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 May 2003
Commission File Number 0-25816
-------
ARCHANGEL DIAMOND CORPORATION
-----------------------------
(Translation of registrant's name into English)
Suite 400, 65 Overlea Blvd., Toronto, ON M4H 1P1
(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- ________
________________________________________________________________________________
The following are included in this Form 6-K:
Annual General Meeting - June 12, 2003
- --------------------------------------
- - Notice of Meeting
- - Management Proxy Circular
- - Proxy Card
- - Supplemental Mailing Card
- - BC Form 51-902F, Schedules A, B&C to the audited consolidated financial
statements for the year ended December 31, 2002, as contained in the Annual
Report
- - Annual Report
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/ David Massola
-----------------
David Massola
Chief Financial Officer
Date: May 16, 2003
Notice of 2003 Annual Meeting of Shareholders
Management Proxy Circular
Meeting will be held at: Crowne Plaza Hotel 225 Front Street West Toronto,
ONTARIO 10:00 a.m. (EDT) Thursday, June 12, 2003
NOTICE OF
ANNUAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the "Meeting")
of ARCHANGEL DIAMOND CORPORATION (the "Corporation") will be held at the Crowne
Plaza Hotel, 225 Front Street West, Toronto, Ontario, on Thursday, the 12th day
of June 2003, at the hour of 10:00 o'clock in the forenoon (Eastern Daylight
Time), for the following purposes:
1. To receive the report of the directors to the shareholders and the
financial statements of the Corporation for the fiscal year ended December
31, 2002, together with the report of the auditors thereon;
2. To appoint auditors for the ensuing year;
3. To authorize the directors to fix the remuneration to be paid to the
auditors;
4. To fix the number of directors at five;
5. To elect directors for the ensuing year;
6. To transact such further and other business as may be properly brought
before the Meeting or any adjournment(s) thereof.
This Notice is accompanied by a Instrument of Proxy, Management Proxy Circular
and the Corporation's Annual Report for the fiscal year ended December 31, 2002.
The share transfer books of the Corporation will not be closed, but the Board of
Directors has fixed Friday, May 2, 2003, as the Record Date for the
determination of shareholders entitled to notice of and to vote at the Meeting.
================================================================================
Shareholders who are unable or do not wish to attend the meeting in person are
requested to date and sign the enclosed Instrument of Proxy promptly and return
it in the self-addressed envelope enclosed for such purpose. To be used at the
Meeting, the Instrument of Proxy must be deposited at the offices of the Pacific
Corporate Trust Company, 10th Floor - 625 Howe Street, Vancouver, British
Columbia V6C 3B8, no later than forty-eight (48) hours (excluding Saturdays,
Sundays and holidays) prior to the time of the Meeting, or any adjournment(s)
thereof. If a shareholder receives more than one Instrument of Proxy because
such shareholder owns shares registered in different names or addresses, each
Instrument of Proxy should be completed and returned.
================================================================================
DATED at London, England, this 25th day of April 2003.
BY ORDER OF THE BOARD
"Raymond A. Clark"
RAYMOND A. CLARK
President, Chief Executive Officer and a Director
ARCHANGEL DIAMOND CORPORATION
Suite 400, 65 Overlea Boulevard, Toronto, Ontario M4H 1P1
Management Proxy Circular
As at April 25, 2003, except as indicated.
(All dollar amounts are expressed in Canadian dollars unless otherwise noted)
SOLICITATION OF PROXIES
THIS MANAGEMENT PROXY CIRCULAR IS FURNISHED IN CONNECTION WITH THE SOLICITATION
BY THE MANAGEMENT OF ARCHANGEL DIAMOND CORPORATION (THE "CORPORATION") OF
PROXIES TO BE USED AT THE ANNUAL MEETING OF THE SHAREHOLDERS OF THE CORPORATION
to be held on Thursday, June 12, 2002, at 10:00 a.m. (Toronto, Ontario time)
(the "Meeting") and any adjournment(s) thereof at the time and place and for the
purposes set forth in the accompanying Notice of Meeting. References in the
Management Proxy Circular to "Shareholder" or "Shareholders" are references to
the holder or holders of the common shares of the Corporation (the "Common
Shares").
All costs of solicitation will be borne by the Corporation. While it is expected
that the solicitation will be primarily by mail, proxies may be solicited
personally or by telephone by the directors, officers and regular employees of
the Corporation or by agents retained for that purpose.
APPOINTMENT AND REVOCATION OF PROXIES
The persons named in the enclosed Instrument of Proxy are directors and/or
senior officers of the Corporation. A REGISTERED SHAREHOLDER DESIRING TO APPOINT
SOME OTHER PERSON (WHO NEED NOT BE A REGISTERED SHAREHOLDER) TO REPRESENT SUCH
REGISTERED SHAREHOLDER AT THE MEETING MAY DO SO EITHER BY INSERTING SUCH OTHER
PERSON'S NAME IN THE BLANK SPACE PROVIDED IN THE INSTRUMENT OF PROXY OR BY
COMPLETING ANOTHER INSTRUMENT OF PROXY. To be used at this Meeting, the
completed Instrument of Proxy must be deposited at the office of the
Corporation's Registrar and Transfer Agent, Pacific Corporate Trust Company,
10th Floor, 625 Howe Street, Vancouver, British Columbia V6C 3B8, no later than
forty-eight (48) hours (excluding Saturdays, Sundays and holidays) prior to the
time of the Meeting, or any adjournment(s) thereof.
A Registered Shareholder who has given a proxy may revoke it at any time, before
it is exercised, by any manner provided by law including: (a) signing an
Instrument of Proxy bearing a later date or by any other instrument in writing
executed by the Registered Shareholder or by such Registered Shareholder's
attorney-in-fact authorized in writing or, where the Registered Shareholder is a
corporation, by a duly authorized officer or attorney-in-fact of that
corporation, and delivering the same to the registered office of the Corporation
at Suite 200, 204 Lambert Street, Whitehorse, Yukon Territory Y1A 3T2, no later
than forty-eight (48) hours (excluding Saturdays, Sundays and holidays) prior to
the time of the Meeting, or any adjournment(s) thereof, or to the Chairman of
the Meeting before any vote in respect of which the Instrument of Proxy is to be
used shall have been taken; or (b) attending the Meeting in person and
registering with the scrutineers as a Registered Shareholder personally present.
NON-REGISTERED SHAREHOLDERS
Only Registered Shareholders or the persons they appoint as their proxies are
permitted to vote at the Meeting. In many cases, Common Shares beneficially
owned by a person (a "non-registered shareholder") are registered either (i) in
the name of an intermediary that the non-registered shareholder deals with in
respect of the Common Shares (intermediaries include, among others, banks, trust
companies, securities dealers or brokers and trustees or administrators of
self-administered RRSPs, RRIFs, RESPs and similar plans) or (ii) in the name of
a clearing agency such as The Canadian Depository for Securities Limited of
which the intermediary is a participant. In accordance with the requirements of
National Instrument 54-101 of the Canadian Securities Administrators, the
Corporation will have distributed copies of the Notice of Meeting, this
Management Proxy Circular and the Instrument of Proxy (collectively, the
"Meeting Materials") to the clearing agencies and intermediaries for onward
distribution to non-registered shareholders who have not waived the right to
receive them.
Intermediaries are required to forward the Meeting Materials to those
non-registered shareholders who have not waived the right to receive them.
Intermediaries often use service companies to forward the Meeting Materials to
non-registered shareholders. Generally, non-registered shareholders who have not
waived the right to receive the Meeting Materials will either:
(a) be given an Instrument of Proxy which has already been signed by the
intermediary (typically by a facsimile, stamped signature), which is
restricted to the number of Common Shares beneficially owned by the
non-registered shareholder but which is otherwise uncompleted. In this
case, the non-registered shareholder who wishes to submit a proxy
should properly complete the Instrument of Proxy and submit it to the
Corporation's Registrar and Transfer Agent, Pacific Corporate Trust
Company, as provided above; or
(b) be given an Instrument of Proxy which is not signed by the intermediary
and which, when properly completed and signed by the non-registered
shareholder and returned to the intermediary or its service company,
will constitute voting instructions (often called a "proxy
authorization form") which the intermediary must follow. Typically, the
non-registered shareholder will be given a page of instructions which
contains a removable label containing a bar-code and other information.
In order for the Instrument of Proxy to validly constitute a proxy
authorization form, the non-registered shareholder must remove the
label from the instructions and affix it to the Instrument of Proxy,
properly complete and sign the Instrument of Proxy and submit it to the
intermediary or its service company in accordance with the instructions
of the intermediary or the service company.
In either case, the purpose of these procedures is to permit non-registered
shareholders to direct the voting of the shares they beneficially own. If a
non-registered shareholder who receives either an Instrument of Proxy or a proxy
authorization form and who wishes to attend the Meeting and vote in person (or
have another person do so on behalf of the non-registered shareholder), the
non-registered shareholder should strike out the persons named in the Instrument
of Proxy and insert the name of the non-registered shareholder or other person's
name in the blank space provided. In either case, non-registered shareholders
should follow the instructions of their intermediary carefully, including the
instructions regarding when and where the Instrument of Proxy or proxy
authorization form is to be delivered.
A non-registered shareholder may revoke a proxy authorization form (voting
instructions), or a waiver of the right to receive Meeting Materials and to
vote, given to an intermediary at any time by written notice to the
intermediary, except that an intermediary is not required to act on revocation
of a proxy authorization form (voting instructions) or of a waiver of the right
to receive Meeting Materials and to vote, that is not received by the
intermediary at least seven (7) days prior to the Meeting.
EXERCISE OF DISCRETION BY PROXIES
The shares represented by proxy are entitled to be voted only on a poll
(ballot). If there is certainty of instruction on the enclosed Instrument of
Proxy, the shares represented thereby will be voted by the persons named therein
on any poll (ballot) except where there is a specification to withhold from
voting and, where a choice with respect to any matter to be acted upon has been
specified in the Instrument of Proxy, the shares will be voted in accordance
with the specification so made. IN THE ABSENCE OF ANY INSTRUCTIONS, THE SHARES
WILL BE VOTED AS IF THE REGISTERED SHAREHOLDER HAD SPECIFIED AN AFFIRMATIVE
VOTE.
The enclosed Instrument of Proxy confers discretionary authority upon the
persons named therein with respect to: (a) amendments or variations to matters
identified in the Notice of Meeting; and (b) other matters which may properly
come before the Meeting or any adjournment(s) thereof. In the event that
amendments or variations to matters identified in the Notice of Meeting are
properly brought before the Meeting, or any further or other business is
properly brought before the Meeting, it is the intention of the persons
designated in the enclosed Instrument of Proxy to vote in accordance with their
best judgment on such matters or business. At the time of printing of this
Management Proxy Circular, management of the Corporation knows of no such
amendments, variations or other matters to come before the Meeting other than
the matters referred to in the Notice of Meeting.
VOTING SHARES AND PRINCIPAL HOLDERS THEREOF
The Corporation is authorized to issue an unlimited number of Common Shares,
each share carrying the right to one vote. As of the date hereof, 72,234,558
Common Shares were issued as fully paid and non-assessable. The share transfer
books of the Corporation will not be closed, but the Board of Directors has
fixed May 2, 2003 as the record date for the determination of shareholders
entitled to notice of and to vote at the Meeting or any adjournment(s) thereof,
and only shareholders of record at the close of business on that date are
entitled to such notice and to vote at the Meeting. A complete list of the
shareholders entitled to vote at the Meeting will be open to examination by any
shareholder for any purpose germane to the Meeting, during ordinary business
hours at the offices of the Corporation or at the Meeting.
To the knowledge of the directors and/or senior officers of the Corporation, no
person beneficially owns, directly or indirectly, or exercises control or
direction over Common Shares carrying more than 10% of voting rights attached to
all outstanding shares of the Corporation except the following:
===================== =========================== ===================== =========================================
Name Type of Ownership Number of Shares % of Outstanding Common Shares
- --------------------- --------------------------- --------------------- -----------------------------------------
Cencan S.A. (1)(2) Of record and beneficial 45,305,226 (1) 62.7%
===================== =========================== ===================== =========================================
Notes:
(1) On December 19, 2002, Cencan S.A., a wholly-owned subsidiary of De Beers
S.A., subscribed for 28,000,000 shares of the Corporation and purchased
17,305,226 million shares from Task Holdings Limited.
(2) The information as to shares beneficially owned, not being within the
knowledge of the management of the Corporation, has been furnished by the
respective individuals or has been extracted from the register of
shareholdings maintained by the Corporation's Registrar and Transfer Agent,
Pacific Corporate Trust Company.
VOTES NECESSARY TO PASS RESOLUTIONS AT THE MEETING
Under the Corporation's By-laws, the quorum for the transaction of business at
the Meeting consists of two persons present in person or by proxy, each being a
shareholder of the Corporation entitled to vote thereat or a duly appointed
proxy for an absent shareholder so entitled, and together holding or
representing by proxy not less than 10% of the outstanding Common Shares of the
Corporation entitled to vote at the Meeting. The Yukon Business Corporations Act
requires a majority of the votes cast at the Meeting (in person or by proxy) to
pass the resolutions referred to in the accompanying Notice of Meeting.
BUSINESS OF THE MEETING
Report of the Directors
The Annual Report of the directors of the Corporation for the year ended
December 31, 2002 accompanies this Information Circular.
Financial Statements
The financial statements of the Corporation for the year ended December 31, 2002
will be placed before the Shareholders at the Meeting. Such financial statements
have been mailed to Shareholders together with the Notice of Meeting and this
Information Circular.
Election of Directors
The Board of Directors presently consists of six (6) directors. Unless otherwise
instructed, the proxies given pursuant to this solicitation will be voted in
favour of fixing the number of directors at six (6) for the ensuing year.
The term of office of each of the present directors expires at the Meeting. The
persons named below will be presented for election at the Meeting as
management's nominees and the persons named in the accompanying Instrument of
Proxy as proxyholders intend to vote for the election of these nominees as
directors. Management does not contemplate that any such nominee will be unable
to serve as a director. Each director elected will hold office until the next
annual meeting of the Corporation or until a successor is elected or appointed,
unless such director's office is earlier vacated in accordance with the By-laws
of the Corporation or with the provisions of the Yukon Business Corporations
Act.
The following table sets out the name and, if applicable, all offices of the
Corporation now held by each nominee to be presented by management for election
as director for the ensuing year, as well as the principal occupation of each
such nominee; the period of time, if applicable, that each has served as a
director of the Corporation; and the number of Common Shares of the Corporation
beneficially owned by each, directly or indirectly, or over which control or
direction is exercised.
==================================== ========================================= ==================== ===============
Shares
Name, Position of Office Principal Occupation Term as Director Beneficially
with the Corporation or Employment of the Corporation Owned (2)
------------------------------------ ----------------------------------------- -------------------- ---------------
RALFE, GARY M. Managing Director of De Beers S.A. December 19, 2002 Nil
Chairman & Director since January 1998; Director of De
Beers Consolidated Mines Ltd. since
March 1990 and of De Beers Centenary AG
since May 1990, both private
subsidiaries of De Beers S.A., and
Director of Consolidated Co Bultfontein
Mine (London Exchange) since May 1998.
------------------------------------ ----------------------------------------- -------------------- ---------------
CLARK, RAYMOND A. Head of the Moscow Office of The December 19, 2002 Nil
President, Chief Executive Officer Diamond Trading Co. Ltd., the to date
& Director London-based rough-diamond marketing
arm of De Beers, since April 1994.
------------------------------------ ----------------------------------------- -------------------- ---------------
FARMILOE, MICHAEL J.M. Director of The Diamond Trading Co. December 19, 2002 Nil
Non-Executive Director Ltd., the London-based rough-diamond to date
marketing arm of De Beers, since June
1995.
