<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
AMENDMENT No. 1
(Mark One)
[X] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended
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 ___________
BIRCH MOUNTAIN RESOURCES LTD.
(Exact Name of Registrant as Specified in its Charter)
ALBERTA, CANADA
(Jurisdiction of Incorporation or Organization)
3100, 205 - 5TH AVE. S.W., CALGARY, ALBERTA, CANADA T2P 2V7
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON SHARES
(Title of class)
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
<PAGE> 2
NONE
Indicate the number of outstanding shares of each of the registrant's
classes of common stock as of the date of this registration:
As of October 10, 2000:
33,552,966 COMMON SHARES
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.
NOT APPLICABLE
Indicate by check mark which financial statement item the registrant has elected
to follow.
ITEM 17 X ITEM 18
------- -------
(APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) for the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
NOT APPLICABLE
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page #
<S> <C>
DESCRIPTION OF THE BUSINESS ......................................................... -1-
Introduction ................................................................... -1-
General Development During Past Five Years ................................ -2-
Mineral Exploration .................................................. -2-
Exploration Research ................................................. -2-
Technology Research and Development .................................. -2-
Plan of Operation for 2000 and the First Six Months of 2001 .................... -3-
Principal Products and Markets ............................................ -3-
Sales and Revenue During Past Three Years ................................. -3-
Special Characteristics of Operations or Industry .............................. -4-
Contractual and Financing Risks ........................................... -4-
Technology Development Risk ............................................... -4-
Intellectual Property Protection .......................................... -4-
Exploration and Development Risk .......................................... -4-
Environmental ............................................................. -5-
Management ................................................................ -5-
Shareholders Rights Plan .................................................. -5-
Legal and Regulatory Risks ................................................ -6-
Gold and Precious Metal Pricing Risks ..................................... -6-
DESCRIPTION OF PROPERTIES ........................................................... -6-
Metallurgical Laboratory ....................................................... -6-
Core Laboratory ................................................................ -6-
Exploration Properties ......................................................... -7-
Alberta Properties ........................................................ -7-
Manitoba Properties ....................................................... -8-
Prairie Gold Exploration ....................................................... -8-
Prairie Gold Model ........................................................ -8-
Prairie Gold in Athabasca ................................................. -9-
Prairie Gold in Dawson Bay ................................................ -13-
LEGAL PROCEEDINGS ................................................................... -14-
CONTROL OF THE REGISTRANT/COMPANY ................................................... -14-
NATURE OF THE TRADING MARKET ........................................................ -15-
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS .................. -16-
Canadian Exchange Controls ..................................................... -16-
TAXATION ............................................................................ -17-
Disposition of Common Shares ................................................... -18-
Dividends ...................................................................... -18-
Capital Gains .................................................................. -19-
Certain United States Federal Income Tax Consequences .......................... -19-
U.S. Holders ................................................................... -19-
Distributions on Common Shares of the Company .................................. -20-
Foreign Tax Credit ............................................................. -20-
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
Disposition of Common Shares of the Company .................................... -21-
SELECTED FINANCIAL DATA ............................................................. -21-
Stock Based Compensation ....................................................... -24-
Escrow Shares .................................................................. -24-
Income Taxes ................................................................... -24-
Stock Options .................................................................. -24-
Recent Accounting Developments ................................................. -24-
Dividends ...................................................................... -25-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -25-
Liquidity and Capital Resources ................................................ -25-
Results of Operations .......................................................... -26-
Corporate Income and Expenses .................................................. -27-
RISKS AND UNCERTAINTIES ............................................................. -27-
DIRECTORS AND EXECUTIVE OFFICERS .................................................... -28-
Profiles of Directors and Executive Officers ................................... -28-
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS .................................... -30-
OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES ...................... -30-
Stock Option Grants ............................................................ -30-
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS ...................................... -31-
DESCRIPTION OF SECURITIES TO BE REGISTERED .......................................... -32-
Rights Plan .................................................................... -32-
DEFAULTS UPON SENIOR SECURITIES ..................................................... -33-
CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES ............. -33-
FINANCIAL STATEMENTS ................................................................ -33-
FINANCIAL STATEMENTS AND EXHIBITS ................................................... -33-
</TABLE>
<PAGE> 5
FORWARD-LOOKING STATEMENTS
The information presented in or incorporated by reference in this report
includes both historical information and "forward-looking statements" (within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) relating to the future results of Birch Mountain
Resources Ltd. (the "Company" or "Birch") (including projections and business
trends), which involve risks and uncertainties. Except where the context
indicates otherwise, "Company" means Birch Mountain Resources Ltd., its
predecessors and subsidiaries.
Numerous factors could cause actual results to differ materially from those in
the forward-looking statements, including without limitation the risk of
developing new technology, protection of intellectual property, exploration and
development of mineral properties and related activities, the ability to finance
future exploration and development, market prices for precious metals, the
ability to produce and market precious metals, the actions of government
authorities including increases in taxes, changes in environmental and other
regulations, and changes in government, and the dependence upon the abilities
and continued participation of certain key employees of the Company.
Reference should be made to "Risk Factors". As a result of the foregoing and
other factors, no assurance can be given as to future results, levels of
activity and achievements.
Investors are cautioned not to put undue reliance on forward-looking statements,
and should not infer that there has been no change in the affairs of the Company
since the date of this report that would warrant any modification of any
forward-looking statement made in this document or other documents filed
periodically with securities regulators. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this notice. The Company
disclaims any intent or obligation to update publicly these forward-looking
statements, whether as a result of new information, future events or otherwise.
CURRENCY AND EXCHANGE RATES
All dollar amounts set forth in this Registration Statement are in Canadian
dollars, except where otherwise indicated. The following table sets forth (i)
the exchange rates for the Canadian dollar, expressed in U.S. dollars, in effect
at the end of each of the financial periods indicated; (ii) the average exchange
rates based on the last day of each month during such periods; and (iii) the
high and low exchange rates during such periods, in each case based on the noon
buying rate in New York City for cable transfers in Canadian dollars, as
certified for customs purposes by the Federal Reserve Bank of New York.
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDING ENDING ENDING ENDING ENDING ENDING
JUNE DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
30, 2000 31, 1999 31, 1998 31, 1997 31, 1996 31, 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
END OF PERIOD 1.4828 1.4720 1.5333 1.4305 1.3702 1.3641
HIGH FOR 1.5142 1.4720 1.5685 1.4305 1.3865 1.4267
PERIOD
LOW FOR PERIOD 1.4318 1.4512 1.4198 1.3470 1.3287 1.3278
AVERAGE FOR 1.4669 1.4920 1.4835 1.3846 1.3636 1.3726
PERIOD
</TABLE>
<PAGE> 6
GLOSSARY OF SIGNIFICANT TERMS
Certain terms and their usage used throughout this Registration Statement are
defined below.
<TABLE>
<S> <C>
ANOMALOUS A value that is unusually elevated compared to
other values in the same data set.
ASSAY OR FIRE ASSAY A high-temperature process involving the
melting of a rock to determine its metal
content.
BIOCLASTIC A sedimentary rock composed of fragments of
biological components such as shells.
BRINE Water with a high content of dissolved salts.
CAMBRIAN The geological time period between about 570 and 500 million
years ago.
CANADIAN SHIELD Area of surface exposure of Precambrian rocks in Quebec,
Ontario, Manitoba, Saskatchewan, northeastern Alberta, Northwest
and Nunavut Territories.
CLASTIC A sedimentary rock composed of fragments of
pre-existing rocks; includes sandstones,
siltstones and shales.
CRETACEOUS The geological time period between about 135 and 65 million
years ago
DEVONIAN The geological time period between about 410 and 360 million
years ago.
EVAPORITE A sedimentary rock containing minerals formed
from the evaporation of marine and non-marine
waters.
EXTRACTION A chemical or physical process by which a metal
or mineral is separated and removed from a host
rock.
GRADE The relative quantity of ore-mineral content in a mineralized
body, e.g. grams of gold per tonne or percent of copper.
HECTARE A metric measurement of area equivalent to 10,000 square meters
or 2.4711 acres.
IGNEOUS A rock that has cooled and solidified from a melt.
KILOMETRE A metric measure of length: one kilometre is equivalent to 1000
metres or 0.6214 miles.
LINEAMENT A linear topographic or geophysical feature.
MAGMATIC Igneous.
MESOSOIC ERA The major geological time period between about 65 and 240
million years ago.
MICROPARTICULATE Composed of or comprising particles on the order of 0.1 to 100
micrometres in size.
MINERAL RESOURCE A deposit or concentration of natural,
solid, inorganic or fossilized organic
substance in such quantity and at such grade or
quality that extraction of the material at a
profit is currently or potentially possible.
MINERAL A naturally occurring homogeneous substance
having fixed physical properties and chemical
composition and, if formed under favorable
conditions, a defined crystal form.
MINERALIZATION The process of formation of minerals in a
specific area or geological formation.
NANOPARTICULATE Composed of or comprising particles on the order of 0.1 to 100
nanometres in size.
ORDOVICIAN The geological time period between about 500 and 435 million
years ago.
PALEOZOIC ERA The major geological time period between about 240 and 570
million years ago.
</TABLE>
<PAGE> 7
<TABLE>
<S> <C>
PRAIRIE GOLD MODEL An exploration model postulating the origin of microparticulate
precious and non-precious metals observed in rocks from the
Athabasca region of Alberta and the Dawson Bay area of Manitoba.
In this model, metals are carried in brines of sedimentary
origin (Prairie formation) and are deposited where
oxidation-reduction reactions cause the metals to precipitate.
PRECAMBRIAN ERA The major period of geologic time before 570 million years ago.
PRECIOUS METALS A group of unoxidizable metals of relatively high economic
value; includes silver, gold, platinum and palladium.
RECOVERY The percentage of valuable metal in the ore
that is recovered by metallurgical treatment.
TAILINGS The material removed from the milling circuit
after separation of the valuable metals.
TERTIARY The major geological time period between about 65 and 2 million
years ago.
