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, 1998
Commission File Number: 0-6088
Earth Sciences, Inc.
(Name of small business issuer in its charter)
Colorado 84-0503749
(State of incorporation) (IRS Employer Identification No.)
910 12th Street, Golden, Colorado 80401
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(Address of principal executive offices,
including Zip Code)
(Registrant's telephone number, including area code): (303) 279-7641
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, one cent par value
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Title of class
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $ 4,893,000
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 12, 1999 was $18,490,000.
Number of shares outstanding of registrant's Common Stock, one cent par value as
of March 12, 1999 - 23,554,362.
DOCUMENTS INCORPORATED BY REFERENCE :
None
Transitional Small Business Disclosure Format: Yes __ No X
<PAGE>
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. In particular, 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 chemical processing,
air pollution control and mineral exploration company. 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. The major
activities of the Company include the operation of its 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 wholly-owned
subsidiary; and continued exploration activities for diamond and gold resources
in Venezuela.
During 1998, ESI (1) acquired the remaining equity interest in ADA and through
ADA (a) received 2 patents for its flue-gas conditioning technology, (b)
developed new products to resolve treated ash use in cement, (c) was awarded
several contracts to demonstrate various technologies, and (d) successfully
completed the warranty period for its installation in Wisconsin; (2) continued
and improved production of purified phosphate products at its solvent extraction
facility in Calgary, Alberta, Canada; (3) applied for 15 mineral concessions in
Venezuela covering over 30,000 acres and continued exploration activities for
diamond and gold resources in Venezuela; (4) issued $3,081,000 in convertible
debentures to fund its activities; and (5) maintained its position in several
mineral resources and prospects in the Western US.
Thus far in 1999, ESI has (a) signed a letter of intent with Chemical
Interchange Company ("CIC") to sell 6,000-8,000 tons per year of purified
phosphoric acid ("PPA") for distribution in the US primarily east of the Rocky
Mountains; (b) been awarded a third patent for advanced flue-gas conditioning
technology; and (c) won additional commitments for demonstration of several
technologies related to air pollution control. 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).
In May 1998, ESI acquired the remaining 49% interest in ADA through the issuance
of approximately 1,716,000 of its common shares. ESI's initial 51% interest was
purchased in 1997 by payments to ADA totaling $2,500,000. At that time ESI
obtained the option to acquire the remaining 49%. In December 1997, ADA
delivered its first three commercial units; one to Alliant Power Company ("APC")
and two to Mississippi Power Co. ("MPC"), in accordance with contract terms.
Initial injection of chemical was suspended earlier in the year after concerns
arose from the results of co-injection of other chemicals. ADA-34, a new
chemical blend, was developed during the summer of 1998 in response to those
concerns. Injection of ADA-34, commenced in September 1998 at the APC
installation. The APC unit has been operating successfully since that time and
has completed its three-month warranty period in December 1998. One unit at MPC
commenced injection in the first half of March 1998, while the second unit
commenced operation in May after completion by MPC of necessary electrical and
piping connections. Injection at both these units was suspended when the treated
fly ash collected lengthened the set time in cement where it was being recycled
as a filler. ADA-34 addresses that concern and has proven acceptable in tests of
the treated fly ash generated at the APC unit. MPC has elected a major capital
conversion for both of its systems and other modifications that will alleviate
the current need for ADA's flue-gas conditioning technology. Although ADA-34
continues to perform well at the installations where it is in use, the
parameters and mechanisms that determine its effectiveness are complex and
dependent on several factors outside the control of ADA. There can be no
assurances that any of the units will continue to perform as anticipated.
<PAGE>
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 evaluations
are in process to select equipment for production of food grade product targeted
for completion in 1999. Production and sales of products have been increasing
monthly as ESI establishes and expands its market position. ESI also intends to
pursue the recovery of other valuable elements in the feed stock once sufficient
levels of routine production and cash flow are achieved. Initial investigation
of such production recovery potential and the equipment required to produce food
grade material are estimated at a combined cost between $200,000-$500,000. Such
amounts are expected to be funded from equipment leasing opportunities and
internally generated cash flow. There can be no assurances that Registrant will
be able to achieve its anticipated goals.
During 1998, 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. 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 filed for 15
concessions covering approximately 30,000 acres with prospective interests for
diamonds and gold. In 1999 VENESI expects to conduct surface exploration on the
concessions, currently filed for, when they are granted, and file applications
in other areas of interest.
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 was payable quarterly. The 1998 Debentures were convertible
at any time following 45 days after the issuance thereof and mature on January
31, 1999. The Debentures were 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. All such debentures were
converted to a total of 3,497,981 shares of common stock during 1998.
In February 1999, ESI sold 1,260,623 shares of common stock and received net
proceeds of $1,137,000. Such shares are restricted from sale until after a
registration statement becomes effective covering their subsequent sale or 90
days after the sale which ever occurs later. ESI has committed to file such a
registration statement no later then April 11, 1999 and has an obligation to
issue additional shares in the event the market price at the time of sale is
less than 125% of the purchase price. Such additional shares are limited to two
and one half times the number of shares originally issued.
(b) Business of Issuer.
Registrant is a chemical processing, air pollution control and mineral
exploration company. 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 100%
interest in ADA which provides air pollution control technologies and services;
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.
<PAGE>
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 produce a technical grade PPA
and by-products. ESI purchases SPA from a variety of US suppliers under
different supply arrangements and has been able to acquire sufficient quantities
to supply it's estimated requirements of SPA. There can be no assurances that
the Company will be able to 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 1.3 million tons PPA industrial market where an estimated 370,000 tons
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. As additional
compensation, the Company issued 50,000 shares and 80,000 shares of common stock
to TKI in 1998 and 1999, respectively. 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. ESEC signed a letter of intent with
Chemical Interchange Company ("CIC") to sell 6,000-8,000 tons per year of PPA
for distribution in the US primarily east of the Rocky Mountains and is
presently negotiating a similar contract with another group. However, Registrant
has limited experience in marketing industrial chemicals and is relying on
consultants and others to initiate and maintain other sales contacts. PPA is not
typically sold under long-term contracts, and Registrant does not have any other
significant long-term commitments to purchase its products. There can be no
assurances that Registrant will be successful in its future sales efforts.
Solvent Extraction Process
The facility produces PPA using an environmentally clean solvent extraction
process employing tributyl phosphate. 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 most fertilizer grade phosphoric acid feedstock with
extraction efficiencies of 70 to 90%. The remaining material is 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 continuing, long-term commercial basis at the Calgary plant.
Although ESI has performed numerous bench-scale and pilot plant test of the
process, and has operated the facility on a continuing basis since June of 1997,
there can be no assurances that the process will yield satisfactory results when
employed on a long-term continuous commercial scale.
<PAGE>
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. Although the contract with CIC will move products into the Midwest, 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 is in competition with several domestic and international
producers, many of whom have substantially greater financial, production,
distribution and marketing resources than ESEC. As ESEC increases its market
share, further 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 agents using phosphoric acid, 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. In May 1998 ESI exercised such option, acquiring
a 100% interest in ADA, by issuance of 1,716,000 shares of stock.
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.
<PAGE>
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.
ADA 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.
ADA Patents
ADA has received three patents related to different aspects of its technology.
Although important to protect its continuing business, ADA does not consider any
of such patents to be critical to the ongoing conduct of its business.
(See also the discussion below under the heading Patents, Licenses and
Franchises.)
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. In 1998, an additional 15 applications were
made to MEM covering approximately 30,000 acres in southeastern Venezuelan,
chiefly of interest for their diamond and gold potential. These applications
were filed for areas where previous concessions had been granted but had lapsed.
ESI expects MEM to give consideration to these applications on a more timely
basis since the areas requested underwent a level of scrutiny in the past.
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.
<PAGE>
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
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. Although specific work programs have
been formalized for initial detailed exploration of the above mentioned areas,
such programs are on hold until the Venezuelan government grants the applied for
concessions.
From May through December 1998, VENESI filed for 15 concessions ranging in size
from 200 to 4,228 hectares (approx. 480 to 10,150 acres) all located in the
Bolivar state in southeastern Venezuela. The location of the filings primarly
centers in two areas, one near the Brazil border and the other south of the town
of La Paragua. Both of these areas have historical diamond production from
alluvial materials. ESI believes that there is growing body of geologic evidence
to support the existence of kimberlitic sources for such diamonds in Venezuela
and is targeting its exploration effort to acquire concessions with a likelihood
for such sources. Thus far VENESI has not confirmed the existence of any
kimberlites in Venezuela and there can be no assurances that its exploration
efforts will be successful in the future.
The primary objectives of the 1999 plans are to determine as quickly as possible
the nature and extent of diamond and gold mineralization on the anticipated new
land concessions, if and when they are granted, 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 1998 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 (See also the discussion above under the
heading "ADA Patents.") 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".
<PAGE>
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
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 $285 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 1999 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.
<PAGE>
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.
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, 1998, 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
<PAGE>
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. (See also the discussions above under the
headings "Market for Purified Phosphoric Acid" and "Market for ADA Services" and
Note 14 to the Consolidated Financial Statement submitted in response to Item 7
below.) 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 $19,000 and
$98,000 on research and development activities related to the Calgary extraction
facility during 1998 and 1997, respectively. ADA spent approximately $62,000 and
$127,000 on research and development activities related to further development
of its technology during 1998 and 1997, respectively.
Employees. As of December 31, 1998 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.
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 2,500 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).
<PAGE>
(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 1998.
(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 in 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.
(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 1998.
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 and 1998.
Registrant has listed the property for sale with a local real estate company.
(e) Calgary Solvent Extraction Facility.
Registrant owns a hydrometallurgical solvent extraction facility which produces
purified phosphate products. 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.
<PAGE>
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 (high and low sale prices)
1998 1997
---- ----
1st Quarter $ 2.97 - 1.06 $ 4.05 - 3.00
2nd Quarter 1.94 - 1.16 3.69 - 2.69
3rd Quarter 1.38 - 0.53 3.13 - 2.06
4th Quarter 0.84 - 0.47 2.19 - 1.06
The price ranges shown are based on NASDAQ quotations as reported by the
National Association of Securities Dealers, Inc. The sale prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. In October 1998, Registrant received notice from
NASDAQ that it failed to meet the minimum bid requirement of $1.00 for continued
listing. Registrant requested a written hearing before a board appointed by
NASDAQ to stay the delisting, which hearing was held on February 18, 1999. On
March 24, 1999, Registrant received written notice from NASDAQ that it has been
granted an extension until June 30, 1999 to meet the minimum bid requirement.
Management of Registrant is evaluating a reverse stock split, among other
actions, as a means of gaining compliance with the minimum bid requirement.
(b) Holders.
The number of record holders of common stock, one cent par value of Registrant
as of March 12, 1999 was approximately 1,900, the approximate number of
beneficial shareholders is estimated at 9,900.
(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.
In February 1999, Registrant sold 1,260,623 shares of its common stock for cash
consideration of $1,137,000 to a limited number of accredited investors 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. In particular 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, a recently approved credit
facility and recent private placements of common stock are sufficient to fund
the planned growth in operations until positive cash flow is achieved in Calgary
and at ADA, which are both anticipated during 1999. The achievement of such
positive cash flow is dependent upon several factors including continued
production of technical grade quality product, 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
units currently operating at APC and in Oregon, and the sale of at least two
other units to any of a number of utilities where proposals have been issued.
Significant delay in signing new contracts or unsatisfactory operations at the
units operating could delay or frustrate such achievement. Additional funds may
be required to fund expanded exploration activities in Venezuela (see Item 1(b)
above) and purchase equipment to produce food-grade product in Calgary. Private
placements of common stock, convertible debentures and bank borrowings may be
evaluated to fund such requirements. Registrant received a net of $1.1 million
from the sale of common stock in the first quarter of 1999 (see Item 1(a) above)
and has received approval, subject to definitive documentation, of a $400,000
credit facility from the Bank of Hongkong secured by trade accounts receivable
of ESEC.
<PAGE>
Based on current estimates, the Calgary facility may require as much as U.S.
$500,000 to initiate and finalize modification for the production of food grade
phosphoric acid. Registrant expects to finance those requirements from bank
borrowings, equipment leasing and/or existing working capital.
Registrant is funding the majority of cash costs of the Venezuelan gold
exploration activities. Activities planned on the existing SAMI contract and on
those concessions expected to be granted 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 $2,688,000 for 1998 versus $3,178,000 for
1997 and resulted primarily from the operating losses less non-cash charges for
interest related to convertible debentures. Cash flow from investing activities
for 1998 includes proceeds from sale of building of $337,000 and capital
expenditures of $729,000. Cash flow from financing activities in 1998 consisted
of payments on notes payable and long-term debt of $500,000, proceeds from the
issuance of stock of $167,000 and proceeds from the issuance of convertible
debentures and notes payable, net of $3,203,000. Cash flow from investing
activities for 1997 included funding and collections on notes receivable of
$50,000, and 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, net of $8,586,000.
