SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
Form 8-K/A, Amendment No. 1
Current Report
Pursuant to Section 13 or 15(d) of
Securities Exchange Act of 1934
Date of Report September 27, 2001
Commission file number 333-50982
Highland Holdings International, Inc.
-------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 98-0179679
-------- ----------
(State of Incorporation) (IRS Identification No.)
480 Route 9, North
Englishtown, NJ 07726
((732) 617-2855
---------------------------------------------------------------
(Registrant's address, including zip code and telephone number)
Items 1 and 2. Change of Control and Acquisition
(a) Transaction
Effective July 16, 2001, Highland Holdings International, Inc.
("Highland"), acquired approximately 70% of the outstanding common stock of E
Street Access, Inc., a privately-held New Jersey corporation ("E Street"),
pursuant to (i) an offer by Highland to exchange its equity securities for all
outstanding common stock and warrants of E-Street Access, Inc., a New Jersey
corporation (the "Exchange"), and (ii) a Plan and Agreement of Reorganization,
dated June 29, 2001, among Highland, E Street Access, Inc. ("E Street") and
holders of approximately 70% of E Street's outstanding common stock, as amended
by a First Amendment thereto (together, the "Agreement"). The transactions
contemplated by the Exchange and the Agreement are intended to be a tax-free
exchange pursuant to Section 368 of the Internal Revenue Code of 1986.
Pursuant to the Agreement and the Exchange, on July 16, 2001, Highland
issued 2,646,533 shares of its Series A Voting Convertible Preferred Stock ( the
"Preferred Stock") (convertible into 13,232,655 shares of common stock) and
5,800,669 shares of its common stock, in exchange for an aggregate of 19,033,334
shares of E Street common stock, with the result that E Street has become a
subsidiary of the Issuer. Highland had intended to issue one share of its common
stock for each share of common stock of E Street tendered in the Exchange, but
since Highland did not have the required number of authorized shares of common
stock to complete the Exchange on this basis, it agreed to issue one share of
Preferred Stock to certain E Street shareholders for five shares of E Street
common stock. Upon approval by Highland's shareholders of an increase in the
number of shares of common stock which Highland is authorized to issue, the
Preferred Stock will be automatically converted into shares of Highland's common
stock If, at July 16, 2001, the Preferred Stock was converted into common stock,
an aggregate of 20,305,660 shares of common stock of Highland would have been
outstanding.
Outstanding warrants to acquire 43,371 shares of E Street common stock,
at an exercise price of $ 1.00 per share, will be convertible into warrants to
purchase the same number of shares of Highland's common stock on the same terms
and conditions pursuant to the Exchange.
The Exchange of one share of common stock of Highland for each share of
common stock of E Street will continue on a rolling basis to E Street's
remaining shareholders. If all remaining shares of E Street common stock are
exchanged for shares of Highland, an additional 9,436,676 shares of Highland's
common stock will be issued in the Exchange, and the total number of such shares
then outstanding will be approximately 29,742,326, and former E Street
shareholders would own approximately 96% of Highland's outstanding common stock.
Management of E Street expects that most, if not all, of the remaining E Street
shareholders will accept the offer to exchange their shares for shares of
Highland when made.
1
(b) Participation of E Street Principals
The E Street shareholders who participated in the Exchange on July 16,
2001 included the officers and directors of E Street, John Derrico, Warren B.
Minton and Joseph Schultz, who became beneficial owners of approximately 22%,
25% and 25%, respectively, of Highland's outstanding common stock.
As part of the Agreement, Highland agreed to nominate Messrs. Derrico,
Minton and Schultz to serve as members of its Board of Directors, and, together
with E Street, entered into employment agreements with each of Messrs. Derrico,
Schultz and Minton for terms of three-years commencing July 16, 2001.
(c) Description of E Street's Business
E Street, whose offices are located in Englishtown, New Jersey, is a
multifaceted securities and financial solutions company that develops and
licenses software for the financial services industry and systems and hardware
architecture for use in both Internet and traditional securities services and
operations, including NASDAQ market making and investment banking. E Street's
subsidiaries are: ESA Securities, Inc., a registered broker-dealer and NASD
member firm; Global Tradesoft, Inc., which is developing proprietary software
and systems architecture for regulatory reporting; and E Street Venture Partner
Group, LLC, a limited liability company which was organized to conduct
merchant-banking activities.
2
PRO FORMA AND HISTORICAL FINANCIAL STATEMENTS
BASIS OF PRESENTATION OF PRO FORMA CONSOLIDATED BALANCE SHEET
The following pro forma consolidated balance sheet of Highland Holdings
International, Inc. includes the accounts of Highland Holdings International,
Inc. (Corporation) and its wholly-owned subsidiary Highland Resources Honduras,
S.A. (Subsidiary) and E Street Access, Inc. (Target) (collectively the Company).
The Corporation and the Subsidiary are non-operating, development stage
companies, whereas, the Target is an operating, non-public company.
Pursuant to an agreement, effective July 16, 2001, the Corporation is expected
to exchange one share of its common stock for each share of Target. If and when
all of Targets stockholders exchange their shares, Target shareholders will own
approximately 96% of the Corporation and the continuing business of the Company
will be that of Target. Although the transaction documents describe the
Corporation as the acquirer, the reality of the situation is that Target is the
continuing entity. As a result, the accounting for the business combination
should follow by combining the net liabilities of the Corporation and Subsidiary
with the net assets of Target from the effective date of the transaction
forward. The statements of operations and cash flows, currently and
historically, will be those of Target.
The capital structure of the Company will represent that of the Corporation with
respect to the number of shares and par value. This will differ from previously
issued statements of Target because of the accounting entries to account for
this transaction as a "Reverse Takeover." Specifically, in consolidation, the
common stock, additional paid-in capital and retained (deficit) of the
Corporation and Subsidiary (net liabilities) are debited to the additional
paid-in capital of Target. An adjustment is then made between par value and
additional paid-in capital so that the number of shares actually outstanding of
the Corporation, multiplied times its par value, equals the aggregate par value
in the financial statements.
At June 30, 2001, the actual number of common shares issued and outstanding for
the Corporation was 1,272,326 shares. The pro forma consolidated balance sheet
reflects an authorized amount of 20,000,000 common shares with 29,122,776 shares
issues and outstanding. The greater number of shares issued reflects the
Corporation's intention to seek an increase in its authorized amount in the near
future followed by the conversion of 2,646,533 shares of Series A Preferred
Stock into 13,232,655 common shares. In addition to common shares upon
conversion, the Corporation is expected to issue an additional 8,817,126 shares
to stockholders who have not yet exchanged their shares. In July, the
Corporation issued 5,800,669 common shares to E Street Access, Inc. stockholders
in exchange for their shares. As a result of the share issuances and those
expected to be issued, the Corporation's issued and outstanding shares for pro
forma consolidated balance sheet purposes is the sum of what was outstanding at
June 30, 2001 (1,272,326 shares) plus the shares issued and issuable (27,850,450
shares) or 29,122,776 shares.
The following adjustments have been included in the following pro forma
consolidated balance sheet:
(1- Eliminate Highland Holdings International, Inc.'s (HHII's) common stock,
additional paid-in capital, retained (deficit) and charge HHII's net
liabilities to additional paid-in capital of the consolidated entity.
3
(2- Eliminate E Street Access, Inc.'s aggregate par value.
(3- Record number of shares multiplied times par value to establish aggregate
par value in consolidated financial statements.
4
HIGHLAND HOLDINGS INTERNATIONAL, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET AFTER "REVERSE TAKEOVER"
July 31, 2001
(UNAUDITED)
Assets
HIGHLAND
HOLDINGS
INTERNATIONAL, E STREET CONSOLIDATING
INC. ACCESS ENTRIES CONSOLIDATED
June 30, 2001 July 31, 2001
---------------------- -------------- -------------------- -------------------
Current assets
Cash $ 2,798 $ 181,049 $ 183,847
Receivable-brokers/dealers - 95,370 95,370
Securities, at fair value - 23,655 23,655
Prepaid interest - 120,000 120,000
---------------------- -------------- -------------------- -------------------
Total current assets 2,798 420,074 - 422,872
---------------------- -------------- -------------------- -------------------
Fixed assets, net 1,115 597,465 598,580
Other assets
Clearing deposit - 146,494 146,494
Advance - 175,000 175,000
Investment, at cost - 3,300 3,300
---------------------- -------------- -------------------- -------------------
Total Assets $ 3,913 $ 1,342,333 $ - $ 1,346,246
====================== ============== ==================== ===================
Liabilities And Stockholders' Equity
Current liabilities
Accounts payable $ 22,931 $ 342,075 - $ 365,006
Short-term note payable - 500,000 - 500,000
Officers loans 153,612 - - 153,612
Other payable 103,000 - - 103,000
---------------------- -------------- -------------------- -------------------
Total current liabilities 279,543 842,075 - 1,121,618
---------------------- -------------- -------------------- -------------------
Stockholders' equity
Preferred stock; 5,000,000 shares
authorized; $0.001 par value; none
issued and outstanding - - -
Common stock; 20,000,000 shares
authorized; $0.001 par value; none (1- (1,272)
29,122,776 shares issued and (2- (139,252)
outstanding 1,272 139,252 (3- 29,123 29,123
(1- (2,097,767)
(1- (275,630)
(2- 139,252
Additional paid-in capital 2,097,767 4,155,463 (3- (29,123) 3,989,962
Retained (deficit) (2,374,669) (3,794,457) (1- 2,374,669 (3,794,457)
---------------------- -------------- -------------------- -------------------
Total stockholders' equity (275,630) 500,258 - 224,628
---------------------- -------------- -------------------- -------------------
Total Liabilities and
Stockholders' Equity $ 3,913 $ 1,342,333 $ - $ 1,346,246
====================== ============== ==================== ===================
See basis of presentation of pro forma consolidated balance sheet.
5
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholders and Board of Directors
Highland Holdings International, Inc. (an exploration stage company):
We have audited the accompanying consolidated balance sheet of Highland
Holdings International, Inc. (an exploration stage company) as of December 31,
2000 and the related consolidated statements of operations, cash flows and
shareholders' deficit for the year ended December 31, 2000 and 1999 and for the
period from inception, March 23, 1992 to December 31, 2000. These consolidated
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The financial statements as of December 31, 1999
and for the year then ended, were audited by other auditor whose report dated
April 28, 2000 expressed an unqualified opinion on those statements.
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 consolidated 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 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
Highland Holdings International, Inc. (an exploration stage company) and
subsidiaries as of December 31, 2000 and the consolidated results of their
operations and their consolidated cash flows for the year then ended and for the
period from inception, March 23, 1992 to December 31, 2000 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Highland Holdings International, Inc. (an exploration stage company) will
continue as a going concern. As more fully described in Note 2, the Company has
incurred operating losses since inception and requires additional capital to
continue operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans as to these
matters are described in Note 2. The consolidated financial statements do not
include any adjustments to reflect the possible effects on the recoverability
and classification of assets or the amounts and classifications of liabilities
that may result from the possible inability of Highland Holdings International,
Inc. (an exploration stage company) to continue as a going concern.
/s/ KABANI & COMPANY, INC.
--------------------------
KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Fountain Valley, California
March 28, 2001
6
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration stage company)
CONSOLIDATED BALANCE SHEET
December 31,
2000
------------
Assets
Current assets
Cash $ 1,934
Prepaid expenses 1,278
-----------
Total current assets 3,212
Property & equipment-net 1,835
-----------
Total assets $ 5,047
===========
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable and accrued expenses $ 19,939
Officer loan payable 132,712
Contract payable 103,000
-----------
Total liabilities 255,651
Stockholders deficit
Preferred stock- $.001 par value, authorized
5,000,000 shares. The number of shares outstanding
at December 31, 2000; -0-
Capital stock- $.001 par value, authorized
20,000,000 shares. The number of shares
outstanding at December 31, 2000; 1,072,326 1,072
Additional paid in capital 2,047,967
Accumulated other comprehensive income: Currency translation 5,982
Accumulated deficit during exploration stage (2,305,625)
-----------
Total stockholders deficit (250,604)
-----------
Total liabilities and stockholders deficit $ 5,047
===========
See accompanying notes to financial statements.
7
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration stage company)
CONSOLIDATED STATEMENT OF OPERATIONS
For the period
from inception,
For the For the March 23, 1992
year ended year ended to
December 31, December 31, December 31,
2000 1999 2000
----------- ----------- -----------
Income $ 0 $ 0 $ 0
Cost of goods sold 0 0 0
----------- ----------- -----------
Gross profit 0 0 0
Operations:
General and administration 36,624 27,827 866,578
Exploration costs 64,506 130,197 770,375
Non cash compensation-consulting fees 50,000 30,000 175,500
Non cash payment for mining interests 391,753
Realized and unrealized loss on
trading securities-net 13,286 17,132 30,418
Depreciation and amortization 1,591 1,956 6,124
----------- ----------- -----------
Total expense 166,007 207,112 2,240,748
Loss from continuing operations (166,007) (207,112) (2,240748)
Other income and loss
Interest expense 0 (11,903) (64,877)
----------- ----------- -----------
Total other income and expenses (0) (11,903) (64,877)
Net Profit (Loss) from operations $ (166,007) $ (219,015) $(2,305,625)
=========== =========== ===========
Net loss per share-basic & diluted $ (0.16) $ (0.33)
=========== ===========
Weighted average number of shares outstanding
Basic & Diluted 986,153 664,178
=========== ===========
See accompanying notes to financial statements.
