SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 2004 |
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 0-15474
AMERALIA, INC.
(Exact name of Company as specified in its charter)
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Utah |
87-0403973 |
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(State or other jurisdiction of |
(I.R.S. Employer |
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Incorporation or organization) |
Identification No.) |
20971 E. Smoky Hill Rd., Centennial, Colorado 80015-5187
(Address of Principal Executive Offices)
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Company's telephone number, including area code: |
(720) 876-2373 |
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Securities registered pursuant to Section 12(b) of the Act: |
None. |
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Securities to be registered pursuant to Section 12(g) of the Act: | |
Common Stock - $.01 Par Value
(Title of Class)
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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. Yes x No o |
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Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o |
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Revenues for the fiscal year ending June 30, 2004: |
$12,609,041 |
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Shares of common stock, $.01 par value, outstanding as of September 1, 2004: 16,866,301. Aggregate market value of the voting stock held by non-affiliates of AmerAlia as of September 1, 2004 was approximately $5,175,200. The estimate is based on the last sale price per share and 6,900,244 shares held by non-affiliates. |
Documents incorporated by reference: See Item 13.
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Forward Looking Statements pursuant to 1933 & 1934 Securities Acts
AmerAlia’s future conduct depends on a number of factors beyond our control, so we cannot assure you we will be able to conduct AmerAlia’s operations as we contemplate in this report. This report contains various statements using the terms “may”, “expect to”, and other terms denoting future possibilities. They are forward-looking statements. We cannot guarantee the accuracy of these statements as they are subject to a variety of risks beyond our ability to predict or control. These risks may cause actual results to differ materially from the projections or estimates contained in this report. These risks include, but are not limited to:
| · | the Company’s historical lack of profitable operations; |
| · | a need for highly profitable operations to service the interest costs of the new long-term financing; |
| · | the risks that the refinancing necessary to reduce our cost of funding and to finance our operations, the operations of our subsidiaries and expansion of production capacity will not be available on reasonable terms, if at all; |
| · | the risks of undertaking exploration, development and mining of mineral properties; |
| · | the risks associated with the manufacture and marketing of chemical products; and |
| · | the risk of default on the debentures held by the Sentient Entities, the promissory notes issued to our various investors and the Bank of America and its associated guaranty agreement obligations to the Mars Trust. |
These risks are discussed further at the end of Item 1(b).
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| AmerAlia, Inc. - Form 10-KSB For the Fiscal Year Ended June 30, 2004 | ||
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| ITEM 1. | DESCRIPTION OF BUSINESS |
(a) Business Development
AmerAlia, Inc. was incorporated in Utah on June 7, 1983 as Computer Learning Software, Inc. and renamed AmerAlia, Inc. in January 1984. When we use the term “We” or “AmerAlia” in this annual report, we are referring to AmerAlia, Inc. and its wholly-owned subsidiaries, Natural Soda Holdings, Inc. ("NSHI") and Natural Soda, Inc. ("NSI").
AmerAlia’s business is to produce and sell natural sodium bicarbonate, commonly known as baking soda, for use in a wide variety of products and activities. Our primary objective is to be the world’s largest and lowest cost producer of sodium bicarbonate. We own the largest Bureau of Land Management sodium leases in the Piceance Creek Basin which contains the largest known deposits of naturally occurring sodium bicarbonate in the world. Our leases are located near the depositional center of the Piceance Creek Basin deposits in Colorado where the nahcolite beds are thickest with greatest concentration and purity. Consequently, we believe our deposits are unique and capable of producing sodium bicarbonate and related sodium products for many generations.
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NSI's Plant Operations, Rifle, Colorado |
We first gained an interest in these deposits through our 1989 acquisition of an interest in a Bureau of Land Management lease known as the Rock School Lease in Rio Blanco County, Colorado. We purchased the lease in 1992 and devoted a number of years of research, development and permitting activity to bring that lease into production. In 2001 the Bureau of Land Management renewed the lease for a further ten years. Initially, we planned to produce sodium bicarbonate through building a solution mining and recovery facility on our Rock School Lease. We entered into agreements to design and fabricate a processing plant and commenced the construction of equipment.