------------------------------------ ----------------------------------------- -------------------- ---------------
HARTZ, CLIVE (1) International businessman. March 25, 1997 to 603,000
Non-Executive Director date
------------------------------------ ----------------------------------------- -------------------- ---------------
GORDON, L. LAMONT (1) Investment banker. July 31, 1997 to Nil
Non-Executive Director date
------------------------------------ ----------------------------------------- -------------------- ---------------
SHIRRIFF, ROBERT (1) Counsel, Fasken Martineau DuMoulin LLP, December 19, 2002 25,000
Non-Executive Director Barristers and Solicitors to date
==================================== ========================================= ==================== ===============
Notes:
(1) Denotes a member of the Audit Committee and of the Corporate Governance
Committee. The Corporation does not presently have an Executive Committee.
(2) The information as to Common Shares beneficially owned, controlled or
directed has been furnished by the respective directors and nominees.
Unless otherwise indicated, such shares are held directly.
Appointment of Auditor
The persons named in the enclosed Instrument of Proxy, unless directed by the
shareholder completing the proxy to withhold voting, intend to vote for the
appointment of Deloitte & Touche LLP as auditors of the Corporation to hold
office until the next annual meeting of shareholders and to authorize the
directors to fix the remuneration of the auditors so appointed.
By resolution dated April 25, 2003 the Board of Directors of the Corporation
resolved not to propose the Corporation's present auditors, KPMG LLP for
re-appointment to the position as auditors for the Corporation at the meeting
and further approved the termination of the services of KPMG LLP and the
proposal to the meeting of the appointment of Deloitte & Touche as the successor
auditors of the Corporation. There are no reportable disagreements between the
Corporation and KPMG LLP, as defined in National Policy Statement No. 31 of the
Canadian Securities Administrators, and there have been no qualified opinions or
denials of opinions by KPMG LLP.
Attached to this Management Proxy Circular as Schedule "A" is (i) a Notice to
Shareholders of Change of Auditor stating that there have been no "reportable
events" as defined in National Policy No. 31; (ii) a letter of KPMG LLP
confirming that the contents of the Notice to Shareholders of Change of Auditor
are, to the best of their knowledge, true; (iii) a letter of Deloitte & Touche
LLP confirming, to the best of their knowledge, that the contents of the Notice
to Shareholders of Change of Auditor are true; and (iv) a written confirmation
that the letters referred to in items (ii) and (iii) above have been reviewed by
the directors of the Corporation.
The Board of Directors of the Corporation recommends the election of Deloitte &
Touche LLP as auditors of the Corporation, to hold office until the close of the
next annual meeting of shareholders, and the authorization for the directors to
fix the remuneration of the auditors so appointed.
EXECUTIVE COMPENSATION
Compensation Table
The following table sets forth all compensation earned for the three most
recently completed financial years by the Chief Executive Officer and the
Corporation's most highly compensated executive officers, other than the Chief
Executive Officer, each of whose total annual compensation exceeded Cdn$100,000
(collectively the "Named Executive Officers").
Summary Compensation Table
======================================== ========== ============== ===================== =========================
Fiscal Securities Under
Name and Principal Position Year Salary Options Granted All Other Compensation
(Cdn$) (#) (Cdn$)
- ---------------------------------------- ---------- -------------- --------------------- -------------------------
Timothy J. Haddon (1) 2002 131,807 1,000,000 933 (3)
President & Chief Executive Officer 2001 334,154 1,500,000 13,944 (3)
2000 300,109 Nil 23,859 (3)
- ---------------------------------------- ---------- -------------- --------------------- -------------------------
Gary E. Davis (2) 2002 131,807 75,000 Nil
Corporate Secretary & Chief Financial 2001 200,038 900,000 8,014 (4)
Officer 2000 179,309 Nil 13,362 (4)
======================================== ========== ============== ===================== =========================
Notes:
(1) Mr. Haddon served as Chief Executive Officer and President from November
28, 1997 to December 19, 2002. Mr. Raymond Clark was appointed Chief
Executive Officer and President on December 19, 2002 but was not paid any
compensation for the balance of the fiscal year. Mr. Haddon's employment
was terminated effective December 19, 2002. See "Termination of Employment,
Change in Responsibilities and Employment Contracts" below.
(2) Mr. Davis served as Chief Administrative Officer from July 31, 1997 to
November 28, 1997, Acting Chief Financial Officer from November 28, 1997 to
July 22, 1998, Corporate Secretary from July 31, 1997 to December 19, 2002,
Acting Chief Financial Officer from November 28, 1997 to July 22, 1998, and
Chief Financial Officer from July 22, 1998 to December 19, 2002. Mr. Davis'
employment was terminated effective December 19, 2002. See "Termination of
Employment, Change in Responsibilities and Employment Contracts" below.
(3) This amount constitutes compensation paid under the Corporation's 401K
defined contribution plan and life insurance premiums for a life insurance
policy naming the Corporation as beneficiary. The life insurance premiums
were $933 in 2002, $1,345 in 2001 and $2,850 in 2000.
(4) Compensation paid under the Corporation's 401K defined contribution plan.
Option Grants During the Most Recently Completed Fiscal Year
The following table sets forth stock options granted during the most recently
completed fiscal year to each of the Named Executive Officers.
======================== ============= ===================== =============== ======================= =============
Securities % of Total Options Market Value of
Under Granted to All Securities Underlying
Name and Position as Options Employees in the Exercise or Options on the Date Expiration
at Fiscal Year-end Granted Financial Year Base Price of Grant Date
(#) ($/Securities) ($/Security)
------------------------ ------------- --------------------- --------------- ----------------------- -------------
Timothy J. Haddon 1,000,000 51.8% 0.10 0.10 Nov 29/07
President & Chief
Executive Officer
------------------------ ------------- --------------------- --------------- ----------------------- -------------
Gary E. Davis 75,000 03.8% 0.23 0.30 Oct 09/07
Corporate Secretary &
Chief Financial Officer
======================== ============= ===================== =============== ======================= =============
CORPORATE GOVERNANCE PRACTICES
The Corporation has adopted a policy for corporate governance which is broadly
in line with the TSX Toronto Stock Exchange guidelines and commensurate with the
size and stage of development of the Corporation. The current and proposed Board
of Directors consists of and will, if elected, consist of three directors who
are considered by the Board to be "unrelated directors" as such term is used in
Section 474 of the TSX Stock Exchange Company Manual, two of whom do not have
interests in or relationships with either the Corporation or a significant
shareholder of the Corporation. Messrs. Ralfe, Clark and Farmiloe, due to their
positions in management of the Corporation and/or their respective affiliation
with De Beers S.A., are considered related directors for the purposes herein.
Mr. Shirriff is a partner in the law firm of Fasken Martineau DuMoulin LLP,
Canadian legal counsel for De Beers S.A.
There are no special structures or processes in place to facilitate the
functioning of the Board of Directors independently of management. However, the
independent directors are given full access to management so that they can
develop an independent perspective and express their views and communicate their
expectations of management.
The Board of Directors has established a standing Audit Committee and Corporate
Governance Committee. The Corporation does not currently have an Executive or
Compensation Committee. The members of the Audit Committee are all outside
directors (with a majority considered unrelated directors). The role of the
Audit Committee is to provide oversight of the Corporation's financial
management and of the design and implementation of an effective system of
internal financial controls; and review and report to the Board of Directors on
all audited financial statements prepared by the Corporation. The members of the
Corporate Governance Committee are all outside directors (with a majority
considered unrelated directors). The role of the Corporate Governance Committee
is to develop and monitor the Corporation's overall approach to corporate
governance issues and, subject to approval by the Board of Directors, implement
and administer the system. The Corporation maintained a Compensation Committee
represented by outside directors (with a majority considered unrelated
directors) until December 19, 2002. From December 19, 2002, forward, no
compensation has been paid to the Corporation's executive officers, nor is any
compensation contemplated for the near future and, consequently, the Board of
Directors decided that a Compensation Committee was no longer required.
The Board of Directors periodically reviews the guidelines on corporate
governance adopted by Section 474 of the TSX Stock Exchange Company Manual to
determine ways of implementing those guidelines that will improve the governance
of the Corporation.
Compensation of Directors
Beginning February 17, 1999, the Chairman receives cash remuneration of US$7500
and each non-executive director receives cash remuneration of US$5,000, payable
during the first quarter of the fiscal year for services to be rendered during
the remainder of the fiscal year, as well as reimbursement for all related
out-of-pocket expenses. As of November 24, 2000, payment of such fees to
Directors was deferred until the transfer of the Verkhotina Licence is effected
at which time each Director will receive payment of all fees so deferred.
Directors performing work for the Corporation that is outside of that considered
normal for directorship positions are reimbursed at the rate of US$100 per hour,
plus reimbursement of associated expenses.
The following table sets forth all consulting or directors' fees paid to the
Corporation's directors, former directors, or companies controlled by them,
excluding the Named Executive Officers, during the last completed fiscal year.
==========================================================================
Name of Director Amount of Compensation
(Cdn$)
- --------------------------------------------------------------------------
Hartz, Clive 7,845 (1)
- --------------------------------------------------------------------------
Gordon, L. Lamont 7,845 (1)
- --------------------------------------------------------------------------
Pein, Alasdair 0
- --------------------------------------------------------------------------
Shirriff, Robert 0
- --------------------------------------------------------------------------
Wake-Walker, Richard 7,845 (2)
==========================================================================
Notes:
(1) This compensation was accrued, but not paid during the last completed
fiscal year.
(2) This compensation was paid upon receipt of Mr. Wake-Walker's resignation
from the Board, December 19, 2002 as was the accrued compensation for 2001
in the amount of $7,745.
During the last completed fiscal year, the Corporation granted incentive stock
options to directors or former directors, excluding the Named Executive
Officers, as follows:
================================== ========================= ========================= =================
Name and Position as at Fiscal Securities Under Exercise Price Expiration Date
Year-end Options Granted ($/Securities)
(#)
- ---------------------------------- ------------------------- ------------------------- -----------------
Gordon, Lamont L. 50,000 0.23 Oct 9/07
100,000 0.19 May 1/07
- ---------------------------------- ------------------------- ------------------------- -----------------
Hartz, Clive 50,000 0.23 Oct 9/07
100,000 0.17 May 8/07
100,000 0.19 May 1/07
- ---------------------------------- ------------------------- ------------------------- -----------------
Wake-Walker, Richard 50,000 0.23 Oct 9/07
50,000 0.17 May 8/07
100,000 0.19 May 1/07
================================== ========================= ========================= =================
Termination of Employment, Change in Responsibilities and Employment Contracts
Executive employment agreements executed November 27, 1997, between the
Corporation and Mr. Haddon and Mr. Davis (the "Employment Agreement(s)"),
providing for terms of employment, salary, benefits, expenses, confidentiality
and termination with or without cause and upon certain events, were modified
effective January 1, 2002 to reflect changes in compensation, resulting in a
reduction in annual salaries from $200,000 for Mr. Haddon and from $120,000 for
Mr. Davis to $7000 per month each.
As a result of a Change of Control of the Corporation on December 19, 2002, the
Employment Agreements (as amended) were terminated by way of a Termination and
Release Agreement executed on that date, between the Corporation and each of
Messrs. Haddon and Davis.
Under Messrs. Haddon's and Davis' respective Termination and Release Agreement,
each acknowledged, confirmed and agreed that as of December 19, 2002, the
Employment Agreement was terminated and that each discharged the Corporation and
its directors, officers, employees, servants, agents, predecessors and assigns
(collectively, the Releasees") of and from any and all actions, causes of
action, claims, demands, damages, interest, costs, expenses and compensation of
any kind, however arisen, whether known or unknown (collectively, a "Claim"),
and which each of them then had or any time thereafter can, shall or may have,
in any way resulting or arising from any cause, matter, or thing whatsoever
existing up to the present time with respect to the Releasees, and in
particular, of and from or in connection with any business, directorship or
employment arrangement between or among each of them or their respective
affiliates and any or all of the Releasees and any remuneration obligation or
settlement related thereto, except as follows for:
a) any salary payable to each of them, respectively, pursuant to the
Employment Agreement as of December 19, 2002;
b) any deferred salary or bonus obligations owed to each of them,
respectively, by the Corporation as of December 19, 2002;
c) any outstanding stock options or other rights to purchase granted or
issued to each of them, respectively, in any capacity by the
Corporation up to December 19, 2002;
d) any claim or right of indemnity from the Corporation for the benefit
of each of them, respectively, in accordance with Yukon corporate law
in connection with any Claim made against Mr. Haddon in his capacity
as an employee or officer of the Corporation; and
e) the rights and obligations set out in the Termination and Release
Agreement.
Equity Incentive Plan
The Corporation currently maintains an equity incentive plan (the "Amended and
Restated 1999 Equity Incentive Plan") adopted by the Board of Directors and
ratified by the disinterested Shareholders of the Corporation in February 2002
and which amended and restated the 1999 Equity Incentive Plan adopted by the
Board of Directors and Shareholders of the Corporation in July 1999 which had
replaced the Incentive Stock Option Plan adopted by the Board of Directors and
Shareholders of the Corporation in July 1997, as amended in January 1998 and
July 1998.
The Amended and Restated 1999 Equity Incentive Plan (the "Plan") authorizes an
aggregate of 6,335,183 Common Shares be reserved for issuance, inclusive of
those Common Shares reserved under the share bonus provisions described below.
The Plan provides the Board of Directors with the discretion to, from time to
time, grant options to purchase Common Shares of the Corporation to directors,
senior officers, employees and consultants of the Corporation or its
subsidiaries. Options shall be granted only to such eligible participants who,
by the nature of their jobs or their participation in the affairs of the
Corporation or any subsidiary are, in the opinion of the Board of Directors, in
a position to contribute to the success of the Corporation or that subsidiary.
The exercise price for each option shall be determined by the Board of
Directors, provided that such price shall not be lower than the minimum price
allowable pursuant to the policies of the applicable Stock Exchange on the date
of grant of the option. Options shall be exercisable for a period, or in
percentage installments over such period, to be determined in each instance by
the Board of Directors, not exceeding five years from the date of grant. The
stock option provisions also provide that, subject to applicable law, the Board
of Directors may authorize the Corporation to loan money to an employee, on such
terms and conditions as the Board of Directors may reasonably determine, to
assist such employee to exercise an option held by him or her. Such terms and
conditions of any loan shall include, in any event, interest at prevailing
market rates, a term not in excess of one year, and security in favour of the
Corporation.
The Plan also provides the Board of Directors with the discretion to, from time
to time, issue or reserve for issuance, for no cash consideration, to directors,
senior officers and employees any number of Common Shares of the Corporation as
a discretionary bonus subject to the limits prescribed in the Plan and such
provisos and restrictions as the Board of Directors may determine. The aggregate
maximum number of bonus shares that may be issued and/or allocated for issuance
pursuant to the share bonus provisions will be limited to 1,000,000 Common
Shares. Shares reserved for issuance and issued under the share bonus provisions
shall be subject to the limitations set out in the Plan. The Board of Directors
shall have the right to reallocate any of the bonus shares reserved for issuance
under share bonus provisions for future issuance under the share option
provisions the event that any bonus shares specifically reserved under the share
bonus provisions are reallocated to the share option provisions, the aggregate
maximum number of bonus shares reserved under the share option provisions will
be reduced to that extent.
The purpose of the Plan is to attract, retain and motivate directors, officers,
consultants, and employees of the Corporation (including an employee who is an
officer and director) or any subsidiary thereof by providing them with the
opportunity, through stock options, to acquire Common Shares in the capital of
the Corporation. The purpose of the Plan is also to provide Eligible Persons
with additional incentive; to encourage stock ownership by such Eligible
Persons; and to increase the proprietary interest of Eligible Persons in the
success of the Corporation.
