UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 (with other information to
July 31, 2003 except where noted)
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER 0-32255
BALATON POWER INC.
(Exact name of Registrant specified in its charter)
BALATON POWER INC.
(Translation of Registrant's name into English)
BRITISH COLUMBIA, CANADA
(Jurisdiction of incorporation or organization)
19 EAST FOURTH AVENUE
HUTCHINSON, KANSAS 67501
(Address of principal executive offices)
COMMON SHARES WITHOUT PAR VALUE
(Title of Class)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of Each Class Name of each exchange on which registered
None Not applicable
- --------------------------------------------------------------------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act
COMMON SHARES WITHOUT PAR VALUE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act. None
Number of outstanding shares of the Company's only class of capital stock as on
December 31, 2002 (date of last audited financial statement herein) was
64,988,194 Common Shares Without Par Value.
The number outstanding on July 31, 2002 was 66,162,214 (unaudited).
Indicate by check mark whether 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 Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
NOT APPLICABLE
Indicate by check mark which financial statement item Registrant has elected to
follow:
Item 17 [X] Item 18 [ ]
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether Registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
NOT APPLICABLE
Currency and Exchange Rates
All monetary amounts contained in this document are, unless otherwise indicated,
expressed in United States dollars.
-ii-
TABLE OF CONTENTS
TO FORM 20-F OF
BALATON POWER INC. ("BALATON")
<Table>
<Caption>
PAGE
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS OF BALATON.....................................1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..............................................................1
ITEM 3. KEY INFORMATION......................................................................................1
ITEM 4. INFORMATION ON THE COMPANY...........................................................................4
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS........................................................15
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..........................................................16
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...................................................19
ITEM 8. FINANCIAL INFORMATION...............................................................................20
ITEM 9. THE OFFER AND LISTING...............................................................................21
ITEM 10. ADDITIONAL INFORMATION..............................................................................22
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................31
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..............................................32
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.....................................................32
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS........................32
ITEM 15. [RESERVED]..........................................................................................32
ITEM 16. [RESERVED]..........................................................................................32
ITEM 17. FINANCIAL STATEMENTS................................................................................32
ITEM 18. FINANCIAL STATEMENTS................................................................................32
ITEM 19..........................................................................................................33
</Table>
PART 1.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS OF BALATON
A. DIRECTORS AND SENIOR MANAGEMENT
Not applicable.
B. ADVISERS
Not applicable.
C. AUDITORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following constitutes selected financial data derived from the audited
financial statements for the Company for the last five fiscal years ended
December 31, 2002 (see Item 17). The financial statements are presented in
United States dollars and have been prepared in accordance with generally
accepted accounting principles in Canada ("CDN GAAP"). During 2002, we acquired
Continental Resources (USA) Ltd. ("CRL"). Unless otherwise indicated, for
comparative purposes, all references to the number of issued shares of the
Company have been adjusted to the number of shares the Company's shareholders
received upon completion of the acquisition of CRL.
<Table>
<Caption>
(US$)
2002 2001 2000 1999 1998
Balance Sheet Data
Total assets according to
financial statements (CDN GAAP) 1,664,408 2,389,251 2,404,638 2,391,053 2,396,000
Total assets (US GAAP) 1,664,408 2,389,251 2,404,638 2,391,053 2,396,000
Total liabilities 1,663,097 50,387 34,104 12,281 --
Share capital 2,598,000 2,400,000 2,400,000 2,400,000 2,400,000
Retained earnings (deficit) (CDN GAAP) (2,596,689) (61,136) (29,466) (21,229) 8,086
Retained earnings (deficit) (US GAAP) (2,596,689) (61,136) (29,466) (21,229) 8,086
(US$)
Period End Balances (as at)
Working capital (1,598,581) (50,387) (34,104) (12,281) 12,086
Resource properties 1,145,163 2,389,251 2,404,638 2,391,053 2,396,000
Shareholders' equity 1,311 2,389,251 2,404,638 2,391,053 2,408,086
Number of outstanding shares 64,988,194 55,878,194 55,878,194 55,878,194 55,878,194
</Table>
<Table>
<Caption>
2002 2001 2000 1999 1998
(US$)
Statement of Operations Data
Revenue 24,899 35,158 10,937 7,197 13,516
Production costs 22,398 30,687 11,219 21,490
Writedown of resource properties 1,895,987
General and administrative expenses 232,587 20,755 3,007 10,075 1,430
Income (loss) according to financial
statements (CDN GAAP) (2,126,073) (31,671) (8,237) (29,315) 8,086
Loss per common share (0.05) (0.01) (0.01) (0.01) 0.01
Loss per common share (US GAAP) (0.05) (0.01) (0.01) (0.01) 0.01
</Table>
Note: Statement of Financial Accounting Standards No.128: Earnings per Share
("SFAS 128") replaces the presentation of primary earnings per share ("EPS")
with a presentation of both basic and diluted EPS for all entities with complex
capital structures, including a reconciliation of each numerator and
denominator. Basic EPS excludes dilutive securities and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the year. Diluted EPS reflects the potential dilution
that could occur if dilutive securities were converted into common stock and is
computed similarly to fully diluted EPS pursuant to previous accounting
pronouncements. SFAS128 applies equally to loss per share presentations.
Note: Stock options and warrants outstanding were not included in the
computation of diluted loss per share as their inclusion would be antidilutive.
See Item17 for accompanying audited year end financial statements (prepared in
accordance with Canadian GAAP) for further details.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
Company with No History of Earnings. The Company has no operating history, no
revenues and is subject to all of the risks inherent in a start-up business
enterprise including lack of cash flow and service acceptance.
Development and Market Acceptance of Services. The Company's success and growth
will depend upon the Company's ability to construct hydroelectric facilities and
the acceptance of its products, including the Pisces Product referred to in
Item4 of this document, in relation to hydroelectric facilities.
Liquidity; Need for Additional Financing. The Company believes that it does not
have sufficient funds to meet its twelve month cash requirement forecast based
upon its internally prepared budget. Further, the Company's cash requirements
are not easily predictable and there is a possibility that its budget estimates
will prove to be inaccurate. If the Company is unable to generate a positive
cash flow, it will be required to curtail operations substantially and seek
additional capital. There is no assurance that the Company will be able to
obtain additional capital if required, or if capital is available, to obtain it
on terms favourable to the Company. The Company may suffer from a lack of
liquidity in the future, which could impair its short-term marketing and sales
efforts and adversely affect its results of operations.
Patents. The Company has obtained a license to manufacture and sell the Pisces
Product detailed in Item 4 of this document. There is no assurance, however,
that third parties may not infringe on the patents. In order to protect the
patent rights, the Company or the patent owners may have to file lawsuits and
obtain injunctions. If the Company does that, it will have to spend large sums
of money for attorney's fees in order to obtain the injunctions. Even if the
Company or patent holders obtain the injunctions, there is no assurance that
those infringing on the patents will
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comply with the injunctions. Further, the Company or patent holders may not have
adequate funds available to prosecute actions to protect the patents, in which
case those infringing on the patents could continue to do so in the future.
Competition. There are numerous competitors engaged in small hydro-electric
"run-of-river" projects. Most of the Company's competitors have substantially
greater financial, technical and marketing resources than the Company. In
addition, the Company's services compete indirectly with all other forms of
energy delivery.
Reliance Upon Directors and Officers. The Company is wholly dependent, at the
present, upon the personal efforts and abilities of its Officers and Directors,
who exercise control over the day-to-day affairs of the Company.
Issuance of Additional Shares. The Company is authorized to issue 700,000,000
common shares 66,162,214 common shares were issued and as at July 31, 2003,
633,837,786 or 90.6% of the common shares are unissued. The Board of Directors
has the power to issue such shares. Although the Company presently has no
commitments or contracts to issue any additional shares to other persons, except
as otherwise disclosed in this document, the Company may in the future attempt
to issue shares to acquire products, equipment or properties, or for other
corporate purposes. Any additional issuance by the Company, from its authorized
but unissued shares, would have the effect of diluting the interest of existing
shareholders.
Indemnification of Officers and Directors for Securities Liabilities. The laws
of the Province of British Columbia provide that the Company could indemnify any
Director, Officer, agent and/or employee as to those liabilities and on those
terms and conditions as are specified in the British Columbia Company Act.
Further, the Company may purchase and maintain insurance on behalf of any such
persons whether or not the corporation would have the power to indemnify such
person against the liability insured against. The foregoing could result in
substantial expenditures by the Company and prevent any recovery from such
Officers, Directors, agents and employees for losses incurred by the Company as
a result of their actions. Further, the Company has been advised that in the
opinion of the Securities and Exchange Commission, indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable.
Cumulative Voting, Pre-emptive Rights and Control. There are no pre-emptive
rights in connection with the Company's common stock. Shareholders may be
further diluted in their percentage ownership of the Company in the event
additional shares are issued by the Company in the future. Cumulative voting in
the election of Directors is not provided for. Accordingly, the holders of a
majority of the shares of common stock, present in person or by proxy, will be
able to elect all of the Company's Board of Directors.
The Company's Management May Not Be Subject to U.S. Legal Process. As Canadian
citizens and residents, the Company's directors and officers may not subject
themselves to U.S. legal proceedings so that recovery on judgments issued by
U.S. courts may be difficult or impossible. While reciprocal enforcement of
judgment legislation exists between Canada and the U.S., the Company's insiders
may have defences available to avoid in Canada the effect of U.S. judgments
under Canadian law, making enforcement difficult or impossible. The Company's
management may not have any personal assets available in the U.S. to satisfy
judgments of U.S. courts. Therefore, the Company's shareholders in the United
States may have to avail themselves of remedies under Canadian corporate and
securities laws for perceived oppression, breach of fiduciary duty and like
legal complaints. Canadian law may not provide for remedies equivalent to those
available under U.S. law.
Exploration and Development. The resource properties in which the Company has an
interest in are in the development stage only. Development of the Company's
resource properties will only follow upon obtaining satisfactory results.
Exploration for, and the development of natural resources, involves a high
degree of risk and few properties that are explored are ultimately developed
into producing properties. There is no assurance that the Company's exploration
and development activities will result in any commercial discoveries. The
long-term profitability of the Company's operations will, in part, be directly
related to the cost and success of the exploration and development programs
carried out which may be affected by a number of factors, as outlined below.
Drilling and Extraction Costs. Substantial expenditures are required to
establish resources and reserves through drilling, to develop processes for
extraction and, in the case of new properties, to develop the extraction and
processing facilities and infrastructure at any site chosen for extraction.
Although substantial benefits may be
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derived from the discovery of a major deposit, no assurance can be given that
resources will be discovered in sufficient quantities to justify commercial
operations, or that the funds required for the development can be obtained on a
timely basis.
Operating Hazards and Risks. Exploration for natural resources involves many
risks, which, even with a combination of experience, knowledge and careful
examination may not be mitigated. Operations in which the Company has a direct
or indirect interest will be subject to all the hazards and risks normally
incidental to exploration, development and production of resources, any of which
could result in work stoppages, damage to persons or property and possible
environmental damage. Although the Company has or will obtain liability
insurance in an amount which it considers adequate, the nature of these risks is
such that the liabilities might exceed policy limits, the liabilities and
hazards might not be insurable against, or the Company might not elect to insure
itself against such liabilities due to high premium costs or other reasons, in
which event the Company could incur significant costs that could have a material
adverse effect upon its financial condition.
Fluctuating Prices. The Company's revenues, if any, are expected to be in large
part derived from the extraction and sale of bauxite. Commodity prices fluctuate
and are affected by numerous factors beyond the Company's control including
international, economic and political trends, expectations of inflation,
currency exchange fluctuations, interest rates, global or regional consumptive
patterns, speculative activities and increased production due to extractive
developments and improved extractive production methods. The effect of these
factors on the price of bauxite, and therefore the economic viability of the
Company's exploration projects cannot be accurately predicted.
Competition. The resource industry is intensely competitive in all of its
phases, and the Company competes with many companies possessing greater
financial resources and technical facilities than itself. Competition could
adversely affect the Company's ability to develop the Gandhamardan Bauxite
Deposit.
Options and Joint Ventures. The Company may enter into option or joint venture
agreements from time to time, during the currency of which the optionor or joint
venture partner may decide not to proceed further with their work. The Company
may not be able to meet future expenditure requirements and/or the Company may
not be able to finance the costs required to complete recommended programs. If
such options or joint venture agreements are entered into, the Company would
suffer dilution to its interests in its projects.
Title to Assets. Although the Company has or will receive title opinions for any
properties in which it has or will acquire a material interest, there is no
guarantee that title to such concessions, claims or leases will not be
challenged or impugned.
Inadequate Working Capital. The Company does not have adequate working capital
to explore and develop the Gandhamardan Bauxite Deposit or any of its other
properties, and must raise funds through private placements or public offerings
of treasury shares, through debt financing, if available, or sale of a portion
of its interest in its projects. If the Company were not successful in raising
further funds it may not be able to complete its exploration and development
plans.
Management. The Company is dependant upon a relatively small number of key
employees, the loss of any of whom could have an adverse affect on the Company.
Exchange Rate Fluctuation. The profitability of the Company may be adversely
affected by fluctuations in the rate of exchange of Indian Rupies into United
States dollars. The Company does not take any steps to hedge against currency
fluctuations.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT
The Company's legal name is Balaton Power Inc. The Company was incorporated
under the Company Act (British Columbia) under the laws of the Province of
British Columbia on June 25, 1986. The Company's registered office is c/o its
solicitors, Lang Michener, 1500 - 1055 West Georgia Street, PO Box 11117,
Vancouver, British Columbia,
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Canada, V6E 4N7, telephone number (604) 689-9111. The Company's principal place
of business is 19 East Fourth Street, Hutchinson, Kansas, 67502, telephone
number (620) 662-3697. The Company is in the start-up stage and has initiated
limited operations. The Company was in the construction, installation and sale
of "low impact" run-of-the-river hydroelectric power production systems
(throughout this document referred to as the "System") which incorporates a
patent pending fish protective water inlet device (throughout this document
referred to as the "Pisces") prior to the acquisition/merger with Continental
Resources (USA) Ltd. ("CRL") in October 2002. Following the acquisition/merger
with the Company changed its primary business to developing a large bauxite
deposit located in Orissa in the State of India.
On September 30, 2002 the Company entered into a Stock Exchange Agreement with
Perial Ltd. ("Perial") for the purchase of CRL. The Company issued a total of
33,000,000 shares of its common stock to acquire CRL of which 25,000,000 were
allocated to Perial and 8,000,000 shares were issued as finder's fees. CRL is a
joint venture partner with the Orissa Mining Corporation (OMC) on a significant
bauxite deposit in Orissa, India, known as the "Gandhamardan".
CRL and OMC, an Orissa state government owned corporation, teamed together for a
50/50 joint venture in developing the Gandhamardan bauxite. The Gandhamardan
bauxite deposit contains in excess of 230 million metric tones of metallurgical
grade bauxite averaging 45.75% Al2O3 and 2.33% SiO2. This deposit is the second
largest bauxite deposit in India and is similar in all respects to the largest
deposit, Panchpatmali, being mined by National Aluminium Co. (NALCO). With the
acquisition of CRL, the Company will no longer focus on the development of its
hydro electric business, and will focus 100% of its efforts on developing the
Gandhamardan Deposit.
The Company is seeking a manager, joint venture partner, purchaser for its
hydroelectric power business which includes the manufacture and sale of the
Pisces and the sale of the Balaton Remote Integrated Monitoring and Control
System (throughout this document referred to as the "BRIMAC"). The Company will
not install the system at any sites, and does not plan to develop any of its own
hydroelectric sites. The System is designed to produce "green"/renewable
electricity. A green system is one which generates electricity from non-carbon
based fuels and does not adversely impact the flows of rivers or aquatic life
and is considered "low impact" on the environment. As of the date hereof, the
Company has not constructed, installed or sold any Systems, Pisces (other than
its tested prototypes) or BRIMACs and does not generate or distribute any
electricity to anyone. There is no assurance that the Company will ever
construct, install or sell any Systems, Pisces or BRIMACs to anyone.
