SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
Date of report (date of earliest event reported):
JANUARY 15, 1997
EARTH SEARCH SCIENCES, INC.
(Exact name of registrant as specified in its charter
State of Utah 0-19566 87-0437723
(State of Incorporation) (Commission (I.R.S. Employer
File No.) Identification No.)
502 North 3rd Street, Suite #8, McCall, Idaho 83638
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:
(208) 634-7080
No Change
(Former Name or Former Address, if changed since last report)
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Item 5. OTHER EVENTS.
On January 10, 1997, the Company filed a declaratory relief action against
the Idaho Department of Finance in the District court of the Fourth Judicial
District of the State of Idaho, in and for the County of Valley, Civil
No.CV-97-000C. The Company's declaratory relief action seeks a declaration
from the court that the Company did not violate the Idaho Securities Act with
regard to certain transactions taking place subsequent to April 1, 1994. The
Company's declaratory relief action was filed in response to repeated threats
by the Department that it would file suit against the Company.
On January 10, 1997, the Department of Finance filed suit against the
Company and its Chairman, Larry Vance, in the District Court of the Fourth
Judicial District of the State of Idaho, in and for the County of Ada, Civil
No. CV OC 9700155D. The Department's complaint set forth five counts, alleging
that the Company and Mr. Vance (1) sold unregistered securities to Idaho and
non-Idaho residents in violation of Idaho law, (2) acted as broker-dealer or
securities salesmen without having registered as such, (3) made untrue
statements of material facts in violation of the Idaho antifraud law, (4) by
making said untrue statements of material facts, engaged in a practice which
operates as a deceit upon persons, and (5) distributed press releases and other
written literature without filing same with the Director of the Idaho Department
of Finance in violation of the Department's rules.
The Department's complaint seeks the following relief: (A) a declaration
that the Company and Mr. Vance have violated Idaho law, (B) entry of a
permanent injunction enjoining the Company and Mr. Vance from violating Idaho
law, (C) entry of a permanent injunction prohibiting the Company and Mr. Vance
from claiming the availability of, using or offering or selling securities,
under any exemptions under Idaho law without seeking the prior written consent
of the Director of the Department, (D) an order requiring the Company and Mr.
Vance to make an offer of rescission to all persons who purchased or received
securities sold by the Company or Mr. Vance in violation of Idaho law, (E) an
order requiring the Company and Mr. Vance to pay a penalty of $10,000 for each
violation of Idaho law, and (F) an award to the State of its attorneys fees and
costs.
With respect to sales of securities violation of the registration
requirements of Idaho law, the Company believes it may have misunderstood
certain state regulations in completing transactions with a limited number of
Idaho-based investors. The Company is preparing to offer approximately 19 Idaho
residents offers of rescission which, if accepted by all offerees, would costs
the Company an aggregate of $143,540. The Company does not believe it
violated the laws of any other state or any federal laws and regulations, and
vehemently denies all other allegations made in the Department's complaint.
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The Company in particular intends to vigorously oppose the Department on
the issue of whether the Company has made any untrue statements of material
facts. The Department included seven specific allegations of untrue statements
in its complaint. The Department's allegation and the Company's response are
set forth below:
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DEPARTMENT ALLEGATION COMPANY RESPONSE
<S> <C>
A. Defendants represented to offeree The Company has never denied that it pays
and/or investors that principal corporate compensation to Dr. Peel and it has
officers did not receive compensation for accrued compensation for Mr. Vance that
services rendered, when it fact, will be paid only when the Company
compensation was received by principal generates revenues. All information
corporate officers. regarding officer compensation has been
properly disclosed in the Company's SEC
filings and in the Company's audited
financial statements.
B. Defendants represented to certain The Company's 10-K's, 10-Q's,
offeree and/or investors that ESSI owned shareholder letters and press releases
certain remote sensing equipment, when in accurately reflect that state of development
fact, ESSI owned no such equipment. and the Company's ownership interest in
the ESSI Probe 1 instrument. In fact, the
Company has filed a copy of its contract
with Integrated Spectronics for the
manufacture and acquisition of ESSI Probe 1
as an exhibit to its Form 10-K for the
year ended March 31, 1996.
