U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number: 0-6088
Earth Sciences, Inc.
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(Name of small business issuer in its charter)
Colorado 84-0503749
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(State of incorporation) (IRS Employer Identification No.)
910 12th Street, Golden, Colorado 80401
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(Address of principal executive offices, including Zip Code)
(Registrant's telephone number, including area code): (303) 279-7641
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, one cent par value
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Title of class
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ]No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $ 798,000
State the aggregate market value of the voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. As of March 21, 1997 was $21,125,000.
Number of shares outstanding of registrant's Common Stock, one cent par value as
of March 7, 1997 - 8,577,951.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into PART I, Item 2 of
this Form 10-KSB: 1974 through 1979, 1981, 1986 and 1988 Forms 10-K of
Registrant
Transitional Small Business Disclosure Format: Yes No X
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PART I
Item 1. Description of Business
(a) Business Development.
Earth Sciences, Inc. ("ESI" or "Registrant", which term includes its wholly
owned subsidiaries unless otherwise indicated) is a diversified mineral
exploration and development company with planned production of purified
phosphate products in Calgary. ESI was incorporated under the name of Colorado
Central Mines, Inc. in Colorado in 1957. During 1996, ESI (1) continued with
activities leading to production of purified phosphate products at its solvent
extraction facility in Calgary, Alberta, Canada; (2) settled certain
indebtedness with Alberta Treasury and negotiated an option to settle the $9.4
million deferred revenue liability both associated with the Calgary facility;
(3) continued exploration activities for gold resources in Venezuela including
its land contract covering approximately 1200 acres; (4) aquired an interest and
commenced exploration work on the Cerro Gordo gold/silver property in Inyo
County, California, and (5) maintained its position in several mining deposits
and prospects in the Western US including its royalty position in the San Luis
gold mine which completed mining in October 1997 and produced approximately
52,000 ounces of gold in 1996. Thus far in 1997, ESI has signed a letter of
intent to acquire a majority equity interest in ADA Environmental Solutions LLC.
These activities are described in the succeeding paragraphs of this Item 1(a)
and below in Item 1(b).
ESI's solvent extraction facility in Calgary, Alberta, recovered uranium from
phosphoric acid during the period from 1983 through 1987. Uranium oxide
production was suspended in the fall of 1987 when the adjacent fertilizer plant
from which the facility received its feed stock suspended operations. The
contract under which the uranium was sold was modified in 1990 to allow
unrestricted alternative use of the facility. An in-house feasibility study,
completed in 1995, confirmed the technical and financial feasibility of
conversion of the facility for the production of purified phosphate products.
Revamp of the facility to allow such production is currently underway. Start-up
activities are expected to commence in March 1997 with product expected to be
available for sale in May 1997. There can be no assurances that the Company will
be able to maintain the expected schedule.
In November 1996, ESI reached agreements in principal with Yankee Atomic
Electric Company and Vermont Yankee Nuclear Power Corporation (the "Yankee
Companies") to purchase a 270 day option for $100,000 to terminate their
deferred revenue position in the Calgary facility. As of December 31, 1996, the
consolidated financial statements of ESI reported Deferred Revenues of
$9,382,000 which represents prepayments by the Yankee Companies for uranium.
Under the terms of the option, if exercised, ESI would pay the Yankee Companies
$1,150,000 and grant them a 10 year non-cost bearing net profits royalty on
activities at the Calgary facility. Payments to the Yankee Companies would be
capped at a total of $6 million, excluding the $100,000 option payment, and ESI
could purchase the royalty interest for $3 million plus $50,000 per year after
the exercise date to a total of not more than $3,250,000. The definitive
document for this agreement was signed in January 1997.
In December 1996, ESI reached a final settlement with the Alberta Treasury
("AT") concerning certain indebtedness related to the Calgary facility. As of
November 30, 1996, ESI had recorded principal and accrued interest totaling
$600,000 payable to AT. ESI obtained a complete release from the indebtedness
and all claims against the Calgary facility by payment to AT of $76,000.
In July 1996, ESI entered into an agreement with Martin Trost Associates
("MTA"), a Colorado joint venture which will allow it to earn up to an 80
percent working interest in the Cerro Gordo property in Inyo County, California.
The property covers 80 patented and unpatented mining claims. The agreement
provides for ESI to arrange financing of up to $4.2 million to place the "H"
area into production to earn an 80% working interest in the property. Evaluation
of a 4 hole drilling program conducted in December is in progress to determine
further action on the property. See Item 2(f) below.
On November 15, 1996, ESI received notice from Battle Mountain Gold Comapny
("BMGC") that they had completed mining at the San Luis project at the end of
October and that reclamation activities were continuing with an expected
completion date toward the end of March, 1997.
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In March 1997, ESI issued $2,510,000 of 4% convertible debentures (the
"Debentures") for which ESI received net proceeds of approximately $2,309,000.
Interest is payable quarterly. The Debentures are convertible at any time
following 45 days after the issuance thereof and are all automatically
convertible on March 31, 1999. The Debentures are convertible into shares of
common stock based on a 25% discount from the market price of the common stock
at the time of conversion, but not in excess of $3.25 per share. ESI is required
to register the shares underlying the Debentures, and may repurchase the
Debentures at a 25% premium under certain circumstances.
On February 18, 1997, ESI signed a Letter of Intent to acquire a majority equity
position in ADA Environmental Solutions LLC through a combination of stock and
cash. The closing of the acquisition, scheduled for April 30, 1997, is subject
to a number of preconditions, including the negotiation and execution of
definitive documentation.
During 1996, through ESI's Venezuelan company, ESIGEO, formed by ESI in joint
venture with GEO C.A. ("GEO"), ESI continued gold exploration and development
activities in Venezuela. ESI also owns 49% of another company, Minera Antabari
C.A. ("Antabari"), which received a contract on a 1200 acre site on the Guyana
Shield in March 1992. To date, geologic mapping, geochemistry of drainages,
soils and old workings, and detailed trenching and pitting of several
mineralized zones has been performed. ESIGEO is discussing further exploration
work at this contract area with third parties. Three other contracts were filed
for in 1994 and refiled in 1995 with the Venezuelan Ministry of Energy and Mines
("MEM"). ESIGEO is awaiting response from MEM on these filings. ESI reached
agreement in 1996 with certain shareholders in GEO and Antabari to acquire their
holdings in exchange for 20,000 shares of stock. When the transference of shares
is completed in 1997, ESI will have a 67% ownership of GEO, and an effective 83%
ownership of Antabari and ESIGEO. Several other sites with existing MEM
concessions are being evaluated, and ESIGEO is negotiating with the current
concession holders to obtain rights to further explore these areas. In 1997
ESIGEO expects to conduct surface exploration on the concessions, currently
filed for, when they are granted, and other areas, if any, obtained from ongoing
negotiations.
(b) Business of Issuer.
Registrant is a diversified mineral exploration and development company with
planned production of purified phosphate products in Calgary. Registrant owns
the San Luis gold mine; a processing facility in Calgary, Alberta, Canada which
recovered uranium oxide from phosphoric acid and for which the production of
purified phosphate products is being pursued; alunite properties which contain
alumina, sulfur and potash; other domestic properties containing gold, vanadium
and phosphate; and controls prospects containing copper, molybdenum, silver,
lead and zinc.
Registrant through its 49% ownership in Minera Antabari C.A. ("Antabari") and
its 50% ownership in Recursos Minerales ESIGEO C.A. ("ESIGEO") is exploring,
evaluating, acquiring and plans to develop gold resources in Venezuela.
San Luis Gold Mine
As a result of transactions in 1987, ESI (1) sold its working interest in the
San Luis gold mine to BMGC, (2) acquired the underlying property and (3) through
a lease of the property to BMGC, has a 3 1/2% gross royalty on future production
from the mine. Mining and milling activities were completed by BMGC in 1996.
During 1996 approximately 52,400 ounces of gold and 28,000 ounces of silver were
produced by BMGC from the property, as compared to 72,700 ounces of gold and
32,000 ounces of silver in 1995. ESI recognized $692,000 in revenue from that
production in 1996, as compared to $978,000 in 1995. ESI recognized cash flow of
approximately $720,000 from its royalty interest in 1996. ESI does not expect to
recognize any significant royalty revenue from the San Luis mine in 1997 or
thereafter.
Calgary Solvent Extraction Facility
In 1996, ESI continued activities for production of purified phosphate products
at the facility. The planned schedule to restart the facility in Calgary,
Alberta to produce purified phosphoric acid (PPA) and by-products targets
production commencing in May 1997 assuming the planned construction and start-up
schedule can be maintained. Earth Sciences Extraction Company ("ESEC"), a
wholly-owned Canadian limited partnership of ESI, intends to produce PPA at its
solvent extraction facility in Calgary, Alberta. The facility, with
modification, is expected to have the capacity to produce in excess of 80,000
tons of P2O5 per year in the form of PPA and recover other valuable constituents
available in the feedstock.
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ESEC's Facility The phosphoric acid treatment facility has been maintained on a
standby basis since its uranium recovery operations were suspended in 1987 when
the adjacent fertilizer plant, which had supplied feedstock, suspended
operations. Certain contractual restraints and lower uranium prices have made
the stand-alone recovery of uranium from other feedstock sources uneconomic.
ESEC is modifying the facility to purify superphosphoric acid ("SPA") to a
technical grade PPA and manufacture by-products. The SPA feedstock is to be
purchased from producers in Idaho and Florida for which supply contracts with
Agrium Inc. and Farmland Industries, Inc. have been negotiated. In the future,
it is anticipated that phosphate rock from an open pit deposit owned by ESI may
be processed under a tolling arrangement to provide feedstock for the Calgary
plant. (See Item 2(a) below).
Market for Purified Phosphoric Acid
Phosphorus in the form of purified phosphoric acid, H3PO4 (PPA), is a basic
commercial chemical essential to a broad variety of industrial and consumer
applications. At present ESEC would compete with four North American PPA
producers in the 700,000 ton P2O5 industrial market where 200,000 tons P2O5 of
direct consumption PPA is sold. ESEC would be the sole producer in Canada, and
would be the only producer in western North America. ESEC's targeted market
segments include those where growth is 10% or more per year, where the
predominate users are in ESEC's freight advantage area, and the large
Minneapolis/Chicago area market. In the first year of production ESEC expects to
capture approximately 5% of the North American PPA market by matching other
producers' quality but with lower prices. It is anticipated that cost advantages
would be realized from the use of less expensive purification through solvent
extraction and lower freight costs. It is anticipated that by-products would be
sold in local markets, which ESEC believes are large enough to absorb the volume
without being disrupted. There can be no assurances that actual sales recognized
by ESEC will equal the anticipated volumes.
Solvent Extraction Process
It is anticipated that the facility will produce PPA using an environmentally
clean solvent extraction process employing tributyl phosphate with a kerosene
diluent. The basic process is well established in the industry and believed by
ESEC to be free of patent conflicts. The ESEC process has been verified for
anticipated ESEC feedstocks by numerous laboratory bench tests and continuous
recycle pilot plant runs. The studies show that a competitive PPA can be
produced from any fertilizer grade phosphoric acid feedstock with extraction
efficiencies of 70 to 90%. The remaining material will be sold in local market
for its contained phosphate values. ESEC believes that no significant waste will
be generated at the ESEC facility.
Production Plan and Operating Costs
ESEC intends to start production in 1997 at the rate of 10,000 tons P2O5 per
year of technical grade PPA, carrying 54.4% P2O5, or 18,400 tons of product
acid. Associated with the PPA will be the production of 2,800 tons of P2O5
contained in other material. An 8% per year growth is anticipated in tonnage
sales.
Future Potential
The upside potential of the ESEC facility in Calgary is substantial. Management
believes relatively minor changes would have to be made to increase the output
from 10,000 tons to 80,000 tons P2O5 per year. In addition, the raffinate
contains a large number of valuable elements in high concentrations, including
uranium, vanadium, yttrium, scandium and the rare earths. The technology for
recovery of these elements is available. The plant has a good deal of additional
equipment including a second solvent extraction circuit that could possibly be
utilized for that purpose. ESEC intends to pursue these recovery opportunities
in earnest after the commencement of PPA production.
Venezuelan Gold Activities
ESI's Venezuelan joint venture with GEO commenced initial exploration activities
in the fall of 1988.
In order to facilitate the development of the Company's various expected land
concessions in Venezuela, the Venezuelan corporate structure was reorganized in
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1994 by forming a holding company called Recursos Minerales ESIGEO C.A.
("ESIGEO") that is controlled equally by ESI and its Venezuelan partners, GEO
C.A. ("GEO"). It is anticipated that each new land concession will be placed in
a separate entity, owned and controlled by ESIGEO. ESI reached agreement in 1996
with certain shareholders in GEO and Antabari to acquire their holdings in
exchange for 20,000 shares of stock. When the transference of shares is
completed in 1997, ESI will have a 67% ownership of GEO, and an effective 83%
ownership of Antabari and ESIGEO. The joint company will continue in the manner
in which ESI has conducted exploration for thirty years. That is to define and
acquire land positions in key areas that have a high probability of being within
the heart of future mining districts. After minimal work to define mineral
potential, these prospects are then sold to major mining companies for a cash
payment and a royalty on future production. To facilitate this approach, each
land concession is to be held in a separate company, wholly-owned by ESIGEO,
which can be sold without additional regulatory review and delay. The goal of
ESIGEO in Venezuela is to enter into several such agreements with major gold
producers within the next several years.
The decree which empowered the Corporacion Venezolana de Guyana ("CVG") to issue
land contracts in the Guyana Shield has been determined to be illegal by the
Venezuelan courts. The Ministry of Energy and Mines ("MEM") is expected to issue
concessions to replace the over 450 existing CVG contracts after a study
commissioned to evaluate the existing contracts' status is complete and final
legislative action annuls the rights granted CVG. The SAMI land contract is
included in this category and it is anticipated that its terms will improve as
the new concession terms will be more favorable. The three applications for new
land contracts discussed below are included with some 300 other unacted-upon
requests that have accumulated with CVG since March 1994, when CVG stopped
signing contracts. New applications to MEM have been made for these three areas
and assurances have been obtained that they will receive priority when they are
ultimately considered. Due to political complexities of coordinating land use
between MEM and designated regions and states, it is uncertain when these new
applications will be acted upon.
SAMI Area Contract
In 1991, ESI and GEO formed Antabari, a Venezuelan company of which ESI owns
49%. In November 1991, Antabari filed for a contract with CVG for 488 hectares
to be explored and exploited for gold. The area, called SAMI for San Miguel, is
located southeast of the town of Upata, Bolivar state, Venezuela in the open
country of the savannas, and is readily accessible from established roads. The
contract, which was issued in March 1992, provides a two year period for
exploration work and to prepare a plan for exploitation. An extension has been
granted to complete further exploration work. The contract requires certain
financial guarantees with regard to exploration and reclamation, and requires
that the area be reduced by one-half at the end of the exploration period.
Antabari has performed geologic mapping, geochemistry of drainages, soils and
old workings, and trenching of several mineralized zones. One such zone has a
continuity of over 600 feet with a width of 40 feet and has yielded values of up
to 1.6 ounces per ton of gold. Additional sampling and analysis from extensive
pitting show a large (8 acre) anomalous gold area, clearly open to the north and
east. Drilling and further sampling will be necessary to determine the potential
of the area. ESIGEO is evaluating this next phase and/or a sale to third parties
at this time.
New Filings
In 1994, formal applications were made to CVG, which in 1995 have been renewed
in applications to MEM, to acquire exclusive mineral exploration rights on three
new land areas located in the Bolivar state in southeastern Venezuela. ESI has
been advised that ESIGEO's filings establish priority for the areas sought. The
Company is very optimistic about the potential these areas hold for further gold
exploration and exploitation. The areas were first identified as potential
targets through regional geochemistry that defined anomalous occurrences of gold
and associated minerals, and legends of past production by primitive methods
which have historically been key to exploration in remote areas. Queries of
natives and sampling of stream sediments has allowed selection of the best
targets from a 130 square km area that was investigated.
Apicharai
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The first concession area covering 500 hectares (approx. 1200 acres), is known
as Apicharai, located about 165 km from the town of La Paragua. This small
tributary to the Antabari river has a history of panning and small scale
hydraulic mining. Apicharai has an abundance of thick quartz veins in the
drainage and gold is commonly visible. The mineralization of Apicharai is
typically associated with the quartz veining in acidic pyroclastics. One 80
meter zone on the river is panned every year by the natives after the rainy
season. The gold particles commonly run 0.5mm and angular quartz is dominate in
the creek sediments. As a result of the stream sediment sampling, an area has
been selected for further work where the source of the gold mineralization is
likely to be located.
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Man-cai
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The second concession area, known as Man-cai, covers 500 hectares, is located in
a remote area near the Brazilian border accessible by boat from the La Paragua
river. Reports are that 100 kilos of gold were taken by primitive methods from
an area of only a few hectares. Sampling and estimates of alluvial-colluvial
material show that there is another 50-100 kilos available in a very small area.
It is believed that this gold can be easily recovered with portable equipment.
The source rock may hold significant potential and will be targeted early on in
the further exploration program. Considerable pyrite exists in the volcanic host
rock and upstream, out of the rhyolite, gold is at background levels, helping to
define the source material. The existence of easily obtainable gold in the
surface material and the boundary definition of the source rock make this an
excellent target for significant gold mineralization.
Manaima
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The third concession area, known as Manaima, also covers 500 hectares and is
located 50 Km from the town of La Paragua. This is an area rich in history of
small primitive mining operations. The hydrothermal mineralization on the
property is associated with a fault zone where gold is typically found with
copper and manganese.
Specific work programs are being formalized for initial detailed exploration of
the above mentioned areas. The plans provide for the building of an airstrip to
facilitate access and transportation of equipment into Apicharai, Man-cai and
other prospects. Access is now being accomplished via river routes.
The primary objectives of the 1997 plans are to determine as quickly as possible
the nature and extent of gold mineralization on the anticipated new land
concessions and to continue to define those additional areas where future
filings will be made. Activities will include surface geochemistry, geologic
mapping and trenching.
ADA Environmental Solutions
On February 18, 1997, ESI signed a Letter of Intent to acquire a majority equity
position in ADA Environmental Solutions LLC ("ADA") through a combination of
stock and cash. The acquisition was prompted by synergism involving products to
be produced by the solvent extraction facility in Calgary. These products will
be utilized by ADA in a new proprietary technology designed to reduce
particulate emissions from plants burning low-sulfur coal. It is expected that
the 1990 Clean Air Act Amendments will result in 600 to 800 coal-fired boilers
switching to low-sulfur coal by the year 2000. ADA anticipates capturing a
significant portion of this market with its proprietary non-toxic chemical
conditioner which offers both technical and economic advantages over the
hazardous chemicals currently being used. The closing of the acquisition,
scheduled for April 30, 1997, is subject to a number of preconditions, including
the negotiation and execution of definitive documentation.
The Letter of Intent provided for (i) an immediate cash payment of $400,000 for
a 4.8% equity interest, (ii) a combination of $500,000 in cash and $1.6 million
in notes to be paid at the scheduled closing, for the acquisition of an
additional 46.2% interest in ADA, and (iii) an option to acquire the remaining
equity interests (49%) in ADA during the six months following May 1, 1998 for
issuance of stock valued at approximately $5.8 million. In addition, the
principals of ADA will have an option to require ESI to sell its 51% interest in
ADA for the price paid by ESI plus interest in the event ESI does not exercise
its option.
Mineral Properties and Other Business Matters
During 1996 Registrant maintained its ownership position in the several mineral
interests it holds. The mineral interests maintained by Registrant include
significant resource interests in alumina, gold, vanadium, potash and sulfur,
and prospects for copper/molybdenum and silver (see Item 2 below). Raw
materials, as the term is generally used, are not essential to Registrant's
mineral acquisition and development activities performed for its own account.
However, Registrant's commercialization of its properties is dependent upon
securing adequate supplies of energy and water. The planned production of PPA at
the Calgary facility will require adequate supplies of SPA feedstock. Adequate
supplies of this material are currently available in the required quantities and
at reasonable prices. There can be no assurance that such availability will
continue in the future.
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Registrant holds no patents, licenses, franchises or land contract which it
considers material in light of its other assets. However, Registrant holds for
itself, and in association with others, Federal Potassium Prospecting Permits,
State Potash and Alunite Leases, Federal Potassium Preference Right Leases and
Applications, Federal Phosphate Prospecting Permits, Federal Phosphate Leases,
State Phosphate Leases, fee mineral rights and other exploration and mineral
interests which are the basis for Registrant to explore and develop the
properties subject thereto. In certain instances such mineral interests give
preferential leasing rights to Registrant upon location and demonstration to the
US Geological Survey Conservation Division that the deposit is a "valuable,
workable deposit in commercial quantities".
Registrant also holds certain of its mineral properties by means of "unpatented"
lode and placer mining claim locations. Unpatented mining claims require
compliance with certain Federal and State laws in order to maintain mineral
interests thereon. Legislation enacted in October 1992 requires a $100 per claim
rental charge on all unpatented mining claims.
Numerous and in some regards conflicting bills have been introduced and are now
pending in the US Congress which would supplant or radically alter the
provisions of the US Mining Law of 1872, under which npatented mining claims are
located. If enacted, such legislation could substantially increase the cost of
holding unpatented mining claims and could impair the ability of companies to
develop mineral resources on unpatented mining claims. Under the terms of these
bills, the ability of companies to obtain patents on unpatented mining claims
would be nullified or substantially impaired, and most contain provisions for
the payment of royalties to the federal government in respect of production from
unpatented mining claims, which could adversely affect the potential for
unpatented mining claims. Registrant's financial performance could therefore be
affected adversely by passage of such legislation. Pending possible reform of
the Mining Law of 1872, Congress has put in place a moratorium which prohibits
acceptance or processing of most mineral patent applications. It is not possible
to predict whether any change in the Mining Law of 1872 will, in fact, be
enacted or, if enacted, the form the changes may take.
The activities of Registrant performed for its own account are not seasonal,
although winter weather may limit certain activities.
Registrant's mineral exploration and property acquisition activities are not
dependent upon one or a few major customers. The search for and
commercialization of economic mineral deposits is highly competitive. Large
companies having greater financial resources than Registrant and many small
mining companies are active in acquiring, evaluating and developing mineral
resource prospects in the western United States and Venezuela.
Registrant spent approximately $109,000 and $183,000 on research and development
activities related to the Calgary extraction facility during 1996 and 1995,
respectively.
Registrant is subject to regulation by various local, state and Federal agencies
with regard to the environmental effects of its business. Although environmental
regulatory costs to date and those expected in 1997 are not significant, they
may become substantial in the future. Such costs are considered a part of the
ordinary costs of Registrant's business.
As of December 31, 1996 Registrant employed 5 personnel at its Golden, Colorado,
offices and 14 fulltime at the Calgary facility. In addition, other personnel
were employed on a contract basis for specific project tasks.
Item 2. Description of Property. 1
Registrant owns, controls and participates with others in mineral property
interests and mineral property exploration and development programs in
California, Colorado, Idaho, Montana, Nevada, Utah, and Venezuela. The following
property descriptions contain deposit references according to the indicated
definitions, although it has not been proven that any of these deposits, except
the San Luis gold mine, are commercially viable. In-house studies for several of
the undeveloped properties indicate technical and economic feasibility. The
following is summary information regarding Registrant's principal properties.
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(a) Vanadium/Phosphate Property near Paris and Bloomington, Idaho
See Item 3(f), 1975-1977 Forms 10-K for the property acquisition, property
rights, property description and exploration program prior to 1979. See Item
1(c) 1981 Form 10-K concerning Registrant's sale and option of its interests on
the properties in January, 1981. Registrant reacquired all of the interests in
the properties from the Conda Partnership in 1992.
To date, drill testing on the southern portion of the deposit show tonnage of
approximately 34 million tons of phosphate rock classified as Measured Reserves,
with an additional 19 million tons of phosphate rock classified as Indicated
Reserves. The grade of the upper bed material of the block is calculated to be
25% P2O5 over a thickness of 9 feet and the grade of the lower (main) bed
material is calculated to be 30% P2O5 over a 6 foot thickness.
Metallurgical test work on the vanadium bed has resulted in a patent being
issued to Registrant regarding the extraction techniques which were developed as
a result of such work. Economic feasibility calculations show that production of
vanadium from the property is commercially feasible. Registrant is investigating
plans for development of the property, however there can be no assurance that
marketing and financing arrangements can be obtained. In 1993, Registrant
negotiated an arrangement with a third party to allow a minor amount of
phosphate ore to be removed from the outcrop on a portion of one of its
properties held in fee interest. That party obtained permits in 1994 to mine
3,000 tons from the property but no mining has yet taken place. This deposit may
provide a source for the intended purified phosphoric acid production at the
Calgary facility (See Item 1(a) above).
(b) San Luis Gold Mine.
See Item 3(h) 1975 Form 10-K for a description of the property.
See Item 1(c)(1) 1988 Form 10-K and above concerning Registrant's sale to BMGC,
other related transactions in 1987 and BMGC development work. Registrant owns
the 800 acre site on which the mine is located, has leased the property to BMGC,
and received a 3 1/2% gross royalty from all production. Mining and milling
activities were completed by BMGC in 1996 and Registrant does not expect any
significant revenue in 1997 or thereafter. BMGC commenced mining operations in
early 1991.
Production during the period from 1991 through 1996 was as follows:
Year Ounces of Gold Ounces of Silver
1991 31,500 21,600
1992 55,600 21,000
1993 72,800 27,000
1994 72,700 19,400
1995 72,700 31,800
1996 52,400 28,000
(c) Alunite Resources. 2
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1 For purposes of this Item, the term "Measured Reserves" and "Indicated
Reserves" shall have the meaning as adopted by the US Geological Survey and the
US Bureau of Mines, as follows: Measured Reserves are reserves for which tonnage
is computed from dimensions revealed in outcrops, trenches, workings and drill
holes, and for which the grade is computed from results of detailed sampling.
The sites for inspection, sampling and measurement are so closely spaced, and
the geologic character is defined so well, that the size, shape, and mineral
content are well established. The computed tonnage and grade are judged to be
accurate within limits which are stated, and no such limit is judged to differ
from the computed tonnage or grade by more than 20%. Indicated Reserves are
reserves from which the tonnage and grade are computed partly from specific
measurements, samples, or production data, and partly from projections, for a
reasonable distance, on geologic evidence. The sites available for inspection,
measurement, and sampling are too widely or otherwise inappropriately spaced to
outline the reserve completely or to establish its grade throughout.
2 Acquisition of Federal alunite mineral rights is accomplished through Federal
Potassium Preference Right Leases issued under Section 4 of the Leasing Act of
February 7, 1927.
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Alunite is a source of alumina (the raw material of aluminum), potassium sulfate
fertilizer, sulfuric acid and sulfur.
(1) "LC" Alunite Property.
See Item 3(b)(1), 1974 and 1975 Forms 10-K and Item 3(h), 1976 and 1977 Forms
10-K for property description, property rights and exploration work in prior
years. Results of exploration work to date show a total of 61.1 million tons of
material classified as Measured or Indicated Reserves. The grade of the material
is calculated to average approximately 39.6% alunite (approximately 14.7%
alumina).
In 1978, Registrant applied for a Preference Right Lease for potassium on the
property (a "PRLA"), in 1979 submitted the "initial showing" required in the
lease application and in 1982 submitted the operating plan for an environmental
impact assessment. Approval of the project was recommended by a Bureau of Land
Management advisory panel. However, in 1985 a Congressional resolution suspended
all Preference Right Lease activity in Wilderness Study Areas. Until further
Congressional action is taken, progress on the project will be restricted. In
1991, Registrant received notice from the Department of Interior that the Bureau
of Land Management considers the PRLA as a valid existing right with respect to
any future wilderness designation. Registrant relinquished its 48 unpatented
mining claims covering the alunite property in 1993.
(2)"NG" Property and Other Utah Alunite Interests.
See Item 3(a)(1), (2), (3), (4) and (5), 1974-1979 Forms 10-K for NG Property
and other Utah alunite interest descriptions, property rights and exploration
programs prior to 1978. ESI was granted Preference Right leases on the ten
principal tracts that comprise the NG deposit on January 13, 1983. The leases
were assigned to the Alumet Partnership effective February 1, 1983. Alumet
assigned its Utah alunite interests back to ESI in December, 1986 (See item
1(c)(1) 1986 Form 10-K). ESI relinquished a portion of the leases, reducing the
acreage under lease to 680 acres. All required lease payments were made in 1996.
Results of exploration and drilling programs on the properties to date show 129
million tons of material classified as Measured Reserves, with a grade
calculated to be 37.9% alunite (approximately 14.03% alumina) with an additional
287 million tons classified as Indicated Reserves with average grades calculated
to range from 33.5% to 39.4% alunite (approximately 12.4% to 14.6% alumina).
(d) Calgary Solvent Extraction Facility.
Registrant owns a hydrometallurgical solvent extraction facility which was used
to extract uranium from phosphoric acid from June 1983 through September 1987,
when the adjacent phosphoric acid fertilizer plant supplying feed stock shut
down. (See Item 1(a) and 1(b) above). The facility occupies a 20,000 square foot
building and is located in southeast Calgary, Alberta on a 12 acre site leased
from the adjacent fertilizer plant.
(e) Emigrant Property.