The Company's wholly-owned subsidiary, Balaton Power USA Inc., an Idaho company,
is not proceeding with the development of the companies and projects acquired
pursuant to the Stock Purchase and Business Review Agreement with Hydro Energy
Development Corporation ("HEDC"). Under that agreement BPI USA agreed to
purchase from HEDC seven Washington State companies, comprising 11 unlicensed
hydro-electric sites with a combined 80MW power generation potential and three
fully licensed hydro-electric sites with a combined 20MW power generation
potential.
On January 14, 2001, the Company entered into an Agreement in Principle, which
supersedes an earlier agreement dated August 25, 2000 with Mr. Vernon
Ravenscroft ("Ravenscroft") of Bliss, Idaho to acquire a one-third interest in
Ravenscroft's hydro-electric power production facility and site (the "Site")
together with a power purchase agreement with Idaho Power Company. During 2002,
the Company relinquished any right to its one-third interest to Ravenscroft for
$20,000 and a release of its ongoing commitments to Ravenscroft. While the
Company had spent $160,000 earning its interest, it had substantial obligations
remaining, and no resources with which to fulfil them.
B. BUSINESS OVERVIEW
The Company was in the manufacture, distribution and sale of hydroelectric power
production systems, the development/operation of company owned and operated
hydroelectric power production sites, and the manufacture, distribution and sale
of protective fish water inlet devices prior to the acquisition/merger of
Continental Resources (USA) Ltd. in October 2002. The Company will focus all of
its efforts on the exploration and development of a bauxite deposit known as
"Gandhamardan" located in the State of Orissa, India.
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GANDHAMARDAN BAUXITE DEPOSIT
Acquisition and Ownership
On September 30, 2002, the Company entered into a Stock Exchange Agreement with
Perial Ltd. for the purchase of CRL in consideration for 35,000,000 common
shares. Prior to the acquisition by the Company, CRL sold all of its oil and gas
assets to its then parent company, Perial, for a promissory note in the amount
of $481,724 and the assumption of CRL's outstanding debts. The note is
non-interest bearing and is repayable through the payment of a 25% royalty on
production from the oil and gas assets.
CRL's sole asset at the time of the acquisition is a 50% interest and effective
control of Continental Orissa Mining Private Limited ("Orissa"), which CRL
acquired during 2002 in consideration for agreeing to direct the exploration and
development of a bauxite deposit in the State of Orissa, India.
The following information is summarized from a report prepared by E.A. Gallo,
P.Geo. entitled "Summary Report Gandhamardan Bauxite Deposit Sambupar and
Balangir Districts, State of Orissa, India, dated April 8, 2003.
Property Description And Location
The Gandhamardan bauxite deposit occurs at the top of Gandhamardan hill. This
hill, which has a plateau top, is linear aligned in a NE-SW direction. The hill
straddles the boundary ,between Balangir District to the SE, and Sambalpur
District to the NW, in the west central part of the State of Orissa, in eastern
India.
Gandhamardan is bounded by Latitudes 20 degrees50' and '20 degrees55' North, and
Longitudes 82 degrees451 and 82 degrees54' East. It plots on Survey of India
topographic sheet NTS 64L/l3.
Gandhamardan hill extends in a NE-SW direction for a length of 9.8 kms. Width
ranges from 0.4 to 2.6 kms, and averages 0.75 km. The top of the hill is a
plateau, with an areal extent of 7.4 kms2. The bauxite zone covers- an area of
734 hectares. Because of its large size and lineal alignment, the deposit has
been divided into 10 l-km wide blocks, numbered 1 to 10.
Orissa Mining Corporation ("OMC") currently holds a Mining Lease on Block 7,
which contains about 20% of the deposit, or approximately 40 million tonnes. The
Lease covers an area of 285 hectares.
OMC has applied for a Mining Lease covering the rest of the deposit. A perimeter
land survey must be performed before this second Lease is granted.
Gandhamardan hill stands approximately 1,200 meters above sea level, and 700
meters above a plain at the base of the hill. The plateau top has a gentle
relief of about 50 meters.
Vegetation on the plateau consists primarily of tiger-grass, dwarf palm,
chachar, chhena, bantulsi, etc., with small, isolated clumps of stunted hardwood
trees such as char and kendu. The stunted trees rarely exceed 4 meters in
height.
Vegetation on the hill flanks contrast greatly. with that on the plateau. The
flanks are densely forested by mature hardwood trees such as char, kendu, tenk,
and sal. Underbrush consists mainly of bamboo clumps, leafy vines, shrubs, and
medicinal herbs.
Gandhamardan hill is a designated Forest Reserve. Regulations allow mining
operations to be conducted in such reserves, however the operator must establish
a reserve area elsewhere that is equal in area 1 extent .to the mining lands.
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Accessibility, Physiography and Infrastructure
The property is easily accessed by 4-wheel drive vehicle along a
poorly-maintained road up the NW flank of the hill. This road departs the
village of Duragali, at the base of the hill, and winds 4 kms. to the top.
Duragali is connected by paved road to Paikmal, a town with all modern
facilities, including power, water, transportation, communication, food,
shelter, supplies, services, and labour. Paikmal is connected by paved roads to
the State Capital, Bhubaneswar, about 300 kms. to the E, and to port cities
along the Bay of Bengal, equidistant to the SE.
At the time that the exploration work was performed, the hill top could also be
accessed up the SE side. This road currently has 3 wash-outs. After repairs,
this road would also be navigable by 4-wheel drive vehicle. The SE road is
preferable, as it provides a slightly shorter route to the hill top, and access
by paved roads southerly to the towns of Lakhna and Nawaspara, 32 and 39 kms.
distant, respectively. Both these towns lie along the South Eastern Railway
line. This rail line was recently constructed by the Indian Government to
facilitate the development of Orissa bauxite deposits by linking them to the
port city of Vishakhapnam on the Bay of Bengal.
The climate in the Gandhamardan area is sub-tropical, with summer temperatures
averaging 33 degreesC, and winter temperatures averaging 18 degreesC. Annual
rainfall averages 150 cms., most of it during the monsoon season, between July
and August. The months of January and February experience little or no rain.
Previously, the monsoon rains came in 3-year cycles, however, they have failed
to come for the past several years, resulting in impoverished drought
conditions.
Should a mining operation be established, no tailings or wastes would be
created, since the bauxite is direct-shipping. The cover of soil and laterite
would be moved and stockpiled, then replaced after removal of the bauxite.
Geological Setting
The general geology of the Orissa region consists primarily of Precambrian rocks
of the Indian Shield. These rocks have been divided into 4 distinct sectors,
based on their lithologies and structure. The sectors are named after the
geographic region in which they occur - West, South, Coastal, and North Sectors.
The West Sector is where Gandhamardan is located. This sector is underlain
primarily by Archean granitic gneisses, khondalites, charnockites, and
migmatites. These rocks trend in a general NE-SW direction, gently curving
eastward at their northern end. Khondalites are rocks formed by high-grade
metamorphism of argillaceous, arenaceous, and calcareous sediments. They are
unique to this part of the world, and they host major deposits of bauxite. The
West Sector is separated from the South and North Sectors by the Eastern Ghat
Boundary Fault and the North Orissa Boundary Fault, respectively.
The South Sector is also underlain predominantly by Archean rocks. They are
comprised of marbles,. calc-granulites, carbonatites, gneisses, khondalites, and
charnockites. This sector is composed of 4 fault blocks, each with distinct
trends. The rocks in 2 of the blocks trend E-W. Trends in the other 2 blocks are
NE-SW, and NW-SE, respectively. The North Orissa Boundary Fault separates the
South Sector from the North Sector.
The Coastal Sector is underlain primarily by Quaternary laterite and alluvium.
They appear to overlie the eastward extension of the South Sector rocks.
The North Sector is composed. mainly of Archean granites and greenstones.. The
granites occur as large batholiths, and the greenstones as broad, intervening
belts. The greenstones are comprised of mafic volcanics and banded iron
formation. This assemblage of granites and greenstones is very similar to that
which occurs in the Superior Province in NW Ontario. Ultramafic bodies intrude
the granites and the volcanics. The western third of the North Sector is
Underlain by Grenville-type metasediments consisting of marble, quartzite,
phyllite, and slate.
The local geology at Gandhamardan and the geology of the property are the same.
Both consist exclusively of khondalites, represented by garnetiferous
quartz-feidspar-sillimanite gneisses and schists with or without ilmenite and
graphite. Subordinate garnetiferous quartzites are also present. The rocks have
a pronounced NE-SW strike,
-7-
conformable to the regional trend, and curve slightly to the east at their
northern extremity. The rocks have been tightly folded, and now dip steeply to
the SE at 45 degrees to 70 degrees.
Prolonged exposure to the elements has altered the khondalite at the top of
Gandhamardan hill, resulting in the formation of bauxite as an extensive layer
blanketing the parent rock throughout the plateau.
The bauxite is overlain by laterite, and the discontinuous layer of lateritic
soil. This colour, granular, and high in silica and iron a thickness of up to
several centimeters.
The laterite is also rusty-red in colour, and high in silica and iron. The
weathered surface is irregular, porous, and craggy. The upper portion of the
laterite is hard, reflecting a relatively higher silica content than the lower
portion. Iron content also decreases with depth, while aluminous content
increases. The laterite varies in. thickness from 0.3 to 12.0 meters, and
averages 5.0 meters. The laterite grades downwards into bauxite.
The bauxite layer ranges from 4.3 to 35.0 meters in thickness, and averages 16.6
meters. It varies in colour from pinkish-red to yellowish-brown, buff, or brown.
It is medium to fine grained, massive and compact. Vesicular. and pisolitic
textures may be displayed. Hardness varies from 2.5 to 3.5. Banding and
foliation are sometimes evident. The bauxite is composed mainly of the minerals
gibbsite and hematite, which together comprise about 95%. The remaining 5% is a
mixture of several oxide minerals in minor and trace amounts.
The table below shows the mineralogical composition of the bauxite.
<Table>
<Caption>
CATEGORY MINERAL COMPOSITION
- --------------------- -------------------- ---------------------------------------------
Major Gibbsite (Al(2)O(3).3H(2)O) AlO (OH)
Hematite Fe(2)O(3)
Minor Goethite HfeO(2)
Boehmite A1O (OH)
Anatase TiO(2)
Quartz TiO(2)
Trace Zircon ZrSiO(4)
Ilmenite FeTiO(3)
Kaolinite Al(4)(SiO(10)) (OH)(8)
Lepidocrocite FeO (OH)
Garnet A(3)B(2)(SiO(4))(3) A = Ca, Fe, Mg, or Mn
B = Al, Fe, Ti, or Cr
</Table>
Source: MECL Exploration Report, Vol. I, 1980
The basement khondalite rock is composed of a heterogeneous mix of minerals,
including quartz, orthoclase, sillimanite, garnet, ilmenite, and graphite.
Quartz predominates, forming up to 60% of the rock locally. The khondalite is
gneissic, and the quartz is closely associated with orthoclase and sillimanite
in gneissic bands of leucocratic minerals. Orthoclase locally forms up to 35% of
the rock, sillimanite up to 20%, garnet up to 20%, and ilmenite and graphite
together up to 3%. The contact between the khondalite and the bauxite is fairly
sharp, although the khondalite immediately beneath the bauxite is partly
altered. Orthoclase in altered khondalite displays varying stages of
bauxitization, while sillimanite displays varying stages of gibbsitization.
History
The potential for bauxite at Gandhamardan was first recognized by the GSI in the
1940's, and they recommended that the area be thoroughly prospected.
In 1948, ODM sank several pits which intersected only laterite.
-8-
In 1959, ODM identified bauxite at Gandhamardan, and they immediately undertook
a programme of exploration and evaluation. GSI and MECL participated, as did
Aluminium Corp. of India, an aluminium producer.
ODM drilled 75 holes in 1959, and reported a resource of 6 million tonnes
grading +50% Al2O3 to a depth of 17 meters.
Subsequent phases of drilling were conducted between 1961-65. In the late
1960's, Aluminium Corp. of India undertook detailed exploration with MECL, after
which MECL reported a resource of 26 million tonnes of metallurgical grade
bauxite, using a cut-off of +46% Al2O3.
The deposit attracted no further attention until 1975, when the economic
potential of the large, low-silica bauxite deposits in Orissa became recognized.
Balco expressed interest in Gandhamardan as a source of feed for their aluminium
plant at Korba, situated 350 kms. by rail to the N, in the adjoining State of
Madhya Pradesh. At Balco's request, an integrated exploration programme was
undertaken jointly by MECL, GSI, and ODM. The programme included linecutting,
topographic surveying, geological mapping, pitting, drilling, sampling,
mineralogical studies, and metallurgical tests.
Balco commissioned a feasibility study on a portion of the deposit in 1980, and
upon its conclusion, prepared to bring it into production. Local villagers
opposed the project, and Balco finally gave it up.
The property remained idle until 1997, when Continental Resources Ltd. and OMC
agreed to jointly develop it. Continental commissioned SNC-Lavalin to undertake
a feasibility study on the deposit, however numerous delays ensued, and the
study was never done. The author visited the property at this time, and during
one of the visits, collected 6 samples, 2 from Pit GP-2, and 2 'from each of 2
scarp sites. The samples were collected in the author's presence, and he
personally transported them to a Canadian commercial laboratory. Analyses were
performed for 12 radicals, including Al2O3, SiO2, Fe2O3, TiO2, and LOI, by x-ray
fluorescence, fused-disc method. Appendix I of this Report is the Certificate of
Analyses for these samples. In 2002, OMC transferred the Agreement from
Continental Resources Ltd. to Continental Resources (USA) Ltd. There is no
connection between the two companies.
Sampling Procedure and Analyses
Samples of the bauxite zone were taken from selected scarp sites, from each pit,
and from each drill hole. All samples were collected under direct supervision of
ODM or MECL geologists.
Scarp samples of the bauxite were taken by ODM wherever accessible at the ends
of cross lines. Channel samples were cut vertically along 1-meter intervals,
forming channels 15 cms. wide, 5 cms. deep, and 1 meter long. A total of 130
samples were cut from 17 scarp sites, across a cumulative length of 121 meters.
The bauxite zone in the scarp faces is not fully exposed, the lower half being
buried by talus. Recognizing this limitation, ODM nevertheless calculated
average grades from the assay results. They are given in MECL's Exploration
Report, Volume I, 1980, as 47.03% Al2O3, 2.97% SiO2, 22.00% Fe2O3, 2.09% TiO2,
and 22.27% LOI, across an average thickness of +7.6 meters.
ODM also sampled the pits. Channel samples were cut in the same manner employed
in scarp sampling. All 4 walls of each pit were sampled. As a check, and for
comparison, the walls of 1 pit were sampled at 25 cm. intervals. Surplus
material from the channel samples was combined to form composite samples, which
were also analysed. A total of 1,772 pit samples were collected and analysed.
The bauxite zone exposed in the pits ranged from 2.0 to 30.0 meters in
thickness, and averaged 18.7 meters. ODM calculated average grades from the pit
sample results. MECL's same report shows them as 46.31% Al2O3, 4.37% SiO2,
20.34% Fe2O3, 1.78% TiO2, and 23.71% LOI.
Both ODM and MECL sampled the drill holes in their respective programmes,
employing the same technique. Casing shoes were used in place of core barrels.
The drill cuttings were carefully removed from the shoe, put into paper sleeves
in the order drilled, identified by hole number and footage, and boxed. Cuttings
were collected continuously across 1-meter intervals. If the upper or lower
contact of the bauxite zone did not coincide exactly with a whole-integer meter
mark then that particular sample was taken as a fraction of a meter. Within the
bauxite zone,
-9-
if "non-ore" material was recognized or suspected, then 2 sub-samples were taken
from that 1-meter interval, separated by their geologic contact.
All collected samples were geologically classified before being prepared for
analyses. Samples of the drill cuttings were crushed to -60 mesh, and quartered
using a Jones Sample Splitter. Three-quarters of the sample was shipped to Balco
for storage, and the remaining quarter was further crushed to -120 mesh. This
- -120 mesh fraction was further reduced by coning and quartering, and a 50-gram
portion was weighed out, bagged, and shipped to the laboratory for analyses. pit
and scarp samples were prepared in a similar manner, except for their primary
crushing, which was to -10 mesh rather than -60.