However, in February 2003, we successfully completed the acquisition of the business operations of a company owning adjoining leases already in production. This immediately gained us access to an existing customer base, production facilities and very substantial additional deposits of nahcolite. We plan to use the equipment and plans we have already developed to expand the production capacity of our newly acquired operations.
Our subsidiary, Natural Soda, Inc., purchased the assets and certain related contracts held by White River Nahcolite Minerals, LLC (“WRNM”) and IMC Chemicals Inc. (“IMC Chemicals”) with short-term financing provided by Sentient Global Resource Fund I, LP and Sentient Global Resource Trust No. 1 of George Town, Grand Cayman, Cayman Islands (the “Sentient Entities”). This short-term financing was converted into long term funding at the financial closing completed March 19, 2004. The Sentient Entities hold all the outstanding NSHI and NSI common stock as collateral for the repayment of their loans. AmerAlia owns all the outstanding stock of NSHI. NSHI owns NSI. WRNM was an indirect, wholly-owned subsidiary of IMC Global, Inc. ("IMC"). IMC Chemicals is a subsidiary of IMC.
We have not been involved in any bankruptcy, receivership, or similar proceedings.
| AmerAlia, Inc. - Form 10-KSB For the Fiscal Year Ended June 30, 2004 | ||
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| (b) | Business of Issuer |
We are currently involved in only one industry segment: the production of various grades of sodium bicarbonate recovered from our naturally occurring deposits of nahcolite using solution mining.
General Discussion
Traditionally, sodium bicarbonate is manufactured chemically from soda ash, however, we recover our natural sodium bicarbonate using solution mining which we believe gives us significant production cost advantages over chemically manufactured product.
The largest known deposits in the world of nahcolite, a naturally occurring mineral form of sodium bicarbonate, exist in an area known as the Piceance Creek Basin in northwest Colorado. Access to these deposits is governed by the United States Bureau of Land Management which has granted leases to allow recovery of the sodium bicarbonate. We own the largest leases covering these deposits and there is only one other lease currently capable of being brought into production. Our leases cover 9,543 acres and are located near the depositional center of the Piceance Creek Basin deposits where the nahcolite beds are thickest with greatest concentration and purity. Consequently, we believe our deposits are unique and capable of producing sodium bicarbonate and related sodium products for many generations.
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AmerAlia's sodium leases are located
about 54 miles northwest of Rifle, Colorado |
Solution mining requires pumping hot water approximately 1900 feet underground, dissolving the mineral and bringing the saturated liquid to the surface where we recrystallize the sodium bicarbonate as a fine white crystalline powder. We package product in various grades of purity and crystal size in 50 lb. bags, 2000 lb. “supersacks”, or in bulk, and transport to our customers by truck or rail. We are capable of producing approximately 110,000 tons per year. We sell our products throughout the United States, Canada and Mexico. Our principal competitors are Church & Dwight, manufacturers of the Arm & Hammer brand; FMC Corporation and Solvay Chemicals.
Our products have many uses and applications. They include sales to the animal feed, industrial, food and pharmaceutical grade markets. Sodium bicarbonate is used in baking products, personal care products including toothpaste and antacid tablets; household products including deodorizers, cleaning products, detergents, carpet cleaners, bath salts and cat litter; and in industrial situations and uses such as leather tanning, fire extinguishers, blast media and waste water treatment.
The production of sodium bicarbonate also potentially enables the production of soda ash and caustic soda, chemicals widely used in the manufacture of glass, detergents and a variety of inorganic and organic chemicals. Sodium bicarbonate can also be used as an agent for flue gas desulfurization, a market that may expand as the requirements of the 1990 amendments to the Clean Air Act impact more significantly on the power generation industry.
| AmerAlia, Inc. - Form 10-KSB For the Fiscal Year Ended June 30, 2004 | ||
| Page 2 of 67 | ||
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Description of the WRNM Transaction
NSI acquired all of the WRNM assets, subject to all of the liabilities for a total purchase price of $20.6 million. WRNM and IMC assigned to NSI all of their interests in the assets including property, plant, equipment, water rights, accounts receivables, and four federal sodium leases issued by the Bureau of Land Management. NSI assumed WRNM's accounts payable. All of the 22 employees previously working for WRNM accepted employment from NSI. None of the employees is a member of a collective bargaining unit. The Company has accounted for the acquisition as a purchase under the provisions of SFAS No. 141. Accordingly, the Company has recorded the assets acquired and the liabilities assumed at their fair market values. The excess purchase price has been allocated to the assets purchased. No amount was allocated to goodwill.
