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, 1997
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. [ ]
State issuer's revenues for its most recent fiscal year. $ 1,578,000
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 6, 1998 was $22,263,000.
Number of shares outstanding of registrant's Common Stock, one cent par value as
of March 6, 1998 - 16,264,716.
DOCUMENTS INCORPORATED BY REFERENCE :
None
Transitional Small Business Disclosure Format: Yes No X
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PART I
Item 1. Description of Business
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 "Description of Business," and below in Item 6.
under "Management's Discussion and Analysis 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
including those set forth below or under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations." .
(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 specializing in chemical processing, air
pollution control and mineral exploration. Production of purified phosphate
products in Calgary commenced in June 1997. ESI was incorporated under the name
of Colorado Central Mines, Inc. in Colorado in 1957. Current major activities of
the Company include the operation of its recently modified solvent extraction
facility in Calgary, Alberta for production of purified phosphate products; flue
gas conditioning technology for coal-fired boilers and other applications
provided through ADA Environmental Solutions LLC ("ADA"), a majority-owned
subsidiary; and continued exploration activities for diamond and gold resources
in Venezuela.
During 1997, ESI (1) acquired a majority equity interest in ADA, which signed
contracts to provide three flue gas conditioning units to utilities in Wisconsin
and Mississippi; (2) commenced production of purified phosphate products at its
solvent extraction facility in Calgary, Alberta, Canada; (3) exercised its
option to settle the $9.4 million liability associated with the Calgary
facility, recognizing an extraordinary gain of approximately $2.2 million in the
fourth quarter; (4) continued exploration activities for gold resources in
Venezuela including its land contract covering approximately 1200 acres; (5)
performed limited exploration work on the Cerro Gordo gold/silver property in
Inyo County, California; (6) issued $8,785,000 in convertible debentures to fund
its activities; and (7) maintained its position in several mineral resources and
prospects in the Western US.
Thus far in 1998, ESI has (a) acquired exclusive rights to explore and mine the
CODSA 14 concession in Venezuela; (b) given written notice of its intent to
terminate funding of activities at the Cerro Gordo property; and (c) issued
approximately $3.1 million in convertible debentures. In addition, ADA has
commenced operation of its unit at Wisconsin Power and Light's Columbia Energy
Center, one of two units in Mississippi, the second of which is expected to
start up in April, and was awarded a contract to install a unit at Portland
General Electric's Boardman plant. These activities and those in the preceding
paragraph are described in the succeeding paragraphs of this Item 1(a) and below
in Item 1(b).
On April 30, 1997, ESI acquired a majority equity position in ADA by payments to
ADA of $900,000 in cash and a promissory note in the amount of $1,600,000. ESI
also acquired an option to purchase the remaining equity in ADA by the issuance
of 1,716,000 shares of its common stock exerciseable during a six month period
commencing May 1, 1998. In December 1997, ADA delivered its first three
commercial units; one to Wisconsin Power and Light Company ("WPL") and two to
Mississippi Power Co. ("MPC"), in accordance with contract terms. Injection of
chemical at the WPL installation commenced in January, 1998 and was suspended
after concerns arose from the results of co-injection of other chemicals. The
WPL unit went back on line in the first half of February 1998 and has been
operating satisfactorily since that time. One unit at MPC commenced injection in
the first half of March 1998, while the second unit is awaiting completion by
MPC of necessary electrical and piping connections. Based on the current
schedule for completion of these items, the remaining unit is expected to be
placed in operation in April. Although tests over several months were performed
satisfactorily at other utility companies, there can be no assurances that any
of the units will perform as anticipated.
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. Revamp of the facility to allow
production of purified phosphate products was completed in 1997. The Calgary
facility is routinely producing technical grade phosphoric acid and steps are
underway for production of food grade product targeted for completion by the end
of the second quarter in 1998. Production and sales of products have been
increasing monthly as ESI establishes and expands its market position. ESI
intends to pursue the recovery of other valuable elements in the feed stock once
routine production and cash flow are achieved. Initial investigation of such
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recovery potential is estimated to cost between $20,000-$50,000 and is expected
to be funded out of internally generated cash flow. There can be no assurances
that Registrant will be able to achieve its anticipated goals.
In January 1997, ESI finalized agreements with Yankee Atomic Electric Company
and Vermont Yankee Nuclear Power Corporation (the "Yankee Companies") and
acquired an option for $100,000 to terminate their liability position in the
Calgary facility recorded in the consolidated financial statements at
$9,382,000. The liability arose from prepayments by the Yankee Companies for
uranium. In October 1997, ESI exercised the option by paying the Yankee
Companies $1,150,000 and granting them a 10 year non-cost bearing net profits
royalty on activities at the Calgary facility. Future payments to the Yankee
Companies under the royalty are capped at a total of $4.85 million, and ESI can
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.
During 1997, through ESI's Venezuelan company, VENESI, ESI continued gold
exploration and development activities in Venezuela. ESI also owns 83% 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. VENESI 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"). VENESI is awaiting response from MEM on
these filings. Several other sites with existing MEM concessions are being
evaluated, and VENESI is negotiating with the current concession holders to
obtain rights to further explore these areas. In 1998 VENESI expects to conduct
surface exploration on the concessions, currently filed for, when they are
granted, and other areas, if any, obtained from ongoing negotiations.
In January 1998, ESI and VENESI signed a letter agreement with CODSA 14 S.A. to
acquire exclusive rights to explore and mine its diamond concession. Located in
southeastern Venezuela near the Brazil border, the concession covers 6,177 acres
(2,500 hectares). Exploratory mining of the alluvium on the concession has
recently produced diamonds in the two to five carat range in addition to minor
gold production. ESI is obligated to make payments of cash and stock valued at a
total of $50,000 during the 6- 8 month exploration period, after which it will
have earned the exclusive right to lease the concession. The lease terms call
for a sliding scale royalty that ranges from 5-20% based on the size and grade
of the diamonds mined. ESI expects to continue exploration and exploration
mining of the concession while it evaluates other potential in the area.
In 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. In January
1998, after receiving the evaluation and analysis of trench samples taken on the
property, ESI gave the required 30 day notice of its intent to cease funding of
the joint venture activities at the property. The trench results did not
demonstrate sufficient continuity in gold-bearing mineralization in ESI's
evaluation to warrant further exploration efforts given currently weak gold
prices.
During 1997, ESI issued $8,785,000 of convertible debentures (the "Debentures")
for which ESI received net proceeds of approximately $7.9 million. Interest on
the Debentures is payable quarterly. Of the total Debentures, $7,785,000 bear
interest at 4%, are convertible at any time following 45 days after the issuance
thereof, and mature on March 31, 1998 with regard to $550,000, August 31, 1998
with regard to $1,990,000, October 31, 1998 with regard to $2,100,000, and March
31, 1999 with regard to the balance of $3,145,000. The $7.8 million of
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. The remaining $1,000,000 in Debentures bear interest
at 10%, are secured by certain assets of ESI, are convertible at a weighted
average rate of $3.12 per share and mature on March 31, 2000. ESI is required to
register the shares underlying the Debentures, and may repurchase the $7.8
million in Debentures at a 25% premium under certain circumstances. As of March
19, 1998, $7,744,000 of the Debentures had been converted to common stock.
In January and February 1998, ESI issued $3,080,845 of 4% convertible debentures
(the "1998 Debentures") for which ESI received net proceeds of approximately
$2,830,000. Interest is payable quarterly. The 1998 Debentures are convertible
at any time following 45 days after the issuance thereof and mature on January
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 $2.00 per share. ESI is required to register
the shares underlying the Debentures, and may repurchase the Debentures at a 25%
premium under certain circumstances.
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(b) Business of Issuer.
Registrant is a diversified mineral exploration and development company with
production of purified phosphate products in Calgary, and through ADA provides
proprietary flue gas conditioning technology for air pollution abatement.
Registrant owns a processing facility in Calgary, Alberta, Canada which
recovered uranium oxide from phosphoric acid and for which the production of
purified phosphate products commenced in June 1997; a majority interest in ADA;
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 100% ownership of Recursos Minerales VENESI C.A.
("VENESI"), 83% ownership in Minera Antabari C.A. ("Antabari") and its 67%
ownership in Recursos Minerales ESIGEO C.A. ("ESIGEO") is exploring, evaluating,
acquiring and plans to develop diamond and gold resources in Venezuela.
Calgary Solvent Extraction Facility
In 1997, ESI commenced production of purified phosphate products at the
facility. The facility currently produces purified phosphoric acid (PPA) and
by-products. Earth Sciences Extraction Company ("ESEC"), a wholly-owned Canadian
limited partnership of ESI, operates the solvent extraction facility in Calgary,
Alberta.
ESEC's Facility
The phosphoric acid treatment facility was 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 modified the
facility to purify superphosphoric acid ("SPA") to a technical grade PPA and
manufacture by-products. ESI has negotiated a renewable annual supply contract
with Farmland Industries ("Farmland") and a supply arrangement with Agrium U.S.
Inc. ("Agrium") to supply the estimated requirement of SPA. The contract with
Farmland contains provisions that allow extension of the contract in the future
or termination upon a 90 day written notice. There can be no assurances that the
Company will be able to extend this contract and supply arrangement in the
future and/or obtain sufficient quantities of SPA at reasonable prices. 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. PPA is an important inorganic acid used in foods, cola beverages,
cleaning solutions, fertilizers, fire retardants and metal treatments, among
other uses. ESEC competes with four North American PPA producers in the
estimated 700,000 tons P2O5 industrial market where an estimated 200,000 tons
P2O5 of direct consumption PPA is sold. ESEC is the sole producer in Canada and
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. ESEC is marketing PPA by attempting to match other producers' quality
but with lower prices and improved service. If and when routine levels of
production are achieved, it is anticipated that cost advantages will be realized
from the use of less expensive purification through solvent extraction and lower
freight costs. By-products are being sold in local fertilizer markets. All of
the facility's production is being marketed through an agreement dated January
1, 1997 with Twin-Kem International, Inc., a Colorado corporation ("TKI") whose
principals have over 60 years of combined experience in the marketing and
distribution of industrial and agricultural chemicals. The agreement is for an
automatically renewing one-year term where TKI receives a commission of between
$2.00-$5.00 per ton of product sold. A prepayment of $100,000 toward such
commission was made in 1997, consisting of 50% cash and 50% stock. There can be
no assurances that actual sales recognized by ESEC will equal the anticipated
volumes.
The growth and profitability of operations at the ESEC facility in Calgary are
dependent upon, among other things, the sale of purified phosphate products to
chemical distributors and customers. Registrant has limited experience in
marketing industrial chemicals and is relying on consultants and others to
initiate and maintain sales contacts. PPA is not typically sold under long-term
contracts, and Registrant does not have any long-term commitments to purchase
its planned products. There can be no assurances that Registrant will be
successful in its future sales efforts.
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Solvent Extraction Process
The facility produces 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 was verified for several 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 is
being sold in local markets for its contained phosphate values. ESEC believes
that no significant waste will be generated at the ESEC facility. However, the
ESEC process has not been proven on a long-term commercial basis at the Calgary
plant. Although ESI has performed numerous bench-scale and pilot plant test of
the process, there can be no assurances that the process will yield satisfactory
results when employed on a continuing commercial scale.
Geographic Expansion
The growth and profitability of operations at the solvent extraction facility in
Calgary will be dependent upon, among other things, the ability to become the
predominate supplier of PPA in the geographic region surrounding Calgary and on
the US West Coast, and to sell on an increasing basis to the Minneapolis/Chicago
area. There can be no assurance that ESEC's efforts to expand sales can be
accomplished on a profitable basis.
Competition
ESEC's purified phosphate products will be sold in markets that are highly
competitive. The principal competitive factors include product quality, price
and distribution capabilities. There can be no assurances that ESEC will be able
to compete successfully against current and future competitors based on these
factors. ESEC will compete with several domestic and international producers,
many of whom have substantially greater financial, production, distribution and
marketing resources than ESEC. Increased competition could result in price
reductions, reduced margins and loss of market share, all of which could have a
material adverse affect on the ESEC business, financial condition and results of
operations.
If there is no demand, or the demand is less than projected, for ADA's services
for flue gas conditioning, Registrant will not recognize the synergies expected
from its acquisition, because ADA will not be able to utilize Registrant's
purified phosphate products.
ADA Environmental Solutions
In 1997, ESI acquired a majority equity position in ADA Environmental Solutions
LLC ("ADA") through a combination of stock and cash. The acquisition agreement,
signed April 30, 1997 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 exerciseable during the six months following May
1, 1998 by issuance of 1,716,000 shares of stock. Although at the current time
ESI intends to exercise its option, the principals of ADA 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.
The acquisition was prompted by synergism involving products produced by the
solvent extraction facility in Calgary. ADA utilizes product from the Calgary
facility and other sources in a new proprietary technology designed to reduce
particulate emissions from plants burning low-sulfur coal.
ADA's Technology and Services
ADA has developed a technology for conditioning flue gas streams from combustion
sources that allows existing air pollution control devices to operate more
efficiently. ADA, through various suppliers and contractors, manufactures
engineered skids for each individual application. The skids mix, pump and
monitor the feed of a proprietary chemical blend. The chemical blend is applied
to the flue gas stream by a pressurized system of specially designed lances and
nozzles. Such treatment of the flue gas stream alters the physical properties of
the fly ash particles contained therein by decreasing particle resistivity and
increasing particle cohesion. These alterations allow the existing electrostatic
precipitator (ESP) or baghouse to more effectively collect such fly ash
particles that would otherwise escape into the atmosphere. ADA also offers
consulting services to assist utilities in planning and implementing strategies
to meet new government emission standards requiring reductions in both sulfur
dioxide and nitrogen dioxide. ADA's technology also has application in the
cement and petroleum industries where particulate emissions are being or need to
be controlled.
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Market for ADA Services
It is expected that the 1990 Clean Air Act Amendments will result in as many as
600 coal-fired utility boilers switching to low-sulfur coal by the year 2000 to
meet the more stringent sulfur dioxide emission standards. Utilities that switch
to low-sulfur coals will generally require flue gas conditioning to meet the
federal standards unless they make costly equipment changes. ADA has entered
this market with its proprietary non-toxic chemical conditioner, which offers
both technical and economic advantages over the hazardous chemicals currently
being used. ADA's own sales staff markets its technology through trade shows,
mailings and direct contact with potential customers.
Competition
ADA's primary competition is the conventional flue gas conditioning technology
using either sulfur trioxide or a combination of sulfur trioxide and ammonia.
This technology has been available commercially since the 1970's and can be
obtained from a variety of suppliers and in a variety of forms. Conditioning of
fly ash by injecting small amounts of sulfur trioxide into the flue gas is a
well proven technique for improving performance of the ESP. Such sulfur trioxide
conditioning loses its effectiveness in application with temperatures over 350
degrees F. The competitive advantages of ADA's conditioning technology include
an effective temperature range of 375 degrees F to 900 degrees F; a simple
injection system; a non-toxic conditioner that will not become a secondary
pollutant; and chemicals that are safer and easier to handle on site.
Patents Pending
ADA has filed for three patents related to different aspects of its technology.
