Registration No. 0-25117
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4 TO
FORM 10
FILED APRIL 3, 1997
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
NEVADA MANHATTAN GROUP, INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
(fka TERRA NATURAL RESOURCES CORPORATION)
NEVADA 88-0219765
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
15260 VENTURA BOULEVARD, SUITE 1200
SHERMAN OAKS, CALIFORNIA 91403
(Address of Principal Executive Offices) (Zip Code)
(818) 728-9728
(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)
================================================================================
<PAGE>
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
i
TABLE OF CONTENTS
PAGE
----
The Company.............................................................. 1
Selected Financial Data.................................................. 5
Properties............................................................... 5
Risk Factors............................................................. 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 23
Security Ownership of Certain Beneficial Owners and Management........... 27
Management............................................................... 29
Executive Compensation................................................... 32
Certain Relationships and Related Transactions........................... 34
Legal Proceedings........................................................ 34
Market Price of and Dividends on Company's Equity........................ 37
Recent Sales of Unregistered Securities.................................. 38
Description of Securities Being Registered............................... 43
Indemnification of Directors and Officers................................ 44
Legal Matters and Auditors............................................... 45
Further Information...................................................... 45
Financial Statements and Supplementary Data.............................. 45
<PAGE> 1
1
THE COMPANY
BUSINESS
Nevada Manhattan Group, Incorporated (the "Company"), was formed on June
10, 1985, in the state of Nevada (1). The Company's Articles, as amended
December 11, 1998, currently authorize the issuance of 250,000,000 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 66,044,666 shares of the
Company's Common Stock and 143,908 shares of the Preferred Stock issued and
outstanding as of February 28, 1999.
In the six months ending February 28, 1999 the Company initiated expansion,
diversification and restructuring, with additional experienced management, into
the fields of metals/mining processing and sales; fish products and sales;
timber harvesting/processing and sales; coal mining and exploration; oil and gas
products and technology.
The Company is acquiring and deriving revenues from (1) fishing operations
in the Russian Far East and (2) metals/mining in Russia and (3) timber
operations/holdings in the Russian Far East encompassing over two million
hectares.
The Company derives revenue from timber harvesting and production in Brazil
and holds various rights to develop and harvest timber properties on up to
490,000 hectares located in the State of Para, Brazil (the "Brazilian Timber
Properties").
The Company has also acquired the rights to seven (7) gold mining
concessions and four (4) coal mining concessions in Indonesia.
A description of the Company's timber and metals/mining business is
presented in the "Properties" section of this Registration Statement.
In the field of oil and gas, on February 10, 1999, the Company and
Sibnefteprovod "Siberian Oil Pipeline" jointly announced the signing of a
partnership agreement (the "General Agreement"). The Company will maintain the
role of agent, representative and partner in preparation and realization of
specific projects, programs and contracts and will handle certain international
business matters for the pipeline and will also provide acquisition,
installation and maintenance of equipment including two oil refineries,.
Siberian Oil Pipeline reports that it has a cargo turnover of 184.8 billion tons
per kilometer. It transports 186.7 million tons (1.12 billion barrels) of oil
per year and owns and operates 9,618 km (5,963.16 miles) of oil transporting
pipeline which represents the transportation of approximately 70% of Russian
crude oil.
- ----------------------------------
(1) The Company was originally incorporated 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 to change its name to Nevada
Manhattan Mining Incorporated. On May 12, 1998, the Company further amended its
Articles to change its name to Terra Natural Resources Corporation. On December
11, 1998, the Company further amended its Articles to change its name to Nevada
Manhattan Group, Incorporated.
<PAGE> 2
2
The agreement establishes an authorized management committee consisting of
Sibnefteprovod General Director, Mr. G.G. Khopiorskiy; Mr. Tetsuo Kitagawa, COO
of Nevada Manhattan Group; and individuals and companies assigned by them to
evaluate potential ventures between the parties. No revenue has been generated
through the Sibnefteprovod agreement and no assurances can be given that revenue
or earnings will be generated as all related business is in the preliminary
stages.
The General Agreement is a basis for entering into accords, protocols,
agreements and contracts regarding any type of activity between the parties. Any
limitations would be due to restrictions imposed by the laws of Russia and the
United States as well as by any legislative act of the countries. Coordination
of activities will be done in the form of written accords, agreements and
contracts. The parties to the General Agreement have determined the following
basic directions for activities, taking into account the needs and interests of
Sibnefteprovod which include: (1) long-term financing of Sibnefteprovod
maintenance operations and modernization of the production system; (2)
establishment of long-term financial resources for the development of
Sibnefteprovod infrastructure; (3) preparation and implementation of contracts
for delivery of equipment for the needs of Sibnefteprovod which may include
engineering, research and development technologies, and other activities; (4)
the organization and conducting of marketing studies, auditing services and
legal servicing of the agreements, protocols, accords and contracts executed by
Sibnefteprovod. Sibnefteprovod and Nevada Manhattan may act as contracting
parties, consultants and otherwise. The General Agreement is not a basis for
making financial claims against each other and cannot be the basis for claims of
any type. Financing and payments within the framework of the General Agreement
will be done on the basis of contracts, agreements, accords and protocols signed
to that effect by the authorized persons. The General Agreement is valid until
it is replaced by a later agreement or until one of the parties decides to
suspend or rescind its validity in a unilateral manner as provided.
The text of the General Agreement is executed in the Russian language and
translated into the English language.
In the field of technology, pursuant to a Letter of Understanding, the
Company is acquiring technological inventions by Russian scientist Professor
Alexander Bogomolov, Deputy Director of Kometa, Deputy Director of the Institute
of Chemical Kinetics and Burning Processes, Deputy Director of Siberian Academy
of Science (NOVOSIBIRSK), as follows:
a. Backward Wave Linear Accelerator of Protons, ABC3D, Accelerator based
on concept of three-dimensionality and CVC generators attached to them
with the initial uses of these devices being:
1. to produce isotopes for medical and other uses;
2. for proton, ion and medical therapies;
3. the transmutation (elimination) of radioactive waste;
4. to detect explosives and narcotics and other contraband; and
5. for selection and inspection of objects in space.
b. A mass separator with the ability to divide a mass of 20,000 AME
(1/2000 of a micron). This has many uses including the extraction of
metals for tailings of various mines. In addition, it has other
applications including diamond mining.
Under the terms of a Letter of Understanding between the Company and
Phystechmed, a joint stock company located in Moscow, dated November 16, 1998,
the Company has agreed to acquire the sole and exclusive rights, title and
interest to the technologies described above. In consideration, the Company
agrees to pay the selling party and/or its designees royalties and/or stock in
an amount and under terms to be agreed upon by the parties to the agreement
after completion of thorough due diligence and financial assessment.
The Company does not yet have any indication as to applicable timeframes
for potential exploitation and/or commercial development. In certain instances
prototypes exist but in order to achieve commercialization, further development
will be required. The Company does anticipate substantial funding will be
required to pay for future development costs.
<PAGE> 3
3
Additional areas of the Company's technological business include (1)
telecommunications, (2) software and internet services, and (3) coding
protection systems.
On March 31, 1999 the Company announced a software, internet and technology
joint venture with two scientific and educational centers of Russia: Bauman
Moscow State Technical University and Novosibirsk State University (the
"Institute(s)"). The mission of the joint venture shall be to exploit, for the
benefit of the parties, the vast technological human resources and achievements
available through the universities to continue the development and
implementation of Internet information processing and control systems, Internet
gateway systems software for computers and automation systems. No revenues have
been generated and no assurances can be given that these ventures will result in
revenues and/or earnings.
By the terms of their respective agreements, the Institute(s) appointed the
Company as a joint venture partner, and in certain instance its exclusive
representative, for worldwide marketing and exploitation of certain
technologies. Subject to the provisions of the agreements, the Company agrees to
develop marketing opportunities and to create business relations for the
Institute(s). In connection therewith, the Company, at its sole cost and expense
shall, among other things, maintain an office facility, handle all product
technical inquiries and quotations, assist customers approved by the Company in
placing orders directly with the Institute(s) for: (1) scientific software
development, and (2) retraining and managing personnel chosen by the Company.
The Institute(s) and the Company will provide each other with information
regarding competitive products and technologies available or being developed.
The Company will be responsible for communication between the Institute(s) and
potential customers. Except as otherwise provided, the Company shall be solely
responsible for the payment of all expenses, taxes and levies related to
performance under the agreement(s). As compensation for the grant of rights and
the services of the Institute(s) to be performed, the Institute(s) shall receive
compensation as set forth in a compensation schedule to be mutually agreed upon
by the parties subsequent to completion of due diligence and initial marketing
studies.
AT PRESENT THERE IS NO FULL-TIME STAFF EMPLOYED IN THE TECHNOLOGY BUSINESS.
WHILE THE COMPANY HAS ACQUIRED RIGHTS TO CERTAIN TECHNOLOGIES, THE COMPANY HAS
NOT YET ATTEMPTED TO DETERMINE IF THESE BUSINESSES CAN PERFORM AS SPECIFIED. TO
DATE, NO REVENUES HAVE BEEN DERIVED FROM THE TECHNOLOGY SEGMENT OF THE COMPANY'S
BUSINESS AND NO ASSURANCE CAN BE GIVEN THAT THE COMPANY WILL BE ABLE TO
SUCCESSFULLY AND COMMERCIALLY DEVELOP ANY OF THESE INVENTIONS OR BUSINESSES
RELATED TO TECHNOLOGY, WHICH ARE IN THEIR PRELIMINARY STAGES.
Since September , 1998, the Company has made a transition to the operations
described above from its primary stated purpose of formation which was to
explore, and if warranted develop a property located near Tonopah, Nevada (the
"Nevada Property"), and other gold mineral properties.
The Company has its principal executive offices at 15260 Ventura Boulevard,
Suite 1200, Sherman Oaks, California 91403. Its telephone number is (818)
728-9728 and its facsimile number is 818 728-9717.
Management of the Company presently consists of a seven-member board of
directors (three of which are neither executive officers nor employees) and
three of which are designated by TiNV1, Inc., pursuant to agreements with the
Company (see "Recent Sales of Unregistered Securities - TiNV1 Transaction"). The
Company employs four full-time executive officers as well as four full-time
employees at its principal offices which includes management of its
subsidiaries. The Company's subsidiary, Terra Resources Brazil, Ltda., employs
approximately 30 persons in Brazil who are employed in various capacities
relating to its sawmill operations located near the port city of Belem, Brazil.
<PAGE> 4
4
THE COMPANY'S SUBSIDIARIES
NMG Rexco, Inc. ("NMG Rexco"), incorporated in California in November 1998,
is 100% owned by the Company, with offices at 15260 Ventura Boulevard, Suite
1200, Sherman Oaks, California 91403. NMG Rexco was formed to act on behalf of
Nevada Manhattan for the fishing, processing and distribution of fish and other
seafood, as well as sales and distribution of timber and other resources,
primarily other products from the Russian Far East.
Initial fish products of the company include crab, cod fish and cod fillets,
pollack, halibut and salmon. Initial market development for these products
include Russia, Japan, USA, Norway and China with initial sales taking place in
Japan and USA. The primary area being fished currently is the Sea of Japan and
Eastern Russia. Further proposed developments include the establishment of port
facilities, processing plants, cryogenic facilities, packaging and storage.
Although revenue has commenced, there can be no assurances that businesses
associated with fishing will continue to result in substantial revenue or
profitability.
Chrustalnaya. In December 1998, the Company acquired 80% of the metal mining
resources and timber properties of Chrustalnaya, a Russian joint stock company
headquartered in Kavalerovo for 8,000,000 shares of restricted common stock.
Chrustalnaya has approximate reported annual timber and mining revenues in
excess of $16 million and net income of $500,000. Chrustalnaya's reported mining
resources are in excess of 16,690 tons of tin, 9,970 tons of lead, 50,970 tons
of zinc, 426 tons of silver, 2,760 tons of copper and 878 kg. of gold. Reported
dense timber holdings in the Primorsky Kray region are over two million hectares
or 9,000 square miles. Chrustalnaya's mining activities include mining,
processing ore of colored metals and obtaining concentrates in the fields of
gold, silver and tin.
The Company intends to continue to mine and harvest the resources of
Chrustalnaya under existing license agreements.
Terra Resources Brazil Ltda. (hereinafter "Terra"), incorporated in Brazil
in May 1998, is engaged in the acquisition and development of timber producing
property in the Amazon Basin of Brazil. It has replaced Equatorial Resources,
Ltd. (hereinafter "Equatorial"), incorporated in the British Virgin Islands
("BVI") as an international business company in December 1996, as the operating
entity of the Company in Brazil. Terra is owned 99.5% by the Company and .5% by
Terra's sawmill manager in nominee name of the company. Terra operates from
Jurunas-Belem, Para, Brasil.
Science & Technology Resources, Inc. ("STRI"), incorporated in Nevada in
October, 1998 , is wholly owned. STRI's purpose is to acquire, initiate and
utilize a variety of patented technologies, some of which may have important
application in the area of natural resources. STRI is headed by Dr. Thomas Ward,
a consultant to the U.S. Department of Energy.
At present there is no full-time staff employed in the technology business.
While the Company has acquired rights to certain technologies described above,
the Company has not yet attempted to determine if these businesses can perform
as specified. To date, no revenues have been derived from the technology segment
of the Company's business and no assurance can be given that the Company will be
able to successfully and commercially develop any of these inventions or
businesses related to technology, which are in their preliminary stages.
Kalimantan Resources, Ltd. Kalimantan Resources, Ltd., (hereinafter
"Kalimantan"), incorporated in British Virgin Island in September 1996 maintains
its primary business office in Sherman Oaks, California and is 100% owned by the
Company. Kalimantan's was formed to enter into contracts for the exploration and
if warranted the development and extraction of coal and gold ore in Indonesia.
<PAGE> 5
5
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
(Restated) (Restated) (Restated)
----------- ----------- ---------- ---------- ----------
<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 13,001,362 6,386,452 1,463,258 698,103 480,473
activities.............................. ..
----------- ----------- ---------- ---------- ----------
Net loss....................................(12,838,379) .. (6,362,973) (1,463,258) (698,103) (480,473)
Cumulative preferred dividends.............. 80,316 .. (149,500) (10,600) -- --
----------- ----------- ---------- ---------- ----------
Net loss attributable to common (12,918,695) (6,535,952) (1,473,858) (698,103) (480,473)
shareholders.............................. ..
=========== =========== ========== ========== ==========
Net loss per common share................... (0.86) .. (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..............................$ 2,749,846 .. $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...................... (3,692,285) .. 4,416,783 2,197,495 3,081,334 1,800,234
</TABLE>
PROPERTIES
BUSINESS
The Company currently derives a portion of its revenues from the production
and purchase of rough sawn lumber and other finished wood products in Russia
(former Soviet Union "FSU") and Brazil, the exploration, mining and sales of
metals in Russia (FSU), and the exploration of coal in Indonesia. To this end,
the Company has acquired various rights to develop and/or harvest timber
properties on up to approximately 490,000 hectares located in the state of Para,
Brazil; the right to conduct sawmill operations at a sawmill facility located
near city of Sousel, Para, Brazil; and the right to conduct exploration
activities on seven (7) gold properties and four (4) coal properties in
Indonesia.
The Company holds various rights in and to the following properties (i) 80%
of the metal mining resources and timber properties of Chrustalnaya, a Russian
joint stock company headquartered in Kavalerovo ("Russian Mining and Timber
Properties"). Chrustalnaya's reported dense timber holdings in the Primorsky
Kray region are over two million hectares or 9,000 square miles. Chrustalnaya's
mining activities include mining, processing ore of colored metals and obtaining
concentrates in the fields of gold, silver and tin;. (ii) timber harvesting
rights to various timber properties aggregating up to approximately 490,000
hectares and sawmill facilities located in the state of Para, Brazil (the
"Brazilian Timber Properties"); (iii) real property and mining and exploration
rights to twenty-eight (28) patented and one hundred-eighteen (118) 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); (iv) mining exploration rights to 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
<PAGE> 6
6
"Indonesian Gold Concessions"); and (v) four (4) coal properties located in
Kalimantan, Indonesia, comprising 325,800 hectares (814,500 acres) (the
"Indonesian Coal Concessions"). A more thorough description of the properties is
contained within portions of this section of this Report entitled "Russian
Mining and Timber Properties," "The Brazilian Timber Properties," "The Nevada
Property," and "The Indonesian Concessions."
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 amount ($100,000) budgeted by the Company for environmental compliance
at this time is based on the Company's start up environmental program related to
the Brazilian Timber Properties. The Company previously expended approximately
$50,000 through Eco-Rating International for the commencement of the development
of an eco-effeciency model related to the Company's Brazilian Timber Properties.
Subsequent to this start up program, the Company has begun preparation of the
next phase of development in this program, with targeted budgets at
approximately $100,000 to be expended. Actual budgets related to this program
may be materially different.
At this time, the Company has not budgeted any sums for environmental
expenses related to its mining operations since current activities are
contracted out to third parties in the case of Indonesian operations, and no
current activities are taking place on the Company's Nevada mining property
other than maintenance. In the case of the Company's operations previously
conducted on the Nevada mining property, all necessary permits were obtained
from the Nevada Division of Environmental Protection. In the case of the
Company's recently acquired mining and timber assets in Russia, the Company is
currently not acting as the operator and although the Company is not aware of
any environmental compliance non-conformity, no assurances can be given that the
Company may not be subject to environmental regulatory actions or experience
environmental remediation or compliance costs in the future.
RUSSIAN MINING AND TIMBER PROPERTIES
In December 1998, the Company acquired 80% of the metal mining resources and
timber properties of Chrustalnaya, a Russian joint stock company headquartered
in Kavalerovo for 8,000,000 shares of restricted common stock. Chrustalnaya has
approximate reported annual timber and mining revenues in excess of $16 million
and net income of $500,000. Reported revenues for the period ended February 28,
1999 indicate Chrustalnaya is maintaining revenue levels. Chrustalnaya's
reported mining resources are in excess of 16,690 tons of tin, 9,970 tons of
lead, 50,970 tons of zinc, 426 tons of silver, 2,760 tons of copper and 878 kg.
of gold. Reported dense timber holdings in the Primorsky Kray region are over
two million hectares or 9,000 square miles. Chrustalnaya's mining activities
include mining, processing ore of colored metals and obtaining concentrates in
the fields of gold, silver and tin.
The Company intends to continue to mine and harvest the resources of
Chrustalnaya under existing license agreements.
Nevada Manhattan's activities in Russia and the surrounding Commonwealth
of Independent States (CIS) countries will be supervised by Dr. Alexander
Gonchar, chairman of the General Euro-Asian Committee of Coal, Metals and
Natural Resources, which is comprised of the presidents of the 11 CIS members.
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.
<PAGE> 7
7
THE BRAZILIAN TIMBER PROPERTIES
The Company has acquired timber harvesting rights in up to 490,000 hectares
of timber properties located on various tracts of land in the state of Para,
Brazil. In addition, the Company is currently conducting sawmill activities in
the town of Sousel, Para, Brazil.
The sawmill facility (the "Facility") consists of the port shared with the
owner, two portable saws to cut logs, a variety of timber processing equipment,
a new 230 Kva diesel-powered generator, a forklift to transport sawn timber and
equipment, a 1994 Mercedes truck, various ancillary equipment (carts, rollers,
etc.) and the remaining equipment from its previous sawmill in Sao Miguel not
presently being utilized (including carts, band saws and related equipment)
which the Company plans to use in its expansion.
Terra also purchases sawn timber from other sawmills in the area of Sousel.
Since October 9, 1998 to the present, Terra has purchased over 2,000 cubic
meters of sawn timber.
GOVERNMENT REGULATIONS IN BRAZIL
Both the federal government of Brazil and the state governments of Para and
Amazonas have adopted laws and standards relating to the harvesting and
reclamation of forests. The Company and its subsidiaries, Equatorial and Terra,
have familiarized themselves with all of these laws and standards. These laws
are extensive and have not all been fully adjudicated by the courts in Brazil.
At present, several agencies have interpreted many of these laws in different
manners.
The Company has entered into an agreement with Eco-Rating International,
Incorporated ("Eco-Rating"), Zurich, Switzerland, to better assist the Company
and its subsidiaries 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 the Company to
establish environmental management guidelines for the conduct of activities on
its Brazilian Timber Properties consistent with all applicable environmental
laws and standards.
THE NEVADA PROPERTY
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 1860's, 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.
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 a certain promissory note (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.
<PAGE> 8
8
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
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 1999.
The Company entered into a Subscription Agreement with Silenus Limited on
April 14, 1997 (the "Subscription Agreement"). The Subscription Agreement
required the Company to grant 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. The Company has neither delivered nor
recorded this deed.
Current Ownership Interest. The Nevada Property consists of twenty-eight
(28) patented and one hundred-eighteen (118) unpatented claims aggregating
approximately 1,800 acres. Due to many issues related to the Nevada Property
which present significant doubt regarding the future economic benefits this
property will have to the Company, a full reserve has been provided against its
investment in the property.
THE INDONESIAN CONCESSIONS
General. Three (3) agreements cover the various concessions which the
Company and its wholly-owned subsidiary, Kalimantan Resources, have acquired:
(i) the Principles of Agreement by and between the Company and Maxwells Energy
and Metals Technology Ltd., a Bahamian Company ("Maxwells"), as amended; (ii)
the Acquisition Agreement dated January 26, 1997 by and between Kalimantan
Resources and Singkamas Agung Ltd. ("Singkamas"); and (iii) the Acquisition
Agreement dated February 18, 1997, by and between Kalimantan Resources and
Kalimas Jaya Ltd.
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"). In January and February, 1997, the Company entered into two (2)
additional agreements to acquire an additional six (6) gold mining concessions
aggregating over 23,400 hectares (58,500 acres) and ) four (4) coal properties
located in Kalimantan, Indonesia, comprising 325,800 hectares (814,500 acres).
In January 1997, the Company and Maxwells 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. In May 1998, for no additional consideration, Singkamas
assigned its interests in one additional coal property to the Acquisition
Agreement with Nevada/Kalimantan (see Mecfa Property). Ownership of the
Indonesian Concessions will be acquired through the Company's wholly-owned
subsidiary formed under the laws of the British Virgin Islands known as
Kalimantan Resources, Ltd. ("Kalimantan Resources"). None of the properties
identified under "The Indonesian Concessions" have any proven and recoverable
reserves based on guidelines established under SEC Industry Guide 7.
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
<PAGE> 9
9
Current political and economic conditions in Indonesia have curtailed the
Company's activities in the region over the past year. This may have an impact
on the viability of the Company's projects in the region. The Company recently
commenced additional activities related to one of its coal properties (see
"Mecfa Property" more particularly described hereafter) by organizing available
data and making that data available to one or more potential joint venture
partners in a series of discussions and meetings in both the Company's corporate
offices in California and Singapore, as well as follow-up meetings in Jakarta,
Indonesia for the purpose of reviewing available geological, permit and title
data. These current activities are for the purpose of establishing exploration
programs and, subsequently, the potential for commercial viability through a
joint venture with a partner/operator.