Description of the Assets
The principal assets NSI acquired from WRNM are four federal sodium leases (Federal Sodium Mineral Leases C-0118326, C-37474, C-0118327 and C-0119986) and the 26,500 square foot processing plant located on one of the leases. NSI also acquired federal rights of way, operating permits, water rights, ownership of an existing water reservoir, rights with respect to an additional potential reservoir site, approximately 3,900 tons of inventory and receivables. In order to transfer the operations of the business at the closing, NSI and NSHI posted reclamation bonds and other financial security with federal and state agencies totalling about $924,500. NSI also assumed WRNM's accounts payables and other liabilities of approximately $2,240,000, as well as equipment and other leases necessary for the business operations. The leases and the plant are located about 54 miles northwest of Rifle, Colorado, and are accessible all year by paved road.
The Sodium Leases:
NSI acquired four sodium leases containing nahcolite, a naturally occurring mineral form of sodium bicarbonate, commonly called baking soda. They are located in the Piceance Creek Basin in northwest Colorado and have been combined into a single operational unit, the "Wolf Ridge Mining Unit", established by the Bureau of Land Management in 1993. The sodium leases cover an area of 8,223 acres or nearly 13 square miles. Our total lease area is 9,543 acres when combined with the Rock School Lease. Unique to the NSI leases is the Boies Bed, an interval very rich in nahcolite located at an approximate depth of 1,900 feet. NSI has Bureau of Land Management approval to recover nahcolite from the Boies Bed and an adjacent interval at the rate of 48,000 tons per acre.
Each of the four WRNM sodium leases was renewed effective July 1, 2001 for a ten year term with a preferential right to subsequent renewals provided that sodium is being produced in paying quantities. Under the unit agreement, production in paying quantities from one lease is sufficient to extend all four WRNM leases. The leases bear a production royalty payable to the federal government of 5% of the gross value of the leased deposits at the processing plant. Each of these leases contains covenants to protect the in situ oil shale, water, and historical resources.
During the last ten years, WRNM and its predecessors have been solution mining nahcolite from the Boies Bed from horizontal cavities. Each horizontal cavity may be expected to produce approximately 150,000 to 250,000 tons over time. Horizontal drilling into the Boies Bed has the advantage of being a proven technology.
The Plant:
The plant consists of a single building with crystallizers, boilers, centrifuge, dryers and other equipment capable of producing various grades of sodium bicarbonate at approximately 110,000 tons per year. There are also several other buildings associated with the plant which are used for bulk storage (one building of approximately 50 feet in diameter with a storage capacity of 3,000 tons) and three small sheds (lube storage shed, fire pump house shed, and hazardous materials shed). The plant, the bulk storage facility and one of the sheds are of metal construction; the other two sheds are of wood construction, each on concrete pads.
| AmerAlia, Inc. - Form 10-KSB For the Fiscal Year Ended June 30, 2004 | ||
| Page 3 of 67 | ||
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Underground cavities constitute a material part of the plant and its operations. Solution mining requires pumping hot water into the nahcolite-bearing rock zone at a depth of approximately 1,900 feet. The nahcolite dissolves and is pumped to the surface in solution known as a pregnant liquor and brought into the plant. The equipment in the plant recrystallizes the sodium bicarbonate from the pregnant liquor and then dries the sodium bicarbonate. The barren liquor is reheated and recycled underground to continue the solution mining process. The dried sodium bicarbonate is then stored for bulk sales or is bagged at the plant in 50 pound or 2,000 pound bags. The plant is capable of producing all commercial grades of sodium bicarbonate from animal feed grade to USP5, the highest commercial grade.