Samples were shipped for analyses to ODM's own laboratory in Bhubaneswar; or to
MECL's own lab in Nagpur. Minor and trace element analyses were conducted at a
commercial laboratory in Bangalore operated by Esson and Co. All samples were
analysed for Al2O3, SiO2, Fe2O3, TiO2, and LOI. Composite samples were analysed
as well for V, Zn, S, P2O5, K2O, Na2O, CaO, adherent moisture, and organic
carbon.
Analyses for all these radicals were determined by chemical method, employing
the EDTA technique (ethylene-diamene-tetra-acetic acid), the industry standard
at that time. LOI was determined thermally, by calculating the percentage loss
on ignition of the resultant ash compared to the weight of the pre-heated
sample.
Resource Calculations
ODM and MECL independently calculated resource estimates, based exclusively on
data obtained from the holes drilled at 200-meter intervals. Data obtained from
the closer-spaced drill holes were also utilized, but only as a check on the
validity of the calculations. Data from the inclined drill holes, and from the
pits were similarly utilized for checking purposes.
The resource estimates are in-situ geological resources. No mining constraints
were considered. The cut-off grades of +40% Al2O3 and -5% SiO2 used in the
calculations were specified by Balco, and were determined in anticipation of the
bauxite being processed at their plant in Korba. Korba produces alumina by the
Bayer Process.
A tonnage factor of 2.0 tonnes per cubic meter of bauxite was used in the
calculations. This figure was based on bulk density tests performed on pit
samples, and on specific gravity and porosity tests performed on pit and drill
hole samples.
Three conventional techniques were followed in preparing the resource estimates
- - average factor and area of influence method, cross section method, and
isocline (isochore) method. The first two methods are similar in that they
calculate area and multiply it by thickness to determine volume. Both methods
are well-suited to estimating a resource such as Gandhamardan, which is a
uniform, homogeneous, horizontally-lying body.
The average factor and area of influence method is based on the assumption that
all unit blocks are uniform in shape and in grade. An area of influence is
established for each vertical drill hole, as one-half the horizontal distance to
an adjacent hole. In the case of peripheral holes, it is the horizontal distance
to the physical limit of the bauxite zone. This area is multiplied by the
thickness of the bauxite intersected in that hole to give the volume, which is
then converted to tonnage. Average grades are calculated by weighting grades
against tonnages.
The cross section method utilizes cross sections, in this case prepared on a
scale of 1:1,000. A cross-sectional area of bauxite is determined for each hole
by taking one-half the distances to adjacent holes, and multiplying this area by
the linear strike influence of the hole. The volume so obtained is then
converted to tonnage.
The isocline method is based on the assumption that unit values gradually change
from one point to another. Isograde maps and isochore maps are prepared, in this
case 1% Al2O3 and 5 meters, respectively. The area encompassed between the
respective isoclines and the two corresponding mid-points of assay value and
thickness is used to estimate the resource.
-10-
Four categories of resources were established, based on the Russian system, and
termed A, B, Cl, and C2. MECL's 1980 Exploration Report, Volume I states "A
Category reserves are considered suitable for mine planning", and considers them
to be 90% accurate. MECL's Report describes the B Category resources as being
"...sufficiently detailed to allow...broad outlining of the future mining
activities and development of the deposit". B category resources were calculated
in areas where technical data were less detailed than in A category areas, and
were deemed to be 70% accurate.
Cl category resources were estimated for areas where the bauxite was
sufficiently explored to provide a "...rough estimation of the nature of
mineralization, shape and structure of the ore body..." (ibid). Accuracy of the
CI resources is considered to be 50%.
C2 Category resources are estimated for irregular parts of the bauxite zone,
where "...insufficient exploration data...do not permit proper evaluation of
shape, quality, etc." (ibid). The resources of Block 10 fall into this category.
Here the plateau is irregular in shape, and the bauxite varies in thickness.
B. K. Mohanty in ODM's Resource Evaluation Report, 1981, states the total
calculated tonnage as 207.37 million tonnes with a weighted average grade of
45.75% Al2O3, 2.23% SiO2, 23.23% Fe2O3, 2.58% TiO2, 22.95% LOI. In the same
report, S. M. Patnaik tabulates resource estimates for each of the 10 Blocks.
His figures are shown in the table below. His calculated total tonnage is 213.43
million tonnes with a weighted average grade of 46.50% Al2O3, and 2.49% SiO2.
The 3 other radicals were not calculated.
<Table>
<Caption>
AVERAGE AVERAGE AVERAGE GRADE
AVERAGE COVER BAUXITE RESOURCES -----------------------
BLOCK LENGTH WIDTH AREA THICKNESS THICKNESS (MILLION AL(2)O(3) SIO(2)
NUMBER (KMS) (KMS) (KMS2) (METERS) (METERS) TONNES) (%) (%)
- --------- -------- ------- ------- ---------- ---------- ------------ ---------- -----------
1 0.65 0.25 0.07 4.00 11.10 1.00 44.28 2.90
2 1.00 0.48 0.48 3.70 18.78 15.46 45.46 2.40
3 1.00 0.98 0.98 5.10 16.20 27.23 45.85 2.12
4 1.00 1.05 1.05 5.85 15.54 24.36 46.28 2.17
5 1.00 1.12 1.12 5.32 17.71 28.85 46.20 2.67
6 1.00 0.67 0.67 4.03 11.72 28.08 46.43 2.71
7 1.00 2.20 1.28 7.23 16.33 44.75 47.16 2.58
8 1.00 0.90 0.82 5.91 20.43 27.65 47.00 2.62
9 1.00 0.78 0.36 5.17 18.75 8.40 47.05 2.65
10 1.20 0.65 0.33 7.63 9.81 7.70 47.30 2.81
Total 213.48 46.50 2.49
</Table>
MECL calculated resources independently, and categorized them according to the
Russian system. MECL's 1980 Exploration Report, Volume I gives their total
calculated resource as 201.3 million tonnes averaging 46.40% Al2O3, 2.44% SiO2,
and estimates the Fe2O3, TiO2, and LOI contents to be 23.41%, 2.47% and 24.59%,
respectively. MECL's resource estimates by category are shown in the following
table:
<Table>
<Caption>
TONNAGE AVERAGE GRADE
(MILLION ----------------------------------------------------------
CATEGORY TONNES) AL(2)O(3) SIO(2) FE(2)O(2) TIO(2) LOI
- -------------- -------- ----------- ------ --------- --------- -------
A 27.9 46.67 2.45 23.71 2.27 24.73
B 45.8 46.85 2.61 22.96 2.50 24.51
C1 + C2 127.5 46.18 2.38 23.51e 2.51e 24.59e
Total 201.3 46.40 2.44 23.41e 2.47e 24.59e
</Table>
Note: e = estimated figure
-11-
The 3 resource calculations are in fairly close agreement. The total tonnage
figures differ by a maximum of only 6%, and the calculated weighted average
grades by 1.4% for Al203, 9.0% for SiO2, 0.8% for Fe2O3, 1.2% for TiO2, and 6.7%
for LOI.
MECL's resource estimates were calculated in 1980-81, and they followed the
Russian system of classification. Resource estimates made today are usually
classified by standards established by the Canadian Institute of Mining and
Metallurgy (CIMM). Parameters used to determine specific categories in the
Russian system are analogous to those employed in the CIMM system. Under the
CIMM classification system, MECL's A Category resource would become a Measured
Resource, the B and Cl would become an Indicated Resource, and the C2 would
become an Inferred Resource.
Data Verification
In examining the technical reports authored by ODM and MECL, it became apparent
to the author of the report that the exploration-evaluation programmes were
conducted in a thorough, competent manner by knowledgeable, capable persons. The
programmes followed a logical sequence of steps, justified by positive results,
to determine the nature and extent of the bauxite deposit, and its suitability
for the production of alumina by the Bayer Process.
Discussions with OMC technical staff verified the integrity of the data.
Three site visits verified the presence of bauxite, the extent of the deposit,
the grid that was established, the holes that were drilled, and the pits that
were sunk. Six bauxite samples were personally collected by the author, and
transported to a Canadian commercial laboratory for analyses. The analytical
results for these samples are in general agreement with the results reported by
ODM and MECL.
Planned Development
The Gandhamardan Bauxite Deposit has had exploration work performed by reliable
government exploration agencies to prove the quality and quantity of Al2O3 in
place. Recent reports done by independents have presented data that qualifies
the deposit as proven. Only a modest amount of confirmatory work is required
before the deposit can be brought into production.
Even though a large amount of data has been generated over this deposit through
over 600 drill holes of 6,685.87 meters, core analysis of 5,178, pit samples of
135 and scarp samples of 130 a Baseline Study needs to occur before mining
begins. This would be the final phase before the mining startup.
The Baseline Study could take up to two years to complete at an estimated cost
of $2,000,000. This study includes 1) the various environmental studies, 2)
preparing the local people with the overall understanding that their lifestyle
would not be disturbed but that benefits would raise their standard of living
and 3) some topside sampling and chemical analysis. The following work programs
for item 1 should be completed before the sampling can begin:
<Table>
AIR QUALITY Dust measurement and assessment
WATER QUALITY AND MEASUREMENTS Surface water
GROUND WATER Drill wells and obtain data on existing wells Study
streams and possible effects of drainage from mining
operations
POSSIBILITIES OF FLASH FLOODING
SOIL QUALITY AND QUANTITY Determine if there are any Hazards that might be caused
by mining
GEO TECHNICAL
INCLUDING ROCK AND SOIL STABILITY Especially around temple sites
</Table>
-12-
<Table>
SOCIOLOGICAL IMPACT STUDY
EFFECTS ON TRADITIONAL RELIGIOUS Effects on Life style
Implement an assertive positive campaign
Drill new water wells for Locals
Mobile medical unit for Locals
CULTURAL AND HISTORICAL INVENTORY Social economical impact to ensure the locals their
lifestyle won't be harmed but improve
NOISE POLLUTION Audio assessment
FOREST, HERBS AND PLANTS Native plant inventory including herbs for medicinal
purposes
Endangered plants
Reforestation program
Vegetation - study for possible cash crop
WILDLIFE Effects on wildlife habitat
List any endangered species, if any or those at risk
BLASTING Determine if any blasting in certain areas might affect
Temples and surrounding areas
</Table>
Contractors will be engaged to follow through with the individual studies. If
necessary, Bids will be taken when appropriate.
The Company plans to seek partners to provide the capital necessary to fund the
Base Line Study. During the summer of 2003 a team of consultants are meeting in
Orissa with potential partners to negotiate a participation agreement. Subject
to funding and entering into an agreement the Base Line Study is to begin in
October 2003. No assurance can be made that the Company will be successful in
negotiating an agreement or that funding from other sources can be obtained to
meet the October 2003 schedule of beginning the Base Line Study.
HYDROELECTRIC BUSINESS
The Company is currently reviewing alternative methods to continue development
of its hydroelectric business. The Company does not intend to expand any further
funds on the development of its hydroelectric business as it will focus all of
its efforts on the development of its bauxite deposit in bauxite.
The major components that make up the Balaton hydroelectric power production
system incorporate industry standard, off-the-shelf generator components,
electricity conversion and transmission components and related ancillary
hardware, all of which are readily available from a variety of industry
recognized leaders in the manufacture and supply of these components as well as
for the turbines, which will be built to an exacting size in order to
specifically address the output capability of a site on a site-by-site basis, or
in other words, all components will be "site specific." Once the site has been
permitted for development, if necessary, the Company would need to undertake a
variety of studies that may include one or more of the following: an aquatic
species survey, a botanical species survey, an endangered species survey, a
topographical and project features survey, a cultural resources study, a
geological study, a soils classification study and a water quality study. The
approximate outside cost of undertaking all of these required surveys and
studies is $150,000 to $250,000. Additional funds would be required for
site-development and installation. The Company will not use its own funds to
further develop its hydro electric business.
The Pisces
The Pisces, a fish protective water inlet device, is a mechanical system
designed to steer fish stocks around the water intake to prevent, reduce and/or
eliminate their impingement and/or entrainment at irrigation, industrial use and
hydroelectric production facility water intakes. The Company believes the Pisces
can be manufactured utilizing a combination of materials ranging from
poly-composite plastics to hybrid metal alloys. The Pisces can also be built
-13-
on a site-specific basis and manufacturing of the Pisces units can be tendered
out as outlined for the system components as mentioned above. The Company
completed its first field testing of the Pisces net with the Yakima Indian
Nation of Washington State. The tests were conducted by Entrix Inc., and initial
test results have shown the Pisces to work in the manner for which it was
designed.
Patent
Rodney Smith, former a Director and officer of the Company, and Colin Hall have
transferred all of their right, title and interest in the Pisces design and its
derivatives to Balaton Power Corporation S.A. ("BSA"). BSA has achieved "patent
pending" status of its application filed with the United States Patent and
Trademark Office (Case Docket No. SMTT 321) and is patent-protected in 104
countries around the world for a float mounted intake system which will be
marketed under the name of "Pisces." The Pisces is a mechanical device designed
to steer fish stocks around the water intake to prevent, reduce and/or eliminate
their impingement and/or entrainment at irrigation, industrial use and
hydroelectric production facility water intakes. Model testing of Pisces was
conducted in the spring of 2000 at a laboratory in North Vancouver, British
Columbia, Canada.
BSA has entered into a licensing agreement with the Company whereby the Company
has the right to manufacture and sell the System, the Pisces and the BRIMAC and
to implement the System at Company owned hydroelectric power production sites in
the United States and Canada. See "Material Contracts" for a description of the
terms of this license.
The BRIMAC System
The BRIMAC (Balaton Remote Integrated Monitoring and Control) system, is
identified as a combination of water monitoring and data collection sensors that
are mounted on a Pisces or a derivation of the Pisces water intake device, and
assembled to gather data regarding water temperature, toxic and non-toxic
chemical analysis, flow rates, oxygen and nitrogen content. The potential market
involves the collection and analysis of water quality data throughout the United
States. The collection of such data has to date, primarily been accomplished by
technicians in the field who physically attend a location and manually gather
the data for on-site and/or in-lab analysis. This costs state and federal
agencies billions of dollars annually. The State of Idaho alone has allocated
$900 million over the next eight years for its river data collection process.
Also the monitoring of the Total Maximum Daily Load ("TMDL"), the identification
of non-source point pollution in rivers, streams, lakes and reservoirs is a tool
that the Clean Water Act uses to bring polluted waters into compliance with the
EPA's water quality standards. States are required to provide the EPA with TMDL
readings, however, at present only 6 states have sufficient data collection to
comply. The states will require federal financial resources to adequately
develop scientifically and legally defensible TMDLs and Congress is preparing to
grant billions of dollars to provide states with the means to address non-point
source pollution and meet federal water quality goals.
Protection of Aquatic Life
Hydroelectric facilities are required to operate under guidelines and approval
of the FERC. Section 18 of the FERC licensing procedure requires that the
facility has provided a safe environment for fish in accordance with a "fish
prescription" that will prevent, reduce and/or eliminate the entrainment and/or
impingement of fish at the water intakes of hydroelectric production facilities.
The Company believes that the Pisces has been tested sufficiently to date to
meet the status of an acceptable "fish prescription" that will greatly prevent,
reduce and/or eliminate the entrainment and/or impingement of fish in the intake
system and therefore would be in compliance with Section 18 of FERC. Phase I
testing of the Pisces was favourable in demonstrating the units' viability
regarding preliminary flow and water extraction rates from specific water column
levels along with other flow dynamics and characteristics. The Company has not
submitted an application to FERC for recognition of the Pisces unit at this
time. The recognition by FERC of a particular applicant's fish prescription is
handled on a site-by-site basis relative to the type of fish found inhabiting
the site, if any at all.
