UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT #2
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
Number
incorporation or organization)
5912 West 11600 South, Payson, 84651
Utah
(Address of principal executive (zip code)
offices)
Issuer's telephone number: (801) 465-4400
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, 17,314,793 issued and outstanding as of September 30, 2000.
/1/
TABLE OF CONTENTS
Part I 3
Item 1. Description of Business 3
Item 2. Management's Plan of Operation & Discussion 8
and Analysis
Item 3. Description of Property 1
4
Item 4. Security Ownership of Management 1
4
Item 5. Directors and Executive Officers 1
5
Item 6. Executive Compensation 1
6
Item 7. Certain Relationships and Related 1
Transactions 7
Item 8. Description of Securities 1
7
Part II 1
8
Item 1. Market for Common Equity and Related 1
Stockholder Matters 8
Item 2. Legal Proceedings 1
8
Item 3. Changes in and Disagreements with 1
Accountants 9
Item 4. Recent Sales of Unregistered Securities 1
9
Item 5. Indemnification of Directors and Officers 2
0
Part F/S 2
1
Item 1. Financial Statements 2
1
Part III 2
2
Item 1. Index to Exhibits 2
2
/2/
Forward Looking Statements
Some of the statements contained in this Form 10-SB are not historical
facts rather "forward-looking statements" which can be identified by
the use of terminology such as "estimates," "projects," "plans,"
"believes," "expects," "anticipates," "intends," or the negative of
such terms or other variations, or by discussions of strategy that
involve risks and uncertainties. Caution should be exercised in regards
to these forward-looking statements. Such statements contained herein
reflect our current beliefs with respect to future events. These
beliefs involve known and unknown risks, uncertainties and other
factors, including, but not limited to, economic, competitive,
regulatory, technological, key employee and general business factors
affecting our operations, market growth, services, products and
licenses. No assurances can be given regarding the achievement of
future results. Actual results may differ materially as a result of the
above-mentioned risks, and from assumptions made based on anticipated
events. Factors that may cause actual results in our performance or
achievements, or industry results, to differ materially from those
contemplated by such forward-looking statements include without
limitation:
1. Our ability to maintain, attract and integrate internal
management, technical information and management information systems;
2. Our ability to generate customer demand for our services;
3. The intensity of competition; and
4. General economic conditions.
Part I
We are filing this Form 10-SB on a voluntary basis to:
1. Provide current, public information to the investment community;
2. Expand the availability of secondary trading exemptions under the
Blue Sky laws and thereby expand the trading market in our securities;
and
3. Comply with prerequisites for the listing of our securities on the
NASD OTC Bulletin Board.
Item 1. Description of Business
A. Business Development and Summary
We were formed as a Utah Corporation on February 16, 1996 under the
name Terra Systems, Inc. Our articles of incorporation authorize us to
issue up to 100,000,000 shares of common stock at a par value of $0.001
per share. For the nine-months ended September 30, 2000 we reported a
loss of (1,210,036) or (.07) per share. For the year ended December
31, 1999 we reported a loss of (1,229,863) or (.08) per share. The
accumulated deficit from inception February 17, 1996 through September
30, 2000 was (6,420,754) or (.41) per share. Given our current cash
flows, it is questionable as to whether the company will be able to
continue as a going concern. While future developments regarding
patent issuance will allow Terra Systems to more aggressively pursue
revenue-generating contracts by year-end 2000, it may be necessary to
raise additional funds and/or reduce cash expenditures in the next 12
months. Funds could be generated through the issuance of additional
stock, or through the sale of existing plant and office equipment.
Cash expenditures could be reduced through the lay-off of personnel and
the elimination of employee benefits.
Our Company stock began trading in July 1996 and is currently quoted
under the ticker symbol "TSYI" on the OTC Bulletin Board. We entered
into an agreement with XCEL Associates, Inc. on March 29, 2000. In
exchange for Terra Systems, Inc. stock options, XCEL Associates, Inc.,
agreed to review our business plan and prepare a company profile as
well as recommend our common stock to various Retail Brokers, Analysts,
and Institutional Investors and Bankers (see exhibit 10).
We develop and commercialize low-pressure pneumatic conveyance systems.
These low-pressure systems are used in connection with the
pulverization, moisture control, classification, transport and
processing of bulk materials.
/3/
When utilized at a coal burning power plant, this system can aid in
British Thermal Unit (BTU) output gain while improving the surrounding
air and water quality. It is able to do this because it employs a dry
transport system that uses air instead of water for propulsion. Less
moisture in the coal helps it burn cleaner and more efficiently and the
employment of a dry system means less water purification is required.
"BTU" is a term used to define how efficient a given fuel is in
relation to the quantity of heat it emits. For the reasons described
above, our Company is targeting the carbon fuels industry. We believe
this market can benefit the most from our dry bulk handling systems.
The system relies on a slow moving laminar flow gas bearing to allow
for the transportation of material through a carrying duct. To define,
a laminar flow gas bearing is formed when the air in the center of a
pipeline is surrounded by a slow moving turbulent flow boundary air
layer next to the inside wall of the pipe. It is referred to as a
boundary because it acts to insulate the pipe from severe abrasive
contact with the transported material. Furthermore, an "abrasion
signature" is the amount of wear and tear or erosion on the inside of a
pipe caused by the flow of a given material. Our process reduces this
abrasion signature because the material being transported is caught up
and carried by the faster moving gas in the center of the pipe. Unlike
high-pressure conveyance systems, low-pressure systems do not allow for
the "caking" of material inside the piping. Caking is a term used to
describe the build up of material on the inside of its containment
pipe. In pneumatic conveyance, caking occurs when dust combines with
moisture and starts to gradually build up on the inside wall of the
pipe.
High-pressure pneumatic conveyance systems rely on the compression of
air for operation. When the air is compressed, the moisture contained
in the air collects inside the pipe. These pressurized systems have to
be enclosed and can only purge moisture at the end of their conveyance
cycle. The material they carry becomes exposed to this moisture, which
may lead to caking. On the other hand, a low-pressure system like ours
operates in an open environment. This allows the material being
transported to breathe any moisture out during the transportation
process.
B. Business of Issuer
(1) Principal Product and Principal Markets
We develop and market a unique particle accelerator. It is a low-
pressure gas linear accelerator, which carries bulk materials such as
rice, coal, coal ash, wheat and grain at high velocity. Our process
begins by performing particle isolation. The system places particles
(materials) in a high-spin state. This high-spin state allows two
attributes to occur to promote a high degree of particle isolation:
1.An enhanced energy state on the particle, due to the high-spin
state, puts a similar energy (electro-static) charge on the
material being conveyed. The particles then will tend to repel
each other. Example: Two positive ends of a magnet (like
charges) repel; and
2.Just like the gases that surround the earth become denser as
they get closer to the surface of the spinning planet. This
gas density around the surface constitutes an atmosphere.
These atmospheric density differences can act as barriers in
allowing particles to re-combine. Our system creates gas flow
barriers (atmospheres) that act to isolate similar particles.
