FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For November 25, 2002
Commission File Number 0-25816
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ARCHANGEL DIAMOND CORPORATION
-----------------------------
(Translation of registrant's name into English)
Suite 205, 10920 West Alameda Avenue, Lakewood, CO 80226
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40- [ ]F
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): ____
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): ____
Indicate by check mark whether by furnishing the information contained in this
Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82- ________
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The following are included in this Form 6-K:
1. Unaudited Interim Financial Statements for the third quarter ended
September 30, 2002
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARCHANGEL DIAMOND CORPORATION
(Registrant)
By: /s/ Gary E. Davis
--------------------
Gary E. Davis
Corporate Secretary
Date: November 26, 2002
Quarterly Report FORM 51-901F (previously Form 61) and
Schedules A, B&C
ISSUER DETAILS
For Quarter Ended: September 30, 2002
Date of Report: November 26, 2002
Name of Issuer: Archangel Diamond Corporation
Issuer's Address: 10920 West Alameda Avenue, Suite 205
Lakewood, Colorado 80226
Issuer Fax Number: 303-297-0538
Issuer Phone Number: 303-292-1299
Contact Person: Gary E. Davis
Contact Position: Corporate Secretary and Chief Financial Officer
Contact Phone Number: 303-292-1299
Contact Email Address: archangeldiamond@worldnet.att.net
Contact Website: www. archangeldiamond.com
CERTIFICATE
The three schedules, Schedules "A," "B" and "C," required to
complete this Quarterly Report are attached and the disclosure
contained therein has been approved by the Board of Directors.
A copy of this Quarterly Report will be provided to any
shareholder who requests it.
Director's Name: Timothy J. Haddon Date Signed: November 26, 2002
Director's Name: Gary E. Davis Date Signed: November 26, 2002
ARCHANGEL DIAMOND CORPORATION
CONSOLIDATED BALANCE SHEETS
(Prepared by Management in United States dollars without audit)
September 30, December 31,
2002 2001
------------------------------
ASSETS
CURRENT ASSETS
Cash $ 428,983 $ 1,379,480
Accounts receivable 5,319 5,057
Prepaid expenses 31,278 25,773
- -----------------------------------------------------------------------------
465,580 1,410,310
Mineral properties 1 1
Capital assets 80,650 80,650
Less accumulated depreciation (77,486) (76,130)
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3,164 4,520
$ 468,745 $ 1,414,831
=============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 260,233 $ 188,346
- -----------------------------------------------------------------------------
260,233 188,346
SHAREHOLDERS' EQUITY
Share capital 31,046,368 31,046,368
Deficit (30,837,856) (29,819,883)
- -----------------------------------------------------------------------------
208,512 1,226,485
$ 468,745 $ 1,414,831
=============================================================================
APPROVED BY THE BOARD
"Timothy Haddon" "Gary E. Davis"
- ------------------------------- ----------------------------------
Director Director
ARCHANGEL DIAMOND CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Prepared by Management in United States dollars without audit)
For the three months For the nine months
ended September 30, ended September 30,
2002 2001 2002 2001
---------------------------------------------------------------
Interest Income $ 1,828 $ 18,163 $ 9,807 $ 87,903
Administration costs
Amortization 452 258 1,356 1,798
Bank charges 701 1,292 2,784 3,062
Consulting 10,833 8,187 27,561 53,906
Foreign exchange loss 68 (14,022) 79 (6,953)
Investor relations 695 19,905 2,267 42,836
Legal and accounting 7,430 10,263 30,208 36,211
Listing fees 25 -- 1,468 1,711
Office and administration 21,364 31,482 69,072 99,396
Printing and shareholder information 2,107 (1,092) 11,890 15,956
Rent 4,368 7,303 15,325 24,813
Salaries and benefits 28,322 52,166 96,211 160,972
Telephone 735 2,125 3,115 5,710
Transfer agent 2,216 3,320 6,583 5,344
Travel 9,045 784 9,577 40,741
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88,361 121,971 277,496 485,503
Property development costs 75,353 271,477 750,284 1,382,178
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NET LOSS FOR THE PERIOD (161,886) (375,285) (1,017,973) (1,779,778)
DEFICIT, BEGINNING OF PERIOD 30,675,970 30,734,163 29,819,883 29,329,670
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DEFICIT, END OF PERIOD $ 30,837,856 $ 31,109,448 $ 30,837,856 $ 31,109,448
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Loss per share $ (0.00) $ (0.01) $ (0.02) $ (0.04)
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Weighted average number of shares 42,234,558 42,234,558 42,234,558 42,234,558
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ARCHANGEL DIAMOND CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Prepared by Management in United States dollars without audit)
For the three months For the nine months
ended September 30, ended September 30,
2002 2001 2002 2001
------------------------------------------------------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES:
Loss for the period $ (161,886) $ (375,285) $(1,017,973) $(1,779,778)
