REGISTRATION NO. 001-12867
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO.3 TO
FORM 10
FILED APRIL 3, 1997
Amending the Previously Filed Form 10-12(b) to
a Form 10-12(g) and Including Other Material Changes
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
TERRA NATURAL RESOURCES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(fka NEVADA MANHATTAN MINING INCORPORATED)
NEVADA 88-0219765
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5038 NORTH PARKWAY CALABASAS, SUITE 100
CALABASAS, CALIFORNIA 91302
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818) 591-4400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(TITLE OF CLASS)
PREFERRED STOCK
(TITLE OF CLASS)
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CROSS-REFERENCE SHEET BETWEEN
REGISTRATION STATEMENT AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
FORM 10 ITEM NUMBER AND CAPTION CAPTION IN INFORMATION STATEMENT
- - ----------------------------------- ------------------------------------------------
<S> <C>
1. Business....................... The Company: Properties, Risk Factors; Management's
Discussion of and Analysis of Financial Conditions and
Results of Operations
2. Financial Information.......... Selected Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Financial Statements, Market Price of and
Dividends on the Registrant's Common Equity & Related
Stockholder Matters.
3. Properties..................... Properties; Risk Factors
4. Security Ownership of Certain
Beneficial Owners and
Management..................... Security Ownership of Certain Beneficial Owners and
Management
5. Directors and Executive
Officers....................... Management
6. Executive Compensation......... Executive Compensation
7. Certain Relationships and
Related Transactions........... The Company's Business and Properties
8. Legal Proceedings.............. Legal Proceedings
9. Market Price of and Dividends
on the Registrant's Common
Equity and Related Stockholder
Matters........................ Market Price of and Dividends on Company Equity;
Management; Executive Compensation
10. Recent Sales of Unregistered
Securities..................... Risk Factors, Recent Sales of Unregistered Securities.
11. Description of Registrant's
Securities to be Registered.... Description of Securities Being Registered
12. Indemnification of Directors
and Officers................... Management, Indemnification of Directors and Officers.
13. Financial Statements and
Supplementary Data............. Financial Statements and Supplementary Data
14. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure....... Not Applicable
15. Financial Statements and
Exhibits....................... Financial Statements and Exhibits
</TABLE>
<PAGE>
i
TABLE OF CONTENTS
PAGE
----
The Company.............................................................. 1
Selected Financial Data.................................................. 2
Properties............................................................... 3
Risk Factors............................................................. 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 24
Security Ownership of Certain Beneficial Owners and Management........... 26
Principal and Selling Shareholders....................................... 26
Management............................................................... 27
Executive Compensation................................................... 31
Certain Relationships and Related Transactions........................... 32
Legal Proceedings........................................................ 32
Market Price of and Dividends on Company's Equity........................ 34
Description of Securities Being Registered............................... 37
Registration Rights...................................................... 40
Indemnification of Directors and Officers................................ 41
Legal Matters and Auditors............................................... 41
Further Information...................................................... 41
Financial Statements and Supplementary Data.............................. 42
<PAGE>
1
1. THE COMPANY
THE COMPANY
Nevada Manhattan Mining Incorporated (the "Company") was formed on June 10,
1985, in the state of Nevada under the name of Epic Enterprises, Ltd. On
September 11, 1987, the Company amended its Articles of Incorporation changing
its name to Nevada Manhattan Mining Incorporated. The Company's articles
currently authorize the issuance of 49,750,000 shares of Common Stock with a par
value of one cent ($.01) per share and 250,000 shares of Series A Preferred
Stock with a par value of $1.00 per share (the "Preferred Stock") convertible
into Common Stock on the terms and conditions described elsewhere in this
Registration Statement. There were 12,273,565 shares of the Company's Common
Stock and 228,319 shares of the Preferred Stock issued and outstanding as of May
31, 1997. The average price per share paid for the Common Stock issued directly
by the Company has been approximately $2.00 per share. Holders of the Preferred
Stock have paid $10.00 per share with an effective purchase price for the Common
Stock (after giving effect to the conversion thereof on a one-for-ten basis) of
$1.00 per share. In addition, the Company has recently issued approximately
$3,500,000 of 8% Senior Secured Convertible Debentures in two
privately-negotiated transactions.
The Company was formed primarily to develop the Nevada Property, other gold
mining properties which it had previously owned, and certain gold mining
properties which it has recently acquired. Pursuant to prior action of both the
Company's directors and its shareholders, certain gold mining properties have
been abandoned as uneconomic. The Company has recently acquired the rights to
harvest various species of hardwoods in up to 750,000 hectares (approximately
1,900,000 acres) of virgin timber properties located on various tracts
throughout the state of Para, Brazil and the rights to acquire a sawmill
facility near the town of Sao Miguel do Guama. In addition, the Company has also
acquired the rights to seven (7) gold mining concessions and three (3) coal
mining concessions in Indonesia.
The Company has its principal executive offices at 5038 North Parkway
Calabasas, Suite 100, Calabasas, California 91302. Its telephone number is (818)
591-4400 and its facsimile number is 818 591-4411.
Management of the Company presently consists of a five-member board of
directors (two of which are neither executive officers nor employees). The
Company employs two (2) full-time executive officers as well as seven (7)
full-time employees at its principal offices. The Company's subsidiary,
Equatorial Resources, Ltd., also employs approximately 90 persons in Brazil who
are employed in various capacities relating to either its sawmill facility or
its harvesting operations being conducted on the Brazilian Timber Properties.
THE COMPANY'S SUBSIDIARIES
Equatorial Resources, Ltd. (hereinafter "Equatorial") was incorporated in
the British Virgin Islands as an international business company on December 13,
1996. Equatorial currently maintains offices in Road Town, Tortola, British
Virgin Islands with its primary business office located in Calabasas,
California. Equatorial's board of directors consists of three (3) members with
such number being able to increase to seven. Its authorized capitalization is
25,000 shares of common stock and 25,000 shares of preferred stock with its
largest single shareholder being Nevada Manhattan Mining Incorporated which owns
80% of Equatorial's outstanding common shares.
Equatorial's primary business purpose is the acquisition and development of
timber producing property in the Amazon Basin of Brazil. Since Equatorial's
inception, it has acquired the right to develop and/or harvest virgin timber
properties on up to approximately 750,000 hectares located in the state of Para,
Brazil, and the right to acquire a sawmill facility located near the town of Sao
Miguel do Guama, Brazil. In the development of such properties Equatorial
currently employs approximately 90 persons, most of whom are Brazilian nationals
employed in connection with the operations being conducted at the sawmill or in
connection with the timber harvesting operations on the Terranorte Concessions.
Kalimantan Resources, Ltd. Kalimantan Resources, Ltd., (hereinafter
"Kalimantan") was incorporated in the British Virgin Islands as an international
business company on September 16, 1996. Kalimantan currently maintains offices
in Road Town, Tortola, British Virgin Islands with its primary business office
located in Calabasas, California. Kalimantan's board of directors consists of 3
members with such number
<PAGE>
2
being able to increase to seven. Its authorized capitalization is 1,000 shares
of common stock with its sole shareholder being Nevada Manhattan Mining
Incorporated.
Kalimantan's primary business purpose is to enter into contracts for the
exploration and if warranted the development and extraction of coal and gold ore
in Indonesia. Since Kalimantan's inception it has: entered into an agreement to
acquire a fifty-one percent (51%) interest in a gold exploration property
comprising 10,000 hectares (25,000 acres) located in East Kalimantan; entered
into two (2) additional agreements to acquire an additional six (6) gold mining
concessions aggregating over 23,400 hectares (58,500 acres) and three (3) coal
mining concessions comprising 290,000 hectares (725,000 acres); and entered into
an agreement with Maxwells Energy and Metals Technology Ltd. to substitute the
acquired original 10,000 hectare property for a 16,000 hectare (40,000 acre)
tract located elsewhere on the island of Kalimantan.
Shareholder Advisory Committee. In 1989, the Company formed a Shareholder
Advisory Committee (the "Advisory Committee") comprised of up to 12 outside
shareholders. The purpose of the Advisory Committee is to participate in
directors' meetings and compensation meetings, as well as planning meetings
related to all aspects of corporate development. Members are selected annually
from a group of shareholders who respond to Company inquiries regarding interest
in participating on the Advisory Committee. Membership is rotated annually. One
of the primary purposes of this Committee is to provide independent, shareholder
participation in critical decisions relating to overall corporate strategy.
Significant Contracts with Consultants. The Company has contracted with
Harrison Western Mining and Construction, Lakeland, Colorado, to supply labor,
service, materials and equipment for Nevada property operations. The Company has
also entered into agreements with: Gold King Mines Corporation to provide mining
consulting services with respect to the Nevada Property; Behre Dolbear &
Company, Inc. and its affiliates, to provide oversight and third-party
validation services relative to the exploration and development activities on
the Indonesian Concessions; Eco-Rating International, Inc., to provide an
economic and environmental evaluation of the Company's Brazilian Timber
Properties; and with British Far East Holdings Ltd. to provide certain financial
and management consulting services.
2. SELECTED FINANCIAL DATA
The following table sets forth certain historical financial data for the
Company for fiscal years 1994 through 1998. The historical financial data for
the three years ended May 31, 1998, were derived from the financial statements
of the Company included elsewhere herein. The historical financial data are not
necessarily indicative of the results of operations for any future period.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
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1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Revenues....................................$ 557,691 .. $ 287,178 $ -- $ -- $ --
394,708 261,089 -- -- --
Cost of Sales............................... ..
Gross Profit.............................. 162,983 .. 26,089 -- -- --
Expenses:
Costs and expenses of development stage 9,365,362 6,386,452 1,463,258 698,103 480,473
activities.............................. ..
----------- ----------- ---------- ---------- ----------
Net loss.................................... (9,202,392) .. (6,362,973) (1,463,258) (698,103) (480,473)
Cumulative preferred dividends.............. 80,316 .. (149,500) (10,600) -- --
----------- ----------- ---------- ---------- ----------
Net loss attributable to common (9,282,695) (6,535,952) (1,473,858) (698,103) (480,473)
shareholders.............................. ..
=========== =========== ========== ========== ==========
Net loss per common share................... (0.62) .. (0.61) (0.20) (0.14) (0.15)
=========== =========== ========== ========== ==========
Weighted average shares outstanding......... 14,969,621 .. 10,684,176 7,428,081 5,021,801 3,146,727
=========== =========== ========== ========== ==========
Balance Sheet Data:
Total assets..............................$ 6,385,846 .. $7,825,223 $2,763,755 $3,711,865 $3,651,286
Long-term debt............................ 2,357,786 .. 1,406,028 115,723 10,919 143,209
Stockholders' equity...................... (56,285) .. 4,416,783 2,197,495 3,081,334 1,800,234
</TABLE>
<PAGE>
3
3. PROPERTIES
THE COMPANY'S BUSINESS
The Company's business is the harvesting of timber and the production of
rough sawn lumber and other finished wood products in Brazil and the exploration
and mining of precious metals in Nevada, and the exploration of precious metals
and coal in Indonesia, To this end the Company has within the last year acquired
the right to the right to develop and/or harvest virgin timber properties on up
to approximately 750,000 hectares located in the state of Para, Brazil; the
right to complete its acquisition of a sawmill facility located near the town of
Sao Miguel do Guama, Brazil which it currently operates; and the right to
conduct exploration activities on seven (7) gold properties and three (3) coal
properties in Indonesia. The Company holds various rights in and to the
following properties: (i) various timber properties aggregating up to
approximately 750,000 hectares and sawmill facilities all of which are located
in the state of Para, Brazil (the "Brazilian Timber Properties"); (ii)
twenty-eight (28) patented and sixty-five (65) unpatented claims aggregating
approximately 1,800 acres (the "Nevada Property") which are located near the
town of Manhattan, Nevada (approximately 45 miles northeast of Tonopah, Nevada);
(iii) seven (7) gold concessions aggregating 39,400 hectares (98,500 acres)
which are located in both the gold belt area of Kalimantan, Indonesia, and on
the island of Sumatra (see "Indonesian Gold Concessions"); and (iv) three (3)
coal properties located in Kalimantan, Indonesia, comprising 290,000 hectares
(725,000 acres) (the "Indonesian Coal Concessions"). A more thorough description
of the properties is contained within portions of this Section of this
Registration Statement entitled "THE BRAZILIAN TIMBER PROPERTIES," "THE NEVADA
PROPERTY," and "THE INDONESIAN CONCESSIONS."
Management of the Company generally reviews all proposed natural resources
projects submitted by third parties. The Company initially will be heavily
dependent upon the operations presently being conducted in Brazil.
The Company has budgeted the sum of One Hundred Thousand Dollars ($100,000)
from sums anticipated to be spent for compliance with applicable environmental
laws. However, the Company can provide no assurance that the amount so budgeted
for environmental compliance will be consistent with the amounts actually spent
for compliance or that the actual amount of such compliance may not be
substantially greater than that which has been projected to be spent by the
Company pursuant to the budget.
THE BRAZILIAN TIMBER PROPERTIES
The Company has acquired sundry rights in up to 750,000 hectares of timber
properties located on various tracts of land in the state of Para, Brazil. In
addition, the Company has entered into an agreement to acquire and is currently
operating a sawmill facility located near the town of San Miguel do Guama, Para
Brazil. The property areas contain a variety of timber species of which
initially only seventeen (17) of the most commercial of the one hundred
twenty-five (125) available species have been selected and factored into the
Company's economic forecasts. The other species will be harvested at the
appropriate time.
All shipping and associated transportation services will be provided by the
Jonasa Group, one of the largest private shipping companies in the Amazon Basin.
Their expertise and political position are anticipated to provide substantial
support to the operation and as a participant in the joint venture, allow for
operating efficiencies that greatly enhance profitability.
To date, One Million Four Hundred Thousand Dollars ($1,400,000) has been
provided by the Company for initial start-up of its operations in Brazil. The
Company has budgeted up to an additional Three Million Four Hundred Fifteen
Thousand Dollars ($3,415,000) for the additional expansion noted above.
The United Nations Food and Agricultural Organization (F.A.O.), Simons
Corporation (Canada) and Reid, Collins & Associates, Ltd. (Canada), highly
respected forestry experts, have evaluated 24,000 hectares of the Jonasa
Concessions and have posited that each hectare will yield approximately 200
cubic meters of raw timber. If these evaluations are accurate with respect to
all of the Jonasa Concessions, the total potential asset value of all 276,000
hectares would be approximately 55.2 million cubic meters of raw hardwood
timber.
<PAGE>
4
The Company has also agreed to pay the sum of Three Million Dollars
($3,000,000) to Ignatius Z. Theodorou on or before December 31, 1998 in
consideration of Mr. Theodorou's services rendered and the transfer of rights to
various business opportunities including the rights to the Jonasa Concessions
and the sawmill facility at Sao Miguel do Guama.
The Company has received approximately $290,000 for the sawed lumber
produced through May 31, 1997. All of this revenue has been reinvested in
improvements to the mills and infrastructure on the property. The Company's
subsidiary, Equatorial Resources, Ltd., currently employs approximately 90
persons to operate the mills and conduct the activities contemplated under the
agreements pertaining to these concessions. Potential markets for the lumber
include the Far East, Brazil, Europe and the United States.
The description of the Company's proposed activities relating to the
Brazilian Timber Properties which follows summarizes the activities more
particularly described in the 1997 Business Plan which is appended to this
Registration Statement.
Terranorte Concessions. On May 30, 1997, the Company's subsidiary,
Equatorial Resources, entered into an Agreement to Harvest Timber and Develop
Timber Properties with Terranorte S.A. (the "Terranorte Agreement"). Under the
terms of the original agreement, Terranorte granted to Equatorial Resources the
exclusive right to either harvest the timber on or to purchase certain species
of logs extracted by Terranorte which are located on approximately 20,000
hectares of virgin timber property located near the town of Moju, Para, Brazil.
In May 1997, Equatorial Resources began harvesting operations employing its own
crews and purchasing harvested logs from Terranorte. Based upon the current
market prices for export quality Brazilian hardwood of $500 per cubic meter, the
Company is projecting its cost to harvest, produce and sell such product to be
approximately $300 per cubic meter, thereby resulting in a pre-tax profit of
$200 per cubic meter.
Terranorte and Equatorial Resources have subsequently amended the
Terranorte Agreement to include the rights to harvest up to an additional
463,000 hectares of virgin timber properties located in the vicinity of the
Terranorte property.
Production at Sao Miguel Sawmill. On May 30, 1997, Equatorial Resources and
Jonasa Madeiras Limitada ("Jonasa Madeiras") entered into an Agreement to
Acquire Sawmill. Under the terms of the agreement, Jonasa Madeiras agreed to
convey all right, title, and interest in and to the sawmill facility, all
equipment relating to the sawmill facility, and 246 hectares of adjacent real
property, all of which is located near the town of San Miguel do Guama, Para,
Brazil. At present, Equatorial Resources has expended the sum of approximately
$335,000 for the sawmill facility and anticipates that an additional $350,000 in
improvements will be made over the next several months.
The sawmill facility currently consists of two manually-operated sawmills
and two semiautomated sawmills. Equatorial Resources has made deposits on
certain additional equipment to repair the semiautomated sawmill, to install a
third semi-automated sawmill, and to purchase additional specialty sawblades
designed to upgrade the sawmills and increase production.
The Jonasa Concessions. On May 30, 1997, Jonasa Navigation, S.A. ("Jonasa")
and Equatorial Resources entered with an agreement to jointly develop various
tracts of virgin timber properties comprising up to 268,000 hectares located in
the state of Para, Brazil. Under this agreement, Jonasa has granted to
Equatorial Resources the exclusive right to harvest all of the timber which
Jonasa now or hereafter has the right to extract from the properties comprising
the Jonasa Concessions. In consideration of this grant, Equatorial Resources has
agreed to pay to Jonasa fifty percent (50%) of the net proceeds received on the
sale of all timber and related products produced and sold pursuant to the
agreement. The term "net proceeds" is defined to be the gross sales price
received for lumber sold, less the costs of harvesting, reclamation,
transportation to the mill, milling expenses, physicalization duties,
transportation f.o.b. to the ports of Belem and Breves, and certain operating
expenses associated with Equatorial Resources' operations in Brazil. The parties
have also designated Equatorial Resources as its exclusive export agent for all
products produced and sold under the joint venture.
<PAGE>
5
THE NEVADA PROPERTY
Current Ownership Interest. The Nevada Property consists of twenty-eight
(28) patented and sixty-five (65) unpatented claims aggregating approximately
1,800 acres. The Company believes it owns an undivided one hundred percent 100%)
interest in the Nevada Property based upon the agreements described below in
greater detail. The primary areas of current development are the Litigation Hill
Area and the White Caps Mine Area. Both areas will be discussed in greater
detail below. The Company has identified 1,500 tons to be mined by open pit
methods at 0.206 ounces per ton of gold of proven and probable reserves in the
Litigation Hill area. The Company has recently sold approximately $40,000 of
gold produced from the Nevada Property. The Company has not identified any other
reserves at the Nevada properties defined as proven and probable.
The Company originally acquired its rights to the Nevada Property pursuant
to a mining agreement dated April 4, 1987 (the "Nevada Property Agreement") with
Anthony C. Selig and related entities (the "Selig Entities"). On December 9,
1987, the Selig Entities and the Company entered into an amendment to the Nevada
Property Agreement reducing both the area of interest and the purchase price of
the Nevada Property from Two Million One Hundred Thousand Dollars ($2,100,000)
to Six Hundred Thousand Dollars ($600,000) and modifying, amongst other things,
the schedule of semiannual payments due from the Company to the Selig Entities
in consideration of the purchase of the Nevada Property.
On March 2, 1989, the Company entered into an agreement entitled "Manhattan
Mining Property Agreement" with Argus Resources, Inc., a Nevada corporation, and
Argus Mines, Inc., a Nevada corporation (the "Argus Companies"); and the Selig
Entities (the "Nevada Mining Agreement"). This agreement was entered into after
a dispute had arisen between Argus Resources, Inc., and the Selig Entities under
the lease/purchase agreement which had been previously entered into between such
parties and which originally formed the basis upon which the Company derived its
rights to the Property. This agreement also modified certain terms and
conditions contained within the Nevada Property Agreement.
Under the terms of the Nevada Property Agreement, as amended, the Company
was required to pay, and did pay, to the other parties the sum of Twenty-Five
Thousand Dollars ($25,000) upon execution of the agreement. The Company also
agreed to pay the Argus Companies the additional sum of One Hundred Sixty-Five
Thousand Dollars ($165,000) in monthly installments of Seven Thousand Five
Hundred Dollars ($7,500) commencing on April 15, 1989, and continuing thereafter
until the entire sum was paid in full. The Nevada Property Agreement, as
amended, further required the Company to issue 1,000,000 (pre-reverse split)
shares of Common Stock as additional consideration to Argus Resources, Inc. In
fact, the Company paid the Argus Companies, Inc., and the Selig Entities all
amounts due under the Nevada Property Agreement, as amended, and issued 100,000
(post-reverse split) shares of Common Stock to Argus Resources, Inc.
Pursuant to the terms and conditions of the Nevada Property Agreement, as
amended, the Argus Companies executed a Corporation Quitclaim Deed conveying a
forty percent (40%) undivided interest in the Nevada Property to the Company on
March 9, 1989. Concurrently therewith, the Company delivered a Deed of Trust and
Assignment of Rents (the "Deed of Trust") to the Selig Entities to further
secure the obligations under the Nevada Property Agreement. Both the Corporation
Quitclaim Deed and the Deed of Trust were duly recorded in the office of the
county records by and for Nye County, Nevada.
In June 1993, the Company entered into a Joint Venture Agreement with
Marlowe Harvey/Maran Holdings, Inc. ("Marlowe Harvey"); Argus Resources, Inc.;
and the Selig Entities respecting the Nevada Property. Under the terms of the
Joint Venture Agreement, Marlowe Harvey was entitled to a fifty-one percent
(51%) interest in the Nevada Property in consideration of Marlowe Harvey
assuming certain obligations, including the purchase of the Deed of Trust from
the Selig Entities. The remaining forty-nine percent (49%) interest in the
Nevada Property was to be held equally by Argus Resources, Inc., and the Company
in consideration of their payment of their pro rata share of all amounts due
under the promissory note (the "Nevada Note") secured by the Deed of Trust
created by the Nevada Property Agreement, as amended. The failure of either
Argus Resources, Inc., or the Company to pay any amounts due under the note
during the first year of the joint venture was to be deemed a default requiring
the defaulting party to quitclaim its interest in the Nevada Property to the
remaining parties. The Argus Companies, Marlowe Harvey and the
<PAGE>
6
Company were also responsible for their pro rata share of all property
development expenses. At the time, Marlowe Harvey was the operator of the Nevada
Property and responsible for all operations relating to maintaining the Nevada
Property in accordance with the Mining Agreement.
On October 20, 1995, the Company and Mr. Harvey "as an individual and for
Maran Holdings and Argus Resources" executed an agreement (the "Amended Joint
Venture Agreement") which purports to amend the June 1993 Joint Venture
Agreement. The Amended Joint Venture Agreement obligates Marlowe Harvey to
convey to the Company within ten (10) days of the date of execution of such
Agreement fifty-two percent (52%) of the outstanding and issued stock in Argus
Resources, Inc.("Argus"), in exchange for the payment of One Hundred Forty-Seven
Thousand Dollars ($147,000) to be paid in the future from a percentage of Argus'
share of the net proceeds realized from the sale of gold production on the
Nevada Property. In addition, Marlowe Harvey agreed to convey a one percent (1%)
interest in the Nevada Property to the "management" of the Company (Messrs.
Michaels and Kramer) in exchange for a "production payment" of Forty-Seven
Thousand Dollars ($47,000) likewise to be paid from future production
attributable to Argus Resources, Inc. It was, and is, the intention of the
Company's officers to convey their rights under the Amended Joint Venture
Agreement to the Company in exchange for the Company's assumption of such
officers' obligations under such Agreement.
Both the obligations of the Company and its officers under the Amended
Joint Venture Agreement were to be secured by the pledge of Common Stock (in the
case of the Company, 1,235,429 shares) with "piggyback" registration rights to
be granted to Marlowe Harvey in two (2) years in the event $147,000 is not paid
from production by that time. If only a portion of the production payment is
made by October 20, 1997, the obligation to seek registration was to be ratably
reduced. The Company was further required to issue 1,186,981 shares of its
Common Stock to Maran Holdings, Inc., an affiliate of Argus, at the time at
which it was obligated to issue to Argus the shares to be used as security for
the production payment.
The Amended Joint Venture Agreement also required both the Company and its
joint venture partners to each make one-half of the property tax payments and
the payments due to the Selig Entities under the Nevada Property Agreement. Both
of these payments are due in January of each year.
In January 1996, the Company notified Marlowe Harvey that it had been
"ready, willing, and able" to convey the Common Stock pursuant to the terms of
the Amended Joint Venture Agreement. In addition, the Company made all of the
required property tax payments relating to the Nevada Property and the payments
due to the Selig Entities in reliance upon the terms of the Amended Joint
Venture Agreement. Marlowe Harvey has failed to reimburse the Company for its
one-half share of the property tax payments and the payments due to the Selig
Entities which were advanced on its behalf by the Company and has failed to make
the conveyances required by the terms and conditions of the Amended Joint
Venture Agreement. As a result, the Company instituted an action in Nye County,
Nevada, on November 4, 1996, originally seeking specific performance and damages
against Marlowe Harvey, Maran Holdings Inc., Calais Resources Inc., and Argus
Resources, Inc. The Company has recently amended the complaint to seek a
judicial determination that the Harvey Entities have forfeited all rights in and
to the Joint Venture Agreement and the Nevada Property. This action is described
in further detail under the Section of this Registration Statement entitled
"LEGAL PROCEEDINGS." Depending on the outcome of the action, the Company will
either own 100% of the Nevada Property if successful or 50% if it does not
prevail. Regardless of the outcome the Company will continue to operate its
portion of the Nevada Property.
In March 1997, the Company entered into a Sale and Purchase Agreement with
the Selig Entities. The Selig Entities were the original owners of the patented
and unpatented mining claims comprising the Nevada Property, having perfected
their rights to ownership pursuant to Federal and local law. Under the terms of
this agreement, the Selig Entities agreed to sell to the Company one hundred
percent (100%) of their interests in the Nevada Note, the Deed of Trust, and the
Nevada Property for the sum of Three Hundred Seventy Five Thousand Dollars
($375,000) payable as follows: One Hundred Thousand Dollars ($100,000) in March
1997 and the balance plus all accrued and unpaid interest (calculated at the
rate of 5.25%) on or before February 6, 1999. The Company in fact paid the first
installment of One Hundred Thousand Dollars ($100,000) in March 1997 and prepaid
the remaining balance in June 1997. As a result, all obligations to the Selig
Entities have been fulfilled by the Company and the original note and deed of
trust have been delivered by the Selig
<PAGE>
7
Entities to the Company. The agreement also acknowledges that the Company is the
only person or entity legally entitled to conduct mineral operations on the
Nevada Property. The Company is also required to pay all U.S. Bureau of Land
Management annual maintenance fees associated with the claims comprising the
Nevada Property. Such fees have been paid by the Company through August 1998.
The Company entered into a Subscription Agreement with Silenus Limited on
April 14, 1997 (the "Subscription Agreement"). As a result of entering into the
Subscription Agreement, the Company granted to Silenus Limited a $2,000,000 deed
of trust encompassing the Nevada Property until the Debentures issued to Silenus
are converted, redeemed or paid in full.
Property Description. The Nevada Property is located in an historic mining
district which has experienced mining operations from 1866 to the present with
the major activity in the late 1860s, between 1906 and 1921, and from 1960 to
the present. Placer and lode mining took place principally in the Reliance Mine,
the White Caps Mine, the Union Amalgamated Mine, the Manhattan Consolidated
Mine, the Earle Mine, the Big Four Mine, and the April Fool Mine.
The Nevada Property lies in several shallow gullies in a general area which
is located between 7,500 to 7,800 feet in elevation. Mineralization of the
Nevada Property appears to be structurally controlled by a series of parallel
east-northeast trending faults dipping from 50 to 75 degrees southwest and with
some cross or perpendicular faults. The Nevada Property consists of two distinct
areas which require different mining and production techniques. Gold
mineralization in the vicinity of "Litigation Hill" is near the surface and much
less expensive to mine. The lower grade mineralization can be "leached" while
higher grades must be milled. Gold mineralization located in the White Caps Mine
has revealed two delineated mineralized areas below the 600-foot level and a
deeper exploration target requiring substantially higher costs for extraction as
compared to "Litigation Hill." "Dewatering" the mine and driving a decline to
the 800-foot level could become quite costly. Additionally, any ore obtained
from the White Caps Mine may be required to be processed using autoclave
technology or other proven methods in order to comply with environmental
regulations due to the mineralization's high content of antimony, mercury,
arsenic, and sulphur; nevertheless, the Company believes that the deep
mineralized area located within the White Caps Mine may have sufficient
potential to justify the large development program. Both the "Litigation Hill"
and White Caps Mine areas of the Property will be discussed below.
The White Caps Mine is located in the Manhattan Mining District. Production
of gold began in 1911 and remained in production until 1935 when the vein was
lost and the lower levels of the mine encountered water. A total of 120,000
ounces of gold were produced during that period. The mine was closed in 1942 by
executive order relating to all "mining activities nonessential to the [World
War II] effort."
The mine was found to be flooded from its deepest point at the 1,300-foot
level to the 450-foot level. Beginning in 1957, a $400,000 program was put in
place to "dewater," renovate, and reactivate the mine. Pumping of water began
that year and by 1958, the water level was down to the 800-foot level. At that
time some exploration resumed at the upper levels of the mine. At the 300-foot
level, antimony-mercury mineralization grading 60 percent and 8 percent,
respectively, was discovered.
An extensive antimony deposit (also containing gold and mercury values) was
located near the 500-foot level and plans were made to begin mining activities
after the renovation of the mine was completed. While continuing to explore for
gold mineralization on the lower levels of the mine, the owners leased out the
right to mine antimony-gold-mercury mineralization above the 600-foot levels in
1962 and production thereafter began.
A diamond drilling program in 1962 relocated the gold-bearing vein which
had been lost in 1935 when it faulted out at the 600-foot level. Drilling of the
formation began at the head of the winze (i.e. incline shaft) and continued down
to the 1,200-foot level. Eight regularly-spaced holes of approximately 100 feet
in length were drilled. These holes revealed a gold mineralized area 65 feet
wide with values ranging as high as 7.7 ounces per ton and averages over .8
ounces per ton. This mineralization is found in the foot wall of the old winze.
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8
The next phase of the 1962 drilling program consisted of diamond drilling a
"hole" starting at the 1,200-foot level. Six holes of approximately 100 feet in
length each were drilled and revealed gold values averaging over 3 ounces per
ton with a high of 6 ounces per ton. This drilling program blocked out gold
mineralization of over 14,000 ounces of gold according to a 1964 report
published by the California Mining Journal. The program also indicated that a
mineralized area containing several hundred thousand ounces of gold is present
in the relocated vein which runs from the 600-foot level down to the 800-foot
level and from the 1,200-foot level down to at least the 1,300-foot level.
Before production could begin, a fire was accidentally started by a pumping
subcontractor at the 300-foot level. The ore bins, shaft and head frame were
destroyed and the mine was closed in 1964. The low price of gold (then $35 per
ounce), high costs to rebuild the damaged mine, and the lack of funds caused the
White Caps Mine to close in 1964, and it has remained closed since that time.
The Company's plans include reentering this mine and resuming gold exploration
and production.
By contrast, "Litigation Hill" was the site of both Earle and Consolidated
Mines, all early producers of high-grade areas until the veins ran out. Recent
geomagnetic activity and a drilling program have located several small
commercial-sized deposits of medium-grade gold mineralization which can be
either milled or heap leached.
The Company has conducted a geophysics and geochemical survey of
"Litigation Hill." A Schlumberger resistivity survey indicated gold
mineralization down to a depth of 1,000 feet (the limit of the instrument's
sensitivity). Bulk sampling conducted by Nevada Gold Fields and the Placer
Management Group of the mine dumps remaining at these mines indicated an overall
average grade of .206 ounces of gold per ton.
The 1987 exploration of underground workings on "Litigation Hill" showed
that the Earle Mine had experienced massive cave-ins. Two samples were taken
from channel cuts. These samples, which were performed by Nevada Gold Fields and
the Placer Management Group, indicated values of .120 ounces of gold per ton.
The Bath Mine was accessible through a stope which leads directly to the main
haulage decline. Channel cut samples were taken on pillars left in
previously-worked stopes. Values varied from .64 to 1.288 ounces of gold per
ton.
The Company initiated a rotary drilling program in 1988. Holes drilled
pursuant to the program varied in depth from 200 feet to 525 feet. Gold values
located in the carbonates at a depth of 70 feet indicate that open pit mining is
suitable for the lower grade present.
The Company commenced an exploration program during the years 1989 and
1990. This program consisted of two parts: conducting a magnetic survey of the
property and drilling 25 reverse circulation drill-angle holes varying in depth
from 50 to 150 feet. The magnetic survey identified the areas around "Litigation
Hill" and the White Caps Mine as strong targets for further exploration. The
drilling program located several areas of gold mineralization.
In September 1993, the joint venture partners began a decline (i.e. tunnel)
in order to intercept a drill hole which had been drilled by Freeport Mining
Company in 1983. The drill hole revealed that from 465 feet to 505 feet below
the surface, an average gold grade of .886 ounces of gold per ton over 40 feet
existed. The decline was completed during the Spring of 1994 and drill stations
were prepared. Exploration and drilling activities commenced and are ongoing as
of the date of this Prospectus. The decline is approximately nine feet by nine
feet and runs at an approximate twelve-degree grade. At the 500-foot level, a
turnaround or transfer bay has been added to enable the operators of the mine to
successfully remove ore in a cost-effective method.
The 1993 drilling program also included the mapping and sampling of the old
workings of the Consolidated Mine (which was closed in 1939) as well as the
drilling and sampling of the decline itself in the immediate potential ore zones
contained within the decline.
The Nevada Business Plan. In July 1995, the Company engaged the services of
William R. Wilson, a minerals industry consultant, to prepare a plan to develop
the Nevada Property (the "Nevada Business Plan"). According to the Nevada
Business Plan, two alternative plans for exploration and development of the
Property exist. The first plan would extend the existing decline in the White
Caps Mine to the 565-foot level,
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9
rehabilitate and mine old workings in the Consolidated Manhattan Mine, drift and
mine a new area near the drill hole which was intercepted by the decline formed
during the 1993 program, rehabilitate the White Caps Shaft, and mine the
565-foot level, 670-foot level, 800-foot level, 910-foot level, 1,120-foot
level, 1,200-foot level, and 1,300-foot level of the White Caps Mine.
According to the Nevada Business Plan, the major advantage to this
alternative would be that access to the lower levels of the White Caps Mine
would be considerably improved. It is anticipated that the lower levels may
yield higher grades as compared to the yields anticipated at current levels of
the mine.
The second alternative identified in the Nevada Business Plan would extend
the decline in the White Caps Mine to the 565-foot level, rehabilitate and mine
old workings in the Consolidated Manhattan Mine, drift and mine a new area near
the drill hole which was intercepted by the decline formed during the 1993
program, mine the 565-foot level only in the White Caps Mine, and conduct
underground sampling in the White Caps Mine in the 670-foot through 1,300-foot
levels.
The Nevada Business Plan identifies the major advantage to this alternative
to be significantly reduced capital costs combined with the opportunity to
sample underground the White Caps Mine without rehabilitating the White Caps
shaft. The disadvantages of this alternative are that mining access to the lower
portions of the White Caps Mine may not be completed, and it is still not known
whether access can be obtained to each of the levels below the 560-foot level.
Cash flow analyses pertaining to both alternatives project a positive cash
flow for the initial development. Management utilized these analyses in reaching
a decision to proceed with the second alternative.
The cash flow calculations are on a "cash basis," an industry standard in
comparing mining operations. The cash basis includes exploration, development,
equipment, mining, hauling, processing, and refining costs. Some overhead costs
were not included in the cash flow analysis as of the time the analysis was
prepared because the Company had not determined what its actual mine-related
overhead costs would be. A ten percent allowance for general and administrative
expenses was included. Since the Company uses a mining contractor, Harrison
Western Construction Company, the majority of the mine related overhead is
included in the contractor's cost. The costs of the Company's on-site geologist
and project manager are included as the 10% general and administrative costs in
the cash flow analysis. The following major assumptions were used in the Cash
Flow projections:
- Gold price of $390.
- Mining costs of $43 per ton.
- Processing and environmental costs of $15 per ton.
- Mining General and Administrative costs of $6 per ton.
- Refining charges of $2 per ounce.
The Nevada Business Plan concludes by recommending the second alternative
as the preferable alternative for the Company to follow. In June 1996, the
Company initiated the second alternative by contracting with Harrison Western
Mining and Construction Company, Lakeland, Colorado, to execute this plan.
In July 1995, the Company notified Marlowe Harvey and related companies,
then the operator of the Nevada Property, that Marlowe Harvey was not in
compliance with contractual operations under the Nevada Property Agreement as
well as several applicable mining laws and regulations. At that time the Company
assumed the position of operator and continues to act in this capacity.
All permits for this operation have been issued, and the Company is in
compliance with all state, federal, and environmental regulations to the best of
its knowledge and belief.
Initially, the Company's operations in Nevada will be heavily dependent
upon the mill constructed approximately one mile from the Nevada Property which
is currently owned and operated by New Concept Mining, Inc. ("New Concept"). The
Company presently intends to use the New Concept mill for milling the
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10
ore produced from the Nevada Property and selling gold bullion dore bars or
concentrate for sale to third-party buyers. Under the terms of an agreement
entered into with the Company, New Concept has agreed to provide the Company
with the capacity to initially process between 1,000-1,200 tons of ore per
month. New Concept has also agreed to increase processing capacity once the
Company's development program expands. The Company has also been engaged in
preliminary discussions with New Concept to purchase up to one half of the mill.
These discussions have not yet resulted in a binding agreement between the
Company and New Concept.
The Company has also budgeted the sum of One Hundred Thousand Dollars
($100,000) to be spent in the foreseeable future for compliance with applicable
environmental laws. However, the Company can provide no assurance that the
amount so budgeted for environmental compliance will be consistent with the
amounts actually spent for compliance or that the actual amount of such
compliance may not be substantially greater than that which has been projected
to be spent by the Company pursuant to the budget.
Over the past three (3) years, the Company has expended approximately One
Million Five Hundred Thousand Dollars ($1,500,000) on development expenses on or
relating to the Nevada Property. These expenses relate primarily to developing
the most effective means by which to extract the ore and transport it to the New
Concept mill approximately one mile from the Nevada Property.
THE INDONESIAN CONCESSIONS
General. In August 1996, the Company entered into an agreement to acquire a
fifty-one percent (51%) interest in a gold exploration property comprising
10,000 hectares (25,000 acres) located in East Kalimantan, Indonesia (the
"Kalimantan Property"). More recently, the Company has entered into two (2)
additional agreements to acquire an additional six (6) gold mining concessions
aggregating over 23,400 hectares (58,500 acres) and three (3) coal mining
concessions comprising 290,000 hectares (725,000 acres). In January 1997, the
Company and Maxwells Energy and Metals Technology Ltd., a Bahamian Company
("Maxwells"), agreed to substitute the original 10,000 hectare property (i.e.
the Kalimantan Property) for a 16,000 hectare (40,000 acre) tract (the "Sopang
Property") located elsewhere on the island of Kalimantan. Ownership of the
Indonesian Concessions will be acquired through the Company's new wholly-owned
subsidiary formed under the laws of the British Virgin Islands known as
Kalimantan Resources, Ltd. ("Kalimantan Resources"). NONE OF THE PROPERTIES
IDENTIFIED ABOVE HAVE ANY PROVEN AND RECOVERABLE RESERVES.
Mineralization of the Indonesian islands known as Kalimantan (the
Indonesian section of Borneo) and Sumatra occurred as a result of rifting of the
earth's crust at the ocean floor. There are approximately fifteen known
mineralized "arcs" comprising all of Indonesia. Six (6) of these arcs contain
the majority of the gold and copper deposits currently discovered in Indonesia.
The Central Kalimantan Arc is the area which has evidenced the majority of
recent attention of mineral exploration efforts although significant work is
also being undertaken in other areas. Located within the Central Kalimantan Arc
is the Kelian Mine which has been operating since 1992 and produces
approximately 450,000 ounces of gold per annum from ore grading approximately
1.8 grams per tonne of gold. Over seventy (70) tonnes of gold has been produced
to date. Based upon current estimated reserves, the mine is scheduled to operate
until 2003. Further south is the Mt. Muro Mine. Production for 1996 at this mine
was 187,000 ounces of gold. At present, it is impossible to predict whether the
Indonesian Concessions possesses any recoverable reserves of gold ore or whether
the yields noted in the above-described mines will be indicative of the yields
to be established on the Indonesian Concessions.
Three (3) agreements cover the various concessions which the Company and
Kalimantan Resources have acquired: (i) the Principles of Agreement by and
between the Company and Maxwells, as amended; (ii) the Acquisition Agreement
dated January 26,1997 by and between Kalimantan Resources and Singkamas Agung
Ltd.; and (iii) the Acquisition Agreement dated February 18, 1997, by and
between Kalimantan Resources and Kaliman Jaya Ltd.
As described in further detail elsewhere in this Registration Statement,
the Company has developed a business plan (the "1997 Business Plan") relating to
the activities to be conducted on the concessions acquired under the
above-described agreements as well as the Brazilian Timber Properties. The
proposed activities described in this section of this Registration Statement
summarizes a portion of the 1997 Business Plan.
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11
The Sopang Property. The Company acquired its interest in the Sopang
Property pursuant to a document entitled "Principles of Agreement" dated August
19, 1996 ("POA"). The parties to the POA are Maxwells and the Company. The
Company and Maxwells originally agreed to conduct exploration activities on a
10,000 hectare tract, but pursuant to an addendum to the POA, substituted the
16,000 hectare Sopang Property.
In exchange for a fifty-one percent (51%) interest in the concession
relating to the Sopang Property, the Company agreed to convey to Maxwells Four
Hundred Thousand (400,000) shares of its Common Stock. In addition, the Company
must issue an additional Four Million (4,000,000) shares of its Common Stock to
Maxwells should an investment banker confirm by independent appraisal that the
Sopang Property is valued to be at least Twelve Million Dollars ($12,000,000
U.S.) and/or such investment banker provides financing to the Company based upon
an evaluation of at least Twelve Million Dollars ($12,000,000 U.S.) or upon the
appreciation of the Common Stock in an aggregate amount exceeding Twelve Million
Dollars ($12,000,000) within ninety (90) days of an announcement by the Company
of its acquisition of the Indonesian Property. The Company recently received a
letter from Maxwells acknowledging that other than the issuance of 10,800
shares, no additional shares of Common Stock will be required to be issued until
the independent appraisal mentioned above has been performed. A provision of the
POA allows Maxwells to obtain a "nondilutive" percentage ownership in the Common
Stock to be issued under the POA should the Sopang Property produce at least
2,000,000 ounces of gold. As of the date of this Registration Statement, Three
Hundred Eighty Nine Thousand Two Hundred (389,200) of the Four Hundred Thousand
(400,000) shares required to be issued to Maxwells have in fact been issued
(200,000 shares of which are currently held in the name of Singkamas Agung, Ltd.
but which will be reissued in the name of Maxwells).
While the Company was entitled to defer exploration activities for six (6)
months, exploration activities have commenced and are ongoing on the Sopang
Property.
Under the POA, the Company is responsible for one hundred percent (100%) of
all exploration and operating expenses relating to the Sopang Property. Maxwells
also enjoys antidilution rights with respect to the Common Stock to be issued
under the POA provided exploration activities result in a valuation evidencing a
yield of at least two million (2,000,000) ounces of gold.
Maxwells has agreed to provide a voting trust in favor of existing
management. Maxwells is not, however, required to vote its shares with existing
management in connection with the registration of Common Stock issued or to be
issued to Maxwells. Maxwells' consent is also required in the case of any
issuance of the Company's capital stock exceeding Two Hundred Fifty Thousand
Dollars ($250,000).
The Company has undertaken efforts to confirm the chain of title which it
believes to exist with respect to the Sopang Property.
Silobat Property. On January 26, 1997, the Company's wholly-owned
subsidiary, Kalimantan Resources, entered into an Acquisition Agreement with
Singkamas Agung Ltd., a Bahamian corporation ("Singkamas"), relating to one (1)
gold mining concession and three (3) coal mining concessions located in
Kalimantan, Indonesia (the "Acquisition Agreement"). Singkamas is an affiliate
of Maxwells and is owned and controlled by the same persons who own and control
Maxwells.
The gold mining concession subject to the Acquisition Agreement relates to
a 62-hectare (155-acre) tract located in West Kalimantan and is known as the
"Silobat Property." Currently, PT Kajiwahida Mandiri, an Indonesian limited
liability company ("PT Kajiwahida"), holds a Kuasa Pertambangan Eksploitasi
license ("KPE") and a Kuasa Pertambangan Pengangkutan and Penjualan license
("KPPE") issued by the Indonesian Directorate General of General Mining and the
Ministry of Mines and Energy on October 7, 1996. On December 21, 1996, PT
Kajiwahida entered into a Mining Authorization Transfer Agreement with PT Duta
Sena Rahayu, an Indonesian limited liability company ("PT Duta"), whereby PT
Kajiwahida agreed to transfer its KPE and KPPE licenses to PT Duta in exchange
for $5,000,000 payable as follows: $100,000 at the time of execution of the
Acquisition Agreement; four consecutive installment payments of $100,000 each on
the fourth days of February, March, April and May 1997; and a final payment of
$4,500,000 at such time as official test results from exploration activities
demonstrate the existence of at least 2,000,000 ounces of gold
<PAGE>
12
reserves. Should exploration activities reveal gold reserves of less than
2,000,000 ounces, the final payment is to be adjusted in relation to the amount
of gold reserves so established. In addition, PT Kajiwahida is obligated to seek
the appropriate governmental authority to expand its licenses to include a
2,000-hectare tract contiguous to the 62-hectare tract currently comprising the
Silobat Property.
On December 21, 1996, the shareholders of PT Duta and Kalimantan Resources
entered into a Cooperation Agreement whereby in exchange for assuming the
financial responsibilities under the Transfer Agreement, the shareholders of PT
Duta agreed to hold the shares of such limited liability company for the benefit
of Kalimantan Resources. On the same date, Kalimantan Resources entered into a
Participation Agreement with Singkamas whereby Kalimantan Resources agreed to
grant to Singkamas a net profits interest derived from the exploitation of the
Silobat Property.
The Acquisition Agreement with Singkamas requires Kalimantan to secure the
issuance by the Company of Four Million (4,000,000) shares of Common Stock as
follows: Two Hundred Thousand (200,000) upon execution of the Acquisition
Agreement and the balance to be issued upon verification by an independent
evaluation that the value of the Silobat Property and the three (3) Indonesian
Coal Concessions equal or exceed Forty Million Dollars ($40,000,000). In the
case of the initial issuance of shares and twenty-five percent (25%) of the
balance of the shares of Common Stock to be issued, Singkamas is entitled to
"piggyback" registration rights. The Company has issued Four Hundred Thousand
(400,000) shares of its Common Stock to Singkamas as of the date of this
Registration Statement. Of this amount, Two Hundred Thousand (200,000) shares
are to be reissued to Maxwells.
To date, no funds have been transferred by Kalimantan to PT Kajiwahida or
any other party. However, Kalimantan Resources has been given authority to
conduct trenching and pitting and has conducted preliminary mapping, sampling
and trench hole pitting under the supervision of Behre Dolbear & Co. for the
purpose of evaluating the Silobat Property. Under the supervision of Behre
Dolbear, three separate sampling programs were conducted at the Silobat
Property. Based on that work which indicates the presence of analogous gold
values in four sampling pits, the Company intends to initiate a core drilling
program at the Silobat Property in the third quarter of 1997. The Company
(through its association with Singkamas) is currently in negotiations with PT
Kajiwahida to amend the terms of the Acquisition Agreement to reflect the accord
reached by the parties to enable Kalimantan to conduct further exploration
activities on the Silobat Property and to forego any payments due under the
Acquisition Agreement until such time as all governmental approvals associated
with annexing the 2,000-hectare tract have been secured.
The Silobat Property forms part of what was known as the Chinese District
of Western Borneo and has been the location of substantial exploitation by the
Chinese since the 1880s. In the 1960s, a Dutch company was granted a concession
to conduct mining operations on the Silobat Property, but such property was
abandoned shortly thereafter because of political unrest, sabotage and lack of
funding.
The property is located 1 degree 1 minute north longitude and 109 degrees
12 minutes east latitude in the subdistrict of Sambas, Kalimantan Barat. The
topography of the property is characterized by swampy lowlands with isolated
hilly outcrops covered mainly with revegetation and local rubber plantations.
The geology is characterized by green-black mudstone, fine silt stone,
quartz-feldspar porphyry and quartz diorite rock types.
In 1977, 21 rock chip and 7 stream sediment samples were submitted for
analysis to the Superintendent Laboratories in Jakarta. Only small traces of
gold were detected in all rock samples submitted while stream sediment samples
yielded values of .5 to 1.05 ppm in four of the seven samples.
Munung (Monroe) Property. The Company's wholly-owned subsidiary, Kalimantan
Resources, entered into an Acquisition Agreement for Gold and Coal Concessions
February 18, 1997, with Kalimas Jaya Ltd., a Bahamian corporation ("Kalimas"),
relating to five (5) gold mining concessions and one (1) coal mining concession
(the "Kalimas Acquisition Agreement"). Kalimas is also an affiliate of Maxwells
and is owned and controlled by the same persons who own and control Maxwells.
Kalimas acquired its rights to the concession relating to the Monroe Property
pursuant to a Development Agreement dated February 14, 1997, by and between PT
Muara Mayang Coal Utama ("PT Muara") and Kalimas. Under the Development
Agreement,
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13
Kalimas obtained the right to acquire an 80% interest in a Kuasa Pertambangan
Penyelidikan ("KP") issued to PT Muara for the sum of $1,000,000 payable as
follows: $150,000 upon execution of the Development Agreement and verification
by Kalimas that PT Muara possesses marketable title to the concession without
encumbrances and $850,000 upon commencement of production and generation of net
profits.
The Monroe Property comprises 6,096 hectares and is located in Central
Kalimantan, Indonesia. It is located in the same general area of the Kelian gold
mining concession which has produced over 450,000 per annum ounces of gold since
1992.
The existing KP issued on the Monroe Property allows PT Muara to conduct a
general survey and perform exploration activities for gold and other precious
metals. The Development Agreement requires PT Muara to use its "expert abilities
and efforts" to obtain additional licenses for the exploitation, production and
refining, and transportation and sale of all minerals obtained from the Monroe
Property.
The Kalimas Acquisition Agreement requires Kalimas to convey a 51% interest
in all current and future licenses which it acquires with respect to the Monroe
Property.
To date, no sums have been paid by Kalimas or Kalimantan Resources to PT
Muara nor has any exploration work been performed on the Monroe Property.
Kalimantan Resources currently intends to complete title work prior to engaging
in any exploration activities.
Telen (Tomak) Property. The second gold concession in which Kalimantan
Resources received rights under the Kalimas Acquisition Agreement is known as
the Telen or Tomak Property. This property comprises 687 hectares and is located
in East Kalimantan, Indonesia. Kalimas acquired its rights to the property
pursuant to a Development Agreement dated February 14, 1997, which it entered
into with PT Walea Bahimas, an Indonesian limited liability company. PT Walea
Bahimas currently holds a KP for general survey and exploration on the property.
Kalimas is required to pay a purchase price of $1,000,000 to acquire an 80%
interest in the current KP. The Development Agreement contains provisions
similar to those contained within the Development Agreement relating to the
Monroe Property with respect to payment terms. Moreover, PT Walea Bahimas will
only be entitled to receive the final $850,000 payment upon commencement of
commercial production and obtaining licenses for exploration and exploitation,
production and refining, and transportation and sale.
Kalimas is obligated to commence exploration in or before April 1997 or at
such other time as agreed upon by the parties. In addition to being required to
dig test pits as part of the exploration program, Kalimas has agreed to: conduct
shallow drilling to a depth of approximately 60 meters during the first 90-day
period, conduct deep drilling to a depth of at least 200 meters during the
second 90-day period, and securing a commitment of at least $300,000 during the
first three (3) years of exploration activities.
The Kalimas Acquisition Agreement requires Kalimas to convey a 51% interest
in all current and future licenses which it acquires with respect to the Tomak
Property. In addition, Kalimas and the Company have agreed that Kalimas will be
entitled to receive a number of shares of Common Stock the amount of which is to
be determined no later than July 1997. The Kalimas Acquisition Agreement further
provides that the value of the Common Stock is to be determined at $10 per
share, which was the approximate value as of January 26, 1997.
To date, no sums have been paid by Kalimas or Kalimantan Resources to PT
Walea Balimas nor has any exploration work been performed on the Tomak Property.
Kalimantan Resources currently intends to complete title work prior to engaging
in any exploration activities.
Long Beleh (La Bella) Property. The La Bella Property represents the third
gold concession in which Kalimantan Resources acquired rights pursuant to the
Kalimas Acquisition Agreement. This property currently comprises 4,637 hectares
and is located in East Kalimantan, Indonesia. Kalimas acquired its rights in and
to a KP for general survey and exploration pursuant to a Development Agreement
dated February 14, 1997, with PT Muara Koman Mas ("PT Muara Koman"). The terms
and conditions for the acquisition of an eighty percent (80%) interest in the
current license and all future licenses held or to be held by PT Muara Koman are
identical to the terms and conditions described above and relating to the Tomak
Property. The
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14
obligations of Kalimas under the Kalimas Acquisition Agreement are identical to
the obligations which it possesses with respect to the Tomak Property.
To date, no sums have been paid by either Kalimas or Kalimantan Resources
to PT Muara Koman nor has any exploration been performed on the La Bella
Property. Kalimantan Resources currently intends to complete title work prior to
engaging in any exploration activities.
Sengingi Property. The Sengingi Property is the fourth gold concession in
which Kalimantan Resources acquired rights pursuant to the Kalimas Acquisition
Agreement. Unlike the previous gold concessions mentioned in this Section of the
Registration Statement, the Sengingi Property is a 4,000-hectare (10,000-acre)
tract which is located on the island of Sumatra in the province of Riau,
Indonesia. Kalimas acquired the right to obtain an eighty percent (80%) interest
in a KP for exploration and a KPE for exploitation with respect to 3,000
hectares of this property from PT Aksara Mina Artha ("PT Aksara") pursuant to a
Development Agreement dated February 14, 1997. Under the terms of its agreement
with PT Aksara, Kalimas is obligated to pay PT Aksara $1,000,000 to be paid from
production derived from the property. In all other material respects, the terms
and conditions of the Development Agreement between Kalimas and PT Aksara and
the terms and conditions of the Kalimas Acquisition Agreement between Kalimas
and Kalimantan Resources are identical to the terms and conditions described
above with respect to the other gold concessions subject to the Kalimas
Acquisition Agreement.
Kuantan Property. The last gold concession subject to the Kalimas
Acquisition Agreement is known as the Kuantan Property. The Kuantan Property is
also located in Riau Province, Sumatra, Indonesia, and comprises 8,000 hectares.
Kalimas derives its rights pursuant to a Development Agreement dated February
14, 1997, between it and PT Aksara Tama Pramita ("PT Aksara Tama"). PT Aksara
Tama currently holds a KP for general survey and exploration. The general terms
and conditions upon which Kalimas is to acquire an eighty percent (80%) interest
in all current and future licenses on the Kuantan Property are similar to the
terms and conditions upon which all other licenses subject to the Kalimas
Acquisition Agreement have been acquired. The purchase price which Kalimas will
be required to pay for the Kuantan Property is $1,000,000 payable as follows:
$250,000 upon execution of the Development Agreement and verification by Kalimas
that PT Aksara Tama possesses marketable title to the concession without
encumbrances, and $750,000 to be paid upon commencement of production and
generation of net profits.
Indonesian Coal Concessions. As previously mentioned, Kalimantan Resources
and Singkamas entered into an Acquisition Agreement on January 26, 1997. In
addition to acquiring rights to the Silobat Property, Kalimantan Resources
obtained rights to three coal mining concessions aggregating over 286,000
hectares. Singkamas acquired its rights to these three coal mining concessions
pursuant to Development agreements entered into with the PT Andhika Group of
Companies, three Indonesian limited liability brother-sister companies
(collectively referred to as "PT Andhika"). Under the terms of these Development
Agreements, Singkamas received the right to acquire seventy-seven and one-half
percent (77.5%) interest in the three contracts of work ("COWs") currently held
by PT Andhika.
Under the terms of the Acquisition Agreement between Singkamas and
Kalimantan Resources, Singkamas has agreed to assign a fifty-one percent (51%)
in and to the COWs (as well as a fifty-one percent [51%] interest in the Silobat
Property) in consideration of the issuance of 4,000,000 shares of the Company's
Common Stock described elsewhere in this Registration Statement in greater
detail.
