UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT #1
FORM 10 - SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS
ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of
1934
Terra Systems, Inc.
(Name of Small Business Issuers in its charter)
Utah 87-0476073
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
5912 West 11600 South, Payson, 84651
Utah (zip code)
(Address of principal executive
offices)
(801) 465-4400
(Issuer's telephone number)
Securities to be registered under section 12(b) of the Act:
Title of Each Class Name on each exchange on which
To be so registered Each class is to be registered
Securities to be registered under section 12(g) of the Act:
Common Stock, $0.001 par value per share, 100,000,000 shares
authorized, 17,025,393 issued and outstanding as of June 30,
2000
/1/
TABLE OF CONTENTS
Part I 3
Item 1. Description of Business 3
Item 2. Management's Plan of Operation & Discussion and 8
Analysis
Item 3. Description of Property 13
Item 4. Security Ownership of Management 13
Item 5. Directors and Executive Officers 14
Item 6. Executive Compensation 15
Item 7. Certain Relationships and Related Transactions 16
Item 8. Description of Securities 16
Part II 17
Item 1. Market for Common Equity and Related Stockholder 17
Matters
Item 2. Legal Proceedings 17
Item 3. Changes in and Disagreements with Accountants 18
Item 4. Recent Sales of Unregistered Securities 18
Item 5. Indemnification of Directors and Officers 18
Part F/S 19
Item 1. Financial Statements 19
Part III 20
Item 1. Index to Exhibits 20
/2/
Forward Looking Statements
Some of the statements contained in this Form 10-SB are not
historical facts rather "forward-looking statements" which can
be identified by the use of terminology such as "estimates,"
"projects," "plans," "believes," "expects," "anticipates,"
"intends," or the negative of such terms or other variations, or
by discussions of strategy that involve risks and uncertainties.
Caution should be exercised in regards to these forward-looking
statements. Such statements contained herein reflect our current
beliefs with respect to future events. These beliefs involve
known and unknown risks, uncertainties and other factors,
including, but not limited to, economic, competitive,
regulatory, technological, key employee and general business
factors affecting our operations, market growth, services,
products and licenses. No assurances can be given regarding the
achievement of future results. Actual results may differ
materially as a result of the above-mentioned risks, and from
assumptions made based on anticipated events. Factors that may
cause actual results in our performance or achievements, or
industry results, to differ materially from those contemplated
by such forward-looking statements include without limitation:
1. Our ability to maintain, attract and integrate internal
management, technical information and management information
systems;
2. Our ability to generate customer demand for our services;
3. The intensity of competition; and
4. General economic conditions.
Part I
We are filing this Form 10-SB on a voluntary basis to:
1. Provide current, public information to the investment
community;
2. Expand the availability of secondary trading exemptions
under the Blue Sky laws and thereby expand the trading market in
our securities; and
3. Comply with prerequisites for the listing of our securities
on the NASD OTC Bulletin Board.
Item 1. Description of Business
A. Business Development and Summary
We were formed as a Utah Corporation on February 16, 1996 under
the name Terra Systems, Inc. Our articles of incorporation
authorize us to issue up to 100,000,000 shares of common stock
at a par value of $0.001 per share. For the six-months ended
June 30, 2000 we reported a loss of (983,539) or (.06) per
share. For the year ended December 31, 1999 we reported a loss
of (1,229,863) or (.08) per share. The accumulated deficit from
inception February 17, 1996 through June 30, 2000 was
(6,194,257) or (.43) per share. Given our current cash flows,
it is questionable as to whether the company will be able to
continue as a going concern. While future developments
regarding patent issuance will allow Terra Systems to more
aggressively pursue revenue-generating contracts by year-end
2000, it may be necessary to raise additional funds and/or
reduce cash expenditures in the next 12 months. Funds could be
generated through the issuance of additional stock, or through
the sale of existing plant and office equipment. Cash
expenditures could be reduced through the lay-off of personnel
and the elimination of employee benefits.
Our Company stock began trading in July 1996 and is currently
quoted under the ticker symbol "TSYI" on the OTC Bulletin Board.
We entered into an agreement with XCEL Associates, Inc. on March
29, 2000. In exchange for Terra Systems, Inc. stock options,
XCEL Associates, Inc., agreed to review Terra's business plan
and prepare a company profile as well as recommend our common
stock to various Retail Brokers, Analysts, and Institutional
Investors and Bankers (see exhibit 10).
We develop and commercialize low-pressure pneumatic conveyance
systems. These low-pressure systems are used in connection with
the pulverization, moisture control, classification, transport
and processing of bulk materials.
/3/
When utilized at a coal burning power plant, this system can aid
in British Thermal Unit (BTU) output gain while improving the
surrounding air and water quality. It is able to do this because
it employs a dry transport system that uses air instead of water
for propulsion. Less moisture in the coal helps it burn cleaner
and more efficiently and the employment of a dry system means
less water purification is required. "BTU" is a term used to
define how efficient a given fuel is in relation to the quantity
of heat it emits. For the reasons described above, our Company
is targeting the carbon fuels industry. We believe this market
can benefit the most from our dry bulk handling systems.
The system relies on a slow moving laminar flow gas bearing to
allow for the transportation of material through a carrying
duct. To define, a laminar flow gas bearing is formed when the
air in the center of a pipeline is surrounded by a slow moving
turbulent flow boundary air layer next to the inside wall of the
pipe. It is referred to as a boundary because it acts to
insulate the pipe from severe abrasive contact with the
transported material. Furthermore, an "abrasion signature" is
the amount of wear and tear or erosion on the inside of a pipe
caused by the flow of a given material. Our process reduces
this abrasion signature because the material being transported
is caught up and carried by the faster moving gas in the center
of the pipe. Unlike high-pressure conveyance systems, low-
pressure systems do not allow for the "caking" of material
inside the piping. Caking is a term used to describe the build
up of material on the inside of its containment pipe. In
pneumatic conveyance, caking occurs when dust combines with
moisture and starts to gradually build up on the inside wall of
the pipe.
High-pressure pneumatic conveyance systems rely on the
compression of air for operation. When the air is compressed,
the moisture contained in the air collects inside the pipe.
These pressurized systems have to be enclosed and can only purge
moisture at the end of their conveyance cycle. The material
they carry becomes exposed to this moisture, which may lead to
caking. On the other hand, a low-pressure system like ours
operates in an open environment. This allows the material being
transported to breathe any moisture out during the
transportation process.
B. Business of Issuer
(1) Principal Product and Principal Markets
We develop and market a unique particle accelerator. It is a
low-pressure gas linear accelerator, which carries bulk
materials such as rice, coal, coal ash, wheat and grain at high
velocity. Our process begins by performing particle isolation.
The system places particles (materials) in a high-spin state.
This high-spin state allows two attributes to occur to promote a
high degree of particle isolation:
1. an enhanced energy state on the particle due to the
high-spin puts a similar energy (electro-static) charge
on the material being conveyed. The particles then will
tend to repel each other. Example: Two positive ends of a
magnet (like charges) repel; and
2. just like the gases that surround the earth become
denser as they get closer to the surface of the spinning
planet. This gas density around the surface constitutes
an atmosphere. These atmospheric density differences can
act as barriers in allowing particles to re-combine. Our
system creates gas flow barriers (atmospheres) that act
to isolate similar particles.
After our system has isolated the materials, it then can
accelerate, stratify, and classify the material to facilitate a
variety of end process results. These include 1) drying, 2)
pulverizing, 3) mixing, and 4) trans-loading. Trans-loading is
the process by which materials are transferred from one method
of storage to another. For example, moving grain from a storage
silo to a barge for shipment, or moving coal from a train to a
truck. In addition, our system can transport almost any
particle, for any duration of time, at any temperature and at
any velocity/density ratio.
Many components are pre-fabricated in our warehouse with final
assembly occurring at the client's site. In most cases, we bill
the client an hourly/daily rate for constructing a system that
will vary in cost based on the customization involved for each
client and their unique requirements. For example, some
applications may require just product drying before going to an
existing milling operation.
/4/
Thus our equipment could provide
just the product drying service onsite. We construct and test
each system with the use of our technical and research staff.
Our particle accelerator has inherent economic advantages:
1. it utilizes air, instead of water (water based systems can
be costly due to their detrimental effect on the environment,
i.e. clean-up costs);
2. it performs multiple handling and processing tasks;
3. its projected unit costs are lower than wet processes;
4. it does not require the additional purchase of chemicals;
and
5. it can increase the economic value of the end product (i.e.
coal will produce more BTUs).
Furthermore, we received notification that all 31 claims made to
the United States Patent Office have been allowed. Our Patent
Counsel advised the company to expect the full patent to be
issued in the first quarter of 2001. Existing industry
conditions make this technology very attractive. They include:
1. the efficient processing of bulk material in a more
environmentally sound manner;
2. the need for a process to handle material utilizing air as
opposed to water, and the need for a system that can "multi-
task" in the processing of bulk material at a reduced cost and
with less equipment; and
3. the desire for a mineral pulverization system that would
reduce maintenance costs by functioning more effectively and
efficiently.
The prospective markets for our industrial particle accelerator
include power generation, mining, agriculture, environmental,
ceramics, construction, and materials transportation. Because
of the nature and flexibility of our process, virtually all bulk
materials used in basic industries can be economically
separated, classified, and otherwise processed.
There exists, however, the inherent risk that a market does not
exist for the system due to its unique technological nature.
Potential clients/customers may be reluctant to invest in a new,
commercially unproven product. Additionally, there exists the
inherent risk that we will lack the cash flows necessary to
operate as a going concern as we attempt to develop the market
for the system. For example, it may require several months of
contract negotiations and feasibility studies before a revenue-
generating contract is approved. We are also exposed to the
risk that the Company will not be able to aggressively pursue
clients if the U.S. Patent Office does not award a full patent.
Finally, rising raw material (i.e. blowers, computer control
systems) costs could make it difficult for the Company to
acquire the items needed for further testing and development.
The realization of any of these risks could have a material
adverse effect on our operations and could hinder our ability to
continue as a going concern.
(2) Distribution methods for our services
Our marketing strategy is to promote, advertise and increase our
brand visibility and attract new customers through multiple
channels, including:
1. developing strategic alliances;
2. establishing our brand name; and
3. direct marketing to existing and potential customers.
We believe that the use of multiple marketing channels will
reduce our reliance on any one source for obtaining customers.
This in turn will lower costs and maximize brand awareness.
Strategic alliances
As of the date of this filing, we have no existing strategic
alliances. We do, however, believe that future joint venture
relationships will allow us to gain additional insight,
expertise and penetration into markets where joint venture
partners already operate and may serve to increase our revenue
and income growth.
/5/
We reserve the right to review potential
strategic alliance candidates, and to enter into agreements in
the future should management feel these alliances would be in
the best interest of the Company.
Establish our name brand
We cannot guarantee that we will be able to successfully market
and distribute our services in either the United State or other
countries, and the failure to do so could have an adverse effect
on our operations. We believe that building awareness of the
Terra Systems, Inc. brand is important in establishing and
expanding our customer base. We currently have a web site
(www.tsyi.com) and will use traditional media as our revenues
permit, to attract new customers.
Direct Marketing
The majority of our marketing activity is conducted through on-
site demonstrations, as well as on our web site. We plan to
move forward with industrial and agricultural clients entering
into exclusive licensing agreements, which will generate fees
and royalty revenues. We have engaged with P.S.G. LLC (Product
Service Group) in a project that will clean up a low-level
radioactive waste site. A successful initial presentation was
made at Terra Systems headquarters at Payson, Utah on October
13, 2000. The follow-up presentation will be made in Denver to
Morrison-Knudsen Corp in late November.