Results of Operations
Revenues from sales totaled $4,686,000 in 1998 versus $1,468,000 in 1997. In
1998 $2,818,000 of that amount was generated by ADA and $1,868,000 from Calgary
phosphate sales. ADA's revenues were less than anticipated due to (1) delays in
the installation of units at Wisconsin and Mississippi, (2) cessation of
chemical injection in Mississippi when the treated fly-ash prolonged the set
time of cement into which it was being recycled, and (3) less than expected
additional sales due to market concern over the recycled fly-ash issue. In the
summer of 1998, ADA developed a new chemical blend that has alleviated the
cement set time problem and has improved overall performance in the several
units where it has been utilized. (See discussion of ADA's Technology and
Services above in Item 1.b.) Sales of phosphate products were also less than
targeted because (1) ADA's demand was less than expected as described above, and
(2) product quality problems reduced margins and market acceptance, restricting
sales. Additional filtering and other process changes instituted in the fourth
quarter of 1998 have thus far solved the product quality issue, and the Calgary
phosphate production facility has been routinely producing acceptable technical
grade material since that time. Rental income included in other income decreased
slightly in 1998 due to the sale of ESI office building in September 1998. Also
included in other income for 1998 is gain on the sale of that building of
$158,000. Other income in 1997 includes interest income earned from investment
of funds on hand and a legal settlement in the amount of $30,000.
Operating expenses increased significantly in 1998 in response to increased
sales and revenues related to both Calgary phosphate production ($1,663,000 of
the increase) and ADA ($1,157,000 of the increase). The Company experienced
negative gross margins at its Calgary operations in 1997 and 1998 primarily due
to the start up nature of the phosphate production and the product quality
problem mentioned above. The Company expects such margins to improve in 1999
with expected increased sales. ADA experienced positive gross margins in 1998,
but these were less than expected from routine operations and resulted from ADA
establishing its market acceptance and market share for its technology. The
Company's ultimate success will be dependent on generating greatly improved
gross margins which in turn are dependent upon increased sales and market
penetration. Consolidated research and development decreased in 1998 to $81,000
from $225,000 in 1997. General and administrative expenses decreased by a net of
approximately $500,000 in 1998 as a result of increases in Calgary related to
increased production (an increase of $254,000), ADA's increased activities (an
increase of $686,000), decreased investor relations expenses (a decrease of
$1,227,000), and adoption of a sabbatical leave policy during 1997 not incurred
in 1998 ($200,000 of the decrease).
Registrant's interest expense totaled approximately $1,264,000 for 1998 and
$3,062,000 for 1997. Interest expense includes approximately $84,000 and $20,000
in 1998 and 1997, respectively, from the consolidation of the Canadian
subsidiary's and ADA's results. Included in interest expense for 1998 and 1997
is $1,027,000 and $2,595,000, respectively of non-cash charges representing the
25% discount from market related to the convertible debentures issued and
convertible in those years.
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.
<PAGE>
Impact of Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written and
imbedded chips 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 recent and ongoing assessments, Registrant has 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 except that Registrant
does rely on utilities supplied by municipalities and power companies, the
disruption of which will cause Registrant to shut down its affected operations
until such service is restored. Extended disruption of utility services will
have a material adverse effect on Registrant. With regard to other third party
systems, 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
material exposure to contingencies related to the Year 2000 Issue for products
or services it has sold.
Item 7. Financial Statements.
Index to Financial Statements
-----------------------------
Independent Auditor's Report F-2
Financial Statements:
Earth Sciences, Inc. and Subsidiaries
Consolidated Balance Sheet, December 31, 1998 F-3
Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended December 31, 1998 and 1997 F-4
Consolidated Statement of Stockholders' Equity,
For the Period from January 1, 1997 to December 31, 1998 F-5
Consolidated Statements of Cash Flows,
For the Years Ended December 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-8
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
(Balance of this page intentionally blank.)
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act. (1)
<TABLE>
<CAPTION>
Term First Became
Name Age Position and Offices Expires Director
---- --- -------------------- ------- --------
<S> <C> <C> <C> <C>
Ramon E. Bisque 67 Chairman of the Board of Directors and Annual Meeting 1963
Member of the Executive Committee Date, 1999
Duane N. Bloom 65 Director, Secretary, Chairman of the " 1963
Executive Committee
Michael D. Durham 49 Director, President of ADA, Member of the " 1997
Audit Committee
Robert H. Lowdermilk 62 Director, Member of the Audit Committee " 1990
Mark H. McKinnies 47 Director, President of ESI, Treasurer, " 1983
Member of the Executive Committee
</TABLE>
(1) Kristen R. Armstrong was a Director of Registrant from 1991 until her
resignation on March 1, 1999.
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 14,
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.
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.
No relationship exists between any individuals named in this Item 9.
<PAGE>
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, 1998, all filing requirements
applicable to its officers, directors and greater than ten percent beneficial
owners were complied with except Mr. Lowdermilk was late filing his Form 5
reporting one transaction.
Item 10. Executive Compensation.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
------
Name of Individual and Securities
Principal Position Year Salary Other(2) Underlying Options (#)
- ------------------ ---- ------ -------- ----------------------
<S> <C> <C> <C> <C>
Ramon E. Bisque(1) 1998 $87,884 $12,905 25,000
Chairman of the Board 1997 $85,175 $12,291 25,000
1996 $81,288 $11,706 50,000
Duane N. Bloom(1) 1998 $118,638 $17,207 25,000
Chairman of the Executive Committee 1997 $114,564 $16,388 25,000
Secretary and Director 1996 $107,240 $15,607 50,000
Mark H. McKinnies(1) 1998 $126,619 $18,900 25,000
Director, President and Treasurer 1997 $116,618 $17,400 25,000
1996 $101,568 $15,142 150,000
</TABLE>
(1)Member of the Executive Committee of Registrant, which performs the duties of
the Chief Executive Officer.
(2)Amounts represent pension and matching 401(k) payments made to a qualified
plan by Registrant for the benefit of the named individual.
<TABLE>
<CAPTION>
Options/SAR Grants in Last Fiscal Year
Individual Grants
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base Expiration
Name Granted (#) in Fiscal Year Price ($/Sh) Date
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ramon E. Bisque 25,000 8.3% $ .51 10/15/01
Duane N. Bloom 25,000 8.3% $ .51 10/15/01
Mark H. McKinnies 25,000 8.3% $ .51 10/15/01
</TABLE>
All options shown for each individual were exerciseable as of December 31, 1998.
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 $ 2,100
Duane N. Bloom 125,000 $ 2,100
Mark H. McKinnies 225,000 $ 2,100
All options shown for each individual were exerciseable as of December 31, 1998.
<PAGE>
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.
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 12, 1999, 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.
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address Beneficial Ownership Percent of Class
- ---------------- -------------------- ----------------
<S> <C> <C>
Ramon E. Bisque (Chairman of the Board of Directors) 433,281 (1) 2.1%
9113 Fern Way
Golden, CO
Duane N. Bloom (Director and Secretary) 648,297 (2) 3.0%
5565 Pine Ridge Rd.
Golden, CO
Michael D. Durham (Director) 772,269 (3) 3.3%
5252 Lariat Drive
Castle Rock, CO
Robert H. Lowdermilk (Director) 1,041,889 (4) 4.6%
100 Cherry St.
Denver, CO
Mark H. McKinnies (Director and President) 225,805 (5) 1.1%
10134 S. Pinedale Dr.
Conifer, CO
Directors and Officers as a Group (5 individuals) 3,196,541 (6) 13.1%
</TABLE>
Notes:
(1) Included in the amount shown are 100,000 shares to which Dr. Bisque has the
right to acquire beneficial ownership through stock options, and 1,000
registered in the name of Dr. Bisque's wife.
(2) Included in the amount shown are 100,000 shares to which Dr. Bloom has the
right to acquire beneficial ownership through stock options, and 7,725
shares registered in the name of Dr. Bloom's wife.
(3) Included in the amount shown are 30,000 shares to which Dr. Durham has the
right to acquire beneficial ownership through stock options.
(4) 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.
(5) Included in the amount shown are 200,000 shares to which Mr. McKinnies has
the right to acquire beneficial ownership through stock options.
(6) The amount shown includes 800,115 shares to which individuals in the group
have the right to acquire beneficial ownership through convertible debt and
stock options.
<PAGE>
Item 12. Certain Relationships and Related Transactions.
(a) During 1997, Dr. Bisque borrowed a total of $50,000 from Registrant at an
interest rate of 8%. The loan was paid back to Registrant prior to year end. The
amount borrowed was collateralized by amounts owing to Dr. Bisque by Registrant
and was 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 were collateralized by a mining property. As of December 31, 1997,
$70,000 was outstanding under such notes. All of that amount was converted to
common stock during the year ended December 31, 1998.
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 "1997 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 1997 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 $3.12. The 1997 Note was repaid in full in February, 1998. In
May 1998 Registrant borrowed $250,000 from TCC under a short-term note (the
"1998 Note") due March 31, 1999. The 1998 Note is collateralized by receivables
and inventory in Calgary. The 1998 Note bears interest at the greater of prime
plus two points or 10% which interest is payable quarterly.
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, Exhibits 4.4, 4.5, and
10.11through 10.13 were filed as exhibits to Registrant's 1997 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.
4.3 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.
10.2 Lease dated April 3, 1978 between Western Co-operative Fertilizers,
Limited and ESI Resources, Ltd.
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.
<PAGE>
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.
10.14* Letter of Intent dated January 28, 1999 between ESI Resource Limited,
Earth Sciences Extraction Company and Chemical Interchange Company.
10.15* Securities Subscription Agreement dated February 1999
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.
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 26, 1999 March 26, 1999
-------------- --------------
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 26, 1999 March 26, 1999
- -------------- --------------
Date Date
/s/Duane N. Bloom /s/ Michael D. Durham
- ----------------- ---------------------
Duane N. Bloom, Director Michael D. Durham, Director
March 26, 1999 March 26, 1999
- -------------- --------------
Date Date
/s/ Mark H. McKinnies
- ---------------------
Mark H. McKinnies, Director
March 26, 1999
- --------------
Date
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report.................................................F-2
Consolidated Balance Sheet - December 31, 1998...............................F-3
Consolidated Statements of Operations and Comprehensive Loss -
For the Years Ended December 31, 1998 and 1997......................F-4
Consolidated Statements of Changes in Stockholders' Equity -
For the Years Ended December 31, 1998 and 1997......................F-5
Consolidated Statements of Cash Flows -
For the Years Ended December 31, 1998 and 1997......................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, 1998, and the related consolidated
statements of operations and comprehensive loss, changes in stockholders' equity
and cash flows for the years ended December 31, 1998 and 1997. 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, 1998, and the results of their operations
and their cash flows for the years ended December 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
March 19, 1999
F-2
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 122,000
Trade receivables, with allowance for doubtful
accounts $4,000 549,000
Inventories 508,000
Prepaid expenses and other 81,000
------------
Total current assets 1,260,000
PROPERTY, PLANT AND EQUIPMENT, at cost 20,763,000
Less accumulated depreciation and amortization (5,333,000)
------------
Net property, plant and equipment 15,430,000
------------
OTHER ASSETS 69,000
INTANGIBLE ASSETS, net of $390,000 in amortization 3,190,000
------------
TOTAL ASSETS $ 19,949,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 935,000
Accrued expenses 389,000
Billings in excess of costs and profits on
uncompleted contracts 170,000
Note payables:
Related parties 277,000
Line-of-credit 185,000
Other current liabilities 66,000
------------
Total current liabilities 2,022,000
LONG-TERM LIABILITIES:
Extraction plant liability 4,850,000
Convertible debentures - related parties 1,000,000
Other liabilities 590,000
------------
6,440,000
COMMITMENTS (Notes 2, 6, 10, and 11)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,00
shares authorized; 22,194,000 shares issued 222,000
Additional paid-in capital 24,157,000
Accumulated deficit (12,892,000)
------------
Total stockholders' equity 11,487,000
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,949,000
============
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1998 1997
---- ----
NET REVENUES:
Sales $ 4,686,000 $ 1,468,000
Other income 208,000 110,000
------------ ------------
Total revenues 4,894,000 1,578,000
COST AND EXPENSES:
Operating 5,077,000 2,565,000
General and administrative 3,074,000 3,557,000
Research and development 81,000 225,000
Depreciation and amortization 735,000 341,000
------------ ------------
Total expenses 8,967,000 6,688,000
------------ ------------
OPERATING LOSS (4,073,000) (5,110,000)
OTHER INCOME (EXPENSE):
Interest expense (1,264,000) (3,062,000)
Minority interest in loss of subsidiary -- 297,000
Other, net (103,000) (139,000)
------------ ------------
Total other income (expense) (1,367,000) (2,904,000)
LOSS BEFORE EXTRAORDINARY ITEMS AND TAXES (5,440,000) (8,014,000)
Income tax benefit -- 985,000
------------ ------------
LOSS BEFORE EXTRAORDINARY GAIN (5,440,000) (7,029,000)
------------ ------------
Extraordinary gain from debt restructuring
(net of income tax of $985,000) -- 2,298,000
------------ ------------
NET LOSS $ (5,440,000) $ (4,731,000)
============ ============
OTHER COMPREHENSIVE ITEMS -
Foreign currency translation adjustment -- (9,000)
------------ ------------
COMPREHENSIVE LOSS $ (5,440,000) $ (4,722,000)
============ ============
NET LOSS PER COMMON SHARE (Basic and Diluted):
Before extraordinary item $ (.27) $ (.76)
Extraordinary gain -- .25
------------ ------------
Net loss per common share $ (.27) $ (.51)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 20,116,000 9,290,000
============ ============
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, 1998 AND 1997
Additional
COMMON STOCK Paid-in
Shares Amount Capital
------ ------ -------
<S> <C> <C> <C>
BALANCES, January 1, 1997 8,449,000 $ 84,000 $ 8,645,000
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 acquired subsidiary 36,000 1,000 119,000
Foreign currency translation adjustment -- -- --
Transfer of foreign currency translation
adjustment to additional paid-in
capital -- -- (1,837,000)
Net loss -- -- --
------------ ------------ ------------
BALANCES, December 31, 1997 11,912,000 119,000 12,261,000
Debt converted to common stock 8,046,000 80,000 9,467,000
Officer/director debt converted to
common stock 70,000 1,000 37,000
Stock and options issued for services 150,000 2,000 174,000
Stock issued for cash 300,000 3,000 164,000
Stock issued for interest in
acquired subsidiary 1,716,000 17,000 2,054,000
Net loss -- -- --
------------ ------------ ------------
BALANCES, December 31, 1998 22,194,000 $ 222,000 $ 24,157,000
============ ============ ============
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Continued)
Cumulative
Accumulated Translation
Deficit Adjustments TOTAL
------- ----------- -----
BALANCES, January 1, 1997 $ (2,721,000) $ (1,828,000) $ 4,180,000
Debt converted to common stock -- -- 3,926,000
Officer/director debt converted to
common stock -- -- 151,000
Stock and options issued for services -- -- 1,249,000
Stock issued for cash -- -- 42,000
Stock issued for acquired subsidiary -- -- 120,000
Foreign currency translation adjustment -- (9,000) (9,000)
Transfer of foreign currency translation
adjustment to additional paid-in
capital -- 1,837,000 --
Net loss (4,731,000) -- (4,731,000)
------------ ------------ ------------
BALANCES, December 31, 1997 (7,452,000) -- 4,928,000
Debt converted to common stock -- -- 9,547,000
Officer/director debt converted to
common stock -- -- 38,000
Stock and options issued for services -- -- 176,000
Stock issued for cash -- -- 167,000
Stock issued for interest in
acquired subsidiary -- -- 2,071,000
Net loss (5,440,000) -- (5,440,000)
------------ ------------ ------------
BALANCES, December 31, 1998 $(12,892,000) $ -- $ 11,487,000
============ ============ ============
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,
---------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(5,440,000) $(4,731,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depletion, depreciation and amortization 735,000 341,000
Minority interest in loss -- (297,000)
Interest expense related to debt discount 1,027,000 2,595,000
Write-down of mineral properties -- 87,000
Gain on sale of building (158,000) --
Gain on settlement of debt, net of income taxes -- (2,298,000)
Income tax benefit -- (985,000)
Expenses paid with stock and options 176,000 427,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables 277,000 (521,000)
Inventories 12,000 (519,000)
Other assets 517,000 318,000
Sale of marketable securities -- 1,135,000
Increase (decrease) in:
Accounts payable 59,000 624,000
Billings in excess of costs and profits on
uncompleted contracts 508,000 --
Accrued expenses 191,000 524,000
Other liabilities (592,000) 122,000
----------- -----------
Net cash used in operating activities (2,688,000) (3,178,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections on notes receivable -- 50,000
Notes receivable funded -- (50,000)
Proceeds from sale of building 337,000 --
Capital expenditures (729,000) (3,154,000)
Purchase of investment in ADA -- (417,000)
----------- -----------
Net cash used in investing activities (392,000) (3,571,000)
See accompanying notes to these consolidated financial statements.