In 1987 Registrant acquired fee ownership of two patented lode mining claims in
the Emigrant Peak area, Park County, Montana containing approximately 38 acres.
Registrant also owns two other patented placer claims containing 37 acres and
holds 13 unpatented mining claims in the same area. This block of contiguous
mining claims contains copper, molybdenum, gold, silver, lead and zinc
mineralization which has not yet been fully delineated. All necessary payments
were made to hold the unpatented claims in 1996.
During 1992, a third party conducted limited geochemical sampling, geological
mapping and a remote sensing study using Landsat Thematic Mapper data and image
enhancements. One core hole was subsequently drilled to a depth of 588 feet. In
1993, an additional four reverse circulation holes were drilled on the property
totaling 950 feet. Analysis of samples from the drilling helped to define the
southwest boundaries of a breccia pipe containing gold, silver, copper, zinc and
lead mineralization. Based on the drilling performed a deposit of from 750,000
to 1.5 million tons of material classified as Measured and Indicated Reserves
can be delineated with current metal values of over $15 per ton.
(f) Cerro Gordo Property.
In July 1996, Registrant entered into an agreement with Martin Trost Associates
("MTA"), a Colorado joint venture which will allow it to earn up to an 80
percent working interest in the Cerro Gordo property in Inyo County, California.
8
<PAGE>
The agreement provides for Registrant to arrange financing of up to $4.2 million
to place the "H" area into production to earn an 80% working interest in the
property. MTA acquired a mineral lease in August 1995 on 75 unpatented and 5
patented claims. Terms of the lease are a 5% net smelter royalty and annual
payments averaging $36,000 per year. Two patented claims lie within the claim
block and are currently held by third parties.
The Cerro Gordo property lies in the Inyo Mountains east of Owens Lake and west
of Death Valley at an elevation of approximately 7800 feet. Access is by an
existing, county maintained, gravel road. Temperatures are moderate with limited
snowfall during the months of January and February. The property is
approximately equidistant from Reno and Las Vegas, Nevada and Los Angles,
California.
Based on 36,000 feet of past drilling and old underground workings, gold/silver
mineralization has been demonstrated along a NW-SE mineralized trend stretching
8,000 feet long and 5,600 feet wide. The mineralized area appears zoned with a
lead/zinc/silver/tungsten core trending outward to the west to a gold/silver
zone. The large areal extent of the gold/silver mineralization may lend itself
to the discovery of a significant gold mine. Evaluation of a 4 hole drilling
program conducted in December is in progress to determine further action on the
property.
Item 3. Legal Proceedings.
In June 1993, a lawsuit was filed in the United States District Court for the
Northern District of California against ESI Chemical, Inc. (ESIC), a dormant
subsidiary of Registrant, by Volvo GM Heavy Truck Corporation. The claim
concerns contamination at a property in Oakland, California previously owned by
a predecessor of ESIC. HM Holdings, Inc. is also a defendant in the action. The
complaint seeks recovery of response costs, damages, and injunctive and
regulatory relief. A court ordered mediation took place in January, 1997 which
led to a settlement in principle involving all the parties. Drafts of the
settlement agreements are in process of being prepared, and if the final
settlement is executed with the terms and conditions contained in the agreement
in principle, it will not have a material effect on the Registrant.
See also note 8 to the consolidated financial statements submitted in response
to Item 7 below concerning legal proceedings of Registrant.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Market Information.
Registrant's common stock trades on The NASDAQ Small-Cap
Market under the symbol ESCI.
Price Ranges (closing high and low bids)
1996 1995
1st Quarter $ 1.63 - 2.56 $ 1.06 - 1.69
2nd Quarter 1.63 - 4.31 1.00 - 1.38
3rd Quarter 1.50 - 3.75 1.00 - 2.25
4th Quarter 1.75 - 3.88 1.25 - 2.63
The price ranges shown are based on NASDAQ quotations as reported by the
National Association of Securities Dealers, Inc. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
(b) Holders.
The number of record holders of common stock, one cent par value of Registrant
as of March 15, 1997 was approximately 1,870, which number excludes "street
name" holders.
(c) Dividends.
Registrant has not paid dividends since its inception and there are no plans for
paying dividends in the foreseeable future.
9
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Annual Report may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933. Such forward-looking statements may
be found in this section under and under "Description of Business," "Management'
Discussion and Analysis of Financial of Financial Condition and Results of
Operations." Actual events or results could differ materially from those
discussed in the forward-looking statements as a result of various factors.
Liquidity and Capital Resources
Management believes that existing working capital and recent private placements
of stock and convertible debentures are sufficient to fund revamp construction
and start up activities at Calgary and planned operations until positive casflow
is achieved in Calgary, which is anticipated in the 4th quarter of 1997. The
achievement of such positive cash flow is dependent upon several factors
including commercialization of the purification process, success in marketing
product and competition, any of which could delay or frustrate such achievement.
Additional funds may be required to meet the further obligations associated with
the ADA acquisition, exercise of the Yankee Option, further exploration work on
the Cerro Gordo property, and any expanded exploration activities in Venezuela
(see Item 1(b) above). Private placements of common stock, convertible
debentures and bank borrowings may be evaluated to fund such requirements.
Registrant received a net of $1,954,000 from Regulation S offerings and private
placements of its common stock in 1996 and a net of $2,309,000 from the issuance
of convertible debentures in the first quarter of 1997 (see Item 1(a) above).
Based on current estimates, the Calgary facility will require an additional
approximately Can. $3 million to finalize revamp construction and re-start the
plant for the production of purified phosphate products, planned for Spring
1997. Registrant expects to finance those requirements from existing working
capital and the convertible debentures sold in March 1997.
Registrant is funding the majority of cash costs of the Venezuelan gold
exploration activities. Activities planned on the existing contract and on those
concessions expected to be acquired in the future can be met through existing
working capital. Registrant plans to raise the additional capital, if and when
needed, through further private placements of stock, convertible debentures
and/or joint venture arrangements, if appropriate.
Cash flow provided by (used in) operations totaled $(233,000) for 1996 versus
$336,000 for 1995. Cash flow from investing activities for 1996 included funding
and collections on notes receivable of $70,000, capital expenditures of $736,000
and the net purchase of marketable securities $660,000. Cash flow from financing
activities in 1996 consisted of payments on notes payable and long-term debt of
$9,000, proceeds from the issuance of stock of $1,055,000 and proceeds from
convertible debentures of $899,000.
Results of Operations
In 1991, royalty income from the San Luis gold mine commenced. Registrant
recognized $692,000 and $978,000 in revenue from the production and sale of gold
and silver from the property in 1996 and 1995, respectively. Production from the
mine ended in November 1996.
Operating expenses increased significantly in 1996 as staff and activities
related to the Calgary facility expanded, whereas research and development work
related to the Calgary facility decreased from $183,000 in 1995 to $109,000 in
1996. General and administrative expenses rose significantly in 1996 also as a
result of adding staff in Calgary for construction and start-up activities and
an aggressive investor relations program that commenced in 1996.
Registrant's interest expense totaled approximately $82,000 for both 1996 and
1995. Interest expense includes approximately $40,000 in 1996 and $45,000 in
1995 from the consolidation of the Canadian subsidiary's results. Based on a
recently adopted new position of the SEC staff, Registrant may be required to
recognize as much as $837,000 in interest expense in the 1st and 2nd quarters of
1997 as a result of the convertible debentures issued in March 1997.
Extraordinary gain from debt extinquishment recognized in 1996 represents the
difference between the recorded liabilities at the time of settlement with
Alberta Treasury of approximately $600,000 and the settlement payment of
$76,000, net of income taxes of $159,000.
10
<PAGE>
Item 7. Financial Statements.
Index to Financial Statements
Independent Auditor's Report
Financial Statements:
Earth Sciences, Inc. and Subsidiaries
Consolidated Balance Sheet, December 31, 1996
Consolidated Statements of Operations,
For the Years Ended December 31, 1996 an 1995
Consolidated Statement of Stockholders' Equity,
For the Period from January 1, 1995 to December 31, 1996
Consolidated Statements of Cash Flows,
For the Years Ended December 31, 1996 and 1995
Notes to Consolidated Financial Statements
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
(Balance of this page intentionally blank)
11
<PAGE>
Earth Sciences, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 1996 and 1995
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report........................................... F-2
Consolidated Balance Sheet - December 31, 1996......................... F-3
Consolidated Statements of Operations -
For the Years Ended December 31, 1996 and 1995....................... F-4
Consolidated Statements of Changes in Stockholders' Equity -
For the Years Ended December 31, 1996 and 1995....................... F-5
Consolidated Statements of Cash Flows - For the
Years Ended December 31, 1996 and 1995............................... F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Earth Sciences, Inc. and subsidiaries
Golden, Colorado
We have audited the accompanying consolidated balance sheet of Earth Sciences,
Inc. and subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended December 31, 1996 and 1995. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Earth Sciences, Inc.
and subsidiaries as of December 31, 1996, and the results of their operations
and their cash flows for the years ended December 31, 1996 and 1995, in
conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
February 3, 1997
F-2
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 586,000
Marketable securities 1,135,000
Receivables 101,000
Prepaid expenses and other 217,000
------------
Total current assets 2,039,000
PROPERTY, PLANT AND EQUIPMENT, at cost 17,198,000
Less accumulated depreciation and amortization (5,043,000)
------------
Net property, plant and equipment 12,155,000
------------
OTHER ASSETS 207,000
------------
TOTAL ASSETS $ 14,401,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 151,000
Note payable - related party 58,000
Other current liabilities 69,000
------------
Total current liabilities 278,000
LONG-TERM LIABILITIES:
Deferred revenues 9,382,000
Long-term debt from related parties 167,000
Accrued decommissioning liability 220,000
Other liabilities 174,000
-----------
9,943,000
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 7, and 8) --
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 25,000,000
shares authorized;
8,449,000 shares issued 84,000
Additional paid-in capital 8,645,000
Accumulated deficit (2,721,000)
Cumulative translation adjustments (1,828,000)
------------
Total stockholders' equity 4,180,000
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,401,000
============
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
EARTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Royalty income $ 692,000 $ 978,000
Rental income 19,000 18,000
Other income 87,000 47,000
----------- -----------
Total revenues 798,000 1,043,000
EXPENSES:
Operating 505,000 146,000
General and administrative 380,000 260,000
Research and development 109,000 183,000
Depletion, depreciation and amortization 260,000 234,000
Interest 82,000 82,000
----------- -----------
Total expenses 1,336,000 905,000
----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND TAXES (538,000) 138,000
INCOME TAX BENEFIT 159,000 --
----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN (379,000) 138,000
----------- -----------
EXTRAORDINARY GAIN FROM DEBT EXTINGUISHMENT,
(net of income tax of $159,000) $ 371,000 --
----------- -----------
NET INCOME (LOSS) $ (8,000) $ 138,000
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Before extraordinary item $ (.05) $ .02
Extraordinary Gain .05 --
----------- -----------
Net Income (Loss) Per Common Share $ -- $ .02
=========== -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,186,000 6,382,000
=========== ==========
See accompanying notes to these consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EARTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
COMMON STOCK Additional Cumulative
------------------------- Paid-in Accumulated Translation
Shares Amount Capital Deficit Adjustments
------ ------ ------- ------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1994 6,354,000 $ 64,000 $ 6,390,000 $(2,851,000) $(2,056,000)
Net income -- -- -- 138,000 --
Foreign currency translation -- --
adjustment -- -- -- -- 261,000
----------- ----------- ----------- ----------- -----------
BALANCES, December 31, 1995 6,354,000 64,000 6,390,000 (2,713,000) (1,795,000)
Debt converted to common stock 883,000 8,000 891,000 -- --
Related party debt converted to common
stock 210,000 2,000 111,000 -- --
Stock issued for cash, net of related costs 899,000 9,000 1,046,000 -- --
Stock issued for services 100,000 1,000 135,000 -- --
Stock options issued for services -- -- 64,000 -- --
Stock issued to employees for bonuses 3,000 -- 8,000 -- --
Net loss -- -- -- (8,000) --
Foreign Currency translation adjustment -- -- -- -- (33,000)
----------- ----------- ----------- ----------- -----------
BALANCES, December 31, 1996 8,449,000 $ 84,000 $ 8,645,000 $(2,721,000) $(1,828,000)
=========== =========== =========== =========== ===========
See accompanying notes to these consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EARTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1996 1995
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (8,000) $ 138,000
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depletion, depreciation and amortization 260,000 234,000
Gain on settlement of debt, net of income taxes (371,000) --
Income tax benefit (159,000)
Expenses paid with stock 208,000 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables 116,000 (85,000)
Other assets (387,000) (13,000)
Increase (decrease) in:
Accounts payable 145,000 6,000
Other liabilities (37,000) 56,000
----------- -----------
Net cash provided by (used in) operating activities (233,000) 336,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections on notes receivable 70,000 130,000
Notes receivable funded (70,000) (130,000)
Capital expenditures (736,000) (25,000)
Purchase of marketable securities (3,084,000) (190,000)
Sale of marketable securities 2,424,000 --
----------- -----------
Net cash used in investing activities (1,396,000) (215,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable and long-term debt (9,000) (181,000)
Proceeds from issuance of common stock 1,055,000 --
Proceeds from convertible debentures 899,000 --
----------- -----------
Net cash provided by (used in) financing activities 1,945,000 (181,000)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 8,000 (1,000)
----------- -----------
INCREASE (DECREASE) IN CASH 324,000 (61,000)
CASH AND CASH EQUIVALENTS, beginning of year 262,000 323,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 586,000 $ 262,000
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash payments for interest $ 40,000 $ 37,000
=========== ===========
Conversion of notes payable $ 1,012,000 $ -
=========== ===========
Stock and options issued for investor relations $ 200,000 $ -
=========== ===========
Purchase of property and equipment for debt $ 125,000 $ -
=========== ===========
Stock issued for payment of employee bonuses $ 8,000 $ -
=========== ===========
See accompanying notes to these consolidated financial statements
F-6
</TABLE>
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------------------------------------------
Nature of Operations - The accompanying consolidated financial statements
include the accounts of Earth Sciences, Inc. (ESI) and its wholly-owned
subsidiaries, ESI Chemicals, Inc. (ESIC) and ESI Resources Limited (ESIR).
ESIC has been a dormant subsidiary since 1983. ESIR's only asset is its
investment in its wholly-owned subsidiary, Earth Sciences Extraction
Company (ESEC). All significant intercompany transactions have been
eliminated. Collectively, these entities are referred to as the Company.
The Company is principally engaged in natural resources exploration,
research and development and planned production in the second quarter of
1997 of purified phosphate products in Calgary, Alberta.
Cash Equivalents - For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents. At December 31, 1996, cash
equivalents consisted of money market instruments in the amount of
$520,000, which are not FDIC insured.
Marketable Securities - Marketable securities consist of government backed
debt securities, corporate stock and bonds and certificates of deposits,
which mature within one year or less. The securities are classified as
trading securities, as defined in Financial Accounting Standards (FAS) 115,
and are stated at market, which approximates cost at December 31, 1996.
Property, Plant and Equipment - Property, plant and equipment is stated at
cost and includes a solvent extraction facility. Depreciation on the
facility and its equipment, while it was in production, was generally
provided using the units of production method based on estimated production
over the life of the contract. Depreciation on the solvent extraction
facility while not in operation is being computed at 1% per year (see Note
2). Depreciation on other assets is provided using the straight-line method
based on estimated useful lives ranging from 3 to 20 years. Depletion of
producing mineral properties is computed using the unit of production
method based on proved reserves. Maintenance and repairs are charged to
operations as incurred. When assets are retired, or otherwise disposed of,
the property accounts are relieved of costs and accumulated depreciation
and any resulting gain or loss is credited or charged to income.
Deferred Exploration and Development Costs - Land and mineral properties,
including related deferred exploration and development costs, are carried
at cost.
The Company follows the policy of capitalizing all direct costs, including
labor, related to the exploration and development of properties held or
controlled by the Company, which, in the opinion of management, have a
continuing value.
Impairment of Long-Lived Assets - In fiscal 1996, the Company adopted FAS
121 "Impairment of Long- Lived Assets." In the event that facts and
circumstances indicate that the cost of assets or other assets may be
impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount
F-7
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to determine if a write-down to market value or discounted cash flow value
is required. Adoption of FAS 121 had no effect on the December 31, 1996
financial statements.
Deferred Revenues - Deferred revenues represent non-interest bearing
prepayments from Vermont Yankee Nuclear Power Corp. and Yankee Atomic
Electric Company (the Yankee Companies) for future production and delivery
of uranium (see Note 2).
Income Taxes - The Company accounts for income taxes under the liability
method of SFAS No. 109, whereby current and deferred tax assets and
liabilities are determined based on tax rates and laws enacted as of the
balance sheet date. Deferred tax expense represents the change in the
deferred tax asset/liability balance.
Foreign Currency Translation - The accounts of ESEC are maintained in
Canadian dollars, its functional currency. Assets and liabilities are
translated into U.S. dollars at the current exchange rate, and earnings or
losses are translated at the average exchange rate for the year; resulting
translation adjustments are recorded as a separate component of
stockholders' equity. Transactional gains and losses are recorded in the
statement of operations.
Royalty Income - Royalty income represents the Company's 3.5% gross royalty
in production from the San Luis gold mine. The mine is leased to and
operated by a third party. During the years ended December 31, 1996 and
1995, the Company had $638,000 and $978,000 in royalty income, which
represented 86% and 94% of the Company's revenues, respectively. The ore
reserves at San Luis gold mine were depleted in the fourth quarter of 1996.
Research and Development Costs - Research and development costs are charged
to operations in the period incurred.
Net Income (Loss) Per Share - Net income (loss) per common share is
calculated based upon the weighted average number of shares outstanding
during the years ended December 31, 1996 and 1995. In 1996, convertible
debt, stock options, and warrants have not been included in the calculation
of net loss per share, as the result is anti-dilutive. In 1995, convertible
debt, stock options, and warrants have been included in the calculation of
net income per share as the result is dilutive. Income per common share,
assuming full dilution, approximates primary income per common share.
Stock-Based Compensation - In fiscal 1996, the Company adopted Financial
Accounting Standards Board "Accounting for Stock-Based Compensation" (FAS
123). FAS 123 encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on fair value. Companies that do not adopt
the fair value accounting rules must disclose the impact of adopting the
new method in the notes to the financial statements. Transactions in equity
instruments with non-employees for goods or services must be accounted for
on the fair value method. The Company has elected not to adopt the fair
value accounting prescribed by FAS 123 for employees, and is subject only
to the disclosure requirements prescribed by FAS 123.
F-8
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that
affect the amounts reported in these financial statements and accompanying
notes. Actual results could differ from those estimates. The Company makes
significant assumptions concerning the decommissioning cost of its solvent
extraction facility, the realizability of its investment in its extraction
facility and land and mineral properties, and the ultimate liabilities
associated with asserted claims (see Note 8). Due to the uncertainties
inherent in the estimation process and the significance of these costs, it
is at least reasonably possible that the Company's estimates in connection
with these items could be further materially revised within the next year.
2. EARTH SCIENCES EXTRACTION COMPANY (ESEC):
-----------------------------------------
In 1978, ESI entered into a 20-year sales agreement with the Yankee
Companies, covering substantially all of the uranium produced from ESEC's
solvent extraction facility. During the period from 1980 through 1987, the
Yankee Companies made required prepayments for uranium under the agreement
related to debt service on a term loan, which were in excess of uranium
production from the facility and which have accumulated as a prepayment
balance.
In September 1987, ESEC suspended operations due to the suspension of
fertilizer manufacturing operations at an adjacent facility that provided
feedstock to ESEC. In May 1990, ESI and the Yankee Companies agreed to
modify the long-term sales agreement to allow ESEC to develop alternative
uses at the facility with the provision that certain royalties or net
profits from the facility be paid to the Yankee Companies, and provide for
repayment of any remaining prepayment balance over a seven year period with
interest accruing as of January 1, 2005 at 8.50% and with repayment
commencing no earlier than December 31, 2004. The prepayment balance is
collateralized by the solvent extraction facility, certain underlying
agreements, the land lease where the facility is located, and certain
leases held by the Company in Idaho. ESI is a co-obligor of this liability.
In November 1996, the Company reached agreement in principal with the
Yankee Companies to purchase a 270-day option (the "Option") for $100,000
to terminate their deferred revenue position in the Calgary facility. Under
the terms of the option, if exercised, the Company would pay the Yankee
Companies $1,150,000 and grant them a 10-year non-cost bearing net profits
royalty on activities at the Calgary facility. Payments to the Yankee
Companies would be capped at a total of $6 million, excluding the $100,000
option payment, and the Company could purchase the royalty interest for $3
million plus $50,000 per year after the exercise date for a total of not
more than $3,250,000. The definitive documents for this agreement were
signed in January 1997.
At December 31, 1996, the Company's consolidated balance sheet included
assets with a remaining net book value of approximately $9,732,000 that
relates to the extraction facility, consisting of other current assets of
$28,000 and the extraction facility with a net carrying basis of
$9,704,000, and approximately $9,382,000 of deferred revenues related to
the long-term sales contract for output from the facility and $221,000 in
accrued decommissioning costs. The recovery of the Company's investment in
these assets and its ability to fulfill the terms of its agreement with the
Yankee Company, is dependent upon future operations of the facility, a sale
F-9
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of such assets or exercise of the Option. The Company currently is
modifying the extraction facility for the production of purified phosphate
products and expects to be in production in the second quarter of 1997.
3. PROPERTY, PLANT AND EQUIPMENT:
------------------------------
Property, plant and equipment as of December 31, 1996 is summarized as
follows:
Extraction facility $14,494,000
San Luis Land and mineral property 577,000
Land and mineral properties, including deferred
exploration and development costs (a) 1,518,000
Building and other equipment 609,000
-----------
$17,198,000
===========
- ---------
(a) These land and mineral properties are not in production. The recovery of
the Company's investment in these assets is dependent upon future
production from such assets or a sale of the Company's interests therein.
The Company's mineral properties include patented and unpatented mining
claims; the latter requiring annual rental fees to maintain possessory
titles. Certain bills have been introduced to in both houses of United
States which could adversely effect the potential for development of
existing unpatented mining claims and the economics of operating mines on
Federal unpatented mining claims if enacted. All of these bills are in the
early stages of the legislative process and it is not possible to predict
whether any change in the mining laws will be enacted or if enacted, the
form the changes may take. In addition, the Company leases or has options
to lease various other claims. Such leases are cancelable at the option of
the Company.
4. LONG-TERM DEBT:
---------------
December 31,
1996
Related Parties: ------------
----------------
Note payable to stockholder at 9%. Principal and
accrued interest payments are due in 1998 and
convertible to common stock at $.54 per share. $27,000
Notes payable to officers/directors at 8%, with
quarterly payments of interest and principal of
$250 and the balance due October 31, 1998,
collateralized by real property. 9,000
F-10
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes payable to officers/directors at 9%,
principal and interest payments are due January 1,
1998. However, a $58,000 note payable to an
officer/director has been classified as current,
as the Company lent the officer/director a similar
amount subsequent to December 31, 1996. The notes
are collateralized by a mining property. Principal
and accrued interest are convertible to common
stock at $.54 per share. 189,000
--------
$225,000
========
Future maturities of notes payable and long-term debt are as follows:
1997 $ 58,000
1998 167,000
--------
$225,000
========
During 1996, the Company settled a note payable and related accrued
interest totaling $605,000 with the Province of Alberta for approximately
$75,000 in cash. As a result, the Company recorded a extraordinary gain on
debt extinguishment of $371,000 in 1996, net of income tax expense of
$159,000.
5. INCOME TAXES:
-------------
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1996:
CANADIAN
SUBSIDIARY U.S.
OPERATIONS Operations
---------- ----------
Deferred assets (liabilities):
Net operating loss carryforward $ 405,000 $ 1,122,000
Tax credit carryforwards 80,000 13,000
Depreciation differences 671,000 13,000
Mining properties basis differences -- 364,000
Deferred revenue 3,114,000 --
Other 140,000 115,000
----------- -----------
Net deferred tax assets 4,410,000 1,627,000
Less valuation allowance (4,410,000) (1,627,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
F-11
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The valuation allowance increased $372,000 for the Canadian subsidiary
operations and decreased $356,000 for U.S. operations since December 31,
1995.
The Company's actual effective income tax rate differs from the U.S.
Federal corporate income tax rate of 34% as follows for the year ended
December 31, 1996:
Tax at statutory rate $ 2,000
Non-deductible expenses:
Equity in loss of foreign subsidiary 107,000
Other 4,000
Reduction in valuation allowance due to usage of NOL
carryforward and temporary differences utilized (113,000)
--------
Tax at effective tax rate $ -
========
The Company has remaining U.S. a net operating loss carryforward at
December 31, 1996 of approximately $3,000,000, which if not utilized to
reduce taxable income in future periods, will expire in the years 1996
through 2007. In addition, the Company has $13,000 of alternative minimum
tax credit which is available to offset future U.S. regular tax liability.
The net operating loss carryforward related to the Canadian subsidiary and
operations is $799,000 (U.S.). The Canadian investment tax credit
carryforward for this subsidiary is $80,000 (U.S.).
6. STOCKHOLDERS' EQUITY:
---------------------
The Company has reserved 125,000 shares for awards under a stock bonus plan
established in 1978. As of December 31, 1996, 69,900 shares remain
available for award under the plan.
During 1996, the Company received net proceeds of $899,000 and $1,055,000
from offerings of convertible debt and common stock, respectively. The
convertible debt was subsequently converted to common stock during 1996.
Certain officers/directors also converted notes payable, totaling
approximately $113,400 to shares of common stock under terms of their
notes, and were issued a total of 210,060 shares.
In August 1996, the Company engaged an entity to provide the Company
investor relation services over a five-year period. In addition to certain
cash payments, the Company issued options to the entity to purchase 300,000
shares of common stock at prices ranging from $2.00 to $4.00. The options
expire at the rate of 60,000 per year over each of the following three
years with the remaining 120,000 expiring in 2001. The cash payments and
related expense associated with the option grants are being expensed over
the expected period the services will be performed, the majority of which
is during the first year of the contract.
F-12
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a table of options issued during 1996 and 1995:
<TABLE>
<CAPTION>
Weighted
Average
Employees Non-employee Exercise
Options Options Price
--------- ------------ --------
<S> <C> <C> <C>
OPTIONS OUTSTANDING, January 1, 1995 75,000 -- $1.25
Options granted 75,000 10,000 $1.33
-------- --------- -------
OPTIONS OUTSTANDING, December 31, 1995 150,000 10,000 $1.29
Options granted:
Officers 250,000 -- $1.69
Consultants -- 29,000 $1.69
Investor relations -- 60,000 $2.00
Investor relations -- 120,000 $2.60
Investor relations -- 120,000 $3.60
-------- --------- -------
OPTIONS OUTSTANDING, December 31, 1996 400,000 339,000 $2.09
======== ========= =======
</TABLE>
For all options granted during 1996 and 1995, the weighted average market
price of the Company's common stock on the grant date was approximately
equal to the weighted average exercise price. The weighted average
remaining contractual life for all options and warrants as of December 31,
1996 was approximately 2.3 years. At December 31, 1996, all options were
exercisable. If not previously exercised, options outstanding at December
31, 1996, will expire as follows:
Weighted
Average
Number of Exercise
Year Shares Price
---- --------- ---------
1997 135,000 $1.58
1998 135,000 $1.79
1999 339,000 $1.89
2000 10,000 $1.50
2001 120,000 $3.60
-------
739,000
=======
F-13
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for its stock options
and warrants which are granted to employees. Accordingly, no compensation
cost has been recognized for grants of options and warrants to employees
since the exercise prices were not less than the fair value of the
Company's common stock on the grant dates. Had compensation cost been
determined based on an estimate of the fair value consistent with the
method of FAS 123 at the grant dates for awards under those plans, the
Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below.
Year Ended December 31,
------------------------
1996 1995
--------- ---------
Net income (loss) applicable to common stockholders:
As reported $ (8,000) $138,000
Pro forma $(255,000) $ 83,000
Net income (loss) per common share:
As reported $ - $ .02
Pro forma $ (.04) $ .01
The fair value of each employee option and warrant granted in 1996 and 1995
was estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Year Ended December 31,
--------------------------
1996 1995
------- -------
Expected volatility 67% 74%
Risk-free interest rate 5.7% 5.7%
Expected dividends - -
Expected terms (in years) 3 3
7. PROFIT SHARING RETIREMENT PLAN:
-------------------------------
Effective January 1, 1988, the Company formed a defined contribution and
401(k) plan to cover all eligible employees. The Company paid $30,196 and
$28,715 as the contributions for 1996 and 1995, respectively based on 10%
of the eligible employees' annual compensation. In 1996 and 1995, the
Company also matched 401(K) employee contributions up to 5% of gross
salary, totaling $15,098 and $14,358, respectively.
F-14
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. CONTINGENCIES:
--------------
In 1993, a lawsuit was filed in the United States District Court for the
Northern District of California against ESIC by Volvo GM Heavy Truck
Corporation. The claim concerns contamination at a property in Oakland,
California previously owned by a predecessor of ESIC. HM Holdings, Inc., a
prior property owner, is also a defendant in the action. The complaint
seeks recovery of response costs, damages, and injunctive and regulatory
relief. A court ordered mediation took place in January 1997 which led to a
settlement in principle involving all the parties. Drafts of the settlement
agreements are in process of being prepared, and if the final settlement is
executed with the terms and conditions contained in the agreement in
principle, it will not have a material effect on the Company.