In March 1997, Kalimantan Resources, engaged an Indonesian exploration crew
to travel to the properties and to perform preliminary evaluations of possible
coal reserves in place on the three (3) coal concessions located in Indonesia
where the Company and Kalimantan Resources have entered into contracts to
acquire certain exploration and exploitation rights. Behre Dolbear & Co. will
review the results of these activities and present recommendations based upon
such review.
The Company has been contacted by several large coal mining companies for
the purpose of entering into proposed joint ventures to conduct further
exploration and subsequent development of such properties. At present, no joint
venture agreements have been entered into by the Company.
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15
The Company has entered into an agreement with Behre Dolbear & Company,
Inc. ("Behre Dolbear"), an internationally recognized mining consulting firm
which was established in 1911. Behre Dolbear will be responsible for providing
independent technical advisory third-party validation services to the Company as
more particularly outlined in the agreement. Under the supervision of Behre
Dolbear, three separate sampling programs were conducted at the Silobat
Property. Based on that work which indicates the presence of analogous gold
values in four sampling pits, the Company intends to initiate a core drilling
program at the Silobat Property in the third quarter of 1997. A more thorough
description of this agreement is described in the Section of this Registration
Statement entitled "MANAGEMENT."
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16
4. RISK FACTORS
The purchase of shares of common stock involves a substantial degree of
risk and is suitable only for persons of substantial means who have no need for
liquidity in their investment. this section of the prospectus sets forth the
risks and special considerations which the company believes may exist concerning
an investment in the common stock. Prospective investors should recognize that
factors other than those set forth below may ultimately affect an investment in
a manner and to a degree which cannot be foreseen at this time. all prospective
investors are urged to consult with their advisors prior to making an investment
in common stock so that they understand fully the nature of the undertaking and
the risks which may be involved prior to investing. Furthermore, all prospective
investors are urged to review with their counsel, accountants, and professional
advisors the financial statements attached to the prospectus. Any documents
described in this prospectus which have not been attached as exhibits may be
obtained by prospective investors and/or their advisors upon request from the
Company. This registration statement also contains certain forward-looking
statements and information that are based upon management's beliefs as well as
on assumptions made by an upon information currently available to management.
when used in this registration statement, the words "expect," "anticipate,"
"intend," "plan," "believe," "seek" and "estimate" or similar expressions are
intended to identify such forward-looking statements. However, this registration
statement also contains other forward-looking statements. Forward-looking
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions, including, but not limited to, the
following risk factors, which could cause the Company's future results and stock
values to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. Many of such factors are beyond
the company's ability to control or predict. Readers are cautioned not to put
undue reliance on forward-looking statements.
NO COMMERCIALLY VIABLE ORE DEPOSITS
Even though the Company has reviewed reports and records of its mining
properties, there is no assurance that there are commercially viable ore
deposits. Moreover, the Company has not established any proven or recoverable
gold or ore deposits as of the date of this Registration Statement.
HISTORY OF LOSSES
Although the Company was formed in 1985 to engage in precious metal mining
activities, its net worth is limited. The Company is and still should be
considered in its development stage, having a net worth of $7,537,653 as of May
31, 1997. As of May 31, 1997, the Company has realized an aggregate net loss
(since inception) of $15,836,084, or $1.09 per share. Until the fiscal year
ended May 31, 1997, the Company had failed to post revenues from operations.
Prospective Investors should be aware that the Company was a development-stage
company that only recently has begun to report sales. There is no guaranty that
the Company's operations will be successful or realize a profit in the future.
Moreover, the Company's net worth and the value of its Common Stock will
ultimately be dependent upon the overall success of timber operations currently
being conducted and to be conducted on the Brazilian Timber Properties, mining
operations conducted on the Nevada Property, and the Indonesian Concessions.
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17
The financial information accompanying this Registration Statement reflects
the current financial condition of the Company. It should be noted that the
Company has not yet reported a profit from operations since its inception to the
present. Management projects that the further exploration and development of its
properties will result in profitable operations although, for the reasons stated
elsewhere in this Prospectus, no guaranty to that effect can be made.
HISTORY OF UNSUCCESSFUL OPERATIONS
Mining and natural resource operations are speculative by their nature.
Present management of the Company has in the past selected mining properties
which have proven to be uneconomic. There is no assurance that the present gold,
coal, and timber properties will prove to be economic or profitable to the
Company. If all or most of the properties prove to be uneconomic, the Company
may be unable to realize a profit from its operations which may have a profound
impact upon the value of the Company and the liquidity of the Common Stock.
TITLE PROBLEMS TO BRAZILIAN TIMBER PROPERTIES
The Company has acquired its rights to the Brazilian Timber Properties
pursuant to harvesting agreements entered into by and between the Company's
subsidiary, Equatorial Resources, Ltd. ("Equatorial Resources"), and third
parties. The Company will also acquire its rights to purchase the sawmill
facility in Sao Miguel do Guama pursuant to an acquisition agreement with Jonasa
Maderias Ltda.
The Company has performed preliminary title work on the tracts of
properties on which current harvesting operations are being conducted. These
examinations have been conducted by legal counsel in Belem, Brazil, who are
competent to examine title. While Equatorial Resources has commenced timber
production from these properties, there can be no assurance that title problems
and other claims hostile to the chain of title on which the Company has relied
will not arise in the future.
Before any sums are expended by the Company on timber operations on the
other tracts of properties on which it has acquired harvesting rights, the
Company intends to employ legal counsel to advise it of the status of title to
these concessions.
In addition to the title problems and environmental problems commonly
associated with the development of timber properties in the United States,
foreign ownership of timber rights in foreign countries subjects a U.S.-based
company to the additional risk of political instability.
The Company has expended considerable sums to improve the sawmill facility
located in Sao Miguel do Guama, Para Brazil even though transfer of ownership
has not been completed. The terms of the acquisition agreement require Jonasa
Maderias Ltda. (the current owner) to transfer the sawmill facility free and
clear of all liens. The Company has discovered that the sawmill facility is
burdened by certain taxes due to various governmental authorities. If the
current owner does not remove these liens from the sawmill facility, the Company
will likely complete the sale of the facility and assume such obligations.
RISKS OF FORFEITURE TO BRAZILIAN TIMBER PROPERTIES
A recent federal law in Brazil grants certain rights to indigenous peoples
who invade individually-owned property in various regions of the country. In
cases where such invasion has occurred, the federal government has condemned the
properties and paid "just compensation" to the owners. Some of the properties in
which the Company has acquired rights are subject to this legislation. In the
case of its agreement relating to the Jonasa Concessions, any tracts
appropriated by the federal government, under this legislation are required to
be replaced by Jonasa. In the case of the tracts subject to the Terranorte
Agreement, a physical inspection of the tract will be made prior to commencement
of harvesting operations. The Company and its subsidiary, Equatorial Resources,
will be subject to the risk of forfeiture of its rights in both the Jonasa
Concessions and the Terranorte Concessions in the event that Jonasa fails to
perform its obligation in the first instance or all or a portion of the tracts
on which operations are conducted on the Terranorte Concessions are condemned by
the federal government in the second instance.
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18
It should be noted that the Company and many of its key personnel have
limited operating experience in Brazil and in timber operations. Such
inexperience could result in unsuccessful operations or unfavorable returns to
the Company.
The Company has acquired its rights to the Nevada Property through a
variety of agreements with predecessors-in-interest. The precise nature and
amount of interest owned by the Company is now the subject of a lawsuit pending
in Nye County and more particularly described in the section of this
Registration Statement entitled "LEGAL PROCEEDINGS." The Company is seeking to
obtain an order from the court declaring that the Company is the owner of the
undivided 100% interest in a substantial number of the mining claims comprising
the Nevada Property. If the Company is unsuccessful in its request for
declaratory relief, title to 50% of the interests in the Nevada Property may be
retained by persons or entities other than the Company.
The Company has recently executed a deed of trust encumbering the Nevada
Property in the principal amount of Two Million Dollars ($2,000,000) to Silenus
Limited pursuant to a privately-negotiated placement of 8% Senior Secured
Convertible Debentures described elsewhere in this Registration Statement. Until
such time as all obligations due under the Debentures issued to Silenus Limited
are paid, converted or redeemed, and the encumbrances on the Nevada Property are
reconveyed to the Company, one of the primary assets of the Company, namely the
Nevada Property, will be subject to the terms and conditions of such
instruments. Any default under such agreement or the Deed of Trust which remains
uncured would subject the Company to the possible loss of the Nevada Property.
TITLE PROBLEMS ASSOCIATED WITH THE INDONESIAN CONCESSIONS
Mineral interests in Indonesia are controlled exclusively by the federal
government through the Ministry of Mines and Energy. Title to a mineral property
in Indonesia is subject to obtaining various forms of licenses for the
extraction of commercial quantities of minerals after obtaining property rights
from the fee owner. Title is confirmed by the issuance of a government seal
affixed to specific property location maps.
Because direct foreign ownership of mining concessions is difficult, if not
prohibited by Indonesian law, the Company and its subsidiary, Kalimantan
Resources, must rely upon its contractual rights under the various agreements
into which they and/or their predecessors have entered. These contracts are
described in greater detail elsewhere in this Registration Statement. Should a
dispute arise as to the interpretation or enforcement of such agreements, resort
to the Indonesian judicial system will likely be required. It should be noted
that since members of the judicial branch are employed by the executive branch
of the government, a fair opportunity to assert a foreign company's rights under
such agreement may be limited.
Even if the contractual rights of Kalimantan Resources are clearly
delineated in its agreements, the Company's interests in the Indonesian
concessions are subject to title failures associated with the entities with whom
Kalimantan Resources has contracted. The Company has not currently completed its
title investigations with respect to any of the Indonesian Concessions. However,
prior to the time at which any payments will be made to the current holders of
the licenses, the Company will have satisfied itself that either it, Kalimantan
Resources, or the parties with whom it has contracted (and/or their predecessors
in interest) will have good and merchantable title to the particular licenses
purported to be owned by such third parties.
Ownership of licenses to explore for and/or exploit natural resources in
foreign countries is also subject to political risks. The United States has
important economic, commercial and security interests in Indonesia because of
its growing economy and markets and its strategic location in relation to key
international straits. The U.S. and Indonesia maintain cordial and cooperative
relations, although the two countries are not bound by formal security treaties.
Indonesia is a republic based upon its 1945 constitution providing for a
limited separation of executive, legislative and judicial power. The president,
elected to a five-year term, is the overwhelmingly dominant government and
political figure. The president appoints the cabinet, currently composed of four
coordinating ministers (in the fields of political and security affairs,
economic and financial affairs, people's welfare and
<PAGE>
19
industrial and trade affairs), thirteen state ministers, twenty-four ministers
and three high officials with the status of state ministers. Moreover, judges
are employees of the executive branch.
Unlike Western democratic systems, the legislative branch meets only once
during its five-year term, to formulate the overall principles and aims of the
government and to elect the president and vice president. Representative bodies
at all levels in Indonesia eschew voting, preferring to arrive at decisions
through "consultation and consensus."
Because of the presence of a strong executive branch, some foreign
companies have been forced to accede to government demands to revise licenses to
include the participation of Indonesian-owned companies, larger foreign
companies and, in some instances, the Indonesian government. The inability of a
foreign company to effectively enforce its rights in licenses issued by the
Indonesian government through the judicial branch of government represents a
risk of doing business in a developing country as compared to the United States.
GOVERNMENTAL REGULATION
Mining operations on the Nevada Property are and will be subject to
substantial federal, state and local regulation concerning mine safety and
environmental protection. Some of the laws and regulations which will pertain to
mining operations include maintenance of air and water quality standards; the
protection of threatened, endangered and other species of wildlife and
vegetation; the preservation of certain cultural resources and the reclamation
of exploration, mining and processing sites. These laws are continually changing
and, as a general matter, are becoming more restrictive. The location of the
Nevada Property is found in an area which strongly encourages mining operation.
However, the Company's inability to comply with such federal, state or local
ordinances and regulations on an ongoing basis may cause significant delays in
the permitting process or in the operations anticipated to be conducted on the
Nevada Property. In addition, delays in such compliance could result in
unexpected and substantial capital expenditures. Although no such problems or
delays are anticipated, no assurances can be given that the Company will be able
to comply with all applicable law and regulations and maintain all necessary
permits, licenses and approvals or, in the alternative, that compliance and/or
permitting will be obtained without substantial delays and/or expenses.
With regard to the Nevada Department of Conservation and Natural Resources,
Division of Environmental Protection ("NDEP"), the Company has received
authorization to proceed with its currently planned mining operations on the
Nevada Property pursuant to the applicable statutes and regulations relating to
a small mining operation. In the event, however, the Company's operations exceed
the designated limits for a limited mining operation, a full reclamation plan
will need to be prepared, submitted and approved by NDEP. The Company is
currently preparing such a reclamation plan. While the Company believes that it
will be able to obtain such approval, there is no guarantee that the required
approval will in fact be obtained by the Company.
A change in the nature or magnitude of the Company's presently anticipated
operations on the Nevada Property may trigger the need to obtain additional NDEP
and other federal, state or local governmental approvals, licenses or permits.
For example, water processing discharge needs may trigger the requirement that
the Company obtain a water pollution control permit. The Company is currently
preparing for submission of an application for a water pollution control permit.
Other significant permits, required by a change in operations on the Nevada
Property, might include an NDEP permit, air quality permit, waste management
permit, archeological clearance and wildlife permit. There is no guaranty that
the Company will be able to obtain any or all of the required federal, state or
local permits that might be required to expand its operations on the Nevada
Property.
Even if the Company does not change its currently planned operations on the
Nevada Property, the Company is nevertheless vulnerable to the various federal,
state and local laws and regulations governing regulations and protection of the
environment, occupational health, labor standards and other matters. The reason
for this is that these laws are continually changing, and as a general matter,
are becoming more restrictive.
<PAGE>
20
To comply with these federal, state and local laws, the Company may in the
future be required to make capital and operating expenditures on environmental
projects both with respect to maintaining currently planned operations and the
initiation of new operations. Such projects may include, for example, air and
water pollution control equipment; treatment, storage and disposal facilities
for solid and hazardous waste; remedial actions required for the containment of
tailings pond seepage; continuous testing programs; data collection and analysis
land reclamation (specifically including existing mine and processing waste on
the Nevada Property); landscaping and construction projects. There is no
guaranty that the Company will technically or financially be able to comply with
any or all of these potential requirements.
ENVIRONMENTAL REGULATION AND LIABILITY
The Company's proposed mineral operations on the Nevada Property are and
will be subject to environmental regulation by federal, state and local
authorities. Under applicable federal and state law, the Company may become
jointly and severally liable with all prior property owners for the treatment,
cleanup, remediation and/or removal of substances discovered at the Property
which are deemed by federal and/or state law to be toxic or hazardous
("Hazardous Substances"). Liability may be imposed among other things for the
improper release, discharge, storage, use, disposal or transportation of
Hazardous Substances only in the areas which the Company disturbs.
Applicable law imposes strict joint and several liability on, among others,
"owners" and "operators" of properties contaminated with Hazardous Substances.
Such liability may result in any and all "owners", "operators" and
"transporters" of contaminated property being required to bear the entire cost
of remediation. The Company may utilize substances which have been deemed by
applicable law to be Hazardous Substances. The potential liability of the
Company under such laws will be derived from the Company's classification as
both an "owner" and "operator" of a contaminated property. While the Company
intends to employ all reasonably practicable safeguards to prevent any liability
under applicable laws relating to Hazardous Substances, mineral exploration by
its very nature will subject the Company to substantial risk that remediation
may be required. If the cleanup or remediation of hazardous substances is
required on the Nevada Property, substantial delays could occur in the
permitting process and/or in the further extraction of gold and other precious
minerals on the Nevada Property.
Much like environmental laws found in the United States, both the federal
and state governments in Brazil have adopted laws and standards relating to the
harvesting and reclamation of forests. While the Company and its subsidiary,
Equatorial Resources, have not yet fully familiarized themselves with all of
these laws and standards, Equatorial Resources has entered into an agreement
with Eco-Rating International, Incorporated ("Eco-Rating"), Zurich, Switzerland,
to better assist the Company and Equatorial Resources in understanding and
complying with such laws and standards. Under the terms of its agreement with
the Company, Eco-Rating has agreed to establish an "eco-efficiency model"
designed to enable Equatorial Resources to establish environmental management
guidelines for the conduct of activities on the Jonasa Concessions and
ultimately the remainder of the Brazilian Timber Properties consistent with all
applicable environmental laws and standards.
The Indonesian Concessions may also be subject to federal and provincial
environmental laws in place or being contemplated by those governmental
entities. Mining in certain locations in Indonesia may be restricted because of
difficulties associated with mine reclamation, water quality, air quality,
endangered species or local cultural conditions similar to those restrictions of
other international mining operations in Indonesia.
LIQUIDITY OF COMMON STOCK
The Company's Common Stock is currently traded on the NASDAQ Electronic
Bulletin Board. Over the past six (6) months, the average monthly trading volume
has been approximately 800,000 shares. Trading volumes on the Electronic
Bulletin Board have been limited and there is no assurance that the Electronic
Bulletin Board will provide an effective market for a prospective investor to
sell his or her shares of Common Stock.
<PAGE>
21
DIVIDENDS
The Company has not paid cash dividends on any of its Common Stock and does
not anticipate paying any cash dividends on any of its Common Stock for the
foreseeable future. Holders of the Preferred Stock are entitled to an annual
cash or stock dividend offered at the rate of eight percent (8%) per year
payable out of any funds legally available therefor and payable on January 1,
April 1, July 1, and October 1 of each year. Such dividends are cumulative so
that if full dividends in respect of any previous dividend period are not paid,
holders of the Preferred Stock are entitled to receive any deficiency before any
dividend or other distribution may be made or declared by the Company with
respect to any other class of stock including other series of preferred shares
should the Company elect to issue such additional series.
As of the date of this Registration Statement, no accrued quarterly
dividends payable to the holders of the Preferred Stock (which were $160,500 as
of May 31, 1997) have been paid. Management of the Company is presently
scheduling payment of accrued dividends in Common Stock as authorized in the
Company's "Certificate of Determination of Preferences of Series A Preferred
Stock" filed with the Nevada Secretary of State on October 25, 1995 at the time
that the Preferred Stock is converted into Common Stock on or before the earlier
of the effective date of this Prospectus or December 31, 1997.
CLASSIFICATION OF SECURITIES
Currently the Company's stock is not considered to be "penny stock"
pursuant to Section 3(a)(51)(A) of the Securities Exchange Act of 1934. However,
the Company makes no representations that it will be able to continue with such
classification. In the event the price of the Company's Common Stock decreases
below $5.00 per share, the Common Stock will be considered "penny stock." In
such case the Company will be subject to the increased disclosure requirements
associated with the issuers of such securities. In addition to increased
disclosure requirements, such situation may also result in either a decrease in
the liquidity of the stock or a total disappearance of a market for the Common
Stock. In either instance the difficulty associated with disposition of the
shares would greatly increase.
DEPENDENCE UPON MANAGEMENT
The business of the Company is and will be greatly dependent upon the
active participation of Christopher D. Michaels and Jeffery S. Kramer. The
Company also anticipates that it will be dependent upon the active participation
of other key personnel and/or consultants in the future. The Company presently
has employment agreements with both Mr. Michaels and Mr. Kramer and has entered
into agreements with key consultants; nevertheless, the loss of the services of
Mr. Michaels, Mr. Kramer and/or other key personnel (including such consultants)
regardless of reason could adversely affect the Company and the Company's
business. The Company does not maintain any life insurance policies enabling it
to receive benefits in the case of either Mr. Michaels' or Mr. Kramer's death.
In addition, Messrs. Michaels and Kramer are parties and subject to a consent
judgment wherein they are restrained from selling securities in interstate
commerce in violation of the provisions of section 5 of the Securities Act of
1933, as amended (the "Act"), or from engaging in any transaction, practice, or
course of conduct resulting in a violation of the antifraud provisions of the
Act. A violation of these provisions could result in the resignation of these
officers. To the extent that the services of Mr. Michaels or Mr. Kramer would be
unavailable to the Company for any reason, the Company might be required to
employ other executive personnel to manage and operate the Company. There is no
assurance that the Company under such circumstances would be able to employ
qualified persons on terms suitable to the Company to assure the fulfillment of
the objectives stated in this Registration Statement.
LACK OF DIVERSIFICATION
The Company has, in the past, maintained other mining properties for
exploration and development. These properties were located in Bolivia, South
America and Vancouver, British Columbia. Through its board of directors and
shareholders, the Company elected to abandon such other properties as a result
of uneconomic results. The Company's primary assets presently consist of the
Brazilian Timber Properties, the Nevada Property, and the Indonesian
Concessions. No assurance can be given that once the Company
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22
increases or continues its timber operations in Brazil and completes its present
exploration and development of the Company's properties in Nevada and Indonesia
as described in further detail in this Prospectus, it will be able to establish
and produce significant revenues from such operations or become profitable. In
addition, there can be no assurance that continued development activities on the
Nevada Property and/or exploration activities currently being conducted on the
Indonesian Concessions will result in the establishment of commercial quantities
of mineralization. As a result, persons reading this Prospectus should be aware
that investment in the Common Stock represents an additional risk because the
Company's activities are presently confined to the conduct of timber operations
on the Brazilian Timber Properties, the exploration, development and gold
production on the Nevada Property, and preliminary exploration activities on
certain of the Indonesian Concessions.
STOCK ISSUANCES UNDER MINING CONTRACTS
The Company has entered into various contracts with third parties to issue
Common Stock in consideration of services rendered in relation to various mining
properties. Common Stock has been issued to the following parties: Harrison
Western Construction Company (100,000 shares); Maxwells Energy & Metals
Technology Ltd. (400,000 shares); and Singkamas Agung Ltd. (200,000 shares).
Maxwells Energy & Metals Technology Ltd. is entitled to receive an additional
4,000,000 shares of Common Stock if an investment banker confirms by independent
appraisal that the value of the properties subject to the Principles of
Agreement dated August 19, 1996 equals or exceeds $12,000,000. Singkamas Agung
Ltd. is entitled to receive an additional 3,800,000 shares of Common Stock if an
independent evaluation confirms that the value of the properties subject to the
Acquisition Agreement dated January 26, 1997 equals or exceeds $40,000,000. Of
the additional shares which may be issued to Singkamas Agung Ltd., 950,000
shares are entitled to "piggy-back" registration rights. Once these shares are
issued to the various parties and such shares become unrestricted, the sales of
such securities could adversely affect the price of Common Stock.
CONSENT JUDGMENT AGAINST THE COMPANY AND CERTAIN EMPLOYEES
In May 1989, the Company received notice that the Securities and Exchange
Commission (the "Commission") had commenced an informal investigation into the
Company's compliance with the registration and disclosure requirements of the
Securities Act of 1933 (the " '33 Act") and the Securities Exchange Act of 1934
(the " '34 Act"). Thereafter the Commission commenced an extensive review of the
Company's books and records relating to the Company's business and mining
operations, its capital raising activities, and its financial condition and
history. Through all stages of the investigation, the Company voluntarily
cooperated with the Commission.
On August 3, 1993, the Commission and the Company agreed to terminate the
Commission's investigation by the entry of a consent judgment against the
Company and certain of the Company's past and present key employees. These key
employees include Christopher D. Michaels, Jeffrey Kramer and Stanley Mohr. The
terms and conditions of the consent judgment can be summarized as follows:
1. The Company and its officers, agents, servants, employees and
others receiving actual notice of the consent judgment neither admitted nor
denied any of the allegations alleged by the Commission;
2. The Company and its officers, agents, servants, employees, and
others receiving actual notice of the consent judgment are permanently
restrained and enjoined from violating section 5 of the '33 Act or from
selling securities in interstate commerce unless and until a registration
statement is in effect or the security or transaction is exempt from the
registration provisions of the '33 Act and/or the '34 Act;
3. The Company and its officers, agents, servants, employees, and
others receiving actual notice of the consent judgment are permanently
restrained from engaging in any transaction, practice, or course of
conduct, employing any course of conduct, or obtaining any money or
property by means of an untrue statement of a material fact, or any
omission to state a material fact, necessary to make the statements made in
light of the circumstances under which they were made not misleading in
violation of the antifraud provisions of the '33 Act and '34 Act.
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23
As part of the consent judgment, the Company was required to engage an
independent certified public accountant to conduct a full and complete analysis
of the disposition of all funds received by the Company from investors and, to
the extent so discovered, to disgorge all ill-gotten gains.
On April 7, 1994, in response to the audits completed by the certified
public accountant, the Company and the Commission entered into a stipulation
regarding the resolution of all outstanding issues which then existed, which
stipulation was entered as an order by the United States District Court for the
Central District of California. Such stipulation contained an acknowledgement
that the Company and its executive officers had received no ill-gotten gains as
a result of prior activities by the Company in offering and selling its
securities, and that the consent judgment resolved once and for all, all issues
raised by the Commission as a result of the Company's prior activities. The
Company and the persons named in the formal order of investigation were not
required to pay any fines or required to disgorge any monies previously received
by it in connection with its securities.
On February 27, 1989, the Pennsylvania Securities Commission issued a cease
and desist order against the Company and Christopher D. Michaels, Jeffrey S.
Kramer, Stanley J. Mohr, and William Michaels prohibiting them from violating
Section 201 of the Pennsylvania Securities Act of 1972 relating to the sale of
unregistered "penny stocks."
As a result of the foregoing regulatory and judicial actions, the Company
may not be able to utilize the exemptions from registration available under
Regulation A and Rule 701 promulgated under the '33 Act and may not be able to
rely upon certain private placement exemptions afforded by applicable state blue
sky laws in connection with the offer and sale of securities in a transaction
which qualifies as exempt from qualification under the '33 Act. In such cases,
the Company would be required to register/qualify the transaction under said
blue sky laws, which would likely increase the cost of, and extend the time for
completing, any private placement of securities.
FLUCTUATION OF COMMODITY PRICES
Since its deregulation in August 1971, the market price for gold has been
highly speculative and volatile. Since 1980, gold has fluctuated from a high of
approximately $850 per ounce in January 1980 to a low of approximately $285 per
ounce in 1985. Currently gold is trading at approximately $320 per ounce. In
1996, gold averaged over $380 per ounce. Instability in gold prices may effect
the profitability of the Company's future operations.
Similarly coal and timber prices fluctuate. Natural resources have
traditionally evidenced volatile swings in pricing, thereby affecting overall
the relative profitability of engaging in these lines of business. For example,
timber prices increased fifty-two percent (52%) in 1996 while coal prices have
remained relatively stable for the past several years. Coal prices, which
historically have been heavily dependent upon mining conditions, location of
deposits, and freight variations, have remained relatively stable for the past
several years.
USE OF FORWARD-LOOKING STATEMENTS
This Registration Statement contains "forward-looking statements." Such
statements are found in the Sections of this Registration Statement entitled
"The COMPANY", "PROPERTIES", and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION" and elsewhere. Prospective Investors are cautioned that the
assumptions upon which such statements are based cannot be guarantied by the
Company to occur in the future or that the overall success of the Company might
be materially adversely affected should such bases (or some of them) not occur.
<PAGE>
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
- - ------------
The Company is a timber and mining company, with corporate offices in
Calabasas, California, owning interest(s) in certain timber or mineral
properties located in the (1) states of Para and Amazonas, Brazil (the
"Brazilian Timber Properties"); (2) Manhattan Mining District, Nye County,
Nevada, (the "Nevada Property"); (3) Indonesian Gold Belt, Kalimantan, Indonesia
(the "Indonesian Gold Concessions"); (4) Kutai District of East Kalimantan,
Indonesia (the "Indonesian Coal Concessions"); and (5) on the island of Sumatra,
Indonesia. The terms and conditions of these acquisitions and the risks and
contingencies associated with such ownership interests are more particularly
described in the Section of the Annual Report entitled "PROPERTIES" AND "RISKS
FACTORS."
Comparison of Results of Operations -- Year Ended May 31, 1998
Compared to Year Ended May 31, 1997
- - ---------------------------------------------------------------
Revenues for the year ended May 31, 1998 were approximately $558,000 as compared
to $287,000 for the same period in 1997. The sales in both periods relate to the
Brazilian timber operations. The $271,000 increase in sales is due to increased
efficiencies.
The gross margin for the year ended May 31, 1998 was approximately 29.0% as
compared to 9.0% same period in 1997. The increase is also due to increased
efficiencies.
The general and administrative expenses for the year ended May 31, 1998 were
approximately $7,540,000 as compared to $4,270,000 for the same period in 1997.
The $3,270,000 is a result of the following: 1) $1,540,000 increase in
consulting fees; 2) $250,000 increase in corporate salaries; 3) $150,000
increase in travel; and 3) the remaining increase is due to the operations of
the Brazilian activities.
Year Ended May 31, 1997 Compared to Year Ended May 31, 1996
- - -----------------------------------------------------------
Revenues for the year ended May 31, 1997 were approximately $287,000 as compared
to no sales for the same period in 1996. The sales in 1997 relate to the
Brazilian timber operations that are new operations for the Company in 1997.
Exploration cost of the year ended May 31, 1997 were approximately $2,120,000 as
compared to approximately $34,000 for the same period in 1996. The $2,086,00
increase in exploration cost is a result of activities at the Company's Nevada
mining property and the Indonesian Concessions.
General and administrative expenses for the year ended May 31, 1997 were
approximately $4,270,000 as compared to approximately $1,430,000 for the same
period in 1996. The $2,840,000 increase in general and administrative expense is
a result of the following: 1) $1,200,000 of expense related to the issuance of
warrants for services; 2)$827,000 related to financing expenses; 3) and increase
for the Brazilian general and administrative expenses of approximately operating
expense of approximately $150,000; and 4) general increase of $663,000 for other
expenses (legal, consulting, travel and salaries) attributable to the Company's
increased activities from the 1996.
As of July 1, 1997, Brazil is no longer considered a highly inflationary
economy under SFAS 52. Therefore, translation adjustments will begin to be
accumulated in a separate component of equity. Translation adjustments during
the year ended May 31, 1997 were taken to income and were not material to the
Company's results of operations.
Year Ended May 31, 1996 Compared to Year Ended May 31, 1995
- - -----------------------------------------------------------
During the year ended May 31, 1996, the Company reported an operating loss
of $1,463,258 as compared to an operating loss of $698,103 for the year ended
May 31, 1995. The difference between these two period was principally due to the
issuance of stock to officers for services rendered of $485,000.
<PAGE>
25
Liquidity and Capital Resources
- - -------------------------------
The Company's working capital position as of May 31, 1998 was a deficit of
approximately $3,356,000. Almost since inception, the Company has experienced
pressure on its working capital position due to operating losses and the need to
continually invest in exploration activities on the Nevada Property and, more
recently, the Brazilian Properties, the Silobat Property and the remainder of
the Indonesian Concessions.
To raise funds in the past, the Company has relied upon private placements
of its equity securities. Over the past two years, the Company has raised
approximately $5,538,000 pursuant to such private placements and notes payable
to stockholders. In addition, the Company in 1997 concluded privately-negotiated
placements of approximately Three Million Five Hundred Thousand Dollars
($3,500,000) of 8% Senior Convertible Debentures with certain investors. The
Company has initiated litigation relating to its Convertible Debenture holders
(see "LEGAL PROCEEDINGS").
On March 27, 1998, the Company executed an agreement securing $14 million in
equity financing, primarily to fund its timber operations in South America. The
financing, through Bristol Asset Management Company II LLC, requires an
effective registration statement and enables the Company to draw up to $14
million over a three-year period. As of the filing date of this Annual Report,
the Company has not effected a registration statement covering the common stock
to be issued pursuant to the $14 million equity financing agreement.
On September 2, 1998, TiNV1, Inc., ("TiNV1"), entered into a Subscription
Agreement and a letter agreement with the Company pursuant to which TiNV1
purchased 5,500,000 shares of the Company's common stock for $500,000. This
transaction, which provided a significant capital infusion into the Company, is
described in more detail in Note 12 to the Financial Statements - "Subsequent
Events."
The Brazilian operations represent an opportunity for the Company to
generate significant cash flows for the first time. Over the past several
months, Brazil has lost more than $30 billion (US) in foreign-exchange reserves
because of President Fernando Henrique Cardoso's attempts to control inflation
and support its currency, the real. The result has been the
artificially-inflated value of the real and a loss of foreign investor
confidence in Brazil's economy. To address its large budget and foreign-exchange
reserves, Brazil is seeking up to $30 billion (US) in loans from the
International Monetary Fund (the "IMF"). In order to obtain such financing, the
Cardoso government has recently announced a three-year program of fiscal targets
approved by the IMF. These include raising taxes significantly and slashing
government spending. This is likely to lead to increased inflation (currently at
3% per annum) and may lead to a recession.
The Company's subsidiary, Terra Resources Brazil, Ltda., exports the
majority of its timber products to Europe, the Dominican Republic and, to a
lesser extent, the United States. Its policy has been to receive payment in US
dollars as a hedge against inflation. This policy will remain in effect. The
Company has also undertaken to explore the possibility of establishing a trading
company offshore from Brazil to receive payments as an additional protection
from the financial uncertainty currently existing in the country. With the
increase in its production to about 1,000 cubic meters of sawn timber products
per quarter, its reduction in operating expenses, and its planned expansion of
production facilities, the Company believes that adequate measures have been
taken to minimize the effects of the uncertainty in the Brazilian economy.
The Company anticipates that it will require additional capital and intends
to secure it through its agreement with Bristol Assets Management Company II
LLC, by utilizing a publicly registered offering of its securities, the capital
provided by the TiNV1 transaction, "Private Placements" and/or funds generated
from its Brazilian operations.
<PAGE>
26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of May 31, 1997,
regarding the record and beneficial ownership of the Common Stock and Preferred
Stock with respect to: (i) any individual or group of affiliated individuals or
persons owning, of record or beneficially, five percent (5%) or more of the
outstanding shares of the Common Stock or the Preferred Stock; (ii) the amount
of shares of Common Stock or Preferred Stock owned by each executive officer and
director of the Company; and (iii) the number of shares of Common Stock and/or
Preferred Stock owned, of record or beneficially, by the directors of the
Company as a group. Except as otherwise indicated, the Company believes that the
beneficial owners listed below, based upon information provided by such owners,
have sole voting and investment power with respect to such shares.
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
TITLE OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNER PERCENT OF CLASS
- - -------------- ------------------------------- ------------------- ----------------
<S> <C> <C> <C>
Common Christopher D. Michaels 1,294,510(2) 8.66%
876 Ballina Court
Newbury Park, California 91320
Common Jeffrey S. Kramer 1,180,000(3) 7.89%
6053 Paseo Canyon Drive
Malibu, California 90265
Common Joseph C. Rude' III, M.D. 1,284,150(4) 8.59%
3065 River N. Pkwy.
Atlanta, Georgia 30328
Common David Weissberg, M.D. 1,109,900 7.43%
29 Blair Drive
Huntington, New York 11743
Common All Officers and 4,042,160(5) 27.04%
Directors as a Group
6 persons)
</TABLE>
- - ---------------
(1) In addition to the 12,273,565 shares of Common Stock outstanding as of May
31, 1997, the percentages noted in this column assume the conversion of
228,319 shares of Preferred Stock into 2,283,190 shares of Common Stock, and
the issuance of 390,000 shares of Common Stock pursuant to various options
primarily to existing management which may be issued in whole or in part
within 60 days of the date of this Prospectus.
(2) Includes options to purchase up to 110,000 shares of Common Stock which may
be exercised in whole or in part within 60 days of the date of this
Registration Statement.
(3) Includes options to purchase up to 80,000 shares of Common Stock which may
be exercised in whole or in part within 60 days of the date of this
Registration Statement.
(4) Includes shares owned by Carolyn Rude and Cobb Radiology (an affiliate of
Dr. Rude) as well options to purchase up to 20,000 shares of Common Stock
which may be exercised in whole or in part within 60 days of the date of
this Registration Statement.
(5) Includes options to purchase up to 280,000 shares of Common Stock by all
Directors or Officers as a group which may be exercised in whole or in part
within 60 days of the date of this Prospectus.
<PAGE>
27
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's Bylaws authorize the creation of the offices of President,
Treasurer (Chief Financial Officer), one or more Vice Presidents, Secretary, and
one or more Assistant Secretaries and Assistant Treasurers as the Board of
Directors deems proper. The Bylaws also provide for not less than three
directors and not more than seven directors who shall hold office until the
following annual meeting of the shareholders. The Bylaws further provide that
the number of directors may be increased by the affirmative vote of the Board of
Directors or a majority in interest of the shareholders at an annual or special
meeting.
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
- - ------------------------ --- -----------------------------------------------
Christopher D. Michaels 54 President and Chairman of the Board
Jeffrey S. Kramer 43 Senior Vice President, Chief Financial Officer,
Chief Operating Officer, Secretary-Treasurer,
and Director
Stanley J. Mohr 61 Vice President of Shareholder Relations and
Director
Edna Pollock 60 Director
Joseph Rude III, M.D. 52 Director
William Michaels 79 Vice President of Client Relations
Ignatius Z. Theodorou 55 President and Director of Equatorial Resources,
Ltd.
CHRISTOPHER D. MICHAELS cofounded the Company in June 1986. Since then he
has served as President, Chief Executive Officer, and Chairman of the Board and
is entitled to retain his positions with the Company until the next annual
meeting of the Company's shareholders. Mr. Michaels is also a director, vice
president and chairman of the Board of Equatorial Resources, Ltd. and the
chairman and a director of Kalimantan Resources, Ltd., subsidiaries of the
Company. Mr. Michaels received a bachelor of arts degree from Alfred University
located in New York. After graduation, he accepted a post with the United States
government overseas in the Peace Corps. Since 1980, Mr. Michaels has acted in
sales and management positions in corporations whose primary business consists
of mining and minerals. Mr. Michaels has extensive background and experience in
international relations and has spent considerable time at the Company's
Bolivian mine site (closed in 1992) as well as on the Nevada Property. Mr.
Michaels is a party and is subject to the permanent injunction more particularly
described in the Section of the Registration Statement entitled "LEGAL
PROCEEDINGS." Mr. Michaels has also been and is subject to a cease and desist
order issued by the Pennsylvania Securities Commission issued February 27, 1989
prohibiting the Company, Mr. Michaels and other executive officers from
violating Section 201 of the Pennsylvania Securities Act of 1972 relating to the
sale of unregistered "penny stocks."
JEFFREY S. KRAMER, Senior Vice President, Chief Financial Officer, Chief
Operating Officer, Secretary-Treasurer and Director, has held these positions
since 1989 and is entitled to retain these positions with the Company until the
next annual meeting of the Company's shareholders. Mr. Kramer is also a
director, vice president and the secretary-treasurer of Equatorial Resources,
Ltd. and a director and the secretary-treasurer of Kalimantan Resources, Ltd. He
has held management positions with Continental Cafes. As Chief Financial
Officer, Mr. Kramer's responsibilities include business affairs, contract
administration, public relations and broker and shareholder relations. Mr.
Kramer was also responsible for management oversight of the Nevada Property
operations since 1995 and was management's liaison in negotiating the Company's
settlement with the Securities and Exchange Commission more particularly
described in the Section of this Registration Statement entitled "LEGAL
PROCEEDINGS." Mr. Kramer is a party and is subject to the regulatory proceedings
described in the Section of this Registration Statement entitled "LEGAL
PROCEEDINGS" and the action taken by the Pennsylvania Securities Commission
detailed above with respect to Mr. Michaels.
STANLEY J. MOHR, has been Vice President Client Relations with Nevada
Manhattan since 1986. Mr. Mohr became a Director in 1992 and is entitled to
retain his current positions with the Company until the next annual meeting of
the Company's shareholders. He is also a director of Kalimantan Resources, Ltd.
Mr. Mohr has been employed as a marketing executive with several mining and
mineral related companies
<PAGE>
28
and has gained extensive experience in many phases of operations in the mining
industry. Mr. Mohr held a real estate license issued by the state of California
from 1976 to 1984. Mr. Mohr was a party and is subject to the regulatory
proceedings more particularly described in the Section of the Registration
Statement entitled "LEGAL PROCEEDINGS."
EDNA POLLOCK was elected to the Board of Directors on April 3, 1995 and is
entitled to retain her position as director until the next annual meeting of the
Company's shareholders. Ms. Pollock is a court reporter in North Carolina and
has been a shareholder of record since 1989. She has been an active member of
the Shareholders' Advisory Committee for several years representing shareholders
at Director's meetings. Ms. Pollock is a graduate of Columbia University, New
York, New York, having received her bachelor of arts degree in Journalism. She
spent twenty-eight years as a freelance reporter for both the federal and state
courts in North Carolina and acted in her official capacity as a court reporter
at numerous depositions, arbitrations, hearings, and conventions.
DR. JOE RUDE' III was elected to the Board of Directors on April 3, 1995
and is entitled to retain his position as a director until the next annual
meeting of the Company's shareholders. Dr. Rude' is a radiologist and has been
practicing his medical specialty since 1977 in Georgia. Dr. Rude' has been a
shareholder of record since 1989 and has been an active member of the
Shareholders' Advisory Committee for several years representing shareholders at
Director's meetings. Since 1995, Dr. Rude' has been a diagnostic radiologist at
Quantum Radiology, Atlanta, Georgia. From 1977 to 1995, he was associated with
Cobb Radiology Associates, Austell, Georgia, which merged with Quantum Radiology
in 1995. Dr. Rude' is a graduate of the University of Texas, Austin, Texas,
where he received his bachelor of arts degree in 1966. In 1970, he was awarded a
medical degree from the University of Texas Southwestern Medical School, Dallas,
Texas. Dr. Rude' is board certified in radiology and served in the United States
Air Force as a flight medical officer from 1971 to 1973.
WILLIAM MICHAELS, Vice President of Client Relations, has served in such
capacity or in other capacities since the Company's inception. Mr. Michaels is
the father of Christopher D. Michaels, the Company's President and Chairman of
the Board. Mr. Michaels is a party and is subject to the regulatory proceedings
more particularly described in the Section of the Registration Statement
entitled "LEGAL PROCEEDINGS."
IGNATIUS Z. THEODOROU, President and Director of Equatorial Resources, Ltd.
has served in such capacities since the formation of the Company's
Brazilian-based subsidiary. Mr. Theodorou is the remaining shareholder of
Equatorial Resources, owning twenty percent (20%) of such company. Mr. Theodorou
was born in Greece but has spent a substantial portion of the last thirty-seven
(37) years in the United States. Mr. Theodorou holds dual citizenship (Greek and
U.S.) and is currently managing the Company's operations in Brazil. His
employment experience has included consulting arrangements with Dames & Moore
Consulting Company, employment as Managing Director of the Liberian-owned
shipping company Crest Lines Inc., and founder and chief executive officers of
the timber companies known as Madira Intex, S.A. International Imports and
United Amazonian Resources, Limited.
SIGNIFICANT EMPLOYEES AND CONSULTANTS
The Company has entered into employment agreements dated January 1, 1995,
with Christopher D. Michaels and Jeffery S. Kramer relating to their respective
positions as executive officers and directors of the Company. Under the terms
and conditions of these employment agreements, both Mr. Michaels and Mr. Kramer
are required to devote substantially all of their business time and effort
during normal business hours to the Company through December 31, 1997. As
compensation for the services rendered and to be rendered to the Company, Mr.
Michaels is entitled to receive annual salaries equal to One Hundred Forty-Eight
Thousand Seven Hundred Twenty-Seven Dollars ($148,727) per annum which Mr.
Kramer is entitled to a salary of One Hundred Thirty-Seven Thousand Two Hundred
Twelve Dollars ($137,212) per annum. Both the salaries of Mr. Michaels and Mr.
Kramer are to be reviewed on each anniversary date of the Agreement by the board
of directors for the purposes of either increasing or decreasing such base
salary. The Board, however, may not reduce the base salary of either Mr.
Michaels or Mr. Kramer by more than twenty percent (20%) of the base salary for
the immediately preceding year. In addition, both Mr. Michaels and
<PAGE>
29
Mr. Kramer have each received 900,000 shares of the Company's Common Stock as
part of their compensation under the terms of their employment agreements.
In addition to the base salaries and stock options, both Mr. Michaels and
Mr. Kramer are entitled to receive reimbursement on a monthly basis for all
reasonable expenses incurred in connection with the performance of their duties
under the employment agreement. Mr. Michaels and Mr. Kramer are also entitled to
certain fringe benefits (including but not limited to paid vacation and
participation in medical insurance plans and employee benefit plans) which now
are or may thereafter become available to all executive officers of the Company
and such other benefits (if any) as may be authorized from time to time by the
board of directors of the Company. The amount of such yearly fringe benefits is
approximately $6,500 and $7,700 for Mr. Michaels and Mr. Kramer respectively.
The employment agreements also authorize these officers to receive a "merit
bonus" ranging between twenty-five percent (25%) and seventy-five percent (75%)
of such officer's base salary in the event the Company experiences operating
cash flow for a fiscal year equal to not less than One Million Dollars
($1,000,000). Specifically, if the Company's operating cash flow for any fiscal
year ranges between One Million Dollars ($1,000,000) and Two Million Dollars
($2,000,000), both Mr. Michaels and Mr. Kramer will be entitled to a "merit
bonus" equal to twenty-five percent (25%) of his base salary; if the operating
cash flow is between Two Million Dollars ($2,000,000) and Three Million Dollars
($3,000,000) for any fiscal year, the "merit bonus" will be equal to fifty
percent (50%) of such officer's base pay; and if the Company's operating cash
flow is over Three Million Dollars ($3,000,000) or more during any fiscal year,
during the term of the Agreement, such officer's "merit bonus" will be equal to
seventy-five percent (75%) of such officer's base salary. In the event of
termination of the employment agreement by the Company for cause or by such
officer without cause, the "merit bonus" is not required to be paid. In the
event of termination for any other reason, the "merit bonus" will be prorated
for the fiscal year in which termination occurs.
The employment agreements with Messrs. Michaels and Kramer contain a
covenant prohibiting such officer from engaging directly or indirectly as a
principal partner or director or officer of any business competitive with the
Company. However, such officer may hold up to a five percent (5%) equity
interest in any entity engaged in a business competitive with the Company
without violating such covenant.
The agreements contain provisions for termination in the event of such
officer's permanent disability, death, or for cause. In addition, the agreements
provide for severance compensation equal to such officer's highest monthly base
salary times thirty-six. Both Mr. Michaels and Mr. Kramer also possess an option
to acquire up to twenty-five percent (25%) of the number of then outstanding
shares of the Company's capital stock at a price of five cents per share in the
event of an occurrence of a "Change in Control." For the purposes of such
employment agreements, the term "Change in Control" shall be deemed to have
occurred if the Company sells substantially all of its assets to a single
purchaser or to a group of associated purchasers in a single transaction or
series of related transactions; shares of the Company's outstanding capital
stock constituting more than twenty percent (20%) of the voting power of the
Company's outstanding capital stock are sold, exchanged, or otherwise disposed
of in one transaction or in a series of related transactions; or the Company is
a party to a merger or consolidation in which the Company is not the surviving
entity or the Company's shareholders receive shares of capital stock of the new
or continuing corporation constituting less than eighty percent (80%) of the
voting power of the new or continuing corporation.
The Company has engaged the services of Arthur J. Mendenhall to act as
project geologist for the Nevada Property. His duties include acting as the
on-site representative of the Company and to provide geological exploration and
mining grade control of the Nevada Property on a daily basis.
Mr. Mendenhall is an experienced mining geologist. He received his bachelor
of science degree in 1971 and his master of science degree in geology from Utah
State University, Logan, Utah. Mr. Mendenhall's work experience includes roles
supervising and monitoring the work of senior geologists in the coring and
sampling of ore; working as senior geologist in the sampling and mapping of
tertiary volcanic rock formations in gold exploration projects; collecting
cuttings and core samples for geochemical analyses; drafting drill hole cross
sections; and supervised drilling operations for bentonite and iron ore. Mr.
Mendenhall has completed the Occupational & Safety Hazard Agency ("OSHA")
forty-hour hazardous waste site training course and OSHA'S refresher course, and
has attended other geological seminars and courses relevant to mining. Mr.
Mendenhall is a registered geologist in the Commonwealth of Pennsylvania and a
member of the Geological Society of America.
<PAGE>
30
AGREEMENT WITH GOLD KING MINES CORPORATION
On April 1, 1995, the Company entered into an Agreement with Gold King
Mines Corporation ("Gold King"), Denver, Colorado. Under the terms of this
Agreement, Gold King has agreed to provide the services of William R. Wilson on
a consulting basis at the rate of $400 per day. The initial term of the
consulting agreement was through December 31, 1995, and extended for one-year
periods upon mutual agreement between Gold King and the Company. Gold King and
the Company have extended this consulting agreement for two years.
Mr. Wilson has provided various services to the Company including the
preparation of the Business Plan. Mr. Wilson possesses a professional degree in
metallurgical engineering from the Colorado School of Mines, Golden, Colorado,
and has been awarded a Master's in Business Administration from the University
of Southern California, Los Angeles, California. In his more than thirty years
of experience, Mr. Wilson has, for the past fifteen years served in various
seniority executive capacities with engineering, construction, and consulting
firms, many of such capacities as president or the chief executive officer of
mining companies operating in the United States and internationally. Mr. Wilson
is the past chairman of the Colorado Mining Association. Gold King is a
subsidiary of Sheridan Reserve Corporation, a publicly-traded resource company
based in Toronto, Canada.
Mr. Wilson's primary responsibility to the Company has been and will be to
act as project manager for the Nevada Property and to act as the Company's
representative to Harrison Western Mining & Construction Company, the mining
contractor for the Nevada Property. Mr. Wilson will also provide technical and
managerial consulting to the Company on the Indonesian Property.
AGREEMENT WITH BEHRE DOLBEAR & COMPANY, INC.
The Company entered into a Consulting Services Agreement (the "Consulting
Agreement") with Behre Dolbear & Company, Inc. ("Behre Dolbear"), an
internationally recognized mining consulting firm. Under the terms of the
Consulting Agreement, Behre Dolbear will be responsible for providing
independent technical advisory services relating to the Indonesian Property.
Such services initially require Behre Dolbear to advise and validate the
exploration program contemplated by the Company, and would include related
technical input for other aspects of project development. The term of the
Consulting Agreement is for six months or upon satisfactory completion of the
consulting services contemplated prior to such expiration date. The Company has
agreed to pay Behre Dolbear the hourly rate of $137.50 up to a maximum of $1,100
per diem for the services contemplated under the Consulting Agreement and has
committed to utilize Behre Dolbear a minimum of two days per month. Unused days
will accrue under the Consulting Agreement but will be forfeited if not utilized
prior to the expiration of the term of the agreement. The Company must also
reimburse Behre Dolbear for any travel, reasonable and necessary lodging
expenses (including meals), telegram, cable, telex charges; a 2.5% "flat" labor
charge in lieu of actual telephone charges; printing, copies, reproduction, and
fax charges; postage, courier, express, and freight charges; use of personal
automobiles; royalties on computer software; professional liability insurance
(assessed on a 1.5% flat fee basis); clerical fees at the rate of $35 per hour
and other costs and expenses incurred by Behre Dolbear and/or its personnel in
performing the services contemplated by the Consulting Agreement.
AGREEMENT WITH BRITISH FAR EAST HOLDINGS LTD.
On April 30, 1997, the Company entered into a financial and management
services agreement with British Far East Holdings Ltd. ("BFE"). Under this
agreement, BFE has agreed to provide the personal services of Arthur Lipper III
to the Company for a period of thirty-six months to assist the Company with
respect to financial and business matters. The Company has agreed to pay BFE
$5,000 per month for the first three days of service and $1,000 per diem for
each additional day of service rendered by Mr. Lipper under the contract. The
agreement also grants to BFE warrants to purchase up to 100,000 shares of the
Company's Common Stock at one hundred twenty percent (120%) of the April 30,
1997 market price of $5.75 per share (subject to adjustment for certain events)
vesting at the rate of thirty-three and one-third percent (33 1/3%) per year
after the first twelve months of service. In addition to the services provided
under the contract, Mr. Lipper has also tentatively agreed to join the Company's
Board of Directors subject to his completion of due dilegence of the Company's
operations.
<PAGE>
31
AGREEMENT WITH ECO-RATING INTERNATIONAL
In order to better assure compliance with applicable Brazilian
environmental laws and regulations, the Company has entered into an agreement
with Eco-Rating International, Zurich, Switzerland ("Eco-Rating"). Under the
terms of the agreement, Eco-Rating has agreed to develop an "eco-efficiency
model" designed to establish environmental management guidelines for the
Company's operations in Brazil. It is the objective of the Company to establish
a reputation as a leader in the timber industry in environmentally-related
issues and to develop its properties in a manner best designed to properly
reclaim any areas harvested pursuant to its concessions.
SHAREHOLDERS' ADVISORY COMMITTEE
In 1989, the Company formed a Shareholder Advisory Committee (the "Advisory
Committee") comprised of up to 12 outside shareholders. The purpose of the
Advisory Committee is to participate in directors' meetings and compensation
meetings, as well as planning meetings related to all aspects of corporate
development. Members are selected annually from a group of shareholders who
respond to Company inquiries regarding interest in participating on the Advisory
Committee. Membership is rotated annually. One of the primary purposes of this
Committee is to provide independent, shareholder participation in critical
decisions relating to overall corporate strategy.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The table set forth below identifies the compensation paid to the Company's
executive officers for the last three completed fiscal years (i.e. fiscal years
ending May 31, 1995; May 31, 1996; and May 31, 1997):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ------------------------- -----------------------
------------------------------------------------ RESTRICTED SECURITIES ALL
NAME AND OTHER STOCK UNDERLYING LTIP OTHER
PRINCIPAL ANNUAL AWARD(S) OPTIONAL/ PAYOUTS COMPENSATION
POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) ($) SARS(#) ($) ($)
- - ----------------------- ---- --------- -------- ------------------ ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Christopher Michaels,
President.............. 1997 $251,299 -- $6,264 -- 10,000(2) -- --
and Chairman of the
Board 1996 $100,449 -- $6,316 $225,000(3) 10,000 -- --
1995 $148,727 -- $5,712 -- 10,000 -- --
-- -- 10,000 -- --
Jeffrey Kramer, Senior
Vice................. 1997 $224,397 -- $8,080 -- 10,000(2) -- --
President and Director 1996 $117,791 -- $7,658 $225,000(3) 10,000 -- --
1995 $137,212 -- $6,564 -- 10,000 -- --
-- -- 10,000 -- --
</TABLE>
- - ---------------
(1) The Company incurs the annual cost of health insurance for Messrs. Michaels
and Kramer and their respective dependents.
(2) The Company has granted stock options to all members of its board of
directors in the amount of 10,000 shares per full year of service as an
active member of the board. These options may be exercised at $1.00 per
share of Common Stock. Options may not be exercised after the expiration of
10 years from the date of the grant and are nontransferable other than by
inheritance. As of the date of this Registration Statement, the Company has
granted options aggregating 110,000 shares to Mr. Michaels and 80,000 shares
to Mr. Kramer.
(3) The Company granted Messrs. Michaels and Kramer the option to purchase
900,000 shares of Common Stock each at an average price of $1.50 per share.
These options were exercised during the year ended May 31, 1996, at which
time the Company's board of directors agreed to issue these shares for
services rendered. The Company has valued these restricted securities to be
worth twenty-five cents ($.25) per share.
<PAGE>
32
OPTIONS AND STOCK APPRECIATION RIGHTS
The table set forth below provides certain information concerning
individual grants of stock options and stock appreciation rights (whether
granted in connection with stock options or as "freestanding" rights made during
the last fiscal year of the Company ending May 31, 1997) to each of the named
executive officers, directors, and/or others noted below:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
NUMBER OF SECURITIES % OF TOTAL OPTIONS/SARS
UNDERLYING OPTIONS/ GRANTED TO EXERCISE
SARS EMPLOYEES OR BASE EXPIRATION
NAME GRANTED(4) IN FISCAL YEAR PRICE($/SH) DATE
- - --------------------------------- -------------------- ----------------------- ------------ -----------
<S> <C> <C> <C> <C>
Christopher D. Michaels(1)....... 110,000 10% $ 1.00 May 31, '06
Jeffrey S. Kramer(1)............. 80,000 14% $ 1.00 May 31, '06
Stanley Mohr(1).................. 50,000 25% $ 1.00 May 31, '06
Edna Pollock(1).................. 20,000 100% $ 1.00 May 31, '06
Joe Rude' III(1)................. 20,000 100% $ 1.00 May 31, '06
Lloyd S. Pantell, Esq.(4)........ 100,000 100% $ 4.00 May 31, '06
</TABLE>
- - ---------------
(1) The Company has granted stock options to all members of its board of
directors pursuant to Stock Option Agreements executed at various times.
Under the terms of these agreements, each director has been granted options
to purchase 10,000 shares of Common Stock per full year of service. The
exercise price for such options is $1.00 per share. The years in which stock
options were initially granted to each respective board member are as
follows: Christopher Michaels, 1986; Jeffrey Kramer, 1989; Stanley Mohr,
1993; Edna Pollock, 1996; and Joe Rude' III, 1996. In 1996, the Stock Option
Agreements relating to Messrs. Michaels, Kramer and Mohr were extended so
that they may be exercised through May 31, 2006. The remaining may not be
exercised after the expiration of ten (10) years from the date of grant and
are nontransferable other than by inheritance.
