SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended March 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to
-------
Commission file number 0-19566
EARTH SEARCH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Utah 87-0437723
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
502 North 3rd Street, #8
McCall, Idaho 83638
Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (208) 634-7080
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statement incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
Aggregate market value of Common Stock held by nonaffiliates of
the Registrant at March 31, 1996: $54,572,364. For purposes of this
calculation, officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at March 31, 1996:
76,847,162.
This Form 10-K consists of ____ pages. Exhibits are indexed at page ____.
<PAGE>
TABLE OF CONTENTS
Item of Form 10-K Page
PART I........................................................... 3
Item 1 - Business ........................................ 3
Item 2 - Properties....................................... 10
Item 3 - Legal Proceedings................................ 10
Item 4 - Submission of Matters to a Vote of
Security Holders................................. 10
Item 4(a) Executive Officers of the Registrant............. 10
PART II.......................................................... 12
Item 5 - Market for the Registrant's Common
Equity and Related Shareholder Matters........... 12
Item 6 - Selected Financial Data.......................... 13
Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations....................................... 13
Item 8 - Financial Statements and Supplementary Data...... 18
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........... 19
PART III......................................................... 19
Item 10 - Directors and Executive Officers of
the Registrant................................... 19
Item 11 - Executive Compensation........................... 19
Item 12 - Security Ownership of Certain Beneficial
Owners and Management............................ 20
Item 13 - Certain Relationships and Related
Transactions..................................... 20
PART IV.......................................................... 20
Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.......................... 20
SIGNATURES....................................................... 22
<PAGE>
PART I
ITEM 1. BUSINESS
General
Earth Search Sciences, Inc. (formerly Turnabout Corporation) (the
"Registrant" or the "Company") was incorporated as a Utah corporation on May 15,
1984. The Company, up until 1985, had limited activity except for expenditures
for exploration and acquisition of mining claims in Alaska. On December 5, 1985,
the Registrant acquired all of the outstanding common stock of Earth Search
Sciences, Inc. ("ESSI"), in exchange for 13,639,600 shares of its previously
authorized, unissued $.001 par value common stock. On August 11, 1987, the
Registrant changed its name to Earth Search Sciences, Inc. and on November 19,
1987, the former subsidiary was dissolved.
The Company has been in a research and development posture since its
inception, and has recently reported limited revenues of $6,332.00 due to
the receipt of two consecutive consulting contracts for time and materials
with the Lockheed Martin Group.
Company has developed a two-prong strategy to convert from a research and
development company to an operating company. With the experience of Dr. John
Peel, the Company's president, the Company has a strong base from which to
develop remote sensing business aimed at the United States Government sector
of customers, principally with respect to the use of remote sensing in
identifying environmental exposures and aiding the Government in designing
economical remediation programs. The Company anticipates developing a
strategic alliance with one or more established companys to enhance its
opportunities for developing remote sensing business with the Government sector
of customers. The second prong of the Company's strategy involves the
continued focus on commercialization of the remote sensing technology
focused principally on identification and exploitation of mineral
opportunities. To better focus the Company's commercial plans, the Company
formed a wholly-owned subsidiary, Earth Search Resources, Inc. ("ESR") and on
June 1, 1996, hired Brian C. Savage, formerly director of the investment
banking mining group of Nesbitt Burns Securities, Inc., in New York, as
president of ESR and Vice President-Resource Development of the Company.
Mr. Savage's experience in the mining industry and his investment banking
background should provide the Company with significant assistance in developing
the commercial side of the business.
<PAGE>
The Company and its chairman, Larry Vance, have spent the last ten years
developing an airborne remote sensing capability that can be
economically configured into both governmental and commercial projects. The
Company initially sought to utilize United States Government proprietary
airborne remote sensing technology to identify sites with potential economically
recoverable mineral deposits. The Company intended to use the remote sensing
data as a means of limiting the universe of available mining sites in a given
region. The Company anticipated doing further investigative work on the
identified sites, taking a land or mineral interest in promising sites and
thereafter either developing the sites into mines independently or seeking a
joint venture partner or mining entity to develop the site.
Imagery Database
In the summer of 1987, the Company obtained airborne multi-spectral
scanner imagery over sites in Oregon, Arizona and Nevada. The imagery, gathered
by an airplane using a thematic mapper scanner, was recorded on high density
digital tape and later decompressed into computer compatible data. The Company's
cost basis in this database includes imagery produced in photographic form (hard
copy) as well as the data on digital tape. This information was then interpreted
by a geologist having expertise in the ATM method. The initial interpretation
was complete by June, 1988 and produced approximately 500 anomalies that will
require exploration work to determine mineralization. In addition to
identification of potential mineralization, the database can be used for oil and
gas exploration, environmental exposure identification and other purposes for
which geology is a major consideration. The Company has fully depreciated the
cost of acquiring this database but still intends as financial resources become
available to use the data base to focus ESR on promising target properties for
further remote sensing and exploration.
In 1991, the Company was invited to participate in the Visiting
Investigator Program (VIP) sponsored by the National Aeronautics and Space
Administration ("NASA"). In the VIP program, the Company sought to compare the
benefits of using an Airborne Visible and Infra-Red Imaging Spectrometer
("AVIRIS" instrument) in locating geologic areas of interest in a test area in
Nevada with other less advanced instruments. The results of that program were
published in January 1993 in a study entitled "Developing the use of AVIRIS,
TIMS and TM Data to evaluate Hydrothermal alteration types as related to
geologic structures in the Cuprite, Nevada Region," Series VIP-002-93, Stennis
Space Center, Remote Sensing Technologies. As a result of participation in the
program the Company acquired a large amount of unprocessed data. The useful life
of this information is expected to be in the range of five to ten years.
The Company's data collected in 1987 and 1991 has been stored and can
be used many times interactively to determine the fine detail that go with the
use of remote sensing as an exploration tool for locating mineral prospects.
That same data can be used for other applications such as environmental issues,
resource management issues and corridor development.
<PAGE>
The Company intends to structure its relationship with ESR so the
Company receives licensing fees for access to data and technology available to
the Company and overriding royalties on minerals ultimately exploited by ESR or
any of its customers. ESR is presently preparing with a joint venture mining
company partner to develop data packages based on the imagery data the Company
has acquired. The Company anticipates that the mining partner will provide the
capital necessary to exploit this very valuable asset.
As with ESR, the Company anticipates structuring its relationship with
its strategic alliance partners for the Government sector in a manner that
provides the Company with licensing fees for exclusive use of the seven meter
imagery on government programs, including but not limited to the U.S. Forest
Service, Bureau of Land Management, Environmental Protection Agency,
Department of Energy, Department of Agriculture, and Department of Defense.
The Company will reserve the rights to this imagery for the perpetual duration
of the licensing contract.
Original Business Plan
Based on the imagery database accumulated by the Company in 1987 and
1991, the Company procured mining patents and land leases and sought partners to
develop several prospective mining properties. The Company in fact entered into
several arrangements with mining entities for the development of some of the
Company's properties, but none of those arrangements resulted in development of
operating mines. Due to lack of capital to fund advance royalties and due
diligence requirements on the Company's mining properties and to changes in
mining laws which required increased and more timely due diligence expenditures,
the Company opted to release virtually all of its mining properties between 1991
and 1994. The new mining laws imposed a financial burden on the Company by
requiring a payment in advance of a flat fee per claim plus filing costs instead
of the prior arrangement under which the Company could perform general
assessment work prior to making a significant financial commitment. The Company
only retained one mining property--a 58% interest in several as yet undeveloped
mineral tracts aggregating 3,389 acres in Colorado, as part of a joint venture
with Emerald Operating Company of Denver, Colorado. The Company intends to
acquire imagery over these mineral tracts, develop a technical data package and
approach a resource development company to farm the property out to them,
allowing the Company to retrieve its front end costs.
As an adjunct to the business of developing mineral properties, the
Company recognized the need to refine the technology of remote sensing with the
ultimate goal of commercializing the technology. To achieve that goal, the
Company believes that a miniaturized hyperspectral remote sensing instrument
must be developed so that more economical aircraft can be utilized for the
airborne sensing. The Landsat sensor is configured with 11 channels of data in
comparison with a hyperspectral instrument that has 224 channels of data. The
difference is achieved by splitting the light spectrum 213 times more than
the Landsat sensor and by providing better resolution. The resulting
improvement in resolution enables the Company to be able to read the chemistry
of the spectra giving us more substantial information. The comparison between
the two instruments enables the user to identify what is there instead of
merely learning that something is there.
<PAGE>
On April 12, 1991, the Company commenced entering into semiannual
agreements with NASA to participate in the VIP program to utilize the
specialized resources and sensing technology of NASA to the goal of
commercialization. The agreements allow the Company access to NASA's
sophisticated facilities that are capable of a full range of remote sensing
activities. Pursuant to the agreement NASA supplies administrative and technical
support and the Company is responsible for the expenses and costs of the
project. Information and technology developed are to be shared between NASA and
the Company. The Company has signed a Space Act Agreement with JPL/NASA,
allowing Earth Search access to a sensor that has never been available to the
general public before. The Company has gained several years experience in the
hyperspectral field under this agreement. The mission of JPL/NASA is to develop
the technology and the relationship with Earth Search Sciences--so Earth Search
Sciences can commercialize the technology. The experience gained has led to a
feasibility of a miniaturized hyperspectral instrument (the ESSI Probe 1), which
will weigh 165 pounds and will collect data in .4 to 2500mm range and 5 meter
spatial resolution.
In addition, the Company established a non-exclusive agreement with the
University of Utah Research Institute ("UURI") and its center for remote sensing
to mutually conduct on a project-by-project basis research and development
activities as they relate to remote sensing. UURI is obligated to provide
technical support for mineral and petroleum exploration and related
environmental analysis and laboratory and field training. The Company provides
geological personnel and funding for the projects. In May 1991, the Company paid
$15,000 to have NASA fly three (3) targets of interest in southwest Idaho,
northwest Nevada and northwest Arizona. The Company is continuing with the
assistance of UURI to evaluate the data generated from this Project.
