UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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
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Table of Contents
Part I ........................................... 3
Item 1. Description of Business ....................... 3
Item 2. Management's Plan of Operation & Discussion and
Analysis ........ 8
Item 3. Description of Property ....................... 11
Item 4. Security Ownership of Management 11
Item 5. Directors and Executive Officers 12
Item 6. Executive Compensation ........................ 13
Item 7. Certain Relationships and Related Transactions 14
Item 8. Description of Securities 15
Part II .......................................... 16
Item 1. Market for Common Equity and Related Stockholder 16
Item 2. Legal Proceedings ......................... 16
Item 3. Changes in and Disagreements with Accountants 16
Item 4. Recent Sales of Unregistered Securities 16
Item 5. Indemnification of Directors and Officers 16
Part F/S .......................................... 17
Item 1. Financial Statements ......................... 17
Part III ........................................ 18
Item 1. Index to Exhibits ......................... 18
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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.
All written and oral forward-looking statements made in connection with
this Form 10-SB that are attributable to us or persons acting on our behalf
are expressly qualified in their entirety by these cautionary statements.
Given the uncertainties that surround such statements, you are cautioned
not to place undue reliance on such forward-looking statements.
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.
We are filing this Form 10-SB voluntarily with the intention of
establishing the full reporting status of our company with the SEC.
Consequently, we will continue to voluntarily file all necessary reports
and forms as required by existing legislation and SEC rules. Presently, we
have no market maker nor have we discussed with any market maker or
registered broker any aspect of our operations.
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. 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
/3/
required. "BTU" is a term used to define how efficient a given fuel is in
relation to the quantity of heat it emits.
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 purports to reduce 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 operates in an open
environment. This allows the material being transported to breathe any
moisture out during the transportation process.
We have a limited history in the development and commercialization of low-
pressure pneumatic conveyance systems, and we operate in a competitive
environment. Our potential for success must be considered, in light of the
difficulties frequently encountered in connection with the development,
introduction, marketing and distribution of products in a competitive
environment.
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 in a particle-isolated state.
Our process permits a high degree of particle isolation, after which
materials can be accelerated, stratified, and classified to facilitate a
variety of end process results. These include 1) drying, 2) pulverizing,
3) classifying, 4) mixing, and 5) transloading. This system constitutes a
virtual "factory in a pipeline" because of its ability to perform multiple
tasks, in addition to moving particles. Our system can transport almost any
particle, for any duration of time, at any temperature and at any
velocity/density ratio.
The accelerators can be set up to pulverize, dry, and classify various
materials while in our system. The system can also prepare material for
outside processing as well. For example, some applications may require
just product drying before going to an existing milling operation. Thus
our equipment could provide just the product drying service onsite.
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;
5. and it can increase the economic value of the end product (i.e. coal
will produce more BTUs).
/4/
Furthermore, there is a patent pending status on this technology, which
affords our company a competitive advantage in this industry. Per patent
counsel advice, any documentation relating to this patent cannot be
released at this time. Existing industry conditions make this technology
very attractive. They include:
1. the market for the processing of bulk material is substantial and has
demonstrated a continued pattern of growth;
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;
3. and the desire for a mineral pulverization system that would reduce
maintenance costs by functioning more effectively and efficiently.
The prospective market is vast for our industrial particle accelerator.
Because of its nature and flexibility, virtually all bulk materials used in
basic industries can be economically separated, classified, and otherwise
processed. Opportunities are seen for many applications in an array of
large industries, including power generation, mining, agriculture,
environmental, ceramics, construction, and materials transportation.
However, it should be stated that we have a limited operating history, and
face all of the risks inherent to any new business. These risks include,
but are not limited to, market acceptance and penetration of our services,
our ability to distribute and market our services and product, management
of the costs of conducting operations, general economic conditions and
other factors, some of which are beyond our control. We cannot assure you
that we will be successful in addressing these risks. Failure to
successfully address these risks could have a material adverse effect on
our operations.
(2) Distribution methods for our services
We do not engage in selling any products to clients. In most cases, we
bill the client a hourly/daily rate for use of the system. The cost for
constructing a system will vary due to the customization involved for each
client and their unique requirements. The cost to design and complete a
system will vary based upon the client's needs.
We construct and test each system with the use of our technical and
research staff. Many components can be pre-fabricated in our warehouse
with final assembly occurring at the client's site. The client pays for
the assembly.