In accordance with SFAS No. 121, the Company has provided an impairment
reserve against the Indonesian properties of $227,000 as of May 31, 1997. This
represents the exploration expenditures as of December 31, 1996 as the
properties do not contain any proven or probable reserves. In addition, for the
year ended May 31, 1998, the Company has taken a write-down for the Sopang Gold
Concession acquisition cost of $1,200,000.
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. 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.
While the Company was entitled to defer exploration activities for six (6)
months, exploration activities commenced but are currently not 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 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.
The Company has undertaken efforts to confirm the chain of title which it
believes to exist with respect to the Sopang Property.
<PAGE> 10
10
West Kalimantan Gold Project. 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" (which has been expanded to 2,000 hectares). 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 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 was
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 Two Hundred Thousand
(200,000) shares of its Common Stock to Singkamas as of the date of this
Registration Statement.
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 anomalous gold
values in four sampling pits, the Company intends to initiate a core drilling
program at the Silobat Property, but as of December 30, 1998, the Company has
not initiated the drilling or development activities. Recent political and
economic conditions in the region have impacted the Company's plans to commence
these activities. Management believes this is a temporary impact. The Company
has not abandoned the operation. Once political and economic conditions improve,
the Company plans to resume activities.
<PAGE> 11
11
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, 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.
Recent political and economic conditions in the region have impacted the
Company's plans to commence these activities. Management believes this is a
temporary impact. The Company has not abandoned the operation. Once political
and economic conditions improve, the Company plans to resume 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.
<PAGE> 12
12
Kalimas was 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 was
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.
Recent political and economic conditions in the region have impacted the
Company's plans to commence these activities. Management believes this is a
temporary impact. The Company has not abandoned the operation. Once political
and economic conditions improve, the Company plans to resume 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 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.
Recent political and economic conditions in the region have impacted the
Company's plans to commence these activities. Management believes this is a
temporary impact. The Company has not abandoned the operation. Once political
and economic conditions improve, the Company plans to resume 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.
<PAGE> 13
13
Recent political and economic conditions in the region have impacted the
Company's plans to commence these activities. Management believes this is a
temporary impact. The Company has not abandoned the operation. Once political
and economic conditions improve, the Company plans to resume activities.
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.
Recent political and economic conditions in the region have impacted the
Company's plans to commence these activities. Management believes this is a
temporary impact. The Company has not abandoned the operation. Once political
and economic conditions improve, the Company plans to resume activities.
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%)
interest in and to the COWs (as well as a fifty-one percent 51% interest in the
Silobat Property) in consideration of the issuance of 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 deposits 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.
Mecfa Property. For no additional consideration, Singkamas assigned its
interests in one additional coal property to the Agreement with
Nevada/Kalimantan. The Mecfa coal property is comprised of three blocks of land
totaling 39,770 hectares, not included in the Company's other coal properties
noted above. Contracts of Work ("COW") have been issued for these properties
supporting the potential for commercial viability and allowing for further
exploration and development to take place. On October 9, 1998, the Company and
Cyprus Amax Coal Co., a unit of Cyprus Amax Minerals Co. (NYSE:CYM) signed an
agreement to operate and fund one of Nevada Manhattan's coal holdings in East
Kalimantan, Indonesia. Under the terms of the agreement, Cyprus will have the
exclusive right to further explore and develop the East Kalimantan coal property
and the right to acquire an 85% interest. Cyprus will manage, operate and sell
the coal. Cyprus will be responsible for 100% of the costs and expenses of each
phase of exploration and development. These expenditures will be recoverable
from production. This project is the primary focus of the Company's coal
activities in Indonesia. No assurances can be made that the Mecfa Property will
result in proven reserves or economic viability.
<PAGE> 14
14
BEHRE DOLBEAR AGREEMENT
The Company entered into an agreement with Behre Dolbear & Company, Inc.
("Behre Dolbear"), an internationally recognized mining consulting firm which
was established in 1911. Behre Dolbear was 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 anomalous gold values in four
sampling pits, the Company intends to initiate a core drilling program at the
Silobat Gold Property in the future.
RISK FACTORS
The purchase of shares of common stock of the company 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 Registration
Statement sets forth certain of 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 Registration Statement. any documents described in
this Registration Statement 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 and 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.
<PAGE> 15
15
NO COMMERCIALLY VIABLE ORE DEPOSITS
Even though the Company has reviewed reports and records of its mineral
properties in Nevada and Indonesia and believes them to have potential, there is
no assurance that there are commercially viable ore deposits. Moreover, the
Company has not established any proven or probable 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 has a stockholders' deficiency
of $3,692,285 at May 31, 1998. As of May 31, 1998, the Company has realized an
aggregate net loss (since inception) of $32,874,115. Until the fiscal year ended
May 31, 1997, the Company had failed to post revenues from operations. Total
revenues for 1997 and 1998 were $287,178 and $557,691 respectively, and
additional increases are anticipated. However, prospective investors should be
aware that the Company was a development-stage company for financial statement
of Financial Accounting Standards only and not for mining operations, that only
recently (1997/1998) 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 operations currently being
conducted and to be conducted in its fishing operations, mining and metals sales
in Russia and the countries of the Former Soviet Union, timber operations and
sales and technology development .
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 an annual profit from operations since its
inception to the present. Management projects that the further exploration and
development of its businesses will result in profitable operations although, for
the reasons stated elsewhere in this Registration Statement, no guaranty to that
effect can be made.
HISTORY OF UNSUCCESSFUL OPERATIONS
Timber, mining and natural resource operations are speculative by their
nature. Management of the Company has in the past selected certain mineral
properties which have proven to be uneconomic. There is no assurance that the
present operations will prove to be economic or profitable to the Company.
Although revenues have commenced and are increasing, if all or most of the
businesses 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.
PROFITABILITY OF FISHING OPERATIONS
During the Company's second fiscal quarter of fiscal 1999, it commenced
fishing operations. Current operations include fishing, processing and
distribution of fish and other seafood. Although revenues have commenced and are
increasing, no assurances can be given that the Company's fishing operations
will continue to result in substantial revenue or profitability.
PROFITABILITY OF RUSSIAN MINING AND TIMBER OPERATIONS
On December 23, 1998, the Company acquired 80% of the metal mining
resources and timber properties of Chrustalnaya, a Russian joint stock company
headquartered in Kavalerovo. Chrustalnaya's reported annual timber and mining
revenues are approximately $16,000,000 and net income of $500,000. Operations in
Russia and the countries of the Former Soviet Union are speculative in nature.
Although revenues are ongoing, with anticipated increases, no assurances can be
given that the Company's operations in association with its acquisition of
assets from Chrustalnaya will result in ongoing profitability.
<PAGE> 16
16
PROFITABILITY OF TECHNOLOGY-RELATED BUSINESS
During the second quarter of fiscal 1999, the Company initiated expansion,
diversification and restructuring, with experienced management, into the fields
of high technology, some of which is related to natural resources. Additional
areas of the Company's technological business include telecommunications,
software and internet services and coding protection systems. The Company has
not experienced any revenues from its technology-based businesses which are in
the development stage. No assurances can be given that the Company's activities
in the fields of technology will result in revenue or profit.
PROFITABILITY OF BRAZILIAN TIMBER OPERATIONS
The Company has expended considerable sums to improve the Tropical Woods
sawmill facility located in Belem, Para Brazil. Although revenues have commenced
and are increasing, no assurances can be given that the Company's Brazilian
timber operations will be profitable.
In addition to title 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.
TITLE FAILURE TO THE NEVADA PROPERTY
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 the 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 certain of the interests in the Nevada Property may be retained by
persons or entities other than the Company.
The Company 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, 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
<PAGE> 17
17
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 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 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.
Recent political and economic conditions in the region have restricted the
commencement of exploration and development activities in some of the Indonesian
projects. Management believes this is a temporary impact. The Company has not
abandoned the operation. Once political and economic conditions improve, the
Company plans to resume activities. No assurances can be given that exploration
activities will result in the establishment of any proven reserves. There has
been no revenue generated to date through production of gold or coal and no
assurances can be given that operations will result in economic viability.
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
<PAGE> 18
18
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.
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.
<PAGE> 19
19
ENVIRONMENTAL REGULATION AND LIABILITY
United States: 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.
Brazil: Both the federal government of Brazil and the state government of
Para have adopted laws and standards relating to the harvesting and reclamation
of forest. These laws have not been completely adjudicated through the courts in
Brazil. As a consequence, many government agencies have interpreted these laws
and regulations in inconsistent manners, thereby contributing to uncertainty as
to the Company's compliance with these standards. Failure to comply with these
standards results in varying levels of sanctions, including the cessation of
further activities. As discussed elsewhere, the Company intends to conduct its
operations to meet or exceed these standards. Consequently, costs of operations
will be higher.
Indonesia: 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.
Russia. The Company is currently not acting as the operator of its recently
acquired mining and timber assets in Russia. Although the Company is not aware
of any environmental compliance non-conformity, no assurances can be given that
the Company may not be subject to environmental regulatory actions or experience
environmental remediation or compliance costs in the future.
LIQUIDITY OF COMMON STOCK; CAPITALIZATION
The Company's Common Stock is currently traded on the NASDAQ Electronic
Bulletin Board. Over the past six (6) months ending February 28, 1999, the
average monthly trading volume has been approximately 5,940,000 shares (see
"Market for Common Equity"). In addition, the number of outstanding shares of
the Company's common stock has increased from 12,215,415 shares as of May 31,
1997 to 66.044,666 shares as of February 28, 1999. The result of this increase
in capitalization results in greater difficulty for shareholders in the Company
to realize a return of their investment based upon price-earning ratios. 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> 20
20
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 in the
foreseeable future. Holders of the 1998 Preferred Stock are entitled to an
annual cash or stock dividend offered at the rate of eight percent (8%) of par
value (equal to $.08 per share) payable out of any funds legally available
therefor. 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.
CLASSIFICATION OF SECURITIES
Currently, the Company's stock is considered to be "penny stock" pursuant to
Section 3(a)(51)(A) of the Securities Exchange Act of 1934. This designation has
resulted from various factors including a lack of performance by the Company and
increased capitalization. In the event the price of the Company's Common Stock
remains below $5.00 per share, the Company will continue to be subject to the
increased disclosure requirements associated with the issuers of "penny stock".
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 may increase.
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
mineral 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. In addition, the
Company purchased an 80% interest in the mining and timber assets of
Chrustalnaya for 8,000,000 restricted shares of Common Stock. Once these 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.
<PAGE> 21
21
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.
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.
<PAGE> 22
22
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 and 1998. Currently gold is trading at approximately $285 per
ounce. In 1996, gold averaged over $380 per ounce. Instability in gold prices
may affect the profitability of certain 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.
See below with respect to the Company's lack of engaging in any hedging or
similar transactions with respect to commodity price fluctuations.
LACK OF HEDGING TRANSACTIONS
The Company does not presently engage in any hedging or other transactions
which are intended to manage risks relating to commodity price fluctuations.
While timber prices can fluctuate, in recent periods such prices have been
relatively stable, and, accordingly, the Company has not elected to engage in
any hedging transactions relating to timber. With respect to mineral resources,
the Company does not presently engage in any hedging transactions since the
Company's production of such resources is limited at the present time. At such
time as the Company's production of such resources increases, the Company may
engage in hedging or other transactions which are intended to manage risks
relating to price fluctuations of these minerals. The Company also does not
presently engage in hedging or other transactions which are intended to manage
risks relating to fluctuations in foreign currency exchange rates, but may
engage in such transactions as the revenues from foreign operations which are
remitted to the United States increase. The Company's failure to engage in any
such hedging transactions may result in a material adverse effect on the Company
if commodity prices or foreign exchange rates fluctuate.
USE OF FORWARD-LOOKING STATEMENTS
This Registration Statement contains "forward-looking statements". Such
statements are found in the Sections of this Registration Statement entitled
"Business," "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> 23
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
- ------------
In the six months ending February 28, 1999 the Company initiated expansion,
diversification and restructuring, with additional experienced management, into
the fields of metals/mining processing and sales; fish products and sale; timber
harvesting/processing and sales; coal mining and exploration; oil and gas
products and technology.
A detailed description of these businesses and the risks and contingencies
associated with such businesses and ownership interests are more particularly
described in the Sections of the Registration Statement entitled "The Company,"
"Properties" and "Risk Factors."
The Company believes that the changes in management and operations will
have a positive impact on the Company's liquidity and capital expenditures.
While revenues have expanded over the last two quarters, no assurances can be
given that this trend will continue. The Company anticipates requiring
additional capital and intends to secure it by utilizing a publicly registered
offering of its securities, "Private Placements" and/or funds generated from
operations. No assurances can be given that the Company will secure the
necessary funds through a publicly registered offering of its securities,
private placements and/or funds generated from operations.
Comparison of Results of Operations - Nine months ended February 28, 1999
and February 28, 1998
- ----------------------------------------------------------------------------
Revenues for the nine months ended February 28, 1999 were $24,573,243, as
compared to $525,981 for the same period in 1998. The increase of $24,047,262 in
revenues is attributed primarily to the Company's new operations as follows:
$21,140,000 attributed to the Company's sales and marketing activities of
products manufactured in the Commonwealth of Independent States (these
transactions are not necessarily recurring, however, the Company will continue
to seek these types of transactions in the future); and $2,645,360 from Fishing
operations (of this, there were three customers whose sales represented 50%, 31%
and 19%, respectively). These are new revenue generators for the Company and may
be indicative of what the Company will do in the future. However, no assurances
can be given.
Gross profit margin for the nine months ended February 28, 1999 was 15%,
compared to gross profit margin of 21% for the same period in 1998. Sales and
marketing activities had a gross profit margin of 15% and the sale of fish had a
gross profit margin of 1%. However, gross profit margins the Company is
experiencing now are not necessarily indicative of what can be anticipated in
the future.
General and administrative expenses for the nine months ended February 28,
1999 were $4,085,834 compared to $4,363,954 for the same period in 1998. The
decrease of approximately $278,120 is attributed primarily to reduced expenses
and increased efficiencies in the Brazilian operations and reduction in related
travel expense.
Investment income for the nine months ended February 28, 1999 was $327,909
compared to no activity for the same period in 1998. The increase is attributed
to the Company's asset acquisition of 80% of the metal mining resources and
timber properties of Chrustalnaya, a Russian Joint Stock Company headquartered
in Kavalerovo.
<PAGE> 24
24
Interest expense for the nine months ended February 28, 1999 was $425,527
compared to no activity for the same period in 1998. The increase of $425,527 in
the Company's interest expense is attributable primarily to convertible
debentures and notes payable to shareholders.
The write-off of mineral properties for the nine months ended February 28,
1999 was $885,920 compared to no activity for the same period in 1998. The
increase is a one-time charge not expected to be recurring in the future.
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 approximately $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. Other interest and expense increased by $5,436,555
which is due to an increase in interest expense related to the debentures and
notes to shareholders and a $4,836,000 writedown of mineral properties and
timber investment which resulted from Management's test for impairment.
Comparison of Results of Operations --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.
<PAGE> 25
25
Comparison of 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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company continues to experience pressure on its working capital
position due to operating losses and the need to continually invest in its
exploration activities and operational obligations. Management believes that the
Company's expansion and diversification plan, as more fully described below,
along with plans to obtain additional capital, as more fully described below,
will provide sufficient funds to continue the Company's operations.
For the first time since the Company's inception it has experienced net
income for two consecutive quarters. Revenues increased substantially due to
increased activities in the areas of sales and marketing of metals/mining,
fishing and timber operations. Management anticipates that this trend may
continue, though no assurances can be given.
The Company had a cash position, at February 28, 1999, of $754,733, of
which $393,000 is being allocated for use in the acquisition of assets and other
costs associated with establishing the Company's fishing operations in Far East
Russia and is not available for general corporate purposes. The other $361,733
is available for general corporate purposes.
Pursuant to the Company's expansion and diversification plan, including the
formation of its newly formed subsidiary, NMG Rexco and the Company's new
branch, Nevada Manhattan Tokyo Branch, as well as increased revenue from the
Company's metals/mining, fishing and timber sales and marketing activities, the
Company has continued for the second consecutive quarter to generate significant
revenue. The Company believes that with the anticipated increase in daily
production from each of these operations, expenses and overhead will be funded
by the cash flow generated from its operations.
The acquisition of the assets of Chrustalnaya, with reported annual revenue
in excess of $16,000,000, for 8,000,000 shares of restricted common stock of the
Company, represents an additional significant source of potential revenue and
earnings.
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 restricted common stock for
$500,000. In the six months ended February 28, 1999, the Company received in
excess of an additional $1,860,000 of equity funding from TiNV1 principals
and/or affiliates. On December 9, 1998 the Company's stockholders approved an
option for TiNV1 to purchase an additional 70,000,000 shares of restricted
common stock at an exercise price of $0.335 per share which was the trading
price of the Company's common stock on the date of the transaction.
In December, 1998 an investor subscribed for 6,000,000 shares of Common
Stock, pursuant to a private placement, at a purchase price of $1,500,000,
through the issuance of a Promissory Note (the "Note") at the interest rate of
average monthly Federal Funds rate as listed daily in the Wall Street Journal,
payable in installments of $400,000 on or around December 20, 1998 and
$1,100,000 (which is included in stock subscriptions receivable as of February
28, 1999) on March 25, 1999. The first installment has been received by the
Company. The second installment has not yet been received by the Company.
<PAGE> 26
26
The Company anticipates that it will require additional capital and intends
to secure it by utilizing a publicly registered offering of its securities,
"Private Placements" and/or funds generated from operations. No assurance can be
given that the Company will secure the necessary funds through a publicly
registered offering of its securities, private placements and/or funds generated
from operations.
YEAR 2000 DISCLOSURE
----------------------
The Company has appointed a Year 2000 ("Y2K") Risk Manager to look into all
possible effects of Y2K problems within the business operations of the Company
and implement corrective action to ensure that the Company's operations will not
be adversely affected.
The corporate headquarters in the United States maintains eight computers
connected on a peer-to-peer network and four computers independent of the
network. The Company's office in Japan maintains two computers independent of
any network. The company has no proprietary software. All hardware and software
vendors have been contacted and most have expressed no immediate Y2K concerns in
relation to the company's hardware and software. The company has plans to
replace and/or upgrade software and hardware that is non-Y2K compliant; however
has not begun to take such corrective action. The Company's Y2K Risk Manager has
determined that the accounting software of the Company is not as yet Y2K
compliant and is taking such necessary steps to replace and/or upgrade such
software. The Company estimates that the replacement and/or upgrade of the
accounting software is less than $1,000. The Company's Y2K Risk Manager shall
periodically seek an update from hardware and software manufacturers in order to
update the Company's Y2K information and reassess any possible Y2K problems.
If the Company had to replace all of its computers, the costs would be
approximately $25,000. All Company files and records have been backed up on zip
drives and are continuously backed up on a weekly schedule. Furthermore, select
Company proprietary, legal and financial information has been backed up on hard
copy in order to preserve business records and maintain business flow in case of
any possible unforeseen or undisclosed Y2K conflicts by third parties.
The Company maintains no direct customers. The Company maintains suppliers
and/or utilizes professional services including but not limited to legal,
accounting and banking. The Company has been in contact with its legal,
accounting and banking service providers and has been assured by the providers
that they are Y2K compliant and/or have assigned a "Risk Manager" to assess and
resolve any possible conflicts that may arise.
The Company maintains a number of subsidiaries and/or affiliates in various
countries including the United States, Brazil, Indonesia, and various republics
of the Commonwealth of Independent States. As part of the Company's risk
assessment, the Risk Manager has contacted and evaluated each affiliate and
subsidiary in order to assess any possible Y2K conflicts.
It has been determined that there is only one major conflict within the
Company's United States operations as noted above, and no major conflicts within
the Indonesia operations/subsidiaries. There are no major conflicts between
suppliers and/or manufacturers within the United States/Indonesia operations.
The primary activities within these regions are explorative and thus utilize no
manufacturers and/or suppliers as well as no equipment with possible imbedded
chips and/or microcontrollers.
<PAGE> 27
27
The Company's subsidiaries in Brazil and the Commonwealth of Independent
States are currently in the process of assessing their state of readiness and
any possible counter measures that need to be undertaken in order to assure Y2K
compliance. Although it is believed that all subsidiaries in Brazil and within
the Commonwealth of Independent States are Y2K compliant, the Company believes
that since the majority of the operations are manually conducted, the effects of
any possible technological problem shall be minimal. The Company has further
assessed that if there should happen to be a Y2K problem, the Company's
financial statement shall not be materially affected.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of February 28,
1999 regarding the record and beneficial ownership of the Common Stock and
Preferred Stock by: (i) any individual or group (as that term is defined in the
federal securities laws) of affiliated individuals or entities who is known by
the Company to be the beneficial owner of more than five percent of the
outstanding shares of Common Stock or Preferred Stock; (ii) each executive
officer and Director of the Company; and (iii) the executive officers and
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.
<TABLE>
<CAPTION>
AMOUNT OF
NAME AND ADDRESS TITLE OF BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER CLASS OWNERSHIP CLASS (1)
- ------------------- ---------------- ----------- -----------
<S> <C> <C> <C>
TiNV1, Inc.(2) Common Stock 5,500,000 (3) 8%
15260 Ventura Blvd., Ste. 1200
Sherman Oaks, CA 91403 Preferred Stock 0 --
Alikhan Gakaev Common Stock 7,808,795 12%
Lomonosovsky 14
Moscow, Russia Preferred Stock 0 --
LLC NPK Edikt Common Stock 8,000,000 12%
Mikhailova str. 39,1
Moscow, Russia Preferred Stock 0 --
Christopher D. Michaels Common Stock 1,664,231 (4) 3%
15260 Ventura Blvd., Ste. 1200
Sherman Oaks, CA 91403 Preferred Stock 0 --
Jeffrey S. Kramer Common Stock 1,353,200 (5) 2%
15260 Ventura Blvd., Ste. 1200
Sherman Oaks, CA 91403 Preferred Stock 8,550 7%
Joe C. Rude III, M.D. Common Stock 3,261,982 (6) 5%
3065 River N. Pkwy
Atlanta, Georgia 30328 Preferred Stock 0 --
William E. Wilson Common Stock 143,304 (7) *
1819 E. Brainard Street
Pensacola, FL 32503 Preferred Stock 789 *
Tetsuo Kitagawa Common Stock 5,500,000 (8) 8%
15260 Ventura Blvd., Ste. 1200
Sherman Oaks, CA 91403 Preferred Stock 0 --
</TABLE>
<PAGE> 28
28
<TABLE>
<CAPTION>
AMOUNT OF
NAME AND ADDRESS TITLE OF BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER CLASS OWNERSHIP CLASS (1)
- ------------------- ---------------- ----------- -----------
<S> <C> <C> <C>
Hironao Mutoh Common Stock 5,500,000 (8) 8%
15260 Ventura Blvd., Ste. 1200
Sherman Oaks, CA 91403 Preferred Stock 0 --
Richard Izumi Common Stock 5,500,000 (8) 8%
15260 Ventura Blvd., Ste. 1200
Sherman Oaks, CA 91403 Preferred Stock 0 --
Ilyas Chaudhary Common Stock 0 --
5753-G Santa Ana Cyn. Road
Ste 5100 Preferred Stock 0 --
Anaheim, CA 92807
Neil H. Lewis Common Stock 0 (9) --
18620 Hattaras Street, #175
Tarzana, CA 91356 Preferred Stock 0 --
All Officers and Directors Common Stock 11,922,717 (10) 18%
as a Group
(nine persons) Preferred Stock 9,339 7%
</TABLE>
- --------------
* Less than 1%.
