UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
[ ] Registration Statement Pursuant to Section 12(b) or (g) of the Securities
Exchange Act of 1934
or
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number: 000-30196
HALO RESOURCES LTD.
(Exact name of Registrant as specified in its charter)
HALO RESOURCES LTD.
(Translation of Registrant's name into English)
BRITISH COLUMBIA, CANADA
(Jurisdiction of incorporation or organization)
1305 - 1090 WEST GEORGIA STREET, VANCOUVER, BRITISH COLUMBIA, V6E 3V7
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act.
COMMON STOCK, NO PAR VALUE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NOT APPLICABLE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
9,443,859 COMMON SHARES AS OF AUGUST 31, 2004
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [X] Item 18 [ ] Page 1 of 156
GENERAL INFORMATION:
UNLESS OTHERWISE INDICATED, ALL REFERENCES HEREIN ARE TO CANADIAN DOLLARS.
GLOSSARY
The following is a glossary of geological terms used in this report:
andesite a fine grained intermediate volcanic rock
composed of andesine and one or more mafic
constituents.
cm centimeter
diamond drill a type of rotary drill in which the
cutting is done by abrasion using diamonds
embedded in a matrix rather than by
percussion. The drill cuts a core of rock
which is recovered in long cylindrical
sections.
epithermal hydrothermal mineral deposit formed within
about 1 kilometer of the earth's surface
and within a temperature range of 50 to
200 degrees centigrade, occurring mainly
as veins.
g gram
g/t grams per tonne.
grade the concentration of each ore metal in a
rock sample, usually given as weight
percent. Where extremely low
concentrations are involved, the
concentration may be given in grams per
tonne (g/t) or ounces per ton (oz/t). The
grade of an ore deposit is calculated,
often using sophisticated statistical
procedures, as an average of the grades of
a very large number of samples collected
from throughout the deposit.
induced polarization (I.P.) method the method used
to measure various electrical responses to
the passage of alternating currents of
different frequencies through near-surface
rocks or to the passage of pulses of
electricity.
intrusion general term for a body of igneous rock
formed below the surface.
km kilometer
m meters
petrographic the description and classification of
rocks.
porphyry rock type with mixed crystal sizes, i.e.
containing phenocrysts of one or more
minerals.
probable (indicated) reserves reserves for which quantity and grade
and/or quality are computed from
information similar to that used for
proven (measured) reserves, but the sites
for inspection, sampling, and measurement
are farther apart or are otherwise less
adequately spaced. The degree of
assurance, although lower than that for
proven (measured) reserves, is high enough
to assume continuity between points of
observation.
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proven (measured) reserves reserves for which (a) quantity is
computed from dimensions revealed in
outcrops, trenches, workings or drill
holes; grade and/or quality are computed
from the results of detailed sampling; and
(b) the sites for inspection, sampling and
measurement are spaced so closely and the
geologic character is so well defined that
size, shape, depth and mineral content of
reserves are well- established.
pyrite iron sulphide
reserves that part of a mineral deposit which could
be economically and legally extracted or
produced at the time of the reserve
determination.
rhyolite a fine-grained extrusive volcanic rock,
similar to granite in composition.
shear zone where a fault affects a width of rock
rather than being a single clean break,
the width of affected rock is referred to
as the shear zone. The term implies
movement, i.e. shearing.
strike the direction of a horizontal line on the
surface of the bed, or other planar
feature.
tailings material rejected from a mill after
recoverable valuable minerals have been
extracted.
FORWARD LOOKING STATEMENTS
The Company cautions readers regarding forward looking statements found in the
following discussion and elsewhere in this annual report and in any other
statement made by, or on the behalf of the Company, whether or not in future
filings with the Securities Exchange Commission ("SEC"). Forward looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which, with respect to future business decisions, are subject to
change. See "Item 3. Key Information - Risk Factors". These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward looking statements made by or on
behalf of the Company. The Company disclaims any obligation to update forward
looking statements.
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 3. KEY INFORMATION.
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
The selected financial data of the Company for the years ended August 31, 2004,
2003 and 2002, was derived from the consolidated financial statements of the
Company which have been prepared in accordance with Canadian generally accepted
accounting principles ("GAAP") and audited by D & H Group, independent Chartered
Accountants, as indicated in their report which is included elsewhere in this
report. The selected financial data set forth for the years ended August 31,
2001 and 2000 are derived from the Company's audited consolidated financial
statements, not included herein.
The information in the following table was extracted from the more detailed
consolidated financial statements and related notes included herein and should
be read in conjunction with such financial statements and with the information
appearing under the heading "Item 5. Operating and Financial Review and
Prospects".
Reference is made to Note 11 of the Company's consolidated financial statements
included herein for a discussion of the material differences between Canadian
GAAP and US GAAP, and their effect on the Company's financial statements.
($ IN 000, EXCEPT PER SHARE DATA)
------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Revenues $82 $69 $163 $635 $398
Production expenses $22 $17 $135 $185 $155
Depreciation, depletion and impairment $10 $1,252 $6,011 $5,168 $78
General and administrative expenses $184 $177 $242 $330 $462
Stock-based compensation $180 - - - -
Net income (loss) $(257) $(1,473) $(6,567) $(5,048) $(297)
Income (loss) per share $(0.05) $(0.50) $(2.24) $(2.03) $(0.14)
Weighted average number of shares 5,654 2,927 2,927 2,480 2,110
Dividends per share - - - - -
Working capital (deficiency) $279 $(2) $77 $6 $1,262
Resource interests $76 $76 $1,111 $7,022 $7,795
Other assets - - $115 $619 $773
Shareholders' equity $355 $(945) $528 $7,094 $9,830
Capital stock $20,914 $19,537 $19,537 $19,537 $17,225
Contributed surplus $180 - - - -
Total assets $418 $93 $1,631 $8,168 $10,137
-4-
Adjustment to United States Generally Accepted Accounting Principles
The consolidated financial statements of the Company are presented in accordance
with Canadian GAAP. Canadian GAAP differs in certain material respects from US
GAAP. The material differences between Canadian and US GAAP, in respect of these
consolidated financial statements, are summarized in the tables below.
Consolidated Statement of Loss
2004 2003 2002
$ $ $
Net loss under Canadian GAAP (257,022) (1,472,642) (6,566,673)
Adjustments for related party transactions (i) - - 1,928,229
Unproven mineral interest expensed (ii) (75,906) - -
Stock-based compensation (iv) - - (74,614)
Other compensation expense (vi) (15,503) - -
Gain on settlement (vii) (97,207) - -
Additional depreciation, depletion
and amortization (ix) - (500) -
---------- ---------- ----------
Net loss under US GAAP (445,638) (1,473,142) (4,713,058)
========== ========== ==========
Loss per share under US GAAP (0.08) (0.50) (1.61)
========== ========== ==========
Consolidated Balance Sheet
2004 2003
$ $
Total assets under Canadian GAAP 417,581 93,085
Unproven mineral interest expensed (ii) (75,906) -
Deferred tax asset (v) 890,000 780,000
Less: Valuation allowance (v) (890,000) (780,000)
Asset retirement cost (ix) - 7,400
---------- ----------
Total assets under US GAAP 341,675 100,485
========== ==========
Total liabilities under Canadian GAAP 62,965 1,038,058
Asset retirement obligations (ix) - 7,900
Discount on advances (x) - (60,028)
---------- ----------
Total liabilities under US GAAP 62,965 985,930
========== ==========
Total shareholders' equity under Canadian GAAP 354,616 (944,973)
Unproven mineral interest expensed (ii) (75,906) -
Additional depreciation, depletion and
amortization (ix) - (500)
Discount on advances (x) - 60,028
---------- ----------
Total shareholders' equity under US GAAP 278,710 (885,445)
========== ==========
(i) Capital Contributions with Respect to Related Party Transactions
During the 1999 fiscal year, the Company acquired and disposed of
certain petroleum interests with Hilton for a combination of monetary
and non-monetary consideration.
US GAAP requires that certain transfers of non-monetary assets to a
company by its promoters or shareholders, in exchange for stock, should
generally be recorded at the transferor's historical cost basis,
whereas under Canadian GAAP, transfers of non-monetary assets may be
recorded based on the fair value of either the stock
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issued or the assets acquired under certain circumstances. Under
Canadian GAAP these transactions were recorded at their fair values.
The transactions have been adjusted to reflect the transactions based
on the historical cost basis.
The net loss under US GAAP for the 2002 fiscal year has also been
adjusted for the subsequent amortization and impairment charges of
these petroleum interest acquisitions costs. There was no impact on the
2003 and 2004 fiscal years.
(ii) Unproven Mineral Interests
Unproven mineral interests and deferred exploration costs are accounted
for in accordance with Canadian GAAP . The Company has determined for
US GAAP purposes to expense the acquisition and exploration costs
relating to unproven mineral interests as incurred. In addition, US
GAAP requires that exploration costs not be capitalized until a
positive feasibility study is completed. The capitalized costs of such
claims would then be assessed for impairment, on a periodic basis, to
ensure that the carrying value can be recovered on an undiscounted cash
flow basis. If the carrying value cannot be recovered on this basis,
the mineral claims would be written down to net recoverable value on a
discounted cash flow basis.
(iii) Ceiling Test on Petroleum Interests
US GAAP requires that the net book value of proved petroleum interests
not exceed the sum of the present value of estimated future net
revenues (determined using current prices of petroleum production less
estimated future expenditures to be incurred in developing and
producing the proved reserves, discounted at ten percent). This ceiling
test was performed effective August 31, 2003 and it was determined that
no additional write-down of proved petroleum interests was necessary.
(iv) Stock-Based Compensation
The Company grants stock options which reserves common shares for
issuance to employees and directors. Before the 2003 fiscal year, the
issuance of stock options was not recognized for accounting purposes
under Canadian GAAP. Under US GAAP, the issuance of stock options
requires an assessment to determine stock based compensation.
Accordingly, the Company has applied the provisions of Statement of
Financial Accounting Standards ("SFAS") 123 Accounting for Stock-Based
Compensation to account for and calculate stock-based compensation
under US GAAP using the fair value method.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions used for grants in the 2002 fiscal year:
Risk-free interest rate 4.54%
Expected volatility 118%
Expected lives 3 years
Expected dividend yield 0%
No options were granted during the 2003 fiscal year.
For the 2004 fiscal year, the Company believes that its accounting for
stock options complies with SFAS 123.
(v) Income Tax
Under Canadian GAAP, deferred tax assets relating to the potential
benefit of income tax loss carryforwards are not recognized unless
there is virtual certainty of realization of the benefit. US GAAP
provides similar treatment, but requires the benefit be recognized and
a valuation allowance be recognized to fully offset the deferred tax
asset.
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As at August 31, 2004, the Company has fully reserved the $890,000 tax
benefit of operating loss carryforwards, by a valuation allowance of
the same amount, because the likelihood of realization of the tax
benefit cannot be determined. Of the total tax benefit, $145,000 is
attributable to the 2004 fiscal year.
(vi) Private Placements of Common Stock
The Company conducts the majority of its equity financings pursuant to
private placements. Under the policies of the TSX Venture, the Company
may provide a discount off the market price of the Company's common
stock. US GAAP does not permit a discount from the market price. US
GAAP requires the recognition of the market value of the Company's
common stock as a credit to share capital, with a charge to operations
for the portion of the discount relating to equity financings conducted
with officers and directors of the Company and a charge to
shareholders' equity, as a capital distribution, for the discount
relating to the remaining portion of the equity financings.
Under US GAAP, loss and capital distributions for the year ended August
31, 2004 would increase by $15,503 (2003 - $nil; 2002 - $nil) and
$206,497 (2003 - $nil; 2002 - $nil), respectively, and share capital,
as at August 31, 2004 would increase by $1,183,402 (2003 - $961,402;
2002 - $961,402). There is no net change to shareholders' equity.
(vii) Settlement with Related Parties
US GAAP requires that gains on settlement of advances with related
parties be credited to deficit. There is no net change in shareholders'
equity.
(viii) Functional Currency
The Company's functional currency is the Canadian dollar.
(ix) Asset Retirement Obligations
The Company adopted SFAS 143 "Asset Retirement Obligations" for US GAAP
reporting purposes on September 1, 2003. SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement
of tangible long-lived assets and the associated asset retirement
costs. SFAS 143 requires companies to record the present value of
obligations associated with the retirement of tangible long-lived
assets in the period in which it is incurred. The liability is
capitalized as part of the related long-lived asset's carrying amount.
Over time, accretion of the liability is recognized as an operating
expense and the capitalized cost is depreciated over the expected
useful life of the related asset. The Company's asset retirement
obligations relate primarily to the plugging, dismantlement, removal,
site reclamation and similar activities of its petroleum and natural
gas interests. Prior to adoption of SFAS 143, such obligations were
accrued ratably over the productive lives of the assets through its
depreciation, depletion and amortization of petroleum and natural gas
interests without recognizing a separate liability for such amounts.
At the time of adoption, total assets increased by $7,500, and total
liabilities increased by $7,500. The amounts recognized upon adoption
are based upon numerous estimates and assumptions, including future
retirement costs, future recoverable quantities of petroleum and
natural gas, future inflation rates and the credit-adjusted risk free
interest rate. Changes in asset retirement obligations during the 2004
and 2003 fiscal years were:
---------- ----------
2004 2003
$ $
---------- ----------
Asset retirement obligations at
beginning of year 7,900 -
Liabilities incurred - 7,500
Liabilities settled (7,900) -
Accretion expense (included in depreciation) - 400
---------- ----------
Asset retirement obligation at end of year - 7,900
Less: current portion - -
---------- ----------
Long-term portion - 7,900
========== ==========
The Company will adopt Section 3110 "Asset Retirement Obligations" of
the CICA Handbook, which is harmonious with SFAS 143, on September 1,
2004 and had no asset retirements obligations at at August 31, 2004.
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(x) Imputed Interest on Long-Term Debt
US GAAP requires that interest be imputed on debt that does not bear
interest. The Company has imputed interest at its estimated incremental
borrowing rate of 10%, with an offsetting charge to retained earnings
as the debt is held by related parties.
(xi) Development Stage Company
The Company is in the exploration stage and, as of July 1, 2004, is
considered a development stage company as defined by SFAS 7. To August
31, 2004, the Company has accumulated a deficit of $166,197 while in
the development stage.
The Company's consolidated statements of cash flow comply with US GAAP.
New Accounting Standards
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS 150,
"ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY", which addresses how to classify and measure certain
financial instruments with characteristics of both liabilities (or assets in
some circumstances) and equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. Adoption of
SFAS 150 on July 1, 2003 had no impact on the Company's financial position and
results of operations.
In January 2003, the FASB issued Interpretation No. 46 "CONSOLIDATION OF
VARIABLE INTEREST ENTITIES" ("FIN 46") (revised December 2003). FIN 46 clarifies
the application of Accounting Research Bulletin 51 "CONSOLIDATED FINANCIAL
STATEMENTS" to only certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the equity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and the variable
interest entities obtained after that date. It applies at the end of the first
annual reporting period beginning after June 15, 2003, to variable interests in
which an enterprise holds a variable interest which was acquired before February
1, 2003. Adoption of FIN 46 on January 1, 2004 will not materially impact the
Company's financial position or results of operations.
A similar guideline has been introduced in Canada, Accounting Guideline 15
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES". This guideline applies to annual
and interim periods beginning on or after November 1, 2004. The Company is
continuing to evaluate the potential impact of Accounting Guideline 15.
In July 2003, the CICA released Section 1100 "GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES". This new section establishes standards for financial reporting in
accordance with generally accepted accounting principles. It describes what
constitutes Canadian GAAP and its sources, replacing "FINANCIAL STATEMENT
CONCEPTS" paragraph 1000.59-61. Also, in July 2003, the CICA released Section
1400, "GENERAL STANDARDS OF FINANCIAL STATEMENT PRESENTATION". This section
clarifies what constitutes fair presentation in accordance with Canadian GAAP.
Both these sections are effective for fiscal years beginning on or after October
1, 2003 and the Company is currently evaluating their impact.
In December 2004 the FASB issued SFAS 123(r), "SHARE-BASED PAYMENT". This
statement requires all entities to recognize compensation expenses in an amount
equal to the fair value of share-based payments granted to employees. The
Company believes the requirements of SFAS 123(R) are equivalent to CICA 3870
"STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS", which the Company
adopted effective September 1, 2002. The Company therefore does not anticipate
the adoption of SFAS 123(R) for US financial reporting purposes will have an
impact on the Company's financial position and results of operations.
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EXCHANGE RATE HISTORY
The following table sets forth the average exchange rate for one Canadian dollar
expressed in terms of one US dollar for the fiscal years ended August 31, 2004,
2003, 2002, 2001 and 2000.
PERIOD AVERAGE
----------------------------------- -------
September 1, 2003 - August 31, 2004 0.7518
September 1, 2002 - August 31, 2003 0.6767
September 1, 2001 - August 31, 2002 0.6355
September 1, 2000 - August 31, 2001 0.6537
September 1, 1999 - August 31, 2000 0.6805
The following table sets forth high and low exchange rates for one Canadian
dollar expressed in terms of one US dollar for the six-month period ended
December 31, 2004.
MONTH HIGH LOW
--------------- ------ ------
December 2004 0.8435 0.8064
November 2004 0.8493 0.8155
October 2004 0.8201 0.7858
September 2004 0.7906 0.7651
August 2004 0.7714 0.7506
July 2004 0.7694 0.7489
Exchange rates are based upon the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York.
The noon rate of exchange on January 26, 2005, reported by the United States
Federal Reserve Bank of New York for the conversion of Canadian dollars into
United States dollars was CDN$1.2307 (US$0.8125 = CDN$1.00).
RISK FACTORS
The Company has, in the past, conducted business primarily in the petroleum and
natural gas industry. As of the date of this annual report, the Company no
longer is active in this industry. The Company has, however, entered into option
agreements which will result in the Company conducting mineral exploration
activities. See "Item 4. Information on the Company - Principal Properties". The
following risk factors apply to the Company's mineral exploration activities.
THE COMPANY HAS LIMITED FINANCIAL RESOURCES AND IF THE COMPANY IS UNABLE TO
SECURE ADDITIONAL FUNDING AND/OR IF THE COMPANY'S EXPLORATION PROGRAMS ARE
UNSUCCESSFUL, THE COMPANY MAY FAIL.
Mineral exploration involves significant risk and few properties that are
explored are ultimately developed into producing mines. Substantial expenditures
may be required to establish ore reserves through drilling, to develop
metallurgical processes to extract the metals from the ore and to construct the
mining and processing facilities at any site chosen for mining. The Company's
proposed exploration programs may not result in any commercial mining operation.
The Company's interests relates to unproved mineral claims which are without a
known body of commercial ore and the proposed programs are an exploratory search
for ore. The Company intends to carry out exploration with the objective of
establishing an economic body of ore. If the Company's proposed exploration
programs are successful, additional funds will be required for the development
of an economic ore body and to place it into commercial production. The only
sources of future funds presently available to the Company are the sale of
equity capital, the exercise of warrants and options or the offering by the
Company of an interest in the mineral claim to be earned to another party or
parties. If the Company is unable to secure additional funding, the Company may
lose its interest in one or more of its mineral claims and/or may be required to
cease operations.
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IT IS UNLIKELY THAT ANY OF THE PROPERTY INTERESTS OWNED OR OPTIONED BY THE
COMPANY WILL CONTAIN "RESERVES"; THEREFORE, IT IS LIKELY THAT THE FUNDS SPENT BY
THE COMPANY ON ITS EXPLORATION ACTIVITIES WILL BE LOST.
All of the Company's property interests are in the exploration stage and do not
contain any "reserves", as that term is defined in Industry Guide 7 adopted by
the SEC. The term "reserves" is defined in Industry Guide 7 as "that part of a
mineral deposit which could be economically and legally extracted or produced at
the time of the reserve determination." Industry Guide 7 is available from the
SEC's website at
http://www.sec.gov/divisions/corpfin/forms/industry.htm#secguide7.
Mineral exploration involves significant risk and few properties that are
explored are ultimately developed into producing mines. The probability of an
individual prospect ever having reserves that meet the requirements of Industry
Guide 7 is extremely remote. The Company's property interests, in all
probability, do not contain any reserves and any funds spent on exploration of
the Company's property interests will probably be lost. If any of the Company's
exploration programs are successful, the Company will require additional funds
to advance the property beyond the exploration stage. Substantial expenditures
are required to establish reserves through drilling, to develop metallurgical
processes to extract the metal from the ore and, in the case of new properties,
to develop the mining and processing facilities and infrastructure at any site
chosen for mining. If the Company is unable to secure additional funding, the
Company may lose its interest in one or more of its mineral claims and/or may be
required to cease all activities.
IF THE COMPANY ISSUES SHARES OR OPTIONS TO ITS OFFICERS, DIRECTORS OR KEY
EMPLOYEES, OR IF THE COMPANY OBTAINS FUNDING THROUGH THE SALE OF ADDITIONAL
COMMON SHARES, THE SHAREHOLDERS WILL EXPERIENCE DILUTION.
The Company may in the future grant to some or all of its directors, officers,
insiders and key employees options to purchase the Company's common shares as
non-cash incentives to those employees. Such options may be granted at exercise
prices equal to market prices, or at prices as allowable under the policies of
the TSX Venture Exchange ("TSXV"), when the public market is depressed. To the
extent that significant numbers of such options may be granted and exercised,
the interests of then existing shareholders of the Company will be subject to
additional dilution.
The Company is currently without a source of revenue and will most likely be
required to issue additional shares to settle its debentures, to pay the
interest on the preferred stock and/or to redeem or retract the preferred stock
if issued on completion of the Duport Property acquisition, finance its
activities and, depending on the outcome of its proposed exploration programs,
may issue additional shares to finance additional exploration programs on any or
all of its projects or to acquire additional properties. The issuance of
additional shares will cause the Company's existing shareholders to experience
dilution of their ownership interests.
THE PRICE OF THE COMPANY'S COMMON SHARES IS SUBJECT TO MARKET FLUCTUATIONS AND
VOLATILITY WHICH MAY NOT BE RELATED TO THE COMPANY'S OPERATIONS AND SUCH
FLUCTUATIONS MAY IMPACT THE COMPANY'S ABILITY TO COMPLETE EQUITY FINANCINGS; IF
THE COMPANY CANNOT COMPLETE ADDITIONAL EQUITY FINANCINGS, IT MAY NOT BE ABLE TO
CONTINUE ITS OPERATIONS.
In recent years, the securities markets in Canada have experienced a high level
of price and volume volatility, and the market price of securities of many
companies, particularly junior natural resources exploration companies, have
experienced wide fluctuations in price which have not necessarily been related
to the operating performance, underlying asset values or prospects of such
companies. In particular, the per share price of the Company's common shares
fluctuated from a low of $0.45 to a high of $1.08 during the 12-month period
ending December 31, 2004. Continued price fluctuations will have a significant
impact on the Company's ability to complete equity financings.
THE COMPANY'S OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATIONS WHICH MAY SUBJECT
THE COMPANY TO PENALTIES FOR FAILURE TO COMPLY AND MAY LIMIT THE COMPANY'S
ABILITY TO CONDUCT EXPLORATION ACTIVITIES AND COULD CAUSE THE COMPANY TO DELAY
OR ABANDON ITS PROJECTS.
Exploration activities are also subject to national and local laws and
regulations governing prospecting, taxes, labor standards, occupational health,
land use, environmental protection, mine safety, and others which currently or
in the
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future may have a substantial adverse impact on the Company. In order to comply
with applicable laws, the Company may be required to make capital expenditures
until a particular problem is remedied. Existing and possible future
environmental legislation, regulation and action could cause additional expense,
capital expenditures, restriction and delays in the activities of the Company,
the extent of which cannot be reasonably predicted. Violators may be required to
compensate those suffering loss or damage by reason of their mining activities
and may be fined if convicted of an offence under such legislation.
Amendments to current laws, regulations and permits governing activities of
mineral exploration companies or more stringent implementation thereof could
require increases in exploration expenditures, or require delays in exploration
or abandonment of new mineral properties.
The Company's proposed exploration activities may be subject to federal,
provincial and local laws and regulations governing the protection of the
environment, including laws and regulations relating to air and water quality,
waste disposal, and the protection of endangered or threatened species.
The Company may be required to obtain pre-construction environmental and land
use review and comply with permitting, control and mitigation requirements of
the jurisdictions in which the projects are located. Compliance with these
requirements could impose costs on the Company in the future, the materiality of
which cannot reasonably be predicted at this time. Any change in the applicable
laws or regulations could have an adverse effect on any project in which the
Company might have an interest. Also, the Company may require additional permits
for its future operations, which may or may not be obtainable on reasonable
terms. It is unlikely that the Company will not be able to obtain the required
permitting. If the permitting process becomes extended the Company may be
required to obtain additional financial resources.
If the Company is unable to obtain the necessary permits, the Company might have
to change its planned exploration for such non-permitted properties and/or to
seek other joint venture arrangements. If the Company were unable to mitigate
the problem, the Company might not be able to proceed with exploration. In this
event, the Company might seek to mitigate any losses through sale of the
property, prior to abandonment.
EXPLORATION FOR MINERALS ON THE COMPANY'S PROJECTS IS SUBJECT TO SIGNIFICANT
RISKS WHICH COULD INCREASE THE COSTS OF EXPLORATION AND COULD CAUSE THE COMPANY
TO DELAY OR ABANDON ITS PROJECTS.
The Company's projects are without a known ore body of commercial ore and its
proposed programs are exploratory in nature. Mineral exploration involves a high
degree of risk and few properties which are explored are ultimately developed
into producing mines. The long-term profitability of the Company's activities
will be, in part, directly related to the cost and success of its proposed
exploration programs, which may be affected by a number of factors beyond the
Company's control.
Mineral exploration involves many risks, which even a combination of experience,
knowledge and careful evaluation may not be able to overcome. Operations in
which the Company has a direct or indirect interest will be subject to all the
hazards and risks normally incidental to exploration for gold (also "Au"), and
other metals, any of which could result in work stoppages, damage to property,
and possible environmental damage.
The Company will rely upon consultants and others for exploration expertise. If
any of the Company's option interests merit development, substantial
expenditures will be required to advance the project beyond the exploration
stage. The Company may not discover minerals in sufficient quantities to justify
commercial operations and the Company may not be able to obtain the funds
required for its activities on a timely basis. The economics of exploring for
gold, silver and other mineral properties is affected by many factors including
the cost of operations, variations in the grade of ore, fluctuations in metal
markets, costs of processing equipment and such other factors as government
regulations, including regulations relating to royalties, allowable production,
importing and exporting of minerals and environmental protection.
