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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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 0-21635
Global Diamond Resources, Inc.
(Name of Small Business Issuer in its charter)
Nevada 33-0213535
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
836 Prospect Street, Suite 2B
La Jolla, California 92037
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (619) 459-1928
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None N/A
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Securities to be registered under Section 12(g) of the Act:
Common Stock, $.0005 par value
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(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
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Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained in this form, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [_]
The market value of the voting stock held by non-affiliates of the registrant as
of March 23, 1998 was approximately $7,036,472.
The number of shares of the Common Stock outstanding as of March 23, 1998 was
24,075,890.
Documents incorporated by reference: None.
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Part I
Item 1. Description of Business.
Business Development
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Certain mining and geological terms used below are defined in the section
"Glossary," below. The Company has entered into certain financial commitments
payable in Rand, the unit of currency of the Republic of South Africa. All Rand
based amounts are designated by the symbol R. As of March 23, 1998, the Rand-
Dollar exchange rate was 4.979 Rand to one U.S. Dollar. Unless otherwise
indicated, all share information contained in this report has been adjusted to
give effect for a two for one split of the outstanding shares of Common Stock
effected on December 19, 1997.
Global Diamond Resources, Inc., a Nevada corporation ("Company"), was
formed under the laws of the State of Nevada on January 7, 1987 under the name
Lohengrin, Inc. for the purpose of conducting an unspecified offering of its
securities and then applying the net proceeds towards the acquisition of one or
more businesses. In March and April 1987, the Company conducted a public
offering of 69,334 shares of its Common Stock pursuant to an offering statement
on Form 1-A filed with the Securities and Exchange Commission. In that public
offering, the Company sold 48,534 shares at an offering price of $1.44 per
share. From April 1987 to March 1988, the Company's operations consisted solely
of the investigation of acquisition candidates.
In March 1988, the Company entered into an Agreement of Merger and Plan of
Reorganization ("Western Capital Agreement") pursuant to which it acquired all
of the outstanding common shares of capital stock of Western Capital Leasing
Corporation, a California corporation engaged in the business of equipment
financing. At that time, the Company changed its corporate name to Western
Capital Financial Corporation. Pursuant to the Western Capital Agreement, the
Company issued to the stockholders of Western Capital Leasing Corporation
182,626 shares of the Common Stock of the Company. Between March 1988 and March
1992, the Company acted as a holding corporation for its wholly-owned
subsidiary, Western Capital Leasing Corporation. However, as a result of
declining interest rates and an economic recession, Western Capital Leasing
Corporation's business became less profitable to the point that in 1992 Western
Capital Leasing Corporation discontinued active business operations. Between
March 1992 and July 1995, the Company and Western Capital Leasing Corporation
were both inactive.
In July 1995, the Company acquired all of the outstanding shares of common
stock of Global Diamond Resources Inc. ("Global Diamond-BC"), a British Columbia
corporation. At the time, Global Diamond-BC served as a holding company for its
South African operations. Pursuant to a Securities Purchase Agreement and Plan
of Reorganization dated July 17, 1995, the Company acquired from the
shareholders of Global Diamond-BC all of the issued and outstanding capital
shares of that corporation in exchange for the Company's issuance of 8,830,000
shares of Common Stock of the Company (representing 95% of the issued and
outstanding shares of the Common Stock after giving effect to the
reorganization) and warrants to purchase 1,100,000 shares of Common Stock, at
Canadian $.375 per share, expiring on December 31, 1997. The terms of the
reorganization were the result of arm's-length negotiations between management
of the Company and management of Global Diamond-BC. Prior to the consummation
of the reorganization, the Company divested itself of its interest in Western
Capital Leasing Corporation by selling all of the issued and outstanding shares
of the common stock of Western Capital Leasing Corporation to its founder,
Weston J. Coolidge, for $1.00. At the time of the divestiture, Western Capital
Leasing Corporation was a dormant corporation without assets or operations of
any kind. Subsequent to the reorganization, the Company changed its corporate
name to Global Diamond Resources, Inc.
On December 5, 1997, the Company entered into a Securities Purchase
Agreement with International PCM Holdings Limited ("PCM") pursuant to which PCM
has invested $4,600,000 in the Company with a commitment to advance an
additional $1,400,000 subject to the fulfillment of certain conditions. Under
the terms of the Agreement, PCM purchased 7,050,482 shares of Common Stock for
the purchase price of $3,000,000. In addition, PCM agreed to lend the Company
up to $3,000,000 pursuant to a Secured Convertible Promissory Note in the
original principal amount of $3,000,000 issued by a wholly-owned offshore
subsidiary of the Company. To date, PCM has advanced $1,600,000 under the Note
to the Company's subsidiary and has agreed to advance the balance
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of $1,400,000 at such time as the Company acquires government approval of the
mineral lease for the Caerwinning Deposit. See "Business of the Issuer - The
Caerwinning Deposit." The Note issued to PCM is secured by 100% of the stock of
the Company's South African subsidiary, Global Diamond Resources (SA) (Pty)
Limited, which holds all of the Company's mining properties, plant and
equipment.
Under the terms of the Note, the outstanding principal accrues interest at
a rate of 15% per year, payable in arrears in bi-annual installments, with all
principal and interest due within five years from the date of the Note. The
principal and interest under the Note is convertible in to a maximum of
1,807,816 shares of Common Stock of the Company at the rate of $.425 per share.
The Note does not contain any penalties for prepayment, however the Note does
include certain negative and affirmative financial and operational covenants on
the part of the Company. In addition to the foregoing, PCM received warrants to
purchase up to 807,852 shares of Common Stock at prices ranging from $.25 to
$.375. On March 11, 1998, PCM exercised warrants to purchase 172,286 shares
of Common Stock at an exercise price of Cdn$.375 per share. The Company will
use the proceeds from the PCM financing to further its mining operations in
South Africa.
The Company has agreed to expand its Board of Directors to nine members and
appoint three nominees of PCM to the Board.
In December 1997, the Board of Directors approved a two for one split of
the outstanding shares of Common Stock of the Company and a change in its
authorized Common Stock from 25 million shares of $.001 par value Common Stock
to 50 million shares of $.0005 par value Common Stock. The effective date of
the split was December 19, 1997.
Unless the context otherwise requires, all references to the Company
include its wholly-owned subsidiaries, Global Diamond Resources Inc., a British
Columbia corporation, Global Diamond Resources (SA) (Pty) Limited, a South
African corporation, Global Diamond Resources International Limited, a British
Virgin Islands corporation, and Nabas Diamonds (Pty) Limited, a South African
corporation. The Company's executive offices are located at 836 Prospect
Street, Suite 2B, La Jolla, California 92037; Telephone (619) 459-1928.
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Business of the Issuer
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General
The Company is engaged in diamond exploration and mining. The Company has
acquired one mining property (the Grasdrif Deposit), exercised an option to
acquire a second mining property (the Caerwinning Deposit), and acquired an
option to purchase a third mining property (the Montrose Kimberlite Pipe), all
of which are located in the Republic of South Africa. The Company's current
mine projects include:
The Grasdrif Deposit. The property is an alluvial deposit on the inner
bank of the Orange River in the Northern Cape Province. Based on previous
exploration, the deposit is estimated to contain 80.43 million tonnes of in situ
diamondiferous gravel. Between 1973 and 1984, a previous producer recovered in
excess of 700,000 carats of high quality large gemstones from some 19 million
tonnes of gravel from properties in the area. The Company owns the rights to
this property. The Company has commenced site establishment, including the
development of roads, power, housing and water, and expects to commence full
scale mining operation at the Grasdrif Deposit in the second quarter of 1998.
The Caerwinning Deposit. The property is an alluvial deposit downstream of
the confluence of the Vaal and Harts Rivers in the Griqualand West area of the
Northern Cape Province. The property is estimated to include 38.3 million
tonnes of in situ diamondiferous gravel. During the period February 1989 to
October 1994, 3,685 carats of high quality large gemstones with an average value
of $488 per carat were recovered from this property. The Company has exercised
an option to acquire the Caerwinning Deposit in June 1996 and completed a bulk
sample in September 1996 in which it recovered 60 diamonds with a combined
weight of 111.05 carats and a value of $642 per carat. The Company intends to
commence full scale mining operations at the Caerwinning Deposit in the second
quarter of 1998.
The Montrose Kimberlite Pipe. The property is located 30 kilometers east
of Pretoria in the Gauteng Province, and is part of the Pretoria Group
geological formation which includes the Premier Diamond Mine. Geological
testing and drilling evidences a diamondiferous kimberlite pipe with a surface
dimension of 4.25 hectares and a depth of 400 meters, which indicates a
geological resource in excess of 9 million tonnes. The Company has acquired an
option to purchase the Montrose Pipe which expires on October 10, 1998 and has
commenced an extensive drilling program at the site in March 1998.
The Company believes that historical mining data and the results of past
prospecting at its three mining properties to date suggest significant reserves
exist throughout the mine properties. However, as of the date of this report,
the Company has not conducted sufficient drilling or bulk sampling at any of the
three mines for the purpose of establishing proven reserves. Any estimate of
reserves is necessarily imprecise and would depend on statistical inferences
drawn from limited drilling or bulk sampling, which can prove unreliable.
Consequently, the Company is unable to estimate with any degree of assurance the
amount of reserves at any of its mine properties.
The Company intends to conduct exploration and acquisitions of additional
diamond pipes and alluvial deposits and is continuously evaluating potential
property acquisitions.
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Diamond Mining - Generally
Diamonds are chemically inert crystals formed by the subjection of carbon
to extraordinary heat and pressure. Diamonds are believed to have been formed
more than 90 million years ago at a depth of 400 km below the surface of the
earth and then transported to the earth's surface by the movement of molten
rock. The solidified rock is known as kimberlite pipes or fissures, and it is
from these kimberlite pipes or fissures that diamonds are generally mined. Some
of the pipes and fissures have eroded over time, and the diamonds once contained
in such formations have been transported and deposited in ancient or existing
river beds, seas and beaches. The Company's present projects include the mining
of kimberlite pipes and alluvial deposits.
Diamond exploration typically begins with surface sampling and magnetic
surveys for purposes of locating kimberlite or geographical anomalies which may
indicate the presence of kimberlite. In the event a pipe is located, follow-up
prospecting, trenching or drilling is conducted to determine if it is
diamondiferous. If the pipe is determined to be diamondiferous, bulk sampling
is conducted to evaluate the grade of the prospect and, thereby, establish
proven or probable reserves. The exploration and evaluation of an alluvial
diamond deposit is typically more complex and less conclusive because of scarce
and irregular distribution of diamonds.
Kimberlite pipes are mined through a combination of open pit excavation and
underground mining. The mining of a kimberlite pipe typically commences with an
open pit mine to a shallow depth, generally 30 meters. Initially, a mining zone
is designed and then dozers are used to remove the topsoil which is set aside
for reclamation. Dozers are then employed to excavate an open pit. As the
mining operations expand, the open pit is enlarged by digging benches into the
pit wall. Since kimberlite pipes are relatively narrow bodies, it becomes
impractical at a certain depth, approximately 30 to 50 meters, to continue
mining operations through open pit excavation. At this point, shafts are sunk
away from and parallel to the ore body, and from these shafts adits to the ore
body are developed at various levels. The kimberlite ore is hoisted to the
surface and hauled to a recovery plant by front-end loaders and trucks.
Mining Operations
The Company intends to construct at each mining deposit a state-of-the-art
recovery plant for purposes of processing ore or gravel. Each recovery plant
will consist of a wash plant and associated screens, tables and separators that
will employ water, agitation, gravity and centrifugal force to separate the
heavier diamondiferous material from the lighter gravel. In the case of ore
from a kimberlite pipe, the ore will be delivered to the plant in large chunks
and those chunks will initially be subjected to a primary crusher that will mill
the ore into smaller blocks five inches thick. This crushed ore will be passed
through a high capacity electronic sorting machine. The electronic sorting
machine beams an X-Ray over the ore, which will cause any diamonds to fluoresce.
When a light sensor identifies the fluorescent diamonds, the electronic sorting
machine activates a trap door and the diamonds drop into a secured recovery
chamber. The crushed ore is passed through a secondary crusher that will mill
the ore into smaller blocks two inches thick. In the case of gravel from an
alluvial deposit, the gravel is initially passed over a grizzly that catches and
rejects all rocks six inches or greater in size. From this point, the recovery
process is virtually the same in the case of pipe or alluvial ore. The ore then
passes though screens which further reduces the size. At this point water will
be introduced, turning the ore into a slurry. The slurry passes through the pan
plant in which centrifugal force is used to separate the heavier diamondiferous
ore from the lighter ore. The heavier ore then passes through an electronic
sorting machine which recovers diamonds as described above.
The lighter ore recovered from the pan plants described above is passed
through a dense medium separation process through which centrifugal force is
used to again separate the heavier diamondiferous ore from the lighter ore.
This heavier ore is also passed through the electronic sorting machine as
described above. A grease table will also be used where the climatic conditions
favor its use. From the electronic sorting machine the slurry is run over a
grease table. Because water does not adhere to diamonds, any freed diamonds
will stick to the grease table whereas the remainder of the slurry will slide
over the grease. The ore from the grease table is sent through a ball mill and
the ore is reduced to pulp. The ore from the bail mill is sifted through small
mesh screens to recover any remaining diamonds, and the residue is sent to the
tailing pile.
The Company intends to sell its diamonds directly to private diamond
dealers and manufacturers. There are no formal rules by which the price of
diamonds are determined. Sale prices are usually set by the diamond's weight,
color and clarity, and the evaluation process is generally subjective. The
Company expects that its sale of
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diamonds will be transacted in U.S. dollars on a cash basis. The Company has
engaged Weir International Limited ("Weir") to market the Company's diamond
production. In exchange for Weir's services, the Company shall pay Weir five
percent (5%) of the gross amount of all diamond sales. Weir is a stockholder of
the Company and certain members of management, including the Company's Chief
Executive Officer, have a beneficial interest in Weir. See "Part III, Item 12.
Certain Relationships and Related Transactions."
The Grasdrif Deposit
Property Rights. The Grasdrif Deposit is an alluvial diamond deposit
located on the inner bank of the Orange River in the Northern Cape Province. The
rights to the deposit are owned by Nabas Diamonds (Pty) Limited, a wholly-owned
subsidiary of the Company. Nabas Diamonds has acquired exclusive rights to
prospect the deposit from appropriate governmental agencies, subject to Nabas
Diamonds' payment of a royalty to the state in the amount of 5% of the gross
selling price of the production from the deposit.
Pursuant to a Shareholder Agreement, dated March 24, 1995, between Global
Diamond Resources (SA) (Pty) Limited and the promoters of Nabas Holdings (Pty)
Limited ("Nabas Holdings"), an unaffiliated South African corporation, the
parties formed Nabas Diamonds and owned the company on a 50/50 basis. Nabas
Holdings assigned the rights to the Grasdrif Deposit to Nabas Diamonds.
Pursuant to an Agreement between the parties dated November 22, 1997, Nabas
Holdings sold its 50% interest in Nabas Diamonds to the Company for R800,000
(US$164,000), 1,000,000 shares of Common Stock and a common stock purchase
warrant to purchase 500,000 shares of Common Stock, at a price of $.375 per
share, expiring December 1, 1998. In addition, the Company agreed to appoint to
its Board of Directors one nominee of Nabas Holdings. Nabas Holdings has
nominated Mr. Charles MacDonald to the Company's board.
Geology. The Grasdrif Deposit is an alluvial gravel deposit situated on a
bedrock of Dwyka Tillites. The gravels of the Grasdrif Deposit have been
preserved in three distinct elevations, all of which seem to have been deposited
on the inner bank of the paleo and present Orange River. The upper terrace
(elevation 215 meters above sea level) seems to have been deposited as a point
bar of a channel incising to the west, while all other terraces are associated
with a gradual migration of channels towards its present situation in the east.
Ingress to and egress from the Grasdrif Deposit is available by way of
public paved and gravel roads. At the present time, power is supplied to the
property by Company-owned generators. Prior to commencement of full scale
mining, the Company intends to connect the Grasdrif Deposit to the state
electric utility.
Reserves. Based on previous exploration and production activity by Namex
(Pty) Limited ("Namex"), a South African mining company, the Company estimates
that the deposit contains approximately 80.43 million tonnes of in situ
diamondiferous gravel. The management of Namex at the time of such production
included several individuals who presently serve as senior management of the
Company, including Johann de Villiers.
Historical Production. The Grasdrif Deposit was prospected for the first
time by Namex. Between 1973 and 1984, Namex produced 706,607 carats from
19,613,759 tonnes of ore, for an average grade of 3.6 carats per 100 tonnes from
properties in the area.
Mining Plan. The Company has commenced site establishment at the Grasdrif
Deposit, including the development of roads, power, housing and water, and
expects to commence full scale mining operations at the Grasdrif Deposit in the
second quarter of 1998. The Company intends to conduct all mining and recovery
activities directly. However, in the event the Company encounters calcified
deposits that require blasting, it intends to engage contractors for this
purpose. The Company estimates that it will incur up to R14 million ($2,810,000
as of March 23, 1998) in expenses in developing and mining the Grasdrif Deposit
before it will commence the recovery of diamonds.
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The Caerwinning Deposit
Property Rights. The Company has acquired the exclusive rights to conduct
mining operations at the Caerwinning Deposit, a 2,333 hectare alluvial deposit
located in the Northern Cape Province. The Caerwinning Deposit lies on
"alienated State land" pursuant to the Precious Stones Act of 1964 and,
therefore, the Republic of South Africa owns all rights to the precious stones
on the property. In 1978, Lama Minerals CC acquired from the Minister of Mines
the necessary approvals to mine the surface and subsurface of the deposit. In
June 1996, the Company exercised its option to acquire the mineral lease to the
alluvial deposit from Lama Minerals CC for R1.14 million ($229,000 as of March
23, 1998). However, if kimberlite pipes or fissures are found on the property
during prospecting or mining of the alluvial deposit, the Company will be
required to pay an additional R8 million ($1,607,000 as of March 23, 1998) to
Lama Minerals CC prior to the Company's mining of the pipes or fissures. The
Company's acquisition of the mineral lease is subject to government approval
which is expected in the second quarter of 1998. The Company believes that as a
condition to the governmental approval it will be required to pay the government
5 percent of the gross selling price of the monthly production from the deposit,
with a minimum payment of R50,000 ($10,000 as of March 23, 1998) per year.
Pursuant to the mineral lease, the Company has an initial ten year right to
mine the Caerwinning Deposit (with a ten year renewal option), subject to Lama
Minerals CC's right to terminate the mineral lease based on the Company's
default thereunder. The Company's principal obligations to Lama Minerals CC
under the lease are to comply with all South African mining regulations, restore
disturbed land to the satisfaction of Lama Minerals CC and to compensate Lama
Minerals CC for lost farming profits to the extent any mining operations disturb
cultivated land.
Geography. The Caerwinning Deposit is situated in the Griqualand area of
the Northern Cape province, approximately 70 kilometers west of Kimberley. It
borders to the east along the Vaal River, approximately 20 kilometers downstream
of the confluence of the Vaal and Hart Rivers. Ingress to and egress from the
Caerwinning property is available by way of public paved and gravel roads. The
property is serviced by the state electric utility.
Geology. The gravels of the Caerwinning Deposit are underlain by quartzite
and shale of the Schmidtsdrift formation of the Transvaal Sequence, as well as
carboniferous shale and tillite of the Dwyka Formation of the Karoo Sequence.
