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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 20-F
_________________________
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES
EXCHANGE ACT OF 1934 or
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No.: 0-13966
MERCURY PARTNERS & COMPANY INC.
(Exact name of Registrant as specified in its charter)
YUKON TERRITORY, CANADA
(Jurisdiction of incorporation or organization)
SUITE 613, 375 WATER STREET, VANCOUVER, BRITISH COLUMBIA, CANADA V6B 5C6
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b)
of the Act: NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
____________________________________
COMMON SHARES WITHOUT PAR VALUE
(Title of Class)
____________________________________
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: NONE
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report:
8,183,733 COMMON SHARES WITHOUT PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark which financial statement item the Registrant has
elected to follow. Item 17 [ ] Item 18 [X]
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TABLE OF CONTENTS
PAGE NO.
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 4
ITEM 3. KEY INFORMATION 4
Forward-Looking Statements 4
Exchange Rates 4
Selected Financial Data 4
Risk Factors 6
ITEM 4. INFORMATION ON THE COMPANY 9
History and Development of the Company 9
Business Overview 9
Organizational Structure 13
Property, Plants and Equipment 13
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 13
Operating Results 14
Liquidity and Capital Resources 16
Research and Development, Patents and Licenses 17
Trend Information 17
Off-balance Sheet Arrangements 17
Contractual Obligations 17
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 18
Directors and Senior Management; Board Practices 18
Compensation 19
Employees 20
Share Ownership 20
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 20
Major Shareholders 20
Related Party Transactions 20
ITEM 8. FINANCIAL INFORMATION 21
Consolidated Statements and Other Financial Information 21
Significant Changes 22
ITEM 9. THE OFFER AND LISTING 22
Markets and Price History 22
ITEM 10. ADDITIONAL INFORMATION 22
Articles and Bylaws 22
Material Contracts 24
Exchange Controls 24
Taxation 25
Documents on Display 28
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 29
-2-
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 29
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF
SECURITY HOLDERS AND USE OF PROCEEDS 29
ITEM 15. CONTROLS AND PROCEDURES 29
ITEM 16. [RESERVED] 29
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 29
ITEM 16B. CODE OF ETHICS 30
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 30
PART III
ITEM 17. FINANCIAL STATEMENTS 30
ITEM 18. FINANCIAL STATEMENTS 30
ITEM 19. EXHIBITS 51
SIGNATURES
CERTIFICATION
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In this annual report references to the "Company" means Mercury Partners &
Company Inc. and its subsidiaries unless the context of the sentence clearly
suggests otherwise.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
FORWARD-LOOKING STATEMENTS
Statements in this annual report, to the extent that they are not based on
historical events, constitute forward-looking statements within the meaning of
the United States Private Securities Litigation Reform Act of 1995. These
statements appear in a number of different places in this annual report and
include statements regarding the intent, belief or current expectations of the
Company and its directors or officers, primarily with respect to the future
market size and future operating performance of the Company and its
subsidiaries. Forward-looking statements include, without limitation, statements
regarding the outlook for future operations, forecasts of future costs and
expenditures, evaluation of market conditions, the outcome of legal proceedings,
the adequacy of reserves, or other business plans. Investors are cautioned that
any such forward-looking statements are not guarantees and may involve risks and
uncertainties, and that actual results may differ from those in the
forward-looking statements as a result of various factors such as general
economic and business conditions, including changes in interest rates, prices
and other economic conditions; actions by competitors; natural phenomena;
actions by government authorities, including changes in government regulation;
uncertainties associated with legal proceedings; technological development;
future decisions by management in response to changing conditions; the ability
to execute prospective business plans; and misjudgments in the course of
preparing forward-looking statements. Investors are advised that these
cautionary remarks expressly qualify in their entirety all forward-looking
statements attributable to the Company or persons acting on its behalf.
EXCHANGE RATES
In this annual report, unless otherwise specified, all monetary amounts are
expressed in United States dollars. The information set forth in this annual
report is as at December 31, 2003, unless an earlier or later date is indicated.
SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data for the
Company prepared in accordance with Canadian generally accepted accounting
principles ("Canadian GAAP"). Additional information is presented to show the
difference which would result from the application of United States generally
accepted accounting principles ("U.S. GAAP") to the Company's financial
information. For a description of the differences between Canadian GAAP and U.S.
GAAP, see Note 18 of the Company's consolidated financial statements included
elsewhere in this annual report. The information in the table was extracted from
the more detailed consolidated financial statements and related notes included
herein and should be read in conjunction with such financial statements and with
the information appearing under the heading, "Item 5. Operating and Financial
Review and Prospects".
-4-
Canadian GAAP
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YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2002 2001
2003 (AS (AS 2000 1999
RESTATED(2)) RESTATED(2))
---------- ---------------- ---------------- -------- --------
(in thousands, other than per share amounts)
Revenues(1) $ 76 $ 184 $ 121 $ 502 $ 505
Income (loss) before discontinued
operations (518) (365) (799) 74 122
Discontinued operations income (loss) - - - - -
Net income (loss) from continuing
operations (518) (365) (799) 74 122
Net income (loss) per share from
continuing operations
Basic (0.09) (0.06) (0.16) 0.02 0.04
Fully diluted (0.09) (0.06) (0.16) 0.02 0.04
Net income (loss) per share from
discontinued operations
Basic - - - - -
Fully diluted - - - - -
Total assets 2,108 2,261 2,638 2,935 3,235
Net assets 2,039 2,119 2,475 2,802 2,728
Debt 69 142 163 133 507
Shareholders' equity 2,039 2,119 2,475 2,802 2,728
Capital stock 3,456 3,456 3,456 2,609 2,609
Dividends - - - - -
Weighted average common stock
outstanding, fully diluted
(in thousands of shares) 5,934 5,934 4,851 4,532 2,746
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(1) Excludes revenues from discontinued operations.
(2) During fiscal 2003, the Company changed from the temporal method of
accounting for foreign exchange translation to the current rate method as
required by Emerging Issues Committee 130 issued by the Canadian Institute
of Chartered Accountants (see Note 2 to the Company's consolidated
financial statements). The standard requires restatement and therefore
financial statements for fiscal 2002 and 2001 have been restated. For more
information about the accounting change and restatement see Note 3 to the
Company's consolidated financial statements.
-5-
U.S. GAAP
- ----------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2002 2001
2003 (AS (AS 2000 1999
RESTATED(2)) RESTATED(2))
---------- ---------------- ---------------- -------- --------
(in thousands, other than per share amounts)
Revenues(1) $ 76 $ 184 $ 121 $ 502 $ 505
Income (loss) before discontinued
operations (237) (286) (799) 1,154 161
Discontinued operations income (loss) - - - - -
Net income (loss) from continuing
operations (237) (286) (799) 1,154 161
Net income (loss) per share from
continuing operations
Basic (0.04) (0.05) (0.16) 0.25 0.06
Fully diluted (0.04) (0.05) (0.16) 0.25 0.06
Net income (loss) per share from
discontinued operations
Basic - - - - -
Fully diluted - - - - -
Total assets 2,109 1,826 2,806 4,022 3,274
Net assets 2,040 1,684 2,643 3,883 2,767
Debt 69 142 163 139 507
Shareholders' equity 2,040 1,684 2,643 3,883 2,767
Capital stock 3,456 3,456 3,456 2,609 2,609
Dividends - - - - -
Weighted average common stock
outstanding, fully diluted (in thousands
of shares) 5,934 5,934 4,851 4,532 2,746
(1) Excludes revenues from discontinued operations.
(2) During fiscal 2003, the Company changed from the temporal method of
accounting for foreign exchange translation to the current rate method as
required by Emerging Issues Committee 130 issued by the Canadian Institute
of Chartered Accountants (see Note 2 to the Company's consolidated
financial statements). The standard requires restatement and therefore
financial statements for fiscal 2002 and 2001 have been restated. For more
information about the accounting change and restatement see Note 3 to the
Company's consolidated financial statements.
RISK FACTORS
The Company's primary risks are transaction risks. In addition, the Company has
been and may continue to be affected by many other factors, including but not
limited to: (1) economic and market conditions, including the liquidity of
capital markets; (2) the volatility of market prices, rates and indices; (3) the
timing and volume of market activity; (4) inflation; (5) the cost of capital,
including interest rates; (6) political events, including legislative,
regulatory and other developments; (7) competitive forces, including the
Company's ability to attract and retain personnel; (8) support systems; and (9)
investor sentiment. In determining whether to make an investment in the
Company's capital stock, investors should consider carefully all of the
information set forth in this annual report and, in particular, the following
risk factors.
TRANSACTION RISKS
The Company manages transaction risk through allocating and monitoring its
capital investments and carefully screening clients and transactions.
Nevertheless, transaction risks can arise from, among other things, the
Company's merchant banking and private equity activities and relate to the risks
of the proposed transaction. These risks include market risks associated with
the Company's role in providing advisory services.
The Company often makes investments in highly unstructured situations and in
companies undergoing severe financial stress. Such investments also often
involve severe time constraints. These investments may expose the Company to
significant transaction risks and place the Company's funds in
-6-
illiquid situations. An unsuccessful investment may result in the total loss of
such investment and may have a material adverse effect on the Company's
business, results of operations and financial condition.
Additionally, in order to grow its business, the Company may seek to acquire or
invest in new companies. The Company's failure to make such acquisitions may
limit its growth. In pursuing acquisition opportunities, the Company may be in
competition with other companies having similar growth and investment
strategies. Competition for these acquisitions or investment targets could
result in increased acquisition or investment prices and a diminished pool of
businesses, technologies, services or products available for acquisition or
investment.
COMPETITION RISKS
The Company conducts its business in a highly competitive environment. Many
of its competitors have far greater resources, capital and access to information
than the Company. Competition includes firms traditionally engaged in financial
services, such as banks, broker-dealers and investment dealers. Increased
competition may lead the Company to become involved in transactions with more
risk.
MARKET RISKS
Market risk relates to fluctuations in the liquidity of securities, as well as
volatility in market conditions generally. The markets for securities and other
related products are affected by many factors over which the Company has little
or no control. These factors include the financial performance and prospects of
specific companies and industries, world markets and economic conditions, the
availability of credit and capital, political events and perceptions of market
participants.
The Company is exposed to the risk of a market downturn.
As a financial services company, the Company's business is materially affected
by conditions in the financial markets and economic conditions generally. In the
event of a market downturn, the Company's business, results of operations and
financial condition could be adversely affected. In addition, there is no
assurance that an active public market for the Company's securities will
continue.
A market downturn could lead to a decline in the number and size of the
transactions that the Company executes for its clients, including transactions
in which the Company provides financial advisory and other services, and to a
corresponding decline in the revenues the Company receives from fees.
A downturn in a market could further result in losses to the extent that the
Company owns assets in such market. Conversely, to the extent that the Company
has sold assets the Company does not own (i.e., if the Company has short
positions) in any market, an upturn in such market could expose the Company to
potentially unlimited losses as it attempts to cover its short positions by
acquiring assets in a rising market.
Even in the absence of a market downturn, the Company is exposed to substantial
risk of loss due to market volatility.
A rise in inflation may affect the Company's results.
The Company does not believe that inflation has had a material impact on its
revenues or income over the past three fiscal years. In addition, since the
Company's assets to a large extent are liquid in nature, they are not
significantly affected by inflation. However, increases in inflation could
result in increases in the Company's expenses, which may not be readily
recoverable in the price of services provided to the Company's clients. To the
extent inflation results in rising interest rates and has other adverse effects
on capital markets, it could adversely affect the Company's business, results of
operations and financial condition.
-7-
Market risk may increase the other risks that the Company faces.
In addition to the market risks described above, market risks could exacerbate
the other risks that the Company faces. For example, if the Company incurs
substantial trading losses, its need for liquidity could rise sharply while its
access to liquidity could be impaired. In addition, in conjunction with a market
downturn, the Company's clients and counterparties could incur substantial
losses of their own, thereby weakening their financial condition and increasing
the Company's credit risk.
LEGAL AND REGULATORY RISKS
The Company is exposed to legal risks in its business and the volume and amount
of damages claimed in litigation against financial intermediaries are
increasing. These risks include potential liability under securities or other
laws for materially false or misleading statements made in connection with
securities and other transactions and, potential liability for advice the
Company provides to participants in corporate transactions.
These risks often may be difficult to assess or quantify and their existence and
magnitude often remain unknown for substantial periods of time. See "Item 8.
Financial Information - Legal Proceedings" for additional information with
respect to the Company's legal and regulatory proceedings.
EMPLOYMENT RISKS
The Company's future success depends, in significant part, upon the continued
service and performance of its senior management. Losing the services of some or
all of these individuals could impair the Company's ability to conduct its
business.
ENFORCEMENT RISKS
The enforcement of civil liabilities by investors under applicable U.S. federal
and state securities laws may be adversely affected because the Company is
organized under the laws of the Yukon Territory, Canada and none of its officers
or directors are residents of the United States.
As a result, it may be difficult or impossible for U.S. investors to effect
service of process upon the Company's officers or directors within the United
States. It may also be difficult to realize against the Company or its officers
or directors, in the United States, upon judgments of U.S. courts for civil
liabilities under applicable U.S. federal and state securities laws. Courts in
Canada or elsewhere may not enforce: (1) judgments of U.S. courts obtained in
actions against the Company or its officers or directors predicated upon the
civil liability provisions of applicable U.S. federal and state securities laws;
and (2) in original actions, liabilities against the Company or officers or
directors predicated upon such laws.
