As filed with the Securities and Exchange Commission on June 2, 2004
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CAN-CAL RESOURCES LTD.
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(Exact name of small business issuer as specified in its charter)
Nevada 1000 88-0336988
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(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)
8224 Ocean Gate Way, Las Vegas, Nevada 89128; Tel. 702.243.1849
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(Address, including zip code, and telephone number of
issuer's principal executive offices)
Anthony F. Ciali, President; 8224 Ocean Gate Way
Las Vegas, NV 89128; Tel. 702.243.1849
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(Name, address, including zip code, and telephone number of agent for service)
Copies to: Stephen E. Rounds, Esq.
The Law Office of Stephen E. Rounds
1544 York Street, Suite 110, Denver, CO 80206
Tel: 303.377.6997; Fax: 303.377.0231
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Approximate date of commencement and end of proposed sale to the public: From
time to time after the registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering:[ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(C) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
CALCULATION OF REGISTRATION FEE
Proposed
Proposed Maximum
Amount of Maximum Aggregate
Title of Each Class Securities Offering Dollar Price Amount
of Securities to be Registered Price Per of Securities to of
to be Registered in the Offering Security be Registered Fee
- ---------------- --------------- -------- ------------- -------
Common Stock 2,495,602 $0.22 $ 549,033.00 $ 70.00
Shares (1)
Common Stock 1,829,327 $0.22 $ 402,452.00 $ 51.00
Shares (2)
Common Stock 50,000 $0.22 $ 11,000.00 $ 1.40
Shares(3)
Total No. Securities 4,374,929 $ 962,485.00 $ 122.40
to be Registered Shares
<FN>
(1) These outstanding shares are registered for resale.
(2) These shares, registered for resale, are issuable on exercise of
outstanding warrants by shareholders, including officers and directors.
(3) These shares, registered for resale, are issuable on exercise of an
outstanding warrant held by Dutchess Private Equities Fund, L.P.
</FN>
The registration fee is based on the $0.22 average of bid and ask prices on
May 25, 2004, under rule 457(g).
DELAYING AMENDMENT UNDER RULE 473(A): The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall become effective in
accordance with section 8(a) of the Securities Act of 1933 or until the
registration statement shall become effective on such date as the Commission
acting pursuant to section 8(a), may determine.
The information in this prospectus is subject to completion or amendment. The
securities covered by this prospectus cannot be sold until the registration
statement filed with the Securities and Exchange Commission becomes effective.
This prospectus shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any state in
which an offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of that state.
CAN-CAL RESOURCES LTD.
Subject to Completion, dated
June ___, 2004
4,374,929 SHARES OF COMMON STOCK
This prospectus covers the resale of up to 4,374,929 restricted shares of
common stock of Can-Cal Resources Ltd. (the "company"): 2,495,602 outstanding
shares, plus 1,879,327 shares issuable on exercise of outstanding warrants
(expiring at different times from January 14, 2006 to May 20, 2006), by 60
persons, including four officers and/or directors of the company (and a former
director and his insurance agency), and by Dutchess Private Equities Fund, L.P.
("Dutchess Fund").
The selling shareholders may sell the shares from time to time in
negotiated transactions, brokers' transactions or a combination of such methods
of sale at prevailing market prices, or at negotiated prices. See "Plan of
Distribution." Although we will receive proceeds if and to the extent the
warrants are exercised, we will not receive any proceeds from sale of the shares
by the selling shareholders. None of the warrants have been exercised at
prospectus date.
The company's stock is quoted on the Over-the-Counter Bulletin Board
("CCRE"). On May 25, 2004, the last reported sale price was $0.19 per share.
Brokers or dealers effecting transactions in these shares should confirm
that the shares are registered under applicable state law or that an exemption
from registration is available.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JUNE ___, 2004
TABLE OF CONTENTS
PAGE NO.
Forward Looking Statements ....................................................4
Where You Can Find More Information............................................4
Summary Information............................................................5
Risk Factors ..................................................................6
Losses to date and general risks faced by the company.....................6
The audit report on the financial statements at
December 31, 2003 has a 'going concern' qualification.....................7
As an exploration company, we are subject to
the risks of the minerals business........................................8
We have not systematically drilled and sampled
any of our properties to confirm the presence of
any concentrations of precious metals, and drilling
and sampling results to date on the U.S. properties
have been inconclusive....................................................8
A return to low gold prices could adversely
impact the company........................................................8
Policy changes............................................................8
Environmental costs are not predictable...................................8
Future reserve evaluations will only be
estimates of potential value..............................................9
Substantial investments in exploration
work could be lost........................................................9
We may not be successful in raising the capital
necessary to explore, evaluate and exploit properties....................9
Stock may be issued as part of the purchase price
for mineral properties, resulting in dilution to shareholders............10
Terms of subsequent financings may
adversely impact your investment.........................................10
2
Risk Factors Involving This Offering.
Future sales by our stockholders may
adversely affect our stock price and our
ability to raise funds in new stock offerings............................11
Market overhang from shares issued to Dutchess Fund......................11
Because the company's common shares are
"penny stock," certain rules may impede
the development of increased trading activity
and could affect the liquidity for stockholders..........................11
Financing Transactions........................................................12
Market for Common Stock and Related Stockholder Matters.......................14
Use of Proceeds...............................................................14
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................15
Business......................................................................19
Properties....................................................................20
Management....................................................................25
Directors and Officers...................................................25
Executive Compensation...................................................27
Agreements with Consultants ............................................30
Security Ownership of Certain Beneficial Owners and Management................31
Certain Relationships and Related Transactions................................33
Selling Shareholders..........................................................34
Plan of Distribution..........................................................40
Description of Securities.....................................................42
Disclosure of Commission Position on
Indemnification for Securities Act Liabilities................................43
Legal Proceedings.............................................................43
Legal Matters.................................................................43
Experts.......................................................................43
Financial Statements..........................................................44
3
REPRESENTATIONS ABOUT THIS OFFERING
We have not authorized anyone to provide you with information different
from that contained in this prospectus. This prospectus is not an offer to sell
nor does it seek an offer to buy the shares in any jurisdiction where this offer
or sale is not permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus (or any supplement), regardless
of when it is delivered or when any shares are sold.
WHERE TO FIND MORE INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 under the 1933 Act with
respect to the shares offered by this prospectus. This prospectus, filed as a
part of the registration statement, does not contain certain information
contained in Part II of the registration statement or filed as exhibits to the
registration statement. We refer you to the registration statement and exhibits
which may be inspected and copied at the Public Reference Department of the
Commission, 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed rates.
You can contact the Commission's Public Reference Department at (800) SEC-0330.
The registration statement and exhibits also are available for viewing at and
downloading from the Commission's internet website (http://www.sec.gov); go to
"Search for Company Filings."
Our common stock is registered with the Commission under section 12(g) of
the Securities Exchange Act of 1934 (the "1934 Act"). Under the 1934 Act, we
file with the Commission periodic reports on Forms 10- KSB, 10-QSB and 8-K, and
proxy statements, and our officers and directors file reports of stock ownership
on Forms 3, 4 and 5. These filings also may be viewed and downloaded from the
Commission's internet website. Also, we will provide copies of these documents
and any exhibits to them, without charge to prospective investors upon request
addressed to Can-Cal Resources Ltd., 8224 Ocean Gate Way, Las Vegas, Nevada
89128, attention Ronald D. Sloan, Chairman of the Board of Directors.
FORWARD LOOKING STATEMENTS
Except for historical and current information, all the information in this
prospectus are considered to be "forward looking" statements. Specifically, all
statements (other than statements of historical and current information)
regarding financial and business strategy and the performance objectives of
management for future operations are forward-looking statements. These
forward-looking statements are based on the beliefs of management, as well as
assumptions made by and information currently available to them. These
statements involve known risks such as lack of capital to fully explore our
properties; not finding enough precious metals mineralization in the properties
to support a mining project; lack of capital to put properties into production;
disappointing recoveries of precious metals from properties once put into
production; higher than expected production costs; declining market prices for
precious metals; and delays or increased costs to obtain production or mining
permits.
When we use the words "anticipate," "believe," "estimate," "expect," "may,"
"will," "should," "continue," "intend" and similar words or phrases, we are
identifying forward-looking statements (also known as "cautionary statements"
because you should be cautious in evaluating such statements in the context of
all the information in this prospectus). These statements reflect our current
views with respect to future events. However, the merit or validity of current
views is subject to the realization in fact of assumptions we have made. What we
now think will happen may turn out much different, and therefore our assumptions
may prove to have been inaccurate or incomplete.
The investment risks discussed under "Risk Factors" specifically address
all of the material factors that may influence future operating results and
financial performance. The investment risks are not "boiler plate;" they are
intended to tell you about the uncertainties and risks inherent in our business
at the present time which you need to evaluate carefully before making an
investment decision.
4
SUMMARY INFORMATION
The following summarizes all material information found elsewhere in this
prospectus, and is qualified by the more detailed information in this prospectus
and in the exhibits to the registration statement of which this prospectus is a
part.
THE COMPANY
Can-Cal Resources Ltd. is a Nevada corporation incorporated on March 22,
1995 under the name of British Pubs USA, Inc. as a wholly owned subsidiary of
305856 B.C., Ltd. dba N.W. Electric Carriage Company ("NWE"), a British
Columbia, Canada company. On April 12, 1995, NWE exchanged shares of British
Pubs USA, Inc. for shares of NWE held by its existing shareholders, on a share
for share basis. NWE changed its name to Can-Cal Resources Ltd. on July 2, 1996.
In January 1999 the company sold its wholly-owned Canadian subsidiary
Scotmar Industries, Inc., which was engaged in the business of buying and
salvaging damaged trucks from insurance companies for resale of guaranteed truck
part components. The subsidiary was sold for a profit and the proceeds used to
acquire and explore mineral properties. The company decided that the subsidiary
would lose money in the vehicle salvage business unless more capital was
obtained specifically for that business.
The company is an exploration company. Since 1996, we have examined various
mineral properties prospective for precious metals and minerals and acquired
those deemed promising. We own, lease or have interests in one mineral property
in Durango State, Mexico, and four mineral properties in the southwestern United
States (California and Arizona).
All the properties are "grass roots" because they are not known to contain
reserves of precious metals or other minerals (a reserve is that part of a
mineral deposit which could be economically and legally extracted or produced at
the time of the reserve determination). None of the properties are in
production. In 2003, we sold $20,000 of volcanic cinders materials from the
Pisgah, California property to an industrial user.
We will pursue a diversified strategy over time. Management intends to
maximize exploration expenditures by utilizing a focused approach to generative
exploration, while simultaneously seeking to acquire potential near-term
production properties. To the extent that financing is available, we will
explore, develop, and, if warranted, bring into production precious metals
properties for our own account or in conjunction with joint venture partners (in
those instances where we acquire less than a 100% interest in a property).
However, either due to the lack of available financing, or the number of
properties which merit development, or the scope of the exploration and/or
development work of a particular property being beyond the company's financial
and administrative capacity, we may farm out one or more properties to other
mining companies.
Executive offices are located at 8224 Ocean Gate Way, Las Vegas, Nevada
89128 (tel. 702.243.1849; fax 702.243.1869).
5
THE OFFERING
This offering relates to the sale of shares, and additional shares which
may be acquired on exercise of warrants, owned by shareholders holders of
warrants (including officers and directors), and on exercise of a warrant held
by Dutchess Private Equity Fund, L.P.
Securities Outstanding 16,064,751 shares of common stock, $0.001
par value.
Securities To Be Outstanding 17,944,078 shares of common stock,
assuming the selling shareholders
exercise warrants to buy 1,879,327
shares. The number of shares to be
outstanding does not include shares
issuable (1) under options held by an
officer and by a consultant, and warrants
held by others; or (2) on conversion of a
debenture held by Dutchess Private
Equities Fund, L.P. (see "Financing
Transactions Related to Dutchess Fund").
Securities Offered 4,374,929 shares (2,495,602 outstanding
shares, plus up to 1,879,327 shares on
exercise of warrants).
Use of Proceeds We will not receive any proceeds from
sale of shares by the selling
shareholders. We will receive up to
$526,988 from exercise of warrants held
by the selling shareholders. See "Use of
Proceeds."
Plan of Distribution The offering is made by the selling
shareholders. Sales may be made in the
open market or in private negotiated
transactions, at fixed or negotiated
prices. See "Plan of Distribution."
Risk Factors The securities offered hereby involve a
high degree of risk. See "Risk Factors."
Trading Symbol CCRE (Over-the Counter Bulletin Board)
RISK FACTORS
An investment in our common stock is speculative in nature and involves a
high degree of risk. You should carefully consider the following risks and the
other information in this prospectus (including the information incorporated by
reference) before investing.
RISK FACTORS INVOLVING THE COMPANY
LOSSES TO DATE AND GENERAL RISKS FACED BY THE COMPANY. We are an
exploration stage company engaged in the acquisition and exploration of precious
metals mineral properties. To date, we have no producing properties. As a
result, we have had minimal sources of operating revenue and we have
historically operated and continue to operate at a loss. For the year ended
December 31, 2003, the company recorded a net loss of $711,100 and had an
accumulated stockholders' deficit of $5,392,300 at that date. For the quarter
ended March 31, 2004, we recorded a net loss of $481,400, and had an accumulated
stockholders' deficit of $5,873,700. Our ultimate success will depend on our
ability to generate profits from our properties.
We lack operating cash flow and rely on external funding sources. If we are
unable to continue to obtain needed capital from outside sources, we will be
forced to reduce or curtail our operations.
6
Further, exploration and development of the mineral properties in which we
hold interests depends upon our ability to obtain financing through:
o Bank or other debt financing,
o Equity financing, or
o Other means.
As a mineral exploration company, our ability to commence production and
generate profits is dependent on our ability to discover viable and economic
mineral reserves. Our ability to discover such reserves is subject to numerous
factors, most of which are beyond our control and are not predictable.
Exploration for gold is speculative in nature, involves many risks and is
frequently unsuccessful. Any gold exploration program entails risks relating to:
o The location of economic ore bodies,
o Development of appropriate metallurgical processes,
o Receipt of necessary governmental approvals, and
o Construction of mining and processing facilities at any site chosen for
mining.
The commercial viability of a mineral deposit is dependent on a number of
factors including:
o The price of gold,
o Exchange rates,
o The particular attributes of the deposit, such as its size, grade and
proximity to infrastructure, financing costs, taxation, royalties, land
tenure, land use, water use, power use, importing and exporting gold
and environmental protection.
All of the mineral properties in which we have an interest or right are in
the exploration stages only and are without reserves of gold or other minerals.
We cannot assure that current or proposed exploration or development programs on
properties in which we have an interest will result in the discovery of gold or
other mineral reserves or will result in a profitable commercial mining
operation.
THE AUDIT REPORT ON THE FINANCIAL STATEMENTS AT DECEMBER 31, 2003 HAS A
'GOING CONCERN' QUALIFICATION. There is substantial doubt that the company may
be able to continue operations unless we obtain additional funding and are
successful with our strategic plan. The company has experienced losses since
inception.
The extended period over which losses have been experienced is principally
attributable to the fact that a lot of money has been spent exploring grass
roots' mineral properties to determine if precious metals might be present in
economic quantities. These efforts have been unsuccessful, so all the money
spent has been written off (charged to expenses). In order to fund future
activities until positive operating cash flow is achieved, the company must
identify and acquire (or sign an agreement to earn interests in) mineral
properties of sufficient geological merit to raise the capital necessary to
explore the properties to determine if they contain economic amounts of precious
metals. If economic deposits are identified, the company then would either
7
seek to raise the capital itself to put those properties into production, or
sell the properties to another company, or place the properties into a joint
venture with another company funding pre-production capital and initial start up
production costs.
Attaining these objectives will require substantial capital, which the
company will have to obtain principally by selling stock in the company. We have
no definitive arrangements in place to raise the necessary capital to continue
operations, but you should note that even if we raise the capital, the
properties may not contain economic amounts of precious metals, or production
may be disappointing. In January 2004, we engaged IBK Capital Corp. to assist
the company in raising equity capital of up to $1 million and paid IBK
Cdn$28,500 as a work fee and advance against out-of-pocket expenses. No capital
has been raised with IBK and no terms of a proposed financing have been
finalized.
AS AN EXPLORATION COMPANY, WE ARE SUBJECT TO THE RISKS OF THE MINERALS
BUSINESS. The exploration for minerals is highly speculative and involves risks
different from and in some instances greater than risks encountered by companies
in other industries. Most exploration programs do not result in the discovery of
mineralization which is economic to mine, and most exploration programs never
recover the funds invested in them. Without extensive technical and economic
feasibility studies, no one can know if any property can be mined at a profit.
Even with promising reserve reports and feasibility studies, profits are not
assured.
WE HAVE NOT SYSTEMATICALLY DRILLED AND SAMPLED ANY OF OUR PROPERTIES TO
CONFIRM THE PRESENCE OF ANY CONCENTRATIONS OF PRECIOUS METALS, AND DRILLING AND
SAMPLING RESULTS TO DATE ON THE U.S. PROPERTIES HAVE BEEN INCONCLUSIVE. Most of
the sampling and exploration work prior to 2003 (all on properties in the United
States) was not conducted by well-established, third party independent
geologists or engineers, and from time to time we used non-standard procedures
to sample and assay material from the properties. Some of these procedures could
have introduced contamination into the tested materials, causing the assay
results to be unreliable.
There is substantial risk that standard and systematic testing on the
United States properties would show limited concentrations of precious metals.
Positive results from tests prior to 2003 only confirmed the presence of
precious metals in the samples. You cannot safely assume that precious
metals-bearing materials exist outside of the samples tested.
A RETURN TO LOW GOLD PRICES COULD ADVERSELY IMPACT THE COMPANY. Gold prices
reached a 15 year high of $432 per ounce on April 1, 2004, and were
approximately $390 per ounce on May 26, 2004. If gold prices were to drop below
$325 per ounce for any sustained period of time, the company could be unable to
raise the capital needed to put properties into production.
POLICY CHANGES. Changes in regulatory or political policy could adversely
affect our exploration and future production activities. Any changes in
government policy, in the United States, Mexico or other countries where
properties are or may be held, could result in changes to laws affecting
ownership of assets, land tenure, mining policies, taxation, environmental
regulations, and labor relations.
ENVIRONMENTAL COSTS ARE NOT PREDICTABLE. Compliance with environmental
regulations could adversely affect our exploration and future production
activities. There can be no assurance that future changes to environmental
legislation and related regulations, if any, will not adversely affect our
operations. We may not know what environmental compliance issues exist, or the
costs to be compliant, until we seek to put a property into production.
Compliance requirements imposed by United States or Mexican authorities could be
costly, and could prevent putting a property into production.
8
FUTURE RESERVE EVALUATIONS WILL ONLY BE ESTIMATES OF POTENTIAL VALUE. All
of the mineral properties in which we have an interest or right are in the
exploration stages only and are without reserves of gold or other minerals. If
and when we can prove such reserves, reserve estimates may not be accurate.
There is a degree of uncertainty attributable to the calculation of reserves or
resources. Until reserves or resources are actually mined and processed, the
quantity of reserves or resources must be considered as estimates only. In
addition, the quantity of reserves or resources may vary depending on metal
prices. Any material change in the quantity of reserves, resource grade or
stripping ratio may affect the economic viability of our properties. In
addition, there can be no assurance that mineral recoveries in small-scale
laboratory tests will be duplicated in large tests under on-site conditions or
during production.
See the risk factor "We may not be successful in raising the capital
necessary to explore, evaluate and exploit properties."
SUBSTANTIAL INVESTMENTS IN EXPLORATION WORK COULD BE LOST. The exploration
for minerals is highly speculative and involves risks different from and in some
instances greater than risks encountered by companies in other industries. Most
exploration programs do not result in the discovery of mineralization which is
economic to mine, and most exploration programs never recover the funds invested
in them. Without extensive technical and economic feasibility studies, no one
can know if any property can be mined at a profit. Even with promising reserve
reports and feasibility studies, profits are not assured.
The company could spend millions of dollars to evaluate a property to the
point where a determination can be made whether it would be economic to mine.
Until such time as reserves are established for a property, all the exploration
costs must be charged to expenses (written off). Exploration work on a property
could be initially promising, but further work (and expense) could condemn the
property because the mineralized body is not large enough to support mining.
If a property is believed to be economic to mine, and reserves have been
established, substantial capital would be required to put the property into
production. Unless the property is put into production, all the money spent in
evaluating the property could be lost. See the next risk factor.
WE MAY NOT BE SUCCESSFUL IN RAISING THE CAPITAL NECESSARY TO EXPLORE,
EVALUATE AND EXPLOIT PROPERTIES. For the foreseeable future, the company does
not anticipate having positive cash flow from operations sufficient to pay for
exploration and capital expenses. However, exploration is a critical and
expensive component of our business: Typically, exploration-stage mineral
properties (properties without known reserves) are acquired without extensive
data about the possible existence of valuable minerals in place, and without
knowledge that the minerals can be mined and processed at a profit. Each
property has unique geological features (where are the minerals located and at
what grades) and metallurgical features (what processing methods, if any, will
extract the minerals from the host rock).
Detailed exploration and feasibility studies must be conducted on each
property before the cost of setting up a mining and processing operation can be
justified. Exploration consists of drilling, sampling, and testing the samples
from defined blocks on the property to determine the presence and extent of
mineralization. Feasibility of mining a particular property requires, among
other factors, an evaluation of mining costs, processing costs, including an
evaluation of which metallurgical (processing) method will extract the minerals
from the mined rock at the lowest cost, and the level of capital development
expenditures and expected returns on that capital. Sometimes, a property may
contain high grades of mineralization, but mining is not warranted because the
metals can't be extracted economically.