Rock types of both sequences found on the deposit are horizontally or near
horizontally bedded, and are not conducive to pothole formation. Outcrops of
rocks of the Transvaal Sequence occur along the western and southern boundaries
of the deposit. Rock types belonging to the Dwyka formation do not outcrop and
were only found in boreholes and excavations.
The gravels occur in three distinct terraces of which the oldest is the
furthest removed from the present river bed. Secondary calcification is rather
extensive in the oldest terraces but negligible in the later and recent
deposits. The gravels mainly consist of cobble and pebble sized casts in a
sandy matrix. Boulder sized particles are extremely rare except where local
tributaries have introduced large more or less angular boulders into the
mainstream deposits.
Reserves. Based on past exploration drilling and bulk sampling and recent
mining activities, the Company believes that the Caerwinning Deposit has 38.3
million tonnes of in situ diamondiferous gravel.
Historical Production. The Caerwinning Deposit has been mined sporadically
since 1969. Over the years, various producers have recovered 4,539 carats. Over
the last six years, the most recent contractor, Mr. Pieter van Wyk, recovered
3,685 carats from 344,400 tonnes of ore, for an average grade of 1.07 carats per
100 tonnes. A review of available production records indicates that 90 to 95%
of the diamonds recovered were of gem quality, and that the average price
received during the last six years of production was $488 per carat. Mr. van
Wyk has served as Chief Consulting Geologist for the Company from July 1994 to
February 1998. In February 1998, Mr. van Wyk was appointed to serve as Director
of Exploration and Mining of the Company and was also appointed to serve on the
Company's Board of Directors. In September 1996, the Company conducted a bulk
sampling of the property in which it recovered 60 diamonds with a combined
weight of 111.05 carats and with an average value of $642 per carat.
Mining Plan. The Company intends to commence full scale production at the
Caerwinning Deposit in the second quarter of 1998. The Company intends to
conduct directly all mining and recovery activities at the
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Caerwinning Deposit. However, in the event the Company encounters calcified
deposits that require blasting, it intends to engage contractors for this
purpose.
The Montrose Kimberlite Pipe
Property Rights. The Company has acquired exclusive prospecting rights and
an option to purchase a farm in the Gauteng Province, which includes a mining
prospect known as the Montrose No. 3 (referred to herein as the "Montrose
Pipe"). Pursuant to a Notarial Prospecting Contract between Maria Anna Gobey
and Global Diamond Resources (SA) (Pty) Limited, the Company has acquired the
exclusive rights to prospect on the property until October 10, 1998 in
consideration of the Company's payment of R54,000 (US$11,000) and 10% of the
value of all minerals recovered by the Company during the prospecting period.
The Company also has the exclusive option until October 10, 1998 to purchase the
farm for R2.8 million ($562,000 as of March 23, 1998). The Company holds a
prospecting permit from the government which expires October 10, 1998 and is
renewable annually, subject to government approval.
Geography. The Montrose Pipe lies 500 meters north of Rayton and 30 km
east of Pretoria in the Gauteng Province. The area forms part of the temperate
eastern plateau and has an average elevation of 1,500 meters, with warm summers
and cool winters. Annual rainfall during the summer months averages 785
millimeters and year-round mining is undertaken in the vicinity.
The region is accessible by the N4 Freeway and the Transnet Railway.
Ingress to and egress from the Montrose property is available by way of public
paved and gravel roads. The property is serviced by the state electric utility
and water for mining purposes is available by pipeline from the Bronkhorstspruit
Dam, 20 kilometers to the east.
Geology. The area of the Montrose Pipe is part of the Rayton Formation,
Pretoria Group. The area is underlain by a north-east succession of quartzite,
shale and subgraywacke of Precambrian time, and overlain by sandstone and
sandstone-shale The Pretoria Group has been intruded by a number of kimberlite
pipes and to a lesser extent by kimberlite fissures, the latter striking mainly
east-west. A total of ten kimberlite bodies are known to exist around Rayton,
six of which, the Montrose No.1, Montrose No.2, Montrose No. 3, Schuller-
Kaalfontein, National and Annex, have been prospected and exploited to a limited
extent.
In November 1994, Geo Hydro Technologies ("Geo Hydro"), an independent
geological engineering firm located in Pretoria, was commissioned by the
Company to conduct a geophysical survey of the Montrose Pipe for purposes of
detecting and delineating the kimberlite pipe. Geo Hydro's written report
stated that it was able to map the position of the kimberlite through
electromagnetic profiling. Geo Hydro estimated that the kimberlite had a
surface dimension of 4.25 hectares based on electromagnetic profiling; however,
the magnetic profiling suggested the presence of a fissure on the southeastern
boundary of the kimberlite, which, if present, would reduce the surface area of
the pipe to a minimum size of 1.25 hectares with the remaining area comprising
fissure material.
Reserves. Drilling to date together with surface sampling and geological
mapping indicate a kimberlite resource with a surface area of 4.25 hectares and
a depth of at least 50 meters. For purpose of estimating the total ore body,
the Company has assumed the pipe has a depth of at least 400 meters based on the
results of the drilling program interpreted by Steffen, Robertson & Kirsten.
Based on a depth of 400 meters and a surface area of 4.25 hectares, the Company
estimates that the pipe contains in excess of 9 million tonnes of ore.
Historical Production. In the early part of this century a prospecting
shaft was sunk alongside the Montrose Pipe to a depth of 30 meters and two
exploratory adits excavated, one at nine meters and the other at 30 meters.
While production records are incomplete, it is known that surface and shallow
underground mining of the Montrose Pipe produced 6,952 carats between 1910 and
1925. During this period average recovery grades varied from 3.19 carats per
100 tonnes from surface material to 15.08 carats per 100 tonnes from underground
ore. In 1989, an unaffiliated mining company acquired prospecting rights to the
Montrose Pipe and between April and July 1990 the company recovered 24.52 carats
from 367 tonnes of surface ore, which were sold for $123 per carat.
Mining Plan. The Company commenced an extensive drilling program at the
Montrose Pipe in March 1998. If the results from the drilling program are
successful, the Company will conduct an extensive underground bulk sample in the
latter half of 1998 and first quarter of 1999. If the results from the
underground bulk sampling
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program are successful, the Company will conduct open pit mining to a depth of
30 meters commencing in 1999. While final pit design will depend on exploration
results, the Company presently plans to excavate 10 meter benches at a pit slope
angle of 55 degrees. Based on a surface area of 4.25 hectares, the Company
estimates that open pit mining will result in the recovery of 1.06 million
tonnes of ore and an estimated life of the open pit of 1.77 years. Based on the
high estimated capital cost of open pit mining at the Montrose Pipe, the Company
intends to engage mine operators on a contract basis in order to take advantage
of the economies offered by a larger mine operator.
The Company will commence underground mining activity upon the completion
of open-pit mining. During the initial phase of underground mining, the
existing shaft will be refurbished and enlarged to a depth of 100 meters. A
second shaft for ventilation purposes will be developed to a depth of 100
meters. Next, the Company intends to excavate adits at the 33 meter level in
order to carry out bulk sampling. The Company presently estimates that R14.1
million ($2,832,000 as of March 23, 1998) in capital expenditures and two years
of development will be required in order to commence underground mining
operations.
Competition
The diamond mining industry is intensely competitive. The principle areas
of competition are the exploration and acquisition of mineral properties. A
large number of companies are engaged in the exploration and development of
diamond properties, many of which have substantially greater technical and
financial resources than the Company. Competition among the members of the
diamond mining industry also affect the marketing of the diamonds produced by
the members, including the price of cut and uncut diamonds.
Regulation
The Company's mining and milling operations in the Republic of South Africa
and elsewhere are subject to various government regulations governing the
protection of the environment, prospecting, production, labor standards and mine
safety. Failure to comply with applicable laws and regulations may result in
orders being issued that may cause operations to cease or be curtailed, require
the installation of additional equipment and possibly the loss of mining rights.
Existing and future legislation and regulations could also cause restrictions
and delays in the development of the Company's properties and additional expense
and capital expenditures. The Company believes it is in substantial compliance
with all material laws and regulations applicable to it and its operations.
The Company's mining operations are also subject to governmental
regulations regarding environmental considerations, including regulations
relating to air quality standards, pollution of stream and fresh water sources
and reclamation. The Company may be required to prepare and present to
governmental authorities data pertaining to the effect or impact that any
proposed exploration or mining may have upon the environment. As well, the
Company will be responsible for reclamation costs. Reclamation requirements may
vary depending on the location and the nature of the mining operations, however,
they are similar in that they aim to minimize long term effects of exploration
and mining disturbance by requiring the operating company to control possible
deleterious effluents and to re-establish to some degree predisturbance
landforms and vegetation. The environmental regulations of the Republic of South
Africa are not considered by the Company to be as stringent as the environmental
laws adopted in the U.S., and the Company does not consider the existing
environmental regulations in the Republic of South Africa to represent a
material cost or burden on the Company's proposed mining operations. However,
future legislation may significantly emphasize the protection of the environment
and, as a consequence, more closely regulate the Company's mining operations.
Any such legislation, as well as future interpretation of existing laws, may
require substantial increases in equipment and operating costs to the Company
and delays, interruptions, or a termination of operations, the extent of which
cannot be predicted.
Mining rights in the Republic of South Africa are governed by the Minerals
Act No. 50 of 1991. Pursuant to the Minerals Act, the right to prospect or mine
is dealt with in terms of the common law, which entitles the holder of the right
to the minerals on his land to prospect and mine. This common law right is,
however, made subject to the provisions of the Minerals Act, which state that no
common law right to prospect or mine minerals may be exercised unless the
prescribed statutory authorization has been obtained in the form of a permit to
prospect or an authorization to mine. A prerequisite for the granting of the
authorization is that the applicant must be the holder of the common law right
to the minerals. Pursuant to assignments from the holders of the common law
mineral rights, the Company has obtained government authorization to prospect
the Grasdrif Deposit and the Montrose Kimberlite Pipe and government
authorization to prospect and mine the Caerwinning Deposit. The
8
<PAGE>
Company expects to acquire the common law mineral rights and direct government
authorization to prospect and mine the Caerwinning Deposit by mid-1998. The
Company believes it will be granted the necessary authorization to mine the
Grasdrif Deposit and the Montrose Kimberlite Pipe in a timely manner.
Employees
The Company employs 52 persons, including three management level employees
in the U.S. and seven managers and 42 laborers in the Republic of South Africa.
None of the Company's employees are unionized or otherwise subject to a
collective bargaining agreement and the Company believes that its relationship
with its employees is excellent.
Glossary
Set forth below are definitions of certain mining and geological terms used
in this report.
Adit A horizontal tunnel from a shaft to a kimberlite pipe
- ---- through which the pipe is mined and the ore is excavated.
Alluvial Deposit A deposit of alluvium (deposits made by water) made by a
- ---------------- stream where it runs out onto a level plain or meets a
slower stream.
Bedrock The solid rock underlying mineral-bearing gravel, sand,
- ------- clay, etc. and upon which alluvial diamond rests.
Bench Cuts The excavation of a flat bench or dirt on a slope to
- ---------- stabilize the slope or to remove material of value in
open pit mining.
Bulk Sampling Acquiring a large (often several thousand tons) sample of
- ------------- rock obtained by mining, excavation, digging or drilling
large diameter holes. Bulk sampling is necessary to
determine the grade and value of diamonds contained in a
property.
Carat A small unit of weight for precious stones equal to 200
- ----- milligrams or 0.2 grams.
Diamondiferous Containing diamonds.
- --------------
Geophysical Surveys Measuring and recording any geophysical properties over a
- ------------------- specific area, e.g., gravity, magnetics, electrical
conductivity, acoustical velocities, etc., utilizing
instruments on land, water or airborne.
Grade The number of carats (weight) in a physical unit of ore,
- ----- normally in carats per 100 tonnes.
Gravel A comprehensive term applied to the water-worn mass of
- ------ broken down rocks making up an alluvial. Alluvial
gravels are sometimes arbitrarily described in terms of
size as "pebble" gravel, "cobble" gravel or "boulder"
gravel.
Hectare Unit of measurement of surface area. One hectare
- ------- approximates 2.47 acres.
Kimberlite One of two primary types of diamond-bearing rock and the
- ---------- most common, often characterized by a carrot-shaped
structure referred to as a kimberlite "pipe."
Magnetic Surveys Measuring the magnetic variations in the Earth's crustal
- ---------------- rocks over a specified area by installing a magnetometer
within, or by towing a
9
<PAGE>
magnetometer behind an aircraft and recording the
variation in the Earth's magnetic field. Useful in
detecting kimberlite and ilmenite bodies due to the
presence of magnetite in kimberlite.
Minerology The science dealing with inorganic, solid, homogeneous
- ---------- crystalline, chemical elements or compounds (minerals),
their crystallography, physical and chemical properties,
classifications and distinguishing characteristics.
Mining The making of any excavation for the purpose of
- ------ recovering diamonds in commercial quantities. Of primary
importance in the Republic of South Africa where mining
laws draw a distinction between "mining" and "prospecting."
See "Prospecting."
Ore A mineral deposit containing one or more metals that can
- --- be mined or treated commercially. See "Reserves."
Petrology The science that deals with the origin, history,
- --------- occurrence, structure, chemical and mineralogical
composition and classification of rocks.
Probable Reserves Reserves for which quantity and grade and/or quality are
- ----------------- computed from information similar to that used for proven
reserves, but the sites for inspection, sampling, and
measurement are farther apart or are otherwise less
adequately spaced. The degree of assurance, although lower
than that for proven reserves, is high enough to assume
continuity between points of observation. See "Reserves"
and "Proven Reserves."
Prospecting Searching for diamonds by any means and the recovery of
- ----------- diamonds through searching, but does not include "mining"
(i.e., excavation for purposes of recovering diamonds in
commercial amounts). See "Mining."
Proven Reserves Reserves for which (a) quantity is computed from dimensions
- --------------- revealed in outcrops, trenches, workings or drill holes,
grades and/or quality are computed from the results of
detailed sampling, and (b) the sites for inspection,
sampling and measurement are spaced so closely and the
geologic character is so well defined that size, shape,
depth and mineral content of reserves are well-established.
See "Reserves" and "Probable Reserves."
Reserves That part of a mineral deposit that can be economically
- -------- and legally extracted or produced at the time of the
reserve determination. Reserves are customarily
stated in terms of "ore" when dealing with diamonds and
other metalliferous minerals.
Tailings The washed material that issues from a recovery plant
- -------- after the concentrate has been removed.
Item 2. Description of Property.
The Company's executive offices are located in La Jolla, California and
consist of approximately 485 square feet of leased premises. The Company's
lease for these premises expires on March 31, 1999 and provides for monthly rent
of $1,067. The Company also leases approximately 260 square feet in the SA
Diamond Center in Johannesburg, South Africa. The lease, which is effective
from March 1, 1998, provides for monthly rental of R736 ($148 as of March 23,
1998) and expires on February 28, 2003. See "Item 1. Business and Properties -
The Caerwinning Deposit; The Montrose Kimberlite Pipe; and The Grasdrif Deposit"
for a description of the Company's mining properties.
10
<PAGE>
Item 3. Legal Proceedings.
From time-to-time, the Company is subject to certain litigation in the
ordinary course of business. At the present time, the Company is not party to
any pending legal proceedings that it believes will have a material adverse
effect on its financial position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders of the Company
during the fourth quarter of fiscal year 1997.
Part II
Item 5. Market for Common Equity and Related Shareholder Matters.
The Company's Common Stock has been listed on the OTC Bulletin Board under
the symbol "GDRS" since August 12, 1996. During the twelve months ended
December 31, 1997, the high and low closing sale prices (as adjusted for the two
for one split effected in December 1997) were $.95 and $.18, respectively. The
Company considers its Common Stock to be thinly traded and that any reported bid
or sale prices may not be a true market-based valuation of the Common Stock. As
of March 23, 1998, there were approximately 138 record holders and 470
beneficial holders of the Company's Common Stock.
The Company has not paid any cash dividends since its inception and does
not contemplate paying dividends in the foreseeable future. It is anticipated
that earnings, if any, will be retained for the operation of the Company's
business.
During the fiscal year ended December 31, 1997, the Company sold
unregistered shares of its Common Stock in the following transactions:
A. In March 1997, the Company entered into separate agreements with three
parties pursuant to which those parties purchased 865,544 shares of Common Stock
for a total of $808,486. The offering was conducted pursuant to Regulation S
under the Securities Act of 1933 (the "Act"). In connection with this offering,
the Company issued to a finder unaffiliated with the Company 64,680 shares of
Common Stock and a common stock purchase warrant entitling the holder to
purchase 808,486 shares of Common Stock at an exercise price of $.25 per share
expiring March 31, 2000. The securities were issued to the finder pursuant to
Regulation S under the Act.
B. In June, October and November 1997, the Company issued 1,310,000 shares
of Common Stock in consideration of services rendered to seven consultants. The
securities were issued pursuant to Regulation S under the Act. There were no
underwriters involved in the transaction.
C. In August and October 1997, the Company granted to five directors of
the Company options to purchase an aggregate of 500,000 shares of Common Stock,
at an exercise price of $.75 per share. The options are immediately exercisable
and expire on December 31, 2000. The securities were issued pursuant to Section
4(2) under the Act. There were no underwriters involved in the transaction.
D. In August 1997, the Company granted to a shareholder of the Company
options to purchase 200,000 shares of Common Stock, at an exercise price of $.75
per share. The options are immediately exercisable and expire on December 30,
1998. The securities were issued pursuant to Regulation S under the Act. There
were no underwriters involved in the transaction.
E. In September 1997, for the purpose of inducing the holders of
outstanding warrants, which entitled the holders to purchase shares of Common
Stock at an exercise price of Cdn $.375 per share, to exercise such warrants by
September 30, 1997, the Company offered to the warrantholders an additional
warrant to purchase one
11
<PAGE>
share of Common Stock for every four shares of Common Stock purchased under the
outstanding warrants. In September 1997, the holders of the outstanding warrants
exercised such warrants for 698,000 shares of Common Stock for the gross
proceeds of Cdn $261,750 (US $187,169) and were granted additional warrants to
purchase an aggregate of 174,500 shares of Common Stock, at an exercise price of
$.25 per share. The warrants are immediately exercisable and expire on December
31, 1998. The securities were issued pursuant to Regulation S under the Act.
There were no underwriters involved in the transaction.
F. In October 1997, the Company issued 1,230,770 shares of Common Stock as
partial consideration for the Company's acquisition of mining and earth moving
equipment. The securities were issued pursuant to Regulation S under the Act.
There were no underwriters involved in the transaction.
G. In November 1997, the Company granted to officers, employees and a
director of the Company options to purchase an aggregate of 2,800,000 shares of
Common Stock, at an exercise price of $.525 per share. The options are
immediately exercisable and expire on November 26, 2002. The securities were
issued pursuant to Section 4(2) under the Act. There were no underwriters
involved in the transaction.
H. In December 1997, as partial consideration for its acquisition of a 50%
interest in the Grasdrif Deposit, the Company issued 1,000,000 shares of Common
Stock and common stock purchase warrants entitling their holders to purchase
500,000 shares of Common Stock, at an exercise price of $.375 per share. The
warrants are immediately exercisable and expire on December 1, 1998. The
securities were issued pursuant to Regulation S under the Act. There were no
underwriters involved in the transaction.
I. In December 1997, the Company sold 7,050,482 shares of Common Stock, a
Secured Convertible Promissory Note in the principal amount of $3,000,000 and
common stock purchase warrants to purchase up to 807,852 shares of Common Stock
at exercise prices ranging from $.25 to $.375. See "Part I, Item 1 -
Description of Business" for a summary of the terms and conditions of the
investment. The securities were issued pursuant to Section 4(2) under the Act.
