As filed with the Securities and Exchange Commission on September 6, 2001
Registration Statement No. 333-66100
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------------
AMENDMENT NO 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
EARTH SEARCH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Utah 6199 87-0437723
- --------------------------------------------------------------------------------
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Identification No.)
or organization) Classification Code Number)
1729 Montana Highway 35
Kalispell, MT 59901
(406) 751-5200
- --------------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
John W. Peel, III
Chief Executive Officer
Earth Search Sciences, Inc.
1729 Montana Highway 35
Kalispell, MT 59901
(406) 751-5200
- --------------------------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------------
Copies to:
Gerald J. Guarcini, Esq.
Ballard Spahr Andrews & Ingersoll
1735 Market Street, 51st Floor
Philadelphia, Pennsylvania 19103
(215) 665-8500
================================================================================
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. [ ]______
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]________
If delivery of this prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
[TO BE INSERTED VERTICALLY ON LEFT MARGIN OF COVER OF PROSPECTUS]
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is declared effective. This
preliminary prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer of sale
is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 6, 2001
[GRAPHIC OMITTED][GRAPHIC OMITTED]
36,847,372 SHARES COMMON STOCK
All of the shares of common stock offered by this propspectus are being
sold by a selling shareholder. We will not receive any proceeds from the sale of
these shares.
Our common stock is traded on the NASD Over-the-Counter Bulletin Board
under the symbol "EDIS." On September 4, 2001, the last reported sale price of
our common stock was $0.15 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 3.
A MAJORITY OF THE SHARES OFFERED BY THIS PROSPECTUS HAVE BEEN OR WILL
BE ISSUED PURSUANT TO A COMMON STOCK PURCHASE AGREEMENT DATED MAY 23, 2001 WITH
ALPHA VENTURE CAPITAL, INC. AND WE ARE REGISTERING THE SHARES PURSUANT TO THAT
AGREEMENT. WE ARE ALSO REGISTERING THE SHARES ON BEHALF OF OTHER SELLING
SHAREHOLDERS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is September __, 2001.
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS
PROSPECTUS.
EARTH SEARCH SCIENCES, INC.
This is a registration of 36,847,372 shares of our common stock.
Approximately 32,000,000 shares will be registered under the terms of the Common
Stock Purchase Agreement between Alpha Venture Capital, Inc. (Alpha) and
ourselves. The terms of the Common Stock Purchase Agreement offer us the
opportunity to sell monthly amounts of our common stock to Alpha at volumes and
discounted prices based on prior trading prices and stock trading volumes. The
one year commitment of Alpha under this agreement is for a maximum of
$10,000,000 and will be extended for an additional year if at least $2,000,000
of the commitment is used during the first twelve (12) months from the effective
date of the registration statement to which this prospectus relates.
Approximately 4,847,372 shares of our common stock will be registered
under piggy back registration rights for certain warrants and convertible
preferred stock and for certain shares held by the former holders of Space
Technology Development Corp. or STDC, our employees and consultants.
The Offering
- ------------
In order to provide a possible source of funding for our current
activities and for the continued development of our current and planned
products, and markets for our products, on May 23, 2001, we entered into a
Common Stock Purchase Agreement, commonly referred to as an equity financing
agreement, with Alpha.
Under the Purchase Agreement, Alpha has agreed to provide us with up to
$10,000,000 of funding during the twelve-month period following the effective
date of the registration statement to which this prospectus relates. The
commitment period will be extended automatically for an additional twelve (12)
months if at least twenty percent (20%) (i.e. $2,000,000) of the commitment
amount is purchased during the first twelve (12) months from the effective date.
During this commitment period, we may request a draw down under the Purchase
Agreement by selling shares of our common stock to Alpha, and Alpha will be
obligated to purchase the shares. The minimum amount we can draw down at any one
time is the lesser of (i) $150,000 or (ii) 300% of the average daily trading
volume over the twenty (20) trading days preceding the date of the draw down
request. The maximum amount we can draw down at any one time is the lesser of
(i) $1,500,000 or (ii) 300% of the average daily trading volume over the twenty
(20) trading days preceding the date of the draw down request. Subject to the
satisfaction of certain conditions, we may request a draw down once every
fifteen (15) trading days, although we are under no obligation to request any
draw down under the Purchase Agreement.
The purchase price shall be based on eighty-eight percent (88%) of the
average of the five (5) lowest reported daily weighted average market prices
during the ten (10) trading days preceding
1
the date of the draw down request. The number of shares to be purchased by Alpha
shall be determined on the date of the draw down request by dividing the draw
down amount requested by the purchase price determined during the ten (10)
trading day period, subject to the minimum amount and the maximum amount
described in the immediately preceding paragraph. We will receive the purchase
price.
Using the formula contained in the Purchase Agreement, if we had
requested a draw down on September 5, 2001, the maximum amount that could be
drawn down would have been $47,577, representing 300% of the dollar value of the
average daily trading volume of our common stock over the 20 preceding trading
days of $15,859 (calculated using the average daily trading volume of 95,825
shares multiplied by the average closing price of $.1655 during such period).
Based upon the five lowest trading prices of our common stock during the 10
trading days preceding September 5, 2001 and the applicable discount, we would
have sold 384,804 shares of our common stock to Alpha at a price of $.124 and
would have received proceeds from the sale of these securities equal to $47,577.
Additionally, we issued "A" Warrants to Alpha to purchase up to
1,500,000 shares of our common stock and "B" Warrants to purchase up to
1,500,000 shares of our common stock. The common stock underlying these warrants
will be registered in the registration statement of which this prospectus is a
part. These shares may be offered for sale from time to time by means of this
prospectus which shall be amended as may be necessary in order to keep this
prospectus effective as long as Alpha holds shares of our common stock or until
these shares can be sold under an appropriate exemption from registration. We
have agreed to bear the expenses of registering the shares, including Alpha's
reasonable legal fees in an amount not more than $5,000, but not the expenses
associated with selling the shares, such as broker discounts and commissions.
The "A" Warrants granted to Alpha are exercisable at any time
commencing May 23, 2001 until May 23, 2006 at an initial price per share equal
to the lesser of (a) ninety-five percent (95%) of the average of the five (5)
closing bid prices following March 15, 2001 or (b) ninety-five (95%) percent of
the average of the five (5) closing bid prices following the effective date of
the registration statement, subject to further adjustment for anti-dilution
provisions. The "B" Warrants are exercisable at any time commencing May 23, 2001
until May 23, 2006 at an initial price per share equal to the lesser of (a) one
hundred percent (100%) of the average of the closing bid prices for the five (5)
trading days immediately preceding the date of the issuance of the "B" Warrant
or (b) one hundred percent (100%) of the average of the closing bid prices of
the five (5) trading days immediately preceding the date Alpha may exercise such
portion of the "B" Warrant, subject to further adjustment for anti-dilution
provisions.
As of August 31, 2001, 154,910,609 shares of our common stock were
issued and outstanding. The number of shares does not give effect to shares that
may be issued pursuant to the Purchase Agreement or upon exercise and/or
conversion of warrants or preferred stock.
Although we will not receive any proceeds from the sale of the shares
by selling shareholders, we will receive proceeds from any sale of common stock
to Alpha under the Purchase Agreement and upon exercise of "A" and "B" Warrants
issued to Alpha when, and if, Alpha pays the exercise price in connection with
such exercise. Under the Purchase Agreement, we are required to use all of the
proceeds for working capital and general corporate purposes.
The purchase of the securities offered by this prospectus involves a
high degree of risk. See the "Risk Factors" section of the prospectus for
additional Risk Factors. 2
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK. THE RISK AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING US. ADDITIONAL RISKS
AND UNCERTAINTIES THAT WE ARE UNAWARE OF, OR THAT WE CURRENTLY DEEM IMMATERIAL,
ALSO MAY BECOME IMPORTANT FACTORS THAT AFFECT US.
IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION
OR RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED. IN THAT
CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE SOME
OR ALL OF YOUR INVESTMENT.
RISKS RELATED TO OUR INDUSTRY
COMPETITIVE PRESSURES MAY ADVERSELY AFFECT OUR OPERATING REVENUES.
We have numerous competitors in the remote sensing services (airborne
hyperspectral services) and natural resource development industries. Competition
in the remote sensing industry comes from several primary sources. Our principal
competitors in the natural resource development industry include traditional
exploration companies using a variety of other technologies. Some of our
competitors in both remote sensing and natural resource development have
substantially greater financial and other resources than we do. Competitive
pressures in either industry may materially adversely affect our operating
revenues and in turn, our business and financial condition.
FACTORS THAT HAVE AN ADVERSE IMPACT ON THE NATURAL RESOURCES OR ENERGY INDUSTRY
MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
A substantial percentage of our gross profit and operating income is
derived from our airborne hyperspectral services business segment. Our airborne
hyperspectral operations are focused, in part, on discovering potential deposits
of hydrocarbons and minerals. Therefore, our business is directly affected by
economic factors and other trends that affect our customers in the energy and
natural commodities industries, including a possible decrease in the cost of
energy or projected market growth that may not materialize or be sustainable.
When these economic and other factors depress the price of energy, they tend to
reduce the overall customer demand for natural resources development services,
which could decrease our operating income. Economic and other factors that might
affect the energy industry may have an adverse impact on our results of
operations.
WE MAY NEED TO EXPEND SIGNIFICANT CAPITAL TO KEEP PACE WITH TECHNOLOGICAL
DEVELOPMENTS IN OUR INDUSTRY.
The remote sensing industry (as well as the computing industry
instrumental in processing the raw data) is constantly undergoing development
and change and it is likely that new technology, whether embodied in new
equipment or techniques, will be introduced in the future. In order to keep pace
with any new developments, we may need to expend significant capital to develop
or purchase new equipment or to train our employees in the new techniques. We
are pursuing
3
financing to develop additional remote sensing instruments; however, we may not
be able to raise sufficient funds and if we do so, there is no guaranty that the
new instruments will out perform instruments used by our competitors.
WE MAY INCUR SIGNIFICANT EXPENSES TO COMPLY WITH NEW OR MORE STRINGENT
GOVERNMENTAL REGULATION.
The sale of our imagery is regulated by the Department of Commerce.
Although we (through our acquisition of STDC) have acquired a Department of
Commerce Remote Sensing License that permits us to market globally hyperspectral
and panchromatic imagery, there is no guarantee that the government will not
impose restrictions on sales if the quality of our imagery increases with new
technology that, for example, allows increased resolution. Because our license
was the first issued Department of Commerce Remote Sensing License, we cannot
anticipate how the Department of Commerce specifically will treat our license or
how the airborne remote sensing industry will be regulated in the future.
RISKS RELATED TO OUR BUSINESS
THE LOSS OF OUR KEY CUSTOMERS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
OPERATING RESULTS.
For the twelve months ended March 31, 2001, a significant survey in
South American accounted for approximately 32% of our total revenue. We are
pursuing contracts that produce revenues from the application of hyperspectral
remote sensing technology. In the future, however, we may not receive
significant contracts and our results of operations may be materially adversely
affected.
WE MAY NOT REALIZE OUR ANTICIPATED RETURN ON CAPITAL COMMITMENTS MADE TO EXPAND
OUR CAPABILITIES.
We purchased an aircraft, additional satellite and airborne
hyperspectral instruments as well as oil and gas property rights. The aircraft
and airborne hyperspectral instruments were purchased to increase our capacity
to conduct airborne surveys. If we do not experience continued demand for our
remote sensing services, we may incur significant expense without generating
corresponding revenues. The oil and gas property rights were acquired in order
to exploit suspected natural resources located within certain properties. If
these properties do not contain sufficient natural resources to warrant
exploitation, we may incur significant expenses without generating corresponding
revenues.
In addition, from time to time, we expect to make significant capital
expenditures to implement new processes and to increase both efficiency and
capacity. Some of these projects may require additional training for our
employees and not all projects may be implemented as anticipated. If any of
these projects do not achieve the anticipated increase in efficiency or
capacity, our returns on these capital expenditures may not be as expected.
4
WE MAY NEED ADDITIONAL FINANCING FOR ACQUISITIONS AND CAPITAL EXPENDITURES AND
SUCH FINANCING MAY NOT BE AVAILABLE ON TERMS ACCEPTABLE TO US.
A key element of our strategy has been, and continues to be, internal
growth and growth through the acquisition of other companies engaged in
commercial hyperspectral remote sensing. In order to grow internally, we may
need to make significant capital expenditures and may need to obtain additional
capital to do so. Our ability to grow is dependent upon, and may be limited by,
among other things, our capital structure, the price of our stock and our
existing financing arrangements. If additional funding sources are needed, we
may not be able to obtain the additional capital necessary to pursue our
internal growth and acquisition strategy or, if we can obtain additional
financing, the additional financing may not be on financial terms that are
satisfactory to us.
THE NEMO PROJECT MAY NOT BE SUCCESSFUL.
The NEMO project, our satellite-based hyperspectral instrument, is the
cornerstone of STDC's strategic plan. The satellite is not yet in orbit. In the
third quarter of 2000, we retained the investment-banking firm of Houlihan Lokey
Howard & Zukin to raise funds to expand our hyperspectral services market and to
satisfy our financial commitment to the NEMO project to enable completion and
successful launch of the satellite. We cannot guarantee that sufficient
financing will be raised. If sufficient funding is raised, we cannot guarantee
that the satellite will be properly completed, launched and set into orbit.
Although the satellite has an expected lifetime of five years, we cannot
guarantee that the satellite will not be rendered inoperable sooner.
OUR FUTURE OWNERSHIP OF THE NEMO PROJECT MAY BE DILUTED TO A MINORITY INTEREST.
We currently own 100% of STDC, our subsidiary responsible for
developing and launching the NEMO satellite. We formed our subsidiary Earthmap,
Inc. to raise capital to fund the completion and launch of the NEMO sensor and
satellite. Currently, we own 100% of Earthmap. As Earthmap raises capital, we
will contribute assets, primarily our shares in STDC, to Earthmap. In order to
raise the funds necessary to complete and launch the NEMO satellite, our
interest in Earthmap may be diluted to a minority interest.
OUR DATABASE OF SPECTRAL INFORMATION MAY NOT BE MARKETABLE OR MAY NOT GARNER A
PRICE WHICH MAKES PROCESSING OR ANALYZING THE DATA ECONOMICALLY REASONABLE.
We have a substantial archive of Probe 1 hyperspectral imagery that was
not gathered under contract with a client. We continue to gather hyperspectral
imagery without having sold the rights to that data. The collection process
requires variable as well as fixed expenditures that must be recouped though
marketing the collected data. Although we do not carry the value of our existing
Phase 1 hyperspectral archives as an asset on our balance sheet, our future
success depends to some extent upon our ability to market this archived data.
5
CANCELLATIONS, REDUCTIONS OR DELAYS IN CUSTOMER ORDERS MAY ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
Our overall operating results are affected by many factors, including
the timing of survey contracts from large clients and the timing of capital
expenditures to increase our capacity for gathering data in anticipation of
future sales of products and services. A portion of our operating expenses are
relatively fixed; however, a significant portion of our expenses relating to
airborne surveys are variable. Because several of our operating divisions and
subsidiaries are new businesses and have not obtained long-term commitments from
our clients, we must anticipate the future demand for our services based upon
our discussions with clients. Cancellations, reductions or delays in orders by a
client or group of clients could have a material adverse effect on our business,
financial condition and results of operations.
OUR ACQUISITION STRATEGY EXPOSES US TO RISKS, INCLUDING THE RISK THAT WE MAY NOT
BE ABLE TO SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES.
We view the STDC acquisition (and the NEMO project) as a means to
achieving our stated goal of becoming a vertically integrated remote sensing
services provider. The NEMO project may not be successfully integrated as an
affiliate. Our ability to grow by acquisition is dependent upon, among other
things, the availability of suitable acquisition candidates. Growth by
acquisition involves risks that could adversely affect our operating results,
including difficulties in integrating the operations and personnel of acquired
companies, the potential amortization of acquired intangible assets and the
potential loss of key employees of acquired companies. We may not be able to
consummate acquisitions on satisfactory terms or, if any acquisitions are
consummated, satisfactorily integrate these acquired businesses.
THE UNAVAILABILITY OF SKILLED PERSONNEL MAY HAVE AN ADVERSE EFFECT ON OUR
OPERATIONS.
From time to time, we or some of our operating divisions and
subsidiaries may experience difficulties in attracting and retaining skilled
personnel to process and interpret the substantial volume of imagery data that
is already collected or is expected to be collected in the future. Our ability
to operate successfully could be jeopardized if we are unable to attract and
retain a sufficient number of skilled personnel to conduct our business.
RISKS RELATED TO THIS OFFERING
OUR CHARTER DOCUMENTS MAY INHIBIT A TAKEOVER THAT SHAREHOLDERS MAY CONSIDER
FAVORABLE.
Our certificate of incorporation and bylaws contain cumulative voting
provisions that could prevent or delay a change in control or change in
management that would provide shareholders with a premium to the market price of
their common stock. Cumulative voting could have the effect of discouraging
unsolicited acquisition proposals or make it more difficult for a third party to
gain control of us, or otherwise could adversely affect the market price of our
common stock.
6
BECAUSE OUR STOCK PRICE MAY BE VOLATILE, OUR STOCK PRICE COULD EXPERIENCE
SUBSTANTIAL DECLINES.
