SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended March 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
exchange Act of 1934 For the transition period from __________ to
---------
Commission file number 0-19566
EARTH SEARCH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Utah 87-0437723
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
502 North 3rd Street, #8
McCall, Idaho 83638
Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (208) 634-7080
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Aggregate market value of Common Stock held by nonaffiliated of the
Registrant at March 31, 1997 $27,470,367. For purposes of this calculation,
officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at March 31, 1997: 70,256,693
This Form 10-K consists of 43 pages.
1
TABLE OF CONTENTS
Item of Form 10-K Page
PART I ............................................................. 3
Item 1 - Business .......................................... 3
Item 2 - Properties ......................................... 10
Item 3 - Legal Proceedings .................................. 10
Item 4 - Submission of Matters to a Vote of
Security Holders .................................... 11
Item 4(a) Executive Officers of the Registrant.................. 11
PART II. ............................................................. 13
Item 5 - Market for the Registrant's Common
Equity and Related Shareholder Matters .......... 14
Item 6 - Selected Financial Data ............................ 14
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations .............. 14
Item 8 - Financial Statements and Supplementary Data .......... 18
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ............ 18
PART III ............................................................. 19
Item 10 - Directors and Executive Officers of the Registrant.... 19
Item 11 - Executive Compensation ............................ 19
Item 12 - Security Ownership of Certain Beneficial Owners and
Management .................................... 19
Item 13 - Certain Relationships and Related Transactions ....... 19
PART IV ............................................................. 20
Item 14 - Exhibits, Financial Statement Schedules, and Reports
on Form 8-K .................................. 20
SIGNATURES .................................................... 22
2
PART I
ITEM 1. BUSINESS
GENERAL
Earth Search Sciences, Inc. (formerly Turnabout Corporation) (the
"Registrant" or the "Company") was incorporated as a Utah corporation on May 15,
1984. The Company, up until 1985, had limited activity except for expenditures
for exploration and acquisition of mining claims in Alaska. On December 5, 1985,
the Registrant acquired all of the outstanding common stock of Earth Search
Sciences, Inc. ("ESSI"), in exchange for 13,639,600 shares of its previously
authorized, unissued $.001 par value common stock. On August 11, 1987, the
Registrant changed its name to Earth Search Sciences, Inc. and on November 19,
1987, the former subsidiary was dissolved.
The Company has been in a research and development posture since its
inception, and has reported immaterial revenues. The Company and its chairman,
Larry Vance, have spent the last ten years developing an airborne remote sensing
capability that can be economically configured into both governmental and
commercial projects. The Company initially sought to utilize United States
Government proprietary airborne remote sensing technology to identify sites with
potential economically recoverable mineral deposits. The Company intended to use
the remote sensing data as a means of limiting the universe of available mining
sites in a given region. The Company anticipated doing further investigative
work on the identified sites, taking a land or mineral interest in promising
sites and thereafter either developing the sites into mines independently or
seeking a joint venture partner or mining entity to develop the site.
The Company has developed a two-prong strategy to convert from a
research and development company to an operating company. With the experience of
Dr. John Peel, the Company's CEO, the Company has a strong base from which to
develop remote sensing business aimed at the United States Government sector of
customers, principally with respect to the use of remote sensing in identifying
environmental exposures and aiding the Government in designing economical
remediation programs. Unfortunately, the funding uncertainties at most
Governmental agencies and defense contracting firms has hampered development of
this prong of the Company's strategy.
The second prong of the Company's strategy involves development of
commercial opportunities involve remote sensing, particularly in the mining
area. To better focus the Company's commercial plans, the Company formed a
wholly owned subsidiary, Earth Search Resources, Inc. ("ESR") and on June 1,
1996, hired Brian C. Savage, formerly director of the investment banking mining
group of Nesbitt Burns Securities, Inc., in New York, as president of ESR and
Vice President-Resource Development of the Company. Mr. Savage's experience in
the mining industry and his investment banking background should provide the
Company with significant assistance in developing the commercial side of the
business. The Company has further consolidated and strengthened its natural
resources exploration and production capabilities with the April 9, 1997
appointment of Mr. Savage as President of Earth Search Sciences. Mr. Savage has
over 17 years of experience in all aspects of the mining industry including mine
operations, management, engineering, mining software specialist, and corporate
finance specialist including equity financing, project financing, gold loans,
production payments, public debt financing, financial advisory, general
corporate banking and investment banking. Mr. Savage has been involved in more
than $10 billion of debt and equity financing for the mining companies. While
with Nesbitt Burns Securities in New York Mr. Savage held the position of
director investment banking mining group. Mr. Savage's experience also includes
serving in the position of director, mining and metals for Bank of Montreal
where his responsibilities included business development in the United States.
Mr. Savage earned a bachelor of science degree in mining engineering and a
master of science degree in mineral economics from the Colorado school of mines.
Mr. Vance remains chairman, and Dr. Peel remains CEO.
3
IMAGERY DATABASE
In the summer of 1987, the Company obtained airborne multi-spectral
scanner imagery over sites in Oregon, Arizona and Nevada. The imagery, gathered
by an airplane using a thematic mapper scanner, was recorded on high density
digital tape and later decompressed into computer compatible data. The Company's
cost basis in this database includes imagery produced in photographic form (hard
copy) as well as the data on digital tape. This information was then interpreted
by a geologist having expertise in the ATM method. The initial interpretation
was complete by June, 1988 and produced approximately 500 anomalies that will
require exploration work to determine mineralization. In addition to
identification of potential mineralization, the database can be used for oil and
gas exploration, environmental exposure identification and other purposes for
which geology is a major consideration. The Company has fully depreciated the
cost of acquiring this database but still intends as financial resources become
available to use the data base to focus ESR on promising target properties for
further remote sensing and exploration.
In 1991, the Company was invited to participate in the Visiting
Investigator Program (VIP) sponsored by the National Aeronautics and Space
Administration ("NASA"). In the VIP program, the Company sought to compare the
benefits of using an Airborne Visible and Infra-Red Imaging Spectrometer
("AVIRIS" instrument) in locating geologic areas of interest in a test area in
Nevada with other less advanced instruments. The results of that program were
published in January 1993 in a study entitled "Developing the use of AVIRIS,
TIMS and TM Data to evaluate Hydrothermal alteration types as related to
geologic structures in the Cuprite, Nevada Region," Series VIP-002-93, Stennis
Space Center, Remote Sensing Technologies. As a result of participation in the
program the Company acquired a large amount of unprocessed data. The useful life
of this information is expected to be in the range of five to ten years.
The Company's data collected in 1987 and 1991 has been stored and can
be used many times interactively to determine the fine detail that go with the
use of remote sensing as an exploration tool for locating mineral prospects.
That same data can be used for other applications such as environmental issues,
resource management issues and corridor development.
The Company intends to structure its relationship with ESR so Earth
Search Sciences receives licensing fees for access to data and technology
available to the Company and overriding royalties on minerals ultimately
exploited by ESR or any of its customers. ESR is presently preparing with a
joint venture mining company partner to develop data packages based on the
imagery data the Company has acquired. The Company anticipates that the mining
partner will provide the capital necessary to exploit this very valuable asset.
As with ESR, the Company anticipates structuring its relationship with
its strategic alliance partners for the Government sector in a manner that
provides the Company with licensing fees for exclusive use of the seven meter
imagery on government programs, including but not limited to the U.S. Forest
Service, Bureau of Land Management, Environmental Protection Agency, Department
of Energy, Department of Agriculture, and Department of Defense. The Company
will reserve the rights to this imagery for the perpetual duration of the
licensing contract.
4
ORIGINAL BUSINESS PLAN
Based on the imagery database accumulated by the Company in 1987 and
1991, the Company procured mining patents and land leases and sought partners to
develop several prospective mining properties. The Company in fact entered into
several arrangements with mining entities for the development of some of the
Company's properties, but none of those arrangements resulted in development of
operating mines. Due to lack of capital to fund advance royalties and due
diligence requirements on the Company's mining properties and to changes in
mining laws which required increased and more timely due diligence expenditures,
the Company opted to release virtually all of its mining properties between 1991
and 1994. The new mining laws imposed a financial burden on the Company by
requiring a payment in advance of a flat fee per claim plus filing costs instead
of the prior arrangement under which the Company could perform general
assessment work prior to making a significant financial commitment.
As an adjunct to the business of developing mineral properties, the
Company recognized the need to refine the technology of remote sensing with the
ultimate goal of commercializing the technology. To achieve that goal, the
Company believes that a miniaturized hyperspectral remote sensing instrument
must be developed so that more economical aircraft can be utilized for the
airborne sensing. The Landsat sensor is configured with 11 channels of data in
comparison with a hyperspectral instrument that has 224 channels of data. The
difference is achieved by splitting the light spectrum 213 times more than the
Landsat sensor and by providing better resolution. The resulting improvement in
resolution enables the Company to be able to read the chemistry of the spectra
giving us more substantial information. The comparison between the two
instruments enables the user to identify what is there instead of merely
learning that something is there.
On April 12, 1991, the Company commenced entering into semiannual
agreements with NASA to participate in the VIP program to utilize the
specialized resources and sensing technology of NASA to the goal of
commercialization. The agreements allowed the Company access to NASA's
sophisticated facilities that are capable of a full range of remote sensing
activities. Pursuant to the agreement NASA supplied administrative and technical
support and the Company was responsible for the expenses and costs of the
project .The Company has gained several years experience in the hyperspectral
field under this agreement. The mission of JPL/NASA is to conduct high risk,
proof of principle investigations and release the findings to the general public
through programs such as the VIP and Space Act Agreement. Industry participants
must submit a scientific project of merit for evaluation by NASA. The non
proprietary , non exclusive data resulting from NASA's investigations can be
utilized by private industry in their own decision making process regarding the
development of commercial hyperspectral imaging technologies. Earth Search
Sciences, in its early stages of development utilized cost shared hyperspectral
image collections from the NASA/ JPL AVIRIS instrument to provide proof of
principle images to its managers and directors during the decision making
process over the issue of whether or not to proceed with the development of the
company's own proprietary, privately funded instrument, Probe 1.
In July, 1993, the Company flew an EPA superfund site at Summitville,
Colorado, jointly with the EPA, USGS, Colorado DEQ, JPL and NASA to characterize
the extent of the environmental exposure at the site and to prove the Company's
remote sensing capabilities. The final report has been completed by the Company
and Analytical Imaging and Geophysics and the findings will be used for
environmental and mineral purposes. The Summitville flight provided the Company
with the opportunity to prove the value of remote sensing in a commercial and
governmental setting, and ultimately led to the development of the Company's
current business plan.
5
CURRENT BUSINESS PLAN
The Company believes that hyperspectral remote sensing technology, if
economical, can play a central role in a multitude of settings, and has
application both in the United States and abroad. The Company has identified
applications in such diverse markets as watershed analysis, pollution detection,
pipeline easement mapping and routing, plume analysis, vegetation stress
analysis, agriculture, disaster assessment, mineral exploration, forestry,
fisheries, heat loss detection, wetlands delineations, stormwater management,
emergency planning and evacuation route assessment, land use, prescription
farming and unexploded ordnance detection.
The key to accessing these market opportunities remains the
miniaturization of the remote sensing technology and usage of the technology on
an economical basis. The Company plans to continue its efforts to miniaturize
and downsize the technology with continued economic improvements in the
operation and maintenance of the sensor the ultimate objective.
Earth Search Sciences, Inc. and Integrated Spectronics Pty Ltd. have
jointly developed a remote sensing instrument, the ESSI Probe 1, that spectrally
measures the reflectance of the sun from the earth and is considered one of the
most advanced hyperspectral instruments in the world. The Company and Integrated
Spectronics have signed a series of agreements to engineer, develop and
manufacture sensors as needed for each market that the Company contemplates
entering.
Earth Search Sciences has developed a financial strategy, and through
that strategy has begun to acquire the necessary capital for the purchase of its
own miniaturized hyperspectral remote measurement instrument, ESSI Probe 1. The
financial strategy is centered around the direct funding of the manufacture of
ESSI's own sensor design by existing qualified Earth Search Sciences
shareholders familiar with the company's business strategy. The manufacture of
the Probe1 sensor is to be accomplished through the strategic alliance that the
Company has been developing since 1994 between Integrated Spectronics Pty. Ltd.