Additionally, the Company is organized under the laws of the Yukon Territory,
Canada and its principal operating assets are located outside of the United
States. Under bankruptcy laws in the United States, courts typically have
jurisdiction over a debtor's property, wherever it is located, including
property situated in other countries. Courts outside of the United States may
not recognize the U.S. bankruptcy court's jurisdiction. Accordingly, investors
may have trouble administering a U.S. bankruptcy case involving a Canadian
debtor with property located outside of the United States. Any orders or
judgments of a bankruptcy court in the United States may not be enforceable.
MISCELLANEOUS RISKS
Certain provisions of the Company's charter documents and the applicable
corporate legislation may discourage, delay or prevent a change of control or
changes in its management that shareholders consider favourable. Such
provisions include authorizing the issuance by its board of directors of
preferred stock
-8-
in series, providing for a classified board of directors with staggered,
three-year terms and limiting the persons who may call special meetings of
shareholders. See "Item 10. Additional Information - Articles and Bylaws".
In addition, the Investment Canada Act (the "ICA") may impose limitations on the
rights of non-Canadians to acquire the Company's common shares. See "Item 10.
Additional Information - Exchange Controls".
If a change of control or change in management is delayed or prevented, the
market price of the Company's common shares could decline.
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
The Company was originally incorporated in 1952 under the Canada Corporations
Act and was continued under the Canada Business Corporations Act in 1980 and
amalgamated with Metanetix Corporation and Canadian Capital Financial Markets
(C.C.F.M.) Inc. on January 1, 1995. The Company changed its name on January 22,
1999 from "Hariston Corporation" to "Midland Holland Inc." On January 24, 2000,
the Company was continued under the Business Corporations Act (Yukon) under the
name "Mercury Partners & Company Inc." On December 28, 2001, the Company
completed an amalgamation with Pacific Mercantile Company Limited ("PMCL"). The
Company's principal place of business is Suite 613, 375 Water Street, Vancouver,
British Columbia, Canada V6B 5C6 and its telephone number is (604) 689-7565.
At a special meeting of shareholders held on August 25, 1998, the slate of
nominee directors proposed by a dissident shareholder was elected. Following
the change in directorship, the Company initiated a comprehensive restructuring
plan, which included, among other things, monetizing all non-cash assets,
reducing corporate overhead expenses, consolidating the Company's share capital
and settling all outstanding litigation. In addition, the Company changed the
focus of its business from investing in a wide variety of start-up or early
stage businesses to engaging primarily in private equity and merchant banking
activities.
On September 26, 2001, shareholders of PMCL and the Company approved the
amalgamation between the companies (the "Amalgamation"). Prior to the
Amalgamation, PMCL was the largest shareholder of the Company, owning 2,250,219
common shares or approximately 49.5% of the Company.
Under the terms of the Amalgamation Agreement between the Company, PMCL and
940296 Alberta Ltd., a wholly owned subsidiary of the Company, each common share
of PMCL was exchanged for five common shares of the Company following the
amalgamation of PMCL and 940296 Alberta Ltd., resulting in 3,681,310 shares of
the Company being issued to the shareholders of PMCL. The 2,250,219 common
shares of the Company owned by PMCL, which had a carrying value of $322,191, are
held in treasury for cancellation. See Note 13 of the Company's consolidated
financial statements included elsewhere in this annual report.
BUSINESS OVERVIEW
The Company is a publicly traded financial services company engaging primarily
in private equity and merchant banking activities in Canada and the United
States. The Company's shares are quoted on the NASD OTC Bulletin Board ("OTC")
in the United States under the symbol "MYPIF" and on the TSX Venture Exchange,
in U.S. dollars, under the symbol "MYP.U". The Company's investment objective
is to acquire influential ownership in companies and, through direct
involvement, bring about the changes required to realize their potential value.
The Company concentrates on return on investment and cash
-9-
flow to build long-term shareholder value. Accordingly, the Company continually
evaluates its existing investments and operations and investigates the possible
acquisition of new businesses.
The Company is dedicated to reviewing meaningful investment opportunities in
public or private businesses that meet any of the following criteria:
(a) businesses that demonstrate consistently high earnings and free cash
flow;
(b) companies priced at a significant discount in terms of net asset value,
earnings multiples or other valuation criteria;
(c) publicly traded companies with unallocated working capital over $5.0
million and discontinued business operations;
(d) troubled businesses where value to the shareholders would be enhanced by
resolving financial or non-financial problems and/or restructuring; or
(e) companies which have under-performing management but still have
underlying business value.
The Company assists companies in developing their business through active
involvement in capital financing, acquisitions, business strategy development
and execution. The Company develops innovative solutions for projects that are
practical, responsible and pragmatic in their implementation. However, the
Company takes a cautious approach to new initiatives, selectively allocating
capital and concentrating on areas where its financial and management expertise
can be best applied.
The Company's principal sources of funds are its available cash resources, bank
financing, public financing and the revenues generated from the Company's
merchant banking activities and realized investment gains from the Company's
private equity operations. The Company has no recurring cash requirements other
than repayment of interest and principal on its debt, tax payments and corporate
overhead.
PRIVATE EQUITY
The Company's private equity operations include reviewing investment
opportunities in undervalued companies or assets, management or leveraged
buy-outs and turn around or workout situations. In furtherance of this strategy,
the Company often advises and invests in the restructuring of businesses that
are having financial distress or have defaulted on their debt obligations. The
Company earns advisory fees by providing strategic and financial advice for
clients. The following is a brief description of the Company's private equity
operations.
Undervalued Companies or Assets
The Company seeks influential ownership in companies or assets whose intrinsic
values are not fully reflected in their price. Specifically, the Company
invests in businesses that demonstrate consistently high earnings and free cash
flow and companies priced at a significant discount in terms of net asset value,
earnings multiples or other valuation criteria. The Company works to bring
about the changes required to realize the strategic value of those companies.
Management and Leveraged Buy-Outs
The Company invests and assists in arranging financing for a management or
succession-leveraged buy-out of a business. The Company invests in equity and
mezzanine securities arising from leveraged acquisitions and recapitalizations
and other similar types of transactions which involve significant
-10-
financial leverage. The Company structures transactions that allow owners to
sell part of their equity in advance of their departure while maintaining
management continuity.
Turn-Arounds or Workouts
The Company invests in the securities of distressed or troubled companies or
assets where the business value is evident but the company suffers from
financial or non-financial difficulties. The Company also invests in companies
with underperforming management, where the underlying business value is still
evident. The Company works to bring about the change required to realize the
strategic value of these businesses.
MERCHANT BANKING
The Company's merchant banking operations include financial and management
services for corporate finance transactions, including mergers and acquisitions,
bridge financing and corporate restructurings. Through merchant banking
partnerships, the Company provides companies and their management with
investment capital and financial direction. The Company receives fees for
services provided including options and other conversion privileges to
participate as an equity investor in businesses to which merchant banking
services have been provided. The following is a brief description of the
Company's merchant banking operations.
Mergers & Acquisitions
The Company is active in public company mergers and acquisitions transactions,
including unsolicited takeover bids. The Company assists companies in
identifying and financing acquisitions and provides recommendations regarding
financial restructuring.
Bridge Financing
The Company provides short-term bridge financing to companies to assist in
capital transactions or to further a company's business plans. While the time
period for which capital is committed varies according to the nature of each
transaction, the Company endeavours to ensure repayment terms of between three
and 12 months and is protected by the underlying security of the operation being
financed or through guarantees.
Corporate Restructuring
The Company provides creative and responsible solutions to restructure
businesses and their balance sheets so as to improve profitability. In certain
circumstances, a company's financial flexibility is enhanced by the company
acquiring loans owing to the company's traditional lenders, which are then
restructured on financial terms consistent with the company's immediate
requirements.
INVESTMENT REVIEW
Through its representatives on the board of directors and board committees, the
Company plays an active role in setting a company's long-term strategic plans
and assessing performance against approved business plans in companies in which
it invests. The Company monitors the performance of its investments by
requiring the chief executives of each company to present to their respective
boards business plans and financial forecasts and targets against which actual
performance can be measured.
-11-
ACQUISITIONS AND DISPOSITIONS
In September, 2001, the Company acquired a 37.5% interest in Mobile Energy
Systems Inc. ("MES"), a private oil and gas service company, as a result of the
acquisition of PMCL. MES was formed in 1998 by the current management of MES to
engage in the Canadian oil service business, primarily in well-site
accommodations. The Company and Mercury Finance Group Inc. ("MFG") provided the
initial mezzanine funding for MES and the Company has structured and placed over
Cdn $3 million in further financing since MES's inception. The Company sold its
controlling shareholder interest in MES pursuant to a share purchase agreement
among PMCL, MFG and Stephen Rota dated as of December 27, 2001 (the "Share
Purchase Agreement") for a profit of $471,372. Pursuant to the terms of the
Share Purchase Agreement each of PMCL and MFG received Cdn $750,000 in exchange
for all of their shareholdings in MES. The terms of the sale included the
release of the Company from its obligations under a guarantee and a release of
the Company and MFG from a postponement and assignment of claim agreement with a
Canadian Chartered bank. As part of the Company's merchant banking services the
Company previously provided an unlimited guarantee of Cdn $300,000 and a
postponement of the repayment of a Cdn $250,000 loan to MES. The Company has
been released from the guarantee and the postponement of claim has been
terminated.
During 2003, the Company increased its ownership interest in North Group Limited
("North Group") (formerly Takla Star Resources Ltd.) to 2,500,000 or
approximately 19.9% of the issued and outstanding shares of North Group through
purchases on the TSX Venture Exchange. North Group is a public mining and
investment company with cash, marketable securities loans receivable and
long-term investments of approximately Cdn $3.6 million. The shareholders of
North Group elected a dissident board of directors supported by the Company at
North Group's 2001 annual general meeting held on June 6, 2001. Following the
election of the Company's nominees to the board of North Group, the management
of the company embarked on a program to deliver increased value by reducing
overhead costs and disposing of all non-performing assets or investments.
As of December 31, 2001, the Company owned 1,916,950 common shares or 11% of
VisuaLABS Inc., a technology company whose share price had fallen dramatically
after it had announced that its technology may be fraudulent. The Company
purchased its shareholdings after the announcement of the alleged fraud as the
management of the Company perceived the shares of VisuaLABS to be trading well
below their cash value per share. The Company spent considerable time ensuring
shareholder rights were maintained during the restructuring of VisuaLABS. On
February 28, 2002 the British Columbia Securities Commission ruled in favour of
the Company and required shareholder approval of certain restructuring decisions
which VisuaLABS was attempting to implement. In May, 2002, the Company sold its
investment in VisuaLABS at a profit and entered into a settlement agreement with
VisuaLABS to recover its legal expenses.
As of December 31, 2003, the Company owned in aggregate 5,168,700 common shares
of Cybersurf Corp. ("Cybersurf") purchased through the facilities of the TSX
Venture Exchange. Cybersurf is the largest independent internet service provider
in Canada.
The Company proposed a dissident slate of directors for election at the November
27, 2002 Cybersurf shareholders' meeting. On November 12, 2002, Fairvest
Corporation, a leading provider of Canadian corporate governance research to
institutional investors, recommended that Cybersurf shareholders vote in favour
of the Company's slate of directors because Cybersurf's corporate governance
profile was unacceptable. The dissident slate was defeated by the Cybersurf
management slate by a narrow margin. The Company brought an application under
the Business Corporations Act (Alberta) in the Alberta Court of Queen's Bench
regarding issues relating to the Cybersurf meeting and the rulings of the chair
of the meeting. The Alberta court dismissed the application on February 21,
2003. The Company has appealed the decision. In April 2003, the Company
requested a meeting of Cybersurf shareholders which is expected to be held in
the fourth quarter of fiscal 2004 after being postponed twice.
-12-
During fiscal 2003, Cybersurf filed a Statement of Claim in the Alberta Court of
Queen's Bench against the Company, several of its directors and other defendants
claiming that the defendants conspired to illegally take over Cybersurf. The
Company is vigorously defending this matter and does not believe this claim will
have a significant effect on the Company's financial position or profitability.
COMPETITION
The Company currently competes against brokerage firms, investment bankers,
merchant banks and other investment managers for appropriate investments. Such
businesses are highly competitive and are subject to fluctuations based upon
many factors over which the Company has no control, such as the condition of
public markets, interest rates and the state of capital markets. Many of the
Company's competitors are national or international companies with far greater
resources, capital and access to information than the Company. As a result, the
Company may become involved in transactions with more risk than if it had
greater resources.
ORGANIZATIONAL STRUCTURE
The following is a list of the Company's significant, but inactive, operating
subsidiaries as of December 31, 2003:
JURISDICTION OF PROPORTION OF
SUBSIDIARY INCORPORATION OWNERSHIP INTEREST
- ---------- --------------- -------------------
Digital Labs Inc. Alberta, Canada 100%
Pearson Finance Group Ltd. Alberta, Canada 100%
PROPERTY, PLANTS AND EQUIPMENT
The Company's principal executive office is located in Vancouver, British
Columbia, Canada, and is leased.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis of the financial condition and results of
operations of the Company for the three years ended December 31, 2003, 2002 and
2001 should be read in conjunction with the consolidated financial statements
and related notes included in this annual report. The Company's financial
statements included herein were prepared in accordance with Canadian generally
accepted accounting principles and are expressed in U.S. dollars. Additional
information is presented to show the difference which would result from the
application of U.S. GAAP to the Company's financial information. For a
reconciliation of the Company's financial statements included herein to U.S.
GAAP, see Note 18 to the financial statements. Certain reclassifications may
have been made to the prior periods' financial statements to conform to the
current period's presentation.