Mining and processing operations on any significant scale is capital
intensive. To raise needed capital, investors must have reliable independent
estimates of the quantity and recoverability in mining and processing
9
of precious metals. For companies of Can-Cal's size and level of operations, it
is not always cost effective to hire independent engineering firms to prepare
independent feasibility studies before production starts. At least in some
instances, we will most likely seek to raise the needed capital with estimates
of the feasibility of the project prepared by employees, and (particularly for
small scale projects) consultants which are not independent. If capital raising
is not successful using our own estimates, we might have to spend the money and
time to hire independent engineers to prepare a feasibility study.
Exploration and feasibility budgets for new properties will vary, depending
on the size of the property, location (accessability), drilling depths, the
amount of reliable data (if any) available from prior owners, and other factors.
After completion of exploration work, the company may build a small pilot
processing plant on a property to evaluate what processing methods will work.
The amounts to be spent on exploration and feasibility work for future
properties we acquire can't be estimated, but could exceed millions of dollars
per property. Additional capital to begin mining and build and start up a
processing facility would be needed, if the company elects to hold a property
and exploit its resources. We expect to rely on outside sources of capital for
the foreseeable future. Sometimes we may seek industry partners to joint venture
a project, or enter into a 'farm out' agreement. In a farm out agreement,
typically, another company is responsible for funding exploration and
development work, and we would either receive a royalty or small net profits
interest.
However, the strategy of lowering financial risk by enlisting participation
of industry partners may not be successful, and we may not be successful in
raising the capital required to develop and mine.
Therefore, it is possible that some or all of the money invested by the
company to acquire a property, and evaluate its mineral content and the
economics of mining and processing, will be lost.
STOCK MAY BE ISSUED AS PART OF THE PURCHASE PRICE FOR PROPERTIES, RESULTING
IN DILUTION TO SHAREHOLDERS. In some instances, the sellers of properties we may
seek to acquire may require the company to issue restricted stock in the company
as part of the purchase price, in addition to the cash and royalty components of
the purchase price. The amount of stock which might be issued could be
substantial, as the company's stock price is low and the company has no
properties in production. This could result in dilution to shareholders, which
would not be recouped if exploration of the property is unsuccessful or a good
property can't be put into production.
TERMS OF SUBSEQUENT FINANCINGS MAY ADVERSELY IMPACT YOUR INVESTMENT. We
will have to raise equity, debt or preferred stock financing in the future. Your
rights and the value of your investment in the common stock could be reduced.
For example, if we have to issue secured debt securities, the holders of the
debt would have a claim to our assets that would be prior to the rights of
stockholders until the debt is paid. Interest on these debt securities would
increase costs and negatively impact operating results. Preferred stock could be
issued in series from time to time with such designations, rights, preferences,
and limitations as needed to raise capital. The terms of preferred stock could
be more advantageous to those investors than you as holders of common stock. In
addition, if we need to raise more equity capital from sale of common stock,
institutional or other investors may negotiate terms at least and possibly more
favorable than the terms of this offering. More common stock could be sold under
these circumstances at prices lower than offered under this prospectus, which
could result in dilution of the book value of shares bought in this offering.
10
RISK FACTORS INVOLVING THIS OFFERING.
FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND
OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS. Sales of our common stock in
the public market following this offering could lower the market price of our
common stock. Sales may also make it more difficult for the company to sell
equity securities or equity-related securities in the future at a time and price
that our management deems acceptable, or at all. Of the 16,064,751 shares of
common stock outstanding on May 26, 2004, approximately 11,000,000 shares could
be sold under rule 144 or become free tradable by removal of restrictions under
rule 144(k), not including shares covered by this prospectus or shares issuable
to Dutchess Fund on conversion of its debenture (see the next risk factor).
MARKET OVERHANG FROM SHARES ISSUED TO DUTCHESS FUND. Dutchess Fund holds a
debenture; principal and interest owed on the debenture is convertible into
shares of common stock, at a conversion price per share equal to the lesser of:
(1) $0.33; or (2) 80% of the average of the three lowest closing bid prices in
the 15 trading days preceding notice of conversion. The subsequent sale of such
shares by Dutchess Fund could cause significant downward pressure on the price
of the stock, to the detriment and dilution of existing shareholders as well as
investors in this offering.
Further, there is no maximum number of shares which we might be required to
issue on conversion of the debenture, except for the 4.99% limitation on
Dutchess Fund's ownership interest until all of the debenture is converted to
stock. However, by converting the debenture, and selling those shares on a
continual basis over time, Dutchess Fund may effectively exceed this limit. At
maturity, if the debenture automatically converts to stock, the 4.99% ownership
limitation will no longer apply.
If the debenture is not paid in cash at or before maturity on June 12,
2004, the debenture automatically converts to common stock. The company
presently does not have funds available to pay the debenture. Under the SEC's
rule 144, this stock would be deemed to have been acquired on June 12, 2002, and
thus not be restricted stock on conversion.
At May 31, 2004, approximately $70,000 of principal and interest was owed
on the debenture. Assuming a conversion price of $0.15 per share, 466,667 shares
would be issued on conversion; at a $0.10 conversion price, 700,000 shares would
be issued. Dilution to current shareholders would be less than 5% at the $0.10
conversion price, but the stock price will drop if the shares sold by Dutchess
Fund exceed demand.
BECAUSE THE COMPANY'S COMMON SHARES ARE "PENNY STOCK," CERTAIN RULES MAY
IMPEDE THE DEVELOPMENT OF INCREASED TRADING ACTIVITY AND COULD AFFECT THE
LIQUIDITY FOR STOCKHOLDERS. Penny stocks generally are equity securities with a
price of less than $5.00 per share other than securities registered on certain
national securities exchanges or quoted on the Nasdaq stock market, provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system.
Our securities are subject to the SEC's "penny stock rules" that impose
additional sales practice requirements on broker-dealers who sell penny stock
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of penny stock securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the "penny stock rules"
require the delivery, prior to the transaction, of a disclosure schedule
relating to the penny stock market. The broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. And, monthly statements must be sent
disclosing recent price information on the limited market in penny
11
stocks. These rules may restrict the ability of broker-dealers to sell our
securities and may have the effect of reducing the level of trading activity of
our common stock in the secondary market.
On January 12, 2004, the SEC proposed amendments to the penny stock rules
to ensure that investors continue to receive the protections of those rules. The
SEC also is proposing that broker-dealers be required to enhance their
disclosure schedule to investors who purchase penny stocks, and that those
investors have an explicit "cooling-off period" to rescind the transaction.
These amendments could place further constraints on broker-dealers' ability to
sell our securities.
FINANCING TRANSACTIONS RELATED TO DUTCHESS FUND
CONVERTIBLE DEBENTURE. On June 14, 2002, we received $106,604 net proceeds
from sale of a $120,000 convertible debenture to Dutchess Private Equities Fund.
The company paid $13,396 to Dutchess Advisors, Ltd. (advisor to Dutchess Fund)
in payment of fees ($12,000) and travel expenses ($1,396).
All or part of the principal amount of the debenture, plus accrued interest
at 8% annually, is convertible at Dutchess Fund's discretion into restricted
shares of common stock, at a per share price equal to the lesser of $0.33 or 80%
of the average of the three lowest closing bid prices in the 15 trading days
preceding notice of conversion. To the extent not prepaid or converted,
outstanding principal and accrued interest will be converted automatically to
restricted shares of common stock, at the lesser of the conversion prices stated
above, on the maturity date of the debenture (June 12, 2004).
Through May 31, 2004, Dutchess Fund has converted $65,000 of the principal
amount of the debenture to 522,879 shares of stock. We have been informed by
Dutchess Fund that these shares have been sold pursuant to the SEC's rule 144.
Under the terms of the debenture, so long as any amount is outstanding on
the debenture (principal and/or interest), the number of shares which the
company is obligated to issue to Dutchess Fund is limited to that number which
equals not more than 4.99% of the company's total outstanding shares. If this
limit would be exceeded, issuance of more shares would be deferred until
Dutchess Fund can receive the additional shares and remain at or under the 4.99%
limit, i.e., until such time as Dutchess Fund has sold off some of the acquired
shares or the company has issued more shares to others, or both.
Also in connection with the debenture loan from Dutchess Fund, in June 2002
we issued to Joseph B. LaRocco, a former attorney for Dutchess Fund, 30,000
restricted shares of common stock, for legal services provided to Dutchess Fund
in connection with the debenture and warrant transaction. The services have been
valued by the company at $13,500. We have been informed by Mr. LaRocco that he
has sold his shares under rule 144.
WARRANT. In connection with the debenture transaction, we issued to
Dutchess Fund a warrant to purchase 50,000 restricted shares of common stock, at
an exercise price of $0.22. The warrant expires on June 12, 2005. The value of
the warrant was recorded at $16,700 when issued.
The principals of Dutchess Fund are Dutchess Capital Management LLC, its
general partner, and Michael A. Novielli and Douglas H. Leighton, managing
members and principal owners of the general partner. Mr. Novielli and Mr.
Leighton exercise voting and investment power over the company's shares owned by
Dutchess Fund.
12
PRIOR INVESTMENT AGREEMENT WITH DUTCHESS FUND. On October 4, 2001 we signed
an investment agreement (the "investment agreement") with Dutchess Private
Equities Fund, L.P. and DRH Investment Company, LLC to sell up to $8,000,000 in
shares of common stock to Dutchess Fund and DRH, in equal amounts.
Under the investment agreement (which has been terminated), Dutchess Fund
and DRH had committed to buy from us up to a total of $8,000,000 in shares of
common stock, when and as requested by us, until May 10, 2005, 50% by Dutchess
Fund and 50% by DRH.
When the investment agreement was signed, the company issued 227,272 shares
of common stock to Dutchess Advisors, Ltd. (for its advisory services to
Dutchess Fund), and issued an additional 75,757 shares to Dutchess Fund, as fees
to induce Dutchess Fund to enter into the investment agreement. The shares
issued to Dutchess Advisors were required to be so issued by Dutchess Fund. We
also issued 303,030 shares to May Davis Group, Inc., a securities broker-dealer
firm, as a placement fee for the execution of the first investment agreement;
May Davis subsequently assigned its shares to persons affiliated with it. All
the 530,302 shares were issued based on the value (agreed to by the company and
the parties pursuant to the investment agreement) of such fees in the amounts of
$50,000 by Dutchess Fund, $200,000 by May Davis, and $150,000 by Dutchess
Advisors (total $400,000), divided by the $0.66 closing bid price of the
company's stock when the first investment agreement was signed (October 4,
2001).
An additional 37,000 shares were issued to Joseph B. LaRocco, for services
valued at $12,500 ($0.33 per share) provided by him as attorney for Dutchess
Fund and DRH in connection with the investment agreement. The value of his
services was determined by his clients Dutchess Fund and DRH, and agreed to
within the investment agreement. The per share price for his services was
negotiated and agreed to between Mr. LaRocco and the company, as the company did
not have the funds to pay Mr. LaRocco in cash. The $0.33 per share price
represents a discount of 50% from the market price at October 4, 2001 ($0.66).
We have been advised that Mr. LaRocco no longer represents Dutchess Fund or DRH.
In October 2001, the company signed an agreement with National Financial
Communications Corp., Needham, Massachusetts, and amended the agreement in March
2002, for NFC to provide public relations and communications services to the
company for a period of 12 months. We paid NFC $20,000 cash and issued 40,000
shares for NFC's services (valued at $14,000). This agreement has been
terminated.
All of these shares (683,059 total) were issued as restricted securities
under section 4(2) of the 1933 Act.
In 2001, we filed a registration statement with the SEC (SEC File No.
333-72252) to cover resale of shares owned by the above persons and entities,
and shares which might be sold to Dutchess Fund and DRH. This registration
statement was declared effective by the SEC in April 2002. Before the investment
agreement was terminated, 67,960 shares was sold in 2002 to Dutchess Fund and
DRH under the investment agreement, at a price equal to 93% of the market prices
at the time. The company realized $10,100 from the sale of stock to Dutchess
Fund (no shares sold to DRH) after deduction of $900 in offering costs paid to
Dutchess Advisors, Ltd. and to a brokerage firm (May Davis, Inc.), also pursuant
to the investment agreement.
In 2002, those persons and entities which received stock in the company in
connection with the negotiation and execution of the investment agreement
(Dutchess Fund, Dutchess Advisors, the brokers associated with May Davis Group,
National Financial Communications, and Mr. LaRocco), and Dutchess (which bought
67,960 shares in 2002) sold all of the 751,019 shares they received. The resale
registration statement no longer is in effect; in the second quarter 2004, the
company deregistered the balance of shares which could have been sold to
Dutchess Fund and DRH under the investment agreement and resold under the
registration statement.
13
Except for the debenture and the warrant held by Dutchess Fund, the company
has no contractual or other relationship with Dutchess Fund, DRH, May Davis, or
National Financial, or any affiliates of or persons associated with those
entities.
USE OF PROCEEDS
We will not receive proceeds from the selling shareholders' sales, but we
will receive up to $529,988 if they exercise all of the warrants covered by this
prospectus. These funds will be applied to general working capital, consisting
of corporate administrative expense, and exploration costs on the Arco property
(and other properties which may be acquired). No exploration budgets have been
prepared to date.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The stock is traded on the Nasdaq Over-the-Counter Bulletin Board
("CCRE.OB").
The following shows the high and low market quotation for the shares for
the last three years. Quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commissions, and do not necessarily represent actual
transactions.
Low High
--- ----
2001
----
First Quarter $1.218 $1.75
Second Quarter $1.156 $1.813
Third Quarter $0.77 $1.563
Fourth Quarter $0.31 $0.90
2002
----
First Quarter $0.25 $0.51
Second Quarter $0.21 $0.51
Third Quarter $0.18 $0.48
Fourth Quarter $0.13 $0.43
2003
----
First Quarter $0.10 $0.25
Second Quarter $0.07 $0.31
Third Quarter $0.10 $0.25
Fourth Quarter $0.14 $0.49
2004
----
First Quarter $0.22 $0.49
The company has approximately 337 shareholders of record (approximately
1,000 beneficial owners). The stock transfer agent is Pacific Stock Transfer
Company, 500 E. Warm Springs, Suite 240, Las Vegas, NV 89119.
The company has never paid any dividends. There are no legal restrictions
which limit the company's ability to pay dividends but, based on its present
financial situation, it is extremely unlikely to do so in the near future.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS,
AND PLAN OF OPERATIONS
PLAN OF OPERATION.
The company is engaged in the acquisition and exploration of precious
metals mineral properties. As part of its growth strategy, the company will
focus its future activities in the Western Hemisphere, with an emphasis on Latin
America, particularly Mexico. The extent of these activities will be subject to
available funding. Management intends to maximize exploration expenditures by
utilizing a focused approach to generative exploration, while simultaneously
seeking out potential near-term production properties.
The company presently has gold exploration projects located in Mexico and
in California and Arizona. The US projects are inactive. None of these
properties has any proven or probable reserves and none of these properties is
in production. All expenditures on all properties are expensed, not capitalized.
Since June 2003, management has investigated several interesting mining
properties in Mexico, which met the objectives of the company's future growth
strategy. In September 2003, the company incorporated a wholly owned Mexican
subsidiary, Sierra Madre Resources S. A. de C. V., which will be the company's
principal vehicle for future acquisitions in Mexico. In February 2004, the
company acquired a 100% interest in a gold-silver mineral concession, referred
to as the Arco Project (the "Project"). The Project includes a land package of
463 hectares (approximately 1,140 acres), which is owned by a private Mexican
individual. The Project is located in Durango State, approximately 120
kilometers north-northwest of the city of Durango, and lies in the Central
Plateau Gold-Silver belt of the Sierra Madre Occidental, near the historic
Silver-Lead-Zinc district of Tejamen.
The company intends to continue to attempt to develop industrial sales for
the volcanic materials located on the Pisgah property in California, as a follow
up to the limited industrial sales attained in 2003 and 2002. No further testing
is planned at this time with respect to developing a leaching process to extract
precious metals contained in the cinder materials.
The company presently has two full-time employees and two part-time
geological consultants and will continue to rely on outside consultants and
agents, in the near-term, to perform various administrative, legal and technical
functions, as required.
At May 17, 2004, we had approximately $130,000 cash available to sustain
operations, which would cover the company's planned activities at least through
July 31, 2004. We may seek additional capital by sale of restricted stock in
private placement transactions in Canada, loans from directors, or possible
funding or joint venture arrangements with other mining companies.
On January 29, 2004, the company entered into an agreement with IBK Capital
Corp. ("IBK"), whereby IBK agreed to assist the company in arranging financing
of up to $1,000,000 on terms to be negotiated. The agreement is effective
through July 28, 2004 and may be terminated or extended by either party upon 15
days advance notice in writing. To date, no financing has been finalized. Other
than the IBK agreement, there are no plans or arrangements now in place to fund
the company or its operations by any of the means noted above.
LIQUIDITY AND CAPITAL RESOURCES AT MARCH 31, 2004 COMPARED TO MARCH 31, 2003,
AND RESULTS OF OPERATIONS FOR THE THREE MONTHS MARCH 31, 2004 AND MARCH 31, 2003
As of March 31, 2004, we had a working capital deficit of $390,100 and
approximately $139,200 cash was available to sustain operations. The working
capital deficit as of December 31, 2003 was $661,000 and approximately $17,400
cash was available.
15
The company had sales of $5,700, and gross profit of $2,500, from the sale
of cinder materials during the three-month period ended March 31, 2004, compared
with sales of $6,200 and gross profit of $2,900 for the three-month period ended
March 31, 2003. The company sustained a net loss of $481,400 for the three
months ended March 31, 2004, compared to a net loss of $144,700 for the three
months ended March 31, 2003. The increased net loss in the 2004 period was
principally due to a $274,000 increase in interest expense and a $66,300
increase in general and administrative expenses. The higher interest expense was
entirely due to a $277,300 non-cash charge, using the Black Scholes model, to
record the value of warrants to purchase 1,233,127 shares which were granted to
shareholders (including officers and directors), in connection with the
conversion of $82,687 in notes payable and $225,595 in accrued salary into
1,233,127 restricted common shares (at a conversion price of $0.25 per share).
See "Certain Relationships and Related Transactions." These conversions
eliminated $308,282 in liabilities from the company's balance sheet at March 31,
2004.
The $66,300 increase in general and administrative expenses during the
three months ended March 31, 2004 compared to the same period in 2003 was
principally due to:
o Consulting increased by $30,900, due to Mr. Ciali's consulting services
and consulting geological and investor relations services, which were
not incurred during the same period in 2003. Mr. Ciali was not
appointed President of the company until March 2003, but a non-cash
charge of $33,900, representing the value of the stock options granted
to Mr. Ciali, was included in consulting services for the three-month
period ended March 31, 2003.
o Professional fees increased by $29,900, due to $21,400 in fees and
advance expenses paid to IBK Capital Corp, in connection with a
proposed $1 million financing, and higher legal expenses related to the
new Mexican operations and general corporate requirements.
o Travel and entertainment expenses increased by $8,400, due to
international travel expenses, as part of the expansion of activities
into Latin America, and Mr. Ciali's travel related expenses in general.
Net cash used by operating activities amounted to approximately $96,900 for
the three-month period ended March 31, 2004, compared with approximately $38,900
for the same period in 2003, reflecting the increased level of general and
administrative expenses. The company financed its activities principally through
the issuance of common stock, which amounted to approximately $199,100 for the
three-month period ended March 31, 2004 compared to approximately $11,000 for
the same period in 2003.
Unless the company is able to establish the economic viability of its
mining properties, the company will continue writing off exploration and testing
costs. Losses will continue unless the company locates and delineates reserves
and initiates mining operations. If reserves are delineated and mining
operations are initiated, the company may capitalize certain of those expenses.
The company has no material commitments for capital expenditures other than
expenditures it chooses to make with respect to testing and or exploration of
its mineral properties.
16
LIQUIDITY AND CAPITAL RESOURCES AT DECEMBER 31, 2003 COMPARED WITH DECEMBER 31,
2002, AND RESULTS OF OPERATIONS FOR THE TWO YEARS ENDED DECEMBER 31, 2003:
Year ended December 31,
----------------------------------
2003 2002
------------ ------------
Material sales $ 20,000 $ 300
Cost of sales 9,100 200
Gross profit 10,900 100
General & administrative expenses (586,300) (578,400)
Other income (expenses) (135,700) (131,000)
Net loss $ (711,100) $ (709,300)
Mineral sales in 2003 and 2002 were related to limited industrial sales of
cinder material from the Pisgah property.