In this presentation, Terra will propose a total bulk handling
system that will extract, transport, pulverize, treat, bind, and
load-out into containment the low-level radioactive material.
This material is presently being held in storage silos that are
disintegrating due to natural erosion. 5,100 cubic yards of
material needs to be extracted, treated, and re-contained.
Should our proposal be accepted, we would envision engineering
and feasibility funds to be made available in November of 2000.
Construction and on-site operation would take place in 2001.
The final scope of this project would be in the 5 million US
dollar range and take approximately 20 months to complete. This
project could lead to similar future clean-up activity with PSG
who contracts with Morrison-Knudsen.
We intend to sell proprietary components and furnish technicians
throughout startup operations. Manufacturing of this hardware
will be done at our plant in Payson, Utah with initial
industrial project applications taking place in the United
States.
(3) Status of any announced new service
As of November 1, 2000 we have:
1. developed and implemented a business plan;
2. recruited and retained an appropriate management team
and board of directors; and
3. attained capital that we believe will be sufficient
for the next nine to twelve months of operations.
We have commenced operations, and have begun generating
revenues. However, we expect the industry to become
increasingly competitive, despite the size and growth expected
in the market. We intend to compete by targeting specific
market segments such as power companies who rely on the
pulverization and transport of coal to produce energy. Another
goal is to ensure client satisfaction with the Company's
services and to develop an outstanding reputation for client
service. If we fail to market and distribute our services and
generate sufficient revenues, we may be unable to continue as a
going concern.
(4) Industry background
Nearly all bulk materials used in basic industries can or must
be separated, pulverized, classified, and/or otherwise enhanced.
Opportunities exist for many applications in both organic and
inorganic materials in an array of large industries, including
power generation, mining, agriculture, environmental, ceramics,
construction, and materials transportation. Our main
competition consists of traditional methods of pulverization and
transport of bulk materials. These include manufacturers of
roller mills and ball mills.
/6/
However, we do not consider these
to be major competitive factors due to the unique nature of our
technology. Specific competitors in our industry would be
Bechtel, Babcock & Wilcox, and Ecology & Environment. These
companies provide coal pulverization, mineral processing, and
remediation of industrial wastes.
(5) Raw materials and suppliers
Our company is neither a purchaser nor a supplier of raw
materials. Numerous raw materials are used to conduct on-site
demonstrations on the effectiveness of our process and
equipment; however, the prospective client holds the
responsibility for providing these materials. Such materials
used in on-site demonstrations would include rice, coal, coal
ash, limestone, gypsum, agricultural waste and other materials
containing various heavy minerals (i.e. gold, silver, platinum).
(6) Customers
Our current material customers and their percentage of our
Company's revenues is as follows:
PacifiCorp / Interwest 95%
Mining
Quantum Minerals / Utah 3%
Chemical
Other 2%
We believe that our ability to establish and maintain long-term
relationships with our customers and encourage repeat business
depends, in part, on the strength of our customer support and
service operations and staff. We value frequent communication
with and feedback from our customers to continually improve our
services. We focus on designing and manufacturing high quality,
applications-engineered products that are designed to address
specific customer needs. In addition, our operating results may
also fluctuate due to factors such as the gain or loss of
significant customers. Our existing customer relationships are
strong, and our revenues would increase considerably should we
secure the contract with P.S.G. LLC.
(7) Patents, trademarks, licenses, franchises, concessions,
royalty agreements, or labor contracts
Our success and ability to compete will be dependent in part on
the protection of our potential patents, trademarks, trade
names, service marks and other proprietary rights. We have
engaged Morriss, Bateman, O'Bryant & Compagni as patent counsel
since early spring 1997. Application was made in early 1998 for
specific patent applications with the United States Patent
Office. As developments are made, patents are upgraded. Patent
pending status has been granted to us on specific patent
filings. In addition, we may rely on certain intellectual
property licenses from third parties, and may be required to
license additional products or services in the future, for use
in the general operations of our business plan. We cannot
assure you that these third party licenses will be available or
will continue to be available to us on acceptable terms if at
all. The inability to enter into and maintain any of these
licenses could have a material adverse effect on our business,
financial condition or operating results. In addition, policing
unauthorized use of our proprietary and other intellectual
property rights could be expensive if not difficult or
impossible. Also, we cannot guarantee that third parties will
not bring claims of copyright or trademark infringement against
us or claim that certain aspects of our processes or other
features violates a patent they may hold. There can be no
assurance that third parties will not claim that we have
misappropriated their creative ideas or formats or otherwise
infringed upon their proprietary rights. Any claims of
infringement, with or without merit, could be time consuming to
defend, result in costly litigation, divert management
attention, or require us to enter into costly royalty or
licensing arrangements. These potentialities could have a
material adverse effect on our business, financial condition or
operating results.
(8) Regulation
/7/
We are not currently subject to direct regulation by any
domestic or foreign governmental agency, other than regulations
applicable to businesses generally, export control laws and laws
or regulations directly applicable to the industry. We will be
required to ensure the enforcement of the Occupational Safety
and Health Administration (OSHA) regulations.
(9) Effect of existing or probable government regulations
We believe that we will be able to comply in all material
respects with the laws and regulations governing the industry,
and that such laws will not have a material effect on our
operations. However, various federal and state agencies may
propose new legislation that may adversely affect our business,
financial condition and results of operations. We are not aware
of any probable government regulations that may adversely affect
our business.
(10) Research and development activities
We seek to continue developing our products internally through
research and development or if appropriate, through strategic
partnerships. But, if we can purchase or license products,
services or technologies from third parties at a reasonable
cost, we will do so in order to avoid the time and expense
involved in developing such products, services or technologies.
(11) Employees
The Company presently has five (5) full time employees, one (1)
part-time employee and two (2) consultants and advisors.
Currently, there exist no organized labor agreements or union
agreements between Terra Systems, Inc. and Terra's employees.
We believe that our relations with our employees are good.
(12) Dependence on Key Personnel
The success of our Company depends upon the efforts, abilities
and expertise of our executive officers and other key employees,
including our Chief Executive Officer, President, Research &
Development, Secretary/Treasurer, Director, and Consultant of
each of our operating units. The loss of the services of such
individuals and/or other key individuals could have a material
adverse effect on our operations. Generally, we do not offer
employment agreements to our executive officers or key
employees, nor do we maintain key man life insurance on such
individuals.
Item 2. Management's Plan of Operation & Discussion and
Analysis
A. Management's Plan of Operation
(1) In our initial approximately fifty-two month operating
period ended June 30, 2000; we have incurred $6,194,257 in net
losses and $335,822 in revenues from operations. Management
intends to use capital and debt financing as needed to
supplement the cash flows received through successful
negotiations of licensing agreements. Currently, the primary
source of capital has been obtained through the issuance of
common stock and options to a corporation that has also engaged
to provide business management and marketing consultation
services for Terra Systems, Inc (see Note 1 to Financial
Statements under "Basis of Presentation", paragraph 2 and Note 3
to the Financial Statements). Our fixed and variable expenses
and our ability to control them are as follows:
Classification Fixed / Variable Ability to Control
Employee Wages and Salary = Fixed / Can reduce through
Benefits Hourly = Variable lay off of personnel
Subcontractor Fixed Can reduce through
Expense discontinuation of
agreements
Accounting and Legal Variable May increase as
Expenses Company becomes
fully reporting
/8/
Capital Lease , Fixed Little control over,
Leasing Fees per agreement
Building Rental Fixed Little control over,
Expense per agreement
Utilities Variable May fluctuate due to
seasonality or
increased production
levels
Business Insurance Fixed Required business
coverage. May be
able to renegotiate
upon policy renewal
Misc. Office Variable Can control through
Supplies & Shipping reduced office
supply requisitions,
negotiating
alternative shipping
solutions
Selected financial data of the Company is as follows:
Balance Sheet As of As of As of
Data:
June December December
30, 31, 31,
2000 1999 1998
---------------------------
Total Assets $590,580 $647,950 $795,232
Total Long-Term
Liabilities $702,859 $852,097 $940,570
Balance Sheet As of As of
Data:
December December
31, 31,
1997 1996
-----------------------
Total Assets $911,934 $971,717
Total Long-Term
Liabilities $843,729 $308,337
Statement of Operations For the For the For the
Data:
Six Months Six Months Year Ended
Ended Ended
June 30, June 30, December
31,
2000 1999 1999
-------------------------------------
Total Revenue $ 6,150 $ 55,920 $ 159,705
Loss from Cont. Operations $(937,477) $(493,057) $(1,129,237)
Loss from Cont. Operations $ (0.06) $ (0.04) $ (0.08)
per Common Share
Statement of Operations For the
Data: Period from
For the For the February
17, 1996
Year Ended Year Ended (Inception)
through
December December December
31, 31, 31,
1998 1997 1996
--------------------------------------
Total Revenue $ 166,767 $ 3,200 $ -0-
Loss from Cont. Operations $(1,189,265) $(1,384,991) $(1,291,657)
Loss from Cont. Operations $ (0.09) $ (0.06) $ (0.02)
per Common Share
Stock-Based Compensation for Current and Future Services
From February 17, 1996 (Inception) through December 31, 1997 the
Company issued 75,000 shares of common stock at $0.001 per
share. During the year ended December 31, 1998 the Company
issued 350,000 shares of common stock at $0.001 per share and
during the year ended December 31, 1999 the Company issued
20,000 shares of common stock at $0.001 per share to various
employees for current and future services. The shares issued
from February 17, 1996 (Inception) through December 31, 1997 had
a market value of $74,925 or $1.00 per share on the day of
issuance. The shares issued during the year ended December 31,
1998 had a market value of $393,750 or $1.13 per share on the
day of issuance and
/9/
the shares issued during the year ended
December 31, 1999 had a market value of $19,320 or $0.97 per
share on the day of issuance. Under the terms of the stock
issuance, the Company can reacquire all the stock at $0.001 per
share within one year from the date of issuance and one half of
the shares within two years from the date of issuance. These
shares are considered non-vested and have been accounted for in
accordance with APB 25 Accounting for Stock Issued to Employees,
whereby the Company is recognizing compensation expense over the
vesting period of the stock for the difference between the fair
value of the stock on the day of issuance and the consideration
paid by the employees. In the event employment should be
terminated, all non-vested shares of stock shall be forfeited by
the employee.
During the six months ended June 30, 2000, an officer of the
Company, who had been issued 150,000 shares of the above
mentioned stock, forfeited 50,000 shares of non-vested common
stock valued at $56,200. During the year ended December 31,
1999, an officer of the Company, who had been issued 200,000
shares of the above mentioned stock, left the Company.
Accordingly, the officer forfeited 100,000 shares of non-vested
common stock, which was valued at $112,400.
The Company recognizes compensation expense for the above shares
over the period the shares vest as follows:
Period Compensation Deferred
Expense Compensation
------------------------------------------------------------
February 17, 1996 to $ 44,955 $ 0
December 31, 1997
January 1, 1998 to $ 275,953 $147,767
December 31, 1998
January 1, 1999 to $ 205,720 $ 28,093
December 31, 1999
January 1, 2000 to June $ 41,389 $ 13,282
30, 2000
Common Stock Issued to Acquire Xullux
On May 1, 1996, we entered into a merger agreement with Xullux,
Inc., whereby we agreed to issue 2,955,000 shares of common
stock for all of the outstanding common stock of Xullux, Inc.
Xullux, Inc. had no assets at the date of the merger and was
considered a shell corporation; accordingly, the 2,955,000
shares held by the Xullux, Inc. stockholders were deemed to have
been issued for no consideration.