(2) Mr. Pantell is an attorney who is a principal in Lloyd S. Pantell, APLC who
has provided substantial legal services to the Company. Under the terms of
the option agreement, Mr. Pantell has been granted options to purchase
100,000 shares of Common Stock. The exercise price of such options is $4.00
per share. The options may be exercised at any time through May 31, 2006 and
are non-transferable other than through inheritance.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY
SHARES ACQUIRED AT MAY 31, 1997 OPTION/SARS
ON EXERCISE VALUE EXERCISABLE/ AT MAY 31, 1997
NAME (#) REALIZED UNEXERCISABLE EXERCISABLE/
(A) (B) (C) (D) UNEXERCISABLE(E)
- - ----------------------- --------------- -------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Christopher D.
Michaels............. 0 0 110,000 $550,000
Jeffrey S. Kramer...... 0 0 80,000 $400,000
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the last fiscal year the company entered into certain transaction
with Jeffrey S. Kramer, an officer and Director of the Company who is more
particularly described in the Section of this Registration Statement entitled
"MANAGEMENT." Specifically, as of August 2, 1997, Mr. Kramer has lent the
Company an aggregate of $258,000 which is evidenced by promissory notes payable
in his name (the "Notes"). The Note are: unsecured, payable on demand and bare
interest at the rate of 6.6%. As of this time, no payment demand has been made
on the Notes.
<PAGE>
33
LEGAL PROCEEDINGS
In May 1989, the Company received notice that the Securities and Exchange
Commission (the "Commission") had commenced an informal investigation into the
Company's compliance with the registration and disclosure requirements of the
Securities Act of 1933 (the " '33 Act") and the Securities Exchange Act of 1934
(the " '34 Act"). Thereafter the Commission commenced an extensive review of the
Company's books and records relating to the Company's business and mining
operations, its capital raising activities, and its financial condition and
history. Through all stages of the investigation, the Company voluntarily
cooperated with the Commission.
On August 3, 1993, the Commission and the Company agreed to terminate the
Commission's investigation by the entry of a consent judgment against the
Company and certain of the Company's past and present key employees. These key
employees include Christopher D. Michaels, Jeffrey Kramer and Stanley Mohr. The
terms and conditions of the consent judgment can be summarized as follows:
1. The Company neither admitted nor denied any of the allegations
alleged by the Commission;
2. The Company and its officers, agents, servants, employees, and
others receiving actual notice of the consent judgment are permanently
restrained and enjoined from violating section 5 of the '33 Act or from
selling securities in interstate commerce unless and until a registration
statement is in effect or the security or transaction is exempt from the
registration provisions of the '33 Act and/or the '34 Act;
3. The Company and its officers, agents, servants, employees, and
others receiving actual notice of the consent judgment are permanently
restrained from engaging in any transaction, practice, or course of
conduct, employing any course of conduct, or obtaining any money or
property by means of an untrue statement of a material fact, or any
omission to state a material fact, necessary to make the statements made in
light of the circumstances under which they were made not misleading in
violation of the antifraud provisions of the '33 Act and the '34 Act.
As part of the consent judgment, the Company was required to engage an
independent certified public accountant to conduct a full and complete analysis
of the disposition of all funds received by the Company from investors and, to
the extent so discovered, to disgorge all ill-gotten gains.
On April 7, 1994, in response to the audits completed by the certified
public accountant, the Company and the Commission entered into a stipulation
regarding the resolution of all outstanding issues which then existed, which
stipulation was entered as an order by the United States District Court for the
Central District of California. Such stipulation contained an acknowledgement
that the Company and its executive officers had received no ill-gotten gains as
a result of prior activities by the Company in offering and selling its
securities, and that the consent judgment resolved once and for all, all issues
raised by the Commission as a result of the Company's prior activities. The
Company and the persons named in the formal order of investigation were not
required to pay any fines or required to disgorge any monies previously received
by it in connection with its securities.
On February 27, 1989, the Pennsylvania Securities Commission issued a cease
and desist order against the Company and Christopher D. Michaels, Jeffrey S.
Kramer, Stanley J. Mohr, and William Michaels prohibiting them from violating
Section 201 of the Pennsylvania Securities Act of 1972 relating to the sale of
unregistered "penny stocks."
As a result of the foregoing regulatory and judicial actions, the Company
may not be able to utilize the exemptions from registration available under
Regulation A and Rule 701 promulgated under the '33 Act and may not be able to
rely upon certain private placement exemptions afforded by applicable state blue
sky laws in connection with the offer and sale of securities in a transaction
which qualifies as exempt from qualification under the '33 Act. In such cases,
the Company would be required to register/qualify the transaction under said
blue sky laws, which would likely increase the cost of, and extend the time for
completing, any private placement of securities.
On November 4, 1996, the Company filed a complaint (the "Action") in Nye
County, Nevada against Marlowe Harvey, Maran Holdings Inc., Calais Resources
Inc., and Argus Resources, Inc. (the "Harvey Entities"). The complaint in the
Action alleges, amongst other things, that the Harvey Entities breached their
obligations under various agreements (including the October 20, 1995 amendment
to the Joint Venture Agreement discussed in further detail in the Section of
this Registration Statement entitled "Properties" -- The Nevada Property"). The
Action, as amended, is seeking a judicial declaration that the Harvey Entities
<PAGE>
34
do not have any joint venture or real property interest in the mining claims
included within the Nevada Property. The Action also seeks compensatory damages
and other financial relief based on the Harvey Entities' breach of contract and
other causes of action.
During April 1997 the Company through its counsel filed a first amendment
to its complaint in the action. Counsel for the Harvey Entities filed answers
and a counterclaim in the Action during July 1997. In their answer, the Harvey
Entities have generally denied the allegations of the first amended complaint
and have raised various affirmative defenses. In their counterclaims, the Harvey
entities are seeking an injunction preventing the Company from conducting
activities related to the Nevada Property pending resolution of the issues in
the Action and compensation and punitive damages and other financial relief
based on breach of contract and other causes of action.
In July 1997, the Harvey Entities moved for a Preliminary Injunction
against the Company preventing it from conducting further activities at the
Manhattan Project without their consent, from issuing press releases describing
certain real property as being wholly owned by the Company, and from using the
same as security for loans. After a two-hour hearing on September 4, 1997, the
court refused to issue an injunction against the Company. Pursuant to
stipulation, the parties have agreed not to interfere with one another's
operations on the Nevada Property. Additionally, the Company has agreed not to
further encumber the Nevada Property pending trial. A trial date has been set
for April 30, 1998.
If the Company is successful in obtaining specific performance of the
agreement alleged in the Action, it will effectively continue to own or control
an undivided 100% interest in the Nevada property. Regardless of whether the
Company is successful in the Action, it will continue to own at lease a fifty
percent (50%) undivided interest in the Nevada Property by virtue of its
contractual rights.
If the Company is successful in obtaining specific performance of the
agreements alleged in the Action, it will effectively continue to own or control
an undivided 100% interest in the Nevada Property.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The authorized capital stock of the Company consists of 50,000,000 shares
of which 49,750,000 shares are Common Stock with a par value of one cent ($.01)
per share and 250,000 shares of Series A Preferred Stock with a par value of
$1.00 per share and convertible into Common Stock on the terms and conditions
hereinbelow described. As of February 28, 1997, there were 12,208,412 shares of
the Company's Common Stock issued and outstanding and 228,919 shares of the
Preferred Stock issued and outstanding. The average price paid per share for the
Common Stock to date has been approximately $2.00 per share while the price per
share paid for the Preferred Stock has been $10.00 per share, with an effective
conversion price (determined on the basis of one-for-ten conversion rights
accorded the Preferred Stock shareholders) to be $1.00 per share.
The following description of the capital stock of the Company and certain
provisions of the Company's Amended Articles of Incorporation and Certificate of
Determination of Preferences of Series A Preferred Stock is a summary and is
qualified in its entirety by the provisions of those documents which have been
filed as exhibits to the Company's Registration Statement of which this
Registration Statement is a part.
PUBLIC MARKET
The Company received approval for trading of its Common Stock on the
Electronic Bulletin Board (NASDAQ) in March 1996. From the period from December
1995 until March 1996, the Company published "bid" and "ask" prices on the "pink
sheets". The low and high prices for the Common Stock since commencement of
quotations are as follows:
HIGH DATE LOW DATE
- - ------ ---------------------------- ------ ----------------------------
$14.50 March 3, 1997 $1.25 December 1995
<PAGE>
35
Over the past six months the average monthly volume of trading of the
Company's Common Stock has been approximately 800,000 shares. Prospective
Investors should be aware that the volume of trading on the Electronic Bulletin
Board traditionally has been limited and there can be no assurance that the
Electronic Bulletin Board will provide an effective market for a shareholder to
sell his or her Common Stock of the Company.
For the periods ended May 31, 1996 and May 31, 1997, there were 834 and
1,140 shareholders respectively. As of August 31, 1997, there were 808
shareholders of record.
The Company has applied for listing with the American Stock Exchange
("AMEX") by requesting a preliminary listing eligibility opinion. The Company
has also applied for listing with the Philadelphia Stock Exchange.
The high and low interdealer prices for the calendar quarters since trading
began on the Electronic Bulletin Board (without retail markup, markdown or
commission) are as follows:
QUARTER ENDED HIGH LOW
----------------------------------------- ------- -------
December 31, 1995........................ $ 1.25 $ 1.25
March 31, 1996........................... $ 2.44 $ 1.35
June 30, 1996............................ $ 3.75 $ 1.812
September 30, 1996....................... $ 4.25 $ 2.125
December 31, 1996........................ $10.375 $ 2.875
March 31, 1997........................... $ 14.50 $ 6.00
June 30, 1997............................ $ 9.75 $3.0625
OPTIONS AND STOCK APPRECIATION RIGHTS
The table set forth below provides certain information concerning
individual grants of stock options and stock appreciation rights (whether
granted in connection with stock options or as "freestanding" rights made during
the last fiscal year of the Company ending May 31, 1997) to each of the named
executive officers noted below:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS
OPTIONS/ GRANTED TO EXERCISE
SARS EMPLOYEES OR BASE EXPIRATION
NAME GRANTED(4) IN FISCAL YEAR PRICE($/SH) DATE
- - ---------------------------------------------- ----------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Christopher D. Michaels....................... 110,000 10% $ 1.00 May 31, '06
Jeffrey S. Kramer(1).......................... 80,000 14% $ 1.00 May 31, '06
Stanley Mohr(1)............................... 50,000 25% $ 1.00 May 31, '06
Edna Pollock(1)............................... 20,000 100% $ 1.00 May 31, '06
Joe Rude' III(1).............................. 20,000 100% $ 1.00 May 31, '06
Lloyd S. Pantell, Esq.(2)..................... 100,000 100% $ 4.00 May 31, '06
</TABLE>
- - ---------------
(1) The Company has granted stock options to all members of its board of
directors pursuant to Stock Option Agreements executed at various times.
Under the terms of these agreements, each director has been granted options
to purchase 10,000 shares of Common Stock per full year of service. The
exercise price for such options is $1.00 per share. The years in which
stock options were initially granted to each respective board member are as
follows: Christopher Michaels, 1986; Jeffrey Kramer, 1989; Stanley Mohr,
1993; Edna Pollock, 1996; and Joe Rude' III, 1996. In 1996, the Stock
Option Agreements relating to Messrs. Michaels, Kramer and Mohr were
extended so that they may be exercised through May 31, 2006. The remaining
may not be exercised after the expiration of ten (10) years from the date
of grant and are nontransferable other than by inheritance.
<PAGE>
36
(2) Mr. Pantell is an attorney who is a principal in Lloyd S. Pantell, APLC who
has provided substantial legal services to the Company. Under the terms of
the option agreement. Mr. Pantell has been granted options to purchase
100,000 shares of Common Stock. The exercise price of such options is $4.00
per share. The options may be exercised at any time through May 31, 2006 and
are non-transferable other than through inheritance.
OUTSTANDING WARRANTS
The Company has issued warrants to purchase Common Stock to a number of
persons and entities. The following chart summarizes such issuances and details
the terms of each parties warrants:
OUTSTANDING WARRANTS
<TABLE>
<CAPTION>
EXERCISE ISSUANCE EXPIRATION
NAME AMOUNT PRICE DATE DATE
- - ---------------------------------- ------- -------- -------------- --------------
<S> <C> <C> <C> <C>
Holston, John 100,000 $ 1.50 Oct. 8, 1996 Apr. 7, 1998
Weissberg, David 125,000 $ 2.50 Nov. 26, 1996 Nov. 25, 1998
Renneisen, Irv 125,000 $ 2.50 Nov. 26, 1996 Nov. 25, 1998
Silenus Limited 62,500 $ 8.00 April 17, 1997 April 16, 2002
British Far East Holdings, Ltd. 100,000 $ 6.90 April 30, 1999 N/A
Magerman, Alan 350,000 $ 4.06 June 2, 1997 June 1, 2002
Austat Anstalt Schaan 25,000 $ 6.75 July 15, 1997 July 16, 2002
Mary Park Properties 20,000 $ 6.75 July 15, 1997 July 16, 2002
UFH Endowment, Ltd. 25,000 $ 6.75 July 15, 1997 July 16, 2002
Mendel Group, Inc. 5,250 $ 6.75 July 15, 1997 July 16, 2002
</TABLE>
Several of the warrant holders listed above were granted registration
rights on the underlying Common Stock. As a result the Company is registering
such shares pursuant to this Offering. Specifically, Silenus Limited, Austat
Anstalt Schaan, Mary Park Properties, UFH Endowment, Ltd. and the Mendel Group,
Inc. were granted such rights. See "REGISTRATION RIGHTS."
RECENT SALE OF UNREGISTERED SECURITIES
From the period March 1, 1994, through February 28, 1997, the Company
offered and sold 8,342,619 shares of its Common Stock and 228,319 shares of
Preferred Stock. In addition, the Company concluded the private placement of its
Debentures in a negotiated transaction with certain investors more particularly
described in the Section of the Registration Statement entitled "Description of
Securities Being Registered." With the exception of the placement of the
Debentures, these sales were made primarily to its existing shareholders. The
Company has relied upon applicable exemptions from the registration requirements
of the Federal Securities Laws and upon compatible exemptions from securities
registration under applicable state ("blue sky") laws. In the event that it is
determined that the Company sold and issued these securities without complying
with either the Federal Securities Laws or blue sky laws, the purchasers of
these securities may have the right to rescind the sale of these securities and
to recover the purchase price paid to the Company plus interest accrued on such
purchase price. The Company does not currently have funds with which it could
repay the purchase price and accrued interest from any prior sale of securities.
Moreover, it is doubtful that the Company could continue operations if a
significant number of existing shareholders were to seek to rescind their
purchases of securities. The financial statements of the Company do not reflect
a contingent liability for any such rescission rights.
<PAGE>
37
DESCRIPTION OF SECURITIES BEING REGISTERED
The following description of the capital stock of the Company and certain
provisions of the Company's Amended Articles of Incorporation and Certificate of
Determination of Preferences of Series A Preferred Stock is a summary and is
qualified in its entirety by the provisions of those documents which have been
filed as exhibits to the Company's Registration Statement of which this
Prospectus is a part.
COMMON STOCK
The issued and outstanding shares of Common Stock, including the shares
being offered hereby, are validly issued, fully paid and nonassessable. Subject
to the rights of holders of Preferred Stock, the holders of outstanding shares
of the Common Stock are entitled to receive dividends out of assets legally
available therefor at such time and at such amounts as the board of directors
may, from time to time, determine. See "Dividend Policy." The shares of Common
Stock are neither redeemable nor convertible and the holders thereof have no
preemptive or subscription rights to purchase any securities of the Company.
Upon liquidation, dissolution, or winding up of the Company, the holders of the
Common Stock are entitled to receive, pro rata, the assets of the Company which
are legally available for distribution after payment of all debts and other
liabilities and subject to the rights of any holders of the Preferred Stock then
outstanding. Before declaring any dividends, the board of directors may set
apart out of any funds of the Company available for dividends such sum or sums
as they may, from time to time, deem in their discretion to be proper working
capital or as a reserve fund to meet contingencies or for equalizing dividends
or for such other purposes as the directors shall deem conducive to the
interests of the Company. Each outstanding share of the Common Stock is entitled
to one vote on all matters submitted to a vote of stockholders if there is no
cumulative voting in the election of directors.
PREFERRED STOCK
The Company's Amended Articles of Incorporation and its Certificate of
Determination of Preferences of Series A Preferred Stock authorized the Company
to issue up to 250,000 shares of the Preferred Stock. The holders of the
Preferred Stock are entitled to receive dividends at the rate of eight percent
per annum of the original issue price per share out of any funds legally viable
therefor payable on each January 1, April 1, July 1, and October 1 after the
issuance of the Preferred Stock. Dividends on the Preferred Stock are cumulative
so that if the full dividends in respect of any preference dividend is not paid,
the deficiency will be fully paid or declared and set apart for such shares
(without interest) before any dividend or other distribution is paid on or
declared or set apart for any other class or series of the Common Stock or
preferred shares of the Company. The Company enjoys the right to pay any
dividend on the Preferred Stock in cash or through the issuance of additional
shares of Preferred Stock or Common Stock having an issue price equal to the
amount of the dividend or through a combination of cash and stock. In the event
of any liquidation, dissolution, or winding up of the Company, either
voluntarily or involuntarily, the holders of the Preferred Stock will be
entitled to receive prior and in preference to any distribution of any of the
assets or surplus funds of the Company to the holders of the Common Stock or any
other class of preferred shares of the Company an amount equal to $10 per share
plus a further amount equal to any dividends declared but unpaid on such shares.
In the event of any consolidation or merger of the Company, or a sale of all or
substantially all of the assets of the Company, or a series of related
instructions in which more than fifty percent of the voting power of the Company
is disposed of, holders of the Preferred Stock will not be entitled to treat
such event as a liquidation, dissolution, or winding up of the Company The
Company has and intends to implement the right granted to each holder of the
Preferred Stock to convert each such share into 10 shares of fully priced and
nonaccessible shares of the Common Stock as of the date of this Registration
Statement.
CONVERTIBLE DEBENTURES
The Company recently completed two private placements of Convertible
Debentures in the aggregate amount of $3,505,000. The private offerings were
made in reliance upon the exemption from registration afforded by Section 4(2)
of the Securities Act of 1933. The terms of the offerings were as follows:
<PAGE>
38
On April 14, 1997, the Company entered into a Subscription Agreement with
Silenus Limited ("Silenus") in a negotiated private placement. This transaction
was made in reliance upon the exemption from registration afforded by Section
4(2) of the Securities Act of 1933. As a result, the Company issued $2,000,000
of 8% Senior Secured Convertible Debentures due March 31, 2000 (the
"Debentures") and granted to Silenus a warrant to purchase 62,500 shares of the
Company's Common Stock (the "Warrant").
The Debentures may be converted into shares of Common Stock at any time
commencing June 2, 1997 through August 16, 1997 at a price equal to the lesser
of: seventy-five percent (75%) of the closing bid price of the Common Stock on
April 16, 1997 (i.e. 75% X $8.00, or $6.00 per share); seventy-five percent
(75%) of the closing bid price of the Common Stock on the day prior to the
funding of any subsequent funding ("tranche"); or seventy-five percent (75%) of
the average closing bid price for the five trading days immediately preceding
the actual date of conversion of the Debentures. If conversion is made after
August 16, 1997, the conversion price will be seventy-two and one-half percent
(72.5%) of the above-referenced valuation standards.
The Company is required to use its "best efforts" to cause the Registration
Statement to become effective prior to August 16, 1997. If the Registration
Statement does not become effective by August 16, 1997, the Company is required
to pay liquidated damages to Silenus equal to two percent (2%) of the Debentures
for the first thirty (30) days and three percent (3%) per month thereafter until
the Registration Statement becomes effective.
Provided Silenus and the Company fund at least two tranches of $2,000,000
each, Silenus will be entitled to a right of first refusal for one year to
participate in all or any part of any equity securities (i.e., stock or
securities convertible into equity) subsequently issued or proposed to be issued
by the Company. In addition, the Company will be prohibited from issuing any of
its securities at a discount (other than in connection with any merger,
acquisition, or certain benefit plans) for a period of ninety days following the
funding of the last tranche. The Company may notify Silenus that a funding is
requested at any time after the effective date of the Registration Statement
until the funding of the last tranche. In such event, should Silenus elect not
to fund the tranche so requested, the Company may issue its securities at a
discount to a third party, provided a public distribution of the securities sold
to such third party is not made until at the earlier of: ninety days following
the effective date of the Company's Registration Statement on Form 10 or the
date on which at least seventy-five percent (75%) of the Debentures are
converted.
Until Silenus has converted at least seventy-five percent (75%) of the
Debentures, a deed of trust on the Nevada Property and the pledge of 1,000,000
shares of Common Stock will secure the Debentures.
On July 17, 1997 the Company entered into Subscription Agreements with,
Mary Park Properties, UFH Endowment Fund, Ltd., Austat Anstalt Schaan, and the
Mendel Group (the "Investor Group") in a negotiated private placement. This
transaction was made in reliance upon the exemption from registration afforded
by Section 4(2) of the Securities Act of 1933. As a result, the Company issued
$1,505,000 of 8% Senior Convertible Debentures due July 1, 2002 (the "July
Debentures") and granted to the Investor Group warrants to purchase an aggregate
of 75,250 shares of the Company's Common Stock (the "July Warrants").
The July Debentures may be converted into shares of Common Stock at any
time commencing July 18, 1997 through July 1, 2000 at a price equal to
Seventy-five percent (75%) of the Market Price (as defined below) of the Common
Stock for all conversions for which notice is received after the date hereof.
For purposes of this Section 4, the "Market Price" shall be the lesser of (a)
the closing bid price of the Common Stock on the day prior to closing; or (b)
the average closing bid price of the Common Stock for the five (5) New York
Stock Exchange Trading days immediately preceding each conversion date, in each
case as reported by the National Association of Securities Dealers Automated
Quoting System, or as reported by the American Stock Exchange of the Common
Stock shall then be listed in trading upon such exchange.
The July Debentures bear interest at a coupon rate of 8% per annum. Such
interest is payable quarterly on the last calendar day of June, September,
December and March of each year. Interest may be paid in either cash or Common
Stock and will continue to accrue until payment in full of the principal amount
of the July Debentures has been made or duly provided for.
<PAGE>
39
The Company is required to use its "best efforts" to cause the Registration
Statement to become effective prior to November 14, 1997. If the Registration
Statement does not become effective by November 14, 1997, the Company is
required to pay liquidated damages to the Investor Group equal to two percent
(2%) of the Debentures for the first thirty days and three percent (3%) per
month thereafter until the Registration Statement becomes effective.
The Company has also issued to the Investor Group warrants to purchase
75,250 shares of Common Stock. The warrant may be exercised at any time up to
and through July 16, 2002 at the price of $6.75 per share. The exercise price is
subject to adjustment to account for payments of dividends, stock splits,
reverse stock splits, and similar events.
In order to provide for the issuance of all shares of Common Stock which
may be issued pursuant to the Subscription Agreement and Warrants, the Company
agreed to register approximately 370,000 shares of Common Stock.
DIVIDENDS
The Company has not paid cash dividends on any of its Common Stock and does
not anticipate paying any cash dividends on any of its Common Stock for the
foreseeable future. Holders of the Preferred Stock are entitled to an annual
cash or stock dividend offered at the rate of eight percent (8%) per year
payable out of any funds legally available therefor and payable on January 1,
April 1, July 1, and October 1 of each year. Such dividends are cumulative so
that if full dividends in respect of any previous dividend period are not paid,
holders of the Preferred Stock are entitled to receive any deficiency before any
dividend or other distribution may be made or declared by the Company with
respect to any other class of stock including other series of preferred shares
should the Company elect to issue such additional series.
As of the date of this Registration Statement, no accrued quarterly
dividends payable to the holders of the Preferred Stock (which were $160,500 as
of May 31, 1997) have been paid. Management of the Company is presently
scheduling payment of accrued dividends in Common Stock as authorized in the
Company's "Certificate of Determination of Preferences of Series A Preferred
Stock" filed with the Nevada Secretary of State on October 25, 1995 at the time
that the Preferred Stock is converted into Common Stock on or before the earlier
of the effective date of this Registration Statement or December 31, 1997.
<PAGE>
40
REGISTRATION RIGHTS
The Company has entered into agreements with various shareholders to
attempt to effect registration of their shares under the '33 Act pursuant to the
filing of Form SB-2. The following table identifies such shareholders and the
amount of Common Shares to be registered:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OF SHARES OWNED AFTER
OFFERING BEING OFFERED OFFERING
---------------------- ---------------- -------------------
NAME NUMBER PERCENT(1) MIN. MAX. NUMBER PERCENT
- - -------------------------------- ------- ---------- ---- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Silenus Limited................. 42,244(2) .28% 0 700,000(3) 700,000 4.69%
c/o Betuvo AG,
Baoerostrase 73
Postfach 6302
Zug, Switzerland
Mary Park Properties............ 98,431(4) .66% 0 98,431 98,431 .66%
3 Tora Mezion Street
Jerusalem, Israel
UFH Endowment, Ltd.............. 123,040(4) .82% 0 123,040 123,040 .82%
c/o CH Financial Services
160 Central Park South
Suite 3212
New York, NY
Austat Anstalt Schaan........... 123,040(4) .82% 0 123,040 123,040 .82%
7440 Fuerstentium
Liechtenstein,
Landstrassa 163
Mendel Group, Inc............... 25,838(4) .17% 0 25,838 25,838 .17%
17 West 17 Street
8th Floor
New York, New York 10011
Irv Reneisson................... 100,000 .67% 0 100,000 100,000 .67%
660 Newtown/Yardley Road
Newtown, Pennsylvania 18940
Harrison Western................ 100,000 .67% 0 100,000 100,000 .67%
Construction Company
1208 Quail Street
Lakewood, Colorado 82015
</TABLE>
- - ---------------
(1) Except where otherwise described in these footnotes, the percentages noted
in this column represent the ratio that a shareholder's beneficial ownership
bears to the total number of shares outstanding and issued as of May 31,
1997 12,273,565, the conversion of all Preferred Stock issued and
outstanding as of May 31, 1997, into the Common Stock on a ten-to-one basis
(2,283,190 shares of Common Stock) plus the number of stock options issued
and outstanding as of February 28, 1997 380,000.
(2) Pursuant to the terms and conditions of the April 14, 1997 Subscription
Agreement and related documents, Silenus redeemed $200,000 in Debentures on
July 25, 1997 and received 42,244 shares of Common Stock.
(3) The Subscription Agreement requires the Company to register shares of Common
Stock to account for the conversion of the 8% Senior Secured Convertible
Debentures and the exercise of warrants to purchase Common Stock. To date,
only $2,000,000 in Debentures have been issued. 700,000 shares of Common
Stock are hereby being registered to assure that there are a sufficient
number of shares of Common Stock registered to account for the conversion of
all remaining Debentures and the exercise of all 62,500 warrants.
<PAGE>
40
(4) Assumes the conversion of all Debentures at $5.10 per share (based upon 75%
of the "bid" price of $6.825 as of July 16, 1997), plus the exercise of all
warrants to purchase Common Stock issued in conjunction with the Debentures.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws do not contain a provision entitling any director or
executive officer to indemnification against liability under the Securities Act
of 1933 (the " '33 Act"). Sections 78.751 et seq. of the Nevada Revised Statutes
allow a company to indemnify its officers, directors, employees, and agents from
any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, except under certain
circumstances. Indemnification may only occur if a determination has been made
that the officer, director, employee, or agent acted in good faith and in a
manner which such person believed to be in the best interests of the company. A
determination may be made by the shareholders, by a majority of the directors
who were not parties to the action, suit, or proceeding confirmed by opinion of
independent legal counsel; or by opinion of independent legal counsel in the
event a quorum of directors who were not a party to such action, suit, or
proceeding does not exist. Provided the terms and conditions of these provisions
under Nevada law are met, officers, directors, employees, and agents of the
Company may be indemnified against any cost, loss, or expense arising out of any
liability under the '33 Act. Insofar as indemnification for liabilities arising
under the '33 Act may be permitted to directors, officers and controlling
persons of the Company, the Company has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy and is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and the Preferred
Stock is US Stock Transfer Corporation, Glendale, California.
LEGAL MATTERS AND AUDITORS
COUNSEL
Lloyd S. Pantell, APLC has acted as Special Counsel. As such Special
Counsel has assisted the Company in the preparation of the Company's
Registration Statement under the '34 Act. As required by applicable federal and
state securities laws, Special Counsel has rendered an opinion to the effect
that, when issued, the Common Stock shall be duly and validly issued in
accordance with applicable law.
As partial compensation for services rendered, the Company has granted Mr.
Pantell 100,000 stock options with a strike price of $4.00 per share.
AUDITORS
The Company has retained Jackson and Rhodes, P.C., Dallas, Texas, to serve
as Company's accountants for fiscal year 1997 and Merdinger, Fruchter, Rosen &
Corso, P.C. for fiscal year ended 1998. The financial statements accompanying
this Registration Statement have been audited by such firms.
FURTHER INFORMATION
The Company has applied for listing on the American Stock Exchange. If
approved for listing, certain reports and information not necessarily contained
in this Registration Statement will be available for inspection through the
American Stock Exchange, 86 Trinity Place, New York, New York 10006-1881.
<PAGE>
42
The Company has applied for listing on the Philadelphia Stock Exchange. If
approved for listing, certain reports and information not necessarily contained
in this Registration Statement will be available for inspection through the
Philadelphia Stock Exchange, 1900 Market Street, Philadelphia, PA 19103-3584.
The Company has and intends to continue to furnish its shareholders annual
reports containing financial statements examined by an independent accounting
firm and quarterly reports for the first three fiscal quarters of each fiscal
year containing interim unaudited financial information.
This registration statement and all the Company's subsequent filings will
be filed through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR")
system and are, or will be, publicly available through the Commissions Web site
at http://www.sec.gov.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form SB-2
under the Securities Act of 1933, as amended. This Registration Statement does
not contain all of the exhibits and schedules accompanying this Registration
Statement. For further information with respect to the Company, reference is
made to the Registration Statement and the exhibits and schedules accompanying
the Registration Statement on Form SB-2 filed May 28, 1997, and amended July 31,
1997 (Registration Number 333-27923). Copies of the Registration Statement on
Form SB-2, as amended, and such exhibits and schedules may be inspected, without
charge, at the public reference facility of the Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of such material can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following pages contain the financial statements of the Company for the
fiscal years ending May 31, 1996, 1997 and 1998.
<PAGE>
F-1
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
(FORMERLY NEVADA MANHATTAN MINING INCORPORATED)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports F-2
Consolidated Balance Sheets at May 31, 1997 and 1998 F-4
Consolidated Statements of Operations
For the Years Ended May 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Changes in Stockholders'
Equity (Deficiency)
For the Years Ended May 31, 1996, 1997 and 1998 F-6
Consolidated Statements of Cash Flows
For the Years Ended May 31, 1996, 1997 and 1998 F-9
Notes to Consolidated Financial Statements F-11
Interim (Unaudited) Financial Statements from the Company's
Form 10-QSB for the quarter ended August 28, 1998
Part I - Financial Information
Item 1 - Financial Statements (Unaudited) F-36
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operation F-42
<PAGE> F-2
F-2
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
TERRA NATURAL RESOURCES CORPORATION
We have audited the accompanying consolidated balance sheet of Terra Natural
Resources Corporation (formerly Nevada Manhattan Mining Incorporated) and
Subsidiaries as of May 31, 1998, and the related consolidated statements of
operations, changes in stockholders' equity (deficiency) and cash flows for the
year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Terra
Natural Resources Corporation and Subsidiaries as of May 31, 1998, and results
of its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in the financial
statements, the Company has incurred net losses and its current liabilities
exceed its current assets. These matters, among others, as discussed in Note 1
to the financial statements, raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to 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.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
September 3, 1998
<PAGE> F-3
F-3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Terra Natural Resources Corporation
We have audited the accompanying consolidated balance sheet of Terra Natural
Resources Corporation (formerly Nevada Manhattan Mining Incorporated) and
subsidiaries as of May 31, 1997 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the two
years in the period then ended. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position of Terra
Natural Resources Corporation and subsidiaries as of May 31, 1997, and the
results of its operations and its cash flows for each of the two years in the
period then ended, in conformity with generally accepted accounting principles.
As discussed in Note 11, the Company has restated its financial statements for
the year ended May 31, 1997 to account for the rescission, in December 1997, of
the $3,000,000 note agreement with an officer of the Company's Brazilian
subsidiary. The effect of the restatement was to decrease long-term debt and
Brazilian timber concessions by $2,596,729. As explained in Note 11, the Company
has restated its financial statements as of May 31, 1996 and for the year ended
May 31, 1997 to provide for impairment of its mining properties in accordance
with SEC guidelines. The effect of the restatement was to increase accumulated
deficit and decrease property by $947,429 as of May 31, 1996 and $3,120,873 as
of May 31, 1997, and increase net loss for the year ended May 31, 1997 by
$2,173,444. Accordingly, the accompanying financial statements for the years
ended May 31, 1996 and 1997 have been restated to correct the error and the
rescission.
Jackson & Rhodes P.C.
July 28, 1997 (except as to Notes 2 and 11, which
are as of February 13, 1998)
Dallas, Texas
<PAGE> F-4
F-4
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31
1997 1998
---------- ----------
ASSETS (Restated)
CURRENT ASSETS
Cash and Cash Equivalents $ 559,510 $ 81,529
Accounts Receivable, net of allowance for
doubtful accounts of $150,000 58,161 255,027
Inventories - 108,844
Prepaid Expenses 622,710 283,354
---------- -----------
Total Current Assets 1,240,381 728,754
PROPERTIES AND EQUIPMENT
Mineral Properties:
Domestic 2,936,000 2,936,000
Indonesia 2,600,000 1,400,000
Timber Concessions 700,000 700,000
Machinery and Equipment, net 348,842 355,392
OTHER ASSETS - 265,700
----------- -----------
TOTAL ASSETS $7,825,223 $ 6,385,846
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 986,273 $ 1,445,106
Convertible Notes Payable to Stockholders -
Secured by Common Stock 405,000 1,366,075
Notes Payable to Stockholders 307,321 522,950
Note Payable to Officer - 718,000
Current Portion of Long-Term Debt 303,818 32,214
----------- -----------
Total Current Liabilities 2,002,412 4,084,345
Long-Term Debt 72,695 44,327
Convertible Debentures 1,333,333 2,313,459
----------- -----------
TOTAL LIABILITIES 3,408,440 6,442,131
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
MINORITY INTEREST - -
STOCKHOLDERS' DEFICIENCY
Common Stock to be issued 108 -
Preferred Stock, $1 par value, 250,000 shares
authorized, 176,414 shares issued and
outstanding 228,319 176,414
Common Stock, $0.01 par value, 50,000,000
shares authorized and 26,492,543 shares
issued and outstanding 122,736 264,926
Additional Paid-in Capital 23,699,575 28,715,550
Accumulated Foreign Currency Translation - 24,940
Accumulated Deficit (19,633,955) (29,238,115)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 4,416,783 ( 56,285)
------------ ------------
TOTAL LIABILITIES STOCKHOLDERS'
EQUITY (DEFICIENCY) $7,825,223 $ 6,385,846
=========== ============
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> F-5
F-5
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31,
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ---------
(Restated) (Restated)
<S> <C> <C> <C>
REVENUES $ - $ 287,178 $ 557,691
COST OF SALES - 261,089 394,708
------------ ------------ ------------
GROSS PROFIT - 26,089 162,983
EXPLORATION COSTS (34,404) (2,119,042) -
GENERAL AND ADMINISTRATIVE EXPENSES (1,428,854) (4,270,020) (7,541,328)
------------ ------------ ------------
NET LOSS FROM OPERATIONS (1,463,258) (6,362,973) (7,378,355)
------------ ------------ ------------
OTHER EXPENSES
Interest Expense - 23,479 624,034
Write-Off of Mineral Properties - - 1,200,000
------------ ------------ ------------
Total Other Expenses - 23,479 1,824,034
------------ ------------ ------------
NET LOSS (1,463,258) (6,386,452) (9,202,392)
CUMULATED PREFERRED DIVIDENDS (10,600) 149,500 80,316
------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $(1,473,858) $(6,535,952) $(9,282,695)
=========== =========== ===========
BASIC LOSS PER SHARE $( 0.20) $( 0.61) $( 0.62)
=========== =========== ===========
DILUTED LOSS PER SHARE $( 0.20) $( 0.61) $( 0.62)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,428,081 10,684,176 14,969,621
=========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> F-6
F-6
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED MAY 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Stock
Stock Subscrptns Preferred Stock Common Stock
to be Issued Receivable Shares Amount Shares Amount
-------------- ------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1995 1,232,327 $(50,500) - - 4,568,481 $ 46,585
Issuance of stock -
previously purchased (1,232,327) - 13,150 13,150 554,400 5,544
Cash received from stock
subscriptions - 50,500 - - - -
Common shares issued for cash
in private placement ($.25
per share) - - - - 1,001,000 10,010
Preferred shares issued for
cash in private placements
(principally at $10 per share) - - 119,360 119,360 - -
Shares Issued for Services - - - - 1,940,000 19,400
Shares issued in connection
with shareholder loan - - - - 200,000 2,000
Preferred Dividend - - - - - -
Net Loss (Restated) - - - - - -
------- ------- ------- --------- ---------- --------
Balance, May 31, 1996 $ - - 132,510 $132,510 8,353,881 $ 83,539
======== ======= ======= ======== ========= ========
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY) - continued
<TABLE>
<CAPTION>
Additional Accumulated
Paid-in Foreign Currency Accumulated
Capital Translation Deficit Total
----------- ----------------- ------------ ---------
<S> <C> <C> <C> <C>
Balance, May 31, 1995 $12,305,772 $ - $(11,624,145) $1,910,039
Issuance of stock -
previously purchased
1,213,633 - - -
Cash received from stock
subscriptions - - - 50,500
Common shares issued for cash
in private placement ($.25
per share) 258,990 - - 269,000
Preferred shares issued for
cash in private placements
principally at $10 per share) 816,465 - - 935,825
Shares Issued for Services 465,600 - - 485,000
Shares issued in connection 19,000 - - 21,000
with shareholder loan
Preferred Dividend - - ( 10,600) ( 10,600)
Net Loss (Restated) - - (1,463,258) (1,463,258)
----------- ----------- ------------ ----------
$15,079,460 $ - $(13,098,003) $2,197,506
Balance, May 31, 1996 =========== =========== ============ ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> F-7
F-7
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED MAY 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Stock Preferred Stock Common Stock
to be Issued Shares Amount Shares Amount
-------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1996 $ - 132,510 $132,510 8,353,881 $ 83,539
Shares Issued for Property 108 - - 689,200 6,892
Shares Issued for Accounts
Payable - - - 100,000 1,000
Shares Issued for Cash - 96,409 96,409 1,917,351 19,174
Shares Issued for Services - - - 120,000 1,200
Shares Issued for Conversion
of Debt - - - 1,087,133 10,871
Conversion of Preferred Stock - ( 600) ( 600) 6,000 60
Warrants Issued with Debentures - - - - -
Other Warrants Issued - - - - -
Preferred Dividend - - - - -
Net Loss - - - -
------- ------- --------- ---------- --------
Balance, May 31, 1997 $ 108 228,319 $228,319 12,273,565 $122,736
======= ======= ======== ========== ========
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY) - continued
<TABLE>
<CAPTION>
Additional Accumulated
Paid-in Foreign Currency Accumulated
Capital Translation Deficit Total
----------- ----------------- ------------ ---------
<S> <C> <C> <C> <C>
Balance, May 31, 1996 $15,079,460 $ - $(13,098,003) $ 2,197,506
Shares Issued for Property 3,293,000 - - 3,300,000
Shares Issued for Accounts
Payable 249,000 - - 250,000
Shares Issued for Cash 1,888,477 - - 2,004,060
Shares Issued for Services 238,800 - - 240,000
Shares Issued for Conversion
of Debt 1,076,755 - - 1,087,626
Conversion of Preferred Stock 540 - - -
Warrants Issued with Debentures 666,668 - - 666,668
Other Warrants Issued 1,206,875 - - 1,206,875
Preferred Dividend - - ( 149,500) ( 149,500)
Net Loss - - (6,386,452) (6,386,452)
----------- ----------- ------------ -----------
Balance, May 31, 1997 $23,699,575 $ - $(19,633,955) $ 4,416,783
=========== ========== ============ ===========
</TABLE>
R
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> F-8
F-8
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED MAY 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Stock Preferred Stock Common Stock
to be Issued Shares Amount Shares Amount
------------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1997 $ 108 228,319 $ 228,319 12,273,565 $122,736
Common Stock Issued For:
Cash ( 108) - - 2,165,400 21,654
Property - - - 5,005,000 50,050
Conversion of Debt and Interest - - - 582,575 5,826
Conversion of Debentures - - - 338,302 3,383
Collateral for Stockholders Notes - - - 2,743,698 27,437
Conversion of Preferred Stock - (207,444) (207,444) 2,280,199 22,802
Liquidated Damages - - - 289,426 2,894
Services Rendered - - - 814,378 8,144
Discount for Conversion of Debentures - - - - -
Warrants Issued For:
Services Rendered - - - - -
Common Stock Dividend
Issuance of Preferred Stock - 167,789 167,789 - -
Issuance of Common Stock Warrants - - - - -
Dividends to be Paid - ( 12,250) ( 12,250) - -
Common Stock in Escrow - - - - -
Foreign Currency Translation Adjustment - - - - -
Preferred Dividend - - - - -
Net Loss - - - - -
--------- -------- --------- ----------- -------- ----
Balance, May 31, 1998 $ - 176,414 $ 176,414 26,492,543 $264,926 $
========= ======== ========= ========== ======== =
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY) - continued
<TABLE>
<CAPTION>
Additional Accumulated
Paid-in Foreign Currency Accumulated
Capital Translation Deficit Total
----------- ----------------- ------------ ---------
<S> <C> <C> <C> <C>
Balance, May 31, 1997 $23,699,575 $ - $(19,633,955) $ 4,416,783
Common Stock Issued For:
Cash 547,672 - - 569,218
Property 3,946,123 - - 3,996,173
Conversion of Debt and Interest 766,463 - - 772,289
Conversion of Debentures 331,089 - - 334,472
Collateral for Stockholders Notes ( 27,437) - - -
Conversion of Preferred Stock 389,886 - - 205,244
Liquidated Damages 406,606 - - 409,500
Services Rendered 1,545,026 - - 1,553,170
Discount for Conversion of Debentures 500,000 - - 500,000
Warrants Issued For:
Services Rendered 428,996 - - 428,996
Common Stock Dividend
Issuance of Preferred Stock - - ( 167,789) -
Issuance of Common Stock Warrant 165,926 - ( 165,926) -
Dividends to be Paid - - 12,250 -
Common Stock in Escrow (3,984,375) - - (3,984,375)
Foreign Currency Translation
Adjustment - - 24,940 - 24,940
Preferred Dividend - - ( 80,316) ( 80,316)
Net Loss - - ( 9,202,379) (9,202,379)
------------ ------------ ------------- -----------
Balance, May 31, 1998 $ 28,715,550 $ 24,940 $(29,238,115) $( 56,285)
============ ============ ============ ===========
</TABLE>
<PAGE> F-9
F-9
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31,
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ -----------
(Restated) (Restated)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,463,258) $(6,535,952) $(9,282,695)
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Provision for Doubtful Accounts - - 150,000
Write-Off of Mineral Properties - - 1,200,000
Common Stock Issued for Services 485,000 240,000 1,442,447
Warrants Issued for Services - 1,206,875 278,996
Write-Off of Officer Advances - - 52,013
Common Stock Issued for Financing
Expense - 677,000 -
Amortization of Debenture Discount - - 314,598
Depreciation 6,200 23,931 35,645
Write-Off of Mill Acquisition Cost - - 291,246
(Increase) Decrease
Accounts Receivable 1,846 ( 58,161) ( 46,866)
Inventories - - ( 108,844)
Prepaid Expenses 2,545 ( 622,710) 61,878
Other Assets - - ( 40,701)
Increase (Decrease)
Accounts Payable and Accrued Expenses ( 71,893) 772,572 1,122,390
----------- ------------ -----------
Net Cash Used in Operating Activities (1,039,560) (4,296,445) (4,529,893)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment ( 200) ( 253,998) ( 333,441)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Issuance of Convertible
Debentures - 2,000,000 1,500,000
Payments on Long-Term Debt ( 46,153) ( 114,284) ( 29,881)
Advances from Officer - - 718,000
Proceeds from Issuances of Notes to
Stockholders 64,569 986,196 1,978,075
Payments for Notes to Stockholders - - ( 375,000)
Proceeds from Issuance of Common Stock
and stock to be issued 1,255,325 2,004,060 569,218
----------- ----------- -----------
Net Cash Provided by Financing Activities 1,273,741 4,875,972 4,360,412
----------- ----------- -----------
Foreign Currency Translation Adjustment - - 24,940
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents 233,981 325,529 ( 477,982)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR - 233,982 559,511
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 233,981 $ 559,511 $ 81,529
=========== ============ ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> F-10
F-10
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1998
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended May 31, 1996, 1997 and 1998, the Company paid no
income taxes and no interest.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
During 1996, the Company issued 200,000 shares of common stock, valued at
$21,000, for conversion of a loan from a shareholder. Also, during 1996,
the Company assumed $77,067 in debt in connection with acquiring an
additional interest in its Domestic Mineral Properties.
During 1997, the Company issued 589,200 shares of common stock in
connection with the Indonesian mining property acquisitions, 100,000 shares
for domestic mining services and 100,000 shares for a Brazilian timber
concession (Note 2). In addition, the Company issued 120,000 shares to
employees for services and 1,087,133 shares for conversion of $410,626 in
debt. The Company also issued warrants in connection with a debenture and
issued other warrants (see Note 4). The Company also assumed $375,000 in
debt in connection with acquiring an additional interest in the mine (Note
2). The Company also accrued $149,500 in preferred dividends during 1997.
During 1998, the Company issued 814,378 shares of its common stock for
services rendered by employees and third parties for $1,553,170, 338,302
shares of its common stock for conversion of $334,472 of convertible
debentures, 2,280,199 shares of its common stock for the conversion of
$207,444 of preferred stock and payment of cumulative dividends of
$205,244, 582,575 shares of its common stock for the conversion of $772,289
of stockholder's notes and interest, 289,426 shares of its common stock for
the payment of liquidating damages of $409,500 and 5,000,000 shares of its
common stock for the purchase of timberlands in Brazil for $3,996,173. See
Note 8 - Stockholders' Equity for further details of these transactions.
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> F-11
F-11
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Terra Natural Resources Corporation and Subsidiaries (Nevada
Manhattan Mining Incorporated) (the "Company") was organized
to acquire, explore, develop, finance and sell mining and
timber rights and properties. For the year ended May 31, 1998,
the Company changed its name from Nevada Manhattan Mining
Incorporated to Terra Natural Resources Corporation.
For the year ended May 31, 1997, the Company's majority-owned
subsidiary Equatorial Resources, Ltd. ("Equatorial"),
conducted the Company's Brazilian timber operations. For the
year ended May 31, 1998, the Company has ceased to operate its
Brazilian timber operations under Equatorial and all of its
timber concessions are being assigned to the Company's newly
formed majority-owned subsidiary Terra Resources Brazil, Ltd.
This decision is not considered to be a discontinued operation
because the Company is still operating the timber concessions.
Basis of Presentation
The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles which contemplate continuation of the Company as
a going concern. As shown in the consolidated financial
statements, the Company has incurred operating losses and
has had negative cash flows from operations for the last
three years. These matters raise substantial doubt about the
Company's ability to continue as a going concern.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset
amounts shown in the accompanying consolidated balance sheet
is dependent upon continued operations of the Company, which
in turn is dependent upon the Company's ability to continue to
raise capital and generate positive cash flows from
operations. The consolidated financial statements do not
include any adjustments, if any, relating to the
recoverability and classification of recorded asset amounts or
amounts and classifications of liabilities that might be
necessary should the Company be unable to continue its
existence. Management plans to take the following steps that
it believes will be sufficient to provide the Company with the
ability to continue in existence:
<PAGE> F-12
F-12
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Management's Financial Plan to provide sufficient funds to
continue the Company's operations, development and expansion
consists primarily of (a) the $14 million Bristol Asset
Management Investment Agreement (see Note 7 - "Investment
Agreement"); (b) the September 2, 1998 $500,000 Stock Purchase
Agreement (see Note 12 - "Subsequent Events"); and (c)
increasing revenue from Brazilian Timber Operations.
Management believes that the increasing revenues from
Brazilian operations and available capital from the two
above-mentioned investment agreements will provide sufficient
capital to continue the Company's operations, development and
expansion activities.
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All
significant intercompany accounts and transactions are
eliminated in consolidation.
Cash and Cash Equivalents
For statement of cash flow purposes, the Company considers
short-term investments with original maturities of three
months or less to be cash equivalents.
Mineral Properties
Acquisition costs relating to mineral properties with proven
and probable reserves are deferred until the properties are
put into commercial production, sold or abandoned. Exploration
costs, including an allocation of employee salaries and
related costs, are charged to operations when incurred. Mine
development costs incurred to develop new ore bodies, to
expand or rehabilitate the capacity of operating mines, or to
develop areas substantially in advance of production are
charged to operations until management has established proven
and probable reserves for the property. For properties placed
in production, the related deferred costs are depleted using
the units-of-production method over the life of the reserves.
Deferred costs applicable to sold or abandoned properties are
charged against operations at the time of sale or abandonment
of the property.
Management's estimates of gold prices, recoverable proven and
probable reserves, operating, capital and reclamation costs
are subject to certain risks and uncertainties which may
affect the recoverability of the Company's investment in
mineral properties. Although management has made its best
estimate of these factors based on current conditions, it is
possible that changes could occur in the near term which could
adversely affect management's estimate of the net cash flows
expected to be generated from properties in operation.
<PAGE> F-13
F-13
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Timber Concessions
Timber concessions costs relate to the fees paid to acquire
the rights to harvest timber. The acquisition costs are
amortized over the term or useful life of the related
concession. The harvesting and reclamation costs are charged
to expense as incurred.
Machinery and Equipment
Machinery and equipment is stated as its historical cost less
accumulated depreciation. Depreciation of machinery and
equipment is primarily determined by using the straight-line
method over the estimated useful life of seven years for
furniture and fixtures and ten years for mill equipment.
Impairment of Long-Lived Assets
In accordance with Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of", long-lived
assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amounts of such
assets may not be recoverable. Impairment losses would be
recognized if the carrying amounts of the assets exceed the
fair value of the assets.
Foreign Currency Translation
For foreign subsidiaries whose functional currency is the
local foreign currency, the balance sheet accounts are
translated at exchange rates in effect at the end of the year
and income and expense accounts are translated at average
exchange rates for the year. Translation gains and losses are
included as a separate component of stockholders' equity.
Revenue Recognition
Substantially all revenues are recognized when finished
products are shipped with appropriate provision for
uncollectible accounts.
Income Taxes
The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes'. Deferred taxes are
provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences, and deferred
tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
<PAGE> F-14
F-14
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Loss Per Share
For the year ended May 31, 1998, the Company adopted SFAS No.
128, "Earnings Per Share". Basic loss per share is computed by
dividing net loss attributable to common stockholders by the
weighted average number of common shares outstanding. Diluted
loss per share is computed similar to basic loss per share
except that the denominator is increased to include the number
of additional common shares that would have been outstanding
if the potential common shares had been issued and if the
additional common shares were dilutive. Loss per share for
1997 and 1996 has been restated using the methodologies of
SFAS No. 128.
Concentration of Credit Risk
The Company sells products (primarily in Brazil) and extends
credit based on an evaluation of the customer's financial
condition, generally without requiring collateral. Exposure to
losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its
exposure for credit losses and maintains allowances for
anticipated losses.
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 and disclosure of contingent
assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and
expenses during the reported periods. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in
accordance with generally accepted accounting principles. For
certain of the Company's financial instruments including cash,
accounts receivable, and accounts payable and accrued
expenses, the carrying amounts approximate fair value due to
their short maturities. The amounts owed for notes payable and
convertible debentures also approximate fair value because
current interest rates and terms offered to the Company for
similar notes are substantially the same.
<PAGE> F-15
F-15
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently Issued Accounting Pronouncements
In June 1997, FASB issued SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for
reporting and displaying comprehensive income and its
components in financial statements. This statement is
effective for fiscal years beginning after December 15, 1997.
The adoption of this standard is not expected to have a
material impact on the presentation of the Company's financial
statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which
requires a company to report certain information about its
operating segments including factors used to identify the
reportable segments and types of products and services from
which each reportable segment derives its revenues. This
statement is effective for fiscal years beginning after
December 15, 1997. The adoption of this standard is not
expected to have a material impact on the presentation of the
Company's financial statements.
NOTE 2 - PROPERTIES AND EQUIPMENT
Brazil
The Company has acquired various rights (Jonasa Concessions,
Terranorte Concessions and Timberlands), to up to
approximately 958,000 hectares (2,395,000 acres) of timber
properties located in Brazil. In addition, the Company
acquired a sawmill facility located near the town of Sao
Miguel do Guama, which is no longer operated by the Company.
The Company began harvesting trees in April 1997 and commenced
sales during the year ended May 31, 1997.
The Jonasa Concessions
The Company, through Equatorial, entered into a letter
agreement with Madeira Intex, S.A, ("Madeira") whereby Madeira
agreed to assign its rights in and to a Joint Venture
Agreement which Madeira had entered into in 1984 with
Companhia Agropecuaria do Rio Jabuti ("Jonasa"). The Joint
Venture Agreement required Jonasa to assign to Madeira the
exclusive rights to extract and market all lumber licensed by
the appropriate Brazilian authorities for export. All the
various agreements were integrated into an Agreement to
Jointly Develop Timber Properties. Under this agreement,
Jonasa has granted to Equatorial the properties comprising the
Jonasa Concessions. In consideration of this grant, Equatorial
has agreed to pay to Jonasa 50% of the net proceeds received
on the sale of all timber and related products produced and
sold pursuant to the agreement. During the year ended May 31,
1998, the Company temporarily suspended harvesting of timber
under this agreement. The Company has decided to harvest from
the Terranorte Concessions and Tropical Woods Concessions. See
Jonasa Concessions in Note 7 - Commitments and Contingencies.
<PAGE> F-16
F-16
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 2 - PROPERTIES AND EQUIPMENT (continued)
Terranorte Concessions
On May 30, 1997, Equatorial entered into an Agreement to
Harvest Timber and Develop Timber Properties with Terranorte
S.A. ("Terranorte"). Terranorte granted to Equatorial the
exclusive right to either harvest the timber or to purchase
certain species of logs extracted by Terranorte located on
approximately 490,000 hectares of timber property located near
the town of Moju, Para, Brazil. In June 1997, Equatorial began
harvesting operations employing its own crews and purchasing
harvested logs from Terranorte.
Sao Miguel Sawmill
On May 30, 1997, Equatorial and Jonasa Madeiras Limitada
("Jonasa Madeiras") entered into an Agreement to Acquire
Sawmill. Under the terms of the agreement, Jonasa Madeiras
agreed to convey all right, title, and interest in and to the
sawmill facility, all equipment relating to the sawmill
facility, and 246 hectares of adjacent real property, all of
which is located near the town of Sao Miguel do Guama, Para,
Brazil. During the year ended May 31, 1998, the Company
abandoned the use of the sawmill and extracted a majority of
the assets purchased during the year. The Company has
terminated the agreement for the use of the sawmill, and
charged the acquisition cost to expense for the year ended May
31, 1998.
Timberlands
In April 1998, the Company entered into an agreement to
acquire title to land, containing approximately 292,598
hectares, which consists of one large tract in the state of
Amazonas and several smaller tracts in the state of Para. The
Company acquired title to the property for the issuance of
5,000,000 shares of the Company's common stock. The shares
were valued at $3,984,375 which represents the fair market
value of the stock at date of issuance. The shares were issued
as escrow shares contingent upon the stockholder's completion
of certain financial obligations to the Company and the
Company's completion of its due diligence as to the proper
conveyance of the deeds for the property. The stockholder has
until October 7, 1998 to complete his financial obligation to
the Company and the Company has until October 22, 1998 to
complete its due diligence. Also, the Company has the right to
cancel the shares and rescind the acquisition any time prior
to the completion of its due diligence. Also, if the
stockholder does not complete his financial obligation to the
Company, then the Company can cancel the shares and the
property remains with the Company.
<PAGE> F-17
F-17
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 2 - PROPERTIES AND EQUIPMENT (continued)
Tapana (Tropical Woods) Sawmill
In May 1998, the Company entered into a lease agreement for a
sawmill, located in Belem, Brazil which includes 3.6 hectares
of property, an office building, a sawmill with related
equipment and a port for unloading and storage of logs. The
lease is for a minimum of two years. Also, the agreement
provides for Tropical Woods to deliver a minimum of 2,300
cubic meters of logs per month from their property, consisting
of 162,982 hectares. The Company began operating the sawmill
in June 1998.