The following table summarizes working capital, total assets, accumulated
deficit, and shareholders' equity:
Year ended December 31,
----------------------------------
2003 2002
------------- ------------
Working capital $ (661,000) $ (358,500)
Total assets $ 46,400 $ 72,200
Accumulated deficit $ (5,392,300) $ (4,681,200)
Shareholders' deficit $ (1,019,700) $ (730,400)
In 2002, additions to funds available for operations, in the amount of
$399,600, were provided by: a.) $271,000 from the sale of 1,025,320 restricted
common shares for proceeds of $260,900 and the sale of 67,960 restricted shares
to Dutchess Private Equity Fund under the Investment Agreement for proceeds of
$10,100 (net of offering costs of $900); b.) $79,000 in notes payable from
related parties: $25,000 - First Colony Merchant, a shareholder, (secured, with
an interest rate of 8.0%, due on demand), $19,908 - Landing Insurance Agency, a
shareholder, (unsecured, with an interest rate of 5.0%, due July 15, 2003),
$10,492 - Scott A. Nichols, a shareholder, (unsecured, with an interest rate of
24.0%, due May 26, 2002), $10,000 - James Dacyszyn, a director, (unsecured, with
an interest rate of 7.50%, due with respect to $5,000 February 12, 2003 and with
respect to $5,000 April 22, 2003), $5,000 - Brian Wolf, a director, (unsecured,
with an interest rate of 7.50%, due July 1, 2003), $3,600 - Betty Ann Sloan, a
shareholder, (unsecured, with an interest rate of 7.50%, due February 5, 2003),
$3,000 - Barry Amies, a director, (unsecured, with an interest rate of 7.50%,
due April 5, 2003), and $2,000 - Ronald D. Sloan, Chairman, (unsecured, with an
interest rate of 7.50%, due July 1, 2003); and c.) $120,000 from a convertible
debenture (unsecured, with an interest rate of 8.0%, due June 12, 2004, issued
to Dutchess Private Equities Fund); offset by $70,400 principal payments on
notes payable to related parties: $32,220 - Ronald D. Sloan, Chairman, $10,492 -
Scott A. Nichols, a shareholder,
17
$12,500 - First Colony Merchant, a shareholder, $10,000 - Owen Sequoia, a
shareholder, $3,588 - Landing Insurance, a shareholder, and $ 1,600 - Betty Ann
Sloan, a shareholder.
In 2003, additions to funds available for operations, in the amount of
$193,500, were provided by: a.) $164,700 from the sale of 823,410 restricted
common shares; b.) $41,900 in notes payable from related parties: $25,000 -
First Colony Merchant, a shareholder, (secured, with an interest rate of 8.0%,
due January 2, 2004), $12,500 - James Dacyszyn, a director, (unsecured, with an
interest rate of 7.50%, due with respect to $10,000 February 18, 2004 and with
respect to $2,500 March 7, 2004), $3,000 - Barry Amies, a former director and a
shareholder, (unsecured, with an interest rate of 7.50%, due with respect to
$1,000 March 27, 2004 and with respect to $2,000 September 8, 2004), and $1,400
- - Ronald D. Sloan, Chairman, (unsecured, with an interest rate of 7.50%, due
June 30, 2004) (see notes to the audited financial statements), and c.) $13,100
principal payments on notes payable to related parties, Ronald D. Sloan,
Chairman.
We recorded a net loss from operations in 2003 of $711,100 compared to a
net loss from operations of $709,300 in 2002. A $10,800 increase in gross profit
on industrial sales in 2003, due to higher sales ($20,000 in 2003, compared to
$300 in 2002), was offset by a $7,900 increase in general and administrative
expenses and a $5,000 increase in interest expense in 2003 compared to 2002,
respectively.
General and administrative expenses increased by $7,900 in 2003 to
$586,300, compared to $578,400 in 2002. The increase, stated as changes in 2003
compared to 2002, was due principally to:
o A $104,000 increase in consulting expenses, principally due to a
non-cash charge of $33,900, representing the value of the stock options
granted to Mr. Ciali when he was appointed President of the company in
March 2003, and an increase in overall consulting fees, as a result of
Mr. Ciali's and third party geological and investor relations
consulting services.
o A $26,700 increase in travel and entertainment expenses due to
international travel expenses, as part of the company's growth strategy
to expand its mining-related activities into Latin America, and
management travel-related expenses, in general.
o A $10,700 increase in professional fees due to higher legal fees
incurred both in the US and Mexico and somewhat higher audit fees.
o A $59,300 decrease in bad debts expense, as no bad debts expense was
incurred in 2003.
o A $29,700 decrease in insurance expense because the company's insurance
policy has not yet been renewed, as more reasonably priced bids
coverage is being sought.
o A $24,500 decrease in exploration expenses as there were only limited
expenditures on the company's US-based exploration properties.
o A $18,700 decrease in advertising and promotion expenses as part of the
company's overall cost savings efforts.
Interest expense increased by $5,000 in 2003 to $162,200 compared to
$157,200 in 2002, due principally to a somewhat higher level of debt outstanding
and equity conversions under the Dutchess Fund convertible debenture, which
include an interest component to account for the difference in the share price
of the company's common stock on the date of conversion compared to the
discounted conversion share price pursuant to the convertible debenture
agreement.
18
Unless we can establish the economic viability of the company's exploration
properties, we will continue writing off the expenses of exploration and
testing. Therefore, losses will continue until such time, if ever, as we
establish the economic viability of the properties. If viability is established
for a property, some of the expenses related to that property would be
capitalized instead of expensed.
We have no material commitments for capital expenditures.
BUSINESS
The company is an exploration company. Since 1996, we have examined various
mineral properties prospective for precious metals and minerals and acquired
those deemed promising. We own, lease or have interests in one mineral property
in Durango State, Mexico, and four mineral properties in the southwestern United
States (California and Arizona).
Prior to 2003, we performed more than 1,000 "in-house" assays on mineral
samples from our properties in the United States. An assay is a test performed
on a sample of minerals to determine the quantity of one or more elements
contained in the sample. The in-house work was conducted with our equipment by
persons with whom we contracted, who are experienced in performing assays, but
were not independent of us. We also sent samples of materials from which we
obtained the most promising results to outside independent assayers to confirm
in-house results.
All the United States properties, and the Mexico property, are "grass
roots" because they are not known to contain reserves of precious metals or
other minerals (a reserve is that part of a mineral deposit which could be
economically and legally extracted or produced at the time of the reserve
determination). None of these properties is in production. In 2003, we sold
$20,000 of volcanic cinders materials from the Pisgah, California property to an
industrial user.
The company's current focus is in Latin America, particularly Mexico. In
2003, the company hired a new chief executive officer (Anthony F. Ciali) and
retained a consulting geologist (Luis Vega). A second consulting geologist
(Terry Brown) was retained in 2004. All these individuals have extensive
experience with large companies in locating, acquiring and putting precious
metals properties into production in North and South America. See "Management."
In 2003, the company incorporated a wholly-owned subsidiary in Mexico,
Sierra Madre Resources S.A. de C.V. ("SMR"), to be our principal operating
entity for mining-related acquisitions and activities in Mexico. In February
2004, SMR acquired a 100% interest in a gold-silver mineral concession, in
Durango State, Mexico. This is an exploration stage property. See "Arco
Project." Other subsidiaries may be incorporated in other countries as needed.
We will pursue a diversified strategy over time. Management intends to
maximize exploration expenditures by utilizing a focused approach to generative
exploration, while simultaneously seeking to acquire potential near-term
production properties. To the extent that financing is available, we will
explore, develop, and, if warranted, bring into production precious metals
properties for our own account or in conjunction with joint venture partners (in
those instances where we acquire less than a 100% interest in a property).
However, either due to the lack of available financing, or the number of
properties which merit development at any point in time, or the scope of the
exploration and/or development work of a particular property being beyond the
company's financial and administrative capabilities, the company may farm out
one or more of its properties to other mining companies.
19
PROPERTIES
GENERAL.
We own or have interests in five properties: The Arco Project in Durango
State, Mexico, and four properties in the United States. Of the United States
properties, one is owned (patented mining claims on a volcanic cinders property
at Pisgah, California), one is leased with an option to purchase (the Cerbat
property in Mohave County, Arizona), and two properties are groups of unpatented
mining claims located on federal public land and managed by the United States
Bureau of Land Management (the "BLM"): the Owl Canyon property (23 miles
northeast of Baker, California); and the Wikieup property (in Mohave County,
Arizona).
In the United States, unpatented claims are "located" or "staked" by
individuals or companies on federal public land. Each placer claim covers 160
acres and each lode claim covers 20 acres. The company is obligated to pay a
maintenance fee of $100 per claim per year to the BLM and file an Affidavit of
Assessment Work with the County showing labor and improvements of at least $100
for each claim yearly.
If the statutes and regulations for the location and maintenance of a
mining claim in the United States are complied with, the locator obtains a valid
possessory right to the contained minerals. Failure to pay such fees or make the
required filings may render the mining claim void or voidable. We believe we
have valid claims, but, because mining claims are self-initiated and
self-maintained, it is impossible to ascertain their validity solely from public
real estate records. If the validity of an unpatented mining claim is challenged
by the government, we would have the burden of proving the present economic
feasibility of mining minerals located on the claims.
ARCO PROJECT.
On February 17, 2004, SMR acquired a 100% interest in a exploration stage
gold-silver mineral concession, referred to as the Arco Project (the "Project").
The Project includes a land package of 463 hectares (approximately 1,140 acres),
which is owned by a private Mexican individual (the "Concessionaire"). The
Project is located in Durango State, approximately 120 kilometers
north-northwest of the city of Durango, and lies in the Central Plateau
Gold-Silver belt of the Sierra Madre Occidental, near the historic
Silver-Lead-Zinc district of Tejamen.
SMR acquired its 100% interest in the Project subject to a ninety days due
diligence period, for which SMR paid the Concessionaire $1,000. If SMR elects to
proceed with the Project, it will be required to pay an additional $1,000 to the
Concessionaire and make future minimum semi-annual advance royalty payments
("Advance Royalty"), ranging from $2,000 initially to a maximum of $4,000 after
4.5 years. If production commences on the Project, the Concessionaire will
receive a quarterly net smelter returns production royalty ("Production
Royalty"), ranging from 1% at gold prices less than $300 to a maximum of 6% at
gold prices of $450 or higher. SMR will be permitted to deduct all Advance
Royalty payments against any future Production Royalty payments, on an unlimited
carry-forward basis. In addition, SMR will be permitted to recoup all of its
development capital expenditures from the Project's net operating cash flow,
before being required to make any Production Royalty payments. During the
recoupment period, the periodic Advance Royalty payments will be doubled. When
the sum of all payments to the Concessionaire amounts to $3.5 million, SMR will
obtain title to the Arco concession and be relieved of making any further
payments to the Concessionaire.
Initial geological work indicates that the Project is a low-sulfidation
epithermal gold-vein occurrence in Upper Series rhyolite formation. Typically,
it is the underlying andesite formations that are mineralized in Mexico. The
fact that the veins occur in the rhyolite formation is unusual and indicates the
potential for wider and stronger vein structures in the underlying Lower Series
andesite formation. Limited surface chip sampling has returned encouraging gold
values. Although the exposed surface veins are narrow (from 2 to 100
20
centimeters for individual veins in zones of up to 20 meters), they have a
strike length of over 2 kilometers and form vein swarms, suggesting that the
veins may thicken at depth in the underlying andesite series rocks.
SMR has completed its due diligence review of the Project, and now plans to
start exploration activities in the second quarter 2004, including a mapping,
sampling and trenching program, leading to a first phase drilling program to
test the significant and unusual vein outcropping in the Upper Series rhyolite
formation and the implications this may have on the potential for more robust
vein structures in the underlying andesite formation.
Under the Mining Law of Mexico, exploration concessions are granted for a
period for six years and may not be renewed. Prior to the expiration of the
six-year exploration term, a concessionaire may request to have all, or any
portion, of the exploration concession substituted for an exploitation
concession, which has a term of 50 years and may be renewed for an additional 50
years. To maintain the concessions in good standing, the concessionaire is
required to perform certain annual exploration or exploitation work, and pay
semi-annual mining duties based on the number of hectares per concession. The
mining duty per hectare escalates over time and is greater for exploitation
concessions; typically, companies will obtain concessions over a large area,
then drop portions of the concessions to save on paying mining duties, as
exploration work refines the best areas to keep. A concessionaire is not
required to pay to the Mexican government any royalty on production from an
exploitation concession.
The exploration term of the Arco concession expires in 2009.
PISGAH, CALIFORNIA PROPERTY.
GENERAL, TESTING. In 1997 we acquired fee title to a "volcanic cinders"
property at Pisgah, San Bernardino County, California, for $567,000. The cinders
material resulted from a geologically recent volcanic eruption.
The property is privately owned and is comprised of approximately 120 acres
located 10 miles southwest of Ludlow, California, with a very large hill of
volcanic cinders, accessible by paved road from Interstate 40. An independent
survey service hired by the company reported that there are approximately
13,500,000 tons of volcanic cinders above the surface. Approximately 3,500,000
tons of the cinders have been screened and stockpiled, the result of prior
operations by Burlington Northern Railroad Co. which processed the cinders from
the hill for railroad track ballast, taking all cinders above about one inch
diameter and leaving the rest on the ground surface within one-quarter mile of
the hill. The remaining material in the hill, and the material left over from
Burlington's operations, can easily be removed by front end loaders and loaded
into dump trucks for hauling. The Cinder and Cinder #2 patented mining claims
contain morphologically young alkali basalt and hawaiite lava flows and cinder.
The cinder and spatter cone is about 100 meters high and has a basal diameter of
about 500 meters. The volcanic cone and crater consists of unsorted basalis
tephra, ranging from finest ash, through scoriascious cinders and blocks, to
dense and broken bombs up to two meters in dimension.
The company owns equipment which was acquired with the property, and is
located on the property: a ball mill for crushing cinders, truck loading pads,
two buildings, large storage tanks, conveyors to load trucks, material silos and
screening equipment.
The Pisgah property consists of patented claims we own; no fees have to be
paid to the BLM or work performed on the claims to retain title to the property.
Electrical power presently is not available to the site, and is not
expected to be needed.
21
From 2000 through 2002, the company ran numerous tests on the "volcanic
cinders" property (located on patented mining claims we own at Pisgah,
California) to determine if the material contains precious metals. Although the
program indicated precious metals may exist in material taken from the Pisgah
property, overall the program results were inconclusive. There are no current
plans to continue the analysis program at Pisgah. The company is evaluating the
potential sale of the cinders as industrial minerals in the future.
PISGAH PROPERTY MINING LEASE. To generate working capital, as of May 1,
1998 we signed a Mining Lease Agreement for the Pisgah property with Twin
Mountain Rock Venture, a California general partnership ("Twin Mountain," a
subsidiary of Rinker Materials, Fort Calhoun, Nebraska). The Agreement is for an
initial term of 10 years, with an option to renew for an additional ten year
term. Twin Mountain has the right to take 600,000 tons of volcanic cinders
during the initial term, and 600,000 more tons during the additional term, for
processing and sale as decorative rock. The material would be removed from the
original cinder deposit, not the stockpiled material. Twin Mountain has not
removed any material to date.
The agreement provides Twin Mountain will pay minimum annual rental
payments of $22,500 for the initial term and $27,500 per year for the additional
term. Twin Mountain is also obligated to pay us a monthly production royalty for
all material removed from the premises: The greater of 5% of gross sales f.o.b.
Pisgah, or $.80 per ton for material used for block material; plus 10% of gross
sales f.o.b. Pisgah for all other material. Against these payments, Twin
Mountain will be credited for minimum royalty payments previously made.
Twin Mountain is current in payments, which are pledged to service company
debt. Twin Mountain has not yet removed any material from the property and has
not indicated when it would do so. Twin Mountain does not have the right to
remove or extract any precious metals from the property; it does have the right
to remove cinder material which could contain precious metals (and Twin Mountain
would have title to the removed cinder material), but it cannot process the
materials for precious metals either on or off site.
Mining and reclamation permits, and an air quality permit have been issued
by the California regulatory agencies in the names of both Twin Mountain and the
company. We posted a cash bond in the amount of $1,379 (1% of the total bond
amount) and Twin Mountain has posted the remainder of the $137,886 bond. If Twin
Mountain defaults, we would be responsible for reclamation of the property, but
reclamation costs incurred in that event would be paid in whole or part by the
bond posted by us and Twin Mountain. Reclamation costs are not presently
determinable.
PISGAH PROPERTY - DEBT TRANSACTIONS. In 1998, the company borrowed $100,000
from a private lender. The debt carried annual interest at 8%, was secured by a
first deed of trust on the Pisgah property, plus our rights to payments under
the Twin Mountain lease. This debt has been paid.
At December 31, 2003, we owed a second private lender (First Colony
Merchant) a total of $487,751 including accrued interest, secured by a deed of
trust and assignment of rents (payments under the Twin Mountain lease) on the
Pisgah property. For additional consideration for part of the amounts loaned,
the company granted the lender a five year option to purchase 300,000 restricted
shares of common stock, at the lower of $0.65 per share or 50% of the lowest
trading price during the month before exercise, payable in cash. The option was
exercised in 2000 at $0.52 per share. As further consideration, also in 2000 we
issued 45,000 restricted shares of common stock to a corporate affiliate of the
lender as a loan placement fee. The company is in default of interest payments
totaling $100,000 and is negotiating forbearance on collection of the interest
with the lender.
OWL CANYON - S & S JOINT VENTURE
In 1996, the company entered into a Joint Venture Agreement with the
Schwarz family covering approximately 425 acres of unpatented placer and lode
mining claims in the Silurian Hills of California, known
22
as Owl Canyon. The S & S Joint Venture has since increased its holdings to 740
acres of lode claims and a five acre mill site claim. These claims are
prospective for precious metals and some base metals. The property is located
approximately 23 miles northeast of Baker, California, accessible by 23 miles of
paved and dirt road. The company and the Schwarz family each have a 50% interest
in the venture which is operated by a management committee, comprised of Ronald
Sloan, a director of the company, and Ms. Robin Schwarz.
Holding costs are approximately $3,809 per year for county and BLM filing
fees, and work must be performed on the property each year to keep title to the
claims.
Pursuant to the Joint Venture Agreement, we are funding the venture's
operations. Any income from the venture will first be paid to the company to
repay funds advanced to the venture or spent on its account, with any additional
income divided 50% to the company and 50% to the Schwarz family.
As the acquisition price of its 50% interest in the S & S Joint Venture, in
1996 the company issued 500,000 restricted shares of common stock to the Schwarz
family.
The venture owns miscellaneous drilling, milling and assay and facilities,
all of is stored at the property. The equipment is used but operational.
Prior to 2003, the company conducted extensive preliminary testing and
assaying on the Owl Canyon property. Results indicate precious metals may be
present in material located on the Owl Canyon property, but the results are
inconclusive and we have no current plans to continue exploration of this
property.
GEOLOGY OF OWL CANYON.
Mineralization on the property migrates along north/south oriented faulting
and at the contact point between metamorphic and dolomite rocks. Metalliferous
deposits along these fractures are prevalent near the central area of Owl
Canyon. Along the southern side of the property, fault contact areas exhibit
localized zone alteration from migrating hydrothermal fluids producing a
mineralized vein ranging in width from approximately 18 to 36 inches.
We have performed external and in-house fire assays on material from the
Owl Canyon property, sending both trench and rock samples to independent
laboratories. Approximately 15 tons of material was removed to a depth of 3 to 4
feet to expose a continuation of one of the veins. Samples from this material
were analyzed by an independent laboratory.
A detailed structural and geologic mapping survey has been completed on the
property, indicating some zones in certain areas are suitable exploration
targets. Currently, work on this property has been suspended. This property is
without known reserves and future work would be exploratory in nature. There was
no significant activity on this property in 2003.
CERBAT PROPERTY
On March 12, 1998, we signed a Lease and Purchase Option Agreement covering
six patented mining claims in the Cerbat Mountains, Hualapai Mining District,
Mohave County, Arizona. The patented claims cover approximately 120 acres. We
paid $10,000 as the initial lease payment and are obligated to pay $1,500 per
quarter as minimum advance royalties. The company has the option to purchase the
property for $250,000, less payments already made. In the event of production
before purchase, we will pay the lessor a production royalty of 5% of the gross
returns received from the sale or other disposition of metals produced. Except
for limited testing and evaluation work performed in mid-2002, no work has been
performed on this property since
23
1999. Access is north 15 miles from Kingman, Arizona on Highway 93, east from
the historical market to Mill Ranch, then left three miles to a locked gate.
The country rock is pre-Cambrian granite, gneiss and schist complex. It is
intruded by dikes of minette, granite porphyry, diabase, rhyolite, basalt and
other rocks, some of which are associated with workable veins and are too
greatly serieitized for determination. The complex is also flanked on the west
by masses of the tertiary volcanic rocks, principally rhyolite. The mineralized
body contains principally gold, silver and lead. They occur in fissure veins,
which generally have a north-easterly trend and a steep north-easterly or
south-westerly dip. Those situated north of Cerbat wash are chiefly gold bearing
while those to the south principally contain silver and lead. The gangue is
mainly quartz and the values usually favor the hanging wall. The company has
been informed by the owner that the property contains several mine shafts of up
to several hundred feet in depth and tailings piles containing thousands of tons
of tailings. The property has not produced since the late 1800's.
The buildings on the property are practically valueless, owing to being in
disuse for so many years.
We conducted (in late June and July 2002) a limited number of preliminary
tests and assays on material taken from mine dumps (material left on the
property from mining by others many years ago). It was anticipated that this
material could be economically processed. However, the dump material tonnage
will not support a small-scale operation without being supplemented with
additional underground ore. We are considering selling or farming out the
property, as there have been expressions of interest in the property from time
to time. There was no significant activity on Cerbat in 2003.
WIKIEUP PROPERTY
The Wikieup Arizona property consists of one unpatented lode mining claim
namely the Brown Derby #25 located in Section 36, Township 160N and Range 140W.
The 20 acre claim is accessed via gravel road just off Highway 93 at the town of
Wikieup, Arizona.
Holding costs are approximately $109.00 per year for county and BLM filing
fees, and work must be performed on the property each year to keep title to the
claims.
The geology of the area is comprised of Precambrian granoids and gneiss.
Outcrop is extensive on the property and rock units include diorite, gabbro and
granitic dikes. The company has kept the claim in good standing by submission of
the required rental fees. We have conducted very limited geologic examination
and surface sampling of the rock units on the property. We are holding this
property for possible limited exploration. This property is without known
reserves. There was no significant activity on this property in 2003.