Current Business Plan
In July, 1993, the Company flew an EPA superfund site at Summitville,
Colorado, jointly with the EPA, USGS, Colorado DEQ, JPL and NASA to characterize
the extent of the environmental exposure at the site and to prove the Company's
remote sensing capabilities. The final report has been completed by the Company
and Analytical Imaging and Geophysics and the findings will be used for
environmental and mineral purposes. The Summitville flight provided the Company
with the opportunity to prove the value of remote sensing in a commercial and
governmental setting, and ultimately led to the development of the Company's
current business plan.
Earth Search Sciences has developed a financial strategy, and through
that strategy has begun to acquire the necessary capital for the purchase of its
own miniaturized hyperspectral remote measurement instrument, ESSI Probe 1.
The financial strategy is centered around the direct funding of the manufacture
of
<PAGE>
ESSI's own sensor design by existing qualified Earth Search Sciences
shareholders familiar with the company's business strategy. The manufacture of
the Probe1 sensor is to be accomplished through the strategic alliance that the
company has been developing since 1994 between Integrated Spectronics
Corporation and The Company. The first instruments have been ordered and the
first instrument will be delivered in the first quarter of 1997. ESSI believes
it can offer territorial concessions to qualified shareholders who fund the
acquisition of Probe 1s. The terms of these concessions include ownership in a
subsidiary that is licensed by the Company to use the Probe 1 in a specified
location utilizing services provided by the Company or ESR (data collection,
processing, interpretation, technical data packages, and management and
marketing).
The Company has received a commitment from Jan Arnett to fund two (2)
sensors. One is to be delivered the first quarter of 1997 and the second during
the second quarter of 1997. Upon delivery, those instruments will be operated in
Canada and Brazil. The Company and Dr. Arnett are finalizing documents whereby
Dr. Arnett will own the two instruments and lease them back to the Company or
ESR.
The Company is in the process of setting up the following markets: Canada,
Brazil and the United States. The Company, through ESR, has acquired control of
Quasar Resource, Inc. for Canada, Bear Creek Exploration, Inc. for Brazil and is
negotiating a third for the United States. These subsidiaries will rely on
their own sources of capital to develop and market data packages using the ESSI
Probe1 and data provided by the Company.
Earth Search Sciences, Inc. and Integrated Spectronics have jointly
developed a remote measurement instrument, the ESSI Probe 1, that spectrally
measures the reflectance of the sun from the earth and is considered one of the
most advanced hyperspectral instrument in the world. The Company and Integrated
Spectronics have signed a series of agreements to engineer, develop and
manufacture sensors as needed for each market that the Company contemplates
entering.
The Company believes that hyperspectral remote sensing technology, if
economical, can play a central role in a multitude of settings, and has
application both in the United States and abroad. The Company has identified
applications in such diverse markets as watershed analysis, pollution detection,
pipeline easement mapping and routing, plume analysis, vegetation stress
analysis, agriculture, disaster assessment, mineral exploration, forestry,
fisheries, heat loss detection, wetlands delineations, stormwater management,
emergency planning and evacuation route assessment, land use, prescription
farming and unexploded ordnance detection.
The key to accessing these market opportunities remains the
miniaturization of the remote sensing technology and usage of the technology on
an economical basis. To achieve this goal, the Company continues to pursue the
identification and ultimate usage of technologies not presently available in the
commercial market place. The Company has since 1994 submitted joint bids with
several other service providers and contractors to provide comprehensive
environmental remediation services to prospective clients both in the United
States and abroad. Many of these joint bids have involved teaming by the Company
with multi-national, multi-billion dollar government contractors. Although none
of these
<PAGE>
bids have yet produced revenues, the Company is hopeful that the presence of the
Company's remote sensing capabilities will differentiate the joint bids from
bids submitted by other ventures that do not include remote sensing capabilities
as part of their offered scope of services. By teaming with such contractors,
the Company has and will continue to be exposed to developments presently only
available in the governmental arena. The Company hopes to align itself with
government agencies advocating technology transfer, and to use that technology
together with the Company's existing expertise to perfect a miniaturized
instrument.
The Company also believes that a merger with or acquisition of one or
more of the strategic partners in these joint bids may be the most expeditious
and cost-effective way to achieve the goals of commercializing the remote
sensing technology and converting the Company to an operating, revenue-producing
entity. A merger or acquisition would provide the Company with a revenue base
and with more immediate access to prospective users of remote sensing
technology.
The Company signed a definitive agreement on June 30, 1995 to acquire all
the capital stock of Lamb Associates, Inc. ("LAI"), an established engineering
and technical services company with a strong United States Government
contracting practice. The definitive agreement was contigent on, among other
things, receipt by the Company of financing or equity capital to fund the
acquisition. The Agreement has been extended and renegotiated several times
during the past year in an attempt to restructure the agreement to close the
acquisition without funding. On July 11, 1996, the Company and the LAI
Shareholders broke off discussions concerning the restructuring of the
definitive agreement. There were two principle reasons for this decision.
First, the needs of the LAI shareholders to receive cash were incompatible with
the Company's enablity to raise funding to acquire LAI. Second, the
profitablity of LAI declined somewhat due to the present uncertainity
surrounding Government contracting. The Company and LAI may negotiate a
strategic alliance, and its possible that acquisition discussion may occur in
the further if funding becomes available.
The acquisition of LAI would have provided the Company with the
infrastructure and expertise to bid, secure, and execute significant contracts.
The Company will now need to develop that infrastucture and expertise
independently or obtain access to it through a strategic alliance. A strategic
alliance with LAI would allow the companies to work together on certain
contracts, particularly in the environmental area. For example, the Company's
remote sensing technology could be used at the outset of an environmental
project to identify and locate contaminants. LAI could then perform
contamination characterization and assessment, remediation program design,
cost analysis, assessment of safety and health issues, compliance tasks, and
other technical functions in support of the environmental restoration.
The Company also believes the recent hiring of Brian Savage as its
Vice President-Resource Development and President of ESR will strengthen the
Company's ability to develop the commercial side of the business and enhance the
Company's ability to access funds to fulfill the business plan. Mr. Savage was
formerly director of the Investment Banking Mining Group of Nesbitt Burns
Securities Inc., in New York. He has served in capacities of increasing
responsibility in equity financing, corporate and project financing, merger and
acquisition, public debt and advisory projects for clients of Nesbitt Burns and
its parent company, the Bank of Montreal, for the past four years. Savage holds
a bachelor's degree in mining engineering and a master's in resources
economics from the Colorado School of Mines.
The Company intends over the next year to continue pursuing (a)
acquisitions that aid in the commercialization of hyperspectral remote sensing
technology, (b) contracts that produce revenues from the application of remote
sensing to the existing markets in environmental remediation and mineral
identification and to undeveloped markets for other appropriate projects
<PAGE>
involving a multitude of applications of the technology, (c) financing to fund
the development of miniaturized remote sensing instruments, and (d) development
of promising potential mineral properties in which the Company has an interest
or acquires an interest as a result of its existing database of geological
information.
The Company is not aware of any present commercial competition in the
field of hyperspectral spectroscopy. The only knowledge the Company has of any
other use of hyperspectral data today is in academic and federal research.
The Company is not aware of any environmental concerns associated with
remote sensing technology.
Employees
As of March 31, 1996, the Company had only two full-time employee:
Larry F. Vance, Chairman and John W. Peel, III, Chief Executive Officer. Also
the Company retains Tami J. Story, Company Secretary, as an administrative and
support person on an independent contractor basis.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters and all of the
furnishings from an unrelated third party, and has approximately 2,000 square
feet of office space in McCall, Idaho. The Company believes its offices are
adequate to meet its needs for the foreseeable future. The Company anticipates
that ESR will require office space later this year. The Company intends that
ESR will lease office space in a site conducive to the conduct of a mineral
related business, and Mr. Savage has indicated that perhaps ESR should locate
its headquarters in Denver, Colorado. The Company also anticipates that
future subsidiaries set up to develop data packages in other countries,
including perhaps Quasar and Bear Creek, may be set up as foreign entities and
may require leased space in their locales.
In December, 1993 the Company acquired a 58% interest in several
undeveloped mineral tracts aggregating 3,389 acres in Colorado. The mineral
interest is held through a joint venture with Emerald Operating Company located
in Denver, Colorado. Presently, the Company is evaluating the commercial
viability of the property. The Company has only expended $15,000 in geological
exploration costs relating to these tracts, and does not have enough information
yet to determine the amount of economically recoverable mineral reserves. The
joint venture retains the mineral tracts by paying an annual rental payment, the
Company's share of which is approximately $4,000.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with
respect to the executive officers of the Company as of June 29, 1996.
Name Age Position
Larry Vance 61 Chairman
John W. Peel 50 Chief Executive Officer
Brian C. Savage 36 Vice President-Resource Development
Tami J. Story 33 Secretary and Treasurer
Larry F. Vance served as Chief Executive Officer of the Company from
1985 until April 8, 1995. Since April 8, 1995, Mr. Vance has served as Chairman
of the Company. Mr. Vance is a director of the Company. Mr. Vance is a full-
time employee of the Company and has been since 1985.
John W. Peel, III joined the Company as Chief Executive Officer in
April 1995. Prior to joining the Company, Dr. Peel served for the past six and-
one-half years as Senior Vice President of Tetra Tech, Inc., a major publicly-
held environmental remediation consulting firm. Dr. Peel holds a Bachelor of
Sciences in Biology from Millsaps College, a Master of Sciences in Parasitology
and Invertebrate Zoology from the University of Mississippi and a Ph.D. in
Environmental Health/Health Physics from Purdue University. Dr. Peel is a full-
time employee of the Company and has been since 1995.
Brian C. Savage joined the Company as Vice President-Resource Development
and President of the Company's wholly owned subsidiary, Earth Search Resources,
Inc. in June 1996. Mr. Savage, for the past four years, was formerly director of
the Investment Banking Mining Group of Nesbitt Burns Securities Inc., in
New York. Savage holds a bachelor's degree in mining engineering and a master's
in resources economics from the Colorado School of Mines.
Tami J. Story joined the Company as Secretary and Treasurer in 1993. Ms.