Common Stock Issued for Cash
The Company issued shares of common stock for cash as follows:
Period Stock Price Proceeds
Issued Range
----------------------------------------------------------------
February 17, 1996 to 1,926,687 $0.50 to $2.00 $1,834,139
December 31, 1997
January 1, 1998 to 715,727 $0.30 to $0.80 $377,712
December 31, 1998
January 1, 1999 to 705,000 $0.25 to $0,50 $285,460
December 31, 1999
January 1, 2000 to June 224,673 $0.25 to $0.30 $ 57,835
30, 2000
Common Stock Issued in Satisfaction of Subscription Agreements
and Marketable Securities
Between July and September 1996, $206,000 was contributed to the
Company under various stock purchase agreements for future
issuances of common stock. In October through December 1996, the
Company issued 246,000 shares of common stock in satisfaction of
these subscription agreements.
In May 1996, the Company entered into an agreement to issue
250,000 shares of common stock to acquire an investment in
another company, which had a fair value of $190,000. By
September 30, 1996, the Company had issued 19,000 shares of
common stock relating to this transaction. The remaining 231,000
common shares were issued in December 1996. The investment in
another company was sold in 1996 for $91,000, and a loss of
$99,000 was recorded.
/10/
Common Stock Issued for Services
During the six months ended June 30, 2000 the Company issued
122,920 of common stock and in the year ended December 31, 1999
the Company issued 259,286 shares of common stock for consulting
services. The common stock was valued at prices ranging from
$0.48 to $0.70 per share. For the six months ended June 30, 2000
the Company charged $143,189 and for the year ended December 31,
1999 the Company charged $60,000 of consulting expense to
operations (See exhibit 99).
Common Stock Redemptions
In 1996, the Company issued 48,000,000 shares of common stock
upon organization of the Company. In 1997, the Company exercised
its right to repurchase 36,775,000 shares of common stock from
two shareholders at $0.001 per share. The stock redemption was
paid by the Company issuing 10% promissory notes.
In September 1996, the Company redeemed a total of 3,000,000
shares of the Company's common stock from six different
shareholders for no consideration.
Common Stock Issued for the Conversion of Debt
During the six months ended June 30, 2000, a stockholder
exercised 500,000 options. The Company issued 500,000 shares of
common stock for the conversion of notes payable to stockholders
in the amount of $100,000 or $0.20 per share. During the year
ended December 31, 1999, the Company issued 200,000 common
shares for the retirement of accounts payable to a related
party, valued at $50,000 or $0.25 per share.
Stock Right Exercised
During the period ended June 30, 2000 (as discussed in Note 3 of
the Notes to the Consolidated Financial Statements) the Company
granted stock rights in connection with a consulting agreement.
The Company recognized consulting expense of $560,000 in
connection with the grant of these stock rights. Upon grant of
the rights, the corporation exercised its right and the Company
issued 400,000 shares of common stock for $100,000 or $0.20 per
share.
As of June 30, 2000, we have 17,025,393 shares of $0.001 par
value common voting stock issued and outstanding. However, if
our capital requirements are greater than our financial
resources, we may be required to raise additional capital via an
additional public or private offering. In the meantime, our
officers and directors plan to advance funds on an as-needed
basis, although there is no definitive or legally binding
arrangement to do so. There are no preliminary loan agreements
or understandings between our officers, directors or affiliates
and lending institutions. We currently have no arrangements or
commitments for accounts and accounts receivable financing.
There can be no assurance that any such financing can be
obtained or, if obtained would be found to be reasonable by the
company.
As of June 30, 2000, we have generated $335,822 in sales
revenues and devoted our efforts primarily to developing our
products and services, implementing our business strategy and
raising working capital through equity financing. Our revenues
are primarily dependent upon our ability to cost-effectively and
efficiently develop and market our products and/or services.
Our priorities for the next six to twelve months of operations
are to:
1. continue marketing our services;
2. develop strategic relationships;
3. respond to competitive developments; and
4. establish our brand identity.
Realization of sales of our products and services during the
fiscal year ending December 31, 2000 is vital to operations. We
may not be able to continue as a going concern without realizing
additional sales or
/11/
capital. We cannot guarantee that we will
be able to compete successfully or that the competitive
pressures we may face will not have a material adverse effect on
our business, results of operations and financial condition.
Additionally, a superior competitive product could force us out
of business.
(2) Our net loss for the six months ended June 30, 2000
was approximately $983,539 and our net loss for the year ended
December 1999 was approximately $1,229,863. Our net loss was
primarily attributable to less than expected revenues being
realized from sales of our products and services. Our expenses
for the six months ended June 30, 2000 were approximately
$941,130, of which approximately 85.54% of our expenses were
general and administrative. Our expenses for the year ended
December 31, 1999 were approximately $1,143,992, of which
approximately 78.29% of our expenses were general and
administrative.
During each of these interim periods, we realized minimal
revenues while incurring normal fixed overhead and debt service
costs. For the six months ended June 30, 2000, the depreciation
and amortization expense for our product development costs is
$62,463. There was $125,823 depreciation and amortization
expense in 1999. This operating trend is projected to continue
for at least the remaining period of fiscal 2000.
To fund fiscal 2000 operations, we believe our projected cash
balance will be adequate to fund our operations and provide for
our working capital needs through December 2000.
We may experience significant fluctuations in operating results
in future periods due to a variety of factors, including but not
limited to, the following risk factors.
Limited Operating History
We have a limited operating history on which to base estimates
for future performance. In 1996 Terra entered into a capital
lease agreement with Spring Lake Company to facilitate the
acquisition of various pieces of plant equipment. This
transaction has been designated a "related party" transaction
(please see note 9 of the financial statements). As a result of
insufficient cash flows, Terra has been unable to meet their
lease payment obligations with Spring Lake Co. on a timely
basis. Currently, the monthly payment obligation is
approximately $13,700 per month. It will be difficult for Terra
to continue operating at a deficit. On a short-term basis,
Terra may elect to raise additional funds through the sale of
stock to outside investors; however, any future offerings could
significantly dilute the value of any previous investor's
investment value.
Current negotiations with potential clients may also result in
the finalization of feasibility study and licensing agreements
that would result in revenues, and thus cash flow, for the firm.
If these events do not generate sufficient cash flow to cover
operating expenditures, Terra may elect to reduce costs through
a reduction of its workforce, elimination of employee benefits,
or a combination of both. On a long-term basis, licensing
agreements will be structured to result in an up-front licensing
fee arrangement, with subsequent revenues to be generated by
volume (ex tons per hour) transported, dried, moved, etc.
Need for Additional Financing
We may need to obtain additional financing in the event that we
are unable to realize sales of our services or collect accounts
receivable. We may incur additional indebtedness from time to
time to finance acquisitions, provide for working capital or
capital expenditures or for other purposes. However, we
currently anticipate that our operating cash flow will be
sufficient to meet our current operating expenses as they become
due. Furthermore, our ability to pay cash dividends on, and to
satisfy the redemption obligations in respect of our outstanding
Common Stock will be primarily dependent upon the future
financial and operating performance of our operating units. Such
performance is dependent upon financial, business and other
general economic factors, many of which are beyond the control
of our operating units. If we are unable to generate sufficient
cash flow to meet our future debt service obligations or provide
adequate long-term liquidity, we will have to pursue one or more
alternatives, such as reducing or delaying capital expenditures,
refinancing debt, selling assets or operations, or raising
/12/
equity capital. There can be no assurance that such
alternatives could be accomplished on satisfactory terms, if at
all, or in a timely manner.
The Market
Technological change, continuing process development and new
product introductions may affect the markets for our products.
Our success will depend, in part, upon our continued ability to
manufacture products that meet changing customer needs,
successfully anticipate or respond to technological changes in
manufacturing processes on a cost-effective and timely basis and
enhance and expand our existing product offerings. Current
competitors or new market entrants may develop new products with
features that could adversely affect the competitive position of
our products. We have invested and continue to invest
substantial resources in research and development in an effort
to improve upon our existing manufacturing processes. However,
there can be no assurance that our process development efforts
will be successful or that the emergence of new technologies,
industry standards or customer requirements will not render our
technology, equipment or processes obsolete or uncompetitive.
Any failure or delay in accomplishing these goals could have a
material adverse effect on our business, results of operations
and financial condition. In addition, to the extent that we
determine that new manufacturing equipment or processes are
required to remain competitive, the acquisition and
implementation of the technologies, equipment and processes
required are likely to require significant capital investment.
(3) No engineering, management or similar report has been
prepared or provided for external use by us in connection with
the offer of our securities to the public.
(4) Management believes that our future growth and
success will be largely dependent on our ability to develop and
market our products. We believe that the long-term success of
our business may require substantial research and development.
There are no formal agreements to date, and we pay for all
independent tests. We have incurred research and development
costs from February 16, 1996 (date of inception) through June
30, 2000. In addition, we anticipate incurring research and
development costs through the fiscal and calendar year ending
December 31, 2000.
B. Management's Discussion and Analysis of Financial Condition
and Results of Operations
As of February 16, 1996 (date of inception) through June 30,
2000, we have generated $335,822 sales revenue. Revenues have
been generated primarily through the development of a test-scale
system and related feasibility studies. These feasibility
studies have been conducted on coal (PacifiCorp) and Black Sands
(Quantum) and were conducted to determine size reduction,
moisture removal, and mineral extraction capabilities.
A substantial percentage of our revenue was derived from work
performed for PacifCorp / Interwest Mining. The majority of
this work was related to feasibility studies related to the coal
industry. The agreed upon testing was completed by late 1999,
and we began negotiating additional testing and contract
formulation with management at PacifiCorp. Early in 2000,
Scottish Power acquired PacifiCorp, and as a result discussions
were temporarily halted. In the late summer of 2000 discussions
were resumed; however, our management staff and consultants have
had to devote considerable time and effort in the
"reintroduction" of themselves and our system to new management
from Scottish Power. It is currently anticipated that we will
be able to begin pursuit of a licensing agreement with
PacifiCorp in the near future.
Item 3. Description of Property
A. Description of Property
Our corporate headquarters are located at 5912 West 11600 South,
Payson, Utah 84651. We have use of this space through a lease
arrangement from Spring Lake Company, a related party. The
terms of this lease are for $4,120.00 per month on a month-to-
month basis. The lease expires on July 1, 2003. This facility
consists of approximately 20,000 square feet of office and
warehouse space in the main building,
/13/
and approximately 10,000
feet of additional warehouse/storage in an unattached building,
in addition to approximately 3.2 acres of land. Additionally,
there are currently no proposed programs for the renovation,
improvement or development of the property currently being
utilized. We have also entered into another capital lease
agreement with Spring Lake Community. The purpose of this lease
is to acquire plant equipment at a total of $423,594. This
lease expires on March 2002. The monthly payment is
approximately $13,258 per month. Furthermore, we have acquired
office equipment at a cost of $70,811, and additional plant
equipment at a cost of $193,152. In addition, we have an
automobile valued at $22,000, and software valued at $10,380.
B. Investment Policies
Management does not currently have policies regarding the
acquisition or sale of assets primarily for possible capital
gain or primarily for income. We do not presently hold any
investments or interests in real estate, investments in real
estate mortgages or securities of or interests in people'
primarily engaged in real estate activities.
Item 4. Security Ownership of Management
A. Security Ownership of Management
The following table sets forth as of December 31, 1999 certain
information regarding the beneficial ownership of our common
stock by (a) each person who is known us to be the beneficial
owner of more than five percent (5%) of the common stock, (b)
each of our director and executive officers and (c) all of our
directors and executive officers as a group. Except as otherwise
indicated, the persons or entities listed below have sole voting
and investment power with respect to all shares of common stock
beneficially owned by them, except to the extent such power may
be shared with a spouse. No change in control is currently
being contemplated.