-11-
BECAUSE THE COMPANY IS SUBJECT TO COMPLIANCE WITH GOVERNMENTAL REGULATION, THE
COST OF ITS PROPOSED EXPLORATION PROGRAMS MAY INCREASE, WHICH MAY CAUSE THE
COMPANY TO HAVE TO ABANDON SUCH PROGRAMS.
The Company's activities will be subject to environmental regulations
promulgated by government agencies from time to time. Environmental legislation
provides for restrictions and prohibitions on spills, releases or emissions of
various substances produced in association with certain mining industry
operations, such as seepage from tailings disposal areas, which would result in
environmental pollution. A breach of such legislation may result in the
imposition of fines and penalties. In addition, certain types of operations
require the submission and approval of environmental impact assessments.
Environmental legislation is evolving in a manner which means stricter
standards, and enforcement, fines and penalties for non-compliance are more
stringent. Environmental assessments of proposed projects carry a heightened
degree of responsibility for companies and directors, officers and employees.
The cost of compliance with changes in governmental regulations has a potential
to reduce the profitability of operations.
THE COMPANY MAY INCUR LIABILITY FOR CERTAIN RISKS AGAINST WHICH THE COMPANY DOES
NOT HAVE INSURANCE, WHICH COULD REDUCE OR ELIMINATE ANY FUTURE PROFITABILITY AND
NEGATIVELY IMPACT THE PRICE OF THE COMPANY'S SHARES.
In the course of exploration of mineral concessions, certain risks, and in
particular, unexpected or unusual geological operating conditions including rock
bursts, cave-ins, fires, flooding and earthquakes may occur. It is not always
possible to fully insure against such risks and the Company may decide not to
take out insurance against such risks as a result of high premiums or other
reasons. Should such liabilities arise, they could reduce or eliminate any
future profitability and result in increasing costs and a decline in the value
of the securities of the Company. The Company currently does not have any
insurance coverage on its mineral option interests.
THE COMPANY (OR THE OPTIONOR OF THE PROPERTY) MAY NOT HAVE PROPER TITLE TO ITS
PROPERTIES AND, AS A RESULT, THE COMPANY MAY INCUR SIGNIFICANT EXPENSES TO
OBTAIN PROPER TITLE, OR MAY HAVE TO ABANDON ANY SUCH PROPERTIES.
The Company has under option, unpatented and patented mining claims, mineral
claims or concessions which constitute the Company's property holdings. The
ownership and validity of unpatented mining claims and concessions are often
uncertain and may be contested.
In those jurisdictions where the Company has property interests, the Company
makes a search of mining records in accordance with mining industry practices to
confirm that it has acquired, or can acquire upon exercise of any option,
satisfactory title to the properties but does not intend to obtain title
insurance with respect to such properties. The possibility exists that title to
one or more of the concessions in which the Company has an interest,
particularly title to undeveloped claims, might be defective because of errors
or omissions in the chain of title, including defects in conveyances and defects
in locating or maintaining such claims, or concessions.
The boundaries of some of the Company's property interests have not been
surveyed and, therefore, the precise location and area of these mining
properties may be in doubt. The Company is not aware of challenges to the
location or area of the unpatented mining claims in which the Company has
acquired an interest.
IF THE COMPANY IS UNABLE TO EFFECTIVELY COMPETE AGAINST OTHER COMPANIES, OR IF
THE COMPANY CANNOT MARKET ANY MINERALS DISCOVERED ON THE PROPERTIES IN WHICH THE
COMPANY HAS AN INTEREST, THE COMPANY MAY HAVE TO CEASE OPERATIONS.
The mineral industry is intensely competitive in all its phases. The Company
competes with many companies possessing greater financial resources and
technical facilities than itself for the acquisition of mineral concessions,
claims, leases and other mineral interests as well as for the recruitment and
retention of qualified employees.
Factors beyond the control of the Company may affect the marketability of any
substances discovered. These factors include market fluctuations, the proximity
and capacity of natural resource markets and processing equipment, government
regulations, including regulations relating to prices, taxes, royalties, land
tenure, land use, importing and exporting of minerals and environmental
protection. The exact effect of these factors cannot be accurately predicted,
-12-
but the combination of these factors may result in the Company not receiving an
adequate return on invested capital or losing its investment capital.
CONFLICTS OF INTEREST MAY ARISE AMONG THE MEMBERS OF OUR BOARD OF DIRECTORS AND
SUCH CONFLICTS MAY CAUSE THE COMPANY TO ENTER INTO TRANSACTIONS ON TERMS WHICH
ARE NOT BENEFICIAL TO THE COMPANY.
Several of the Company's directors are also directors, officers or shareholders
of other companies. Some of the directors and officers are engaged and will
continue to be engaged in the search for additional business opportunities on
behalf of other corporations, and situations may arise where these directors and
officers will be in direct competition with the Company. Such associations may
give rise to conflicts of interest from time to time. Such a conflict poses the
risk that the Company may enter into a transaction on terms which could place
the Company in a worse position than if no conflict existed. Conflicts, if any,
will be dealt with in accordance with the relevant provisions of the BUSINESS
CORPORATIONS ACT (British Columbia) (the "BCBCA"). The directors of the Company
are required by law to act honestly and in good faith with a view to the best
interests of the Company and to disclose any interest which they many have in
any project or opportunity of the Company. However, each director has a similar
obligation to other companies for which such director serves as an officer or
director. In order to avoid the possible conflict of interest which may arise
between the directors' duties to the Company and their duties to the other
companies on whose boards they serve, the directors and officers of the Company
have agreed to the following:
1. participation in other business ventures offered to the directors will
be allocated between the various companies and on the basis of prudent
business judgment and the relative financial abilities and needs of the
companies to participate;
2. no commissions or other extraordinary consideration will be paid to
such directors and officers; and
3. business opportunities formulated by or through other companies in
which the directors and officers are involved will not be offered to
the Company except on the same or better terms than the basis on which
they are offered to third party participants.
See "Item 7. Major Shareholders and Related Party Transactions - Related Party
Transactions - Conflicts of Interest". As of the date of this annual report all
material conflicts of interests which have arisen since September 1, 2003, have
been described in "Item 7. Major Shareholders and Related Party Transactions."
If a conflict of interest arises at a meeting of the board of directors, any
director in a conflict will disclose his interest and abstain from voting on
such matter, and the minutes of the meeting will reflect such disclosure and
abstention from voting. In determining whether or not the Company will
participate in any project or opportunity, the board of directors will primarily
consider the degree of risk to which the Company may be exposed and its
financial position at that time.
THE PRICES OF METALS FLUCTUATE IN THE MARKET AND SUCH FLUCTUATIONS COULD
NEGATIVELY IMPACT THE COMPANY'S ABILITY TO RAISE FUNDING AND MAY CAUSE CERTAIN
ACTIVITIES TO BECOME UNECONOMIC.
Factors beyond the control of the Company may affect the marketability of any
substances discovered. The prices of various metals have experienced significant
movement over short periods of time, and are affected by numerous factors beyond
the control of the Company, including international economic and political
trends, expectations of inflation, currency exchange fluctuations, interest
rates and global or regional consumption patterns, speculative activities and
increased production due to improved mining and production methods. The supply
of and demand for metals are affected by various factors, including political
events, economic conditions and production costs in major mineral producing
regions. Variations in the market prices of metals may impact on the Company's
ability to raise funding to conduct exploration of its properties. In addition,
any significant fluctuations in metal prices will impact on the Company's
decision to accelerate or reduce its proposed exploration activities.
-13-
THE COMPANY DOES NOT PAY DIVIDENDS ON ITS COMMON SHARES; THEREFORE, INVESTORS
SEEKING DIVIDEND INCOME SHOULD NOT PURCHASE THE COMMON SHARES.
The Company has never declared or paid cash dividends on its common shares and
does not anticipate doing so in the foreseeable future. Additionally, the
determination as to the declaration of dividends is within the discretion of the
Company's Board of Directors, which may never declare cash dividends on the
Company's common stock. Investors cannot expect to receive a dividend on the
Company's common shares in the foreseeable future, if at all.
THE COMPANY IS DEPENDENT UPON ITS MANAGEMENT AND THE LOSS OF ANY OF ITS
MANAGEMENT AND/OR IF THE COMPANY IS UNABLE TO RECRUIT ADDITIONAL MANAGERS COULD
NEGATIVELY IMPACT THE COMPANY'S ABILITY TO CONTINUE ITS OPERATIONS.
The success of the operations and activities of the Company is dependent to a
significant extent on the efforts and abilities of its key officers, Mr. Nick
DeMare, a director and the President, Chief Executive Officer and Chief
Financial Officer of the Company and Mr. Marc Cernovitch, the Vice-President,
Corporate Development of the Company and a nominee for election as a director at
the Company's upcoming annual general meeting. In addition the Company has
engaged Mr. Tom Healy, M.Sc.,P. Eng. as the acting Vice-President of Operations.
The loss of services of either Messrs. DeMare, Cernovitch or Healy could have a
material adverse effect on the Company. The Company has not obtained key-man
life insurance on any of its officers or directors. The Company's ability to
recruit and retain highly qualified management personnel is critical to its
success; if it is unable to do so this may materially affect the Company's
financial performance.
THE MAJORITY OF THE COMPANY'S CURRENT CORPORATE OPERATIONS ARE PERFORMED BY
OTHER THAN COMPANY PERSONNEL AND IF SUCH PERSONNEL ARE NOT AVAILABLE IN THE
FUTURE, THE COMPANY MAY INCUR SIGNIFICANT EXPENSES TO FIND SUITABLE REPLACEMENTS
AND/OR TO HIRE OTHER PERSONNEL.
Corporate accounting, management and administration are provided, in part, by
Chase Management Ltd. ("Chase"), a company owned by Mr. Nick DeMare, a director
and the President, Chief Executive Officer and Chief Financial Officer of the
Company. In the event the Company needs to employ additional personnel, it will
need to recruit qualified personnel to staff its operations. The Company
believes that such personnel currently are available at reasonable salaries and
wages in the geographic areas in which the Company operates. There can be no
assurance, however, that such personnel will be available in the future. In
addition, it cannot be predicted whether the labour staffing at any of the
Company's projects will be unionized, which may result in potentially higher
operating costs.
THE COMPANY'S SHARES ARE SUBJECT TO THE SEC'S PENNY STOCK RULES, WHICH MAY
RESTRICT THE ABILITY OF BROKERS TO SELL THE COMPANY'S COMMON STOCK AND MAY
REDUCE THE SECONDARY MARKET FOR THE COMMON STOCK.
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stock". Generally, penny stocks are equity
securities with a price of less than US $5.00 (other than securities registered
on certain national securities exchanges or quoted on the NASDAQ system). If the
Company's shares are traded for less than US $5 per share, as they currently
are, the shares will be subject to the SEC's penny stock rules unless (1) the
Company's net tangible assets exceed US $5,000,000 during the Company's first
three years of continuous operations or US $2,000,000 after the Company's first
three years of continuous operations; or (2) the Company has had average revenue
of at least US $6,000,000 for the last three years. The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document
prescribed by the SEC that provides information about penny stocks and the
nature and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules require that prior to
a transaction in a penny stock not otherwise exempt from those rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These requirements may have the effect of reducing
the level of trading activity in the secondary market for a stock that becomes
subject to the penny stock rules. Since the Company's shares are traded for
-14-
less than US $5.00 per share, the Company's common stock is subject to the penny
stock rules. Therefore, the holders of the common stock may find it difficult to
sell the common stock of the Company. These rules may restrict the ability of
brokers to sell the common stock and may reduce the secondary market for the
common stock. A limited secondary market may result in a decrease in the value
of the shares and/or a partial or total loss of an investor's investment.
THE COMPANY AND/OR ITS SUBSIDIARIES (IF ANY) MAY BE DEEMED TO BE A "PASSIVE
FOREIGN INVESTMENT COMPANY" FOR U.S. TAX PURPOSES WHICH COULD SUBJECT U.S.
SHAREHOLDERS TO INCREASED TAX LIABILITY.
The Company and/or its subsidiaries may be deemed to be a "Passive Foreign
Investment Company". See "Item 10. Additional Information - Taxation." If the
Company or any of its subsidiaries is deemed to be a Passive Foreign Investment
Company, a United States holder of the Company's common shares would be required
to pay an interest charge together with tax calculated at maximum tax rates on
certain "excess distributions" (defined to include certain dividends from a
Passive Foreign Investment Company and any gain on the sale of stock of a
Passive Foreign Investment Company) unless such holder made an election either
to (1) include in his or her taxable income his or her pro rata share of the
Passive Foreign Investment Company's ordinary earnings and net capital gains
under the Qualified Electing Fund rules or (2) mark to market his or her Company
common shares at the end of each taxable year as set forth in Section 1296 of
the Internal Revenue Code of 1986, as amended. The elections require certain
conditions be met such as filing on or before the due date, as extended, for
filing the shareholder's income tax return for the first taxable year to which
the election will apply.
THIS ANNUAL REPORT CONTAINS STATEMENTS ABOUT FUTURE EVENTS AND RESULTS WHICH MAY
NOT BE ACCURATE.
Statements contained in this annual report that are not historical facts are
forward-looking statements that involve risks and uncertainties. Such statements
may not prove to be accurate as actual results and future events could differ
materially from those anticipated in such statements. Without limiting the
generality of the foregoing, such risks and uncertainties include interpretation
of results and geology, results of pre-feasibility and feasibility studies,
recovery, accidents, equipment breakdowns, labor disputes or other unanticipated
difficulties with or interruptions in production, delays in exploration
activities, the inherent uncertainty of production fluctuations and failure to
obtain adequate financing on a timely basis.
INVESTORS IN THE UNITED STATES MAY NOT BE ABLE TO ENFORCE THEIR CIVIL
LIABILITIES AGAINST THE COMPANY OR ITS DIRECTORS AND OFFICERS.
It may be difficult to bring and enforce suits against the Company. The Company
is a corporation domiciled in British Columbia. None of the Company's directors
and officers are residents of the United States, and all or a substantial
portion of their assets are located outside of the United States. As a result,
it may be difficult for U.S. holders of the Company's common shares to effect
service of process on these persons within the United States or to enforce
judgements obtained in the U.S. based on the civil liability provisions of the
U.S. federal securities laws against the Company or its officers and directors.
In addition, a shareholder should not assume that the courts of Canada (i) would
enforce judgments of U.S. courts obtained in actions against the Company, its
officers or directors predicated upon the civil liability provisions of the U.S.
federal securities laws or other laws of the United States, or (ii) would
enforce, in original actions, liabilities against the Company, its officers or
directors predicated upon the U.S. federal securities laws or other laws of the
United States.
However, U.S. laws would generally be enforced by a Canadian court provided that
those laws are not contrary to Canadian public policy, are not foreign penal
laws or laws that deal with taxation or the taking of property by a foreign
government and provided that they are in compliance with applicable Canadian
legislation regarding the limitation of actions. Also, a judgment obtained in a
U.S. court would generally be recognized by a Canadian court except, for
example:
a) where the U.S. court where the judgment was rendered had no
jurisdiction according to applicable Canadian law;
-15-
b) the judgment was subject to ordinary remedy (appeal, judicial
review and any other judicial proceeding which renders the
judgment not final, conclusive or enforceable under the laws
of the applicable state) or not final, conclusive or
enforceable under the laws of the applicable state;
c) the judgment was obtained by fraud or in any manner contrary
to natural justice or rendered in contravention of fundamental
principles of procedure;
d) a dispute between the same parties, based on the same subject
matter has given rise to a judgment rendered in a Canadian
court or has been decided in a third country and the judgment
meets the necessary conditions for recognition in a Canadian
court;
e) the outcome of the judgment of the U.S. court was inconsistent
with Canadian public policy;
f) the judgment enforces obligations arising from foreign penal
laws or laws that deal with taxation or the taking of property
by a foreign government; or
g) there has not been compliance with applicable Canadian law
dealing with the limitation of actions.
ITEM 4. INFORMATION ON THE COMPANY.
- --------------------------------------------------------------------------------
HISTORY AND DEVELOPMENT OF THE COMPANY
NAME AND INCORPORATION
The Company was incorporated under the laws of British Columbia, Canada, under
the name of Golden Chance Resources Inc. on June 16, 1983. On October 15, 1990,
the Company's name was changed to Trimark Resources Ltd. On December 14, 1993,
the Company was continued under the BUSINESS CORPORATIONS ACT (Yukon Territory).
On the continuance the Company changed its authorized capital into "unlimited
common shares without par value." On December 13, 1996, the Company's name was
changed to International Trimark Resources Ltd. On June 16, 1997, the Company
changed its name to Trimark Oil & Gas Ltd. On March 21, 2002, the Company
changed its name to Trimark Energy Ltd. On February 23, 2004, the Company
changed its name to its current name, Halo Resources Ltd.
On March 29, 2004, the British Columbia legislature enacted the BCBCA and
repealed the BC Company Act. At the Company's special meeting of shareholders
held on November 2, 2004, the Company received shareholder approval to continue
its corporate jurisdiction into British Columbia under the BCBCA. See "Item 10.
Additional Information - Memorandum and Articles of Association". Effective
November 16, 2004, the Company changed its domicile through continuation from
the Yukon Territory to British Columbia under the BCBCA.
The Company's common shares are listed for trading on the TSXV, which classifies
listed companies into two different tiers based on standards, which include
historical financial performance, stage of development, and financial resources
of the listed company. Tier 1 is the TSXV's premier tier and is reserved for the
TSXV's most advanced issuers with the most significant financial resources. Tier
1 issuers benefit from decreased filing requirements and improved service
standards. The majority of the companies listed on the TSXV are Tier 2
companies. The Company trades on the TSXV under the symbol "HLO" and is
classified as a Tier 2 company.
Effective August 7, 2000, the Company's common stock was listed for quotation on
the Over-the-Counter Bulletin Board (the "OTC Bulletin Board") operated by the
National Association of Securities Dealers, where it currently trades under the
symbol "HLOSF.OB".
-16-
The Company's registered and principal business office is located at Suite 1305
- - 1090 West Georgia Street, Vancouver, British Columbia, V6E 3V7. The contact
person is Nick DeMare, President. The telephone number is (604) 685-9316 and the
facsimile number is (604) 683-1585. The Company does not have a registered agent
in the United States.
BUSINESS OVERVIEW
Beginning October 1990, the Company was active in the business of acquiring,
exploring and developing oil and gas prospects in the United States. Over the
past years the Company's main focus were its interests in the East Lost Hills
Joint Venture and the San Joaquin Joint Venture. These ventures were
unsuccessful and the Company ceased participation in these activities in
February 2002. During fiscal 2002, the Company also participated in the drilling
of an exploratory well in regional California. A side-track well was
subsequently drilled and determined to be uneconomic. The well was plugged and
abandoned in September 2002.
Effective March 1, 2004, the Company sold its remaining interests in certain oil
and gas leases in the West Ranch Field. The Company no longer holds any oil and
gas interests, nor is it conducting any further activities in the oil and gas
industry.
On July 5, 2004, the Company entered into an agreement to acquire a 100%
interest in the Duport Property. On November 12, 2004, the Company entered into
an option agreement to earn a 50% interest in the Bachelor Lake Property. See
"Item 4. Information on the Company - Principal Properties".
On December 24, 2004 the Company completed a brokered private placement of
7,016,481 common shares for $6,398,304 cash proceeds.
DISPOSITIONS
During fiscal 2004, the Company sold its 3% working interest in the West Ranch
Field for $78,630. On August 31, 2004, the Company formally abandoned its
investments in its wholly-owned subsidiaries, Safari Petroleum LLC ("Safari")
and TMK Oil and Gas Inc. ("TMK"). Both of these companies were inactive at the
time of abandonment.
During fiscal 2003, the Company wrote-off its net investment in its wholly-owned
subsidiary, Trimark Resources Inc. ("Trimark Inc."), which held substantially
all of the Company's petroleum and natural gas interests at that time.
Accordingly, it recorded a net charge of $1,240,794 for depreciation, depletion
and impairment to reflect the abandonment of Trimark Inc.
No dispositions occurred in fiscal 2002.
EXPLORATION EXPENDITURES
During fiscal 2004, the Company incurred $75,906 for mineral property
acquisition costs and $23,935 for development of petroleum interests. During
fiscal 2003 and 2002, the Company incurred $319,757 and $99,517 respectively, on
the acquisition, exploration and development of its petroleum interests.
No mineral property acquisitions or exploration expenditures were made in fiscal
2003 or 2002.
2005 EXPLORATION BUDGET
As of the date of this annual report, the Company anticipates that it will
undertake a Phase I exploration program on its Duport Property. This program
will comprise a geophysical survey followed by preliminary diamond drilling.
Management believes the cost of the Phase I program will be approximately
$650,000. Subject to the results from Phase I, the Company plans a Phase II
follow-up exploration program of fill-in drilling and scoping study at an
estimated budget of $1.6 million. The Company will also be proceeding with the
assumption of the de-watering of old workings
-17-
of the Bachelor Lake Property and once completed to implement an underground
drill program. The cost for these activities is estimated to be $3.2 million.
Financing of the exploration activities will be provided from existing working
capital.
SALES AND REVENUE DISTRIBUTION
As of the date of this annual report, the Company has not generated any revenues
from its mineral properties.
The Company's share of petroleum, natural gas and natural gas liquids produced
from its wells was sold to a variety of purchasers at the wellhead in the United
States. All of its sales were conducted with unaffiliated customers. These
purchasers provided a ready market for all of the Company's production and paid
the local market price, which fluctuated based upon prevailing market
conditions. Due to the number of purchasers in each area, the loss of one or a
number of purchasers did not pose a significant risk to the continuity of the
Company's operations. During fiscal 2004, the Company sold its remaining
interest in oil and natural gas properties. As of the date of this annual
report, the Company does not generate any petroleum, natural gas and natural gas
liquids revenue.
Total revenues, interest and other income reported for fiscal 2004, 2003 and
2002, were as follows:
($ IN 000)
--------------------------------------
YEARS ENDED AUGUST 31,
--------------------------------------
2004 2003 2002
Petroleum and Natural Gas Sales
- United States $ 81 $ 45 $ 126
---------- ---------- ----------
Interest and Other Income
- United States - 23 14
- Canada 1 1 23
---------- ---------- ----------
1 24 37
---------- ---------- ----------
Total Revenue,Interest and Other Income $ 82 $ 69 $ 163
========== ========== ==========
PRINCIPAL PROPERTIES
DUPORT PROPERTY, ONTARIO
[MAP 1 - Map of Ontario from Roscoe Postle Associates Inc. indicating the
location of the Duport Property, with a close-up inset map showing the location
of the Duport Property in relationship to the city of Kenora and Lake of the
Woods taken from the November 8, 2004 report by Graham G. Clow, P.Eng. and Wayne
W. Valliant, P.Geo., entitled the "Technical Report on the Duport Property,
Northwestern Ontario, Canada"]
Property Agreements
Pursuant to a letter of intent dated July 5, 2004 (the "LOI") between the
Company and The Sheridan Platinum Group Ltd. and Pat Sheridan (the "Vendors"),
the Company agreed to purchase a 100% interest in the Duport Property (the
"Duport Property") located near Kenora, Ontario (the "Acquisition"), subject to
regulatory approval and certain other conditions. The Vendors are at arm's
length to the Company.
Pursuant to the LOI, the Company has the right to acquire the Duport Property by
paying $250,000 cash and issuing one million common shares and $8 million in
Series 1 preferred shares of the Company.
The Series 1 preferred shares will have a term of five years and have an
aggregate annual dividend requirement of $50,000 in years one and two and at 4%
thereafter. The Series 1 preferred shares are non-voting (unless the Company is
in default on the payment of dividends and the dividends remain unpaid for a
period of 60 days), non-convertible and
-18-
can be redeemed by the Company. In order to redeem the Series 1 preferred
shares, the Company may at any time on or before the end of the term of the
Series 1 preferred shares:
(i) make a payment (in cash or common shares) of $8 million plus a $400,000
bonus, together with any accrued and unpaid dividends; or
(ii) provided the dividends payable pursuant to the terms of the Series 1
preferred shares have been paid to date, the Company may return the
Duport Property to the vendors.
If the Series 1 preferred shares have not been redeemed the Company will retract
the Series 1 preferred shares by paying the holders $8 million plus accrued
unpaid dividends in cash or common shares of the Company. See "Item 10.
Additional Information - Description of Authorized Shares - Preferred Shares".
The Company has also agreed to pay a 2.5% net smelter return royalty ("NSR") on
the first 1.5 million ounces of gold produced and a 5% NSR on the excess. The
Company will have the right to buy back a portion of the NSR.
Completion of the acquisition of the Duport Property is subject to normal
closing conditions including receipt of final regulatory approvals.
Description of the Duport Property
The following discussion is based on a geological report written for the
Company. The "Technical Report on the Duport Property, Northwestern Ontario,
Canada" (the "Duport Report") was written by Graham G. Clow, P.Eng. and Wayne W.
Valliant, P.Geo., of Roscoe Postle Associates Inc., on October 12, 2004. The
Duport Report is available on the SEDAR website, www.sedar.com.
Property Description and Location
The Duport Property is located on Stevens Island in Shoal Lake, on the
Ontario-Manitoba border, 45 km southwest of the town of Kenora, Ontario. The
Duport Property consists of 85 mineral claims over an area of approximately
3,250 hectares ("ha") and is currently owned by The Sheridan Platinum Group Ltd.
Accessibility, Climate, Local Resources, Infrastructure and Physiography
The Duport Property is accessed from Kenora, Ontario, west along the
Trans-Canada Highway #17, a distance of 40 km, south by gravel road for 14 km
and then 8 km by boat. The Duport Property may also be reached by float equipped
aircraft.
The Shoal Lake area terrain is generally flat with numerous low rolling hills
which are typical of glaciated Pre-Cambrian Shield areas. Overburden is thin and
rock outcrop is abundant. The area is covered with growths of white spruce,
balsam, white birch, and aspen. Ground cover varies according to slope and soil
buildup. Cedar is abundant along the shorelines.
There is currently no permanent source of power on the Duport Property. It is
anticipated that diesel power generation will be utilized during exploration and
development until such time as it is economic to tie into the provincial power
grid.
There are several old buildings on the Duport Property including an old staff
house and a maintenance shop that was used during the construction of the
underground exploration development. Some minor infrastructure such as
pipelines, sedimentation ponds and sewage fields are also present.