MANAGEMENT CONTRACTS
The Corporation has entered into an arrangement with De Beers Canada whereby
certain management and administrative responsibilities are conducted on behalf
of the Corporation by personnel of De Beers Canada. The Corporation will
reimburse De Beers Canada for such services in the amount of $150 per hour plus
actual expenses incurred, such amount to be capped at $5000 per month.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
On December 19, 2002, the Corporation closed a private placement of 30,000,000
Common Shares in the capital stock of the Corporation at a price of $0.10 for
proceeds of $3,000,000. Cencan S.A., a Luxembourg company affiliated with De
Beers S.A., acquired 28,000,000 Common shares, representing 38.8% of the total
issued share capital of the Corporation. Cencan S.A. also concurrently acquired
17.3 million shares owned by Task Holdings Limited, resulting in aggregate
ownership of approximately 45.3 million Common shares (or 64%) of the
Corporation on a post-transaction basis. Clive Hartz, a director of the
Corporation, participated in the private placement through the indirect
acquisition of 500,000 Common shares at $0.10 per share.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED ON AT THE MEETING
Except as set forth herein, no proposed nominee for election as a director, and
no director or officer of the Corporation has any interest in any matter to be
acted on at the Meeting.
OTHER MATTERS
Management of the Corporation is not aware of any other matter to come before
the Meeting other than as set forth in the Notice of Meeting. If any other
matter properly comes before the Meeting, it is the intention of the persons
named in the enclosed Instrument of Proxy to vote the Common Shares represented
thereby in accordance with their best judgement on such matter.
ADDITIONAL INFORMATION
Shareholders may obtain additional information about the Corporation in the
Annual Report for the year ended December 31, 2002, which is included with this
Information Circular. Additional copies may be obtained without charge upon
request to Linda Dorrington, at the offices of the Corporation, telephone: (416)
423-1600. Shareholders may also access the Corporation's disclosure documents
through the Internet on the Canadian System for Electronic Document Analysis and
Retrieval (SEDAR) at .
DATED at Toronto, Ontario, this 25th day of April 2003.
CERTIFICATION
The foregoing contains no untrue statement of a material fact and does not omit
to state a material fact that is required to be stated or that is necessary to
make a statement not misleading in light of the circumstances in which it was
made.
/s/ Raymond A. Clark /s/ David W. Massola'
- --------------------------------- --------------------------------------
RAYMOND A. CLARK DAVID W. MASSOLA
Chief Executive Officer Chief Financial Officer
SCHEDULE "A"
(i)
Notice to Shareholders of Change of Auditor stating that there have been no
"reportable events" as defined in National Policy 31
________________________________________________________________________________
NOTICE OF CHANGE OF AUDITOR
ARCHANGEL DIAMOND CORPORATION
(the "Corporation")
TO: British Columbia Securities Commission
Alberta Securities Commission
Manitoba Securities Commission
Ontario Securities Commission
Yukon Registrar of Securities
TSX Venture Exchange
AND TO: The shareholders of Archangel Diamond Corporation
Please be advised that the Corporation's current auditor, KPMG LLP, will not be
proposed by the board of directors of the Corporation for re-appointment to the
position as auditor for the Corporation at the Corporation's annual meeting of
shareholders to be held on June 12, 2003. By resolution dated April 25, 2003,
the board of directors of the corporation have approved the termination of the
services of KPMG LLP and approved the proposal to appoint Deloitte & Touche LLP,
as the auditor of the Corporation at the next annual meeting of shareholders.
The Corporation reports that there have been no reservations in the auditors'
reports of KPMG LLP for the last two fiscal years reported on by KPMG, LLP
ending December 31, 2001 and December 31, 2002. In the opinion of the
Corporation, there have been no "Reportable Events" (as defined below) in
connection with the audit of the Corporation's last two fiscal years reported
upon by KPMG LLP.
For the purposes of this notice, National Policy Statement No. 31 of the
Canadian Securities Administrators, states that a Reportable Event may consist
of "disagreements," "unresolved issues" and "consultations," each as defined in
National Policy Statement No. 31, between the Corporation and its former
auditor, KPMG LLP.
Dated at Toronto, Ontario this 25th day of April 2003.
BY ORDER OF THE BOARD
/s/ David W. Massola
DAVID W. MASSOLA
CHIEF FINANCIAL OFFICER AND
SECRETARY
(ii)
Letter from KPMG LLP confirming that there have been no "reportable events" as
defined in National Policy No. 31
________________________________________________________________________________
KPMG LLP
KPMG LLP
Chartered Accountants
Box 10426 777 Dunsmuir Street Telephone: (604) 691-3000
Vancouver BC V7Y 1K3 Telefax: (604) 691-3031
Canada www.kpmg.ca
British Columbia Securities Commission
Alberta Securities Commission
Manitoba Securities Commission
Ontario Securities Commission
Yukon Registrar of Securities
TSX Venture Exchange
Dear Sirs:
Re: Archangel Diamond Corporation
We have read the attached Notice of Archangel Diamond Corporation dated April
25, 2003 and are in agreement with the statements contained in such Notice.
Yours very truly
KPMG LLP (signed)
Chartered Accountants
Vancouver, Canada
May 5, 2003
cc
Deloitte & Touche
(iii)
Letter from Deloitte & Touche LLP confirming, to the best of their knowledge,
that the contents of the Notice to Shareholders of Change of Auditor are true
________________________________________________________________________________
Deloitte & Touche LLP
BCE Place
181 Bay Street, Suite 1400
Toronto, ON M5J 2V1
Canada
Tel: (416) 601-6150
Fax: (416) 601-8151
www.deloitte.ca Deloitte
- --------------- & Touche
May 7, 2003
British Columbia Securities Commission
Alberta Securities Commission
Manitoba Securities Commission
Ontario Securities Commission
Yukon Registrar of Securities
TSX Venture Exchange
Dear Sirs:
Archangel Diamond Corporation - National Policy 31
(Change of Auditors of a Reporting Issuer)
We acknowledge receipt of a Notice of Change of Auditor (the "Notice") dated
April 25, 2003 delivered to us by Archangel Diamond Corporation ("Archangel") in
respect of the resignation of KPMG LLP from the office of auditor of Archangel
and the subsequent appointment of Deloitte & Touche LLP to that office,
effective as of April 25, 2003.
Pursuant to National Policy 31, please accept this letter as confirmation by
Deloitte & Touche LLP that we have reviewed the Notice and, based on our
knowledge as at the time of receipt of the Notice, we agree with each of the
statements therein.
We trust the foregoing is satisfactory. If you have any questions, please do not
hesitate to contact Robert Francis at (416) 601-6174.
Yours truly,
s/s DELOITTE & TOUCHE LLP
(iv)
Confirmation that the letters referred to in items (i), (ii) and (iii) above
have been reviewed by the directors of the Corporation
________________________________________________________________________________
ARCHANGEL DIAMOND CORPORATION
VIA SEDAR
April 25, 2003
TO: British Columbia Securities Commission
Alberta Securities Commission
Manitoba Securities Commission
Ontario Securities Commission
Yukon Registrar of Securities
TSX Venture Exchange
AND TO: The shareholders of Archangel Diamond Corporation
Dear Sirs:
RE: Archangel Diamond Corporation (the "Corporation")
- Change of Auditors
The undersigned, on behalf of the Board of Directors (the "Board") of the
Corporation, hereby confirms that the Board has reviewed the attached Notice of
Change of Auditors; the letter from the former auditor of the Corporation, KPMG
LLP; and the letter from the successor auditors of the Corporation, Deloitte &
Touche LLP.
Dated at Toronto, Ontario, this 25th day of April 2003
By and on behalf of the
Board of Directors of Archangel Diamond Corporation
/s/ David W. Massola
ANNUAL GENERAL MEETING OF SHAREHOLDERS OF
Archangel Diamond Corporation (the "Corporation")
TO BE HELD AT Crowne Plaza Hotel
225 Front Street West, Toronto, Ontario
ON Thursday, June 12, 2003, at 10:00 a.m. (EDT)
The undersigned shareholder ("Registered Shareholder") of the Corporation hereby
appoints, Gary M. Ralfe, a Director of the Corporation, or failing this person,
Raymond A. Clark, a Director of the Corporation, or in the place of the
foregoing, , (print the name), as proxyholder for and on behalf of the
Registered Shareholder with the power of substitution to attend, act and vote
for and on behalf of the Registered Shareholder in respect of all matters that
may properly come before the aforesaid meeting of the Registered Shareholders of
the Corporation (the "Meeting") and at every adjournment thereof, to the same
extent and with the same powers as if the undersigned Registered Shareholder
were present at the said Meeting, or any adjournment thereof.
The Registered Shareholder hereby directs the proxyholder to vote the securities
of the Corporation registered in the name of the Shareholder as specified
herein.
The undersigned Registered Shareholder hereby revokes any proxy previously given
to attend and vote at said Meeting.
REGISTERED SHAREHOLDER SIGN HERE: ______________________________________
DATE SIGNED: ___________________________
- --------------------------------------------------------------------------------
Resolutions (For full details of each item, please see the enclosed Notice of
Meeting and Management Proxy Circular)
For Against
1. To authorize the Directors to fix the Auditors'
remuneration ------- -------
2. To determine the number of Directors at six ------- -------
For Withhold
3. To appoint Deloitte & Touche LLP, Chartered Accountants,
as Auditors ------ ------
4. To elect as Director, Gary M. Ralfe ------ ------
5. To elect as Director, Raymond A. Clark ------ ------
6. To elect as Director, Michael J.M. Farmiloe ------ ------
7. To elect as Director, Robert Shirriff ------ ------
8. To elect as Director, L. Lamont Gordon ------ ------
9. To elect as Director, Clive Hartz ------ ------
- --------------------------------------------------------------------------------
THIS PROXY FORM MAY NOT BE VALID UNLESS IT IS SIGNED AND DATED.
SEE IMPORTANT INFORMATION AND INSTRUCTIONS ON REVERSE.
INSTRUCTIONS FOR COMPLETION OF PROXY
1. This Proxy is solicited by the Management of the Corporation.
2. This form of proxy ("Instrument of Proxy") must be signed by you, the
Registered Shareholder, or by your attorney duly authorized by you in
writing, or, in the case of a corporation, by a duly authorized officer or
representative of the corporation; and if executed by an attorney, officer,
or other duly appointed representative, the original or a notarial copy of
the instrument so empowering such person, or such other documentation in
support as shall be acceptable to the Chairman of the Meeting, must
accompany the Instrument of Proxy.
3. If this Instrument of Proxy is not dated in the space provided, authority
is hereby given by you, the Registered Shareholder, for the proxyholder to
date this proxy seven (7) calendar days after the date on which it was
mailed to you, the Registered Shareholder, by Pacific Corporate Trust
Company.
4. A Registered Shareholder who wishes to attend the Meeting and vote on the
resolutions in person, may simply register with the scrutineers before the
Meeting begins.
5. A Registered Shareholder who is not able to attend the Meeting in person
but wishes to vote on the resolutions, may do the following:
(a) appoint one of the management proxyholders named on the Instrument of
Proxy, by leaving the wording appointing a nominee as is (i.e. do not
strike out the management proxyholders shown and do not complete the
blank space provided for the appointment of an alternate proxyholder).
Where no choice is specified by a Registered Shareholder with respect
to a resolution set out in the Instrument of Proxy, a management
appointee acting as a proxyholder will vote the resolution as if the
Registered Shareholder had specified an affirmative vote;
OR
(b) appoint another proxyholder, who need not be a Registered Shareholder
of the Corporation, to vote according to the Registered Shareholder's
instructions, by striking out the management proxyholder names shown
and inserting the name of the person you wish to represent you at the
meeting in the space provided for an alternate proxyholder. If no
choice is specified, the proxyholder has discretionary authority to
vote as the proxyholder sees fit.
6. The securities represented by this Instrument of Proxy will be voted or
withheld from voting in accordance with the instructions of the Registered
Shareholder on any poll of a resolution that may be called for and, if the
Registered Shareholder specifies a choice with respect to any matter to be
acted upon, the securities will be voted accordingly. Further, if so
authorized by this Instrument of Proxy, the securities will be voted by the
appointed proxyholder with respect to any amendments or variations of any
of the resolutions set out on the Instrument of Proxy or matters which may
properly come before the Meeting as the proxyholder in its sole discretion
sees fit.
7. If a Registered Shareholder has submitted an Instrument of Proxy, the
Registered Shareholder may still attend the Meeting and may vote in person.
To do so, the Registered Shareholder must record his/her attendance with
the scrutineers before the commencement of the Meeting and revoke, in
writing, the prior votes.
================================================================================
To be represented at the Meeting, voting instructions must be DEPOSITED at the
office of "PACIFIC CORPORATE TRUST COMPANY" " no later than forty-eight ("48")
hours (excluding Saturdays, Sundays and holidays) prior to the time of the
Meeting, or adjournment thereof.
The mailing address of Pacific Corporate Trust Company is 10th Floor, 625 Howe
Street, Vancouver, British Columbia, V6C 3B8, and its fax number is (604)
689-8144.
================================================================================
Supplemental Mailing List Return Card (National Instrument 54-101)
NOTICE TO SHAREHOLDERS OF ARCHANGEL DIAMOND CORPORATION
In accordance with National Instrument 54-101/Communication with Beneficial
Owners of Securities of a Reporting Issuer (54-101) and pursuant to the British
Columbia Securities Act and Rules:
Any registered shareholder may elect annually to have his or her name added to
an issuer's supplemental mailing list in order to receive quarterly reports
for the issuer's first, second, and third fiscal quarters. All Registered
shareholders will automatically receive a quarterly report for an issuer's
fourth fiscal quarter; while only Non-registered shareholders entitled to
receive an issuer's audited financial statements, pursuant to 54-101, will
receive a quarterly report for an issuer's fourth fiscal quarter.
In anticipation of the ability to use electronic methods for communication
between issuers and their shareholders, we are requesting that you provide us
with your fax number and/or e-mail address. Please also indicate your preferred
method of communication.
------------------------------------------------------------------------
ARCHANGEL DIAMOND CORPORATION (the "Corporation")
The undersigned certifies that he/she is the owner of securities (other than
debt instruments) of the Corporation, and requests that he/she be placed on the
issuer's Supplemental Mailing List in respect of its quarterly financial
statements.
________________________________________________________________________________
Name - Please Print
________________________________________________________________________________
Address
________________________________________________________________________________
City/ Province/Postal Code
________________________________________________________________________________
Signature Date
________________________________________________________________________________
Fax E-mail Address
Method of Communication: ___Fax ___E-mail ___Mail
Please complete and return this card to: Archangel Diamond Corporation.
P.O. Box 1609
Summerland, BC V0H 1Z0
Fax: (250) 404-0311
E-mail: securitiescomp@shaw.ca
----------------------
BCSC
QUARTERLY AND YEAR END REPORT
British Columbia BC FORM 51-901F (previously Form 61)
Securities Commission
________________________________________________________________________________
INCORPORATED AS PART OF:
[ X ] Schedule A
[ X ] Schedules B and C
(Place X in appropriate category.)
________________________________________________________________________________
ISSUER DETAILS
DATE OF REPORT
NAME OF ISSUER FOR QUARTER ENDED YY/MM/DD
________________________________________________________________________________
ARCHANGEL DIAMOND CORPORATION DECEMBER 31, 2002 03/05/02
________________________________________________________________________________
ISSUER'S ADDRESS: 65 OVERLEA BOULEVARD, SUITE 400
________________________________________________________________________________
CITY PROVINCE POSTAL CODE ISSUER FAX NO. ISSUER TELEPHONE NO.