In connection with that transaction, the Company issued to finders involved in
the financing an aggregate of 282,020 shares of Common Stock pursuant to
Regulation S under the Act, a payment of $315,000 and common stock purchase
warrants entitling the holders to purchase 70,000 shares of Common Stock, at an
exercise price of $.85 per share. The warrants are immediately exercisable and
expire on March 6, 2001.
J. In December 1997, holders of outstanding warrants exercised their
rights to purchase 402,000 shares of Common Stock at an exercise price of Cdn
$.375 for the gross proceeds of Cdn $150,750 (US $105,960). The securities were
issued pursuant to Regulation S under the Act. There were no underwriters
involved in the transaction.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The Company is engaged in diamond exploration and mining. The Company has
acquired one mining property (the Grasdrif Deposit), exercised an option to
acquire a second mining property (the Caerwinning Deposit), and acquired an
option to purchase a third mining property (the Montrose Kimberlite Pipe), all
of which are located in the Republic of South Africa. The Company intends to
conduct exploration and acquisitions of additional diamond pipes and alluvial
deposits and is continuously evaluating potential property acquisitions. See
"Part I, Item 1. Description of Business" for a further description of the
Company's mining properties.
The Company has entered into certain financial commitments payable in Rand,
the unit of currency of the Republic of South Africa. All Rand based amounts
are designated by the symbol R. As of March 23, 1998, the Rand-Dollar exchange
rate was 4.979 Rand to one U.S. Dollar.
To date, the Company's activities have included the investigation and
acquisition of mining property interests and limited exploratory work and site
establishment. The Company has financed its activities to date through the sale
of its equity and debt securities. See "Item 1. Description of Business" for a
summary of the terms of the $6 million financing agreements between the Company
and International PCM Holdings Limited ("PCM") completed in December 1997 and
"Item 7. Financial Statements" for a summary of the Company's financings over
12
<PAGE>
the last three years. The Company's plan of operations for the next 12 months
include the completion of exploratory work and site establishment and the
commencement of full scale operations at two of its present mining properties.
See "Item 1 Description of Business - Business of the Issuer" for a summary of
the Company's mining plans for each of its three mining properties.
The Company believes that it has sufficient working capital to satisfy its
working capital requirements for the remainder of fiscal 1998, including the
capital required to commence full scale operations at two of its mining
properties, the Grasdrif and Caerwinning Deposits. Commencement of production
at the Caerwinning Deposit assumes, however, the payment of the remaining
$1,400,000 to be advanced by PCM upon the Company's receipt of government
approval of the mineral lease. The Company's beliefs concerning the sufficiency
of its working capital are based on certain assumptions concerning, among other
things, the estimated grade of the processed ore, average price per diamond
carat and cost of production. If any of these assumptions prove incorrect, the
Company may require additional capital. Any such additional financing might
involve a pledge or mortgage of the Company's properties and of any production
therefrom. There is, of course, no assurance that satisfactory financing, if
necessary, could be obtained therefor. In addition to borrowings to finance
individual development projects, the Company may also borrow funds from time to
time for working capital and other general corporate purposes.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. At this time, the Company does not expect that this statement will
have a significant impact on the Company's financial statement disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 established
standards regarding how public companies report information about operating
segments in annual financial statements and requires that selected information
about operating segments be reported in interim financial reports to
stockholders. This statement is effective for fiscal years beginning after
December 15, 1997. In the initial year of adoption, comparative information for
earlier years must be restated. The Company does not expect that this statement
will have a significant impact on the Company's financial statement disclosures
for the year ending December 31, 1998.
The Company considers its hardware and software to be Year 2000 compliant
and does not expect to incur material costs in connection with Year 2000 issues.
This report contains various forward-looking statements that are based on
the Company's beliefs as well as assumptions made by and information currently
available to the Company. When used in this report, the words "believe,"
"expect," "anticipate," "estimate" and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks, uncertainties and assumptions, including, without limitation, that as of
this date the Company has not commenced mining operations at any of its three
mines; the lack of proven reserves at any of the Company's three mines; mining
risks generally; political risks associated with the Company's operations in the
Republic of South Africa; general economic conditions; currency fluctuations;
and estimates of costs of production. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, or
projected. The Company cautions potential investors not to place undue reliance
on any such forward-looking statements all of which speak only as of the date
made.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................... 15
Consolidated Balance Sheets at December 31, 1997 and 1996...... 16
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995....................... 17
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995........ 18
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................. 19
Notes to Consolidated Financial Statements..................... 21
</TABLE>
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Global Diamond Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Global Diamond
Resources, Inc. and subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Global Diamond
Resources, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
San Diego, California
March 24, 1998
15
<PAGE>
GLOBAL DIAMOND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------------------- -------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,096,141 334,387
Accounts receivable:
Trade 63,929 6,538
Officer 25,000 25,000
Inventory -- 64,208
Prepaid expenses 11,069 24,115
------------------- -------------------
4,196,139 454,248
Fixed assets, net 1,572,442 271,739
Deposits on equipment 284,438 --
------------------- -------------------
$ 6,053,019 725,987
=================== ===================
Liabilities
Current liabilities:
Accounts payable and accrued liabilities $ 63,890 86,258
Current portion of long-term debt 237,500 --
------------------- -------------------
301,390 86,258
------------------- -------------------
Long-term debt, less current portion 1,662,500 --
------------------- -------------------
Stockholders' Equity
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $0.0005 par value, 50,000,000 shares authorized,
23,903,604 and 11,000,108 shares issued and outstanding,
respectively 11,952 5,500
Additional paid-in capital 6,955,639 2,199,234
Accumulated deficit (2,837,791) (1,547,612)
Cumulative translation adjustment (40,671) (17,393)
------------------- -------------------
4,089,129 639,729
------------------- -------------------
Commitments and contingencies (Notes 8 and 9)
$ 6,053,019 725,987
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
GLOBAL DIAMOND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Other Income:
Interest income $ 17,990 10,017 15,242
Fee income -- 35,950 --
------------------- ------------------- -------------------
17,990 45,967 15,242
Expenses:
Business development 64,529 84,085 82,758
Site investigation, option costs and
project costs written off 11,234 100,031 117,218
Consulting fees 444,248 26,078 15,504
Depreciation 43,013 6,024 4,913
Foreign exchange transaction (gain) loss -- (6,862) 2,228
Interest 15,333 -- --
Legal and accounting 135,340 134,891 181,165
Management fees -- -- 38,855
Office and miscellaneous 73,666 65,678 36,458
Office rent 14,272 14,134 20,062
Printing and graphics 37,905 14,897 16,384
Salaries and benefits 332,259 149,431 27,881
Telephone 25,706 18,111 16,716
Travel 108,884 113,997 80,072
------------------- ------------------- -------------------
1,306,389 720,495 640,214
Operating loss (1,288,399) (674,528) (624,972)
Income taxes 1,780 1,624 --
------------------- ------------------- -------------------
Net loss $ (1,290,179) (676,152) (624,972)
=================== =================== ===================
Basic and diluted loss per share $ (0.11) (0.06) (0.07)
=================== =================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
GLOBAL DIAMOND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Preferred
Stock Common Stock Additional Receivable Cumulative Total
------------- ------------------ Paid-in Accumulated From Stock Translation Stockholders'
Shares Amount Shares* Amount Capital Deficit Sales Adjustment Equity
------ ------ ---------- ------- ---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 -- $ -- 8,830,000 $ 4,415 869,758 (246,488) (299,401) (17,311) 310,973
Receipt of payment for
receivable from stock sales -- -- -- -- -- -- 299,401 --
Net effect of issuance of
common stock to account for
reverse acquisition -- -- 500,108 250 (250) -- -- --
Issue of shares for cash -- -- 870,000 435 329,565 -- -- -- 330,000
Translation adjustment -- -- -- -- -- -- -- 15,933 15,933
Net loss -- -- -- -- -- (624,972) -- -- (624,972)
------ ------ ---------- ------- ---------- ----------- ---------- ----------- ------------
Balance at December 31, 1995 -- -- 10,200,108 5,100 1,199,073 (871,460) -- (1,378) 331,335
Issue of shares for cash, net
of issuance costs of $51,439 -- -- 800,000 400 948,161 -- -- --
Issuance of stock warrants
to nonemployees -- -- -- -- 52,000 -- -- --
Translation adjustment -- -- -- -- -- -- -- (16,015) (16,015)
Net loss -- -- -- -- -- (676,152) -- -- (676,152)
------ ------ ---------- ------- ---------- ----------- ---------- ----------- ------------
Balance at December 31, 1996 -- -- 11,000,108 5,500 2,199,234 (1,547,612) -- (17,393) 639,729
Issue of shares for cash, net
of issuance costs of $517,760 -- -- 8,262,726 4,131 3,408,805 -- -- -- 3,412,936
Issue of shares for warrants
exercised -- -- 1,100,000 550 292,579 -- -- --
Issue of shares for services -- -- 1,310,000 655 417,387 -- -- -- 418,042
Issue of shares for equipment -- -- 1,230,770 616 249,384 -- -- -- 250,000
Issue of shares and warrants
for mining rights -- -- 1,000,000 500 388,250 -- -- --
Translation adjustment -- -- -- -- -- -- -- (23,278) (23,278)
Net loss -- -- -- -- -- (1,290,179) -- -- (1,290,179)
------ ------ ---------- ------- ---------- ----------- ---------- ----------- ------------
Balance at December 31, 1997 -- $ -- 23,903,604 $11,952 6,955,639 (2,837,791) -- (40,671) 4,089,129
====== ====== ========== ======= ========== =========== ========== =========== ============
</TABLE>
_______________
* Adjusted for two-for-one stock split (Note 10)
See accompanying notes to consolidated financial statements.
18
<PAGE>
GLOBAL DIAMOND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,290,179) (676,152) (624,972)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 43,013 6,024 4,913
Shares issued in consideration for services 418,042 -- --
Issuance of warrants to nonemployees -- 52,000 --
Increase in accounts receivable - trade (57,391) (3,497) (26,164)
Decrease (increase) in inventory 64,208 (64,208) --
Decrease (increase) in prepaid expenses 13,046 (17,238) (6,877)
Increase (decrease) in accounts payable
and accrued liabilities (22,368) 65,741 11,513
------------ ------------ ------------
Net cash used in operating activities (831,629) (637,330) (641,587)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of equipment, net (7,277) (19,978) (6,149)
Mining properties and equipment (697,689) (247,957) --
Deposits on equipment (284,438) -- --
------------ ------------ ------------
Net cash used in investing activities (989,404) (267,935) (6,149)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common shares 3,706,065 948,561 330,000
Proceeds from long-term debt 1,900,000 -- --
Subscriptions received (refunded) -- (83,333) 83,333
Receipt of payment for receivable from stock
sales -- -- 299,401
------------ ------------ ------------
Net cash provided by financing activities 5,606,065 865,228 712,734
------------ ------------ ------------
Effects of exchange rates on cash (23,278) (16,015) 15,933
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 3,761,754 (56,052) 80,931
Cash and cash equivalents, beginning of year 334,387 390,439 309,508
------------ ------------ ------------
Cash and cash equivalents, end of year $ 4,096,141 334,387 390,439
============ ============ ============
</TABLE>
Continued
19
<PAGE>
GLOBAL DIAMOND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the years ended December 31, 1997, 1996 and 1995
Supplemental disclosure of noncash investing and financing transactions:
During the year ended December 31, 1997, the Company issued 1,310,000 common
shares to seven unaffiliated parties. The shares were issued in consideration
of consulting services rendered by each party. The Company purchased plant and
equipment for $350,000. The Company paid $100,000 in cash and issued 1,230,770
common shares for the balance, being the number of shares based on the market
value on the date of purchase. The Company purchased the 50% interest in the
Grasdrif Property not already owned by it for 800,000 Rand (US $164,000) in cash
and by the issue of 1,000,000 common shares and 500,000 common stock purchase
warrants. The Company also issued 346,700 common shares to three unaffiliated
parties. The shares were issued in consideration for the raising of equity
capital.
See accompanying notes to consolidated financial statements.
20
<PAGE>
GLOBAL DIAMOND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1997 and 1996, and for each of the
years in the three-year period ended December 31, 1997
(1) Summary of Significant Accounting Policies and Practices
Description of Business
Global Diamond Resources, Inc. (the "Company") was incorporated on January 7,
1987 and commenced operations during 1994. Operations prior to January 1, 1994
were not significant. The Company's operations have been directed primarily
towards raising capital, developing business strategies, developing diamond
mining opportunities, carrying out mining surveys, drilling, bulk sampling,
acquiring mining interests, commencing mine site establishment, purchasing
mining equipment and recruiting personnel.
Principles of Consolidation
The consolidated financial statements include the financial statements of
Global Diamond Resources, Inc. and its wholly-owned subsidiaries, Global
Diamond Resources Inc., a Canadian corporation ("Global BC"), Global Diamond
Resources International Limited, a British Virgin Islands corporation ("Global
BVI") and Global BVI's wholly-owned subsidiary, Global Diamond Resources (SA)
(Pty) Limited ("Global SA"), a South African corporation. Prior to a
reorganization in July 1995, the accompanying consolidated financial statements
reflect only the accounts of Global BC and Global SA. All amounts are in U.S.
dollars unless otherwise indicated. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash Equivalents
Cash equivalents include all highly liquid investments with an original
maturity of three months or less.
Foreign Exchange Translation
The financial position and results of operations of the Company's foreign
subsidiaries are measured using local currency as the functional currency.
Assets and liabilities of the subsidiaries are translated at the exchange rate
in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from differences in exchange rates from period to period are included
in the cumulative translation adjustment account in stockholders' equity.
Inventory
Inventory consists of diamonds ready for sale and are valued at the lower of
cost or estimated net realizable value. Diamonds are ready for sale when they
have been separated from the alluvials or broken ore, processed and are in a
deliverable form. No value is ascribed to diamonds in the alluvials or in the
broken ore.
Fixed Assets
Fixed assets consist of mining properties under development, mining equipment
and office equipment (primarily computers) recorded at cost. Depreciation is
provided for mining equipment and office equipment using the straight-line
method over the estimated useful lives of 3-5 years and 3 years, respectively,
of such assets. Value of diamonds recovered from bulk sampling and drilling
activities are offset against mine development costs.
Mining Operations
Initial exploration and evaluation costs are expensed as incurred. Initial
option payments and costs of acquiring options or other mineral or mining
rights to properties, when not expected to be significant, are also expensed as
incurred.
21
<PAGE>
The decision to develop or mine a property is based on an assessment of the
viability of the property and the availability of financing. Once the decision
to proceed with development is made, development and other expenditures
relating to such property will be deferred and carried at cost with the
intention of depleting such costs over the related reserves from such mining
properties.
Stock Options and Warrants
Prior to January 1, 1996, the Company accounted for its stock options and
warrants in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense was recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation,
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share disclosures
for employee stock option and warrant grants made in 1995 and future years as
if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure of SFAS No. 123.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
losses. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
that fair values be disclosed for the Company's financial instruments. The
carrying amounts of cash and cash equivalents, accounts receivable - trade,
inventory, deposits on equipment and accounts payable and accrued liabilities
approximate fair values due to the short-term nature of these instruments.
Estimation of the fair value of the account receivable-officer is not
considered practicable due to its related party nature. The carrying amount of
the long term debt approximates fair value because the terms are comparable to
the current market.
Loss Per Common Share
In December 1997, the Company adopted the provisions of SFAS No. 128 Earnings
per Share. SFAS No. 128 supersedes APB Opinion No. 15 and replaces "primary"
and "fully diluted" earnings per share ("EPS") under APB Opinion No. 15 with
"basic"and "diluted" EPS. Unlike primary EPS, basic EPS excludes the dilutive
effects of securities options, warrants and other convertible securities.
Dilutive EPS reflects the potential dilution of securities that could share in
the earnings of the Company. Common equivalent shares from convertible debt,
stock options and warrants are excluded from the computation because their
effect is anti-dilutive for all periods presented. All current and prior
period information presented conforms to the provisions of SFAS No. 128.
Net loss per share for each period is computed based on the weighted-average
number of common shares outstanding. The weighted-average shares outstanding
for the years ended December 31, 1997, 1996 and 1995 were 12,241,298,
10,420,108 and 9,424,632 respectively.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
22
<PAGE>
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of this Statement did not have a material impact on
the Company's financial position, results of operations, or liquidity.
(2) Fixed Assets
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Mining properties under development:
Caerwinning deposit $ 374,403 209,553
Grasdrif deposit 819,724 --
------------ ------------
1,194,127 209,553
------------ ------------
Mining equipment, at cost 393,601 42,398
Less accumulated depreciation (31,932) --
------------ ------------
361,669 42,398
------------ ------------
Office equipment, at cost 37,603 30,326
Less accumulated depreciation (20,957) (10,538)
----------- ------------
16,646 19,788
----------- ------------
$ 1,572,442 271,739
=========== ============
</TABLE>
23
<PAGE>
(3) Long-term Debt
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
15% Secured note payable, due 2002 $1,600,000 --
Other 300,000 --
------------ ------------
1,900,000 --
Less current portion (237,500) --
------------ ------------
$1,662,500 --
============ ============
</TABLE>
The 15% secured note payable has a prepayment requirement that if on December
31, 2000 or 2001, the Company has in excess of $2,000,000 in cash and cash
equivalents on hand, that excess must be paid as a prepayment on the note. The
note does not contain any penalties for prepayment. The interest is payable
every six months in arrears and the note is secured by the pledge of 100% of
the stock of Global SA,which holds all of the Company's mining properties,
plant and equipment. The agreement related to the note restricts the payment
of dividends by the Company. The principal and interest under the note is
convertible in to a maximum of 1,807,816 common shares of the Company at the
rate of $0.425 per share. The principal amount of the secured note payable is
$3,000,000. The remaining $1,400,000 is to be advanced at such time as the
Company receives government approval of the mineral lease, which is expected to
be received by the second quarter of 1998.
The other long-term debt is unsecured and is payable without interest at the
rate of $20,834 per month starting April 30, 1998. An initial payment of
$50,000 was made in March 1998.
(4) Income Taxes
The Company has no significant taxable temporary differences which would
require recognition of deferred tax liabilities, and due to the uncertainty of
future realizability, has not recognized any deferred tax assets for deductible
temporary differences and tax operating loss carryforwards.
At December 31, 1997, the Company had available net operating loss
carryforwards of approximately $1,452,000 for federal income tax reporting
purposes which begin to expire in 2010. The net operating loss carryforwards
for state purposes, which begin to expire in 2000, approximate the federal
amounts. The net operating loss carryforwards are subject to certain
limitations under Section 382 of the Internal Revenue Code.
(5) Foreign Operations
The Company's wholly-owned subsidiary, Global SA, operates in the Republic of
South Africa. During the year ended December 31, 1997, Global SA's revenue
represented 8% of consolidated revenue, while Global SA's expenses represented
6% of consolidated expenses. At December 31, 1997, Global SA's total assets
(primarily cash, mining properties under development and equipment) represented
20% of consolidated total assets. The Republic of South Africa has experienced
and continues to experience political and economic instability. While current
indications are such that instability appears to be diminishing, there can be
no assurance that the Company's business or interests in mining properties and
related options will not be materially adversely affected by local political or
economic developments.
(6) Related Party Transactions
The Company has engaged Weir International Limited ("Weir") to market and sell
the Company's diamond production. The Company shall be responsible for all
direct costs relating to the sale of the diamonds, such as insurance, freight,
import and export duties, and all applicable taxes and levies. Weir shall be
responsible for all sales and marketing expenses. In consideration of its
services, the Company shall pay Weir a commission of five percent (5%) of the
gross sale amount. Weir is a stockholder of the Company and certain members of
the Company's management, including the Company's Chairman and Chief Executive
Officer have a beneficial interest in Weir.