The Shoal Lake area experiences long, cold winters and warm, humid summers. Mean
daily temperatures range from -17.8(0)C in January to 19.6(0)C in July. Winter
temperatures (December-February) range from -14.1(0)C to -17.8(0)C, with minimum
mean daily temperatures occurring in January (-22.7(0)C). Average summer
temperatures (June-August) range from 16(0)C to 20(0)C, with maximum mean daily
temperatures reaching 24.7(0)C in July. Extremes of -43.9(0)C in January
-19-
and 35.8(0)C in July have been recorded in Kenora. Total annual precipitation
averages 632 mm of which 473 mm falls as rain and the remaining 159 mm (water
equivalent) as snow. Snowfall occurs mostly from November to March.
There are two First Nations communities with land holdings and residents on
Shoal Lake - Iskutewisakaygun #39 Independent First Nation and Shoal Lake #40
First Nation. In addition to the resident First Nations, two other First Nations
have land holdings on Shoal Lake but do not reside there.
Since the early part of the 20th century, Shoal Lake has been the source of
drinking water for the city of Winnipeg. Water flows by gravity through a 2.2 m
diameter pipeline at the western edge of the lake, traveling approximately 160
km to the city distribution system. Lake of the Woods and Shoal Lake both
support extensive multi-season cottage development. Recreational fishing and
hunting are popular in the area. Commercial fishing on Shoal Lake has been
largely suspended to protect walleye populations. Only two active commercial
fishing licenses remain, both held by First Nations #39 and #40.
Exploration and Development History
Exploration and mining activities have been carried out on the Duport Property
at various times since 1897. The original discovery of a gold bearing sulphide
zone was made on Cameron Island, where a small exploratory inclined shaft was
sunk in 1899.
Limited bulk sampling and mining by the Duport Mining Company produced 1,100
tonnes of material, which was shipped to smelters at Tacoma, Washington and Flin
Flon, Manitoba for processing during the period 1934-1936.
Matachewan Consolidated Mines Ltd., (1950) and Westfield Minerals Ltd. (1965)
extended the known gold bearing zone both laterally and vertically by diamond
drilling.
Consolidated Professor Mines Ltd. ("CPM") obtained an option on the Duport
Property in 1973 and carried out an initial program of exploration and sampling.
CPM acquired a 100% interest in the Duport Property by amalgamating with Duport
Mining Company in 1981. During joint venture arrangements with Selco Inc. in
1982 and with Union Carbide Company from 1983-1985, drilling and underground
exploration took place from a new 1,100 m underground decline on Stevens Island.
The program confirmed the presence of a mineral resource and led to the
extension of known geological structures along strike to the northeast and
southwest.
CPM continued underground development on the Duport Property during 1986 and
1987 with a program to further define the extent of the gold bearing horizon.
The program included extending the existing decline to a vertical depth of 200
m, and diamond drilling, to establish continuity of the gold bearing horizon to
500 m below surface. Three raises were driven in ore and a 90 tonne bulk sample
was mined and shipped to Lakefield Research for pilot plant metallurgical
testing. In all, CPM completed approximately 3,000 m of underground development
and more than 60,000 m of drilling. Based on the resultant resource estimate and
metallurgical work, CPM commissioned an independent engineering firm to conduct
a feasibility study in 1988. The study included the following key components:
- mining rate, average grade
- mine life
- method, backfill
- process
- capital
- operating cost
- conclusion
During the time the study was being prepared, CPM commenced the formal
permitting process. The most important aspect of the potential environmental
impact of proposed mine development is its location on Shoal Lake. Shoal Lake is
the source of drinking water for the city of Winnipeg, Manitoba, and is also the
location of two First Nations communities and a number of seasonal cottages. CPM
recognized very early during its ownership of the Duport Property that
environmental concerns regarding development and operation of the property were
important. Between 1979 and 1988, CPM collected baseline environmental data and
commissioned outside consultants to study the issues
-20-
and prepare an environmental impact study. The design for plant and
infrastructure was intended to mitigate any environmental effects of the
operation.
Despite the fact that the technical aspects of the environmental management plan
were relatively straightforward, the Duport Property received considerable
scrutiny from the local cottagers and, eventually, the City of Winnipeg and the
Province of Manitoba. The public perceptions were such that in 1989 the Ontario
permitting process was stopped and the Duport Property was designated for review
under the Canadian Environmental Assessment Act. From 1989 to 1993, essentially
no activity took place on any aspect of the Duport Property.
Commencing in 1993, CPM reactivated the environmental aspects of the Duport
Property with the objective of restarting the approval process. As a first step,
the property development plan was significantly revised from the feasibility
study in that all processing was moved to a location outside the Shoal Lake
watershed. Ore was to be mined on Stevens Island and hauled by truck to the
proposed plant site approximately 10 km away on the mainland. Two processing
options were considered - production of concentrate at the plant followed by
gold recovery at Placer Dome's Campbell Mine in Red Lake, and production of gold
at the plant. The former option had the advantage of eliminating the use of
cyanide in the Shoal Lake area. No physical work was carried out on the Duport
Property during this time other than environmental baseline work and minor
fieldwork in support of the revised property development plan.
During this time, CPM re-established a working relationship with the two First
Nations on Shoal Lake. An extensive program of community relations was carried
out including workshops and public consultation sessions in the communities.
Impact and Benefit Agreements were signed with both communities. CPM also
implemented a buyout program with affected cottagers on Shoal Lake. Outside the
area, CPM carried out extensive consultations with key officials at the City of
Winnipeg, the Provinces of Manitoba and Ontario, and the federal government in
order to describe the revised project and to establish the process for formal
environmental approval.
In 1996, Royal Oak Mines Inc. ("ROM") made a successful takeover bid for all the
shares of CPM, whereupon CPM became a wholly owned subsidiary of ROM. ROM
updated the CPM work and initiated an internal feasibility study based on the
revised development plan instituted by CPM previously, but rather than using the
Campbell Red Lake option, concentrate was to be railed to the ROM plant in
Timmins, Ontario, where it would be treated using a bio- oxidation process. ROM
did not carry out any physical work on the site other than a limited diamond
drilling program during 1996-1997. In 1997, ROM filed for bankruptcy and the
Duport Property became inactive. The current owners acquired the Duport Property
from the bankruptcy.
Diamond Drilling and Underground Development
Prior to 1983 underground development consisted of approximately 104 m of shaft
and winzes and 664 m of lateral development. From 1984 to 1987 inclusive a 1,360
m decline was completed as well as 1,463 m of lateral development and 112 m of
raising. The following table summarizes the work.
Underground Development Summary
---------------------------------------
Type Meters
------ ------
Ramp 1,360
Levels 2,127
Raises 112
Shafts 104
Regional Geology
The Shoal Lake area is underlain by Precambrian (Archean) volcanic and
sedimentary rocks, which are part of a broad greenstone belt striking in a
general east-west direction across the northern end of the Lake of the Woods
district. It extends for a distance of several hundreds of kilometers from
Savant Lake to the east to beyond the Manitoba border to the west. Stocks and
dykes of acid and basic rocks intrude these older rocks.
-21-
Local Geology
In the northern part of the Shoal Lake area there are two principal granodiorite
intrusives, identified as the Canoe Lake and Snowshoe Bay stocks, each several
kilometers in diameter, separated by a northeasterly trending volcanic series
some seven kilometers wide. The series includes steeply dipping felsic to
ultramafic flows and fragmentals, tops facing west, minor clastic sediments, and
sulphide facies iron formations. Also present are coarse anorthosites, gabbros,
diorites and quartz-diorites, some of which may represent volcanic flows. Within
this extrusive-intrusive assemblage are irregular dykes and/or sills of
quartz-feldspar porphyry, quartz diorite, and lamprophyre. All the rock types
have been exposed to regional and local dynamic and thermal metamorphism, which
has altered the intermediate, mafic, and ultramafic lavas to the greenschist and
/or amphibolite facies.
The deposit lies within a northeast trending band of mafic volcanics flanked to
the northwest and southeast by a sequence of intermediate to felsic volcanics
and related volcanoclastic sediments, which may be correlated through folding.
The Cameron Island volcanic sequence forms the west limb of one of a number of
relatively small anticlines whose axes strike northeast. The core of the
anticline is the Stevens Island anorthosite-diorite complex. A major zone of
deformation, which hosts the Duport deposit, follows the same general strike and
is characterized by strongly developed foliation or fracturing.
Property Geology
The predominant rock types on Cameron and Stevens Islands and the mine area are
andesites, amphibilites, tholeiitic and komatiitic basalts and porphyritic
basalts, talc-chlorite schist and narrow sheared horizons of felsic and
intermediate tuffs and interflow material with buff colored cherty sections.
Dykes and sills of various thicknesses are comprised of feldspar porphyry,
quartz feldspar porphyry, quartz diorite, diorite, and lamprophyre. The dykes
and sills cut, separate, or replace the gold-bearing mineralized horizons.
Gold mineralization stakes N30 (degree)E and dips steeply (65-75 (degree)) west.
Grade thickness contours of the Main Zone indicate the mineralization plunges
north at about (30 (degree)). However, within the mineralization there appears
to be several local areas that plunge 45 (degree) to 75 (degree) south.
The mineralization extends over a drill indicated strike length of 1,200 m and
is associated with highly sheared, narrow, thinly bedded, conformable felsic and
intermediate tuffs and cherty units that contain sulphide mineralization,
generally in the range of 5-10%. These mineralized tuffs are identified as the
Main Zone and the parallel East Zone, plus a number of en-echelon and parallel
associated units in the hangingwall and footwall of each of these principal
horizons. The Main Zone is between massive chloritic and amphibolitic basalts
while the North Main Zone is at the contact between basaltic flows and
amphibolites, or within the amphibolites further north. The East Zone is hosted
by intensely sheared ultramafics altered to talc schists. The favorable tuffs
range in thickness from one to ten meters and dip steeply west. Talc schist
occurs in two prominent zones of shearing and alteration, which parallel the
footwall of both the Main and East Zones over widths of up to twenty meters. The
schist below the East Zone footwall has an average thickness of eight meters and
is more persistent than the Main Zone schist.
The principal Duport gold zones are sheared, fractured, narrow, and often highly
silicified felsic and intermediate tuffs and/or interflow material which has
recognizable cherty sections and sulphide mineralization consisting of pyrite,
arsenopyrite, and lesser amounts of pyrrhotite. Less frequently, gold occurs in
association with sulphides within thick sections of felsite, close to or within
the gold-bearing tuff units. The mineralized horizons are persistent along
strike and down dip although they may change mineralogically, including
variation gold and sulphide content. The horizons are frequently separated or
split into several narrower units by the intercalation of narrow sheared
chloritized and silicified basalt sections. These separated gold bearing lenses
often exhibit an en-echelon configuration. Also felsite dykes occasionally cut
the mineralized horizon at a low angle. These and other minor variable
characteristics often make correlation problematic.
Numerous faults cut and occasionally displace the mineralized horizon.
-22-
Deposit Types
The deposit is related to an epigenetic, hydrothermal system likely hosted by a
sheared lithologic contact.
Mineralization
Gold occurs within sheared, fractured, narrow often highly silicified felsic and
intermediate tuffaceous interflow rocks which have recognizable cherty looking
sections and sulphide mineralization consisting of pyrite, arsenopyrite and
minor pyrrhotite and chalcopyrite. The mineralization often exhibits a banded or
laminated appearance, which parallels the tuff pseudo-bedding and shearing. The
gold grade is proportional to the percentage of arsenopyrite and associated
pyrite, the degree of silicification and to a lesser extent the incidence of
mariposite. A combination of arsenopyrite with one or both of these secondary
conditions usually results in high grade intersection, while the lack of
arsenopyrite usually indicates negligible gold.
Petrographic work indicates that gold is usually found as discrete grains up to
0.05 mm in diameter and associated with arsenopyrite, pyrite and quartz veining
or flooding.
Exploration
There has been no recent exploration on the Duport Property.
Drilling
There has been no recent drilling on the Duport Property.
Sample Preparation and Analyses and Security
There has been no recent sampling on the Duport Property.
Mineral Processing and Metallurgical Testing
Gold in the Duport Property deposit occurs both as fine grains of free gold and
in association with grains of arsenopyrite and pyrite. Previous owners of the
Duport Property conducted a program of bench testing and a pilot plant at
Lakefield Research, Lakefield, Ontario, to determine the optimum method for
concentration of the arsenical gold deposit. The gold is considered to be
refractory and testwork demonstrated that oxidation of the arsenopyrite would be
necessary for optimum gold extraction. Based on the foregoing testwork, a
feasibility study obtained by previous owners recommended a flowsheet including
crushing, grinding, gravity gold separation, bulk flotation, pressure oxidation,
cyanidation of the oxidation product, carbon adsorption, hot caustic cyanide
stripping, electrowinning and refining. Gold recovery to flotation concentrate
was estimated at 93.7%, followed by a 97% recovery in the pressure oxidation
through refining stages, for an overall estimated recovery of approximately 90%.
A subsequent study prepared in 1996 for Royal Oak Mines Ltd. recommended
bio-oxidation as the preferred method of treating the flotation concentrate. The
study, although order of magnitude, concluded that bio-oxidation would obtain
similar gold recovery as pressure oxidation but at lower capital and operating
costs.
Mineral Resource and Mineral Reserve Estimates
Previous owners of the Duport Property have identified a gold deposit on the
Duport Property; however, as of the date of this report there are no known
reserves on the property and the Company's proposed program is exploratory in
nature.
In October 2004, the Company engaged Roscoe Postle Associates Inc., ("RPA") to
prepare an independent technical report (the "RPA Report") on the Duport
Property. The RPA Report, dated November 8, 2004, reviewed the conclusions of a
feasibility report prepared in 1989 on the Duport Property and other historical
estimates. The RPA Report has been filed and can be found at www.sedar.com .
Management of the Company believes that work performed
-23-
by previous owners have demonstrated that the Duport Property has exploration
potential and recommends that future exploration programs should focus on
expanding the deposit.
Environmental Considerations
A significant amount of environmental work has been carried out in the Duport
Property area by parties engaged by the previous owners. The primary
environmental concerns regarding development and operation of the Duport
Property as a mine relate to the preservation of the existing water quality and
important recreational and traditional land use of the area. The land use
surrounding the property area is characterized by forestry activity, mineral
exploration, two First Nations reserves situated near Indian Bay, and cottage
recreation. Shoal Lake itself provides important resources including drinking
water, fisheries, wild rice harvests, and recreation. The water supply intake
for the City of Winnipeg is located in the western portion of Indian Bay, which
connects to Shoal Lake. The Duport Property environment and social challenges
have been well documented in the past. Although the technical challenges can be
met within the context of current technology, there remains a negative public
perception, particularly in the City of Winnipeg and with some of the cottagers
on Shoal Lake. In the Company's opinion, these perceptions can be overcome
through diligent and thorough technical studies, combined with significant and
detailed public information and consultation.
Exploration Program
Management of the Company intends to conduct a phased exploration program. Phase
I will include a geophysical survey over previously untested areas followed by
preliminary diamond drilling of anomalies and favorable geology. Five holes,
totalling 1,500 m are planned in the area north of the known deposit while 3
holes, 900 m are planned to the south. Six holes, totalling 2,190 m are planned
to test the down plunge extensions of significant intersections in previous
exploration. The cost of the Phase I program is estimated at approximately
$650,000. Contingent on the success of Phase I, Phase II would follow up
significant mineralization and/or favorable stratigraphy intersected in Phase I
drilling. The estimated budget for Phase II is $1.6 million.
BACHELOR LAKE PROPERTY, QUEBEC
[MAP 2 - Map of Quebec prepared by Innovexplo Inc. - Geological Services
indicating the location of the Bachelor Lake Property in relationship to the
cities of Val Dor, Quebec and Montreal.]
On November 12, 2004, the Company entered into an option agreement with Wolfden
Resources Inc. ("Wolfden"), whereby Wolfden assigned to the Company, Wolfden's
option to earn a 50% undivided interest in two mining concessions and 51 mineral
claims for a total of 1,851 hectares (the "Bachelor Lake Property"), located in
the La Sueur Township, Quebec. Wolfden is earning a 50% interest by funding $3
million of exploration expenditures and as at November 12, 2004 had incurred
approximately $1.6 million of expenditures on the property.
Under the terms of the agreement, the Company can acquire Wolfden's option by
paying, on closing, $1.25 million and issuing 800,000 units, with each unit
comprising one common share and one-half warrant. Each whole warrant will
entitle Wolfden to acquire an additional common share at a price of $1.50 for a
period of two years. The Company will also assume from November 12, 2004, the
balance of Wolfden's remaining $1.4 million of expenditure commitments under
Wolfden's underlying option agreement with the vendor. Upon earning the 50%
option interest, the Company will issue a further 400,000 common shares to
Wolfden. If project financing is arranged and the Bachelor Lake Property
achieves commercial production, the Company will pay to Wolfden a further
$250,000, issue 250,000 common shares once 50,000 ounces of gold or gold
equivalent has been produced and a 0.5% NSR. Mr. Ewan Downie, a director of the
Company is also the President, Chief Executive Officer and a director and
shareholder of Wolfden. See "Item 7.
Major Shareholders and Related Party Transactions - Related Party Transactions."
The Bachelor Lake Property is without known reserves and the Company's proposed
program is exploratory in nature.
Management believes the Bachelor Lake Property has excellent exploration
potential as well as near term production possibilities. The Bachelor Lake mine
site includes an office, a shop, a warehouse complex, a compressor room, a
headframe and a 500 ton per day mill with a cyanidation plant and crusher room.
-24-
The main exploration target has been previously identified as the 1,000 feet
area below level 12, the lowest extent of the previous mine operations. Mine
production commenced from the upper portion of the mine in 1982 and ceased in
1989. During the latter part of mine operations, a "B" Vein was discovered on
levels 11 and 12. In January 1990, a 34-hole diamond drill program, conducted by
Hecla Mining Company of Canada, below level 12 yielded significant results
suggesting that the mineralization there is not merely a down-dip extension of
the mined out deposit, but that the deposit enters into a different structural
setting at depth. Check sampling and assaying performed by Wolfden on selected
intervals from this deep drilling program confirmed that the "Main" and "B"
veins are richer and wider at depth than previously indicated during mining.
Management believes that the apparent vertical continuity of mineralization and
increasing intensity of mineralization below level 12 suggest the potential to
discover and develop significant additional resources and sees the addition of
this project as an excellent fit with the Company's business plan.
Upon finalization and closing, the Company will assume Wolfden's current work
program of de-watering of the old workings and once completed move to implement
an underground drill program to test new targets at depth below the historical
workings. The de-watering is expected to be completed by the end of February
2005 and underground diamond drilling is expected to commence in April 2005. As
of the date of this report, the Company and Wolfden are formalizing a final
agreement.
GOVERNMENT REGULATIONS
The Company's proposed exploration and development activities will be subject to
extensive Canadian federal, provincial, and local laws and regulations governing
various matters, including:
- environmental protection;
- management and use of toxic substances and explosives;
- management of natural resources;
- exploration, development of mines, production and post-closure
reclamation;
- taxation;
- labour standards and occupational health and safety, including
mine safety; and
- historic and cultural preservation.
The costs associated with compliance with these laws and regulations are
substantial and possible future laws and regulations, or more stringent
enforcement of current laws and regulations by governmental authorities, could
cause additional expense, capital expenditures, restrictions on or suspensions
of the Company's activities and delays in the development of its properties.
OTHER ASSETS
As at the date of this annual report, the Company does not hold any material
assets other than its option and mineral claim interests.
EMPLOYEES
As of the date of this annual report the Company has one full-time employee, Mr.
Marc Cernovitch, the Company's Vice-President, Corporate Development. The
majority of the Company's management functions are provided by private companies
owned by officers and directors of the Company. See "Item 7. Major Shareholders
and Related Party Transactions - Related Party Transactions." In addition, the
Company employs a number of consultants to perform specific functions, on an as
needed basis.
ORGANIZATIONAL STRUCTURE
Effective November 30, 2002, the Company wrote off its investment in its
wholly-owned subsidiary, Trimark Inc., which was engaged in the petroleum and
natural gas operations in the United States. Accordingly, the Company ceased
-25-
to record the activities of Trimark Inc. Effective August 31, 2004, the Company
wrote-off Safari, which was inactive throughout the 2004 fiscal year, and TMK,
which had sold its remaining asset.
As of the date of this annual report, the Company has no subsidiaries.
PRINCIPAL OFFICES
The Company's corporate office is located at Suite #1305, 1090 West Georgia
Street, Vancouver, British Columbia, Canada. The corporate office facility is
provided on a month-to-month basis by Chase as part of its agreement with the
Company. The Company also rents, from an unrelated third party, on a
month-to-month basis, office premises, located at Suite #2300, 1066 West
Hastings Street, Vancouver, British Columbia, Canada. This office is provided
for Mr. Marc Cernovitch, the Company's Vice-President, Corporate Development.
See "Item 7. Major Shareholders and Related Party Transactions - Related Party
Transactions".
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
- --------------------------------------------------------------------------------
The following discussion of the results of operations of the Company for the
fiscal years ended August 31, 2004, 2003, and 2002 should be read in conjunction
with the consolidated financial statements of the Company and related notes
included therein.
The Company's consolidated financial statements are prepared in accordance with
Canadian GAAP, the application of which, in the case of the Company, conforms in
all material respects for the periods presented with US GAAP except for the
differences referred to in Note 11 of the consolidated financial statements of
the Company included herein. The noon rate of exchange on January 26, 2005,
reported by the United States Federal Reserve Bank of New York, for the
conversion of Canadian dollars into United States dollars was CDN$1.2307
(US$0.8125 = CDN$1.00). The effects of inflation and price changes have not had
a material impact on the Company's income or net sales revenues during the past
three years. To date, the Company has not engaged in any formal hedging program.
OVERVIEW
Since inception the Company has primarily been engaged in the mineral resource
and petroleum and natural gas industries. Most recently it had been engaged in
the acquisition, exploration for and development of crude oil and natural gas
interests in the United States. In July and November 2004, the Company entered
into agreements on the Duport and Bachelor Lake properties, respectively. The
Company is now considered to be a junior mineral exploration company engaged in
the acquisition of and exploration for precious metals on mineral interests
located in Canada.
At this stage of development, the Company has no producing properties and,
consequently, has no current operating income or cash flow. The Company has not
yet determined whether the properties in which the Company has an option to
acquire an interest ore reserves that are economically recoverable. As a result,
the Company is considered an exploration stage company.
The Company is actively reviewing additional resource properties at various
stages of development and may make additional acquisitions through staking,
options, purchases or joint ventures. If so, significant additional financing
may be required, and there is no assurance that funds would be available on
terms acceptable to the Company or at all.
The Company expects the properties in which it has option interests will be
moved toward determining individual viability over the next two to three years.
There is no assurance that any property will prove to be mineable or, that if
such a determination is made, that the Company will be able to secure financing
for capital costs.
Nearly all of the Company's activities are directed to such exploration
programs. Yearly variations in individual property expenditures generally
reflect increases or decreases in specific exploration and development costs
based on previous results and the Company's decisions regarding the allocation
of exploration expenditures between its projects.
-26-
The Company intends to conduct exploration activities on the properties the
Company has optioned. None of the properties in which the Company has interests
are in production and, consequently, the properties do not produce any revenue.
As a result there is little variation expected in operating results from year to
year and little is to be expected until such time, if any, as the Company
discovers sufficient mineralization on a property to advance the property beyond
the exploration stage. The Company's level of exploration expenditures is
dependent upon exploration results and the Company's ability to maintain
sufficient financial resources.
The Company derives interest income on its bank deposits and other short-term
deposits, which depend on the Company's ability to raise funds. Of most
significance would be further cash received from issuance of shares to fund
ongoing operations.
Through the exploration process, management intends to periodically reviews
results, both internally and externally, through mining related professionals.
Decisions to abandon, reduce or expand exploration efforts are based upon many
factors including general and specific assessments of mineral deposits, the
likelihood of increasing or decreasing those deposits, land costs, estimates of
future mineral prices, potential extraction methods and costs, the likelihood of
positive or negative changes to the environment, permitting, taxation, labor and
capital costs. Geological and/or economic circumstances render each property
unique. Consequently, it is not possible to have any predetermined hold period
for a specific property interest.
Costs incurred for general exploration that do not result in the acquisition of
mineral properties with ongoing exploration or developmental potential are
charged to operations. Exploration costs relating to the Company's property
interests are capitalized as mineral properties and deferred costs. Should the
Company abandon a property interest or project, the related deferred costs will
be charged to operations.
The recoverability of amounts shown for mineral properties and deferred costs is
dependent upon the discovery of economially recoverable reserves, completion of
positive feasibility studies, confirmation of the Company's interest in the
underlying mineral claims, the ability of the Company to obtain necessary
financing to complete exploration and development and future profitable
production, or from the disposition of such properties.
To the best of the Company's knowledge, there are no governmental economic,
fiscal, monetary, or political policies or factors that have materially
affected, or could materially affect, directly or indirectly, the Company's
operations or investments by U.S. shareholders.
RESULTS OF OPERATIONS
YEAR ENDED AUGUST 31, 2004 COMPARED TO YEAR ENDED AUGUST 31, 2003
The Company received oil and gas sales from its remaining oil and gas property
until March 1, 2004, the effective date of the sale of the West Ranch Field.
During fiscal 2004, the Company reported a net loss of $257,022, an improvement
of $1,215,620 from the $1,472,642 loss reported during fiscal 2003. During
fiscal 2003, the Company recorded an impairment charge of $1,240,794,
representing the Company's net investment in its wholly-owned subsidiary,
Trimark Inc., which held the Company's East Lost Hills and regional California
petroleum interests. During fiscal 2004, the Company recorded $81,347 in oil and
gas revenues, comprising of $15,447 of oil (378 barrels) and $65,900 of gas
(8,921 mcf). Production costs of $21,832 were incurred and depletion of $10,441
was recorded for 2004. Effective March 1, 2004, the Company sold its 3% interest
in the West Ranch Field for $78,630, recording a net loss of $11,031. With the
sale of the Company's working interest in the West Ranch Field, the Company no
longer holds any oil and gas interests.
General and administrative costs increased in fiscal 2004 by $6,592, from
$176,947 in 2003 to $183,539 in fiscal 2004. Expenses incurred in fiscal 2004
includes $11,000 for audit fees, $23,324 for legal costs incurred for
preparation of the Company's year-end Form 20-F and regulatory filings; $27,077
for transfer agent and regulatory filings for the Company's name change and
financing filings; $27,500 for consulting services with respect to the Company's
restructuring, name change and financing plans; $5,386 for shareholder
communications costs; $11,025 for investment conference, website designs and
maintenance cost; $2,165 for travel costs; and $16,125 for office and
miscellaneous.