9. RELATED PARTY:
--------------
During 1995 and 1996, the Company made loans to an officer/director
totaling $130,000 at an interest rate of 8%. Not more than $70,000 was
outstanding at any one time and these loans, and the related interest, were
paid back to the Company during the year. The loans were collateralized by
amounts owing Subsequent to year-end, the Company loaned the same
officer/director $50,000 at 8% interest. This loan is collateralized by
amounts owing to the officer/director from the Company (see Note 4).
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (FAS 107):
----------------------------------------------
The estimated fair values for financial instruments under FAS 107,
Disclosures about Fair value of Financial Instruments, are determined at
discrete points in time based on relevant market information. These
estimates involve uncertainties and cannot be determined with precision.
The estimated fair values of the Company's financial instruments which
differ from their recorded values, as measured on December 31, 1996 and
1995, are as follows:
December 31, 1996
-----------------
Carrying Fair
Amount Value
----------- ----------
Long-term debt $ 225,000 $ 213,000
Deferred revenues 9,382,000 4,250,000
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Long-Term Debt - The fair value is difficult to estimate as loans are from
related parties. However, fair value was estimated using an effective
borrowing rate of 15%.
F-15
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Revenues - The fair value is estimated based on the total payments
which would be required for terminate the deferred revenue position as of
December 31, 1996.
11. CONCENTRATIONS OF CREDIT RISK:
------------------------------
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance sheet)
that arise from financial instruments exist for groups of customers or
counterparties when they have similar economic characteristics that would
cause their ability to meet contractual obligations to be similarly
effected by changes in economic or other conditions described below. In
accordance with FASB Statement No. 105, Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments
with Concentrations of Credit Risk, the credit risk amounts shown do not
take into account the value of any collateral or security. Financial
instruments that subject the Company to credit risk consist principally of
money market instruments, receivables, and investments, which includes U.S.
Treasury bills, Certificates of Deposits, corporate bonds, and preferred
stock.
All of the Company's royalty income for the years ended December 31, 1996
and December 31, 1995 was generated from one customer. The Company will no
longer receive royalty income from this customer as the mining operations
related to the royalty income ceased in the fourth quarter of 1996. This
customer also is responsible for a substantial portion of the Company's
receivables.
At December 31, 1996, receivables totaled $101,000. For the years ended
December 31, 1996 and 1995, the Company had no bad debts. The Company
believes that no allowance for doubtful accounts is considered necessary.
12. SUBSEQUENT EVENTS:
------------------
In January 1997, the Company issued an additional 18,520 shares of common
stock in return for marketing services. Certain officers of the Company
also converted an additional $37,809 in debt to 70,020 in common stock. The
Company also issued an additional 20,000 shares of common stock to an
existing stockholder for net proceeds of $41,720.
In February, the Company signed a letter of intent to buy an environmental
services entity (ESE). The Letter of Intent provided for (i) an immediate
cash payment of $400,000 for a 4.8% equity interest, (ii) a combination of
$500,000 in cash and $1.6 million in notes to be paid at the scheduled
closing, for the acquisition of an additional 46.2% interest in ESE, and
(iii) an option to acquire the remaining equity interests (49%) in the ESE
during the six months following May 1, 1998 for issuance of stock valued at
approximately $5.8 million. In addition, the principals of the acquired
company will have an option to require the Company to sell its 51% interest
in ESE for the price paid by ESI plus interest in the event ESI does not
exercise its option.
F-16
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 1997, the Company issued $2,510,000 of 4% convertible debentures
(the "Debentures") for which the Company received net proceeds of
approximately $2,309,000. Interest is payable quarterly. The Debentures are
convertible at any time following 45 days after the issuance thereof and
are all automatically convertible on March 31, 1999. The Debentures are
convertible into shares of common stock based on a 25% discount from market
price of the common stock at the time of conversions, but not in excess of
$3.25 per share. The Company is required to register the shares underlying
the debentures. The Company may repurchase the debentures at a 25% premium
under certain circumstances.
13. BUSINESS SEGMENT INFORMATION:
-----------------------------
The Company has identified its principal business segments as natural
resource exploration and development and ownership of a solvent extraction
facility. These segments are shown in the accompanying table as ESI and
ESIR, respectively. ESIR is located in Canada.
F-17
<PAGE>
<TABLE>
<CAPTION>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depletion,
Inter- Net Depreciation
TOTAL Segment Income Identifiable and Capital
REVENUE Revenue Revenue (Loss) Assets Amortization Expenditures
----------- -------------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996:
- -----
ESI $ 2,167,000 $ 1,369,000 $ 798,000 $ 130,000 $ 4,207,000 $ 122,000 $ 89,000
ESIR -- -- -- (138,000) 10,194,000 138,000 647,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 2,167,000 $ 1,369,000 $ 798,000 $ (8,000) $14,401,000 $ 260,000 $ 736,000
=========== =========== =========== =========== =========== =========== ===========
1995:
- -----
ESI $ 1,063,000 $ 20,000 $ 1,043,000 $ 422,000 $ 2,983,000 $ 97,000 $ 17,000
ESIR -- -- -- (284,000) 9,732,000 137,000 9,000
----------- ----------- ----------- ----------- ----------- -----------
Total $ 1,063,000 $ 20,000 $ 1,043,000 $ 138,000 $12,715,000 $ 234,000 $ 26,000
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
F-18
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
<TABLE>
<CAPTION>
Positions Term First Became
Name Age and Offices Expires Director
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ramon E. Bisque 65 Chairman of the Board of Annual 1963
Directors and Member of the Meeting
Executive Committee Date, 1997
Duane N. Bloom 63 Director, Secretary, Chairman " 196
of the Executive Committee
Robert C. Hart 88 Director, Member of the Audit " 1973
Committee
Robert H. Lowdermilk 60 Director, Member of the Audit " 1990
Committee
Mark H. McKinnies 45 Director, President, Treasurer, " 1983
Member of the Executive Committee
Kristen R. Stevens 34 Director, Member of the Audit " 1991
Committee
</TABLE>
There are no arrangements or understandings between any directors or
executive officers and any other person or persons pursuant to which they were
selected as director or executive officer.
Each of the officers named above serves from year to year at the
pleasure of the Board of Directors. Drs. Bisque and Bloom were first elected to
the Board of Directors of Earth Sciences, Inc.`s predecessor company as of
February 18, 1963. Drs. Bisque and Bloom were first elected to serve in their
present offices on March 22, 1974. Mr. McKinnies was elected Controller on
January 25, 1980, Secretary on January 23, 1981 and as a Director and President
on February 23, 1983.
Dr. Bisque is Professor Emeritus at the Colorado School of Mines,
Golden, Colorado and was a co-founder of Earth Sciences, Inc. in 1963. Dr.
Bisque has been Chairman of the Board of Directors, a member of the Executive
Committee and a full or part time employee of Registrant since 1974.
Dr. Bloom was a co-founder of Earth Sciences, Inc. in 1963. Dr. Bloom
has been employed full time by Registrant since that time.
For several years prior to his retirement in 1974, Mr. Hart was
employed by Rio Algom, Ltd., Toronto, Canada, as Manager of Exploration for that
Company. Since his retirement, Mr. Hart has been self-employed as a geological
consultant.
Mr. Lowdermilk has been president of Tectonic Construction Company, a
producer of washed aggregates and specialty sands since 1986. Mr. Lowdermilk has
a long history in construction and engineering projects.
Mr. McKinnies is a CPA and worked for Peat, Marwick, Mitchell & Co.
before commencing employment at ESI. Mr. McKinnies joined Registrant as
Accounting Manager in January, 1978, was appointed Manager of Finance and
Administration in January, 1979, was elected Controller of the Corporation in
January, 1980, was elected Secretary in January, 1981 and was elected President
in February, 1983.
Ms. Stevens has been an attorney since her graduation from Stanford
University in 1987 and specializes in real estate and other business matters.
Mr. Hart is the step-grandfather of Ms. Stevens. No other family
relationship exists between any individuals named in Item 9(a) above.
12
<PAGE>
Item 10. Executive Compensation.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------- ----------------------
Name of Individual and Awards
Principal Position Year Salary Other(2) Securities Underlying Options (#)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ramon E. Bisque(1) 1996 $ 81,288 $11,706 50,000
Chairman of the Board 1995 $ 74,765 $11,148 25,000
1994 $ 72,630 $10,617 25,000
Duane N. Bloom(1) 1996 $107,240 $15,607 50,000
Chairman of the Executive Committee 1995 $101,931 $14,864 25,000
Secretary and Director 1994 $ 96,927 $14,156 25,000
Mark H. McKinnies(1) 1996 $101,568 $15,142 150,000
Director, President and Treasurer 1995 $ 96,763 $13,735 25,000
1994 $ 92,182 $13,735 25,000
</TABLE>
(1) Member of the Executive Committee of Registrant, which performs the duties
of the Chief Executive Officer.
(2) Amounts represent pension and matching 401(k) payments made to a qualified
plan by Registrant for the benefit of the named individual.
<TABLE>
<CAPTION>
Options/SAR Grants in Last Fiscal Year
Individual Grants
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base Expiration
Name Granted (#) in Fiscal Year Price ($/Sh) Date
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ramon E. Bisque 50,000 18% $1.69 10/7/99
Duane N. Bloom 50,000 18% $1.69 10/7/99
Mark H. McKinnies 150,000 54% $1.69 10/7/99
</TABLE>
All options shown for each individual were exerciseable as of December 31, 1996,
except the option of Mr McKinnies to acquire 100,000 shares which is exercisable
after April 30, 1997.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Share Acquired Value Number of Securities Underlying Value of Unexercised
Name on Exercise Realized Unexercised Options at FY-End (#) Options at FY-End
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ramon E. Bisque 0 $ 0 100,000 $195,250
Duane N. Bloom 0 $ 0 100,000 $195,250
Mark H. McKinnies 0 $ 0 200,000 $370,000
</TABLE>
All options shown for each individual were exerciseable as of December 31, 1996.
Compensation of Directors
Directors who are not also executive officers of Registrant are accruing
compensation in the amount of $500 per quarter, which amount may be paid by
issuance of Registrant's common stock, and are reimbursed for any out-of-pocket
expenses incurred in attendance at meetings. The number of shares of stock which
may be issued will be determined using the quarterly compensation amount and the
average between the bid and asked price quoted during the quarter. No stock was
issued or other payments made in 1996 and $30,000 is owing as of December 31,
1996.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the number of shares of the Registrant's common
stock owned beneficially as of March 14, 1997, by each person known by
Registrant to have owned beneficially more than five percent of such shares then
outstanding, by each person serving as a named officer and/or a director of
Registrant and by all of Registrant's officers and directors as a group. With
the exception of Mr. Lowdermilk , each of the individuals named below has sole
voting and investment power for the respective shares.
13
<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Beneficial Ownership Percent of Class
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Ramon E. Bisque 512,341 (1) 5.82%
9113 Fern Way
Golden, CO
Duane N. Bloom 730,710 (2) 8.23%
5565 Pine Ridge Rd.
Golden, CO
Robert C. Hart 31,871 Less then 1%
4 Willow St.
Waterloo, Ontario
Robert H. Lowdermilk 463,666 (3) 5.38%
100 Cherry St.
Denver, CO
Mark H. McKinnies 265,565 (4) 3.00%
10134 S. Pinedale Dr.
Conifer, CO
Kristen R. Stevens 200 (5) Less then 1%
667 N. Marine Dr.
Tamuning, Guam
Directors and Officers as 1,972,482 (6) 21.55%
a Group (6 individuals)
</TABLE>
Notes to Item 11:
(1) Included in the amount shown are 186,531 shares to which Dr. Bisque has the
right to acquire beneficial ownership through convertible debt and stock
options.
(2) Included in the amount shown are 257,461 shares to which Dr. Bloom has the
right to acquire beneficial ownership through convertible debt and stock
options.
(3) Included in the amount shown are 125,000 shares registered in the name of
Mr. Lowdermilk's wife, Ann Gragg Lowdermilk.
(4) Included in the amount shown are 236,025 shares to which Mr. McKinnies has
the right to acquire beneficial ownership through convertible debt and
stock options.
(5) Ms. Stevens is the step granddaughter of Mr. Hart and disclaims any
beneficial ownership in his shares.
(6) The amount shown includes 680,017 shares to which individuals in the group
have the right to acquire beneficial ownership through convertible debt and
stock options.
Item 12. Certain Relationships and Related Transactions.
(a) At various times during 1996 and 1995, Dr. Bisque borrowed a total of
$70,000 and $130,000, respectively, from Registrant at an interest rate of 8%.
Not more than $85,000 was outstanding at any one time in 1995 and these loans
were paid back to Registrant prior to each year end. All of the amounts borrowed
were collateralized by amounts owing to Dr. Bisque by Registrant and were made
available from funds that would have otherwise only earned Registrant
approximately 5%.
Item 13. Exhibits and Reports on Form 8-K.
14
<PAGE>
(a) Exhibits and Index of Exhibits (all exhibits are incorporated by reference
except Exhibit 27 which was filed electronically; Exhibits 3.1, 4.3, and 10.5
through 10.9 are filed herewith, all other such Exhibits were filed as Exhibits
to Registrant's 1993 Form 10KSB).
No. Description
- --- -----------
3.1 Articles of Incorporation, as amended and restated.
3.2 By-laws.
4.1 Agreement for Conversion Rights dated July 31, 1991.
4.2 Conversion Agreement dated June 23, 1993.
4.3 Form of Convertible Debenture due March 31, 1999.
10.1 Uranium Extraction Agreement dated May 14, 1976 between Registrant
and Western Co-operative Fertilizers, Limited.
10.2 Lease dated April 3, 1978 between Western Co-operative Fertilizers,
Limited and ESI Resources, Ltd.
10.3 Mining Lease dated October 1, 1987 between Registrant and Battle
Mountain Gold Company.
10.4 Letter of Intent - Gold Joint Venture in Venezuela dated December 31,
1987 between Registrant and GEO C.A.
10.5 Cerro Gordo Letter Agreement dated September 1, 1996 between
Registrant and Martin Trost Associates.
10.6 Option Agreement dated January 20, 1997 between Registrant and Yankee
Atomic Electric Company and Vermont Yankee Nuclear Power Corporation.
10.7 Letter of Intent among ADA Environmental Solutions LLC, ADA-ES, Inc.
their respective members and shareholders and Registrant.
10.8 Securities Purchase Agreement dated March 21, 1997.
10.9 Registration Rights Agreement dated March 21, 1997.
21.1 Subsidiaries of Registrant.
27 Financial Data Schedule.
(b) Reports on Form 8-K. None.
15
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Earth Sciences, Inc.
(Registrant)
By /s/ Mark H. McKinnies /s/ Duane N. Bloom
---------------------------- --------------------------------
Mark H. McKinnies, President Duane N. Bloom, Member of
and Principal Financial Officer Executive Committee
Date March 21, 1997 March 21, 1997
-------------- --------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Ramon E. Bisque /s/ Robert H. Lowdermilk
- ---------------------------------- -----------------------------------
Ramon E. Bisque Robert H. Lowdermilk
Chairman of The Board of Directors Director
March 21, 1997 March 21, 1997
- -------------- --------------
Date Date
/s/Duane N. Bloom /s/ Mark H. McKinnies
- ---------------------------------- -----------------------------------
Duane N. Bloom, Director Mark H. McKinnies, Director
March 21, 1997 March 21, 1997
- -------------- --------------
Date Date
16
Exhibit 3.1
Amended and Restated
ARTICLES OF INCORPORATION
OF
EARTH SCIENCES, INC.
ARTICLE I
---------
The name of the corporation is EARTH SCIENCES, INC.
ARTICLE II
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The nature, objectives and purposes of the business to be transacted by
the corporation shall be:
1. To prospect, explore, purchase or otherwise acquire, either absolutely
or conditionally, and either solely or jointly with others, to sell, dispose of,
and deal in lands and interests in and over lands and properties of every
description including mines, works, steamships, railways, tramways, telegraph
and telephone lines, wharves, docks, canals, waterways, electric light and power
plants, quarries, forests, pits mills, buildings, machinery, mining, milling,
concentrating, smelting, refining, and manufacturing plants, ores and minerals,
and claims and interests therein, and shares in the capital stock of
corporations owning or operating the same, in any part of the world, upon such
terms and in such manner as may be deemed advisable; to develop, improve, and
work the same; to conduct mining operations of every kind, and to operate plants
for reducing, smelting, and refining ores, minerals matte, and bullion; to enter
into contracts with other persons, firms or corporations (including any
corporation in which the directors of this company may be interested, or of
which they may be officers or directors, or which may be the owner of a large or
controlling interest of the stock of this company)for the reduction, treatment,
smelting, and refining of the ores, minerals, matte and bullion produced by the
corporation hereby organized; to search for, obtain, and disseminate information
as to mines, mining districts, mining claims, water claims, water rights and any
other rights, claims, and property; to examine, investigate, and secure the
titles to lands, mines, minerals ores, and mining or other rights and claims,
and interests therein, in any part of the world; to employ and send to any part
of the world, and to pay the fees, costs, charges, and expenses of, agents,
including persons and corporations, mining experts, legal counsel, and all
persons useful in examining, investigating, and securing the title to lands,
mines, minerals, ores, mining and other rights and claims, or interest therein,
in any part of the world; to print, publish, advertise, and circulate reports,
maps, plans, prospectuses, and documents of every kind whatsoever, directly or
indirectly relating to lands, mines, minerals, ores, and mining or other rights,
concessions, and claims in any part of the world, or to the title thereto, or to
the organization, operations, and objects of this company, or of any other
company.
2. to manufacture, sell, import, export, purchase, hold, own, assign,
transfer, invest, trade, and deal in or with all kinds of ores, minerals,
metals, and the products and by-products thereof, and goods, wares, merchandise,
and other materials and property of every class and description necessary for
the convenient and proper accomplishment of the purposes or objectives
enumerated herein; to acquire, transport, ship, buy, sell, contract for, deal
in, engage in trade or commerce in, or otherwise dispose of products of ores,
mineral substances, mineral compounds, metals, and intermediate metallurgical
compounds or substances obtained from the mining, production, manufacturing, or
refining of ores, minerals or metals which are for export or are to be exported,
or are in the course of being exported, or have been exported from the United
States, to any foreign nation; or to act as the agent, broker, consignee, or
factor for others in respect to the foregoing.
3. To carry on the business of advisors, consultants, and managers in any
or all fields of the earth sciences; to engage in a general counseling service
and to gather, compile, and disseminate information, data, and advice in respect
to matters of a commercial, financial, statistical, professional and business
nature, and to render and furnish services pertinent thereto; to enter into
agreements with any corporation, association, individual, or enterprise and to
carry on and undertake any business and to render any service which it may seem
to the company capable of being conveniently carried on in connection with the
above, and in promoting, advising, consulting with, maintaining, and operating
any business enterprise; to contract for, acquire, plan, superintend, manage,
operate, cooperate with, and assist in, the maintenance and operation of
business enterprises of any and every kind, and to do and carry on such other
work of every kind and of any and every nature; to own, operate, mange, assist,
finance, audit, supervise, and otherwise deal with corporations, associations,
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business, financial, and other enterprises; and to aid and assist in any manner
any corporation, association or reorganization with which this company may have
business relations.
4. To engage in any lawful act or activity for which corporations may be
organized under the laws of the State of Colorado.
5. The foregoing enumeration of purposes shall not be deemed to limit or to
restrict in any manner the exercise of other and further rights and powers which
may now or hereafter be allowed or permitted by law; the purposes specified in
each of the paragraphs of this Article II shall not be restricted by reference
to or inference from the terms of any other paragraph, but shall be regarded as
independent purposes.
ARTICLE III
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The affairs and management of this corporation are to be under the control
of a Board of Directors. The number of directors shall be as specified in the
By-laws of the corporation, but in no event shall there be fewer than three or
more than fifteen directors of the corporation
ARTICLE IV
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The aggregate number of shares which the corporation shall have the
authority to issue shall be 25,000,000, which shall consist of a single class of
shares designated "Common Stock" of par value of one cent per share.
ARTICLE V
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All stock shall be fully paid and nonassessable.
ARTICLE VI
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The stockholders of this corporation shall not have a preemptive right to
subscribe to any or all issues of stock or other securities of any or all
classes of stock of the corporation or securities convertible into stock or
which carry stock purchase warrants or privileges.
ARTICLE VII
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Cumulative voting shall not be allowed.
ARTICLE VIII
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The principal place of business of said corporation shall be Georgetown, in
the County of Clear Creek, State of Colorado, and the principal office of said
corporation shall be 1700 Broadway, Denver, Colorado 80202 or at such other
location as the Directors of the corporation shall hereafter select.
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FORM OF CONVERTIBLE DEBENTURE
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND ARE
BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE
SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS."
4% CONVERTIBLE DEBENTURE
Due March 31, 1999
March __, 1997
$2,510,000
No. ESI-1A
Earth Sciences, Inc., a Colorado corporation with principal executive
offices located at 910 12th Street, Golden, Colorado 80101 the ("Company"), for
value received, hereby promises to pay to the Holder (as defined below), or
order, on March 31, 1999 (the "Maturity Date") the principal sum of Two Million
Five Hundred and Ten Thousand Dollars and No Cents ($2,510,000.00) and to pay
interest thereon from the date of original issuance (or the most recent interest
payment date to which interest has been paid), quarterly in arrears, on each
March 31, June 30, September 30 and December 31 of each year, commencing on June
30, 1997, at the rate of 4% per annum (the "Debenture Interest Rate"), until the
principal of this Debenture has been paid in full or duly and irrevocably
provided for. The interest so payable and duly and punctually provided for on
any interest payment date shall be paid to the Person in whose name this
Debenture is registered at the close of business on the 15th day next preceding
the applicable interest payment date and all interest payable on the principal
amount of this Debenture shall be calculated on the basis of 365-day year for
the actual number of days elapsed.
ARTICLE 1
DEFINITIONS
SECTION 1.1 Definitions. The terms defined in this Article whenever used in
this Debenture have the following respective meanings:
(a) "Additional Capital Shares" has the meaning set forth in Section
3.1(c).
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(b) "Affiliate" has the meaning ascribed to such term in Rule 12b-2
under the Securities Exchange Act of 1934, as amended.
(c) "Business Day" means a day other than Saturday, Sunday or any day
on which banks located in the state of New York are authorized or obligated to
close.
(d) "Capital Shares" means the Common Shares and any other shares of
any other class or series of common stock, whether now or hereafter authorized
and however designated, which have the right to participate in the distribution
of earnings and assets (upon dissolution, liquidation or winding-up) of the
Company.
(e) "Closing Date" means March __, 1997.
(f) "Common Shares" or "Common Stock" means shares of the common
stock, $.01 par value, of the Company.
(g) "Common Stock Issued at Conversion" when used with reference to
the securities issuable upon conversion of this Debenture, means all Common
Shares now or hereafter Outstanding and securities of any other class or series
into which the Debenture hereafter shall have been changed or substituted,
whether now or hereafter created and however designated.
(h) "Company" means Earth Sciences, Inc., a Colorado corporation, and
any successor or resulting corporation by way of merger, consolidation, sale or
exchange of all or substantially all of the Company's assets, or otherwise.
(i) "Conversion Date" means any day on which all or any portion of the
principal amount of this Debenture is converted in accordance with the
provisions hereof.
(j) "Conversion Notice" has the meaning set forth in Section 3.2.
(k) "Conversion Price" has the meaning set forth in Section 3.1.
(l) "Conversion Ratio" has the meaning set forth in Section 3.1.
(m) "Current Market Price" on any date of determination means the
closing bid price of a Common Share on such day as reported on the National
Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") Small
Market System or, if the Common Shares are listed on the NASDAQ National Market
Capitalization System or on an established United States national stock
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exchange, the closing price of a Common Share on such day as reported by such
system or exchange (provided, that the NASDAQ quotation shall shall be utilized
in the event of the dual listing of the Common Shares).
(n) "Debenture" means this 4% Convertible Debenture due March 31, 1999
of the Company or such other convertible debentures or Debentures exchanged
therefor as provided in Section 2.1.
(o) "Default Interest Rate" shall be equal to the Debenture Interest
Rate plus an additional 4% per annum.
(p) "Event of Default" has the meaning set forth in Section 6.1.
(q) "Holder" means ___________________, any successor thereto, or any
Person to whom this Debenture is subsequently transferred in accordance with the
provisions hereof.
(r) "Market Disruption Event" means any event that results in a
material suspension or limitation of trading of Common Shares on NASDAQ.
(s) "Market Price" per Common Share means the average of the closing
bid prices of the Common Shares as reported on the NASDAQ Small Market
Capitalization System for the five Trading Days in any Valuation Period or, if
the Common Shares are listed on the NASDAQ National Market System or on an
established United States national stock exchange, the average of the closing
prices of the Common Shares for the five Trading Days in any Valuation Period as
reported by such system or exchange (provided, that the NASDAQ quotation shall
shall be utilized in the event of the dual listing of the Common Shares).
(t) "Maximum Rate" has the meaning set forth in Section 6.3.
(u) "Outstanding" when used with reference to Common Shares or Capital
Shares (collectively, "Shares"), means, on any date of determination, all issued
and outstanding Shares, and includes all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares; provided, however, that any such Shares directly or indirectly owned or
held by or for the account of the Company or any Subsidiary of the Company shall
not be deemed "Outstanding" for purposes hereof.
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(v) "Person" means an individual, a corporation, a partnership, an
association, a limited liability company, a unincorporated business
organization, a trust or other entity or organization, and any government or
political subdivision or any agency or instrumentality thereof.
(w) "Registration Rights Agreement" means that certain registration
rights agreement dated March __, 1997, between the Company and
________________________.
(x) "SEC" means the United States Securities and Exchange Commission.
(y) "Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations of the SEC thereunder, all as in effect at the time.
(z) "Securities Purchase Agreement" means that certain Securities
Purchase Agreement dated March __, 1997, between the Company and
___________________________.
(aa) "Subsidiary" means any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by the Company.
(bb) "Trading Day" means any day on which purchases and sales of
securities authorized for quotation on the NASDAQ Small Market Capitalization
System are reported thereon and on which no Market Disruption Event has
occurred.
(cc) "Valuation Event" has the meaning set forth in Section 3.1.
(dd) "Valuation Period" means the five Trading Day period immediately
preceding the Conversion Date.
All references to "cash" or "$" herein means currency of the United
States of America.
ARTICLE 2
EXCHANGES AND TRANSFER
SECTION 2.1 Exchange and Registration of Transfer of Debentures. The Holder
may, at its option, surrender this Debenture at the principal executive offices
of the Company and receive in exchange therefor a Debenture or Debentures, each
in the denomination of $10,000 or integral multiples of $1,000 in excess
thereof, dated as of the date of this Debenture, and, subject to Section 4.2,
payable to such Person or order as may be designated by such Holder. The
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aggregate principal amount of the Debenture or Debentures exchanged in
accordance with this Section 2.1 shall equal the aggregate unpaid principal
amount of this Debenture as of the date of such surrender; provided, however,
that upon any exchange pursuant to this Section 2.1 there shall be filed with
the Company the name and address for all purposes hereof of the Holder or
Holders of the Debenture or Debentures delivered in such exchange. This
Debenture, when presented for registration of transfer or for exchange or
conversion, shall (if so required by the Company) be duly endorsed, or be
accompanied by a written instrument of transfer in form reasonably satisfactory
to the Company duly executed, by the Holder duly authorized in writing.
SECTION 2.2 Loss, Theft, Destruction of Debenture. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Debenture and, in the case of any such loss, theft or destruction, upon
receipt of indemnity or security reasonably satisfactory to the Company, or, in
the case of any such mutilation, upon surrender and cancellation of this
Debenture, the Company shall make, issue and deliver, in lieu of such lost,
stolen, destroyed or mutilated Debenture, a new Debenture of like tenor and
unpaid principal amount dated as of the date hereof. This Debenture shall be
held and owned upon the express condition that the provisions of this Section
2.2 are exclusive with respect to the replacement of a mutilated, destroyed,
lost or stolen Debenture and shall preclude any and all other rights and
remedies notwithstanding any law or statute existing or hereafter enacted to the
contrary with respect to the replacement of negotiable instruments or other
securities without the surrender thereof.
SECTION 2.3 Who Deemed Absolute Owner. The Company may deem the Person in
whose name this Debenture shall be registered upon the registry books of the
Company to be, and may treat it as, the absolute owner of this Debenture
(whether or not this Debenture shall be overdue) for the purpose of receiving
payment of or on account of the principal amount of this Debenture, for the
conversion of this Debenture and for all other purposes, and the Company shall
not be affected by any notice to the contrary. All such payments and such
conversion shall be valid and effectual to satisfy and discharge the liability
upon this Debenture to the extent of the sum or sums so paid or the conversion
so made.