As of December 31, 1997 and 1996, the Company had a $25,000 account receivable
from the Chairman and Chief Executive Officer of the Company. The receivable
is unsecured, is due on demand and bears no interest.
24
<PAGE>
(7) Stock Options and Warrants
In July 1995, the Company granted its Chairman and Chief Executive Officer
performance based options to purchase up to 2,000,000 shares of common stock
at $2.40 per share. In June 1996, the Company cancelled the options and
reissued them with an exercise price of $1.50 per share and removed the
performance based vesting conditions. In August 1997, the Company cancelled
the options and reissued them with an exercise price of $.75 per share. The
options expire on July 25, 2000 and are exercisable at any time.
In conjunction with the reorganization with Global BC in July 1995, the
Company issued 1,100,000 common stock purchase warrants to certain
stockholders of Global BC. The warrants were issued as part of the securities
exchange under the securities exchange agreement and plan of reorganization
in consideration of the recipient's cancellation of warrants of like number
and terms previously granted to it by Global BC in 1994. The warrants were
exercisable at Canadian $.375 per share and expired on December 31, 1997. All
of the warrants were exercised prior to December 31, 1997.
In September 1995, the Company granted the Chairman and Chief Executive
Officer 200,000 common stock options exercisable at $1.50 per share,
exercisable at any time until they expire on September 7, 1998. In August
1997, the Company cancelled the options and reissued them with an exercise
price of $.75 per share.
In December 1995, the Company issued to certain shareholder 200,000 common
stock purchase warrants at $1.50 per share, exercisable at any time until
they expire on December 30, 1998. In August 1997, the Company cancelled the
warrants and reissued them with an exercise price of $.75 per share.
In October 1996, the Company granted 500,000 common stock options to the
Chief Financial Officer of the Company and 200,000 common stock options to
another employee of the Company. The options are exercisable at $1.25 per
share and are exercisable at any time until they expire on October 2, 2001.
In August 1997, the Company cancelled the options and reissued them with an
exercise price of $.75 per share.
In December 1996, the Company issued to a mining financial and consulting
firm located in London, England, 200,000 common stock purchase warrants at
$1.25 per share, exercisable at any time until they expire on December 31,
2000.
In August 1997, the Company issued to each of the four directors 100,000
common stock purchase warrants, exercisable at $.75 per share, exercisable at
any time until they expire on December 31, 2000. In October 1997, the Company
granted a new director 100,000 common stock purchase warrant exercisable at
$.75 per share, exercisable at any time until they expire on December 31,
2000.
In August 1997, the Company issued to a certain shareholder 200,000 common
stock purchase warrants at $.75 per share, exercisable at any time until they
expire on December 30, 1998.
In September 1997, the Company offered to the holders of the Canadian $.375
common stock purchase warrants, which expired on December 31, 1997, an
incentive of 1 new warrant for every 4 exercised by the end of September
1997. In October 1997, the Company granted 174,500 warrants to the qualifying
holders, exercisable at $.25 per share, exercisable at any time until they
expire on December 31, 1998.
In October 1997, the Company issued to a certain shareholder 808,486 common
stock purchase warrants, exercisable at $.25 per share, for assisting with
the raising of equity financing. The warrants are exercisable at any time
until they expire on March 31, 2000.
In November 1997, the Company granted 1,200,000 common stock options to the
Chairman and Chief Executive Officer of the Company, 600,000 common stock
options to the Chief Financial Officer of the Company, 200,000 to one of the
directors of the Company and 800,000 common stock options to two other
employees of the Company. The options are exercisable at $.525 per share and
are exercisable at any time until they expire on November 26, 2002.
In December 1997, the Company issued 500,000 common stock purchase warrants
at $.375 per share as part of the purchase price for the 50% interest in the
Grasdrif Property not already owned by the Company. The warrants are
exercisable at any time until they expire on December 1, 1998.
In December 1997, the Company issued common stock purchase warrants as part
of an equity financing agreement. The 346,494, 74,786, 214,286 and 172,286
warrants are exercisable at $.25, $.25, $.375 and Canadian $.375 per share
respectively, exercisable at any time until they expire on March 31, 2000,
25
<PAGE>
December 31, 1998, December 1, 1998 and March 14, 1998, respectively. The
warrants expiring on March 14, 1998 were exercised in March 1998.
In December 1997, the Company issued to a mining financial and consulting
firm located in London, England, 70,000 common stock purchase warrants,
exercisable at $.85 per share, at any time until they expire on March 6,
2001.
The per share weighted-average fair value of stock options and warrants
granted to directors, officers and employees during 1997, 1996 and 1995 was
$.46, $.66 and $1.21, respectively, on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions;
1997 - expected dividend yield 0%, risk-free interest rate of 6%, expected
life of 3 years and an expected volatility of the stock over the expected
life of the options and warrants of 70%; 1996 - expected dividend yield 0%,
risk-free interest rate of 6.54%, expected life of 3.5 years, and an expected
volatility of the stock over the expected life of the options and warrants of
40%; 1995 - expected dividend yield 0%, risk-free interest rate of 6.08%,
expected life of 3.8 years, and an expected volatility of the stock over the
expected life of the options and warrants of 40%.
The Company applies APB Opinion No. 25 in accounting for its stock options
and warrants granted to directors, officers and employees. No compensation
cost has been recognized for its stock options and warrants issued to
employees or directors of the Company in the consolidated financial
statements. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options and warrants under SFAS No.
123, the Company's net loss and net loss per share would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Net loss, as reported $(1,290,179) (676,152) (624,972)
Net loss, pro forma (1,849,099) (921,152) (2,017,972)
Basic and diluted loss per
share, as reported (.11) (.06) (.07)
Basic and diluted loss per
share, pro forma (.15) (.09) (.21)
</TABLE>
Stock option and warrant activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Shares Exercise Price
----------------------- ---------------------
<S> <C> <C>
Balance at December 31, 1994 1,100,000 $ 0.28
Granted 2,400,000 2.25
----------------------- ---------------------
Balance at December 31, 1995 3,500,000 1.63
Granted 900,000 1.25
Canceled (2,000,000) 2.40
Reissued 2,000,000 1.50
----------------------- ---------------------
Balance at December 31, 1996 4,400,000 1.14
Granted 5,860,838 0.46
Exercised (1,100,000) 0.26
Canceled (3,100,000) 1.43
Reissued 3,100,000 0.75
----------------------- ---------------------
Balance at December 31, 1997 9,160,838 $ 0.57
======================= =====================
</TABLE>
At December 31, 1997, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options and warrants were $.25 to
$1.25 and 3.1 years, respectively.
26
<PAGE>
At December 31, 1997, 1996 and 1995, the number of options and warrants
exercisable was 9,160,838, 4,400,000 and 3,500,000, respectively, and the
weighted-average exercise price of those options and warrants was $.57, $1.14
and $1.63, respectively.
(8) Properties
Caerwinning Deposit and Montrose Kimberlite Pipe
The Company, through its wholly-owned subsidiary, Global SA, owns options to
acquire two mining properties (the Caerwinning Deposit and the Montrose
Kimberlite Pipe) in South Africa and a 100% interest in a third South African
property (the Grasdrif Deposit, see Grasdrif Deposit below). The Caerwinning
option allows for the transfer of the mineral lease to Global SA with
governmental consent and provides for the right to mine alluvial deposits for
1,140,000 Rand (US $234,000 at December 31, 1997) and the right to mine the
pipes or fissures that may be discovered for 8,000,000 Rand (US $1,644,000 at
December 31, 1997). This amount is payable only if and when such pipes or
fissures are discovered and if management deems this deposit to be
economically exploitable. The right to mine pipes or fissures discovered on
the property could be granted to a third party if the option is not
exercised. The Company exercised the alluvial deposit option for the
Caerwinning Deposit in June 1996 and is waiting governmental consent for
transfer of the mineral lease. Approval is expected in the second quarter of
1998 (See Caerwinning Option below). The mineral lease and mining
authorization for the Caerwinning Deposit also requires that the government
receive approximately 5 percent of gross proceeds from mining. The mineral
lease for the Caerwinning Deposit has an initial ten year term with a ten
year renewal option, subject to Lama Minerals CC's right to terminate the
mineral lease based on the Company's default thereunder. It may be terminated
by the Company with 30 days notice. The Company is required to meet certain
requirements to maintain good standing with the lessor. The option for the
Montrose Kimberlite Pipe expires on October 10, 1998. The contract for the
Montrose Kimberlite Pipe provides that the Company must pay the owner 10
percent of the recovery value of any minerals prospected and recovered,
during the option period. The option on the Montrose Kimberlite Pipe property
includes the exclusive option to purchase the related land and mineral rights
for 2,800,000 Rand (US $575,000 at December 31, 1997). A prospecting permit
is required for the Montrose Kimberlite Pipe from the local government and is
renewable annually subject to government approval. The Company presently
holds such a permit for the Montrose Kimberlite Pipe, which expires on
October 10, 1998. The Company has expensed all option payments, with the
exception of the option payments on the Caerwinning Deposit from July 1,
1996, because of uncertainty regarding recoverability or future benefit.
Grasdrif Deposit
The Company had entered into a joint venture for purposes of mining the
Grasdrif Deposit. In December 1997, the Company purchased the 50 percent of
the joint venture not already owned by it for 800,000 Rand (US $164,000),
1,000,000 common shares and 500,000 common stock purchase warrants. The
Company owns the exclusive mining rights to the Grasdrif Deposit. A royalty
of 5 percent is payable to the surface owner. A prospecting permit is
required from the local government and is renewable annually subject to
government approval. The Company presently holds such a permit, which expires
August 4, 1998.
Caerwinning Option
As discussed above, in June 1996, the Company exercised the option for the
mineral lease for the alluvial deposits. The mineral lease is issued upon
governmental approval, which is expected in the second quarter of 1998. The
Company will pay the 1,140,000 Rand (US $234,000 at December 31, 1997) for
the option upon governmental approval of the mineral lease.
(9) Commitments and Contingencies
Lease Agreement
As of December 31, 1997, the Company had a noncancelable operating lease
commitment for the Company's corporate office expiring in March 1999. The
monthly rent payment on this operating lease is $1,067. Additionally, the
Company rents office space in South Africa on a month-to-month basis. Rent
expense for the years ended December 31, 1997, 1996 and 1995 was $14,272,
$14,134 and $20,062, respectively.
27
<PAGE>
Legal Matters
From time-to-time, the Company is subject to certain litigation in the
ordinary course of business. At the present time, the Company is not party to
any pending legal proceedings that it believes will have a material adverse
effect on its financial position, results of operations or liquidity.
(10) Common Stock Split
In December 1997, the Company's Board of Directors declared a two-for-one
stock split in the Company's common stock. In addition, they declared that
the par value of the common stock be adjusted from $.001 per common share to
$.0005 per common share. The stock split and adjustment to par value were
effective December 19, 1997. All share and per share data, including stock
options and warrants, included in these financial statements have been
restated to reflect this stock split.
28
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Inapplicable.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Directors and Executive Officers
- --------------------------------
Set forth below are the directors and officers of the Company and its South
African subsidiary, Global Diamond Resources (SA)(Pty) Limited ("Global
Diamond-SA"). Unless otherwise indicated, each person holds the stated positions
with both companies.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Johann de Villiers 45 Chairman of the Board and Chief Executive Officer
Mervyn McCulloch 54 Chief Financial Officer,
Secretary and Director of the Company
Pieter van Wyk 46 Director of Exploration and Mining and Director
of the Company
John Tyson 50 Director of the Company
Charles MacDonald 44 Director of the Company
Abu Bakr Bin Ali Al-Akhdar Mood 41 Director of the Company
Said H. Ghachem 56 Director of the Company
Gasem S. Al-Shaikh 44 Director of the Company
Andries Janzen 54 Managing Director of Global Diamond-SA and
Director of the Company
Derek Williams 35 Chief Financial Officer and Director of Global
Diamond-SA
</TABLE>
Mr. de Villiers founded the business of the Company in 1993 and has served as
Chairman and Chief Executive Officer since inception. From 1984 to 1990, Mr. de
Villiers served as Chief Executive Officer of Kensington Finance Corp., an
options trading firm and member of the American Stock Exchange. From 1990 to
1994, Mr. de Villiers acted as investment advisor to the Monitrend Gold Mutual
Fund. From 1976 to 1984, Mr. de Villiers was the managing director of the Octha
Group, a South Africa based international diamond mining, polishing and trading
company.
Mr. McCulloch has served as Chief Financial Officer and Secretary of the
Company since March 1995 and as a director of the Company since October 1997.
Mr. McCulloch is a Certified Public Accountant and was a partner of Deloitte,
Haskins & Sells in South Africa from 1972 to 1984 and a partner in Deloitte &
Touche in the United States from 1985 to 1990. From 1990 to 1995, Mr. McCulloch
was Executive Vice President and Chief Financial Officer of Armor All Products
Corporation, a NASDAQ/NMS public corporation located in California.
Mr. van Wyk has served as Chief Consulting Geologist of Global Diamond-SA from
July 1994 to February 1998. In February 1998, Mr. van Wyk was appointed to
serve as Director of Exploration and Mining of the Company and as member of the
Company's Board of Directors. Mr. van Wyk holds a M.Sc. (Geology) and has
lectured in Sedimentology at the University of Pretoria and in Economic Geology
at the Rand Afrikaans University. He was the Senior Field Geologist for Rand
Mines before operating his own diamond mining and exploration concern with
29
<PAGE>
interests in southern Namibia (alluvials), south of Kimberley (kimberlite
fissures), and west of Kimberley along the Vaal River (alluvials) at
Caerwinning. He is the published author of a number of articles.
Mr. Tyson has served as director of the Company since 1994. Since 1990, Mr.
Tyson has served as President of Tyson & Associates, an international consulting
firm headquartered in Washington, D.C. specializing in providing investment,
business development and promotional services to African countries.
Mr. MacDonald has served as a director of the Company since July 1995. Since
1990, Mr. MacDonald has been engaged in the practice of law in Cape Town, South
Africa.
Eng. Abu Bakr Bin Ali Al-Akhdar Mood has served as a director of the Company
since December 1997. He has also served as the Managing Director of the
Petroleum Chemicals and Mining Division and an Executive Board Member of the
Saudi Binladin Group, headquartered in Jeddah, Kingdom of Saudi Arabia, since
1994. The Saudi Binladin Group is a diversified international conglomerate
specializing in the construction of major infrastructure projects worldwide.
Eng. Abu Bakr Bin Ali Al-Akhdar Mood serves on the Board of Directors of the
Company as the nominee of International PCM Holdings Limited.
Mr. Said H. Ghachem has served as a director of the Company since December
1997. He has also served as the Vice President of International Business
Development of the Saudi Binladin Group since 1994. Mr. Ghachem serves on the
Board of Directors of the Company as the nominee of International PCM Holdings
Limited.
Eng. Gasem S. Al-Shaikh as served as a director of the Company since December
1997. He has also served as the Deputy Managing Director of the Petroleum
Chemicals and Mining Division and an Executive Board Member of the Saudi
Binladin Group since 1994. Eng. Gasem S. Al-Shaikh serves on the Board of
Directors of the Company as the nominee of International PCM Holdings Limited.
Mr. Janzen has served as Managing Director of Global Diamond-SA since July
1994 and a director of the Company since February 1998. Mr. Janzen is a
qualified engineer with a degree in commerce, and a shareholder and general
manager of Elite Diamond Cutting Works (Pty) Ltd., a South African based diamond
cutting and trading company. He was the general manager of the Octha Group,
having established its Johannesburg and Taiwan diamond cutting factories. In
this position he was responsible for the operations of five producing diamond
mines, an active mine exploration program, two diamond polishing factories, as
well as the marketing organization of the group that extended to Belgium,
Switzerland and the United States.
Mr. Williams has served as Chief Financial Officer of Global Diamond-SA since
March 1998. Mr. Williams previously served as Chief Financial Officer of
Thompson Publishing SA (Pty) Ltd. from June 1995 to February 1998; Financial and
Administrative Manager of VIVO African Breweries (Pty) Ltd. from July 1994 to
April 1995; and Financial Manager of ZIMCO Industries from July 1991 to June
1994. All of the foregoing companies are based in South Africa. Mr. Williams
is a Chartered Accountant in South Africa.
30
<PAGE>
Item 10. Executive Compensation.
Cash Compensation of Executive Officers. The following table sets forth the
cash compensation paid by the Company to its executive officers for services
rendered during the fiscal years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION> Long-Term
Annual Compensation Compensation
---------------------------------------- -----------------------
Common
Restricted Underlying
Other Stock Options
Annual Awards Granted All Other
Name and Position Year Salary Bonus Compensation ($) (# Shares) Compensation
- ------------------------- ---- ------ ----- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Johann de Villiers, CEO(1) 1997 $127,500 12,500 -0- -0- 1,300,000(2) -0-
1996 60,000 5,000 -0- -0- -0- -0-
1995 40,000 -0- -0- -0- 2,200,000(3) -0-
Mervyn McCulloch, CFO(4) 1997 $121,000 10,000 -0- -0- 700,000(5) -0-
1996 42,000 3,000 -0- -0- 500,000(6) -0-
1995 -0- -0- -0- -0- -0- -0-
</TABLE>
_______________
(1) The Company has entered into a five year employment agreement with Mr. de
Villiers effective as of February 4, 1998. Pursuant to the agreement, Mr.
de Villiers receives a monthly salary of $20,833 and a monthly car
allowance of $750. In addition, Mr. de Villiers is entitled to participate
in a senior management bonus pool in the amount of 10% of the Company's
annual after tax earnings.
(2) On August 11, 1997, the Company granted Mr. de Villiers a Nonqualified
Stock Option which allows Mr. de Villiers to purchase up to 100,000 shares
of Common Stock at $.75 per share. The option is fully vested and may be
exercised at any time, or from time to time, until December 31, 2000. On
November 26, 1997, the Company granted to Mr. de Villiers a Nonqualified
Stock Option which allows Mr. de Villiers to purchase up to 1,200,000
shares of Common Stock at $.75 per share. The option is fully vested and
may be exercised at any time, or from time to time, until November 26,
2002.
(3) On July 25, 1995, the Company granted to Mr. de Villiers a Nonqualified
Stock Option which, as amended, allows Mr. de Villiers to purchase up to
2,000,000 shares of Common Stock at $1.50 per share. The option is fully
vested and may be exercised at any time, or from time to time, until July
25, 2000. On September 7, 1995, the Company granted to Mr. de Villiers a
Nonqualified Stock Option to purchase 200,000 shares of Common Stock at any
exercise price of $1.50 per share. The option is fully vested, and
immediately exercisable and expires on September 7, 1998. On August 11,
1997 the exercise price on both options was adjusted to $.75 per share.
(4) The Company has entered into a five year employment agreement with Mr.
McCulloch effective as of February 4, 1998. Pursuant to the agreement, Mr.
McCulloch receives a monthly salary of $15,000 and a car allowance of $500.
In addition, Mr. McCulloch is entitled to participate in a senior
management bonus pool in the aggregate amount of 10% of the Company's
annual after tax earnings.
(5) On October 10, 1997, the Company granted to Mr. McCulloch a Nonqualified
Stock Option which allows Mr. McCulloch to purchase up to 100,000 shares of
Common Stock at $.75 per share. The option is fully vested and may be
exercised at any time, or from time to time, until December 31, 2000. On
November 26, 1997, the Company granted to Mr. McCulloch a Nonqualified
Stock Option which allows Mr. McCulloch to purchase up to 600,000 shares of
Common Stock at $.75 per share. The option is fully vested and may be
exercised at any time, or from time to time, until November 26, 2002.