Statements in this annual report, to the extent that they are not based on
historical events, constitute forward-looking statements within the meaning of
the United States Private Securities Litigation Reform Act of 1995. These
statements appear in a number of different places in this annual report and
include statements regarding the intent, belief or current expectations of the
Company and its directors or officers, primarily with respect to the future
market size and future operating performance of the Company and its
subsidiaries. Forward-looking statements include, without limitation, statements
regarding the outlook for future operations, forecasts of future costs and
expenditures, evaluation of market conditions, the outcome of legal proceedings,
the adequacy of reserves, or other business plans. Investors are cautioned that
any such forward-looking statements are not guarantees and may involve risks and
uncertainties, and that actual results may differ from those in the
forward-looking statements as a result of various factors such as general
economic and business conditions, including changes in interest rates, prices
and other economic conditions; actions by competitors; natural phenomena;
actions
-13-
by government authorities, including changes in government regulation;
uncertainties associated with legal proceedings; technological development;
future decisions by management in response to changing conditions; the
ability to execute prospective business plans; and misjudgements in the
course of preparing forward-looking statements.
RESTATEMENT OF FISCAL 2002 AND 2001 FINANCIAL STATEMENTS
In accordance with Emerging Issues Committee (EIC) 130 of The Canadian Institute
of Chartered Accounts (CICA) Handbook, the Company has changed from the temporal
method of accounting for foreign exchange translation to the current rate
method. Accordingly, the Company has restated its financial statements for the
years ending December 31, 2002 and 2001. Please see Note 3 to the Company's
financial statements for more information.
OPERATING RESULTS
The Company operates in both the United States and Canada and, as such, the
Company's consolidated financial results are subject to foreign currency
exchange rate fluctuations. The Company reports its results of operations in
U.S. dollars and translates assets and liabilities into U.S. dollars at the rate
of exchange on the balance sheet date. Unrealized gains and losses from
these translations are recorded on the consolidated balance sheet as "Cumulative
translation adjustment".
Realized investment gains or losses are a recurring element in the Company's
revenues and net earnings. Realized investment gains or losses may fluctuate
significantly from period to period, with a meaningful effect upon the Company's
consolidated net earnings. However, the amount of realized investment gain or
loss for any given period has no predictive value, and variations in amount from
period to period have no practical analytical value.
The Company's financial results for the past three years are summarized below.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2002 2001
2003 (AS RESTATED(1)) (AS RESTATED(1))
---------- ---------------------- ----------------------
Revenue $ 75,704 $ 184,341 $ 121,164
Expenses 176,804 153,450 253,702
Net loss (517,555) (364,789) (799,421)
Net loss per share (0.09) (0.06) (0.16)
(1) During fiscal 2003, the Company changed from the temporal method of
accounting for foreign exchange translation to the current rate method as
required by Emerging Issues Committee 130 issued by the Canadian Institute
of Chartered Accountants (see Note 2 to the Company's consolidated
financial statements). The standard requires restatement and therefore
financial statements presented for fiscal 2002 and 2001 have been restated.
For more information about the accounting change and restatement see Note 3
to the Company's consolidated financial statements.
Revenues during fiscal 2003, 2002 and 2001 were generated from the Company's
merchant banking operations, investment income from the Company's private equity
investments and oil and gas royalties. In fiscal 2003, the Company's revenues
decreased to $75,704 compared to revenues of $184,341 and $121,164 for the
periods ending December 31, 2002 and 2001, respectively.
Expenses increased to $176,804 in fiscal 2003 compared to $153,450 in fiscal
2002 and $253,702 in fiscal 2001. General and administrative expenses increased
marginally during the year as the Company no longer recovers Canadian Goods and
Services Taxes (GST) on goods and services purchased. The Company did not pay
management fees in 2003 or 2002 but paid management fees of $119,535 in 2001.
During the year ended December 31, 2003 the Company recorded a gain of $108,065
as a result of the recovery of loan and receivables which had been written off
in fiscal 2002. The Company recorded a charge of $426,950 against long-term
investments and paid $99,707 in exercise tax due to a re-assessment in GST,
which were recorded in other income.
-14-
The Company reported a net loss of $517,555 in fiscal 2003 compared to a net
loss of $364,789 in fiscal 2002 and a net loss of $799,421 in fiscal 2001.
Basic and diluted loss per common share was $0.09 in 2003 compared to losses of
$0.06 and $0.16 in fiscal 2002 and 2001, respectively.
The Company and certain of its subsidiaries have tax loss carry-forwards and
other tax attributes, the amount and availability of which are subject to
certain qualifications, limitations and uncertainties.
INFLATION
The Company does not believe that inflation has had a material impact on
revenues or income over the past three fiscal years.
FOREIGN CURRENCY
The Company's operations are conducted in international markets and its
consolidated financial results are subject to foreign currency exchange
rate fluctuations. During fiscal 2003 the Company changed from the temporal
method of accounting for foreign exchange translation to the current rate
method as required by EIC 130 issued by the CICA (see Note 2 to the
Company's consolidated financial statements). The standard requires
restatement and therefore, financial statements for all periods presented
have been restated. The cumulative impact of this change as at December 31,
2001 was to create a cumulative translation adjustment of $55,198, a
decrease of $26,001 in assets and an offsetting decrease in deficit of
$29,197. The impact of this change as at December 31, 2002 was a decrease
of $8,904 in cumulative translation adjustment, an increase of $17,154 in
assets and an offsetting decrease in deficit of $8,250. The impact of this
change on net loss for the years end December 31, 2002 and 2001 was a
decrease of $8,250 ($0.00 per share) and a decrease of $29,197 ($0.01 per
share), respectively.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's 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 periods.
Management routinely makes judgments and estimates about the effects of matters
that are inherently uncertain. As the number of variables and assumptions
affecting the probable future resolution of the uncertainties increase, these
judgments become even more subjective and complex. The Company has identified
certain accounting policies, described below, that are the most important to the
portrayal of its current financial condition and results of operations. The
significant accounting policies are disclosed in Note 2 to the consolidated
financial statements included in this annual report.
MARKETABLE SECURITIES
Marketable securities are recorded at the lower of cost or quoted market value
on a specific identification basis.
LONG-TERM INVESTMENTS
Investments in companies over which the Company has significant influence are
accounted for by the equity method, whereby the original cost of the shares is
adjusted for the Company's share of earnings or losses less dividends since
significant influence was acquired. Investments in which the Company has no
significant influence and that it intends to hold longer than one year are
accounted for on the cost basis and reported as long-term investments. Cost of
investments includes acquisition costs of shares as well as legal and consulting
costs related to maintaining the Company's interest. Investments are
written-down to their estimated net realizable value when there is evidence of a
decline in value below their carrying amount that is other than temporary.
-15-
A decline in market value may be only temporary in nature or may reflect
conditions that are more persistent. Declines may be attributable to general
market conditions, either globally or regionally, that reflect prospects of the
economy as a whole or prospects of a particular industry or a particular
company. Such declines may or may not indicate the likelihood of ultimate
recovery of the carrying amount of a security. Management regularly reviews the
Company's portfolio position to determine whether other than temporary
decline exists.
In determining whether the decline in value is other than temporary, quoted
market price is not the only deciding factor, particularly for thinly-traded
securities, large block holdings and restricted shares.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal assets consist of securities, loan and receivables, long
term investments and stock of its direct subsidiaries. The Company continuously
evaluates its existing operations and investigates possible acquisitions of new
businesses and dispositions of businesses in order to maximize its ultimate
economic value to shareholders. Accordingly, while the Company does not have any
material arrangement, commitment or understanding with respect thereto (except
as disclosed in this annual report), further acquisitions, divestitures,
investments and changes in capital structure are possible.
The Company's principal sources of funds are its available cash resources, bank
financing, public financing and the financial services fees generated from the
Company's merchant banking activities and investment gains from the Company's
private equity operations. The Company has no recurring cash requirements other
than repayment of interest and principal on its debt, tax payments and corporate
overhead.
At December 31, 2003, the Company's readily available cash and cash equivalents
decreased to $241,105 compared to $656,580 at December 31, 2002. Additional
sources of liquidity at December 31, 2003 included $110,000 in marketable
securities and $51,651 in loan and receivables, compared to $14,629 in
marketable securities and $51,001 in loans and receivables at
December 31, 2002. The market value of marketable securities as of December 31,
2003 was $390,580. Total current assets at December 31, 2003 fell to $402,756
from $722,210 the year earlier.
The Company believes that it has sufficient working capital to meet its present
requirements.
In fiscal 2003 operations used cash of $273,921 compared with operations
providing cash of $984,714 during fiscal 2002 and using cash of $203,909 during
fiscal 2001.
Investing activities used cash of $244,152 during fiscal 2003 compared to using
cash of $619,267 in fiscal 2002 and using cash of $565,162 in fiscal 2001.
Financing activities provided no cash in fiscal 2003, 2002 and 2001.
FINANCIAL POSITION
Total assets of the Company at December 31, 2003 were $2.1 million, compared to
$2.3 million at December 31, 2002. The Company's long-term assets included
meaningful equity ownership in TSX-Venture Exchange-listed companies:
North Group Limited and Cybersurf Corp.
North Group is a mining and investment company with cash, marketable securities,
loans receivable and long-term investments securities of approximately $3.6
million Canadian dollars. North Group trades on the TSX Venture Exchange under
the trading symbol "NOR".
-16-
The Company owned approximately 19% of the issued and outstanding shares of
North Group as of the year ended December 31, 2003. The shareholders of North
Group elected a dissident board of directors supported by the Company at the
North Group's 2001 annual general meeting. Following the election of the
Company's nominees to the board of North Group, the management of the Company
embarked on a program to deliver increased value by reducing overhead costs and
disposing of all non-performing assets or investments.
Cybersurf Corp.
As of December 31, 2003, the Company owned approximately 16% of the issued and
outstanding shares of Cybersurf, a Canadian independent internet service
provider (ISP) whose share price, in the Company's view, was suffering from a
combination of misguided business strategy, poor corporate governance and high
overhead. The Company was unsuccessful in having its nominees elected to the
board of Cybersurf at the company's annual general meeting held on November 28,
2002. In April 2003, the Company requested a meeting of Cybersurf shareholders
which is expected to be held in the fourth quarter of fiscal 2004 after being
postponed twice. During fiscal 2003, Cybersurf filed a Statement of Claim in the
Alberta Court of Queen's Bench against the Company, several of its directors and
other defendants claiming that the defendants conspired to illegally take over
Cybersurf. The Company is vigorously defending this matter and does not believe
this claim will have a significant effect on the Company's financial position or
profitability.
The Company's liabilities were reduced to $69,260 in fiscal 2003 from
$141,781 in fiscal 2002.
SHAREHOLDERS' EQUITY
Shareholders' equity declined to $2.0 million in fiscal 2003 from $2.1 million
in fiscal 2002 due largely to the net loss incurred during the year. The
Company had 8,183,733 shares issued and outstanding as of December 31, 2003 of
which 2,250,219 were held in treasury for cancellation.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
Not applicable.
TREND INFORMATION
For the current financial year, the Company is not aware of any trends,
uncertainties, demands, commitments or events that are reasonably likely to have
a material effect on the Company's net sales or revenues, income from continuing
operations, profitability, liquidity or capital resources, or that would cause
reported financial information not necessarily to be indicative of future
operating results or financial condition.
OFF-BALANCE SHEET ARRANGEMENTS
We do note have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
-----------------------------------------------------
less more
than 1 1-3 3-5 than 5
Contractual Obligations Total year years years years
- ----------------------- ----- ------ ----- ----- ------
Operating Lease Obligations $23,434 $21,616 $1,818 - -
------- ------- ------ ----- ------
Total $23,434 $21,616 $1,818 - -
======= ======= ====== ===== ======
-17-
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT; BOARD PRACTICES
The Company's Articles provide for three classes of directors with staggered
terms. Each director holds office until the expiry of his term or until his
successor is elected or appointed, unless his office is earlier vacated in
accordance with the Bylaws of the Company or with the provisions of the Business
Corporations Act (Yukon). At each annual meeting of the Company, a class of
directors is elected to hold office for a three year term. Successors to the
class of directors whose term expires are identified as being of the same class
as the directors they succeed and are elected to hold office for a term expiring
at the third succeeding annual meeting of shareholders. A director appointed or
elected to fill a vacancy on the board of directors holds office for the
unexpired term of his predecessor. Officers of the Company serve at the
discretion of the board of directors of the Company.
The following table sets out certain information concerning the directors and
executive officers of the Company:
Expiration of
Name and Present Current Term
Position with the Company Principal Occupation Director Since of Office
- ------------------------- --------------------- -------------- --------------
Tom S. Kusumoto(1)
President, Secretary
and Director Managing Director, President, August 25, 1998 2005(2)
and Secretary, Mercury Partners
& Company Inc.;
Director and President,
North Group Limited; Director
and President, Pacific Northwest
Partners Limited; Director,
Wavefire.com Inc.; formerly
corporate finance analyst with
Haywood Securities Inc.
Greg MacRae(1)
Director Director, Mercury August 7, 2003 2004(2)
Partners & Company Inc.; Director
and Secretary, Pacific Northwest
Partners Limited; Director, LML
Payment Systems Inc.; Director
and President, CSI Capital
Solutions Inc.; Director and
Secretary, North Group Limited
Alex W. Blodgett(1)
Director Director, Mercury Partners & August 25, 1998 2006(2)
Company Inc.; Managing Director,
Corporate Finance, Evans & Evans,
Inc.; Director, North Group
Limited; formerly, Vice President,
Oxford Bancorp Inc.; formerly,
Partner, Gordon Capital Corporation;
Formerly, Vice President of Corporate
Finance, Bankers Trust Company
(1) Members of the Audit Committee.