(1) Common Stock issued and outstanding does not include 6,569,104 shares of
Common Stock issuable upon the alleged conversion of convertible debentures by
parties to a lawsuit as described under "Legal Proceedings". The Company does
not believe that it is obligated to issue such Common Stock and, accordingly,
does not consider such stock to be outstanding as of this date.
(2) On September 21, 1998 TiNV1, Inc. ("TiNV1"), newly formed California
corporation, filed with the Securities and Exchange Commission a Schedule 13D
(the "Schedule 13D") regarding 5,500,000 shares of Common Stock it purchased
from the Company. The Schedule 13D indicated that TiNV1 was a wholly-owned
subsidiary of SYMIC, Inc. ("SYMIC"), a California corporation, which in turn was
a wholly-owned subsidiary of RDI, Inc. ("RDI"), a California corporation. (The
Schedule 13D further indicated that SYMIC had entered into subscription
agreements to issue 5% of its stock to each of the following persons: Tetsuo
Kitagawa, elected a Director in December, 1998; Hironao Mutoh, elected a
Director in December, 1998 and Richard Izumi elected a Director in April, 1999.
During September, 1998, Messrs. Kitagawa, Mutoh and Izumi had become 5%
shareholders, respectively, upon providing consideration to SYMIC.) The Schedule
13D stated that RDI was in turn owned and controlled by Mr. Movdy Gakayev, whose
address is 701 Ocean Avenue, Suite 108, Santa Monica, California 90402, and that
Mr. Kitagawa was sole Director and President, Chief Financial Officer and
Secretary of TiNV1, SYMIC and RDI. The Schedule 13D indicated that the source of
the funds used to purchase the stock was capital contributions to RDI from
personal funds of Mr. Movdy Gakayev, TiNV1's ultimate owner, and in turn as
capital contributions from RDI to SYMIC to TiNV1. For information concerning
TiNV1's purchase of the 5,500,000 shares and a related option agreement in favor
of TiNV1, see "Recent Sale of Unregistered Securities - TiNV1 Transaction."
(3) Excludes up to 70,000,000 shares of Common Stock which may be issued
pursuant to an option granted to TiNV1. See "Recent Sale of Unregistered
Securities - TiNV1 Transaction." The 70,000,000 shares, together with the
5,500,000 shares presently held by TiNV1, would represent approximately 55% of
the Company's presently outstanding Common Stock on a pro forma basis as of
February 28, 1999.
(4) Includes 120,000 shares of Common Stock issuable upon exercise of stock
options which may be exercised in whole or in part within 60 days of the date of
this Registration Statement.
Mr. Michaels resigned as Chief Executive Officer on February 10, 1999 and as
Director on April 7, 1999.
<PAGE> 29
29
(5) Includes 90,000 shares of Common Stock issuable upon exercise of stock
options which may be exercised in whole or in part within 60 days of the date of
this Registration Statement and 8,550 shares of Common Stock issuable upon
conversion of 8,550 shares of Preferred Stock held by Mr. Kramer.
(6) Includes shares owned by Dr. Carolyn Rude and Quantum Radiology (an
affiliate of Dr. Rude), as well as (a) 317,392 shares held as collateral as
provided under "Certain Relationships and Related Transactions" below, (b)
30,000 shares of Common Stock issuable upon exercise of stock options which may
be exercised in whole or in part within 60 days of the date of this Registration
Statement.
(7) Includes 789 shares of Common Stock issuable upon conversion of 789 shares
of Preferred Stock held by Mr. Wilson.
(8) Represents the shares held by TiNV1 as indicated above.
Mr. Izumi became Chief Executive Officer on February 7, 1999 and Chairman
of the Board on April 7, 1999.
(9) Mr. Lewis resigned as Secretary and Director on April 23, 1999.
(10) Includes 250,000 shares of Common Stock issuable upon exercise of stock
options held by all officers and Directors as a group which may be exercised in
whole or in part within 60 days of the date of this Registration Statement and
9,339 shares of Common Stock issuable upon conversion of 9,339 shares of
Preferred Stock held by such persons.
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:
Principal Occupation and Director
Name Age Offices with the Company Since
---- --- ------------------------ --------
Richard Izumi 45 Chief Executive Officer, Chairman April 1999
Hironao Mutoh 44 President --
Bruce D. Lauper 40 Chief Financial Officer --
Tetsuo Kitagawa 50 Chief Operating Officer and Director Oct. 1998
Jeffrey S. Kramer 44 Vice President, Technology and 1989
Telecommunications; Director
<PAGE> 30
30
Principal Occupation and Director
Name Age Offices with the Company Since
---- --- ------------------------ --------
Joe C. Rude III 53 Diagnostic radiologist with Quantum 1995
Radiology, Director
William E. Wilson 82 Retired, Director April 1998
Ilyas Chaudhary 51 President of Sedco, Director Dec. 1998
RICHARD IZUMI was appointed Chief Executive Officer by the Board of Directors on
February 10, 1999 and Chairman of the Board on April 7, 1999. Mr. Izumi also
serves as a director of NMG Rexco. Mr. Izumi has an extensive 27-year career in
finance that includes the immediately preceding 11 years as a partner at Price
Waterhouse and Ernst & Young, where his experience included financial statement
audits, international tax, M & A consulting and ABS, Euro and MTN bond
financings. He has served numerous Fortune Global 500 companies including
Toyota, Japan Energy, Mitsui & Co., Mitsuibishi Corporation and NEC.
HIRONAO MUTOH was appointed President by the Board of Directors on February 10,
1999 and also serves as CEO and director of NMG Rexco. Mr Mutoh served briefly
as a director of the Company. From 1997 to 1998, Mr. Mutoh served as Managing
Director at Delphi Trade Finance, a trade finance company. Prior to this, from
January 1989 to January 1997, Mr. Mutoh served as President of Crown USA Inc., a
$400 million subsidiary of a Tokyo Stock Exchange, first section listed company.
BRUCE D. LAUPER was appointed Chief Financial Officer by the Board of Directors
on April 23, 1999. Mr. Lauper is also a director and Chief Financial Officer of
NMG Rexco, Inc. Mr. Lauper has an extensive 18-year career in accounting and
finance. This includes working at Price Waterhouse, an international accounting
firm, as an audit senior manager from January 1984 to August 1990, working as an
independent consultant providing accounting and finance services from September
1990 to May 1995 and serving as Chief Financial Officer of a privately held
professional photographic laboratory from June 1995 to March, 1999 when he
joined the Company.
TETSUO KITAGAWA is Chief Operating Officer of the Company since December, 1998.
Mr. Kitagawa has been a Director of the Company since October 1998 and President
of SYMIC, a management consulting firm, since October 1997, prior to which he
was the Managing Director President of Marubeni Finance (Holland) B.V., a
wholly-owned subsidiary of Marubeni, one of Japan's leading general trading
companies.
JEFFREY S. KRAMER is Vice President of Technology and Telecommunications and
Director of the Company. Mr. Kramer previously served as Chief Financial
Officer, Chief Operating Officer, Secretary and Treasurer. 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.
Mr. Kramer attended the City College of New York. He has held management
positions with Continental Cafes. He has traveled both nationally and
internationally on behalf of the company to conduct contract negotiations and
assist in the supervision of the Company's projects.
JOE C. RUDE III has been a Director since 1995. From 1977 to 1995, he was a
diagnostic radiologist associated with Cobb Radiology Associates, Austell,
Georgia, which merged with Quantum Radiology in 1995. Since 1995, Dr. Rude has
been a diagnostic radiologist at Quantum Radiology. Dr. Rude also is a co-owner
of the Ambulatory Care Center, a medical care company.
<PAGE> 31
31
WILLIAM E. WILSON was elected a director in April 1998. Mr. Wilson purchased his
own insurance agency in 1954, which was sold in 1985; however, Mr. Wilson
remained an associate agent until his retirement in 1996.
ILYAS CHAUDHARY has been a Director of the Company since January, 1999, pursuant
to an agreement between the Company and Capco Aquisub, Inc. Mr. Chaudhary is
currently President of Sedco, Inc., an oil and gas investment company.
Concurrently, Mr. Chaudhary serves as Chairman of Meteor Industries, a
NASDAQ-listed oil and gas company, since November 1995. He was a director of
Saba Petroleum Company, an AMEX-listed oil and gas company, from 1985 to
November, 1998 and served as its Chairman of the Board from 1993 to 1998.
REGULATORY PROCEEDINGS
As previously reported, 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 federal securities laws. 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 the entry of a consent judgment, which
judgment was entered on April 7, 1994, against the Company and certain of the
Company's past and present key employees, including Christopher D. Michaels,
Jeffrey S. Kramer and Stanley J. Mohr. Pursuant to the terms of the consent
judgment, the Company, the aforesaid three executives and the Company's
officers, agents and certain others were permanently enjoined from (a) selling
securities in violation of the registration provisions of the federal securities
laws and (b) violating the antifraud provisions of the federal securities laws.
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 any improper gains. On April 7, 1994, in
response to the audit 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 acknowledgment that the Company and its executive
officers had received no improper gains as a result of prior activities by the
Company in offering and selling its securities and that the consent judgment
resolved 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 them.
SIGNIFICANT CONSULTANTS
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 $5.75 per share (subject to adjustment for certain events)
vesting at the rate of thirty-three and one-third percent (33 1/3%) per year
after the first twelve months of service.
<PAGE> 32
32
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Company's
executive officers for the last three fiscal years (i.e. fiscal years ending May
31, 1996; May 31, 1997; and May 31, 1998).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ------------------------- -----------------------
------------------------------------------------ RESTRICTED SECURITIES ALL
NAME AND OTHER STOCK UNDERLYING LTIP OTHER
PRINCIPAL ANNUAL AWARD(S) OPTIONAL/ PAYOUTS COMPENSATION
POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) ($) SARS(#) ($) ($)
- ---------------------- ---- --------- -------- ------------------ ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Christopher D. 1998 $156,000 -- $5,408 -- 10,000 -- --
Michaels, President
Chief Executive 1997 $251,299 -- $6,264 -- 10,000 -- --
Officer and Chair- 1996 $100,449 -- $6,316 $ 225,000(3) 10,000 -- --
man of the Board
of Directors (1)
Jeffrey S. Kramer, 1998 $156,000 -- $6,056 -- 10,000 -- --
Senior Vice 1997 $224,397 -- $8,080 -- 10,000 -- --
President, Chief
Financial Officer 1996 $117,791 -- $7,658 $ 225,000(5) 10,000 -- --
and Sec-Treas (2)
</TABLE>
(1) Mr. Michaels resigned as Chief Executive Officer and President in
February 1999 and as Chairman of the Board in April 1999.
(2) Mr. Kramer resigned as Chief Financial and Operating Officer, Secretary
and Treasurer in February 1999.
(3) The Company pays the annual cost of health insurance for Messrs.
Michaels and Kramer and their respective dependents.
(4) In lieu of any other compensation the Company annually grants options to
purchase 10,000 shares of Common Stock at a purchase price of $1.00 per share to
all members of the Board of Directors for each full year of service as an active
member of the Board. In general, options are exercisable in full upon issuance
and may not be exercised after the expiration of ten years from the date of the
grant and are nontransferable other than by inheritance. (In 1996, the options
granted to Messrs. Michaels and Kramer were extended to be exercisable through
May 31, 2006.) As of the date of this Registration Statement the Company has
granted options aggregating 120,000 shares to Mr. Michaels and 90,000 shares to
Mr. Kramer.
(5) In 1995 the Company granted each of Messrs. Michaels and Kramer options
to purchase 900,000 shares of Common Stock at an average price of $1.50 per
share. Such options were granted pursuant to their employment agreements
described below. Messrs. Michaels and Kramer each exercised their options during
fiscal 1996, at which time the Company's Board of Directors agreed to issue
these shares for services rendered in lieu of payment of the exercise price. The
Company valued these restricted securities at $.25 per share.
Messrs. Michaels and Kramer entered into employment agreements with the
Company as of January 1995 employing them as President and Senior Vice
President, respectively, until June 2001, subject to their rights to terminate
their agreements on 90 days notice. Their annual salaries were to be equal to
their salaries at the time of execution of the agreements, subject to annual
increases (or in limited cases decreases) at the Board of Directors' discretion.
<PAGE> 33
33
The agreements also provide for bonuses of from 25% (if the Company's cash flow
is at least $1,000,000) to 75% (if the Company's cash flow exceeds $3,000,000)
of their base salaries. If within 12 months of a change in control (as defined
in the agreements) their employment is terminated other than for cause or if
they resign and their compensation, status, title and/or reporting
responsibilities were diminished after the change in control, they will be
entitled to a payment equal to 36 times their highest monthly salary during the
employment term. (The TiNV1 transactions described under "Recent Sales of
Unregistered Securities - TiNV1 Transaction" below will not result in such a
change in control.) In addition, upon a change of control which effects a change
in incumbent management they will have the right to purchase a number of shares
of Common Stock at a price of $.05 per share equal to 5% of the Company's
outstanding Common Stock prior to giving effect to the exercise of the option,
and the Company will pay them an amount equal to their taxes in connection with
such exercise. Substantially all of the Company's obligations under the
agreements continue if there is a termination of the employees as a result of
disability.
OPTIONS AND STOCK APPRECIATION RIGHTS
The following table provides information relating to options granted to
those persons named in the "Summary Compensation Table" above during fiscal
1998.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
NUMBER OF SECURITIES % OF TOTAL OPTIONS/SARS
UNDERLYING OPTIONS/ GRANTED TO EXERCISE
SARS EMPLOYEES OR BASE EXPIRATION
NAME GRANTED(#)(1) IN FISCAL YEAR PRICE($/SH) DATE
- --------------------------------- -------------------- ----------------------- ----------- -----------
<S> <C> <C> <C> <C>
Christopher D. Michaels 10,000 20% $ 1.00 May 31, 2006
Jeffrey S. Kramer 10,000 20% $ 1.00 May 31, 2006
</TABLE>
- ----------
(1) See footnote (2) to the "Summary Compensation Table" for the terms of the
options.
The following table sets forth certain information with regard to option
exercises during fiscal 1998 by each of the executive officers named in the
"Summary Compensation Table" above:
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
OPTIONS/SARS OPTION/SARS
SHARES ACQUIRED AT MAY 31, 1998 AT MAY 31, 1998
ON EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (#) REALIZED UNEXERCISABLE UNEXERCISABLE
- ----------------------- --------------- -------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Christopher D.
Michaels 0 0 120,000/0 --
Jeffrey S. Kramer 0 0 90,000/0 --
</TABLE>
<PAGE> 34
34
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1997 and 1998 the Company borrowed funds from Jeffrey S.
Kramer, an officer and Director of the Company. As of October 19, 1998 Mr.
Kramer had loaned the Company an aggregate of $714,000 which was evidenced by
promissory notes payable in January 1999 bearing interest at the rate of 8.0%
per annum. On October 20, 1998 $500,000 principal amount of the notes and
accrued interest thereon were canceled in exchange for 583,200 shares of the
Company's Common Stock. (On October 20, 1998, the market price for the Company's
Common Stock was approximately $.83 per share.)
During fiscal 1997, 1998 and 1999 the Company borrowed funds from Joe C.
Rude, a Director of the Company, and his wife, Dr. Carolyn Rude. Such loans were
generally for a period of one year and provided for interest at a rate of 10%
per annum. Certain of such loans were non-recourse and were collateralized by
shares of the Company's Common Stock. (Drs. Rude have the right to vote such
shares.) If such non-recourse loans are not paid when due, Drs. Rude are
entitled to keep the collateral in repayment of the loans. The total amount of
loans made by Drs. Rude from fiscal 1997 to date is $307,000. As of October 31,
1998, non-recourse loans aggregating $82,000 of the $307,000 loaned to the
Company had not been paid when due, as a result of which Drs. Rude retained the
128,000 shares of Common Stock which collateralized said loans. The remaining
loans are due from March 1999 to September 1999 and are secured by 317,392
shares of Common Stock. The market value of the collateral securing non-recourse
loans at the time such collateral was pledged exceeded the amount of the loans,
in general ranging from approximately two to eight times the amount of the
loans. Because Drs. Rude have supported the Company a multitude of times during
the Company's history, both through their personal time and making funds
available to the Company, from late June to early July 1998 the Company
requested Drs. Rude to purchase 1,500,000 shares of Common Stock from the
Company for $95,000 in order to provide funds to the Company so that the
Company's Brazilian timber activities could remain in operation. On the dates of
purchase, the market price of Common Stock ranged from approximately $.19 to
$.31 per share.
During fiscal 1998, the Company repaid loans and interest aggregating
$545,000 to Christopher D. Michaels, an officer and Director of the Company. On
October 20, 1998, Mr. Michaels purchased 929,500 shares of the Company's
restricted Common Stock and issued in exchange therefor a promissory note in the
amount of $278,850 (which bears interest at the prime rate plus 1%) and is due
October 20, 2003. (On August 17, 1998, the date of the Board action approving
the stock purchase, the market price for the Company's Common Stock was
approximately $.48 per share.) While Mr. Michaels has the right to vote the
929,500 shares, he cannot dispose of shares unless he applies at least 80% of
the sales proceeds to repayment of the promissory note.
LEGAL PROCEEDINGS
o Francis Parkes, Dr. Joe C. Rude III, Christopher D. Michaels and Nevada
- --------------------------------------------------------------------------------
Manhattan Mining, Inc. v. Sheldon Salcman, Arie Rabinowitz, Mayer Rooz, Thomson
- --------------------------------------------------------------------------------
Kernaghan & Co. Limited, Soreq, Inc., Silenus Limited, Mary Park Properties,
- --------------------------------------------------------------------------------
L.H. Financial Services, Austost Anstalt Schaan, Tusk Investments, Inc., Top
- --------------------------------------------------------------------------------
Holding International, Ltd., Praha Investments S.A., UFH Endowment, Ltd., Atead
- --------------------------------------------------------------------------------
Consulting S.A., and Ausinvest Anstalt Balzers, (Case No. 98-5624 JSL(CTx) (the
- ----------------------------------------------
"Securities Action") was filed in United States District Court for the Central
District of California (the "Court") on July 14, 1998 on behalf of the Company
and Francis Parkes, Dr. Joe C. Rude and Christopher D. Michaels, who are
individual Company shareholders. In the Securities Action, plaintiffs contend
<PAGE> 35
35
that defendants violated Section 10(b) and 13(g) of the Securities Exchange Act
of 1934, 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. 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. On November 2, 1998, the Court denied various motions
to dismiss, strike or transfer the complaint filed by various defendants.
Thereafter, separate counterclaims for breach of contract and declaratory relief
were filed by each of Tusk Investments, Inc., Silenus Limited, Thomson Kernaghan
& Co., Ltd. and Mary Park Properties. Discovery in the Securities Action is
proceeding.
o UFH Endowment, Ltd. and Austost Anstalt Schaan v. Nevada Manhattan Mining,
- --------------------------------------------------------------------------------
Inc., Jeffrey Kramer and Christopher Michaels, (Case No. 98 Civ. 5032) (the "UFH
- ---------------------------------------------
Action") was filed in United States District Court for the Southern District of
New York on July 15, 1998, by the Securities Action defendants UFH Endowment,
Ltd. and Austost Anstalt Schaan against the Company, Jeffrey S. Kramer and
Christopher Michaels, officers and directors of the Company, President of the
Company. The plaintiffs in the UFH Action claim that the Company breached
certain debentures and subscription agreements, and that the other defendants
induced such breach, and thus seek an injunction directing the Company to file a
registration statement with the Securities and Exchange Commission ("SEC") and
to issue common stock, as well as damages from the Company and defendants Kramer
and Michaels. Approximately one month after first filing their complaint, the
plaintiffs amended their complaint to include a claim purporting to allege
violations by the Company and Jeffrey S. Kramer and Christopher Michaels. On or
about July 30, 1998 plaintiffs sought a preliminary injunction requesting that
the Company be compelled to file a registration statement with the SEC and issue
stock to the plaintiffs. This motion was denied. On July 27, 1998, the Company
and Messrs. Kramer and Michaels filed various motions to dismiss, stay, or
transfer the UFH Action. These motions have not yet been ruled upon by the
United States District Court for the Southern District of New York.
o Mary Park Properties, Inc. v. Nevada Manhattan Mining, Inc. Terra Natural
- --------------------------------------------------------------------------------
Resources, Inc., Jeffrey Kramer and Christopher Michaels, U.S.D.C. Case No. CV
- ---------------------------------------------------------
98 6862 (the "Mary Park Action") was filed on November 4, 1998 in the United
States District Court for the Eastern District of New York by Securities Action
defendant Mary Park Properties, Inc. ("Mary Park"). In the Mary Park Action,
plaintiff alleges breach of contract by the Company for failure to permit Mary
Park to convert certain of its debentures in shares of common stock in the
Company, among other things. In addition, on November 4, 1998, Mary Park filed
an application in the Mary Park Action for a temporary restraining order and
order to show cause re preliminary injunction, seeking an order enjoining the
Company from issuing new common stock to any person other than Mary Park and
compelling the Company to convert certain of Mary Park's debentures into common
stock in the Company. On December 30, 1998, the Court denied Mary Park's
application for temporary restraining order and order to show cause re
preliminary injunction. On or about December 21, 1998, the Company and Messrs.