Shareholder Corporate Shares Consideration Percentage
Position Benefic- of
ially Owned Ownership
------------ ------------ ------------- --------------- -----------
Clayton Chief 1,600,000 500,000 @ 22.46%
Timothy Executive $0.001/share
Officer
3,000 @
$1.000/share
990,000 @
$0.001/share
L. Kent President 625,000 625,000 @ 8.77%
Harmon $0.001/share
Leonard Howe Technical 625,000 625,000 @ 8.77%
Director $0.001/share
CHT Holding N/A 2,505,000 2,505,000 @ 35.17%
Trust* $0.001/share
Lloyd McEwan Secretary/ 1,600,000 200,000 @ 22.46%
Treasurer $1.000/share
125,000 @
$0.800/share
250,000 @
$0.001/share
1,025,000 @
$0.001/share
Shareholder Street Address City State Zip
Code
------------ -------------- ------ ----- ------
Clayton 1660 West 2470 Price Utah 84501
Timothy North
L. Kent 631 South 1500 Provo Utah 84606
Harmon East
Leonard Howe 10032 South Payson Utah 84651
6000 West
CHT Holding 3037 Somoa Costa Califor- 92626
Trust* Place Mesa nia
Lloyd McEwan 684 North Alpine Utah 84004
Summit Way
*Please refer to Audited Financial
Statements
/14/
B. Persons Sharing Ownership of Control of Shares
No person other than Clayton Timothy, L. Kent Harmon, Leonard
Howe, CHT Holding Trust (consisting of Howard Hucks, Valgene
Blackburn and Wayne Hanson) and Lloyd McEwan owns or shares the
power to vote five percent (5%) or more of Terra Systems
securities.
Item 5. Directors and Executive Officers
A. Directors and Executive Officers
The following table sets forth certain information with respect
to each of our executive officers or directors.
Name Age Position Term
-------- ----- --------------- -----------
Clayton 52 Chief Executive Since October
Timothy Officer of 1996
L. Kent 45 President Since February
Harmon of 1996
Lloyd McEwan 71 Secretary/Treas Since October
urer of 1996
Leonard Howe 41 Technical Since February
Director of 1996
Robert 56 Director and Since January
Underwood Consultant of 1999
B. Work Experience
Clayton Timothy, Chief Executive Officer- Mr. Timothy, 52, is
presently serving as the Chairman of the board of directors and
as the Chief Executive Officer of Terra Systems. He has held
that position since September 1996. Prior to joining Terra
Systems, Mr. Timothy was Vice President of Industrial Management
and Engineering in Lehi, Utah. He was responsible for corporate
Marketing and coordination of all projects. From 1990 to 1994,
he was Executive Vice President and Director of COVOL
Environment Technologies of Lehi, Utah.
L. Kent Harmon, President- Mr. Harmon, 45, is presently serving
as a member of the board of directors and as the President of
Terra Systems. He has held these positions since October of
1996. Prior to his employment with Terra Systems he was
President of Metredyne Imaging Services in Buena Park,
California. Metredyne created and marketed diagnostic systems
that quantified the extent of physical impairment caused by work
related injuries.
Lloyd McEwan, Secretary and Treasurer- Mr. McEwan, 71, is
presently serving as a member of the board of directors and as
Secretary and Treasurer of Terra Systems since 1996. Prior to
his employment with Terra Systems he was the principal owner of
State, Inc., which is a construction company specializing in
metals, mining, electrical utility and petroleum refinery
industries. He has over 40 years of management experience in
this field.
Leonard Howe, Technical Director- Mr. Howe, 41, has served as
Technical Director of Terra Systems since inception. He has
been actively involved in the research and development of
Terra's technology, patent filing, and feasibility testing.
Before his employment with Terra Systems he worked in the gold
mining industry.
/15/
Robert Underwood, Consultant- Mr. Underwood, 56, has served on
the board of directors of Terra Systems since January 1999. He
also serves as a Director and Consultant to the company. Prior
to Terra Systems he worked for 27 years in the commercial
banking industry as Vice President and Manager for First
Security Bank of Utah NA. He received his BA from Brigham Young
University in Economics and Language and his MBA in Finance from
the University of Utah. In addition he was an instructor of
Economics at BYU and for the American Institute of Banking for
eleven years.
Item 6. Executive Compensation
Remuneration of Directors and Executive Officers
We do not currently have organized labor agreements or union
agreements between Terra Systems, Inc. and our employees. Every
twelve (12) months, each executive officer is expected to draw
the following annual compensation. If the payroll obligation is
not met on a timely basis, the payment(s) accrue(s) until such
time as the Company is able to meet the obligation.
Name Capacities in which Annual Compensation
Remuneration was
Recorded
-------- ------------------- ---------------------
Clayton Chief Executive $60,000 Annual Salary
Timothy Officer Beginning October,
1996
L. Kent President $60,000 Annual Salary
Harmon Beginning February,
1996
Leonard Howe Technical Director $60,000 Annual Salary
Beginning February,
1996
Lloyd McEwan Secretary and $60,000 Annual Salary
Treasurer Beginning October,
1996
Robert Director and $60,000 Annual
Underwood Consultant Consulting Fee
Beginning January,
1999
Tim Gwyther Project Manager and $60,000 Annual
Consultant Consulting Fee
Beginning January,
1999
Compensation of directors
There are no arrangements for our directors to be compensated at
this time, nor does the company have any intention to provide
compensation to its directors in the future.
Stock Option Plan
We currently do have an employee stock option plan. On January
12, 1999, Terra Systems issued stock options to the following
individuals, in the following amounts:
Individual Corporate Number of
Position Shares
---------- --------------- --------
Clayton Chief Executive 500,000
Timothy Officer
L. Kent President 500,000
Harmon
Leonard Howe Technical 500,000
Director
Lloyd McEwan Secretary and 500,000
Treasurer
Robert Director and 250,000
Underwood Consultant
The Exercise Price is $0.20 per share. The options expire on
the second anniversary of the Stock Option Agreement (all dated
January 12, 1999). In addition to the above, federal and/or
state law requires that
/16/
Terra Systems contributes to a workers
compensation fund, in addition to state and federal unemployment
insurance plans on behalf of all Terra Systems employees
(including regular, temporary, full-time, and part-time).
Item 7. Certain Relationships and Related Transactions
There were no actual or proposed transactions that occurred over
the past two years, to which any person related to the issuer
had or is to have a direct or indirect material interest as set
forth in item 404 of Regulation S-B of the Securities and
Exchange Act of 1933.
Item 8. Description of Securities
We authorized capital stock that consists of 100,000,000 shares
of common stock, par value $0.001 per share. As of June 30,
2000, we had 17,025,393 shares of common stock outstanding. The
holders of shares of our common stock are entitled to one vote
for each share on all matters that the holders of common stock
are entitled to vote. There is no cumulative voting for the
election of directors. Holders of our common stock are entitled
to share ratably in our net assets upon liquidation or
dissolution as declared by the Board of Directors out of funds
legally available therefor. Our holders of common stock have no
pre-emptive rights to purchase any shares of any class of our
stock. All outstanding shares of common stock are, and our
shares of common stock to be issued pursuant hereto will be,
upon payment therefore, fully paid and non-assessable.
/17/
Part II
Item 1. Market for Common Equity and Related Stockholder
Matters
B. Holders
As of December 31, 1999, we have approximately 233 stockholders
of record.
D. Reports to Shareholders
We will furnish our shareholders with annual reports containing
audited financial statements and such other periodic reports as
we determine to be appropriate or as may be required by law. We
are filing this Form 10-SB voluntarily with the intention of
establishing the fully reporting status of Terra Systems, Inc.
with the SEC. Upon the effectiveness of this Registration
Statement, we will be required to comply with periodic
reporting, proxy solicitation and certain other requirements by
the Securities Exchange Act of 1934. Consequently, we will
voluntarily file all necessary reports and forms as required by
existing legislation and SEC rules.
E. Transfer Agent and Registrar
The Transfer Agent for our shares of common voting stock is Pam
Gray, Atlas Stock Transfer Company, 5899 South State, Murray,
Utah, 84107, (801) 266-7151.
Item 2. Legal Proceedings
The Company has filed a complaint against a former director and
officer and other stockholders of the Company (the defendants)
for using various forms of improper conduct and
misrepresentations concerning their qualifications and
intentions to obtain a significant number of the Company's
shares. The Company is seeking a declaration by the court that
none of the defendants have any right, title to or ownership of
the Company's stock originally issued to the defendants. The
defendants claim the Company and certain of its officers have
engaged in fraudulent and conspiratorial conduct and have filed
a counterclaim seeking the following: a dismissal of the
Company's complaint, unspecified amount of damages resulting
from the Company's refusal on March 1, 1997 to tender shares to
the defendants that the defendants were entitled to sell, the
removal of certain restrictions on the Company's stock, $60,000
for breach of an employment contract and interest, compensatory
damages and punitive damages in unspecified amounts, and
together with attorney fees.
On October 9, 1999, the Court entered a partial summary judgment
against one of the defendants in favor of the Company on all of
its claims. The Court found that the damages sought against the
defendant and an award of reasonable attorney's fees, and
expenses incurred in connection with the case shall be
determined at a future date. The Court also found that the
Company is entitled to a partial summary judgment against the
defendant for securities fraud, including recission and
restitution of the issuance of one million Terra Systems shares
and additional damages to be determined in further proceedings
before the Court. The amount of damages to be awarded has not
yet been determined.
The Company denies all material allegations against the Company
and intends to fully defend the counterclaim of the defendants
and prosecute the Company's claims and actions against the
defendants. This litigation is still in the discovery phase and
the ultimate outcome cannot presently be determined.
Threatened Litigation
The Company and certain Officers and Directors of the Company
received notice from a litigant's legal counsel of threatened
litigation. The litigant contends that certain current Officers
and Directors held and sold a number of Xullux shares that were
free trading prior to the merger of Xullux and Terra Systems.
The alleged sale may have impacted the value of the litigant's
Terra Systems restricted publicly issued
/18/
shares in the company.
The litigant claims that the defendant's ownership and alleged
sale of Xullux stock was not disclosed to him at or during the
time he contributed certain assets and other equipment to Terra
Systems in exchange for the Terra Systems restricted stock. The
litigant seeks to return 125,000 shares to Terra Systems for
value and seeks other monetary and punitive damages in an amount
of not less than $1,500,000 including additional costs and
attorney's fees. The Company denies all of the material
allegations and claims of the litigant. Currently, the ultimate
outcome of this situation cannot presently be determined.
Based on the uncertain outcome of these contingencies, no
provision for any loss or gain that may result upon adjudication
has been made in the accompanying financial statements, and the
possible effect it will have on future financial statements is
unknown.
Item 3. Changes in and Disagreements with Accountants
We have had no disagreements with our independent accountants.
Item 4. Recent Sale of Unregistered Securities
In 1996, five founding shareholders purchased 8,225,000 shares
of our authorized common stock at par value of $.001 per share.
This original stock offering, in addition to all subsequent
offerings, was made in accordance with Section 4(2) of the
Securities Act of 1933, as amended. No underwriting discounts
or commissions were paid in any offering and all purchases were
made by persons unaffiliated with Terra Systems, Inc. unless
otherwise noted:
1. In 1997, we exercised the right to repurchase 36,775,000
shares of common stock from two shareholders at $0.001 per
share. Issuance of 10% promissory notes paid for the stock
redemption.
2. In 1998, we issued 33,000 shares of common stock at a price
of $.303 per share for proceeds of $10,000.00; 27,900 shares at
a price of $.3185 per share for proceeds of $8,887.38; 90,000
shares at a price of $.33 per share for proceeds of $29,700.00;
89,739 shares at a price of $.36 per share for proceeds of
$32,632.56; 160,000 shares at a price of $.50 per share for
proceeds of $80,000.00; 125,000 shares at a price of $.60 per
share for proceeds of $75,000.00; 121,609 shares at a price of
$.73 per share for proceeds of $ 88,883.82; 43,479 shares at a
price of $.75 per share for proceeds of $32,609.31; and 25,000
shares at a price of $.80 per share for proceeds of $20,000.00.