Toronto Ontario M4H 1P1 416-429-2462 416-423-1600
________________________________________________________________________________
CONTACT PERSON CONTACT'S POSITION CONTACT TELEPHONE NO.
David W. Massola CFO & Corporate Secretary 416-423-1600
________________________________________________________________________________
CONTACT EMAIL ADDRESS WEB SITE ADDRESS
archangeldiamond.com www.archangeldiamond.com
________________________________________________________________________________
CERTIFICATE
The three schedules required to complete this Report are attached and the
disclosure contained therein has been approved by the Board of Directors. A copy
of this Report will be provided to any shareholder who requests it.
________________________________________________________________________________
DIRECTOR'S SIGNATURE PRINT FULL NAME DATE SIGNED
YY/MM/DD
"Robert Shirriff" Robert Shirriff 03/05/02
________________________________________________________________________________
DIRECTOR'S SIGNATURE PRINT FULL NAME DATE SIGNED
YY/MM/DD
"Clive Hartz" Clive Hartz 03/05/02
________________________________________________________________________________
(Electronic signatures should be entered in "quotations".)
________________________________________________________________________________
ARCHANGEL DIAMOND CORPORATION
SCHEDULE "B": SUPPLEMENTARY INFORMATION
Period Ended December 31, 2002
1. Analysis of expenses for the year ended December 31, 2002:
a) Effective January 1, 2002, property development costs associated with
the Verkhotina Area are expensed as incurred. Property development
costs for the year ended December 31, 2002 were $1,864,293 as shown in
the attached Schedule "A" as part of "Statement of Operations and
Deficit."
b) General and administrative expenses for the year ended December 31,
2002 were $2,272,917. A summary is attached in Schedule "A" as part of
"Statement of Operations and Deficit."
2. Related party transactions: During the year ended December 31, 2002, the
Corporation received, on a cost recovery basis, $24,742 related to office
space and administration costs from a company whose chief financial officer
was the chief financial officer and secretary of the Corporation prior to
the change in management control.
There were no other expenditures made to non-arm's length parties for the
year ended December 31, 2002.
3. Summary of securities issued and options granted during the year ended
December 31, 2002:
a) Securities issued including date of issue, type of security (common
shares, convertible debentures, etc.), type of issue (private
placement, public offering, exercise of warrants, etc.), number,
price, total proceeds, type of consideration (cash, property, etc.)
and commission paid:
------------- -------------------- -------------------- -------------- ----------------- ----------------
Type of Number of Common Price per Share Total Type of Commission Paid
Security Shares (Cdn$) Proceeds Consideration
(US$)
------------- -------------------- -------------------- -------------- ----------------- ----------------
Common 30,000,000 0.10 1,890,106 Cash None
Shares
------------- -------------------- -------------------- -------------- ----------------- ----------------
b) Summary of options granted, including date, number, name of optionee
for those options granted to insiders, generic description of other
optionees (e.g. "employees,") exercise price and expiry date:
--------------------------- -------------------- --------------- ----------------- ---------------
Name Number of Options Date of Grant Exercise Price Expiry Date
Granted (Cdn$)
--------------------------- -------------------- --------------- ----------------- ---------------
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 (1) 100,000 May 2/02 0.19 May 1/07
--------------------------- -------------------- --------------- ----------------- ---------------
Consultants (2) 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 (1) 50,000 May 9/02 0.17 May 8/07
--------------------------- -------------------- --------------- ----------------- ---------------
Gordon, L. Lamont 50,000 Oct 9/02 0.23 Oct 9/07
--------------------------- -------------------- --------------- ----------------- ---------------
Davis, Gerald E. (3) 75,000 Oct 9/02 0.23 Oct 9/07
--------------------------- -------------------- --------------- ----------------- ---------------
Hartz, Clive 50,000 Oct 9/02 0.23 Oct 9/07
--------------------------- -------------------- --------------- ----------------- ---------------
Wake-Walker, Richard (1) 50,000 Oct 9/02 0.23 Oct 9/07
--------------------------- -------------------- --------------- ----------------- ---------------
Consultant 5,000 Oct 9/02 0.23 Oct 9/07
--------------------------- -------------------- --------------- ----------------- ---------------
Haddon, Timothy (4) 1,000,000 Nov 28/02 0.10 Nov 28/07
--------------------------- -------------------- --------------- ----------------- ---------------
TOTAL 1,930,000
--------------------------- -------------------- --------------- ----------------- ---------------
(1) As of December 19, 2002, Mr. Wake-Walker is no longer a director of
the Corporation, however, by resolution of the Board of Directors
of the Corporation, all options granted to Mr. Wake-Walker will run
to their respective expiry dates.
(2) All options are fully vested with the exception of 100,000 options
which are subject to vesting requirements as follows: 1/4 vested
August 2, 2002; 1/4 vested November 2, 2002; 1/4 vested February 2,
2003 and the balance will vest May 1, 2003.
(3) As of December 19, 2002, Mr. Davis is no longer a director or
officer of the Corporation, however, effective December 31, 2002,
he became a consultant to the Corporation. By resolution of the
Board of Directors of the Corporation, all of Mr. Davis's options
will run to their respective expiry dates.
(4) As of December 19, 2002, Mr. Haddon is no longer a director or
officer of the Corporation, however, effective December 31, 2002,
he became a consultant to the Corporation. By resolution of the
Board of Directors of the Corporation, all of Mr. Haddon's options
will run to their respective expiry dates.
4. Summary of securities as at the end of the year ended December 31, 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: 72,234,558 common shares, npv Recorded value: $32,936,474
c) Description of options, warrants and convertible securities
outstanding, including number or amount, exercise or conversion price
and expiry date, and any recorded value:
(i) Share options:
- ------------------------ --------------------------- -----------------------
Number of Options Exercise Price (Cdn$) Expiry Date
- ------------------------ --------------------------- -----------------------
50,000 1.00 February 18, 2004
- ------------------------ --------------------------- -----------------------
100,000 0.50 February 18, 2004 (1)
- ------------------------ --------------------------- -----------------------
200,000 0.50 February 18, 2004 (2)
- ------------------------ --------------------------- -----------------------
50,000 1.00 April 14, 2005
- ------------------------ --------------------------- -----------------------
35,000 0.50 June 14, 2005 (1)
- ------------------------ --------------------------- -----------------------
50,000 0.50 November 28, 2005
- ------------------------ --------------------------- -----------------------
1,500,000 0.11 November 25, 2006
- ------------------------ --------------------------- -----------------------
900,000 0.11 November 25, 2006
- ------------------------ --------------------------- -----------------------
550,000 0.19 May 1, 2007
- ------------------------ --------------------------- -----------------------
150,000 0.17 May 8, 2007
- ------------------------ --------------------------- -----------------------
230,000 0.23 October 9, 2007
- ------------------------ --------------------------- -----------------------
1,000,000 0.10 November 28, 2007
- ------------------------ --------------------------- -----------------------
4,815,000 (3)
- ------------------------ --------------------------- -----------------------
(1) The per share exercise price of $1.03 was re-priced to $0.50 December 13,
2000.
(2) The per share exercise price of $1.03 was re-priced to $0.50 June 21, 2001.
(3) All options are fully vested with the exception of 100,000 options which
are subject to vesting requirements as follows: 1/4 vested August 2, 2002;
1/4 vested November 2, 2002; 1/4 vested February 2, 2003 and the balance
will vest May 1, 2003.
(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
---------
Gary M. Ralfe
Raymond A. Clark
Michael J.M. Farmiloe
L. Lamont Gordon
Clive Hartz
Robert Shirriff
Officers Position Held
Gary M. Ralfe Chairman
Raymond A. Clark President and Chief Executive Officer
David Massola Chief Financial Officer and Corporate Secretary
SCHEDULE "C": MANAGEMENT DISCUSSION AND ANALYSIS
------------------------------------------------
3 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 Licence (the "Licence") 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
Licence 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 Licence 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 Licence.
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 Licence 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
Licence 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 quarter 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 Licence 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
Licence 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 Licence
transfer dispute is resolved.
As the parties were unable to reach an agreement concerning Licence
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
Licence 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
Licence 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 Licence.
In January 2000, with the transfer of the Licence having not been completed
within the allotted 180-day period, the Company formally filed a request
with the Tribunal to reinstate the arbitration proceedings. The Company
subsequently filed its detailed statement of case on April 14, 2000. After
several legal submissions by both parties, the Tribunal established
February 26, 2001 as the final date for submission of pleadings.
During the week of March 5, 2001 the Tribunal heard the Company's claim in
regard to AGD's alleged non-performance of the amended VDV Agreement and
its obligation to transfer the Licence to the Russian joint stock company
referred to in the Memorandum. On the basis of new arguments put forward by
AGD, the Tribunal agreed to hear new arguments as to its jurisdiction over
the dispute.
On June 27, 2001, the Tribunal issued a split ruling that the dispute was
not arbitrable in Sweden, a finding that overturned their 1999 acceptance
of jurisdiction over the dispute. The Company filed a Summons Application
with the Swedish District Court on July 23, 2001, seeking to determine the
majority arbitrators' competence regarding their majority decision of "no
jurisdiction," and in May 2002, the Swedish District Court accepted the
Corporation's petition. Detailed pleadings have not been submitted by both
parties. Submission of pleadings was postponed a number of times upon the
request of both parties and, consequently, the main hearing scheduled for
mid-December 2002 was postponed. A new pre-trial hearing is scheduled for
June 2, 2003. A date for a main hearing is not yet fixed; however, this is
not likely to take place before autumn 2003.
On August 23, 2001, LUKoil, the 74.1% owner of AGD, filed claims with the
Arbitration Court of the Arkhangel'sk Region in the Russian Federation
("Arbitration Court") seeking a ruling, in the case of the first claim,
that the arbitration provisions in the VDV Agreement are invalid and, in
the case of the second claim, that the 1999 Agreement is invalid. In
addition, on August 31, 2001, AGD filed a claim with the Arbitration court
of the Arkhangel'sk region seeking a ruling that the Memorandum be declared
not concluded and invalid and, further, on January 14, 2002, AGD filed a
claim with the same court to terminate the VDV Agreement on the grounds
that the VDV Agreement funding provisions have been breached by the
Company.
During 2002, a number of hearings were held with respect to these claims.
Firstly, on March 21, 2002, the Arbitration Court at first instance
rejected the claim brought by LUKoil that the arbitration clause in the VDV
Agreement be declared invalid and this decision was not appealed. Secondly,
on May 21, 2002, the Arbitration Court at first instance dismissed LUKoil's
claim to have the 1999 Agreement declared invalid, finding that the 1999
Agreement is valid, and this decision was also not appealed. Thirdly, AGD's
petition that the Memorandum be declared unconcluded and invalid was
initially remanded until July 26, 2002, at which hearing original specimens
of AGD's signatory to the Memorandum, Dr. Grib, were presented to the
Arbitration Court for examination by handwriting experts. The case was
subsequently again remanded until such examination could be completed. On
October 1, 2002, the hearings with respect to AGD's claims concerning the
VDV Agreement were suspended until a final decision regarding the
Memorandum came into force at which time the hearing would recommence. On
October 28, 2002, the Arbitration Court ruled that the Memorandum between
the Company and AGD is unconcluded. The decision was appealed by the
Company in November 2002 and, until the then-scheduled appeal date hearing
of January 23, 2003, the October 28, 2002 ruling will not come into effect.
As a direct result of the actions by LUKoil and AGD, in November 2001 the
Company filed a lawsuit in the Denver District Court, State of Colorado,
against LUKoil and AGD (the "Defendants") seeking to recover in excess of
$1 billion in damages for harm caused by a scheme of fraud, breach of
contract, civil conspiracy and related claims. On October 15, 2002 the
Denver District Court issued an order dismissing the Company's action
against LUKoil and AGD based solely on a determination that it lacked
personal jurisdiction over the Defendants, but rejecting all of the
Defendants' other arguments on jurisdiction. The Company's legal advisors
were of the view that the Court's decision was erroneous for a number of
reasons, including the Court's failure to consider the Company's fraud and
other tort claims against LUKoil and AGD as a basis for personal
jurisdiction. Accordingly, on November 27, 2002, the Company filed a motion
with the Colorado Court of Appeals appealing the October 15, 2002 decision.
The appeal is likely to be heard during the last quarter of 2003.
On December 19, 2002, the Corporation completed a private placement of
28,000,000 Common Shares to Cencan S.A., a wholly-owned subsidiary of De
Beers S.A., at a price of $0.10 per share. A further 2,000,000 Common
Shares were placed with various other placees. Cencan S.A. also bought from
Task Holdings Limited 17,305,226 Common Shares, for a total holding of
62.7% of the Common Shares of the Corporation. The private placement
effected a change of controlling shareholder of the Corporation and a
change of management and, effective December 19, 2002, Timothy J. Haddon
resigned as director, President and CEO; Gary E. Davis resigned as
director, Chief Financial Officer and Corporate Secretary; and Richard
Wake-Walker resigned as a director. Messrs. Haddon and Davis have been
retained as consultants to the Corporation. Gary M. Ralfe was then
appointed Chairman and a director; Raymond A. Clark was appointed
President, CEO and a director; Michael J.M. Farmiloe and former director,
Robert Shirriff, joined the Board of Directors. Clive Hartz and L. Lamont
Gordon remained on the Board subsequent to the change in control.
3. DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
The Company incurred a loss of $3,856,070 for the year ended December 31,
2002, compared to a loss of $18,677,461 for the same period ended December
31, 2001. The loss per share for the year ended December 31, 2002 was $0.09
compared to $0.44 for the year ended December 31, 2001. The significant
decrease in loss of $14,821,391 is primarily attributable to the absence of
the write-down of deferred exploration and mineral property cost of
$18,145,299 which occurred in 2001, which was offset by 2002 restructuring
costs of $267,830, relating to the change in management control that
occurred when Cencan S.A. became the controlling shareholder, and mineral
property costs of $2,256,293.
During the year ended December 31, 2002, the Company adopted the new
accounting recommendations with respect to stock-based compensation. As a
result, $1,347,776 of stock-based compensation, representing the fair value
of stock options granted, to be granted, or modified, to non-employees of
the Company during 2002 was expensed. Of this amount $955,776 has been
recorded in administration costs and $392,000 in mineral property costs -
legal and permits.
Administration costs during the year ended December 31, 2002 versus the
same period ended December 31, 2001 increased $712,724 from $629,870 in
2001 to $1,342,594 in 2002. Apart from the increase resulting from
stock-based compensation expense, the decrease in administration cost was
primarily due to decreased Investor relations, Office administration,
Salaries and benefits, Consulting and Travel costs. Investor Relations
costs decreased from $52,115 in 2001 to $2,778 in 2002 due to the
elimination of the investor relations consulting position due to the lack
of shareholder activity. Office administration costs were reduced from
$128,366 for the year ended December 31, 2001 to $87,580 for the same
period in 2002 primarily due to decreased insurance coverages and
associated premiums, the absence of the office moving costs during first
quarter 2001 and an overall cutback in office spending in 2002 due to
limited funds. Salaries and benefits decreased significantly from $209,905
during 2001 to $119,095 in 2002 due to the voluntary salary reductions
agreed to by the former officers of the Company, which also decreased
related payroll taxes and other employee benefit programs. Consulting costs
decreased by $26,010 to $35,523 for the year ended December 31, 2002 due to
the decrease in board of director's fees due to the resignation of two
board members during the year. Travel costs were reduced for the year ended
December 31, 2002 to $19,043 from $50,118 in 2001 due to the elimination
all non-essential travel in 2002. Interest income decreased $87,031 from
$97,708 in 2001 to $10,677 in 2002 as a result of lower cash balances
during the year and lower interest rates.