After our system has isolated the materials, it then can accelerate,
stratify, and classify the material to facilitate a variety of end
process results. These include 1) drying, 2) pulverizing, 3) mixing,
and 4) trans-loading. Trans-loading is the process by which materials
are transferred from one method of storage to another. For example,
moving grain from a storage silo to a barge for shipment, or moving
coal from a train to a truck. In addition, our system can transport
almost any particle, for any duration of time, at any temperature and
at any velocity/density ratio.
Many components are pre-fabricated in our warehouse with final assembly
occurring at the client's site. In most cases, we bill the client an
hourly/daily rate for constructing a system that will vary in cost
based on the customization involved for each client and their unique
requirements. For example, some applications may require
/4/
just product
drying before going to an existing milling operation. Thus our
equipment could provide just the product drying service onsite. We
construct and test each system with the use of our technical and
research staff.
Our particle accelerator has inherent economic advantages:
1. It utilizes air, instead of water (water based systems can be
costly due to their detrimental effect on the environment, i.e. clean-
up costs);
2. It performs multiple handling and processing tasks;
3. Its projected unit costs are lower than wet processes;
4. It does not require the additional purchase of chemicals; and
5. It can increase the economic value of the end product (i.e. coal
will produce more BTUs).
Furthermore, we received notification that all 31 claims made to the
United States Patent Office have been allowed. Our Patent Counsel
advised the company to expect the full patent to be issued in the first
quarter of 2001. Existing industry conditions make this technology
very attractive. They include:
1. The efficient processing of bulk material in a more
environmentally sound manner;
2. The need for a process to handle material utilizing air as opposed
to water, and the need for a system that can "multi-task" in the
processing of bulk material at a reduced cost and with less equipment;
and
3. The desire for a mineral pulverization system that would reduce
maintenance costs by functioning more effectively and efficiently.
The prospective markets for our industrial particle accelerator include
power generation, mining, agriculture, environmental, ceramics,
construction, and materials transportation. Because of the nature and
flexibility of our process, virtually all bulk materials used in basic
industries can be economically separated, classified, and otherwise
processed.
There exists, however, the inherent risk that a market does not exist
for the system due to its unique technological nature. Potential
clients/customers may be reluctant to invest in a new, commercially
unproven product. Additionally, there exists the inherent risk that we
will lack the cash flows necessary to operate as a going concern as we
attempt to develop the market for the system. For example, it may
require several months of contract negotiations and feasibility studies
before a revenue-generating contract is approved. We are also exposed
to the risk that the Company will not be able to aggressively pursue
clients if the U.S. Patent Office does not award a full patent.
Finally, rising raw material (i.e. blowers, computer control systems)
costs could make it difficult for the Company to acquire the items
needed for further testing and development. The realization of any of
these risks could have a material adverse effect on our operations and
could hinder our ability to continue as a going concern.
(2) Distribution methods for our services
Our marketing strategy is to promote, advertise and increase our brand
visibility and attract new customers through multiple channels,
including:
1. Developing strategic alliances;
2. Establishing our brand name; and
3. Direct marketing to existing and potential customers.
We believe that the use of multiple marketing channels will reduce our
reliance on any one source for obtaining customers. This in turn will
lower costs and maximize brand awareness.
Strategic alliances
As of the date of this filing, we have no existing strategic alliances.
We do, however, believe that future joint venture relationships will
allow us to gain additional insight, expertise and penetration into
markets where joint venture partners already operate and may serve to
increase our revenue and income growth. We reserve the right to
/5/
review
potential strategic alliance candidates, and to enter into agreements
in the future should management feel these alliances would be in the
best interest of the Company.
Establish our name brand
We cannot guarantee that we will be able to successfully market and
distribute our services in either the United State or other countries,
and the failure to do so could have an adverse effect on our
operations. We believe that building awareness of the Terra Systems,
Inc. brand is important in establishing and expanding our customer
base. We currently have a web site (www.tsyi.com) and will use
traditional media as our revenues permit, to attract new customers.
Direct Marketing
The majority of our marketing activity is conducted through on-site
demonstrations, as well as on our web site. We plan to move forward
with industrial and agricultural clients entering into exclusive
licensing agreements, which will generate fees and royalty revenues.
We have engaged with P.S.G. LLC (Product Service Group) in a project
that will clean up a low-level radioactive waste site. A successful
initial presentation was made at Terra Systems' headquarters at Payson,
Utah on October 13, 2000. The follow-up presentation will be made in
Denver to Morrison-Knudsen Corp in late November.
In this presentation, Terra will propose a total bulk handling system
that will extract, transport, pulverize, treat, bind, and load-out into
containment the low-level radioactive material. This material is
presently being held in storage silos that are disintegrating due to
natural erosion. 5,100 cubic yards of material needs to be extracted,
treated, and re-contained. Should our proposal be accepted, we would
envision engineering and feasibility funds to be made available in
November of 2000. Construction and on-site operation would take place
in 2001. The final scope of this project would be in the 5 million US
dollar range and take approximately 20 months to complete. This
project could lead to similar future clean-up activity with PSG who
contracts with Morrison-Knudsen.
We intend to sell proprietary components and furnish technicians
throughout startup operations. Manufacturing of this hardware will be
done at our plant in Payson, Utah with initial industrial project
applications taking place in the United States.
(3) Status of any announced new service
As of December 1, 2000 we have:
1.Developed and implemented a business plan;
2.Recruited and retained an appropriate management team and board
of directors; and
3.Attained capital that we believe will be sufficient for the
next nine to twelve months of operations.
We have commenced operations, and have begun generating revenues.
However, we expect the industry to become increasingly competitive,
despite the size and growth expected in the market. We intend to
compete by targeting specific market segments such as power companies
who rely on the pulverization and transport of coal to produce energy.
Another goal is to ensure client satisfaction with the Company's
services and to develop an outstanding reputation for client service.
If we fail to market and distribute our services and generate
sufficient revenues, we may be unable to continue as a going concern.
(4) Industry background
Nearly all bulk materials used in basic industries can or must be
separated, pulverized, classified, and/or otherwise enhanced.
Opportunities exist for many applications in both organic and inorganic
materials in an array of large industries, including power generation,
mining, agriculture, environmental, ceramics, construction, and
materials transportation. Our main competition consists of traditional
methods of pulverization and transport of bulk materials. These
include manufacturers of roller mills and ball mills. However, we do
not consider these to be
/6/
major competitive factors due to the unique
nature of our technology. Specific competitors in our industry would
be Bechtel, Babcock & Wilcox, and Ecology & Environment. These
companies provide coal pulverization, mineral processing, and
remediation of industrial wastes.
(5) Raw materials and suppliers
Our company is neither a purchaser nor a supplier of raw materials.
Numerous raw materials are used to conduct on-site demonstrations on
the effectiveness of our process and equipment; however, the
prospective client holds the responsibility for providing these
materials. Such materials used in on-site demonstrations would
include rice, coal, coal ash, limestone, gypsum, agricultural waste
and other materials containing various heavy minerals (i.e. gold,
silver, platinum).