(6) On October 2, 1996, the Company granted to Mr. McCulloch a Nonqualified
Stock Option to purchase 500,000 shares of Common Stock at an exercise
price of $1.50 per share. The option is fully vested and immediately
exercisable and expires on October 2, 2001. On August 11, 1997 the
exercise price was adjusted to $.75 per share.
31
<PAGE>
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------------------------------------------------------
Number of Securities % of Total Options/SARs
Underlying Options/SARs Granted to Employees in Fiscal Exercise or Base
Name Granted (#) Year Price ($/Sh) Expiration Date
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Johann de Villiers 100,000 3% $.75 12/31/00
Johann de Villiers 1,200,000 36% $.75 11/26/02
Mervyn McCulloch 100,000 3% $.75 12/31/00
Mervyn McCulloch 600,000 18% $.75 11/26/02
</TABLE>
Compensation of Directors. All non-officer directors receive an attendance
fee of $1,000 per meeting of the Board of Directors. All directors receive
reimbursement for out-of-pocket expenses in attending Board of Directors
meetings. From time to time the Company may engage certain members of the Board
of Directors to perform services on behalf of the Company. The Company will
compensate the members for their services at rates no more favorable than could
be obtained from unaffiliated parties.
32
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the shares of Common Stock as of March 23, 1998 by (i) each person
who is known by the Company to be the beneficial owner of more than five percent
(5%) of the issued and outstanding shares of Common Stock, (ii) each of the
Company's directors and executive officers and (iii) all directors and executive
officers as a group.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage Owned
---------------- ----------------
<S> <C> <C>
Johann de Villiers(1)(2) 1,642,668 6.4%
Mervyn McCulloch(1)(3) 1,345,500 5.3%
Pieter van Wyk(1)(4) 600,000 2.4%
John Tyson(1)(5) 393,920 1.6%
Charles MacDonald(1)(6) 225,000 (7)
Abu Bakr Bin Ali Al-Akhdar Mood(1) (8) --
Said H. Ghachem(1) (8) --
Gasem S. Al-Shaikh(1) (8) --
Andries Janzen(1) -- --
International PCM Holdings Limited(9) 9,711,525 37.5%
All officers and directors 4,207,088 15.1%
as a group
_______________
</TABLE>
(1) Address is 836 Prospect, Suite 2B, La Jolla, California 92037.
(2) Includes 1,542,668 shares of Common Stock underlying immediately
exercisable options held by Mr. de Villiers.
(3) Includes 1,200,000 shares of Common Stock underlying immediately
exercisable options held by Mr. McCulloch.
(4) Represents 600,000 shares of Common Stock underlying immediately
exercisable options.
(5) Includes 300,000 shares of Common Stock underlying immediately
exercisable options.
(6) Includes 100,000 shares of Common Stock underlying immediately
exercisable options.
(7) Less than one percent.
(8) Serves on the Board of Directors of the Company as the nominee of
International PCM Holdings Limited.
(9) Includes 1,807,816 shares of Common Stock issuable upon conversion of a
Secured Convertible Promissory Note. Does not include 635,566 shares of
Common Stock underlying warrants not immediately exercisable.
33
<PAGE>
Item 12. Certain Relationships and Related Transactions.
The Company has engaged Weir International Limited ("Weir") to market and sell
the Company's diamond production. The Company shall be responsible for all
direct costs relating to the sale of the diamonds, such as insurance, freight,
import and export duties, and all applicable taxes and levies. Weir shall be
responsible for all sales and marketing expenses. In consideration of its
services, the Company shall pay Weir a commission of five percent (5%) of the
gross sale amount. In June 1997, the Company paid Weir a fee of $16,000 in
consideration of consulting services rendered. Weir is a stockholder of the
Company and the Company's Chief Executive Officer, Johann de Villiers, has a
beneficial interest in Weir. The Company believes that the terms of its
transactions with Weir are no less favorable than could be obtained from an
unaffiliated party.
In December 1997, the Company entered into a consulting agreement with a
director of the Company, John Tyson. The Agreement provides for consulting fees
of $5,000 per month to Mr. Tyson and is terminable by either party effective
upon written notice. Mr. Tyson provides advice and assistance to the Company
with respect to its relationships with the Republic of South Africa and other
possible mining prospects in the rest of Africa. The Company believes that the
terms of its agreement with Mr. Tyson are no less favorable than could be
obtained from an unaffiliated party.
Item 13. Exhibits and Reports on Form 8-K.
(a) 2.1* Securities Purchase Agreement and Plan of Reorganization dated July
17, 1995 between Western Capital Financial Corporation and Global
Diamond Resources, Inc.
3.1* Articles of Incorporation of the Company
3.2* Bylaws of the Company
4.1* Specimen of Common Stock Certificate
10.1* Notarial Prospecting Contract dated March 22, 1995 between Global
Diamond Resources (SA)(Pty) Limited and Maria Anna Gobey (Montrose
Kimberlite Pipe).
10.2* Deed of Assignment between Lama Minerals CC and Global Diamond
Resources (SA)(Pty) Limited (Caerwinning Deposit).
10.3* Deed of Assignment dated March 25, 1995 between Global Diamond
Resources (SA)(Pty) Limited and Nabas Holdings (Pty) Limited
(Grasdrif Deposit).
10.4 Securities Purchase Agreement dated December 5, 1997 between the
Company and International PCM Holdings Limited.
21.1 The Company's subsidiaries are Global Diamond Resources, Inc., a
British Columbia corporation, and Global Diamond Resources (SA)(Pty)
Limited, a South African corporation, Global Diamonds Resources
International Limited, a British Virgin Islands corporation, and
Nabas Diamonds (Pty) Ltd., a South African corporation
27.1 Financial Data Schedule.
_______________
*Previously filed as part of registration statement on Form 10-SB (SEC File No.
0-21635) filed with the Securities and Exchange Commission on October 29, 1996.
(b) Reports on Form 8-K.
During the fourth quarter of the fiscal year ended December 31, 1997, the
Company filed a Current Report on Form 8-K to report the terms of the investment
by International PCM Holdings Limited.
34
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GLOBAL DIAMOND RESOURCES, INC.
Date: March 26, 1998 By: /s/ JOHANN DE VILLIERS
-------------------------------------------
Johann de Villiers, Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ JOHANN DE VILLIERS
- ----------------------------------- Chairman of the Board March 26, 1998
JOHANN DE VILLIERS and Chief Executive Officer
/s/ MERVYN MCCULLOCH
- ----------------------------------- Chief Financial Officer March 26, 1998
MERVYN MCCULLOCH and Principal Accounting Office r
/s/ PIETER VAN WYK
- ----------------------------------- Director March 26, 1998
PIETER VAN WYK
/s/ JOHN TYSON
- ----------------------------------- Director March 26, 1998
JOHN TYSON
/s/ CHARLES MACDONALD
- ----------------------------------- Director March 26, 1998
CHARLES MACDONALD
/s/ ABU BAKR BIN ALI AL-AKHDAR MOOD
- ----------------------------------- Director March 26, 1998
ABU BAKR BIN ALI AL-AKHDAR MOOD
/s/ SAID H. GHACHEM
- ----------------------------------- Director March 26, 1998
SAID H. GHACHEM
/s/ GASEM S. AL-SHAIKH
- ----------------------------------- Director March 26, 1998
GASEM S. AL-SHAIKH
/s/ ANDRIES JANZEN
- ----------------------------------- Director March 26, 1998
ANDRIES JANZEN
</TABLE>
35
<PAGE>
EXHIBIT 10.4
GLOBAL DIAMOND RESOURCES, INC.
SECURITIES PURCHASE AGREEMENT
--------------------------------------------
December 5, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purchase and Sale of Securities ..................................... 1
2. Deliveries at Closing ............................................... 2
3. Representations and Warranties of the Company ....................... 4
4. Representations, Warranties and Covenants of the Purchaser .......... 10
5. Indemnification ..................................................... 12
6. Post-Closing Covenants .............................................. 13
7. Registration Rights ................................................. 16
8. Miscellaneous ....................................................... 26
</TABLE>
EXHIBITS
--------
A. Secured Convertible Promissory Note
B. Pledge Agreement
C. Corporate Guaranty
D. Warrant Certificates
E. Company's Officer's Certificate
F. Opinion of Company Counsel
G. Opinion of GDRIL Counsel
H. Opinion of Global Diamond-SA Counsel
I. Purchaser's Officer's Certificate
<PAGE>
SECURITIES PURCHASE AGREEMENT
-----------------------------
This Securities Purchase Agreement ("Agreement") is entered into this 5th
day of December 1997, by and among GLOBAL DIAMOND RESOURCES, INC., a Nevada
corporation (the "Company"), GLOBAL DIAMOND RESOURCES INTERNATIONAL LIMITED, a
British Virgin Islands company ("GDRIL"), and INTERNATIONAL PCM HOLDINGS
LIMITED, a British Virgin Islands company ("Purchaser").
R E C I T A L S
- - - - - - - -
A. The Company and GDRIL desire to obtain additional capital in order to
further the mine development and operations of GRDIL's South African
subsidiaries.
B. In order to obtain such funds, GDRIL desires to sell and issue to the
Purchaser at Closing (as defined below) GDRIL's Secured Convertible Promissory
Note in the original principal amount of Three Million U.S. Dollars
(U.S.$3,000,000) and the Company desires to sell and issue to the Purchaser
3,525,241 shares of the Company's $.001 par value common stock ("Common Stock"),
for the aggregate payment of Six Million U.S. Dollars (U.S.$6,000,000), on the
terms and subject to the conditions set forth herein.
A G R E E M E N T
- - - - - - - - -
It is agreed as follows:
1. Purchase and Sale of Securities.
-------------------------------
1.1 Purchase and Sale of Shares. Subject to the terms and conditions
---------------------------
herein stated, the Company agrees to sell and issue to the Purchaser, and the
Purchaser agrees to purchase from the Company, 3,525,241 shares ("Shares") of
Common Stock at a total purchase price of Three Million U.S. Dollars
(U.S.$3,000,000), which Shares constitute thirty percent (30%) of the issued and
outstanding Common Stock of the Company as of the date hereof.
1.2 Purchase and Sale of Note. Subject to the terms and conditions
-------------------------
herein stated, GDRIL agrees to sell and issue to the Purchaser, and the
Purchaser agrees to purchase from GDRIL, GDRIL's Secured Convertible Promissory
Note ("Note") in the original principal amount of up to Three Million U.S.
Dollars (U.S.$3,000,000) at a purchase price of Three Million U.S. Dollars (U.S.
$3,000,000).
1.2.1 Note. The Note shall be in the form of, and have the
----
payment terms, interest rate, and other rights, terms and conditions as provided
in the Note attached hereto as Exhibit "A".
1.2.2 Security for the Note. To secure repayment and full
---------------------
and timely performance of the obligations of GDRIL under the Note, GDRIL shall
enter into the Pledge Agreement attached hereto as Exhibit "B" (the "Pledge
Agreement") pursuant to which GDRIL
-1-
<PAGE>
shall pledge to the Purchaser and grant to the Purchaser a security interest in
and to 100% of the issued and outstanding shares of Global Diamond Resources
(SA) (Pty) Limited ("Global Diamond-SA"), a South African corporation wholly-
owned by GDRIL.
1.2.3 Corporate Guaranty. As further security for the repayment
------------------
of the Note, the Company shall unconditionally and irrevocably guarantee all of
GDRIL's payment and other obligations under the Note pursuant to a Corporate
Guaranty in the form attached to this Agreement as Exhibit "C" ("Guaranty").
1.3 Purchase and Sale of Warrants. Subject to the terms and
-----------------------------
conditions of this Agreement, the Company agrees to sell and issue to the
Purchaser, for no additional consideration, four (4) separate common stock
purchase warrants in the forms attached to this Agreement as Exhibit "D" (the
"Warrants"). The Warrants shall give the Purchaser the right to purchase a
number of shares of Common Stock at the exercise price and subject to the terms
and conditions as contained in the Warrants, it being understood that the
Warrants have been prepared with the intent of affording the Purchaser the right
to maintain its 30% shareholding in the Company in the event that outstanding
warrants having an exercise price of less than $1.00 are exercised.
1.4 Closing. The closing of the transactions contemplated by this
-------
Agreement ("Closing") shall take place at the offices of Baker & McKenzie,
Twelfth Floor, 101 West Broadway, San Diego, California at 11:00 a.m. on
December 5, 1997, or at such other time or place as the parties hereto shall by
written instrument designate (with the date on which such Closing takes place
referred to as the "Closing Date"). Except as otherwise provided herein, the
Closing may be conducted by means of exchange of documents via facsimile with
original documents to be exchanged by overnight mail. At the Closing, GDRIL
shall deliver to the Purchaser the Note and the Company shall deliver to the
Purchaser the certificates representing the Shares and Warrants purchased by the
Purchaser under this Agreement in definitive form and registered in the name of
the Purchaser against delivery to the Company by the Purchaser of separate wire
transfers to the general accounts of GDRIL and the Company in the amounts of One
Million One Six Hundred Thousand U.S. Dollars ($U.S.1,600,000), representing the
first installment under the Note, and Three Million U.S. Dollars
(U.S.$3,000,000), respectively (together with the conditional second installment
under the Note in the amount of $U.S.1,400,000, collectively referred to as the
"Purchase Price").
2. Deliveries at Closing.
---------------------
2.1 Company's Deliveries at Closing. At the Closing, the Company and
-------------------------------
GDRIL shall deliver or cause to be delivered to the Purchaser all of the
following:
(a) the Note, duly executed by GDRIL;
(b) a certificate or certificates representing the Shares and
each of the Warrants, registered in the name of the Purchaser;
-2-
<PAGE>
(c) the Pledge Agreement, duly executed by each of GDRIL, the
Company and Global Diamond-SA;
(d) the Guaranty, duly executed by the Company;
(e) an Officer's Certificate of the Company in the form attached
hereto as Exhibit "E";
(f) certified resolutions of the Board of Directors of each of
the Company, GDRIL and Global Diamond-SA authorizing consummation of the
transactions contemplated by this Agreement;
(g) an opinion letter of counsel for the Company in the form
attached hereto as Exhibit "F";
(h) an opinion letter of counsel for GDRIL in the form attached
hereto as Exhibit "G";
(i) an opinion letter of counsel for Global Diamond-SA in the
form attached hereto as Exhibit "H";
(j) a Certificate of Good Standing from the State of Nevada for
the Company as of a date not earlier than ten (10) business days before the
Closing; and
(k) such other documents and instruments as shall be reasonably
necessary to effect the transactions contemplated hereby.
2.3 Purchaser's Deliveries at Closing. At the Closing, the Purchaser
---------------------------------
shall deliver or cause to be delivered to the Company and to GDRIL all of the
following:
(a) separate wire transfers of immediately available funds to
GDRIL's and the Company's general accounts in the amounts of $1,600,000 and
$3,000,000, respectively;
(b) the Pledge Agreement, duly executed by the Purchaser;
(c) an Officer's Certificate of the Purchaser in the form
attached hereto as Exhibit "I";
(d) certified resolutions of the Purchaser's Board of Directors
authorizing consummation of the transactions contemplated by this Agreement; and
(e) such other documents and instruments as shall be reasonably
necessary to effect the transactions contemplated hereby.
-3-
<PAGE>
3. Representations and Warranties of the Company and GDRIL.
-------------------------------------------------------
As a material inducement to the Purchaser to enter into this Agreement
and to purchase the Shares, the Note and the Warrants, each the Company and
GDRIL represents and warrants, jointly and severally, that the following
statements are true and correct in all material respects except as expressly
qualified or modified herein.
3.1 Organization and Good Standing. The Company is a corporation
------------------------------
duly organized, validly existing, and in good standing under the laws of the
State of Nevada and has full corporate power and authority to enter into and
perform its obligations under this Agreement, and to own its properties and to
carry on its business as presently conducted and as proposed to be conducted.
The Company is duly qualified to do business as a foreign corporation in every
jurisdiction in which the failure to so qualify would have a material adverse
effect upon the Company. GDRIL is a corporation duly organized, validly
existing, and in good standing under the laws of the British Virgin Islands and
has full corporate power and authority to enter into and perform its obligations
under this Agreement, and to own its properties and to carry on its business as
presently conducted and as proposed to be conducted. GDRIL is duly qualified to
do business as a foreign corporation in every jurisdiction in which the failure
to so qualify would have a material adverse effect upon GDRIL.
3.2 Capitalization. The authorized capital stock of the Company
--------------
consists of 10,000,000 shares of Preferred Stock, $.001 par value, of which no
shares are issued, and 25,000,000 shares of Common Stock, $.001 par value, of
which 8,225,561 shares are issued and outstanding. All of the issued and
outstanding capital shares of GDRIL are owned by the Company and the Company's
wholly-owned subsidiary, Global Diamond Resources Inc., a British Columbia
corporation. The authorized capital of Global Diamond-SA consists of 100
ordinary shares, of which 95 shares are issued and outstanding and held by
GDRIL. Global Diamond-SA owns 50% of the issued and outstanding share capital
of Nabas Diamonds (Pty) Limited, a South African corporation ("Nabas Diamonds"),
free and clear of any mortgage, deed of trust, pledge, lien, security interest
or other charge or encumbrance of any nature. There are no options, warrants or
rights outstanding which entitle their holder to purchase or acquire any capital
shares of GDRIL, Global Diamond-SA or Nabas Diamonds. All outstanding shares of
Common Stock have been duly authorized and validly issued, and are fully paid,
nonassessable, and free of any preemptive rights. The Shares and the Warrants,
along with the shares of Common Stock underlying the Note and Warrants
(collectively referred to as the "Securities") are duly authorized and, when
issued and paid for in accordance with the terms of the Agreement, the Note or
the Warrants, as the case may be, will be validly issued, fully paid and
nonassessable. Except as set forth in Schedule 3.2, there are no agreements,
options, warrants or other rights to purchase any of the Company's authorized
and unissued Preferred Stock or Common Stock, and there are no voting, pooling
or voting trust agreements, arrangements or contracts known to the Company by
and among the Company, its shareholders, or any of them.
-4-
<PAGE>
3.3 No Subsidiaries. Except as set forth on Schedule 3.3, the
---------------
Company does not control, or have any interest in, directly or indirectly, any
corporation, partnership, business trust, association or other business entity.
3.4 SEC Reports. The Company has delivered to the Purchaser its
-----------
annual report on Form 10-KSB for the fiscal year ended December 31, 1996 and all
quarterly reports on Form 10-QSB subsequently filed with the U.S. Securities and
Exchange Commission (collectively, the "SEC Reports"). Except as set forth in
Schedule 3.4 or this Agreement, the information in the SEC Reports, taken as a
whole, is true and correct in all material respects and does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
3.5 Validity of Transactions. This Agreement, and each document
------------------------
executed and delivered by each of the Company and GDRIL in connection with the
transactions contemplated by this Agreement, and the performance of the
transactions contemplated therein have been duly authorized, executed and
delivered by each of the Company and GDRIL and is each the valid and legally
binding obligation of each of the Company and GDRIL, enforceable in accordance
with its terms, except as limited by applicable bankruptcy, insolvency
reorganization and moratorium laws and other laws affecting enforcement of
creditor's rights generally and by general principles of equity. The Shares
issuable hereunder, when issued in accordance with the terms of this Agreement
will be duly authorized, validly issued, fully paid and nonassessable. The
Securities will be free of any liens or encumbrances, except for any
restrictions imposed by federal or state securities laws.