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;
3. and 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
We have pursued strategic alliances with the Kaizen group. The Kaizen group
is an established American Company doing business with Institutional groups
in Hong Kong focused on the modernization and new construction of coal
fired power plants in the Far East. We have signed a letter of intent with
the Kaizen group to take advantage of these opportunities. The Kaizen
Group has committed two million dollars as initial capitalization for the
formation and development of projects and ventures in the Far East. As
part of these joint venture agreements, Terra Systems will receive a
licensing agreement fee of one million dollars. We believe that these
joint venture relationships, if successful, will allow us to gain
additional insight,
/5/
expertise and penetration into markets where joint venture partners
already operate and may serve to increase our revenue and income growth.
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 brand is important in
establishing and expanding our customer base. We intend to introduce
marketing efforts to build our user base and create brand name recognition.
We currently have a web site (www.tysi.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 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 August 8, 2000 we have:
1. Developed and implemented a business plan;
2. Recruited and retained an appropriate management team
and board of directors;
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
The carbon fuels industry is where we will place our initial emphasis.
There is currently a great demand for dry bulk handling systems to replace
wet handling systems. Our prospective market is very large because our
technology addresses this issue and provides for a flexibility of use.
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. 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
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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
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.
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
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.
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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.
(12) 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.
(13) Dependence on Key Personnel
The success of our Company depends upon the efforts, abilities and
expertise of its executive officers and other key employees, including its
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
Forward Looking Statements
When used in this Form 10-SB and in our future filings with the Securities
and Exchange Commission, the words or phrases "will likely result,"
"management expects," or "we expect," "will continue," "is anticipated,"
"estimated" or similar expressions are intended to identify "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned not to place undue reliance on
any such forward-looking statements, each of which speak only as of the
date made. These statements are subject to risks and uncertainties, some of
which are described below. Actual results may differ materially from
historical earnings and those presently anticipated or projected. We have
no obligation to publicly release the result of any revisions that may be
made to any forward-looking statements to reflect anticipated events or
circumstances occurring after the date of such statements.
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.
The following comprises the capitalization history for Terra Systems,
Inc.:
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.
/8/
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 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.
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 (6) to twelve (12) months of
operations are:
1. To continue marketing our services,
2. Developing strategic relationships,
3. Responding to competitive developments, and
4. Establishing 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 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.
/9/
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. We believe that the need for additional funds will be
mitigated somewhat from internal revenues and earnings. Any future
offerings could significantly dilute the value of any previous investor's
investment value.
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 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
/10/
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.
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, 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 trucks and other automobiles, which are collectively
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.
/11/
Shareholder Corporate Shares Percenta
Position Beneficially Consideration ge of
Owned Ownershi
p
Clayton 1,600,000 500,000 @ 22.46%
Timothy Chief $0.001/share
Executive 3,000 @
Officer $1.00/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%
/ $1.00/share
Treasurer 125,000 @
$0.80/share
250,000 @
$0.001/share
1,025,000 @
$0.001/share
*Please refer to Audited Financial Statements
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 Timothy 52 Chief Executive Since October
Officer of 1996
L. Kent Harmon 45 President Since February
of 1996
Lloyd McEwan 71 Secretary/Treasurer Since October
of 1996
Leonard Howe 41 Technical Director Since February
of 1996
Robert Underwood 56 Director and Since January
Consultant of 1999
/12/
B. Work Experience
Clayton Timothy, Chief Executive Officer- Mr. Timothy, 52, is presently
serving as a member 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, is presently serving as a
member of the board of directors and 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.
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 of union agreements
between Terra Systems, Inc. and our employees. Over the next twelve (12)
months, each executive officer is expected to draw the following annual
compensation.
Name Capacities in which Annual Compensation
Remuneration was
Recorded
Clayton Timothy Chief Executive $60,000 Annual Salary
Officer
L. Kent Harmon President $60,000 Annual Salary
Leonard Howe Technical Director $60,000 Annual Salary
/13/
Lloyd McEwan Secretary and $60,000 Annual Salary
Treasurer
Robert Underwood Director and $60,000 Annual
Consultant Consulting Fee
Tim Gwyther Project Manager and $60,000 Annual
Consultant Consulting Fee
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.
