SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2003
Commission file number: 0-21968
STAR RESOURCES CORP.
(Exact Name of Registrant as Specified in Its Charter)
BRITISH COLUMBIA
(State or Other Jurisdiction of 76-0195574
Incorporation or Organization) (I.R.S. Employer Identification No.)
2000 South Dairy Ashford, Suite 510
Houston, Texas 77077
(Address of Principal Executive Offices, including Zip Code)
(281) 870-9882
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
-------------------
COMMON STOCK
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of April 15, 2003, the aggregate market value of voting stock held by
non-affiliates of the Registrant, based on the closing price of the Common Stock
of the Registrant quoted on the TSX Venture Exchange was $2,469,257 (Canadian).
For purposes of calculating this amount, only directors, officers and beneficial
owners of 5% or more of the capital stock of the Registrant have been deemed
affiliates.
Number of shares of Registrant's Common Stock outstanding as of April 15, 2003:
18,471,459
Documents incorporated by reference: None.
STAR RESOURCES CORP.
FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
NUMBER NUMBER
- ------ ------
PART I
Item 1. Business 1
Item 2. Properties 3
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market For Registrant's Common Stock and
Related Stockholder Matters 7
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 13
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 17
Item 13. Certain Relationships and Related Transactions 18
Item 14. Controls and Procedures 18
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on 8-K 18
ITEM 1. BUSINESS
--------
GENERAL INFORMATION
Star Resources Corp. ("the Company") is engaged in the business of
exploring for and, if warranted, developing mineral properties and historically
has concentrated its efforts on those properties with the potential for the
commercial recovery of diamonds. The Company leases interests in properties
located in the State of Arkansas in the United States (collectively the
"Properties").
The Company has a wholly owned subsidiary, Star U.S. Inc., a Delaware
corporation ("Star"). Star in turn owns 100% of the stock of three corporations,
Diamond Exploration, Inc. and Continental Diamonds, Inc., both of which are
Arkansas corporations ("DEI" and "CDI", respectively), and Diamond Operations,
Inc., a Delaware corporation ("DOI"). All references to the Company herein
include its subsidiaries unless otherwise noted. The Company's Consolidated
Financial Statements referred to herein also include its subsidiaries. The
Company's fiscal year ends January 31.
The Company's principal office is located at 2000 South Dairy Ashford,
Suite 510, Houston, Texas 77077. The Company had two (2) full-time employees at
January 31, 2003; however, the Company retains consultants, independent
contractors and part-time employees on an as-needed basis in connection with its
exploration and development activities.
The Company was incorporated under the Company Act (British Columbia) on
March 12, 1986. The authorized capital of the Company consists of 100,000,000
shares of common stock without par value (the "Common Stock"), of which
18,471,459 shares were issued and outstanding as of April 15, 2003. The Common
Stock of the Company ranks equally as to dividends, voting rights and
participation in assets and is traded under the symbol "SRS" on the TSX Venture
Exchange.
Unless otherwise stated herein, all monetary amounts are expressed in
Canadian dollars. At April 15, 2003, the exchange rate for conversion to United
States dollars was $1.00 (Canadian) = U.S. $ 0.6889. Historical exchange rates
for the last five years are set forth in Item 6 at page 11.
The Company is subject to substantial risks with respect to exploration
activities and will require additional capital during fiscal 2004 to acquire
exploration opportunities, conduct property exploration activities and to fund
general and administrative expenses. See "Certain Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
OPERATING HISTORY AND DEVELOPMENT
The Company became a public company in January 1988 when it undertook an
initial public offering of its Common Stock in British Columbia, Canada and
became listed on the Vancouver Stock Exchange, the predecessor to the TSX
Venture Exchange. From inception and prior to 1988 the Company had limited
business activities and through 1993 explored and abandoned several mineral
properties. During fiscal 1993, the Company elected to pursue prospects with
the potential for commercial diamond production.
The Company completed three acquisitions in fiscal 1993 consistent with its
focus on diamond exploration prospects, including acquisitions of the "Arkansas
Properties" (defined below). During fiscal 1995 through 2003, the Company
completed additional acquisitions in Arkansas and directly managed and funded
exploration efforts on certain Arkansas Properties. The Company's existing
properties all located in Arkansas are described in "Item 2. Properties." In
the fourth quarter of fiscal 2003 the Company decided to cease exploration
efforts in Arkansas due to disappointing exploration results. The Company will
continue to pursue mineral exploration prospects, particularly gold prospects,
on a worldwide basis as opportunities arise, subject to adequate acquisition and
exploration funding.
1
The Company has no revenues from operations other than rental income from
the Company's Diamond Recovery Plant ("the Plant") totaling $1,079,000, which
was received during the three fiscal years ended January 31, 1999. In March
2003 the Company sold the Plant to a third party for $350,000 (U.S.).
A GLOSSARY OF CERTAIN TECHNICAL TERMS USED HEREIN AND A GENERAL EXPLANATION OF
DIAMOND OCCURRENCES, EXPLORATION AND RECOVERY APPEARS ON PAGES 4-5 HEREOF.
CERTAIN RISK FACTORS
The Company's business plan to acquire additional exploration prospects
and, if warranted, undertake development and mining operations are subject to
numerous risks and uncertainties, including the following:
LACK OF PROVEN PROPERTIES AND INSUFFICIENT EXPLORATION AND DEVELOPMENT
FUNDS. At this point, all of the Company's exploration prospects and property
interests (collectively the "Properties") are in Arkansas, and the Company has
determined not to pursue additional exploration activities on those properties.
The Company intends to pursue gold exploration prospects with large scale
potential. Additional funds are necessary in order for the Company to acquire
and develop additional exploration prospects. Certain of the Company's planned
expenditures are discretionary and may be increased or decreased based upon
funds available to the Company.
As of January 31, 2003, the Company had sufficient cash to fund general and
administrative expenses anticipated during fiscal 2004. The Company will be
required to raise additional capital for acquisition of new exploration
prospects during fiscal 2004. There can be no assurance that additional funds
can be raised. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" (hereinafter referred to as "MD & A").
ENVIRONMENTAL LAWS. The exploration programs conducted by the Company are
subject to national, state and/or local regulations regarding environmental
considerations in the jurisdiction where they are located. Most operations
involving exploration or production activities are subject to existing laws and
regulations relating to exploration and mining procedures, reclamation, safety
precautions, employee health and safety, air quality standards, pollution of
stream and fresh water sources, odor, noise, dust, and other environmental
protection controls adopted by federal, state and local governmental authorities
as well as the rights of adjoining property owners. The Company may be required
to prepare and present to federal, state or local authorities data pertaining to
the effect or impact that any proposed exploration or production of minerals may
have upon the environment. All requirements imposed by any such authorities may
be costly, time consuming, and may delay commencement or continuation of
exploration or production operations. However, at this time, the Company is in
the exploration stage with respect to all of its Properties and does not
anticipate preparing environmental impact statements or assessments until such
time as the Company believes one or more of its properties will prove to be
commercially feasible.
LIMITED EXPLORATION PROSPECTS. The Company's existing properties are
diamond prospects in Arkansas. As discussed in Item 2, the Company does not
intend to continue exploration activities on the Arkansas Properties.
Accordingly, the Company does not have a diversified portfolio of exploration
prospects either geographically or by mineral targets.
TITLE TO PROPERTIES. The Company cannot guarantee title to all of its
Properties as the Properties may be subject to prior unregistered agreements or
transfers or native land claims, and title may be affected by undetected
defects. The Properties have not been surveyed and the precise location and
extent thereof may be in doubt. In particular, the Company's Arkansas
Properties are subject to title uncertainties due to the physical loss and
destruction of land records over the years in the principal county where such
properties are located. The Company does not maintain title insurance on its
properties.
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K under "Item 1. Business", "Item 2.
Properties", "Item 3. Legal Proceedings", and "Item 7. MD & A" and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions;
competition; success of operating initiatives; the success of the Company's
exploration and development operations on its properties; the Company's ability
to raise capital and the terms thereof; the acquisition of additional
properties; the continuity, experience and quality of the Company's management;
changes in or failure to comply with government regulations or the lack of
government authorization to continue the Company's projects; and other factors
referenced in this Form 10-K. The use in this Form 10-K of such words as
"believes", "plans", "anticipates", "expects", "intends" and similar expressions
are intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements. The success of the Company is dependent
on the efforts of the Company, its employees and many other factors including,
primarily, its ability to raise additional capital and establishing the economic
viability of its exploration properties.
ITEM 2. PROPERTIES
----------
Currently, all of the Company's Properties are located in the State of
Arkansas. The general location of the Company's Arkansas Properties is shown on
the map provided below. The map is followed by a description of the Company's
rights and interests in each of the Properties, including those Properties where
the Company's rights and interests have expired. The glossary and background
information relating to diamond occurrences, exploration and recovery processes
is provided on pages 4-5 hereof and should be reviewed in connection with the
discussion and description of the Company's Properties which follows. As the
Company has determined not to pursue additional exploration activities on any of
its currently held Properties, the Company does not have an interest in any
mineral property which is considered material to the Company.
[GRAPHIC OMITED]
- ------------------------------------------------
3
GLOSSARY OF CERTAIN TERMS
-------------------------
The following is a glossary of certain terms relating to diamond
occurrences and recovery, which may be utilized in the description of the
Company's Properties and exploration activities. The glossary should be read in
conjunction with the general background information and discussion of diamond
occurrences, exploration and recovery, which immediately follows.
AIRBORNE MAGNETIC SURVEYS. Measuring the magnetic variations in the
Earth's crustal rocks over a specified area by installing a magnetometer within,
or by towing a magnetometer behind, an aircraft and recording the variation in
the Earth's magnetic field.
ALLUVIAL DEPOSITS. Gravel, sand and clay deposits formed by erosion,
including streams, wind, waves and glaciers. Many gems, including diamonds, are
found in these types of deposits.
BENCH CUTS. The excavation of a flat bench in rock or dirt on a slope to
stabilize the slope or to remove material of value as in open pit mining.
BULK SAMPLING. Acquiring a large (often several thousand tons) sample of
rock obtained by mining, excavation, digging or drilling large diameter holes.
Bulk sampling is necessary to determine the grade and value of diamonds
contained in a property.
CARAT. A small unit of weight for precious stones equal to 200 milligrams
or 0.2 grams.
CORE DRILLING. A drilling operation that accurately extracts a cylindrical
sample, or core, of rock. This is an effective means for determining the
mineralogical composition of the rock.
DIAMOND RECOVERY PLANT. A plant designed to treat large bulk samples and
recover diamonds. The most successful recovery method for processing
diamondiferous materials or rock is to utilize a diamond recovery plant to (I)
crush the rock and remove the clays, (ii) pass the material through a heavy
media separator to concentrate the diamonds and heavy minerals from the lighter
waste rock or materials, (iii) pass the heavy mineral concentrate through an
x-ray sorting machine (Sortex) and grease tables, and (iv) hand pick the
diamonds (using sealed glove boxes) from the selected material. Such a process
can be designed for specific deposits to give recoveries around 99%.
DIAMOND INDICATOR MINERALS. Distinctive heavy minerals that may occur with
diamonds.
DIAMONDIFEROUS. Containing diamonds.
GEOPHYSICAL SURVEYS. Measuring and recording any geophysical properties
over a specific area, e.g. gravity, magnetics, electrical conductivity,
acoustical velocities, etc., utilizing instruments on land, water or airborne.
INTRUSION. Any forcible upwelling of molten rock (magma) into other rock
units that cools and solidifies before it reaches the earth's surface. (As
opposed to extrusion, in which molten rock reaches the earth's surface as
volcanism).
KIMBERLITE. One of two types of diamond-bearing rock unit and the most
common, often characterized by a carrot-shaped structure referred to as a
kimberlite "pipe."
LAMPROITE. The second type (and rarer) diamond-bearing rock unit, often
characterized by a champagne glass or a funnel-shaped structure referred to as a
lamproite "vent."
LITHOLOGY. The character of a rock formation.