The market price of our common stock has historically experienced and
may continue to experience volatility. This volatility may cause wide
fluctuations in the price of our common stock on the NASD Over-the-Counter
Bulletin Board Service. The market price is likely to be affected by:
o changes in general conditions in the economy of the financial market;
o variations in our quarterly operating results;
o changes in financial estimates by securities analysts;
o other developments affecting us, our industry, customers or
competitors;
o the operating and stock price performance of companies that investors
deem comparable to us; and
o the number of shares available for resale in the public market under
applicable securities laws.
The entire stock market has experienced significant volatility in
recent months. This volatility has affected the market prices of securities
issued by many companies for reasons unrelated to their operating performance.
Therefore, we cannot predict the market price for our common stock after this
offering.
WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE.
We have not paid any dividends on our common stock and do not intend to
pay dividends in the foreseeable future. In the event that we and/or certain of
our subsidiaries enter into future financings, the terms of such financings may
include dividend restrictions.
IF THE PRICE OF OUR COMMON STOCK BECOMES LOWER, THE SALE OF OUR COMMON STOCK TO
ALPHA MAY DILUTE THE INTERESTS OF OTHER SECURITY HOLDERS AND DEPRESS THE PRICE
OF OUR COMMON STOCK.
As of August 31, 2001, we had 154,201,609 outstanding shares of common
stock. As of August 31, 2001, there were 200,000 shares of convertible preferred
stock outstanding that are currently convertible into 1,000,000 shares of common
stock. Additional shares of common stock that may be sold by means of this
prospectus, are issuable under the Purchase Agreement and upon exercise of the
"A" and "B" Warrants held by Alpha. We may also issue additional shares for
various reasons and may grant additional stock options to our employees,
officers, directors and third parties.
7
Accordingly, the issuance of shares under the Purchase Agreement, in
connection with any other financing, and upon exercise of warrants, options or
the conversion of preferred stock will have a dilutive impact on other
shareholders and could have a negative effect on the market price of the common
stock. In addition, the shares issuable to Alpha will be issued at a discount to
the daily volume weighted average prices of our common stock.
As we sell shares of our common stock to Alpha under the Purchase
Agreement, and Alpha sells the common stock to third parties, the price of the
common stock may decrease due to the additional shares in the market. If we
decide to draw down on the Purchase Agreement as the price of our common stock
decreases, we will be required to issue more shares of our common stock for any
given dollar amount invested by Alpha. The more shares that are issued to Alpha,
the more the then outstanding shares will be diluted and the more our common
stock price may decrease. Any decline in the price of the common stock may
encourage short sales that could place further downward pressure on the price of
our common stock.
The following table illustrates how the number of shares of common
stock required to be sold to draw down the full $10,000,000 under the Purchase
Agreement would increase or decrease if the market price (as defined in the
Purchase Agreement) of our common stock were to increase or decrease.
For illustrative purposes, the market prices shown below are based on
the trading price of our common stock as of September 4, 2001 ($.15), the
52-week high of our common stock ($.72) and the 52-week low of our common stock
($.125). Also included are market prices representing an increase of 50% from
the current trading price ($.225) and a decrease of 50% from the current trading
price ($.075).
- ------------------------ ------------ ------------ ------------ ------------- -------------
Market Price $.72 $.225 $.15 $.125 $.075
- ------------------------ ------------ ------------ ------------ ------------- -------------
Purchase Price $.6336 $.198 $.132 $.11 $.066
- ------------------------ ------------ ------------ ------------ ------------- -------------
Number of Shares of
Common Stock
Required to Draw Down
$10,000,000 15,782,828 50,505,050 75,757,575 90,909,090 151,515,151
- ------------------------ ------------ ------------ ------------ ------------- -------------
Percentage of Shares of
Common Stock
Outstanding as of
August 31, 2001 upon
Issuance 9.28% 24.67% 32.94% 37.09% 49.56%
- ------------------------ ------------ ------------ ------------ ------------- -------------
The market price is based on the average of the five (5) lowest
reported daily volume weighted average market prices of the common stock for the
ten (10) days preceding the date of the draw down request. The purchase price
reflects an 88% discount from the market price pursuant to the Purchase
Agreement. This chart is for illustrative purposes only and the amount we will
actually be able to draw down is subject to certain minimums, maximums and other
conditions. We are under no obligation to draw down any amount under the
Purchase Agreement.
OUR COMMON STOCK IS A "PENNY STOCK" AND ITS LIQUIDITY MAY BE AFFECTED BY CERTAIN
SEC REGULATIONS.
Trading of our common stock is now being conducted over-the-counter
through the NASD Electronic Bulletin Board and covered by Rule 15g-9 under the
Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend
these securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if the market price is at least
$5.00 per share.
The Securities and Exchange Commission adopted regulations that
generally define a "penny stock" as any equity security that has a market price
of less than $5.00 per share. Additionally, if the equity security is not
registered or authorized on a national securities exchange or the Nasdaq and the
issuer has net tangible assets under $2,000,000, the equity security also would
constitute a "penny stock." Our common stock falls within the definition of
penny stock. These regulations require the delivery, prior to any transaction
involving our common stock, of a disclosure schedule explaining the penny stock
market and the risks associated with it. Furthermore, the ability of
broker/dealers to sell our common stock and the ability of stockholders to sell
our common stock in the secondary market would be limited. As a result, the
market liquidity for our common stock would be severely and adversely affected.
We can provide no assurance that trading in our common stock will not be subject
to these or other regulations in the future, which would negatively affect the
market for our common stock.
Forward-Looking Statements
- --------------------------
This prospectus contains statements about future events and
expectations that constitute forward-looking statements. Forward-looking
statements are based on management's beliefs, assumptions and expectations of
our future economic performance, taking into account the information currently
available to management. These statements are not statements of historical fact.
Forward-looking statements involve risk and uncertainties that may cause our
actual results, performance or financial condition to differ materially from the
expectations of future results, performance or financial conditions we express
or imply in any forward-looking statements. Factors that could contribute to
these differences include those discussed in "Risk Factors" and in other
sections of this prospectus. The words "believe," "may," "will," "should,"
"anticipate," "estimate," "expect," "intend," "objective," "seek," or similar
words, or the negatives of these words, identify forward-looking statements. We
qualify any forward-looking statements entirely by these cautionary factors.
8
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of common shares
by the selling shareholders. We will receive the sale price of any common stock
we sell to Alpha pursuant to the Purchase Agreement or upon exercise of warrants
to the extent the purchase price is paid in cash. We expect to use the proceeds
from any such sales for working capital and general corporate purposes.
DILUTION
The issuance of additional shares and the eligibility of issued shares
for resale will dilute our common stock and may lower the price of our common
stock. Investors in this offering will suffer immediate dilution because the
market price paid for the securities offered will likely be more than the net
tangible book value of our common stock. Net tangible book value is calculated
by taking our total assets, less intangible assets and liabilities, and dividing
it by the number of outstanding shares of common stock.
The actual dilution to investors in this offering will depend on the
price paid for the shares and the actual prices at which we sell shares to Alpha
under the Purchase Agreement and the "A" and "B" Warrants.
9
PRICE RANGE OF COMMON STOCK
Our common stock trades in the over-the-counter market. The range of
reported high and low bid quotations for our common stock, as set forth below,
reflect interdealer bid prices, without retail markups, markdowns, commissions,
or adjustments as reported in the NASDAQ "pink sheets" and do not represent
actual transactions.
Quarter Ended High Low
------------- ---- ---
June 30, 1999 .21 .19
September 30, 1999 .15 .13
December 31, 1999 1.32 1.25
March 31, 2000 1.81 1.70
June 30, 2000 1.72 .75
September 30, 2000 .97 .44
December 31, 2000 .67 .31
March 31, 2001 .50 .28
June 30, 2001 .46 .19
September 30, 2001
(through July 16, 2001) .67 .19
The number of record owners of our $.001 par value common stock at June
30, 2001 was approximately 1,063. This does not include shareholders that hold
stock in their accounts at brokers/dealers.
Holders of our common stock are entitled to receive such dividends as
may be declared by our Board of Directors. No dividends have been paid with
respect to our common stock and no dividends are anticipated to be paid in the
foreseeable future.
10
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data for each
of the last five fiscal years and is qualified in its entirety by reference to
our audited financial statements and notes thereto. The financial statements for
1997 and 1998 were audited but are not included in this S-1. We acquired STDC on
December 21, 1999. The results of operations for 2001 and 2000 include the
results of operation for STDC from December 22, 1999 to March 31, 2001.
As of or for the fiscal year ended
2001 2000 1999 1998 1997
-------------------------------------------------------------------------------
Operating revenue $ 2,678,986 $ 1,526,446 $ 881,006 $ 55,000 $ -
Net loss(*) (6,636,480) (5,177,983) (2,271,428) (5,849,999) (2,549,823)
Net loss per common share(*) (0.05) (0.05) (0.03) (0.08) (0.04)
Total assets 19,710,126 19,532,230 3,992,233 4,880,652 3,951,914
Long-term obligations 5,253,135 4,515,118 6,594,080 5,767,961 873,462
Stockholders' equity (deficit) 2,346,846 2,663,656 (3,998,137) (3,005,765) (2,960,610)
Cash dividends declared - - - - -
(*) The net loss in fiscal 1999 and 1998 included an extraordinary loss of
$115,023 and $1,165,000, respectively, or (0.001) and (0.015), respectively,
per share.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial comparisons will be made between the fiscal years ended March
31, 2001 and 2000 and 1999.
Results of Operations
- ---------------------
We recognized revenue of $2,678,986 in 2001 compared with $1,526,446
and $881,006 in 2000 and 1999, respectively. The increase in revenue in 2001
compared with 2000 is the beginning of revenue on oil and gas properties in 2001
of approximately $417,000 and a significant hyperspectral survey in Peru that
resulted in approximately $860,000 in revenue in 2001. In 2001, costs of
services provided was $1,777,437 compared with $1,796,412 and $767,570 in 2000
and 1999, respectively.
Exploration costs in 2001 were $95,540 compared with $6,282 and $68,229
in 2000 and 1999, respectively. The increase in exploration costs from 2000 to
2001 is primarily a result of our focus on utilization of the Probe for our own
exploration projects. General and administrative costs were $3,854,000 in 2001
compared with $2,397,484 and $1,417,514 in 2000 and 1999, respectively. The
increase in 2001 and 2000 compared to 1999 is, in part, due to the inclusion of
$1,458,662 and $233,397 of STDC costs included in general and administrative
costs in 2001 and 2000, respectively.
During 2001, our Board of Directors approved the issuance of 8,587,000
shares against options as a performance based stock bonus. The issuance of these
shares resulted in non-cash compensation expense of $2,926,781. In 2000, we
recognized non-cash compensation expense of $1,608,001 for the vesting of
options. Of this amount, $1,593,600 relates to performance options issued to our
officers in 1997. At the time these options were granted, the officers' salary
was deferred and our common stock price was approximately $0.48. These options
allow the officers to purchase restricted shares at exercise prices ranging from
$.50 per share to $2.50 per share, for up to 24 months after vesting. The
vesting of these options is dependent on our stock price reaching certain prices
and maintaining that level for a specified number of days. In 2000, 3,000,000 of
options met the performance criteria and resulted in the recording of $1,593,600
of compensation expense.
Interest income in 2001 was $98,436 compared to $38,821 in 2000. The
increase was due to $73,721 in interest from STDC in 2001 compared to $23,425 in
2000. In 2001, we recognized interest expense of $1,035,856 compared to
$1,136,995 and $773,288 in 2000 and 1999, respectively. This decrease in
interest expense over the prior year is a result of our conversion of
convertible notes to equity in the fourth quarter of 2001. Other expense was
$641 and $10,810 in 2000 and 1999, respectively.
In 2001, we recorded minority interest in losses of consolidated
subsidiaries of $290,336 compared to $202,565 in 2000. In 2000, ESSI Probe 1 LC,
a consolidated subsidiary with a 50% minority interest took delivery of the
second Probe instrument and started operations. ESSI
12
Probe 1 LC minority interest loss in 2000 was $201,298. In 2001, ESSI Probe 1 LC
completed its first full year of operations and incurred a minority loss of
$270,252.
We recognized a net loss of $6,636,480 in fiscal 2001 compared with a
net loss of $5,177,983 and $2,271,428 in 2000 and 1999, respectively. The loss
on a per share basis was $0.05, $0.05, and $0.03 in fiscal 2001, 2000, and 1999,
respectively. Included in the loss in 2001 and 2000 is a loss of $1,822,434 and
$879,250 or $0.13 and $.01 per share, respectively, from the operations of STDC.
Liquidity and Capital Resources
- -------------------------------
We have financed our activities to date with a combination of cash flow
from operations and the use of equity securities and promissory notes.
Subsequent to March 31, 2001, we signed a definitive agreement with an investor
for an equity line of up to $10,000,000 for one year with an extension option
for a second year. The terms of the equity line are that, after the
effectiveness of a registration statement, we can sell at our option our
registered shares of common stock to the investor on a monthly basis. The
maximum amount of funds that can be raised in any month is $1,500,000 limited by
a calculation based on the average volume of the stock for the preceding month
and the price of the stock. The stock will be sold at 88% of the average of the
lowest five (5) trading days over the ten (10) days of trading immediately
proceeding the sale date.
Net cash used in operating activities was $525,414 in 2001, resulting
primarily from payment for salaries and services. Cash used in operating
activities was $3,343,109 in 2000, resulting primarily from a net loss of
$5,177,983, and payments for salaries, services and depreciation. Cash used in
operations was $374,023 in 1999, resulting primarily from a net loss of
$2,271,428, and payments for salaries, services and depreciation.
Capital expenditures for March 31, 2001 were primarily for payments on
airborne hyperspectral instruments and purchases of new computer equipment,
working interests in mining properties and an airplane specially equipped for
flying our hyperspectral instruments, and payments on a subsidiary's satellite
hyperspectral instrument.
At March 31, 2001 and 2000, we had cash of $367,902 and $6,119,562 and
working deficit of $10,750,323 and $5,408,478, respectively.
We do not intend to pay cash dividends to the holders of our common
stock and intend to retain future earnings to finance the expansion and
development of our business.
As of June 30, 2001, we believe that available funds and those
generated through our operations will be adequate to meet our anticipated cash
needs for the next fiscal year. However, there can be no assurance that
additional capital beyond the amounts we currently forecast will not be required
nor that any such required additional capital will be available on reasonable
terms, if at all, at such time or times as we require. Additional financing may
involve public or private offerings of debt or equity securities, and may
include bank debt. Debt financing may increase our leveraged position, require
us to devote significant cash to service debt and limit funds available for
working capital, capital expenditures, and general corporate purposes, all of
13
which could increase our vulnerability to adverse economic and industry
conditions and competitive pressures. Equity financing may cause additional
dilution to purchasers of our common stock.
STDC will need to raise private industry funds of approximately
$125,000,000 in order to complete, launch and operate the hyperspectral imaging
satellite and instrument. We have engaged investment banker Houlihan, Lokey,
Howard and Zukin to assist in this capital raise.
There can be no assurance that additional capital beyond the amounts we
currently forecast will not be required nor that any such required additional
capital will be available on reasonable terms, at such time or times as we
require.
Future Operations
- -----------------
We will focus on expanding our markets for remote sensing services by
marketing our remote sensing imagery collection services and value added imagery
processing. In addition, in the mineral and hydrocarbon resource exploration
areas we will operate our remote sensing instruments for our own use and secure
equity interests in promising properties identified from the remote sensing
imagery. Further, collected imagery will be analyzed and processed to aid in our
decisions to take new or additional equity interests in prospective properties.
We, through our subsidiary STDC, will continue to focus on raising
capital to finish construction of the NEMO satellite in expectation of a launch
in 2003. Further, we will continue to look for equity funding to develop
additional instruments including handheld, as well as airborne spectrometers.
We have entered into an agreement to use an Inertial Measurement Unit
or IMU provided by The Boeing Corporation. Use of the IMU will enable us to more
accurately geoposition our Probe hyperspectral data and assist in the insertion
of our data into a customer's Geographical Information System or GIS database.
In addition, collection of field spectra using our field spectrometer provides
customers both ground and airborne spectral information that can be incorporated
into a customer's GIS to provide a custom, leading edge information product.
Lastly, we will seek to acquire revenue-producing companies in the
natural resources and environmental monitoring field.
Through teaming with other firms, we will identify additional
technology applications for remote sensing. Management intends to pursue
additional markets for our imagery databases, which would generate operating
revenues and improve cash flows.
Additional Risk Factors That Could Affect Operating Results And Market
- ----------------------------------------------------------------------
Price Of Stock
- --------------
We believe other commercially available current and planned remote
sensing instruments pose competitive pressures. While our plan is to develop
better hyperspectral airborne and satellite instruments to maintain our
competitive position, there can be no assurance that our new instrument
developments will be commercially or financially successful.
14
The current prices of oil and natural gas has intensified efforts to
locate new reserves and use new technologies for exploration such as remote
sensing. Fluctuations in the prices of oil and gas could negatively impact the
commercial applications for our instruments in the oil and gas exploration area
as well as any revenue on our interests in oil and gas properties.
Lower prices for minerals could negatively impact our commercial
prospects for marketing our remote sensing instruments and our strategy to earn
revenue by identifying minerals for our own exploration and development.
The STDC agreement with the Office of Naval Research to develop and
deploy NEMO requires STDC to raise additional industry funds of approximately
$125,000,000 to complete the project. There can be no assurances that STDC will
be able to raise funds necessary to complete the project.
