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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, 1998
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
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(Address of principal executive offices) 92037
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(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
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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)
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 [_] No [X]
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 September 30, 1999 was approximately $4,235,000.
The number of shares of the Common Stock outstanding as of September 30, 1999
was 45,600,678.
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 September 30, 1999, the
Rand-Dollar exchange rate was 6.14 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 1988, the Company 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. Between March 1988 and March 1992, the Company acted as a holding
corporation for its wholly-owned subsidiary, Western Capital Leasing
Corporation. 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 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 $6,000,000 in the Company. 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. 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 has used
the proceeds from the PCM financing to further its mining operations in South
Africa. The Company agreed to expand its Board of Directors to nine members and
appoint three nominees of PCM to the Board.
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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.
On December 29, 1998, the Company entered into Securities Purchase
Agreements with LIWA Diamond Company Limited and New Diamond Holdings Limited,
respectively, as amended June 30, 1999, pursuant to which each investor
purchased 9,238,096 shares of Common Stock of the Company for $3,000,000. The
Company agreed to expand its Board of Directors to 11 members and appoint 2
nominees of each investor to the board. PCM agreed to reduce its nominees to
the Board to two.
In connection with the investment by LIWA Diamond and New Diamond, the
Company paid a finder's fee amounting to $1,363,200 and 2,750,000 shares of
Common Stock to Mr. Abu Bakr Bin Ali Al-Akhdar Mood, who at the time was a
director of PCM and a member of the Board of Directors of the Company. As a
result of a subsequent arbitration over the matter, Mr. Abu Bakr returned to the
Company $963,165 and the 2,750,000 shares of Common Stock. It is uncertain
whether Mr. Abu Bakr will return the $400,035 balance of the cash portion of the
finder's fee. On June 3, 1999, Mr. Abu Bakr resigned from the Board of
Directors of the Company. In connection with the return of the cash and shares
by Mr. Abu Bakr, 666,667 shares of common stock were issued to PCM as a fee for
their assistance in the return of the finder's fee.
In July 1999, the Company and its Chairman, Johann de Villiers, were named
as defendants in an action brought by Mr. Abu Bakr in the United States District
Court for the Southern District of California. In that action, Mr. Abu Bakr
alleges that he acted as a finder in connection with the Company's sale of
common stock to LIWA Diamond and New Diamond and that in connection with that
offering, he was entitled to a finders' fee equal to approximately 28% of the
gross proceeds. Mr. Abu Bakr alleges that the Company and Mr. de Villiers
fraudulently forced Mr. Abu Bakr to participate in a binding arbitration
regarding his finders' fees and that as a result of this arbitration, he was
forced to return the finders' fee and resign from his position as Managing
Director of the Bin Ladin Group, Petroleum, Chemical and Mining Division. Mr.
Abu Bakr has alleged causes of action for breach of contract, unjust enrichment,
fraud, misrepresentation and duress. Mr. Abu Bakr also alleges interference
with and breach of his employment contract with the Bin Ladin Group. Mr. Abu
Bakr seeks compensatory and punitive damages in an unspecified amount.
In August 1999, the Company and Mr. de Villiers filed an answer to Mr. Abu
Bakr's complaint in which they denied all of the allegations contained therein.
The Company believes that the allegations of Mr. Abu Bakr are frivolous and,
accordingly, the Company intends to vigorously defend this case.
On June 16, 1999 the Company increased its authorized Common Stock from 50
million shares of $0.0005 par value Common Stock to 100 million shares of
$0.0005 par value Common Stock. This increase was approved by a majority vote
of shareholders.
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 two mining properties (the Grasdrif Deposit and the Caerwinning
Deposit), and owns 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 completed site establishment, including roads,
power, housing and water, erection of a primary and final recovery plant on the
lower terrace and commenced bulk sampling operations on the lower terrace in the
last 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 mineral lease, which
has an initial ten year right to mine the Caerwinning Deposit was approved by
the government of South Africa on March 31, 1998. The Company commenced
production at the Caerwinning Deposit when the primary and final recovery plant
was commissioned in September 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 and completed an extensive drilling program
in April 1998. The Company has negotiated a one-year extension of the option
period to October 2000. The extension was obtained for a lease payment of
R60,000 ($9,800 at September 30, 1999) to the property owner. An increase in
the option amount was also agreed upon. In the event the Company decides to
exercise its option to purchase the mineral and surface rights of the Montrose
property, the price was increased to $600,000.
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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Background
Diamond is the name attributed to a chemically inert mineral, which
normally occurs as crystals formed when the element carbon is subjected to
extraordinary heat and pressure. Diamond is believed to have been formed at a
depth of 200-400km below the surface of the earth and is then transported to the
earth's surface by the upward movement of molten rock. The molten rock
solidifies as semi-circular (pipes) or linear bodies (fissures). The solidified
rock is known as kimberlite. Pipes and fissures are eroded over time, and the
diamonds thus released from such formations are transported and are eventually
deposited in ancient or existing riverbeds and on beaches. In these deposits,
the diamonds are typically associated with the coarser (gravel) fraction of the
sediments, which are collectively known as alluvial deposits. The process of
erosion grinds and crushes the poorer quality diamonds thereby enhancing greatly
the average quality of the diamonds eventually deposited.
Diamond exploration
Diamond exploration typically begins with aerial photography, surface
sampling and magnetic surveys for purposes of locating indicator minerals or
geophysical anomalies, which may indicate the presence of kimberlite or an
alluvial deposit. In the event a pipe is located, follow-up sampling is
conducted to determine if it is diamondiferous. If the pipe is determined to be
diamondiferous, bulk sampling is then conducted to evaluate the value of the
diamonds present and the grade of the prospect.
The exploration and evaluation of an alluvial diamond deposit is similar to
that of kimberlite but typically more complex and less conclusive because of
what is termed the "nugget-effect" which pertains to the scarce and irregular
distribution of diamonds in the gravel. Drilling can only determine the three-
dimensional extent of the gravel while bulk sampling is of necessity
substantially more complex than for kimberlite.
Diamond mining
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 bulldozers are used to remove the topsoil, which is set
aside for reclamation. Hydraulic excavators are then employed to excavate an
open pit. As the mining operations expand, digging benches into the pit wall
enlarges the open pit. Since kimberlite pipes are relatively confined bodies,
it becomes impractical at a certain depth, approximately 30 to 100 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 trucks.
Alluvial deposits are mined by open cast methods generally known as strip
mining. Removing any overburden present exposes the gravel. The gravel is then
removed by hydraulic excavator, loaded onto trucks and transported to the
recovery plant where it is then screened to remove all particles larger than
25mm. The larger fraction is discarded while the smaller fraction is then
processed by gravity separation (rotary pans) or centrifugal separation (DMS) to
recover the particles with a relative density of larger than 2.9 as concentrate.
Recovery
Each recovery plant consists of screens and associated separators that
employ water, agitation, gravity and centrifugal force as a primary method to
separate the heavier diamondiferous concentrate from the lighter tailings.
Two methods are employed i.e. rotary pans and dense media separation (DMS),
both well tried, the only difference is that pans are much cheaper to construct
and operate but a DMS can be monitored electronically.
Electronic sorting machines conduct final recovery from the concentrate.
These machines utilize the luminescent properties of diamond when it is
irradiated with X-rays. Photo multiplier tubes sense the luminescence and
activate a trap door, which diverts the diamond to a safe box. This concentrate
is then finally sorted by hand.
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Marketing
The Company sells it diamonds directly to private diamond dealers and
manufacturers through a tender system. There are no formal rules by which the
prices of diamonds are determined. Sale prices are set by the diamonds' color,
clarity, cut and weight which the prospective buyer expects to obtain through
the polishing process, and the evaluation process is generally subjective. The
Company expects that its sale of 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 the Company's Chief Executive
Officer, has 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
($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, 1999. 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.
The Company holds a prospecting permit for the Grasdrif Deposit which
expires August 4, 2003. The Company will apply for a mining permit when the
level of activities warrant such application, which is not anticipated to be
reached for a few years.
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.
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 completed site establishment at the Grasdrif
Deposit, including roads, power, housing and water, erection of a primary and
final recovery plant on the lower terrace and commenced bulk sampling operations
on the lower terrace in the last 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. In the third quarter of 1999, the Company
completed the erection of a primary recovery plant on the upper terrace and
commenced bulk sampling on the upper terrace.
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Production from the upper and lower terrace will only commence if positive
results from the bulk samples are obtained.
See "Item 6. Management's Discussion and Analysis" for a discussion of the
results of operations and capital requirements of the Grasdrif Deposit.
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). 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 ($1,302,900 as of September 30, 1999) to Lama Minerals CC
prior to the Company's mining of the pipes or fissures. The Company is 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 ($8,100 as of
September 30, 1999) 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. The initial ten year right to mine the Caerwinning Deposit
commenced on March 31, 1998 upon approval of the mineral lease by the government
of South Africa. The Company holds a mining permit for the Caerwinning Deposit
which expires on March 31, 2008.
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. The terraces are named T1, T2 and
T3 with T1 being the oldest terrace. 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 T2 terrace
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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 commenced production from the T2 terrace at the
Caerwinning Deposit when it commissioned the primary and final recovery plant in
September 1998. The Company intends to conduct directly all mining and recovery
activities at the Caerwinning Deposit. However, in the event the Company
encounters calcified deposits that require blasting, it intends to engage
contractors for this purpose. Due to higher than normal rainfall in the area,
run off from the irrigation lands as well as a higher than normal water table,
wet ore from the T2 terrace had to be processed by the primary recovery plant,
which was designed as a dry primary recovery plant. This caused a drop in
tonnes processed as well as in the recovery rate of diamonds. This resulted in
the production loss of $122,209 for the period from the commissioning of the
plant in September 1998 to December 31, 1998.
In the third quarter of 1999, the Company completed the erection of a wet
primary recovery plant to process the wet ore from the T2 terrace. The dry
plant will continue to process the dry ore. Combined capacity is 240 tonnes per
hour.
See "Item 6. Management's Discussion and Analysis" for a discussion of the
results of operations and capital requirements of the Caerwinning Deposit.
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 acquired the
exclusive rights to prospect on the property until October 10, 1999 in
consideration of the Company's payment of R48,000 ($7,800 at September 30, 1999)
and 10% of the value of all minerals recovered by the Company during the
prospecting period. The Company also had the exclusive option until October 10,
1999 to purchase the farm for R3.1 million ($504,900 as of September 30, 1999).
The Company has negotiated a one-year extension of the option period to October
2000. The extension was obtained for a lease payment of R60,000 ($9,800 at
September 30, 1999) to the property owner. An increase in the option amount was
also agreed upon. In the event the Company decides to exercise its option to
purchase the mineral and surface rights of the Montrose property, the price was
increased to $600,000. A prospecting permit is required from the local
government and is renewable annually subject to government approval. The
present prospecting permit expired on October 10, 1998. The Company is in the
process of applying for an extension of this prospecting permit which includes
preparing an environmental rehabilitation plan for submission to the local
government. Upon acceptance of the plan, the prospecting permit is expected to
be issued with the same expiration date as the option.
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
7
<PAGE>
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 completed an extensive drilling program at the
Montrose Pipe in April 1998. The drill samples consisted of 222 tonnes which
have been processed, milled and handsorted by an independent laboratory. A
total of 31 diamonds were recovered with a total weight of 3.82 carats.
Diamonds were recovered from all but 2 of the 30 holes drilled. The largest is
a diamond of 0.47 carats. The diamonds are all of gem or near gem quality. The
final report on the results of the program prepared by the independent
laboratory were received at the end of August 1998. The company has evaluated
the report. An extensive bulk sample must be carried out before a decision can
be made on whether to exercise the option on the Montrose Kimberlite Pipe. The
decision whether to carry out the bulk sample still has to be made based upon
the cost and availability of financing. Proposals and quotations are being
obtained from mining contractors and consultants and the various cost scenarios
are being evaluated with a planned start date of February 2000. If the results
from the bulk sampling program are successful, the Company will exercise its
exclusive option to buy the property. The Company will then conduct open pit
mining to a depth of 30 meters commencing in late 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 expects to commence underground mining activity upon the
completion of open-pit mining. During the initial phase of underground mining,
the existing shaft is expected to 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 R16
million ($2,606,000 as of September 30, 1999) in capital expenditures and two
years of development will be required in order to commence underground mining
operations.
See "Item 6. Management's Discussion and Analysis" for a discussion of the
results of operations and capital requirements of the Montrose Pipe.
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
8
<PAGE>
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 rehabilitation. 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 rehabilitation costs. Rehabilitation
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, new environmental legislation has been tabled, and other legislation
has been passed which places significantly more emphasis on the protection of
the environment and, as a consequence, more closely regulates the Company's
mining operations. Such legislation, together with legislation which may be
tabled in future, as well as future interpretation of existing laws, may require
substantial increases in equipment and operating costs to the Company, and may
cause delays, interruptions or a termination of operations, the extent of which,
at present, cannot be predicted with certainty.
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 minerals on land to prospect for and mine the minerals concerned. 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 cessions 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 Company acquired
the common law mineral rights and direct government authorization to prospect
and mine the Caerwinning Deposit in 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 85 persons, including 2 management level employees in
the U.S. and 8 managers and 75 other employees 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.
9
<PAGE>
Glossary
Set forth below are definitions of certain mining and geological terms used
in this report.
<TABLE>
<S> <C>
Adit The main horizontal or near-horizontal underground opening, with single
- ---- access to the surface, through which a kimberlite pipe is mined and the ore
is excavated.
Alluvial Deposit A mass of gravel, sand or similar material resulting from the crumbling and
- ---------------- erosion of solid rocks. In the sense that it is used here, it also implied
an association with precious minerals such as diamond. A deposit of
alluvium (deposits made by water) is made by a stream where it runs out onto
a level plain or meets a slower stream.
Bedrock The solid or weathered rock underlying mineral-bearing gravel, sand clay,
- ------- etc. and upon which alluvial deposits rest.
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
deposit.
Carat A unit of weight used for precious stones equal to 200 milligrams or 0.2
- ----- grams.
Concentrate That fraction of the processed ore which contains all or the largest portion
- ----------- of the economic mineral to be recovered. In the case of alluvial deposits,
approximately 0.5-1.5% of the ore reports as concentrate from the primary
recovery process. Of this a further 0.1-0.5% reports as concentrate from the
electronic sorters.
Diamondiferous Containing diamonds.
- --------------
Geophysical Surveys Measuring and recording any geophysical properties over a specific area,
- ------------------- e.g., gravity, magnetics, electrical conductivity, acoustical velocities
(seismics), 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 deposit. Alluvial gravels are sometimes arbitrarily
described in terms of size as "pebble," "cobble" or "boulder" gravel.
Hectares 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 more or less vertically orientated carrot-shaped
structure referred to as a kimberlite "pipe."
Magnetic Surveys Measuring the magnetic variations in the earth's magnetic field caused by
- ---------------- the variations in the magnetic properties of different rocks in the earth's
crust with an instrument known as a magnetometer either as ground-based
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
or mounted within or by towed an aircraft. Useful in detecting kimberlite
bodies due to the presence of magnetite and/or ilmenite.
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 activity, occupation, and industry concerned with the large-scale
- ------ extraction of minerals and includes both surface and underground
excavations. 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 body of rock or sediment containing a mineral that has sufficient utility
- --- and value to be extracted at a profit. See "Reserves."
Petrology The science that deals with the origin, history, occurrence, structure,
- --------- chemical and mineralogical composition and classification.
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
(Indicated Resource) 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 minerals (including diamond) by any means such as geophysical,
- ----------- drilling and pilot plant recovery methods, but does not include "mining"
(i.e., excavation for purposes of recovering diamonds in commercial
amounts). See "Mining."
Proven Reserves Reserves for which (a) the quantity is computed from dimensions which can be
- --------------- measured from outcrops, trenches, workings or drill holes. Certain grades
(Measured Resource) and/or qualities computed from the results of detailed sampling, can be
allocated to the quantity thus delineated 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 the reserves
are well-established. See "Reserves" and "Proven Reserves."
Reserves That part of a total mineral deposit (resource) that can be economically and
- -------- legally processed or produced from at the time of the reserve determination.
Reserves are customarily stated in terms of "ore."
Stripping Ratio The overburden that must be removed to gain access to an amount of ore.
- --------------- Expressed as a ratio in meters or tonnes of overburden: one meter or tone of
ore. The standard in this Company is to use a m:m ratio.
Tailings The washed material that issues from a recovery plant after the economic
- -------- portion of the ore has been removed as a concentrate.
</TABLE>
11
<PAGE>
Item 2. Description of Property.
The Company's executive offices are located in La Jolla, California and
consist of approximately 599 square feet of leased premises. The Company's
lease for these premises expires on March 31, 2002 and provides for monthly rent
of $1,411. The Company also leases approximately 260 square feet in the SA
Diamond Center in Johannesburg, South Africa. The lease provides for monthly
rental of R825 ($134 as of September 30, 1999) and expires on February 28, 2003.
The Company purchased a property in August 1998 in Delportshoop, South Africa
which is near the Caerwinning Deposit, by issuing 151,171 shares of Common
Stock. The property, which consists of an office and employees and visitors
housing totalling 5,880 square feet is used for the Caerwinning Deposit. 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.
Item 3. Legal Proceedings.
In July 1999, the Company and its Chairman, Johann de Villiers, were
named as defendants in an action brought by Mr. Abu Bakr Bin Ali Al-Akhdar Mood
in the United States District Court for the Southern District of California. Mr.