4
MACRO- AND MICRO-DIAMONDS. Macro-diamonds are diamonds with a diameter in
excess of 0.5 millimeters. Micro-diamonds are diamonds less than 0.5
millimeters in diameter.
MINERALOGY. The science dealing with inorganic, solid, homogeneous
crystalline chemical elements or compounds (minerals), their crystallography,
physical and chemical properties, classification and distinguishing
characteristics.
PETROLOGY. The science that deals with the origin, history, occurrence,
structure, chemical and mineralogical composition and classification of rocks.
TRAIN OR MINERAL TRAIN. An elongated area containing anomalous quantities
of indicator minerals derived from weathering and erosion.
TRENCHING. The excavation of a linear ditch in rock or dirt that is
generally deeper than it is wide, as distinguished from a pit, which is a more
equidimensional excavation.
BACKGROUND OF DIAMOND OCCURRENCES, EXPLORATION AND RECOVERY.
Synthetic diamonds account for almost 75 percent of world production, but
economic production of synthetics is limited primarily to much cheaper
industrial diamonds. Natural or primary diamonds occur in several rare rock
types, but in commercial concentrations they are found in closely-related
magmatic rocks called kimberlites or lamproites or in alluvial deposits.
Alluvial deposits are formed from the erosion of the primary source rocks and
are also important sources of natural diamonds, accounting for about 20 percent
of primary diamond production. Only a small proportion of kimberlite pipes or
lamproite vents contain economic quantities of diamonds. Kimberlite pipes and
lamproite vents commonly occur in clusters (or provinces) of anywhere from 5 to
100 extending over an area 30 to 60 miles across. Lamproite rock formations
usually form funnel-shaped "vents," which have relatively gently sloping margins
as opposed to kimberlite formations, which are usually steeply dipping
carrot-shaped "pipes." The surface area of pipes and vents are small, ranging
from approximately 500 acres for the largest, with 25 to 100 acres being typical
for an economic one. Of the 4,000 to 5,000 known kimberlite and lamproite pipes
and vents, only about 1,000 are diamondiferous, and of those, only a small
proportion have been economic. It is estimated that only about 12 to 15 are
being mined today. The Company is aware of only one commercial diamond mining
operation in North America despite the presence of very large areas which are
geologically favorable for hosting diamond bearing pipes or vents.
Initial diamond exploration in a region usually involves taking surface
samples to locate kimberlite or lamproite diamond indicator minerals which are
often transported by alluvial activity. These minerals can then be traced back
to a source area where geophysical surveys can help locate target pipes or
vents. Airborne magnetic surveys are often involved in the first step of
regional exploration to locate anomalous conditions which may indicate
kimberlite or lamproite. Should follow-up prospecting, trenching or drilling
discover a pipe or vent, the next step is to determine if it is diamondiferous.
Most of the current exploration in northern Canada is of this type. This is
usually accomplished by core drilling and taking samples from benches, trenches,
and underground workings. The presence of micro-diamonds is an encouraging
sign; however, no conclusions can be drawn as to the likely concentration or
quality of larger (i.e., economic) macro diamonds. Recent technological
advances make it possible to use the chemical compositions of certain indicator
minerals to establish whether or not a particular kimberlite host rock is likely
to contain diamonds. However, the chemical analysis of lamproite diamond
indicator minerals is not yet this advanced.
The final step in evaluating a kimberlite pipe or a lamproite vent, and the
only way to evaluate the diamond grade and value of a diamond prospect with any
degree of confidence, is to obtain and analyze bulk samples. The exploration
and evaluation of a diamond deposit is more complex and expensive than for other
commodities because of the extreme scarcity and irregular distribution of
diamonds in their host rocks. Because of this, unusually large bulk samples
must be taken and processed to determine grade and value accurately.
5
ARKANSAS PROPERTIES
BLACK LICK AND TWIN KNOBS II PROPERTIES
On February 5, 1999, the Company entered into an agreement with Potlatch
Corporation to purchase the surface rights to approximately 480 acres in Pike
County, Arkansas located adjacent to the Company's American Mine Property for a
total of approximately $313,000 (U.S.). In December 1999, the Company entered
into an agreement with a third party lessor to lease the undersurface rights
below the 480 acres described above. The consideration paid for the lease was
$50,000 (U.S.), 500,000 shares of the Company and the transfer to the lessor of
the surface rights which the Company purchased from Potlatch Corporation as
described above. The lease grants the rights to explore, develop and extract
diamond bearing material lying below overburden and the upper 50 feet of diamond
bearing material on those areas for which the surface rights have been acquired
and transferred to the lessor. The primary term of the lease is five years plus
two year extensions and will continue so long as there is commercial production.
Royalties include 2% of gross sales subject to a minimum of $48,000 (U.S.) per
year after the first seven years. The Company has the right to use the surface
for plant and other facilities for additional royalties.
During fiscal 2001, the Company commenced a drilling program to assess
these prospects. Core samples totaling 14,374 feet were taken from 40 drilling
locations on the Black Lick Property. Definition drilling commenced on the Twin
Knobs II Property in the third fiscal quarter of 2001, and core samples totaling
1,211 feet were taken from five drilling locations. An analysis of a total of
238kg of lamproite from three different core samples from the American Mine
Property and the Black Lick Property was performed and produced 14 microdiamonds
and one macrodiamond. In July 2001 the Company excavated a bulk sample of
approximately 10,000 tons on the Black Lick Property, and approximately 2,000
tons of the bulk sample was processed through the Company's diamond sampling
plant. Three diamonds with a total carat weight of 0.38 were recovered, which
is significantly less than the Company had anticipated.
During fiscal 2003, the Company recovered several microdiamonds from drill
core from the Black Lick and American Mine Properties, which were processed at
the Diamond Recovery Plant. In May 2002 the Company drilled a total of 11 auger
holes, each five feet in diameter, on the American Mine, Black Lick and
Kimberlite Properties. Most of drilling was not successful as the holes were
terminated short of their target depths by hard sandstone blocks, which could
not be penetrated by the auger. In the third quarter of fiscal 2003 the Company
completed eleven wide diameter holes on the American Mine and Black Lick
Properties and bulk sampled approximately 900 tons of material. Bulk sampling
revealed no macrodiamonds. In December 2002, based upon the cumulative
exploration results obtained on the Arkansas Properties, the Company made the
decision to cease exploration efforts in Arkansas. Accordingly, the capitalized
costs related to the Black Lick and Twin Knobs II properties totaling $2,512,500
were written off in the third quarter of fiscal 2003.
AMERICAN MINE PROPERTY
Pursuant to an agreement dated November 4, 1992, DEI was granted a permit
to explore a mineral property located in Pike County, Arkansas. The Company's
Diamond Recovery Plant ("the Plant") is located on this leased property. In
November 1996, the Company exercised its option to lease the property for 10
years upon the payment of $125,000 (U.S.). Yearly payments of $25,000 (U.S.)
were required for each of the four years after the first year and $40,000 (U.S.)
per year for the following five years, plus an additional $7,500 per year for
surface rentals related to the Plant. Sampling was performed on the American
Mine property in the first quarter of fiscal 1998. The Company excavated a
100-ton sample during fiscal 1998, and a total of 51 diamonds with a total carat
weight of 9.591 were recovered, including two stones greater than one carat.
During fiscal 2003 sampling was conducted on this property in conjunction with
the sampling performed on the Black Lick Property as discussed above. Due to
the exploration results discussed above, the capitalized costs related to the
American Mine Property totaling $450,823 were written off in the third quarter
of fiscal 2003.
The Company did not make the lease payment of $47,500, due November 1,
2002. In March 2003 the Company sold the Plant to a third party for $350,000
(U.S.). In conjunction with the sale, the third party paid the lessor of the
American Mine Property $47,500 (U.S.) on behalf of the Company in order to
extend the Company's lease on the property through October 31, 2003.
6
KIMBERLITE MINE PROPERTY
In November 1998, the Company executed a lease on certain property in Pike
County, Arkansas with a two-year term ending November 14, 2000 by payment of
$15,000 (U.S.). The Company extended the lease to November 14, 2002 by payment
of an additional $15,000 (U.S.) in November 2000. The Company allowed this
lease to expire in November 2002, and the capitalized costs totaling $84,034
were written off in the third fiscal quarter of 2003.
SOUTHWEST PROPERTIES
In June 1994, the Company acquired from an unrelated company its
rights under fifteen mineral leases located in the southwestern region of
Arkansas covering approximately 2,000 acres. The original dates of the leases
were from May 1992 to August 1992, with terms from 10 to 20 years. In fiscal
2002 and fiscal 2003 the Company elected not to renew selected leases, and,
accordingly, write-downs representing all prior acquisition costs totaling
$86,067 and $59,020, respectively, were recorded. The capitalized costs related
to the remaining active leases totaling $35,349 were written off in the third
quarter of fiscal 2003 based upon the Company's decision to cease exploration
efforts in Arkansas as discussed above.
DIAMOND RECOVERY PLANT
In 1993, the Company contracted to obtain the Diamond Recovery Plant with
complete process design and specific modules supplied from E.L. Bateman
Engineering, a South African based company with worldwide experience in
designing and building diamond recovery plants. The Plant is located on the
American Mine Property. The Company utilized the Plant during its testing of
its Arkansas properties from 1994 through 2003. Additionally, the Plant was
used to process bulk samples for a third party in fiscal 1999. As discussed
above, the Plant was sold in March 2003 to a third party for $350,000 (U.S.).
ITEM 3. LEGAL PROCEEDINGS
------------------
Except as described in Note 9 of the Notes to the Company's Consolidated
Financial Statements incorporated by reference into Part II. Item 8 hereof,
there are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
-------------------------------------------------------------------
MATTERS
-------
The Company's Common Stock is not traded on an exchange or market in the
United States. The Company's Common Stock is listed on the TSX Venture Exchange
("the TSX") in British Columbia, Canada under the symbol "SRS", and was listed
on the Toronto Stock Exchange ("the TSE") in Ontario, Canada, under the symbol
"SRR" through November 9, 2001. The TSX now constitutes the principal trading
market for the Company's Common Stock. The high and low sales prices (in
Canadian dollars) as quoted on the TSX (the TSE prior to November 10, 2001) for
the below referenced quarterly periods were as follows:
7
Price Range of Common Stock (1)
Fiscal Year Ended January 31
2003 2002
--------- ----------
Fiscal Quarter Ended High Low High Low
- --------------------- ---- ---- ---- ----
April 30 0.85 0.16 0.09 0.05
July 31 0.75 0.21 0.10 0.02
October 31 0.32 0.09 0.02 0.01
January 31 (2) 0.19 0.07 0.35 0.00
(1) The Company consolidated its Common Stock on a seven for one basis on
November 27, 2001. The sales prices for periods prior to that date have been
adjusted to reflect the consolidation on a pro-forma basis for comparison
purposes.
(2) The low price of the Company's Common Stock was trading at a pre-
consolidation price of $0.03 during the quarter ended January 31, 2002, which
is less than $0.01 when adjusted to reflect the seven for one consolidation.
The closing price of the Company's Common Stock was $0.18 (Canadian) as of
April 15, 2003 on the TSX Venture Exchange.
At April 15, 2003, there were 124 holders of record of the Company's Common
Stock including 103 in the United States who collectively held 10,600,294 shares
representing 57% of the total number of issued and outstanding shares. The
Company believes it has in excess of 300 beneficial owners of its Common Stock
residing in the United States and Canada based on the number of record holders
and individual participants in security position listings.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company presently intends to retain cash for the operation and development
of its business and does not anticipate paying cash dividends in the foreseeable
future. A future determination as to the payment of dividends will depend on a
number of factors, including future earnings, capital requirements, the
financial condition and prospects of the Company and such other factors as the
Board of Directors of the Company deems relevant.
FOREIGN CONTROLS
The Company is not aware of governmental laws, decrees or regulations in
Canada restricting the import or export of capital or affecting the remittance
to the United States of interest, dividends or other payments to non-resident
holders of the Company's Common Stock. However, the payment or crediting of
interest or dividends to United States residents may be subject to applicable
withholding taxes at a rate prescribed by the Income Tax Act (Canada) as
modified by the provisions of the Canada-United States Income Tax Act (Canada)
and as further modified by the provisions of the Canada-United States Income Tax
Convention, 1980 (see "Taxation" below).