PERMITTING
Exploration and mining operations in the United States are subject to
statutory and agency requirements which address various issues, including: (i)
environmental permitting and ongoing compliance, including plans of operations
which are supervised by the Bureau of Land Management ("BLM"), the Environmental
Protection Agency ("EPA") and state and county regulatory authorities and
agencies (e.g., state departments of environmental quality) for water and air
quality, hazardous waste, etc.; (ii) mine safety and OSHA generally; and (iii)
wildlife (Department of Interior for migratory fowl, if attractive standing
water is involved in operations). The company has been added by San Bernardino
County as a party to the Approved Mining/ Reclamation Plan and related permits,
which have been issued for the Pisgah property.
24
Operations in Mexico are subject to similar requirements for environmental
permitting and compliance, which are administered by Mexican government agencies
at various levels.
Because any exploration (and future mining) operations of the company would
be subject to the permitting requirements of one or more agencies, the
commencement of any such operations could be delayed, pending agency approval
(or a determination that approval is not required because of size, etc.), or the
project might even be abandoned due to prohibitive costs.
Generally, the effect of governmental regulations on the company cannot be
determined until a specific project is undertaken by the company.
In the United States, federal, state and local provisions regulating the
discharge of material into the environment, or otherwise relating to the
protection of the environment, such as the Clean Air Act, Clean Water Act, the
Resource Conservation and Recovery Act, and the Comprehensive Environmental
Response Liability Act ("Superfund") affect mineral operations. For exploration
and mining operations, applicable environmental regulation includes a permitting
process for mining operations, an abandoned mine reclamation program and a
permitting program for industrial development and siting. Other
non-environmental regulations can impact exploration and mining operations and
indirectly affect compliance with environmental regulations. For example, a
state highway department may have to approve a new access road to make a project
accessible at lower costs, but the new road itself may raise environmental
issues. Compliance with these laws, and any regulations adopted thereunder, can
make the development of mining claims prohibitively expensive, thereby
frustrating the sale or lease of properties, or curtailing profits or royalties
which might have been received therefrom. In 1997, the S & S Joint Venture spent
approximately $32,000 to clean up areas of the Owl Canyon properties as
requested by the BLM. The company cannot anticipate what the further costs
and/or effects of compliance with any environmental laws might be. The BLM
approved the S&S Joint Venture trenching program at Owl Canyon without a
requirement for bonding. The BLM approved the reclamation of this trenching
program in 2000. BLM demanded further clean up of the mill site and surrounding
area, and the Joint Venture complied with their request in 2000.
MANAGEMENT
DIRECTORS AND OFFICERS
Officers and directors of the company are listed below. Directors are
elected to hold office until the next annual meeting of shareholders and until
their successors are elected or appointed and qualified. Officers are appointed
by the board of directors until a successor is elected and qualified or until
resignation, removal or death.
NAME AGE POSITION AND TENURE
Anthony F. Ciali 58 President (since March 2003), and Chief
Executive Officer and Director (since April
2003)
Ronald D. Sloan 63 President from May 1996 to March 2003;
Treasurer, and Chief Financial Officer since
May 1996; Chairman of the Board since
January 2001
John Brian Wolfe 52 Secretary and a Director since May, 1996
James Dacyszyn 72 Director since February, 1999
25
ANTHONY F. CIALI. Mr. Ciali is a senior mining executive with over
twenty-three years of international mining industry experience. Mr. Ciali was
appointed President of the company on March 24, 2003 and Chief Executive Officer
and a director of the company on April 25, 2003. Prior to joining the company,
Mr. Ciali was, from July 1999 to December 2002, EVP-COO and CFO of ACS Advanced
Computer Systems, Inc., a computer related company. From July 1997 to September
1999, he was a mining industry consultant. Mr. Ciali was President and CEO, and
a director of Monarch Resources Limited, an international gold mining company
listed on The Toronto Stock Exchange, with exploration and mining operations in
Venezuela and Mexico and approximately 700 employees, from May 1991 to June
1997. From 1977 to 1990, Mr. Ciali was Vice President Finance and Administration
of Gold Fields Mining Corporation ("Gold Fields"), an international gold mining
company and a wholly owned subsidiary of Consolidated Gold Fields PLC. Gold
Fields had annual gold production of approximately 400,000 ounces from gold
mines based in the western United States, and an annual exploration budget of
approximately $20 million for exploration projects in North and South America.
Gold Fields employed over 700 people. From 1976 to 1977, Mr. Ciali was Assistant
Controller of Azcon Corporation, an affiliate of Gold Fields, which was involved
in steel distribution and manufacturing. From 1972 to 1976, he was employed as
an auditor with Price Waterhouse, in New York, New York, where he obtained a CPA
license (no longer active). Mr. Ciali has a BSc. degree in Mechanical
Engineering and a Masters degree in Business Administration.
RONALD D. SLOAN. Mr. Sloan served as President, Treasurer and CEO from May
2, 1996 until his resignation as President on March 24, 2003 and as CEO on April
25, 2003. He is Chairman of the Board of Directors and Treasurer (and Chief
Financial Officer) of the company. During the past twenty five years Mr. Sloan
has been an entrepreneur as an owner and operator of several companies
including: Atlas Insurance Adjusters Ltd, partner/president from 1977 to 1978;
United Auto Parts, senior manager, parts sales and distribution, approximate
staff of 100 from 1979 to 1984; Save-On Auto Parts Ltd., shareholder, president,
secretary, parts sales and distribution, approximate staff of 40 from 1985 to
1989; Knight Auto Recyclers Ltd., owner/president, parts sales and distribution
from 1990 to 1995; Scotmar Industries Ltd., D.B.A. Truck City Inc., senior
management, parts sales and distribution from 1990-1995. Mr. Sloan spends his
full time on the company's business and assists Mr. Ciali in operations. Mr.
Sloan has no professional or technical credentials in the metals mining
industry.
JOHN BRIAN WOLFE. Since 1984, Mr. Wolfe has owned Wolfe & Associates
Appraisal Services, which appraises damages sustained by vehicles, recreation
vehicles, motorcycles and equipment for insurance companies throughout North
America. From 1980 to 1984 he appraised damages to automobiles for ICBC
(Insurance Corporation of British Colombia). Mr. Wolfe also managed McLaughlin
Motors and Brasso Lincoln, both automotive companies where he was in charge of
their full operation and payroll from 1977 to 1980. Mr. Wolfe has no direct
metal mining experience, or any professional or technical credentials in the
metals mining industry, however, he has experience in management affairs. Mr.
Wolfe, Secretary, spends approximately 8 hours per month on the company's
business.
JAMES DACYSZYN. Mr. Dacyszyn is a Canadian citizen who is semi-retired. He
owns and operates several concrete transit mix plants and gravel operations in
central Alberta, Canada. He has no precious metal mining experience, or any
professional credentials in the metals mining industry, but he does have
extensive experience in Materials Engineering and holds a bachelor's degree in
Civil Engineering. From 1954 to 1971 he managed a laboratory which tested
gravels, asphalts, paints and coordinating quality control tests on earthwork.
Mr. Dacyszyn also drilled and evaluated more than 500 gravel deposits in the
Province of Alberta and has vast knowledge in crushing rock. From 1982 to 1995
he managed several concrete mixing plants and gravel operations, also producing
aggregates as owner/operator. The companies are now being managed by his son, a
professional engineer, and Mr. Dacyszyn is retained in a consulting capacity.
Mr. Dacyszyn spends approximately 8 hours per month on the company's business.
26
DIRECTOR COMPENSATION
The directors do not now have any stock options or similar plans,
annuities, pension, retirement incentive, deferred compensation or any
arrangements whereby they have been paid or may receive compensation.
Each of our present directors who is also an employee receives no
additional compensation for acting as a director or attending meetings of
directors. In the past, the company has not compensated outside (non-employee)
directors for service but has reimbursed them for travel costs to attend Board
meetings. In the future, the Board of Directors may issue non-qualified options
to non-executive directors. The terms of such options to be granted have not yet
been established.
STOCK OPTION PLANS
THE CAN-CAL 2003 QUALIFIED INCENTIVE STOCK OPTION PLAN. The 2003 Qualified
Incentive Stock Option Plan was established by the Board of Directors in June
2003 and approved by shareholders in October 2003. A total of 1,500,000 shares
of common stock are reserved for issuance under this plan, which will be used to
compensate senior executives and mid-level employees in the future. An option on
500,000 shares has been granted to Mr. Ciali under this plan (see "Executive
Compensation").
THE CAN-CAL 2003 NON-QUALIFIED STOCK OPTION PLAN FOR SENIOR EXECUTIVES,
OUTSIDE DIRECTORS, AND CONSULTANTS. The 2003 Non-Qualified Option Plan was
established by the Board of Directors in June 2003 and approved by shareholders
in October 2003. A total of 1,500,000 shares of common stock are reserved for
issuance under this plan, of which 300,000 shares are covered by an option
granted to Anthony F. Ciali when he was appointed an officer of the company in
March 2003 (see "Executive Compensation"), and 100,000 shares are covered by an
option granted to Luis Vega when he signed a consulting agreement with the
company in April 2003 (see "Agreements with Consultants").
The total number of options issued and outstanding at any time, under both
the Qualified and Non-Qualified Stock Option Plans will not exceed 10% of the
company's issued and outstanding common stock, calculated on a pro forma basis.
CODE OF ETHICS
The company has adopted a Code of Ethics. A copy of the Code of Ethics will
be provided to any person, without charge, upon written request addressed to
Ronald D. Sloan, Chairman, 8224 Ocean Gate Way, Las Vegas, Nevada 89128
EXECUTIVE COMPENSATION
The following table shows selected information about the compensation paid
or accrued to or for the account of executive officers in 2003, 2002 and 2001
for services, and bonuses rendered in all capacities in those years. In 2002 and
2001, the company had one executive officer (Ronald D. Sloan). The company does
not have a long-term compensation plan.
27
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other All Other
and Annual Restricted LTIP Compen-
Principal Compen- Stock Options/ Payouts sation
Position Year Salary Bonus sation Award SARs(#) ($) ($)(2)
- --------------------------------------------------------------------------------------------------------------------------
Anthony F. Ciali 2003 $79,435* $ 18,000*** $ -0- -0- 800,000(1) $ -0- $ -0-
CEO and 2002 $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0-
President 2001 $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0-
Ronald D. Sloan 2003 $60,000** $ -0- $ -0- -0- -0- $ -0- $ -0-
Treasurer (CEO 2002 $60,000** $ -0- $ -0- -0- -0- $ -0- $ -0-
to April 25, 2003) 2001 $30,000** $ -0- $ -0- -0- -0- $ -0- $ -0-
<FN>
* Accrued (not paid) at the rate of $7,500 per month for March - August 2003,
and $10,000 September - December 2003. See "Employment Agreement" below.
This accrual was converted to equity in 2004. See "Certain Relationships
and Related Transactions."
** Accrued (not paid) at the rate of $5,000 per month as of July 2001. These
accruals were converted to equity in 2004. See "Certain Relationships and
Related Transactions."
*** Accrued (not paid) at not less than 15% of Mr. Ciali's annualized
compensation on the fiscal year-end monthly fee in effect. See "Employment
Agreement" below.
(1) Stock options granted pursuant to the company's 2003 Stock Option Plans.
See details of the options under "Employment Agreement" below.
(2) Does not include (a) $38,332 paid as rent for a Las Vegas apartment for Mr.
Sloan in 2001, 2002 and 2003; or $6,346 for a car allowance, automobile
operating expenses, medical insurance and life insurance paid for Mr. Ciali
during the four months ended December 31, 2003.
</FN>
In 2003, the company ceased renting a separate apartment for Mr. Sloan in
Las Vegas. From the last quarter 2003, the company pays for the costs of
maintaining one apartment in Las Vegas which serves as a company office and also
for persons transacting business with the company to stay.
OPTION GRANTS TO EXECUTIVE OFFICERS IN 2003
PERCENT
NUMBER OF OF ALL OPTIONS
SHARES UNDER- GRANTED TO
LYING OPTIONS EMPLOYEES EXERCISE EXPIRATION GRANT DATE
NAME GRANTED IN 2002 PRICE DATE PRES. VALUE (1)
Anthony F. Ciali 300,000 37.5% $0.14 March 23, 2006 $ 40,271
Anthony F. Ciali 500,000 62.5% $0.16 Oct. 14, 2013 $ 79,896
<FN>
(1) The Black-Scholes option-pricing model was used to determine the grant date
present value of the stock options that were granted to the named officer. The
following facts and assumptions were used in making this calculation: Exercise
prices of $0.14 and $0.16 which were equal to the market value of the stock on
the grant
</FN>
28
dates (the average of the closing price for five days before the grant date for
the first option (on 300,000 shares), March 24, 2003, and closing market price
on the grant date for the second option, October 15, 2003); a zero dividend
yield; expected volatility of 277.87%, risk-free interest rate of 3.0%, and an
expected life of three and 10 years for each option.
AGGREGATED OPTION/SAR EXERCISES IN 2003 AND OPTION/SAR VALUES AT 12/31/03
The following table shows options exercised during 2003, options
exercisable at December 31, 2003, and the dollar values for in-the-money options
at December 31, 2003 (closing market price on that date was $0.25).
(a) (b) (c) (d) (f)
Number
Value of
of Shares Unexercised
Underlying In-the-Money
Options/SARS Options/SARs
Shares at 12/31/03 at 12/31/03
Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable/ Unexercisable
- ---- --------------- ------------ -------------- -------------
Anthony F. Ciali -0- -0- 800,000/-0- $78,000 (1)
CEO
<FN>
(1) Equal to $0.25, the closing market price on December 31, 2003, less the
$0.14 exercise price, multiplied by 300,000 shares, and less the $0.16 exercise
price, multiplied by 500,000 shares.
</FN>
EMPLOYMENT AGREEMENT
On March 24, 2003 the company signed a Management Consulting Agreement with
Anthony F. Ciali, to employ Mr. Ciali as President for a fee of $7,500 per
month. The company issued an option to Mr. Ciali to purchase 300,000 shares at
$0.14 per share (the average closing price for the five trading days preceding
March 24, 2003); this option expires on March 23, 2006, and was fully vested
upon grant. This is a non-qualified option. Mr. Ciali was appointed Chief
Executive Officer and a director of the company on April 25, 2003.
The original agreement contemplated re-negotiation in good faith between
Mr. Ciali and the company, of certain terms after June 24, 2003. As result of
re-negotiations after June 24, 203, on July 25, 2003, the agreement was amended
to provide for: Monthly cash compensation of $10,000 from September 1, 2003
through December 31, 2003, and $12,500 starting January 1, 2004, with annual
increases thereafter at the discretion of the board of directors (but not less
than the annual rate of inflation); a cash bonus payable by January 30 of each
year, with the amount determined at the discretion of the board of directors,
but not less than 15% of the annualized compensation based on the fiscal
year-end monthly fee in effect; medical and term life insurance, and a car lease
allowance; the company establishing and paying for a branch office in
Lawrenceville, New Jersey (the city of Mr. Ciali's residence); and the grant to
Mr. Ciali of an option to purchase 500,000 shares (in addition to the prior
option on 300,000 shares). The option was granted on October 15, 2003, is
exercisable at $0.16 per share (market price on grant date), expires on October
15, 2013, and was fully vested upon grant. This is a qualified option.
If the agreement (as amended) is terminated by the company other than for
cause, or if Mr. Ciali terminates the agreement because he is paid less than the
rate of cash compensation then in effect, or if there is a change in control of
25% or more of the combined voting power of the company, then Mr. Ciali will be
entitled to 24 months severance pay at the monthly rate then in effect, payable
monthly; payment of 24 months of continued medical and term life insurance, and
the car lease allowance; and payment of annual bonuses for
29
24 months at the same amount paid prior to termination. If the agreement (as
amended) is terminated by the company other than for cause, all of Mr. Ciali's
stock options will remain exercisable for the balance of their terms.
The agreement does not have a specific term, and will end only if either
the company or Mr. Ciali terminate the agreement.
The company does not have a written employment agreement with Ronald D.
Sloan, Treasurer.
AGREEMENTS WITH CONSULTANTS
- LUIS A. VEGA. On April 21, 2003 the company signed a Management
Consulting Agreement with Luis A. Vega; the agreement does not have a specific
term, and will continue until termination by either party on 30 days written
notice.
Mr. Vega has been retained as Senior Consulting Geologist to the company.
He has 30 years of international gold exploration experience with senior mining
companies, including Utah International, Duval Corporation, and (most recently)
Battle Mountain Gold, where he was Vice President - Manager, Latin American
Exploration. His exploration experience has encompassed projects in the Western
United States, Mexico, and Central and South America, including Bolivia (the
Korri Kollo gold mine), Chile, Argentina, and the Dominican Republic, as well as
project submittal evaluations for properties in Peru, Ecuador, Brazil, Uruguay
and Venezuela. Mr. Vega holds a Bachelor of Science in Geology and a Masters of
Science in Economic Geology.
Under the agreement with the company, Mr. Vega is paid $500 per day of
service (based on invoices showing service and time provided), payable in
restricted shares of common stock of the company, calculated by dividing the
amount owed by the average closing price of the company's stock for each day's
service. He also is reimbursed travel and entertainment expenses (plus
accountable out-of-pocket expenses). Through December 31, 2003, the company has
issued 205,166 restricted shares of stock to Mr. Vega to pay $31,500 of
consulting services.
As additional compensation, the company has issued to Mr. Vega a
non-qualified stock option to purchase 100,000 shares of common stock at $0.22
per share (the average closing price for the five trading days before April 21,
2003). This option will fully vest on April 21, 2004 (is not exercisable before
that date) if the consulting agreement then still is in effect; this option
expires April 21, 2006 unless sooner forfeited on termination of the consulting
agreement.
The consulting agreement provides for Mr. Vega to receive a finder's fee if
the company acquires a mineral property presented to the company for
consideration. The fee will be a 1% net smelter return ("NSR") royalty on any
future sales of mineral products from the acquired property. The NSR royalty
will be calculated as 1% multiplied by the reported sales from the property,
less shipping and refining costs.
- TERRY BROWN. On April 19, 2004 the company signed a consulting agreement
with Terry Brown; the agreement does not have a specific term, and will continue
until termination by either party on 60 days written notice.
Mr. Brown has been retained as a Consulting Geologist to the company. Mr.
Brown has over 20 years of international gold mining, exploration and
development experience with international mining companies, including Glamis
Gold, Eldorado gold, Alamos Minerals, and Niugini Mining. In addition to his
exploration background in the Western United States and Latin America, he has
been involved with the start up of six mines, both in the United States and
Latin America, principally in the capacity of Project/Construction
30
manager. Mr. Brown has resided in Mexico for more than the past ten years and is
well acquainted with the deposits and potential of Mexico's Sierra Madre
Occidental Gold-Silver Belt, which is the company's regional focus in Mexico.
Mr. Brown holds a Bachelor of Science degree in geology.
Under the consulting agreement, Mr. Brown will provide services to the
company for up to 20 days per month, for $250 per day, initially payable $160 in
cash and $90 in restricted shares of common stock (at the closing stock price
averaged over the days of service). At such time as the company has raised $1
million of financing after April 19, 2004 (or in any event after December 31,
2004), the $250 day rate will be paid in cash only. He also will be reimbursed
for travel and entertainment expenses and accountable out-of-pocket expenses. In
May 2004, 1,170 shares were issued to Mr. Brown for $269 of services.
The consulting agreement provides for Mr. Brown to receive a finder's fee
if the company acquires a mineral property formally presented to the company by
Mr. Brown for acquisition consideration, based on a list of properties in Mexico
he identified to the company when the consulting agreement was signed. The fee
will be a 1% net smelter return ("NSR") royalty on any future sales of mineral
products from a property on the list, if the company acquires the property. The
NSR royalty will be calculated as 1% multiplied by the reported sales from the
property, less shipping and refining costs. Mr. Brown will not be entitled to a
finder's fee as to properties on the list if then already known to the company,
or brought to his attention by the company or a third party even if on the list,
or other properties on the list but which Mr. Brown has not formally presented
to the company for acquisition consideration.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information about beneficial
ownership of our common stock as of May 25, 2004 by each officer and director,
by any person or group who is known by us to own more than 5% of our common
stock, and by the officers and directors as a group. The ownership information
for officers and directors is based on the Forms 3 and 4 they have filed with
the Securities and Exchange Commission pursuant to section 16(a) of the
Securities Exchange Act of 1934. Based on the Forms 3 and 4, the beneficial
owners have sole voting and dispositive power with respect to their shares
except as otherwise noted.
The number of shares shown as owned by the individual includes shares
issuable on exercise of any options and warrants he holds. The percentage for
each person has been determined by dividing (x) the shares owned by the
individual plus the shares the person has the right to acquire on exercise of
options and warrants by (y) the 16,064,751 shares outstanding at May 25, 2004,
plus for each person with options and warrants, the number of shares the person
has the right to acquire on exercise thereof. The shares shown as owned by
officers and directors as a group includes shares issuable on exercise of the
options and warrants, and the percentage of shares shown as owned by that group
has been determined as if all of those options and warrants had been exercised.
31
NAME AND ADDRESS AMOUNT AND NATURE
TITLE OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNER PERCENT OF CLASS
Common stock Ronald D. Sloan* 1,954,711(1) 11.7%
4312-212 Street
Langley, B.C., Canada
Common Stock John Brian Wolfe* 893,211(2) 5.6%
3157 Silver Throne Drive
Coquitlam, B.C., Canada
Common Stock James Dacyszyn* 862,316 (3) 5.4%
#64, 9703-41 Avenue
Edmonton, A.B., Canada
Common Stock Anthony F. Ciali* 1,435,480 (4) 8.4%
28 Lawrencia Drive
Lawrenceville, NJ 08648
Common Stock All Officers and Directors 5,145,718 (5) 28.8%
as a group
<FN>
* Director
(1) Includes 584,640 shares underlying warrants.