8
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Deficit
accumulated
Additional during Currency
Common Common paid in exploration translation
Date Stock Stock capital stage adjustment Total
------ ----------- ----------- ----------- ----------- ----------- -----------
03-13-1992 556 $ 1 $ 1,999 $ $ $ 2,000
----------- ----------- ----------- ----------- ----------- -----------
Net loss (1,800) (1,800)
12-31-1994 556 1 1,999 (1,800) 200
Issuance of stock for acquisition 2280 2 293,195 293,197
additional capital contribution 27,000 27,000
Currency translation adjustment
Net loss (30,050) (30,050)
----------- ----------- ----------- ----------- ----------- -----------
12-31-1995 2,836 3 322,194 (31,850) 290,347
Issuance of shares for
forgiveness of loans 670 1 147,375 147,376
Issuance of shares for
acquisition 198 1 43,055 43,056
Currency translation adjustment
Net loss (845,629) (845,629)
----------- ----------- ----------- ----------- ----------- -----------
12-31-1996 3,704 5 512,624 (877,479) (364,850)
Issuance of shares for
acquisition 19,048 19 99,981 100,000
Issuance of shares for
consulting services 12,476 12 65,488 65,500
Sale of shares 2,857 2 14,998 15,000
Sale of shares 17,143 17 89,983 90,000
Issuance of shares for
acquisition 2,381 2 62,498 62,500
Issuance of shares to Advisory
Board 286 1 1,499 1,500
Sale of shares 5,000 5 524,995 525,000
Currency translation adjustment 8,621 8,621
Net loss (593,679) (593,679)
----------- ----------- ----------- ----------- ----------- -----------
12-31-1997 62,895 63 1,372,066 (1,471,158) 8,621 (90,408)
Issuance in consideration for
consulting fees 2,666 3 28,497 28,500
Issuance of shares for
conversion of debt 67,906 68 100,932 101,000
Sale of shares through private
placement 40,317 40 155,960 156,000
Sale of shares 22,667 23 33,977 34,000
Sale of shares through private
placement 182,542 182 81,962 82,144
Beneficial conversion feature on
loans 41,248 41,248
Foreign currency translation (940) (940)
Net loss (449,445) (449,445)
----------- ----------- ----------- ----------- ----------- -----------
12-31-1998 378,993 379 1,814,642 (1,920,603) 7,681 (97,901)
Capital contribution 8,024 8,024
Sale of shares through private
placement 506,667 507 113,493 114,000
Issuance of shares for
conversion of debt 53,333 53 23,947 24,000
Issuance of shares for
consulting fees 40,000 40 29,960 30,000
Beneficial conversion feature on
loans 7,994 7,994
Currency translation adjustment (1,699) (1,699)
Net loss (219,015) (219,015)
----------- ----------- ----------- ----------- ----------- -----------
12-31-1999 978,993 979 1,998,060 (2,139,618) 5,982 (134,597)
Issuance of shares for
consulting fees 93,333 93 49,907 50,000
Net loss (166,007) (166,007)
----------- ----------- ----------- ----------- ----------- -----------
12-31-2000 1,072,326 $ 1,072 $ 2,047,967 $(2,305,625) $ 5,982 $ (250,604)
All shares issuance reflect a 17,500 forward split on January 24, 1995; a 30 to
1 reverse split on April 4, 1997 and a 7 to 1 reverse split on July 1, 1998 and
a 15 to 1 reverse split on January 10, 2001.
See accompanying notes to financial statements.
9
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the period from
For the year For the inception, March
ended year ended 23, 1992, to
December 31, December 31, December 31,
2000 2000 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit (loss) $ (166,007) $ (219,015) $(2,305,625)
Add items not affecting cash
Depreciation and amortization 1,591 1,956 6,124
Issuance of common stock for consulting fees 50,000 30,000 175,500
Issuance of common stock for the Lagoa da Pedra Project 293,197
Issuance of common stock for the acquisition of Arizona properties 100,000
Issuance of common stock for the acquisition of Minas Novas 105,556
Interest expense 11,903 64,877
Write off of security deposit
Write off of office equipment abandoned with shut down of office Changes in
non-cash operating accounts
Trading securities (31,375) 31,375
Prepaid expenses (174) 6,570 (1,278)
Accounts payable (2,473) 15,116 19,939
----------- ----------- -----------
TOTAL CASH FLOWS FROM OPERATIONS (85,688) (184,845) (1,541,710)
CASH FLOWS FROM FINANCING ACTIVITIES
Officer loan payable 82,712 50,000 132,712
Contract payable 103,000
Proceeds from issuance of shares of common stock for debt 147,376
Proceeds of convertible note 109,365
Currency translation adjustment (1,699) 5,982
Sale of stock-net of offering costs -- 122,024 1,053,168
----------- ----------- -----------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 82,712 170,325 1,551,603
CASH FLOWS FROM INVESTING ACTIVITIES
Office equipment (768) -- (7,959)
----------- ----------- -----------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (7,959) -- (768)
NET INCREASE (DECREASE) IN CASH 3,744 (14,520) 1,934
CASH BALANCE BEGINNING OF PERIOD 5,678 20,198 0
----------- ----------- -----------
CASH BALANCE END OF PERIOD $ 1,934 $ 5,678 $ 1,934
=========== =========== ===========
See accompanying notes to financial statements.
10
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 & 1999
Note 1. Organization of Company and Issuance of Common Stock
a. Creation of the Company
Highland Holdings International, Inc. (the "Company") was formed on March
23, 1992 under the laws of the State of Delaware as Northern Medical, Inc. with
10,000,000 shares of common stock authorized, $.001 par value each and 1,000,000
shares of preferred stock, $.001 par value each. On October 30, 1992, the
certificate of incorporation was amended to change the name of the Company to
Normed Industries, Inc. The certificate of incorporation was again amended on
January 17, 1995 increasing the number of shares of common stock to 20,000,000,
$.001 par value each and 5,000,000 shares of preferred stock, $.001 par value
each. On March 28, 1995, the Company amended its certificate of incorporation to
change its name to Highland Resources, Inc. On November 3, 1997, the Company
amended its certificate of incorporation to change its name to Highland Holdings
International, Inc.
b. Description of the Company
The Company is an exploration stage company involved in the acquiring and
development of a gold mining concession in Honduras. At the report date mineral
claims, with unknown reserves, had been acquired. At present, the Company is in
the exploration stage and there is no assurance that any of its prospects or
properties contains a commercially viable ore body (reserves) until further
geologic exploration work is done, and a final feasibility study based upon such
work is concluded.
c. Issuance of Capital Stock
All shares issued reflect a 17,500 forward split on January 24, 1995; a 30
to 1 reverse split on April 4, 1997 and a 7 to 1 reverse split on July 1, 1998
and 15 to 1 reverse split on January 10, 2001and such the per share amounts have
been adjusted to reflected the adjusted number of shares.
On March 31, 1992, the Company issued 556 shares of common stock to Mr.
Roger Fidler in consideration for the contribution of $1,500 in cash and $500 in
organization costs.
On March 13, 1995, The Company entered into an agreement to obtain the
alluvial gold and diamond mineral rights in its Lagoa da Pedra Project of the
Lagoa da Pedra Partnership for 2280 shares of common stock with an aggregate
consideration of $293,197.
On September 11, 1996, the Company issued 670 shares of common stock in
consideration for the forgiveness of $147,376 in loans to the Company.
On September 11, 1996, the Company issued 198 shares of common stock as
part consideration in the acquisition of Minas Novas valued at an aggregate
consideration of $43,056.
On May 5, 1997, the Company issued, pursuant to regulation D, an aggregate
of 19,048 shares of common stock to various parties in consideration for the
purchase of 18 unpatented mining claims situated in Pima County, Arizona, valued
at $100,000.
11
On May 5, 1997, the Company issued, pursuant to Regulation D, and aggregate
of 12,476 shares of common stock to various related parties to the Company in
consideration of consulting services valued at $65,500 in services.
On May 30, 1997, the Company sold 2,857 shares of common stock pursuant to
Rule 504 for an aggregate consideration of $15,000.
As of June 30, 1997, the Company sold 17,143 shares of common stock,
pursuant to a private placement under "Rule 504" of the Securities Act of 1933,
as amended, for an aggregate consideration of $90,000.
On December 16, 1997, the Company issued 2,381 shares of common stock for
an aggregate consideration of $62,500 pursuant to the agreement with Minas Novas
Pesquisa E. Lavra S.A. to three individuals named in the agreement as follows:
1,310 shares to Friedrich Ewald Ronger, 833 shares to Victor Eugenio Suckau and
238 shares to Lothar Wirth for an aggregate consideration of $62,500.
On December 16, 1997, the Company issued 286 shares of common stock to 6
advisory board members in exchange for services over a period of 1 year valued
at $1,500.
On December 16, 1997, the Company sold 5,000 shares pursuant to Regulation
D for an aggregate consideration of $525,000.
During the year 1998, the Company sold an aggregate of 22,667 shares of
common stock for an aggregate consideration of $34,000 in consulting fees.
During 1998, the Company issued 67,906 shares of common stock through the
initial sale of $101,000 in convertible debt that was converted into shares of
common stock during the year.
The Company sold an aggregate of 40,317 shares of common stock in
consideration for $156,000 through the completion of a private placement.
The Company sold an aggregate of 182,542 shares for an aggregate
consideration of $82,144 through the completion of a private placement.
As of September 30, 1999, the Company sold 20,000 shares of common stock
for $10,000 or to Mr. George Nadas, Secretary.
As of September 30, 1999, the Company sold an aggregate of 486,667 shares
of common stock for an aggregate of $104,000 to Mr. John Demoleas, President.
As of December 31, 1999, the Company converted the balance of $24,000 due
Cadence Capital into 53,333 shares of common stock in consideration for the
conversion of debt.
As of September 30, 1999, the Company issued an aggregate of 40,000 shares
of common stock in consideration of consulting fees valued at an aggregate of
$30,000.
In December 1999, the Company converted the balance due Cadence Capital
into 53,333 shares of common stock for $24,000 of debt or $0.03 per share.
On December 4, 2000, the Company issued 93,333 shares of common stock in
consideration of consulting fees valued at an aggregate of $50,000.
12
Note 2. Summary of Significant Accounting Policies
a. Basis of Financial Statement Presentation
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company incurred net losses of
$2,305,625 for the period from inception, March 23, 1992, to December 31, 2000.
These factors indicate that the Company's continuation as a going concern is
dependent upon its ability to obtain adequate financing. The Company is
anticipating the need to do further private placements to bring the mine in
Honduras into production and with the completion of its additional private
placement and with the increase in working capital, the Company will be able to
continue to develop the Company's mining concession and begin production. The
Company will require substantial additional funds to finance its business
activities on an ongoing basis and will have a continuing long-term need to
obtain additional financing. The recoverability of the amounts shown for the
mining projects and the ability of the Company to continue as a going concern
are dependent upon its ability to raise capital, achieve profitable operations
from its mining activities, and on a satisfactory regulatory environment
governing the development and operation of mining properties in Honduras.
The financial statements presented consist of the consolidated balance
sheet of the Company as at December 31, 2000 and the related consolidated
statements of operations, stockholders equity and cash flows for the years
ending December 31, 2000, 1999, and for the period from inception, March 23,
1992, to December 31, 2000.
b. Cash and cash equivalents
The Company treats temporary investments with a maturity of less than three
months as cash.
c. Investments
The Company's investments are classified as trading securities and are
carried at fair value with the realized and unrealized losses are carried in
operations.
d. Exploration Costs
Cost of acquisition, exploration, carrying, and retained unproven
properties are expensed as incurred. Cost incurred in proving and developing a
property ready for production are capitalized and amortized over the life of the
mineral deposit or over a shorter period if the property is shown to have an
impairment in value.
e. Environmental Requirements
At the report date environmental requirements related to the mineral claims
acquired are unknown and therefore an estimate of any future cost cannot be
made.
f. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives using the straight-line
methods over a period of five years. Maintenance and repairs are charged against
operations and betterment's are capitalized.
13
g. Revenue Recognition
Revenue is recognized when extracted minerals are shipped.
h. Foreign Currency Translation
The U.S. dollar amounts presented have been translated from the Brazilian,
Honduras and Canada currency amounts in accordance with he criteria set forth in
Statement of Financial Accounting Standards 52 (SFAS 52) as applicable to the
accounts and transactions of a company operating in the currency of a country
with a non-highly inflationary economy. As of July 01, 1997, the three years
cumulative rate of inflation in Brazil, Honduras and Canada was less than 100%
and the entity's functional currency became the Brazilian real, Honduars lempira
and the Canadian dollar, the currency of the primary economic environment in
which the Company operates. As the reporting currency is the U.S. dollar, the
following criteria for the translation of Brazilian reais, Honduras lempira and
Canadian dollars to U.S. dollars was applied to the local currency basis
financial statements according to SFAS 52. Assets and liabilities were
translated by using the exchange rate at the balance sheet date; Revenues,
expenses, gains, losses were translated by using the weighted average exchange
rate for the period from January 1, 2000 to December 31, 2000.
The translation loss for the period from January 1, 2000 to December 31,
2000 was reported separately as a component of shareholder's Equity (as a CTA
-cumulative translation adjustment); The capital account in Shareholder's equity
was translated by using the historical exchange rate.
i. Selling and Marketing Costs
Selling and Marketing - Certain selling and marketing costs are expensed in
the period in which the cost pertains. Other selling and marketing costs are
expensed as incurred.
j. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
k. Asset Impairment
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
(SFAS No. 121) effective January 1, 1996. SFAS No. 121 requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the estimated undiscounted cash flows to be generated
by those assets are less than the assets' carrying amount. SFAS No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of.
14
l. Basic and diluted net loss per share
Net loss per share is calculated in accordance with the Statement of
financial accounting standards No. 128 (SFAS No. 128), "Earnings per share".
SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net
loss per share for all periods presented has been restated to reflect the
adoption of SFAS No. 128. Basic net loss per share is based upon the weighted
average number of common shares outstanding. Diluted net loss per share is based
on the assumption that all dilutive convertible shares and stock options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options and warrants are assumed to be exercised at
the beginning of the period (or at the time of issuance, if later), and as if
funds obtained thereby were used to purchase common stock at the average market
price during the period.
m. Stock-based compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS No. 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using the existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for stock issued to employees" (APB 25) and
related interpretations with proforma disclosure of what net income and earnings
per share would have been had the Company adopted the new fair value method. The
implementation of this standard did not have any impact on the Company's
financial statements.
n. Fair value of financial instruments
Statement of financial accounting standard No. 107, Disclosures about fair
value of financial instruments, requires that the Company disclose estimated
fair values of financial instruments. The carrying amounts reported in the
statements of financial position for current assets and current liabilities
qualifying as financial instruments are a reasonable estimate of fair value.
o. Segment Reporting
The Company allocates resources and assesses the performance of its
activities as one segment. During the years ended December 31, 2000 and 1999,
the Company only operated in one segment therefore segment disclosure has not
been presented.
p. Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for fiscal
quarters of fiscal years beginning after June 15, 2000. This statement is not
applicable to the Company.
15
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards (SFAS) No. 136, "Transfer of Assets to a
Not-for-Profit Organization or Charitable Trust that raises or Holds
Contributions for Others." This statement is not applicable to the Company.