3. In 1999, we issued 220,000 shares of common stock at a
price of $.25 per share for proceeds of $55,460.32; 125,000
shares at a price of $.40 per share for proceeds of $50,000.00;
and 360,000 shares at a price of $.50 per share for proceeds of
$180,000.00.
4. In 1999, we issued 200,000 shares for the retirement of
accounts payable to a related party, valued at $50,000 or $0.25
per share.
5. On January 12, 1999, the Company issued stock options to
five individual shareholders totaling 2,250,000 shares of common
stock at a price of $0.20 per share.
6. As of year-end December 31, 1999, we issued 166,286 shares
of common stock at a price of $.50; 50,000 shares at a price of
$.60; and 43,000 shares at a price of $.70 for consulting
services. During the six months ended June 30, 2000, we issued
62,920 shares at a price of $.48 and 60,000 shares at a price of
$.50 for consulting services.
7.During the six months ended June 30, 2000, we issued
191,340 shares of common stock at a price of $.25 per share
for proceeds of $47,835 and 33,333 shares at a price of
$.30 per share for
/19/
proceeds of $10,000.00. Within the same
period we issued 500,000 shares of common stock upon
conversion of notes payable to stockholders in the amount
of $100,000 or $0.20 per share.
Item 5. Indemnification of Directors and Officers
The bylaws of the company provide for indemnification of
employees and agents in certain cases. Insofar as
indemnification for liabilities arises under the Securities Act
of 1933 may be permitted to directors, officers or persons
controlling the company pursuant to the foregoing provisions,
the company has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the act and is therefore
unenforceable.
/20/
Part F/S
Item 1. Financial Statements
The following documents are filed as part of this
report:
a) Terra Systems, Inc. Page
Report of Independent Certified Public F-1
Accountants
Consolidated Balance Sheets - June 30, 2000 F-2
(unaudited),
December 31, 1999 and 1998
Consolidated Statement of Operations for the F-3
Six Months
Ended June 30, 2000 and 1999, and for the
Years Ended
December 31, 1999 and 1998 and for the
Cumulative Period
February 17, 1996 (Date of Inception) through
June 30, 2000 (unaudited)
Consolidated Statement of Stockholder's Equity F-4
(Deficit)
for the period February 17, 1996 (Date of
Inception)
through June 30, 2000 (unaudited)
Consolidated Statement of Cash Flows for the F-6
Six Months
Ended June 30, 2000 and 1999, and for the
Years Ended
December 31, 1999 and 1998 and for the
Cumulative Period
February 17, 1996 (Date of Inception) through
June 30, 2000 (unaudited)
Notes to Financial Statements F-7
/21/
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Fax (801) 532-7944
Firms
Member of SECPS 345 East Broadway, Suite
200
Member of Summit International Salt Lake City, Utah 84111-
Associates 2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
To the Board of Directors and Shareholders
Terra Systems, Inc. and Subsidiary
We have audited the accompanying consolidated
balance sheets of Terra Systems, Inc. and
subsidiary (collectively a development stage
company) as of December 31, 1999 and 1998 and
the related consolidated statements of
operations, stockholders' deficit, and cash
flows for the years ended December 31, 1999 and
1998, and for the cumulative period from
February 17, 1996 (date of inception) through
December 31, 1999. These financial statements
are the responsibility of the Company's
management. Our responsibility is to express an
opinion on these financial statements based on
our audits.
We conducted our audits in accordance with
auditing standards generally accepted in the
United States. Those standards require that we
plan and perform the audits 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
Terra Systems, Inc. and subsidiary as of
December 31, 1999 and 1998, and the results of
their operations and their cash flows for the
years ended December 31, 1999 and 1998, and for
the cumulative period from February 17, 1996
(date of inception) through December 31, 1999,
in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been
prepared assuming that the Company will continue
as a going concern. The Company is a development
stage enterprise engaged in the development and
commercialization of a pneumatic conveyance
system to handle materials in a bulk state. As
discussed in Note 1 to the consolidated
financial statements, the Company's operating
losses since inception and the deficit
accumulated during the development stage raise
substantial doubt about its ability to continue
as a going concern. Management's plans
concerning these matters are also described in
Note 1. The financial statements do not include
any adjustments that might result from the
outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
July 31, 2000
/22/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
June December 31,
30,
2000 1999 1998
--------- ------ ------
(Unaudited)
ASSETS
Current Assets
Cash $ 5,239 $ 1,429 $ 4,499
Receivables 6,225 5,075 22,311
Prepaid expenses - - 1,259
Total Current Assets 11,464 6,504 28,069
-------- ------ -------
Property and Equipment
Leasehold improvement 331,642 331,642 331,642
Furniture and equipment 687,557 687,424 687,318
Trucks and automobiles 22,000 22,000 22,000
Software 10,380 10,380 10,380
Less: Accumulated (472,463) (410,000) (284,177)
depreciation
Net Property and 579,116 641,446 767,163
Equipment
Total Assets $ 590,580 $ 647,950 $ 795,232
======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 331,062 $ 316,183 $ 236,298
Accounts payable to 255,632 200,175 80,474
related party
Accrued liabilities 631,486 542,224 401,082
Accrued interest payable 231,393 192,946 106,818
Notes payable to - - 10,367
stockholders - current
portion
Capital lease obligation 219,126 178,210 108,014
- current portion
Total Current 1,668,699 1,429,738 943,053
Liabilities --------- --------- -------
Long-Term Liabilities
Notes payable to 656,517 756,517 751,769
stockholders - net of
current portion
Capital lease obligation 46,342 95,580 188,801
- net of current portion
Total Long-Term 702,859 852,097 940,570
Liabilities ------- ------- -------
Stockholders' Deficit
Common stock, $0.001 par
value; 100,000,000
shares authorized;
shares outstanding:
June 30, 2000 -
17,025,393 shares,
December 31, 1999 -
15,827,800 shares,
December 31, 1998 - 17,025 15,828 14,744
14,743,414 shares
Additional paid-in 4,409,536 3,589,098 3,025,487
capital
Deficit accumulated (6,194,257) (5,210,718) (3,980,855)
during the development
stage
Deferred compensation (13,282) (28,093) (147,767)
Total Stockholders' (1,780,978) (1,633,885) (1,088,391)
Deficit
Total Liabilities and
Stockholders' Deficit $590,580 $647,950 $795,232
/24/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATION
Cumulat Cumulat
ive For ive For
The The
Period Period
For the Six Months For the Year February February
Ended June Ended December 17, 17,
30, 31, 1996 1996
(incept (incept
ion) ion)
Through Through
June December
30, 22,
2000 1999 1999 1998 2000 1999
------ ----- ------- ------ ------ ------
(Unaudited) (Unaudited)
Revenues $ 6,150 $ 55,920 $ 159,705 $166,767 $335,822 329,672
Cost of 2,497 31,582 144,950 160,111 307,558 305,061
Revenues
Gross 3,653 24,338 14,755 6,656 28,264 24,611
Profit
Expenses
Research 73,649 45,122 122,518 240,296 1,265,961 1,192,312
and
Development
General and 805,018 409,171 895,651 826,137 4,030,607 3,225,589
administrative
Depreciation and
Amortization 62,463 63,102 125,823 129,488 478,444 415,981
Total 941,130 517,395 1,143,992 1,195,921 5,775,012 4,833,882
Expenses ------- -------- --------- --------- --------- ---------
Loss from (937,477) (493,057) (1,129,237) (1,189,265) (5,746,748) (4,809,271)
Operations -------- -------- --------- ---------- --------- -----------
Nonoperating
Income/
(Expenses)
Interest (46,073) (46,283) (100,643) (110,342) (343,554) (297,481)
expense
Interest 11 - 17 150 1,716 1,705
income
Loss on - - - - (99,000) (99,000)
sale of
securities
Loss on - - - (4,750) (6,671) (6,671)
sale of ------ ----- ---- ------- ------- -------
assets
Net
Nonoperating
Income/
(Expenses) (46,062) (46,283) (100,626) (114,942) (447,509) (401,447)
------- ------- -------- -------- -------- --------
Net Loss $(983,539)$(539,340)$(1,229,863)$(1,304,207)$(6,194,257)$(5,210,718)
======= ======= ========= ========= ========= =========
Basic and
Diluted
Loss
Per Share $(0.06) $(0.04) $(0.08) $(0.09) $(0.45) $(0.38)
======= ======= ======= ======= ======= ========
Weighted
Average
Shares Out-
standing 16,357,291 15,057,282 15,342,540 14,271,091 13,851,918 13,579,216
========== ========== ========== ========== ========== ==========
/25/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Common Stock
Deficit
Additi Common Accumu Deferr Total
Number onal Stock lated ed Stockh
of Amount Paid- Subscr During Compen olders'
Shares In iptions the sation Deficit
Capital Develo
pment
Stage
------- ------ ------ ------ ------- ----- ------
Balance - - $ - $ - $ - $ - $ - $ -
February 17, 1996
(Inception)
March 1996 - 48,000,000 48,000 (47,520) - - - 480
$0.00 per share
Shares issued to
acquire
Xullux-May 1996- 2,955,000 2,955 (2,955) - - - -
$0.00 per share
Common stock
subscriptions -
July
1996 through - - - 196,000 - - 196,000
September 1996
Stock issued for
cash:
September 1996- 706,500 707 667,793 10,000 - - 678,500
$0.80 to $1.00
per share
October 1996- 350,000 350 279,650 - - - 280,000
$0.80 per share
November 1996 - 12,000 12 20,988 - - - 21,000
$1.75 per share
December 1996 - 57,500 58 103,692 - - - 103,750
$1.75 to $2.00
per share
January 1997 - 126,000 126 145,374 - - - 145,500
$1.00 to $1.75
per share
February 1997- 100,000 100 99,900 - - - 100,000
$1.00 per share
March 1997 - 25,413 25 44,448 - - - 44,473
$1.75 per share
April 1997 - 7,500 8 14,992 - - - 15,000
$2.00 per share
May 1997 - $1.00 100,000 100 99,900 - - - 100,000
per share
June 1997 - $1.00 90,000 90 89,910 - - - 90,000
per share
August 1997 - 70,000 70 44,930 - - - 45,000
$0.50 to $1.00
per share
October 1997 - 25,000 25 24,975 - - - 25,000
$1.00 per share
November 1997 - 172,399 173 128,243 - - - 128,416
$0.72 to $0.80
per share
December 1997 - 84,375 84 67,416 - - - 67,500
$0.80 per share
Stock issued in
satisfaction of
subscription
agreements:
October B 246,000 245 205,755 (206,000) - - -
December - $0.80
to $1.00 per
share
December - $0.76 231,000 231 174,569 (174,800) - - -
per share
Stock-based
compensation for
current and
future services -
May 1997 - $1.00 75,000 75 74,850 - - (74,925) -
per share
Stock issued for
marketable
securities -
September 1996 - 19,000 19 15,181 174,800 - - 190,000
$0.80 per share
Stock
redemptions:
Stock redemption
from original
investors -
$0.001 per share (36,775,000) (36,775) - - - - (36,775)
Redemption of
stock (no
consideration)
- September 1996 (3,000,000) (3,000) 3,000 - - - -
Amortization of - - - - - 44,955 44,955
deferred
compensation
Net loss from
February 17, 1996
through
December 31, 1997 - - - - (2,676,648) - (2,676,648)
Balance - 13,677,687 13,678 2,255,091 - (2,676,648)(29,970)(437,849)
December 31,1997 ---------- ------ --------- --- ---------- ------ --------
Stock issued for
cash:
April - $0.50 to 239,502 240 146,671 - - - 146,911
$0.73 per share
May - $0.75 to 38,333 38 29,962 - - - 30,000