(2) Includes 53,890 shares underlying warrants.
(3) 666,816 shares (including 98,408 shares covered by warrants) are owned
directly by Mr. Dacyszyn and 195,500 shares are owned by a family company.
Mr. Dacyszyn exercises investment and dispositive powers over 60,000
shares (31%) of those owned by the family company. The balance of shares
in the family company are controlled by an adult son, who manages the
family company and has a 25% pecuniary interest in these shares.
(4) Includes 800,000 shares covered by options and 317,740 shares underlying
warrants.
(5) Assumes exercise of 1,054,678 warrants held by officers and directors (but
not warrants on 178,449 shares held by a former director and his insurance
agency), and the options on 800,000 shares held by Mr. Ciali.
</FN>
Equity Plan Compensation Information - Information about Compensation Plans as
of December 31, 2003:
32
Plan category Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options outstanding future issuance under
options equity compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
- ---------------------------------------------------------------------------------------------------
Equity
compensation
plans approved by
security holders
(shares reserved)
2003 Qualified
ISOP 500,000 $0.16 1,000,000
(1,500,000 shares)
2003
Non-Qualified 300,000 $0.14 1,100,000
ISOP 100,000 $0.22
(1,500,000 shares)
- ----------------------------------------------------------------------------------------------------
Equity
compensation -- -- --
plans not approved
by security holders
None
- ----------------------------------------------------------------------------------------------------
Total 900,000 $0.__ 2,100,000
- ----------------------------------------------------------------------------------------------------
Total shares underlying unexercised options (both plans) cannot exceed 10%
of the company's total issued and outstanding shares of common stock, calculated
on a pro forma basis.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONVERSION OF SALARIES OWED TO OFFICERS AND LOANS OWED TO DIRECTORS
In 2002 and 2003, the company borrowed money from directors. Salaries for
the two officers in 2001, 2002 and 2003 were accrued but not paid. In 2003,
premiums on a company insurance policy were paid for the company by an insurance
agency owned by a director who resigned in 2003.
On March 1, 2004, the company paid these loans (all unsecured, 7.5% annual
interest, principal and accrued interest through February 29, 2004), the
salaries accrued through December 31, 2003, and the advances for insurance
premiums, by issuing restricted stock (at $0.25 per share, equal to the closing
market price on March 1, 2004), and warrants to purchase common stock (for two
years, at an exercise price of $0.30 per share), at the rate of one warrant to
purchase one share, for each one share issued to pay the obligations. The
issuance of shares and warrants was approved by the board of directors; the
issuance for each director was
33
approved by the other directors. The amounts of obligations so paid, and number
of shares and warrants, is shown below. Each of these persons is a selling
shareholder under this prospectus. See "Selling Shareholders."
Loans Salary Total Shares Warrants
----- ------ ----- ------ --------
Directors and officers
Ronald D. Sloan $ 146,160 $ 146,160 584,640 584,640
Anthony F. Ciali 79,435 79,435 317,740 317,740
John Brian Wolfe $ 13,472 13,742 53,890 53,890
James Dacyszyn 24,602 24,602 98,408 98,408
Others
Barry Amies* 6,578 6,578 26,312 26,312
Landing Insurance Agency*:
Loan 18,881 18,881 75,523 75,523
Loan 19,154 76,614 76,614 76,614
--------- ---------- ---------- --------- ---------
$ 82,687 $ 225,595 $ 308,282 1,233,127 1,233,127
========= ========== ========== ========= =========
* Mr. Amies was a director but resigned in 2003. Landing Insurance Agency is
Mr. Amies' insurance agency which advanced the insurance premiums on behalf
of the company.
LOANS OWED TO OFFICER AND A SHAREHOLDER
At December 31, 2003, the company owed Ronald D. Sloan, an officer and
director, $56,691 for principal and accrued interest (at 7.5% per year) on
various loans made by him to the company from 2001 through 2003. The amount of
Mr. Sloan's obligation is net of $13,100 of loans repaid to him by the company
in 2003.
The company owes Robin Schwarz, an unaffiliated shareholder, $16,278 at
December 31, 2003 consisting of unsecured loans in various amounts made in 2001
and 2002, at various dates, and interest ranging from 13.24% to 27.99%, due on
demand.
SELLING SHAREHOLDERS
This prospectus covers the resale of up 4,374,929 restricted shares of
common stock (2,495,602 outstanding shares, plus 1,879,327 shares issuable on
exercise of outstanding warrants, by the 60 persons shown in the table,
including four officers and/or directors of the company (and a former director
and his insurance agency), and by Dutchess Private Equities Fund, L.P.
("Dutchess Fund").
Of the shares covered by this prospectus (a) 696,275 shares were purchased
for $124,464 by 27 persons (26 residents of Canada and one United States
resident) on exercise of warrants, from January 1 through April 30, 2004
(369,775 shares at $0.16 each under one set of warrants, and 326,500 shares at
$0.20 under a second set of warrants); (b) 1,233,127 shares were issued as of
March 1, 2004 to officers and directors (and a former director and his insurance
agency), to pay loans and salaries (and to reimburse insurance premiums), see
"Certain Relationships and Related Transactions"; (c) 1,233,127 shares are
issuable on exercise of warrants (at $0.30 per share, expiring March 1, 2006)
held by officers and directors, and a former director and his insurance agency
(issued in connection with the settlement of loans, salaries and reimbursement
of insurance
34
premiums); (d) 598,200 shares, and an additional 598,200 shares issuable on
exercise of warrants (60,000 shares at $0.20 per share; 538,200 shares at $0.25
per share), expiring at various times from February 23,2006 to May 20, 2006);
and (e) 50,000 shares are issuable on exercise of a warrant held by Dutchess
Fund, at $0.22 per share, expiring June 12, 2005 (see "Financing Transactions
Related to Dutchess Fund"). The shares and warrants described in (d) were
purchased by 24 residents of Canada, and four United States residents; two of
the Canadian investors had previously exercised warrants as described in the
transaction described in (a).
The selling shareholders may sell the shares from time to time in
negotiated transactions, brokers' transactions or a combination of such methods
of sale at prevailing market prices, or at negotiated prices. See "Plan of
Distribution."
The selling shareholders may offer shares for sale on a continuous basis
pursuant to rule 415 under the 1933 Act.
Information in the table has been provided to us by the selling
shareholders. All numbers of shares owned, and percentage ownership, are stated
on a pro forma basis to include, for each person as applicable, the number of
shares owned and shares issuable (a) to Dutchess Fund, 496,873 shares underlying
the $74,531 balance on the convertible debenture (principal and interest) at
April 30, 2004, assuming a conversion price of $0.15 per share, and 50,000
shares underlying the warrant held by Dutchess; (b) to Anthony F. Ciali, 800,000
shares issuable on exercise of options and 317,740 shares underlying warrants,
held by him; (c) to the officers and directors (Ronald Sloan, John Brian Wolfe
and James Dacyszyn), the shares underlying warrants held by each; (d) to Barry
Amies, 26,312 shares, and Landing Insurance, 152,127 shares, underlying warrants
held by each; and (e) to the other selling shareholders, the shares underlying
any warrants each may own. No other warrants held by non-selling shareholders or
options held by consultants are assumed to be exercised for purposes of the pro
forma calculations.
Number of Number of Shares
Shares of of Common Stock Percent Owned
Name and Address Common Stock Registered Prior to After
of Beneficial Owner Owned(1) For Sale Offering Offering*
- ---------------------------------------------------------------------------------------------------
Dutchess Private 546,873 546,873 3.3 **
Equities Fund Ltd.
100 Mill Plain Road, 3rd Floor
Danbury, CT 06811
Ronald D. Sloan 1,954,711 1,169,280 11.7 4.7
4312-212 Street
Langley, BC, Canada
John Brian Wolfe 893,211 107,780 5.6 4.9
3157 Silver Throne Drive
Coquitlam, BC, Canada
James Dacyszyn 862,316 196,816 5.4 4.1
#64, 9703-41 Avenue
Edmonton, AB, Canada
Anthony F. Ciali 1,435,480 635,480 8.4 4.7
28 Lawrencia Drive
Lawrenceville, NJ 08648
35
Number of Number of Shares
Shares of of Common Stock Percent Owned
Name and Address Common Stock Registered Prior to After
of Beneficial Owner Owned(1) For Sale Offering Offering*
- ---------------------------------------------------------------------------------------------------
Barry Amies 206,159(2) 56,624 ** **
14198 Tamarck Drive
Vernon, BC, Canada
Landing Insurance Agency 304,274 304,274 1.9 **
No. 119-5301 Okanagan Landing Road
Vernon, BC, Canada
Lindsay Young 279,685 239,775 1.7 **
411 A 7 Street N.W.
Calgary, AB, Canada T2N1S5
Stuart Cameron 72,500 25,000 ** **
16286-29 Avenue
Surrey, BC, Canada V3S9X4
Larry Orwick 9,000 5,000 ** **
35112-Panorama Drive
Abbotsford, BC, Canada V3G2E4
Neil Waite 9,000 5,000 ** **
2286 Bedford Place
Abbotsford, BC, Canada V2T4A5
Perry Bratseth 25,648 7,500 ** **
127-9080-198 Street
Langley, BC, Canada V1M3A8
Robert S. Sustarsic 27,000 15,000 ** **
15-1209 Alpha Lake Road
Whistler, BC, Canada V0N1B1
Elodie Guillet 22,500 12,500 ** **
10648 Brackenridge Road SW
Calgary, AB, Canada T2W1A3
Brent Davies 32,000 10,000 ** **
15210 12 Mile Road/ RR3
Ilderton, ON, Canada N0M2A0
Michael M. Sean Dawson 18,000 10,000 ** **
Box 28073 R.P.O. East Kelowna
Kelowna, BC, Canada V1W4A6
Barry & Lidwien Billington 60,667 30,000 ** **
418 Scenic Drive
Vernon, BC, Canada V1B2W9
Alan J. Richardson 17,917 6,250 ** **
# 104-3310 32nd Avenue
Vernon, BC, Canada V1T2M6
36
Number of Number of Shares
Shares of of Common Stock Percent Owned
Name and Address Common Stock Registered Prior to After
of Beneficial Owner Owned(1) For Sale Offering Offering*
- ---------------------------------------------------------------------------------------------------
Dennis Bigham 22,500 12,500 ** **
#202-2323 Hunter Road
Kelowna, BC, Canada V1X7C5
David and Norah Cotton 19,800 11,000 ** **
1171 Finlay Street
White Rock, BC, Canada V4B4K9
Ken MacKinnon 9,000 5,000 ** **
2101 Fell Avenue North
Vancouver, BC, Canada V7P2K8
G. Michael Hogan Assante 387,959 250,000 2.4% 1.6%
Capital Management Ltd.
Suite 1010 4950 Young St.
Toronto, ON, Canada M2N6K1
Michael A. Hogan Assante 17,500 12,500 ** **
Capital Management Ltd.
Suite 1010 4950 Young St.
Toronto, ON, Canada M2N6K1
Paul Cansdale 56,250 31,250 ** **
53 Saskatoon Drive
Etobicoke, ON, M9P2G1 Canada
Joseph Douglas Benning 69,750 38,750 ** **
#403-955 Dingley
Dell Victoria, BC, V9A 5R6 Canada
Alex Davie 3,600 2,000 ** **
14887-Hardie Avenue
White Rock, BC, V4B 2H6 Canada
Richard A. Donner 52,500 37,500 ** **
12340 Flintlock Lane
Ft. Myers FL 33912
Robert Wray Taylor 2,250 1,250 ** **
# 412-9688-14854
Surrey, BC, V3R 0W2
Paul Ross Sine 9,000 5,000 ** **
19611-47th Avenue
Langley, BC, V3A 5G8 Canada
Janice Renker 18,000 10,000 ** **
167A Street
Surrey, BC, V4N 5E7 Canada
37
Number of Number of Shares
Shares of of Common Stock Percent Owned
Name and Address Common Stock Registered Prior to After
of Beneficial Owner Owned(1) For Sale Offering Offering*
- ---------------------------------------------------------------------------------------------------
Crystal Pugsley 227,000 165,000 1.4 **
3227 Westminster Road
Regina, SK, S4V 0S1 Canada
Joe Radovich 3,650 1,000 ** **
6737 137 A Street
Surrey, BC, V3W 5E8 Canada
Alan C. Fisher 9,.000 5,000 ** **
14472-89A Avenue
Surrey, BC, Canada V3R6M5
Lindsay Young 45,000 25,000 ** **
102 Glamorgan Drive SW
Calgary, AB, Canada T3E4S4
David Jesske 17,500 9,500 ** **
Unit 2 45712 Watson Road
Chilliwack, BC, Canada V2R5L5
Garry Monk 20,000 20,000 ** **
12301 Coldstream Creek Road
Vernon, BC V1B 1E9 Canada
Hugo Bondi 64,000 64,000 ** **
2615 Trinty Street
Vancouver, BC V5K 1E5 Canada
Derek Milani 110,000 110,000 ** **
1285 Bennech Way
Port Coquitlam, BC V3C 5Y8 Canada
John Paul Minelli 40,000 40,000 ** **
308 Dartmoor Drive
Coquitlam, BC V3K 5R3 Canada
Deborah Mae Hansen 5,000 5,000 ** **
130-33173 Old Yale Road
Abbotsford, BC V2S 2J4 Canada
Robert Mummery 20,000 20,000 ** **
82-1973 Winfield Drive
Abbotsford, BC V3G 1K6 Canada
Loretta Froh 75,000 75,000 ** **
7710 Discovery Road
Regina, SK, S4Y 1E7 Canada
Royce Martin Nordstrom 10,000 10,000 ** **
104 Lakeview Cove, Chestermere
Alberta T1X 1E7 Canada
38
Number of Number of Shares
Shares of of Common Stock Percent Owned
Name and Address Common Stock Registered Prior to After
of Beneficial Owner Owned(1) For Sale Offering Offering*
- ---------------------------------------------------------------------------------------------------
Myles Marusiak 100,000 100,000 ** **
2726 Poplar Place East
Regina, SK S4V 1X8 Canada
Tracy-Lynn Pugsley 7,200 7,200 ** **
3227 Westminster Road
Regina, SK S4V 0S1 Canada
Kathie-Lee Pugsley 7,200 7,200 ** **
3227 Westminster Road
Regina, SK S4V 0S1 Canada
Danelle Hendren 15,000 15,000 ** **
2826 Mackay Street
Regina, SK S4N 2V1 Canada
Lucille Meaney 15,000 15,000 ** **
2404 Gordon Road
Regina, SK S4S 4M3 Canada
Brian Meaney 25,000 25,000 ** **
2404 Gordon Road
Regina, SK S4S 4M3 Canada
Linda Sweinhagen 20,000 20,000 ** **
4614 E.Vernon
Phoenix, AZ 85008
Lorne J. Stoppler 100,000 100,000 ** **
9146 E. Rusty Spur Place
Scottsdale, AZ 85255
Deborah Stoppler 30,000 30,000 ** **
9146 E. Rusty Spur Place
Scottsdale, AZ 85255
Arliss Overbye 2,000 2,000 ** **
Box 143
Lake Alma SK S0C 1M0 Canada
Aaron Overbye 2,000 2,000 ** **
Box 143
Lake Alma, SK S0C 1M0 Canada
Clifford Olson 100,000 100,000 ** **
46433 Ranchero Drive
Chilliwack, BC V4Z 1K3 Canada
Bradley Olson 5,000 5,000 ** **
46433 Ranchero Drive
Chilliwack, BC V4Z 1K3 Canada
39
Number of Number of Shares
Shares of of Common Stock Percent Owned
Name and Address Common Stock Registered Prior to After
of Beneficial Owner Owned(1) For Sale Offering Offering*
- ---------------------------------------------------------------------------------------------------
Meg Sherring 5,000 5,000 ** **
46433 Ranchero Drive
Chilliwack, BC V4Z 1K3 Canada
Phyllis Olson 100,000 100,000 ** **
46433 Ranchero Drive
Chilliwack, BC V4Z 1K3 Canada
Robert Webster 4,000 4,000 ** **
5656 Vedder Road
Chilliwack, BC V2R 3M7, Canada
Celest Herauf 40,000 40,000 ** **
60 Valley Ridge Green N.W.
Calgary, AB Canada T3B 5L7
Don Matheson 10,000 10,000 ** **
6408-20 Street S.E.
Calgary, AB Canada T2C 0P2
<FN>
* Assumes all shares offered by the selling shareholder are sold.
** Less than 1%.
(1) Includes shares underlying warrants and options.
(2) Does not include shares or warrants held by Landing Insurance Agency.
</FN>
Resale of the shares owned or to be owned by the selling shareholders is
registered under rule 415 of the Securities and Exchange Commission, concerning
delayed and continuous offers and sales of securities. In regard to the offer
and sale of such shares, we have made certain undertakings in Part II of the
registration statement of which this prospectus is part, by which, in general,
we have committed to keep this prospectus current during any period in which the
selling shareholders make offers to sell the covered securities pursuant to rule
415.
PLAN OF DISTRIBUTION
The selling shareholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling shareholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers; o block trades in which the
broker-dealer will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the
transaction; o purchases by a broker-dealer as principal and resale by
the broker-dealer for its account; o an exchange distribution in
accordance with the rules of the applicable exchange; o privately
negotiated transactions; o settlement of short sales entered into after
the date of this prospectus (a short sale occurs when shares, not owned
by the seller, are sold in hopes of a decline in market price so the
seller can purchase in the market at a lower price to be able to
deliver the shares sold);
40
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise;
o a combination of any such methods of sale; or o any other method
permitted pursuant to applicable law.
The selling shareholders may also sell shares under rule 144 under the 1933
Act, if available, rather than under this prospectus. Broker-dealers engaged by
the selling shareholders may arrange for other brokers-dealers to participate in
sales. Broker-dealers may receive commissions or discounts from the selling
shareholders (or, if any broker-dealer acts as agent for the purchaser of
shares, from the purchaser) in amounts to be negotiated. The selling
shareholders do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved. Broker-dealers may agree to
sell a specified number of such shares at a stipulated price per share, and, to
the extent such broker-dealer is unable to do so, acting as agent for a selling
shareholder, to purchase as principal any unsold shares at the price required to
fulfill the broker-dealer commitment. Broker-dealers who acquire shares as
principal may thereafter resell such shares from time to time in transactions,
which may involve block transactions and sales to and through other
broker-dealers, including transactions of the nature described above, in the
over-the-counter markets or otherwise at prices and on terms then prevailing at
the time of sale, at prices than related to the then-current market price, or in
negotiated transactions. In connection with such resales, broker-dealers may pay
to or receive from the purchasers such share commissions as described above.
In connection with the sale of our common stock or interests therein, the
selling shareholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
shareholders may also sell shares short and deliver the shares to close out
their short positions, or loan or pledge the common stock to broker-dealers that
in turn may sell these securities. The selling shareholders may also enter into
option or other transactions with broker-dealers or other financial
institutions, or create one or more derivative securities which require the
delivery to such broker-dealer or other financial institution of shares offered
by this prospectus, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).
The selling shareholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus.
The selling shareholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the 1933 Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the 1933 Act. The selling shareholders have informed the company
that none of them have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
The company has agreed to pay all fees and expenses incurred by the company
incident to the registration of the shares. The company has agreed to indemnify
one of the selling shareholders (Dutchess Fund) against certain losses, claims,
damages and liabilities, including liabilities under the 1933 Act.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in such jurisdictions, if required, only
through registered or licensed brokers or dealers. In addition, in certain
states the shares may not be sold unless the shares have been registered or
qualified for sale in such state or an exemption from registration or
qualification is available.
41
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue 100,000,000 shares of common stock ($.001 par
value).
Holders of common stock are entitled to one vote per share on each matter
submitted to a vote at any meeting of shareholders. Cumulative voting is not
permitted in elections of directors or otherwise. The presence in person or by
proxy of the holders of a majority of the outstanding common stock is required
to constitute a quorum at any shareholders meeting. If a quorum is present,
proposals are passed if approved by the holders of a majority of the votes
present, except for substantive corporate matters (such as a merger, sale of
assets or amendment to articles of incorporation, which matters must be approved
by the holders of a majority of outstanding shares under Nevada law). In
addition, if there is preferred stock outstanding, the holders of the preferred
stock would be entitled to vote as a separate class on such substantive
corporate transactions.
A minimum of 10 days notice is required to be given for any shareholders
meeting.
Our board of directors has authority, without action by the shareholders,
to issue all or any portion of the authorized but unissued shares of common
stock, which would reduce the percentage ownership of its present shareholders
and which may dilute the book value of the common stock.
Shareholders have no pre-emptive rights to acquire additional shares of
common stock. The common stock is not subject to redemption and carries no
subscription or conversion rights. In the event of liquidation, the shares of
common stock are entitled to share equally in corporate assets after
satisfaction of all liabilities.
Holders of common stock are entitled to receive such dividends as the board
of directors may from time to time declare out of funds legally available for
the payment of dividends. We have not paid dividends and do not intend to pay
dividends in the foreseeable future.
PREFERRED STOCK
We are authorized to issue 10,000,000 shares of preferred stock ($.001 par
value). The board of directors has authority, without action by the
shareholders, to issue preferred stock in one or more series and to determine
the voting rights, preferences as to dividends and liquidation, conversion
rights, and other rights of such series. Preferred stock may carry rights
superior to those of the common stock. No series of preferred stock has been
authorized, and no shares of preferred stock have been issued.