ESSI believes it can offer territorial concessions to qualified
shareholders who fund the acquisition of Probe 1s. The terms of these
concessions include ownership in a subsidiary that is licensed by the Company to
use the Probe 1 in a specified location utilizing services provided by the
Company or ESR (data collection, processing, interpretation, technical data
packages, and management and marketing).
On June 1, 1997,the company took delivery of one of three Probe 1
instruments currently on order . This instrument has been installed in a Naval
research Laboratory P-3 aircraft as part of a deployment to Kazakstan in Central
Asia for a U.S. Government/ Earth Search Sciences cost shared scientific mission
sponsored by the U.S. Department of Energy, Battelle Pacific Northwest National
Laboratory (PNNL), The Remote Sensing Laboratory-Las Vegas, Nevada, and Sandia
National Laboratory. Economic development issues, including natural resources
mapping and environmental surveillance are being addressed as part of the
mission.
The Company also believes that the recent appointment of Brian Savage
as President of Earth Search will strengthen the Company's ability to develop
the commercial side of the business and enhance the Company's ability to access
funds to fulfill the business plan. Mr. Savage has been representing Earth
Search's interests in Central Asia and is currently participating in the joint
scientific mission to Kazakstan sponsored by the Department of Energy with
Battelle Pacific Northwest National Laboratories, The Remote Sensing Laboratory
(RSL)-Las Vegas, Nevada, and Sandia National Laboratory, and the Naval Research
Laboratory. The mission is scheduled from June 19, 1997 to July 5, 1997. Earth
Search will collect imagery with its Probe-1 instrument that is currently flying
aboard the Naval Research Laboratory's P-3 aircraft. The imagery will be
utilized by Earth Search and its Kazakstani partner, SEMTECH for natural
resources mapping. This represents the first deployment of the Probe 1
instrument for commercial purposes.
6
Falconbridge, Limited (approximately $2.5 billion Canadian annual
revenue mining company) has signed a memorandum of agreement to explore and
develop the base metals on the Polygon (Kazakstan). Falconbridge has provided
assistance to Earth Search in meeting the terms and conditions of the new
Kazakstan mining laws that require that a major mining company be part of any
team that seeks to develop Kazakstan's mineral resources.
Falconbridge, Limited and Earth Search have also signed a letter of
intent to form a new company whose mission is exploration and development of
resource opportunities. The relationship continues to develop within the stated
conditions of the letter.
During the fiscal year ended March 31, 1996, the Company negotiated a
concession license to develop hydrocarbons and minerals and formed a team for a
mission to Kazakstan in 1996. The team includes the Company and contractors:
Battelle/PNNL and the Department of Energy's AMPS program. A letter from the
Kazakhstan Ministry of Science and New Technologies has been received by the
U.S. State Department addressed to the Secretary of Energy. This letter invites
Earth Search Sciences, its contractors and Department of Energy to perform the
mission. In addition to the concession license the Company has acquired a twenty
percent (20%) ownership in Semtech from Scientech and commenced the acquisition
of a complex mining license. The Company is negotiating with a large mining
company that has international holdings. Prior to March 31, 1997, John Peel, CEO
of Earth Search Sciences, Brian Savage, President of Earth Search Sciences and
Bill Farrand, senior remote sensing geologist from Applied Signal and Image
Technology visited prospective (candidate) sites for field exploration.
Mineralization was found and ore samples were collected for laboratory
examination. The extent of mineralization is unknown at this time. Ground
truthing of seven acres was performed in support of the contemplated AMPS
flyover.
Earth Search Sciences engaged Behre Dolbear & Company, Inc. to
undertake property examination of the Polygon in September 1996. Behre Dolbear's
commission was among other things to (I) conduct a site visit, visit and sample
mineral properties occurring within the Polygon; (ii) determine their economic
potential; and (iii) develop an exploration program which would bring the
properties to a prefeasibility level of confidence. The site visit was made
during the period of September 20 through September 28, 1996. Behre Dolbear
submitted its findings in a report titled "Review of the Mineral Potential of
the former Semipalatinsk Test Site Eastern Kazakstan" dated November 1996. While
this report remains "Company Confidential", based upon its visit to 15
prospects, Behre Dolbear believes that the Polygon represents a remarkable
concentration of potentially viable precious and base metal properties. The true
economic potential of the Polygon remains unknown pending exploration of the
area. There are no known bodies of commercial ore on any of the above referenced
mineral exploration properties and the activities of ESRL will constitute an
exploratory search for ore. Any exploration or development activities are
contingent upon the receipt of licenses in proper form.
7
Earth Search through a Kazakstani Joint Stock Company, Semtech, (which
it wons 20% of) submitted a license application covering the entire area of the
Polygon in November 1996. Semtech was formed to assist in the transfer of
peaceful nuclear technology, provide remote sensing expertise, and to develop
mineral deposits on the former Semipalatinsk following the break-up of the
Soviet Union, control of all operations on the territory of the former
Semipalatinsk Nuclear Test Site known as the Polygon was given to the National
Nuclear Center of the Republic of Kazakstan (NNC). "Decree of the Cabinet
Ministers of the Republic of Kazakstan No. 44" dated January 7, 1994 granted the
NNC certain priority rights including the right to utilize and manage the
mineral rights within the Polygon. The NNC subsequently transferred certain
exclusive rights through Semtech, a joint stock company organized under the laws
of Kazakstan, to Earth Search, who owns 20% of Semtech including (I) Access to
the data available to the NNC regarding the Polygon connected with commercial
development of minerals, oil, gas and coal except for objects already found or
currently being exploited; and (ii) The rights of the NNC to explore, develop
and mine mineral resources within the borders of the Polygon, except objects
already found or currently being exploited. The only exclusions are a producing
coal mine and an exploration and developmental license that is believed to be
for Molybdenum. At the same time Earth Search Sciences submitted its license
application, it was made known that several licenses were granted on the Polygon
territory. These licenses were granted without the approval of the NNC. Semtech
submitted its license application on December 4, 1996 exercising the NNC's
priority rights to mineral exploration on the Polygon. Earth Search Sciences and
Semtech determined that attempting to negotiate mutually satisfactory agreements
was a better alternative than taking legal action. During January and February
1997, the Company, through Semtech negotiated letter of intent agreements with
three of the four licensees and submitted an application for the Balykshy area,
which is outside the Polygon area. Two of the agreements resulted in the intent
to form joint ventures and the third agreement resulted in the intent to acquire
four (4) individual licenses held by the same company.
During the fiscal year ended March 31, 1996, the Company has signed a
Co-operative Research and Development Agreement (CRADA) with the Department of
Energy's Pacific Northwest National Laboratories and the Battelle Corporation.
The Agreement allows the Company a very strong research and development partner
who also provides capital for sensor research and development and technology
transfer. This cost sharing philosophy keeps with the ESSI strategy to minimize
our research and development costs. To date, Earth Search has paid and expensed
all costs associated with its cost share obligations as they pertain to
supporting the June 1997 mission to Kazakstan.
The Company is in the process of forming Earth Search Resources Ltd.
(ESRL), an Ontario, Canada mineral exploration company who, through its
subsidiaries and affiliates, will engage in locating, evaluating, acquiring,
exploring, and if warranted, developing mineral properties in Kazakstan. Upon
completion of the formation of ESRL, ESRL through Semtech, will register 3
mineral exploration and development joint ventures ("Joint Ventures") that will
hold 7 mineral exploration licenses and 1 mineral exploration and development
license. Semtech is also in the process of negotiating with Botamoynak, a
Kazakstani company that holds a mineral exploration license covering a large
portion of the Polygon. The 3 Joint Venture Companies that will be submitted to
the Ministry of Justice for Registration are Polygon Resources, LLP; Besshoky,
LLP; and SemGeo, LLP. Semtech will be the licensee for 6 of the 8 mineral
exploration licenses that are awaiting final ratification by the Government of
the Republic of Kazakstan (the "Government"). The other 2 licenses have already
been ratified by the Government and are currently held separately by 2
Kazakstani companies. Each of these licenses will be transferred to its
respective Joint Venture Company upon the completion of the legal registration
of each company.
8
The Company intends for ESRL to fund the Company's expected commitments
of approximately $20,000,000 over the next several years relating to the
Kazakstan venture. The Company anticipates that most of this funding will come
from a mining company or companies and from a private placement of securities of
ESRL. There can be no assurance that the Company will succeed in raising the
required capital.
The Company has taken steps to develop its infrastructure and expertise
independently or obtain access to it through teaming agreements or strategic
alliances.
On January 16, 1997, the Company signed an agreement with California
Microwave Inc. (CMI) and Applied Signal and Image Technology Inc. (ASIT).
California Microwave is a leader in wireless and satellite communications. CMI
Airborne Systems Integration Division will provide a dedicated aircraft for the
joint project, ASIT will provide the software and hardware for the processing of
all data and ESSI will provide the Probe 1 sensor. The first mission will be to
display the aircraft, software and hardware and the sensor the Third
International Airborne Remote Sensing Conference and Exhibition in Copenhagen,
Denmark, July 7-10, 1997.
The Company also believes that a merger with or acquisition of one or
more companies may be the most expeditious and cost-effective way to achieve the
goals of commercializing the remote sensing technology and converting the
Company to an operating, revenue-producing entity. A merger or acquisition would
provide the Company with a revenue base and with more immediate access to
prospective users of remote sensing technology. The Company would not rule out
the creation of a joint venture or "newco" as part of this strategy.
The Company had attempted to acquire a revenue producing entity that
could enhance the Company's remote sensing business prospects, and in fact
signed a definitive agreement on June 30, 1995 to acquire all of the capital
stock of Lamb Associates, Inc. ("LAI"), an established engineering and technical
services company with a strong U.S. Government contracting practice. The
definitive agreement was contingent on, among other things, receipt by the
Company of financing or equity capital to fund the acquisition. At one point in
time, the Company and William Lamb believed they had closed the transaction in a
restructured format. However, the restructured format proved fragile and
ultimately, on July 11, 1996, the Company and the LAI Shareholders broke off
discussions concerning the restructuring of the definitive agreement. There were
three principle reasons for this decision. First, the needs of the LAI
shareholders to receive cash were incompatible with the Company's inability to
raise funding to acquire LAI, second, the profitability of LAI declined somewhat
due to the present uncertainty surrounding Government contracting, and third the
personal requirements of Mr. Lamb for free trading shares were unacceptable.
The Company intends over the next year to continue pursuing (a)
acquisitions that aid in the commercialization of hyperspectral remote sensing
technology, (b) contracts that produce revenues from the application of remote
sensing to the existing markets in environmental remediation and mineral
identification and to undeveloped markets for other appropriate projects
involving a multitude of applications of the technology, (c) financing to fund
the development of miniaturized remote sensing instruments, and (d) development
of promising potential mineral properties in which the Company has an interest
or acquires an interest as a result of its existing database of geological
information.
The Company is not aware of any present commercial competition in the
field of hyperspectral spectroscopy. The only knowledge the Company has of any
other use of hyperspectral data today is in academic and federal research.
The Company is not aware of any environmental concerns associated with
remote sensing technology.
9
EMPLOYEES
As of March 31, 1997, the Company had 3 full-time employees: Larry F.
Vance, Chairman and John W. Peel, III, Chief Executive Officer, and Brian
Savage, President. Also the Company retains Tami J. Story, Company Secretary,
as a full-time administrative and support person on an independent contractor
basis.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters and all of the
furnishings from an unrelated third party, and has approximately 2,000 square
feet of office space in McCall, Idaho. The Company believes its offices are
adequate to meet its needs for the foreseeable future. The Company anticipates
that ESR will require office space later this year. The Company intends that ESR
will lease office space in a site conducive to conducting mineral related
business, and Mr. Savage has indicated that perhaps ESR should locate its
headquarters in Denver, Colorado. The Company also anticipates that future
subsidiaries set up to develop data packages in other countries, including
perhaps Quasar and Bear Creek, may be set up as foreign entities and may require
leased space in their locality.
As part of the Company's involvement in Kazakstan, the Company has
acquired office space in the Kazakstan city of Kurchatov in March of 1997,
consisting of two buildings for $1,700 in cash. Kurchatov is located near the
Polygon and is linked to the capital city of Almaty by air through Kazakstan
Airlines which offers scheduled air service between Semipalatinsk and Almaty
three times per week. The buildings are directly across from each other.