Amortization, an item not involving cash 452 258 1,356 1,798
Changes in non-cash working capital:
Accounts receivable 2,168 1,995 (262) (3,344)
Prepaid expenses 17,764 (13,753) (5,505) (25,117)
Accounts payable and accrued liabilities (60,248) 291,178 71,887 436,393
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(201,750) (95,607) (950,497) (1,370,048)
INVESTING ACTIVITIES:
Purchase of fixed assets -- (2,521) -- (3,106)
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-- (2,521) -- (3,106)
DECREASE IN CASH (201,750) (98,128) (950,497) (1,373,154)
CASH, BEGINNING OF PERIOD 630,733 2,215,717 1,379,480 3,490,743
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CASH, END OF PERIOD $ 428,983 $ 2,117,589 $ 428,983 $ 2,117,589
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Supplementary information:
Income taxes paid $ -- $ -- $ -- $ --
Interest paid -- -- -- --
Interest received 1,828 18,163 9,807 87,903
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ARCHANGEL DIAMOND CORPORATION
Notes to Interim Financial Statements
Nine Months Ended September 30, 2002
(Prepared by Management Without Audit)
1. Interim Financial Statements
The interim consolidated financial statements of the Corporation have been
prepared by management in accordance with Canadian generally accepted
accounting principles. The interim consolidated financial statements do not
conform in all respects to the requirements of generally accepted
accounting principles for annual financial statements and, accordingly,
should be read in conjunction with the consolidated financial statements
and the accompanying notes for the fiscal year ended December 31, 2001.
2. Significant Accounting Policies and Change in Accounting Policy
These interim financial statements follow the same accounting policies and
methods of application as the annual financial statements for the year
ended December 31, 2001, except with regard to the new Recommendations of
the Canadian Institute of Chartered Accountants with respect to accounting
for stock-based compensation and other stock based payments, effective
January 1, 2002. The new Recommendations are applied prospectively to all
stock based payments to non-employees, and to employee awards that are
direct awards of stock, call for settlement in cash or other assets, or are
stock appreciation rights that call for settlement by the issuance of
equity instruments, granted on or after January 1, 2002 (except grants
outstanding at January 1, 2002 that call for settlement in cash or other
assets or stock appreciation rights that call for settlement in equity
instruments of which the Corporation had none).
Pursuant to the new Recommendations, the Corporation will account for all
stock-based payments to non-employees, and employee awards that are direct
awards of stock, call for settlement in cash or other assets, or are stock
appreciation rights that call for settlement by the issuance of equity
instruments, granted on or after January 1, 2002, using the fair value
based method.
No compensation cost is recorded for all other stock-based employee
compensation awards. Consideration paid by employees on the exercise of
stock options will be recorded as share capital and contributed surplus.
The Corporation discloses the pro forma net earning (loss) and earnings
(loss) per share as if the fair value based accounting method had been used
to account for stock-based compensation cost (see note 3). For awards that
vest at the end of a vesting period, compensation cost is recognized on a
straight-line basis; for awards that vest on a graded basis, compensation
cost is recognized on a pro-rata basis over the vesting period.
3. Stock Based Compensation
On February 25, 2002, the Corporation received shareholder approval with
respect to the November 26, 2001 granting of stock options to certain
employees. The Corporation granted 2,400,000 stock options with an exercise
price of Cdn.$0.11 expiring November 26, 2006. 1,600,000 of such options
vest immediately, while 800,000 vest on the earlier of November 26, 2002 or
on the date a change in control of the Corporation occurs.
On May 2, 2002, the Corporation granted 550,000 stock options with an
exercise price of Cdn.$0.19, expiring May 1, 2007. On May 9, 2002, the
Corporation granted 150,000 stock options with an exercise price of
Cdn.$0.17, expiring May 8, 2007. All of these options vest immediately.
No compensation cost has been recognized for these stock-based compensation
awards granted to employees. Had compensation expense been determined based
on the fair value method of accounting for stock based compensation, the
pro forma effect of options issued during the quarter ended September 30,
2002 to employees on the Corporation's net earnings (loss) and per share
amounts would have been as follows:
Loss, as reported $1,018,000
Loss, pro forma $1,817,000
Basic loss per share, as reported $ 0.02
Basic loss per share, pro forma $ 0.04
The fair value of each option grant is calculated assuming an expected life
of three years, volatility of 297%, 228% and 226% for options granted on
February 25, 2002, May 2, 2002 and May 9, 2002, respectively, and a
dividend yield of nil. An interest rate of 4.00% was applied to the
calculation.
4. Comparative Figures
Certain 2001 comparative figures have been reclassified to conform with the
presentation adopted in 2002.