During the year ended December 31, 2002, $0 was capitalized as deferred
exploration relating to the Verkhotina Area, compared to $1,630,090 for the
year ended December 31, 2001. During 2002 all costs associated with the
Verkhotina property were expensed as incurred as mineral property costs,
which totaled $2,256,293 for the year. The change in costs associated with
the Verkhotina property included slightly higher legal fees, including
stock-based compensation, associated with the litigation, offset by lower
holding costs.
4. SUBSEQUENT EVENTS
The Company's appeal against the decision declaring the Memorandum
unconcluded was heard on January 23 and 27, 2003. The Arkhangel'sk Court of
Appeal rejected the appeal, whereupon the original decision declaring the
Memorandum unconcluded (and hence of no force and effect as a matter of
Russian law) entered into force on February 4, 2003. A second level appeal
against the decision was filed with the St. Petersburg Court of Cassation
on March 23, 2003, and this case is pending. Following the entering into
force of the decision declaring the Memorandum unconcluded, on February 4,
2003, the Arbitration Court resumed consideration of AGD's claim to
terminate the VDV Agreement on the grounds that the Company has breached
its funding obligations. Hearings in this case are scheduled to commence on
April 28, 2003.
On January 20, 2003, the Corporation granted to consultants 1,500,000 stock
options with an exercise price of Cdn$0.35 and expiry date of January 20,
2007. The options vest immediately, but are subject to a hold period
expiring May 21, 2003.
5. FINANCINGS, PRINCIPAL PURPOSES AND MILESTONES
Not applicable.
6. LIQUIDITY AND SOLVENCY
The Company had working capital of $608,297 as of December 31, 2002
compared to $1,221,964 as of December 31, 2001. As of December 31, 2002,
the Company had $1,932,766 in cash and equivalents compared with $1,379,480
as of December 31, 2001. The decrease in working capital is due to
increased accrued liabilities relating to litigation of approximately
$1,025,000, deferred compensation payable of $192,252 and cash used for
operations of $1,341,830. These liabilities were partially offset by the
receipt of net proceeds of $1,890,106 upon completion of a private
placement of 30,000,000 Common Shares in the capital stock of the Company
at Cdn$0.10 per share, in December 2002, of which 28,000,000 Common Shares
were placed with Cencan S.A., a wholly-owned subsidiary of De Beers S.A.,
and now the controlling shareholder of the Company as owner of 62.7% of the
issued and outstanding shares of the Company. The Company currently has
working capital sufficient for its requirements until about September 2003.
During the 2003 timeframe, it is the Company's intention to conserve cash
wherever it can while pursuing the appeal it has filed in the United States
against LUKoil and AGD and pursuing negotiations in Russia. Should a
settlement of some nature take place or should the various legal
proceedings continue, it is fully expected that the Company will be
successful in raising the required funds to meet its operating
requirements. The Company is considering various financing options.
ARCHANGEL DIAMOND CORPORATION
DECEMBER 31, 2002 ANNUAL REPORT
THIS ANNUAL REPORT 2002 CONTAINS:
-------------------------------------------------------
The President's Message
-------------------------------------------------------
-------------------------------------------------------
Management's Discussion & Analysis
-------------------------------------------------------
-------------------------------------------------------
Management's Report
-------------------------------------------------------
-------------------------------------------------------
Auditor's Report
-------------------------------------------------------
-------------------------------------------------------
Financial Statements for the Year Ended December 31,
2002
-------------------------------------------------------
-------------------------------------------------------
Corporate Information
-------------------------------------------------------
DEFINITIONS
---------------------- --------------------------------------------
AGD Arkhangelskgeoldobycha is the
Company's Russian joint venture
partner on the Verkhotina Area and is
the holder of the Licence.
---------------------- --------------------------------------------
Licence a 25 year Licence for the exploration
and mining of diamonds from the
Verkhotina Area in the Arkhangel'sk
Oblast of the Russian Federation held
by AGD
---------------------- --------------------------------------------
Memorandum Memorandum of agreement dated February
25, 1994, amending the VDV Agreement
and setting out ownership structure of
a Russian joint stock company and
providing for AGD to transfer the
Licence to such joint stock company
---------------------- --------------------------------------------
1999 Agreement Agreement dated July 15, 1999, between
the Company and AGD, wherein AGD would,
within a period not to exceed 180 days,
transfer or re-register the Licence
to a new Russian joint stock company to
be established, of which the Company
would also own a 40% interest
---------------------- --------------------------------------------
VDV Agreement Verkhotina Mining Agreement
dated November 24, 1993 (as amended)
between the Company and AGD, by which
the Company acquired the right to earn
a 40% interest in any profits from the
Verkhotina Area
---------------------- --------------------------------------------
PRESIDENT'S MESSAGE
Dear Shareholders:
It is a great privilege for me, as the new President and CEO of Archangel
Diamond Corporation (the "Company"), to be able to communicate with you from
Russia where I live and have been based for the last ten years. I relish the
challenge of the position and am committed to doing everything in my power to
create value for the Company for the benefit of all shareholders.
I must first pay tribute to the outgoing Board of Directors for their tireless
efforts over the past few years, in particular my predecessor Tim Haddon and
former CFO, Gary Davis. I am delighted that Tim and Gary have agreed to remain
as consultants to the Company so their wealth of knowledge and experience will
still be available to us. The management changes in December 2002 followed the
purchase by Cencan S.A., a wholly owned subsidiary of De Beers S.A., of Task
Holdings Limited's interest in the Company and of an additional 28 million
common shares of the Company. Post these transactions, Cencan S.A.'s investment
represented approximately 62.7% of the total issued share capital of the
Company. Tim Haddon's quote at the time is worth repeating `Having De Beers, the
world's leading diamond producer, as our largest shareholder bodes well for the
future of the Company.' Gary Ralfe, Managing Director of De Beers S.A. and
incoming Chairman of the Company, commented "The dispute between Archangel
Diamond Corporation and Arkhangelskgeoldobycha is clearly not furthering the
interests of either party or of Russia in that it is delaying a full evaluation
and the possible future development of the Verkhotina deposit. De Beers believes
that with its long experience of working in Russia it may be able to assist in
the resolution of the dispute which would meet the objectives of all parties
that have an interest in the development of the Russian diamond mining
industry."
The new management has begun to immerse itself in the complex legal and
political issues surrounding the Verkhotina deposit. On October 15, 2002 the
Denver District Court issued an order dismissing the Company's action against
LUKoil and AGD. The Company has been advised that the Denver District Court, in
coming to its decision, failed to consider the Company's fraud and other tort
claims against LUKoil and AGD as a basis for personal jurisdiction.
Consequently, on November 27, 2002, the Company filed a motion with the Colorado
Court of Appeals appealing the October 15, 2002 decision. The appeal is likely
to be heard in the last quarter of 2003.
Turning to the Stockholm arbitration, as is well known, on June 27, 2001, the
Tribunal ruled that they did not have jurisdiction in the dispute and all
arbitration ceased. In the matter of the appeal, detailed pleadings have now
been submitted by both parties. Consequent upon the submission of pleadings
having been postponed a number of times at the request of both parties, the main
hearing, originally scheduled for December 11 - 12, 2002, was also postponed. A
new pre-trial hearing is scheduled for June 2, 2003 but a date for the main
trial hearing has not yet been fixed. This is unlikely to take place before the
autumn of 2003.
In Russia, in addition to the claims already filed prior to 2002, AGD filed a
claim to terminate the VDV Agreement on January 14, 2002 claiming that the VDV
Agreement funding provisions have been breached by the Company. During 2002, a
number of hearings were held with respect to outstanding claims. LUKoil's claims
against certain provisions of the VDV Agreement and the 1999 Agreement were
dismissed by the court and were not appealed. On October 28, 2002, AGD's
petition that the Memorandum be declared unconcluded was eventually upheld. The
decision was appealed by the Company in November 2002, but in January 2003, the
Arkhangel Court of Appeal rejected the appeal. A second level appeal has now
been filed with the St. Petersburg Court of Cassation and is currently pending.
Following the decision of the Arkhangel Court of Appeal, the Arkhangel'sk
Arbitration Court resumed consideration of AGD's claim to terminate the VDV
Agreement. The hearing is scheduled to commence on April 28, 2003.
Following the investment by Cencan S.A., the Company has sufficient financial
resources to meet its commitments for the immediate future. However, subject to
progress being made in resolving the dispute with AGD and LUKoil and the need to
protect the Company's rights, management will keep further financing options
under review as we go forward.
Thank you for your support.
[GRAPHIC OMITTED] " The dog is barking - but the caravan moves on"
"Ray A. Clark"
President and Chief Executive Officer
May 2, 2003
MANAGEMENT DISCUSSION AND ANALYSIS
All monetary amounts and financial results are expressed in
U.S. dollars unless otherwise denoted.
Overview
In December 1993 a Licence (the "Licence") for the exploration and mining of
diamonds from a 400-square kilometer area located northwest of Arkhangel'sk,
Russia (the "Verkhotina Area") was granted to a Russian enterprise, AGD
(formerly Arkhangel'sk Geologia Enterprises). Through agreements in 1993 and
1994 with AGD, Archangel Diamond Corporation (the "Company") acquired the right
to earn a 40% interest in any profits from the Verkhotina Area. As part of such
agreements, AGD agreed to transfer the Licence to a Russian joint stock company,
of which the Company 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 Company, and 10% by
IBME Ltd. AB was formed with the intention that it would hold the Licence and
coordinate the operations on the Verkhotina Area. During May 1995 new Russian
legislation was introduced which, in the view of the Company, enabled AGD to
transfer the Licence to AB.
In 1996 the Grib Pipe was discovered within the Verkhotina Area by the Company
and its Russian partners. As the Grib Pipe represents the key asset of the
Company, it was the primary focus of the Company's work efforts in 1999 and
2000. From the inception of the project in 1993, approximately $18.1 million had
been invested by the Company in the acquisition and exploration of the
Verkhotina Area, for legal and certain administrative costs with respect to the
Licence 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
Licence to AB would take place upon completion by the Company of an agreed upon
work program (the "Work Program") on the Verkhotina Area for 1997 and the first
quarter 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 Company that the Company
had satisfied all of its requirements regarding the Work Program. However, no
supplemental agreement was provided by AGD to the Company and transfer of the
Licence to AB as resolved upon by the AGD Board did not take place.
After having repeatedly failed in its attempts to get AGD to transfer the
Licence to AB, in June 1998 the Company advised AGD that it was temporarily
suspending its further funding of the Verkhotina Area effective July 1, 1998,
until AGD complied with its obligations. As a result of this, the Company began
accruing the costs for continuing exploration work as invoiced by AGD on the
Verkhotina Area until such time as the Licence transfer dispute was resolved.
As the parties were unable to reach an agreement concerning Licence transfer, in
August 1998 the Company commenced international arbitration of the matter in
Stockholm as provided for in the VDV Agreement. The Arbitration Tribunal (the
"Tribunal") was constituted and unanimously accepted preliminary jurisdiction of
the dispute.
In 1998, it became public knowledge that Open Joint Stock Company LUKoil, the
largest oil company in Russia and one of the largest oil companies in the world,
had acquired a controlling interest in AGD. With the assistance of the Russian
Government, agreement was reached between the Company and AGD in 1999 that,
among other matters, the Company would, within a period not to exceed 180 days,
transfer or re-register the Licence to a new Russian joint stock company to be
established, of which the Company would also own a 40% interest. At a meeting at
which senior representatives of the LUKoil group participated, the Board of AGD
unanimously approved the terms and the 1999 Agreement was executed July 15,
1999. As part of the 1999 Agreement, the Company agreed to suspend international
arbitration for 180 days, after which time the arbitration would be discontinued
if the Licence 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 Company
for 50% of its past costs, and the right to appoint the General Director of AGD
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 held or borne solely by the Company, these new
AGD requests erected further roadblocks in effecting transfer of the Licence.
In January 2000, with the transfer of the Licence having not been completed
within the allotted 180-day period, the Company formally filed a request with
the Tribunal to reinstate the arbitration proceedings. The Company 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.
During the week of March 5, 2001 the Tribunal heard the Company's claim in
regard to AGD's alleged non-performance of the amended VDV Agreement and its
obligation to transfer the Licence to the Russian joint stock company referred
to in the Memorandum. On the basis of new arguments put forward by AGD, the
Tribunal agreed to hear new arguments as to its jurisdiction over the dispute.
On June 27, 2001 the Tribunal issued a split ruling that the dispute was not
arbitrable in Sweden, a finding that reversed its own April 1999 decision. On
July 23, 2001 the Company filed a Summons Application with the Swedish District
Court seeking to determine arbitrators' competence regarding their majority
decision of "no jurisdiction," and in May 2002, the Swedish District Court
accepted the Corporation's petition. Detailed pleadings have now been submitted
by both parties and, consequently, the main hearing scheduled for mid-December
2002 was postponed. A new pre-trial hearing is scheduled for June 2, 2003. A
date for a main hearing is not yet fixed, however, this is not likely to take
place before autumn 2003.
On August 23, 2001, LUKoil, the 74.1% owner of AGD, filed claims with the
Arbitration Court of the Arkhangel'sk region in the Russian Federation (the
"Arbitration Court") seeking a ruling, in the case of the first claim, that the
arbitration provisions in the VDV Agreement are invalid and, in the case of the
second claim, that the 1999 Agreement is invalid. In addition, on August 31,
2001, AGD filed a claim with the Arbitration court of the Arkhangel'sk region
seeking a ruling that the Memorandum be declared not concluded and invalid and,
further, on January 14, 2002, AGD filed a claim with the same court to terminate
the VDV Agreement on the grounds that the VDV Agreement funding provisions have
been breached by the Company.
During 2002, three different claims brought by Open Joint Stock Company, LUKoil,
the largest oil company in Russia, and/or its 74.1% owned subsidiary, AGD,
against the Company in August 2001 were heard by the Arbitration Court of the
Arkhangel'sk Region in Russia (the "Arbitration Court"). On March 21, 2002, the
Arbitration Court rejected the claim brought by LUKoil that the arbitration
clause in the VDV Agreement be declared invalid and this decision was not
appealed. On May 21, 2002, the Arbitration Court dismissed LUKoil's claim to
have the 1999 Agreement declared invalid, finding that the 1999 Agreement is
valid, and this decision was also not appealed. On October 28, 2002, the
Arbitration Court ruled in favour of AGD's petition and declared the Memorandum
between the Company and AGD unconcluded.
The Company's appeal to the Arkhangel'sk Court of Appeals against this decision
was heard on January 23 and 27, 2003. The Arkhangel'sk Court of Appeal rejected
the appeal, whereupon the original decision declaring the Memorandum unconcluded
(and hence of no force and effect as a matter of Russian law) entered into force
on February 4, 2003. A second level appeal against the decision was filed with
the St. Petersburg Court of Cassation on March 23, 2003, and this case is
pending. Following the entering into force of the decision declaring the
Memorandum unconcluded, on February 4, 2003, the Arbitration Court resumed
consideration of AGD's claim to terminate the VDV Agreement on the grounds that
the Company has breached its funding obligations. Hearings in this case are
scheduled to commence on April 28, 2003.
As a direct result of the actions by LUKoil and AGD, in November 2001 the
Company filed a lawsuit in the Denver District Court, State of Colorado, against
LUKoil and AGD (the "Defendants") seeking to recover in excess of $1 billion in
damages for harm caused by a scheme of fraud, breach of contract, civil
conspiracy and related claims. On October 15, 2002 the Denver District Court
issued an order dismissing the Company's action against LUKoil and AGD based
solely on a determination that it lacked personal jurisdiction over the
Defendants, but rejecting all of the Defendants' other arguments on
jurisdiction. The Company's legal advisors were of the view that the Court's
decision was erroneous for a number of reasons, including the Court's failure to
consider the Company's fraud and other tort claims against LUKoil and AGD as a
basis for personal jurisdiction. Accordingly, on November 27, 2002, the Company
filed a motion with the Colorado Court of Appeals appealing the October 15, 2002
decision. The appeal is likely to be heard during the last quarter of 2003.