Domestic Mineral Properties
The Company owns a 100% interest in mineral properties located
in the Manhattan Mining District, Nye County Nevada (the
Nevada Properties). The Nevada Properties consist of 28
patented (fee ownership) and 65 unpatented (deed ownership)
mining claims that include the Whitecaps Mine, Union Mine,
Consolidated Mine, Earl Mine, Bath Mine and other
miscellaneous mines and claims which cover approximately 1,800
acres.
In March 1997, the Company entered into a Sale and Purchase
Agreement with the former owners of the Nevada Properties.
Under the terms of this latest agreement, the former owners
agreed to sell to the Company 100% of their interests in the
Nevada Properties for $375,000, payable as follows: $100,000
in March 1997 and the balance plus all accrued and unpaid
interest (calculated at the rate of 5.25%) on or before
February 6, 1999. The Company paid the first installment of
$100,000 in March 1997 and paid the balance in June 1997. See
Note 7 for discussion of a contingency regarding the ownership
of the property. The agreement also acknowledges that the
Company is the only entity legally entitled to conduct mineral
operations on the Nevada Property. The Company is also
required to pay all U.S. Bureau of Land Management ("BLM")
annual maintenance fees associated with the claims comprising
the Nevada Property. The Company is current with the fees to
the BLM.
Management of the Company is active in the supervision of work
taking place, plus future planning of all aspects of
operations. The operating permits for the Manhattan Gold Mine
were issued to the Company by the State of Nevada during April
1996. The Company negotiated an agreement with Harrison
Western Mining and Construction Company ("Harrison") for the
beginning of production in July 1996. The work was begun in
July 1996 and included placement of mine shops and support
facilities; mining in the existing workings of the mine and
extension of the existing decline from its end location of
1,200 linear feet from the surface to the White Caps Level.
Underground flooding and caving of the existing decline
required an alternate access way and a new decline was driven
from approximately 800 feet on the existing decline. The
development activities with Harrison have been ceased as of
May 31, 1998 because of depressed gold prices and the Company
lacks the capital requirements and they are in arbitration
(see Note 7) relating to a dispute with Harrison.
<PAGE> F-18
F-18
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 2 - PROPERTIES AND EQUIPMENT (continued)
On November 25, 1997, the Company entered into a non-binding
letter of intent with Royal Gold relating to exploration and
development efforts on its Nevada Property. Under terms of the
letter of intent, Royal Gold was granted an exclusive option
to explore, develop and purchase all of the interests which
are or may be controlled by the Company on the Nevada
Property. The renewable three year agreement provides that the
Company will retain a 4% net smelter returns royalty and also
will reserve the right to continue with the development of its
under ground mining opportunity at the White Caps location.
Royal Gold has the option to acquire all of the Company's
interests in the property for $5,000,000. The agreement would
continue indefinitely to the extent that Royal Gold is
achieving production in commercial quantities or is engaged in
reclamation.
For the year ended May 31, 1997, the Company has performed an
assessment of the recoverability of the carrying value of its
domestic mineral properties and has provided an impairment
write-down against this property as explained in Note 11.
Indonesia Mineral Properties
The Company has made certain acquisitions in Indonesia during
the year ended May 31, 1997:
On August 19, 1996, the Company entered into an agreement to
acquire a 51% interest in a metals/minerals mining property in
Kalimantan, Indonesia (Sopang Gold Concession). Consideration
for the purchase consisted of 400,000 shares of the Company's
common stock due upon the signing of the agreement and an
additional 4,000,000 shares to be released only if an
independent valuation of the property exceeds $12,000,000. The
Company issued shares and has valued the 400,000 shares at
$1,200,000 based upon the $3 market price of the Company's
common shares at the time.
The Sopang Gold Concessions ("Sopang") consists of 16,480
hectares and is held under Indonesian title as a KP, a form of
Indonesian citizen ownership with a joint venture agreement.
The concession is located in southeast Kalimantan. Because of
the lack of major infrastructure in the area, initial work
will be limited to surface trenching and geochemical sampling.
The Company has not initiated any material exploration or
development activities as of May 31, 1998.
<PAGE> F-19
F-19
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 2 - PROPERTIES AND EQUIPMENT (continued)
The West Kalimantan Gold Project ("West Kalimantan") is 75
kilometers south of the Sarawak region of Malaysia and
contains 62 hectares with the intent to expand to at least
2,000 hectares. The Project is held under a KP title, a form
of Indonesian citizen ownership in joint venture with the
Company. Access to the property is by road and motorized canoe
for initial field work and helicopter support for advanced
exploration activities. Infrastructure is limited but the
proximity to the west coast of Kalimantan and low relief
terrain indicates no unusual development problems will be
encountered. Following a survey and additional ground
sampling, supervised by Behre, Dolbear & Company, Inc., key
core drill targets were identified from pitting showing
anomalous gold values, but as of May 31, 1998, the Company has
not initiated the drilling or development activities.
The Cepa Coal Project ("Cepa") in East Kalimantan covers an
area of approximately 286,000 hectares and is held in three
concessions as Contracts of Work ("COW's"). Initial work on
the property will include reasonable expansion of ownership to
include promising additional property containing similar coal.
During the year ended May 31, 1998, the concessions were
expanded to include the Mecfa Coal Property. The Mecfa Coal
Property is comprised of three blocks of land totaling 39,770
hectares which have a COW. The property is currently being
reviewed by potential joint venture partners.
The West Kalimantan and Cepa projects, collectively, were
acquired in January 1997 for 200,000 common shares issued upon
signing of the agreement and an additional 3,800,000 shares to
be released only if an independent valuation of the property
exceeds $40,000,000. The Company has valued the 200,000 shares
at $1,400,000 based upon the $10 market price of the Company's
common shares at the time, discounted 30% for the restricted
nature of and the thin market for the shares.
The Company owns the interests it acquired with the 600,000
shares issued as explained above. The Company has
contractually acquired the rights to obtain controlling
interests in five additional gold concessions in Indonesia.
The Company is currently reviewing these properties to
determine an applicable acquisition structure.
For the year ended May 31, 1997, the Company has performed an
assessment of the recoverability of the carrying value of its
Indonesia mineral properties and has provided an impairment
write-down against this property as explained in Note 11. For
the year ended May 31, 1998, the Company has taken an
impairment write-down for the Sopang Gold Concession
acquisition cost of $1,200,000. Based on the current analysis
of the property and its underlying minerals, the Company could
not substantiate that future operations would provide cash
flows to recover the acquisition cost. The Company will
expense, as incurred, future development and exploration cost
until the Company can determine the property's proven and
probable mineral reserves.
<PAGE> F-20
F-20
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 3 - CONVERTIBLE NOTES PAYABLE STOCKHOLDERS - SECURED BY COMMON STOCK
As of May 31, 1997 and 1998 the Company has $1,366,075 due
to various stockholders. The principal and accrued interest,
at 10% per annum, are due within a one year period from date
of advance. Each note is secured by a certain number of
shares of the Company's common stock. The number of shares,
which were issued on the date of the advance, is determined
by dividing the principal amount by the fair market value of
the stock on the date of advance. If the Company does not
repay the note on the due date, the principal and unpaid
interest are converted to common stock. For the years ended
May 31, 1997 and 1998, the Company issued 0 and 2,741,698
shares, respectively, of the Company's common stock to
secure the loans, and 0 and 355,000, respectively, of the
shares have been converted to equity leaving 2,386,698
shares outstanding as collateral for the debt at May 31,
1998.
NOTE 4 - NOTE PAYABLE TO OFFICER
During the Year ended May 31, 1998, the COO of the Company
advanced $718,000 to the Company for working capital
requirements. The note bears interest at 8% per annum and all
principal and accrued interest is due September 1998.
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
Notes payable to stockholders of $522,950 accrue interest at
the rate of 9%, are due on demand and are guaranteed by
certain Company officers.
As of May 31, long-term debt consisted of:
<TABLE>
<CAPTION>
1997 1998
---------- -------
<S> <C> <C>
Note payable to stockholder, interest imputed
at 9%, payable $1,000 per month until April 2001 $ 48,110 $ 40,646
Note payable to stockholder at $2,000 per
month, including interest at 9% 53,403 35,895
10% Note Payable to an individual under terms
of a joint venture agreement, paid in June,
1997. See Note 2. 275,000 -
----------- -----------
376,513 76,541
Current portion 303,818 32,214
----------- -----------
Long-term debt $ 72,695 $ 44,327
=========== ===========
</TABLE>
Maturities of long-term debt principal are as follows for the
years ending May 31:
1999 $ 32,214
2000 23,992
2001 15,533
2002 4,802
------------
$ 76,541
The Company has capitalized $26,693 and $54,332 of interest into its
Domestic Mineral Properties during the years ended May 31, 1996 and 1997,
respectively.
The obligation to a stockholder resulted from a lawsuit in 1991. The suit
alleged that the Company failed to deliver free-trading stock, thereby
resulting in alleged liability. The lawsuit was finally settled in 1994 for
$89,050, payable, without interest, at $1,000 per month.
<PAGE> F-21
F-21
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 6 - CONVERTIBLE DEBENTURES
In April and July 1997, the Company entered into Subscription
Agreements related to two negotiated private placements (the
"Debentures"). These transactions were made in reliance upon
the exemption from registration afforded by Section 4(2) of
the Securities Act of 1933. As a result, the Company issued an
aggregate of $3,500,000 of 8% Senior Secured Convertible
Debentures due March 31, 2000 and July 1, 2000 for the April
($2,000,000) and July ($1,500,000) offerings, respectively.
The Debentures may be converted into shares of the Company's
Common Stock at any time commencing June 2, 1997 at a price
equal to the lesser of seventy-five percent (75%) of the
closing bid price of the Common Stock on the closing date;
seventy-five percent (75%) of the closing bid price of the
Common Stock on the day prior to the funding of any subsequent
funding; or seventy-five percent (75%) of the average closing
bid price for the five trading days immediately preceding the
actual date of conversion of the Debentures. With respect to
the April 1997 funding, if conversion is made after August 16,
1997, the conversion price will be seventy-two and one-half
percent (72.5%) of the above-referenced valuation standards.
The Company has recorded $666,666 and $500,000 for the years
ended May 31, 1997 and 1998, respectively, deferred financing
charges for the differences between the conversion price and
the fair market value of the stock at the date of each
funding. The discount is being amortized over the life of the
debentures.
The Company was required to use its "best efforts" to cause a
Registration Statement with the Securities and Exchange
Commission to become effective. If the Registration Statement
did not become effective within 120 days of each respective
funding, the Company is required to pay liquidated damages
equal to two percent (2%) of the Debentures for the first
thirty days and three percent (3%) per month thereafter until
the Registration Statement becomes effective. For the year
ended May 31, 1998, the Company has incurred $717,636 of
liquidating damages of which $409,500 has been converted to
289,426 shares of the Company's common stock.
With regard to the April 1997 funding, until at least
seventy-five percent (75%) of the Debentures are converted, a
deed of trust on the Nevada Property and a pledge of 1,000,000
shares of Common Stock will secure the Debentures. No such
security is given on the Debentures issued in July 1997.
The Company has issued warrants to the Subscribers of the
April and July offerings. Regarding the Subscribers of the
April offering, the Company has granted 62,500 warrants with
an exercise price of $8 per share and an expiration date of
April 16, 2002. Regarding Subscribers of the July 1997
offering, the Company has granted 75,250 warrants with an
exercise price of $6.75 per share and an expiration date of
July 16, 2002. The exercise price is subject to adjustment to
account for payments of dividends, stock splits, reverse stock
splits, and similar events. See Note 7 - "Legal Proceedings."
<PAGE> F-22
F-22
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 7 - COMMITMENT AND CONTINGENCIES
Leases
The Company's Brazilian operation leases approximately 3.6
hectares of property and a related sawmill through May, 2000.
The future minimum lease payments are $180,000 for each year
ending May 31, 1999 and 2000. Rent expense amounted to
$20,726, $27,181 and $20,726 for the years ended May 31,
1996, 1997 and 1998, respectively.
Securities and Exchange Commission
In fiscal 1994, the Company entered into a consent judgment
with the Securities and Exchange Commission following an
investigation into the Company's business activities.
In connection with the judgment, the Company received the
following "Stipulation Regarding Resolution of Outstanding
Issues" from the Commission closing out the investigation and
all related issues:
"Whereas the disposition of funds analysis conducted
pursuant to the Judgment of Permanent Injunction and Other
Relief against Defendant Terra Natural Resources
Corporation entered on August 3, 1993 has revealed no
ill-gotten gains received by any defendant, the undersigned
parties hereby stipulate that all outstanding issues in
this action have been resolved, including disgorgement, and
that the judgment entered against the defendants are
final."
The entry of the judgment may impose certain burdens on the
Company with respect to its future activities. The more
significant of such burdens are as follows:
(i) The Company may not be able to utilize the exemptions from
registration available under Regulation A and Rule 701
under the 1933 Act.
(ii)The Company may not be able to rely on the private
placement exemptions provided in various state securities
laws in connection with the offer and sale of securities
in a transaction which qualifies as an exempt sale of
securities under the 1933 Securities Act.
In such case, the Company would be required to qualify the
transaction under the state securities laws, which may not be
available. This qualification would increase the cost of, and
extend the time for completing, such private placement of
securities.
Commissions
During May 1997, the Company agreed to pay two shareholders an
aggregate of 3% of the "net profits" of the Company's
Brazilian operations. For the year ended May 31, 1997 and 1998
no commissions were paid.
<PAGE> F-23
F-23
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 7 - COMMITMENT AND CONTINGENCIES (continued)
Legal Proceedings
During November 1996, the Company filed a lawsuit in Nevada
against its former joint venturer partners in the Nevada
Properties ("the Harvey Entities"). The complaint originally
alleged, among other things, that the Harvey Entities breached
their obligations under various agreements. The action as
amended seeks damages of approximately $4,000,000 resulting
from the actions and inactions of the defendants. In a
counterclaim, the defendants are seeking an injunction
preventing the Company from conducting activities related to
the mine and punitive damages and other financial relief based
on breach of contract and other causes of action.
The Company subsequently amended its complaint, seeking a
judicial determination that the Joint Venture Agreement was
null and void and a determination that the Harvey Entities
have forfeited all interest in the Nevada properties. After a
hearing in September 1997, the court refused to issue an
injunction against the Company. Pursuant to stipulation, the
parties have agreed not to interfere with one another's
operations on the Nevada Properties. Additionally, the Company
has agreed not to further encumber the Nevada property pending
trial.
If the Company is successful in obtaining specific performance
of the agreement alleged in the Action, it will effectively
continue to own or control an undivided 100% interest in the
Nevada property. Regardless of whether the Company is
successful in the Action, it will continue to own at least a
50% undivided interest in the Nevada Properties by virtue of
its contractual rights.
In June 1996, the Company entered into an agreement with
Harrison Western Construction Corporation ("Harrison") to
perform contract mine development services on the Company's
Nevada Properties. In October 1997, these services ceased and
a dispute arose between the parties. The scope of work
estimated at the time of commencement was approximately
$600,000 as projected by Harrison. At termination of the
agreement, Harrison reportedly furnished a total amount of
services and materials totaling approximately $1,684,000
without completion of the objectives for which the parties
entered into the agreement. The Company paid approximately
$1,155,000, in 1997, in cash to Harrison and in November 1996
issued 100,000 shares of the Company's stock in payment of
$250,000 of services. In July 1997, an additional 65,000
shares were issued to Harrison as collateral for any unpaid
and owing amounts. Subsequent to the termination of the
agreement, Harrison filed a mechanic's and materialman's lien
in the amount of $482,749 on the Company's Nevada property in
January 1998. This filing was, in the opinion of the Company,
in direct violation of specific clauses contained in the
agreement between the parties.
<PAGE> F-24
F-24
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 7 - COMMITMENT AND CONTINGENCIES (continued)
In support of its lien, Harrison filed a lawsuit in July 1998
in Federal District Court in Nevada. In August 1998, the
Company was granted a motion to stay the proceedings and enter
arbitration. The parties have been ordered to report to the
Federal District Court the status of the arbitration
proceedings on or before November 30, 1998. The Company
believes that any arbitration agreement or damages would not
have a material impact on the Company's financial statements.
In July 1998, the Company and several stockholders filed a
lawsuit, in United States District Court for the Central
District of California against its Debenture holders. The
lawsuit contends that the defendants violated Section 10(b)
and 13(g) of the Securities Exchange Act, Section 1962(b) of
the Racketeer Influenced and Corrupt Organizations Act, and
committed fraud by engaging in a fraudulent scheme to
manipulate and artificially depress the market in and for the
Company's common stock by use of massive short sales. The
Plaintiffs seek an unspecified amount of damages, including
punitive damages, a judicial declaration that the terms,
conditions and covenants of certain debentures and
subscription agreements were violated and certain injunctive
relief.
In July 1998, the Company and certain board members and
officers of the Company were named as defendants in lawsuits
filed by certain debenture holders. Each suit claims that the
defendants breached certain debentures and subscription
agreements and failed to file a registration statement with
the Securities and Exchange Commission. Also, the suits claim
that the defendants were in violation of Section 10(b) and
20(a) of the Securities and Exchange Act. The Company and
other defendants deny any wrong doings and intend to
vigorously defend both these lawsuits. The impact of these
lawsuits on the Company's financial position or operations
cannot be determined presently.
Jonasa Agreement
In February 1998, a dispute arose between the Company's
subsidiary, Equatorial and Jonasa. In addition, the Company
had been considering transferring its operations closer to the
principal port in the area, Belem, to sell more of its
products for export, and consolidating its operations with the
administration of its Brazilian operations. As a result,
Equatorial and Jonasa entered into a compromise and settlement
agreement which resulted in the removal of substantially all
equipment from the Sao Miguel sawmill facility and the
abandonment of its operations in Sao Miguel. Given these
events, the legality of the Jonasa Timber Concession could be
contested by Jonasa. However, the Company believes any such
actions by Jonasa would be defendable by the Company and that
the Concession is still valid.
<PAGE> F-25
F-25
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 7 - COMMITMENT AND CONTINGENCIES (continued)
Regulations
The Company's mining operations, exploration and timber
activities are subject to various foreign, federal, state and
local laws and regulations governing protection of the
environment. These laws are continually changing and, as a
general matter, are becoming more restrictive. Management
believes that the Company is in material compliance with all
applicable laws and regulations.
Investment Agreement
During the year ended May 31, 1998, the Company entered into
an agreement for an investor to purchase up to $14,000,000 of
the Company's common stock over a period of three years from
March 28, 1998. The principal terms of the agreement are as
follows:
- The sale of the Company's common stock to the investor will
be in the form of a Put Notice in which the Company will
designate the dollar amount of shares to be purchased by
the investor. Each Put Notice must be in an amount not less
than $50,000. The number of shares to be issued under each
Put Notice shall be an amount equal to the Put amount
divided by 78% of the lowest sale price of the common stock
as listed on the principal exchange during the ten trading
days prior to the Put Notice.
- The Company may not issue a Put Notice if a)trading of the
Company's common stock is suspended or delisted, b)the
closing price of the Company's common stock is less than
$.25 per share, c)a registration statement, covering the
shares, is not effective or is subject to a stop order or
is otherwise suspended, d)the Dow Jones Industrial Average
has dropped more than 3% within the preceding five business
days, or e)the common stock is not then registered under
the Exchange Act.
- Also, with the issuance of the shares the investor is to
receive common stock purchase warrants to purchase shares
of the Company's common stock. Each warrant shall be for
the purchase of shares in an amount equal to 12% of the
number of shares of common stock purchased and with an
exercise price of equal to 94% of the average closing bid
price for the Company's common stock on the exchange for
ten trading days prior to the Put Notice. The warrant shall
be exercisable for a five-year period.
- To the extent that the Company has not delivered Put
Notices to the investor on or before one year from the
date of the agreement in an aggregate dollar amount equal
to the lessor of a)$4,666,667 or b)the maximum dollar
amount with respect to which Put Notices could have been
delivered prior to such date, then any warrants that have
not been issued had such Put Notices been delivered shall
be issued. The exercise price of the warrants shall be
equal to 94% of the average closing bid price for the
Company's common stock on the exchange during the ten
trading days prior to the one year anniversary.
<PAGE> F-26
F-26
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 7 - COMMITMENT AND CONTINGENCIES (continued)
- To the extent that the Company has not delivered Put
Notices to the investor on or before two years from the
date of the agreements in an aggregate dollar amount equal
to the lessor of a)$9,333,332 or b)the maximum dollar
amount with respect to which Put Notices could have been
delivered prior to such date, then any warrants that have
not been issued had such Put Notices been delivered shall
be issued. The exercise price of the warrants shall be
equal to 94% of the average closing bid price for the
Company's common stock on the exchange during the ten
trading days prior to the two year anniversary.
- To the extent that the Company has not delivered Put
Notices to the investor on or before the termination of the
agreement in an aggregate dollar amount equal to
$14,000,000 or b)the maximum dollar amount with respect to
which Put Notices could have been delivered prior to such
date, then any warrants which have not been delivered to
the investor which would have been issued had such Put
Notices been delivered shall be issued. The exercise price
of the warrants shall be equal to 94% of the average
closing bid price for the Company's common stock on the
exchange during the ten trading days prior to the
termination date.
NOTE 8 - STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue up to 250,000 shares of
Preferred Stock with a par value of $1.00 per share. The
Preferred Stock may be issued from time to time in one or more
series.
In October 1995, the Board of Directors authorized Series A
Preferred Stock ("Old Series A") for up to 250,000 shares. The
Old Series A holders are entitled to receive an 8% per annum
cumulative dividend and a liquidating preference of $10 per
share. The holders of the Old Series A shall have the right to
convert each share of Series A into 10 shares of the Company's
common stock, for the period of issuance to December 31, 1997.
The Old Series A shares automatically convert to 10 shares of
the Company's common stock upon the earlier of December 31,
1997 or the Company successful completion of an IPO for more
than $5,000,000.
In January 1998, the Board of Directors authorized a Series A
Preferred Stock ("New Series A") for up to 250,00 shares. The
New Series A holders are entitled to receive an 8% per annum
cumulative dividend payable December 31, 1998 and a
liquidating preference of $3.50 per share. The New Series A
shares automatically convert into one share of the Company's
common stock on December 31, 1998. Also, each New Series A
share has a common stock purchase warrant entitled to purchase
two shares of the Company's common stock at $3.00 per share on
or before December 31, 1999.
<PAGE> F-27
F-27
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
For the years ended May 31, 1996 and 1997, the Company issued
132,510 and 95,809, respectively, of Old Series A for aggregate
proceeds of $1,791,425. As of May 31, 1998, 20,875 Old Series A
shares have not been converted which have cumulative dividends of
$35,172. These shares are being converted as the holders present
them for conversion.
In December 1997, the Company declared a dividend for
shareholders of record as of December 31, 1997. The dividend is
to be paid in one New Series A for each 100 shares of the
Company's common stock. As of May 31, 1998, the Company has
issued approximately 155,539 New Series A shares of the total to
be issued of 167,789.
Common Stock
For the year ended May 31, 1996, the Company issued 140,000
common shares to certain employees for services rendered. The
shares were valued at $.25 per share ($35,000), the price at
which the Company was issuing its shares in a private placement
at the time.
For the year ended May 31, 1997, the Company had the following
significant common stock transactions (see Note 12 for Subsequent
Events):
- Issued 120,000 common shares to certain employees
for services rendered. The Company has valued the
shares at $240,000 based upon the $2 market price of
the Company's common shares at the time.
- Issued 100,000 common shares to its mining
contractor in Nevada to settle a mining contract
payable of $250,000. The shares were valued at the
amount of the payable settled. The fair value of the
shares at the time was approximately $2.50 per
share.
- Issued 1,087,133 common shares to certain
shareholder creditors for the conversion of $410,626
in debt. The Company recorded a financing expense of
$677,000 (included in general and administrative
expenses) for the excess of the fair market value of
the shares over the amount of the debt. The fair
market value was determined as the $1 per share
price at which the Company was issuing its shares in
a private placement at the time.
For the year ended May 31, 1998, the Company had the following
significant common stock transactions:
- Issued 814,378 shares for payment of services
rendered by employees and unrelated parties. The
shares have been valued at $1,553,170, the fair
market value at the date of issuance.
- Issued 338,302 shares for the conversion of
convertible debentures for $334,472 of discounted
principal.
- Issued 2,280,199 shares for the conversion of Old
Series A Preferred Stock for $207,444 of par value
and $205,244 of cumulative dividends.
- Issued 289,426 shares for the payment of liquidated
damages of $409,500 associated with the convertible
debentures.
<PAGE> F-28
F-28
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
- Issued 5,000,000 shares for the acquisition of
timberlands in Brazil for $3,984,375, the fair
market value of the stock at the date of issuance.
The shares have been issued as escrow shares per the
Company's purchase contract. The shareholder is
required to perform certain financial obligations
prior to the release of the shares from escrow.
Also, the Company has to complete its due diligence
as to the proper conveyance of the deeds for the
land. The Company has not recorded the purchase as
an asset until the Stockholder's obligations and the
Company's due diligence have been completed. (See
Note 2 - "Timberlands").
- Issued 2,743,698 shares as collateral for shareholder
notes of which $436,088 of principal and interest and
355,000 shares have converted to common stock for the
year ended May 31, 1998.
- Issued 582,575 shares for the conversion of
shareholder notes and accrued interest for $772,289,
of which $436,088 represents principal and interest
for shareholder notes secured by common stock, the
fair market value of the shares at the date of the
issuance of the notes.
Warrants
During the year ended May 31, 1997, warrants were issued to
third parties for an aggregate of 412,500 shares. In
accordance with SFAS 123, the Company expensed $1,206,875 in
connection with these warrants.
During the year ended May 31, 1998, the Company had the
following significant issuances of warrants:
- Issued to a shareholder for services 200,000 warrants
to purchase the Company's common stock at $2.50 per
share for a period from date of grant to May 2000. The
Company recognized compensation expense of $268,996,
the fair market value of the warrants at date of grant.
- Issued for services 350,000 warrants to purchase the
Company's common stock at $4.06 per share for a period
from date of grant to June 2002. The Company recognized
compensation expense of $10,000, the fair market value
of the services rendered.
- Issued 167,789 warrants to purchase two shares of the
Company's common stock at $3.00 per share on or before
December 31, 1999 in association with the New Series A
shares.
<PAGE> F-29
F-29
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
Stock Options The Company has adopted only the disclosure
provisions of SFAS No. 123. It applies Accounting Principles
Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employess", and related interpretations in accounting for its
plan and does not recognize compensation expense for its
stock-based compensation plan other than for restricted stock and
options/warrants issued to outside third parties. If the Company
had elected to recognize compensation expense based upon the fair
value at the grant date for awards under its plan consistent with
the methodology prescribed by SFAS No. 123, the Company's net
income and earnings per share would be reduced to the proforma
amounts indicated below:
For The Years Ended,
--------------------
May 31,
1997 1998
------- ------
Net Loss
As Reported $(6,535,952) $(9,282,695)
============ ===========
Proforma $(6,584,802) $(9,315,016)
============ ===========
Basic Loss Per Share
As Reported $( .61) $( 0.62)
============ ============
Proforma $( .62) $( 0.62)
============ ============
These proforma amounts may not be representative of future
disclosures because they do not take into effect proforma
compensation expense related to grants made before 1995. The fair
value of these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended May 31, 1997 and
1998: dividend yields of 0% and 0%, respectively; expected
volatility of 44% and 129%, respectively; risk-free interest
rates of 6.63% and 5.74%, respectively; and expected life of 1.0
and 3.0 years, respectively. No compensation cost was considered
under either Opinion 25 or SFAS 123 for the year ended May 31,
1996, since the option price for the restricted shares
approximated the value of the restricted stock and the options
were considered to have a nominal fair value.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
<PAGE> F-30
F-30
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
The following summarizes the stock option and warrant transactions (see Note 12
for Subsequent Events):
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Stock Options Exercise Other Exercise
Outstanding Price Warrants Price
----------- ----- -------- -----
<S> <C> <C> <C> <C>
Balance, May 31, 1995 190,000 $ 1.00 -
Granted 50,000 $ 1.00 -
Exercised - -
Canceled - -
-------- -------
Balance, May 31, 1996 240,000 $ 1.00 125,000 $ 2.50
Granted 150,000 $ 1.70 387,500 $ 3.81
Exercised - -
Canceled - -
-------- -------
Balance, May 31, 1997 390,000 $ 1.70 512,500 $ 3.49
Granted 50,000 $ 1.00 793,039 $ 3.80
Exercised - ( 100,000) $ 1.00
Canceled - -
------- ----------
Outstanding, May 31, 1998 440,000 $ 1.70 1,205,539 $ 3.90
======= =========
Exercisable, May 31, 1997 390,000 $ 1.70 512,500 $ 3.49
======= =========
Exercisable, May 31, 1998 440,000 $ 1.70 1,205,539 $ 3.90
======== =========
</TABLE>
The weighted average remaining contractual lives of the options and warrants are
8.0 and 3.1 years, respectively, at May 31, 1998.
<PAGE> F-31
F-31
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 9 - INCOME TAXES
The Company has recorded no income tax benefit, nor has deferred
taxes in any year due to a net operating loss carryforward
amounting to approximately $25,000,000 at May 31, 1998, which
will expire, if not utilized, starting 2002.
There are no significant temporary differences between the
Company's tax and financial bases.
Following is a reconciliation between income tax provision
(credit) and the amount that would result from applying the U. S.
statutory rate to pretax income (loss):
May 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
Income Tax Credit at
Statutory Rate $( 450,000) $(1,430,000) $(3,634,624)
Lack of Taxable Income
in Carryback Period 450,000 1,430,000 3,634,624
----------- ----------- -----------
Income Tax Provision $ - $ - $ -
=========== =========== ===========
Following are the components of the Company's deferred tax asset
resulting from the Company's net operating loss carryforward at
each period:
May 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
Deferred Tax Asset $3,388,000 $5,300,000 $9,900,000
Valuation Allowance (3,388,000) (5,300,000) (9,900,000)
----------- ----------- ----------
Net Deferred Tax Asset $ - $ - $ -
=========== ========== ==========
<PAGE> F-32
F-32
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 10 - GEOGRAPHIC AND SEGMENT INFORMATION
Geographic Information
The Company's operations through the year ended May 31, 1996 were
entirely gold mining operations in the United States. Beginning in the
year ended May 31, 1997, the Company began operating in Indonesia
(mining) and Brazil (timber).
Financial data by geographic area as of and for the years ended May
31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
Operating Identifiable
1997 Sales Loss Assets
---------- ------------- ------------- ----------
<S> <C> <C> <C>
United States - $(5,823,572) $ 3,661,472
Indonesia - ( 318,165) 2,600,000
Brazil 287,148 ( 221,236) 2,323,751
------------- ----------- -----------
Total $ 287,148 $(6,362,973) $ 8,585,223
============ =========== ===========
1998
----------
United States $ 41,740 $(6,740,233) $ 3,407,899
Indonesia - ( 13,110) 1,400,000
Brazil 515,951 (2,449,036) 1,577,947
------------ ---------- -----------
Total $ 557,691 $(9,202,379) $ 6,385,846
============ =========== ===========
</TABLE>
Financial data by segment as of and for the years ending May
31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
1997 Timber Mining Total
---------- ------------- ------------ ------------
<S> <C> <C> <C>
Sales $ 287,178 $ - $ 287,178
============ ============ ===========
Operating Loss $( 221,238) $(2,379,049) $(5,597,286)
General Corporate
Expenses - - (3,789,165)
------------ -------------- -----------
Net Loss $( 221,238) $(2,379,049) $(6,386,452)
============ ============ ===========
Identifiable Assets $ 2,323,751 $ 5,829,783 $ 8,153,534
Corporate Assets - - 431,689
----------- ----------- -----------
Total Assets $ 2,323,751 $ 5,829,783 $ 8,585,223
=========== =========== ===========
Capital Expenditures $ 253,998 $ - $ 253,998
============ =========== ============
Depreciation $ 5,500 $ 18,431 $ 23,931
============ =========== ============
</TABLE>
<PAGE> F-33
F-33
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 10 - GEOGRAPHIC AND SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
1998 Timber Mining Total
---------- ------------- ------------ -----------
<S> <C> <C> <C>
Sales $ 515,951 $ 41,740 $ 557,691
============ ============ ============
Operating Loss $(2,449,036) $(1,768,388) $(4,217,424)
General Corporate
Expenses - - (4,984,955)
----------- ----------- -----------
Net Loss $(2,449,036) $(1,766,388) $(9,202,379)
=========== =========== ===========
Identifiable Assets $ 1,577,947 $ 4,336,000 $ 5,913,947
Corporate Assets - - 471,899
----------- ----------- -----------
Total Assets $ 1,577,947 $ 4,336,000 $ 6,385,846
=========== =========== ===========
Capital Expenditures $ 320,702 $ - $ 320,702
Corporate Expenditures - - 12,739
------------ ---------- ------------
Total Expenditures $ 320,702 $ - $ 333,441
Depreciation $ 16,857 $ - $ 16,857
Corporate Depreciation - - 18,788
------------ ---------- ------------
Total Depreciation $ 16,857 $ - $ 35,645
============ ========== ============
</TABLE>
One customer accounted for approximately 20% of the Company's sales
for the year ended May 31, 1997.
NOTE 11 - RESTATEMENTS
The Company has restated its financial statements for the year ended
May 31, 1997 to account for the rescission, in December 1997, of a
$3,000,000 note agreement with an officer of the Company's Brazilian
subsidiary. The effect of the restatement was to decrease long-term
debt and Brazilian timber concession by $2,596,729.
As explained in Note 2, the Company has restated its financial
statements as of May 31, 1996 and for the year ended May 31, 1997 to
provide for impairment of its mining properties in accordance with SEC
guidelines. The effect of the restatement was as follows:
Increase (Decrease)
-------------------------------
Accumulated
Period Net Loss Property Deficit
------------- ---------- ----------- ----------
May 31, 1997 $2,173,444 $(3,120,873) $3,120,873
May 31, 1996 $ - $ - $ 947,429
<PAGE> F-34
F-34
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 11 - RESTATEMENTS (continued)
The amounts as of May 31, 1996 relate solely to the Nevada property.
The 1997 amounts are as a result of the impairment of Nevada and
Indonesia (increase in net loss and decrease in property):
Nevada Indonesia
------ ---------
May 31, 1997 $1,946,662 $226,782
NOTE 12 - SUBSEQUENT EVENTS
Tropical Woods Concessions
In August 1998, the Company entered into an agreement with Tropical
Woods to harvest timber from 1,380 hectares, in Para, Brazil, for a
period of thirty years.
Stock Purchase Agreement
In September 1998, the Company entered into a stock purchase agreement
to sell 5,500,000 shares of its common stock for $500,000.
Simultaneously with the stock purchase agreement, the Company issued a
stock option for the purchase of up to 70,000,000 shares of the
Company's common stock at a price of $0.335 per share and expiring in
September 2005. However, at present, the Company's Articles of
Incorporation authorizes the issuance of up to 50,000,000 shares of
the Company's common stock. If the Company does not gain stockholders'
approval for an increase in the number of authorized shares, to allow
for the exercise of the option, then the option will be cancelled. If
the option is cancelled, the purchaser may elect to rescind the
purchase agreement and receive a refund of the purchase price, or
obtain from the CEO and COO their securities of the Company, owned by
them. The option holders have planned to transfer a portion of the
options to the Company's CEO and COO. While the number of options that
may be transferred has not been specified, it is anticipated that it
will be material.
Also, the Company has agreed to use its best efforts to create a class
of preferred stock which converts to the Company's common stock, on a
public sale, with attributes no less favorable than those comprising
the shares of common stock purchased, as stated above. The preferred
stock will have voting rights to elect three Directors, and the
Company has the right to exchange the preferred stock for the common
stock acquired, as stated above.
<PAGE> F-35
F-35
Interim (Unaudited) Financial Statements for the quarter ended August 28, 1998
The Interim (Unaudited) Financial Statements from the Company's Form 10-QSB
for the quarter ended August 28, 1998 are included on the following pages.
<PAGE> F-36
F-36
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
(dba NEVADA MANHATTAN)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
August 31, 1998 May 31, 1998
--------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 221,273 $ 81,529
Accounts receivable, net of allowance
for doubtful accounts of $150,000 285,316 255,027
Inventories 96,001 108,844
Stock Subscription Receivable 250,000
Prepaid expenses 372,789 283,354
--------- -------
Total current assets 1,225,379 728,754
Properties and equipment
Mineral Properties:
Domestic 2,936,000 2,936,000
Indonesia 1,400,000 1,400,000
Timber concession 700,000 700,000
Machinery and equipment, net 352,300 355,392
Other Assets 234,445 265,700
---------- ----------
TOTAL ASSETS $6,848,124 $6,385,846
========== ==========
LIABILITIES AND STOCKHOLDERS'EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and Accrued Expenses $1,524,254 $1,445,106
Convertible Notes payable to stockholders
- Secured by Common Stock 1,264,520 1,366,075
Notes Payable to Stockholders 522,950 522,950
Note Payable to Officer 713,955 718,000
Current portion of long-term debt 32,214 32,214
---------- ----------
Total current liabilities 4,057,893 4,084,345
Long term debt 35,327 44,327
Convertible debentures 2,407,771 2,313,459
---------- ---------
Total liabilities 6,500,991 6,442,131
---------- ---------
Commitments and contingencies --- ---
Stockholders' Equity (Deficiency):
Preferred stock, $1 par, 250,000 shares
Authorized, 176,414 outstanding
At August 31, 1998 and May 31, 1998 176,414 176,414
Common stock, $0.01 par, 49,750,000
Shares authorized, 40,157,243 and
26,492,543 shares issued and outstanding 401,572 264,926
Additional paid-in capital 30,540,415 28,715,550
Accumulated Foreign Currency Translation 29,610 24,940
Accumulated deficit (30,800,878) (29,238,115)
---------- -----------
Total stockholders' equity (deficiency) 347,133 ( 56,285)
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY) $6,848,124 $ 6,385,846
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> F-37
F-37
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
(dba NEVADA MANHATTAN)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended August 31, 1998 and 1997
<TABLE>
<CAPTION>
(Unaudited)
1998 1997
---- ----
<S> <C> <C>
Revenues $ 248,649 $ 156,776
Cost of Sales 191,004 80,595
------- ------
Gross profit 57,645 76,181
Exploration Costs 78,008 ---
General and administrative Expenses 1,308,308 1,354,981
--------- ---------
Net loss from Operations (1,328,671) (1,278,800)
Other Expenses 234,092 ---
--------- ---------
Net Loss (1,562,763) (1,278,800)
---------- ---------
Cumulative preferred dividends --- 29,337
----------- ---------
Net loss attributable to common
shareholders $(1,562,763) $(1,308,137)
=========== ===========
Basic Loss Per Share $ (0.06) $ (0.10)
=========== ===========
Diluted Loss Per Share $ (0.06) $ (0.10)
=========== ===========
Weighted average shares outstanding 28,895,266 12,467,496
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> F-38
F-38
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
(dba NEVADA MANHATTAN)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended August 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------ ------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,562,763) $(1,278,800)
Adjustments to reconcile net loss to net cash
used in operating activities:
Common stock issued for services 196,092 ---
Common Stock Issued for Financing Expense ---
Amortization of Debenture Discount 94,312
Depreciation and amortization 15,771 99,909
(Increase) Decrease
Accounts receivable (30,289) (13,391)
Inventories 12,843
Prepaid expenses 87,614 (320,849)
Other Assets 31,255
Increase (Decrease)
Accounts payable and accrued Expenses 282,317 481,109
------- -------
Net cash used in operating activities (872,848) (1,032,022)
--------- -----------
Cash flows from investing activities:
Purchase of property and equipment (12,678) (419,189)
--------- ---------
Cash flows from financing activities:
Proceeds from Issuance of convertible
debentures --- 1,500,000
Payments on long-term debt (9,000) (489,928)
Proceeds from issuance of notes to
stockholders 25,000
Payments for Notes Payable to Officer (4,045)
Proceeds from issuance of stock 1,033,645 0
--------- -------
Net cash provided by financing activities 1,020,600 1,035,072
--------- ---------
Foreign Currency Translation Adjustment 4,670 ---
Net increase (decrease) in cash and cash
equivalents 139,744 (416,139)
Cash and cash equivalents at beginning of
period 81,529 559,510
----------- ----------
Cash and cash equivalents at end of period $ 221,273 $ 143,371
=========== ==========
</TABLE>
Supplemental disclosure of cash flow information:
During the three months ended August 31, 1998 and 1997, the Company paid no
income taxes and no interest.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended August 31, 1998, the Company issued: 722,754
shares of its common stock for services rendered by employees and third parties
for $196,092; and 138,834 shares of its common stock for $187,846 of liquidating
damages associated with the Convertible Debentures.
See accompanying notes to consolidated financial statements
<PAGE> F-39
F-39
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Statement of Information Furnished
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-QSB instructions and in the opinion of
management contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of August
31, 1998, the results of operations for the three months ending August 31,
1998 and 1997, and the cash flows for the three months ended August 31,
1998 and 1997. These results have been determined on the basis of generally
accepted accounting principles and practices applied consistently with
those used in the preparation of the Company's audited financial statements
for its fiscal year ended May 31, 1998.
2. Business
The Company's business is the harvesting of timber and the production of
rough sawn lumber and other finished wood products in Brazil, the
exploration and mining of precious metals in Nevada and the exploration of
precious metals and coal in Indonesia. The Company holds various rights to
develop and/or harvest timber properties on up to approximately 950,000
hectares located in the states of Para and Amazonas, Brazil; the right to
conduct sawmill operations at a 3.6 hectare sawmill facility located near
the port city of Belem, Para, Brazil; and the right to conduct exploration
activities on seven (7) gold properties and four (4) coal properties in
Indonesia. In August 1998, the Company entered into an agreement to harvest
timber from an additional 1,380 hectares in Para, Brazil, for a period of
thirty years.
3. Other
A. On August 31, 1998, the Company announced that it received an initial
capital infusion of $500,000 from a group led by Tetsuo Kitagawa. Mr.
Kitagawa had a 25-year history with the Marubeni Group and until
recently was the financial managing director of Marubeni's subsidiary
in Holland. Mr. Kitagawa is currently assigned by the Office of the
President of the Russian Federation to form investment funds in and
outside of Russia under the management of the Office of the President
of the Russian Federation for the improvement of its economy. Mr.
Kitagawa, with his group, will provide full-time management and
financial services for the Company. The Company has been reviewing
acquisition candidates submitted through the Kitigawa Group, many of
which are located in the countries of the former Soviet Union. On
October 14, 1998, Mr. Kitagawa was elected a director of the Company
by the Board of Directors.
B. From July 1997 through October 16, 1998, Jeffrey S. Kramer, Chief
Operating Officer, provided loans to the Company, aggregating
approximately $714,000. Mr. Kramer and the Company are currently
contemplating a partial settlement of these outstanding loans through
the issuance of restricted common shares by the Company.
<PAGE> F-40
F-40
4. Subsequent Events
A. On September 24, 1998, the Company announced that it executed a letter
of understanding to acquire the controlling interest of "Chrustalnaia"
of Russia. Chrustalnaia owns and operates five mines with significant
reserves as well as 100 percent of "Stanum" which is involved in
harvesting, cutting and fabricating timber, also with substantial
reserves. Chrustalnaia/Stanum has gross revnues of approximately $16.2
million for fiscal 1997 as presented in their Russian-audited balance
sheet. A recognized major accounting firm will be retained to perform
an audit of the Russian balance sheet and assets, and the final
closing will be subject to such confirmation and the preparation of a
more definitive agreement prepared in accordance with the laws of the
United States and the other appropriate countries which will contain
other closing conditions. Chrustalnaia's mining activities include
mining, processing ore of colored metals and obtaining concentrates in
the fields of gold, silver and tin, and functions under the direction
of Dr. Alexander Gonchar. Dr. Gonchar is a well-known academician and
a respected member of the Academy of Science in Russia as well as
other highly respected scientific communities.
B. On September 10, 1998, the Company announced that Dr. Thomas Ward,
consultant to the U.S. Department of Energy and the Pentagon, has
agreed to become a member of the Company's Advisory Committee in the
capacity of Executive Consulting Director for Scientific Development
Mr. Ward, an internationally respected scientist, was for a period of
six years, a representative of the United States in Russia in charge
of the nuclear demilitarization program. Mr. Ward owns his own
consulting company which contracts a number of scientists providing
project expertise to the U.S. government and private companies. Ward
will head the Company's Research and Development Department in a
number of areas including monocrystallite silicon and isotope
development. In addition, he will implement the technology to process
Russian timber for export to the U.S. in order to preserve the United
States' forests and parks in accordance with the Gore-Russian
Agreement which starts in the year 2000 and is in the range of 20
million cubic meters of timber.
On October 13, 1998, the Company formed Science & Technology
Resources, Inc., which is currently structured as a wholly owned
subsidiary, for the purpose of developing its technological division
to be headed by Mr. Ward.
C. The Company is in the final stages of negotiation with Cyprus Amax
Coal Company for the exploration and development of one of the
Company's coal properties in East Kalimantan, Indonesia.
<PAGE> F-41
F-41
D. On October 5, 1998, the Company announced that it had signed an
agreement for the acquisition of a substantial interest in oil and
revenue-producing gas leases located on the Plainview natural gas
field on 25,000 acres of gas prospects. The agreement on the leases
located in Macoupin County in southwest Illinois is with S.M.T.V. and
Western Pipeline Group. In its initial due diligence on a small part
of the holdings prior to entering into the agreement, the Company has
been able to confirm approximately an initial 4.76 BCF of natural gas.
Additional due diligence and confirmation is planned to commence
immediately.
E. On October 13, 1998 the Board of Directors elected Tetsuo Kitagawa and
Neil H. Lewis as directors, expanding the Board to seven members. Mr.
Kitagawa has been President of SYMIC, a management consulting firm,
since October 1997, prior to which he was employed by Marubeni Finance
(Holland). For the last six of those years he was a Managing Director
of Marubeni Finance, which is a wholly-owned subsidiary of Marubeni,
one of Japan's leading general trading companies. Mr. Lewis is an
attorney in private practice and a consultant to the Company.
<PAGE> F-42
F-42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATION
Comparison of Results of Operations - Three months Ended August 31, 1998 and
August 31, 1997.
- - --------------------------------------------------------------------------------
Revenues for three months ended August 31, 1998 were approximately $249,000 as
compared to approximately $157,000 for the same period in 1997. The sales in
both periods relate to the Brazilian operations. The $92,000 increase in Sales
is due to increased efficiencies. The gross margin for the three months ended
August 31, 1998 was approximately 23% as compared to approximately 49% for the
same period in 1997. The decrease in the gross margin is attributable to
increased labor costs. The General and Administrative Expenses and exploration
costs in the aggregate for the three month period ending August 31, 1998
increased slightly compared to the same period in 1997. Although the Company's
operating activities increased for the three months ending August 31, 1998 over
the same period in 1997, General and Administrative Expenses and exploration
costs in the aggregate rose only slightly due to the Company's ability to
control corporate expenses.
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position as of August 31, 1998 was a deficit of
approximately $2,833,000. Almost since inception, the Company has experienced
pressure on its working capital position due to operating losses and the need to
continually invest in exploration activities on the Nevada Property and, more
recently, the Brazilian Properties, the Silobat Property and the remainder of
the Indonesian Concessions.
To raise funds in the past, the Company has relied upon private placements of
its equity securities. In the quarter ending August 31, 1998, the Company raised
approximately $1,242,000 pursuant to such private placements.
On March 27, 1998, the Company executed an agreement securing $14 million in
equity financing, primarily to fund its timber operations in South America. The
financing, through Bristol Asset Management Company II LLC, requires an
effective registration statement and enables the Company to draw up to $14
million over a three-year period. As of the filing date of this Quarterly
Report, the Company has not effected a registration statement covering the
common stock to be issued pursuant to the $14 million equity financing
agreement.
As of August 28, 1998, TiNV1, Inc., ("TiNV1"), entered into a Subscription
Agreement and a letter agreement with the Company pursuant to which TiNV1
purchased 5,500,000 shares of the Company's common stock for $500,000.
The Brazilian operations represent an opportunity for the Company to generate
significant cash flows for the first time. The Company believes that with the
anticipated increase in daily production at its Brazilian operations to 125
cubic meters per day, much of its continued operations in Brazil, Indonesia, the
Nevada Property, and its operating expenses and overhead at its corporate
offices will be funded by the cash flow generated from its operations in Brazil.
The pending acquisition of Chrustalnaia and the formation of Science &
Technology Resources, Inc. are also being developed for the purpose of increased
revenues.
YEAR 2000 DISCLOSURE
The Company has eight computers connected on a peer-to-peer network. The Company
has no proprietary software. If the Company had to replace all of its computers,
the costs would be $16,000. All Company files and records have been backed up on
zip drives and are continuously backed up on a weekly schedule.
The Company anticipates that it will require additional capital and intends to
secure it through its agreement with Bristol Assets Management Company II LLC,
by utilizing a publicly registered offering of its securities, the capital
provided by the TiNV1 transaction, "Private Placements" and/or funds generated
from its Brazilian operations.
<PAGE> 43
43
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
TERRA NATURAL RESOURCES CORPORATION
Date: November 27, 1997
By: /s/ JEFFREY S. KRAMER
------------------------------------
Senior VP, CFO and Director
<PAGE>
All of the above-referenced sales were made by the Company in reliance upon
the exemptions from registration contained in Section 4(2) of the Securities Act
of 1933 and Regulation D promulgated pursuant to such exemption.
13. EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------------ ---------------------------------------------------------------------------------
<S> <C>
3.(i) Articles of Incorporation of Epic Enterprises, Ltd., Filed June 10, 1985*
3.(ii) Certificate of Amendment to Articles of Incorporation of Epic Enterprises, Ltd.,
Filed September 11, 1987*
3.(iii) Certificate of Amendment to Articles of Incorporation of Nevada Manhattan Mining
Incorporated Filed October 26, 1987*
3.(iv) Certificate of Amendment of Articles of Incorporation of Nevada Manhattan Mining
Incorporated Filed August 31, 1995*
3.(v) Certificate of Determination of Preferences of Series A Preferred Stock of Nevada
Manhattan Mining Incorporated Filed October 25, 1995*
3.(vi) Bylaws of Epic Enterprises, Ltd.*
3.(vii) Memorandum and Articles of Association of Equatorial Resources, Ltd.+
3.(viii) Memorandum and Articles of Association of Kalimantan Resources, Ltd.+
4.(i) Pages 1, 3, 4, and 5 of the Bylaws of Epic Enterprises, Ltd.*
4.(ii) Pages 1 through 9 of Certificate of Determination of Preferences of Series A
Preferred Stock of Nevada Manhattan Mining Incorporated Filed October 25, 1995*
4.(iii) Stock Options Issued to Directors+
4.(iv) Subscription Agreement dated April 14, 1997 with Silenus Limited**
4.(v) Warrant to Purchase Common Stock**
4.(vi) Deed of Trust in favor of Silenus Limited**
4.(vii) Form of Debenture**
4.(viii) Subscription Agreement dated July 15, 1997****
4.(ix) Warrants to Purchase Common Stock****
4.(x) Form of Debenture****
5.(i) Opinion on Legality****
5.(ii) Opinion on Legality
10.(i) Mining Agreement Dated April 4, 1987*
10.(ii) Amendment to Mining Agreement Dated December 9, 1987*
10.(iii) Manhattan Mining Property Agreement Dated March 2, 1989*
10.(iv) Corporation Quitclaim Deed Filed March 9, 1989*
10.(v) Deed of Trust and Assignment of Rents Recorded March 9, 1989*
10.(vi) Joint Venture Agreement Dated June 1993*
10.(vii) Letter Agreement Dated August 10, 1995*
10.(viii) Amendment to Joint Venture Agreement Dated October 20, 1995*
10.(ix) Contract Between Nevada Manhattan Mining, Inc. and Harrison Western Construction Corp.*
10.(x) Principles of Agreement Dated August 19, 1996, as amended***
10.(xi) Employment Agreement Dated January 1, 1995 with Christopher D. Michaels*
10.(xii) Employment Agreement Dated January 1, 1995 with Jeffrey Kramer*
10.(xiii) Consulting Agreement with Gold King Mines Corporation Dated April 1, 1995*
10.(xiv) Consulting Services Agreement Dated October 7, 1996 with Behre Dolbear & Company, Inc. *
10.(xv) Letter Agreement Dated March 25, 1996 with David Weissberg, M.D.*
10.(xvi) Letter Agreement Dated May 13, 1996 with David Weissberg, M.D. *
10.(xvii) Letter Agreement Dated September 25, 1996 with Mr. John Holsten*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------------ ---------------------------------------------------------------------------------
<S> <C>
10.(xviii) Letter Agreement dated April 23, 1997 with British Far East Holding Ltd.**
10.(xix) Addendum Agreement to Principles of Agreement+
10.(xx) Acquisition Agreement by and between Sinkamas Agunbg Ltd. and Kalimantan
Resources, Ltd. dated January 26, 1997+
10.(xxi) Acquisition Agreement for Gold and Coal Concessions by and between Kalimas Jaya
Ltd. and Kalimantan Resources, Ltd.+
10.(xxii) November 11, 1996 letter Agreement with Maderia Intex, S.A. International
Exports+
10.(xxiii) Proposal for Sale and Purchase and Authorization for Exploration of Timber+
10.(xxiv) Eco-Rating Standard Agreement dated December 17, 1996+
10.(xxv) Sale and Purchase Agreement dated February 6, 1997+
10.(xxvi) Agreement to Jointly Develop Timber Properties dated May 30, 1997****
10.(xxvii) Agreement to Acquire Sawmill dated May 30, 1997****
10.(xxviii) Agreement to Harvest Timber and Develop Harvest Properties****
10.(xxix) Addendum to Contract for Extraction of Timber and Development of Timber
Properties****
21 Subsidiaries of Small Business Issuer+
23.(i) Consent of Jackson & Rhodes P.C.**
23.(ii) Consent of William R. Wilson**
23.(iii) Consent of Behre Dolbear & Company, Inc.**
23.(iv) Consent of Jackson & Rhodes P.C.
23.(v) Consent of Merdinger, Fruchter, Rosen & Corso P.C.
27 Financial Data Schedule++
99(i) Business Plan Dated July 1995*
99(ii) Business Plan Dated January 1997+
</TABLE>
- - ---------------
+ Previously filed.
* Filed with Registration Statement on Form SB-2 on December 6, 1996
(Registration No. 333-17423).
** Filed with Registration Statement on Form SB-2 on May 28, 1997
(Registration No. 333-27923).
*** Principles of Agreement in original form filed with Registration Statement
on Form SB-2 on December 6, 1996. Amendment to this document filed with
Registration Statement on Form SB-2 on July 31, 1997 (Registration No.
333-27923).
**** Filed with Registration Statement on Form SB-2 on July 31, 1997
(Registration No. 333-27923).
++ Filed with Form 10-KSB for the fiscal year ended May 31, 1998
Filed with Form 10-QSB for the quarter ended August 31, 1998
<PAGE>
A marked copy of this Form 10-12(g) follows (exhibits follow thereafter)
<PAGE>
REGISTRATION NO. 001-12867
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO.3 TO
FORM 10
FILED APRIL 3, 1997
Amending the Previously Filed Form 10-12(b) to
a Form 10-12(g) and Including Other Material Changes
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
TERRA NATURAL RESOURCES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(fka NEVADA MANHATTAN MINING INCORPORATED)
NEVADA 88-0219765
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5038 NORTH PARKWAY CALABASAS, SUITE 100
CALABASAS, CALIFORNIA 91302
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818) 591-4400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(TITLE OF CLASS)
PREFERRED STOCK
(TITLE OF CLASS)
================================================================================
CROSS-REFERENCE SHEET BETWEEN
REGISTRATION STATEMENT AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
FORM 10 ITEM NUMBER AND CAPTION CAPTION IN INFORMATION STATEMENT
- - ----------------------------------- ------------------------------------------------
<S> <C>
1. Business....................... The Company: Properties, Risk Factors; Management's
Discussion of and Analysis of Financial Conditions and
Results of Operations
2. Financial Information.......... Selected Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Financial Statements, Market Price of and
Dividends on the Registrant's Common Equity & Related
Stockholder Matters.
3. Properties..................... Properties; Risk Factors
4. Security Ownership of Certain
Beneficial Owners and
Management..................... Security Ownership of Certain Beneficial Owners and
Management
5. Directors and Executive
Officers....................... Management
6. Executive Compensation......... Executive Compensation
7. Certain Relationships and
Related Transactions........... The Company's Business and Properties
8. Legal Proceedings.............. Legal Proceedings
9. Market Price of and Dividends
on the Registrant's Common
Equity and Related Stockholder
Matters........................ Market Price of and Dividends on Company Equity;
Management; Executive Compensation
10. Recent Sales of Unregistered
Securities..................... Risk Factors, Recent Sales of Unregistered Securities.
11. Description of Registrant's
Securities to be Registered.... Description of Securities Being Registered
12. Indemnification of Directors
and Officers................... Management, Indemnification of Directors and Officers.