Further work is required to research, develop and test the Pisces to the extent
necessary to make a formal application to the National Marine Fisheries Service
("NMFS") to obtain certification from NMFS for a designation as the "BTA" ("Best
Technology Available") which will facilitate the marketing of the Pisces as an
agency certified fish protective device for use as a water intake device at
existing hydroelectric sites, industrial water use facilities and
-14-
irrigation sites that may contain species of fish that may be listed as either
threatened or endangered by the Endangered Species Act.
The Company estimates that the cost to test the Pisces to the level required for
application to NMFS will be approximately $250,000 and has completed its first
field testing at a cost of approximately $100,000. The Company does not intend
to spend further funds testing or developing the Pisces system.
As of the date hereof, the Company has not installed or sold any Systems, Pisces
(other than its tested prototypes) or BRIMACs and does not generate or
distribute any electricity to anyone. There is no assurance that the Company
will be able to locate a manager, operator, joint venture partner or buyer for
the Systems, Pisces or BRIMACs. At this time the Company has no revenue from its
current business activities and net losses to December 31, 2002 of $2,126,073.
C. ORGANIZATIONAL STRUCTURE
The Company owns all of the issued and outstanding securities of the following
companies:
Continental Resources (USA) Inc. (incorporated under the laws of the
State of Delaware)
Balaton Power USA Inc. (incorporated under the laws of the State of
Idaho)
Cascade River Hydro, Inc. (incorporated under the laws of the State of
Washington)
Nooksack River Hydro, Inc. (incorporated under the laws of the State of
Washington)
Skagit River Hydro, Inc. (incorporated under the laws of the State of
Washington)
Skookum Hydro, Inc. (incorporated under the laws of the State of
Washington)
Skykomish River Hydro, Inc. (incorporated under the laws of the State
of Washington)
Warm Creek Hydro, Inc. (incorporated under the laws of the State of
Washington)
Washington Hydro Development Corporation. (incorporated under the laws
of the State of Washington)
Continental Resources (USA) Inc. owns 50% of:
Continental Orissa Mining Private Limited, a joint venture with OMC
governed by the laws of India
D. PROPERTY, PLANTS AND EQUIPMENT
OFFICE LEASE
The Company subleased its office space at 1197 Main Street, Boise, Idaho 83702.
The Company leases its office space in Boise pursuant to the terms of a written
lease agreement. The terms of the lease is three years with monthly rental
payments of $1,280.00 the first year; $1,320.00 the second year; and $1,360.00
the third year. The lease expires in March of 2004.
GANDHAMARDAN BAUXITE DEPOSIT
The Company's wholly-owned subsidiary holds a 50% interest in Continental Orissa
Mining Private Limited, which owns mining licenses to the Gandhamardan Bauxite
Deposit. For a description of this Property, see "Business Overview,
Gandhamardan Bauxite Deposit.
-15-
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
OVERVIEW
During the year ended December 2002, the Company marketed the Pisces and BRIMACs
products and determined that the market potential requires additional funding
for marketing these products. The Company wrote down its interests in these
products. The Company determined to seek an alternative venture and in September
2002 agreed to acquire all of the outstanding shares of CRL for 33,000,000
shares of common stock. The acquisition of CRL moves the Company into a new area
of business in the development of a large bauxite deposit in India known as the
Gandhamardan.
The Company has inadequate cash to maintain operations during the next twelve
months. In order to meet its cash requirements the Company will have to raise
additional capital through the sale of securities or loans. In the event that
the Company is unable to raise additional capital, it may have to suspend or
cease operations.
The Company will hire additional employees on an as needed basis, however, the
Company does not expect any significant changes in the number of employees.
The Company expects to sell small percentages of its working interest in the
Gandhamardan Bauxite Deposit during the fourth quarter of 2003 and also plans to
seek management for the Pisces and Hydro divisions. There is no assurance,
however, that the Company will be able to sell interests in the bauxite project
or find management for the divisions of the Company.
The Company does not have adequate cash to maintain its operations, however, its
major shareholder, Perial Ltd. is contributing cash on an as needed basis to
maintain its operations. Currently, the Company's monthly working capital
requirements total approximately $7,500. In the event the Company is unable to
raise additional capital through the sale of its shares of common stock, loans
or sale of interest in its projects then the Company will have to suspend or
cease operations.
The Company believes that the impact of foreign currency fluctuations will not
affect the Company. The Canadian/U.S. dollar exchange rate has been stable at
approximately $1.35 Canadian dollars for each U.S. dollar.
As of December 31, 2002, the Company had $ 28,080 in cash. The assets owned by
the Company are illiquid except for the interest held in the Gandhamardan
Bauxite Deposit in India. As a result, the Company's principal source of cash is
the sale of its common shares, the sale of interests in the bauxite deposit or
loans from major shareholders. The Company's common shares are listed on the
bulletin board operated by the National Association of Securities Dealers, Inc.,
under the symbol "BPWRF". Accordingly, there is no assurance that the Company
will be able to obtain additional capital that is necessary for continuation of
operations of the Company.
RECONCILIATION TO US GAAP
The Company's financial statements have been prepared in accordance with
generally accepted accounting principles applicable to Canadian companies (see
Note 15 to the audited financial statements).
INFLATIONARY AND OTHER ECONOMIC PRESSURES
The Company is not currently generating revenues from the sale of bauxite or its
Systems. Future revenues will be generated from the sale of bauxite which will
be affected by world commodity prices. No immediate effect in respect to
inflation and changes on prices is realized. However inflationary pressures
affect the Company's operation and development expenditure which is primarily
incurred in U.S. dollars. The directors' estimation of inflation is considered
in regards to the general state of the world economy of the United States in
particular. At this stage the Company is unable to quantify the mix of
inflationary pressures that will affect the price of bauxite.
-16-
GOVERNMENT POLICIES
The Company has considered the issue of political risk in India and will
continue to do so as a matter of normal business practice.
Activities conducted by residents and non-residents in India and the flow of
investment into the country and the return of capital out of the country are
subject to regulation. All of these controls and regulations are subject to
change from time to time. Some of the interests of the Company are subject to
the laws of Canada. These factors, in addition to the usual risks and the
economic and political stability of the host country, India, must all be taken
into account in relation to the Company's operations.
These policies or factors do not affect investments by United States residents
in the Company's common shares.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
RICHARD BURDETT, PRESIDENT, CHIEF EXECUTIVE OFFICER AND A DIRECTOR
Richard Burdett, CEO and Director, is a consultant for the oil and gas industry
since he retired from active duty as an officer of the Air Force. As a
consultant he performs financial and landman services. He has leased land for
oil and gas exploration in Wyoming, North Dakota and South Dakota and Kansas.
Mr. Burdett also serves as a director of Perial Ltd. which is a major
shareholder of the Company
ROBERT WYLLIE, CHIEF FINANCIAL OFFICER AND DIRECTOR
Robert Wyllie serves as the Company's Chief Financial Officer and Director. From
May 1999 to present Mr. Wyllie served as technical support head for Dealervoice
Marketing Administrator from September 1990 to April 1999 Ciba Speciality
Chemicals. Mr. Wyllie also serves as a director of Perial Ltd. which is a major
shareholder of the Company.
MICHAEL ROSA, DIRECTOR
Michael Rosa of Surrey, British Columbia serves as a Director of the Company and
is an experienced corporate director and has been involved in natural resource
projects and other entrepreneurial activities. His resource experience is
beneficial in assisting the Company in the development of the Gandhamardan
Bauxite Deposit and also in evaluating other resource projects that may be
presented to the Company.
LOIS ZELENKA, SECRETARY
Lois Zelenka serves as the Company's Corporate Secretary since the acquisition
of Continental Resources (USA) Ltd was made effective in October 2002. Ms.
Zelenka has been involved in various capacities principally in managerial roles
since 1997. Currently Ms. Zelenka is Corporate Secretary and employee for Titan
Employment Services Inc. of Hutchinson, Kansas and is responsible for compliance
and regulatory filings of this temporary employment business.
B. COMPENSATION
The officers and directors of the Company that came into office subsequent to
the end of the fiscal year ended December 31, 2002 currently are serving without
compensation because of the current financial status of the Company. A
compensation committee will be formed when working capital is sufficient to
carry on the Companies operations including compensation to management, officers
and directors.
-17-
The following table sets forth the compensation incurred by the Company for each
of the last three fiscal years, to the previous officers and director of the
Company. This information includes the dollar value of base salaries, bonus
awards and number of stock options granted, and certain other compensation, if
any.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
RESTRICTED
SECURITIES SHARES OF
NAMES OF EXECUTIVE OTHER ANNUAL UNDER RESTRICTED OTHER ANNUAL
OFFICERS AND YEAR SALARY BONUS COMPEN- OPTIONS/ SARS SHARES LTIP COMPEN-
PRINCIPAL POSITIONS ENDED (US$) (US$) SATION(US$) GRANTED(#) UNITS(US$) PAYOUTS(US$) SATION(US$)
Rodney E. Smith 2002 $42,000 nil 36,000(2) nil nil nil nil
Former President, 2001 $68,000 nil nil 400,000 nil nil $1,774
CEO Director 2000 $9,984 nil 52,477(1) nil nil nil nil
Ronald E. Brown 2002 $nil nil nil nil nil nil nil
Former President 2001 $2,451 nil nil nil nil nil nil
2000 $100,251 $11,029 nil nil nil nil nil
Robert Jamieson 2002 n/a n/a n/a n/a n/a n/a n/a
Former President and 2001 n/a n/a n/a n/a n/a n/a n/a
Director 2000 nil nil $11,783(3) nil nil nil nil
Patrick Lavin 2002 n/a n/a n/a n/a n/a n/a n/a
Former CFO and 2001 $41,500 nil nil 400,000 nil nil nil
Secretary 2000 n/a n/a n/a n/a n/a n/a n/a
Philip Cerpanya 2002 n/a n/a n/a n/a n/a n/a n/a
Former CFO 2001 n/a n/a n/a n/a n/a n/a n/a
2000 $26,668 nil nil nil nil nil nil
Maureen O'Brien 2002 81,324 nil nil nil nil nil nil
Former COO 2001 51,682 51,682 nil 400,000 nil nil $12,730
2000 n/a n/a n/a n/a n/a n/a n/a
Robert Stewart 2002 48,000 nil nil nil nil nil nil
Former VP Corporate 2001 67,290 nil nil 500,000 nil nil $22,299
Communications 2000 30,000 nil nil nil nil nil nil
</Table>
(1) Represents living allowance of $3,000 per month.
(2) Consulting fees paid to Briar Management Group, wholly owned by Rodney
E. Smith. See related parties transactions.
(3) Management fees paid to Street Corporate Services Ltd., a company
controlled by Robert Jamieson. See related party transactions.
The Company has not adopted any stock option plans, retirement, pension, or
profit sharing plans for the benefit of the Company's officers and directors
other than as described herein.
STOCK OPTION PLANS AND LONG-TERM INCENTIVE PLAN AWARDS
The Company does not have a stock option plan or long-term incentive plan but
has granted incentive stock options on an individual basis in order to provide
compensation as incentive for performance. These stock options are earned over a
three year vesting schedule.
-18-
COMPENSATION OF DIRECTORS
Directors do not receive any compensation for serving as members of the Board of
Directors. The Board may award options to Directors. There are no contractual
arrangements with any member of the Board of Directors.
EMPLOYMENT CONTRACT WITH RON BROWN - STILL OUTSTANDING
On July 27, 2000, the Company entered into an employment agreement with Ron
Brown, the Company's former President and later Vice President. Under the terms
of the agreement Mr. Brown agreed to perform the services commonly associated
with President and Chief Executive Officer in consideration of a salary of at
least $15,000 per month, reimbursement of all expenses incurred, a life
insurance policy in the amount of $1,500,000, medical and health benefits for
Mr. Brown and all of his family members, and a vehicle allowance. In addition to
the foregoing, the Company was obligated to issue to Mr. Brown options to
acquire 5% of the shares issued and outstanding after the first year; 5% of the
shares issued and outstanding after the second year, and 5% of the shares issued
and outstanding at the end of the third year or a total of 15% of the total
outstanding shares of the Company after three years. The term of the agreement
was from June 30, 2000 to May 31, 2003. The Company has the right to terminate
the agreement for just cause or for any act or omission that is breach under the
agreement that is not remedied within thirty days. It is also a term of
agreement that Mr. Brown could be terminated for cause. On February 12, 2001,
Mr. Brown was terminated for cause. Mr. Brown brought an action in the Chancery
Court for Williamson County, Tennessee, Case No. 27720, seeking a declaratory
judgment that the foregoing employment contract is in full force and effect. As
of the date of this document, the case remains outstanding.
TERMINATION OF EMPLOYMENT, CHANGE IN RESPONSIBILITIES AND EMPLOYMENT CONTRACTS
There are no compensatory plans or arrangements with respect to the Named
Executive Officers resulting from the resignation, retirement or any other
termination of employment of the officer's employment or from a change of the
Named Executive Officer's responsibilities following a change in control.
C. BOARD PRACTICES
All directors hold office until the next annual meeting of shareholders and
until their successors have been elected and qualified. The Company's officers
are elected by the Board of Directors at the annual meeting after each annual
meeting of the Company's shareholders and hold office until their death, or
until they resign or have been removed from office. All of the current officers
and directors were appointed in February, 2003 after completion of the
acquisition of CRL. The Company currently does not have a remuneration
committee. All of the members of the board sit on the audit committee.
D. EMPLOYEES
The Company has no employees other than its officers and directors. The Company
has three directors/officers involved in management and administration of the
Company. These employees are not compensated for their services, and will not be
compensated until the Company obtains funding for the development of the
Gandhamardan Deposit.
E. SECURITY HOLDINGS OF DIRECTORS AND OFFICERS (AS AT JULY 31, 2003)
<Table>
<Caption>
SHARES OWNED OR BENEFICIALLY PERCENTAGE OF 66,988,194 NUMBER OF OPTIONS HELD
NAME OF INSIDER CONTROLLED OUTSTANDING COMMON SHARES BY INSIDER
Richard Burdett 50,000 less than 0.1% Nil
Robert Wyllie 50,000 less than 0.1% Nil
Lois Zelenka 50,000 less than 0.1% Nil
Michael Rosa 50,000 less than 0.1% Nil
TOTAL: 200,000 0.3% Nil
</Table>
-19-
OPTIONS
The following chart details all outstanding options granted to directors and
officers of the Company. All of the persons listed are no longer directors or
officers of the Company.
<Table>
<Caption>
PERCENTAGE OF TOTAL
NAME AND POSITION SHARES OPTIONED OPTION PRICE EXPIRY DATE OUTSTANDING OPTIONS
- ----------------------- --------------------- --------------------- ----------------- ---------------------
Rod Smith 400,000 US$0.50 Dec. 31, 2005 11.8%
Maureen O'Brien 400,000 US$0.50 Dec. 31, 2005 11.8%
Robert Stewart 500,000 US$0.50 Dec. 31, 2005 14.7%
Patrick Lavin 400,000 US$0.50 Dec. 31, 2005 11.8%
Andrew Finneran 400,000 US$0.50 Dec. 31, 2005 11.8%
Paul Davey 50,000 US$0.50 Dec. 31, 2005 1.5%
Lois VanHoover 50,000 US$0.50 Dec. 31, 2005 1.5%
Paul Trudel 300,000 US$0.50 Dec. 31, 2005 8.8%
Martina F. Kaessner 300,000 US$0.50 Dec. 31, 2005 8.8%
Randall Saunders 100,000 US$0.50 Dec. 31, 2005 2.9%
Dan Pfeiffer 400,000 US$0.50 Jan. 2, 2006 11.8%
</Table>
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The Company is controlled by Perial Ltd. by virtue of its beneficial ownership
of 25,000,000 common shares. There are no agreements in place that could result
in a change of control of the Company.
The following table sets forth the common share ownership of each person known
by the Company to be the beneficial owner of five percent or more of the
Company's common shares. Each person has sole voting and investment power with
respect to the shares of common stock shown, and all ownership is of record and
beneficial.