CHANGE IN ACCOUNTANTS
On May 25, 2001, our Board of Directors dismissed our former
accountants, PricewaterhouseCoopers LLP. PricewaterhouseCoopers LLP served as
our auditor for the fiscal year ended March 31, 2000. Our Board of Directors has
appointed Grant Thornton LLP as our auditor for the year ended March 31, 2001.
Grant Thornton's engagement began on May 25, 2001. Grant Thornton's office is
located at 701 Pike Street Suite 1500 Seattle, Washington 98101.
The reports of PricewaterhouseCoopers LLP on the financial statements
for the past two fiscal years contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle except for the inclusion in both reports of an explanatory
paragraph regarding our ability to continue as a going concern.
In connection with its audits for the two most recent fiscal years and
through May 25, 2001, there have been no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP
would have caused them to make reference thereto in their report on the
financial statements for such years.
During the two most recent fiscal years and through May 25, 2001, there
have been no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)).
We have requested that PricewaterhouseCoopers LLP furnish us with a
letter addressed to the SEC stating whether or not it agrees with the above
statements. A copy of such letter, dated May 25, 2001, was filed as Exhibit 16.1
to our Form 8-K filed June 1, 2001.
15
DESCRIPTION OF BUSINESS
Organization
- ------------
We were incorporated in 1984 under the laws of the state of Utah.
Corporate Focus
- ---------------
Our mission is to commercially exploit the science of remote sensing in
a wide variety of industries around the globe. The science of remote sensing
includes acquiring, processing and interpreting imagery of the earth captured
from instruments deployed on aircraft or satellites. The advantages of airborne
and satellite remote sensing over other methods of gathering visual information
are that data can be collected better, faster and cheaper over larger areas
including sites inaccessible from the ground. By collecting data at different
times, changes can be detected that may be due to significant natural or
man-made processes. Detection of such changes can assist in environmental/land
use management. Remote sensing instruments measure reflected, visible and
infrared sunlight from the Earth's surface over a spectral range seven times
broader than the human eye can see. This collected data can then be digitally
analyzed using personal computers. The digitally analyzed imagery can provide
information useful to a wide range of industries such as, but not limited to,
natural resource development (including oil and mineral exploration, fisheries
and forestry), land use development, environmental remediation and monitoring,
agriculture (including vegetation stress analysis and fertilizer treatment),
disaster assessment, marine sciences and military sciences.
Original Business Plan
- ----------------------
We acquired an imagery database obtained from the utilization of remote
sensing instruments owned and operated by third parties in 1987 and 1991 for the
purpose of mineral exploration. Based on an analysis of obtained imagery, we
procured mining patents and land leases and sought partners to develop several
prospective mining properties. We entered into several arrangements with mining
entities for the development of some of our properties, but none of those
arrangements resulted in the development of operating mines. Due to the lack of
capital to fund advance royalties, due diligence requirements associated with
our mining properties and changes in mining laws which required increased and
more timely due diligence expenditures, we opted to release virtually all of our
mining properties starting in 1991. We completed this divesture in 1994.
In 1991, we were invited to participate in the Visiting Investigator
Program sponsored by the National Aeronautics and Space Administration. In the
program, we sought to compare the benefits of using an Airborne Visible and
Infra-Red Imaging Spectrometer, along with other less advanced instruments, in
locating geologic areas of interest in a test area in Nevada. The results of
that program were published in January 1993. As a result of our participation in
the program, we acquired a large amount of unprocessed imagery data.
We recognized the need to refine existing remote sensing technology in
order to improve the economics of commercial remote sensing applications. We
decided to use hyperspectral remote sensing instruments which expand the image
resolution and, thus, the
16
usefulness of acquired imagery. To achieve our goal, we undertook the
development of a miniaturized hyperspectral remote sensing instrument, Probe 1,
which is designed to be used with cost effective and easily available aircraft.
Current Business Plan
- ---------------------
We are evolving from a mineral exploration and research and development
organization into a leading provider of remote sensing services for both our own
mineral and hydrocarbon exploration purposes as well as for third party
customers. On June 1, 1997, we took delivery of our first Probe 1 instrument. In
its first full year of commercial operation, we developed markets and generated
revenue from multiple clients. In August of 1999, we took delivery of our second
Probe 1 instrument. Since June 1, 1997, we have collected and currently own a
substantial archive of Probe 1 hyperspectral imagery from Kazakhstan, Australia,
British Columbia, Ontario, Quebec, Chile, Peru, Mexico, California, Nevada,
Arizona, Idaho, Montana, Wyoming, Louisiana, Florida and Utah. At the present
time, the value of this data archive has not been independently appraised and
its value is not reflected in our financial statements.
We believe cost effective hyperspectral remote sensing and imagery
processing has tremendous potential in various global applications and markets.
We are establishing subsidiaries to focus on hyperspectral remote sensing
applications, marketing, and distribution in various industries. Each subsidiary
will focus on a specific segment of commercial remote sensing and have a
management team with relevant skills and expertise. If applicable, we will
provide an exclusivity license for each subsidiary, provide use of our
hyperspectral instruments, provide processing support, and provide marketing and
management support to each subsidiary. In addition, we will receive a royalty
from any resource development that occurs as a result of the subsidiaries' use
of our instruments and technology. Until the successful launch and deployment of
the NEMO satellite described below, the subsidiaries will utilize our airborne
hyperspectral instruments. After the successful launch of the NEMO satellite and
depending on the application both the airborne and satellite hyperspectral
instruments will be made available to the subsidiaries. Following the launch,
the subsidiaries expect to use the NEMO satellite's instrument in addition to
the airborne instrument. Additional capital will need to be raised for each
subsidiary by means of private placements or public offerings.
To complement our Probe 1 technology, in fiscal 2000 we acquired STDC
and its ownership in satellite based imagery technology (discussed below). The
combination of a high-resolution airborne Probe 1 system and the lower
resolution, larger area coverage achieved by satellite based imagery will
provide powerful capabilities. The use of aircraft to collect large areas of
remote sensing imagery throughout the world is an expensive and time-consuming
task. Satellite gathered data will allow remote sensing customers to gather
imagery from any large area around the world, including those areas which
currently are inaccessible due to restrictions by foreign governments. This
imagery can then be processed to determine if a closer look using our airborne
instruments is necessary or desirable. The joint use of satellite and airborne
remote sensing instruments, as well as our intent to use handheld instruments we
intend to develop, will combine economical large area imagery collection by the
satellite instrument and high-resolution imagery collection of target areas by
the airborne instruments. All collected imagery can be processed by our imagery
processors.
17
We also plan to pursue mergers and acquisitions as the most expeditious
and cost-effective way to consolidate commercial hyperspectral remote sensing.
We intend 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 the
undeveloped markets for other appropriate projects involving a multitude of
applications of the technology, (c) financing the development of additional
miniaturized remote sensing instruments, and (d) development of promising
mineral, oil and gas properties in which we have or acquire an interest,
identifying such properties by utilizing our existing imagery database or
acquiring such data.
Acquisition of Space Technology Development Corporation
- -------------------------------------------------------
In fiscal 2000, we acquired STDC of Alexandria, Virginia. We acquired
all the outstanding shares of STDC in exchange for four million shares of our
common stock and the option to purchase another four million shares at exercise
prices ranging from $0.50 to $5.00 per share. Our management views the
acquisition of STDC and the NEMO project (discussed below) as a way to advance
our long-range strategic plan to become a vertically integrated service provider
for clients requiring precise identification of materials on the Earth's surface
from satellite, airborne and ground platform instruments.
In early 1997, the Navy issued a broad agency announcement that it
would conduct a competition on several "dual-use" projects, including the
development of hyperspectral remote sensing technology in space. STDC bid on the
project, which developed into the NEMO project. STDC signed an agreement with
the Office of Naval Research in December of 1997 for the development, operation
and launch of the NEMO satellite as a dual use project. Under the rules of the
dual use program, the U.S. government will fund half or less of the program
cost, while STDC and its industrial partners provide funding or in-kind
contributions for the remaining costs of the program. The dual use program is
administered by the Defense Advanced Research Projects Agency in the Office of
the Secretary of Defense. Dual-use projects are designed so that both the armed
services and private companies contribute to the projects and share in the
benefits. The Defense Advanced Research Projects Agency works with the Army, the
Navy and the Air Force to design a number of advanced technology projects that
might qualify as dual-use projects worthy of special funding.
The agreement between the Navy and STDC states its goals as to the
successful launch of the NEMO satellite and the acquisition of image data of
interest to the U.S. government. An additional goal is to form the basis for a
commercially viable enterprise that will continue to provide imagery data to the
U.S. government for the life of the satellite.
The principal partner of STDC for the NEMO project is the Naval
Research Laboratory, which operates under the direction of the Chief of the
Office of Naval Research. The National Research Laboratory will modify, assemble
and test the satellite and prepare it for launch.
18
Industrial partners of STDC include Space Systems/Loral of Palo Alto,
California; Science Applications International Corporation of La Jolla,
California; AlliedSignal Technical Services Corporation of Columbia, Maryland
(which recently merged with Honeywell); and Litton Advanced Systems of College
Park, Maryland. Space Systems/Loral provided the basic satellite, a
Globalstar(R) bus. AlliedSignal Technical Services Corporation will manage
satellite operations and collect the imagery data transmitted from the satellite
and Litton Advanced Systems is producing the NEMO spacecraft controller.
Through launch and the first 60 days of orbit, the NEMO program will
cost approximately $250 million. This figure includes the space segment
(satellite, sensor and other electronics), the launch and the commercial
business segment - imagery processing, product development, marketing and
administration. Of this amount, the government has committed to fund
approximately $63 million, and STDC and its industry partners are expected to
contribute the balance.
The NEMO satellite is the core of STDC's strategic plan to become the
dominant provider of satellite gathered hyperspectral global imagery and related
processing services. STDC has attained the required Department of Commerce
Remote Sensing License that permits hyperspectral and panchromatic imagery to be
sold commercially to a global market. This is the first license ever granted for
a space-based hyperspectral system.
NEMO is a high performance, highly sensitive imaging and information
generating satellite that leverages the U.S. government's state of the art
hyperspectral technology R&D programs. NEMO is designed to collect large volumes
of 30 or 60-meter resolution hyperspectral data to spectrally identify and
characterize objects and to collect 5-meter resolution panchromatic data for
precise visual interpretation of the imagery. NEMO provides the potential for
mapping all of the Earth's landmass with 5-m panchromatic, 30-m and/or 60-m
hyperspectral data over its three-year mission life. NEMO has a design life of 5
years. The Navy desires the imagery data NEMO will collect, but without the
expense of satellite ownership. After launch, STDC will own and operate the
satellite, providing the Navy with the imagery it needs and affording the
possibility of commercial success of the venture through the sale of processed
imagery.
Of keen interest to the Navy and commercial clients is NEMO's unique
ability to characterize the littoral regions of the world (i.e., water and
coastline areas within 50 km of shore). Specific areas of interest to the Navy
include bathymetry, water clarity, currents, oil slicks, bottom type,
atmospheric visibility, tides, bioluminescence, beach characterization,
underwater hazards, total column atmospheric water vapor and detection and
mapping of sub-visible cirrus.
A key technology developed for NEMO by the Navy Research Laboratory is
an extraction and data compression software algorithm called the Optical
Real-Time Spectral Identification System or ORASIS(TM). ORASIS(TM) offers
automated and adaptive signature recognition capability, improving the
operational efficiency to analyze both military and commercial data sets.
ORASIS(TM) is a high-speed processing system that identifies the spectral
signatures corresponding to physical objects in an area without supervision or
prior knowledge.
19
It will minimize subsequent ground processing for data exploitation and maps. In
essence, ORASIS(TM) enables the on-board production of data products and results
in a greater than tenfold data compression, relieving hyperspectral data
bottlenecks of on-board data storage and transmission to the ground.
Formation of Petro Probe, Inc.
- ------------------------------
We formed Petro Probe, Inc. to identify and develop potential
hydrocarbon properties by utilizing Probe 1 imagery and our hydrocarbon
geologists and imagery processors. Petro Probe, Inc.'s strategy will entail
flying over areas of interest that we may later take an equity interest in, as
well as the sale of hyperspectral imagery and processing services for oil and
gas properties owned by third party customers. A primary objective in evaluating
a potential hydrocarbon resource project is to provide geologic mapping of
outcrop lithology and surface structure. The Probe 1 instrument is an excellent
tool to obtain this mapping. Probe 1 imagery can identify subtle features due to
topographic offset, vegetation change and/or soil alteration that play a major
role in forming hydrocarbon traps. Hyperspectral imagery can also aid in
petroleum exploration by detecting surface indicators of potential petroleum
reserves such as micro seepage.
Petro Probe, Inc.'s goal is to develop the competitive advantages of
Probe 1 resource mapping capability, combining this with conventional
hydrocarbon exploration information and then applying newer value-added
technology such as 3D seismic to identify and acquire equity positions in oil
and gas properties. 3D seismic is the technology of measuring explosions to map
subsurface geologic structures. From Petro Probe's inception in 2000 through
March 31, 2001, Petro Probe, Inc. has acquired working interests in five (5) oil
and gas projects in the U.S. The first project acquired was the Louisiana West
Scott Field Prospect, where an oil well has been drilled and logged based on
data from Probe 1 as well as other exploration measurements. This property was
acquired for $195,000 with capitalized costs totaling approximately $250,000 and
in fiscal 2001 began production. We recognized $417,319 in revenue from this
property in fiscal 2001 Capitalized costs for that project amortized under the
unit-of-production method were $34,633. Based on an outside engineering study,
the current producing well has total estimated reserves of 17.31 billion cubic
feet of natural gas and 17,000 barrels of oil as of March 31, 2001. Our 5%
working interest in the discounted net cash flows from this well is estimated to
be $1,767,000 as of March 31, 2001 based on prices for natural gas and oil as of
March 31, 2001.
In fiscal 2002, two (2) wells being drilled as of March 31, 2001 were
determined to be dry holes. These two wells were plugged and capitalized costs
of approximately $467,000 were written off. In fiscal 2002, two (2) more of
Petro Probe, Inc.'s projects are anticipated to be drilled and if successful
will begin production in fiscal 2002. In addition, Petro Probe, Inc.'s working
interests offer it the right to participate in drilling additional wells within
the five (5) oil and gas projects. Petro Probe, Inc. will determine whether or
not to participate in any additional drilling efforts on a case by case basis.
20
In addition, in fiscal 2000 Petro Probe, Inc. has surveyed targets for
hydrocarbon exploration in the oil and gas basins of Greater Green River Basin,
Wyoming, Paradox Basin, Utah and the Australian Basin and is proceeding to
further evaluation.
In fiscal 2000, we acquired working interests in three oil and gas
properties. One property was acquired for $195,000 in cash. The other two
properties were purchased by exchanging 596,398 shares of our stock valued at
$226,632. In fiscal 2001, we acquired working interests in two additional oil
and gas properties for $555,406 in working capital and the issuance of 167,066
shares of our common stock valued at $63,485.
In fiscal 2001, one of the oil and gas properties with capitalized
costs totaling approximately $250,000 began production and we recognized
$417,319 in revenue from that property. Capitalized costs for that project
amortized under the unit-of-production method were $34,633. Based on an outside
engineering study, the current producing well has estimated reserves of 17.31
billion cubic feet of natural gas and 17,000 barrels of oil as of March 31,
2001. Our 5% working interest in the discounted net cash flows from this well is
estimated to be $1,767,000 as of March 31, 2001 based on prices for natural gas
and oil as of March 31, 2001.
The estimates of proved and proved developed reserve quantities and
related standardized measure of discounted net cash flow are estimates only, and
do not purport to reflect realizable values or fair market values of our
reserves. We emphasize that reserve estimates are inherently imprecise and that
estimates of new discoveries are more imprecise that those of producing oil and
gas properties. Accordingly, these estimates are expected to change as future
information becomes available.
Proved reserves are estimated reserves of crude oil (including
condensate and natural gas liquids) and natural gas that geological and
engineering data demonstrate with reasonable certainty to be recoverable in the
future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those expected to be recovered through
existing well, equipment, and operating methods.
The standardized measure of discounted future net cash flows is
computed by applying year-end prices of oil and gas (with consideration of price
changes only to the extent provided by contractual arrangements) to the
estimated future production of proved oil and gas reserves, less estimated
future expenditures (based on year-end costs) to be incurred in developing and
producing the proved reserves, less estimated future income tax expenses (based
on year-end statutory tax rates, with consideration of future tax rates already
legislated) to be incurred on pretax net cash flows less tax basis of the
properties and available credits, and assuming continuation of existing economic
conditions. The estimated future net cash flows are then discounted using a rate
of 10 percent a year to reflect the estimated timing of the future cash flows.
In fiscal 2000, we purchased mineral leases in Nova Scotia with the
intention of surveying the properties and exploring mineral exploration
possibilities for our own purposes.
21
Formation of Geoprobe, Inc.
- ---------------------------
We formed Geoprobe, Inc. to pursue remote sensing applications in the
mineral exploration industry. Mineral deposits are part of larger geological
systems that typically have mineralogical zonations that are mappable using
Probe 1 imagery. In vegetated areas, the subtle effects that bedrock geology has
on plants can be measured to identify hidden minerals. Our mapping agreement
with Noranda, a major mining company, expired in 2000. As of March 31, 2001,
Geoprobe, Inc. was financially inactive. When it again becomes active, Geoprobe,
Inc. will use our remote sensing instruments to globally survey any areas that
have promise for the location of minerals either for its own use or for third
party customers.
Formation of Ecoprobe, Inc.