(6) Customers
Our current material customers and their percentage of our Company's
revenues is as follows:
PacifiCorp / Interwest 95%
Mining
Quantum Minerals / 3%
Utah Chemical
Other 2%
We believe that our ability to establish and maintain long-term
relationships with our customers and encourage repeat business depends,
in part, on the strength of our customer support and service operations
and staff. We value frequent communication with and feedback from our
customers to continually improve our services. We focus on designing
and manufacturing high quality, applications-engineered products that
are designed to address specific customer needs. In addition, our
operating results may also fluctuate due to factors such as the gain or
loss of significant customers. Our existing customer relationships are
strong, and our revenues would increase considerably should we secure
the contract with P.S.G. LLC.
(7) Patents, trademarks, licenses, franchises, concessions, royalty
agreements, or labor contracts
Our success and ability to compete will be dependent in part on the
protection of our potential patents, trademarks, trade names, service
marks and other proprietary rights. We have engaged Morriss, Bateman,
O'Bryant & Compagni as patent counsel since early spring 1997.
Application was made in early 1998 for specific patent applications
with the United States Patent Office. As developments are made,
patents are upgraded. Patent pending status has been granted to us on
specific patent filings. In addition, we may rely on certain
intellectual property licenses from third parties, and may be required
to license additional products or services in the future, for use in
the general operations of our business plan. We cannot assure you that
these third party licenses will be available or will continue to be
available to us on acceptable terms if at all. The inability to enter
into and maintain any of these licenses could have a material adverse
effect on our business, financial condition or operating results. In
addition, policing unauthorized use of our proprietary and other
intellectual property rights could be expensive if not difficult or
impossible. Also, we cannot guarantee that third parties will not
bring claims of copyright or trademark infringement against us or claim
that certain aspects of our processes or other features violates a
patent they may hold. There can be no assurance that third parties
will not claim that we have misappropriated their creative ideas or
formats or otherwise infringed upon their proprietary rights. Any
claims of infringement, with or without merit, could be time consuming
to defend, result in costly litigation, divert management attention, or
require us to enter into costly royalty or licensing arrangements.
These potentialities could have a material adverse effect on our
business, financial condition or operating results.
(8) Regulation
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.
/7/
(9) Effect of existing or probable government regulations
We believe that we will be able to comply in all material respects with
the laws and regulations governing the industry, and that such laws
will not have a material effect on our operations. However, various
federal and state agencies may propose new legislation that may
adversely affect our business, financial condition and results of
operations. We are not aware of any probable government regulations
that may adversely affect our business.
(10) Research and development activities
We seek to continue developing our products internally through
research and development or if appropriate, through strategic
partnerships. But, if we can purchase or license products, services
or technologies from third parties at a reasonable cost, we will do so
in order to avoid the time and expense involved in developing such
products, services or technologies.
(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 our executive officers and other key employees, including
our Chief Executive Officer, President, Research & Development,
Secretary/Treasurer, Director, and Consultant of each of our operating
units. The loss of the services of such individuals and/or other key
individuals could have a material adverse effect on our operations.
Generally, we do not offer employment agreements to our executive
officers or key employees, nor do we maintain key man life insurance on
such individuals.
Item 2. Management's Plan of Operation & Discussion and Analysis
A. Management's Plan of Operation
(1) In our initial approximately fifty-five month operating period
ended September 30, 2000; we have incurred $6,420,754 in net losses
and $336,464 in revenues from operations. Management intends to use
capital and debt financing as needed to supplement the cash flows
received through successful negotiations of licensing agreements.
Currently, the primary source of capital has been obtained through the
issuance of common stock and options to a corporation that has also
engaged to provide business management and marketing consultation
services for Terra Systems, Inc (see Note 1 to Financial Statements
under "Basis of Presentation", paragraph 2 and Note 3 to the Financial
Statements). Our fixed and variable expenses and our ability to
control them are as follows:
Classification Fixed / Ability to Control
Variable
Employee Wages and Salary = Can reduce through lay
Benefits Fixed off of personnel
Hourly =
Variable
Subcontractor Expense Fixed Can reduce through
discontinuation of
agreements
Accounting and Legal Variable May increase as
Expenses Company becomes fully
reporting
Capital Lease , Fixed Little control over,
Leasing Fees per agreement
Building Rental Fixed Little control over,
Expense per agreement
Utilities Variable May fluctuate due to
seasonality or
increased production
/8/
levels
Business Insurance Fixed Required business
coverage. May be able
to renegotiate upon
policy renewal
Misc. Office Supplies Variable Can control through
& Shipping reduced office supply
requisitions,
negotiating
alternative shipping
solutions
Selected financial data of the Company is as follows:
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
Selected Balance Sheet Data
Balance Sheet Data: As of As of As of
September December December
30, 31, 31,
2000 1999 1998
(Unaudited (Audited) (Audited)
)
Total Assets $ $ $
554,828 647,950 795,232
Total Long-Term Liabilities $ $ $
677,865 852,097 940,570
Balance Sheet Data: As of As of
December December
31, 31,
1997 1996
(Audited) (Audited)
Total Assets $ $
911,934 971,717
Total Long-Term Liabilities $ $
843,729 308,337
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
Selected Statement of Operations Data
Statement of Operations Data: For the For the For the
Nine Nine Months Year Ended
Months Ended
Ended
September September December
30, 30, 31,
2000 1999 1999
(Unaudited) (Unaudited) (Audited)
Total Revenue $ $ $
6,792 129,690 159,705
Loss from Cont. Operations $ $ $
(1,148,482 (918,205) (1,129,237)
)
Loss from Cont. Operations $ $ $
per Common Share (0.07) (0.06) (0.08)
Statement of Operations Data: For the
Period from
For the For the February
17, 1996
Year Ended Year Ended (Inception)
through
December December December
31, 31, 31,
1998 1997 1996
(Audited) (Audited) (Audited)
Total Revenue $ $ $
166,767 3,200 -
Loss from Cont. Operations $ $ $
(1,189,265) (1,384,991) (1,291,657)
Loss from Cont. Operations $ $ $
per Common Share (0.09) (0.06) (0.02)
/9/
Statement of Operations Data: Cumulative Cumulative
For the For the
Period Period
February February
17, 1996 17, 1996
(Inception (Inception)
through through
September December
30, 2000 31, 1999
(Unaudited) (Audited)
Total Revenue $ $
336,464 329,672
Loss from Cont. Operations $ $
(5,957,753) (4,809,271)
Loss from Cont. Operations $ $
per Common Share (0.41) (0.38)
Stock-Based Compensation for Current and Future Services
From February 17, 1996 (Inception) through December 31, 1997 the
Company issued 75,000 shares of common stock at $0.001 per share.
During the year ended December 31, 1998 the Company issued 350,000
shares of common stock at $0.001 per share and during the year ended
December 31, 1999 the Company issued 20,000 shares of common stock at
$0.001 per share to various employees for current and future services.