-27-
Included in general and administration expenses was $63,638 charged by Chase for
bookkeeping, accounting, administration and corporate filing services provided.
See "Item 7. Major Shareholders and Related Party Transactions - Related Party
Transactions." During fiscal 2004, the Company recorded a non-cash compensation
expense of $179,611 relating to stock options granted to the Company's
directors, officers and consultants. No stock options were granted during fiscal
2003.
During fiscal 2004, the Company negotiated settlements with certain arms-length
and related parties in which it paid $951,622 to settle a total of $1,048,829
owed, which was recorded as advances payable, resulting in a gain of $97,207.
See "Item 7. Major Shareholders and Related Party Transactions".
During fiscal 2004, the Company recorded interest expense of $29,817, compared
to $60,741 in fiscal 2004. The decrease in fiscal 2004 occurred as a result of
the retirement of the advances.
As of August 31, 2004, the Company had incurred $75,906 for staking, due
diligence, professional and legal costs pertaining to the purchase of the Duport
Property.
YEAR ENDED AUGUST 31, 2003 COMPARED TO YEAR ENDED AUGUST 31, 2002
Effective November 30, 2002, the Company wrote-off its net investment in Trimark
Inc., a wholly-owned subsidiary which held all of the Company's petroleum and
natural gas interests at that time. Accordingly, the Company ceased to record
the activities of Trimark Inc. and recorded a $1,240,794 depreciation, depletion
and impairment charge to reflect the abandonment of Trimark Inc.
In January 2003, the Company earned a 3% working interest in certain oil and gas
leases known as the West Ranch Field, by funding exploration and development
costs. As of August 31, 2003, the Company has incurred $87,255 on drilling
activities and had recorded $40,044 in oil and gas revenues, comprising of
$22,208 (507 barrels) of oil and $17,836 (2,131 mcf) of gas. All the production
in 2003 is associated with production from the West Ranch Field. Production
costs of $11,257 were incurred and depletion of $11,088 was recorded for 2003.
All production in the 2002 fiscal year was derived primarily from the ELH #1
well on the East Lost Hills property.
General and administrative costs decreased by $64,842, from $241,789 in the 2002
fiscal year to $176,947 in the 2003 fiscal year. The decrease in costs were as a
result of the Company's reduced operations and limited financial resources. All
costs were reduced where possible.
During fiscal 2003, the Company disposed of its interest in the South Haskell
property for cash proceeds of $84,907.
LIQUIDITY AND CAPITAL RESOURCES
The Company's practice is to proceed with staged exploration, where each stage
is dependent on the successful results of the preceding stage. To date the
Company has not received any revenues from its mining activities and has relied
on equity financing to fund its commitments and discharge its liabilities as
they come due. In March 2004, the Company completed a non-brokered private
placement of 3,400,000 units at $0.15 per unit, for $510,000. On April 15, 2004,
the Company also completed a further private placement of 2,600,000 units at
$0.30 per unit, for $780,000. As at August 31, 2004, the Company had working
capital of $278,710. Subsequent to August 31, 2004, the Company completed
private placement financings for gross proceeds of $6.6 million. On finalization
and closing of the agreements, the Company will proceed to make the initial
$1.25 million option payment on the Bachelor Lake Property, conduct the Phase 1
exploration program on the Duport Property, estimated at $650,000, and
de-watering of the old workings and an underground drill program on the Bachelor
Lake Property, estimated at $3.2 million. On closing of the Duport Property
agreement the Company will also be required to issue one million common shares
and issue $8 million in preferred shares.
The Company considers that it has adequate resources to maintain its core
operations for the next fiscal year. However, results from its exploration
programs and/or additional mineral property acquisitions may result in
additional financial requirements. If needed, the Company would be required to
conduct additional financings, however, there is no
-28-
assurance that funding will be available on terms acceptable to the Company or
at all. If such funds cannot be secured, the Company may be forced to curtail
additional exploration efforts to a level for which funding can be secured.
The Company does not have any loans or bank debt and there are no restrictions
on the use of its cash resources.
There are no material commitments for capital expenditures during fiscal 2005.
The Company holds the majority of its cash and cash equivalents in Canadian
funds.
TREND INFORMATION
The Company is not aware of any trends which might affect its financial results
or business.
RESEARCH AND DEVELOPMENT
During fiscal 2004, the Company incurred $75,906 for mineral property
acquisition costs. No mineral property acquisitions or exploration expenditures
were made in fiscal 2003 or 2002.
During fiscal 2004, 2003 and 2002, the Company incurred $23,935, $319,757 and
$99,517 respectively, on the acquisition, exploration and development of its
petroleum interests.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any material off balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
CONTRACTUAL OBLIGATIONS
The Company does not have any contractual obligations. The Company has entered
into agreements to earn various interests in mineral properties through payments
and expenditures. These agreements are described in "Item 4. Information on the
Company - Principal Properties". The Company may, at any time, elect to
terminate the agreements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
- --------------------------------------------------------------------------------
DIRECTORS AND SENIOR MANAGEMENT
The names, positions held with the Company and terms of office of each director
and officer of the Company as of the date of this annual report, are as follows:
NAME POSITION WITH THE COMPANY TERM OF OFFICE (FOR EACH OFFICE HELD)
- ---------------- ---------------------------------- -------------------------------------
NICK DEMARE(1) President, Chief Executive Officer
and Chief Financial Officer July 2003 to present
Director January 1996 to present
ANDREW CARTER(1) Director February 2004 to present
EWAN DOWNIE Director May 2004 to present
WILLIAM LEE(1) Director February 2004 to present
HARVEY LIM Corporate Secretary December1998 to present
MARC CERNOVITCH Vice-President, Corporate Development(2) September 2004 to present
(1) Member of the Audit Committee.
(2) Mr. Cernovitch is a nominee for election as a director of the Company at
the Company's annual general meeting to be held on February 9, 2005.
-29-
Each officer's and director's term of office shall expire at the Company's next
annual general meeting. The Company does not have an executive committee or a
compensation committee. The Company's audit committee is responsible for
reviewing the Company's financial statements before they are approved by the
Company's directors.
There are no family relationships between any directors or executive officers of
the Company. To the best of the Company's knowledge, there are no arrangements
or understandings with major shareholders, customers, suppliers, or others,
pursuant to which any of the Company's officers or directors was selected as an
officer or director of the Company.
Set forth below are brief descriptions of recent employment and business
experience of the Company's officers and directors.
Nick DeMare (Age 50), Director, President, Chief Executive Officer and Chief
Financial Officer
Mr. DeMare holds a Bachelor of Commerce degree from the University of British
Columbia and is a member in good standing of the Institute of Chartered
Accountants of British Columbia. Since May, 1991, Mr. DeMare has been the
President of Chase, a private company which provides a broad range of
administrative, management and financial services to private and public
companies engaged in mineral exploration and development, gold and silver
production, oil and gas exploration and production and venture capital. Mr.
DeMare indirectly owns 100% of Chase. Mr. DeMare currently serves as an officer
and director of other public reporting companies. See "Item 7. Major
Shareholders and Related Party Transactions - Related Party Transactions -
Conflicts of Interest."
Andrew Carter (Age 57), Director
Mr. Carter obtained a certificate in accounting from the Midland College of TAFE
(Western Australia) in 1987. Since 1992, Mr. Carter has been a member of the
Australian Institute of Credit Management. Mr. Carter has an extensive
background, initially in the mining industry and then as a commercial financial
executive. During the 1970's, Mr. Carter was involved in the mining industry,
where he managed exploration crews in the Leonora and Kimberly regions in
Western Australia. He subsequently changed professions and, in 1988, was
appointed Chief Executive of RAC Finance Limited, a non-bank owned commercial
financier in Western Australia. During this time, he was appointed Chairman and
Director of Australian Finance Conference Limited and represented the industry
as a panel member of the Commercial Tribunal for Western Australia. In 1999, Mr.
Carter relocated to Vancouver where he has been providing services as an
independent corporate consultant. Mr. Carter is currently the President of Tinka
Resources Ltd., a public company trading on the TSXV, and serves as an officer
and director of other public reporting companies. See "Item 7. Major
Shareholders and Related Party Transactions - Related Party Transactions -
Conflicts of Interest".
Ewan Downie (Age 38), Director
President, CEO and a director of Wolfden Resources Inc., a TSX Exchange traded
company, and Chairman of Sabina Resources Inc., a TSXV traded company. Since
1989, Mr. Downie has been the owner of Vytyl Exploration Services, a contracting
business in mineral development and exploration for a wide variety of major and
junior mining companies. Mr. Downie currently serves as an officer and director
of other public reporting companies. See "Item 7. Major Shareholders and Related
Party Transactions - Related Party Transactions - Conflicts of Interest."
William Lee (Age 51), Director
Mr. Lee holds a Bachelor of Commerce degree from the University of British
Columbia and is a member in good standing of the Institute of Chartered
Accountants of British Columbia. He has been a financial officer or controller
of several public and private companies since 1986 and, prior, thereto, was a
Senior Audit Manager at Deloitte & Touche. Prior to March, 1995, Mr. Lee was
employed as the Chief Financial Officer of Sanctuary Woods Multimedia Corp. From
March 1995 to June 1996, Mr. Lee was employed as the Chief Financial Officer of
Wildwood Interactive Inc. From June, 1996 to March, 2004, Mr. Lee was employed
as the Chief Financial Officer of IMA Exploration Inc., a public company engaged
in the exploration of mineral properties. Since July, 2004 Mr. Lee has been
employed as a business analyst of Ivanhoe Energy Inc., a public company engaged
in the exploration for and production of oil and
-30-
natural gas. Mr. Lee currently serves as an officer and director of other public
reporting companies. See "Item 7. Major Shareholders and Related Party
Transactions - Related Party Transactions - Conflicts of Interest."
Harvey Lim (Age 46), Corporate Secretary
Mr. Lim holds a Bachelor of Commerce degree from the University of British
Columbia and is a member in good standing of the Institute of Chartered
Accountants of British Columbia. Mr. Lim was employed by Coopers & Lybrand (now
PricewaterhouseCoopers LLP) from 1981 to 1988. From 1988 to 1991, Mr. Lim was
employed as a controller with Ingot Management Ltd. Since 1991, Mr. Lim has been
employed by Chase as a controller. Mr. Lim currently serves as an officer and
director of other public reporting companies. See "Item 7. Major Shareholders
and Related Party Transactions - Related Party Transactions - Conflicts of
Interest."
Marc Cernovitch (Age 31), Vice-President - Corporate Development
Mr. Cernovitch holds a bachelors degree in Economics from McGill University. Mr.
Cernovitch started his career in the financial sector as an investment advisor
and has lived and worked in Montreal, Calgary, Vancouver and New York. Mr.
Cernovitch currently resides in Vancouver and, since September 2004, has been
employed by the Company as Vice- President, Corporate Development. Mr.
Cernovitch has focused on corporate development, funding and building companies
primarily in the resource and energy technology fields. Mr. Cernovitch is a
nominee for election as a director of the Company at the next annual general
meeting scheduled for February 9, 2005.
COMPENSATION
During the fiscal year ended August 31, 2004, the directors and officers of the
Company, as a group, had received or charged the Company a total of $64,638 for
services rendered by the directors and officers or companies owned by the
individuals.
The Company is required, under applicable securities legislation in Canada, to
disclose to its shareholders details of compensation paid to its directors and
officers. The following fairly reflects all material information regarding
compensation paid by the Company to its directors and officers, which
information has been disclosed to the Company's shareholders in accordance with
applicable Canadian law.
"Named Executive Officers" means the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO") of the Company, regardless of the amount of
compensation of those individuals, and each of the Company's three most highly
compensated executive officers, other than the CEO, who were serving as
executive officers at the end of the most recent fiscal year and whose total
salary and bonus amounted to $150,000 or more. In addition, disclosure is also
required for any individuals whose total salary and bonus during the most recent
fiscal year was $150,000 whether or not they are an executive officer at the end
of the fiscal year.
During the fiscal year ended August 31, 2004, the Company had one Named
Executive Officer, Mr. Nick DeMare, the Company's President, CEO and CFO. The
following table sets forth the compensation awarded, paid to or earned by the
Named Executive Officer during the financial years ended August 31, 2002, 2003
and 2004:
- ----------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------- --------------------------------
AWARDS PAYOUTS
------------------------------- --------------------------------
SECURITIES RESTRICTED
UNDER SHARES OR ALL
NAME AND OTHER OPTIONS/ RESTRICTED OTHER
PRINCIPAL ANNUAL SARS SHARE LTIP COMPEN-
POSITION YEAR(1) SALARY BONUS COMPENSATION GRANTED UNITS PAYOUTS SATION
($) ($) ($) (#)(2) ($) ($) ($)
- ---------------- ------ ------ ----- ------------ ----------- ---------- ------- --------
Nick DeMare(3) 2004 Nil Nil 8,000(5) 150,000(4) N/A N/A 55,638(5)
President, CEO, 2003 Nil Nil Nil Nil/Nil N/A N/A 52,215(5)
CFO and Director 2002 Nil Nil Nil Nil/Nil N/A N/A 46,080(5)
- ----------------------------------------------------------------------------------------------------------------
-31-
NOTES:
(1) Financial years ended August 31, 2002, 2003 and 2004.
(2) Figures represent options granted during a particular year; see "Aggregate
Option" table for the aggregate number of options outstanding at year end.
(3) Mr. DeMare was appointed on July 4, 2003 as the President, CEO and CFO of
the Company.
(4) Includes 50,000 options granted to Chase, a private company owned by Mr.
DeMare. See "Item 6. Directors, Senior Management and Employees - Share
Ownership".
(5) Paid to Chase for accounting, administration and professional services
rendered by Chase personnel. See "Management Contracts".
LONG TERM INCENTIVE PLAN AWARDS
The Company has no long-term incentive plans in place and therefore there were
no awards made under any long-term incentive plan to the Name Executive Officer
during the Company's most recently completed financial year. A "Long- Term
Incentive Plan" is a plan under which awards are made based on performance over
a period longer than one financial year, other than a plan for options, stock
appreciation rights ("SARs") or restricted share compensation.
OPTION/SAR GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
The following table sets forth stock options granted to the Named Executive
Officer during the financial year ended August 31, 2004:
- -------------------------------------------------------------------------------------------------------------------
% OF TOTAL MARKET VALUE OF
SECURITIES OPTIONS/SARS SECURITIES
UNDER GRANTED TO UNDERLYING
OPTIONS/SARS EMPLOYEES IN EXERCISE OR OPTIONS/SARS ON EXPIRATION
NAME GRANTED FINANCIAL YEAR BASE PRICE THE DATE OF GRANT DATE
(#) (%) ($/SECURITY) ($/SECURITY)
- -------------------------------------------------------------------------------------------------------------------
Nick DeMare 150,000(1) 18.15% $0.60 $0.73 May 31/07
- -------------------------------------------------------------------------------------------------------------------
NOTE:
(1) Includes 50,000 options granted to Chase.
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
AND FINANCIAL YEAR-END OPTION/SAR VALUES
The following table sets out details of all the incentive stock options, both
exercised and unexercised, for the Named Executive Officer during the financial
year ended August 31, 2004:
- -----------------------------------------------------------------------------------------------------------------------
UNEXERCISED VALUE OF UNEXERCISED
SECURITIES OPTIONS/SARS AT IN THE MONEY OPTIONS AT
ACQUIRED ON AGGREGATE VALUE FINANCIAL YEAR -END FINANCIAL YEAR -END (1)
NAME EXERCISE REALIZED EXERCISABLE / UNEXERCISABLE EXERCISABLE / UNEXERCISABLE
(#) ($) (#) ($)
- -----------------------------------------------------------------------------------------------------------------------
Nick DeMare Nil N/A 150,000(2)/N/A 40,500/N/A
- -----------------------------------------------------------------------------------------------------------------------
NOTES:
(1) The closing price of the Company's shares on August 31, 2004 was $0.87.
(2) Includes 50,000 options granted to Chase.
TERMINATION OF EMPLOYMENT, CHANGE IN RESPONSIBILITIES AND EMPLOYMENT CONTRACTS
The Company does not have any compensatory plan(s), contract(s) or
arrangement(s) with respect to the resignation, retirement or any other
termination of the Named Executive Officer's employment, a change of control of
our Company or a change in the Named Executive Officer's responsibilities
following a change in control, which entitle a Named Executive Officer to
receive from the Company an amount, including all period payments or
installments, exceeding $100,000.
-32-
DIRECTOR COMPENSATION
CASH COMPENSATION
During the financial year ended August 31, 2004, the Company paid $1,000 for
professional fees to a director who is not the Named Executive Officer of the
Company. See "Item 7. Major Shareholders and Related Party Transactions -
Related Party Transactions."
NON-CASH COMPENSATION
The following table sets forth stock options granted by the Company during the
financial year ended August 31, 2004 to the directors who are not the Named
Executive Officer of the Company:
- -------------------------------------------------------------------------------------------------------------------
% OF TOTAL MARKET VALUE OF
SECURITIES OPTIONS/SARS SECURITIES
UNDER GRANTED TO UNDERLYING
OPTIONS/SARS EMPLOYEES IN EXERCISE OR OPTIONS/SARS ON EXPIRATION
NAME GRANTED FINANCIAL YEAR BASE PRICE THE DATE OF GRANT DATE
(#) (%) ($/SECURITY) ($/SECURITY)
- -------------------------------------------------------------------------------------------------------------------
Directors as a group 400,000 49.38% $0.60 $0.73 May 31/07
who are not Named
Executive Officers
- -------------------------------------------------------------------------------------------------------------------
The following table sets forth details of all exercises of stock options during
the financial year ended August 31, 2004 by the directors who are not the Named
Executive Officers, and the financial year end value of unexercised options:
- -----------------------------------------------------------------------------------------------------------------------
UNEXERCISED VALUE OF UNEXERCISED
SECURITIES OPTIONS/SARS AT IN THE MONEY OPTIONS AT
ACQUIRED ON AGGREGATE VALUE FINANCIAL YEAR -END FINANCIAL YEAR -END (1)
NAME EXERCISE REALIZED EXERCISABLE / UNEXERCISABLE EXERCISABLE / UNEXERCISABLE
(#) ($) (#) ($)
- -----------------------------------------------------------------------------------------------------------------------
Directors as a group Nil N/A 400,000 / N/A 108,000 / N/A
who are not Named
Executive Officers
- ------------------------------------------------------------------------------------------------------------------------
NOTE:
(1) The closing price of the Company's shares on August 31, 2004 was $0.87.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets out, as of the end of the Company's financial year
ended August 31, 2004, all information required with respect to compensation
plans under which equity securities of the Company are authorized for issuance:
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO BE AVAILABLE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
- ------------------------------------------------------------------------------------------------------------------------
PLAN CATEGORY (a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation 810,000(1) $0.61 See Note (1)
plans approved by
securityholders
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation N/A N/A N/A
plans not approved by
securityholders
- ------------------------------------------------------------------------------------------------------------------------
Total 810,000 $0.61 See Note (1)
- ------------------------------------------------------------------------------------------------------------------------
-33-
NOTE:
(1) The Company has in place a "rolling" stock option plan (the "Plan") whereby
the maximum number of Common shares that may be reserved for issuance
pursuant to the Plan will not exceed 10% of the issued shares of the
Company at the time of the stock option grant.
INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS OF THE COMPANY
No executive officers, directors, employees or former executive officers and
directors of the Company are indebted to the Company. None of the directors,
executive officers or proposed nominees of the Company nor any associate or
affiliate of these individuals, is or has been indebted to the Company since
September 1, 2003.
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS
Other than as disclosed in "Item 7. Major Shareholders and Related Party
Transactions - Related Party Transactions", no informed person of the Company,
any proposed director of the Company, or any associate or affiliate of any
informed person or proposed director has any material interest, direct or
indirect, in any transaction since the commencement of our most recently
completed financial year or in any proposed transaction which has materially
affected or would materially affect the Company. An "informed person" means a
director or executive office of a reporting issuer; a director or executive
officer of a person or company that is itself an informed person or subsidiary
of a reporting issuer; any person or company who beneficially owns, directly or
indirectly, voting shares of a reporting issuer or who exercises control or
direction over shares of the reporting issuer or a combination of both carrying
more than 10% of the voting rights attached to all outstanding voting securities
of the reporting issuer; and a reporting issuer that has purchased, redeemed or
otherwise acquired any of its securities, for so long as it holds any of its
securities.
EMPLOYMENT / MANAGEMENT AGREEMENTS
The Company has a management contract with Chase, whereby the Company has
retained Chase to provide ongoing administrative, accounting, professional and
management services. In return for providing such services, Chase is paid a
monthly fee of $3,000 plus any out-of-pocket disbursements made by Chase on the
Company's behalf. In addition, the Company may engage Chase to perform extra
services in which case Chase will charge the Company for its employees at
competitive rates. The Company is also paying Chase $2,000 per month for the
services of Mr. DeMare in his capacity as President, CEO and CFO of the Company.
Payment for these services have been included as part of "Other Annual
Compensation" and "All Other Compensation" of the Summary Compensation Table for
Mr. DeMare. See "Item 7. Major Shareholders and Related Party Transactions -
Related Party Transactions".
There are no service contracts with the Company providing for benefits upon
termination of employment of any director of the Company.
BOARD PRACTICES
AUDIT COMMITTEE
THE AUDIT COMMITTEE'S CHARTER
MANDATE
The primary function of the audit committee (the "Committee") is to assist the
board of directors in fulfilling its financial oversight responsibilities by
reviewing the financial reports and other financial information provided by the
Company
-34-
to regulatory authorities and shareholders, the Company's systems of internal
controls regarding finance and accounting and the Company's auditing, accounting
and financial reporting processes. The Committee's primary duties and
responsibilities are to:
- Serve as an independent and objective party to monitor the Company's
financial reporting and internal control system and review the
Company's financial statements.
- Review and appraise the performance of the Company's external auditors.
- Provide an open avenue of communication among the Company's auditors,
financial and senior management and the Board of Directors.
COMPOSITION
The Committee shall be comprised of three directors as determined by the Board
of Directors, the majority of whom shall be free from any relationship that, in
the opinion of the Board of Directors, would interfere with the exercise of his
independent judgment as a member of the Committee. At least one member of the
Committee shall have accounting or related financial management expertise. All
members of the Committee that are not financially literate will work towards
becoming financially literate to obtain a working familiarity with basic finance
and accounting practices. For the purposes of the Audit Committee Charter, the
definition of "financially literate" is the ability to read and understand a set
of financial statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and complexity of
the issues that can presumably be expected to be raised by the Company's
financial statements.
The members of the Committee shall be elected by the Board of Directors at its
first meeting following the annual shareholders' meeting. Unless a Chair is
elected by the full Board of Directors, the members of the Committee may
designate a Chair by a majority vote of the full Committee membership.
MEETINGS
The Committee shall meet a least twice annually, or more frequently as
circumstances dictate. As part of its job to foster open communication, the
Committee will meet at least annually with the CFO and the external auditors in
separate sessions.
RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties, the Committee shall:
Documents/Reports Review
(a) Review and update the Charter annually.
(b) Review the Company's financial statements, MD&A and any annual and
interim earnings, press releases before the Company publicly discloses
this information and any reports or other financial information
(including quarterly financial statements), which are submitted to any
governmental body, or to the public, including any certification,
report, opinion, or review rendered by the external auditors.
External Auditors
(a) Review annually, the performance of the external auditors who shall be
ultimately accountable to the Board of Directors and the Committee as
representatives of the shareholders of the Company.
(b) Recommend to the Board of Directors the selection and, where
applicable, the replacement of the external auditors nominated annually
for shareholder approval.
-35-
(c) Review with management and the external auditors the audit plan for the
year-end financial statements and intended template for such
statements.
(d) Review and pre-approve all audit and audit-related services and the
fees and other compensation related thereto, and any non-audit
services, provided by the Company's external auditors.
Provided the pre-approval of the non-audit services is presented to the
Committee's first scheduled meeting following such approval such authority may
be delegated by the Committee to one or more independent members of the
Committee.
FINANCIAL REPORTING PROCESSES
(a) In consultation with the external auditors, review with management the
integrity of the Company's financial reporting process, both internal
and external.
(b) Consider the external auditors' judgments about the quality and
appropriateness of the Company's accounting principles as applied in
its financial reporting.
(c) Consider and approve, if appropriate, changes to the Company's auditing
and accounting principles and practices as suggested by the external
auditors and management.
(d) Following completion of the annual audit, review separately with
management and the external auditors any significant difficulties
encountered during the course of the audit, including any restrictions
on the scope of work or access to required information.
(e) Review any significant disagreement among management and the external
auditors in connection with the preparation of the financial
statements.
(f) Review with the external auditors and management the extent to which
changes and improvements in financial or accounting practices have been
implemented.
(g) Review any complaints or concerns about any questionable accounting,
internal accounting controls or auditing matters.
(h) Review certification process.
(i) Establish a procedure for the confidential, anonymous submission by
employees of the Company of concerns regarding questionable accounting
or auditing matters.
OTHER
Review any related-party transactions.
COMPOSITION OF THE AUDIT COMMITTEE
The following are the members of the Committee (1):
- --------------------------------------------------------------------------------
INDEPENDENT (1) FINANCIALLY LITERATE
- --------------------------------------------------------------------------------
Nick DeMare N Y
Andrew Carter Y Y
William Lee Y Y
- --------------------------------------------------------------------------------
NOTE: (1) As defined by Multilateral Instrument 52-110 ("MI 52-110").
-36-
The Company is relying on the exemption provided under Section 6.1 of MI 52-110.
AUDIT COMMITTEE OVERSIGHT
At no time since the commencement of the Company's most recently completed
financial year was a recommendation of the Committee to nominate or compensate
an external auditor not adopted by the Board of Directors.
RELIANCE ON CERTAIN EXEMPTIONS
At no time since the commencement of the Company's most recently completed
financial year has the Company relied on the exemption in Section 2.4 of MI
52-110 (De Minimis Non-audit Services), or an exemption from MI 52-110, in whole
or in part, granted under Part 8 of Multilateral Instrument 52-110.
PRE-APPROVAL POLICIES AND PROCEDURES
The Committee has adopted specific policies and procedures for the engagement of
non-audit services as described above under the heading "External Auditors".
REMUNERATION COMMITTEE
The Company does not have a separate Remuneration Committee.