(2) Directors' terms expire at the Company's annual meeting
of shareholders for the applicable fiscal year. The annual meeting is typically
held following the completion at the fiscal year. The annual meeting for the
fiscal year ended December 31, 2003 is scheduled to be held on June 30, 2004, at
which Mr. MacRae's term will expire. Mr. MacRae has been nominated for election
to serve for a term of three years until the annual meeting of shareholders for
fiscal 2006, to be held in 2007.
There are no arrangements or understandings with major shareholders, customers
or others pursuant to which any person referred to above was selected as a
director or executive officer.
The Company does not have a Remuneration Committee of the board of directors.
The Company's board of directors is primarily responsible for determining the
compensation to be paid to the Company's executive officers and evaluating their
performance. The compensation of executives is based upon, among other things,
the responsibility, skills and experience required to carry out the functions of
each position held by each executive officer and varies with the amount of time
spent by each executive officer in carrying out his or her functions on behalf
of the Company. The President's compensation is additionally based upon the
responsibility, skills and experience required to conduct his functions and upon
the time spent by him in relation to the affairs of the Company. In setting
compensation rates for executive officers and the President, the board of
directors compares the amounts paid to them with the amounts paid to executives
in comparable positions at other comparable corporations.
-18-
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ON CHANGE OF CONTROL
There are no employment contracts between the Company and its directors or
executive officers, nor are there any arrangements with the Company's directors
or executive officers for compensation in the event of resignation, retirement
or any other termination with the Company or change in the directors' or
executive officers' responsibilities following a change of control.
COMPENSATION
During the fiscal year ended December 31, 2003, the Company did not pay any
compensation to its directors. The Company has not issued or granted any
incentive stock options to either the Company's directors or officers or any
other non-cash compensation, as more particularly described below. No other
funds were set aside or accrued by the Company during the fiscal year ended
December 31, 2003 to provide pension, retirement or similar benefits for
directors or officers of the Company pursuant to any existing plan provided or
contributed to by the Company.
The Company is required, under applicable securities legislation in Canada, to
disclose to its shareholders details of compensation paid to certain of its
directors and executive officers. The following fairly reflects material
information regarding compensation paid thereto.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid or accrued for services rendered to the Company in all
capacities during each of the last three financial years of the Company to its
Chief Executive Officer and to the other executive officers of the Company who
received a combined salary and bonus in excess of Cdn $100,000 during the
financial year ended December 31, 2003 (the "Named Executive Officer"):
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
------------ ------------
Awards
-------------
Fiscal Year Securities Under All Other
Name and Ended Salary Options Granted Compensation
Principal Position December 31, ($) (#) ($)
- ------------------ ------------- ------- ---------------- ------------
Tom S. Kusumoto(1) 2003 - - -
President 2002 - - -
2001 60,000(2) - -
- ----------------
(1) Tom S. Kusumoto was appointed President of the Company on August 25, 1998.
(2) Paid as fees to Geko Bank Corp., a company wholly-owned by Tom S. Kusumoto.
OPTIONS TO PURCHASE SECURITIES
The directors and officers of the Company do not have any incentive stock
options or warrants, and the Company's 1996 Stock Option Plan and 1996 Stock
Option Plan No. 2 were terminated by shareholder consent at an annual and
special meeting of the Company in December 1998. The Company has outstanding
incentive stock options entitling former directors of the Company to acquire an
aggregate of 120,000 common shares at an exercise price of $1.25 per share,
expiring February 2, 2005.
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FISCAL YEAR
The Company did not grant any options to the Named Executive Officer during the
fiscal year ended December 31, 2003.
-19-
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
The Named Executive Officer does not hold any options or freestanding SARs to
acquire securities of the Company and did not acquire any securities of the
Company on the exercise of options or freestanding SARs during the financial
year ended December 31, 2003.
EMPLOYEES
As at December 31, 2003, the Company employed three people.
SHARE OWNERSHIP
As at May 21, 2004, the Named Executive Officer beneficially owns, directly or
indirectly 552,490 shares, or approximately 6.75%, of the Company's outstanding
common shares.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
To the knowledge of the Company's directors and senior officers, the following
table sets forth certain information as at May 21, 2004 concerning the
ownership of the Company's common shares as to each person known by the
directors and senior officers, based solely upon public records and filings, to
be the direct and/or indirect owner of more than 5% of the Company's common
shares:
IDENTITY OF PERCENTAGE
TITLE OF CLASS PERSON OR GROUP AMOUNT OWNED OF CLASS
- -------------- -------------- ------------ ----------
Common Shares Tom S. Kusumoto(1) 552,490 6.75%
- ------------------
(1) The shares are held by Geko Bank Corp., a company wholly-owned by Tom S.
Kusumoto.
All of the Company's common shares carry the same voting rights. The Company's
officers and directors, as a group, own or control, directly or indirectly, an
aggregate of 552,490 common shares, representing approximately 6.75% of the
Company's outstanding common shares.
SHAREHOLDER DISTRIBUTION
As at May 17, 2004, there were approximately 62 holders of record of the
Company's common shares. Approximately 1,985,875, OR 24.3%, of the Company's
common shares are held of record by 32 U.S. holders.
RELATED PARTY TRANSACTIONS
Other than as disclosed herein, to the best of the Company's knowledge, there
have been no material transactions since January 1, 2003 to which the Company
was or is a party and in which a director or officer of the Company, or any
relative or spouse of any director or officer, or any relative of such spouse
who has the same home as such person or who is a director or officer of any
subsidiary of the Company, has or will have a direct or indirect material
interest, nor were any directors or officers of the Company, or any associates
of such directors or officers, indebted to the Company or any of its
subsidiaries during this period.
During the year ended December 31, 2002, the Company sold an investment in a
debenture to an investee company with common directors at a price equal to the
carrying amount of $71,012.
-20-
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See "Item 18. Financial Statements" for financial statements filed as part of
this annual report.
LEGAL PROCEEDINGS
The Company is subject to routine litigation incidental to the Company's
business and is named from time to time as a defendant in various legal actions
arising in connection with the Company's activities. The Company is also
involved from time to time, in investigations and proceedings by governmental
and self-regulatory agencies. Some of these legal actions, investigations and
proceedings may result in adverse judgements, penalties or fines.
In view of the inherent difficulty of predicting the outcome of such matters,
particularly in cases in which substantial damages are sought, the Company
cannot state what the eventual outcome of pending matters will be. The Company
is contesting the allegations made in each pending matter and believes, based on
current knowledge and after consultation with counsel, that the outcome of such
matters will not have a material adverse effect on the Company's consolidated
financial condition, but may be material to the Company's operating results for
any particular period, depending on the level of the Company's income for such
period.
The following is a description of material legal proceedings involving the
Company.
FORMER MONTANA OPERATIONS
In 1995, the Company's former subsidiary, Metanetix Corporation ("Metanetix"),
disposed of its minerals recovery project. In connection with this project, the
Company was subject to various United States federal, state and local statutes,
rules and regulations relating to environmental matters, including provisions
related to mine reclamation and the discharge of materials into the environment.
The Company may still be held liable for environmental clean-up costs
notwithstanding indemnities obtained from the property lessor and property
owners. Currently, no environmental liabilities have been identified or accrued
in the consolidated financial statements. No assurance can be given, however,
that a claim will not be made in the future. If such a claim is made and is
successful, the costs, damages and fines that may be imposed on the Company as a
result could be material.
CYBERSURF LITIGATION
During the year, Cybersurf filed a Statement of Claim in the Alberta Court of
Queen's Bench against the Company, several of its directors and other defendants
claiming that the defendants illegally attempted to takeover Cybersurf. The
Company is vigorously defending this matter and does not believe this claim will
have a significant effect on the Company's financial position or profitability.
DIVIDEND INFORMATION
The Company has not paid any dividends on its common shares during the past five
years.
Any decision to pay dividends on the common shares in the future will be made by
the board of directors on the basis of earnings, financial requirements and
other conditions existing at the time. Currently, the board does not intend to
pay any dividends.
-21-
SIGNIFICANT CHANGES
No significant changes have occurred since the date of the financial statements
provided in Item 18 below.
ITEM 9. THE OFFER AND LISTING
MARKETS AND PRICE HISTORY
The Company's common shares are quoted on the OTC Bulletin Board under the
symbol "MYPIF" and, on the TSX Venture Exchange, in U.S. dollars, under the
symbol "MYP.U". The following table sets forth the high and low sales prices of
the Company's common shares on the OTC and TSX Venture Exchange for the periods
indicated:
OTC TSX VENTURE EXCHANGE
--------------------- --------------------------
HIGH LOW HIGH LOW
-------- ------- -------- -------
ANNUAL HIGHS AND LOWS
1999 0.43 0.001 - -
2000(1) 1.25 0.125 0.20 0.15
2001 0.28 0.08 0.35 0.12
2002 0.76 0.15 0.65 0.13
2003 0.75 0.23 0.60 0.15
QUARTERLY HIGHS AND LOWS
2002
First Quarter 0.27 0.15 0.30 0.13
Second Quarter 0.51 0.24 0.55 0.35
Third Quarter 0.45 0.24 0.56 0.40
Fourth Quarter 0.76 0.24 0.65 0.45
2003
First Quarter 0.75 0.40 0.60 0.50
Second Quarter 0.55 0.35 0.55 0.35
Third Quarter 0.35 0.35 0.35 0.24
Fourth Quarter 0.35 0.23 0.24 0.15
MOST RECENT SIX MONTHS: HIGHS AND LOWS
2003
December 0.25 0.23 0.185 0.185
2004
January 0.23 0.23 0.185 0.17
February 0.23 0.23 0.19 0.17
March 0.23 0.23 0.19 0.19
April 0.23 0.15 0.22 0.15
May(2) 0.20 0.20 0.22 0.15
- ----------------
(1) The Company's common shares were listed on the TSX Venture Exchange as of
November 27, 2000.
(2) As of May 20, 2004.
ITEM 10. ADDITIONAL INFORMATION
ARTICLES AND BYLAWS
The Company is organized under the laws of the Yukon Territory, Canada and has
been assigned corporate access number 29234.
-22-
The Company's Articles and Bylaws do not contain a description of the Company's
objects and purposes, except insofar as to restrict the Company from carrying on
the business of a railway, steamship, air transport, canal, telegraph, telephone
or irrigation company. The Company may perform any and all corporate activities
permissible under the laws of the Yukon Territory.
The Company's Articles and Bylaws do not restrict a director's power to vote on
a proposal, arrangement or contract in which the director is materially
interested, vote compensation to themselves or any other members of their body
in the absence of an independent quorum or exercise borrowing powers. There is
no mandatory retirement age for the Company's directors and the Company's
directors are not required to own securities of the Company in order to serve as
directors.
The Company's authorized capital consists of an unlimited number of common
shares without par value and an unlimited number of class A preferred shares.
The Company's class A preferred shares may be issued in one or more series and
the Company's directors may fix the number of shares which is to comprise each
series and the designation, rights, privileges, restrictions and conditions
attaching to each series. Currently, the Company has not issued any class A
preferred shares.
Holders of the Company's common shares are entitled to receive notice of, attend
at and vote at all meetings of shareholders, except meetings at which only
holders of a specified class of shares are entitled to vote, receive any
dividend declared by the Company and, subject to the rights, privileges,
restrictions and conditions attaching to any other class of shares of the
Company, receive the remaining property of the Company upon dissolution,
liquidation or winding-up.
The Company's class A preferred shares of each series rank on a parity with the
Company's class A preferred shares of any other series and are entitled to a
preference over the Company's common shares with respect to the payment of
dividends and the distribution of assets or return of capital in the event of
liquidation, dissolution or winding-up of the Company.
The provisions in the Company's Articles attaching to the Company's common
shares and class A preferred shares may be altered, amended, repealed, suspended
or changed by the affirmative vote of the holders of not less than two-thirds of
the common shares and two-thirds of the class A preferred shares, respectively.
The Company's Articles provide for three classes of directors with staggered
terms. Each director holds office until the expiry of his term or until his
successor is elected or appointed, unless his office is earlier vacated in
accordance with the Company's Bylaws or with the provisions of the Business
Corporations Act (Yukon). At each annual meeting of the Company, a class of
directors is elected to hold office for a three-year term. Successors to the
class of directors whose term expires are identified as being of the same class
as the directors they succeed and are elected to hold office for a term expiring
at the third succeeding annual meeting of shareholders. A director appointed or
elected to fill a vacancy on the board of directors holds office for the
unexpired term of his predecessor.
An annual meeting of shareholders must be held at such time in each year not
later than 15 months after the last preceding annual meeting and at such place
as the Company's board of directors, or failing it, the Company's Chairman,
Managing Director or President, may from time to time determine. The holders of
not less than five percent of the Company's issued shares that carry the right
to vote at a meeting may requisition the Company's directors to call a meeting
of shareholders for the purposes stated in the requisition. The quorum for the
transaction of business at any meeting of shareholders is two persons present in
person or by proxy who together hold or represent by proxy in aggregate not less
than one-third of the Company's outstanding shares entitled to vote at the
meeting. Only persons entitled to vote, the Company's directors and auditor and
others who, although not entitled to vote, are otherwise entitled or required to
be present, are entitled to be present at a meeting of shareholders.
-23-
Except as provided in the ICA, there are no limitations specific to the rights
of non-Canadians to hold or vote the Company's common shares under the laws of
Canada or the Yukon Territory, or in the Company's charter documents. See
"Exchange Controls" below for a discussion of the principal features of the ICA
for non-Canadian residents proposing to acquire the Company's common shares.
As set forth above, the Company's Articles and Bylaws contain certain provisions
that would have an effect of delaying, deferring or preventing a change in
control of the Company, including authorizing the issuance by the Company's
board of directors of preferred stock in series, providing for a classified
board of directors with staggered, three-year terms and limiting the persons who
may call special meetings of shareholders. The Company's Articles and Bylaws do
not contain any provisions that would operate only with respect to a merger,
acquisition or corporate restructuring of the Company.