The patent applications are in various stages of review. ADA does not consider
the granting of any patents on such applications as critical to the ongoing
conduct of its business.
Venezuelan Gold Activities
ESI commenced initial exploration activities in Venezuela in the fall of 1988.
No proven commercially viable reserves have been discovered on the properties
discussed.
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
Antabari was formed in 1991, a Venezuelan company of which ESI owns 83%. 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. ESI is evaluating this next phase and/or a sale to third parties at
this time.
Pending Applications
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 the filings establish priority for the areas sought. The
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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.
Each of the three application areas cover 500 hectares (approx. 1200 acres). The
first concession area is known as Apicharai, located about 165 km from the town
of La Paragua on a small tributary to the Antabari river with a history of
panning and small scale hydraulic mining. The second concession area, known as
Man-cai, is located in a remote area near the Brazilian border accessible by
boat from the La Paragua river. The third concession area, known as Manaima, is
located 50 Km from the town of La Paragua.
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 1998 plans are to determine as quickly as possible
the nature and extent of diamond and gold mineralization on the CODSA 14
concession and the anticipated new land concessions, and to continue to define
those additional areas where future filings will be made. Activities may include
pitting, surface geochemistry, geologic mapping and trenching.
Mineral Properties and Other Business Matters
During 1997 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. 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. Continued
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.
Patents, Licenses and Franchises 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".
Competition and Scarcity of Mineral Lands. Many companies and individuals are
engaged in mineral exploration and development, including large, established
mining companies with substantial capabilities and long earnings records. There
is a limited amount of desirable mineral lands available for claim staking,
lease or other acquisition in the United States ("US"), Venezuela and other
areas where ESI contemplates conducting exploration activities. ESI may be at a
competitive disadvantage in acquiring mineral properties since it must compete
with these individuals and companies, many of which have greater financial
resources and larger technical staffs than ESI. From time to time, specific
properties or areas, which would otherwise be attractive to ESI for exploration
or acquisition, are unavailable due to their previous acquisition by other
companies.
Fluctuation in the Price of Minerals. The market price of minerals is extremely
volatile and beyond the control of ESI. Gold prices are generally influenced by
basic supply/demand fundamentals. The market dynamics of supply/demand can be
heavily influenced by economic policy, i.e., central banks sales/purchases,
political unrest, conflicts between nations, and general perceptions about
inflation. Fluctuating metal prices may have a significant impact on ESI's
results of operations and operating cash flow. Furthermore, if the price of a
mineral should drop dramatically, the value of ESI's properties which are being
explored or developed for that mineral could also drop dramatically, and ESI
might not be able to recover its investment in those properties. The decision to
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put a mine into production, and the commitment of the funds necessary for that
purpose, must be made long before the first revenues from production will be
received. During the last five years, the average annual market price of gold
has fluctuated between $300 per ounce and $384 per ounce. Price fluctuations
between the time that such a decision is made and the commencement of production
can change completely the economics of the mine. Although it is possible to
protect against price fluctuations by hedging in certain circumstances, the
volatility of mineral prices represents a substantial risk in the mining
industry generally which no amount of planning or technical expertise can
eliminate. ESI is not involved in, nor does it expect to enter into any hedging
activities
Environmental Controls. Compliance with environmental quality requirements and
reclamation laws imposed by federal, state, provincial, and local governmental
authorities may necessitate significant capital outlays, may materially affect
the economics of a given property, or may cause material changes or delays in
ESI's intended activities. The Secretary of the Interior has directed the BLM to
propose amendments to surface management regulations that impose more stringent
reclamation and environmental protection requirements on mining operations. The
extent of the changes, if any, which may be made by the BLM is not presently
known, and the potential impact on ESI as a result of future regulatory action
is difficult to predict. New or different environmental standards imposed by any
governmental authority in the future may adversely affect the ESI's activities.
United States Federal and state environmental laws and regulations potentially
applicable to mining exploration, development and operations of Registrant
include: (a) the assessment of environmental impacts pursuant to the National
Environmental Policy Act and its state counterparts; (b) the Endangered Species
Act and any comparable state laws; (c) water quality laws and regulations which
address impacts on waters of the United States or a state; (d) solid, and
possibly hazardous, waste laws and regulations to the extent that waste is
generated as a result of activities on the property; (e) air quality laws and
regulations if air emissions result from site operations; and (f) mined land
operational and reclamation requirements. In addition to the imposition of
requirements which may impact operations, a number of these environmental laws
and regulations impose permitting requirements related both to the initiation of
certain mining activities as well as to the ongoing operation once mining
commences. Local regulations in the U.S. typically are land use related rather
than environmental. 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.
Uncertainty of Title. Several of the ESI's mining properties which are in the
United States are unpatented mining claims to which ESI, or those under which
ESI holds its rights, has only possessory title. Because title to unpatented
mining claims is subject to inherent uncertainties, it is difficult to determine
conclusively ownership of such claims. Since a substantial portion of all
mineral exploration, development and mining in the United States now occurs on
unpatented mining claims, this uncertainty is inherent in the mining industry.
In addition, in order to retain title to an unpatented mining claim, a claim
holder must have met annual assessment work requirements ($100 per claim)
through September 1, 1992 and must have complied with stringent state and
federal regulations pertaining to the filing of assessment work affidavits.
Moreover, after September 1, 1992, the right to locate or maintain a claim
generally is conditional upon payment to the United States of a rental fee of
$100 per claim per year for each assessment year instead of performing
assessment work. State law may, in some instances, still require performance of
assessment work.
The present status of the ESI's properties as unpatented mining claims located
on public lands of the U.S. allows the claimant the exclusive right to mine and
remove valuable minerals, such as precious and base metals and industrial
minerals, found therein, and also to use the surface of the land solely for
purposes related to mining and processing the mineral-bearing ores. However,
legal ownership of the land remains with the U.S. Accordingly, with an
unpatented claim, the U.S. retains many of the incidents of ownership of land,
the U.S. regulates use of the surface, and ESI remains at risk that the claims
may be forfeited either to the U.S. or to rival private claimants due to failure
to comply with statutory requirements as to locations and maintenance of the
claims. If there exists a valuable deposit of locatable minerals (which is the
requirement for the unpatented claim to be valid in the first place), and
provided certain levels of work and improvements have been performed on an
unpatented mining claim, the Mining Law of 1872 authorizes claimants to then
seek to purchase the full title to the claim, thereby causing the claim to
become the private property of the claimant. Such full ownership expands the
claimant's permissible uses of the property (to any use authorized for private
property) and eliminates the need to comply with maintenance and reporting
requirements necessary to protect rights in an unpatented claim. At present
there is a statutory moratorium in effect prohibiting the Department of Interior
from accepting and processing new applications for purchase of fee title to
mining claims. The moratorium is likely to continue indefinitely but does not
affect the ability to hold and develop valuable deposits by means of unpatented
mining claims.
7
<PAGE>
Proposed Legislation Affecting the Mining Industry. For the last several
Congressional sessions, bills have been repeatedly introduced in the U.S.
Congress, which would supplant or radically alter the provisions of the Mining
Law of 1872. As of December 31, 1997, no such bills have passed, although a
number of differing and sometimes conflicting bills are now pending. 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 certain proposed
legislation, the ability of companies to obtain a patent on unpatented mining
claims would be nullified or substantially impaired. Moreover, certain forms of
such proposed legislation 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 development of such claims and the
economics of operating existing mines on federal unpatented mining claims. ESI's
financial performance could therefore be affected adversely by passage of such
legislation. It is impossible to predict at this point what any legislated
royalties might be, but a potential three to four percent gross royalty,
assuming a gold price of $300 per ounce, would have an approximated $9 to $12
per ounce impact on ESI's costs of any production from unpatented mining claims.
Uncertainty of Funding for Exploration. ESI has funded much of its exploration
and acquisition activities through joint venture arrangements, which minimize
the cost of such activities to ESI and allow it to explore and acquire a greater
number of properties than it would otherwise be able to explore or acquire on
its own. ESI has also funded a portion of its exploration activities without
joint venture participation, resulting in increased costs to ESI. ESI has been
successful in raising such funds for its exploration activities. Additional
funding from existing partners or third parties, however, may be necessary to
conduct detailed and thorough evaluations of, and to develop certain properties.
ESI's ability to obtain this financing will depend upon, among other things, the
price of gold and the industry's perception of its future price. Therefore,
availability of funding is dependent largely upon factors outside of ESI's
control, and cannot be accurately predicted. ESI does not know from what sources
it will derive any required funding. If ESI is not able to raise additional
funds (as to which there can be no assurance), it will not be able to fund
certain exploration activities on its own.
Uncertainty of Development and Operating Property Economics and Ore Grades at
Development Properties. Decisions as to whether any of the mineral development
properties which ESI now holds or which it may acquire in the future contain
commercially minable deposits, and whether such properties should therefore be
sold or brought into production, depend upon the results of exploration programs
and/or feasibility analyses and the recommendations of duly qualified engineers
or geologists. Such decisions involve consideration and evaluation of several
significant factors, including, but not limited to, the (a) costs of bringing a
property into production, including exploration and development work,
preparation of production feasibility studies and construction of production
facilities, (b) availability and costs of financing, (c) ongoing costs of
production, (d) market prices for the mineral to be produced, and (e) the amount
and grades of reserves or mineralized material. There can be no assurance that
any of the development properties now held by ESI, or which may be acquired by
ESI, contains a commercially minable mineral deposit, and therefore no assurance
that ESI will ever generate a positive cash flow from the sale of or production
operations on such properties. In addition, once a property is sold with a
retained royalty or placed into production, risks still exist that the amount
and grade of its reserves will not actually be as predicted. To the extent that
lower amounts and/or grades of reserves are experienced, costs per unit produced
and profitability can be adversely affected. Depending upon the extent of such
an effect in any of ESI's properties, ESI could incur a writedown on its
investment in any such property.
Seasonality of Activities. The activities of Registrant performed for its own
account are not seasonal, although winter weather may limit certain activities.
Dependence on Major Customers. 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.
Research and Development Activities. Registrant spent approximately $98,000 and
$109,000 on research and development activities related to the Calgary
extraction facility during 1997 and 1996, respectively. ADA spent approximately
$127,000 on research and development activities related to further development
of its technology during 1997.
Employees. As of December 31, 1997 Registrant employed 5 personnel at its
Golden, Colorado, offices and 25 full-time at the Calgary facility. ADA employs
12 people at its offices in Littleton, Colorado and 2 others at locations in
Alabama and New Hampshire. In addition, other personnel were employed on a
contract basis for specific project tasks.
8
<PAGE>
Item 2. Description of Property.
Registrant owns, controls and participates with others in mineral property
interests and mineral property exploration and development programs in 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 are commercially viable. In-house
studies for several of the undeveloped properties indicate technical and
economic feasibility, although Registrant is not currently pursuing development
of any of its exploration properties at this time. The following is summary
information regarding Registrant's principal properties. For purposes of this
item, Mineral Deposit or Mineralized Material is a mineralized body which has
been delineated by appropriately spaced drilling and/or underground sampling to
support a sufficient tonnage and average grade of metal(s). Such a deposit does
not qualify as a reserve, until a comprehensive evaluation based upon unit cost,
grade, recoveries, and other material factors conclude legal and economic
feasibility.
Exploration Properties
(a)Vanadium/Phosphate Properties.
Registrant's interests in the properties consist of fee ownership, State of
Idaho mineral leases, Federal leases and lease applications and leases with
private parties. The properties are located near Paris and Bloomington , Idaho
and cover approximately 3,000 acres. To date, drill testing on the southern
portion of the deposit show tonnage of approximately 53 million tons of
mineralized material. 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. This deposit may provide a
source for the purified phosphoric acid production at the Calgary facility (See
Item 1(a) above).
(b) 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 1997.
(c) Alunite Resources.
Alunite is a source of alumina (the raw material of aluminum), potassium sulfate
fertilizer, sulfuric acid and sulfur. 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.
(1) "LC" Alunite Property.
The property is located inn southwestern Colorado, about 7 miles south of Lake
City, Colorado and consists of approximately 1,667 acres. Results of exploration
work to date show a total of 61.1 million tons of mineralized material. 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.
9
<PAGE>
(2)"NG" Property and Other Utah Alunite Interests.
The properties are located within the southern end of the Wah Wah Mountain range
in southwestern Utah, approximately 38 miles from Milford, Utah. Registrant owns
Federal leases on 680 acres. All required lease payments were made in 1997.
Results of exploration and drilling programs on the properties to date show 129
million tons of mineralized material with a grade calculated to be 37.9% alunite
(approximately 14.03% alumina) with an additional 287 million tons of
mineralized material with average grades calculated to range from 33.5% to 39.4%
alunite (approximately 12.4% to 14.6% alumina).
Other Properties
(d) San Luis Property.
Registrant owns an 800 acre site near San Luis, Colorado on which gold mining
was conducted from 1991 through 1996 and from which Registrant received royalty
income during that period. Mining and milling activities were completed in 1996.
The property was reclaimed in accordance with the plan approved by the State of
Colorado during 1997. Registrant is evaluating alternatives for sale or
development of the real estate value of the property.
(e) 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 landowner.
Item 3. Legal Proceedings.
Registrant knows of no reportable pending legal matters involving Registrant or
its subsidiaries.
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)
1997 1996
1st Quarter $ 2.94 - 3 94 $ 1.63 - 2.56
2nd Quarter 2.69 - 3.69 1.63 - 4.31
3rd Quarter 2.06 - 3.13 1.50 - 3.75
4th Quarter 1.06 - 2.19 1.75 - 3.88
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 13, 1998 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. The terms of the $1,000,000
debenture with Tectonic Construction Co. prohibit the payment of dividends
without obtaining a written waiver.
(d) Recent Sales of Unregistered Securities.
See Items 1(a) and (b) above for a description of the convertible debentures
issued by Registrant in 1997 and in January and February of 1998. The debentures
were sold to a limited number of accredited investors pursuant to the exemption
provided by section 4(2) of the Securities Act of 1933. As of March 19, 1998,
$7,744,000 of such debentures issued in 1997 had been converted to 7,100,144
shares of Common stock of Registrant. As of that date, none of the debentures
issued in 1998 had been converted. Placement fees totaling $630,000 in cash and
77,850 shares of stock were paid in connection with the convertible debentures.
10
<PAGE>
In January 1997, Registrant sold 20,000 shares of its common stock for cash
consideration of $41,720 to an accredited investor in reliance upon the
exemption provided by section 4(2) of the Securities Act of 1933.
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 and under the heading "Description of
Business." Actual events or results could differ materially from those discussed
in the forward-looking statements as a result of various factors including those
set forth below or under the heading "Description of Business."
Liquidity and Capital Resources
Management believes that existing working capital and recent private placements
of convertible debentures are sufficient to the planned growth in operations
until positive cash flow is achieved in Calgary and at ADA, which are both
anticipated during 1998. The achievement of such positive cash flow is dependent
upon several factors including continued improvement of product quality in
Calgary, success in marketing phosphate products and meeting competition in the
market place, the failure in any of which could delay or frustrate such
achievement. For ADA, the achievement of positive cash flow is dependent upon
the successful ongoing operation of the unit currently operating at WPL and the
successful startup and operation of the 2 units at MPC, delay or unsatisfactory
operations at any of which could delay or frustrate such achievement..