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An illustration representing the solution mining process |
Historically, the plant has shipped approximately 55% of its production as bulk product and the remainder as bagged product. There is no rail transportation to the plant. Product that is to be shipped by rail must be transported by truck to a rail loading facility in Rifle, Colorado that is operated by a third party under a contract assigned to NSI. Historically, about 25% of the plant's production has been shipped to its final destination by truck rather than by rail.
Water Rights:
WRNM also transferred all of its water rights to NSI, including the production well used to obtain water for solution mining operations, conditional well water rights associated with 13 wells located on the land covered by the federal sodium leases, absolute surface water rights from the White River drainage, a water storage reservoir and rights relating to future expansion of the reservoir, and rights associated with an augmentation plan governing substitution and exchange of water withdrawn from wells located on the sodium leases.
Fee Property:
WRNM transferred to NSI real property owned in fee simple that is used for the existing water storage reservoir of about 35.8 acres, about 25 miles east of the plant.
Other Assets:
In addition to the federal sodium leases and the assets associated with the plant, NSI acquired approximately 3,900 tons of sodium bicarbonate inventory in storage at the plant site and in a warehouse located in Rifle, Colorado. US Filter assigned equipment to NSI that it had fabricated for AmerAlia in consideration for the settling obligations due to US Filter under a May 1999 Design/Build Contract,. This equipment included a centrifuge, six silos, a dryer system, baghouse equipment, air compressors, pumps and pump parts now located at or near to the NSI plant. AmerAlia originally intended to use this equipment in the plant it had contemplated constructing for production from the Rock School Lease, however, we now plan to use this equipment to expand the existing NSI plant.
| AmerAlia, Inc. - Form 10-KSB For the Fiscal Year Ended June 30, 2004 | ||
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Marketing:
Before we acquired the WRNM business, IMC Chemicals and WRNM had entered into a number of marketing contracts with various distributors and users of the sodium bicarbonate products that the plant produces. Of these, the most significant (in tonnage as well as revenue) was an agreement with Bioproducts Incorporated of Fairlawn, Ohio to distribute animal feed grade products. However, at the end of 2003 we exercised our rights to terminate this agreement and we now sell animal feed grade product through a number of independent distributors. The largest of these is Bunnett & Company of Amarillo, Texas which now represents the largest part of our animal feed sales. The majority of our industrial and USP grade products is distributed by an agent, Vitusa Products, Inc. of Berkeley Heights, New Jersey. There are no written distribution agreements with Bunnett or Vitusa. There are no other significant marketing relationships that constitute more than 10% of our sales.
Other Contractual Arrangements:
When NSI acquired the WRNM business, it assumed a number of WRNM's other contractual arrangements including a sublease for 55 rail cars, a contract for the use of six airslide railcars, contracts with third parties for rail, freight and trucking services, equipment leases and contracts for services provided for normal business operations.
Description of the Short-Term Financing
At the time the asset purchase agreement with IMC Global was due for completion, AmerAlia and the Sentient Entities had not yet finalized their own agreements with respect to their final structure and commercial arrangements. Therefore, as an interim measure, AmerAlia and the Sentient Entities entered into a "Closing Agreement" which provided for temporary short-term funding until replaced by the long term funding structure when the final structure and commercial arrangements were resolved.
Consequently, the Sentient Entities loaned $24,000,000 to NSHI. NSHI used these funds to pay the purchase price of approximately $20.6 million to WRNM, payment of deposits to certain vendors to the WRNM business that NSI acquired, a portion of the fee to US Filter for termination of the May 1999 Design/Build Contract, transaction costs and working capital.
The Sentient Entities loaned the funds to NSHI on a short-term basis and took a security interest in all the outstanding shares of NSI capital stock. The Sentient Entities and NSHI completed their agreements on March 19, 2004 for the financial closing and long-term financing for the acquisition as discussed below.
Pro-forma Financial Statements
This information has been provided in our filings on Form 8-K/A-1 filed May 6, 2003 and Form 8-K/A-2 filed June 1, 2003. A copy of these filings can be obtained through the internet at www.sec.gov or by writing to our Corporate Secretary.