5. Subsequent Events
On October 9, 2002 an aggregate of 230,000 stock options were granted to
certain of the Corporation's directors and consultants. The options are
exercisable at $0.23 until October 10, 2007.
On October 15, 2002 the Colorado State Court for the City and County of
Denver issued an order dismissing the Corporation's action against Lukoil
and AGD based solely on a Determination that it lacked personal
jurisdiction over the Defendants. The Court rejected all of Defendants'
other arguments. The Corporation believes that the Court's decision is
erroneous for a number of reasons, including the Court's failure to
consider the Corporation's fraud and other tort claims against Lukoil and
AGD as a basis for personal jurisdiction.
On October 18, 2002, the Corporation reached an agreement with its Russian
legal counsel to restructure payment of certain invoices for legal services
rendered. In exchange for payment of $150,000, the legal firm agreed to
waive payment of the remaining outstanding balance of approximately
$250,000 until such time as the Corporation is successful in raising
additional funds for operations. Should the Corporation be unsuccessful in
raising additional funds, legal counsel will have no recourse for
collection of these deferred payments.
On October 21, 2002, the Arbitrazh Court of Arkhangel'sk ruled that the
1994 Memorandum between the Corporation and AGD with respect to the ongoing
license transfer dispute is unconcluded and invalid. The decision will be
appealed and, until such time as the appeal is heard, the ruling will not
come into effect.
On October 22, 2002, the Corporation filed a motion with the Colorado State
Court for the City and County of Denver seeking the Court's reconsideration
of its October 15, 2002, order dismissing the Corporation's action against
Lukoil and AGD.
SCHEDULE "B": SUPPLEMENTARY INFORMATION
---------------------------------------
Period Ended September 30, 2002
1. Analysis of expenses for the nine-month period ended September 30, 2002:
a) Effective January 1, 2002, property development costs associated with
the Verkhotina Area are expensed as incurred. Property development
costs for the nine-month period ended September 30, 2002 were $750,300
as shown in the attached Schedule "A" as part of "Statement of
Operations and Deficit."
b) General and administrative expenses for the nine-month period ended
September 30, 2002 were $277,500. A summary is attached in Schedule "A"
as part of "Statement of Operations and Deficit."
2. Related party transactions:
There were no expenditures made to non-arm's length parties for the
nine-month period ended September 30, 2002.
3. Summary of securities issued and options granted during the nine-month
period ended September 30, 2002:
a) Securities issued including date of issue, type of security (common
shares, convertible debentures, etc.), type of issue (private
placement, public offering, exercise of warrants, etc.), number,
price, total proceeds, type of consideration (cash, property, etc.)
and commission paid: None
b) Summary of options granted, including date, number, name of optionee
for those options granted to insiders, generic description of other
optionees (e.g. "employees,") exercise price and expiry date:
--------------------------- -------------------- --------------- ------------------------- -----------
Name Number of Options Date of Grant Exercise Price (Cdn$) Expiry Date
Granted
--------------------------- -------------------- --------------- ------------------------- -----------
Gordon, L. Lamont 100,000 May 2/02 0.19 May 1/07
--------------------------- -------------------- --------------- ------------------------- -----------
Hartz, Clive 100,000 May 2/02 0.19 May 1/07
--------------------------- -------------------- --------------- ------------------------- -----------
Wake-Walker, Richard 100,000 May 2/02 0.19 May 1/07
--------------------------- -------------------- --------------- ------------------------- -----------
Consultants 200,000 May 2/02 0.19 May 1/07
--------------------------- -------------------- --------------- ------------------------- -----------
Employees 50,000 May 2/02 0.19 May 1/07
--------------------------- -------------------- --------------- ------------------------- -----------
Hartz, Clive 100,000 May 9/02 0.17 May 8/07
--------------------------- -------------------- --------------- ------------------------- -----------
Wake-Walker, Richard 50,000 May 9/02 0.17 May 8/07
--------------------------- -------------------- --------------- ------------------------- -----------
Total 700,000
--------------------------- -------------------- --------------- ------------------------- -----------
4. Summary of securities as at the end of the nine-month period ended
September 30, 2002:
a) Description of authorized share capital including number of shares for
each class, dividend rates on preferred shares and whether or nor
cumulative, redemption and conversion provisions:
Authorized capital: unlimited common shares, npv
b) Number and recorded value for shares issued and outstanding:
Issued capital: 42,234,558 common shares, npv
Recorded value: $31,046,368
c) Description of options, warrants and convertible securities
outstanding, including number or amount, exercise or conversion price