Building number one is 30 meters by 60 meters or 1800 sq. meters. Building
number two is 60 meters by 90 meters or 5400 sq. meters. Both buildings are in
need of remodeling and new construction to bring them into local code
compliance. Conversion of the facility to the Kazakstan headquarters of Earth
Search is expected to cost $150,000. Work will commence as funding becomes
available to the Company. Since the cessation of the existence of the USSR and
the curtailment of nuclear testing, facilities in Kurchatov have significantly
deteriorated. Once a city of 50,000 in population, Kurchatov now hosts
approximately 10,000 residents; most underemployed or unemployed. Skilled
technical workers are available in both Kurchatov and Semipalatinsk. These
professionals will be of great assistance in any mineral development activities.
ITEM 3. LEGAL PROCEEDINGS
On January 10, 1997 , the State of Idaho Department of Finance sued
earth Search Sciences, Inc. and Larry F. Vance for alleged violations of the
Idaho Securities Act. The lawsuit is pending in the District Court for the
Fourth Judicial District of the State of Idaho, Ada County, CV OC 9700155D. In
the lawsuit, the State contends that ESSI and Mr. Vance violated Idaho law by
making sales of unregistered securities without a license and with no applicable
exemption. In addition, the State contends that ESSI and Mr. Vance violated the
antifraud provision of the Idaho Securities Act by making untrue statements of
material facts. The alleged untrue statements include (I) misrepresentations
regarding the lack of compensation paid to certain officers; (ii)
misrepresentations regarding the ownership by ESSI of remote sensing equipment;
(iii) misrepresentations regarding revenue producing contracts that did not
materialize or produce revenues; (iv) misrepresentations regarding the rights of
investors to convert promissory notes to stock; (v) misrepresentations regarding
the nature of ESSI's interest in the mineral concession in Kazakstan; and (vii)
misrepresentations regarding the acquisition by ESSI of Lamb Associates Inc.
when in fact such acquisition never closed. The State also alleges that press
releases and other written literature released by ESSI were advertisements
regarding ESSI securities that should have been filed with the State.
10
The State requests injunctive relief, including an order requiring ESSI
to offer all investors who acquired securities from ESSI recission of their
investment in ESSI. The State also requests a penalty of US $ 10,000 per
violation and reimbursement for the State's attorney's fees and costs.
ESSI and Mr. Vance are vigorously defending the lawsuit, and believe
all of the fraud claims are without merit. ESSI and Mr. Vance believe they may
have misunderstood certain rules regarding sales of unregistered securities, and
have announced their intention to offer recission to certain residents of Idaho
who purchased convertible debt and equity securities from ESSI during the period
from 1994 to present. To make that offer, ESSI needs to secure funding of
approximately US $143,545 and will need to make certain filings with the SEC and
the State. ESSI is not yet in a position to fund the offer or to make the
requisite filings, but is hopeful that it will be able to do so within the next
several months. There can be no assurance of the outcome of this litigation, and
an adverse result would be material and might affect ESSI's ability to survive
as an ongoing enterprise. Unfortunately, the State's tactics in investigating
and pursuing its claims against the Company and Mr. Vance has made certain key
people with whom the Company does business nervous. The Company's efforts to
fulfill its business plan have been hampered by this nervousness and the need to
reassure the people of the Company's legitimacy. The Company believes that it
has successfully overcome most of these issues but the costs have been high and
the delays have been untimely.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company as of June 29, 1997.
NAME AGE POSITION
Larry Vance 62 Chairman
John W. Peel 51 Chief Executive Officer
Brian C. Savage 37 President
Tami J. Story 34 Secretary/Treasurer
Larry F. Vance served as Chief Executive Officer of the Company from
1985 until April 8, 1995. Since April 8, 1995, Mr. Vance has served as Chairman
of the Company. Mr. Vance is a director of the Company. Mr. Vance is a full-
time employee of the Company and has been since 1985.
John W. Peel, III joined the Company as Chief Executive Officer in
April 1995. Prior to joining the Company, Dr. Peel served for the past six
and-one-half years as Senior Vice President of Tetra Tech, Inc., a major
publicly held environmental remediation consulting firm. Dr. Peel holds a
Bachelor of Sciences in Biology from Millsaps College, a Master of Sciences
in Parasitology and Invertebrate Zoology from the University of Mississippi and
a Ph.D. in Environmental Health/Health Physics from Purdue University. Dr. Peel
is a full-time employee of the Company and has been since 1995.
Brian C. Savage joined the Company as Vice President-Resource
Development and President of the Company's wholly owned subsidiary, Earth Search
Resources, Inc. in June 1996. Mr. Savage was appointed President of Earth Search
Sciences on April 9, 1997. Mr. Savage, for the past four years, was formerly
director of the Investment Banking Mining Group of Nesbitt Burns Securities
Inc., in New York. Savage holds a bachelor's degree in mining engineering and a
master's in resources economics from the Colorado School of Mines.
Tami J. Story joined the Company as Secretary and Treasurer in 1993.
Ms. Story has been with the Company for 6 years in an administrative support
capacity as an independent contractor. Ms. Story also serves as a director of
the Company. Ms. Story holds a degree with a major in Nursing and a minor in
Business Administration.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) Principal Market or Markets. The Company's Common Stock has in the
past traded in the over-the-counter market, based on inter dealer bid prices,
without markups, markdowns, commissions, or adjustments (which do not represent
actual transactions) as reported in the "pink sheets."
QUARTER ENDED HIGH LOW
June 30, 1994 $0.10 $0.07
September 30, 1994 $0.10 $0.08
December 31, 1994 $0.20 $0.10
March 31, 1995 $0.20 $0.16
June 30, 1995 $0.28 $0.24
September 30, 1995 $0.35 $0.30
December 31, 1995 $0.41 $0.38
March 28, 1996 $0.84 $0.81
June 30, 1996 $0.75 $0.68
September 30, 1996 $0.37 $0.34
December 31, 1996 $0.20 $0.17
March 28, 1997 $0.41 $0.38
(b) Approximate Number of Holders of Common Stock. The number of record
owners of the Company's $.001 par value common stock at March 31, 1997, was
approximately 735. This does not include shareholders that hold stock in their
accounts at brokers/dealers.
(c) Dividends. Holders of common stock are entitled to receive such
dividends as may be declared by the Company's Board of Directors. No dividends
have been paid with respect to the Company's common stock and no dividends are
anticipated to be paid in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data for each
of the last five fiscal years with respect to the Company and is qualified in
its entirety by reference to the Company's audited financial statements and
notes thereto.
Cumulative
Amounts
During the
Development As of or for the fiscal year ended
Stage 1997 1996 1995 1994 1993
Operating
Revenue 21,332 $ -0- $ 6,332 $ -0- $ -0- $ -0-
Net Loss (8,233,202) (2,549,823) (2,408,292) (1,122,541) (340,004) (333,657)
Net Loss per
Common Share n/a (0.04) (0.05) (0.02) (0.01) (0.01)
Total Assets 3,951,914 3,951,914 922,377 95,861 49,598 139,669
Long-term
Obligations 873,462 873,462 736,209 1,231,217 300,052 443,227
Stockholders'
Deficit (2,960,610) (2,960,610) (1,295,908) (1,899,435) (843,440) (829,081)
Cash Dividends
Declared 0 0 0 0 0 0
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial comparisons will be made between the years ended March 31,
1997 and 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended March 31, 1995, the Company had no
operating revenues. The Company was required to obtain working capital through
the sale of its unissued common stock and the issuance of short-term notes.
Aggregate amounts received are approximately $113,325 from stock sales and
$460,810 from the issuance of notes. In addition, the Company's operating
payables and accrued liabilities increased approximately $34,675. The large
operating payables and short-term notes create a substantial working capital
deficiency.
During the fiscal year ended March 31, 1996, the Company had limited
operating revenues of $6,332 that derived from two consulting agreements for
time and materials with Lockheed Martin Group. The Company was required to
obtain working capital through the sale of its unissued common stock and the
issuance of short-term notes. Aggregate amount received are approximately
$192,400 for stock sales and $570,574 from the issuance of notes. In addition,
the Company's operating payables and accrued liabilities increased approximately
$178,832. The large operating payables and short-term notes create a substantial
working capital deficiency. If the Company cannot continue to raise working
capital from private placements of stock and/or notes, the Company will
experience a substantial hardship in continuing to operate.
During the fiscal year ended March 31, 1996, the Company experienced a
large increase in general and administrative expense from $952,500 for the year
ended March 31, 1995, to $2,143,013. Approximately $240,320 of that increase
relates to deferred compensation to the three principal officers of the Company
at March 31, 1996. The balance of the increase in general and administrative
expense relates to the recording by the Company of $1,150,000 in compensation
expense in the fiscal year ended March 31, 1996, relating to the difference
between the exercise price for stock options granted to officers of the Company
in their employment agreements, and the market price of the Company's stock on
the date the options were granted. The remainder of the general and
administrative expense resulted mostly from significant research and development
and financing related activities undertaken by the Company utilizing consulting
services. The Company paid for many of such consulting services by issuing
shares of its common stock to the consultants.
During the fiscal year ended March 31, 1997, the Company had limited
operating revenues. This does not reflect the working capital held back per the
ESSI agreement with ISPL discussed below in the section on Accuprobe, Inc. These
funds are accounted for separately in the financial section of this report it is
considered a sales/leaseback transaction for accounting purposes. In addition,
the Company's operating payables and accrued liabilities increased. The large
operating payables and short-term notes create a substantial working capital
deficiency.
14
Subsequent to March 31, 1997, the Company formed a new company, ESSI
Probe 1 LC, to acquire a third Probe 1 instrument manufactured by Integrated
Spectronics Pty Ltd. of Australia. The new company is a joint venture managed by
Earth Search Sciences and owned 50% by Earth Search Sciences, who contributed
$500,000 and certain rights to its proprietary technology and 50% by two
shareholders, who contributed $1 million for their interest in the company.
Under the terms of the joint venture arrangement, Earth Search Sciences will use
the Probe 1 instrument for the identification and exploitation of minerals as
well as environmental remediation and other projects. The joint venture hopes to
receive certain royalties on minerals discovered and exploited through use of
the instrument, as well as other fees paid by third parties for data gathered by
the instrument. This instrument is slated for delivery between the third and
fourth quarters of 1997.
The Company restructured the commitment from Accuprobe, Inc. to fund
two (2) sensors, in June 1997, by agreeing to sell to Accuprobe, Inc. one Probe1
under a sale-leaseback arrangement with an option to repurchase the instrument
outright and by agreeing to a loan from Accuprobe, Inc. for a portion of the
proceeds to fund a second Probe1 secured by a pledge of the contract with
Integrated Spectronics Pty Ltd related to the manufacture of such second Probe1.
The Company must repay this loan of $2,200,000 upon delivery of the second
Probe1, which is presently scheduled for Fall 1997. The Company and Accuprobe
continue to seek ways to renegotiate the agreements to provide Accuprobe with
more long term upside in exchange for relieving the Company from short-term cash
flow stresses. There can be no assurance that the Company and Accuprobe will be
successful in restructuring their agreements. If the Company defaults in its
obligations to Accuprobe, the Company could lose the instruments that
collateralize those obligations. This would have potentially material adverse
competitive consequences to the Company.
In 1996, the Company set up subsidiaries to develop mining
opportunities in the following markets: Canada, Brazil and the United States.
The Canadian market is controlled through Quasar Resources, Inc.; and Brazil is
controlled by Bear Creek Exploration, Inc. Earth Search currently controls the
exploration activities associated with the United States. The Company recently
acquired all the stock in Quasar Resources, Inc. and Bear Creek and is
determining their future use.
The Company has also signed an agreement with Applied Signal and
Imaging Technology Inc. ("ASIT"), pursuant to which ASIT will work with the
Company to develop a system to provide real time translation of remote sensing
data into usable information. The Company expects that this technical
advancement will significantly enhance the value of air-borne remote sensing in
a large variety of contexts, where the present delay in receiving usable
information of several months has been an impediment to the use of remote
sensing technology.
The financial statements reflect consolidation of the Company's results
with the financial statements of the Company's subsidiaries. One of the
Company's subsidiaries, Quasar Resources, Inc., a Wyoming corporation, completed
a private placement to certain qualified individuals of 30% of its outstanding
capital stock. In fiscal 1997 and 1996, Quasar received $165,945 and $157,100,
respectively in net proceeds from the private placement. ESR received its 70%
interest in Quasar for nominal consideration and certain agreements relating to
technology. Accordingly, the Company has recorded a minority interest of $49,798
and $47,130, respectively relating to the shares purchased by the unaffiliated
Quasar shareholders and has recorded $116,197 and $109,970, respectively as
additional paid-in capital. In March 1997 and subsequent to March 31, 1997, the
Company and the outside shareholders of Quasar agreed to swap shares of the
Company's common stock for shares of Quasar on a 2-to-1 basis. As a result to
Company now owns all of the outstanding stock of Quasar Resources, Inc.