Except as provided in the Investment Canada Act (the "ICA"), there are no
limitations under the laws of Canada, the Province of British Columbia or in the
charter and organizational documents of the Company on the right of nonresident
or foreigner owners to hold and/or vote the shares of the Company.
8
The ICA applies when a "non-Canadian" individual or entity or controlled
group of entities as defined in the ICA proposes to make an investment to
acquire control of a Canadian business enterprise, either directly or
indirectly, and by way of purchase of voting shares of a corporation or of
substantially all of the assets used in the Canadian business enterprise. An
investment in voting shares of a corporation is deemed to be an acquisition of
control where more than 50% of the voting shares are acquired. An acquisition
of less than one-third of the voting shares of a corporation is deemed not to be
an acquisition of control and an acquisition of between one-third and one-half
of the voting shares of a corporation is presumed to be an acquisition of
control unless it can be established that the acquisition does not in fact
result in control of the corporation by the investor.
An investment to acquire control of a Canadian business enterprise, the
gross assets of which exceed certain thresholds, must be reviewed and approved
under the ICA before implementation. An investment to acquire control of a
Canadian business enterprise, the gross asset value of which falls below these
threshold amounts, is one in respect of which notification must be given under
the ICA although approval is not required prior to implementation of the
investment. NAFTA Investors, (i.e.) investors who are nationals, other than
Canadian, as defined in the North American Free Trade Agreement, are not
considered for the purposes of the ICA to be "non-Canadian".
TAXATION
Dividends. Generally, dividends paid by a Canadian corporation to
non-resident shareholders are, under the Income Tax Act (Canada) (the "ITA"),
subject to a withholding tax of 25%. However, paragraph 2 of Article X of the
Canada-United States Income Tax Convention (1980) (the "Treaty") provides for
the following maximum withholding tax rates:
a) 10% of the gross amount of the dividends if the beneficial owner of such
dividends is a U.S. resident company which owns at least 10% of the voting stock
of the corporation paying the dividends; and
b) 15% of the gross amount of the dividends in all other cases.
Subject to certain limitations and exceptions, U.S. resident shareholders
of a Canadian corporation may be entitled to a credit for all or a portion of
such withholding taxes in computing their U.S. federal and possibly their state
income tax liability.
Dividends paid by a Canadian corporation to shareholders resident in Canada
will not be subject to withholding tax. Any dividends received by a Canadian
resident on shares of the Company will be treated for tax purposes as dividends
from a taxable Canadian corporation. Accordingly, where a dividend is received
by an individual resident in Canada, the individual will be entitled to claim a
federal dividend tax credit, equal to 16 2/3% of the dividend. Where the
dividend is received by a corporation resident in Canada, the dividend will
normally be free of tax under Part I of the ITA but may be subject to refundable
tax under Part IV of the ITA.
Disposition of Capital Property. If shares of a Canadian public
corporation held by a non-resident shareholder constitute capital property to
that shareholder, the disposition of such shares will not be subject to tax
under the ITA unless the shares constitute "taxable Canadian property" to the
vendor. Where a non-resident shareholder or persons with whom the non-resident
shareholder does not deal at arm's length have, at any time during the five year
period immediately preceding the disposition, owned not less than 25% of the
issued shares of any class of the capital stock of the public corporation, the
shares so disposed of will constitute "taxable Canadian property". Under the
ITA, a disposition of shares that constitute taxable Canadian property will give
rise to a capital gain (or a capital loss) equal to the amount by which the
proceeds of disposition of such shares, net of any cost of disposition, exceeds
(or is less than) the adjusted cost basis of such shares to that investor.
Generally, three-quarters of any capital gain realized by an investor on a
disposition or a deemed disposition of such a shares must be included in
computing his Canadian income for that year as a taxable capital gain.
Three-quarters of any capital loss realized by an investor on a disposition or
deemed disposition of such a share in a taxable year may generally be deducted
from his Canadian taxable capital gains for that year.
9
Any gains realized by a non-resident shareholder from the disposition of
shares which are taxable Canadian property may be exempt from tax under the ITA
by virtue of Article XIII of the Treaty if, at the time of the disposition of
the subject shares, the value thereof was derived principally from something
other than direct or indirect real property interests situated in Canada.
Under the ITA, the disposition of a share by an investor may occur or be
deemed to occur in a number of circumstances including on a sale or gift of such
share or upon the death of that investor.
The initial adjusted cost base of a share to an investor will be the cost
to him of that share. Under the ITA, certain addition or reduction adjustments
may be required to be made to the cost base of a share. The adjusted cost base
of each common share of a corporation owned by an investor at any particular
time will be the average adjusted cost base to him of all common shares of that
corporation owned at that time.
Subject to certain limitations and exceptions, U.S. resident shareholders
of a Canadian corporation may be entitled to a credit for all or a portion of
any capital gain taxation in computing their U.S. federal and possibly their
state income tax liability.
In general, the disposition by a shareholder resident in Canada of the
capital stock in a Canadian corporation will be subject to Canadian income
taxation in the same manner as rules described above relating to a disposition
of share which constitute taxable Canadian property. A shareholder resident in
Canada may, however, be entitled to a capital gains exemption. The ITA
provides, for residents of Canada, a cumulative lifetime exemption from income
tax or $100,000 of qualifying net capital gains.
Disposition of Non-Capital Property. If the shares of a Canadian public
corporation held by a non-resident do not constitute capital property to that
shareholder, any gains realized from the disposition thereof will be fully
taxable under the ITA if their disposition arises in the course of a business
carried on by the shareholder in Canada. Under the ITA, a shareholder will be
deemed to carry on business in Canada in respect of particular shares if he
offers them for sale in Canada through an agent, including the Vancouver Stock
Exchange. Under the Treaty, any business profits derived by a U.S. resident
shareholder of a Canadian public corporation from the disposition of the subject
corporation's shares will only be taxable in Canada to the extent that such
profits are attributable to a permanent establishment of the shareholder in
Canada.
RECENT SALES OF UNREGISTERED SECURITIES
For a discussion of the recent sale of unregistered securities by the
Company, see" MD & A - Liquidity and Capital Resources".
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
----------------------------------------------
The selected consolidated financial information set forth below for each of
the five years ended January 31, 2003 has been derived from the Consolidated
Financial Statements of the Company prepared in accordance with generally
accepted accounting principles in Canada. These principles are also in
conformity, in all material respects, with generally accepted accounting
principles in the United States except as described in Note 11 of the Notes to
Consolidated Financial Statements. The selected consolidated financial
information should be read in conjunction with the MD & A discussion below and
the Consolidated Financial Statements and related notes thereto included on
pages 21 to 36 herein.
Since its formation, the Company has been in the exploration stage and its
activities have consisted primarily of acquiring interests in mineral
properties, exploration of those properties and acquiring financing for such
purposes. Consequently, the Selected Consolidated Financial Information may not
indicate the Company's future financial performance. The weighted average
number of common shares outstanding and the net loss per common share for the
fiscal years ending January 31, 1999 through 2001 have been restated to reflect
the consolidation of the Company's common shares outstanding on a seven for one
basis effective November 27, 2001.
10
SELECTED CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------
Fiscal Year Ended January 31
----------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(In Canadian dollars)
($000's except for net loss per common share data)
Writedown and abandonment of properties, plant and
equipment 3,142 86 - 22 -
Net loss (4,310) (1,961) (1,695) (1,085) (1,041)
Net loss per common share (0.26) (0.21) (0.20) (0.20) (0.20)
Weighted average common shares outstanding 16,439 9,142 8,388 5,441 5,168
Working capital (deficit) (63) 376 379 (1,205) 761
Total assets 96 3,516 3,132 1,770 1,761
Long-term debentures payable 1,279 1,279 - - 1,599
Deficit accumulated during the exploration stage (32,436) (28,125) (26,165) (24,469) (23,385)
Total shareholders' equity (deficit) (1,557) 1,983 2,492 71 (3)
EXCHANGE RATES
On April 15, 2003, the noon buying rate in New York City for cable
transfers in Canadian dollars, as certified for customs purposes by the Federal
Reserve Bank of New York, was $1.00 (Canadian) = U.S. $0.6889. The following
table sets forth, for each of the years indicated, additional information with
respect to the noon buying rate for $1.00 (Canadian). Such rates are set forth
as U.S. dollars per Canadian. $1.00 and are based upon the rates quoted by the
Federal Reserve Bank of New York.
Rate 2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Last Day. . 0.6542 0.6279 0.6669 0.6925 0.6535
Average (1) 0.6386 0.6446 0.6727 0.6744 0.6721
High. . . . 0.6619 0.6697 0.6936 0.6969 0.7102
Low . . . . 0.6200 0.6241 0.6410 0.6535 0.6331
(1) The average rate means the average of the exchange rates on the last day of
each month during the year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------------
RESULTS OF OPERATIONS
-----------------------
Results of Operations.
- For the Years Ended January 31, 2003, 2002 and 2001
The Company is in the exploration stage and has no revenues from operations
other than rental income related to the Diamond Recovery Plant totaling
approximately $1,079,000 from inception. None of its Properties have proven to
be commercially developable to date and as a result the Company has not
generated any revenue from these activities. The Company's existing properties
are diamond prospects in Arkansas. As discussed in Item 2, the Company does not
intend to continue exploration activities on the Arkansas Properties. The
Company capitalizes expenditures associated with the direct acquisition,
evaluation and exploration of mineral properties. When an area is disproved or
abandoned, the acquisition costs and related deferred expenditures are
written-off. The net capitalized cost of each mineral property is periodically
compared to management's estimation of the net realizable value and a write-down
is recorded if the net realizable value is less than the cumulative net
capitalized costs. During fiscal 2003 the Company decided to cease exploration
activities in Arkansas due to disappointing exploration results, and the total
of $3,141,726 of accumulated capitalized costs related to the Arkansas leases
were written off. The Company has recorded cumulative write-offs of mineral
properties of $15,306,613 during its exploration stage, a period of
approximately fifteen years, and cumulative writedowns of property, plant and
equipment of $3,614,952.
11
As of January 31, 2003 mineral properties and deferred expenditures
decreased to a zero balance from $2,942,086 at January 31, 2002 as a result of
the writedown discussed above. During fiscal 2002 the Company's mineral
properties and deferred expenditures increased by $491,396 from $2,450,690,
largely as a result of exploration expenditures on the Blacklick and the Twin
Knobs II Properties.
The Company's revenues during the last three fiscal years are comprised
entirely of interest income on proceeds received from prior financings and gains
on sales of equipment. The Company has not received any revenues from mining
operations from inception.
General and administrative expenses decreased by approximately $673,000, or
40%, from fiscal 2002 to fiscal 2003. The exploration program in fiscal 2002
involved extensive excavation activities, and the Company incurred significant
salary costs associated with the supervision of the excavation and the
preparation of the Plant for the bulk sample test conducted in July 2001. The
sampling work performed in fiscal 2003 consisted of drilling, microdiamond
analysis and limited bulk sampling, which required less of a staffing
commitment. General and administrative expenses increased only 1% from
$1,677,442 in fiscal 2001 to $1,693,363 in fiscal 2002. A decrease in
depreciation expense in fiscal 2002 of approximately $146,000 that resulted from
the Diamond Recovery Plant becoming fully depreciated was offset by an increase
in salaries in fiscal 2002 of approximately $152,000. As discussed above, the
salary increase was related to the additional exploration and sampling
activities, particularly the bulk sampling, conducted during fiscal 2002 on the
Blacklick and Twin Knobs II Properties. The Company anticipates that general
and administrative expenses during fiscal 2004 will decrease as the Company has
sold the Diamond Recovery Plant and is in the early stages of mineral prospect
acquisition and evaluation.
LIQUIDITY AND CAPITAL RESOURCES.