The shares issued from February 17, 1996 (Inception) through December
31, 1997 had a market value of $74,925 or $1.00 per share on the day
of issuance. The shares issued during the year ended December 31,
1998 had a market value of $393,750 or $1.13 per share on the day of
issuance and the shares issued during the year ended December 31, 1999
had a market value of $19,320 or $0.97 per share on the day of
issuance. Under the terms of the stock issuance, the Company can
reacquire all the stock at $0.001 per share within one year from the
date of issuance and one half of the shares within two years from the
date of issuance. These shares are considered non-vested and have
been accounted for in accordance with APB 25 Accounting for Stock
Issued to Employees, whereby the Company is recognizing compensation
expense over the vesting period of the stock for the difference
between the fair value of the stock on the day of issuance and the
consideration paid by the employees. In the event employment should
be terminated, all non-vested shares of stock shall be forfeited by
the employee.
During the nine months ended September 30, 2000, an officer of the
Company, who had been issued 150,000 shares of the above mentioned
stock, forfeited 50,000 shares of non-vested common stock valued at
$56,200. During the year ended December 31, 1999, an officer of the
Company, who had been issued 200,000 shares of the above mentioned
stock, left the Company. Accordingly, the officer forfeited 100,000
shares of non-vested common stock, which was valued at $112,400.
The Company recognizes compensation expense for the above shares over
the period the shares vest as follows:
Period Compensation Deferred
Expense Compensation
February 17, 1996 to $ 44,955 $ 0
December 31, 1997
January 1, 1998 to $275,953 $147,767
December 31, 1998
January 1, 1999 to $205,720 $ 28,093
December 31, 1999
January 1, 2000 to June $ 41,389 $ 13,282
30, 2000
Common Stock Issued to Acquire Xullux
On May 1, 1996, we entered into a merger agreement with Xullux, Inc.,
whereby we agreed to issue 2,955,000 shares of common stock for all of
the outstanding common stock of Xullux, Inc. Xullux, Inc. had no assets
at the date of the merger and was considered a shell corporation;
accordingly, the 2,955,000 shares held by the Xullux, Inc. stockholders
were deemed to have been issued for no consideration.
Common Stock Issued for Cash
The Company issued shares of common stock for cash as follows:
/10/
Period Stock Price Proceed
Issued Range s
February 17, 1996 to 1,926,687 $0.50 to $1,834,
December 31, 1997 $2.00 139
January 1, 1998 to 715,727 $0.30 to $
December 31, 1998 $0.80 377,712
January 1, 1999 to 705,000 $0.25 to $
December 31, 1999 $0.50 285,460
January 1, 2000 to June 224,673 $0.25 to $
30, 2000 $0.30 57,835
Common Stock Issued in Satisfaction of Subscription Agreements and
Marketable Securities
Between July and September 1996, $206,000 was contributed to the
Company under various stock purchase agreements for future issuances of
common stock. In October through December 1996, the Company issued
246,000 shares of common stock in satisfaction of these subscription
agreements.
In May 1996, the Company entered into an agreement to issue 250,000
shares of common stock to acquire an investment in another company,
which had a fair value of $190,000. By September 30, 1996, the Company
had issued 19,000 shares of common stock relating to this transaction.
The remaining 231,000 common shares were issued in December 1996. The
investment in another company was sold in 1996 for $91,000, and a loss
of $99,000 was recorded.
Common Stock Issued for Services
During the six months ended June 30, 2000 the Company issued 122,920 of
common stock and in the year ended December 31, 1999 the Company issued
259,286 shares of common stock for consulting services. The common
stock was valued at prices ranging from $0.48 to $0.70 per share. For
the six months ended June 30, 2000 the Company charged $143,189 and for
the year ended December 31, 1999 the Company charged $60,000 of
consulting expense to operations (See exhibit 99).
Common Stock Redemptions
In 1996, the Company issued 48,000,000 shares of common stock upon
organization of the Company. In 1997, the Company exercised its right
to repurchase 36,775,000 shares of common stock from two shareholders
at $0.001 per share. The stock redemption was paid by the Company
issuing 10% promissory notes.
In September 1996, the Company redeemed a total of 3,000,000 shares of
the Company's common stock from six different shareholders for no
consideration.
Common Stock Issued for the Conversion of Debt
During the nine months ended September 30, 2000, a stockholder
exercised 500,000 options. The Company issued 500,000 shares of common
stock for the conversion of notes payable to stockholders in the amount
of $100,000 or $0.20 per share. During the year ended December 31,
1999, the Company issued 200,000 common shares for the retirement of
accounts payable to a related party, valued at $50,000 or $0.25 per
share.
Stock Right Exercised
During the period ended September 30, 2000 (as discussed in Note 3 of
the Notes to the Consolidated Financial Statements) the Company granted
stock rights in connection with a consulting agreement. The Company
recognized consulting expense of $560,000 in connection with the grant
of these stock rights. Upon grant of the rights, the corporation
exercised its right and the Company issued 400,000 shares of common
stock for $100,000 or $0.20 per share.
As of September 30, 2000, we have 17,314,793 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.
/11/
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 September 30, 2000, we have generated $336,464 in sales revenues
and devoted our efforts primarily to developing our products and
services, implementing our business strategy and raising working
capital through equity financing. Our revenues are primarily
dependent upon our ability to cost-effectively and efficiently develop
and market our products and/or services. Our priorities for the next
six to twelve months of operations are to:
1. Continue marketing our services;
2. Develop strategic relationships;
3. Respond to competitive developments; and
4. Establish our brand identity.
Realization of sales of our products and services during the fiscal
year ending December 31, 2000 is vital to operations. We may not be
able to continue as a going concern without realizing additional sales
or 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 nine months ended September 30, 2000
was approximately $1,210,036 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 nine months ended
September 30, 2000 were approximately $1,152,777, of which
approximately 82.50% 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
nine months ended September 30, 2000, the depreciation and
amortization expense for our product development costs is $93,696.
There was $125,823 depreciation and amortization expense in 1999.
This operating trend is projected to continue for at least the
remaining period of fiscal 2000.
To fund fiscal 2000 operations, we believe our projected cash balance
will be adequate to fund our operations and provide for our working
capital needs through December 2000.
We may experience significant fluctuations in operating results in
future periods due to a variety of factors, including but not limited
to, the following risk factors.
Limited Operating History
We have a limited operating history on which to base estimates for
future performance. In 1996 Terra entered into a capital lease
agreement with Spring Lake Company to facilitate the acquisition of
various pieces of plant equipment. This transaction has been
designated a "related party" transaction (please see note 9 of the
financial statements). As a result of insufficient cash flows, Terra
has been unable to meet their lease payment obligations with Spring
Lake Co. on a timely basis. Currently, the monthly payment obligation
is approximately $13,700 per month. It will be difficult for Terra to
continue operating at a deficit. On a short-term basis, Terra may
elect to raise additional funds through the sale of stock to outside
investors; however, any future offerings could significantly dilute the
value of any previous investor's investment value.