15
During the fiscal year ended March 31, 1996, the Company had entered
into an agreement to acquire all outstanding shares of LAI, an engineering and
professional service company, which provides technical services primarily to the
environmental industry. As of July 11, 1996, the Company and LAI could not reach
an agreement on a restructuring of the transaction. As a result, the Company
recorded a charge in fiscal year 1997 for its expenses relating to the
transaction, which approximated $130,000.
RESULTS OF OPERATIONS
The Company has continued to pursue strategic alliances with several
substantial companies and Federal laboratories.
The Company has also collected hyperspectral data and performed ground
truthing on a target using the AVIRIS instruments and NASA's UER-2 aircraft. The
target was a Superfund site at Summitville, Colorado, allowing the Company to
characterize the site for environmental purposes. The final report has been
completed by the Company and Analytical Imaging and Geophysics and the findings
will be used for environmental and mineral purposes.
During the fiscal year ended March 31, 1996, the Company has continued
working with NASA's research and development department, to assist in continual
efforts to commercialize remote sensing. In addition, the Company will endeavor
to secure additional capital necessary to continue the Company's efforts to
commercialize remote sensing.
JOINT VENTURE AND OPERATING ENTITY RELATIONSHIP
During the fiscal year ended March 31, 1996, the Company signed a
Memorandum of Agreement (MOA) and a Teaming Agreement with Hughes Santa Barbara
Research facilities. The Agreements will provide certain Hughes instruments,
manufacturing and Hughes support for the ESSI Kazakhstan mission in August 1996,
which will include the Department of Energy, Navy Research Laboratory, Sandia
National Laboratory, Lawrence Livermore Laboratory, Pacific Northwest National
Laboratory and Battelle. As reported in subsequent SEC 10-Q filings, the August
1996 mission to Kazakstan was delayed until the spring of 1997 and Hughes
withdrew from participating in the mission because of prior commitments
conflicting with the schedule change. Earth Search is not conducting any new
business with Hughes at this time.
In October 1994, the Company obtained JPL support to retrofit the
AVIRIS instrument to the NASA C-130 aircraft. This will enable the AVIRIS
instrument to collect 5 x 5 meter pixel data flying at 5,000 meter AGL, which is
a 16-fold increase in spatial resolution over the resolution available currently
with the ER-2 aircraft. Although a contract was issued to Earth Search to
retrofit a C-130 aircraft , utilizing funds to be provided by Earth Search,
negotiations were suspended with NASA over this issue in the fourth quarter of
1996 because of programmatic uncertainties contributed by Federal budget cuts
and the elimination of a key aircraft from the NASA fleet which would have been
a candidate for conversion to a test platform. While Earth Search recognizes
that NASA's not for profit status precludes the agency from endorsing any
commercial product or instrument, Earth Search intends to contract with NASA/JPL
to evaluate the Probe 1 instrument against AVIRIS.
16
Earth Search and a private Canadian group are in the final stages of
the formation of a company whose mission is to raise capital and manage the
development of remote sensing opportunities in the Canadian territory.
Dr. Larry Lass, University of Idaho teamed with Earth Search Sciences
on a joint proposal to the Farm Bureau and won a contract to overfly the Snake
River Basin (Hell's Canyon) to prove the use of hyperspectral imagery for
control and eradication of noxious week intrusion. The results of which will
enable Earth Search to determine the applicability of Probe1 technology to this
potentially lucrative agricultural market.
During the fiscal year ended March 31, 1995, the Company signed a
multi-year Space Act Agreement with JPL, California Institute of Technology
(CALTECH) and NASA's high altitude missions branch. JPL is to provide the AVIRIS
hyperspectral instrument to collect data and process the same and NASA is to
provide the airborne platform and UER-2 aircraft to fly the instrument over
targets of interests generated by (1) the Company, (2) major mineral/petroleum
companies and (3) environmental/engineering targets. Under this Agreement, NASA
has flown Summitville, Colorado, an EPA superfund project, the San Jacinto River
oil spill (pipeline break), the Coeur d'Alene mining district and the Payette
National Forest. The Company is currently developing data packages for each of
such flights for interpretation.
During the fiscal year ended March 31, 1996, several proposals have
been developed to partner with private industry, universities and state and
Federal agencies to develop, package and deliver competitive advanced technology
products and services. This approach provides solutions to critical
environmental restoration and waste management problems, while furthering
national business and technology goals.
FUTURE OPERATIONS
The Company continues to increase its involvement in the mineral
exploration and environmental areas, using the results of its research and
development over the last five years in remote sensing. By attempting to obtain
equity funding, the Company anticipates developing instruments to include
hand-held, airborne and satellite spectrometers and to acquire revenue-producing
companies in the natural resources and environmental monitoring field.
Through teaming with other firms, the Company will identify possible
technology applications for remote sensing. Management intends to pursue
additional markets for its imagery databases, which would generate operating
revenues and adequate cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item
are included on pages F-1 to F-22 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company will be included
under "Election of Directors" in the Company's definitive proxy statement for
its 1997 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference. Information with respect to executive officers of the
Company is included under Item 4(a) of Part I of this Report.
Based solely on a review of copies of reports received by the Company
from persons required to file reports of ownership and changes on ownership
pursuant to Section 16(a) of the Securities Exchange Act of 1934, the Company
believes that all of its executive officers and directors complied with
applicable filing requirements for the fiscal year ended March 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be included
under "Executive Compensation" in the Company's definitive proxy statement for
its 1997 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management will be included under "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its 1997 annual meeting of shareholders filed or to be filed not later than
120 days after the end of the fiscal year covered by this Report and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions with management will be included under "Certain Transactions" in
the Company's definitive proxy statement for its 1997 annual meeting of
shareholders to be filed not later than 120 days after the end of the fiscal
year covered by this Report and is incorporated herein by reference.
18
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements Page in this Report
Reports of Independent Accountants F-1
Balance Sheet at March 31, 1997 and 1996 F-2
Statement of Loss for the Years
Ended March 31, 1997, 1996 and 1995 F-3
Statement of Changes in Shareholders'
Equity (Deficit) for the Years Ended
March 31, 1997, 1996 and 1995 F-4/F-5/F-6
Statement of Cash Flows for the Years
Ended March 31, 1997, 1996 and 1995 F-7
Notes to Financial Statements F-8--F-22
(a)(2) Financial Data Schedules F-23
(a)(3) Exhibits Filed
3.1 Articles of Incorporation; incorporated by reference to Exhibit 3.1 to
the Registrant's Form 10-K for the fiscal year ended March 31, 1995
(Amendment authorizing additional shares is attached hereto)
3.2 Bylaws; incorporated by reference to Exhibit 3.2 to the Registrant's
Form 10-K for the fiscal year ended March 31, 1995
4.1 See Exhibit 3.1 and Exhibit 3.2
10.1 NASA Agreement; incorporated by reference to Exhibit 3a to the
Registrant's Amended Form 10-K for the fiscal year ended March 31, 1993
10.2 Space Act Agreement between NASA and the Registrant dated June 30,
1994; incorporated by reference to exhibit 10.4 to the Registrant's
Form 10-K for fiscal year ended March 31, 1995
10.3 Settlement Agreement and Release dated November 7, 1994; incorporated
by reference to exhibit 10.5 to the Registrant's Form 10-K for fiscal
year ended March 31, 1995
10.4 Agreement dated February 16, 1995 between Graham, Hamilton & Dwyer,
Inc. and the Registrant; incorporated by reference to exhibit 10.6 to
the Registrant's Form 10-K for fiscal year ended March 31, 1995
10.5 Agreement dated September 11, 1995 between Registrant and Integrated
Spectronics Pty Ltd.; incorporated by reference to exhibit 10.5 to the
Registrant's Form 10-K for fiscal year ended March 31, 1996
10.6 Memorandum of Understanding between the Registrant and Applied
Signal and Imaging Technology, Inc. dated May 27, 1996; incorporated
by reference to exhibit 10.6 to the Registrant's Form 10-K for
fiscal year ended March 31, 1996
10.7 Agreement dated September 11, 1995 between Registrant and Integrated
Spectronics Pty. Ltd. for $2 million
10.8 Agreement dated September 11, 1995 between Registrant and Integrated
Spectronics Pty. Ltd. for $1.9 million
10.9 Agreement dated June 10, 1997 between Registrant and Accuprobe, Inc.
10.10 Operating Agreement of ESSI Probe1 LC, dated June 3, 1997
16.1 Letter re: change in certifying accountant; incorporated by
reference to exhibit 16.1 to the Registrant's Form 10-K for fiscal
years ended March 31, 1995 and March 31, 1996
21.1 Earth Search Resources, Inc., Wyoming Quasar Resource Inc., Wyoming and
Bear Creek Exploration, Inc., Nevada; incorporated by reference to
exhibit 21.1 to the Registrant's Form 10-K for fiscal year ended March
31, 1996
(b) Reports on Form 8-K.
Filed a Form 8-K on December 6, 1996 Filed a Form 8-K on January
15, 1997 Filed a Form 8-K on March 25, 1997 Filed a Form 8-K on
April 9, 1997 Filed a Form 8-K on June 19, 1997
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
EARTH SEARCH SCIENCES, INC.
By /s/ Larry F. Vance
Larry F. Vance
Chairman and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the following capacities on June 29, 1996.
Signature Title
/s/ Larry F Vance Chairman and Chief Financial
Larry F. Vance Officer (Principal Executive and Financial Officer)
/s/ John W. Peel, III Chief Executive Officer
John W. Peel, III (Principal Executive Officer)