TERMINATION OF EMPLOYMENT OR CHANGE OF CONTROL
Other than as described in the Summary Compensation Table and above, the Company
has no plans or arrangements in respect of remuneration received or that may be
received by the Named Executive Officer in the Company's most recently completed
financial year or current financial year in view of compensating such officers
in the event of termination of employment (as a result of resignation,
retirement, change of control, etc.) or a change in responsibilities following a
change of control, where the value of such compensation exceeds $100,000 per
executive officer.
The Company and its subsidiaries do not have any contracts with the directors of
the Company (or any entities controlled by the directors of the Company)
providing for benefits upon termination of employment.
EMPLOYEES
As at August 31, 2004, the Company had two full-time employees, including Mr.
Cernovitch, in the area of management and administration. During the years ended
August 31, 2003 and 2002, the Company had no full-time or part-time employees in
the area of management and administration. Corporate accounting, management and
administration are provided, in part, by Chase, a company owned by Mr. Nick
DeMare. Chase provides its services to a number of public and private companies
and currently employs six full-time employees, including Mr. Lim (excluding Mr.
DeMare). Mr. DeMare provides his services as the President, CEO and CFO of the
Company. The Company also retains consultants to handle specific projects on a
case by case basis. In the event the Company needs to employ personnel, it will
need to recruit qualified personnel to staff its operations. The Company
believes that such personnel currently are available at reasonable salaries and
wages in the geographic areas in which the Company and its subsidiaries operate.
There can be no assurance, however, that such personnel will be available in the
future. Exploration activities are conducted by consultants, laborers and
technicians hired for the duration of the exploration program.
SHARE OWNERSHIP
The following table sets forth certain information regarding ownership of the
Company's common shares by the Company's officers and directors as of December
31, 2004.
-37-
- --------------------------------------------------------------------------------
SHARES AND
RIGHTS
BENEFICIALLY
OWNED OR PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF OWNER CONTROLLED(1) CLASS(1)
- -------------- --------------------------------- ------------- ----------
Common Stock Nick DeMare 850,377(2) 5.00%
Burnaby, British Columbia, Canada
Common Stock Andrew Carter 74,500(3) 0.45%
North Vancouver,
British Columbia, Canada
Common Stock Ewan Downie 2,012,500(4) 11.41%
Thunder Bay, Ontario, Canada
Common Stock William Lee 57,950(5) 0.35%
Delta, British Columbia, Canada
Common Stock Marc Cernovitch 150,000(6) 0.90%
Vancouver, British Columbia, Canada
Common Stock Harvey Lim 50,143(7) 0.30%
Burnaby, British Columbia, Canada
- --------------------------------------------------------------------------------
NOTES:
(1) Where persons listed on this table have the right to obtain additional
shares of common stock through the exercise of outstanding options or
warrants within 60 days from December 31, 2004, these additional shares are
deemed to be outstanding for the purpose of computing the percentage of
common stock owned by such persons, but are not deemed to be outstanding
for the purpose of computing the percentage owned by any other person.
Based on 16,500,340 shares of common stock outstanding as of December 31,
2004.
(2) Includes 208,659 common shares held directly by Mr. DeMare, 91,404 common
shares held by DNG Capital Corp. ("DNG"), a private corporation
wholly-owned by Mr. DeMare, and 34,580 common shares held by 888 Capital
Corp., a private corporation 50% owned by Mr. DeMare. Also includes options
to acquire 100,000 common shares held by Mr. DeMare directly, options to
acquire 50,000 common shares held by Chase, warrants to acquire 294,734
common shares held directly by Mr. DeMare and warrants to acquire 71,000
common shares held by DNG.
(3) Includes 22,000 common shares held, options to acquire 50,000 common shares
and warrants to acquire 2,500 common shares.
(4) Includes 875,000 common shares held, options to acquire 300,000 common
shares and warrants to acquire 837,500 common shares. Does not include
800,000 shares proposed to be issued to Wolfden and 400,000 common shares
which may be acquired by Wolfden upon exercise of warrants to be issued to
Wolfden. Mr. Downie is the President, CEO and a director of Wolfden and
will be deemed to beneficially own the shares held by Wolfden and the
shares which Wolfden may acquire upon exercise of the warrants issued to
Wolfden.
(5) Includes 5,300 common shares held, options to acquire 50,000 common shares
and warrants to acquire 2,650 common shares.
(6) Includes options to acquire 150,000 common shares.
(7) Includes 143 common shares held and options to acquire 50,000 common
shares.
All of the Company's common shareholders have the same voting rights. Holders of
the Company's Series 1 preferred shares do not have the right to vote unless the
Company is in default on the payment of dividends and the dividends remain
unpaid for a period of 60 days. See "Item 10. Additional Information -
Description of Authorized Shares - Preferred Shares."
STOCK OPTION PLAN
The Company has a rolling stock option plan (the "Plan"), which makes a total of
10% of the issued and outstanding common shares of the Company available for
issuance thereunder. The Company's Plan is approved annually by the
shareholders. In accordance with the policies of the TSXV, a rolling plan, which
is the type of plan the Company has adopted, requires the approval of the
shareholders of the Company on an annual basis.
The purpose of the Plan is to provide the Company with a share related mechanism
to enable the Company to attract, retain and motivate qualified directors,
officers, employees and other service providers, to reward directors, officers,
employees and other service providers for their contribution toward the long
term goals of the Company and to enable and encourage such individuals to
acquire shares of the Company as long term investments.
-38-
The Plan provides that it is solely within the discretion of the Board to
determine who should receive options and in what amounts. The Board of Directors
may issue a majority of the options to insiders of the Company. However, the
Plan provides that in no case will the Plan or any existing share compensation
arrangement of the Company result, at any time, in the issuance to any option
holder, within a one year period, of a number of shares exceeding 5% of the
Company's issued and outstanding share capital.
The following information is intended to be a brief description of the Plan:
1. The maximum number of common shares that may be issued upon exercise of
stock options granted under the Plan will be that number of shares
which is 10% of the issued and outstanding shares of the Company. Any
outstanding options will form a part of the foregoing 10%. The exercise
price of the stock options, as determined by the Board of Directors in
its sole discretion, shall not be less than the closing price of the
Company's shares traded through the facilities of the TSXV on the date
prior to the date of grant, less allowable discounts, in accordance
with the policies of the TSXV or, if the shares are no longer listed
for trading on the TSXV, then such other exchange or quotation system
on which the shares are listed and quoted for trading.
2. The Board of Directors will not grant options to any one person which
will, when exercised, exceed 5% of the issued and outstanding shares of
the Company.
3. Upon expiry of the option, or in the event an option is otherwise
terminated for any reason, without having been exercised in full, the
number of shares in respect of the expired or terminated option shall
again be available for the purposes of the Plan. All options granted
under the Plan may not have an expiry date exceeding five years from
the date on which the Board of Directors grant and announce the
granting of the option.
4. If the option holder ceases to be a director of the Company or ceases
to be employed by the Company (other than by reason of death), as the
case may be, then the option granted shall expire on the 90th day
following the date that the option holder ceases to be a director or
ceases to be employed by the Company, subject to the terms and
conditions set out in the Plan.
The Plan may be administered by the Company's secretary or such other senior
officer or employee as may be designated by the Board of Directors from time to
time. Upon the approval of the Plan by the Company's shareholders, shareholder
approval will not be required or sought on a case-by-case basis for the purpose
of the granting of options to and the exercise of options by employees of the
Company regularly employed on a full-time or part-time basis, directors of the
Company and persons who perform services for the Company on an ongoing basis or
who have provided, or are expected to provide, services of value to the Company.
As of December 31, 2004, an aggregate of 860,000 incentive stock options to
purchase shares of the Company's common stock remain outstanding to the
following persons:
- --------------------------------------------------------------------------------
Nature No. of Exercise Expiry
OPTIONEE of Option Options Price/Share Date
$
- --------------------------------------------------------------------------------
Ewan Downie Director 300,000 0.60 May 31, 2007
Chase Management Ltd. Consultant 50,000 0.60 May 31, 2007
Nick DeMare Director 100,000 0.60 May 31, 2007
Harvey Lim Officer 50,000 0.60 May 31, 2007
Andrew Carter Director 50,000 0.60 May 31, 2007
William Lee Director 50,000 0.60 May 31, 2007
Kamcot International Ltd. Consultant 60,000 0.75 July 22, 2007
Marc Cernovitch Officer 150,000 0.70 September 27, 2007
Malinda Poe Employee 50,000 0.85 October 18, 2007
-------
TOTAL: 860,000
=======
-39-
As of December 31, 2004, the directors and officers of the Company, as a group
(six persons), held options to purchase 750,000 shares of the Company's common
stock.
WARRANTS
As of December 31, 2004, there were non-transferable common share purchase
warrants exercisable for the purchase of 11,213,652 common shares, which expire
at various times until December 23, 2006 and may be exercised at various prices
ranging from $0.20 per share to $1.50 per share, as follows:
- --------------------------------------------------------------------------------
COMMON SHARES ISSUABLE Exercise
ON EXERCISE OF WARRANTS Price/Share Expiry
$
- --------------------------------------------------------------------------------
2,965,000 0.20 / 0.25 March 4, 2005 / 2006
2,171,475 1.25 / 1.35 December 23, 2005 / 2006
2,693,530 1.10 / 1.35 December 23. 2005 / 2006
2,682,000 0.40 April 15, 2006
701,647 1.05 December 23, 2006
----------
11,213,652
==========
As of December 31, 2004, the directors and officers of the Company, as a group
(six persons), held warrants to purchase 1,208,384 shares of the Company's
common stock.
There are no assurances that the options or warrants described above will be
exercised in whole or in part.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
- --------------------------------------------------------------------------------
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth certain information regarding ownership of the
Company's common shares by the Company's officers and directors as of December
31, 2004.
- --------------------------------------------------------------------------------
SHARES AND
RIGHTS
BENEFICIALLY
OWNED OR PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF OWNER CONTROLLED(1) CLASS(1)
- -------------- --------------------------------- ------------- ----------
Common Stock Nick DeMare 850,377(2) 5.00%
Burnaby, British Columbia, Canada
Common Stock Ewan Downie 2,012,500(3) 11.41%
Thunder Bay, Ontario, Canada
Common Stock RAB Special Situations L.P. 2,000,000(4) 10.82%
London, United Kingdom
- --------------------------------------------------------------------------------
NOTES:
(1) Where persons listed on this table have the right to obtain additional
shares of common stock through the exercise of outstanding options or
warrants within 60 days from December 31, 2004, these additional shares are
deemed to be outstanding for the purpose of computing the percentage of
common stock owned by such persons, but are not deemed to be outstanding
for the purpose of computing the percentage owned by any other person.
Based on 16,500,340 shares of common stock outstanding as of December 31,
2004.
(2) Includes 208,659 common shares held directly by Mr. DeMare, 91,404 common
shares held by DNG Capital Corp. ("DNG"), a private corporation
wholly-owned by Mr. DeMare, and 34,580 common shares held by 888 Capital
Corp., a private corporation 50% owned by Mr. DeMare. Also includes options
to acquire 100,000 common shares held by Mr. DeMare directly, options to
acquire 50,000 common shares held by Chase, warrants to acquire 294,734
common shares held directly by Mr. DeMare and warrants to acquire 71,000
common shares held by DNG.
(3) Includes 875,000 common shares, options to acquire 300,000 common shares
and warrants to acquire 837,500 common shares held directly by Mr. Downie.
Does not include 800,000 shares proposed to be issued to Wolfden and
400,000 common shares which may be acquired by Wolfden upon exercise of
warrants to be issued to Wolfden. Mr. Downie is the President, CEO and
-40-
a director of Wolfden and will be deemed to beneficially own the shares
held by Wolfden and the shares which Wolfden may acquire upon exercise of
the warrants issued to Wolfden.
(4) Includes1,000,000 common shares and warrants to acquire 1,000,000 common
shares.
To the best of the Company's knowledge, it is not directly or indirectly owned
or controlled by another Company or by any foreign government.
None of the Company's common shareholders have different voting rights than any
of the Company's other common shareholders.
ESCROW SHARES
As of the date of this annual report, no shares are held in escrow.
CHANGE OF CONTROL
As of the date of this annual report, there are no arrangements known to the
Company which may at a subsequent date result in a change of control of the
Company, except the possible issuance of shares to The Sheridan Platinum Group
Ltd. and Pat Sheridan in connection with the redemption or retraction of the
Series 1 preferred shares. See "Item 4. Information on the Company - Principal
Properties - Duport Property, Ontario" and "Item 10. Additional Information -
Description of Authorized Shares - Preferred Shares."
In the event that the Company exercises its right to retract or redeem the
Series 1 preferred shares in exchange for common shares of the Company, this may
result in a change of control of the Company. Based on the Company's currently
outstanding share capital, if the Company retracted or redeemed the Series 1
preferred shares in exchange for common shares, The Sheridan Platinum Group Ltd.
and Pat Sheridan would own in the aggregate approximately 35.68% of the
Company's outstanding shares, calculated as follows:
Shares Currently Outstanding (1) 16,540,340
Shares Issuable Upon Retraction (2) 7,619,048
----------
Shares Outstanding After Retraction 24,159,388
==========
Shares Currently Held by Vendors 1,000,000
Shares Acquired by Vendors Upon Retraction 7,619,048
----------
Shares Held by Vendors After Retraction 8,619,048
==========
% of Shares held by Vendors After Retraction 35.68%
==========
NOTES:
(1) As at January 13, 2005.
(2) Calculated as $8 million divided by $1.05 per share, being the
closing price of the Corporation's common shares on January 13,
2005.
The foregoing calculation is for illustrative purposes only and does not take
account of additional shares which may be issued by the Company, or any
purchases or sales of shares by The Sheridan Platinum Group Ltd. or Mr.
Sheridan, subsequent to the date hereof but prior to redemption or retraction,
or any change in the market price of the Company's common shares, all of which
may materially change the calculation.
UNITED STATES SHAREHOLDERS
As of December 31, 2004, there were approximately 7 registered holders of the
Company's common shares in the United States, with combined holdings of 493,661
shares, representing 2.99% of the issued shares of the Company. The Company does
not know how many beneficial shareholders it has in the United States, but
management believes there are less than 300 such shareholders.
-41-
CONTROL BY FOREIGN GOVERNMENT OR OTHER PERSONS
To the best of the Company's knowledge, the Company is not directly or
indirectly owned or controlled by another corporation, any foreign government,
or any other natural or legal person jointly or severally.
RELATED PARTY TRANSACTIONS
Other than as disclosed below, for the period from September 1, 2003 through
December 31, 2004, the Company has not entered into any transactions or loans
between the Company and any (a) enterprises that directly or indirectly through
one or more intermediaries, control or are controlled by, or are under common
control with, the Company; (b) associates; (c) individuals owning, directly or
indirectly, an interest in the voting power of the Company that gives them
significant influence over the Company, and close members of any such
individuals' family; (d) key management personnel and close members of such
individuals' families; or (e) enterprises in which a substantial interest in the
voting power is owned, directly or indirectly, by any person described in (c) or
(d) or over which such a person is able to exercise significant influence.
1. The Company has retained Chase, a company wholly-owned by Mr. Nick
DeMare, the President, Chief Executive Officer and Chief Financial
Officer and a director and shareholder of the Company, to provide
office premises, administrative, accounting and management services. In
consideration therefor, Chase is paid a monthly fee of $3,000. Chase is
also reimbursed for out-of-pocket disbursements incurred on behalf of
the Company. In addition, Chase also provides additional services to
the Company which are billed at rates which Chase charges to unrelated
third parties. Management believes the arrangement with Chase is fair
to the Company and similar to terms which could be obtained from
unrelated third parties. During the year ended August 31, 2004 and the
period from September 1, 2004 to December 31, 2004, the Company paid
Chase $55,638 and $16,300, respectively.
2. Commencing July 4, 2003, the Company paid Chase a monthly fee for the
services of Mr. Nick DeMare in his capacity as President, Chief
Executive Officer and Chief Financial Officer of the Company. The
Company is currently paying $2,000 per month. See "Item 6. Directors,
Senior Management and Employees - Compensation." Management believes
the arrangement with Chase for Mr. DeMare's services is fair to the
Company. During the year ended August 31, 2004 and the period from
September 1, 2004 to December 31, 2004, the Company paid Chase $8,000
and $8,000 respectively.
3. The Company has completed previous private placements of securities,
the subscribers of which include companies wholly-owned by directors
and officers of the Company. The securities issued pursuant to such
private placements were issued in accordance with the pricing policies
of the TSXV. During the year ended August 31, 2004, and the period from
September 1, 2004 to December 31, 2004, the Company conducted the
following private placements of common stock:
PARTICIPATION PURCHASE MARKET
PLACEE BY INSIDERS PRICE PRICE(1)
$ $
Period September 1,2004 to December 31, 2004
------------------------------------------------------
4,342,951 units (one common share and one-half warrant) 0.95 1.05
- Ewan Downie 75,000
- Nick DeMare 26,135
- William Lee 5,300
- Andrew Carter 5,000
-------
111,435
=======
2,673,530 units (one common share and one warrant) Nil 0.85 1.05
=======
-42-
PARTICIPATION PURCHASE MARKET
PLACEE BY INSIDERS PRICE PRICE(1)
$ $
Year Ended August 31, 2004
-------------------------------------------------
3,400,000 units (one common share and one warrant) 0.15 0.20
- Nick DeMare 281,667
=======
2,600,000 units (one common share and one warrant) 0.30 0.32
- DNG Capital Corp.(2) 71,000
=======
(1) Quoted closing price on date of announcement of private placement.
(2) 100% owned by Nick DeMare
4. On November 12, 2004, the Company entered into an option agreement with
Wolfden whereby Wolfden assigned to the Company, Wolfden's option to
earn a 50% undivided interest the Bachelor Lake Property. See "Item 4.
Information on the Company - Principal Properties - Bachelor Lake
Property, Quebec." Mr. Ewan Downie, a director of the Company is also
the President, Chief Executive Officer and a shareholder and director
of Wolfden.
5. During the fiscal year ended August 31, 2004, the Company negotiated a
settlement with Hilton Resources Ltd., a public corporation which
certain of its directors and officers are also officers and directors
of the Company, in which the Company paid $688,079 to settle $748,687
owed, resulting in a gain of $60,608.
6. During the fiscal year ended August 31, 2004, the Company negotiated
settlements with six creditors in which the Company paid $263,543 to
settle a total of $300,142 owed, resulting in a gain of $36,599. The
creditors are corporations owned by current and former officers and
directors of the Company.
7. During the fiscal year ended August 31, 2004, the Company paid $1,000
to Ewan Downie for consulting services.
8. See also "Item 6. Directors, Senior Management and Employees -
Compensation."
INDEBTEDNESS OF DIRECTORS, OFFICERS, PROMOTERS AND OTHER MANAGEMENT
No executive officers, directors, employees or former executive officers and
directors of the Company are indebted to the Company. None of the directors,
executive officers or proposed nominees of the Company nor any associate or
affiliate of these individuals, is or has been indebted to the Company since
September 1, 2003.
CONFLICTS OF INTEREST
The table below shows that certain officers and directors of the Company are
also directors, officers or shareholders of other companies which are engaged in
the business of acquiring, developing and exploiting natural resource
properties. Such associations may give rise to conflicts of interest from
time-to-time. The directors of the Company are required by law to act honestly
and in good faith with a view to the best interest of the Company and to
disclose any interest which they may have in any project or opportunity of the
Company. However, each director has a similar obligation to other companies for
which such director serves as an officer or director. As of the date of this
report, no conflicts of interest have arisen, except as described below and
above. Where conflicts of interests arose, the directors of the Company
disclosed their interests and abstained from voting on the transaction.
The following table identifies the name of each director and officer of the
Company and any company, which is a reporting issuer in Canada or the United
States, and for which such director or officer currently serves as an officer or
director, other than the Company:
-43-
DIRECTOR REPORTING ISSUER CAPACITY COMMENCED SERVICE
- ----------- ----------------------------- ----------------------------- -----------------
Nick DeMare Aguila American Resources Ltd. Director January 2003
Andean American Mining Corp. Director August 2002
Secretary December 1995
Baradero Resources Limited Director October 2002
President September 2003
Dial Thru International Inc. Director January 1991
GGL Diamond Corp. Director May 1989
Global Energy Inc. Director, President, Secretary September 2002
& Treasurer
Golden Peaks Resources Ltd. Director January 1992
Goldmarca Limited Director September 2000
Gold Point Exploration Ltd. Director & President August 2003
Hilton Resources Ltd. Director October 1989
President & CEO July 2003
Kookaburra Resources Ltd. Director June 1988
Lariat Resources Ltd. Director & President August 2002
Mawson Resources Limited Director March 2004
Medina International Corp. Director, Secretary & Treasurer May 2002
Tinka Resources Limited Director & Secretary October 2003
Tumi Resources Limited Director January 2002
Andrew Carter Baradero Resources Limited Director September 2003
Gold Point Exploration Ltd. Director October 2003
Hilton Resources Ltd. Director July 2003
Tinka Resources Ltd. Director, President & CEO February 2003
Ewan Downie Anaconda Gold Corp. Director May 2003
Sabina Resources Limited Director November 2002
Wolfden Resources Ltd, Director, President & CEO October 1995
William Lee Hilton Resources Ltd. Director September 1995
Tinka Resources Limited Director October 2002
Marc Cernovich N/A N/A N/A
Harvey Lim Baradero Resources Limited Director September 2003
Gold Point Exploration Ltd. Director & Secretary October 2003
Hilton Resources Ltd. Secretary June 1997
Median International Director May 2002
Tumi Resources Limited Director January 2002
There are no known existing or potential conflicts of interest among the
Company, promoters, directors, officers, principal holders of securities and
persons providing professional services to the Company which could reasonably be
expected to affect an investor's investment decision except as described in this
section.
The Company does not have any agreements with its officers or directors,
including any officers or directors with a conflict of interest, with respect to
the amount of time they must spend on the Company's business.
ITEM 8. FINANCIAL INFORMATION.
- --------------------------------------------------------------------------------
DESCRIPTION PAGES
- ----------- -----
Audited Consolidated Financial Statements for the Years Ended
August 31, 2004, 2003 and 2002 F-1 to F-22
-44-
DIVIDEND POLICY
The Company has not paid any dividends on its common shares and does not intend
to pay dividends on its common shares in the immediate future. Any decision to
pay dividends on its common shares in the future will be made by the board of
directors on the Company on the basis of earnings, financial requirements and
other such conditions that may exist at that time.
LEGAL PROCEEDINGS
The Company knows of no material, active or pending legal or arbitration
proceedings against it; nor is the Company involved as a plaintiff in any
material proceeding or pending litigation.
The Company knows of no active or pending proceedings against anyone that might
materially adversely affect an interest of the Company.
There are no legal or arbitration proceedings (including governmental
proceedings pending or known to be contemplated) which may have, or have had in
the recent past, significant effects on the Company's financial position or
profitability.
There are no proceedings in which any director, any member of senior management,
or any affiliate of the Company is a party adverse to the Company or has a
material adverse interest to the Company.
ITEM 9. THE OFFER AND LISTING.
- --------------------------------------------------------------------------------
PRICE HISTORY
The TSXV classifies listed companies into two different tiers based on
standards, which include historical financial performance, stage of development,
and financial resources of the listed company. Tier 1 is the TSXV's premier tier
and is reserved for the TSXV's most advanced issuers with the most significant
financial resources. Tier 1 issuers benefit from decreased filing requirements
and improved service standards. The majority of the companies listed on the TSXV
are Tier 2 companies. The Company trades on the TSXV under the symbol "HLO" and
is classified as a Tier 2 company.
There have been no trading suspensions imposed by the TSXV or any other
regulatory authorities in the past three years.
The following table sets forth the market price ranges and the aggregate volume
of trading of the common shares of the Company on the TSXV, and predecessor
exchanges, for the periods indicated:
TSXV STOCK TRADING ACTIVITY
- -------------------------------------------------------------------------------
SALES PRICE
------------------------
YEAR ENDED VOLUME HIGH LOW
- -------------------------------------------------------------------------------
August 31, 2004 2,866,231 $0.96 $0.05
August 31, 2003 735,039 $0.18 $0.06
August 31, 2002 934,326 $1.89 $0.12
August 31, 2001 2,925,311 $7.49 $1.40
August 31, 2000 5,257,977 $20.37 $2.5
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SALES PRICE
------------------------
QUARTER ENDED VOLUME HIGH LOW
- -------------------------------------------------------------------------------
November 30, 2004 1,322,800 $1.09 $0.76
August 31, 2004 1,761,300 $0.96 $0.72
May 31, 2004 512,300 $0.85 $0.50
- -------------------------------------------------------------------------------
-45-
- -------------------------------------------------------------------------------
SALES PRICE
------------------------
QUARTER ENDED VOLUME HIGH LOW
- -------------------------------------------------------------------------------
February 29, 2004 301,186 $0.50 $0.19
November 30, 2003 291,445 $0.22 $0.05
August 31, 2003 52,048 $0.09 $0.06
May 31, 2003 259,747 $0.18 $0.09
February 28, 2003 267,372 $0.15 $0.07
November 30, 2002 155,872 $0.18 $0.06
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SALES PRICE
------------------------
MONTH ENDED VOLUME HIGH LOW
- -------------------------------------------------------------------------------
December 31, 2004 442,300 $1.05 $0.89
November 30, 2004 422,600 $1.09 $0.92
October 31, 2004 484,400 $1.08 $0.85
September 30, 2004 415,800 $1.05 $0.76
August 31, 2004 458,300 $0.95 $0.75
July 31, 2004 1,168,400 $0.94 $0.76
- -------------------------------------------------------------------------------
On August 7, 2000, the Company's common shares were approved for quotation on
the Over-the-Counter Bulletin Board ("OTCBB") system operated by the National
Association of Securities Dealers. The Company currently trades on the OTCBB
under the symbol "HLOSF.OB". The following tables set forth the market price
ranges and the aggregate volume of trading of the common shares of the Company
on the OTCBB system for the periods indicated:
OTCBB TRADING ACTIVITY
- -------------------------------------------------------------------------------
SALES PRICE
------------------------
YEAR ENDED VOLUME HIGH LOW
- -------------------------------------------------------------------------------
August 31, 2004 109,396 $0.75 $0.05
August 31, 2003 177,000 $0.09 $0.03
August 31, 2002 309,935 $1.19 $0.06
August 31, 2001 504,571 $4.27 $1.12
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SALES PRICE
------------------------
QUARTER ENDED VOLUME HIGH LOW
- -------------------------------------------------------------------------------
November 31, 2004 340,727 $0.90 $0.52
August 31, 2004 59,477 $0.75 $0.50
May 31, 2004 19,240 $0.50 $0.35
February 29, 2004 19,153 $0.34 $0.06
November 30, 2003 11,526 $0.07 $0.05
August 31, 2003 1,500 $0.05 $0.05
May 31, 2003 133,000 $0.08 $0.04
February 28, 2003 18,500 $0.08 $0.03
November 30, 2002 24,000 $0.09 $0.05
- -------------------------------------------------------------------------------
-46-
- -------------------------------------------------------------------------------
SALES PRICE
------------------------
MONTH ENDED VOLUME HIGH LOW
- -------------------------------------------------------------------------------
December 31, 2004 20,976 $0.84 $0.75
November 30, 2004 14,041 $0.90 $0.75
October 31, 2004 323,796 $0.80 $0.63
September 30, 2004 3,890 $0.65 $0.52
August 31, 2004 0 - -
July 31, 2004 47,024 $0.75 $0.57
- -------------------------------------------------------------------------------
These above quotations reflect inter-dealer prices without retail mark-up,
markdown, or commissions and may not necessarily represent actual transactions.