13. Financial Statements and
Supplementary Data............. Financial Statements and Supplementary Data
14. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure....... Not Applicable
15. Financial Statements and
Exhibits....................... Financial Statements and Exhibits
</TABLE>
<PAGE>
i
TABLE OF CONTENTS
PAGE
----
The Company.............................................................. 1
Selected Financial Data.................................................. 2
Properties............................................................... 3
Risk Factors............................................................. 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 24
Security Ownership of Certain Beneficial Owners and Management........... 26
Principal and Selling Shareholders....................................... 26
Management............................................................... 27
Executive Compensation................................................... 31
Certain Relationships and Related Transactions........................... 32
Legal Proceedings........................................................ 32
Market Price of and Dividends on Company's Equity........................ 34
Description of Securities Being Registered............................... 37
Registration Rights...................................................... 40
Indemnification of Directors and Officers................................ 41
Legal Matters and Auditors............................................... 41
Further Information...................................................... 41
Financial Statements and Supplementary Data.............................. 42
<PAGE>
1
1. THE COMPANY
THE COMPANY
Nevada Manhattan Mining Incorporated (the "Company") was formed on June 10,
1985, in the state of Nevada under the name of Epic Enterprises, Ltd. On
September 11, 1987, the Company amended its Articles of Incorporation changing
its name to Nevada Manhattan Mining Incorporated. The Company's articles
currently authorize the issuance of 49,750,000 shares of Common Stock with a par
value of one cent ($.01) per share and 250,000 shares of Series A Preferred
Stock with a par value of $1.00 per share (the "Preferred Stock") convertible
into Common Stock on the terms and conditions described elsewhere in this
Registration Statement. There were 12,273,565 shares of the Company's Common
Stock and 228,319 shares of the Preferred Stock issued and outstanding as of May
31, 1997. The average price per share paid for the Common Stock issued directly
by the Company has been approximately $2.00 per share. Holders of the Preferred
Stock have paid $10.00 per share with an effective purchase price for the Common
Stock (after giving effect to the conversion thereof on a one-for-ten basis) of
$1.00 per share. In addition, the Company has recently issued approximately
$3,500,000 of 8% Senior Secured Convertible Debentures in two
privately-negotiated transactions.
The Company was formed primarily to develop the Nevada Property, other gold
mining properties which it had previously owned, and certain gold mining
properties which it has recently acquired. Pursuant to prior action of both the
Company's directors and its shareholders, certain gold mining properties have
been abandoned as uneconomic. The Company has recently acquired the rights to
harvest various species of hardwoods in up to 750,000 hectares (approximately
1,900,000 acres) of virgin timber properties located on various tracts
throughout the state of Para, Brazil and the rights to acquire a sawmill
facility near the town of Sao Miguel do Guama. In addition, the Company has also
acquired the rights to seven (7) gold mining concessions and three (3) coal
mining concessions in Indonesia.
The Company has its principal executive offices at 5038 North Parkway
Calabasas, Suite 100, Calabasas, California 91302. Its telephone number is (818)
591-4400 and its facsimile number is 818 591-4411.
Management of the Company presently consists of a five-member board of
directors (two of which are neither executive officers nor employees). The
Company employs two (2) full-time executive officers as well as seven (7)
full-time employees at its principal offices. The Company's subsidiary,
Equatorial Resources, Ltd., also employs approximately 90 persons in Brazil who
are employed in various capacities relating to either its sawmill facility or
its harvesting operations being conducted on the Brazilian Timber Properties.
THE COMPANY'S SUBSIDIARIES
Equatorial Resources, Ltd. (hereinafter "Equatorial") was incorporated in
the British Virgin Islands as an international business company on December 13,
1996. Equatorial currently maintains offices in Road Town, Tortola, British
Virgin Islands with its primary business office located in Calabasas,
California. Equatorial's board of directors consists of three (3) members with
such number being able to increase to seven. Its authorized capitalization is
25,000 shares of common stock and 25,000 shares of preferred stock with its
largest single shareholder being Nevada Manhattan Mining Incorporated which owns
80% of Equatorial's outstanding common shares.
Equatorial's primary business purpose is the acquisition and development of
timber producing property in the Amazon Basin of Brazil. Since Equatorial's
inception, it has acquired the right to develop and/or harvest virgin timber
properties on up to approximately 750,000 hectares located in the state of Para,
Brazil, and the right to acquire a sawmill facility located near the town of Sao
Miguel do Guama, Brazil. In the development of such properties Equatorial
currently employs approximately 90 persons, most of whom are Brazilian nationals
employed in connection with the operations being conducted at the sawmill or in
connection with the timber harvesting operations on the Terranorte Concessions.
Kalimantan Resources, Ltd. Kalimantan Resources, Ltd., (hereinafter
"Kalimantan") was incorporated in the British Virgin Islands as an international
business company on September 16, 1996. Kalimantan currently maintains offices
in Road Town, Tortola, British Virgin Islands with its primary business office
located in Calabasas, California. Kalimantan's board of directors consists of 3
members with such number
<PAGE>
2
being able to increase to seven. Its authorized capitalization is 1,000 shares
of common stock with its sole shareholder being Nevada Manhattan Mining
Incorporated.
Kalimantan's primary business purpose is to enter into contracts for the
exploration and if warranted the development and extraction of coal and gold ore
in Indonesia. Since Kalimantan's inception it has: entered into an agreement to
acquire a fifty-one percent (51%) interest in a gold exploration property
comprising 10,000 hectares (25,000 acres) located in East Kalimantan; entered
into two (2) additional agreements to acquire an additional six (6) gold mining
concessions aggregating over 23,400 hectares (58,500 acres) and three (3) coal
mining concessions comprising 290,000 hectares (725,000 acres); and entered into
an agreement with Maxwells Energy and Metals Technology Ltd. to substitute the
acquired original 10,000 hectare property for a 16,000 hectare (40,000 acre)
tract located elsewhere on the island of Kalimantan.
Shareholder Advisory Committee. In 1989, the Company formed a Shareholder
Advisory Committee (the "Advisory Committee") comprised of up to 12 outside
shareholders. The purpose of the Advisory Committee is to participate in
directors' meetings and compensation meetings, as well as planning meetings
related to all aspects of corporate development. Members are selected annually
from a group of shareholders who respond to Company inquiries regarding interest
in participating on the Advisory Committee. Membership is rotated annually. One
of the primary purposes of this Committee is to provide independent, shareholder
participation in critical decisions relating to overall corporate strategy.
Significant Contracts with Consultants. The Company has contracted with
Harrison Western Mining and Construction, Lakeland, Colorado, to supply labor,
service, materials and equipment for Nevada property operations. The Company has
also entered into agreements with: Gold King Mines Corporation to provide mining
consulting services with respect to the Nevada Property; Behre Dolbear &
Company, Inc. and its affiliates, to provide oversight and third-party
validation services relative to the exploration and development activities on
the Indonesian Concessions; Eco-Rating International, Inc., to provide an
economic and environmental evaluation of the Company's Brazilian Timber
Properties; and with British Far East Holdings Ltd. to provide certain financial
and management consulting services.
2. SELECTED FINANCIAL DATA
The following table sets forth certain historical financial data for the
Company for fiscal years 1994 through 1998. The historical financial data for
the three years ended May 31, 1998, were derived from the financial statements
of the Company included elsewhere herein. The historical financial data are not
necessarily indicative of the results of operations for any future period.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues....................................$ 557,691 .. $ 287,178 $ -- $ -- $ --
394,708 261,089 -- -- --
Cost of Sales............................... ..
Gross Profit.............................. 162,983 .. 26,089 -- -- --
Expenses:
Costs and expenses of development stage 9,365,362 6,386,452 1,463,258 698,103 480,473
activities.............................. ..
----------- ----------- ---------- ---------- ----------
Net loss.................................... (9,202,392) .. (6,362,973) (1,463,258) (698,103) (480,473)
Cumulative preferred dividends.............. 80,316 .. (149,500) (10,600) -- --
----------- ----------- ---------- ---------- ----------
Net loss attributable to common (9,282,695) (6,535,952) (1,473,858) (698,103) (480,473)
shareholders.............................. ..
=========== =========== ========== ========== ==========
Net loss per common share................... (0.62) .. (0.61) (0.20) (0.14) (0.15)
=========== =========== ========== ========== ==========
Weighted average shares outstanding......... 14,969,621 .. 10,684,176 7,428,081 5,021,801 3,146,727
=========== =========== ========== ========== ==========
Balance Sheet Data:
Total assets..............................$ 6,385,846 .. $7,825,223 $2,763,755 $3,711,865 $3,651,286
Long-term debt............................ 2,357,786 .. 1,406,028 115,723 10,919 143,209
Stockholders' equity...................... (56,285) .. 4,416,783 2,197,495 3,081,334 1,800,234
</TABLE>
<PAGE>
3
3. PROPERTIES
THE COMPANY'S BUSINESS
The Company's business is the harvesting of timber and the production of
rough sawn lumber and other finished wood products in Brazil and the exploration
and mining of precious metals in Nevada, and the exploration of precious metals
and coal in Indonesia, To this end the Company has within the last year acquired
the right to the right to develop and/or harvest virgin timber properties on up
to approximately 750,000 hectares located in the state of Para, Brazil; the
right to complete its acquisition of a sawmill facility located near the town of
Sao Miguel do Guama, Brazil which it currently operates; and the right to
conduct exploration activities on seven (7) gold properties and three (3) coal
properties in Indonesia. The Company holds various rights in and to the
following properties: (i) various timber properties aggregating up to
approximately 750,000 hectares and sawmill facilities all of which are located
in the state of Para, Brazil (the "Brazilian Timber Properties"); (ii)
twenty-eight (28) patented and sixty-five (65) unpatented claims aggregating
approximately 1,800 acres (the "Nevada Property") which are located near the
town of Manhattan, Nevada (approximately 45 miles northeast of Tonopah, Nevada);
(iii) seven (7) gold concessions aggregating 39,400 hectares (98,500 acres)
which are located in both the gold belt area of Kalimantan, Indonesia, and on
the island of Sumatra (see "Indonesian Gold Concessions"); and (iv) three (3)
coal properties located in Kalimantan, Indonesia, comprising 290,000 hectares
(725,000 acres) (the "Indonesian Coal Concessions"). A more thorough description
of the properties is contained within portions of this Section of this
Registration Statement entitled "THE BRAZILIAN TIMBER PROPERTIES," "THE NEVADA
PROPERTY," and "THE INDONESIAN CONCESSIONS."
Management of the Company generally reviews all proposed natural resources
projects submitted by third parties. The Company initially will be heavily
dependent upon the operations presently being conducted in Brazil.
The Company has budgeted the sum of One Hundred Thousand Dollars ($100,000)
from sums anticipated to be spent for compliance with applicable environmental
laws. However, the Company can provide no assurance that the amount so budgeted
for environmental compliance will be consistent with the amounts actually spent
for compliance or that the actual amount of such compliance may not be
substantially greater than that which has been projected to be spent by the
Company pursuant to the budget.
THE BRAZILIAN TIMBER PROPERTIES
The Company has acquired sundry rights in up to 750,000 hectares of timber
properties located on various tracts of land in the state of Para, Brazil. In
addition, the Company has entered into an agreement to acquire and is currently
operating a sawmill facility located near the town of San Miguel do Guama, Para
Brazil. The property areas contain a variety of timber species of which
initially only seventeen (17) of the most commercial of the one hundred
twenty-five (125) available species have been selected and factored into the
Company's economic forecasts. The other species will be harvested at the
appropriate time.
All shipping and associated transportation services will be provided by the
Jonasa Group, one of the largest private shipping companies in the Amazon Basin.
Their expertise and political position are anticipated to provide substantial
support to the operation and as a participant in the joint venture, allow for
operating efficiencies that greatly enhance profitability.
To date, One Million Four Hundred Thousand Dollars ($1,400,000) has been
provided by the Company for initial start-up of its operations in Brazil. The
Company has budgeted up to an additional Three Million Four Hundred Fifteen
Thousand Dollars ($3,415,000) for the additional expansion noted above.
The United Nations Food and Agricultural Organization (F.A.O.), Simons
Corporation (Canada) and Reid, Collins & Associates, Ltd. (Canada), highly
respected forestry experts, have evaluated 24,000 hectares of the Jonasa
Concessions and have posited that each hectare will yield approximately 200
cubic meters of raw timber. If these evaluations are accurate with respect to
all of the Jonasa Concessions, the total potential asset value of all 276,000
hectares would be approximately 55.2 million cubic meters of raw hardwood
timber.
<PAGE>
4
The Company has also agreed to pay the sum of Three Million Dollars
($3,000,000) to Ignatius Z. Theodorou on or before December 31, 1998 in
consideration of Mr. Theodorou's services rendered and the transfer of rights to
various business opportunities including the rights to the Jonasa Concessions
and the sawmill facility at Sao Miguel do Guama.
The Company has received approximately $290,000 for the sawed lumber
produced through May 31, 1997. All of this revenue has been reinvested in
improvements to the mills and infrastructure on the property. The Company's
subsidiary, Equatorial Resources, Ltd., currently employs approximately 90
persons to operate the mills and conduct the activities contemplated under the
agreements pertaining to these concessions. Potential markets for the lumber
include the Far East, Brazil, Europe and the United States.
The description of the Company's proposed activities relating to the
Brazilian Timber Properties which follows summarizes the activities more
particularly described in the 1997 Business Plan which is appended to this
Registration Statement.
Terranorte Concessions. On May 30, 1997, the Company's subsidiary,
Equatorial Resources, entered into an Agreement to Harvest Timber and Develop
Timber Properties with Terranorte S.A. (the "Terranorte Agreement"). Under the
terms of the original agreement, Terranorte granted to Equatorial Resources the
exclusive right to either harvest the timber on or to purchase certain species
of logs extracted by Terranorte which are located on approximately 20,000
hectares of virgin timber property located near the town of Moju, Para, Brazil.
In May 1997, Equatorial Resources began harvesting operations employing its own
crews and purchasing harvested logs from Terranorte. Based upon the current
market prices for export quality Brazilian hardwood of $500 per cubic meter, the
Company is projecting its cost to harvest, produce and sell such product to be
approximately $300 per cubic meter, thereby resulting in a pre-tax profit of
$200 per cubic meter.
Terranorte and Equatorial Resources have subsequently amended the
Terranorte Agreement to include the rights to harvest up to an additional
463,000 hectares of virgin timber properties located in the vicinity of the
Terranorte property.
Production at Sao Miguel Sawmill. On May 30, 1997, Equatorial Resources and
Jonasa Madeiras Limitada ("Jonasa Madeiras") entered into an Agreement to
Acquire Sawmill. Under the terms of the agreement, Jonasa Madeiras agreed to
convey all right, title, and interest in and to the sawmill facility, all
equipment relating to the sawmill facility, and 246 hectares of adjacent real
property, all of which is located near the town of San Miguel do Guama, Para,
Brazil. At present, Equatorial Resources has expended the sum of approximately
$335,000 for the sawmill facility and anticipates that an additional $350,000 in
improvements will be made over the next several months.
The sawmill facility currently consists of two manually-operated sawmills
and two semiautomated sawmills. Equatorial Resources has made deposits on
certain additional equipment to repair the semiautomated sawmill, to install a
third semi-automated sawmill, and to purchase additional specialty sawblades
designed to upgrade the sawmills and increase production.
The Jonasa Concessions. On May 30, 1997, Jonasa Navigation, S.A. ("Jonasa")
and Equatorial Resources entered with an agreement to jointly develop various
tracts of virgin timber properties comprising up to 268,000 hectares located in
the state of Para, Brazil. Under this agreement, Jonasa has granted to
Equatorial Resources the exclusive right to harvest all of the timber which
Jonasa now or hereafter has the right to extract from the properties comprising
the Jonasa Concessions. In consideration of this grant, Equatorial Resources has
agreed to pay to Jonasa fifty percent (50%) of the net proceeds received on the
sale of all timber and related products produced and sold pursuant to the
agreement. The term "net proceeds" is defined to be the gross sales price
received for lumber sold, less the costs of harvesting, reclamation,
transportation to the mill, milling expenses, physicalization duties,
transportation f.o.b. to the ports of Belem and Breves, and certain operating
expenses associated with Equatorial Resources' operations in Brazil. The parties
have also designated Equatorial Resources as its exclusive export agent for all
products produced and sold under the joint venture.
<PAGE>
5
THE NEVADA PROPERTY
Current Ownership Interest. The Nevada Property consists of twenty-eight
(28) patented and sixty-five (65) unpatented claims aggregating approximately
1,800 acres. The Company believes it owns an undivided one hundred percent 100%)
interest in the Nevada Property based upon the agreements described below in
greater detail. The primary areas of current development are the Litigation Hill
Area and the White Caps Mine Area. Both areas will be discussed in greater
detail below. The Company has identified 1,500 tons to be mined by open pit
methods at 0.206 ounces per ton of gold of proven and probable reserves in the
Litigation Hill area. The Company has recently sold approximately $40,000 of
gold produced from the Nevada Property. The Company has not identified any other
reserves at the Nevada properties defined as proven and probable.
The Company originally acquired its rights to the Nevada Property pursuant
to a mining agreement dated April 4, 1987 (the "Nevada Property Agreement") with
Anthony C. Selig and related entities (the "Selig Entities"). On December 9,
1987, the Selig Entities and the Company entered into an amendment to the Nevada
Property Agreement reducing both the area of interest and the purchase price of
the Nevada Property from Two Million One Hundred Thousand Dollars ($2,100,000)
to Six Hundred Thousand Dollars ($600,000) and modifying, amongst other things,
the schedule of semiannual payments due from the Company to the Selig Entities
in consideration of the purchase of the Nevada Property.
On March 2, 1989, the Company entered into an agreement entitled "Manhattan
Mining Property Agreement" with Argus Resources, Inc., a Nevada corporation, and
Argus Mines, Inc., a Nevada corporation (the "Argus Companies"); and the Selig
Entities (the "Nevada Mining Agreement"). This agreement was entered into after
a dispute had arisen between Argus Resources, Inc., and the Selig Entities under
the lease/purchase agreement which had been previously entered into between such
parties and which originally formed the basis upon which the Company derived its
rights to the Property. This agreement also modified certain terms and
conditions contained within the Nevada Property Agreement.
Under the terms of the Nevada Property Agreement, as amended, the Company
was required to pay, and did pay, to the other parties the sum of Twenty-Five
Thousand Dollars ($25,000) upon execution of the agreement. The Company also
agreed to pay the Argus Companies the additional sum of One Hundred Sixty-Five
Thousand Dollars ($165,000) in monthly installments of Seven Thousand Five
Hundred Dollars ($7,500) commencing on April 15, 1989, and continuing thereafter
until the entire sum was paid in full. The Nevada Property Agreement, as
amended, further required the Company to issue 1,000,000 (pre-reverse split)
shares of Common Stock as additional consideration to Argus Resources, Inc. In
fact, the Company paid the Argus Companies, Inc., and the Selig Entities all
amounts due under the Nevada Property Agreement, as amended, and issued 100,000
(post-reverse split) shares of Common Stock to Argus Resources, Inc.
Pursuant to the terms and conditions of the Nevada Property Agreement, as
amended, the Argus Companies executed a Corporation Quitclaim Deed conveying a
forty percent (40%) undivided interest in the Nevada Property to the Company on
March 9, 1989. Concurrently therewith, the Company delivered a Deed of Trust and
Assignment of Rents (the "Deed of Trust") to the Selig Entities to further
secure the obligations under the Nevada Property Agreement. Both the Corporation
Quitclaim Deed and the Deed of Trust were duly recorded in the office of the
county records by and for Nye County, Nevada.
In June 1993, the Company entered into a Joint Venture Agreement with
Marlowe Harvey/Maran Holdings, Inc. ("Marlowe Harvey"); Argus Resources, Inc.;
and the Selig Entities respecting the Nevada Property. Under the terms of the
Joint Venture Agreement, Marlowe Harvey was entitled to a fifty-one percent
(51%) interest in the Nevada Property in consideration of Marlowe Harvey
assuming certain obligations, including the purchase of the Deed of Trust from
the Selig Entities. The remaining forty-nine percent (49%) interest in the
Nevada Property was to be held equally by Argus Resources, Inc., and the Company
in consideration of their payment of their pro rata share of all amounts due
under the promissory note (the "Nevada Note") secured by the Deed of Trust
created by the Nevada Property Agreement, as amended. The failure of either
Argus Resources, Inc., or the Company to pay any amounts due under the note
during the first year of the joint venture was to be deemed a default requiring
the defaulting party to quitclaim its interest in the Nevada Property to the
remaining parties. The Argus Companies, Marlowe Harvey and the
<PAGE>
6
Company were also responsible for their pro rata share of all property
development expenses. At the time, Marlowe Harvey was the operator of the Nevada
Property and responsible for all operations relating to maintaining the Nevada
Property in accordance with the Mining Agreement.
On October 20, 1995, the Company and Mr. Harvey "as an individual and for
Maran Holdings and Argus Resources" executed an agreement (the "Amended Joint
Venture Agreement") which purports to amend the June 1993 Joint Venture
Agreement. The Amended Joint Venture Agreement obligates Marlowe Harvey to
convey to the Company within ten (10) days of the date of execution of such
Agreement fifty-two percent (52%) of the outstanding and issued stock in Argus
Resources, Inc.("Argus"), in exchange for the payment of One Hundred Forty-Seven
Thousand Dollars ($147,000) to be paid in the future from a percentage of Argus'
share of the net proceeds realized from the sale of gold production on the
Nevada Property. In addition, Marlowe Harvey agreed to convey a one percent (1%)
interest in the Nevada Property to the "management" of the Company (Messrs.
Michaels and Kramer) in exchange for a "production payment" of Forty-Seven
Thousand Dollars ($47,000) likewise to be paid from future production
attributable to Argus Resources, Inc. It was, and is, the intention of the
Company's officers to convey their rights under the Amended Joint Venture
Agreement to the Company in exchange for the Company's assumption of such
officers' obligations under such Agreement.
Both the obligations of the Company and its officers under the Amended
Joint Venture Agreement were to be secured by the pledge of Common Stock (in the
case of the Company, 1,235,429 shares) with "piggyback" registration rights to
be granted to Marlowe Harvey in two (2) years in the event $147,000 is not paid
from production by that time. If only a portion of the production payment is
made by October 20, 1997, the obligation to seek registration was to be ratably
reduced. The Company was further required to issue 1,186,981 shares of its
Common Stock to Maran Holdings, Inc., an affiliate of Argus, at the time at
which it was obligated to issue to Argus the shares to be used as security for
the production payment.
The Amended Joint Venture Agreement also required both the Company and its
joint venture partners to each make one-half of the property tax payments and
the payments due to the Selig Entities under the Nevada Property Agreement. Both
of these payments are due in January of each year.
In January 1996, the Company notified Marlowe Harvey that it had been
"ready, willing, and able" to convey the Common Stock pursuant to the terms of
the Amended Joint Venture Agreement. In addition, the Company made all of the
required property tax payments relating to the Nevada Property and the payments
due to the Selig Entities in reliance upon the terms of the Amended Joint
Venture Agreement. Marlowe Harvey has failed to reimburse the Company for its
one-half share of the property tax payments and the payments due to the Selig
Entities which were advanced on its behalf by the Company and has failed to make
the conveyances required by the terms and conditions of the Amended Joint
Venture Agreement. As a result, the Company instituted an action in Nye County,
Nevada, on November 4, 1996, originally seeking specific performance and damages
against Marlowe Harvey, Maran Holdings Inc., Calais Resources Inc., and Argus
Resources, Inc. The Company has recently amended the complaint to seek a
judicial determination that the Harvey Entities have forfeited all rights in and
to the Joint Venture Agreement and the Nevada Property. This action is described
in further detail under the Section of this Registration Statement entitled
"LEGAL PROCEEDINGS." Depending on the outcome of the action, the Company will
either own 100% of the Nevada Property if successful or 50% if it does not
prevail. Regardless of the outcome the Company will continue to operate its
portion of the Nevada Property.
In March 1997, the Company entered into a Sale and Purchase Agreement with
the Selig Entities. The Selig Entities were the original owners of the patented
and unpatented mining claims comprising the Nevada Property, having perfected
their rights to ownership pursuant to Federal and local law. Under the terms of
this agreement, the Selig Entities agreed to sell to the Company one hundred
percent (100%) of their interests in the Nevada Note, the Deed of Trust, and the
Nevada Property for the sum of Three Hundred Seventy Five Thousand Dollars
($375,000) payable as follows: One Hundred Thousand Dollars ($100,000) in March
1997 and the balance plus all accrued and unpaid interest (calculated at the
rate of 5.25%) on or before February 6, 1999. The Company in fact paid the first
installment of One Hundred Thousand Dollars ($100,000) in March 1997 and prepaid
the remaining balance in June 1997. As a result, all obligations to the Selig
Entities have been fulfilled by the Company and the original note and deed of
trust have been delivered by the Selig
<PAGE>
7
Entities to the Company. The agreement also acknowledges that the Company is the
only person or entity legally entitled to conduct mineral operations on the
Nevada Property. The Company is also required to pay all U.S. Bureau of Land
Management annual maintenance fees associated with the claims comprising the
Nevada Property. Such fees have been paid by the Company through August 1998.
The Company entered into a Subscription Agreement with Silenus Limited on
April 14, 1997 (the "Subscription Agreement"). As a result of entering into the
Subscription Agreement, the Company granted to Silenus Limited a $2,000,000 deed
of trust encompassing the Nevada Property until the Debentures issued to Silenus
are converted, redeemed or paid in full.
Property Description. The Nevada Property is located in an historic mining
district which has experienced mining operations from 1866 to the present with
the major activity in the late 1860s, between 1906 and 1921, and from 1960 to
the present. Placer and lode mining took place principally in the Reliance Mine,
the White Caps Mine, the Union Amalgamated Mine, the Manhattan Consolidated
Mine, the Earle Mine, the Big Four Mine, and the April Fool Mine.
The Nevada Property lies in several shallow gullies in a general area which
is located between 7,500 to 7,800 feet in elevation. Mineralization of the
Nevada Property appears to be structurally controlled by a series of parallel
east-northeast trending faults dipping from 50 to 75 degrees southwest and with
some cross or perpendicular faults. The Nevada Property consists of two distinct
areas which require different mining and production techniques. Gold
mineralization in the vicinity of "Litigation Hill" is near the surface and much
less expensive to mine. The lower grade mineralization can be "leached" while
higher grades must be milled. Gold mineralization located in the White Caps Mine
has revealed two delineated mineralized areas below the 600-foot level and a
deeper exploration target requiring substantially higher costs for extraction as
compared to "Litigation Hill." "Dewatering" the mine and driving a decline to
the 800-foot level could become quite costly. Additionally, any ore obtained
from the White Caps Mine may be required to be processed using autoclave
technology or other proven methods in order to comply with environmental
regulations due to the mineralization's high content of antimony, mercury,
arsenic, and sulphur; nevertheless, the Company believes that the deep
mineralized area located within the White Caps Mine may have sufficient
potential to justify the large development program. Both the "Litigation Hill"
and White Caps Mine areas of the Property will be discussed below.
The White Caps Mine is located in the Manhattan Mining District. Production
of gold began in 1911 and remained in production until 1935 when the vein was
lost and the lower levels of the mine encountered water. A total of 120,000
ounces of gold were produced during that period. The mine was closed in 1942 by
executive order relating to all "mining activities nonessential to the [World
War II] effort."
The mine was found to be flooded from its deepest point at the 1,300-foot
level to the 450-foot level. Beginning in 1957, a $400,000 program was put in
place to "dewater," renovate, and reactivate the mine. Pumping of water began
that year and by 1958, the water level was down to the 800-foot level. At that
time some exploration resumed at the upper levels of the mine. At the 300-foot
level, antimony-mercury mineralization grading 60 percent and 8 percent,
respectively, was discovered.
An extensive antimony deposit (also containing gold and mercury values) was
located near the 500-foot level and plans were made to begin mining activities
after the renovation of the mine was completed. While continuing to explore for
gold mineralization on the lower levels of the mine, the owners leased out the
right to mine antimony-gold-mercury mineralization above the 600-foot levels in
1962 and production thereafter began.
A diamond drilling program in 1962 relocated the gold-bearing vein which
had been lost in 1935 when it faulted out at the 600-foot level. Drilling of the
formation began at the head of the winze (i.e. incline shaft) and continued down
to the 1,200-foot level. Eight regularly-spaced holes of approximately 100 feet
in length were drilled. These holes revealed a gold mineralized area 65 feet
wide with values ranging as high as 7.7 ounces per ton and averages over .8
ounces per ton. This mineralization is found in the foot wall of the old winze.
<PAGE>
8
The next phase of the 1962 drilling program consisted of diamond drilling a
"hole" starting at the 1,200-foot level. Six holes of approximately 100 feet in
length each were drilled and revealed gold values averaging over 3 ounces per
ton with a high of 6 ounces per ton. This drilling program blocked out gold
mineralization of over 14,000 ounces of gold according to a 1964 report
published by the California Mining Journal. The program also indicated that a
mineralized area containing several hundred thousand ounces of gold is present
in the relocated vein which runs from the 600-foot level down to the 800-foot
level and from the 1,200-foot level down to at least the 1,300-foot level.
Before production could begin, a fire was accidentally started by a pumping
subcontractor at the 300-foot level. The ore bins, shaft and head frame were
destroyed and the mine was closed in 1964. The low price of gold (then $35 per
ounce), high costs to rebuild the damaged mine, and the lack of funds caused the
White Caps Mine to close in 1964, and it has remained closed since that time.
The Company's plans include reentering this mine and resuming gold exploration
and production.
By contrast, "Litigation Hill" was the site of both Earle and Consolidated
Mines, all early producers of high-grade areas until the veins ran out. Recent
geomagnetic activity and a drilling program have located several small
commercial-sized deposits of medium-grade gold mineralization which can be
either milled or heap leached.
The Company has conducted a geophysics and geochemical survey of
"Litigation Hill." A Schlumberger resistivity survey indicated gold
mineralization down to a depth of 1,000 feet (the limit of the instrument's
sensitivity). Bulk sampling conducted by Nevada Gold Fields and the Placer
Management Group of the mine dumps remaining at these mines indicated an overall
average grade of .206 ounces of gold per ton.
The 1987 exploration of underground workings on "Litigation Hill" showed
that the Earle Mine had experienced massive cave-ins. Two samples were taken
from channel cuts. These samples, which were performed by Nevada Gold Fields and
the Placer Management Group, indicated values of .120 ounces of gold per ton.
The Bath Mine was accessible through a stope which leads directly to the main
haulage decline. Channel cut samples were taken on pillars left in
previously-worked stopes. Values varied from .64 to 1.288 ounces of gold per
ton.
The Company initiated a rotary drilling program in 1988. Holes drilled
pursuant to the program varied in depth from 200 feet to 525 feet. Gold values
located in the carbonates at a depth of 70 feet indicate that open pit mining is
suitable for the lower grade present.
The Company commenced an exploration program during the years 1989 and
1990. This program consisted of two parts: conducting a magnetic survey of the
property and drilling 25 reverse circulation drill-angle holes varying in depth
from 50 to 150 feet. The magnetic survey identified the areas around "Litigation
Hill" and the White Caps Mine as strong targets for further exploration. The
drilling program located several areas of gold mineralization.
In September 1993, the joint venture partners began a decline (i.e. tunnel)
in order to intercept a drill hole which had been drilled by Freeport Mining
Company in 1983. The drill hole revealed that from 465 feet to 505 feet below
the surface, an average gold grade of .886 ounces of gold per ton over 40 feet
existed. The decline was completed during the Spring of 1994 and drill stations
were prepared. Exploration and drilling activities commenced and are ongoing as
of the date of this Prospectus. The decline is approximately nine feet by nine
feet and runs at an approximate twelve-degree grade. At the 500-foot level, a
turnaround or transfer bay has been added to enable the operators of the mine to
successfully remove ore in a cost-effective method.
The 1993 drilling program also included the mapping and sampling of the old
workings of the Consolidated Mine (which was closed in 1939) as well as the
drilling and sampling of the decline itself in the immediate potential ore zones
contained within the decline.
The Nevada Business Plan. In July 1995, the Company engaged the services of
William R. Wilson, a minerals industry consultant, to prepare a plan to develop
the Nevada Property (the "Nevada Business Plan"). According to the Nevada
Business Plan, two alternative plans for exploration and development of the
Property exist. The first plan would extend the existing decline in the White
Caps Mine to the 565-foot level,
<PAGE>
9
rehabilitate and mine old workings in the Consolidated Manhattan Mine, drift and
mine a new area near the drill hole which was intercepted by the decline formed
during the 1993 program, rehabilitate the White Caps Shaft, and mine the
565-foot level, 670-foot level, 800-foot level, 910-foot level, 1,120-foot
level, 1,200-foot level, and 1,300-foot level of the White Caps Mine.
According to the Nevada Business Plan, the major advantage to this
alternative would be that access to the lower levels of the White Caps Mine
would be considerably improved. It is anticipated that the lower levels may
yield higher grades as compared to the yields anticipated at current levels of
the mine.
The second alternative identified in the Nevada Business Plan would extend
the decline in the White Caps Mine to the 565-foot level, rehabilitate and mine
old workings in the Consolidated Manhattan Mine, drift and mine a new area near
the drill hole which was intercepted by the decline formed during the 1993
program, mine the 565-foot level only in the White Caps Mine, and conduct
underground sampling in the White Caps Mine in the 670-foot through 1,300-foot
levels.
The Nevada Business Plan identifies the major advantage to this alternative
to be significantly reduced capital costs combined with the opportunity to
sample underground the White Caps Mine without rehabilitating the White Caps
shaft. The disadvantages of this alternative are that mining access to the lower
portions of the White Caps Mine may not be completed, and it is still not known
whether access can be obtained to each of the levels below the 560-foot level.
Cash flow analyses pertaining to both alternatives project a positive cash
flow for the initial development. Management utilized these analyses in reaching
a decision to proceed with the second alternative.
The cash flow calculations are on a "cash basis," an industry standard in
comparing mining operations. The cash basis includes exploration, development,
equipment, mining, hauling, processing, and refining costs. Some overhead costs
were not included in the cash flow analysis as of the time the analysis was
prepared because the Company had not determined what its actual mine-related
overhead costs would be. A ten percent allowance for general and administrative
expenses was included. Since the Company uses a mining contractor, Harrison
Western Construction Company, the majority of the mine related overhead is
included in the contractor's cost. The costs of the Company's on-site geologist
and project manager are included as the 10% general and administrative costs in
the cash flow analysis. The following major assumptions were used in the Cash
Flow projections:
- Gold price of $390.
- Mining costs of $43 per ton.
- Processing and environmental costs of $15 per ton.
- Mining General and Administrative costs of $6 per ton.
- Refining charges of $2 per ounce.
The Nevada Business Plan concludes by recommending the second alternative
as the preferable alternative for the Company to follow. In June 1996, the
Company initiated the second alternative by contracting with Harrison Western
Mining and Construction Company, Lakeland, Colorado, to execute this plan.
In July 1995, the Company notified Marlowe Harvey and related companies,
then the operator of the Nevada Property, that Marlowe Harvey was not in
compliance with contractual operations under the Nevada Property Agreement as
well as several applicable mining laws and regulations. At that time the Company
assumed the position of operator and continues to act in this capacity.
All permits for this operation have been issued, and the Company is in
compliance with all state, federal, and environmental regulations to the best of
its knowledge and belief.
Initially, the Company's operations in Nevada will be heavily dependent
upon the mill constructed approximately one mile from the Nevada Property which
is currently owned and operated by New Concept Mining, Inc. ("New Concept"). The
Company presently intends to use the New Concept mill for milling the
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10
ore produced from the Nevada Property and selling gold bullion dore bars or
concentrate for sale to third-party buyers. Under the terms of an agreement
entered into with the Company, New Concept has agreed to provide the Company
with the capacity to initially process between 1,000-1,200 tons of ore per
month. New Concept has also agreed to increase processing capacity once the
Company's development program expands. The Company has also been engaged in
preliminary discussions with New Concept to purchase up to one half of the mill.
These discussions have not yet resulted in a binding agreement between the
Company and New Concept.
The Company has also budgeted the sum of One Hundred Thousand Dollars
($100,000) to be spent in the foreseeable future for compliance with applicable
environmental laws. However, the Company can provide no assurance that the
amount so budgeted for environmental compliance will be consistent with the
amounts actually spent for compliance or that the actual amount of such
compliance may not be substantially greater than that which has been projected
to be spent by the Company pursuant to the budget.
Over the past three (3) years, the Company has expended approximately One
Million Five Hundred Thousand Dollars ($1,500,000) on development expenses on or
relating to the Nevada Property. These expenses relate primarily to developing
the most effective means by which to extract the ore and transport it to the New
Concept mill approximately one mile from the Nevada Property.
THE INDONESIAN CONCESSIONS
General. In August 1996, the Company entered into an agreement to acquire a
fifty-one percent (51%) interest in a gold exploration property comprising
10,000 hectares (25,000 acres) located in East Kalimantan, Indonesia (the
"Kalimantan Property"). More recently, the Company has entered into two (2)
additional agreements to acquire an additional six (6) gold mining concessions
aggregating over 23,400 hectares (58,500 acres) and three (3) coal mining
concessions comprising 290,000 hectares (725,000 acres). In January 1997, the
Company and Maxwells Energy and Metals Technology Ltd., a Bahamian Company
("Maxwells"), agreed to substitute the original 10,000 hectare property (i.e.
the Kalimantan Property) for a 16,000 hectare (40,000 acre) tract (the "Sopang
Property") located elsewhere on the island of Kalimantan. Ownership of the
Indonesian Concessions will be acquired through the Company's new wholly-owned
subsidiary formed under the laws of the British Virgin Islands known as
Kalimantan Resources, Ltd. ("Kalimantan Resources"). NONE OF THE PROPERTIES
IDENTIFIED ABOVE HAVE ANY PROVEN AND RECOVERABLE RESERVES.
Mineralization of the Indonesian islands known as Kalimantan (the
Indonesian section of Borneo) and Sumatra occurred as a result of rifting of the
earth's crust at the ocean floor. There are approximately fifteen known
mineralized "arcs" comprising all of Indonesia. Six (6) of these arcs contain
the majority of the gold and copper deposits currently discovered in Indonesia.
The Central Kalimantan Arc is the area which has evidenced the majority of
recent attention of mineral exploration efforts although significant work is
also being undertaken in other areas. Located within the Central Kalimantan Arc
is the Kelian Mine which has been operating since 1992 and produces
approximately 450,000 ounces of gold per annum from ore grading approximately
1.8 grams per tonne of gold. Over seventy (70) tonnes of gold has been produced
to date. Based upon current estimated reserves, the mine is scheduled to operate
until 2003. Further south is the Mt. Muro Mine. Production for 1996 at this mine
was 187,000 ounces of gold. At present, it is impossible to predict whether the
Indonesian Concessions possesses any recoverable reserves of gold ore or whether
the yields noted in the above-described mines will be indicative of the yields
to be established on the Indonesian Concessions.
Three (3) agreements cover the various concessions which the Company and
Kalimantan Resources have acquired: (i) the Principles of Agreement by and
between the Company and Maxwells, as amended; (ii) the Acquisition Agreement
dated January 26,1997 by and between Kalimantan Resources and Singkamas Agung
Ltd.; and (iii) the Acquisition Agreement dated February 18, 1997, by and
between Kalimantan Resources and Kaliman Jaya Ltd.
As described in further detail elsewhere in this Registration Statement,
the Company has developed a business plan (the "1997 Business Plan") relating to
the activities to be conducted on the concessions acquired under the
above-described agreements as well as the Brazilian Timber Properties. The
proposed activities described in this section of this Registration Statement
summarizes a portion of the 1997 Business Plan.
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11
The Sopang Property. The Company acquired its interest in the Sopang
Property pursuant to a document entitled "Principles of Agreement" dated August
19, 1996 ("POA"). The parties to the POA are Maxwells and the Company. The
Company and Maxwells originally agreed to conduct exploration activities on a
10,000 hectare tract, but pursuant to an addendum to the POA, substituted the
16,000 hectare Sopang Property.
In exchange for a fifty-one percent (51%) interest in the concession
relating to the Sopang Property, the Company agreed to convey to Maxwells Four
Hundred Thousand (400,000) shares of its Common Stock. In addition, the Company
must issue an additional Four Million (4,000,000) shares of its Common Stock to
Maxwells should an investment banker confirm by independent appraisal that the
Sopang Property is valued to be at least Twelve Million Dollars ($12,000,000
U.S.) and/or such investment banker provides financing to the Company based upon
an evaluation of at least Twelve Million Dollars ($12,000,000 U.S.) or upon the
appreciation of the Common Stock in an aggregate amount exceeding Twelve Million
Dollars ($12,000,000) within ninety (90) days of an announcement by the Company
of its acquisition of the Indonesian Property. The Company recently received a
letter from Maxwells acknowledging that other than the issuance of 10,800
shares, no additional shares of Common Stock will be required to be issued until
the independent appraisal mentioned above has been performed. A provision of the
POA allows Maxwells to obtain a "nondilutive" percentage ownership in the Common
Stock to be issued under the POA should the Sopang Property produce at least
2,000,000 ounces of gold. As of the date of this Registration Statement, Three
Hundred Eighty Nine Thousand Two Hundred (389,200) of the Four Hundred Thousand
(400,000) shares required to be issued to Maxwells have in fact been issued
(200,000 shares of which are currently held in the name of Singkamas Agung, Ltd.
but which will be reissued in the name of Maxwells).
While the Company was entitled to defer exploration activities for six (6)
months, exploration activities have commenced and are ongoing on the Sopang
Property.
Under the POA, the Company is responsible for one hundred percent (100%) of
all exploration and operating expenses relating to the Sopang Property. Maxwells
also enjoys antidilution rights with respect to the Common Stock to be issued
under the POA provided exploration activities result in a valuation evidencing a
yield of at least two million (2,000,000) ounces of gold.
Maxwells has agreed to provide a voting trust in favor of existing
management. Maxwells is not, however, required to vote its shares with existing
management in connection with the registration of Common Stock issued or to be
issued to Maxwells. Maxwells' consent is also required in the case of any
issuance of the Company's capital stock exceeding Two Hundred Fifty Thousand
Dollars ($250,000).
The Company has undertaken efforts to confirm the chain of title which it
believes to exist with respect to the Sopang Property.
Silobat Property. On January 26, 1997, the Company's wholly-owned
subsidiary, Kalimantan Resources, entered into an Acquisition Agreement with
Singkamas Agung Ltd., a Bahamian corporation ("Singkamas"), relating to one (1)
gold mining concession and three (3) coal mining concessions located in
Kalimantan, Indonesia (the "Acquisition Agreement"). Singkamas is an affiliate
of Maxwells and is owned and controlled by the same persons who own and control
Maxwells.
The gold mining concession subject to the Acquisition Agreement relates to
a 62-hectare (155-acre) tract located in West Kalimantan and is known as the
"Silobat Property." Currently, PT Kajiwahida Mandiri, an Indonesian limited
liability company ("PT Kajiwahida"), holds a Kuasa Pertambangan Eksploitasi
license ("KPE") and a Kuasa Pertambangan Pengangkutan and Penjualan license
("KPPE") issued by the Indonesian Directorate General of General Mining and the
Ministry of Mines and Energy on October 7, 1996. On December 21, 1996, PT
Kajiwahida entered into a Mining Authorization Transfer Agreement with PT Duta
Sena Rahayu, an Indonesian limited liability company ("PT Duta"), whereby PT
Kajiwahida agreed to transfer its KPE and KPPE licenses to PT Duta in exchange
for $5,000,000 payable as follows: $100,000 at the time of execution of the
Acquisition Agreement; four consecutive installment payments of $100,000 each on
the fourth days of February, March, April and May 1997; and a final payment of
$4,500,000 at such time as official test results from exploration activities
demonstrate the existence of at least 2,000,000 ounces of gold
<PAGE>
12
reserves. Should exploration activities reveal gold reserves of less than
2,000,000 ounces, the final payment is to be adjusted in relation to the amount
of gold reserves so established. In addition, PT Kajiwahida is obligated to seek
the appropriate governmental authority to expand its licenses to include a
2,000-hectare tract contiguous to the 62-hectare tract currently comprising the
Silobat Property.
On December 21, 1996, the shareholders of PT Duta and Kalimantan Resources
entered into a Cooperation Agreement whereby in exchange for assuming the
financial responsibilities under the Transfer Agreement, the shareholders of PT
Duta agreed to hold the shares of such limited liability company for the benefit
of Kalimantan Resources. On the same date, Kalimantan Resources entered into a
Participation Agreement with Singkamas whereby Kalimantan Resources agreed to
grant to Singkamas a net profits interest derived from the exploitation of the
Silobat Property.
The Acquisition Agreement with Singkamas requires Kalimantan to secure the
issuance by the Company of Four Million (4,000,000) shares of Common Stock as
follows: Two Hundred Thousand (200,000) upon execution of the Acquisition
Agreement and the balance to be issued upon verification by an independent
evaluation that the value of the Silobat Property and the three (3) Indonesian
Coal Concessions equal or exceed Forty Million Dollars ($40,000,000). In the
case of the initial issuance of shares and twenty-five percent (25%) of the
balance of the shares of Common Stock to be issued, Singkamas is entitled to
"piggyback" registration rights. The Company has issued Four Hundred Thousand
(400,000) shares of its Common Stock to Singkamas as of the date of this
Registration Statement. Of this amount, Two Hundred Thousand (200,000) shares
are to be reissued to Maxwells.
To date, no funds have been transferred by Kalimantan to PT Kajiwahida or
any other party. However, Kalimantan Resources has been given authority to
conduct trenching and pitting and has conducted preliminary mapping, sampling
and trench hole pitting under the supervision of Behre Dolbear & Co. for the
purpose of evaluating the Silobat Property. Under the supervision of Behre
Dolbear, three separate sampling programs were conducted at the Silobat
Property. Based on that work which indicates the presence of analogous gold
values in four sampling pits, the Company intends to initiate a core drilling
program at the Silobat Property in the third quarter of 1997. The Company
(through its association with Singkamas) is currently in negotiations with PT
Kajiwahida to amend the terms of the Acquisition Agreement to reflect the accord
reached by the parties to enable Kalimantan to conduct further exploration
activities on the Silobat Property and to forego any payments due under the
Acquisition Agreement until such time as all governmental approvals associated
with annexing the 2,000-hectare tract have been secured.
The Silobat Property forms part of what was known as the Chinese District
of Western Borneo and has been the location of substantial exploitation by the
Chinese since the 1880s. In the 1960s, a Dutch company was granted a concession
to conduct mining operations on the Silobat Property, but such property was
abandoned shortly thereafter because of political unrest, sabotage and lack of
funding.
The property is located 1 degree 1 minute north longitude and 109 degrees
12 minutes east latitude in the subdistrict of Sambas, Kalimantan Barat. The
topography of the property is characterized by swampy lowlands with isolated
hilly outcrops covered mainly with revegetation and local rubber plantations.
The geology is characterized by green-black mudstone, fine silt stone,
quartz-feldspar porphyry and quartz diorite rock types.
In 1977, 21 rock chip and 7 stream sediment samples were submitted for
analysis to the Superintendent Laboratories in Jakarta. Only small traces of
gold were detected in all rock samples submitted while stream sediment samples
yielded values of .5 to 1.05 ppm in four of the seven samples.
Munung (Monroe) Property. The Company's wholly-owned subsidiary, Kalimantan
Resources, entered into an Acquisition Agreement for Gold and Coal Concessions
February 18, 1997, with Kalimas Jaya Ltd., a Bahamian corporation ("Kalimas"),
relating to five (5) gold mining concessions and one (1) coal mining concession
(the "Kalimas Acquisition Agreement"). Kalimas is also an affiliate of Maxwells
and is owned and controlled by the same persons who own and control Maxwells.
Kalimas acquired its rights to the concession relating to the Monroe Property
pursuant to a Development Agreement dated February 14, 1997, by and between PT
Muara Mayang Coal Utama ("PT Muara") and Kalimas. Under the Development
Agreement,
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13
Kalimas obtained the right to acquire an 80% interest in a Kuasa Pertambangan
Penyelidikan ("KP") issued to PT Muara for the sum of $1,000,000 payable as
follows: $150,000 upon execution of the Development Agreement and verification
by Kalimas that PT Muara possesses marketable title to the concession without
encumbrances and $850,000 upon commencement of production and generation of net
profits.
The Monroe Property comprises 6,096 hectares and is located in Central
Kalimantan, Indonesia. It is located in the same general area of the Kelian gold
mining concession which has produced over 450,000 per annum ounces of gold since
1992.
The existing KP issued on the Monroe Property allows PT Muara to conduct a
general survey and perform exploration activities for gold and other precious
metals. The Development Agreement requires PT Muara to use its "expert abilities
and efforts" to obtain additional licenses for the exploitation, production and
refining, and transportation and sale of all minerals obtained from the Monroe
Property.
The Kalimas Acquisition Agreement requires Kalimas to convey a 51% interest
in all current and future licenses which it acquires with respect to the Monroe
Property.
To date, no sums have been paid by Kalimas or Kalimantan Resources to PT
Muara nor has any exploration work been performed on the Monroe Property.
Kalimantan Resources currently intends to complete title work prior to engaging
in any exploration activities.
Telen (Tomak) Property. The second gold concession in which Kalimantan
Resources received rights under the Kalimas Acquisition Agreement is known as
the Telen or Tomak Property. This property comprises 687 hectares and is located
in East Kalimantan, Indonesia. Kalimas acquired its rights to the property
pursuant to a Development Agreement dated February 14, 1997, which it entered
into with PT Walea Bahimas, an Indonesian limited liability company. PT Walea
Bahimas currently holds a KP for general survey and exploration on the property.
Kalimas is required to pay a purchase price of $1,000,000 to acquire an 80%
interest in the current KP. The Development Agreement contains provisions
similar to those contained within the Development Agreement relating to the
Monroe Property with respect to payment terms. Moreover, PT Walea Bahimas will
only be entitled to receive the final $850,000 payment upon commencement of
commercial production and obtaining licenses for exploration and exploitation,
production and refining, and transportation and sale.
Kalimas is obligated to commence exploration in or before April 1997 or at
such other time as agreed upon by the parties. In addition to being required to
dig test pits as part of the exploration program, Kalimas has agreed to: conduct
shallow drilling to a depth of approximately 60 meters during the first 90-day
period, conduct deep drilling to a depth of at least 200 meters during the
second 90-day period, and securing a commitment of at least $300,000 during the
first three (3) years of exploration activities.
The Kalimas Acquisition Agreement requires Kalimas to convey a 51% interest
in all current and future licenses which it acquires with respect to the Tomak
Property. In addition, Kalimas and the Company have agreed that Kalimas will be
entitled to receive a number of shares of Common Stock the amount of which is to
be determined no later than July 1997. The Kalimas Acquisition Agreement further
provides that the value of the Common Stock is to be determined at $10 per
share, which was the approximate value as of January 26, 1997.
To date, no sums have been paid by Kalimas or Kalimantan Resources to PT
Walea Balimas nor has any exploration work been performed on the Tomak Property.
Kalimantan Resources currently intends to complete title work prior to engaging
in any exploration activities.
Long Beleh (La Bella) Property. The La Bella Property represents the third
gold concession in which Kalimantan Resources acquired rights pursuant to the
Kalimas Acquisition Agreement. This property currently comprises 4,637 hectares
and is located in East Kalimantan, Indonesia. Kalimas acquired its rights in and
to a KP for general survey and exploration pursuant to a Development Agreement
dated February 14, 1997, with PT Muara Koman Mas ("PT Muara Koman"). The terms
and conditions for the acquisition of an eighty percent (80%) interest in the
current license and all future licenses held or to be held by PT Muara Koman are
identical to the terms and conditions described above and relating to the Tomak
Property. The
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14
obligations of Kalimas under the Kalimas Acquisition Agreement are identical to
the obligations which it possesses with respect to the Tomak Property.
To date, no sums have been paid by either Kalimas or Kalimantan Resources
to PT Muara Koman nor has any exploration been performed on the La Bella
Property. Kalimantan Resources currently intends to complete title work prior to
engaging in any exploration activities.
Sengingi Property. The Sengingi Property is the fourth gold concession in
which Kalimantan Resources acquired rights pursuant to the Kalimas Acquisition
Agreement. Unlike the previous gold concessions mentioned in this Section of the
Registration Statement, the Sengingi Property is a 4,000-hectare (10,000-acre)
tract which is located on the island of Sumatra in the province of Riau,
Indonesia. Kalimas acquired the right to obtain an eighty percent (80%) interest
in a KP for exploration and a KPE for exploitation with respect to 3,000
hectares of this property from PT Aksara Mina Artha ("PT Aksara") pursuant to a
Development Agreement dated February 14, 1997. Under the terms of its agreement
with PT Aksara, Kalimas is obligated to pay PT Aksara $1,000,000 to be paid from
production derived from the property. In all other material respects, the terms
and conditions of the Development Agreement between Kalimas and PT Aksara and
the terms and conditions of the Kalimas Acquisition Agreement between Kalimas
and Kalimantan Resources are identical to the terms and conditions described
above with respect to the other gold concessions subject to the Kalimas
Acquisition Agreement.
Kuantan Property. The last gold concession subject to the Kalimas
Acquisition Agreement is known as the Kuantan Property. The Kuantan Property is
also located in Riau Province, Sumatra, Indonesia, and comprises 8,000 hectares.
Kalimas derives its rights pursuant to a Development Agreement dated February
14, 1997, between it and PT Aksara Tama Pramita ("PT Aksara Tama"). PT Aksara
Tama currently holds a KP for general survey and exploration. The general terms
and conditions upon which Kalimas is to acquire an eighty percent (80%) interest
in all current and future licenses on the Kuantan Property are similar to the
terms and conditions upon which all other licenses subject to the Kalimas
Acquisition Agreement have been acquired. The purchase price which Kalimas will
be required to pay for the Kuantan Property is $1,000,000 payable as follows:
$250,000 upon execution of the Development Agreement and verification by Kalimas
that PT Aksara Tama possesses marketable title to the concession without
encumbrances, and $750,000 to be paid upon commencement of production and
generation of net profits.
Indonesian Coal Concessions. As previously mentioned, Kalimantan Resources
and Singkamas entered into an Acquisition Agreement on January 26, 1997. In
addition to acquiring rights to the Silobat Property, Kalimantan Resources
obtained rights to three coal mining concessions aggregating over 286,000
hectares. Singkamas acquired its rights to these three coal mining concessions
pursuant to Development agreements entered into with the PT Andhika Group of
Companies, three Indonesian limited liability brother-sister companies
(collectively referred to as "PT Andhika"). Under the terms of these Development
Agreements, Singkamas received the right to acquire seventy-seven and one-half
percent (77.5%) interest in the three contracts of work ("COWs") currently held
by PT Andhika.
Under the terms of the Acquisition Agreement between Singkamas and
Kalimantan Resources, Singkamas has agreed to assign a fifty-one percent (51%)
in and to the COWs (as well as a fifty-one percent [51%] interest in the Silobat
Property) in consideration of the issuance of 4,000,000 shares of the Company's
Common Stock described elsewhere in this Registration Statement in greater
detail.
In March 1997, Kalimantan Resources, engaged an Indonesian exploration crew
to travel to the properties and to perform preliminary evaluations of possible
coal reserves in place on the three (3) coal concessions located in Indonesia
where the Company and Kalimantan Resources have entered into contracts to
acquire certain exploration and exploitation rights. Behre Dolbear & Co. will
review the results of these activities and present recommendations based upon
such review.
The Company has been contacted by several large coal mining companies for
the purpose of entering into proposed joint ventures to conduct further
exploration and subsequent development of such properties. At present, no joint
venture agreements have been entered into by the Company.
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15
The Company has entered into an agreement with Behre Dolbear & Company,
Inc. ("Behre Dolbear"), an internationally recognized mining consulting firm
which was established in 1911. Behre Dolbear will be responsible for providing
independent technical advisory third-party validation services to the Company as
more particularly outlined in the agreement. Under the supervision of Behre
Dolbear, three separate sampling programs were conducted at the Silobat
Property. Based on that work which indicates the presence of analogous gold
values in four sampling pits, the Company intends to initiate a core drilling
program at the Silobat Property in the third quarter of 1997. A more thorough
description of this agreement is described in the Section of this Registration
Statement entitled "MANAGEMENT."
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16
4. RISK FACTORS
The purchase of shares of common stock involves a substantial degree of
risk and is suitable only for persons of substantial means who have no need for
liquidity in their investment. this section of the prospectus sets forth the
risks and special considerations which the company believes may exist concerning
an investment in the common stock. Prospective investors should recognize that
factors other than those set forth below may ultimately affect an investment in
a manner and to a degree which cannot be foreseen at this time. all prospective
investors are urged to consult with their advisors prior to making an investment
in common stock so that they understand fully the nature of the undertaking and
the risks which may be involved prior to investing. Furthermore, all prospective
investors are urged to review with their counsel, accountants, and professional
advisors the financial statements attached to the prospectus. Any documents
described in this prospectus which have not been attached as exhibits may be
obtained by prospective investors and/or their advisors upon request from the
Company. This registration statement also contains certain forward-looking
statements and information that are based upon management's beliefs as well as
on assumptions made by an upon information currently available to management.
when used in this registration statement, the words "expect," "anticipate,"
"intend," "plan," "believe," "seek" and "estimate" or similar expressions are
intended to identify such forward-looking statements. However, this registration
statement also contains other forward-looking statements. Forward-looking
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions, including, but not limited to, the
following risk factors, which could cause the Company's future results and stock
values to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. Many of such factors are beyond
the company's ability to control or predict. Readers are cautioned not to put
undue reliance on forward-looking statements.