<Table>
<Caption>
PERCENT OF INCREASE/DECREASE IN
NAME AND ADDRESS OF OWNER NUMBER OF SHARES POSITION CLASS PERCENTAGE HELD OVER 2001
- ------------------------- ---------------- -------- ---------- -------------------------
Balaton Power Corporation S.A. 725,000 Shareholder 1.1% -50%
Perial Ltd. 25,000,000 Shareholder 37.8% +37.8%
City Source Net Ltd. 5,000,000 Shareholder 7.6% +7.6%
</Table>
B. RELATED PARTY TRANSACTIONS
Other than as disclosed herein, the directors, senior officers and principal
shareholders of the Company, or any associate or affiliate of the foregoing,
have not participated in and have no other interest, direct or indirect, in any
material transactions in which the Company has participated, or in any proposed
transaction which has materially affected or will materially affect the Company
during the previous three fiscal years, as follows:
-20-
During the year ended December 31, 2002, the Company, incurred $171,500
(2001-$283,506) to directors and officers for salaries, benefits and consulting
fees. Subsequent to the year end, the Company issued 674,020 common shares at a
price of $0.10 per share to settle amounts owed such directors and officers.
Currently, Perial Inc. is loaning funds to the Company to enable the Company to
meet its day to day working capital requirements. The amounts loaned have no
fixed rate of interest or repayment date. As at July 31, 2003, approximately
$85,000 was owed by the Company to Perial.
During the year ended December 31, 2001, the Company paid $171,216 (2000 - $Nil)
to directors and officers for wages and benefits, $112,290 (2000 - $52,477) to
two officers for consulting fees, and $29,499 (2000 - $Nil) to an officer and
director of the parent company for finders' fees. Also during fiscal 2001 the
parent company advanced $103,875 to the Company. These advances are without
interest or specific terms of repayment but are due on demand. As at December
31, 2001 a director of the parent company and the president of the Company were
owed $10,500. These amounts were repaid subsequent to year-end.
Balaton Power Corporation S.A purchased 12,500,000 shares of the Company for a
price of $.001 per share and subsequently issued a license to the Company to
manufacture and sell the System, the Pisces and the BRIMAC and to implement the
System at Company owned hydroelectric power production sites in the United
States and Canada. As further consideration, the Company is obligated to make a
payment of $150,000 to BSA as advance payment of royalties of five percent (5%)
of gross revenues. Under the terms of the agreement, the Company has paid
$50,000 to BSA and has agreed to pay the balance of $100,000 upon receipt of
funding by the Company in the aggregate amount of not less than $4,000,000.
Subsequent to the year ended December 31, 2003, the parties amended the
agreement to reduce the royalty to 2% and eliminated all further obligations of
the Company. The Company issued 500,000 common shares to Balaton in
consideration for this amendment.
There are no additional interests of management in transactions involving the
Company except for those stated in the Notes to the Financial Statements.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See "Item 17 Financial Statements" and pages 2 to 3 of this document.
LEGAL PROCEEDINGS
No material legal proceedings to which the Company is a party are pending nor
are any known to be contemplated and the Company knows of no legal proceedings
pending or threatened, or judgments entered against, any Director or Officer of
the Company in his capacity as such other than a suit initiated by Ronald Brown,
the Company's former President and Chief Executive Officer. Mr. Brown seeks
relief from the Chancery Court of Williamson County, Tennessee (Case No. 27720)
to determine that his employment contract which was entered into between he and
the Company dated July 27, 2000 is still in full force and effect. The Company
terminated Mr. Brown with cause effective February 12, 2001.
DIVIDENDS POLICY
No dividend has been paid on the Common Shares since inception, and none is
contemplated in the foreseeable future.
-21-
B. SIGNIFICANT CHANGES
Not Applicable.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
For the five most recent full financial years, the annual high and low market
prices for the Company's common stock were as follows:
<Table>
<Caption>
2002 2001 2000 1999 1998
HIGH $0.95 1.25 N/A* N/A* N/A*
LOW $0.02 .50 N/A* N/A* N/A*
</Table>
For the two most recent full financial years, the high and low market prices for
each full financial quarter for the Company's common stock were as follows:
<Table>
<Caption>
2002 2001
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
HIGH $0.95 .80 .45 .02 N/A* N/A* N/A* $1.25
LOW $0.80 .45 .02 .25 N/A* N/A* N/A* $0.50
</Table>
For the most recent six months, the high and low market prices for each month
for the Company's common stock were as follows:
<Table>
<Caption>
JUNE 02 MAY 02 APR 02 MAR 03 FEB03 JAN 03
HIGH $0.09 $0. $0. $0. $0. $0.
LOW $0.14 $0. $0. $0. $0. $0.
</Table>
* The Company's shares did not trade on any exchange.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
The shares of the Company have traded on the Over-the-Counter Bulletin Board
Quotation System under the symbol "BPWRF" since November 26, 2001.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
-22-
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Information regarding the Company's Memorandum and Articles of Association is
set out in the Company's Annual Report on Form 20F filed July 15, 2002 and is
incorporated herein by reference.
C. MATERIAL CONTRACTS
STOCK EXCHANGE AGREEMENT DATED SEPTEMBER 30, 2002
On September 3, 2002 the Company entered into an agreement to acquire 100% of
CRL from Perial, Inc. in consideration for 33,000,000 common shares of the
Company. 25,000,000 of these shares were issued to Perial Inc. and 8,000,000
were issued as a finder's fee. The transaction completed on October 31, 2003 and
resulted in the change of control of the Company and the refocus of the
Company's business on the Gandhamardan Bauxite Deposit.
LOAN AGREEMENT DATED FEBRUARY 11, 2002
On February 11th, 2002, the Company entered into a loan agreement arranged by
S.J. Roth Capital Placement Inc. Under the terms of the agreement, the "Lender"
is to make four consecutive loans to the Company, each loan in the amount of
$125,000 (the "Loans") a total of $163,436 was advanced to the Company. Each
Loan is evidenced by a Promissory Note, accruing interest at approximately 7.3%
per annum and maturing and payable December 31, 2002. Each Loan has conversion
privileges whereby the Lender may convert each of the Loans or any portion
thereof outstanding, including interest, into "Units". Each Unit consists of one
common share of the Company and one Share Purchase Warrant entitling the Lender
to purchase from the Company, one additional common share at an exercise price
of $0.50 at any time prior to the expiry date of December 31, 2004. As at
December 31, 2002, $179,779 was owing on the loans, being $163,438 in principal
and $16,343 in penalties. The loans have not yet been repaid.
STOCK PURCHASE AGREEMENT OF MARCH 11, 2002
On March 11th, 2002, the Company's wholly-owned subsidiary, Balaton Power USA
Inc. ("BPIUSA"), an Idaho company, entered into a Stock Purchase and Business
Review Agreement with Hydro Energy Development Corporation ("HEDC"), a
Washington corporation, to purchase from HEDC seven Washington State companies,
comprising 11unlicensed hydro-electric sites with a combined 80MW power
generation potential and three Washington State companies, comprising three
fully licensed hydro-electric sites with a combined 20MW power generation
potential. The Company has made the payments and acquired the companies.
SHARE ISSUANCE OF APRIL 17, 2002
On April 17th, 2002, the Company issued 1,250,000 fully-paid common shares in
the capital of the Company, issued at the price of $0.40 per share and 1,250,000
non-transferable share purchase warrants, entitling the holders thereof to
purchase a total of 625,000 common shares in the capital of the Company, each
exercisable at any time before the close of business on April 17, 2004 at a
price of $0.60 per common share if exercised on or before April 17, 2004 (Note
9).
LETTER OF INTENT DATED JANUARY 14, 2002
The Company has entered into a letter of intent with Vernon Ravenscroft to
acquire three companies operating an existing low impact hydroelectric power
production facility located near Bliss, Idaho. The facility generated
-23-
approximately 3 MW of power in 2001 and the electricity is sold under a long
term Power Purchase Agreement ("PPA") with Idaho Power Company. The letter of
intent was subject to entering into a definitive agreement to acquire a working
interest in the facility in the third quarter of 2001. The Company did not enter
into the definitive agreement. On December 28, 2002, the Company relinquished
its right to acquire an interest in the Company in consideration for $20,000 and
a release from all of its obligations under the letter of intent.
LICENSE AGREEMENT WITH BALATON POWER CORPORATION, S.A.
Rodney Smith, a director and Colin Hall, an individual, have transferred all of
their right, title and interest in the Pisces design and its derivatives to
Balaton Power Corporation S.A. ("BSA"). BSA has achieved "patent pending" status
of its application filed with the United States Patent and Trademark Office
(Case Docket No. SMTT 321) and is patent-protected in 104 countries around the
world for a float mounted intake system which will be marketed under the name of
"Pisces." The Pisces is a mechanical device designed to steer fish stocks around
the water intake to prevent, reduce and/or eliminate their impingement and/or
entrainment at irrigation, industrial use and hydroelectric production facility
water intakes. Model testing of Pisces was conducted in the spring of 2000 at
the Northwest Hydraulic Consultants' laboratory in North Vancouver, British
Columbia, Canada.
BSA has entered into a licensing agreement with the Company whereby the Company
has the right to manufacture and sell the System, the Pisces and the BRIMAC and
to implement the System at Company owned hydroelectric power production sites in
the United States and Canada. In consideration of the license, the Company is
obligated to make the payment of $150,000 to BSA as advance payment of royalties
of five percent (5%) of gross revenues. Under the terms of the agreement, the
Company has paid $50,000 to BSA and has agreed to pay the balance of $100,000
upon receipt of funding by the Company in the aggregate amount of not less than
$4,000,000. Subsequent to the year ended 2002, the parties agreed to reduce the
royalty to 2%, and waive all further obligations of the Company, in
consideration for 500,000 common shares of the Company.
D. EXCHANGE CONTROLS
There are no exchange controls or other limitations which affect security
holders other than the shares of common stock issued to Balaton Power
Corporation, S.A. which are "restricted securities" as that term is defined in
Reg. 144 of the Securities Act of 1933 (the "Act") and may only be resold in
compliance with Reg. 144 of the Act.
In general, under Reg. 144, an affiliate of the Company (officers, directors,
and owners of more than ten percent (10%) of the outstanding shares of Common
Stock of the Company) may sell in ordinary market transactions through a broker
or with a market maker, within any three (3) month period a number of shares
which does not exceed the greater of one percent (1%) of the number of
outstanding shares of Common Stock or the average of the weekly trading volume
of the Common Stock during the four calendar weeks prior to such sale. Sales
under Reg. 144 require the filing of Form 144 with the Securities and Exchange
Commission. If the shares of Common Stock have been held for more than two (2)
years by a person who is not an affiliate, there is no limitation on the manner
of sale or the volume of shares that may be sold and no Form 144 is required.
Sales under Reg. 144 may have a depressive effect on the market price of the
Company's Common Stock.
The Company is a Province of British Columbia, Canada corporation. There is no
law or governmental decree or regulation in Canada that restricts the export or
import of capital, or affects the remittance of dividends, interest or other
payments to a non-resident holder of Common Shares, other than withholding tax
requirements. Any such remittances to United States residents are generally
subject to withholding tax, however no such remittances are likely in the
foreseeable future. See "Taxation", below.
There is no limitation imposed by the laws of Canada or by the charter or other
constituent documents of the Company on the right of a non-resident to hold or
vote its common shares, other than as provided in the Investment Canada Act
(Canada) (the "Investment Act"). The following discussion summarizes the
material features of the Investment Act for a non-resident who proposes to
acquire a controlling number of the Company's common shares. It is general only,
it is not a substitute for independent advice from an investor's own advisor,
and it does not anticipate statutory or regulatory amendments. The Company does
not believe the Investment Act will have any affect on it or on its non-Canadian
shareholders due to a number of factors including the nature of its operations
and the Company's relatively small capitalization.
-24-
The Investment Act generally prohibits implementation of a "reviewable"
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture (each an "entity") that is not a "Canadian"
as defined in the Investment Act (i.e. a "non-Canadian"), unless after review
the Director of Investments appointed by the minister responsible for the
Investment Act is satisfied that the investment is likely to be of net benefit
to Canada. The size and nature of a proposed transaction may give rise to an
obligation to notify the Director to seek an advance ruling. An investment in
the Company's common shares by a non-Canadian (other than a "WTO Investor" as
that term is defined in the Investment Act and which term includes entities
which are nationals of or are controlled by nationals of member states of the
World Trade Organization) when the Company was not controlled by a WTO Investor,
would be reviewable under the Investment Act if it was an investment to acquire
control of the Company and the value of the assets of the Company, as determined
in accordance with the regulations promulgated under the Investment Act, was
over a certain figure, or if an order for review was made by the federal cabinet
on the grounds that the investment related to Canada's cultural heritage or
national identity, regardless of the value of the assets of the Company. An
investment in the Common Shares by a WTO Investor, or by a non-Canadian when the
Company was controlled by a WTO Investor, would be reviewable under the
Investment Act if it was an investment to acquire control of the Company and the
value of the assets of the Company, as determined in accordance with the
regulations promulgated under the Investment Act, was not less than a specified
amount. A non-Canadian would acquire control of the Company for the purposes of
the Investment Act if the non-Canadian acquired a majority of the Common Shares.
The acquisition of less than a majority but one-third or more of the Common
Shares would be presumed to be an acquisition of control of the Company unless
it could be established that, on the acquisition, the Company was not controlled
in fact by the acquiror through the ownership of the Common Shares.
The foregoing assumes the Company will not engage in the production of uranium
or own an interest in a producing uranium property in Canada, or provide any
financial service or transportation service, as the rules governing these
businesses are different. Certain transactions relating to the Common Shares
would be exempt from the Investment Act, including
(a) an acquisition of the Common Shares by a person in the ordinary course of
that person's business as a trader or dealer in securities,
(b) an acquisition of control of the Company in connection with the realization
of security granted for a loan or other financial assistance and not for a
purpose related to the provisions of the Investment Act, and
(c) an acquisition of control of the Company by reason of an amalgamation,
merger, consolidation or corporate reorganization following which the ultimate
direct or indirect control in fact of the Company, through the ownership of the
Common Shares, remained unchanged.
E. TAXATION
MATERIAL CANADIAN FEDERAL INCOME TAX CONSEQUENCES FOR UNITED STATES RESIDENTS
The following summarizes the material Canadian federal income tax consequences
generally applicable to the holding and disposition of Common Shares by a holder
(in this summary, a "U.S. Holder") who, (a) for the purposes of the Income Tax
Act (Canada) (the "Tax Act"), is not resident in Canada, deals at arm's length
with the Company, holds the Common Shares as capital property and does not use
or hold the Common Shares in the course of carrying on, or otherwise in
connection with, a business in Canada, and (b) for the purposes of the
Canada-United States Income Tax Convention, 1980 (the "Treaty"), is a resident
solely of the United States, has never been a resident of Canada, and has not
held or used (and does not hold or use) Common Shares in connection with a
permanent establishment or fixed base in Canada. This summary does not apply to
traders or dealers in securities, limited liability companies, tax-exempt
entities, insurers, financial institutions (including those to which the
mark-to-market provisions of the Tax Act apply), or any other U.S. Holder to
which special considerations apply.
This summary is based on the current provisions of the Tax Act including all
regulations thereunder, the Treaty, all proposed amendments to the Tax Act, the
regulations and the Treaty publicly announced by the Government of Canada to the
date hereof, and the current administrative practices of the Canada Customs and
Revenue Agency. It has been assumed that all currently proposed amendments will
be enacted as proposed and that there will be no other relevant change in any
governing law or administrative practice, although no assurances can be given in
these
-25-
respects. The immediately following summary does not take into account Canadian
provincial, U.S. federal (which follows further below), state or other foreign
income tax law or practice. The tax consequences to any particular U.S. Holder
will vary according to the status of that holder as an individual, trust,
corporation, partnership or other entity, the jurisdictions in which that holder
is subject to taxation, and generally according to that holder's particular
circumstances. Accordingly, this summary is not, and is not to be construed as,
Canadian tax advice to any particular U.S. Holder.