In June 1999, the FASB issued Financial Accounting Standards (SFAS) No.
137, "Accounting for Derivative Instruments and Hedging Activities." The Company
does not expect adoption of SFAS No. 137 to have a material impact, if any, on
its financial position or results of operations.
In June 2000, the FASB issued Financial Accounting Standards (SFAS) No.
138, "Accounting for Certain Instruments and Certain Hedging Activities." This
statement is not applicable to the Company.
In June 2000, the FASB issued Financial Accounting Standards (SFAS) No.
139, "Rescission of FASB Statement No. 53 and Amendments to Statements No. 63,
89, and 121." This statement is not applicable to the Company.
In September 2000, the FASB issued Financial Accounting Standards SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, and a replacement of FASB Statement No. 125."
This statement is not applicable to the Company.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes the SEC's views on the application of GAAP
to revenue recognition. In June 2000, the SEC released SAB No. 101B that delays
the implementation date of SAB 101 until no later than the fourth fiscal quarter
of fiscal year beginning after December 15, 1999. The Company has reviewed SAB
No. 101 and believes that it is in compliance with the SEC's interpretation of
Revenue recognition.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation." This Interpretation
clarifies (a) the definition of employee for purposes of applying APB Opinion
No. 25, (b) the criteria for determining whether a plan qualifies as a no
compensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. The
adoption of this Interpretation has not had a material impact on the Company's
financial position or operating results.
q. Reclassifications
Certain amounts in the 1999 financial statements have been reclassified to
conform with the 2000 presentation.
Note 3. Acquisition of Assets
The following claims have not been proven to have a commercial minable ore
reserve and therefore all costs for exploration and retaining the properties
have been expensed
a. Lagoa da Pedra Project
On March 13, 1995 when the Company entered into an agreement to purchase
the alluvial mineral rights in its Lagoa da Pedra Project located on the
Jequitinhonha river, near Diamantina, Minas Gerais, Brazil from the Lagoa da
Pedra Partnership (the "Partnership") for 2,280 shares of common stock. The
partnership consisted of Charles Stetler, a geologist (owning 12.5% of the
Partnership), Jose Lourenco Viana Neto (owning 12.5% of the Partnership),
16
Enterprise Gold Limited, a partnership located in Monaco (owning 50% of the
Partnership) and Perth Limited of the British Virgin Islands (owning 25% of the
Partnership). Charles Stetler and Jose Lourenco Viana Neto are experienced in
the mining industry in Brazil and will manage the operations in Brazil and
Enterprise Gold Limited and Perth are investors with international business
affiliations that assisted in the corporate development of the operation. The
transaction has been accounted for as a reverse acquisition and using the
purchase method of accounting with historic costs being the basis of valuation.
The financial statements of the Company have been retroactively restated to
include the combined statements of operations and cash flows for the period from
inception, March 22, 1992, to March 13, 1995 and the statements of operations
and cash flows of Lagoa da Pedra Partnership for the period March 13, 1995. The
aggregate moneys spent on the project to date represent $293,197.
The contract for purchase required a payment of $30,000 with a down payment
of $5,000, which was paid on May 10, 1993 by the Lagoa da Pedra Partnership and
the balance of $25,000 to be paid by December 31, 1996 by the Lagoa da Pedra
Partnership. The terms of the agreement were modified on various occasions to
extend the time required to pay the balance of $25,000.
As of December 31, 1996, the Company had concluded that the Logoa da Pedra
Project is not able to yield production sufficient to offset the required
investment in exploration and commercial production costs and had charged the
mineral costs $446,967 accumulated for this project were charged to operations
for the year ending December 31, 1996.
b. Option on Acquisition of Minas Novas
On June 27, 1996, the Company entered into an agreement with Minas Novas
Pesquisa E Lavra S.A. ("Minas Novas"), a Brazilian corporation for the
acquisition of 95% of the issued and outstanding stock of Minas Novas for a
purchase price of $380,000.
On September 1, 1997, the agreement was modified as to the terms and
conditions as follows:
The Company was given recognition of the $15,000 paid pursuant to the
original agreement on June 27, 1996.
On September 11, 1996, the Company issued an aggregate of 198 shares of
restricted common stock as part consideration in the acquisition of Minas Novas
and to extend the deadline for the payment of the purchase price of the mineral
property. These shares were subsequently restated to 198 upon the reverse split
of the Company's stock. The shares were issued as restricted stock.
On December 16, 1997, the Company issued an additional 2,381 shares of
common stock pursuant to the agreement with Minas Novas to three individuals
named in the agreement as follows: 1,310 shares to Friedrich Ewald Renger, 833
shares to Victor Eugenio Suckau and 238 shares to Lothar Wirth. These shares
were issued as a further inducement to extend the deadline for the payment of
the purchase price of the mineral property and as additional consideration and
collateral for the consummation of this purchase agreement. The shares of common
stock, were issued as restricted stock and were valued at an aggregate of
$62,500 and charged to operations as a cost of acquiring the mineral property.
The shareholders' of Minas Novas had an option until September 30, 1998, to
require the Company to repurchase the shares for an aggregate consideration of
$500,000 by notifying the company of Minas Nova's intention in writing by
September 1, 1998 and effect payment within 120 days. Thirty days after written
notice, interest will accrue at the rate of 2% per month. In the event of
17
default by the Company to repurchase these shares, then the present contract
looses all legal validity and all outstanding shares of Minas Novas must be
returned to the seller without onus to the seller. Effective September 2, 1998,
if the principals of Minas Novas wish to sell on the open market any part of the
shares of restricted stock, these shares can only be sold in blocks with a
combined maximum value of $100,000 in any given month.
The Company also agreed to begin to advance money as follows:
$5,000 per month for the next 12 months for payment of administration costs
commencing September 1, 1997.
$20,000 toward the costs of the elaboration of the Economic Development
Plan as required by the Brazilian government.
$80,000 for working capital commencing December 1, 1997.
The default of any of the obligations of either the Company or Minas Novas
that is not corrected in a maximum period of 30 days, counting the date of the
specific notification will cause the dissolution of the contract and subject the
Company to a penalty of $210,000 and the return to each party the shares issued
pursuant to this contract.
As of December 31, 1997, the Company reflected a total Contract Payable of
$603,000 consisting of a $103,000 balance for monies due towards the 4 monthly
payments of $5,000 due for 1997, the $80,000 and the $20,000 less $17,000 paid
as of December 31, 1997 and the liability for the repurchase of the shares of
common stock for an aggregate consideration of $500,000.
The Company has charged operations for an aggregate of $240,000
representing the $120,000 in operating monies due Minas Novas and $120,000
representing the difference in the purchase price of $120,000 due to the
penalties for prolonging payment of the original terms of purchase ($500,000 for
the option less the original purchase price of $380,000).
As of December 31, 1998, the Company has concluded that the Minas Novas
Project is not able to yield production sufficient to offset the required
investment in exploration and commercial production costs and has charged the
cost to purchase the Minas Novas project of $380,000 to operations for the year
ending December 31, 1998. Management is also of the opinion that Minas Novas
Pesquisa E Lavra S.A. has not lived up to the terms and conditions of the
contract for purchase, exploration and development entered into on September 11,
1997 and has discontinued any further relationship with the shareholders of
Minas Novas. The Company has also placed a stop transfer order on the shares of
common stock that were issued as a further inducement and as additional
consideration and collateral for the consummation of this purchase agreement and
has requested the return of these shares. As of December 31, 2000, the Company
has recognized the value of the outstanding put option of the shares of common
stock collateralizing aggregating $500,000 and the balance of the contract
payable aggregating $103,000. Pursuant to the terms and conditions of the
agreement, the Company may also be liable for liquidated damages of up to
$210,000 if litigation should occur.
As of December 31, 2000, a lawsuit has not been entered into by either
party and in the opinion of management a lawsuit by Minas Novas is not expected
considering that they have regained all rights to the property and their shares
of stock and the benefits of the Company's investment in property improvements
and equipment purchased.
18
c. Arizona Property
On May 5, 1997, the Company issued, pursuant to regulation D, an aggregate
of 19,048 shares of common stock to various parties in consideration for the
purchase of 18 unpatented mining claims situated in Pima County, Arizona, valued
at $100,000.
This agreement was memorialized on January 23, 1998 with the actual
transfer and registration of title to the 18 mining claims. As of December 31,
1998, the Company has concluded that the Arizona Project is not able to yield
production sufficient to offset the required investment in exploration and
commercial production costs and has charged the mineral costs of $29,658
accumulated for this project and has charged operations for the year ending
December 31, 1998.
d. Honduras Properties
In October 1997, the Company, through its subsidiary, Highland Resources
Honduras S.A., of which the Company owns 95%, entered into an agreement for the
purchase of 100% ownership of the and the mineral rights from Desarrollo De
Recursos Naturales, S. de R.L. de C.V., ("Derena") consisting of mineral
concessions aggregating 18,000 hectares. The agreement was memorialized in
Honduras on March 18, 1998 with the recording and registration of the Company
rights and titles to the concessions in Tegucigalpa, Honduras through the
Company's subsidiary Highland Resources Honduras, S.A.
As of March 31, 1998, title had transferred by agreement but had not been
officially registered with the local government.
In June 1997, the Company paid a fee of $25,000 to Derena for the right to
do due diligence on the properties owned by Derena in Honduras. Upon
acceptability of the investigation, the Company would obtain 75% ownership of
Derena for a cash payment of US$ 250,000. In December 1998, the percentage of
ownership was renegotiated to become 95% ownership. Derena's minority holding of
5% would be a "free carried interest", (i.e. not contributing to exploration,
administration and development costs), except as follows:
Production from all properties would be subject to a 2% "Net Smelter
Royalty", payable to Decenna, Mr. Mattsson and/or his assignees and/or
successors.
For a period of 5 years from June 10, 1997, the Company has the option to
purchase Mr. Mattsson's minority interest interests, whether carried or
participatory for the sum of US$ 1,000,000.
Mr. Mattsson has been appointed to the Executive Advisory Board of the
Company.
As of December 31, 1998, the Company has paid $391,313 pursuant to the
terms of this agreement and the percentage of ownership was renegotiated to
become 95%.
Note 4. Related Party transactions
a. Issuance of Common Stock
On March 31, 1992, the Company issued 556 shares of common stock to Mr.
Roger Fidler in consideration for the contribution of $1,500 in cash and $500 in
organization costs.
19
On December 16, 1997, the Company issued pursuant to regulation D, 286
shares of common stock to 6 advisory board members in exchange for services over
a period of 1 year valued at $1,500.
On May 5, 1997, the Company issued an aggregate of 103 shares of common
stock to Wolfdietrich Bruehl, former Chairman of the Board, in consideration for
services valued at $22,450.
On May 5, 1997, the Company issued an aggregate of 1,905 shares of common
stock to Charles Stetler, former President, in consideration for services valued
at $28,571.
On May 5, 1997, the Company issued an aggregate of 952 shares of common
stock to Melanie Ellerton, former President of the Company for an aggregate
consideration for services valued at $5,000.
On May 5, 1997, the Company issued an aggregate of 990 shares of common
stock to George Nadas in consideration for services valued at $5,000.
On July 10, 1998, the Company sold an aggregate of 71,338 shares of common
stock to John Demoleas, President, in consideration for $40,000.
On September 9, 1998 the Company sold an aggregate of 48,444 shares of
common stock to John Demoleas for $14,533.
As of December 31, 1998, the Company issued an aggregate of 476 shares of
common stock to John Demoleas, President of the Company for an aggregate
consideration of $5,000.
As of September 30, 1999, the Company sold an aggregate of 486,666 shares
of common stock for an aggregate of $104,000 to Mr. John Demoleas, President.
As of September 30, 1999, the Company sold 20,000 shares of common stock
for $10,000 to Mr. George Nadas, Secretary.
b. Officer Compensation
For the year ended December 31, 2000, the Company has not paid any salary
to any of the officers.
c. Officer Loan
In April 1999, John Demoleas, President of the Company advanced the Company
an aggregate of $50,000. During 2000, the Company borrowed additional $82,712.
Total loan from officer at December 31, 2000 amounted to $132,712. The loan is
payable on demand, unsecured and interest free.
Note 5. Preferred Stock
The certificate of Incorporation was amended on January 17, 1995 increasing
the number of shares authorized from 200 common shares with a par value of $.001
to an aggregate number of shares of stock which the corporation shall have
authority to issue is 20,000,000, which are divided into 5,000,000 shares of
Preferred stock with a par value of $.001. The Preferred Shares have the
following provisions:
20
a. Dividends are cumulative.
Preferred shareholders are entitled to receive dividends at the rate of
$.12 per share per annum and no more, payable in cash quarterly commencing March
31, 1995 and thereafter on the last day of September, December, March and June
of each year on any Preferred series A shares ("Preferred Stock") outstanding.
Dividends that are in arrears must be paid before any distribution shall be paid
on common stock.
b. Redemption
At any time during the six year period commencing on the date of issuance,
the Company may redeem all or part of the outstanding shares of the Preferred
Stock at the redemption cash price equal to $2.50 per share, together with all
declared and unpaid dividends provided the Company gives thirty days prior to
the date specified for redemption.
c. Voting Rights
Except as otherwise required by law or by the articles of incorporation of
the Company, the shares of Preferred Stock shall have no voting rights
whatsoever.
d. Conversion Rights
Each share of Preferred Stock shall be convertible at the option of the
holder, at any time during the time period commencing 5 years from the date of
issuance and ending 6 years from the date of issuance, and on or prior to the
5th day prior to a redemption date into fully paid and nonassessable shares of
common stock of the Company. The number of shares of common stock into which
each share of the Preferred Stock may be converted shall be determined by
dividing the initially issuable conversion price of $2.50 subject to adjustment
by the conversion price in effect at the time of the conversion. The conversion
price from time to time in effect shall be subject to adjustment as follows: In
case the Company shall at any time subdivide the outstanding shares of common
stock, or shall issue a stock dividend on its outstanding common stock, the
conversion price in effect immediately prior to such subdivision or the issuance
of such dividend shall be proportionately decreased, and in case the Company
shall at any time combine the outstanding shares of common stock, the conversion
price in effect immediately prior to such combination shall be proportionately
increased, effective at the close of business on the date of such subdivision,
dividend or combination, as the case may be.
e. Contingent Liability
The Company shall at all times reserve and keep available out its
authorized but unissued common stock, solely for the purpose of effecting the
conversion of the Preferred Shares, the full number of shares of common stock
deliverable upon the conversion of all Preferred Stock from time to time
outstanding.