3.6 No Violation. The execution, delivery and performance of this
------------
Agreement and each document executed and delivered by the Company and GDRIL has
been duly authorized by the Boards of Directors of each of the Company and GDRIL
and, to the extent necessary, the shareholders of each of the Company and GDRIL,
will not violate any law or any order of any court or government agency
applicable to the Company or GDRIL, as amended, as the case may be, or the
Articles of Incorporation or Bylaws of the Company or GDRIL, as amended, and
will not result in any breach of or default under, or, except as expressly
provided herein, result in the creation of any encumbrance upon any of the
assets of the Company or GDRIL pursuant to the terms of any agreement or
instrument by which the Company or GDRIL or any of their assets may be bound.
No approval of or filing with any governmental authority is required for either
of the Company or GDRIL to enter into, execute or perform this Agreement.
3.7 Litigation. Except as set forth in the SEC Reports, there are no
----------
suits or proceedings (including without limitation, proceedings by or before any
arbitrator, government commission, board, bureau or other administrative agency)
pending or, to the knowledge of the Company or GDRIL, threatened against or
affecting the Company or GDRIL which, if adversely determined, would have a
material adverse effect on the consolidated financial condition, results of
operations, prospects or business of the Company or GDRIL, or which questions
the validity of this Agreement or any action to be taken in connection
therewith, and neither the Company nor GDRIL is subject to or in
-5-
<PAGE>
default with respect to any order, writ, injunction or decree of any federal,
state, local or other governmental department. Neither the Company nor GDRIL has
commenced nor currently intends to commence any legal proceedings against any
other person or entity.
3.8 Mining Properties. Neither the Company nor any of its
-----------------
subsidiaries own any real property or mining interests except as set forth on
Schedule 3.8 attached hereto. Set forth on Schedule 3.8 attached hereto is a
complete list as of the date hereof of all contracts and permits which represent
Global Diamond-SA's and Nabas Diamond's mining properties and interests ("Mining
Contracts"). Each of the Mining Contracts is legal, binding and enforceable, is
in full force and effect, and grants to the Company or its subsidiaries, as the
case may be, the exclusive right to mine the property interest demised
thereunder, except as expressly limited by the terms of the respective Mining
Contract and applicable South African law. Except as set forth in Schedule 3.8,
none of the Mining Contracts will expire or be terminated or be subject to any
modification of terms or conditions upon the consummation of the transactions
contemplated by this Agreement. All amounts due and payable by the Company or
its subsidiaries under the Mining Contracts have been fully paid. There are no
actual or, to the knowledge of the Company and GDRIL, threatened expropriations,
interdicts or rood proclamations relating to the premises covered by the Mining
Contracts, and no claims for restitution of land rights have been lodged under
the South African Restitution of Lands Rights Act 20 of 1994 in relation to the
premises covered by the Mining Contracts. Nabas Diamonds has all necessary
statutory consents to prospect in that area of the Richtersveld National Park
covered by the prospecting permit therefor and it has obtained a Section 51(3)
permission in terms of the Rural Areas Act 9 of 1987 to prospect in the area
covered by the Grasdrif prospecting permit. Except as set forth in Schedule
3.8, neither Global Diamond-SA nor Nabas Diamonds is in default in any material
respect under the terms of any Mining Contract nor has any event occurred which,
with the passage of time or giving of notice, would constitute such a default by
Global Diamond-SA or Nabas Diamonds and, to the Company's knowledge, no other
party to any such Mining Contract is in default in any material respect
thereunder nor has any such event occurred with respect to such party. The
Company or its subsidiaries, as the case may be, has good and valid title to
each of the mining interests demised under the Mining Contracts free and clear
of any liens or encumbrances, except those set forth in the Mining Contracts and
applicable South African law.
3.9 Use of Proceeds. The Company and GDRIL shall use the proceeds
---------------
from the sale of the Securities solely for the purpose of furthering the
operations of the Company, GDRIL and its South African subsidiaries.
3.10 Taxes. All federal income tax returns and state and local income
-----
tax returns for each of the Company and GDRIL have been filed as required by
law; all taxes as shown on such returns or on any assessment received subsequent
to the filing of such returns have been paid, and there are no pending
assessments or adjustments or any income tax payable for which reserves, which
are reasonably believed by the Company to be adequate for the payment of any
additional taxes that may come due, have not been established. All other taxes
imposed by any government authority on either the Company or GDRIL have been
paid and any reports or returns due in connection therewith have been filed. No
outstanding claim for assessment or collection of taxes has been asserted
against
-6-
<PAGE>
the Company or GDRIL, and there are no pending, or to the knowledge of
the Company or GDRIL, threatened tax audits, examinations or claims.
3.11 No Defaults. No material default (or event which, with the
-----------
passage of time or the giving of notice, or both, would become a material
default) exists or is alleged to exist with respect to the performance of any
obligation either of the Company or GDRIL under the terms of any indenture,
license, mortgage, deed of trust, lease, note, guaranty, joint venture
agreement, operating agreement, partnership agreement, or other contract or
instrument to which either the Company or GDRIL is a party or any of its assets
are subject, or by which it is otherwise bound, and, to the best knowledge of
the Company, no such default or event exists or is alleged to exist with respect
to the performance of any obligation of any party thereto.
3.12 Environmental Matters. Based on the actual knowledge of the
---------------------
Company and GDRIL: (i) the operations of Global Diamond-SA and Nabas Diamonds
comply in all respects with all applicable South African environmental, health
and safety statutes and regulations; (ii) none of the operations of the Company,
Global Diamond-SA and Nabas Diamonds involve the unlawful generation of,
transportation, treatment or disposal of hazardous waste; (iii) neither Global
Diamond-SA or Nabas Diamonds has disposed of any hazardous waste or substance by
placing it in or on the ground of any premises owned, leased or used by it; and
(iv) no underground storage tanks or surface impoundments are on any of the
premises owned, leased or used by the Company, Global Diamond-SA or Nabas
Diamonds. There are no pending or to the actual knowledge of the Company and
GDRIL, threatened claims, encumbrances or restrictions of any nature resulting
from environmental laws with respect to or affecting any properties in which the
Company or its subsidiaries has an interest.
3.13 Insurance. The Company has insurance with respect to its
---------
property and operations in the United States as set forth in Schedule 3.13.
3.14 Absence of Undisclosed Liabilities. The Company has no
----------------------------------
liabilities or obligations of any nature, whether known or unknown, absolute,
accrued contingent or otherwise, and whether due or to become due, not disclosed
in the SEC Reports, except: (a) those set forth in Schedule 3.14; and (b) those
which (i) were incurred in the ordinary course of business subsequent to
September 30, 1997, and (ii) individually and in the aggregate are not material
to the operations or financial condition of the Company.
3.15 Securities Law Compliance. Assuming the accuracy of the
-------------------------
representations and warranties of the Purchaser set forth in Section 4 of this
Agreement, the offer, issue, sale and delivery of the Securities constitutes or
will constitute, as the case may be, an exempted transaction under the
Securities Act of 1933 ("1933 Act"), as now in effect, and registration of the
Securities under the 1933 Act, is not required, and no notice, filing,
registration, or qualification under any U.S. state securities or "Blue Sky" law
is required in connection therewith except for such filings as may be necessary
to comply with the Blue Sky laws of any state, which filings will be made in a
timely manner.
-7-
<PAGE>
3.16 Directors and Officers. None of the directors or officers of the
----------------------
Company has:
(a) ever filed, or had filed against him or her, a petition under
the bankruptcy or insolvency laws of any governmental regulatory authority,
whether U.S. or foreign, or had a receiver, fiscal agent or similar officer
appointed by a court for his or her business or property or any partnership in
which he or she was a general partner at or within two years before the date
hereof; or
(b) been convicted of a crime or named in a criminal proceeding
which is presently pending or, to the knowledge of the Company, threatened
(excluding traffic violations and other minor offenses); or
(c) been the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction permanently or temporarily enjoining him or her from, or otherwise
limiting, any of the following activities: (i) acting as a futures commission
merchant, introducing broker, commodity trading advisor, commodity pool
operator, floor broker, leverage transaction merchant, any other person
regulated by the Commodity Futures Trading Commission, or an associated person
of any of the foregoing, or as an investment adviser, underwriter, broker or
dealer in securities, or as an affiliated person, director or employee of any
investment company, bank, savings and loan association or insurance company, or
engaging in or continuing any conduct or practice in connection with any such
activity; (ii) engaging in any type of business practice; or (iii) engaging in
any activity in connection with the purchase or sale of any security or
commodity or in connection with any violation of the U.S. Federal commodities
laws or the securities laws of any other governmental regulatory authority,
whether U.S. or foreign; or
(d) been the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of a governmental regulatory
authority, whether U.S. or foreign, barring, suspending or otherwise limiting
for more than sixty (60) days his or her right to engage in any activity
described in Section 3.11(c) above or to be associated with persons engaged in
any such activity; or
(e) been found by a court in a civil action or any governmental
authority to have violated any U.S. Federal or State securities laws or the
securities laws of any other country, which judgment or finding has not been
subsequently reversed, suspended or vacated;
(f) been found by a court in a civil action or by the U.S.
Commodity Futures Trading Commission to have violated any U.S. Federal
commodities law, which judgment or finding has not been subsequently reversed,
suspended or vacated; or
(g) have or will have an interest adverse to the Company or any
of its subsidiaries in any pending litigation or contemplated legal proceeding
(including administrative proceedings and investigations by governmental
authorities).
-8-
<PAGE>
3.17 Corporate Documents. The Company has furnished to the Purchaser,
-------------------
or will furnish upon request, true and complete copies of the Articles of
Incorporation and Bylaws of the Company certified by its secretary and copies of
the resolutions adopted by the Company's Board of Directors authorizing and
approving this Agreement and the transactions contemplated hereby. The Company
has made available to the Purchaser and its representatives all corporate minute
books of the Company, and such minute books contain complete and accurate
records of the proceedings of the Company's shareholders and directors.
3.18 Compliance with Laws. The Company has complied in all material
--------------------
respects with all laws, regulations and orders affecting its business and
operations and is not in default under or in violation of any provision of any
federal, state or local rule, regulation or law.
3.19 Board of Directors. At the completion of the Closing, the Board
------------------
of Directors of the Company shall take the necessary corporate action to
increase the authorized number of directors of the Company to nine (9) and then
appoint three (3) nominees of the Purchaser to the Board of Directors.
3.20 Brokers and Finders. Except as set forth in Schedule 3.20, the
-------------------
Company has not incurred, nor shall it incur, directly or indirectly, any
liability for any brokerage or finders' fees, agent commissions or any similar
charges in connection with this Agreement or any transaction contemplated
hereby. As more fully set forth in Section 5.1, the Company shall indemnify and
hold the Purchaser harmless against all claims for brokers' or finders' fees
made or asserted by any party claiming to have been employed by the Company or
any shareholder, director, officer, employee or agent of the Company and all
costs and expenses (including the reasonable fees of counsel) of investigating
and defending such claims.
3.21 Copies of Certain Documents. Prior to the date hereof, the
---------------------------
Company has delivered or made available to the Purchaser true and complete
copies of all documents relating to the operations of the Company that the
Purchaser has requested.
4. Representations, Warranties and Covenants of the Purchaser.
----------------------------------------------------------
As a material inducement to the Company and GDRIL to enter into this
Agreement and to sell and issue the Note, the Shares and the Warrants, the
Purchaser represents, warrants and covenants that the following statements are
true and correct in all material respects except as expressly qualified or
modified herein.
4.1 Domicile and Accredited Purchaser. The Purchaser is domiciled in
---------------------------------
the British Virgin Islands and is an "accredited investor" as defined under Rule
501 under the 1933 Act. All of the beneficial owners of the Purchaser are
domiciled in the Kingdom of Saudi Arabia.
4.2 Power and Authority. The Purchaser, if organized as a
-------------------
corporation, partnership or other entity (i) is duly organized, validly existing
and in good standing under
-9-
<PAGE>
the laws of the jurisdiction of its organization, and (ii) the Purchaser has
taken all corporate, partnership and other action on the part of the Purchaser,
as applicable, necessary for the execution, delivery and consummation of the
transactions contemplated by this Agreement. The Purchaser has full and absolute
right, power and authority and legal capacity to execute, deliver and perform
this Agreement and all other agreements contemplated hereby to be executed by
the Purchaser and, upon such execution, this Agreement and Pledge Agreement will
be the valid and binding obligation of the Purchaser, enforceable in accordance
with its terms, subject to applicable bankruptcy, insolvency, reorganization and
moratorium laws and other laws of general application affecting enforcement of
creditors rights generally.
4.3 No Violation. The execution, delivery and performance of this
------------
Agreement and all other agreements contemplated hereby to be executed and
delivered by the Purchaser, and the consummation of the transactions
contemplated hereby and thereby will not materially violate, with or without the
giving of notice or the lapse of time, or both, any provision of law applicable
to the Purchaser and will not conflict with or result in the breach or
termination of any provision of, or constitute a default under, or give any
person the right to accelerate any material obligation under, or result in the
creation of any lien, security interest, charge or encumbrance upon any material
properties, assets or business of the Purchaser.
4.4 Limited Transferability. The Purchaser acknowledges that the
-----------------------
Securities have not been registered under the 1933 Act, as amended, or the
securities laws of any state (collectively the "Acts") and are being offered,
and will be sold, pursuant to applicable exemptions from such registration for
nonpublic offerings and will be issued as "restricted securities" as defined by
Rule 144 promulgated pursuant to the 1933 Act. The Securities may not be resold
in the absence of an effective registration thereof under the 1933 Act and
applicable state securities laws unless, in the opinion of the Company's
counsel, an applicable exemption from registration is available.
4.5 Acquisition for Investment. The Purchaser is acquiring the
--------------------------
Securities for the Purchaser's own account, for investment purposes only and not
with a view to, or for sale in connection with, a distribution, as that term is
used in Section 2(11) of the 1933 Act thereof in a manner which would require
registration under the 1933 Act or any state securities laws.
4.6 Restrictive Legends. The Purchaser understands and acknowledges
-------------------
that the Securities will bear the following legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR THE SECURITIES LAWS OF
ANY STATE. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE SOLD OR TRANSFERRED FOR VALUE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION THEREOF UNDER THE SECURITIES ACT OF 1933 AND/OR THE
SECURITIES ACT OF ANY STATE HAVING JURISDICTION OR AN OPINION OF
COUNSEL
-10-
<PAGE>
ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER SUCH ACT OR ACTS.
4.7 Rule 144. The Purchaser acknowledges that an investment in the
--------
Securities is not liquid and is transferable only under limited conditions. The
Purchaser acknowledges that such securities must be held indefinitely unless
they are subsequently registered under the 1933 Act or an exemption from such
registration is available. The Purchaser is aware of the provisions of Rule 144
promulgated under the 1933 Act, which permits limited resale of securities
purchased in a private placement subject to the satisfaction of certain
conditions and that such Rule is not now available and, in the future, may not
become available for resale of the Securities.
4.8 Speculative Nature and Risk. The Purchaser understands and
---------------------------
acknowledges the speculative nature of and substantial risk of loss associated
with an investment in the Securities. The Purchaser represents and warrants
that the Securities constitute an investment which is suitable and consistent
with the Purchaser's financial condition and that the Purchaser is able to bear
the risks of this investment for an indefinite period of time, which may include
the total loss of the Purchaser's investment in the Securities. The Purchaser
further represents that (a) the Purchaser has adequate means of providing for
the Purchaser's current financial needs and contingencies, (b) there is no need
for liquidity in the Purchaser's investment in the Securities, and (c) the
Purchaser has sufficient financial and business experience to evaluate the
merits and risks of an investment in the Securities.
4.9 Independent Investigation and Advisors. The Purchaser confirms
--------------------------------------
that (a) the Purchaser has received, reviewed, and understands the financial
statements included in the SEC Reports; (b) the Purchaser has been expressly
offered the opportunity to be provided a copy of and to review all reports,
documents and exhibits referenced therein and such other agreements, documents
and information as the Purchaser deems necessary or appropriate in determining
to make an investment in the Securities, and (c) the Purchaser is purchasing the
Securities without any offering memoranda or prospectus of any kind, other than
the SEC Reports. The Purchaser represents and warrants that in making the
decision to acquire the Securities the Purchaser has relied upon its own
independent investigation of the Company, GDRIL and Global Diamond-SA and the
independent investigations of the Company, GDRIL and Global Diamond-SA by the
Purchaser's representatives, including the Purchaser's own professional legal,
tax, mining and investment advisors, and (d) the Purchaser and the Purchaser's
representatives have been given the opportunity to examine all relevant
documents and to ask questions of and to receive answers from the Company, GDRIL
and Global Diamond-SA, or person(s) acting on their behalf, concerning the terms
and conditions of acquisition by the Purchaser of the Securities and any other
matters concerning an investment in the Securities, and to obtain any additional
information the Purchaser deems necessary or appropriate to verify the accuracy
of the information provided.
4.10 Board of Directors. At the completion of the Closing, the
------------------
Purchaser shall have the right to nominate three (3) of the nine (9) members of
the Company's Board of Directors. The Purchaser represents and warrants that
none of its nominees to the
-11-
<PAGE>
Company's Board of Directors shall have undertaken or been the subject of any
actions or proceedings set forth in Section 3.16. The Purchaser also agrees that
all of its nominees to the Company's Board of Directors at the time of said
nomination will complete an Officers and Directors Questionnaire in a form to be
provided by the Company.
4.11 Copies of Certain Documents. Prior to the date hereof, the
---------------------------
Company has delivered or made available to the Purchaser true and complete
copies of all documents relating to the operations of the Company that the
Purchaser has requested.
5. Indemnification.
---------------
5.1 Indemnity by the Company. Each of the Company and GDRIL, jointly
------------------------
and severally agrees to and does hereby indemnify and hold the Purchaser, the
Purchaser's successors and assigns and their respective directors, officers,
employees and agents, harmless from and against any and all loss, damage,
liability, injury, cost and expense (including attorneys fees) incurred by such
party in connection with or arising from: (a) the non-performance, partial or
total, by the Company or GDRIL of any of its agreements and covenants contained
in this Agreement or the Note; (b) the non-performance, partial or total, by the
Company, GDRIL or Global Diamond-SA of any of its agreements and covenants
contained in the Pledge Agreement; (c) the inaccuracy of any representation of
the Company or GDRIL contained or referred to in this Agreement or any Schedule,
Exhibit or certificate delivered by or on behalf of the Company pursuant hereto;
(d) the inaccuracy of any representation of the Company or GDRIL contained or
referred to in the Pledge Agreement or any Schedule, Exhibit or certificate
delivered by or on behalf of the Company or GDRIL pursuant thereto; (e) claims
for any brokers' or finders' fees made or asserted by any party claiming to have
been employed by the Company or any shareholder, director, officer, employee or
agent of the Company; and (f) any and all actions, suits, proceedings, demands,
assessments or judgments, costs and expenses incidental to any of the foregoing
matters set forth in this Section 5.1.
5.2 Indemnity by the Purchaser. The Purchaser agrees to and does
--------------------------
hereby indemnify and hold each of the Company and GDRIL, their successors and
assigns, and their respective directors, officers, employees and agents harmless
from and against any and all loss, damage, liability, injury, cost and expense
(including attorneys fees) incurred by such party in connection with or arising
from: (a) the non-performance, partial or total, by the Purchaser of any of its
agreements and covenants contained in this Agreement; (b) the inaccuracy of any
representation of the Purchaser contained or referred to in this Agreement or
any Schedule, Exhibit or certificate delivered by or on behalf of the Purchaser
pursuant hereto; (c) claims for any brokers' or finders' fees made or asserted
by any party claiming to have been employed by the Purchaser or any shareholder,
director, officer, employee or agent of the Purchaser; and (d) any and all
actions, suits, proceedings, demands, assessments or judgments, costs and
expenses incidental to any of the foregoing matters set forth in this Section
5.2.