Additional funds may be required to fund 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 $2.8 million from the issuance of convertible
debentures in the first quarter of 1998 (see Item 1(a) above).
Based on current estimates, the Calgary facility will require approximately CDN.
$500,000 (U.S. $350,000) to finalize modification for the production of food
grade phosphoric acid. Registrant expects to finance those requirements from
existing working capital.
Registrant is funding the majority of cash costs of the Venezuelan gold
exploration activities. Activities planned on CODSA 14, the existing SAMI
contract and on those concessions expected to be acquired in the future can be
met through existing working capital. Registrant may 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 used in operations totaled $3,178,000 for 1997 versus $893,000 for
1996. Cash flow from investing activities for 1997 included funding and
collections on notes receivable of $50,000, capital expenditures of $3,154,000
and the purchase of investment in ADA of $417,000. Cash flow from financing
activities in 1997 consisted of payments on restructuring of extraction plant
liability of $1,250,000, payments on notes payable and long-term debt of
$886,000, proceeds from the issuance of stock of $42,000 and proceeds from the
issuance of convertible debentures and notes payable of $8,586,000. Cash flow
from investing activities for 1996 included funding and collections on notes
receivable of $70,000 and capital expenditures of $736,000. 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 the issuance of convertible debentures of $899,000.
Results of Operations
Revenues from sales totaled $1,468,000 in 1997 with $945,000 of that amount from
ADA and $538,000 from Calgary phosphate sales. ADA's revenues were less than
anticipated due to delays in the installation of units at Wisconsin and
Mississippi. Sales of phosphate products were also less than targeted because of
the ADA delays and corrosion experienced in the Calgary facility that delayed
the routine production of acceptable technical grade product. In 1991, royalty
income from the San Luis gold mine commenced. Registrant recognized $692,000 in
revenue from the production and sale of gold and silver from the property in
1996. Production from the mine ended in November 1996. Rental income increased
slightly in 1997 due to increased charges to tenants. Other income increased in
1997 due to an increase in interest income earned from investment of funds on
hand and a legal settlement in the amount of $30,000.
Operating expenses increased significantly in 1997 as start up expenses were
incurred at activities related to both Calgary phosphate production ($1,561,000
of the increase) and ADA ($700,000 of the increase). Consolidated research and
development increased to $225,000 from $109,000 in 1996. General and
administrative expenses rose significantly in 1997 as a result of adding staff
in Calgary for start-up activities ($342,000 of the increase), consolidation of
ADA's start up activities ($699,000 of the increase), an increased investor
relations program ($1,597,000 of the increase) and adoption of a sabbatical
leave policy during 1997 ($200,000 of the increase).
11
<PAGE>
Registrant's interest expense totaled approximately $3,062,000 for 1997 and only
$82,000 for 1996. Interest expense includes approximately $20,000 in 1997 and
$40,000 in 1996 from the consolidation of the Canadian subsidiary's and ADA's
results. Included in interest expense for 1997 is a $2,595,000 non-cash charge
representing the 25% discount from market related to the convertible debentures
issued in 1997. Registrant will be required to recognize $1,027,000 in interest
expense in the first quarter of 1998 as a result of the convertible debentures
issued in January and February 1998.
Extraordinary gain from debt restructuring recognized in 1997 represents the
difference between the recorded liabilities at the time of settlement with
Yankee Companies of $9,382,000 and the settlement payments totaling $1,250,000
plus the remaining recorded liability of $4,850,000, net of income taxes of
$985,000. 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.
Impact of Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four digits to define years. Any of Registrant's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Based on a recent assessment, Registrant determined that it will not be
necessary to modify or replace any significant portions of its equipment or
software so that its computer systems will properly utilize dates beyond
December 31, 1999. The Year 2000 Issue is not expected to have a material impact
on the operations of Registrant. Registrant does not expect to incur any
material expenses or costs related to the Year 2000 Issue.
Based on a review of the nature and quantity of transactions with significant
suppliers and large customers to determine the extent to which Registrant is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue, Registrant has concluded that it does not materially rely on third
parties' systems for the continuance of its operations. However, there can be no
guarantee that a failure to convert by another company, or a conversion that is
incompatible with Registrant's systems, would not have a material adverse effect
on Registrant. Registrant has determined that it has no exposure to
contingencies related to the Year 2000 Issue for products or services it has
sold.
12
<PAGE>
New Accounting Standards
Statement of Financial Accounting Standards 130 Reporting Comprehensive Income
and Statement of Financial Accounting Standards 131 Disclosures About Segments
of an Enterprise and Related Information were recently issued. Statement 130
establishes standards for reporting and display of comprehensive income, its
components, and accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by owners and
distributions to owners. Among their disclosures, Statement 130 requires that
all components of comprehensive income shall be classified based on their nature
and shall be reported in the financial statements in the period in which they
are recognized. A total amount for comprehensive income shall be displayed in
the financial statements where the components of other comprehensive income are
reported. Statement 131 supersedes Statement of Financial Accounting Standards
14 Financial Reporting for Segments of a Business Enterprise. Statement 131
establishes standards on the way that the public companies report financial
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas, and major customers.
Statement 131 defines operating segments as components of a company about which
separate financial information is available that is evaluated regularly by the
chief operating decisionmaker in deciding how to allocate resources and in
assessing performance.
Statements 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Statements 130 and 131 are not expected to have a
material impact on Registrant.
Item 7. Financial Statements.
Index to Financial Statements
Independent Auditor's Report
Financial Statements:
Earth Sciences, Inc. and Subsidiaries
Consolidated Balance Sheet, December 31, 1997
Consolidated Statements of Operations, For the Years Ended December 31,
1997 and 1996
Consolidated Statement of Stockholders' Equity, For the Period from January
1, 1996 to December 31, 1997
Consolidated Statements of Cash Flows, For the Years Ended December 31,
1997 and 1996
Notes to Consolidated Financial Statements
13
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report................................................F-2
Consolidated Balance Sheet - December 31, 1997..............................F-3
Consolidated Statements of Operations -
For the Years Ended December 31, 1997 and 1996.............................F-4
Consolidated Statements of Changes in Stockholders' Equity -
For the Years Ended December 31, 1997 and 1996.............................F-5
Consolidated Statements of Cash Flows -
For the Years Ended December 31, 1997 and 1996.............................F-6
Notes to Consolidated Financial Statements..................................F-8
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, 1997, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended December 31, 1997 and 1996. 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, 1997, and the results of their operations
and their cash flows for the years ended December 31, 1997 and 1996, in
conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
March 24, 1998
F-2
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 332,000
Trade receivables, with no allowance
for doubtful accounts 826,000
Costs in excess of billings on uncompleted contracts 338,000
Inventories 520,000
Prepaid expenses and other 627,000
------------
Total current assets 2,643,000
PROPERTY, PLANT AND EQUIPMENT, at cost 20,458,000
Less accumulated depreciation and amortization (5,250,000)
------------
Net property, plant and equipment 15,208,000
------------
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSETS ACQUIRED 1,438,000
------------
TOTAL ASSETS
$ 19,289,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 876,000
Accrued expenses 423,000
Billings in excess of costs on uncompleted
contracts 200,000
Note payables - related parties 527,000
Other current liabilities 186,000
------------
Total current liabilities 2,212,000
LONG-TERM LIABILITIES:
Extraction plant liability 4,850,000
Convertible debentures:
Related party 1,000,000
Other 5,752,000
Other liabilities 544,000
------------
12,146,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 3,000
COMMITMENTS (Notes 2, 3, and 11)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 25,000,000
shares authorized; 11,912,070 shares issued 119,000
Additional paid-in capital 12,261,000
Accumulated deficit (7,452,000)
------------
Total stockholders' equity 4,928,000
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,289,000
============
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
NET REVENUES:
Sales $ 1,468,000 $ --
Royalty income -- 692,000
Other income 110,000 106,000
----------- -----------
Total revenues 1,578,000 798,000
COST AND EXPENSES:
Operating 2,565,000 505,000
General and administrative 3,557,000 380,000
Research and development 225,000 109,000
Depletion, depreciation and amortization 341,000 260,000
----------- -----------
Total expenses 6,688,000 1,254,000
----------- -----------
OPERATING LOSS (5,110,000) (456,000)
OTHER INCOME (EXPENSE):
Interest expense (3,062,000) (82,000)
Minority interest in loss of subsidiary 297,000 --
Other, net (139,000) --
----------- -----------
(2,904,000) (82,000)
LOSS BEFORE EXTRAORDINARY ITEMS AND TAXES (8,014,000) (538,000)
Income tax benefit 985,000 159,000
----------- -----------
LOSS BEFORE EXTRAORDINARY GAIN (7,029,000) (379,000)
----------- -----------
Extraordinary gain from debt restructuring
(net of income tax of
$985,000 and $159,000) 2,298,000 371,000
----------- -----------
NET LOSS $(4,731,000) $ (8,000)
=========== ===========
NET LOSS PER COMMON SHARE (Basic and Diluted):
Before extraordinary item $ (.76) $ (.05)
Extraordinary Gain .25 .05
----------- -----------
Net Loss Per Common Share $ (.51) $ --
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,290,000 7,186,000
=========== ===========
See accompanying notes to these consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
EARTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
COMMON STOCK Additional Cumulative
-------------------- Paid-in Accumulated Translation
Shares Amount Capital Deficit Adjustments
------ ------ ------- ------- -----------
<S> <C> <C> <C> <C> <C>
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 -- --
Officer/director 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 and options issued for services 100,000 1,000 199,000 -- --
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)
Debt converted to common stock 2,620,000 26,000 3,900,000 -- --
Officer/director debt converted to
common stock 280,000 3,000 148,000 -- --
Stock and options issued for services 507,000 5,000 1,244,000 -- --
Stock issued for cash 20,000 -- 42,000 -- --
Stock issued for partial interest
in acquired subsidiary 36,000 1,000 119,000 -- --
Foreign currency translation adjustment -- -- -- -- (9,000)
Transfer of foreign currency translation
adjustment to additional paid-in capital -- -- (1,837,000) -- 1,837,000
Net loss -- -- -- (4,731,000) --
------------ ------------ ------------ ------------ ------------
BALANCES, December 31, 1997 11,912,000 $ 119,000 $ 12,261,000 $ (7,452,000) $ --
============ ============ ============ ============ ============
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,
-------------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(4,731,000) $ (8,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depletion, depreciation and amortization 341,000 260,000
Minority interest in loss (297,000) --
Interest expense related to debt discount 2,595,000 --
Write-down of mineral properties 87,000 --
Gain on settlement of debt, net of income taxes (2,298,000) (371,000)
Income tax benefit (985,000) (159,000)
Expenses paid with stock and options 427,000 208,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables (521,000) 116,000
Inventories (519,000) --
Other assets 318,000 (387,000)
Purchase of marketable securities -- (3,084,000)
Sale of marketable securities 1,135,000 2,424,000
Increase (decrease) in:
Accounts payable 624,000 145,000
Accrued expenses 524,000 --
Other liabilities 122,000 (37,000)
----------- -----------
Net cash provided by (used in) operating activities (3,178,000) (893,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections on notes receivable 50,000 70,000
Notes receivable funded (50,000) (70,000)
Capital expenditures (3,154,000) (736,000)
Purchase of investment in ADA (417,000) --
----------- -----------
Net cash used in investing activities (3,571,000) (736,000)
See accompanying notes to these consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EARTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1997 1996
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C>
Payments on restructuring of extraction plant liability (1,250,000) --
Payments on notes payable and long-term debt (886,000) (9,000)
Proceeds from convertible debentures and notes payable, net 8,586,000 899,000
Proceeds from issuance of common stock 42,000 1,055,000
----------- -----------
Net cash provided by (used in) financing activities 6,492,000 1,945,000
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,000 8,000
----------- -----------
INCREASE (DECREASE) IN CASH (254,000) 324,000
CASH AND CASH EQUIVALENTS, beginning of year 586,000 262,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 332,000 $ 586,000
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash payments for interest $ 223,000 $ 40,000
=========== ===========
Conversion of notes payable and debentures $ 4,440,000 $ 1,012,000
=========== ===========
Stock and options issued for investor relations $ 898,000 $ 200,000
=========== ===========
Purchase of property and equipment for debt $ 178,000 $ 125,000
=========== ===========
Stock issued for payment of employee bonuses $ -- $ 8,000
=========== ===========
Stock issued for partial interest in acquired subsidiary $ 120,000 $ --
=========== ===========
See accompanying notes to these consolidated financial statements.
F-7
</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), ESI Resources Limited (ESIR) and
Recursos Minerales Venesi C.A. (Venesi) and its majority-owned
subsidiaries, ADA Environment Solutions LLC (ADA), Minera Antabari C.A.,
and Recurso Minerales Esigeo, C.A. ADA has been consolidated with ESI and
its subsidiaries since its acquisition, effective May 1, 1997. 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 production of purified phosphate
products (PPA), providing flue gas conditioning technology (FGCT) for air
pollution abatement and natural resources exploration. The Company sells
PPA and FGCT principally throughout the United States.
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, 1997, cash
equivalents consisted of money market instruments in the amount of
$240,000, which are not FDIC insured.
Inventories - Inventories are stated at the lower of cost or market,
determined by the first-in, first-out method and consist of the following
at December 31, 1997:
Supplies $176,000
Raw Material 100,000
Work-in-progress 134,000
Finished goods 110,000
--------
$520,000
========
Percentage of Completion - ADA follows the percentage of completion method
of accounting for all significant long-term contracts. The percentage of
completion method of reporting income from contracts takes into account the
cost and revenue to date on contracts not yet completed. The Company does
not believe it will incur any losses on contracts in progress as of
December 31, 1997. However, due to its lack of operating history,
management does not believe it can reliably estimate total costs to
complete contracts in progress and, therefore, has recognized revenues only
to the extent of costs incurred. Upon completion of each contract,
earnings, if any, will be recognized.
Revenue Recognition - ESEC product sales are recognized when products are
shipped to customers.
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 in production, is provided using the
units of production method based on estimated production over the estimated
F-8
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
life of the facility. Depreciation on other assets is provided using the
straight-line method based on estimated useful lives ranging from 3 to 30
years. 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.
Intangible Assets - The excess of the aggregate purchase price over the
fair value of net assets of businesses acquired is included in the
accompanying financial statements as "Excess of purchase price over fair
value of net assets acquired" (Goodwill) and is being amortized over a
10-year period using the straight-line method. Goodwill amounts are
reported net of accumulated amortization of $100,000 at December 31, 1997.
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
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 financial statements.
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.
Foreign Currency Translation - Through September 30, 1997, the accounts of
ESEC were maintained in Canadian dollars, its functional currency. Assets
and liabilities were translated into U.S. dollars at the current exchange
rate, and earnings or losses were translated at the average exchange rate
for the year; resulting translation adjustments were recorded as a separate
component of stockholders' equity.