Abu Bakr is a former director of the Company. In that action, Mr. Abu Bakr
alleges that he acted as a finder in connection with the sale of a total of
$6,000,000 of the Company's common stock to two private investors (LIWA Diamond
and New Diamond) and that in connection with that offering, he was entitled to a
finders' fee equal to approximately 28% of the gross proceeds. Mr. Abu Bakr
alleges that the Company and Mr. de Villiers fraudulently forced Mr. Abu Bakr to
participate in a binding arbitration regarding his finders' fees and that as a
result of this arbitration, he was forced to return the finders' fee and resign
from his position as Managing Director of the Bin Ladin Group, Petroleum,
Chemical and Mining Division. Mr. Abu Bakr has alleged causes of action for
breach of contract, unjust enrichment, fraud, misrepresentation and duress. Mr.
Abu Bakr also alleges interference with and breach of his employment contract
with the Bin Ladin Group. Mr. Abu Bakr seeks compensatory and punitive damages
in an unspecified amount.
In August 1999, the Company and Mr. de Villiers filed an answer to Mr.
Abu Bakr's complaint in which they denied all of the allegations contained
therein. The Company believes that the allegations of Mr. Abu Bakr are frivolous
and, accordingly, the Company intends to vigorously defend this case.
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 1998.
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, 1998, the high and low closing sale prices were $.5625 and $.1094,
respectively. The Company considers its Common Stock to be thinly traded and
that any reported bid or sale prices may not be a true market-based valuation of
the Common Stock. As of September 30, 1999, there were approximately 133 record
holders and 595 beneficial holders of the Company's Common Stock.
The Company has not paid any cash dividends since its inception and
does not contemplate paying dividends in the foreseeable future. It is
anticipated that earnings, if any, will be retained for the operation of the
Company's business.
During the fiscal year ended December 31, 1998, the Company sold
unregistered shares of its Common Stock in the following transactions:
A. In March 1998, holders of outstanding warrants exercised their
rights to purchase 172,286 shares of common stock at an exercise price of
Cdn$.375 per share for the gross proceeds of Cdn$60,608 (US$45,896). The
securities were issued pursuant to Section 4(2) under the Securities Act of 1933
(the "Act"). There were no underwriters involved in the transaction.
12
<PAGE>
B. In March 1998, the Company granted 100,000 common stock options to
an employee of the Company. The options are exercisable at $.46875 per share
with 25,000 exercisable at any time, 25,000 after September 2, 1998, 25,000
exercisable after March 2, 1999 and 25,000 exercisable after March 2, 2000. All
options expire on March 2, 2008 or 60 days after termination of service,
whichever occurs first. The securities were issued pursuant to Section 4(2) of
the Act. There were no underwriters involved in the transaction.
C. In March 1998, the Company issued 25,000 common stock warrants for
consulting services at $.50 per share, exercisable at any time until expiration
on March 20, 2001. The securities were issued pursuant to Section 4(2) of the
Act. There were no underwriters involved in the transaction.
D. In July 1998, the Company granted 100,000 common stock options to an
employee of the Company. The options are exercisable at $.43 per share with
25,000 exercisable at any time, 25,000 after July 1, 1999, 25,000 after July 1,
2000 and 25,000 after July 1, 2001. All options expire on July 1, 2008 or 60
days after termination of service, whichever occurs first. The securities were
issued pursuant to Section 4(2) of the Act. There were no underwriters involved
in the transaction.
E. In August 1998, the Company issued the following options to
directors of the Company. 100,000 common stock options to each of three
directors, exercisable at $.525 per share, exercisable at any time until
expiration on December 31, 2000. 50,000 common stock options to each of five
directors, exercisable at $.525 per share, exercisable at any time until
expiration on January 2, 2001. 50,000 common stock options to each of the two
new directors, exercisable at $.525 per share, exercisable at any time until
expiration, 50,000 on February 4, 2001 and 50,000 on May 5, 2001. The securities
were issued pursuant to Section 4(2) of the Act. There were no underwriters
involved in the transaction.
F. In August 1998, the Company issued 151,171 shares of common stock in
consideration for the Company's acquisition of a housing and administration
building for the Caerwinning Deposit. The securities were issued pursuant to
Section 4(2) of the Act. There were no underwriters involved in the transaction.
G. In December 1998, the Company issued 3,616,651 shares of common
stock of the Company to JB Smith Ltd., a British Virgin Islands corporation. JB
Smith was to hold these shares as an agent for the Company to be issued for
investment banking services as and when rendered. These services were not
rendered and the common shares were returned to the Company in June 1999 and
cancelled. The effective date of the cancellation was regarded as December 31,
1998.
H. In December 1998, the Company sold 18,476,192 shares of common stock
for $6,000,000 to two unrelated parties, each investor purchasing 9,238,096
shares of common stock for $3,000,000. The shares were issued pursuant to
Section 4(2) of the Act. There were no underwriters involved in the transaction,
however, the Company paid a finder's fee of $1,363,200 and 2,750,000 shares of
common stock of the Company to a director of the Company, Mr. Abu Bakr Bin Ali
Al-Akhdar Mood. The $1,363,200 was paid in part in January 1999 and the balance
in March 1999. As a result of a subsequent arbitration over the matter, Mr. Abu
Bakr returned to the Company $963,165 and the 2,750,000 common shares as of June
1999. It is uncertain whether Mr. Abu Bakr will return the $400,035 balance of
the cash portion of the finder's fee. On June 3, 1999, Mr. Abu Bakr resigned
from the board of directors. In connection with the return of cash and shares,
666,667 shares of common stock were issued to PCM as a fee for their assistance
in the return of a portion of the finder's fee.
I. In December 1998, the Company issued 720,000 shares of common stock
for market support to two unrelated parties. There were no underwriters involved
in the transaction.
J. In December 1998, the Company sold to a director of the Company
1,510,758 shares of common stock for $244,300. The offering was conducted
pursuant to Section 4(2) of the Act. There were no underwriters involved in the
transaction.
K. In December 1998, the Company issued 50,000 common stock options
each to four directors, exercisable at $.4875 per share, exercisable at any time
until they expire, 100,000 on December 29, 2001 and 100,000 on December 30,
2001. The shares were issued pursuant to Section 4(2) of the Act. There were no
underwriters involved in the transaction.
13
<PAGE>
Item 6. Management's Discussion and Analysis.
Background
- ----------
The Company is engaged in diamond exploration and mining. The Company
has acquired two mining properties (the Grasdrif Deposit and the Caerwinning
Deposit), and owns 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.
To date, the Company's activities have included the investigation and
acquisition of mining property interests, exploratory work, site establishment
and purchase and operation of mining plant and equipment. During the year ended
December 31, 1998, the Company purchased mining plant and equipment for
$2,729,667 and incurred mine development costs at the Grasdrif Deposit in the
amount of $632,824 and at the Caerwinning Deposit in the amount of $534,868. In
addition, an extensive drilling program at the Montrose Kimberlite Pipe costing
$127,200 was completed in April 1998.
Results of Operations
- ---------------------
The increase in interest income in 1998 compared to 1997 and 1996 is
mainly due to the temporary investment of cash received from the debt and equity
financings in December 1997 and April 1998. The interest expense in 1998 is the
result of the debt portion of that financing. The increase in operating expenses
is mainly due to the Company gearing up to place the Grasdrif and Caerwinning
Deposits into bulk sampling and production, respectively. Bulk sampling
commenced on the Grasdrif Deposit in the last quarter of 1998. The Caerwinning
Deposit commenced production in September 1998. Production loss through December
31, 1998 amounted to $122,209. The production loss was caused in part by
processing problems encountered with wet ore.
The Company's mining properties, mining properties under development
and mining equipment are all situated in the Republic of South Africa, where the
currency is the Rand. In June 1998, the Rand weakened significantly against
other major currencies including the US dollar. The revaluation of the Company's
property and equipment caused most of the foreign currency translation
adjustment of $794,310 for the year ended December 31, 1998.
Accounting Change
- -----------------
Effective January 1, 1998, the Company changed its method of accounting
for exploration and related costs on unproven properties from capitalizing all
expenditures to expensing all costs, other than acquisition costs, prior to the
completion of a definitive feasibility study which establishes proven and
probable reserves. Previously, the Company began capitalizing exploration costs
upon the decision to proceed to develop a property, which for certain properties
preceded the completion of a definitive feasibility study. The cumulative effect
of this change calculated as of January 1, 1998, was $606,781, which amount was
charged to operations in 1998 as the cumulative effect of a change in accounting
principle. Adoption of this new accounting method increased the net loss by
$929,829 in 1998. Management believes the newly adopted accounting method is
preferable because it is the more predominant method of accounting used in the
mining industry and will better reflect operating income and cash flow.
Liquidity and Capital Resources
- -------------------------------
The Company has financed its activities to date through the sale of its
equity and debt securities. A $6 million equity and debt financing agreement was
completed in December 1997 and a $6 million equity financing was completed in
December 1998. The Company's plan of operations for the next 12 months include
the completion of exploratory work at the Montrose Kimberlite Pipe properties,
the completion of exploratory work and commencement of mining operations at the
Grasdrif Deposit and continuation of mining operations at the Caerwinning
Deposit.
The Caerwinning Deposit incurred an operating loss from the date it
commenced production in September 1998 to December 31, 1998 amounting to
$122,209 net of the value of the diamonds recovered of $36,990. The bulk sample
of the lower terrace, which commenced in 1998 at the Grasdrif Deposit, has not
identified a profitable area of diamondiferous grade of gravel to mine on the
lower terrace. The lower terrace at the Grasdrif Deposit
14
<PAGE>
contains 77 million tonnes of gravel of which the Company has bulk sampled
115,800 tonnes through September 30, 1999 which represents about 0.15% of the
deposit. The Company completed the purchase and erection of additional plant and
equipment at the Grasdrif Deposit and brought the upper terrace into production
in the third quarter of 1999. In addition the Company has completed the purchase
and erection of a wet primary recovery plant at the Caerwinning Deposit in order
to increase tonnage processed and improve recovery for the whole plant. The wet
plant was placed into production during the third quarter of 1999 and the grade
increased to just over one carat per 100 tonnes with average value of over $500
per carat. Plant capacity increased to 240 tonnes per hour. The Caerwinning
Deposit is expected to be generating positive cash flow in the fourth quarter of
1999.
Even though the Company has working capital at December 31, 1998
amounting to $4,608,995, the Company believes that it requires, at a minimum,
additional working capital of approximately $3,000,000 to satisfy its working
capital requirements for the next 12 months, including the capital that will be
required to conduct the bulk sample at the Montrose Kimberlite Pipe. Should any
of the following events occur, additional working capital may be needed in the
next 12 months.
The events are:
(a) that the Caerwinning Deposit has negative cash flow from
operations;
(b) the bulk sample on the lower terrace at the Grasdrif Deposit does
not identify a profitable area of diamondiferous grade of gravel
to mine and profitable mining operations do not commence; or
(c) the mining on the upper terrace at Grasdrif results in an
operating loss.
The Company is in discussions with bankers to obtain financing secured
by new mining and earthmoving equipment, held free and clear, with a net book
value at December 31, 1998 of $2,832,000. However, there is no assurance that
the Company will be able to raise the additional capital it requires through the
equipment refinancing or otherwise. In the event that the Company is unable to
raise the working capital it needs, it will focus its efforts on the activities
that its resources can support at that time.
The Company's beliefs concerning its working capital requirements are
based on certain assumptions concerning, among other things, the estimated grade
of the processed ore, average price per diamond carat, commencement and scale of
mining operations, Rand - US$ exchange rate and cost of production. If any of
these assumptions prove incorrect, the Company may require further additional
capital. Any such additional financing may require an additional pledge or
mortgage of the Company's properties and of any production therefrom. There is,
of course, no assurance that satisfactory financing could be obtained. In
addition to financing individual development projects, the Company may also
borrow funds from time to time for working capital and other general corporate
purposes.
As stated in the Auditor's Report to the accompanying financial
statements, the financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Year 2000
- ---------
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 hardware and software failures. Failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company has addressed this risk as to the availability,
integrity and reliability of financial accounting and operational systems. The
Company has completed Year 2000 compliance testing on all hardware used for
financial accounting systems. Assurance has been received from the software
vendors of the accounting systems that all their software in use by the Company
is Year 2000 compliant. The Company considers its systems to be Year 2000
compliant and does not expect to incur any further material costs in connection
with Year 2000 issues. All expenses to date have been written off as incurred.
Since the Company's mining equipment is not date sensitive, the most likely
worse case scenario is the loss of supply of power and fuel to the mining
operations. The Company is presently in contact with the suppliers of power and
fuel to ensure they are Year 2000 compliant. If such assurances are not
received, the Company will start using alternative Year 2000 compliant
suppliers.
15
<PAGE>
Forward Looking Statements
- --------------------------
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 just commenced mining operations at its
Caerwinning Deposit, has not commenced mining operations at its Grasdrif
Deposit; 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.
16
<PAGE>
Item 7. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report................................ 18
Consolidated Balance Sheets at December 31, 1998 and 1997... 19
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996...................... 20
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996....... 21
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996........................... 22
Notes to Consolidated Financial Statements.................. 24
17
<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, 1998 and
1997, 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, 1998. 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, 1998 and 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for exploration and related costs on unproven
properties.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
San Diego, California
March 5, 1999, except for Notes 2, 4, 6, 7,
10 and 13 as to which the date is July 16, 1999
18
<PAGE>
GLOBAL DIAMOND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Assets 1998 1997
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,461,235 4,096,141
Accounts receivable:
Trade 25,478 74,998
Officer 25,000 25,000
Inventory of diamonds 57,016 --
----------------- -----------------
5,568,729 4,196,139
Fixed assets, net 4,603,765 1,572,442
Deposits on equipment -- 284,438
----------------- -----------------
$ 10,172,494 6,053,019
================= =================
Liabilities
Current liabilities:
Accounts payable and accrued liabilities $ 772,237 63,890
Current portion of long-term debt 187,497 237,500
----------------- -----------------
959,734 301,390
----------------- -----------------
Long-term debt, less current portion 3,000,000 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,
45,600,678 and 23,903,604 shares issued and outstanding,
respectively 22,800 11,952
Additional paid-in capital 13,457,899 6,955,639
Accumulated deficit (6,432,958) (2,837,791)
Accumulated other comprehensive income -
Foreign currency translation adjustment (834,981) (40,671)
----------------- -----------------
6,212,760 4,089,129
----------------- -----------------
$ 10,172,494 6,053,019
================= =================
</TABLE>
Commitments and contingencies (Note 13)
See accompanying notes to consolidated financial statements.
19
<PAGE>
GLOBAL DIAMOND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
Other Income:
Interest income $ 69,045 17,990 10,017
Fee income -- -- 35,950
------------------- ------------------- -------------------
69,045 17,990 45,967
------------------- ------------------- -------------------
Production Expenses:
Costs 159,199 -- --
Less diamonds recovered 36,990 -- --
------------------- ------------------- -------------------
122,209 -- --
------------------- ------------------- -------------------
Other Expenses:
Business development 145,321 64,529 84,085
Site investigation, option costs and
project costs written off -- 11,234 100,031
Consulting fees 138,701 444,248 26,078
Depreciation 10,952 43,013 6,024
Foreign exchange transaction (gain) loss 6,778 -- (6,862)
Interest 400,917 15,333 --
Legal and accounting 339,626 135,340 134,891
Office and miscellaneous 602,403 125,843 94,709
Salaries and benefits 645,380 332,259 149,431
Telephone 69,443 25,706 18,111
Travel 251,739 108,884 113,997
------------------- ------------------- -------------------
2,611,260 1,306,389 720,495
------------------- ------------------- -------------------
Operating loss (2,664,424) (1,288,399) (674,528)
Income tax expense 914 1,780 1,624
------------------- ------------------- -------------------
Loss before cumulative effect of
accounting change (2,665,338) (1,290,179) (676,152)
Cumulative effect of change in accounting
for exploration and related costs (929,829) -- --
------------------- ------------------- -------------------
Net loss (3,595,167) (1,290,179) (676,152)
Other comprehensive loss -
Foreign currency translation adjustment (794,310) (23,278) (16,015)
------------------- ------------------- -------------------
Comprehensive loss (4,389,477) (1,313,457) (692,167)
=================== =================== ===================
Basic and diluted loss per share before
cumulative effect of accounting change (.11) (.11) (.06)
Accounting change (.04) -- --
------------------- ------------------- -------------------
Basic and diluted loss per share (.15) (.11) (.06)
=================== =================== ===================
Pro forma amounts assuming the change
in the method of accounting for exploration
and related costs is applied retroactively
(note 1):
Net loss (2,988,386) (1,690,110) (883,002)
Basic and diluted loss per share $ (.12) (.14) (.08)
=================== =================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
GLOBAL DIAMOND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Foreign
Preferred Stock Common Stock Additional Currency Total
--------------- ----------------------- Paid- Accumulated Translation Stockholders'
Shares Amount Shares Amount in Capital Deficit Adjustment Equity
------ ------ ---------- ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 -- -- 948,561
Issuance of stock warrants
to nonemployees -- -- -- -- 52,000 -- -- 52,000
Foreign currency translation -- -- -- -- -- -- (16,015) (16,015)
adjustment
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 -- -- 293,129
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 -- -- 388,750
Foreign currency translation -- -- -- -- -- -- (23,278) (23,278)
adjustment
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
Issue of shares for cash, net of
issuance costs of $98,125 -- -- 19,986,950 9,993 6,136,111 -- -- 6,146,104
Issue of shares for warrants
exercised -- -- 172,286 86 45,810 -- -- 45,896
Issue of shares for services -- -- 1,386,667 693 222,640 -- -- 223,333
Issue of warrants for services -- -- -- -- 5,701 -- -- 5,701
Issue of shares and extension of
warrants for mining properties -- -- 151,171 76 91,998 -- -- 92,074
Foreign currency translation
adjustment -- -- -- -- -- -- (794,310) (794,310)
Net loss -- -- -- -- -- (3,595,167) -- (3,595,167)
------ ------ ---------- ---------- ---------- ----------- ----------- ------------
Balance at December 31, 1998 -- $ -- 45,600,678 $ 22,800 13,457,899 (6.432,958) (834,981) 6,212,760
====== ====== ========== ========== ========== =========== =========== ============
</TABLE>
_______________
See accompanying notes to consolidated financial statements.