Reference is made to our certificate of incorporation and by-laws which are
available for inspection at our offices or which can be viewed through the EDGAR
data base at http://www.sec.gov as exhibits to the registration statement on
Form SB-2. Reference is also made to applicable statutes of the state of Nevada
for laws concerning rights of shareholders.
WARRANTS
As of May 25, 2004, warrants (all presently exercisable) to purchase a
total of 3,385,647 shares are outstanding (including the warrants held by the
selling shareholders under this prospectus): Warrants on 2,904,907 shares are
held by 99 Canadian investors; warrants on 432,740 shares are held by 11 United
States investors; and warrants on 48,000 shares are held by a Great Britain
investor. The warrants expire at various times from June 10, 2004 to May 20,
2006, and are exercisable at various prices from $0.20 to $0.25 per share.
42
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our bylaws provide that we shall indemnify directors provided that the
indemnification shall not eliminate or limit the liability of a director for
breach of the director's duty or loyalty to the corporation or its stockholders,
or for acts of omission not in good faith or which involve intentional
misconduct or a knowing violation of law.
Nevada law permits a corporation, under specified circumstances, to
indemnify its directors, officers, employees or agents against expenses
(including attorney's fees), judgments, fines and amounts paid in settlements
actually and reasonably incurred by them in connection with any action, suit or
proceeding brought by third parties by reason of the fact that they were or are
directors, officers, employees or agents of the corporation, if these directors,
officers, employees or agents acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceedings, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agent in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnify for such expenses despite
such adjudication of liability.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
company pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the 1933 Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the company of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, the company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Securities Act, and will be
governed by the final adjudication of such issue.
LEGAL PROCEEDINGS
The company is not a party to current litigation and no notice of possible
claims against the company has been received. LEGAL MATTERS
The legality of the issuance of the shares offered hereby will be passed
upon for us by The Law Office of Stephen E. Rounds, Denver, Colorado.
EXPERTS
Our financial statements as of December 31, 2003, and for the two years
then ended, have been audited by L.L. Bradford & Company, LLC, Las Vegas,
Nevada, independent certified public accountants, as stated in their report on
those financial statements, which financial statements and the report thereon
have been included in this prospectus in reliance upon the authority of such
firm as experts in accounting and auditing.
43
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Can-Cal Resources Ltd.
Las Vegas, Nevada
We have audited the accompanying balance sheet of Can-Cal Resources Ltd. as of
December 31, 2003, and the related statements of operations, stockholders'
deficit, and cash flows for the years ended December 31, 2003 and 2002. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Can-Cal Resources Ltd. as of
December 31, 2003, and the results of its activities and cash flows for the
years ended December 31, 2003 and 2002 in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered losses from operations and
current liabilities exceed current assets, all of which raise substantial doubt
about its ability to continue as a going concern. Management's plans in regards
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
L.L. Bradford & Company, LLC
March 4, 2004
Las Vegas, Nevada
44
CAN-CAL RSOURECES LTD.
BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Current assets
Cash $ 17,400
Accounts receivable 2,700
-----------
Total current assets 20,100
Fixed assets, net 20,800
Other assets, net 5,500
-----------
Total assets $ 46,400
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued liabilities $ 440,900
Due to stockholder 16,300
Notes payable-related parties - current portion 223,900
-----------
Total current liabilities 681,100
Long-term liabilities
Note payable-related party - long-term portion 300,000
Convertible note payable-related party 85,000
-----------
Total liabilities 1,066,100
Commitments and contingencies --
Stockholders' deficit
Preferred stock; $0.001 par value; 10,000,000 shares
authorized, no shares issued an outstanding --
Common stock; $0.001 par value; 100,000,000 shares
authorized, 13,252,962 shares issued and outstanding 13,300
Additional paid-in capital 4,366,300
Unamortized loan fees from stock issued and warrants
granted in relation to convertible note
payable-related party (7,000)
Accumulated deficit (5,392,300)
-----------
Total stockholders' deficit (1,019,700)
-----------
Total liabilities and stockholders' deficit $ 46,400
===========
See Accompanying Notes to Financial Statements
45
CAN-CAL RESOURCES LTD.
STATEMETNS OF OPERATIONS
For the year ended December 31,
-------------------------------
2003 2002
------------- -------------
Material sales $ 20,000 $ 300
Cost of sales 9,100 200
------------ ------------
Gross profit 10,900 100
General and administrative expenses 586,300 578,400
Loss from operations (575,400) (578,300)
Other income (expense)
Rental revenue 26,500 22,500
Interest income -- 4,200
Interest expense (162,200) (157,200)
------------ ------------
Loss on sale of fixed asset -- (500)
Loss before provision for income taxes (711,100) (709,300)
Provision for income taxes -- --
------------ ------------
Net loss $ (711,100) $ (709,300)
============ ============
Basic and diluted loss per common share $ (0.06) $ (0.06)
============ ============
Basic and diluted weighted average
common shares outstanding 12,203,600 11,031,600
============ ============
See Accompanying Notes to Financial Statements
46
CAN-CAL RESOURCES LTD.
STATEMENT OF STOCKHOLDERS' DEFICIT
Common Stock
----------------------- Additional
Number of Paid-in
Shares Amount Capital
---------- ------ ------------
Balance, December 31, 2001 10,158,738 $10,200 $ 3,490,100
Common shares issued for cash 1,025,320 1,000 259,900
Common shares issued for principal payment 309,677 300 119,500
including interest of $71,800
Common shares issued for services 92,292 100 23,800
Warrants granted for services -- -- 7,100
Common shares issued for loan fees related 30,000 -- 13,500
to convertible note payable-related party
Warrants granted for loan fees related to -- -- 16,700
convertible note payable-related party
Current period amortization of loan fees -- -- --
Deemed interest expense related to conversion -- -- 20,500
feature of note payable-related party
Net loss -- -- --
---------- -------- -----------
Balance, December 31, 2002 11,683,987 11,700 3,961,100
Common shares issued for cash 823,410 800 163,900
Common shares issued for services 381,260 400 63,800
Common shares issued for conversion of 364,305 400 77,900
convertible note payable, including
interest of $43,300
Current period amortization of loan fees -- -- --
Options granted for services -- -- 55,400
Warrants granted for services -- -- 5,900
Deemed interest expense related to -- -- 38,300
conversion feature of note payable
Net loss -- -- --
---------- -------- -----------
Balance, December 31, 2003 13,252,962 $ 13,300 $ 4,366,300
========== ======== ===========
47a
Unamortized
loan fees
related to
convertible Total
note payable- Accumulated Stockholders'
related party Deficit Equity
-------------- -------------- -------------
Balance, December 31, 2001 $ -- $ (3,971,900) $ (471,600)
Common shares issued for cash -- -- 260,900
Common shares issued for principal payment -- -- 119,800
including interest of $71,800
Common shares issued for services -- -- 23,900
Warrants granted for services -- -- 7,100
Common shares issued for loan fees related (13,500) -- --
to convertible note payable-related party
Warrants granted for loan fees related to (16,700) -- --
convertible note payable-related party
Current period amortization of loan fees 8,200 -- 8,200
Deemed interest expense related to conversion -- -- 20,500
feature of note payable-related party
Net loss -- (709,300) (709,300)
----------- ------------- ------------
Balance, December 31, 2002 (22,000) (4,681,200) (730,400)
Common shares issued for cash -- -- 164,700
Common shares issued for services -- -- 64,200
Common shares issued for conversion of -- -- 78,300
convertible note payable, including
interest of $43,300
Current period amortization of loan fees 15,000 -- 15,000
Options granted for services -- -- 55,400
Warrants granted for services -- -- 5,900
Deemed interest expense related to -- -- 38,300
conversion feature of note payable
Net loss -- (711,100) (711,100)
----------- ------------- ------------
Balance, December 31, 2003 $ (7,000) $ (5,392,300) $ (1,019,700)
=========== ============= ============
See Accompanying Notes to Financial Statements
47b
CAN-CAL RESOURCES LTD.
STATEMETNS OF CASH FLOWS
For the year ended December 31,
-------------------------------
2003 2002
----------- ------------
Cash flows from operating activities:
Net loss $ (711,100) $ (709,300)
Adjustments to reconcile net loss to net
cash used by operating activities:
Stock based compensation 125,500 31,000
Depreciation and amortization 37,800 34,600
Stock issued for interest 43,300 71,800
Deemed interest expense 38,300 20,500
Loss on sale of fixed asset -- 500
Changes in operating assets and liabilities:
Change in notes receivable-related parties -- 57,400
Change in accounts receivable (2,700) --
Change in prepaid expenses 10,800 2,300
Change in other assets (400) (13,400)
Change in accounts payable and accrued expenses 271,400 118,100
---------- ----------
Net cash used by operating activities (187,100) (386,500)
Cash flows from investing activities:
Purchase of fixed assets (600) (23,000)
Sale of fixed asset -- 12,000
---------- ----------
Net cash used by investing activities (600) (11,000)
Cash flows from financing activities:
Change in due to stockholder (1,700) (3,600)
Proceeds from issuance of common stock 164,700 271,000
Proceeds from borrowing on notes payable-related parties 41,900 79,000
Principal payments on notes payable-related parties (13,100) (70,400)
Proceeds from convertible debenture -- 120,000
---------- ----------
Net cash provided by financing activities 191,800 396,000
---------- ----------
Net increase (decrease) in cash 4,100 (1,500)
Cash, beginning of period 13,300 14,800
---------- ----------
Cash, end of period $ 17,400 $ 13,300
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ -- $ --
========== ==========
Cash paid for interest $ 4,900 $ 9,400
========== ==========
Schedule of non-cash financing activities:
Issuance of common stock for principal payment on
note payable - related party $ -- $ 48,000
========== ==========
Accrued interest added to principal on notes
payable - related parties $ -- $ 22,600
========== ==========
Common shares issued for loan fees related to convertible
note payable-related party $ -- $ 13,500
========== ==========
Loan fees related to warrants to purchase common stock $ -- $ 16,700
========== ==========
Issuance of common stock for conversion of convertible note
payable-related party, excluding interest of $43,300 $ 35,000 $ --
========== ==========
Accrued interest added to principal on notes
payable - related parties $ 12,300 $ --
========== ==========
See Accompanying Notes to Financial Statements
48
CAN-CAL RESOUUCES LTD.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES
--------------------------------------------------------------------
Description of business - Can-Cal Resources Ltd. (hereinafter referred to
as the "Company") was incorporated in the State of Nevada on March 22,
1995. The Company is engaged in the exploration for precious metals, with
gold exploration projects located in California and Arizona.
Going concern - The Company incurred a net loss of approximately $711,000
for the year ended December 31, 2003. The Company's current liabilities
exceed its current assets by approximately $661,000 as of December 31,
2003. These factors create substantial doubt about the Company's ability to
continue as a going concern. The Company's management plans to continue to
fund its operations in the short term with a combination of debt and equity
financing, as well as revenue from operations in the long term.
The ability of the Company to continue as a going concern is dependent on
additional sources of capital and the success of the Company's plan. The
financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
Amended Articles of Incorporation - In October 2003, a Certificate of
Amendment to the Articles of Incorporation changed the number of authorized
shares of common stock from 15,000,000 to 100,000,000.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Revenue and expense recognition - Precious metals and other materials sales
are recognized when delivery has occurred, title passes and pricing is
either fixed or determinable. Rental revenue is recognized over the term of
the rental agreement. Expenses are recognized when they are incurred. Mine
exploration costs are expensed as incurred.
Fixed assets - Fixed assets are stated at cost less accumulated
depreciation. Depreciation is provided principally on the straight-line
method over the estimated useful lives of the assets, which are generally 5
to 7 years. The amounts of depreciation provided are sufficient to charge
the cost of the related assets to operations over their estimated useful
lives. The cost of repairs and maintenance is charged to expense as
incurred. Expenditures for property betterments and renewals are
capitalized. Upon sale or other disposition of a depreciable property, cost
and accumulated depreciation are removed from the accounts and any gain or
loss is reflected in other income.
The Company periodically evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of fixed
assets or whether the remaining balance of fixed assets should be evaluated
for possible impairment. The Company uses an estimate of the related
undiscounted cash flows over the remaining life of the fixed assets in
measuring their recoverability.
Advertising costs - The Company recognizes advertising expenses in
accordance with Statement of Position 93-7 "Reporting on Advertising
Costs." Accordingly, the Company expenses the costs of producing
advertisements at the time production occurs, and expenses the costs of
communicating advertisements in the period in which the advertising space
or airtime is used.
49
CAN-CAL RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES
(continued)
--------------------------------------------------------------------
Income taxes - The Company accounts for its income taxes in accordance with
Statement of Financial Accounting Standards No. 109, which requires
recognition of deferred tax assets and liabilities for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in operations in the period that includes the
enactment date.
As of December 31, 2003, the Company has available net operating loss
carryovers that will expire in various periods through 2023. Such losses
may not be fully deductible due to the significant amounts of non-cash
service costs. The Company has established a valuation allowance for the
full tax benefit of the operating loss carryovers due to the uncertainty
regarding realization.
Stock-based compensation - The Company applies Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
Related Interpretations, in accounting for stock options issued to
employees. Under APB No. 25, employee compensation cost is recognized when
estimated fair value of the underlying stock on date of the grant exceeds
exercise price of the stock option. For stock options and warrants issued
to non-employees, the Company applies SFAS No. 123, Accounting for
Stock-Based Compensation, which requires the recognition of compensation
cost based upon the fair value of stock options at the grant date using the
Black-Scholes option pricing model.
The following table represents the effect on net loss and loss per share if
the Company had applied the fair value based method and recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation", to stock-based employee
compensation:
2003 2002
---------- ----------
Net loss, as reported $ (711,100) $ 709,300)
Add: Stock-based employee compensation
expense included in reported loss,
net of related tax effects -- --
Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all awards,
net of related tax effects (79,900) --
---------- ----------
Pro forma net loss $ (791,000) $ (709,300)
========== ==========
Net loss per common share
Basic and diluted loss, as reported $ (0.06) $ (0.06)
========== ==========
Basic and diluted loss, pro forma $ (0.06) $ (0.06)
========== ==========
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". SFAS No. 148 amends the transition
and disclosure provisions of SFAS No. 123. The Company is currently
evaluating SFAS No. 148 to determine if it will adopt SFAS No. 123 to
account for employee stock options using the fair value method and, if so,
when to begin transition to that method.
50
CAN-CAL RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES
(continued)
---------------------------------------------------------------------
Fair value of financial instruments - The carrying amounts and estimated
fair values of the Company's notes payable-related parties and convertible
note payable-related party at December 31, 2003 are as follows:
Carrying Estimated
Amounts Fair Value
------------ -------------
Notes payable-related parties $ 523,900 $ 655,600
Convertible note payable-related party 85,000 94,100
----------- -----------
$ 608,900 $ 749,700
=========== ===========
The estimated fair values of the Company's long-term liabilities were based
on quoted market rates. The carrying values of all other financial
instruments approximate their fair value.
Net loss per common share - The Company computes net loss per share in
accordance with SFAS No. 128, "Earnings per Share" (SFAS 128) and SEC Staff
Accounting Bulletin No. 98 (SAB 98). Under the provisions of SFAS 128 and
SAB 98, basic net loss per share is computed by dividing the net loss
available to common stockholders for the period by the weighted average
number of shares of common stock outstanding during the period. The
calculation of diluted net loss per share gives effect to common stock
equivalents, however, potential common shares are excluded if their effect
is antidilutive. For the years ended December 31, 2002 and 2001 no options
and warrants were excluded from the computation of diluted earnings per
share because their effect would be antidilutive.
New accounting pronouncements - In July 2001, the FASB issued SFAS No. 143,
Accounting for Obligations Associated with the Retirement of Long-Lived
Assets. SFAS No. 143 establishes accounting standards for the recognition
and measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS No. 143
is effective in fiscal years beginning after June 15, 2002, with early
adoption permitted. The adoption of SFAS No. 143 did not have a material
impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144 establishes a single accounting
model for the impairment or disposal of long-lived assets, including
discontinued operations. SFAS 144 superseded Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and APB Opinion No. 30,
Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. The provisions of SFAS No. 144 are
effective in fiscal years beginning after December 15, 2001, with early
adoption permitted, and in general are to be applied prospectively. The
adoption of SFAS No. 144 did not have a material impact on the Company's
financial statements for the years ended December 31, 2003 and 2002.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities, such as restructurings, involuntarily terminating
employees, and consolidating facilities initiated after December 31, 2002.
The implementation of SFAS No. 146 did not have a material effect on the
Company's financial statements for the years ended December 31, 2003 and
2002.
51
CAN-CAL RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES
(continued)
--------------------------------------------------------------------
New accounting pronouncements (continued) - In April 2003, the FASB issued
SFAS No. 149, Amendment of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 149 amends SFAS No. 133 for
decisions made (1) as part of the Derivatives Implementation Group process
that effectively required amendments to SFAS No. 133, (2) in connection
with other Board projects dealing with financial instruments, and (3) in
connection with implementation issues raised in relation to the application
of the definition of a derivative. The Statement clarifies under what
circumstances a contract with an initial net investment meets the
characteristics of a derivative discussed in paragraph 6(b) of SFAS No.
133, clarifies when a derivative contains a financing component, amends the
definition of underlying to conform it to language used in FASB
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,
and amends certain other existing pronouncements. Those changes will result
in more consistent reporting of contracts as either derivatives or hybrid
instruments. This statement is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The implementation of SFAS No. 149 did not have a material
on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No.
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
In addition, the statement requires an issuer to classify certain
instruments with specific characteristics described in it as liabilities.
This statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The implementation
of SFAS No. 150 is not expected to have a material effect on the Company's
financial statements.
2. FIXED ASSETS
Fixed assets consist of the following as of December 31, 2003:
Machinery and equipment $ 106,600
Transportation equipment 19,900
Furniture and fixtures 14,800
----------
141,300
Less: accumulated depreciation 120,500
----------
Fixed assets, net $ 20,800
==========
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following as of
December 31, 2003:
Accrued officers salary payables $ 222,600
Accrued interest 133,200
Accounts payable 50,700
Accrued officer bonus 18,000
Unearned revenues 7,500
Other accrued liabilities 8,900
----------
$ 440,900
==========
4. DUE TO STOCKHOLDER
As of December 31, 2003, due to stockholder totaling $16,300 consists of
credit card debt incurred by the Company. The cards are owned by a
stockholder of the Company and bear interest rates ranging from 13.24% to
27.99%.
52
CAN-CAL RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
5. NOTES PAYABLE-RELATED PARTIES
Notes payable-related parties consist of the following as of December 31,
2003:
Note payable to a stockholder, secured by real
property, bearing interest at 16.0% per annum, interest
only payments payable in semi-annual payments, maturing
November 2005 (Note: The Company is in default of
interest payments totaling $100,000 and is currently
negotiating forbearance on collection of the interest) $ 300,000
Note payable to a stockholder, unsecured, bearing
interest at 7.5% per annum, maturing June 2004 56,700
Note payable to a stockholder, secured by real
property, bearing interest at 8.0% per annum, maturing
February 2004 (As discussed in Note 9, the maturity
date was extended to August 2004 in February 2004) 27,900
Note payable to a stockholder, secured by real
property, bearing interest at 8.0% per annum, maturing
January 2004 (As discussed in Note 9, the maturity date
was extended to July 2004 in January 2004) 25,800
Note payable to an entity owned by a stockholder,
unsecured, bearing interest at 5% per annum, maturing
January 2004 (As discussed in Note 9, the stockholder
converted the outstanding balance and accrued interest
into shares of the Company's common stock plus
warrants) 18,500
Note payable to an entity owned by a stockholder,
unsecured, bearing interest at 5% per annum, maturing
January 2004 (As discussed in Note 9, the stockholder
converted the outstanding balance and accrued interest
into shares of the Company's common stock plus
warrants) 18,300
Note payable to a stockholder, secured by real
property, bearing interest at 8.0% per annum, maturing
June 2004 17,400
Note payable to a stockholder, secured by real
property, bearing interest at 8.0% per annum, maturing
May 2004 14,900
Note payable to a stockholder and director, unsecured,
bearing interest at 7.5% per annum, maturing February
2004 (As discussed in Note 9, the stockholder converted
the outstanding balance and accrued interest into
shares of the Company's common stock plus warrants) 10,000
Note payable to a stockholder and director, unsecured,
bearing interest at 7.5% per annum, maturing July 2004
(As discussed in Note 9, the stockholder converted the
outstanding balance and accrued interest into shares of
the Company's common stock plus warrants) 7,300
53
CAN-CAL RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
5. NOTES PAYABLE-RELATED PARTIES (continued)
Note payable to a stockholder and director, unsecured,
bearing interest at 7.5% per annum, maturing February
2004 (As discussed in Note 9, the stockholder converted
the outstanding balance and accrued interest into
shares of the Company's common stock plus warrants) 5,400
Note payable to a stockholder and director, unsecured,
bearing interest at 7.5% per annum, maturing February
2004 (As discussed in Note 9, the stockholder converted
the outstanding balance and accrued interest into
shares of the Company's common stock plus warrants) 5,400
Note payable to a stockholder and director, unsecured,
bearing interest at 7.5% per annum, maturing April 2004
(As discussed in Note 9, the stockholder converted the
outstanding balance and accrued interest into shares of
the Company's common stock plus warrants) 5,400
Note payable to a stockholder, unsecured, bearing
interest at 7.5% per annum, maturing April 2004 (As
discussed in Note 9, the stockholder converted the
outstanding balance and accrued interest into shares of
the Company's common stock plus warrants) 3,200
Note payable to a stockholder and director, unsecured,
bearing interest at 7.5% per annum, maturing March 2004
(As discussed in Note 9, the stockholder converted the
outstanding balance and accrued interest into shares of
the Company's common stock plus warrants) 2,500
Note payable to a stockholder, unsecured, bearing
interest at 7.5% per annum, maturing February 2004 (As
discussed in Note 9, the maturity date was extended to
July 2004 in February 2004) 2,200
Note payable to a stockholder, unsecured, bearing
interest at 7.5% per annum, maturing September 2004 (As
discussed in Note 9, the stockholder converted the
outstanding balance and accrued interest into shares of
the Company's common stock plus warrants) 2,000
Note payable to a stockholder, unsecured, bearing
interest at 7.5% per annum, maturing March 2004 (As
discussed in Note 9, the stockholder converted the
outstanding balance and accrued interest into shares of
the Company's common stock plus warrants) 1,000
-----------
523,900
Less: amounts due within one year 223,900
-----------
Long-term portion of notes payable-related parties $ 300,000
===========
54
CAN-CAL RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
5. NOTES PAYABLE-RELATED PARTIES (continued)
Principal payments on notes payable-related parties are as follows as of
December 31, 2003:
2004 $ 223,900
2005 300,000
----------
$ 523,900
==========
6. CONVERTIBLE NOTE PAYABLE-RELATED PARTY
As of December 31, 2003, convertible note payable-related party totaling
$85,000 consisted of an unsecured loan agreement with a stockholder. Upon
closing, the Company paid $3,100 (net of amortization expense of $10,100)
in loan fees and other expenses which were capitalized and reflected as
part of other assets totaling $5,500 and will be expensed over the life of
the loan using the straight-line method. The term of the loan is two years,
with interest at 8.0%, and maturing in June 2004. The stockholder/lender
has the option of converting this loan to free-trading common stock, at the
lower of a) the initial purchase price, defined as the lower of $0.41 per
share or 100% of the average of the lowest five closing bid prices of the
fifteen trading days prior to closing, or b) 80% of average of the three
lowest prices in fifteen closing bid prices prior to conversion.