The Company's Bylaws do not contain any provisions governing the ownership
threshold above which shareholder ownership must be disclosed.
MATERIAL CONTRACTS
Except for contracts entered into in the normal course of business, there have
been no material contracts entered into by the Company during the preceding two
years.
EXCHANGE CONTROLS
There are presently no governmental laws, decrees or regulations in Canada which
restrict the export or import of capital, or which impose foreign exchange
controls or affect the remittance of interest, dividends or other payments to
non-resident holders of the Company's common shares. However, any remittances of
dividends to United States residents are subject to a 15% withholding tax (5% if
the beneficial owner of the dividends is a corporation owning at least 10% of
the Company's voting shares) pursuant to the Canada-U.S. Tax Convention (1980),
as amended (the "Treaty"). See "Item 10. Additional Information - Taxation".
Except as provided in the ICA, there are no limitations specific to the rights
of non-Canadians to hold or vote the Company's common shares under the laws of
Canada or the Yukon Territory, or in the Company's charter documents. The
following summarizes the principal features of the ICA for non-Canadian
residents proposing to acquire the Company's common shares. THIS SUMMARY IS OF
A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED TO
BE, LEGAL ADVICE TO ANY HOLDER OR PROSPECTIVE HOLDER OF THE COMPANY'S COMMON
SHARES, AND NO OPINION OR REPRESENTATION TO ANY HOLDER OR PROSPECTIVE HOLDER OF
THE COMPANY'S COMMON SHARES IS HEREBY MADE. ACCORDINGLY, HOLDERS AND
PROSPECTIVE HOLDERS OF THE COMPANY'S COMMON SHARES SHOULD CONSULT WITH THEIR OWN
LEGAL ADVISORS WITH RESPECT TO THE CONSEQUENCES OF PURCHASING AND OWNING THE
COMPANY'S COMMON SHARES.
The ICA governs the acquisition of Canadian businesses by non-Canadians. Under
the ICA, non-Canadian persons or entities acquiring "control" (as defined in the
ICA) of a corporation carrying on business in Canada are required to either
notify, or file an application for review with, Industry Canada. Industry
Canada may review any transaction which results in the direct or indirect
acquisition of control of a Canadian business, where the gross value of
corporate assets exceeds certain threshold levels (which are higher for
investors from members of the World Trade Organization ("WTO"), including
Americans, or WTO member-controlled companies) or where the activity of the
business is related to Canada's cultural heritage or national identity. No
change of voting control will be deemed to have occurred, for purposes of the
ICA, if less than one-third of the voting control of a Canadian corporation is
acquired by an investor.
If an investment is reviewable under the ICA, an application for review in the
form prescribed is normally required to be filed with Industry Canada prior to
the investment taking place, and the
-24-
investment may not be implemented until the review has been completed and the
Minister responsible for the ICA is satisfied that the investment is likely to
be of net benefit to Canada. If the Minister is not satisfied that the
investment is likely to be of net benefit to Canada, the non-Canadian applicant
must not implement the investment, or if the investment has been implemented,
may be required to divest itself of control of the Canadian business that is the
subject of the investment.
Certain transactions relating to the Company's common shares would be exempt
from the ICA, including:
(a) the acquisition of the Company's common shares by a person in the
ordinary course of that person's business as a trader or dealer in
securities;
(b) the acquisition of control of the Company in connection with the
realization of security granted for a loan or other financial assistance
and not for a purpose related to the provisions of the ICA; and
(c) the acquisition of control of the Company by reason of an amalgamation,
merger, consolidation or corporate reorganization following which the
ultimate direct or indirect control in fact of the Company, through
ownership of the Company's common shares, remains unchanged.
TAXATION
CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES
The Company considers that the following general summary fairly describes the
principal Canadian federal income tax consequences applicable to a holder of the
Company's common shares who is a resident of the United States, who is not, will
not be and will not be deemed to be a resident of Canada for purposes of the
Income Tax Act (Canada) (the "ITA") and any applicable tax treaty and who does
not use or hold, and is not deemed to use or hold, his common shares of the
Company in connection with carrying on a business in Canada (a "non-resident
holder").
This summary is based upon the current provisions of the ITA, the regulations
thereunder (the "Regulations"), the current publicly announced administrative
and assessing policies of the Canada Customs and Revenue Agency and the Treaty.
This summary also takes into account the amendments to the ITA and Regulations
publicly announced by the Minister of Finance (Canada) prior to the date hereof
(the "Tax Proposals") and assumes that all such Tax Proposals will be enacted in
their present form. However, no assurances can be given that the Tax Proposals
will be enacted in the form proposed, or at all. This summary is not exhaustive
of all possible Canadian federal income tax consequences applicable to a holder
of common shares of the Company and, except for the foregoing, this summary does
not take into account or anticipate any changes in law, whether by legislative,
administrative or judicial decision or action, nor does it take into account
provincial, territorial or foreign income tax legislation or considerations,
which may differ from the Canadian federal income tax consequences described
herein.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND SHOULD
NOT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR HOLDER
OR PROSPECTIVE HOLDER OF THE COMPANY'S COMMON SHARES, AND NO OPINION OR
REPRESENTATION WITH RESPECT TO THE TAX CONSEQUENCES TO ANY HOLDER OR PROSPECTIVE
HOLDER OF THE COMPANY'S COMMON SHARES IS MADE. ACCORDINGLY, HOLDERS AND
PROSPECTIVE HOLDERS OF THE COMPANY'S COMMON SHARES SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE INCOME TAX CONSEQUENCES OF PURCHASING, OWNING AND
DISPOSING OF THE COMPANY'S COMMON SHARES IN THEIR PARTICULAR CIRCUMSTANCES.
-25-
Dividends
Dividends paid on the Company's common shares to a non-resident holder will be
subject under the ITA to withholding tax at a rate of 25% subject to a reduction
under the provisions of an applicable tax treaty, which tax is deducted at
source by the Company. The Treaty provides that the ITA's standard 25%
withholding tax rate is reduced to 15% on dividends paid on shares of a
corporation resident in Canada (such as the Company) to residents of the United
States, and also provides for a further reduction of this rate to 5% where the
beneficial owner of the dividends is a corporation resident in the United States
that owns at least 10% of the voting shares of the corporation paying the
dividend.
Capital Gains
A non-resident holder is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of a common share of the Company
unless such share represents "taxable Canadian property" (as defined in the ITA)
to the holder thereof. The Company's common shares generally will be considered
taxable Canadian property to a non-resident holder if:
(a) the non-resident holder;
(b) persons with whom the non-resident holder did not deal at arm's length;
or
(c) the non-resident holder and persons with whom such non-resident holder
did not deal at arm's length,
owned or had an interest in an option in respect of not less than 25% of the
issued shares of any class of the Company's capital stock at any time during the
60-month period immediately preceding the disposition of such shares. In the
case of a non-resident holder to whom shares of the Company represent taxable
Canadian property and who is resident in the United States, no Canadian taxes
will generally be payable on a capital gain realized on such shares by reason of
the Treaty unless the value of such shares is derived principally from real
property situated in Canada.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain possible United States Federal
foreign income tax matters under current law, generally applicable to a U.S.
Holder (as defined below) of the Company's common shares who holds such shares
as capital assets. This discussion does not address all aspects of United States
Federal income tax matters and does not address consequences peculiar to persons
subject to special provisions of Federal income tax law, such as those described
below as excluded from the definition of a U.S. Holder. In addition, this
discussion does not cover any state, local or foreign tax consequences. See
"Certain Canadian Federal Income Tax Consequences" above.
The following discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations, published Internal Revenue Service
("IRS") rulings, published administrative positions of the IRS and court
decisions that are currently applicable, any or all of which could be materially
and adversely changed, possibly on a retroactive basis, at any time. In
addition, this discussion does not consider the potential effects, both adverse
and beneficial, of any recently proposed legislation which, if enacted, could be
applied, possibly on a retroactive basis, at any time. No assurance can be
given that the IRS will agree with such statements and conclusions, or will not
take, or a court will not adopt, a position contrary to any position taken
herein.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT INTENDED TO
BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO ANY
HOLDER OR PROSPECTIVE HOLDER OF THE COMPANY'S COMMON SHARES, AND NO OPINION OR
REPRESENTATION WITH RESPECT TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TO ANY SUCH HOLDER OR PROSPECTIVE HOLDER IS MADE. ACCORDINGLY,
-26-
HOLDERS AND PROSPECTIVE HOLDERS OF COMMON SHARES SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF
PURCHASING, OWNING AND DISPOSING OF THE COMPANY'S COMMON SHARES.
U.S. Holders
As used herein, a "U.S. Holder" includes a holder of the Company's common shares
who is a citizen or resident of the United States, a corporation created or
organized in or under the laws of the United States or of any political
subdivision thereof, any entity which is taxable as a corporation for U.S. tax
purposes and any other person or entity whose ownership of the Company's common
shares is effectively connected with the conduct of a trade or business in the
United States. A U.S. Holder does not include persons subject to special
provisions of Federal income tax law, such as tax-exempt organizations,
qualified retirement plans, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, broker-dealers,
non-resident alien individuals or foreign corporations whose ownership of the
Company's common shares is not effectively connected with the conduct of a trade
or business in the United States and shareholders who acquired their shares
through the exercise of employee stock options or otherwise as compensation.
Foreign Tax Credit
A U.S. Holder who pays (or has had withheld from distributions) Canadian income
tax with respect to the ownership of the Company's common shares may be
entitled, at the option of the U.S. Holder, to either a deduction or a tax
credit for such foreign tax paid or withheld. Generally, it will be more
advantageous to claim a credit because a credit reduces United States Federal
income taxes on a dollar-for-dollar basis, while a deduction merely reduces the
taxpayer's income subject to tax. This election is made on a year-by-year basis
and generally applies to all foreign income taxes paid by (or withheld from) the
U.S. Holder during that year. There are significant and complex limitations
which apply to the tax credit, among which is an ownership period requirement
and the general limitation that the credit cannot exceed the proportionate share
of the U.S. Holder's United States income tax liability that the U.S. Holder's
foreign source income bears to his or its worldwide taxable income. In
determining the application of this limitation, the various items of income and
deduction must be classified into foreign and domestic sources. Complex rules
govern this classification process. There are further limitations on the foreign
tax credit for certain types of income such as "passive income", "high
withholding tax interest", "financial services income", "shipping income", and
certain other classifications of income. THE AVAILABILITY OF THE FOREIGN TAX
CREDIT AND THE APPLICATION OF THESE COMPLEX LIMITATIONS ON THE TAX CREDIT ARE
FACT SPECIFIC AND HOLDERS AND PROSPECTIVE HOLDERS OF THE COMPANY'S COMMON SHARES
SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THEIR INDIVIDUAL CIRCUMSTANCES.
Passive Foreign Investment Corporation
The Company does not believe that it is a passive foreign investment corporation
(a "PFIC"). If a U.S. Holder disposes of shares in a PFIC, any resultant gain
will be subject to a tax that is determined by apportioning the gain pro rata
over the entire holding period of the shares. The amount of gain that is
apportioned to the current year, and to any pre-1987 holding period, is included
in the U.S. Holder's current income.
The tax on the amount apportioned to any prior years beginning with 1987 is
calculated using the highest tax rate in each applicable year. In addition,
interest compounded daily is charged on the tax due for each prior year from the
due date of the return for the respective year to the due date for the current
year. The interest rate is set quarterly. The U.S. Holder's current year tax is
increased by the special tax and interest on amounts apportioned to prior years.
A U.S. Holder can avoid this special tax and interest charge by making a
permanent election to treat a PFIC as a "qualified electing fund" and to report
in each year thereafter such shareholder's pro rata share
-27-
of the ordinary earnings and net capital gains of a PFIC. If the election is not
made in the first year that the U.S. Holder owns the shares, a special election
would have to be made to cleanse the effect of the prior year's holding periods.
These rules apply similarly to distributions from a PFIC that would be
considered excess distributions. Complex rules govern the determination of
applicable gains and excess distributions, the calculation of the amounts
allocated pro rata to prior years, the resultant tax and applicable interest,
and the qualified electing fund elections whether as pedigreed or non-pedigreed.
HOLDERS AND PROSPECTIVE HOLDERS OF COMMON SHARES OF A PFIC SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING THEIR INDIVIDUAL CIRCUMSTANCES.
DOCUMENTS ON DISPLAY
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with these
requirements, the Company files reports and other information with the SEC.
These materials, including this annual report and the exhibits hereto, may be
inspected and copied at the public reference facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices
at 175 West Jackson Boulevard, Suite 900, Chicago, Illinois 60604, and 233
Broadway, New York, New York 10279. Copies of the materials may be obtained
from the principal office of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The public may obtain information on the operation
of the SEC's public reference facilities by calling the SEC in the United States
at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that
contains reports, proxy statements and other information regarding registrants
that file electronically with the SEC.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risks that the Company is exposed to are changes in equity
prices which may affect the Company's results of operations and financial
condition. Other market risks include interest rate and foreign currency
exchange rate fluctuations. The Company manages its exposure to interest rate
fluctuations by maintaining its cash balances in deposits at banks and in highly
liquid short-term investments, which lowers the Company's exposure to interest
rate fluctuations. The Company has not entered into any derivative hedging
instruments to reduce the risk of exchange rate fluctuations.