21
<PAGE>
GLOBAL DIAMOND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------------- -------------------- -------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (3,595,167) (1,290,179) (676,152)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 61,261 43,013 6,024
Shares issued in consideration for services 223,333 418,042 --
Issuance of warrants to nonemployees 5,701 -- 52,000
Decrease (increase) in accounts receivable -
trade 49,520 (44,345) (20,735)
Decrease (increase) in inventory (57,016) 64,208 (64,208)
Increase (decrease) in accounts payable
and accrued liabilities 723,347 (22,368) 65,741
------------------- -------------------- -------------------
Net cash used in operating activities (2,589,021) (831,629) (637,330)
------------------- -------------------- -------------------
Cash flows provided by financing activities:
Net proceeds from issuance of common shares 6,192,000 3,706,065 948,561
Proceeds from long-term debt 1,400,000 1,900,000 --
Repayment of long-term debt (127,503) -- --
Subscriptions refunded -- -- (83,333)
------------------- -------------------- -------------------
Net cash provided by financing activities 7,464,497 5,606,065 865,228
------------------- -------------------- -------------------
Cash flows used in investing activities:
Additions to fixed assets (3,441,037) (704,966) (267,935)
Deposits on equipment -- (284,438) --
------------------- -------------------- -------------------
Net cash used in investing activities (3,441,037) (989,404) (267,935)
------------------- -------------------- -------------------
Effects of exchange rates on cash (69,345) (23,278) (16,015)
------------------- -------------------- -------------------
Net increase (decrease) in cash and
cash equivalents 1,365,094 3,761,754 (56,052)
Cash and cash equivalents, beginning of year 4,096,141 334,387 390,439
------------------- -------------------- -------------------
Cash and cash equivalents, end of year $ 5,461,235 4,096,141 334,387
=================== ==================== ===================
</TABLE>
Continued
22
<PAGE>
GLOBAL DIAMOND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the years ended December 31, 1998, 1997 and 1996
Supplemental disclosure of noncash investing and financing transactions:
During the year ended December 31, 1998, the Company purchased mine housing and
administration offices for R380,000 ($61,980) in exchange for 151,171 shares of
Common Stock and extended the expiration date of certain warrants. The amount
capitalized for the mine housing was based on market price on the date the
shares were issued. The amount expensed for the extension of the expiration
date of the common stock warrants was based on a change in value using the Black
Scholes Method. During the year ended December 31, 1998, the Company also
issued 720,000 common shares to two unaffiliated parties and 666,667 common
shares to an affiliated party. The shares were issued in consideration for
services.
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 R800,000 ($164,000) in cash and by
the issue of 1,000,000 common shares and 500,000 common stock purchase warrants,
expiring in December 1998. During 1998, the Company extended the expiration
date of the common stock warrants by one year. 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.
23
<PAGE>
GLOBAL DIAMOND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997, and for each of the
years in the three-year period ended December 31, 1998
(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, mine site establishment, purchasing mining
equipment, mine operations 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"),
Global BVI's wholly-owned subsidiary, Global Diamond Resources (SA) (Pty)
Limited ("Global SA"), a South African corporation and Global SA's wholly owned
subsidiary, Nabas Diamonds (Pty) Limited ("Nabas"), a South African corporation.
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. Statements of Operations 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 foreign currency 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 consisting of mining properties, mining properties under
development, mining equipment and office equipment (primarily computers) are
recorded at cost. Depreciation is provided for mining properties, mining
equipment and office equipment using the straight-line method over the estimated
useful lives of 10 years, 3-10 years and 3 years, respectively, of such assets.
Mining Operations
Initial exploration and evaluation costs are expensed as incurred. The
decision to develop or mine a property is based on an assessment of the
viability of the property and the availability of financing.
Effective January 1, 1998, the Company changed its method of accounting for
exploration and related costs on unproven properties from capitalizing all
expenditures to expensing all costs, other than acquisition costs, prior to the
completion of a definitive feasibility study which establishes proven and
probable reserves. Previously, the
24
<PAGE>
Company began capitalizing exploration costs upon the decision to proceed to
develop a property, which for certain properties preceded the completion of a
definitive feasibility study. The cumulative effect of this change calculated as
of January 1, 1998, was $606,781, which amount was charged to operations in 1998
as the cumulative effect of a change in accounting principle. Adoption of this
new accounting method increased the net loss by $929,829 in 1998. Management
believes the newly adopted accounting method is preferable because it is the
more predominant method of accounting used in the mining industry and will
better reflect operating income and cash flow.
Deferred development costs related to mining properties and mining
properties under development are depleted on a units-of-production method based
on estimated recoverable reserves.
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 required by 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. Diluted 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, 1998, 1997 and 1996 were
24,189,634, 12,241,298 and 10,420,108 respectively. Common equivalent shares
from stock options and warrants excluded from the computation because their
effect is anti-dilutive for the years ended December 31, 1998, 1997 and 1996
were 9,863,552, 9,160,838 and 4,400,000, 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
25
<PAGE>
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.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of 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.
Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income."
This statement requires that certain items of comprehensive income other than
net earnings or loss be reported in the financial statements. For the three
years ended December 31, 1998, the Company's comprehensive loss relates to
foreign currency translation adjustments.
Segment Reporting
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
An operating segment is defined as a component of an enterprise that engages in
business activities from which it may earn revenues and incur expenses, and
about which separate financial information is regularly evaluated by the chief
operating decision maker in deciding how to allocate resources. All of the
Company's operations are aggregated into one reportable segment given the
similarities of economic characteristics between the operations represented by
the various mines. The Company's administrative headquarters is located in the
United States of America.
(2) Financial Results and Liquidity
The Caerwinning Deposit incurred an operating loss from the date it
commenced production in September 1998 to December 31, 1998 amounting to
$122,209, net of diamonds recovered of $36,990. The bulk sample of the lower
terrace, which commenced in 1998 at the Grasdrif Deposit, has not identified a
profitable area of diamondiferous grade of gravel to mine on the lower terrace.
The lower terrace at the Grasdrif Deposit contains 77 million tonnes of gravel
of which the Company has bulk sampled 115,800 tonnes through September 30, 1999
which represents about 0.15% of the deposit. The Company completed the purchase
and erection of additional plant and equipment at the Grasdrif Deposit and
brought the upper terrace into production in the third quarter of 1999. In
addition the Company has completed the purchase and erection of a wet primary
recovery plant at the Caerwinning Deposit in order to increase tonnage processed
and improve recovery for the whole plant. The wet plant was placed into
production during the third quarter of 1999.
Even though the Company has working capital at December 31, 1998 amounting
to $4,608,995, the Company believes that it requires, at a minimum, additional
working capital of approximately $3,000,000 to satisfy its working capital
requirements for the next 12 months, including the capital that will be required
to conduct the bulk sample at the Montrose Kimberlite Pipe. Should any of the
following events occur, additional working capital may be needed in the next 12
months.
The events are:
(a) that the Caerwinning Deposit has negative cash flow from operations;
(b) the bulk sample on the lower terrace at the Grasdrif Deposit does not
identify a profitable area of diamondiferous grade of gravel to mine
and profitable mining operations do not commence; or
(c) the mining on the upper terrace at Grasdrif results in an operating
loss.
The Company is in discussions with bankers to obtain financing secured by
new mining and earthmoving equipment, held free and clear, with a net book value
at December 31, 1998 of $2,832,000. However, there is no assurance that the
Company will be able to raise the additional capital it requires through the
equipment refinancing or otherwise. In the event that the Company is unable to
raise the working capital it needs, it will focus its efforts on the activities
that its resources can support at that time.
26
<PAGE>
The Company's beliefs concerning its working capital requirements are based
on certain assumptions concerning, among other things, the estimated grade of
the processed ore, average price per diamond carat, commencement and scale of
mining operations, Rand - US$ exchange rate and cost of production. If any of
these assumptions prove incorrect, the Company may require further additional
capital. Any such additional financing may require an additional pledge or
mortgage of the Company's properties and of any production therefrom. There is,
of course, no assurance that satisfactory financing could be obtained. In
addition to financing individual development projects, the Company may also
borrow funds from time to time for working capital and other general corporate
purposes.
These financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has suffered recurring losses from
operations that raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(3) Fixed Assets
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------------------- -----------------------
Mining property:
<S> <C> <C>
Caerwinning deposit, at cost $ 534,868 374,403
Less accumulated amortization (13,392) --
----------------------- -----------------------
521,476 374,403
----------------------- -----------------------
Mining properties under development -
Grasdrif deposit 1,220,197 819,724
----------------------- -----------------------
Mining equipment, at cost 3,123,268 393,601
Less accumulated depreciation (290,883) (31,932)
----------------------- -----------------------
2,832,385 361,669
----------------------- -----------------------
Office equipment, at cost 57,880 37,603
Less accumulated depreciation (28,173) (20,957)
----------------------- -----------------------
29,707 16,646
----------------------- -----------------------
$ 4,603,765 1,572,442
======================= =======================
</TABLE>
(4) Accounts Payable and Accrued Liabilities.
Included in accounts payable and accrued liabilities at December 31, 1998
is an amount of $400,035. This represents the amount paid to a related party in
January 1999 and March 1999 totalling $1,363,200 as a finder's fee in connection
with the $6,000,000 equity financing which closed in December 1998 less $963,165
which was recovered pursuant to an arbitration proceeding over the matter. The
Company is attempting to recover the balance ($400,035) of the finders fee. The
unrecovered balance of $400,035 has been expensed as office and miscellaneous
expenses in the Statement of Operations for the year ended December 31, 1998.
27
<PAGE>
(5) Long-term Debt
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------------------- -----------------------
<S> <C> <C>
15% Secured note payable, due 2002 $ 3,000,000 1,600,000
Other 187,497 300,000
----------------------- -----------------------
3,187,497 1,900,000
Less current portion (187,497) (237,500)
----------------------- -----------------------
$ 3,000,000 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. As of December 31, 1998, the Company was not in compliance with a
debt covenant which required the Company to timely file the 1998 Form 10-KSB and
1999 1st and 2nd quarter Forms 10-QSB. The Company received a waiver through
December 31, 1999. The Company expects to complete these filings by November 30,
1999.
(6) Authorized Share Capital
On June 16, 1999 the Company increased its authorized common stock from
50,000,000 shares of $.0005 par value common stock to 100,000,000 shares of
$0.0005 par value common stock.
(7) Common Stock
In December 1998, the Company issued 3,616,651 shares of common stock to JB
Smith Ltd., a British Virgin Islands corporation. JB Smith was to hold these
shares as an agent for the Company to be issued for investment banking services
as and when rendered. These services were not rendered and the common shares
were returned to the Company in June 1999 and cancelled. As no services were
rendered and the shares were held by JB Smith as an agent of the Company, the
effective date of cancellation of these shares was regarded as December 1998 and
accordingly the issuance and cancellation of the shares of common stock was not
reflected in the financial statements. In December 1998, the Company issued
2,750,000 shares of common stock to a related party as finder's fee for the
$6,000,000 equity financing which closed in December 1998. As a result of a
subsequent arbitration over the matter, the shares were returned to the Company
and cancelled. The effective date of cancellation of these shares was regarded
as December 1998 and accordingly the issuance and cancellation of the shares of
common stock was not reflected in the financial statements.
(8) 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, 1998, the Company had available net operating loss
carryforwards of approximately $3,920,000 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.
(9) Foreign Operations
The Company's wholly-owned subsidiary, Global SA, operates in the Republic
of South Africa. During the year ended December 31, 1998, Global SA's revenue
represented 3% of consolidated revenue, while Global SA's expenses represented
31% of consolidated non-production expenses. All production occurs in the
Republic of South Africa and thus Global SA represents 100% of the production
expenses for the year ended December 31, 1998. At December 31, 1998, Global SA's
total assets (primarily cash, mining properties and equipment) represented 46%
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
28
<PAGE>
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.
(10) 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 the Company's
Chairman and Chief Executive Officer has a beneficial interest in Weir. All
diamonds sold to date have been sold independent of Weir.
As of December 31, 1998 and 1997, 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.
In connection with the investment by LIWA Diamond Company Limited and New
Diamond Holdings Limited, the Company paid a finder's fee amounting to
$1,363,200 and 2,750,000 shares of Common Stock to Mr. Abu Bakr Bin Ali Al-
Akhdar Mood, who at the time was a director of PCM and a member of the Board of
Directors of the Company. As a result of a subsequent arbitration over the
matter, Mr. Abu Bakr returned to the Company $963,165 and the 2,750,000 shares
of Common Stock in June 1999. It is uncertain whether Mr. Abu Bakr will return
the $400,035 balance of the cash portion of the finder's fee which has been
expensed as office and miscellaneous expenses in the Statement of Operations. On
June 3, 1999, Mr. Abu Bakr resigned from the Board of Directors of the Company.
In connection with the return of cash and shares, 666,667 shares of common stock
were issued to International PCM Holdings Limited as a fee for their assistance
in the return of a portion of the finder's fee.
In December 1998, the Company sold to a director of the Company 1,510,758
shares of common stock for $244,300.
In December 1997, the Company entered into a consulting agreement with a
director of the Company. It was terminated in 1998. The Company paid consulting
fees of $43,000 during the year ended December 31, 1998 and $5,000 during the
year ended December 31, 1997.
(11) Stock Options and Warrants
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 expiration 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 expiration on December 31, 2000.
In August 1997, the Company issued to each of the four directors 100,000
common stock options, exercisable at $.75 per share, exercisable at any time
until expiration on December 31, 2000. In October 1997, the Company granted a
new director 100,000 common stock options exercisable at $.75 per share,
exercisable at any time until expiration 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
expiration on December 30, 1998. The expiration date was extended to July 16,
1999.
In September 1997, the Company offered to the holders of the Canadian $.375
common stock purchase warrants, which were to expire 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 expiration on
December 31, 1998. The expiration date was extended to July 16, 1999.
29
<PAGE>
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
expiration 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 expiration 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 expiration on December 1, 1998. In August 1998, the expiration
date was extended to December 1, 1999.
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 expiration on March 31, 2000,
December 31, 1998, December 1, 1998 and March 14, 1998, respectively. The
warrants expiring on March 14, 1998 were exercised in March 1998. In August
1998, the expiration date on the December 1, 1998 warrant was extended to
December 1, 1999. The expiration date of the warrants was extended to July 16,
1999.
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 expiration on March 6, 2001.
In March 1998, the Company granted 100,000 common stock options to an
employee of the Company. The options are exercisable at $.46875 per share with
25,000 exercisable at any time, 25,000 after September 2, 1998, 25,000
exercisable after March 2, 1999 and 25,000 exercisable after March 2,2000. All
options expire on March 2, 2008 or 60 days after termination of service,
whichever occurs first.
In March 1998, the Company issued 25,000 common stock warrants for
consulting services at $.50 per share, exercisable at any time until expiration
on March 20, 2001.
In July 1998, the Company granted 100,000 common stock options to an
employee of the Company. The options are exercisable at $.43 per share with
25,000 exercisable at any time, 25,000 after July 1, 1999, 25,000 after July 1,
2000 and 25,000 after July 1, 2001. All options expire on July 1, 2008 or 60
days after termination of service, whichever occurs first.
In August 1998, the Company issued the following options to directors of
the Company: 100,000 common stock options to each of three directors,
exercisable at $.525 per share, exercisable at any time until expiration on
December 31, 2000. 50,000 common stock options to each of five directors,
exercisable at $.525 per share, exercisable at any time until expiration on
January 2, 2001. 50,000 common stock options to each of the two new directors,
exercisable at $.525 per share, exercisable at any time until expiration, 50,000
on February 4, 2001 and 50,000 on May 5, 2001.
In December 1998, the Company issued 50,000 common stock options to each of
the four new directors, exercisable at $.4875 per share. 100,000 of these
options expire on December 29, 2001 and the balance of 100,000 options expire on
December 30, 2001.
In December 1998, the Company extended the expiration date of December 31,
1998 on 249,286 common stock warrants, exercisable at $0.25 per share to July
16, 1999.
The per share weighted-average fair value of stock options and warrants
granted to directors, officers and employees during 1998, 1997 and 1996 was
$0.16, $0.23 and $0.33, respectively, on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions;
1998 -expected dividend yield 0%, risk-free interest rate of 5.97%, expected
life of 2.5 years and an expected volatility of the stock over the expected life
of the options and warrants of 68%; 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%.