- ---------------------------
We formed Ecoprobe, Inc. to pursue remote sensing applications in the
environmental industry. The same indicators that can be used to find mineral
deposits can also be used to monitor the environmental impact of active and
past-producing mines, mills, smelters, refineries and pipelines. We have taken
an industrial leadership role in working with U.S. government agencies such as
the Environmental Protection Agency, the Bureau of Land Management and the
Office of Surface Mining on setting up applications for commercial monitoring of
industries, forest inventory and health issues, slope stability assessment and
the spread of noxious weeds.
Ecoprobe, Inc. undertook hyperspectral surveys and performed fieldwork
in Florida for two internal vegetation-related projects. The primary goal of
this project is to evaluate the efficacy of hyperspectral remote sensing for
identifying diseased citrus trees. Citrus canker is a serious threat to the
Florida citrus industry. The second goal is to map the location of non-native
invasive vegetation species that are threatening the ecological systems of the
Florida Everglades. Analysis of the data for this project is ongoing and the
work will continue in fiscal 2002. Researchers from the University of Idaho are
performing much of the data analysis for the Florida work. With their
contributions, Ecoprobe, Inc. hopes to demonstrate the commercial applicability
of hyperspectral remote sensing for the detection of diseased vegetation as well
as the detection and monitoring of invasive weed species. Ecoprobe, Inc. expects
that environmental problems caused by the spread of non-native noxious weeds
such as loss of wildlife habitat, soil erosion, diminished water quality, loss
of fish habitat and reduced crop production will precipitate a commercial demand
for the use of Probe hyperspectral data for both initial noxious weed detection
and subsequent monitoring.
Formation of Terranet, Inc.
- ---------------------------
We formed Terranet, Inc. as our e-commerce content provider to globally
market and distribute our airborne and satellite imagery over an internet and
broadband imagery distribution system that Terranet, Inc. is developing. This
imagery can be sold repeatedly to multiple end users. In addition to selling our
own imagery, Terranet, Inc. will pursue the resale of imagery obtained from
third parties. Terranet, Inc. is preparing for a late-2001 launch of a portal
design, multi-media imagery "supermarket" on the internet that will have the
capability to individually customize data packages for customers. A proprietary
software application service available on line will allow simple data
acquisition and processing with a "pay as you go" billing
22
system. Its domain name on the world wide web will be Earthmapsearch.com.
Terranet, Inc. has engaged Hewlett-Packard to provide the business case
consulting and system architecture design for Earthmapsearch.com. An agreement
has also been signed with OnSat Network Communications of Salt Lake City, Utah
to provide global broadband wireless internet connectivity for major
Earthmapsearch.com users where required.
Fiscal 2001 Significant Projects
- --------------------------------
In fiscal 2001, we completed hyperspectral surveys for major mining
companies in areas in North America and South America. These projects produced
the majority of our 2001 revenue. The imagery from these collections will be
available for resale on Terranet, Inc's website two (2) years after the data
collection.
To date, we have collected gigabyte quantities of imagery. These data
tapes are being processed and the imagery is being examined for the presence of
mineral properties exhibiting the qualifications necessary to establish them for
candidacy as "royalty properties" under the agreement with Noranda, a major
mining company. A substantial backlog of collected imagery exists, and the
evaluation process continues to move forward. As we continued to perform under
our Noranda mapping contract in fiscal 2001, additional mapping assignments have
come from new customers in emerging growth areas such as hydrocarbon
exploration, environmental damage assessments, land use planning and noxious
weed species detection. These additional imagery data collections continue to
expand and improve the commercial applications of our remote sensing library.
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 would
provide solutions to critical environmental restoration and waste management
problems, while furthering national business and technology goals.
In the Canadian province of Nova Scotia, we surveyed for our own use
several sites for potential mineral and hydrocarbon deposits. This region is
where numerous quartz vein related gold and some copper have been discovered.
There have been seven past producing gold properties in our surveyed area as
well as two past producing sandstone copper properties. In fiscal 2002, we will
continue to review our collected imagery from this region for potential economic
mineral and hydrocarbon deposits.
Business Segment Information
- ----------------------------
Included in the attached financial statements is our business segment
information.
Employees
- ---------
As of March 31, 2001 we had sixteen (16) full-time employees and
consultants.
23
Available Information
- ---------------------
The Securities and Exchange Commission maintains an Internet site at
http://www.sec.gov that contains reports and financial information we filed
electronically. The public may read and copy any materials we file with the SEC
at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. We do not provide regular
reports to shareholders; however, we maintain an Internet site at
http://www.earthsearch.com that contains information about our business, markets
and technology.
Properties
- ----------
We lease our corporate headquarters and all of the furnishings from two
of our officers. Our headquarters consist of approximately 6,400 square feet of
office space in Kalispell, Montana. In addition, a wholly owned subsidiary
leases office space in Alexandria, Virginia from an unrelated third party. We
believe our offices are adequate to meet our needs for the foreseeable future.
In addition, we own working interests in five (5) oil and gas
properties. Wells being drilled on two projects as of March 31, 2001 were
determined to be dry holes, were plugged and capitalized costs of approximately
$467,000 were written off in fiscal 2002. See "Description of Business -
Formation of Petro Probe, Inc." and note 3 to the Notes to Consolidated
Financial Statements.
Legal Proceedings
- -----------------
In May 2000, a lawsuit was filed against us by Applied Signal and Image
Technologies, Inc. or ASIT. ASIT's complaint alleges that we have not paid ASIT
500,000 shares of our stock, which it claims it is owed pursuant to a written
contract between ASIT and ourselves in which ASIT agreed to perform certain
services for us. ASIT's complaint requests compensatory and punitive damages. In
November 2000, the Circuit Court of Baltimore County, Third Judicial Circuit of
Maryland issued a ruling on certain matters. Among other things, the Court
denied our motion for summary judgment.
24
MANAGEMENT
The following sets forth certain information with respect to our
executive officers and directors.
Name Age Position
--------------- ----- ---------------------
Larry F. Vance 66 Chairman and Director
John W. Peel, III 55 Chief Executive Officer and Director
John J. Sciuto 58 President
Rory J. Stevens 43 Chief Financial Officer
Tami J. Story 38 Secretary/Treasurer and Director
Larry F. Vance served as our Chief Executive Officer from 1985 until
April 8, 1995. Since April 8, 1995, Mr. Vance has served as our Chairman. Mr.
Vance is also one of our directors. Mr. Vance's training is in business and
marketing. He served in a management capacity for the 3M companies, IBM and
Computer Usage Corporation prior to founding Earth Search Sciences, Inc.
John W. Peel, III joined us as Chief Executive Officer in April 1995
and has been one of our directors since 1995. Prior to joining us, Dr. Peel
serviced 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 Science in
Parasitology and Invertibrate Zoology from the University of Mississippi and a
Ph.D. in Environmental Health/Health Physics from Purdue University.
John J. Sciuto joined us as President on May 1, 2001. Prior to joining
us, Mr. Sciuto served fourteen years with Comptek Research, a publicly traded
defense electronics and information technology company. He joined Comptek in
1986 as a Junior Vice President. He assumed duties as President and Chief
Operating Officer of Comptek Federal Systems, Comptek Research's defense-focused
subsidiary, in 1991. In 1996, Mr. Sciuto was installed as President and CEO of
Comptek Research and was voted to the position of Chairman in 1997. Prior to
joining Comptek, Mr. Sciuto was the Director at EW Systems with Engineering
Research Associates of McLean, VA from 1983 to 1986. Mr. Sciuto also served 23
years with the United States Navy, rising through the enlisted, warrant officer
and commissioned officer ranks, retiring with the rank of Lieutenant Commander
in 1983. Mr. Sciuto holds a Bachelor of Applied Science Degree in Aviation
Electronics from Troy State University and is a 1991 graduate of Stanford
University's Senior Executive Institute for the Management of High Technology
Companies.
Rory J. Stevens, CPA, a certified public accountant became one of our
directors in 1994 and joined us as Chief Financial Officer in January 2000.
Prior to joining us, Mr. Stevens was employed by Chiyoda International
Corporation, an engineering and construction company, for eleven years, the last
six years as corporate controller. Mr. Stevens holds a Bachelor of Business
Administration from Boise State University and a Master of Business
Administration and Master of Professional Accounting from the University of
Washington.
Tami J. Story served in an administrative support capacity for us from
1991 until April 1993. Since April 1993, Ms. Story has served as our Secretary
and Treasurer. Ms. Story also serves as one of our directors. Ms. Story holds a
degree with a major in Nursing and a minor in Business Administration.
25
EXECUTIVE COMPENSATION
Table below summarizes information on Executive and Director compensation.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
-------------------------------------------------------------------------------------------
Securities
Other Annual Restricted underlying All other
Name and Principal Fiscal Compensation Stock Stock Option options/SARS LTIP pay- Compensation
Position Year Salary($) Bonus($) ($) Award(s)($) Grants (#) outs ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Larry Vance/Chairman (1) 2001 160,000 875,000(4)
2000 160,000 - 157,500(2) - 10,000,000 - - -
1999 160,000 - - - 9,000,000 - - -
John Peel/CEO (1) 2001 150,000 875,000(4)
2000 150,000 - - - 10,000,000 - - -
1999 150,000 - - - 7,500,000 - - -
Rory J. Stevens/CFO (1) 2001 125,000 218,750(4)
2000 125,000 - - - 2,500,000 - - -
1999 - - - - 2,500,000 - - -
Tami J. Story/Secretary 2001 80,000 437,500(4)
and Treasurer 2000 80,000 - - - 5,000,000 - - -
1999 80,000 63,000(2) - - 5,300,000 - - -
(1) Prior to January 2000, the Chairman's and Secretary's salary and one half of
the CEO's salary was deferred.
(2) In 1997, the Chairman and Secretary relinquished deferred salary in order to
entice a third party to invest in us. As the investment didn't materialize,
in fiscal 2000 we treated 1,500,000 ($0.105 exercise price) and 300,000
($0.21 exercise price) of the Chairman's and Secretary/Treasurer's options,
respectively, as paid in full to offset the deferred salary previously
foregone.
(3) The CFO joined us in January 2000 and has been one of our directors since
1994.
(4) In 2001, our Board of Directors approved the issuance of 6,875,000
restrictive shares to officers as a stock bonus. Outstanding officer options
were reduced by 6,875,000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Number of securities
underlying Value of Unexercised
unexercised options In-the Money Options
Shares at FY-End at FY-End ($)
Acquired on Value
Name Exercise Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- --------------- --------------------------- ---------------------- ------------------------
Larry Vance 2,500,000 875,000 4,500,000/3,000,000(2) 256,250/0
John Peel 2,500,000 875,000 4,500,000/3,000,000(2) 256,250/0
Rory J. Stevens 625,000 218,750 375,000/1,500,000(2) 38,438/0
Tami Story 1,250,000 437,500 750,000/3,000,000(2) 0/0
(1) In 2001, our Board of Directors approved the issuance of 6,875,000
restrictive shares to officers as a stock bonus. Outstanding officer options
were reduced by 6,875,000.
(2) Exercise prices range from $0.21 - $2.50 per share.
26
Employment Contracts
- --------------------
In October 28, 2000, we entered into a new employment agreement with
Mr. Larry Vance. Pursuant to the agreement, we will pay Mr. Vance an annual
salary of $160,000. In the event of termination of Mr. Vance without cause or
due to a change in control, we will pay Mr. Vance two years of annual salary. Mr
Vance's options and vesting criteria are described above and in note 10 to the
attached annual financial statements.
On October 28, 2000, we entered into a new employment agreement with
Dr. John Peel. Pursuant to the agreement, we will pay Dr. Peel an annual salary
of $150,000. In the event of termination of Dr. Peel without cause or due to a
change in control, we will pay Dr. Peel two years of annual salary. Dr Peel's
options and vesting criteria are described above and in note 10 to the attached
annual financial statements.
On October 28, 2000, we entered into a new employment agreement with
Mr. Rory Stevens. Pursuant to the agreement, we will pay Mr. Stevens an annual
salary of $125,000. In the event of termination of Mr. Stevens without cause or
due to a change in control, we will pay Mr. Stevens two years of annual salary.
Mr. Stevens' options and vesting criteria are described above and in note 10 to
the attached annual financial statements.
On October 28, 2000, we entered into a new employment agreement with
Ms. Tami Story. Pursuant to the agreement, we will pay Ms. Story an annual
salary of $80,000. In the event of termination of Ms. Story without cause or due
to a change in control, we will pay Ms. Story two years of annual salary. Ms.
Story's options and vesting criteria are described above and in note 10 to the
attached annual financial statements.
On May 1, 2001, we entered into an employment agreement with Mr. John
J. Sciuto. Pursuant to the agreement, we will pay Mr. Sciuto an annual salary of
$300,000. Mr Sciuto can earn options for our common stock and equity in a newly
formed subsidiary as certain performance milestones are achieved. In the event
Mr. Sciuto is terminated without cause or due to a change of control and he has
successfully achieved certain milestones, then we will pay Mr. Sciuto a
severance equal to one-half years salary if a minimum of $5,000,000 in equity
has been raised into a newly formed subsidiary and two years salary if a minimum
of $10,000,000 has been raised into a newly formed subsidiary.
27
BENEFICIAL OWNERSHIP
The following table sets forth certain information regarding ownership
of our common stock as of July 11, 2001 by each person known by us to own
beneficially more than five percent of our common stock and by all directors and
officers and as a group:
Amount and
nature of
Name and address beneficial Percent
of beneficial owner ownership (1) of class
-----------------------------------------------------------------------
Larry Vance 15,465,003(2)(3) 9.74%
P.O. Box 763
Lakeside, MT 59922
John Peel 7,146,500(3) 4.50%
100 North Pitt Street, Suite 403
Alexandria, VA 22314
Rory J. Stevens 1,025,000(5) 0.66%
455 Orchard Ridge Road
Kalispell, MT 59901
Tami Story 2,365,169(4) 1.53%
P.O. Box 763
Lakeside, MT 59901
Accuprobe 17,663,842 11.46%
42-07 30th Avenue
Astoria, MT 11103
Monte Meltzer 11,280,667 7.32%
8531 W. Howell Rd
Bethesda, Maryland 20817
All directors and officers 26,001,672 26.37%
- ---------------------------
(1) All shares are held directly with sole voting and investment power
unless otherwise indicated.
(2) Includes 1,775,000 shares held by Universal Search Technology, a
private company owned by Mr. Vance.
(3) Includes 4,500,000 options, which became exercisable on March 31, 2001.
(4) Includes 750,000 options, which became exercisable on March 31, 2001.
(5) Includes 375,000 options, which became exercisable on March 31, 2001.
28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal 2001, we entered into a lease for our office in Kalispell,
Montana. The lease is with two of our officers and is for a term of 5 years with
minimum monthly payments of $6,400.
We have financed our operations in part by funds received from advances
by shareholders. These advances are in the form of unsecured promissory notes
and bear interest at rates ranging from 8% to 10%. As of March 31, 2001 and
2000, interest accrued on such advances aggregated $294,332 and $226,347,
respectively, and has been included in accrued interest in the accompanying
consolidated balance sheet.
Shareholder loans are reflected as a noncurrent liability in the
accompanying consolidated financial statements due to: a) the undefined terms of
repayments, b) our inability to repay the advances unless and until we achieve
positive cash flow, and c) the possibility that the obligations will be
satisfied through the issuance of shares of our common stock. We do not
anticipate repayment of the loans during the fiscal 2002.
29
SELLING SHAREHOLDERS
SHARES SHARES BENEFICIALLY OWNED
BENEFICIALLY AFTER THIS OFFERING(2)
NAME OF OWNED PRIOR TO SHARES BEING ----------------------
BENEFICIAL OWNER THIS OFFERING(1) OFFERED NUMBER PERCENT
---------------- ---------------- ------------ -------- -------
Alpha Venture Capital, Inc. 32,000,000 32,000,000 0 0
Noranda Mining and Exploration, Inc. 1,000,000 1,000,000 0 0
Falconbridge Limited 1,000,000 1,000,000 0 0
Paul C. Setze and Patricia J. Setze 766,400 766,400 0 0
Bruce D. Berkowitz 538,770 538,770 0 0
Lloyd T. Preslar 516,400 516,400 0 0
Burton Edelson 26,402 26,402 0 0
Lenore M. Rumpf 17,200 17,200 0 0
Lee Q. Neimela 17,200 17,200 0 0
Rolf Riccius 30,000 30,000 0 0
John Peel 7,146,500(3) 500,000 6,646,500 4.3
Rory Stevens 1,025,000(4) 125,000 900,000 *
Tim Monroe 500,000 100,000 400,000 *
Bob Stewart 625,000 125,000 500,000 *
Ken Danchuk 200,000 40,000 160,000 *
John Adamson 125,000 25,000 100,000 *
Joe Zamudio 262,000 32,500 229,500 *
Laurel Gordner 50,000 10,000 40,000 *
Ward Kilby 37,500 7,500 30,000 *
Cal Kilby 12,500 2,500 10,000 *
- ---------------------------
* Less than one percent (1%)
(1) All shares are held directly with sole voting and investment power
unless otherwise indicated.
(2) Presumes all shares offered are sold.
(3) Includes 4,500,000 options, which are exercisable on March 31, 2001
(4) Includes 375,000 options, which are exercisable on March 31, 2001.
30
PLAN OF DISTRIBUTION
This prospectus, as appropriately amended or supplemented, may be used
from time to time principally by persons who own shares of our common stock, or
their transferees, pledges, donees, legatees, heirs, or legal representatives
who wish to offer and sell such shares (such persons are herein referred to as
the "selling shareholder" or "selling shareholders") in transactions in which
they and any person acting on their behalf through whom such shares are sold may
be deemed to be underwriters within the meaning of the Securities Act of 1933.