Story has been with the Company for 6 years in an administrative support
capacity as an independent contractor. Ms. Story also serves as a director of
the Company. Ms. Story holds a degree with a major in Nursing and a minor in
Business Administration.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Principal Market or Markets. The Company's Common Stock has in the
past traded in the over-the-counter market, based on inter dealer bid prices,
without markups, markdowns, commissions, or adjustments (which do not represent
actual transactions) as reported in the "pink sheets."
<TABLE>
<CAPTION>
Quarter Ended High Low
--------------------------------------------
<S> <C> <C>
June 30, 1993 $.12 $.05
September 30, 1993 $.10 $.02
December 31, 1993 $.15 $.06
March 31, 1994 $.10 $.05
June 30, 1994 $.10 $.07
September 30, 1994 $.10 $.08
December 31, 1994 $.20 $.10
March 31, 1995 $.20 $.16
June 30, 1995 $.28 $.24
September 30, 1995 $.35 $.30
December 31, 1995 $.41 $.38
March 28, 1996 $.84 $.81
</TABLE>
(b) Approximate Number of Holders of Common Stock. The number of record
owners of the Company's $.001 par value common stock at March 31, 1996, was
approximately 706. This does not include shareholders who hold stock in their
accounts at brokers/dealers.
(c) Dividends. Holders of common stock are entitled to receive such
dividends as may be declared by the Company's Board of Directors. No dividends
have been paid with respect to the Company's common stock and no dividends are
anticipated to be paid in the foreseeable future.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data for each
of the last five fiscal years with respect to the Company and is qualified in
its entirety by reference to the Company's audited financial statements and
notes thereto.
<TABLE>
<CAPTION>
Cumulative
Amounts
During The
Development As of or for the fiscal Year Ended March 31,
Stage 1996 1995 1994 1993 1992
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating
revenue $ 21,332 $ 6,332 $ -0 $ -0- $ -0- $ -0-
Net Loss (5,683,379) (2,408,292) (1,122,541) (340,004) (333,657) (749,259)
Net Loss per
Common Share (.20) (.05) (.02) (.01) (.01) (.03)
Total Assets 922,377 922,377 95,861 49,598 139,668 191,937
Long-term
Obligations 736,209 736,209 1,231,217 300,052 443,227 526,931
Stockholders'
Deficit (1,295,908) (1,295,908) (1,899,435) (843,440) (829,081) (731,690)
Cash Dividends
Declared -0- -0- -0- -0- -0- -0-
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Financial comparisons will be made between the
years ended March 31, 1996 and 1995 and 1994.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended March 31, 1995, the Company had no
operating revenues. The Company was required to obtain working capital through
the sale of its unissued common stock and the issuance of short-term notes.
Aggregate amounts received are approximately $113,325 from stock sales and
$460,810 from the issuance of notes. In addition, the Company's operating
payables and accrued liabilities increased approximately $34,675. The large
operating payables and short-term notes create a substantial working capital
deficiency.
<PAGE>
During the fiscal year ended March 31,1996, the Company had limited
operating revenues of $6,332 that derived from two consulting agreements for
time and materials with Lockheed Martin Group. The Company was required to
obtain working capital through the sale of its unissued common stock and the
issuance of short-term notes. Aggregate amount received are approximately
$192,400 for stock sales and $570,574 from the issuance of notes. In addition,
the Company's operating payables and accrued liabilities increased approximately
$178,832. The large operating payables and short-term notes create a
substantial working capital deficiency. If the Company cannot continue to
raise working capital from private placements of stock and/or notes, the
Company will experience a substantial hardship in continuing to operate.
During the fiscal year ended March 31, 1996, the Company experienced
a large increase in general and administrative expense from $952,500 for the
year ended March 31, 1995, to $2,143,013. Approximately $240,320 of that
increase relates to deferred compensation to the three principal officers of the
Company at March 31, 1996. The balance of the increase in general and
administrative expense relates to the recording by the Company of $1,150,000 in
compensation expense in the fiscal year ended March 31, 1996, relating to the
difference between the exercise price for stock options granted to officers
of the Company in their employment agreements, and the market price
of the Company's stock on the date the options were granted. The remainder of
the general and administrative expense resulted mostly from significant research
and development and financing related activities undertaken by the Company
utilizing consulting services. The Company paid for many of such consulting
services by issuing shares of its common stock to the consultants.
<PAGE>
Management continues to find difficulty in raising required working
capital. It is expected to continue to sell unissued shares of common stock
and/or issue notes to provide the working capital for its operating needs. The
Company has developed a financial strategy, and through that strategy has
acquired the necessary capital for the purchase of its own miniaturized
hyperspectral remote measurement instrument, ESSI Probe1. The financial
strategy is centered around the direct funding of the manufacture of
ESSI's own sensor design by existing qualified Earth Search Sciences
shareholders familiar with the company's business strategy. The
manufacture of the Probe 1 sensor is to be accomplished through the strategic
alliance that the Company has been developing since 1994 between Integrated
Spectronics Pty Ltd. and the Company. Two instruments have been ordered at an
aggregate purchase price of 5,000,000 and the first instrument will be
delivered in the first quarter of 1997. ESSI believes it can offer territorial
concessions to qualified shareholders who fund the acquisition of Probe 1s.
The terms of these concessions include ownership in a subsidiary that is
licensed by the Company to use the Probe 1 in a specified location utilizing
services provided by the Company or ESR (data collection, processing,
interpretation, technical data packages, and management and marketing).
The Company has receive a commitment from Dr. Jan Arnett to fund two
(2) sensors. One is to be delivered the first quarter of 1997 and the second
during the second quarter of 1997. Upon delivery, those instruments will be
operated in Canada and Brazil. Dr. Arnett has committed $5 million to fund the
purchase of the two instruments. The Company has already received $1,000,000
of that funding, and expects the balance to be paid over the next several months
as Integrated Spectronics requires draws to complete the manufacture of the
two sensors. The money from Dr. Arnett has provided the Company with some
working capital because the Company's agreement with Integrated Spectronics
permits the Company to retain a portion of each draw. The Company and Dr.
Arnett are in the process of finalizing agreements whereby Dr. Arnett will own
the two instruments and lease them back to the Company or ESR.
<PAGE>
Under the terms of the arrangement with Dr. Arnett, ESR will pay Dr.
Arnett a lease payment of $250,000 per year per instrument. In addition, Dr.
Arnett will receive an overriding royalty on any mineral production that
ultimately occurs in Canada and Brazil as a result of usage of the Probe 1 to
identify mineral sites. The Company intends to repurchase the
instruments at a future point in time for a mutually agreeable price.
The Company has also signed an agreement with Applied Signal and Imaging
Technology Inc. ("ASIT"), pursuant to which ASIT will work with the Company to
develop a system to provide real time translation of remote sensing data into
usable information. The Company expects that this technical advancement will
significantly enhance the value of air-borne remote sensing in a large variety
of contexts, where the present delay in receiving usable information of several
months has been an impediment to the use of remote sensing technology.
During the fiscal year ended March 31, 1996, the Company had entered
into an agreement to acquire all outstanding shares of LAI, an engineering and
professional service company, which provides technical services primarily to the
environmental industry. As of July 11, 1996, the Company and LAI could not
reach an agreement on a restructuring of the transaction. As a result, the
Company intends to take a change in fiscal year 1997 for its expenses relating
to the transaction, which will be approximately $200,000.
The financial statements reflect consolidation of the Company's results
with the financial statements of the Company's subsidiaries. One of the
Company's subsidiaries, Quasar Resources, Inc., a Wyoming corporation, recently
completed a private placement to
<PAGE>
certain qualified individuals of 30% of its outstanding capital stock. Quasar
received $157,100 in net proceeds from the private placement. ESR received its
70% interest in Quasar for nominal consideration and certain agreements relating
to technology. Accordingly, the Company has recorded a minority interest of
$47,130 relating to the shares purchased by the unaffiliated Quasar shareholders
and has recorded $109,970 as additional paid-in capital.
RESULTS OF OPERATIONS
The Company has continued to pursue strategic alliances with several
substantial companies and Federal laboratories.
The Company has also collected hyperspectral data and performed ground
truthing on a target using the AVIRIS instruments and NASA's UER-2 aircraft. The
target was a Superfund site at Summitville, Colorado, allowing the Company to
characterize the site for environmental purposes. The final report has been
completed by the Company and Analytical Imaging and Geophysics and the findings
will be used for environmental and mineral purposes.
During the fiscal year ended March 31, 1996, the Company has continued
working with NASA's research and development department, to assist in continual
efforts to commercialize remote sensing. In addition, the Company will endeavor
to secure additional capital necessary to continue the Company's efforts to
commercialize remote sensing.
During the fiscal year ended March 31, 1996, the Company issued a proxy
statement related to a meeting of shareholders to (1) retain Price Waterhouse as
the Company's accountants, (2) elect Dr. John W. Peel to the Board of Directors
and (3) increase the number of authorized shares. The meeting was held on
September 26, 1996 and all proposals were adopted by an affirmative vote of 98%
of the shares reported at the meeting.
JOINT VENTURE AND OPERATING ENTITY RELATIONSHIP
During the fiscal year ended March 31, 1996, the Company signed a
Memorandum of Agreement (MOA) and a Teaming Agreement with Hughes Santa Barbara
Research facilities. The Agreements with provide certain Hughes instruments,
manufacturing and Hughes support for the ESSI Kazakhstan mission in August 1996,
which will include the Department of Energy, Navy Research Laboratory, Sandia
National Laboratory, Lawrence Livermore Laboratory, Pacific Northwest National
Laboratory and Battelle.
In January 1994, the Company established a joint venture with
Emerald Operating
<PAGE>
Company, a Colorado corporation, to acquire several state leases for developing
the minerals potential. These properties were qualified by using remote sensing.
The Company intends to acquire imagery of these properties, develop a technical
data package and, a resource development company to farm the property out to
them, allowing the Company to retrieve its front end costs.
In August 1994, the Company submitted a proposal, per a Rocky Flats
Request for Proposals, entitled "Aerial Multispectral Sensor Platform for the
Detection of Rocky Flats Hazardous (including Radiological) and Toxic Wastes."