On December 31, 2000, the number of shares of preferred stock outstanding
was -0-.
21
Note 6. Furniture and Fixtures
Furniture and fixtures consisted of the following:
December 31, 2000
-----------------
Office equipment $7,959
Accumulated depreciation 6,124
------
Balance $1,835
======
Note 7. Income Taxes
The Company provides for the tax effects of transactions reported in the
financial statements. The provision if any, consists of taxes currently due plus
deferred taxes related primarily to differences between the basis of assets and
liabilities for financial and income tax reporting. The deferred tax assets and
liabilities, if any, represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. As of December 31, 2000, the Company had
no material current tax liability, deferred tax assets or liabilities to impact
on the Company's financial position because the deferred tax asset related to
the Company's net operating loss carry forward and was fully offset by a
valuation allowance.
As of December 31, 2000, the Company has net operating loss carry forwards
for income tax purposes of $2,254,000. This carry forward is available to offset
future taxable income, if any, and expires in the year 2015. The Company's
utilization of this carry forward against future taxable income may become
subject to an annual limitation due to a cumulative change in ownership of the
Company of more than 50 percent.
The components of the net deferred tax asset as of December 31, 2000 are as
follows:
Deferred tax asset:
Net operating loss carry forward $ 770,000
Valuation allowance (770,000)
---------
Net deferred tax asset $ 0
=========
The Company recognized no income tax benefit for the loss generated in the
period from inception, March 23, 1992, to December 31, 2000.
SFAS No. 109 requires that a valuation allowance be provided if it is more
likely than not that some portion or all of a deferred tax asset will not be
realized. The Company's ability to realize benefit of its deferred tax asset
will depend on the generation of future taxable income. Because the Company has
yet to recognize significant revenue from the sale of its products, the Company
believes that a full valuation allowance should be provided.
22
Note 8. Cash Flow Information
The following is supplemental cash flow information for the period from
inception, March 23, 1992, to December 31, 1997
Issuance of 2,280 common shares for
acquisition of mineral properties
on March 13, 1995 $(293,197)
Issuance of 670 common shares for
forgiveness of debt (147,376)
Issuance of 198 common shares as part
consideration of Minas Novas (43,056)
Issuance of 19,048 common shares as
consideration for acquisition of Arizona
properties (100,000)
Issuance of 12,476 common shares in
consideration for consulting fees (65,500)
Issuance of 2,381 common shares as part
consideration for the Minas Novas acquisition (62,500)
Issuance of 286 common shares to 6 advisory
board members in exchange for services (1,500)
Capital Stock 713,129
---------
Total $ 0
=========
The following is supplemental cash flow information for the year ended
December 31, 1998:
Issuance of 2,666 common shares in consideration
of consulting fees $ (28,500)
Issuance of 39,997 common shares in consideration
of the conversion of debt (101,000)
Capital Stock 129,500
---------
Total $ 0
=========
The following is supplemental cash flow information for the year ended
December 31, 1999:
Issuance of 53,312 common shares in consideration
of the conversion of debt $(24,000)
Issuance of 40,000 shares in consideration consulting
fees (30,000)
Capital Stock 54,000
--------
Total $ 0
========
23
The following is supplemental cash flow information for the year ended
December 31, 2000:
Issuance of 93,333 shares in consideration of consulting
fees (50,000)
Capital Stock 50,000
--------
Total $ 0
========
Note 9. Commitments and Contingencies
a. Stock Option Plan and Stock Grant Program
In June 1995, the Company adopted a non-qualified stock option plan and a
stock grant program with the following provisions.
1. Stock Option Plan: The Company has reserved 20,000 shares of its
authorized common stock for issuance to key employees, officers and consultants.
Under this plan, no employee may receive more than 3,333 options. Options are
nontransferable and expire if not exercised within two years. The options may
not be exercised by the employee until after the completion of two years of
employment with the Company. The options are issuable to officers, key employees
and consultants in such amounts and prices as determined by the Board of
Directors. As of December 31, 1997, no options have been granted pursuant to
this plan.
2. Stock Grant Program: The Company has reserved 20,000 shares of its
authorized common stock for issuance to key employees, officers, directors, and
consultants. Under this plan, no employee may receive more than 6,666 options.
The program requires the employee to remain as the employee of the company for
at least one year following the grant and to agree not to engage in any activity
which would be considered in competition with the Company's business. If the
employee violates any one of these conditions the ownership of the stock issued
under the program shall revert back to the Company. The stock issued under the
program is nontransferable for two years. As of December 31, 1998, December 31,
1999 and December 31, 2000, no options have been granted pursuant to this plan.
b. Leased Office Space
The Company occupies office space at the office of George Nadas, Chartered
Accountant and Secretary to the Company at 800 Petrrolia Road, Unit 7, Toronto,
Canada M3J 3K4. The Company pays rent on a month-to-month basis at the rate of
$250.
c. Leased Office Space in Honduras
On October 26, 1997, the Company, through its subsidiary HRH, leased
approximately 630 square feet of office space for two years in the city of
Tequcigalps for $625 per month.
d. Consulting Agreements
1. On November 17, 1997, the Company entered into a consulting agreement
with Loeb Aron & Company LTD. ("Loeb Aron"), a company incorporated in England
for services relating to geology and related mining, smelting, engineering, and
production of minerals. The agreement is for two years beginning October 1, 1997
and is extended automatically for a period of 6 months or until notice is given
by either party.
24
For the year ended December 31, 1998, the Company has paid Loeb Aron as
follows: On February 4, 1998, 714 post split shares of common stock valued at
$1,000 and on September 10, 1998, 15,333 shares of common stock valued at
$25,000.
2. Agreement with A-Z Professional Consultants, Inc. a Utah corporation,
("A-Z"), for the purposes of consulting on matters relating to mergers and
acquisitions, advising corporate management and in performing general
administrative duties for public-held companies and development stage investment
ventures. The term is for 1 year and is renewable.
Payment for these services is 40,000 shares of common stock. As of
September 30, 1999, the Company has delivered 40,000 shares of common stock
valued at $0.75 per share for an aggregate consideration of $30,000.
3. On November 22, 2000, the Company entered into a consulting agreement
with two individuals, whereby, these individuals will provide the Company
financial consulting services. On December 4, 2000, the Company issued 93,333 of
its ordinary share capital valued at $50,000.
Note 10. Convertible Promissory Note
The Company borrowed an aggregate of $125,000 as evidenced by a Convertible
Promissory Note with Cadence Capital Corp., (the "Note") dated March 26, 1998
and due September 22, 1998. The Company received net proceeds of $109,635 after
paying interest in advance of $15,635. The Note is payable pursuant to the
following terms and conditions:
Interest is payable at the rate of 12% in advance upon the closing of the
issuance of this Note. The holder of this Note has the right to convert this
note, in whole or in part at any time into shares of common stock, at the lesser
of 75% of the lowest closing bid price for the shares quoted on the Bulletin
Board for the 5 day trading period ending on the day prior to the conversion
date, or the lowest closing bid price for the shares quoted on the Bulletin
Board for the five day trading period ending on the day prior to the date.
Notwithstanding any provisions of this Note, in no event will the Holder be
entitled to convert this Note into shares to the extent that after such
conversion, the number of shares of common stock beneficially owned by the
Holder and its affiliates and the number of shares issuable upon the conversion
of this Note would result in beneficial ownership and its affiliates of more
than 4.9% of the issued and outstanding shares of common stock as of the date of
the conversion.
The number of shares is also subject to various conversion price
adjustments and adjustment for reverse stock splits.
The Company has agreed to use the proceeds of this Note for working capital
and not to pay any indebtedness of the Company.
As of December 31, 1998, the Company had converted $101,000 in debt into an
aggregate of 67,906 shares of common stock for an average conversion price of
$1.50 per share.
As of December 31, 1999, the Company converted the balance of $24,000 into
53,312 shares of common stock in consideration for the conversion of $24,000 in
debt $.45 per share.
25
On the dates of conversion of the promissory notes, the conversion prices
were less than the fair values of the common stock; hence a beneficial
conversion feature is attached to these convertible notes. For the year ended
December 31, 1998 and 1999, the amount of this beneficial conversion feature is
$41,248 and $7,994 respectively and has been recorded as interest expense and
additional paid-in-capital for the years ended December 31, 1998 and 1999.
Note 11. Subsequent Events
Stock Option
Subsequent to year ended December 31, 2000, the company has adopted a stock
option plan, under which options may be granted, as determined by the option
committee of the board of directors at the time of grant of an option. The plan
enables the option committee of the board of directors to grant up to 13,333
stock options to employees and consultants from time to time. The option
committee has granted no options. The date of grant of an Option shall, for all
purposes, be the date on which the Option Committee makes the determination
granting such Option, or such other date as determined by the Option Committee.
Stock Split
Subsequent to year ended December 31, 2000, the stockholders of the Company
authorized a reverse stock split of the Company's common stock in the ratio up
to one share for fifteen shares. The net loss per common share has been restated
to retroactively effect a reverse stock split in the ratio of one share for ten
shares.
26
THOMAS P. MONAHAN
CERTIFIED PUBLIC ACCOUNTANT
208 LEXINGTON AVENUE
PATERSON, NEW JERSEY 07502
(973) 790-8775
To The board of Directors and Shareholders
of Highland Holdings International, Inc. (an exploration stage company)
I have audited the accompanying consolidated balance sheet of Highland
Holdings International, Inc. (an exploration stage company) as of December 31,
1999 and the related consolidated statements of operations, cash flows and
shareholders' equity for the year ended December 31, 1998 and 1999 and for the
period from inception, March 23, 1992, to December 31, 1999. These consolidated
financial statements are the responsibility of the company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I 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 and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Highland
Holdings International, Inc. (an exploration stage company) as of December 31,
1999 and the related consolidated statements of operations, cash flows and
shareholders' equity for the years ending December 31, 1998 and 1999 and for the
period from inception, March 23, 1992, to December 31, 1999 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Highland Holdings International, Inc. (an exploration stage
company) will continue as a going concern. As more fully described in Note 2,
the Company has incurred operating losses since inception and requires
additional capital to continue operations. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans as to these matters are described in Note 2. The financial statements do
not include any adjustments to reflect the possible effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the possible inability of Highland Holdings
International, Inc. (an exploration stage company) to continue as a going
concern.
/s/ Thomas P. Monahan
---------------------
Thomas P. Monahan, CPA
April 28, 2000
Paterson, New Jersey
27
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration stage company)
CONSOLIDATED BALANCE SHEET
December 31,
1999
----
Assets
Current assets
Cash $ 5,678
Trading securities 31,375
Prepaid expenses 1,104
-----------
Total current assets 38,157
Furniture and fixtures-net 2,658
Total assets $ 40,815
===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 22,412
Officer loan payable 50,000
Contract payable 103,000
-----------
Total liabilities 175,412
Stockholders equity
Preferred stock- $.001 par value, authorized 5,000,000 shares. The number of
shares outstanding at December 31, 1999 was -0-.
Capital stock- $.001 par value, authorized 20,000,000 shares.
The number of shares outstanding at December 31, 1999 was 14,684,581 14,685
Additional paid in capital 1,984,354
Accumulated other comprehensive income: Currency translation 5,982
Accumlated deficit during exploration stage (2,139,618)
-----------
Total stockholders equity (134,597)
-----------
Total liabilities and stockholders equity $ 40,815
===========
See accompanying notes to financial statements.
28
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the period
from inception,
For the year For the March 23, 1992,
ended year ended to
December 31, December 31, December 31,
1998 1999 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit (loss) $ (449,445) $ (219,015) $(2,139,618)
Add items not affecting cash
Depreciation and amortization 1,370 1,956 4,533
Issuance of common stock for consulting fees 28,500 30,000 125,500
Issuance of common stock for the Lagoa da Pedra Project -- -- 293,197
Issuance of common stock for the acquisition of Arizona properties -- -- 100,000
Issuance of common stock for the acquisition of Minas Novas -- -- 105,556
Interest expense 52,974 11,903 64,877
Write off of security deposit 2,853 -- --
Write off of office equipment abandoned with shut down of office 6,044 -- --
Changes in non-cash operating accounts -- -- --
Trading securities -- (31,375) (31,375)
Prepaid expenses (1,347) 6,570 (1,104)
Accounts payable (17,039) 15,116 22,412
----------- ----------- -----------
TOTAL CASH FLOWS FROM OPERATIONS (376,090) (184,845) (1,456,866)
CASH FLOWS FROM FINANCING ACTIVITIES
Officer loan payable -- 50,000 50,000
Contract payable -- -- 103,000
Proceeds from issuance of shares of common stock for debt -- -- 147,376
Proceeds of convertible note 109,365 -- 109,365
Currency translation adjustment (940) (1,699) 5,982
Sale of stock-net of offering costs 272,144 122,024 1,053,168
----------- ----------- -----------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 380,569 170,325 1,468,891
CASH FLOWS FROM INVESTING ACTIVITIES
Office equipment -- -- (7,191)
----------- ----------- -----------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES -- -- (7,191)
NET INCREASE (DECREASE) IN CASH 4,479 (14,520) 5,678
CASH BALANCE BEGINNING OF PERIOD 15,719 20,198 -0-
----------- ----------- -----------
CASH BALANCE END OF PERIOD $ 20,198 $ 5,678 $ 5,678
=========== =========== ===========
See accompanying notes to financial statements.
29
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration stage company)
CONSOLIDATED STATEMENT OF OPERATIONS
For the period
from inception,
For the year For the March 23, 1992
ended year ended to
December 31, December 31, December 31,
1998 1999 1999
----------- ----------- -----------
Income $ -0- $ -0- $ -0-
Cost of goods sold -0- -0- -0-
----------- ----------- -----------
Gross profit -0- -0- -0-
Operations:
General and administration 333,966 27,827 829,954
Exploration costs 32,635 130,197 705,869
Non cash compensation-consulting fees 28,500 30,000 125,500
Non cash payment for minining interests -- -- 391,753
Realized and unrealized loss on trading
securities-net -- 17,132 17,132
Depreciation and amortization 1,370 1,956 4,533
----------- ----------- -----------
Total expense 396,471 207,112 2,074,741
Loss from continuing operations (396,471) (207,112) (2,074,741)
Other income and loss
Interest expense (52,974) (11,903) (64,877)
----------- ----------- -----------
Total other income and expenses (52,974) (11,903) (64,877)
Net Profit (Loss) from operations $ (449,445) $ (219,015) $(2,139,618)
=========== =========== ===========
Net loss per share-basic $ (0.01) $ (0.02)
=========== ===========
Weighted average number of shares outstanding 2,134,123 9,962,675
=========== ===========
See accompanying notes to financial statements.