F-6
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1998 1997
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on restructuring of extraction plant liability -- (1,250,000)
Payments on notes payable and long-term debt (500,000) (886,000)
Proceeds from convertible debentures and notes payable, net 3,203,000 8,586,000
Proceeds from issuance of common stock 167,000 42,000
----------- -----------
Net cash provided by financing activities 2,870,000 6,492,000
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- 3,000
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (210,000) (254,000)
CASH AND CASH EQUIVALENTS, beginning of year 332,000 586,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 122,000 $ 332,000
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash payments for interest $ 121,000 $ 223,000
=========== ===========
Conversion of notes payable and debentures $ 9,585,000 $ 4,077,000
=========== ===========
Stock and options issued for services $ 176,000 $ 1,249,000
=========== ===========
Purchase of property and equipment for debt or leases $ 104,000 $ 178,000
=========== ===========
Stock issued for interest in acquired subsidiary $ 2,071,000 $ 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 Resources Limited (ESIR) ADA Environment Solutions LLC
(ADA), Recursos Minerales Venesi C.A. (Venesi), and ESI Chemicals, Inc.
(ESIC), and its majority-owned subsidiaries, 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, 1998, cash
equivalents consisted of money market instruments in the amount of $75,000,
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, 1998:
Supplies $221,000
Raw material 84,000
Work-in-progress 32,000
Finished goods 171,000
--------
$508,000
========
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, 1998.
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
life of the facility. Beginning in fiscal 1999, when the Company estimates
production will be approaching projected operating levels, the Company will
begin depreciating the plant over the greater of 15 years or the units of
production method. Depreciation on other assets is provided using the
F-8
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
straight-line method based on estimated useful lives ranging from 5 to 15
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 - Intangible assets principally consists of the excess of
the aggregate purchase price over the fair value of net assets of
businesses acquired (Goodwill) and amounts allocated to patents (see Note
2). Goodwill is being amortized over a 10-year period and patents over a
7-year period using the straight-line method, which is less than the
remaining legal life of the patents.
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 explora tion 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 - The Company follows Statement of
Financial Accounting Standards (SFAS) No. 121, Impairment of Long-Lived
Assets. In the event that facts and circumstances indicate that the cost of
assets or intangible 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.
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 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 have been recorded as a
reduction of additional paid-in capital.
F-9
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 SFAS No. 128, Earnings Per Share. SFAS No. 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, 1998 and
1997. Accordingly, basic and diluted EPS are the same for each year.
Stock-Based Compensation - In fiscal 1996, the Company adopted SFAS No.
123, Accounting for Stock- Based Compensation. SFAS No. 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
SFAS No. 123 for employees, and is subject only to the disclosure
requirements prescribed by SFAS No. 123. For employees, the Company follows
APB 25 which requires expense to be recognized only to the extent the
exercise price of the stock-based compensation is below the market price.
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 realizability of its investment in
its extraction facility, land and mineral properties and the amounts
allocated to Goodwill and patents associated with the acquisition of ADA as
well as the percentage of completion estimates on ADA contracts and
decommissioning cost of its solvent extraction facility. If operating
losses continue at the extraction facility and at ADA as well as other
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 materially revised within
the next year.
Comprehensive Income - SFAS No. 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.
Segment Information - In 1998, the Company adopted SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements and
F-10
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. SFAS No. 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. The
Company has identified the following reportable segments: natural resource
exploration, production of purified phosphate products, and flue gas
conditioning technology for air pollution abatement, sales, and
environmental solutions.
Impact of Recently Issued Accounting Pronouncements - In 1998, SFAS Nos.
132, Employers' Disclosure about Pensions and Other Postretirement
Benefits, No. 133, Accounting for Derivative Instruments and Hedging
Activities, and No. 134, Accounting for Mortgage-Backed Securities Retained
After the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprises were issued. These pronouncements are not expected to
impact the Company.
2. LIQUIDITY:
Management believes that existing working capital, recent private
placements of common stock, and recent credit facility approval in the
amount of $400,000 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 1999. For ESEC, the achievement of positive cash flow is
dependent upon several factors including continued production of technical
grade quality product 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 sale of at least two other
units to any of a number of utilities where proposals have been issued.
Significant delay in signing new contracts, or unsatisfactory operations at
any of the units operating 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.
Final modifications are being made to the Calgary facility for the
production of food grade phosphoric acid. These modifications are expected
to be financed through bank borrowings, equipment and leasing, and/or
existing working capital.
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, cash, and notes that was accounted for
under the purchase method of accounting. The Company issued 36,000 shares
of common stock valued at $120,000, paid $500,000 in cash and $1,600,000 in
notes for an additional 46% interest in ADA. As part of the acquisition
F-11
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement, the Company acquired an option for the remaining 49% equity
interests in ADA. In May 1998, the Company acquired the remaining 49%
interest in ADA through the issuance of approximately 1,716,000 shares of
stock valued at $2,071,000. The tangible assets of ADA acquired in
acquisition were recorded at their historical value, which approximated
their fair value. In addition, approximately $1,000,000 of the purchase
price was allocated to the estimated value of ADA's patents and $2,500,000
to Goodwill.
4. COSTS ON UNCOMPLETED CONTRACTS:
The following information is applicable to ADA's uncompleted contracts at
December 31, 1998:
Costs incurred and profits recognized on $ 898,000
uncompleted contracts
Less billings to date (1,068,000)
-----------
Billings in excess of cost on uncompleted contracts $ (170,000)
===========
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment as of December 31, 1998 is summarized as
follows:
Estimated
Useful Lives
------------
Extraction facility $17,796,000 15
Machinery and equipment 576,000 10
Furniture and fixtures 157,000 5
Land and mineral properties, including deferred
exploration and development costs (a) 2,234,000
-----------
$20,763,000
===========
----------
(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
F-12
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 and 1997 was $427,000 and $241,000,
respectively.
During 1998, the Company sold its corporate office building to a company
owned an adult son of an officer and director. The Company recognized a
gain of approximately $158,000 on this sale. The Company leases a portion
of this building on a month-to-month basis. The sales price was verified by
an independent appraisal.
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
exercised its 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 purchase the royalty interest at December 31,
1998 for $3,050,000, 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,
1998
----
Related Parties:
----------------
Note payable to a stockholder/director at the greater
of prime plus 2% or 10% (10% at December 31, 1998),
with quarterly payments of interest, due in May 1999,
collateralized by ESEC's assets. $250,000
Convertible debenture - to a stockholder/director at
the greater of prime plus 2% or 10% (10% at December
31, 1998) with quarterly payments of interest and
principal due in March 2000, collateralized by the
assets of ESI and ESEC. 1,000,000
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
----------
1,277,000
Less current portion (277,000)
----------
Long-term debt, net of current portion $1,000,000
==========
F-13
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1997, ESI issued convertible debentures (the "1997 Debentures") at
their face value totaling $8,785,000. Of the total 1997 Debentures,
$7,785,000 were 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 1997 Debentures. The
remaining $1,000,000 was issued to a company owned by a director and was
outstanding as of December 31, 1998. This debenture is convertible at $3.12
per share, which was market value of the Company's common stock at the date
of the debenture.
During 1998, ESI issued convertible debentures (the "1998 Debentures") at
their face value totaling $3,081,000. The 1998 Debentures were convertible
into shares of common stock based at 25% discount from the market price of
the common stock at the time of conversion, but not in excess of $2.00 per
share. During 1998, the Company recorded additional interest expense
(premium) of $1,063,000 for the difference between the quoted price and the
discounted price of the common stock that would be issued upon conversion
of the 1998 Debentures. As of December 31, 1998 all of the 1998 Debentures
had been converted to common stock.
Line-of-Credit - ADA has a $200,000 line-of-credit with a bank that expires
in 1999. The line has an interest rate of prime plus 1.75% (9.5% at
December 31, 1998 and is collateralized by certain receivables). The
$185,000 borrowed under this line has been classified with current
liabilities.
F-14
<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, 1998:
CANADIAN
SUBSIDIARY U.S.
OPERATIONS Operations
---------- ----------
Deferred assets (liabilities):
Net operating loss carryforward $ 334,000 $ 2,678,000
Tax credit carryforwards 2,000 13,000
Depreciation differences (414,000) 14,000
Mining properties basis differences -- (355,000)
Deferred revenue 1,528,000 --
Compensation related deferrals -- 144,000
Other 135,000 --
----------- -----------
Net deferred tax assets 1,585,000 2,494,000
Less valuation allowance (1,585,000) (2,494,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
The Company has remaining U.S. a net operating loss carryforward at
December 31, 1998 of approximately $7,176,000, which if not utilized to
reduce taxable income in future periods, will expire in the years 2003
through 2018. 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 $741,000 (U.S.). The Canadian investment tax credit
carryforward for this subsidiary is $2,000 (U.S.).
The utilization of these U.S. net operating loss carryforwards is 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 will 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, 1998, 15,000
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 and 1998, 120,000 options expired, 60,000 in
each year. Additionally, during 1997, in addition to certain cash payments,
the Company issued 320,000 shares of common stock to the entity. The cash
F-15
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payments and the related cost associated with the stock grants were
amortized over one year, the period the services were expected to be
performed.
Private Placements - Subsequent to Year-End - In February 1999, ESI sold
1,260,623 shares of common stock and received net proceeds of $1,137,000.
Such shares are restricted from sale until after a registration statement
becomes effective covering their subsequent sale or 90 days after the sale
which ever occurs later. ESI has committed to file such a registration
statement no later then April 11, 1999 and has an obligation to issue
additional shares in the event the market price at the time of sale is less
than 125% of the purchase price. Such additional shares are limited to two
and one half times the number of shares originally issued.