DIVIDENDS
Dividends paid or deemed to be paid to a U.S. Holder by the Company will be
subject to Canadian withholding tax. Under the Treaty, the rate of withholding
tax on dividends paid to a U.S. Holder is generally limited to 15% of the gross
amount of the dividend (or 5% if the U.S. Holder is a corporation and
beneficially owns at least 10% of the Company's voting shares). the Company will
be required to withhold the applicable withholding tax from any such dividend
and remit it to the Canadian government for the U.S. Holder's account.
DISPOSITION
A U.S. Holder is not subject to tax under the Tax Act in respect of a capital
gain realized on the disposition of a Common Share in the open market unless the
share is "taxable Canadian property" to the holder thereof and the U.S. Holder
is not entitled to relief under the Treaty. A common share will be taxable
Canadian property to a U.S. Holder if, at any time during the 60 months
preceding the disposition, the U.S. Holder or persons with whom the U.S. Holder
did not deal at arm's length alone or together owned, or had rights to acquire,
25% or more of the Company's issued shares of any class or series.
A U.S. Holder whose common shares do constitute taxable Canadian property, and
who might therefore be liable for Canadian income tax under the Tax Act, will
generally be relieved from such liability under the Treaty unless the value of
such shares at the time of disposition is derived principally from real property
situated in Canada. The value of the Company's common shares is not currently
derived principally from real property situated in Canada.
UNITED STATES TAX CONSEQUENCES
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of all material United States federal income tax
consequences, under current law, generally applicable to a U.S. Holder (as
hereinafter defined) of common shares of the Company. This discussion does not
address all potentially relevant federal income tax matters and it does not
address consequences peculiar to persons subject to special provisions of
federal income tax law, such as those described below as excluded from the
definition of a U.S. Holder. In addition, this discussion does not cover any
state, local or foreign tax consequences. (see "Taxation- Canadian Federal
Income Tax Consequences" above). Accordingly, we urge holders and prospective
holders of common shares of the Company to consult their own tax advisors about
the specific federal, state, local, and foreign tax consequences to them of
purchasing, owning and disposing of common shares of the Company, based upon
their individual circumstances.
The following discussion is based upon the sections of the Internal Revenue Code
of 1986, as amended (the "Code"), Treasury Regulations, published Internal
Revenue Service ("IRS") rulings, published administrative positions of the IRS
and court decisions that are currently applicable, any or all of which could be
materially and adversely changed, possibly on a retroactive basis, at any time
and which are subject to differing interpretations. This discussion does not
consider the potential effects, both adverse and beneficial, of any proposed
legislation which, if enacted, could be applied, possibly on a retroactive
basis, at any time.
U.S. HOLDERS
As used herein, a "U.S. Holder" means a holder of common shares of the Company
who is a citizen or individual resident of the United States, a corporation or
partnership created or organized in or under the laws of the United States or of
any political subdivision thereof, an estate whose income is taxable in the
United States irrespective of
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source or a trust subject to the primary supervision of a court within the
United States and control of a United States fiduciary as described Section
7701(a)(30) of the Code. This summary does not address the tax consequences to,
and U.S. Holder does not include, persons subject to specific provisions of
federal income tax law, such as tax-exempt organizations, qualified retirement
plans, individual retirement accounts and other tax-deferred accounts, financial
institutions, insurance companies, real estate investment trusts, regulated
investment companies, broker-dealers, non-resident alien individuals, persons or
entities that have a "functional currency" other than the U.S. dollar,
shareholders subject to the alternative minimum tax, shareholders who hold
common shares as part of a straddle, hedging or conversion transaction, and
shareholders who acquired their common shares through the exercise of employee
stock options or otherwise as compensation for services. This summary is limited
to U.S. Holders who own common shares as capital assets and who own (directly
and indirectly, pursuant to applicable rules of constructive ownership) no more
than 5% of the value of the total outstanding stock of the Company. This summary
does not address the consequences to a person or entity holding an interest in a
shareholder or the consequences to a person of the ownership, exercise or
disposition of any options, warrants or other rights to acquire common shares.
In addition, this summary does not address special rules applicable to United
States persons (as defined in Section 7701(a)(30) of the Code) holding common
shares through a foreign partnership or to foreign persons holding common shares
through a domestic partnership.
DISTRIBUTION ON COMMON SHARES OF THE COMPANY
In general, U.S. Holders receiving dividend distributions (including
constructive dividends) with respect to common shares of the Company are
required to include in gross income for United States federal income tax
purposes the gross amount of such distributions, equal to the U.S. dollar value
of such distributions on the date of receipt (based on the exchange rate on such
date), to the extent that the Company has current or accumulated earnings and
profits, without reduction for any Canadian income tax withheld from such
distributions. Such Canadian tax withheld may be credited, subject to certain
limitations, against the U.S. Holder's federal income tax liability or,
alternatively, may be deducted in computing the U.S. Holder's federal taxable
income by those who itemize deductions. (See more detailed discussion at
"Foreign Tax Credit" below). To the extent that distributions exceed current or
accumulated earnings and profits of the Company, they will be treated first as a
return of capital up to the U.S. Holder's adjusted basis in the common shares
and thereafter as gain from the sale or exchange of property. Preferential tax
rates for long-term capital gains are applicable to a U.S. Holder which is an
individual, estate or trust. There are currently no preferential tax rates for
long-term capital gains for a U.S. Holder which is a corporation.
In the case of foreign currency received as a dividend that is not converted by
the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have
a tax basis in the foreign currency equal to its U.S. dollar value on the date
of receipt. Generally any gain or loss recognized upon a subsequent sale or
other disposition of the foreign currency, including the exchange for U.S.
dollars, will be ordinary income or loss. However, an individual whose realized
gain does not exceed $200 will not recognize that gain, provided that there are
no expenses associated with the transaction that meet the requirements for
deductibility as a trade or business expense (other than travel expenses in
connection with a business trip) or as an expense for the production of income.
Dividends paid on the common shares of the Company generally will not be
eligible for the dividends received deduction provided to corporations receiving
dividends from certain United States corporations. A U.S. Holder which is a
corporation and which owns shares representing at least 10% of the voting power
and value of the Company may, under certain circumstances, be entitled to a 70%
(or 80% if the U.S. Holder owns shares representing at least 20% of the voting
power and value of the Company) deduction of the United States source portion of
dividends received from the Company (unless the Company qualifies as a "foreign
personal holding company" or a "passive foreign investment company," as defined
below). The Company does not anticipate that it will earn any United States
income, however, and therefore does not anticipate that any U.S. Holder will be
eligible for the dividends received deduction.
Under current Treasury Regulations, dividends paid on the Company's common
shares, if any, generally will not be subject to information reporting and
generally will not be subject to U.S. backup withholding tax. However, dividends
and the proceeds from a sale of the Company's common shares paid in the U.S.
through a U.S. or U.S. related paying agent (including a broker) will be subject
to U.S. information reporting requirements and may also be subject to the 31%
U.S. backup withholding tax, unless the paying agent is furnished with a duly
completed and signed Form W-9. Any amounts withheld under the U.S. backup
withholding tax rules will be allowed as a refund or
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a credit against the U.S. Holder's U.S. federal income tax liability, provided
the required information is furnished to the IRS.
FOREIGN TAX CREDIT
A U.S. Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of common shares of the Company may be entitled,
at the option of the U.S. Holder, to either receive a deduction or a tax credit
for such foreign tax paid or withheld. Generally, it will be more advantageous
to claim a credit because a credit reduces United States federal income taxes on
a dollar-for-dollar basis, while a deduction merely reduces the taxpayer's
income subject to tax. This election is made on a year-by-year basis and
generally applies to all foreign taxes paid by (or withheld from) the U.S.
Holder during that year. There are significant and complex limitations which
apply to the credit, among which is the general limitation that the credit
cannot exceed the proportionate share of the U.S. Holder's United States income
tax liability that the U.S. Holder's foreign source income bears to his or its
worldwide taxable income. In the determination of the application of this
limitation, the various items of income and deduction must be classified into
foreign and domestic sources. Complex rules govern this classification process.
In addition, this limitation is calculated separately with respect to specific
classes of income such as "passive income, " "high withholding tax interest,"
"financial services income," "shipping income," and certain other
classifications of income. Dividends distributed by the Company will generally
constitute "passive income" or, in the case of certain U.S. Holders, "financial
services income" for these purposes. The availability of the foreign tax credit
and the application of the limitations on the credit are fact specific, and U.S.
Holders of common shares of the Company should consult their own tax advisors
regarding their individual circumstances.
DISPOSITION OF COMMON SHARES OF THE COMPANY
In general, U.S. Holders will recognize gain or loss upon the sale of common
shares of the Company equal to the difference, if any, between (i) the amount of
cash plus the fair market value of any property received, and (ii) the
shareholder's tax basis in the common shares of the Company. Preferential tax
rates apply to long-term capital gains of U.S. Holders which are individuals,
estates or trusts. In general, gain or loss on the sale of common shares of the
Company will be long-term capital gain or loss if the common shares are a
capital asset in the hands of the U.S. Holder and are held for more than one
year. Deductions for net capital losses are subject to significant limitations.
For U.S. Holders which are not corporations, any unused portion of such net
capital loss may be carried over to be used in later tax years until such net
capital loss is thereby exhausted. For U.S. Holders that are corporations (other
than corporations subject to Subchapter S of the Code), an unused net capital
loss may be carried back three years and carried forward five years from the
loss year to be offset against capital gains until such net capital loss is
thereby exhausted.
OTHER CONSIDERATIONS
Set forth below are certain material exceptions to the above-described general
rules describing the United States federal income tax consequences resulting
from the holding and disposition of common shares:
FOREIGN PERSONAL HOLDING COMPANY
If at any time during a taxable year more than 50% of the total combined voting
power or the total value of the Company's outstanding shares is owned, directly
or indirectly (pursuant to applicable rules of constructive ownership), by five
or fewer individuals who are citizens or residents of the United States and 60%
or more of the Company's gross income for such year is derived from certain
passive sources (e.g., from certain interest and dividends), the Company may be
treated as a "foreign personal holding company." In that event, U.S. Holders
that hold common shares would be required to include in gross income for such
year their allocable portions of such passive income to the extent the Company
does not actually distribute such income. The Company does not believe that it
currently qualifies as a foreign personal holding company. However, there can be
no assurance that the Company will not be considered a foreign personal holding
company for the current or any future taxable year.
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FOREIGN INVESTMENT COMPANY
If 50% or more of the combined voting power or total value of the Company's
outstanding shares is held, directly or indirectly, by citizens or residents of
the United States, United States domestic partnerships or corporations, or
estates or trusts other than foreign estates or trusts (as defined by the Code
Section 7701(a)(31)), and the Company is found to be engaged primarily in the
business of investing, reinvesting, or trading in securities, commodities, or
any interest therein, it is possible that the Company may be treated as a
"foreign investment company" as defined in Section 1246 of the Code, causing all
or part of any gain realized by a U.S. Holder selling or exchanging common
shares to be treated as ordinary income rather than capital gain. the Company
does not believe that it currently qualifies as a foreign investment company.
However, there can be no assurance that the Company will not be considered a
foreign investment company for the current or any future taxable year.
PASSIVE FOREIGN INVESTMENT COMPANY
United States income tax law contains rules governing "passive foreign
investment companies" ("PFIC") which can have significant tax effects on U.S.
Holders of foreign corporations. These rules do not apply to non-U.S. Holders.
Section 1297 of the Code defines a PFIC as a corporation that is not formed in
the United States if, for any taxable year, either (i) 75% or more of its gross
income is "passive income," which includes interest, dividends and certain rents
and royalties or (ii) the average percentage, by fair market value (or, if the
corporation is not publicly traded and either is a controlled foreign
corporation or makes an election, by adjusted tax basis), of its assets that
produce or are held for the production of "passive income" is 50% or more. Each
U.S. Holder of the Company is urged to consult a tax advisor with respect to how
the PFIC rules affect such U.S. Holder's tax situation with respect to ownership
of the Company's shares.
Each U.S. Holder who holds stock in a foreign corporation during any year in
which such corporation qualifies as a PFIC is subject to United States federal
income taxation under one of three alternative tax regimes at the election of
such U.S. Holder. The following is a discussion of such alternative tax regimes
applied to such U.S. Holders of the Company. In addition, special rules apply if
a foreign corporation qualifies as both a PFIC and a "controlled foreign
corporation" (as defined below) and a U.S. Holder owns, actually or
constructively, 10% or more of the total combined voting power of all classes of
stock entitled to vote of such foreign corporation (Seemore detailed discussion
at "Controlled Foreign Corporation" below).
A U.S. Holder who elects to treat the Company as a qualified electing fund
("QEF") will be subject, under Section 1293 of the Code, to current federal
income tax for any taxable year to which the election applies in which the
Company qualifies as a PFIC on his pro rata share of the Company's (i) "net
capital gain" (the excess of net long-term capital gain over net short-term
capital loss), which will be taxed as long-term capital gain, and (ii) "ordinary
earnings" (the excess of earnings and profits over net capital gain), which will
be taxed as ordinary income, in each case, for the shareholder's taxable year in
which (or with which) the Company's taxable year ends, regardless of whether
such amounts are actually distributed. A U.S. Holder's tax basis in the common
shares will be increased by any such amount that is included in income but not
distributed.
The procedure a U.S. Holder must comply with in making an effective QEF
election, and the consequences of such election, will depend on whether the year
of the election is the first year in the U.S. Holder's holding period in which
the Company is a PFIC. If the U.S. Holder makes a QEF election in such first
year, i.e., a "timely" QEF election, then the U.S. Holder may make the QEF
election by simply filing the appropriate documents at the time the U.S. Holder
files his tax return for such first year. If, however, the Company qualified as
a PFIC in a prior year during the U.S. Holder's holding period, then, in order
to avoid the Section 1291 rules discussed below, in addition to filing
documents, the U.S. Holder must elect to recognize under the rules of Section
1291 of the Code (discussed herein), (i)any gain that he would otherwise
recognize if the U.S. Holder sold his stock on the qualification date or (ii)if
the Company is a controlled foreign corporation, the U.S. Holder's pro rata
share of the Company's post-1986 earnings and profits as of the qualification
date. The qualification date is the first day of the Company's first tax year in
which the Company qualified as a QEF with respect to such U.S. Holder. For
purposes of this discussion, a U.S. Holder who makes (i) a timely QEF election,
or (ii) an untimely QEF election and either of the above-described
gain-recognition elections under Section 1291 is referred to herein as an
"Electing U.S. Holder." A U.S. Holder who holds common shares at any time during
a year of the Company in which the Company is a PFIC and who is not an Electing
U.S. Holder (including a U.S. Holder who makes an untimely QEF election and
makes neither of the
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above-described gain-recognition elections) is referred to herein as a
"Non-Electing U.S. Holder." An Electing U.S. Holder (i)generally treats any gain
realized on the disposition of his the Company common shares as capital gain;
and (ii)may either avoid interest charges resulting from PFIC status altogether,
or make an annual election, subject to certain limitations, to defer payment of
current taxes on his share of the Company's annual realized net capital gain and
ordinary earnings subject, however, to an interest charge. If the U.S. Holder is
not a corporation, any interest charge imposed under the PFIC regime would be
treated as "personal interest" that is not deductible.
In order for a U.S. Holder to make (or maintain) a valid QEF election, the
Company must provide certain information regarding its net capital gains and
ordinary earnings and permit its books and records to be examined to verify such
information. the Company intends to make the necessary information available to
U.S. Holders to permit them to make (and maintain) QEF elections with respect to
the Company. The Company urges each U.S. Holder to consult a tax advisor
regarding the availability of, and procedure for making, the QEF election.
A QEF election, once made with respect to the Company, applies to the tax year
for which it was made and to all subsequent tax years, unless the election is
invalidated or terminated, or the IRS consents to revocation of the election. If
a QEF election is made by a U.S. Holder and the Company ceases to qualify as a
PFIC in a subsequent tax year, the QEF election will remain in effect, although
not applicable, during those tax years in which the Company does not qualify as
a PFIC. Therefore, if the Company again qualifies as a PFIC in a subsequent tax
year, the QEF election will be effective and the U.S. Holder will be subject to
the rules described above for Electing U.S. Holders in such tax year and any
subsequent tax years in which the Company qualifies as a PFIC. In addition, the
QEF election remains in effect, although not applicable, with respect to an
Electing U.S. Holder even after such U.S. Holder disposes of all of his or its
direct and indirect interest in the shares of the Company. Therefore, if such
U.S. Holder reacquires an interest in the Company, that U.S. Holder will be
subject to the rules described above for Electing U.S. Holders for each tax year
in which the Company qualifies as a PFIC.