Long-Term Financing Agreements
On March 19, 2004 NSHI and the Sentient Entities completed their arrangements known as the financial closing. The principal agreement is the Debenture Purchase Agreement which provided for the repayment of the short-term financing and raising additional funding. A Securityholder Agreement between AmerAlia, NSHI, NSI and the Sentient Entities defines their mutual expectations and conduct with respect to the restrictions on transfer of the debentures and other securities issued in the transaction; board representations and appointment of management; budget approvals and minimum voting majority; limitations on the actions of NSHI and NSI; restrictions on transfer of securities and/or a trade sale including drag along/tag along rights; forbearance agreements; agreements for the exchange of Series B2 Debentures into 49% of NSI common stock and exchange of the NSI common stock for AmerAlia common stock; exchange of the Series B1 and Series B2 Debentures for AmerAlia common stock and dispute resolution procedures. The agreements include a Management & Cost Reimbursement Agreement whereby AmerAlia will provide management services for a fee through September 30, 2005. This agreement has been pledged to US Filter as security for moneys owed to US Filter. Finally, in consideration for amending the terms of the original closing agreement completed with the Sentient Entities on February 20, 2003 to allow a closing, the Company has granted the Sentient Entities warrants to purchase 600,000 shares of AmerAlia’s restricted common stock exercisable at $1.00 per share until March 19, 2009.
| AmerAlia, Inc. - Form 10-KSB For the Fiscal Year Ended June 30, 2004 | ||
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Under these agreements, NSHI raised additional debt of $5,500,000 through the issue of new debentures, as follows:
| · | AmerAlia received $3,500,000 in NSHI Series A Secured 10% Debentures utilizing funds it raised from accredited investors (see “AmerAlia Funding”, below); |
| · | The Sentient Entities invested an additional $2,000,000 in NSHI Secured Series A 10% Debentures. |
In addition at the financial closing, NSHI issued to the Sentient Entities in exchange for its $24 million short term loan:
| · | $3,000,000 in Secured Series A 10% Debentures; |
| · | $11,300,000 in Secured Subordinated Series B1 Debentures; |
| · | $9,700,000 in Secured Subordinated Series B2 Convertible Debentures. |
NSHI also issued to AmerAlia in cancellation of its loan to NSHI of approximately $17,678,100:
| · | $275,000 of Secured Series A 10% Debentures; |
| · | $12,000,000 of Unsecured Subordinated Series C Debentures; |
| · | 4,949 shares of Series A Preferred Stock having a liquidation value of $4,949,000; |
| · | an additional issue of common stock bringing the total common stock held by AmerAlia to 51,000 shares, being all the common stock issued. |
NSHI also issued $750,000 of Secured Series A 10% Debentures to NSI in exchange for an obligation by NSI to pay $750,000 to NSHI. The purpose of the issue of the $750,000 Series A Debenture to NSI was to enable NSI to provide the debenture as collateral to the Mars Trust for its bonding support as discussed in Item 12 “Certain Relationships and Related Party Transactions”.
In addition, the board of directors of NSHI and of NSI will be expanded to five members comprising two representatives from AmerAlia, two representatives from the Sentient Entities and one member with industry experience mutually acceptable to all parties. The Sentient representatives have not yet accepted appointment as directors of the two companies but David R. Delling, a former President of both Tenneco Minerals and Solvay Minerals, has been appointed a director of NSI.
Description of the Debentures:
The Series A Debentures were issued March 19, 2004 and are due September 30, 2005. The interest rate is 10% per annum, payable quarterly with the first interest payment due June 30, 2004. The Series A Debentures are senior to all other debentures and are collateralized by all of the assets of NSI and NSHI, as well as by all of NSHI’s common stock of NSI. These assets also collateralize the Series B1 Debentures and the Series B2 Debentures held by the Sentient Entities. Sentient Resources USA, Inc. acts as agent holding the collateral for the benefit of all of the secured debenture holders.