Stock Options - The following is a table of options issued during 1998 and
1997:
Weighted
Average
Employees Non-employee Exercise
Options Options Price
------- ------- -----
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
Options granted:
Officers 100,000 $ 0.74
Consultants -- 50,000 $ 1.41
Other employees 200,000 -- $ 0.54
Options expired (175,000) (60,000) $ 1.58
-------- -------- --------
OPTIONS OUTSTANDING, December 31, 1998 600,000 369,000 $ 1.86
======== ======== ========
For all options granted during 1997 and 1998, 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
F-16
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
remaining contractual life for all options as of December 31, 1998 was
approximately 2.1 years. At December 31, 1998, all options were
exercisable. If not previously exercised, options outstanding at December
31, 1998, will expire as follows:
Weighted
Average
Range Number of Exercise
Year Low High Options Price
---- --- ---- ------- -----
1999 1.69 1.69 279,000 $1.69
1999 2.80 2.80 60,000 $2.80
2000 1.50 1.88 135,000 $1.85
2000 2.50 2.50 50,000 $2.50
2001 .51 .54 275,000 $.53
2001 1.41 1.41 50,000 $1.41
2001 3.20 4.00 120,000 $3.60
-------
969,000
=======
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 EPS would have been reduced to the pro forma
amounts indicated below.
Year Ended December 31,
------------------------------
1998 1997
---- ----
Net income (loss) applicable to
common stockholders:
As reported $ (5,440,000) $ (4,731,000)
Pro forma $ (5,535,000) $ (4,803,000)
Net income (loss) per common share:
As reported $ (.27) $ (.51)
Pro forma $ (.28) $ (.52)
F-17
<PAGE>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each employee option and warrant granted in 1998 and 1997
was estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Year Ended December 31,
-----------------------
1998 1997
---- ----
Expected volatility 75% 72%
Risk-free interest rate 5% 5.7%
Expected dividends -- --
Expected terms (in years) 3 3
10. PROFIT SHARING RETIREMENT PLAN:
The Company has a defined contribution and 401(k) plan to cover all
eligible employees. The Company paid $136,000 and $111,000 as the
contributions for 1998 and 1997, respectively based on a percentage of the
eligible employees' annual compensation.
11. COMMITMENT:
Capital Lease Obligations - The Company leases certain equipment under
agreements classified as capital leases. Equipment under these leases has a
cost of $421,000 and accumulated amortization of $170,000 as of December
31, 1998. The following is a schedule of future minimum lease payments
under capital leases at December 31, 1998. (The capitalized lease
obligation is classified with other liabilities on the accompanying balance
sheet.)
Year Amount
---- ------
1999 $116,000
2000 111,000
2001 89,000
2002 23,000
2003 1,000
---------
Total Future minimum lease payments 340,000
Less amount representing interest (49,000)
---------
Present value of net minimum lease payments 291,000
Less current portion (65,000)
---------
$ 226,000
=========
F-18
<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 $72,781 and
$10,000 for the years ended December 31, 1998 and 1997, respectively. The
total minimum rental commitments at December 31, 1998 are as follows:
Year
----
1999 $72,000
2000 72,000
2001 73,000
2002 75,000
2003 -
--------
$292,000
========
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, 1998, the Company has accrued $132,000 in connection with this
policy.
12. RELATED PARTY:
During 1997, the Company made loans to an officer/director totaling
$120,000 at an interest rate of 8%. These loan, and the related interest,
were paid back to the Company during 1997. The loan was collateralized by
amounts owing to the officer/director from the Company.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values for financial instruments under SFAS No. 107,
Disclosures about Fair value of Financial Instruments, are determined at
discrete points in time based on relevant market information.
F-19
<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, 1998
-----------------------
Carrying Fair
Amount Value
------ -----
Extraction plant liability $4,850,000 $3,050,000
The fair value of the extraction plant liability is estimated based on the
total payments which would be required to terminate the extraction plant
liability position as of December 31, 1998.
The Company believes the fair value of all remaining financial instruments
approximates the carrying amount due to their short-term nature or actual
interest rates that approximate the Company's effective borrowing rate.
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 SFAS 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-20
<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, 1998 and 1997 were as
follows (as a percentage of sales):
Customer 1998 1997
-------- ---- ----
ESEC
----
A 29% 32%
B 20% 18%
C 13% 15%
ADA
---
D 30% 29%
E 30% 22%
F 21% 13%
At December 31, 1998, approximately 66% of the Company's trade receivables
were from three customers.
In 1998, 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 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. 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. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. These segments are shown in the
accompanying table as ESI, ESIR, and ADA, respectively. ESIR is located in
Canada.
ESI's reportable segments are strategic business units that offer different
products and services. They are managed separately because each business
requires different technology and marketing strategies. Most of the
businesses were acquired as a unit, and the management at the time of the
acquisition was retained.
F-21
<PAGE>
<TABLE>
<CAPTION>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Eliminating
ESI ESEC ADA Entries Consolidated
--- ---- --- ------- ------------
1998
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ -- $ 1,868,000 $ 2,818,000 $ -- $ 4,686,000
Intersegment revenues -- 244,000 -- (244,000) --
Other revenue 201,000 -- 7,000 -- 208,000
------------ ------------ ------------ ------------ ------------
Total revenue $ 201,000 $ 2,112,000 $ 2,825,000 $ (244,000) $ 4,894,000
============ ============ ============ ============ ============
Interest expense $ (1,180,000) $ (40,000) $ (44,000) N/A $ (1,264,000)
Depreciation and amortization $ (17,000) $ (286,000) $ (432,000) N/A $ (735,000)
Segment profit (loss) $ (2,241,000) $ (2,305,000) $ (894,000) * $ (5,440,000)
Segment assets $ 1,926,000 $ 13,966,000 $ 4,057,000 N/A $ 19,949,000
Expenditures for segment assets $ 9,000 $ 537,000 $ 183,000 N/A $ 729,000
- ------------------------
* There were no profits on intersegment revenues.
F-22
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EARTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Eliminating
ESI ESEC ADA Entries Consolidated
--- ---- --- ------- ------------
1997
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 9,000 $ 514,000 $ 945,000 $ -- $ 1,468,000
Intersegment revenues -- 24,000 -- (24,000) --
Other revenue 110,000 -- -- -- 110,000
------------ ------------ ------------- ------------ ------------
Total revenue $ 119,000 $ 538,000 $ 945,000 $ (24,000) $ 1,578,000
============ ============ ============= ============ ============
Interest expense $ (3,038,000) $ (7,000) $ (17,000) N/A $ (3,062,000)
Depreciation and amortization $ (20,000) $ (212,000) $ (109,000) N/A $ (341,000)
Segment profit (loss) $ (5,530,000) $ (2,075,000) $ (409,000) * $ (8,014,000)
Segment assets $ 3,825,000 $ 13,846,000 $ 1,618,000 N/A $ 19,289,000
Expenditures for segment assets $ 33,000 $ 2,501,000 $ 620,000 N/A $ 3,154,000
- ------------------------
* There were no profits on intersegment revenues.
F-23
</TABLE>
Exhibit 3.1
Amended and Restated
ARTICLES OF INCORPORATION
OF
EARTH SCIENCES, INC.
ARTICLE I
---------
The name of the corporation is EARTH SCIENCES, INC.
ARTICLE II
----------
The nature, objectives and purposes of the business to be transacted by the
corporation shall be:
1. To prospect, explore, purchase or otherwise acquire, either absolutely
or conditionally, and either solely or jointly with others, to sell, dispose of,
and deal in lands and interests in and over lands and properties of every
description including mines, works, steamships, railways, tramways, telegraph
and telephone lines, wharves, docks, canals, waterways, electric light and power
plants, quarries, forests, pits mills, buildings, machinery, mining, milling,
concentrating, smelting, refining, and manufacturing plants, ores and minerals,
and claims and interests therein, and shares in the capital stock of
corporations owning or operating the same, in any part of the world, upon such
terms and in such manner as may be deemed advisable; to develop, improve, and
work the same; to conduct mining operations of every kind, and to operate plants
for reducing, smelting, and refining ores, minerals matte, and bullion; to enter
into contracts with other persons, firms or corporations (including any
corporation in which the directors of this company may be interested, or of
which they may be officers or directors, or which may be the owner of a large or
controlling interest of the stock of this company)for the reduction, treatment,
smelting, and refining of the ores, minerals, matte and bullion produced by the
corporation hereby organized; to search for, obtain, and disseminate information
as to mines, mining districts, mining claims, water claims, water rights and any
other rights, claims, and property; to examine, investigate, and secure the
titles to lands, mines, minerals ores, and mining or other rights and claims,
and interests therein, in any part of the world; to employ and send to any part
of the world, and to pay the fees, costs, charges, and expenses of, agents,
including persons and corporations, mining experts, legal counsel, and all
persons useful in examining, investigating, and securing the title to lands,
mines, minerals, ores, mining and other rights and claims, or interest therein,
in any part of the world; to print, publish, advertise, and circulate reports,
maps, plans, prospectuses, and documents of every kind whatsoever, directly or
indirectly relating to lands, mines, minerals, ores, and mining or other rights,
concessions, and claims in any part of the world, or to the title thereto, or to
the organization, operations, and objects of this company, or of any other
company.
2. To manufacture, sell, import, export, purchase, hold, own, assign,
transfer, invest, trade, and deal in or with all kinds of ores, minerals,
metals, and the products and by-products thereof, and goods, wares, merchandise,
and other materials and property of every class and description necessary for
the convenient and proper accomplishment of the purposes or objectives
enumerated herein; to acquire, transport, ship, buy, sell, contract for, deal
in, engage in trade or commerce in, or otherwise dispose of products of ores,
mineral substances, mineral compounds, metals, and intermediate metallurgical
compounds or substances obtained from the mining, production, manufacturing, or
refining of ores, minerals or metals which are for export or are to be exported,
or are in the course of being exported, or have been exported from the United
States, to any foreign nation; or to act as the agent, broker, consignee, or
factor for others in respect to the foregoing.
3. To carry on the business of advisors, consultants, and managers in any
or all fields of the earth sciences; to engage in a general counseling service
and to gather, compile, and disseminate information, data, and advice in respect
to matters of a commercial, financial, statistical, professional and business
nature, and to render and furnish services pertinent thereto; to enter into
agreements with any corporation, association, individual, or enterprise and to
carry on and undertake any business and to render any service which it may seem
<PAGE>
to the company capable of being conveniently carried on in connection with the
above, and in promoting, advising, consulting with, maintaining, and operating
any business enterprise; to contract for, acquire, plan, superintend, manage,
operate, cooperate with, and assist in, the maintenance and operation of
business enterprises of any and every kind, and to do and carry on such other
work of every kind and of any and every nature; to own, operate, mange, assist,
finance, audit, supervise, and otherwise deal with corporations, associations,
business, financial, and other enterprises; and to aid and assist in any manner
any corporation, association or reorganization with which this company may have
business relations.
4. To engage in any lawful act or activity for which corporations may be
organized under the laws of the State of Colorado.
5. The foregoing enumeration of purposes shall not be deemed to limit or to
restrict in any manner the exercise of other and further rights and powers which
may now or hereafter be allowed or permitted by law; the purposes specified in
each of the paragraphs of this Article II shall not be restricted by reference
to or inference from the terms of any other paragraph, but shall be regarded as
independent purposes.
ARTICLE III
-----------
The affairs and management of this corporation are to be under the control
of a Board of Directors. The number of directors shall be as specified in the
By-laws of the corporation, but in no event shall there be fewer than three or
more than fifteen directors of the corporation.
ARTICLE IV
----------
The aggregate number of shares which the corporation shall have the
authority to issue shall be 50,000,000, which shall consist of a single class of
shares designated "Common Stock" of par value of one cent per share.
ARTICLE V
---------
All stock shall be fully paid and nonassessable.
ARTICLE VI
----------
The stockholders of this corporation shall not have a preemptive right to
subscribe to any or all issues of stock or other securities of any or all
classes of stock of the corporation or securities convertible into stock or
which carry stock purchase warrants or privileges.
ARTICLE VII
-----------
Cumulative voting shall not be allowed.
ARTICLE VIII
------------
The principal place of business of said corporation shall be Georgetown, in
the County of Clear Creek, State of Colorado, and the principal office of said
corporation shall be 1700 Broadway, Denver, Colorado 80202 or at such other
location as the Directors of the corporation shall hereafter select.
Exhibit 10.14
Earth Sciences, Incorporated
910 Twelfth Street
Golden, Colorado 80401 USA
[email protected]
Fax: 303-279-1180
303-279-7641
January 28, 1999
Randall S. Moore
President
Chemical Interchange Company
2932 S. Brentwood Blvd.
St. Louis, Mo. 63144
RE: Letter of Intent for the Sale and Purchase of Purified Phosphoric
Acid Produced by Earth Sciences Extraction Company in Calgary
Dear Randy:
This Letter of Intent is made and entered into as of the date first written
above, by and between Chemical Interchange Company, a Missouri corporation
(hereinafter known as "CIC"), ESI Resources, Ltd. an Alberta corporation
(hereinafter known as "ESIR") and Earth Sciences Extraction Company, an Alberta
registered limited partnership (hereinafter known as "ESEC") whose sole general
partner is ESIR.
