CANADA Province of Ontario

Court No.: 31-1481974 Estate No.: 31-1481974 TRUSTEES PRELIMINARY REPORT TO CREDITORS ON THE BANKRUPTCY ADMINISTRATION IN THE MATTER OF THE BANKRUPTCY OF TERRASAN ENVIRONMENTAL SOLUTIONS INC. OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO Section A Background Terrasan Environmental Solutions Inc. (the Company) is an Ontario corporation that was incorporated in March, 2004. The Company operated as a construction company, specializing in all aspects of responsible demolition and environmental contracting. It operated from a leased commercial space located at 94 Brockport Drive, Toronto, Ontario (Premises). On April 4, 2011, the Company filed an assignment in bankruptcy with the Official Receiver under the Bankruptcy and Insolvency Act. MSI Spergel Inc. (Trustee) was named as the Trustee of the Estate by the Official Receiver. The Designated Officer of the Company in this bankruptcy administration is Mr. Luigi Santaguida. The Trustee has been advised by the management of the Company that financial difficulties commenced in 2009 as a result of some delayed payments from contractors, a $4,000,000 contract for the Constellation Hotel that was not paid due to the bankruptcy of the owner, an unprofitable venture into the United States market due to the downturn in the United States economy, and a lack of confidence in the industry that has created difficulties in collecting outstanding accounts receivables. Additionally, as a result of significant debts owing to Canada Revenue Agency (CRA) for unremitted payroll deductions and GST/HST, CRA issued enhanced garnishment notices on the Companys customers and bank account holders which resulted in an interruption in the Companys cash flow. The

indebtedness to CRA for unremitted payroll source deductions and GST/HST is approximately $2,171,753. The Company was unable to continue operating and accordingly filed an assignment in bankruptcy. Prior to the date of the bankruptcy the company employed approximately 72 employees.

Section B - Evaluation of Assets Based on the sworn Statement of Affairs dated April 1, 2011, the Companys assets are as follows: Asset description

Per Statement of Affairs Work in progress

$

3,168,526

Accounts receivable

817,290 Machinery and equipment

192,212 Furniture & fixtures

5,462 Prepaid expenses and deposits

61,972

$

4,245,463

Work in progress The work in progress of $3,168,526 encompasses 11 projects that are at various stages of completion, and is calculated based on the estimated equity available in the projects. The estimated equity includes the outstanding accounts receivable and accounts payable, and the future expected cash collections and disbursements. The realization of this amount is dependent on the co-operation of the Canada Revenue Agency (CRA) and the owners/general contractors for each of these projects. Upon its appointment, the Trustee attempted to negotiate an assignment of eight of the unfinished contracts to a third party; however, the bankruptcy filing triggered default provisions in the contracts and the bonding company advised that it would not allow an assignment of the bonds to a third party. Accordingly, the potential purchaser could not complete the transaction. The Trustee also attempted to negotiate a sale of another unfinished contract to a third party; however, the owner cancelled the contract due to inactivity. The Trustee no longer has the ability to complete or assign the contracts to any other party. Accounts receivable The accounts receivable of $817,290 represents amounts due for completed projects. CRA has issued enhanced garnishments on these amounts, and will apply any collections against the amount owing to it. The Trustee is of the view that this amount is understated by approximately $885,000 due from another contract, which is also subject to CRAs enhanced garnishment. Machinery and equipment The Companys machinery and equipment is comprised substantially of large construction equipment and vehicles that are located at various job sites, properties owned by Mr. Santaguida and bailiffs and mechanics, pursuant to liens. The Trustee has obtained a copy of a recently completed appraisal of the large construction equipment and will discuss this appraisal with the Estate Inspectors. Proceeds realized from the sale of the machinery and equipment are subject to priority claims and security interests of secured creditors. At the time of the Trustees appointment the equipment was located primarily on construction sites. The Trustee has not taken possession of the equipment due to a lack of funding required to relocate the equipment. The director has taken actions to relocate equipment from risky job sites, wherever possible, to more secure locations. This is discussed further in