Employment Agreements
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 Position Number of Shares
Clayton Timothy Chief Executive 500,000
Officer
L. Kent Harmon President 500,000
Leonard Howe Technical Director 500,000
Lloyd McEwan Secretary and 500,000
Treasurer
Robert Underwood Director and 250,000
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 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
Capitalization of Terra Systems, Inc.
Terra Systems, Inc. was incorporated on February 17, 1996 in the State of
Utah. The following represents the capitalization of Terra Systems, Inc.
for the last two (2) years:
1.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.
2.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.
/14/
3.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.
4.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.
5.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.
6.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 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 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.
/15/
Part II
Item 1. Market for Common Equity and Related Stockholder Matters
B. Holders
As of December 31, 1999, we have had 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
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 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 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. This original stock offering was
made in accordance with Section 4(2) of the Securities Act of 1933, as
amended. No underwriting discounts or commissions were paid in this
offering.
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.
/16/
Part F/S
Item 1. Financial Statements Page
The following documents are filed as part of
this report:
a)Terra Systems, Inc.
Report of Independent Certified Public F-1
Accountants
Consolidated Balance Sheets - June 30, 2000
(unaudited),
December 31, 1999 and 1998 F-2
Consolidated Statement of Operations for the
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 F-3
June 30, 2000 (unaudited)
Consolidated Statement of Stockholder's
Equity (Deficit)
for the period February 17, 1996 (Date of
Inception)
through June 30, 2000 (unaudited) F-4
Consolidated Statement of Cash Flows for the
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 F-6
June 30, 2000 (unaudited)
Notes to Financial Statements F-7
/17/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
AND
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
TABLE OF CONTENTS
Page
Report of Independent Certified F-1
Public Accountants
Financial Statements:
Consolidated Balance Sheets - June
30, 2000 (Unaudited) December 31,
1999 and 1998
F-2
Consolidated Statements of
Operations for the Six Months
Ended June 30, 2000 and 1999
(Unaudited) 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)
F-3
Consolidated Statements of
Stockholders' Equity (Deficit) for
the Period February 17, 1996 (Date
of Inception) through June 30,
2000 (Unaudited)
F-4
Consolidated Statements of Cash
Flows for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)
and for the Years Ended December
31, 1999 and 1998, and for the
Cumulative Period February17, 1996
(Date of Inception) through June
30, 2000 (Unaudited)
F-6
Notes to Consolidated Financial F-7
Statements
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Fax (801) 532-7944
345 East Broadway, Suite 200
Salt Lake City, Utah 84111- 2693
Member of AICPA Division of Firms
Member of SECPS
Member of Summit International
Associates
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 which is included in the
cumulative period from February 17, 1996, (date of inception) through June
30, 2000. 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 which is included in the
cumulative period from February 17, 1996 (date of inception) through June
30, 2000, 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
/F-1/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 1998
------------ ----------- --------
(Unaudited)
ASSETS
<S> <C> <C> <C>
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 improvements 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 depreciation (472,463) (410,000) (284,177)
Net Property and Equipment 579,116 641,446 767,163