NO COMMERCIALLY VIABLE ORE DEPOSITS
Even though the Company has reviewed reports and records of its mining
properties, there is no assurance that there are commercially viable ore
deposits. Moreover, the Company has not established any proven or recoverable
gold or ore deposits as of the date of this Registration Statement.
HISTORY OF LOSSES
Although the Company was formed in 1985 to engage in precious metal mining
activities, its net worth is limited. The Company is and still should be
considered in its development stage, having a net worth of $7,537,653 as of May
31, 1997. As of May 31, 1997, the Company has realized an aggregate net loss
(since inception) of $15,836,084, or $1.09 per share. Until the fiscal year
ended May 31, 1997, the Company had failed to post revenues from operations.
Prospective Investors should be aware that the Company was a development-stage
company that only recently has begun to report sales. There is no guaranty that
the Company's operations will be successful or realize a profit in the future.
Moreover, the Company's net worth and the value of its Common Stock will
ultimately be dependent upon the overall success of timber operations currently
being conducted and to be conducted on the Brazilian Timber Properties, mining
operations conducted on the Nevada Property, and the Indonesian Concessions.
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17
The financial information accompanying this Registration Statement reflects
the current financial condition of the Company. It should be noted that the
Company has not yet reported a profit from operations since its inception to the
present. Management projects that the further exploration and development of its
properties will result in profitable operations although, for the reasons stated
elsewhere in this Prospectus, no guaranty to that effect can be made.
HISTORY OF UNSUCCESSFUL OPERATIONS
Mining and natural resource operations are speculative by their nature.
Present management of the Company has in the past selected mining properties
which have proven to be uneconomic. There is no assurance that the present gold,
coal, and timber properties will prove to be economic or profitable to the
Company. If all or most of the properties prove to be uneconomic, the Company
may be unable to realize a profit from its operations which may have a profound
impact upon the value of the Company and the liquidity of the Common Stock.
TITLE PROBLEMS TO BRAZILIAN TIMBER PROPERTIES
The Company has acquired its rights to the Brazilian Timber Properties
pursuant to harvesting agreements entered into by and between the Company's
subsidiary, Equatorial Resources, Ltd. ("Equatorial Resources"), and third
parties. The Company will also acquire its rights to purchase the sawmill
facility in Sao Miguel do Guama pursuant to an acquisition agreement with Jonasa
Maderias Ltda.
The Company has performed preliminary title work on the tracts of
properties on which current harvesting operations are being conducted. These
examinations have been conducted by legal counsel in Belem, Brazil, who are
competent to examine title. While Equatorial Resources has commenced timber
production from these properties, there can be no assurance that title problems
and other claims hostile to the chain of title on which the Company has relied
will not arise in the future.
Before any sums are expended by the Company on timber operations on the
other tracts of properties on which it has acquired harvesting rights, the
Company intends to employ legal counsel to advise it of the status of title to
these concessions.
In addition to the title problems and environmental problems commonly
associated with the development of timber properties in the United States,
foreign ownership of timber rights in foreign countries subjects a U.S.-based
company to the additional risk of political instability.
The Company has expended considerable sums to improve the sawmill facility
located in Sao Miguel do Guama, Para Brazil even though transfer of ownership
has not been completed. The terms of the acquisition agreement require Jonasa
Maderias Ltda. (the current owner) to transfer the sawmill facility free and
clear of all liens. The Company has discovered that the sawmill facility is
burdened by certain taxes due to various governmental authorities. If the
current owner does not remove these liens from the sawmill facility, the Company
will likely complete the sale of the facility and assume such obligations.
RISKS OF FORFEITURE TO BRAZILIAN TIMBER PROPERTIES
A recent federal law in Brazil grants certain rights to indigenous peoples
who invade individually-owned property in various regions of the country. In
cases where such invasion has occurred, the federal government has condemned the
properties and paid "just compensation" to the owners. Some of the properties in
which the Company has acquired rights are subject to this legislation. In the
case of its agreement relating to the Jonasa Concessions, any tracts
appropriated by the federal government, under this legislation are required to
be replaced by Jonasa. In the case of the tracts subject to the Terranorte
Agreement, a physical inspection of the tract will be made prior to commencement
of harvesting operations. The Company and its subsidiary, Equatorial Resources,
will be subject to the risk of forfeiture of its rights in both the Jonasa
Concessions and the Terranorte Concessions in the event that Jonasa fails to
perform its obligation in the first instance or all or a portion of the tracts
on which operations are conducted on the Terranorte Concessions are condemned by
the federal government in the second instance.
<PAGE>
18
It should be noted that the Company and many of its key personnel have
limited operating experience in Brazil and in timber operations. Such
inexperience could result in unsuccessful operations or unfavorable returns to
the Company.
The Company has acquired its rights to the Nevada Property through a
variety of agreements with predecessors-in-interest. The precise nature and
amount of interest owned by the Company is now the subject of a lawsuit pending
in Nye County and more particularly described in the section of this
Registration Statement entitled "LEGAL PROCEEDINGS." The Company is seeking to
obtain an order from the court declaring that the Company is the owner of the
undivided 100% interest in a substantial number of the mining claims comprising
the Nevada Property. If the Company is unsuccessful in its request for
declaratory relief, title to 50% of the interests in the Nevada Property may be
retained by persons or entities other than the Company.
The Company has recently executed a deed of trust encumbering the Nevada
Property in the principal amount of Two Million Dollars ($2,000,000) to Silenus
Limited pursuant to a privately-negotiated placement of 8% Senior Secured
Convertible Debentures described elsewhere in this Registration Statement. Until
such time as all obligations due under the Debentures issued to Silenus Limited
are paid, converted or redeemed, and the encumbrances on the Nevada Property are
reconveyed to the Company, one of the primary assets of the Company, namely the
Nevada Property, will be subject to the terms and conditions of such
instruments. Any default under such agreement or the Deed of Trust which remains
uncured would subject the Company to the possible loss of the Nevada Property.
TITLE PROBLEMS ASSOCIATED WITH THE INDONESIAN CONCESSIONS
Mineral interests in Indonesia are controlled exclusively by the federal
government through the Ministry of Mines and Energy. Title to a mineral property
in Indonesia is subject to obtaining various forms of licenses for the
extraction of commercial quantities of minerals after obtaining property rights
from the fee owner. Title is confirmed by the issuance of a government seal
affixed to specific property location maps.
Because direct foreign ownership of mining concessions is difficult, if not
prohibited by Indonesian law, the Company and its subsidiary, Kalimantan
Resources, must rely upon its contractual rights under the various agreements
into which they and/or their predecessors have entered. These contracts are
described in greater detail elsewhere in this Registration Statement. Should a
dispute arise as to the interpretation or enforcement of such agreements, resort
to the Indonesian judicial system will likely be required. It should be noted
that since members of the judicial branch are employed by the executive branch
of the government, a fair opportunity to assert a foreign company's rights under
such agreement may be limited.
Even if the contractual rights of Kalimantan Resources are clearly
delineated in its agreements, the Company's interests in the Indonesian
concessions are subject to title failures associated with the entities with whom
Kalimantan Resources has contracted. The Company has not currently completed its
title investigations with respect to any of the Indonesian Concessions. However,
prior to the time at which any payments will be made to the current holders of
the licenses, the Company will have satisfied itself that either it, Kalimantan
Resources, or the parties with whom it has contracted (and/or their predecessors
in interest) will have good and merchantable title to the particular licenses
purported to be owned by such third parties.
Ownership of licenses to explore for and/or exploit natural resources in
foreign countries is also subject to political risks. The United States has
important economic, commercial and security interests in Indonesia because of
its growing economy and markets and its strategic location in relation to key
international straits. The U.S. and Indonesia maintain cordial and cooperative
relations, although the two countries are not bound by formal security treaties.
Indonesia is a republic based upon its 1945 constitution providing for a
limited separation of executive, legislative and judicial power. The president,
elected to a five-year term, is the overwhelmingly dominant government and
political figure. The president appoints the cabinet, currently composed of four
coordinating ministers (in the fields of political and security affairs,
economic and financial affairs, people's welfare and
<PAGE>
19
industrial and trade affairs), thirteen state ministers, twenty-four ministers
and three high officials with the status of state ministers. Moreover, judges
are employees of the executive branch.
Unlike Western democratic systems, the legislative branch meets only once
during its five-year term, to formulate the overall principles and aims of the
government and to elect the president and vice president. Representative bodies
at all levels in Indonesia eschew voting, preferring to arrive at decisions
through "consultation and consensus."
Because of the presence of a strong executive branch, some foreign
companies have been forced to accede to government demands to revise licenses to
include the participation of Indonesian-owned companies, larger foreign
companies and, in some instances, the Indonesian government. The inability of a
foreign company to effectively enforce its rights in licenses issued by the
Indonesian government through the judicial branch of government represents a
risk of doing business in a developing country as compared to the United States.
GOVERNMENTAL REGULATION
Mining operations on the Nevada Property are and will be subject to
substantial federal, state and local regulation concerning mine safety and
environmental protection. Some of the laws and regulations which will pertain to
mining operations include maintenance of air and water quality standards; the
protection of threatened, endangered and other species of wildlife and
vegetation; the preservation of certain cultural resources and the reclamation
of exploration, mining and processing sites. These laws are continually changing
and, as a general matter, are becoming more restrictive. The location of the
Nevada Property is found in an area which strongly encourages mining operation.
However, the Company's inability to comply with such federal, state or local
ordinances and regulations on an ongoing basis may cause significant delays in
the permitting process or in the operations anticipated to be conducted on the
Nevada Property. In addition, delays in such compliance could result in
unexpected and substantial capital expenditures. Although no such problems or
delays are anticipated, no assurances can be given that the Company will be able
to comply with all applicable law and regulations and maintain all necessary
permits, licenses and approvals or, in the alternative, that compliance and/or
permitting will be obtained without substantial delays and/or expenses.
With regard to the Nevada Department of Conservation and Natural Resources,
Division of Environmental Protection ("NDEP"), the Company has received
authorization to proceed with its currently planned mining operations on the
Nevada Property pursuant to the applicable statutes and regulations relating to
a small mining operation. In the event, however, the Company's operations exceed
the designated limits for a limited mining operation, a full reclamation plan
will need to be prepared, submitted and approved by NDEP. The Company is
currently preparing such a reclamation plan. While the Company believes that it
will be able to obtain such approval, there is no guarantee that the required
approval will in fact be obtained by the Company.
A change in the nature or magnitude of the Company's presently anticipated
operations on the Nevada Property may trigger the need to obtain additional NDEP
and other federal, state or local governmental approvals, licenses or permits.
For example, water processing discharge needs may trigger the requirement that
the Company obtain a water pollution control permit. The Company is currently
preparing for submission of an application for a water pollution control permit.
Other significant permits, required by a change in operations on the Nevada
Property, might include an NDEP permit, air quality permit, waste management
permit, archeological clearance and wildlife permit. There is no guaranty that
the Company will be able to obtain any or all of the required federal, state or
local permits that might be required to expand its operations on the Nevada
Property.
Even if the Company does not change its currently planned operations on the
Nevada Property, the Company is nevertheless vulnerable to the various federal,
state and local laws and regulations governing regulations and protection of the
environment, occupational health, labor standards and other matters. The reason
for this is that these laws are continually changing, and as a general matter,
are becoming more restrictive.
<PAGE>
20
To comply with these federal, state and local laws, the Company may in the
future be required to make capital and operating expenditures on environmental
projects both with respect to maintaining currently planned operations and the
initiation of new operations. Such projects may include, for example, air and
water pollution control equipment; treatment, storage and disposal facilities
for solid and hazardous waste; remedial actions required for the containment of
tailings pond seepage; continuous testing programs; data collection and analysis
land reclamation (specifically including existing mine and processing waste on
the Nevada Property); landscaping and construction projects. There is no
guaranty that the Company will technically or financially be able to comply with
any or all of these potential requirements.
ENVIRONMENTAL REGULATION AND LIABILITY
The Company's proposed mineral operations on the Nevada Property are and
will be subject to environmental regulation by federal, state and local
authorities. Under applicable federal and state law, the Company may become
jointly and severally liable with all prior property owners for the treatment,
cleanup, remediation and/or removal of substances discovered at the Property
which are deemed by federal and/or state law to be toxic or hazardous
("Hazardous Substances"). Liability may be imposed among other things for the
improper release, discharge, storage, use, disposal or transportation of
Hazardous Substances only in the areas which the Company disturbs.
Applicable law imposes strict joint and several liability on, among others,
"owners" and "operators" of properties contaminated with Hazardous Substances.
Such liability may result in any and all "owners", "operators" and
"transporters" of contaminated property being required to bear the entire cost
of remediation. The Company may utilize substances which have been deemed by
applicable law to be Hazardous Substances. The potential liability of the
Company under such laws will be derived from the Company's classification as
both an "owner" and "operator" of a contaminated property. While the Company
intends to employ all reasonably practicable safeguards to prevent any liability
under applicable laws relating to Hazardous Substances, mineral exploration by
its very nature will subject the Company to substantial risk that remediation
may be required. If the cleanup or remediation of hazardous substances is
required on the Nevada Property, substantial delays could occur in the
permitting process and/or in the further extraction of gold and other precious
minerals on the Nevada Property.
Much like environmental laws found in the United States, both the federal
and state governments in Brazil have adopted laws and standards relating to the
harvesting and reclamation of forests. While the Company and its subsidiary,
Equatorial Resources, have not yet fully familiarized themselves with all of
these laws and standards, Equatorial Resources has entered into an agreement
with Eco-Rating International, Incorporated ("Eco-Rating"), Zurich, Switzerland,
to better assist the Company and Equatorial Resources in understanding and
complying with such laws and standards. Under the terms of its agreement with
the Company, Eco-Rating has agreed to establish an "eco-efficiency model"
designed to enable Equatorial Resources to establish environmental management
guidelines for the conduct of activities on the Jonasa Concessions and
ultimately the remainder of the Brazilian Timber Properties consistent with all
applicable environmental laws and standards.
The Indonesian Concessions may also be subject to federal and provincial
environmental laws in place or being contemplated by those governmental
entities. Mining in certain locations in Indonesia may be restricted because of
difficulties associated with mine reclamation, water quality, air quality,
endangered species or local cultural conditions similar to those restrictions of
other international mining operations in Indonesia.
LIQUIDITY OF COMMON STOCK
The Company's Common Stock is currently traded on the NASDAQ Electronic
Bulletin Board. Over the past six (6) months, the average monthly trading volume
has been approximately 800,000 shares. Trading volumes on the Electronic
Bulletin Board have been limited and there is no assurance that the Electronic
Bulletin Board will provide an effective market for a prospective investor to
sell his or her shares of Common Stock.
<PAGE>
21
DIVIDENDS
The Company has not paid cash dividends on any of its Common Stock and does
not anticipate paying any cash dividends on any of its Common Stock for the
foreseeable future. Holders of the Preferred Stock are entitled to an annual
cash or stock dividend offered at the rate of eight percent (8%) per year
payable out of any funds legally available therefor and payable on January 1,
April 1, July 1, and October 1 of each year. Such dividends are cumulative so
that if full dividends in respect of any previous dividend period are not paid,
holders of the Preferred Stock are entitled to receive any deficiency before any
dividend or other distribution may be made or declared by the Company with
respect to any other class of stock including other series of preferred shares
should the Company elect to issue such additional series.
As of the date of this Registration Statement, no accrued quarterly
dividends payable to the holders of the Preferred Stock (which were $160,500 as
of May 31, 1997) have been paid. Management of the Company is presently
scheduling payment of accrued dividends in Common Stock as authorized in the
Company's "Certificate of Determination of Preferences of Series A Preferred
Stock" filed with the Nevada Secretary of State on October 25, 1995 at the time
that the Preferred Stock is converted into Common Stock on or before the earlier
of the effective date of this Prospectus or December 31, 1997.
CLASSIFICATION OF SECURITIES
Currently the Company's stock is not considered to be "penny stock"
pursuant to Section 3(a)(51)(A) of the Securities Exchange Act of 1934. However,
the Company makes no representations that it will be able to continue with such
classification. In the event the price of the Company's Common Stock decreases
below $5.00 per share, the Common Stock will be considered "penny stock." In
such case the Company will be subject to the increased disclosure requirements
associated with the issuers of such securities. In addition to increased
disclosure requirements, such situation may also result in either a decrease in
the liquidity of the stock or a total disappearance of a market for the Common
Stock. In either instance the difficulty associated with disposition of the
shares would greatly increase.
DEPENDENCE UPON MANAGEMENT
The business of the Company is and will be greatly dependent upon the
active participation of Christopher D. Michaels and Jeffery S. Kramer. The
Company also anticipates that it will be dependent upon the active participation
of other key personnel and/or consultants in the future. The Company presently
has employment agreements with both Mr. Michaels and Mr. Kramer and has entered
into agreements with key consultants; nevertheless, the loss of the services of
Mr. Michaels, Mr. Kramer and/or other key personnel (including such consultants)
regardless of reason could adversely affect the Company and the Company's
business. The Company does not maintain any life insurance policies enabling it
to receive benefits in the case of either Mr. Michaels' or Mr. Kramer's death.
In addition, Messrs. Michaels and Kramer are parties and subject to a consent
judgment wherein they are restrained from selling securities in interstate
commerce in violation of the provisions of section 5 of the Securities Act of
1933, as amended (the "Act"), or from engaging in any transaction, practice, or
course of conduct resulting in a violation of the antifraud provisions of the
Act. A violation of these provisions could result in the resignation of these
officers. To the extent that the services of Mr. Michaels or Mr. Kramer would be
unavailable to the Company for any reason, the Company might be required to
employ other executive personnel to manage and operate the Company. There is no
assurance that the Company under such circumstances would be able to employ
qualified persons on terms suitable to the Company to assure the fulfillment of
the objectives stated in this Registration Statement.
LACK OF DIVERSIFICATION
The Company has, in the past, maintained other mining properties for
exploration and development. These properties were located in Bolivia, South
America and Vancouver, British Columbia. Through its board of directors and
shareholders, the Company elected to abandon such other properties as a result
of uneconomic results. The Company's primary assets presently consist of the
Brazilian Timber Properties, the Nevada Property, and the Indonesian
Concessions. No assurance can be given that once the Company
<PAGE>
22
increases or continues its timber operations in Brazil and completes its present
exploration and development of the Company's properties in Nevada and Indonesia
as described in further detail in this Prospectus, it will be able to establish
and produce significant revenues from such operations or become profitable. In
addition, there can be no assurance that continued development activities on the
Nevada Property and/or exploration activities currently being conducted on the
Indonesian Concessions will result in the establishment of commercial quantities
of mineralization. As a result, persons reading this Prospectus should be aware
that investment in the Common Stock represents an additional risk because the
Company's activities are presently confined to the conduct of timber operations
on the Brazilian Timber Properties, the exploration, development and gold
production on the Nevada Property, and preliminary exploration activities on
certain of the Indonesian Concessions.
STOCK ISSUANCES UNDER MINING CONTRACTS
The Company has entered into various contracts with third parties to issue
Common Stock in consideration of services rendered in relation to various mining
properties. Common Stock has been issued to the following parties: Harrison
Western Construction Company (100,000 shares); Maxwells Energy & Metals
Technology Ltd. (400,000 shares); and Singkamas Agung Ltd. (200,000 shares).
Maxwells Energy & Metals Technology Ltd. is entitled to receive an additional
4,000,000 shares of Common Stock if an investment banker confirms by independent
appraisal that the value of the properties subject to the Principles of
Agreement dated August 19, 1996 equals or exceeds $12,000,000. Singkamas Agung
Ltd. is entitled to receive an additional 3,800,000 shares of Common Stock if an
independent evaluation confirms that the value of the properties subject to the
Acquisition Agreement dated January 26, 1997 equals or exceeds $40,000,000. Of
the additional shares which may be issued to Singkamas Agung Ltd., 950,000
shares are entitled to "piggy-back" registration rights. Once these shares are
issued to the various parties and such shares become unrestricted, the sales of
such securities could adversely affect the price of Common Stock.
CONSENT JUDGMENT AGAINST THE COMPANY AND CERTAIN EMPLOYEES
In May 1989, the Company received notice that the Securities and Exchange
Commission (the "Commission") had commenced an informal investigation into the
Company's compliance with the registration and disclosure requirements of the
Securities Act of 1933 (the " '33 Act") and the Securities Exchange Act of 1934
(the " '34 Act"). Thereafter the Commission commenced an extensive review of the
Company's books and records relating to the Company's business and mining
operations, its capital raising activities, and its financial condition and
history. Through all stages of the investigation, the Company voluntarily
cooperated with the Commission.
On August 3, 1993, the Commission and the Company agreed to terminate the
Commission's investigation by the entry of a consent judgment against the
Company and certain of the Company's past and present key employees. These key
employees include Christopher D. Michaels, Jeffrey Kramer and Stanley Mohr. The
terms and conditions of the consent judgment can be summarized as follows:
1. The Company and its officers, agents, servants, employees and
others receiving actual notice of the consent judgment neither admitted nor
denied any of the allegations alleged by the Commission;
2. The Company and its officers, agents, servants, employees, and
others receiving actual notice of the consent judgment are permanently
restrained and enjoined from violating section 5 of the '33 Act or from
selling securities in interstate commerce unless and until a registration
statement is in effect or the security or transaction is exempt from the
registration provisions of the '33 Act and/or the '34 Act;
3. The Company and its officers, agents, servants, employees, and
others receiving actual notice of the consent judgment are permanently
restrained from engaging in any transaction, practice, or course of
conduct, employing any course of conduct, or obtaining any money or
property by means of an untrue statement of a material fact, or any
omission to state a material fact, necessary to make the statements made in
light of the circumstances under which they were made not misleading in
violation of the antifraud provisions of the '33 Act and '34 Act.
<PAGE>
23
As part of the consent judgment, the Company was required to engage an
independent certified public accountant to conduct a full and complete analysis
of the disposition of all funds received by the Company from investors and, to
the extent so discovered, to disgorge all ill-gotten gains.
On April 7, 1994, in response to the audits completed by the certified
public accountant, the Company and the Commission entered into a stipulation
regarding the resolution of all outstanding issues which then existed, which
stipulation was entered as an order by the United States District Court for the
Central District of California. Such stipulation contained an acknowledgement
that the Company and its executive officers had received no ill-gotten gains as
a result of prior activities by the Company in offering and selling its
securities, and that the consent judgment resolved once and for all, all issues
raised by the Commission as a result of the Company's prior activities. The
Company and the persons named in the formal order of investigation were not
required to pay any fines or required to disgorge any monies previously received
by it in connection with its securities.
On February 27, 1989, the Pennsylvania Securities Commission issued a cease
and desist order against the Company and Christopher D. Michaels, Jeffrey S.
Kramer, Stanley J. Mohr, and William Michaels prohibiting them from violating
Section 201 of the Pennsylvania Securities Act of 1972 relating to the sale of
unregistered "penny stocks."
As a result of the foregoing regulatory and judicial actions, the Company
may not be able to utilize the exemptions from registration available under
Regulation A and Rule 701 promulgated under the '33 Act and may not be able to
rely upon certain private placement exemptions afforded by applicable state blue
sky laws in connection with the offer and sale of securities in a transaction
which qualifies as exempt from qualification under the '33 Act. In such cases,
the Company would be required to register/qualify the transaction under said
blue sky laws, which would likely increase the cost of, and extend the time for
completing, any private placement of securities.
FLUCTUATION OF COMMODITY PRICES
Since its deregulation in August 1971, the market price for gold has been
highly speculative and volatile. Since 1980, gold has fluctuated from a high of
approximately $850 per ounce in January 1980 to a low of approximately $285 per
ounce in 1985. Currently gold is trading at approximately $320 per ounce. In
1996, gold averaged over $380 per ounce. Instability in gold prices may effect
the profitability of the Company's future operations.
Similarly coal and timber prices fluctuate. Natural resources have
traditionally evidenced volatile swings in pricing, thereby affecting overall
the relative profitability of engaging in these lines of business. For example,
timber prices increased fifty-two percent (52%) in 1996 while coal prices have
remained relatively stable for the past several years. Coal prices, which
historically have been heavily dependent upon mining conditions, location of
deposits, and freight variations, have remained relatively stable for the past
several years.
USE OF FORWARD-LOOKING STATEMENTS
This Registration Statement contains "forward-looking statements." Such
statements are found in the Sections of this Registration Statement entitled
"The COMPANY", "PROPERTIES", and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION" and elsewhere. Prospective Investors are cautioned that the
assumptions upon which such statements are based cannot be guarantied by the
Company to occur in the future or that the overall success of the Company might
be materially adversely affected should such bases (or some of them) not occur.
<PAGE>
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
- - ------------
The Company is a timber and mining company, with corporate offices in
Calabasas, California, owning interest(s) in certain timber or mineral
properties located in the (1) states of Para and Amazonas, Brazil (the
"Brazilian Timber Properties"); (2) Manhattan Mining District, Nye County,
Nevada, (the "Nevada Property"); (3) Indonesian Gold Belt, Kalimantan, Indonesia
(the "Indonesian Gold Concessions"); (4) Kutai District of East Kalimantan,
Indonesia (the "Indonesian Coal Concessions"); and (5) on the island of Sumatra,
Indonesia. The terms and conditions of these acquisitions and the risks and
contingencies associated with such ownership interests are more particularly
described in the Section of the Annual Report entitled "PROPERTIES" AND "RISKS
FACTORS."
Comparison of Results of Operations -- Year Ended May 31, 1998
Compared to Year Ended May 31, 1997
- - ---------------------------------------------------------------
Revenues for the year ended May 31, 1998 were approximately $558,000 as compared
to $287,000 for the same period in 1997. The sales in both periods relate to the
Brazilian timber operations. The $271,000 increase in sales is due to increased
efficiencies.
The gross margin for the year ended May 31, 1998 was approximately 29.0% as
compared to 9.0% same period in 1997. The increase is also due to increased
efficiencies.
The general and administrative expenses for the year ended May 31, 1998 were
approximately $7,540,000 as compared to $4,270,000 for the same period in 1997.
The $3,270,000 is a result of the following: 1) $1,540,000 increase in
consulting fees; 2) $250,000 increase in corporate salaries; 3) $150,000
increase in travel; and 3) the remaining increase is due to the operations of
the Brazilian activities.
Year Ended May 31, 1997 Compared to Year Ended May 31, 1996
- - -----------------------------------------------------------
Revenues for the year ended May 31, 1997 were approximately $287,000 as compared
to no sales for the same period in 1996. The sales in 1997 relate to the
Brazilian timber operations that are new operations for the Company in 1997.
Exploration cost of the year ended May 31, 1997 were approximately $2,120,000 as
compared to approximately $34,000 for the same period in 1996. The $2,086,00
increase in exploration cost is a result of activities at the Company's Nevada
mining property and the Indonesian Concessions.
General and administrative expenses for the year ended May 31, 1997 were
approximately $4,270,000 as compared to approximately $1,430,000 for the same
period in 1996. The $2,840,000 increase in general and administrative expense is
a result of the following: 1) $1,200,000 of expense related to the issuance of
warrants for services; 2)$827,000 related to financing expenses; 3) and increase
for the Brazilian general and administrative expenses of approximately operating
expense of approximately $150,000; and 4) general increase of $663,000 for other
expenses (legal, consulting, travel and salaries) attributable to the Company's
increased activities from the 1996.
As of July 1, 1997, Brazil is no longer considered a highly inflationary
economy under SFAS 52. Therefore, translation adjustments will begin to be
accumulated in a separate component of equity. Translation adjustments during
the year ended May 31, 1997 were taken to income and were not material to the
Company's results of operations.
Year Ended May 31, 1996 Compared to Year Ended May 31, 1995
- - -----------------------------------------------------------
During the year ended May 31, 1996, the Company reported an operating loss
of $1,463,258 as compared to an operating loss of $698,103 for the year ended
May 31, 1995. The difference between these two period was principally due to the
issuance of stock to officers for services rendered of $485,000.
<PAGE>
25
Liquidity and Capital Resources
- - -------------------------------
The Company's working capital position as of May 31, 1998 was a deficit of
approximately $3,356,000. Almost since inception, the Company has experienced
pressure on its working capital position due to operating losses and the need to
continually invest in exploration activities on the Nevada Property and, more
recently, the Brazilian Properties, the Silobat Property and the remainder of
the Indonesian Concessions.
To raise funds in the past, the Company has relied upon private placements
of its equity securities. Over the past two years, the Company has raised
approximately $5,538,000 pursuant to such private placements and notes payable
to stockholders. In addition, the Company in 1997 concluded privately-negotiated
placements of approximately Three Million Five Hundred Thousand Dollars
($3,500,000) of 8% Senior Convertible Debentures with certain investors. The
Company has initiated litigation relating to its Convertible Debenture holders
(see "LEGAL PROCEEDINGS").
On March 27, 1998, the Company executed an agreement securing $14 million in
equity financing, primarily to fund its timber operations in South America. The
financing, through Bristol Asset Management Company II LLC, requires an
effective registration statement and enables the Company to draw up to $14
million over a three-year period. As of the filing date of this Annual Report,
the Company has not effected a registration statement covering the common stock
to be issued pursuant to the $14 million equity financing agreement.
On September 2, 1998, TiNV1, Inc., ("TiNV1"), entered into a Subscription
Agreement and a letter agreement with the Company pursuant to which TiNV1
purchased 5,500,000 shares of the Company's common stock for $500,000. This
transaction, which provided a significant capital infusion into the Company, is
described in more detail in Note 12 to the Financial Statements - "Subsequent
Events."
The Brazilian operations represent an opportunity for the Company to
generate significant cash flows for the first time. Over the past several
months, Brazil has lost more than $30 billion (US) in foreign-exchange reserves
because of President Fernando Henrique Cardoso's attempts to control inflation
and support its currency, the real. The result has been the
artificially-inflated value of the real and a loss of foreign investor
confidence in Brazil's economy. To address its large budget and foreign-exchange
reserves, Brazil is seeking up to $30 billion (US) in loans from the
International Monetary Fund (the "IMF"). In order to obtain such financing, the
Cardoso government has recently announced a three-year program of fiscal targets
approved by the IMF. These include raising taxes significantly and slashing
government spending. This is likely to lead to increased inflation (currently at
3% per annum) and may lead to a recession.
The Company's subsidiary, Terra Resources Brazil, Ltda., exports the
majority of its timber products to Europe, the Dominican Republic and, to a
lesser extent, the United States. Its policy has been to receive payment in US
dollars as a hedge against inflation. This policy will remain in effect. The
Company has also undertaken to explore the possibility of establishing a trading
company offshore from Brazil to receive payments as an additional protection
from the financial uncertainty currently existing in the country. With the
increase in its production to about 1,000 cubic meters of sawn timber products
per quarter, its reduction in operating expenses, and its planned expansion of
production facilities, the Company believes that adequate measures have been
taken to minimize the effects of the uncertainty in the Brazilian economy.
The Company anticipates that it will require additional capital and intends
to secure it through its agreement with Bristol Assets Management Company II
LLC, by utilizing a publicly registered offering of its securities, the capital
provided by the TiNV1 transaction, "Private Placements" and/or funds generated
from its Brazilian operations.
<PAGE>
26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of May 31, 1997,
regarding the record and beneficial ownership of the Common Stock and Preferred
Stock with respect to: (i) any individual or group of affiliated individuals or
persons owning, of record or beneficially, five percent (5%) or more of the
outstanding shares of the Common Stock or the Preferred Stock; (ii) the amount
of shares of Common Stock or Preferred Stock owned by each executive officer and
director of the Company; and (iii) the number of shares of Common Stock and/or
Preferred Stock owned, of record or beneficially, by the directors of the
Company as a group. Except as otherwise indicated, the Company believes that the
beneficial owners listed below, based upon information provided by such owners,
have sole voting and investment power with respect to such shares.
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
TITLE OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNER PERCENT OF CLASS
- - -------------- ------------------------------- ------------------- ----------------
<S> <C> <C> <C>
Common Christopher D. Michaels 1,294,510(2) 8.66%
876 Ballina Court
Newbury Park, California 91320
Common Jeffrey S. Kramer 1,180,000(3) 7.89%
6053 Paseo Canyon Drive
Malibu, California 90265
Common Joseph C. Rude' III, M.D. 1,284,150(4) 8.59%
3065 River N. Pkwy.
Atlanta, Georgia 30328
Common David Weissberg, M.D. 1,109,900 7.43%
29 Blair Drive
Huntington, New York 11743
Common All Officers and 4,042,160(5) 27.04%
Directors as a Group
6 persons)
</TABLE>
- - ---------------
(1) In addition to the 12,273,565 shares of Common Stock outstanding as of May
31, 1997, the percentages noted in this column assume the conversion of
228,319 shares of Preferred Stock into 2,283,190 shares of Common Stock, and
the issuance of 390,000 shares of Common Stock pursuant to various options
primarily to existing management which may be issued in whole or in part
within 60 days of the date of this Prospectus.
(2) Includes options to purchase up to 110,000 shares of Common Stock which may
be exercised in whole or in part within 60 days of the date of this
Registration Statement.
(3) Includes options to purchase up to 80,000 shares of Common Stock which may
be exercised in whole or in part within 60 days of the date of this
Registration Statement.
(4) Includes shares owned by Carolyn Rude and Cobb Radiology (an affiliate of
Dr. Rude) as well options to purchase up to 20,000 shares of Common Stock
which may be exercised in whole or in part within 60 days of the date of
this Registration Statement.
(5) Includes options to purchase up to 280,000 shares of Common Stock by all
Directors or Officers as a group which may be exercised in whole or in part
within 60 days of the date of this Prospectus.
<PAGE>
27
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's Bylaws authorize the creation of the offices of President,
Treasurer (Chief Financial Officer), one or more Vice Presidents, Secretary, and
one or more Assistant Secretaries and Assistant Treasurers as the Board of
Directors deems proper. The Bylaws also provide for not less than three
directors and not more than seven directors who shall hold office until the
following annual meeting of the shareholders. The Bylaws further provide that
the number of directors may be increased by the affirmative vote of the Board of
Directors or a majority in interest of the shareholders at an annual or special
meeting.
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
- - ------------------------ --- -----------------------------------------------
Christopher D. Michaels 54 President and Chairman of the Board
Jeffrey S. Kramer 43 Senior Vice President, Chief Financial Officer,
Chief Operating Officer, Secretary-Treasurer,
and Director
Stanley J. Mohr 61 Vice President of Shareholder Relations and
Director
Edna Pollock 60 Director
Joseph Rude III, M.D. 52 Director
William Michaels 79 Vice President of Client Relations
Ignatius Z. Theodorou 55 President and Director of Equatorial Resources,
Ltd.
CHRISTOPHER D. MICHAELS cofounded the Company in June 1986. Since then he
has served as President, Chief Executive Officer, and Chairman of the Board and
is entitled to retain his positions with the Company until the next annual
meeting of the Company's shareholders. Mr. Michaels is also a director, vice
president and chairman of the Board of Equatorial Resources, Ltd. and the
chairman and a director of Kalimantan Resources, Ltd., subsidiaries of the
Company. Mr. Michaels received a bachelor of arts degree from Alfred University
located in New York. After graduation, he accepted a post with the United States
government overseas in the Peace Corps. Since 1980, Mr. Michaels has acted in
sales and management positions in corporations whose primary business consists
of mining and minerals. Mr. Michaels has extensive background and experience in
international relations and has spent considerable time at the Company's
Bolivian mine site (closed in 1992) as well as on the Nevada Property. Mr.
Michaels is a party and is subject to the permanent injunction more particularly
described in the Section of the Registration Statement entitled "LEGAL
PROCEEDINGS." Mr. Michaels has also been and is subject to a cease and desist
order issued by the Pennsylvania Securities Commission issued February 27, 1989
prohibiting the Company, Mr. Michaels and other executive officers from
violating Section 201 of the Pennsylvania Securities Act of 1972 relating to the
sale of unregistered "penny stocks."
JEFFREY S. KRAMER, Senior Vice President, Chief Financial Officer, Chief
Operating Officer, Secretary-Treasurer and Director, has held these positions
since 1989 and is entitled to retain these positions with the Company until the
next annual meeting of the Company's shareholders. Mr. Kramer is also a
director, vice president and the secretary-treasurer of Equatorial Resources,
Ltd. and a director and the secretary-treasurer of Kalimantan Resources, Ltd. He
has held management positions with Continental Cafes. As Chief Financial
Officer, Mr. Kramer's responsibilities include business affairs, contract
administration, public relations and broker and shareholder relations. Mr.
Kramer was also responsible for management oversight of the Nevada Property
operations since 1995 and was management's liaison in negotiating the Company's
settlement with the Securities and Exchange Commission more particularly
described in the Section of this Registration Statement entitled "LEGAL
PROCEEDINGS." Mr. Kramer is a party and is subject to the regulatory proceedings
described in the Section of this Registration Statement entitled "LEGAL
PROCEEDINGS" and the action taken by the Pennsylvania Securities Commission
detailed above with respect to Mr. Michaels.
STANLEY J. MOHR, has been Vice President Client Relations with Nevada
Manhattan since 1986. Mr. Mohr became a Director in 1992 and is entitled to
retain his current positions with the Company until the next annual meeting of
the Company's shareholders. He is also a director of Kalimantan Resources, Ltd.
Mr. Mohr has been employed as a marketing executive with several mining and
mineral related companies
<PAGE>
28
and has gained extensive experience in many phases of operations in the mining
industry. Mr. Mohr held a real estate license issued by the state of California
from 1976 to 1984. Mr. Mohr was a party and is subject to the regulatory
proceedings more particularly described in the Section of the Registration
Statement entitled "LEGAL PROCEEDINGS."
EDNA POLLOCK was elected to the Board of Directors on April 3, 1995 and is
entitled to retain her position as director until the next annual meeting of the
Company's shareholders. Ms. Pollock is a court reporter in North Carolina and
has been a shareholder of record since 1989. She has been an active member of
the Shareholders' Advisory Committee for several years representing shareholders
at Director's meetings. Ms. Pollock is a graduate of Columbia University, New
York, New York, having received her bachelor of arts degree in Journalism. She
spent twenty-eight years as a freelance reporter for both the federal and state
courts in North Carolina and acted in her official capacity as a court reporter
at numerous depositions, arbitrations, hearings, and conventions.
DR. JOE RUDE' III was elected to the Board of Directors on April 3, 1995
and is entitled to retain his position as a director until the next annual
meeting of the Company's shareholders. Dr. Rude' is a radiologist and has been
practicing his medical specialty since 1977 in Georgia. Dr. Rude' has been a
shareholder of record since 1989 and has been an active member of the
Shareholders' Advisory Committee for several years representing shareholders at
Director's meetings. Since 1995, Dr. Rude' has been a diagnostic radiologist at
Quantum Radiology, Atlanta, Georgia. From 1977 to 1995, he was associated with
Cobb Radiology Associates, Austell, Georgia, which merged with Quantum Radiology
in 1995. Dr. Rude' is a graduate of the University of Texas, Austin, Texas,
where he received his bachelor of arts degree in 1966. In 1970, he was awarded a
medical degree from the University of Texas Southwestern Medical School, Dallas,
Texas. Dr. Rude' is board certified in radiology and served in the United States
Air Force as a flight medical officer from 1971 to 1973.
WILLIAM MICHAELS, Vice President of Client Relations, has served in such
capacity or in other capacities since the Company's inception. Mr. Michaels is
the father of Christopher D. Michaels, the Company's President and Chairman of
the Board. Mr. Michaels is a party and is subject to the regulatory proceedings
more particularly described in the Section of the Registration Statement
entitled "LEGAL PROCEEDINGS."
IGNATIUS Z. THEODOROU, President and Director of Equatorial Resources, Ltd.
has served in such capacities since the formation of the Company's
Brazilian-based subsidiary. Mr. Theodorou is the remaining shareholder of
Equatorial Resources, owning twenty percent (20%) of such company. Mr. Theodorou
was born in Greece but has spent a substantial portion of the last thirty-seven
(37) years in the United States. Mr. Theodorou holds dual citizenship (Greek and
U.S.) and is currently managing the Company's operations in Brazil. His
employment experience has included consulting arrangements with Dames & Moore
Consulting Company, employment as Managing Director of the Liberian-owned
shipping company Crest Lines Inc., and founder and chief executive officers of
the timber companies known as Madira Intex, S.A. International Imports and
United Amazonian Resources, Limited.
SIGNIFICANT EMPLOYEES AND CONSULTANTS
The Company has entered into employment agreements dated January 1, 1995,
with Christopher D. Michaels and Jeffery S. Kramer relating to their respective
positions as executive officers and directors of the Company. Under the terms
and conditions of these employment agreements, both Mr. Michaels and Mr. Kramer
are required to devote substantially all of their business time and effort
during normal business hours to the Company through December 31, 1997. As
compensation for the services rendered and to be rendered to the Company, Mr.
Michaels is entitled to receive annual salaries equal to One Hundred Forty-Eight
Thousand Seven Hundred Twenty-Seven Dollars ($148,727) per annum which Mr.
Kramer is entitled to a salary of One Hundred Thirty-Seven Thousand Two Hundred
Twelve Dollars ($137,212) per annum. Both the salaries of Mr. Michaels and Mr.
Kramer are to be reviewed on each anniversary date of the Agreement by the board
of directors for the purposes of either increasing or decreasing such base
salary. The Board, however, may not reduce the base salary of either Mr.
Michaels or Mr. Kramer by more than twenty percent (20%) of the base salary for
the immediately preceding year. In addition, both Mr. Michaels and
<PAGE>
29
Mr. Kramer have each received 900,000 shares of the Company's Common Stock as
part of their compensation under the terms of their employment agreements.
In addition to the base salaries and stock options, both Mr. Michaels and
Mr. Kramer are entitled to receive reimbursement on a monthly basis for all
reasonable expenses incurred in connection with the performance of their duties
under the employment agreement. Mr. Michaels and Mr. Kramer are also entitled to
certain fringe benefits (including but not limited to paid vacation and
participation in medical insurance plans and employee benefit plans) which now
are or may thereafter become available to all executive officers of the Company
and such other benefits (if any) as may be authorized from time to time by the
board of directors of the Company. The amount of such yearly fringe benefits is
approximately $6,500 and $7,700 for Mr. Michaels and Mr. Kramer respectively.
The employment agreements also authorize these officers to receive a "merit
bonus" ranging between twenty-five percent (25%) and seventy-five percent (75%)
of such officer's base salary in the event the Company experiences operating
cash flow for a fiscal year equal to not less than One Million Dollars
($1,000,000). Specifically, if the Company's operating cash flow for any fiscal
year ranges between One Million Dollars ($1,000,000) and Two Million Dollars
($2,000,000), both Mr. Michaels and Mr. Kramer will be entitled to a "merit
bonus" equal to twenty-five percent (25%) of his base salary; if the operating
cash flow is between Two Million Dollars ($2,000,000) and Three Million Dollars
($3,000,000) for any fiscal year, the "merit bonus" will be equal to fifty
percent (50%) of such officer's base pay; and if the Company's operating cash
flow is over Three Million Dollars ($3,000,000) or more during any fiscal year,
during the term of the Agreement, such officer's "merit bonus" will be equal to
seventy-five percent (75%) of such officer's base salary. In the event of
termination of the employment agreement by the Company for cause or by such
officer without cause, the "merit bonus" is not required to be paid. In the
event of termination for any other reason, the "merit bonus" will be prorated
for the fiscal year in which termination occurs.
The employment agreements with Messrs. Michaels and Kramer contain a
covenant prohibiting such officer from engaging directly or indirectly as a
principal partner or director or officer of any business competitive with the
Company. However, such officer may hold up to a five percent (5%) equity
interest in any entity engaged in a business competitive with the Company
without violating such covenant.
The agreements contain provisions for termination in the event of such
officer's permanent disability, death, or for cause. In addition, the agreements
provide for severance compensation equal to such officer's highest monthly base
salary times thirty-six. Both Mr. Michaels and Mr. Kramer also possess an option
to acquire up to twenty-five percent (25%) of the number of then outstanding
shares of the Company's capital stock at a price of five cents per share in the
event of an occurrence of a "Change in Control." For the purposes of such
employment agreements, the term "Change in Control" shall be deemed to have
occurred if the Company sells substantially all of its assets to a single
purchaser or to a group of associated purchasers in a single transaction or
series of related transactions; shares of the Company's outstanding capital
stock constituting more than twenty percent (20%) of the voting power of the
Company's outstanding capital stock are sold, exchanged, or otherwise disposed
of in one transaction or in a series of related transactions; or the Company is
a party to a merger or consolidation in which the Company is not the surviving
entity or the Company's shareholders receive shares of capital stock of the new
or continuing corporation constituting less than eighty percent (80%) of the
voting power of the new or continuing corporation.
The Company has engaged the services of Arthur J. Mendenhall to act as
project geologist for the Nevada Property. His duties include acting as the
on-site representative of the Company and to provide geological exploration and
mining grade control of the Nevada Property on a daily basis.
Mr. Mendenhall is an experienced mining geologist. He received his bachelor
of science degree in 1971 and his master of science degree in geology from Utah
State University, Logan, Utah. Mr. Mendenhall's work experience includes roles
supervising and monitoring the work of senior geologists in the coring and
sampling of ore; working as senior geologist in the sampling and mapping of
tertiary volcanic rock formations in gold exploration projects; collecting
cuttings and core samples for geochemical analyses; drafting drill hole cross
sections; and supervised drilling operations for bentonite and iron ore. Mr.
Mendenhall has completed the Occupational & Safety Hazard Agency ("OSHA")
forty-hour hazardous waste site training course and OSHA'S refresher course, and
has attended other geological seminars and courses relevant to mining. Mr.
Mendenhall is a registered geologist in the Commonwealth of Pennsylvania and a
member of the Geological Society of America.
<PAGE>
30
AGREEMENT WITH GOLD KING MINES CORPORATION
On April 1, 1995, the Company entered into an Agreement with Gold King
Mines Corporation ("Gold King"), Denver, Colorado. Under the terms of this
Agreement, Gold King has agreed to provide the services of William R. Wilson on
a consulting basis at the rate of $400 per day. The initial term of the
consulting agreement was through December 31, 1995, and extended for one-year
periods upon mutual agreement between Gold King and the Company. Gold King and
the Company have extended this consulting agreement for two years.
Mr. Wilson has provided various services to the Company including the
preparation of the Business Plan. Mr. Wilson possesses a professional degree in
metallurgical engineering from the Colorado School of Mines, Golden, Colorado,
and has been awarded a Master's in Business Administration from the University
of Southern California, Los Angeles, California. In his more than thirty years
of experience, Mr. Wilson has, for the past fifteen years served in various
seniority executive capacities with engineering, construction, and consulting
firms, many of such capacities as president or the chief executive officer of
mining companies operating in the United States and internationally. Mr. Wilson
is the past chairman of the Colorado Mining Association. Gold King is a
subsidiary of Sheridan Reserve Corporation, a publicly-traded resource company
based in Toronto, Canada.
Mr. Wilson's primary responsibility to the Company has been and will be to
act as project manager for the Nevada Property and to act as the Company's
representative to Harrison Western Mining & Construction Company, the mining
contractor for the Nevada Property. Mr. Wilson will also provide technical and
managerial consulting to the Company on the Indonesian Property.
AGREEMENT WITH BEHRE DOLBEAR & COMPANY, INC.
The Company entered into a Consulting Services Agreement (the "Consulting
Agreement") with Behre Dolbear & Company, Inc. ("Behre Dolbear"), an
internationally recognized mining consulting firm. Under the terms of the
Consulting Agreement, Behre Dolbear will be responsible for providing
independent technical advisory services relating to the Indonesian Property.
Such services initially require Behre Dolbear to advise and validate the
exploration program contemplated by the Company, and would include related
technical input for other aspects of project development. The term of the
Consulting Agreement is for six months or upon satisfactory completion of the
consulting services contemplated prior to such expiration date. The Company has
agreed to pay Behre Dolbear the hourly rate of $137.50 up to a maximum of $1,100
per diem for the services contemplated under the Consulting Agreement and has
committed to utilize Behre Dolbear a minimum of two days per month. Unused days
will accrue under the Consulting Agreement but will be forfeited if not utilized
prior to the expiration of the term of the agreement. The Company must also
reimburse Behre Dolbear for any travel, reasonable and necessary lodging
expenses (including meals), telegram, cable, telex charges; a 2.5% "flat" labor
charge in lieu of actual telephone charges; printing, copies, reproduction, and
fax charges; postage, courier, express, and freight charges; use of personal
automobiles; royalties on computer software; professional liability insurance
(assessed on a 1.5% flat fee basis); clerical fees at the rate of $35 per hour
and other costs and expenses incurred by Behre Dolbear and/or its personnel in
performing the services contemplated by the Consulting Agreement.
AGREEMENT WITH BRITISH FAR EAST HOLDINGS LTD.
On April 30, 1997, the Company entered into a financial and management
services agreement with British Far East Holdings Ltd. ("BFE"). Under this
agreement, BFE has agreed to provide the personal services of Arthur Lipper III
to the Company for a period of thirty-six months to assist the Company with
respect to financial and business matters. The Company has agreed to pay BFE
$5,000 per month for the first three days of service and $1,000 per diem for
each additional day of service rendered by Mr. Lipper under the contract. The
agreement also grants to BFE warrants to purchase up to 100,000 shares of the
Company's Common Stock at one hundred twenty percent (120%) of the April 30,
1997 market price of $5.75 per share (subject to adjustment for certain events)
vesting at the rate of thirty-three and one-third percent (33 1/3%) per year
after the first twelve months of service. In addition to the services provided
under the contract, Mr. Lipper has also tentatively agreed to join the Company's
Board of Directors subject to his completion of due dilegence of the Company's
operations.
<PAGE>
31
AGREEMENT WITH ECO-RATING INTERNATIONAL
In order to better assure compliance with applicable Brazilian
environmental laws and regulations, the Company has entered into an agreement
with Eco-Rating International, Zurich, Switzerland ("Eco-Rating"). Under the
terms of the agreement, Eco-Rating has agreed to develop an "eco-efficiency
model" designed to establish environmental management guidelines for the
Company's operations in Brazil. It is the objective of the Company to establish
a reputation as a leader in the timber industry in environmentally-related
issues and to develop its properties in a manner best designed to properly
reclaim any areas harvested pursuant to its concessions.
SHAREHOLDERS' ADVISORY COMMITTEE
In 1989, the Company formed a Shareholder Advisory Committee (the "Advisory
Committee") comprised of up to 12 outside shareholders. The purpose of the
Advisory Committee is to participate in directors' meetings and compensation
meetings, as well as planning meetings related to all aspects of corporate
development. Members are selected annually from a group of shareholders who
respond to Company inquiries regarding interest in participating on the Advisory
Committee. Membership is rotated annually. One of the primary purposes of this
Committee is to provide independent, shareholder participation in critical
decisions relating to overall corporate strategy.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The table set forth below identifies the compensation paid to the Company's
executive officers for the last three completed fiscal years (i.e. fiscal years
ending May 31, 1995; May 31, 1996; and May 31, 1997):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ------------------------- -----------------------
------------------------------------------------ RESTRICTED SECURITIES ALL
NAME AND OTHER STOCK UNDERLYING LTIP OTHER
PRINCIPAL ANNUAL AWARD(S) OPTIONAL/ PAYOUTS COMPENSATION
POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) ($) SARS(#) ($) ($)
- - ----------------------- ---- --------- -------- ------------------ ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Christopher Michaels,
President.............. 1997 $251,299 -- $6,264 -- 10,000(2) -- --
and Chairman of the
Board 1996 $100,449 -- $6,316 $225,000(3) 10,000 -- --
1995 $148,727 -- $5,712 -- 10,000 -- --
-- -- 10,000 -- --
Jeffrey Kramer, Senior
Vice................. 1997 $224,397 -- $8,080 -- 10,000(2) -- --
President and Director 1996 $117,791 -- $7,658 $225,000(3) 10,000 -- --
1995 $137,212 -- $6,564 -- 10,000 -- --
-- -- 10,000 -- --
</TABLE>
- - ---------------
(1) The Company incurs the annual cost of health insurance for Messrs. Michaels
and Kramer and their respective dependents.
(2) The Company has granted stock options to all members of its board of
directors in the amount of 10,000 shares per full year of service as an
active member of the board. These options may be exercised at $1.00 per
share of Common Stock. Options may not be exercised after the expiration of
10 years from the date of the grant and are nontransferable other than by
inheritance. As of the date of this Registration Statement, the Company has
granted options aggregating 110,000 shares to Mr. Michaels and 80,000 shares
to Mr. Kramer.
(3) The Company granted Messrs. Michaels and Kramer the option to purchase
900,000 shares of Common Stock each at an average price of $1.50 per share.
These options were exercised during the year ended May 31, 1996, at which
time the Company's board of directors agreed to issue these shares for
services rendered. The Company has valued these restricted securities to be
worth twenty-five cents ($.25) per share.
<PAGE>
32
OPTIONS AND STOCK APPRECIATION RIGHTS
The table set forth below provides certain information concerning
individual grants of stock options and stock appreciation rights (whether
granted in connection with stock options or as "freestanding" rights made during
the last fiscal year of the Company ending May 31, 1997) to each of the named
executive officers, directors, and/or others noted below:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
NUMBER OF SECURITIES % OF TOTAL OPTIONS/SARS
UNDERLYING OPTIONS/ GRANTED TO EXERCISE
SARS EMPLOYEES OR BASE EXPIRATION
NAME GRANTED(4) IN FISCAL YEAR PRICE($/SH) DATE
- - --------------------------------- -------------------- ----------------------- ------------ -----------
<S> <C> <C> <C> <C>
Christopher D. Michaels(1)....... 110,000 10% $ 1.00 May 31, '06
Jeffrey S. Kramer(1)............. 80,000 14% $ 1.00 May 31, '06
Stanley Mohr(1).................. 50,000 25% $ 1.00 May 31, '06
Edna Pollock(1).................. 20,000 100% $ 1.00 May 31, '06
Joe Rude' III(1)................. 20,000 100% $ 1.00 May 31, '06
Lloyd S. Pantell, Esq.(4)........ 100,000 100% $ 4.00 May 31, '06
</TABLE>
- - ---------------
(1) The Company has granted stock options to all members of its board of
directors pursuant to Stock Option Agreements executed at various times.
Under the terms of these agreements, each director has been granted options
to purchase 10,000 shares of Common Stock per full year of service. The
exercise price for such options is $1.00 per share. The years in which stock
options were initially granted to each respective board member are as
follows: Christopher Michaels, 1986; Jeffrey Kramer, 1989; Stanley Mohr,
1993; Edna Pollock, 1996; and Joe Rude' III, 1996. In 1996, the Stock Option
Agreements relating to Messrs. Michaels, Kramer and Mohr were extended so
that they may be exercised through May 31, 2006. The remaining may not be
exercised after the expiration of ten (10) years from the date of grant and
are nontransferable other than by inheritance.
(2) Mr. Pantell is an attorney who is a principal in Lloyd S. Pantell, APLC who
has provided substantial legal services to the Company. Under the terms of
the option agreement, Mr. Pantell has been granted options to purchase
100,000 shares of Common Stock. The exercise price of such options is $4.00
per share. The options may be exercised at any time through May 31, 2006 and
are non-transferable other than through inheritance.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY
SHARES ACQUIRED AT MAY 31, 1997 OPTION/SARS
ON EXERCISE VALUE EXERCISABLE/ AT MAY 31, 1997
NAME (#) REALIZED UNEXERCISABLE EXERCISABLE/
(A) (B) (C) (D) UNEXERCISABLE(E)
- - ----------------------- --------------- -------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Christopher D.
Michaels............. 0 0 110,000 $550,000
Jeffrey S. Kramer...... 0 0 80,000 $400,000
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the last fiscal year the company entered into certain transaction
with Jeffrey S. Kramer, an officer and Director of the Company who is more
particularly described in the Section of this Registration Statement entitled
"MANAGEMENT." Specifically, as of August 2, 1997, Mr. Kramer has lent the
Company an aggregate of $258,000 which is evidenced by promissory notes payable
in his name (the "Notes"). The Note are: unsecured, payable on demand and bare
interest at the rate of 6.6%. As of this time, no payment demand has been made
on the Notes.
<PAGE>
33
LEGAL PROCEEDINGS
In May 1989, the Company received notice that the Securities and Exchange
Commission (the "Commission") had commenced an informal investigation into the
Company's compliance with the registration and disclosure requirements of the
Securities Act of 1933 (the " '33 Act") and the Securities Exchange Act of 1934
(the " '34 Act"). Thereafter the Commission commenced an extensive review of the
Company's books and records relating to the Company's business and mining
operations, its capital raising activities, and its financial condition and
history. Through all stages of the investigation, the Company voluntarily
cooperated with the Commission.