and expiry date, and any recorded value:
(i) Share options:
- ------------------------ --------------------------- --------------------------
Number of Options Exercise Price (Cdn$) Expiry Date
- ------------------------ --------------------------- --------------------------
395,000 1.03 October 9, 2002
- ------------------------ --------------------------- --------------------------
93,000 0.50 October 9, 2002 (2)
- ------------------------ --------------------------- --------------------------
1,000,000 1.15 November 28, 2002 (1)(2)
- ------------------------ --------------------------- --------------------------
150,000 1.00 February 17, 2004
- ------------------------ --------------------------- --------------------------
225,000 0.50 February 17, 2004 (2)
- ------------------------ --------------------------- --------------------------
75,000 0.50 February 18, 2004 (2)
- ------------------------ --------------------------- --------------------------
150,000 1.00 April 14, 2005 (4)
- ------------------------ --------------------------- --------------------------
35,000 0.50 June 14, 2005 (2)(3)
- ------------------------ --------------------------- --------------------------
50,000 0.50 November 28, 2005 (5)
- ------------------------ --------------------------- --------------------------
1,500,000 0.11 November 25, 2006 (6)
- ------------------------ --------------------------- --------------------------
900,000 0.11 November 25, 2006 (7)
- ------------------------ --------------------------- --------------------------
550,000 0.19 May 1, 2007
- ------------------------ --------------------------- --------------------------
150,000 0.17 May 8, 2007
- ------------------------ --------------------------- --------------------------
5,273,000
- ------------------------ --------------------------- --------------------------
(1) Options granted to Timothy Haddon vested as to 166,667 on the date of
issuance (November 28, 1997), 333,333 vested on the first anniversary
date and 500,000 options (the "Restricted Options") will vest after
the second anniversary of the effective transfer date of the
Verkhotina License (the "Transfer Date") to Almazny Bereg or a similar
legal entity. The Restricted Options will expire on November 28, 2002
unless the Transfer Date has previously occurred, in which case the
Restricted Options will expire on the earlier of (i) two years and six
months after the Transfer Date, and (ii) March 31, 2004.
(2) The per share exercise price of $1.03 was re-priced to $0.50 as to
93,000 of the October 9, 1997 options granted; 1,000,000 options
granted November 28, 1997 were re-priced from $1.15 to $0.50 per
share; 225,000 of the February 17, 1999 options granted, 75,000
options granted February 18, 1999 and 35,000 options granted June 14,
2000 were re-priced from $1.00 to $0.50 per share during the year
ended December 31, 2000. Shareholder approval was received June 21,
2001.
(3) One-third of the options vested on the date of grant (June 14, 2000);
one-third vested on the first anniversary date; and one-third will
vest on the second anniversary date.
(4) One-third of the options vested on the date of grant, one-third vested
on the first anniversary date and the balance vest on the second
anniversary date.
(5) One-third of the options vested six months from the date of grant
(November 28, 2000); one-third vested on the first anniversary date;
and the balance vest on the second anniversary date.
(6) 1,000,000 of the options vested on date of grant (November 26, 2001)
and 500,000 vest on the earlier of November 26, 2002 or on the date a
Control Change takes place.
(7) 600,000 of the options vested on the date of grant (November 26, 2001)
and 300,000 vest on the earlier of November 26, 2002 or on the date a
Control Change takes place.
(ii) Common share purchase warrants: None
d) Number of shares in each class of shares subject to escrow or pooling
agreements: None
5. Names of directors and officers as at the date this report is signed and
filed:
Directors
---------
Timothy J. Haddon
L. Lamont Gordon
Clive Hartz
Gary E. Davis
Richard Wake-Walker
Officers Position Held
-------- -------------
Timothy J. Haddon President and Chief Executive Officer
Gary E. Davis Chief Financial Officer and Corporate Secretary
SCHEDULE "C": MANAGEMENT DISCUSSION AND ANALYSIS
------------------------------------------------
1. DESCRIPTION OF BUSINESS
The Corporation was incorporated on July 3, 1987 under the name "Gold Parl
Resources Ltd." by registration of its Memorandum and Articles under the
Company Act (British Columbia). On September 3, 1993, the Corporation
changed its name to "Canmet Resources Limited" and consolidated its share
capital on the basis of two pre-consolidation common shares for one
post-consolidation common share. On August 5, 1994, the Corporation changed
its name to "Archangel Diamond Corporation," and on September 16, 1996, the
Corporation was continued from British Columbia to the Yukon Territory. The
Corporation and its predecessors are collectively referred to herein as the
"Corporation."
The Corporation is an international diamond exploration company. The
Corporation is currently engaged in the exploration for, and development
of, diamondiferous kimberlite pipes for the purpose of mining diamonds in
the Russian Federation.