TROY OUNCE Unit of weight measurement used for all precious metals.
The familiar 16 ounce avoirdupois pound equals 14.583
troy ounces. One troy ounce is equivalent to 31.1034 grams.
UNMETAMORPHOSED Refers to rocks that have not undergone
metamorphism, where metamorphism is the process
by which the minerology and textures of a rock
changes during deep burial or by contact with
igneous rocks at high temperature and/or
pressure.
WESTERN CANADIAN SEDIMENTARY A large area of sedimentary rock in western Canada covering much
BASIN of Manitoba, Saskatchewan, Alberta and the western Northwest
Territories where sediments of late Precambrian
through Tertiary age were deposited on rocks of
the Precambrian Shield.
</TABLE>
<TABLE>
<S> <C> <C> <C>
CONVERSION FACTORS: 1 Troy ounce = 31.1034 Grams
1 Tonne = 1.1023 Short tons
1 Tonne = 2204.6 Pounds
1 oz/ton = 34.3 grams per tonne
1 Hectare = 2.4711 Acres
1 Kilometre = 0.6214 Miles
1 Metre = 3.28084 Feet
SYMBOLS: Au = Gold
g/t = Gram per tonne
oz/ton = Troy ounce per ton
PGM = Platinum group metals
</TABLE>
<PAGE> 8
PART 1
ITEM 1: DESCRIPTION OF THE BUSINESS
A. INTRODUCTION
Birch Mountain Resources Ltd. (the "Company" or "Birch") is a mineral technology
and exploration company conducting business primarily in Canada.
The Common Shares of Birch Mountain Resources Ltd. were listed on The Alberta
Stock Exchange (now the Canadian Venture Exchange Inc.) on January 31, 1995 as a
junior capital pool corporation. On July 4, 1995, Birch Mountain Resources Ltd.
completed its Major Transaction within the meaning of Policy 4.11 of the Alberta
Securities Commission and Circular No. 7 of The Alberta Stock Exchange through
the purchase of all of the issued and outstanding securities of Birch Mountain
Minerals Ltd., a private Alberta company which held certain mining exploration
interests in Alberta and British Columbia.
Birch Mountain Resources Ltd. was incorporated by Certificate of Incorporation
issued pursuant to the provisions of the Business Corporations Act (Alberta) on
October 25, 1994. Birch Mountain Resources Ltd. and Birch Mountain Minerals Ltd.
amalgamated under the name Birch Mountain Resources Ltd., pursuant to a
Certificate of Amalgamation issued pursuant to the provisions of the Business
Corporations Act (Alberta) on December 31, 1995.
The Company has one active, wholly owned subsidiary, Dawson Bay Minerals Inc.
("Dawson Bay"), a company incorporated pursuant to the Corporations Act
(Manitoba) on October 24, 1996 with a registered office located at 2200, 201
Portage Avenue, Winnipeg, Manitoba, R3B 3L3. Unless the context requires
otherwise, whenever the words "Company" or "Birch" are used, they will include
Dawson Bay.
The Company's head office is at 3100, 205 Fifth Avenue S.W., Calgary, Alberta
T2P 2V7. The principal contact persons are Mr. Douglas J. Rowe, President & CEO,
(403) 262-1838, Fax (403) 263-9888 Email: [email protected] or Mr. Donald
L. Dabbs, Vice President & CFO (403) 262-1838 Fax (403) 263-9888 e-mail:
[email protected].
The Company's stock trades in Canadian dollars on the Canadian Venture Exchange
Inc. under the trading symbol BMD. The Company trades no other class of shares
other than common shares ("Common Shares") without par value.
Birch holds Metallic and Industrial Mineral Permits and Leases in the Province
of Alberta totaling approximately 2.5 million acres. Dawson Bay holds Special
Exploration Permits in the Province of Manitoba totaling 228,004 acres. In
addition to these mineral rights, Birch has developed proprietary extraction
technology. The Company has applied for a U.S. Patent to protect its
intellectual property as it is considered a valuable asset.
The information in this Registration Statement is current as of June 30, 2000,
except where otherwise indicated. In this Registration Statement, any references
to dollars or "$'s" refers to Canadian dollars unless specifically stated
otherwise.
-1-
<PAGE> 9
GENERAL DEVELOPMENT DURING PAST FIVE YEARS
Birch Mountain Resources Ltd. was incorporated by Certificate of Incorporation
issued pursuant to the provisions of the Business Corporations Act (Alberta) on
October 25, 1994.
The Common Shares of Birch Mountain Resources Ltd. were listed on The Alberta
Stock Exchange (now the Canadian Venture Exchange Inc.) on January 31, 1995 as a
junior capital pool corporation. On July 4, 1995 Birch completed its Major
Transaction within the meaning of Policy 4.11 of the Alberta Securities
Commission and Circular No. 7 of The Alberta Stock Exchange through the purchase
of all of the issued and outstanding securities of Birch Mountain Minerals Ltd.,
a private Alberta corporation which held certain mining exploration interests in
Alberta and British Columbia. Birch Mountain Resources Ltd. and Birch Mountain
Minerals Ltd. amalgamated to form Birch, pursuant to a Certificate of
Amalgamation issued pursuant to the provisions of the Business Corporations Act
(Alberta) on December 31, 1995.
Mineral Exploration
Since inception, Birch's activities have involved both mineral exploration and
research and technology development. Initially, the business of the Company was
primarily the acquisition, exploration and development of mineral properties.
The Company started business with properties in northeastern Alberta and British
Columbia, and acquired additional mineral rights in the Yukon Territories, the
Republic of Indonesia, Saskatchewan and Manitoba. From 1995 to 1998 the Company
undertook exploration work on all of these properties, but relinquished the land
in British Columbia, the Yukon Territories, Saskatchewan and Indonesia as these
properties were determined by Birch not to meet the criteria for further
exploration. The Company continues exploration work on its 2.7 million acres
(1.12 million hectares) of mineral leases and exploration permits in Alberta and
Manitoba.
Exploration Research
Originally, Birch's research and development activities were directed towards
developing the Prairie Gold Model, a new exploration model to explain the
processes leading to the deposition of unusual occurrences of microparticulate
gold and other precious and non-precious metals in rocks from Birch's Athabasca
and Dawson Bay properties. An early version of this geological model was
developed at the Geological Survey of Canada in partnership with Birch and other
mineral exploration companies. The Prairie Gold Model guides Birch's exploration
for precious metals on its Athabasca and Dawson Bay properties.
Technology Research and Development
Through its research and development efforts related to development of the
Prairie Gold Model, Birch is developing new technology for the analysis and
extraction of microparticulate metals. Electron imaging and x-ray analysis of
surface samples and drill core from Birch's Athabasca property have documented
multiple occurrences of microparticulate precious and non-precious metals. Birch
believes that the diverse elemental assemblage documented within these rocks is
indicative of a previously unknown type of mineral deposition process. Birch
also has evidence that suggests that conventional methods for determining metal
concentrations in these rocks are ineffective in detecting the metals observed
by electron imaging to be present in these rocks.
In 1999, Birch established its own laboratory to conduct proprietary research
into the analysis and recovery of precious metals from its Athabasca and Dawson
Bay properties. Material properties research is also conducted
-2-
<PAGE> 10
using advanced analytical equipment available in industry, university and
government research laboratories. The goals of this work are to identify and
characterize the specific forms of metals present so that effective analytical,
extraction and recovery processes can be designed and tested.
Birch believes that the extremely small size of the microparticulate metals has
a profound impact on both their physical and chemical behavior. Furthermore,
Birch's material properties research has identified what it believes to be the
first documented occurrence of natural nanoparticulate metal in rocks from its
Athabasca property. By handling and treating the rock in accordance with the
properties of the contained metals, Birch has been able to extract
nanoparticulate metal from the rock. Birch has filed a U.S. patent application
to protect its intellectual property related to the recovery of this newly
identified form of natural metal. This technology is still under development, it
has not been independently verified, and its commercial significance has not
been determined.
Research and technology development related to nanoparticulate metals is
on-going. Birch believes that its research and development activities may
provide new ways to focus exploration on its existing properties and may be
applicable to similar rocks in other sedimentary basins worldwide. Therefore,
Birch's continuing research and development program may lead to additional
discoveries elsewhere in the world and the development of new intellectual
property. Birch also believes that its discovery may have applications beyond
metals exploration and will direct some of its research and development
activities to identifying additional opportunities.
PLAN OF OPERATION FOR 2000 AND THE FIRST SIX MONTHS OF 2001
Birch will continue work related to the development and refinement of its
mineral extraction and measurement technology in the Company's lab, with
verification of results in independent research laboratories. The Company plans
to establish a Scientific Advisory Board to provide guidance for the
advancements of Birch's proprietary minerals technology.
Birch will continue studies using the electric logs and geochemical analyses of
core from over five hundred wells drilled by Birch and oil sands companies that
hold overlapping mineral interests. The core and e-logs have been provided to
Birch under the terms of the cooperation agreements with oil sands companies
that hold overlapping mineral rights, more fully described in Item 2:
Description of Properties. These analyses will be used, in conjunction with
other analytical results, to focus future exploration drilling to areas of
alteration and elevated precious metal content in the Devonian limestone.
The Company does not currently plan to initiate its own field-drilling program
in the next year. This, however, may change depending on the results of the
office and laboratory analyses.
PRINCIPAL PRODUCTS AND MARKETS
The Company is engaged entirely in mineral technology development and
exploration and does not have any production.
SALES AND REVENUE DURING PAST THREE YEARS
The Company has had no sales from production, and has received only $390,000
from the sale of exploration data plus incidental interest and other minor
revenue.