30
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Deficit
accumulated
Additional during Currency
Common Common paid in exploration translation
Date Stock Stock capital stage adjustment Total
---- ----------- ----------- ----------- ----------- ----------- -----------
03-13-1992 8,333 8 $ 1,992 $ 2,000
Net loss (1,800) (1,800)
----------- ----------- ----------- ----------- -----------
12-31-1994 8,333 8 1,992 (1,800) 200
Issuance of stock for acquisition 34,202 34 293,163 293,197
additional capital contribution 27,000 27,000
Currency translation adjustment
Net loss (30,050) (30,050)
----------- ----------- ----------- ----------- -----------
12-31-1995 42,535 42 322,155 (31,850) 290,347
Issuance of shares for 10,057 10 147,366 147,376
forgiveness of loans
Issuance of shares for 2,971 3 43,053 43,056
acquisition
Currency translation adjustment
Net loss (845,629) (845,629)
----------- ----------- ----------- ----------- -----------
12-31-1996 55,563 55 512,574 (877,479) (364,850)
Issuance of shares for 285,714 286 99,714 100,000
acquisition
Issuance of shares for 187,143 187 65,313 65,500
consulting services
Sale of shares 42,857 43 14,957 15,000
Sale of shares 257,143 257 89,743 90,000
Issuance of shares for 35,714 36 62,464 62,500
acquisition
Issuance of shares to Advisory 4,286 4 1,496 1,500
Board
Sale of shares 75,000 75 524,925 525,000
Currency translation adjustment 8,621 8,621
Net loss (593,679) (593,679)
----------- ----------- ----------- ----------- ----------- -----------
12-31-1997 943,420 943 1,371,186 (1,471,158) 8,621 (90,408)
Issuance in consideration for 40,000 40 28,460 28,500
consulting fees
Issuance of shares for 1,018,584 1,019 99,981 101,000
conversion of debt
Sale of shares through private 604,761 605 155,395 156,000
placement
Sale of shares 340,000 340 33,660 34,000
Sale of shares through private 2,738,133 2,738 79,406 82,144
placement
Beneficial conversion feature on 41,248 41,248
loans
Foreign currency translation (940) (940)
Net loss (449,445) (449,445)
----------- ----------- ----------- ----------- ----------- -----------
12-31-1998 5,684,898 $ 5,685 $ 1,809,336 (1,920,603) 7,681 (97,901)
Table continues on following page.
31
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Continued)
Deficit
accumulated
Additional during Currency
Common Common paid in exploration translation
Date Stock Stock capital stage adjustment Total
---- ---------- ----------- ----------- ----------- ----------- -----------
Capital contribution 8,024 8,024
Sale of shares through private 7,600,000 7,600 106,400 114,000
placement
Issuance of shares for 799,683 800 23,200 24,000
conversion of debt
Issuance of shares for 600,000 600 29,400 30,000
consulting fees
Beneficial conversion feature on 7,994 7,994
loans
Currency translation adjustment (1,699) (1,699)
Net loss (219,015) (219,015)
---------- ----------- ----------- ----------- ----------- -----------
12-31-1999 14,684,581 $ 14,685 $ 1,984,354 $(2,139,618) $ 5,982 (134,597)
========== =========== =========== =========== =========== ===========
All shares issuance reflect a 17,500 forward split on January 24, 1995; a 30 to
1 reverse split on April 4, 1997 and a 7 to 1 reverse split on July 1, 1998.
See accompanying notes to financial statements.
32
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 1. Organization of Company and Issuance of Common Stock
----------------------------------------------------
a. Creation of the Company
Highland Holdings International, Inc. (the "Company") was formed on March
23, 1992 under the laws of the State of Delaware as Northern Medical, Inc. with
10,000,000 shares of common stock authorized, $.001 par value each and 1,000,000
shares of preferred stock, $.001 par value each. On October 30, 1992, the
certificate of incorporation was amended to change the name of the Company to
Normed Industries, Inc. The certificate of incorporation was again amended on
January 17, 1995 increasing the number of shares of common stock to 20,000,000,
$.001 par value each and 5,000,000 shares of preferred stock, $.001 par value
each. On January 24, 1995, the Company forward split the number of shares of
common stock outstanding in a ratio of 17,500 to 1 restating the number of
shares of common stock outstanding to 1,750,000. On March 28, 1995, the Company
amended its certificate of incorporation to change its name to Highland
Resources, Inc. On November 3, 1997, the Company amended its certificate of
incorporation to change its name to Highland Holdings International, Inc.
b. Description of the Company
The Company is an exploration stage company involved in the acquiring and
exploration of a gold mining concession in Honduras. At the report date mineral
claims, with unknown reserves, had been acquired. At present, the Company is in
the exploration stage and there is no assurance that any of its prospects or
properties contain a commercially viable ore body (reserves) until further
geologic exploration work is done, and a final feasibility study based upon such
work is concluded.
c. Issuance of Capital
Stock All shares issued reflect a 17,500 forward split on January 24, 1995;
a 30 to 1 reverse split on April 4, 1997 and a 7 to 1 reverse split on July 1,
1998 and such the per share amounts have been adjusted to reflected the adjusted
number of shares.
On March 31, 1992, the Company issued 8,333 shares of common stock to Mr.
Roger Fidler in consideration for the contribution of $1,500 in cash and $500 in
organization costs or $0.24 per share.
On March 13, 1995, The Company entered into an agreement to obtain the
alluvial gold and diamond mineral rights in its Lagoa da Pedra Project of the
Lagoa da Pedra Partnership for 34,202 shares of common stock with an aggregate
consideration of $293,197 or $8.57 per share.
On September 11, 1996, the Company issued 10,057 shares of common stock in
consideration for the forgiveness of $147,376 in loans to the Company or $14.65
per share.
33
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
On September 11, 1996, the Company issued 2,971 shares of common stock as
part consideration in the acquisition of Minas Novas valued at an aggregate
consideration of $43,056 or $14.49 per share.
On May 5, 1997, the Company issued, pursuant to regulation D, an aggregate
of 285,714 shares of common stock to various parties in consideration for the
purchase of 18 unpatented mining claims situated in Pima County, Arizona, valued
at $100,000 or $.35 per share.
On May 5, 1997, the Company issued, pursuant to Regulation D, and aggregate
of 187,143 shares of common stock to various related parties to the Company in
consideration of consulting services valued at $65,500 in services or $.35 per
share.
On May 30, 1997, the Company sold 42,857 shares of common stock pursuant to
Rule 504 for an aggregate consideration of $15,000 or $.35 per share.
As of June 30, 1997, the Company sold 257,143 shares of common stock,
pursuant to a private placement under "Rule 504" of the Securities Act of 1933,
as amended, for an aggregate consideration of $90,000 or $.35.
On December 16, 1997, the Company issued 35,714 shares of common stock for
an aggregate consideration of $62,500 pursuant to the agreement with Minas Novas
Pesquisa E. Lavra S.A. to three individuals named in the agreement as follows:
19,643 shares to Friedrich Ewald Ronger, 12,500 shares to Victor Eugenio Suckau
and 3,571 shares to Lothar Wirth for an aggregate consideration of $62,500 or
$1.75 per share.
On December 16, 1997, the Company issued 4,286 shares of common stock to 6
advisory board members in exchange for services over a period of 1 year valued
at $1,500 or $0.35 per share.
On December 16, 1997, the Company sold 75,000 shares pursuant to Regulation
D for an aggregate consideration of $525,000 or $7.00 per share.
During the year 1998, the Company issued 40,000 shares of common stock to
various individuals in consideration of consulting services valued in the
aggregate of $28,500 or for an average price of $0.71 per share.
During the year 1998, the Company sold an aggregate of 340,000 shares of
common stock for an aggregate consideration of $34,000 in consulting fees or an
average of $.10 per share
During 1998, the Company issued 1,018,584 shares of common stock through the
initial sale of $101,000 in convertible debt that was converted into shares of
common stock during the year at an average conversion price of $.10 per share.
The Company sold an aggregate of 604,761 shares of common stock in
consideration for $156,000 through the completion of a private placement at $.26
per share.
The Company sold an aggregate of 2,738,133 shares for an aggregate
consideration of $82,144 through the completion of a private placement at $.03
per share.
34
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
As of September 30, 1999, the Company sold 300,000 shares of common stock
for $10,000 or $0.067 per share to Mr. George Nadas, Secretary.
As of September 30, 1999, the Company sold an aggregate of 7,300,000 shares
of common stock for an aggregate of $104,000 or an average value of $0.014 per
share to Mr. John Demoleas, President.
As of September 30, 1999, the Company issued an aggregate of 600,000 shares
of common stock in consideration of consulting fees valued at an aggregate of
$30,000 or $.05 per share.
In December, 1999, the Company converted the balance due Cadence Capital
into 799,683 shares of common stock for $24,000 of debt or $0.03 per share.
Note 2- Summary of Significant Accounting Policies
------------------------------------------
a. Basis of Financial Statement Presentation
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company incurred net losses of
$2,139,618 for the period from inception, March 23, 1992, to December 31, 1999.
These factors indicate that the Company's continuation as a going concern is
dependent upon its ability to obtain adequate financing. The Company is
anticipating the need to do further private placements to bring the mine in
Honduras into production and with the completion of its additional private
placement and with the increase in working capital, the Company will be able to
continue to develop the Company's mining concession and begin production. The
Company will require substantial additional funds to finance its business
activities on an ongoing basis and will have a continuing long-term need to
obtain additional financing. The recoverability of the amounts shown for the
mining projects and the ability of the Company to continue as a going concern
are dependent upon its ability to raise capital, achieve profitable operations
from its mining activities, and on a satisfactory regulatory environment
governing the development and operation of mining properties in Honduras.
The financial statements presented consist of the consolidated balance sheet
of the Company as at December 31, 1999 and the balance sheet as at December 31,
1999 and the related consolidated statements of operations, stockholders equity
and cash flows for the years ending December 31, 1998 and 1999. and the related
consolidated statements of operations, stockholders equity and cash flows for
the period from inception, March 23, 1992, to December 31, 1999.
35
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
b. Cash and cash equivalents
The Company treats temporary investments with a maturity of less than three
months as cash.
c. Investments
The Company's investments are classified as trading securities and are
carried at fair value with the realized and unrealized losses carried in
operations.
d. Exploration Costs
Cost of acquisition, exploration, carrying, and retained unproven properties
are expensed as incurred. Cost incurred in proving and developing a property
ready for production are capitalized and amortized over the life of the mineral
deposit or over a shorter period if the property is shown to have an impairment
in value.
e. Environmental Requirements
At the report date environmental requirements related to the mineral claims
acquired are unknown and therefore an estimate of any future cost cannot be
made.
f. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives using the straight line
methods over a period of five years. Maintenance and repairs are charged against
operations and betterment's are capitalized.
g. Revenue
Recognition Revenue is recognized when extracted minerals are shipped.
h. Foreign Currency Translation
The U.S. dollar amounts presented have been translated from the Brazilian,
Honduras and Canada currency amounts in accordance with he criteria set forth in
Statement of Financial Accounting Standards 52 (SFAS 52) as applicable to the
accounts and transactions of a company operating in the currency of a country
with a non-highly inflationary economy. As of July 01, 1997, the three years
cumulative rate of inflation in Brazil, Honduras and Canada was less than 100%
and the entity's functional currency became the Brazilian real, Honduars lempira
and the Canadian dollar, the currency of the primary economic environment in
which the Company operates. As the reporting currency is the U.S. dollar, the
following criteria for the translation of Brazilian reais, Honduras lempira and
Canadian dollars to U.S. dollars was applied to the local currency basis
financial statements according to SFAS 52.
Assets and liabilities were translated by using the exchange rate at the
balance sheet date;
36
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Revenues, expenses, gains, losses were translated by using the weighted
average exchange rate for the period from January 1, to December 31, 1999.
The translation loss for the period from January 1, to December 31, 1999 was
reported separately as a component of shareholder's Equity (as a CTA -cumulative
translation adjustment); The capital account in Shareholder's equity was
translated by using the historical exchange rate.
i. Selling and Marketing Costs
Selling and Marketing - Certain selling and marketing costs are expensed in
the period in which the cost pertains. Other selling and marketing costs are
expensed as incurred.
j. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
k. Asset Impairment
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
(SFAS No. 121) effective January 1, 1996. SFAS No. 121 requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the estimated undiscounted cash flows to be generated
by those assets are less than the assets' carrying amount. SFAS No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of.
l. Earnings per share
Basic earnings per share are calculated on the basis of the weighted average
number of common shares outstanding for each period.
Note 3 - Acquisition of Assets
---------------------
The following claims have not been proven to have a commercial minable ore
reserve and therefore all costs for exploration and retaining the properties
have been expensed
a. Lagoa da Pedra Project
On March 13, 1995 when the Company entered into an agreement to purchase the
alluvial mineral rights in its Lagoa da Pedra Project located on the
Jequitinhonha river, near Diamantina, Minas Gerais, Brazil from the Lagoa da
Pedra Partnership (the "Partnership") for 34,202 shares of common stock. The
37
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
partnership consisted of Charles Stetler, a geologist (owning 12.5% of the
Partnership), Jose Lourenco Viana Neto (owning 12.5% of the Partnership),
Enterprise Gold Limited, a partnership located in Monaco (owning 50% of the
Partnership) and Perth Limited of the British Virgin Islands (owning 25% of the
Partnership). Charles Stetler and Jose Lourenco Viana Neto are experienced in
the mining industry in Brazil and will manage the operations in Brazil and
Enterprise Gold Limited and Perth are investors with international business
affiliations that assisted in the corporate development of the operation. The
transaction has been accounted for as a reverse acquisition and using the
purchase method of accounting with historic costs being the basis of valuation.
The financial statements of the Company have been retroactively restated to
include the combined statements of operations and cash flows for the period from
inception, March 22, 1992, to March 13, 1995 and the statements of operations
and cash flows of Lagoa da Pedra Partnership for the period March 13, 1995. The
aggregate moneys spent on the project to date represent $293,197.