2. DISCUSSION OF BUSINESS
In December 1993, a license (the "License") for the exploration and mining
of diamonds from a 400-square kilometre area located northwest of
Arkhangel'sk, Russia (the "Verkhotina Area") was granted to a Russian
enterprise, Arkhangelskgeoldobycha ("AGD") (formerly Arkhangel'sk Geologia
Enterprises). Through agreements in 1993 and 1994 with AGD, the Corporation
acquired the right to earn a 40% interest in any profits from the
Verkhotina Area. As part of such agreements, including the Memorandum dated
25 February 1994 (the "1994 Memorandum"), AGD agreed to transfer the
License to a Russian joint stock company, of which the Corporation would
hold 40% of the ordinary shares, when Russian legislation permitted such
transfer.
In May 1994, the partners established a Russian international open joint
stock company, Almazny Bereg ("AB"), the ordinary shares of which are owned
50% by AGD, 40% by the Corporation, and 10% by IBME Ltd. AB was formed to
hold the License and to coordinate the operations on the Verkhotina Area.
During May 1995, new Russian legislation was introduced which, in the view
of the Corporation, enabled AGD to transfer the License.
In 1996, the Grib Pipe diamondiferous deposit was discovered by the
Corporation and its Russian partners within the Verkhotina Area. As the
Grib Pipe represents the key asset of the Corporation, it was the primary
focus of the Corporation's work efforts in 1999 and 2000. From the
inception of the project in 1993, approximately $18.4 million has been
invested by the Corporation in the acquisition and exploration of the
Verkhotina Area, for legal and certain administrative costs with respect to
the License transfer dispute, and on the delineation of the Grib Pipe
discovery itself.
In April 1997 the AGD Board of Directors resolved that the transfer of the
License to AB would take place upon completion by the Corporation of an
agreed upon work program (the "Work Program") on the Verkhotina Area for
1997 and the first six-month period of 1998 and that a supplemental
agreement would be prepared to record this. In December 1997 the Work
Program was agreed upon by the parties, and in March 1998 the General
Director of AGD confirmed to the Corporation that the Corporation had
satisfied all of its requirements regarding the Work Program. However, no
supplemental agreement was provided by AGD to the Corporation and transfer
of the License to AB as agreed by the AGD Board did not take place.
After having repeatedly failed in its attempts to get AGD to transfer the
License to AB, in June 1998 the Corporation advised AGD that it was
temporarily suspending its further funding of the Verkhotina Area effective
July 1, 1998 until AGD complies with its obligations. As a result of this,
the Corporation began accruing the costs for continuing exploration work as
invoiced by AGD on the Verkhotina Area until such time as the License
transfer dispute is resolved.
As the parties were unable to reach an agreement concerning License
transfer, in August 1998 the Corporation commenced international
arbitration of the matter in Stockholm as provided for in the Verkhotina
Diamond Venture Agreement (the "VDV Agreement"). The Arbitration Tribunal
was constituted and unanimously accepted preliminarily jurisdiction of the
dispute.
Continued negotiations between the Corporation and AGD resulted in a new
agreement being executed between the parties on July 15, 1999 (the "1999
Agreement"). Among other matters, the 1999 Agreement stipulated that AGD
would, within a period not to exceed 180 days, transfer or re-register the
License to a new Russian joint stock company to be established, of which
the Corporation would also own a 40% interest. As part of the 1999
Agreement, the Corporation agreed to suspend international arbitration for
180 days, after which time the arbitration would be discontinued if the
License had been transferred under the terms of the 1999 Agreement.
Within weeks of executing the 1999 Agreement, AGD brought forth new demands
requesting the right, but not the obligation, to jointly fund the project
through completion of the feasibility study, the right to reimburse the
Corporation for 50% of its past costs, and the right to appoint the General
Director of AB on an alternating basis if they did so fund and reimburse.
As all previous agreements, including the 1999 Agreement, specifically
contemplated that these rights and obligations were to be borne solely by
the Corporation, these new AGD requests erected new roadblocks in effecting
transfer of the License.
In January 2000, with the transfer of the License having not been completed
within the allotted 180-day period, the Corporation formally filed a
request with the Arbitration Tribunal in Stockholm to reinstate the
arbitration proceedings. The Corporation subsequently filed its detailed
Statement of Case on April 14, 2000. After several legal submissions by
both parties, the Tribunal eventually established February 26, 2001 as the
final date for submission to it of all pleadings.
In March 2001, the Tribunal finally heard the Corporation's claim in regard
to AGD's alleged non-performance of the VDV Agreement and its obligation to
transfer the License to the Russian stock company referred to in the 1994
Memorandum. On June 28, 2001, the Tribunal ruled that it does not have
jurisdiction to resolve the Corporation's dispute with AGD regarding the
diamond license transfer, despite the unanimous Tribunal ruling in April
1999 that it did have jurisdiction over this dispute. The decision was
split with the dissenting arbitrator commenting that the majority's
decision that the present dispute was not arbitrable in Sweden was
manifestly erroneous and was contrary to the overwhelming body of law,
practice and legal commentary in Sweden. He also found that it improperly
overruled the Tribunal's own previous Award on Jurisdiction which had been
rendered in April 1999 and, therefore, directly violated the principle of
the finality of arbitration awards, as contained in the Swedish and
UNCITRAL [United Nations Commission of International Trade Law] rules
governing the arbitration.