-3-
<PAGE> 11
B. SPECIAL CHARACTERISTICS OF OPERATIONS OR INDUSTRY
CONTRACTUAL AND FINANCING RISKS
The Company holds very large land blocks under Special Exploration Permit,
Metallic and Industrial Mineral Permit and Metallic and Industrial Mineral Lease
issued by the provincial governments. Exploration permits require a level of
exploration expenditures each year in order to continue to hold the rights to
the land. Mineral Leases require an annual rental payment in order to hold the
leases in good standing. The Company currently has the financial resources to
hold its land in good standing, but there is no assurance that the Company will
be able to raise additional funds to be able to hold all of the land in good
standing beyond the current term of up to twenty-four months.
TECHNOLOGY DEVELOPMENT RISK
The Company has developed new technology for which it has filed a U.S. patent
application to protect its intellectual property. The Company will continue to
file additional applications as the technology is further developed, but there
is no assurance that Birch will receive patent protection for its new technology
or that patents granted to the Company will not be successfully challenged. The
Company will continue to develop the new mineral recovery technology, but there
is no assurance that it will be economically viable or that there will be a
market for the new technology.
INTELLECTUAL PROPERTY PROTECTION
The Company relies on a combination of patent, confidentiality procedures and
contractual provisions to protect its proprietary rights in its technology. The
Company generally enters into confidentiality agreements with its employees,
consultants and advisors and limits access to, and distribution of, its
proprietary information. Despite the Company's efforts to safeguard and maintain
its proprietary rights both in the United States and abroad, there can be no
assurance that the Company will be successful in doing so or that the steps
taken by the company in this regard will be adequate to deter misappropriation
or independent third-party development of the Company's technology or to prevent
an unauthorized third party from copying or otherwise obtaining and using the
Company's technology. In addition, policing unauthorized use of the Company's
technology is difficult.
There can be no assurance that third parties will not assert infringement or
misappropriation claims against the Company in the future with respect to
current or future products. Any claims or litigation, with our without merit,
could be time consuming, result in costly litigation and diversion of
management's attention. Adverse determinations in such claims or litigation also
could have a material adverse effect on the Company's business, operating
results and financial condition.
Litigation to defend and enforce the Company's intellectual property rights
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, operating results and
financial condition, regardless of the final outcome of such litigation.
EXPLORATION AND DEVELOPMENT RISK
Mineral exploration and development involve a high degree of risk which even a
combination of experience, knowledge and careful evaluation may not be able to
overcome. There is no assurance that Birch's properties will prove to be
economically viable. Even if Birch discovers economically viable mineral
deposits, there is no
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<PAGE> 12
assurance that profitable marketing and sales arrangements can be implemented or
that Birch will be operated as a profitable business. Birch competes with larger
companies which have greater assets and financial and human resources than
Birch, and which may be able to sustain larger losses than Birch to develop
business. Any investment in Birch at this time is highly speculative.
Mineral exploration and production activities are subject to numerous risks,
many of which are beyond Birch's control. These factors include the cost of
labour, materials and services, cost of financing, technological change, demand
for and price of commodities and government regulation, including regulations
related to taxes, royalties and environmental protection, the exact effects of
which cannot be accurately predicted. There is a risk that no commercial
deposits of precious metals will be encountered.
ENVIRONMENTAL
The mining industry is subject to environmental regulation pursuant to extensive
legislation enacted by federal and provincial governments in Canada. Birch is
able to conduct its exploration within the provisions of the applicable
environmental legislation without undo constraint on its ability to carry on
efficient operations. Public expectation of the mining industry's environmental
performance remains high and this continues to translate into new and generally
more rigorous environmental policies, legislation and regulations. Birch has
established environmental policies and procedures that should allow it to
operate effectively under increasingly stringent environmental laws, but there
is no assurance that the Company will be granted all of the necessary permits in
the future.
MANAGEMENT
At June 30, 2000, Birch had nine employees with Douglas J. Rowe, President and
Chief Executive Officer, Donald L. Dabbs, Vice President and Chief Financial
Officer, and Hugh J. Abercrombie, Vice President Exploration, working full time
for the Company.
Birch also relies on the services of certain consultants for technical and
operational guidance. Birch believes that its relations with its officers and
consultants are satisfactory. There can be no assurance that such individuals
will remain with Birch for the immediate or foreseeable future. From time to
time, Birch also utilizes the services of independent consultants and
contractors to perform various professional services, particularly in the areas
of drilling, analytical services, research and development and environmental
assessment.
Birch is relying upon the good faith, expertise and judgment of the officers and
directors of the Company to make appropriate decisions with respect to
investments and operations. Birch will be dependent on maintaining its key staff
to advance its technology development and explore and delineate economic ore
bodies on the Company's mineral properties. Birch may rely on joint ventures or
other business relations with companies to advance the development of its
technology and exploration properties.
SHAREHOLDERS RIGHTS PLAN
Although the Company's shareholders rights plan ("Rights Plan") is not intended
to prevent a take over of the Company, to secure continuance of current
management or the directors in office or deter fair offers for the Common Shares
of the Company, it may have the result of discouraging certain transactions by
making such transactions impractical.
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<PAGE> 13
LEGAL AND REGULATORY RISKS
In all areas where Birch conducts activities, there are statutory provisions
regulating exploration and development of mineral resources. Birch may be
constrained or forbidden to develop a mine in areas of economic mineral deposits
as a result of conflicting regulations governing other natural resource
extraction activities. Regulatory agencies may impose operating limitations
which may adversely affect Birch's revenues and/or the economic viability of a
project.
GOLD AND PRECIOUS METAL PRICING RISKS
If the Company were able to identify an economic mineral deposit on its permits
and leases, the price of gold and other precious metals may have a significant
influence on the market price of the Company's shares and the Company's business
activities. The price of gold is affected by numerous factors beyond the
Company's control, such as the level of inflation, fluctuation of the United
States dollar and foreign currencies, global and regional demand, sale of gold
by central banks, forward selling by producing companies and the political and
economic conditions of major gold producing countries throughout the world.
Recently the price of gold has been at or near 20 year lows. As of June 30,
2000, the closing price for gold was US$288.15 per troy ounce. The following
table sets forth the average of the daily closing price for gold for the periods
indicated as reported by the London Metal Exchange:
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
5 YR. AVG 1999 1998 1997 1996 1995
--------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
GOLD 337.00 279.00 294.00 340.00 388.00 384.00
(US$/TROY
OUNCE)
</TABLE>
ITEM 2: DESCRIPTION OF PROPERTIES
Birch maintains a head office in Calgary. Executive, administrative and support
staff work in the 11,000 square foot office space which also contains a
boardroom. The rental commitment is $212,238 per year and the Company offsets
approximately half of the cost by subletting to other companies.
METALLURGICAL LABORATORY
Birch's research and technology activities are principally carried out at
Birch's Calgary laboratory. The laboratory is housed in a 1800 square foot
facility which is leased at a cost of $16,700 per year. The laboratory is
equipped for sample preparation, fire assay and wet chemical analyses. Most
capital items are owned by Birch; an atomic absorption spectrometer is leased at
an annual cost of $18,000.
CORE LABORATORY
Birch maintains core analysis and storage facilities in Calgary. Core drilled by
Birch and core obtained from oil sands mining companies is shipped to Calgary
for cutting, logging and sampling. Drill core and samples are archived in a
secure storage facility. The core research facility is leased at an annual cost
of $13,300. Long-term storage facilities are leased at an annual cost of $9,600.
-6-
<PAGE> 14
EXPLORATION PROPERTIES
Birch's Alberta properties are located in areas that have at one time or another
been considered prospective for both diamonds and precious metals. At one time
Birch held the mineral exploration rights to about 10 million acres in
northeastern Alberta, but through time this has been reduced to some 2.5 million
acres distributed across Birch's three Alberta exploration properties:
Athabasca, Birch Mountain and Caribou Mountains. In Manitoba, Birch's
exploration properties are held by Dawson Bay.
Alberta Properties
The majority of Birch's Alberta properties are held under Metallic and
Industrial Mineral Exploration Permits issued by the Provincial Government of
Alberta. Exploration permits may be held for up to ten years and convey the
right to explore and an option to convert to lease. Assessment costs must be
filed every two years against an escalating work requirement ranging from $5.00
to $15.00 per hectare ($2.00 to $6.00 per acre) for each 2 year assessment
period. Birch owns a 100% working interest in virtually all exploration permits
held in Alberta. Some exploration permits are subject to a royalty payable to
the original permit holder; Birch has the option to purchase most of these
royalties for a fixed price. A small minority convey a 1% royalty right to the
original permit holder.
Birch also holds a small number of leases. Leases are granted by the Alberta
government and convey the right to produce minerals, subject to meeting other
regulatory criteria. Leases are held on the basis of an annual rental fee of
$3.50 per hectare ($1.42 per acre). Currently, the Company's lease rental
payments are $12,887.75 per year.
Overlapping Mineral Rights: Ownership of metallic and industrial minerals within
the area of the Athabasca Oil Sands Mining Area as defined by the Alberta
government, is split between oil sands lease holders and metallic and industrial
mineral lease holders. The Athabasca oil sands mining area covers most of Birch
Mountain's Athabasca exploration permits. Within this area, the oil sands lease
holders own the rights to all metallic and industrial minerals that occur within
the geological formations mined for oil. Oil sands lease holders do not own
metallic or industrial mineral rights in either the overlying Quaternary and
recent sediments, nor in the underlying Devonian limestone, which rights are
owned by the metallic and industrial mineral leaseholder.
Athabasca: At June 30, 2000 the Athabasca property comprises 100 Metallic and
Industrial Mineral Exploration Permits and 5 Mineral Leases covering
approximately 1,891,110 acres (765,305 hectares). The dates of issue of the
permits are tabulated below. Precious metals are the principal exploration
target on the Athabasca property. Birch has also conducted diamond exploration
on its Athabasca property.
ATHABASCA MINERAL PERMITS BY ISSUE DATE.