ESEC owns a solvent extraction facility in southeast Calgary, Alberta (the
"Calgary Facility") from which it produces and sells purified phosphoric acid
("PPA") in commercial grades.
CIC is a long-standing marketer and transporter of liquid chemicals with
terminals in various locations in the U.S. CIC desires to acquire a long-term
source of PPA for sale through its terminals and distribution network.
This letter sets forth the intent of the parties with regard to the production
and supply by ESEC and the purchase by CIC of PPA.
Production and Supply by ESEC
- -----------------------------
1. ESEC expects to produce PPA at the annual equivalent rate of
approximately 16,500 tons of 75% H3PO4 technical grade PPA in calendar 1999 at
the Calgary Facility.
2. The PPA to be produced by ESEC will meet industry standards for
technical grade white phosphoric acid. The typical properties of the PPA are set
forth on the attached spec sheet.
3. ESEC expects to produce PPA continually throughout the year, but may
adjust its production schedule to coincide with availability of feedstock from
its suppliers. ESEC will make its best efforts to produce and supply the
quantities of PPA requested by CIC, but for reasons outside of its control may
be unable to do so. ESEC will supply CIC with 100% of PPA produced from super
phosphoric acid "SPA" deliveries arranged by CIC.
4. Although ESEC will make its best efforts to arrange appropriate freight
delivery schedules, sales to CIC from the Calgary Facility will be on an f. o.
b. Calgary basis and ESEC assumes no title or risk of loss after PPA has left
the Calgary Facility.
5. ESEC will use CIC as their sole representative East of the Rocky
Mountains. Marketing efforts will be coordinated through close communication
with TwinKem International, Inc. ("TKI"), ESEC's marketing consultant.
6. If ESEC is unable to produce PPA or has reduced production, CIC will be
released from a like portion of its total volume purchases.
<PAGE>
Purchase by CIC.
- ----------------
1. CIC intends to purchase the equivalent of 6,000 to 8,000 tons of 75%
H3PO4 technical grade PPA per year from ESEC commencing with the date hereof.
2. CIC expects to schedule its quarterly purchases in the following manner
over the calendar year: 1st quarter - 1,500 to 2,000 tons, 2nd quarter - 1,500
to 2,000 tons, 3rd quarter - 1,500 to 2,000 tons, 4th quarter - 1,500 to 2,000
tons.
3. CIC expects to continue to purchase a minimum of 6,000 to 8,000 tons of
75% H3PO4 technical grade PPA per year from ESEC for a period of no less than
five (5) years with automatic renewal for three (3) years upon request, however
CIC's requirements may well increase to the level of 15,000 to 20,000 tons per
year.
4. The price to be paid ESEC by CIC will be negotiated from time to time by
the parties as market conditions dictate with the good faith intent that each
party receive the highest margin possible commensurate with their investment and
value added. The price will be stated on a per ton 75% H3PO4 technical grade PPA
f.o.b. the Calgary.
5. Payments for PPA purchased by CIC will be made within thirty (30) days
of the loading for delivery of product unless other credit arrangements,
satisfactory to ESEC, are made. Payment to CIC for any SPA purchased by CIC for
processing in the Calgary Facility will correspond and coincide with CIC's
payments for the equivalent PPA purchased by CIC.
The parties hereto recognize that ESEC may utilize this Letter to confirm to
certain banks, and other potential lenders and investors, expected sales of PPA.
It is the good faith intention of both CIC and ESEC to carry through with the
matters set forth above under U.S. law. CIC and ESEC both acknowledge that third
parties may rely on the matters expressed herein.
CIC and ESEC also acknowledge that the parent company of ESIR, Earth Sciences,
Inc. is a U.S. public company, with certain public disclosure requirements and,
that Earth Sciences, Inc. may disclose the contents of this letter to its
shareholders and the public as it deems necessary.
If the foregoing accurately sets forth the intentions of CIC and ESEC, and has
the approval of CIC, please so indicate by dating and executing a copy hereof in
the space provided below and returning to us.
Earth Sciences Extraction Company
by its General Partner, ESI Resources, Ltd.
/s/ Mark H. McKinnies
-------------------------------------------
Mark H. McKinnies, President
Acknowledged this 2 day of February, 1999.
Chemical Interchange Company
/s/ Randall S. Moore
- --------------------
Randall S. Moore, President
Exhibit 10.15
SECURITIES SUBSCRIPTION AGREEMENT
SECURITIES SUBSCRIPTION AGREEMENT dated as of the ___ day of February 1999,
between EARTH SCIENCES, INC., a Colorado corporation with principal executive
offices located at 910 12th Street, Golden, Colorado 80401 (the "Company"), and
the undersigned ("Buyer").
W I T N E S S E T H:
--------------------
WHEREAS, Buyer desires to purchase from the Company, and the Company
desires to issue and sell to the Buyer, upon the terms and subject to the
conditions of this Agreement, shares of the Company's common stock, $.01 par
value (the "Common Stock"); and
WHEREAS, such investment will be made in reliance upon the provisions of
Section 4(2) and Regulation D of the United States Securities Act of 1933, as
amended and the regulations promulgated thereunder (the "Securities Act"),
and/or upon such other exemption from the registration requirements of the
Securities Act as may be available with respect to any or all of the investments
in Common Stock subscribed to hereunder.
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. PURCHASE AND SALE OF COMMON STOCK
a. Transaction and Purchase Price. Buyer hereby subscribes for
_________shares of Common Stock (the "Shares") at $ 0.906 per share for a total
of ______________________________ payable in United States Dollars (the
"Purchase Price").
b. Form of Payment. Buyer shall pay the Purchase Price by wire
transfer or check of immediately available funds to the Company. Simultaneously
against receipt by the Company of the Purchase Price, the Company shall deliver
one or more duly authorized, issued and executed certificates (I/N/O Buyer)
evidencing the Shares, to the Buyer or its designated depository.
c. Method of Payment. Payment to the Company of the Purchase Price
shall be made by wire transfer of immediately available funds to the escrow
account of World Capital Funding, Inc. or:
Norwest Bank of Colorado N.A.
Golden Branch
1301 Jackson Street - P.O. Box 428
Golden, Colorado 80401-0428
ABA# 102000076
For the Account of: Earth Sciences, Inc.
Account# 300 2132533
Simultaneously with the receipt of the Purchase Price the Company shall deliver
the Shares to the Buyer.
2. BUYER'S REPRESENTATIONS, WARRANTIES; ACCESS TO INFORMATION; INDEPENDENT
INVESTIGATION.
Buyer represents and warrants to and covenants and agrees with the Company
as follows:
a. Buyer is purchasing the Shares of Common Stock for its own account,
for investment purposes only and not with a view towards or in connection with
the public sale or distribution thereof in violation of the Securities Act of
1933, as amended (the "Securities Act").
<PAGE>
b. Buyer is (i) an "accredited investor" within the meaning of Rule
501 of Regulation D under the Securities Act, (ii) experienced in making
investments of the kind contemplated by this Agreement, (iii) capable, by reason
of its business and financial experience, of evaluating the relative merits and
risks of an investment in the Securities, and (iv) able to afford the loss of
its investment in the Securities.
c. Buyer understands that the Shares of Common Stock are being offered
and sold by the Company in reliance on an exemption from the registration
requirements of the Securities Act and equivalent state securities and "blue
sky" laws, and that the Company is relying upon the accuracy of, and Buyer's
compliance with, Buyer's representations, warranties and covenants set forth in
this Agreement to determine the availability of such exemption and the
eligibility of Buyer to purchase the Shares;
d. Buyer has been furnished with or provided access to all materials
relating to the business, financial position and results operations of the
Company, and all other materials requested by Buyer to enable it to make an
informed investment decision with respect to the Shares.
e. Buyer acknowledges that it has been furnished with copies of the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1997, the Company's Quarterly Reports on Form 10-QSB for the fiscal quarters
ended March 31, 1998, June 30, 1998 and September 30, 1998, respectively, and
all other reports and documents heretofore filed by the Company with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act")
since December 31, 1997 (collectively the "Commission Filings").
f. Buyer acknowledges that in making its decision to purchase the
Shares it has (i) relied upon independent investigations made by it and its
professional advisors, (ii) visited the Company's principal executive offices
and been given access and the opportunity to examine all material agreements,
books and records of the Company and all documents relating to the Company's
private placement of the Shares, and (iii) been given an opportunity to ask
questions of and to receive answers from the Company's executive officers,
directors and management personnel concerning the terms and conditions of the
private placement of the Shares by the Company.
g. Buyer understands that sale of the Shares have not been approved or
disapproved by the Commission or any state securities commission and that the
foregoing authorities have not reviewed any documents or instruments in
connection with the offer and sale to it of the Securities and have not
confirmed or determined the adequacy or accuracy of any such documents or
instruments.
h. This Agreement has been duly and validly authorized, executed and
delivered by the Buyer and is a valid and binding agreement of the Buyer
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally.
i. Neither Buyer nor its affiliates nor any person acting on its or
their behalf has the intention of entering, or will enter into, prior to the
Closing, any put option, short position or other similar instrument or position
with respect to the Common Stock and neither Buyer nor any of its affiliates nor
any person acting on its or their behalf will use at any time shares of Common
Stock acquired pursuant to this Agreement to settle any put option, short
position or other similar instrument or position that may have been entered into
prior to the execution of this Agreement or any issuance of the Shares.
3. COMPANY'S REPRESENTATIONS
The Company represents and warrants to Buyer that:
a. Capitalization.
(i) The authorized capital stock of the Company consists of
50,000,000 shares of Common Stock, of which 22,193,739 shares were outstanding
as of December 31, 1998; all of the issued and outstanding shares of Common
Stock have been duly authorized and validly issued and are fully paid and
non-assessable. The Common Stock issuable upon purchase of the Shares has been
duly and validly authorized and reserved for issuance by the Company, and when
issued by the Company will be duly and validly issued, fully paid and
non-assessable and will not subject the holder thereof to personal liability by
reason of being such holder. There are no preemptive, subscription, "call" or
other similar rights to acquire the Common Stock that have been issued or
granted to any person, except as disclosed in the Commission Filings or
otherwise previously disclosed in writing to Buyer.
<PAGE>
(ii) Except as disclosed in the Commission Filings, the Company
does not own or control, directly or indirectly, any interest in any other
corporation, partnership, limited liability company, unincorporated business
organization, association, trust or other business entity. Except as disclosed
in the Commission Filings, the Company owns 100% of the outstanding shares of
capital stock of each of its subsidiaries, free and clear of any and all liens,
pledges, encumbrances, charges, agreements, security interests, mortgages or
claims of any kind whatsoever.
b. Organization; Reporting Company Status.
(i) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Colorado and is duly
qualified as a foreign corporation in all jurisdictions in which the failure to
so qualify would have a Material Adverse Effect on the business, properties,
prospects, condition (financial or otherwise) or results of operations of the
Company and its subsidiaries, taken as a whole, or on the consummation of any of
the transactions contemplated by this Agreement (a "Material Adverse Effect").
Each of the Company's subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its respective jurisdiction of
incorporation and is duly qualified as a foreign corporation in all
jurisdictions in which the failure to so qualify would have a Material Adverse
Effect.