The Series B1 and Series B2 Debentures are subordinate to the Series A Debentures but rank equally with the Series C Debentures with respect to all payments of principal and interest unless the Series B Debenture holders declare an event of default. The Series B1, Series B2 and Series C debentures were issued March 19, 2004, pay interest quarterly and have interest rates as follows:
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Period |
Interest Rate per Annum |
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March 19, 2004 - June 30, 2004 |
1.5% |
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July 1, 2004 - June 30, 2005 |
4.5% |
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July 1, 2005 - June 30, 2006 |
7.5% |
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July 1, 2006 - June 30, 2007 |
10.5% |
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July 1, 2007 - February 19, 2008 |
13.5% |
| AmerAlia, Inc. - Form 10-KSB For the Fiscal Year Ended June 30, 2004 | ||
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The Series B1 Debentures have a right to earn “Contingent Interest” which means a payment of additional interest, which when added to the other payments of principal and interest on the Debentures held by the Sentient Entities, could provide the Sentient Entities with an internal rate of return of 34.8766% per annum compounded annually, using February 20, 2003 as the commencement date. Contingent Interest shall be paid on the amounts represented by the Series B1 Debentures to the Sentient Entities only (a) on the Maturity Date of the Series B1 Debentures, if owed, subject to the achievement of the contingencies described below, (b) without regard to the contingencies described below, if the Company prepays any of the Series B Debentures, and (c) without regard to the contingencies described herein, upon the declaration of a default pursuant to the Series B Debentures. Contingent Interest shall not be payable if the Adjusted EBITDA of the Company is less than $500,000 for the 12 month period prior to the Maturity Date; provided, however, that if the Adjusted EBITDA is less than $500,000, then if the Adjusted EBITDA of the Company is in excess of $1,000,000 in the aggregate for a 36 month period immediately prior to the Maturity Date, the Contingent Interest shall be due and payable on the Maturity Date. In addition to the quarterly payments of interest in accordance with the interest rate table above, a mandatory prepayment of principal of $4,029,760 is required on September 30, 2005
The Series B2 Debentures have similar terms and conditions as the Series B1 Debentures except that the “Contingent Interest” internal rate of return is thirty percent (30%) per annum compounded annually, commencing February 20, 2003.
The Sentient Entities have the option to convert the Series B2 Debentures into 49% of the common stock of NSI. The Sentient Entities also have the option to exchange the Series B1 Debentures and/or the Series B2 Debentures into shares of AmerAlia common stock. This right to exchange the debentures (or the underlying NSI common stock if the Sentient Entities convert the Series B2 Debentures) provides for the issuance of AmerAlia common stock at a price equal to 85% of the market price for the AmerAlia common stock. If the Sentient Entities were to exchange these debentures, they would acquire a significant majority of AmerAlia’s shares based on today’s stock prices and could exercise control of AmerAlia.
The Unsecured Subordinated Series C Debentures held by AmerAlia earn the same interest rate as the Series B Debentures and have a right to earn contingent interest up to a total internal rate of return of fifteen per cent (15%) per annum compounded annually, commencing February 20, 2003. They rank equally with the Series B1 and Series B2 Debentures with respect to all payments of principal and interest unless the Series B Debenture holders declare an event of default, in which case the Series B1 and Series B2 Debentures will be senior to and be repaid prior to the Series C Debentures. The Series C Debentures have been pledged by AmerAlia to secure guarantees and loans as discussed below under “Other Loans” and “Continuing Guarantee of Bank of America Indebtedness”.
The Series B and the Series C Debentures have a provision that if NSHI sells NSI or substantially all of the assets of NSI in a trade sale, then the proceeds must be used to repay the Series A Debentures, then the Series B1 Debentures, then the Series B2 Debentures and then the Series C Debentures.
Drag Along & Tag Along Rights:
The drag along and tag along rights apply to the Sentient Entities and to AmerAlia if the Sentient Entities own NSI common stock and the remaining Series B1 Debentures have been repaid. They are defined in the Securityholder Agreement.