On August 3, 1993, the Commission and the Company agreed to terminate the
Commission's investigation by the entry of a consent judgment against the
Company and certain of the Company's past and present key employees. These key
employees include Christopher D. Michaels, Jeffrey Kramer and Stanley Mohr. The
terms and conditions of the consent judgment can be summarized as follows:
1. The Company neither admitted nor denied any of the allegations
alleged by the Commission;
2. The Company and its officers, agents, servants, employees, and
others receiving actual notice of the consent judgment are permanently
restrained and enjoined from violating section 5 of the '33 Act or from
selling securities in interstate commerce unless and until a registration
statement is in effect or the security or transaction is exempt from the
registration provisions of the '33 Act and/or the '34 Act;
3. The Company and its officers, agents, servants, employees, and
others receiving actual notice of the consent judgment are permanently
restrained from engaging in any transaction, practice, or course of
conduct, employing any course of conduct, or obtaining any money or
property by means of an untrue statement of a material fact, or any
omission to state a material fact, necessary to make the statements made in
light of the circumstances under which they were made not misleading in
violation of the antifraud provisions of the '33 Act and the '34 Act.
As part of the consent judgment, the Company was required to engage an
independent certified public accountant to conduct a full and complete analysis
of the disposition of all funds received by the Company from investors and, to
the extent so discovered, to disgorge all ill-gotten gains.
On April 7, 1994, in response to the audits completed by the certified
public accountant, the Company and the Commission entered into a stipulation
regarding the resolution of all outstanding issues which then existed, which
stipulation was entered as an order by the United States District Court for the
Central District of California. Such stipulation contained an acknowledgement
that the Company and its executive officers had received no ill-gotten gains as
a result of prior activities by the Company in offering and selling its
securities, and that the consent judgment resolved once and for all, all issues
raised by the Commission as a result of the Company's prior activities. The
Company and the persons named in the formal order of investigation were not
required to pay any fines or required to disgorge any monies previously received
by it in connection with its securities.
On February 27, 1989, the Pennsylvania Securities Commission issued a cease
and desist order against the Company and Christopher D. Michaels, Jeffrey S.
Kramer, Stanley J. Mohr, and William Michaels prohibiting them from violating
Section 201 of the Pennsylvania Securities Act of 1972 relating to the sale of
unregistered "penny stocks."
As a result of the foregoing regulatory and judicial actions, the Company
may not be able to utilize the exemptions from registration available under
Regulation A and Rule 701 promulgated under the '33 Act and may not be able to
rely upon certain private placement exemptions afforded by applicable state blue
sky laws in connection with the offer and sale of securities in a transaction
which qualifies as exempt from qualification under the '33 Act. In such cases,
the Company would be required to register/qualify the transaction under said
blue sky laws, which would likely increase the cost of, and extend the time for
completing, any private placement of securities.
On November 4, 1996, the Company filed a complaint (the "Action") in Nye
County, Nevada against Marlowe Harvey, Maran Holdings Inc., Calais Resources
Inc., and Argus Resources, Inc. (the "Harvey Entities"). The complaint in the
Action alleges, amongst other things, that the Harvey Entities breached their
obligations under various agreements (including the October 20, 1995 amendment
to the Joint Venture Agreement discussed in further detail in the Section of
this Registration Statement entitled "Properties" -- The Nevada Property"). The
Action, as amended, is seeking a judicial declaration that the Harvey Entities
<PAGE>
34
do not have any joint venture or real property interest in the mining claims
included within the Nevada Property. The Action also seeks compensatory damages
and other financial relief based on the Harvey Entities' breach of contract and
other causes of action.
During April 1997 the Company through its counsel filed a first amendment
to its complaint in the action. Counsel for the Harvey Entities filed answers
and a counterclaim in the Action during July 1997. In their answer, the Harvey
Entities have generally denied the allegations of the first amended complaint
and have raised various affirmative defenses. In their counterclaims, the Harvey
entities are seeking an injunction preventing the Company from conducting
activities related to the Nevada Property pending resolution of the issues in
the Action and compensation and punitive damages and other financial relief
based on breach of contract and other causes of action.
In July 1997, the Harvey Entities moved for a Preliminary Injunction
against the Company preventing it from conducting further activities at the
Manhattan Project without their consent, from issuing press releases describing
certain real property as being wholly owned by the Company, and from using the
same as security for loans. After a two-hour hearing on September 4, 1997, the
court refused to issue an injunction against the Company. Pursuant to
stipulation, the parties have agreed not to interfere with one another's
operations on the Nevada Property. Additionally, the Company has agreed not to
further encumber the Nevada Property pending trial. A trial date has been set
for April 30, 1998.
If the Company is successful in obtaining specific performance of the
agreement alleged in the Action, it will effectively continue to own or control
an undivided 100% interest in the Nevada property. Regardless of whether the
Company is successful in the Action, it will continue to own at lease a fifty
percent (50%) undivided interest in the Nevada Property by virtue of its
contractual rights.
If the Company is successful in obtaining specific performance of the
agreements alleged in the Action, it will effectively continue to own or control
an undivided 100% interest in the Nevada Property.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The authorized capital stock of the Company consists of 50,000,000 shares
of which 49,750,000 shares are Common Stock with a par value of one cent ($.01)
per share and 250,000 shares of Series A Preferred Stock with a par value of
$1.00 per share and convertible into Common Stock on the terms and conditions
hereinbelow described. As of February 28, 1997, there were 12,208,412 shares of
the Company's Common Stock issued and outstanding and 228,919 shares of the
Preferred Stock issued and outstanding. The average price paid per share for the
Common Stock to date has been approximately $2.00 per share while the price per
share paid for the Preferred Stock has been $10.00 per share, with an effective
conversion price (determined on the basis of one-for-ten conversion rights
accorded the Preferred Stock shareholders) to be $1.00 per share.
The following description of the capital stock of the Company and certain
provisions of the Company's Amended Articles of Incorporation and Certificate of
Determination of Preferences of Series A Preferred Stock is a summary and is
qualified in its entirety by the provisions of those documents which have been
filed as exhibits to the Company's Registration Statement of which this
Registration Statement is a part.
PUBLIC MARKET
The Company received approval for trading of its Common Stock on the
Electronic Bulletin Board (NASDAQ) in March 1996. From the period from December
1995 until March 1996, the Company published "bid" and "ask" prices on the "pink
sheets". The low and high prices for the Common Stock since commencement of
quotations are as follows:
HIGH DATE LOW DATE
- - ------ ---------------------------- ------ ----------------------------
$14.50 March 3, 1997 $1.25 December 1995
<PAGE>
35
Over the past six months the average monthly volume of trading of the
Company's Common Stock has been approximately 800,000 shares. Prospective
Investors should be aware that the volume of trading on the Electronic Bulletin
Board traditionally has been limited and there can be no assurance that the
Electronic Bulletin Board will provide an effective market for a shareholder to
sell his or her Common Stock of the Company.
For the periods ended May 31, 1996 and May 31, 1997, there were 834 and
1,140 shareholders respectively. As of August 31, 1997, there were 808
shareholders of record.
The Company has applied for listing with the American Stock Exchange
("AMEX") by requesting a preliminary listing eligibility opinion. The Company
has also applied for listing with the Philadelphia Stock Exchange.
The high and low interdealer prices for the calendar quarters since trading
began on the Electronic Bulletin Board (without retail markup, markdown or
commission) are as follows:
QUARTER ENDED HIGH LOW
----------------------------------------- ------- -------
December 31, 1995........................ $ 1.25 $ 1.25
March 31, 1996........................... $ 2.44 $ 1.35
June 30, 1996............................ $ 3.75 $ 1.812
September 30, 1996....................... $ 4.25 $ 2.125
December 31, 1996........................ $10.375 $ 2.875
March 31, 1997........................... $ 14.50 $ 6.00
June 30, 1997............................ $ 9.75 $3.0625
OPTIONS AND STOCK APPRECIATION RIGHTS
The table set forth below provides certain information concerning
individual grants of stock options and stock appreciation rights (whether
granted in connection with stock options or as "freestanding" rights made during
the last fiscal year of the Company ending May 31, 1997) to each of the named
executive officers noted below:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS
OPTIONS/ GRANTED TO EXERCISE
SARS EMPLOYEES OR BASE EXPIRATION
NAME GRANTED(4) IN FISCAL YEAR PRICE($/SH) DATE
- - ---------------------------------------------- ----------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Christopher D. Michaels....................... 110,000 10% $ 1.00 May 31, '06
Jeffrey S. Kramer(1).......................... 80,000 14% $ 1.00 May 31, '06
Stanley Mohr(1)............................... 50,000 25% $ 1.00 May 31, '06
Edna Pollock(1)............................... 20,000 100% $ 1.00 May 31, '06
Joe Rude' III(1).............................. 20,000 100% $ 1.00 May 31, '06
Lloyd S. Pantell, Esq.(2)..................... 100,000 100% $ 4.00 May 31, '06
</TABLE>
- - ---------------
(1) The Company has granted stock options to all members of its board of
directors pursuant to Stock Option Agreements executed at various times.
Under the terms of these agreements, each director has been granted options
to purchase 10,000 shares of Common Stock per full year of service. The
exercise price for such options is $1.00 per share. The years in which
stock options were initially granted to each respective board member are as
follows: Christopher Michaels, 1986; Jeffrey Kramer, 1989; Stanley Mohr,
1993; Edna Pollock, 1996; and Joe Rude' III, 1996. In 1996, the Stock
Option Agreements relating to Messrs. Michaels, Kramer and Mohr were
extended so that they may be exercised through May 31, 2006. The remaining
may not be exercised after the expiration of ten (10) years from the date
of grant and are nontransferable other than by inheritance.
<PAGE>
36
(2) Mr. Pantell is an attorney who is a principal in Lloyd S. Pantell, APLC who
has provided substantial legal services to the Company. Under the terms of
the option agreement. Mr. Pantell has been granted options to purchase
100,000 shares of Common Stock. The exercise price of such options is $4.00
per share. The options may be exercised at any time through May 31, 2006 and
are non-transferable other than through inheritance.
OUTSTANDING WARRANTS
The Company has issued warrants to purchase Common Stock to a number of
persons and entities. The following chart summarizes such issuances and details
the terms of each parties warrants:
OUTSTANDING WARRANTS
<TABLE>
<CAPTION>
EXERCISE ISSUANCE EXPIRATION
NAME AMOUNT PRICE DATE DATE
- - ---------------------------------- ------- -------- -------------- --------------
<S> <C> <C> <C> <C>
Holston, John 100,000 $ 1.50 Oct. 8, 1996 Apr. 7, 1998
Weissberg, David 125,000 $ 2.50 Nov. 26, 1996 Nov. 25, 1998
Renneisen, Irv 125,000 $ 2.50 Nov. 26, 1996 Nov. 25, 1998
Silenus Limited 62,500 $ 8.00 April 17, 1997 April 16, 2002
British Far East Holdings, Ltd. 100,000 $ 6.90 April 30, 1999 N/A
Magerman, Alan 350,000 $ 4.06 June 2, 1997 June 1, 2002
Austat Anstalt Schaan 25,000 $ 6.75 July 15, 1997 July 16, 2002
Mary Park Properties 20,000 $ 6.75 July 15, 1997 July 16, 2002
UFH Endowment, Ltd. 25,000 $ 6.75 July 15, 1997 July 16, 2002
Mendel Group, Inc. 5,250 $ 6.75 July 15, 1997 July 16, 2002
</TABLE>
Several of the warrant holders listed above were granted registration
rights on the underlying Common Stock. As a result the Company is registering
such shares pursuant to this Offering. Specifically, Silenus Limited, Austat
Anstalt Schaan, Mary Park Properties, UFH Endowment, Ltd. and the Mendel Group,
Inc. were granted such rights. See "REGISTRATION RIGHTS."
RECENT SALE OF UNREGISTERED SECURITIES
From the period March 1, 1994, through February 28, 1997, the Company
offered and sold 8,342,619 shares of its Common Stock and 228,319 shares of
Preferred Stock. In addition, the Company concluded the private placement of its
Debentures in a negotiated transaction with certain investors more particularly
described in the Section of the Registration Statement entitled "Description of
Securities Being Registered." With the exception of the placement of the
Debentures, these sales were made primarily to its existing shareholders. The
Company has relied upon applicable exemptions from the registration requirements
of the Federal Securities Laws and upon compatible exemptions from securities
registration under applicable state ("blue sky") laws. In the event that it is
determined that the Company sold and issued these securities without complying
with either the Federal Securities Laws or blue sky laws, the purchasers of
these securities may have the right to rescind the sale of these securities and
to recover the purchase price paid to the Company plus interest accrued on such
purchase price. The Company does not currently have funds with which it could
repay the purchase price and accrued interest from any prior sale of securities.
Moreover, it is doubtful that the Company could continue operations if a
significant number of existing shareholders were to seek to rescind their
purchases of securities. The financial statements of the Company do not reflect
a contingent liability for any such rescission rights.
<PAGE>
37
DESCRIPTION OF SECURITIES BEING REGISTERED
The following description of the capital stock of the Company and certain
provisions of the Company's Amended Articles of Incorporation and Certificate of
Determination of Preferences of Series A Preferred Stock is a summary and is
qualified in its entirety by the provisions of those documents which have been
filed as exhibits to the Company's Registration Statement of which this
Prospectus is a part.
COMMON STOCK
The issued and outstanding shares of Common Stock, including the shares
being offered hereby, are validly issued, fully paid and nonassessable. Subject
to the rights of holders of Preferred Stock, the holders of outstanding shares
of the Common Stock are entitled to receive dividends out of assets legally
available therefor at such time and at such amounts as the board of directors
may, from time to time, determine. See "Dividend Policy." The shares of Common
Stock are neither redeemable nor convertible and the holders thereof have no
preemptive or subscription rights to purchase any securities of the Company.
Upon liquidation, dissolution, or winding up of the Company, the holders of the
Common Stock are entitled to receive, pro rata, the assets of the Company which
are legally available for distribution after payment of all debts and other
liabilities and subject to the rights of any holders of the Preferred Stock then
outstanding. Before declaring any dividends, the board of directors may set
apart out of any funds of the Company available for dividends such sum or sums
as they may, from time to time, deem in their discretion to be proper working
capital or as a reserve fund to meet contingencies or for equalizing dividends
or for such other purposes as the directors shall deem conducive to the
interests of the Company. Each outstanding share of the Common Stock is entitled
to one vote on all matters submitted to a vote of stockholders if there is no
cumulative voting in the election of directors.
PREFERRED STOCK
The Company's Amended Articles of Incorporation and its Certificate of
Determination of Preferences of Series A Preferred Stock authorized the Company
to issue up to 250,000 shares of the Preferred Stock. The holders of the
Preferred Stock are entitled to receive dividends at the rate of eight percent
per annum of the original issue price per share out of any funds legally viable
therefor payable on each January 1, April 1, July 1, and October 1 after the
issuance of the Preferred Stock. Dividends on the Preferred Stock are cumulative
so that if the full dividends in respect of any preference dividend is not paid,
the deficiency will be fully paid or declared and set apart for such shares
(without interest) before any dividend or other distribution is paid on or
declared or set apart for any other class or series of the Common Stock or
preferred shares of the Company. The Company enjoys the right to pay any
dividend on the Preferred Stock in cash or through the issuance of additional
shares of Preferred Stock or Common Stock having an issue price equal to the
amount of the dividend or through a combination of cash and stock. In the event
of any liquidation, dissolution, or winding up of the Company, either
voluntarily or involuntarily, the holders of the Preferred Stock will be
entitled to receive prior and in preference to any distribution of any of the
assets or surplus funds of the Company to the holders of the Common Stock or any
other class of preferred shares of the Company an amount equal to $10 per share
plus a further amount equal to any dividends declared but unpaid on such shares.
In the event of any consolidation or merger of the Company, or a sale of all or
substantially all of the assets of the Company, or a series of related
instructions in which more than fifty percent of the voting power of the Company
is disposed of, holders of the Preferred Stock will not be entitled to treat
such event as a liquidation, dissolution, or winding up of the Company The
Company has and intends to implement the right granted to each holder of the
Preferred Stock to convert each such share into 10 shares of fully priced and
nonaccessible shares of the Common Stock as of the date of this Registration
Statement.
CONVERTIBLE DEBENTURES
The Company recently completed two private placements of Convertible
Debentures in the aggregate amount of $3,505,000. The private offerings were
made in reliance upon the exemption from registration afforded by Section 4(2)
of the Securities Act of 1933. The terms of the offerings were as follows:
<PAGE>
38
On April 14, 1997, the Company entered into a Subscription Agreement with
Silenus Limited ("Silenus") in a negotiated private placement. This transaction
was made in reliance upon the exemption from registration afforded by Section
4(2) of the Securities Act of 1933. As a result, the Company issued $2,000,000
of 8% Senior Secured Convertible Debentures due March 31, 2000 (the
"Debentures") and granted to Silenus a warrant to purchase 62,500 shares of the
Company's Common Stock (the "Warrant").
The Debentures may be converted into shares of Common Stock at any time
commencing June 2, 1997 through August 16, 1997 at a price equal to the lesser
of: seventy-five percent (75%) of the closing bid price of the Common Stock on
April 16, 1997 (i.e. 75% X $8.00, or $6.00 per share); seventy-five percent
(75%) of the closing bid price of the Common Stock on the day prior to the
funding of any subsequent funding ("tranche"); or seventy-five percent (75%) of
the average closing bid price for the five trading days immediately preceding
the actual date of conversion of the Debentures. If conversion is made after
August 16, 1997, the conversion price will be seventy-two and one-half percent
(72.5%) of the above-referenced valuation standards.
The Company is required to use its "best efforts" to cause the Registration
Statement to become effective prior to August 16, 1997. If the Registration
Statement does not become effective by August 16, 1997, the Company is required
to pay liquidated damages to Silenus equal to two percent (2%) of the Debentures
for the first thirty (30) days and three percent (3%) per month thereafter until
the Registration Statement becomes effective.
Provided Silenus and the Company fund at least two tranches of $2,000,000
each, Silenus will be entitled to a right of first refusal for one year to
participate in all or any part of any equity securities (i.e., stock or
securities convertible into equity) subsequently issued or proposed to be issued
by the Company. In addition, the Company will be prohibited from issuing any of
its securities at a discount (other than in connection with any merger,
acquisition, or certain benefit plans) for a period of ninety days following the
funding of the last tranche. The Company may notify Silenus that a funding is
requested at any time after the effective date of the Registration Statement
until the funding of the last tranche. In such event, should Silenus elect not
to fund the tranche so requested, the Company may issue its securities at a
discount to a third party, provided a public distribution of the securities sold
to such third party is not made until at the earlier of: ninety days following
the effective date of the Company's Registration Statement on Form 10 or the
date on which at least seventy-five percent (75%) of the Debentures are
converted.
Until Silenus has converted at least seventy-five percent (75%) of the
Debentures, a deed of trust on the Nevada Property and the pledge of 1,000,000
shares of Common Stock will secure the Debentures.
On July 17, 1997 the Company entered into Subscription Agreements with,
Mary Park Properties, UFH Endowment Fund, Ltd., Austat Anstalt Schaan, and the
Mendel Group (the "Investor Group") in a negotiated private placement. This
transaction was made in reliance upon the exemption from registration afforded
by Section 4(2) of the Securities Act of 1933. As a result, the Company issued
$1,505,000 of 8% Senior Convertible Debentures due July 1, 2002 (the "July
Debentures") and granted to the Investor Group warrants to purchase an aggregate
of 75,250 shares of the Company's Common Stock (the "July Warrants").
The July Debentures may be converted into shares of Common Stock at any
time commencing July 18, 1997 through July 1, 2000 at a price equal to
Seventy-five percent (75%) of the Market Price (as defined below) of the Common
Stock for all conversions for which notice is received after the date hereof.
For purposes of this Section 4, the "Market Price" shall be the lesser of (a)
the closing bid price of the Common Stock on the day prior to closing; or (b)
the average closing bid price of the Common Stock for the five (5) New York
Stock Exchange Trading days immediately preceding each conversion date, in each
case as reported by the National Association of Securities Dealers Automated
Quoting System, or as reported by the American Stock Exchange of the Common
Stock shall then be listed in trading upon such exchange.
The July Debentures bear interest at a coupon rate of 8% per annum. Such
interest is payable quarterly on the last calendar day of June, September,
December and March of each year. Interest may be paid in either cash or Common
Stock and will continue to accrue until payment in full of the principal amount
of the July Debentures has been made or duly provided for.
<PAGE>
39
The Company is required to use its "best efforts" to cause the Registration
Statement to become effective prior to November 14, 1997. If the Registration
Statement does not become effective by November 14, 1997, the Company is
required to pay liquidated damages to the Investor Group equal to two percent
(2%) of the Debentures for the first thirty days and three percent (3%) per
month thereafter until the Registration Statement becomes effective.
The Company has also issued to the Investor Group warrants to purchase
75,250 shares of Common Stock. The warrant may be exercised at any time up to
and through July 16, 2002 at the price of $6.75 per share. The exercise price is
subject to adjustment to account for payments of dividends, stock splits,
reverse stock splits, and similar events.
In order to provide for the issuance of all shares of Common Stock which
may be issued pursuant to the Subscription Agreement and Warrants, the Company
agreed to register approximately 370,000 shares of Common Stock.
DIVIDENDS
The Company has not paid cash dividends on any of its Common Stock and does
not anticipate paying any cash dividends on any of its Common Stock for the
foreseeable future. Holders of the Preferred Stock are entitled to an annual
cash or stock dividend offered at the rate of eight percent (8%) per year
payable out of any funds legally available therefor and payable on January 1,
April 1, July 1, and October 1 of each year. Such dividends are cumulative so
that if full dividends in respect of any previous dividend period are not paid,
holders of the Preferred Stock are entitled to receive any deficiency before any
dividend or other distribution may be made or declared by the Company with
respect to any other class of stock including other series of preferred shares
should the Company elect to issue such additional series.
As of the date of this Registration Statement, no accrued quarterly
dividends payable to the holders of the Preferred Stock (which were $160,500 as
of May 31, 1997) have been paid. Management of the Company is presently
scheduling payment of accrued dividends in Common Stock as authorized in the
Company's "Certificate of Determination of Preferences of Series A Preferred
Stock" filed with the Nevada Secretary of State on October 25, 1995 at the time
that the Preferred Stock is converted into Common Stock on or before the earlier
of the effective date of this Registration Statement or December 31, 1997.
<PAGE>
40
REGISTRATION RIGHTS
The Company has entered into agreements with various shareholders to
attempt to effect registration of their shares under the '33 Act pursuant to the
filing of Form SB-2. The following table identifies such shareholders and the
amount of Common Shares to be registered:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OF SHARES OWNED AFTER
OFFERING BEING OFFERED OFFERING
---------------------- ---------------- -------------------
NAME NUMBER PERCENT(1) MIN. MAX. NUMBER PERCENT
- - -------------------------------- ------- ---------- ---- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Silenus Limited................. 42,244(2) .28% 0 700,000(3) 700,000 4.69%
c/o Betuvo AG,
Baoerostrase 73
Postfach 6302
Zug, Switzerland
Mary Park Properties............ 98,431(4) .66% 0 98,431 98,431 .66%
3 Tora Mezion Street
Jerusalem, Israel
UFH Endowment, Ltd.............. 123,040(4) .82% 0 123,040 123,040 .82%
c/o CH Financial Services
160 Central Park South
Suite 3212
New York, NY
Austat Anstalt Schaan........... 123,040(4) .82% 0 123,040 123,040 .82%
7440 Fuerstentium
Liechtenstein,
Landstrassa 163
Mendel Group, Inc............... 25,838(4) .17% 0 25,838 25,838 .17%
17 West 17 Street
8th Floor
New York, New York 10011
Irv Reneisson................... 100,000 .67% 0 100,000 100,000 .67%
660 Newtown/Yardley Road
Newtown, Pennsylvania 18940
Harrison Western................ 100,000 .67% 0 100,000 100,000 .67%
Construction Company
1208 Quail Street
Lakewood, Colorado 82015
</TABLE>
- - ---------------
(1) Except where otherwise described in these footnotes, the percentages noted
in this column represent the ratio that a shareholder's beneficial ownership
bears to the total number of shares outstanding and issued as of May 31,
1997 12,273,565, the conversion of all Preferred Stock issued and
outstanding as of May 31, 1997, into the Common Stock on a ten-to-one basis
(2,283,190 shares of Common Stock) plus the number of stock options issued
and outstanding as of February 28, 1997 380,000.
(2) Pursuant to the terms and conditions of the April 14, 1997 Subscription
Agreement and related documents, Silenus redeemed $200,000 in Debentures on
July 25, 1997 and received 42,244 shares of Common Stock.
(3) The Subscription Agreement requires the Company to register shares of Common
Stock to account for the conversion of the 8% Senior Secured Convertible
Debentures and the exercise of warrants to purchase Common Stock. To date,
only $2,000,000 in Debentures have been issued. 700,000 shares of Common
Stock are hereby being registered to assure that there are a sufficient
number of shares of Common Stock registered to account for the conversion of
all remaining Debentures and the exercise of all 62,500 warrants.
<PAGE>
40
(4) Assumes the conversion of all Debentures at $5.10 per share (based upon 75%
of the "bid" price of $6.825 as of July 16, 1997), plus the exercise of all
warrants to purchase Common Stock issued in conjunction with the Debentures.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws do not contain a provision entitling any director or
executive officer to indemnification against liability under the Securities Act
of 1933 (the " '33 Act"). Sections 78.751 et seq. of the Nevada Revised Statutes
allow a company to indemnify its officers, directors, employees, and agents from
any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, except under certain
circumstances. Indemnification may only occur if a determination has been made
that the officer, director, employee, or agent acted in good faith and in a
manner which such person believed to be in the best interests of the company. A
determination may be made by the shareholders, by a majority of the directors
who were not parties to the action, suit, or proceeding confirmed by opinion of
independent legal counsel; or by opinion of independent legal counsel in the
event a quorum of directors who were not a party to such action, suit, or
proceeding does not exist. Provided the terms and conditions of these provisions
under Nevada law are met, officers, directors, employees, and agents of the
Company may be indemnified against any cost, loss, or expense arising out of any
liability under the '33 Act. Insofar as indemnification for liabilities arising
under the '33 Act may be permitted to directors, officers and controlling
persons of the Company, the Company has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy and is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and the Preferred
Stock is US Stock Transfer Corporation, Glendale, California.
LEGAL MATTERS AND AUDITORS
COUNSEL
Lloyd S. Pantell, APLC has acted as Special Counsel. As such Special
Counsel has assisted the Company in the preparation of the Company's
Registration Statement under the '34 Act. As required by applicable federal and
state securities laws, Special Counsel has rendered an opinion to the effect
that, when issued, the Common Stock shall be duly and validly issued in
accordance with applicable law.
As partial compensation for services rendered, the Company has granted Mr.
Pantell 100,000 stock options with a strike price of $4.00 per share.
AUDITORS
The Company has retained Jackson and Rhodes, P.C., Dallas, Texas, to serve
as Company's accountants for fiscal year 1997 and Merdinger, Fruchter, Rosen &
Corso, P.C. for fiscal year ended 1998. The financial statements accompanying
this Registration Statement have been audited by such firms.
FURTHER INFORMATION
The Company has applied for listing on the American Stock Exchange. If
approved for listing, certain reports and information not necessarily contained
in this Registration Statement will be available for inspection through the
American Stock Exchange, 86 Trinity Place, New York, New York 10006-1881.
<PAGE>
42
The Company has applied for listing on the Philadelphia Stock Exchange. If
approved for listing, certain reports and information not necessarily contained
in this Registration Statement will be available for inspection through the
Philadelphia Stock Exchange, 1900 Market Street, Philadelphia, PA 19103-3584.
The Company has and intends to continue to furnish its shareholders annual
reports containing financial statements examined by an independent accounting
firm and quarterly reports for the first three fiscal quarters of each fiscal
year containing interim unaudited financial information.
This registration statement and all the Company's subsequent filings will
be filed through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR")
system and are, or will be, publicly available through the Commissions Web site
at http://www.sec.gov.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form SB-2
under the Securities Act of 1933, as amended. This Registration Statement does
not contain all of the exhibits and schedules accompanying this Registration
Statement. For further information with respect to the Company, reference is
made to the Registration Statement and the exhibits and schedules accompanying
the Registration Statement on Form SB-2 filed May 28, 1997, and amended July 31,
1997 (Registration Number 333-27923). Copies of the Registration Statement on
Form SB-2, as amended, and such exhibits and schedules may be inspected, without
charge, at the public reference facility of the Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of such material can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following pages contain the financial statements of the Company for the
fiscal years ending May 31, 1996, 1997 and 1998.
<PAGE>
F-1
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
(FORMERLY NEVADA MANHATTAN MINING INCORPORATED)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports F-2
Consolidated Balance Sheets at May 31, 1997 and 1998 F-4
Consolidated Statements of Operations
For the Years Ended May 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Changes in Stockholders'
Equity (Deficiency)
For the Years Ended May 31, 1996, 1997 and 1998 F-6
Consolidated Statements of Cash Flows
For the Years Ended May 31, 1996, 1997 and 1998 F-9
Notes to Consolidated Financial Statements F-11
Interim (Unaudited) Financial Statements from the Company's
Form 10-QSB for the quarter ended August 28, 1998
Part I - Financial Information
Item 1 - Financial Statements (Unaudited) F-36
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operation F-42
<PAGE> F-2
F-2
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
TERRA NATURAL RESOURCES CORPORATION
We have audited the accompanying consolidated balance sheet of Terra Natural
Resources Corporation (formerly Nevada Manhattan Mining Incorporated) and
Subsidiaries as of May 31, 1998, and the related consolidated statements of
operations, changes in stockholders' equity (deficiency) and cash flows for the
year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Terra
Natural Resources Corporation and Subsidiaries as of May 31, 1998, and results
of its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in the financial
statements, the Company has incurred net losses and its current liabilities
exceed its current assets. These matters, among others, as discussed in Note 1
to the financial statements, raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to 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.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
September 3, 1998
<PAGE> F-3
F-3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Terra Natural Resources Corporation
We have audited the accompanying consolidated balance sheet of Terra Natural
Resources Corporation (formerly Nevada Manhattan Mining Incorporated) and
subsidiaries as of May 31, 1997 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the two
years in the period then ended. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position of Terra
Natural Resources Corporation and subsidiaries as of May 31, 1997, and the
results of its operations and its cash flows for each of the two years in the
period then ended, in conformity with generally accepted accounting principles.
As discussed in Note 11, the Company has restated its financial statements for
the year ended May 31, 1997 to account for the rescission, in December 1997, of
the $3,000,000 note agreement with an officer of the Company's Brazilian
subsidiary. The effect of the restatement was to decrease long-term debt and
Brazilian timber concessions by $2,596,729. As explained in Note 11, the Company
has restated its financial statements as of May 31, 1996 and for the year ended
May 31, 1997 to provide for impairment of its mining properties in accordance
with SEC guidelines. The effect of the restatement was to increase accumulated
deficit and decrease property by $947,429 as of May 31, 1996 and $3,120,873 as
of May 31, 1997, and increase net loss for the year ended May 31, 1997 by
$2,173,444. Accordingly, the accompanying financial statements for the years
ended May 31, 1996 and 1997 have been restated to correct the error and the
rescission.
Jackson & Rhodes P.C.
July 28, 1997 (except as to Notes 2 and 11, which
are as of February 13, 1998)
Dallas, Texas
<PAGE> F-4
F-4
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31
1997 1998
---------- ----------
ASSETS (Restated)
CURRENT ASSETS
Cash and Cash Equivalents $ 559,510 $ 81,529
Accounts Receivable, net of allowance for
doubtful accounts of $150,000 58,161 255,027
Inventories - 108,844
Prepaid Expenses 622,710 283,354
---------- -----------
Total Current Assets 1,240,381 728,754
PROPERTIES AND EQUIPMENT
Mineral Properties:
Domestic 2,936,000 2,936,000
Indonesia 2,600,000 1,400,000
Timber Concessions 700,000 700,000
Machinery and Equipment, net 348,842 355,392
OTHER ASSETS - 265,700
----------- -----------
TOTAL ASSETS $7,825,223 $ 6,385,846
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 986,273 $ 1,445,106
Convertible Notes Payable to Stockholders -
Secured by Common Stock 405,000 1,366,075
Notes Payable to Stockholders 307,321 522,950
Note Payable to Officer - 718,000
Current Portion of Long-Term Debt 303,818 32,214
----------- -----------
Total Current Liabilities 2,002,412 4,084,345
Long-Term Debt 72,695 44,327
Convertible Debentures 1,333,333 2,313,459
----------- -----------
TOTAL LIABILITIES 3,408,440 6,442,131
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
MINORITY INTEREST - -
STOCKHOLDERS' DEFICIENCY
Common Stock to be issued 108 -
Preferred Stock, $1 par value, 250,000 shares
authorized, 176,414 shares issued and
outstanding 228,319 176,414
Common Stock, $0.01 par value, 50,000,000
shares authorized and 26,492,543 shares
issued and outstanding 122,736 264,926
Additional Paid-in Capital 23,699,575 28,715,550
Accumulated Foreign Currency Translation - 24,940
Accumulated Deficit (19,633,955) (29,238,115)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 4,416,783 ( 56,285)
------------ ------------
TOTAL LIABILITIES STOCKHOLDERS'
EQUITY (DEFICIENCY) $7,825,223 $ 6,385,846
=========== ============
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> F-5
F-5
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31,
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ---------
(Restated) (Restated)
<S> <C> <C> <C>
REVENUES $ - $ 287,178 $ 557,691
COST OF SALES - 261,089 394,708
------------ ------------ ------------
GROSS PROFIT - 26,089 162,983
EXPLORATION COSTS (34,404) (2,119,042) -
GENERAL AND ADMINISTRATIVE EXPENSES (1,428,854) (4,270,020) (7,541,328)
------------ ------------ ------------
NET LOSS FROM OPERATIONS (1,463,258) (6,362,973) (7,378,355)
------------ ------------ ------------
OTHER EXPENSES
Interest Expense - 23,479 624,034
Write-Off of Mineral Properties - - 1,200,000
------------ ------------ ------------
Total Other Expenses - 23,479 1,824,034
------------ ------------ ------------
NET LOSS (1,463,258) (6,386,452) (9,202,392)
CUMULATED PREFERRED DIVIDENDS (10,600) 149,500 80,316
------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $(1,473,858) $(6,535,952) $(9,282,695)
=========== =========== ===========
BASIC LOSS PER SHARE $( 0.20) $( 0.61) $( 0.62)
=========== =========== ===========
DILUTED LOSS PER SHARE $( 0.20) $( 0.61) $( 0.62)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,428,081 10,684,176 14,969,621
=========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> F-6
F-6
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED MAY 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Stock
Stock Subscrptns Preferred Stock Common Stock
to be Issued Receivable Shares Amount Shares Amount
-------------- ------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1995 1,232,327 $(50,500) - - 4,568,481 $ 46,585
Issuance of stock -
previously purchased (1,232,327) - 13,150 13,150 554,400 5,544
Cash received from stock
subscriptions - 50,500 - - - -
Common shares issued for cash
in private placement ($.25
per share) - - - - 1,001,000 10,010
Preferred shares issued for
cash in private placements
(principally at $10 per share) - - 119,360 119,360 - -
Shares Issued for Services - - - - 1,940,000 19,400
Shares issued in connection
with shareholder loan - - - - 200,000 2,000
Preferred Dividend - - - - - -
Net Loss (Restated) - - - - - -
------- ------- ------- --------- ---------- --------
Balance, May 31, 1996 $ - - 132,510 $132,510 8,353,881 $ 83,539
======== ======= ======= ======== ========= ========
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY) - continued
<TABLE>
<CAPTION>
Additional Accumulated
Paid-in Foreign Currency Accumulated
Capital Translation Deficit Total
----------- ----------------- ------------ ---------
<S> <C> <C> <C> <C>
Balance, May 31, 1995 $12,305,772 $ - $(11,624,145) $1,910,039
Issuance of stock -
previously purchased
1,213,633 - - -
Cash received from stock
subscriptions - - - 50,500
Common shares issued for cash
in private placement ($.25
per share) 258,990 - - 269,000
Preferred shares issued for
cash in private placements
principally at $10 per share) 816,465 - - 935,825
Shares Issued for Services 465,600 - - 485,000
Shares issued in connection 19,000 - - 21,000
with shareholder loan
Preferred Dividend - - ( 10,600) ( 10,600)
Net Loss (Restated) - - (1,463,258) (1,463,258)
----------- ----------- ------------ ----------
$15,079,460 $ - $(13,098,003) $2,197,506
Balance, May 31, 1996 =========== =========== ============ ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> F-7
F-7
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED MAY 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Stock Preferred Stock Common Stock
to be Issued Shares Amount Shares Amount
-------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1996 $ - 132,510 $132,510 8,353,881 $ 83,539
Shares Issued for Property 108 - - 689,200 6,892
Shares Issued for Accounts
Payable - - - 100,000 1,000
Shares Issued for Cash - 96,409 96,409 1,917,351 19,174
Shares Issued for Services - - - 120,000 1,200
Shares Issued for Conversion
of Debt - - - 1,087,133 10,871
Conversion of Preferred Stock - ( 600) ( 600) 6,000 60
Warrants Issued with Debentures - - - - -
Other Warrants Issued - - - - -
Preferred Dividend - - - - -
Net Loss - - - -
------- ------- --------- ---------- --------
Balance, May 31, 1997 $ 108 228,319 $228,319 12,273,565 $122,736
======= ======= ======== ========== ========
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY) - continued
<TABLE>
<CAPTION>
Additional Accumulated
Paid-in Foreign Currency Accumulated
Capital Translation Deficit Total
----------- ----------------- ------------ ---------
<S> <C> <C> <C> <C>
Balance, May 31, 1996 $15,079,460 $ - $(13,098,003) $ 2,197,506
Shares Issued for Property 3,293,000 - - 3,300,000
Shares Issued for Accounts
Payable 249,000 - - 250,000
Shares Issued for Cash 1,888,477 - - 2,004,060
Shares Issued for Services 238,800 - - 240,000
Shares Issued for Conversion
of Debt 1,076,755 - - 1,087,626
Conversion of Preferred Stock 540 - - -
Warrants Issued with Debentures 666,668 - - 666,668
Other Warrants Issued 1,206,875 - - 1,206,875
Preferred Dividend - - ( 149,500) ( 149,500)
Net Loss - - (6,386,452) (6,386,452)
----------- ----------- ------------ -----------
Balance, May 31, 1997 $23,699,575 $ - $(19,633,955) $ 4,416,783
=========== ========== ============ ===========
</TABLE>
R
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> F-8
F-8
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED MAY 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Stock Preferred Stock Common Stock
to be Issued Shares Amount Shares Amount
------------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1997 $ 108 228,319 $ 228,319 12,273,565 $122,736
Common Stock Issued For:
Cash ( 108) - - 2,165,400 21,654
Property - - - 5,005,000 50,050
Conversion of Debt and Interest - - - 582,575 5,826
Conversion of Debentures - - - 338,302 3,383
Collateral for Stockholders Notes - - - 2,743,698 27,437
Conversion of Preferred Stock - (207,444) (207,444) 2,280,199 22,802
Liquidated Damages - - - 289,426 2,894
Services Rendered - - - 814,378 8,144
Discount for Conversion of Debentures - - - - -
Warrants Issued For:
Services Rendered - - - - -
Common Stock Dividend
Issuance of Preferred Stock - 167,789 167,789 - -
Issuance of Common Stock Warrants - - - - -
Dividends to be Paid - ( 12,250) ( 12,250) - -
Common Stock in Escrow - - - - -
Foreign Currency Translation Adjustment - - - - -
Preferred Dividend - - - - -
Net Loss - - - - -
--------- -------- --------- ----------- -------- ----
Balance, May 31, 1998 $ - 176,414 $ 176,414 26,492,543 $264,926 $
========= ======== ========= ========== ======== =
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY) - continued
<TABLE>
<CAPTION>
Additional Accumulated
Paid-in Foreign Currency Accumulated
Capital Translation Deficit Total
----------- ----------------- ------------ ---------
<S> <C> <C> <C> <C>
Balance, May 31, 1997 $23,699,575 $ - $(19,633,955) $ 4,416,783
Common Stock Issued For:
Cash 547,672 - - 569,218
Property 3,946,123 - - 3,996,173
Conversion of Debt and Interest 766,463 - - 772,289
Conversion of Debentures 331,089 - - 334,472
Collateral for Stockholders Notes ( 27,437) - - -
Conversion of Preferred Stock 389,886 - - 205,244
Liquidated Damages 406,606 - - 409,500
Services Rendered 1,545,026 - - 1,553,170
Discount for Conversion of Debentures 500,000 - - 500,000
Warrants Issued For:
Services Rendered 428,996 - - 428,996
Common Stock Dividend
Issuance of Preferred Stock - - ( 167,789) -
Issuance of Common Stock Warrant 165,926 - ( 165,926) -
Dividends to be Paid - - 12,250 -
Common Stock in Escrow (3,984,375) - - (3,984,375)
Foreign Currency Translation
Adjustment - - 24,940 - 24,940
Preferred Dividend - - ( 80,316) ( 80,316)
Net Loss - - ( 9,202,379) (9,202,379)
------------ ------------ ------------- -----------
Balance, May 31, 1998 $ 28,715,550 $ 24,940 $(29,238,115) $( 56,285)
============ ============ ============ ===========
</TABLE>
<PAGE> F-9
F-9
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31,
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ -----------
(Restated) (Restated)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,463,258) $(6,535,952) $(9,282,695)
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Provision for Doubtful Accounts - - 150,000
Write-Off of Mineral Properties - - 1,200,000
Common Stock Issued for Services 485,000 240,000 1,442,447
Warrants Issued for Services - 1,206,875 278,996
Write-Off of Officer Advances - - 52,013
Common Stock Issued for Financing
Expense - 677,000 -
Amortization of Debenture Discount - - 314,598
Depreciation 6,200 23,931 35,645
Write-Off of Mill Acquisition Cost - - 291,246
(Increase) Decrease
Accounts Receivable 1,846 ( 58,161) ( 46,866)
Inventories - - ( 108,844)
Prepaid Expenses 2,545 ( 622,710) 61,878
Other Assets - - ( 40,701)
Increase (Decrease)
Accounts Payable and Accrued Expenses ( 71,893) 772,572 1,122,390
----------- ------------ -----------
Net Cash Used in Operating Activities (1,039,560) (4,296,445) (4,529,893)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment ( 200) ( 253,998) ( 333,441)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Issuance of Convertible
Debentures - 2,000,000 1,500,000
Payments on Long-Term Debt ( 46,153) ( 114,284) ( 29,881)
Advances from Officer - - 718,000
Proceeds from Issuances of Notes to
Stockholders 64,569 986,196 1,978,075
Payments for Notes to Stockholders - - ( 375,000)
Proceeds from Issuance of Common Stock
and stock to be issued 1,255,325 2,004,060 569,218
----------- ----------- -----------
Net Cash Provided by Financing Activities 1,273,741 4,875,972 4,360,412
----------- ----------- -----------
Foreign Currency Translation Adjustment - - 24,940
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents 233,981 325,529 ( 477,982)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR - 233,982 559,511
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 233,981 $ 559,511 $ 81,529
=========== ============ ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> F-10
F-10
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1998
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended May 31, 1996, 1997 and 1998, the Company paid no
income taxes and no interest.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
During 1996, the Company issued 200,000 shares of common stock, valued at
$21,000, for conversion of a loan from a shareholder. Also, during 1996,
the Company assumed $77,067 in debt in connection with acquiring an
additional interest in its Domestic Mineral Properties.
During 1997, the Company issued 589,200 shares of common stock in
connection with the Indonesian mining property acquisitions, 100,000 shares
for domestic mining services and 100,000 shares for a Brazilian timber
concession (Note 2). In addition, the Company issued 120,000 shares to
employees for services and 1,087,133 shares for conversion of $410,626 in
debt. The Company also issued warrants in connection with a debenture and
issued other warrants (see Note 4). The Company also assumed $375,000 in
debt in connection with acquiring an additional interest in the mine (Note
2). The Company also accrued $149,500 in preferred dividends during 1997.
During 1998, the Company issued 814,378 shares of its common stock for
services rendered by employees and third parties for $1,553,170, 338,302
shares of its common stock for conversion of $334,472 of convertible
debentures, 2,280,199 shares of its common stock for the conversion of
$207,444 of preferred stock and payment of cumulative dividends of
$205,244, 582,575 shares of its common stock for the conversion of $772,289
of stockholder's notes and interest, 289,426 shares of its common stock for
the payment of liquidating damages of $409,500 and 5,000,000 shares of its
common stock for the purchase of timberlands in Brazil for $3,996,173. See
Note 8 - Stockholders' Equity for further details of these transactions.
See Accompanying Notes to Consolidated Financial Statements.
<PAGE> F-11
F-11
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Terra Natural Resources Corporation and Subsidiaries (Nevada
Manhattan Mining Incorporated) (the "Company") was organized
to acquire, explore, develop, finance and sell mining and
timber rights and properties. For the year ended May 31, 1998,
the Company changed its name from Nevada Manhattan Mining
Incorporated to Terra Natural Resources Corporation.
For the year ended May 31, 1997, the Company's majority-owned
subsidiary Equatorial Resources, Ltd. ("Equatorial"),
conducted the Company's Brazilian timber operations. For the
year ended May 31, 1998, the Company has ceased to operate its
Brazilian timber operations under Equatorial and all of its
timber concessions are being assigned to the Company's newly
formed majority-owned subsidiary Terra Resources Brazil, Ltd.
This decision is not considered to be a discontinued operation
because the Company is still operating the timber concessions.
Basis of Presentation
The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles which contemplate continuation of the Company as
a going concern. As shown in the consolidated financial
statements, the Company has incurred operating losses and
has had negative cash flows from operations for the last
three years. These matters raise substantial doubt about the
Company's ability to continue as a going concern.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset
amounts shown in the accompanying consolidated balance sheet
is dependent upon continued operations of the Company, which
in turn is dependent upon the Company's ability to continue to
raise capital and generate positive cash flows from
operations. The consolidated financial statements do not
include any adjustments, if any, relating to the
recoverability and classification of recorded asset amounts or
amounts and classifications of liabilities that might be
necessary should the Company be unable to continue its
existence. Management plans to take the following steps that
it believes will be sufficient to provide the Company with the
ability to continue in existence:
<PAGE> F-12
F-12
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Management's Financial Plan to provide sufficient funds to
continue the Company's operations, development and expansion
consists primarily of (a) the $14 million Bristol Asset
Management Investment Agreement (see Note 7 - "Investment
Agreement"); (b) the September 2, 1998 $500,000 Stock Purchase
Agreement (see Note 12 - "Subsequent Events"); and (c)
increasing revenue from Brazilian Timber Operations.
Management believes that the increasing revenues from
Brazilian operations and available capital from the two
above-mentioned investment agreements will provide sufficient
capital to continue the Company's operations, development and
expansion activities.
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All
significant intercompany accounts and transactions are
eliminated in consolidation.
Cash and Cash Equivalents
For statement of cash flow purposes, the Company considers
short-term investments with original maturities of three
months or less to be cash equivalents.
Mineral Properties
Acquisition costs relating to mineral properties with proven
and probable reserves are deferred until the properties are
put into commercial production, sold or abandoned. Exploration
costs, including an allocation of employee salaries and
related costs, are charged to operations when incurred. Mine
development costs incurred to develop new ore bodies, to
expand or rehabilitate the capacity of operating mines, or to
develop areas substantially in advance of production are
charged to operations until management has established proven
and probable reserves for the property. For properties placed
in production, the related deferred costs are depleted using
the units-of-production method over the life of the reserves.
Deferred costs applicable to sold or abandoned properties are
charged against operations at the time of sale or abandonment
of the property.
Management's estimates of gold prices, recoverable proven and
probable reserves, operating, capital and reclamation costs
are subject to certain risks and uncertainties which may
affect the recoverability of the Company's investment in
mineral properties. Although management has made its best
estimate of these factors based on current conditions, it is
possible that changes could occur in the near term which could
adversely affect management's estimate of the net cash flows
expected to be generated from properties in operation.
<PAGE> F-13
F-13
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Timber Concessions
Timber concessions costs relate to the fees paid to acquire
the rights to harvest timber. The acquisition costs are
amortized over the term or useful life of the related
concession. The harvesting and reclamation costs are charged
to expense as incurred.
Machinery and Equipment
Machinery and equipment is stated as its historical cost less
accumulated depreciation. Depreciation of machinery and
equipment is primarily determined by using the straight-line
method over the estimated useful life of seven years for
furniture and fixtures and ten years for mill equipment.
Impairment of Long-Lived Assets
In accordance with Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of", long-lived
assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amounts of such
assets may not be recoverable. Impairment losses would be
recognized if the carrying amounts of the assets exceed the
fair value of the assets.
Foreign Currency Translation
For foreign subsidiaries whose functional currency is the
local foreign currency, the balance sheet accounts are
translated at exchange rates in effect at the end of the year
and income and expense accounts are translated at average
exchange rates for the year. Translation gains and losses are
included as a separate component of stockholders' equity.
Revenue Recognition
Substantially all revenues are recognized when finished
products are shipped with appropriate provision for
uncollectible accounts.
Income Taxes
The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes'. Deferred taxes are
provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences, and deferred
tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
<PAGE> F-14
F-14
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Loss Per Share
For the year ended May 31, 1998, the Company adopted SFAS No.
128, "Earnings Per Share". Basic loss per share is computed by
dividing net loss attributable to common stockholders by the
weighted average number of common shares outstanding. Diluted
loss per share is computed similar to basic loss per share
except that the denominator is increased to include the number
of additional common shares that would have been outstanding
if the potential common shares had been issued and if the
additional common shares were dilutive. Loss per share for
1997 and 1996 has been restated using the methodologies of
SFAS No. 128.
Concentration of Credit Risk
The Company sells products (primarily in Brazil) and extends
credit based on an evaluation of the customer's financial
condition, generally without requiring collateral. Exposure to
losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its
exposure for credit losses and maintains allowances for
anticipated losses.
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 and disclosure of contingent
assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and
expenses during the reported periods. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in
accordance with generally accepted accounting principles. For
certain of the Company's financial instruments including cash,
accounts receivable, and accounts payable and accrued
expenses, the carrying amounts approximate fair value due to
their short maturities. The amounts owed for notes payable and
convertible debentures also approximate fair value because
current interest rates and terms offered to the Company for
similar notes are substantially the same.
<PAGE> F-15
F-15
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently Issued Accounting Pronouncements
In June 1997, FASB issued SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for
reporting and displaying comprehensive income and its
components in financial statements. This statement is
effective for fiscal years beginning after December 15, 1997.
The adoption of this standard is not expected to have a
material impact on the presentation of the Company's financial
statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which
requires a company to report certain information about its
operating segments including factors used to identify the
reportable segments and types of products and services from
which each reportable segment derives its revenues. This
statement is effective for fiscal years beginning after
December 15, 1997. The adoption of this standard is not
expected to have a material impact on the presentation of the
Company's financial statements.
NOTE 2 - PROPERTIES AND EQUIPMENT
Brazil
The Company has acquired various rights (Jonasa Concessions,
Terranorte Concessions and Timberlands), to up to
approximately 958,000 hectares (2,395,000 acres) of timber
properties located in Brazil. In addition, the Company
acquired a sawmill facility located near the town of Sao
Miguel do Guama, which is no longer operated by the Company.
The Company began harvesting trees in April 1997 and commenced
sales during the year ended May 31, 1997.
The Jonasa Concessions
The Company, through Equatorial, entered into a letter
agreement with Madeira Intex, S.A, ("Madeira") whereby Madeira
agreed to assign its rights in and to a Joint Venture
Agreement which Madeira had entered into in 1984 with
Companhia Agropecuaria do Rio Jabuti ("Jonasa"). The Joint
Venture Agreement required Jonasa to assign to Madeira the
exclusive rights to extract and market all lumber licensed by
the appropriate Brazilian authorities for export. All the
various agreements were integrated into an Agreement to
Jointly Develop Timber Properties. Under this agreement,
Jonasa has granted to Equatorial the properties comprising the
Jonasa Concessions. In consideration of this grant, Equatorial
has agreed to pay to Jonasa 50% of the net proceeds received
on the sale of all timber and related products produced and
sold pursuant to the agreement. During the year ended May 31,
1998, the Company temporarily suspended harvesting of timber
under this agreement. The Company has decided to harvest from
the Terranorte Concessions and Tropical Woods Concessions. See
Jonasa Concessions in Note 7 - Commitments and Contingencies.
<PAGE> F-16
F-16
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 2 - PROPERTIES AND EQUIPMENT (continued)
Terranorte Concessions
On May 30, 1997, Equatorial entered into an Agreement to
Harvest Timber and Develop Timber Properties with Terranorte
S.A. ("Terranorte"). Terranorte granted to Equatorial the
exclusive right to either harvest the timber or to purchase
certain species of logs extracted by Terranorte located on
approximately 490,000 hectares of timber property located near
the town of Moju, Para, Brazil. In June 1997, Equatorial began
harvesting operations employing its own crews and purchasing
harvested logs from Terranorte.
Sao Miguel Sawmill
On May 30, 1997, Equatorial and Jonasa Madeiras Limitada
("Jonasa Madeiras") entered into an Agreement to Acquire
Sawmill. Under the terms of the agreement, Jonasa Madeiras
agreed to convey all right, title, and interest in and to the
sawmill facility, all equipment relating to the sawmill
facility, and 246 hectares of adjacent real property, all of
which is located near the town of Sao Miguel do Guama, Para,
Brazil. During the year ended May 31, 1998, the Company
abandoned the use of the sawmill and extracted a majority of
the assets purchased during the year. The Company has
terminated the agreement for the use of the sawmill, and
charged the acquisition cost to expense for the year ended May
31, 1998.
Timberlands
In April 1998, the Company entered into an agreement to
acquire title to land, containing approximately 292,598
hectares, which consists of one large tract in the state of
Amazonas and several smaller tracts in the state of Para. The
Company acquired title to the property for the issuance of
5,000,000 shares of the Company's common stock. The shares
were valued at $3,984,375 which represents the fair market
value of the stock at date of issuance. The shares were issued
as escrow shares contingent upon the stockholder's completion
of certain financial obligations to the Company and the
Company's completion of its due diligence as to the proper
conveyance of the deeds for the property. The stockholder has
until October 7, 1998 to complete his financial obligation to
the Company and the Company has until October 22, 1998 to
complete its due diligence. Also, the Company has the right to
cancel the shares and rescind the acquisition any time prior
to the completion of its due diligence. Also, if the
stockholder does not complete his financial obligation to the
Company, then the Company can cancel the shares and the
property remains with the Company.
<PAGE> F-17
F-17
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 2 - PROPERTIES AND EQUIPMENT (continued)
Tapana (Tropical Woods) Sawmill
In May 1998, the Company entered into a lease agreement for a
sawmill, located in Belem, Brazil which includes 3.6 hectares
of property, an office building, a sawmill with related
equipment and a port for unloading and storage of logs. The
lease is for a minimum of two years. Also, the agreement
provides for Tropical Woods to deliver a minimum of 2,300
cubic meters of logs per month from their property, consisting
of 162,982 hectares. The Company began operating the sawmill
in June 1998.
Domestic Mineral Properties
The Company owns a 100% interest in mineral properties located
in the Manhattan Mining District, Nye County Nevada (the
Nevada Properties). The Nevada Properties consist of 28
patented (fee ownership) and 65 unpatented (deed ownership)
mining claims that include the Whitecaps Mine, Union Mine,
Consolidated Mine, Earl Mine, Bath Mine and other
miscellaneous mines and claims which cover approximately 1,800
acres.
In March 1997, the Company entered into a Sale and Purchase
Agreement with the former owners of the Nevada Properties.
Under the terms of this latest agreement, the former owners
agreed to sell to the Company 100% of their interests in the
Nevada Properties for $375,000, payable as follows: $100,000
in March 1997 and the balance plus all accrued and unpaid
interest (calculated at the rate of 5.25%) on or before
February 6, 1999. The Company paid the first installment of
$100,000 in March 1997 and paid the balance in June 1997. See
Note 7 for discussion of a contingency regarding the ownership
of the property. The agreement also acknowledges that the
Company is the only entity legally entitled to conduct mineral
operations on the Nevada Property. The Company is also
required to pay all U.S. Bureau of Land Management ("BLM")
annual maintenance fees associated with the claims comprising
the Nevada Property. The Company is current with the fees to
the BLM.
Management of the Company is active in the supervision of work
taking place, plus future planning of all aspects of
operations. The operating permits for the Manhattan Gold Mine
were issued to the Company by the State of Nevada during April
1996. The Company negotiated an agreement with Harrison
Western Mining and Construction Company ("Harrison") for the
beginning of production in July 1996. The work was begun in
July 1996 and included placement of mine shops and support
facilities; mining in the existing workings of the mine and
extension of the existing decline from its end location of
1,200 linear feet from the surface to the White Caps Level.
Underground flooding and caving of the existing decline
required an alternate access way and a new decline was driven
from approximately 800 feet on the existing decline. The
development activities with Harrison have been ceased as of
May 31, 1998 because of depressed gold prices and the Company
lacks the capital requirements and they are in arbitration
(see Note 7) relating to a dispute with Harrison.
