adverse effect on the
Company's financial position or results of operations.
SEC ENFORCEMENT INQUIRY:
On November 19, 1999, the Company was notified that the Securities and
Exchange Commission was conducting an informal inquiry in connection with
matters relating to the Company's restatement of financial results. The
Securities and Exchange Commission requested that the Company provide
them with certain documents concerning the previous revision of its
financial results and financial reporting documents. The Securities and
Exchange Commission indicated that its inquiry should not be construed as
any indication that any violation of law has occurred, nor as an adverse
reflection upon any person, entity or security. The Company has
cooperated with the Securities and Exchange Commission in connection with
this inquiry and its outcome cannot be determined at this time. The
Company has not had any contact with the Securities and Exchange
Commission regarding their inquiry since the Spring of 2000.
F-35
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
22. SUBSEQUENT EVENTS:
CONVERSION OF PORTION OF REVOLVING LINE OF CREDIT OWED TO RELATED PARTY
INTO COMMON STOCK:
On January 8, 2001, $1,500,000 of the revolving line of credit owed to an
entity affiliated with the Chief Executive Officer was converted into
13,793,103 shares of the Company's common stock.
CONVERSION OF CERTAIN RELATED PARTY DEBT INTO COMMON STOCK:
On March 3, 2001, the $51,962 note payable to the former Chief Executive
Officer and the $42,424 note payable to an entity owned by the former
Chief Executive Officer, as well as a $22,655 obligation owed to that
entity, were converted into 780,269 shares of the Company's common stock.
In addition, a $43,250 obligation owed to a shareholder and former
director of the Company was converted into 288,333 shares of the
Company's common stock.
CONVERSION OF PREFERRED STOCK:
During January through March of 2001, the holder the Company's Series A
Preferred Stock converted 155 of their remaining 461 shares of the
preferred stock ($461,000 stated value) into 466,667 shares of common
stock.
CREATION OF EARTHFIRST WASTE TO ENERGY, INC. AND RELATED AGREEMENT:
The Company and the licensor of the rights to the Waste To Energy
technology have cooperated on the further development of this technology
through the construction and operation of a prototype plant located in
Port Gibson, Mississippi. On January 13, 2001, a Formation Agreement (the
"Waste To Energy Agreement") was entered into by and among the Company,
Marilyn Chirinsky ("Chirinsky"), John Rivera ("Rivera"), and Tomorrows
Innovative Technology Today, Inc. ("TI Tech"). Under the Waste To Energy
Agreement, the above parties agreed to form a new entity named EarthFirst
Waste To Energy, Inc. ("EFWE") to carry out further development and
commercialization of the Waste To Energy technology.
The Company received a 51% interest in EFWE in exchange for transferring
all of its rights under the Exclusive License agreement entered into on
December 15, 1999. In addition, until such time as EFWE is profitable,
the Company is required to fund all operating expenses of EFWE. The
Company is also required to provide all financial recordkeeping and
administration for EFWE, as well as provide assistance with the
coordination of grant applications on behalf of EFWE.
F-36
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
22. SUBSEQUENT EVENTS (CONTINUED):
CREATION OF EARTHFIRST WASTE TO ENERGY, INC. AND RELATED AGREEMENT
(CONTINUED):
In exchange for a 49% interest in EFWE, Chirinsky assigned to EFWE any
and all rights relating to the Waste To Energy technology not embodied
within the Exclusive Licensing agreement, and conveyed to EFWE all right,
title and interest in and to all matters and property associated with the
Port Gibson Mississippi facility. The parties also agreed that the
December 15, 1999 license agreement would be amended to eliminate the
royalty payments required.
Under the Waste To Energy Agreement, it was agreed that each party would
be reimbursed all expenses they incurred in furtherance of the Waste To
Energy technology from the available cash of EFWE on a pro rata basis
except that the first $500,000 of expenses submitted by TI Tech, Rivera
and Chirinsky will be reimbursed prior to any expenses of the Company.
In connection with the development of the prototype facility, Rivera
incurred indebtedness in the course of equipping and otherwise
facilitating the prototype facility in Port Gibson, Mississippi for which
he encumbered 1,900,000 shares he owns of the Company's common stock.
Under the Waste To Energy Agreement, the Company agreed to assume the
obligations for which Rivera pledged his common stock or otherwise insert
itself in Rivera's place so that the shares shall no longer be
encumbered. If the Company is unable to secure such a release, the
Company has agreed to issue to Rivera up to 1,900,000 shares of the
Company's common stock.
Pursuant to the Waste To Energy Agreement, Mr. Rivera agreed to resign as
an employee of the Company and become an employee of EFWE. Rivera shall
be paid at the rate of $90,000 per annum. At such time as EFWE (i)
receives its first purchase order and (ii) receives the required down
payment for the sale of a plant utilizing the technology, then EFWE will
increase Rivera's compensation to $150,000 per annum, plus bonus and
Chirinsky shall become an employee of EFWE at a rate of no less than
$100,000 per annum, plus bonus.
F-37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: APRIL 16, 2001
By: /s/ TIM KLACE By /s/ JOHN STANTON
--------------------------- ---------------------------
Tim Klace John Stanton
Chief Financial Officer and Chief Executive Officer and
Accounting Officer Chairman of the Board
By: /s/ PHILIP RAPPA
----------------------------
Philip Rappa
Chief Operating Officer and
Director
30