We have granted registration rights to the selling shareholders. The
registration statement of which this prospectus forms a part is intended to
satisfy these registration rights. We will receive none of the proceeds from any
such sales by selling shareholders. We will pay substantially all of the
expenses incident to this offering of the shares by the selling shareholders to
the public other than commissions and discounts of underwriters, brokers,
dealers, or agents.
There are no arrangements or understandings, formal or informal,
pertaining to the distribution of the shares described in this prospectus. Upon
being notified by a selling shareholder that any material arrangements have been
entered into for the sale of shares, to the extent required, we will file,
during the period in which offers or sales are being made, one or more
supplements to this prospectus to set forth the names of selling shareholders
and any other material information with respect to the plan of distribution not
previously disclosed. In addition, any shares that qualify for sale pursuant to
Section 4 of, or Rules 144 or 144A under the Securities Act of 1933 may be sold
under such provisions rather than pursuant to this prospectus.
Alpha is an "underwriter" within the meaning of the Securities Act of
1933 in connection with the sale of the common stock offered hereby.
Broker-dealers who act in connection with the sale of common stock may also be
deemed to be underwriters. Profits on any resale of the common stock as a
principal by such broker-dealers and any commissions received by such
broker-dealers may be deemed to be underwriting discounts and commissions under
the Securities Act of 1933. Any broker-dealer participating in such transactions
as agent may receive commissions from Alpha (and, if they act as agent for the
purchaser of our common stock, from such purchaser).
The shares may be sold or distributed from time to time by the selling
security holders or by pledgees, donees or transferees of, or successors in
interest to, the selling security holders, directly to one or more purchasers
(including pledgees) or through brokers, dealers or underwriters who may act
solely as agents or may acquire shares as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or at fixed prices, which may be changed. The
distribution of the shares may be effected in one or more of the following
methods:
o ordinary broker transactions,
o transactions involving cross or block trades or otherwise on the NASD
Over-the-Counter Bulletin Board,
o purchases by brokers, dealers or underwriters as principal and resale
by such purchasers for their own accounts pursuant to this prospectus,
31
o "at the market" to or through market makers or into an existing market
for the common stock,
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected through
agents,
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise), or
o any combination of the foregoing, or by any other legally available
means.
Participating broker-dealers may agree with selling shareholders to
sell a specified number of shares at a stipulated price per share and, to the
extent such broker-dealer is unable to do so acting as an agent for selling
shareholders, to purchase as principal any unsold shares at the price required
to fulfill the broker-dealer's commitment to selling shareholders. In addition
or alternatively, shares may be sold by selling shareholders and/or by or
through other broker/dealers in special offerings or secondary distributions
pursuant to and in compliance with the governing rules of the NASD and in
connection therewith commissions in excess of the customary commissions
prescribed by the rules of the NASD may be paid to participating broker-dealers,
or, in the case of certain secondary distributions, a discount or concession
from the offering price may be allowed to participating broker-dealers in excess
of the customary commission. Broker-dealers who acquire shares as principal may
thereafter resell such shares from time to time in transactions (which may
involve crosses and block transactions and which may involve sales to or through
other broker-dealers, including transactions of the nature described in the
preceding two sentences) on the NASD Over-the-Counter Bulletin Board, in
negotiated transactions or otherwise, at market prices prevailing at the time of
sale or at negotiated prices, and in connection with such resale may pay to or
receive commissions from the purchaser of such shares.
Selling shareholders will be subject to applicable provisions of the
Securities Exchange Act of 1934 and the rules and regulations thereunder,
including without limitation Regulation M, which provisions may limit the timing
of purchase and sales of any of the shares by the selling shareholders. All of
the foregoing may affect the marketability of the shares.
If the shares are sold in an underwritten offering, the underwriting
and selling group members (if any) may engage in passive market transactions in
our common stock on the NASD Over-the-Counter Bulletin Board immediately prior
to the commencement of the offering in accordance with Regulation M. Passive
market making presently consists of displaying bids on the NASD Over-the-Counter
Bulletin Board limited by the bid prices of market maker not connected with such
offering and purchases limited by such prices and effected in response to order
flow.
DESCRIPTION OF SECURITIES TO BE REGISTERED
As of June 30, 2001, our authorized capital stock consists of
200,000,000 shares of common stock of which 154,201,609 shares are issued and
outstanding and 200,000 shares of preferred stock are issued and outstanding.
All of our outstanding shares of common stock have
32
been duly and validly authorized and issued and are fully paid and
nonassessable. This registration covers 38,967,500 shares of our authorized
capital stock. The following is a summary of options, warrants or rights to
subscribe to, securities, rights or obligations convertible into or exchangeable
for or giving any right to subscribe for any shares of our capital stock:
Item Expiration Period Common Shares Exercise Prices
- --------------------------- ----------------- ------------- -----------------------
Options 2002 - 2006 29,813,000 $0.07 - $3.50 per share
Warrants 2002 3,000,000 $1.30 - $2.00 per share
Convertible Preferred Stock None 1,000,000
The attached Notes to Consolidated Financial Statements include
additional detail on options, warrants, and convertible preferred stock
LEGAL MATTERS
Ballard Spahr Andrews & Ingersoll, LLP Philadelphia, Pennsylvania, will
pass upon the validity of the issuance of the shares of common stock being
offered hereby.
EXPERTS
Our consolidated financial statements and schedules as of March 31,
2001 included in this prospectus have been audited by Grant Thornton LLP,
independent accountants and experts in auditing and accounting.
The consolidated balance sheet as of March 31, 2000 and the related
consolidated statements of loss, of redeemable common stock and changes in
nonredeemable shareholders' equity (deficit) and of cashflows for the years
ended March 31, 2000 and 1999, respectively, included in this prospectus have
been so included in reliance on the report (which contains an explanatory
paragraph relating to the Company's ability to continue as a going concern as
described in note 1 to the financial statements) of PricewaterhouseCoopers LLP,
independent accountants, given on the authoritiy of said firm as and experts in
auditing and accounting.
33
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Shareholders
Earth Search Sciences, Inc.
We have audited the accompanying balance sheet of Earth Search Sciences, Inc.
and subsidiaries (the Company) as of March 31, 2001, and the related statements
of loss, redeemable common stock and changes in nonredeemable shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial
position of Earth Search Sciences, Inc. as of March 31, 2001, and the results of
its operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $6,636,480 during the year ended March 31,
2001, and, as of that date, the Company's current liabilities exceeded its
current assets by $10,750,323. These factors, among others, as discussed in note
1 to the financial statements, 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 financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
GRANT THORNTON LLP
Seattle, Washington
June 15, 2001
F-1
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 redeemable common stock and changes in
nonredeemable shareholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Earth Search Sciences, Inc.
and its subsidiaries at March 31, 2000 and the results of their operations and
their cash flows for each of the two years in the period ended March 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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 our opinion. We have not audited the consolidated financial
statements of Earth Search Sciences, Inc. for any period subsequent to March 31,
2000.
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
financial statements, the Company has incurred recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Portland, Oregon
June 9, 2000
F-2
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
------------ ------------
Assets
Current assets:
Cash $ 367,902 $ 6,119,562
Accounts receivable 900,531 433,709
Other current assets 73,408 369,973
------------ ------------
Total current assets 1,341,841 6,923,244
Property and equipment, net 18,368,285 12,608,986
------------ ------------
Total assets $ 19,710,126 $ 19,532,230
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 352,425 $ 2,687,212
Capital lease obligation 3,058,603 3,000,000
Accounts payable 7,216,731 5,984,602
Accrued expenses 107,422 302,946
Accrued interest 356,983 356,962
Investor deposit 1,000,000 --
------------ ------------
Total current liabilities 12,092,164 12,331,722
Long-term liabilities
Shareholder loans 825,844 459,844
Deferred officers' compensation 2,178,195 2,037,846
Minority interest 2,249,096 2,017,428
------------ ------------
Total liabilities 17,345,299 16,846,840
Commitments and contingencies -- --
Redeemable common stock, $.001 par value 17,981 21,734
------------ ------------
Nonredeemable shareholders' equity:
Series A preferred stock; 200,000 shares authorized,
issued and outstanding; liquidation preference $1,000,000 1,000,000 1,000,000
Common stock, $.001 par value; 200,000,000 shares
authorized;154,090,616 and 126,402,044 shares,
respectively, issued and outstanding 154,091 126,402
Additional paid-in capital 29,561,847 22,906,866
Common stock subscribed -- 363,000
Treasury stock (200,000) (200,000)
Accumulated deficit (28,169,092) (21,532,612)
------------ ------------
2,346,846 2,663,656
------------ ------------
Total liabilities and shareholders' equity $ 19,710,126 $ 19,532,230
============ ============
F-3
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF LOSS
FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenue $ 2,678,986 $ 1,526,446 $ 881,006
Costs of revenue (1,777,437) (1,796,412) (767,570)
------------ ------------ ------------
Gross margin (deficit) 901,549 (269,966) 113,436
Expenses:
Exploration 95,540 6,282 68,229
General and administrative expenses
Other 3,854,000 2,397,484 1,417,514
Non-cash compensation expense 2,941,405 1,608,001 --
------------ ------------ ------------
6,890,945 4,011,767 1,485,743
------------ ------------ ------------
Loss from operations (5,989,396) (4,281,733) (1,372,307)
Other income (expense)
Interest income 98,436 38,821 --
Interest expense (1,035,856) (1,136,995) (773,288)
Other expense -- (641) (10,810)
------------ ------------ ------------
Loss before minority interest (6,926,816) (5,380,548) (2,156,405)
Minority interest in losses of
consolidated subsidiaries 290,336 202,565 --
------------ ------------ ------------
Loss before extraordinary item (6,636,480) (5,177,983) (2,156,405)
Extraordinary item -- -- (115,023)
------------ ------------ ------------
Net loss $ (6,636,480) $ (5,177,983) $ (2,271,428)
============ ============ ============
Shares applicable to basic and
diluted loss per share 135,941,012 107,778,285 90,388,446
Basic and diluted loss per share $ (0.05) $ (0.05) $ (0.03)
F-4
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (6,636,480) $ (5,177,983) $ (2,271,428)
Adjustments to reconcile net loss to
net cash used in operating activities:
Non cash compensation expense 2,941,405 1,608,001 --
Common stock issued for services and
interest expense 568,347 743,224 462,549
Common stock issued for Skywatch stock -- -- 101,484
Extraordinary items -- -- 115,023
Loss attributed to minority interest (290,336) (202,565) --
Depreciation, amortization and depletion 576,350 356,364 279,212
Amortization of lease discount -- 485,622 484,968
Allowance for doubtful accounts 287,371 33,912 --
Loss on sale of equipment -- -- 79,584
Changes in assets and liabilities
Accounts receivable (754,193) (406,645) (17,600)
Other current assets 296,565 (266,577) 255,477
Accounts payable and accrued expenses 1,036,605 (829,394) (137,720)
Accrued interest 308,603 104,452 (45,491)
Investor deposits 1,000,000 (121,986) --
Deferred officers compensation 140,349 330,466 319,919
============ ============ ============
Net cash used in operating activities (525,414) (3,343,109) (374,023)
------------ ------------ ------------
Cash flow from investing activities:
Capital expenditures (6,272,164) (456,545) (660,558)
Net cash acquired from acquisition of STDC -- 168,046 --
Proceeds from sale of property and equipment -- -- 58,346
------------ ------------ ------------
Net cash used in investing activities (6,272,164) (288,499) (602,212)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 250,000 2,324,983 386,000
Repayments on notes payable (25,000) (10,593) (24,955)
Repayments on capital lease obligation (250,000) -- --
Proceeds from shareholder loans 141,000 333,602 476,317
Repayments on shareholder loans -- (312,883) (208,085)
Proceeds from sale of common stock 407,914 6,785,426 242,000
Proceeds from common stock subscribed -- 363,000 --
Proceeds from sale of common stock of subsidiaries 522,004 219,993 --
Proceeds from sale of treasury stock -- -- 110,000
------------ ------------ ------------
Net cash provided by financing activities 1,045,918 9,703,528 981,277
------------ ------------ ------------
Net (decrease) increase in cash (5,751,660) 6,071,920 5,042
Cash at beginning of period 6,119,562 47,642 42,600
------------ ------------ ------------
Cash at end of period $ 367,902 $ 6,119,562 $ 47,642
============ ============ ============
Interest paid $ 4,818 $ 22,798 $ 61,363
F-5
EARTH SEARCH SCIENCES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK AND
CHANGES IN NONREDEEMABLE SHAREHOLDERS' EQUITY (DEFICIT)
MARCH 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
Nonredeemable Shareholders' Equity
Redeemable
Common Stock Preferred Stock Common Stock
---------------------------- ---------------------------- ----------------------------
Description Shares Amount Shares Amount Shares Amount
- ------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 1998 1,725,914 $ 517,845 200,000 $ 1,000,000 84,792,576 $ 84,792
Issuance of common stock for
services rendered 3,104,414 3,104
Issuance of common stock for
cash 1,924,166 1,924
Issuance of common stock on
behalf of Skywatch
Exploration for purchase
of Skywatch Northern 465,000 465
Issuance of common stock
previously subscribed 1,000,000 1,000
Issuance of common stock in
lieu of future lease payments 547,727 548
Shares issued in conjunction
with note for cash 300,000 300
Shares issued as incentive
for new debt obligation 1,285,000 1,285
Issuance of shares in lieu
of interest payment 70,817 71
Issuance of Shares as bonus 275,000 275
Issuance of shares in
exchange for minority
owned shares of subsidiary 2,646,667 2,647
Redeemable shares received
back into Treasury (1,000,000) (400,000) 1,000,000 1,000
Treasury Stock Sold
Net Loss
--------------------------------------------------------------------------------------------
Balance at March 31, 1999 725,914 117,845 200,000 1,000,000 97,411,367 97,411
--------------------------------------------------------------------------------------------
Issuance of common stock for
services rendered 3,344,687 3,345
Issuance of common stock for
cash 17,708,175 17,708
Issuance of stock subscription
Issuance of shares in lieu of
interest payment 1,900,000 1,900
Issuance of shares for loan
conversions 849,663 850
Issuance of shares for
acquisition of STDC 4,000,000 4,000
Issuance of shares for
interests in oil and gas
properties 596,398 596
Shares no longer subject to
redemption (591,754) (96,111) 591,754 592
Non cash compensation expense
Net Loss
--------------------------------------------------------------------------------------------
Balance at March 31, 2000 134,160 21,734 200,000 1,000,000 126,402,044 126,402
--------------------------------------------------------------------------------------------
Issuance of common stock for
services rendered 576,024 576
Issuance of common stock for
cash 2,037,441 2,037
Issuance of shares for loan
and interest conversions 16,097,874 16,099
Issuance of shares for
interests in mineral 167,066 167
properties
Issuance of common stock for
exercise of options 200,000 200
Non-cash compensation expense
Shares no longer subject to
redemption (23,167) (3,753) 23,167 23
Issuance of stock for bonus 8,587,000 8,587
Net Loss
--------------------------------------------------------------------------------------------
Balance at March 31, 2001 110,993 $ 17,981 $ 200,000 $ 1,000,000 154,090,616 $ 154,091
============================================================================================
Nonredeemable Shareholders' Equity
Additional Common
paid-in Stock Accumulated Treasury
Description capital Subscribed Deficit stock Total
- ------------------------------- ------------ ------------ ------------ ------------ ------------
Balance at March 31, 1998 $ 9,827,644 $ 165,000 $(14,083,201) $ -- $ (3,005,765)
Issuance of common stock for
services rendered 272,197 275,301
Issuance of common stock for
cash 204,076 206,000
Issuance of common stock on
behalf of Skywatch
Exploration for purchase
of Skywatch Northern 101,019 101,484
Issuance of common stock
previously subscribed 164,000 (165,000) 0
Issuance of common stock in
lieu of future lease payments 114,475 115,023
Shares issued in conjunction
with note for cash 55,950 56,250
Shares issued as incentive
for new debt obligation 136,340 137,625
Issuance of shares in lieu
of interest payment 10,552 10,623
Issuance of Shares as bonus 18,475 18,750
Issuance of shares in
exchange for minority
owned shares of subsidiary 245,353 248,000
Redeemable shares received
back into Treasury 399,000 (400,000) --
Treasury Stock Sold (90,000) 200,000 110,000
Net Loss (2,271,428) (2,271,428)
----------------------------------------------------------------------------
Balance at March 31, 1999 11,459,081 -- (16,354,629) (200,000) (3,998,137)
----------------------------------------------------------------------------
Issuance of common stock for
services rendered 466,129 469,474
Issuance of common stock for
cash 6,767,718 6,785,426
Issuance of stock subscription 363,000 363,000
Issuance of shares in lieu of
interest payment 271,850 273,750
Issuance of shares for loan
conversions 88,328 89,178
Issuance of shares for
acquisition of STDC 1,924,203 1,928,203
Issuance of shares for
interests in oil and gas
properties 226,036 226,632
Shares no longer subject to
redemption 95,520 96,112
Non cash compensation expense 1,608,001 1,608,001
Net Loss $ (5,177,983) (5,177,983)
----------------------------------------------------------------------------
Balance at March 31, 2000 22,906,866 363,000 (21,532,612) (200,000) 2,663,656
----------------------------------------------------------------------------
Issuance of common stock for
services rendered 125,701 126,277
Issuance of common stock for
cash 718,892 (363,000) 357,929
Issuance of shares for loan
and interest conversions 2,760,737 2,776,836
Issuance of shares for
interests in mineral 63,318 63,485
properties
Issuance of common stock for
exercise of options 49,785 49,985
Non-cash compensation expense 14,624 14,624
Shares no longer subject to
redemption 3,730 3,753
Issuance of stock for bonus 2,918,194 2,926,781
Net Loss $ (6,636,480) (6,636,480)
----------------------------------------------------------------------------
Balance at March 31, 2001 $ 29,561,847 $ -- $(28,169,092) $ (200,000) $ 2,346,846
============================================================================
The accompanying notes are an integral part of these financial statements.