During the last quarter of 1997, ESEC ended its construction and start-up
phase of the Calgary plant and commenced significant production and sales
activities of its primary product. The Company purchases most of its raw
materials and sells most of its products from/to U.S. entities in U.S.
dollars and as a result, ESEC changed its functional currency from Canadian
dollars to U.S. dollars during 1997. Accordingly, effective October 1,
1997, current assets and liabilities denominated in Canadian are translated
in U.S. dollars at the current exchange rate with any resulting gain or
loss recorded in the income statement. Property, plant and equipment is
recorded at its historical costs (U.S. dollars) as of October 1, 1997,
after taking into effect the foreign currency translation adjustment from
Canadian dollars to U.S. dollars at that date. Translation adjustments that
were shown as a separate component of stockholders' equity at September 30,
1997 have been recorded as a reduction of additional paid-in capital.
F-9
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Royalty Income - Royalty income represented the Company's 3.5% gross
royalty in production from the San Luis gold mine for 1996. The mine was
leased to and operated by a third party. During the year ended December 31,
1996, the Company had $638,000 in royalty income, which represented 86% of
the Company's revenues. The ore reserves at San Luis gold mine were
depleted in the fourth quarter of 1996 and, therefore, royalty income
ceased in 1996.
Research and Development Costs - Research and development costs are charged
to operations in the period incurred.
Loss Per Share - The loss per common share is presented in accordance with
the provisions of Statement of Financial Accounting Standards No., 128,
Earnings Per Share (FAS 128). FAS 128 replaced the presentation of primary
and fully diluted earnings (loss) per share (EPS) with a presentation of
basic EPS and diluted EPS. Basic EPS is calculated by dividing the income
or loss available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. All
potential dilutive securities are antidilutive as a result of the Company's
net loss for the years ended December 31, 1997 and 1996. Accordingly, basic
and diluted earnings per share are the same for each year.
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.
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 percentage of completion
estimates on ADA contracts. 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.
New Pronouncements - Statement of Financial Accounting Standards 130
Reporting Comprehensive Income and Statement of Financial Accounting
Standards 131 Disclosures About Segments of an Enterprise and Related
F-10
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information were recently issued. Statement 130 establishes standards for
reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, Statement 130 requires
that all components of comprehensive income shall be classified based on
their nature and shall be reported in the financial statements in the
period in which they are recognized. A total amount for comprehensive
income shall be displayed in the financial statements where the components
of other comprehensive income are reported. Statement 131 supersedes
Statement of Financial Accounting Standards 14 Financial Reporting for
Segments of a Business Enterprise. Statement 131 establishes standards on
the way that public companies report financial information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued
to the public. It also establishes standards for disclosures regarding
products and services, geographic areas, and major customers. Statement 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decisionmaker in deciding how to allocate resources and in
assessing performance.
Statements 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Statements 130 and 131 are not expected to
have a material impact on the Company.
2. LIQUIDITY:
----------
Management believes that existing working capital and recent private
placements of convertible debentures are sufficient to fund the planned
growth in operations until positive cash flow is achieved at ESEC and at
ADA, which are both anticipated in 1998. For ESEC, the achievement of
positive cash flow is dependent upon several facts including continued
improvement of product quality in Calgary, success in marketing phosphate
products and meeting competition in the market place, the failure in any of
which could delay such achievement. For ADA, the achievement of positive
cash flow is dependent upon the successful ongoing operation of the units
currently installed at two power plants and the successful startup and
operation of an additional unit, the failure in or unsatisfactory
operations at any of which could delay such achievement. Additional funds
may be required to fund expanded exploration activities in Venezuela.
Additional private placements of common stock, convertible debentures and
bank borrowings may be needed to fund additional working capital
requirements. The Company received net proceeds of $2.8 million from the
issuance of convertible debentures in the first quarter of 1998.
Based on current estimates, final modifications to the Calgary facility for
the production of food grade phosphoric acid will be financed through
existing working capital.
F-11
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITION OF ADA:
-------------------
During February 1997, the Company acquired a 5% interest in ADA for
$400,000. Effective May 1, 1997, ESI acquired a majority equity position in
ADA through a combination of stock and cash and that was accounted for
under the purchase method of accounting. The Company paid $500,000 in cash
and $1,600,000 in notes for an additional 46% interest in ADA. As part of
the acquisition agreement, the Company acquired an option for the remaining
49% equity interests in ADA exercisable during the six months following May
1, 1998 for issuance of 1,716,000 shares of stock. Although, at the current
time, ESI intends to exercise its option, the principals of ADA 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. The net
assets of ADA acquired in acquisition were recorded at their historical
value, which approximated their fair value. During 1997, the Company
recorded goodwill of $1,503,000 as a result of the acquisition of ADA.
The summarized unaudited pro forma amounts shown below reflect this
transaction as if it had occurred at January 1, 1996:
For the Year Ended
December 31,
-------------------------
1997 1996
------------ ---------
Revenues $ 1,818,000 $ 873,000
============ =========
Net loss $ (4,871,000) $(225,000)
============ =========
Net loss per common share $ (.52) $ (.03)
============ =========
4. COSTS ON UNCOMPLETED CONTRACTS:
-------------------------------
The following information is applicable to ADA's uncompleted contracts at
December 31, 1997:
Costs incurred on uncompleted contracts $ 801,000
Less billings to date (663,000)
---------
$ 138,000
=========
The above amounts are included in the accompanying balance sheet as of
December 31, 1997 under the following captions:
Costs in excess of billings on
uncompleted contracts $ 338,000
Billings in excess of costs on
uncompleted contracts (200,000)
---------
$ 138,000
=========
F-12
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY, PLANT AND EQUIPMENT:
------------------------------
Property, plant and equipment as of December 31, 1997 is summarized as follows:
Estimated
Useful Lives
------------
Extraction facility $ 6,142,000 15
Machinery and equipment 11,511,000 10
Furniture and fixtures 146,000 5
Leasehold improvements 130,000 5
Building 326,000 30
Land and mineral properties, including deferred
exploration and development costs (a) 2,203,000
-----------
$20,458,000
===========
- ----------
(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.
Depletion, depreciation and amortization of property, plant and equipment
for the years ended December 31, 1997 and 1996 was $241,000 and $260,000,
respectively.
6. EXTRACTION PLANT LIABILITY AND EXTRAORDINARY GAIN:
--------------------------------------------------
In January 1997, ESI finalized agreements with Yankee Atomic Electric
Company and Vermont Yankee Nuclear Power Corporation (the "Yankee
Companies") and acquired an option to liquidate the liability to them,
which at that time totaled $9,382,000. The liability arose from prepayments
by the Yankee Companies for uranium during the period that the Calgary
plant operated as a uranium extraction facility. In October 1997, ESI
F-13
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exercised their option by paying the Yankee Companies $1,250,000 and
granting them a 10-year net profits royalty on activities at the Calgary
facility. Future payments to the Yankee Companies under the royalty cannot
exceed $4,850,000. However, ESI can currently purchase the royalty interest
for $3,000,000, which increases $50,000 per year, but not to exceed
$3,250,000. Under the terms of the agreement, the Company's future royalty
payments will be 10% of net profits. The Company has recorded the liability
at the greater amount, until such time as when or if, the Company
repurchases the royalty or the termination of the agreement. During 1997,
the Company recognized a extraordinary gain on debt restructure of
$2,298,000 as a result of this debt restructure.
7. LONG-TERM DEBT:
---------------
December 31,
1997
------------
Related Parties:
Note payable to a stockholder/director at the greater
of prime plus 2% or 10% (10% at December 31, 1997),
with quarterly payments of interest, collateralized by
ESEC's assets. The note was repaid in full February
1998. $ 500,000
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 9%. The notes
are collateralized by a mining property. Principal and
accrued interest were converted to common stock at $.54
per share subsequent to December 31, 1997. 37,000
----------
564,000
Less current portion (527,000)
----------
Long-term liability (classified with other liabilities) $ 37,000
==========
Convertible Debentures:
-----------------------
Convertible debenture, related party - to a
stockholder/director at the greater of prime plus 2% or
10% (10% at December 31, 1997) with quarterly payments
of interest and principal due in March 2000,
collateralized by the assets of ESI and ESEC. $1,000,000
F-14
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
1997
------------
Convertible debenture, other - at 4% with quarterly
payments of interest due from August 1998 to March
1999. The principal balance includes a $1,438,000
premium as a result of the debentures being convertible
to common stock at a 25% discount from market. 5,752,000
----------
$6,752,000
==========
During 1997, ESI issued convertible debentures (the "Debentures") at their
face value totaling $8,785,000. Of the total Debentures, $7,785,000 are
convertible at any time following 45 days after the issuance date and are
convertible into shares of common stock based at 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. During 1997, the Company recorded additional
interest expense (premium) totaling $2,595,000 for the difference between
the quoted price and the discounted price of the common stock that would be
issued upon conversion of the Debentures. The remaining $1,000,000 in
Debentures are convertible at the average rate of $3.12 per share. ESI was
required to register the shares underlying the Debentures, and may
repurchase the $7,785,000 in Debentures at a 25% premium under certain
circumstances.
The Debentures totaling $7,785,000 will automatically convert to common
stock at a future date (up to two years) if not already converted or if the
Company has not previously redeemed them. It is not the Company's intent to
redeem any of the $3,216,000 Debentures that mature during 1998. As such,
these Debentures have been classified as a long-term liability since they
will convert to common stock during 1998 and therefore not require the use
of current assets for their payment. As of December 31, 1997, $3,471,000 of
the Debentures had been converted to common stock. Subsequent to December
31, 1997, the Company issued an additional $3,081,000 of the 4% Debentures,
which 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 $2.00 per share. Subsequent to December 31, 1997,
$4,273,000 (face value) of the Debentures were converted into 4,505,000
shares of common stock.
F-15
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES:
-------------
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1997:
CANADIAN
SUBSIDIARY U.S.
OPERATIONS Operations
----------- -----------
Deferred assets (liabilities):
Net operating loss carryforward $ 441,000 $ 1,961,000
Tax credit carryforwards 2,000 13,000
Depreciation differences (298,000) 14,000
Mining properties basis differences -- (356,000)
Deferred revenue 1,528,000 --
Compensation related deferrals -- 169,000
Other 136,000 --
----------- -----------
Net deferred tax assets 1,809,000 1,801,000
Less valuation allowance (1,809,000) (1,801,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
The Company has remaining U.S. a net operating loss carryforward at
December 31, 1997 of approximately $5,285,000, which if not utilized to
reduce taxable income in future periods, will expire in the years 1998
through 2012. 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 $980,000 (U.S.). The Canadian investment tax credit
carryforward for this subsidiary is $2,000 (U.S.).
F-16
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The utilization of these U.S. net operating loss carryforwards may be
subject to restrictions because of the ownership changes of the Company
that occurred as a result of issuances of the Company's securities. These
restrictions may limit the amount of utilizable net operating loss
carryforwards per year.
9. STOCKHOLDERS' EQUITY:
---------------------
Stock Bonus Plan - The Company has reserved 125,000 shares for awards under
a stock bonus plan established in 1978. As of December 31, 1997, 33,595
shares remain available for award under the plan.
Investor Relations - During 1997 and 1996, the Company engaged an entity to
provide the Company investor relation services over a five-year period.
During 1996, 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. During 1997, 60,000 options expired. Additionally, during
1997, in addition to certain cash payments, the Company issued 320,000
shares of common stock to the entity. The cash payments and the related
cost associated with the stock grants are being amortized over one year,
the period the services are expected to be performed.
Stock Options - The following is a table of options issued during 1997 and
1996:
Weighted
Average
Employees Non-employee Exercise
Options Options Price
-------- -------- --------
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
Options granted:
Officers 150,000 -- $ 1.57
Consultants -- 50,000 $ 2.50
Debenture holder - related party -- 50,000 $ 1.88
Options expired (75,000) (60,000) $ (1.58)
-------- -------- --------
OPTIONS OUTSTANDING, December 31, 1997 475,000 379,000 $ 2.19
======== ======== ========
F-17
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For all options granted during 1997 and 1996, 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 as of December 31, 1997 was
approximately 2 years. At December 31, 1997, all options were exercisable.
If not previously exercised, options outstanding at December 31, 1997, will
expire as follows:
Weighted
Average
Number of Exercise
Year Shares Price
---- ------ -----
1998 210,000 $1.60
1999 339,000 $1.89
2000 185,000 $2.03
2001 120,000 $3.60
-------
854,000
=======
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,
--------------------------
1997 1996
------------- ---------
Net income (loss) applicable
to common stockholders:
As reported $ (4,731,000) $ (8,000)
Pro forma $ (4,803,000) $(255,000)
Net income (loss) per common share:
As reported $ (.51) $ --
Pro forma $ (.52 $ (.04)
F-18
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each employee option and warrant granted in 1997 and 1996
was estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Year Ended December 31,
1997 1996
---- ----
Expected volatility 72% 67%
Risk-free interest rate 5.7% 5.7%
Expected dividends -- --
Expected terms (in years) 3 3
10. 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 $71,000 and
$30,000 as the contributions for 1997 and 1996, respectively based on 10%
of the eligible employees' annual compensation. In 1997 and 1996, the
Company also matched 401(K) employee contributions up to 5% of gross
salary, totaling $40,000 and $15,000, respectively.
11. COMMITMENT:
-----------
Capital Lease Obligations - The Company leases certain equipment under
agreements classified as capital leases. Equipment under these leases has a
cost of $178,000 and no accumulated amortization as of December 31, 1997.
The following is a schedule of future minimum lease payments under capital
leases at December 31, 1997. (The capitalized lease obligation is
classified with other liabilities on the accompanying balance sheet.)
Year Amount
---- ------
1998 $ 56,000
1999 56,000
2000 56,000
2001 50,000
--------
Total Future minimum lease payments 218,000
Less amount representing interest (40,000)
---------
Present value of net minimum lease payments 178,000
Less current portion (56,000)
---------
$ 122,000
=========
F-19
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Office Lease - The Company leases office space and equipment under
noncancellable operating leases. Total rental expense was $10,000 and $-0-
for the years ended December 31, 1997 and 1996, respectively. The total
minimum rental commitments at December 31, 1997 are as follows:
Year
1998 $102,000
1999 102,000
2000 96,000
2001 85,000
2002 86,000
--------
$471,000
========
ESEC's production is being marketed though one entity. The agreement was
executed January 1, 1997 and renews automatically for 1-year terms. The
entity receives a commission from $2.00 to $5.00 per ton of product sold. A
prepayment of $100,000 was made in 1997, consisting of 50% cash and 50%
stock.
During 1997, the Board of Directors approved a one-year paid sabbatical
leave for employees who have been employed for 25 years or greater. As of
December 31, 1997, the Company has accrued $200,000 in connection with this
policy.
12. RELATED PARTY:
--------------
During 1997 and 1996, the Company made loans to an officer/director
totaling $120,000 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 1997 and 1996. The loans were
collateralized by amounts owing to the officer/director from the Company.
13. 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.
F-20
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997
are as follows:
December 31, 1997
-----------------------
Carrying Fair
Amount Value
--------- ----------
Long-term debt $ 37,000 $ 33,000
Extraction plant liability 4,850,000 3,000,000
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%.
Extraction Plant Liability - The fair value is estimated based on the total
payments which would be required to terminate the extraction plant
liability position as of December 31, 1997.