/s/ Brian C. Savage Director
Brian C. Savage
/s/ Tami Story Director
Tami J. Story
/s/ Rory J. Stevens Director
Rory J. Stevens
20
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
27. Financial Data Schedules --
3.1 Articles of Incorporation --
3.2 Bylaws --
4.1 See Exhibit 3.1 and Exhibit 3.2 --
101 NASA Agreement; incorporated by reference to Exhibit 3a to the Registrant's
Amended Form 10-K for the fiscal year ended March 31, 1993 --
10.2 UURI Agreement; incorporated by reference to Exhibit 3b to the Registrant's
Amended Form 10-K for the fiscal year ended March 31, 1993 --
10.3 Agreement dated January 25, 1994 among the Registrant, Emerald
Operating Company and Spectral International; incorporated by reference
to exhibit 10.3 to registrant for 10-K for fiscal year
ended March 31, 1995 --
10.4 Space Act Agreement between NASA and the Registrant dated June 30, 1994;
incorporated by reference to exhibit 10.4 to registrant for 10-K for fiscal
year ended March 31, 1995 --
10.5 Settlement Agreement and Release dated November 7, 1994; incorporated by
reference to exhibit 10.5 to registrant for 10-K for fiscal year ended
March 31, 1995 --
10.6 Agreement dated February 16, 1995 between Graham, Hamilton & Dwyer, Inc.
and the Registrant; incorporated by reference to exhibit 10.6 to
registrant for 10-K for fiscal year ended March 31, 1995 --
10.7 Agreement dated September 11, 1995 between Registrant and Integrated
Spectronics Pty. Ltd. for $2 million Filed
10.8 Agreement dated September 11, 1995 between Registrant and Integrated
Spectronics Pty. Ltd. for $1.9 million Filed
10.9 Agreement dated June 10, 1997 between Registrant and Accuprobe, Inc. Filed
10.10 Operating Agreement of ESSI Probe1 LC, dated June 3, 1997 Filed
16.1 Letter re: change in certifying accountant --
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Earth Search Sciences, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of loss, of changes redeemable common stock and
nonredeemable in shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Earth Search
Sciences, Inc. and its subsidiaries (collectively, the Company, a development
stage company) at March 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997 and for the period from inception (May 15, 1984) through March 31, 1997, in
conformity with generally accepted accounting principles. These consolidated
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 of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company is in the development stage and
has not generated operating revenues to date. In addition, the Company has
suffered recurring losses since its inception and, at March 31, 1997, has a
deficit aggregating $8,233,202 accumulated during its development stage and an
excess of current liabilities over current assets of $5,469,551. Such factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
Portland, Oregon
June 26, 1997
F-1
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
Consolidated Balance Sheet
March 31,
1997 1996
---------------- ---------------
Assets
Current assets:
Cash $ 51,666 $ 670,325
---------------- ---------------
Total current assets 51,666 670,325
Property and equipment (Note 2) 3,840,460 122,276
Other long-term assets 59,788 129,776
---------------- ---------------
Total assets $ 3,951,914 $ 922,377
================ ===============
Liabilities, Redeemable Common Stock and
Nonredeemable Shareholders' Deficit
Current liabilities:
Notes payable (Note 5) $ 203,250 $ 444,981
Accounts payable 1,764,836 188,818
Accrued payroll taxes 64,733 34,000
Accrued interest (Notes 5 and 6) 406,273 314,277
Advance deposits 3,082,125 500,000
---------------- ---------------
Total current liabilities 5,521,217 1,482,076
Long-term liabilities:
Shareholder loans (Note 6) 37,090 96,519
Deferred officers' compensation (Note 4) 779,818 592,560
Minority interest (Note 9) 56,554 47,130
---------------- ---------------
Total liabilities 6,394,679 2,218,285
---------------- ---------------
Commitments and contingencies (Note 11)
Redeemable common stock, $.001 par value, 1,725,914 shares
issued and outstanding at March 31, 1997 (Note 9) 517,845 -
---------------- ---------------
Nonredeemable shareholders' deficit (Note 1, 8 and 9):
Common stock $.001 par value; 200,000,000 shares
authorized; 68,530,779 and 66,551,663 shares, respectively,
issued (excluding redeemable common stock) 68,531 66,551
Additional paid-in capital 5,204,061 4,320,920
Deficit accumulated during the development stage (8,233,202) (5,683,379)
---------------- ---------------
(2,960,610) (1,295,908)
Total liabilities, redeemable common stock and
nonredeemable shareholders' deficit $ 3,951,914 $ 922,377
================ ===============
F-2
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
Consolidated Statement of Loss
From inception
(May 15, 1984)
through
March 31, For the years ended March 31,
1997 1997 1996 1995
Revenue $ 21,332 $ - $ 6,332 $ -
------------- ------------- ------------- -------------
Expenses:
Exploration (Note 1) 1,604,004 606,169 150,419 14,865
Depreciation 248,226 29,668 20,004 16,327
General and administrative 5,784,239 1,646,063 2,143,013 952,500
------------- ------------- ------------- -------------
7,636,469 2,281,900 2,313,436 983,692
------------- ------------- ------------- -------------
Loss from operations (7,615,137) (2,281,900) (2,307,104) (983,692)
Interest income 10,002 - 6,762 -
Interest expense (Notes 5 and 6) (744,441) (305,297) (107,950) (138,849)
------------- ------------- ------------- -------------
Loss before minority interest (8,349,576) (2,587,197) (2,408,292) (1,122,541)
Minority interest in losses of consolidated
subsidiary 37,374 37,374 - -
------------- ------------- ------------- -------------
Loss before extraordinary item (8,312,202) (2,549,823) (2,408,292) (1,122,541)
Extraordinary item 79,000 - - -
------------- ------------- ------------- -------------
Net loss $ (8,233,202) $ (2,549,823) $ (2,408,292) $ (1,122,541)
============= ============= ============= =============
Net loss per common share (Note 1) $ (.04) $ (.05) $ (.02)
============ ============= ==============
Weighted average shares outstanding 66,556,995 53,150,421 49,543,726
============= ============= =============
F-3
The accompanying notes are an integral part of these financial statements.
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
Consolidated Statement of Redeemable Common Stock and Nonredeemable Shareholders' Equity (Deficit) Page 1 of 3
NONREDEEMABLE SHAREHOLDERS' EQUITY (DEFICIT)
Redeemable Additional
Common stock Common stock paid-in
Shares Amount Shares Amount capital
Balance at May 15, 1984 (date of inception) - $ - - $ - $ -
Issuance of common stock to incorporators
for cash (Notes 1 and 9) 7,000,000 7,000 28,000
Net loss
--------- --------- ---------- ------- --------
Balance at March 31, 1985 - - 7,000,000 7,000 28,000
Issuance of common stock in connection with
public offering, net of offering costs of
$23,892 (Notes 1 and 9) 2,129,100 2,129 80,434
Issuance of common stock in connection with
merger (Notes 1 and 9) 13,639,600 13,640 (12,640)
Net loss
--------- --------- ---------- ------- --------
Balance at March 31, 1986 - - 22,768,700 22,769 95,794
Net loss --------- --------- ---------- ------- --------
Balance at March 31, 1987 - - 22,768,700 22,769 95,794
Acquisition of treasury stock (Notes 1 and 9)
Net loss
--------- --------- ---------- -------- --------
Balance at March 31, 1988 - - 22,768,700 22,769 95,794
Net loss
--------- --------- ---------- -------- --------
Balance at March 31, 1989 - - 22,768,700 22,769 95,794
Net loss --------- --------- ---------- -------- --------
Balance at March 31, 1990 - - 22,768,700 22,769 95,794
Issuance of common stock in exchange for
services rendered 1,944,977 1,945 56,655
Sale of treasury stock (Note 9) 98,500
Net loss
--------- --------- ---------- ------- ---------
Balance at March 31, 1991 - - 24,713,677 24,714 250,949
Issuance of common stock for cash 3,335,196 3,335 235,729
Issuance of common stock to a director
pursuant to stock option 1,000,000 1,000 9,000
Issuance of common stock in exchange
for services rendered 872,000 872 84,188
Issuance of common stock in exchange
for mineral properties (Notes 1 and 2) 1,500,000 1,500 73,500
Issuance of common stock in exchange for equipment 140,000 140 7,768
Sale of treasury stock (Notes 1 and 9) 54,500
Net loss
--------- --------- ---------- -------- --------
Balance at March 31, 1992 - - 31,560,873 31,561 715,634
F-4
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
Consolidated Statement of Redeemable Common Stock and Nonredeemable Shareholders' Equity (Deficit) Page 1a of 3
NONREDEEMABLE SHAREHOLDERS' EQUITY (DEFICIT)
Deficit
accumulated
during the
development Treasury
stage stock Total
Balance at May 15, 1984 (date of inception) $ - $ - $ -
Issuance of common stock to incorporators
for cash (Notes 1 and 9) 35,000
Net loss (604) (604)
---------- --------- --------
Balance at March 31, 1985 (604) - 34,396
Issuance of common stock in connection with
public offering, net of offering costs of
$23,892 (Notes 1 and 9) 82,563
Issuance of common stock in connection with
merger (Notes 1 and 9) 1,000
Net loss (27,451) (27,451)
---------- --------- --------
Balance at March 31, 1986 (28,055) - 90,508
Net loss (47,625) (47,625)
---------- --------- --------
Balance at March 31, 1987 (75,680) - 42,883
Acquisition of treasury stock (Notes 1 and 9) (33,000) (33,000)
Net loss (102,616) (102,616)
---------- --------- --------
Balance at March 31, 1988 (178,296) (33,000) (92,733)
Net loss (123,463) (123,463)
---------- --------- --------
Balance at March 31, 1989 (301,759) (33,000) (216,196)
Net loss (256,125) (256,125)
---------- --------- --------
Balance at March 31, 1990 (557,884) (33,000) (472,321)
Issuance of common stock in exchange for
services rendered 58,600
Sale of treasury stock (Note 9) 26,000 124,500
Net loss (171,742) (171,742)
---------- --------- --------
Balance at March 31, 1991 (729,626) (7,000) (460,963)
Issuance of common stock for cash 239,064 239,064
Issuance of common stock to a director
pursuant to stock option 10,000
Issuance of common stock in exchange
for services rendered 85,060
Issuance of common stock in exchange
for mineral properties (Notes 1 and 2) 75,000
Issuance of common stock in exchange for equipment 7,908
Sale of treasury stock (Notes 1 and 9) 7,000 61,500
Net loss (749,259) (749,259)
---------- --------- --------
Balance at March 31, 1992 (1,478,885) - (731,690)
F-4a
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
Consolidated Statement of Redeemable Common Stock and Nonredeemable Shareholders' Equity (Deficit) Page 2 of 3
NONREDEEMABLE SHAREHOLDERS' EQUITY (DEFICIT)
Redeemable Additional
Common stock Common stock paid-in
Shares Amount Shares Amount capital
Balance at March 31, 1992 - $ - 31,560,873 $ 31,561 $ 715,634
Issuance of common stock for cash 2,308,611 2,308 78,192
Issuance of common stock in exchange
for services rendered (Notes 1 and 9) 1,810,000 1,810 52,583
Issuance of common stock in exchange
for notes payable or accounts payable 2,404,697 2,405 98,968
Net loss
--------- --------- ---------- ------ ---------
Balance at March 31, 1993 - - 38,084,181 38,084 945,377
Issuance of common stock for cash 2,043,904 2,044 67,456
Issuance of common stock in exchange for
services rendered (Notes 1 and 9) 125,000 125 6,125
Issuance of common stock in exchange for
notes payable or accounts payable (Notes 6 and 9) 8,405,094 8,405 241,490
Net loss
--------- --------- ---------- ------ ---------
Balance at March 31, 1994 - - 48,658,179 48,658 1,260,448
Issuance of common stock for cash 360,000 360 17,640
Issuance of common stock in exchange for
services rendered, excluding treasury
stock (Notes 1 and 9) 200,000 200 9,800
Conversion of debentures into shares of
common stock, excluding treasury stock (Note 9) 531,821 532 20,696
Issuance of common stock in exchange
for equipment (Note 9) 250,000 250 12,250
Common stock relinquished to the Company (Notes 6 and 9)
Sale of treasury stock (Note 9)
Issuance of treasury stock in exchange for
services rendered (Notes 2 and 9)
Conversion of debentures through issuance of
treasury stock (Note 9)
Stock purchase warrants and options
issues (Notes 3 and 8) 172,500
Adjustment resulting from issuance of
treasury stock (Notes 1 and 9) (167,118)
Net loss
--------- --------- ---------- ------ ---------
Balance at March 31, 1995 - - 50,000,000 50,000 1,326,216
F-5
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
Consolidated Statement of Redeemable Common Stock and Nonredeemable Shareholders' Equity (Deficit) Page 2a of 3
NONREDEEMABLE SHAREHOLDERS' EQUITY (DEFICIT)
Deficit
accumulated
during the
development Treasury
stage stock Total
Balance at March 31, 1992 $(1,478,885) $ $
Issuance of common stock for cash 80,500
Issuance of common stock in exchange for
services rendered (Notes 1 and 9) 54,393
Issuance of common stock in exchange for
notes payable or accounts payable 101,373
Net loss (333,657) (333,657)
----------- ---------- ----------
Balance at March 31, 1993 (1,812,542) - (829,081)
Issuance of common stock for cash 69,500
Issuance of common stock in exchange for
services rendered (Notes 1 and 9) 6,250
Issuance of common stock in exchange for
notes payable or accounts payable
(Notes 6 and 9) 249,895
Net loss (340,004) (340,004)
----------- ---------- ----------
Balance at March 31, 1994 (2,152,546) - (843,440)
Issuance of common stock for cash 18,000
Issuance of common stock in exchange for
services rendered, excluding treasury
stock (Notes 1 and 9) 10,000
Conversion of debentures into shares of
common stock, excluding treasury stock
(Note 9) 21,228
Issuance of common stock in exchange
for equipment (Note 9) 12,500
Common stock relinquished to the
Company (Notes 6 and 9) (705,935) (705,935)
Sale of treasury stock (Note 9) 95,325 95,325
Issuance of treasury stock in exchange
for services rendered (Notes 2 and 9) 169,141 169,141
Conversion of debentures through issuance
of treasury stock (Note 9) 273,787 273,787
Stock purchase warrants and options
issues (Notes 3 and 8) 172,500
172,500
Adjustment resulting from issuance of
treasury stock (Notes 1 and 9) 167,118 -
Net loss (1,122,541) (1,122,541)
----------- ---------- ----------