In its June 2001 decision, the Tribunal found that both parties should
share the cost of arbitration equally. The Corporation had solely borne the
costs of arbitration and, in early August 2001, AGD reimbursed the
Corporation $279,026 for its half of such costs.
In July 2001, the Corporation filed with the Swedish District Court a
Summons Application for appeal of the Stockholm Arbitration Tribunal's June
28, 2001 decision seeking to determine the majority arbitrators'
competence. A preparatory conference with the Judge presiding over the
matter was scheduled to be held in May 2002. Subsequently, at the May 2002
preliminary hearing, the Swedish District Court accepted the Corporation's
petition. A final hearing is scheduled for December 2002.
In August 2001, open joint stock company Lukoil, the largest oil company in
Russia and one of the largest oil companies in the world, filed a claim
before the Arbitration Court of the Arkhangel'sk Region in Russia (the
"Russian Court"), seeking a ruling that the 1999 Agreement between Lukoil's
subsidiary, AGD, and the Corporation is of no legal force or effect. The
claim was filed against the Corporation, AB and Lukoil's 74.1% owned and
controlled subsidiary, AGD. Lukoil filed the claim on the basis that its
rights as a shareholder of AGD were infringed by reason of AGD entering
into the 1999 Agreement, even though the 1999 Agreement has been
unanimously approved by the Board of AGD at a meeting at which senior
representatives of the Lukoil group participated. Lukoil also filed claims
with the Russian Court asking it to declare invalid the arbitration clauses
of the VDV Agreement and to prohibit the Corporation and AGD from
participating in international commercial arbitration in Stockholm.
Simultaneously, AGD filed a petition with the Russian Court asking that the
1994 Memorandum be declared invalid. All cases were scheduled to be heard
by the Russian Court in March 2002.
The Corporation subsequently received a letter in August 2001 from AGD
alleging that the Corporation is in breach of the VDV Agreement and
associated agreements by reason of the Corporation's failure to fund
ongoing exploration since July 1998. AGD requested that the Corporation
sign a document under which it would terminate the VDV Agreement and
associated agreements without compensation. AGD stated in the letter that
if such a termination agreement was not received within twenty days, they
would take legal measures to enforce the termination of the VDV Agreement
and associated agreements. In December 2001, AGD filed a claim with the
Russian Court seeking a ruling that VDV Agreement be terminated as AGD
alleged that the funding provisions were breached by the Corporation. The
case is scheduled to be heard in August 2002.
It is clear from the terms of this letter and from the claims brought by
Lukoil and AGD before the Russian courts, that, if the Corporation does not
accede to AGD's request, Lukoil and AGD will seek to expel the Corporation
from the Verkhotina project. Such expulsion will mean that the Corporation
will cease to have any contractual right to, or proprietary interest in,
the Grib Pipe diamondiferous deposit, which was jointly discovered by the
Corporation and AGD in 1996 and which has significant potential value.
On August 7, 2001, the Russian President signed amendments to Russia's
existing legislation on joint stock companies that may dramatically affect
the ownership and operation of AB, the Corporation's 40 percent owned
company established in 1994. Among other things, the new amendments, which
become effective January 1, 2002, provide that a shareholder that has more
than 50 percent of the shares has full control over the management of the
joint stock company and may elect the board of directors, the director
general and the chief accountant at its sole discretion. As a result of
this legislation, it is possible that AGD could gain complete control of AB
sometime in the future, contrary to the original charter and agreement
amongst AGD, the Corporation and IBME.