In the case of a Non-Electing U.S. Holder, special taxation rules under Section
1291 of the Code will apply to (i)gains realized on the disposition (or deemed
to be realized by reasons of a pledge) of his Balaton common shares and
(ii)certain "excess distributions," as defined in Section 1291(b), by the
Company.
A Non-Electing U.S. Holder generally would be required to pro rate all gains
realized on the disposition of his Balaton common shares and all excess
distributions on his Balaton common shares over the entire holding period for
the common shares. All gains or excess distributions allocated to prior years of
the U.S. Holder (excluding any portion of the holder's period prior to the first
day of the first year of the Company (i) which began after December 31, 1986,
and (ii) for which the Company was a PFIC) would be taxed at the highest tax
rate for each such prior year applicable to ordinary income. The Non-Electing
U.S. Holder also would be liable for interest on the foregoing tax liability for
each such prior year calculated as if such liability had been due with respect
to each such prior year. A Non-Electing U.S. Holder that is not a corporation
must treat this interest charge as "personal interest" which, as discussed
above, is wholly non-deductible. The balance, if any, of the gain or the excess
distribution will be treated as ordinary income in the year of the disposition
or distribution, and no interest charge will be incurred with respect to such
balance. In certain circumstances, the sum of the tax and the PFIC interest
charge may exceed the amount of the excess distribution received, or the amount
of proceeds of disposition realized, by the U.S. Holder.
If the Company is a PFIC for any taxable year during which a Non-Electing U.S.
Holder holds the Company common shares, then the Company will continue to be
treated as a PFIC with respect to such Balaton common shares, even if it is no
longer definitionally a PFIC. A Non-Electing U.S. Holder may terminate this
deemed PFIC status by electing to recognize gain (which will be taxed under the
rules discussed above for Non-Electing U.S. Holders) as if the Company's common
shares had been sold on the last day of the last taxable year for which it was a
PFIC.
Effective for tax years of U.S. Holders beginning after December 31, 1997, U.S.
Holders who hold (actually or constructively) marketable stock of a foreign
corporation that qualifies as a PFIC may elect to mark such stock to the market
annually (a "mark-to-market election"). If such an election is made, such U.S.
Holder will generally not be subject to the special taxation rules of Section
1291 discussed above. However, if the mark-to-market election is made by a
Non-Electing U.S. Holder after the beginning of the holding period for the PFIC
stock, then the Section 1291 rules will apply to certain dispositions of,
distributions on and other amounts taxable with respect to the Company's common
shares. A U.S. Holder who makes the mark-to-market election will include in
income for each
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taxable year for which the election is in effect an amount equal to the excess,
if any, of the fair market value of the common shares of the Company as of the
close of such tax year over such U.S. Holder's adjusted basis in such common
shares. In addition, the U.S. Holder is allowed a deduction for the lesser of
(i)the excess, if any, of such U.S. Holder's adjusted tax basis in the common
shares over the fair market value of such shares as of the close of the tax
year, or (ii)the excess, if any, of (A)the mark-to-market gains for the common
shares in the Company included by such U.S. Holder for prior tax years,
including any amount which would have been treated as a mark-to-market gain for
any prior tax year but for the Section 1291 rules discussed above with respect
to Non-Electing U.S. Holders, over (B)the mark-to-market losses for shares that
were allowed as deductions for prior tax years. A U.S. Holder's adjusted tax
basis in the common shares of the Company will be adjusted to reflect the amount
included in or deducted from income as a result of a mark-to-market election. A
mark-to-market election applies to the taxable year in which the election is
made and to each subsequent taxable year, unless the Company's common shares
cease to be marketable, as specifically defined, or the IRS consents to
revocation of the election. Because the IRS has not established procedures for
making a mark-to-market election, U.S. Holders should consult their tax advisor
regarding the manner of making such an election. No view is expressed regarding
whether common shares of the Company are marketable for these purposes or
whether the election will be available.
Under Section 1291(f) of the Code, the IRS has issued Proposed Treasury
Regulations that, subject to certain exceptions, would treat as taxable certain
transfers of PFIC stock by Non-Electing U.S. Holders that are generally not
otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations,
and transfers at death. Generally, in such cases the basis of Balaton common
shares in the hands of the transferee and the basis of any property received in
the exchange for those common shares would be increased by the amount of gain
recognized. Under the Proposed Treasury Regulations, an Electing U.S. Holder
would not be taxed on certain transfers of PFIC stock, such as gifts, exchanges
pursuant to corporate reorganizations, and transfers at death. The transferee's
basis in this case will depend on the manner of the transfer. In the case of a
transfer by an Electing U.S. Holder upon death, for example, the transferee's
basis is generally equal to the fair market value of the Electing U.S. Holder's
common shares as of the date of death under Section 1014 of the Code. The
specific tax effect to the U.S. Holder and the transferee may vary based on the
manner in which the common shares are transferred. Each U.S. Holder of the
Company is urged to consult a tax advisor with respect to how the PFIC rules
affect his or its tax situation.
Whether or not a U.S. Holder makes a timely QEF election with respect to common
shares of the Company, certain adverse rules may apply in the event that both
the Company and any foreign corporation in which the Company directly or
indirectly holds shares is a PFIC (a "lower-tier PFIC"). Pursuant to certain
Proposed Treasury Regulations, a U.S. Holder would be treated as owning his or
its proportionate amount of any lower-tier PFIC shares, and generally would be
subject to the PFIC rules with respect to such indirectly-held PFIC shares
unless such U.S. Holder makes a timely QEF election with respect thereto. The
Company intends to make the necessary information available to U.S. Holders to
permit them to make (and maintain) QEF elections with respect to each subsidiary
of the Company that is a PFIC.
Under the Proposed Treasury Regulations, a U.S. Holder who does not make a
timely QEF election with respect to a lower-tier PFIC generally would be subject
to tax (and the PFIC interest charge) on (i) any excess distribution deemed to
have been received with respect to his or its lower-tier PFIC shares and (ii)
any gain deemed to arise from a so-called "indirect disposition" of such shares.
For this purpose, an indirect disposition of lower-tier PFIC shares would
generally include (i) a disposition by the Company (or an intermediate entity)
of lower-tier PFIC shares, and (ii) any other transaction resulting in a
diminution of the U.S. Holder's proportionate ownership of the lower-tier PFIC,
including an issuance of additional common shares by the Company (or an
intermediate entity). Accordingly, each prospective U.S. Holder should be aware
that he or it could be subject to tax even if such U.S. Holder receives no
distributions from the Company and does not dispose of its common shares. THE
COMPANY STRONGLY URGES EACH PROSPECTIVE U.S. HOLDER TO CONSULT A TAX ADVISOR
WITH RESPECT TO THE ADVERSE RULES APPLICABLE, UNDER THE PROPOSED TREASURY
REGULATIONS, TO U.S. HOLDERS OF LOWER-TIER PFIC SHARES.
Certain special, generally adverse, rules will apply with respect to Balaton
common shares while Balaton is a PFIC unless the U.S. Holder makes a timely QEF
election. For example under Section 1298(b)(6) of the Code, a U.S. Holder who
uses PFIC stock as security for a loan (including a margin loan) will, except as
may be provided in regulations, be treated as having made a taxable disposition
of such shares.
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CONTROLLED FOREIGN CORPORATION
If more than 50% of the total combined voting power of all classes of shares
entitled to vote or the total value of the shares of Balaton is owned, actually
or constructively, by citizens or residents of the United States, United States
domestic partnerships or corporation, or estates or trusts other than foreign
estates or trusts (as defined by the Code Section 7701(a)(31)), each of which
own, actually or constructively, 10% or more of the total combined voting power
of all classes of shares entitled to vote of Balaton ("United States
Shareholder"), Balaton could be treated as a controlled foreign corporation
("CFC") under Subpart F of the Code. This classification would effect many
complex results, one of which is the inclusion of certain income of a CFC which
is subject to current U.S. tax. The United States generally taxes United States
Shareholders of a CFC currently on their pro rata shares of the SubpartF income
of the CFC. Such United States Shareholders are generally treated as having
received a current distribution out of the CFC's SubpartF income and are also
subject to current U.S. tax on their pro rata shares of increases in the CFC's
earnings invested in U.S. property. The foreign tax credit described above may
reduce the U.S. tax on these amounts. In addition, under Section 1248 of the
Code, gain from the sale or exchange of shares by a U.S. Holder of common shares
of Balaton which is or was a United States Shareholder at any time during the
five-year period ending on the date of the sale or exchange is treated as
ordinary income to the extent of earnings and profits of Balaton attributable to
the shares sold or exchanged. If a foreign corporation is both a PFIC and a CFC,
the foreign corporation generally will not be treated as a PFIC with respect to
United States Shareholders of the CFC. This rule generally will be effective for
taxable years of United States Shareholders beginning after 1997 and for taxable
years of foreign corporations ending with or within such taxable years of United
States Shareholders. Special rules apply to United States Shareholders who are
subject to the special taxation rules under Section1291 discussed above with
respect to a PFIC. Because of the complexity of Subpart F, a more detailed
review of these rules is outside of the scope of this discussion. The Company
does not believe that it currently qualifies as a CFC. However, there can be no
assurance that Balaton will not be considered a CFC for the current or any
future taxable year.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not Applicable.
H. DOCUMENTS ON DISPLAY
Exhibits attached to this Form 20-F are also available for viewing at the
offices of the Company, 19 East 4th Avenue, Hutchinson, Kansas 67501 or on
request of the Company at the same address, attention: Corporate Secretary.
Copies of the Company's financial statements and other continuous disclosure
documents required under the British Columbia Securities Act are available for
viewing on the internet at www.SEDAR.com.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed are:
1. interest rates on debt; and,
2. foreign exchange rates.
The following risk management discussion and the estimated amounts generated
from analytical techniques are forward looking statements of market risk
assuming certain market conditions occur. The Company's actual results
-32-
in the future may differ materially from these projected results due to actual
developments in the global financial markets.
INTEREST RATES
The Company currently does not have a material debt which a fluctuation in
interest rates could affect.
FOREIGN EXCHANGE RATES
The Company has not generated any revenues to date. In the future the Company
intends to hedge transactions because of its exposure to foreign exchange
fluctuations.
Operating in international markets involves exposure to movements in currency
exchange rates that typically affect economic growth, inflation, interest rates,
governmental actions and other factors.
The Company's revenue streams and operating expenses are denominated in three
primary currencies: the US dollar, the Canadian dollar and the Indian Rupies.
The currency movement that would have the greatest impact upon the Company's
operations is the US dollar/Indian Rupies exchange rate. Strengthening the U.S.
dollar will have the affect of decreasing the Company's earnings.
INFLATION
Inflation had no material impact on the Company's operations during the years
ended December 31, 2002, 2001, and 2000.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. DEBT SECURITIES
Not applicable.
B. WARRANTS AND RIGHTS
Not applicable. (The Company's warrants are non-transferable and no market
exists for them. The Company has issued no rights.)
C. OTHER SECURITIES
Not applicable.
D. AMERICAN DEPOSITARY SHARES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
Not applicable.
-33-
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
The following attached financial statements are incorporated herein:
<Table>
Auditor's Report F-1
Consolidated Balance Sheet F-2
Consolidated Statement of Operations and Deficit F-3
Consolidated Statement of Cash Flows F-4
Notes to Consolidated Financial Statements F-5
</Table>
ITEM 18. FINANCIAL STATEMENTS
Not applicable.
ITEM 19.
The following exhibits are filed with this annual report:
<Table>
<Caption>
TYPE OF INCORPORATED BY
DOCUMENT DESCRIPTION REFERENCE?
12a Consolidated Financial Statements for the years ended December 31, 2002 and 2001 yes
</Table>
-34-
Page F1
AUDITORS' REPORT
To the Shareholders of
Balaton Power Inc.
We have audited the consolidated balance sheets of Balaton Power Inc. as at
December 31, 2002 and 2001 and the consolidated statements of operations and
deficit and cash flows for the years then ended. These financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards
in both Canada and the United States. Those standards require that we plan and
perform an audit to obtain reasonable assurance as to whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 2002
and 2001 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
"Harris & Partners, LLP"
Richmond Hill, Ontario Harris & Partners, LLP
July 29, 2003 Chartered Accountants
Comments by Auditors for U.S. readers on Canada - U.S. reporting difference
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph when the financial statements are affected by
conditions and events that cast doubt on the Company's ability to continue as a
going concern, such as those described in note 1 to the financial statements.
Our report to the shareholders dated July 29, 2003, is expressed in accordance
with Canadian reporting standards which do not permit a reference to such events
and conditions in the auditors' report when these are adequately disclosed in
the financial statements.
"Harris & Partners, LLP"
Richmond Hill, Ontario Harris & Partners, LLP
July 29, 2003 Chartered Accountants
Page F2
BALATON POWER INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in US Dollars)
AS AT DECEMBER 31, 2002 AND 2001
<Table>
<Caption>
2002 2001
ASSETS
Current
Cash $ 28,080 $ --
Prepaid expenses and sundry 9,441 --
----------- -----------
37,521 --
Note receivable (Note 4) 481,724 --
Mineral property (Note 5) 1,145,163 --
Natural resource properties (Note 6) -- 2,389,251
----------- -----------
$ 1,664,408 $ 2,389,251
=========== ===========
LIABILITIES
Current
Accounts payable and accrued liabilities $ 1,456,323 $ 50,387
Convertible loans (Note 7) 179,779 --
----------- -----------
1,636,102 50,387
Minority interest 26,995 --
----------- -----------
1,663,097 50,387
----------- -----------
SHAREHOLDERS' EQUITY
Share capital (Note 8) 2,598,000 2,400,000
Deficit (2,596,689) (61,136)
----------- -----------
1,311 2,338,864
----------- -----------
$ 1,664,408 $ 2,389,251
=========== ===========
</Table>
Approved by the board Approved by the board
(ROBERT WYLLIE) (MICHAEL ROSA)
Director (signed) "Robert Wyllie" Director (signed) "Michael Rosa"
------------------------ -----------------------
See accompanying notes
Page F3
BALATON POWER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in US Dollars)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
<Table>
<Caption>
2002 2001
REVENUE $ 24,899 $ 35,158
----------- --------
EXPENSES
Writedown of resource properties 1,895,987 --
Consulting fees and commissions 171,500 --
Administration and general 38,404 20,755
Production costs 22,398 30,687
Professional fees 8,142 --
Interest 3,000 --
Depletion 11,541 15,387
----------- --------
2,150,972 66,829
----------- --------
NET LOSS (2,126,073) (31,671)
Deficit, beginning of year (61,136) (29,465)
Acquisition of Balaton Power Inc. (Note 3) (409,480) --
----------- --------
DEFICIT, END OF YEAR $(2,596,689) $(61,136)
=========== ========
LOSS PER COMMON SHARE
Basic $ (0.05) $ (0.01)
=========== ========
Diluted $ (0.05) $ (0.01)
=========== ========
</Table>
See accompanying notes
Page F4
BALATON POWER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in US Dollars)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
<Table>
<Caption>
2002 2001
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net loss $(2,126,073) $(31,671)
Adjustment for items not affecting cash
Shares issued for services 160,000 --
Depletion 11,541 15,387
Writedown of resource properties 1,895,987 --
----------- --------
(58,545) (16,284)
Changes in non-cash working capital components
Accounts payable and accrued liabilities 13,987 16,284
----------- --------
(44,558) --
----------- --------
FINANCING ACTIVITIES
Issue of share capital 38,000 --
Cash received on acquisition 34,638 --
----------- --------
72,638 --
----------- --------
CASH, BEGINNING AND END OF YEAR $ 28,080 $ --
=========== ========
SUPPLEMENTARY INFORMATION:
Interest paid $ -- $ --
=========== ========
Income taxes paid $ -- $ --
=========== ========
</Table>
See accompanying notes
Page F5
BALATON POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US Dollars)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
1. GOING CONCERN BASIS OF PRESENTATION AND NATURE OF ORGANIZATION
On October 31, 2002 Balaton Power Inc. ("BPI") acquired Continental
Resources (USA) Ltd., ("CRL") in an arms length transaction, in
exchange for 25,000,000 restricted common shares to the shareholders of
CRL and as well issued an additional 8,000,000 restricted shares as
finders' fees. Balaton Power Corporation S.A. in order to facilitate
the transaction also sold 10,000,000 of its 13,000,000 common shares to
various parties connected to CRL at $0.001 per share. The acquisition
was treated as a reverse takeover of the Company. However, in
accordance with EIC-10, the transaction is a capital transaction in
substance rather than a business combination. The purchase method has
been applied by CRL and the net liability of BPI has been charged to
the deficit. The transaction was an asset acquisition by the Company
and not a business combination. Accordingly, while the Company will
have issued sufficient shares such that control of the Company was
acquired by the shareholders of CR the transaction was not accounted
for as a reverse takeover.