The Company manages other risks through internal risk management policies. If
any of the variety of instruments and strategies the Company utilizes to manage
its exposure to various types of risk are not effective, the Company may incur
losses. Many of the Company's strategies are based on historical trading
patterns and correlations. However, these strategies may not be fully effective
in mitigating the Company's risk exposure in all market environments or against
all types of risk. Unexpected market developments may affect the Company's risk
management strategies during this time, and unanticipated developments could
impact its risk management strategies in the future.
Changes in trading prices of equity securities may affect the fair value of
equity securities or the fair value of other securities convertible into equity
securities. An increase in trading prices will increase the fair value and a
decrease in trading prices will decrease the fair value of equity securities or
instruments convertible into equity securities. The Company's financial
instruments which may be sensitive to fluctuations in equity prices are
investments and debt obligations.
The Company's reporting currency is the U.S. dollar. The majority of the
Company's foreign exchange rate exposure for financial statement reporting
purposes relates to the translation of the Company's Canadian dollar investments
into U.S. dollars which is impacted by changes in the exchange rate between the
U.S. dollar and the Canadian dollar. Significant fluctuations in the U.S. dollar
to Canadian dollar exchange rate affect the number of Canadian dollars required
to satisfy the Company's debts
-28-
denominated in U.S. dollars. As of December 31, 2003 the majority of all of the
Company's investments were in Canadian dollars.
The Company has prepared a sensitivity analysis to assess the impact of exchange
rate fluctuations on its 2003 operating results. Based on this analysis, the
Company estimates that a 5% increase in the exchange rate for the U.S. dollar to
the Canadian dollar would have decreased the Company's reported net
loss for 2003 by approximately $25,878.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
(a) We performed an evaluation of the effectiveness of our disclosure
controls and procedures that are designed to ensure that the material financial
and non-financial information required to be disclosed on Form 20-F and filed
with the Securities and Exchange Commission is recorded, processed, summarized
and timely reported. There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide
reasonable assurance of achieving their control objectives. Based upon and as
of the date of our evaluation, our Chief Executive Officer concluded that the
disclosure controls and procedures are effective to provide reasonable assurance
that information required to be disclosed in the reports we file and submit to
the Securities and Exchange Commission under the Exchange Act is recorded,
processed, summarized and reported as and when required.
(b) There have been no changes in our internal controls over financial
reporting or other factors that could significantly affect these controls during
fiscal 2003 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Alex Blodgett is an "audit committee
financial expert" as defined in Item 16A of Form 20-F under the Exchange Act,
and that Mr. Blodgett is independent under the applicable rules promulgated by
the SEC.
-29-
ITEM 16B. CODE OF ETHICS
On May 18, 2004 our board of directors adopted a Code of Ethics, as defined in
Item 16B of Form 20-F. Our Code of Ethics applies to our senior financial
officers, including our Chief Executive Officer and persons performing similar
functions, as well as to our directors and other officers and employees. Our
Code of Ethics is attached to this annual report as Exhibit 11.1.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table summarizes the aggregate fees billed to us by Davidson &
Company during the fiscal years ended December 31, 2003 and 2002:
YEARS ENDED DECEMBER 31,
--------------------------------------
2003 2002
---------- ----------
(Canadian dollars)
$ $
Audit Fees 36,500 27,050
Audit Related Fees - -
Tax Fees 6,650 4,550
All Other Fees - -
------- -------
Total 43,150 31,600
AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES
We have adopted pre-approval policies and procedures under which all audit and
non-audit services provided by our external auditors must be pre-approved by the
audit committee. Any service proposals submitted by external auditors need to be
discussed and approved by the audit committee. Once the proposed services are
approved, we formalize the engagement of service. The approval of any audit and
non-audit services to be provided by our external auditors is specified in the
minutes of our audit committee.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
1. Independent Auditors' Report on the consolidated financial statements of
the Company as at December 31, 2003 and 2002.
2. Consolidated Balance Sheets at December 31, 2003 and 2002.
3. Consolidated Statements of Operations for the years ended December 31,
2003, 2002 and 2001.
4. Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2003, 2002 and 2001.
5. Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001.
6. Notes to the Consolidated Financial Statements.
-30-
MERCURY PARTNERS & COMPANY INC.
-------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
(EXPRESSED IN U.S. DOLLARS)
---------------------------
DECEMBER 31, 2003
-------------------
-31-
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Mercury Partners & Company Inc.
We have audited the consolidated balance sheets of Mercury Partners & Company
Inc. as at December 31, 2003 and 2002 and the consolidated statements of
operations, shareholders' equity and cash flows for the years ended December 31,
2003, 2002 and 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States generally
accepted auditing standards. Those standards require that we plan and perform
an audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2003
and 2002 and the results of its operations and its cash flows for the years
ended December 31, 2003, 2002 and 2001 in accordance with Canadian generally
accepted accounting principles.
As described in note 3, the accompanying consolidated financial statements of
Mercury Partners & Company Inc., as at December 31, 2002 and the consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 2002 and 2001 have been restated.
"DAVIDSON & COMPANY"
Vancouver, Canada Chartered Accountants
February 13, 2004
-32-
MERCURY PARTNERS & COMPANY INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)
---------------------------------------
DECEMBER 31,
---------------------------------------
2002
2003 (AS RESTATED
- NOTE 3)
------------ -------------
ASSETS
CURRENT
Cash and cash equivalents $ 241,105 $ 656,580
Marketable securities (Note 4) 110,000 14,629
Loan and receivables (Note 5) 51,651 51,001
---------- ----------
Total current assets 402,756 722,210
LONG-TERM INVESTMENTS, COST (Note 6) 998,127 973,483
LONG-TERM INVESTMENTS, EQUITY (Note 6) 696,070 550,599
PROPERTY AND EQUIPMENT (Note 7) 11,267 14,579
---------- ----------
Total assets $2,108,220 $2,260,871
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities $ 69,260 $ 123,067
Due to related party (Note 8) - 18,714
---------- ----------
Total current liabilities 69,260 141,781
---------- ----------
CONTINGENCIES (NOTE 10)
COMMITMENT (NOTE 14)
SHAREHOLDERS' EQUITY
Capital stock
Authorized
Unlimited number of common shares
Unlimited number of Class A preferred shares
Issued and outstanding 8,183,733 shares at December 31, 2003
and 2002 3,456,139 3,456,139
Additional paid-in capital 971,859 971,859
Less: Treasury stock - 2,250,219 common shares at
December 31, 2003 and 2002 (1,294,050) (1,294,050)
Cumulative translation adjustment 391,131 (46,294)
Deficit (1,486,119) (968,564)
---------- -----------
Total shareholders' equity 2,038,960 2,119,090
---------- -----------
Total liabilities and shareholders' equity $2,108,220 $ 2,260,871
========== ===========
ORGANIZATION AND OPERATIONS (Note 1)
ON BEHALF OF THE BOARD
The accompanying notes are an integral part of these consolidated financial
statements.
-33-
MERCURY PARTNERS & COMPANY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. dollars)
---------------------------------------------
DECEMBER 31,
---------------------------------------------
2003 2002 2001
(AS RESTATED (AS RESTATED
- NOTE 3) - NOTE 3)
--------- ------------ ------------
REVENUE $ 75,704 $ 184,341 $ 121,164
--------- ----------- ------------
EXPENSES
Amortization 4,229 6,058 8,607
General and administrative (Note 9) 169,006 145,852 104,835
Directors and management fees 3,529 1,273 127,842
Interest 40 267 12,418
Total expenses 176,804 153,450 253,702
--------- ----------- -----------
INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE) (101,100) 30,891 (132,538)
--------- ----------- -----------
OTHER INCOME (EXPENSE)
Equity income (loss) (Note 6) 2,397 (17,975) -
Write-down of marketable securities (260) (16,147) (753,858)
Write-down of long-term investments (426,950) - -
Recovery (write-down) of loan and receivables
(Note 5) 108,065 (361,558) (3,425)
Excess accrual of accounts payable - - 93,029
Excise tax re-assessed (99,707) - -
Loss on settlement of lawsuit - - (2,629)
Total other expense, net (416,455) (395,680) (666,883)
--------- ----------- -----------
NET LOSS FOR THE YEAR $(517,555) $ (364,789) $ (799,421)
========= =========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.09) $ (0.06) $ (0.16)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 5,933,514 5,933,514 4,851,401
The accompanying notes are an integral part of these consolidated financial
statements.
-34-
MERCURY PARTNERS & COMPANY INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Expressed in U.S. dollars)
COMMON TREASURY
SHARES SHARES
---------------------- ADDITIONAL ------------------------ CUMULATIVE RETAINED
NUMBER OF PAID-IN NUMBER OF TRANSLATION EARNINGS
SHARES AMOUNT CAPITAL SHARES AMOUNT ADJUSTMENT (DEFICIT) TOTAL
--------- ---------- ---------- --------- ---------- ----------- -------- -----
BALANCE AT
DECEMBER 31, 2000 4,532,623 $ 2,608,777 $ - (200) $ (2,180) $ - $195,646 $2,802,243
Shares issued for
purchase of PMCL
(Note 13) 3,681,310 849,542 - - - - - 849,542
Shares cancelled (30,200) (2,180) - 200 2,180 - - -
Treasury shares
held for
cancellation
(Note 13) - - 971,859 (2,250,219) (1,294,050) - - (322,191)
Cumulative
translation
adjustment - - - - - (55,198) - (55,198)
Net loss
for the year - - - - - - (799,421) (799,421)
--------- ------------ -------- ---------- ---------- ---------- ---------- ---------
BALANCE AT
DECEMBER 31, 2001
(As restated
- Note 3) 8,183,733 3,456,139 971,859 (2,250,219) (1,294,050) (55,198) (603,775) 2,747,975
Cumulative
translation
adjustment - - - - - 8,904 - 8,904
Net loss for
the year - - - - - - (364,789) (364,789)
--------- ------------ -------- ---------- ---------- ---------- --------- ----------
BALANCE
DECEMBER 31, 2002
(As restated
- Note 3) 8,183,733 3,456,139 971,859 (2,250,219) (1,294,050) (46,294) (968,564) 2,119,090
Cumulative
translation
adjustment - - - - - 437,425 - 437,425
Net loss
for the year - - - - - - (517,555) (517,555)
--------- ------------ -------- ---------- ---------- ---------- -------- ----------
BALANCE AT
DECEMBER 31, 2003 8,183,733 $ 3,456,139 $971,859 (2,250,219) $(1,294,050) $ 391,131 $(1,486,119) $2,038,960
========= ============ ======== ========== =========== ========== =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-35-
MERCURY PARTNERS & COMPANY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. dollars)
---------------------------------------------
DECEMBER 31,
---------------------------------------------
2003 2002 2001
(AS RESTATED (AS RESTATED
- NOTE 3) - NOTE 3)
--------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the year $ (517,555) $ (364,789) $ (799,421)
Items not affecting cash and
cash equivalents:
Amortization 4,229 6,058 8,607
Equity (income) loss (2,397) 17,975 -
Write-down (recovery) of
loan and receivables (108,065) 361,558 3,425
Write-down of marketable securities 260 16,147 753,858
Write-down of long-term investments 426,950 - -
Excess accrual of accounts payable - - (93,029)
Changes in non-cash working capital
items:
Decrease in marketable securities 10,471 363,570 205,613
(Increase) decrease in loan and
receivables 15,624 603,423 (323,477)
Increase (decrease) in marketable
securities sold short - (70,360) 66,751
Increase (decrease) in accounts payable and
accrued liabilities (80,643) 30,418 (26,236)
Increase (decrease) in due to
related party (22,795) 18,714 -
--------- ----------- -----------
Net cash provided by (used in)
operating activities (273,921) 982,714 (203,909)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment - - 196
Long-term investment costs (244,152) (619,267) (636,222)
Acquisition costs for purchase of PMCL
(Note 13) - - (79,099)
Cash acquired on purchase of PMCL (Note 13) - - 149,963
--------- ----------- -----------
Net cash used in investing activities (244,152) (619,267) (565,162)
Effect of foreign exchange on cash and cash
equivalents 102,598 (8,250) (29,197)
--------- ----------- -----------
Change in cash and cash equivalents
during the year (415,475) 355,197 (798,268)
Cash and cash equivalents, beginning
of year 656,580 301,383 1,099,651
--------- ----------- -----------
Cash and cash equivalents, end of year $ 241,105 $ 656,580 $ 301,383
========= =========== ===========
CASH PAID DURING THE YEAR FOR INTEREST $ 40 $ 267 $ 12,418
========= =========== ===========
CASH PAID DURING THE YEAR FOR INCOME TAXES $ - $ - $ -
========= =========== ===========
SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS (Note 11)
The accompanying notes are an integral part of these consolidated financial
statements.
-36-
MERCURY PARTNERS & COMPANY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. ORGANIZATION AND OPERATIONS
Mercury Partners & Company Inc. (the "Company") is organized under the Yukon
Business Corporations Act. On December 28, 2001, the Company amalgamated with
Pacific Mercantile Company Limited (Note 13). The Company currently operates in
the financial services industry in Canada, engaging in private equity, merchant
banking, consulting activities and asset-based commercial lending.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles. The significant accounting
policies adopted by the Company are as follows:
Principles of consolidation
These consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant inter-company transactions and
balances have been eliminated upon consolidation.
Use of estimates
The preparation of financial statements in accordance with Canadian 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 amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less.
Marketable securities
Marketable securities are recorded at the lower of cost or quoted market value
on a specific identification basis.
Loans and receivables
Provisions are made for doubtful accounts and loan losses on an individual
basis.
-37-
Long-term investments
Investments in companies over which the Company has significant influence are
accounted for by the equity method, whereby the original cost of the shares is
adjusted for the Company's share of earnings or losses less dividends since
significant influence was acquired. Investments in which the Company has no
significant influence and that it intends to hold longer than one year are
accounted for on the cost basis. Cost of investments includes acquisition costs
of shares as well as legal and consulting costs related to maintaining the
Company's interest. Investments are written-down to their estimated net
realizable value when there is evidence of a decline in value below their
carrying amount that is other than temporary.