F-6
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The business of Earth Search Sciences, Inc. ("the Company") is the collection of
high value imagery of the earth's surface utilizing the Company's proprietary
hyperspectral imaging sensors principally in North America and globally. This
imagery is either sold to end users via contracts to collect the information,
collected for the Company's own exploration purposes, or to be sold to third
parties through its web based e-commerce site. The Company also performs a range
of imagery processing services. Information collected by the sensor has
applications in natural resources development, environmental monitoring and
remediation, wildlife habitat monitoring, hydrocarbon exploration and
development, agricultural assessment and planning including weed species
identification, land use planning, forestry monitoring and planning and defense
surveillance.
The Company has five wholly owned subsidiaries: Quasar Resources, Inc.
("Quasar"), Skywatch Exploration, Inc., Polyspectrum Imaging, Inc., Geoprobe
Inc., and Space Technology Development Corporation ("STDC"). In addition, there
are four majority owned consolidated subsidiaries: Earth Search Resources, Inc.,
ESSI Probe 1 LC, Petro Probe, Inc. and Terranet, Inc. As of March 31, 2001,
Earth Search Resources, Inc., Skywatch Exploration, Inc., Geoprobe Inc., and
Quasar Resources, Inc. are inactive. The 50% owned subsidiary ESSI Probe 1 LC
was formed as a joint venture to own and operate hyperspectral instruments.
Polyspectrum Imaging, Inc. was formed to develop design, engineer, explore
feasibility of and construct additional airborne instruments.
The majority owned Petro Probe, Inc. was formed to identify and develop
hydrocarbon properties by utilizing the Company's hyperspectral instruments,
hydrocarbon geologists, and imagery processors. At March 31, 2001, Petro Probe,
Inc. holds interest in five oil and gas projects.
In fiscal 2000, Terranet, Inc. was formed as the Company's internet based global
information and imagery distribution system. The system will provide high value
added data packages, tailored for end users that can be downloaded over the
Company's high-speed delivery system. It is through the use of this high-speed
delivery system that information can be provided to a wide customer base using
high-speed broadband delivery of imagery and video. It is expected that in
fiscal 2002 Terranet will start operations.
The Company entered into an Agreement and Plan of Merger ("Agreement") with STDC
dated November 15, 1999. Under the Agreement, the Company exchanged 4,000,000
shares of its common stock and options to purchase an additional 4,000,000
shares of its common stock at exercise prices ranging from $0.50 to $5.00 per
share for all of the shares of common stock of STDC. The merger was finalized as
of December 21, 1999 and was accounted for under the purchase method of
accounting at a cost of $1,928,203. The excess of the cost of STDC over the
historical cost of STDC net assets is allocated to the value of a satellite
included in construction in progress. STDC results of operations for the period
December 22, 1999 through March 31, 2000 are included in the Company's results
of operations for the year ended March 31, 2000. In fiscal 2001, a full year of
STDC results of operations are consolidated with the Company.
F-7
STDC, in cooperation with the U.S. Navy and several commercial partners, is
developing a remote-sensing instrument to be mounted on a satellite, Naval
EarthMap Observer (NEMO), that will, after launch and deployment, provide
imagery for applications in natural resources development, environmental
monitoring and remediation, wildlife habitat monitoring, hydrocarbon exploration
and development, agricultural assessment and planning including weed species
identification, land use planning, forestry monitoring and planning and defense
surveillance markets throughout the world.
In fiscal 2001, the Company operated its hyperspectral sensors under contracts
with third parties in several areas around the world. Contracts to operate the
airborne hyperspectral sensors overseas for major mining companies with the
objective of identifying potential mineral deposits contributed approximately
$1,087,000 (see note 7) in revenue in 2001. Contracts to operate the airborne
hyperspectral sensor in the U.S. as an ecological, agricultural, hydrocarbon,
and fisheries application contributed approximately $81,000 to revenue in 2001.
STDC's contract with the Office of Naval Research to design, build, and operate
a hyperspectral sensor mounted on a satellite contributed approximately
$1,094,000 to revenue in 2001. In fiscal 2001, projects with three clients and
the revenue from the oil and gas property accounted for approximately 89% of
total revenue.
Going concern
The Company is experiencing working capital deficiencies because it has incurred
operating losses. 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. The Company plans to increase the number of revenue
producing services through the use of additional hyperspectral sensors and has
entered into an agreement for an equity line (see note 11), which should allow
the Company to continue as a going concern.
Principles of consolidation
The consolidated financial statements include the accounts of Earth Search
Sciences, Inc. and its subsidiaries. All significant intercompany transactions
have been eliminated. The Company's change of ownership in its subsidiaries as a
result of the sale of its subsidiaries common stock is charged against
additional paid-in capital in the Company's financial statements. The Company's
financial statements reflect minority interests in subsidiaries for
non-controlling interest held by third parties in Earth Search Resources, Inc.,
ESSI Probe 1 LC, Petro Probe, Inc. and Terranet, Inc.
F-8
Oil and gas properties
The Company uses the successful efforts method to account for its oil and gas
properties. Under this method, it capitalizes costs incurred for property
acquisition, exploration, and drilling related to its oil and gas properties.
Once the project is completed, and, if oil or gas is located, costs capitalized
to date on the specific project are amortized under the unit-of-production
method as revenue is recognized. Capitalized costs for unsuccessful projects
will be expensed when that determination is made. Costs capitalized on
properties in fiscal 2001 were $320,262.
Based on the agreements for the working interests in oil and gas properties, the
Company will proportionately share in future revenues as well as future
operating and drilling costs.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the unit-of production
method.
Revenue recognition
The Company recognizes revenue and costs as services are rendered under contract
for airborne hyperspectral services and imaging processing services.
STDC receives funds in the form of grants from the U.S. Navy to construct its
satellite and to manage the NEMO program. The grants are considered
cost-reimbursement instruments under Office of Management and Budget (OMB)
circulars. As allowable government-reimbursable costs are incurred, STDC
recognizes a proportionate share of revenue. Government funds received in excess
of government-reimbursable costs are deferred until reimbursable costs are
incurred.
Research and development costs and exploration costs
Research and development costs and exploration costs from using hyperspectral
instruments to map areas of interest to the Company are expensed as incurred.
Depreciation and amortization
The Company recognizes depreciation on its property and equipment using the
straight-line method over estimated useful lives ranging from five years for
computers and software, vehicles and equipment to ten years for hyperspectral
sensors (Probe 1). The Probes included in construction in progress will be
depreciated from the time they are placed into service. The ATM imagery database
is fully depreciated. Satellite construction in progress represents only the
Company's direct investment in the construction of the satellite and an
allocation of the excess of the purchase price of STDC over the net book value
of STDC assets. Upon successful launch and deployment of the satellite, the
total costs incurred will be depreciated over a five year period, which is the
expected life of the satellite.
F-9
Income taxes
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts based on enacted tax laws and statutory tax rates applicable
to the period in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
Common stock
Common stock issued for other than cash consideration is reflected in the
accompanying financial statements at estimated fair value on the date of issue.
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 diluted net loss per share calculation because their
effect on net loss per share is anti-dilutive. Exercisable stock option and
warrant shares outstanding as of March 31, 2001, 2000 and 1999 totaled
20,575,000, 32,850,000 and 14,750,000, respectively.
Changes in classification
Certain reclassifications have been made to the fiscal 2000 and 1999 financial
statements to conform with the financial statement presentation for fiscal 2001.
Such reclassifications had no effect on the Company's results of operations or
shareholders' equity.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
F-10
2. SUPPLEMENTAL CASH FLOW INFORMATION
Year ended March 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
Non-cash financing and investing activities
Notes payable and interest converted into common stock $2,776,836 $ 89,178 $ --
Common stock issued in lieu of interest payments -- 273,750
Issuance of shares in exchange for minority interest in subsidiary -- -- 248,000
Reduction of fixed assets for redeemable stock returned -- -- (400,000)
Redeemable shares received into Treasury -- -- 400,000
Issuance of common stock previously subscribed -- -- 165,000
Issuance of shares for mineral properties 63,485 226,632 --
Issuance of shares for acquisition of STDC -- 1,928,203 --
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
----------------------------
2001 2000
------------ ------------
Mineral properties (A) $ 1,363,785 $ 424,632
ATM imagery database 134,000 134,000
Computers and software 297,639 157,698
Vehicles and equipment 1,054,468 114,012
Hyperspectral instruments (B) 4,058,000 4,058,000
Construction in progress (C) 13,019,501 8,703,401
----------------------------
19,927,393 13,591,743
Accumulated depreciation,
amortization and depletion (1,559,108) (982,757)
----------------------------
$ 18,368,285 $ 12,608,986
============================
(A) In fiscal 2000, the Company acquired working interests in three oil and gas
properties. One property was acquired for $195,000 in cash. The other two
properties were purchased by exchanging 596,398 shares of the Company's
stock valued at $226,632. In fiscal 2001, the Company acquired working
interests in two additional oil and gas properties for $555,406 in working
capital and the issuance of 167,066 shares of its common stock value at
$63,485.
In fiscal 2001, one of the oil and gas properties with capitalized costs
totaling approximately $250,000 began production and the Company recognized
$417,319 in revenue from that property. Capitalized costs for that project
amortized under the unit-of-production method were $34,633. Based on an
outside engineering study, the current producing well has total estimated
reserves of 17.31 billion cubic feet of natural gas and 17,000 barrels of
oil as of March 31, 2001. The Company's 5% working interest in the
discounted net cash flows from this well is estimated to be $1,767,000 as
of March 31, 2001 based on prices for natural gas and oil as of March 31,
2001.
F-11
The estimates of proved and proved developed reserve quantities and related
standardized measure of discounted net cash flow are estimates only, and do
not purport to reflect realizable values or fair market values of the
Company's reserves. The Company emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more
imprecise that those of producing oil and gas properties. Accordingly,
these estimates are expected to changes as future information becomes
available.
Proved reserves are estimated reserves of crude oil (including condensate
and natural gas liquids) and natural gas that geological and engineering
data demonstrate with reasonable certainty to be recoverable in the future
years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those expected to be recovered
through existing well, equipment, and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price
changes only to the extent provided by contractual arrangements) to the
estimated future production of proved oil and gas reserves, less estimated
future expenditures (based on year-end costs) to be incurred in developing
and producing the proved reserves, less estimated future income tax
expenses (based on year-end statutory tax rates, with consideration of
future tax rates already legislated) to be incurred on pretax net cash
flows less tax basis of the properties and available credits, and assuming
continuation of existing economic conditions. The estimated future net cash
flows are then discounted using a rate of 10 percent a year to reflect the
estimated timing of the future cash flows.
In fiscal 2000, the Company purchased mineral leases in Nova Scotia with
the intention of surveying the properties and exploring mineral exploration
possibilities for its own purposes.
(B) The Company entered into a sale-leaseback of a hyperspectral instrument in
1997. The instrument was sold for $2,500,000 and leased back under the
following terms: 1) the Company will lease the instrument for $250,000 per
year bearing interest at the prime rate plus 2% through June 2007; 2) at
any time during the above lease period but no later than April 10, 2000,
the Company can repurchase the instrument for $3,500,000 net of any lease
payments; 3) at any time prior to the repurchase, the lessor may convert
the remaining obligation into shares of the Company's subsidiary's common
stock at a conversion rate of 40% of the stock's then fair market value. In
the event the Company 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
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. The Company recorded a capital
lease obligation of $3,500,000 (net of a debt discount of $1,375,000) and
$375,000 in shareholders' equity related to the shares of common stock and
stock purchase warrants issued in conjunction with the above transaction.
F-12
In fiscal 1999, 547,727 restricted shares of the Company's common stock was
issued in lieu of the lease payment due on April 10, 1999, respectively.
The Company recognized an extraordinary loss of $115,000 in 1999 from the
debt extinguishment as a result of the settlement of the lease payments. As
further consideration, the Company agreed to issue an additional 1,000,000
restricted shares of the Company's common stock to retire the warrant
issued in conjunction with the sale-leaseback transaction discussed above.
These subscribed shares were issued as of March 31, 1999.
In fiscal 2001, the Company issued a promissory note for $250,000 for the
third lease payment due on April 2001. This note was later converted to
common stock per the terms of the note.
The cost of the equipment under capital leases at March 31, 2001 and 2000
was $2,500,000 with related accumulated depreciation of $875,000 and
$625,000 as of March 31, 2001 and 2000, respectively.
As of March 31, 2001, the total amount of $3,058,603 is currently due as
the Company anticipates repurchase of the instrument. The Company is
pursuing the possibility of issuing subsidiary common stock to satisfy the
obligation with the lessor.
In fiscal 2000, the Company completed purchase and received its second
hyperspectral instrument. The capitalized cost of the instrument was
$1,558,000 with accumulated depreciation of $233,700 and $77,900 as of
March 31, 2001 and 2000, respectively.
(C) Included in construction in progress is $12,119,500 of costs and allocated
purchase price related to the development of a remote sensing instrument
and satellite. The satellite is scheduled for completion and launch in the
third quarter of calendar year 2002. Upon launch and deployment of the
satellite, the total capitalized costs will be depreciated over a five-year
period, which is the expected life of the satellite.
4. NOTES PAYABLE
Notes payable consist of 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 rates ranging from 10% to 12.5%.
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 of the promissory notes.
In fiscal 2001 and 2000, $2,776,836 and $89,178, respectively, of notes
outstanding plus accrued interest were converted into common stock at the
agreed upon conversion rates.
5. SHAREHOLDER LOANS
The Company has financed its operations in part by funds received from
advances by shareholders. These advances are in the form of unsecured
promissory notes and bear interest at rates ranging from 8% to 10%. As of
March 31, 2001 and 2000, interest accrued on such advances aggregated
$294,332 and $226,347, respectively, and has been included in accrued
interest in the accompanying consolidated balance sheet.
F-13
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. The Company does not anticipate repayment of
the loans during the fiscal 2002.
6. DEFERRED OFFICERS' COMPENSATION
Deferred compensation consists of the cumulative unpaid compensation due to
corporate officers (Chairman, Chief Executive Officer, President and
Secretary). The Company recorded deferred officer compensation, accrued
payroll taxes and accrued interest of $140,349, $425,104, and $744,134
during the fiscal years ended March 31, 2001, 2000 and 1999, respectively,
and included these amounts in general and administrative expenses. The
Company is accruing interest on the deferred compensation balances at a
rate of 8.5%, compounded quarterly. The Company is making full salary
payments to the Chairman, Chief Executive Officer, and Secretary as
cashflow allows. The Company does not anticipate repayment of these amounts
during fiscal 2002.
In 1999, the employment agreement with the Company's former President was
terminated. The approximately $157,000 due as a result of terminating this
agreement was charged to expense in fiscal 1999 and paid in its entirety in
fiscal 2000.
7. BUSINESS SEGMENT INFORMATION
The major activities of the Company and its subsidiaries are broken down
into an Airborne Hyperspectral Services business segment, a Satellite
Development business segment, Oil and Gas property business segment and an
Other Industries business segment. While the Airborne Hyperspectral
Services segment and Satellite Development segment will utilize remote
sensing instruments to earn revenue from the sale of hyperspectral imagery,
the Satellite Development segment will share responsibilities for tasking
the satellite instrument with the Office of Navy Research and is not
scheduled to begin operations until the fourth quarter of fiscal 2001.
Currently, the Airborne Hyperspectral business segment revenue is primarily
from one external customer, an international mining company. The Satellite
Development business segment revenue is from a contract with the U.S. Navy.
Transactions between the business segments are loans, interest, and
management fees based on an allocation of incurred costs for general and
administrative expenses. As the consolidated group is operating at a net
loss position no income tax expense or benefit is provided. Prior to fiscal
2000, the Company's activities were focused in the Airborne Hyperspectral
Services segment.