----------- ----------- -----------
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 related party 255,632 200,175 80,474
Accrued liabilities 631,486 542,224 401,082
Accrued interest payable 231,393 192,946 106,818
Notes payable to stockholders - - - 10,367
current portion
Capital lease obligation - current 219,126 178,210 108,014
portion
Total Current Liabilities 1,668,699 1,429,738 943,053
----------- ----------- -----------
Long-Term Liabilities
Notes payable to stockholders - 656,517 756,517 751,769
net of current portion
Capital lease obligation - net of 46,342 95,580 188,801
current portion
Total Long-Term Liabilities 702,859 852,097 940,570
----------- ----------- -----------
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 - 14,743,414 17,025 15,828 14,744
shares
Additional paid-in capital 4,409,536 3,589,098 3,025,487
Deficit accumulated during the
development stage (6,194,257) (5,210,718) (3,980,855)
Deferred compensation (13,282) (28,093) (147,767)
Total Stockholders' Deficit (1,780,978) (1,633,885) (1,088,391)
Total Liabilities and ----------- ----------- -----------
Stockholders' Deficit $ 590,580 $ 647,950 $ 795,232
=========== =========== ===========
</TABLE>
/F-2/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
For the Period
February 17, 1996
For the Six Months For the Year Ended (Inception)
Ended June 30 December 31, Through
---------------------- ------------------------ June 30,
2000 1999 1999 1998 2000
---------- ---------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ 6,150 $ 55,920 $ 159,705 $ 166,767 $ 335,822
Cost of Revenues 2,497 31,582 144,950 160,111 307,558
Gross Profit 3,653 24,338 14,755 6,656 28,264
---------- ---------- ----------- ----------- -----------
Expenses
Research and development 73,649 45,122 122,518 240,296 1,265,961
General and
administrative 805,018 409,171 895,651 826,137 4,030,607
Depreciation and 62,463 63,102 125,823 129,488 478,444
amortization
Total Expenses 941,130 517,395 1,143,992 1,195,921 5,775,012
Loss from Operations (937,477) (493,057) (1,129,237) (1,189,265) (5,746,748)
---------- ---------- ----------- ----------- -----------
Nonoperating Income/
(Expenses)
Interest expense (46,073) (46,283) (100,643) (110,342) (343,554)
Interest income 11 - 17 150 1,716
Loss on sale of - - - - (99,000)
securities
Loss on sale of assets - - - (4,750) (6,671)
Net Nonoperating Income/
(Expenses) (46,062) (46,283) (100,626) (114,942) (447,509)
Net Loss $ (983,539) $ (539,340) $(1,229,863) $(1,304,207) $(6,194,257)
========== ========== =========== =========== ===========
Basic and Diluted Loss
Per Share $ (0.06) $ (0.04) $ (0.08) $ (0.09) $ (0.41)
========== ========== =========== =========== ===========
Weighted Average Shares
Outstanding 16,357,291 15,057,282 15,342,540 14,271,091 15,275,411
========== ========== =========== =========== ===========
</TABLE>
/F-3/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Deficit
------------------- Accumulated
Number Additional Common During the Total
of Paid-In Stock Development Deferred Stockholders'
Shares Amount Capital Subscription Stage Compensation Deficit
---------- ------- ---------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - February 17, - $ - $ - $ - $ - $ - $ -
1996 (Inception)
March 1996 - $0.00 per
share 48,000,000 48,000 (47,520) - - - 480
Shares issued to
acquire Xullux - May
1996-$0.00 per share 2,955,000 2,955 (2,955) - - - -
Common stock
subscriptions - July
1996 through September
1996
- - - 196,000 - - 196,000
Stock issued for cash:
September 1996 - $0.80
$0.80 to $1.00 per share 706,500 707 667,793 10,000 - - 678,500
October 1996 - $0.80
per share 350,000 350 279,650 - - - 280,000
November 1996 - $1.75
per share 12,000 12 20,988 - - - 21,000
December 1996 - $1.75
to $2.00 per share 57,500 58 103,692 - - - 103,750
January 1997 - $1.00
to $1.75 per share 126,000 126 145,374 - - - 145,500
February 1997 - $1.00
per share 100,000 100 99,900 - - - 100,000
March 1997 - $1.75
per share 25,413 25 44,448 - - - 44,473
April 1997 - $2.00
per share 7,500 8 14,992 - - - 15,000
May 1997 - $1.00 per
share 100,000 100 99,900 - - - 100,000
June 1997 - $1.00 per
share 90,000 90 89,910 - - - 90,000