Current negotiations with potential clients may also result in the
finalization of feasibility study and licensing agreements that would
result in revenues, and thus cash flow, for the firm. If these events
do not generate sufficient cash flow to cover operating expenditures,
Terra may elect to reduce costs through a reduction of its workforce,
elimination of employee benefits, or a combination of both. On a long-
term basis, licensing agreements will be
/12/
structured to result in an up-
front licensing fee arrangement, with subsequent revenues to be
generated by volume (ex tons per hour) transported, dried, moved, etc.
Need for Additional Financing
We may need to obtain additional financing in the event that we are
unable to realize sales of our services or collect accounts receivable.
We may incur additional indebtedness from time to time to finance
acquisitions, provide for working capital or capital expenditures or
for other purposes. However, we currently anticipate that our
operating cash flow will be sufficient to meet our current operating
expenses as they become due. Furthermore, our ability to pay cash
dividends on, and to satisfy the redemption obligations in respect of
our outstanding Common Stock will be primarily dependent upon the
future financial and operating performance of our operating units. Such
performance is dependent upon financial, business and other general
economic factors, many of which are beyond the control of our operating
units. If we are unable to generate sufficient cash flow to meet our
future debt service obligations or provide adequate long-term
liquidity, we will have to pursue one or more alternatives, such as
reducing or delaying capital expenditures, refinancing debt, selling
assets or operations, or raising equity capital. There can be no
assurance that such alternatives could be accomplished on satisfactory
terms, if at all, or in a timely manner.
The Market
Technological change, continuing process development and new product
introductions may affect the markets for our products. Our success will
depend, in part, upon our continued ability to manufacture products
that meet changing customer needs, successfully anticipate or respond
to technological changes in manufacturing processes on a cost-effective
and timely basis and enhance and expand our existing product offerings.
Current competitors or new market entrants may develop new products
with features that could adversely affect the competitive position of
our products. We have invested and continue to invest substantial
resources in research and development in an effort to improve upon our
existing manufacturing processes. However, there can be no assurance
that our process development efforts will be successful or that the
emergence of new technologies, industry standards or customer
requirements will not render our technology, equipment or processes
obsolete or uncompetitive. Any failure or delay in accomplishing these
goals could have a material adverse effect on our business, results of
operations and financial condition. In addition, to the extent that we
determine that new manufacturing equipment or processes are required to
remain competitive, the acquisition and implementation of the
technologies, equipment and processes required are likely to require
significant capital investment.
(3) No engineering, management or similar report has been
prepared or provided for external use by us in connection with the
offer of our securities to the public.
(4) Management believes that our future growth and success will
be largely dependent on our ability to develop and market our
products. We believe that the long-term success of our business may
require substantial research and development. There are no formal
agreements to date, and we pay for all independent tests. We have
incurred research and development costs from February 16, 1996 (date
of inception) through September 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 September 30, 2000,
we have generated $336,464 sales revenue. Revenues have been generated
primarily through the development of a test-scale system and related
feasibility studies. These feasibility studies have been conducted on
coal (PacifiCorp) and Black Sands (Quantum) and were conducted to
determine size reduction, moisture removal, and mineral extraction
capabilities.
A substantial percentage of our revenue was derived from work performed
for PacifCorp / Interwest Mining. The majority of this work was
related to feasibility studies related to the coal industry. The
agreed upon testing was completed by late 1999, and we began
negotiating additional testing and contract formulation with management
/13/
at PacifiCorp. Early in 2000, Scottish Power acquired PacifiCorp, and
as a result discussions were temporarily halted. In the late summer of
2000 discussions were resumed; however, our management staff and
consultants have had to devote considerable time and effort in the
"reintroduction" of themselves and our system to new management from
Scottish Power. It is currently anticipated that we will be able to
begin pursuit of a licensing agreement with PacifiCorp in the near
future.
Item 3. Description of Property
A. Description of Property
Our corporate headquarters are located at 5912 West 11600 South,
Payson, Utah 84651. We have use of this space through a lease
arrangement from Spring Lake Company, a related party. The terms of
this lease are for $4,120.00 per month on a month-to-month basis. The
lease expires on July 1, 2003. This facility consists of approximately
20,000 square feet of office and warehouse space in the main building,
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 Company. The purpose of this lease is to acquire
plant equipment at a total of $423,594. This lease expires on March
2002. The monthly payment is approximately $13,258 per month.
Furthermore, we have acquired office equipment at a cost of $70,811,
and additional plant equipment at a cost of $193,152. In addition, we
have an automobile valued at $22,000, and software valued at $10,380.
B. Investment Policies
Management does not currently have policies regarding the acquisition
or sale of assets primarily for possible capital gain or primarily for
income. We do not presently hold any investments or interests in real
estate, investments in real estate mortgages or securities of or
interests in people' primarily engaged in real estate activities.
Item 4. Security Ownership of Management
A. Security Ownership of Management
The following table sets forth as of December 31, 1999 certain
information regarding the beneficial ownership of our common stock by
(a) each person who is known us to be the beneficial owner of more than
five percent (5%) of the common stock, (b) each of our director and
executive officers and (c) all of our directors and executive officers
as a group. Except as otherwise indicated, the persons or entities
listed below have sole voting and investment power with respect to all
shares of common stock beneficially owned by them, except to the extent
such power may be shared with a spouse. No change in control is
currently being contemplated.
Shareholder Corporate Shares 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
/14/
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
Shareholder Street Address City State Zip
Code
Clayton 1660 West 2470 Price Utah 84501
Timothy North
L. Kent 631 South 1500 Provo Utah 84606
Harmon East
Leonard Howe 10032 South Payson Utah 84651
6000 West
CHT Holding 3037 Somoa Costa Califor 92626
Trust* Place Mesa nia
Lloyd McEwan 684 North Alpine Utah 84004
Summit Way
*Please refer to Audited Financial Statements
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
B. Work Experience
Clayton Timothy, Chief Executive Officer- Mr. Timothy, 52, is presently
serving as the Chairman of the board of directors and as the Chief
Executive Officer of Terra Systems. He has held that position since
September 1996. Prior to joining Terra Systems, Mr. Timothy was Vice
President of Industrial Management and Engineering in Lehi, Utah. He
was responsible for corporate Marketing and coordination of all
projects. From 1990 to 1994, he was Executive Vice President and
Director of COVOL Environment Technologies of Lehi, Utah.
L. Kent Harmon, President- Mr. Harmon, 45, is presently serving as a
member of the board of directors and as the President of Terra Systems.
He has held these positions since October of 1996. Prior to his
employment with
/15/
Terra Systems he was President of Metredyne Imaging
Services in Buena Park, California. Metredyne created and marketed
diagnostic systems that quantified the extent of physical impairment
caused by work related injuries.
Lloyd McEwan, Secretary and Treasurer- Mr. McEwan, 71, is presently
serving as a member of the board of directors and as Secretary and
Treasurer of Terra Systems since 1996. Prior to his employment with
Terra Systems he was the principal owner of State, Inc., which is a
construction company specializing in metals, mining, electrical utility
and petroleum refinery industries. He has over 40 years of management
experience in this field.