Due to the conversion feature of the debt and the Company's historical
range of common stock prices, the Company recorded significant amounts of
deemed interest totaling $38,300
In relation to the loan, the Company granted warrants to purchase 50,000
shares of the Company's common stock at the lower of 110% of the 5-day
average closing bid prices a) preceding the date of issue, or b) 180 days
after each closing. The warrants expire after three years. The fair value
of the warrants as computed using the Black-Scholes option-pricing model
was $16,700 and recorded as unamortized loan fees, of which $8,300 and
$4,500 was expensed during the years ended December 31, 2003 and 2002,
respectively.
Additionally, the Company issued 30,000 shares of common stock to a third
party for fees related to the loan. The 30,000 shares were valued at
$13,500 and recorded as unamortized loan fees, of which $6,700 and $3,700
was expensed during the years ended December 31, 2003 and 2002,
respectively.
During the fiscal year 2003, the lender exercised the option to convert
$35,000 in principal to 364,305 shares of the Company's common stock valued
at $78,300, including interest of $43,300 which reflects the differential
between market price and discounted conversion price.
55
CAN-CAL RESOURCES LTD
NOTES TO FINANCIAL STATEMENTS
7. OPTIONS AND WARRANTS
Options granted for consulting services - During the year ended 2003, the
Company granted 400,000 stock options with an exercise price ranging from
$0.14 and $0.22 per share of its common stock. These stock options were
granted in connection with consulting agreements with Anthony F. Ciali and
a consulting geologist as discussed in Note 8. These stock options were
exercisable upon issuance and expire in March and April 2006. The following
table summarizes the Company's option activity related to consultants:
Weighted
Average
Options Exercise
Outstanding Price
----------- ------------
Balance, January 1, 2003 -- $ --
Granted 400,000 0.16
Cancelled -- --
Exercised -- --
Expired -- --
----------- ------------
Balance, December 31, 2003, 400,000 $ 0.16
=========== ============
The weighted average fair value of warrants granted during 2003 was $0.15.
The following table summarizes information about consulting options
outstanding at December 31, 2003:
Options Outstanding Options Exercisable
--------------------------------------- -------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Prices 12/31/03 Life Price 12/31/03 Price
-------- ----------- ------------ -------- ----------- -----------
0.14 300,000 2.2 years $ 0.14 300,000 $ 0.14
0.22 100,000 2.3 years 0.22 100,000 0.22
-------- ----------- ------------ -------- ----------- -----------
400,000 $ 0.16 400,000 $ 0.16
=========== ======== =========== ==========
The Company estimates the fair value of options at the grant date by using
the Black-Scholes option pricing-model with the following weighted-average
assumptions used for grants in 2003; no dividend yield; expected volatility
of 271.4%; risk free interest rates of 1.7%, and expected lives of 2.0
years. Compensation expense relating to warrants granted for services in
2003 was $55,400.
Option granted for employee services - During the year ended 2003, the
Company granted a 500,000 stock option with an exercise price of $0.16 per
share of its common stock. This stock option was granted to Anthony F.
Ciali as discussed in Note 8. This stock option was exercisable upon
issuance and expires in October 2013. The option totaled $-- under APB No.
25 as the exercise price was equal to the closing price on the day of
grant.
56
CAN-CAL RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
7. OPTIONS AND WARRANTS (continued)
--------------------
Warrants related to the sale of common stock - During fiscal years 2003 and
2002, the Company granted 823,410 and 1,025,300 stock warrants,
respectively, with an exercise price ranging from $0.20 to $0.35 per share
for its common stock. These stock warrants were granted in connection with
common stock sold during fiscal years 2003 and 2002. These stock warrants
were exercisable upon issuance and expire various times throughout 2004 and
2005. The following table summarizes the Company's warrant activity related
to the sale of common stock:
Weighted
Average
Warrants Exercise
Outstanding Price
----------- --------
Balance, January 1, 2002 -- $ --
Granted 1,025,320 0.26
Cancelled -- --
Exercised -- --
Expired -- --
--------- -------
Balance, December 31, 2002 1,025,320 0.26
Granted 1,060,820 0.20
Cancelled -- --
Exercised -- --
Expired -- --
--------- -------
Balance, December 31, 2003 2,086,140 $ 0.23
========= =======
Warrants granted for services and loan fees - During the year ended
December 31, 2002, the Company granted 90,000 stock warrants with an
exercise price ranging from $0.25 to $0.44 per share of its common stock.
These stock warrants were granted in connection with consulting services
rendered to the Company during fiscal year ended 2002 and loan fees in
connection with the convertible note payable - related party (see Note 6).
These stock warrants were exercisable upon issuance expiring in November
2004 and June 2005. The following table summarizes the Company's warrants
activity not related to the sale of common stock:
Weighted
Average
Warrants Exercise
Outstanding Price
Balance, January 1, 2002 -- $ --
Granted 90,000 0.36
Cancelled -- --
Exercised -- --
Expired -- --
------- --------
Balance, December 31, 2002 90,000
Granted 31,200 0.23
Cancelled -- --
Exercised -- --
Expired -- --
------- --------
Balance, December 31, 2003 90,000 $ 0.36
====== =========
The weighted average fair value of warrants granted during 2003 and 2002
was $0.19 and $0.26, respectively.
57
CAN-CAL RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
7. OPTIONS AND WARRANTS (continued)
--------------------
The following table summarizes information about warrants outstanding at
December 31, 2003:
Weighted
Average
Range of Remaining
Exercise Number Contractual Number
Price Outstanding Life Exercisable
-------------- ----------- ----------- -----------
$ 0.20 - 0.25 71,200 1.3 years 40,000
0.44 50,000 1.5 years 50,000
-------------- ----------- ----------- -----------
121,200 121,200
=========== ===========
The Company estimates the fair value of warrants at the grant date by using
the Black-Scholes option pricing-model with the following weighted-average
assumptions used for grants in 2003 and 2002; no dividend yield; expected
volatility of 393% and 265%; risk free interest rates of 1.4% and 1.9%, and
expected lives of 1.0 and 1.0 years. Compensation expense relating to
warrants granted for services in 2003 and 2002 was $5,900 and $7,100,
respectively, while loan fees were valued at $16,700.
8. COMMITMENTS AND CONTINGENCIES
-----------------------------
Mining claims - The Company has a lease and purchase option agreement
covering six patented mining claims in the Cerbat Mountains, Hualapai
Mining District, Mohave County Arizona. The Company pays $1,500 per quarter
as minimum advance royalties. The Company has the option to purchase the
property for $250,000 less payments already made.
Auto lease - The Company has an operating lease for an automobile that
expires during 2004. The monthly lease payment totals $ 650 per month.
Lease payments for year ended December 31, 2003 and 2002 totaled $7,800 and
$7,800, respectively.
Future minimum lease payments required under the auto lease as of December
31, 2003 total $6,100 for the year ended December 31, 2004
Consulting agreements - In March 2003, the Company engaged Anthony F. Ciali
as a management consultant of the Company. Under the agreement, Mr. Ciali
is to provide consulting services, initially, in the capacity of President
of the Company. Compensation is payable at a monthly rate of $7,500 and
shall be reviewed by the Board of Directors in January 2004, with any
adjustment not to be less than the rate of inflation during the previous
twelve-month period, as measured by the U.S. Consumer Price Index. Further,
the Company granted Mr. Ciali an option to purchase 300,000 shares of the
Company's common stock with an exercise price equal to the average closing
price of the Company's common stock, as quoted on the OTC BB, for the five
trading days prior to the Effective Date or $0.142. The option is fully
vested, has a three year term, and is valued at $33,900 using the Black
Scholes Model. The agreement is continuous until either party terminates
such services.
During April 2003, the Company entered into a Management Consulting
Agreement (the "Agreement") whereby the Company agreed to pay $500 per day
of service provided by the consulting geologist payable in shares of the
Company's common stock. Through December 31, 2003, the Company has issued
205,166 shares of the Company's common stock to the consultant totaling
$31,500. The agreement may be terminated by either party. Additionally, the
Company granted an option to purchase 100,000 shares of the Company's
common stock with an exercise price of $0.22 per share. The option is fully
vested in April 2004 and was valued at $21,500 using the Black Scholes
model and will be forfeited if the Agreement is terminated prior to April
2004.
58
CAN-CAL RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (continued)
-----------------------------
Consulting agreements (continued) - During July 2003, the Company amended
their agreement with the CEO to increase his monthly compensation to
$10,000 beginning September 1, 2003, and to $12,500 per month beginning
January 1, 2004. The amended agreement also calls for an annual
discretionary bonus to be determined by the board, which shall not be less
than 15% of the CEO's annualized compensation based on the fiscal year-end
monthly fee in effect. As discussed in note 3, the Company has accrued a
bonus of $18,000 as of December 31, 2003. During October 2003, the Company
also granted a ten-year option to the CEO to purchase 500,000 shares of its
common stock, with an exercise price of $0.16 per share. The option is
fully vested upon grant, expires in October 2013, and totaled $-- under APB
No. 25 as the exercise price was equal to the closing market price on the
day of grant.
9. SUBSEQUENT EVENTS
-----------------
During January, February, and March 2004, various stockholders exercised
their warrants to purchase 527,020 shares of the Company's common stock for
$118,000 cash.
During January 2004, the maturity date of note payable-related party
totaling $25,800 was extended to July 2004.
During January 2004, the Company entered into an agreement with IBK Capital
Corp. ("IBK") whereby, IBK would assist the Company in a private placement
of up to $1,000,000 of the Company's common shares or some other acceptable
financing arrangement. The Company agreed to a non-refundable fee of
CDN$25,000 as well as an expense advance of CDN$3,500, which the Company
paid in February 2004. The agreement is effective through August 2004 and
may be terminated or extended by either party upon 15 days advanced notice
in writing.
During February 2004, the maturity date of note payable-related party
totaling $27,900 was extended to August 2004.
During February 2004, the maturity date of note payable-related party
totaling $2,200 was extended to August 2004.
During March 2004, the Company issued 50,000 shares of its common stock for
cash totaling $10,000.
During March 2004, the Company issued 584,640 shares of common stock to an
officer for accrued wages totaling $146,200. In addition, the Company
granted the officer warrants to purchase an additional 584,640 shares of
common stock at $0.30 per share. The warrants expire in March 2006 and
totaled $131,500 using the Black Scholes model. The Company recorded the
warrants as interest expense.
During March 2004, the Company issued 317,740 shares of common stock to an
officer for accrued wages totaling $79,400. In addition, the Company
granted the officer warrants to purchase an additional 317,740 shares of
common stock at $0.30 per share. The warrants expire in March 2006 and
totaled $71,500 using the Black Scholes model. The Company recorded the
warrants as interest expense.
During March 2004, a stockholder and director of the Company converted
$13,500 in notes payable - related parties and accrued interest into 53,890
shares of the Company's common stock. In addition, the Company granted the
director warrants to purchase an additional 53,890 shares of common stock
at $0.30 per share. The warrants expire in March 2006 and totaled $12,100
using the Black Scholes model. The Company recorded the warrants as
interest expense.
59
CAN-CAL RESOURCES LTD.
NOTES TO FINANCIAL STATEMENTS
9. SUBSEQUENT EVENTS (continued)
-----------------
During March 2004, a stockholder and director of the Company converted
$24,600 in notes payable - related parties and accrued interest into 98,408
shares of the Company's common stock. In addition, the Company granted the
director warrants to purchase an additional 98,408 shares of common stock
at $0.30 per share. The warrants expire in March 2006 and totaled $22,100
using the Black Scholes model. The Company recorded the warrants as
interest expense.
During March 2004, a stockholder of the Company converted $6,600 in notes
payable - related parties and accrued interest into 26,312 shares of the
Company's common stock. In addition, the Company granted the stockholder
warrants to purchase an additional 26,312 shares of common stock at $0.30
per share. The warrants expire in March 2006 and totaled $5,900 using the
Black Scholes model. The Company recorded the warrants as interest expense.
During March 2004, a stockholder of the Company converted $38,000 in notes
payable - related parties and accrued interest into 152,137 shares of the
Company's common stock. In addition, the Company granted the stockholder
warrants to purchase an additional 152,137 shares of common stock at $0.30
per share. The warrants expire in March 2006 and totaled $34,200 using the
Black Scholes model. The Company recorded the warrants as interest expense.
60
CAN-CAL RESOURCES LTD.
CONDENSED BALANCE SHEET
(UNAUDITED)
ASSETS
March 31, 2004
--------------
Current assets
Cash $ 139,200
Accounts receivable 6,200
------------
Total current assets 145,400
Fixed assets, net 17,500
Other assets, net 3,800
------------
Total assets $ 166,700
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued liabilities $ 267,400
Due to stockholder 14,900
Advances for stock purchases 21,000
Notes payable-related parties - current portion 147,200
Convertible note payable - related party 85,000
------------
Total current liabilities 535,500
Long-term liabilities
Notes payable-related parties - long-term portion 300,000
Total liabilities 835,500
Commitments and contingencies --
Stockholders' deficit
Preferred stock; $0.001 par value; 10,000,000 shares
authorized, no shares issued an outstanding --
Common stock; $0.001 par value; 100,000,000 shares
authorized, 15,707,058 shares issued and outstanding 15,700
Additional paid-in capital 5,202,500
Unamortized loan fees from stock issued and warrants
granted in relation to convertible note payable-related party (3,300)
Receivable related to issuance of common stock (10,000)
Accumulated deficit (5,873,700)
------------
Total stockholders' deficit (668,800)
Total liabilities and stockholders' deficit $ 166,700
============
See Accompanying Notes to Financial Statements
61
CAN-CAL RESOURCES LTD.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
---------------------------------
2004 2003
------------- -------------
Material sales $ 5,700 $ 6,200
Cost of sales 3,200 3,300
------------ ------------
Gross profit 2,500 2,900
General and administrative expenses 187,100 120,800
------------ ------------
Loss from operations (184,600) (117,900)
Other income (expense)
Rental revenue 9,600 5,600
Interest income -- --
Interest expense (306,400) (32,400)
------------ ------------
Loss before provision for income taxes (481,400) (144,700)
Provision for income taxes -- --
------------ ------------
Net loss $ (481,400) $ (144,700)
============ ============
Basic and diluted loss per common share $ (0.03) $ (0.01)
============ ============
Basic and diluted weighted average
common shares outstanding 14,175,734 11,691,445
============ ============
See Accompanying Notes to Financial Statements
62
CAN-CAL RESOURCES LTD.
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
Unamortized
Loan Fees
Common Stock Related to Receivable
---------------------- Additional Convertible Related to Total
Number Paid-in Note Payable- Issuance of Accumulated Stockholders'
of Shares Amount Capital Related Party Common Stock Deficit Deficit
Balance, December 31, 2003 13,252,962 $ 13,300 $ 4,366,300 $ (7,000) $ -- $ (5,392,300) $ (1,019,700)
Common shares issued for cash 372,200 400 74,000 -- -- -- 74,400
Exercise of warrants for cash 696,275 700 124,000 -- -- -- 124,700
Common shares issued 102,493 100 22,000 -- -- -- 22,100
for services
Common shares issued 50,001 -- 10,000 -- (10,000) -- --
for receivable
Current period amortization -- -- -- 3,700 -- -- 3,700
of loan fees
Common shares issued in
satisfaction of accounts
payable and accrued 902,380 900 224,700 -- -- -- 225,600
liabilities
Common shares issued in
satisfaction of notes
payable-related parties 330,747 300 82,400 -- -- -- 82,700
Warrants granted in -- -- 277,300 -- -- -- 277,300
satisfaction of interest
Warrants granted for services -- -- 12,200 -- -- -- 12,200
Deemed interest expense related
to conversion feature of
note payable-related party -- -- 9,600 -- -- -- 9,600
Net loss -- -- -- -- -- (481,400) (481,400)
---------- --------- ----------- --------- ---------- ----------- ------------
Balance, March 31, 2004 15,707,058 $ 15,700 $ 5,202,500 $ (3,300) $ (10,000) $ (5,873,700) $ (668,800)
========== ========= =========== ========= ========== ============ ============
See Accompanying Notes to Financial Statements
63
CAN-CAL RESOURCES LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
-----------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $ (481,400) $ (144,700)
Adjustments to reconcile net loss to net
cash used by operating activities:
Stock based compensation 34,300 38,900
Depreciation and amortization 8,700 10,400
Warrants granted in satisfaction of interest 277,300 --
Deemed interest expense 9,600 9,600
Changes in operating assets and liabilities:
Change in accounts receivable (3,500) (2,400)
Change in prepaid expenses -- 5,000
Change in accounts payable and accrued expenses 58,100 44,300
---------- ----------
Net cash used by operating activities (96,900) (38,900)
Cash flows from investing activities:
Purchase of fixed assets -- (1,100)
---------- ----------
Net cash used by investing activities -- (1,100)
Cash flows from financing activities:
Change in due to stockholder (1,400) (500)
Proceeds from issuance of common stock 199,100 11,000
Proceeds from advances for stock purchases 21,000 --
Proceeds from borrowing on notes payable-related parties -- 28,900
Principal payments on notes payable-related parties -- (2,500)
---------- ----------
Net cash provided by financing activities 218,700 36,900
---------- ----------
Net increase (decrease) in cash 121,800 (3,100)
Cash, beginning of period 17,400 13,300
---------- ----------
Cash, end of period $ 139,200 $ 10,200
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ -- $ --
========== ==========
Cash paid for interest $ -- $ --
========== ==========
Schedule of non-cash financing activities:
Issuance of common stock for satisfaction of accounts payable
and accrued liabilities $ 225,600 $ --
========== ==========
Issuance of common stock for principal payment on
notes payable-related parties $ 82,700 $ --
========== ==========
Issuance of common stock for receivable $ 10,000 $ --
========== ==========
See Accompanying Notes to Financial Statements
64
CAN-CAL RESOURCES LTD
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited financial statements have been prepared in
accordance with Securities and Exchange Commission requirements for interim
financial statements. Therefore, they do not include all of the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements. The financial statements
should be read in conjunction with the Form 10-KSB for the year ended
December 31, 2003 of Can-Cal Resources LTD. ("the Company").
The interim financial statements present the condensed balance sheet,
statements of operations, stockholders' deficit and cash flows of Can-Cal
Resources LTD. The financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.
The interim financial information is unaudited. In the opinion of
management, all adjustments necessary to present fairly the financial
position as of March 31, 2004 and the results of operations and cash flows
presented herein have been included in the financial statements. Interim
results are not necessarily indicative of results of operations for the
full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Reclassification - Certain prior year balances have been reclassified to
conform to the current year presentation, which have no effect on net
income.
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
----------------------------------------
Accounts payable and accrued liabilities consist of the following as of
March 31, 2004:
Accrued interest $ 145,300
Accrued officers salary payables 49,500
Accounts payable 42,500
Accrued officer bonus 18,000
Other accrued liabilities 10,200
Unearned revenues 1,900
-----------
$ 267,400
===========
During March 2004, the Company issued 902,380 shares of Common stock to
officers in satisfaction of $225,600 in accrued officers salary payables.
Additionally, the Company granted warrants to purchase 902,380 shares of
common stock at $0.30 per shares. The warrants expire in March 2006 and
totaled $202,900 using the Black Scholes model. The Company recorded the
warrants as interest expense.