F-14
Business Segment Information for Fiscal Year 2001
Airborne Adjustments
Hyperspectral Satellite Oil and Gas Other and
Services Development Properties Industries Eliminations Combined
------------ ------------ ------------ ------------ ------------ ------------
Revenue $ 1,167,741 $ 1,093,926 $ 417,319 -- -- $ 2,678,986
============ ============ ============ ============ ============ ============
Operating Income (Loss) $ (4,166,052) $ (1,324,622) $ 39,064 $ (537,786) -- $ (5,989,396)
============ ============ ============ ============ ============ ============
Interest income 24,715 73,721 -- -- -- 98,436
Interest expense (464,323) (571,533) -- -- -- (1,035,856)
Income from continuing operations
before income taxes and minority
interests -- -- -- -- -- (6,926,816)
Identifiable assets at 3/31/2001 $ 4,934,159 $ 13,091,253 $ 1,570,357 $ 114,357 -- $ 19,710,126
============ ============ ============ ============ ============ ============
Total Assets at 3/31/2001 -- -- -- -- -- $ 19,710,126
============
Depreciation and amortization
for the period ending 3/31/2001 $ 538,419 $ 1,575 $ 34,633 $ 1,723 -- $ 576,350
============ ============ ============ ============ ============ ============
Capital expenditures for the
period ending 3/31/2001 1,624,647 3,666,100 $ 939,153 105,750 -- $ 6,335,650
============ ============ ============ ============ ============ ============
Business Segment Information for Fiscal Year 2000
Airborne Adjustments
Hyperspectral Satellite Oil and Gas Other and
Services Development Properties Industries Eliminations Combined
------------ ------------ ------------ ------------ ------------ ------------
Revenue $ 863,655 $ 662,791 -- -- -- $ 1,526,446
============ ============ ============ ============ ============ ============
Operating Loss $ (2,933,764) $ (740,392) $ (143,843) $ (372,938) $ (90,796) $ (4,281,733)
============ ============ ============ ============ ============ ============
Interest income 15,396 23,425 -- -- -- 38,821
Interest expense (1,066,149) (161,642) -- -- 90,796 (1,136,995)
Other expense (641) -- -- -- -- (641)
Income from continuing operations
before income taxes and minority
interests -- -- -- -- -- (5,380,548)
Identifiable assets at 3/31/2000 $ 7,235,839 $ 11,825,838 $ 452,142 $ 18,411 -- $ 19,532,230
============ ============ ============ ============ ============ ============
Total Assets at 3/31/2000 -- -- -- -- -- $ 19,532,230
============
Depreciation and amortization
for the period ending 3/31/2000 $ 355,502 -- -- $ 862 -- $ 356,364
============ ============ ============ ============ ============ ============
Capital expenditures for the
period ending 3/31/2000 $ 253,084 $ 2,595,677 $ 421,632 $ 8,616 -- $ 3,279,009
============ ============ ============ ============ ============ ============
8. QUARTERLY FINANCIAL DATA (UNAUDITED):
Fiscal 2001
----------------------------------------------------------------------
First Second Third Fourth
------------- ------------- ------------- -------------
Revenue $ 463,014 $ 259,863 $ 1,159,048 $ 797,061
Gross margin (deficit) (518,350) (66,035) 650,450 835,484
Loss before minority interest (1,507,523) (1,296,457) (3,570,273) (552,563)
Net loss $ (1,435,247) $ (1,225,342) $ (3,505,087) $ (470,804)
Shares applicable to basic and
diluted loss per share 128,179,335 130,112,623 134,509,211 146,471,805
Basic and diluted loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.00)
F-15
Fiscal 2000
----------------------------------------------------------------------
First Second Third Fourth
------------- ------------- ------------- -------------
Revenue $ 101,784 $ 238,317 $ 79,678 $ 1,106,667
Gross margin (deficit) 27,741 12,964 (62,247) (248,424)
Loss before minority interest (347,460) (726,078) (1,293,270) (3,013,740)
Net loss $ (548,830) $ (726,078) $ (1,293,270) $ (2,609,805)
Shares applicable to basic and
diluted loss per share 98,327,779 98,610,500 104,354,564 117,972,227
Basic and diluted loss per share $ (0.01) $ (0.01) $ (0.01) $ (0.02)
9. INCOME TAXES
The Company recorded no provision for income taxes in fiscal 2001, 2000 and
1999 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,
----------------------------
2001 2000
------------ ------------
Net operating loss carryforwards $ 9,169,227 $ 6,035,665
Other net deferred tax assets 1,326,707 1,849,148
------------ ------------
Gross deferred tax assets 10,495,934 7,884,813
Deferred tax assets valuation allowance (10,495,934) (7,884,813)
------------ ------------
$ -- $ --
============ ============
The deferred tax asset has been fully reserved because the Company cannot
anticipate future taxable income to realize the potential benefits of the
gross deferred tax asset.
F-16
The benefit for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:
YEAR ENDED MARCH 31,
----------------------------------------------
2001 2000 1999
------------ ------------ ------------
Income tax benefits at statutory rate $ 2,654,593 $ 2,058,593 $ 908,571
Decrease in benefit resulting from:
Permanent differences and other (43,472) 103,830 (11,378)
Increase in valuation allowance (2,611,121) (2,162,423) (897,193)
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
The Company has net tax operating loss carryforwards at March 31, 2001 of
approximately $22,923,068. Such carry forwards may be used to offset
taxable income, if any, in future years through their expiration in
2002-2021. Future expiration of tax loss carryforwards, if not utilized,
are as follows: 2002, $47,625; 2003, $104,696; 2004, $176,084; 2005,
$225,957; and 2006, $143,645; and thereafter, $22,225,061. The annual
amount of tax loss carryforward, which can be utilized, may be limited due
to the substantial changes in the Company's ownership as defined by section
382 of the Internal Revenue Code, which may occur in the future. Such
limitations could result in the expiration of a part of the loss
carryforwards before their utilization.
10. OFFICER AND DIRECTOR STOCK OPTIONS
In August 1997, the Board of Directors granted performance based options to
the Company's Chairman, President and Chief Executive Officer to each
purchase 5,000,000 shares of the Company's restricted stock at exercise
prices ranging from $0.50 per share to $2.50 per share and to the Company's
Secretary to purchase 1,000,000 shares of the Company's restricted stock at
an exercise price of $0.50 per share. All of these performance based stock
options are exercisable for a period of 24 months from the date of vesting.
The options will be deemed vested for each individual if that individual is
employed by the Company on the first date on which the closing market price
of the Company's common stock equals or exceeds the price per share
performance targets for 30 consecutive days. The specific vesting criteria
for these options are described below:
When and if the closing market price of common stock equals or exceeds each
of the following prices $0.50, $1.00, $1.50, $2.00 and $2.50 per share for
30 consecutive days, each of the three individuals shall become fully
vested with an option to purchase 1,000,000 shares of common stock for each
milestone at a price equal to the milestone price of $0.50, $1.00, $1.50,
$2.00 and $2.50 per share, exercisable for a period of 24 months from the
date of vesting.
During 2001, the Board of Directors approved performance based bonuses in
the form of options to the officers of the Company. These bonus clauses
provide for immediate vesting of stock options at certain points in time
dependent on the Company raising predetermined amounts of capital. The
specific vesting criteria for these options are described below:
F-17
15% of all options shall become vested and paid in full when the
Company is successful in obtaining a commitment from a strategic
partner, financial institution, reputable investment banker or other
source in raising capital sufficient to fund the NEMO program; 20%
vested and paid in full when successful in raising gross capital of at
least $6,000,000; 20% vested and paid in full when successful in
raising gross capital of at least $30,000,000; 20% vested and paid in
full when successful in raising gross capital of at least $100,000,000;
and 15% vested and paid in full in the event the NEMO program is
successfully funded.
In fiscal 2000, the Company's common stock maintained a price that resulted
in the vesting of the above options with the $1.00 exercise price. As a
result of the vesting of these options, the Company recognized non-cash
compensation expense of $1,593,600 in fiscal 2000. As of March 31, 2001, no
additional options were vested.
During fiscal 2000, the Board of Directors issued options to a new employee
to purchase 650,000 shares of the Company's common stock with an exercise
price below fair value. In fiscal 2001 and 2000, the Company recognized
$14,624 and $14,401, respectively, of non-cash compensation expense related
to these options.
During fiscal 2001, the Board of Directors approved the issuance of
8,587,000 shares against options as a stock bonus. The Company reduced
options outstanding by 8,587,000 and recorded non-cash compensation expense
of $2,926,781.
The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standard No. 123 ("FAS 123"), Accounting for
Stock-Based Compensation. This statement allows companies to choose whether
to account for stock-based compensation under the intrinsic method as
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25") or to
use a fair value method described in FAS 123. The Company continues to
follow the provisions of APB 25. No compensation cost has been recognized
on the Company's stock option grants except as described above, as the
options include an exercise price equal to or exceeding the fair value on
the date of grant.
The Company has determined that the pro forma effects of applying FAS 123
would increase the net loss in 2001 and 2000 by approximately $986,000 and
$1,044,000 or $0.007 and $0.01 per share, respectively, and would have had
an immaterial effect on the results of operation in 1999. The fair value
was determined using the Black-Scholes option pricing model using the
following weighted-average assumptions:
Fiscal Fiscal Fiscal
2001 2000 1999
---------- ---------- ----------
Risk-free interest rate 5.59% 5.63% 5.62%
Expected dividend yield -- -- --
Expected lives 2.54 4.78 4.23
Expected volatility 131.20% 127.97% 82.50%
F-18
The following table summarizes the employee stock option transactions
described above.
Shares Weighted-average
under option exercise price
-------------- --------------
Balance, March 31,1998 34,800,000 $ 0.78
Options granted 6,200,000 1.23
Options cancelled (10,500,000) 0.83
Options exercised -- --
-------------- --------------
Balance, March 31,1999 30,500,000 0.90
Options granted 5,650,000 0.20
Options cancelled -- --
Options exercised (1,800,000) 0.12
-------------- --------------
Balance, March 31,2000 34,350,000 0.83
Options granted 4,750,000 0.49
Options cancelled (4,500,000) 0.46
Options exercised (8,787,000) 0.27
-------------- --------------
Balance, March 31,2001 25,813,000 $ 1.01
============== ==============
The weighted average per share fair value of options granted during fiscal
year 2001, 2000 and 1999 was $0.31, $0.11 and $0.11, respectively.
In fiscal 2000, the Company exchanged 4,000,000 shares of its common stock
and options to purchase an additional 4,000,000 shares of its common stock,
at exercise prices ranging from $0.50 to $5.00 per share, for all of the
shares of common stock of STDC.
The following table summarizes information about employee stock options and
the options issued as part of the acquisition of STDC outstanding at March
31, 2001.
Options Outstanding
------------------------------------------------
Weighted average
Exercise Number remaining Number
Price Outstanding contractual life exercisable
-------- --------- ---------------- -----------
(Years)
0.07 150,000 1.67 150,000
0.14 487,500 3.50 237,500
0.21 5,375,000 4.69 5,375,000
0.30 1,500,000 1.59 1,500,000
0.50 6,350,000 1.71 3,412,500
0.75 250,000 2.76 250,000
0.84 113,000 2.16 113,000
1.00 3,537,500 1.75 3,537,500
1.50 3,550,000 1.65 500,000
2.00 4,250,000 1.97 1,250,000
2.50 3,000,000 1.33 --
3.00 750,000 3.50 750,000
4.00 250,000 3.50 250,000
5.00 250,000 3.50 250,000
---------- ----------
29,813,000 17,575,500
========== ==========
F-19
11. REDEEMABLE COMMON STOCK AND NONREDEEMABLE SHAREHOLDER'S EQUITY
REDEEMABLE COMMON STOCK
Included in redeemable common stock are amounts related to a potential
rescission offer related to certain shares sold in the state of Idaho (see
note 12). During fiscal 2001 and 2000, 23,167 and 591,754 shares of
redeemable stock were sold by the original investors and thus reclassified
as common stock and additional paid in capital.
PREFERRED STOCK
During the year ended March 31, 1998, the Company issued 200,000 shares of
its Series A preferred stock: 100,000 of these shares were issued as a
result of the conversion of a note payable. Each share of the Company's
Series A preferred stock is convertible into five shares of the Company's
common stock. The preferred stock has liquidation preference in the amount
of $5.00 per share or $1,000,000. The preferred stock is redeemable by the
Company and has no voting rights. In addition, the recipient of the
preferred stock was granted warrants as discussed below to purchase an
additional 1,000,000 shares of the Company's common stock. As such,
2,000,000 shares of the Company's common stock have been reserved for
issuance upon the conversion of the Series A preferred stock and exercise
of the warrants.
COMMON STOCK
During the fiscal years ended March 31, 2001 and 2000, the Company issued
16,097,874 and 849,663 shares of common stock, respectively, to satisfy
$2,334,787 and $75,500, respectively, of principal and $442,049 and
$13,678, respectively, of interest relating to convertible notes payable.
COMMON STOCK SUBSCRIBED
In fiscal 2000, the Company received $363,000 for purchases of common
stock. The shares were issued during the year ended March 31, 2001.
TREASURY STOCK
In fiscal 1999, the Company received into treasury 1,000,000 shares of
redeemable common stock previously issued to a vendor as payment for a
hyperspectral instrument contract that was subsequently cancelled. The
Company subsequently reissued 500,000 of these shares to a third party
during fiscal 1999.
F-20
STOCK WARRANTS
During fiscal 1998, warrants to purchase 4,000,000 shares of the Company's
common stock were granted, with exercise prices ranging from $1.30 to $2.00
per share. These warrants were issued to investors of the Company and
expire 3-5 years after issuance. In fiscal 2001, 1,000,000 of these
warrants expired.
PRIVATE PLACEMENT OF EARTH SEARCH RESOURCES, INC. COMMON STOCK
During fiscal 1998, Earth Search Resources, Inc., a wholly owned subsidiary
of the Company, issued 2,494,000 shares of its common stock at $0.50 per
share. In fiscal 1999, the Company exchanged 2,646,667 shares of its own
common stock for Earth Search Resources, Inc.'s stock not previously owned.
This transaction reduced minority interest by $248,000 in 1999.
PRIVATE PLACEMENT OF TERRANET, INC. COMMON STOCK
In fiscal 2000, Terranet, Inc., a wholly owned subsidiary of the Company,
issued 62,965 shares of its common stock at approximately $3.00 per share.
This transaction increased minority interest by $189,493.
PRIVATE PLACEMENT OF PETRO PROBE, INC. COMMON STOCK
In fiscal 2001 and 2000, Petro Probe, Inc., a wholly owned subsidiary of
the Company, issued 22,332 and 10,166 shares, respectively, of its common
stock at approximately $3.00 per share. This transaction increased minority
interest by $67,000 and $30,500, respectively.
PRIVATE PLACEMENT OF ECO PROBE, INC. COMMON STOCK
In fiscal 2001, Eco Probe, Inc., a wholly owned subsidiary of the Company,
issued 151,667 shares of its common stock at approximately $3.00 per share.
This transaction increased minority interest by $455,004.
In fiscal 2001, warrants to purchase 100,000 shares of either Petro Probe
or Terranet at $3.00 per share for two years and 100,000 shares of either
Petro Probe or Terranet at $5.00 per share for five years were issued to a
consultant of the Company.
EQUITY LINE
Subsequent to March 31, 2001, the Company signed a definitive agreement
with an investor for an equity line of up to $10,000,000 for one year with
an extension option for another year. The terms of the equity line are that
the Company, after the effectiveness of a registration statement, at its
option can sell its registered common shares to the investor on a monthly
basis. The maximum amount of funds that can be raised in any month is
$1,500,000 limited by a calculation based on the average volume of the
stock for the preceding month and the price of the stock. In conjunction
with the equity line, the Company issued warrants to the investor to
purchase 1,500,000 shares of the Company's common stock for 5 years at a
price equal to the lesser of 95% of an average stock price after the
definitive documents were signed or 95% of the market price at the date of
effectiveness of the registration statement. Additional warrants up to
1,500,000 will be issued pro rata as the equity line is used. The price of
these additional warrants will be based on the market price immediately
following sale to the investor.
F-21
12. COMMITMENTS AND CONTINGENCIES
CONTRACTUAL COMMITMENTS
The Company has outstanding purchase orders, commitments, and contracts
with future milestone payments totaling $2,350,000
OPERATING RENT
Future minimum rental payments and sublease rental income under
non-cancelable leases with initial terms in excess of one year are as
follows at March 31, 2001:
Year ending Total Sublease
March 31 commitments Rental Income Net Rent
----------- ----------- ------------- --------
2002 $ 181,050 $ (24,006) $157,044
2003 172,619 (24,006) 148,613
2004 92,813 (2,001) 90,812
2005 77,256 -- 77,256
Thereafter 25,600 -- 25,600
----------- ------------- --------
$ 549,338 $ (50,013) $499,325
Rental expense for office space is included in operations for the fiscal
years ended March 31, 2001, 2000 and 1999 and is $132,529, $30,341, and
$19,200, respectively. In fiscal 2001, the Company entered into a lease for
its office in Kalispell, Montana. The lease is with two officers of the
Company and is for a term of 5 years with minimum monthly payments of
$6,400.
LITIGATION
In fiscal 1997, the Company settled its lawsuit with the Idaho Department
of Finance. As a result of the settlement, the Company agreed to proceed
with a rescission offer to certain Idaho residents who invested in the
Company at the $0.16 to $0.18 per share at which they originally purchased
the Company's common stock. In fiscal 2001 and 2000, 23,167 and 591,754
shares of the Company's common stock subject to rescission were sold by
such Idaho investors. In conjunction with the rescission settlement,
$17,981 and $21,734, related to 110,993 and 134,160 shares of common stock,
respectively, have been recorded in redeemable common stock as of March 31,
2001 and 2000.
In November 2000, a lawsuit was filed against the Company by a vendor. The
vendor alleges that the Company has not paid them 500,000 shares of the
Company's stock, which it is owed pursuant to a written contract between
the vendor and the Company in which the vendor agreed to perform certain
services for the Company in return for cash and the Company's common stock.
The relief sought by the vendor in the lawsuit includes significant
compensatory and punitive damages; however, the Company believes that it
will be able to settle the lawsuit for less than the relief sought. The
Company has recorded a contingency loss accrual of $185,000. It is
management's opinion that the loss accrual is their best estimate of the
potential liability and associated legal costs of the dispute.