14. CONCENTRATIONS OF CREDIT RISK, MAJOR CUSTOMERS, AND OTHER RISKS AND
UNCERTAINTIES:
---------------------------------------------------------------------------
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 and receivables.
F-21
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales to unaffiliated customers which represent 10% or more of the
Company's sales for the year ended December 31, 1997 were as follows (as a
percentage of sales):
Customer 1997
-------- ----
ESEC
----
A 32%
B 18%
C 15%
ADA
---
D 29%
E 22%
F 13%
At December 31, 1997, the Company had gross trade receivables totaling
approximately $807,000 due from 21 customers.
In 1997, ESEC purchased the majority of its superphosphoric acid (SPA) from
three suppliers. SPA is the raw material processed into purified phosphoric
acid. There is no assurance that the Company will be able to
maintain/extend its contracts and supply arrangement in the future and/or
obtain sufficient quantities of SPA at reasonable prices. Other suppliers
of SPA may not be readily available.
15. SUBSEQUENT EVENTS:
------------------
During January 1998, the Company signed a letter agreement with an entity
to acquire exclusive rights to explore and mine a diamond concession in
Venezuela. ESI is obligated to make payments of cash and stock valued at
$50,000 during the 6 to 8-month exploration period, after which it will
have earned the exclusive right to lease the concession. The lease terms
call for royalties that range from 5% to 20% based on size and grade of the
diamond mined.
See Note 7 for issuance and conversion of convertible debentures.
16. BUSINESS SEGMENT INFORMATION:
-----------------------------
The Company has identified its principal business segments as natural
resource exploration, production of purified phosphate products and
providing flue gas conditioning technology for air pollution abatement.
These segments are shown in the accompanying table as ESI, ESIR, and ADA,
respectively. ESIR is located in Canada.
F-22
<PAGE>
<TABLE>
<CAPTION>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depletion,
Operating Depreciation
Net Profit Identifiable and Capital
Revenues (Loss)(1) Assets Amortization Expenditures
----------- ----------- ----------- ------------ ------------
1997:
<S> <C> <C> <C> <C> <C>
ESI $ 120,000 $ (380,000) $ 3,825,000 $ 120,000 $ 33,000
ESIR 513,000 (1,281,000) 13,846,000 9,000 2,679,000
ADA 945,000 108,000 1,618,000 212,000 620,000
----------- ----------- ----------- ----------- -----------
Total $ 1,578,000 $(1,553,000) $19,289,000 $ 341,000 $ 3,332,000
=========== =========== =========== =========== ===========
1996:
ESI $ 798,000 $ 83,000 $ 4,207,000 $ 122,000 $ 89,000
ESIR -- (159,000) 10,194,000 138,000 647,000
ADA -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total $ 798,000 $ (76,000) $14,401,000 $ 260,000 $ 736,000
=========== =========== =========== =========== ===========
- ----------
(1) Operating loss represents operating loss from the consolidated statement of operations less general and administrative
expenses.
F-23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Positions Term First Became
Name Age and Offices Expires Director
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ramon E. Bisque 66 Chairman of the Board of Annual 1963
Directors and Member of the Meeting
Executive Committee Date, 1998
Duane N. Bloom 64 Director, Secretary, Chairman " 1963
of the Executive Committee
Michael D. Durham 47 Director, Member of the Audit " 1997
Committee
Robert H. Lowdermilk 61 Director, Member of the Audit " 1990
Committee
Mark H. McKinnies 46 Director, President, Treasurer, " 1983
Member of the Executive Committee
Kristen R. Stevens 35 Director, Member of the Audit " 1991
Committee
The appointment of Michael D. Durham to the Board of Directors of
Registrant (the "Board") in 1997 was made pursuant to the ADA Purchase Agreement
whereby Registrant agreed to make available one seat on the Board between April
30, 1997 and November 1, 1998, and so long thereafter as the recipients of
shares of Registrant in that transaction continue, in the aggregate, to hold no
less than 1,000,000 shares. Management shareholders of Registrant entered into
voting agreements, agreeing to vote their shares of stock in favor of the
designated individual. There are no other 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.
Dr. Durham was a co-founder in 1982 of ADA Technologies, Inc., an
Englewood, Colorado private company which contracts to the Federal government
and others for development of emission technologies. Dr. Durham is president of
ADA-Environmental Solutions LLC, a majority-owned subsidiary of Registrant. Dr.
Durham was appointed to the Board on April 30, 1997.
14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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 in 1978. Mr. McKinnies was elected President of
Registrant 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.
No relationship exists between any individuals named in this Item 9.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires Registrant's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership with the Securities and Exchange Commission (the "SEC"). Officers,
directors and greater than ten percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, Registrant believes that
during the fiscal year ended December 31, 1997, all filing requirements
applicable to its officers, directors and greater than ten percent beneficial
owners were complied with except that Dr. Bisque was late filing his Form 5
reporting two gifts of stock, Mr. Lowdermilk was late filing his Form 5
reporting one transaction and Mr. McKinnies was late filing his Form 5 reporting
two gifts of stock. In addition, Dr. Durham did not timely file his Initial
Report on Form 3 and had one late filing reporting one transaction on Form 4.
Item 10. Executive Compensation.
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
Name of Individual and ------
Principal Position Year Salary Other(2) Securities Underlying Options (#)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ramon E. Bisque(1) 1997 $85,175 $12,291 25,000
Chairman of the Board 1996 $81,288 $11,706 50,000
1995 $74,765 $11,148 25,000
Duane N. Bloom(1) 1997 $114,564 $16,388 25,000
Chairman of the Executive Committee 1996 $107,240 $15,607 50,000
Secretary and Director 1995 $101,931 $14,864 25,000
Mark H. McKinnies(1) 1997 $116,618 $17,400 25,000
Director, President and Treasurer 1996 $101,568 $15,142 150,000
1995 $ 96,763 $13,735 25,000
(1)Member of the Executive Committee of Registrant, which performs the duties of
the Chief Executive Officer.
(2)Amounts represent pension and matching 401(k)
payments made to a qualified plan by Registrant for the benefit of the named
individual.
Options/SAR Grants in Last Fiscal Year
Individual Grants
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base Expiration
Name Granted (#) in Fiscal Year Price ($/Sh) Date
- -------------------------------------------------------------------------------------------
Ramon E. Bisque 25,000 33% $1.88 10/30/00
25,000 $1.25 11/03/98*
Duane N. Bloom 25,000 33% $1.88 10/30/00
25,000 $1.25 11/03/98*
Mark H. McKinnies 25,000 33% $1.88 10/30/00
25,000 $1.25 11/03/98*
* Represents options granted in 1994 whose expiration date was extended from
11/03/97 to 11/03/98.
All options shown for each individual were exerciseable as of December 31, 1997.
15
</TABLE>
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of Securities Underlying Value of Unexercised
Name Unexercised Options at FY-End (#) Options at FY-End
- ------------------------------------------------------------------------------
Ramon E. Bisque 125,000 $ 0
Duane N. Bloom 125,000 $ 0
Mark H. McKinnies 225,000 $ 0
All options shown for each individual were exerciseable as of December 31, 1997.
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. A total of
25,252 shares of stock were issued in 1997 in payment of $38,500 of accrued fees
through year end 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 6, 1998, 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.
Amount and Nature of
Name and Address Beneficial Ownership Percent of Class
- --------------------------------------------------------------------------------
Ramon E. Bisque 488,281 (1) 2.98%
910 12th Street
Golden, CO
Duane N. Bloom 690,622 (2) 4.20%
910 12th Street
Golden, CO
Michael D. Durham 29,706 Less then 1%
8100 SouthPark Way, B-2
Littleton, CO
Robert H. Lowdermilk 841,889 (3) 5.06%
910 12th Street
Golden, CO
Mark H. McKinnies 287,055 (4) 1.74%
910 12th Street
Golden, CO
Kristen R. Stevens 200 Less then 1%
910 12th Street
Golden, CO
Directors and Officers as a Group 2,337,753(5) 13.61%
(6 individuals)
16
<PAGE>
Notes to Item 11:
(1) Included in the amount shown are 146,640 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 164,370 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. Also included in the amount shown
are 370,115 shares to which Tectonic Construction Co.("TCC") has the right to
acquire beneficial ownership through convertible debt and stock options. Mr.
Lowdermilk is the president and majority shareholder of TCC.
(4) Included in the amount shown are 234,010 shares to which Mr. McKinnies has
the right to acquire beneficial ownership through convertible debt and stock
options.
(5) The amount shown includes 915,135 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 1997 and 1996, Dr. Bisque borrowed a total of
$50,000 and $70,000, respectively, from Registrant at an interest rate of 8%.
Not more than $70,000 was outstanding at any one time in 1996 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%.
In 1991, the Registrant converted a total of $366,000 of deferred salaries
payable to Mssrs. Bisque, Bloom and McKinnies to notes payable bearing interest
at 9%, payable on demand, and granted them rights to convert such notes payable
to shares of common stock at the then current market price of $.54 per share.
The notes are collateralized by a mining property. From year to year, Mssrs.
Bisque, Bloom and McKinnies have agreed not to demand payment during the current
year. As of December 31, 1997, $38,000 remained outstanding under the notes.
In 1997, Registrant issued a convertible debenture in the amount of $1,000,000
(the "Debenture") to Tectonic Construction Co. ("TCC") and borrowed $500,000
from TCC under a short-term note (the "Note"). Mr. Lowdermilk, a director of
Registrant, is the president and majority shareholder of TCC. These amounts were
collateralized by a mining property, and buildings, equipment, receivables and
inventory in Calgary. The Debenture and the Note bear interest at the greater of
prime plus two points or 10% which interest is payable quarterly. The Debenture,
if not converted, is due March 31, 2000. The Debenture is convertible at any
time after November 30, 1997 into shares of common stock at a weighted average
rate of $3.20. The Note was repaid in full in February, 1998.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits and Index of Exhibits (all exhibits except as otherwise noted are
incorporated by reference; Exhibit 2.1 and 99.1 were filed as exhibits to
Registrant's April 30, 1997 Form 8K; Exhibits 3.1, 4.3, and 10.5 through 10.9
were filed as exhibits to Registrant's 1996 Form 10KSB, all other such Exhibits
were filed as Exhibits to Registrant's 1993 Form 10KSB).
No. Description
- --- -----------
2.1 Stock Option and Exchange Agreement and exhibits among Earth
Sciences, Inc. and ADA-ES, Inc., ADA Environmental Solutions LLC,
ADA Technologies, Inc., C. Jean Bustard, John F. Wurster, Kenneth
E. Baldrey and Cameron E. Martin dated April 30, 1997.
2.2 Amended and Restated Operating Agreement of ADA Environmental
Solutions LLC, a Colorado Limited Liability Company, April 30,
1997.
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.
4.4* Form of Convertible Debenture due January 31, 1999.
4.5* Form of Convertible Debenture due March 31, 2000.
10.1 Uranium Extraction Agreement dated May 14, 1976 between
Registrant and Western Co-operative Fertilizers, Limited.
17
<PAGE>
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.
10.10 Independent Contractor Agreement dated January 1, 1997 between
Registrant and Twin- Kem International, Inc.
10.11* Subscription and Investment Agreement dated June 12, 1997 between
Tectonic Construction Company and Registrant.
10.12* Assignment of Net Profits Interest dated November 1, 1997 from
Registrant, ESI Resource Limited, and Earth Sciences Extraction
Company to Yankee Atomic Electric Company and Vermont Yankee
Nuclear Power Corporation.
10.13* Letter Agreement dated January 9, 1998 between CODSA 14 S.A.,
Registrant and Recursos Minerales VENESI C.A.
21.1* Subsidiaries of Registrant.
23.1* Consent of Hein + Associates LLP
27* Financial Data Schedule.
99.1 Financial Statements of ADA Environmental Solutions LLC, December
31, 1996
(*) - filed herewith.
(b) Reports on Form 8-K. None.
18
<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 27, 1998 March 27, 1998
-------------- --------------
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 27, 1998 March 27, 1998
- -------------- --------------
Date Date
/s/Duane N. Bloom /s/ Michael D. Durham
- ----------------- ---------------------
Duane N. Bloom, Director Michael D. Durham, Director
March 27, 1998 March 27, 1998
- -------------- --------------
Date Date
/s/ Mark H. McKinnies
- ---------------------
Mark H. McKinnies, Director
March 27, 1998
- --------------
Date
19
Exhibit 4.5
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE. THE
SECURITIES MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), PURSUANT TO REGISTRATION OR AN
EXEMPTION THEREFROM.
No. R-697 US$ 1,000,000
EARTH SCIENCES, INC.
10% CONVERTIBLE DEBENTURE DUE MARCH 31, 2000
THIS DEBENTURE is one of a duly authorized issue of Debentures of Earth
Sciences, Inc., a corporation duly organized and existing under the laws of the
State of Colorado (the "Company"), designated as its 10% Convertible Debenture
Due March 31, 2000, in an aggregate principal amount not exceeding US$1,000,000
(herein, the "Debentures").
FOR VALUE RECEIVED, the Company promises to pay to Tectonic Construction
Co., the registered holder hereof (the "Holder"), the principal sum of US$
1,000,000.00, on March 31, 2000 (the "Maturity Date") together with interest on
the principal sum outstanding from time to time at the rate equal to the greater
of (I) the prime rate as reported by Bank One, Denver, Colorado plus two percent
(2%) ("Prime +2%), or (ii) ten percent (10%), per annum, adjusted quarterly and
computed on the basis of the actual number of days elapsed in a 365-day year.
All accrued interest shall be payable in arrears, and shall be due and payable
at the end of each calendar quarter or, if earlier, on the Conversion Date (as
hereinafter defined). Accrual of interest shall commence on the date hereof and
shall continue until payment in full of the principal sum has been made or duly
provided for. All accrued and unpaid interest so payable, together with any and
all other amounts payable hereunder, less any amounts required by law to be
deducted or withheld, will be paid on the Maturity Date or, if earlier, on the
Conversion Date, and shall be paid to the person in whose name this Debenture
(or one or more predecessor Debentures) is registered on the records of the
Company regarding registration and transfers of the Debentures (the "Debenture
Register") on the Conversion Date or tenth day prior to the Maturity Date, as
the case may be; provided, however, that the Company's obligation to a
transferee of this Debenture arises only if such transfer, sale or other
disposition is made in accordance with the terms and conditions of the
Subscription Agreement and Investment Agreement executed by the original Holder
in connection with the purchase of this Debenture (the "Subscription
Agreement"). The principal of, and interest on, this Debenture are payable in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts, at the address last
appearing on the Debenture Register of the Company as designated in writing by
the Holder from time to time. The Company may prepay a portion or all of the
Debentures at any time. The Company shall provide the Holder with no less than
30 days written notice of any prepayment. The forwarding of the Company's check
shall, subject to collection, constitute a payment of interest and principal
hereunder and shall satisfy and discharge the liability for principal and
interest on this Debenture to the extent of the sum represented by such check.
Any payments received by Holder will be applied in the following order: (I) any
collection costs the Holder may have incurred in procuring the Company's
performance hereunder, (ii) payment of the interest then accrued and due on the
unpaid principal balance of this Debenture, (iii) any charges assessed by the
Holder, and (iv) principal.