Leonard Howe, Technical Director - Mr. Howe, 41, has served as
Technical Director of Terra Systems since inception. He has been
actively involved in the research and development of Terra's
technology, patent filing, and feasibility testing. Before his
employment with Terra Systems he worked in the gold mining industry.
Robert Underwood, Consultant- Mr. Underwood, 56, has served on the
board of directors of Terra Systems since January 1999. He also serves
as a Director and Consultant to the company. Prior to Terra Systems he
worked for 27 years in the commercial banking industry as Vice
President and Manager for First Security Bank of Utah NA. He received
his BA from Brigham Young University in Economics and Language and his
MBA in Finance from the University of Utah. In addition he was an
instructor of Economics at BYU and for the American Institute of
Banking for eleven years.
Item 6. Executive Compensation
Remuneration of Directors and Executive Officers
We do not currently have organized labor agreements or union agreements
between Terra Systems, Inc. and our employees. Every twelve (12)
months, each executive officer is expected to draw the following annual
compensation. If the payroll obligation is not met on a timely basis,
the payment(s) accrue(s) until such time as the Company is able to meet
the obligation. The following table sets forth the annual compensation
due our executives and the amount of each executive's compensation that
has accrued based on the inability of the Company to meet the
obligation.
Name Capacities in which Annual Salary Accrued
Remuneration was Compensation As Of
Recorded September 30,
2000
Clayton Chief Executive $60,000 Annual
Timothy Officer Salary $240,000
Beginning October,
1996
L. Kent President $60,000 Annual
Harmon Salary $65,000
Beginning
February, 1996
Leonard Technical Director $60,000 Annual
Howe Salary $65,000
Beginning
February, 1996
Lloyd Secretary and $60,000 Annual
McEwan Treasurer Salary $240,000
Beginning October,
1996
Robert Director and $60,000 Annual
Underwood Consultant Consulting $0
Fee Beginning
January, 1999
Tim Gwyther Project Manager and $60,000 Annual
Consultant Consulting $0
Fee Beginning
January, 1999
Compensation of directors
There are no arrangements for our directors to be compensated at this
time, nor does the company have any intention to provide compensation
to its directors in the future.
/16/
Stock Option Plan
We currently do have an employee stock option plan. On January 12,
1999, Terra Systems issued stock options to the following individuals,
in the following amounts:
Individual Corporate Number of
Position Shares
Clayton Chief Executive 500,000
Timothy Officer
L. Kent President 500,000
Harmon
Leonard Howe Technical 500,000
Director
Lloyd McEwan Secretary and 500,000
Treasurer
Robert Director and 250,000
Underwood Consultant
The Exercise Price is $0.20 per share. The options expire on the
second anniversary of the Stock Option Agreement (all dated January 12,
1999). In addition to the above, federal and/or state law requires
that Terra Systems contributes to a workers compensation fund, in
addition to state and federal unemployment insurance plans on behalf of
all Terra Systems employees (including regular, temporary, full-time,
and part-time).
Item 7. Certain Relationships and Related Transactions
There were no actual or proposed transactions that occurred over the
past two years, to which any person related to the issuer had or is to
have a direct or indirect material interest as set forth in item 404
of Regulation S-B of the Securities and Exchange Act of 1933.
Item 8. Description of Securities
We authorized capital stock that consists of 100,000,000 shares of
common stock, par value $0.001 per share. As of September 30, 2000, we
had 17,314,793 shares of common stock outstanding. The holders of
shares of our common stock are entitled to one vote for each share on
all matters that the holders of common stock are entitled to vote.
There is no cumulative voting for the election of directors. Holders
of our common stock are entitled to share ratably in our net assets
upon liquidation or dissolution as declared by the Board of Directors
out of funds legally available therefor. Our holders of common stock
have no pre-emptive rights to purchase any shares of any class of our
stock. All outstanding shares of common stock are, and our shares of
common stock to be issued pursuant hereto will be, upon payment
therefore, fully paid and non-assessable.
/17/
Part II
Item 1. Market for Common Equity and Related Stockholder Matters
B. Holders
As of December 31, 1999, we have 233 stockholders of record.
D. Reports to Shareholders
We will furnish our shareholders with annual reports containing
audited financial statements and such other periodic reports as we
determine to be appropriate or as may be required by law. We are
filing this Form 10-SB voluntarily with the intention of establishing
the fully reporting status of Terra Systems, Inc. with the SEC. Upon
the effectiveness of this Registration Statement, we will be required
to comply with periodic reporting, proxy solicitation and certain
other requirements by the Securities Exchange Act of 1934.
Consequently, we will voluntarily file all necessary reports and forms
as required by existing legislation and SEC rules.
E. Transfer Agent and Registrar
The Transfer Agent for our shares of common voting stock is Pam Gray,
Atlas Stock Transfer Company, 5899 South State, Murray, Utah, 84107,
(801) 266-7151.
Item 2. Legal Proceedings
The Company has filed a complaint against a former director and officer
and other stockholders of the Company (the defendants) for using
various forms of improper conduct and misrepresentations concerning
their qualifications and intentions to obtain a significant number of
the Company's shares. The Company is seeking a declaration by the court
that none of the defendants have any right, title to or ownership of
the Company's stock originally issued to the defendants. The defendants
claim the Company and certain of its officers have engaged in
fraudulent and conspiratorial conduct and have filed a counterclaim
seeking the following: a dismissal of the Company's complaint,
unspecified amount of damages resulting from the Company's refusal on
March 1, 1997 to tender shares to the defendants that the defendants
were entitled to sell, the removal of certain restrictions on the
Company's stock, $60,000 for breach of an employment contract and
interest, compensatory damages and punitive damages in unspecified
amounts, and together with attorney fees.
On October 9, 1999, the Court entered a partial summary judgment
against one of the defendants in favor of the Company on all of its
claims. The Court found that the damages sought against the defendant
and an award of reasonable attorney's fees, and expenses incurred in
connection with the case shall be determined at a future date. The
Court also found that the Company is entitled to a partial summary
judgment against the defendant for securities fraud, including
recission and restitution of the issuance of one million Terra Systems
shares and additional damages to be determined in further proceedings
before the Court. The amount of damages to be awarded has not yet been
determined.
The Company denies all material allegations against the Company and
intends to fully defend the counterclaim of the defendants and
prosecute the Company's claims and actions against the defendants. This
litigation is still in the discovery phase and the ultimate outcome
cannot presently be determined.
Threatened Litigation
The Company and certain Officers and Directors of the Company received
notice from a litigant's legal counsel of threatened litigation. The
litigant contends that certain current Officers and Directors held and
sold a number of Xullux shares that were free trading prior to the
merger of Xullux and Terra Systems. The alleged sale may have impacted
the value of the litigant's Terra Systems restricted publicly issued
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
/18/
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. Specifics regarding the
case are as follows:
Terra Systems, Inc. Versus a Former Director/Officer and Other
Stockholders-
Court: District Court For The Fourth Judicial District In And For Utah
County, State Of Utah
Case Name: Terra Systems, Inc., a Utah corporation, Terra Merger
Subsidiary, Inc., a Utah corporation; Kent Harmon, an individual; and
Clayton Timothy, an individual, Plaintiffs, v. Wayne Hanson, an
individual, Howard H. Hucks, an individual and Trustee of CHT Holding
Trust; Valgene Blackburn, an individual, and CHT Holding Trust,
Defendants.