<TABLE>
<CAPTION>
YEAR NO. OF PERMITS AREA (HECTARES) AREA (ACRES)
---- -------------- --------------- ------------
<S> <C> <C> <C>
1990 2 4,558 11,263
1993 24 217,135 536,550
1994 35 265,684 656,517
1996 18 154,368 381,450
1998 18 119,744 295,893
1999 1 420 1,038
</TABLE>
Birch Mountains: The Birch Mountains property comprises 9 Metallic and
Industrial Mineral Exploration Permits issued in 1994, covering approximately
204,959 acres (82,944 hectares). Diamonds are the principal exploration target
and Birch has also conducted some preliminary precious metal exploration on the
Birch Mountains
-7-
<PAGE> 15
property.
Caribou Mountains: The Caribou Mountains property comprises 19 Metallic and
Industrial Mineral Exploration Permits issued in 1994, covering approximately
432,691 acres (175,104 hectares). Birch has conducted preliminary precious
metals exploration on the Caribou Mountains property, and considers this
property to be prospective for diamonds as well.
Manitoba Properties
Birch's Manitoba properties are held by Dawson Bay. Mineral tenure is held
through Special Exploration Permits issued by the Province of Manitoba. The
special exploration permits convey the right to explore for minerals and to
convert to mineral claims. The right to produce metals is awarded by conversion
to lease from a mineral claim. The permits are renewable for negotiable periods
of up to five years with an escalating work commitment ranging from $0.50 per
hectare ($0.20 per acre) in year 1 to $4.00 per hectare ($1.62 per acre) in year
5 and an additional $1.00/hectare for every year thereafter.
Dawson Bay: Birch's Dawson Bay property comprises three Special Exploration
permits, SEP 96-1, 99-1 and 99-2, covering 228,004 acres (92,270 hectares) in
west-central Manitoba. Precious metals are the principal exploration target on
Birch's Dawson Bay property.
PRAIRIE GOLD EXPLORATION
The commercial viability of Birch's Prairie Gold Model is unproven. Based on
current Canadian standards of mineral disclosure, there is no conclusive
evidence supporting the existence of precious metals in potentially economic
concentrations or quantities on Birch's Athabasca and Dawson Bay exploration
properties. Birch's exploration is based upon the unproven assumption that
micro- and nanoparticulate precious metals can not be detected by conventional
means. Conventional fire assays have not, in general, produced repeatable
precious metals concentrations above trace levels for rocks from Athabasca and
Dawson Bay. Therefore, the economic significance of the Company's Athabasca and
Dawson Bay exploration properties has not been determined.
Considering the results of previous research and exploration, Birch believes
that it has information to support the conclusion that conventional fire assay,
defined as routine lead collector fire assay by a recognized fire assay
laboratory, may not necessarily accurately determine the precious metal content
of rocks from Athabasca and Dawson Bay, although this has not been conclusively
demonstrated or independently verified. Birch believes that, in consideration of
the body of relevant scientific information, the identification of unusual
microparticulate precious and non-precious metals, and the documentation of
natural nanocluster metals, there are sufficient grounds to justify further
investigation.
Prairie Gold Model
The Prairie Gold Model is the exploration model developed by Birch that
postulates the origin of dispersed, microparticulate gold, silver and platinum
group metals in rocks from Athabasca and Dawson Bay. The model describes the
origin of these particles as a product of basin-scale fluid flow systems.
According to this model, precious metals originally contained in basement rocks
are dissolved and transported by highly saline, oxidized brines through a
network of faults to focused discharge locations where reduction reactions,
possibly involving bacteria and hydrocarbons, cause precipitation of precious
metals and formation of precious metal deposits. Such a process is not unusual
in exploration geology, except that in Athabasca relevant data suggests that
this happened at temperatures well under 100(degree)C and without any connection
to high temperature magmatic systems. The low
-8-
<PAGE> 16
temperature of mineral deposition and the unusual character of the
microparticulate precious metals appear to be the key distinguishing
characteristics of the Prairie Gold Model when compared to other models for the
formation of sediment-hosted precious metal deposits.
Prairie Gold in Athabasca
Microparticulate precious metals have been identified in all major geological
units, including Precambrian basement rocks, on Birch's Athabasca property.
Birch believes that the origin of microparticulate metals in Athabasca may be
related to systems active in the formation of the Athabasca oil sands deposit.
The Athabasca oil sands are contained within Cretaceous age sandstones which
directly overlie Devonian age microparticulate precious metal-bearing limestone.
The Athabasca oil sands are believed to have formed through a process of focused
secondary migration of hydrocarbons and associated waters to the Athabasca
region. In mining terms, Alberta government figures show that the Athabasca oil
sands represents a resource of approximately 3 trillion tons. Birch believes
that the formation of a deposit of this size signifies that Athabasca was
subjected to focused flow of unusually large fluid volume, an unusually long
duration of fluid throughput and, possibly, multiple flow events. Birch believes
that the same hydrological processes which led to the formation of the Athabasca
oil sands deposits focused the flow of brines carrying precious metals resulting
in the formation of microparticulate precious metals on Birch's Athabasca
property.
Geological Setting: The Athabasca area is underlain by Precambrian basement of
the Canadian Shield and younger sedimentary rocks of the Western Canada
Sedimentary Basin ("WCSB"). Precambrian rocks occur at surface in the
northeastern part of the region and are overlain by a southwesterly thickening
wedge of Paleozoic and Mesozoic age sedimentary rocks. The following discussion
is based on information published in the scientific literature and the Company's
analysis of drill holes in the Athabasca region.
Precambrian Basement: Precambrian basement rocks are a diverse assemblage of
metamorphosed sedimentary and igneous rocks. Precambrian rocks show evidence of
having been subjected to oxidation for variable thicknesses below the
sedimentary cover. Metals leached during this process may be the source for the
microparticulate precious metals found in Athabasca.
Western Canada Sedimentary Basin: Precambrian rocks are overlain by sedimentary
rocks of the WCSB. The sedimentary rocks are, in general, poorly exposed within
the project area; most outcrops are found along river valleys. As a result, most
of the information on the sedimentary succession is derived from drill cores and
electric logs. A long-lived tectonic feature, the Peace River Arch, transects
Birch's Athabasca property and has influenced both basement rocks and rocks of
the WCSB.
Two major sequences of sedimentary rocks are preserved in the Athabasca region.
Devonian age sedimentary rocks were deposited between about 370 and 360 million
years ago. Cretaceous age sandstones and shales were deposited in a major
intracontinental seaway between about 115 and 80 million years ago. The
sedimentary rocks of the WCSB are capped by a succession of glacial,
post-glacial and recent sediments of variable thickness, locally exceeding
200 m.
Devonian Rocks: Within the Athabasca property, Devonian rocks form the first
major sequence of sedimentary rocks of the WCSB and are bounded below and above
by erosion surfaces, or "unconformities". The Devonian rocks comprise carbonate,
evaporite and "clastic" (i.e., sands, silts and shales) sediments that include
the Elk Point and Beaverhill Lake groups.
Elk Point Group: The Elk Point Group is the oldest Devonian unit present and
lies directly on Precambrian
-9-
<PAGE> 17
basement. The oldest rocks of the group are a sequence of red sandstone and red
and green shales, with anhydrite and gypsum, signifying deposition under arid
conditions. The red color is due to oxidation of iron minerals and is consistent
with post-depositional oxidation and leaching of metals. These rocks, and
underlying oxidized Precambrian rocks, are believed to be the source of metals
found in microparticulate form in rocks from Athabasca.
The upper part of the Elk Point Group comprises carbonate and evaporite units
with subordinate clastics. From the exploration point of view, the most salient
unit is the Prairie Formation which is an evaporite unit consisting of salt
(halite) with gypsum/anhydrite and thin beds of shale and dolostone. The highly
saline oxidized brines which are believed to have leached and transported
metals, probably originated either as residual evaporite brines or by
dissolution of salts of the Prairie Formation. These highly saline brines can,
when oxidized by reaction with other fluids or rocks, dissolve and carry
precious metals as chloride complexes. Birch believes that fluids originating in
the Prairie Formation have scavenged trace metals over a wide area and carried
these as chloride complexes to focused, fault controlled brine discharge sites
in the Athabasca region.
Beaverhill Lake Group: The Beaverhill Lake Group overlies the Elk Point Group
and predominantly comprises marine limestone and shaly limestone. At its base,
it consists of marine evaporite and shale units. The top of the evaporite unit
marks the transition from the oxidized environment of the bulk of the underlying
Elk Point Group to the reduced marine limestone and shale of the Beaverhill Lake
Group. Regionally, native sulfur is observed at the base of the marine limestone
unit marking the upwards transition from oxidizing to reducing conditions.
Limestone and shaly limestone of the Waterways Formation host most of the
microparticulate precious metals observed to date by Birch and others in
Athabasca. This formation is composed of greater or lesser proportions of green
marine shale, clastic and "bioclastic" sediments, and limestone. Birch has
defined a series of alteration indices that it can use to identify parts of the
Waterways Formation where the primary textures and composition of the rock have
been changed by interaction with highly saline, oxidized waters originating in
the Elk Point Group, below. The top of the Devonian age rocks is marked by an
extensive regional erosion surface referred to as the pre-Cretaceous
unconformity.
Cretaceous Rocks: Cretaceous rocks form the second major sequence of
post-Precambrian sedimentary rocks on the Athabasca property. They include
sandstone, siltstone, shale and coaly sediments. Sandstone of the McMurray
Formation occurs directly above the pre-Cretaceous unconformity and forms the
host to the Athabasca oil sands deposit. The bulk of the younger, Cretaceous
units in Athabasca are shales.
Locally within the area of the Athabasca permits, an unusually hard, silicified
quartz sandstone occurs within the lower part of the McMurray Formation. This
unit is informally known as the Beaver River sandstone and its occurrence is
highly localized to the central part of the permit area. Electron imaging of
this unit has identified microparticulate platinum in association with
microparticulate iron, nickel and chromium.
Structure: The axis of the Peace River Arch cuts across the Athabasca property
from southwest to northeast. Although the axis of the Peace River Arch is shown
as a line on many geological maps, it is in fact a broad area of uplift up to
200 km wide. In the Athabasca region, the cumulative uplift distributed across
many structures is about 200 m. Late Cretaceous to Tertiary age uplift of the
Peace River Arch resulted in the collapse of the arch, forming a large
structural feature known as the Bitumount Basin. Geological structures, such as
faults associated with the Peace River Arch and Bitumount Basin, are believed to
have played a role in focusing the flow of mineralizing fluids.