As of January 31, 2003, the Company had a working capital deficit of
$62,984 as compared to working capital of $376,057 at January 31, 2002. At
January 31, 2003, the Company had current assets of $61,696, including $22,734
in cash and $38,962 in accounts receivable compared to total current liabilities
of $124,680. The Company received $717,412 during fiscal 2003, representing
subscriptions totaling $563,955 for a private placement of the Company's common
shares and option exercises totaling $153,457. A total of 2,819,774 units were
issued in the private placement at a price of $0.20 per unit, each unit to
consist of one common share and one share purchase warrant with an exercise
price of $0.25. The share purchase warrants have an expiration date of
September 17, 2004.
In the first quarter of fiscal 2002, the Company completed the issuance of
$1,278,595 principal amount of 10% secured convertible debentures ("the 10%
Debentures"). The 10% Debentures were convertible into units at the rate of one
unit for each $2.87 principal amount of the 10% Debentures until February 16,
2003. Each unit was to consist of one common share of the Company and one share
purchase warrant with an exercise price of $3.15, exercisable through August 16,
2003. The conversion and share purchase warrant prices above were adjusted to
reflect the Company's seven for one share consolidation on November 27, 2001.
On February 11, 2003, the holders of the Debentures approved the amendment
of the conversion price of the units to $0.30 and the extension of the maturity
date of the Debentures to February 16, 2004. As amended, each of the 4,261,983
units would consist of one common share of the Company and one share purchase
warrant with an exercise price of $0.30, exercisable through February 16, 2004.
Upon conversion, $97,000 principal amount of 10% Debentures held by a director
will be convertible only into common shares of the Company on the basis on one
share for each $0.30 principal amount. Additionally, the terms of the Debenture
were amended to include a mandatory conversion provision which will require
conversion of all Debentures and exercise of all related warrants within 30 days
after the closing price of the Company's common shares has exceeded $0.375 for
ten consecutive trading days.
12
The Company received approximately $1,138,000 during fiscal 2002
representing subscriptions for a private placement of the Company's common
shares. A total of 5,691,376 units were issued at a price of $0.20 per unit,
each unit to consist of one common share and one share purchase warrant with an
exercise price of $0.25. The share purchase warrants originally had an
expiration date of January 29, 2003, and that date was extended during fiscal
2003 to January 29, 2004.
During the 2001 fiscal year the Company received approximately $1,350,000
representing the exercise price of 8,179,790 share purchase warrants with an
exercise price of $0.165 per share. During fiscal 2002 and 2001 the Company
received $313,660 and $1,142,930 representing the exercise price of 1,229,000
and 3,536,000 stock options, respectively, by officers, directors, employees and
consultants at exercise prices from $0.15 to $0.53.
All financings described herein were private placements and were made
pursuant to the private placement laws of Canada and pursuant to the exemptions
provided by Section 4(2) and Regulation S under the United States Securities Act
of 1933. The 10% Debentures were offered to a limited number of accredited
investors in the United States and Canada pursuant to Rule 506 of Regulation D
and Regulation S.
The Company has no properties that have proven to be commercially
developable and has no revenues from mining operations other than the rentals
received from the Diamond Recovery Plant. The rights and interests in the
Arkansas Properties constitute the Company's current mineral holdings, and the
Company does not intend to pursue exploration activities in Arkansas in the
future. At this point in time, the Company cannot estimate with any degree of
certainty either the time or the amount of funds that will be required to
acquire and conduct exploration activities on new prospects. The Company
intends to seek additional equity financing during fiscal 2004, including the
potential exercise or conversion of the 10% Debentures, warrants and outstanding
options. The inability of the Company to raise further equity financing will
adversely affect the Company's business plan, including its ability to acquire
additional properties and perform exploration activities on such acquired
properties. If additional equity is not available, the Company may seek
additional debt financing or seek exploration partners to assist in funding
acquisition or exploration efforts. Historically, the Company has been able to
successfully raise capital as required for its business needs; however, no
assurances are made by the Company that it can continue to raise debt or equity
capital for a number of reasons including its history of losses and property
writedowns, the decline in the price of its common stock, the number of shares
outstanding and the Company's limited and speculative asset base of exploration
properties and prospects.
IMPACT OF INFLATION.
As the Company is in the exploration stage and has not recorded sales and
revenues from operations, a discussion of the effect of inflation and changing
prices on its operations is not relevant.
DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
At the present stage of the Company's business development, there are no
significant differences between Canadian and United States generally accepted
accounting principles that impact the Consolidated Balance Sheet and
Consolidated Statement of Operations and Deficit Accumulated During the
Exploration Stage except for foreign currency translation, the capitalization of
mineral properties and deferred expenditures, and the treatment of stock options
under FASB Statement No. 123 "Accounting for Stock Based Compensation". For a
discussion of certain differences between Canadian and United States generally
accepted accounting principles impacting the Consolidated Statement of Cash
Flows, see Note 11 to Notes to Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------------
None.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------
The Consolidated Financial Statements of the Company included as part of
this Annual Report on Form 10-K (pages 21 through 36) are incorporated by
reference in response to this Item 8. An index to the Consolidated Financial
Statements is included in Item 14.
The Company is not required to provide the selected quarterly financial
data specified in Item 302 of Regulation S-K because it does not satisfy the
tests outlined therein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------------
The directors and executive officers of the Company, their ages and term of
continuous service are as follows:
POSITION WITH SERVED AS A DIRECTOR
NAME AGE REGISTRANT AND/ OR OFFICER SINCE
Patrick L. Glazier 45 Director July 8, 1998
Brian C. Irwin 63 Director October 3, 1995
Mark E. Jones, III 62 Director, Chairman & CEO March 12, 1986
Leendert G. Krol 63 Director, President March 6, 2003
Daniel B. Leonard 66 Director October 20, 1999
Dr. Roger Howard Mitchell 61 Director June 14, 1993
Dr. Roger David Morton 67 Director June 14, 1993
PATRICK L. GLAZIER. Mr. Glazier has served as the President of East Fraser
Fiber Co. Ltd. based in Prince George, British Columbia for the past five years.
BRIAN C. IRWIN. For the past five years, Mr. Irwin's principal occupation
has been the practice of law as a partner of DuMoulin Black in Vancouver,
British Columbia.
MARK E. JONES, III. Mr. Jones has served as a Director of the Board of
Crown Resources Corporation since January 1987. Crown Resources Corporation,
based in Denver, Colorado, is publicly traded on the OTC Bulletin Board and is
engaged in the exploration and development of mineral properties, primarily
gold. Mr. Jones served as the President of the Company from 1986 to June 1990
and from July 2001 to the March 2003. Mr. Jones is also a director of Solitario
Resources Corporation. In his capacity as Chairman of the Board of Directors,
Mr. Jones is the chief executive officer of the Company.
LEENDERT G. KROL. Until his retirement in April 2001, Mr. Krol had spent
15 years with Newmont Mining Corporation including the last 10 years,
successively, as Director of Foreign Operation, Vice President Exploration and
Vice President International Exploration.
DAN LEONARD. Mr. Leonard served as Senior Vice President of INVESCO for
twenty-four years until his retirement in January 1999. Mr. Leonard also serves
as a Director of Solitario Resources Corporation.
14
DR. ROGER HOWARD MITCHELL. For the past six years, Dr. Mitchell has served
as a Professor of Geology at Lakehead University, Thunder Bay, Ontario. Dr.
Mitchell received his B.Sc. from the University of Manchester, 1964; M.Sc. from
Manchester, 1966; Ph.D from McMaster University, 1969; and a D.Sc in 1978 from
the University of Manchester. He was elected a Fellow of the Royal Society of
Canada in 1994.
DR. ROGER DAVID MORTON. For the past five years, Dr. Morton has been
Professor Emeritus in Geology with the Department of Earth and Atmospheric
Sciences at the University of Alberta. He also serves as Chairman of the Board
for Mindoro Resources Inc., and is President of Muskox Minerals Corp. He is a
member of the Board of Directors of Uruguay Mineral Resources and Black Swan
Resources. Dr. Morton obtained his B.Sc. (Hons. 1st class) in Geology and his
Ph.D. in Geology from the University of Nottingham, England.
All of the directors are residents of Canada except for Messrs. Jones, Krol
and Leonard, who reside in the United States. All directors are elected
annually by the shareholders and hold office until the next Annual Meeting of
Shareholders. Each officer of the Company holds office at the pleasure of the
Board of Directors. No director or officer of the Company has any family
relationship with any other officer or director of the Company. Messrs. Jones,
Irwin and Mitchell are members of the Company's audit committee. Messrs. Morton
and Mitchell are members of the Company's Environmental Committee and Messrs.
Morton and Jones serve as members of the Company's Compensation Committee.
Operating within the guidance provided by the Company's Board of Directors, the
Compensation Committee's role is to assure that the Company's executive
compensation strategy is aligned with the interests of the shareholders, and the
Company's compensation structure will allow for fair and reasonable base salary
levels and the opportunity for executives to earn compensation that reflects
both Company and individual performance.
CERTAIN SIGNIFICANT EMPLOYEES OR CONSULTANTS
The Company has consulting relationships with other geologists and persons
that are included in its projects and properties from time to time, none of
which are currently material to the Company.
ITEM 11. EXECUTIVE COMPENSATION
-----------------------
OFFICERS
The Company has no long-term incentive plans. However stock options are
awarded from time-to-time in the discretion of the Board of Directors and the
Compensation Committee. The following tables set forth all annual and long-term
compensation for services in all capacities to the Company and its subsidiaries
for the three most recently completed financial years, including information
regarding stock option awards made under the Company's Stock Option Plan. All
information regarding the number and price of securities under options granted
prior to November 27, 2001 have been adjusted to reflect the seven for one
consolidation of the Company's Common Shares effective on that date.
(This portion of the page is intentionally left blank.)
15
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------------------ ---------------------------------
Awards Payouts
------------------------- -------
Name Securities All other
and Other Annual Under Options Restricted LTIP Compensa-
Principal Fiscal Salary Bonus Compensation Granted Shares Payouts tion (2)
Position Year ($) ($) ($) (#) ($) ($) ($)
- ------------------ ------ --------- ----- ------------ ------------- ---------- ------- ---------
Mark E. Jones, III 2003 US$ 60,000 - - 130,888 - - US$7,800
Chairman 2002 US$ 60,000 - - 184,072 - - US$7,800
2001 - - - 265,929 - - -
J. David Edwards 2002 US$ 62,500 - - 21,429 - - US$3,900
President (1) 2001 US$125,000 - - 228,571 - - US$7,300
(1) Mr. Edwards served as the Company's President from 1994 through July 2001.
All options held by Mr. Edwards expired unused in August 2001.
(2) Car allowance.
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FISCAL YEAR
Market Value
Securities % of Total of Securities
Under Options Options Exercise or Underlying
Granted Granted to Base Price Options on
Employees in Date of Grant
Name (#) Fiscal Year ($/Security) ($/Security) Expiration Date
- ---------------------- -------------- -------------- --------------- -------------- ------------------
Mark E. Jones, III 55,888 4.9% $ 0.27 $ 0.27 June 28, 2007
- ---------------------- -------------- -------------- --------------- -------------- ------------------
Mark E. Jones, III (1) 75,000 6.6% $ 0.18 $ 0.18 September 26, 2007
- ---------------------- -------------- -------------- --------------- -------------- ------------------
(1) The options are subject to vesting requirements (25% on the date of grant
and 12.5% on each quarter end thereafter).
OPTION EXERCISES IN LAST FISCAL YEAR
Unexercised Value of Unexercised
Options In-the-Money
at Fiscal Options
Securities Aggregate Year-End at Fiscal Year-End
Acquired Value (#) ($)
on Exercise Realized
Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- ------------------ ----------- --------- ---------------------- --------------------
Mark E. Jones, III 55,888 $ 10,600 478,125 - Exercisable $ 0 - Exercisable
46,875 - Unexercisable $ 0 - Unexercisable
Following the consolidation of the Company's Common Stock effective
November 27, 2001, the exercise price for the outstanding options ranged from
$2.24 to $6.71, which exceeded the market price after consolidation by a
significant margin. The directors and officers have in the past provided a
significant source of financing to the Company without fees and on a timely
basis. At the Extraordinary General Meeting of the Company held on October 15,
2001, the shareholders of the Company approved the repricing of existing stock
options to a price equivalent to the weighted average trading price for a five
day, post-consolidation period.