Under the drag along rights, if the Sentient Entities wish to sell all (and not less than all) of the shares of NSI common stock they own, the Sentient Entities shall make a written offer to sell the shares to AmerAlia naming a price and the terms of purchase. If AmerAlia does not elect irrevocably and in writing to purchase the shares within 30 days, the Sentient Entities may complete the sale of the shares to a third party at the same price and on the same terms within 90 days of AmerAlia’s receipt of the written offer. The Sentient Entities may further require that AmerAlia or NSHI sell all the shares of NSI common stock they own to the third party on the same terms. If the AmerAlia shareholders are required to approve the sale of the NSI common stock by AmerAlia and fail to do so, then there is a mechanism whereby the Sentient Entities can gain a majority of the board and a majority of the common stock of NSHI. Thereafter, the Sentient Entities shall have 90 days to complete the sale of the shares to the third party. If the Sentient Entities are unable to complete the sale within that time, the Sentient Entities will rescind the actions that gave them control.
| AmerAlia, Inc. - Form 10-KSB For the Fiscal Year Ended June 30, 2004 | ||
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Alternatively, under the tag along rights, if AmerAlia wishes to sell the NSI shares of common stock it owns, AmerAlia shall make a written offer to the Sentient Entities naming a price and terms. If the Sentient Entities do not elect irrevocably and in writing to purchase the shares within 30 days, AmerAlia may complete the sale of the shares to a third party at the same price and on the same terms within 90 days of the Sentient Entities receipt of the written offer, provided that the Sentient Entities may require the purchaser to purchase its shares at the same price and on the same terms. If the purchaser will not buy the shares held by the Sentient Entities, AmerAlia may not sell its shares unless AmerAlia buys the Sentient Entities shares on the same terms and conditions.
Management & Cost Reimbursement Agreement:
This agreement provides for the payment of $700,000 per year commencing October 1, 2003 for two years to AmerAlia for providing management services to NSHI and NSI. The agreement also provides for indemnification of NSHI and the Sentient Entities from certain AmerAlia creditors. AmerAlia’s rights to this agreement have been pledged as security to U.S. Filter under its settlement agreement with U.S. Filter completed on February 21, 2003 and discussed in AmerAlia’s filings on Form 8-K.
AmerAlia Funding:
The Company raised $3,500,000 from a group of accredited investors through the issue of 10% promissory notes due September 30, 2005. The Company also granted four warrants for each $10 of their promissory notes to subscribe for shares of restricted common stock in the Company at $1.00 per share until March 19, 2009. The Promissory notes are secured by an equal value of NSHI Series A Debentures held by the Company. The warrant agreements are on the same terms and conditions as the warrants issued to the Sentient Entities. A total of 1,400,000 warrants were granted to these accredited investors. Consequently, as a result of her participation in this funding, Mrs. Karen O. Woolard, spouse of Mr. Robert C. Woolard, now an AmerAlia director, became a five percent shareholder.
As discussed in Item 12 “Certain Relationships and Related Party Transactions”, these investors also included James V. Riley, an AmerAlia director, and J. Jeffrey Geldermann who was elected a director on June 25, 2004.
Finders’ Fees:
The Company paid finders’ fees of $55,000 in cash to RBC Dain Rauscher and 210,000 shares of restricted common stock to Mrs. Karen O. Woolard for negotiating these funding arrangements.
In February, 2003 the Company agreed to pay a finder’s fee to McFarland Dewey Securities Co, LLP of $1,000,000 and the reimbursement of expenses of approximately $11,000. At the financial closing, the Company and McFarland Dewey completed a new settlement agreement under which McFarland Dewey agreed to accept $750,000 in cash, a $250,000 promissory note secured by an equal value NSHI Series A Debenture, an unsecured promissory note due May 10, 2004 for $18,000 for expenses reimbursement, the issue of the 503,979 shares of restricted common stock, the grant of 300,000 warrants on the same terms as those granted to the Sentient Entities and the investors above, and the release of any and all claims under the prior agreement.