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of Two Hundred Fifty
Thousand Dollars (US $250,000) and integral multiples thereof. The Debentures
are exchangeable for an equal aggregate principal amount of Debentures of
different authorized denominations, as requested by the Holders surrendering the
same. No service charge will be made for such registration or transfer or
exchange.
20
<PAGE>
2. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax laws or
other applicable laws at the time of such payments.
3. This Debenture has been issued subject to investment
representations of the original purchaser hereof and may be transferred or
exchanged only in compliance with the Securities Act of 1933, as amended (the
"Act") and the terms of the Subscription Agreement. Prior to due presentment for
transfer of this Debenture, the Company and any agent of the Company may treat
the person in whose name this Debenture is duly registered on the Debenture
Register as the owner hereof for the purpose of receiving payment as herein
provided and for all other purposes, whether or not this Debenture be overdue,
and neither the Company nor any such agent shall be affected by notice to the
contrary.
4. The Holder of this Debenture shall be entitled, at any time during
the period commencing on and after November 30, 1997 and expiring on the
Maturity Date, to convert up to the entire principal amount of all outstanding
Debentures into shares of common stock, par value $.01 per share (the "Common
Stock"), of the Company at a conversion price for each share of Common Stock
equal to the Market Price of the Company's Common Stock. For purposes of this
Section 4, the Market Price shall be the average of the closing bid prices of
the Common Stock over the five consecutive trading days ending on the Closing
Date (as defined in the Subscription Agreement), as reported by the National
Association of Securities Automated Quotation System ("NASDAQ"). Such conversion
shall be effectuated by surrendering all of the Debentures to the Company with
the form of conversion notice attached hereto as Exhibit A, executed by the
Holder(s) of the Debentures evidencing such Holder's intention to convert the
Debentures. The amount of accrued but unpaid interest as of the Conversion Date
shall not be subject to conversion but shall be paid in cash as of the
Conversion Date. No fraction of shares of the Common Stock or scrip representing
fractions of shares will be issued on conversion, but the number of shares of
the Common Stock issuable shall be rounded to the nearest whole share. The date
on which notice of conversion is given shall be deemed to be the date on which
the Holder has delivered this Debenture, with the conversion notice duly
executed, to the Company, or if earlier, the date set forth in such notice of
conversion if the Debenture is received by the Company within three business
days thereafter. Such date is referred to herein as the "Conversion Date."
Facsimile delivery of the conversion notice shall be accepted by the Company.
Certificates representing Common Stock upon conversion will be delivered to the
Holder within five (5) business days from the date the notice of conversion is
delivered to the Company. The conversion rights granted by this Section 4 shall
become null and void if the control of Holder no longer resides in the Robert H.
Lowdermilk family.
5. Any of the following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal or
interest on this Debenture as and when the same shall be due and
payable and such default shall continue for five (5) business days
after the receipt of written notice that the Company is in default
hereunder; or
b. Any of the representations or warranties made by the Company
herein, in the Subscription 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 or the Subscription Agreement
shall be false or misleading in any material respect at the time made;
or
c. The Company shall fail to perform or observe, in any material
respect, any other covenant, term, provision, condition, agreement or
obligation of the Company under this Debenture, or under the
Subscription Agreement, or under any related agreement, or under any
document or instrument granting security for amounts owing under this
Debenture including, without limitation, any of the Loan Documents
(defined below), and such failure shall continue uncured for a period
of five (5) business days after the receipt of written notice that the
Company is in default hereunder (it being understood that in the case
of defaults which can not reasonably be cured within a 5-day period no
grace period shall be necessary as a precondition to the failure to
perform such covenant constituting an Event of Default); or
d. The Company shall (1) make an assignment for the benefit of
creditors or commence proceedings for its dissolution; or (2) apply
for or consent to the appointment of a trustee, liquidator or receiver
for its or for a substantial part of its property or business; or
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<PAGE>
e. A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business without
its consent and shall not be discharged within sixty (60) days after
such appointment; or
f. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against
the Company and, if instituted against the Company, shall not be
dismissed within sixty (60) days after such institution or the Company
shall by any action or answer approve of, consent to, or acquiesce in
any such proceeding or admit the material allegations of, or default
in answering a petition filed in any such proceeding; or
g. The Company shall fail to make any required material payments,
fees, taxes, costs, insurance premiums when due beyond any applicable
grace period; or
h. The Company shall default on the payment of any material
indebtedness for borrowed money beyond any applicable grace period; or
i. Any judgment, levy or attachment shall be rendered against the
Company or any of its assets or properties in an amount in excess of
$100,000 and such judgment, levy or attachment shall not be dismissed,
stayed, bonded or discharge within thirty (30) days of the date of
entry thereof; or
j. The purified phosphoric acid facility (the "PPA Facility")
owned by the Company in Calgary is not fully operational within
eighteen (18) months of the issuance of the Debentures; or
k. The control of the Company or ESI Resources Limited or Earth
Sciences Extraction Company is changed by reason of merger or
acquisition of shares of either company, or sale of substantially all
assets of either company; or
l. The Company allows any of the following conditions without the
prior written waiver of the Holder:
i. the declaration of a dividend to holders of the Common
Stock;
ii. capital expenditures, except for the completion of the
PPA Facility, in any calendar quarter exceeding $500,000; or
iii. consolidated working capital at any calendar quarter
end date, irrespective of this or any other convertible
debenture, of less than $500,000.
Upon the occurrence of any Event of Default or at any time thereafter, and in
each and every such case, unless such Event of Default shall have been waived in
writing by the Holder (which waiver shall not be deemed to be a waiver of any
subsequent Event of Default) at the option of the Holder and in the Holder's
sole discretion, then or at any time thereafter, at the option of the Holder,
the whole of said principal sum then remaining unpaid hereunder, together with
all interest accrued thereon, and all other sums owing hereunder or under the
Loan Documents, shall immediately become due and payable without notice
("Acceleration") and the liens given to secure the payment of this Debenture may
be foreclosed and the Holder may pursue all rights and remedies available under
this Debenture, or under the Loan Documents, or otherwise available at law or in
equity.
6. Following the occurrence of an Event of Default, and so long as any
such Event of Default shall remain outstanding and uncured, the Company promises
to pay interest on the outstanding principal balance of this Debenture, and on
any and all other amounts then outstanding, at a rate of interest (the "Default
Rate") equal to the greater of (i) eighteen percent (18%) per annum or (ii) five
percent (5%) per annum in excess of the prime interest rate of Bank One, Denver,
Colorado in effect at the time ("Prime +5%"), provided that any interest which
has accrued at the Default Rate shall be paid at the time of, and as a condition
precedent to the curing of any default under any statutory right to cure. The
fluctuating Default Rate at which interest accrues shall be adjusted
simultaneously, at each announced change of the Prime Rate. Failure to exercise
such option or charge of such increased interest shall not be a waiver of the
right to do so at any future time or with respect to any other default.
22
<PAGE>
7. No provision of this Debenture shall alter or impair the obligation
of the Company which is absolute and unconditional, to pay the principal of, and
interest on, this Debenture at the time, place, and rate, and in the coin or
currency, herein prescribed. This Debenture and all other Debentures now or
hereafter issued of similar terms are direct obligations of the Company. The
Company shall pay all costs and expenses, including reasonable attorneys' fees,
which the Holder may incur in connection with any effort or action to collect
amounts due under this Debenture.
8. 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, statue 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.
9. The rights or remedies of the Holder as provided in this Debenture
and the Loan Documents shall be cumulative and concurrent and may be pursued
singly, successively, or together against the Company, the property described in
the Loan Documents, and any other funds, property or security held by the Holder
for the payment hereof or otherwise at the sole discretion of the Holder. The
failure to exercise any such right or remedy shall in no event be considered as
a waiver or release of such rights or remedies or the right to exercise them at
any later time.
10. In the event the interest provisions hereof or any exactions
provided for herein, or in the Loan Documents or any other instrument securing
this Debenture shall result, because of any reduction of principal, or for any
reason at any time during the life of this loan, in any effective rate of
interest which, for any month, transcends the limit of the usury or any other
law applicable to the obligation evidenced hereby, all sums in excess of those
lawfully collectible as interest for the period in question shall, without
further agreement or notice between or by any party hereto, be applied upon
principal immediately upon receipt of such moneys by Holder, with the same force
and effect as though the payor had specifically designated such extra sums to be
so applied to principal and Holder had agreed to accept such extra payment as a
premium-free prepayment. In no event shall any agreed to or actual exaction as
consideration for this obligation transcend the limits imposed or provided by
the laws applicable to this transaction or the Company hereof in the
jurisdiction in which any of the security herefor is located for the use or
detention of money or for forbearance in seeking its collection.
11. The Company and all endorsers, guarantors and all persons liable
or to become liable on this Debenture waive presentment, protest and demand,
notice of protest, demand and dishonor and nonpayment of this Debenture, and
consent to any and all renewals and extensions in the time of payment hereof,
and agree, further, that at any time and from time to time without notice, the
terms of payment herein may be modified or the security described in the Loan
Documents released in whole or in part or increased, changed or exchanged by
agreement between the Holder hereof and any owner of the property affected by
said Loan Documents without in anywise affecting the liability of any party to
this instrument or any person liable or to become liable with respect to any
indebtedness evidenced hereby. The right to plead any and all statues of
limitation as a defense to any demand on this Debenture, or any guaranty hereof,
or any agreement to pay the same, or any demand secured by the Loan Documents,
or any and all obligations or liabilities arising out of or in connection with
this Debenture or in the Loan Documents, is expressly waived by each and every
of the Company, endorsers, or guarantors to the fullest extent permitted by law.
23
<PAGE>
12. Any forbearance of Holder in exercising any right or remedy
hereunder or under the Loan Documents, or otherwise, afforded by applicable law,
shall not be a waiver of or preclude the exercise of any right or remedy. The
acceptance by Holder of payment of any sum payable, hereunder after the due date
of such payment shall not be a waiver of Holder's right to either require prompt
payment when due of all other sums payable hereunder or to declare a default for
failure to make prompt payment. Holder shall at all times have the right to
proceed against any portion of the security held herefor in such order and in
such manner as Holder may deem fit, without waiving any rights with respect to
any other security. No delay or omission on the part of Holder in exercising any
right hereunder shall operate as a waiver of such right or of any other right
under this Debenture.
13. This Debenture shall be governed by and construed in accordance
with the laws of the State of Colorado without regard to the choice of law
provisions thereof, and in the event this Debenture is placed in the hands of
any attorney for collection or is collected through any legal proceedings, the
undersigned promises to pay (in addition to costs and disbursements otherwise
allowed), to the extent permitted by law, reasonable attorneys' fee and legal
costs (whether or not suit is commenced and whether or not incurred in
connection with appeal of a lower court judgment or order or in collecting any
judgment entered therein), and if foreclosure is made by the Public Trustee or
any other public official, reasonable attorneys' fees and legal costs shall be
added by the Public Trustee or such public official to the cost of foreclosure.
The undersigned hereby represents that the proceeds of the loan evidenced by
this Debenture will be used for a commercial or business purpose.
14. Time is of the essence with regard to the performance of the
obligations of the Company in this Debenture and each and every term, covenant
and condition herein by or applicable to the Company.
15. This Debenture is guaranteed by a guarantee executed by ESI
Resources Limited, a wholly-owned subsidiary of the Company ("ESI Guaranty") and
the ESI Guaranty is secured by that certain security agreement, of even date
herewith, encumbering certain equipment and fixtures located at the solvent
extraction plant in Calgary, Alberta Canada (the "ESI Calgary Security
Agreement"). And, this Debenture is guaranteed by a guarantee executed by Earth
Sciences Extraction Company, a partnership in which ESI Resources Limited is the
general partner ("ES Extraction Guaranty") and the ES Extraction Guaranty is
secured by that certain security agreement, of even date herewith, encumbering
certain equipment and fixtures located at the solvent extraction plant in
Calgary, Alberta Canada (the "ES Extraction Security Agreement"), and a security
agreement by the Company (the "ESI Security Agreement").
16. This Debenture is secured by certain real and personal property in
the United States and Canada as set forth in that certain deed of trust, of even
date herewith, encumbering real property in Costilla County, Colorado (the
"Colorado Deed of Trust"), and in other documents and instruments given as
further security herefor ( the Colorado Deed of Trust, ESI Guaranty, ES
Extraction Guaranty, ESI Calgary Security Agreement, ES Extraction Security
Agreement, ESI Security Agreement and all such other security documents being
collectively referred to herein as the "Loan Documents").
17. The Company hereby irrevocably waives, to the fullest extent
permitted by law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Debenture and the other Loan Documents or the
transactions contemplated thereby. In any action which may be brought under this
Debenture, Holder hereby irrevocably consents to the personal jurisdiction of
any State District Court or Federal Court located in the State of Colorado, and
further stipulates and agrees that venue shall be proper in the State of
Colorado for any such actions (save and except for the foreclosure or
enforcement of the ESI Guaranty, ES Extraction Guaranty, ESI Calgary Security
Agreement, ES Extraction Security Agreement, and ESI Security Agreement for
which venue shall be proper in the province of Alberta in the City of Calgary),
and further agrees not to seek a change of venue to any court outside the State
of Colorado without the consent of Holder.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
EARTH SCIENCES, INC.
By:/s/ Mark H. McKinnies
------------------------
Name: Mark H. McKinnies
Title: President
Dated: June 12, 1997
24
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert the above Debenture
No._____ into shares of Common Stock of EARTH SCIENCES, INC. (the "Company")
according to the conditions hereof, as of the date written below.
--------------------------------
Date of Conversion
--------------------------------
Applicable Conversion Price
[SUBSCRIBER]
-------------------------------
Signature
Address:
-------------------------------
-------------------------------
* The original Debenture and Notice of Conversion must be received by the
Company by the third business day following the Date of Conversion.
25
Exhibit 10.11
SUBSCRIPTION AGREEMENT AND INVESTMENT AGREEMENT
EARTH SCIENCES, INC.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE. THESE SECURITIES MAY NOT BE OFFERED OR SOLD UNLESS THE SECURITIES ARE
REGISTERED UNDER THE ACT, OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), IS AVAILABLE. THIS
SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION
OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL.
This Subscription Agreement and Investment Agreement (the "Agreement") is
executed by the undersigned (the "Subscriber") in connection with the offer and
the subscription of the undersigned to purchase an aggregate of $1,000,000 of
10% Convertible Debentures (the "Debentures") of Earth Sciences, Inc., a
Colorado corporation (the "Company"), at a price of $1,000,000. The terms and
provisions of the Debentures are set forth in the form of Debenture certificate
attached hereto as Exhibit A. The Debentures are convertible into shares of the
Company's $0.01 par value Common Stock (the "Stock") as provided for in Exhibit
A. The Subscriber, in order to induce the Company to enter into the transaction
contemplated hereby and acknowledging that the Company will rely thereon
represents, warrants and agrees as follows:
1. Offer to Subscribe; Purchase Price. The Subscriber hereby offers to
purchase and subscribes for the Debentures for an aggregate price of
$1,000,000. The closing of the transaction contemplated hereby (the
"Closing") shall be deemed to occur when this Agreement has been executed
by both Subscriber and Company. Payment shall be made at the Closing by
delivering immediately available funds in United States dollars by wire
transfer for simultaneous closing by delivery of securities versus payment.