<PAGE> F-18
F-18
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 2 - PROPERTIES AND EQUIPMENT (continued)
On November 25, 1997, the Company entered into a non-binding
letter of intent with Royal Gold relating to exploration and
development efforts on its Nevada Property. Under terms of the
letter of intent, Royal Gold was granted an exclusive option
to explore, develop and purchase all of the interests which
are or may be controlled by the Company on the Nevada
Property. The renewable three year agreement provides that the
Company will retain a 4% net smelter returns royalty and also
will reserve the right to continue with the development of its
under ground mining opportunity at the White Caps location.
Royal Gold has the option to acquire all of the Company's
interests in the property for $5,000,000. The agreement would
continue indefinitely to the extent that Royal Gold is
achieving production in commercial quantities or is engaged in
reclamation.
For the year ended May 31, 1997, the Company has performed an
assessment of the recoverability of the carrying value of its
domestic mineral properties and has provided an impairment
write-down against this property as explained in Note 11.
Indonesia Mineral Properties
The Company has made certain acquisitions in Indonesia during
the year ended May 31, 1997:
On August 19, 1996, the Company entered into an agreement to
acquire a 51% interest in a metals/minerals mining property in
Kalimantan, Indonesia (Sopang Gold Concession). Consideration
for the purchase consisted of 400,000 shares of the Company's
common stock due upon the signing of the agreement and an
additional 4,000,000 shares to be released only if an
independent valuation of the property exceeds $12,000,000. The
Company issued shares and has valued the 400,000 shares at
$1,200,000 based upon the $3 market price of the Company's
common shares at the time.
The Sopang Gold Concessions ("Sopang") consists of 16,480
hectares and is held under Indonesian title as a KP, a form of
Indonesian citizen ownership with a joint venture agreement.
The concession is located in southeast Kalimantan. Because of
the lack of major infrastructure in the area, initial work
will be limited to surface trenching and geochemical sampling.
The Company has not initiated any material exploration or
development activities as of May 31, 1998.
<PAGE> F-19
F-19
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 2 - PROPERTIES AND EQUIPMENT (continued)
The West Kalimantan Gold Project ("West Kalimantan") is 75
kilometers south of the Sarawak region of Malaysia and
contains 62 hectares with the intent to expand to at least
2,000 hectares. The Project is held under a KP title, a form
of Indonesian citizen ownership in joint venture with the
Company. Access to the property is by road and motorized canoe
for initial field work and helicopter support for advanced
exploration activities. Infrastructure is limited but the
proximity to the west coast of Kalimantan and low relief
terrain indicates no unusual development problems will be
encountered. Following a survey and additional ground
sampling, supervised by Behre, Dolbear & Company, Inc., key
core drill targets were identified from pitting showing
anomalous gold values, but as of May 31, 1998, the Company has
not initiated the drilling or development activities.
The Cepa Coal Project ("Cepa") in East Kalimantan covers an
area of approximately 286,000 hectares and is held in three
concessions as Contracts of Work ("COW's"). Initial work on
the property will include reasonable expansion of ownership to
include promising additional property containing similar coal.
During the year ended May 31, 1998, the concessions were
expanded to include the Mecfa Coal Property. The Mecfa Coal
Property is comprised of three blocks of land totaling 39,770
hectares which have a COW. The property is currently being
reviewed by potential joint venture partners.
The West Kalimantan and Cepa projects, collectively, were
acquired in January 1997 for 200,000 common shares issued upon
signing of the agreement and an additional 3,800,000 shares to
be released only if an independent valuation of the property
exceeds $40,000,000. The Company has valued the 200,000 shares
at $1,400,000 based upon the $10 market price of the Company's
common shares at the time, discounted 30% for the restricted
nature of and the thin market for the shares.
The Company owns the interests it acquired with the 600,000
shares issued as explained above. The Company has
contractually acquired the rights to obtain controlling
interests in five additional gold concessions in Indonesia.
The Company is currently reviewing these properties to
determine an applicable acquisition structure.
For the year ended May 31, 1997, the Company has performed an
assessment of the recoverability of the carrying value of its
Indonesia mineral properties and has provided an impairment
write-down against this property as explained in Note 11. For
the year ended May 31, 1998, the Company has taken an
impairment write-down for the Sopang Gold Concession
acquisition cost of $1,200,000. Based on the current analysis
of the property and its underlying minerals, the Company could
not substantiate that future operations would provide cash
flows to recover the acquisition cost. The Company will
expense, as incurred, future development and exploration cost
until the Company can determine the property's proven and
probable mineral reserves.
<PAGE> F-20
F-20
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 3 - CONVERTIBLE NOTES PAYABLE STOCKHOLDERS - SECURED BY COMMON STOCK
As of May 31, 1997 and 1998 the Company has $1,366,075 due
to various stockholders. The principal and accrued interest,
at 10% per annum, are due within a one year period from date
of advance. Each note is secured by a certain number of
shares of the Company's common stock. The number of shares,
which were issued on the date of the advance, is determined
by dividing the principal amount by the fair market value of
the stock on the date of advance. If the Company does not
repay the note on the due date, the principal and unpaid
interest are converted to common stock. For the years ended
May 31, 1997 and 1998, the Company issued 0 and 2,741,698
shares, respectively, of the Company's common stock to
secure the loans, and 0 and 355,000, respectively, of the
shares have been converted to equity leaving 2,386,698
shares outstanding as collateral for the debt at May 31,
1998.
NOTE 4 - NOTE PAYABLE TO OFFICER
During the Year ended May 31, 1998, the COO of the Company
advanced $718,000 to the Company for working capital
requirements. The note bears interest at 8% per annum and all
principal and accrued interest is due September 1998.
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
Notes payable to stockholders of $522,950 accrue interest at
the rate of 9%, are due on demand and are guaranteed by
certain Company officers.
As of May 31, long-term debt consisted of:
<TABLE>
<CAPTION>
1997 1998
---------- -------
<S> <C> <C>
Note payable to stockholder, interest imputed
at 9%, payable $1,000 per month until April 2001 $ 48,110 $ 40,646
Note payable to stockholder at $2,000 per
month, including interest at 9% 53,403 35,895
10% Note Payable to an individual under terms
of a joint venture agreement, paid in June,
1997. See Note 2. 275,000 -
----------- -----------
376,513 76,541
Current portion 303,818 32,214
----------- -----------
Long-term debt $ 72,695 $ 44,327
=========== ===========
</TABLE>
Maturities of long-term debt principal are as follows for the
years ending May 31:
1999 $ 32,214
2000 23,992
2001 15,533
2002 4,802
------------
$ 76,541
The Company has capitalized $26,693 and $54,332 of interest into its
Domestic Mineral Properties during the years ended May 31, 1996 and 1997,
respectively.
The obligation to a stockholder resulted from a lawsuit in 1991. The suit
alleged that the Company failed to deliver free-trading stock, thereby
resulting in alleged liability. The lawsuit was finally settled in 1994 for
$89,050, payable, without interest, at $1,000 per month.
<PAGE> F-21
F-21
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 6 - CONVERTIBLE DEBENTURES
In April and July 1997, the Company entered into Subscription
Agreements related to two negotiated private placements (the
"Debentures"). These transactions were made in reliance upon
the exemption from registration afforded by Section 4(2) of
the Securities Act of 1933. As a result, the Company issued an
aggregate of $3,500,000 of 8% Senior Secured Convertible
Debentures due March 31, 2000 and July 1, 2000 for the April
($2,000,000) and July ($1,500,000) offerings, respectively.
The Debentures may be converted into shares of the Company's
Common Stock at any time commencing June 2, 1997 at a price
equal to the lesser of seventy-five percent (75%) of the
closing bid price of the Common Stock on the closing date;
seventy-five percent (75%) of the closing bid price of the
Common Stock on the day prior to the funding of any subsequent
funding; or seventy-five percent (75%) of the average closing
bid price for the five trading days immediately preceding the
actual date of conversion of the Debentures. With respect to
the April 1997 funding, if conversion is made after August 16,
1997, the conversion price will be seventy-two and one-half
percent (72.5%) of the above-referenced valuation standards.
The Company has recorded $666,666 and $500,000 for the years
ended May 31, 1997 and 1998, respectively, deferred financing
charges for the differences between the conversion price and
the fair market value of the stock at the date of each
funding. The discount is being amortized over the life of the
debentures.
The Company was required to use its "best efforts" to cause a
Registration Statement with the Securities and Exchange
Commission to become effective. If the Registration Statement
did not become effective within 120 days of each respective
funding, the Company is required to pay liquidated damages
equal to two percent (2%) of the Debentures for the first
thirty days and three percent (3%) per month thereafter until
the Registration Statement becomes effective. For the year
ended May 31, 1998, the Company has incurred $717,636 of
liquidating damages of which $409,500 has been converted to
289,426 shares of the Company's common stock.
With regard to the April 1997 funding, until at least
seventy-five percent (75%) of the Debentures are converted, a
deed of trust on the Nevada Property and a pledge of 1,000,000
shares of Common Stock will secure the Debentures. No such
security is given on the Debentures issued in July 1997.
The Company has issued warrants to the Subscribers of the
April and July offerings. Regarding the Subscribers of the
April offering, the Company has granted 62,500 warrants with
an exercise price of $8 per share and an expiration date of
April 16, 2002. Regarding Subscribers of the July 1997
offering, the Company has granted 75,250 warrants with an
exercise price of $6.75 per share and an expiration date of
July 16, 2002. The exercise price is subject to adjustment to
account for payments of dividends, stock splits, reverse stock
splits, and similar events. See Note 7 - "Legal Proceedings."
<PAGE> F-22
F-22
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 7 - COMMITMENT AND CONTINGENCIES
Leases
The Company's Brazilian operation leases approximately 3.6
hectares of property and a related sawmill through May, 2000.
The future minimum lease payments are $180,000 for each year
ending May 31, 1999 and 2000. Rent expense amounted to
$20,726, $27,181 and $20,726 for the years ended May 31,
1996, 1997 and 1998, respectively.
Securities and Exchange Commission
In fiscal 1994, the Company entered into a consent judgment
with the Securities and Exchange Commission following an
investigation into the Company's business activities.
In connection with the judgment, the Company received the
following "Stipulation Regarding Resolution of Outstanding
Issues" from the Commission closing out the investigation and
all related issues:
"Whereas the disposition of funds analysis conducted
pursuant to the Judgment of Permanent Injunction and Other
Relief against Defendant Terra Natural Resources
Corporation entered on August 3, 1993 has revealed no
ill-gotten gains received by any defendant, the undersigned
parties hereby stipulate that all outstanding issues in
this action have been resolved, including disgorgement, and
that the judgment entered against the defendants are
final."
The entry of the judgment may impose certain burdens on the
Company with respect to its future activities. The more
significant of such burdens are as follows:
(i) The Company may not be able to utilize the exemptions from
registration available under Regulation A and Rule 701
under the 1933 Act.
(ii)The Company may not be able to rely on the private
placement exemptions provided in various state securities
laws in connection with the offer and sale of securities
in a transaction which qualifies as an exempt sale of
securities under the 1933 Securities Act.
In such case, the Company would be required to qualify the
transaction under the state securities laws, which may not be
available. This qualification would increase the cost of, and
extend the time for completing, such private placement of
securities.
Commissions
During May 1997, the Company agreed to pay two shareholders an
aggregate of 3% of the "net profits" of the Company's
Brazilian operations. For the year ended May 31, 1997 and 1998
no commissions were paid.
<PAGE> F-23
F-23
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 7 - COMMITMENT AND CONTINGENCIES (continued)
Legal Proceedings
During November 1996, the Company filed a lawsuit in Nevada
against its former joint venturer partners in the Nevada
Properties ("the Harvey Entities"). The complaint originally
alleged, among other things, that the Harvey Entities breached
their obligations under various agreements. The action as
amended seeks damages of approximately $4,000,000 resulting
from the actions and inactions of the defendants. In a
counterclaim, the defendants are seeking an injunction
preventing the Company from conducting activities related to
the mine and punitive damages and other financial relief based
on breach of contract and other causes of action.
The Company subsequently amended its complaint, seeking a
judicial determination that the Joint Venture Agreement was
null and void and a determination that the Harvey Entities
have forfeited all interest in the Nevada properties. After a
hearing in September 1997, the court refused to issue an
injunction against the Company. Pursuant to stipulation, the
parties have agreed not to interfere with one another's
operations on the Nevada Properties. Additionally, the Company
has agreed not to further encumber the Nevada property pending
trial.
If the Company is successful in obtaining specific performance
of the agreement alleged in the Action, it will effectively
continue to own or control an undivided 100% interest in the
Nevada property. Regardless of whether the Company is
successful in the Action, it will continue to own at least a
50% undivided interest in the Nevada Properties by virtue of
its contractual rights.
In June 1996, the Company entered into an agreement with
Harrison Western Construction Corporation ("Harrison") to
perform contract mine development services on the Company's
Nevada Properties. In October 1997, these services ceased and
a dispute arose between the parties. The scope of work
estimated at the time of commencement was approximately
$600,000 as projected by Harrison. At termination of the
agreement, Harrison reportedly furnished a total amount of
services and materials totaling approximately $1,684,000
without completion of the objectives for which the parties
entered into the agreement. The Company paid approximately
$1,155,000, in 1997, in cash to Harrison and in November 1996
issued 100,000 shares of the Company's stock in payment of
$250,000 of services. In July 1997, an additional 65,000
shares were issued to Harrison as collateral for any unpaid
and owing amounts. Subsequent to the termination of the
agreement, Harrison filed a mechanic's and materialman's lien
in the amount of $482,749 on the Company's Nevada property in
January 1998. This filing was, in the opinion of the Company,
in direct violation of specific clauses contained in the
agreement between the parties.
<PAGE> F-24
F-24
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 7 - COMMITMENT AND CONTINGENCIES (continued)
In support of its lien, Harrison filed a lawsuit in July 1998
in Federal District Court in Nevada. In August 1998, the
Company was granted a motion to stay the proceedings and enter
arbitration. The parties have been ordered to report to the
Federal District Court the status of the arbitration
proceedings on or before November 30, 1998. The Company
believes that any arbitration agreement or damages would not
have a material impact on the Company's financial statements.
In July 1998, the Company and several stockholders filed a
lawsuit, in United States District Court for the Central
District of California against its Debenture holders. The
lawsuit contends that the defendants violated Section 10(b)
and 13(g) of the Securities Exchange Act, Section 1962(b) of
the Racketeer Influenced and Corrupt Organizations Act, and
committed fraud by engaging in a fraudulent scheme to
manipulate and artificially depress the market in and for the
Company's common stock by use of massive short sales. The
Plaintiffs seek an unspecified amount of damages, including
punitive damages, a judicial declaration that the terms,
conditions and covenants of certain debentures and
subscription agreements were violated and certain injunctive
relief.
In July 1998, the Company and certain board members and
officers of the Company were named as defendants in lawsuits
filed by certain debenture holders. Each suit claims that the
defendants breached certain debentures and subscription
agreements and failed to file a registration statement with
the Securities and Exchange Commission. Also, the suits claim
that the defendants were in violation of Section 10(b) and
20(a) of the Securities and Exchange Act. The Company and
other defendants deny any wrong doings and intend to
vigorously defend both these lawsuits. The impact of these
lawsuits on the Company's financial position or operations
cannot be determined presently.
Jonasa Agreement
In February 1998, a dispute arose between the Company's
subsidiary, Equatorial and Jonasa. In addition, the Company
had been considering transferring its operations closer to the
principal port in the area, Belem, to sell more of its
products for export, and consolidating its operations with the
administration of its Brazilian operations. As a result,
Equatorial and Jonasa entered into a compromise and settlement
agreement which resulted in the removal of substantially all
equipment from the Sao Miguel sawmill facility and the
abandonment of its operations in Sao Miguel. Given these
events, the legality of the Jonasa Timber Concession could be
contested by Jonasa. However, the Company believes any such
actions by Jonasa would be defendable by the Company and that
the Concession is still valid.
<PAGE> F-25
F-25
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 7 - COMMITMENT AND CONTINGENCIES (continued)
Regulations
The Company's mining operations, exploration and timber
activities are subject to various foreign, federal, state and
local laws and regulations governing protection of the
environment. These laws are continually changing and, as a
general matter, are becoming more restrictive. Management
believes that the Company is in material compliance with all
applicable laws and regulations.
Investment Agreement
During the year ended May 31, 1998, the Company entered into
an agreement for an investor to purchase up to $14,000,000 of
the Company's common stock over a period of three years from
March 28, 1998. The principal terms of the agreement are as
follows:
- The sale of the Company's common stock to the investor will
be in the form of a Put Notice in which the Company will
designate the dollar amount of shares to be purchased by
the investor. Each Put Notice must be in an amount not less
than $50,000. The number of shares to be issued under each
Put Notice shall be an amount equal to the Put amount
divided by 78% of the lowest sale price of the common stock
as listed on the principal exchange during the ten trading
days prior to the Put Notice.
- The Company may not issue a Put Notice if a)trading of the
Company's common stock is suspended or delisted, b)the
closing price of the Company's common stock is less than
$.25 per share, c)a registration statement, covering the
shares, is not effective or is subject to a stop order or
is otherwise suspended, d)the Dow Jones Industrial Average
has dropped more than 3% within the preceding five business
days, or e)the common stock is not then registered under
the Exchange Act.
- Also, with the issuance of the shares the investor is to
receive common stock purchase warrants to purchase shares
of the Company's common stock. Each warrant shall be for
the purchase of shares in an amount equal to 12% of the
number of shares of common stock purchased and with an
exercise price of equal to 94% of the average closing bid
price for the Company's common stock on the exchange for
ten trading days prior to the Put Notice. The warrant shall
be exercisable for a five-year period.
- To the extent that the Company has not delivered Put
Notices to the investor on or before one year from the
date of the agreement in an aggregate dollar amount equal
to the lessor of a)$4,666,667 or b)the maximum dollar
amount with respect to which Put Notices could have been
delivered prior to such date, then any warrants that have
not been issued had such Put Notices been delivered shall
be issued. The exercise price of the warrants shall be
equal to 94% of the average closing bid price for the
Company's common stock on the exchange during the ten
trading days prior to the one year anniversary.
<PAGE> F-26
F-26
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 7 - COMMITMENT AND CONTINGENCIES (continued)
- To the extent that the Company has not delivered Put
Notices to the investor on or before two years from the
date of the agreements in an aggregate dollar amount equal
to the lessor of a)$9,333,332 or b)the maximum dollar
amount with respect to which Put Notices could have been
delivered prior to such date, then any warrants that have
not been issued had such Put Notices been delivered shall
be issued. The exercise price of the warrants shall be
equal to 94% of the average closing bid price for the
Company's common stock on the exchange during the ten
trading days prior to the two year anniversary.
- To the extent that the Company has not delivered Put
Notices to the investor on or before the termination of the
agreement in an aggregate dollar amount equal to
$14,000,000 or b)the maximum dollar amount with respect to
which Put Notices could have been delivered prior to such
date, then any warrants which have not been delivered to
the investor which would have been issued had such Put
Notices been delivered shall be issued. The exercise price
of the warrants shall be equal to 94% of the average
closing bid price for the Company's common stock on the
exchange during the ten trading days prior to the
termination date.
NOTE 8 - STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue up to 250,000 shares of
Preferred Stock with a par value of $1.00 per share. The
Preferred Stock may be issued from time to time in one or more
series.
In October 1995, the Board of Directors authorized Series A
Preferred Stock ("Old Series A") for up to 250,000 shares. The
Old Series A holders are entitled to receive an 8% per annum
cumulative dividend and a liquidating preference of $10 per
share. The holders of the Old Series A shall have the right to
convert each share of Series A into 10 shares of the Company's
common stock, for the period of issuance to December 31, 1997.
The Old Series A shares automatically convert to 10 shares of
the Company's common stock upon the earlier of December 31,
1997 or the Company successful completion of an IPO for more
than $5,000,000.
In January 1998, the Board of Directors authorized a Series A
Preferred Stock ("New Series A") for up to 250,00 shares. The
New Series A holders are entitled to receive an 8% per annum
cumulative dividend payable December 31, 1998 and a
liquidating preference of $3.50 per share. The New Series A
shares automatically convert into one share of the Company's
common stock on December 31, 1998. Also, each New Series A
share has a common stock purchase warrant entitled to purchase
two shares of the Company's common stock at $3.00 per share on
or before December 31, 1999.
<PAGE> F-27
F-27
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
For the years ended May 31, 1996 and 1997, the Company issued
132,510 and 95,809, respectively, of Old Series A for aggregate
proceeds of $1,791,425. As of May 31, 1998, 20,875 Old Series A
shares have not been converted which have cumulative dividends of
$35,172. These shares are being converted as the holders present
them for conversion.
In December 1997, the Company declared a dividend for
shareholders of record as of December 31, 1997. The dividend is
to be paid in one New Series A for each 100 shares of the
Company's common stock. As of May 31, 1998, the Company has
issued approximately 155,539 New Series A shares of the total to
be issued of 167,789.
Common Stock
For the year ended May 31, 1996, the Company issued 140,000
common shares to certain employees for services rendered. The
shares were valued at $.25 per share ($35,000), the price at
which the Company was issuing its shares in a private placement
at the time.
For the year ended May 31, 1997, the Company had the following
significant common stock transactions (see Note 12 for Subsequent
Events):
- Issued 120,000 common shares to certain employees
for services rendered. The Company has valued the
shares at $240,000 based upon the $2 market price of
the Company's common shares at the time.
- Issued 100,000 common shares to its mining
contractor in Nevada to settle a mining contract
payable of $250,000. The shares were valued at the
amount of the payable settled. The fair value of the
shares at the time was approximately $2.50 per
share.
- Issued 1,087,133 common shares to certain
shareholder creditors for the conversion of $410,626
in debt. The Company recorded a financing expense of
$677,000 (included in general and administrative
expenses) for the excess of the fair market value of
the shares over the amount of the debt. The fair
market value was determined as the $1 per share
price at which the Company was issuing its shares in
a private placement at the time.
For the year ended May 31, 1998, the Company had the following
significant common stock transactions:
- Issued 814,378 shares for payment of services
rendered by employees and unrelated parties. The
shares have been valued at $1,553,170, the fair
market value at the date of issuance.
- Issued 338,302 shares for the conversion of
convertible debentures for $334,472 of discounted
principal.
- Issued 2,280,199 shares for the conversion of Old
Series A Preferred Stock for $207,444 of par value
and $205,244 of cumulative dividends.
- Issued 289,426 shares for the payment of liquidated
damages of $409,500 associated with the convertible
debentures.
<PAGE> F-28
F-28
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
- Issued 5,000,000 shares for the acquisition of
timberlands in Brazil for $3,984,375, the fair
market value of the stock at the date of issuance.
The shares have been issued as escrow shares per the
Company's purchase contract. The shareholder is
required to perform certain financial obligations
prior to the release of the shares from escrow.
Also, the Company has to complete its due diligence
as to the proper conveyance of the deeds for the
land. The Company has not recorded the purchase as
an asset until the Stockholder's obligations and the
Company's due diligence have been completed. (See
Note 2 - "Timberlands").
- Issued 2,743,698 shares as collateral for shareholder
notes of which $436,088 of principal and interest and
355,000 shares have converted to common stock for the
year ended May 31, 1998.
- Issued 582,575 shares for the conversion of
shareholder notes and accrued interest for $772,289,
of which $436,088 represents principal and interest
for shareholder notes secured by common stock, the
fair market value of the shares at the date of the
issuance of the notes.
Warrants
During the year ended May 31, 1997, warrants were issued to
third parties for an aggregate of 412,500 shares. In
accordance with SFAS 123, the Company expensed $1,206,875 in
connection with these warrants.
During the year ended May 31, 1998, the Company had the
following significant issuances of warrants:
- Issued to a shareholder for services 200,000 warrants
to purchase the Company's common stock at $2.50 per
share for a period from date of grant to May 2000. The
Company recognized compensation expense of $268,996,
the fair market value of the warrants at date of grant.
- Issued for services 350,000 warrants to purchase the
Company's common stock at $4.06 per share for a period
from date of grant to June 2002. The Company recognized
compensation expense of $10,000, the fair market value
of the services rendered.
- Issued 167,789 warrants to purchase two shares of the
Company's common stock at $3.00 per share on or before
December 31, 1999 in association with the New Series A
shares.
<PAGE> F-29
F-29
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
Stock Options The Company has adopted only the disclosure
provisions of SFAS No. 123. It applies Accounting Principles
Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employess", and related interpretations in accounting for its
plan and does not recognize compensation expense for its
stock-based compensation plan other than for restricted stock and
options/warrants issued to outside third parties. If the Company
had elected to recognize compensation expense based upon the fair
value at the grant date for awards under its plan consistent with
the methodology prescribed by SFAS No. 123, the Company's net
income and earnings per share would be reduced to the proforma
amounts indicated below:
For The Years Ended,
--------------------
May 31,
1997 1998
------- ------
Net Loss
As Reported $(6,535,952) $(9,282,695)
============ ===========
Proforma $(6,584,802) $(9,315,016)
============ ===========
Basic Loss Per Share
As Reported $( .61) $( 0.62)
============ ============
Proforma $( .62) $( 0.62)
============ ============
These proforma amounts may not be representative of future
disclosures because they do not take into effect proforma
compensation expense related to grants made before 1995. The fair
value of these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended May 31, 1997 and
1998: dividend yields of 0% and 0%, respectively; expected
volatility of 44% and 129%, respectively; risk-free interest
rates of 6.63% and 5.74%, respectively; and expected life of 1.0
and 3.0 years, respectively. No compensation cost was considered
under either Opinion 25 or SFAS 123 for the year ended May 31,
1996, since the option price for the restricted shares
approximated the value of the restricted stock and the options
were considered to have a nominal fair value.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
<PAGE> F-30
F-30
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
The following summarizes the stock option and warrant transactions (see Note 12
for Subsequent Events):
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Stock Options Exercise Other Exercise
Outstanding Price Warrants Price
----------- ----- -------- -----
<S> <C> <C> <C> <C>
Balance, May 31, 1995 190,000 $ 1.00 -
Granted 50,000 $ 1.00 -
Exercised - -
Canceled - -
-------- -------
Balance, May 31, 1996 240,000 $ 1.00 125,000 $ 2.50
Granted 150,000 $ 1.70 387,500 $ 3.81
Exercised - -
Canceled - -
-------- -------
Balance, May 31, 1997 390,000 $ 1.70 512,500 $ 3.49
Granted 50,000 $ 1.00 793,039 $ 3.80
Exercised - ( 100,000) $ 1.00
Canceled - -
------- ----------
Outstanding, May 31, 1998 440,000 $ 1.70 1,205,539 $ 3.90
======= =========
Exercisable, May 31, 1997 390,000 $ 1.70 512,500 $ 3.49
======= =========
Exercisable, May 31, 1998 440,000 $ 1.70 1,205,539 $ 3.90
======== =========
</TABLE>
The weighted average remaining contractual lives of the options and warrants are
8.0 and 3.1 years, respectively, at May 31, 1998.
<PAGE> F-31
F-31
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 9 - INCOME TAXES
The Company has recorded no income tax benefit, nor has deferred
taxes in any year due to a net operating loss carryforward
amounting to approximately $25,000,000 at May 31, 1998, which
will expire, if not utilized, starting 2002.
There are no significant temporary differences between the
Company's tax and financial bases.
Following is a reconciliation between income tax provision
(credit) and the amount that would result from applying the U. S.
statutory rate to pretax income (loss):
May 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
Income Tax Credit at
Statutory Rate $( 450,000) $(1,430,000) $(3,634,624)
Lack of Taxable Income
in Carryback Period 450,000 1,430,000 3,634,624
----------- ----------- -----------
Income Tax Provision $ - $ - $ -
=========== =========== ===========
Following are the components of the Company's deferred tax asset
resulting from the Company's net operating loss carryforward at
each period:
May 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
Deferred Tax Asset $3,388,000 $5,300,000 $9,900,000
Valuation Allowance (3,388,000) (5,300,000) (9,900,000)
----------- ----------- ----------
Net Deferred Tax Asset $ - $ - $ -
=========== ========== ==========
<PAGE> F-32
F-32
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 10 - GEOGRAPHIC AND SEGMENT INFORMATION
Geographic Information
The Company's operations through the year ended May 31, 1996 were
entirely gold mining operations in the United States. Beginning in the
year ended May 31, 1997, the Company began operating in Indonesia
(mining) and Brazil (timber).
Financial data by geographic area as of and for the years ended May
31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
Operating Identifiable
1997 Sales Loss Assets
---------- ------------- ------------- ----------
<S> <C> <C> <C>
United States - $(5,823,572) $ 3,661,472
Indonesia - ( 318,165) 2,600,000
Brazil 287,148 ( 221,236) 2,323,751
------------- ----------- -----------
Total $ 287,148 $(6,362,973) $ 8,585,223
============ =========== ===========
1998
----------
United States $ 41,740 $(6,740,233) $ 3,407,899
Indonesia - ( 13,110) 1,400,000
Brazil 515,951 (2,449,036) 1,577,947
------------ ---------- -----------
Total $ 557,691 $(9,202,379) $ 6,385,846
============ =========== ===========
</TABLE>
Financial data by segment as of and for the years ending May
31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
1997 Timber Mining Total
---------- ------------- ------------ ------------
<S> <C> <C> <C>
Sales $ 287,178 $ - $ 287,178
============ ============ ===========
Operating Loss $( 221,238) $(2,379,049) $(5,597,286)
General Corporate
Expenses - - (3,789,165)
------------ -------------- -----------
Net Loss $( 221,238) $(2,379,049) $(6,386,452)
============ ============ ===========
Identifiable Assets $ 2,323,751 $ 5,829,783 $ 8,153,534
Corporate Assets - - 431,689
----------- ----------- -----------
Total Assets $ 2,323,751 $ 5,829,783 $ 8,585,223
=========== =========== ===========
Capital Expenditures $ 253,998 $ - $ 253,998
============ =========== ============
Depreciation $ 5,500 $ 18,431 $ 23,931
============ =========== ============
</TABLE>
<PAGE> F-33
F-33
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 10 - GEOGRAPHIC AND SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
1998 Timber Mining Total
---------- ------------- ------------ -----------
<S> <C> <C> <C>
Sales $ 515,951 $ 41,740 $ 557,691
============ ============ ============
Operating Loss $(2,449,036) $(1,768,388) $(4,217,424)
General Corporate
Expenses - - (4,984,955)
----------- ----------- -----------
Net Loss $(2,449,036) $(1,766,388) $(9,202,379)
=========== =========== ===========
Identifiable Assets $ 1,577,947 $ 4,336,000 $ 5,913,947
Corporate Assets - - 471,899
----------- ----------- -----------
Total Assets $ 1,577,947 $ 4,336,000 $ 6,385,846
=========== =========== ===========
Capital Expenditures $ 320,702 $ - $ 320,702
Corporate Expenditures - - 12,739
------------ ---------- ------------
Total Expenditures $ 320,702 $ - $ 333,441
Depreciation $ 16,857 $ - $ 16,857
Corporate Depreciation - - 18,788
------------ ---------- ------------
Total Depreciation $ 16,857 $ - $ 35,645
============ ========== ============
</TABLE>
One customer accounted for approximately 20% of the Company's sales
for the year ended May 31, 1997.
NOTE 11 - RESTATEMENTS
The Company has restated its financial statements for the year ended
May 31, 1997 to account for the rescission, in December 1997, of a
$3,000,000 note agreement with an officer of the Company's Brazilian
subsidiary. The effect of the restatement was to decrease long-term
debt and Brazilian timber concession by $2,596,729.
As explained in Note 2, the Company has restated its financial
statements as of May 31, 1996 and for the year ended May 31, 1997 to
provide for impairment of its mining properties in accordance with SEC
guidelines. The effect of the restatement was as follows:
Increase (Decrease)
-------------------------------
Accumulated
Period Net Loss Property Deficit
------------- ---------- ----------- ----------
May 31, 1997 $2,173,444 $(3,120,873) $3,120,873
May 31, 1996 $ - $ - $ 947,429
<PAGE> F-34
F-34
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998
NOTE 11 - RESTATEMENTS (continued)
The amounts as of May 31, 1996 relate solely to the Nevada property.
The 1997 amounts are as a result of the impairment of Nevada and
Indonesia (increase in net loss and decrease in property):
Nevada Indonesia
------ ---------
May 31, 1997 $1,946,662 $226,782
NOTE 12 - SUBSEQUENT EVENTS
Tropical Woods Concessions
In August 1998, the Company entered into an agreement with Tropical
Woods to harvest timber from 1,380 hectares, in Para, Brazil, for a
period of thirty years.
Stock Purchase Agreement
In September 1998, the Company entered into a stock purchase agreement
to sell 5,500,000 shares of its common stock for $500,000.
Simultaneously with the stock purchase agreement, the Company issued a
stock option for the purchase of up to 70,000,000 shares of the
Company's common stock at a price of $0.335 per share and expiring in
September 2005. However, at present, the Company's Articles of
Incorporation authorizes the issuance of up to 50,000,000 shares of
the Company's common stock. If the Company does not gain stockholders'
approval for an increase in the number of authorized shares, to allow
for the exercise of the option, then the option will be cancelled. If
the option is cancelled, the purchaser may elect to rescind the
purchase agreement and receive a refund of the purchase price, or
obtain from the CEO and COO their securities of the Company, owned by
them. The option holders have planned to transfer a portion of the
options to the Company's CEO and COO. While the number of options that
may be transferred has not been specified, it is anticipated that it
will be material.
Also, the Company has agreed to use its best efforts to create a class
of preferred stock which converts to the Company's common stock, on a
public sale, with attributes no less favorable than those comprising
the shares of common stock purchased, as stated above. The preferred
stock will have voting rights to elect three Directors, and the
Company has the right to exchange the preferred stock for the common
stock acquired, as stated above.
<PAGE> F-35
F-35
Interim (Unaudited) Financial Statements for the quarter ended August 28, 1998
The Interim (Unaudited) Financial Statements from the Company's Form 10-QSB
for the quarter ended August 28, 1998 are included on the following pages.
<PAGE> F-36
F-36
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
(dba NEVADA MANHATTAN)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
August 31, 1998 May 31, 1998
--------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 221,273 $ 81,529
Accounts receivable, net of allowance
for doubtful accounts of $150,000 285,316 255,027
Inventories 96,001 108,844
Stock Subscription Receivable 250,000
Prepaid expenses 372,789 283,354
--------- -------
Total current assets 1,225,379 728,754
Properties and equipment
Mineral Properties:
Domestic 2,936,000 2,936,000
Indonesia 1,400,000 1,400,000
Timber concession 700,000 700,000
Machinery and equipment, net 352,300 355,392
Other Assets 234,445 265,700
---------- ----------
TOTAL ASSETS $6,848,124 $6,385,846
========== ==========
LIABILITIES AND STOCKHOLDERS'EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and Accrued Expenses $1,524,254 $1,445,106
Convertible Notes payable to stockholders
- Secured by Common Stock 1,264,520 1,366,075
Notes Payable to Stockholders 522,950 522,950
Note Payable to Officer 713,955 718,000
Current portion of long-term debt 32,214 32,214
---------- ----------
Total current liabilities 4,057,893 4,084,345
Long term debt 35,327 44,327
Convertible debentures 2,407,771 2,313,459
---------- ---------
Total liabilities 6,500,991 6,442,131
---------- ---------
Commitments and contingencies --- ---
Stockholders' Equity (Deficiency):
Preferred stock, $1 par, 250,000 shares
Authorized, 176,414 outstanding
At August 31, 1998 and May 31, 1998 176,414 176,414
Common stock, $0.01 par, 49,750,000
Shares authorized, 40,157,243 and
26,492,543 shares issued and outstanding 401,572 264,926
Additional paid-in capital 30,540,415 28,715,550
Accumulated Foreign Currency Translation 29,610 24,940
Accumulated deficit (30,800,878) (29,238,115)
---------- -----------
Total stockholders' equity (deficiency) 347,133 ( 56,285)
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY) $6,848,124 $ 6,385,846
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> F-37
F-37
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
(dba NEVADA MANHATTAN)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended August 31, 1998 and 1997
<TABLE>
<CAPTION>
(Unaudited)
1998 1997
---- ----
<S> <C> <C>
Revenues $ 248,649 $ 156,776
Cost of Sales 191,004 80,595
------- ------
Gross profit 57,645 76,181
Exploration Costs 78,008 ---
General and administrative Expenses 1,308,308 1,354,981
--------- ---------
Net loss from Operations (1,328,671) (1,278,800)
Other Expenses 234,092 ---
--------- ---------
Net Loss (1,562,763) (1,278,800)
---------- ---------
Cumulative preferred dividends --- 29,337
----------- ---------
Net loss attributable to common
shareholders $(1,562,763) $(1,308,137)
=========== ===========
Basic Loss Per Share $ (0.06) $ (0.10)
=========== ===========
Diluted Loss Per Share $ (0.06) $ (0.10)
=========== ===========
Weighted average shares outstanding 28,895,266 12,467,496
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> F-38
F-38
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
(dba NEVADA MANHATTAN)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended August 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------ ------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,562,763) $(1,278,800)
Adjustments to reconcile net loss to net cash
used in operating activities:
Common stock issued for services 196,092 ---
Common Stock Issued for Financing Expense ---
Amortization of Debenture Discount 94,312
Depreciation and amortization 15,771 99,909
(Increase) Decrease
Accounts receivable (30,289) (13,391)
Inventories 12,843
Prepaid expenses 87,614 (320,849)
Other Assets 31,255
Increase (Decrease)
Accounts payable and accrued Expenses 282,317 481,109
------- -------
Net cash used in operating activities (872,848) (1,032,022)
--------- -----------
Cash flows from investing activities:
Purchase of property and equipment (12,678) (419,189)
--------- ---------
Cash flows from financing activities:
Proceeds from Issuance of convertible
debentures --- 1,500,000
Payments on long-term debt (9,000) (489,928)
Proceeds from issuance of notes to
stockholders 25,000
Payments for Notes Payable to Officer (4,045)
Proceeds from issuance of stock 1,033,645 0
--------- -------
Net cash provided by financing activities 1,020,600 1,035,072
--------- ---------
Foreign Currency Translation Adjustment 4,670 ---
Net increase (decrease) in cash and cash
equivalents 139,744 (416,139)
Cash and cash equivalents at beginning of
period 81,529 559,510
----------- ----------
Cash and cash equivalents at end of period $ 221,273 $ 143,371
=========== ==========
</TABLE>
Supplemental disclosure of cash flow information:
During the three months ended August 31, 1998 and 1997, the Company paid no
income taxes and no interest.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended August 31, 1998, the Company issued: 722,754
shares of its common stock for services rendered by employees and third parties
for $196,092; and 138,834 shares of its common stock for $187,846 of liquidating
damages associated with the Convertible Debentures.
See accompanying notes to consolidated financial statements
<PAGE> F-39
F-39
TERRA NATURAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Statement of Information Furnished
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-QSB instructions and in the opinion of
management contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of August
31, 1998, the results of operations for the three months ending August 31,
1998 and 1997, and the cash flows for the three months ended August 31,
1998 and 1997. These results have been determined on the basis of generally
accepted accounting principles and practices applied consistently with
those used in the preparation of the Company's audited financial statements
for its fiscal year ended May 31, 1998.
2. Business
The Company's business is the harvesting of timber and the production of
rough sawn lumber and other finished wood products in Brazil, the
exploration and mining of precious metals in Nevada and the exploration of
precious metals and coal in Indonesia. The Company holds various rights to
develop and/or harvest timber properties on up to approximately 950,000
hectares located in the states of Para and Amazonas, Brazil; the right to
conduct sawmill operations at a 3.6 hectare sawmill facility located near
the port city of Belem, Para, Brazil; and the right to conduct exploration
activities on seven (7) gold properties and four (4) coal properties in
Indonesia. In August 1998, the Company entered into an agreement to harvest
timber from an additional 1,380 hectares in Para, Brazil, for a period of
thirty years.
3. Other
A. On August 31, 1998, the Company announced that it received an initial
capital infusion of $500,000 from a group led by Tetsuo Kitagawa. Mr.
Kitagawa had a 25-year history with the Marubeni Group and until
recently was the financial managing director of Marubeni's subsidiary
in Holland. Mr. Kitagawa is currently assigned by the Office of the
President of the Russian Federation to form investment funds in and
outside of Russia under the management of the Office of the President
of the Russian Federation for the improvement of its economy. Mr.
Kitagawa, with his group, will provide full-time management and
financial services for the Company. The Company has been reviewing
acquisition candidates submitted through the Kitigawa Group, many of
which are located in the countries of the former Soviet Union. On
October 14, 1998, Mr. Kitagawa was elected a director of the Company
by the Board of Directors.
B. From July 1997 through October 16, 1998, Jeffrey S. Kramer, Chief
Operating Officer, provided loans to the Company, aggregating
approximately $714,000. Mr. Kramer and the Company are currently
contemplating a partial settlement of these outstanding loans through
the issuance of restricted common shares by the Company.
<PAGE> F-40
F-40
4. Subsequent Events
A. On September 24, 1998, the Company announced that it executed a letter
of understanding to acquire the controlling interest of "Chrustalnaia"
of Russia. Chrustalnaia owns and operates five mines with significant
reserves as well as 100 percent of "Stanum" which is involved in
harvesting, cutting and fabricating timber, also with substantial
reserves. Chrustalnaia/Stanum has gross revnues of approximately $16.2
million for fiscal 1997 as presented in their Russian-audited balance
sheet. A recognized major accounting firm will be retained to perform
an audit of the Russian balance sheet and assets, and the final
closing will be subject to such confirmation and the preparation of a
more definitive agreement prepared in accordance with the laws of the
United States and the other appropriate countries which will contain
other closing conditions. Chrustalnaia's mining activities include
mining, processing ore of colored metals and obtaining concentrates in
the fields of gold, silver and tin, and functions under the direction
of Dr. Alexander Gonchar. Dr. Gonchar is a well-known academician and
a respected member of the Academy of Science in Russia as well as
other highly respected scientific communities.
B. On September 10, 1998, the Company announced that Dr. Thomas Ward,
consultant to the U.S. Department of Energy and the Pentagon, has
agreed to become a member of the Company's Advisory Committee in the
capacity of Executive Consulting Director for Scientific Development
Mr. Ward, an internationally respected scientist, was for a period of
six years, a representative of the United States in Russia in charge
of the nuclear demilitarization program. Mr. Ward owns his own
consulting company which contracts a number of scientists providing
project expertise to the U.S. government and private companies. Ward
will head the Company's Research and Development Department in a
number of areas including monocrystallite silicon and isotope
development. In addition, he will implement the technology to process
Russian timber for export to the U.S. in order to preserve the United
States' forests and parks in accordance with the Gore-Russian
Agreement which starts in the year 2000 and is in the range of 20
million cubic meters of timber.
On October 13, 1998, the Company formed Science & Technology
Resources, Inc., which is currently structured as a wholly owned
subsidiary, for the purpose of developing its technological division
to be headed by Mr. Ward.
C. The Company is in the final stages of negotiation with Cyprus Amax
Coal Company for the exploration and development of one of the
Company's coal properties in East Kalimantan, Indonesia.
<PAGE> F-41
F-41
D. On October 5, 1998, the Company announced that it had signed an
agreement for the acquisition of a substantial interest in oil and
revenue-producing gas leases located on the Plainview natural gas
field on 25,000 acres of gas prospects. The agreement on the leases
located in Macoupin County in southwest Illinois is with S.M.T.V. and
Western Pipeline Group. In its initial due diligence on a small part
of the holdings prior to entering into the agreement, the Company has
been able to confirm approximately an initial 4.76 BCF of natural gas.
Additional due diligence and confirmation is planned to commence
immediately.
E. On October 13, 1998 the Board of Directors elected Tetsuo Kitagawa and
Neil H. Lewis as directors, expanding the Board to seven members. Mr.
Kitagawa has been President of SYMIC, a management consulting firm,
since October 1997, prior to which he was employed by Marubeni Finance
(Holland). For the last six of those years he was a Managing Director
of Marubeni Finance, which is a wholly-owned subsidiary of Marubeni,
one of Japan's leading general trading companies. Mr. Lewis is an
attorney in private practice and a consultant to the Company.
<PAGE> F-42
F-42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATION
Comparison of Results of Operations - Three months Ended August 31, 1998 and
August 31, 1997.
- - --------------------------------------------------------------------------------
Revenues for three months ended August 31, 1998 were approximately $249,000 as
compared to approximately $157,000 for the same period in 1997. The sales in
both periods relate to the Brazilian operations. The $92,000 increase in Sales
is due to increased efficiencies. The gross margin for the three months ended
August 31, 1998 was approximately 23% as compared to approximately 49% for the
same period in 1997. The decrease in the gross margin is attributable to
increased labor costs. The General and Administrative Expenses and exploration
costs in the aggregate for the three month period ending August 31, 1998
increased slightly compared to the same period in 1997. Although the Company's
operating activities increased for the three months ending August 31, 1998 over
the same period in 1997, General and Administrative Expenses and exploration
costs in the aggregate rose only slightly due to the Company's ability to
control corporate expenses.
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position as of August 31, 1998 was a deficit of
approximately $2,833,000. Almost since inception, the Company has experienced
pressure on its working capital position due to operating losses and the need to
continually invest in exploration activities on the Nevada Property and, more
recently, the Brazilian Properties, the Silobat Property and the remainder of
the Indonesian Concessions.
To raise funds in the past, the Company has relied upon private placements of
its equity securities. In the quarter ending August 31, 1998, the Company raised
approximately $1,242,000 pursuant to such private placements.
On March 27, 1998, the Company executed an agreement securing $14 million in
equity financing, primarily to fund its timber operations in South America. The
financing, through Bristol Asset Management Company II LLC, requires an
effective registration statement and enables the Company to draw up to $14
million over a three-year period. As of the filing date of this Quarterly
Report, the Company has not effected a registration statement covering the
common stock to be issued pursuant to the $14 million equity financing
agreement.
As of August 28, 1998, TiNV1, Inc., ("TiNV1"), entered into a Subscription
Agreement and a letter agreement with the Company pursuant to which TiNV1
purchased 5,500,000 shares of the Company's common stock for $500,000.
The Brazilian operations represent an opportunity for the Company to generate
significant cash flows for the first time. The Company believes that with the
anticipated increase in daily production at its Brazilian operations to 125
cubic meters per day, much of its continued operations in Brazil, Indonesia, the
Nevada Property, and its operating expenses and overhead at its corporate
offices will be funded by the cash flow generated from its operations in Brazil.
The pending acquisition of Chrustalnaia and the formation of Science &
Technology Resources, Inc. are also being developed for the purpose of increased
revenues.
YEAR 2000 DISCLOSURE
The Company has eight computers connected on a peer-to-peer network. The Company
has no proprietary software. If the Company had to replace all of its computers,
the costs would be $16,000. All Company files and records have been backed up on
zip drives and are continuously backed up on a weekly schedule.
The Company anticipates that it will require additional capital and intends to
secure it through its agreement with Bristol Assets Management Company II LLC,
by utilizing a publicly registered offering of its securities, the capital
provided by the TiNV1 transaction, "Private Placements" and/or funds generated
from its Brazilian operations.
<PAGE> 43
43
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
TERRA NATURAL RESOURCES CORPORATION
Date: November 27, 1997
By: /s/ JEFFREY S. KRAMER
------------------------------------
Senior VP, CFO and Director
<PAGE>
All of the above-referenced sales were made by the Company in reliance upon
the exemptions from registration contained in Section 4(2) of the Securities Act
of 1933 and Regulation D promulgated pursuant to such exemption.
13. EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------------ ---------------------------------------------------------------------------------
<S> <C>
3.(i) Articles of Incorporation of Epic Enterprises, Ltd., Filed June 10, 1985*
3.(ii) Certificate of Amendment to Articles of Incorporation of Epic Enterprises, Ltd.,
Filed September 11, 1987*
3.(iii) Certificate of Amendment to Articles of Incorporation of Nevada Manhattan Mining
Incorporated Filed October 26, 1987*
3.(iv) Certificate of Amendment of Articles of Incorporation of Nevada Manhattan Mining
Incorporated Filed August 31, 1995*
3.(v) Certificate of Determination of Preferences of Series A Preferred Stock of Nevada
Manhattan Mining Incorporated Filed October 25, 1995*
3.(vi) Bylaws of Epic Enterprises, Ltd.*
3.(vii) Memorandum and Articles of Association of Equatorial Resources, Ltd.+
3.(viii) Memorandum and Articles of Association of Kalimantan Resources, Ltd.+
4.(i) Pages 1, 3, 4, and 5 of the Bylaws of Epic Enterprises, Ltd.*
4.(ii) Pages 1 through 9 of Certificate of Determination of Preferences of Series A
Preferred Stock of Nevada Manhattan Mining Incorporated Filed October 25, 1995*
4.(iii) Stock Options Issued to Directors+
4.(iv) Subscription Agreement dated April 14, 1997 with Silenus Limited**
4.(v) Warrant to Purchase Common Stock**
4.(vi) Deed of Trust in favor of Silenus Limited**
4.(vii) Form of Debenture**
4.(viii) Subscription Agreement dated July 15, 1997****
4.(ix) Warrants to Purchase Common Stock****
4.(x) Form of Debenture****
5.(i) Opinion on Legality****
5.(ii) Opinion on Legality
10.(i) Mining Agreement Dated April 4, 1987*
10.(ii) Amendment to Mining Agreement Dated December 9, 1987*
10.(iii) Manhattan Mining Property Agreement Dated March 2, 1989*
10.(iv) Corporation Quitclaim Deed Filed March 9, 1989*
10.(v) Deed of Trust and Assignment of Rents Recorded March 9, 1989*
10.(vi) Joint Venture Agreement Dated June 1993*
10.(vii) Letter Agreement Dated August 10, 1995*
10.(viii) Amendment to Joint Venture Agreement Dated October 20, 1995*
10.(ix) Contract Between Nevada Manhattan Mining, Inc. and Harrison Western Construction Corp.*
10.(x) Principles of Agreement Dated August 19, 1996, as amended***
10.(xi) Employment Agreement Dated January 1, 1995 with Christopher D. Michaels*
10.(xii) Employment Agreement Dated January 1, 1995 with Jeffrey Kramer*
10.(xiii) Consulting Agreement with Gold King Mines Corporation Dated April 1, 1995*
10.(xiv) Consulting Services Agreement Dated October 7, 1996 with Behre Dolbear & Company, Inc. *
10.(xv) Letter Agreement Dated March 25, 1996 with David Weissberg, M.D.*
10.(xvi) Letter Agreement Dated May 13, 1996 with David Weissberg, M.D. *
10.(xvii) Letter Agreement Dated September 25, 1996 with Mr. John Holsten*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------------ ---------------------------------------------------------------------------------
<S> <C>
10.(xviii) Letter Agreement dated April 23, 1997 with British Far East Holding Ltd.**
10.(xix) Addendum Agreement to Principles of Agreement+
10.(xx) Acquisition Agreement by and between Sinkamas Agunbg Ltd. and Kalimantan
Resources, Ltd. dated January 26, 1997+
10.(xxi) Acquisition Agreement for Gold and Coal Concessions by and between Kalimas Jaya
Ltd. and Kalimantan Resources, Ltd.+
10.(xxii) November 11, 1996 letter Agreement with Maderia Intex, S.A. International
Exports+
10.(xxiii) Proposal for Sale and Purchase and Authorization for Exploration of Timber+
10.(xxiv) Eco-Rating Standard Agreement dated December 17, 1996+
10.(xxv) Sale and Purchase Agreement dated February 6, 1997+
10.(xxvi) Agreement to Jointly Develop Timber Properties dated May 30, 1997****
10.(xxvii) Agreement to Acquire Sawmill dated May 30, 1997****
10.(xxviii) Agreement to Harvest Timber and Develop Harvest Properties****
10.(xxix) Addendum to Contract for Extraction of Timber and Development of Timber
Properties****
21 Subsidiaries of Small Business Issuer+
23.(i) Consent of Jackson & Rhodes P.C.**
23.(ii) Consent of William R. Wilson**
23.(iii) Consent of Behre Dolbear & Company, Inc.**
23.(iv) Consent of Jackson & Rhodes P.C.
23.(v) Consent of Merdinger, Fruchter, Rosen & Corso P.C.
27 Financial Data Schedule++
99(i) Business Plan Dated July 1995*
99(ii) Business Plan Dated January 1997+
</TABLE>
- - ---------------
+ Previously filed.
* Filed with Registration Statement on Form SB-2 on December 6, 1996
(Registration No. 333-17423).
** Filed with Registration Statement on Form SB-2 on May 28, 1997
(Registration No. 333-27923).
*** Principles of Agreement in original form filed with Registration Statement
on Form SB-2 on December 6, 1996. Amendment to this document filed with
Registration Statement on Form SB-2 on July 31, 1997 (Registration No.
333-27923).
**** Filed with Registration Statement on Form SB-2 on July 31, 1997
(Registration No. 333-27923).
++ Filed with Form 10-KSB for the fiscal year ended May 31, 1998
Filed with Form 10-QSB for the quarter ended August 31, 1998
<PAGE> 1
EXHIBIT 5.(II)
ALVERSON, TAYLOR, MORTENSEN
NELSON & SANDERS
LAWYERS
7401 West Charleston Boulevard
Las Vegas, Nevada 89117-1401
(702) 384-7000
Fax (702) 385-7000
January 26, 1998
Nevada Manhattan Mining Incorporated
5038 N. Parkway Calabasas, Suite 100
Calabasas, California 91302
Re: Organization and status of
Nevada Manhattan Mining Incorporated
Our File No.: 10177
Nevada Manhattan Mining Incorporated ("Nevada Manhattan") has requested
that we render this opinion as to the organization and good standing of the
corporation in the state of Nevada. This opinion is only for the use of Nevada
Manhattan to demonstrate the compliance of its corporation with applicable
Nevada statutes governing the organization and status of corporations.
We confirm the following:
1) We do not have any financial interest in Nevada Manhattan or its
assets other than fees for legal services performed by us, payment for
which has been provided; and
2) Other than as counsel for Nevada Manhattan, we have no interest in
Nevada Manhattan and do not serve as a director, officer or an
employee of the corporation. We have no undisclosed interest in the
subject matters of this opinion.
The opinions expressed herein are based on an analysis of existing Nevada
statutes. uch opinions may be affected by actions taken or events occurring
after the date hereof. We have not undertaken to determine, or to inform any
person, whether any such actions or events are taken or occur. With the delivery
of this opinion, our engagement with respect to the organization of Nevada
Manhattan has concluded. In examining the documents and signatures presented to
us, we have assumed the genuineness of all documents and signatures presented to
us. We have not undertaken to independently verify the accuracy of the factual
<PAGE> 2
Page Number 2
January 26, 1998
matters represented, warranted or certified therein. We have not been requested
to investigate or verify, and have not investigated or verified, any records,
data or other material relating to Nevada Manhattan or its financial condition
and we have not assumed any responsibility, and we express no opinion, with
respect thereto.
This opinion is based on our knowledge and examination of the specific
documents listed below, copies of which are attached hereto.
1) Certificate of Existence with Status in Good Standing executed by the
Secretary of State for the State of Nevada on November 19, 1997;
2) Articles of Incorporation of Epic Enterprises Ltd., later known as
Nevada Manhattan, filed on June 10, 1985;
3) Certificate of Amendment to Articles of Incorporation of Epic
Enterprises Ltd. filed on September 11, 1987;
4) Certificate of Amendment to Articles of Incorporation of Nevada
Manhattan Mining Incorporated filed on October 26, 1987;
5) Certificate of Amendment of Articles of Incorporation of Nevada
Manhattan Mining Incorporated filed on May 12, 1995;
6) Certificate of Amendment of Articles of Incorporation of Nevada
Manhattan Mining Incorporated filed on August 31, 1995; and
7) Certificate of Determination of Preferences of Series A Preferred
Stock of Nevada Manhattan Mining Incorporated, pages 1 and 2 of 9
pages, filed on October 25, 1995.
The words "our knowledge" signify that in the course of our representation of
Nevada Manhattan no facts have come to our attention that would give us actual
knowledge or actual notice that any such opinions or other matters are not
accurate. Except as otherwise stated in this opinion, we have undertaken no
independent investigation or verification of such matters.
Based on the foregoing, it is our opinion that:
<PAGE> 3
Page Number 3
January 26, 1998
1) Nevada Manhattan is a properly organized corporation under the
applicable laws of the State of Nevada, see Items 2 and 3 above; and
2) Nevada Manhattan is a corporation in good standing with the Secretary
of State for the State of Nevada, see Item 1 above;
This opinion is delivered to you pursuant to your request. This opinion may
not be relied upon by any other party, nor may copies be delivered or furnished
to any other party, nor may all or portions of this opinion be quoted,
circulated or referred to in any other documents without our prior written
consent.
Sincerely,
ALVERSON, TAYLOR, MORTENSEN,
NELSON & SANDERS
Erven T. Nelson
<PAGE> 1
EXHIBIT 23.(IV)
The Board of Directors
Terra Natural Resources Corporation
We consent to the use of our reports included herein in the Registration
Statement on Form 10.
Jackson & Rhodes P.C.
Dallas, Texas
November 24, 1998
<PAGE> 1
EXHIBIT 23.(V)
The Board of Directors
Terra Natural Resources Corporation
We consent to the use of our reports included herein in the Registration
Statement on Form 10.
Merdinger, Fruchter, Rosen & Corso, P.C.
New York, New York
November 24, 1998