16
DIRECTORS
The Directors of the Company did not receive cash or other compensation by
the Company for their service as directors during the most recently completed
fiscal year, except for option awards under the Company's stock option plan. In
fiscal 2003, in addition to the option awards to Mr. Jones discussed above, Mr.
Glazier, Mr. Irwin, Mr. Leonard, Mr. Mitchell and Mr. Morton received 273,300,
121,750, 176,975, 75,000 and 121,750 options to purchase common stock,
respectively, for their services on the Board of Directors. Mr. Glazier
received consulting fees of approximately $20,000 during fiscal 2003,
representing payment for plant management services. Information regarding
individual awards to directors is included in the footnotes to Item 12. Security
Ownership of Certain Beneficial Owners and Management below. The Company
maintains no pension, profit sharing, retirement or other plan providing
benefits to its officers and directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
---------------------------------------------------------------------
The following table sets forth, as of April 15, 2003, the number of Common
Stock and the corresponding percentage ownership of (i) each person who held of
record, or was known by the Company to own beneficially, more than five percent
of the Company's Common Stock, (ii) each director and executive officer of the
Company, and (iii) all directors and executive officers of the Company as a
group. Unless otherwise indicated, the Company believes the following persons
have sole voting and investment power with respect to the number of shares set
forth opposite their names.
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
CDS & Co.
P. O. Box 1038, Station A, 25 The Esplanade
Toronto, Ontario M5W 1G5 7,044,302 (1) 37.5 %
Cede & Co.
P.O. Box 20, Bowling Green Station
New York, New York 10274 3,360,087 (1) 18.8 %
Patrick L. Glazier (3) 1,741,012 (2) 9.2 %
Brian C. Irwin 150,000 (2) * %
Mark E. Jones, III 2,133,252 (2) 11.2 %
Leendert G. Krol 1,000,000 (2) 5.1 %
Daniel B. Leonard 1,120,369 (2) 6.0 %
Dr. Roger Howard Mitchell 180,494 (2) * %
Dr. Roger David Morton 155,428 (2) * %
L. Vann Downs
PO Box 1620, Pembroke GA 31321 1,074,563 5.8%
William L. Downs
PO Box 1620, Pembroke GA 31321 1,489,403 8.1%
Officer and Directors of the Company as a group
(7 persons) 6,480,555 (2) 30.8 %
* Less than 1%.
1. It is the understanding of the Company that all of these shares are
held by the record shareholder in a nominal, fiduciary, trustee or similar
capacity. The Company is unaware of the identities of the beneficial owners of
these shares, with the exception of shares held by the Company's officers or
directors included in such share positions.
17
2. A director of the Company. Address is 2000 South Dairy Ashford, Suite
510, Houston, TX 77077. Mr. Jones and Mr. Krol are also executive officers of
the Company. Includes options to purchase common shares at $0.24 through April
6, 2005 (71,428 options for Mr. Jones and 7,143 options for Mr. Mitchell).
Includes options to purchase 7,143 common shares at $0.24 through May 4, 2005
for Mr. Mitchell. Includes 192,643 options to purchase common shares at $0.24
through September 27, 2005 for Mr. Jones. Includes options to purchase 1,857
common shares at $0.24 through October 2, 2005 for Mr. Jones. Includes options
to purchase common shares at $0.24 through May 11, 2006 (87,643 for Mr. Jones
and 21,429 for Mr. Mitchell). Includes options to purchase common shares at
$0.28 through January 31, 2007 (101,700 for Mr. Glazier, 28,250 for Mr. Irwin,
40,541 for Mr. Jones, 48,025 for Mr. Leonard, 64,285 for Mr. Mitchell and 28,250
for Mr. Morton). Includes options to purchase common shares at $0.27 through
June 28, 2007 (198,300 for Mr. Glazier, 71,750 for Mr. Irwin, 55,888 for Mr.
Jones, 101,975 for Mr. Leonard and 71,750 for Mr. Morton). Includes options to
purchase common shares at $0.18 through September 30, 2007 (75,000 for Messrs.
Glazier, Jones, Leonard, and Mitchell and 50,000 for Messrs. Irwin and Mr.
Morton). Includes options to purchase common shares at $0.10 through March 5,
2008 for Mr. Krol. Includes 323,333 common shares for Mr. Leonard based upon
conversion of a 10% Debenture with principal value of $97,000. Includes
325,000, 763,950, and 278,875 warrants to purchase common shares at an exercise
price of $0.25 for Messrs. Glazier, Jones, and Leonard, respectively.
3. The beneficial owner has sole ownership, with the exception of a total
of 300,161 shares, where ownership is shared.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------
Debentures payable at January 31, 2003 and 2002 include $97,000 payable to
Mr. Leonard, a director of the Company. In September, 2002, Mr. Jones, Mr.
Glazier and Mr. Leonard purchased subscriptions in a private placement by
payment of $57,240, $20,000 and $8,000 and received 286,200, 100,000, and 40,000
common shares and warrants to purchase common shares with an exercise price of
$0.25 through September 18, 2004, respectively. In January 2002, Mr. Jones
purchased a subscription in a private placement by payment of $95,550 and
received 477,750 common shares and 477,750 warrants to purchase common shares
with an exercise price of $0.25 through January 29, 2004. Amounts totaling
$24,681 and $99,140 were paid by the Company during fiscal 2003 and 2002 to a
law firm in which Mr. Irwin is a partner. Accounts receivable at January 31,
2003 includes $31,600 receivable from Mr. Jones. See Notes 6 and 8 to the
Consolidated Financial Statements for additional information regarding related
party transactions.
ITEM 14. CONTROLS AND PROCEDURES.
--------------------------
(a) Evaluation of disclosure controls and procedures.
The term "disclosure controls and procedures" (defined in SEC rule
13a-14(c)) refers to the controls and other procedures of a company
that are designed to ensure that information required to be disclosed
by a company in the reports that it files under the Securities
Exchange Act of 1934 (the "Exchange Act") is recorded, processed,
summarized and reported within required time periods. The Company's
Chairman, who also serves as the Company's principal financial
officer, has evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days before the filing
of this annual report, and he concluded that, as of such date, the
Company's controls and procedures were effective.
(b) Changes in internal controls.
The Company maintains a system of internal accounting controls that
are designed to provide reasonable assurance that its books and
records accurately reflect its transactions and that established
policies and procedures are followed. There were no significant
changes to the Company's internal controls or in other factors that
could significantly affect its internal controls subsequent to such
evaluation.
18
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
------------------------------------------------------------------
(a) Financial Statements and Schedules.
(1) The following is a list of and index to the Consolidated Financial
Statements filed as part of this Registration Statement:
STAR RESOURCES CORP.
Index to Consolidated Financial Statements
Page
Report of Independent Auditors - Morgan & Company 21
Consolidated Financial Statements:
Consolidated Balance Sheets - January 31, 2003 and 2002 22
Consolidated Statements of Operations and Deficit Accumulated
During the Exploration Stage for each of the years ended
January 31, 2003, 2002 and 2001 23
Consolidated Statements of Cash Flows for each of the years
ended January 31, 2003, 2002 and 2001 24
Notes to Consolidated Financial Statements 25
(2) All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are either not
required under the related instructions, are not applicable, or the information
required thereby is set forth in the Company's Consolidated Financial Statements
or the Notes thereto.
(3) Exhibits Filed as Part of this Registration Statement.
See Index to Exhibits.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
April 30, 2003 STAR RESOURCES CORPORATION
(Registrant)
By: /s/ Mark E. Jones, III
--------------------------
MARK E. JONES, III
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------------- ----------------------------------- --------------
/s/ Mark E. Jones, III Chief Executive Office and Director April 30, 2003
______________________
Mark E. Jones, III*
_____________________ Director April 30, 2003
Patrick L. Glazier*
_____________________ Director April 30, 2003
Brian C. Irwin*
_____________________ President and Director April 30, 2003
Leendert G. Krol*
_____________________ Director April 30, 2003
Daniel B. Leonard*
____________________ Director April 30, 2003
Dr. Roger Howard Mitchell*
______________________ Director April 30, 2003
Dr. Roger David Morton*
By: /s/ Mark E. Jones, III
___________________________
Mark E. Jones, III
Attorney-in-fact
For persons indicated *
20
AUDITORS' REPORT
To the Shareholders of
Star Resources Corporation
(An exploration stage enterprise)
We have audited the consolidated balance sheets of Star Resources Corporation
(an exploration stage enterprise) as at January 31, 2003 and 2002, and the
consolidated statements of operations and deficit, and cash flows for the years
ended January 31, 2003, 2002, and 2001. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada and the United States of America. 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 January 31, 2003
and 2002, and the results of its operations and cash flows for the years ended
January 31, 2003, 2002, and 2001, in accordance with Canadian generally accepted
accounting principles. As required by the British Columbia Company Act, we
report that, in our opinion, these principles have been applied on a consistent
basis.
Vancouver, B.C. "Morgan & Company"
April 15, 2003 Chartered Accountants
COMMENTS BY INDEPENDENT AUDITORS FOR U.S. READERS ON
CANADA-U.S. REPORTING CONFLICT
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by significant uncertainties such as those described in
Note 1 of the consolidated financial statements. Our report to the
shareholders, dated April 15, 2003, is expressed in accordance with Canadian
reporting standards which do not permit a reference to such an uncertainty in
the Auditors' Report when the uncertainty is adequately disclosed in the
financial statements.
Vancouver, B.C. "Morgan & Company"
April 15, 2003 Chartered Accountants
21
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
January 31, 2003 January 31, 2002
------------------ ------------------
(In Canadian Dollars)
ASSETS
Current assets:
Cash $ 22,734 $ 493,305
Accounts receivable 38,962 14,838
------------------ ------------------
61,696 508,143
Property, plant, and equipment, at cost:
Mineral properties and deferred
expenditures (Note 3) - 2,942,086
Diamond sorting and recovery pilot plant 1,905,873 1,905,873
Buildings, equipment and other 101,853 143,421
Accumulated depreciation (1,982,185) (1,995,438)
------------------ ------------------
25,541 2,995,942
------------------ ------------------
Other assets 9,018 12,289
------------------ ------------------
Total assets $ 96,255 $ 3,516,374
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 124,680 $ 132,086
------------------ ------------------
Total current liabilities 124,680 132,086
Debentures (Note 4) 1,278,595 1,278,595
Interest payable (Note 4) 250,114 122,604
Commitments and contingencies (Note 9)
Shareholders' equity (deficit)
Common share capital, no par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 18,471,459
(14,862,935 at January 31, 2002) (Note 5) 30,878,419 30,108,507
Deficit accumulated during the exploration stage (32,435,553) (28,125,418)
------------------ ------------------
Total shareholders' equity (deficit) (1,557,134) 1,983,089
------------------ ------------------
Total liabilities and shareholders' equity $ 96,255 $ 3,516,374
================== ==================
Approved by the Board of Directors.
See accompanying notes.
22
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Year Ended January 31,
2003 2002 2001
------------- ------------- -------------
(In Canadian Dollars)
Revenues:
Interest income $ 1,618 $ 6,514 $ 11,383
Gain on sale of equipment 10,740 - -
------------- ------------- -------------
12,358 6,514 11,383
Expenses:
General and administrative (Note 10) 1,020,729 1,693,363 1,677,442
Finance charges 22,396 91,116 19,583
Write-down of mineral properties (Note 3) 3,141,726 86,067 -
Interest expense 127,510 122,932 11,755
Translation (gains) losses 10,132 (26,300) (2,090)
------------- ------------- -------------
4,322,493 1,967,178 1,706,690
------------- ------------- -------------
Loss before provision for income taxes (4,310,135) (1,960,664) (1,695,307)
Provision for income taxes (Note 7) - - -
------------- ------------- -------------
Net loss (4,310,135) (1,960,664) (1,695,307)
Deficit accumulated during the exploration stage at
beginning of the year (28,125,418) (26,164,754) (24,469,447)
------------- ------------- -------------
Deficit accumulated during the exploration stage at
end of the year $(32,435,553) $(28,125,418) $(26,164,754)
============= ============= =============
Basic and diluted net loss per common share $ (0.26) $ (0.21) $ (0.20)
============= ============= =============
Weighted-average common shares outstanding 16,439,454 9,141,534 8,387,527
See accompanying notes.