C. Defendants represented to offeree The Company has properly disclosed the
and/or investors that they had contract existence and nature of all of its material
with major well-known corporations and contract, and has never misrepresented the
suggested that such contracts would be revenue potential of these contracts. The
revenue producing, when in fact, such Company's financial statements and filings
contracts were not revenue producing. with the SEC accurately reflect the only
revenues received by the Company to date
(from one of such contracts).
D. Defendants represented to offeree In response to their allegation, the Company
and/or investors that they would have the only converted promissory notes with the
right to convert promissory notes into prior consent or knowledge of investor. In
stock, when in fact, promissory notes were fact, the Company has signed authorization
automatically converted to stock without the for all conversions, except four. For those
prior consent or knowledge of investors. isolated transactions taking place in 1995,
the Company made the conversion based on the
oral directions of the noteholders. Since the
Department's concerns came to light, the
Company contacted the noteholders and exchanged
their stock for payment in full of their
promissory notes. Except for these isolated
instances, which have been rectified to the
satisfaction of the investors, the Company has
no knowledge of any other conversions of a note
without the written authorization of the
noteholder.
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E. Defendants represented to offeree and/or The Company does not understand the
investors that ESSI owned subsidiary Department's allegation regarding
companies, however, no disclosures subsidiaries. The Company's financial
regarding said companies were in financial statements and SEC filings properly disclose
documents or SEC filings. all material subsidiaries and their respective
business activities, if any.
F. Defendants represented to offeree The Company has properly disclosed its
and/or investors that ESSI "holds a majority interest in the Kazakstan joint stock
equity interest in the mineral concession in company SEMTECH and SEMTECH's possession
a region of Kazakstan" where Defendants of a mineral concession for the Polygon
claim there is a "remarkable concentration region of Kazakstan. The Company quoted
of potentially viable precious and base from a report prepared by Behre Dolbear &
metals properties," when in fact, ESSI does Company, independent consultants, regarding
not have any binding agreement giving it a the potential quality of the mineral
majority equity interest in a mineral deposits in the Polygon region, and has
concession in Kazakstan. made no representation to anyone concerning
the presence or nature of mineral reserves
in the Polygon region. The Company recognizes
that doing business in Kazakstan entails
a higher degree of unpredictability and risk
than doing business in the United States or
other, more developed nations. The Company
has disclosed its concerns about the risk
profile most recently in its Form 10-Q for
the quarter ended September 30, 1996.
G. Defendants represented to offeree The Company never represented in any of
and/or investors that ESSI acquired Lamb its SEC filings that it closed the acquisition
Associates, Inc., an engineering and of Lamb Associates, Inc. The Company had a
technical services firm, when in fact, binding agreement to purchase Lamb Associates,
ESSI did not acquire Lamb Associates, Inc. Inc., but never obtained the financing
necessary to close the transaction. All of
this was fully disclosed in the Company's
SEC filings, including most recently in
the Company's Form 10-K for the year ended
March 31, 1996. In January 1996, the Company
and William Lamb renegotiated the transaction
documents to accommodate a closing without
financing. Mr. Lamb issued a press release
at the time of the renegotiation indicating
that the transaction would be closing. The
Company withdrew its offer to close the
transaction when it learned that Lamb
Associates' revenues and earning were less
that had been projected by Lamb Associates.
The Company never misrepresented the nature
of the Lamb Associates transaction.
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The Company is very disappointed that the Department has chosen to file its
complaint. The Company requires financing to complete the development and
implementation of its business plan. There can be no assurance given the
existence of the complaint that the Company will obtain the required financing.
The Department had offered to settle the complaint on terms that would have
required the Company to admit that it had unmade untrue statements of material
facts. The Board of Directors of the Company considered the offer of settlement
but rejected it because the admission would have potentially undermined the
Company's credibility. During the pendency of the Department's lawsuit, the
Company intends to defend its credibility vigorously, and to try its hardest to
conduct business as though the complaint does not exist.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
EARTH SEARCH SCIENCES, INC.
(Registrant)
By /s/ Larry F. Vance
Larry F. Vance
Chairman and Director
January 15, 1997