30
<PAGE>
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>
1998 1997 1996
--------------- -------------- -------------
<S> <C> <C> <C>
Net loss, as reported $ (3,595,167) (1,290,179) (676,152)
Net loss, pro forma (3,749,919) (1,849,099) (921,152)
Basic and diluted net loss per
share, as reported (.15) (.11) (.06)
Basic and diluted loss per
share, pro forma $ (.16) (.15) (.09)
</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, 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
Granted 1,075,000 0.50
Exercised (172,286) 0.27
Canceled (1,563,572) 0.41
Reissued 1,363,572 0.41
------------- --------------
Balance at December 31, 1998 9,863,552 $ 0.57
============= ==============
</TABLE>
At December 31, 1998, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options and warrants were $0.25 to
$1.25 and 2.4 years, respectively.
At December 31, 1998, 1997 and 1996, the number of options and warrants
exercisable was 9,738,552, 9,160,838 and 4,400,000, respectively, and the
weighted-average exercise price of those options and warrants was $0.57, $0.57
and $1.14, respectively.
(12) Properties
The Company, through its wholly-owned subsidiary, Global SA owns two mining
properties (the Grasdrif Deposit and the Caerwinning Deposit) and an option to
acquire a mining property (the Montrose Kimberlite Pipe). All properties are in
the Republic of South Africa.
31
<PAGE>
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 R800,000 ($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 subject to government approval. The Company
presently holds such a permit, which expires August 4, 2003.
Caerwinning Deposit
In April 1998, the Company acquired the mineral lease which provides for
the right to mine alluvial deposits for R1,140,000 ($226,000). In addition, the
Company owns an option to acquire the right to mine pipes or fissures that may
be discovered for R8,000,000 ($1,364,000 at December 31, 1998). 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 mineral lease and mining authorization requires
that the government receive 5% of gross proceeds from mining. The mineral lease
has an initial ten year term with a ten year renewal option, subject to the
original lease holders right to terminate the mineral lease based on the
Company's default thereunder. The Company is required to meet certain standards
to maintain good standing with the original lease holder. It may be terminated
by the Company with 30 days notice. A mining permit is required from the local
government and is renewable subject to government approval. The Company
presently holds such a permit, which expires on March 31, 2008.
Montrose Kimberlite Pipe
The Company owns an option to acquire a mining property (the Montrose
Kimberlite Pipe). The option expires on October 10, 1999. The contract 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 includes
the exclusive option to purchase the related land and mineral rights for
R3,200,000 ($545,600 at December 31, 1998). The Company has negotiated a one-
year extension of the option period to October 2000. The extension was obtained
for a payment consisting of R60,000 ($9,800 at September 30, 1999) to the
property owner. An increase in the option amount was also agreed upon. In the
event of the Company deciding to exercise its option to purchase the mineral and
surface rights of the Montrose property, the price was increased to $600,000. A
prospecting permit is required from the local government and is renewable
annually subject to government approval. The present prospecting permit expired
October 10, 1998. The Company is in the process of applying for an extension of
this prospecting permit which includes preparing an environmental rehabilitation
plan for submission to the local government. Upon acceptance of the plan the
prospecting permit will be issued with the same expiration date as the option.
The Company has expensed the cost of the drilling program carried out in 1998
amounting to $127,200 as well as all option payments.
(13) Commitments and Contingencies
Lease Agreement
As of December 31, 1998, the Company had a noncancelable operating lease
commitment for the Company's corporate office expiring in March 2002. The
monthly rent payment on this operating lease is $1,411. In addition, Global SA
had a noncancelable operating lease commitment for the South African corporate
office expiring in March 2003. The monthly rent payment on this operations lease
is R825 ($140 at December 31, 1998). Rent expense for the years ended December
31, 1998, 1997 and 1996 was $17,961, $14,272 and $14,134, respectively.
32
<PAGE>
Legal Matters
In July 1999, the Company and its Chairman, Johann de Villiers, were named
as defendants in an action brought by Mr. Abu Bakr Bin Ali Al-Akhdar Mood in the
United States District Court for the Southern District of California. Mr. Abu
Bakr is a former director of the Company. In that action, Mr. Abu Bakr alleges
that he acted as a finder in connection with the sale of a total of $6,000,000
of the Company's common stock to two private investors (LIWA Diamond and New
Diamond) and that in connection with that offering, he was entitled to a
finders' fee equal to approximately 28% of the gross proceeds. Mr. Abu Bakr
alleges that the Company and Mr. de Villiers fraudulently forced Mr. Abu Bakr to
participate in a binding arbitration regarding his finders' fees and that as a
result of this arbitration, he was forced to return the finders' fee and resign
from his position as Managing Director of the Bin Ladin Group, Petroleum,
Chemical and Mining Division. Mr. Abu Bakr has alleged causes of action for
breach of contract, unjust enrichment, fraud, misrepresentation and duress. Mr.
Abu Bakr also alleges interference with and breach of his employment contract
with the Bin Ladin Group. Mr. Abu Bakr seeks compensatory and punitive damages
in an unspecified amount.
In August 1999, the Company and Mr. de Villiers filed an answer to Mr. Abu
Bakr's complaint in which they denied all of the allegations contained therein.
The Company believes that the allegations of Mr. Abu Bakr are frivolous and,
accordingly, the Company intends to vigorously defend this case.
33
<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, effective as of September 30, 1999, 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 46 Chairman of the Board, Director of the Company, Chief
Executive Officer and Chief Financial Officer
Pieter van Wyk 47 Director of Exploration and Mining and Director of the
Company
John Tyson 51 Director of the Company
Charles MacDonald 45 Director of the Company
Said H. Ghachem 57 Director of the Company
Ahmed M. Basodan 37 Director of the Company
Yassin Abduaalh Kadi 44 Director of the Company
Mattar Abdulla Al Muhairy 55 Director of the Company
Amin Koudsi 55 Director of the Company
Andries Janzen 55 Director of the Company and
Managing Director of Global Diamond-SA
Gasem S. Al-Shaikh 45 Director of the Company
Eugene Brill 34 Secretary of the Company
</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. He was appointed Chief Financial Officer in July 1999.
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
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.
34
<PAGE>
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.
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.
Mr. Basodan has served as a director of the Company since December
1998. Mr. Basodan has served as Vice President of Nimir Petroleum Company based
in the Kingdom of Saudi Arabia since 1991. Mr. Basodan holds a B.SC in
Industrial Management. Mr. Basodan serves on the Board of Directors as the
nominee of New Diamond Holdings Limited.
Mr. Kadi has served as a director of the Company since December 1998.
Mr. Kadi is the Chairman of Saudi National Consulting Center and Qordoba Real
Estate Co. based in the Kingdom of Saudi Arabia, Chairman of Caravan Co. based
in Turkey, board member of Himont Chemical based in Pakistan and Cariba Bank
based in Kazakhstan. Mr. Kadi holds a B.SC in Engineering. Mr. Kadi also serves
on the Board of Directors as the nominee of New Diamond Holdings Limited.
Mr. Al Muhairy has served as a director of the Company since December
1998. Mr. Al Muhairy is vice chairman of Al Muhairy Group based in United Arab
Emirates. Al Muhairy Group was established in 1981 and its activities are
diversified in many fields: Contracting, Oil Drilling - Petroleum Services,
investments in other major companies in United Arab Emirates and in other fields
in United Arab Emirates and other countries overseas. Mr. Al Muhairy serves on
the Board of Directors as the nominee of LIWA Diamond Company Limited.
Mr. Koudsi has served as a director of the Company since December 1998.
Mr. Koudsi has served as Deputy General Manager of Al Muhairy Group based in
United Arab Emirates since 1981. Al Muhairy Group was established in 1981 and
its activities are diversified in many fields: Contracting, Oil Drilling -
Petroleum Services, investments in other major companies in United Arab Emirates
and in other fields in United Arab Emirates and other countries overseas. Mr.
Koudsi serves on the Board of Directors as the nominee of LIWA Diamond Company
Limited.
Mr. Janzen has served as Managing Director of Global Diamond-SA since
July 1994 and a director of the Company from February 1998 to December 1998. He
was reappointed as a director of the Company in May 1999. 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.
Eng. Gasem S. Al-Shaikh as served as a director of the Company from
December 1997 to December 1998. He was reappointed as a director of the Company
in June 1999. 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. He also serves as Chairman and Managing
Director of International PCM Holdings Limited. Eng. Gasem S. Al-Shaikh serves
on the Board of Directors of the Company as the nominee of International PCM
Holdings Limited.
Mr. Brill has served as Vice President of Investor Relations of the
Company since January 1994. In July 1999, he was appointed Secretary of the
Company. Since January 1993, he was a Vice President at Kensington Finance
Corp., an options trading firm and investment trader for the Monitrend Gold
Mutual Fund. He holds Series 7, 63, 4 and 24 as a securities representative with
the National Association of Securities Dealers, Inc. He holds a certificate in
diamond grading from the Gemological Institute of America as well as a
certificate in rough evaluation from the Diamond Institute of Africa.
35
<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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------------- -----------------------------
Year Salary Bonus Other Restricted Common All Other
Name and Position ($) ($) Annual Stock Shares Compensation
Compensation Awards Underlying ($)
($) Options
Granted
(# Shares)
- ------------------ ----- -------- ------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Johann de Villiers, CEO(1) 1998 241,667 -0- -0- -0- -0-
1997 127,500 12,500 -0- -0- 1,300,000(2) -0-
1996 60,000 5,000 -0- -0- -0- -0-
Abu Bakr Bin Ali 1998 -0- -0- 150,000(7) 400,035(8)
Al-Akhdar Mood, Executive 1997 -0- -0- -0- -0-
Vice Chairman(6) 1996 -0- -0- -0- -0-
Mervyn McCulloch, CFO(3) 1998 175,000 0 -0- -0- -0- -0-
1997 121,000 10,000 -0- -0- 700,000(4) -0-
1996 42,000 3,000 -0- -0- 500,000(5) -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. Mr. de Villiers was appointed Chief Financial
Officer on July 1, 1999.
(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) The Company entered into a five year employment agreement with Mr.
McCulloch effective 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 was entitled to participate in a senior
management bonus pool in the aggregate amount of 10% of the Company's
annual after tax earnings. Mr. McCulloch resigned as Chief Financial
Officer on June 30, 1999.
(4) 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.
(5) 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.
(6) The Company has entered into a five year employment agreement with Mr. Abu
Bakr Bin Ali Al-Akhdar Mood effective as of January 1, 1999. Pursuant to
the Agreement, Mr. Abu Bakr Bin Ali Al-Akhdar Mood was appointed Executive
Vice Chairman and received a monthly salary of $10,417. He resigned as
Executive Vice Chairman on April 30, 1999.
(7) On August 3, 1998, the Company granted Mr. Abu Bakr Bin Ali Al-Akhdar Mood
a Nonqualified Stock Option which allows Mr. Abu Bakr to purchase up to
100,000 shares of Common Stock at $0.525 per share. The option is fully
vested and may be exercised at any time, or from time to time, until
December 31, 2000. On August 3, 1998, the Company granted to Mr. Abu Bakr
a Nonqualified Stock Option which allows Mr. Abu Bakr to purchase up to
50,000 shares of Common Stock at $0.525 per share. The option is fully
vested and may be exercised at any time, or from time to time, until
January 2, 2001. These options were granted to him in his capacity as a
director prior to his appointment as Executive Vice Chairman.
(8) In December 1998, Mr. Abu Bakr Bin Ali Al-Akhdar Mood received a finders
fee in connection with the $6,000,000 equity financing which closed in
December 1998. The finders fee consisted of $1,363,200 in cash (paid part
in January 1999 and the balance in March 1999) and 2,750,000 shares of
Common Stock of the Company. In June 1999, Mr. Abu Bakr returned all the
common shares and $963,165 of the cash. He resigned as a director in June
1999.
36
<PAGE>
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Name Number of Securities % of Total Options/SARs Exercise or Base Expiration Date
Underlying Granted to Employees in Price ($/Sh)
Options/SARs Granted Fiscal Year
(#)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Compensation of Directors. Effective January 1, 1998, all non-officer
directors receive an attendance fee of $1,000 per meeting of the Board of
Directors and $250 per telephone meeting. Directors' fees paid in 1998 were
$11,000. No fees were paid in 1997 and 1996. 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.
37
<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 September 30, 1999 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.
Name and Address Number of Shares Percentage Owned
- ------------------------------------ -------------------- ------------------
Johann de Villiers(1)(2) 1,727,668 3.7%
Pieter van Wyk(1)(3) 600,000 1.3%
John Tyson(1)(4) 436,920 (6)
Charles MacDonald(1)(5) 387,500 (6)
Said H. Ghachem(7)(8)(9) 200,000 (6)
Ahmed M. Basodan(10)(11)(12) 100,000 (6)
Yassin Abduaalh Kadi(10)(11)(12) 100,000 (6)
Mattar Abdulla Al Muhairy(10)(13)(14) 100,000 (6)
Amin Koudsi(10)(13)(14) 100,000 (6)
Andries Janzen(1)(10) 100,000 (6)
Gasem S. Al-Shaikh(7)(8)(9) 200,000 (6)
Eugene Brill(1)(15) 461,040 1.0%
International PCM Holdings 11,582,392 24.4%
Limited(7)(16)(17)
New Diamond Holdings Limited(11) 9,238,096 20.3%
LIWA Diamond Company Limited(13) 9,238,096 20.3%
All officers and directors 4,513,128 9.1%
as a group
_______________
(1) Address is 836 Prospect, Suite 2B, La Jolla, California 92037.
(2) Includes 1,542,668 shares of Common Stock underlying immediately
exercisable options.
(3) Represents 600,000 shares of Common Stock underlying immediately
exercisable options.
(4) Includes 400,000 shares of Common Stock underlying immediately exercisable
options.
(5) Includes 262,500 shares of Common Stock underlying immediately exercisable
options.
(6) Less than one percent.
(7) Address is P.O. Box 33251, Jeddah 21448, Saudi Arabia.
(8) Includes 200,000 shares of Common Stock underlying immediately exercisable
options.
(9) Serves on the Board of Directors of the Company as the nominee of
International PCM Holdings Limited.
(10) Includes 100,000 shares of common stock underlying immediately exercisable
options.
(11) Address is Almahmal Center, 18th Floor, Jeddah, Saudi Arabia.
(12) Serves on the Board of Directors of the Company as the nominee of New
Diamond Holdings Limited.
(13) Address is P.O. Box 95, Abu Dhabi, United Arab Emirates.
(14) Serves on the Board of Directors of the Company as the nominee of LIWA
Diamond Company Limited.
(15) Includes 400,000 shares of Common Stock underlying immediately exercisable
options.
(16) 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.
(17) Address is Parade House, The Parade, Castletown, IM9 1LG, Isle of Man,
British Isles.
38
<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. 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.
The Company paid a finders fee of $1,363,200 and 2,750,000 shares of Common
Stock of the Company to Mr. Abu Bakr Bin Ali Al-Akhdar Mood upon the closing of
the $6,000,000 equity funding in December 1998. At the time, Mr. Abu Bakr was a
member of the Board of Directors of the Company. The $1,363,200 was paid part
in January 1999 and the balance in March 1999. As a result of a subsequent
arbitration over the matter, Mr. Abu Bakr returned $963,165 and 2,750,000 common
shares of the Company. It is uncertain whether Mr. Abu Bakr will return the
$400,035 balance of the cash portion of the finder's fee. Mr. Abu Bakr resigned
from the Board of Directors on June 3, 1999. In connection with the return of
cash and shares, 666,667 shares of common stock were issued to International PCM
Holdings Limited as a fee for their assistance in the return of a portion of the
finder's fee.
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. It was terminated in 1998. The Company paid consulting
fees of $43,000 during the year ended December 31, 1998 and $5,000 during the
year ended December 31, 1997.
In December 1998, the Company sold to a director of the Company 1,510,758
shares of common stock for $244,300.
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
3.3 Certificate dated December 17, 1997
3.4 Amendment dated June 16, 1999 to Articles of Incorporation
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.
10.5 Securities Purchase Agreement dated December 29, 1998 between the
Company and New Diamond Holdings Limited
10.6 Securities Purchase Agreement dated December 29, 1998 between the
Company and LIWA Diamond Company Limited
39
<PAGE>
10.7 Amendment No. 1 dated June 28, 1999 to Securities Purchase Agreement
dated December 29, 1998 between the Company and New Diamond Holdings
Limited
10.8 Amendment No. 1 dated June 28, 1999 to Securities Purchase Agreement
dated December 29, 1998 between the Company and LIWA Diamond Company
Limited
18.1 Letter re: Change in Accounting Method
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.
**Previously filed as part of Annual Report on Form 10-KSB for the year ended
December 31, 1997.
(b) Reports on Form 8-K.