Smaller scale faulting in basement and sedimentary rocks is recognized at
virtually all scales. Offset on faults
-10-
<PAGE> 18
cutting sedimentary rocks can be seen, in seismic sections, to be distributed
across fault zones that are tens to hundreds of metres wide. Some
basement-cutting faults probably are related to the Peace River Arch, although
some older basement faults are more likely related to Precambrian tectonics.
Sedimentary fault zones that can be correlated with basement faults may
represent either reactivated basement structures or new basement-sediment faults
related to movement on the Peace River Arch.
Previous Exploration: No production of metallic elements is known from the
Athabasca property. In 1920, Alberta government geologists reported that a
sample of basement granite from drill hole Athabasca Oils Ltd. No. 1 drilled in
1911-12 in the central part of the permit area contained 21.6 g/t (0.63 oz/ton)
over an interval of 8 metres (26.2 feet.). A careful re-examination of the
circumstances of this drilling suggests that the quartz veins which hosted the
gold mineralization may not have been in basement rocks, but instead may have
cut Devonian limestone.
Since this time, exploration for gold and other precious metals has continued
and a number of holes have been drilled to test other locations and structures.
In 1962-63, four holes were drilled in the vicinity of Athabasca Oils Ltd. No.
1, but only trace amounts of gold were detected. In 1986, two holes were drilled
approximately 35 kilometres south of this location; one sample assaying 2.16 g/t
(0.063 oz/ton) was obtained from Devonian carbonate rocks at a depth of 241
metres. Drill hole Ells Gold No. 1 was drilled in 1988 across the Athabasca
River from the site of the original Athabasca Oils No. 1 and encountered 1.10
g/t gold (0.032 oz/ton) and 7.54 g/t silver (0.22 oz/ton) in basement rocks at a
depth of 272.8 metres.
In the 1992-94 period, there was a significant increase in exploration for
precious metals in Athabasca. In part this was due to publication of analytical
results from surface and core samples that showed exceptionally high levels of
gold, silver, platinum and rhodium by non-standard fire assay and other
analytical techniques. Analytical results produced at this time were plagued by
lack of repeatability and many of the methods used were not suited to the
carbonate-rich rocks analyzed without extensive background corrections and
advanced standardization techniques. Furthermore, the elevated gold and platinum
group metal results reported could not be reproduced by other conventional
analytical techniques.
In early 1994, the Geological Survey of Canada identified a novel form of
microparticulate, precious and non-precious metals in sedimentary and basement
rocks from the Athabasca region. These results have since been corroborated in
other laboratories in Canada, the U.S. and South Africa and have formed the
basis of the Prairie Gold Model advanced by Birch and others. Since 1994, Birch
has conducted the bulk of Prairie Gold exploration in Athabasca.
Birch's Exploration: Over the past five years, Birch's knowledge and
understanding of the geology of its Athabasca property has undergone a
significant evolution. Birch's initial approach to exploring Athabasca was
conventional in terms of exploration and metallurgical testing. In 1995 and
1996, Birch conducted a series of regional mapping studies including
bio-geochemical mapping, structural mapping, airphoto lineament analysis and
gamma ray spectrometry surveying to define exploration targets. In 1996, Birch
drilled 12 holes in locations selected based on structure and lineament
analysis. Nine of these holes were drilled by Birch alone; three were
cost-shared with Syncrude Canada Ltd., owners of the mineral rights within the
oil-bearing McMurray Formation in the area drilled.
No elevated precious metal values were returned by conventional fire assay of
core samples from the 1996 drilling. However, scanning electron microscope
analysis of this drill core detected the characteristic microparticulate gold
and silver, and detailed analysis of the geochemical data revealed that some of
the 1996 drill cores contained subtle geochemical evidence of alteration.
Alteration is a geochemical process whereby reactions between the rock and
fluids introduced into the rock change, or alter, the original composition of
the rock; ore
-11-
<PAGE> 19
bodies typically are found within a volume of altered rock. Mineral exploration
geologists explore for signs of alteration because they normally are more widely
distributed than the ore body and thus easier to map.
Extensive conventional metallurgical testing was carried out by Birch in 1995
and 1996, without success. Metallurgical testing was abandoned in early 1997
when it was decided that Birch's exploration efforts would be directed towards
the goal of refining the then current understanding of mineralization and
alteration so that it could be used to differentiate altered, potentially
mineralized bodies from surrounding unaltered rock.
Work conducted in 1997 and 1998 focused primarily on defining geochemical and
physical signs of alteration through examination of drill core. A field
exploration program was conducted in 1997 and included a high resolution
airborne magnetic survey and regional rock and soil sampling. The results from
the airborne magnetic survey were particularly beneficial, showing the location
of major faults, their relative ages and their spatial relations to structures
and alteration detected in core and outcrop. The most important work conducted
in 1997 was the examination of some 150 drill cores and 275 electric logs
obtained from oil sands operator Syncrude Canada Ltd. in the area of their
Aurora Oil Sands Mine where Birch Mountain holds overlapping mineral rights.
Detailed examination of these drill cores allowed Birch Mountain to map
alteration in this area.
Another important outcome of Birch Mountain's agreements with oil sands mining
companies was the release to Birch Mountain by Syncrude Canada Ltd. of
information pertaining to fire assays of limestone from the Aurora Mine area. On
April 3, 1997, Birch Mountain announced significant gold and platinum grades in
altered shaly limestone on its Athabasca property. Three different fire assays
of a 1.60 m (5.25 ft.) interval in Syncrude Canada Ltd. drill hole
11-7-AE-96-10W4 gave values of 2.21 to 4.94 g/t (0.064-0.144 opt) platinum and
0.19 to 0.21 g/t (0.006 opt) gold. The original results were independently
obtained by consultants working for Syncrude Canada Ltd. and were confirmed by
reanalysis by Birch. However, when additional holes were drilled at the same
location during winter 1998/99, including a twin of the original drill hole,
fire assays of the corresponding interval in the twinned hole detected no
anomalous concentrations of precious metals. No other sample from Athabasca has
consistently returned fire essay values greater than 0.5 g/t (0.015 oz/ton)
total precious metals.
Since 1998, Birch's exploration and research results have further refined the
Prairie Gold Model, but more importantly they have led Birch to a new
interpretation and understanding of the nature and potential significance of
Prairie Gold deposits. Based on alteration patterns developed through core
analysis, in 1998 Birch Mountain collected a series of bulk samples from
trenches excavated into rocks showing evidence of such alteration. Examination
of these samples and of samples from the platinum-bearing interval in
11-7-AE-96-10W4 described above, led to the identification of what Birch
believes to be the first documented occurrence of natural nanoparticulate metal.
This led directly to the development of proprietary methods for detecting and
recovering this form of metal from these rocks, as detailed in the section on
general development during the past five years.
Prairie Gold in Dawson Bay
In 1996, the Manitoba Department of Energy and Mines and the Geological Survey
of Canada published the results of joint studies documenting the occurrence of
microparticulate metals in the Dawson Bay area of west-central Manitoba.
Following this announcement, Birch acquired the mineral exploration rights to a
large area centered on the discovery site in a quarry at Mafeking. Birch has
released most of this ground, but retains mineral exploration rights to areas
judged to be most highly prospective for precious metals.
Geological Setting: The geological setting of Birch's Dawson Bay property is
similar in many respects to the Athabasca property. Crystalline rocks of the
Precambrian Shield underlie the Dawson Bay property and are overlain by clastic,
carbonate and evaporite rocks of the WCSB. Unlike Athabasca, Devonian rocks do
not sit
-12-
<PAGE> 20
directly on basement, but are underlain by older sedimentary rocks of the WCSB.
The host of microparticulate precious metals is Devonian limestone which is
correlative with the host limestone in Athabasca. The Devonian rocks are
unconformably overlain by Cretaceous sediments which are correlative to the
McMurray and younger formations in Athabasca. Glacial, post-glacial and recent
surficial deposits of variable thickness mantle the geological formations in the
Dawson Bay region.
Precambrian Basement: The Dawson Bay property is underlain by the boundary
between two major structural provinces of Precambrian Shield: the Churchill and
Superior provinces. The Churchill-Superior Boundary Zone ("CSBZ") is about 50
kilometres (30 miles) wide in the Dawson Bay area. Reactivation of basement
faults associated with the CSBZ is believed to have provided conduits for
mineralizing fluids to ascend, leading to the deposition of microparticulate
precious metals. The CSBZ is a well known metallogenic province and hosts major
nickel deposits at Thompson, Manitoba, at Raglan in Quebec and at Voisey's Bay
in Labrador.
Western Canada Sedimentary Basin: Sedimentary rocks are somewhat better exposed
on the Dawson Bay property compared to Athabasca. Devonian age rocks are exposed
at surface while older units are known from drilling or from outcrop exposures
north and east of the property. The oldest rocks of the WCSB in this region are
Cambrian and Ordovician age sandstone and shale deposited on the Precambrian
Shield. These rocks are overlain by carbonate and evaporite rocks of Ordovician
through Devonian age. As in Athabasca, highly saline fluids associated with the
salts of Prairie Formation are present and are believed to have carried the
metals now present in microparticulate form. The Devonian rocks exposed at
surface have been eroded at the pre-Cretaceous unconformity and infilled by
younger, Cretaceous age sandstone and siltstone. These lower Cretaceous rocks
are overlain by thick sequences of shale to the west of the Dawson Bay permits.
The Dawson Bay region is an area of contemporary discharge of highly saline
brines. These brines probably originate from the Prairie Formation and other
evaporite units. Studies of the chemistry of brine springs in west-central
Manitoba show that brines collected over the CSBZ contain elevated
concentrations of silver, nickel, copper, lead, zinc and cadmium compared to
other brine discharge areas.