The Company agrees to deliver certificates representing the Debentures
subscribed for at the Closing. The date on which the Closing occurs is
hereafter referred to as the Closing Date.
2. Subscriber Representations and Warranties. The Subscriber hereby
represents and warrants to the Company as follows:
(a) the Subscriber has a net worth, i.e. total assets in excess
of total liabilities, not less than $2,500,000;
(b) the Subscriber's overall commitment to investments that are
not readily marketable is not disproportionate to the Subscriber's net
worth, and the Subscriber's investment in the Company will not cause
such overall commitment to become excessive;
(c) the Subscriber has the financial ability to bear the economic
risk of this investment, has adequate means of providing for the
Subscriber's current needs and personal contingencies, and has no need
for liquidity in this investment in the Company;
(d) the Subscriber's annual gross income during the last two tax
years and the Subscriber's anticipated annual gross income during the
current tax year are in excess of $150,000;
(e) the Subscriber has the requisite knowledge and experience in
financial and business matters for properly evaluating the risks of an
investment in the Company;
(f) the Subscriber has received:
i. the most recent Form 10-KSB of the Company;
ii. the most recent Form 10-QSB of the Company;
iii. any Form SR's filed by the Company during the one year
prior to this Agreement;
iv. all information reasonably requested by the Subscriber;
and
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<PAGE>
(g) the Subscriber has evaluated the risks of investing in the
Company;
(h) the Subscriber has been given the opportunity to ask
questions of, and to receive answers from, the Company concerning the
terms and conditions of the offering and to obtain additional
information necessary to verify the accuracy of the information
contained in the information described in subparagraph (f) above, or
such other information as the Subscriber desired in order to evaluate
an investment in the Company;
(i) the residence of the Subscriber set for below is the true and
correct residence of the Subscriber, the Subscriber has no present
intention of becoming a resident or domiciliary of any other state or
jurisdiction;
(j) in making a decision to invest in the Company, the Subscriber
has relied solely upon independent investigations made by the
Subscriber, and the particular tax consequences arising from an
investment in the Company will depend upon the Subscriber's individual
circumstances;
(k) the Subscriber understands that an investment in the Company
involves certain risks of which the Subscriber has taken full
cognizance, and which risks the Subscriber fully understands;
(l) the Subscriber understands that (i) the Debentures and the
Stock are speculative investments that involve a risk of loss by the
Subscriber; and (ii) the Company and Affiliates of the Company may
perform services on behalf of the Company and may receive substantial
fees, distributions and compensation for performing such services;
(m) the Debentures and the Stock subscribed for in this Agreement
are being acquired by the Subscriber in good faith solely for the
Subscriber's own personal account, for investment purposes only, and
are not being purchased with a view to, or for the resale or
distribution thereof. Further, the Subscriber plans to acquire the
Debentures and the Stock as an investment and without any intent to
transfer or assign the same to third parties, and the Subscriber will
hold the Debentures and the Stock as an investment;
(n) the Subscriber understands that neither the Debentures nor
the Stock have been registered under the Act and agrees that the Stock
may not be sold, offered for sale, transferred, pledged, hypothecated
or otherwise disposed of except in compliance with the Securities Act
of 1933 (the "Act") and that any certificate representing the
Debentures or the Stock will bear a legend to such effect;
(o) the Subscriber understands that no federal or state agency
has made any finding or determination as to the fairness for
investment, or any recommendation or endorsement, of the Company or of
the Debentures or the Stock;
(p) the Subscriber owns no stock, either of record or
beneficially, of the Company or an affiliate thereof, except as set
forth below. The Subscriber owns 463,666 shares of stock of the
Company;
(q) all of the representations and warranties of the Subscriber
contained in this Agreement and all information furnished by the
Subscriber to the Company are true, correct and complete in all
respects; and
(r) the Subscriber will be the sole party in interest in the
Debentures and the Stock to be acquired by the Subscriber and as such
will be vested with all legal and equitable rights in such
subscription.
The foregoing representations, warranties, agreements, undertakings and
acknowledgments are made by the Subscriber with the intent that they be relied
upon in determining the Subscriber's suitability as a purchaser of the
Debentures and the Stock, and the Subscriber agrees that those representations,
warranties, agreements, undertakings and acknowledgments shall survive this
Agreement. In addition, the Subscriber undertakes to notify the Company
immediately of any change in any representation, warranty or other information
relating to the Subscriber set forth in this Agreement.
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<PAGE>
If more than one person is executing this Agreement, each representation,
warranty and undertaking in this Agreement shall be a joint and several
representation, warranty and undertaking of each such person. If the Subscriber
is a partnership, corporation, trust or other entity, the Subscriber further
represents and warrants that (a) the Subscriber has enclosed with this Agreement
appropriate evidence of the authority of the individual executing this Agreement
to act on behalf of the Subscriber, and (b) the Subscriber was not specifically
formed to acquire the Stock subscribed for in this Agreement.
3. The Company Represents, Covenants and Warrants the following:
a) Reporting Company Status. 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 Company and its subsidiaries taken as a
whole. The Company has registered its Common Stock pursuant to Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the Stock is listed and trades on the NASDAQ Small
Capitalization Market System. The Company has filed all material
required to be filed pursuant to all reporting obligations under
either Section 13(a) or 15(d) of the Exchange Act for a period of at
least twelve (12) months immediately preceding this offer or sale of
the Debentures (or for such shorter period that the Company has been
required to file such material).
(b) Concerning the Debentures. The issuance, sale and delivery of
the Debentures and the shares of Stock issuable upon the conversion
thereof are within the Company's corporate powers and have been duly
authorized by all required corporate action on the part of the Company
and its stockholders and when such securities are issued, sold and
delivered in accordance with the terms hereof and the Debentures for
the consideration expressed herein and in the Debentures, such
securities will be duly and validly issued, fully paid and
nonassessable. There are no preemptive rights of any shareholders of
the Company.
(c) Subscription Agreement. This Agreement has been duly
authorized, validly executed and delivered on behalf of the Company
and is a valid and binding agreement enforceable against the Company
in accordance with its terms, subject to general principles of equity
and to bankruptcy or other laws affecting the enforcement of
creditors' rights generally,
(d) Non-contravention. The execution and delivery of this
Agreement and the consummation of the issuance of the Debentures and
the transactions contemplated by this Agreement and the Debentures 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 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 is a party or by which it or any of its properties
or assets are bound, or any existing applicable law, rule or
regulation of the United States of any State there of or any
applicable decree, judgment or order of any Federal or State court,
Federal or State regulatory body, administrative agency or other
United States governmental body having jurisdiction over the Company
or any of its properties or assets.
(e) Litigation. Except as indicated in the SEC Filings, there is
no action, suit or proceeding before or by any court or governmental
agency or body, domestic or foreign, now pending or, to the knowledge
of the Company, threatened, against or affecting the Company, or any
of its properties, which might result in any material adverse change
in the condition (financial or otherwise) or in the earnings, business
affairs or business prospects of the Company, or which might
materially and adversely affect the properties or assets thereof.
(f) No Default. The Company is not in default in the performance
or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust or other
material instrument or agreement to which it is a party or by which it
or its property may be bound; and neither the execution, nor the
delivery by the Company, nor the performance by the Company of its
obligations under this Agreement or the Debentures will conflict with
or result in the breach or violation of any of the terms or provisions
of, or constitute a default or result in the creation or imposition of
any lien or charge on any assets or properties of the Company under,
any material indenture, mortgage, deed of trust or other material
agreement or instrument to which the Company is a party or by which it
is bound or any statute or the Articles of Incorporation or Bylaws of
the Company, or any decree, judgment, order, rule or regulation of any
court or governmental agency or body having jurisdiction over the
Company or its properties.
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<PAGE>
(g) SEC Filings. None of the Company's filings with the
Securities and Exchange Commission since January 1, 1996, contains any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statement
therein in light of the circumstances under which they were made, not
misleading. The Company has since January 1, 1996 timely filed all
requisite forms, reports and exhibits thereto with the Securities and
Exchange Commission.
(h) Full Disclosure. There is no fact known to the Company (other
than general economic conditions known to the public generally) that
has not been disclosed in writing to the Subscriber that (i) could
reasonably be expected to have a material adverse effect on the
condition (financial or otherwise) or in the earnings, business
affairs, business prospect, properties or assets of the Company or
(ii) could reasonably be expected to materially and adversely affect
the ability of the Company to perform its obligations pursuant to this
Agreement.
4. Covenants of the Company. For so long as any Debentures held by the
Subscriber remain outstanding, the Company covenants and agrees with the
Subscriber that:
(a) It will maintain the listing of its Stock on the NASDAQ Small
Capitalization Market System.
(b) It will permit the Subscriber to exercise its right to
convert the Debentures by telecopying an executed and completed Notice
of Conversion to the Company and delivering the original Notice of
Conversion and the certificate representing the Debentures to the
Company by express courier. 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 will
transmit the certificates representing shares of Stock issuable upon
conversion of any Debentures (together with the certificates
representing the Debentures not so converted) to the Subscriber via
express courier, by electronic transfer or otherwise within five
business days after the conversion date if the Company has received
the original Notice of Conversion and Debentures certificate being so
converted by such date. In addition to any other remedies which may be
available to the Subscriber, in the event that the Company fails for
any reason to effect delivery of such shares of Common Stock within
such five business day period, the Subscriber will be entitled to
revoke the relevant Notice of Conversion by delivering a notice to
such effect to the Company whereupon the Company and the Subscriber
shall each be restored to their respective positions immediately prior
to delivery of such Notice of Conversion.
5. Reliance on Representations. THE SUBSCRIBER UNDERSTANDS THAT THE
OFFER AND SALE OF THE DEBENTURES OR THE STOCK HAS NOT BEEN REGISTERED UNDER
THE ACT OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THE DEBENTURES AND
THE STOCK MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION OR QUALIFICATION UNDER THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, OR AN OPINION OF COUNSEL, ACCEPTABLE TO THE COMPANY, THAT
SUCH REGISTRATION IS NOT REQUIRED.
NEITHER THE DEBENTURES NOR THE STOCK HAVE BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
6. Resales of Debentures. Subscriber acknowledges and agrees that the
Debentures may only be resold (a) pursuant to a Registration Statement
under the Act; or (b) pursuant to an exemption from registration under the
Act. Subscriber further acknowledges and agrees that the Debentures may not
be resold or otherwise transferred without the express written consent of
the Company, such consent not to be unreasonably withheld or delayed.
7. Confidentiality. Each of the Company and the Subscriber 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.
29
<PAGE>
8. Indemnification. Each of the Company and the Subscriber agrees to
indemnify the other and to hold the other harmless from and against any and
all losses, damages, liabilities, costs and expenses (including reasonable
attorneys' fees) which the other may sustain or incur in connection with
the breach by the indemnifying party of any representation, warranty or
covenant made by it in this Agreement.
9. Registration. The Company agrees to file, at its expense, a
registration statement with respect to the offering and sale or other
disposition of the shares of Stock underlying the Debentures within six (6)
months after the conversion of all the Debentures into Stock and shall use
its best efforts to cause such registration statement to become effective
as soon as practicable thereafter. Such best efforts shall include, but not
be limited to, promptly responding to all comments received from the staff
of the Securities and Exchange Commission, providing Subscriber's counsel
with a contemporaneous copy of all written communications from and to the
staff of the Securities and Exchange Commission with respect to such
registration statement and promptly preparing and filing amendments to such
registration statement which are responsive to the comments received from
the staff of the Securities and Exchange Commission. Once declared
effective by the Securities and Exchange Commission, the Company shall
cause such registration statement to remain effective until the earlier of
(i) the sale by the Subscriber of all shares of Common Stock so registered
or (ii) 360 days after the effective date of such registration statement.
10. Notices. Any notice to be given or to be served upon any party to
this Agreement in connection with this Agreement must be in writing and
will be deemed to have been given and received upon confirmed receipt, if
sent by facsimile, or two (2) days after it has been submitted for delivery
by Federal Express or an equivalent carrier, charges prepaid and addressed
to the following addresses with a confirmation of delivery:
If to the Company, to:
Earth Sciences, Inc.
910 12th Street
Golden, Colorado 80401
Attention: Mr. Mark H. McKinnies
Chief Executive Officer
Phone No: (303)279-7641
Fax No: (303)279-1180
If to the Subscriber, to:
Tectonic Construction Co.
100 Cherry
Denver, CO 80220
Attention: Rober H. Lowdermilk
Phone No: (303) 355-1877
Fax No: (303)394-9822
Any party may, at any time by giving notice to the other party,
designate any other address in substitution of an address established
pursuant to the foregoing to which such notice will be given.
11. Multiple Counterparts. This Agreement may be executed in several
counterpart, each of which will be deemed to be an original but all of
which will constitute one in the same instrument. However, in enforcing any
party's rights under this Agreement it will be necessary to produce only
one copy of this Agreement signed by the party to be charged.
12. Governing Law. This Agreement will be construed and enforced in
accordance with and governed by the laws of the State of Colorado, except
for matters arising under the Act, without reference to principles of
conflicts of law. Each of the parties consents to the jurisdiction of the
federal courts whose districts encompass any part of the State of Colorado
or the state courts of the State of Colorado 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.
30
<PAGE>
Each party hereby agrees that if another party to this Agreement obtains a
judgment against it in such a proceeding, the party which obtained such
judgment may enforce same by summary judgment in the courts of any country
having jurisdiction over the party against whom such judgment was obtained,
and each party hereby waives any defenses available to it under local law
and agrees to the enforcement of such a judgment. Each party to this
Agreement irrevocably consents to the service of process in any such
proceeding by the mailing of copies thereof by registered or certified
mail, postage prepaid, to such party at its address set forth herein.
Nothing herein shall affect the right of any party to serve process in any
other manner permitted by law.
The undersigned acknowledges that this Agreement shall not be effective
unless and until accepted by the Company as indicated below.
Dated this 12th day of June, 1997.
Tectonic Construction Company
By:/s/Robert H. Lowdermilk
----------------------------------
Name: Robert H. Lowdermilk
Title: President
THIS SUBSCRIPTION IS ACCEPTED BY THE COMPANY ON THE 12th DAY OF JUNE, 1997.
EARTH SCIENCES, INC.
By:/s/ Mark H. McKinnies
-----------------------------------
Name: Mark H. McKinnies
Title: President
31
Exhibit 10.12
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 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.
32
<PAGE>
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.
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
33
<PAGE>
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.
"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
34
<PAGE>
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 20, 1997 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.
"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
35
<PAGE>
(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 inGross 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.
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
36
<PAGE>
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 /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/ Thomas W. Bennett Jr.
- -----------------------------------
Authorized Officer
Chief Financial Officer
Vermont Yankee Nuclear Power Corporation
By Ross P. Barkhurst
- -----------------------------------
Authorized Officer
President
37
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF JEFFERSON )
The foregoing instrument was acknowledged before me this 20th day of October ,
1997, by Mark H. McKinnies as President of Earth Sciences, Inc.
Witness my hand and official seal.