Kramer and Michaels filed various motions to dismiss, stay or transfer. On or
about February 25, 1999, Mary Park voluntarily dismissed the Mary Park Action.
o Silenus Limited v. Terra Natural Resources Corp. aka Nevada Manhattan Mining
- --------------------------------------------------------------------------------
Incorporated, TiNV1, Inc., Jeffrey Kramer, Joseph C. Rude and Christopher
- --------------------------------------------------------------------------------
Michaels, LASC Case No. BC 201577 (the "Silenus State Action"), was filed in Los
- --------
Angeles County Superior Court on December 1, 1998. The Silenus State Action
accused the Company and Messrs. Kramer and Michaels and Joseph Rude, a director,
of issuing new common stock and options to purchase additional new common stock
in the Company to TiNV1, Inc. ("TiNV1") as part of a conspiracy to effect a
"fraudulent transfer" of assets of the Company to TiNV1, and further accused
<PAGE> 36
36
Messrs. Kramer, Michaels and Rude of breaching their fiduciary duties as
directors by engaging in the alleged conduct described above, as well as by
allegedly attempting to fraudulently transfer assets of the Company to
themselves. On December 7, 1998, plaintiff Silenus Limited ("Silenus") sought a
temporary restraining order and order to show cause re preliminary injunction in
the Los Angeles County Superior Court, seeking an order enjoining the Company
from holding its December 9, 1998 annual shareholders meeting as well as
imposition of a receivership over any common stock in the Company issued to
TiNV1. After briefing and oral argument, on December 7, 1998 the Court denied
Silenus's application for temporary restraining order and order to show cause re
preliminary injunction. On December 31, 1998, the Company and Messrs. Kramer,
Michaels and Rude filed a demurrer in the Silenus State Action, contending that
the allegations of the Silenus State Action failed to state a legally viable
claim for relief, which demurrer is presently set for hearing on January 20,
1999. On March 9, 1999, the Court granted the demurrer and gave the plaintiff
leave to amend by March 30, 1999 only if the plaintiff seeks to proceed on a
"nonderivative" basis, failing which the complaint would be dismissed on March
31, 1999. Plaintiff has failed to proceed with the lawsuit. A formal order of
dismissal is expected to be entered by the Court shortly.
o 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, seeks a judicial declaration that the Harvey Entities 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 were 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 was set for September, 1998.
Settlement discussions have been instituted by the parties without resolve as of
the date of this filing. On August 28, 1998, on motion brought by the Company,
the court granted a continuance and ordered the parties to engage in "good
faith" settlement negotiations.
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 an undivided
interest in the Nevada Property by virtue of its contractual rights.
o A prior regulatory proceeding against the Company and certain key employees,
which resulted in the entry of a consent judgment, but subsequently was followed
by a stipulation which contained an acknowledgment that the Company and its
<PAGE> 37
37
executive officers had received no ill-gotten gains as a result of prior
activities by the Company in offering and selling its securities, is described
elsewhere in this Registration Statement (see "Risk Factors - Consent Judgment
Against the Company and Certain Employees" and "Management - Regulatory
Proceedings").
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
At the annual meeting of stockholders on December 9, 1998, the stockholders
approved an increase in the authorized common stock from 49,750,000 shares to
250,000,000 shares, enabling the Company to have greater flexibility in
considering potential future actions involving the issuance of stock which may
be necessary or desirable to accommodate the Company's growth plan, including
capital raising transactions and acquisitions. The authorized capital stock of
the Company consists of 250,250,000 shares of which 250,000,000 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 (the "Preferred
Stock") convertible into Common Stock on the terms and conditions described
below. There were 66,044,666 shares of the Company's Common Stock and 143,908
shares of the Preferred Stock issued and outstanding as of February 28, 1999.
The latest series of Preferred Stock was issued as a dividend to shareholders on
December 31, 1997 on the basis of one share of Preferred for every 100 shares of
Common Stock.
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".
Over the six-month period ending March 31, 1999, the average monthly volume
of trading of the Company's Common Stock has been approximately _5,940,000
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.
The Company's Registration Statement on Form 10 became effective on June 2,
1997. The Company is a "fully-reporting company" within the meaning of the
Securities Exchange Act of 1934 (the "Exchange Act"). As of February 28, 1999,
there were 906 stockholders of record plus approximately 1550 stockholders in
"Street Name."
The high and low interdealer prices for the last two fiscal years and latest
quarterly periods on the Electronic Bulletin Board (without retail markup,
markdown or commission) are as follows:
Quarter Ended High Low
------------- ---------- --------
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
<PAGE> 38
38
Quarter Ended High Low
------------- ---------- --------
September 30, 1997.................... $ 7.50 $ 3.75
December 31, 1997..................... $ 4.5625 $ 0.6875
March 31, 1998........................ $ 2.125 $ 0.9375
June 30, 1998......................... $ 1.80 $ 0.125
September 30, 1998.................... $ 1.41 $ 0.15
December 31, 1998..................... $ 1.51 $ 0.55
March 31, 1999........................ $ 1.55 $ 0.69
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.
The Board of Directors declared a dividend to all shareholders of record as
of December 31, 1997 consisting of one share of a new series of Convertible
Preferred Stock (the "1998 Preferred Stock"), $1.00 par value, for every 100
shares of Common Stock owned. As authorized in the Company's Amended Certificate
of Determination of Preferences of Series A Preferred Stock filed with the
Nevada Secretary of State on January 14, 1998, the 1998 Preferred Stock will be
convertible to one share of Common Stock for a period of one year and carry a
dividend equal to eight percent (8%) of par value, payable in cash or stock at
the Company's election from funds legally available therefor. Such dividends
were cumulative such that if full dividends in respect of any previous dividend
period are not paid, holders of the 1998 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.
Each share of 1998 Preferred Stock includes a warrant (the "Dividend Warrant")
to purchase two additional shares of Common Stock at $3.00 per share for a
period of two years. The Warrants are callable by the Company at $3.50 per
share.
The 1998 Preferred Stock was automatically converted to common stock at
December 31, 1998 pursuant to its terms.
RECENT SALE OF UNREGISTERED SECURITIES
From the period December 1, 1995 through November 30, 1998, the Company
offered and sold 35,156,154 shares of its Common Stock which includes conversion
to common stock of 228,319 shares of Old Series A Preferred Stock. In addition,
the Company concluded the private placement of its Debentures in a negotiated
transaction with certain investors more particularly described in this Section
of the Registration Statement entitled "Convertible Debentures."
With the exception of the placement of the Debentures, and sales to
accredited investors as noted below, these sales were made primarily to its
existing shareholders. While the Company believed that there were applicable
exemptions from the registration requirements of the Federal Securities Laws and
compatible exemptions from securities registration under applicable state ("blue
sky") laws (principally the "private placement" exemptions, which is Section
4(2) of the 1933 Act), these issuances may not have complied with applicable
securities 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
<PAGE> 39
39
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. Notwithstanding the foregoing, the Company may not
have a material liability with respect to any such rescission rights (assuming
the price of the common stock remains at recent levels) since shareholders who
still have rescission rights generally paid significantly less than the current
trading price for the Common Stock. (Under Federal Securities Laws, there is a
one year statute of limitations for shareholders seeking rescission rights,
while under California law the statue of limitations is either one or two years
depending on the facts of the case.)
SALE OF PREFERRED STOCK
From November, 1995 to February, 1997, in a private placement offering made
in reliance upon exemption from registration provided by Section 4(2) of the
1933 Act, the Company offered and sold 228,919 shares of Old Series A Preferred
Stock for aggregate proceeds of $1,791,425 (an average price of $0.78 per common
share after giving effect to the conversion thereof on a ten for one basis).
As of May 31, 1998, the Company issued 2,280,199 shares of common stock for
conversion of 207,444 shares of Old Series A and payment of $205,244 of
cumulative dividends. As of February 28, 1999, 18,850 Old Series A Shares have
not yet been presented for conversion. These shares are being converted and the
cumulative dividends are being paid in common stock as these shares are
presented by the holders for conversion.
SALE OF COMMON STOCK
Private Placement Offerings: From the period December 1, 1995 to November
30, 1998, the Company offered and sold 24,047,418 shares of common stock, for
aggregate proceeds of $4,280,651 at an average price of $0.18 per share.
Included in these amounts is the TiNV1 transaction described below.
Consideration for Services: From the December 1, 1995 to November 30, 1998,
the Company offered and sold 1,367,712 shares of common stock in payment of
services provided to the Company by employees or third parties with an aggregate
value $1,901,970 (an average price of $1.39 per share)..
Retirement of loans and other obligations of the Company: From the period
December 1, 1995 to November 30, 1998, the Company offered and sold 3,929,128
shares of common stock to retire loans and other obligations of the Company with
an aggregate value of $1,771,561 (an average price of $0.45 per share).
Collateralization of Stockholder Notes: From the period December 1, 1995 to
November 30, 1998, the Company issued 2,842,270 shares of common stock to
collateralize notes payable to stockholders with an aggregate value of
$2,015,575 (an average price of $0.71 per share).
Consideration for the Acquisition of Property: From the period December 1,
1995 to November 30, 1998, the Company offered and sold 689,200 shares of common
stock to acquire property with an aggregate value of $3,300,000 (an average
price of $4.79 per share).
<PAGE> 40
40
TINV1, INC. TRANSACTION
On September 2, 1998, the Company completed a private placement of Common
Stock in the amount of $500,000. The private offering was made in reliance upon
the exemption from registration afforded by Section 4(2) of the 1933 Act. The
terms of the offering were as follows: TiNV1, Inc. a California corporation, and
the Company entered into a Subscription Agreement and a letter agreement, each
dated as of August 28, 1998 (collectively, the "Purchase Agreements"), pursuant
to which TiNV1 purchased and the company issued 5,500,000 shares of the
Company's Common Stock for $500,000.
The Purchase Agreements provided that the Company's Board of Directors will
be expanded to seven and that three designees of TiNV1 will be elected to the
Board of Directors. As a condition to its investment, TiNV1 required that it be
granted three of the seven Board seats. Subject to certain exceptions provided
for in the Purchase Agreements, including exceptions arising on sales of the
Company's Common Stock by TiNV1, the Company also agreed that three designees of
TiNV1 will be included in each management slate of nominees for the Board of
Directors and that the Company will use its continuing best efforts to cause
such nominees to be elected to the Board. The Purchase Agreements provide that
all acquisitions and divestitures by the Company which require Board approval
and any issuances of securities to the Company's debentureholders must be
approved by a supermajority of the Company's Board of Directors (initially at
least five of the seven directors).
As provided in the Purchase Agreements, the Company agreed to use its best
efforts to create a class of preferred stock (the "New Preferred Stock")
automatically convertible into Common Stock on a public sale with attributes no
less favorable than those comprising the shares purchased by TiNV1. The New
Preferred Stock voting as a class will be entitled to elect three Directors
(except as provided in the Purchase Agreements), and the Company has the right
to exchange the New Preferred Stock for the Common Stock acquired by TiNV1. As
of the date of this Registration Statement, no shares of New Preferred Stock
have been issued.
Simultaneously with the execution of the Purchase Agreements, the Company
entered into an option agreement (the "Option Agreement") with TiNV1, which
Option Agreement was subject to stockholder approval, including approval of an
amendment to the Company's Articles of Incorporation to increase the number of
authorized shares of Common Stock to 250,000,000. The Option Agreement allows
the optionee to purchase, on or before September 1, 2005, up to 70,000,000
shares of the Company's Common Stock at a purchase price of $.335 per share,
which was the market price of the Company's Common Stock on August 28, 1998, the
date of the Option Agreement. (The 70,000,000 shares, together with the
5,500,000 shares presently held by TiNV1, would represent approximately 68% of
the Company's presently outstanding Common Stock on a pro forma basis as of
October 23, 1998.)
At the Annual Meeting of Stockholders held on December 9, 1998, by vote of
an overwhelming majority of shares present at the meeting, stockholders elected
the three TiNV1 Director nominees (Tetsuo Kitagawa, Hironao Mutoh and Neil
Lewis), increased the number of authorized shares of Common Stock to 250,000,000
and granted authority to the Board of Directors to approve the Option Agreement.
CONVERTIBLE DEBENTURES
The Company 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 "1933 Act"). The terms of the offerings were as follows:
<PAGE> 41
41
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 1933 Act. 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 underlying agreement related to the Debentures provided that the
Debentures could 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 underlying agreement related to the Debentures provided that the Company
has an obligation to Silenus to effect registration of its shares issuable upon
conversion under the 1933 Act. The Company is required to use its "best efforts"
to cause a Registration Statement under the 1933 Act 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.
The Company has issued 289,426 shares of Common Stock to Silenus, Ltd. in
payment of Liquidated Damages, as detailed in the following table:
Liquidated Avg.
Damages Market Shares
Debentureholder Amount Period Price Issued
--------------- ---------- ------ ----- -------
Silenus, Ltd. $520,000 8/97-4/98 $1.80 289,426
The Company has issued 167,635 shares of Common Stock to Silenus, Ltd. to
convert an aggregate $325,000 of Debentures.
No further shares have been issued for liquidated damages since the Company
feels it has no legal obligation to do so. (see "Legal Proceedings").
On July 17, 1997 the Company entered into Subscription Agreements with Mary
Park Properties, UFH Endowment Fund, Ltd., Austost 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 underlying agreements related to the July Debentures provided that the
July Debentures could 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
<PAGE> 42
42
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. 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 if the Common Stock shall then be listed in trading
upon such exchange.
The underlying agreements related to the July Debentures provided that 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.
The underlying agreements related to the July Debentures provided that the
Company has an obligation to Mary Park Properties, UFH Endowment, Ltd. and
Austost Anstalt Schaan to effect registration of their shares issuable upon
conversion of the July Debentures. The Company is required to use its "best
efforts" to cause a Registration Statement under the 1933 Act 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 issued 69,418 shares of Common Stock to UFH Endowment Ltd.,
and 69,418 shares of Common Stock to Austost Anstalt Schaan in payment of
Liquidated Damages, as detailed in the following table:
Liquidated Avg.
July Damages Market Shares
Debentureholder Amount Period Price Issued
--------------- ---------- ------ ----- -------
UFH Endowment $ 93,904 11/97-5/98 $1.35 69,418
Austost Anstalt Schaan $ 93,904 11/97-5/98 $1.35 69,418
No further shares have been issued for liquidated damages since the Company
feels it has no legal obligation to do so. (see "Legal Proceedings").
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 June, 1998, certain of the Silenus Debentures were sold as follows:
$100,000 to Ausinvest Anstalt Balzers; $150,000 to Tusk Investments; and
$100,000 to Atead Consulting S.A. In June, 1998, certain of the July Debentures
were sold as follows: $100,000 to Top Holding International, Ltd.; and $100,000
to Praha Investments S.A.
The Company is a plaintiff in lawsuits relating to the Debentures and July
Debentures as described under "Legal Proceedings." In that regard, parties to
such lawsuits allegedly converted convertible debentures into 6,569,104 shares
of Common Stock. The Company does not believe that it is obligated to issue such
Common Stock and, accordingly, does not consider such stock to be outstanding as
of the date of the filing of this Registration Statement, and those shares are
not included in the aggregate 338,302 shares which have been issued upon
conversion of the 8% Senior Secured Convertible Debentures, as shown in the
table below.
<PAGE> 43
43
The Company has issued the following common stock upon conversion of 8%
Senior Secured Convertible Debentures:
Date of Amount Conversion Shares
Debentureholder Conversion Converted Price Issued
--------------- ---------- --------- ---------- -------
Silenus, Ltd. 7/25/97 $ 200,000 $4.73 42,244
Silenus, Ltd. 3/9/98 $ 125,000 $0.99 125,391
UFH Endowment, Ltd. 2/6/98 $ 60,000 $0.82 73,143
Austost Anstalt Schaan 2/6/98 $ 60,000 $0.82 73,143
Mendel Group 2/6/98 $ 20,000 $0.82 24,381
In December 1998, the Company and Mendel Group executed a settlement
agreement whereby the Company issued 107,500 shares of its Common Stock in full
settlement and release of all claims between the parties including $85,000 of
Debentures.
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 Amended
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 on
Form 10.
COMMON STOCK
The Company's Amended Articles of Incorporation authorize the issuance of up
to 250,000,000 shares of 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
"Market Price and Dividends on the Registrant's Common Equity - Dividends." 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.
<PAGE> 44
44
PREFERRED STOCK
The Company's Amended Articles of Incorporation and its Amended Certificate
of Determination of Preferences of Series A Preferred Stock authorized the
Company to issue up to 250,000 shares of the Preferred Stock, par value $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 Old 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's successful completion of an IPO for more than
$5,000,000. As of February 29, 1999, 18,850 Old Series A Shares have not yet
been presented for conversion. These shares are being converted and the
cumulative dividends are being paid in common stock as these shares are
presented by the holders for conversion.
The Board of Directors declared a dividend to all shareholders of record as
of December 31, 1997 consisting of one share of a new series of Convertible
Preferred Stock (the "1998 Preferred Stock"), for every 100 shares of Common
Stock owned. As authorized in the Company's Amended Certificate of Determination
of Preferences of Series A Preferred Stock filed with the Nevada Secretary of
State on January 14, 1998, the 1998 Preferred Stock will be convertible to one
share of Common Stock for a period of one year and carry a dividend equal to
eight percent (8%) of par value, payable in cash or stock at the Company's
election, from funds legally available therefor. Such dividends were cumulative
such that if full dividends in respect of any previous dividend period are not
paid, holders of the 1998 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 February
28, 1999, 125,028 shares of 1998 Preferred Stock were issued of a total to be
issued of 167,789. The 1998 Preferred Stock was automatically converted to
common stock at December 31, 1998 pursuant to its terms. Notification has been
sent to holders to send their preferred stock certificates to the Company's
transfer agent to effect the conversion to Common Stock.
. 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.
<PAGE> 45
45
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 $1.00 per share.
AUDITORS
The Company 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 1998. The financial statements accompanying this
Registration Statement have been audited by such firms.
FURTHER INFORMATION
The Company is currently a reporting company within the meaning of Section
12(g) of the Securities Exchange Act of 1934.
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 Commission's Web site
at http://www.sec.gov.
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 and the unaudited interim
financial statements for the nine months ended February 28, 1999.
<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 quarterly report for the nine months ending
February 28, 1999 F-34
<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.
As discussed in Note 13 to the financial statements, certain circumstances and
facts resulting in overstatement of Mineral Properties as of May 31, 1998, were
discovered by management of the Company during the current year. Accordingly,
adjustments have been made to correct for these circumstances and facts.
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
(Except for Note 13 which is as of February 24, 1999)
<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 mineral properties in accordance
with SFAS No. 121. 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) (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 --
Indonesia 2,600,000 1,400,000
Timber Concessions 700,000 --
Machinery and Equipment, net 348,842 355,392
OTHER ASSETS - 265,700
----------- -----------
TOTAL ASSETS $7,825,223 $ 2,749,846
=========== ===========
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) (32,874,115)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 4,416,783 ( 3,692,285)
------------ ------------
TOTAL LIABILITIES STOCKHOLDERS'
EQUITY (DEFICIENCY) $7,825,223 $ 2,749,846
=========== ============
#May 31, 1998 Restated - See Note 13
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) (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) (7,378,345)
------------ ------------ ------------
OTHER EXPENSES
Interest Expense - 23,479 624,034
Write-Off of Mineral Properties
and Timber Investment - - 4,836,000
------------ ------------ ------------
Total Other Expenses - 23,479 5,460,034
------------ ------------ ------------
NET LOSS (1,463,258) (6,386,452) (12,838,379)
CUMULATED PREFERRED DIVIDENDS (10,600) 149,500 80,316
------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $(1,473,858) $(6,535,952) $(12,918,695)
=========== =========== ============
BASIC LOSS PER SHARE $( 0.20) $( 0.61) $( 0.86)
=========== =========== ===========
DILUTED LOSS PER SHARE $( 0.20) $( 0.61) $( 0.86)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,428,081 10,684,176 14,969,621
=========== =========== ===========
</TABLE>
#May 31, 1998 Restated - See Note 13
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 (Restated, see Note 13)
<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 (Restated, see Note 13)
<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 (Restated, see Note 13)
<TABLE>
<CAPTION>
Stock Preferred Stock Common Stock
to be Issued Shares Amount Shares Amount
------------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1997 (Restated) $ 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 (Restated) $ - 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 (Restated) $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 - - (12,838,379) (12,838,379)
------------ ------------ ------------- -----------
Balance, May 31, 1998 (Restated) $ 28,715,550 $ 24,940 $(32,874,115) $( 3,692,285)
============ ============ ============ ===========
</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) (Restated)#
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,463,258) $(6,535,952) $(12,918,695)
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Provision for Doubtful Accounts - - 150,000
Write-Off of Mineral Properties
and Timber Investment - - 4,836,000
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>
#May 31, 1998 Restated - See Note 13
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, 1996, 1997 AND 1998 (Restated, see Note 13)#
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 (Restated, see Note 13)
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:
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.
<PAGE> F-12
F-12
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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.
<PAGE> F-13
F-13
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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.
<PAGE> F-14
F-14
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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 780,000 hectares (1,950,000 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 - See Note 13 - 1998 Restatements
----------------------
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-15
F-15
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
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.
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 - See Note 13 - Restatements
---------------------------
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.
<PAGE> F-16
F-16
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
NOTE 2 - PROPERTIES AND EQUIPMENT (continued)
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.
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.
<PAGE> F-17
F-17
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
NOTE 2 - PROPERTIES AND EQUIPMENT (continued)
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.
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.
<PAGE> F-18
F-18
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
NOTE 2 - PROPERTIES AND EQUIPMENT (continued)
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.
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.
<PAGE> F-19
F-19
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
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.
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.
<PAGE> F-20
F-20
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
NOTE 6 - CONVERTIBLE DEBENTURES (continued)
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."
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 $153,000 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.
<PAGE> F-21
F-21
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
NOTE 7 - COMMITMENT AND CONTINGENCIES (continued)
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.
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.
<PAGE> F-22
F-22
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
NOTE 7 - COMMITMENT AND CONTINGENCIES (continued)
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.
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.
<PAGE> F-23
F-23
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
NOTE 7 - COMMITMENT AND CONTINGENCIES (continued)
Jonasa Agreement - See Note 13 - 1998 Restatements
----------------
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.
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.
<PAGE> F-24
F-24
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
NOTE 7 - COMMITMENT AND CONTINGENCIES (continued)
- 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.