Property and equipment
Property and equipment are recorded at cost less accumulated amortization.
Amortization is provided for on a straight-line basis over the estimated useful
lives of the assets as follows:
Furniture and equipment 5 years
Computer equipment 3 years
Leasehold improvements 5 years
Foreign currency translation
The Company's functional currency is the Canadian dollar. The Company changed
from the temporal method of accounting for foreign exchange to the current rate
method, in accordance with EIC 130 of the CICA Handbook. Under the current rate
method, all assets and liabilities are translated into United States dollars at
the rate of exchange at the balance sheet date. Any revenues and expenses are
translated into United States dollars at the average rate of exchange throughout
the year. Gains and losses arising from translation of the financial statements
are disclosed as a separate component of shareholders' equity. The Company has
adopted the current rate method for all periods presented (Note 3).
Revenue recognition
Revenue consists of gains or losses from trading securities, interest income
from a loan, investments of cash and cash equivalents, royalty revenue and
management and merchant banking fees. Gains and losses from trading are
recorded when securities are disposed of. Interest income is recognized when
earned using the effective interest method. Management and merchant banking fees
are recorded when services are provided. Oil and gas royalty revenue from the
Company's pro rata interest in oil and gas claims in Alberta are recorded when
received.
Loss per share
The Company uses the treasury stock method to compute the dilutive effect of
options, warrants and similar instruments. Under this method the dilutive
effect on loss per share is recognized on the use of the proceeds that could be
obtained upon exercise of options, warrants and similar instruments. It assumes
that the proceeds would be used to purchase common shares at the average market
price during the period. This calculation proved to be anti-dilutive for the
years ended December 31, 2003, 2002 and 2001. The dilutive instrument consists
of stock options convertible into 120,000 common shares for the years presented.
Basic loss per share is calculated using the weighted-average number of common
shares outstanding during the year.
-38-
Stock-based compensation
From January 1, 2002 to December 31, 2002, in accordance with CICA Handbook
Section 3870, the Company used the intrinsic value-based method, which
recognizes compensation cost for awards to employees only when the market price
exceeds the exercise price at date of grant, but requires pro-forma disclosure
of earnings and earnings per share as if the fair value method had been adopted.
Any consideration paid by the option holders to purchase shares is credited to
capital stock.
Effective January 1, 2003, in accordance with CICA Handbook Section 3870, the
Company adopted, on a prospective basis, the fair value based method of
accounting for all stock-based compensation. There is no impact for the years
presented.
Income taxes
Future income taxes are recorded using the asset and liability method, whereby
future income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Future tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply when the asset is realized or
the liability settled. The effect on future tax assets and liabilities of a
change in tax rates is recognized in income in the period that substantive
enactment or enactment occurs. To the extent that the Company does not consider
it to be more likely than not that a future tax asset will be recovered, it
provides a valuation allowance against the excess.
Comparative figures
Certain comparative figures have been reclassified to conform to the current
year's presentation.
3. CHANGE IN ACCOUNTING POLICY
During the current year, the Company changed from the temporal method of
accounting for foreign exchange translation to the current rate method as
required by EIC 130 issued by the CICA (Note 2). The standard requires
restatement and therefore, financial statements for all periods presented have
been restated. The cumulative impact of this change as at December 31, 2001 was
to create a cumulative translation adjustment of $55,198, a decrease of $26,001
in assets and an offsetting decrease in deficit of $29,197. The impact of this
change as at December 31, 2002 was a decrease of $8,904 in cumulative
translation adjustment, an increase of $17,154 in assets and an offsetting
decrease in deficit of $8,250. The impact of this change on net loss for the
years end December 31, 2002 and 2001 was a decrease of $8,250 ($0.00 per share)
and a decrease of $29,197 ($0.01 per share), respectively.
-39-
4. MARKETABLE SECURITIES
=====================================================================================
2003 2002
------------------------ -----------------------
Fair Value Cost Fair Value Cost
---------- ------- ---------- -------
Fixed Income Securities
Canadian Bonds or Debentures $ - $ - $ - $ -
---------- ------- ---------- -------
Variable Income Securities
Publicly Traded Securities
Canadian 84,050 1,935 93,908 14,629
American 306,530 108,065 - -
---------- ------- ---------- -------
Total Variable Income Securities 390,580 110,000 93,908 14,629
---------- ------- ---------- -------
Total Marketable Securities $390,580 $110,000 $ 93,908 $14,629
=====================================================================================
5. LOAN AND RECEIVABLES
2003 2002
-------- ---------
Loan $ 48,563 $ 33,346
Receivables 3,088 17,655
-------- --------
$ 51,651 $ 51,001
======== ========
Included in loan and receivables at December 31, 2001 was an outstanding
convertible debenture of $200,000 bearing interest at 10% per annum, to mature
on August 23, 2004. The debenture was convertible into common shares of the
borrower at the rate of CDN$11.00 per common share. The debenture was secured
and subordinated to certain future senior indebtedness. The debenture, as well
as $161,558 in loan and receivables, were written-off during the year ended
December 31, 2002 as management determined the balances to be uncollectable.
During the year ended December 31, 2003, a loan in the amount of $108,065, which
had been written-down during the 2002 fiscal year, was recovered in the form of
common shares of a public U.S. company having a market price of $306,530 at
December 31, 2003. The recovery and investment have been recorded at the
carrying amount of the original loan.
Included in loan and receivables is a secured loan bearing interest at 18%
per annum totalling $48,563 (2002 - $33,346).
-40-
6. LONG-TERM INVESTMENTS
========================================================================================
2003 2002
------------------------- ------------------------
Fair Value Cost Fair Value Cost
---------- -------- ---------- ----------
Investments carried at cost $ 718,651 $ 998,127 $ 458,886 $ 973,483
Investments carried at equity 492,430 696,070 380,493 550,599
---------- ---------- --------- ----------
Total $1,211,081 $1,694,197 $ 839,379 $1,524,082
========================================================================================
========================================================================================
2003 2002
------------------------- ------------------------
Fair Value Cost Fair Value Cost
---------- -------- ---------- ----------
Fixed Income Securities
Canadian Bonds or
Debentures $ - $ - $ - $ -
---------- ---------- --------- ----------
Variable Income Securities
Canadian (publicly
traded securities) 1,211,081 1,694,197 839,379 1,524,082
---------- ---------- --------- ----------
Total Long-term investments $1,211,081 $1,694,197 $839,379 $1,524,082
========================================================================================
Investments carried at equity
As at December 31, 2003 and 2002, the Company held a 19% interest in the common
shares of North Group Limited ("North Group"). Since the companies also have
common directors and management, the Company has significant influence over
North Group and has recorded equity income (loss) totalling $2,397 (2002 -
$(17,975)).
At December 31, 2003, the Company's interest in the book value of North Group's
net assets totalled $542,754 (2002 - $429,012). The investment is carried at
$696,070 (2002 - $550,599) and has not been written-down as the Company
considers the decline to be temporary and that there is no permanent impairment
in value.
7. PROPERTY AND EQUIPMENT
2003 2004
------------------------------------- ------------------------------------
NET NET
ACCUMULATED BOOK ACCUMULATED BOOK
COST AMORTIZED VALUE COST AMORTIZED VALUE
------------------------------------- -----------------------------------
Furniture and
equipment $ 34,159 $ 27,769 $ 6,390 $ 31,431 $ 22,959 $ 8,472
Computer
equipment 52,626 47,875 4,751 48,424 42,493 5,931
Leasehold
Improvements 3,880 3,754 126 3,571 3,395 176
------------------------------------- -----------------------------------
$ 90,665 $ 79,398 $11,267 $ 83,426 $ 68,847 $ 14,579
===================================== ===================================
-41-
The Company holds an interest in certain oil and gas properties in Alberta with
a value of $Nil (2002 - $Nil). Title to the properties is subject to a dispute
(Note 10).
8. RELATED PARTY TRANSACTIONS
A balance of $Nil (2002 - $18,714) was owing to an investee company with common
directors. The balance was without interest or stated terms of repayment.
As part of the Company's merchant banking activities, the Company usually
appoints a representative to the client company's board of directors.
Accordingly, such transactions are deemed to be related party transactions in
nature.
The Company entered into the following transactions with related parties:
a) Paid or accrued $Nil (2002 - $Nil; 2001 - $119,535) in management fees to
private companies of the executive management of the Company.
b) Sold an investment in a debenture to an investee company with common
directors at a price equal to the carrying amount of $Nil (2002 -
$71,012).
c) Recovered acquisition costs of $Nil (2002 - $Nil; 2001 - $91,810) from an
investee company with common directors for expenditures related
to proxy solicitation costs.
d) Paid or accrued directors fees of $3,529 (2002 - $1,273; 2001 - $Nil) to
directors of the Company.
These transactions are in the normal course of operations and are measured at
the exchange amount, which is the amount of consideration established and agreed
to by the related parties.
9. GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs include the following expenses:
======================================================================================
2003 2002 2001
-------- -------- --------
Consulting fees, salaries and benefits $ 47,861 $ 27,135 $ 31,300
Non-recoverable GST 14,062 - -
Office and supplies 3,583 7,085 40,973
Professional fees 89,405 105,677 19,298
Regulatory, transfer agent and shareholder communication 14,095 5,955 13,264
-------- -------- --------
$169,006 $145,852 $104,835
======================================================================================
-42-
10. CONTINGENCIES
Environmental contingencies
The Company disposed of its minerals recovery project in 1995. In connection
with this project, the Company was subject to various United States federal,
state and local statutes, rules and regulations relating to environmental
matters, including provisions related to mine reclamation and the discharge of
materials into the environment. The Company may still be held liable for
environmental clean-up costs notwithstanding indemnifications obtained from the
property lessor and property owners. Currently, no environmental liabilities
have been identified or accrued in these consolidated financial statements.
Litigation
A statement of claim has been filed against the Company to recover certain oil
and gas properties (Note 7), which the claimant alleges were sold to it by the
former management of the Company. The Company believes these oil and gas
properties were not included as part of the properties sold to the claimant.
Cybersurf Corp. has filed a statement of claim for $6,000,000 in damages and
other relief, claiming that the Company engaged in improper actions during the
Company's attempt to replace the board of directors of Cybersurf at its annual
general meeting held on November 28, 2003. As a result of the statement of
claim, Cybersurf was also able to postpone its next annual general meeting until
the case can be heard. It will be almost two years before Cybersurf holds its
next annual general meeting. The Company is Cybersurf's largest shareholder.
Subsequent to year end, a court judgment was issued against the Company for
approximately $81,000 for costs related to the election of directors of
Cybersurf. This amount was paid subsequent to year end and has not been included
in the current year as the Company intends to appeal this decision.
The Company has been notified of certain additional legal claims. In the opinion
of management these claims are without merit and no provision has been made for
them in the accounts. The likelihood and amount of any loss is not determinable.
11. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
Significant non-cash transaction for the year ended December 31, 2003 included:
a) The Company receiving common shares in a U.S. public company as
settlement of a $108,065 loan, which was written off in 2002.
There were no significant non-cash transactions during the year ended December
31, 2002.
Significant non-cash transactions for the year ended December 31, 2001 included:
a) The Company issuing 3,681,310 common shares to acquire PMCL (Note 13).
b) The Company cancelling 200 common shares returned to treasury with a
value of $2,180.
-43-
12. STOCK OPTIONS
During the years ended December 31, 2003, 2002 and 2001, no stock options were
granted, exercised, forfeited or cancelled.
The following is a summary of the status of stock options outstanding to former
management at December 31, 2003:
==============================================================================================
Outstanding Options Exercisable Options
- ----------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price of Shares Life (Years) Price of Shares Price
- --------------- --------- ------------ --------- --------- ---------
$ 1.25 120,000 1 $ 1.25 120,000 $ 1.25
===============================================================================================
13. BUSINESS COMBINATION
In June 2001, Pacific Mercantile Company Limited ("PMCL"), which owned 2,250,219
common shares, or approximately 49.5% of the Company, began discussions
concerning the amalgamation of the two companies.
On September 26, 2001, shareholders of the Company and PMCL approved the
amalgamation of the Company, PMCL and a wholly-owned subsidiary of the Company
("Amalco") (collectively the "Amalgamation"). Under the terms of the
Amalgamation, which became effective as of September 28, 2001, each common share
of PMCL was exchanged for five common shares of the Company resulting in
3,681,310 shares of the Company being issued to the shareholders of PMCL. The
2,250,219 common shares of the Company owned by PMCL are held in treasury for
cancellation. The carrying value of these shares was $322,191. The return to
treasury resulted in a reduction of the capital stock of the Company of
$1,294,050 and the difference of $971,859 being recorded as "additional paid-in
capital" on the Company's balance sheet.
The acquisition of PMCL was between related parties and was accounted for by the
purchase method. Since the acquisition was a non-monetary transaction between
related parties, the net assets of PMCL were recorded at book values. The
purchase has been recorded as follows:
===========================================================================
Cash and cash equivalents $ 149,963
Receivables 63,629
Loan and receivables 1,585
Investments in and advances to affiliated companies 617,544
Marketable securities 176,878
Capital assets 2,009
Accounts payable and accrued liabilities (82,967)
Acquisition costs (79,099)
----------
Value of shares issued $ 849,542
===========================================================================
-44-
The consolidated balance sheet includes the accounts of the Company and PMCL.