23
STAR RESOURCES CORP.
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended January 31,
2003 2002 2001
------------ ------------ ------------
(In Canadian Dollars)
Operating activities:
Net loss $(4,310,135) $(1,960,664) $(1,695,307)
Items not affecting cash:
Depreciation 28,924 88,358 234,852
Write-down of mineral properties 3,141,726 86,067 -
Interest expense 127,510 122,604 11,755
Other 4,275 534 -
------------ ------------ ------------
(1,007,700) (1,663,101) (1,448,700)
------------ ------------ ------------
Changes in noncash working capital:
Accounts receivable (24,124) 93,672 30,993
Prepaid expenses and other assets - - (8,847)
Accounts payable and accrued liabilities 45,094 (63,507) 32,917
------------ ------------ ------------
20,970 30,165 55,063
------------ ------------ ------------
Net cash used in operating activities (986,730) (1,632,936) (1,393,637)
Investing activities:
Property acquisition and exploration (199,640) (577,463) (1,462,821)
Buildings, equipment and other (1,613) (48,403) (41,739)
------------ ------------ ------------
Net cash used in investing activities (201,253) (625,866) (1,504,560)
------------ ------------ ------------
Financing activities:
Proceeds from issuances of common shares 717,412 1,451,935 2,492,596
Issuances of advances and notes payable (net) - (445,000) 445,000
Proceeds from issuance of convertible debentures - 1,278,595 -
------------ ------------ ------------
Net cash provided by financing activities 717,412 2,285,530 2,937,596
------------ ------------ ------------
Increase (decrease) in cash and temporary cash investments (470,571) 26,728 39,399
Cash and temporary cash investments, beginning of period 493,305 466,577 427,178
------------ ------------ ------------
Cash and temporary cash investments, end of period $ 22,734 $ 493,305 $ 466,577
============ ============ ============
See accompanying notes.
24
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2003
1. OPERATIONS
Star Resources Corp. ("the Company") was incorporated in 1986 in British
Columbia, Canada, and has been engaged in the acquisition and exploration of
mineral properties with the potential for economically recoverable reserves.
Since fiscal year 1993, the Company has concentrated its efforts on the
acquisition and exploration of mineral properties with the potential for
economically recoverable diamonds. As discussed in Note 3, in fiscal 2003 the
Company wrote off all costs capitalized as mineral properties and deferred
expenditures based upon exploration results. The Company intends to pursue gold
exploration opportunities that have large scale potential, with prospects in
South America as the primary focus. See Note 3 for further discussion of the
Company's mineral property interests.
SIGNIFICANT ESTIMATES
The nature of the Company's operations results in significant expenditures for
the acquisition and exploration of properties. None of the Company's properties
have economically recoverable reserves or proven reserves at the current stage
of exploration. The recoverability of the carrying value of mineral properties
and deferred expenditures is dependent upon a number of factors including the
existence of recoverable reserves, the ability of the Company to obtain
financing to renew leases and continue exploration and development and the
discovery of economically recoverable reserves.
GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company anticipates that amounts
received for the sale of its diamond sorting and recovery plant in the first
quarter of fiscal 2004 as discussed in Note 12 will be sufficient to satisfy the
Company's cash needs for general and administrative expenses during the fiscal
2004. The Company has incurred operating losses and will require additional
cash to obtain new leases and fund exploration activities during fiscal 2004.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustment to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
All amounts are in Canadian dollars unless noted otherwise.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in Canada and comply in all material respects with
United States generally accepted accounting principles except as discussed in
Note 11.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned United States subsidiary, Star U.S. Inc. ("Star"), and the
three wholly-owned subsidiaries of Star, Diamond Operations, Inc. ("DOI"),
Diamond Exploration, Inc. ("DEI") and Continental Diamonds, Inc. ("CDI") from
their respective dates of acquisition. Significant intercompany balances and
transactions have been eliminated.
25
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2003
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Transactions denominated in United States dollars or other foreign currencies
during a year are translated at exchange rates prevailing at the date of the
transaction. Exchange gains or losses resulting from such translations are
included in the determination of net loss. Translation adjustments resulting
from the process of translating monetary assets and liabilities of United States
wholly owned subsidiaries into Canadian dollars are included in the
determination of net loss. Property, plant and equipment of the United States
wholly owned subsidiaries are translated into Canadian dollars at exchange rates
prevailing at the date of the expenditure.
CASH AND TEMPORARY CASH INVESTMENTS
All instruments with a maturity of three months or less are considered to be
temporary cash investments. Cash and temporary cash investments are carried at
cost which approximates market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of January 31, 2003 and 2002, the fair value of cash, accounts receivable and
accounts payable including amounts due to and from related parties approximates
carrying values because of the short term of these instruments.
MINERAL PROPERTIES AND DEFERRED EXPENDITURES
Direct acquisitions, evaluation and exploration expenditures are capitalized,
reduced by sundry income, to be amortized over the recoverable mineral reserves
if a property becomes commercially developed. When an area is disproved or
abandoned, the acquisition costs and related deferred expenditures are written
off. Interest is capitalized on properties upon the commencement of active
evaluation and preproduction activities, if significant. During the three-year
period ended January 31, 2003, no interest was capitalized.
The net capitalized cost of each mineral property is periodically compared to
management's estimation of the net realizable value and a write-down is recorded
if the net realizable value is less than the cumulative net capitalized costs.
Write-downs totaling $3,141,726 and $86,067 were recorded in fiscal 2003 and
2002, respectively
OTHER PROPERTY, PLANT AND EQUIPMENT
Buildings, equipment and other are depreciated on a straight-line basis over
useful lives ranging from 3 to 25 years. The diamond sorting and recovery pilot
plant (the "Plant") became fully operational in April 1994 and was depreciated
on a straight-line basis over its estimated useful life of seven years.
INCOME TAXES
The Company files a separate Canadian income tax return. The Company's United
States subsidiaries file a consolidated United States income tax return. The
Company provides future income taxes, when applicable, on items of income and
expense reported in different periods for financial and income tax reporting
purposes. At January 31, 2003, the Company has net operating loss carryforwards
in excess of timing differences between financial and income tax reporting
amounts which are not probable of realization. Accordingly, the future benefit
of these net operating loss carryforwards are not reflected in the accompanying
consolidated financial statements.
26
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2003
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER COMMON SHARE
The Company has adopted the new accounting standard for the calculation of loss
per share, which follows the treasury stock method in the calculation of diluted
loss per share and requires the presentation of both basic and diluted loss per
share on the face of the consolidated statements of operations and deficit.
3. MINERAL PROPERTIES AND DEFERRED EXPENDITURES
ARKANSAS PROPERTIES
Black Lick and Twin Knobs II Properties
On February 5, 1999, the Company entered into an agreement with Potlatch
Corporation to purchase the surface rights to approximately 480 acres in Pike
County, Arkansas located adjacent to the Company's American Mine Property for a
total of approximately $313,000 (U.S.). In December 1999, the Company entered
into an agreement with a third party lessor to lease the undersurface rights
below the 480 acres described above. The consideration paid for the lease was
$50,000 (U.S.), 500,000 shares of the Company and the transfer to the lessor of
the surface rights which the Company purchased from Potlatch Corporation as
described above. The lease grants the rights to explore, develop and extract
diamond bearing material lying below overburden and the upper 50 feet of diamond
bearing material on those areas for which the surface rights have been acquired
and transferred to the lessor. The primary term of the lease is five years plus
two year extensions and will continue so long as there is commercial production.
Royalties include 2% of gross sales subject to a minimum of $48,000 (U.S.) per
year after the first seven years. The Company has the right to use the surface
for plant and other facilities for additional royalties.
During fiscal 2001, the Company commenced a drilling program to assess these
prospects. Core samples totaling 14,374 feet were taken from 40 drilling
locations on the Black Lick Property. Definition drilling commenced on the Twin
Knobs II Property in the third fiscal quarter of 2001, and core samples totaling
1,211 feet were taken from five drilling locations. An analysis of a total of
238kg of lamproite from three different core samples from the American Mine
Property and the Black Lick Property was performed and produced 14 microdiamonds
and one macrodiamond. In July 2001 the Company excavated a bulk sample of
approximately 10,000 tons on the Black Lick Property, and approximately 2,000
tons of the bulk sample was processed through the Company's diamond sampling
plant. Three diamonds with a total carat weight of 0.38 were recovered, which
is significantly less than the Company had anticipated.
During fiscal 2003, the Company recovered several microdiamonds from drill core
from the Black Lick and American Mine Properties which were processed at the
Diamond Recovery Plant. In May 2002 the Company drilled a total of 11 auger
holes, each five feet in diameter, on the American Mine, Black Lick and
Kimberlite Properties. Most of drilling was not successful as the holes were
terminated short of their target depths by hard sandstone blocks, which could
not be penetrated by the auger. In the third quarter of fiscal 2003 the Company
completed eleven wide diameter holes on the American Mine and Black Lick
Properties and bulk sampled approximately 900 tons of material. Bulk sampling
revealed no macrodiamonds. In December 2002, based upon the cumulative
exploration results obtained on the Arkansas Properties, the Company made the
decision to cease exploration efforts in Arkansas. Accordingly, the capitalized
costs related to the Black Lick and Twin Knobs II properties totaling $2,512,500
were written off in the third quarter of fiscal 2003.
27
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2003
3. MINERAL PROPERTIES AND DEFERRED EXPENDITURES (CONTINUED)
American Mine Property
Pursuant to an agreement dated November 4, 1992, Diamond Exploration, Inc.
("DEI"), a wholly owned subsidiary of the Company, was granted a permit to
explore a mineral property located in Pike County, Arkansas. The Company's
Diamond Recovery Plant ("the Plant") is located on this leased property. In
November 1996, the Company exercised its option to lease the property for 10
years upon the payment of $125,000 (U.S.). Yearly payments of $25,000 (U.S.)
were required for each of the four years after the first year and $40,000 (U.S.)
per year for the following five years, plus an additional $7,500 per year for
surface rentals related to the Plant. Sampling was performed on the American
Mine property in the first quarter of fiscal 1998. The Company excavated a
100-ton sample during fiscal 1998, and a total of 51 diamonds with a total carat
weight of 9.591 were recovered, including two stones greater than one carat.
During fiscal 2003 sampling was conducted on this property in conjunction with
the sampling performed on the Black Lick Property as discussed above. The lease
payment of $47,500(U.S.), due November 1, 2002, was not made by the Company.
Due to the lease expiration and the exploration results discussed above, the
capitalized costs related to the American Mine Property totaling $450,823 were
written off in the third quarter of fiscal 2003.
As discussed in Note 12, in March 2003 the Company sold the Plant to a third
party for $350,000 (U.S.). In conjunction with the sale, the third party paid
the lessor of the American Mine Property $47,500 (U.S.) on behalf of the Company
in order to extend the Company's lease on the property through October 31, 2003.
Kimberlite Mine Property
In November 1998, the Company executed a lease on certain property in Pike
County, Arkansas with a two-year term ending November 14, 2000 by payment of
$15,000 (U.S.). The Company extended the lease to November 14, 2002 by payment
of an additional $15,000 (U.S.) in November 2000. The Company allowed this
lease to expire in November 2002, and the capitalized costs totaling $84,034
were written off in the third fiscal quarter of 2003.
Southwest Properties
In June 1994, the Company acquired from an unrelated company its rights under
fifteen mineral leases located in the southwestern region of Arkansas covering
approximately 2,000 acres. The original dates of the leases were from May 1992
to August 1992, with terms from 10 to 20 years. In fiscal 2002 and fiscal 2003
the Company elected not to renew selected leases, and, accordingly, write-downs
representing all prior acquisition costs totaling $86,067 and $59,020,
respectively, were recorded. The capitalized costs related to the remaining
active leases totaling $35,349 were written off in the third quarter of fiscal
2003 based upon the Company's decision to cease exploration efforts in Arkansas
as discussed above.