This $1.4 million effort proposes to characterize both hazardous and toxic
wastes surveyed from an airborne multisensor at hovering altitudes, mid-level
altitudes and high altitudes. A Memorandum of Agreement was concluded between
Tetra Tech, Inc., the Company and LITCO to develop and demonstrate the airborne
multisensor platform and the ground-based remote sensing and Geographical
Information Systems at the Rocky Flats Plant. During the fiscal year ended March
31, 1995, the Company won the bid on the Rocky Flats proposal and is awaiting
the Department of Energy to fund the project. Due to government downsizing,
defense conversion and budget cuts the schedules for contract awards or start
work orders are prone to delays.
In September 1994, the Company submitted a proposal under the EPA's
Environmental Technology Initiative (ETI) Program. The project is a one-year
effort to develop land use and environmental base maps from imagery acquired by
the AVIRIS. The imagery will be collected over the Fort Hall Reservation in
southeastern Idaho. The teaming partners are the Shoshone-Bannock Tribes, the
Company, DOE's Idaho National Engineering Laboratory/Lockheed Idaho Technology
Company, NASA's High Altitude Missions Branch and the EPA's Environmental
Monitoring and Sensing Laboratory. Since March 31, 1995, this proposal has been
resubmitted to the Department of Energy. Due to government downsizing, defense
conversion and budget cuts the schedules for contract awards or start work
orders are prone to delays.
In October 1994, the EPA requested the Company's assistance to use the
AVIRIS (under the Company's Space Act Agreement with NASA/Jet Propulsion
Laboratory (JPL)) to assess the environmental impact of a pipeline break in the
Houston, Texas area. With demonstration of the technology for environmental
purposes over large land areas, EPA has indicated that remote sensing may be
substituted for traditional, expensive and time-consuming sampling procedures.
This may include monitoring the environmental status of the Gulf of Mexico coast
and the U.S.-Mexico border area. The imagery has been collected, processed and
is presently being interpreted. A draft report is due in January 1996. The
responsible federal agency has yet to be funded and Earth Search Sciences is
negotiating with the pipeline company's owner. The Company expect a positive
outcome.
In October 1994, the Company obtained JPL support to retrofit the
AVIRIS instrument to the NASA C-130 aircraft. This will enable the AVIRIS
instrument to collect 5 x 5 meter pixel data flying at 5,000 meter AGL, which is
a 16-fold increase in spatial resolution over the resolution available currently
with the ER-2 aircraft. The Company
<PAGE>
is in the final stages of negotiation with NASA Headquarters and is waiting for
a draft agreement. The Company has been negotiating for three years to retrofit
the AVIRIS instrument from the UER-2 aircraft at 20 meter spatial resolution to
a C-130 transport aircraft with a 5 meter spatial resolution collection rate and
has just recently received a contract to accomplish this task. The Company has
recently received the formal agreement from NASA Headquarters (Mission to Planet
earth) pertaining to the retrofit of the AVIRIS hyperspectral sensor to the
C-130. The Company is presently negotiating the terms and conditions of this
agreement and the attendant requirement for Earth Search Science
capitalization of this project to create an airborne laboratory from which
future generation of sensors or sensor concepts could be fabricated and test
flown.
During the fiscal year ended March 31, 1996, the Company negotiated a
concession license to develop hydrocarbons and minerals and formed a team for a
mission to Kazakhstan in August of 1996. The team includes the Company and
contractors: Battelle/PNNL and the Department of Energy's AMPS program. A letter
from the Kazakhstan Ministry of Science and New Technologies has been received
by the U.S. State Department addressed to the Secretary of Energy. This letter
invites Earth Search Sciences, its contractors and Department of Energy to
perform the mission in August. In addition to the concession the Company has
acquired a twenty percent (20%) ownership from Scientech and commenced the
acquisition of a complex mining license. The Company is negotiating with a large
mining company that has international holdings. The Company has also just
returned from Kazakhstan where John Peel, CEO of ESSI, Brian Savage, Vice
President- Resource Development of Earth Search Sciences (ESSI) and President of
Earth Search Resources, Inc. (ESRI) and Bill Farrand, senior remote sensing
geologist from Applied Signal and Image Technology visited prospective
(candidate) sites for field exploration. Mineralization was found and ore
samples were collected for laboratory examination. The extend of mineralization
is unknown at this time. Further field work is planned in the August -September
1996 time frame to determine the resource reserve estimates and the viability of
developing the prospects. Ground truthing of seven acres was performed in
support of the AMPS flyover, scheduled for early August 1996. As part of the
Kazakhstan mission, the Company has acquired a thirty percent (30%) interest in
Semtech, a Kazakhstan joint stock company, for a purchase price of $30,000 (of
which $10,000 was paid before March 31, 1996, and the balance of which was paid
subsequent to March 31, 1996.
During the fiscal year ended March 31, 1996, the Company has signed a
Creative Research and Development Agreement (CRADA) with the Department of
Energy's Pacific Northwest National Laboratories and the Battelle Corporation.
The Agreement allows the Company a very strong research and development partner
who also provides capital for sensor research and development and technology
transfer. This keeps with ESSI strategy to minimize our research and development
costs.
<PAGE>
During the fiscal year ended March 31, 1995, the Company signed a
multi-year Space Act Agreement with JPL, California Institute of Technology
(CALTECH) and NASA's highaltitude missions branch. JPL is to provide the AVIRIS
hyperspectral instrument to collect data and process the same and NASA is to
provide the airborne platform and UER-2 aircraft to fly the instrument over
targets of interests generated by (1) the Company, (2) major mineral/petroleum
companies and (3) environmental/engineering targets. Under this Agreement, NASA
has flown Summitville, Colorado, an EPA superfund project, the San Jacinto River
oil spill (pipeline break), the Coeur d'Alene mining district and the Payette
National Forest. The Company is currently developing data packages for each of
such flights for interpretation.
During the fiscal year ended March 31, 1996, several proposals have
been developed to partner with private industry, universities and state and
Federal agencies to develop, package and deliver Department of Energy and
competitive advanced technology products and services. This approach provides
solutions to critical environmental restoration and waste management problems,
while furthering national business and technology goals. Use of the AVIRIS and
other non-intrusive remote sensing technologies provides the technical
foundation for this effort.
FUTURE OPERATIONS
The Company continues to increase its involvement in the mineral
exploration and environmental areas, using the results of its research and
development over the last five years in remote sensing. By attempting to obtain
equity funding, the Company anticipates developing instruments to include
hand-held, airborne and satellite spectrometers and to acquire revenue-producing
companies in the environmental monitoring field.
Through teaming with other firms, the Company will identify possible
technology applications for remote sensing. Management intends to pursue
additional markets for its imagery databases, which would generate operating
revenues and adequate cash flows.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item
are included on pages F-1 to F-16 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company replaced its previous auditor, James L. Hansen, C.P.A.,
with Price Waterhouse LLP in May 1995. The decision to change accounting firms
was approved by the Company's Board of Directors. During the Company's two most
recent fiscal years preceding the dismissal of James L. Hansen, C.P.A., the
reports of Mr. Hansen on the financial statements of the Company contained no
adverse opinion or disclaimer of opinion and were not qualified or modified but
did contain an explanatory reference regarding the uncertainty of whether the
Company can continue as a going concern given its lack of liquidity. There were
no disagreements of the Company with James L. Hansen, C.P.A. on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which, if not resolved to the satisfaction of such
accountants, would have caused them to make reference to the subject matter of
the disagreements in connection with their reports. Before engaging Price
Waterhouse LLP as its new independent auditors, the Company did not previously
consult with them regarding any matters related to the application of accounting
principles, the type of audit opinion that might be rendered on the Company's
financial statements or any other such matters.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company will be included
under "Election of Directors" in the Company's definitive proxy statement for
its 1996 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference. Information with respect to executive officers of the
Company is included under Item 4(a) of Part I of this Report.
Based solely on a review of copies of reports received by the Company
from persons required to file reports of ownership and changes on ownership
pursuant to Section 16(a) of the Securities Exchange Act of 1934, the Company
believes that all of its executive officers and directors complied with
applicable filing requirements for the fiscal year ended March 31, 1996.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be included
under "Executive Compensation" in the Company's definitive proxy statement for
its 1996 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management will be included under "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its 1996 annual meeting of shareholders filed or to be filed not later than
120 days after the end of the fiscal year covered by this Report and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions with management will be included under "Certain Transactions" in
the Company's definitive proxy statement for its 1996 annual meeting of
shareholders to be filed not later than 120 days after the end of the fiscal
year covered by this Report and is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements Page in this Report
Reports of Independent Accountants F-1
Balance Sheet at March 31, 1996 and 1995 F-3
Statement of Loss for the Years
Ended March 31, 1996, 1995 and 1994 F-4
Statement of Changes in Shareholders'
Equity (Deficit) for the Years Ended
March 31, 1996, 1995 and 1994 F-5
Statement of Cash Flows for the Years
Ended March 31, 1996, 1995 and 1994 F-7
Notes to Financial Statements F-8
<PAGE>
(a)(2) Financial Statement Schedules - None
(a)(3) Exhibits
3.1 Articles of Incorporation; incorporated by reference to Exhibit
3.1 to the Registrant's Form 10-K for the fiscal year ended
March 31, 1995 (Amendment authorizing additional shares is attached
hereto)
3.2 Bylaws; incorporated by reference to Exhibit 3.2 to the Registrant's
Form 10-K for the fiscal year ended March 31, 1995
4.1 See Exhibit 3.1 and Exhibit 3.2
10.1 NASA Agreement; incorporated by reference to Exhibit 3a to the
Registrant's Amended Form 10-K for the fiscal year ended March 31,
1993
10.2 UURI Agreement; incorporated by reference to Exhibit 3b to the
Registrant's Amended Form 10-K for the fiscal year ended March 31,
1993
10.3 Emerald Operating Company and Spectral International; incorporated by
reference
10.4 Space Act Agreement between NASA and the Registrant dated June 30,
1994; incorporated by reference
10.5 Settlement Agreement and Release dated November 7, 1994; incorporated
by reference
10.6 Agreement dated February 16, 1995 between Graham, Hamilton & Dwyer,
Inc. and the Registrant; incorporated by reference
10.7 Agreement dated September 11, 1995 between Registrant and Integrated
Spectronics Pty Ltd
10.8 Letter on Intent among the Registrant and Dr. Arnett dated March 28,
1996
10.9 Memorandum of Understanding between the Registrant and Applied Signal
and Imaging Technology, Inc. dated May 27, 1996
16.1 Letter re: change in certifying accountant
21.1 Earth Search Resources, Inc. Wyoming
Quasar Resource Inc. Wyoming
Bear Creek Exploration, Inc. Nevada
(b) Reports on Form 8-K.