The OTCBB is smaller and less liquid than the major securities markets in the
United States. The trading volume of the Company's shares on the OTCBB has been
volatile. Consequently, shareholders in the United States may not be able to
sell their shares at the time and at the price they desire.
ITEM 10. ADDITIONAL INFORMATION.
- --------------------------------------------------------------------------------
ARTICLES OF CONTINUANCE AND ARTICLES
The Company was incorporated under the laws of British Columbia, Canada on June
16, 1983 by registration of its Memorandum and Articles with the B.C. Registrar
of Companies (the "BC Registrar") under the incorporation number 372193. On
December 14, 1993, the Company was continued to the Yukon Territory, Canada by
the registration of its Articles of Continuance with the Yukon Registrar of
Corporations under the access number 29383 (the "Yukon Registrar").
On March 29, 2004, the British Columbia legislature enacted the BCBCA and
repealed the BC COMPANY ACT. The BCBCA removes many of the restrictions
contained in the BC COMPANY ACt, including restrictions on the residency of
directors, the location of annual general meetings and limits on authorized
share capital, as well, the BCBCA uses new forms and terminology and has
replaced the Memorandum with a Notice of Articles.
On November 16, 2004, the Company was continued to British Columbia, Canada by
the registration of a Certificate of Continuance with the BC Registrar under
incorporation number C0708624.
The Company's Articles of continuance place no restriction upon the Company's
objects and purposes.
The Company is of the view that the BCBCA provides to shareholders of the
Company substantively the same rights as were available to shareholders under
the YBCA, including rights of dissent and appraisal and rights to bring
derivative and oppression actions. The following is a comparison of some of the
principal provisions of the YBCA and the BCBCA that the Company believes may be
relevant to shareholders. This summary is not intended to be exhaustive and
shareholders should consult their legal advisors with respect to the detailed
provisions of the BCBCA and their rights under it. Reference should be made to
the full text of both statutes for particulars of the differences.
Note: Within this summary, the term "Articles" when referring to the BCBCA is
the equivalent to the "by-laws" under the YBCA. The term "Notice of Articles"
when referring to the BCBCA is the equivalent of the "articles" under the YBCA.
SALE OF COMPANY'S UNDERTAKING. Under the BCBCA, a sale of all or substantially
all the property of a corporation, other than in the ordinary course of
business, of the corporation requires approval by special resolution. The
Company's Articles confirm a special resolution, being a resolution passed by a
majority of not less than two-thirds of the votes cast by shareholders who voted
in respect of the resolution (the "Special Resolution"), must be approved in
respect of the proposed sale. The provisions of the YBCA are substantially the
same.
-47-
ALTERATION TO NOTICE OF ARTICLES OF THE COMPANY. Under the BCBCA, any
substantive change to the Notice of Articles of a corporation, such as a change
in the name of the corporation and certain changes to the share capital of a
corporation, require approval of a Special Resolution in respect of the change.
The provisions of the YBCA are substantially the same.
ARTICLE AMENDMENTS. The BCBCA provides that unless the Articles or a unanimous
shareholder agreement otherwise provide, the directors may, by resolution, make,
amend, or repeal any Articles that regulate the business or affairs of a
corporation. However, the directors must submit an Article, or an amendment or a
repeal of an Article, to the shareholders of the corporation, and the
shareholders may, with approval by way of Special Resolution, confirm, reject or
amend the article, amendment or repeal. The provisions of the YBCA are
substantially the same in connection with amendments to the by-laws.
AUTHORIZATION OF UNLIMITED NUMBER OF SHARES. The BCBCA permits a corporation to
have an unlimited number of shares without par value. The provisions of the YBCA
are substantially the same.
RIGHTS OF DISSENT AND APPRAISAL. The BCBCA provides that shareholders who
dissent to certain actions being taken by a corporation may exercise a right of
dissent and require the corporation to purchase the shares held by such
shareholder at the fair value of such shares. The dissent right is applicable
where the corporation proposes to (a) amend its articles to alter the
restrictions on the powers of the corporation or on the business that the
corporation may carry on, (b) adopt an amalgamation agreement, (c) in respect of
a resolution to approve an amalgamation under the BCBCA (d) in respect of a
resolution approving an arrangement, the terms of which arrangement permits
dissent, (e) continue out of the jurisdiction, (f) in respect of a resolution to
authorize and ratify the lease or other disposition of all or substantially all
its undertaking, (g) in respect of any other resolution, if dissent is
authorized by the resolution, or (h) in respect of any court order that permits
dissent. The dissenting shareholder is required to strictly comply with the
provisions of the BCBCA in order to exercise this remedy. The YBCA provides
similar rights to shareholders.
OPPRESSION REMEDIES. Under the BCBCA, a shareholder of a corporation has the
right to apply to a court for an order where the business or affairs are being
or have been conducted, or the exercise of the directors' of the corporation's
or any of its affiliates' powers, in a manner oppressive or unfairly prejudicial
to or would unfairly disregard the interests of any shareholder of the
corporation. On such an application, the court may make any interim or final
order it considers appropriate, including regulating the conduct of the
corporation's affairs. Under the YBCA, the oppression remedy is substantially
the same as that contained in the BCBCA.
SHAREHOLDER DERIVATIVE ACTIONS. Pursuant to the BCBCA, a complainant, which
includes a shareholder, may apply to the court for leave to bring an action in
the name of and on behalf of a corporation or any subsidiary, or to intervene in
an existing action to which the corporation is a party for the purpose of
prosecuting, defending or discontinuing the action on behalf of the corporation.
On such an application, the court may make any order it thinks fit, including an
order authorizing the complainant or any other person to control the conduct of
the action. Pursuant to the YBCA, derivative actions are dealt with in
substantially the same manner as the BCBCA.
FINANCIAL ASSISTANCE. The BCBCA does not restrict a corporation from giving
financial assistance to shareholders or directors of the corporation or an
affiliated corporation. The provisions of the YBCA are substantially the same
except that in certain cases a solvency test is met.
RECORD DATE FOR VOTING. The BCBCA provides the Company with the ability to fix a
record date for voting purposes. Transfers of shares after the record date are
not recognized for voting entitlement purposes. The YBCA also provides for the
setting of a fixed record date for voting purposes but a transferee of shares
requesting to have its name included in the relevant shareholder list at least
ten days (or such shorter time as is provided in the by-laws) prior to the
meeting is entitled to vote, provided that the transferee can establish that the
transferee owns the shares.
REQUISITION OF MEETINGS. The BCBCA provides that holders of not less than five
per cent of the issued shares of a corporation that carry the right to vote at a
meeting sought to be held may requisition the directors to call a meeting of
shareholders for the purposes stated in the requisition. The provisions of the
YBCA are substantially the same.
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FORM OF PROXY AND INFORMATION CIRCULAR. The BCBCA requires that management of a
distributing corporation (public company), concurrently with giving notice of a
meeting of shareholders, send a form of proxy in prescribed form to each
shareholder who is entitled to receive notice of the meeting. Where management
of a corporation solicits proxies, an information circular in prescribed form
must also accompany the notice of the meeting. The YBCA contains similar
provisions.
PLACE OF MEETINGS. The BCBCA provides that meetings of shareholders of a
corporation must be held at the place within the Province of British Columbia
provided in the articles. A meeting of shareholders of a corporation may however
be held at a place outside of British Columbia if the location is approved by
the resolution required by the Articles for the purpose, or if no resolution is
required for that purpose by the Articles, approved by ordinary resolution.
Under the YBCA, meetings of shareholders of a corporation must be held at a
location in the Yukon Territory or, if the articles so provide at one or more
places specified in the articles, or in the absence of such determination, at
the place where the registered office of the corporation is located.
QUORUM OF SHAREHOLDERS. The BCBCA states that the quorum of shareholders of the
corporation at a meeting of shareholders is established in the articles of the
corporation. If no quorum is established by the articles, the quorum is two
shareholders entitled to vote at the meeting whether present in person or by
proxy. Under the YBCA, unless the articles of a corporation otherwise provide, a
quorum of shareholders is present at a meeting of shareholders (irrespective of
the number of persons actually present at the meeting) if holders of a majority
of the shares entitled to vote at the meeting are present in person or
represented by proxy.
SHAREHOLDER PROPOSALS. The BCBCA contains eligibility requirements for
shareholders that wish to submit proposals for inclusion in a corporation's
proxy materials. The YBCA imposes similar requirements.
DUTIES OF DIRECTORS. The BCBCA provides that subject to any unanimous
shareholder agreement, the directors manage, or supervise the management of, the
business and affairs of the Company. The YBCA contains substantially the same
provisions.
REMOVAL OF DIRECTORS. The BCBCA permits the removal of directors by special
resolution. Unless otherwise provided in the articles of a corporation, a quorum
of directors may fill a vacancy among the directors, except for a vacancy
resulting from an increase in the number or the minimum or maximum number of
directors or the failure to elect the number or minimum number of directors
provided for in the articles. The YBCA contains substantially the same
provisions.
The following is a summary of all material provisions of the Company's
Continuation Application and Articles and certain provisions of the BCBCA,
applicable to the Company:
A. DIRECTOR'S POWER TO VOTE ON A PROPOSAL, ARRANGEMENT OR
CONTRACT IN WHICH THE DIRECTOR IS MATERIALLY INTERESTED.
Under the BCBCA, subject to certain exceptions, a director or
senior officer of the Company must disclose any material
interest that he personally has, or that he as a director or
senior officer of another corporation has in a contract or
transaction that is material to the Company and which the
Company has entered into or proposes to enter into.
A director or senior officer of the Company does not hold a
disclosable interest in a contract or transaction if:
1. the situation that would otherwise constitute a
disclosable interest arose before the coming into
force of the BCBCA, and the interest was disclosed
and approved under, or was not required to be
disclosed under legislation that applied to the
Company before the coming into effect of the BCBCA;
2. both the Company and the other party to the contract
or transaction are wholly owned subsidiaries of the
same corporation;
3. the Company is a wholly owned subsidiary of the other
party to the contract or transaction;
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4. the other party to the contract or transaction is a
wholly owned subsidiary of the Company; or
5. the director or senior officer is the sole
shareholder of the Company or of a corporation of
which the Company is a wholly owned subsidiary.
A director or senior officer of the Company does not hold a
disclosable interest in a contract or transaction merely
because:
1. the contract or transaction is an arrangement by way
of a security granted by the Company for money loaned
to, or obligations undertaken by, the director or
senior officer, or a person in whom the director or
senior officer has a material interest, for the
benefit of the Company or an affiliate of the
Company;
2. the contract or transaction relates to an indemnity
or insurance under the BCBCA;
3. the contract or transaction relates to the
remuneration of the director or senior officer, in
that person's capacity as director, officer, employee
or agent of the Company or of an affiliate of the
Company;
4. the contract or transaction relates to a loan to the
Company, and the director or senior officer, or a
person in whom the director or senior officer has a
material interest, is or is to be a guarantor of some
or all of the loan; or
5. the contract or transaction has been or will be made
with or for the benefit of a corporation that is
affiliated with the Company and the director or
senior officer is also a director or senior officer
of that corporation or an affiliate of that
corporation.
A director or senior officer who holds such a material
interest must disclose the nature and extent of such interest
in writing. The disclosure must be evidenced in writing in a
consent resolution, the minutes of a meeting or any other
record deposited with the Company's record office. A director
who has a disclosable interest in a contract or transaction is
not entitled to vote on any directors' resolution to approve
that contract or transaction, but may be counted in the quorum
at the directors' meeting at which such vote is taken.
B. DIRECTORS' POWER, IN THE ABSENCE OF AN INDEPENDENT QUORUM, TO
VOTE COMPENSATION TO THEMSELVES OR ANY MEMBERS OF THEIR BODY.
The compensation of the directors is decided by the directors
unless the Board of Directors specifically requests approval
of the compensation from the shareholders. If the issuance of
compensation to the directors is decided by the directors, a
quorum is the majority of the directors in office.
C. BORROWING POWERS EXERCISABLE BY THE DIRECTORS AND HOW SUCH
BORROWING POWERS MAY BE VARIED.
The Company, if authorized by the directors, may:
1. borrow money in the manner and amount, on the
security, from the sources and on the terms and
conditions that they consider appropriate;
2. issue bonds, debentures and other debt obligations
either outright or as security for any liability or
obligation of the Company or any other person and at
such discounts or premiums and on such other terms as
they consider appropriate;
3. guarantee the repayment of money by any other person
or the performance of any obligation of any other
person; and
4. mortgage, charge, whether by way of specific or
floating charge, grant a security interest in, or
give other security on, the whole or any part of the
present and future assets and undertaking of the
Company.
The borrowing powers may be varied by amendment to the
Articles of the Company which requires approval of the
shareholders of the Company by Special Resolution.
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D. RETIREMENT AND NON-RETIREMENT OF DIRECTORS UNDER AN AGE LIMIT
REQUIREMENT.
There are no such provisions applicable to the Company under
the Certificate of Continuance , Notice of Articles, Articles
or the BCBCA.
E. NUMBER OF SHARES REQUIRED FOR A DIRECTOR'S QUALIFICATION.
A director of the Company is not required to hold a share in
the capital of the Company as qualification for his office.
DESCRIPTION OF AUTHORIZED SHARES
The authorized capital of the Company consists of an unlimited number of common
shares without par value and an unlimited number of preferred shares without par
value. A complete description is contained in the Company's Continuation
Application.
COMMON SHARES
Of the Company's unlimited common share capital, a total of 16,500,340 common
shares were issued and outstanding as of December 31, 2004.
All of the common shares are fully paid and not subject to any future call or
assessment. All of the common shares of the Company rank equally as to voting
rights, participation in a distribution of the assets of the Company on a
liquidation, dissolution or winding-up of the Company and the entitlement to
dividends. The holders of the common shares are entitled to receive notice of
all shareholder meetings and to attend and vote at such meetings. Shareholders
are not entitled to cumulative voting. Each common share carries with it the
right to one vote. The common shares do not have preemptive or conversion
rights. In addition, there are no sinking fund or redemption provisions
applicable to the common shares or any provisions discriminating against any
existing or prospective holders of such securities as a result of a shareholder
owning a substantial number of common shares. The Company's board of directors
does not stand for re-election at staggered intervals.
PREFERRED SHARES
Of the Company's unlimited preferred share capital, a total of nil preferred
shares were issued and outstanding as of January 31, 2005. The Company intends
to issued Series 1 preferred shares on closing of the Duport Property
Acquisition. Series 1 preferred shares will be entitled to a liquidation
preference over the holders of any other shares together with an amount equal to
all accrued and unpaid dividends thereon which for such purpose shall be
calculated as if such dividends were accruing up to the date of such
distribution.
DIVIDEND RECORD
The Company has not paid any dividends on its common shares and has no policy
with respect to the payment of dividends.
OWNERSHIP OF SECURITIES AND CHANGE OF CONTROL
Except for the Investment Canada Act, discussed below, there are no limitations
on the rights to own securities, including the rights of non-resident or foreign
shareholders to hold or exercise voting rights on the securities imposed by
foreign law or by the constituent documents of the Company.
Any person who beneficially owns or controls, directly or indirectly, more than
10% of the Company's voting shares is considered an insider, and must file an
insider report with the British Columbia, Alberta and Ontario Securities
Commissions within ten days of becoming an insider disclosing any direct or
indirect beneficial ownership of, or control over direction over securities of
the Company. In addition, if the Company itself holds any of its own securities,
the Company must disclose such ownership.
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There are no provisions in the Company's Continuation Application, Notice of
Articles and Articles that would have an effect of delaying, deferring or
preventing a change in control of the Company operating only with respect to a
merger, acquisition or corporate restructuring involving the Company or its
subsidiaries.
CHANGES TO RIGHTS AND RESTRICTIONS OF SHARES
Under the BCBCA and the Company's Articles, if the Company wishes to change the
rights and restrictions of the common shares or the preferred shares the Company
must obtain the approval of the shareholders by Special Resolution.
SHAREHOLDER MEETINGS
ANNUAL AND EXTRAORDINARY GENERAL MEETINGS
Under the BCBCA and the Company's Articles, the Company's annual general meeting
is to be held once in each calendar year and not more than 15 months after the
previous meeting. No advance notice will be required to be published at a
meeting where directors are to be elected. The Company, under the BCBCA, must
give shareholders not less than 21 days' notice of any general meeting of the
shareholders.
The Directors may fix in advance a date, which is no fewer than 35 days or no
more than 60 days prior to the date of the meeting, as the record date for the
meeting. All the holders of common shares as at the record date are entitled to
attend and vote at a general meeting.
On a show of hands, every person who is present, a shareholder or proxy holder
and entitled to vote shall have one vote. Whenever a vote by show of hands shall
have been taken upon a question, unless a ballot thereon is so required or
demanded, a declaration by the Chairman of the meeting that the vote upon the
resolution has been carried or carried by the necessary majority or is defeated
must be entered in the minutes of the meeting and shall be conclusive evidence
of the fact without proof of the number or proportion of the votes recorded in
favor of or against the resolution and the result of the vote so taken shall be
the decision of the members upon the said question.
DIFFERENCES FROM REQUIREMENTS IN THE UNITED STATES
Except for the Company's quorum requirements, certain requirements related to
related party transactions, the requirement for notice of shareholder meetings,
the approval of amendments to the Company's articles and disclosures by certain
shareholders of their ownership, which are discussed above, there are no
significant differences in the law applicable to the Company, in the areas
outlined above, in British Columbia versus the United States. In most states in
the United States, a quorum must consist of a majority of the shares entitled to
vote. Some states allow for a reduction of the quorum requirements to less than
a majority of the shares entitled to vote. Having a lower quorum threshold may
allow a minority of the shareholders to make decisions about the Company, its
management and activities. In addition, most states in the United States require
that a notice of meeting be mailed to shareholders prior to the meeting date.
Additionally, in the United States, a director may not be able to vote on the
approval of any transaction in which the director has a interest. Generally,
most states in the United States require amendments to a company's articles of
incorporation to be approved by at least a majority of the votes cast by the
holders of the issued and outstanding shares. Some states, or some older
corporations, may require approval of amendments by 2/3 of the votes cast by the
holders of the issued and outstanding shares. In addition, in the United States
voting by separate voting groups may be required on the approval of any such
amendments. The Company's common shares are registered with the Securities and
Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). As a result, under Section 13 of the Act,
shareholders beneficially owning more than five percent (5%) of the Company's
common shares may be required to make filings with the Securities and Exchange
Commission relating to their ownership of the Company's common shares.
-52-
MATERIAL CONTRACTS
The following are material contracts entered into by the Company during the two
years preceding the date of this annual report:
1. Purchase and Sale Agreement by and between TMK Oil & Gas, Inc. and
Westport Petroleum Inc., dated March 1, 2004, relating to the sale of a
3% working interest in the West Ranch Field, Texas for $78,630
(US$60,000) proceeds, resulting in a net loss on sale of $11,031.
2. Letter of Intent by and among Halo Resources Ltd., The Sheridan
Platinum Group Ltd. and Mr. Pat Sheridan, dated July 5, 2004. See "Item
4. Information on the Company - Principal Properties - Duport
Property".
3. Head of Agreement by and among Halo Resources Ltd. and Wolfden
Resources Inc., dated November 12, 2004. See "Item 4. Information on
the Company - Principal Properties - Bachelor Lake Property".
EXCHANGE CONTROLS
There are no governmental laws, decrees, or regulations in Canada relating to
restrictions on the export or import of capital, or affecting the remittance of
interest, dividends, or other payments to non-resident holders of the Company's
common stock. Any remittances of dividends to United States residents are,
however, subject to a 15% withholding tax (10% if the shareholder is a
corporation owning at least 10% of the outstanding common stock of the Company)
pursuant to Article X of the reciprocal tax treaty between Canada and the United
States. See "Item 10. Additional Information - Taxation".
Except as provided in the Investment Canada Act, there are no limitations
specific to the rights of non-Canadians to hold or vote the common stock of the
Company under the laws of Canada or the Province of British Columbia or in the
charter documents of the Company.
The following discussion summarizes the principal features of the Investment
Canada Act for a non-resident who proposes to acquire the common shares.
The Investment Canada Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture (each an "entity") that is not a "Canadian"
as defined in the Investment Canada Act (a "non-Canadian"), unless after review,
the Director of Investments appointed by the minister responsible for the
Investment Canada Act is satisfied that the investment is likely to be of net
benefit to Canada. An investment in the common shares by a non-Canadian other
than a "WTO Investor" (as that term is defined by the Investment Canada Act, and
which term includes entities which are nationals of or are controlled by
nationals of member states of the World Trade Organization) when the Company was
not controlled by a WTO Investor, would be reviewable under the Investment
Canada Act if it was an investment to acquire control of the Company and the
value of the assets of the Company, as determined in accordance with the
regulations promulgated under the Investment Canada Act, equals or exceeds $5
million for direct acquisition and over $50 million for an indirect acquisition,
or if an order for review was made by the federal cabinet on the grounds that
the investment related to Canada's cultural heritage or national identity,
regardless of the value of the assets of the Company. An investment in the
common shares by a WTO Investor, or by a non-Canadian when the Company was
controlled by a WTO Investor, would be reviewable under the Investment Canada
Act if it was an investment to acquire control of the Company and the value of
the assets of the Company, as determined in accordance with the regulations
promulgated under the Investment Canada Act was not less than a specified
amount. A non-Canadian would acquire control of the Company for the purposes of
the Investment Canada Act if the non-Canadian acquired a majority of the common
shares. The acquisition of one third or more, but less than a majority of the
common shares would be presumed to be an acquisition of control of the Company
unless it could be established that, on the acquisition, the Company was not
controlled in fact by the acquirer through the ownership of the common shares.
Certain transactions relating to the common shares would be exempt from the
Investment Canada Act, including: (a) an acquisition of the common shares by a
person in the ordinary course of that person's business as a trader or dealer in
securities; (b) an acquisition of control of the Company in connection with the
realization of security granted for a loan or other financial assistance and not
for a purpose related to the provisions of the Investment Canada Act; and (c) an
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acquisition of control of the Company by reason of an amalgamation, merger,
consolidation or corporate reorganization following which the ultimate direct or
indirect control in fact of the Company, through the ownership of the common
shares, remained unchanged.
TAXATION
MATERIAL CANADIAN FEDERAL INCOME TAX CONSEQUENCES
Management of the Company considers that the following discussion fairly
describes the material Canadian federal income tax consequences applicable to a
holder of Common Stock of the Company who is a resident of the United States and
who is not a resident of Canada and who does not use or hold, and is not deemed
to use or hold, his shares of Common Stock of the Company in connection with
carrying on a business in Canada (a "non-resident shareholder").
This summary is based upon the current provisions of the Income Tax Act (Canada)
(the "ITA"), the regulations thereunder (the "Regulations"), the current
publicly announced administrative and assessing policies of Revenue Canada,
Taxation and all specific proposals (the "Tax Proposals") to amend the ITA and
Regulations announced by the Minister of Finance (Canada) prior to the date
hereof. This description is not exhaustive of all possible Canadian federal
income tax consequences and, except for the Tax Proposals, does not take into
account or anticipate any changes in law, whether by legislative, governmental
or judicial action.
DIVIDENDS
Dividends paid on the common stock of the Company to a non-resident will be
subject to withholding tax. The Canada- US Income Tax Convention (1980) (the
"Treaty") provides that the normal 25% withholding tax rate is reduced to 15% on
dividends paid on shares of a corporation resident in Canada (such as the
Company) to residents of the United States, and also provides for a further
reduction of this rate to 5% where the beneficial owner of the dividends is a
corporation which is a resident of the United States which owns at least 10% of
the voting shares of the corporation paying the dividend.
CAPITAL GAINS
In general, a non-resident of Canada is not subject to tax under the ITA with
respect to a capital gain realized upon the disposition of a share of a
corporation resident in Canada that is listed on a prescribed stock exchange.
For purposes of the ITA, the Company is listed on a prescribed stock exchange.
Non-residents of Canada who dispose of shares of the Company will be subject to
income tax in Canada with respect to capital gains if:
(a) the non-resident holder;
(b) persons with whom the non-resident holder did not deal at
arm's length; or
(c) the non-resident holder and persons with whom the non-resident
holder did not deal with at arm's length,
owned not less than 25% of the issued shares of any class or series of the
Company at any time during the five-year period preceding the disposition. In
the case of a non-resident holder to whom shares of the Company represent
taxable Canadian property and who is resident in the United States, no Canadian
taxes will be payable on a capital gain realized on such shares by reason of the
Treaty unless the value of such shares is derived principally from real property
situated in Canada. However, in such a case, certain transitional relief under
the Treaty may be available.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal income
tax consequences, under current law, applicable to a US Holder (as defined
below) of the Company's common stock. This discussion does not address
consequences peculiar to persons subject to special provisions of federal income
tax law, such as tax-exempt organizations, qualified retirement plans, financial
institutions, insurance companies, real estate investment trusts, regulated
investment companies, broker-dealers, nonresident alien individuals or foreign
corporations, and shareholders owning common stock representing 10% of the vote
and value of the Company. In addition, this discussion does not cover any state,
local or foreign tax consequences.
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The following discussion is based upon the sections of the Internal Revenue Code
of 1986, as amended (the "Code"), Treasury Regulations, published Internal
Revenue Service ("IRS") rulings, published administrative positions of the IRS
and court decisions that are currently applicable, any or all of which could be
materially and adversely changed, possibly on a retroactive basis, at any time.
In addition, this discussion does not consider the potential effects, both
adverse and beneficial of recently proposed legislation which, if enacted, could
be applied, possibly on a retroactive basis, at any time. Holders and
prospective holders of the Company's Common Stock should consult their own tax
advisors about the federal, state, local and foreign tax consequences of
purchasing, owning and disposing of shares of Common Stock of the Company.