My Commission Expires: 12/14/2000
/s/ Christy L Zapp
--------------------------------------
Notary Public
Name: Christy L Zapp
Address: 11957 W. 71st Dr. Arvada, CO
STATE OF COLORADO )
) ss.
COUNTY OF JEFFERSON )
The foregoing instrument was acknowledged before me this 20th day of October,
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: 12/14/2000
/s/ Christy L Zapp
--------------------------------------
Notary Public
Name: Christy L Zapp
Address: 11957 W. 71st Dr. Arvada, CO
COMMONWEALTH OF MASSACHUSETTS )
) ss.
COUNTY OF WORCESTER )
The foregoing instrument was acknowledged before me this 24th day of October,
1997, by Thomas W. Bennett Jr., as Chief financial Officer of Yankee Atomic
Electric Company.
Witness my hand and official seal.
My Commission Expires: 8/28/2003
/s/ Maureen E. Maynard
--------------------------------------
Notary Public
Name: Maureen E. Maynard
Address: 10 Winward Drive,
Oxford, MA 01540
STATE OF VERMONT )
) ss.
COUNTY OF WINDHAM )
38
<PAGE>
The foregoing instrument was acknowledged before me this 28th day of October,
1997 by Ross P. Barkhurst, as President of Vermont Yankee Nuclear Power
Corporation.
Witness my hand and official seal.
My Commission Expires: 2/10/99
/s/ Judith A. Harris
-----------------------------------
Notary Public
Name: Judith A. Harris
Address: 228 MHP W. Brattleboro,
VT 05301
39
Exhibit 10.13
FROM: EARTH SCIENCES, INC., Mark H. McKinnies
TO: CODSA 14 S.A., ENG. PEDRO PEREZ
DATE: JANUARY 9, 1998
RE: LETTER AGREEMENT Between CODSA 14 S.A. ("CODSA 14")
and EARTH SCIENCES, INC. ("ESI") AND RECURSOS
MINERALES VENESI C.A. ("VENESI"), ESI and VENESI
collectively as "ESI/VENESI"
OBJECTIVE - SYSTEMATIC EXPLORATION AND EVALUATION OF THE CODSA 14 CONCESSION TO
DETERMINE THE VIABILITY OF MECHANIZED MINING OPERATIONS.
1. VENESI, wholly-owned subsidiary of ESI, will conduct a systematic exploration
program on the CODSA 14 Concession (the "Concession") over a 6-8 month period
and make its report and results available to CODSA 14. Such program will include
the preparation of a geologic map, evaluation of ongoing manual exploration
mining production, pitting, sampling, analysis and perhaps exploratory mining.
ESI stands behind the performance of VENESI.
2. In exchange for the program to be conducted by VENESI, and payments of stock
in ESI and cash to CODSA 14, CODSA 14 agrees to negotiate exclusively with
ESI/VENESI on the further development of the Concession including CODSA 14's
preferential rights for the veins that may underlay the Concession.
3. ESI/VENESI will make advance royalty payments (an upfront payment of ESI
stock and monthly payments of ESI stock and cash) to CODSA 14 during the term of
the agreement. However, ESI or VENESI may, at their sole discretion and upon 30
days written notice to CODSA 14, terminate the agreement at any time.
ESI/VENESI's only obligation upon such termination would be to provide CODSA 14
the results of any work performed as of the date of termination. The upfront
payment would consist of ESI stock of $8,000 valued at $1.50 per share plus cash
of $10,000. Monthly payments would consist of $1,867 in ESI stock valued at
$1.50 per share plus $133 cash. See point 9 below for buyback of stock.
4. ESI/VENESI shall only be responsible for the reclamation and proper
environmental handling of the environmental disturbances created as a result of
its exploration program. ESI/VENESI assumes no responsibility for any prior or
ongoing environmental disturbances created on the Concession or adjacent areas.
5. CODSA 14 will provide all reasonable assistance to ESI/VENESI during the term
of the agreement including but not limited to:
A. authorization to obtain information on file concerning the
corresponding MEM's lapsed concessions,
B. logistical assistance during exploration program and formulation of
any mining plan,
C. detailed production information for ongoing exploratory mining, and
D. upon joint agreement of CODSA 14 and ESI/VENESI, employment of the
Caicarenos or another group to perform exploratory mining in areas as
directed by ESI/VENESI (in this case CODSA 14 would continue to
receive its 20% of production as now is the case with the ongoing
exploratory mining).
6. The assistance noted in point 5. above will be supplemented with a
professional services agreement with Eng. Pedro Perez, the term of which will
run concurrent with the CODSA 14 agreement. Payments to Mr. Perez will consist
of monthly amounts of cash ($1,500 per month) and stock ($1,500 per month at
$1.50 per share). The cash amount for February 1998 being paid now.
7. Upon successful completion of the evaluation process, CODSA 14 will negotiate
exclusively with ESI/VENESI for the further development of the Concession. In
such case, ESI/VENESI will negotiate a lease of the Concession, as per the terms
set forth in Exhibit A attached hereto, under which CODSA 14 will receive either
a minimum monthly advance royalty of $2,000 per month or a production royalty
which will range from 5-20%. The details of the royalty calculation are set
40
<PAGE>
forth in Exhibit B attached hereto. The production royalty will range on a
sliding scale based on the grade of the pay zone mined, so that CODSA 14 will
receive a proportionately greater amount if the property shows outstanding
values. The royalty paid to CODSA 14 will remain at the minimum level until
ESI/VENESI has recovered its investment in the Concession's development.
ESI/VENESI will have a buyout amount for the CODSA 14 royalty.
8. If ESI/VENESI chooses to place the property into production, an agreeable
plan for required reclamation of past disturbances, if any, will be put forth.
The cost of implementing that plan will be deducted from the royalty payments
made to CODSA 14 over a one year or longer period but not reducing such payments
below the minimum level.
9. ESI/VENESI agree to buy back the ESI stock issued to CODSA 14 and Mr. Perez,
at their option, at the end of six months from the date of the agreement for
$1.50 per share.
10. During the term of the agreement ESI/VENESI will (a) have the right to
examine and evaluate the production from any ongoing exploratory mining, and (b)
have a 'right of first refusal' to purchase such production at the routine
price.
Agreed to as of the 1st day of February, 1998
/s/ Pedro A. Perez /s/ Mark H. McKinnies
- ------------------------------- ---------------------------------
Pedro A. Perez Mark H. McKinnies
President, CODSA 14 S.A. President, Earth Sciences, Inc.
/s/ Jean Pasquali Z.
- -------------------------------
Jean Pasquali Z.
President, Recursos Minerales VENESI C.A.
41
<PAGE>
EXHIBIT A
to
LETTER AGREEMENT Between CODSA 14 S.A. ("CODSA 14") and EARTH SCIENCES, INC.
("ESI") AND RECURSOS MINERALES VENESI C.A. ("VENESI")
Dated as of February 1, 1998
LEASE TERMS
The Lease that may be negotiated among CODSA 14, ESI and VENESI at the end of
the exploration program will include the following terms and conditions:
1. Grant of Rights The Lease shall grant ESI/VENESI the exclusive right for
exploitation of gold and diamonds on the CODSA 14 Concession during the term of
the Lease. All of the rights, privileges and responsibilities granted CODSA 14
under the Concession shall apply fully to ESI/VENESI, which shall have the duty
to defend the Concession during the term of the Lease.
2. Term The term of the Lease shall continue so long as commercial production is
continued from the Concession or the Minimum Royalty is paid, unless sooner
terminated.
3. Minimum and Production Royalty During the term of the Lease, ESI/VENESI shall
make either monthly minimum advance royalty payments of $2,000 or monthly
production royalty payments based on the schedule as set forth in Exhibit B of
the Letter Agreement. The production royalty may be reduced, but not below the
minimum level, to provide for recovery of ESI/VENESI's investment in the
development of the Concession and the costs for required reclamation of past
environmental disturbances, if any.
4. Possession and Control of Concession During the term of the Lease, ESI/VENESI
shall be granted the exclusive possession and control of the Concession and the
right to carry on all lawful activities necessary to exploit the minerals
thereon.
5. CODSA 14's Lien CODSA 14 shall at all times hold a lien against all material
mined from the Concession but not yet sold, as security for any unpaid balance
of money due under the Lease.
6. Taxes During the term of the Lease, ESI/VENESI shall be responsible for all
taxes related to the Concession and production therefrom, excepting those taxes
which are due as a result of CODSA 14's receipt of its minimum or production
royalty.
7. Reports and Inspections ESI/VENESI shall maintain appropriate records and
make monthly reports to CODSA 14 of its activities which will include quantities
of materials mined and grade in sufficient detail to calculate the production
royalty, if any. CODSA 14 shall have the right, at its risk and expense, to
enter the Concession at any reasonable time. Within 90 days of termination,
ESI/VENESI will deliver CODSA 14 information and material developed or obtained
during the term of the Lease that relates to the Concession.
8. Right to Purchase During the term of the Lease, ESI/VENESI shall have a right
of first refusal for any bona fide offer made to purchase CODSA 14's interest in
the Concession. ESI/VENESI shall have the right at any time to purchase CODSA
14's interest in the Concession for a payment of cash to be determined at the
end of the 6-8 month exploration period based on an estimate of the mineable
reserves on the Concession, a mine life of 5 years and a net percent value
calculation of the royalty that would be due CODSA 14 using a 15% discount rate.
9. Other Terms Other standard terms shall be placed in the Lease which will
include:
a. Notices,
b. Handling controversies among the parties through arbitration,
c. Removal of property on termination, and
d. cooperation among the parties in obtaining further permits, etc.
42
<PAGE>
EXHIBIT B
to
LETTER AGREEMENT Between CODSA 14 S.A. ("CODSA 14") and EARTH SCIENCES, INC.
("ESI") AND RECURSOS MINERALES VENESI C.A. ("VENESI")
Dated as of February 1, 1998
PRODUCTION ROYALTY SCHEDULE
A production royalty shall be due to CODSA 14 for material mined and sold from
the Concession. Nothing in this schedule shall cause the minimum royalty paid to
CODSA 14 to be less than the amount set forth in the Lease. The determination of
the Production Royalty, before any deduction for recovery of ESI/VENESI's
development costs or costs for reclamation of past environmental disturbances,
if any, shall be based on the following schedule with the meaning of the terms
used as set forth below.
================================================================================
Grade of Ore Material - Prodfuction Royalty Rate -
Equivalent Grade in Carats per % of Gross
cubic meter of Ore Material Revenues
0.375 or less 5%
0.0376 to 0.4375 6%
0.4376 to 0.5000 7%
0.5001 to 0.5625 8%
0.5626 to 0.6250 9%
0.6251 to 0.6875 10%
0.6876 to 0.7500 11%
0.7501 to 0.8125 12%
0.8126 to 0.8750 13%
0.8751 to 0.9375 14%
0.9376 to 1.0000 15%
1.0001 to 1.0625 16%
1.0626 to 1.1250 17%
1.1251 to 1.1875 18%
1.1876 to 1.2500 19%
greater than 1.2500 20%
================================================================================
Definitions -
1. Equivalent Grade in Carats shall be a monthly average determined from the
mining activities carried on for the month, and shall be calculated by dividing
the monthly quantity of gold, measured in grams converted to carats at the rate
of 1 gram = 0.11275 carats, plus diamonds, measured in carat weight, recovered
by the total cubic meters of Ore Material processed during the calendar month.
2. Ore Material shall be the in-place, measured quantity of all material
processed for recovery of gold and/or diamonds during the calendar month.
3. Production Royalty Rate is the rate the Gross Revenues actually received from
sale of the gold and diamond production that occurred during the month is
multiplied to determine the royalty for a month. CODSA 14 may choose to receive
their royalty in kind which shall be accomplished in a mutually agreeable manner
to both parties.
4. Gross Revenue shall be the amount actually received from sale of a calendar
month's production less any production taxes that may be assessed at the time of
production. To the fullest extent possible ESI/VENESI and CODSA 14 will
cooperate so that each party is responsible for and pays its own taxes and
assessments related to production and revenues from the Concession.
43
<TABLE>
<CAPTION>
Exhibit 21.1
Earth Sciences, Inc.
Listing of Subsidiaries
BENEFICIAL
NAME PERCENTAGE OWNERSHIP DESCRIPTION
- -------------------------------------------------------------------------------------------------------------
Domestic Corporations and Entities
- ----------------------------------
<S> <C> <C>
ESI Chemicals, Inc. - 100% a dormant Colorado corporation
ESI Minerals, Inc. - 100% a dormant Colorado corporation
ADA Environmental Solutions LLC 83% of assets a Colorado limited liability company
51% of profits
and losses
Foreign Corporations and Entities
- ---------------------------------
ESI Resources Limited - 100% an Alberta, Canada private corporation
Earth Sciences Extraction Company 100% an Alberta, Canada registered
limited partnership 389337 Alberta Corp. 100% an Alberta, Canada private corporation
Recursos Minerales VENESI C.A. - 100% a Venezuelan private corporation
Minera Antabari C.A. 83% a Venezuelan private corporation
Recursos Minerales ESIGEO C.A. 83% a Venezuelan private corporation
Recursos Minerales Apicharai C.A. 83% a Venezuelan private corporation
Recursos Minerales Manaima C.A. 83% a Venezuelan private corporation
Recursos Minerales Mancai C.A. 83% a Venezuelan private corporation
Recursos Minerales Cudiez C.A. 83% a Venezuelan private corporation
Proyectos Y Asesorias GEO C.A. 67% a Venezuelan private corporation
44
</TABLE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference of our report dated March 24, 1998
accompanying the financial statements of Earth Sciences, Inc. to Form S-3
Registration Statement declared effective July 23, 1997, File No. 333-25465,
Form S-3 Registration Statement declared effective September 22, 1997, File No.
333-35135, and Form S-3 Registration Statement declared effective February 25,
1998, File No. 333-46199 of Earth Sciences, Inc. and to the use of our name and
the statements with respect to us, as appearing under the heading "Experts" in
the Registration Statement.
/s/ Hein + Associates LLP
HEIN + ASSOCIATES
Denver, Colorado
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
CONSOLIDATED FINANCIAL STATEMENTS, DECEMBER 31, 1997 AND 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 332
<SECURITIES> 0
<RECEIVABLES> 826
<ALLOWANCES> 0
<INVENTORY> 520
<CURRENT-ASSETS> 2643
<PP&E> 20458
<DEPRECIATION> 5250
<TOTAL-ASSETS> 19289
<CURRENT-LIABILITIES> 2212
<BONDS> 6752
0
0
<COMMON> 119
<OTHER-SE> 4928
<TOTAL-LIABILITY-AND-EQUITY> 19289
<SALES> 1468
<TOTAL-REVENUES> 1578
<CGS> 2565
<TOTAL-COSTS> 6688
<OTHER-EXPENSES> 2904
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3062
<INCOME-PRETAX> (8014)
<INCOME-TAX> (985)
<INCOME-CONTINUING> (7029)
<DISCONTINUED> 0
<EXTRAORDINARY> 2298
<CHANGES> 0
<NET-INCOME> (4731)
<EPS-PRIMARY> (.51)
<EPS-DILUTED> (.51)
</TABLE>