Should the Company not attain jurisdiction in Colorado or should it not prevail
in this lawsuit, the Company could lose any and all rights it has to the
Verkhotina Area.
In December 2002 completion of a private placement of 28,000,000 Common Shares
of the Company to Cencan S.A., a wholly-owned subsidiary of De Beers S.A., and
of 2,000,000 Common Shares of the Company to other investors, at Cdn$0.10 per
share, netted the treasury $1,890,106. Cencan S.A. also bought the 17,305,226
Common Shares held by Task Holdings Limited, giving Cencan S.A. ownership of
approximately 62.7% of the issued and outstanding Common Shares of the Company
and resulting in a change of controlling shareholder of the Company effective
December 19, 2002.
Critical Accounting Policies
Management periodically reviews the carrying value of its investments in mineral
leases and properties with internal and external mining related professionals. A
decision to abandon, reduce or expand a specific project is based on many
factors including general and specific assessment of mineral reserves,
anticipated future mineral prices, the anticipated costs of developing a
producing mine, the expiration term, if any, of leased mineral properties and
the general likelihood that the Company will continue exploration. The Company
does not set a pre-determined holding period for properties with unproven
reserves. However, properties that have not demonstrated suitable mineral
concentrations at the conclusion of each phase of an exploration program are
re-evaluated to determine if the future exploration is warranted and their
carrying values are appropriate. If there has been a delay in exploration
activity that extends beyond three years, the Company writes off any exploration
or acquisition costs related to that property unless persuasive evidence exists
to the contrary.
If an area of interest is abandoned or it is determined that its carrying value
cannot be supported by future production or sale or significant uncertainty
exists as to access and operations, the related costs are charged against
operations in the year of abandonment or determination of value. The amounts
recorded as mineral leases and properties and deferred exploration costs
represent costs to date less write-downs and do not necessarily reflect present
or future values.
The Company's consolidated financial statements have bee prepared assuming the
Company will continue on a going concern basis. To date, the Company has not
generated revenue from its principal business activities and has relied on
equity financing to meet its obligations. The ability of the Company to continue
as a going concern is dependent on continuation of the Company's interest in the
underlying mineral claims, the discovery of economically recoverable reserves,
the continued financial support of the controlling shareholder, the ability of
the Company to obtain necessary financing to complete exploration and,
ultimately, development and future production.
Results of Operations
The Company incurred a loss of $3,856,070 for the year ended December 31, 2002,
compared to a loss of $18,677,461 for the same period ended December 31, 2001.
The loss per share for the year ended December 31, 2002 was $0.09 compared to
$0.44 for the year ended December 31, 2001. The significant decrease in loss of
$14,821,391 is primarily attributable to the absence of the write-down of
deferred exploration and mineral property cost of $18,145,299 which occurred in
2001, which was offset by 2002 restructuring costs of $267,830, relating to the
change in management control that occurred when Cencan S.A. became the
controlling shareholder, and mineral property costs of $2,256,293.
During the year ended December 31, 2002, the Company adopted the new accounting
recommendations with respect to stock-based compensation. As a result,
$1,374,776 of stock-based compensation, representing the fair value of stock
options granted, to be granted, or modified, to non-employees of the Company
during 2002 was expensed. Of this amount, $955,776 has been recorded in
administration costs and $392,000 in mineral property costs - legal and permits.
Administration costs during the year ended December 31, 2002 versus the same
period ended December 31, 2001 increased $712,754 from $629,870 in 2001 to
$1,342,624 in 2002. Apart from the increase resulting from stock-based
compensation expense, the decrease in administration cost was primarily due to
decreased Investor relations, Office administration, Salaries and benefits,
Consulting and Travel costs. Investor Relations costs decreased from $52,115 in
2001 to $2,778 in 2002 due to the elimination of the investor relations
consulting position due to the lack of shareholder activity. Office
administration costs were reduced from $128,366 for the year ended December 31,
2001 to $87,580 for the same period in 2002 primarily due to decreased insurance
coverages and associated premiums, the absence of the office moving costs during
first quarter 2001 and an overall cutback in office spending in 2002 due to
limited funds. Salaries and benefits decreased significantly from $209,905
during 2001 to $119,095 in 2002 due to the voluntary salary reductions agreed to
by the former officers of the Company, which also decreased related payroll
taxes and other employee benefit programs. Consulting costs decreased by $26,010
to $35,523 for the year ended December 31, 2002 due to the decrease in board of
director's fees due to the resignation of two board members during the year.
Travel costs were reduced for the year ended December 31, 2002 to $19,043 from
$50,118 in 2001 due to the elimination all non-essential travel in 2002.
Interest income decreased $87,031 from $97,708 in 2001 to $10,677 in 2002 as a
result of lower cash balances during the year and lower interest rates.
During the year ended December 31, 2002, $nil was capitalized as deferred
exploration relating to the Verkhotina Area, compared to $1,630,090 for the year
ended December 31, 2001. During 2002 all costs associated with the Verkhotina
property were expensed as mineral property costs, which totaled $2,256,293 for
the year. The change in costs associated with the Verkhotina property included
slightly higher legal fees, including stock-based compensation, associated with
the litigation, offset by lower holding costs.
Liquidity and Capital Resources
The Company had working capital of $608,297 as of December 31, 2002 compared to
$1,221,964 as of December 31, 2001. As of December 31, 2002, the Company had
$1,932,766 in cash and equivalents compared with $1,379,480 as of December 31,
2001. As at December 31, 2002, the Company's cash and cash equivalents are
substantially denominated in Canadian dollars. The decrease in working capital
is due to increased accrued liabilities relating to litigation of approximately
$1,025,000, deferred compensation payable of $192,252 and cash used for
operations of $1,341,830. These liabilities were partially offset by the receipt
of net proceeds of $1,890,106 upon completion of a private placement of
30,000,000 Common Shares in the capital stock of the Company at Cdn$0.10 per
share, in December 2002, of which 28,000,000 Common Shares were placed with
Cencan S.A., a wholly-owned subsidiary of De Beers S.A., and now the controlling
shareholder of the Company as owner of 62.7% of the issued and outstanding
shares of the Company. The Company currently has working capital sufficient for
its requirements until about September 2003.
During the 2003-2004 timeframe, it is the Company's intention to conserve cash
wherever it can while pursuing the appeal it has filed in the United States
against LUKoil and AGD and pursuing negotiations in Russia. Should a settlement
of some nature take place or should the various legal proceedings continue, it
is fully expected that the Company will be successful in raising the required
funds to meet its operating requirements. The Company is considering various
financing options.
Risks and Uncertainties
The Company's operations are subject to all of the hazards and risks normally
incidental to the exploration, development and production of diamonds, any of
which could result in damage to life or property, environmental damage, and
possible legal liability for any or all damage.
The Company's property is located in Russia. Diamond exploration in Russia may
be affected by political instability, emerging laws and regulations and their
enforcement, and government requirements related to the industry, all of which
continue to evolve.
If the Company wins a judgment that the Licence should be transferred or is
awarded damages, given the current uncertainty regarding enforcement of
contractual law and of arbitration awards in Russia, there is no assurance that
the Licence will be transferred or that damages, if awarded, can be recovered.
Inasmuch as the Licence to the Verkhotina Area is issued to and held by AGD,
there is a possibility that the rights to the Licence could be rescinded in the
event that conditions requisite to maintaining the Licence are not met by AGD.
The Licence could also be rescinded should AGD declare bankruptcy. Should the
Licence be rescinded, it is unclear as to whether the Company would have any
continuing rights concerning participation in development of the Verkhotina
Area.
Russian law provides inter alia the following condition for the transfer of a
mineral licence to a subsidiary of a subsoil user. The shareholding of the
previous subsoil user in the charter capital of such subsidiary at the moment of
re-registration of a licence must be at least 50%. The total shareholding of AGD
in AB has decreased below 50% (following a decrease in its holding of preferred
shares), as a result of which AB does not currently qualify as a company to
which the Licence can be transferred.
Should the Company prevail in having the Licence transferred and a new field
work program be agreed upon, the Company would need to seek additional
financing. The advancement of the property would, therefore, depend upon the
Company's ability to obtain financing through debt financing, equity financing,
or other means. There is no assurance that the Company would be successful in
obtaining the required financing. Failure to obtain such financing could result
in the delay or indefinite postponement of exploration and development work on
the property, as well as the possible loss of the Company's interest in the
Verkhotina Licence under the VDV Agreement.
Whether a diamond deposit will be commercially viable depends on a number of
factors, some of which are the particular attributes of the deposit such as the
resource size, quality and quantity of the diamonds, the proximity to
infrastructure, financing costs and government regulations. This includes
regulations relating to prices, taxes, royalties, land tenure, land use,
importing and exporting of diamonds, production plant and equipment, and
environmental protection. The Company's exploration projects could also be
adversely affected by exchange controls, currency fluctuations, taxation, and
laws or policies affecting foreign trade and investment.
To date, the Company has not generated revenue from its principal business
activities and has relied on equity financing to meet its obligations. The
ability of the Company to continue as a going concern is dependent on
continuation of the Company's interest in the underlying mineral claims, the
discovery of economically recoverable reserves, the continued financial support
of the controlling shareholder, the ability of the Company to obtain necessary
financing to complete exploration and, ultimately, development and future
production.
REPORT OF MANAGEMENT
The consolidated financial statements and the information contained in the
annual report have been prepared by the management of the Company. The financial
statements have been prepared in accordance with accounting principles generally
accepted in Canada and, where appropriate, reflect management's best estimates
and judgments based on currently available information. A system of internal
accounting control is maintained to provide reasonable assurance that financial
information is accurate and reliable.
The Company's independent auditors, who are appointed by the shareholders,
conduct an audit in accordance with generally accepted auditing standards to
allow them to express an opinion on the financial statements.
The Board of Directors' Audit Committee meets periodically with management to
review the financial statements and related reporting matters and meets annually
with the independent auditors to review the scope and results of the annual
audit prior to approval of the financial statements by the entire board.
/s/ Raymond A. Clark /s/ David W. Massola
President and Chief Executive Officer Secretary and Chief Financial Officer
May 2, 2003 May 2, 2003
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Archangel Diamond Corporation
as at December 31, 2002 and 2001 and the consolidated statements of operations
and deficit, deferred exploration costs and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2002
and 2001 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
KPMG LLP
Chartered Accountants
Vancouver, Canada March 14, 2003, except as to note 4 which is as of March 23,
2003
ARCHANGEL DIAMOND CORPORATION
Consolidated Balance Sheets
(Expressed in United States dollars)
December 31, 2002 and 2001
- ------------------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,925,688 $ 1,379,480
Accounts receivable 4,386 5,057
Prepaid expenses 2,692 25,773
-------------------------------------------------------------------------------------
1,932,766 1,410,310
Mineral property (note 4) 1 1
Property, plant and equipment 49,474 80,650
Accumulated amortization (49,474) (76,130)
-------------------------------------------------------------------------------------
- 4,520
- ------------------------------------------------------------------------------------------
$ 1,932,767 $ 1,414,831
- ------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 1,132,218 $ 188,346
Deferred compensation payable (note 6) 192,252 -
-------------------------------------------------------------------------------------
1,324,470 188,346
Shareholders' equity:
Share capital (note 5) 32,936,474 31,046,368
Contributed surplus (note 5(c)) 1,347,776 -
Deficit (33,675,953) (29,819,883)
-------------------------------------------------------------------------------------
608,297 1,226,485
- ------------------------------------------------------------------------------------------
$ 1,932,767 $ 1,414,831
- ------------------------------------------------------------------------------------------
Continuing operations (note 2) Contingencies (note 4) Subsequent events (notes 4
and 11) Commitments (note 10)
See accompanying notes to consolidated financial statements.
Approved by the Board:
"Clive R. Hartz" Director "Robert L. Shirriff" Director
- ------------------- -------------------------
ARCHANGEL DIAMOND CORPORATION
Consolidated Statements of Operations and Deficit
(Expressed in United States dollars)
Years ended December 31, 2002 and 2001
- ------------------------------------------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------
Administration costs:
Amortization $ 2,153 $ 2,444
Bank charges 3,452 4,521
Consulting 35,523 61,533
Foreign exchange loss 30,507 7,249
Investor relations 2,778 52,115
Legal and accounting 38,602 47,898
Listing fees 1,578 2,160
Office and administration 87,580 128,366
Printing and shareholder information 13,822 18,070
Rent 20,386 32,112
Salaries and benefits 119,095 209,905
Stock-based compensation (note 5(c)) 955,776 -
Telephone 4,714 7,605
Transfer agent 7,615 5,774
Travel 19,043 50,118
- ------------------------------------------------------------------------------------------------------------------
1,342,624 629,870
Mineral property costs:
Contract services and salaries 145,163 -
Legal and permits (note 5(c)) 2,006,181 -
Russian office administration 104,949 -
- ------------------------------------------------------------------------------------------------------------------
2,256,293 -
Interest income (10,677) (97,708)
Deferred exploration costs and mineral property write down (note 4) - 18,145,299
Restructuring costs (note 6) 267,830 -
- ------------------------------------------------------------------------------------------------------------------
Loss for the year (3,856,070) (18,677,461)
Deficit, beginning of year (29,819,883) (11,142,422)
- ------------------------------------------------------------------------------------------------------------------
Deficit, end of year $ (33,675,953) $ (29,819,883)
- ------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share $ (0.09) $ (0.44)
Weighted average number of shares outstanding 43,312,640 42,234,558
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ARCHANGEL DIAMOND CORPORATION
Consolidated Statements of Deferred Exploration Costs
(Expressed in United States dollars)
Years ended December 31, 2002 and 2001
- -------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------
Deferred exploration costs in the year:
Amortization $ - $ 450
Contract services and salaries - 310,213
Report, drafting and mapping - 28,857
Russian office administration - 129,477
Permits and legal - 1,092,278
Site administration and communication - 25,937
Travel - 42,878
-------------------------------------------------------------------------
- 1,630,090
Balance, beginning of year - 18,187,248
Amounts written off (note 4) - (19,817,338)
- -------------------------------------------------------------------------------
Balance, end of year $ - $ -
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ARCHANGEL DIAMOND CORPORATION
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Loss for the year $ (3,856,070) $ (18,677,461)
Item not involving cash:
Amortization 2,153 2,444
Deferred exploration costs and mineral property
write down (note 4) - 18,145,299
Restructuring costs (note 6) 4,435 -
Stock-based compensation (note 5(c)) 1,347,776 -
Changes in non-cash working capital:
Accounts receivable 671 (426)
Prepaid expenses 23,081 13,092
Accounts payable and accrued liabilities 943,872 40,853
Deferred compensation payable (note 6) 192,252 -
-----------------------------------------------------------------------------------------
(1,341,830) (476,199)
Investments:
Deferred exploration costs - (1,629,640)
Purchase of property, plant and equipment (2,068) (5,424)
---------------------------------------------------------------------------------------------
(2,068) (1,635,064)
Financing:
Issuance of shares, net of issue costs 1,890,106 -
- --------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 546,208 (2,111,263)
Cash and cash equivalents, beginning of year 1,379,480 3,490,743
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,925,688 $ 1,379,480
- --------------------------------------------------------------------------------------------------
Supplementary information:
Income taxes paid $ - $ -
Interest received (paid) 10,677 97,908
- --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
1. General:
The Company was incorporated under the laws of British Columbia and
continued under the Business Corporations Act of the Yukon Territory on
September 16, 1996. The Company's principal business activities are the
exploration for development of natural resource properties.