Balance at March 31, 1995 (3,275,087) (564) (1,899,435)
F-5a
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
Consolidated Statement of Redeemable Common Stock and Nonredeemable Shareholders' Equity (Deficit) Page 3 of 3
NONREDEEMABLE SHAREHOLDERS' EQUITY (DEFICIT)
Redeemable Additional
Common stock Common stock paid-in
Shares Amount Shares Amount capital
Balance at March 31, 1995 - $ - 50,000,000 $ 50,000 $1,326,216
Issuance of common stock for
cash (Note 9) 1,058,880 1,059 191,341
Issuance of common stock in exchange
for services (Note 9) 1,379,355 1,379 271,497
Conversion of debentures into shares of
common stock (Note 9) 3,596,861 3,596 566,978
Liquidation of shareholders loans for
shares of common stock (Note 9) 10,466,567 10,467 695,468
Adjustment to additional paid-in-capital
related to sale of subsidiary common
stock (Note 9) 109,970
Stock purchase warrants and options
issued (Note 9) 1,150,000
Shares issued to a related party (Note 9) 50,000 50 8,450
Purchase of treasury stock (Note 9)
Adjustment resulting from issuance of
treasury stock 1,000
Sale of treasury stock
Net loss
--------- -------- ---------- ------ ----------
Balance at March 31, 1996 - - 66,551,663 66,551 4,320,920
Issuance of common stock in exchange
for services (Note 9) 1,836,140 1,837 535,404
Issuance of common stock in exchange
for scanner (Note 9) 1,000,000 400,000
Conversion of debentures into shares
of common stock (Note 9) 828,890 829 345,699
Issuance of common stock for shares
of subsidiary common stock 40,000 40 2,960
Adjustment to additional paid-in-capital
related to sale of subsidiary
common stock (Note 9) 116,197
Common stock subject to potential
rescission offering (Note 11) 725,914 117,845 (725,914) (726) (117,119)
Net loss
--------- -------- ---------- --------- ----------
Balance at March 31, 1997 1,725,914 $517,845 68,530,779 $ 68,531 $5,204,061
========= ======== ========== ========= ==========
F-6
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
Consolidated Statement of Redeemable Common Stock and Nonredeemable Shareholders' Equity (Deficit) Page 3a of 3
NONREDEEMABLE SHAREHOLDERS' EQUITY (DEFICIT)
Deficit
accumulated
during the
development Treasury
stage stock Total
Balance at March 31, 1995 $(3,275,087) $ (564) $(1,899,435)
Issuance of common stock for cash (Note 9) 192,400
Issuance of common stock in exchange
for services (Note 9) 272,876
Conversion of debentures into shares
of common stock (Note 9) 570,574
Liquidation of shareholders loans
for shares of common stock (Note 9) 705,935
Adjustment to additional paid-in-capital
related to sale of subsidiary common
stock (Note 9) 109,970
Stock purchase warrants and options issued (Note 9) 1,150,000
Shares issued to a related party (Note 9) 8,500
Purchase of treasury stock (Note 9) (15,000) (15,000)
Adjustment resulting from issuance of treasury stock (1,000) -
Sale of treasury stock 16,564 16,564
Net loss (2,408,292) (2,408,292)
----------- --------- -----------
Balance at March 31, 1996 (5,683,379) - (1,295,908)
Issuance of common stock in exchange
for services (Note 9) 537,241
Issuance of common stock in exchange
for scanner (Note 9) -
Conversion of debentures into shares
of common stock (Note 9) 346,528
Issuance of common stock for shares
of subsidiary common stock 3,000
Adjustment to additional paid-in-capital
related to sale of subsidiary
common stock (Note 9) 116,197
Common stock subject to potential
rescission offering (Note 11) (117,845)
Net loss (2,549,823) (2,549,823)
----------- --------- -----------
Balance at March 31, 1997 $(8,233,202) $ - $(2,960,610)
============ ========= ===========
F-6a
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
Consolidated Statement of Cash Flows
From inception
(May 15, 1984)
through
March 31, For the years ended March 31,
1997 1997 1996 1995
Cash flows from operating activities:
Net loss $ (8,233,202) (2,549,823) $ (2,408,292) $ (1,122,541)
Adjustments to reconcile net loss to net cash
used in operating activities:
Notes payable issued for services and
interest expense 36,892 - - -
Common stock issued for services and
interest expense 1,290,843 730,674 322,974 28,765
Treasury stock issued for services 169,141 - - 169,141
Expense resulting from issuance of warrants
and options to purchase common stock 1,322,500 - 1,150,000 172,500
Charge off of capitalized costs for
mineral properties 206,715 - - -
Extraordinary items (79,000) - - -
Loss attributed to minority interest (37,374) (37,374) - -
Depreciation 248,226 29,668 20,004 16,327
Loss/(gain)on sale of equipment 997 - (5,765) 6,762
Changes in assets and liabilities
Prepaid expenses - - 837 263
Other assets (59,788) 69,988 (129,776)
Accounts payable 1,781,538 1,576,018 88,916 (82,909)
Accrued liabilities 500,561 129,593 89,916 117,584
Deferred officers compensation 779,818 187,258 240,320 352,240
------------- ------------- ------------- -------------
Net cash used in operating activities (2,072,133) 136,002 (630,866) (341,868)
-------------- ------------- ------------- -------------
Cash flow from investing activities:
Capital expenditures (3,755,440) (3,347,852) (87,611) (27,695)
Advance deposits 3,082,125 2,582,125 500,000 -
Proceeds from sale of property and equipment 33,527 - 15,700 1,000
------------- ------------- ------------- -------------
Net cash used in investing activities (639,788) (765,727) 428,089 (26,695)
------------- -------------- ------------- -------------
Cash flows from financing activities:
(Decrease) increase in book overdraft - - - (690)
Proceeds from notes payable 1,394,749 - 569,267 460,810
Repayments on notes payable (210,451) (95,500) (9,062) (47,452)
Proceeds from shareholder loans 1,186,694 -
Repayments of shareholder loans (907,852) (59,429) (68,023) (127,010)
Issuance of common stock 728,027 - 192,400 18,000
Issuance of subsidiary common stock 323,095 165,995 157,100 -
Purchase of treasury stock (48,000) - (15,000) -
Proceeds from sale of treasury stock 297,325 - 16,000 95,325
------------- ------------- ------------- -------------
Net cash provided by financing activities 2,763,587 11,066 842,682 398,983
------------- ------------- ------------- -------------
Net increase (decrease) in cash 51,666 (618,659) 639,905 30,420
Cash at beginning of period - 670,325 30,420 -
------------- ------------- ------------- -------------
Cash at end of period $ 51,666 $ 51,666 $ 670,325 $ 30,420
============= ============= ============= =============
F-7
EARTH SEARCH SCIENCES, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The Company was incorporated on May 15, 1984 pursuant to the laws of the
state of Utah under the name Turnabout Corporation. In November, 1984 the
Company commenced a public offering of its common stock.
In December, 1985 the Company acquired all of the outstanding shares of
common stock of a privately held company known as Earth Search Sciences,
Inc. (ESSI), a Utah corporation formed on August 29, 1985. The Company
issued 13,639,600 shares of its common stock in exchange for ESSI's
outstanding shares. This merger was a reverse acquisition and accounted for
as a pooling of interests. Accordingly, the assets and liabilities of the
two companies were combined at their recorded net book values. ESSI's
principal assets were unpatented mining claims in Alaska that were acquired
from ESSI's incorporators at a cost of $126,715. ESSI's operations were the
continuing operations of the Company, and ESSI was the entity, which had
substance and control both before and after the merger.
In August, 1987 the Company changed its name to Earth Search Sciences, Inc.
and in November, 1987 ESSI was dissolved.
The Company has three subsidiaries: Earth Search Resources, Inc.; Bear
Creek Exploration, Inc. ("Bear Creek"); and Quasar Resources, Inc.
("Quasar"). As of March 31, 1996, these entities were not operational;
however, during the period from February to April 1996, the Company sold 30
percent of Quasar in a private placement offering. In March 1997 and
subsequent to March 31, 1997, the Company repurchased all outstanding
Quasar common stock. See Note 9.
The Company's activities have included the acquisition of the ATM imagery
database which can be utilized by the Company in mineral property
exploration activities or the development of information that can be sold
to third parties. In addition, the Company has acquired mineral properties
and has performed certain exploration work. Direct exploration costs
incurred to date have been principally geologists' salaries and consulting
fees.
In April, 1991, the Company commenced entering into semiannual agreements
with National Aeronautics and Space Administration (NASA) to participate in
the Visiting Investigator Program ("VIP") to utilize the specialized
resources and sensing technology of NASA to the goal of commercialization.
The agreements allow the Company access to NASA's sophisticated facilities
that are capable of a full range of remote sensing activities. Pursuant to
the agreement NASA supplies administrative and technical support and the
Company is responsible for its expenses and costs relating to its
participation in VIP. Information and technology which may be developed are
to be shared between NASA and the Company.
In addition, the Company has established a non-exclusive agreement with the
University of Utah Research Institute ("UURI") and its center for remote
sensing to mutually conduct, on a project-by-project basis, research and
development activities relating to remote sensing. UURI is obligated to
F-8
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
provide technical support for mineral and petroleum exploration, related
environmental analysis and laboratory and field training. The Company
provides geological personnel and funding for the projects.
GOING CONCERN
The Company is experiencing working capital deficiencies because it has
incurred operating losses and has not generated operating revenues to date.
In addition the Company has been unable to meet some of its financial
obligations (see Note 6). The Company has operated with funds received from
the sale of its common stock and the issuance of notes. The ability of the
Company to continue as a going concern is dependent upon continued debt or
equity financings until or unless the Company is able to generate operating
revenues to sustain ongoing operations.
Management expects to continue to raise capital through private placement
of its unissued stock to meet its financial obligations and cash
requirements. In addition, management intends to pursue potential markets
for its ATM imagery database and for potential products, which may be
developed, from its NASA VIP research and development agreement to generate
operating revenues and adequate cash flows. However, there can be no
assurance that the Company will be able to raise such capital or to
generate operating revenues to sustain its operations.
DEVELOPMENT STAGE ENTERPRISE
The Company is considered a development stage company. The Company's
planned principal operations have commenced, but have not resulted in any
significant revenue to date. Pursuant to the requirements of Financial
Accounting Standards Board Statement No. 7, the Company has included in the
accompanying financial statements its cumulative results of operations,
changes in shareholders' deficit and cash flows from the Company's
inception (May 15, 1984) through March 31, 1997.
MINERAL PROPERTIES AND EXPLORATION COSTS
Cost incurred to acquire mineral properties are capitalized. Costs
associated with mineral properties determined to be impaired or to have
little or no value are expensed. Exploration costs are expensed in the
period incurred. The Company considers geologist salaries, studies of
geologic structures, mapping and incidental expenditures incurred in the
field to assess mineral deposits as exploration costs.
DEPRECIATION AND DEPLETION
The Company recognizes depreciation on its property and equipment using the
straight-line method over estimated useful lives of five years.
Depletion of mineral properties is calculated using the unit-of-production
method. There has been no mining activity performed by the Company on its
mineral properties to date; therefore, no depletion is reflected in the
accompanying financial statements.
F-9
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
Effective April 1, 1994, the Company adopted on a prospective basis
Statement of Financial Accounting Standards No. 109 (FAS 109), Accounting
for Income Taxes. FAS 109 requires the recognition of deferred tax assets
and liabilities for the expected tax effects from differences between the
financial reporting and tax basis of assets and liabilities. In estimating
future tax effects, FAS 109 generally considers all expected future events
other than enactments of changes in tax law or statutorily imposed rates.
The adoption of FAS 109 had no effect on loss or shareholders' deficit.
COMMON STOCK
Expenses and commissions incurred in connection with the Company's public
offering of its common stock and the subsequent sales of common stock for
cash have been recorded as reductions of proceeds received.
Common stock issued for other than cash consideration is reflected in the
accompanying financial statements at estimated fair value at the date of
issue, considering the restricted nature of such shares.
DIVIDENDS
The Company has not paid any dividends and does not expect to pay dividends
in the foreseeable future.
TREASURY STOCK
Treasury stock is recorded at cost. Sales of treasury stock at amounts in
excess of or below cost, net of selling expenses, have been recorded as
increases/decreases in additional paid-in capital.
NET LOSS PER COMMON SHARE
Net loss per common share has been computed based on the weighted average
number of the Company's common shares outstanding. Common stock equivalents
have not been considered in the net loss per share calculation because the
effect on net loss per share would be anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share." In accordance with this pronouncement, the
Company will adopt the new standard for periods ending after December 15,
1997. Management does not expect the adoption of this pronouncement to have
a significant effect on reported earnings per share information.