- 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-25
F-25
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
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-26
F-26
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
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-27
F-27
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
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
------- ------
(Restated) (Restated)
Net Loss
As Reported $(6,535,952) $(12,918,695)
============ ============
Proforma $(6,584,802) $(12,951,016)
============ ============
Basic Loss Per Share
As Reported $( .61) $( 0.86)
============ ============
Proforma $( .62) $( 0.87)
============ ============
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-28
F-28
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
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-29
F-29
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
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 (Restated) (Restated)
Statutory Rate $( 450,000) $(1,430,000) $(5,230,000)
Lack of Taxable Income
in Carryback Period 450,000 1,430,000 5,230,000
----------- ----------- -----------
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
---- ---- ----
(Restated) (Restated)
Deferred Tax Asset $3,388,000 $5,300,000 $10,500,000
Valuation Allowance (3,388,000) (5,300,000) (10,500,000)
----------- ----------- ----------
Net Deferred Tax Asset $ - $ - $ -
=========== ========== ==========
<PAGE> F-30
F-30
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
---------- ------------- ------------- ----------
(Restated)
<S> <C> <C> <C>
United States - $(5,823,572) $ 3,661,472
Indonesia - ( 318,165) 2,600,000
Brazil 287,148 ( 221,236) 1,563,751
------------- ----------- -----------
Total $ 287,148 $(6,362,973) $ 7,825,223
============ =========== ===========
1998
----------
(Restated)
United States $ 41,740 $( 8,489,343) $ 471,899
Indonesia ( 13,110) ( 1,200,000) 1,400,000
Brazil 515,951 ( 3,149,036) 877,947
------------ ------------ -----------
Total $ 557,691 $(12,838,379) 2,749,846
============ ============ ===========
</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
---------- ------------- ------------ -----------
(Restated)
<S> <C> <C> <C>
Sales $ 287,178 $ - $ 287,178
============ ============ ===========
Operating Loss $( 221,238) $(2,379,049) $(2,600,287)
General Corporate
Expenses - - (3,786,165)
------------ -------------- -----------
Net Loss $( 221,238) $(2,379,049) $(6,386,452)
============ ============ ===========
Identifiable Assets $ 1,563,751 $ 5,829,783 $ 7,393,534
Corporate Assets - 431,689
----------- ----------- -----------
Total Assets $ 1,563,751 $ 5,829,783 $ 7,825,223
=========== =========== ===========
Capital Expenditures $ 253,998 $ - $ 253,998
============ =========== ============
Depreciation $ 5,500 $ 18,431 $ 23,931
============ =========== ============
</TABLE>
<PAGE> F-31
F-31
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
NOTE 10 - GEOGRAPHIC AND SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
1998 Timber Mining Total
---------- ------------- ------------ -----------
(Restated)
<S> <C> <C> <C>
Sales $ 515,951 $ 41,740 $ 557,691
============ =========== ============
Operating Loss $(3,149,036) $(5,904,388) $( 9,053,424)
General Corporate
Expenses - - ( 3,784,955)
----------- ----------- ------------
Net Loss $(3,149,036) $(5,904,388) $(12,838,379)
=========== =========== ============
Identifiable Assets $ 877,947 $ 1,400,000 $ 2,277,947
Corporate Assets - - 471,899
----------- ----------- ------------
Total Assets $ 877,947 $ 1,400,000 $ 2,749,846
=========== =========== ============
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 impairmentof its mineral properties in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." 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-32
F-32
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
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.
NOTE 13 - 1998 RESTATEMENTS
The Company has restated its financial statements as of May 31, 1998
and for the year then ended to account for impairment of its Domestic
Mineral Properties ("Nevada Properties") and its Timber Concession
("Jonasa Concession") in accordance with SFAS No. 121. Subsequent to
the previous issuance of the financial statements, management
discovered certain circumstances and facts which existed, as of the
financial statement date, that were misinterpreted when evaluating
whether the carrying amounts of these two properties were recoverable,
as follows:
<PAGE> F-33
F-33
TERRA NATURAL RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1998 (Restated, see Note 13)
NOTE 13 - 1998 RESTATEMENTS (continued)
- For the Nevada Properties, management was unable to substantiate
proven and probable reserves of extractable ore sufficient to
calculate the cash flows required to evaluate the recovery of the
acquisition costs.
- For the Jonasa Concessions, management did not properly estimate
the costs required to perfect the title to the property, as
discussed in Note 7 - Commitments and Contingencies, and the
additional costs required to transport the harvested timber to
the Company's new sawmill, Tropical Woods. Given these facts
management believes these additional costs would prohibit the
Company's continuing involvement with this project.
When properly applying these circumstances and facts in accordance
with SFAS 121, the Nevada Property acquisition costs of $2,936,000 and
Jonasa Concession acquisition costs of $700,000 were deemed to be
unrecoverable and written off during the year ended May 31, 1998.
<PAGE> 34
34
Interim (Unaudited) Financial Statements for the nine months
ended February 28, 1999.
The Interim (Unaudited) Financials Statements from the Company's Form
10-QSB for the nine months ended February 28, 1999 are included on the following
pages.
<PAGE> 35
Q-1
NEVADA MANHATTAN GROUP, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
PART I FINANCIAL INFORMATION PAGE NO.
Item 1 Financial Statements for Nevada Manhattan Group, Inc.
Consolidated Balance Sheets -
February 28, 1999 and May 31, 1998 Q-2
Consolidated Statements of Operations -
Three and Nine Months Ended February 28, 1999 and 1998 Q-3
Consolidated Statements of Cash Flow -
Nine Months Ended February 28, 1999 and 1998 Q-4
Notes to Consolidated Financial Statements Q-5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operation Q-9
Year 2000 Disclosure Q-12
PART II OTHER INFORMATION
Item 1 Legal Proceedings Q-13
Item 2 Changes in Securities Q-14
Item 3 Defaults Upon Senior Securities Q-15
Item 4 Submission of Matters to a Vote of Security Holders Q-15
Item 5 Other Information Q-15
Item 6 Exhibits and Reports on Form 8-K Q-15
<PAGE> Q-2
Q-2
NEVADA MANHATTAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
May 31, 1998
February 28, 1999 Restated
----------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 754,733 $ 81,529
Accounts receivable, net of allowance
for doubtful accounts of $150,000 4,062,577 255,027
Inventories 143,148 108,844
Prepaid expenses 1,685,551 283,354
------------ ----------
Total current assets 6,646,009 728,754
Properties and equipment
Mineral properties - Indonesia 1,400,000 1,400,000
Machinery and equipment, net 960,117 355,392
Investment - Chrustalnaya 4,725,280 --
Other Assets 227,237 265,700
------------ ----------
TOTAL ASSETS $13,958,643 $2,749,846
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and Accrued Expenses $ 3,083,719 $1,445,106
Advance payment for stock sale 800,000 --
Convertible Notes 992,335 1,889,025
Note Payable to Officer 57,769 718,000
Current portion of long-term debt -- 32,214
------------ ----------
Total current liabilities 4,933,823 4,084,345
Long term debt -- 44,327
Convertible debentures 2,624,222 2,313,459
------------ ---------
Total liabilities 7,558,045 6,442,131
------------ ---------
Commitments and contingencies -- --
Stockholders' Equity (Deficiency):
Preferred stock, $1 par, 250,000 shares
Authorized, 143,908 and 176,414 outstanding 143,908 176,414
Common stock, $0.01 par, 250,000,000
Shares authorized, 66,044,666 and
26,492,543 shares issued and outstanding 660,447 264,926
Additional paid-in capital 43,153,561 28,715,550
Accumulated Foreign Currency Translation (696,033) 24,940
Subscriptions receivable (2,528,850) --
Accumulated deficit (34,332,435) (32,874,115)
------------ ------------
Total stockholders' equity (deficiency) 6,400,598 ( 3,692,285)
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $13,958,643 $ 2,749,846
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> Q-3
Q-3
NEVADA MANHATTAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended February 28, 1999 and 1998
<TABLE>
<CAPTION>
(Unaudited)
Three Months Nine Months
------------------------------- --------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $16,615,779 $174,175 $24,573,243 $ 525,981
Cost of Sales 14,356,821 147,278 20,962,191 413,151
---------- ------- ------------ -------
Gross profit 2,258,958 26,897 3,611,052 112,830
General and administrative
Expenses 1,572,484 1,424,240 4,085,834 4,363,954
--------- --------- ------------ ---------
Net income (loss) from
Operations 686,474 (1,397,343) ( 474,782) (4,251,124)
Other Income (Expenses)
Investment Income 327,909 -- 327,909 --
Interest Expense ( 60,700) -- ( 425,527) --
Write-off of Mineral Properties ( 885,920) -- ( 885,920) --
--------- ----------- ----------- ----------
Total Other Income (Expenses) ( 618,711) -- ( 983,538) --
---------- ----------- ----------- ----------
Net Income (Loss) 67,763 (1,397,343) (1,458,320) (4,251,124)
--------- ---------- ---------- ----------
Cumulative preferred dividends -- -- -- ( 58,356)
--------- --------- ----------- -----------
Net income (loss) attributable
to common shareholders $67,763 ($1,397,343) ($1,458,320) ($4,309,480)
========== =========== =========== ===========
Basic Income (Loss) Per Share $ 0.00 $ (0.08) $ (0.03) $ (0.32)
======== ======== ========== ========
Diluted Income (Loss)
Per Share $ 0.00 $ (0..08) $ (0.03) $ (0.32)
======== ======== ========== ========
Weighted average shares
outstanding 43,960,679 13,436,463 43,960,679 13,436,463
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> Q-4
Q-4
NEVADA MANHATTAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended February 28, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,458,320) $(4,251,124)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 55,158 328,021
Amortization of Debenture Discount 368,640 --
Common stock issued for services 1,287,468 63,878
(Increase) Decrease
Accounts receivable (3,807,550) ( 6,320)
Inventories ( 34,304) (45,000)
Prepaid expenses (725,148) 378,426
Other Assets 38,463 --
Increase (Decrease)
Accounts payable and accrued Expenses 2,100,716 819,511
---------- ---------
Net cash used in operating activities (2,174,877) (2,712,608)
---------- ---------
Cash flows from investing activities:
Purchase of property and equipment ( 659,883) ( 529,381)
Prepaid investment in Meteor Industries ( 500,000) --
---------- ---------
Net cash used in investing activities (1,159,883) ( 529,381)
---------- ----------
Cash flows from financing activities:
Proceeds from advance payment for stock sale 800,000 --
Proceeds from Issuance of convertible
debentures -- 1,500,000
Payments on long-term debt -- (293,376)
Proceeds from issuance of notes to
stockholders 190,308 1,346,176
Proceeds from issuance of stock 3,738,629 139,033
---------- ---------
Net cash provided by financing activities 4,728,937 2,691,833
---------- ---------
Foreign Currency Translation Adjustment ( 720,973) --
---------- ---------
Net increase (decrease) in cash and cash
equivalents 673,204 (550,156)
---------- ---------
Cash and cash equivalents at beginning of
period 81,529 559,510
---------- ---------
Cash and cash equivalents at end of period $ 754,733 $ 9,354
---------- ---------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During the nine months ended February 28, 1999 and 1998, the Company paid no
income taxes and no interest.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended February 28, 1999, the Company issued: 1,688,469
shares of its common stock for services rendered by employees and third parties
for $1,287,468; and 138,834 shares of its common stock for $196,909 of
liquidated damages associated with Convertible Debentures.
See accompanying notes to consolidated financial statements
<PAGE> Q-5
Q-5
NEVADA MANHATTAN GROUP, INC. 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 February
28, 1999, the results of operations for the three and nine months ending
February 28, 1999 and 1998, and the cash flows for the nine months ended
February 28, 1999 and 1998. 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
In the six months ending February 28, 1999 the Company initiated expansion,
diversification and restructuring, with additional experienced management,
into the fields of high technology, some of which is related to natural
resources; metals/mining processing and sales; fish products and sales;
timber harvesting/processing and sales; coal mining and exploration; and
distribution of oil and gas products.
In the sector of technology, the Company is acquiring and in the process of
implementing groundbreaking technological inventions by Russian scientist
Professor Alexander Bogomolov, Deputy Director of Kometa, Deputy Director
of the Institute of Chemical Kinetics and Burning Processes, Deputy
Director of Siberian Academy of Science (NOVOSIBIRSK), as follows:
a. Backward Wave Linear Accelerator of Protons, ABC3D, Accelerator based
on concept of three-dimensionality and CVC generators attached to them
with the initial uses of these devices being:
1. to produce isotopes for medical and other uses;
2. for proton, ion and medical therapies;
3. the transmutation (elimination) of radioactive waste;
4. to detect explosives and narcotics and other contraband; and
5. for selection and inspection of objects in space.
b. A mass separator with the ability to divide a mass of 20,000 AME
(1/2000 of a micron). This has many uses including the extraction of
metals for tailings of various mines. In addition, it has other
applications including diamond mining.
Additional areas of the Company's technological business include (1) the
acquisition and development and distribution of irradiated carbon tissues,
(2) telecommunications, (3) software and internet services, and (4) coding
protection systems.
No assurance can be given that the Company will be able to successfully and
commercially develop any of these inventions or businesses related to
technology, which are in their preliminary stages.
The Company is acquiring and deriving revenues from (1) fishing operations
in the Far East of Russia and (2) metals/mining in Russia and (3) timber
operations/holdings in the Russian Far East encompassing over two million
hectares.
<PAGE> Q-6
Q-6
The Company is deriving revenue from timber harvesting and production in
Brazil and holds various rights to develop and harvest timber properties on
up to 389,000 hectares located in the State of Para, Brazil.
The Company has the right to conduct exploration activities on seven gold
and four coal properties in Indonesia. One of the coal properties is
currently under contract with Cyprus Amax Coal Company, a unit of Cyprus
Amax Minerals Company, to operate and fund one of the Company's coal
holdings in East Kalimantan, Indonesia.
The Company has a gold exploration property in Manhattan, Nevada which
previously (pre-1940) produced in excess of 500,000 ounces of gold.
3. OTHER
A. On February 16, 1999, the Company's Board of Directors unanimously
elected Richard Izumi as Chief Executive Officer and Hironao Mutoh as
President. Mr. Izumi has an extensive 27-year career in finance that
includes the immediately preceeding 11 years as a partner in Price
Waterhouse and Ernst & Young where his experience included
acquisitions, divestitures and ventures, JV negotiations, ABS, Euro
and MTN bond financings and financial statement audits. He has served
numerous Fortune Global 500 companies including Toyota, Japan Energy,
Mitsui & Co., Mitsubishi Corporation, NEC and Yamaha Corporation. Mr.
Mutoh served as president of Crown USA Inc., a $400 million subsidiary
of the Crown Corporation (traded on the No. 1 Tokyo Stock Exchange).
B. On February 10, 1999, the Company and Sibnefteprovod "Siberian Oil
Pipeline" jointly announced the signing of a partnership agreement.
The Company will maintain the role of agent, representative and
partner in preparation and realization of specific projects, programs
and contracts and will handle all international business matters for
the pipeline including international contracts for transportation and
distribution of crude oil and will also provide acquisition,
installation and maintenance of equipment including two oil
refineries. Siberian Oil Pipeline reports that it has a cargo turnover
of 184.8 billion tons per kilometer. It transports 186.7 million tons
(1.12 billion barrels) of oil per year and owns and operates 9,618 km
(5,963.16 miles) of oil transporting pipeline which represents the
transportation of approximately 70% of Russian crude oil.
The Agreement establishes an authorized management committee
consisting of Sibnefteprovod General Director, Mr. G.G. Khopiorskiy;
Mr. Tetsuo Kitagawa, CFO of Nevada Manhattan Group; and individuals
and companies assigned by them. Petrotec International, 51% owned by
Nevada Manhattan Group, will provide services to the Pipeline related
to installation, maintenance and acquisition of equipment. American
Petroleum Technology Corp. ("Petrotec"), a United States company based
in Los Angeles, California, has extensive global experience in the
design, engineering, construction and management of petroleum
refineries, pipelines, storage systems, oil transport and other
critically important energy technologies. Petrotec. has a 49% interest
in Petrotec International.
C. On December 23, 1998, the Company acquired 80% of the metal mining
resources and timber properties of Chrustalnaya, a Russian joint stock
company headquartered in Kavalerovo for 8,000,000 shares of restricted
common stock. Chrustalnaya has approximate reported annual timber and
mining revenues in excess of $16 million. Chrustalnaya's reported
resources are in excess of 16,690 tons of tin, 9,970 tons of lead,
50,970 tons of zinc, 426 tons of silver, 2,760 tons of copper and 878
kg. of gold. Reported dense timber holdings in the Primorsky Kray
region are over two million hectares or 9,000 square miles.
Chrustalnaya's mining activities include mining, processing ore of
colored metals and obtaining concentrates in the fields of gold, silver
and tin.
<PAGE> Q-7
Q-7
The Company intends to continue to mine and harvest the resources of
Chrustalnaya under existing license agreements.
The determination of issuing 8,000,000 shares for consideration is
based on the current and anticipated market value of the Company's
common stock and is based on the current and anticipated value of the
assets that the Company is acquiring.
Nevada Manhattan's activities in Russia and the surrounding
Commonwealth of Independent States (CIS) countries will be supervised
by Dr. Alexander Gonchar, chairman of the General Euro-Asian Committee
of Coal, Metals and Natural Resources, which is comprised of the
presidents of the 11 CIS members. 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.
While management previously considered an acquisition of
Chrustalnaya's stock, it was determined by the parties that the asset
acquisition, rather than the stock purchase, was in the best interests
of all parties concerned due to international complexities and
reporting requirements.
D. At the annual meeting of stockholders on December 9, 1998, the
stockholders approved an increase in the authorized common stock from
49,750,000 shares to 250,000,000 shares, enabling the Company to have
greater flexibility in considering potential future actions involving
the issuance of stock which may be necessary or desirable to
accommodate the Company's growth plan, including capital raising
transactions and acquisitions.
E. In December, 1998 an investor subscribed for 6,000,000 shares of
Common Stock, pursuant to a private placement, at a purchase price of
$1,500,000, through the issuance of a Promissory Note (the "Note") at
the interest rate of average monthly Federal Funds rate as listed
daily in the Wall Street Journal, payable in installments of $400,000
on or around December 20, 1998 and $1,100,000 on March 25, 1999. The
first installment has been received by the Company. The second
installment has not yet been received by the Company.
F. On August 31, 1998, the Company announced that it received an initial
capital infusion of $500,000 from a group led by Tetsuo Kitagawa and
during the period October 19, 1998 to November 24, 1998, an additional
equity investment in excess of $1,100,000 was received from the same
group. 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 Mr. Kitagawa
and certain of his associates, 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 and currently serves as the Company's Chief Financial and
Operating Officer.
G. On November 30, 1998, the Company announced that, as part of the
company's diversification plan, the following three companies were
formed: Science and Technology Resources, Inc. ("STR"), Nevada
Manhattan Tokyo branch and NMG Rexco.
STR, a Nevada corporation wholly owned by Nevada Manhattan, was formed
to acquire, initiate and utilize a variety of patented technologies,
some of which may have important application in the area of natural
resources. STR is headed by Dr. Thomas Ward, a consultant to the U.S.
Department of Energy.
<PAGE> Q-8
Q-8
Nevada Manhattan Tokyo was formed to act on behalf of Nevada Manhattan
to transact the sale and marketing of Nevada Manhattan's products as
well as other companies' products produced from diverse areas around
the world.
NMG Rexco, a California corporation, was formed to act on behalf of
Nevada Manhattan for the fishing, processing and distribution of fish
and other seafood, as well as sales and distribution of timber and
other resources, primarily products from the Far East.
H. In consideration of other acquisitions being negotiated but not yet
consummated, the Company entered into an agreement with Asset
Management Academy ("AMA"), a California corporation, and issued AMA
5,000,000 shares of restricted common stock for fees and services in
connection with these acquisitions. On February 26, 1999, the
5,000,000 shares were cancelled on the books and records of the
Company and the transaction was rescinded.
I. From July 1997 through October 16, 1998, Jeffrey S. Kramer, V.P.,
provided loans to the Company, aggregating approximately $714,000 in
principal. Mr. Kramer and the Company have reached an agreement for a
partial settlement of these outstanding loans through the issuance of
restricted common shares by the Company. On October 23, 1998, the
Company issued Mr. Kramer 583,200 shares of restricted common stock in
settlement of $583,200 of principal and interest.
J. On October 20, 1998, Christopher Michaels, Chairman, purchased 929,500
shares of restricted common stock from the Company at a purchase price
of $0.30 per share through the issuance of a promissory note in the
amount of $278,850, due on or before October 20, 2003 at an interest
rate of prime plus 1%. The note is collateralized by the common stock.
K. On October 5, 1998, the Company announced an agreement for the
acquisition of a substantial interest in a revenue-producing oil and
gas project located on the Plainview natural gas field in Macoupin
County in southwest Illinois. The agreement was subject to
verification of the seller's projections. Upon careful consideration
and extensive due diligence, the Company has elected not to proceed
with the acquisition.
L. On December 31, 1998, pursuant to the terms of a Term Sheet executed
by the Company and Capco Acquisub Inc., (the "Term Sheet") the Company
acquired 1,212,000 shares (35%) of Meteor Industries Inc. (NASDAQ:
METR) from Capco Acquisub Inc., ("Capco") at a purchase price of $7.00
per share plus additional consideration in the form of certain options
to buy Nevada Manhattan common stock.. Pursuant to the Term Sheet,
Capco agreed to deliver an additional 518,000 shares of Meteor to the
Company by January 14, 1999 at a purchase price of $7.00 per share.
The entire transaction was rescinded by the Company before February
15, 1999.
M. On October 8, 1998, the Company elected not to proceed with the
acquisition of the Skluth "Timberlands" in the states of Para and
Amazonas, Brazil. The 5,000,000 escrowed shares were immediately
cancelled on the books and records of the Company and the original
property deeds were returned. The Company does not anticipate that the
reduction in timberland holdings will have an impact on current
operations.
4. CONTINGENCIES
On February 8, 1999, the Company issued one million shares of
restricted common stock pursuant to a subscription agreement executed
by Kawrr Holdings & Investments Ltd. To date the Company has failed to
receive the agreed-upon consideration which was $1.1 million pursuant
to the subscription agreement. The Company has requested the immediate
return of the shares and believes this item is a contingency.
<PAGE> Q-9
Q-9
5. SUBSEQUENT EVENTS
A. On March 10, 1999, the Company announced a stock buy back plan to
acquire up to $10 million worth of Nevada Manhattan Group shares of
Common Stock in the open market, to be completed within the next six
months.
B. On March 31, 1999 the Company announced a software, internet and
technology joint venture with two top scientific and educational
centers of Russia: The Bauman Moscow State Technical University and the
Novosibirsk State University and International Software Consortium,
Inc. a Delaware-incorporated subsidiary of Nevada Manhattan. The
mission of the joint venture shall be to exploit, for the benefit of
the parties, the vast technological human resources and achievements
available through the universities to continue the development and
implementation of Internet information processing and control systems,
Internet gateway systems software for computers and automation systems.
No revenues have been generated and no assurances can be given that
these ventures will result in revenues and/or earnings.
C. On April 7, 1999, the Board of Directors accepted the resignation of
Christopher D. Michaels from the Board and appointed Richard H. Izumi
to fill the vacant position. Mr. Izumi was elected Chairman of the
Board. On April 12, 1999 Neil H. Lewis resigned as Director/Secretary.