Section E of this report. Section C Priority Claims and Secured Creditors Priority Claims The Trustee has received a copy of an Examiners Statement of Account dated March 3, 2011 produced by CRA indicating unpaid deductions at source totaling $1,837,476 and unremitted GST/HST in the amount of $334,227, which has been registered on PPSA. The Trustee is currently in negotiations with CRA to enter into an administrative agreement that would allow the Trustees fees and disbursements to be paid in priority to the claims of CRA with respect to certain realizations. Eligible employees may be entitled to a claim pursuant to the Wage Earner Protection Program Act for unpaid wages, vacation pay, termination pay and severance pay. Based on the Companys books and records as at the date of bankruptcy, the Trustee anticipates that Service Canada will have a priority over the Companys current assets for approximately $106,709. This claim will rank in priority to the claims of secured creditors with respect to the Companys current assets. Secured Creditors A search pursuant to the Personal Property and Security Act (Ontario) was conducted on April 4, 2011, which revealed that the following registrations may have a security interest in the Companys assets: Name Registration type Fleet Street Financial Corporation General Security Agreement Scotia Tire & Alignment Services (2003) Ltd. Motor Vehicles Meridian Credit Union Limited General Security Agreement Travelers Guarantee Company of Canada Indemnity and Security Agreement Landmark Vehicle Leasing Corporation

Motor Vehicles Gold Card Leasing O/B Goldcard Inc. Equipment and Motor Vehicles Ford Credit Canada Limited Equipment, Other and Motor Vehicles Business Development Bank of Canada General Security Agreement Royal Bank of Canada Equipment, Accounts, Other, Motor Vehicles John Deere Equipment, Other, Motor Vehicles Citicapital Commercial Corporation Equipment and Motor Vehicles Mazda Canada Credit Leasing Equipment, Other and Motor Vehicles Ricoh Canada Inc. Equipment and Other DCFS Canada Corp. Equipment, Other, Motor Vehicle Trisura Guarantee Insurance Company General Security Agreement Luigi Santaguida General Security Agreement The Trustee is in the process of reviewing the claims of the secured creditors. Valid claims will rank in priority to the claims of unsecured creditors. Furthermore, all assets that are not subject to a true lease may be subject to the priority claims of CRA. The Trustee has contacted the secured creditors and requested that they file their proofs of claim as soon as possible. At the

present time the Trustee does not anticipate any funds to be available for distribution to unsecured creditors. Section D - Provable Claims Claims filed against the estate are as follows to date:

Per Statement of Affairs

Filed to Date Deemed Trust $ 1,837,476

$ Secured 13

-

10,171,969 Preferred -

Unsecured 7,532,314

3,695,840

$

9,369,803

$

13,867,809

Contingent -

$

16,583,939

Section E - Conservatory and Protective Measures On April 4, 2011, the Trustee made arrangements for an inventory of the Companys assets and to secure the Companys books and records. The Trustee is currently not in possession of the capital assets because it does not have funding to do so, as it does not currently have an administrative agreement in place with CRA to allow for its fees and disbursements that would be required in order to take possession. The Trustee did not take possession of the Companys Premises and has removed the records of the Company from the Premises. Section F Legal Proceedings, Reviewable Transactions and Preference Payments No legal proceedings have been commenced by the Trustee prior to the First Meeting of Creditors; however there is a significant amount of litigation that had commenced prior to the bankruptcy, including claims for debts due to the Company. The Trustee will request an administrative agreement with CRA with respect to the handling of these claims. As set out above, the Trustee is in the process of reviewing the security documents of secured claimants in order to verify the enforceability of the security as against the Trustee. The claim of the secured creditors will rank in priority to the claims of unsecured creditors. Preference payments are payments that may have resulted in one or more creditors being paid in preference to other creditors at a time when the Company was insolvent. Transfers at under value is a disposition of property or provision of services for which no consideration was received by the debtor, or for which the consideration given was conspicuously less than the fair market value. A Court can issue a judgement or possibly reverse a preference or transfer at under value if it can be proven that a preference was given to a creditor(s) or if a transaction did not take place for fair

value. The Trustee has completed a preliminary review of the Companys bank statements and payments made prior to the date of bankruptcy, and has not found to date any transactions that qualify as a preferential payment or transfer at under value. Section G Remuneration of Trustee The Trustees fees will be based on time and hourly basis and will be paid from the realizations of the Estate. Luigi Santaguida has guaranteed the Trustees fees for its time and disbursements incurred in administering the Estate and has provided a limited third party deposit. These funds have been deposited to the Trustees third party trust account and will be drawn upon in the event that the realization of assets is insufficient to pay the Trustees fees and disbursements. Section H - Anticipated Realization and Projected Distribution Based on the estimated realizations set out in the Companys Statement of Affairs, the Trustee anticipates a shortfall to the secured creditors, accordingly no distributions are anticipated for unsecured creditors. Dated: April 21, 2011 MSI Spergel Inc., Trustee of the Estate of Terrasan Environmental Solutions Inc. Per: ______________________________ Alan H. Spergel, CA, CACIRP, CFE President