Report on Form 8-K filed August 21, 1995 with respect to Change in Accountants.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
EARTH SEARCH SCIENCES, INC.
By /s/ Larry F. Vance
Larry F. Vance
Chairman and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the following capacities on June 29, 1996.
Signature Title
/s/ Larry F Vance Chairman and Chief Financial
Larry F. Vance Officer (Principal Executive
and Financial Officer)
/s/ John W. Peel, III Chief Executive Officer
John W. Peel, III (Principal Executive Officer)
/s/ Tami Story Director
Tami J. Story
/s/ Rory J. Stevens Director
Rory J. Stevens
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
3.1 Articles of Incorporation 36
3.2 Bylaws --
4.1 See Exhibit 3.1 and Exhibit 3.2 --
10.1 NASA Agreement; incorporated by reference to
Exhibit 3a to the Registrant's Amended Form 10-K
for the fiscal year ended March 31, 1993 --
10.2 UURI Agreement; incorporated by reference to
Exhibit 3b to the Registrant's Amended Form 10-K
for the fiscal year ended March 31, 1993 --
10.3 Agreement dated January 25, 1994 among the Registrant,
Emerald Operating Company and Spectral International;
incorporated by reference --
10.4 Space Act Agreement between NASA and the Registrant
dated June 30, 1994; incorporated by reference --
10.5 Settlement Agreement and Release dated November 7,
1994; incorporated by reference --
10.6 Agreement dated February 16, 1995 between Graham,
Hamilton & Dwyer, Inc. and the Registrant;
incorporated by reference --
16.1 Letter re: change in certifying accountant
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Report and Consolidated Financial Statements
March 31, 1996 and 1995
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Earth Search Sciences, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of loss, of changes in shareholders' deficit
and of cash flows present fairly, in all material respects, the financial
position of Earth Search Sciences, Inc. and its subsidiaries (collectively, the
Company, a development stage company) at March 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the two years in
the period ended March 31, 1996 and for the period from inception (May 15,
1984) through March 31, 1996, in conformity with generally accepted
accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company is in the development stage and
has not generated operating revenues to date. In addition, the Company has
suffered recurring losses since its inception and, at March 31, 1996, has a
deficit aggregating $5,683,379 accumulated during its development stage and an
excess of current liabilities over current assets of $811,751. Such factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
Portland, Oregon
July 10, 1996
F-1
<PAGE>
JAMES L. HANSEN
CERTIFIED PUBLIC ACCOUNTANT
INDEPENDENCE SQUARE
111 East 5600 South, Suite 200
Salt Lake City, UT 84107
(801) 265-0515
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Earth Search Sciences, Inc.
I have audited the accompanying statements of operations, stockholders' deficit,
and cash flows of Earth Search Sciences, Inc. (a development stage company) for
the fiscal year ended March 31, 1994 and cumulative period from inception
(May 15, 1994) through March 31, 1994. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the results of operations of Earth Search Sciences, Inc.
and its cash flows for the fiscal year ended March 31, 1994 and the cumulative
period from inception (May 15, 1984) through march 31, 1994 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 of the notes
to finanical statements, the Company has suffered recurring losses from
operations and has anet capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ James L.Hansen
July 10, 1996
Salt Lake City, Utah
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31,
1996 1995
------ ------
<S> <C> <C>
Assets
Current assets:
Cash $ 670,325 $ 30,420
Prepaid expenses - 837
---------- ----------
Total current assets 670,325 31,257
Property and equipment (Note 2) 122,276 64,604
Deposit and other assets (Note 10) 129,776 -
---------- ----------
Total assets $ 922,377 $ 95,861
---------- ------------
Liabilities and Shareholders' Deficit
Current liabilities:
Convertible Notes payable (Note 5) $ 444,981 $ 405,816
Accounts payable 188,818 99,902
Accrued payroll taxes 34,000 -
Accrued interest (Notes 5 and 6) 314,277 258,361
Customer deposit (Note 3) 500,000 -
---------- ---------
Total current liabilities 1,482,076 764,079
Long-term liabilities:
Shareholder loans (Note 6) 96,519 878,977
Deferred officers' compensation (Note 4) 592,560 352,240
Minority interest (Note 9) 47,130
---------- ---------
Total liabilities 2,218,285 1,995,296
---------- ---------
Commitments and contingencies (Note 10) Shareholders' deficit (Note 1, 8 and 9):
Common stock $.001 par value; 200,000,000 shares
authorized; 66,551,663 and 50,000,000 shares, respectively,
issued 66,551 50,000
Additional paid-in capital 4,320,920 1,326,216
Deficit accumulated during the development stage (5,683,379) 3,275,087)
Treasury stock (4,501 shares at March 31, 1995) - (564)
---------- ---------
(1,295,908) (1,899,435)
---------- ----------
Total liabilities and shareholders' deficit $ 922,377 $ 95,861
---------- ----------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Consolidated Statement of Loss
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
From inception
(May 15, 1984)
through
March 31, For the years ended March 31,
1996 1996 1995 1994
----------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenue $ 21,332 $ 6,332 $ - $ -
---------- ---------- ---------- ----------
Expenses:
Exploration (Note 1) 997,835 150,419 14,865 97,492
Depreciation 218,558 20,004 16,327 17,575
General and administrative 4,138,176 2,143,013 952,500 158,415
---------- ----------- ---------- ----------
5,354,569 2,313,436 983,692 273,482
---------- ---------- ---------- ----------
Loss from operations (5,333,237) (2,307,104) (983,692) (273,482)
Interest income 10,002 6,762 - -
Interest expense (Notes 5 and 6) (439,144) (107,950) (138,849) (66,522)
----------- ---------- ---------- ----------
Loss before extraordinary item (5,762,379) (2,408,292) (1,122,541) (340,004)
Extraordinary item 79,000 - - -
----------- ---------- ---------- ----------
Net loss $(5,683,379) $(2,408,292) $(1,122,541) $ (340,004)
---------- ---------- ---------- ----------
Loss per common share (Note 1):
Loss before extraordinary item $ (.20) $ (.05) $ (.02) $ (.01)
Extraordinary item - - - -
----------- ---------- ---------- ----------
Net loss per common share
(Note 1) $ (.20) $ (.05) $ (.02) $ (.01)
--------- ---------- ---------- ----------
Weighted average shares
outstanding 28,857,000 53,150,421 49,543,726 44,246,566
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Consolidated Statement of Changes in Shareholders' Deficit
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
accumulated
Additional during the
Common stock paid-in development Treasury
Shares Amount capital stage stock Total
------ ------- ---------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at May 15, 1984 (date of inception) - $ - $ - $ - $ - $ -
Issuance of common stock to incorporators
for cash (Notes 1 and 9) 7,000,000 7,000 28,000 35,000
Net loss (604) (604)
---------- ------- -------- ------- ------- --------
Balance at March 31, 1985 7,000,000 7,000 28,000 (604) - 34,396
Issuance of common stock in connection with
public offering, net of offering costs of $23,892
(Notes 1 and 9) 2,129,100 2,129 80,434 82,563
Issuance of common stock in connection with
merger (Notes 1 and 9) 13,639,600 13,640 (12,640) 1,000
Net loss (27,451) (27,451)
---------- ------ ------- -------- -------- ---------
Balance at March 31, 1986 22,768,700 22,769 95,794 (28,055) - 90,508
Net loss (47,625) (47,625)
---------- ------ ------ -------- -------- ---------
Balance at March 31, 1987 22,768,700 22,769 95,794 (75,680) - 42,883
Acquisition of treasury stock (Notes 1 and 9) (33,000) (33,000)
Net loss (102,616) (102,616)
---------- ------ ------ -------- ------- --------
Balance at March 31, 1988 22,768,700 22,769 95,794 (178,296) (33,000) (92,733)
Net loss (123,463) (123,463)
---------- ------ ------ -------- ------- --------
Balance at March 31, 1989 22,768,700 22,769 95,794 (301,759) (33,000) (216,196)
Net loss (256,125) (256,125)
---------- ------ ------ -------- ------- --------
Balance at March 31, 1990 22,768,700 22,769 95,794 (557,884) (33,000) (472,321)
Issuance of common stock in exchange for
services rendered 1,944,977 1,945 56,655 58,600
Sale of treasury stock (Note 9) 98,500 26,000 124,500
Net loss (171,742) (171,742)
---------- ------ ------ -------- ------- --------
Balance at March 31, 1991 24,713,677 24,714 250,949 (729,626) (7,000) (460,963)
Issuance of common stock for cash 3,335,196 3,335 235,729 239,064
Issuance of common stock to a director pursuant
to stock option 1,000,000 1,000 9,000 10,000
Issuance of common stock in exchange for
services rendered 872,000 872 84,188 85,060
Issuance of common stock in exchange for
mineral properties (Notes 1 and 2) 1,500,000 1,500 73,500 75,000
Issuance of common stock in exchange for
equipment 140,000 140 7,768 7,908
Sale of treasury stock (Notes 1 and 9) 54,500 7,000 61,500
Net loss (749,259) (749,259)
---------- ------ ------ -------- ----- --------
Balance at March 31, 1992 31,560,873 31,561 715,634 (1,478,885) - (731,690)
Issuance of common stock for cash 2,308,611 2,308 78,192 80,500
Issuance of common stock in exchange for
services rendered (Notes 1 and 9) 1,810,000 1,810 52,583 54,393
Issuance of common stock in exchange for
notes payable or accounts payable 2,404,697 2,405 98,968 101,373
Net loss (333,657) (333,657)
---------- ------ ------- --------- ------ --------
Balance at March 31, 1993 38,084,181 38,084 945,377 (1,812,542) - (829,081)
Issuance of common stock for cash 2,043,904 2,044 67,456 69,500
Issuance of common stock in exchange for
services rendered (Notes 1 and 9) 125,000 125 6,125 6,250
Issuance of common stock in exchange for
notes payable or accounts payable (Notes 6 and 9) 8,405,094 8,405 241,490 249,895
Net loss (340,004) (340,004)
---------- ------ ------- --------- ------ --------
Balance at March 31, 1994 48,658,179 $48,658 $1,260,448 $(2,152,546) $ - $(843,440)
---------- ------ --------- ---------- ------ --------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Consolidated Statement of Shareholders' Deficit (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
accumulated
Additional during the
Common stock paid-in development Treasury
Shares Amount capital stage stock Total