$0.80 per share
June - $0.75 per 30,146 30 22,579 - - - 22,609
share
July - $0.36 to 236,846 237 119,368 - - - 119,605
$0.73 per share
August - $0.50 20,000 20 9,980 - - - 10,000
per share
November - $0.30 78,000 78 24,772 - - - 24,850
to $0.33 per
share
December - $0.32 72,900 73 23,664 - - - 23,737
to $0.33 per
share
Stock-based
compensation for
current and
future services 350,000 350 393,400 - - (393,750) -
March - $1.13
Amortization of - - - - - 275,953 275,953
deferred
compensation
Net loss for the - - - - (1,304,207) - (1,304,207)
period
Balance December 14,743,414 14,744 3,025,487 - (3,980,855)(147,767)(1,088,391)
31, 1998 ========== ====== ========= == ========= ======= =========
/27/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Common Stock
Deficit
Additi Common Accumu Deferr Total
Number onal Stock lated ed Stockh
of Amount Paid- Subscr During Compen olders'
Shares In iptions the sation Deficit
Capital Develo
pment
Stage
------- ------ ------ ------ ------- ----- ------
Balance 14,743,414 14,744 3,025,487 - (3,980,855)(147,767)(1,088,391)
December ---------- ------ --------- -- --------- ------- ---------
31, 1998
Stock
issued for
cash:
January - 100,000 100 49,900 - - - 50,000
$0.50 per
share
April - 20,000 20 4,980 - - - 5,000
$0.25 per
share
May - 20,000 20 9,980 - - - 10,000
$0.50 per
share
June - 100,000 100 49,900 - - - 50,000
$0.50 per
share
July - 200,000 200 50,260 - - - 50,460
$0.25 per
share
September 145,000 145 59,855 - - - 60,000
- $0.40
and $0.50
per share
October - 60,000 60 29,940 - - - 30,000
$0.50 per
share
December - 60,000 60 29,940 - - - 30,000
$0.50 per
share
Stock
issued for
retirement
of debt
January - 200,000 200 49,800 - - - 50,000
$0.25 per
share
Stock
issued for
services
March - 106,286 106 53,083 - - - 53,189
$0.50 per
share
June - 60,000 60 29,940 - - - 30,000
$0.50 per
share
September 43,000 43 29,957 - - - 30,000
- $0.70
per share
December - 50,000 50 29,950 - - - 30,000
$0.60 per
share
Outstanding
stock
from
acquisition
of
Xullux not 100 - - - - - -
previously
recorded
Deferred
compensati
on
relating
to grant
of stock - - 179,126 - - - 179,126
options
Stock-
based
compensati
on for
current
and
future
services
September 20,000 20 19,300 - - (19,320) -
- $0.97
per share-
Stock
redemption
from
former
officer
December - (100,000) (100) (112,300) - - 112,400 -
$1.13 per
share
Amortizati
on of
deferred
compensation - - - - - 26,594 26,594
Net loss - - - - (1,229,863) - (1,229,863)
for the
period
Balance - 15,827,800 15,828 3,589,098 - (5,210,718)(28,093)(1,633,885)
December ---------- ------ --------- -- --------- ------ ---------
31, 1999
Stock
redemption
from
officer
(unaudited
):
February - (50,000) (50) (56,150) - - 56,200 -
$0.89 per
share
Stock
issued for
cash
(unaudited):
January - 12,000 12 2,988 - - - 3,000
$0.25 per
share
February - 40,000 40 9,960 - - - 10,000
$0.25 per
share
March - 139,340 139 34,696 - - - 34,835
$0.25 per
share
April - 33,333 33 9,967 - - - 10,000
$0.30 per
share
Stock
issued for
services
(unaudited
):
March - 60,000 60 29,940 - - - 30,000
$0.50 per
share
May - 62,920 63 29,937 - - - 30,000
$0.48 per
share
Conversion
of debt
through
the
exercise
of stock 500,000 500 99,500 - - - 100,000
options
(unaudited)
Exercise 400,000 400 99,600 - - - 100,000
of stock
rights
(unaudited)
Consulting
expense
relating
to grant
of
stock - - 560,000 - - - 560,000
options
(unaudited)
Amortizati
on of
deferred
compensati
on
(unaudited) - - - - - (41,389) (41,389)
Net loss - - - - (983,539) - (983,539)
for the
period
(unaudited)
Balance- 17,025,393 $17,025 $4,409,536 $ -$(6,194,257)$(13,282)$(1,780,978)
June 30, ========== ====== ========= == ========= ======= ===========
2000
(Unaudited)
/29/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative Cumulative
For For
the the
Period Period
February February
17, 1996 17, 1996
For the Six (inception) (Inception)
Months Ended For the Year Ended Through Through
June 30, December 31,
June December
30, 31,
2000 1999 1999 1998 2000 1999
------ ------- ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows From
Operating
Activities
Net loss $(983,539) $(539,340) $(1,229,863) $(1,304,207) $(6,194,257) $(5,210,718)
Adjustments to
reconcile net
loss to
net cash used by
operating
activities:
Depreciation and 62,463 63,102 125,823 129,488 478,444 415,981
amortization
Loss on sale of
investment
Securities - - - - 99,000 99,000
Loss on sale of - - - 4,750 6,671 6,671
assets
Compensation
paid with common
stock net of 18,611 53,301 205,720 275,953 545,239 526,628
forfeitures
Consulting
expense relating
to
grant of stock 560,000 - - - 560,000 -
options
Changes in
current assets
and liabilities:
Receivables (1,150) (10,570) 17,236 (21,111) (6,225) (5,075)
Prepaid expenses - (88) 1,259 3,552 - -
Accounts payable 14,879 194,722 336,517 161,609 612,862 534,440
Accounts payable
- related
Party 55,458 (631) 55,639 (9,914) 166,403 174,387
Accrued 89,261 114,471 141,142 188,398 631,485 542,325
liabilities
Accrued interest 38,447 40,443 86,128 70,266 231,393 192,946
payable
Net Cash Used by
Operating
Activities (145,570) (84,590) (260,399) (501,216) (2,868,985) (2,723,415)
Cash Flows From
Investing
Activities
Purchase of (133) (106) (106) (31,022) (662,597) (662,464)
equipment
Organization - - - - (4,755) (4,755)
costs paid
Proceeds from - - - 20,211 117,715 117,715
sale of assets
Net Cash Used by
Investing
Activities (133) (106) (106) (10,811) (549,637) (549,504)
Cash Flows From
Financing
Activities
Proceeds from
borrowings -
Stockholders - - - 208,352 870,111 870,111
Payments on
borrowings -
Stockholders - (5,000) (5,000) (20,000) (149,750) (149,750)
/30/
Proceeds from
stock issuance
and
Subscriptions 157,835 115,000 285,460 377,712 2,861,626 2,703,791
Payments on (8,322) (23,025) (23,025) (64,796) (158,126) (149,804)
capital lease
obligations
Net Cash
Provided by
Financing
Activities 149,513 86,975 257,435 501,268 3,423,861 3,274,348
Net Increase 3,810 2,279 (3,070) (10,759) 5,239 1,429
(Decrease) in
Cash
Cash at 1,429 4,499 4,499 15,258 - -
Beginning of
Period
Cash at End of $5,239 $6,778 $1,429 $ 4,499 $ 5,239 $ 1,429
Period ====== ===== ====== ======== ======= =======
</TABLE>
/31/
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
PRINCIPLES
Organization- Terra Systems, Inc. was incorporated on February
17, 1996 pursuant to the laws of the State of Utah. It is a
development stage company whose primary business purpose is the
development and commercialization of a pneumatic conveyance
system to handle materials in a bulk state in industrial
research and processing.
Xullux, Inc. was incorporated under the laws of the state of
Utah on November 4, 1983 under the name of Bunker Research, Inc.
It changed its name to Diamond Resources, Inc. on May 15, 1984
and changed its name again to Xullux, Inc. on August 6, 1988. On
May 1, 1996, Xullux, Inc. entered into a merger agreement with
Terra Systems, Inc. whereby Terra Systems, Inc. was merged into
a newly-formed subsidiary of Xullux, Inc. called Terra Merger
Subsidiary, Inc. and the Terra Systems, Inc. stockholders were
issued 48,000,000 shares of Xullux, Inc. common stock.
For financial accounting purposes, the merger was accounted for
by the purchase method of accounting with Terra Systems, Inc.
considered the acquiring corporation. The historical financial
statements of Terra Systems, Inc. were restated to reflect the
shares issued to the Terra Systems, Inc. stockholders as being
outstanding for all periods presented, similar to a stock split.
Xullux, Inc. had no assets at the date of the merger and was
considered a shell corporation; accordingly, the 2,955,100
shares held by the Xullux, Inc. stockholders were deemed to have
been issued for no consideration. The operations of Xullux, Inc.
have been included in the statements of operations from the date
of the merger.
Following the reorganization, Xullux, Inc. changed its name to
Terra Systems, Inc.
Principles of Consolidation- The consolidated financial
statements include the accounts of Terra Systems, Inc. and its
wholly owned subsidiary Terra Merger Subsidiary, Inc. All
intercompany transactions have been eliminated. The consolidated
entities are collectively referred to herein as the Company or
Terra Systems.
Use of Estimates- The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Basis of Presentation- The accompanying consolidated financial
statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the
consolidated financial statements for the six month period ended
June 30, 2000, and the years ended December 31, 1999 and 1998,
the Company has received nominal revenue and incurred net losses
of $983,539, $1,229,863 and $1,304,207, respectively. At
December 31, 1999, the Company had a working capital deficit of
$1,423,234. These factors, among others, raise substantial doubt
about the Company's ability to continue as a going concern for a
reasonable period of time. The consolidated financial statements
do not include any adjustments relating to the recoverability
and classification of recorded assets or the amount and
classification of liabilities which might be necessary should
the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flows to meet its
obligations on
/32/
a timely basis, to obtain additional financing as
may be required, and ultimately to attain successful operations.
The Company's management is in the process of negotiating various
agreements to perform research on and the development of
pneumatic conveyance systems to handle materials in a bulk state
in industrial research and processing. Management also intends
to use capital and debt financing as needed to supplement the
cash flows that potentially could be generated through the
successful negotiation of agreements. As discussed in Note 3,
the Company entered into an agreement with a corporation for
consultation and advisory services related to business management
and marketing. As a result of this agreement, the Company
received $100,000 for the issuance of common stock and options.
This agreement allows for additional cash proceeds through the
issuance of additional common stock and options. Aside from this
agreement, the Company obtained additional cash proceeds of
$57,835 through the issuance of common stock.
Property and Equipment- Property and equipment are recorded at
cost and are depreciated using the straight-line method based on
the expected useful lives of the assets which range from five to
fifteen years. Depreciation expense for the six month period
ended June 30, 2000, and the years ended December 31, 1999 and
1998 was $62,463, $125,823 and $125,259, respectively.
Long-Lived Assets- The realizability of long-lived assets is
evaluated periodically when events or circumstances indicate a
possible inability to recover the carrying amounts. An
impairment loss is recognized for the excess of the carrying
amount over the fair value of the assets. Fair value is
determined based on estimated discounted net future cash flows
or other valuation techniques available in the circumstances.
This analyses involves significant management judgement to
evaluate the capacity of an asset to perform within projections.
Based upon these analyses, no impairment losses were recognized
in the accompanying financial statements.