The consolidated financial statements of the combined entity are issued
under the name of the legal parent, BPI, but are considered a
continuation of the financial statements of the legal subsidiary CRL.
The Corporation is developing a bauxite deposit in the state of Orissa
in India.
The business of mining and exploring for minerals involves a high
degree of risk and there can be no assurance that current exploration
programs will result in profitable mining operations. The
recoverability of the carrying value of exploration properties and the
Company's continued existence is dependent upon the preservation of its
interest in the underlying properties, the discovery of economically
recoverable reserves, the achievement of profitable operations, or the
ability of the Company to raise alternative financing, if necessary, or
alternatively upon the Company's ability to dispose of its interests on
an advantageous basis. Changes in future conditions could require
material write downs of the carrying values.
These financial statements have been prepared on the basis of
accounting principles applicable to a going concern, which assume that
the Company will continue in operation for the foreseeable future and
will be able to realize its assets and discharge its liabilities in the
normal course of operations. These financial statements do not include
adjustments to the amounts and classification of assets and liabilities
that might be necessary should the Company be unable to continue in
business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada and include the
accounts of the Company and its wholly-owned subsidiary, Continental
Resources (USA) Ltd. A summary of the differences between accounting
principles generally accepted in Canada ("Canadian GAAP") and those
generally accepted in the United States ("US GAAP") which affect the
Company is contained in Note 15.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Page F6
BALATON POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US Dollars)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include deposits at Canadian and United
States financial institutions.
MINERAL PROPERTY
The Company expenses all exploration costs incurred on properties other
than acquisition costs prior to the establishment of proven and
probable reserves. The company performs evaluations of its assets to
assess the recoverability of its investments in these assets. All
long-lived assets are reviewed for impairment whenever events or
circumstances change which indicate the carrying amount of an asset may
not be recoverable utilizing established guidelines based upon
discounted future net cash flows from asset or upon the determination
that certain exploration properties do not have sufficient potential
for economic mineralization.
Costs related to the acquisition, exploration, development and inherent
costs to the management of the mineral properties are capitalized by
property until the commencement of commercial production. If
commercially profitable ore reserves are developed, capitalized costs
of the related property are reclassified as mining assets and amortized
on the unit of production method. If it is determined that capitalized
acquisition, exploration and development costs are not recoverable over
the estimated economic life of the property, or the project is
abandoned, the project is written down to its net realizable value.
Recovery of the amounts recorded under mineral properties is dependent
upon the ability of the Corporation to obtain the financing needed to
complete the development, and future profitable production or proceeds
from the disposal thereof. The amount shown for mineral property does
not necessarily reflect future or present values.
STOCK-BASED COMPENSATION PLANS
Effective January 1, 2002, the Company adopted the new recommendations
of the CICA Handbook Section 3870, Stock-based Compensation and Other
Stock-based Payments. This section established standards for the
recognition, measurement and disclosure of stock-based compensation and
other stock-based payments made in exchange for goods and services.
These new recommendations require that compensation for all awards made
to non-employees and certain awards made to employees be measured and
recorded in the financial statements at fair value. This section also
sets out a fair value based method of accounting for stock options
issued to employees and applies to awards granted on or after fiscal
years beginning January 1, 2002.
INCOME TAXES
Income taxes are calculated using the asset and liability method of tax
accounting. Under this method, current income taxes are recognized for
the estimated income taxes payable for the current period. Future
income tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities
and on unclaimed losses carried forward and are measured using the
substantially enacted tax rates that will be in effect when the
differences are expected to reverse or losses are expected to be
utilized. A valuation allowance is recognized to the extent that the
recoverability of future income tax assets is not considered more
likely than not.
Page F7
BALATON POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States Dollars)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share is computed by dividing the earnings
(loss) for the period by the weighted average number of common shares
outstanding during the period, including contingently issuable shares
which are included when the conditions necessary for issuance have been
met. Diluted earnings per share is calculated in a similar manner,
except that the weighted average number of common shares outstanding is
increased to include potentially issuable common shares from the
assumed exercise of common share purchase options and warrants, if
dilutive. The number of additional shares included in the calculation
is based on the treasury stock method for options and warrants.
FOREIGN EXCHANGE
Although the functional currency of the Company is the Canadian dollar,
these financial statements use the US dollar as the unit of
measurement. Monetary assets and liabilities denominated in foreign
currencies are translated at year-end exchange rates. Other balance
sheet items denominated in foreign currencies are translated at the
rates of exchange in effect at the translation date. Income and
expenses denominated in foreign currencies are translated at average
rates prevailing during the year. Translation gains and losses are
included in income.
3. ACQUISITIONS
Effective October 31, 2002, Continental Resources (USA) Ltd., in order
to become a reporting issuer, was acquired by Balaton Power Inc. (see
Note 1).
Assets acquired, liabilities assumed and purchase consideration are as
follows:
<Table>
Cash $ 696
Other assets 10,200
Liabilities assumed (420,376)
-------------
Net liability charged to retained earnings $ (409,480)
=============
</Table>
During the year, the company CRL acquired 50% and effective control of
Continental Orissa Mining Private Limited ("Orissa") for consideration
of management directing the exploration and development of a bauxite
deposit in the province of Orissa, India. The acquisition has been
accounted for as a purchase and the results of operations have been
included in these financial statements from the date of acquisition.
Assets, acquired, liabilities assumed and purchase consideration are as
follows:
<Table>
Assets acquired
Mineral property $ 1,145,163
Liabilities assumed (1,145,163)
--------------
Consideration $ --
==============
</Table>
Page F8
BALATON POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US Dollars)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
4. NOTE RECEIVABLE
On October 31, 2002, Perial Ltd. ("Perial"), the parent of CRL,
purchased the oil and gas properties of CRL to facilitate the
reorganization of CRL and Balaton Power Inc. Perial acquired from its
then wholly owned subsidiary, CRL, all of the oil and gas interests
held by the subsidiary in exchange for a promissory note and the
assumption of debt. No gain or loss was recognized on this transaction.
The note is non-interest bearing and is payable from 25% of the gross
production revenue of the oil and gas properties.
5. NATURAL RESOURCE PROPERTIES
<Table>
<Caption>
Resource properties consist of: 2002 2001
Acquisition costs $ -- $ 2,418,533
Accumulated depletion (29,282)
-------------- -------------
$ -- $ 2,389,251
============== =============
</Table>
6. LICENSE AGREEMENT
The Company has entered into a license agreement with Balaton Power
Corporation S.A., to manufacture, market, sell/lease and otherwise
commercialize Balaton's proprietary technology and related confidential
data throughout Canada and the United States for a period of 20 years.
The license has a continuing option to renew for a further 20 years at
the expiration of each 20 year period. The Company paid a $50,000
advance royalty payment and will pay a royalty of 5% as calculated
pursuant to the agreement and a further $100,000 once the Company has
raised a further $4,000,000 in financing.
Subsequent to the year end, the agreement was amended to reduce the
royalty to 2% and eliminate all other obligations of the Company under
the agreement. The Company issued 500,000 common shares as
consideration for this amendment.
7. CONVERTIBLE DEBT
On February 11, 2002, the Company entered into a loan agreement
arranged by S.J. Roth Capital Placement Inc. Under the terms of the
agreement, the Lender was to make four consecutive loans to the
Company, each loan in the amount of $125,000 ("the loans"). Each loan
shall be evidenced by a Promissory Note, accruing interest at
approximately 7.3% per annum and maturing and payable December 31,
2002. Each loan has conversion privileges whereby the Lender may
convert each of the loans or any portion thereof outstanding, including
interest, into "Units". Each Unit shall consist of one common share of
the Company and one Share Purchase Warrant entitling the Lender to
purchase from the Company one additional common share at an exercise
price of $0.50 at any time prior to expiry date of December 31, 2004.
The Company received $163,436 under the terms of these loans and has
incurred a penalty of $16,343.
Page F9
BALATON POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US Dollars)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
8. SHARE CAPITAL
Authorized 700,000,000 common shares without par value
<Table>
Issued and fully paid Shares Amount
Balance - December 31, 2000 and 2001 55,878,194 $ 2,400,000
Issued for fees and services 8,000,000 160,000
Issued for cash 1,110,000 38,000
-------------- -------------
Balance - December 31, 2002 64,988,194 $ 2,598,000
============== =============
</Table>
Effective October 31, 2002, the Company purchased 100% of the
outstanding common shares of CRL. This transaction has been accounted
for as a purchase of assets by CRL. CRL is deemed to be the acquiring
company and CRL is now the reporting company. CRL is the legal
subsidiary and Balaton Power Inc. is the legal parent. The issued
capital in these consolidated financial statements is the issued
capital of CRL. The number of shares issued and outstanding in 2000 has
been restated to reflect the number of shares issued to the former
shareholders of CRL.
At December 31, 2002, the following warrants were outstanding:
<Table>
<Caption>
AMOUNT PRICE EXPIRY
$ 1,250,000 $ 0.60 April 17, 2004
150,000 0.10 July 17, 2003
150,000 0.20 July 17, 2004
935,000 0.20 July 17, 2003
935,000 0.30 July 17, 2004
60,000 0.20 August 15, 2003
60,000 0.30 August 15, 2004
730,000 0.20 September 15, 2003
730,000 0.30 September 15, 2004
300,000 0.20 September 15, 2004
149,000 0.20 February 21, 2004
150,000 0.10 July 15, 2003
1,145,000 0.20 July 15, 2003
995,000 0.30 July 15, 2004
1,030,000 0.20 September 15, 2004
</Table>
At December 31, 2002, the following employee stock options were
outstanding:
<Table>
Options
3,000,000 $ 0.50 December 31, 2005
400,000 0.50 January 2, 2006
</Table>
All warrants and stock options were issued prior to the acquisition of
CRL.
Page F10
BALATON POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US Dollars)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
9. INCOME TAXES
In assessing the realizability of future tax assets, management
considers whether it is more likely than not that some portion or all
of the future income tax assets will not be realized. The ultimate
realization of future income tax assets is dependant upon the
generation of future taxable income and on the successful development
of its mineral property.
A reconciliation comparing income taxes calculated at the statutory
rates to the amount provided in the accompanying financial statements
is as follows:
<Table>
<Caption>
2002 2001
Combined federal and provincial income tax rates 40% 44%
============== ==============
Loss before income taxes $ (2,126,073) $ (31,671)
Expected income tax (recovery) (850,000) (14,000)
Non-deductible loss 758,000 --
Losses for which tax benefit has not been recorded 92,000 14,000
-------------- --------------
Actual income taxes $ -- $ --
============== ==============
</Table>
The significant components of the company's future income taxes are as
follows:
Future income tax assets
<Table>
Net operating losses carried forward $ 1,917,000 $ 61,000
Valuation allowance for future income taxes 1,917,000 61,000
-------------- --------------
$ -- $ --
============== ==============
</Table>
The company has accumulated potential tax benefits coming from losses
carried forward. The related tax benefits will be recorded when
realized. They expire as follows:
<Table>
<Caption>
Losses
2006 $ 475,000
2007 695,000
2008 747,000
-------------
$ 1,917,000
=============
</Table>
Page F11
BALATON POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US Dollars)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a) Fair value disclosure
Fair values are made as of a specific point in time using
available information about the financial instrument. These
estimates are subjective in nature and often cannot be
determined with precision.
The Company has determined that the carrying value of its
financial assets and liabilities approximates their fair
value.
b) Foreign exchange risk
The Company incurs expenditures in United States dollars and
Indian rupees as such is subject to risk due to fluctuations
in exchange rates. The Company does not use derivative
instruments to reduce its exposure to foreign exchange risk.
Interest rate risk
The Company's principal exposure to interest rate fluctuations
is with respect to its convertible debt financing which bears
interest at 7.3%.
11. RELATED PARTY TRANSACTIONS
Related party transactions are in the normal course of operations and
are measured at the exchange amount, which is the amount of
consideration established and agreed to by the related parties. Related
party transactions include the following:
On October 31, 2002, CRL sold its oil and gas properties to Perial
Ltd., its parent company, to facilitate the reorganization of CRL and
Balaton Power Inc. Perial acquired from its then wholly owned
subsidiary, CRL all of the oil and gas interests held by the subsidiary
in exchange for a promissory note and the assumption of debt. No gain
or loss was recognized on this transaction. The note is non-interest
bearing and is payable from 25% of the gross production revenue of the
oil and gas properties.
12. COMMITMENTS
The Company is committed to the lease of its Boise, Idaho premises
until March 2004 at the rate of $1,280 per month.
13. CONTINGENT LIABILITY
On February 21, 2001, a lawsuit for wrongful termination was filed in
the Chancery Court for Williamson County, Tennessee against the Company
by the former president. The Company believes that it has meritorious
defences against the claim and intends to vigourously defend itself. As
the outcome is not determinable, the Company has not accrued any amount
for this claim.
Page F12
BALATON POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US Dollars)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
14. SUBSEQUENT EVENTS
Subsequent to the year end the Company issued 674,020 common shares in
lieu of cash as payment for services and reimbursement of expenses and
500,000 common shares on account of royalty payments.
15. COMMENTS FOR U.S. READERS
Differences in the Generally Accepted Accounting Principles ("GAAP")
between those utilized in Canada and those utilized in the United
States create differences in the treatment of certain transactions and
the disclosures contained in the financial statements. Accordingly,
disclosure of those differences and a reconciliation with United States
accounting practices is appropriate for United States readers of the
financial statements.
STATEMENT OF SHAREHOLDERS' DEFICIENCY
<Table>
<Caption>
Share Capital
Shares Amount Deficit Total
Balance at December 31, 2000 55,878,194 $2,400,000 $ (29,465) $ 2,370,535
Net loss -- -- (31,671) (31,671)
---------- ---------- ----------- -----------
Balance at December 31, 2001 55,878,194 2,400,000 (61,136) 2,338,864
Issued for cash 1,110,000 38,000 -- 38,000
Issued for services 8,000,000 160,000 -- 160,000
Acquisition of Balaton (note 3) -- -- (409,480) (409,480)
Net loss -- -- (2,126,073) (2,126,073)
---------- ---------- ----------- -----------
Balance at December 31, 2002 64,988,194 $2,598,000 $(2,596,689) $ 1,311
========== ========== =========== ===========
</Table>
SIGNATURES
The Company certifies that it meets all of the requirements for filing this Form
20-F and that it has duly caused and authorized the undersigned to sign this
annual report on its behalf.
BALATON POWER INC.
Per:
/s/ Richard Burdett
- -------------------------------------
RICHARD BURDETT
Chief Executive Officer
DATED: July 31, 2003
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT INCORPORATED BY
NUMBER DESCRIPTION REFERENCE?
- ------ ----------- ---------------
12a Consolidated Financial Statements for the years ended December 31, 2002 and 2001 yes
31.1 Certification of the Chief Executive Officer
31.2 Certification fo the Chief Executive Officer
32.1 Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant
to Section 906 of Sarbanes-Oxley Act of 2002
</Table>