A Special General Meeting of Shareholders of the Corporation was held
February 25, 2002, whereat disinterested Shareholders approved:
(1) an amendment to and restatement of the Equity Incentive Plan (the
"Amended and Restated Plan"), as approved by the Board of Directors on
November 26, 2001 and by the Canadian Venture Exchange on November 30,
2001, to (i) increase the number of Common Shares reserved for issuance
thereunder from 4,200,000 to 6,335,183 Common Shares, representing 15%
of the issued and outstanding Common Shares (42,234,558 Common Shares
as of December 31, 2001); (ii) amend references to the "Vancouver Stock
Exchange" to "Canadian Venture Exchange"; and (iii) amend the
definitions of "Market Price" and "Eligible Participant" to align the
Amended and Restated Plan to the Canadian Venture Exchange's stock
option policy; and
(2) (a) the grant of 1,500,000 options to purchase Common Shares in
the Corporation to Timothy J. Haddon, President and CEO, at an
exercise price of Cdn $0.11 per share (the average trading price
of the shares on the Canadian Venture Exchange for the preceding
ten days was Cdn$0.148 to which the allowable Discounted Market
Price of 25% was applied, equalling Cdn$0.11) having an expiry
date of November 25, 2006, with 1,000,000 of such options vesting
immediately and 500,000 vesting on the earlier of November 26,
2002 or on the date a Control Change takes place; and
(b) 900,000 options to purchase Common Shares in the Corporation to
Gary E. Davis, Secretary and CFO, at an exercise price of Cdn
$0.11 per share (the average trading price of the shares on the
Canadian Venture Exchange for the preceding ten days was Cdn$0.148
to which the allowable Discounted Market Price of 25% was applied,
equalling Cdn$0.11) having an expiry date of November 25, 2006,
with 600,000 of such options vesting immediately and 300,000
vesting on the earlier of November 26, 2002 or on the date a
Control Change takes place.
The options to Messrs. Haddon and Davis were approved by the Board of
Directors of the Corporation on November 26, 2001 and approved by the
Canadian Venture Exchange on December 3, 2001. The options were granted
consideration of Messrs. Haddon and Davis agreeing to reduce their
respective monthly remuneration so that the Corporation can conserve its
financial resources. Effective January 1, 2002, the gross remuneration paid
to each of Messrs. Haddon and Davis by the Corporation, was reduced by
approximately 60% and 40%, respectively.
During March 2002, the three different claims brought by Lukoil and AGD
against the Corporation in Russia in August 2001 were heard by the Russian
Court. On March 21, 2002, the Russian Court rejected the claim brought by
Lukoil which sought a ruling that the arbitration clause in the VDV
Agreement be declared invalid. The Judge presiding over the matter
postponed until May 21, 2002, the hearings on the claim brought by Lukoil
seeking to have the 1999 Agreement declared invalid and on AGD's petition
that the 1994 Memorandum be declared unconcluded and invalid. At a hearing
on May 21, 2002, the Judge dismissed Lukoil's claim, finding that the 1999
Agreement is valid. AGD's petition regarding the 1994 Memorandum was
remanded until July 26, 2002, at which hearing original specimens of AGD's
signator to the Memorandum, Dr. Grib, were presented to the Court for
examination by handwriting experts. The case was subsequently again
remanded until such examination is completed. A decision regarding this
matter was forthcoming in late October 2002 [See 4. Subsequent Events].
As a direct result of the actions by Lukoil and AGD, in November 2001 the
Corporation filed a lawsuit in Denver District Court, State of Colorado,
against Lukoil and AGD (the "Defendants") seeking to recover in excess of
US$1 billion in damages for harm caused by a scheme of fraud, breach of
contract, civil conspiracy and related claims. In January 2002 Lukoil filed
a notice with the U.S. District Court (10th Federal District) seeking to
have the lawsuit moved to the Federal court and in March 2002 filed a
motion to have the case dismissed. In April 2002 the U.S. District Court
remanded all action, including the Defendants' motion to dismiss the case,
to the Denver District Court. On June 5, 2002, the Corporation filed its
memorandum with the Denver District Court in opposition to the Defendants
motion to dismiss and in late June the Defendants filed their final
responses. On October 15, 2002 the Denver District Court issued an order
dismissing the Corporation's action against Lukoil and AGD [See 4.
Subsequent Events].
In August 2002, the TSX Venture Exchange notified the Corporation that it
had been reclassified to a Tier 2 designation from a Tier 1, mainly due to
the Corporation's 2001 year end write down of the capitalized deferred
mineral property and exploration costs of the Verkhotina project. This
write down in the carrying value of the property was necessitated as the
result of a new Canadian accounting guideline which became effective for
the Corporation as of December 31, 2001, combined with the disputes
concerning the Verkhotina mineral property and the Company's extended delay
in exploration activity.
The foregoing not withstanding, the Corporation is continuing to explore
avenues to resolve the dispute, with the assistance of senior Russian
Federation and Canadian Government officials, so that investment in the
Verkhotina Area may resume.
3. DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
The Corporation had a net loss of $1,018,000 for the nine-month period
ended September 30, 2002, versus a net loss of $1,779,800 for the same
period ended September 30, 2001.