2. Continuing operations:
The Company is engaged in mineral exploration in Russia. The Company's
mineral property is subject to disputes (note 4) and the Russian
corporation which holds the mineral property licence has refused to
transfer the licence to an entity that is 40% owned by the Company. The
disputes are subject to legal proceedings in the United States and Russia
and an appeal of an arbitration ruling as to jurisdiction in Stockholm,
Sweden. If the Company receives favourable decisions in respect of the
legal proceedings or arbitration, the ability to enforce such decisions in
Russia could be affected by the Russian regulatory, legal and political
systems, some of which are still evolving.
To date the Company has not generated revenue from its principal business
activities and has relied on equity financings to meet its obligations. The
ability of the Company to continue as a going concern is dependent on
confirmation of the Company's interest in the underlying mineral claims,
the discovery of economically recoverable reserves, the continued financial
support of the controlling shareholder (note 6) and the ability of the
Company to obtain necessary financing to complete exploration, and,
ultimately, development and future profitable production.
3. Significant accounting policies:
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles. Specific policies
are as follows:
(a) Basis of presentation:
These consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary and its proportionate investment
in an incorporated joint venture (note 3(e)). All intercompany
balances and transactions have been eliminated on consolidation.
(b) Cash equivalents:
Cash equivalents are comprised of highly liquid investments having
original terms to maturity of 90 days or less when purchased.
(c) Mineral property and deferred exploration costs:
Expenditures to acquire mineral properties and incur exploration costs
are capitalized pending the determination and production of
commercially recoverable reserves. Administration costs are expensed
in the year that they are incurred.
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
3. Significant accounting policies (continued):
(c) Mineral property and deferred exploration costs (continued):
Management periodically reviews the carrying value of its investments
in mineral leases and properties with internal and external mining
related professionals. A decision to abandon, reduce or expand a
specific project is based upon many factors including general and
specific assessments of exploration results to date and mineral
reserves, anticipated future mineral prices, the anticipated costs of
developing and operating a producing mine, the expiration term, if any,
of leased mineral properties and the general likelihood that the
Company will continue exploration. The Company does not set a
pre-determined holding period for properties with unproven reserves.
However, properties that have not demonstrated suitable mineral
concentrations at the conclusion of each phase of an exploration
program are re-evaluated to determine if the future exploration is
warranted and their carrying values are appropriate.
If there has been a delay in exploration activity that extends beyond
three years, the Company writes off any exploration or acquisition
costs related to that property unless persuasive evidence exists to the
contrary.
If an area of interest is abandoned, it is determined that its carrying
value cannot be supported by future production or sale or significant
uncertainty exists as to access and operations, the related costs are
charged against operations in the year of abandonment or determination
of impairment in value. The amounts recorded as mineral leases and
properties and deferred exploration costs represent costs to date less
write-downs and do not necessarily reflect present or future values.
(d) Property, plant and equipment:
Property, plant and equipment are stated at cost. Amortization is
provided over three years using the straight-line method.
(e) Investments:
In May 1994, the Company and other parties involved with the Verkhotina
mineral property incorporated the International Joint Stock Public
Company Almazny Bereg ("AB"), a Russian Company. AB is an incorporated
joint venture, with the Company owning 514,400 (2001 - 514,400) of the
1,286,000 (2001 - 1,286,000) issued common shares or 40%. The Company's
investment in AB's assets, liabilities and results of operations are
not material to these consolidated financial statements.
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
3. Significant accounting policies (continued):
(f) Share capital:
The Company records proceeds from share issuances net of issue costs.
Shares issued for other than cash consideration are valued at the
quoted price on the TSX Venture Exchange on the date the agreement to
issue the shares was reached.
Shares to be issued which are contingent upon future events or actions
will be recorded by the Company when it is reasonably determinable that
the shares will be issued.
(g) Stock based compensation:
The Company has a stock option plan as approved by its shareholders
(see note 5(c)).
Effective January 1, 2002, the Company adopted the new recommendations
of the Canadian Institute of Chartered Accountants regarding
stock-based compensation. The Company now applies the fair value
method of accounting for certain stock-based transactions, which
includes stock options granted by the Company to non-employees. The
Company continues to account for stock options granted to employees by
the settlement method whereby consideration paid to the Company on the
exercise of stock options is recorded as share capital at the time of
exercise. The pro forma effect of accounting for the granting of
employee stock options using the fair value based method is disclosed
in note 5(c).
(h) Loss per share:
Basic loss per share is calculated by dividing loss available to common
shareholders by the weighted average number of common shares
outstanding in the period. For all periods presented, loss available to
common shareholders equals the reported loss. Diluted loss per share is
calculated by the treasury stock method. Under the treasury stock
method, the weighted average number of common shares outstanding for
the calculation of diluted loss per share assumes that the proceeds to
be received on the exercise of dilutive stock options are applied to
repurchase common share at the average market price of the period. For
all periods presented, the impact of stock options has been excluded as
it would be anti-dilutive.
(i) Future income taxes:
The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, future income tax
assets and liabilities are determined based on differences between the
financial statement carrying values and their respective income tax
basis (temporary differences) and loss carry forwards. Future income
tax assets and liabilities are measured using the enacted or
substantively enacted tax rates expected to be in effect when the
temporary differences are likely to reverse. The effect on future
income tax assets and liabilities of a change in tax rates is included
in operations in the period in which the change is substantively
enacted. The amount of future income tax assets recognized is limited
to the amount that is more likely than not to be realized.
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
3. Significant accounting policies (continued):
(j) Foreign currency transactions:
These financial statements are presented in United States dollars, the
Company's functional currency. Transactions and amounts denominated in
other currencies have been translated into United States dollars as
follows:
(i) monetary items at the rate of exchange prevailing at the balance
sheet date; and
(ii) non-monetary and revenue and expense items at the rate of
exchange prevailing at the time of the transactions.
Any gains or losses arising thereon are charged to operations.
(k) Use of estimates:
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant areas
requiring the use of management estimates include the assessment of
recoverability of mineral properties and deferred exploration costs and
reclamation obligations. Actual results could differ from those
estimates.
4. Mineral property and exploration:
The Company's mineral property consists of the following:
- ------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------
Verkhotina, Arkhangel'sk, Russia:
Mineral property $ 1 $ 1
- ------------------------------------------------------------------------------
On October 12, 1993, the Company acquired rights to acquire an interest in
the Verkhotina area mineral licence in Russia.
On December 30, 1993, a 25-year licence for the exploration and mining of
diamonds (the "Licence") for an approximately 400-square kilometer area
located northwest of Arkhangel'sk, Russia (the "Verkhotina Area") was
granted to a Russian enterprise, Arkhangelskgeoldobycha ("AGD") (formerly
Arkhangel'sk Geologia Enterprises). Pursuant to the Verkhotina Diamond
Venture Agreement (the "VDV Agreement") dated November 24, 1993 (as
amended) with AGD, the Company acquired the right to earn a 40% interest in
any profits from the Verkhotina Area.
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
4. Mineral property and exploration (continued):
The VDV Agreement requires the Company to fund all exploration and
evaluation costs, the costs of completing feasibility studies on the
Verkhotina Area, the funding of all agreed to expenses associated with the
registration and maintenance of the Licence, and all Licence fees, bonuses
and payments for geological information until such time as the decision is
made to place the Verkhotina Area into commercial production. Under the VDV
Agreement, if a feasibility study were to recommend commencement of
commercial production, the parties further agreed to establish a Russian
joint stock company (the "Stock Company"), of which the Company would own a
40% interest. AGD agreed to grant to the Stock Company sole and exclusive
rights within the Verkhotina Area for the conducting of development and
mining as determined as a result of the feasibility study. The parties
would contribute through the Stock Company to all expenditures incurred in
relation to the Verkhotina Project in proportion to their respective
interests in the Stock Company. At the time of formation of the Stock
Company, the prior expenditures of each of the parties were to be reflected
in the initial contributed capital. For this purpose, the past expenditures
of AGD were estimated to be approximately US$20 million, subject to such
expenditures being substantiated and verified by independent audit. All
profits derived from commercial mining are to be distributed between the
parties in proportion to their share holding interest in the Stock Company.
Should the Company withdraw from the VDV Agreement, the Company will be
required to reassign its interest to AGD without compensation. Should the
Company breach its financial obligations under the VDV Agreement, AGD has a
right to withdraw from the VDV Agreement.
In February 1994, the Company and AGD signed a memorandum (the "1994
Memorandum") that amended the VDV Agreement and which, among other matters,
established the ownership structure of a Russian joint stock company, and
provided for AGD to transfer the Licence to such joint stock company when
Russian legislation permitted such a transfer. In May 1994, pursuant to
such amended VDV Agreement, the Company and the other parties to the
project incorporated AB, a Russian joint stock company, with the Company
owning 40% of the ordinary shares.
By means of a public offering through a prospectus in 1994, AB issued
300,000 preferred, non-voting shares with a par value of 20,000 old Russian
rubles each, at a price of 40,000 old Russian rubles each. Effective
December 1996, the offering was closed and no preferred shares have been
subsequently issued.
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
4. Mineral property and exploration (continued):
As of December 31, 2002, AB had received 1.66 billion old Russian rubles
(approximately $274,000 at the historical exchange rate and $52,000 at the
exchange rate at December 31, 2002) in cash relating to the issuance of
41,500 preferred shares and had received promissory notes in the aggregate
amount of 10.34 billion Russian rubles (approximately $1,712,000 at the
historical exchange rate and $325,000 at the exchange rate at December 31,
2002) relating to the issuance of 258,500 preferred shares. All amounts of
Russian rubles are before the January 1, 1998 redenomination of 1,000 old
rubles for 1 new ruble. The terms of the preferred shares, according to the
prospectus and the AB Charter, include the right of shareholders to receive
dividends of not less than 10% per annum of the shares' nominal value.
According to the AB Charter, the preferred shares of AB are not cumulative
preferred shares. The AB Charter contains no specific provisions which
provide for the accumulation of unpaid dividends but does refer back to the
prospectus. The provisions of the prospectus are not clear, and it cannot
be completely excluded that a Russian court might decide that the preferred
shares are cumulative.
As no shareholders' resolution has been passed to pay any dividend on the
preferred shares, the owners of the preferred shares have the same voting
rights as the common shareholders. When the first dividend on the preferred
shares is paid by AB, preferred shareholders will have voting rights only
as regards to a limited number of matters. While preferred shareholders
have the same voting rights as the common shareholders, the Company has the
right to vote an aggregate of 32.4% of the voting shares of AB on a fully
diluted basis.
During May 1995, new Russian legislation was introduced which, in the view
of the Company, enabled AGD to transfer the Licence in accordance with the
1994 Memorandum. Although AGD has disputed the legality of this
legislation, in April 1997 the AGD Board of Directors resolved that the
transfer of the Licence to AB would take place upon completion and payment
by the Company of an agreed upon work program (the "Work Program") on the
Verkhotina Area for 1997 and the first quarter of 1998. In December 1997,
the Work Program was agreed upon by the parties. In March 1998, the General
Director of AGD confirmed to the Company that AGD had no claims in regard
to the Work Program.
On May 7, 1998, the Company requested AGD to transfer the Licence to AB,
and notified AGD in June that a dispute existed. On June 17, 1998, the
Company advised AGD that it was temporarily suspending further funding for
the Verkhotina Area as from July 1, 1998 until AGD complied with its
obligations under the amended VDV Agreement. AGD continued to perform
exploration in the area and the Company accrued for all of the exploration
costs associated with the Verkhotina Area.
Russian law provides inter alia the following condition for the transfer of
a mineral licence to a subsidiary of a subsoil user. The shareholding of
the previous subsoil user in the charter capital of such subsidiary at the
moment of re-registration of a licence must be at least 50%. The total
shareholding of AGD in AB has decreased below 50% (following a decrease in
its holding of preferred shares), as a result of which AB does not
currently qualify as a company to which the Licence can be transferred.
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
4. Mineral property and exploration (continued):
As the parties were unable to reach an agreement concerning Licence
transfer, in August 1998 the Company commenced international arbitration of
the matter in Stockholm. The Arbitration Tribunal was constituted and
preliminarily accepted jurisdiction of the dispute.
A new agreement between the parties was reached and executed on July 15,
1999 (the "1999 Agreement"). Among other matters, the 1999 Agreement
stipulated AGD would, within a period not to exceed 180 days, transfer or
re-register the Licence to a new Russian joint stock company to be
established, of which the Company would also own a 40% interest. As part of
the 1999 Agreement, the Company agreed to suspend international arbitration
for 180 days, after which time the arbitration would be discontinued if the
Licence had been transferred under the terms of the 1999 Agreement.
In January 2000, with the transfer of the Licence having not been completed
within the allotted 180-day period, the Company formally filed a request
with the Arbitration Tribunal in Stockholm (the "Tribunal") to reinstate
the arbitration proceedings. The Company subsequently filed its detailed
statement of case on April 14, 2000. After several legal submissions by
both parties, the Tribunal established February 26, 2001 as the final date
for submission of all pleadings.
During the week of March 5, 2001, the Tribunal heard the Company's claim in
regard to AGD's alleged non-performance of the amended VDV Agreement and
its obligation to transfer the Licence to the Russian stock company
referred to in the 1994 Memorandum. Moreover, on the basis of new arguments
put forward by AGD, the Tribunal agreed to hear new arguments as to its
jurisdiction over the dispute. On June 27, 2001, the Tribunal ruled that
they did not have jurisdiction in the dispute and all arbitration ceased.
The Company appealed this decision to the Swedish District Court and, in
May 2002, the Swedish District Court accepted the Company's petition for
hearing of an appeal. A new pre-trial hearing for the appeal as to
jurisdiction is scheduled for June 2, 2003 and the main hearing is expected
to take place in late 2003.
On August 23, 2001, LUKoil, the controlling shareholder of AGD, filed
claims with the Arbitration court of the Arkhangel'sk region seeking a
ruling, in the case of the first claim, that the arbitration provisions in
the VDV Agreement are invalid and, in the case of the second claim, that
the 1999 Agreement is invalid. In addition, on August 31, 2001, AGD filed a
claim with the Arbitration court of the Arkhangel'sk region seeking a
ruling that the 1994 Memorandum be declared not concluded and invalid and,
further, on January 14, 2002, AGD filed a claim with the same court to
terminate the VDV Agreement on the grounds that the VDV Agreement funding
provisions have been breached by the Company.
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
4. Mineral property and exploration (continued):
During 2002, a number of hearings were held with respect to these claims.
First, on March 21, 2002, the Court rejected the claim brought by LUKoil
that the arbitration clause in the VDV Agreement be declared invalid and
this decision was not appealed. Second, on May 21, 2002, the Court
dismissed LUKoil's claim to have the 1999 Agreement declared invalid,
finding that the 1999 Agreement is valid, and this decision was also not
appealed. Third, AGD's petition that the 1994 Memorandum be declared
unconcluded and invalid was initially remanded until July 26, 2002, at
which hearing original specimens of AGD's signatory to the Memorandum were
presented to the Court for examination by handwriting experts. On October
28, 2002, the Court ruled that the 1994 Memorandum between the Company and
AGD is unconcluded and invalid. The decision was appealed by the Company in
November 2002, the appeal was heard during January 2003, and the Arkhangel
Court of Appeal rejected the appeal. A second level appeal against the
decision was filed with the St. Petersburg Court of Cassation on March 23,
2003 and this case is pending. On October 1, 2002, the hearings with
respect to AGD's claims concerning the VDV Agreement were suspended until a
final decision regarding the 1994 Memorandum came into force at which time
the hearing would recommence. Following the entering into force of the
decision declaring the 1994 Memorandum unconcluded, on February 4, 2003,
the Arkhangel'sk Arbitration Court resumed consideration of AGD's claim to
terminate the VDV Agreement on the grounds that the Company has breached
its funding obligations. Hearings in this case are scheduled to commence on
April 28, 2003.