(ii) The Company has registered the Common Stock pursuant to
Section 12 of the Exchange Act and has timely filed with the Commission all
reports and information required to be filed by it pursuant to all reporting
obligations under Section 13(a) or 15(d), as applicable, of the Exchange Act for
the 24-month period immediately preceding the date hereof. The Common Stock is
listed and traded on the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") Small Capitalization Market System.
c. Authority; Validity and Enforceability. The Company has the
requisite corporate power and authority to enter into this Agreement and the
Registration Rights Agreement of even date herewith between the Company and
Buyer, (the "Registration Rights Agreement") and to perform all of its
obligations hereunder and thereunder (including the issuance, sale and delivery
to Buyer of the Shares). The execution, delivery and performance by the Company
of this Agreement and the Registration Rights Agreement, and the consummation by
the Company of the transactions contemplated hereby and thereby, has been duly
authorized by all necessary corporate action on the part of the Company. Each of
this Agreement and the Registration Rights Agreement has been duly and validly
executed and delivered by the Company and constitutes a valid and binding
agreement of the Company enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally. The Shares have been duly and validly authorized for
issuance by the Company.
d. Non-contravention. The execution and delivery by the Company of
this Agreement and the Registration Rights Agreement, the issuance of the
Shares, and the consummation by the Company of the other transactions
contemplated hereby and thereby, do not and will not conflict with or result in
a breach by the Company of any of the terms or provisions of, or constitute a
default (or an event which, with notice, lapse of time or both, would constitute
a default) under, the articles of incorporation or by-laws of the Company, or
any indenture, mortgage, deed of trust or other material agreement or instrument
to which the Company or any of its subsidiaries is a party or by which its or
any of its subsidiaries' properties or assets are bound, or any law, rule,
regulation, decree, judgment or order of any court or public or governmental
authority having jurisdiction over the Company or any of its subsidiaries or any
of its or its subsidiaries' properties or assets, except such conflict, breach
or default which would not have a Material Adverse Effect.
e. Approvals. No authorization, approval or consent of any court or
public or governmental authority is required to be obtained by the Company for
the issuance and sale of the Shares to Buyer as contemplated by this Agreement,
except such authorizations, approvals and consents that have been obtained by
the Company prior to the date hereof.
f. Commission Filings. None of the Commission Filings contained at the
time they were filed any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
<PAGE>
g. Absence of Certain Changes. Since the Balance Sheet Date (as
defined in Section 3.k.), there has not occurred any change, event or
development, and there has not existed any condition having or reasonably likely
to have, a Material Adverse Effect.
h. Full Disclosure. There is no fact known to the Company (other than
general economic or industry conditions known to the public generally) that has
not been fully disclosed to the Buyer that (i) reasonably could be expected to
have a Material Adverse Effect or (ii) reasonably could be expected to
materially and adversely affect the ability of the Company to perform its
obligations pursuant to this Agreement or the Registration Rights Agreement.
i. Absence of Litigation. There is no action, suit, claim, proceeding,
inquiry or investigation pending or, to the Company's knowledge, threatened, by
or before any court or public or governmental authority which, if determined
adversely to the Company or any of its subsidiaries, would have a Material
Adverse Effect.
j. Absence of Events of Default. No "Event of Default" (as defined in
any agreement or instrument to which the Company or any of its subsidiaries is a
party) and no event which, with notice, lapse of time or both, would constitute
an Event of Default (as so defined), has occurred and is continuing, which could
have a Material Adverse Effect.
k. Financial Statements; No Undisclosed Liabilities. Seller has
delivered to Buyer true and complete copies of its (i) audited consolidated
balance sheet as at December 31, 1997 and the related audited consolidated
statements of operations and cash flows for the fiscal years ended December 31,
1997 and December 31, 1996 and (ii) unaudited consolidated balance sheets as at
March 31, 1998, June 30, 1998 and September 30, 1998, respectively, and the
related unaudited consolidated statements of operations and cash flows for the
periods ended March 31, 1998, June 30, 1998 and September 30, 1998,
respectively, including in all such cases the related notes and schedules
thereto (collectively, the "Financial Statements). Each of the Financial
Statements is complete and correct in all material respects, has been prepared
in accordance with United States General Accepted Accounting Principles ("GAAP")
(subject, in the case of the interim Financial Statements, to normal year-end
adjustments and the absence of footnotes) and in conformity with the practices
consistently applied by the Company without modification of the accounting
principles used in the preparation thereof, and fairly presents the financial
position, results of operations and cash flows of the Company and its
consolidated subsidiaries as at the dates and for the periods indicated. For
purposes hereof, the audited consolidated balance sheet of the Company and its
subsidiaries as at December 31, 1997 is hereinafter referred to as the "Balance
Sheet" and December 31, 1997 is hereinafter referred to as the "Balance Sheet
Date". Neither the Company nor any of its subsidiaries has any indebtedness,
obligations or liabilities of any kind (whether accrued, absolute, contingent or
otherwise, and whether due or to become due) that would have been required to be
reflected in, reserved against or otherwise described in the Balance Sheet or in
the notes thereto in accordance with GAAP, which was not fully reflected in,
reserved against or otherwise described in the Balance Sheet or the notes
thereto or was not incurred in the ordinary course of business consistent with
the Company's past practices since the Balance Sheet Date.
l. Compliance with Laws; Permits. The Company and each of its
subsidiaries is in compliance with all laws, rules, regulations, codes,
ordinances and statutes (collectively "Laws") applicable to it or to the conduct
of its business, except for such non-compliance which would not have a Material
Adverse Effect. The Company and each of its subsidiaries possesses all permits,
approvals, authorizations, licenses, certificates and consents from all public
and governmental authorities which are necessary to conduct its business, except
for those the absence of which would not have a Material Adverse Effect.
m. Related Party Transactions. Except as set forth in the Commission
Filings, neither the Company nor any of its officers, directors or "Affiliates"
(as such term is defined in Rule 12b-2 under the Exchange Act) has borrowed any
moneys from or has outstanding any indebtedness or other similar obligations to
the Company. Neither the Company nor any of its officers, directors or
Affiliates (i) owns any direct or indirect interest of any kind in, or controls
or is a director, officer, partner, member or employee of, or consultant to or
lender to or borrower from, or has the right to participate in the profits of,
any person or entity which is (x) a competitor, supplier, customer, landlord,
tenant, creditor or debtor of the Company or any of its subsidiaries, (y)
engaged in a business related to the business of the Company or any of its
subsidiaries, or (z) a participant in any transaction to which the Company or
any of its subsidiaries is a party or (ii) is a party to any contract,
agreement, commitment or other arrangement with the Company or any of its
subsidiaries. Notewithstanding the foregoing, this paragraph does not require
the disclosure by the Company to the Buyer of any related party transactions not
required to be disclosed in the Commission Filings.
<PAGE>
n. Insurance. The Company maintains property and casualty, general
liability, workers' compensation, environmental hazard, personal injury and
other similar types of insurance with financially sound and reputable insurers
that is adequate, consistent with industry standards and the Company's
historical claims experience, to cover all loss contingencies which forseeably
may arise in the conduct of the business of the Company and its subsidiaries.
The Company has not received notice from, and has no knowledge of any threat by,
any insurer (that has issued any insurance policy to the Company or any of its
subsidiaries) that such insurer intends to deny coverage under or cancel,
discontinue or not renew any insurance policy presently in force.
o. Securities Law Matters. Based, in part, upon the representations
and warranties of Buyer set forth in Section 2 hereof, the offer and sale by the
Company of the Shares is exempt from (i) the registration and prospectus
delivery requirements of the Securities Act and the rules and regulations of the
Commission thereunder and (ii) the registration and/or qualification provisions
of all applicable state securities and "blue sky" laws. Other than pursuant to
an effective registration statement under the Securities Act, the Company has
not issued, offered or sold the Shares or any shares of Common Stock (including
for this purpose any securities of the same or a similar class as the Common
Stock, or any securities convertible into or exchangeable or exercisable for the
Common Stock or any such other securities) within the six-month period next
preceding the date hereof, except as disclosed in the Commission Filings or
otherwise previously disclosed in writing to Buyer, and the Company shall not
directly or indirectly take, and shall not permit any of its directors, officers
or Affiliates directly or indirectly to take, any action (including, without
limitation, any offering or sale to any person or entity of shares of Common
Stock), so as to make unavailable the exemption from Securities Act registration
being relied upon by the Company for the offer and sale to Buyer of Shares as
contemplated by this Agreement. No form of general solicitation or advertising
has been used or authorized by the Company or any of its officers, directors or
Affiliates in connection with the offer or sale of Shares as contemplated by
this Agreement or any other agreement to which the Company is a party.
p. Environmental Matters.
(i) The operations of the Company and each of its subsidiaries are in
compliance with all applicable Environmental Laws and all permits issued
pursuant to Environmental Laws or otherwise;
(ii) to its knowledge, the Company and each of its subsidiaries has obtained all
permits required under all applicable Environmental Laws necessary to
operate its business;
(iii)neither the Company nor any of its subsidiaries is the subject of any
outstanding written order of or agreement with any governmental authority
or person respecting (i) Environmental Laws, (ii) Remedial Action or (iii)
any Release or threatened Release of Hazardous Materials;
(iv) neither the Company nor any of its subsidiaries has received any written
communication alleging either or both that the Company or any of its
subsidiaries may be in violation of any Environmental Law or any permit
issued pursuant to Environmental Law, or may have any liability under any
Environmental Law;
(v) neither the Company nor any of its subsidiaries has any current contingent
liability in connection with any Release of any Hazardous Materials into
the indoor or outdoor environment (whether on-site or off-site);
(vi) except as set forth in the Commission Filings, to the Company's knowledge,
there are no investigations of the business, operations, or currently or
previously owned, operated or leased property of the Company or any of its
subsidiaries pending or threatened which could lead to the imposition of
any liability pursuant to any Environmental Law;
(vii)to the Company's knowledge, there is not located at any of the properties
of the Company or any of its subsidiaries any (A) underground storage
tanks, (B) asbestos-containing material or (C) equipment containing
polychlorinated biphenyls; and,
(viii) the Company has provided to Buyer all environmentally related audits,
studies, reports, analyses, and results of investigations that have been
performed with respect to the currently or previously owned, leased or
operated properties of the Company or any of its subsidiaries.
<PAGE>
For purposes of this Section 3.p.:
"Environmental Law" means any foreign, federal, state or local
statute, regulation, ordinance, or rule of common law as now or hereafter in
effect in any way relating to the protection of human health and safety or the
environment including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act (42 U.S.C. ss. 9601 et seq.), the
Hazardous Materials Transportation Act (49 U.S.C. App. ss. 1801 et seq.), the
Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.), the Clean
Water Act (33 U.S.C. ss. 1251 et seq.), the Clean Air Act (42 U.S.C. ss. 7401 et
seq.), the Toxic Substances Control Act (15 U.S.C. ss. 2601 et seq.), the
Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. ss. 136 et seq.),
and the Occupational Safety and Health Act (29 U.S.C. ss. 651 et seq.), and the
regulations promulgated pursuant thereto.
"Hazardous Material" means any substance, material or waste which is
regulated by the United States, Canada or any of its provinces, or any state or
local governmental authority including, without limitation, petroleum and its
by-products, asbestos, and any material or substance which is defined as a
"hazardous waste," "hazardous substance," "hazardous material," "restricted
hazardous waste," "industrial waste," "solid waste," "contaminant," "pollutant,"
"toxic waste" or toxic substance" under any provision of any Environmental Law;
"Release" means any release, spill, filtration, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, or leaching into
the indoor or outdoor environment, or into or out of any property;
"Remedial Action" means all actions to (x) clean up, remove, treat or
in any other way address any Hazardous Material; (y) prevent the Release of any
Hazardous Material so it does not endanger or threaten to endanger public health
or welfare or the indoor or outdoor environment; or (z) perform pre-remedial
studies and investigations or post-remedial monitoring and care.
q. Labor Matters. Neither the Company nor any of its subsidiaries is
party to any labor or collective bargaining agreement and there are no labor or
collective bargaining agreements which pertain to employees of the Company or
any of its subsidiaries. No employees of the Company or any of its subsidiaries
are represented by any labor organization and none of such employees has made a
pending demand for recognition, and there are no representation proceedings or
petitions seeking a representation proceeding presently pending or, to the
Company's knowledge, threatened to be brought or filed, with the National Labor
Relations Board or other labor relations tribunal. There is no organizing
activity involving the Company or any of its subsidiaries pending or to the
Company's knowledge, threatened by any labor organization or group of employees
of the Company or any of its subsidiaries. There are no (i) strikes, work
stoppages, slowdowns, lockouts or arbitrations or (ii) material grievances or
other labor disputes pending or, to the knowledge of the Company, threatened
against or involving the company or any of its subsidiaries. There are no unfair
labor practice charges, grievances or complaints pending or, to the knowledge of
the Company, threatened by or on behalf of any employee or group of employees of
the Company.
r. ERISA Matters. Each of the Company, its subsidiaries and their
ERISA Affiliates is in compliance in all material respects with all provisions
of ERISA applicable to it. No Reportable Event has occurred, been waived or
exists as to which the Company or any of its subsidiaries or any ERISA Affiliate
was required to file a report with the Pension Benefits Guaranty Corporation,
and the present value of all liabilities under all Plans (based on those
assumptions used to fund such Plans) did not, as of the most recent annual
valuation date applicable thereto, exceed the value of the assets of all such
Plans in the aggregate. None of the Company or any of its subsidiaries or ERISA
Affiliates has incurred any Withdrawal Liability that could result in a Material
Adverse Effect. None of the Company or any of its subsidiaries or ERISA
Affiliates has received any notification that any Multiemployer Plan is in
reorganization or has been terminated within the meaning of Title IV of ERISA,
and no Multiemployer Plan is reasonably expected to be in reorganization or
termination where such reorganization or termination has resulted or could
reasonably be expected to result in increases to the contributions required to
be made to such Plan or otherwise.
For purposes of this Section 3.r.:
"ERISA" means the Employee Retirement Income Security Act of 1974, or
any successor statute, together with the regulations thereunder, as the same may
be amended from time to time.
<PAGE>
"ERISA Affiliate" means any trade or business (whether or not
incorporated) that was, is or hereafter may become, a member of a group of which
the Company or any of its subsidiaries is a member and which is treated as a
single employer under ss. 414 of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code").
"Multiemployer Plan" means a multiemployer plan as defined in Section
4001(a)(3) of ERISA to which the Company or any ERISA Affiliate (other than one
considered an ERISA Affiliate only pursuant to subsection (m) or (o) of ss. 414
of the Internal Revenue Code) is making or accruing an obligation to make
contributions, or has within any of the preceding five plan years made or
accrued an obligation to make contributions.
"PBGC" means the Pension Benefit Guaranty Corporation referred to and
defined in ERISA or any successor thereto.
"Plan" means any pension plan (other than a Multiemployer Plan)
subject to the provision of Title IV of ERISA or ss. 412 of the Internal Revenue
Code that is maintained for employees of the Company or any ERISA Affiliate.