40
<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: November 17, 1999 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, Director, November 17, 1999
- ------------------------------------ Chief Executive Officer and Chief
JOHANN DE VILLIERS Financial Officer
/S/ PIETER VAN WYK Director November 17, 1999
- ------------------------------------
PIETER VAN WYK
/S/ JOHN TYSON Director November 17, 1999
- ------------------------------------
JOHN TYSON
/S/ CHARLES MACDONALD Director November 17, 1999
- ------------------------------------
CHARLES MACDONALD
/S/ SAID H. GHACHEM Director November 17, 1999
- ------------------------------------
SAID H. GHACHEM
/S/ AHMED M. BASODAN Director November 17, 1999
- ------------------------------------
AHMED M. BASODAN
/S/ YASSIN ABDUAALH KADI Director November 17, 1999
- ------------------------------------
YASSIN ABDUAALH KADI
/S/ MATTAR ABDULLA AL MUHAIRY Director November 17, 1999
- ------------------------------------
MATTAR ABDULLA AL MUHAIRY
/S/ AMIN KOUDSI Director November 17, 1999
- ------------------------------------
AMIN KOUDSI
/S/ ANDRIES JANZEN Director November 17, 1999
- ------------------------------------
ANDRIES JANZEN
/S/ GASEM S. AL-SHAIKH Director November 17, 1999
- ------------------------------------
GASEM S. AL-SHAIKH
</TABLE>
41
<PAGE>
Exhibit 10.5
NEW DIAMOND CORPORATION LIMITED
GLOBAL DIAMOND RESOURCES, INC.
SECURITIES PURCHASE AGREEMENT
December 29, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purchase and Sale of Shares 1
2. Deliveries at Closing 2
3. Representations, Warranties and Covenants of the Company 3
4. Representations, Warranties and Covenants of the Purchaser 9
5. Indemnification 11
6. Post-Closing Covenants 12
7. Registration Rights 14
8. Miscellaneous 24
</TABLE>
EXHIBITS
--------
A. Company's Officer's Certificate
B. Opinion of Company Counsel
C. [Form of] Indemnification Agreements
D. Purchaser's Officer's Certificate
<PAGE>
SECURITIES PURCHASE AGREEMENT
-----------------------------
This Securities Purchase Agreement ("Agreement") is entered into this 29th
day of December 1998 by and among GLOBAL DIAMOND RESOURCES, INC., a Nevada
corporation (the "Company"), and NEW DIAMOND CORPORATION LIMITED, a British
Virgin Islands company ("Purchaser").
R E C I T A L S
---------------
A. The Company desires to obtain additional capital in order to further
the mine development and operations of its South African subsidiaries.
B. In order to obtain such funds, the Company desires to sell and issue to
the Purchaser 8,571,429 shares of the Company's $.0005 par value common stock
("Common Stock"), for the aggregate payment of Three Million U.S. Dollars
(US$3,000,000), on the terms and subject to the conditions set forth herein.
A G R E E M E N T
-----------------
It is agreed as follows:
1. Purchase and Sale of Shares.
---------------------------
1.1 Purchase and Sale of Shares. Subject to the terms and conditions
---------------------------
set forth herein, the Company agrees to sell and issue to Purchaser, and
Purchaser agrees to purchase from the Company, 8,571,429 shares ("Shares") of
Common Stock, at a purchase price of US$.35 per share.
1.2 Closing. The closing of the transactions contemplated by this
-------
Agreement ("Closing") shall take place at the offices of Oppenheimer Wolff &
Donnelly, located at 500 Newport Center Drive, Suite 700, Newport Beach,
California, at 9:00 a.m., local time, on or before December 31, 1998, 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"). At the Closing, the Company shall deliver to the Purchaser the
certificates representing the Shares purchased by the Purchaser under this
Agreement in definitive form and registered in the name of Purchaser against
delivery to the Company by Purchaser of a wire transfer in the amount of the
purchase price to the general account of the Company pursuant to the following
instructions:
<PAGE>
Account Name: Global Diamond Resources, Inc.
Bank: Wells Fargo Bank
Branch: La Jolla Branch
7714 Girard Avenue
La Jolla, CA 92037
Branch Number 0651
ABA Number 121000248
Account Number 6651 253585
2. Deliveries at Closing.
------------------------------
2.1 Company's Deliveries at Closing. At the Closing, the Company
-------------------------------
shall deliver or cause to be delivered to the Purchaser all of the following:
(a) certificates representing the Shares registered in the name
of the Purchaser;
(b) an Officer's Certificate of the Company, in the form of
Exhibit "A" attached hereto, representing that, to such officer's knowledge, all
of the representations and warranties of the Company set forth in this Agreement
are accurate as of the Closing and that the Company has taken all actions
required to be taken by the Company under this Agreement prior to the Closing;
(c) certified resolutions of the Board of Directors of the
Company authorizing consummation of the transactions contemplated by this
Agreement;
(d) a Certificate of Good Standing from the State of Nevada for
the Company;
(e) an opinion letter of counsel for the Company in the form of
Exhibit "B" attached hereto; and
(f) Indemnification Agreements, each in the form of Exhibit "C"
attached hereto, between the Company and each of the Purchaser's Nominees (as
defined in Section 3.21) who will become directors immediately following the
Closing;
(g) a certified copy of the Articles of Incorporation of the
Company, as amended;
(h) written confirmation from American Securities Transfer &
Trust, Inc., the transfer agent for the Company's Common Stock, as to the number
of issued and outstanding shares of Common Stock as of December 23, 1998;
(i) written notice from International PCM Holdings Limited, a
British Virgin Islands company ("PCM"), of the waiver of its rights to 30 days'
prior written notice of this offering pursuant to Section 6.7 of that certain
Securities Purchase Agreement dated December 5, 1997 by and among the Company,
Global Diamond Resources Limited, a British Virgin Islands company ("GDRIL"),
and PCM ("PCM Agreement");
-2-
<PAGE>
(j) written resignations from Andries Janzen, Hugh Wilmer and
Gasem S. Al-Shaikh from their positions as directors of the Company effective as
of and subject to the Closing; and
(k) such other documents and instruments as shall be reasonably
necessary to effect the transactions contemplated hereby.
2.2 Purchaser's Deliveries at Closing. At the Closing, Purchaser
---------------------------------
shall deliver or cause to be delivered to the Company all of the following:
(a) a wire transfer of immediately available funds to the
Company's general account in the amount of the purchase price of the Shares;
(b) an Officer's Certificate of Purchaser, in the form of
Exhibit "D" attached hereto, representing that, to such officer's knowledge, all
of the representations and warranties of Purchaser set forth in this Agreement
are accurate as of the Closing and Purchaser has taken all actions required to
be taken by Purchaser hereunder prior to the Closing;
(c) such other documents and instruments as shall be reasonably
necessary to effect the transactions contemplated hereby.
3. Representations, Warranties and Covenants of the Company.
--------------------------------------------------------
As a material inducement to the Purchaser to enter into this Agreement
and to purchase the Shares, the Company represents, warrants and covenants as
follows (The term "Company," when used in Sections 3.6 through 3.19, shall
include each of the Subsidiaries, as defined in Section 3.1, unless the context
in which such term is used indicates otherwise):
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. The Company has equity interests in the following
companies (all of which are collectively referred to as the "Subsidiaries."):
GDRIL, Global Diamond Resources (SA) (Pty) Limited, a South African corporation
("Global Diamond-SA"), Global Diamond Resources Inc., a British Columbia
corporation ("Global Diamond-BC"), and Nabas Diamonds (Pty) Limited, a South
African corporation ("Nabas Diamonds"). Each of the Subsidiaries is a
corporation duly organized, validly existing, and in good standing under the
laws of its jurisdiction and has full corporate power and authority to own its
properties and to carry on its business as presently conducted and as proposed
to be conducted. Each of the Subsidiaries 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 Subsidiary.
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 50,000,000 shares of Common Stock, $.0005 par value, of
which 32,824,470 shares are issued and outstanding. All of the Subsidiaries are
beneficially owned either directly or indirectly by
-3-
<PAGE>
the Company. All of the issued and outstanding capital shares of GDRIL are owned
by the Company and Global Diamond-BC. 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 all of the issued and
outstanding share capital of Nabas Diamonds. There are no options, warrants or
rights outstanding which entitle their holder to purchase or acquire any capital
shares of GDRIL, Global Diamond-SA, Global Diamond-BC 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. 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 or the equity securities of any of the Subsidiaries, 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.
3.3 No Subsidiaries. Except as set forth in Section 3.1, 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 (i) its
-----------
annual report on Form 10-KSB for the fiscal year ended December 31, 1997 and all
quarterly reports on Form 10-QSB subsequently filed with the U.S. Securities and
Exchange Commission ("SEC") (collectively, the "SEC Reports"), and (ii) the
press releases dated September 9, 1998, July 17, 1998, and April 16, 1998, which
constitute all press releases issued by the Company subsequent to January 1,
1998 ("Press Releases"). The information in the SEC Reports and the Press
Releases, 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. Except as provided in
the SEC Reports, since September 30, 1998, there has been no material adverse
change in the business or financial condition of the Company.
3.5 Validity of Transactions. This Agreement, and each document
------------------------
executed and delivered by the Company 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 the
Company and is each the valid and legally binding obligation of the Company,
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 Shares 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 has been duly
authorized by the Board of Directors of the Company and the Company has taken
all necessary corporate action in connection with the execution, delivery and
performance of the Agreement. The execution, delivery and performance of this
Agreement and each document executed and delivered by the Company will not
violate any law or any order of any court or government agency applicable to the
Company, as amended, or the Articles of Incorporation or Bylaws of the Company,
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
-4-
<PAGE>
pursuant to the terms of the PCM Agreement, or any other agreement or instrument
by which the Company or any of its assets may be bound. No approval of or filing
with any governmental authority (including any governmental authority in South
Africa) is required for the Company 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, threatened against or affecting the
Company which questions the validity of this Agreement or any action to be taken
in connection therewith, and the Company is not subject to or in default with
respect to any order, writ, injunction or decree of any foreign, federal, state,
local or other governmental department. The Company has not commenced nor
currently intends to commence any legal proceedings against any other person or
entity. The Company has provided Purchaser with copies of all substantive
correspondence for the past three years between the Company and either the SEC,
the National Association of Securities Dealers or the California Department of
Corporations
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. Set forth on Schedule 3.8 is a complete list 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 the SEC Reports, 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,
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 the SEC Reports, 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. Except as provided in the
SEC Reports, since January 1, 1998, there has been no material adverse change in
the mining rights held by the Company.
-5-
<PAGE>
3.9 Use of Proceeds. The Company shall use the proceeds from the
---------------
sale of the Shares solely for the purpose of furthering the operations of the
Company and its South African Subsidiaries.
3.10 Taxes. All foreign and federal income tax returns and state and
-----
local income tax returns for the Company 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 the Company 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 the Company, and
there are no pending, or to the knowledge of the Company, threatened tax audits,
examinations or claims.
3.11 No Defaults. Except as set forth in Schedule 3.11, 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 of the Company 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, including, without limitation, the PCM Agreement, to which the
Company 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: (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,
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 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 those which (a) were incurred in the
ordinary course of business subsequent to September 30, 1998, and (b)
individually and in the aggregate are not material to the operations or
financial condition of the Company.
3.14 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 Shares constitutes an
exempted transaction under the Securities Act of 1933 ("1933 Act"), as now in
effect, and registration of the Shares under the 1933 Act, is not required,
-6-
<PAGE>
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. All securities issued to date by the
Company have been issued in compliance with all applicable federal and state
securities laws.
3.15 Directors and Officers. None of the directors or officers of
----------------------
the Company has:
(a) ever filed, or had filed against him 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 business or property or any partnership in which he 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 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 right to engage in any activity described in
Section 3.15(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
-7-
<PAGE>
(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).
3.16 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.
3.17 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.
3.18 Copies of Certain Documents. Prior to the Closing Date, 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.
3.19 Indemnification of Directors and Officers. The Company has
-----------------------------------------
prepared and executed, and at the Closing will deliver to Purchaser for
execution by each of the Purchaser Nominees who will take office immediately
following the Closing, an Indemnification Agreement for execution by such
Purchaser Nominees. Immediately following the election or appointment of any
other Purchaser Nominees, the Company will prepare, execute and deliver to each
such Purchaser Nominee an Indemnification Agreement for execution by such
Purchaser Nominee.
3.20 Committees of Board of Directors. The Board of Directors of the
--------------------------------
Company has established an Audit Committee and a Compensation Committee
(collectively referred to as the "Committees"). Other than the Committees, the
Board of Directors of the Company has not established any committees of
directors which have been delegated any substantive authority or responsibility.
3.21 Board of Directors. The Board of Directors of the Company has
------------------
taken the necessary corporate action to increase the authorized number of
directors of the Company to eleven (11) and appoint two (2) nominees of the
Purchaser to the Board of Directors, effective immediately following the Closing
and subject to Purchaser's purchase of at least 8,571,429 Shares for the gross
proceeds of US$3,000,000. The Company covenants and agrees that if any of such
nominees (or any successor Purchaser nominee nominated pursuant to this Section
3.21) dies, resigns from the Board of Directors, does not stand for re-election
by the stockholders or is removed from the Board of Directors, then the Company
shall appoint another nominee of the Purchaser to the vacancy so created. The
nominees of the Purchaser who take office immediately following the Closing,
together with any such successors, are referred to in this Agreement as the
"Purchaser's Nominees."
3.22 Brokers and Finders. 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
-8-
<PAGE>
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.
4. Representations, Warranties and Covenants of the Purchaser.
----------------------------------------------------------
As a material inducement to the Company to enter into this Agreement
and to sell and issue the Shares, Purchaser represents, warrants and covenants
as follows:
4.1 Domicile and Accredited Purchaser. The beneficial owners of
---------------------------------
Purchaser are domiciled in Saudi Arabia and are "accredited investors" as
defined under Rule 501 under the 1933 Act.
4.2 Power and Authority. Purchaser is a corporation organized,
-------------------
validly existing and in good standing under the laws of the British Virgin
Islands and Purchaser has taken all corporate action necessary for the
execution, delivery and consummation of the transactions contemplated by this
Agreement. 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 Purchaser and, upon such execution, this
Agreement will be the valid and binding obligation of 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 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
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 Purchaser.
4.4 Limited Transferability. Purchaser acknowledges that the Shares
-----------------------
have not been registered under the 1933 Act or the securities laws of any state
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
Shares 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. Purchaser is acquiring the Shares
--------------------------
for its 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, in a manner which would require registration under the 1933 Act
or any state securities laws.
4.6 Restrictive Legends. Purchaser understands and acknowledges that
-------------------
the Shares will bear the following legend:
-9-
<PAGE>
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 ACCEPTABLE TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR ACTS.
4.7 Rule 144. Purchaser acknowledges that an investment in the
--------
Shares is not liquid and is transferable only under limited conditions.
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. 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 Shares.
4.8 Speculative Nature and Risk. Purchaser understands and
---------------------------
acknowledges the speculative nature of and substantial risk of loss associated
with an investment in the Shares. Purchaser represents and warrants that the
Shares constitute an investment which is suitable and consistent with
Purchaser's financial condition and that Purchaser is able to bear the risks of
this investment for an indefinite period of time, which may include the total
loss of Purchaser's investment in the Shares. Purchaser further represents that
(a) Purchaser has adequate means of providing for Purchaser's current financial
needs and contingencies, (b) there is no need for liquidity in Purchaser's
investment in the Shares, and (c) Purchaser has sufficient financial and
business experience to evaluate the merits and risks of an investment in the
Shares.
4.9 Independent Investigation and Advisors. Purchaser confirms that
--------------------------------------
(a) Purchaser has received, reviewed, and understands the financial statements
included in the SEC Reports; (b) 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 Purchaser deems necessary or appropriate in determining to make an investment
in the Shares, and (c) Purchaser is purchasing the Shares without any offering
memoranda or prospectus of any kind, other than the SEC Reports. Purchaser
represents and warrants that in making the decision to acquire the Shares
Purchaser has relied upon its own independent investigation of the Company,
GDRIL, Global Diamond-SA and Nabas Diamonds and the independent investigations
of the Company, GDRIL, Global Diamond-SA and Nabas Diamonds by Purchaser's
representatives, including Purchaser's own professional legal, tax, mining and
investment advisors, and (d) Purchaser and 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, Global Diamond-SA and Nabas
Diamonds, or person(s) acting on their behalf, concerning the terms and
conditions of acquisition by Purchaser of the Shares and any other matters
concerning an investment in the Shares, and to obtain any additional information
Purchaser deems necessary or appropriate to verify the accuracy of the
information provided.
4.10 Brokers and Finders. As more fully set forth in Section 5.2,
-------------------
Purchaser shall indemnify and hold the Company harmless against all claims for
brokers' or finders' fees made or asserted by any party claiming to have been
employed by the Purchaser or any
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<PAGE>
shareholder, director, officer, employee or agent of the Purchaser and all costs
and expenses (including the reasonable fees of counsel) of investigating and
defending such claims.
5. Indemnification.
---------------
5.1 Indemnity by the Company. Notwithstanding the provisions of
------------------------
Section 4.9 or any investigations or examinations made by Purchaser or
Purchaser's representatives, the Company agrees to and does hereby indemnify and
hold the Purchaser, the Purchaser's successors and assigns and its shareholders,
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 of any of its agreements and
covenants contained in this Agreement; (b) the inaccuracy of any representation
of the Company contained or referred to in this Agreement or any Schedule,
Exhibit or certificate delivered by or on behalf of the Company pursuant hereto;
(c) 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 (d) any and all actions, suits,
proceedings, demands, assessments or judgments, cost 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 the Company, its successors and assigns, and its
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.
6. Post-Closing Covenants.
----------------------
6.1 Confidentiality. Each of the parties hereto shall have, prior to
---------------
the Closing, through their respective representatives, permitted investigation
of the property, records and the financial condition of the other party. In the
course of said investigation and in the course of the negotiation of this
Agreement, each party shall have received confidential information regarding the
operations of the other party. Each party shall each keep confidential and not
use any information so obtained which is not otherwise publicly available or
ascertainable. In this regard, 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, it has and will come
into possession of material, non-public information about the Company.