Case Number: Civil No. 97-0400506
Item 3. Changes in and Disagreements with Accountants
We have had no disagreements with our independent accountants.
Item 4. Recent Sale of Unregistered Securities
In 1996, five founding shareholders purchased 8,225,000 shares of our
authorized common stock at par value of $.001 per share. This
original stock offering, in addition to all subsequent offerings, was
made in accordance with Section 4(2) of the Securities Act of 1933, as
amended. No underwriting discounts or commissions were paid in any
offering and all purchases were made by persons unaffiliated with
Terra Systems, Inc. unless otherwise noted:
1.In 1997, we exercised the right to repurchase 36,775,000 shares
of common stock from two shareholders at $0.001 per share.
Issuance of 10% promissory notes paid for the stock redemption.
2.In 1998, we issued 33,000 shares of common stock at a price of
$.303 per share for proceeds of $10,000.00; 27,900 shares at a
price of $.3185 per share for proceeds of $8,887.38; 90,000
shares at a price of $.33 per share for proceeds of $29,700.00;
89,739 shares at a price of $.36 per share for proceeds of
$32,632.56; 160,000 shares at a price of $.50 per share for
proceeds of $80,000.00; 125,000 shares at a price of $.60 per
share for proceeds of $75,000.00; 121,609 shares at a price of
$.73 per share for proceeds of $ 88,883.82; 43,479 shares at a
price of $.75 per share for proceeds of $32,609.31; and 25,000
shares at a price of $.80 per share for proceeds of $20,000.00.
In each instance, the purchasers of the issuer's securities were
accredited and/or sophisticated purchasers, and each of them were
afforded complete access to all of the issuer's books and records
prior to their investment.
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.
In each instance, the purchasers of the issuer's securities were
accredited and/or sophisticated purchasers, and each of them were
afforded complete access to all of the issuer's books and records
prior to their investment.
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
/19/
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. In each instance, the purchasers of the
issuer's securities were accredited and/or sophisticated
purchasers, and each of them were afforded complete access to all
of the issuer's books and records prior to their investment.
Within the same period we issued 500,000 shares of common stock
upon conversion of notes payable to Lloyd McEwan, Secretary and
Treasurer of Terra Systems, Inc., in the amount of $100,000 or
$0.20 per share.
Item 5. Indemnification of Directors and Officers
The bylaws of the company provide for indemnification of employees and
agents in certain cases. Insofar as indemnification for liabilities
arises under the Securities Act of 1933 may be permitted to directors,
officers or persons controlling the company pursuant to the foregoing
provisions, the company has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the act and is therefore unenforceable.
/20/
Part F/S
Item 1. Financial Statements
The following documents are filed as part of this report:
Terra Systems, Inc. Page
Consolidated Balance Sheets - September 30, 2000 F-1
(unaudited),
December 31, 1999
Consolidated Statement of Operations for the Three F-2
Months
Ended September 30, 2000 and 1999 (unaudited), and
for the Nine Months Ended
September 30, 2000 and 1999 (unaudited) and for the
Cumulative Period
February 17, 1996 (Inception) through September 30,
2000 (unaudited)
Consolidated Statement of Cash Flows for the Nine F-3
Months
Ended September 30, 2000 and 1999 (unaudited), and
for the Cumulative Period
February 17, 1996 (Date of Inception) through
September 30, 2000 (unaudited)
Notes to Financial Statements F-4
/21/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
(Unaudited)
ASSETS
Current Assets
Cash $934 $1,429
Receivables 6,010 5,075
Prepaid expenses - -
Total Current Assets 6,944 6,504
Property and Equipment
Leasehold improvements 331,642 331,642
Furniture and equipment 687,558 687,424
Trucks and automobiles 22,000 22,000
Software 10,380 10,380
Less: Accumulated (503,696) (410,000)
depreciation
Net Property and Equipment 547,884 641,446
Total Assets $554,828 $647,950
LIABILITIES AND
STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $351,975 $316,183
Accounts payable to related 270,509 200,175
party
Accrued liabilities 689,114 542,224
Accrued interest payable 250,509 192,946
Capital lease obligation - 237,318 178,210
current portion
Total Current Liabilities 1,799,425 1,429,738
Long-Term Liabilities
Notes payable to 656,517 756,517
stockholders - net of
current portion
Capital lease obligation - 21,348 95,580
net of current portion
Total Long-Term Liabilities 677,865 852,097
Stockholders' Deficit
Common stock, $0.001 par
value; 100,000,000
shares authorized; shares
outstanding:
September 30, 2000 -
17,314,793 shares
December 31, 1999 - 17,315 15,828
15,827,800 shares
Additional paid-in capital 4,492,247 3,589,098
Deficit accumulated during (6,420,754) (5,210,718)
the development stage
Deferred compensation (11,270) (28,093)
Total Stockholders' Deficit (1,922,462) (1,633,885)
Total Liabilities and $554,828 $647,950
Stockholders' Deficit
See accompanying notes to condensed consolidated financial statements.
/F-1/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Cumulati
ve
For the
Period
February
17,
1996
(Incepti
on)
For the Three For the Nine Through
Months Months
Ended September Ended September Septembe
30, 30, r 30,
___2000 ___1999 ___2000 ___1999 ___2000_
Revenues $642 $73,770 $6,792 $129,690 $336,464
Cost of Revenues - 74,279 2,497 105,861 307,558
Gross Profit 642 (509) 4,295 23,829 28,906
(Loss)
Expenses
Research and 34,424 23,833 108,073 68,955 1,300,385
development
General and 145,990 369,269 951,008 778,566 4,176,597
administrative
Depreciation and
Amortization 31,233 31,411 93,696 94,513 509,677
Total Expenses 211,647 424,513 1,152,77 942,034 5,986,659
7
Loss from (211,00 (425,022 (1,148,4 (918,205 (5,957,753
Operations 5) ) 82) ) )
Nonoperating
Income/
(Expenses)
Interest expense (15,503 (18,573) (61,576) (64,855) (359,057)
)
Interest income 11 (125) 22 - 1,727
Loss on sale of - - - - (99,000)
securities
Loss on sale of - - - - (6,671)
assets
Net Nonoperating
Income/
(Expenses) (15,492 (18,698) (61,554) (64,855) (463,001)
)
Net Loss $(226,4 $(443,72 $(1,210, $(983,06 $(6,420,75
97) 0) 036) 0) 4)
Basic and Diluted
Loss
Per Share $(0.01) $(0.03) $(0.07) $(0.06) $(0.41)
Weighted Average
Shares
Outstanding 17,150, 15,482,4 16,623,5 15,200,5 15,600,624
143 09 04 48
See accompanying notes to condensed consolidated financial statements.