65
CAN-CAL RESOURCES LTD
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
4. NOTES PAYABLE-RELATED PARTIES
-----------------------------
Notes payable consisted of the following as of March 31, 2004:
Note payable to a stockholder, secured real
property, bearing interest at 16.0% per
annum, interest only payments payable in
semi-annual payments, maturing November 2005
(Note: The Company is in default of interest
payments totaling $96,000 (accrued interest
through March 31, 2004, total $112,000) but
is currently negotiating forbearance on
collection of the interest) $ 300,000
Note payable to a stockholder, unsecured,
bearing interest at 7.5% per annum, maturing
June 2004 56,700
Note payable to a stockholder, secured by
real property, bearing interest at 8.0% per
annum, maturing August 2004 29,100
Note payable to a stockholder, secured by
real property, bearing interest at 8% per
annum, maturing July 2004 26,800
Note payable to a stockholder, secured by
real property, bearing interest at 8.0% per
annum, maturing June 2004 17,400
Note payable to an stockholder, secured by
real property, bearing interest at 8.0% per
annum, maturing May 2004 14,900
Note payable to a stockholder, unsecured,
bearing interest at 7.5% per annum, maturing
February 2005 2,300
-----------
447,200
Less: amounts due within one year 147,200
-----------
Long-term portion of notes payable $ 300,000
===========
During March 2004, the Company issued 330,747 shares of Common stock to
various stockholders in satisfaction of $82,700 in principal on notes
payable-related parties. Additionally, the Company granted warrants to
those same stockholders to purchase 330,747 shares of common stock at $0.30
per share. The warrants expire in March 2006 and totaled $74,400 using the
Black Scholes model. The Company recorded the warrants as interest expense.
5. ADVANCES FOR STOCK PURCHASES
----------------------------
Advances for stock purchases totaling $21,000 as of March 31, 2004 consist
of cash received from investors for the purchase of 105,000 shares of the
Company's common stock which were not issued until April 2004, as discussed
in Note 8.
66
CAN-CAL RESOURCES LTD
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
6. CONVERTIBLE NOTE PAYABLE - RELATED PARTY
----------------------------------------
As of March 31, 2004, convertible note payable-related party totaling
$85,000 consisted of an unsecured loan agreement with a stockholder. Upon
closing, the Company paid $1,400 (net of amortization expense of $11,800)
in loan fees and other expenses which were capitalized and reflected as
part of other assets totaling $3,800 and will be expensed over the life of
the loan using the straight-line method. The term of the loan is two years,
with interest at 8.0%, and maturing in June 2004. The lender has the option
of converting this loan to common stock, at the lower of a) the initial
purchase price, defined as the lower of $0.41 per share or 100% of the
average of the lowest five closing bid prices of the fifteen trading days
prior to closing, or b) 80% of average of the three lowest prices in
fifteen closing bid prices prior to conversion.
Due to the conversion feature of the debt and the Company's historical
range of common stock prices, the Company recorded significant amounts of
deemed interest totaling $9,600.
In relation to the loan, the Company granted warrants to purchase 50,000
shares of the Company's common stock at the lower of 110% of the 5-day
average closing bid prices a) preceding the date of issue, or b) 180 days
after each closing. The warrants expire after three years. The fair value
of the warrants as computed using the Black-Scholes option-pricing model
was $16,700 and recorded as unamortized loan fees, of which $2,000 and
$2,100 was expensed during the three months ended March 31, 2004 and 2003,
respectively.
Additionally, the Company issued 30,000 shares of common stock to a third
party (counsel to the lender) for fees related to the loan. The 30,000
shares were valued at $13,500 and recorded as unamortized loan fees, of
which $1,700 and $1,700 was expensed during the three months ended March
31, 2004 and 2003, respectively.
7. GOING CONCERN
-------------
The Company incurred a net loss of approximately $481,000 for the three
months ended March 31, 2004. The Company's current liabilities exceed its
current assets by approximately $390,000 as of March 31, 2004. These
factors create substantial doubt about the Company's ability to continue as
a going concern. The Company's management plans to continue to fund its
operations in the short term with a combination of debt and equity
financing, as well as revenue from operations in the long term.
The ability of the Company to continue as a going concern is dependent on
additional sources of capital and the success of the Company's plan. The
financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
8. SUBSEQUENT EVENTS
-----------------
During April 2004, the Company issued 26,000 shares of common stock for
cash totaling $5,200.
During April 2004, the Company issued 105,000 shares of common stock in
satisfaction of advances for stock purchases totaling $21,000.
During April 2004, the lender exercised the option to convert $20,000 in
principal to 92,593 shares of the Company's common stock.
During April 2004, the Company issued 7,850 shares of common stock for
services totaling $2,300.
67
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The bylaws provide that directors and officers shall be indemnified by the
corporation against expenses incurred in connection with the defense of any
action, suit or proceeding in which they are made parties by reason of being or
having been directors or officers of the corporation, except in relation to
matters as to which they are adjudged in such matter to be liable for negligence
or misconduct in the performance of duty. Such indemnification is not exclusive
of any other rights to which those indemnified may be entitled by agreement,
vote of stockholders, or otherwise. In addition, the Nevada Corporation Act
permits indemnification of directors and officers against such expenses.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses in connection with the issuance and distribution of the
securities being registered:
Securities and Exchange Commission registration fee...................$ 122.40
National Association of Securities Dealers, Inc. examination fee...... n/a
Accounting ........................................................... 1,000.00
Legal fees and expenses............................................... 15,000.00
Printing ............................................................. 300.00
Blue Sky fees and expenses (excluding legal fees)..................... 1,500.00
Transfer agent ....................................................... n/a
Escrow agent.......................................................... n/a
Miscellaneous......................................................... n/a
Total.................................................................$17,922.40
The Registrant will pay all of these expenses.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. From January 1, 2001 to
January 16, 2004, the registrant has sold the following unregistered securities.
Where shares were sold at a discount from market prices, the discount was made
by the board of directors of the registrant for the restricted status of the
shares as subject to Rule 144, except for the shares sold to Dutchess Fund under
a prior investment agreement, which shares were sold at a 7% discount to market
as provided in that agreement.
a. 2001:
(1) For cash: In August and September, 2001, a total of 82,888
shares to three Canadian investors and a private
company owned and controlled by Canadian residents
for $65,916 (an average share price of $0.80 per
share, representing a discount of approximately 8%
from market prices). These shares were sold
pursuant to the exemption provided by Regulation S
of the 1933 Act. Complete information about the
company was provided to these investors. No
commissions were paid.
On October 2, 2001, 20,000 restricted shares to a
Canadian investor for $10,000 ($0.50 per share,
representing a discount of approximately 50% from
market prices, as determined by the board of
directors). These shares were sold pursuant to the
exemption provided by Regulation S of the 1933
68
Act. Complete information about the company was
provided to this investor. December 12, 2001,
40,000 restricted shares to a Canadian investor for
$14,000 ($0.35 per share, representing a discount
of approximately 50% from market prices). Complete
information about the company was provided to this
investor. These shares and warrants were sold
pursuant to the exemption provided by Regulation S
of the 1933 Act. No commissions were paid.
(2) For services: In October 2001, 75,757 restricted common shares to
Dutchess Private Equities Fund L.P., 227,272
restricted common shares to Dutchess Advisors,
Ltd., as inducements for execution of Investment
Agreement between issuer and Dutchess Fund and DRH
Investment Company, LLC. 303,030 restricted common
shares to May Davis Group, Inc., a securities
broker-dealer, as a placement fee in connection
with the Investment Agreement. 37,000 shares to
Joseph B. LaRocco, attorney for Dutchess Fund and
DRH Investment Company, LLC in connection with the
Investment Agreement, for legal services to such
entities, which the issuer agreed to pay pursuant
to the Investment Agreement. These shares were sold
pursuant to the exemption provided by section 4(2)
of the 1933 Act.
B. 2002
(1) For cash: On January 8, 2002, 36,000 restricted common shares
to three investors (one Canadian resident, and two
private companies controlled and owned by Canadian
residents) for $12,600 cash ($0.35 per share,
representing a discount of approximately 50% from
market price). These investors also were issued
warrants to purchase 36,000 additional restricted
shares, at a price of $0.35 per share; the warrants
expired January 8, 2004. On February 11, 2002,
10,000 restricted common shares to one investor (a
Canadian resident) for $3,500 cash ($0.35 per
share, representing a discount of approximately 50%
from market price). This investor also was issued
warrants to purchase 10,000 additional restricted
shares, at a price of $0.35 per share; the warrants
expired February 11, 2004. Complete information
about the company was provided to these investors.
These shares and warrants were sold pursuant to the
exemption provided by Regulation S of the 1933 Act.
No commissions were paid.
From March 1, 2002 through June 3, 2002, 369,600
restricted common shares were issued to 48
investors (all Canadian residents or companies
controlled and owned by Canadian residents) for
$92,400 cash ($0.25 per share, representing
discounts ranging from 0% to approximately 50% from
market prices at the time of issuance). These
investors also were issued warrants to purchase
369,600 additional restricted shares, at a price of
$0.25 per share; the warrants will expire two years
from the date of issuance. These shares and
warrants were sold pursuant to the exemption
provided by Regulation S of the 1933 Act. No
commissions were paid.
From June 5, 2002 through December 24, 2002,
609,720 restricted common shares were issued to 45
investors (all Canadian residents and companies
controlled and owned by Canadian residents) for
$152,430 cash ($0.25 per share, representing
premiums and/or discounts of up to approximately
50% from market prices at the time of issuance).
These investors were also issued warrants to
purchase 605,720 additional restricted common
shares, at a price of $0.25 per share; the warrants
will expire two years from the date of
69
issuance. These shares and warrants were sold
pursuant to the exemption provided by Regulation S
of the 1933 Act. No commissions were paid.
(2) Debt payment: On January 31, 2002, 309,677 restricted common
shares to lender (First Colony Merchant) for
payment of interest on debt ($119,800). These
shares were sold pursuant to the exemption provided
by Regulation S of the 1933 Act. No commissions
were paid.
(3) For services: On June 21, 2002, 40,000 restricted common shares
to Financial Communications Corp. for public
relations services. These shares were sold pursuant
to the exemption provided by section 4(2) of the
1933 Act. No commissions were paid.
C. 2003
(1) For Cash: During 2003, 673,410 restricted common shares were
issued to 19 Canadian resident or companies
controlled and owned by Canadian resident investors
for $134,682 and 150,000 restricted common shares
were issued to 12 U.S. resident investors for
$30,000 (all shares were priced at $0.20 per share,
representing premiums of up to 25% and discounts
ranging from 0% to approximately 25% from market
prices at the time of issuance). With respect to
237,410 restricted common shares, the investors
were also issued warrants to purchase 474,820
additional restricted common shares and with
respect to 473,500 restricted common shares, the
investors were also issued warrants to purchase
473,500 additional restricted common shares; all
warrants were priced at $0.20 per share and will
expire two years from the date of issuance. With
respect to 112,500 restricted common shares, the
investors were also issued 112,500 warrants to
purchase additional restricted common shares, at a
price of $0.25 per share for a period of two years
from the date of issuance. The shares and warrants
were sold to Canadian investors pursuant to the
exemption provided by Regulation S of the 1933 Act,
and the shares and warrants sold to U.S. investors
were sold pursuant to the exemption provided by
section 4(2) of the 1933 Act. No commissions were
paid.
(2) For Debt: 364,305 restricted common shares in conversion of
$35,000 principal and interest on a debenture held
by Dutchess Fund. The conversion prices were $0.099
for 50,710 shares ($5,000 of the debenture); $0.112
for 44,643 shares ($5,000 of the debenture); $0.061
for 81,433 shares ($5,000 of the debenture); $0.067
for 75,075 shares ($5,000 of the debenture); and
$0.1334 for 112,444 shares ($15,000 of the
debenture). All of the prices were determined by
the conversion formula in the debenture (80% of the
average bid prices for the three lowest trading
days before conversion. These shares were sold
pursuant to the exemption provided by section 4(2)
of the 1933 Act. No commissions were paid.
(3) For Services: 205,166 restricted common shares in payment of
$31,500 of services by Luis Vega, consulting
geologist. The per share price was determined by
dividing the amount owed by the average closing
price of the company's stock for each day's
service. These shares were sold pursuant to the
exemption provided by section 4(2) of the 1933 Act.
On March 14, 2003, 24,960 restricted common shares
were issued to Catherine Nichols, a Canadian
resident, for marketing services amounting to
$5,000. The price per share was based on the
average closing share price for
70
the period during which the services were rendered.
These shares were sold pursuant to the exemption
provided by Regulation S of the 1933 Act.
During the period July 15-December 31, 2003,
112,326 restricted common shares in payment of
$22,250 of investor relations services by Jeffrey
Whitford, a Canadian resident who is a consultant
to the company. The price per share was based on
the average monthly closing share prices for the
period. These shares were sold pursuant to the
exemption provided by Regulation S of the 1933 Act.
33,600 restricted common shares were issued to pay
$4,200 of legal services provided by Stephen E.
Rounds, outside company counsel. The price per
share was based on the average closing share price
for the period during which the services were
rendered. These shares were sold pursuant to the
exemption provided by section 4(2) of the 1933 Act.
On December 30, 2003, 5,208 restricted common
shares were issued to Terry Brown, a Mexican
resident, for technical consulting services
amounting to $1,250. The price per share was based
on the average closing share price for the period
during which the services were rendered. These
shares were sold pursuant to the exemption provided
by Regulation S of the 1933 Act.
(D) 2004
(1) For Cash: From January 1, 2004 through March 17, 2004,
696,275 restricted common shares were issued to 27
investors (26 Canadian residents, 658,775 shares,
and one US resident, 37,500 shares) for $124,464
cash. The shares were issued pursuant to the
exercise of two sets of warrants, which had
original exercise prices of $0.20 on 295,820 shares
and $0.25 on 261,200 shares; the original exercise
prices represented discounts of 17% to 31% from
market prices at the time of issuance. The warrants
were exercised under a company incentive program,
whereby shareholders with warrants outstanding as
of January 1, 2004 were offered 1.25 shares for
every warrant they exercised and received a
commitment by the company to file a resale
registration statement with the SEC with respect to
the shares issued, by not later than June 30, 2004.
The incentive program resulted in lowering the
exercise price of the warrants to $0.16 and $0.20,
respectively, and the issuance of the total 696,275
shares. These shares were issued in private
transactions, with respect to the Canadian
residents, in reliance on the exemption from
registration with the SEC provided by Regulation S,
and with respect to the U.S. citizen, in reliance
on the exemption available under Section 4(2) of
the 1933 Act. No commissions were paid.
From January 1, 2004 through May 20, 2004, we sold
598,200 restricted common shares to 25 Canadian
residents for $119,640 cash at $0.20 per share,
representing discounts of 0% - 50% from market
prices at the time of issuance. These investors
also were issued warrants to purchase 598,200
additional restricted shares, at an exercise price
of $0.25 per share for 538,200 shares, and $0.20
per share for 60,000 shares. The warrants will
expire between February 23, 2006 and May 20, 2006.
Complete information about the company was provided
to these investors. These securities were sold to
(a) Canadian residents pursuant to the exemption
71
provided by Regulation S of the 1933 Act; and (b)
United States residents pursuant to the exemption
provided by Section 4(2) of the 1933 Act. No
commissions were paid.
(2) For Services: On February 4, 2004, 10,000 restricted common
shares were issued to Yvonne St. Pierre, a Canadian
resident, for computer-related services, in the
amount of $2,500. These shares were issued pursuant
to the exemption provided by Regulation S of the
1933 Act.
Between February 10 and March 31, 2004, 75,000
restricted common shares were issued to Jeff
Whitford, a Canadian resident, for investor
relation services, in the amount of $15,000. In
addition, Mr. Whitford received 50,000 warrants at
an exercise price of $0.20 per share; the warrants
will expire between February 2006 and March 2006.
The warrants were valued at $12,200 utilizing the
Black Scholes model. These shares were issued
pursuant to the exemption provided by Regulation S
of the 1933 Act.
Between February 19 and April 15, 2004, 24,173
restricted common shares were issued to Luis A.
Vega, a US resident, for consulting geological
services, in the amount of $6,619. These shares
were issued in reliance on the exemption available
under Section 4(2) of the 1933 Act.
On May 3, 2004, 1,170 restricted common shares were
issued to Terry Brown, a Mexican resident, for
consulting geological services, in the amount of
$269. These shares were issued pursuant to the
exemption provided by Regulation S of the 1933 Act.
(3) For Debt: With respect to a debenture held by Dutchess Fund,
on April 13, 2004, we issued 92,593 restricted
common shares in conversion of $20,000 principal
and interest, at a conversion price of $0.216 per
share, and on April 23, 2004, we issued 31,250
restricted common shares in conversion of $5,000
principal and interest, at a conversion price of
$0.16 per share. The conversion prices were
determined by the conversion formula in the
debenture (80% of the average bid prices for the
three lowest trading days before conversion). These
shares were sold pursuant to the exemption
available under Section 4(2) of the 1933 Act. No
commissions were paid.
(4) For Conversions: On March 1, 2004, in connection with the conversion
of $82,687 in notes payable and $225,595 in accrued
officers' salary payable, we issued 1,233,127
restricted common shares at $0.25 per share and
1,223,127 warrants, with an exercise price of $0.30
and expiring on March 1, 2006, to two officers, two
directors, and a former director and his insurance
agency. These persons and the insurance agency are
accredited investors. No commissions were paid.
No general solicitation or advertising was used in the preceding
transactions, and all investors were provided with complete information about
the company. The issuer believes all the investors are either sophisticated
investors or accredited investors. Stop transfer instructions were issued to the
issuer's transfer agent for the securities as "restricted" under rule 144.
72
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
EXHIBIT NO. TITLE OF EXHIBIT
3.0 Articles of Incorporation .....................................[1]
3.1 Amendment to the Articles of Incorporation ....................[1]
3.1(a) Further Amendment to the Articles of Incorporation [2]
3.2 By-Laws .......................................................[1]
4.0 Form of warrant held by selling shareholders.....................*
4.1 Warrant held by Dutchess Private Equities Fund, L.P. ..........[3]
5.0 Opinion re legality..............................................*
10.0 Joint Venture Agreement between Robin Schwarz,
Aylward Schwarz, S&S Mining, a Nevada Corporation,
and Can-Cal Resources Ltd. ....................................[1]
10.1 Mining Lease Agreement between Can-Cal Resources Ltd.
and Twin Mountain Rock Venture dated May 1, 1998 ..............[1]
10.2 Consulting Agreement (Luis A. Vega)..............................*
10.3 Consulting Agreement (Terry Brown)...............................*
10.4 [intentionally left blank]
10.5 Deed of Trust, Security Agreement, Financing Statement,
and Fixture Filing with Assignment of Rents ...................[1]
10.6 Lease and Purchase Option Agreement dated March 12, 1998
between Arthur James Good and Wanda Mae Good
and Can-Cal Resources Ltd......................................[1]
10.7 Management Consulting Agreement
with Anthony F. Ciali .........................................[4]
10.8-10.13 [intentionally left blank]
10.14 Loan Agreement between First Colony Merchant,
Tobian Trading Limited and Can-Cal Resources, Limited
(f/y 2000 loan, second lender on Pisgah property) .............[5]
10.15 Deed of Trust Security Agreement, Financial
Statement and Fixture Filing with Assignment of Rents .........[5]
10.16-10.18 [intentionally left blank]
73
10.19 Forbearance Agreement with Lender
(first lender (Owen Sequoia) on Pisgah property)...............[6]
10.20 Forbearance Agreement with Lender
(second lender (First Colony Merchant and
Tobian Trading Limited) on Pisgah property)....................[6]
10.21-10.25 [intentionally left blank]
10.26 Form of Debenture
Dutchess Private Equities Fund, L.P. ..........................[3]
10.27-10.28 [intentionally left blank]
10.29 Arco Agreement.................................................[7]
23.0 Consent of Independent Auditors..................................*
23.1 Consent of Counsel (with Exhibit 5.0)............................*
* Filed herewith.
_____________________
[1] Incorporated by reference with the like-numbered exhibit filed with the
company's Form 10-SB filed July 9, 1999.
[2] [intentionally left blank]
[3] Incorporated by reference from the exhibit filed with the company's Form
8-K, filed July 29, 2002.
[4] Incorporated by reference from exhibit 10.7 to the company's Form 10-KSB
filed April 14, 2004.
[5] Incorporated by reference from the like-numbered exhibit from the
company's Form 10-KSB for the fiscal year ended December 31, 2000, filed
March 15, 2001.
[6] Incorporated by reference from the like-numbered exhibit from the
company's Form 10-QSB for the quarter ended June 30, 2001, filed August
13, 2001.
[7] Incorporated by reference from the like-numbered exhibit from the
company's Form 10-KSB for the fiscal year ended December 31, 2003, filed
March 30, 2004.
74
ITEM 17. UNDERTAKINGS.
(a) RULE 415 OFFERING.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or in the most recent
post-effective amendment thereof) which, individually or together, represent a
fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) For the purpose of determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering thereof.
(3) File of a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) WARRANTS AND RIGHTS OFFERINGS. Not applicable.
(c) COMPETITIVE BIDS. Not applicable.
(d) EQUITY OFFERINGS OF NON-REPORTING SMALL BUSINESS ISSUERS. Not
applicable.
(e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a director,
officer, or controlling person of the small business issuer in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act, and will be governed
by the final adjudication of such issue.
75
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Las
Vegas, Nevada, on June 1, 2004.
CAN-CAL RESOURCES LTD.
(Registrant)
Date: June 1, 2004. By: /s/ Anthony F. Ciali
-------------------------------
Anthony F. Ciali, CEO, Director
Date: June 1, 2004. By: /s/ Ronald D. Sloan
-------------------------------
Ronald D. Sloan,
Treasurer, Director
Date: June 1, 2004. By: /s/ John Brian Wolfe
-------------------------------
John Brian Wolfe,
Secretary, Director
Date: June 1, 2004. By: /s/ James Dacyszyn
-------------------------------
James Dacyszyn, Director
76