August 1997 - $0.50
to $1.00 per share 7,0000 70 44,930 - - - 45,000
October 1997 - $1.00
per share 25,000 25 24,975 - - - 25,000
November 1997 - $0.72
to $0.80 per share 172,399 173 128,243 - - - 128,416
December 1997 - $0.80
per share 84,375 84 67,416 - - - 67,500
Stock issued in satisfaction of
subscription agreements:
October 1996 - $0.80
to $1.00 per share 233,500 233 195,767 (196,000) - - -
December 1996 -
$0.76 to $0.80 per share 243,500 243 184,557 (184,800) - - -
Stock issued for
current and future services -
May 1997 - $1.00 per
share 75,000 75 74,850 - - (29,970) 44,955
Stock issued for
marketable securities -
September 1996 -
$0.80 per share 19,000 19 15,181 174,800 - - 190,000
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 - - - -
Net loss from February
17, 1996 through
December 31, 1997 - - - - (2,676,648) - (2,676,648)
---------- ------- ---------- --------- ----------- ---------- ----------
Balance - December 31,
1997 13,677,687 13,678 2,255,091 - (2,676,649) (29,970) (437,849)
Stock issued for cash:
April - $0.50 to $0.73
per share 239,502 240 146,671 - - - 146,911
May - $0.75 to $0.80
per share 38,333 38 29,962 - - - 30,000
June - $0.75 per share 30,146 30 22,579 - - - 22,609
July - $0.36 to $0.73
per share 236,846 237 119,368 - - - 119,605
August - $0.50 per share 20,000 20 9,980 - - - 10,000
November - $0.30 to
$0.33 per share 78,000 78 24,772 - - - 24,850
December - $0.32 to
$0.33 per share 72,900 73 23,664 - - - 23,737
Stock issued for
current and future
services March - $1.13 350,000 350 393,400 - - (141,557) 252,193
Amortization of
deferred compensation - - - - 23,760 23,760
Net loss for the period - - - - (1,304,207) - (1,304,207)
---------- ------- ---------- --------- ----------- ---------- ----------
Balance December 31,
1998 14,743,414 14,744 3,025,487 - (3,980,855) (147,767) (1,088,391)
(Continued)
</TABLE>
/F-4/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Deficit
------------------- Accumulated
Number Additional Common During the Total
of Paid-In Stock Development Deferred Stockholders'
Shares Amount Capital Subscription Stage Compensation Deficit
---------- ------- ---------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1998 14,743,414 14,744 3,025,487 - (3,980,855) (147,767) (1,088,391)
Stock issued for cash:
January - $0.50 per
share 100,000 100 49,900 - - - 50,000
April - $0.25 per
share 20,000 20 4,980 - - - 5,000
May - $0.50 per share 20,000 20 9,980 - - - 10,000
June - $0.50 per share 100,000 100 49,900 - - - 50,000
July - $0.25 per share 200,000 200 50,260 - - - 50,460
September - $.40 and
$.50 per share 145,000 145 59,855 - - - 60,000
October - $0.50 per
share 60,000 60 29,940 - - - 30,000
December - $0.50 per
share 60,000 60 29,940 - - - 30,000
Stock issued for
retirement of debt
January - $0.25 per
share 200,000 200 49,800 - - - 50,000
Stock issued for
services
March - $0.50 per
share 106,286 106 53,083 - - - 53,189
June - $0.50 per share 60,000 60 29,940 - - - 30,000
September - $0.70 per
share 43,000 43 29,957 - - - 30,000
December - $0.60 per
share 50,000 50 29,950 - - - 30,000
Outstanding stock from
acquisition of Xullux not
previously recorded 100 - - - - - -
Deferred compensation
relating to grant
of stock options - - 179,126 - - (179,126) -
Stock issued for
future services
September - $0.97 per
share 20,000 20 19,300 - - (19,320) -
Stock redemption from
former officer
December - $1.13 per
share (100,000) (100) (112,300) - - 112,400 -
Amortization of
deferred compensation - - - - - 205,720 205,720
Net loss for the
period - - - - (1,229,863) - (1,229,863)
---------- ------- ---------- -------- ------------ ---------- ----------
Balance - December
31, 1999 15,827,800 15,828 3,589,098 - (5,210,718) (28,093) (1,633,885)
Stock redemption from
officer (unaudited):
February - $0.89 per
share (50,000) (50) (56,150) - - 56,200 -
Stock issued for cash
(unaudited):
January - $0.25 per
share 12,000 12 2,988 - - - 3,000
February - $0.25 per
share 40,000 40 9,960 - - - 10,000
March - $0.25 per
share 139,340 139 34,696 - - - 34,835
April - $0.30 per
share 33,333 33 9,967 - - - 10,000
Stock issued for
services (unaudited):
March - $0.50 per
share 60,000 60 29,940 - - - 30,000