------ ------ ---------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 48,658,179 $ 48,658 $1,260,448 $ (2,152,546) $ - $ (843,440)
Issuance of common stock for cash 360,000 360 17,640 18,000
Issuance of common stock in exchange for
services rendered, excluding treasury stock
(Notes 1 and 9) 200,000 200 9,800 10,000
Conversion of debentures and accrued interest
into shares of common stock, excluding
treasury stock (Note 9) 531,821 532 20,696 21,228
Issuance of common stock in exchange
for equipment (Note 9) 250,000 250 12,250 12,500
Common stock relinquished to the Company
(Notes 6 and 9) (705,935) (705,935)
Sale of treasury stock (Note 9) 95,325 95,325
Issuance of treasury stock in exchange for services
rendered (Notes 2 and 9) 169,141 169,141
Conversion of debentures through issuance of
treasury stock (Note 9) 273,787 273,787
Stock purchase warrants and options
(Notes 3 and 8) 172,500 172,500
Adjustment resulting from issuance of
treasury stock (Notes 1 and 9) (167,118) 167,118 -
Net loss (1,122,541) (1,122,541)
-------- ------- ----------- ---------- --------- ----------
Balance at March 31, 1995 50,000,000 50,000 1,326,216 (3,275,087) (564) (1,899,435)
Issuance of common stock for cash (Note 9) 1,058,88 1,059 191,341 192,400
Issuance of common stock in exchange for services
(Note 9) 1,379,355 1,379 271,497 272,876
Conversion of debentures and accrued interest
into shares of common stock (Note 9) 3,596,861 3,596 566,978 570,574
Liquidation of shareholders loans for shares
of common stock (Note 9) 10,466,567 10,467 695,468 705,935
Adjustment to additional paid-in-capital related
to sale of subsidiary common stock (Note 9) 109,970 109,970
Stock purchase warrants and options issued (Note 9) 1,150,000 1,150,000
Shares issued to a related party (Note 9) 50,000 50 8,450 8,500
Purchase of treasury stock (Note 9) (15,000) (15,000)
Adjustment resulting from issuance of treasury stock 1,000 (1,000) -
Sale of treasury stock 16,564 16,564
Net loss (2,408,292) (2,408,292)
---------- ------- ----------- ---------- -------- ---------
Balance at March 31, 1996 66,551,663 $ 66,551 $ 4,320,920 $(5,683,379) $ - $(1,295,908)
----------- ------- ---------- ---------- ------ ----------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-6
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
From inception
(May 15, 1984)
through For the year ended March 31,
March 31, 1996 1996 1995 1994
-------------- -------- ------- ------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,683,379) $ (2,408,292) $(1,122,541) $(340,004)
Adjustments to reconcile net loss to net cash used
in operating activities:
Notes payable issued for services and interest expense 36,892 - 22,892
Common stock issued for services and interest expense 560,169 322,974 28,765 7,538
Treasury stock issued for services 169,141 169,141 -
Expense resulting from issuance of warrants and options
to purchase common stock 1,322,500 1,150,000 172,500 -
Charge off of capitalized costs for mineral
properties 206,715 - - 80,000
Extraordinary items (79,000) - -
Depreciation 218,558 20,004 16,327 17,575
Loss (gain) on sale of equipment 997 (5,765) 6,762 (701)
Changes in assets and liabilities
Prepaid expenses (177) 837 263 (550)
Other assets (129,776) (129,776)
Accounts payable 205,697 88,916 (82,909) 8,879
Accrued interest 336,968 55,916 117,584 38,436
Accrued payroll taxes 34,000 34,000
Deferred officers compensation 592,560 240,320 352,240 -
Customer deposit 500,000 500,000
------------- ------------- -------- -------
Net cash used in operating activities (1,708,135) (130,866) (341,868) (165,935)
------------- ------------ --------- -------
Cash flow from investing activities:
Capital expenditures (407,588) (87,611) (27,695) (22,143)
Proceeds from sale of property and equipment 33,527 15,700 1,000 9,400
------------ ------------ --------- ----------
Net cash used in investing activities (374,061) (71,911) (26,695) (12,743)
------------ ------------ --------- ----------
Cash flows from financing activities:
(Decrease) increase in book overdraft - - (690) 690
Proceeds from notes payable 1,394,749 569,267 460,810 35,000
Repayments on notes payable (114,951) (9,062) (47,452) (27,001)
Proceeds from shareholder loans 1,186,694 145,000
Repayments of shareholder loans (848,423) (68,023) (127,010) (51,000)
Issuance of common stock 728,027 192,400 18,000 69,500
Issuance of subsidiary common stock 157,100 157,100 - -
Purchase of treasury stock (48,000) (15,000) - -
Proceeds from sale of treasury stock 297,325 16,000 95,325 -
------------ ------------ ---------- -----------
Net cash provided by financing activities 2,752,521 842,682 398,983 172,189
------------ ------------ ---------- -----------
Net increase (decrease) in cash 670,325 639,905 30,420 (6,489)
Cash at beginning of period - 30,420 - 6,489
------------ ------------ ---------- -----------
Cash at end of period $ 670,325 $ 670,325 $ 30,420 $ -
------------ ------------ ---------- -----------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-7
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Earth Search Sciences, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Operations and Significant Accounting Policies
The Company was incorporated on May 15, 1984 pursuant to the laws of the
state of Utah under the name Turnabout Corporation. In November, 1984 the
Company commenced a public offering of its common stock.
In December, 1985 the Company acquired all of the outstanding shares of
common stock of a privately held company known as Earth Search Sciences,
Inc. (ESSI), a Utah corporation formed on August 29, 1985. The Company
issued 13,639,600 shares of its common stock in exchange for ESSI's
outstanding shares. This merger was a reverse acquisition and accounted for
as a pooling of interest. Accordingly, the assets and liabilities of the
two companies were combined at their recorded net book values. ESSI's
principal assets were unpatented mining claims in Alaska that were acquired
from ESSI's incorporators at a cost of $126,715. ESSI's operations were the
continuing operations of the Company, and ESSI was the entity which had
substance and control both before and after the merger.
In August, 1987 the Company changed its name to Earth Search Sciences, Inc.
and in November, 1987 ESSI was dissolved.
The Company has three subsidiaries: Earth Search Resources, Inc.;
Bear Creek Exploration, Inc. ("Bear Creek"); and Quasar Resources, Inc.
("Quasar"). As of March 31, 1996, these entities were not operational;
however, in February 1996, the Company sold 30 percent of Quasar in a
private placement offering. See Note 9.
The Company's activities have included the acquisition of the ATM imagery
database which can be utilized by the Company in mineral property
exploration activities or the development of information that can be sold
to third parties (see Note 2). In addition, the Company has acquired
mineral properties and has performed certain exploration work. Direct
exploration costs incurred to date have been principally geologists'
salaries and consulting fees.
In April, 1991, the Company commenced entering into semiannual agreements
with National Aeronautics and Space Administration (NASA) to participate in
the Visiting Investigator Program ("VIP") to utilize the specialized
resources and sensing technology of NASA to the goal of commercialization.
The agreements allow the Company access to NASA's sophisticated facilities
that are capable of a full range of remote sensing activities. Pursuant to
the agreement NASA supplies administrative and technical support and the
Company is responsible for its expenses and costs relating to its
participation in VIP. Information and technology which may be developed are
to be shared between NASA and the Company.
In addition, the Company has established a non-exclusive agreement with the
University of Utah Research Institute ("UURI") and its center for remote
sensing to mutually conduct, on a project-by-project basis, research and
development activities relating to remote sensing. UURI is obligated to
provide technical support for mineral and petroleum exploration, related
environmental analysis and laboratory and field training. The Company
provides geological personnel and funding for the projects.
Going concern
The Company is experiencing working capital deficiencies because it has
incurred operating losses and has not generated operating revenues to date.
In addition the Company has been unable to meet some of its financial
obligations (see Note 6). The Company has operated with funds received from
the sale of its common stock and the issuance of notes. The ability of the
Company to continue as a going concern is dependent upon continued debt or
equity financings until or unless the Company is able to generate operating
revenues to sustain ongoing operations.
F-8
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Operations and Significant Accounting Policies (Continued)
Going concern (continued)
Management expects to continue to raise capital through private placement
of its unissued stock to meet its financial obligations and cash
requirements. In addition, management intends to pursue potential markets
for its ATM imagery database and for the potential results which may be
developed from its NASA VIP research and development agreement to generate
operating revenues and adequate cash flows. However, there can be no
assurance that the Company will be able to raise such capital or to
generate operating revenues to sustain its operations.
Development stage enterprise
The Company is considered a development stage company. The Company's
planned principal operations have commenced, but have not resulted in any
significant revenue to date. Pursuant to the requirements of Financial
Accounting Standards Board Statement No. 7, the Company has included in the
accompanying financial statements its cumulative results of operations,
changes in shareholders' deficit and cash flows from the Company's
inception (May 15, 1984) through March 31, 1996.
Mineral properties and exploration costs
Cost incurred to acquire mineral properties are capitalized. Costs
associated with mineral properties determined to be impaired or to have
little or no value are expensed. Exploration costs are expensed in the
period incurred. The Company considers geologist salaries, studies of
geologic structures, mapping and incidental expenditures incurred in the
field to assess mineral deposits as exploration costs.
Depreciation and depletion
The Company recognizes depreciation on its property and equipment using the
straight-line method over estimated useful lives of five years.