Administration costs during the nine-month period ended September 30, 2002,
versus the same period ended September 30, 2001, decreased $208,000 from
$485,500 in 2001 to $277,500 in 2002. Administration costs were reduced
primarily due to decreased Investor relations, Office administration,
Salaries and benefits, Consulting and Travel costs. Investor relation costs
decreased from $42,800 during the nine months ended September 30, 2001 to
$2,300 during the same period in 2002 due to the elimination of the
investor relations consulting position due to the lack of shareholder
activity. Office administration costs were reduced by $30,300 from the
first three quarters of 2001 to the same period in 2002 primarily due to
the absence of moving costs experienced in first quarter 2001, decreased
insurance coverages and associated premiums, and an overall cutback in
office spending in 2002. Salaries and benefit costs were $96,200 for the
nine months ended September 30, 2002 versus $161,000 for the same period in
2001 due to voluntary salary cutbacks taken by the executive officers for
the Corporation. Consulting costs decreased $29,700 from the nine months
ended September 30, 2001 compared to the same period in 2002. The decrease
is attributable to the elimination of board of director's fees for 2002.
Travel costs were reduced to 9,600 during the first three quarters of 2002
from $40,700 for the first three quarters of 2001 due to the elimination of
all non-essential travel in 2002. Property development costs were $750,300
for the nine months ended September 30, 2002 versus $1,382,200 for the
comparable period in 2001. These costs relate primarily to the legal costs
incurred for the arbitration and legal proceedings relating to the
Verkhotina license dispute. The costs were higher in 2001 due to the
Stockholm arbitration hearing and subsequent appeal in 2001. Interest
income has decreased from $87,900 for the first nine months of 2001 to
$9,800 for the same period in 2002 as a result of lower cash balances
during 2002 versus 2001 and lower interest rates.
At the Corporation's Annual General Meeting of Shareholders held June 20,
2002, the following persons were elected as directors for the ensuing year:
Timothy J. Haddon (President and CEO), Gary E. Davis (CFO and Corporate
Secretary), Clive Hartz, L. Lamont Gordon and Richard Wake-Walker. Former
directors Robert Shirriff, Q.C. and Alasdair Pein did not stand for
re-election.
4. SUBSEQUENT EVENTS
On October 9, 2002 an aggregate of 230,000 stock options were granted to
certain of the Corporation's directors and consultants. The options are
exercisable at $0.23 until October 10, 2007.
On October 15, 2002 the Colorado State Court for the City and County of
Denver issued an order dismissing the Corporation's action against Lukoil
and AGD based solely on a Determination that it lacked personal
jurisdiction over the Defendants. The Court rejected all of Defendants'
other arguments. The Corporation believes that the Court's decision is
erroneous for a number of reasons, including the Court's failure to
consider the Corporation's fraud and other tort claims against Lukoil and
AGD as a basis for personal jurisdiction.
On October 18, 2002, the Corporation reached an agreement with its Russian
legal counsel to restructure payment of certain invoices for legal services
rendered. In exchange for payment of $150,000, the legal firm agreed to
waive payment of the remaining outstanding balance of approximately
$250,000 until such time as the Corporation is successful in raising
additional funds for operations. Should the Corporation be unsuccessful in
raising additional funds, legal counsel will have no recourse for
collection of these deferred payments.
On October 21, 2002, the Arbitrazh Court of Arkhangel'sk ruled that the
1994 Memorandum between the Corporation and AGD with respect to the ongoing
license transfer dispute is unconcluded and invalid. The decision will be
appealed and, until such time as the appeal is heard, the ruling will not
come into effect.
On October 22, 2002, the Corporation filed a motion with the Colorado State
Court for the City and County of Denver seeking the Court's reconsideration
of its October 15, 2002, order dismissing the Corporation's action against
Lukoil and AGD.
5. FINANCINGS, PRINCIPAL PURPOSES AND MILESTONES
Not applicable.
6. LIQUIDITY AND SOLVENCY
The Corporation has working capital of $205,300 at September 30, 2002
compared to a working capital deficit of $559,400 at September 30, 2001. As
of September 30, 2002, the Corporation had $429,000 in cash compared with
$2,117,600 as of September 30, 2001. Based on its current rate of
expenditure, including payment of $150,000 to legal counsel in October 2002
[See 4.Subsequent Events], and absent the raising of additional funds, the
Corporation has sufficient funds from September 30, 2002, to continue its
primary activities through the end of calendar year 2002.
The Corporation will strive to conserve cash wherever it can while
continuing to pursue, as long as monetarily possible, the claims pending in
the U.S. and Russia regarding Lukoil and AGD. Inasmuch as the Corporation
has to date not been successful in holding jurisdiction in the U.S. in its
lawsuits against Lukoil and AGD, the Corporation has yet to be successful
in raising additional funds to support general administrative expenses and
to continue with the various legal proceedings. Discussions remain ongoing
with several prospective investors, and the Corporation is hopeful that
additional funding will be forthcoming before December 31, 2002.
Should the Corporation be unsuccessful in obtaining such funding by
December 31, 2002, it is the current intention of the Corporation to
further reduce, and possibly close, the Denver office and continue only
those minimum activities as required to maintain the corporate entity while
continuing to explore avenues to resolve the ongoing disputes.