/F-2/
TERRA SYSTEMS, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Cumulative
For the
Period
February
17,
1996
(Inception)
For the Nine Through
Months
Ended September September
30, 30,
2000 1999 2000
Cash Flows From Operating Activities
Net loss $(1,210 $(983,0 $(6,420
,036) 60) ,754)
Adjustments to reconcile net loss to
net cash used by operating
activities:
Depreciation and amortization 93,696 94,513 509,677
Loss on sale of investment securities - - 99,000
Loss on sale of assets - - 6,671
Compensation paid with common stock 65,623 417,611 755,441
Consulting expense relating to
grant of stock options 560,000 - 560,000
Receivables (935) 22,236 (6,010)
Prepaid expenses - 166 -
Accounts payable 35,792 101,202 470,585
Accounts payable - related party 70,335 (631) 181,280
Accrued liabilities 146,890 99,608 689,114
Accrued interest payable 57,563 58,513 250,509
Net Cash Used by Operating Activities (181,07 (189,84 (2,904,
2) 2) 487)
Cash Flows From Investing Activities
Purchase of equipment (134) (106) (662,59
8)
Organization costs paid - - (4,755)
Proceeds from sale of assets - - 117,715
Net Cash Used by Investing Activities (134) (106) (549,63
8)
Cash Flows From Financing Activities
Proceeds from borrowings - stockholders - - 870,111
Payments on borrowings - stockholders - (5,000) (149,75
0)
Proceeds from stock issuance and
Subscriptions 195,835 225,460 2,899,6
26
Payments on capital lease obligations (15,124 (23,025 (164,92
) ) 8)
Net Cash Provided by Financing 180,711 197,435 3,455,0
Activities 59
Net Increase (Decrease) in Cash (495) 7,487 934
Cash at Beginning of Period 1,429 4,499 -
Cash at End of Period $934 $11,986 $934
Supplemental Cash Flow Information
Interest Paid $4,013 $-
Non-Cash Investing and Financing
Activities
Conversion of notes payable to equity $100,00 $-
0
Redemption of stock issued to officer 56,200 -
See accompanying notes to condensed consolidated financial statements.
/F-3/
NOTE 1-BUSINESS CONDITION
The accompanying 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. During the three month periods ended
September 2000 and 1999, the Company incurred net losses of
$226,497 and $443,720, respectively. During the nine month
periods ended September 2000 and 1999, the Company incurred
net losses of $1,210,036 and $983,060, respectively. As of
September 2000, the Company's losses accumulated from
inception totaled $6,420,754. These factors, among others,
indicate that the Company may be unable to continue as a
going concern for a reasonable period of time. The financial
statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts
or the amount and classification of liabilities that might
be necessary should the Company be unable to continue as a
going concern. The Company's ability to continue as a going
concern is dependent upon its ability to generate sufficient
cash flow to me 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 is in the process of negotiating
various agreements to perform research on and the
development of pneumatic conveyance systems to handle
materials in a bulk state in industrial research and
processing. Management also intends to use capital and debt
financing as needed to supplement the cash flows that
potentially could be generated through the successful
negotiation of agreements. As discussed in Note 3, the
Company entered into an agreement with a corporation for
consultation and advisory services related to business
management and marketing. As a result of this agreement, the
Company received $100,000 for the issuance of common stock
and options. This agreement allows for additional cash
proceeds through the issuance of additional common stock and
options. Aside from this agreement, the Company obtained
additional cash proceeds of $95,835 through the issuance of
common stock.
NOTE 2-INTERIM FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by
the Company, and are unaudited. In the opinion of
management, the accompanying unaudited financial statements
contain all necessary adjustments for fair presentation,
consisting of normal recurring adjustments except as
disclosed herein.
The accompanying unaudited interim financial statements have
been condensed pursuant to the rules and regulations of the
Securities and Exchange Commission; therefore, certain
information and disclosures generally included in financial
statements have been condensed or omitted. These financial
statements should be read in connection with the Company's
annual financial statements included in the Company's annual
report on Form 10-KSB as of December 31, 1999. The financial
position and results of operations of the interim periods
presented are not necessarily indicative of the results to
be expected for the year ended December 31, 2000.
/F-4/
NOTE 3-RELATED PARTY TRANSACTIONS
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
September 30, 2000, the Company owed this related party
$212,507 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 September 30, 2000, the Company owed
these Officers $58,002. Total amounts due to Related Parties
as shown on the balance sheet at September 30, 2000 are
$270,509. All amounts are due on demand with no interest.
NOTE 4-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-5/
NOTE 5-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 Options - During the nine months ended September
30, 2000, an employee exercised 500,000 stock options for
500,000 shares of common stock by converting notes payable
in the amount of $100,000, or $0.20 per share.
Non Employee Options - 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 the status of the
Company's stock options as of September 30, 2000 and 1999
and changes during the nine months then ended is as follows:
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
2000 1999
Weighte Weighte
d- d-
Average Average
Shares Exercis Shares Exercis
e Price e Price
Outstanding at 2,250,00 $0.20 - $-
beginning of 0
period
Forfeited - - (250,000 0.20
)
Exercised (500,000 0.20 - -
)
Granted 400,000 0.88 2,500,00 0.20
0
Outstanding at 2,150,00 0.33 2,250,00 0.20
period end 0 0
Options 2,150,00 $0.33 2,250,00 $0.20
exercisable at 0 0
period end
Weighted-average
fair value of
options $0.21 $0.20
granted during
the period
/F-6/
NOTE 6-STOCKHOLDERS' EQUITY
During the nine months ended September 30, 2000, an
officer of the Company, who had been issued 150,000
shares of contingently issued stock, left the Company,
and forfeited 50,000 shares of non-vested common stock
valued at $56,200.
Common Stock Issued for Cash - During the nine months
ended September 30, 2000, the Company issued 376,673
shares of common stock for proceeds of $95,835 at
prices ranging from $0.25 to $0.30 per share.
Common Stock Issued for Services - During the nine
months ended September 30, 2000, the Company issued
260,320 shares of stock for consulting services valued
at $105,000 at prices ranging from $0.25 to $1.00 per
share.
Common Stock Issued for the Conversion of Debt - During
the nine months ended September 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.
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.
NOTE 7-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 awarded has not yet been determined.
/F-7/
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-8/
Part III
Item 1. Index to Exhibits (Pursuant to Item 601 of Regulation SB)
Exhibit Name and/or Identification of
Number Exhibit
2 Merger Agreement Rendered as
Previously Filed
3 Articles of Incorporation & By-Laws
(a) Articles of Incorporation Rendered as
filed May 1, 1996 Previously Filed
(b) By-Laws of the Company Rendered as
adopted October 7, 1997 Previously Filed
10 Material Contracts
Agreement between Terra Systems, Rendered as
Inc. & XCEL Associates, Inc. Previously Filed
27 Financial Data Schedule
Financial Data Schedule of Terra Rendered as
Systems, Inc. ending June 30, Previously Filed
2000
99 Stock Issuance with a Call Option
Vesting Schedule &
Stock Issued for Services - Non Rendered as
Employees Previously Filed
/22/