Structure: Sedimentary rocks of the WCSB in western Manitoba have been affected
by structures associated with the CSBZ. The CSBZ is marked by anomalous basement
surface features interpreted as faults and fault blocks. Movement along
east-trending structures within Precambrian rocks may have caused minor
disruption in the depositional framework of the WCSB. In addition, reactivation
of basement faults has probably influenced regional hydrodynamic patterns.
Several structural studies, including air photo interpretation and core
analysis, have identified the Dawson Bay region as being structurally complex.
Surface lineaments may represent reactivated basement faults; the
northeast-trending lineaments are subparallel to the western boundary of the
CSBZ. At least 7 major fault zones have been identified from drilling and
surface mapping.
Previous Exploration: There are no records of prior precious metal exploration
on the Dawson Bay property. The primary metallic mineral commodities sought in
prior mineral exploration were base metals and uranium. In 1970, an airborne
electromagnetic survey was conducted over parts of the Dawson Bay permits to
investigate base metal potential. A circular conductivity high was discovered
south of the southeastern corner of Red Deer Lake, with a sinuous channel of
high conductivity running towards Dawson Bay. The published aeromagnetic map for
the region shows a slight magnetic high in the vicinity of the conductivity
high, which is interpreted to be basement uplift. Both of these features appear
to be spatially associated with known fault zones and salt springs. Further
exploration for zinc-lead-silver deposits was conducted in the early to mid
1980's. Five holes were drilled in 1985 based on extensive airborne and ground
geophysical surveys and soil geochemical surveys. None of the drill holes
-13-
<PAGE> 21
encountered significant zinc or lead mineralization.
Exploration for uranium was conducted in the region in the 1960's and 70's.
Surface geological and geochemical exploration, including helium and radon gas
surveys, soil polonium-210 and trace element surveys, identified a number of
targets that were subsequently drilled. No significant concentrations of uranium
were identified.
Birch's Exploration: Studies by Birch, the Geological Survey of Canada and
others on rocks from the Dawson Bay region have documented microparticulate
gold, silver and platinum group metals similar to those observed in Athabasca
and thought to be characteristic of Prairie Gold mineralization. Since 1996,
Birch primarily has conducted surface exploration including geological and soil
sampling surveys, and airphoto lineament analysis. Additional work has included
examination of archived drill core and subsurface structural mapping. In summer,
1999, two holes were drilled on a cost-shared basis with the Manitoba Department
of Energy and Mines. The cores show evidence of structural disturbances and
contain alteration patterns similar to those observed in Athabasca; no anomalous
precious metals were detected by conventional analysis of these cores.
In spring 2000, a high resolution airborne magnetometer survey was flown over
the Dawson Bay properties in order to identify magnetized structures in the
basement rocks and sedimentary column. Preliminary results suggest the presence
of at least four major basement faults associated with the CSBZ. Correlation
between the magnetized faults and the sedimentary faults suggests that at least
some of the latter are due to reactivation of older basement faults.
ITEM 3: LEGAL PROCEEDINGS
The Company knows of no active or pending legal proceedings against the Company.
ITEM 4: CONTROL OF THE REGISTRANT/COMPANY
To the best of the knowledge of the directors and senior officers of the
Company, no person beneficially owns, directly or indirectly, or exercises
control or direction over equity or voting securities carrying more than 10% of
the voting rights attached to any class of equity or voting securities of the
Company.
Officers and directors of the Company directly and indirectly own or control
Common Shares of the Company, representing the Company's issued and outstanding
Common Shares as follows:
<TABLE>
<CAPTION>
----------------------- -------------------- ---------------- ------------------- -----------------
IDENTITY OF PERSON OR DESCRIPTION OF TYPE OF NUMBER OF SHARES PERCENT OF
GROUP CLASS OWNERSHIP COMMON SHARES
----------------------- -------------------- ---------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Officers and Directors Common Direct 3,116,642 8.4%
----------------------- -------------------- ---------------- ------------------- -----------------
</TABLE>
The Company is not owned or controlled by another corporation.
ITEM 5: NATURE OF THE TRADING MARKET
The Company's Common Shares trade on the Canadian Venture Exchange Inc., having
the trading symbol BMD. The Common Shares were quoted on The Alberta Stock
Exchange commencing January 31, 1995. On November 29, 1999 the Alberta and
Vancouver Stock Exchanges were amalgamated to form a new and larger exchange
known as the Canadian Venture Exchange Inc. (CDNX). The Company was listed on
the new exchange as a Tier 1 Company and retained the symbol BMD.
-14-
<PAGE> 22
The following table sets forth the high and low closing bid prices on the CDNX
(and predecessor The Alberta Stock Exchange) and the volume of Common Shares
traded for each Fiscal quarter for the period indicated. All financial figures
are expressed in Canadian dollars.
<TABLE>
<CAPTION>
FISCAL PERIOD HIGH (CAD$) LOW (CAD$) VOLUME
------------- ----------- ---------- ------
<S> <C> <C> <C>
2000
Second Quarter $2.54 $1.25 1,273,956
First Quarter $3.05 $1.95 3,237,879
1999
Fourth Quarter $2.10 $1.15 3,166,411
Third Quarter $1.50 $0.89 1,248,875
Second Quarter $1.72 $0.73 2,210,062
First Quarter $1.79 $0.29 3,623,774
1998
Fourth Quarter $0.47 $0.21 1,864,876
Third Quarter $0.58 $0.12 3,359,504
Second Quarter $0.70 $0.16 1,430,920
First Quarter $1.00 $0.47 781,337
1997
Fourth Quarter $1.35 $0.31 377,633
Third Quarter $1.50 $0.80 168,100
Second Quarter $2.00 $1.25 368,100
First Quarter $2.70 $1.45 744,480
</TABLE>
To the best of the Company's knowledge, as of June 30, 2000, 7,853,200 Common
Shares were held by 51 registered holders in the United States. The Common
Shares currently are not listed for trading on any securities exchange in the
United States. The Common Shares are not registered to trade in the United
States in the form of American Depository Receipts or similar certificates.
ITEM 6: EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
CANADIAN 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-residents. Dividends paid to United
States residents, however, are subject to a 15% withholding tax or a 5%
withholding tax for dividends paid in 1997 and thereafter, if the shareholder is
a corporation owning at least 10% of the outstanding voting shares of the
corporation pursuant to Article X of the reciprocal tax treaty between Canada
and the United States. (See "Item 7 -- Taxation").
Except as provided in the Investment Canada Act (the "Act"), which has
provisions that restrict the holding of voting shares by non-Canadians, there
are no limitations specific to the rights of non-Canadians to hold or vote the
Common Shares under the laws of Canada or the Province of Alberta, or in the
charter documents of Birch or its subsidiaries.
-15-
<PAGE> 23
Management of the Corporation believes that the following summary fairly
describes those provisions of the Act pertinent to an investment in the
Corporation by a person who is not a Canadian resident (a "non-Canadian").
The Act requires a non-Canadian making an investment which would result in the
acquisition of control of a Canadian business, the gross value of the assets of
which exceed certain threshold identified, to either notify, or file an
application for review with Investment Canada, the federal agency created by the
Act. The notification procedure involves a brief statement of information about
the investment on a prescribed form which is required to be filed with
Investment Canada by the investor at any time up to 30 days following
implementation of the investment. It is intended that investments requiring only
notification will proceed without government intervention unless the investment
is in a specific type of business activity related to Canada's cultural heritage
and national identity.
If an investment is reviewable under the Act, an application for review in the
form prescribed is normally required to be filed with Investment Canada prior to
the investment taking place and the investment may not be implemented until the
review has been completed and the Minister responsible for Investment Canada is
satisfied that the investment is likely to be of net benefit to Canada. If the
Minister is not satisfied that the investment is likely to be of net benefit to
Canada, the non-Canadian must not implement the investment or, if the investment
has been implemented, may be required to divest himself of control of the
business that is the subject of the investment.
The following investments by non-Canadians are subject to notification under the
Act:
1. An investment to establish a new Canadian business; and
2. An investment to acquire control of a Canadian business that is not
reviewable pursuant to the Act.
The following investments by a non-Canadian are subject to review under the Act:
1. Direct acquisitions of control of Canadian businesses with assets of $5
million or more, unless the acquisition is being made by a World Trade
Organization ("WTO") member country investor (the United States being a
member of the WTO);
2. Direct acquisitions of control of Canadian businesses with assets of
$160 million or more by a WTO investor;
3. Indirect acquisitions of control of Canadian businesses with assets of
$5 million or more if such assets represent more than 50% of the total
value of the assets of the entities the control of which is being
acquired, unless the acquisition is being made by a WTO investor, in
which case there is no review;
4. Indirect acquisitions of control of Canadian businesses with assets of
$50 million or more even if such assets represent less than 50% of the
total value of the assets of the entities the control of which is being
acquired, unless the acquisition is being made by a WTO investor, in
which case there is no review; and
5. An investment subject to notification that would not otherwise be
reviewable if the Canadian business engages in the activity of
publication, distribution or sale of books, magazines, periodicals,
newspapers, film or video recordings, audio or video music recordings,
or music in print or machine-readable form.
-16-
<PAGE> 24
Generally speaking, an acquisition is direct if it involves the acquisition of
control of the Canadian business or of its direct or indirect Canadian parent
and an acquisition is indirect if it involves the acquisition of control of a
non-Canadian direct or indirect parent of an entity carrying on the Canadian
business. Control may be acquired through the acquisition of substantially all
of the assets of the Canadian business. No change of voting control will be
deemed to have occurred if less than one-third of the voting control of a
Canadian corporation is acquired by an investor.
A WTO investor, as defined in the Act, includes an individual who is a national
or a member country of the WTO or who has the right of permanent residence in
relation to that WTO member, a government or government agency of a WTO
investor-controlled corporation, limited partnership, trust or joint venture
that is neither WTO-investor controlled or Canadian controlled of which
two-thirds of its board of directors, general partners or trustees, as the case
may be, are any combination of Canadians and WTO investors. The higher
thresholds for WTO investors do not apply if the Canadian business engages in
activities in certain sectors such as uranium, financial services (except
insurance), transportation services or media activities.