As a direct result of the actions by LUKoil and AGD, in November 2001 the
Company 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. On October 15, 2002, the
Denver District Court issued an order dismissing the Company's action
against LUKoil and AGD based solely on a determination that it lacked
personal jurisdiction over the Defendants but rejecting all of the
Defendants' other arguments on jurisdiction. The Company's legal advisers
were of the view that the Court's decision was erroneous for a number of
reasons, including the Court's failure to consider the Company's fraud and
other tort claims against LUKoil and AGD as a basis for personal
jurisdiction. Accordingly, on November 27, 2002 the Company filed a motion
with the Colorado Court of Appeals appealing the October 15, 2002,
decision. The appeal is likely to be heard during the last quarter of 2003.
According to the Licence issued to AGD in December 1993, during the first
five years of prospecting, evaluation and detailed exploration (the "First
Stage") of the Verkhotina Area, the Company had a requirement to pay a tax
of 1.5% of the annual expenditure costs associated with prospecting and
evaluation, 4.0% of the expenditure costs during the period of detailed
exploration, and 4.0% of the value of any diamonds recovered during the
First Stage. Should this First Stage extend beyond five years, the required
tax payments could increase by 50%.
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
4. Mineral property and exploration (continued):
In August 1999, application was made by AGD to the appropriate Russian
agencies requesting an extension of the five year term of the First Stage.
In September 1999, this request for an extension was granted for the
Verkhotina Area until December 31, 2002 and the tax for prospecting and
evaluation during this stage was increased to 2.25%. As part of the Licence
extension, the license holder, AGD, was to produce a report by September
30, 2001, detailing the evaluation completed on the Grib Pipe. It is
management's understanding that the report was issued by AGD by September
30, 2001.
Due to the disputes discussed above and the Company's extended delay in
exploration activity, the Company wrote down deferred mineral property
costs, exploration costs, net of a reversal of accrued exploration costs
that would arise from the VDV Agreement, as amended, included in accounts
payable and accrued liabilities, associated with the Verkhotina Area during
the year ended December 31, 2001 as follows:
---------------------------------------------------------------------------
Mineral property $ 493,493
Exploration costs 19,817,338
Reversal of accrued exploration costs (2,165,532)
---------------------------------------------------------------------------
Write-down $ 18,145,299
---------------------------------------------------------------------------
5. Share capital:
(a) Authorized:
Unlimited common shares without par value
(b) Issued:
- ------------------------------------------------------------------------------------
Number
of shares Amount
- ------------------------------------------------------------------------------------
Balance, December 31, 2001 and 2000 42,234,558 $ 31,046,368
- ------------------------------------------------------------------------------------
Shares issued during year:
By private placement for cash at CDN$0.10 per
share (note 6) 30,000,000 1,933,117
Less share issuance costs - (43,011)
- ------------------------------------------------------------------------------------
30,000,000 1,890,106
- ------------------------------------------------------------------------------------
Balance, December 31, 2002 72,234,558 $ 32,936,474
- ------------------------------------------------------------------------------------
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
5. Share capital (continued):
(c) Common share options:
The Company has adopted a stock option plan in order to provide
incentive to its employees. Stock options are granted by the board of
directors and have an expiry period of no more than ten years. For
stock options granted subsequent to December 31, 2000, unless
specifically resolved, one-third of the stock options granted will vest
immediately, one-third of the stock options will vest 12 months from
date of grant and the balance of stock options granted will vest 24
months from the date of grant. All options are exercisable in Canadian
dollars.
Outstanding director and employee options are as follows:
-------------------- ------------ -------------- ----------- ------------ ------------ ----------------
Exercise Outstanding Granted Exercised Expired / Outstanding
price December 31, during during cancelled December 31,
Expiry date CDN$ 2001 period period during 2002
period
-------------------- ------------ -------------- ----------- ------------ ------------ ----------------
February 14, 2002 $2.06 65,000 - - (65,000) -
May 9, 2002 $2.00 215,000 - - (215,000) -
October 9, 2002 $1.03 395,000 - - (395,000) -
October 9, 2002 $0.50 93,000 - - (93,000) -
November 28, 2002 $0.50 1,000,000 - - (1,000,000) -
February 18, 2004 $1.00 150,000 - - (100,000) 50,000
February 18, 2004 $0.50 300,000 - - - 300,000
April 14, 2005 $1.00 150,000 - - (100,000) 50,000
June 14, 2005 $0.50 35,000 - - - 35,000
November 28, 2005 $0.50 50,000 - - - 50,000
November 25, 2006 $0.11 2,400,000 - - - 2,400,000
May 1, 2007 $0.19 - 550,000 - - 550,000
May 8, 2007 $0.17 - 150,000 - - 150,000
October 9, 2007 $0.23 - 230,000 - - 230,000
November 28, 2007 $0.10 - 1,000,000 - - 1,000,000
-------------------- ------------ -------------- ----------- ------------ ------------ ----------------
4,853,000 1,930,000 - (1,968,000) 4,815,000
-------------------- ------------ -------------- ----------- ------------ ------------ ----------------
Weighted average exercise price $ 0.47 $ 0.15 - $ 0.87 $ 0.17
--------------------------------- -------------- ----------- ------------ ------------ ----------------
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
5. Share capital (continued):
(c) Common share options (continued):
---------------------- ---------- -------------- ----------- ------------ -------------- --------------
Exercise Outstanding Granted Exercised Expired / Outstanding
price December 31, during during cancelled December 31,
Expiry date CDN$ 2000 period period during period 2001
---------------------- ---------- -------------- ----------- ------------ -------------- --------------
May 16, 2001 $1.75 300,000 - - (300,000) -
September 9, 2001 $1.75 100,000 - - (100,000) -
September 18, 2001 $2.50 45,000 - - (45,000) -
February 14, 2002 $2.06 65,000 - - - 65,000
May 9, 2002 $2.00 215,000 - - - 215,000
October 9, 2002 $1.03 395,000 - - - 395,000
October 9, 2002 $0.50 93,000 - - - 93,000
November 28, 2002 $0.50 1,000,000 - - - 1,000,000
February 18, 2004 $1.00 150,000 - - - 150,000
February 18, 2004 $0.50 300,000 - - - 300,000
April 14, 2005 $1.00 150,000 - - - 150,000
June 14, 2005 $0.50 35,000 - - - 35,000
November 28, 2005 $0.50 50,000 - - - 50,000
November 25, 2006 $0.11 - 2,400,000 - - 2,400,000
---------------------- ---------- -------------- ----------- ------------ -------------- --------------
2,898,000 2,400,000 - (445,000) 4,853,000
---------------------- ---------- -------------- ----------- ------------ -------------- --------------
Weighted average exercise price $ 0.97 $ 0.11 - $ 1.83 $ 0.47
--------------------------------- -------------- ----------- ------------ -------------- --------------
On February 25, 2002, the Company received shareholder approval with
respect to the November 25, 2001 granting of stock options to certain
employees. For accounting purposes, these options are considered to
have been granted on February 25, 2002. The Company granted 2,400,000
stock options with an exercise price of CDN$0.11 expiring November 25,
2006. 1,600,000 of such options vested immediately, while 800,000
vested November 25, 2002. On December 19, 2002 the options were
modified to maintain the original expiry date despite the resignation
of the recipients.
On May 2, 2002, the Company granted 550,000 stock options with an
exercise price of CDN$0.19, expiring May 1, 2007. Of these stock
options, 450,000 vest immediately, while the remaining 100,000 vest as
to 25% every three months after issuance. On May 9, 2002, the Company
granted 150,000 stock options with an exercise price of CDN$0.17,
expiring May 8, 2007. All of these options vested immediately.
On October 9, 2002, an aggregate of 230,000 stock options were granted
to certain of the Company's directors and consultants. The options are
exercisable at $0.23 until October 9, 2007. On December 19, 2002,
75,000 of the options granted on October 9, 2002 were modified to
maintain the original expiry date despite the resignation of the
recipient.
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
5. Share capital (continued):
(c) Common share options (continued):
On November 28, 2002, 1,000,000 stock options were granted to an
officer of the Company at an exercise price of CDN$0.10. The options
vested immediately and are exercisable until November 28, 2007. On
December 19, 2002 all of these options were modified to maintain the
original expiry date despite the resignation of the recipient.
During the year ended December 31, 2002, options granted to
non-employees and options modified for former employees who continue to
provide services to the Company as non-employees resulted in
stock-based compensation expense of $1,347,776, of which $392,000 is
included in mineral property costs - legal and permits. This
stock-based compensation expense was calculated using the fair value
method. Under the settlement method, no compensation cost has been
recognized in these financial statements for options granted to
employees. However, if the fair value method of accounting had been
applied to employee stock options granted since January 1, 2002, the
effect would have been to record additional stock-based compensation
expense of $608,000. The Company's pro forma loss and basic and diluted
loss per share would have been as follows:
- --------------------------------------------------------------------------------
Loss:
As reported $ 3,856,070
Pro forma 4,464,070
Basic and diluted loss per share:
As reported $ 0.09
Pro forma 0.10
- --------------------------------------------------------------------------------
The stock-based compensation expense recorded in these financial
statements and the pro forma expense were calculated using the
Black-Scholes option pricing model assuming an expected life of three
to five years, volatility of 265%, a dividend yield of nil, a risk
free interest rate of 3.94%, and includes the amortization of the fair
value calculated over the vesting period of the stock options.
As at December 31, 2002, 4,765,000 stock options can be exercised by
the holders at an average exercise price of $0.17.
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
6. Change in management, control and restructuring:
During December 2002, the Company arranged a private placement financing of
CDN$3,000,000 through the issuance of 30 million additional common shares
of the Company at CDN$0.10 per share. Cencan S.A. ("Cencan"), a
wholly-owned subsidiary of De Beers S.A., acquired 28 million common shares
through the private placement and concurrently acquired 17,305,226 shares
of the Company previously owned by Task Holdings Limited. Cencan's total
investment after the above transactions resulted in a 62.7% ownership of
the Company. Effective at the closing of the private placement with Cencan,
a change in management and control occurred whereby the previous officers
of the Company resigned and Cencan appointed new managing officers.
Subsequently, the Company entered into consulting agreements with the
resigning officers to advance the Company's interests during the transition
to the new management team (note 10). As a result of the change in
management and control, the Company has recorded restructuring costs of
$267,830 relating to the closing of the Denver, USA office and deferred
compensation agreements with the former officers.
7. Future income taxes:
At December 31, 2002, the Company has available losses for income tax
purposes in Canada totalling approximately nil (2001 - $8,601,000).
As at December 31, 2002, the tax effect of the significant components
within the Company's future tax asset (liability) are as follows:
- -----------------------------------------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------
Mineral property and deferred exploration costs $ - $ 5,838,000
Loss carry forwards - 2,752,000
Other 10,294 110,000
- -----------------------------------------------------------------------------------------------
10,294 8,700,000
Valuation allowance (10,294) (8,700,000)
- -----------------------------------------------------------------------------------------------
Net future income tax asset $ - $ -
- -----------------------------------------------------------------------------------------------
The tax benefit of pools related to the mineral property and deferred
exploration costs and loss carry forward have not been recognized as the
recognition of these tax pools is unlikely due to the acquisition of
control on December 19, 2002 (note 6).
Income tax expense (recovery) differs from the amounts computed by applying
the combined federal and provincial income tax rate of 38.6% (2001 - 38.1%)
to pretax income from continuing operations as a result of the following:
ARCHANGEL DIAMOND CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars, unless otherwise stated)
Years ended December 31, 2002 and 2001
- --------------------------------------------------------------------------------
7. Future income taxes (continued):
- -------------------------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------------------------
Loss for the year $ (3,856,070) $ (18,677,461)
- -------------------------------------------------------------------------------------------------
Computed expected tax recovery $ (1,488,443) $ (7,116,113)
Increase in valuation allowance - 7,116,113
Losses no longer recognized due to change of control 1,488,443 -
- -------------------------------------------------------------------------------------------------
Income tax expense (recovery) $ - $ -
- -------------------------------------------------------------------------------------------------
8. Financial instruments:
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable and accrued liabilities approximate their fair value
because of the short-term to maturity of those instruments. The fair value
of deferred compensation payable cannot be determined due to uncertainties
as to the timing of its payment.
9. Related party transactions:
During the year ended December 31, 2002, the Company received, on a cost
recovery basis, $24,742 (2001 - $670) related to office space and
administration costs from a company whose chief financial officer was the
chief financial officer and secretary of the Company prior to the change in
management control (note 6).
10. Commitments:
On December 31, 2002 the Company entered into consulting agreements with
the former president and chief executive officer and the former chief
financial officer and secretary. Under the terms of the agreement the
Company is committed to consulting costs as follows:
---------------------------------------------------------------------------
2003 $ 384,322
2004 384,322
2005 250,000
---------------------------------------------------------------------------
11. Subsequent events:
On January 20, 2003, the Company granted 1,500,000 stock options with an
exercise price of CDN$0.35 each to consultants expiring January 20, 2007.
The options vested immediately. As these options were granted, pursuant to
an agreement dated December 13, 2002, for services rendered in the year
ended December 31, 2002, $392,000 of stock-based compensation expense was
recorded in mineral property costs - legal and permits during the year
ended December 31, 2002.
CORPORATE INFORMATION
HEAD OFFICE SHARES LISTED
Suite 400 TSX Venture Exchange
65 Overlea Boulevard Symbol: AAD
Toronto, Ontario
Canada M4H 1P1
Phone: 416-423-1600 CAPITAL
Fax: 416-429-2462
Web: www.archangeldiamond.com Authorized: Unlimited
E-Mail: archangeldiamond.com Issued: 72,234,558
Fully Diluted: 78,549,558
Manager, Communications OFFICERS
Linda Dorrington Gary M. Ralfe Chairman of the Board
416-423-1600 Raymond A. Clark President & CEO
David Massola CFO & Secretary
REGISTERED AND RECORDS OFFICE DIRECTORS
Campion MacDonald Raymond A. Clark
200 Financial Plaza Michael J.M. Farmiloe
204 Lambert Street L. Lamont Gordon
Whitehorse, YT Clive Hartz
Canada Y1A 3T2 Gary M. Ralfe
Robert Shirriff, Q.C.
LEGAL COUNSEL
Campion MacDonald - Whitehorse, Canada
Getz Prince Wells - Vancouver, Canada
McMillan Binch - Toronto, Canada
Marks & Sokolof - Philadelphia, USA
Norton Rose - Moscow, Russia
AUDITORS
KPMG LLP, Chartered Accountants
BANKERS
Bank of Montreal - Toronto, Canada
REGISTRAR & TRANSFER AGENTS
Pacific Corporate Trust Company
Vancouver, Canada
Pacific Corporate Services, Ltd.
Toronto, Canada
Copies of the Annual Report and Form 20-F
are available without charge upon written
request to the Manager, Communications,
Head Office
FORWARD-LOOKING INFORMATION
This Annual Report contains forward-looking statements about the Corporation's
operations, exploration activities and financial condition. These statements are
found in the President's Message, the Management Discussion and Analysis and
elsewhere and are based on the Corporation's best estimates and information at
the time of writing. They are nonetheless subject to significant uncertainties
and contingencies, many of which are beyond the control of the Corporation.
Unanticipated events may differ materially from current expectations due to
exploration results, new business opportunities, changes in priorities by the
Corporation as well as other factors. Any of these facts may materially affect
the Corporation's future business activities and its ongoing financial results.