(This portion of the page is intentionally left blank.)
28
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2003
3. MINERAL PROPERTIES AND DEFERRED EXPENDITURES (CONTINUED)
Mineral properties and deferred expenditures were as follows:
BALANCE AT BALANCE AT
JANUARY 31 IMPAIRED JANUARY 31
2000 ADDITIONS WRITE-OFFS 2001
Arkansas Properties:
Southwest Properties:
Acquisition costs $156,373 $ 14,387 $ - $ 170,760
-------- ---------- ----------- ----------
156,373 14,387 - 170,760
American Mine Property:
Acquisition costs 176,460 49,604 - 226,064
Exploration costs 76,977 57,490 - 134,467
-------- ---------- ----------- ----------
253,437 107,094 - 360,531
Blacklick and Twin Knobs II Properties:
Acquisition costs 533,902 249,943 - 783,845
Exploration costs - 1,068,229 - 1,068,229
-------- ---------- ----------- ----------
533,902 1,318,172 - 1,852,074
Kimberlite Mine Property:
Acquisition costs 44,157 23,168 - 67,325
-------- ---------- ----------- ----------
44,157 23,168 - 67,325
-------- ---------- ----------- ----------
Total acquisition costs 910,892 337,102 - 1,247,994
Total exploration costs 76,977 1,125,719 - 1,202,696
-------- ---------- ----------- ----------
Total costs $987,869 $1,462,821 $ - $2,450,690
======== ========== =========== ==========
BALANCE AT BALANCE AT
JANUARY 31 IMPAIRED JANUARY 31
2001 ADDITIONS WRITE-OFFS 2002
Arkansas Properties:
Southwest Properties:
Acquisition costs $ 170,760 $ 7,410 $ (86,067) $ 92,103
----------- ----------- ------------ ----------
170,760 7,410 (86,067) 92,103
American Mine Property:
Acquisition costs 226,064 75,585 - 301,649
Exploration costs 134,467 - - 134,467
----------- ----------- ------------ ----------
360,531 75,585 - 436,116
Blacklick and Twin Knobs II Properties:
Acquisition costs 783,845 - - 783,845
Exploration costs 1,068,229 494,468 - 1,562,697
----------- ----------- ------------ ----------
1,852,074 494,468 - 2,346,542
Kimberlite Mine Property:
Acquisition costs 67,325 - - 67,325
----------- ----------- ------------ ----------
67,325 - - 67,325
----------- ----------- ------------ ----------
Total acquisition costs 1,247,994 82,995 (86,067) 1,244,922
Total exploration costs 1,202,696 494,468 - 1,697,164
----------- ----------- ------------ ----------
Total costs $ 2,450,690 $ 577,463 $ (86,067) $2,942,086
=========== =========== ============ ==========
29
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2003
3. MINERAL PROPERTIES AND DEFERRED EXPENDITURES (CONTINUED)
BALANCE AT BALANCE AT
JANUARY 31 IMPAIRED JANUARY 31
2002 ADDITIONS WRITE-OFFS 2003
Arkansas Properties:
Southwest Properties:
Acquisition costs $ 92,103 $ 2,266 $ (94,369) -
---------- ---------- ------------ ---------
92,103 2,266 (94,369) -
American Mine Property:
Acquisition costs 301,649 - (301,649) -
Exploration costs 134,467 14,707 (149,174) -
---------- ---------- ------------ ---------
436,116 14,707 (450,823) -
Blacklick and Twin Knobs II Properties:
Acquisition costs 783,845 - (783,845) -
Exploration costs 1,562,697 165,958 (1,728,655) -
---------- ---------- ------------ ---------
2,346,542 165,958 (2,512,500) -
Kimberlite Mine Property:
Acquisition costs 67,325 - (67,325) -
Exploration costs - 16,709 (16,709) -
---------- ---------- ------------ ---------
67,325 16,709 (84,034) -
---------- ---------- ------------ ---------
Total acquisition costs 1,244,922 2,266 (1,247,188) -
Total exploration costs 1,697,164 197,374 (1,894,538) -
---------- ---------- ------------ ---------
Total costs $2,942,086 $ 199,640 $(3,141,726) $ -
========== ========== ============ =========
4. DEBENTURES
In February 2002, the Company completed the issuance of $1,278,595 principal
amount of 10% secured convertible debentures ("the Debentures"). The Debentures
were convertible into 445,503 units at the rate of one unit for each $2.87
principal amount of Debenture until February 16, 2003. Each unit would consist
of one common share of the Company and one share purchase warrant with an
exercise price of $3.15, exercisable through August 16, 2003. The conversion
and share purchase warrant prices above were adjusted to reflect the Company's
seven for one share consolidation as disclosed in Note 5.
On February 11, 2003, the holders of the Debentures approved the amendment of
the conversion price of the units to $0.30 and the extension of the maturity
date of the Debentures to February 16, 2004. As amended, each of the 4,261,983
units would consist of one common share of the Company and one share purchase
warrant with an exercise price of $0.30, exercisable through February 16, 2004.
Upon conversion, $97,000 principal amount of 10% Debentures held by a director
will be convertible only into common shares of the Company on the basis on one
share for each $0.30 principal amount. Additionally, the terms of the Debenture
were amended to include a mandatory conversion provision which will require
conversion of all Debentures and exercise of all related warrants within 30 days
after the closing price of the Company's common shares has exceeded $0.375 for
ten consecutive trading days.
Interest at the rate of 10% is payable on conversion or maturity in cash, or at
the election of the Company, in common shares valued at the weighted average
trading price of the common shares of the Company for the ten trading days
preceding the interest payment date. The Debentures are secured by a general
security interest in the Company's current and future assets and by the stock of
Star U.S., Inc. ("Star"), a wholly owned subsidiary of the Company, and a
wholly-owned subsidiary of Star.
30
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2003
5. SHARE CAPITAL
Common share issuances during the three years ended January 31, 2003 are as
follows:
DATE NUMBER OF SHARES PRICE PER SHARE AMOUNT
Balance at January 31, 2000 42,618,650 $ 24,540,467
Common share options exercised February 14 through September 28, 2000 3,536,000 (1) 1,142,930
Issued for conversion of convertible
debentures February 14 through April 12, 2000 8,271,233 $ 0.165 1,364,754
Common share warrants exercised February 29 through April 16, 2000 8,179,790 0.165 1,349,666
Issued for interest on convertible
debentures February 29 through April 30, 2000 249,898 (2) 183,130
Issued for services November 2, 2000 116,345 0.65 75,625
----------- ------------
Balance at January 31, 2001 62,971,916 28,656,572
Common share options exercised March 21 through May 11, 2001 1,229,000 (3) 313,660
Common shares consolidated on a ratio
of 7 to 1 November 27, 2001 (55,029,357) -
Issued for cash January 29, 2002 5,691,376 0.20 1,138,275
----------- ------------
Balance at January 31, 2002 14,862,935 30,108,507
Issued for services March 25, 2002 218,750 0.24 52,500
Common share options exercised June 18, 2002 570,000 (4) 153,457
Issued for cash September 18, 2002 2,819,774 0.20 563,955
----------- ------------
Balance at January 31, 2003 18,471,459 $ 30,878,419
=========== ============
(1) Price ranged from $0.15 to $0.53
(2) Price ranged from $0.62 to $0.93
(3) Price ranged from $0.20 to $0.32
(4) Price ranged from $0.24 to $0.28
On January 29, 2002 the Company completed a private placement of 5,691,376 units
at a price of $0.20 per unit, each unit to consist of one common share and one
share purchase warrant with an exercise price of $0.25 per unit. The share
purchase warrants had an expiration date of January 29, 2003, which was extended
during fiscal 2003 to January 29, 2004. A total of $1,138,275 was received by
the Company during the third and fourth quarters of fiscal 2002 representing
subscriptions for the private placement. Included in that amount was a total of
$188,325 representing subscriptions for 941,625 units by three of the Company's
directors.
In March 2002 the Company issued a total of 218,750 common shares to three
creditors to settle debts totaling $52,500, which were included in accounts
payable and accrued liabilities as of January 31, 2002. During June 2002, the
Company received proceeds of $153,457, representing the exercise by directors
and employees of 570,000 common share options with exercise prices from $0.24 to
$0.28.
On September 18, 2002, the Company completed a private placement of 2,819,774
units at a price of $0.20 per unit, each unit consisting of one common share and
one share purchase warrant with an exercise price of $0.25 per unit. The share
purchase warrants have an expiration date of September 18, 2004. A total of
$563,955 was received by the Company during fiscal 2003 representing
subscriptions for the private placement. Included in that amount was a total of
$85,240 representing subscriptions for 426,200 units by three of the Company's
directors.
31
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2003
6. STOCK OPTION PLAN
The Company maintains a stock option plan for its directors, officers and
employees and may issue up to 3,000,000 options. At the Company's annual
meeting held July 23, 2002, shareholders approved an amendment of the 2001 Stock
Option Plan (the "Plan") to increase the number of shares reserved for issuance
under the Plan from 1,142,857 to 3,000,000. Under the terms of the plan, the
exercise price of each option equals the closing market price of the Company's
stock on the date of grant. No compensation expense is recognized when stock
options are issued. Any consideration paid by the optionee on the exercise of
options is credited to share capital. Through July 2002 all options were
immediately vested and generally have a term of five years.
The activity in common stock option grants outstanding for the prior three
fiscal years is as follows (the number and prices of options for prior years
have been adjusted to reflect the seven for one share consolidation effective on
November 27, 2001):
2003 2002 2001
-------------------- ------------------ ---- ----
Weighted Weighted Weighted
Average Average Average
Amount Price Amount Price Amount Price
--------- --------- --------- -------- ------- --------
Outstanding, beginning
of year 1,475,000 $ 0.26 897,857 $ 4.48 748,571 $ 2.24
Granted 1,145,000 0.22 1,044,143 0.44 692,286 4.97
Exercised 570,000 0.27 175,571 0.26 505,143 2.24
Forfeited 103,571 0.24 291,429 0.71 37,857 3.78
--------- --------- --------- -------- ------- -------
Outstanding, end of
year (1) 1,946,429 $ 0.24 1,475,000 $ 0.26 897,857 $ 4.48
========= ========= ========= ======== ======= =======
(1) A total of 438,572 options outstanding at January 31, 2003 (635,000 at January 31, 2002)
were repriced to $0.24 effective January 17, 2002. A total of 343,750 options are
subject to vesting requirements.
The following table summarizes information about stock options outstanding at
January 31, 2003:
NUMBER OUTSTANDING
AT JANUARY 31,2003 ISSUE DATE EXPIRATION DATE EXERCISE PRICE
14,286 December 14, 1999 December 14, 2004 $ 0.24
82,142 April 6, 2000 April 6, 2005 0.24
10,000 May 4, 2000 May 4, 2005 0.24
206,929 September 27, 2000 September 27, 2005 0.24
1,857 October 2, 2000 October 2, 2005 0.24
123,358 May 11, 2001 May 11, 2006 0.24
387,857 January 31, 2002 January 31, 2007 0.28
570,000 June 28, 2002 June 28, 2007 0.27
550,000 September 26, 2002 September 26, 2007 0.18
32
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2003
7. INCOME TAXES
The Company has not incurred or paid any Canadian or United States income taxes
since its inception. At January 31, 2003 the Company has Canadian noncapital
loss carryforwards of approximately $2,096,000 which begin to expire in fiscal
year 2004 and United States federal net operating loss carryforwards of
approximately $18,357,000 (U.S.) which begin to expire in 2004.
United States net operating losses may be limited if more than a 50% ownership
change has occurred with respect to any Company included in the consolidated
group. If an ownership change has occurred, such losses are limited on an
annual basis to the value of the respective Company on the date of change
multiplied by the U.S. federal long-term, tax-exempt rate in effect for the
period. In addition, some U.S. net operating losses may be subject to other
limitations based on taxable income from wholly owned subsidiaries on a
stand-alone basis.