The Act specifically exempts certain transactions from either notification or
review. Included among this category of transactions is the acquisition of
voting shares or other voting interests by any person in the ordinary course of
that person's business as a trader or dealer in securities.
ITEM 7: TAXATION
The following summary of the material Canadian federal income tax considerations
generally applicable in respect of the Common Shares reflects the Company's
opinion. The tax consequences to any particular holder of Common Shares will
vary according to: the status of that holder as an individual, trust,
corporation or member of a partnership, the jurisdiction in which that holder is
subject to taxation, the place where that holder is resident and, generally,
according to that holder's particular circumstances.
This following general discussion in respect of taxation is based upon the
Company's understanding of the rules. No opinion was requested by the Company or
provided by its auditors or lawyers.
This summary is applicable only to holders who are resident in the United
States, have never been resident in Canada, deal at arm's length with the
Company, hold their Common Shares as capital property, do not carry on an
insurance business in Canada, and will not use or hold the Common Shares in
carrying on business in Canada. Special rules, which are not discussed in this
summary, may apply to a United States holder that is a corporation that carries
on business in Canada and elsewhere.
This summary is based upon the provisions of the Income Tax Act of Canada and
the regulations thereunder (collectively, the "Tax Act", or "ITA") and the
Canada-United States Tax Convention (the "Tax Convention") as at the date of the
Registration Statement, and upon the current administrative practices of the
Canada Customs and Revenue Agency (formerly Revenue Canada).
Each holder should consult his own tax advisor with respect to the income tax
consequences applicable to him in his own particular circumstances.
-17-
<PAGE> 25
Disposition of Common Shares
Under the Tax Act, a gain from the sale of Common Shares by a non-resident will
not be subject to Canadian tax, provided the shareholder (together with persons
who do not deal at arm's length with the shareholder) have not owned 25% or more
of the shares of any class of the Company's stock at any time in the five years
preceding the disposition. In addition, the Tax Convention will exempt from
Canadian taxation any capital gain realized on a disposition of Common Shares by
a resident of the United States, provided that the value of the Common Shares is
not derived principally from real property situated in Canada.
However, special rules apply if a non-resident were to dispose of Common Shares
of the Company to another Canadian corporation which deals or is deemed to deal
on a non-arm's length basis with the non-resident and, immediately after the
disposition, the Company is connected with the purchaser corporation (i.e., the
purchaser corporation holds shares representing more than 10% of the voting
power and more than 10% of the market value of all issued and outstanding shares
of the Company). In this case, the amount by which the fair market value of any
consideration paid by the purchaser corporation (other than any shares of the
purchaser corporation) exceeds the paid-up capital of the Common Shares sold
will be deemed to be taxable as a dividend paid by the purchasing corporation,
and subject to withholding taxes as described below.
Dividends
In the case of any dividends paid or deemed to be paid to non-residents, the
non-resident is subject to tax on the gross amount of such dividends. The
Canadian tax is withheld by the Company, which remits only the net amount to the
shareholder. By virtue of Article X of the Tax Convention, the rate of tax on
dividends paid to residents of the United States is generally limited to 15% of
the gross dividend (or 5% in the case of certain corporate shareholders owning
at least 10% of the Company's voting shares). In the absence of the treaty
provisions, the rate of Canadian withholding tax imposed on non-residents is 25%
of the gross dividend. Stock dividends received by non-residents from the
Company are taxable by Canada as ordinary dividends.
Where a holder disposes of Common Shares to the Company (unless the Company
acquired the Common Shares in the open market in the manner in which shares
would normally be purchased by any member of the public), this will result in a
deemed dividend to the holder equal to the amount by which the consideration
paid by the Company exceeds the paid-up capital of such shares. The amount of
such deemed dividend will be subject to withholding tax as described above.
Capital Gains
A non-resident of Canada is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of a share of a class that is listed
on a prescribed stock exchange unless the share represents "taxable Canadian
property" to the holder thereof. A common share of the Company will be taxable
Canadian property to a non-resident holder if, at any time during the period of
five years immediately preceding the disposition, the non-resident holder,
persons with whom the non-resident holder did not deal at arm's length, or the
non-resident holder and persons with whom he/she did not deal at arms' length,
owned 25% of more of the issued shares of any class or series of the Company.
-18-
<PAGE> 26
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
tax will be payable on a capital gain realized on such shares by reason of the
Canada-United States Income Tax Convention (1980)(the "Treaty") unless the value
of such shares is derived principally from real property situated in Canada or
the non-resident holder previously held the shares while resident in Canada.
Even where the value of the shares would be derived from real property holdings
in Canada certain transitional relief might be available under the Treaty. At
this time, this Registrant's asset value is not based on real property holdings
located in Canada.
Certain United States Federal Income Tax Consequences
The following is a discussion of certain possible United States Federal income
tax consequences, under the law, generally applicable to a U.S. Holder (as
defined below) of Common Shares of the Company. This discussion does not address
consequences peculiar to persons subject to special provisions of Federal income
tax law, such as those described below as excluded from the definition of a U.S.
Holder. In addition, this discussion does not cover any state, local or foreign
tax consequences.
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, the 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 Common Shares of the Company should consult
their own tax advisors about the federal, state, local, and foreign tax
consequences of purchasing, owning and disposing of Common Shares of the
Company.
U.S. Holders
As used herein, a U.S. Holder includes a holder of Common Shares of the Company
who is a citizen or resident of the United States, a corporation created or
organized in or under the laws of the United States or of any political
subdivision thereof and any other person or entity whose ownership of Common
Shares of the Company is effectively connected with the conduct of a trade or
business in the United States.
A U.S. Holder does not include persons subject to special provisions of Federal
income tax law, such as tax-exempt organizations, qualified retirement plans,
financial institutions, insurance companies, broker-dealers, non-resident alien
individuals or foreign corporation whose ownership of Common Shares of the
Company 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 Common Shares of the Company
U.S. Holders receiving dividend distributions (including constructive dividends)
with respect to Common Shares of the Company are required to include in gross
income (for United States Federal income tax purposes) the gross amount of such
distributions, to the extent that the Company has current or accumulated
earnings and profits. This
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<PAGE> 27
inclusion is done without reduction for any Canadian income tax withheld from
such distributions.
Any Canadian tax withheld may be credited (subject to certain limitations)
against the U.S. Holder's United States Federal taxable income. (See more
detailed discussion at "Foreign Tax Credits" below). To the extent that
distributions exceed current or accumulated earnings and profits of the Company,
they will be treated first as a return of capital up to the U.S. Holder's
adjusted basis in the Common Shares and thereafter as a gain from the sale or
exchange of the Common Shares. Preferential tax rates for long-term capital
gains are applicable to an U. S. Holder, which is an individual, estate or
trust. There are currently no preferential tax rates for long-term capital gains
for an U.S. Holder, which is a corporation.
Dividends paid on the Common Shares of the Company will not generally be
eligible for the dividends-received deduction provided to corporations receiving
dividends from certain United States corporations. A U.S. Holder, that is a
corporation may, under certain circumstances, be entitled to a 70% deduction of
the United States source-portion of dividends received from the Company (unless
the Company qualifies as a "foreign personal holding company" or a "passive
foreign investment company", as defined below). That occurs if such U.S. Holder
owns shares representing at least 10% of the voting power and value of the
Company. The availability of this deduction is subject to several complex
limitations beyond the scope of this discussion.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of Common Shares of the Company may be entitled,
at the option of the U.S. Holder, to either 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 income
taxes (or taxes in lieu of income tax) paid by (or withheld from) the U.S.
Holder during the year. There are significant and complex limitations which
apply to the credit, among which is the general limitation that the credit
cannot exceed the proportionate share of the U.S. Holder's United States income
tax liability that the U.S. Holder's foreign source income bears to his/her or
its worldwide taxable income.
In the determination of the application of this limitation, the various items of
income and deduction must be classified into foreign and domestic sources.
Complex rules govern this classification process. There are further limitations
on the foreign tax credit for certain types of income such as "passive income",
"high withholding tax interest", "financial services income", "shipping income",
and certain other classifications of income. 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 Shares of the Company should
consult their own tax advisors regarding their individual circumstances.
Disposition of Common Shares of the Company
A U.S. Holder will recognize gain or loss upon the sale of Common Shares of the
Company equal to the difference, if any, between -
- the amount of cash plus the fair market value of any property received,
and
- the shareholders tax basis in the Common Shares of the Company.
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<PAGE> 28
This gain or loss will be capital gain or loss if the Common Shares are a
capital asset in the hands of the U.S. Holder, which will be a short-term or
long-term capital gain or loss depending upon the holding period of the U.S.
Holder. 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 U.S. Holders, as 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 U.S. Holders, as 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.
ITEM 8: SELECTED FINANCIAL DATA
The selected consolidated financial data for the periods ended December 31,
1995, 1996, 1997, 1998 and 1999 are derived from the audited financial
statements of the Company which have been audited by Barr Shelley Stuart,
independent Chartered Accountants, as indicated by their reports which are
included elsewhere in this Registration Statement. The Company's audited
consolidated financial statements are prepared in accordance with Canadian
Generally Accepted Accounting Principles. In addition to the material contained
herein, see Note 17 to the Audited Financial Statements for 1999 for a
discussion of the significant differences between Canadian and U.S. generally
accepted accounting principles as they apply to the Company for the periods
presented therein.
The consolidated financial information has been updated for the 6 month period
ended June 30, 2000, and the comparative period ended June 30, 1999 which have
not been audited.