The contract for purchase required a payment of $30,000 with a down payment
of $5,000 which was paid on May 10, 1993 by the Lagoa da Pedra Partnership and
the balance of $25,000 to be paid by December 31, 1996 by the Lagoa da Pedra
Partnership. The terms of the agreement were modified on various occasions to
extend the time required to pay the balance of $25,000.
As of December 31, 1996, the Company had concluded that the Logoa da Pedra
Project is not able to yield production sufficient to offset the required
investment in exploration and commercial production costs and had charged the
mineral costs $446,967 accumulated for this project were charged to operations
for the year ending December 31, 1996.
b. Option on Acquisition of Minas Novas
On June 27, 1996, the Company entered into an agreement with Minas Novas
Pesquisa E Lavra S.A. ("Minas Novas"), a Brazilian corporation for the
acquisition of 95% of the issued and outstanding stock of Minas Novas for a
purchase price of $380,000.
On September 1, 1997, the agreement was modified as to the terms and
conditions as follows:
The Company was given recognition of the $15,000 paid pursuant to the
original agreement on June 27, 1996.
On September 11, 1996, the Company issued an aggregate of 2,971 shares of
restricted common stock as part consideration in the acquisition of Minas Novas
and to extend the deadline for the payment of the purchase price of the mineral
property. These shares were subsequently restated to 2,971 upon the reverse
split of the Company's stock. The shares were issued as restricted stock and
valued at $0.21 per share.
On December 16, 1997, the Company issued an additional 35,714 shares of
common stock pursuant to the agreement with Minas Novas to three individuals
named in the agreement as follows: 19,643 shares to Friedrich Ewald Renger,
12,500 shares to Victor Eugenio Suckau and 3,571 shares to Lothar Wirth. These
38
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
shares were issued as a further inducement to extend the deadline for the
payment of the purchase price of the mineral property and as additional
consideration and collateral for the consummation of this purchase agreement.
The shares of common stock, were issued as restricted stock and were valued at
$0.25 per share for an aggregate of $62,500 and charged to operations as a cost
of acquiring the mineral property.
The shareholders' of Minas Novas have an option until September 30, 1998, to
require the Company to repurchase the 35,714 shares, by notifying the company of
Minas Nova's intention in writing by September 1, 1998 and must effect payment
within 120 days. Thirty days after written notice, interest will accrue at the
rate of 2% per month. In the event of default by the Company to repurchase these
shares, then the present contract looses all legal validity and all outstanding
shares of Minas Novas must be returned to the seller without onus to the seller.
Effective September 2, 1998, if the principals of Minas Novas wish to sell on
the open market any part of the shares of restricted stock, these shares can
only be sold in blocks with a combined maximum value of $100,000 in any given
month.
The Company also agreed begin to advance certain monies:
The default of any of the obligations of either the Company or Minas Novas
that is not corrected in a maximum period of 30 days, counting the date of the
specific notification will cause the dissolution of the contract and subject the
Company to a penalty of $210,000 and the return to each party the shares issued
pursuant to this contract.
As of December 31, 1997, the Company reflected a total Contract Payable of
$103,000 consisting of the monies due towards 4 monthly payments of $5,000 due
for 1997, $80,000 and the $20,000 less $17,000 paid as of December 31, 1997.
As of December 31, 1998, the Company has concluded that the Minas Novas
Project is not able to yield production sufficient to offset the required
investment in exploration and commercial production costs and has charged the
cost to purchase the Minas Novas project of $380,000 to operations for the year
ending December 31, 1998. Management is also of the opinion that Minas Novas
Pesquisa E Lavra S.A. has not lived up to the terms and conditions of the
contract for purchase, exploration and development entered into on September 11,
1997 and has discontinued any further relationship with the shareholders of
Minas Novas. The Company has also placed a stop transfer order on the shares of
common stock that were issued as a further inducement and as additional
consideration and collateral for the consummation of this purchase agreement and
has requested the return of these shares. As of December 31, 1999, upon
expiration of the option to purchase Minas Novas the Company has reclassified
Common Stock issued for the option to Stock HolderEquity. The Company has also
recognized a balance of the contract payable aggregating $103,000. Pursuant to
the terms and conditions of the agreement, the Company may also be liable for
liquidated damages of up to $210,000 if litigation should occur.
As of December 31, 1999, a lawsuit has not been entered into by either
party and in the opinion of management a lawsuit by Minas Novas is not expected
considering that they have regained all rights to the property and their shares
of stock and the benefits of the Company's investment in property improvements
and equipment purchased.
39
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
c. Arizona Property
On May 5, 1997, the Company issued, pursuant to regulation D, an aggregate
of 285,714 shares of common stock to various parties in consideration for the
purchase of 18 unpatented mining claims situated in Pima County, Arizona, valued
at $100,000.
This agreement was memorialized on January 23, 1998 with the actual transfer
and registration of title to the 18 mining claims. As of December 31, 1998, the
Company has concluded that the Arizona Project is not able to yield production
sufficient to offset the required investment in exploration and commercial
production costs and has charged the mineral costs of $29,658 accumulated for
this project and has charged operations for the year ending December 31, 1998.
d. Honduras Properties
In October, 1997, the Company, through its subsidiary Highland Resources
Honduras S.A., of which the Company owns 95%, entered into an agreement for the
purchase of 100% ownership of the and the mineral rights from Desarrollo De
Recursos Naturales, S. de R.L. de C.V., ("Derena") consisting of mineral
concessions aggregating 18,000 hectares. The agreement was memorialized in
Honduras on March 18, 1998 with the recording and registration of the Company
rights and titles to the concessions in Tegucigalpa, Honduras through the
Company's subsidiary Highland Resources Honduras, S.A.
As of March 31, 1998, title had transferred by agreement but had not been
officially registered with the local government.
In June, 1997, the Company paid a fee of $25,000 to Derena for the right to
do due diligence on the properties owned by Derena in Honduras. Upon
acceptability of the investigation, the Company would obtain 75% ownership of
Derena for a cash payment of US$ 250,000. In December, 1998, the percentage of
ownership was renegotiated to become 95% ownership. Derena's minority holding of
5% would be a "free carried interest", (i.e. not contributing to exploration,
administration and development costs, except as follows:
Production from all properties would be subject to a 2% "Net Smelter
Royalty", payable to Decenna, Mr. Mattsson and/or his assignees and/or
successors.
For a period of 5 years from June 10, 1997, the Company have the option to
purchase Mr. Mattsson's minority interest interests, whether carried or
participatory for the sum of US$ 1,000,000.
Mr. Mattsson has been appointed to the Executive Advisory Board of the
Company.
40
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
As of December 31, 1998, the Company has paid $391,313 pursuant to the terms
of this agreement and the percentage of ownership was renegotiated to become
95%.
Note 4 - Related Party transactions
--------------------------
a. Issuance of Common Stock
On March 31, 1992, the Company issued 8,333 common shares to Mr. Roger
Fidler in consideration for $1,500 in cash and the contribution of $500 in
organization costs.
On December 16, 1997, the Company issued, pursuant to regulation D, 4,286
shares of common stock to 6 advisory board members in exchange for services over
a period of 1 year valued at $1,500 or $.05 per share.
On September 1, 1996, the Company issued an aggregate of 1,550 shares of
common stock to Wolfdietrich Bruehl, former Chairman of the Board, in
consideration for services valued at $22,450 or $14.48 per share.
On May 5, 1997, the Company issued an aggregate of 28,571 shares of common
stock to Charles Stetler, former President, in consideration for services valued
at $28,571.
On May 5, 1997, the Company issued an aggregate of 14,285 shares of common
stock to Melanie Ellerton, former President of the Company for an aggregate
consideration for services valued at $5,000 or $.35.
On May 5, 1997, the Company issued an aggregate of 14,857 shares of common
stock to George Nadas in consideration for services valued at $5,000 or $.34 per
share.
On July 10, 1998, the Company sold an aggregate of 1,070,068 shares of
common stock to John Demoleas, President, in consideration for $40,000 or $0.04
per share.
On September 9, 1998 the Company sold an aggregate of 726,666 shares of
common stock to John Demoleas for 14,533 or $0.02 per share.
As of December 31, 1998, the Company issued an aggregate of 7,143 shares of
common stock to John Demoleas, President of the Company for an aggregate
consideration of $5,000 or $.70 per share.
As of September 30, 1999, the Company sold an aggregate of 7,300,000 shares
of common stock for an aggregate of $104,000 or an average value of $0.02 per
share to Mr. John Demoleas, President.
As of September 30, 1999, the Company sold 300,000 shares of common stock
for $10,000 or $0.03 per share to Mr. George Nadas, Secretary.
b. Officer Compensation
For the year ended December 31, 1999, the Company has not paid any salary to
any of the officers.
41
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
c. Officer Loan
In April, 1999, John Demoleas, President of the Company advanced the Company
an aggregate of $50,000 payable on demand without interest.
Note 5 - Preferred Stock
---------------
The certificate of Incorporation was amended on January 17, 1995 increasing
the number of shares authorized from 200 common shares with a par value of $.001
to an aggregate number of shares of stock which the corporation shall have
authority to issue is 25,000,000, which are divided into 5,000,000 shares of
Preferred stock with a par value of $.001. The Preferred Shares have the
following provisions:
a. Dividends are cumulative.
Preferred shareholders are entitled to receive dividends at the rate of $.12
per share per annum and no more, payable in cash quarterly commencing March 31,
1995 and thereafter on the last day of September, December, March and June of
each year on any Preferred series A shares ("Preferred Stock") outstanding.
Dividends that are in arrears must be paid before any distribution shall be paid
on common stock.
b. Redemption
At any time during the six year period commencing on the date of issuance,
the Company may redeem all or part of the outstanding shares of the Preferred
Stock at the redemption cash price equal to $2.50 per share, together with all
declared and unpaid dividends provided the Company gives thirty days prior to
the date specified for redemption.
c. Voting Rights
Except as otherwise required by law or by the articles of incorporation of
the Company, the shares of Preferred Stock shall have no voting rights
whatsoever.
d. Conversion Rights
Each share of Preferred Stock shall be convertible at the option of the
holder, at any time during the time period commencing 5 years from the date of
issuance and ending 6 years from the date of issuance, and on or prior to the
5th day prior to a redemption date into fully paid and nonassessable shares of
common stock of the Company. The number of shares of common stock into which
each share of the Preferred Stock may be converted shall be determined by
dividing the initially issuable conversion price of $2.50 subject to adjustment
by the conversion price in effect at the time of the conversion. The conversion
price from time to time in effect shall be subject to adjustment as follows: In
case the Company shall at any time subdivide the outstanding shares of common
stock, or shall issue a stock dividend on its outstanding common stock, the
conversion price in effect immediately prior to such subdivision or the issuance
of such dividend shall be proportionately decreased, and in case the Company
42
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
shall at any time combine the outstanding shares of common stock, the conversion
price in effect immediately prior to such combination shall be proportionately
increased, effective at the close of business on the date of such subdivision,
dividend or combination, as the case may be.
e. Contingent Liability
The Company shall at all times reserve and keep available out its authorized
but unissued common stock, solely for the purpose of effecting the conversion of
the Preferred Shares, the full number of shares of common stock deliverable upon
the conversion of all Preferred Stock from time to time outstanding.
At December 31, 1999, the number of shares of preferred stock outstanding
was -0-.
Note 6 - Furniture and Fixtures
----------------------
Furniture and fixtures consisted of the following at:
December 31,
1999
------------
Office equipment $ 7,191
Accumulated depreciation 4,533
-------
Balance $ 2,658
Note 7 - Income Taxes
------------
The Company provides for the tax effects of transactions reported in the
financial statements. The provision if any, consists of taxes currently due plus
deferred taxes related primarily to differences between the basis of assets and
liabilities for financial and income tax reporting. The deferred tax assets and
liabilities, if any represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. As of December 31, 1999, the Company had
no material current tax liability, deferred tax assets, or liabilities to impact
on the Company's financial position because the deferred tax asset related to
the Company's net operating loss carry forward and was fully offset by a
valuation allowance.
At December 31, 1999, the Company has net operating loss carry forwards for
income tax purposes of $2,139,618. This carry forward is available to offset
future taxable income, if any, and expires in the year 2010. The Company's
utilization of this carry forward against future taxable income may become
subject to an annual limitation due to a cumulative change in ownership of the
Company of more than 50 percent.
43
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
The components of the net deferred tax asset as of December 31, 1999 are as
follows:
Deferred tax asset:
Net operating loss carry forward $ 760,756
Valuation allowance (760,756)
----------
Net deferred tax asset $ -0-
==========
The Company recognized no income tax benefit for the loss generated in the
period from inception, March 23, 1992, to December 31, 1999.
SFAS No. 109 requires that a valuation allowance be provided if it is more
likely than not that some portion or all of a deferred tax asset will not be
realized. The Company's ability to realize benefit of its deferred tax asset
will depend on the generation of future taxable income. Because the Company has
yet to recognize significant revenue from the sale of its products, the Company
believes that a full valuation allowance should be provided.
Note 8 - Cash Flow Information
---------------------
The following is supplemental cash flow information for the period from
inception, March 23, 1992, to December 31, 1997
Issuance of 34,202 common shares for acquisition of mineral
properties.
on March 13, 1995 $(293,197)
Issuance of 10,057 common shares for
forgiveness of debt. (147,376)
Issuance of 2,971 common shares as part
consideration of Minas Novas (43,056)
Issuance of 285,714 common shares as
consideration for acquisition of Arizona
properties (100,000)
Issuance of 187,143 common shares in
consideration for consulting fees (65,500)
Issuance of 35,714 common shares as part
consideration for the Minas Novas acquisition ( 62,500)
Issuance of 4,286 common shares to 6 advisory
board members in exchange for services (1,500)
Capital Stock 713,129
-------
Total $ -0-
44
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
The following is supplemental cash flow information for the year ended
December 31, 1998:
Issuance of 40,000 common shares in consideration
of consulting fees $(28,500)
Issuance of 599,950 common shares in consideration
of the conversion of debt (101,000)
Capital Stock 129,500
--------
Total $ -0-
The following is supplemental cash flow information for the nine months
ended December 31, 1999:
Issuance of 799,683 common shares in consideration
for the conversion of debt $(24,000)
Issuance of 600,000 shares in consideration
consulting fees (30,000)
Capital Stock 54,000
--------
Total $ -0-
Note 9 - Commitments and Contingencies
-----------------------------
a. Stock Option Plan and Stock Grant Program
In June 1995, the Company adopted a non-qualified stock option plan and a
stock grant program with the following provisions.