D. On April 12, 1999 the corporation's offices were moved to 15260 Ventura
Boulevard, Suite 1200, Sherman Oaks, California 91403. The new
telephone number is 818-728-9728 and fax number is 818-728-9717.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESULTS OF OPERATIONS
Comparison of Results of Operations - Nine months ended February 28,
1999 and February 28, 1998
----------------------------------------------------------------------
Revenues for the nine months ended February 28, 1999 were $24,573,243,
as compared to $525,981 for the same period in 1998. The increase of
$24,047,262 in revenues is attributed primarily to the Company's new
operations as follows: $21,140,000 attributed to the Company's sales
and marketing activities of products manufactured in the Commonwealth
of Independent States (these transactions are not necessarily
recurring, however, the Company will continue to seek these types of
transactions in the future); and $2,645,360 from Fishing operations
(of this, there were three customers whose sales represented 50%, 31%
and 19%, respectively). These are new revenue generators for the
Company and may be indicative of what the Company will do in the
future. However, no assurances can be given.
Gross profit margin for the nine months ended February 28, 1999 was
15%, compared to gross profit margin of 21% for the same period in
1998. Sales and marketing activities had a gross profit margin of 15%
and the sale of fish had a gross profit margin of 1%. However, gross
profit margins the Company is experiencing now are not necessarily
indicative of what can be anticipated in the future.
General and administrative expenses for the nine months ended February
28, 1999 were $4,085,834 compared to $4,363,954 for the same period in
1998. The decrease of approximately $278,120 is attributed primarily
to reduced expenses and increased efficiencies in the Brazilian
operations and reduction in related travel expense.
<PAGE> Q-10
Q-10
Investment income for the nine months ended February 28, 1999 was
$327,909 compared to no activity for the same period in 1998. The
increase is attributed to the Company's asset acquisition of 80% of
the metal mining resources and timber properties of Chrustalnaya, a
Russian Joint Stock Company headquartered in Kavalerovo.
Interest expense for the nine months ended February 28, 1999 was
$425,527 compared to no activity for the same period in 1998. The
increase of $425,527 in the Company's interest expense is attributable
primarily to convertible debentures and notes payable to shareholders.
The write-off of mineral properties for the nine months ended February
28, 1999 was $885,920 compared to no activity for the same period in
1998. The increase is a one-time charge not expected to be recurring
in the future.
Comparison of Results of Operations - Three months Ended February 28,
1999 and February 28, 1998
----------------------------------------------------------------------
Revenues for the quarter ended February 28, 1999 were approximately
$16,615,779 as compared to $174,175 for the same period in 1998. The
increase of $16,441,604 in revenues is attributed primarily to the
Company's new operations as follows: $14,730,000 attributed to the
Company's sales and marketing activities of products manufactured in
the Commonwealth of Independent States (these transactions are not
necessarily recurring, however, the Company will continue to seek
these types of transactions in the future); and $1,318,943 from
Fishing operations of this, there were two customers whose sales
represented 62% and 38%, respectively. These are new revenue
generators for the Company and may be indicative of what the Company
will do in the future. However, no assurances can be given.
Gross profit margin for the three months ended February 28, 1999 was
14% compared to gross profit margin of 15% for the same period in
1998. The sales and marketing activities had a gross profit margin of
14% and the sale of fish had a gross profit margin of (3%). However,
gross profit margins the Company is experiencing now are not
necessarily indicative of what can be anticipated in the future.
General and administrative expenses for the three months ended
February 28, 1999 were $1,572,484 compared to $1,424,240 for the same
period in 1998. The increase of approximately $148,244 is attributed
primarily to commission expenses related to the Company's sales and
marketing activities, offset by reduced expenses and increased
efficiencies in the Brazilian operations and reduction in related
travel expense.
Investment income for the three months ended February 28, 1999 was
$327,909 compared to no activity for the same period in 1998. The
increase is attributed to the Company's asset acquisition of 80% of
the metal mining resources and timber properties of Chrustalnaya, a
Russian Joint Stock Company headquartered in Kavalerovo.
Interest expense for the three months ended February 28, 1999 was
$60,700 compared to no activity for the same period in 1998. The
increase of $60,700 in the Company's interest expense is attributable
primarily to convertible debentures and notes payable to shareholders.
The write-off of mineral properties for the three months ended
February 28, 1999 was $885,920 compared to no activity for the same
period in 1998. The increase is a one-time charge not expected to be
recurring in the future.
Net profit for the quarter ended February 28, 1999 was approximately
$67,763 as compared to a net loss of $1,397,343 for the same period in
1998. The net profit for the quarter ended February 28, 1999 was
attributable to increased revenues from the newly instituted sales and
marketing and fishing activities of the Company. No assurance can be
given that the Company's activities resulting in increased revenues
and its second consecutive reported earnings can be continued.
<PAGE> Q-11
Q-11
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to experience pressure on its working capital
position due to operating losses and the need to continually invest in
its exploration activities and operational obligations. Management
believes that the Company's expansion and diversification plan, as
more fully described below, along with plans to obtain additional
capital, as more fully described below, will provide sufficient funds
to continue the Company's operations.
For the first time since the Company's inception it has experienced
net income for two consecutive quarters. Revenues increased
substantially due to increased activities in the areas of sales and
marketing of metals/mining, fishing and timber operations. Management
anticipates that this trend may continue, though no assurances can be
given.
The Company had a cash position, at February 28, 1999, of $754,733, of
which $393,000 is being allocated for use in the acquisition of assets
and other costs associated with establishing the Company's fishing
operations in Far East Russia and is not available for general
corporate purposes. The other $361,733 is available for general
corporate purposes.
Pursuant to the Company's expansion and diversification plan,
including the formation of its newly formed subsidiary, NMG Rexco and
the Company's new branch, Nevada Manhattan Tokyo Branch, as well as
increased revenue from the Company's metals/mining, fishing and timber
sales and marketing activities, the Company has continued for the
second consecutive quarter to generate significant revenue. The
Company believes that with the anticipated increase in daily
production from each of these operations, expenses and overhead will
be funded by the cash flow generated from its operations.
The acquisition of the assets of Chrustalnaya, with reported annual
revenue in excess of $16,000,000, for 8,000,000 shares of restricted
common stock of the Company, represents an additional significant
source of potential revenue and earnings.
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
restricted common stock for $500,000. In the six months ended February
28, 1999, the Company received in excess of an additional $1,860,000
of equity funding from TiNV1 principals and/or affiliates. On December
9, 1998 the Company's stockholders approved an option for TiNV1 to
purchase an additional 70,000,000 shares of restricted common stock at
an exercise price of $0.335 per share which was the trading price of
the Company's common stock on the date of the transaction.
In December, 1998 an investor subscribed for 6,000,000 shares of
Common Stock, pursuant to a private placement, at a purchase price of
$1,500,000, through the issuance of a Promissory Note (the "Note") at
the interest rate of average monthly Federal Funds rate as listed
daily in the Wall Street Journal, payable in installments of $400,000
on or around December 20, 1998 and $1,100,000 (which is included in
stock subscriptions receivable as of February 28, 1999) on March 25,
1999. The first installment has been received by the Company. The
second installment has not yet been received by the Company.
The Company anticipates that it will require additional capital and
intends to secure it by utilizing a publicly registered offering of
its securities, "Private Placements" and/or funds generated from
operations.
This section of the Quarterly Report contains forward-looking
statements within the meaning of the `"safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Such statements are
based on management's current expectations and are subject to a number
of factors and uncertainties which could cause actual results to
differ materially from those described in the forward-looking
statements.
<PAGE> Q-12
Q-12
YEAR 2000 DISCLOSURE
--------------------
The Company has appointed a Y2K Risk Manager to look into all possible
effects of Y2K problems within the business operations of the Company
and implement corrective action to ensure that the Company's operations
will not be adversely affected.
The corporate headquarters in the United States maintains eight
computers connected on a peer-to-peer network and four computers
independent of the network. The Company's office in Japan maintains two
computers independent of any network. The company has no proprietary
software. All hardware and software vendors have been contacted and
most have expressed no immediate Y2K concerns in relation to the
company's hardware and software. The company has plans to replace
and/or upgrade software and hardware that is non-Y2K compliant; however
has not begun to take such corrective action. The Company's Y2K Risk
Manager has determined that the accounting software of the Company is
not as yet Y2K compliant and is taking such necessary steps to replace
and/or upgrade such software. The Company estimates that the
replacement and/or upgrade of the accounting software is less than
$1,000. The Company's Y2K Risk Manager shall periodically seek an
update from hardware and software manufacturers in order to update the
Company's Y2K information and reassess any possible Y2K problems.
If the Company had to replace all of its computers, the costs would be
approximately $25,000. All Company files and records have been backed
up on zip drives and are continuously backed up on a weekly schedule.
Furthermore, select Company proprietary, legal and financial
information has been backed up on hard copy in order to preserve
business records and maintain business flow in case of any possible
unforeseen or undisclosed Y2K conflicts by third parties.
The Company maintains no direct customers. The Company maintains
suppliers and/or utilizes professional services including but not
limited to legal, accounting and banking. The Company has been in
contact with its legal, accounting and banking service providers and
has been assured by the providers that they are Y2K compliant and/or
have assigned a "Risk Manager" to assess and resolve any possible
conflicts that may arise.
The Company maintains a number of subsidiaries and/or affiliates in
various countries including the United States, Brazil, Indonesia, and
various republics of the Commonwealth of Independent States. As part of
the Company's risk assessment, the Risk Manager has contacted and
evaluated each affiliate and subsidiary in order to assess any possible
Y2K conflicts.
It has been determined that there is only one major conflict within the
Company's United States operations as noted above, and no major
conflicts within the Indonesia operations/subsidiaries. There are no
major conflicts between suppliers and/or manufacturers within the
United States/Indonesia operations. The primary activities within these
regions are explorative and thus utilize no manufacturers and/or
suppliers as well as no equipment with possible imbedded chips and/or
microcontrollers.
The Company's subsidiaries in Brazil and the Commonwealth of
Independent States are currently in the process of assessing their
state of readiness and any possible counter measures that need to be
undertaken in order to assure Y2K compliance. Although it is believed
that all subsidiaries in Brazil and within the Commonwealth of
Independent States are Y2K compliant, the Company believes that since
the majority of the operations are manually conducted, the effects of
any possible technological problem shall be minimal. The Company has
further assessed that if there should happen to be a Y2K problem, the
Company's financial statement shall not be materially affected.
<PAGE> Q-13
Q-13
NEVADA MANHATTAN GROUP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
1. LEGAL PROCEEDINGS
Francis Parkes, Dr. Joe C. Rude III, Christopher D. Michaels and Nevada
----------------------------------------------------------------------------
Manhattan Mining, Inc. v. Sheldon Salcman, Arie Rabinowitz, Mayer Rooz, Thomson
- --------------------------------------------------------------------------------
Kernaghan & Co. Limited, Soreq, Inc., Silenus Limited, Mary Park Properties,
- --------------------------------------------------------------------------------
L.H. Financial Services, Austost Anstalt Schaan, Tusk Investments, Inc., Top
- --------------------------------------------------------------------------------
Holding International, Ltd., Praha Investments S.A., UFH Endowment, Ltd., Atead
- --------------------------------------------------------------------------------
Consulting S.A., and Ausinvest Anstalt Balzers, (Case No. 98-5624 JSL(CTx) (the
- ----------------------------------------------
"Securities Action") was filed in United States District Court for the Central
District of California (the "Court") on July 14, 1998 on behalf of the Company
and Francis Parkes, Dr. Joe C. Rude and Christopher D. Michaels, who are
individual Company shareholders. In the Securities Action, plaintiffs contend
that defendants violated Section 10(b) and 13(g) of the Securities Exchange Act
of 1934, 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. 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. On November 2, 1998, the Court denied various motions
to dismiss, strike or transfer the complaint filed by various defendants.
Thereafter, separate counterclaims for breach of contract and declaratory relief
were filed by each of Tusk Investments, Inc., Silenus Limited, and Thomson
Kernaghan & Co., Ltd. Discovery in the Securities Action is proceeding.
UFH Endowment, Ltd. and Austost Anstalt Schaan v. Nevada Manhattan Mining,
----------------------------------------------------------------------------
Inc., Jeffrey Kramer and Christopher Michaels, (Case No. 98 Civ. 5032) (the "UFH
- ---------------------------------------------
Action") was filed in United States District Court for the Southern District of
New York on July 15, 1998, by the Securities Action defendants UFH Endowment,
Ltd. and Austost Anstalt Schaan against the Company, Jeffrey S. Kramer and
Christopher Michaels, officers and directors of the Company, President of the
Company. The plaintiffs in the UFH Action claim that the Company breached
certain debentures and subscription agreements, and that the other defendants
induced such breach, and thus seek an injunction directing the Company to file a
registration statement with the Securities and Exchange Commission ("SEC") and
to issue common stock, as well as damages from the Company and defendants Kramer
and Michaels. Approximately one month after first filing their complaint, the
plaintiffs amended their complaint to include a claim purporting to allege
violations by the Company and Jeffrey S. Kramer and Christopher Michaels. On or
about July 30, 1998 plaintiffs sought a preliminary injunction requesting that
the Company be compelled to file a registration statement with the SEC and issue
stock to the plaintiffs. This motion was denied. On July 27, 1998, the Company
and Messrs. Kramer and Michaels filed various motions to dismiss, stay, or
transfer the UFH Action. These motions have not yet been ruled upon by the
United States District Court for the Southern District of New York.
Silenus Limited v. Terra Natural Resources Corp. aka Nevada Manhattan Mining
----------------------------------------------------------------------------
Incorporated, TiNV1, Inc., Jeffrey Kramer, Joseph C. Rude and Christopher
- --------------------------------------------------------------------------------
Michaels, LASC Case No. BC 201577 (the "Silenus State Action"), was filed in Los
- --------
Angeles County Superior Court on December 1, 1998. The Silenus State Action
accused the Company and Messrs. Kramer and Michaels and Joseph Rude, a director,
of issuing new common stock and options to purchase additional new common stock
in the Company to TiNV1, Inc. ("TiNV1") as part of a conspiracy to effect a
"fraudulent transfer" of assets of the Company to TiNV1, and further accused
Messrs. Kramer, Michaels and Rude of breaching their fiduciary duties as
directors by engaging in the alleged conduct described above, as well as by
allegedly attempting to fraudulently transfer assets of the Company to
themselves. On December 7, 1998, plaintiff Silenus Limited ("Silenus") sought a
temporary restraining order and order to show cause re preliminary injunction in
the Los Angeles County Superior Court, seeking an order enjoining the Company
from holding its December 9, 1998 annual shareholders meeting as well as
imposition of a receivership over any common stock in the Company issued to
TiNV1. After briefing and oral argument, on December 7, 1998 the Court denied
Silenus's application for temporary restraining order and order to show cause re
preliminary injunction. On December 31, 1998, the Company and Messrs. Kramer,
Michaels and Rude filed a demurrer in the Silenus State Action, contending that
the allegations of the Silenus State Action failed to state a legally viable
claim for relief, which demurrer is presently set for hearing on January 20,
1999. On March 9, 1999, the Court granted the demurrer and gave the plaintiff
leave to amend by March 30, 1999 only if the plaintiff seeks to proceed on a
"nonderivative" basis, failing which the complaint will be dismissed on March
31, 1999.
<PAGE> Q-14
Q-14
2. CHANGES IN SECURITIES
From the period December 1, 1998 to February 28, 1999, the Company
offered and sold 6,511,908 shares of its Common Stock in a private placement in
reliance upon Section 4(2), at the average weighted price of $.29 per share. The
Company believes that it met all of the requirements contained in Section 4(2).
Sales of shares were made only to the class of persons meeting the
suitability requirements contained within the Offering. The Company reviewed
subscription documents which it required all prospective purchasers to complete.
From the period December 1, 1998 to February 28, 1999, the Company
offered and sold 7,808,795 shares of its Common Stock in a private placement in
reliance upon the exemption provided by Regulation S, at a price of $.19 per
share. Sales of shares were made only to the class of persons meeting the
suitability requirements contained within the Offering. The Company reviewed
subscription documents which it required the purchasers to complete and
conducted due diligence to confirm the representations and warranties of the
Purchasers. By corporate resolution, the Company will prevent any transfer of
the shares not in compliance with the provisions of Regulation S.
On January 11, 1999 the Company delivered 8,000,000 shares of common
stock for the acquisition of 80% of the assets of Chrustalnaya, a Russian joint
stock company. These shares were issued in reliance upon Section 4(2). Sales of
shares were made only to the class of persons meeting suitability requirements
of the offering and the Company has reviewed subscription documents which it
required the purchaser to complete. The Company believes that it met all of the
requirements contained in Section 4(2).
From the period December 1, 1998 to February 28, 1999, the Company
issued 1,000,000 shares of common stock in payment of performance under a
contract, and 107,500 shares to a debentureholder in full settlement of all
amounts due and conversion of an 8% Convertible Debenture. These shares were
issued in reliance upon Section 4(2). Sales of shares were made only to the
class of persons meeting suitability requirements of the offering and the
Company has reviewed subscription documents which it required the purchasers to
complete. The Company believes that it met all of the requirements contained in
Section 4(2).
From the period December 1, 1998 to February 28, 1999, the Company
issued an aggregate 189,000 shares of Common Stock as a bonus to employees for
services rendered to the Company. These shares were issued in reliance upon
Section 4(2) and were at a price of $.33 to $.875 per share based on a price
equal to 70% of market on the date the shares were granted. Sales of shares were
made only to the class of persons meeting suitability requirements and the
Company has reviewed subscription documents which it required all prospective
purchasers to complete. The Company believes that it met all of the requirements
contained in Section 4(2).
On December 9, 1998 the Company's stockholders approved an option for
TiNV1 to purchase an additional 70,000,000 shares of restricted common stock at
an exercise price of $0.335 per share which was the trading price of the
Company's common stock on August 28, 1998 (see "Management's Discussion -
Liquidity and Capital Resources").
<PAGE> Q-15
Q-15
3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
5. OTHER INFORMATION
On January 13, 1999 and January 27, 1999, the Company received comments
from the Securities and Exchange Commission relative to its valuation of
its domestic mineral properties. The Company and its accountants have taken
a prior period writedown of $2,936,000 against its Domestic Mineral
Properties and $700,000 against the Brazilian Timber Properties, pursuant
to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of."
6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
--------
Exhibit Description Reference No.
------------------- -------------
Financial Data Schedule 27
REPORTS ON FORM 8-K
-------------------
8-K Current Report dated January 11, 1999 to report the acquisition of 80%
of the assets, including mining and timber rights, of Chrustalnaya, a
Russian joint stock company, from LLC NPK Edikt, a Russian Limited
Liability Company, for 8,000,000 shares of restricted common stock.
<PAGE> 46
46
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEVADA MANHATTAN
GROUP, INCORPORATED
/s/ Richard H. Izumi
Date: May 20, 1999 By: _______________________________
Chief Executive Officer,
Chairman of the Board
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Chief Executive Officer,
/s/ Richard H. Izumi Chairman of the Board May 20, 1999
- ----------------------------------
Richard H. Izumi
/s/ Jeffrey S. Kramer Vice President, May 20, 1999
- ---------------------------------- Director
Jeffrey S. Kramer
/s/ Tetsuo Kitagawa Chief Operating Officer, May 20, 1999
- ---------------------------------- Director
Tetsuo Kitagawa
/s/ Ilyas Chaudhary Director May 20, 1999
- ----------------------------------
Ilyas Chaudhary
/s/ Joe C. Rude III Director May 20, 1999
- ----------------------------------
Joe C. Rude III, M.D.
/s/ William E. Wilson Director May 20, 1999
- ----------------------------------
William E. Wilson
<PAGE> 47
47
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.+
3 (ix) Amended Certificate of Determination of Preferences of Series A Preferred Stock of Nevada
Manhattan Mining Inc. Filed January 14, 1998
3 (x) Certificate of Amendment of Articles of Incorporation of Terra Natural Resources Corporation Filed
May 12, 1998
3 (xi) Amended Bylaws of Terra Natural Resources Corporation as of August 31, 1998#
3 (xii) Restated Amended Bylaws of Terra Natural Resources Corporation as of Nov. 30, 1998##
3 (xiii) Certificate of Amendment of Articles of Incorporation of Terra Natural Resources Corp. filed
December 11, 1998##
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*
</TABLE>
<PAGE> 48
48
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ---------------------------------------------------------------------------------
<S> <C>
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*
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 Agung 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****
10.(xxx) Term Sheet for Royal Gold/Nevada Manhattan Mining Agreement and Option to Purchase dated Nov. 25, 1997++
10.(xxxi) Cooperation Agreement with Metsa Timber dated March 3, 1998++
10.(xxxvi) Investment Agreement with Bristol Asset Management, LLC dated March 27,1998++
10.(xxxvii) Subscription Agreement with TiNV1, Inc. dated as of August 28, 1998++
10.(xxxix) Option Agreement with TiNV1, Inc. dated as of August 28, 1998++
10.(xl) Letter Agreement with TiNV1, Inc. dated as of August 28, 1998++
10.(xli) Memorandum of Agreement effective as of October 9, 1998 between Cyprus Amax Coal Company and
Nevada Manhattan Mining, Inc.##
10.(xliv) Letter Agreement for Asset Acquisition by and between Nevada Manhattan Group, Inc. and LLC NPK
Edikt, re Chrustalnaya Mining, dated December 23, 1998##
10.(xlv) General Agreement between Nevada Manhattan Group, Inc. and OAO "Sibnefteprovod"
dated February 10, 1999
10.(xlvi) Letter of Understanding between Phystechmed and the Company dated November 30, 1998
10.(xlvii) Joint Venture/Representation Agreement between Nevada Manhattan Group, Inc. and
Bauman Moscow State Technical University as of April 1, 1999
10.(xlviii) Joint Venture/Representation Agreement between Nevada Manhattan Group, Inc. and
Novosibirsk State University as of March 6, 1999
21 Subsidiaries of Small Business Issuer
23.(i) Consent of Jackson & Rhodes P.C.**
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++
</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 28, 1998
## Filed with Form 10-QSB for the quarter ended November 30, 1998
EXHIBIT 10.xlv
Page 1
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
312 NORTH SPRING STREET, ROOM G-3
LOS ANGELES, CA 90012
213-894-4445
(seal)
SHERRI R. CARTER
Clerk of Court
COURT INTERPRETER SERVICES
DECLARATION OF INTERPRETER
I, the undersigned say I am an Official Court interpreter of English and
Russian. I certify that the attached translation from Russian into English is
true and correct to the best of my abilities and belief.
DESCRIPTION OF DOCUMENT(S)
General Agreement
between Nevada Manhattan Group, Co.
of Calabasas, California and
OAO "Sibnefteprovod", Tyumen, Russia
LEGEND: All text in the translation contained in brackets ([ ]) represents
translator's comments or explanatory remarks.