F-22
13. RELATED PARTY TRANSACTIONS
During fiscal 1998, the Company entered into various agreements with an
international mining company. The agreements executed between the Company
and the mining company provide, under certain restrictions, an exclusive
license to use Probe 1 for commercial mining purposes. The agreements have
a three-year term, with an automatic three-year renewal unless the
agreements are terminated by either party at the end of the initial
three-year period. In December 2000 the agreement was terminated and the
Company is reviewing its options under their agreement. Under the terms of
the agreements, the Company was guaranteed minimum services work of
$750,000 in year one, $2,000,000 in year two, $3,000,000 in year three, and
$3,000,000 in each subsequent year. The Company has not recorded the
difference between committed revenue under the agreement and actual
revenue. In year one, the Company earned $810,000 in revenue with direct
costs of $652,000 on missions flown under this contract. In year 2, the
Company earned $511,000 in revenue with direct costs of $331,000 on
missions flown under this contract. In year 3 the Company earned $631,000
in revenue with direct costs of $397,824 under this contract. Furthermore,
the agreement grants the Company net smelter royalties ranging from 1.5
percent to 2.5 percent of revenues on properties subsequently owned or
optioned by the mining company. 200,000 shares of the Company's Series A
preferred stock were issued to the mining company and an affiliate for
consideration equal to $1,000,000; furthermore, the mining company and
affiliate were granted warrants to purchase 1,000,000 shares of the
Company's common stock at a price of $2.00 per share.
14. SIGNIFICANT RISKS AND UNCERTAINTIES
The STDC agreement with the Office of Naval Research to develop and deploy
NEMO requires STDC to raise additional industry funds of approximately
$125,000,000 to complete the project. There can be no assurances that STDC
will be able to raise funds necessary to complete the project.
F-23
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the amounts of expenses attributed to the
issuance of the securities offered pursuant to this registration statement which
shall be borne by us. All of the expenses listed below, except the SEC
registration fee, the NASD filing fee and the New York Stock Exchange listing
fee, represent estimates only.
Estimated
---------
SEC registration fee........................... $ 1,948.38
Printing expenses.............................. $ 1,000.00
Accounting fees and expenses................... $ 20,000.00
"Blue Sky" fees and expenses................... $ 2,000.00
Legal fees and expenses........................ $ 30,000.00
Miscellaneous fees and expenses................ $ 51.62
------------
Total................................. $ 55,000.00
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Utah law requires a corporation, unless limited by its articles of
incorporation, to indemnify a director who was successful, on the merits or
otherwise, in the defense of any proceeding, or in the defense of any claim,
issue, or matter in the proceeding, to which he was a party because he is or was
a director of the corporation, against reasonable expenses incurred by him in
connection with the proceeding or claim with respect to which he has been
successful.
Utah law enables a corporation to indemnify an individual made a party to a
proceeding because he is or was a director, against liability incurred in the
proceeding if his conduct was in good faith and he reasonably believed that his
conduct was in, or not opposed to, the corporation's best interests and, in the
case of any criminal proceeding, he had no reasonable cause to believe his
conduct was unlawful. Such indemnification is limited to reasonable expenses
incurred in connection with the proceeding. Under Utah law a corporation may not
indemnify a director in connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation or in
connection with any other proceeding charging that the director derived an
improper personal benefit, whether or not involving action in his official
capacity, in which proceeding he was adjudged liable on the basis that he
derived an improper personal benefit.
Utah law provides that an officer of a corporation is entitled to the
mandatory indemnification provision above and that the corporation may indemnify
and advance expenses to an officer, employee, fiduciary, or agent of the
corporation to the same extent as to a director or may indemnify and advance
expenses to an officer, employee, fiduciary, or agent who is not a director to a
greater extent, if not inconsistent with public policy, and if provided for by
its articles of incorporation, bylaws, general or specific action of its board
of directors, or contract.
II-1
ITEM 15. RECENT SALE OF UNREGISTERED SECURITIES
In the last three years, we have made the following sales of unregistered
securities, all of which sales were exempt from the registration requirements of
the Securities Act of 1933, as amended, pursuant to Section 4(2) or as otherwise
indicated:
RECENT SALES OF UNREGISTERED SECURITIES (1)
AMOUNT OF PRICE PER TOTAL CASH
DATE SECURITIES SOLD SHARE ($) PROCEEDS ($)
---------- --------------- --------- ------------
4/6/1998 465,000 0.22 (2)
4/22/1998 1,000,000 0.17 (3)
5/12/1998 50,000 0.20 (4)
5/12/1998 50,000 0.20 (5)
5/12/1998 200,000 0.20 (4)
5/13/1998 100,000 0.21 20,000 (6)
5/21/1998 572,727 0.21 (7)
5/13/2001 10,000 0.23 (5)
5/29/1998 50,000 0.23 (4)
6/3/1998 4,166 0.24 1,000 (6)
6/17/1998 300,000 0.19 (5)
6/17/1998 13,886 0.19 (4)
7/21/1998 20,000 0.25 5,000 (6)
8/19/1998 35,386 0.15 (4)
8/28/1998 70,817 0.15 (5)
9/22/1998 35,226 0.12 (4)
10/5/1998 50,000 0.09 (4)
10/30/1998 304,929 0.08 (4)
11/13/1998 447,143 0.07 (4)
12/29/1998 98,161 0.05 (4)
1/13/1999 36,867 0.09 (4)
1/25/1999 5,688 0.09 (4)
2/5/1999 1,200,000 0.10 (5)
2/17/1999 2,646,667 0.10 (9)
2/19/1999 1,500,000 0.08 (8)
2/22/1999 100,000 0.10 10,000 (6)
2/26/1999 100,000 0.08 (4)
3/5/1999 1,700,000 0.10 170,000 (6)
3/17/1999 100,000 0.07 (4)
3/9/1999 77,128 0.09 (4)
3/17/1999 275,000 0.08 (8)
4/15/1999 88,597 0.10 (4)
5/27/1999 300,000 0.08 (5)
II-2
8/18/1999 100,000 0.09 (4)
8/18/1999 100,000 0.09 (4)
10/8/1999 1,300,000 0.15 (5)
10/8/1999 367,845 0.12 (4)
10/8/1999 100,000 0.19 (4)
10/8/1999 300,000 0.21 (8)
10/8/1999 1,500,000 0.11 (8)
10/20/1999 350,000 0.10 (4)
10/28/1999 92,172 0.19 (4)
10/28/1999 300,000 0.19 (5)
11/1/1999 625,000 0.08 50,000 (6)
11/1/1999 125,000 0.08 (7)
12/6/1999 19,728 0.20 (7)
Various 3,768,344 0.45 1,695,755 (10)
12/14/1999 4,147 0.20 (7)
Various 651,551 0.38 247,589 (11)
12/15/1999 7,895 0.20 (7)
12/15/1999 3,948 0.20 (7)
12/20/1999 4,000,000
Various 7,199,561 0.38 2,735,833 (12)
12/22/1999 8,229 0.20 (7)
12/22/1999 22,273 0.20 (4)
12/22/1999 13,889 0.20 (4)
12/22/1999 148,889 0.20 (4)
12/23/1999 6,578 0.29 (4)
12/23/1999 272,916 0.18 (4)
12/31/1999 6,052 0.29 (4)
12/31/1999 111,111 0.45 50,000 (6)
2/1/2000 1,000,000 0.50 500,000 (6)
1/11/2000 407,800 0.05 (7)
1/11/2000 131,545 0.27 36,041 (6)
1/17/2000 200,000 (13)
1/17/2000 3,289 (13)
1/17/2000 16,447 (13)
1/24/2000 331,578 0.38 (14)
1/24/2000 133,242 0.38 (14)
3/28/2000 131,578 0.38 (14)
2/1/2000 2,000,000 0.50 1,000,000 (6)
2/14/2000 44,444 0.45 20,000 (6)
2/22/2000 407,726 (13)
2/22/2000 407,726 (13)
2/25/2000 500,000 0.17 82,500 (6)
2/29/2000 100,000 0.38 (4)
3/9/2000 10,762 1.28 (4)
3/10/2000 25,260 0.34 (4)
3/16/2000 25,000 0.38 (4)
3/16/2000 6,579 (13)
3/28/2000 200,000 1.25 250,000 (6)
II-3
3/30/2000 222,222 0.45 100,000 (6)
3/31/2000 200,000 (13)
4/10/2000 200,000 0.25 49,985 (6)
4/11/2000 167,066 0.38 (14)
4/13/2000 75,000 0.45 33,750 (6)
4/18/2000 22,222 (13)
4/26/2000 500,000 0.50 250,000 (6)
4/26/2000 26,315 0.38 10,000 (6)
4/26/2000 50,000 0.38 19,000 (6)
4/26/2000 50,000 0.38 19,000 (6)
4/28/2000 12,004 0.83 10,000 (6)
4/28/2000 34,212 0.75 (7)
5/4/2000 600,000 0.50 300,000 (6)
5/4/2000 8,333 0.72 6,000 (6)
5/4/2000 5,451 0.20 (7)
5/8/2000 50,000 0.20 10,180 (6)
5/11/2000 500,000 0.25 (13)
5/11/2000 3,940 0.20 (7)
6/6/2000 818,501 0.05 (7)
6/6/2000 65,789 0.38 25,000 (6)
6/6/2000 100,000 0.38 38,000 (6)
6/22/2000 300,000 (13)
8/24/2000 9,383 0.75 (4)
12/12/2000 81,081 0.37 (4)
1/4/2001 29,126 0.26 (4)
1/11/2001 9,980,667 0.14 (7)
1/16/2001 100,000 0.56 (5)
1/17/2001 8,587,000 0.34 (8)
2/26/2001 5,289,315 0.26 (7)
(1) Shares sold were common stock, par value $0.001.
(2) Consideration paid for the shares was an airplane.
(3) Consideration paid for the shares was a sale/leaseback transaction.
(4) Consideration paid for the shares was consulting services.
(5) Shares issued for debt consideration.
(6) Sales of securities exempt from registration under Regulation D Rule
506.
(7) Shares exchanged pursuant to debt conversion.
(8) Consideration paid for the shares was employee and consultant
services.
(9) Shares issued in exchange for shares of Earth Search Resources, a
subsidiary of the Company.
(10) Shares were sold to 75 investors between December 14, 1999 and March
24, 2000 and were exempt from registration under Regulation D Rule
506.
(11) Shares sold to 8 investors between December 21, 1999 and February 25,
2000 and were exempt from registration under Regulation D Rule 506.
(12) Shares sold to 59 investors between December 29, 1999 and March 30,
2000 and were exempt from registration under Regulation D Rule 506.
(13) Shares issued as commissions for stock sales.
(14) Shares issued in exchange for interests in oil and gas properties.
II-4
See Consolidated Statements of Redeemable Common Stock and Changes in
Nonredeemable Shareholders' Equity (Deficit) of Financial Statements for
additional information on common stock activity.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
2.1 Agreement and Plan of Merger by and among Earth Search Sciences,
Inc., ESS Acquisition Corp., Space Technology Development
Corporation and the shareholders of Space Technology Development
Corporation, dated December 21, 1999 (Incorporated by reference
to Exhibit 2.1 to the Registrant's Form 10-K for fiscal year
ended March 31, 2000).
3.1 Articles of Incorporation, as amended (Incorporated by reference
to Exhibit 3.1 to the Registrant's Forms 10-K for the fiscal
years ended March 31, 1995 and March 31, 1996).
3.2 Bylaws (Incorporated by reference to Exhibit 3.2 to the
Registrants' Form 10-K for the fiscal year ended March 31,
1995).
4.1 See exhibits 3.1 and 3.2.
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP.*
10.1 Memorandum of Understanding between the Registrant and Applied
Signal and Imaging Technology, Inc. dated May 27, 1996
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Form 10-K for fiscal year ended March 31, 1996).
10.2 Contract of Sale and Leaseback dated June 10, 1997 between
Registrant and Accuprobe, Inc. (Incorporated by reference to
Exhibit 10.2 to the Registrant's Form 10-K for fiscal year ended
March 31, 2000).
10.3 Operating Agreement of ESSI Probe1 LC, dated June 3, 1997
(Incorporated by reference to Exhibit 10.3 to the Registrant's
Form 10-K for fiscal year ended March 31, 2000).
10.4 Hyperspectral Technology License Agreement between Earth Search
Sciences, Inc. and Noranda Mining and Exploration, Inc. dated
December 16, 1997 (Incorporated by reference to the Registrant's
for 8-K filed on February 6, 1998).
10.5 Agreement between the Office of Naval Research and Space
Technology Development Corporation Agreement for NAVY EARTHMAP
OBSERVER (NEMO) dated December 10, 1997 (Incorporated by
reference to Exhibit 10.5 to the Registrant's Form 10-K for
fiscal year ended March 31, 2000).
II-5
10.6 Sales Contract between Science Applications International Corp.
and Space Technology Development Corporation (STDC) dated 30
March 1998, Contract No.: STDC-98-NEMO-0003 (Incorporated by
reference to Exhibit 10.6 to the Registrant's Form 10-K for
fiscal year ended March 31, 2000).
10.7 Sales Contract between Science Applications International Corp.
and Space Technology Development Corporation dated: 30 March
1998, Contract No.: STDC-98-NEMO-004 (Incorporated by reference
to Exhibit 10.2 to the Registrant's Form 10-K for fiscal year
ended March 31, 2000).
10.8 Sales Contract between Space Systems/Loral (SS/L) and Space
Technology Development Corporation (STDC) dated 21 January 1999,
Contract Number: STDC-98-NEMO-0001 (Incorporated by reference to
Exhibit 10.2 to the Registrant's Form 10-K for fiscal year ended
March 31, 2000).
10.9 Sales Contract between Litton Systems, Inc., Amecom Division
(Litton Amecom) and Space Technology Development Corporation
(STDC) dated 29 October 1998, Contract Number: STDC-98-NEMO-0009
(Incorporated by reference to Exhibit 10.2 to the Registrant's
Form 10-K for fiscal year ended March 31, 2000).
10.10 Common Stock Purchase Agreement between Alpha Venture Capital,
Inc. and Earth Search Sciences, Inc. (ESSI) dated May 23, 2001
(Incorporated by reference to Exhibit 10.10 to the Registrant's
Form 10-K for the fiscal year ended March 31, 2001).
10.11 Registration Rights Agreement between Alpha Venture Capital,
Inc. and Earth Search Sciences, Inc. (ESSI) dated May 23, 2001
(Incorporated by reference to Exhibit 10.11 to the Registrant's
Form 10-K for the fiscal year ended March 31, 2001).
10.12 Common Stock Purchase Warrant A between Alpha Venture Capital,
Inc. and Earth Search Sciences, Inc. (ESSI). Dated May 23, 2001
(Incorporated by reference to Exhibit 10.12 to the Registrant's
Form 10-K for the fiscal year ended March 31, 2001).
10.13 Common Stock Purchase Warrant B between Alpha Venture Capital,
Inc. and Earth Search Sciences, Inc. (ESSI). Dated May 23, 2001
(Incorporated by reference to Exhibit 10.13 to the Registrant's
Form 10-K for the fiscal year ended March 31, 2001).
10.14 Larry F. Vance employment agreement (Incorporated by reference
to Exhibit 10.1 to the Registrant's Form 10-Q for fiscal quarter
ended December 31, 2000).
10.15 John W. Peel employment agreement (Incorporated by reference to
Exhibit 10.2 to the Registrant's Form 10-Q for fiscal quarter
ended December 31, 2000).
II-6
10.16 Rory J. Stevens employment agreement (Incorporated by reference
to Exhibit 10.3 to the Registrant's Form 10-Q for fiscal quarter
ended December 31, 2000).
10.17 Tami J. Story employment agreement (Incorporated by reference to
Exhibit 10.4 to the Registrant's Form 10-Q for fiscal quarter
ended December 31, 2000).
10.18 John J. Sciuto employment agreement (Incorporated by reference
to Exhibit 10.18 to the Registrant's Form 10-K for the fiscal
year ended March 31, 2001).
10.19 Letter Agreement between Alpha Venture Capital, Inc. and Earth
Search Sciences, Inc. dated August 24, 2001.
16.1 Letter re change in certifying accountant (Incorporated by
reference to the Registrant's for 8-K filed on May 25, 2001).
21.1.1 List of Subsidiaries (Incorporated by reference to Exhibit
21.1.1 to the Registrant's Form 10-K for fiscal year ended March
31, 2000).
23.1 Consent of Grant Thornton, LLP.
23.2 Consent of Pricewaterhouse Coopers LLP.
23.3 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in
Exhibit 5.1).*
----------------------
* Filed herewith.
II-7
(b) The Registrant filed the Following Reports on Form 8-K
during the quarter ended March 31, 2001:
Date of Report Item Reported
-------------- -------------
May 25, 2001 4
(b) FINANCIAL STATEMENT SCHEDULES
Not Applicable
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section l0(a)(3) of the
Securities Act of l933;
II-8
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of l933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) To provide to the Underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under the Securities
Act of l933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Kalispell, State of Montana, on September 4, 2001.
Earth Search Sciences, Inc.
By: /s/ John W. Peel, III
------------------------------------
John W. Peel, III
Chief Executive Officer and Director
(Principal Executive Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Larry F. Vance his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this registration
statement and any registration statement relating to any offering made pursuant
to this registration statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ Larry F. Vance Chairman and Director September 4, 2001
- --------------------
Larry F. Vance
/s/ Rory J. Stevens Chief Financial Officer September 4, 2001
- -------------------- and Director
Rory J. Stevens
/s/ Tami J. Story Corporate Secretary and September 4, 2001
- -------------------- Treasurer and Director
Tami J. Story
II-10