1. Stock Option Plan: The Company has reserved 300,000 shares of its
authorized common stock for issuance to key employees, officers and consultants.
Under this plan, no employee may receive more than 50,000 options. Options are
nontransferable and expire if not exercised within two years. The options may
not be exercised by the employee until after the completion of two years of
employment with the Company. The options are issuable to officers, key employees
45
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
and consultants in such amounts and prices as determined by the Board of
Directors. As of December 31, 1997, no options have been granted pursuant to
this plan.
2. Stock Grant Program: The Company has reserved 300,000 shares of its
authorized common stock for issuance to key employees, officers, directors, and
consultants. Under this plan, no employee may receive more than 100,000 options.
The program requires the employee to remain in the employ of the company for at
least one year following the grant and to agree not to engage in any activity
which would be considered in competition with the Company's business. If the
employee violates any one of these conditions the ownership of the stock issued
under the program shall revert back to the Company. The stock issued under the
program is nontransferable for two years. As of December 31, 1998 and September
30, 1999, no options have been granted pursuant to this plan.
b. Leased Office Space
The Company occupies office space at the office's of George Nadas, Chartered
Accountant and Secretary to the Company at 800 Petrrolia Road, Unit 7, Toronto,
Canada M3J 3K4. The Company pay rent on a month to month basis at the rate of
$250.
c. Leased Office Space in Honduras
On October 26, 1997, the Company through its subsidiary HRH leased for two
years approximately 630 square feet of office space in the city of Tequcigalps
for $625 per month.
d. Consulting Agreements
1. Agreement with Loeb Aron & Company Ltd.
On November 17, 1997, the Company entered into a consulting agreement with
Loeb Aron & Company LTD.("Loeb Aron"), a company incorporated in England for
services relating to geology and related mining, smelting, engineering, and
production of minerals. The agreement is for two years beginning October 1, 1997
and is extended automatically for a period of 6 months or until notice is given
by either party.
For the year ended December 31, 1998, the Company has paid Loeb Aron as
follows: On February 4, 1998, 714 post split shares of common stock valued at
$1,000 and on September 10, 1998, 230,000 shares of common stock valued at
$25,000.
2. Agreement with A-Z Professional Consultants, Inc. a Utah corporation,
("A-Z"), for the purposes of consulting on matters relating to mergers and
acquisitions, advising corporate management and in performing general
administrative duties for public-held companies and development stage investment
ventures. The term is for 1 year and is renewable.
Payment for these services is 600,000 shares of common stock. As of
September 30, 1999, the Company has delivered 600,000 shares of common stock
valued at $0.05 per share for an aggregate consideration of $30,000.
46
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
f. Litigation
The Company is being sued by Mr. Douglas Furth of Aurora, Ohio for breach of
contract relating to a consulting agreement entered into on August 26, 1996. The
agreement relates to Mr. Furth performing corporate growth, public relations and
expansion of the Company's shareholder base.
Pursuant to the agreement, the Company was to issue 50,000 shares of common
stock upon signing the agreement, pay a monthly retainer of 10,000 unrestricted
shares of common stock, and pay a bonus of 50,000 unrestricted shares of common
stock when the Company's stock is trading at an average closing price of $3.00
per share for a period of 14 consecutive days; pay a bonus of 50,000
unrestricted shares of common stock when the Company's common stock is trading
at a average closing price of $4.00 per share for 14 consecutive days; pay a
bonus of 100,000 unrestricted shares of common stock when the Company's stock
trades at an average closing price of $5.00 per share for a period of 14 days;
pay a bonus of 100,000 unrestricted shares of common stock when the Company's
stock trades at an average closing price of $6.00 per share for a period of 14
days; and pay a bonus of 100,000 unrestricted shares of common stock when the
Company's stock trades at an average closing price of $7.00 per share for a
period of 14 days. Mr. Furth is seeking damages in the amount of $75,000 plus
interest and punitive damages of $1,000,000.
In the opinion of Management, the Company's exposure for loss is estimated
to be 1,572 shares of common stock.
Subsequent to the date of the financial statements, the case was dismissed.
Note 10 - Convertible Promissory Note
---------------------------
The Company borrowed an aggregate of $125,000 as evidenced by a Convertible
Promissory Note with Cadence Capital Corp., (the "Note") dated March 26, 1998
and due September 22, 1998. The Company received net proceeds of $109,635 after
paying interest in advance of $15,635. The Note is payable pursuant to the
following terms and conditions:
Interest is payable at the rate of 12% in advance upon the closing of the
issuance of this Note. The holder of this Note has the right to convert this
note, in whole or in part at any time into shares of common stock, at the lesser
of 75% of the lowest closing bid price for the shares quoted on the Bulletin
Board for the 5 day trading period ending on the day prior to the conversion
date, or the lowest closing bid price for the shares quoted on the Bulletin
Board for the five day trading period ending on the day prior to the date.
Notwithstanding any provisions of this Note, in no event will the Holder be
entitled to convert this Note into shares to the extent that after such
conversion, the number of shares of common stock beneficially owned by the
Holder and its affiliates and the number of shares issuable upon the conversion
of this Note would result in beneficial ownership and its affiliates of more
than 4.9% of the issued and outstanding shares of common stock as of the date of
the conversion.
47
HIGHLAND HOLDINGS INTERNATIONAL, INC.
(an exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
The number of shares is also subject to various conversion price adjustments
and adjustment for reverse stock splits.
The Company has agreed to use the proceeds of this Note for working capital
and not to pay any indebtedness of the Company.
As of December 31, 1998, the Company had converted $101,000 in debt into an
aggregate of 1,018,584 shares of common stock for an average conversion price of
$.10 per share.
As of December 31, 1999, the Company onverted the balance of $24,000 into
799,683 shares of common stock in consideration for the conversion of $24,000 in
debt $.03 per share.
On the dates of conversion of the promissory notes, the conversion prices
were less than the fair values of the common stock, hence a beneficial
conversion feature is attached to these convertible notes. For the year ended
December 31, 1998 and 1999, the amount of this beneficial conversion feature is
$41,248 and $7,994 respectively and has been recorded as interest expense and
additional paid-in-capital for the years ended December 31, 1998 and 1999.
48
E STREET ACCESS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 2001 AND 2000
AND
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
49
E STREET ACCESS, INC.
TABLE OF CONTENTS
PAGE NO.
--------
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT 51
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 52
Consolidated Statements of Operations 53
Consolidated Statements of Cash Flows 54
Consolidated Statement of Changes in Stockholders' Equity 55
Notes to the Consolidated Financial Statements 56-61
50
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Board of Directors of
E Street Access, Inc.
We have audited the accompanying consolidated balance sheets of E Street Access,
Inc. at April 30, 2001 and 2000, and the related consolidated statements of
operations, cash flows and changes in stockholders' equity for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 E
Street Access, Inc. at April 30, 2001 and 2000, and the consolidated results of
its operations, cash flows and changes in stockholders' equity for years then
ended in conformity with U.S. generally accepted accounting principles.
/s/ VAN BUREN & HAUKE, LLC
--------------------------
63 Wall St., Suite 2501
New York, NY 10005
September 20, 2001
New York, New York
51
E STREET ACCESS, INC
CONSOLIDATED BALANCE SHEETS
Assets
(UNAUDITED) APRIL 30,
JULY 31, --------------------------
2001 2001 2000
----------- ----------- -----------
Current assets
Cash $ 181,049 $ 205,655 $ 31,480
Receivable-brokers/dealers 95,370 113,247 --
Securities, at fair value 23,655 24,315 --
Prepaid interest 120,000 -- --
----------- ----------- -----------
Total current assets 420,074 343,217 31,480
----------- ----------- -----------
Fixed asset, net of accumulated depreciation/amortization 597,465 642,254 521,209
Other assets
Clearing deposit 146,494 149,387 151,932
Advance to Highland Holdings International, Inc. 175,000 -- --
Investment, at cost 3,300 3,300 3,300
----------- ----------- -----------
Total Assets $ 1,342,333 $ 1,138,158 $ 707,921
=========== =========== ===========
Liabilities And Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 342,075 $ 440,660 $ 194,776
Short-term note payable 500,000 -- --
Officers loans -- -- 235,500
----------- ----------- -----------
Total current liabilities 842,075 440,660 430,276
----------- ----------- -----------
Stockholders' equity
Common stock, 50,000,000 shares authorized; $0.005 par value;
27,850,450 shares, 25,812,220 shares and 15,781,366 shares
outstanding at July 31, 2001, April 30, 2001 and 2000, respectively 139,252 129,061 78,907
Additional paid-in capital 4,155,463 3,341,029 791,183
Retained (deficit) (3,794,457) (2,772,592) (592,445)
----------- ----------- -----------
Total stockholders' equity 500,258 697,498 277,645
----------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 1,342,333 $ 1,138,158 $ 707,921
=========== =========== ===========
See accompanying notes to consolidated financial statements.
52
E STREET ACCESS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED
---------------------------- ----------------------------
JULY, 31 JULY, 31 APRIL, 30 APRIL, 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Trading gains/(losses) $ (97,232) $ 15,000 $ 1,064,805 $ --
Commissions 20,719 2,717 112,382 --
Other income 2,510 2,287 3,070 2,170
------------ ------------ ------------ ------------
Total Revenues (74,003) 20,004 1,180,257 2,170
------------ ------------ ------------ ------------
Costs and Expenses:
Compensation and related taxes 275,899 321,425 1,206,276 80,458
Consulting 213,185 114,905 785,241 161,918
Professional fees 92,523 24,728 191,438 34,362
Quote fees 101,471 -- 159,755 7,880
Depreciation and amortization 53,998 27,831 139,098 32,144
Rent 30,338 31,855 123,685 51,311
Insurance 37,654 26,407 118,988 17,141
Office 17,778 32,278 151,208 84,841
Telephone 35,549 4,968 70,498 52,394
Interest 24,420 -- 43,891 18,750
Clearing and exchange fees 34,319 11,545 150,390 --
Software, computing and related expenses 9,573 84,597 121,232 --
Other 21,155 26,114 98,704 35,329
------------ ------------ ------------ ------------
Total Costs and Expenses 947,862 706,653 3,360,404 576,528
------------ ------------ ------------ ------------
NET LOSS $ (1,021,865) $ (686,649) $ (2,180,147) $ (574,358)
============ ============ ============ ============
Basic and diluited net (loss)
per common share $ (0.04) $ (0.04) $ (0.12) $ (0.04)
============ ============ ============ ============
Weighted average common shares
outstanding during the period 26,604,080 16,088,701 17,609,041 14,843,745
============ ============ ============ ============
Pro Forma (See Note 9-"Reverse Takeover")
Basic and diluited net (loss)
per common share $ (0.04) $ (0.02) $ (0.08) $ (0.02)
============ ============ ============ ============
Weighted average common shares
outstanding during the period 27,850,450 27,850,450 27,850,450 27,850,450
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
53
E STREET ACCESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED
-------------------------- --------------------------
JULY, 31 JULY, 31 APRIL, 30 APRIL, 30
2001 2000 2001 2000
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(1,021,865) $ (686,649) $(2,180,147) $ (574,358)
Adjustments to reconcile net (loss) to net cash (used)
by operating activities
Depreciation/amortization 53,998 27,832 139,098 32,144
Interest expense/amortization of prepaid interest 20,000 -- -- --
Receivable-brokers/dealers 17,877 -- (113,247) --
Clearing deposit 2,893 (1,280) 2,545 (151,932)
Stock issued for interest -- -- -- 18,750
Stock issued for services -- 55,000 55,000 --
Accounts payable and accrued expenses (98,585) 119,724 245,884 194,689
----------- ----------- ----------- -----------
NET CASH (USED) BY OPERATING ACTIVITIES (1,025,682) (485,373) (1,850,867) (480,707)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities, at fair value 660 -- (24,315) --
Investment, at cost -- -- -- (3,300)
Fixed asset additions (9,209) (88,699) (260,143) (553,353)
Advance to Highland Holdings International, Inc. (175,000) -- -- --
----------- ----------- ----------- -----------
NET CASH (USED) BY INVESTING ACTIVITIES (183,549) (88,699) (284,458) (556,653)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of short-term notes 500,000 75,000 827,700 50,000
Repayment of short-term notes -- -- (827,700) (50,000)
Proceeds from convertible notes 649,625 -- 788,250 35,000
Proceeds of officers loans -- -- -- 400,000
Repayment of officers loans -- (500) (235,500) (164,500)
Proceeds from sale of common stock 35,000 532,500 1,756,750 790,840
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,184,625 607,000 2,309,500 1,061,340
----------- ----------- ----------- -----------
Net (decrease) increase in cash (24,606) 32,928 174,175 23,980
Cash at beginning of period 205,655 31,480 31,480 7,500
----------- ----------- ----------- -----------
Cash at end of period $ 181,049 $ 64,408 $ 205,655 $ 31,480
=========== =========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 2,970 $ -- $ 38,500 $ --
=========== =========== =========== ===========
Income taxes $ 6,300 $ -- $ -- $ --
=========== =========== =========== ===========
Supplemental disclosures of non-cash financing activities:
Convertible notes converted to common stock
during the periods $ 649,625 $ -- $ 788,250 $ 35,000
=========== =========== =========== ===========
Stock issued for prepaid interest and interest $ 140,000 $ -- $ -- $ 18,750
=========== =========== =========== ===========
Stock issued for services $ -- $ 55,000 $ 55,000 $ --
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
54
E STREET ACCESS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Total
-------------------------- Paid-In Retained Stockholders'
Shares Par value Capital (Deficit) Equity
----------- ----------- ----------- ----------- -----------
Balance, April 8, 1999 (Inception) -- $ -- $ -- $ -- $ --
April 30, 1999 Activity:
Issue stock in private offering 33,334 167 25,333 -- 25,500
Net (loss) (18,087) (18,087)
----------- ----------- ----------- ----------- -----------
Balance, April 30, 1999 33,334 $ 167 $ 25,333 $ (18,087) $ 7,413
April 30, 2000 Activity:
Issue founders stock 14,500,000 72,500 (72,500) -- --
Issue stock in private offering 1,053,032 5,265 785,575 -- 790,840
Issue stock from convertible notes 170,000 850 34,150 -- 35,000
Issue stock for interest 25,000 125 18,625 -- 18,750
Net (loss) -- -- -- (574,358) (574,358)
----------- ----------- ----------- ----------- -----------
Balance, April 30, 2000 15,781,366 $ 78,907 $ 791,183 $ (592,445) $ 277,645
----------- ----------- ----------- ----------- -----------
April 30, 2001 Activity:
Issue founders stock 5,666,667 28,333 (26,333) -- 2,000
Issue stock in private offering 2,342,019 11,710 1,743,040 -- 1,754,750
Issue stock from convertible notes 1,948,834 9,744 778,506 -- 788,250
Issue stock for services 73,334 367 54,633 -- 55,000
Net (loss) -- -- -- (2,180,147) (2,180,147)
----------- ----------- ----------- ----------- -----------
Balance, April 30, 2001 25,812,220 129,061 3,341,029 (2,772,592) 697,498
----------- ----------- ----------- ----------- -----------
July 31, 2001 Activity (Unaudited):
Issue stock for interest 400,000 2,000 138,000 -- 140,000
Issue stock in private offering 46,667 233 34,767 -- 35,000
Issue stock from convertible notes 1,591,563 7,958 641,667 -- 649,625
Net (loss) (1,021,865) (1,021,865)
----------- ----------- ----------- ----------- -----------
Balance, July 31, 2001 27,850,450 $ 139,252 $ 4,155,463 $(3,794,457) $ 500,258
=========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
55
E STREET ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2001 and 2000
1. GENERAL
Basis of Presentation - The consolidated financial statements include
the accounts of E Street Access, Inc. (Corporation) and its
wholly-owned subsidiary, ESA Securities, Inc. (subsidiary)
(collectively, the "Company"). All material intercompany balances and
transactions are eliminated in consolidation.