-12-
<PAGE>
6. Post-Closing Covenants.
----------------------
6.1 Additional Information. Prior to the complete repayment of the
----------------------
Note, each of the Company and GDRIL shall permit the Purchaser and its
affiliated companies, their officers, directors and authorized representatives,
at their expense, to visit and inspect the properties of the Company, GDRIL and
Global Diamond-SA, to examine the Company's, GDRIL's and Global Diamond-SA's
books of account and records and to discuss the Company's, GDRIL's and Global
Diamond-SA's affairs, finances and accounts with its officers, all at such
reasonable times as may be requested by the Purchaser.
6.2 Confidentiality. Each of the parties hereto has, prior to the
---------------
Closing, through their respective representatives, permitted investigation of
the property, records and the financial condition of the other parties hereto.
In the course of said investigation and in the course of the negotiation of this
Agreement, each party has received confidential information regarding the
operations of the other parties hereto. Each party shall each keep confidential
and not use any information so obtained which is not otherwise publicly
available or ascertainable. In this regard, the Purchaser acknowledges that it
is aware, and that it's representatives will be made aware, that in connection
with its discussions with the Company regarding this transaction and pursuant to
the terms of the Note, it has and will come into possession of material, non-
public information about the Company. Accordingly, the Purchaser agrees that it
will not trade (or cause or encourage any third party to trade), and it will use
its best efforts to assure that none of its representatives will trade (or cause
or encourage any third party to trade), in any securities of the Company while
in the possession of such material non-public information. The provisions of
this Section 6.2 shall also apply to all confidential information received by
the Purchaser and its representatives under the Note.
6.3 Employment Agreements. As soon as reasonably practicable
---------------------
following the date hereof, the Company shall commission an independent study of
compensation and benefits paid to executive officers of corporations similarly
situated to the Company. No later than sixty (60) days following the Closing,
the Company shall enter into written employment agreements with Johann de
Villiers as its Chief Executive Officer, Pieter van Wyk as its Director of
Mining and Exploration, Mervyn McCulloch as its Chief Financial Officer and
Eugene Brill as its Vice President of Investor Relations on terms consistent
with the independent study. The employment agreements shall be subject to the
approval of the compensation committee of the Company's Board of Directors
("Compensation Committee"), whose approval shall not be withheld provided that
the terms of the employment agreements are consistent with the independent
study. The Compensation Committee shall consist of John Tyson and two (2) of
the members of the Company's Board of Directors that were nominated by Purchaser
pursuant to Section 4.10 herein.
6.4 Indemnification of Directors and Officers. As soon as reasonably
-----------------------------------------
practicable following the date hereof, but in no event more than thirty (30)
days following the Closing, the Company shall prepare and execute written
Indemnification Agreements with all directors of the Company nominated by the
Purchaser, the terms of which agreements shall be reasonably acceptable to the
Purchaser.
-13-
<PAGE>
6.5 Directors and Officers Liability Insurance. As soon as
------------------------------------------
reasonably practicable following the date hereof, but in no event more than
ninety (90) days following the Closing, the Company shall have investigated and
presented to the Board of Directors of the Company an analysis, including
quotations, of the available Directors' and Officers' Liability Insurance ("D &
O Insurance") covering certain liabilities which may be incurred by its
directors and officers. Within a reasonable time thereafter, and subject to
availability, the Company shall purchase D & O Insurance if requested by the
Purchaser from such carrier, on such terms and in such amounts as the board of
directors of the Company determines are reasonable in light of the nature of the
business of the Company.
6.6 Insurance. As soon as reasonably practicable following the date
---------
hereof, but in no event more than sixty (60) days following the Closing, the
Company shall cause each of Global Diamond-SA and Nabas Diamonds to obtain
insurance covering the conduct of its respective business in such amounts and
against such losses and risks as are customary for the type and scope of such
business.
6.7 Rights to Purchase of Future Securities. In the event that the
---------------------------------------
Company, at any time and from time to time after the Closing and prior to an
event described in Section 6.7 (b) below, wishes to offer, directly or
indirectly, shares of its capital stock or securities exchangeable or
convertible into its capital stock ("Stock") to any person or entity (each a
"Buyer"), then the Company shall send each such time a written notice ("Notice")
to the Purchaser, prior to or contemporaneous with offering Stock to the Buyers,
and in any event no less than thirty (30) business days prior to the proposed
closing date of the sale of Stock. The Notice(s) shall describe the number of
shares of Stock offered and the purchase price and terms. Upon receipt of any
Notice, the Purchaser shall have the right ("Participation Right") to purchase
such number of shares of Stock being sold in the offering that is the subject of
the Notice, at the price and on the terms contained in the Notice, as is
computed by multiplying the total number of shares of Stock being offered by a
fraction, the numerator of which shall be the number of shares of the Company's
Stock held by the Purchaser as of the date of the Notice and the denominator of
which shall be the number of outstanding shares of Stock of the Company as of
the date of the Notice. The provisions of this Section 6.7 shall not apply to
(i) any offers of Stock in exchange for non-cash consideration, or (ii) the
exercise of the warrants and options set forth on Schedule 3.2; provided,
however, until such time as the Purchaser's rights under this Section 6.7 shall
have been terminated or expired, the Company shall provide the Purchaser with
thirty (30) days prior written notice of any proposed or pending issuances of
Common Stock contemplated by either subpart (i) or (ii) of this sentence.
(a) Exercise of Right. The Purchaser may exercise the Participation
-----------------
Right by notifying the Company in writing, within fifteen (15) business days
after the date of the Notice, of the Purchaser's desire to exercise its
Participation Right. The Purchaser must tender the funds and purchase its
proportionate share of the Stock on the date otherwise set for the closing of
the purchase, subject only to the closing of the purchase with the other buyers.
If the Purchaser does not exercise its right in the manner described in this
Section 6.7(a), the Participation Right will lapse with respect to that
offering.
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<PAGE>
(b) Term of Participation Right. The Participation Right under this
---------------------------
Section 6.7 shall commence on the day of this Agreement and shall remain in
effect for so long as (i) any amount remains outstanding under the Note, or (ii)
Purchaser maintains ownership of thirty percent (30%) of the issued and
outstanding Common Stock; provided that such Participation Right shall terminate
upon a registration statement for an underwritten public offering of the shares
of Common Stock being declared effective by the Securities and Exchange
Commission (the "SEC").
6.8 Conversion Rights. The Company covenants and agrees that it
-----------------
shall issue shares of its Common Stock subject to and in accordance with the
terms of Section 7 of the Note.
6.9 Second Installment. Purchaser covenants and agrees that it shall
------------------
advance the second installment under the Note in the amount of One Million Four
Hundred Thousand Dollars ($1,400,000) subject to and in accordance with the
terms and conditions of the Note.
6.10 Acquisition of Nabas Diamonds. The Company covenants and agrees
-----------------------------
to cause Global Diamond-SA to acquire one hundred percent (100%) of the issued
and outstanding shares of capital stock of Nabas Diamonds within forty-five (45)
days of Closing.
6.11 Beneficial Ownership of Shares. Purchaser covenants and agrees
------------------------------
to use its best efforts to file on a timely basis all beneficial ownership of
securities reports, and amendments thereto ("Beneficial Ownership Reports"),
with regards to the securities of the Company in compliance with Sections 13 and
16 of the Securities Exchange Act of 1934. Purchaser further covenants and
agrees to at all times maintain record ownership of its Common Stock in its own
name until such time as it files a Beneficial Ownership Report disclosing that
its percentage ownership of the issued and outstanding Common Stock is less than
thirty percent (30%).
6.12 Further Assurances. From time to time following the Closing
------------------
Date, each of the Company and the Purchaser shall, and shall cause its
affiliates to, reasonably cooperate with the other and assist, where feasible,
to consummate the transactions contemplated herein as soon as possible following
the date hereof.
7. Registration Rights. To induce the Purchaser to purchase the
-------------------
Securities, the Company has agreed to provide registration rights with respect
to the Registrable Securities (as defined below) as set forth in this Section 7.
The Company hereby covenants and agrees as follows:
7.1 Definitions. As used in this Section 7, the following terms have
-----------
the meanings indicated:
(a) "Demand Registration" has the meaning assigned such term in
Section 7.3(a).
-15-
<PAGE>
(b) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(c) "Inspector" has the meaning assigned such term in Section
7.5(a)(viii).
(d) "Holders" means the Purchaser and any Person to whom
Registrable Securities are transferred by any of them other than a transferee to
whom such securities have been transferred pursuant to a registration statement
under the 1933 Act or Rule 144 (as defined below).
(e) "NASD" has the meaning assigned such term in Section
7.5(a)(xiv).
(f) "Person" shall mean any individual, firm, corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
joint stock company, limited liability company, government (or an agency or
political subdivision thereof) or other entity of any kind, and shall include
any successor (by merger or otherwise) of such entity.
(g) "Registrable Securities" mean each of the following: (a) the
Shares, (b) the shares of Common Stock issuable upon conversion of the Note or
exercise of the Warrants, and (c) any shares of Common Stock issued or issuable
to the Holders of the shares of Common Stock considered by subparts (a) or (b)
by way of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization or
otherwise and shares of Common Stock issuable upon conversion, exercise or
exchange thereof.
(h) "Registration Expenses" has the meaning assigned to such term
in Section 7.5(d).
(i) "Rule 144" means Rule 144 as promulgated by the SEC under the
1933 Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the SEC.
(j) "SEC" means the Securities and Exchange Commission.
(k) "Underwriter" has the meaning assigned such term in Section
7.3(e).
7.2 Securities Subject to this Agreement.
------------------------------------
(a) Registrable Securities. For the purposes of this Agreement,
----------------------
Registrable Securities will cease to be Registrable Securities when a
registration statement covering such Registrable Securities has been declared
effective under the 1933 Act by the SEC and such Registrable Securities have
been disposed of pursuant to such effective registration statement.
-16-
<PAGE>
(b) Holders of Registrable Securities. A Person is deemed to be a
---------------------------------
holder of Registrable Securities whenever such Person owns of record Registrable
Securities, or holds an option to purchase, or a security convertible into or
exercisable or exchangeable for, Registrable Securities whether or not such
acquisition or conversion has actually been effected and disregarding any legal
restrictions upon the exercise of such rights. If the Company receives
conflicting instructions, notices or elections from two or more persons with
respect to the same Registrable Securities, the Company may act upon the basis
of the instructions, notice or election received from the registered owner of
such Registrable Securities. Registrable Securities issuable upon exercise of
an option or upon conversion of another security shall be deemed outstanding for
the purposes of this Agreement.
7.3 Demand Registration.
-------------------
(a) Request for Demand Registration. At any time commencing six
-------------------------------
(6) months from the Closing, the Holders may make a written request for
registration (such Holders making such request being deemed to be "Initiating
Holders") of Registrable Securities under the 1933 Act, and under the securities
or blue sky laws of any jurisdiction reasonably designated by such Holder or
Holders (a "Demand Registration"); provided, the Company will not be required to
effect more than five (5) Demand Registrations at the request of the Holders
pursuant to this Section 7.3. Such request for a Demand Registration shall
specify the amount of the Registrable Securities proposed to be sold, the
intended method of disposition thereof and the jurisdictions in which
registration is desired. Upon a request for a Demand Registration, the Company
shall promptly take such steps as are necessary or appropriate to prepare for
the registration of the Registrable Securities to be registered. Within 15 days
after the receipt of such request, the Company shall give written notice thereof
to all other Holders holding Registrable Securities (the "Non-Initiating
Holders") and include in such registration all Registrable Securities held by a
Holder with respect to which the Company has received written requests for
inclusion therein within 15 days of the receipt by such Holder of such written
notice. Each such request shall specify the number of Registrable Securities to
be registered, the intended method of disposition thereof and the jurisdictions
in which registration is desired.
(b) Effective Demand Registration. A registration shall not
-----------------------------
constitute a Demand Registration until it has become effective and remains
continuously effective until the earlier of (i) the date of sale of all
Registrable Securities registered thereunder or (ii) 60 days from the effective
date. The Company shall use its best efforts to cause any such Demand
Registration to become effective not later than 60 days after it receives a
request under Section 7.3(a) hereof.
(c) Expenses. The Company shall pay all Registration Expenses
--------
(other than underwriting discounts and commissions) in connection therewith,
whether or not such Demand Registration becomes effective; provided, however,
that each Holder participating in such Demand Registration shall bear the costs
of its own legal counsel.
(d) Underwriting Procedures. If Initiating Holders holding a
-----------------------
majority of the Registrable Securities held by all such Initiating Holders so
elect, the offering of such
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<PAGE>
Registrable Securities pursuant to such Demand Registration shall be in the form
of a firm commitment underwritten offering and the managing underwriter or
underwriters selected for such offering shall be the Underwriter selected in
accordance with Section 7.3(e). In such event, if the Underwriter advises the
Company in writing that in its opinion the aggregate amount of such Registrable
Securities requested to be included in such offering is sufficiently large to
have a material adverse affect on the success of such offering, the Company
shall include in such registration only the aggregate amount of Registrable
Securities that in the opinion of the Underwriter may be sold without any such
material adverse affect and shall reduce, first as to any stockholders who are
the Non-Initiating Holders as a group and then as to the Initiating Holders as a
group, pro rata within each group based on the number of Registrable Securities
included in the request for Demand Registration, the amount of Registrable
Securities to be included by each Holder in such registration.
(e) Selection of Underwriters. If any Demand Registration of
-------------------------
Registrable Securities is in the form of an underwritten offering, the
Initiating Holders holding a majority of the Registrable Securities held by all
such Initiating Holders shall, in their discretion, select and obtain an
investment banking firm to act as the managing underwriter of the offering (the
"Underwriter"), subject to approval by the Company which shall not be
unreasonably withheld.
7.4 Holdback Agreements and Termination.
-----------------------------------
(a) Delay of Rights Under Special Circumstances. Upon receipt
-------------------------------------------
by the Company of a request for Demand Registration pursuant to Section 7.3(a)
hereof, the Company shall have the right, in the event that the Company is then
engaged in business negotiations which would be materially adversely affected by
a Demand Registration, to delay the effectiveness of such request by the
Initiating Holders for a period of up to 30 days. The Company shall exercise the
foregoing delay right by delivering to the Initiating Holders, within 5 days
after the receipt of such request, a written notice attesting to the necessity
of such a delay.
(b) Restrictions on Demands by Holders and Termination of Demand
------------------------------------------------------------
Rights. Subject to the provision of Section 7.6 hereof, each Holder of
- ------
Registrable Securities agrees that the right to request a Demand Registration
shall be suspended for a period of up to 180 days commencing upon the date the
Company executes a letter of intent with an underwriter for a firm commitment
underwritten public offering of its securities having an aggregate offering
price of not less than $5,000,000, provided that a registration statement with
respect to such offering is filed by the Company with the SEC within 45 days
from the date of execution of such letter of intent. The foregoing suspension
of the rights of the Holders will cease if such registration statement is not
declared effective by the SEC within 60 days of the filing thereof.
7.5 Registration Procedures.
-----------------------
(a) Obligations of the Company. Whenever registration of
--------------------------
Registrable Securities has been requested pursuant to Article 7 of this
Agreement, the
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<PAGE>
Company shall use its best efforts to effect the registration and sale of such
Registrable Securities in accordance with the intended method of distribution
thereof as quickly as practicable, and in connection with any such request, the
Company shall, as expeditiously as possible:
(i) diligently use its best efforts to prepare and file with the
SEC a registration statement on any form for which the Company then qualifies of
which counsel for the Company shall deem appropriate and which form shall be
available for the sale of such Registrable Securities in accordance with the
intended method of distribution thereof, and use its best efforts to cause such
registration statement to become effective; provided, however, that before
filing a registration statement or prospectus or any amendments or supplements
thereto, the Company shall (A) provide counsel selected by the Holders holding a
majority of the Registrable Securities being registered in such registration
("Holders' Counsel") and any other Inspector (as hereinafter defined) with an
adequate and appropriate opportunity to participate in the preparation of such
registration statement and each prospectus included therein (and each amendment
or supplement thereto) to be filed with the SEC, which documents shall be
subject to the review of Holders' Counsel, and (B) notify the Holders' Counsel
and each seller of Registrable Securities of any stop order issued or threatened
by the SEC and take all reasonable action required to prevent the entry of such
stop order or to remove it if entered;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period of not less than 60 days, or such shorter period which will terminate
when all Registrable Securities covered by such registration statement have been
sold, and comply with the provisions of the 1933 Act with respect to the
disposition of all securities covered by such registration statement during such
period in accordance with the intended methods of disposition by the sellers
thereof set forth in such registration statement;
(iii) as soon as reasonably possible, furnish to each seller of
Registrable Securities, prior to filing a registration statement, copies of such
registration statement as is proposed to be filed, and thereafter such number of
copies of such registration statement, each amendment and supplement thereto (in
each case including all exhibits thereto), the prospectus included in such
registration statement (including each preliminary prospectus) and such other
documents as each such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such seller;
(iv) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller of Registrable Securities reasonably requests, and to continue such
qualification in effect in such jurisdiction for as long as is permissible
pursuant to the laws of such jurisdiction, or for as long as any such seller
requests or until all of such Registrable Securities are sold, whichever is
shortest, and do any and all other acts and things which may be reasonably
necessary or advisable to enable any such seller to consummate the disposition
in such jurisdictions of the Registrable Securities owned by such seller;
provided, however, that the
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<PAGE>
Company shall not be required to (A) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 7.5(a)(iv), (B) subject itself to taxation in any such jurisdiction or
(C) consent to general service of process in any such jurisdiction;
(v) use its best efforts to cause the Registrable Securities
covered by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company to enable the seller or sellers of
Registrable Securities to consummate the disposition of such Registrable
Securities;
(vi) notify each seller of Registrable Securities at any time
when a prospectus relating thereto is required to be delivered under the 1933
Act, upon discovery that, or upon the happening of any event as a result of
which, the prospectus included in such registration statement contains an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, and the Company shall
promptly prepare a supplement or amendment to such prospectus and furnish to
each seller a reasonable number of copies of a supplement to or an amendment of
such prospectus as may be necessary so that, after delivery to the purchasers of
such Registrable Securities, such prospectus shall not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made;
(vii) enter into and perform customary agreements (including an
underwriting agreement in customary form with the Underwriter, if any, selected
as provided in Section 7.3) and take such other actions as are prudent and
reasonably required in order to expedite or facilitate the disposition of such
Registrable Securities;
(viii) make available for inspection by any seller of Registrable
Securities, any managing underwriter participating in any disposition pursuant
to such registration statement, Holders' Counsel and any attorney, accountant or
other agent retained by any such seller or any managing underwriter (each, an
"Inspector" and collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company and its
subsidiaries (collectively, the "Records") as shall be reasonably necessary to
enable them to exercise their due diligence responsibility, and cause the
Company's and its subsidiaries, officers, directors and employees, and the
independent public accountants of the Company, to supply all information
reasonably requested by any such Inspector in connection with such registration
statement. Records that the Company determines, in good faith, to be
confidential and which it notifies the Inspectors are confidential shall not be
disclosed by the Inspectors unless (A) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in the registration
statement, (B) the release of such Records is ordered pursuant to a subpoena or
other order from a court of competent jurisdiction, or (C) the information in
such records has been made generally available to the public other than through
a breach of the confidentiality requirement set forth above. Each Seller of
Registrable Securities agrees that
-20-
<PAGE>
it shall, upon learning that disclosure of such Records is required by any court
of competent jurisdiction, give notice to the Company and allow the Company, at
the Company's expense, to undertake appropriate action to prevent disclosure of
the Records deemed confidential;
(ix) if such sale is pursuant to an underwritten offering, use
its best efforts to obtain a "cold comfort" letter from the Company's
independent public accountants in customary form and covering such matters of
the type customarily covered by "cold comfort" letters as Holders' Counsel or
the managing underwriter reasonably request;
(x) use its best efforts to furnish, at the request of any seller
of Registrable Securities on the date such securities are delivered to the
underwriters for sale pursuant to such registration or, if such securities are
not being sold through underwriters, on the date the registration statement with
respect to such securities becomes effective, an opinion, dated such date, of
counsel representing the Company for the purposes of such registration,
addressed to the underwriters, if any, and to the seller making such request,
covering such legal matters with respect to the registration in respect of which
such opinion is being given as such seller may reasonably request and are
customarily included in such opinions;
(xi) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security holders, as
soon as reasonably practicable but no later than 15 months after the effective
date of the registration statement, an earnings statement covering a period of
12 months beginning after the effective date of the registration statement, in a
manner which satisfies the provisions of Section 7.10(a) of the 1933 Act;
(xii) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed, provided, that the applicable listing requirements are satisfied;
(xiii) keep each seller of Registrable Securities advised in
writing as to the initiation and progress of any registration hereunder;
(xiv) cooperate with each seller of Registrable Securities and
each underwriter participating in the disposition of such Registrable Securities
and their respective counsel in connection with any filings required to be made
with the National Association of Securities Dealers, Inc. (the "NASD"); and
(xv) use best efforts to take all other steps necessary to
effect the registration of the Registrable Securities contemplated hereby.