US HOLDERS
As used herein, a "US Holder" is defined as (i) citizens or residents of the US,
or any state thereof, (ii) a corporation or other entity created or organized
under the laws of the US, or any political subdivision thereof, (iii) an estate
the income of which is subject to US federal income tax regardless of source or
that is otherwise subject to US federal income tax on a net income basis in
respect of the common stock, or (iv) a trust whose administration is subject to
the primary supervision of a US court and which has one or more US fiduciaries
who have the authority to control all substantial decisions of the trust, whose
ownership of common stock is not effectively connected with the conduct of a
trade or business in the United States and shareholders who acquired their stock
through the exercise of employee stock options or otherwise as compensation.
DISTRIBUTIONS ON SHARES OF COMMON STOCK
US Holders receiving dividend distributions (including constructive dividends)
with respect to the Company's common stock are required to include in gross
income for United States federal income tax purposes the gross amount of such
distributions to the extent that the Company has current or accumulated earnings
and profits, without reduction for any Canadian income tax withheld from such
distributions. Such Canadian tax withheld may be credited, subject to certain
limitations, against the US Holder's United States federal income tax liability
or, alternatively, may be deducted in computing the US Holder's United States
federal taxable income by those who itemize deductions. (See more detailed
discussion at "Foreign Tax Credit" below.) To the extent that distributions
exceed current or accumulated earnings and profits of the Company, they will be
treated first as a return of capital up to the US Holder's adjusted basis in the
common stock and thereafter as gain from the sale or exchange of such shares.
Preferential tax rates for long-term capital gains are applicable to a US Holder
which is an individual, estate or trust. There are currently no preferential tax
rates for long-term capital gains for a US Holder which is a corporation.
Dividends paid on the Company's common stock will not generally be eligible for
the dividends received deduction provided to corporations receiving dividends
from certain United States corporations.
FOREIGN TAX CREDIT
A US Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of the Company's common stock may be entitled, at
the option of the US Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim a
credit because a credit reduces United States federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on a year-by-year basis and applies to all
foreign taxes paid by (or withheld from) the US Holder during that year. Subject
to certain limitations, Canadian taxes withheld will be eligible for credit
against the US Holder's United States federal income taxes. Under the Code, the
limitation on foreign taxes eligible for credit is calculated separately with
respect to specific classes of income. Dividends paid by the Company generally
will be either "passive" income or "financial services" income, depending on the
particular US Holder's circumstances. Foreign tax credits allowable with respect
to each class of income cannot exceed the US federal income tax otherwise
payable with respect to such class of income. The consequences of the separate
limitations will depend on the nature and sources of each US Holder's income and
the deductions appropriately allocated or apportioned thereto. The availability
of the foreign tax credit and the application of the limitations on the credit
are fact specific and holders and prospective holders of common stock should
consult their own tax advisors regarding their individual circumstances.
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DISPOSITION OF SHARES OF COMMON STOCK
A US Holder will recognize gain or loss upon the sale of shares of common stock
equal to the difference, if any, between (i) the amount of cash plus the fair
market value of any property received; and (ii) the shareholder's tax basis in
the common stock. This gain or loss will be capital gain or loss if the shares
are a capital asset in the hands of the US Holder, and such gain or loss will be
long-term capital gain or loss if the US Holder has held the common stock for
more than one year. Gains and losses are netted and combined according to
special rules in arriving at the overall capital gain or loss for a particular
tax year. Deductions for net capital losses are subject to significant
limitations. For US Holders who are individuals, any unused portion of such net
capital loss may be carried over to be used in later tax years until such net
capital loss is thereby exhausted. For US Holders which are corporations (other
than corporations subject to Subchapter S of the Code), an unused net capital
loss may be carried back three years from the loss year and carried forward five
years from the loss year to be offset against capital gains until such net
capital loss is thereby exhausted.
OTHER CONSIDERATIONS
The Company has not determined whether it meets the definition of a "passive
foreign investment company" (a "PFIC"). It is unlikely that the Company meets
the definition of a "foreign personal holding company" (a "FPHC") or a
"controlled foreign corporation" (a "CFC") under current US law.
If more than 50% of the voting power or value of the Company were owned
(actually or constructively) by US Holders who each owned (actually or
constructively) 10% or more of the voting power of the Company's common shares
("10% Shareholders"), then the Company would become a CFC and each 10%
Shareholder would be required to include in its taxable income as a constructive
dividend an amount equal to its share of certain undistributed income of the
Company. If (1) more than 50% of the voting power or value of the Company's
common shares were owned (actually or constructively) by five or fewer
individuals who are citizens or residents of the United States and (2) 60% or
more of the Company's income consisted of certain interest, dividend or other
enumerated types of income, then the Company would be a FPHC. If the Company
were a FPHC, then each US Holder (regardless of the amount of the Company's
common shares owned by such US Holder) would be required to include in its
taxable income as a constructive dividend its share of the Company's
undistributed income of specific types.
If 75% or more of the Company's annual gross income has ever consisted of, or
ever consists of, "passive" income or if 50% or more of the average value of the
Company's assets in any year has ever consisted of, or ever consists of, assets
that produce, or are held for the production of, such "passive" income, then the
Company would be or would become a PFIC. The Company has not provided assurances
that it has not been and does not expect to become a PFIC. Please note that the
application of the PFIC provisions of the Code to resource companies is somewhat
unclear.
If the Company or any of its subsidiaries (if any) is deemed to be a PFIC, a
United States holder of the Company's common shares would be required to pay an
interest charge together with tax calculated at maximum tax rates on certain
"excess distributions" (defined to include certain dividends from a PFIC and any
gain on the sale of stock of a PFIC) unless such holder made an election either
to (1) include in his or her taxable income his or her pro rata share of the
PFIC's ordinary earnings and net capital gains under the Qualified Electing Fund
rules or (2) mark to market his or her Company common shares at the end of each
taxable year as set forth in Section 1296 of the Internal Revenue Code of 1986,
as amended. The elections require certain conditions be met such as filing on or
before the due date, as extended, for filing the shareholder's income tax return
for the first taxable year to which the election will apply.
INFORMATION REPORTING AND BACKUP WITHHOLDING
US information reporting requirements may apply with respect to the payment of
dividends to US Holders of the Company's shares. Under Treasury regulations
currently in effect, non-corporate holders may be subject to backup withholding
at a 31% rate with respect to dividends when such holder (1) fails to furnish or
certify a correct taxpayer identification number to the payor in the required
manner, (2) is notified by the IRS that it has failed to report payments of
interest or dividends properly or (3) fails, under certain circumstances, to
certify that it has been notified by the IRS that it is subject to backup
withholding for failure to report interest and dividend payments.
-56-
INSPECTION OF DOCUMENTS
Copies of the documents referred to in this report may be inspected at the
Company's corporate office at Suite 1305 - 1090 West Georgia Street, Vancouver,
British Columbia V6E 3V7, during normal business hours.
The Company's documents publicly filed with the SEC may also be viewed and
inspected at the SEC's Public Reference Room located at 450 Fifth Street, NW,
Washington, D.C. 20549. Copies may also be obtained from the SEC at prescribed
rates.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
- --------------------------------------------------------------------------------
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
- --------------------------------------------------------------------------------
The Company has changed its domicile and created Series 1 preferred stock. See
"Item 4. Information on the Company - History and Development of the Company",
"Item 10. Additional Information - Articles of Continuance and Articles" and
"Item 10. Additional Information - Description of Authorized Shares - Preferred
Shares." These actions have effected the rights of the Company's common
shareholders.
ITEM 15. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
An evaluation was performed under the supervision and with the participation of
the Company's management, including Mr. DeMare, the Company's President, CEO and
acting CFO, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rules 13a-15(b) and 15d-15(b) of
the Securities Exchange Act of 1934 (the "Exchange Act") as of August 31, 2004.
Based upon that evaluation, Mr. DeMare, concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission's rules and forms.
During the fiscal year ended August 31, 2004, there were no changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 16. [RESERVED]
- --------------------------------------------------------------------------------
Not applicable.
-57-
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.
- --------------------------------------------------------------------------------
The Board of Directors has determined that the Company has at least one audit
committee financial expert, Mr. Nick DeMare, who serves on the Company's audit
committee. Mr. DeMare is not considered to be an "independent director" as that
term is defined in Rule 4200(a)(15) of the National Association of Securities
Dealers.
ITEM 16B. CODE OF ETHICS.
- --------------------------------------------------------------------------------
The Company has not yet adopted a code of ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer, or controller, or persons performing similar functions. Given the
Company's current operations, management does not believe a code of ethics is
necessary at this stage of the Company's development.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- --------------------------------------------------------------------------------
AUDIT FEES
For the fiscal years ended August 31, 2004 and 2003, the Company's principal
accountant billed $11,615 and $14,350, respectively, for the audit of the
Company's annual financial statements or services that are normally provided by
the accountant in connection with statutory and regulatory filings or
engagements for those fiscal years.
AUDIT-RELATED FEES
For the fiscal years ended August 31, 2004 and 2003, the Company's principal
accountant billed $nil and $nil, respectively, for assurance and related
services that were reasonably related to the performance of the audit or review
of the Company's financial statements outside of those fees disclosed above
under "Audit Fees".
TAX FEES
For the fiscal years ended August 31, 2004 and 2003, the Company's principal
accountant billed $nil and $nil, respectively, for tax compliance, tax advice,
and tax planning services.
ALL OTHER FEES
For the fiscal years ended August 31, 2004 and 2003, the Company's principal
accountant billed $nil and $nil, respectively, for products and services other
than those set forth above.
PRE-APPROVAL POLICIES AND PROCEDURES
Prior to engaging the Company's accountants to perform a particular service, the
Company's audit committee obtains an estimate for the service to be performed.
The Company's audit committee reviews and pre-approves all audit and
audit-related services and the fees and other compensation related thereto, and
any non-audit services provided by the Company's external auditors. Provided the
pre-approval of the non-audit services is presented to the audit committee's
first scheduled meeting following such approval such authority may be delegated
by the audit committee to one or more independent members of the audit
committee. The audit committee in accordance with procedures for the Company
approved all of the services described above.
At no time since the commencement of the Company's most recently completed
financial year has the Company relied on the waiver in paragraph (c)(7)(i)(C) of
Rule 2-01 of Regulation S-X.
-58-
PRINCIPAL ACCOUNTANT SERVICES
To the best of the Company's knowledge, the percentage of hours expended on the
Company's principal accountant's engagement to audit the Company's financial
statements for the fiscal year ended August 31, 2004, that were attributed to
work performed by persons other than the principal accountant's full-time
permanent employees was less than fifty percent (50%).
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PERSONS.
- --------------------------------------------------------------------------------
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
See pages 61 (F-1) through 82 (F-22).
ITEM 18. FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 19. EXHIBITS.
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION PAGE
1.1 Certificate of Continuation and Notice of Articles for
Halo Resources Ltd. 83
1.2 Articles for Halo Resources Ltd. 88
4.1 Purchase and Sale Agreement by and between TMK Oil & Gas,
Inc. and Westport Petroleum Inc., dated March 1, 2004 126
4.2 Letter of Intent by and among Halo Resources Ltd., The
Sheridan Platinum Group Ltd. and Mr. Pat Sheridan,
dated July 5, 2004. 141
4.3 Heads of Agreement by and among Halo Resources Ltd. and
Wolfden Resources Inc., dated November 12, 2004. 145
4.16 Stock Option Plan 2004 N/A
12.1 Certification of Nick DeMare Pursuant to Rule 13a-14(a) 153
13.1 Certification of Nick DeMare Pursuant to 18 U.S.C. Section 1350 155
(1) Previously filed as an exhibit to the Company's Annual Report on Form 20-F,
filed with the Commission on March 12 ,2004. File number 0-30196.
-59-
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
HALO RESOURCES LTD.
Dated: February 2, 2005 /s/ Nick DeMare
---------------- ---------------------------------------
Nick DeMare,
President, Chief Executive Officer,
Chief Financial Officer and Director
-60-
- --------------------------------------------------------------------------------
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
AUGUST 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
F-1
-61-
AUDITORS' REPORT
To the Shareholders of
Halo Resources Ltd.
We have audited the consolidated balance sheets of Halo Resources Ltd. as at
August 31, 2004 and 2003 and the consolidated statements of loss and deficit and
cash flow for the years ended August 31, 2004, 2003 and 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). 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 August 31, 2004
and 2003 and the results of its operations and its cash flow for the years ended
August 31, 2004, 2003 and 2002 in accordance with Canadian generally accepted
accounting principles.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected assets, liabilities and shareholders' equity as at August
31, 2004 and 2003 and results of operations for the years ended August 31, 2004,
2003 and 2002 to the extent summarized in Note 11 to the consolidated financial
statements.
On December 6, 2004 we reported separately to the shareholders of Halo Resources
Ltd. on consolidated financial statements as at, and for the years ended, August
31, 2004 and 2003 audited in accordance with Canadian generally accepted
auditing standards.
/s/ D&H Group
Vancouver, BC
December 6, 2004, except as to CHARTERED ACCOUNTANTS
Note 12(b) which is as of December 24, 2004
F-2
D&H Group
A Partnership of Corporations
A Member of BHD Association with affiliated offices across Canada
and Internationally 10th Floor, 1333 West Broadway, Vancouver B.C. V6H
4C1 www.dhgroup.ca F 604-731-9923 T 604-731-5881
-62-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
AS AT AUGUST 31
2004 2003
$ $
ASSETS
CURRENT ASSETS
Cash 329,065 9,805
Amounts receivable 12,610 7,113
------------ ------------
341,675 16,918
PETROLEUM AND NATURAL GAS INTERESTS (Note 3) - 76,167
UNPROVEN MINERAL INTEREST (Note 3) 75,906 -
------------ ------------
417,581 93,085
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 62,965 19,046
ADVANCES (Note 4) - 1,019,012
------------ ------------
62,965 1,038,058
------------ ------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
SHARE CAPITAL (Note 5) 20,914,102 19,537,102
CONTRIBUTED SURPLUS 179,611 -
DEFICIT (20,739,097) (20,482,075)
------------ ------------
354,616 (944,973)
------------ ------------
417,581 93,085
============ ============
NATURE OF OPERATIONS (Notes 1, 4 and 11)
APPROVED BY THE BOARD
/s/ NICK DEMARE , Director
- ---------------------
/s/ WILLIAM LEE , Director
- ---------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-3
-63-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
FOR THE YEARS ENDED AUGUST 31
2004 2003 2002
$ $ $
REVENUES
Petroleum and natural gas sales 81,347 45,346 125,749
Interest and other 695 23,878 37,028
------------ ------------ ------------
82,042 69,224 162,777
------------ ------------ ------------
EXPENSES
Production 21,832 16,810 134,556
Depreciation, depletion and impairment 10,441 1,251,882 241,789
General and administrative 183,539 176,947 6,010,537
Stock-based compensation 179,611 - -
------------ ------------ ------------
395,423 1,445,639 6,386,882
------------ ------------ ------------
LOSS BEFORE THE FOLLOWING (313,381) (1,376,415) (6,224,105)
INTEREST EXPENSE (29,817) (60,741) (70,630)
WRITE-OFF OF AMOUNTS RECEIVABLE - (19,959) -
LOSS ON SALE OF MARKETABLE SECURITIES - (15,527) (13,239)
GAIN ON SETTLEMENT OF ADVANCES (Note 4) 97,207 - -
LOSS ON SALE OF PETROLEUM AND
NATURAL GAS INTERESTS (11,031) - -
WRITE-DOWN OF OTHER ASSETS - - (258,699)
------------ ------------ ------------
NET LOSS FOR THE YEAR (257,022) (1,472,642) (6,566,673)
DEFICIT - BEGINNING OF YEAR (20,482,075) (19,009,433) (12,442,760)
------------ ------------ ------------
DEFICIT - END OF YEAR (20,739,097) (20,482,075) (19,009,433)
============ ============= ============
LOSS PER COMMON SHARE - BASIC AND DILUTED $(0.05) $(0.50) $(2.24)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,654,354 2,926,859 2,926,859
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-4
-64-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED AUGUST 31
2004 2003 2002
$ $ $
CASH PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
Net loss for the year (257,022) (1,472,642) (6,566,673)
Items not involving cash
Depreciation, depletion and impairment 10,441 1,251,882 6,010,537
Stock-based compensation 179,611 - -
Interest expense 29,817 60,741 70,630
Write-off of amounts receivable - 19,959 -
Loss on sale of marketable securities - 15,527 13,239
Loss on sale of petroleum and natural gas interests 11,031 - -
Write-down of other assets - - 258,699
Gain on settlement of advances (97,207) - -
Effect of unrealized foreign exchange gain - - (24,199)
------------ ------------ ------------
(123,329) (124,533) (237,767)
(Increase) decrease in amounts receivable (5,497) (4,223) 26,093
Decrease in inventory - - 70,050
------------ ------------ ------------
Increase (decrease) in accounts payable and accrued liabilities 43,919 9,197 (40,907)
------------ ------------ ------------
(84,907) (119,559) (182,531)
------------ ------------ ------------
FINANCING ACTIVITIES
Shares issued for cash 1,377,000 - -
Repayment of advances (951,622) (117,405) -
------------ ------------ ------------
425,378 (117,405) -
------------ ------------ ------------
INVESTING ACTIVITIES
Additions to unproven mineral interests (75,906) - -
Additions to petroleum and natural gas interests (23,935) (319,757) (99,517)
Proceeds from sale of petroleum and natural gas interests 78,630 84,907 323,821
Proceeds from sale of marketable securities - 30,594 -
Other assets - 114,843 80,019
------------ ------------ ------------
(21,211) (89,413) 304,323
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 319,260 (326,377) 121,792
CASH - BEGINNING OF YEAR 9,805 336,182 214,390
------------ ------------ ------------
CASH - END OF YEAR 329,065 9,805 336,182
============ ============ ============
See also Note 10 for supplementary cash flow information.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-5
-65-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
1. NATURE OF OPERATIONS
Halo Resources Ltd. (the "Company") is a resource exploration company
which was most recently engaged in the acquisition, exploration and
development of crude oil and natural gas interests in the United
States. Effective March 1, 2004, the Company sold its remaining oil and
natural gas interest. On July 5, 2004, the Company entered into an
agreement to acquire an unproven mineral interest. On November 12,
2004, the Company entered into a further option agreement to acquire
additional unproven mineral interests. See also Notes 3 and 12(a).
The Company presently has no proven or probable reserves and on the
basis of information to date, it has not yet determined whether these
unproven mineral interests contain economically recoverable ore
reserves. Consequently the Company considers itself to be an
exploration stage company. The amounts shown as unproven mineral
interests and deferred costs represent costs incurred to date, less
amounts amortized and/or written off, and do not necessarily represent
present or future values. The underlying value of the unproven mineral
interests is entirely dependent on the existence of economically
recoverable reserves, securing and maintaining title and beneficial
interest, the ability of the Company to obtain the necessary financing
to complete development, and future profitable production.
As at August 31, 2004, the Company had working capital of $278,710.
Subsequent to August 31, 2004, the Company completed an equity
financing of approximately $6.4 million, as described in Note 11(b).
The Company considers that it has adequate financial resources to
maintain its core operations for the next fiscal year.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("Canadian
GAAP"). The significant differences between these principles and those
that would be applied under United States generally accepted accounting
principles ("US GAAP") are disclosed in Note 11.
The consolidated financial statements for the 2003 fiscal year included
the accounts of the Company and its wholly-owned subsidiaries, Trimark
Resources Inc. ("Trimark Inc."), Safari Petroleum, LLC ("Safari") and
TMK Oil & Gas Inc. ("TMK"). As described in Note 3(c), during the 2003
fiscal year the Company abandoned its net investment in Trimark Inc. On
August 31, 2004, the Company abandoned its investment in Safari which
was inactive throughout the 2004 fiscal year, and TMK which had sold
its remaining asset, as described in Note 3(b), and became inactive.
Intercompany balances and transactions are eliminated on consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity Canadian GAAP
requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenditures during the period. Actual results
may differ from those estimates.
F-6
-66-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
2. ACCOUNTING POLICIES (continued)
UNPROVEN MINERAL INTERESTS
Unproven mineral interests costs and exploration, development and field
support costs directly relating to mineral interests are deferred until
the interests to which they relate is placed into production, sold or
abandoned. The deferred costs will be amortized over the life of the
orebody following commencement of production or written off if the
mineral interest is sold or abandoned. Administration costs and other
exploration costs that do not relate to any specific mineral interest
are expensed as incurred.
On a periodic basis, management reviews the carrying values of deferred
unproven mineral interest acquisition and exploration expenditures with
a view to assessing whether there has been any impairment in value.
Management takes into consideration various information including, but
not limited to, results of exploration activities conducted to date,
estimated future metal prices, and reports and opinions of outside
geologists, mine engineers and consultants. When it is determined that
a project or interest will be abandoned or its carrying value has been
impaired, a provision is made for any expected loss on the project or
interest.
Although the Company has taken steps to verify title to the unproven
mineral interests, according to the usual industry standards for the
stage of exploration of such mineral interests, these procedures do not
guarantee the Company's title. Such mineral interests may be subject to
prior agreements or transfers and title may be affected by undetected
defects.
From time to time, the Company acquires or disposes of mineral
interests pursuant to the terms of option agreements. Options are
exercisable entirely at the discretion of the optionee and,
accordingly, are recorded as mineral interest costs or recoveries when
the payments are made or received.
PETROLEUM AND NATURAL GAS INTERESTS
The Company followed the full cost method of accounting for petroleum
and natural gas operations. Under this method all costs related to the
exploration for and development of petroleum and natural gas reserves
were capitalized on a country-by-country basis. Costs included lease
acquisition costs, geological and geophysical expenses, overhead
directly related to exploration and development activities and costs of
drilling both productive and non-productive wells. Proceeds from the
sale of properties were applied against capitalized costs, without any
gain or loss being recognized, unless such a sale would significantly
alter the rate of depletion and depreciation.
Depletion of exploration and development costs and depreciation of
production equipment was provided using the unit-of-production method
based upon estimated proven petroleum and natural gas reserves. The
costs of significant unevaluated properties were excluded from costs
subject to depletion. For depletion and depreciation purposes, relative
volumes of petroleum and natural gas production and reserves were
converted into equivalent units based upon relative energy content.
In applying the full cost method, the Company performed a ceiling test
whereby the carrying value of petroleum and natural gas properties and
production equipment, net of recorded future income taxes and the
accumulated provision for site restoration and abandonment costs, was
compared annually to an estimate of future net cash flow from the
production of proven reserves. Net cash flow was estimated using year
end prices, less estimated future general and administrative expenses,
financing costs and income taxes. Should this comparison indicate an
excess carrying value, the excess was charged against earnings.
F-7
-67-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
2. ACCOUNTING POLICIES (continued)
Substantially all of the Company's oil and gas exploration, development
and production activities were conducted jointly with others and,
accordingly, these consolidated financial statements reflected the
Company's proportionate interest in such activities.
ASSET RETIREMENT OBLIGATIONS
The fair value of a liability for an asset retirement obligation is
recognized when a reasonable estimate of fair value can be made. The
asset retirement obligation is recorded as a liability with a
corresponding increase to the carrying amount of the related long-lived
asset. Subsequently, the asset retirement cost is charged to earnings
using a systematic and rational method and is adjusted to reflect
period-to-period changes in the liability resulting from the passage of
time and revisions to either the timing or the amount of the original
estimate of undiscounted cash flow.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are assessed for impairment when events and
circumstances warrant. The carrying value of a long-lived asset is
impaired when the carrying amount exceeds the estimated undiscounted
net cash flow from use and fair value. In that event, the amount by
which the carrying value of an impaired long-lived asset exceeds its
fair value is charged to earnings.
REVENUE RECOGNITION
The Company recognized petroleum and natural gas revenues from its
interests in producing wells as oil and gas was produced and sold from
these wells. The Company had no gas balancing arrangements in place.
Oil and gas sold was not significantly different from the Company's
product entitlement.
CASH EQUIVALENTS
Cash includes cash and short-term deposits maturing within 90 days of
the original date of acquisition.
FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities are translated into Canadian dollars at
the balance sheet date rate of exchange and non-monetary assets and
liabilities at historical rates. Revenues and expenses are translated
at appropriate transaction date rates except for amortization,
depreciation and depletion, which are translated at historical rates.
Gains and losses resulting from the fluctuation of foreign exchange
rates have been included in the determination of income.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for at fair value as determined
by the Black-Scholes option pricing model using amounts that are
believed to approximate the volatility of the trading price of the
Company's stock, the expected lives of awards of stock-based
compensation, the fair value of the Company's stock and the risk-free
interest rate. The estimated fair value of awards of stock-based
compensation are charged to expense as awards vest, with offsetting
amounts recognized as contributed surplus.
F-8
-68-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
2. ACCOUNTING POLICIES (continued)
INCOME TAXES
Income tax liabilities and assets are recognized for the estimated
income tax consequences attributable to differences between the amounts
reported in the consolidated financial statements and their respective
tax bases, using enacted income tax rates. The effect of a change in
income tax rates on future income tax liabilities and assets is
recognized in income in the period that the change occurs. Future
income tax assets are recognized to the extent that they are considered
more likely than not to be realized.
EARNINGS (LOSS) PER SHARE
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding during the period. The computation of diluted earnings per
share assumes the conversion, exercise or contingent issuance of
securities only when such conversion, exercise or issuance would have a
dilutive effect on earnings per share. The dilutive effect of
convertible securities is reflected in diluted earnings per share by
application of the "if converted" method. The dilutive effect of
outstanding options and warrants and their equivalents is reflected in
diluted earnings per share by application of the treasury stock method.
3. RESOURCE INTERESTS
2004 2003
$ $
Unproven mineral interests
Acquisition costs 75,906 -
------------ ------------
Petroleum and natural gas interests
Exploration and development costs - 87,255
Less: accumulated depreciation,
depletion and impairment - (11,088)
------------ ------------
- 76,167
------------ ------------
75,906 76,167
============ ============
(a) Duport Property, Ontario
On July 5, 2004, the Company, The Sheridan Platinum Group
Ltd., and Pat Sheridan entered into a letter agreement whereby
the Company agreed to acquire a 100% interest in 100 mineral
claims (the "Duport Property") over an area of approximately
4,578 acres, located near Kenora, Ontario. Under the terms of
the agreement, the Company has the right to acquire the Duport
Property by paying $250,000 cash and issuing one million
common shares and $8 million in preferred shares of the
Company.