Depletion of mineral properties is calculated using the unit-of-production
method. There has been no mining activity performed by the Company on its
mineral properties to date; therefore, no depletion is reflected in the
accompanying financial statements.
Income taxes
Effective April 1, 1994, the Company adopted on a prospective basis
Statement of Financial Accounting Standards No. 109 (FAS 109), Accounting
for Income Taxes. FAS 109 requires the recognition of deferred tax assets
and liabilities for the expected tax effects from differences between the
financial reporting and tax basis of assets and liabilities. In estimating
future tax effects, FAS 109 generally considers all expected future events
other than enactments of changes in tax law or statutorily imposed rates.
The adoption of FAS 109 had no effect on loss or shareholders' deficit.
Common stock
Expenses and commissions incurred in connection with the Company's public
offering of its common stock and the subsequent sales of common stock for
cash have been recorded as reductions of proceeds received.
Common stock issued for other than cash consideration is reflected in the
accompanying financial statements at estimated fair value at the date of
issue, considering the restricted nature of such shares.
F-9
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Operations and Significant Accounting Policies (Continued)
Dividends
The Company has not paid any dividends and does not expect to pay dividends
in the near future.
Treasury stock
Treasury stock is recorded at cost. Sales of treasury stock at amounts in
excess of or below cost, net of selling expenses, have been recorded as
increases/decreases in additional paid-in capital.
Net loss per common share
Net loss per common share has been computed based on the weighted average
number of the Company's common shares outstanding. Common stock equivalents
from the exercise of stock options and warrants and from the conversion of
convertible debentures and shareholder loans to common stock have not been
considered in the net loss per share calculation because the effect on net
loss per share would be anti-dilutive.
Changes in classification
Certain reclassifications have been made to the fiscal 1995, 1994 and
cumulative financial statements to conform with the financial statement
presentation for fiscal 1996. Such reclassifications had no effect on the
Company's results of operations or shareholder's deficit.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Financial instruments
The Company records financial instruments at cost which approximates fair
value, unless otherwise stated.
2. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31,
1996 1995
-------------- --------------
<S> <C> <C>
Mineral properties (A) $ 5,833 $ 5,833
ATM imagery database (B) 134,000 134,000
Computers and software 44,852 41,529
Vehicles and equipment 41,529 54,527
Construction in progress (C) 69,789 -
-------- --------
296,003 235,889
Accumulated depreciation (173,727) (171,285)
-------- --------
$122,276 $ 64,604
------- -------
</TABLE>
F-10
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
2. Property and Equipment (Continued)
(A) In December, 1993 the Company acquired a 58% working interest in
mineral tracts aggregating 3,389 acres in Colorado. The mineral
interest was acquired through a joint venture with Emerald
Operating Company located in Denver, Colorado. Presently,
management is evaluating the commercial viability of the property
and the Company has expended $15,000 in geological exploration
costs.
Effective July 1, 1991, the Company consummated the acquisition of 314
unpatented lode mining claims in Owhyee County, Idaho, commonly
referred to as Jordan Valley. The mineral property was acquired in
exchange for 1,500,000 shares of the Company's common stock. The
seller's basis in the mineral property approximated $75,000, the value
of the restricted common shares at the date (January 30, 1991) the
Company entered into the option to acquire the property. During the
year ended March 31, 1994, management of the Company elected not to
continue to maintain this property and perform the assessment work.
Accordingly, the cost of these claims was recognized as exploration
expense in fiscal 1994.
In June 1988, the Company acquired 291 mining claims covering
approximately 5800 acres in the Shasta Butte area in Oregon for $5,000.
During the year ended March 31, 1994, management of the Company
declined to pursue obtaining the necessary lease agreements and to pay
the required advance royalties to maintain these claims. Accordingly,
the cost was recognized as exploration expense in fiscal 1994.
Prior to March 31, 1992, the Company had title to five unpatented
mining claims in the Bonnefield mining districts in Alaska. The claims
were acquired from the incorporators of ESSI at a cost of $126,715.
During the year ended March 31, 1992, the annual assessment work was
not performed and the Company elected not to maintain these mining
claims. Accordingly, the cost was recognized as exploration expense in
fiscal 1992.
(B) In the summer of 1987, the Company obtained a database providing
airborne multispectral scanner imagery over sites in Oregon and
Nevada. The imagery, gathered by an airplane using a thematic
mapper scanner, was recorded on high density digital tape and
later decompressed into computer compatible data. This database
includes imagery produced in photographic form (hard copy) as well
as the data on digital tape. Such imagery was then interpreted by
a geologist having expertise in the ATM method. The initial
interpretation was completed in June, 1988 and produced
approximately 500 anomalies that necessitate exploration work to
determine mineralization.
The Company capitalized the costs of acquiring this database. The
database can be used for identification of potential mineralization as
well as for oil and gas exploration and other purposes for which
geology is a major consideration. The Company intends to utilize this
imagery database for potential sale of information to third parties,
such a large mining companies that desire to investigate mineralization
of large areas over a short period of time, and for use in the
Company's own mineral exploration activities.
The cost of ATM imagery database was fully depreciated as of March 31,
1994; however, the Company believes that it continues to have economic
value.
(C) In September 1995, the Company entered into an agreement to have
an Australian company manufacture an airborne hyperspectral
scanner for $2.5 million. The Company has paid $69,789 to date
(recorded in construction-in-progress at March 31, 1996)
and expects to pay the remainder in fiscal 1997 as contract work
is completed.
F-11
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. Customer Deposit
In 1996, the Company received a $500,000 deposit through its subsidiary
Earth Search Resources, Inc. for the sale of an airborne hyperspectral
scanner which is currently in production (see Note 2). This instrument is
expected to be leased back to the Company in a "sales/leaseback"
transaction. To date, the terms of the agreement have not been formalized.
As such, the deposit has been recorded as a current liability at March 31,
1996.
4. Deferred Officers' Compensation
Deferred compensation consists of the cumulative compensation due to
corporate officers (Chairman, President and Secretary). No salaries have
been paid to such officers since the inception of the Company. The Company
recorded deferred officer compensation of $240,320 during the year ended
March 31, 1996. In addition, effective March 31, 1995, the Company's board
of directors approved cash compensation aggregating $300,000 and $52,240
for the Chairman and Secretary, respectively, for services rendered through
March 31, 1995. Such compensation was reported as general and
administrative expenses for the year ended March 31, 1995. The Company and
the officers have agreed that payment of the 1995 and 1996 compensation
will be deferred until and unless the Company achieves adequate cash flow
from operations. To date management has not anticipated sufficient cash
flow from operations for the succeeding year; accordingly, the deferred
officers' compensation has been classified as a noncurrent liability in
the accompanying consolidated balance sheet at March 31, 1996 and 1995.
In addition, as part of the Chairman's compensation package, the Company,
as of March 31, 1995, granted the Chairman stock options to purchase
1,500,000 shares of restricted common stock at $.105 per share. The options
hold certain registration rights and expire on March 31, 2005. The Company
recognized the estimated fair value of the options, $157,800, as general
and administrative expenses for the year ended March 31, 1995, with a
corresponding increase to additional paid-in capital as of March 31, 1995.
The estimated fair value of the options represents the difference between
the market value of common stock at March 31, 1995 (the date of grant) and
the exercise price. See Note 8 regarding 1996 issuance of stock options to
officers.
5. Notes Payable
During the years ended March 31, 1996 and 1995, the Company obtained
interim working capital by issuing unsecured promissory notes with rights
of conversion. The terms of these debt instruments are typically for an
initial period of ninety days or one year and are renewable at maturity for
one year. The notes bear interest at 12.5% to 12.99%. Holders of the
notes have the right to convert the principal amount plus interest into
restricted shares of the Company common stock, subject to the terms in the
promissory notes. As of March 31, 1996 and 1995, the Company has various
notes aggregating $444,981 and $405,816, respectively. Interest paid on
such notes during the years ended March 31, 1996, 1995 and 1994 aggregated
$2,500, $2,500, and $23,164, respectively.
F-12
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. Shareholder Loans
The Company has financed its development stage activities in part by funds
received from advances from shareholders, primarily an officer and director
of the Company, and Universal Search Technology, a private company owned by
that same officer and director. It is anticipated that these advances will
be repaid when and if the Company generates cash flow from operations
and/or sales of shares of its common stock. During the year ended March 31,
1994, upon approval by the board of directors, the Company issued 7,953,567
shares to Universal Search Technology in exchange for principal reduction
aggregating $238,607 on outstanding advances previously made by it.
In fiscal 1995, the Company classified as shareholder loans the value of
common stock relinquished by the above shareholder to the Company (see Note
8). The Company reissued replacement shares to the shareholder in
satisfaction of this obligation in 1996, subsequent to the shareholders'
approved of an increase in the number of shares authorized. This obligation
aggregated $705,935 (10,466,567 shares of common stock) at March 31, 1995
and accrued interest at 10%. The accrued interest of has not been paid as
of March 31, 1996.
Outstanding shareholder loans bear annual interest at 10%. As of March 31,
1996 and 1995, interest accrued on such advances, aggregating $217,513 and
$168,861, respectively, has been included in accrued interest in the
accompanying consolidated balance sheet.
Shareholder loans are reflected as a noncurrent liability in the
accompanying consolidated financial statements due to: a) the undefined
terms of repayments, b) the inability of the Company to repay the advances
unless and until it achieves positive cash flow, and c) the possibility
that the obligations will be satisfied through the issuance of shares of
the Company's common stock.
7. Income Taxes
The Company recorded no provision for income taxes in fiscal 1996, 1995 and
1994 due to the operating losses incurred from inception to date.
The tax effect of temporary differences between financial reporting and the
tax bases of assets and liabilities relate to the following:
<TABLE>
<CAPTION>
March 31,
1996 1995
--------- -----------
<S> <C> <C>
Net operating loss carryforwards $(2,036,328) $(1,169,139)
Accrued liabilities (237,024) (140,896)
---------- ----------
Gross deferred tax assets (2,273,352) (1,310,035)
Deferred tax assets valuation allowance 2,273,352 1,310,035
---------- ----------
$ - $ -
---------- ----------
</TABLE>
The deferred tax asset has been fully reserved in accordance with FAS 109
because the Company cannot anticipate future taxable income to realize the
potential benefits of the gross deferred tax asset.