Other Loans:
Prior to the financial closing, the Company was obligated under guaranty and loan agreements to two accredited investors who had provided loan funds with accrued interest totalling approximately $2,317,700 at the time of the financial closing. The Company met these obligations by issuing 121,295 shares of restricted common stock in satisfaction of outstanding guarantee fees to each of two accredited investors, one of them Mrs. Karen O. Woolard; and two promissory notes secured by $2,078,417 of the Company’s Series C Debentures and 359 shares of its NSHI Series A Preferred Stock. One of these promissory notes in an amount of $853,400, secured by $765,295 of Series C Debenture and 132 shares of Series A Preferred Stock, has been issued to Mr. Robert C. Woolard now an AmerAlia director. Any interest, contingent interest, dividends or principal repayments received by the Company from the pledged securities must be applied to meeting the obligations on these notes.
In addition, AmerAlia has a long term debt due to the Bank of America that is guaranteed by the Jacqueline Badger Mars Trust. The terms of this debt and the guaranty agreement are discussed at Item 12 “Certain Relationships and Related Party Transactions”.
| AmerAlia, Inc. - Form 10-KSB For the Fiscal Year Ended June 30, 2004 | ||
| Page 8 of 67 | ||
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The Rock School Lease
United States Sodium Lease No. C-0119985, known as the Rock School Lease, with an area of 1,320 acres in Rio Blanco County, Colorado, U.S.A. was previously owned by E. E. Kinder Co., an unaffiliated Colorado general partnership, which had subleased the property to Denison Resources (USA) Corp., a company acquired by AmerAlia in 1989. Under the sublease, Denison had to meet certain requirements sufficient to obtain an extension of the lease. In June 1991, the BLM renewed the lease, effective July 1, 1991, for a period of ten years. We renewed this lease again in June 2001.
We purchased the Rock School Lease from Kinder on December 10, 1992. We amended the acquisition terms in January 1996. We have certain remaining obligations to pay to Kinder:
| · | a minimum annual royalty of $75,000; |
| · | a production royalty equal to $1.50 per ton of production; |
| · | an annual consulting fee of $25,000; and |
| · | if the minimum royalty exceeds the production royalty payable, then a credit is carried forward and allowed against any future production royalties. |
The BLM approved Kinder’s assignment of the Rock School Lease effective January 1, 1996. As at September 1, 2004 AmerAlia owed $833,334 to Kinder.
The Rock School Lease is due for renewal in June 2010. As leaseholder, we have a preferential right to renew the lease, but this right is subject to numerous requirements. The most significant requires that we produce sodium bicarbonate from the lease “in paying quantities” before the expiration of the current term. We believe BLM general practice is that the conduct of our activities proceeding to resource recovery will be sufficient to enable a lease renewal. We believe that we will be able to renew the Rock School Lease in perpetuity if we conduct operations on the lease and comply with the terms and conditions of the lease.
We pay rent to the BLM annually in advance at the rate of $1 per acre and a minimum annual royalty of $26,000. If we produce sodium bicarbonate from the Rock School Lease, we will have to pay the BLM a 5% production royalty.
Prior to our acquiring the WRNM assets, our investment in the Rock School Lease acquisition and development together with the engineering design and plant construction assets was reflected in AmerAlia’s financial statements as being approximately $15.5 million. However, the change in the business plan of the Company in acquiring the WRNM business, its existing operating facilities and its abundance of additional resources meant that the value of AmerAlia’s pre-existing assets was diminished and no longer as great as their value to AmerAlia if it had proceeded with its development of the Rock School Lease. Consequently, in the 2003 fiscal year we recorded an asset impairment cost of approximately $4.3 million, as discussed more fully in Notes 6 & 7 to the financial statements.
Employees
AmerAlia’s day to-day business activities are managed by Mr. Bill H. Gunn, Chairman and President; and Mr. Robert van Mourik, Executive Vice President and Chief Financial Officer. See Item 10 “Executive Compensation”. They are supported by a management team encompassing production, sales & marketing, financial, environmental compliance and humans resources. Natural Soda, Inc. now has 34 employees.
| AmerAlia, Inc. - Form 10-KSB For the Fiscal Year Ended June 30, 2004 | ||
| Page 9 of 67 | ||
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Risk Factors
· NSHI and its operations are highly leveraged which increases the risk of default and the loss of collateral to our lenders.