CHANGES IN CLASSIFICATION
Certain reclassifications have been made to the fiscal 1996, 1995 and
cumulative financial statements to conform with the financial statement
presentation for fiscal 1997. Such reclassifications had no effect on the
Company's results of operations or shareholders' deficit.
F-10
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of estimates in the preparation of financial statements The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The Company records financial instruments at cost, which approximates fair
value, unless otherwise stated.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
1997 1996
------------ ----------
Mineral properties (A) $ 5,833 $ 5,833
ATM imagery database (B) 134,000 134,000
Computers and software 57,490 44,852
Vehicles and equipment 53,053 41,529
Construction in progress (C) 3,770,000 69,789
---------- ---------
4,020,376 296,003
Accumulated depreciation (179,916) (173,727)
---------- ----------
$3,840,460 $ 122,276
========== ==========
(A) In December, 1993 the Company acquired a 58% working interest in
mineral tracts aggregating 3,389 acres in Colorado. The mineral
interest was acquired through a joint venture with Emerald Operating
Company located in Denver, Colorado. Presently, management is
evaluating the commercial viability of the property and the Company has
expended $15,000 in geological exploration costs.
(B) In the summer of 1987, the Company obtained a database providing
airborne multispectral scanner imagery over sites in Oregon and Nevada.
The imagery, gathered by an airplane using a thematic mapper scanner,
was recorded on high-density digital tape and later decompressed into
computer compatible data. This database includes imagery produced in
photographic form (hard copy) as well as the data on digital tape. Such
imagery was then interpreted by a geologist having expertise in the ATM
method. The initial interpretation was completed in June, 1988 and
produced approximately 500 anomalies that necessitate exploration work
to determine mineralization.
F-11
2. PROPERTY AND EQUIPMENT (Continued)
The Company capitalized the costs of acquiring this database. The
database can be used for identification of potential mineralization as
well as for oil and gas exploration and other purposes for which
geology is a major consideration. The Company intends to utilize this
imagery database for potential sale of information to third parties,
such a large mining companies that desire to investigate mineralization
of large areas over a short period of time, and for use in the
Company's own mineral exploration activities.
The cost of ATM imagery database was fully depreciated as of March 31,
1994; however, the Company believes that it continues to have economic
value.
(C) The Company entered into agreements to have an Australian company
manufacture three airborne hyperspectral scanners for $2.5, $1.9 and
$2.0 million, respectively. The Company has paid or owes $3,770,000 to
date on these scanners, which is recorded as construction-in-progress
at March 31, 1997 based on the terms of the contract. The remainder of
$2,600,000 will become due as additional milestones are met.
3. ADVANCE DEPOSITS
In 1997 and 1996, the Company received cash deposits of $2,582,125 and
$500,000, respectively, through its subsidiaries for the sale of airborne
hyperspectral scanners which are currently being manufactured (see Note 2).
The scanners will be leased back to the Company in a "sales/leaseback"
transaction. Subsequent to year-end, the terms of the agreement were
finalized (see Note 12).
4. DEFERRED OFFICERS' COMPENSATION
Deferred compensation consists of the cumulative unpaid compensation due to
corporate officers (Chairman, CEO, President and Secretary). Partial
salaries have been paid to such officers since the inception of the
Company. The Company recorded deferred officer compensation of $187,258 and
$240,520 during the year ended March 31, 1997 and 1996, respectively. In
addition, effective March 31, 1995, the Company's Board of Directors
approved cash compensation aggregating $300,000 and $52,240 for the
Chairman and Secretary, respectively, for services rendered through March
31, 1995. Such compensation was reported as general and administrative
expenses for the year ended March 31, 1995. The Company and the officers
have agreed that payment of the compensation will be deferred until and
unless the Company achieves adequate cash flow from operations. Management
has not and does not presently anticipate sufficient cash flow from
operations for the succeeding year; accordingly, the deferred officers'
compensation has been classified as a noncurrent liability in the
accompanying consolidated balance sheet at March 31, 1997 and 1996.
F-12
4. DEFERRED OFFICERS' COMPENSATION (Continued)
In addition, as part of the Chairman's compensation package, the Company,
as of March 31, 1995, granted the Chairman stock options to purchase
1,500,000 shares of restricted common stock at $.105 per share. The options
hold certain registration rights and expire on March 31, 2005. The Company
recognized the estimated fair value of the options, $157,800, as general
and administrative expenses for the year ended March 31, 1995, with a
corresponding increase to additional paid-in capital as of March 31, 1995.
The estimated fair value of the options represents the difference between
the market value of common stock at March 31, 1995 (the date of grant) and
the exercise price. See Note 8 regarding 1996 issuance of stock options to
officers.
5. NOTES PAYABLE
During the years ended March 31, 1996 and 1995, the Company obtained
interim working capital by issuing unsecured promissory notes with rights
of conversion. The terms of these debt instruments are typically for an
initial period of ninety days or one year and are renewable at maturity for
one year. The notes bear interest at 12.5% to 12.99%. Holders of the notes
have the right to convert the principal amount plus interest into
restricted shares of the Company common stock, subject to the terms in the
promissory notes. As of March 31, 1997 and 1996, the Company has various
outstanding notes aggregating $203,250 and $444,981, respectively. Interest
paid on such notes during the years ended March 31, 1997, 1996 and 1995
aggregated $11,801, $2,500 and $2,500, respectively.
In fiscal 1997 and 1996, $346,528 and $570,574, respectively, of notes
outstanding plus accrued interest were converted into common stock at the
agreed upon conversion rates. In 1997, certain notes contained conversion
provisions at 50% of fair value at the date of conversion. As such, the
Company recognized $155,990 in additional interest expense due to the
conversions.
6. SHAREHOLDER LOANS
The Company has financed its development stage activities in part by funds
received from advances from shareholders, primarily an officer and director
of the Company, and Universal Search Technology, a private company owned by
that same officer and director. It is anticipated that these advances will
be repaid when and if the Company generates cash flow from operations
and/or sales of shares of its common stock. During the year ended March 31,
1994, upon approval by the board of directors, the Company issued 7,953,567
shares to Universal Search Technology in exchange for principal reduction
aggregating $238,607 on outstanding advances previously made by it.
Outstanding advances bear annual interest at 10%. As of March 31, 1997 and
1996, interest accrued on such advances, aggregating $224,385 and $217,705,
respectively, has been included in accrued interest in the accompanying
consolidated balance sheet.
F-13
6. SHAREHOLDER LOANS (Continued)
In fiscal 1995, the Company classified as shareholder loans the value of
common stock relinquished by the above shareholder to the Company (see Note
8). The Company reissued replacement shares to the shareholder in
satisfaction of this obligation in 1996, subsequent to the shareholders=
approval of an increase in the number of shares authorized. This obligation
aggregated $705,935 (10,466,567 shares of common stock) at March 31, 1995
and accrued interest at 10%. The accrued interest of $170,916 has not been
paid as of March 31, 1997.
Shareholder loans are reflected as a noncurrent liability in the
accompanying consolidated financial statements due to: a) the undefined
terms of repayments, b) the inability of the Company to repay the advances
unless and until it achieves positive cash flow, and c) the possibility
that the obligations will be satisfied through the issuance of shares of
the Company's common stock.
7. INCOME TAXES
The Company recorded no provision for income taxes in fiscal 1997, 1996 and
1995 due to the operating losses incurred from inception to date.
The tax effect of temporary differences between financial reporting and the
tax bases of assets and liabilities relate to the following:
March 31,
1997 1996
---------------- ---------------
Net operating loss carryforwards $ (2,981,354) $ (2,036,328)
Accrued liabilities (311,927) (237,024)
---------------- ---------------
Gross deferred tax assets (3,293,281) (2,273,352)
Deferred tax assets valuation allowance 3,293,281 2,273,352
---------------- ---------------
$ - $ -
================ ===============
The deferred tax asset has been fully reserved in accordance with FAS 109
because the Company cannot anticipate future taxable income to realize the
potential benefits of the gross deferred tax asset.
F-14
7. INCOME TAXES (Continued)
The benefit for income taxes differs from an amount computed using the
statutory federal income tax rate as follows: Year ended March 31,
1997 1996 1995
------------- ------------- -------------
Benefit from income taxes at statutory rate $ 1,019,929 $ 963,317 $ 449,016
Decrease in benefit resulting from:
Deferred tax valuation allowance (1,019,929) (963,317) (449,016)
------------- ------------- -------------
$ - $ - $ -
============= ============= =============
The Company has tax net operating loss carryforwards at March 31, 1997 of
$7,453,384. Such carry-forwards may be used to offset taxable income, if
any, in future years through their expiration in 2000 - 2011. Future
expiration of tax loss carryforwards, if not utilized, are as follows:
2000, $604; 2001, $27,451; 2002, $47,625; 2003, $102,616; thereafter
$7,275,088. The annual amount of tax loss carryforward, which can be
utilized, may be limited due to the substantial changes in the Company's
ownership which have occurred or may occur in the future. Such limitations
could result in the expiration of a part of the carryforwards before their
utilization.
8. OFFICER AND DIRECTOR STOCK OPTIONS
At March 31, 1995 the Board of Directors awarded the Chairman stock options
to purchase 1,500,000 shares of restricted common stock as part of his
deferred compensation agreement. See Note 4.
In April 1995, the Board of Directors granted options for the Company's
President and Chairman of the Board through employment agreements to each
purchase 5,000,000 shares of the Company's common stock at an exercise
price of $0.21 per share. Fifty percent of the options are exercisable at
any time. The remaining fifty percent are deemed "Performance Options" and
are exercisable as follows: (I) one-third shall become exercisable if and
when the Company reports a positive net after tax profit for any fiscal
year commencing on or after March 31, 1995; (II) another one-third shall
become exercisable if and when the Company reports a net after tax profit
of greater than $1 million for any fiscal year commencing on or after March
31, 1996; (III) all of the options shall become exercisable if and when the
Company reports a net after tax profit of greater than $2 million for any
fiscal year commencing on or after March 31, 1996; and IV) any remaining
options which have not become exercisable as aforesaid shall become null
and void when the Company reports its net after tax profits or losses for
the fiscal year ended March 31, 1998. Any options remaining unexercised on
December 31, 2004 shall lapse and be deemed null and void. The Company
recognized $1,150,000 in compensation expense during 1996 related the
granting of the above "non-performance" stock options which represents the
difference between fair value and the exercise price at the grant date.
F-15
8. OFFICER AND DIRECTOR STOCK OPTIONS (Continued)
Notwithstanding the foregoing, all Performance Options issued to these
employees become immediately exercisable if employment is terminated by the
Company without cause or by the employee with cause. In the event of
proposed dissolution or liquidation of the Company or in the event of a
transfer of more than 50% of the outstanding shares of the Company, or the
sale of all or substantially all of the assets of the Company, to a person
or persons who were not, as of April 8, 1995, shareholders or employees of
the Company (a "Change in Control"), all Performance Options become
immediately exercisable.
In May 1995, the Board of Directors granted options for the Company's
Secretary/Treasurer to purchase 300,000 shares of common stock at an
exercise price of $0.21 per share exercisable upon grant. In addition,
options were granted to a director of the Company to purchase 1,000,000
shares of common stock of the Company at a purchase price of $0.21 per
share. The director's options are exercisable at any time within five years
after the individual becomes a full-time employee of the Company based on
certain mutually agreeable performance criteria.
The Company adopted Statement of Financial Accounting Standards No. 123
(FAS 123), "Accounting for Stock-Based Compensation" in 1996. This
statement allows companies to choose whether to account for stock-based
compensation under the current method as prescribed by Accounting
Principles Board Opinion No. 25 (APB 25) or use a fair value method
described in FAS 123. The Company continues to follow the provisions of APB
25.
The Company has determined that the pro forma effects of applying FAS 123
would have an immaterial effect on the results of operations for 1997 and
1996. This determination was made using the following assumptions for 1996:
dividend yield of zero for all years; risk-free interest rates of 6.75%;
and an expected life of 10 years.
F-16
8. STOCK OPTIONS (Continued)
The following table summarizes the employee stock option transactions
described above.