May - $0.48 per share 62,920 63 29,937 - - - 30,000
Conversion of debt
through the exercise
of stock options
(unaudited) 500,000 500 99,500 - - - 100,000
Exercise of stock
rights (unaudited) 400,000 400 99,600 - - - 100,000
Consulting expense
relating to grant of
stock options - - 560,000 - - - 560,000
Amortization of
deferred compensation
(unaudited) - - - - - (41,389) (41,389)
Net loss for the
period (unaudited) - - - - (983,539) - (983,639)
---------- ------- ---------- -------- ------------ ---------- ----------
Balance - June 30,
2000 (Unaudited) 17,025,393 $17,025 $4,409,536 $ - $ (6,194,257) $(13,282) $(1,780,978)
========== ======= ========== ======== ============ ======== ===========
</TABLE>
/F-5/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
For the Period
February 17, 1996
For the Six Months For the Year Ended (Inception)
Ended June 30 December 31, Through
---------------------- ------------------------ June 30,
2000 1999 1999 1998 2000
---------- ---------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <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)
Adjustments to reconcile
net loss to net cash used
by operating activities:
Depreciation and
amortization 62,463 63,102 125,823 129,488 478,444
Loss on sale of investment
securities - - - - 99,000
Loss on sale of assets - - - 4,750 6,671
Compensation paid with
common stock net of
forfeitures (41,389) 53,301 205,720 275,953 485,239
Consulting expense relating
to grant of stock options 560,000 - - - 560,000
Changes in current assets
and liabilities:
Receivables (1,150) (10,570) 17,236 (21,111) (6,225)
Prepaid expenses - (88) 1,259 3,552 -
Accounts payable 74,879 194,722 336,517 161,609 672,862
Accounts payable - related
party 55,458 (631) 55,639 (9,914) 166,403
Accrued liabilities 89,261 114,471 141,142 188,398 631,485
Accrued interest payable 38,447 40,443 86,128 70,266 231,393
---------- ---------- ----------- ----------- -----------
Net Cash Used by Operating
Activities (145,570) (84,590) (260,399) (501,216) (2,868,985)
---------- ---------- ----------- ----------- -----------
Cash Flows From Investing
Activities
Purchase of equipment (133) (106) (106) (31,022) (662,597)
Organization costs paid - - - - (4,755)
Proceeds from sale of
assets - - - 20,211 117,715
Net Cash Used by Investing
Activities (133) (106) (106) (10,811) (549,637)
---------- ---------- ----------- ----------- -----------
Cash Flows From Financing
Activities
Proceeds from borrowings
stockholders - - - 208,352 870,111
Payments on borrowings
stockholders - - (5,000) (20,000) (149,750)
Proceeds from stock
issuance and
subscriptions 157,835 115,000 285,460 377,712 2,861,626
Payments on capital
lease obligations (8,322) (23,025) (23,025) (64,796) (158,126)
/F-6/
Net Cash Provided by
Financing Activities 149,513 86,975 257,435 501,268 3,423,861
---------- ---------- ----------- ----------- -----------
Net Increase (Decrease)
in Cash 3,810 2,279 (3,070) (10,759) 5,239
Cash at Beginning of
Period 1,429 4,499 4,499 15,258 -
---------- ---------- ----------- ----------- -----------
Cash at End of Period $ 5,239 $ 6,778 $ 1,429 $ 4,499 $ 5,239
========== ========== =========== =========== ===========
</TABLE>
/F-7/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information With Respect to June 30, 2000 And For
The Six Months Ended June 30, 2000 and 1999 is Unaudited)
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
/F-8/
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 a timely basis, to obtain
additional financing as may be required, and ultimately to
attain successful operations. The Company's management
intends to use both capital and debt financing as needed to
provide sufficient cash flow. Management is in the process
of negotiating various agreements and hopes these agreements
will generate additional cash flow.
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 - Revenue from research and development
contracts is recognized as the contracts are completed.
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, thereby
decreasing the net loss per common share. There were no
potentially issuable shares at December 31, 1998.
/F-9/
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.