The consolidated statements of operations and cash flows for the 2001 fiscal
year include the Company's results of operations and cash flows from January 1,
2001 and PMCL's results of operations and cash flows from September 28, 2001
(date of acquisition).
14. COMMITMENT
The Company is committed to the following annual payments under a long-term
lease for premises:
2004 $ 21,616
2005 1,818
15. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
marketable securities, loan and receivables, accounts payable and accrued
liabilities and due to related party. The Company does not believe it is subject
to any significant concentration of credit risk. Although cash and cash
equivalents balances are held in excess of federally insured limits, they are in
place with major financial institutions and major corporations. Loan and
receivables are secured by assets. The fair value of these financial instruments
approximates their carrying values unless otherwise noted.
Market risk is the risk that the value of a financial instrument might be
adversely affected by a change in commodity prices, interest rates or currency
exchange rates. The Company manages the market risk associated with commodity
prices, interest rates and currency exchange rates by establishing and
monitoring parameters that limit the type and degree of market risk that may be
undertaken.
16. INCOME TAXES
A reconciliation of income tax expense at Canadian statutory rates with the
reported taxes is as follows:
2003 2002 2001
-----------------------------------
Loss before income taxes $(517,555) $(364,789) $(799,421)
===================================
Expected income tax recovery $(194,704) $(144,529) $(332,719)
Equity (income) loss (969) 7,118 -
Expense unrecognized (recognized) for tax purposes 167,096 (44,398) (10,436)
Unrecognized benefit of non-capital losses 28,577 181,809 343,155
-----------------------------------
Total income taxes $ - $ - $ -
===================================
-45-
Details of the Company's future income tax assets are as follows:
2003 2002
---------------------------
Future income tax assets:
Non-capital losses available for future periods $ 934,097 $ 944,009
Property and equipment 73,442 64,453
Other items 171,073 27,916
----------------------------
1,178,612 1,036,378
Valuation allowance (1,178,612) (1,036,378)
----------------------------
$ - $ -
============================
The Company has non-capital losses of approximately $2,622,400 available to
reduce future years' taxable income, which expire through to 2010. The Company
also has net capital losses of approximately $4,910,000 which can be carried
forward indefinitely and applied against future years' taxable capital gains.
Future tax benefits of these losses have been offset by a valuation allowance
and have not been recognized in these consolidated financial statements.
17. SEGMENT INFORMATION
The Company has determined that it has one operating and reportable segment,
being the financial services industry, in Canada. Services include private
equity and merchant banking and asset-based commercial lending as described in
Note 1.
18. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("Canadian GAAP"). The
material variations in the accounting principles, practices, methods and
disclosures used in the preparation of these consolidated financial statements
from principles, practices, methods and disclosures accepted in the United
States ("U.S. GAAP") and in SEC Regulation S-X are described and quantified
below.
The impact of the differences between Canadian GAAP and U.S. GAAP on the
consolidated balance sheets, statements of operations and cash flows would be as
follows:
2003 2002
------------------------
BALANCE SHEETS
Current assets, Canadian GAAP $ 402,756 $ 722,210
Unrealized holding gains on trading securities 280,580 79,279
------------------------
Current assets, U.S. GAAP 683,336 801,489
Long-term investments, cost, Canadian GAAP 998,127 973,483
Unrealized holding loss on available-for-sale securities (279,476) (514,597)
------------------------
Long-term investments, cost, U.S. GAAP 718,651 458,886
-46-
Long-term investments, equity, Canadian GAAP and U.S. GAAP 696,070 550,599
Property and equipment, Canadian GAAP and U.S. GAAP 11,267 14,579
------------------------
Total assets, U.S. GAAP $2,109,324 $1,825,553
========================
Total liabilities, Canadian GAAP and U.S. GAAP $ 69,260 $ 141,781
Shareholders' equity, Canadian GAAP $2,038,960 $2,119,090
Unrealized holding loss on available-for-sale securities (279,476) (514,597)
Unrealized holding gain on trading securities 280,580 79,279
Shareholders' equity, U.S. GAAP 2,040,064 1,683,772
-----------------------
Total liabilities and shareholders' equity, U.S. GAAP $2,109,324 $1,825,553
=======================
2003 2002 2001
----------------------------------
STATEMENTS OF OPERATIONS
Net loss for the year, Canadian GAAP $(517,555) $(364,789) $(799,421)
Unrealized holding gain on trading securities 280,580 79,279 -
Net loss for the year, U.S. GAAP $(236,975) $(285,510) $(799,421)
---------------------------------
Basic and diluted loss per share, U.S. GAAP $ (0.04) $ (0.05) $ (0.16)
=================================
At December 31, 2003, 2002 and 2001, the total number of potentially dilutive
shares excluded from net loss per share was 120,000.
There is no impact on cash flows as the adjustments to the carrying values of
marketable securities and long-term investments required under U.S. GAAP are
comprised of unrealized holding gains and losses only.
Foreign currency translation
Under Canadian GAAP, the Company translated its non-monetary assets and
liabilities at historical rates and recorded gains and losses from translation
in the statement of operations during the years ended December 31, 2002 and
2001. Under U.S. GAAP, the current rate method is used and gains and losses
from foreign exchange translation are recorded as a separate component of
shareholders' equity. The effect of the difference in these translation methods
has been reflected in the change in accounting policy restatement in Canadian
GAAP as per Note 3.
Stock-based compensation
Under U.S. GAAP, Statements of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS 123") requires companies to
establish a fair market value based method of accounting for stock-based
compensation plans. In previous years, the Company has chosen to account for
stock-based compensation using Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees". Accordingly, compensation cost for
stock options were measured as the excess, if any, of the quoted market price of
the Company's stock at the date of grant over the option price. Effective for
fiscal years ending after December 15, 2002, the FASB issued Statements of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS
148"). SFAS 148 amends FASB Statement No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of FASB Statement No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based
-47-
employee compensation and the effect of the method used on reported results. The
Company adopted the fair value based method effective January 1, 2003.
Under Canadian GAAP, the reporting of stock-based compensation expense in the
Company's consolidated financial statements was not required for the year ended
December 31, 2001. New accounting and disclosure standards were introduced
under Canadian GAAP (see Note 2) for the fiscal year ending December 31, 2002.
No stock-based compensation has resulted from the use of SFAS 123 and SFAS 148
during the years ended December 31, 2003, 2002 and 2001.
Marketable securities
For Canadian GAAP purposes, short-term marketable securities are carried at the
lower of cost or quoted market value on a specific identification basis, with
any unrealized loss included in the statements of operations. Long-term
investments are carried on the cost or equity basis and only written-down when
there is evidence of a decline in value that is other than temporary.
Under U.S. GAAP, Statements of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115")
requires that certain investments be classified into available-for-sale or
trading securities stated at fair market values. Any unrealized holding gains
or losses are to be reported as a separate component of shareholders' equity
until realized for available-for-sale securities and included in earnings for
trading securities. Under SFAS 115, the Company's investment in marketable
securities in the amount of $110,000 (2002 - $14,629) would be classified as
trading securities and its investment in long-term investment securities carried
at cost in the amount of $998,127 (2002 - $973,483) would be classified as
available-for-sale securities.
Gross Gross
Carrying Unrealized Unrealized Market
Value Gain Loss Value
-------------------------------------------------
2003
Trading securities $ 110,000 $ 280,580 $ - $ 390,580
Available-for-sale securities 998,127 - (279,476) 718,651
-------------------------------------------------
$1,108,127 $ 280,580 $ (279,476) $1,109,231
=================================================
Gross Gross
Carrying Unrealized Unrealized Market
Value Gain Loss Value
--------- ----------- ------------ --------
2002
Trading securities $ 14,629 $ 79,279 $ - $ 93,908
Available-for-sale securities 973,483 - (514,597) 458,886
----------------------------------------------
$ 988,112 $ 79,279 $ (514,597) $552,794
==============================================
Equity investments
U.S. GAAP requires disclosure of summarized financial information for
significant equity investments while Canadian GAAP does not. The Company's
investment in its equity investee represents approximately 33% (2002 - 24%) of
the Company's total assets. Summarized financial information of North Group
(audited in accordance with Canadian GAAP) for the years ended December 31, 2003
and 2002 is as follows:
-48-
2003 2002
-----------------------
OPERATING RESULTS
Revenues $ 77,270 $ 53,697
Operating income (loss) 10,608 (93,969)
Net income (loss) 10,608 (93,969)
Comprehensive income (loss) 10,608 (93,969)
=======================
FINANCIAL POSITION
Current assets. $1,101,353 $1,711,916
Non-current assets 1,659,811 606,616
---------- ----------
Total assets 2,761,164 2,318,532
=======================
Current liabilities $ 32,293 $ 86,038
Capital stock 2,832,169 2,336,457
Deficit (103,298) (103,963)
---------- ----------
Total liabilities and stockholders' equity $2,761,164 $2,318,532
=======================
The financial position and results of operations have been translated from
Canadian to U.S. dollars at rates in effect at December 31, 2003 and 2002.
Comprehensive income
Under U.S. GAAP, Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" establishes standards for the reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses).
The purpose of reporting comprehensive income is to present a measure of all
changes in shareholders' equity that result from recognized transactions and
other economic events of the year, other than transactions with owners in their
capacity as owners. Under Canadian GAAP, the reporting of comprehensive income
is not required.
Comprehensive income (loss) is as follows:
2003 2002 2001
----------------------------------
Net loss for the year, U.S. GAAP $(236,975) $(285,510) $(799,421)
---------- ---------- ----------
Other comprehensive income:
Unrealized gain (loss) on investments (279,476) (514,597) 59,206
Cumulative translation adjustment 437,425 8,904 (55,198)
----------------------------------
Comprehensive net loss for the year, U.S. GAAP $ (79,026) $(791,203) $(795,413)
==================================
Recent accounting pronouncements
In April 2003, FASB issued Statements of Financial Accounting Standards No. 149
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FASB Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS 149 is
generally effective for contracts entered into or modified after June 30, 2003.
In May 2003, FASB issued Statements of Financial Accounting Standards No.
150 "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003.
-49-
In November 2002, FASB issued Financial Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45") which requires elaborating on
the disclosures that must be made by a guarantor in financial statements about
its obligations under certain guarantees. It also requires that a guarantor
recognize, at the inception of certain types of guarantees, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The
disclosure requirements of FIN 45 are effective for financial statements issued
after December 15, 2002, while the recognition requirements of FIN 45 are
applicable for guarantees issued or modified after December 31, 2002.
In January 2003, FASB issued Financial Interpretation No. 46 "Consolidation
of Variable Interest Entities" ("FIN 46") (revised in December 17, 2003). The
objective of FIN 46 is to improve financial reporting by companies involved with
variable interest entities. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to
support its activities. FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN 46 also requires
disclosures about variable interest entities that the Company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after December 15, 2003. The consolidation requirements apply
to older entities in the first fiscal year or interim period beginning after
March 15, 2004.
The adoption of these new pronouncements is not expected to have a material
effect on the Company's consolidated financial position or results of
operations.
Canadian Standards
In 2002, the CICA issued Handbook Section 3063, "Impairment of Long-Lived
Assets", which is effective for fiscal years commencing September 1, 2003.
Under this section, an impairment loss is measured as the difference between the
carrying value of an asset and its fair value. The Company does not expect the
adoption of this section to have significant impact on its consolidated
financial statements.
In June 2003, the CICA revised Accounting Guideline 13, "Hedging Relationships",
which is effective for fiscal years beginning on and after July 1, 2003. The
guideline addresses the identification, designation, documentation and
effectiveness of hedging relationships, for the purpose of applying hedge
accounting. The guideline establishes certain conditions for applying hedge
accounting and also deals with the discontinuance of hedge accounting. The
Company does not expect the adoption of this guideline to have a significant
impact on its consolidated financial statements.
In June 2003, the CICA issued Accounting Guideline 15, "Consolidation of
Variable Interest Entities", which will be effective for annual and interim
periods beginning on or after November 1, 2004. This guideline addresses the
application of consolidation principles to entities that are subject to control
on a basis other than ownership of voting interests. Management is assessing
the impact, if any, of the adoption of this guideline on the Company's
consolidated financial statements.
-50-
ITEM 19. EXHIBITS
1.1 Articles of Continuance and Bylaws(1)
1.2 Articles of Amalgamation(2)
4.1 Amalgamation Agreement dated August 24, 2001 between the
Company, Pacific Mercantile Company Limited and 940296
Alberta Ltd.(3)
4.2 Share Purchase Agreement dated December 27, 2001 between
Mercury Finance Group Inc., Pacific Mercantile Company
Limited and Stephen Rota(4)
8.1 Subsidiaries of the Company
11.1 Code of Ethics
12.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated May 21, 2004
13.1 Officer certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to the Sarbanes-Oxley Act of 2002,
dated May 21, 2004
- -----------------
(1) Incorporated by reference to the Company's Form 20-F for the fiscal year
ended December 31, 1999.
(2) Incorporated by reference to the Company's Form 20-F for the fiscal year
ended December 31, 2001.
(3) Incorporated by reference to the Company's Form 6-K filed on August 31,
2001.
(4) Incorporated by reference to the Company's Form 20-F for the fiscal year
ended December 31, 2001.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
Dated at Vancouver, British Columbia, Canada this 21st day of May, 2004.
MERCURY PARTNERS & COMPANY INC.
By: /s/ Tom S. Kusumoto
---------------------------
Tom S. Kusumoto
President
MERCURY PARTNERS & COMPANY INC.
FORM 20-F
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------ ------------------------
8.1 Subsidiaries of the Company
11.1 Code of Ethics
12.1 Certification of the Chief Executive Officer
and Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002, dated May 21, 2004
13.1 Officer certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
the Sarbanes-Oxley Act of 2002,
dated May 21, 2004