Shares Weighted
under average
option exercise price
Balance, March 31, 1994 1,500,000 $ .105
Options granted 10,300,000 .21
Options canceled - -
Options exercised - -
----------
Balance, March 31, 1995 11,800,000 .187
Options granted - -
Options canceled - -
Options exercised - -
----------
Balance, March 31, 1996 11,800,000 .187
Options granted - -
Options canceled - -
Options exercised - -
---------- ----------
Balance, March 31, 1997 11,800,000 $ .187
========== ============
The following table summarizes information about stock options outstanding
at March 31, 1997:
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
Weighted
Number average Number
Exercise outstanding remaining exercisable
price at 3/31/97 contractual life at 3/31/97
-------------- --------------- ----------------- --------------------
$ .105 1,500,000 8.0 years 1,500,000
.21 10,300,000 6.9 years 5,300,000
9. REDEEMABLE COMMON STOCK AND NONREDEEMABLE SHAREHOLDER'S EQUITY
REDEEMABLE COMMON STOCK
In 1997, the Company issued to a vendor 1,000,000 unregistered shares of
common stock valued at $400,000 for partial payment of amounts owed for the
airborne hyperspectral scanner (note 2). As part of the stock issuance, the
Company granted "put rights" that may require the Company to redeem
1,000,000 shares of its common stock at a redemption price of $.40 per
share. The redemption period began on January 28, 1997 and will continue
until the contract is completed and final payment is made. If such
shareholder does not place a redemption request during the redemption
period, the "put right" will expire when the above terms are met by the
Company.
F-17
9. REDEEMABLE COMMON STOCK AND NONREDEEMABLE SHAREHOLDER'S EQUITY (Continued)
The shares of common stock subject to the "put rights" are presented in the
accompanying balance sheets as redeemable common stock. Such shares have
been recorded at their approximate fair market value at the date of
issuance. Such fair market value equals the maximum redemption amount.
Also included in redeemable common stock are amounts related to a potential
rescission offering related to certain shares sold in the state of Idaho,
see Note 11.
COMMON STOCK ISSUED
During the years ended March 31, 1996, 1995 and 1994, the Company issued
shares of common stock in exchange for services rendered as follows:
1997 1996 1995
------------- ------------- -------------
Consulting and other $ 537,241 $ 273,440 $ 179,141
============= ============= =============
Number of shares issued, including
treasury stock 1,836,140(a) 1,374,355 4,902,833
============= ============= =============
(a) Inclusive of shares issued in conjunction with the research and
development contract disclosed in Note 11.
During the fiscal year ended March 31, 1997, 1996 and 1995, the Company
issued 828,890, 3,596,861 and 5,499,388 shares of common stock (including
treasury stock) to satisfy $146,231, $521,040 and $276,250, respectively,
of principal and $201,500, $49,534 and $18,765, respectively, of interest
relating to convertible notes payable (see Note 5).
During the year ended March 31, 1995, the Company issued 250,000 shares of
common stock to purchase office equipment with a purchase price of $12,500.
COMMON STOCK LOANS FROM SHAREHOLDER
In fiscal 1995, a shareholder relinquished to the Company 10,466,567 shares
of common stock for the Company to use for additional issuances to outside
shareholders. The shareholder relinquished all ownership and voting rights;
however, the Company was obligated to reissue to the shareholder 10,466,576
replacement shares upon and the shareholders' approval of a proposed
increase in authorized shares from 50,000,000 to 200000,000. These shares
were accounted for as treasury stock and the Company recorded a liability
of $705,935 due to shareholder for the fair value of the shares
relinquished. Such obligation was included in shareholder loans in the
accompanying consolidated balance sheet at March 31, 1995. The Company
received shareholder approval in 1996 to increase the number of shares
authorized and as such, the above shares were reissued to the shareholder
in 1996.
F-18
9. REDEEMABLE COMMON STOCK AND NONREDEEMABLE SHAREHOLDER'S EQUITY (Continued)
TREASURY STOCK
In May 1987, the Company acquired 3.3 million shares of its common stock
from three of its initial incorporators. The purchase price was $33,000,
or $.001 per share. Funding for the stock acquisition was obtained through
loans from certain shareholders of the Company.
During the year ended March 31, 1991, the Company sold 2,600,000 shares of
its treasury stock in eleven separate transactions, resulting in aggregate
proceeds of $129,500. Prices for the shares ranged from $.03 per share to
$.12 per share with the average price approximating $.05 per share. Selling
expenses paid from the proceeds totaled $5,000.
During the fiscal year ended March 31, 1992, the Company sold the then
remaining 700,000 shares of its treasury stock in five separate
transactions aggregating $61,500. Prices ranged from $.05 to $.125 per
share.
In fiscal 1995, the Company issued 10,462,066 shares of its treasury stock
for cash, services and debt conversions. The excess cost of the treasury
stock issued over the amounts received aggregated $167,118 and has been
recorded as a reduction of additional paid-in capital.
STOCK WARRANTS
Warrants to purchase 1,500,000 shares of common stock at $.21 per share
were issued to an investment banker in connection with financial advisory
services provided. The estimated fair value of the warrants aggregated
$15,000. Such value was recorded as general and administrative expenses for
the year ended March 31, 1995, with a corresponding increase to additional
paid-in-capital as of March 31, 1995. The warrants expire on March 1, 2000.
PRIVATE PLACEMENT OF QUASAR COMMON STOCK
In 1997 and 1996, Quasar, a wholly owned subsidiary, issued 331,990 and
314,200 shares of its common stock, respectively, at $.50 per share of its
common stock, in a private placement offering. As the Company owns a
majority interest in Quasar, the subsidiary's financial statements are
consolidated into the parent. Accordingly, the Company has recorded a
minority interest of $49,798 and $47,130, respectively relating to the
outside investors share of net equity in Quasar. The difference between the
stock proceeds of $165,995 and $157,100, respectively, and the minority
interest of $49,798 and $47,130, respectively, has been recorded as an
addition to paid-in-capital.
In 1997, the Company repurchased 20,000 shares of Quasar common stock by
issuing 40,000 shares of the Company's common stock, which resulted in a
$3,000 decrease in minority interest and increase in nonredeemable
shareholders' deficit. Subsequent to year end, the Company repurchased the
remaining 626,190 shares of Quasar common stock outstanding by issuing
1,252,380 shares of the Company's common stock, which resulted in a $56,554
decrease in minority interest and increase in nonredeemable shareholders'
deficit. As a result, the Company now owns all of the outstanding stock of
Quasar Resources, Inc.
F-19
9. REDEEMABLE COMMON STOCK AND NONREDEEMABLE SHAREHOLDER'S EQUITY (Continued)
RELATED PARTY COMMON STOCK ISSUANCE
In December 1995, the Company issued 50,000 shares of common stock to a
relative of the Chairman. The fair value of the common stock issued was
recorded as a reduction in the Chairman's shareholder loan balance as and
as an increase in common stock and additional paid-in capital.
10. EQUITY INVESTMENTS
In fiscal 1996, the Company entered into an agreement to purchase twenty
percent of a Kazahstan "joint stock" company, Semtech. As of March 31,
1997, the Company has paid all of the $30,000 purchase price and has
recorded the investment as a long-term asset.
11. COMMITMENTS AND CONTINGENCIES
RESEARCH AND DEVELOPMENT CONTRACT
In fiscal 1997, the Company entered into a contract to receive certain
services related to future remote sensing projects and have research and
development performed to develop the next generation of remote sensing
software. Total payments under the contract will be $320,000. The Company
has paid $90,000 as of March 31, 1997. Such payments have been recorded as
research and development expense. The Company expects the remainder of the
contract to be completed and paid in fiscal 1998. In addition to the above
cash consideration, the Company issued 1,000,000 shares of unregistered
common stock with a fair value of $390,000 as part of the agreement. This
amount was recorded as research and development expense during the year
ended March 31, 1997.
AIRBORNE HYPERSPECTRAL SCANNER COMMITMENTS
As discussed in Note 2, pursuant to the manufacturing contract, relating to
the manufacture of three scanners, in fiscal 1998 the Company has committed
to pay the remaining $2,600,000 of the contract as additional manufacturing
milestones are met.
LITIGATION
On January 10, 1997, the Company filed a declaratory relief against the
Idaho Department of Finance in the District Court of the Fourth Judicial
District of the State of Idaho, in and for the County of Valley, Civil
No.CV-97-000C. The Company's declaratory relief action seeks a declaration
from the court that the Company did not violate the Idaho Securities Act
with regard to certain transactions taking place subsequent to April 1,
1994. The Company's declaratory relief action was filed in response to
repeated threats by the Department that it would file suit against the
Company.
On January 10, 1997, the Department of Finance filed suit against the
Company and its Chairman, in the district Court of the Fourth Judicial
District of the State of Idaho, in and for the Country of Ada, Civil No. CV
OC 9700155D. The Department's complaint set forth five counts, alleging
that the Company and the Chairman (1) sold unregistered securities to Idaho
and non-Idaho residents in violation of Idaho law, (2) acted as
broker-dealer or securities salesmen without having
F-20
11. COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION (continued)
registered as such, (3) made untrue statements of material facts in
violation of the Idaho antifraud law, (4) by making said untrue statements
of material facts, engaged in a practice which operates as a deceit upon
persons, and (5) distributed press releases and other written literature
without filing same with the Director of the Idaho Department of Finance in
violation of the Department's rules.
The Department's complaint seeks the following relief: (A) a declaration
that the Company and the Chairman have violated Idaho law, (B) entry of a
permanent injunction prohibiting the Company and the Chairman from claiming
the availability of, using or offering or selling securities, under any
exemptions under Idaho law without seeking the prior written consent of the
Director of the Department, (D) an order requiring the Company and the
Chairman to make an offer of rescission to all persons who purchased or
received securities sold by the Company or the Chairman in violation of
Idaho law, (E) an order requiring the Company and the Chairman to pay a
penalty of $10,000 for each violation of Idaho law, and (F) an award to the
State of its attorneys fees and costs.
With respect to sales of securities violation of the registration
requirements of Idaho law, the Company believes it may have misunderstood
certain state regulations in completing transactions with a limited number
of Idaho-based investors. The Company is preparing to offer approximately
19 Idaho residents offers of rescission for certain convertible debt
instruments and common stock issued which, if accepted by all offerees,
would cost the Company approximately $143,545. The Company does not believe
it violated the laws of any other state or any federal laws and
regulations, and vehemently denies all other allegations made in the
Department's complaint. However, as management anticipates offering a
rescission, $117,845 related to 725,914 shares of common stock has been
recorded in redeemable common stock as of March 31, 1997.
12. SUBSEQUENT EVENTS
On June 10, 1997, the Company completed a sales/leaseback transaction of
its first airborne hyperspectral scanner "Probe 1." The instrument was sold
for its cost of $2,500,000. The terms of the leaseback are as follows: 1)
the Company will lease Probe 1 for $250,000 per year bearing interest of
prime plus 2% for three years; 2) at anytime during the above lease period
but no later than April 10, 2000, the Company must repurchase the
instrument for $3,500,000 net of any lease payments; 3) at anytime prior to
the repurchase, the lessor may convert the remaining obligation into shares
of Quasar Resources, Inc. common stock at a conversion rate of 40% of the
stock's then fair market value. In the event Quasar is not the operator at
the time of exercise of the option, the lessee shall substitute comparable
equity securities or other rights subject to reasonable approval of lessor;
4) the Company issued to the lessor 1,000,000 unregistered shares of the
Company's common stock and warrants to purchase an additional 1,000,000
unregistered shares of the Company's common stock at an exercise price of
$2 per share; and 5) the lessor will receive certain royalty rights to
revenues generated from mineral sites identified by the instrument.
F-21
12. SUBSEQUENT EVENTS (Continued)
The Company also signed a promissory note for $2,200,000 to settle
obligations for cash advances of $1,200,000 received as deposits for a
second scanner. The note is due on October 31, 1997 and bears interest at
prime plus 2%. The Company will recognize a debt extinguishment loss of
$1,000,000 during the first quarter of fiscal 1998 as a result of the
settlement.
Subsequent to March 31, 1997, the Company formed a new company, ESSI Probe
1 LC, to acquire the third Probe 1 instrument manufactured by Integrated
Spectronics Pty Ltd. of Australia. The new company is a joint venture
managed by Earth Search Sciences and owned 50% by Earth Search Sciences,
who contributed certain instrument rights and $500,000, and 50% by two
shareholders, who contributed $1 million for their interest in the company.
Under the terms of the joint venture arrangement, Earth Search Sciences
will use the Probe 1 instrument for the identification and exploitation of
minerals as well as environmental remediation and other projects. The joint
venture hopes to receive certain royalties on minerals discovered and
exploited through use of the instrument, as well as other fees paid by
third parties for data gathered by the instrument. This instrument is
scheduled for delivery between the third and fourth quarters of 1998.
F-22