The preferred shares will have a term of five years and have
an annual dividend requirement of $50,000 in years one and two
and at 4% thereafter, are non-voting, non-convertible and can
be redeemed by the Company. In order to redeem the preferred
shares, the Company may at any time on or before the end of
the term of the preferred shares:
F-9
-69-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
3. RESOURCE INTERESTS (continued)
(i) make a cash payment of $8 million plus a $400,000
bonus, together with any accrued and unpaid
dividends; or
(ii) provided the dividends payable pursuant to the terms
of the preferred shares have been paid to date, the
Company may return the Duport Property to the
vendors.
If the preferred shares have not been redeemed the Company
will retract the preferred shares in consideration of $8
million plus accrued unpaid dividends payable in cash or
common shares of the Company.
The Company has also agreed to pay a 2.5% net smelter return
royalty ("NSR") on the first 1.5 million ounces of gold
produced and a 5% NSR on the excess. The Company will have the
right to buy back a portion of the NSR.
As of August 31, 2004, the Company has incurred $75,906 for
staking, due diligence, professional and legal costs relating
to the acquisition of the Duport Property.
Completion of the acquisition of the Duport Property is
subject to normal closing conditions including receipt of
final regulatory approvals.
(b) In January 2003, the Company earned a 3% working interest in
certain oil and gas leases, known as the West Ranch Field,
located in Jackson County, Texas by funding a development
program on the subject leases. Effective March 1, 2004, the
Company sold its interest in the West Ranch Field to an
arms-length private corporation for $78,630 (US $60,000)
proceeds and recorded a net loss on sale of $11,031.
(c) During the 2003 fiscal year, the Company incurred petroleum
expenditures totalling $232,502 on the unsuccessful drilling
of a side-track well on the Basil Project. In addition, the
Company did not participate in any further funding of
exploration activities or holding costs relating to the East
Lost Hills Project. In light of the results the Board of
Directors of the Company determined that the Company could no
longer provide further funding to Trimark Inc., which held the
Company's East Lost Hills and regional California petroleum
interests. Accordingly, during the 2003 fiscal year, the
Company recorded an impairment charge of $1,240,794,
representing the Company's remaining net investment in Trimark
Inc. Effective November 30, 2002, the Company ceased to record
the activities of Trimark Inc.
(d) No write-down was required as a result of the ceiling test
performed effective August 31, 2003. The ceiling test is a
cost-recovery test and is not intended to result in an
estimate of fair market value.
(e) See also Note 12(a).
F-10
-70-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
4. ADVANCES
2004 2003
$ $
Advances, bearing interest at 10%
per annum, due September 1, 2005 (a) - 718,870
Advances, non-interest bearing,
due September 1, 2005 (b) - 300,142
------------ ------------
- 1,019,012
============ ============
(a) The Company had previously received advances from a related
party and a non-related third party. The related party is a
public company which certain of its officers and directors are
also officers and directors of the Company. During the 2004
fiscal year, the Company negotiated a settlement of the
$748,687 which was outstanding and paid $688,079 cash,
resulting in a gain of $60,608.
(b) Advances had been previously made to the Company by
shareholders and directors of the Company for working capital
purposes. During fiscal 2004, the Company negotiated a
settlement of the $300,142 which was outstanding and paid
$263,543 cash, resulting in a gain of $36,599.
5. SHARE CAPITAL
Authorized - unlimited common shares without par value
Issued and outstanding -
2004 2003 2002
------------------------ ------------------------ ------------------------
NUMBER $ NUMBER $ NUMBER $
------------------------ ------------------------ ------------------------
Balance, beginning of year 2,926,859 19,537,102 2,926,859 19,537,102 2,926,859 19,537,102
----------- ----------- ----------- ----------- ----------- -----------
Issued during the year
For cash
Private placements 6,000,000 1,290,000 - - - -
Exercise of warrants 435,000 87,000 - - - -
For finder's fees 82,000 24,600 - - - -
----------- ----------- ----------- ----------- ----------- -----------
6,517,000 1,401,600 - - - -
Less: share issue costs - (24,600) - - - -
----------- ----------- ----------- ----------- ----------- -----------
6,517,000 1,377,000 - - - -
----------- ----------- ----------- ----------- ----------- -----------
Balance, end of year 9,443,859 20,914,102 2,926,859 19,537,102 2,926,859 19,537,102
=========== =========== =========== =========== =========== ===========
F-11
-71-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
5. SHARE CAPITAL (continued)
(a) During the 2004 fiscal year, the Company:
i) completed a non-brokered private placement of
3,400,000 units at $0.15 per unit, for $510,000 cash
proceeds. Each unit comprised one common share and
one share purchase warrant. Each warrant entitles the
holder to purchase an additional common share for a
period of two years, at $0.20 per share on or before
March 4, 2005, and at $0.25 per share on or before
March 4, 2006. 281,667 units were purchased by the
President of the Company; and
ii) completed a non-brokered private placement of
2,600,000 units at $0.30 per unit, for $780,000 cash
proceeds. Each unit comprised one common share and
one share purchase warrant. Each warrant entitles the
holder to purchase an additional common share for a
period of two years, at $0.40 per share on or before
April 15, 2006. 71,000 units were purchased by the
President of the Company. The Company also issued
82,000 units, valued at $0.30 per unit, in
consideration of $24,600 of a finder's fee. The
finder's fee units have the same terms as the private
placement units
(b) The Company has established a rolling stock option plan (the
"Plan"), in which the maximum number of common shares which
can be reserved for issuance under the Plan is 10% of the
issued and outstanding shares of the Company. The exercise
price of the options is set at the Company's closing share
price on the day before the grant date, less allowable
discounts in accordance with the policies of the TSX Venture
Exchange. The options have a maximum term of ten years.
A summary of the Company's options at August 31, 2004, 2003
and 2002, and the changes for the fiscal years ending on those
dates is presented below:
----------------------- ----------------------- ------------------------
2004 2003 2002
----------------------- ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF OPTIONS EXERCISE OF OPTIONS EXERCISE OF OPTIONS EXERCISE
OUTSTANDING PRICE OUTSTANDING PRICE OUTSTANDING PRICE
$ $ $
Balance,
beginning of year 92,857 0.40 125,000 0.40 226,715 6.44
Granted 810,000 0.61 - - 7,143 0.40
Cancelled/expired (92,857) 0.40 (32,143) 0.40 (108,858) 1.97
----------- ----------- -----------
Balance, end of year 810,000 0.61 92,857 0.40 125,000 0.40
=========== =========== ===========
The following table summarizes information about the stock
options outstanding and exercisable at August 31, 2004
NUMBER OF NUMBER OF WEIGHTED AVERAGE
OPTIONS OPTIONS EXERCISE REMAINING WEIGHTED AVERAGE
OUTSTANDING EXERCISABLE PRICE CONTRACTUAL LIFE EXERCISE PRICE
750,000 187,500 $0.60 2.75 years $0.60
60,000 60,000 $0.75 2.89 years $0.75
------- -------
810,000 247,500
======= =======
F-12
-72-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
5. SHARE CAPITAL (continued)
The fair value of stock options granted to employees,
directors and consultants in the 2004 fiscal year is estimated
on the dates of grants using the Black-Scholes option pricing
model with the following assumptions used for the grants made:
Risk-free interest rate 2.28% - 2.53%
Estimated volatility 105% - 106%
Expected life 1.5 years
Expected dividend yield 0%
The weighted average fair value per share of stock options,
calculated using the Black-Scholes option pricing model,
granted during the 2004 fiscal year to the Company's
employees, directors and consultants was $0.40 per share.
Option-pricing models require the use of estimates and
assumptions including the expected volatility. Changes in the
underlying assumptions can materially affect the fair value
estimates and, therefore, existing models do not necessarily
provide reliable measure of the fair value of the Company's
stock options.
(c) A summary of the number of common shares reserved pursuant to
the Company's warrants outstanding at August 31, 2004 and 2003
and the changes for the years ending on those dates is as
follows:
---------- ---------- ----------
2004 2003 2002
---------- ---------- ----------
Balance, beginning of year - 468,857 891,867
Issued pursuant to private placements 6,000,000 - -
Issued for finder's fee 82,000 - -
Exercised (435,000) - -
Expired - (468,857) (423,010)
---------- ---------- ----------
Balance, end of year 5,647,000 - 468,857
========== ========== ==========
Common shares reserved pursuant to warrants outstanding at
August 31, 2004, are as follows:
------------ -------------- ---------------------------
NUMBER EXERCISE PRICE EXPIRY DATE
$
------------ -------------- ---------------------------
2,965,000 0.20 / 0.25 March 4, 2005/March 4, 2006
2,682,000 0.40 April 15, 2006
------------
5,647,000
============
(d) See also Note 3(a) and 12.
F-13
-73-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
6. INCOME TAXES
As at August 31, 2004, the Company has accumulated non-capital losses
for income tax purposes of approximately $2,264,000, expiring from 2005
to 2014, which are available for application against future taxable
income, the related benefits of which have not been recognized in these
financial statements.
7. RELATED PARTY TRANSACTIONS
(a) During the 2004 fiscal year, the Company was charged $69,638
(2003 - $153,064; 2002 - $185,020) for management,
professional, accounting and administrative services provided
by companies controlled by current and former officers of the
Company. As at August 31, 2004, accounts payable and accrued
liabilities include $6,503 due to these related parties.
(b) During the 2003 fiscal year the former President of the
Company repaid the outstanding principal balance of $114,843
and interest income of $2,242 (2002 - $8,831) to the Company.
(c) Other related party transactions are disclosed elsewhere in
these consolidated financial statements.
8. SEGMENTED INFORMATION
During the 2004 fiscal year, the Company's principal activities were
the development of petroleum properties in the United States and the
acquisition of unproven mineral interests in Canada. As at August 31,
2004, the Company had only recorded deferred costs relating to the
unproven mineral interest. The unproven mineral interest and the
Company's corporate assets are located in Canada. Identifiable assets,
revenues and net loss in each of these geographic areas are as follows:
----------------------------------------------
2004
----------------------------------------------
IDENTIFIABLE NET
ASSETS REVENUES INCOME (LOSS)
$ $ $
United States - petroleum operations - 81,347 169,728
Canada - mineral operations 75,906 - -
Canada - corporate 341,675 695 (426,750)
------------ ------------ ------------
417,581 82,042 (257,022)
============ ============ ============
----------------------------------------------
2003
----------------------------------------------
IDENTIFIABLE NET
ASSETS REVENUES INCOME (LOSS)
$ $ $
United States - petroleum operations 80,226 68,800 (967,993)
Canada - corporate 12,859 424 (504,649)
------------ ------------ ------------
93,085 69,224 (1,472,642)
============ ============ ============
F-14
-74-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
8. SEGMENTED INFORMATION (continued)
----------------------------------------------
2002
----------------------------------------------
IDENTIFIABLE NET
ASSETS REVENUES INCOME (LOSS)
$ $ $
United States - petroleum operations 1,250,540 139,280 (6,253,150)
Canada - corporate 379,681 23,497 (313,523)
------------ ------------ ------------
1,631,221 162,777 (6,566,673)
============ ============ ============
9. FINANCIAL INSTRUMENTS
The fair values of financial instruments at August 31, 2004 and 2003,
were estimated based on relevant market information and the nature and
terms of financial instruments. Management is not aware of any factors
which would significantly affect the estimated fair market amounts,
however, such amounts have not been comprehensively revalued for
purposes of these financial statements. Disclosure subsequent to the
balance sheet dates and estimates of fair value at dates subsequent to
August 31, 2004 and 2003 may differ significantly from that presented.
Fair value approximates the amounts reflected in the financial
statements for cash, amounts receivable and accounts payable and
accrued liabilities.
10. SUPPLEMENTARY CASH FLOW INFORMATION
Non-cash operating, investing and financing activities were conducted
by the Company as follows:
------------ ------------ ------------
2004 2003 2002
$ $ $
------------ ------------ ------------
Operating activities
Reversal of accounts payable and
accrued liabilities - - (169,385)
============ ============ ============
Investing activities
Reversal of accounts payable and
accrued liabilities - - 169,385
============ ============ ============
Financing activities
Shares issued for finder's fees 24,600 - -
Share issue costs (24,600) - -
------------ ------------ ------------
- - -
============ ============ ============
Other supplementary cash flow information
------------ ------------ ------------
2004 2003 2002
$ $ $
------------ ------------ ------------
Interest paid in cash 105,484 - -
============ ============ ============
Income taxes paid in cash - - -
============ ============ ============
F-15
-75-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
(a) The consolidated financial statements of the Company are
presented in accordance with Canadian GAAP. Canadian GAAP
differs in certain material respects from US GAAP. The
material differences between Canadian and US GAAP, in respect
of these consolidated financial statements, are summarized in
the tables below.
Consolidated Statement of Loss
2004 2003 2002
$ $ $
Net loss under Canadian GAAP (257,022) (1,472,642) (6,566,673)
Adjustments for related party transactions (i) - - 1,928,229
Unproven mineral interest expensed (ii) (75,906) - -
Stock-based compensation (iv) - - (74,614)
Other compensation expense (vi) (15,503) - -
Gain on settlement (vii) (97,207) - -
Additional depreciation, depletion
and amortization (ix) - (500) -
------------ ------------ ------------
Net loss under US GAAP (445,638) (1,473,142) (4,713,058)
============ ============ ============
Loss per share under US GAAP (0.08) (0.50) (1.61)
============ ============ ============
Consolidated Balance Sheet
2004 2003
$ $
Total assets under Canadian GAAP 417,581 93,085
Unproven mineral interest expensed (ii) (75,906) -
Deferred tax asset (v) 890,000 780,000
Less: Valuation allowance (v) (890,000) (780,000)
Asset retirement cost (ix) - 7,400
------------ ------------
Total assets under US GAAP 341,675 100,485
============ ============
Total liabilities under Canadian GAAP 62,965 1,038,058
Asset retirement obligations (ix) - 7,900
Discount on advances (x) - (60,028)
------------ ------------
Total liabilities under US GAAP 62,965 985,930
============ ============
Total shareholders' equity under Canadian GAAP 354,616 (944,973)
Unproven mineral interest expensed (ii) (75,906) -
Additional depreciation, depletion and amortization (ix) - (500)
Discount on advances (x) - 60,028
------------ ------------
Total shareholders' equity under US GAAP 278,710 (885,445)
============ ============
F-16
-76-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
(i) Capital Contributions with Respect to Related Party
Transactions
During the 1999 fiscal year, the Company acquired and
disposed of certain petroleum interests with Hilton
for a combination of monetary and non-monetary
consideration.
US GAAP requires that certain transfers of
non-monetary assets to a company by its promoters or
shareholders, in exchange for stock, should generally
be recorded at the transferor's historical cost
basis, whereas under Canadian GAAP, transfers of
non-monetary assets may be recorded based on the fair
value of either the stock issued or the assets
acquired under certain circumstances. Under Canadian
GAAP these transactions were recorded at their fair
values. The transactions have been adjusted to
reflect the transactions based on the historical cost
basis.
The net loss under US GAAP for the 2002 fiscal year
has also been adjusted for the subsequent
amortization and impairment charges of these
petroleum interest acquisitions costs. There was no
impact on the 2003 and 2004 fiscal years.
(ii) Unproven Mineral Interests
Unproven mineral interests and deferred exploration
costs are accounted for in accordance with Canadian
GAAP as disclosed in Note 2. The Company has
determined for US GAAP purposes to expense the
acquisition and exploration costs relating to
unproven mineral interests as incurred. In addition,
US GAAP requires that exploration costs not be
capitalized until a positive feasibility study is
completed. The capitalized costs of such claims would
then be assessed for impairment, on a periodic basis,
to ensure that the carrying value can be recovered on
an undiscounted cash flow basis. If the carrying
value cannot be recovered on this basis, the mineral
claims would be written down to net recoverable value
on a discounted cash flow basis.
(iii) Ceiling Test on Petroleum Interests
US GAAP requires that the net book value of proved
petroleum interests not exceed the sum of the present
value of estimated future net revenues (determined
using current prices of petroleum production less
estimated future expenditures to be incurred in
developing and producing the proved reserves,
discounted at ten percent). This ceiling test was
performed effective August 31, 2003 and it was
determined that no additional write-down of proved
petroleum interests was necessary.
F-17
-77-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
(iv) Stock-Based Compensation
The Company grants stock options which reserves
common shares for issuance to employees and
directors. Before the 2003 fiscal year, the issuance
of stock options was not recognized for accounting
purposes under Canadian GAAP. Under US GAAP, the
issuance of stock options requires an assessment to
determine stock based compensation. Accordingly, the
Company has applied the provisions of Statement of
Financial Accounting Standards ("SFAS") 123
Accounting for Stock-Based Compensation to account
for and calculate stock-based compensation under US
GAAP using the fair value method.
The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option
pricing model with the following assumptions used for
grants in the 2002 fiscal year:
Risk-free interest rate 4.54%
Expected volatility 118%
Expected lives 3 years
Expected dividend yield 0%
No options were granted during the 2003 fiscal year.
For the 2004 fiscal year, the Company believes that
its accounting for stock options complies with SFAS
123.
(v) Income Tax
Under Canadian GAAP, deferred tax assets relating to
the potential benefit of income tax loss
carryforwards are not recognized unless there is
virtual certainty of realization of the benefit. US
GAAP provides similar treatment, but requires the
benefit be recognized and a valuation allowance be
recognized to fully offset the deferred tax asset.
As at August 31, 2004, the Company has fully reserved
the $890,000 tax benefit of operating loss
carryforwards, by a valuation allowance of the same
amount, because the likelihood of realization of the
tax benefit cannot be determined. Of the total tax
benefit, $145,000 is attributable to the 2004 fiscal
year.
(vi) Private Placements of Common Stock
The Company conducts the majority of its equity
financings pursuant to private placements. Under the
policies of the TSX Venture, the Company may provide
a discount off the market price of the Company's
common stock. US GAAP does not permit a discount from
the market price. US GAAP requires the recognition of
the market value of the Company's common stock as a
credit to share capital, with a charge to operations
for the portion of the discount relating to equity
financings conducted with officers and directors of
the Company and a charge to shareholders' equity, as
a capital distribution, for the discount relating to
the remaining portion of the equity financings.
F-18
-78-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
Under US GAAP, loss and capital distributions for the
year ended August 31, 2004 would increase by $15,503
(2003 - $nil; 2002 - $nil) and $206,497 (2003 - $nil;
2002 - $nil), respectively, and share capital, as at
August 31, 2004 would increase by $1,183,402 (2003 -
$961,402; 2002 - $961,402). There is no net change to
shareholders' equity.
(vii) Settlement with Related Parties
US GAAP requires that gains on settlement of advances
with related parties be credited to deficit. There is
no net change in shareholders' equity.
(viii) Functional Currency
The Company's functional currency is the Canadian
dollar.
(ix) Asset Retirement Obligations
The Company adopted SFAS 143 "Asset Retirement
Obligations" for US GAAP reporting purposes on
September 1, 2003. SFAS 143 addresses financial
accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143
requires companies to record the present value of
obligations associated with the retirement of
tangible long-lived assets in the period in which it
is incurred. The liability is capitalized as part of
the related long-lived asset's carrying amount. Over
time, accretion of the liability is recognized as an
operating expense and the capitalized cost is
depreciated over the expected useful life of the
related asset. The Company's asset retirement
obligations relate primarily to the plugging,
dismantlement, removal, site reclamation and similar
activities of its petroleum and natural gas
interests. Prior to adoption of SFAS 143, such
obligations were accrued ratably over the productive
lives of the assets through its depreciation,
depletion and amortization of petroleum and natural
gas interests without recognizing a separate
liability for such amounts.
At the time of adoption, total assets increased by
$7,500, and total liabilities increased by $7,500.
The amounts recognized upon adoption are based upon
numerous estimates and assumptions, including future
retirement costs, future recoverable quantities of
petroleum and natural gas, future inflation rates and
the credit-adjusted risk free interest rate. Changes
in asset retirement obligations during the 2004 and
2003 fiscal years were:
2004 2003
$ $
Asset retirement obligations at beginning of year 7,900 -
Liabilities incurred - 7,500
Liabilities settled (7,900) -
Accretion expense (included in depreciation) - 400
------------ ------------
Asset retirement obligation at end of year - 7,900
Less: current portion - -
------------ ------------
Long-term portion - 7,900
============ ============
F-19
-79-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
The Company will adopt Section 3110 "Asset Retirement
Obligations" of the CICA Handbook, which is
harmonious with SFAS 143, on September 1, 2004 and
had no asset retirements obligations at at August 31,
2004.
(x) Imputed Interest on Long-Term Debt
US GAAP requires that interest be imputed on debt
that does not bear interest. The Company has imputed
interest at its estimated incremental borrowing rate
of 10%, with an offsetting charge to retained
earnings as the debt is held by related parties.
(xi) Development Stage Company
The Company is in the exploration stage and, as of
July 1, 2004, is considered a development stage
company as defined by SFAS 7. To August 31, 2004, the
Company has accumulated a deficit of $166,197 while
in the development stage.
(b) The Company's consolidated statements of cash flow comply with
US GAAP.
(c) New Accounting Standards
In May 2003, the Financial Accounting Standards Board ("FASB")
issued SFAS 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY", which
addresses how to classify and measure certain financial
instruments with characteristics of both liabilities (or
assets in some circumstances) and equity. SFAS 150 is
effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15,
2003. Adoption of SFAS 150 on July 1, 2003 had no impact on
the Company's financial position and results of operations.
In January 2003, the FASB issued Interpretation No. 46
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES" ("FIN 46")
(revised December 2003). FIN 46 clarifies the application of
Accounting Research Bulletin 51 "CONSOLIDATED FINANCIAL
STATEMENTS" to only certain entities in which equity investors
do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the
equity to finance its activities without additional
subordinated financial support from other parties. FIN 46
applies immediately to variable interest entities created
after January 31, 2003, and the variable interest entities
obtained after that date. It applies at the end of the first
annual reporting period beginning after June 15, 2003, to
variable interests in which an enterprise holds a variable
interest which was acquired before February 1, 2003. Adoption
of FIN 46 on January 1, 2004 will not materially impact the
Company's financial position or results of operations.
A similar guideline has been introduced in Canada, Accounting
Guideline 15 "CONSOLIDATION OF VARIABLE INTEREST ENTITIES".
This guideline applies to annual and interim periods beginning
on or after November 1, 2004. The Company is continuing to
evaluate the potential impact of Accounting Guideline 15.
F-20
-80-
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
In July 2003, the CICA released Section 1100 "GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES". This new section establishes
standards for financial reporting in accordance with generally
accepted accounting principles. It describes what constitutes
Canadian GAAP and its sources, replacing "FINANCIAL STATEMENT
CONCEPTS" paragraph 1000.59-61. Also, in July 2003, the CICA
released Section 1400, "GENERAL STANDARDS OF FINANCIAL
STATEMENT PRESENTATION". This section clarifies what
constitutes fair presentation in accordance with Canadian
GAAP. Both these sections are effective for fiscal years
beginning on or after October 1, 2003 and the Company is
currently evaluating their impact.
In December 2004 the FASB issued SFAS 123(r), "SHARE-BASED
PAYMENT". This statement requires all entities to recognize
compensation expenses in an amount equal to the fair value of
share-based payments granted to employees. The Company
believes the requirements of SFAS 123(R) are equivalent to
CICA 3870 "STOCK-BASED COMPENSATION AND OTHER STOCK-BASED
PAYMENTS", which the Company adopted effective September 1,
2002. The Company therefore does not anticipate the adoption
of SFAS 123(R) for US financial reporting purposes will have
an impact on the Company's financial position and results of
operations.
12. SUBSEQUENT EVENTS
(a) On November 12, 2004, the Company entered into an option
agreement, with Wolfden Resources Inc. ("Wolfden"), whereby
Wolfden assigned to the Company, Wolfden's option to earn a
50% undivided interest in two mining concessions and 51
mineral claims (the "Bachelor Lake Property"), located in the
La Sueur Township, Quebec. The Company can acquire Wolfden's
option by paying, on closing, $1.25 million and issuing
800,000 units, with each unit comprising one common share and
one-half warrant. Each whole warrant will entitle Wolfden to
acquire an additional common share at a price of $1.50 for a
period of two years. Effective as of November 12, 2004, the
Company will also assume the balance of Wolfden's remaining
$1.4 million of expenditure commitments under Wolfden's
underlying option agreement with the vendor. Upon earning the
50% option interest, the Company will issue a further 400,000
common shares to Wolfden. If project financing is arranged and
the Bachelor Lake Property achieves commercial production, the
Company will pay to Wolfden a further $250,000, issue 250,000
common shares upon 50,000 ounces of gold or gold equivalent
having been produced and a 0.5% NSR.
A director of the Company is also a director and officer of
Wolfden.
(b) On December 24, 2004, the Company completed a brokered private
placement of (i) 4,342,951 flow- through units (the "FT
Units") at a price of $0.95 per FT Unit; and (ii) 2,673,530
units (the "Non FT Units") at a price of $0.85 per Non FT
Unit, for total gross proceeds of $6,398,304. Each FT Unit
consisted of one common share and one-half share purchase
warrant (the "FT Warrant"). Each full FT Warrant entitles the
holder to purchase one further share of the Company for a
period of two years, at a price of $1.25 on or before December
23, 2005 and, thereafter, at a price of $1.50 on or before
December 23, 2006. Each Non FT Unit consists of one common
share and one share purchase warrant (the "Non FT Warrant").
Each full Non FT Warrant entitles the holder to purchase
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HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004, 2003 AND 2002
12. SUBSEQUENT EVENTS (continued)
one further share of the Company for a period of two years, at
a price of $1.10 on or before December 23, 2005 and,
thereafter, at a price of $1.35 on or before December 23,
2006.
The Company paid the agents a cash commission of $479,873 and
issued 701,647 warrants (the "Agents' Warrants"). Each Agents'
Warrant is exercisable to purchase one common share at a price
of $1.05 on or before December 23, 2006.
The Company also issued 40,000 units (the "Corporate Finance
Units"). Each Corporate Finance Unit is comprised of one
common share and one-half share purchase warrant having the
same terms as the Non FT Unit.
(c) Subsequent to August 31, 2004, the Company granted stock
options to purchase 150,000 common shares of the Company at
$0.70 per share and 50,000 shares at $0.85 per share, expiring
September 27, 2007 and October 18, 2007, respectively.
(d) On November 2, 2004, the shareholders of the Company approved
the authorization of an unlimited number of preferred shares
in the Company's share capital.
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