The Company uses the accrual method of accounting for both financial
and tax reporting purposes. The Company's year end is April 30.
Organization And Nature of Operations - E Street Access, Inc.
(Corporation) was organized in April 1999 in the state of New Jersey.
In July 2000, it amended its original Certificate of Incorporation
(Certificate) to increase its authorized shares from 2,500 shares, no
par value to 10,000,000 shares at $0.01 par value. The Corporation
again amended its Certificate in December 2000 to increase its
authorized shares to 50,000,000 shares at $0.005 par value. In November
2000, the Corporation declared a 2 for 1 stock split. These changes
have been incorporated into these financial statements from the
earliest period presented.
The Corporation is engaged in financial software development and
licensing, hardware and network architecture and business development,
which services are used primarily by its subsidiary, ESA Securities,
Inc. The subsidiary, doing business as E Street Access, is registered
as a broker-dealer under the Securities Exchange Act of 1934, and is a
member of the National Association of Securities Dealers, Inc. (NASD)
and the Securities Investor Protection Corp. (SIPC). The Subsidiary is
authorized to conduct a general securities business comprising several
classes of services, including principal transactions, agency
transactions, investment banking and market making.
Pursuant to an agreement between the subsidiary and Robb Peck McCooey
Clearing Corporation (Robb Peck), all securities transactions of the
subsidiary are cleared through Robb Peck, and subsidiary's customers
are introduced and cleared on a fully disclosed basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments - Substantially all of the
Company's assets and liabilities are carried at fair value or
contracted amounts which approximate fair value.
56
E STREET ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2001 and 2000
Receivables-brokers/dealers - Amounts receivable from other
brokers/dealers arising in the ordinary course of the Company's
securities business. The Company routinely performs ongoing assessments
of collectibility of its receivables. No allowance is provided herein
as management deems this amount collectible.
Revenues - Trading gains/(losses) - The Company trades securities for
its own account recording regular-way trades on the settlement date,
which is not materially different than trade date.
Commissions - Commissions are recorded on settlement date, which is not
materially different then trade date.
Securities, At Fair Value - The Company's investments are carried at
fair market value. At April 30, 2001, the Company held equities of
$19,364 and common stock options of $4,950.
Investment, At Cost - The Company has an investment in restricted
stock, recording and carrying its investment at cost as there is no
readily determinable fair value.
Fixes Assets - The Company's fixed assets, its
depreciation/amortization policies and annual expense are set out
below:
Accumulated Depreciation/ Fiscal Year
Gross Depreciation/ Amortization Expense
Description Amount Amortization Policy 2001 2000
-------------------------- ------------ -------------- ------------------------ ---------- ---------
Furniture and fixtures 9,027 992 7 years; S-L 645 347
Computers and equipment 353,819 92,270 5 years; S-L 67,081 25,190
Leasehold improvements 68,152 15,764 48 or fewer months; S-L 62,215 6,607
Developed software 382,497 62,215 36 months; S-L 9,157 --
------------ -------------- ---------- ---------
$ 813,495 $ 171,241 $ 139,098 $ 32,144
============ ============== ========== =========
Annually, the Company reviews its fixed assets to determine their
recoverability in the ordinary course of business. In the event
impairment is indicated, the Company will reduce or totally remove the
carrying value.
The Company records its fixed assets at cost. Developed software is
recorded at the cost of consultant, programmers, etc. and consists of a
system to route and collect customer information and trading data.
57
E STREET ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2001 and 2000
Income Taxes - The Company and its subsidiary file a consolidated
federal income tax return but file separate state income tax returns.
For the years ended April 30, 2001 and 2000, the Company has a current
net operating loss, and, therefore a provision for federal income taxes
has not been provided. At April 30, 2001, the Company has net operating
loss carry forwards of approximately $2,800,000 available to offset
future consolidated federal taxable income, which if unused, expire
through 2021. The Corporation and its subsidiary are subject to state
income taxes on their separate taxable incomes. Accordingly, the
accompanying consolidated financial statements include a provision for
state income taxes of $6,300 for the year ended April 30, 2001.
The Company's loss carry forwards give rise to a deferred tax benefit,
which has been fully offset by a valuation allowance due to
uncertainties as to whether the results of future operations will
enable the Company to realize the tax benefits arising from this loss
carry forwards.
Basic and Diluted Net (Loss) Per Common Share - Basic and diluted net
(loss) per common share has been computed by dividing the net (loss) by
the weighted average number of common shares outstanding during the
period.
3. UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated interim financial statements of
the Company have been prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Consolidated operating results for the three months ended
July 31, 2001 and 2000 may not be indicative of the consolidated
results for the full fiscal years.
4. SHORT-TERM NOTES
During fiscal 2001 and 2000, the Company would from time-to-time borrow
working capital for short periods of time from various stockholders at
nominal interest. During fiscal 2001 and 2000 the Company borrowed and
repaid $727,700 and $50,000, respectively. In the year ended April 30,
2001, the Company paid $21,500 of interest.
In August 2000, the Company borrowed $100,000 and repaid $50,000 in
January and February 2001, and paying interest of $17,000 in March
2001. The Company also issued the lender 43,371 options to purchase the
Company's common stock for a period of 5 years (expiring July 16, 2006)
at $1.00 per share. At April 30, 2001 none of the options have been
exercised.
58
E STREET ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2001 and 2000
5. STOCKHOLDERS' EQUITY
From April 8, 1999 (inception) the Company began raising capital under
a Private Offering Memorandum (POM), which was not registered under the
Securities Act of 1933 pursuant to an exemption from registration
contained in Section 4(2) and 4(6) and Rule 505 of Regulation D and was
not filed with any state securities agencies. The Company's intent was
to raise a maximum of $1,800,000 from the sale of 2,400,000 common
shares at $0.75 per share (post split). The Company began receiving
funds in April 1999 and through April 30, 2000 and 2001 deposited
$816,340 and $1,754,750, respectively, from the sale of 1,086,366
shares and 2,342,019 shares, respectively.
In the year ended April 30, 2000, the Company began offering
convertible notes (note) wherein the note holder would
contemporaneously with the issuance of the note, execute a conversion
document, converting their note to common stock of the Company based on
the original conversion feature stipulated in the note. During fiscal
2000, the Company converted notes into 170,000 shares of common stock,
raising $35,000. In the year ended April 30, 2001, the Company
converted notes into 1,948,834 shares of common stock, raising
$788,250. The conversion feature of the notes provided for the
conversion to shares of the Company's common stock at an average of
$0.21 in fiscal 2000 and an average of $0.40 in fiscal 2001.
During the year ended April 30, 2000, the Company issued 25,000 common
shares in payment of $18,750 in interest, or $0.75 per share, as
stipulated in the loan document. During fiscal year 2001, the Company
issued 73,334 common shares for $55,000 in administrative services to
an unrelated consultant, valuing the shares at the agreed upon value of
$0.75 per share.
In fiscal 2000 and 2001, the Company issued to its founders an
aggregate 19,466,667 common shares, valuing them at par. These share
issuances were pursuant to a May 2000 agreement among the founders to
themselves up to 20,000,000 common shares if and when the Corporation
had the authority to issue them.
6. LEASES
The Company has operating leases for facilities and automobiles in New
Jersey. The terms of the facilities lease runs through February 2004
while the automobile leases vary from expiring in October 2003 to May
2004. The minimum lease payments under the leases are as follows:
59
E STREET ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2001 and 2000
Fiscal year ending Amount
------------------ --------
2000 $ 51,021
2001 132,446
2002 147,300
2003 146,350
2004 124,919
7. CONCENTRATIONS OF CREDIT RISK
The Company is engaged in various trading and brokerage activities.
These activities may expose the Company to off-balance sheet risk in
the event the customer or broker-dealer (collectively "counterparties")
are unable to fulfill their contractual obligations. As a result, the
Company's exposure to credit risk can be directly impacted by volatile
markets, which may impair the customers' or broker-dealers' ability to
satisfy their obligations. The Company seeks to control the risk
associated with nonperformance by reviewing, as considered necessary,
the credit standing of counterparties with which it conducts business.
8. NET CAPITAL REQUIREMENTS
The subsidiary is subject to the Uniform Net Capital Rule 15c3-1 under
the Securities Exchange Act of 1934, which requires the maintenance of
minimum net capital of $100,000 and requires that the ratio of
aggregate indebtedness to net capital, as defined, shall not exceed 15
to 1. At April 30, 2001 subsidiary's net capital of $286,039 exceeded
the minimum requirement by $186,039. Subsidiary's percentage of
aggregate indebtedness to net capital was 2%.
9. SUBSEQUENT EVENTS
Reverse Takeover - Effective July 16, 2001, the Corporation agreed to
an exchange offer from Highland Holdings International, Inc. (HHII) (a
development stage company) wherein the Corporation's shareholders
receive one share of HHII's common stock for each share of the
Corporation's they own. The transaction, as contemplated, will result
in the Corporation being a wholly-owned subsidiary of HHII. Although
HHII is the surviving entity, the business of the consolidated entity
is principally that of the Company's with its stockholders owning
substantially all of HHII. For these reasons, the transaction will be
accounted for as the acquisition of HHII's net liabilities by the
Corporation at HHII's book value followed by the recapitalization of
the entity. During the quarter ended July 31, 2001, the Corporation
advanced HHII $175,000 to cover its obligation to its president. Since
the financial statements of the continuing entity will be those of the
Company, no consolidated pro forma financial information is presented
60
E STREET ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2001 and 2000
except for basic and diluted net (loss) per common share, reflecting
the effect of the transaction on historical results.
Financing - In the first fiscal quarter 2001, the Corporation borrowed
$500,000 from a stockholder at the going money market interest rate
with repayment in two hundred, ten days. In addition to the stated
interest rate, the lender also received 400,000 shares of the
Corporation's common stock. The 400,000 shares were recorded as prepaid
interest based on the agreed upon per share rate of $0.35 per share.
Interest expense will be recorded over the life of the loan based on
the money market interest rate and amortization of the prepaid
interest. During the quarter ended July 31, 2001, the Company recorded
interest expense of $21,450.
61
Item 4. Change in Registrant's Certifying Accountant.
(a) On September 26, 2001 Kabani & Company, Inc. ("Kabani"),
Highland's independent auditor for the previous fiscal year resigned in that
capacity.
(b) During fiscal year 2000 and the subsequent period up to September
26, 2001, the date of resignation, there were no disagreements with Kabani on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure or any reportable events. Further,
Kabani's audit reports for fiscal year 2000 did not contain an adverse opinion,
nor was any report modified as to audit, scope or accounting principals except
an emphasis paragraph on going concern.
(c) Highland has requested that Kabani furnish it with a letter
addressed to the Securities and Exchange Commission stating whether it agrees
with the above statements. A copy of the Kabani letter to the Securities and
Exchange Commission dated September 27, 2001 is filed as Exhibit 16.1 to this
Form 8-K/A, Amendment No. 1.
(d) Effective September 26, 2001, the firm of Van Buren & Hauke, LLC,
CPAs was engaged to audit Highland's financial statements.
62
Item 5. Other Events
Highland has changed its principal executive offices to 480 Route 9
North, Englishtown, New Jersey.
Item 7. Financial Statements and Exhibits
Part (a)(1) Audited consolidated financial statements of Highland
Holdings International, Inc. and subsidiary for the years
ended December 31, 2000 and 1999, and for the period from
March 23, 1992 (inception) to December 31, 2000.
(2) Audited consolidated financial statements of E Street
Access, Inc. and subsidiary for the year ended April 30,
2001 and 2000.
(3) Unaudited interim consolidated financial statements of E
Street Access, Inc. and subsidiary for the quarter ended
July 31, 2001.
Part (b)(1) Pro forma consolidated balance sheet showing the
anticipated effects of the transaction on the consolidated
entity at July 31, 2001.
(c) Exhibits
2.1 Plan and Agreement of Reorganization, dated June 29,
2001, among Highland, E Street and certain
shareholders of E Street ( the "Plan").*
2.2 First Amendment to the Plan, dated July 16, 2001.*
4.2 Amended and Restated Certificate of Designations.
16.1 Letter from Kabani & Company, Inc.
---------
* previously filed
Item 8. Change in Fiscal Year.
Highland has changed its fiscal year to begin on May 1 and to end on
April 30. Previously it had adopted a fiscal year ending December 31. Reports on
Form 10-QSB will be filed during the transition period.
63
SIGNATURES
HIGHLAND HOLDINGS INTERNATIONAL, INC.
September 27, 2001 by:/s/ John Derrico
-----------------------------------------
John Derrico
President
64