/F-10/
NOTE 4-STOCK OPTIONS
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
Exercise
Price
Options Price
Range
------- ----- ---------
Balance, December - - -
31, 1998
Granted 2,500,0 $ 0.20 $ 0.20
00
Forfeited (250,00 0.20 0.20
0)
Balance, December 2,250,0 0.20 0.20
31, 1999 00
------- ---- ----
Granted 400,000 0.50 - 0.88
1.25
Exercised (500,00 0.20 0.20
0)
------- ----- ----
Balance, June 30, 2,150,0 $ 0.20 - $ 0.31
2000 00 1.25
=======
/F-11/
A summary of stock options outstanding and exercisable as of June
30, 2000, and December 31, 1999 follows:
June 30, 2000
Options Outstanding Options Exercisable
------------------------------- -------------------
Range Number Weighted- Weighted- Number Weighted-
of Outstandi Average Average Exercisa Average
Exercis ng Remaining Exercise ble Exercise
e At Contractual Price At Price
Prices 06/30/00 Life 06/30/00
------- -------- ---------- ------- -------- -------
$0.20 1,750,000 0.54 years $0.20 1,750,00 $0.20
0
0.50 - 400,000 0.73 years 0.88 400,000 0.88
1.25
2,150,000 2,150,000
========= =========
December 31, 1999
Options Outstanding Options Exercisable
------------------------------ -------------------
Range Number Weighted- Weighted- Number Weighted-
of Outstandi Average Average Exercisa Average
Exercis ng Remaining Exercise ble Exercise
e At Contractual Price At Price
Prices 12/31/99 Life 12/31/99
------ -------- --------- -------- --------- ------
$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:
Cumulative
from
February 17,
For the For the 1996 (Date
Six Year of
Months Ended Inception)
Ended December through
June 30, 31, June 30,
2000 1999 2000
---------- ------------ -----------
Net loss:
As reported $ (983,539) $ (1,229,763) $ 6,194,157
Pro forma (983,539) (1,545,001) 6,509,395
Basic and diluted
loss per share:
As reported (0.06) (0.08) (0.41)
Pro forma (0.06) (0.10) (0.43)
/F-12/
NOTE 5-STOCKHOLDERS' EQUITY
Stock-Based Compensation - In 1999 and 1998, the Company
issued 20,000 and 350,000 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 $0.97 and
$1.13 per share on the day of issuance during 1999 and 1998,
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
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. The
Company recognized compensation expense for the six months
ended June 30, 2000 of $4,025 and a $45,414 credit for
forfeited stock resulting in a net credit to compensation
expense of $41,389. For the year ended December 31, 1999, the
Company recognized compensation expense of $61,837 and a
$35,243 credit for forfeited stock resulting in a net
compensation expense of $26,594. For the year ended December
31, 1998, the Company recognized compensation expense of
$275,953. Deferred compensation was $13,282, $28,093 and
$147,767 at June 30, 2000 and December 31, 1999 and 1998,
respectively. In the event employment should be terminated,
all non-vested shares of stock shall be forfeited by the
employee.
In 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 were valued at $112,400.
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.
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.
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
stock for consulting services valued at prices ranging from
$0.48 to $0.70 per share.
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 1999, the
Company issued 200,000 shares for the retirement of accounts
payable to a related party, valued at $50,000 or $0.25 per
share.
Stock Rights Exercised - 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 $0.25 per share.
/F-13/
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 30, December 31,
--------------------
2000 1999 1998
-------- --------- ---------
Notes payable to
stockholders, interest
rates from 6% to 10%
payable monthly, all such
notes mature between
December 2001and 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 Payable to 656,517 756,517 762,136
Stockholders
Less: Current portion - - (10,367)
--------- --------- ---------
Notes Payable to
Stockholders - Long-Term $ 656,517 $ 756,517 $ 751,769
========= ========= =========
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 carryforwards $ 1,560,781 $ 1,227,497
Accrued and deferred 145,470 100,710
compensation
Capital loss carryforward 36,927 36,927
----------- -----------
Total Deferred Tax Assets 1,743,178 1,365,134
Less: Valuation Allowance (1,743,178) (1,365,134)
----------- -----------
/F-14/
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
statutory rate (34%) $(334,403) $(418,119) $(443,430)
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 $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 as
of December 31, 1999 was as follows:
Equipment $ 423,594
Less: Accumulated (182,871)
depreciation
----------
$ 240,723
==========
/F-15/
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 - Long $ 95,580
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
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
==========
/F-16/
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 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
/F-17/
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 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.
/F-18/
Part III
Item 1. Index to Exhibits (Pursuant to Item 601 of Regulation SB)
Exhibit Name and/or Identification of Exhibit
Number
2 Merger Agreement
3 Articles of Incorporation & By-Laws
(a) Articles of Incorporation filed May 1, 1996
(b) By-Laws of the Company adopted October 7, 1997
23 Consent of Experts and Counsel
Consent of independent public accountant
27 Financial Data Schedule
Financial Data Schedule of Terra Systems, Inc.
ending June 30, 2000
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