"Reportable Event" means any reportable event as defined in Section
4043(b) of ERISA or the regulations issued thereunder with respect to a Plan
(other than a Plan maintained by an ERISA Affiliate that is considered an ERISA
Affiliate only pursuant to subsection (m) or (o) of ss. 414 of the Internal
Revenue Code.
"Withdrawal Liability" means liability to a Multiemployer Plan as a
result of a complete or partial withdrawal from such Multiemployer Plan, as such
terms are defined in Part I of Subtitle E of Title IV of ERISA.
s. Tax Matters.
(i) The Company and each of its subsidiaries have filed all Tax Returns which
they are required to file under applicable Laws, except for such Tax
Returns in respect of which the failure to so file does not and could not
have a Material Adverse Effect; all such Tax Returns are true and accurate
and have been prepared in compliance with all applicable Laws; the Company
and each of its subsidiaries have paid all Taxes due and owing by them
(whether or not such Taxes are required to be shown on a Tax Return) and
have withheld and paid over to the appropriate taxing authorities all Taxes
which they are required to withhold from amounts paid or owing to any
employee, stockholder, creditor or other third parties; and since the
Balance Sheet Date, the charges, accruals and reserves for Taxes with
respect to the Company (including any provisions for deferred income taxes)
reflected on the books of the Company are adequate to cover any Tax
liabilities of the Company and its subsidiaries if their current tax year
were treated as ending on the date hereof.
(ii) No claim has been made by a taxing authority in a jurisdiction where either
the Company or any of its subsidiaries does not file tax returns that such
corporation is or may be subject to taxation by that jurisdiction. There
are no foreign, federal, state or local tax audits or administrative or
judicial proceedings pending or being conducted with respect to the Company
or any of its subsidiaries; no information related to Tax matters has been
requested by any foreign, federal, state or local taxing authority; and no
written notice indicating an intent to open an audit or other review has
been received by the Company from any foreign, federal, state or local
taxing authority. There are no material unresolved questions or claims
concerning the Company's or any of its subsidiaries' Tax liability. Neither
the Company nor any of its subsidiaries (A) has executed or entered into a
closing agreement pursuant toss. 7121 of the Internal Revenue Code or any
predecessor provision thereof or any similar provision of state, local or
foreign law; or (B) has agreed to or is required to make any adjustments
pursuant toss. 481 (a) of the Internal Revenue Code or any similar
provision of state, local or foreign law by reason of a change in
accounting method initiated by the Company or any of its subsidiaries or
has any knowledge that the IRS has proposed any such adjustment or change
in accounting method, or has any application pending with any taxing
authority requesting permission for any changes in accounting methods that
relate to the business or operations of the Company or any of its
subsidiaries. Neither the Company nor any of its subsidiaries has been a
United States real property holding corporation within the meaning ofss.
897(c)(2) of the Internal Revenue Code during the applicable period
specified inss. 897(c)(1)(A)(ii) of the Internal Revenue Code.
<PAGE>
(iii)Neither the Company nor any of its subsidiaries has made an election under
ss. 341(f) of the Internal Revenue Code. Neither the Company nor any of its
subsidiaries is liable for the Taxes of another person that is not a
subsidiary of the Company under (A) Treas. Reg. ss. 1.1502-6 (or comparable
provisions of state, local or foreign law), (B) as a transferee or
successor, (C) by contract or indemnity or (D) otherwise. Neither the
Company nor any of its subsidiaries is a party to any tax sharing
agreement. Neither the Company nor any of its subsidiaries has made any
payments, is obligated to make payments or is a party to an agreement that
could obligate it to make any payments that would not be deductible under
ss. 280G of the Internal Revenue Code.
For purposes of this Section 3.s.:
"IRS" means the United States Internal Revenue Service.
"Tax" or "Taxes" means federal, state, county, local, foreign, or
other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not.
"Tax Return" means any return, information report or filing with
respect to Taxes, including any schedules attached thereto and including any
amendment thereof.
t. No Misrepresentation. No representation or warranty of the Company
contained in this Agreement, any schedule, annex or exhibit hereto or any
agreement, instrument or certificate furnished by the Company to Buyer pursuant
to this Agreement, contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein, not misleading.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Restrictive Legend. Buyer acknowledges and agrees that, upon
issuance pursuant to this Agreement, any certificate representing the Shares
shall have endorsed thereon a legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the Shares):
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH
OTHER LAWS."
b. Filings. The Company shall make all necessary filings in connection
with the sale of the Shares to the Buyer as required by all applicable Laws, and
shall provide a copy thereof to the Buyer promptly after such filing.
c. Reporting Status. So long as the Buyer beneficially owns any of the
Securities, the Company shall file all reports required to be filed by it with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act and shall not
terminate its status as an issuer required to file reports under the Exchange
Act even if such act or the rules and regulations thereunder would otherwise
permit such termination.
d. Use of Proceeds. The Company shall use the proceeds from the sale
of the Shares (excluding amounts paid by the Company for legal fees and finder's
fees in connection with such sale) for general corporate purposes.
e. Listing. Except to the extent the Company becomes eligible to list
its Common Stock on a national securities exchange or obtained authorization to
include the Common Stock for quotation on the NASDAQ National Market System, the
Company shall take all necessary action to maintain its listing of the Common
Stock on the NASDAQ Small Capitalization Market System.
5. TRANSFER AGENT INSTRUCTIONS.
a. The Company undertakes and agrees that no instruction other than
the instructions referred to in this Section 5 and customary stop transfer
instructions prior to the registration and sale of the Common Stock pursuant to
an effective Securities Act registration statement will be given to its transfer
<PAGE>
agent for the Shares and that the Shares otherwise shall be freely transferable
on the books and records of the Company as and to the extent provided in this
Agreement, the Registration Rights Agreement and applicable law. Nothing
contained in this Section 5.a. shall affect in any way Buyer's obligations and
agreement to comply with all applicable securities laws upon resale of such
Common Stock. If, at any time, Buyer provides the Company with an opinion of
counsel reasonably satisfactory to the Company that registration of the resale
by Buyer of such Common Stock is not required under the Securities Act and that
the removal of restrictive legends is permitted under applicable law, the
Company shall permit the transfer of such Common Stock and, promptly instruct
the Company's transfer agent to issue one or more certificates for Common Stock
without any restrictive legends endorsed thereon.
6. DELIVERY INSTRUCTIONS.
The Shares shall be delivered by the Company to the Buyer pursuant to
Section 1(b) hereof on a "delivery-against-payment basis" at the Closing.
7. CLOSING DATE.
The date and time of the issuance and sale of the Shares (the "Closing
Date") shall be the date hereof or such other as shall be mutually agreed upon
in writing. The issuance and sale of the Shares shall occur on the Closing Date
at the offices of the Company. Notwithstanding anything to the contrary
contained herein, the Company shall not be authorized to accept the Purchase
Price and to issue the Buyer the certificate(s) (I/N/O Buyer) evidencing the
Shares being purchased by Buyer unless the conditions set forth in Section 8(c)
and 9(e) hereof have been satisfied.
8. CONDITIONS TO THE COMPANY'S OBLIGATIONS.
The Buyer understands that the Company's obligation to sell the Shares on
the Closing Date to Buyer pursuant to this Agreement is conditioned upon:
a. Delivery by Buyer to the Company of the Purchase Price;
b. The accuracy on the Closing Date of the representations and warranties
of Buyer contained in this Agreement as if made on the Closing Date
(except for representations and warranties which, by their express
terms, speak as of and relate to a specified date, in which case such
accuracy shall be measured as of such specified date) and the
performance by Buyer in all material respects on or before the Closing
Date of all covenants and agreements of Buyer required to be performed
by it pursuant to this Agreement on or before the Closing Date;
c. There shall not be in effect any Law or order, ruling, judgment or
writ of any court or public or governmental authority restraining,
enjoining or otherwise prohibiting any of the transactions
contemplated by this Agreement.
9. CONDITIONS TO BUYER'S OBLIGATIONS.
The Company understands that Buyer's obligation to purchase the Shares on
the Closing Date pursuant to this Agreement is conditioned upon:
a. Delivery by the Company to the Buyer of one or more certificates
(I/N/O Buyer) evidencing the Shares to be purchased by Buyer pursuant
to this Agreement;
b. The accuracy on the Closing Date of the representations and warranties
of the Company contained in this Agreement as if made on the Closing
Date (except for representations and warranties which, by their
express terms, speak as of and relate to a specified date, in which
case such accuracy shall be measured as of such specified date) and
the performance by the Company in all material respects on or before
the Closing Date of all covenants and agreements of the Company
required to be performed by it pursuant to this Agreement on or before
the Closing Date;
c. There not having occurred (i) any general suspension of trading in, or
limitation on prices listed for, the Common Stock on the NASDAQ Small
Capitalization Market System, (ii) the declaration of a banking
moratorium or any suspension of payments in respect of banks in the
United States, (iii) the commencement of a war, armed hostilities or
other international or national calamity directly or indirectly
involving the United States or any of its territories, protectorates
or possessions, or (iv) in the case of the foregoing existing at the
date of this Agreement, a material acceleration or worsening thereof.
<PAGE>
d. There not having occurred any event or development, and there being in
existence no condition, having or which reasonably and forseeably
could have a Material Adverse Effect.
e. There shall not be in effect any Law or order, ruling, judgment or
writ of any court or public or governmental authority restraining,
enjoining or otherwise prohibiting any of the transactions
contemplated by this Agreement.
10. TERMINATION.
a. Termination by Mutual Written Consent. This Agreement may be terminated
and the transactions contemplated hereby may be abandoned, for any reason and at
any time prior to the Closing Date, by the mutual written consent of the Company
and Buyer.
b. Termination by the Company or Buyer. This Agreement may be terminated
and the transactions contemplated hereby may be abandoned by action of the
Company or Buyer if (i) the Closing shall not have occurred at or prior to 5:00
p.m., Denver time, on March 5, 1999; provided, however, that the right to
terminate this Agreement pursuant to this Section 10.b.(i) shall not be
available to any party whose failure to fulfill any of its obligations under
this Agreement has been the cause of or resulted in the failure of the Closing
to occur at or before such time and date or (ii) any court or public or
governmental authority shall have issued an order, ruling, judgment or writ, or
there shall be in effect any Law, restraining, enjoining or otherwise
prohibiting the consummation of any of the transactions contemplated by this
Agreement.
c. Termination by Buyer. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned by Buyer at any time prior to
the Closing Date, if (i) the Company shall have failed to comply in any material
respect with any of its covenants or agreements contained in this Agreement,
(ii) there shall have been a breach by the Company with respect to any
representation or warranty made by it in this Agreement, or (iii) there shall
have occurred any event or development, or there shall be in existence any
condition, having or reasonably and forseeably likely to have a Material Adverse
Effect.
d. Termination by the Company. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned by the Company at any time
prior to the Closing Date, if (i) Buyer shall have failed to comply in any
material respect with any of its covenants or agreements contained in this
Agreement or (ii) there shall have been a breach by Buyer with respect to any
representation or warranty made by it in this Agreement.
11. SURVIVAL; INDEMNIFICATION.
a. Survival. The representations, warranties and covenants made by each of
the Company and Buyer in this Agreement, the annexes, schedules and exhibits
hereto and in each instrument, agreement and certificate entered into and
delivered by them pursuant to this Agreement, shall survive the Closing and the
consummation of the transactions contemplated hereby. In the event of a breach
or violation of any of such representations, warranties or covenants, the party
to whom such representations, warranties or covenants have been made shall have
all rights and remedies for such breach or violation available to it under the
provisions of this Agreement or otherwise, whether at law or in equity,
irrespective of any investigation made by or on behalf of such party on or prior
to the Closing Date.
b. Indemnification of Buyer by the Company. The Company hereby agrees to
indemnify and hold harmless the Buyer, its Affiliates and their respective
officers, directors, partners and members (collectively, the "Buyer
Indemnitees"), from and against any and all losses, claims, damages, judgments,
penalties, liabilities and deficiencies (collectively, "Losses"), and agrees to
reimburse the Buyer Indemnitees for all out-of-pocket expenses (including the
fees and expenses of legal counsel), in each case promptly as incurred by the
Buyer Indemnitees and to the extent arising out of or in connection with:
(i) any misrepresentation, omission of fact or breach of any of the
Company's representations or warranties contained in this Agreement, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Company pursuant to this Agreement;
or
<PAGE>
(ii) any failure by the Company to perform in any material respect any
of its covenants, agreements, undertakings or obligations set forth in this
Agreement, the annexes, schedules or exhibits hereto or any instrument,
agreement or certificate entered into or delivered by the Company pursuant to
this Agreement.
c. Indemnification of the Company by Buyer. Buyer hereby agrees to
indemnify and hold harmless the Company, its Affiliates and their respective
officers, directors, partners and members (collectively, the "Company
Indemnitees"), from and against any and all Losses, and agrees to reimburse the
Company Indemnitees for all out-of-pocket expenses (including the fees and
expenses of legal counsel), in each case promptly as incurred by the Company
Indemnitees and to the extent arising out of or in connection with:
(i) any misrepresentation, omission of fact, or breach of any of
Buyer's representations or warranties contained in this Agreement, the annexes,
schedules or exhibits hereto or any instrument, agreement or certificate entered
into or delivered by Buyer pursuant to this Agreement; or
(ii) any failure by Buyer to perform in any material respect any of
its covenants, agreements, undertakings or obligations set forth in this
Agreement or any instrument, certificate or agreement entered into or delivered
by Buyer pursuant to this Agreement.