At January 31, 2003, the Company has incurred approximately $538,000 of
exploration and development costs which may be deducted against future Canadian
taxable income subject to certain limitations.
As a result of the losses incurred in each year since inception of the Company,
temporary differences between financial and tax basis of assets and liabilities
are offset by operating loss carryforwards. The Company does not anticipate
completion of the analysis of the temporary differences and the impact of
ownership changes, if any, on net operating losses until such time as the
Company becomes profitable. The Company does not anticipate any effect on the
consolidated financial statements related to the ownership changes for Canadian
or United States generally accepted accounting principles purposes.
8. RELATED PARTY TRANSACTIONS
The chairman of the Company serves as chairman for a third party company with
which the Company shares the cost of office space and certain administrative
personnel. The chairman has significant share ownership of the Company.
Debentures payable at January 31, 2003 and 2002 includes $97,000 payable to a
director. Accounts receivable at January 31, 2003 includes $31,600 receivable
from the chairman of the Company. Included in accounts payable and accrued
liabilities at January 31, 2003 is approximately $37,700 payable to a law firm
in which one of the Company's directors is a partner.
9. COMMITMENTS AND CONTINGENCIES
Except as described below, there are no material pending legal proceedings to
which the Company or any of its subsidiaries is a party or to which any of their
property is subject.
On May 15, 1998, a legal action styled James Cairns and Stewart Jackson vs.
Texas Star Resources Corporation d/b/a Diamond Star, Inc. was filed in the 215th
Judicial District Court of Harris County, Texas, Cause No. 9822760 wherein the
Plaintiffs allege, among other things, that the Company breached contractual
agreements and committed fraud by not timely releasing or causing to be released
from an escrow account required by Canadian law certain shares of the Company to
which Plaintiffs allege that they were entitled to receive in calendar 1995 and,
as a result of the Company's alleged actions with respect to the release of such
shares, the Plaintiffs sought monetary damages for losses in share value,
attorney's fees, court costs, expenses, interest and exemplary damages. In
1999, the litigation against the Company in Houston, Harris County, Texas, was
dismissed by the court with prejudice, leaving only the claims of James M.
Cairns, Jr. pending in British Columbia which is generally described below.
The legal action in Texas is similar to one filed against the Company in the
Supreme Court of British Columbia, Canada, in August 1996 styled Cause No.
C96493; James M. Cairns, Jr. vs. Texas Star Resources Corporation. In January
1993, the Plaintiffs were issued common stock of the Company in escrow which
shares were to be released based on exploration expenditures by the Company on
certain of its properties in Arkansas. The escrow requirements were imposed by
the Vancouver Stock Exchange. Plaintiffs requested that all of the shares be
released in 1995. At that time the Company believed that the release of said
shares when requested by the Plaintiffs was inappropriate due to legal
requirements and regulatory concerns. The shares were subsequently released to
the Plaintiffs.
33
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2003
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company intends to vigorously defend the allegations of the
Plaintiffs in the pending litigation for damages in British Columbia and in
Texas (if the case is appealed or refiled) and believes it has meritorious
defenses to such claims. No proceedings in the action in British Columbia have
been taken by the Plaintiff since March 30, 2000. However, the Company cannot
provide any assurances that it will be successful, in whole or in part, with
respect to its defense of the claims of the Plaintiffs. If the Company is not
successful, any judgment obtained by Plaintiffs could have a material and
adverse effect on its financial condition.
10. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist of the following:
2003 2002 2001
---------- ---------- ----------
Consulting fees $ 134,605 $ 197,473 $ 175,357
Depreciation expense 28,924 88,359 234,852
Entertainment 31,884 40,823 49,542
Insurance 7,385 22,075 22,860
Office expenses 61,639 94,796 108,620
Professional fees 68,767 109,420 145,624
Rent 32,724 32,047 86,901
Repairs and maintenance 126,856 172,205 91,634
Salary 423,802 700,014 547,678
Shareholder relations 30,126 91,826 66,397
Travel 41,393 106,201 129,417
Utilities 32,624 38,124 18,560
---------- ---------- ----------
Total $1,020,729 $1,693,363 $1,677,442
========== ========== ==========
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP")
The consolidated financial statements have been prepared in accordance with
Canadian GAAP which differs in some respects from United States GAAP. The
material differences in respect to these financial statements between Canadian
and United States GAAP, and their effect on the Company's financial statements,
are summarized below.
34
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2003
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP")(CONTINUED)
Mineral Properties and Deferred Expenditures
Under Canadian GAAP, companies have the option to defer mineral exploration
expenditures on prospective properties until such time as it is determined that
further work is not warranted, at which point property costs would be written
off. Under United States GAAP, all exploration expenditures are expensed until
an independent feasibility study has determined that the property is capable of
commercial production. At this stage, the Company has not yet identified
economically recoverable reserves on any of its properties. Accordingly, under
United States GAAP, all exploration costs incurred are expensed.
2003 2002 2001
------------- ------------- -------------
Loss in accordance with Canadian GAAP $ (4,310,135) $ (1,960,664) $ (1,695,307)
Deduct:
Deferred exploration expenditures capitalized
during the period - (494,468) (1,125,719)
Add:
Deferred exploration expenditures written off in the
period that would have been expensed in a prior
period 1,697,164 - -
------------- ------------- -------------
Loss in accordance with United States GAAP $ (2,612,971) $ (2,455,132) $ (2,821,026)
============= ============= =============
Loss per share (United States GAAP) $ (0.16) $ (0.27) $ (0.34)
============= ============= =============
Weighted average shares outstanding (United States
GAAP) 16,439,454 9,141,534 8,387,527
============= ============= =============
2003 2002 2001
------------ ------------ ------------
Shareholders' equity (deficiency) - Canadian GAAP $ (1,557,134) $ 1,983,089 $ 2,491,818
Mineral properties and deferred exploration expenditures - (1,697,164) (1,202,696)
------------ ------------ ------------
Shareholders' equity (deficiency) - United States GAAP $ (1,557,134) $ 285,925 $ 1,289,122
============ ============ ============
2003 2002 2001
---------- ------------ ------------
Mineral properties and deferred exploration expenditures
- Canadian GAAP $ - $ 2,942,086 $ 2,450,690
Mineral properties and deferred exploration expenditures
expensed per United States GAAP - (1,697,164) (1,202,696)
---------- ------------ ------------
Mineral properties and deferred exploration expenditures
- - United States GAAP $ - $ 1,244,922 $ 1,247,994
========== ============ ============
35
STAR RESOURCES CORP.
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2003
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
Foreign Currency Translation
Under United States GAAP for 2003 and 2002, shareholders' equity would reflect a
foreign currency translation gain of $144,289 and $256,142, respectively.
Accounting for Stock Options
The Company accounts for options granted according to requirements of Canadian
GAAP, and those requirements are similar to the accounting prescribed in
Accounting Principles Board Opinion No., "Accounting for Stock Issued to
Employees" (APB 25). Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. An alternative method
under United States GAAP is the fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (Statement 123),
which requires the use of option valuation models. Pro forma information
regarding net income and earnings per share is required by Statement 123, and
has been determined as if the Company had accounted for its options granted to
consultants, directors and employees under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 2001, 2002 and 2003: risk-free interest rate of 5.25%; no
dividends for any year; volatility factor of the expected life of the Company's
common stock of 141% for 2003 (125% in fiscal 2002 and 104% in fiscal 2001); and
a weighted average expected life of the option of three and one-half years.
The Company's pro forma information follows (the net loss per common share for
fiscal 2001 has been adjusted to reflect the share consolidation in November,
2001):
2002 2001 2000
Pro forma net loss $(4,468,492) $(2,230,157) $(4,249,941)
Pro forma net loss per common share $ (0.27) $ (0.24) $ (0.47)
12. SUBSEQUENT EVENTS
In March 2003 the Company sold the Diamond Recovery Plant located on the
American Mine Property to a third party for $350,000 (U.S.). In conjunction
with the sale, the third party paid the lessor of the American Mine Property
$47,500 (U.S.) on behalf of the Company in order to extend the Company's lease
on the property through October 31, 2003.
In March 2003, the Company issued to an officer options to purchase 1,000,000
common shares at $0.10 per share exercisable through March 5, 2008.
36
INDEX TO EXHIBITS
3.1 Certificate of Incorporation, Memorandum and Articles of Texas Star
Resources Corporation (the "Company") dated March 12, 1986. (a)
3.1.1 Amendment to Certificate of Incorporation and Memorandum. (b)
3.1.2 Certificate of Change of Name dated October 30, 1996.
3.1.3 Amendment to the Company's Memorandum, effective November 27, 2001. (h)
10.6 Agreement dated July 28, 1992, between the Company and certain royalty
holders (as set forth therein). (a)
10.7 Stock Purchase Agreement dated July 29, 1992, by and among the Company,
DEI, James M. Cairns, Jr., Gandy Baugh and Stewart Jackson (such
individuals being collectively referred to as the "DEI Shareholders"), and
the Amendment thereto dated January 13, 1993. (a)
10.11 Prospecting Permit and Option to Lease dated November 4, 1992, between DEI
and various interest holders. (a)
10.12 Agreement dated December 22, 1992, between the Company and certain royalty
interest holders.(a)
10.16 Royalty Interest Agreement dated January 13, 1993, by and between the
Company and the DEI Shareholders relating to the properties of the Company
and DEI in Arkansas. (a)
10.40 Mining Lease between the Company and certain royalty interest holders
dated November 4, 1996. (c)
10.42 Amendment No. 1 to Mining Lease between the Company and certain royalty
interest holders dated November 1997. (d)
10.43 Mining Lease between the Company and ABJ Hammett Estate/ Trust dated
September 11, 1997. (d)
10.47 Mining Lease Agreement and Lease Modification and Escrow Agreement dated
December 16, 1999.(e)
10.48 Letter Agreement dated October 26, 2000 between the Company and McGeorge
Contracting Co. (f)
10.49 Stripping Agreement dated October 31, 2000 between the Company and
McGeorge Contracting Co. (f)
10.50 Lease Confirmation Agreement dated effective March 16, 2000. (g)
10.51 Mining Lease between the Company and ABJ Hammett Estate/ Trust dated
November 15, 2000. (g)
10.52 Trust Deed for Debentures dated February 16, 2001 between the Company and
Montreal Trust Company of Canada. (g)
10.53 Pledge Agreement for Shares of Star U.S., Inc. between the Company and
Montreal Trust Company of Canada dated February 16, 2001. (g)
10.54 Pledge Agreement for Shares of Diamond Operations, Inc. between the
Company and Montreal Trust Company of Canada dated February 16, 2001. (g)
22 Subsidiaries of the Registrant. (i)
23 Consent of Independent Auditors, Morgan & Company, dated April 30, 2003.
(i)
24 Powers of Attorney dated April 22, 2003. (i)
99 Certification of Chairman pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (i)
_________________
(a) Filed as an exhibit to Registration Statement on Form 10 as filed on June
23, 1993.
(b) Filed as an exhibit to Form 8 Amendment No. 1 to Form 10 as filed on
October 4, 1993.
(c) Filed as an exhibit to Form 10-K for the fiscal year ended January 31, 1997
as filed on May 13, 1997.
(d) Filed as an exhibit to Form 10-K for the fiscal year ended January 31, 1998
as filed on April 29, 1998.
(e) Filed as an exhibit to Form 10-K for the fiscal year ended January 31, 2000
as filed on April 28, 2000.
(f) Filed as an exhibit to Form 10-Q for the fiscal quarter ended October 31,
2000 as filed on December 13, 2000.
(g) Filed as an exhibit to Form 10-K for the fiscal year ended January 31, 2001
as filed on April 27, 2001.
(h) Filed as an exhibit to Form 10-Q for the fiscal quarter ended October 31,
2001 as filed on December 13, 2001.
(i) Filed herewith.
All Exhibits referred to in (a) through (h) above were filed with previous
Securities and Exchange Commission filings of the Company (File No. 0-21968) and
are incorporated herein by reference.