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Article 3
CONVERSION OF DEBENTURE
SECTION 3.1 Conversion; Conversion Price. At the option of the Holder, at
any time, and from time to time, from and after the 45th day following the date
of issuance of this Debenture until this Debenture is paid in full at maturity,
this Debenture may be converted, either in whole or in part, up to the full
principal amount hereof (in increments of not less than $10,000 principal
amount) into Common Shares (calculated as to each such conversion to the nearest
1/100th of a share), at a conversion price (the "Conversion Price") equal to 75%
of the Market Price (the "Conversion Ratio"), but in no event shall the
Conversion Price be in excess of $_______ per Common Share (the Current Market
Price on the day preceding the execution by the Buyer of the Securities Purchase
Agreement); provided, however, that the Holder shall not have the right to
convert any portion of this Debenture to the extent that the issuance to the
Holder of Common Shares upon such conversion would result in the Holder being
deemed the "beneficial owner" of 5% or more of the then outstanding Common
Shares within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934,
as amended. At the Company's option, the amount of accrued and unpaid interest
as of the Conversion Date shall not be subject to conversion but instead may be
paid in cash as of the Conversion Date.
Notwithstanding anything to the contrary contained herein, if a
Valuation Event occurs during any Valuation Period, a new Valuation Period shall
begin on the Trading Day immediately following the occurrence of such Valuation
Event and end on the Conversion Date; provided that if a Valuation Event occurs
on the fifth day of any Valuation Period, then the Conversion Price shall be the
Current Market Price of the Common Shares on such day; and provided, further,
that the Holder may, in its discretion, postpone such Conversion Date to a
Trading Day which is no more than five Trading Days after the occurrence of the
latest Valuation Event. In the event that the Holder deems the Valuation Period
to be other than the five Trading Days immediately prior to the Conversion Date,
the Holder shall give written notice of such fact to the Company at the time of
conversion.
For purposes of this Section 3.1, a "Valuation Event" shall mean an event in
which the Company at any time during a Valuation Period takes any of the
following actions:
(a) subdivides or combines its Capital Shares;
(b) pays a dividend in its Capital Shares or makes any other
distribution of its Capital Shares;
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(c) issues any additional Capital Shares (the "Additional Capital
Shares"), otherwise than as provided in the foregoing Sections 3.1(a) and 3.1(b)
above, at a price per share less, or for other consideration lower, than the
Current Market Price in effect immediately prior to such issuances, or without
consideration, except for issuances under employee benefit plans consistent with
those presently in effect and issuances under presently outstanding warrants,
options or convertible securities;
(d) issues any warrants, options or other rights to subscribe for or
purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to
such warrants, options or other rights shall be less than the Current Market
Price in effect immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable or
exercisable for Capital Shares and the consideration per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to the
terms of such convertible, exchangeable or exercisable securities shall be less
than the Current Market Price in effect immediately prior to such issuance;
(f) makes a distribution of its assets or evidences of indebtedness to
the holders of its Capital Shares as a dividend in liquidation or by way of
return of capital or other than as a dividend payable out of earnings or surplus
legally available for the payment of dividends under applicable law or any
distribution to such holders made in respect of the sale of all or substantially
all of the Company's assets (other than under the circumstances provided for in
the foregoing Sections 3.1(a) through 3.1(e)), provided, in each case, that such
distribution described in this Section 3.1(f) does not constitute an Event of
Default; or
(g) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing Sections 3.1(a)
through 3.1(f) hereof, inclusive, which in the opinion of the Company's Board of
Directors, determined in good faith, would have a material adverse effect upon
the rights of the Holder at the time of a conversion of this Debenture.
SECTION 3.2 Exercise of Conversion Privilege. (a) Conversion of this
Debenture may be exercised, in whole or in part, by the Holder by telecopying an
executed and completed notice of conversion in the form annexed hereto as Annex
I (the "Conversion Notice") to the Company and sending a manually signed
original Conversion Notice and this Debenture to the Company by express courier
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not later than five (5) Business Days next following the date on which the
telecopied Conversion Notice has been transmitted to the Company. Each date on
which a Conversion Notice is telecopied to and received by the Company in
accordance with the provisions of this Section 3.2 shall constitute a Conversion
Date. The Company shall convert the Debenture and issue the Common Stock Issued
at Conversion effective as of the Conversion Date. The Conversion Notice also
shall state the name or names (with addresses) of the persons who are to become
the holders of the Common Stock Issued at Conversion in connection with such
conversion. Upon surrender for conversion, this Debenture shall be accompanied
by a proper assignment hereof to the Company or be endorsed in blank. As
promptly as practicable after the receipt of the Conversion Notice and the
surrender of this Debenture as aforesaid, but in any event not more than five
Business Days after the Company's receipt of such Conversion Notice and
surrender of this Debenture, the Company shall (i) issue the Common Stock Issued
at Conversion in accordance with the provisions of this Article 3, and (ii) mail
for delivery by overnight courier to the Holder (X) a certificate or
certificate(s) representing the number of Common Shares to which the Holder is
entitled by virtue of such conversion, (Y) cash, as provided in Section 3.4, in
respect of any fraction of a Share issuable upon such conversion and (Z) cash in
the amount of accrued and unpaid interest as of the Conversion Date to the
extent payable in cash. Such conversion shall be deemed to have been effected at
the time at which the Conversion Notice indicates so long as this Debenture
shall have been surrendered as aforesaid at such time, and at such time the
rights of the Holder of this Debenture, as such, shall cease and the Person and
Persons in whose name or names the Common Stock Issued at Conversion shall be
issuable shall be deemed to have become the holder or holders of record of the
Common Shares represented thereby. The Conversion Notice shall constitute a
contract between the Holder and the Company, whereby the Holder shall be deemed
to subscribe for the number of Common Shares which it will be entitled to
receive upon such conversion and, in payment and satisfaction of such
subscription (and for any cash adjustment to which it is entitled pursuant to
Section 3.4), to surrender this Debenture and to release the Company from all
liability thereon. No cash payment aggregating less than $1.50 shall be required
to be given unless specifically requested by the Holder.
(b) If, at any time after the date of this Debenture, the Company
challenges, disputes or denies the right of the Holder hereof to effect the
conversion of this Debenture into Common Shares or otherwise dishonors or
rejects any Conversion Notice delivered in accordance with this Section 3.2 or
if at any time after the date of this Debenture, any third party commences any
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lawsuit or proceeding or otherwise asserts any claim before any court or public
or governmental authority which seeks to challenge, deny, enjoin, limit, modify,
delay or dispute the right of the Holder hereof to effect the conversion of this
Debenture into Common Shares, then the Holder shall have the right, by written
notice to the Company, to require the Company to promptly redeem this Debenture
for cash at a redemption price equal to 125% of the principal amount hereof
together with all accrued and unpaid interest thereon (the "Mandatory Purchase
Amount"). Under any of the circumstances set forth above, the Company shall be
responsible for the payment of all costs and expenses of the Holder, including
legal fees and expenses, as and when incurred in disputing any such action or
pursuing its rights hereunder (in addition to any other rights of the Holder).
SECTION 3.3 [This Section Reserved]
SECTION 3.4 Fractional Shares. No fractional Common Shares or scrip
representing fractional Common Shares shall be issued upon conversion of this
Debenture. Instead of any fractional Common Shares which otherwise would be
issuable upon conversion of this Debenture, the Company shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction.
No cash payment of less than $[1.50] shall be required to be given unless
specifically requested by the Holder.
SECTION 3.5 Reclassification, Consolidation, Merger or Mandatory Share
Exchange. At any time while this Debenture remains outstanding and any principal
amount hereof has not been converted, in case of any reclassification or change
of Outstanding Common Shares issuable upon conversion of this Debenture (other
than a change in par value, or from par value to no par value per share, or from
no par value per share to par value or as a result of a subdivision or
combination of outstanding securities issuable upon conversion of this
Debenture) or in case of any consolidation, merger or mandatory share exchange
of the Company with or into another corporation (other than a merger or
mandatory share exchange with another corporation in which the Company is a
continuing corporation and which does not result in any reclassification or
change, other than a change in par value, or from par value to no par value per
share, or from no par value per share to par value, or as a result of a
subdivision or combination of Outstanding Common Shares upon conversion of this
Debenture), or in the case of any sale or transfer to another corporation of the
property of the Company as an entirety or substantially as an entirety, the
Company, or such successor, resulting or purchasing corporation, as the case may
be, shall, without payment of any additional consideration therefor, execute a
new Debenture providing that the Holder shall have the right to convert such new
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Debenture (upon terms and conditions not less favorable to the Holder than those
in effect pursuant to this Debenture) and to receive upon such exercise, in lieu
of each Common Share theretofore issuable upon conversion of this Debenture, the
kind and amount of shares of stock, other securities, money or property
receivable upon such reclassification, change, consolidation, merger, mandatory
share exchange, sale or transfer by the holder of one Common Share issuable upon
conversion of this Debenture had this Debenture been converted immediately prior
to such reclassification, change, consolidation, merger, mandatory share
exchange or sale or transfer. The provisions of this Section 3.5 shall similarly
apply to successive reclassifications, changes, consolidations, mergers,
mandatory share exchanges and sales and transfers.
SECTION 3.6 Adjustments to Conversion Ratio. For so long as this Debenture
is outstanding, if the Company (i) issues and sells pursuant to an exemption
from registration under the Securities Act (A) Common Shares at a purchase price
representing a percentage of the Current Market Price on the date of issuance
thereof that is lower than 75%, (B) warrants or options with an exercise price
representing a percentage of the Current Market Price on the date of issuance of
the warrants or options that is lower than 75%, except for stock option
agreements or stock incentive agreements, or (C) convertible, exchangeable or
exercisable securities with a right to exchange at lower than 75% of the Current
Market Price on the Common Shares on the date of issuance or conversion, as
applicable, of such convertible, exchangeable or exercisable securities, except
for stock option agreements or stock incentive agreements; and (ii) grants the
right to the purchaser(s) thereof to demand that the Company register under the
Securities Act such Common Shares issued or the Common Shares for which such
warrants or options may be exercised or such convertible, exchangeable or
exercisable securities may be converted, exercised or exchanged, then the
Conversion Ratio shall be reduced to equal the lowest of any such lower
percentages.
SECTION 3.7 Optional Redemption Under Certain Circumstances. If, for two or
more Trading Days in any five-Trading Day period (whether or not consecutive),
the Market Price per Common Share is less than $1.50, then the Company, upon
notice delivered to the Holder as provided in Section 3.8, may redeem this
Debenture (but only with respect to such principal amount as to which the Holder
has not theretofore furnished a Conversion Notice), at 125% of the principal
amount thereof, together with all accrued and unpaid interest thereon to the
date of redemption (the "Redemption Date") which shall be no later than thirty
(30) days following the expiration of such five-Trading Day period. Except as
set forth in this Section 3.7, the Company shall not have the right to prepay or
redeem this Debenture.
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SECTION 3.8 Notice of Redemption. Notice of optional redemption pursuant to
Section 3.7 shall be provided by the Company to the Holder in writing (by
registered mail or overnight courier at the Holder's last address appearing in
the Company's security registry) not less than seven nor more than 15 days prior
to the Redemption Date, which notice shall specify the Redemption Date and refer
to Section 3.7 (including a statement of the Market Price per Common Share) and
this Section 3.8.
SECTION 3.9 Surrender of Debentures. Upon any redemption of this Debenture
pursuant to Section 3.7, the Holder shall either deliver this Debenture by hand
to the Company at its principal executive offices or surrender the same to the
Company at such address by express courier. Payment of the redemption price
specified in Section 3.7 shall be made by the Company to the Holder against
receipt of this Debenture (as provided in this Section 3.9) by wire transfer of
immediately available funds to such account(s) as the Holder shall specify to
the Company. If payment of such redemption price is not made in full by the
Redemption Date, the Holder shall again have the right to convert this Debenture
as provided in Article 3 hereof.
ARTICLE 4
STATUS; RESTRICTIONS ON TRANSFER
SECTION 4.1 Status of Debenture. This Debenture is a general, unsecured and
unconditional obligation of the Company, and constitutes a legal, valid and
binding obligation of the Company, enforceable in accordance with its terms
subject, as to enforceability, to general principles of equity and to principles
of bankruptcy, insolvency, reorganization and other similar laws of general
applicability relating to or affecting creditors' rights and remedies generally.
SECTION 4.2 Restrictions on Transfer. This Debenture, and any Common Shares
issuable according to the terms hereof, have not been registered under the
Securities Act. This Debenture and any Common Shares issued upon conversion may
not be offered or sold, directly or indirectly, except pursuant to an effective
registration statement under the Act, or pursuant to an available exemption
therefrom.
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ARTICLE 5
COVENANTS
The Company covenants and agrees that so long as this Debenture shall be
outstanding:
SECTION 5.1 Conversion. The Company shall not later than five Business Days
after its receipt of the Conversion Notice, issue and deliver to the Holder the
requisite shares of common stock issuable upon conversion, according to the
terms hereof.
SECTION 5.2 Notice of Default. If any one or more events occur which
constitute or which, with notice, lapse of time, or both, would constitute an
Event of Default, or if the Holder shall demand the issuance of Common Shares or
take any other action permitted upon the occurrence of any such Event of
Default, the Company shall forthwith give notice to the Holder, specifying the
nature and status of the Event of Default or other event or of such demand or
action, as the case may be.
SECTION 5.3 Insurance. The Company shall carry and maintain in full force
and effect at all times with insurers that are financially sound and reputable
such insurance in such amounts as is customary in the respective industries of
the Company and such subsidiaries.
SECTION 5.4 Payment of Obligations. Prior to conversion of the entire
principal amount of this Debenture, the Company shall pay, extend, or discharge
at or before maturity, all its respective material obligations and liabilities,
including, without limitation, tax liabilities, except where the same may be
contested in good faith by appropriate proceedings.
SECTION 5.5 Compliance with Laws. The Company shall comply with all
applicable laws, ordinances, rules, regulations, and requirements of
governmental authorities.
SECTION 5.6 Inspection of Property, Books and Records. The Company shall
keep proper books of record and account in which full, true and correct entries
shall be made of all dealings and transactions in relation to its business and
activities and shall permit representatives of the Holder at the Holder's
expense to visit and inspect any of its respective properties, to examine and
make abstracts from any of its respective books and records and to discuss its
respective affairs, finances and accounts with its respective officers,
employees and independent public accountants, all at such reasonable times and
as often as may reasonably be desired.
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ARTICLE 6
REMEDIES
SECTION 6.1 Events of Default. "Event of Default" wherever used herein
means any one of the following events:
(a) the Company shall default in the payment of principal of or
interest on this Debenture as and when the same shall be due and payable and, in
the case of an interest payment default, such default shall continue for five
Business Days after the date such interest payment was due, or the Company shall
fail to perform or observe any other covenant, agreement, term, provision,
undertaking or commitment under this Debenture, the Securities Purchase
Agreement or the Registration Rights Agreement and such default shall continue
for a period of five Business Days after the delivery to the Company of written
notice that the Company is in default hereunder; or
(b) any of the representations or warranties made by the Company
herein, the Securities Purchase Agreement, the Registration Rights Agreement or
in any certificate or financial or other written statements heretofore or
hereafter furnished by or on behalf of the Company in connection with the
execution and delivery of this Debenture, the Securities Purchase Agreement or
the Registration Rights Agreement shall be false or misleading in any material
respect on the Closing Date; or
(c) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Company or any subsidiary a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company under the United
States Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), or any other
applicable Federal or state law, or appointing a receiver, liquidator, assignee,
trustee or sequestrator (or other similar official) of the Company or of any
substantial part of its property, or ordering the winding-up or liquidation of
its affairs, and any such decree or order continues and is unstayed and in
effect for a period of 60 calendar days; or
(d) the institution by the Company or any Subsidiary of proceedings to
be adjudicated a bankrupt or insolvent, or the consent by it to the institution
of bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under the
Bankruptcy Code or any other applicable federal or state law, or the consent by
it to the filing of any such petition or to the appointment of a receiver,
liquidator, assignee, trustee or sequestrator (or other similar official) of the
Company or of any substantial part of its property, or the making by it of an
13
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assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as and when they become due, or the
taking of corporate action by the Company in furtherance of any such action; or
(e) a final judgment or final judgments for the payment of money shall
have been entered by any court or courts of competent jurisdiction against the
Company and remains undischarged for a period (during which execution shall be
effectively stayed) of 30 days, provided that the aggregate amount of all such
judgments at any time outstanding (to the extent not paid or to be paid, as
evidenced by a written communication to that effect from the applicable insurer,
by insurance) exceeds $100,000; or
(f) it becomes unlawful for the Company to perform or comply with its
obligations under this Debenture, the Securities Purchase Agreement or the
Registration Rights Agreement; or
(g) the Common Shares shall be delisted from the NASDAQ Small
Capitalization Market System or suspended from trading thereon, and shall not be
reinstated, relisted or such suspension lifted, as the case may be, within five
(5) days; or
(h) the Company shall default (giving effect to any applicable grace
period) in the payment of principal or interest as and when the same shall
become due and payable, under any indebtedness, individually or in the
aggregate, of more than $100,000.
SECTION 6.2 Acceleration of Maturity; Rescission and Annulment. If an Event
of Default occurs and is continuing, then and in every such case any Holder may
rescind the Conversion Notice and obtain payment for the entire outstanding
principal amount of the Debenture which remains unconverted, by a notice in
writing to the Company, and upon any such declaration the entire principal
amount of this Debenture shall become immediately due and payable by virtue of
such rescission; provided, however, in the case of any Event of Default
described in paragraphs (c), (d) or (f) above, the entire then outstanding
principal amount of this Debenture, together with all accrued and unpaid
interest thereon, automatically shall become immediately due and payable without
the necessity of any notice or declaration as aforesaid.
SECTION 6.3 Default Interest Rate. (a) If any portion of the principal of
or interest on the Debenture shall not be paid when due (whether at the stated
maturity, by acceleration or otherwise) such principal of and interest on the
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Debenture which is due and owing but not paid shall, without limiting the
Holder's rights under this Debenture, bear interest at the Default Interest Rate
until paid in full.
(b) Notwithstanding anything herein to the contrary, if at any time
the applicable interest rate as provided for herein shall exceed the maximum
lawful rate which may be contracted for, charged, taken or received by the
Lender in accordance with applicable laws of the State of Colorado (the "Maximum
Rate"), the rate of interest applicable to the Debenture shall be limited to the
Maximum Rate.
SECTION 6.4 Remedies Not Waived. No course of dealing between the Company
and the Holder or any delay in exercising any rights hereunder shall operate as
a waiver by the Holder.
SECTION 6.5 Waiver. No recourse shall be had for the payment of the
principal of, or the interest on, this Debenture, or for any claim based hereon,
or otherwise in respect hereof, against any incorporator, shareholder, officer
or director, as such, past, present or future, of the Company or any successor
corporation, whether by virtue of any constitution, statute or rule of law, or
by the enforcement of any assessment or penalty or otherwise, all such liability
being, by the acceptance hereof and as part of the consideration for the issue
hereof, expressly waived and released.
ARTICLE 7
MISCELLANEOUS
SECTION 7.1 Notice of Certain Events. In the case of the occurrence of any
event described in Sections 3.1, 3.5 or 3.6 of this Debenture, the Company shall
cause to be mailed to the Holder of this Debenture at its last address as it
appears in the Company's security registry, at least 20 days prior to the
applicable record, effective or expiration date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, issuance or granting of rights, options or warrants, or
if a record is not to be taken, the date as of which the holders of record of
Common Stock to be entitled to such dividend, distribution, issuance or granting
of rights, options or warrants are to be determined or (y) the date on which
such reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of Common Stock will be entitled to
exchange their shares for securities, cash or other property deliverable upon
such reclassification, consolidation, merger, sale transfer, dissolution,
liquidation or winding-up.
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SECTION 7.2 Register. (a) The Company shall keep at its principal office a
register in which the Company shall provide for the registration of this
Debenture. Upon any transfer of this Debenture in accordance with Article 2 and
4 hereof, the Company shall register such transfer on the Debenture register.
(b) The Company may deem the person in whose name this Debenture shall
be registered upon the registry books of the Company to be, and may treat it as,
the absolute owner of this Debenture (whether or not this Debenture shall be
overdue) for the purpose of receiving payment of interest on or principal of
this Debenture, for the conversion of this Debenture and for all other purposes,
and the Company shall not be affected by any notice to the contrary. All such
payments and such conversions shall be valid and effective to satisfy and
discharge the liability upon this Debenture to the extent of the sum or sums so
paid or the conversion or conversions so made.
SECTION 7.3 Withholding. To the extent required by applicable law, the
Company may withhold amounts for or on account of any taxes imposed or levied by
or on behalf of any taxing authority in the United States having jurisdiction
over the Company from any payments made pursuant to this Debenture.
SECTION 7.4 Governing Law. THIS DEBENTURE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING
EFFECT TO CONFLICTS OF LAWS PRINCIPLES). WITH RESPECT TO ANY SUIT, ACTION OR
PROCEEDINGS RELATING TO THIS DEBENTURE, THE COMPANY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED
STATES DISTRICT COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW
YORK AND HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY
CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. SUBJECT TO APPLICABLE LAW, THE COMPANY AGREES THAT FINAL
JUDGMENT AGAINST IT IN ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO THIS DEBENTURE SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER
JURISDICTION WITHIN OR OUTSIDE THE UNITED STATES BY SUIT ON THE JUDGMENT, A
CERTIFIED COPY OF WHICH JUDGMENT SHALL BE CONCLUSIVE EVIDENCE THEREOF AND THE
AMOUNT OF ITS INDEBTEDNESS, OR BY SUCH OTHER MEANS PROVIDED BY LAW.
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SECTION 7.5 Headings. The headings of the Articles and Sections of this
Debenture are inserted for convenience only and do not constitute a part of this
Debenture.
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IN WITNESS WHEREOF, the Company has caused this Debenture to be signed by
its duly authorized officer under its corporate seal, attested by its duly
authorized officer, on the date of this Debenture.
EARTH SCIENCES, INC.
By:
------------------------------------
Name: Mark H. McKinnies
Title: President
Attest
By:
-------------------------------------
Name: Duane N. Bloom
Title: Secretary
INITIAL
HOLDER
By:
--------------------------
Name:
Title:
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ANNEX I
[FORM OF CONVERSION NOTICE]
TO: Earth Sciences, Inc.
910 12th Street
Golden, Colorado 80101
Attention:
-------------------------
The undersigned owner of this 4% Convertible Debenture due March 31, 1999
issued by Earth Sciences, Inc. (the "Debenture") hereby irrevocably exercises
its option to convert $ principal amount of the Debenture into shares of the
common stock, $.01 par value, of Earth Sciences, Inc. ("Common Stock"), in
accordance with the terms of the Debenture. The undersigned hereby instructs the
Company to convert the portion of the Debenture specified above into Shares of
Common Stock Issued at Conversion in accordance with the provisions of Article 3
of the Debenture. The undersigned directs that the Common Stock issuable and
certificates therefor deliverable upon conversion, the Debenture recertificated
in the principal amount, if any, not being surrendered for conversion hereby,
together with any check in payment for fractional Common Stock, be issued in the
name of and delivered to the undersigned unless a different name has been
indicated below. All capitalized terms used and not defined herein have the
respective meanings assigned to them in the Debenture.
Dated:
--------------------------------------
Signature
- ----------------------------------------------
Fill in for registration of Debenture:
Please print name and address
(including zip code number) :
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
19
Exhibit 10.5
CERRO GORDO LETTER AGREEMENT
This letter agreement dated as of the 1st day of September, 1996 is made between
Earth Sciences, Inc. ("ESI"), a Colorado corporation and Martin Trost Associates
("MTA") a Colorado joint venture consisting of Mine Development & Engineering
Corp. ("MDEC"), a California corporation and MTAARI, Inc. ("MTAARI"), a Colorado
corporation. The principals of MDEC and MTAARI are Bill Martin and Paul Trost,
respectively.
RECITALS
MTA has leased certain patented and unpatented mining claims near Cerro Gordo
peak in Inyo county, California from Ms. Jody Stewart and the Montgomery Moyer
Trust (the "Mining Claims"), under lease agreements dated August 29, 1995 and
April 1, 1996, respectively (the "Leases"). MTA has provided true and complete
copies of the Leases to ESI.
ESI and MTA desire, initially through an additional joint venture formed by them
(the "JV"), to further explore, develop and place into production the Mining
Claims. ESI will generally arrange for funds for continuance of the Lease,
preservation of the Mining Claims and other JV activities. ESI's obligation for
expenditures may earn ESI a working interest in the Lease, as outlined below.
MTA will contribute the Lease to the JV and, as approved by the JV, agrees to
act as the operator for JV activities. Both ESI and MTA will look solely to the
profits from future production from the Mining Claims or proceeds from the sale
of JV assets to recover their respective investments in the JV. Both ESI and MTA
will only charge the JV on a cost basis for activities performed on behalf of
the JV
AGREEMENT
1. DUTIES AND OBLIGATIONS OF THE PARTIES
ESI, at its sole cost and expense, will arrange for up to $4.2 million to
explore the Mining Claims and place the 'H' area into profitable production to
earn an 80% working interest in the Mining Claims and Leases. Preproduction
exploration has been estimated by MTA at $650,000. MTA will provide access to
all of the technical data it has in its possession and/or available to it, and
will provide assistance in JV activities as directed by the JV.
2. FUNDING
Based on budgets and schedules approved by the JV, ESI will fund the costs of
all JV activities up to the agreed amount of $4.2 million or until the JV
achieves cash flow, whichever occurs first. Nevertheless, ESI may, in its sole
discretion after a 30 day written notice to MTA, cease funding the activities of
the JV without any future obligation except for its portion of the working
interest in the Leases and Mining Claims it may have earned as a result of its
expenditures. In accounting for the expenditures of ESI, reasonable salaries,
wages, overhead and out-of- pocket costs on a no profit basis of ESI personnel
engaged in JV activities shall be included. The value of MTA's contribution to
the JV as of the date of this Agreement is agreed to by the parties to equal
$92,000.
3. ADDITIONAL FUNDING REQUIREMENTS
In the event that the funding obligation of ESI is insufficient to achieve cash
flow from production, the JV will first seek third party debt or equity
financing. Failing such third party financing, ESI and MTA shall contribute the
funds required by the JV in proportion to their respective working interest at
the beginning of the calendar quarter in which funds are required. In the event
that a party is either unable or unwilling to contribute their proportionate
share, the other party may make such contribution diluting the working interest
of the non-contributing party in proportion to the new expenditure required and
the total project expenditures.
4. PURCHASE OF THE ROYALTY
At least one of the Leases provides the option to purchase a royalty granted
therein. If, outside the JV, either party were to exercise any such option the
other party shall have the right for a 2 year period to pay the purchasing party
their proportionate amount of the purchase price plus interest at prime plus 2%
so that the royalty becomes owned by the JV.
5. TIME SCHEDULE
Time is of the essence and both ESI and MTA agree to carryout all of their
respective duties and obligations under this Agreement in a timely fashion. The
management committee of the JV will establish a tentative schedule of foreseen
near term activities as soon as practical.
<PAGE>
6. FORMATION OF THE JV
ESI and MTA agree to form a JV to manage and control the joint activities
intended under this Agreement. The JV shall not carry on its activities in a way
that it could be construed to be a partnership for U.S. tax purposes and, ESI
and MTA agree to take all reasonable step to avoid such classification. With
regard to the recognition of tax attributes, any assets acquired by the JV shall
be jointly owned in proportion to the working interest of the parties at the end
of the calendar year in question.
7. JV MANAGEMENT COMMITTEE
All the affairs of the JV shall be directed by a management committee (the "MC")
consisting of 3 members from ESI and 2 members from MTA. Decisions of the MC
will be on a consensus basis. If a consensus cannot be reached, the MC will
proceed as provided below in the mediation section below.
8. MTA AS OPERATOR
MTA will serve as the operator for the JV. The continuation of MTA in that
capacity shall be subject to the review and approval of the MC from time to
time. In such capacity, MTA has advised that it will charge overhead on JV
expenditures which it manages as follows: 5% on 3rd party contractors, 7 1/2% on
purchases of materials and supplies, and 10% on other expenditures. MTA will
rent equipment it owns to the JV at blue book rates less 10%. Such overhead
charges are to represent an estimation of actual cost and are not intended to
include any significant element of profit or loss. Such overhead charges will
compensate MTA for the cost of incidental management salaries, office
facilities, telephone, and other items commonly included in general and
administrative expenses. As operator, MTA will submit budgets and schedules to
the MC which shall include their overhead charges for approval of the MC. MTA
and ESI management personnel shall be reimbursed by the JV for their direct and
indirect costs without any additions.
9. DISTRIBUTION OF PROFITS AND PROCEEDS
The distribution of net profits and any net proceeds shall be made
proportionately to ESI and MTA until they have recovered their investment plus a
factor for the cost of money equal to the prime interest rate plus 2% if the
funds have been borrowed or the interest income lost if funds come from amounts
on hand. Thereafter, ESI and MTA shall share in the distribution of any net
profits and/or net proceeds on an 80/20 basis
10. EARN-IN
As a result of its expenditures under this Agreement, ESI shall earn an
undivided interest in the Leases, any equipment owned by the JV and Mining
Claims pursuant to the following schedule:
Expenditure Level Interest Earned
----------------- ---------------
$ 0 - $ 149,999 0%
$ 150,000 - $ 499,999 10%
$ 500,000 - $ 999,999 25%
$1,000,000 - $1,999,999 37.5%
$2,000,000 - $4,199,999 50%
$4,200,000 80%
MTA agrees to evidences such earned interest by a recordable assignment to ESI.