Executed this 4th day of February, 1999, at Agoura Hills, California.
Varvara Olson
- --------------
/s/ Varvara Olson
- ------------------
Signature of Interpreter
Case No. N/A
Case Name: N/A
No. of words: 1185
<PAGE>
Page 2
GENERAL AGREEMENT
BETWEEN
NEVADA MANHATTAN GROUP, INCORPORATED
OF CALABASAS, CALIFORNIA
AND
OAO "SIBNEFTEPROVOD"
of TYUMEN, RUSSIA
<PAGE>
Page 3
GENERAL AGREEMENT
City of Moscow "___" ______1999
This General Agreement is entered into by and between the following parties:
"Nevada Manhattan Group Co.", hereinafter referred to as NMG, an open
joint-stock corporation incorporated in compliance with the US legislation,
having its central office located at: 5038 N. Parkway Calabasas, Suite 100,
Calabasas, California 91302, on the one hand,
and
"Sibnefteprovod", hereinafter referred to as SNP, an open joint-stock company
incorporated in compliance with the legislation of Russia, having its central
office located at: 625048, Russia, Tyumen, Respubliki st., 139, on the other
hand, hereinafter referred to as the Parties to this General Agreement.
1. THE SUBJECT OF THE GENERAL AGREEMENT.
1.1. SNP carrying out its production activity is interested in the acquisition
of the following:
- information on new technologies and equipment that can be used in its
activity, as well as accessible data on possible suppliers of existing
technologies and equipment from the point of both their business
skills and their competitiveness and prospects for the offered
services, products and equipment;
- consultations and explanations on the issues of the validity of
potential deals with foreign partners, development of an effective
financial and technical policy;
- an optimal design (texts) of contacts, agreements and other documents
reflecting financial, equity, technical, technological and other deals
and procedures;
- professional support during negotiations, transaction of deals and
their enforcement;
- access to the protection of its deals on the part of the international
financial system;
- procurement of credits and investments from international
organizations and foreign financial, manufacturing and other entities;
- and other acts providing protection of its interests and the interests
of its partners outside of Russia.
Considering the above stated, SNP has established a business relationship with
NMG as a firm that has offered its experience and skills to solve the current
problems.
1.2 Understanding the tasks facing SNP, having practical experience in their
resolution, attesting to its reliability and professionalism, NMG has
established a partner relationship with SNP and is willing to render
assistance to SNP as an agent, representative and partner in the
preparation and implementation of specific projects, programs and contracts
of SNP as well as to initiate and offer to the latter its programs and
projects for joint realization.
2. ORGANIZATION OF WORKS WITHIN THE FRAMEWORK OF THE GENERAL AGREEMENT
2.1 This General Agreement is grounds for transacting agreements, protocols,
treaties, contracts on any kind of activities between the Parties. The
performance of activities within the framework of this General Agreement is
limited by the bans and restrictions imposed by the legislation of the USA
and Russia as well as by the legislature of the countries or the world
community under whose jurisdiction various types of activities can be
carried out.
<PAGE>
Page 4
2.2 Coordination of activities within the framework of this General Agreement
can be attained in the form of written agreements, treaties and contracts
on the decision of the Parties.
3. AUTHORIZED PERSONNEL.
3.1 Under this General Agreement, the Parties designate the following
authorized persons:
3.1.1. On the part of SNP the assignees are: General Director and persons
authorized by the General Director power of attorney.
3.1.2 On the part of NMG, the authorized persons on the basis of issued powers
of attorney are:
- Neil H. Lewis, Secretary of the Board of Directors;
- Tetsuo Kitagawa, Chief Financial Officer.
3.2 Authorized individuals may be unilaterally added or replaced by each of the
Parties in the form of a written note signed by a superior official
designated under the Charter of each Party to this General Agreement.
3.3 The assigned person authorized to sign by the power of attorney under this
Agreement is entitled on behalf of the Party, which it represents:
- to represent its Party's interests;
- to negotiate the issues of the Parties' activities under the present
General Agreement.
4. THE MAIN TRENDS OF ACTIVITIES
4.1 The Parties that have signed the present General Agreement have determined
the following main trends of their activities considering the requirements
and interests of SNP and those stated in p.1.1 of this General Agreement;
- financing of maintenance operations and updating of the SNP production
system on a long-term basis;
- attraction of long-term financial funds for the development of the SNP
infrastructure;
- preparation and, in case of a positive decision of SNP, implementation
of contracts on the equipment deliveries to meet the SNP demands,
engineering, research and development technologies, and other
activities;
- those issuing from the realization of specific contracts and
agreements: organization and performance of marketing research,
examinations, audits of SNP counteragents, legal support for the SNP
signed treaties, protocols, agreements and contracts from the point of
counteragents and international law requirements.
4.2 Within the framework of the main trends of activities determined by this
General Agreement, SNP and NMG may act as counteragents, consultants and
others.
5. FINANCING AND SETTLEMENTS.
5.1 This General Agreement is not grounds for the execution of mutual financial
claims. This General Agreement may not be grounds for claims of any kind.
5.2 Financing and payments within the framework of this General Agreement
are made on the basis of the contracts, treaties, agreements, and protocols
signed by authorized persons.
<PAGE>
Page 5
6. General Provisions.
6.1 This General Agreement shall be valid until it is replaced by an updated
agreement, before the decision of one of the Parties to suspend or rescind
it unilaterally. Unilateral suspension of this General Agreement is
possible only in case of the complete fulfillment of entire obligations by
the Parties in conformity with p. 5.2.
6.2 The text of the present General Agreement is executed in the Russian
language and translated into English. Equally valid are the two original
Russian documents with the original signatures and two original English
translations thereof with the original signatures. The mentioned texts
executed in Russian and English have equal validity.
On behalf of "Nevada Manhattan Group,Co" On behalf of OJSC "Sibnefteprovod"
s/s Tetsuo Kitagawa /s/ G.G. Khoperskiy
Tetsuo Kitagawa G.G. Khoperskiy
Chief Financial Officer General Director
/s/ Neil H. Lewis /s/ A. A. Tchmutin
Neil H. Lewis A.A. Tchmutin
Secretary of the Board of Directors Deputy General Economy Director
[Seal of Nevada Manhattan Group, Inc.]
(end of certified translation)
<PAGE>
Page A.1
Appendix A to Exhibit 10.(xlv)
[not a certified translation]
SIBNEFTEPROVOD
HISTORY, CURRENT STATUS AND FUTURE DIRECTION
LEGAL STATUS AND FUNCTION
A Shareholding company of the open type "Sibnefteprovod" has been founded
in accordance with the Decree of the President of the Russian Federation
#143 of 17.11.92. "On features of privatization and reorganization into
shareholding companies of state enterprises, production and scientific
organizations in the oil, oil refining and petroleum product industries"
and also Decree #21 of 01.07.92. "On practical steps in regard to
reorganization of state enterprises, voluntary unions of state entities
into shareholding companies". OAO "Sibnefteprovod" has been founded by the
Decree of the State Committee of the Russian Federation on state property #
975-p of 5.05.94 and is the successor of the Production Union of main pipe
lines of Western and Northwestern Siberia.
The shareholding company is engaged in the following kinds of activities:
o pumping oil through main pipe lines;
o oil supply to consumers, connected to main pipe lines, including
export;
o storage of oil based on balances, carrying capacity of pie lines and
considering interests of producers and consumer.
HISTORY
The history of OAO "Sibnefteprovod" began in 1967 when by Decree of the
Minister of oil industry of the RF #480 of October 19th "On operation of
pie line Ust-Balyk - Omsk" the "Department of Main Pipe Lines of Western
and North-Western Siberia (Tyumen)" was founded. It included two pie line
departments (PLD) in Surgut and Tobolsk. The Department was created on the
base of the Ust-Balyk pipe line, still under construction, with the aim of
running pipe lines already in existence and construction of new ones for
extensive exploitation of the Tyumen oil field.
Discovery of new oil fields in northern Tyumen region and construction of
new main pipe lines and pumping stations caused structural changes in the
Department and as of January 1, 1986, it already included eight pipe line
divisions. By Decree of the Minister of the oil industry # 95 of 13.03.91,
"On renaming of Glavtransneft organizations" the Department was transformed
into "Production Union of Main Pipe Lines of Western and North-Western
Siberia."
SCOPE AND STRUCTURE
At the present OAO "Sibnefteprovod" is running main pipe lines 9618 km in
length, with the diameter of 530 ... 1220 mm, 83 oil pumping stations
(OPS), 18 reservoir parks with total capacity of 2.5 mln. cubic meters. The
volume of pumped oil in 1996 amounted to 186.7 mln. tons, cargo turnover -
184.8 billion t/km. OPS are equipped with 418 pumps, capacity up to 12,500
cubic meters per hour, with electrical engines up to 8,000 kW.
<PAGE>
Page A.2
OAO "Sibnefteprovod" has eight pipe line divisions (PLD); Tyumen, Surgut,
Tobo, Nefteyugansk, Nizhnevartovsk, Ishim, Uray and Noyabr; a repair plant
(Tyumen); a start up division (Surgut), a production maintenance and supply
facility (Tyumen) and the company "Sibtruboprovodstroy" (Tyumen). The total
number of engineering staff, workers and administration personnel - 11,000.
Electrical supply is provided by shareholding companies "TyumenEnergo",
"SverdlovEnergo", "KurganEnergo" and OmskEnergo".
All OPS and reservoir parks of OAO "Sibnefteprovod" are equipped with
automated systems, 7 OPS have telemechanic systems, which covers 96% of the
total, and 5419 km of the pipe line length.
OAO "Sibnefteprovod" is running 1236 cathode defense stations, 20 drainage
defense stations, 510 protectors, which ensures corrosion protection for
9,372 km of pipe lines (97.5% of the total length). Electrical supply for
the linear equipment is provided by bytrack power lines with the total
length of 4,071 km.
As of January 1, 1992 OAO "Sibnefteprovod" is providing oil transportation
services on the basis of pipe oil transportation tariffs.
The financial and economic state of the shareholding company during the
period of authorization by governmental bodies of tariffs for oil
transportation services were characterized by different stages.
In 1992-1994, the principles of evaluation of oil transportation costs were
in the process of formation, inflation rates were high, oil production was
declining considerably, financial state of the shareholding company was
unstable.
In 1995-1996, tendencies of economic stabilization emerged, inflation rates
slowed down, main principles of oil transportation costs formations were
worked out at all levels of governmental control. At this period the
financial state of "Sibnefteprovod" was stable.
<PAGE>
Page A.3
Main indices of "Sibnefteprovod's" work during said period are stated in
the table.
BASIC TECHNICAL-ECONOMIC INDICATOR
<TABLE>
<CAPTION>
Measurement
Indicators Units 1992 1993 1994 1995 1996
---------- ----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
1. Volume of transported Thousands 160368 226392 201588 190807 186700
oil Tons
2. Cargo turnover Millions tons 253237 221462 195282 195282 184796
3. Average daily Number of 9566 10718 10592 10592 10925
Workforce People
4. Labor productivity in Thousand 38047 31624 27043 25937 25670
Pipeline transportation Ton/km
</TABLE>
The oil transportation tariff structure, approved by OAO "Sibnefteprovod" for
1995-1997 has somewhat changed during the last years. Thus, expenditures for
ensuring safety in oil transportation constitute more than one-third of the
tariff profits and increased in 1996 by 3.3%. Due to the introduction starting
May 1, 1996 of duties for oil transportation, taxes to the federal budget
increased and amounted to 23.9% of the tariff in 1996 and 26.4% in 1997.
INDICATORS OF FINANCIAL AND ECONOMIC ACTIVITY
Indicator Measurement units 1995 1996
--------- ----------------- ---- ----
1. Cargo turnover of crude oil Millions of tons 185,919.8 184,796.6
x km
2. Total income (without VAT and Thousands of USD 758,028 1,165,454
Excise taxes)
3. Hard currency income Thousands of USD 11,064 21,495
(included in p.r.)
4. Balance profit Thousands of USD 389,937 348,355
5. Final profit Thousands of USD 63,410 260,000
6. Credits (debts to be received)
Short term Thousands of USD 140,765 163,506
Long term Thousands of USD 0 0
7. Debit (debts to be Paid
Short term Thousands of USD 71,711 119,698
Long term Thousands of USD 37 0
8. Debt to the Federal budget Thousand of USD 0 0
(tax debt)
<PAGE>
Page A.4
Liquidity and financial stability of the enterprise on the basis of analysis of
accounting balances for the above mentioned years is characterized by the
following ratios:
Indicator 1995 1996
--------- ---- ----
Ratio of general liquidity 1,257 1,333
Ratio of absolute liquidity 0,356 0,339
Ratio of general solvency 0,908 0,924
Ratio of autonomy 9,878 12,152
Altman's indictor (Z) 6.16 7.38
Z greater than 3 - low probability of bankruptcy
COST REDUCTION ACTIVITIES
Simultaneously with the introduction of federal duties, in spite of
continuing inflation processes in the country, reconsideration of the
tariff after February 1, 1996 has been practically put on hold . In order
to maintain the stable financial position of OAO "Sibnefteprovod" in 1996
work began on lowering of the financial burden on the tariff and work
continued on bringing down maintenance costs and expenses from profits.
First of all, based on Decrees of the President of the RF and resolutions
of the government housing projects, kindergartens, etc. were transferred to
municipal property.
Besides that a number of small unprofitable firms were liquidated.
In 1997 OAO "Sibnefteprovod" has developed and presented for approval its
"Program of improvement of organization and production structure up to
2010." It entails the following steps:
o conservation of oil pumping stations.
o effective retirement (transfer) of non running pipe lines
o transfer of housing, kindergartens, etc. to municipal property
o liquidation of non profitable farms and removal of other agricultural
enterprises from the shareholding company
o reorganization of other auxiliary structures, servicing the
technological process of oil transportation, into self supporting
entities
o other steps directed to decrease of running expenses for oil
transportation.
FUTURE INITIATIVES AND PROJECTIONS
It is assumed that as a result of these steps, outlined in the Program,
maintenance costs and expenses from profit (in 1997 prices) will be lowered
by 37.8 billion Rb in 1997, by 130.1 billion Rb in 1998, by 147.9 billion
Rb in 1999 and by 160.9 billion Rb in 20000. This will enable to lower the
financial burden on the tariff and to ensure financial stability of OAO
"Sibnefteprovod".
One of our main goals is to increase safety in oil transportation and
ensure that no accidents occur. To achieve this goal the following steps
have been taken in 1997:
o together with the Center for Technical diagnostics of AK "Transneft"
1,133 km of pipe line have been inspected by profile measurer
"Kaliper" and 2,687 km by defectoscope "Ultraskan"
o at the Ust-Balyk Omsk pipe line 161 km will be put into operation
together with bytrack constructions.
o at the Shaim - Tyumen pipe line 40 km of pipes have been replaced
o parametric system for leak detection has been installed at the
Tyumen-Yurgamysh sections of Nizhnevartovsk-Kurgan-Kuybishev and
Ust-Balyk-Almetyevsk pipe lines; the system covers 11 underwater
crossings.
<PAGE>
Page A.5
Western Siberia is a land of rivers, lakes and swamps. Pipe lines cross
such big and navigable rivers as Ob and Irtysh. In order to ensure safe
running of underwater crossings OAO "Sibnefteprovod" constantly monitors
the situation, starting in 1995 there are annual regional drills on
liquidation of underwater crossings breakdowns, much attention is paid to
diagnostic checks. By 1997 562 km of reserved pipe lines have been checked.
In the current year we plan to use defectoscope "Ultrascan" on 12 out of 20
reserved underwater pipe lines with the total length of 475 km. All work on
inner pipe diagnostics for main pipe lines of OAO "Sibnefteprovod" are
conducted strictly in accordance with the plans of AK "Transneft".
OAO "Sibnefteprovod" pays much attention to issues of implementation of new
technologies, latest achievements of science and technology. This is
realized in various forms of cooperation with the country's largest
scientific centers on issues of safety increase on main pipe lines. We
sustain business contacts with scientific and designing organizations of
Moscow, Ufa, Novosibirsk, Yekaterinburg, Kazan, Tyumen and other cities;
with said organizations we have signed contracts regarding development and
creation of new equipment for pipe line maintenance.
The staff of OAO "Sibnefteprovod" is successfully coping with is main task
- pumping oil from the Tyumen region. OAO "Sibnefteprovod" provides
services on transportation of oil, stable gas condensate and stable
gasoline. Fifty one metering units accept products for transportation from
shareholding oil producing companies, joint and geological enterprises, AO
"Sibneftegaspererabotka" (gas refinery), GP "Surgutgasprom" (condensate
stabilization plant), all of which are customers serviced in accordance
with contracts signed with AK "Transneft".
OAO "Sibnefteprovod" transfers oil for further transportation to four
allied shareholding companies: OAO "Uralo-Siberian main pipe lines", OAO
"North-Western main pipe lines", OAO "Transsiberian main pipe lines" and
OAO "Main pipe lines of Central Siberia".
PROGNOSIS OF INDICATORS OF FINANCIAL AND ECONOMIC ACTIVITY IN 1997-2001
<TABLE>
<CAPTION>
Measurement
Indicators Units 1997 1998 1999 2000 2001
---------- ----- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1. Cargo turnover Mln ton/km 173,655 198,448 199,448 210,448 214,317
Of crude oil
2. Total income Thousands 839,333 959,166 964,166 1,017,166 1,035,833
of USD
3. Balance profit Thousands 251,799 287,750 289,249 305,150 310,750
Of USD
4. Annual value of Thousands 145,881 147,958 148,996 150,035 150,886
Assets write-off Of USD
(amortization)
</TABLE>
<PAGE>
Page A.6
PERSONNEL QUALIFICATIONS AND TRAINING
These days work efficiency of any enterprise depends largely on the staff,
its qualifications, flexibility in regard to the changing economic
situation, cultural level, traditions and many other factors that define
the notion "personnel".
From the beginning and up till today the management of OAO "Sibnefteprovod"
has paid considerable attention to issues of constant training and raise of
qualification of its personnel. A special school within the framework of
the unique Tyumen training center, the only one in Russia, offers more than
30 subjects. The center has modern equipment and training facilities. More
than 18,000 specialists have passed through the center during the last 20
years. Strong ties are established with the Tyumen state oil and gas
university, which trains specialists for the oil and gas complex, and its
subsidiaries.
At the present a special program for personnel, including the executive
level, is under elaboration. A large number of leading specialists of OAO
"Sibnefteprovod" completed training in USA, Germany and Canada.
All 16 divisions of OAO "Sibnefteprovod" participated in the annual
competition for the best rationalization proposal and as a result there are
five patents of the Russian Federation and several positive decisions on
inventions.
OAO "Sibnefteprovod" takes an active part in world and Russian oil and gas
shows. This enables to establish ties with foreign and local companies -
equipment and materials producers.
CORPORATE POLICIES AND GOALS
Everything we do has one goal - to solve our main problems. Among day to
day routines we try not to lose sight of the most important issues. Pipe
lines of OAO "Sibnefteprovod" have been constructed during the 70's and
80's. They have been in operation for 15 to 25 and even more years. Their
construction and running was always done under extreme conditions: low
temperatures, marsh ridden lands, etc. Aging of pipe lines, stationary and
linear equipment leads to greater breakdown possibilities. That is why the
policy of OAO "Sibnefteprovod" is mostly aimed at increasing safety of main
pipe lines, its equipment and structures, based on methods of non
destructive diagnostics. Test results are loaded into computers which
determine the first and foremost tasks regarding repairs, reconstruction
and optimal allotment of finances.
OAO "Sibnefteprovod" has a considerable reservoir park. The greater part of
these reservoirs were constructed 10 to 20 years ago. As a result of
complex testing during the last years the presence of pitting corrosion has
been discovered. The outcome was an increase in capital repairs. For each
of the reservoirs a draft on capital repairs is completed based on testing
results.
More attention will be paid by OAO "Sibnefteprovod" to further improvement
of automatic and telemechanic systems - from local systems to the united
automated management system for AK "Transneft".
<PAGE>
Page A.7
Changes in oil production volumes in the Tyumen region imply changes in
pumping technology and that, in its turn, determine equipment and
structures optimization.
This so-called optimization process is one of the main tasks for the whole
staff. Complete or partial deletion of pipe lines, OPS that can be excluded
from the pumping process is one of the main steps in the right direction.
Another part of the same process is personnel redistribution within the
shareholding company, setting priorities in regard to capital repairs and
reconstruction of pipe lines, reservoir parks and OPS.
OAO "Sibnefteprovod" implements a wide scale program aimed at improvement
of living conditions for its personnel and social infrastructure.
Exhibit 10.xlvi
Page 1
SCIENCE & TECHNOLOGY RESOURCES, INC.
A Subsidiary of Nevada Manhattan Mining, Inc.
643-B South Washington Street
Alexandria, Virginia 22314 USA
November 16, 1998
Phystechmed
117335 Moscow, Russia
Bolshaya Ordynka, 17-11
Tel/Fax 7095 243-06-91
Re: Letter of Understanding
Dear Professor Bogomolov:
This letter is intended to memorialize the agreement we have reached
relative to the acquisition by Science & Technology Resources, Inc. ("STRI") of
100 percent of the rights, title and interest to the following technologies
(collectively, the "Technologies") owned by Phystechmed, a joint stock company
located in Moscow, Russia:
1. 20 MeV Proton (or heavcy particle) accelerator using Backward Wave
Acceleration Acceleration principle (Bogomolov)
2. 10 (to 12) MeV injectors.
3. 250 MeV Proton Accelerators (Bogomolov); medical model.
4. Explosives detection equipment.
Subject to the completion of its due diligence, corporate and/or regulatory
approvals and if it deems necessary, a more formal agreement, STRI agrees to
acquire the sole and exclusive rights, title and interest to the Technologies.
In consideration therefore, STRI agrees to pay Phystechmed and/or designees
royalties and/or Preferred Stock of STRI, in an amount and under terms to be
agreed upon by the parties to this agreement, after completion of thorough due
diligence and a financial assessment.
Very truly yours,
STRI
/s/ Thomas E. Ward
Thomas E. Ward
President
AGREED AND ACCEPTED, this 30 day of November, 1998, with full power and
authority from Phystechmed, to enter into and execute this agreement on its
behalf.
PHYSTECHMED
by General Manager, CEO
/s/ Y. Yushkevich
Y. Yushkevich
Exhibit 10 xlvii
Page 1
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
312 NORTH SPRING STREET, ROOM G-3
LOS ANGELES, CA 90012
213-894-4445
(seal)
SHERRI R. CARTER
Clerk of Court
COURT INTERPRETER SERVICES
DECLARATION OF INTERPRETER
I, the undersigned say I am an Official Court interpreter of English and
Russian. I certify that the attached translation from Russian into English is
true and correct to the best of my abilities and belief.