Financial Instruments- The amounts reported as cash,
receivables, accounts payable, accrued liabilities, notes
payable to stockholders and obligations under capital leases are
considered to be reasonable approximations of their fair values.
The fair value estimates presented herein were based on market
information available to management as of June 30, 2000. The use
of different market assumptions and/or estimation methodologies
could have a material effect on the estimated fair value
amounts. The reported fair values do not take into consideration
potential expenses that would be incurred in an actual
settlement.
Revenue Recognition- The Company's revenue source has come from
providing research and development on behalf of another
corporation. Revenue from research and development contracts is
recognized on a cost reimbursement basis. As tests are
performed and costs incurred, the Company recognizes the
proceeds as revenue at the time of billing. All contracts are
for specific research and development projects and are short
term in nature.
Basic and Diluted Loss Per Share- The Company computes net loss
per share in accordance with SFAS No. 128 Earnings Per Share
(SFAS 128), and SEC Staff Accounting Bulletin No. 98 (SAB 98).
Under the provisions of SFAS 128 and SAB 98, basic loss per
common share is computed by dividing net loss by the weighted-
average number of common shares outstanding during the period.
Diluted loss per share is calculated to give effect to
potentially issuable common shares except during loss periods
when those potentially issuable common shares would decrease the
loss per share. At June 30, 2000 and December 31, 1999,
respectively, there were 2,400,000 and 2,500,000 potentially
issuable common shares which were excluded from the calculation
of diluted loss per common share as their effect would have been
anti-dilutive,
/33/
thereby decreasing the net loss per common share.
There were no potentially issuable shares at December 31, 1998.
NOTE 2 - RELATED PARTY TRANSACTIONS
As discussed in Notes 9 and 10, the Company entered into capital
and operating lease obligations with a company under common
ownership. The Company has violated its lease agreements by
being delinquent in its payments regarding these leases. At June
30, 2000 and December 31, 1999 and 1998, the Company owed this
related party $197,930, $161,456 and $31,560, respectively, in
delinquent rent, executory fees, late fees, sales tax and cash
advances. Certain Officers of the Company have from time to time
advanced the Company funds used for operating expenses. At June
30, 2000 and December 31, 1999 and 1998, the Company owed these
Officers $57,702, $38,719 and $48,913, respectively. Total
amounts due to Related Parties as shown on the balance sheet at
June 30, 2000, December 31, 1999 and 1998 are: $255,632,
$200,175 and $80,473. All amounts are due on demand with no
interest. See Note 9 for principal amounts due on capital leases
to related party.
NOTE 3 - STOCK RIGHTS
On March 29, 2000, the Company entered into an agreement with a
corporation for consultation and advisory services related to
business management and marketing. In consideration for the
services to be provided, the Company agreed to grant to the
corporation the right to purchase 50,000 equity units at a
purchase price of $5.00 per unit. Each unit consists of 20 freely
tradable common shares and the option to purchase five shares at
$0.50, five shares at $0.75, five shares at $1.00, and five
shares at $1.25 all freely tradeable shares. The option to
purchase the 1,000,000 shares may not be exercised after March
22, 2001, unless the corporation arranges for an acceptable
second offering agreed to by the Company, in which the option
shall automatically extend for an additional two years and expire
on March 22, 2003.
The agreement for services shall be in effect from March 22, 2000
and shall continue in effect for a period of six months. The
agreement may be renewed for a three-month period thereafter,
upon mutual agreement of the parties.
The Company measured compensation under this stock-based
agreement using the fair value at the grant date consistent with
SFAS No. 123, Accounting for Stock-Based Compensation. Under
this method, the Company recognized consulting expense of
$560,000. The fair value of $11.20 for each equity unit granted
was estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions: dividend
yield of 0.0%; expected volatility of 145.00% risk-free rate of
6.13% and expected life of options of 1.0 year.
Upon grant of the rights, the corporation exercised its right
and purchased 20,000 equity units. The Company received $100,000
for the delivery of 400,000 unrestricted shares of common stock
and issued options to purchase an additional 100,000 shares at
$0.50, 100,000 shares at $0.75, 100,000 shares at $1.00 and
100,000 shares at $1.25.
In connection with the consulting agreement, the corporation will
recommend the Company to potential investors. A finder's fee will
be paid to the corporation as a percentage of funds obtained. A
finder's fee of $150,000 would be paid on $5,000,000 obtained. An
additional 1% would be owed on any additional funds obtained over
the $5,000,000. The corporation may elect to obtain all or part
of its fee in shares of the Company's stock. The stock will be
valued at 80% of its most recent bid price for purposes of
conversion to cash value.
NOTE 4 - STOCK OPTIONS
/34/
The Company accounts for its stock options issued to directors,
officers and employees under Accounting Principles Board Opinion
No. 25 and related interpretations (APB 25). Under APB 25,
compensation expense is recognized if an option's exercise price
on the measurement date is below the fair value of the Company's
common stock. The Company accounts for options and warrants
issued to non-employees in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123) which
requires these options and warrants to be accounted for at their
fair value.
Employee Grants- On January 12, 1999, the company granted
2,500,000 stock options to employees and directors of the
Company. The options are exercisable at $0.20 per share,
exercisable immediately and expire two years from the date of
grant. The fair value was estimated on the date of grant using
the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0.0%; expected
volatility of 136%; risk-free rate of 4.61% and expected life of
options of 2.0 years.
On March 2, 1999, a Director of the Company resigned and
forfeited 250,000 options.
Non Employee Grants- As discussed in Note 3, the Company entered
into an agreement with a corporation for consultation and
advisory services related to business management and marketing.
In consideration for the services to be provided, the Company
agreed to grant to the corporation the right to purchase 50,000
equity units. Upon grant of the rights, the corporation
exercised its right and purchased 20,000 equity units.
Accordingly, the Company issued options to purchase 100,000
shares of common stock at $0.50, 100,000 shares at $0.75,
100,000 shares at $1.00 and 100,000 shares at $1.25.
Also discussed in note 3, the Company recognized consulting
expense of $560,000 in connection with the grant of the stock
rights. Accordingly, any consulting expense associated with the
grant of the 400,000 stock options mentioned above was previously
recognized.
Outstanding Stock Options- A summary of stock option activity
for the six months ending June 30, 2000 and the year ending
December 31, 1999 is as follows:
Weighted
Average
Options Price Exercise
Range Price
---------- ---------- -----------
Balance, December 31, - - -
1998
Granted 2,500,000 0.20 0.20
Forfeited (250,000) 0.20 0.20
Balance, December 31, 2,250,000 0.20 0.20
1999
Granted 400,000 0.50 - 1.25 0.88
Exercised (500,000) 0.20 0.20
Balance, June 30, 2000 2,150,000 0.20 - 1.25 0.31
A summary of stock options outstanding and exercisable as of
June 30, 2000, and December 31, 1999 follows:
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June 30, 2000
Options Outstanding Options Exercisable
---------------------- ----------------------
Range of Number Weighted- Number
Exercise Outstandi Average Weighted- Exercisab Weighted-
Prices ng Remaining Average le Average
At Contractu Exercise At Exercise
06/30/00 al Life Price 06/30/00 Price
------- ----------- --------- --------- --------- ---------
$0.20 1,750,000 0.54 $0.20 1,750,000 $0.20
years
0.50-1.25 400,000 0.73 0.88 400,000 0.88
-------- years --------
2,150,000 2,150,000
========= =========
December 31, 1999
Options Outstanding Options Exercisable
--------------------- ----------------------
Range of Number Weighted- Number
Exercise Outstandi Average Weighted- Exercisab Weighted-
Prices ng Remaining Average le Average
At Contractu Exercise At Exercise
12/31/99 al Life Price 12/31/99 Price
-------- --------- --------- -------- ---------- --------
$0.20 2,250,000 1 year $0.20 2,250,000 $0.20
Stock-based compensation charged to operations was $179,126 for
the year ended December 31, 1999 from options granted to
employees and directors. Had compensation cost for the Company's
options granted to employees been determined based on the fair
value at the grant dates consistent with the alternative method
set forth under Statement of Financial Accounting Standards No.
123, net loss and loss per share would have increased to the pro
forma amounts indicated below:
For the Six For the Year
Months Ended Ended
June 30, December 31,
2000 1999
----------- ---------------
Net loss:
As reported $(983,539) $(1,229,863)
Pro forma (983,539) (1,545,001)
Basic and diluted loss per
share:
As reported (0.06) (0.08)
Pro forma (0.06) (0.10)
NOTE 5 - STOCKHOLDERS' EQUITY
Stock-Based Compensation for Current and Future Services- During
the years ended December 31, 1999 and 1998 and the period from
February 17, 1996 (Inception) through December 31, 1997, the
Company issued 20,000, 350,000 and 75,000 shares of common stock
at $0.001 per share, respectively, to various employees for
current and future services. The shares had a market value of
$19,320, $393,750 and $74,925 or $0.97, $1.13 and $1.00 per
share on the day of issuance, respectively. Under the terms of
the stock issuance, the Company can reacquire all the stock at
$0.001 per share within one year from the date of issuance and
one half of the shares within two years from the date of
issuance. These shares are considered non-vested and have been
accounted for in accordance with APB 25 Accounting for Stock
Issued to
/36/
Employees, whereby the Company is recognizing
compensation expense over the vesting period of the stock for
the difference between the fair value of the stock on the day of
issuance and the consideration paid by the employees. In the
event employment should be terminated, all non-vested shares of
stock shall be forfeited by the employee.
During the six months ended June 30, 2000, an officer of the
Company, who had been issued 150,000 shares of the above
mentioned stock, forfeited 50,000 shares of non-vested common
stock valued at $56,200. During the year ended December 31,
1999, an officer of the Company, who had been issued 200,000
shares of the above mentioned stock, left the Company.
Accordingly, the officer forfeited 100,000 shares of non-vested
common stock which was valued at $112,400.
The Company recognizes compensation expense for the above shares
over the period the shares vest. During the six months ended
June 30, 2000, the years ended December 31, 1999 and 1998 and
the period from February 17, 1996 (Inception) through December
31, 1997, the Company recognized compensation expense of
$41,389, $205,720, $275,953 and $44,955, respectively. Deferred
compensation was $13,282, $28,093 and $147,767 at June 30, 2000
and December 31, 1999 and 1998, respectively.
Common Stock Issued to Acquire Xullux- On May 1, 1996, Terra
Systems, Inc. entered into a merger agreement with Xullux, Inc.,
whereby Terra Systems, Inc. agreed to issue 2,955,000 shares of
common stock for all of the outstanding common stock of Xullux,
Inc. Xullux, Inc. had no assets at the date of the merger and
was considered a shell corporation; accordingly, the 2,955,000
shares held by the Xullux, Inc. stockholders were deemed to have
been issued for no consideration.
Common Stock Issued for Cash- During the six months ended June
30, 2000, the Company issued 224,673 shares of common stock for
proceeds of $57,835 at prices ranging from $0.25 to $0.30 per
share. During the year ended December 31, 1999, the Company
issued 705,000 shares of common stock for proceeds of $285,460
at prices ranging from $0.25 to $0.50 per share. During the year
ended December 31, 1998, the Company issued 715,727 shares of
common stock for proceeds of $377,712 at prices ranging from
$0.30 to $0.80 per share. During the period from February 17,
1996 (Inception) through December 31, 1997, the Company issued
1,926,687 shares of common stock for proceeds of $1,834,139 at
prices ranging from $0.50 to $2.00 per share.
Common Stock Issued in Satisfaction of Subscription Agreements
and Marketable Securities- Between July and September 1996,
$206,000 was contributed to the Company under various stock
purchase agreements for future issuances of common stock. In
October through December 1996, the Company issued 246,000 shares
of common stock in satisfaction of these subscription
agreements.