F-13
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Income Taxes (Continued)
The benefit for income taxes differs from an amount computed using the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Benefit from income taxes at statutory rate $ 963,317 $ 449,016 $ 136,002
Decrease in benefit resulting from:
Deferred tax valuation allowance (963,317) (449,016) (136,002)
--------- -------- --------
$ $ - $ -
------- -------- --------
</TABLE>
The Company has tax net operating loss carryforwards at March 31, 1996 of
$5,090,819. Such carry-forwards may be used to offset taxable income, if
any, in future years through their expiration in 2000 - 2011. Future
expiration of tax loss carryforwards, if not utilized are as follows: 2000,
$604; 2001, $27,451; 2002, $47,625; 2003, $102,616; thereafter $4,912,523.
The annual amount of tax loss carryforwards which can be utilized may
be limited due to the substantial changes in the Company's ownership
which have occurred or may occur in the future. Such limitations could
result in the expiration of a part of the carryforwards before their
utilization.
8. Officer and Director Stock Options
At March 31, 1995 the board of directors awarded the chairman stock options
to purchase 1,500,000 shares of restricted common stock as part of his
deferred compensation agreement. See Note 4.
In April 1995, the Board of Directors granted options for the Company's
President and Chairman of the Board through employment agreements to each
purchase 5,000,000 shares of the Company's common stock at an exercise
price of $0.21 per share. Fifty percent of the options are exercisable at
any time. The remaining fifty percent are deemed "Performance Options" and
are exercisable as follows: (I) one-third shall become exercisable if and
when the Company reports a positive net after tax profit for any fiscal
year commencing on or after March 31, 1995; (II) another one-third shall
become exercisable if and when the Company reports a net after tax profit
of greater than $1 million for any fiscal year commencing on or after March
31, 1996; (III) all of the options shall become exercisable if and when the
Company reports a net after tax profit of greater than $2 million for any
fiscal year commencing on or after March 31, 1996; and IV) any remaining
options which have not become exercisable as aforesaid shall become null
and void when the Company reports its net after tax profits or losses for
the fiscal year ended March 31, 1998. Any options remaining unexercised on
December 31, 2004 shall lapse and be deemed null and void. The Company
recognized $1,100,000 in compensation expense during 1996 related the
granting of the above "non-performance" stock options which represents the
difference between fair value and the exercise price at the grant date. No
compensation expense has been recorded for the performance options todate;
however the total compensation to be recorded if any will be based on the
difference between the exercise price and the fair market value of the
common stock on the date the performance criteria are achieved.
Notwithstanding the foregoing, all Performance Options issued to these
employees become immediately exercisable if employment is terminated by the
Company without cause or by the employee with cause. In the event of
proposed dissolution or liquidation of the Company or in the event of a
transfer of more than 50% of the outstanding shares of the Company, or the
sale of all or substantially all of the assets of the Company, to a person
or persons who were not, as of April 8, 1995, shareholders or employees of
the Company (a "Change in Control"), all Performance Options become
immediately exercisable.
F-14
<PAGE>
Earth Search Sciences, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. Officer and Director Stock Options (Continued)
In September 1995, the Board of Directors granted options for the
Company's Secretary/Treasurer to purchase 300,000 shares of common
stock at an exercise price of $0.21 per share exercisable upon grant.
In addition, options were granted to a director of the Company to
purchase 1,000,000 shares of common stock of the Company at a purchase
price of $0.21 per share. The director's options are exercisable at any
time within five years after the individual becomes a full-time employee
of the Company based on certain mutually agreeable performance criteria.
The company recognized $50,000 in compensation expense during 1996 related
to the granting to the above stock options to the Secretary/Treasurer,
which represents the difference between fair value and the exercise price
at the grant date. No compensation expense has been recognized related to
the directors stock options as the individual has not become a full-time
employee as of March 31, 1996
9. Shareholders' Equity
Common stock issued
Upon incorporation in May 1984, the Company issued seven million shares of
common stock at a price of $.005 per share to the incorporators.
In November 1984, the Company commenced a public offering of its common
stock and issued 2,129,100 shares at a price of $.05 per share. The Company
incurred costs for commissions and legal and accounting services associated
with the public offering. These costs aggregated $23,892 and were recorded
as a reduction to the proceeds.
In December 1985, the Company issued 13,639,600 shares of common stock in
exchange for all outstanding shares of common stock of ESSI (see Note 1).
The par value of the common stock issued in the merger aggregated $13,640.
However, after taking into account assets received and liabilities
recognized, net equity aggregated $1,000.
During the years ended March 31, 1996, 1995 and 1994, the Company issued
shares of common stock in exchange for services rendered as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
Consulting and other $ 273,440 $ 179,141 $ 6,250
--------- --------- --------
Number of shares issued, including
treasury stock 1,379,355 4,902,833 125,000
--------- --------- --------
</TABLE>
During the fiscal year ended March 31, 1996, 1995 and 1994, the Company
issued 3,596,861, 5,499,388 and 451,527 shares of common stock (including
treasury stock) to satisfy $521,040, $276,250 and $10,000, respectively, of
principal and $49,534, $18,765 and $1,288, respectively, of interest
relating to convertible notes payable (see Note 6).
During the year ended March 31, 1995, the Company issued 250,000 shares of
common stock to purchase office equipment with a purchase price of $12,500.
F-15
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Earth Search Sciences, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
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9. Shareholders' Equity
Common stock loans from shareholder
In fiscal 1995, a shareholder relinquished to the Company 10,466,567 shares
of common stock for the Company to use for additional issuances to outside
shareholders. The shareholder relinquished all ownership and voting
rights; however, the Company was obligated to reissue to the shareholder
10,466,576 replacement shares upon the shareholder approval of the
proposed increase in authorized shares from 50,000,000 to 200,000,000.
These shares were accounted for as treasury stock and the Company recorded
a liability of $705,935 due to shareholder for the fair value of the shares
relinquished. Such obligation were included in shareholder loans in the
accompanying consolidated balance sheet at March 31, 1995. The Company
received shareholder approval in 1996 to increase the number of shares
authorized and as such, the above shares were reissued to the shareholder
in 1996.
Treasury stock
In May 1987, the Company acquired 3.3 million shares of its common stock
from three of its initial incorporators. The purchase price was $33,000, or
$.001 per share. Funding for the stock acquisition was obtained through
loans from certain shareholders of the Company,
During the year ended March 31, 1991, the Company sold 2,600,000 shares of
its treasury stock in eleven separate transactions, resulting in aggregate
proceeds of $129,500. Prices for the shares ranged from $.03 per share to
$.12 per share with the average price approximating $.05 per share. Selling
expenses paid from the proceeds totaled $5,000.
During the fiscal year ended March 31, 1992, the Company sold the then
remaining 700,000 shares of its treasury stock in five separate
transactions aggregating $61,500. Prices ranged from $.05 to $.125 per
share.
In fiscal 1995, the Company issued 10,462,066 shares of its treasury stock
for cash, services and debt conversions. The excess cost of the treasury
stock issued over the amounts received aggregated $167,118 and has been
recorded as a reduction of additional paid-in capital.
Stock warrants
Warrants to purchase 1,500,000 shares of common stock at $.21 per share
were issued to an investment banker in connection with financial advisory
services provided. The estimated fair value of the warrants aggregated
$15,000. Such value was recorded as general and administrative expenses for
the year ended March 31, 1995, with a corresponding increase to additional
paid-in-capital as of March 31, 1995. The warrants expire on March 1, 2000.
Private Placement of Quasar Common Stock
In February 1996, Quasar, a wholly owned subsidiary, issued 314,200 shares
at $.50 per share of its common stock, in a private placement offering. As
the Company owns a majority interest in Quasar, the subsidiary's financial
statements are consolidated into the parent. Accordingly, the Company has
recorded a minority interest of $47,130 relating to the outside investors'
share of net equity in Quasar. The difference between the stock proceeds of
$157,100 and the minority interest of $47,130 has been recorded as an
addition to paid-in capital.
Related Party Common Stock Issuance
In December 1995, the Company issued 50,000 shares of common stock to a
relative of the Chairman. The fair value of the common stock issued was
recorded as a reduction in the Chairman's shareholder loan balance as and
as an increase in common stock and additional paid-in capital.
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Earth Search Sciences, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. Acquisitions
In June 1995, the Company entered into a letter of intent to acquire all
outstanding shares of an engineering and professional services company for
$3,000,000 in cash and a note payable for an additional $500,000. In
addition, pursuant to the letter of intent, cash or additional shares of
the Company's common stock with an aggregate value of up to $750,000 may
have been issuable if certain levels of earnings were attained during the
three years following the consummation of the acquisition. The engineering
company had 1994 sales of approximately $6,900,000 and was profitable. The
Company planned to finance the acquisition through either a private
placement of its common stock or issuance of convertible debentures. The
proposed transaction was subject to numerous contingencies, including (i)
reaching definitive agreements with the seller; (ii) obtaining approval of
the board of directors (iii) conducting additional due diligence procedures
and (iv) obtaining adequate financing. In subsequent negotiations held
during fiscal 1996, the Company has not raised the required capital to
finance the acquisition. The Company is the acquisition: However, no
mutually agreeable terms has be obtained to date. As of March 31, 1996,
the Company has deferred $119,776 in acquisition related costs which are
recorded as other long-term assets.
In fiscal 1996, the Company entered into an agreement to purchase twenty
percent of a Kazahstan "joint stock" company, Semtech. As of March 31,
1996, the Company has paid $10,000 of the $30,000 purchase price and has
recorded the payment as a deposit in long-term assets. The Company paid the
remainder of the purchase price subsequent to year end.
11. Subsequent Events
Subsequent to March 31, 1996, the Company received a second deposit of
$500,000 through its subsidiary Earth Search Resources, Inc. for the sale
of a second airborne hyperspectral scanner which will be produced in fiscal
1997. This instrument will be leased back to the Company in a "sales/
leaseback" transaction. To date, the terms of the agreement have not been
finalized (See Notes 2 and 3).
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