d. Third Party Claims. Promptly after receipt by either party hereto
seeking indemnification pursuant to this Section 11 (an "Indemnified Party") of
written notice of any investigation, claim, proceeding or other action in
respect of which indemnification is being sought (each, a "Claim"), the
Indemnified Party promptly shall notify the party against whom indemnification
pursuant to this Section 11 is being sought (the "Indemnifying Party") of the
commencement thereof; but the omission to so notify the Indemnifying Party shall
not relieve it from any liability that it otherwise may have to the Indemnified
Party, except to the extent that the Indemnifying Party is materially prejudiced
and forfeits substantive rights and defenses by reason of such failure. In
connection with any Claim as to which both the Indemnifying Party and the
Indemnified Party are parties, the Indemnifying Party shall be entitled to
assume the defense thereof. Notwithstanding the assumption of the defense of any
Claim by the Indemnifying Party, the Indemnified Party shall have the right to
employ separate legal counsel and to participate in the defense of such Claim,
and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs
and expenses of such separate legal counsel to the Indemnified Party if (and
only if): (x) the Indemnifying Party shall have agreed to pay such fees,
out-of-pocket costs and expenses, (y) the Indemnified Party and the Indemnifying
Party reasonably shall have concluded that representation of the Indemnified
Party by the Indemnifying Party by the same legal counsel would not be
appropriate due to actual or, as reasonably determined by legal counsel to the
Indemnified Party, potentially differing interests between such parties in the
conduct of the defense of such Claim, or if there may be legal defenses
available to the Indemnified Party that are in addition to or disparate from
those available to the Indemnifying Party, or (z) the Indemnifying Party shall
have failed to employ legal counsel reasonably satisfactory to the Indemnified
Party within a reasonable period of time after notice of the commencement of
such Claim. If the Indemnified Party employs separate legal counsel in
circumstances other than as described in clauses (x), (y) or (z) above, the
fees, costs and expenses of such legal counsel shall be borne exclusively by the
Indemnified Party. Except as provided above, the Indemnifying Party shall not,
in connection with any Claim in the same jurisdiction, be liable for the fees
and expenses of more than one firm of legal counsel for the Indemnified Party
(together with appropriate local counsel). The Indemnifying Party shall not,
without the prior written consent of the Indemnified Party (which consent shall
not unreasonably be withheld), settle or compromise any Claim or consent to the
entry of any judgment that does not include an unconditional release of the
Indemnified Party from all liabilities with respect to such Claim or judgment.
e. Other Claims. In the event one party hereunder should have a claim for
indemnification that does not involve a claim or demand being asserted by a
third party, the Indemnified Party promptly shall deliver notice of such claim
to the Indemnifying Party. If the Indemnified Party disputes the claim, such
dispute shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in accordance with the
procedures and rules of the American Arbitration Association. Judgment upon any
award rendered by any arbitrators may be entered in any court having competent
jurisdiction thereof.
<PAGE>
12. GOVERNING LAW: MISCELLANEOUS.
This Agreement shall be governed by and interpreted in accordance with the
laws of the State of Colorado without regard to the conflicts of law principles
of such state. Each of the parties consents to the jurisdiction of the federal
courts whose districts encompass any part of the City of Denver or the state
courts of the State of Colorado sitting in the City of Denver in connection with
any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non conveniens, to the bringing of any such proceeding in such jurisdictions. A
facsimile transmission of this signed Agreement shall be legal and binding on
all parties hereto. This Agreement may be signed in one or more counterparts,
each of which shall be deemed an original. The headings of this Agreement are
for convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction. This Agreement may be amended only by an instrument
in writing signed by the party to be charged with enforcement. This Agreement
supersedes all prior agreements and understandings among the parties hereto with
respect to the subject matter hereof.
13. NOTICES. Any notice required or permitted hereunder shall be given in
writing (unless otherwise specified herein) and shall be deemed effectively
given upon personal delivery or seven business days after deposit in the United
States Postal Service, or by (a) advance copy by fax, and (b) mailing by express
courier or registered or certified mail with postage and fees prepaid, addressed
to each of the other parties thereunto entitled at the following addresses, or
at such other addresses as a party may designate by ten days advance written
notice to each of the other parties hereto.
COMPANY: EARTH SCIENCES, INC.
910 12th Street
Golden, Colorado 80401
Attention: President
Telephone: (303) 292-6400
Fax: (303) 295-3040
with a copy to:
Scott Reed, Esq.
1919 14th Street, Suite 330
Boulder, Colorado 80302
Telephone: (303) 413-0691
Fax: (303) 413-0645
BUYER:
Attention:
Telephone:
Fax:
14. CONFIDENTIALITY. Each of the Company and Buyer agrees to keep
confidential and not to disclose to or use for the benefit of any third party
the terms of this Agreement or any other information which at any time is
communicated by the other party as being confidential without the prior written
approval of the other party; provided, however, that this provision shall not
apply to information which, at the time of disclosure, is already part of the
public domain (except by breach of this Agreement) and information which is
required to be disclosed by law.
15. ASSIGNMENT. This Agreement shall not be assignable by either of the
parties hereto prior to the Closing without the prior written consent of the
other party, and any attempted assignment contrary to the provisions hereby
shall be null and void; provided, however, that Buyer may assign its rights and
obligations hereunder, in whole or in part, to any affiliate of Buyer who
furnishes to the Company the representations and warranties set forth in Section
2 hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement on the date first above written.
EARTH SCIENCES, INC.
By:
-----------------------------------------
Name: Mark H. McKinnies
Title: President
BUYER
By:
-----------------------------------------
Name:
Title:
Address of Principal office or residence:
<PAGE>
AMENDMENT TO SECURITIES SUBSCRIPTION AGREEMENT
This Agreement, entered this ____ day of February, 1999 by and between
EARTH SCIENCES, INC., a Colorado corporation with principal executive offices
located at 910 12th Street, Golden, Colorado 80401 (the "Company"), and
Augustine Fund, LP (the "Buyer"), is an amendment of the Securities Subscription
Agreement dated February 25, 1999 by and between the same parties (the
"Subscription Agreement") pursuant to which Buyer purchased ________ shares of
the Company's $.01 par value common stock (the "Shares"). Capitalized terms not
otherwise defined herein have the meanings set forth in the Subscription
Agreement.
In consideration of the mutual promises and covenants contained herein, the
Company and Buyer hereby amend the Subscription Agreement as follow:
1. Issuance of Additional Shares. If the Buyer delivers to the transfer
agent or the Company certificates representing any of the Shares, together with
a notice to the Company to issue additional shares (the "Notice") and the
average per share closing bid price for the Common Stock for the five trading
days immediately preceding the receipt of the Notice is less than 125% of the
closing per share bid price the trading day immediately preceding the date of
the Closing (as defined in the Subscription Agreement), then with respect to the
number of Shares specified in such Notice and represented by certificates
actually sent to the transfer agent or the Company, the Company shall cause to
be issued additional shares in the name of the Buyer in accordance with the
following formula:
AddSh = Sh x [(1+ Dr) x Cb -Fdb]/Fdb, where
AddSh = the additional shares to be issued;
Sh = the number of shares referred to in the Notice;
Cb = the per share closing bid price the trading day before the
date of the Closing;
Dr = 25% (or .25); and
Fdb = the 5 trading day average per share closing bid price
preceding the date of receipt of the Notice;
Any shares issued pursuant to this Amendment shall be deemed Shares pursuant to
the Subscription Agreement and shall be subject to all the terms and conditions
of the Subscription Agreement. For purposes of this Amendment, the closing per
share bid price of the Company's $.01 par value common stock shall be as
specified by Nasdaq. Notwithstanding anything in this Amendment to the contrary,
the Company shall not be required to issue additional shares in excess of its
legally authorized capital, or issue additional shares greater in number than
two and one half times the number of Shares specified in the Notice, or suffer
any penalty for the inability to issue such shares.
2. Call. If at any time the per share closing bid price of the Common Stock
is equal or greater than 130% of the per share closing bid price the day
immediately preceding the date of the Closing, the Company shall have the right
to repurchase the Shares (to the extent that the Buyer has not yet delivered to
the Tranfer Agent such shares and an applicable Notice pursuant to Paragraph 1
hereof) at a price per share equal to 125% of the per share closing bid price of
the Common Stock the day immediately preceding the date of the Closing (the
"Call"). The Buyer shall have the right to decline to sell shares pursuant to
the Call, provided however, that such refusal shall automatically extinguish the
Buyer's right to the issuance of additional shares as provided in Paragraph 1 of
this Amendment with respect to the number of shares called. The Company may
assign its purchase rights under this Paragraph 2 with consent of the Buyer.
3. Mechanics for Exercise of the Call. To exercise the Call, the Company
shall deliver written notice to the Buyer along with its commitment to pay the
appopriate price to the Buyer within ten (10) business days of the date of
delivery of such notice of the Call. The Buyer shall have five (5) business days
from delivery of the notice of the Call to decline to sell the shares pursuant
to the Call by a written notice of such declination to the Company within such 5
business day period. In the event the Company does not receive timely delivery
of such notice to decline the Call, the Company shall be authorized to treat the
Call as accepted and, after payment to the Buyer of the appropriate price, shall
be authorized to take those actions it deems necessary to terminate the Buyers
rights in the Shares. After receipt of the payment pursuant to the Call, the
Buyer shall deliver any and all certificates evidencing the Shares to the
Company properly endorsed for transfer to the Company.
<PAGE>
4. Liquidated Damages. The Company acknowledges that time is of the essence
with respect to the Company's compliance with its obligations to issue
additional shares pursuant to a Notice under Paragraph 1 above. Accordingly, the
Company hereby warrants and represents that in the event it becomes obligated to
issue additional shares to the Buyer, it shall (i) instruct its transfer agent
with respect to such issuance; (ii) cause its counsel to issue any necessary
opinion letters; and (iii) take any and all other action necessary to cause its
Transfer Agent to issue any required additional shares and deliver the same in
accordance with purchaser's instructions within ten (10) business days after the
Transfer Agent has received the certificates for the Shares and the Company has
received the Notice. In the event the Company breaches this warranty, for any
reason, other than an act of God as described below, then the Company shall
immediately pay the Buyer liquidated damages in the amount of 1% of the pro rata
Purchase Price, allocable to the shares for which such additional shares are to
be issued, per day (the "Cash Damages") until the Company shall have complied
with its obligations under Paragraph 1. In the event the Company is in breach of
this warranty for more than ten (10) business days, the Company shall issue to
the Buyer, as additional liquidated damages, additional shares per day of the
Company's Common Stock equal to 1% of the number of the shares originally
purchased pursuant to the Subscription Agreement. The Company's payment of such
liquidated damages shall not, however, alter in any way the Company's
obligations under Paragraph 1. Futher, until the Company cures the breach of
Warranty by delivering the additional shares and paying the liquidated damages,
the Company shall not issue or contract to issue to any other party any of its
equity securities or debt securities convertible into equity securities of the
Company.
For purposes of this agreement, an act of God shall excuse a breach of
warranty in the event that weather conditions, acts of war or terrorism, or some
other catastrophic event not generally encountered in business or reasonably
within the contemplation of the parties at the time of execution of this
agreement renders SELLER's performance impossible. Such breach of warranty shall
be excused only for so long as the act of God in fact renders performance
impossible.
No other amendments of the Subscription Agreement are intended.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement on the date first above written.
EARTH SCIENCES, INC.
By:
-------------------------------------
Name: Mark H. McKinnies
Title: President
BUYER
By:
-------------------------------------
Name:
--------------------------------
Exhibit 21.1
Earth Sciences, Inc.
Listing of Subsidiaries
<TABLE>
<CAPTION>
BENEFICIAL
PERCENTAGE
NAME 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-ES, Inc. 100% a Colorado corporation
ADA Environmental Solutions LLC 100% a Colorado limited liability company
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
</TABLE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference of our report dated March 19, 1999
accompanying the financial statements of Earth Sciences, Inc., which report
appears in the December 31, 1998 annual report on Form 10-KSB 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 Statements.
/s/ Hein + Associates LLP
HEIN + ASSOCIATES
Denver, Colorado
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS, DECEMBER 31, 1998 AND 1997 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 122
<SECURITIES> 0
<RECEIVABLES> 553
<ALLOWANCES> 4
<INVENTORY> 507
<CURRENT-ASSETS> 1259
<PP&E> 20763
<DEPRECIATION> 5333
<TOTAL-ASSETS> 19949
<CURRENT-LIABILITIES> 2022
<BONDS> 1000
0
0
<COMMON> 222
<OTHER-SE> 11487
<TOTAL-LIABILITY-AND-EQUITY> 19949
<SALES> 4686
<TOTAL-REVENUES> 4893
<CGS> 5077
<TOTAL-COSTS> 8967
<OTHER-EXPENSES> 1366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1264
<INCOME-PRETAX> (5440)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5440)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5440)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