(b) Seller Information The Company may require each seller of
------------------
Registrable Securities as to which any registration is being effected to furnish
to the Company such information regarding the seller and the distribution of
such securities as the Company may from time to time reasonably request in
writing.
-21-
<PAGE>
(c) Notice to Discontinue. Each Holder of Registrable Securities
---------------------
agrees that, upon receipt of any notice from the Company of the happening of any
event of the kind described in Section 7.5(a)(vi), such Holder shall forthwith
discontinue disposition of Registrable Securities pursuant to the registration
statement covering such Registrable Securities until such Holder's receipt of
the copies of the supplemented or amended prospectus contemplated by Section
7.5(a)(vi) and, if so directed by the Company, such Holder shall deliver to the
Company (at the Company's expense) all copies, other than permanent file copies
then in such Holder's possession, of the prospectus covering such Registrable
Securities which is current at the time of receipt of such notice. If the
Company shall give any such notice, the Company shall extend the period during
which such registration statement shall be maintained effective pursuant to this
Agreement (including without limitation the period referred to in Section
7.5(a)(ii)) by the number of days during the period from and including the date
of the giving of such notice pursuant to Section 7.5(a)(vi) to and including the
date when the Holder shall have received the copies of the supplemented or
amended prospectus contemplated by and meeting the requirements of Section
7.5(a)(vi).
(d) Registration Expenses. The Company shall pay all expenses (other
---------------------
than as set forth in Section 7.3(c)) arising from or incident to the performance
of, or compliance with, the terms of Article 7 of this Agreement, including
without limitation, (i) SEC, stock exchange and NASD registration and filing
fees, (ii) all fees and expenses incurred in complying with securities or blue
sky laws (including reasonable fees, charges and disbursements of counsel in
connection with blue sky qualifications of the Registrable Securities), (iii)
all printing, messenger and delivery expenses, (iv) the fees, charges and
disbursements of counsel to the Company and of its independent public
accountants and any other accounting and legal fees, charges and expenses
incurred by the Company (including without limitation any expenses arising from
any special audits incident to or required by any registration or
qualification), and (v) any liability insurance or other premiums for insurance
obtained (which insurance the Company agrees to use its best efforts to obtain
upon the reasonable request of any seller of Registrable Securities) retained in
connection with any Demand Registration pursuant to the terms of this Agreement,
regardless of whether such registration statement is declared effective. All of
the expenses described in this Section 7.4(d) are referred to herein as
"Registration Expenses."
7.6 Piggy-Back Registration. If the Company proposes to file a
-----------------------
registration statement under the Act, other than pursuant to Section 7.3 hereof,
with respect to an offering by the Company for its own account of any class of
security (other than a registration statement on Form S-4 or S-8 or any
successor or other forms not available for registering capital stock for sale to
the public), then the Company shall give written notice of such proposed filing
to each of the Holders of Registrable Securities at least 30 days before the
anticipated filing date, and such notice shall describe in detail the proposed
registration and distribution (including those jurisdictions where registration
under the securities or blue sky laws is intended) and offer such Holders the
opportunity to register the number of Registrable Securities as each such Holder
may request. The Company shall use its best efforts (within ten days of the
notice provided for in the preceding sentence) to cause the managing underwriter
or underwriters of a proposed underwritten offering (the "Company Underwriter")
to permit the Holders of Registrable Securities who have requested
-22-
<PAGE>
to participate in the registration for such offering to include such Registrable
Securities in such offering on the same terms and conditions as the securities
of the Company included therein. Notwithstanding the foregoing, if the Company
Underwriter delivers a written opinion to the Holders of Registrable Securities
that the total amount or kind of securities which they, the Company and any
other persons or entities intend to include in such offering (the "Total
Securities") is sufficiently large so as to have a material adverse effect on
the distribution of the Total Securities, then the amount or kind of securities
to be offered for the account of such Holders and such other persons or entities
(other than the Company) shall be reduced pro rata to the extent necessary to
reduce the Total Securities to the amount recommended by the Company
Underwriter, provided that the Holders shall have first priority to participate
in the registration over all other holders of registration rights. Unless waived
by a Holder in writing, each Holder shall have the right to participate pro rata
based upon the proportion of the Registrable Securities held by them bears to
all Registrable Securities.
7.7 Indemnification; Contribution
-----------------------------
(a) Indemnification by the Company. The Company agrees to
------------------------------
indemnify, to the fullest extent permitted by law, each Holder, its officers,
directors, partners, employees, advisors and agents and each Person who controls
(within the meaning of the 1933 Act or the Exchange Act) such Holder from and
against any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation or defending such claim and any amounts paid
in any settlement effected with the Company's consent) arising out of or based
upon (i) any untrue, or allegedly untrue, statement of a material fact contained
in any registration statement, prospectus or preliminary prospectus or
notification or offering circular (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) or (ii) any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as the same are caused by or contained in any information furnished in
writing to the Company by such Holder expressly for use therein. The Company
shall also indemnify any underwriters of the Registrable Securities, their
officers, directors and employees and each Person who controls such underwriters
(within the meaning of the 1933 Act and the Exchange Act) to the same extent as
provided above with respect to the indemnification of the Holders of Registrable
Securities.
(b) Indemnification by Holders. In connection with any
--------------------------
registration statement in which a Holder is participating pursuant to Article 7
hereof, each such Holder shall furnish to the Company in writing such
information with respect to such Holder as the Company may reasonably request or
as may be required by law for use in connection with any such registration
statement or prospectus and each Holder agrees to indemnify, to the fullest
extent permitted by law, the Company, any underwriter retained by the Company
and their respective directors, officers, employees and each Person who controls
the Company or such underwriter (within the meaning of the 1933 Act and the
Exchange Act) to the same extent as the foregoing indemnity from the Company to
the Holders, but only with respect to any statement or alleged statement in or
omission or alleged omission from such registration statement if such statement
or omission was made in reliance upon and in conformity with information
furnished in writing by such Holder; provided, however, that
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<PAGE>
the total amount to be indemnified by such Holder pursuant to this Section
7.7(b) shall be limited to the net proceeds received by such Holder in the
offering to which the registration statement or prospectus relates.
(c) Conduct of Indemnification Proceedings. Any Person entitled
--------------------------------------
to indemnification hereunder (the "Indemnification Party") agrees to give prompt
written notice to the indemnifying party (the "Indemnifying Party") after the
receipt by the Indemnified Party of any written notice of the commencement of
any action, suit, proceeding or investigation or threat thereof made in writing
for which the Indemnified Party intends to claim indemnification or contribution
pursuant to this Agreement; provided, that the failure to notify the
Indemnifying Party shall not relieve the Indemnifying Party of any liability
that it may have to the Indemnified Party hereunder. If notice of commencement
of any such action is given to the Indemnifying Party as above provided, the
Indemnifying Party shall be entitled to participate in and, to the extent it may
wish, jointly with any other Indemnifying Party similarly notified, to assume
the defense of such action at its own expense, with counsel chosen by it and
satisfactory to such Indemnified Party. The Indemnified Party shall have the
right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel (other than
reasonable costs of investigation) shall be paid by the Indemnified Party unless
(i) the Indemnifying Party agrees to pay the same, (ii) the Indemnifying Party
fails to assume the defense of such action with counsel satisfactory to the
Indemnified Party in its reasonable judgment, (iii) the named parties to any
such action (including any impleaded parties) have been advised by such counsel
that either (A) representation of such Indemnified Party and the Indemnifying
Party by the same counsel would be inappropriate under applicable standards of
professional conduct, (B) there may be one or more defenses available to it
which are different from or additional to those available to the Indemnifying
Party, or (C) in the reasonable judgment of the Indemnified Party, upon the
advice of counsel, a conflict of interest may exist between the Indemnified
Party and the Indemnifying Party. In any of such cases the Indemnifying Party
shall not have the right to assume the defense of such action on behalf of such
Indemnified Party. No Indemnifying Party shall be liable for any settlement
entered into without its written consent, which consent shall not be
unreasonably withheld.
(d) Contribution. If the indemnification provided for in this
------------
Section 7.7 from the Indemnifying Party is unavailable to an Indemnified Party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the Indemnifying Party and Indemnified Party in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative faults of such
Indemnifying Party and Indemnified Party shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
-24-
<PAGE>
action. The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Sections 7.7(a), 7.7(b) and 7.7(c), any
legal or other fees, charges or expenses reasonably incurred by such party in
connection with any investigation or proceeding. The parties hereto agree that
it would not be just and equitable if contribution pursuant to this Section
7.7(d) were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any person.
7.8 Rule 144. The Company covenants that, from and after the date
--------
that the Company has a class of equity securities registered under the Exchange
Act, it shall (i) file any reports required to be filed by it under the Exchange
Act and the rules and regulations adopted by the SEC thereunder; (ii) make and
keep public information available as those terms are understood and defined in
Rule 144; and (iii) take such further action as each Holder of Registrable
Securities may reasonably request (including providing any information necessary
to comply with Rules 144 and 144A), all to the extent required from time to time
to enable such Holder to sell Registrable Securities without registration under
the 1933 Act within the limitation of the exemptions provided by (a) Rule 144 or
Rule 144A, as such rules may be amended from time to time, or (b) any similar
rules or regulations hereafter adopted by the SEC. The Company shall, upon the
request of any Holder of Registrable Securities, deliver to such Holder a
written statement as to whether it has complied with such requirements.
8. Miscellaneous.
-------------
8.1 Arbitration. Any controversy or claim arising out of or relating
-----------
to this Agreement or the breach hereof, including the determination of any
disputed set-off amount, shall be settled by arbitration in accordance with the
rules of the American Arbitration Association then in effect. The decision of
the arbitrator shall, except for mistakes of law, be final and binding upon the
parties hereto, and judgment upon the award rendered by the arbitrator, which
shall, in the case of damages, be limited to actual damages proven in the
arbitration, may be entered in any court having jurisdiction thereof.
Enforcement of the decision of the arbitrator shall be governed by the
Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to
which both the United States and Saudi Arabia are parties.
There shall be a single arbitrator who shall be an existing or former
judge of a court of record within the United States or an attorney in good
standing admitted to practice for a period of at least ten (10) years within the
United States. No arbitration shall involve parties other than the parties
hereto and their respective successors and assigns or be in any respect binding
with respect to any such other parties. The situs of the arbitration will be in
the County of San Diego, State of California. The language of the arbitration
shall be English.
-25-
<PAGE>
The parties to any arbitration arising hereunder shall have the right
to take depositions and to obtain discovery regarding the subject matter of the
arbitration and to use and exercise all of the same rights, remedies and
procedures, and be subject to all of the same duties, liabilities, and
obligations in the arbitration with respect to the subject matter thereof, as if
the subject matter of the arbitration were pending in a civil action before a
court of highest jurisdiction in California, U.S.A. The arbitrator shall have
the power to enforce said discovery by imposition of same terms, conditions,
consequences, liabilities, sanctions and penalties as can be or maybe imposed in
like circumstances in a civil action by a court of highest jurisdiction of the
state in which the arbitration is held, except the power to order the arrest or
imprisonment of a person.
If any party commences an action, either arbitration or court
proceedings, against any other party arising out of or in connection with this
Agreement, the prevailing party or parties shall be entitled from the losing
party or parties, both attorney's fees and costs of the arbitration and/or suit
as part of the judgment rendered.
Either party may, without inconsistency with this Agreement, seek from
a court any interim or provisional relief that may be necessary to protect the
rights or property of that party, pending the establishment of the arbitral
tribunal or pending the arbitral tribunal's determination of the merits of the
controversy.
8.2 Survival of Representations. All representations, warranties and
---------------------------
agreements contained herein or made in writing by the Company and the Purchaser
in connection with the transactions contemplated hereby except any
representation, warranty or agreement as to which compliance may have been
appropriately waived, shall survive the execution and delivery of this
Agreement.
8.3 Expenses and Attorney Fees. The Company and the Purchaser shall
--------------------------
each pay all of their respective legal and due diligence expenses in connection
with the transactions contemplated by this Agreement, including, without
limiting the generality of the foregoing, legal and accounting fees.
8.4 Waiver of Conditions. At any time or times during the term
--------------------
hereof, the Company may waive fulfillment of any one or more of the conditions
to its obligations in whole or in part, and the Purchaser may waive fulfillment
of any one or more of the foregoing conditions to their obligation, in whole or
in part, by delivering to the other party a written waiver or waivers of
fulfillment thereof to the extent specified in such written waiver or waivers.
Any such waiver shall be validly and sufficiently authorized for the purposes of
this Agreement if, as to any party, it is authorized in writing by an authorized
representative of such party. The failure of any party hereto to enforce at any
time any provision of this Agreement shall not be construed to be a waiver of
such provision, nor in any way to affect the validity of this Agreement or any
part hereof or the right of any party thereafter to enforce each and every such
provision. No waiver of any breach of this Agreement shall be held to
constitute a waiver of any other or subsequent breach.
8.5 Partial Invalidity. If any term, covenant or condition of this
------------------
Agreement or the application thereof to any person or circumstance shall, to any
extent, be invalid or
-26-
<PAGE>
unenforceable, the remainder of this Agreement, or the application of such term,
covenant or condition to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby and each
term, covenant or condition of this Agreement shall be valid and be enforced to
the fullest extent permitted by law.
8.6 Notices. Any notices relating to this Agreement of the Exhibits
-------
hereto shall be deemed sufficiently given and served for all purposes if given
in writing and delivered (a) personally, (b) by a telegram filed, charges
prepaid, (c) by facsimile with electronic confirmation of receipt, (d) by
registered or certified mail, postage prepaid, or (e) by international courier,
addressed as follows:
If to the Company or GDRIL:
Global Diamond Resources, Inc.
836 Prospect Street, Suite 2B
La Jolla, California 92037
USA
Attention: Johann de Villiers, Chief Executive Officer
Facsimile: (619) 459-5513
If to the Purchaser:
International PCM Holdings Limited
P.O. Box 33251,
Jeddah 21448
Kingdom of Saudi Arabia
Attention: Abu Bakr Bin Ali Akhdar Mood
Facsimile: ______________________________
Such notice shall be deemed given: (a) if personally delivered, at the time of
delivery; (b) if sent by facsimile transmission with confirmation of receipt or
delivered by telegram, three (3) days after being sent or the time of actual
receipt, whichever is earlier; and (c) if sent by mail or international courier,
on the date of actual receipt. The address for the purpose of this Paragraph
8.6 may be changed by giving notice of such change in the manner provided herein
for giving notice.
8.7 Successors and Assigns. The terms, covenants and conditions
----------------------
contained herein shall be binding upon and inure to the benefit of the heirs,
successors and assigns of the parties hereto. The foregoing notwithstanding,
this Agreement may not be assigned by either party, in fact or by operation of
law, without the prior written consent of the other, and any such attempted
assignment shall be null and void; provided, however, that in the event of a
purported assignment by the Purchaser, the consent of the Company and GDRIL
shall not be unreasonably withheld.
8.8 Law Governing. This Agreement shall be construed and interpreted
-------------
in accordance with and governed and enforced in all respects by the laws of the
State of California.
-27-
<PAGE>
8.9 Headings. The section, subsection and paragraph headings
--------
throughout this Agreement are for convenience and reference only, and the words
contained therein shall not be held to expand, modify, amplify or aid in the
interpretation, construction or meaning of this Agreement.
8.10 Counterparts; Fax Signatures. This Agreement may be executed in
----------------------------
any number of counterparts, each signed by different persons and all of said
counterparts together shall constitute one and the same instrument, and such
instrument shall be deemed to have been made, executed and delivered on the date
first hereinabove written, irrespective of the time or times when the same or
any counterparts thereof actually may have been executed and delivered a
counterpart thereof to the Company and the Purchaser. The parties agree that
facsimile signatures may be relied upon by each of the parties hereto as
original signatures.
8.11 Entire Agreement. This Agreement and the Schedules contain the
----------------
entire agreement of the parties hereto and may not be modified, altered or
changed in any manner whatsoever, except by a written agreement signed by the
parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
GLOBAL DIAMOND RESOURCES, INC.,
a Nevada corporation
By:_________________________________
Johann de Villiers,
Chief Executive Officer
INTERNATIONAL PCM HOLDINGS LIMITED,
a British Virgin Islands company
By:_________________________________
Abu Bakr Bin Ali Akhdar Mood,
Director
-28-
<PAGE>
EXHIBIT 21.1
The Registrant's subsidiaries are Global Diamond Resources Inc., a British
Columbia corporation, and Global Diamond Resources (SA)(Pty) Limited, a South
African corporation, Global Diamonds Resources International Limited, a British
Virgin Islands corporation, and Nabas Diamonds (Pty) Ltd., a South African
corporation.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 4,096,141 334,387
<SECURITIES> 0 0
<RECEIVABLES> 88,929 31,538
<ALLOWANCES> 0 0
<INVENTORY> 0 64,208
<CURRENT-ASSETS> 4,196,139 454,248
<PP&E> 1,572,442 271,739
<DEPRECIATION> 52,889 10,538
<TOTAL-ASSETS> 6,053,019 725,987
<CURRENT-LIABILITIES> 301,390 86,258
<BONDS> 1,662,500 0
0 0
0 0
<COMMON> 11,952 5,500
<OTHER-SE> 6,955,639 2,199,234
<TOTAL-LIABILITY-AND-EQUITY> 6,053,019 725,987
<SALES> 0 0
<TOTAL-REVENUES> 17,990 45,967
<CGS> 0 0
<TOTAL-COSTS> 1,291,056 720,495
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 15,333 0
<INCOME-PRETAX> (1,288,399) (674,528)
<INCOME-TAX> 1,780 1,624
<INCOME-CONTINUING> (1,290,179) (676,152)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,290,179) (676,152)
<EPS-PRIMARY> (0.11) (0.06)
<EPS-DILUTED> (0.11) (0.06)
</TABLE>