11. MEDIATION
In the event the MC cannot reach consensus on any issue it shall become the
subject of mediation under the following guidelines: (1) ESI and MTA will
jointly select an unrelated third party familiar with the mining industry, (2)
with the aid of the third party ESI and MTA will reach a consensus on a further
course of action.
12. RIGHT TO ENCUMBER LEASES
ESI is granted the right to encumber the Leases, subject to the terms of the
underlying Leases, solely for the arrangement of financing its obligation for JV
activities. ESI is responsible for repaying any such financing out of its share
of the JV cash flow.
2
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13. AREA OF INFLUENCE
The parties agree to an area of influence of 5 miles from the location of the
Mining Claims in which all property or data already acquired or acquired in the
future by either party will immediately be disclosed to and become the property
of the JV. The restriction imposed by this section shall apply for two years
after the termination of the JV.
14. TERMINATION
Either party may terminate the JV at any time by providing 30 days written
notice to the JV, by paying for all JV commitments that were incurred prior to
the date of termination, and by assigning all of its right title and interest to
the Leases and Mining Claims to the other party. In any event, ESI and MTA can
mutually agree to terminate the JV at any time. In no case will an act of
termination relieve a party from liability for acts of the JV during the period
of that party's involvement.
15. AGREEMENT TO FURTHER DEFINE UNDERSTANDINGS OF ESI AND MTA
The parties agree that at a mutually agreeable future date that they will
negotiate in good faith to further define and formalize the relationship
outlined herein.
SIGNATURES
In witness of the mutual covenants and agreements made herein, ESI, and MTA by
its principals, set their hands and seals as of the day first written above.
Earth Sciences, Inc. Martin Trost Associates
/s/ Mark H. McKinnies /s/ Bill Martin
- ----------------------------------- -------------------------------------
by Mark H. McKinnies, its President by Bill Martin
/s/ Paul Trost
-------------------------------------
by Paul Trost
3
Exhibit 10.6
OPTION AGREEMENT
This Option Agreement, dated as of January 20, 1997, is among Earth Sciences,
Inc. ("ESI"), ESI Resources Limited, an Alberta corporation, and Earth Sciences
Extraction Company, an Alberta limited partnership (collectively referred to as
the "ESI Group") on the one hand and Yankee Atomic Electric Company and Vermont
Yankee Nuclear Power Corporation (such latter two companies are herein referred
to as "Yankee") on the other.
WHEREAS, the parties hereto have previously entered into a Production Purchase
Agreement dated August 4, 1978, which such agreement has been amended on three
occasions (the "PPA");
WHEREAS, the parties are willing, under the terms and conditions set forth
herein, to terminate the PPA and all related liens and mortgages;
NOW, THEREFORE, in consideration of the mutual covenants set forth herein and
other good and valuable consideration, the receipt of which is hereby
acknowledged by each of the parties, the parties hereto hereby agree as follows:
Section 1. Payment for Option. ESI will, simultaneously with the execution and
delivery of this Agreement, wire transfer U.S. $100,000 in immediately available
federal funds to Yankee's bank account at Bank of New York, One Wall Street, New
York, New York (ABA #021-000-018). Such payment amount shall be nonrefundable
and shall constitute consideration for the option granted in Section 2 below.
Section 2. Option. Yankee hereby grants ESI on behalf of the ESI Group the
option, exercisable on or before the close of business in Denver on October 20,
1997, to terminate the PPA without further liability to any party thereto by
delivering to Yankee (i) the sum of U.S. $1,150,000 in immediately available
federal funds and (ii) an assignment, executed by the ESI Group, of a 10% net
profits interest in the form attached hereto as Exhibit A. If ESI exercises such
option, then Yankee will forthwith take all steps necessary or desirable to
release all liens, mortgages and other encumbrances it may have which burden any
asset of the ESI Group, such releases to be in the form attached hereto as
Exhibit B.
Section 3. The ESI Group's Representations and Warranties. The ESI Group
represents and warrants:
(a) Organization, Good Standing Related Matters. Each member of the ESI Group
has been duly incorporated or formed and is validly existing in good standing
under the laws of its state or province of formation. Each member of the ESI
Group is duly qualified to do business in any other jurisdictions in which such
qualification is required except where failure to so qualify would not have a
material adverse effect on the ESI Group or its business. Each member of the ESI
Group has all requisite power and authority to own its properties and conduct
its business as presently being conducted.
(b) Authorization. The execution, delivery and performance by each member of the
ESI Group of this Agreement has been duly authorized by all necessary corporate
action.
(c) Binding Obligation. This Agreement has been duly executed and delivered by
each member of the ESI Group and constitutes a legal, valid and binding
obligation of each member of the ESI Group, enforceable in accordance with its
terms except as limited by bankruptcy, insolvency, moratorium, and other laws of
general application affecting the enforcement of creditors' rights and by
general principles of equity.
(d) No Conflicts. The execution and delivery of this Agreement and the
consummation of the transactions contemplated herein will not (i) conflict with
or result in a breach of any of the terms, provisions or conditions of any
material contract, note, lease, agreement or other instrument or obligation to
which any member of the ESI Group is a party or (ii) violate any law, order,
judgment, rule or regulation applicable to any member of the ESI Group.
<PAGE>
(e) Approvals and Consents. No approval, consent or authorization of any natural
person, firm, corporation, court or federal, state or provincial governmental
authority is necessary for the execution or delivery of this Agreement or for
the performance by any member of the ESI Group of any of the terms or conditions
hereof.
(f) Litigation. There is no action, proceeding, or investigation pending or, to
the best knowledge of any member of the ESI Group, threatened against any member
of the ESI Group before any court or administrative agency, nor any writ, order
or judgment of any court or administrative agency, that questions the validity
of this Agreement or the right of any member of the ESI Group to enter into such
agreement, or to consummate the transaction contemplated hereby or thereby, or
that might result in the aggregate in any material adverse change in the
business, prospects, condition, affairs, operations, properties, or assets of
the ESI Group or in any material liability on the part of the ESI Group.
(g) Compliance with Law. Each member of the ESI Group, to the best of its
knowledge after reasonable investigation, is in compliance with all applicable
statutes, laws, regulations and executive orders of the United States of America
and all states, foreign countries, and other governmental bodies and agencies
having jurisdiction over its business or properties, and no member of the ESI
Group has received notice of any material violation of such statutes, laws,
regulations or orders which has not been remedied prior to the date hereof.
(h) Agreements, Contracts. No member of the ESI Group has breached, nor does any
member of the ESI Group have knowledge of any claim or threat that it has
breached, any of the terms or conditions of any material agreement, contract,
lease, license, instrument or commitment that in the aggregate could have a
material adverse effect on the business, properties, financial condition or
results of operations of the ESI Group. The execution, delivery and performance
of and compliance with this Agreement, have not resulted and will not result in
any violation of, or conflict with, or constitute a default under any of the
foregoing, or result in the creation of any mortgage, pledge, lien, encumbrance
or charge upon any of the properties or assets of any member of the ESI Group.
To the knowledge of each member of the ESI Group, no party to any of its
material contracts is in material default of any such contract.
Section 4. Yankee's Representations and Warranties. Yankee represents and
warrants:
(a) Organization, Good Standing and Related Matters . Yankee has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its state of formation. Yankee is duly qualified to do business as a
foreign corporation in any other jurisdictions in which such qualification is
required except where failure to so qualify would not have a material adverse
effect on Yankee or its business. Yankee has all requisite power and authority
to own its properties and conduct its business as presently being conducted.
(b) Authorization. The execution, delivery and performance by Yankee of this
Agreement has been duly authorized by all necessary action.
(c) Binding Obligation. This Agreement has been duly executed and delivered by
Yankee and constitutes a legal, valid and binding obligation of Yankee,
enforceable in accordance with its terms except as limited by bankruptcy,
insolvency, moratorium, and other laws of general application affecting the
enforcement of creditors' rights and by general principles of equity.
(d) No Conflicts. The execution and delivery of this Agreement and the
consummation of the transactions contemplated herein will not (i) conflict with
or result in a breach of any of the terms, provisions or conditions of any
material contract, note, lease, agreement or other instrument or obligation to
which Yankee is a party or (ii) violate any law, order, judgment, rule or
regulation applicable to Yankee.
2
<PAGE>
(e) Approvals and Consents. No approval, consent or authorization of any natural
person, firm, corporation, court or federal or state governmental authority is
necessary for the execution-or delivery of this Agreement or for the performance
by Yankee of any of the terms or conditions hereof.
(f) Litigation. There is no action, proceeding, or investigation pending or, to
the best knowledge of Yankee, threatened against Yankee before any court or
administrative agency, nor any writ, order or judgment of any court or
administrative agency, that questions the validity of this Agreement or the
right of Yankee to enter into such agreement, or to consummate the transaction
contemplated hereby or thereby, or that might result in the aggregate in any
material adverse change in the business, prospects, condition, affairs,
operations, properties, or assets of Yankee or in any material liability on the
part of Yankee. Yankee does not currently intend to initiate any legal action
against any other person or entity.
(g) Execution of Agreement, et al. The execution, delivery and performance of
and compliance with this Agreement, have not resulted and will not result in any
violation of, or conflict with, or constitute a default under any material
agreement, contract, lease, license, instrument or commitment that in the
aggregate could have a material adverse effect on the business, properties,
financial condition or results of operations of Yankee, or result in the
creation of any mortgage, pledge, lien, encumbrance or charge upon any of the
properties or assets of Yankee. To Yankee's knowledge no party to any of its
material contracts is in material default of any such contract.
Section 5. Miscellaneous.
(a) Waiver and Amendment. Any term hereof may be amended, and the observance of
any term hereof may be waived (either generally or in a particular instance and
either retroactively or prospectively), only with the written consent of the
parties hereto.
(b) Severability. Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid, but if any provision of
this Agreement shall be held to be prohibited by or invalid, such provision
shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Agreement.
(c) Colorado Law Applicable. This Agreement shall be governed by and construed
under the laws of the State of Colorado without regard to its conflicts of law
rules.
(d) Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
(e) Notices. Any notice required under this Agreement shall be given in writing
and shall be deemed effectively given upon personal delivery or sent by
facsimile to the number set forth below to the party to be notified or upon
deposit with the United States Post Office by registered or certified mail,
postage prepaid (or with an equivalent independent postal service) and addressed
to the party at the address set forth below or at such other facsimile number or
address as may be designated by a party by written notice to the other party:
To ESI Group:
c/o Earth Sciences, Inc.
910 12th Street
Golden, CO 80401
Tel. No. (303) 279-7641
Fax No. (303) 279-1180
To Yankee:
3
<PAGE>
c/o Yankee Atomic Electric Company
580 Main Street
Bolton, Massachusetts 01740
Tel. No. (508) 779-6711
Fax No. (508) 568-3703
(f) No Implied Waiver. Failure to insist upon strict compliance with any
provision hereof shall not be a waiver of such provision or any other provision
hereof. Further, the waiver by either party hereto of a breach of any provision
hereof by the other party shall not be construed to waive any subsequent breach
by such party.
(g) Entire Agreement. This Agreement sets forth the entire agreement and
understanding of the parties and supersedes all prior understandings, agreements
or representations by or between the parties, whether oral or written, with
respect to the Option.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year hereinabove first written.
Earth Sciences, Inc.
By /s/Mark H. McKinnies
--------------------------
President
ESI Resources, Limited
By /s/Mark H. McKinnies
- -----------------------------
President
Earth Sciences Extraction Company
by ESI Resources Limited, general partner
By /s/Mark H. McKinnies
- -----------------------------
President
Yankee Atomic Electric Company
By /s/T. W. Bennet
- -----------------------------
Authorized Officer
Vermont Yankee Nuclear Power Corporation
By /s/Bruce W. Wiggett
- -----------------------------
Authorized Officer
4
<PAGE>
EXHIBIT A
ASSIGNMENT OF NET PROFITS
-------------------------
INTEREST
--------
KNOW ALL MEN BY THESE PRESENTS, THAT:
THIS ASSIGNMENT, dated as of the Effective Date as herein defined, is executed
by Earth Sciences, Inc., a Colorado corporation, ESI Resources Limited, an
Alberta corporation, and Earth Sciences Extraction Company, an Alberta limited
partnership, whose mailing address is c/o Earth Sciences, Inc., 910 12th Street,
Golden, Colorado 80401 (collectively, the "Assignor"), to Yankee Atomic Electric
Company and Vermont Yankee Nuclear Power Corporation, jointly, whose mailing
addresses are c/o Yankee Atomic Electric Company, 580 Main Street, Bolton,
Massachusetts 01740 (collectively, the "Assignee"). Capitalized terms shall have
the meaning set forth above and in Article VIII hereof.
ARTICLE I CONVEYANCE
----------
Assignor, for and in consideration of the sum of One Hundred Dollars ($100.00)
and other good and valuable consideration in hand paid by Assignee to Assignor,
the receipt and sufficiency of which are hereby acknowledged, has GRANTED,
BARGAINED, SOLD, CONVEYED, ASSIGNED and DELIVERED, and by these presents does
hereby GRANT, BARGAIN, SELL, CONVEY, ASSIGN and DELIVER, the Net Profits
Interest unto ASSIGNEE.
TO HAVE AND TO HOLD the Net Profits Interest, together with all and singular the
rights and appurtenances thereunto, subject, however, to the terms and
provisions of the Permitted Agreements and Burdens and this Conveyance; and
Assignor does by these presents bind and obligate itself, its successors and
assigns, to WARRANT and FOREVER DEFEND, all and singular the Net Profits
Interest unto the Assignee, its successors and assigns, against every person
whomsoever, lawfully claiming or to claim the same or any part thereof, by,
through or under the Assignor, but not otherwise.
ARTICLE II RECORDS AND REPORTS
-------------------
2 01. Books and Records. The Assignor shall at all times maintain true and
correct books and records sufficient to determine the Net Profits Interest,
including, but not limited to, accounts to which Gross Revenues and Costs and
Expenses are credited and charged and from which Net Income is determined. Such
books and records shall be maintained in accordance with GAAP.
2.02. Inspections. The books and records referred to in Section 2.01 shall be
open for inspection, copying and audit at the offices of ESI Resources Limited,
3077 Shepard Place S.E., Calgary, Alberta T2H 2H4 during normal business hours.
2.03. Annual Statements. Within ninety (90) days next following the close of
each calendar year, Assignor shall deliver to the Assignee, together with any
payment due under Section 3.01 below, a detailed statement showing the
computation of Net Income attributable to such year, accompanied by a
certificate of the chief financial officer of ESI stating that such statement
has been prepared in accordance with this Agreement and that such person does
not know of any inaccuracy therein. The statement will be accompanied by an
audit report on Earth Science, Inc.'s year end financial statement prepared by
Earth Science, Inc.'s independent certified public accountants.
2.04. Assignee's Exceptions to Annual Statements. If Assignee shall take
exception to any item or items included in the annual statements rendered by
Assignor, Assignee shall notify Assignor in writing within two (2) years after
the receipt of thereof, setting forth in such notice the specific charges
complained of and to which exception is taken or the specific credits which
should have been made and allowed, and with respect to such complaints and
exceptions as are justified, adjustment shall be made. If Assignee shall fail to
give Assignor notice of such
<PAGE>
complaints and exceptions prior to the expiration of such two year period, then
the statements as originally rendered by Assignor shall be deemed to be correct
as rendered.
ARTICLE III PAYMENT
-------
3.01. Payment. On or before the last Business Day in the month of March in each
year commencing in 1998, Assignor shall pay to Assignee (except as otherwise
provided in Article VII) an amount equal to the Net Profits Interest for the
prior calendar year or pro rata part thereof less Net Profits Taxes paid or
payable by Assignor and/or its Affiliates or other Person on behalf of the
Assignee. Such payment shall be accompanied by the statement and certificate
required under Section 2.03 hereof. All payments shall be in U.S. dollars.
3.02. Interest on Past Due Payments. Any amount not paid by Assignor to Assignee
when due shall bear, and Assignor will pay, interest at the rate of 18% per
annum, but not in excess of the maximum amount allowed by law.
3.03. Overpayment. If at any time Assignor inadvertently pays Assignee more than
the amount due, Assignee shall not be obligated to return such overpayment, but
the amount or amounts otherwise payable for any subsequent period or periods
shall be reduced by such overpayment, without interest.
ARTICLE IV NON-LIABILITY OF ASSIGNEE
-------------------------
In no event shall Assignee be liable or responsible in any way for any Costs and
Expenses or other costs or liabilities incurred by Assignor in connection with
the Facility.
ARTICLE V OPERATION OF FACILITY
---------------------
5.01. Prudency Standard. Assignor agrees that it will conduct or cause to be
conducted, the development, maintenance and operation of the Facility with
reasonable and prudent business judgment and in accordance with good practices.
5.02. Abandonment of Facility. Nothing herein contained shall obligate Assignor
to continue to maintain or attempt to maintain the Facility when, in Assignor's
sole opinion, the Facility is incapable of producing a profit to the Assignor.
5.03. Insurance. Assignor shall maintain, or cause to be maintained, insurance
in such amounts and covering such risk as is usually carried by companies
engaged in similar business and owning similar properties. All insurance
required by this Section 5.03 shall be maintained with responsible and reputable
insurance companies or associations, and may contain such deductibles as
Assignor deems appropriate.
ARTICLE VI ASSIGNMENTS
-----------
6.01. Assignment by Assignor. Assignor shall not have the right to assign, sell,
transfer, convey, mortgage or pledge any interest in the Facility unless made
expressly subject to the Net Profits Interest and the terms and provisions of
this Conveyance.
6.02. Assignment by Assignee. Assignee has the right to assign the Net Profits
Interest in whole or in part. However, no such assignment will affect the method
of computing Net Income, and if more than one Person becomes entitled to
participate in the Net Profits Interest, Assignor may withhold the furnishing of
any information provided for in ARTICLE II from such other Person until Assignor
is furnished a recordable instrument executed by or binding upon all Persons
interested in the Net Profits Interest designating one Person who is to receive
such information.
2
<PAGE>
6.03. Change in Ownership. No change of ownership or right to receive payment of
the Net Profits Interest, or of any part thereof, however accomplished, shall be
binding upon Assignor until notice thereof shall have been furnished by the
Person claiming the benefit thereof, and then only with respect to payments
thereafter made.
Notice of sale or assignment shall consist of a certified copy of the recorded
instrument accomplishing the same; notice of change of ownership or right to
receive payment accomplished in any manner (for example by reason of incapacity,
death or dissolution) shall consist of certified copies of recorded documents
and complete proceedings legally binding and conclusive of the rights of all
parties. Until such notice shall have been furnished to Assignor as above
provided, the payment or tender of all sums payable on the Net Profits Interest
may be made in the manner provided herein precisely as if no such change in
interest ownership or right to receive payment has occurred. The kind of notice
herein provided shall be exclusive, and no other kind, whether actual or
constructive, shall be binding on Assignor.
6.04. Rights of Mortgagee or Trustee. If the Assignee shall at any time execute
a mortgage or deed of trust covering all or part of the Net Profits Interest,
the mortgagee(s) or trustee(s) therein named or the holder of any obligation
secured thereby shall be entitled, to the extent the mortgage or deed of trust
so provides, to exercise all the rights, remedies, powers and privileges
conferred upon the Assignee by the terms of this Conveyance and to give or
withhold all consents required to be obtained hereunder by the Assignee, but the
provisions of this Section 6.04 shall in no way be deemed or construed to impose
upon the Assignor any obligation or liability undertaken by the Assignee under
such mortgage or deed of trust or under the obligation secured thereby.
ARTICLE VII REPURCHASE OPTION
-----------------
Assignor shall have the option to repurchase the Net Profits Interest from the
Assignee or its successors and assigns at any time prior to the termination of
the Net Profits Interest by paying the Assignee or its successors and assigns
the sum of (a) $3,000,000 plus (b) an additional $50,000 for each January 1st
following the date of this Conveyance. In addition, Assignor shall pay Assignee
on March 30 of the calendar year following the year in which this repurchase
option is exercised an amount equal to (a) the Net Profits for the preceding
calendar year multiplied by (b) a fraction equal to the numeric equivalent of
the month in which the repurchase option is exercised divided by 12.
Notwithstanding anything in this Article to the contrary, the Assignor shall
never be required to pay Assignee and its successors and assigns more than
$3,250,000 to repurchase the Net Profits Interest.
ARTICLE VIII DEFINITIONS
-----------
The following words, terms or phrases have the following meaning when used in
this Agreement:
"Affiliate" means as to any Person, any Person controlling, controlled by or
under common control with such Person, with the concept of control in such
context meaning the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of another, whether
through the ownership of voting securities, by contract or otherwise.
"Assignee" means the Assignee while it owns an interest in the Net Profits
Interest, and any other Person or Persons who subsequently acquire legal title
to-all or any portion of the Net Profits Interest.
"Assignor" means the Assignor while it owns all or part of the Facility other
than a royalty or profits interest, and any other Person or Persons who acquire
all or any part of the Facility other than a royalty or profits interest.
"Business Day" means any day which is not a Saturday, Sunday or other day in
which national banking institutions in the City of Denver, Colorado are closed
as authorized or required by law.
"Conveyance" means this Assignment of Net Profits Interest.
3
<PAGE>
"Costs and Expenses" means the sum of the following amounts related to the
Facility determined in accordance with GAAP from and after the Effective Date
(which shall be counted only once even though they may be covered by more than
one of the subparagraphs or clauses of this definition):
(1) all actual cash expenditures and reasonable accruals by the Assignor or its
Affiliates in connection with the operation of the Facility, including by way of
example and not limitation, all costs for any materials, processing, production,
haulage, storage, rentals, assessments, testing, selling, general and
administrative costs directly relating to the Facility, supplies, materials and
maintenance, all payments of any kind to Western Cooperative Fertilizers
Limited, all taxes directly related to the Facility or the production therefrom
except income taxes, all costs of employees utilized on or for the direct
benefit of the Facility and operations thereof, including wages, plans of
deferred compensation, other employee contributions, and all additional benefits
such as insurance, retirement and services calculated on a cost (no profit and
including only those bonuses that are reasonable and customary in the industry)
basis to Assignor and/or its Affiliates, including appropriate overhead charges,
all costs of professional consultants, accounting and legal services or
independent contractors insofar as they relate directly to the Facility;
insurance; utilities, including power and water, and all other costs of the
Assignor and/or its Affiliates in connection with the preservation and operation
of the Facility;
(2) Production Taxes related to the Facility;
(3) any amounts paid or accrued by the Assignor and/or its Affiliates, whether
as refund, interest or penalty, to a purchaser because the amount initially
received by the Assignor and/or its Affiliates as sales price was more, or
allegedly more, than permitted by the terms of any applicable contract, statute,
regulation, order, decree or other obligations related to the Facility; and
(4) amounts paid by the Assignor and/or its Affiliates on and in accordance with
any Permitted Agreements and Burdens, interest paid by the Assignor to third
parties on indebtedness incurred in connection with the Facility and
depreciation and amortization at a rate no greater than a straight line basis of
or related to the Facility.
"Effective Date" means 12:01 a.m., Calgary time on the first day of the next
succeeding month after exercise by ESI of the option described in the Option
Agreement, dated as of ______________ to which Earth Sciences, Inc. and Yankee
are, among others, parties.
"Facility" means the Assignor's solvent extraction facility located in Calgary,
Alberta, the legal description of which is as follows:
MERIDIAN 4 RANGE 29 TOWNSHIP 23
SECTION 16
THAT PORTION OF THE NORTHEAST QUARTER WHICH LIES TO THE SOUTH AND WEST OF THE
ROADWAY ON PLAN 5170EZ AND TO THE SOUTH AND EAST OF THE LAND COMPRISED WITHIN
6460AR CONTAINING 53.7 HECTARES (132.67 ACRES) MORE OR LESS EXCEPTING THE
STREET WIDENING ON PLAN 8311428 CONTAINING 0.164 HECTARES (0.41 ACRES) MORE
OR LESS EXCEPTING THEREOUT ALL MINES AND MINERALS; and PLAN 6460AR BLOCK "X"
AND BLOCK "Y" EXCEPTING OUT OF SAID BLOCK "Y" THE RIGHT OF WAY ON PLAN RW543
CONTAINING 0.526 HECTARES (1.30 ACRES) MORE OR LESS EXCEPTING THEREOUT ALL
MINES AND MINERALS AND THE RIGHT TO WORK THE SAME.
"GAAP" means generally accepted accounting principles.
4
<PAGE>
"Gross Revenues" means the sum of the following amounts determined in accordance
with GAAP from and after the Effective Date (which items shall be counted only
once even though they may be covered by more than one of the subparagraphs or
clauses of this definition):
(1) An amount equal to all sales of products from the Facility after the
Effective Date recognized under GAAP by the Assignor and/or its Affiliates;
(2) The income from all insurance less costs of collection, judgments and claims
(including settlements thereof), recognized by the Assignor and/or its
Affiliates involving the Facility to the extent such income is not actually used
or committed for use in repairing, rebuilding or replacing any property, the
loss, damage, taking or condemning of which gave rise to such judgment or claim;
and
(3) All other monies and things of value recognized as income by the Assignor
and/or its Affiliates by virtue of the ownership of the Facility, except that
the income from the sale by the Assignor and/or its Affiliates of any interest
in the Facility shall not be included in Gross Revenues in the event that the
Assignor and/or its Affiliates should hereafter sell any part of its interest in
the Facility subject to the Net Profits Interest herein assigned.
"Net Income" for any period means the excess of Gross Revenues recognized during
such period over the Costs and Expenses recognized during such period.
"Net Loss " at any calendar year end date means an amount equal to the excess of
Costs and Expenses over Gross Revenues for such period. Net Loss will not carry
forward or carry back.
"Net Profits Interest" means 10% of the Net Income.
"Net Profits Taxes" means all windfall profit taxes, state severance taxes,
excise taxes, ad valorem taxes, income taxes and all other taxes or governmental
charges which are attributable to the Net Profits Interest, to Net Income
derived by the Assignee therefrom, or to both and as to which the Assignor
and/or its Affiliates is required to withhold and pay over or otherwise account
to any taxing authority.
"Non-Affiliate" means, as to the party specified, any Person who is not an
Affiliate of such party.
"Permitted Agreements and Burdens" means all agreements,
whenever entered into, relating to the borrowing of monies for use at or in
connection with the Facility; and, if consented to by the Assignee, all other
agreements entered into after the Effective Date.
"Person" means any individual, corporation, partnership, trust, estate or other
entity or organization.
"Production Taxes" means (a) all windfall profit taxes, state, provincial and
local severance taxes and all other taxes, excluding income taxes, and (b) all
ad valorem taxes and other taxes, excluding income taxes, imposed on the
Facility or Assignor and/or its Affiliates' interest therein.
ARTICLE IX MISCELLANEOUS
-------------
9.01. Term. This Conveyance shall remain in force and effect until the earliest
of (i) the tenth anniversary following the Effective Date; (ii) payment by the
Assignor of a total of $4,850,000 pursuant to the terms hereof or by prepayment;
or (iii) the date on which the repurchase option described herein is exercised.
9.02. Further Assurances. Should any additional instruments of assignment and
conveyance be required to describe more specifically any interests subject
hereto, Assignor and Assignor agree to execute and deliver the same. Also, if
any other or additional instruments are required in connection herewith in order
to comply with applicable laws or regulations, Assignor and Assignee will
execute and deliver the same.
5
<PAGE>
9.03. Notices. All notices, statements, payments and communications between the
parties hereto shall be deemed to have been sufficiently given and delivered if
enclosed in a post paid wrapper and deposited in the United States mails
directed, or if personally delivered or telecopied, to the party to whom the
same is directed or to be furnished or made at the respective address, as
follows:
ASSIGNOR:
c/o Earth Sciences, Inc.
910 12th Street
Golden, CO 80401
Tel. No. (303) 279-7641
Fax No. (303) 279-1180
ASSIGNEE:
c/o Yankee Atomic Electric Company
580 Main Street
Bolton, Massachusetts 01740
Tel. No. (508) 779-6711
Fax No. (508) 568-3703
Either party or the successors or assignees of the interest or rights or
obligations of either party hereunder may change its address or designate a new
or different address or addresses for the purposes hereof by a similar notice
given or directed to all parties interested hereunder at the time.
9.04. Binding Effect. This Conveyance shall bind and inure to the benefit of the
successors and assigns of Assignor and Assignee.
9.05. Governing Law. The validity, effect and construction of this Conveyance
shall be governed by the laws of Colorado.
9.06. Headings. Article and Section headings used in this Conveyance are for
convenience only and shall not affect the construction of this Conveyance.
9.07. Substitution of Warranty. This instrument is made with full substitution
and subrogation of Assignee in and to all covenants of warranty by others
heretofore given or made with respect to the Facility or any part thereof or
interest therein.
9.08. Counterpart Execution. This Conveyance is being executed in multiple
original counterparts, all of which are identical. Every counterpart of this
Conveyance shall be deemed to be an original for all purposes and all such
counterparts together shall constitute one and the same Conveyance.
IN WITNESS WHEREOF, the parties have caused this Conveyance to be executed in
their respective names and their corporate seals to be affixed hereto and
attested by their proper signatory officers thereunto authorized, in multiple
originals, as of the Effective Date.
Earth Sciences, Inc.