In May 1996, the Company entered into an agreement to issue
250,000 shares of common stock to acquire an investment in
another company, which had a fair value of $190,000. By
September 30, 1996, the Company had issued 19,000 shares of
common stock relating to this transaction. The remaining 231,000
common shares were issued in December 1996. The investment in
another company was sold in 1996 for $91,000, and a loss of
$99,000 was recorded.
Common Stock Issued for Services- During the six months ended
June 30, 2000 and the year ended December 31, 1999, the Company
issued 122,920 and 259,286 shares, respectively, of common stock
for consulting services. The common stock was valued at prices
ranging from $0.48 to $0.70 per share. For the six months ended
June 30, 2000 and the year ended December
/37/
31, 1999, the Company
charged $143,189 and $60,000 of consulting expense to
operations, respectively.
Common Stock Redemptions- In 1996, the Company issued 48,000,000
shares of common stock upon organization of the Company. In
1997, the Company exercised its right to repurchase 36,775,000
shares of common stock from two shareholders at $0.001 per
share. The stock redemption was paid by the Company issuing 10%
promissory notes.
In September 1996, the Company redeemed a total of 3,000,000
shares of the Company's common stock from six different
shareholders for no consideration.
Common Stock Issued for the Conversion of Debt- During the six
months ended June 30, 2000, a stockholder exercised 500,000
options. The Company issued 500,000 shares of common stock for
the conversion of notes payable to stockholders in the amount of
$100,000 or $0.20 per share. During the year ended December 31,
1999, the Company issued 200,000 common shares for the
retirement of accounts payable to a related party, valued at
$50,000 or $0.25 per share.
Stock Right Exercised- During the period ended June 30, 2000 (as
discussed in Note 3) the Company granted stock rights in
connection with a consulting agreement. The Company recognized
consulting expense of $560,000 in connection with the grant of
these stock rights. Upon grant of the rights, the corporation
exercised its right and the Company issued 400,000 shares of
common stock for $100,000 or $0.20 per share.
NOTE 6-NOTES PAYABLE TO STOCKHOLDERS
During the six months ended June 30, 2000, the Company issued
500,000 shares of common stock upon conversion of notes payable
to stockholders in the amount of $100,000, or $0.20 per share.
Notes payable to stockholders are as follows:
June December31,
30,
2000 1999 1998
-------- -------- ---------
Notes payable
to
stockholders,
interest
rates from 6%
to 10% payable
monthly,
all such notes
mature between
December 2001
and January
2010, unsecured $ 619,742 $ 719,742 $ 725,361
Notes payable
to stockholders
for redemption
of stock, 10%
interest
payable
monthly, due
April 2002 36,775 36,775 36,775
Total Notes 656,517 756,517 762,136
Payable to
Stockholders
Less: Current - - (10,367)
portion
Notes Payable
to Stockholders
- Long-Term $ 656,517 $ 756,517 $ 751,769
======== ======== ========
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Annual maturities of long-term debt as of December 31, 1999 for
each of the next five years are as follows:
Year Ending
December 31:
------------
2000 $ -
2001 79,088
2002 462,696
2003 202,733
2004 -
Thereafter 12,000
NOTE 7 - INCOME TAXES
There was no benefit or provision for income taxes during 1999 or
1998. The following presents the components of the net deferred
tax asset at December 31, 1999 and 1998:
1999 1998
---------- ----------
Operating loss $ 1,560,781 $ 1,227,497
carryforwards
Accrued and deferred 145,470 100,710
compensation
Capital loss 36,927 36,927
carryforward
Total Deferred Tax 1,743,178 1,365,134
Assets
Less: Valuation (1,743,178) (1,365,134)
Allowance
Net Deferred Tax Asset $ - $ -
====== ======
The valuation allowance increased $378,044 and $377,458 during
the years ended December 31, 1999 and 1998. The Company has a
net operating loss carryforward of $4,184,399 which expires, if
unused, in the years 2012 through 2019.
The following is a reconciliation of the income tax benefit
computed at the federal statutory tax rate with the provision
for income taxes for the periods ended June 30, 2000, December
31, 1999 and 1998:
June 30, December 31,
2000 1999 1998
-------- ------- -------
Income tax benefit at $(334,403) $(418,119) $(443,430)
statutory rate (34%)
Change in valuation 379,494 378,044 377,458
allowance
State tax, net of federal (32,457) (40,582) (43,039)
benefit
Non deductible expenses (12,634) 80,657 109,011
Provision for Income Taxes $ - $ - $ -
NOTE 8 -RESEARCH AND DEVELOPMENT EXPENSE
Research and development and patent development have been the
principal function of the Company. Expenses in the accompanying
financial statements include certain costs which are directly
associated with the Company's research and development. These
costs, which consist primarily of fees paid to individuals,
materials and supplies amounted to $73,649, $122,518 and
/39/
$240,296
for the six month period ended June 30, 2000 and the years ended
December 31, 1999 and 1998, respectively.
NOTE 9 - CAPITAL LEASE OBLIGATION
In October 1996, the Company entered into capital lease
obligations with a company under common ownership. The related
company entered into an equipment lease with a financial
institution and is responsible to make all payments regarding
the lease. The Company is currently paying to the related
company the amount of the lease payment plus various other
executory fees. These leases expire in March 2002. Equipment
under capital leases of December 31, 1999 was as follows:
Equipment $ 423,594
Less: Accumulated (182,871)
depreciation =========
$ 240,723
The following is a schedule by years of future minimum lease
payments under capital leases together with the present value of
the net minimum lease payments as of December 31, 1999:
Year Ending December 31,
2000 $ 323,050
2001 140,470
2002 8,434
Total Minimum Lease Payments 471,954
Less: Amount representing (154,138)
executory costs
Net Minimum Lease Payments 317,816
Less: Amount representing (44,026)
interest
Present Value of Net Minimum 273,790
Lease Payments
Less: Current portion (178,210)
Capital Lease Obligation - $ 95,580
Long Term
At December 31, 1999, the Company owed $63,103 in delinquent
executory fees to the related party.
The Company has violated its lease agreement by being delinquent
in its payments regarding these leases. At December 31, 1999, the
Company was thirteen months behind in its lease payments.
According to the lease agreement, the lease could be called and
all principal amounts would be due. However, the lessor has
waived this alternative and is only requiring delinquent payments
to be made up during the current year.
NOTE 10 - OPERATING LEASES
/40/
The Company conducts its operations in a building leased from a
related party through common ownership which expires in June
2003. Rent expense under this lease was $45,396 and $49,440 for
the periods ended December 31, 1999 and 1998, respectively. The
Company also leased vehicles under 24 to 36 month operating
leases from a bank, which expired in August 1998 and 1999. Rent
expense under these leases was $17,375 and $22,667 for the
periods ended December 31, 1999 and 1998, respectively.
Future minimum rental payments for the next four years are
as follows:
2000 $ 49,440
2001 49,440
2002 49,440
2003 24,720
========
$ 173,040
In addition, the Company rents several pieces of office and
plant equipment on a month-to- month basis from a related party
through a common ownership. Rent expense under these leases was
$5,044 and $6,654 for the periods ended December 31, 1999 and
December 31, 1998.
At December 31, 1999 and 1998, the Company owed $143,916 for
lease/rental payments as well as other operating expenses. These
payables are due on demand and bear no interest.
NOTE 11-SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
As discussed in Note 5, the Company issued 20,000 and 350,000
shares of common stock to various employees for current and
future services with a value of $19,320 and $393,750 during 1999
and 1998, respectively.
The Company paid $0, $7,124 and $27,276 in interest during the
periods ending June 30, 2000, December 31, 1999 and 1998,
respectively.
As discussed in Note 5, the Company issued 200,000 shares to a
related party for the retirement of accounts payable; the shares
were valued at $50,000. Also, the Company issued 259,286 shares
in exchange for consulting services; the shares were valued at
$143,189.
During the six months ended June 30, 2000, the Company issued
122,920 shares of common stock as compensation for services
valued at $60,000 or $0.49 per share.
NOTE 12 - CONTINGENCIES
Terra Systems, Inc. Versus a Former Director/Officer and Other
Stockholders- The Company has filed a complaint against a former
director and officer and other stockholders of the Company (the
defendants) for using various forms of improper conduct and
misrepresentations concerning their qualifications and
intentions to obtain a significant number of the Company's
shares. The Company is seeking a declaration by the court that
none of the defendants have any right, title to or ownership of
the Company's stock originally issued to the defendants. The
defendants claim the Company and certain of its officers have
engaged in fraudulent and conspiratorial conduct and have filed
a counterclaim seeking the following: a dismissal of the
Company's complaint, unspecified amount of damages resulting
from the Company's refusal on
/41/
March 1, 1997 to tender shares to
the defendants that the defendants were entitled to sell, the
removal of certain restrictions on the Company's stock, $60,000
for breach of an employment contract and interest, compensatory
damages and punitive damages in unspecified amounts, and
together with attorney fees.
On October 9, 1999, the Court entered a partial summary judgment
against one of the defendants in favor of the Company on all of
its claims. The Court found that the damages sought against the
defendant and an award of reasonable attorney's fees, and
expenses incurred in connection with the case shall be determined
at a future date. The Court also found that the Company is
entitled to a partial summary judgment against the defendant for
securities fraud, including rescission and restitution of the
issuance of one million Terra Systems shares and additional
damages to be determined in further proceedings before the Court.
The amount of damages to be awarded has not yet been determined.
The Company denies all material allegations against the Company
and intends to fully defend the counterclaim of the defendants
and prosecute the Company's claims and actions against the
defendants. This litigation is still in the discovery phase and
the ultimate outcome cannot presently be determined.
Accordingly, no adjustments have been made to the Company's
financial position, results of operations or cash flows.
Threatened Litigation- The Company and certain Officers and
Directors of the Company received notice from a litigant's legal
counsel of threatened litigation. The litigant contends that
certain current Officers and Directors held and sold a number of
Xullux shares that were free trading prior to the merger of
Xullux and Terra Systems. The alleged sale may have impacted the
value of the litigant's Terra Systems restricted publicly issued
shares in the company. The litigant claims that the defendant's
ownership and alleged sale of Xullux stock was not disclosed to
him at or during the time he contributed certain assets and
other equipment to Terra Systems in exchange for the Terra
Systems restricted stock. The litigant seeks to return 125,000
shares to Terra Systems for value and seeks other monetary and
punitive damages in an amount of not less than $1,500,000
including additional costs and attorney's fees. The Company
denies all of the material allegations and claims of the
litigant. Currently, the ultimate outcome of this situation
cannot presently be determined. Accordingly, no adjustments
have been made to the Company's financial position, results of
operations or cash flows.
Based on the uncertain outcome of these contingencies, no
provision for any loss or gain that may result upon adjudication
has been made in the accompanying financial statements, and the
possible effect it will have on future financial statements is
unknown.
/42/
Part III
Item 1. Index to Exhibits (Pursuant to Item 601 of Regulation SB)
Exhibit Name and/or Identification of
Number Exhibit
------- -----------------------------
2 Merger Agreement Rendered as
Previously Filed
3 Articles of Incorporation & By-Laws
(a) Articles of Incorporation Rendered as
filed May 1, 1996 Previously Filed
(b) By-Laws of the Company Rendered as
adopted October 7, 1997 Previously Filed
10 Material Contracts
Agreement between Terra Systems,
Inc. & XCEL Associates, Inc.
27 Financial Data Schedule
Financial Data Schedule of Terra Rendered as
Systems, Inc. ending June 30, Previously Filed
2000
99 Stock Issuance with a Call Option
Vesting Schedule &
Stock Issued for Services - Non
Employees
/43/