Accordingly, 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.
-11-
<PAGE>
6.2 Public Communications. The Company shall obtain the approval of
---------------------
the Purchaser of any written public communications that mention either the
Purchaser by name or the transactions contemplated by this Agreement prior to
the dissemination of that communication to the public. The provisions of this
Section 6.2 shall not apply to any reports filed by the Company with the SEC.
6.3 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 6.3(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 6.3 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 6.3 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 6.3(a), the Participation Right will lapse with respect to that
offering.
(b) Term of Participation Right. The Participation Right under this
---------------------------
Section 6.3 shall commence on the day of this Agreement and shall remain in
effect (i) for so long as Purchaser maintains ownership of at least ten percent
(10%) of the issued and outstanding Stock; or (ii) until the consummation of an
underwritten public offering of shares of the Common Stock.
6.4 Corporate Governance. As soon as reasonably practicable
--------------------
following the date hereof, the Company shall:
(a) amend Article II, Section 3 of the Company's Bylaws to permit the
holders of Common Stock holding not less than ten percent (10%) of the issued
and outstanding Common Stock of the Company to call special meetings of the
Company's stockholders; and
-12-
<PAGE>
(b) appoint one (1) of the Purchaser's Nominees to each of the
Committees.
6.5 Bylaws. The Company covenants and agrees that for so long as
------
Purchaser owns at least seven and one half percent (7.5%) of the issued and
outstanding shares of Common Stock:
(a) The Company will not initiate any action to eliminate the rights
provided in Article II, Section 9 of the Bylaws for stockholder action by
written consent in lieu of a meeting.
(b) The Company will not initiate any action to increase the
authorized number of directors to a number greater than eleven (11).
(c) In each instance in which there is an election by the Board of
Directors of the Company of directors to serve on any committee of the Board of
Directors, the Purchaser's Nominees shall have the right to designate one of the
Purchaser's Nominees as a member of such committee.
(d) The Company 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 and each subsidiary,
to examine the Company's and each subsidiary's books of account and records and
to discuss the Company's and each subsidiary's affairs, finances and accounts
with its officers, all at such reasonable times as may be requested by the
Purchaser.
6.6 Teleconference. The Company covenants and agrees that for so
--------------
long as any Purchaser Nominee serves on the Board of Directors of the Company,
the Company will not initiate any action to eliminate the rights provided in
Article III, Section 6 of the Bylaws for the directors to participate in
meetings of the Board of Directors by means of conference telephone or similar
communications equipment.
6.7 Further Assurances. From time to time following the Closing,
------------------
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 Shares,
-------------------
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).
-13-
<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 issued to LIWA Diamond Company Limited, a
British Virgin Islands company ("LIWA") pursuant to that certain Securities
Purchase Agreement ("LIWA Agreement") of even date herewith between the Company
and LIWA, and (c) any shares of Common Stock issued or issuable to the Holders
of the shares of Common Stock described in 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.
(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
-14-
<PAGE>
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.
7.3 Demand Registration.
-------------------
(a) Request for Demand Registration. At any time commencing (i)
-------------------------------
two (2) years from the Closing and terminating seven (7) years from the Closing
and (ii) after the Company has qualified for registration of the Registrable
Securities on Form S-3 or any comparable or successor form or forms, 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 two (2) 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) 180 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 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
-15-
<PAGE>
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 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:
-16-
<PAGE>
(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 180 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 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;
-17-
<PAGE>
(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 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,
-18-
<PAGE>
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.
(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).
-19-
<PAGE>
(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 pursuant to a demand for registration
pursuant to Section 7.3 the PCM Agreement, 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 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 and PCM (or its successors) 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 PCM 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.
-20-
<PAGE>
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 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
-21-
<PAGE>
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
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.
-22-
<PAGE>
87. Miscellaneous.
-------------
8.1 Survival of Representations. All representations, warranties and
---------------------------
agreements contained herein or made in writing by the Company or the Purchaser
in connection with the transactions contemplated hereby except any
representation, warranty or agreement as to which compliance may have been
appropriately waived in writing, shall survive the execution and delivery of
this Agreement.
8.2 Expenses and Attorney Fees. Irrespective of whether the Closing
--------------------------
is effected, the Company shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. If the Closing takes place on or before December 31, 1998, the
Company shall reimburse Purchaser for twenty five percent (25%) of the
reasonable fees of Mr. Ajmal Ebrahim-Hameed and Sidley & Austin, attorneys for
Purchaser, including the reasonable travel and lodging costs incurred by Mr.
Ajmal Ebrahim-Hameed in connection with his attendance at the Closing. The
foregoing obligation is in addition to the Company's separate obligation of
reimbursement to LIWA under Section 8.2 of the LIWA Agreement, it being
understood that Mr. Ajmal Ebrahim-Hameed and Sidley & Austin will be submitting
separate bills to Purchaser and LIWA.
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.
8.3 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 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.
8.4 Waivers. No waiver of any breach of this Agreement shall be held
-------
to constitute a waiver of any other or subsequent breach.
8.5 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 facsimile with electronic
confirmation of receipt, (c) by registered or certified mail, postage prepaid,
or (d) by international courier, addressed as follows:
If to the Company:
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
-23-
<PAGE>
If to the Purchaser:
New Diamond Corporation Limited
Almahmal Center, 18th Floor
Jeddah
Saudi Arabia
Attention: Mr. Ahmed Basodan
Facsimile: 966 2 644 3822
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 Section 8.5
may be changed by giving notice of such change in the manner provided herein for
giving notice.
8.6 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.
8.7 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.
8.8 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.
8.9 Counterparts. 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.
8.10 Entire Agreement. This Agreement and the Exhibits and 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.
-24-
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement of
Understanding as of the day and year first written above.
GLOBAL DIAMOND RESOURCES, INC.,
a Nevada corporation
By: /s/ Johann de Villiers
-----------------------
Johann de Villiers,
Chief Executive Officer
NEW DIAMOND CORPORATION LIMITED,
a British Virgin Islands company
By: /s/ Ajmal Ebrahim-Hameed
-------------------------
Ajmal Ebrahim-Hameed,
An authorized officer
-25-
<PAGE>
Exhibit 10.6
LIWA DIAMOND COMPANY LIMITED
GLOBAL DIAMOND RESOURCES, INC.
SECURITIES PURCHASE AGREEMENT
December 29, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purchase and Sale of Shares 1
2. Deliveries at Closing 2
3. Representations, Warranties and Covenants of the Company 3
4. Representations, Warranties and Covenants of the Purchaser 9
5. Indemnification 11
6. Post-Closing Covenants 12
7. Registration Rights 14
8. Miscellaneous 24
</TABLE>
EXHIBITS
--------
A. Company's Officer's Certificate
B. Opinion of Company Counsel
C. [Form of] Indemnification Agreements
D. Purchaser's Officer's Certificate
<PAGE>
SECURITIES PURCHASE AGREEMENT
-----------------------------
This Securities Purchase Agreement ("Agreement") is entered into this 29th
day of December 1998 by and among GLOBAL DIAMOND RESOURCES, INC., a Nevada
corporation (the "Company"), and LIWA DIAMOND COMPANY LIMITED, a British Virgin
Islands company ("Purchaser").
R E C I T A L S
---------------
A. The Company desires to obtain additional capital in order to further
the mine development and operations of its South African subsidiaries.
B. In order to obtain such funds, the Company desires to sell and issue
to the Purchaser 8,571,429 shares of the Company's $.0005 par value common stock
("Common Stock"), for the aggregate payment of Three Million U.S. Dollars
(US$3,000,000), on the terms and subject to the conditions set forth herein.
A G R E E M E N T
-----------------
It is agreed as follows:
1. Purchase and Sale of Shares.
---------------------------
1.1 Purchase and Sale of Shares. Subject to the terms and conditions
---------------------------
set forth herein, the Company agrees to sell and issue to Purchaser, and
Purchaser agrees to purchase from the Company, 8,571,429 shares ("Shares") of
Common Stock, at a purchase price of US$.35 per share.
1.2 Closing. The closing of the transactions contemplated by this
-------
Agreement ("Closing") shall take place at the offices of Oppenheimer Wolff &
Donnelly, located at 500 Newport Center Drive, Suite 700, Newport Beach,
California, at 9:00 a.m., local time, on or before December 31, 1998, 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"). At the Closing, the Company shall deliver to the Purchaser the
certificates representing the Shares purchased by the Purchaser under this
Agreement in definitive form and registered in the name of Purchaser against
delivery to the Company by Purchaser of a wire transfer in the amount of the
purchase price to the general account of the Company pursuant to the following
instructions:
<PAGE>
Account Name: Global Diamond Resources, Inc.
Bank: Wells Fargo Bank
Branch: La Jolla Branch
7714 Girard Avenue
La Jolla, CA 92037
Branch Number 0651
ABA Number 121000248
Account Number 6651 253585
2. Deliveries at Closing.
---------------------
2.1 Company's Deliveries at Closing. At the Closing, the Company
-------------------------------
shall deliver or cause to be delivered to the Purchaser all of the following:
(a) certificates representing the Shares registered in the name
of the Purchaser;
(b) an Officer's Certificate of the Company, in the form of
Exhibit "A" attached hereto, representing that, to such officer's knowledge, all
of the representations and warranties of the Company set forth in this Agreement
are accurate as of the Closing and that the Company has taken all actions
required to be taken by the Company under this Agreement prior to the Closing;
(c) certified resolutions of the Board of Directors of the
Company authorizing consummation of the transactions contemplated by this
Agreement;
(d) a Certificate of Good Standing from the State of Nevada for
the Company;
(e) an opinion letter of counsel for the Company in the form of
Exhibit "B" attached hereto; and
(f) Indemnification Agreements, each in the form of Exhibit "C"
attached hereto, between the Company and each of the Purchaser's Nominees (as
defined in Section 3.21) who will become directors immediately following the
Closing;
(g) a certified copy of the Articles of Incorporation of the
Company, as amended;
(h) written confirmation from American Securities Transfer &
Trust, Inc., the transfer agent for the Company's Common Stock, as to the number
of issued and outstanding shares of Common Stock as of December 23, 1998;
(i) written notice from International PCM Holdings Limited, a
British Virgin Islands company ("PCM"), of the waiver of its rights to 30 days'
prior written notice of this offering pursuant to Section 6.7 of that certain
Securities Purchase Agreement dated December 5, 1997 by and among the Company,
Global Diamond Resources Limited, a British Virgin Islands company ("GDRIL"),
and PCM ("PCM Agreement");
-2-
<PAGE>
(j) written resignations from Andries Janzen, Hugh Wilmer and
Gasem S. Al-Shaikh from their positions as directors of the Company effective as
of and subject to the Closing; and
(k) such other documents and instruments as shall be reasonably
necessary to effect the transactions contemplated hereby.
2.2 Purchaser's Deliveries at Closing. At the Closing, Purchaser
---------------------------------
shall deliver or cause to be delivered to the Company all of the following:
(a) a wire transfer of immediately available funds to the
Company's general account in the amount of the purchase price of the Shares;
(b) an Officer's Certificate of Purchaser, in the form of
Exhibit "D" attached hereto, representing that, to such officer's knowledge, all
of the representations and warranties of Purchaser set forth in this Agreement
are accurate as of the Closing and Purchaser has taken all actions required to
be taken by Purchaser hereunder prior to the Closing;
(c) such other documents and instruments as shall be reasonably
necessary to effect the transactions contemplated hereby.
3. Representations, Warranties and Covenants of the Company.
--------------------------------------------------------
As a material inducement to the Purchaser to enter into this Agreement
and to purchase the Shares, the Company represents, warrants and covenants as
follows (The term "Company," when used in Sections 3.6 through 3.19, shall
include each of the Subsidiaries, as defined in Section 3.1, unless the context
in which such term is used indicates otherwise):
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. The Company has equity interests in the following
companies (all of which are collectively referred to as the "Subsidiaries."):
GDRIL, Global Diamond Resources (SA) (Pty) Limited, a South African corporation
("Global Diamond-SA"), Global Diamond Resources Inc., a British Columbia
corporation ("Global Diamond-BC"), and Nabas Diamonds (Pty) Limited, a South
African corporation ("Nabas Diamonds"). Each of the Subsidiaries is a
corporation duly organized, validly existing, and in good standing under the
laws of its jurisdiction and has full corporate power and authority to own its
properties and to carry on its business as presently conducted and as proposed
to be conducted. Each of the Subsidiaries 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 Subsidiary.
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 50,000,000 shares of Common Stock, $.0005 par value, of
which 32,824,470 shares are issued and outstanding. All of the Subsidiaries are
beneficially owned either directly or indirectly by
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<PAGE>
the Company. All of the issued and outstanding capital shares of GDRIL are owned
by the Company and Global Diamond-BC. 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 all of the issued and
outstanding share capital of Nabas Diamonds. There are no options, warrants or
rights outstanding which entitle their holder to purchase or acquire any capital
shares of GDRIL, Global Diamond-SA, Global Diamond-BC 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. 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 or the equity securities of any of the Subsidiaries, 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.
3.3 No Subsidiaries. Except as set forth in Section 3.1, 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 (i) its
-----------
annual report on Form 10-KSB for the fiscal year ended December 31, 1997 and all
quarterly reports on Form 10-QSB subsequently filed with the U.S. Securities and
Exchange Commission ("SEC") (collectively, the "SEC Reports"), and (ii) the
press releases dated September 9, 1998, July 17, 1998, and April 16, 1998, which
constitute all press releases issued by the Company subsequent to January 1,
1998 ("Press Releases"). The information in the SEC Reports and the Press
Releases, 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. Except as provided in
the SEC Reports, since September 30, 1998, there has been no material adverse
change in the business or financial condition of the Company.
3.5 Validity of Transactions. This Agreement, and each document
------------------------
executed and delivered by the Company 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 the
Company and is each the valid and legally binding obligation of the Company,
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 Shares 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 has been duly
authorized by the Board of Directors of the Company and the Company has taken
all necessary corporate action in connection with the execution, delivery and
performance of the Agreement. The execution, delivery and performance of this
Agreement and each document executed and delivered by the Company will not
violate any law or any order of any court or government agency applicable to the
Company, as amended, or the Articles of Incorporation or Bylaws of the Company,
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
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pursuant to the terms of the PCM Agreement, or any other agreement or instrument
by which the Company or any of its assets may be bound. No approval of or filing
with any governmental authority (including any governmental authority in South
Africa) is required for the Company 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, threatened against or affecting the
Company which questions the validity of this Agreement or any action to be taken
in connection therewith, and the Company is not subject to or in default with
respect to any order, writ, injunction or decree of any foreign, federal, state,
local or other governmental department. The Company has not commenced nor
currently intends to commence any legal proceedings against any other person or
entity. The Company has provided Purchaser with copies of all substantive
correspondence for the past three years between the Company and either the SEC,
the National Association of Securities Dealers or the California Department of
Corporations.
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. Set forth on Schedule 3.8 is a complete list 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 the SEC Reports, 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,
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 the SEC Reports, 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. Except as provided in the SEC
Reports, since January 1, 1998, there has been no material adverse change in the
mining rights held by the Company.
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3.9 Use of Proceeds. The Company shall use the proceeds from the
---------------
sale of the Shares solely for the purpose of furthering the operations of the
Company and its South African Subsidiaries.
3.10 Taxes. All foreign and federal income tax returns and state and
-----
local income tax returns for the Company 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 the Company 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 the Company, and there are no
pending, or to the knowledge of the Company, threatened tax audits, examinations
or claims.
3.11 No Defaults. Except as set forth in Schedule 3.11, 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 of the Company 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, including, without limitation, the PCM Agreement, to which the
Company 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: (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,
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 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 those which (a) were incurred in the
ordinary course of business subsequent to September 30, 1998, and (b)
individually and in the aggregate are not material to the operations or
financial condition of the Company.
3.14 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 Shares constitutes an
exempted transaction under the Securities Act of 1933 ("1933 Act"), as now in
effect, and registration of the Shares under the 1933 Act, is not required,
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<PAGE>
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. All securities issued to date by the
Company have been issued in compliance with all applicable federal and state
securities laws.
3.15 Directors and Officers. None of the directors or officers of
----------------------
the Company has:
(a) ever filed, or had filed against him 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 business or property or any partnership in which he 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 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 right to engage in any activity described in
Section 3.15(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
-7-
<PAGE>
(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).
3.16 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.
3.17 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.
3.18 Copies of Certain Documents. Prior to the Closing Date, 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.
3.19 Indemnification of Directors and Officers. The Company has
-----------------------------------------
prepared and executed, and at the Closing will deliver to Purchaser for
execution by each of the Purchaser Nominees who will take office immediately
following the Closing, an Indemnification Agreement for execution by such
Purchaser Nominees. Immediately following the election or appointment of any
other Purchaser Nominees, the Company will prepare, execute and deliver to each
such Purchaser Nominee an Indemnification Agreement for execution by such
Purchaser Nominee.
3.20 Committees of Board of Directors. The Board of Directors of the
--------------------------------
Company has established an Audit Committee and a Compensation Committee
(collectively referred to as the "Committees"). Other than the Committees, the
Board of Directors of the Company has not established any committees of
directors which have been delegated any substantive authority or responsibility.