By_________________________
President
6
<PAGE>
ESI Resources Limited
By________________________
President
Earth Sciences Extraction Company
by ESI Resources Limited, general partner
By_________________________
President
Yankee Atomic Electric Company
By_________________________
Authorized Officer
Vermont Yankee Nuclear Power Corporation
By__________________________
Authorized Officer
STATE OF COLORADO )
) ss.
COUNTY OF JEFFERSON )
The foregoing instrument was acknowledged before me this day of , 1997, by Mark
H. McKinnies as President of Earth Sciences, Inc.
Witness my hand and official seal.
My Commission Expires:
------------------------------
Notary Public
Name:
------------------------
Address:
----------------------
STATE OF COLORADO )
) ss.
COUNTY OF JEFFERSON )
The foregoing instrument was acknowledged before me this day of , 1997, by Mark
H. McKinnies as President of ESI Resources Limited on its own behalf and as
general partner of Earth Sciences Extraction Company.
Witness my hand and official seal.
My Commission Expires:
---------------------------------
Notary Public
Name:
----------------------------
Address:
------------------------
COMMONWEALTH OF MASSACHUSETTS )
) ss.
COUNTY OF WORCESTER )
The foregoing instrument was acknowledged before me this day of , 1997, by
Andrew C. Kadak, as President of Yankee Atomic Electric Company.
Witness my hand and official seal.
My Commission Expires:
------------------------------
Notary Public
Name:
-------------------------
Address:
----------------------
7
<PAGE>
STATE OF VERMONT )
) ss.
COUNTY OF WINDHAM )
The foregoing instrument was acknowledged before me this day of , 1997 by Ross
P. Barkhurst, as President of Vermont Yankee Nuclear Power Corporation.
Witness my hand and official seal.
My Commission Expires:
---------------------------
Notary Public
Name:
---------------------
Address:
-------------------
8
Exhibit 10.7
LETTER OF INTENT
This Letter of Intent is made and entered into February 18, 1997 among ADA
Environmental Solutions LLC, a Colorado limited liability company ("ADA"),
ADA-ES, Inc., a Colorado corporation, the parent company of ADA and the owner of
all the membership interests in ADA ("Parent"), the shareholders of Parent (the
"Parent Shareholders") named on the signature page hereof and Earth Sciences,
Inc., a Colorado corporation ("ESI'). ADA, the Parent Company and the Parent
Shareholders are collectively referred to herein as the "ADA Parties."
WHEREAS, the ADA Parties are seeking funding to accomplish the business plan as
set forth in the document entitled "Business Plan for ADA Environmental
Solutions - Flue Gas Conditioning Technology for Cost Effective Enhancement of
ESPs and Baghouses," dated March 1996 (the "Business Plan"), which among other
matters discusses the use of phosphoric acid for treatment of flue gas
particulates;
WHEREAS, ESI's wholly-owned subsidiary intends to produce phosphoric acid at its
facility in Calgary; and
WHEREAS, ESI desires to acquire a 51 % interest in ADA and an option to acquire
a 100% equity interest in the Parent Company and provide the funding necessary
to accomplish the Business Plan, all in accordance with the terms and conditions
set forth in this Letter of Intent;
NOW, THEREFORE, the ADA Parties and ESI, in consideration of the mutual
covenants set forth herein and other good and valuable consideration, the
receipt of which is hereby acknowledged by each of the parties, hereby agree as
follows:
1. Acquisition of Membership Interest in ADA.
- ---------------------------------------------
Simultaneously with the execution and delivery of this letter of intent, ESI has
paid ADA cash in the amount of $400,000 and has been issued by ADA in
consideration thereof a membership interest representing a four and eight tenths
percent (4.8%) interest in ADA. The operating agreement of ADA has been amended
simultaneously herewith to reflect the ownership by ESI of such percentage
interest.
In the event the transactions specified in Paragraph 2 hereof have not
been consummated on or before April 30, 1997, ESI shall have the option of
requiring ADA to repurchase such 4.8% by making equal monthly payments
commencing not later than April 30,1998 over a two (2) year period totaling
$400,000 plus interest at a compound rate of 8% per annum from the date the
funds are received by ADA until payment is made to ESI In the event the
transactions specified in Paragraph 2 hereof have not been consummated on or
before April 30, 1997 and ESI shall not, by May 15, 1997 exercise its right to
cause ADA to repurchase the foregoing membership interest, then ADA shall have
the right to purchase such membership interest over a one year period on the
same terms, such right to be exercised on or before June 15, 1997.
2. Acquisition of Additional Interest in ADA and Option From Parent
Shareholders.
- --------------------------------------------------------------------------------
(a) The Parties will use their good faith efforts to consummate the following
transactions on or before April 30, 1997 (the "Closing Date"):
(i) ESI, or a wholly-owned subsidiary of ESI, will acquire an additional 46.2%
equity interest from ADA in exchange for $500,000 in cash and a non-interest
bearing note in the amount of $1,600,000 (the "Note"), payable as follows:
$600,000 on or before June 30, 1997; $500,000 on or before January 1, 1998; and
$500,000 on or before April 30, 1998.
(ii) The Parent Shareholders will grant ESI an irrevocable option (the "Option")
to acquire all of their shares in Parent during a six month period commencing
<PAGE>
May 1, 1998 and ending October 31, 1998 in exchange (the "Exchange") for shares
of common stock, $.01 par value per share (the "Common Stock") of ESI. The
number of shares of Common Stock to be issued (the "Shares") in the Exchange
shall be 1,715,600. The Shares will be
restricted from trading pursuant to rules of the Securities and Exchange
Commission; however, ESI will prepare and file (at its expense) a registration
statement with the SEC with respect to the offering and sale or other
disposition of the Shares within 3 months of the exercise of the Option.
(b) The following shall be conditions precedent to the obligations of the ADA
Parties and ESI to consummate the transactions specified in Paragraph 2(a) and
to ESI's right to exercise the Option:
(i) ESI shall provide assurances to the ADA Parties, acting reasonably, that the
additional funding needed to pay the Note, is or will be available to ESI. ESI
acknowledges that on April 30, 1997 $400,000 and on June 30, 1997 $330,000 of
the proceeds will be used to repay certain indebtedness owed by ADA to ADA
Technologies, Inc. incurred for operating expenses of ADA. ESI agrees to cause
ADA to make such payment.
(ii) ESI shall satisfy itself, acting reasonably, that the nature and prospects
of ADA are, in material respects, as set forth in the Business Plan and
financial statements that have been provided to ESI, and that there has been no
material adverse change in the business from what is set forth therein.
(iii) ADA shall satisfy itself, acting reasonably, that the nature and prospects
of ESI are, in all material respects, as set forth in ESI's 1995 Form 10-KSB,
1996 Quarterly Form 10-QSB, and other materials that have been or may be
provided to ADA, and that there has been no material adverse change in the
business from what is set forth therein.
(iv) ADA and ESI will negotiate satisfactory employee contracts for the
continued employment of certain individuals and satisfaction of certain accrued
incentives by issuance of 36,305 of Common Stock of ESI.
(v) ESI shall use its best efforts to make available one seat on the ESI Board
of Directors to the ADA Parties so long as, in the aggregate, they own no less
than one million shares of Common Stock and agrees to nominate an individual
designated by the ADA Parties for such seat. Management shareholders of ESI will
enter into appropriate voting agreements, agreeing to vote their shares in favor
of one individual designated by the ADA Parties for such seat.
(vi) ADA and ESI will use their best efforts to effect the Exchange of Shares on
a tax free basis.
(vii) The parties shall negotiate and execute definitive documentation regarding
the transactions set forth in Paragraph 2(a). Such agreement shall contain
customary terms and conditions normally contained in an agreement for a stock
exchange and shall provide, among other things, the terms and conditions set
forth in subparagraphs (i), (iv), (v) and (vi) above and following:
(aa) Standard representations and warranties regarding ESI's, Parent's, and
ADA's financial conditions, operations, assets and liabilities and capital
stock;
(bb) Covenants by the parties that the transactions shall comply with applicable
law;
(cc) In the event that ESI does not exercise the Option, ADA shall have the
option to repurchase all of the membership interest in ADA owned by ESI for a
purchase price equal to $900,000 plus any amount paid by ESI on the Note, such
price to be payable over a three year period in equal monthly installments with
interest at a compound rate of 8% per annum. Upon exercise of such option by ADA
the Note shall be canceled.
(dd) In the event that ESI shall default on any payments on the Note, the Option
shall automatically terminate and ADA shall have the option to repurchase all of
the membership interest in ADA owned by ESI for a purchase price equal to
$900,000 plus any amounts paid by ESI on the Note, such price to be payable over
a three year period in equal monthly installments with interest at a compound
rate of 8% per annum. Upon exercise of such option by ADA the Note shall be
canceled.
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(ee) Satisfactory registration rights provisions applicable to the Shares and
the resale thereof by the Parent Shareholders.
(ff) ESI will maintain covenants to continue listing of Common Stock on NASDAQ.
3. Cooperation.
- ---------------
The parties to this Letter of Intent recognize that open disclosure and
cooperation are essential to consummate the several transactions contemplated
hereby, and each party hereby commits to use its best efforts to accomplish the
goals agreed upon herein. Any cost incurred by any party during the period from
the date of signing this Letter of Intent until the Closing Date shall be for
that party's own account. Prior to the expiration of the Option, the ADA Parties
shall not permit any issue or transfer of any equity interest in ADA or Parent,
except as contemplated herein.
4. Press Release.
-------------
The parties agree to issue, as soon as practical, a joint press release,
substantially in the form of the attached Exhibit A, to announce the agreements
made herein.
5. This Letter of Intent shall be binding on all parties hereto.
- -- -------------------------------------------------------------
IN WITNESS WHEREOF, the parties hereto have executed this Letter of Intent
as of the day and year hereinabove first written.
Earth Sciences, Inc.
By:_/s/ Mark H. McKinnies
---------------------------------
Mark H. McKinnies, its President
ADA Environmental Solutions, LLC
By:_/s/ Michael D. Durham By: /s/ Judith A. Armstrong
---------------------------------- --------------------------------
Michael D. Durham, its Manager Judith A. Armstrong
President, ADA Technologies, Inc.
ADA-ES, Inc.
By:_/s/ Judith A. Armstrong By: /s/ Kenneth E.Baldrey
----------------------------------- --------------------------------
Judith A. Armstrong, Kenneth E. Baldrey, 2% Shareholder
President, ADA Technologies, Inc.
80% Shareholder
By:_/s/C. Jean Bustard By: /s/Cameron E. Martin
------------------------------------ --------------------------------
C. Jean Bustard, 6% Shareholder Cameron E. Martin, 1% Shareholder
By:__/s/ John F. Wurster
-------------------------------------
John F. Wurster, 11% Shareholder
3
EXHIBIT 10.8
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT dated as of the 21st day of March, 1997,
between EARTH SCIENCES, INC., a Colorado corporation with principal executive
offices located at 910 12th Street, Golden, Colorado 80401 (the "Company"), and
the undersigned ("Buyer").
W I T N E S S E T H:
WHEREAS, Buyer desires to purchase from the Company, and the Company
desires to issue and sell to the Buyer, upon the terms and subject to the
conditions of this Agreement, the Company's 4% Convertible Debentures due March
31, 1999 (the "Debentures") which, upon the terms and subject to the conditions
of the Debentures, will be convertible into shares of the Company's common
stock, $.01 par value (the "Common Stock", and together with the Debentures, the
"Securities");
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. PURCHASE AND SALE OF DEBENTURES
a. Transaction. Buyer hereby agrees to purchase from the Company, and the
Company hereby agrees to issue and sell to the Buyer, $2,510,000 aggregate
principal amount of the Debentures having the terms and conditions and being in
the form attached hereto as Annex I.
b. Purchase Price; Form of Payment. The purchase price for the Debentures
to be purchased by Buyer hereunder shall be $2,510,000 (the "Purchase Price").
Buyer shall pay the Purchase Price by wire transfer of immediately available
funds to the escrow agent (the "Escrow Agent") identified in the Joint Escrow
Instructions attached hereto as Annex II (the "Joint Escrow Instructions").
Simultaneously against receipt by the Escrow Agent of the Purchase Price, the
Company shall deliver one or more duly authorized, issued and executed
certificates (I/N/O Buyer) evidencing the Debentures, to the Escrow Agent or its
designated depository. By executing and delivering this Agreement, the Buyer and
the Company each hereby agrees to observe the terms and conditions of the Joint
Escrow Instructions, all of which are incorporated herein by reference as if
fully set forth herein.
<PAGE>
c. Method of Payment. Payment into escrow of the Purchase Price shall be
made by wire transfer of immediately available funds to:
J.P. Morgan Services, Inc.
500 Stanton Christiana
Newark, Delaware 19713-2107
ABA# 021000238
SWIFT# MGTCUS33
For the Account of: Weil, Gotshal & Manges LLP Special
Account
Account# 158-37-474
Reference# 73601.0001
Simultaneously with the execution of this Agreement, the Buyer shall deposit
with the Escrow Agent the Purchase Price and the Company shall deposit with the
Escrow Agent the Debentures.
2. BUYER'S REPRESENTATIONS, WARRANTIES; ACCESS TO INFORMATION; INDEPENDENT
INVESTIGATION.
Buyer represents and warrants to and covenants and agrees with the Company
as follows:
a. Buyer is purchasing the Debentures (and the shares of Common Stock
issuable upon conversion thereof) for its own account, for investment purposes
only and not with a view towards or in connection with the public sale or
distribution thereof in violation of the Securities Act of 1933, as amended (the
"Securities Act").
b. Buyer is (i) an "accredited investor" within the meaning of Rule 501 of
Regulation D under the Securities Act, (ii) experienced in making investments of
the kind contemplated by this Agreement, (iii) capable, by reason of its
business and financial experience, of evaluating the relative merits and risks
of an investment in the Securities, and (iv) able to afford the loss of its
investment in the Securities.
c. Buyer understands that the Debentures (and the Common Stock issuable
upon conversion thereof) are being offered and sold by the Company in reliance
on an exemption from the registration requirements of the Securities Act and
equivalent state securities and "blue sky" laws, and that the Company is relying
upon the accuracy of, and Buyer's compliance with, Buyer's representations,
warranties and covenants set forth in this Agreement to determine the
availability of such exemption and the eligibility of Buyer to purchase the
Debentures;
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<PAGE>
d. Buyer has been furnished with or provided access to all materials
relating to the business, financial position and results operations of the
Company, and all other materials requested by Buyer to enable it to make an
informed investment decision with respect to the Debentures.
e. Buyer acknowledges that it has been furnished with copies of the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1995, the Company's Quarterly Reports on Form 10-QSB for the fiscal quarters
ended March 31, 1996, June 30, 1996 and September 30, 1996, respectively, and
all other reports and documents heretofore filed by the Company with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act")
since December 31, 1995 (collectively the "Commission Filings").
f. Buyer acknowledges that in making its decision to purchase the
Debentures it has (i) relied upon independent investigations made by it and its
professional advisors, (ii) visited the Company's principal executive offices
and been given access and the opportunity to examine all material agreements,
books and records of the Company and all documents relating to the Company's
private placement of the Debentures, and (iii) been given an opportunity to ask
questions of and to receive answers from the Company's executive officers,
directors and management personnel concerning the terms and conditions of the
private placement of the Debentures by the Company.
g. Buyer understands that the Securities have not been approved or
disapproved by the Commission or any state securities commission and that the
foregoing authorities have not reviewed any documents or instruments in
connection with the offer and sale to it of the Securities and have not
confirmed or determined the adequacy or accuracy of any such documents or
instruments.
h. This Agreement has been duly and validly authorized, executed and
delivered by the Buyer and is a valid and binding agreement of the Buyer
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally.
i. Neither Buyer nor its affiliates nor any person acting on its or their
behalf has the intention of entering, or will enter into, prior to the Closing,
any put option, short position or other similar instrument or position with
respect to the Common Stock and neither Buyer nor any of its affiliates nor any
person acting on its or their behalf will use at any time shares of Common Stock
3
<PAGE>
acquired pursuant to this Agreement or the Debentures to settle any put option,
short position or other similar instrument or position that may have been
entered into prior to the execution of this Agreement.
3. COMPANY'S REPRESENTATIONS
The Company represents and warrants to Buyer that:
a. Capitalization. (i) The authorized capital stock of the Company consists
of 25,000,000 shares of Common Stock, of which 8,577,951 shares are outstanding
on the date hereof; all of the issued and outstanding shares of Common Stock
have been duly authorized and validly issued and are fully paid and
non-assessable. The Common Stock issuable upon conversion of the Debentures has
been duly and validly authorized and reserved for issuance by the Company, and
when issued by the Company upon conversion of, or as dividends on, the
Debentures, will be duly and validly issued, fully paid and non-assessable and
will not subject the holder thereof to personal liability by reason of being
such holder. There are no preemptive, subscription, "call" or other similar
rights to acquire the Common Stock (including Common Stock issuable upon
conversion of the Debentures) that have been issued or granted to any person,
except as disclosed in the Commission Filings or otherwise previously disclosed
in writing to Buyer.
(ii) Except as disclosed in the Commission Filings, the Company does not
own or control, directly or indirectly, any interest in any other corporation,
partnership, limited liability company, unincorporated business organization,
association, trust or other business entity. Except as disclosed in the
Commission Filings, the Company owns 100% of the outstanding shares of capital
stock of each of its subsidiaries, free and clear of any and all liens, pledges,
encumbrances, charges, agreements, security interests, mortgages or claims of
any kind whatsoever.
b. Organization; Reporting Company Status. (i) The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Colorado and is duly qualified as a foreign corporation in all
jurisdictions in which the failure to so qualify would have a material adverse
effect on the business, properties, prospects, condition (financial or
otherwise) or results of operations of the Company and its subsidiaries, taken
as a whole, or on the consummation of any of the transactions contemplated by
this Agreement (a "Material Adverse Effect"). Each of the Company's subsidiaries
is a corporation duly organized, validly existing and in good standing under the
laws of its respective jurisdiction of incorporation and is duly qualified as a
foreign corporation in all jurisdictions in which the failure to so qualify
would have a Material Adverse Effect.
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<PAGE>
(ii) The Company has registered the Common Stock pursuant to Section 12 of
the Exchange Act and has timely filed with the Commission all reports and
information required to be filed by it pursuant to all reporting obligations
under Section 13(a) or 15(d), as applicable, of the Exchange Act for the
24-month period immediately preceding the date hereof. The Common Stock is
listed and traded on the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") Small Capitalization Market System and the
Company has not received any notice regarding, and to its knowledge there is no
threat, of the termination or discontinuance of the eligibility of the Common
Stock for such listing.
c. Authorized Shares. The Company has duly and validly authorized and
reserved for issuance shares of Common Stock sufficient in number for the
conversion, in full, of the Debentures (assuming for purposes of this Section
3.c. a conversion price of $.75).
d. Terms of Debentures. The Debentures when issued to Buyer pursuant to
this Agreement shall be in the form of Annex I attached hereto.
e. Authority; Validity and Enforceability. The Company has the requisite
corporate power and authority to enter into this Agreement and the Registration
Rights Agreement of even date herewith between the Company and Buyer, a copy of
which is annexed hereto as Annex III (the "Registration Rights Agreement") and
to perform all of its obligations hereunder and thereunder (including the
issuance, sale and delivery to Buyer of the Debentures and the Common Stock
issuable upon conversion thereof). The execution, delivery and performance by
the Company of this Agreement and the Registration Rights Agreement, and the
consummation by the Company of the transactions contemplated hereby and thereby,
has been duly authorized by all necessary corporate action on the part of the
Company. Each of this Agreement and the Registration Rights Agreement has been
duly and validly executed and delivered by the Company and constitutes a valid
and binding agreement of the Company enforceable against it in accordance with
its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally. The Debentures have been duly and validly authorized for
issuance by the Company and, when executed and delivered by the Company, will be
valid and binding obligations of the Company enforceable against it in
accordance with their terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally.
5
<PAGE>
f. Non-contravention. The execution and delivery by the Company of this
Agreement and the Registration Rights Agreement, the issuance of the Debentures
(and the Common Stock issuable upon conversion thereof), and the consummation by
the Company of the other transactions contemplated hereby and thereby, do not
and will not conflict with or result in a breach by the Company of any of the
terms or provisions of, or constitute a default (or an event which, with notice,
lapse of time or both, would constitute a default) under, the articles of
incorporation or by-laws of the Company, or any indenture, mortgage, deed of
trust or other material agreement or instrument to which the Company or any of
its subsidiaries is a party or by which its or any of its subsidiaries'
properties or assets are bound, or any law, rule, regulation, decree, judgment
or order of any court or public or governmental authority having jurisdiction
over the Company or any of its subsidiaries or any of its or its subsidiaries'
properties or assets, except such conflict, breach or default which would not
have a Material Adverse Effect.
g. Approvals. No authorization, approval or consent of any court or public
or governmental authority is required to be obtained by the Company for the
issuance and sale of the Debentures (and the Common Stock issuable upon
conversion thereof) to Buyer as contemplated by this Agreement, except such
authorizations, approvals and consents that have been obtained by the Company
prior to the date hereof.
h. Commission Filings. None of the Commission Filings contained at the time
they were filed any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were made, not
misleading.
i. Absence of Certain Changes. Since the Balance Sheet Date (as defined in
Section 3.m.), there has not occurred any change, event or development, and
there has not existed any condition having or reasonably likely to have, a
Material Adverse Effect.
j. Full Disclosure. There is no fact known to the Company (other than
general economic or industry conditions known to the public generally) that has
not been fully disclosed in writing to the Buyer that (i) reasonably could be
expected to have a Material Adverse Effect or (ii) reasonably could be expected
to materially and adversely affect the ability of the Company to perform its
obligations pursuant to this Agreement or the Registration Rights Agreement.
6
<PAGE>
k. Absence of Litigation. There is no action, suit, claim, proceeding,
inquiry or investigation pending or, to the Company's knowledge, threatened, by
or before any court or public or governmental authority which, if determined
adversely to the Company or any of its subsidiaries, would have a Material
Adverse Effect.
l. Absence of Events of Default. No "Event of Default" (as defined in any
agreement or instrument to which the Company or any of its subsidiaries is a
party) and no event which, with notice, lapse of time or both, would constitute
an Event of Default (as so defined), has occurred and is continuing, which could
have a Material Adverse Effect.
m. Financial Statements; No Undisclosed Liabilities. Seller has delivered
to Buyer true and complete copies of its (i) audited consolidated balance sheet
as at December 31, 1995 and the related audited consolidated statements of
operations and cash flows for the fiscal years ended December 31, 1995 and
December 31, 1994 and (ii) unaudited consolidated balance sheets as at March 31,
1996, June 30, 1996 and September 30, 1996, respectively, and the related
unaudited consolidated statements of operations and cash flows for the
three-month periods ended March 31, 1996, June 30, 1996 and September 30, 1996,
respectively, including in all such cases the related notes and schedules
thereto (collectively, the "Financial Statements"), and all management letters,
if any, from the Company's independent auditors relating to the dates and
periods covered by the Financial Statements. Each of the Financial Statements is
complete and correct in all material respects, has been prepared in accordance
with United States General Accepted Accounting Principles ("GAAP") (subject, in
the case of the interim Financial Statements, to normal year-end adjustments and
the absence of footnotes) and in conformity with the practices consistently
applied by the Company without modification of the accounting principles used in
the preparation thereof, and fairly presents the financial position, results of
operations and cash flows of the Company and its consolidated subsidiaries as at
the dates and for the periods indicated. For purposes hereof, the audited
consolidated balance sheet of the Company and its subsidiaries as at December
31, 1995 is hereinafter referred to as the "Balance Sheet" and December 31, 1995
is hereinafter referred to as the "Balance Sheet Date". Neither the Company nor
any of its subsidiaries has any indebtedness, obligations or liabilities of any
kind (whether accrued, absolute, contingent or otherwise, and whether due or to
become due) that would have been required to be reflected in, reserved
7
<PAGE>
against or otherwise described in the Balance Sheet or in the notes thereto in
accordance with GAAP, which was not fully reflected in, reserved against or
otherwise described in the Balance Sheet or the notes thereto or was not
incurred in the ordinary course of business consistent with the Company's past
practices since the Balance Sheet Date.
n. Compliance with Laws; Permits. The Company and each of its subsidiaries
is in compliance with all laws, rules, regulations, codes, ordinances and
statutes (collectively "Laws") applicable to it or to the conduct of its
business, except for such non-compliance which would not have a Material Adverse
Effect. The Company and each of its subsidiaries possesses all permits,
approvals, authorizations, licenses, certificates and consents from all public
and governmental authorities which are necessary to conduct its business, except
for those the absence of which would not have a Material Adverse Effect.
o. Related Party Transactions. Except as set forth in the Commission
Filings, neither the Company nor any of its officers, directors or "Affiliates"
(as such term is defined in Rule 12b-2 under the Exchange Act) has borrowed any
moneys from or has outstanding any indebtedness or other similar obligations to
the Company. Neither the Company nor any of its officers, directors or
Affiliates (i) owns any direct or indirect interest of any kind in, or controls
or is a director, officer, partner, member or employee of, or consultant to or
lender to or borrower from, or has the right to participate in the profits of,
any person or entity which is (x) a competitor, supplier, customer, landlord,
tenant, creditor or debtor of the Company or any of its subsidiaries, (y)
engaged in a business related to the business of the Company or any of its
subsidiaries, or (z) a participant in any transaction to which the Company or
any of its subsidiaries is a party or (ii) is a party to any contract,
agreement, commitment or other arrangement with the Company or any of its
subsidiaries.
p. Insurance. The Company maintains property and casualty, general
liability, workers' compensation, environmental hazard, personal injury and
other similar types of insurance with financially sound and reputable insurers
that is adequate, consistent with industry standards and the Company's
historical claims experience, to cover all loss contingencies which forseeably
may arise in the conduct of the business of the Company and its subsidiaries.
The Company has not received notice from, and has no knowledge of any threat by,
any insurer (that has issued any insurance policy to the Company or any of its
subsidiaries) that such insurer intends to deny coverage under or cancel,
discontinue or not renew any insurance policy presently in force.
8
<PAGE>
q. Securities Law Matters. Based, in part, upon the representations and
warranties of Buyer set forth in Section 2 hereof, the offer and sale by the
Company of the Debentures (and the Common Stock issuable upon conversion
thereof) is exempt from (i) the registration and prospectus delivery
requirements of the Securities Act and the rules and regulations of the
Commission thereunder and (ii) the registration and/or qualification provisions
of all applicable state securities and "blue sky" laws. Other than pursuant to
an effective registration statement under the Securities Act, the Company has
not issued, offered or sold the Debentures or any shares of Common Stock
(including for this purpose any securities of the same or a similar class as the
Debentures or Common Stock, or any securities convertible into or exchangeable
or exercisable for the Debentures or Common Stock or any such other securities)
within the six-month period next preceding the date hereof, except as disclosed
in the Commission Filings or otherwise previously disclosed in writing to Buyer,
and the Company shall not directly or indirectly take, and shall not permit any
of its directors, officers or Affiliates directly or indirectly to take, any
action (including, without limitation, any offering or sale to any person or
entity of the Debentures or shares of Common Stock), so as to make unavailable
the exemption from Securities Act registration being relied upon by the Company
for the offer and sale to Buyer of the Debentures (and the Common Stock issuable
upon conversion thereof) as contemplated by this Agreement. No form of general
solicitation or advertising has been used or authorized by the Company or any of
its officers, directors or Affiliates in connection with the offer or sale of
the Debentures (and the Common Stock issuable upon conversion thereof) as
contemplated by this Agreement or any other agreement to which the Company is a
party.
r. Environmental Matters. (i) The operations of the Company and each of its
subsidiaries are in compliance with all applicable Environmental Laws and all
permits issued pursuant to Environmental Laws or otherwise;
(ii) to its knowledge, the Company and each of its subsidiaries has
obtained all permits required under all applicable Environmental Laws necessary
to operate its business;
(iii) neither the Company nor any of its subsidiaries is the subject of any
outstanding written order of or agreement with any governmental authority or
person respecting (i) Environmental Laws, (ii) Remedial Action or (iii) any
Release or threatened Release of Hazardous Materials;
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<PAGE>
(iv) neither the Company nor any of its subsidiaries has received any
written communication alleging either or both that the Company or any of its
subsidiaries may be in violation of any Environmental Law or any permit issued
pursuant to Environmental Law, or may have any liability under any Environmental
Law;
(v) neither the Company nor any of its subsidiaries has any current
contingent liability in connection with any Release of any Hazardous Materials
into the indoor or outdoor environment (whether on-site or off-site);
(vi) except as set forth in the Commission Filings, to the Company's
knowledge, there are no investigations of the business, operations, or currently
or previously owned, operated or leased property of the Company or any of its
subsidiaries pending or threatened which could lead to the imposition of any
liability pursuant to any Environmental Law;
(vii) to the Company's knowledge, there is not located at any of the
properties of the Company or any of its subsidiaries any (A) underground storage
tanks, (B) asbestos-containing material or (C) equipment containing
polychlorinated biphenyls; and,
(viii) the Company has provided to Buyer all environmentally related
audits, studies, reports, analyses, and results of investigations that have been
performed with respect to the currently or previously owned, leased or operated
properties of the Company or any of its subsidiaries.