DESCRIPTION OF DOCUMENT(S)
Joint Venture/Representation Agreement
between
Nevada Manhattan Group, Inc.
and
Bauman Moscow State Technical University
LEGEND: All text in the translation contained in brackets ([ ]) represents
translator's comments or explanatory remarks.
Executed this 24th day of March, 1999, at Agoura Hills, California.
Varvara Olson
- --------------
/s/ Varvara Olson
- ------------------
Signature of Interpreter
Case No. N/A
Case Name: N/A
No. of words: 2281
<PAGE>
Page 2
MOSCOW STATE BAUMAN MOSCOW STATE
TECHNICAL UNIVERSITY TECHNICAL UNIVERSITY
NAMED AFTER N.E. BAUMAN
5 Second Baumanskaya Str. 2-nd Baumanskaya Str.
Moscow, 107005 Moscow 107005, Russia
Tel: (095) 261-40-55 Tel.: (095) 261-40-55
Fax: (095) 267-9893 Fax: (095) 267-98-93
E-Mail: [email protected] E-mail: [email protected]
JOINT VENTURE/REPRESENTATION
AGREEMENT
The present AGREEMENT ("Agreement") is entered into by the Moscow State
Technical University named after N.E. Bauman ("University") and the NEVADA
MANHATTAN GROUP, INCORPORATED ("Nevada"), Nevada Corporation or the party
designated by it as a Partner for the Joint Venture and the Representative, and
becomes valid beginning with April 1, 1999.
DECLARATIVE PART:
A. The University is called forth for research and development in the
fields of industry (Fields), stated in Attachment A to this document.
The University owns and has the right to sell, use and license certain
technologies that belong to it (Technologies) in these Fields, as
shown in Attachment A.
B. The University appoints Nevada as its partner in the joint venture and
representative for international marketing and operation of
Technologies and all products (Products) which utilize said
technologies, on the terms formulated in this Agreement. The right of
exclusivity will be realized only in specific contracts for research
and development projects.
By this, therefore, taking into account the Declarative part stated
above and the joint agreements and provisions, included in the present
document, the parties who have signed below have come to an agreement
about the following:
(Signature) (Signature)
<PAGE>
Page 3
AGREEMENT:
1. Appointment. With this the University appoints Nevada as its Partner
in the Joint Venture for international marketing and sales of
Technologies and Products. With the present Nevada accepts this
appointment on the terms, formulated in the present Agreement. The
right for exclusivity will be realized only in specific contracts for
research and development projects.
2. The Service provided by Nevada. Taking into account the terms of the
present Agreement, Nevada agrees to expand the possibilities of
marketing and to establish business contacts for the needs of the
University. In view of what was stated above, and amongst other
things, Nevada, at its own expense, must:
a. Maintain proper equipping of the office,
b. Review the inquiries for all Products and Technologies and to
determine their value [cost],
c. Help those customers it approves to place orders directly to the
University for:
1. Development of scientific software;
2. Retraining and management of personnel, approved and staffed
by Nevada.
d. The Parties to this Agreement provide each other with information
regarding the competitive Products already available and those
being developed.
e. Nevada will be responsible for the communication between the
University and the potential partners.
3. Statements and the Guarantees: Responsibilities of the University. The
University states and guarantees to Nevada that it is the legal owner
of all rights for the Technologies with the condition that no other
natural or legal party has the right of retention and that it is fully
authorized to enter into and fulfill this Agreement. The University
agrees that at its own expense it must:
(Signature) (Signature)
<PAGE>
Page 4
a. Deliver to Nevada those current technical specifications,
advertising materials, data concentrations [basis], price lists
and other information (collectively, "Product Information"),
which, in the opinion of Nevada it needs to perform its
obligations per this Agreement;
b. Immediately inform Nevada regarding all inquiries received for
the Products; and
c. For the purpose of demonstrating to the potential customers, to
provide Nevada the models, prototypes, components, systems and
instruments, which in its opinion will help it in performing its
obligations per the present Agreement and which at the same time
remains as property of the University.
4. Exclusivity: refusal to be in competition. During the validity of the
present Agreement, the University shall not, without prior written
agreement by Nevada, (I) directly or indirectly guarantee any other
natural party, company, corporation or commercial and industrial
enterprise any rights or licenses for marketing, sale or licensing of
any Products or Technologies for which it has an agreement with
Nevada, (ii) directly or indirectly involve into activity which
comprises competition to the exclusivity rights, guaranteed to Nevada
in accordance with the present Agreement, or (iii) to influence or to
undertake an attempt to influence any natural or legal party to
cooperate, who is or who was working as one hired in the capacity of a
colleague, consultant, customer, supplier or an independent contractor
to Nevada prior to or during the time of termination of the validity
of the present Agreement.
5. Transfer of rights and Sub-Agents. Nevada must have the right to
invite its own agents and sub-agents for performance of its
obligations per this Agreement and to transfer to them its rights and
obligations in accordance with the present Agreement.
6. Remuneration. As remuneration for the rights and services provided by
the University, which will be performed per the present Agreement, the
University must receive remuneration in accordance with the Schedule
of remuneration ("Remuneration Schedule"), provided in Attachment B to
the present Agreement.
(Signature) (Signature)
<PAGE>
Page 5
7. Expenses. Only Nevada must be responsible for payment of all expenses,
taxes and duties related to its fulfillment of the present Agreement,
if this is not in contradiction to the present Agreement.
8. Reimbursement of losses. The University must reimburse and protect
Nevada and its employees, agents, representatives, directors and hired
colleagues, from any liabilities, expenditures, losses, damages,
injuries, instances of lawsuits, claims, litigation, demands, court
hearings, payment of insurance coverage and the like, including,
without limits, attorney fees, if this is a result, or following the
violation of statements and guarantees by the University, or its
inability to fully perform and follow its obligations per the present
Agreement.
9. Confidentiality. Nevada acknowledges that the University is the owner
of certain trade secrets and confidential information, which is used
by the University in its performance of commercial transactions,
including without any limitations the know-how, patents, trade marks,
trade names, files, records, documents, samples of catalogues,
drawings, specifications, technical information, price lists, customer
lists, advertising materials and similar information and literature
(collectively "Confidential information"). This information must be
forwarded to Nevada in accordance with the present Agreement. By this
Nevada agrees that:
(a) it should not, without having a prior written agreement by the
University during the time of validity or after the termination
of the Agreement, directly or indirectly use, disclose or
publicize any confidential information obtained by the present
Agreement, excluding that which it has solely reproduced in
accordance with the terms of the present Agreement.
(Signature) (Signature)
<PAGE>
Page 6
(b) it must take necessary measures in order to guarantee that its
employees, agents and hired workers, without a prior written
agreement by the University during the term of the validity or
after the termination of the Agreement to directly or indirectly
would not use, disclose or publicize any confidential
information, obtained through this Agreement, excluding that
which is produced by itself solely in accordance with the
conditions of the present Agreement.
The University acknowledges that Nevada is a non-governmental company
and has obligations to publicize general information; however, Nevada
will not publish any confidential information without written
permission from the University.
10. Terms. The Present Agreement must become valid from the date indicated
above and must continue in full force for a period of 5 (five) years
("initial term"). The Agreement must be automatically extended for the
following term of 1 (one) year, unless within 30 days before the
termination of the initial period either of the parties informs in
writing the other Party at [its] legal address of the contrary.
11. Notifications. All notifications and other notices required or
permitted on the basis of the present Agreement, must be made in
written form and will be considered timely served when delivered
personally or by means of a confirmed facsimile at the addresses
indicated immediately following the signatures of the parties to the
present Agreement or at other such addresses which each of the signing
parties may from time to time indicate to the other party in writing.
12. Refusals. No delay or inability by any Party to use some right,
authorization or sanction regarding some violation or non-fulfillment
per this Agreement, or the demand for strict adherence to some
provisions of the present Agreement, should diminish any rights,
authorizations or sanctions of this party, unless this is defined as a
refusal of a right in relation to some violation or non-fulfillment of
the same or some other provision of the present Agreement. Any
refusal, permission, agreement or approval of any type or kind by any
of the parties must be [done by] a written document and must be in
force relating only to something specifically provided for in this
document.
(Signature) (Signature)
<PAGE>
Page 7
13. Sanctions. All sanctions either for this Agreement, in the framework
of general law, in the court of law of justice, or in the contrary
presented by any of the parties signed below must be general, and not
alternative type.
14. Successors. Contracts, agreements, conditions contained in the present
Agreement must be mandatory and serve for the benefit of successors
and assignees of the parties signed below.
15. Applicable Law. The present Agreement must be fulfilled and defined in
accordance with the laws of the state of Delaware, USA.
16. Division. Any provision of the present Agreement which may be
prohibited or deemed as invalid by any court will be without force
only regarding that injunction or that acknowledgment of invalidity
and such a prohibition or invalidity should not cancel the legality or
make invalid any one or all remaining provisions of the present
Agreement.
17. Arbitration: Attorney fees. In case of any discrepancies, claims or
disputes between the parties signed below which have arisen from or
which are related to the present Agreement, any of the Parties may
present the case for mandatory arbitration in Stockholm, Sweden, in
accordance with the rules of the Stockholm Chamber of Commerce. In
addition to any arbitration ruling, the prevailing party will have the
right to cover at the expense of the other party all expenditures,
including, without limitations, the expenses for discovery and
reasonable fees to attorneys and respondents, which have been incurred
relating to this.
18. Full Agreement. The present Agreement together with the Attachments
hereto, which by present reference are included in it, formulate the
present Agreement between the Parties signed below and completely
replaces all previous written or oral agreements between the Parties
signed below regarding the subject of the Agreement.
(Signature) (Signature)
<PAGE>
Page 8
19. The right of choice. In further study of the accords with Nevada, the
University guarantees with this the right of choice in purchasing any
or all Technologies, as well as products of commercial activity by the
University [in its capacity of a] functioning enterprise.
20. Variations. No changes, modifications or additional conditions,
corrections or attachments to the present Agreement will be valid if
they are not formulated in the written form, signed and dated by each
of the Parties signed below.
21. Language. The languages of the present Agreement, as well as of all
subsequent related to it documents, must be the corresponding English
and Russian languages. Certified translations in the Russian and
English language are provided to each party.
(Signature) (Signature)
<PAGE>
Page 9
22. Authority. Each natural Party, signing this Agreement on behalf of a
legal party, by this action, states and guarantees that he or she has
all legal authority to execute this document in the name of this legal
party and that such action bears full, legally binding force of claim
on behalf of this legal party.
In attestation to which the parties signing below have drawn up the present
Representation Agreement in due manner on the day indicated at the beginning of
the document.
Approved:
The University NEVADA MANHATTAN
GROUP, INC.
--------------------- ----------------------
I. B. Fedorov Jeffrey Kramer
Rector President
(Signature) (Signature)
Feb. 25, 1999 March 23, 1999
------------------ ----------------------
G. P. Pavlikhin Yuriy Belman
Pro-rector for International Director for Development of
Relations Technologies
(Signature) (Signature)
[Round Seal with following from [Round Seal of Nevada Manhattan
center out] -- details illegible]
Foreign Relations Administration
Moscow State Technical University
The Ministry of General and
Professional Education of the
Russian Federation
<PAGE>
Page 10
MOSCOW STATE BAUMAN MOSCOW STATE
TECHNICAL UNIVERSITY TECHNICAL UNIVERSITY
NAMED AFTER N.E. BAUMAN
5 Second Baumanskaya Str. 2-nd Baumanskaya Str.
Moscow, 107005 Moscow 107005, Russia
Tel: (095) 261-40-55 Tel.: (095) 261-40-55
Fax: (095) 267-9893 Fax: (095) 267-98-93
E-Mail: [email protected] E-mail: [email protected]
ATTACHMENT 1
Based on the proposal by the "MGTU" [Moscow State Technical University] named
after N. E. Bauman in the Russian text the following changes have been made:
1. In the first paragraph, the word "Exclusive" was deleted.
2. In p. "B" of the Declarative Part, in the first sentence the word
"Exclusive" was deleted.
3. In p. "B" of the Declarative Part a sentence has been added: "The
right of exclusivity will be realized only in specific contracts for
research and development projects".
4. In p. 1 this sentence has also been added.
5. In p. 1, in the first sentence the word "Exclusive" has been deleted.
6. In p. 4, in the section "i" [the following has been] added
"...regarding which it has agreements with Nevada".
7. In p. 15. The [following] sentence has been deleted from the text:
"The Parties specifically stipulate that the present Agreement will
not be regulated by the Convention of the United Nations for
International Trade of Goods."
(Round Seal of Nevada Manhattan
-- illegible)
(Signature) 3/23/99
Rector (Signature) 2.25/99 I.B. Fedorov
Pro-rector for International Regulations (Signature) G. P. Pavlikhin
[Round Seal over signatures above with following from center out]
Foreign Relations Administration
Moscow State Technical University
The Ministry of General and Professional Education of the Russian
Federation
Exhibit 10 xlviii
Page 1
JOINT VENTURE/REPRESENTATIVE
AGREEMENT
THIS AGREEMENT ("Agreement") is entered into as of March 6, 1999, by
and between NSU (the "Institute"), and NEVADA MANHATTAN GROUP, INCORPORATED
("Nevada"), a Nevada Corporation or its nominees as the Joint Venture Partner
and exclusive Representative.
RECITALS:
A. The Institute is engaged in research and development in those
industries which are identified on Exhibit A hereto (the
"Industries"). The Institute owns and has the right to sell,
use and license certain proprietary technologies in such
Industries as also identified on Exhibit A (the
"Technologies").
B. The Institute appoints Nevada as its Joint Venture Partner and
Exclusive Representative for the worldwide marketing and
exploitation of the Technologies, and all products which
employ the Technology ("Products"), on the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals and
the mutual agreements and covenants contained herein, the
parties hereto agree as follows:
AGREEMENT:
1. Appointment. The Institute hereby appoints Nevada as its
Exclusive Joint Venture Partner and Exclusive Representative for
the marketing and sales of Technologies and Products throughout
the world. Nevada hereby accepts such appointment, on the terms
and conditions set forth herein.
2. Services of Nevada. Subject to the provisions of this Agreement,
Nevada agrees to develop marketing opportunities and to create
business relationships for the Institute. In connection
therewith, Nevada, at its sole cost and expense, shall, among
other things:
a. Maintain an office facility.
b. Handle all Product and Technologies inquiries and
quotations.
c. Assist customers approved by Nevada in placing orders
directly with the Institute: for:
<PAGE>
Page 2
1. Scientific software development.
2. Retraining and managing personnel approved and chosen
by Nevada.
d. The Parties to this Agreement will provide each other with
information regarding the competitive Products and
technologies available or being developed.
e. Nevada will be responsible for communication between the
Institute and potential customers.
3. Representations and Warranties: Obligations of the Institute. The
Institute represents and warrants to Nevada that it is the true
owner of all rights in and to the Technologies, subject to no
liens or rights of any other person or entity, and it is fully
empowered to enter into and perform this Agreement. The Institute
agrees that at its sole cost and expense, it shall:
(a) Supply to Nevada such current technical specifications,
promotional materials, data sheets, price lists and other
information (collectively, the "Product Information"), as
Nevada deems necessary to assist Nevada in performing its
obligations hereunder;
(b) Institute will immediately disclose to Nevada all Product
inquiries it receives; and
(c) Provide to Nevada such models, prototypes, components,
systems and instruments for demonstration to potential
customers as Nevada deems appropriate to assist Nevada in
performing its obligations hereunder, all of which remain
the property of the Institute.
4. Exclusivity: Non Competition. During the term of this Agreement,
the Institute shall not, without the prior written consent of
Nevada, (i) directly or indirectly grant to any other person,
firm, corporation or business any right or license for the
marketing, sale, or licensing of any of the Products or
Technologies, (ii) directly or indirectly engage in any activity
that is competitive with the exclusive rights granted to Nevada
hereunder, or (iii) solicit, or attempt to solicit, any person or
entity who is or was an employee, consultant, customer, supplier
or independent contractor of Nevada prior to or at the time of
termination of this Agreement.
<PAGE>
Page 3
5. Assignment and Sub-Agents. Nevada shall be fully entitled to
retain its own agents and sub-agents to perform its obligations
under this Agreement and to assign this Agreement and its rights
and obligations hereunder.
6. Compensation. As compensation for the grant of rights and the
services of the Institute to be performed hereunder, Institute
shall receive compensation as set forth on the Compensation
Schedule (the "Compensation Schedule") attached hereto as Exhibit
B.
7. Expenses. Except as otherwise expressly provided to the contrary
herein, Nevada shall be solely responsible for the payment of all
expenses, taxes and levies related to its performance under this
Agreement.
8. Indemnification. The Institute shall indemnify and hold harmless
Nevada and its officers, agents, representatives, directors and
employees from and against any and all liabilities, costs,
losses, damages, injuries, expenses, causes of action, claims,
suits, demands, legal proceedings, assessments and similar
matters, including, without limitation, attorney's fees,
resulting from or arising out of any breach of its
representations and warranties or its failure to fully and
completely perform and comply with its obligations hereunder.
9. Confidentiality. Nevada acknowledges that the Institute is the
owner of certain trade secrets and confidential information used
in the operation of the Institute's business, including without
limitation, know-how, patents, trademarks, trade names, files,
records, documents, samples, catalogs, drawings, specifications,
technical information, price lists, customer lists, promotional
materials and similar information and literature (collectively,
the "Confidential Information") which information shall be
revealed to Nevada pursuant to this Agreement. Nevada hereby
agrees that it shall not, and that it shall use reasonable care
to insure that its officers, agents, representatives and
employees shall not, without the prior written consent of the
Institute, during the term hereof or after termination of this
Agreement, directly or indirectly, use, reveal publish or
disclose any Confidential Information obtained pursuant to this
Agreement except in furtherance of its performance in accordance
with the terms and conditions of this Agreement. The Institute
acknowledges that Nevada is a public company and has an
obligation to disclose general information, but Nevada will not
disclose any "confidential information" without the expressed
written permission of the Institute.
<PAGE>
Page 4
10. Term. This Agreement shall be effective as of the date first set
forth above and shall continue in full force and effect for a
period of five (5) years ("Initial Term") and thereafter this
Agreement shall automatically renew for successive one (1) year
terms.
11. Notices. All notices and other communications required or
permitted to be given hereunder shall be made in writing and
shall be deemed duly given when delivered personally or by
confirmed facsimile to the addresses set forth immediately
following the signatures of the parties hereto or to such other
addresses as either of the parties hereto may from time to time
designate to the other party in writing.
12. Waivers. No delay or failure by any Party to exercise any right,
power or remedy with regard to any breach or default under this
Agreement or to insist upon strict performance of any of the
provisions hereof, shall impair any right, power or remedy of
such party, nor shall it be construed to be a waiver of any
breach or default of the same or any other provision of this
Agreement. Any waiver, permit consent or approval of any kind or
character on the part of either party hereof shall be in writing
and shall be effective only to the extent specifically provided
in such writing
13. Remedies. All remedies, whether under this Agreement, at law, in
equity or otherwise afforded to either party hereto, shall be
cumulative and not alternative.
14. Successors. The covenants, agreements, terms and conditions
contained in this Agreement shall be binding upon and inure to
the benefit of the successors and assigns of the parties hereto.
15. Applicable Law. This Agreement shall be enforced and construed in
accordance with the laws of the State of Delaware, U.S.A. The
parties specifically agree that this Agreement shall not be
governed by the United Nations Convention on the International
Sale of Goods.
16. Severability. Any provision of this Agreement which may be
prohibited or deemed as invalid by or otherwise held invalid by
any court will be ineffective only to the extent of such
prohibition or invalidity and such prohibition or invalidity
shall not invalidate or otherwise render ineffective any or all
of the remaining provisions of this Agreement.
<PAGE>
Page 5
17. Arbitration: Attorney's fees. In the event of any controversy,
claim or dispute between the parties hereto arising out of or
relating to this Agreement, either party may submit the matter to
binding arbitration in Stockholm, Sweden, in accordance with the
rules of the Stockholm Chamber of Commerce. In addition to any
award received, the prevailing party shall be entitled to recover
from the other party all expenses, including, without limitation,
the cost of investigation and reasonable attorney fees and
accountants fees incurred in connection therewith.
18. Entire Agreement. This Agreement, together with the Exhibits
attached hereto, which by this reference are incorporated herein,
sets forth the entire Agreement between the parties hereto, and
fully supersedes any and all prior agreements, written or oral,
between the parties hereto pertaining to the subject matter
hereof.
19. Option. In further consideration of Nevada's covenants herein,
the Institute hereby grants to Nevada the option to purchase any
and all of the Technologies, as well as the business of the
Institute as a going concern.
20. Modification. No changes in, modification of or addition,
amendment or supplement to this Agreement shall be valid unless
set forth in writing and signed and dated by each of the parties
hereto.
21. Language. The language of this Agreement, and all related
subsequent documents, shall be in the respective languages, both
Russian and English. Certified translations in both Russian and
English will be provided by the parties.
THIS SPACE INTENTIONALLY LEFT BLANK
<PAGE>
Page 6
22. Authority. Each individual who signs this Agreement on behalf of
an entity, by such act, represents and warrants that he or she
has the full legal authority to execute this document on behalf
of such entity, and that such action creates a fully binding and
enforceable obligation on behalf of such entity.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Representative Agreement as of the date first set forth above.
Approved by:
"INSTITUTE"
s/s Nekolai Dikansky
[Round seal of NSU] By: Rector, NSU 6.03.99
Address: NSU Novosibirsk, S. U. 60399
Attn: N. Dikansky
NEVADA MANHATTAN GROUP, INC.
By /s/ Jeffrey Kramer
Jeffrey Kramer
President
[Round Seal of Nevada Manhattan]
By /s/ Yuri Belman
Yuri Belman
Director for Technology Development
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Prior to fiscal year ended May 31, 1998, the Company had previously formed two
subsidiaries, Kalimantan Resources, Ltd., and Equatorial Resources, Ltd. Both
companies were organized under the laws of the British Virgin Islands.
Kalimantan Resources, Ltd., is wholly owned by the Company while Equatorial
Resources, Ltd., is 99% owned by the Company.
In May 1998, the Company formed Terra Resources Brazil Ltda., organized under
the laws of Brazil. Terra is 99.5% owned by the Company.
In October, 1998, the Company formed Science & Technology Resources, Inc.
("STRI"), organized under the laws of Nevada. STRI is 100% owned by the Company.
In November, 1998 the Company formed NMG Rexco, Inc., organized under the laws
of California. NMG Rexco is 100% owned by the Company.
In December, 1998, the Company acquired 80% of the metal mining resources and
timber properties of Chrustalnaya, a Russian joint stock company headquartered
in Kavalerovo, Russia.