3.21 Board of Directors. The Board of Directors of the Company has
------------------
taken the necessary corporate action to increase the authorized number of
directors of the Company to eleven (11) and appoint two (2) nominees of the
Purchaser to the Board of Directors, effective immediately following the Closing
and subject to Purchaser's purchase of at least 8,571,429 Shares for the gross
proceeds of US$3,000,000. The Company covenants and agrees that if any of such
nominees (or any successor Purchaser nominee nominated pursuant to this Section
3.21) dies, resigns from the Board of Directors, does not stand for re-election
by the stockholders or is removed from the Board of Directors, then the Company
shall appoint another nominee of the Purchaser to the vacancy so created. The
nominees of the Purchaser who take office immediately following the Closing,
together with any such successors, are referred to in this Agreement as the
"Purchaser's Nominees."
3.22 Brokers and Finders. 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
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<PAGE>
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.
4. Representations, Warranties and Covenants of the Purchaser.
----------------------------------------------------------
As a material inducement to the Company to enter into this Agreement
and to sell and issue the Shares, Purchaser represents, warrants and covenants
as follows :
4.1 Domicile and Accredited Purchaser. The beneficial owners of
---------------------------------
Purchaser are domiciled in the United Arab Emirates and are "accredited
investors" as defined under Rule 501 under the 1933 Act.
4.2 Power and Authority. Purchaser is a corporation organized,
-------------------
validly existing and in good standing under the laws of the British Virgin
Islands and Purchaser has taken all corporate action necessary for the
execution, delivery and consummation of the transactions contemplated by this
Agreement. 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 Purchaser and, upon such execution, this
Agreement will be the valid and binding obligation of 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 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
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 Purchaser.
4.4 Limited Transferability. Purchaser acknowledges that the Shares
-----------------------
have not been registered under the 1933 Act or the securities laws of any state
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
Shares 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. Purchaser is acquiring the Shares
--------------------------
for its 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, in a manner which would require registration under the 1933 Act
or any state securities laws.
4.6 Restrictive Legends. Purchaser understands and acknowledges that
-------------------
the Shares will bear the following legend:
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<PAGE>
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 ACCEPTABLE TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR ACTS.
4.7 Rule 144. Purchaser acknowledges that an investment in the
--------
Shares is not liquid and is transferable only under limited conditions.
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. 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 Shares.
4.8 Speculative Nature and Risk. Purchaser understands and
---------------------------
acknowledges the speculative nature of and substantial risk of loss associated
with an investment in the Shares. Purchaser represents and warrants that the
Shares constitute an investment which is suitable and consistent with
Purchaser's financial condition and that Purchaser is able to bear the risks of
this investment for an indefinite period of time, which may include the total
loss of Purchaser's investment in the Shares. Purchaser further represents that
(a) Purchaser has adequate means of providing for Purchaser's current financial
needs and contingencies, (b) there is no need for liquidity in Purchaser's
investment in the Shares, and (c) Purchaser has sufficient financial and
business experience to evaluate the merits and risks of an investment in the
Shares.
4.9 Independent Investigation and Advisors. Purchaser confirms that
--------------------------------------
(a) Purchaser has received, reviewed, and understands the financial statements
included in the SEC Reports; (b) 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 Purchaser deems necessary or appropriate in determining to make an investment
in the Shares, and (c) Purchaser is purchasing the Shares without any offering
memoranda or prospectus of any kind, other than the SEC Reports. Purchaser
represents and warrants that in making the decision to acquire the Shares
Purchaser has relied upon its own independent investigation of the Company,
GDRIL, Global Diamond-SA and Nabas Diamonds and the independent investigations
of the Company, GDRIL, Global Diamond-SA and Nabas Diamonds by Purchaser's
representatives, including Purchaser's own professional legal, tax, mining and
investment advisors, and (d) Purchaser and 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, Global Diamond-SA and Nabas
Diamonds, or person(s) acting on their behalf, concerning the terms and
conditions of acquisition by Purchaser of the Shares and any other matters
concerning an investment in the Shares, and to obtain any additional information
Purchaser deems necessary or appropriate to verify the accuracy of the
information provided.
4.10 Brokers and Finders. As more fully set forth in Section 5.2,
-------------------
Purchaser shall indemnify and hold the Company harmless against all claims for
brokers' or finders' fees made or asserted by any party claiming to have been
employed by the Purchaser or any
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<PAGE>
shareholder, director, officer, employee or agent of the Purchaser and all costs
and expenses (including the reasonable fees of counsel) of investigating and
defending such claims.
5. Indemnification.
---------------
5.1 Indemnity by the Company. Notwithstanding the provisions of
------------------------
Section 4.9 or any investigations or examinations made by Purchaser or
Purchaser's representatives, the Company agrees to and does hereby indemnify and
hold the Purchaser, the Purchaser's successors and assigns and its shareholders,
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 of any of its agreements and
covenants contained in this Agreement; (b) the inaccuracy of any representation
of the Company contained or referred to in this Agreement or any Schedule,
Exhibit or certificate delivered by or on behalf of the Company pursuant hereto;
(c) 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 (d) any and all actions, suits,
proceedings, demands, assessments or judgments, cost 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 the Company, its successors and assigns, and its
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.
6. Post-Closing Covenants.
----------------------
6.1 Confidentiality. Each of the parties hereto shall have, prior to
---------------
the Closing, through their respective representatives, permitted investigation
of the property, records and the financial condition of the other party. In the
course of said investigation and in the course of the negotiation of this
Agreement, each party shall have received confidential information regarding the
operations of the other party. Each party shall each keep confidential and not
use any information so obtained which is not otherwise publicly available or
ascertainable. In this regard, 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, it has and will come
into possession of material, non-public information about the Company.
Accordingly, 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.
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6.2 Public Communications. The Company shall obtain the approval of
---------------------
the Purchaser of any written public communications that mention either the
Purchaser by name or the transactions contemplated by this Agreement prior to
the dissemination of that communication to the public. The provisions of this
Section 6.2 shall not apply to any reports filed by the Company with the SEC.
6.3 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 6.3(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 6.3 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 6.3 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 6.3(a), the Participation Right will lapse with
respect to that offering.
(b) Term of Participation Right. The Participation Right under
---------------------------
this Section 6.3 shall commence on the day of this Agreement and shall remain in
effect (i) for so long as Purchaser maintains ownership of at least ten percent
(10%) of the issued and outstanding Stock; or (ii) until the consummation of an
underwritten public offering of shares of the Common Stock.
6.4 Corporate Governance. As soon as reasonably practicable
--------------------
following the date hereof, the Company shall:
(a) amend Article II, Section 3 of the Company's Bylaws to
permit the holders of Common Stock holding not less than ten percent (10%) of
the issued and outstanding Common Stock of the Company to call special meetings
of the Company's stockholders; and
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<PAGE>
(b) appoint one (1) of the Purchaser's Nominees to each of the
Committees.
6.5 Bylaws. The Company covenants and agrees that for so long as
------
Purchaser owns at least seven and one half percent (7.5%) of the issued and
outstanding shares of Common Stock:
(a) The Company will not initiate any action to eliminate the
rights provided in Article II, Section 9 of the Bylaws for stockholder action by
written consent in lieu of a meeting.
(b) The Company will not initiate any action to increase the
authorized number of directors to a number greater than eleven (11).
(c) In each instance in which there is an election by the Board
of Directors of the Company of directors to serve on any committee of the Board
of Directors, the Purchaser's Nominees shall have the right to designate one of
the Purchaser's Nominees as a member of such committee.
(d) The Company 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 and each subsidiary,
to examine the Company's and each subsidiary's books of account and records and
to discuss the Company's and each subsidiary's affairs, finances and accounts
with its officers, all at such reasonable times as may be requested by the
Purchaser.
6.6 Teleconference. The Company covenants and agrees that for so
--------------
long as any Purchaser Nominee serves on the Board of Directors of the Company,
the Company will not initiate any action to eliminate the rights provided in
Article III, Section 6 of the Bylaws for the directors to participate in
meetings of the Board of Directors by means of conference telephone or similar
communications equipment.
6.7 Further Assurances. From time to time following the Closing,
------------------
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 Shares,
-------------------
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).
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<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 issued New Diamond Corporation Limited, a
British Virgin Islands company ("New Diamond") pursuant to that certain
Securities Purchase Agreement ("New Diamond Agreement") of even date herewith
between the Company and New Diamond, and (c) any shares of Common Stock issued
or issuable to the Holders of the shares of Common Stock described in 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.
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<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.
7.3 Demand Registration.
-------------------
(a) Request for Demand Registration. At any time commencing (i)
-------------------------------
two (2) years from the Closing and terminating seven (7) years from the Closing
and (ii) after the Company has qualified for registration of the Registrable
Securities on Form S-3 or any comparable or successor form or forms, 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 two (2) 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) 180 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 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
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<PAGE>
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 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:
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<PAGE>
(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 180 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 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;
-17-
<PAGE>
(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
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,
-18-
<PAGE>
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.
(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).
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<PAGE>
(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 pursuant to a demand for registration
pursuant to Section 7.3 the PCM Agreement, 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 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 and PCM (or its successors) 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 PCM 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.
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<PAGE>
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 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
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<PAGE>
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
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.
-22-
<PAGE>
8. Miscellaneous.
-------------
8.1 Survival of Representations. All representations, warranties and
---------------------------
agreements contained herein or made in writing by the Company or the Purchaser
in connection with the transactions contemplated hereby except any
representation, warranty or agreement as to which compliance may have been
appropriately waived in writing, shall survive the execution and delivery of
this Agreement.
8.2 Expenses and Attorney Fees. Irrespective of whether the Closing
--------------------------
is effected, the Company shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. If the Closing takes place on or before December 31, 1998, the
Company shall reimburse Purchaser for twenty five percent (25%) of the
reasonable fees of Mr. Ajmal Ebrahim-Hameed and Sidley & Austin, attorneys for
Purchaser, including the reasonable travel and lodging costs incurred by Mr.
Ajmal Ebrahim-Hameed in connection with his attendance at the Closing. The
foregoing obligation is in addition to the Company's separate obligation of
reimbursement to New Diamond under Section 8.2 of the New Diamond Agreement, it
being understood that Mr. Ajmal Ebrahim-Hameed and Sidley & Austin will be
submitting separate bills to Purchaser and New Diamond.
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.
8.3 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 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.
8.4 Waivers. No waiver of any breach of this Agreement shall be held
-------
to constitute a waiver of any other or subsequent breach.
8.5 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 facsimile with electronic
confirmation of receipt, (c) by registered or certified mail, postage prepaid,
or (d) by international courier, addressed as follows:
If to the Company:
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:
-23-
<PAGE>
LIWA Diamond Company Limited
P.O. Box 95
Abu Dhabi
United Arab Emirates
Attention: Amin Koudsi
Facsimile: 971 2 722 876
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 Section 8.5
may be changed by giving notice of such change in the manner provided herein for
giving notice.
8.6 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.
8.7 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.
8.8 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.
8.9 Counterparts. 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.
8.10 Entire Agreement. This Agreement and the Exhibits and 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.
-24-
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement of
Understanding as of the day and year first written above.
GLOBAL DIAMOND RESOURCES, INC.,
a Nevada corporation
By: /s/ Johann de Villiers
-----------------------------------------
Johann de Villiers,
Chief Executive Officer
LIWA DIAMOND COMPANY LIMITED,
a British Virgin Islands company
By: /s/ Ajmal Ebrahim-Hameed
-----------------------------------------
Ajmal Ebrahim-Hameed,
An authorized officer
-25-
<PAGE>
Exhibit 10.7
AMENDMENT NO. 1 TO SECURITIES PURCHASE AGREEMENT
This Amendment No. 1 To Securities Purchase Agreement ("Amendment") is
entered into as of this 28th day of June 1999 by and between GLOBAL DIAMOND
RESOURCES, INC., a Nevada corporation (the "Company"), and NEW DIAMOND
CORPORATION LIMITED, a British Virgin Islands company (the "Purchaser").
R E C I T A L S
---------------
A. The Company and the Purchaser have previously entered into that
certain Securities Purchase Agreement (the "Agreement") dated December 29, 1998.
B. Subsequent to the close of the investment set forth in the
Agreement, the Company advised the Purchaser that it paid a finder's fee
("Finder's Fee") consisting of $1,363,200 in cash and 2,750,000 shares of the
common stock, $.0005 par value per share, of the Company ("Common Stock") to Mr.
Abu Bakr Bin Ali Al-Akhdar Mood ("Abu Bakr") for services he purported to render
in connection with the investments in the Company by the Purchaser and LIWA
Diamond Company Limited ("LIWA").
C. Pursuant to the request of the Company, the Purchaser and LIWA,
Mr. Abu Bakr has returned to the Company approximately $963,200 of the cash
portion of the Finder's Fee (before deducting $60,000 of the expenses paid by
the Company from such amount incurred in connection with the recovery of the
Finder's Fee) and all 2,750,000 shares of Common Stock. The Company is pursuing
the return of the $400,000 balance of the cash portion of the Finder's Fee (the
"Remaining Cash Portion"). It is uncertain whether Mr. Abu Bakr will return any
portion of the Remaining Cash Portion to the Company. However, as of this date,
the Company has received written notice from International PCM Holdings Limited
("PCM") that Mr. Abu Bakr has instructed the London branch of United Bank of
Kuwait to transfer to the Company a deposit ("Deposit") under the control of Mr.
Abu Bakr that the Company is advised (i) will mature in April 2000, and (ii) has
a maximum maturity value of $250,000.
D. In expectation that Mr. Abu Bakr may not return the Remaining
Cash Portion, the Company and the Purchaser wish to enter into this Amendment
for purposes of revising the purchase price paid by the Purchaser under the
Agreement through the Company's issuance of an additional 666,667 shares of
Common Stock (the "Additional Shares") to the Purchaser.
<PAGE>
A G R E E M E N T
-----------------
It is agreed as follows:
1. Amendment of Agreement. Section 1.1 of the Agreement shall be
----------------------
deleted in its entirety and replaced with the following:
"1.1 Purchase and Sale of Shares. Subject to the terms and
---------------------------
conditions set forth herein, the Company agrees to sell and issue to Purchaser,
and Purchaser agrees to purchase from the Company, 9,238,096 ("Shares") of
Common Stock, at a purchase price of US$.3247422 per share."
Except as specifically stated otherwise herein, all other provisions of the
Agreement shall be unaffected by this Amendment and shall remain in full force
and effect. The Company shall deliver a stock certificate (in definitive form
and registered in the name of the Purchaser) representing the Additional Shares
to Ajmal Ebrahim Hameed, at his office (Purchaser's designated representative),
no later than three (3) business days from the date of this Agreement.
2 Representations, Warranties and Covenants of the Company.
--------------------------------------------------------
As a material inducement to the Purchaser to enter into this
Amendment, the Company represents, warrants and covenants as follows:
2.1 Recitals. The Recitals to this Agreement are true and
--------
correct in all material respects.
2.2 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 100,000,000 shares of Common Stock, $.0005 par value, of
which 44,915,063 shares are issued and outstanding as of the date hereof. (The
number of issued and outstanding shares of Common Stock gives effect to the
recent cancellation of 2,750,000 shares of Common Stock by Mr. Abu Bakr as
referred to in the Recitals and the recent cancellation of 3,616,651 shares of
Common Stock by JB Smith, but does not give effect to the issuance of the
Additional Shares hereunder or the contemplated issuance concurrent herewith of
666,667 shares of Common Stock each to LIWA and PCM.)
2.3 Validity of Transactions. This Amendment, and the
------------------------
performance of the transactions contemplated herein, has been duly authorized,
executed and delivered by the Company and is the valid and legally binding
obligation of the Company, 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. Subject to the consent to this Amendment by New
Diamond and PCM, the Additional Shares issuable hereunder, when issued in
accordance with the terms of this Amendment, will be duly authorized, validly
issued, fully paid and nonassessable. The Additional Shares will be free of any
liens or encumbrances, except for any restrictions imposed by federal or state
securities laws.
-2-
<PAGE>
2.4 No Violation. The execution, delivery and performance of this
------------
Amendment has been duly authorized by the Board of Directors of the Company and
the Company has taken all necessary corporate action in connection with the
execution, delivery and performance of this Amendment. The execution, delivery
and performance of this Amendment will not violate any law or any order of any
court or government agency applicable to the Company, as amended, or the
Articles of Incorporation or Bylaws of the Company, 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 pursuant to the terms of the PCM Agreement (as such term is defined in
Section 2.1(i) of the Agreement), or any other agreement or instrument by which
the Company or any of its assets may be bound. No approval of or filing with any
governmental authority (including any governmental authority in South Africa) is
required for the Company to enter into, execute or perform this Amendment.
3. Additional Understandings and Agreements.
----------------------------------------
A. In furtherance of the resolutions adopted by the Board of
Directors of the Company at its meeting held on May 25, 1999, the Company agrees
to pay upon demand the actual legal fees, costs and other expenses incurred by
the Purchaser and the Purchaser's counsel, Mr. Ajmal Ebrahim Hameed and Sidley &
Austin, relating to the Finder's Fee, such meeting, this Amendment and all
matters relating thereto. Such expenses shall include, without limitation,
travel expenses and the cost of preparing and filing with the Securities and
Exchange Commission all reports relating to the issuance of the Additional
Shares or the current ownership by Purchaser of the total Shares). Such amounts
shall be paid to the Purchaser as reimbursement, or directly to the law firm or
vendor, as directed by Purchaser or as the Company deems appropriate.