For purposes of this Section 3.r.:
"Environmental Law" means any foreign, federal, state or local statute,
regulation, ordinance, or rule of common law as now or hereafter in effect in
any way relating to the protection of human health and safety or the environment
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. ss. 9601 et seq.), the Hazardous
Materials Transportation Act (49 U.S.C. App. ss. 1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.), the Clean Water Act
(33 U.S.C. ss. 1251 et seq.), the Clean Air Act (42 U.S.C. ss. 7401 et seq.),
the Toxic Substances Control Act (15 U.S.C. ss. 2601 et seq.), the Federal
Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. ss. 136 et seq.), and the
Occupational Safety and Health Act (29 U.S.C. ss. 651 et seq.), and the
regulations promulgated pursuant thereto.
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"Hazardous Material" means any substance, material or waste which is
regulated by the United States, Canada or any of its provinces, or any state or
local governmental authority including, without limitation, petroleum and its
by-products, asbestos, and any material or substance which is defined as a
"hazardous waste," "hazardous substance," "hazardous material," "restricted
hazardous waste," "industrial waste," "solid waste," "contaminant," "pollutant,"
"toxic waste" or toxic substance" under any provision of any Environmental Law;
"Release" means any release, spill, filtration, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, or leaching into the indoor
or outdoor environment, or into or out of any property;
"Remedial Action" means all actions to (x) clean up, remove, treat or in
any other way address any Hazardous Material; (y) prevent the Release of any
Hazardous Material so it does not endanger or threaten to endanger public health
or welfare or the indoor or outdoor environment; or (z) perform pre-remedial
studies and investigations or post- remedial monitoring and care.
s. Labor Matters. Except as set forth on Schedule 3.s., neither the Company
nor any of its subsidiaries is party to any labor or collective bargaining
agreement and there are no labor or collective bargaining agreements which
pertain to employees of the Company or any of its subsidiaries. No employees of
the Company or any of its subsidiaries are represented by any labor organization
and none of such employees has made a pending demand for recognition, and there
are no representation proceedings or petitions seeking a representation
proceeding presently pending or, to the Company's knowledge, threatened to be
brought or filed, with the National Labor Relations Board or other labor
relations tribunal. There is no organizing activity involving the Company or any
of its subsidiaries pending or to the Company's knowledge, threatened by any
labor organization or group of employees of the Company or any of its
subsidiaries. There are no (i) strikes, work stoppages, slowdowns, lockouts or
arbitrations or (ii) material grievances or other labor disputes pending or, to
the knowledge of the Company, threatened against or involving the company or any
of its subsidiaries. There are no unfair labor practice charges, grievances or
complaints pending or, to the knowledge of the Company, threatened by or on
behalf of any employee or group of employees of the Company.
t. ERISA Matters. Each of the Company, its subsidiaries and their ERISA
Affiliates is in compliance in all material respects with all provisions of
ERISA applicable to it. No Reportable Event has occurred, been waived or exists
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as to which the Company or any of its subsidiaries or any ERISA Affiliate was
required to file a report with the Pension Benefits Guaranty Corporation, and
the present value of all liabilities under all Plans (based on those assumptions
used to fund such Plans) did not, as of the most recent annual valuation date
applicable thereto, exceed the value of the assets of all such Plans in the
aggregate. None of the Company or any of its subsidiaries or ERISA Affiliates
has incurred any Withdrawal Liability that could result in a Material Adverse
Effect. None of the Company or any of its subsidiaries or ERISA Affiliates has
received any notification that any Multiemployer Plan is in reorganization or
has been terminated within the meaning of Title IV of ERISA, and no
Multiemployer Plan is reasonably expected to be in reorganization or termination
where such reorganization or termination has resulted or could reasonably be
expected to result in increases to the contributions required to be made to such
Plan or otherwise.
For purposes of this Section 3.t.:
"ERISA" means the Employee Retirement Income Security Act of 1974, or any
successor statute, together with the regulations thereunder, as the same may be
amended from time to time.
"ERISA Affiliate" means any trade or business (whether or not incorporated)
that was, is or hereafter may become, a member of a group of which the Company
or any of its subsidiaries is a member and which is treated as a single employer
under ss. 414 of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code").
"Multiemployer Plan" means a multiemployer plan as defined in Section
4001(a)(3) of ERISA to which the Company or any ERISA Affiliate (other than one
considered an ERISA Affiliate only pursuant to subsection (m) or (o) of ss. 414
of the Internal Revenue Code) is making or accruing an obligation to make
contributions, or has within any of the preceding five plan years made or
accrued an obligation to make contributions.
"PBGC" means the Pension Benefit Guaranty Corporation referred to and
defined in ERISA or any successor thereto.
"Plan" means any pension plan (other than a Multiemployer Plan) subject to
the provision of Title IV of ERISA or ss. 412 of the Internal Revenue Code that
is maintained for employees of the Company or any ERISA Affiliate.
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"Reportable Event" means any reportable event as defined in Section 4043(b)
of ERISA or the regulations issued thereunder with respect to a Plan (other than
a Plan maintained by an ERISA Affilare that is considered an ERISA Affiliate
only pursuant to subsection (m) or (o) of ss. 414 of the Internal Revenue Code.
"Withdrawal Liability" means liability to a Multiemployer Plan as a result
of a complete or partial withdrawal from such Multiemployer Plan, as such terms
are defined in Part I of Subtitle E of Title IV of ERISA.
u. Tax Matters. (i) The Company and each of its subsidiaries have filed all
Tax Returns which they are required to file under applicable Laws, except for
such Tax Returns in respect of which the failure to so file does not and could
not have a Material Adverse Effect; all such Tax Returns are true and accurate
and have been prepared in compliance with all applicable Laws; the Company and
each of its subsidiaries have paid all Taxes due and owing by them (whether or
not such Taxes are required to be shown on a Tax Return) and have withheld and
paid over to the appropriate taxing authorities all Taxes which they are
required to withhold from amounts paid or owing to any employee, stockholder,
creditor or other third parties; and since the Balance Sheet Date, the charges,
accruals and reserves for Taxes with respect to the Company (including any
provisions for deferred income taxes) reflected on the books of the Company are
adequate to cover any Tax liabilities of the Company and its subsidiaries if
their current tax year were treated as ending on the date hereof.
(ii) No claim has been made by a taxing authority in a jurisdiction where
either the Company or any of its subsidiaries does not file tax returns that
such corporation is or may be subject to taxation by that jurisdiction. There
are no foreign, federal, state or local tax audits or administrative or judicial
proceedings pending or being conducted with respect to the Company or any of its
subsidiaries; no information related to Tax matters has been requested by any
foreign, federal, state or local taxing authority; and no written notice
indicating an intent to open an audit or other review has been received by the
Company from any foreign, federal, state or local taxing authority. There are no
material unresolved questions or claims concerning the Company's or any of its
subsidiaries' Tax liability. Neither the Company nor any of its subsidiaries (A)
has executed or entered into a closing agreement pursuant to ss. 7121 of the
Internal Revenue Code or any predecessor provision thereof or any similar
provision of state, local or foreign law; or (B) has agreed to or is required to
make any adjustments pursuant to ss. 481 (a) of the Internal Revenue Code or any
similar provision of state, local or foreign law by reason of a change in
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accounting method initiated by the Company or any of its subsidiaries or has any
knowledge that the IRS has proposed any such adjustment or change in accounting
method, or has any application pending with any taxing authority requesting
permission for any changes in accounting methods that relate to the business or
operations of the Company or any of its subsidiaries. Neither the Company nor
any of its subsidiaries has been a United States real property holding
corporation within the meaning of ss. 897(c)(2) of the Internal Revenue Code
during the applicable period specified in ss. 897(c)(1)(A)(ii) of the Internal
Revenue Code.
(iii) Neither the Company nor any of its subsidiaries has made an election
under ss. 341(f) of the Internal Revenue Code. Neither the Company nor any of
its subsidiaries is liable for the Taxes of another person that is not a
subsidiary of the Company under (A) Treas. Reg. ss. 1.1502-6 (or comparable
provisions of state, local or foreign law), (B) as a transferee or successor,
(C) by contract or indemnity or (D) otherwise. Neither the Company nor any of
its subsidiaries is a party to any tax sharing agreement. Neither the Company
nor any of its subsidiaries has made any payments, is obligated to make payments
or is a party to an agreement that could obligate it to make any payments that
would not be deductible under ss. 280G of the Internal Revenue Code.
For purposes of this Section 3.u.:
"IRS" means the United States Internal Revenue Service.
"Tax" or "Taxes" means federal, state, county, local, foreign, or other
income, gross receipts, ad valorem, franchise, profits, sales or use, transfer,
registration, excise, utility, environmental, communications, real or personal
property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not.
"Tax Return" means any return, information report or filing with respect to
Taxes, including any schedules attached thereto and including any amendment
thereof.
v. No Misrepresentation. No representation or warranty of the Company
contained in this Agreement, any schedule, annex or exhibit hereto or any
agreement, instrument or certificate furnished by the Company to Buyer pursuant
to this Agreement, contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein, not misleading.
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4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Restrictive Legend. Buyer acknowledges and agrees that, upon issuance
pursuant to this Agreement, the Debentures (and any shares of Common Stock
issued in conversion thereof) shall have endorsed thereon a legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of the Debentures and the shares of Common Stock issuable upon
conversion thereon):
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED
AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS."
b. Filings. The Company shall make all necessary filings in connection with
the sale of the Debentures to the Buyer as required by all applicable Laws, and
shall provide a copy thereof to the Buyer promptly after such filing.
c. Reporting Status. So long as the Buyer beneficially owns any of the
Securities, the Company shall file all reports required to be filed by it with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act and shall not
terminate its status as an issuer required to file reports under the Exchange
Act even if such act or the rules and regulations thereunder would otherwise
permit such termination.
d. Use of Proceeds. The Company shall use the proceeds from the sale of the
Debentures (excluding amounts paid by the Company for legal fees and finder's
fees in connection with such sale) for the construction, retrofit and
refurbishing of the Company's phosphate plants in Calgary, Alberta, and fees and
expenses payable to Corporate Relations Group Inc.
e. Restrictions on Additional Financings; Right of First Offer. Except for
the transactions previously disclosed in writing to Buyer, the Company shall not
conduct or enter into any agreement, commitment or arrangement providing for the
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offer or sale of debt or equity securities (or any securities convertible into
or exchangeable or exercisable for debt or equity securities) with any third
party until the 241st day after the Closing Date, except that (i) with respect
to an additional amount of up to $1 million, to the extent the Buyer does not
invest such funds in securities of the Company within 30 days following the
Closing Date on terms to be mutually agreed upon, the Company shall have the
right to sell debt or equity securities (or securities convertible into or
exchangeable or exercisable for debt or equity securities) to any third party
provided the Buyer is first offered the opportunity (which shall remain open for
a period of 30 days from the date the Buyer receives notice thereof) to purchase
such additional securities on terms and conditions no less favorable to Buyer
than those offered in writing by such third party ("right of first refusal"),
(ii) commencing on the 131st day after the Closing Date, the Company shall have
the right to sell debt or equity securities to any third party to the extent
necessary to raise an additional $2 million provided the Buyer is offered a
right of first refusal (as defined in clause (i) above) with respect to such
securities, and (iii) for the 60-day period commencing on the 181st day after
the Closing Date, the Company shall have the right to sell debt or equity
securities to any third party (in addition to the amount referred to in (ii)
above) provided the Buyer is offered a right of first refusal (as defined in
clause (i) above) with respect to such securities. In the event that Buyer
declines to participate in any such right of first refusal, the Company shall
provide the Buyer with prompt written notice of the consummation of any such
transaction with a third party, specifying the material terms thereof; provided,
however, the provisions of this Section 4.f. shall not apply to the issuance of
Company securities in connection with a merger, consolidation, business
combination, sale of all or substantially all of the Company's assets or similar
extra-ordinary corporate transaction involving the Company or any of its
subsidiaries.
f. Listing. Except to the extent the Company becomes eligible to list its
Common Stock on a national securities exchange or obtained authorization to
include the Common Stock for quotation on the NASDAQ National Market System, the
Company shall maintain its listing of the Common Stock on the NASDAQ Small
Capitalization Market System.
g. Reserved Conversion Shares. The Company at all times from and after the
date hereof shall have a sufficient number of shares of Common Stock duly and
validly authorized and reserved for issuance to satisfy the conversion, in full,
of the Debentures (assuming for purposes of this Section 3.g., a conversion
price of $.75).
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5. TRANSFER AGENT INSTRUCTIONS.
a. The Company undertakes and agrees that no instruction other than the
instructions referred to in this Section 5 and customary stop transfer
instructions prior to the registration and sale of the Common Stock pursuant to
an effective Securities Act registration statement will be given to its transfer
agent for the Common Stock and that the Common Stock issuable upon conversion of
the Debentures otherwise shall be freely transferable on the books and records
of the Company as and to the extent provided in this Agreement, the Registration
Rights Agreement and applicable law. Nothing contained in this Section 5.a.
shall affect in any way Buyer's obligations and agreement to comply with all
applicable securities laws upon resale of such Common Stock. If, at any time,
Buyer provides the Company with an opinion of counsel reasonably satisfactory to
the Company that registration of the resale by Buyer of such Common Stock is not
required under the Securities Act and that the removal of restrictive legends is
permitted under applicable law, the Company shall permit the transfer of such
Common Stock and, promptly instruct the Company's transfer agent to issue one or
more certificates for Common Stock without any restrictive legends endorsed
thereon.
b. The Company shall permit Buyer to exercise its right to convert the
Debentures by telecopying an executed and completed Notice of Conversion to the
Company and delivering to the Company by express courier within five business
days thereafter, the original Notice of Conversion and the Debentures being
converted. Each date on which a Notice of Conversion is telecopied to and
received by the Company in accordance with the provisions hereof shall be deemed
a Conversion Date. The Company shall transmit the certificates evidencing the
shares of Common Stock issuable upon conversion of any Debentures (together with
certificates evidencing any principal amount of the Debentures not being so
converted) to Buyer via express courier, by electronic transfer or otherwise,
within five business days after receipt by the Company of the original Notice of
Conversion and the Debentures to be converted (the "Delivery Date").
c. The Company understands that a delay in the issuance of the shares of
Common Stock upon such conversion beyond the Delivery Date could result in
economic loss to Buyer. As compensation to Buyer for such loss (and not as a
penalty), the Company agrees to pay to Buyer for late issuance of Common Stock
upon conversion in accordance with the following schedule (where "No. Business
Days" is defined as the number of business days beyond five (5) days from
Delivery Date):
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Compensation For Each
$20,000 Principal
Amount of Debentures
No. Business Days Not Converted Timely
----------------- --------------------
1 $25
2 $50
3 $75
4 $100
5 $125
6 $150
7 $175
8 $200
9 $225
10 $250
more than 10 $250 + $100 for each
Business Day Late
beyond 10 days
The Company shall pay to Buyer the compensation described above by the transfer
of immediately available funds upon Buyer's demand. Nothing herein shall limit
Buyer's right to pursue actual damages for the Company's failure to issue and
deliver Common Stock to Buyer, and in addition to any other remedies which may
be available to Buyer, in the event the Company fails for any reason to effect
delivery of such shares of Common Stock within five business days after the
relevant Delivery Date, Buyer shall be entitled to rescind the relevant Notice
of Conversion by delivering a notice to such effect to the Company whereupon the
Company and Buyer shall each be restored to their respective original positions
immediately prior to delivery of such Notice of Conversion.
For purposes of this Section 5.c., an act of God shall excuse the delay in
issuance of shares of Common Stock upon conversion beyond the Delivery Date in
the event that acts of war or terrorism, or some other catastrophic event not
encountered in business renders the Company's or its transfer agent's
performance impossible. Such delay in issuance of shares shall be excused only
for so long as the act of God in fact renders performance impossible but in no
event longer than seven (7) business days.
6. DELIVERY INSTRUCTIONS.
The Debentures shall be delivered by the Company to the Escrow Agent
pursuant to Section 1(b) hereof on a "delivery-against-payment basis" at the
Closing.
7. CLOSING DATE.
The date and time of the issuance and sale of the Debentures (the "Closing
Date") shall be the date hereof or such other as shall be mutually agreed upon
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in writing. The issuance and sale of the Debentures shall occur on the Closing
Date at the offices of the Escrow Agent. Notwithstanding anything to the
contrary contained herein, the Escrow Agent shall not be authorized to release
to the Company the Purchase Price and to Buyer the certificate(s) (I/N/O Buyer)
evidencing the Debentures being purchased by Buyer unless the conditions set
forth in Section 8(c) and 9(g) hereof have been satisfied.
8. CONDITIONS TO THE COMPANY'S OBLIGATIONS.
The Buyer understands that the Company's obligation to sell the Debentures
on the Closing Date to Buyer pursuant to this Agreement is conditioned upon:
a. Delivery by Buyer to the Escrow Agent of the Purchase Price;
b. The accuracy on the Closing Date of the representations and warranties
of Buyer contained in this Agreement as if made on the Closing Date (except for
representations and warranties which, by their express terms, speak as of and
relate to a specified date, in which case such accuracy shall be measured as of
such specified date) and the performance by Buyer in all material respects on or
before the Closing Date of all covenants and agreements of Buyer required to be
performed by it pursuant to this Agreement on or before the Closing Date;
c. There shall not be in effect any Law or order, ruling, judgment or writ
of any court or public or governmental authority restraining, enjoining or
otherwise prohibiting any of the transactions contemplated by this Agreement.
9. CONDITIONS TO BUYER'S OBLIGATIONS.
The Company understands that Buyer's obligation to purchase the Debentures
on the Closing Date pursuant to this Agreement is conditioned upon:
a. Delivery by the Company to the Escrow Agent of one or more certificates
(I/N/O Buyer) evidencing the Debentures to be purchased by Buyer pursuant to
this Agreement;
b. The accuracy on the Closing Date of the representations and warranties
of the Company contained in this Agreement as if made on the Closing Date
(except for representations and warranties which, by their express terms, speak
as of and relate to a specified date, in which case such accuracy shall be
measured as of such specified date) and the performance by the Company in all
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material respects on or before the Closing Date of all covenants and agreements
of the Company required to be performed by it pursuant to this Agreement on or
before the Closing Date;
c. Buyer having received an opinion of counsel for the Company, dated the
Closing Date, in form, scope and substance reasonably satisfactory to the Buyer,
to the effect set forth in Annex III attached hereto.
d. There not having occurred (i) any general suspension of trading in, or
limitation on prices listed for, the Common Stock on the NASDAQ Small
Capitalization Market System, (ii) the declaration of a banking moratorium or
any suspension of payments in respect of banks in the United States, (iii) the
commencement of a war, armed hostilities or other international or national
calamity directly or indirectly involving the United States or any of its
territories, protectorates or possessions, or (iv) in the case of the foregoing
existing at the date of this Agreement, a material acceleration or worsening
thereof.
e. There not having occurred any event or development, and there being in
existence no condition, having or which reasonably and forseeably could have a
Material Adverse Effect.
f. The Company shall have delivered to Buyer (by bank or certified check or
wire transfer of immediately available funds to an account (or accounts)
specified by Buyer to the Company) reimbursement of Buyer's out-of-pocket costs
and expenses incurred in connection with the transactions contemplated by this
Agreement (including the reasonable fees and disbursements of Buyer's legal
counsel), upon submission by Buyer to the Company of appropriate documentary
evidence of such out-of-pocket costs and expenses.
g. There shall not be in effect any Law or order, ruling, judgment or writ
of any court or public or governmental authority restraining, enjoining or
otherwise prohibiting any of the transactions contemplated by this Agreement.
10. TERMINATION.
a. Termination by Mutual Written Consent. This Agreement may be terminated
and the transactions contemplated hereby may be abandoned, for any reason and at
any time prior to the Closing Date, by the mutual written consent of the Company
and Buyer.
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b. Termination by the Company or Buyer. This Agreement may be terminated
and the transactions contemplated hereby may be abandoned by action of the
Company or Buyer if (i) the Closing shall not have occurred at or prior to 5:00
p.m., New York City time, on March 31, 1997; provided, however, that the right
to terminate this Agreement pursuant to this Section 10.a.(i) shall not be
available to any party whose failure to fulfill any of its obligations under
this Agreement has been the cause of or resulted in the failure of the Closing
to occur at or before such time and date or (ii) any court or public or
governmental authority shall have issued an order, ruling, judgment or writ, or
there shall be in effect any Law, restraining, enjoining or otherwise
prohibiting the consummation of any of the transactions contemplated by this
Agreement.
c. Termination by Buyer. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned by Buyer at any time prior to
the Closing Date, if (i) the Company shall have failed to comply in any material
respect with any of its covenants or agreements contained in this Agreement,
(ii) there shall have been a breach by the Company with respect to any
representation or warranty made by it in this Agreement, or (iii) there shall
have occurred any event or development, or there shall be in existence any
condition, having or reasonably and forseeably likely to have a Material Adverse
Effect.
d. Termination by the Company. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned by the Company at any time
prior to the Closing Date, if (i) Buyer shall have failed to comply in any
material respect with any of its covenants or agreements contained in this
Agreement or (ii) there shall have been a breach by Buyer with respect to any
representation or warranty made by it in this Agreement.
11. SURVIVAL; INDEMNIFICATION.
a. The representations, warranties and covenants made by each of the
Company and Buyer in this Agreement, the annexes, schedules and exhibits hereto
and in each instrument, agreement and certificate entered into and delivered by
them pursuant to this Agreement, shall survive the Closing and the consummation
of the transactions contemplated hereby. In the event of a breach or violation
of any of such representations, warranties or covenants, the party to whom such
representations, warranties or covenants have been made shall have all rights
and remedies for such breach or violation available to it under the provisions
of this Agreement or otherwise, whether at law or in equity, irrespective of any
investigation made by or on behalf of such party on or prior to the Closing
Date.
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b. Indemnification of Buyer by the Company.
The Company hereby agrees to indemnify and hold harmless the Buyer, its
Affiliates and their respective officers, directors, partners and members
(collectively, the "Buyer Indemnitees"), from and against any and all losses,
claims, damages, judgments, penalties, liabilities and deficiencies
(collectively, "Losses"), and agrees to reimburse the Buyer Indemnitees for all
out-of-pocket expenses (including the fees and expenses of legal counsel), in
each case promptly as incurred by the Buyer Indemnitees and to the extent
arising out of or in connection with:
(i) any misrepresentation, omission of fact or breach of any
of the Company's representations or warranties contained in this
Agreement, the annexes, schedules or exhibits hereto or any instrument,
agreement or certificate entered into or delivered by the Company
pursuant to this Agreement; or
(ii) any failure by the Company to perform in any material
respect any of its covenants, agreements, undertakings or obligations
set forth in this Agreement, the annexes, schedules or exhibits hereto
or any instrument, agreement or certificate entered into or delivered
by the Company pursuant to this Agreement.
c. Indemnification of the Company by Buyer.
Buyer hereby agrees to indemnify and hold harmless the Company, its
Affiliates and their respective officers, directors, partners and members
(collectively, the "Company Indemnitees"), from and against any and all Losses,
and agrees to reimburse the Company Indemnitees for all out-of-pocket expenses
(including the fees and expenses of legal counsel), in each case promptly as
incurred by the Company Indemnitees and to the extent arising out of or in
connection with:
(i) any misrepresentation, omission of fact, or breach of any
of Buyer's representations or warranties contained in this Agreement,
the annexes, schedules or exhibits hereto or any instrument, agreement
or certificate entered into or delivered by Buyer pursuant to this
Agreement; or
(ii) any failure by Buyer to perform in any material respect
any of its covenants, agreements, undertakings or obligations set forth
in this Agreement or any instrument, certificate or agreement entered
into or delivered by Buyer pursuant to this Agreement.
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<PAGE>
d. Third Party Claims. Promptly after receipt by either party hereto
seeking indemnification pursuant to this Section 11 (an "Indemnified Party") of
written notice of any investigation, claim, proceeding or other action in
respect of which indemnification is being sought (each, a "Claim"), the
Indemnified Party promptly shall notify the party against whom indemnification
pursuant to this Section 11 is being sought (the "Indemnifying Party") of the
commencement thereof; but the omission to so notify the Indemnifying Party shall
not relieve it from any liability that it otherwise may have to the Indemnified
Party, except to the extent that the Indemnifying Party is materially prejudiced
and forfeits substantive rights and defenses by reason of such failure. In
connection with any Claim as to which both the Indemnifying Party and the
Indemnified Party are parties, the Indemnifying Party shall be entitled to
assume the defense thereof. Notwithstanding the assumption of the defense of any
Claim by the Indemnifying Party, the Indemnified Party shall have the right to
employ separate legal counsel and to participate in the defense of such Claim,
and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs
and expenses of such separate legal counsel to the Indemnified Party if (and
only if): (x) the Indemnifying Party shall have agreed to pay such fees,
out-of-pocket costs and expenses, (y) the Indemnified Party and the Indemnifying
Party reasonably shall have concluded that representation of the Indemnified
Party by the Indemnifying Party by the same legal counsel would not be
appropriate due to actual or, as reasonably determined by legal counsel to the
Indemnified Party, potentially differing interests between such parties in the
conduct of the defense of such Claim, or if there may be legal defenses
available to the Indemnified Party that are in addition to or disparate from
those available to the Indemnifying Party, or (z) the Indemnifying Party shall
have failed to employ legal counsel reasonably satisfactory to the Indemnified
Party within a reasonable period of time after notice of the commencement of
such Claim. If the Indemnified Party employs separate legal counsel in
circumstances other than as described in clauses (x), (y) or (z) above, the
fees, costs and expenses of such legal counsel shall be borne exclusively by the
Indemnified Party. Except as provided above, the Indemnifying Party shall not,
in connection with any Claim in the same jurisdiction, be liable for the fees
and expenses of more than one firm of legal counsel for the Indemnified Party
(together with appropriate local counsel). The Indemnifying Party shall not,
without the prior written consent of the Indemnified Party (which consent shall
not unreasonably be withheld), settle or compromise any Claim or consent to the
entry of any judgment that does not include an unconditional release of the
Indemnified Party from all liabilities with respect to such Claim or judgment.
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e. Other Claims.
In the event one party hereunder should have a claim for indemnification
that does not involve a claim or demand being asserted by a third party, the
Indemnified Party promptly shall deliver notice of such claim to the
Indemnifying Party. If the Indemnified Party disputes the claim, such dispute
shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in accordance with the
procedures and rules of the American Arbitration Association. Judgment upon any
award rendered by any arbitrators may be entered in any court having competent
jurisdiction thereof.
12. GOVERNING LAW: MISCELLANEOUS.
This Agreement shall be governed by and interpreted in accordance with the
laws of the State of New York, without regard to the conflicts of law principles
of such state. Each of the parties consents to the jurisdiction of the federal
courts whose districts encompass any part of the City of New York or the state
courts of the State of New York sitting in the City of New York in connection
with any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non conveniens, to the bringing of any such proceeding in such jurisdictions. A
facsimile transmission of this signed Agreement shall be legal and binding on
all parties hereto. This Agreement may be signed in one or more counterparts,
each of which shall be deemed an original. The headings of this Agreement are
for convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction. This Agreement may be amended only by an instrument
in writing signed by the party to be charged with enforcement. This Agreement
supersedes all prior agreements and understandings among the parties hereto with
respect to the subject matter hereof.
13. NOTICES. Any notice required or permitted hereunder shall be given in
writing (unless otherwise specified herein) and shall be deemed effectively
given upon personal delivery or seven business days after deposit in the United
States Postal Service, by (a) advance copy by fax, and (b) mailing by express
courier or registered or certified mail with postage and fees prepaid, addressed
to each of the other parties thereunto entitled at the following addresses, or
at such other addresses as a party may designate by ten days advance written
notice to each of the other parties hereto.
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COMPANY: EARTH SCIENCES, INC.
910 12th Street
Golden, Colorado 80401
Attention: President
Telephone: (303) 292-6400
Fax: (303) 295-3040
with a copy to:
Parcel, Mauro, Hultin & Spaanstra
1801 California Street, Suite 3600
Denver, Colorado 80202
Attention: Scott Reid, Esq.
Telephone: (303) 292-6400
Fax: (303) 295-3040
BUYER: THE SHAAR FUND LTD.
Apartment 4F
62 King George Street
Jerusalem, Israel
Attention: Samuel Levinson
Telephone: 00-972-2-566-1144
Fax: 00-972-2-566-0424
ESCROW AGENT: WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Attention: Dennis J. Block, Esq.
Telephone: (212) 310-8000
Fax: (212) 310-8007
14. CONFIDENTIALITY. Each of the Company and Buyer agrees to keep
confidential and not to disclose to or use for the benefit of any third party
the terms of this Agreement or any other information which at any time is
communicated by the other party as being confidential without the prior written
approval of the other party; provided, however, that this provision shall not
apply to information which, at the time of disclosure, is already part of the
public domain (except by breach of this Agreement) and information which is
required to be disclosed by law.
15. ASSIGNMENT. This Agreement shall not be assignable by either of the
parties hereto prior to the Closing without the prior written consent of the
other party, and any attempted assignment contrary to the provisions hereby
shall be null and void; provided, however, that Buyer may assign its rights and
obligations hereunder, in whole or in part, to any affiliate of Buyer who
furnishes to the
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Company the representations and warranties set forth in Section 2 hereof.
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IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement on the date first above written.
EARTH SCIENCES, INC.