Concurrently with the execution of this Agreement, the Company is paying Sidley
& Austin an aggregate of $30,398.91, consisting of (i) $15,398.91 payable in
accordance with the invoice dated June 24, 1999, and (ii) $15,000 paid on
account of services rendered (and to be rendered) and expenses invoiced from and
after June 1, 1999.
B. In the event Mr. Abu Bakr reimburses the Company for the
Remaining Cash Portion that is not a part of the Deposit or the proceeds of the
Deposit, or any portion thereof (i.e., up to $150,000), within twelve (12)
months from the date of this Amendment, the Purchaser shall, at its option (i)
return to the Company for cancellation shares of Common Stock at the rate of one
(1) share of Common Stock for each $0.60 of the Remaining Cash Portion paid to
the Company by Mr. Abu Bakr, or (ii) pay the Company $0.20 for each share of
Common Stock otherwise required hereby to be returned for cancellation. The
Purchaser shall either return the shares of Common Stock for cancellation of
make the required cash payment no later than thirty (30) days after receiving
written notice from the Company that its has received a reimbursement of the
Remaining Cash Portion from Mr. Abu Bakr. Notwithstanding the foregoing, no
cancellation of shares or cash payments shall be required of the Purchaser if
the amount of the reimbursement by Mr. Abu Bakr is less than $25,000, but in
such case any cancellation of shares or cash payment that would otherwise be
required then to be made shall be carried forward and shall be made at the time
of and together with the next subsequent reimbursement, which together with any
reimbursement so carried forward, would equal or exceed $25,000. In the event
that the Company delivers to the Purchaser evidence, which evidence is
satisfactory to the Purchaser in its reasonable discretion, of the Company's
irrevocable receipt of the Deposit (or any specified portion thereof), the
Purchaser shall return
-3-
<PAGE>
for cancellation, and the Company shall redeem from the Purchaser, without the
payment of any consideration and without the Purchaser having any purchase
right, shares of Common Stock at the rate of one (1) share of Common Stock for
each $0.60 of the Deposit so received by the Company.
C. Subject to and conditioned upon the Company's issuance of the
Additional Shares to the Purchaser in accordance with the terms and conditions
of this Amendment, the Purchaser hereby releases, acquits and forever discharges
the Company and its Privies from any and all claims, demands, actions, causes of
action, damages, costs, or other claims whatsoever in law or equity, which the
Purchaser may have against the Company and any of its Privies pertaining to,
relating to, connected with, or arising out of the Company's payment of or
failure to disclose the Finder's Fee. As used in this Amendment, the term
"Privies" refers to the Company's: agents, assigns, attorneys, directors,
employees, executors, heirs, insurers, officers, predecessors, reinsurers,
subsidiaries, and successors; provided, however, the term Privies shall not
include Mr. Abu Bakr.
D. The Purchaser acknowledges that the Company intends to enter
into an agreement with LIWA on the same terms and conditions as this Amendment
for purposes of issuing LIWA an additional 666,667 shares of Common Stock ("LIWA
Additional Shares") pursuant to that certain Securities Purchase Agreement dated
December 29, 1998 between the Company and LIWA. The Purchaser also acknowledges
that the Company intends to enter into an agreement with PCM in the form of
agreement attached hereto as Exhibit A for purposes of issuing to PCM 666,667
shares of Common Stock ("PCM Shares") on the terms and conditions set forth in
Exhibit A. The Purchaser hereby waives any rights of notice or participation
with respect to the Company's issuance of the LIWA Additional Shares or the PCM
Shares afforded the Purchaser under Section 6.3 of the Agreement.
4. Miscellaneous. The parties agree that the miscellaneous provisions of
-------------
Section 8 of the Agreement shall apply to this Amendment and shall be
incorporated herein by this reference, with the exception of the first paragraph
of Section 8.2 of the Agreement which shall not apply inasmuch as the matters
provided for therein are already contemplated by Section 3A of this Amendment.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first written above.
GLOBAL DIAMOND RESOURCES, INC.,
a Nevada corporation
By: /s/ Johann de Villiers
-------------------------------
Johann de Villiers,
Chief Executive Officer
NEW DIAMOND CORPORATION LIMITED,
a British Virgin Islands company
By: /s/ Ahmed M. Basodan
----------------------------
Ahmed M. Basodan,
An authorized officer
-5-
<PAGE>
Exhibit 10.8
AMENDMENT NO. 1 TO SECURITIES PURCHASE AGREEMENT
This Amendment No. 1 To Securities Purchase Agreement ("Amendment") is
entered into as of this 28th day of June 1999 by and between GLOBAL DIAMOND
RESOURCES, INC., a Nevada corporation (the "Company"), and LIWA DIAMOND COMPANY
LIMITED, a British Virgin Islands company (the "Purchaser").
R E C I T A L S
---------------
A. The Company and the Purchaser have previously entered into that
certain Securities Purchase Agreement (the "Agreement") dated December 29, 1998.
B. Subsequent to the close of the investment set forth in the
Agreement, the Company advised the Purchaser that it paid a finder's fee
("Finder's Fee") consisting of $1,363,200 in cash and 2,750,000 shares of the
common stock, $.0005 par value per share, of the Company ("Common Stock") to Mr.
Abu Bakr Bin Ali Al-Akhdar Mood ("Abu Bakr") for services he purported to render
in connection with the investments in the Company by the Purchaser and New
Diamond Corporation Limited ("New Diamond").
C. Pursuant to the request of the Company, the Purchaser and New
Diamond, Mr. Abu Bakr has returned to the Company approximately $963,200 of the
cash portion of the Finder's Fee (before deducting $60,000 of the expenses paid
by the Company from such amount incurred in connection with the recovery of the
Finder's Fee) and all 2,750,000 shares of Common Stock. The Company is pursuing
the return of the $400,000 balance of the cash portion of the Finder's Fee (the
"Remaining Cash Portion"). It is uncertain whether Mr. Abu Bakr will return any
portion of the Remaining Cash Portion to the Company. However, as of this date,
the Company has received written notice from International PCM Holdings Limited
("PCM") that Mr. Abu Bakr has instructed the London branch of United Bank of
Kuwait to transfer to the Company a deposit ("Deposit") under the control of Mr.
Abu Bakr that the Company is advised (i) will mature in April 2000, and (ii) has
a maximum maturity value of $250,000.
D. In expectation that Mr. Abu Bakr may not return the Remaining Cash
Portion, the Company and the Purchaser wish to enter into this Amendment for
purposes of revising the purchase price paid by the Purchaser under the
Agreement through the Company's issuance of an additional 666,667 shares of
Common Stock (the "Additional Shares") to the Purchaser.
<PAGE>
A G R E E M E N T
-----------------
It is agreed as follows:
1. Amendment of Agreement. Section 1.1 of the Agreement shall be
----------------------
deleted in its entirety and replaced with the following:
"1.1 Purchase and Sale of Shares. Subject to the terms and conditions
---------------------------
set forth herein, the Company agrees to sell and issue to Purchaser, and
Purchaser agrees to purchase from the Company, 9,238,096 ("Shares") of Common
Stock, at a purchase price of US$.3247422 per share."
Except as specifically stated otherwise herein, all other provisions of the
Agreement shall be unaffected by this Amendment and shall remain in full force
and effect. The Company shall deliver a stock certificate (in definitive form
and registered in the name of the Purchaser) representing the Additional Shares
to Ajmal Ebrahim Hameed, at his office (Purchaser's designated representative),
no later than three (3) business days from the date of this Agreement.
2 Representations, Warranties and Covenants of the Company.
--------------------------------------------------------
As a material inducement to the Purchaser to enter into this
Amendment, the Company represents, warrants and covenants as follows:
2.1 Recitals. The Recitals to this Agreement are true and correct in
--------
all material respects.
2.2 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 100,000,000 shares of Common Stock, $.0005 par value, of
which 44,915,063 shares are issued and outstanding as of the date hereof. (The
number of issued and outstanding shares of Common Stock gives effect to the
recent cancellation of 2,750,000 shares of Common Stock by Mr. Abu Bakr as
referred to in the Recitals and the recent cancellation of 3,616,651 shares of
Common Stock by JB Smith, but does not give effect to the issuance of the
Additional Shares hereunder or the contemplated issuance concurrent herewith of
666,667 shares of Common Stock each to New Diamond and PCM.)
2.3 Validity of Transactions. This Amendment, and the performance of
------------------------
the transactions contemplated herein, has been duly authorized, executed and
delivered by the Company and is the valid and legally binding obligation of the
Company, 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. Subject to the consent to this Amendment by New Diamond
and PCM, the Additional Shares issuable hereunder, when issued in accordance
with the terms of this Amendment, will be duly authorized, validly issued, fully
paid and nonassessable. The Additional Shares will be free of any liens or
encumbrances, except for any restrictions imposed by federal or state securities
laws.
-2-
<PAGE>
2.4 No Violation. The execution, delivery and performance of this
------------
Amendment has been duly authorized by the Board of Directors of the Company and
the Company has taken all necessary corporate action in connection with the
execution, delivery and performance of this Amendment. The execution, delivery
and performance of this Amendment will not violate any law or any order of any
court or government agency applicable to the Company, as amended, or the
Articles of Incorporation or Bylaws of the Company, 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 pursuant to the terms of the PCM Agreement (as such term is defined in
Section 2.1(i) of the Agreement), or any other agreement or instrument by which
the Company or any of its assets may be bound. No approval of or filing with any
governmental authority (including any governmental authority in South Africa) is
required for the Company to enter into, execute or perform this Amendment.
3. Additional Understandings and Agreements.
----------------------------------------
A. In furtherance of the resolutions adopted by the Board of
Directors of the Company at its meeting held on May 25, 1999, the Company agrees
to pay upon demand the actual legal fees, costs and other expenses incurred by
the Purchaser and the Purchaser's counsel, Mr. Ajmal Ebrahim Hameed and Sidley &
Austin, relating to the Finder's Fee, such meeting, this Amendment and all
matters relating thereto. Such expenses shall include, without limitation,
travel expenses and the cost of preparing and filing with the Securities and
Exchange Commission all reports relating to the issuance of the Additional
Shares or the current ownership by Purchaser of the total Shares). Such amounts
shall be paid to the Purchaser as reimbursement, or directly to the law firm or
vendor, as directed by Purchaser or as the Company deems appropriate.
Concurrently with the execution of this Agreement, the Company is paying Sidley
& Austin an aggregate of $30,398.91, consisting of (i) $15,398.91 payable in
accordance with the invoice dated June 24, 1999, and (ii) $15,000 paid on
account of services rendered (and to be rendered) and expenses invoiced from and
after June 1, 1999.
B. In the event Mr. Abu Bakr reimburses the Company for the
Remaining Cash Portion that is not a part of the Deposit or the proceeds of the
Deposit, or any portion thereof (i.e., up to $150,000), within twelve (12)
months from the date of this Amendment, the Purchaser shall, at its option (i)
return to the Company for cancellation shares of Common Stock at the rate of one
(1) share of Common Stock for each $0.60 of the Remaining Cash Portion paid to
the Company by Mr. Abu Bakr, or (ii) pay the Company $0.20 for each share of
Common Stock otherwise required hereby to be returned for cancellation. The
Purchaser shall either return the shares of Common Stock for cancellation of
make the required cash payment no later than thirty (30) days after receiving
written notice from the Company that its has received a reimbursement of the
Remaining Cash Portion from Mr. Abu Bakr. Notwithstanding the foregoing, no
cancellation of shares or cash payments shall be required of the Purchaser if
the amount of the reimbursement by Mr. Abu Bakr is less than $25,000, but in
such case any cancellation of shares or cash payment that would otherwise be
required then to be made shall be carried forward and shall be made at the time
of and together with the next subsequent reimbursement, which together with any
reimbursement so carried forward, would equal or exceed $25,000. In the event
that the Company delivers to the Purchaser evidence, which evidence is
satisfactory to the Purchaser in its reasonable discretion, of the Company's
irrevocable receipt of the Deposit (or any specified portion thereof), the
Purchaser shall return
-3-
<PAGE>
for cancellation, and the Company shall redeem from the Purchaser, without the
payment of any consideration and without the Purchaser having any purchase
right, shares of Common Stock at the rate of one (1) share of Common Stock for
each $0.60 of the Deposit so received by the Company.
C. Subject to and conditioned upon the Company's issuance of the
Additional Shares to the Purchaser in accordance with the terms and conditions
of this Amendment, the Purchaser hereby releases, acquits and forever discharges
the Company and its Privies from any and all claims, demands, actions, causes of
action, damages, costs, or other claims whatsoever in law or equity, which the
Purchaser may have against the Company and any of its Privies pertaining to,
relating to, connected with, or arising out of the Company's payment of or
failure to disclose the Finder's Fee. As used in this Amendment, the term
"Privies" refers to the Company's: agents, assigns, attorneys, directors,
employees, executors, heirs, insurers, officers, predecessors, reinsurers,
subsidiaries, and successors; provided, however, the term Privies shall not
include Mr. Abu Bakr.
D. The Purchaser acknowledges that the Company intends to enter into
an agreement with New Diamond on the same terms and conditions as this Amendment
for purposes of issuing New Diamond an additional 666,667 shares of Common Stock
("New Diamond Additional Shares") pursuant to that certain Securities Purchase
Agreement dated December 29, 1998 between the Company and New Diamond. The
Purchaser also acknowledges that the Company intends to enter into an agreement
with PCM in the form of agreement attached hereto as Exhibit A for purposes of
issuing to PCM 666,667 shares of Common Stock ("PCM Shares") on the terms and
conditions set forth in Exhibit A. The Purchaser hereby waives any rights of
notice or participation with respect to the Company's issuance of the New
Diamond Additional Shares or the PCM Shares afforded the Purchaser under Section
6.3 of the Agreement.
4. Miscellaneous. The parties agree that the miscellaneous provisions of
-------------
Section 8 of the Agreement shall apply to this Amendment and shall be
incorporated herein by this reference, with the exception of the first paragraph
of Section 8.2 of the Agreement which shall not apply inasmuch as the matters
provided for therein are already contemplated by Section 3A of this Amendment.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first written above.
GLOBAL DIAMOND RESOURCES, INC.,
a Nevada corporation
By: /s/ Johann de Villiers
------------------------------------------
Johann de Villiers,
Chief Executive Officer
LIWA DIAMOND COMPANY LIMITED,
a British Virgin Islands company
By: /s/ Mattar Abdulla Al Muhairy
----------------------------------
Mattar Abdulla Al Muhairy,
An authorized officer
-5-
<PAGE>
Exhibit 18.1
November 18, 1999
Global Diamond Resources, Inc.
836 Prospect Street
Suite 2B
La Jolla, CA 92037
Ladies and Gentlemen:
We have audited the consolidated balance sheets of Global Diamond Resources,
Inc. and subsidiaries as of December 31, 1998 and 1997, 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, 1998 and have
reported thereon under date of March 5, 1999, except as to notes 2, 4, 6, 7, 10
and 13 as to which the date is July 16, 1999. The aforementioned consolidated
financial statements and our audit report thereon are included in the Company's
annual report on Form 10-KSB for the year ended December 31, 1998. As stated in
Note 1 to those financial statements, the Company changed its method of
accounting for exploration and related costs on unproven properties from
capitalizing all expenditures to expensing all costs, other than acquisition
costs, prior to the completion of a definitive feasibility study which
establishes proven and probable reserves. The note states that the Company's
newly adopted accounting method is preferable because it is the predominant
method of accounting used in the mining industry and will better reflect
operating income and cash flow. In accordance with your request, we have
reviewed and discussed with Company officials the circumstances and business
judgment and planning upon which the decision to make this change in the method
of accounting was based.
With regard to the aforementioned accounting change, authoritative criteria have
not been established for evaluating the preferability of one acceptable method
of accounting over another acceptable method. However, for purposes of Global
Diamond Resources, Inc.'s compliance with the requirement of the Securities and
Exchange Commission, we are furnishing this letter.
Based on our review and discussion, with reliance on management's business
judgment and planning, we concur that the newly adopted method of accounting is
preferable in the circumstances.
Very truly yours,
KPMG LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 5,461,235 4,096,141
<SECURITIES> 0 0
<RECEIVABLES> 50,478 99,998
<ALLOWANCES> 0 0
<INVENTORY> 57,016 0
<CURRENT-ASSETS> 5,568,729 4,196,139
<PP&E> 4,936,213 1,909,769
<DEPRECIATION> 332,448 52,889
<TOTAL-ASSETS> 10,172,494 6,053,019
<CURRENT-LIABILITIES> 959,734 301,390
<BONDS> 3,000,000 1,662,500
0 0
0 0
<COMMON> 22,800 11,952
<OTHER-SE> 13,457,899 6,955,639
<TOTAL-LIABILITY-AND-EQUITY> 10,172,494 6,053,019
<SALES> 0 0
<TOTAL-REVENUES> 69,045 17,990
<CGS> 122,209 0
<TOTAL-COSTS> 122,209 0
<OTHER-EXPENSES> 2,210,343 1,291,056
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 400,917 15,333
<INCOME-PRETAX> (2,664,424) (1,288,399)
<INCOME-TAX> 914 1,780
<INCOME-CONTINUING> (2,665,338) (1,290,179)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (929,829) 0
<NET-INCOME> (3,595,167) (1,290,179)
<EPS-BASIC> (.15) (.11)
<EPS-DILUTED> (.15) (.11)
</TABLE>