By: /s/ Mark H. McKinnies
---------------------------------
Name: Mark H. McKinnies
Title: President
THE SHAAR FUND LTD.
By: /s/ Jeremy Posen
---------------------------------
Name:Jeremy Posen
Title: Secretary
27
EXHIBIT 10.9
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated this 21st day of March 1997 (this
"Agreement"), between EARTH SCIENCES, INC., a Colorado Corporation, with
principal executive offices located at 910 12th Street, Golden, Colorado 80401
(the "Company"), and the undersigned (the "Initial Investor").
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions of the Securities
Purchase Agreement dated March 21, 1997, between the Initial Investor and the
Company (the "Securities Purchase Agreement"), the Company has agreed to issue
and sell to the Initial Investor $2,510,000 aggregate principal amount of its 4%
Convertible Debentures due March 31, 1999 (the "Debentures") which, upon the
terms and subject to the conditions thereof, are convertible into shares of the
common stock, $.01 par value, of the Company (the "Common Stock"); and
WHEREAS, to induce the Initial Investor to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide with respect to
the Common Stock issued or issuable upon conversion of the Debentures certain
registration rights under the Securities Act;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have the meanings:
(i) "Affiliate" of any specified Person means any other
Person who directly, or indirectly through one or more intermediaries,
is in control of, is controlled by, or is under common control with,
such specified Person. For purposes of this definition, control of a
Person means the power, directly or indirectly, to direct or cause the
direction of the management and policies of or otherwise; and the terms
"controlling" and "controlled" have the respective meanings correlative
to the foregoing.
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(ii) "Commission" means the Securities and Exchange
Commission.
(iii) "Exchange Act" means the Securities Exchange Act of
1934, as amended, and the rules and regulations of the Commission
thereunder, or any similar successor statute.
(iv) "Investor" means the Initial Investor and any transferee
or assignee of Registrable Securities who agrees to become bound by all
of the terms and provisions of this Agreement in accordance with
Section 8 hereof.
(v) "Person" means any individual, partnership, corporation,
limited liability company, joint stock company, association, trust,
unincorporated organization, or a government or agency or political
subdivision thereof.
(vi) "Prospectus" means the prospectus (including, without
limitation, any preliminary prospectus and any final prospectus filed
pursuant to Rule 424(b) under the Securities Act, including any
prospectus that discloses information previously omitted from a
prospectus filed as part of an effective registration statement in
reliance on Rule 430A under the Securities Act) included in the
Registration Statement, as amended or supplemented by any prospectus
supplement with respect to the terms of the offering of any portion of
the Registrable Securities covered by the Registration Statement and by
all other amendments and supplements to such prospectus, including all
material incorporated by reference in such prospectus and all documents
filed after the date of such prospectus by the Company under the
Exchange Act and incorporated by reference therein.
(vii) "Registrable Securities" means the Common Stock issued
or issuable upon conversion of the Debentures; provided, however, a
share of Common Stock shall cease to be a Registrable Security for
purposes of this Agreement when it no longer is a Restricted Security.
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(viii) "Registration Statement" means a registration statement
of the Company filed on an appropriate form under the Securities Act
providing for the registration of, and the sale on a continuous or
delayed basis by the holders of, all of the Registrable Securities
pursuant to Rule 415 under the Securities Act, including the Prospectus
contained therein and forming a part thereof, any amendments to such
registration statement and supplements to such Prospectus, and all
exhibits and other material incorporated by reference in such
registration statement.
(ix) "Restricted Security" means any share of Common Stock
issued or issuable upon conversion of the Debentures except any such
share that (i) has been registered pursuant to an effective
registration statement under the Securities Act and sold in a manner
contemplated by the Prospectus included in the Registration Statement,
(ii) has been transferred in compliance with the resale provisions of
Rule 144 under the Securities Act (or any successor provision thereto)
or is transferable pursuant to paragraph (k) of Rule 144 under the
Securities Act (or any successor provision thereto), or (iii) otherwise
has been transferred and a new share of Common Stock not subject to
transfer restrictions under the Securities Act has been delivered by or
on behalf of the Company.
(x) "Securities Act" means the Securities Act of 1933, as
amended, and the rules and regulations of the Commission thereunder, or
any similar successor statute.
(b) All capitalized terms used and not defined herein have the respective
meaning assigned to them in the Securities Purchase Agreement.
2. Registration.
(a) Filing and Effectiveness of Registration Statement. The Company shall
prepare and file with the Commission not later than the 30th day after the
Closing Date, a Registration Statement relating to the offer and sale of the
Registrable Securities and shall use its best efforts to cause the Commission to
declare such Registration Statement effective under the Securities Act as
promptly as practicable but not later than 90 days after the Closing Date (as
defined in the Securities Purchase Agreement), assuming for purposes hereof a
Conversion Price under the Debentures of $1.50 per share.
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(b) Underwritten Offering. If the offering pursuant to a Registration
Statement contemplated by Section 2(a) hereof involves an underwritten offering,
the Investors who hold a majority-in-interest of the Registrable Securities
subject to such underwritten offering shall have the right to select one legal
counsel to represent their interests, and an investment banker (or bankers) and
manager (or managers) to administer the offering, which investment banker (or
bankers) or manager (or managers) shall be reasonably satisfactory to the
Company. The Investors who hold the Registrable Securities to be included in
such underwriting shall pay all underwriting discounts and commissions of such
investment banker (or bankers) and manager (or managers) so selected in
accordance with this Section 2(b) with respect to their Registrable Securities.
(c) Registration Default. If the Registration Statement covering the
Registrable Securities required to be filed by the Company pursuant to Section
2(a) hereof is not declared effective by the Commission within 120 days after
the Closing Date (the "Initial Date"), then the Company shall make the payments
to the Initial Investor as provided in the next sentence. The amount to be paid
by the Company to the Initial Investor shall be determined as of each
Computation Date, and such amount shall be equal to 2% of the Purchase Price (as
defined in the Securities Purchase Agreement) from the Initial Date to the first
Computation Date, and 3% of the Purchase Price for each Computation Date
thereafter, calculated on a pro rata basis to the date on which the Registration
Statement is declared effective by the Commission (the "Periodic Amount"). The
full Periodic Amount shall be paid by the Company to the Initial Investor by
wire transfer of immediately available funds within three days after each
Computation Date.
As used in this Section 2(c), "Computation Date" means the date which is 30
days after the Initial Date and, if the Registration Statement required to be
filed by the Company pursuant to Section 2(a) has not theretofore been declared
effective by the Commission, and each date which is 30 days after the previous
Computation Date until such Registration Statement is so declared effective.
(d) Eligibility for Use of Form S-3. The Company agrees that at such time
as it meets all the requirements for the use of Securities Act Registration
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Statement on Form S-3 it shall file all reports and information required to be
filed by it with the Commission in a timely manner and take all such other
action so as to maintain such eligibility for the use of such form.
(e) In the event the Current Market Price under the Debentures declines to
$2.25, the Company shall file an additional Registration Statement with the
Commission for such additional number of Registrable Securities as would be
issuable upon conversion of the Debentures, in addition to those previously
registered, assuming a Conversion Price of $.75 per share. The Company shall
prepare and file with the Commission not later than the 30th day thereafter, a
Registration Statement relating to the offer and sale of such Registrable
Securities and shall use its best efforts to cause the Commission to declare
such Registration Statement effective under the Securities Act as promptly as
practicable but not later than 60 days thereafter.
3. Obligations of the Company. In connection with the registration of the
Registrable Securities, the Company shall:
(a) Promptly (i) prepare and file with the Commission such amendments
(including post-effective amendments) to the Registration Statement and
supplements to the Prospectus as may be necessary to keep the Registration
Statement continuously effective and in compliance with the provisions of the
Securities Act applicable thereto so as to permit the Prospectus forming part
thereof to be current and useable by Investors for resales of the Registrable
Securities for a period of two years from the date on which the Registration
Statement is first declared effective by the Commission (the "Effective Time")
or such shorter period that will terminate when all the Registrable Securities
covered by the Registration Statement have been sold pursuant thereto in
accordance with the plan of distribution provided in the Prospectus, transferred
pursuant to Rule 144 under the Securities Act or otherwise transferred in a
manner that results in the delivery of new securities not subject to transfer
restrictions under the Securities Act (the "Registration Period") and (ii) take
all lawful action such that each of (A) the Registration Statement and any
amendment thereto does not, when it becomes effective, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, not misleading and
(B) the Prospectus forming part of the Registration Statement, and any
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<PAGE>
amendment or supplement thereto, does not at any time during the Registration
Period include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Notwithstanding the foregoing provisions of this Section 3(a), the
Company may, during the Registration Period, suspend the use of the Prospectus
for a period not to exceed 30 days (whether or not consecutive) in any 12-month
period if the Board of Directors of the Company determines in good faith that
because of valid business reasons, including pending mergers or other business
combination transactions, the planned acquisition or divestiture of assets,
pending material corporate developments and similar events, it is in the best
interests of the Company to suspend such use, and prior to or contemporaneously
with suspending such use the Company provides the Investors with written notice
of such suspension, which notice need not specify the nature of the event giving
rise to such suspension. At the end of any such suspension period, the Company
shall provide the Investors with written notice of the termination of such
suspension.
(b) During the Registration Period, comply with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities of
the Company covered by the Registration Statement until such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition by the Investors as set forth in the Prospectus forming
part of the Registration Statement;
(c) (i) Prior to the filing with the Commission of any Registration
Statement (including any amendments thereto) and the distribution or delivery of
any Prospectus (including any supplements thereto), provide draft copies thereof
to the Investors and reflect in such documents all such comments as the
Investors (and their counsel) reasonably may propose and (ii) furnish to each
Investor whose Registrable Securities are included in the Registration Statement
and its legal counsel identified to the Company, (A) promptly after the same is
prepared and publicly distributed, filed with the Commission, or received by the
Company, one copy of the Registration Statement, each Prospectus, and each
amendment or supplement thereto, and (B) such number of copies of the Prospectus
and all amendments and supplements thereto and such other documents, as such
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<PAGE>
Investor may reasonably request in order to facilitate the disposition of the
Registrable Securities owned by such Investor;
(d) (i) Register and qualify the Registrable Securities covered by the
Registration Statement under such securities or "blue sky" laws of such
jurisdictions as the Investors who hold a majority-in-interest of the
Registrable Securities being offered reasonably request, (ii) prepare and file
in such jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof at all times during the Registration Period,
(iii) take all such other lawful actions as may be necessary to maintain such
registrations and qualifications in effect at all times during the Registration
Period, and (iv) take all such other lawful actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
therewith or as a condition thereto to (A) qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (B) subject itself to general taxation in any such jurisdiction or
(C) file a general consent to service of process in any such jurisdiction;
(e) As promptly as practicable after becoming aware of such event, notify
each Investor of the occurrence of any event, as a result of which the
Prospectus included in the Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and
promptly prepare an amendment to the Registration Statement and supplement to
the Prospectus to correct such untrue statement or omission, and deliver a
number of copies of such supplement and amendment to each Investor as such
Investor may reasonably request;
(f) As promptly as practicable after becoming aware of such event, notify
each Investor who holds Registrable Securities being sold (or, in the event of
an underwritten offering, the managing underwriters) of the issuance by the
Commission of any stop order or other suspension of the effectiveness of the
Registration Statement at the earliest possible time and take all lawful action
to effect the withdrawal, recession or removal of such stop order or other
suspension;
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<PAGE>
(g) (i) Cause all the Registrable Securities covered by the Registration
Statement to be listed on the principal national securities exchange, and
included in an inter-dealer quotation system of a registered national securities
association, on or in which securities of the same class or series issued by the
Company are then listed or included;
(h) Maintain a transfer agent and registrar, which may be a single entity,
for the Registrable Securities not later than the effective date of the
Registration Statement;
(i) Cooperate with the Investors who hold Registrable Securities being
offered to facilitate the timely preparation and delivery of certificates for
the Registrable Securities to be offered pursuant to the Registration Statement
and enable such certificates for the Registrable Securities to be in such
denominations or amounts, as the case may be, as the Investors reasonably may
request and registered in such names as the Investors may request; and, within
three business days after a Registration Statement which includes Registrable
Securities is declared effective by the Commission, deliver and cause legal
counsel selected by the Company to deliver to the transfer agent for the
Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement) an appropriate
instruction and opinion of such counsel;
(j) Take all such other lawful actions necessary to expedite and facilitate
the disposition by the Investors of their Registrable Securities in accordance
with the intended methods therefor provided in the Prospectus.
(k) Make generally available to its securityholders as soon as practicable,
but in any event not later than 18 months after (i) the effective date (as
defined in Rule 158(c) under the Securities Act) of the Registration Statement,
(ii) the effective date of each post-effective amendment to the Registration
Statement, and (iii) the date of each filing by the Company with the Commission
of its Annual Report on Form 10-K or 10-KSB, as the case may be, an earnings
statement of the Company and its subsidiaries complying with Section 11(a) of
the Securities Act and the rules and regulations of the Commission thereunder
(including, at the option of the Company, Rule 158);
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(l) In the event of an underwritten offering, promptly include or
incorporate in a Prospectus supplement or post-effective amendment to the
Registration Statement such information as the managers reasonably agree should
be included therein and to which the Company does not reasonably object and make
all required filings of such Prospectus supplement or post-effective amendment
as soon as practicable after it is notified of the matters to be included or
incorporated in such Prospectus supplement or post-effective amendment;
(m) Enter into such customary agreements (including an underwriting
agreement in customary form in the event of an underwritten offering) and take
all such other lawful action to expedite and facilitate the registration and
disposition of the Registrable Securities, and in connection therewith, if an
underwriting agreement is entered into, cause the same to contain
indemnification provisions and procedures substantially identical to those set
forth in this Agreement;
(n) (i) Make reasonably available for inspection by Investors, any
underwriter participating in any disposition pursuant to the Registration
Statement, and any attorney, accountant or other agent retained by such
Investors or any such underwriter all relevant financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries, and (ii) cause the Company's officers, directors and employees to
supply all information reasonably requested by such Investors or any such
underwriter, attorney, accountant or agent in connection with the Registration
Statement, in each case, as is customary for similar due diligence examinations;
provided, however, that all records, information and documents that are
designated in writing by the Company, in good faith, as confidential,
proprietary or containing any material non-public information shall be kept
confidential by such Investors and any such underwriter, attorney, accountant or
agent (pursuant to an appropriate confidentiality agreement in the case of any
such holder or agent), unless such disclosure is made pursuant to judicial
process in a court proceeding (after first giving the Company an opportunity
promptly to seek a protective order or otherwise limit the scope of the
information sought to be disclosed) or is required by law, or such records,
information or documents become available to the public generally or through a
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third party not in violation of an accompanying obligation of confidentiality;
and provided further that, if the foregoing inspection and information gathering
would otherwise disrupt the Company's conduct of its business, such inspection
and information gathering shall, to the maximum extent possible, be coordinated
on behalf of the Investors and the other parties entitled thereto by one firm of
counsel designed by and on behalf of the Investors and other parties;
(o) In connection with any underwritten offering, make such representations
and warranties to the Investors participating in such underwritten offering and
to the managers, in form, substance and scope as are customarily made by the
Company to underwriters in secondary underwritten offerings;
(p) In connection with any underwritten offering, obtain opinions of
counsel to the Company (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the managers) addressed to the
underwriters, covering such matters as are customarily covered in opinions
requested in secondary underwritten offerings and such other matters as may be
reasonably requested by the managers (it being agreed that the matters to be
covered by such opinions shall include, without limitation, as of the date of
the opinion and as of the Effective Time of the Registration Statement or most
recent post-effective amendment thereto, as the case may be, the absence from
the Registration Statement and the Prospectus, including any documents
incorporated by reference therein, of an untrue statement of a material fact or
the omission of a material fact required to be stated therein or necessary to
make the statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading, subject to customary
limitations;
(q) In connection with any underwritten offering, obtain "cold comfort"
letters and updates thereof from the independent public accountants of the
Company (and, if necessary, from the independent public accountants of any
subsidiary of the Company or of any business acquired by the Company, in each
case for which financial statements and financial data are, or are required to
be, included in the Registration Statement), addressed to each underwriter
participating in such underwritten offering (if such underwriter has provided
such letter, representations or documentation, if any, required for such cold
comfort letter to be so addressed), in customary form and covering matters of
the type customarily covered in "cold comfort" letters in connection with
secondary underwritten offerings;
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(r) In connection with any underwritten offering, deliver such documents
and certificates as may be reasonably required by the managers, if any.
(s) In the event that any broker-dealer registered under the Exchange Act
shall be an "Affiliate" (as defined in Rule 2729(b)(1) of the rules and
regulations of the National Association of Securities Dealers, Inc. (the "NASD
Rules") (or any successor provision thereto)) of the Company or has a "conflict
of interest" (as defined in Rule 2720(b)(7) of the NASD Rules (or any successor
provision thereto)) and such broker-dealer shall underwrite, participate as a
member of an underwriting syndicate or selling group or assist in the
distribution of any Registrable Securities covered by the Registration
Statement, whether as a holder of such Registrable Securities or as an
underwriter, a placement or sales agent or a broker or dealer in respect
thereof, or otherwise, the Company shall assist such broker-dealer in complying
with the requirements of the NASD Rules, including, without limitation, by (A)
engaging a "qualified independent underwriter" (as defined in Rule 2720(b)(15)
of the NASD Rules (or any successor provision thereto)) to participate in the
preparation of the Registration Statement relating to such Registrable
Securities, to exercise usual standards of due diligence in respect thereof and
to recommend the public offering price of such Registrable Securities, (B)
indemnifying such qualified independent underwriter to the extent of the
indemnification of underwriters provided in Section 5 hereof, and (C) providing
such information to such broker-dealer as may be required in order for such
broker-dealer to comply with the requirements of the NASD Rules.
4. Obligations of the Investors. In connection with the registration of the
Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company to
complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it and the intended method of disposition of the Registrable Securities
held by it as shall be reasonably required to effect the registration of such
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Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. As least seven days prior to
the first anticipated filing date of the Registration Statement, the Company
shall notify each Investor of the information the Company requires from each
such Investor (the "Requested Information") if such Investor elects to have any
of its Registrable Securities included in the Registration Statement. If at
least two business days prior to the anticipated filing date the Company has not
received the Requested Information from an Investor (a "Non-Responsive
Investor"), then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor;
(b) Each Investor by its acceptance of the Registrable Securities agrees to
cooperate with the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the Company
in writing of its election to exclude all of its Registrable Securities from the
Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from the Company
of the occurrence of any event of the kind described in Section 3(e) or 3(f), it
shall immediately discontinue its disposition of Registrable Securities pursuant
to the Registration Statement covering such Registrable Securities until such
Investor's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 3(e) and, if so directed by the Company, such Investor
shall deliver to the Company (at the expense of the Company) or destroy (and
deliver to the Company a certificate of destruction) all copies in such
Investor's possession, of the Prospectus covering such Registrable Securities
current at the time of receipt of such notice.
5. Expenses of Registration. All expenses, other than underwriting
discounts and commissions, incurred in connection with registrations, filings or
qualifications pursuant to Section 3, but including, without limitation, all
registration, listing, and qualifications fees, printing and engraving and
accounting fees, and the fees and disbursements of counsel for the Company, and
the fees of one firm of counsel to the holders of a majority-in-interest of the
Registrable Securities shall be borne by the Company.
6. Indemnification and Contribution.
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(a) The Company shall indemnify and hold harmless each Investor and each
underwriter, if any, which facilitates the disposition of Registrable
Securities, and each of their respective officers and directors and each person
who controls such Investor or underwriter within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act (each such person being
sometimes hereinafter referred to as an "Indemnified Person") from and against
any losses, claims, damages or liabilities, joint or several, to which such
Indemnified Person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement or an
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, not misleading, or
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in any Prospectus or an omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and the Company hereby agrees to
reimburse such Indemnified Person for all legal and other expenses incurred by
them in connection with investigating or defending any such action or claim as
and when such expenses are incurred; provided, however, that the Company shall
not be liable to any such Indemnified Person in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon (i) an
untrue statement or alleged untrue statement made in, or an omission or alleged
omission from, such Registration Statement or Prospectus in reliance upon and in
conformity with written information furnished to the Company by such Indemnified
Person expressly for use therein or (ii) in the case of the occurrence of an
event of the type specified in Section 3(e), the use by the Indemnified Person
of an outdated or defective Prospectus after the Company has provided to such
Indemnified Person an updated Prospectus correcting the untrue statement or
alleged untrue statement or omission or alleged omission giving rise to such
loss, claim, damage or liability.
(b) Indemnification by the Investors and Underwriters. Each Investor
agrees, as a consequence of the inclusion of any of its Registrable Securities
in a Registration Statement, and each underwriter, if any, which facilitates the
disposition of Registrable Securities shall agree, as a consequence of
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facilitating such disposition of Registrable Securities, severally and not
jointly, to (i) indemnify and hold harmless the Company, its directors
(including any person who, with his or her consent, is named in the Registration
Statement as a director nominee of the Company), its officers who sign any
Registration Statement and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, against any losses, claims, damages or liabilities to which the
Company or such other persons may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in such Registration Statement or
Prospectus or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein (in light of the circumstances under which they were
made, in the case of the Prospectus), not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such holder or
underwriter expressly for use therein, and (ii) reimburse the Company for any
legal or other expenses incurred by the Company in connection with investigating
or defending any such action or claim as such expenses are incurred.
(c) Notice of Claims, etc. Promptly after receipt by a party seeking
indemnification pursuant to this Section 6 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party against whom indemnification pursuant to this
Section 6 is being sought (the "Indemnifying Party") of the commencement
thereof; but the omission to so notify the Indemnifying Party shall not relieve
it from any liability that it otherwise may have to the Indemnified Party,
except to the extent that the Indemnifying Party is materially prejudiced and
forfeits substantive rights and defenses by reason of such failure. In
connection with any Claim as to which both the Indemnifying Party and the
Indemnified Party are parties, the Indemnifying Party shall be entitled to
assume the defense thereof. Notwithstanding the assumption of the defense of any
Claim by the Indemnifying Party, the Indemnified Party shall have the right to
employ separate legal counsel and to participate in the defense of such Claim,
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and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs
and expenses of such separate legal counsel to the Indemnified Party if (and
only if): (x) the Indemnifying Party shall have agreed to pay such fees, costs
and expenses, (y) the Indemnified Party and the Indemnifying Party shall
reasonably have concluded that representation of the Indemnified Party by the
Indemnifying Party by the same legal counsel would not be appropriate due to
actual or, as reasonably determined by legal counsel to the Indemnified Party,
potentially differing interests between such parties in the conduct of the
defense of such Claim, or if there may be legal defenses available to the
Indemnified Party that are in addition to or disparate from those available to
the Indemnifying Party, or (z) the Indemnifying Party shall have failed to
employ legal counsel reasonably satisfactory to the Indemnified Party within a
reasonable period of time after notice of the commencement of such Claim. If the
Indemnified Party employs separate legal counsel in circumstances other than as
described in clauses (x), (y) or (z) above, the fees, costs and expenses of such
legal counsel shall be borne exclusively by the Indemnified Party. Except as
provided above, the Indemnifying Party shall not, in connection with any Claim
in the same jurisdiction, be liable for the fees and expenses of more than one
firm of counsel for the Indemnified Party (together with appropriate local
counsel). The Indemnifying Party shall not, without the prior written consent of
the Indemnifying Party (which consent shall not unreasonably be withheld),
settle or compromise any Claim or consent to the entry of any judgment that does
not include an unconditional release of the Indemnifying Party from all
liabilities with respect to such Claim or judgment.
(d) Contribution. If the indemnification provided for in this Section 6 is
unavailable to or insufficient to hold harmless an Indemnified Person under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
Indemnifying Party shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative fault of the Indemnifying Party and the Indemnified Party in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities (or actions in respect thereof); as well as any other relevant
equitable considerations. The relative fault of such Indemnifying Party and
Indemnified Party shall be determined by reference to, among other things,
15
<PAGE>
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
such Indemnified Party or by such Indemnified Party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The parties hereto agree that it would not be just
and equitable if contribution pursuant to this Section 6(d) were determined by
pro rata allocation (even if the Investors or any underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this Section 6(d).
The amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
shall be deemed to include any legal or other fees or expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The obligations of the Investors and any underwriters in this
Section 6(d) to contribute shall be several in proportion to the percentage of
Registrable Securities registered or underwritten, as the case may be, by them
and not joint.
(e) Notwithstanding any other provision of this Section 6, in no event
shall any (i) Investor be required to undertake liability to any person under
this Section 6 for any amounts in excess of the dollar amount of the proceeds to
be received by such Investor from the sale of such Investor's Registrable
Securities (after deducting any fees, discounts and commissions applicable
thereto) pursuant to any Registration Statement under which such Registrable
Securities are to be registered under the Securities Act and (ii) underwriter be
required to undertake liability to any Person hereunder for any amounts in
excess of the aggregate discount, commission or other compensation payable to
such underwriter with respect to the Registrable Securities underwritten by it
and distributed pursuant to the Registration Statement.
(f) The obligations of the Company under this Section 6 shall be in
addition to any liability which the Company may otherwise have to any
Indemnified Person and the obligations of any Indemnified Person under this
16
<PAGE>
Section 6 shall be in addition to any liability which such Indemnified Person
may otherwise have to the Company. The remedies provided in this Section 6 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to an indemnified party at law or in equity.
7. Rule 144. With a view to making available to the Investors the benefits
of Rule 144 under the Securities Act or any other similar rule or regulation of
the Commission that may at any time permit the Investors to sell securities of
the Company to the public without registration ("Rule 144"), the Company agrees
to:
(a) comply with the provisions of paragraph (c)(1) of Rule 144; and
(b) file with the Commission in a timely manner all reports and other
documents required to be filed by the Company pursuant to Section 13 or 15(d)
under the Exchange Act; and
8. Assignment. The rights to have the Company register Registrable
Securities pursuant to this Agreement shall be automatically assigned by the
Investors to any transferee of all or any portion of such securities (or all or
any portion of any Debenture of the Company which is convertible into such
securities) of Registrable Securities only if: (a) the Investor agrees in
writing with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to the Company within a reasonable time after such
assignment, (b) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (i) the name and address of such
transferee or assignee and (ii) the securities with respect to which such
registration rights are being transferred or assigned, (c) immediately following
such transfer or assignment, the securities so transferred or assigned to the
transferee or assignee constitute Restricted Securities, and (d) at or before
the time the Company received the written notice contemplated by clause (b) of
this sentence the transferee or assignee agrees in writing with the Company to
be bound by all of the provisions contained herein.
9. Amendment and Waiver. Any provision of this Agreement may be amended and
the observance thereof may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
17
<PAGE>
consent of the Company and Investors who hold a majority-in-interest of the
Registrable Securities. Any amendment or waiver effected in accordance with this
Section 9 shall be binding upon each Investor and the Company.
10. Miscellaneous.
(a) A person or entity shall be deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) If, after the date hereof, the Company grants to any Person any
registration Rights with respect to any Company securities which are more
favorable to such other Person than those provided in this Agreement, then the
Company forthwith shall grant (by means of an amendment to this Agreement or
otherwise) identical registration rights to all Investors hereunder.
(c) Notices required or permitted to be given hereunder shall be in writing
and shall be deemed to be sufficiently given when personally delivered (by hand,
by courier, by telephone line facsimile transmission, receipt confirmed) or sent
by certified mail, return receipt requested, properly addressed and with proper
postage pre-paid (i) if to the Company, to EARTH SCIENCES, INC., 910 12th
Street, Golden, Colorado 80401 ATT: President, with a copy to Parcel, Mauro,
Hultin & Spaanstra, 1801 California Street, Suite 3600, Denver, Colorado 80202,
ATT: Scott Reid, Esq., (ii) if to the Initial Investor, at the address set forth
in the Securities Purchase Agreement and (iii) if to any other Investor, at such
address as such Investor shall have provided in writing to the Company, or at
such other address as each such party furnishes by notice given in accordance
with this Section 10(b), and shall be effective, when personally delivered, upon
receipt and, when so sent by certified mail, four calendar days after deposit
with the United States Postal Service.
(d) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
18
<PAGE>
(e) This Agreement shall be governed by and interpreted in accordance with
the laws of the State of New York. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection including
any objection based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions. A facsimile transmission of this signed
Agreement shall be legal and binding on all parties hereto. This Agreement may
be signed in one or more counterparts, each of which shall be deemed an
original. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
(f) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and undertakings among
the parties hereto with respect to the subject matter hereof.
(g) Subject to the requirements of Section 9 hereof, this Agreement shall
inure to the benefit of and be binding upon the successors and assigns of each
of the parties hereto.
(h) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(i) The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning thereof.
19
<PAGE>
(j) The Company acknowledges that any failure by the Company to perform its
obligations under Section 3, or any delay in such performance could result in
direct damages to the Investors and the Company agrees that, in addition to any
other liability the Company may have by reason of any such failure or delay, the
Company shall be liable for all direct damages caused by such failure or delay.
(k) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
EARTH SCIENCES, INC.
By:/s/ Mark H. McKinnies
-----------------------------------------
Name: Mark H. McKinnies
Title: President
THE SHAAR FUND LTD.
By: /s/Jeremy Posen
-----------------------------------------
Name: Jeremy Posen
Title: Secretary
20
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