The following table sets forth certain financial data for Birch as at the dates
and for the years indicated. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the financial statements and related notes
included elsewhere in this Registration Statement.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDING
ENDING JUNE 30, DECEMBER 31,
FINANCIAL 2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Amounts in accordance
with Canadian GAAP:
(Loss) before income (1,100) (356) (802) (3,217) (4,539) (1,941) (615)
tax
Net (Loss) for the (1,100) (356) (576) (2,890) (4,539) (1,291) (429)
year
(Loss) per common (0.03) (0.01) (0.02) (0.13) (0.21) (0.07) (0.03)
share
Amounts in accordance
with U.S. GAAP:
(Loss) before income (1,680) (629) (1,392) (3,758) (5,361) (2,852) (1,297)
tax
Net (Loss) for the (1,680) (629) (1,165) (3,431) (5,361) (2,203) (1,110)
year
(Loss) per common (0.05) (0.03) (0.04) (0.15) (0.24) (0.12) (0.07)
share
</TABLE>
CASH FLOW DATA:
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<PAGE> 29
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDING
ENDING JUNE 30, DECEMBER 31,
FINANCIAL 2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts in accordance
with Canadian GAAP:
Net cash provided by (581) (350) (528) (592) (840) (1,085) (488)
(used in) operating
activities
Net cash provided by 4,128 1,110 1,621 951 778 9,268 2,392
financing activities
Net cash used in (809) (286) (625) (603) (4,052) (4,878) (748)
investing activities
Amounts in accordance
with U.S. GAAP:
Net cash provided by (1,162) (623) (1,116) (1,133) (1,661) (1,996) (1,170)
(used in) operating
activities
Net cash provided by 4,128 1,110 1,621 951 778 9,267 2,392
financing activities
Net cash used in (229) (13) (38) (62) (3,231) (3,967) (66)
investing activities
</TABLE>
<TABLE>
<CAPTION>
SIX MONTH ENDING YEAR ENDING
JUNE 30, DECEMBER 31,
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Amounts in accordance
with Canadian GAAP:
Total assets 13,933 8,827 8,982 8,188 10,155 13,687 4,512
Current liabilities 358 422 325 536 516 286 58
Long term debt __ __ __ __ __ __ __
Total Liabilities 358 422 325 536 516 286 58
Shareholders' equity 13,575 8,405 8,657 7,652 9,639 13,401 4,454
Amounts in accordance
with U.S. GAAP:
Total assets 9,295 5,086 4,924 4,720 7,227 11,581 3,317
Current liabilities 358 422 325 536 516 286 58
Long term debt
Total Liabilities 358 422 325 536 516 286 58
Shareholders' equity 8,937 4,664 4,600 4,184 6,711 11,295 3,259
</TABLE>
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<PAGE> 30
<TABLE>
<CAPTION>
SIX MONTHS ENDING YEAR ENDING
JUNE 30, DECEMBER 31,
U.S. GAAP 2000 1999 1999 1998 1997 1996 1995
--------- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS OF DOLLARS, EXCEPT LOSS PER SHARE IN DOLLARS AND SHARES
OUTSTANDING IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Loss In 1,100 356 576 2,890 4,539 1,291 429
Accordance With
Canadian GAAP
Exploration costs 581 273 589 541 821 911 682
Net Loss For The Year 1,680 629 1,165 3,431 5,361 2,203 1,110
Under U.S. GAAP
Weighted Average
Number of Common 31,308 25,040 26,682 22,934 21,936 18,493 16,082
Shares Outstanding
Under U.S. GAAP
Loss Per Share Under 0.05 0.03 0.04 0.15 0.24 0.12 0.07
U.S. GAAP
Shareholders' Equity 13,575 8,405 8,657 7,652 9,639 13,401 4,454
Canadian GAAP
Exploration costs 4,638 3,741 4,057 3,468 2,927 2,106 1,195
Shareholders' Equity 8,937 4,664 4,600 4,184 6,711 11,295 3,259
U.S. GAAP
Mineral Exploration
Costs Canadian GAAP 9,981 7,469 7,829 7,196 8,555 7,619 2,793
Exploration costs 4,638 3,741 4,057 3,468 2,927 2,106 1,195
Mineral Exploration 5,343 3,728 3,771 3,728 5,628 5,513 1,599
Costs U.S. GAAP
</TABLE>
STOCK BASED COMPENSATION
U.S. GAAP requires stock based compensation to employees and directors be
recorded using the intrinsic value based method whereby compensation cost is
recorded for the excess of the quoted market price over the price granted, if
any, at the date granted. Under Canadian GAAP, no compensation cost is recorded.
ESCROW SHARES
U.S. GAAP requires that compensation expense be recorded for the excess of the
quoted market price granted to employees and directors under escrow share
agreements. The compensation expense is recorded when the shares become eligible
for release. Under Canadian GAAP, no compensation expense is recorded for such
escrow agreements. As at December 31, 1999, 3,411,348 shares were held in
escrow.
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<PAGE> 31
INCOME TAXES
In December 1997, the Canadian Institute of Chartered Accountants issued section
3465 of the CICA Handbook, "Income Taxes", which establishes standards for
recognition, measurement, presentation and disclosure of income and refundable
taxes. This statement mandates the use of the liability method of accounting for
income taxes and is effective for fiscal years beginning on or after January 1,
2000. The Company has opted for early adoption with restatement of prior years
reported figures. The Company's future tax assets have been eliminated by a
valuation allowance for all years reported. Income taxes paid for those years
were $nil.
STOCK OPTIONS
Birch accounts for stock options granted according to the requirements of
Canadian GAAP, and those requirements are similar to the accounting prescribe in
Accounting Principles Board Opinion No. 25 ("APB 25"). Under APB 25, because the
exercise price of Birch's stock options are equal to the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized.
RECENT ACCOUNTING DEVELOPMENTS
In March 1999, the Canadian Institute of Chartered Accountants issued section
3461 of the CICA Handbook, "Employee Future Benefits" which deals with the
recognition, measurement, presentation and disclosure of benefits to employees
when they have withdrawn for active service. The statement is effective for
fiscal years beginning on or after January 1, 2000. The Company considers that
the implementation of this standard will not have a material effect on its
reported results.
In June 1998, the Canadian Institute of Chartered Accounts issued section 1540
of the CICA Handbook, "Cash Flow Statements" which deals with the exclusion of
certain items in the statement of cash flow. Non cash items are now excluded
from this statement. The financial data presented has been restated to give
effect to this pronouncement.
DIVIDENDS
Birch has not paid dividends in order to retain funds for reinvestment in
Birch's operations. Birch's dividend policy is reviewed annually by its Board of
Directors.
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<PAGE> 32
ITEM 9: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Birch raised $2,162,352 (net of expenses) over the three-year period ending
December 31, 1999 through the sale of the Company's Common Shares in a series of
private placements. Additionally, the Company raised $348,088 when shareholders
exercised warrants, plus $73,509 on the exercise of stock options by staff,
officers, directors and consultants.
During the six month period ended June 30, 2000, Birch raised $2,692,000 (net of
expenses) through the sale of the Company's Common Shares in a private
placement. Additionally, the Company raised $1,331,000 pursuant to the exercise
of common share purchase warrants and $137,000 pursuant to the exercise of stock
options.
The funds raised during the prior three-years, plus the six months ended June
30, 2000 are summarized in the following table.
<TABLE>
<CAPTION>
NO. OF SHARES UNIT PRICE TOTAL FUNDS RAISED EQUIVALENT $U.S.
DATE OF ISSUE (UNITS) ($Can) ($Can) FUNDS RAISED(1)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON SHARES
February 20/98 204,074 $0.70 $142,852 $96,035
November 13/98 1,172,860 $0.35 $410,500 $280,590
April 12/99 2,900,000 $0.36 $1,044,000 $713,455
November 19/99 491,305 $1.15 $565,000 $386,990
January 28/00 2,365,256 $1.15 $2,697,546 $1,880,216
WARRANTS EXERCISED
1997 883,095 $0.30 to $0.75 $321,699 $216,340
1998 0 0 0 0
1999 26,389 $1.00 $26,389 $18,050
2000 6 months 1,322,226 $1.00 & 1.50 $1,330,976 $897,610
OPTIONS EXERCISED
1997 21,880 $0.10 $2,188 $1,470
1998 5,540 $0.10 to $0.22 $3,788 $2,590
1999 111,446 $0.10 to $0.70 $67,533 $46,160
2000 6 months 175,600 $0.22 to $1.36 $136,154 $91,822
</TABLE>
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<PAGE> 33
NOTE:
(1) U.S. dollars based on the exchange rates for the Canadian dollar as at
the date of issue. See "Currency and Exchange Rates" above.
Management believes that mineral technology and junior mining companies will
continue to have difficulty financing new issues in the current market. As a
result, the Company will continue to be prudent in its technology development
and exploration expenditures and general and administrative costs to preserve
its working capital. Management believes that Birch has adequate financial
resources to fund the next two years of currently planned activities.
The Company has been able to raise the required financing to continue to meet
its obligation to retain qualified staff, conduct exploration and the research
and development necessary to support the exploration.
At December 31, 1997, Birch had working capital of $738,000 compared to
$4,964,494 at December 31, 1996. There was a significant expenditure on field
exploration and drilling on several of the Company's properties in 1997. The
general & administrative expenses in 1997 were $1,144,000, compared with
$1,102,000 in 1996.
As at December 31, 1998, Birch had net working capital of $272,432, compared to
net working capital of $738,000 as at December 31, 1997. The primary sources of
capital were issuance of Common Shares from treasury in the 1997 and 1998
financial years.
As at December 31, 1999, Birch had net working capital of $667,906, compared to
net working capital of $272,432 as at December 31, 1998. The primary sources of
capital were issuance of Common Shares from treasury in both financial years. In
1999 Birch raised a total of $1,609,000 through private placements, compared to
$553,353 raised in 1998. The Company received a refund of the Seriousness Bond,
plus interest, in the amount of $212,629 from the Federal Republic of Indonesia
in 1999.
During 1999 Birch changed its method of accounting for income taxes from the
deferral method to the liability method. This policy has been adopted
retroactively, resulting in the restatement of the December 31, 1998 financial
statements. Details are contained in Note 3 to the Audited Financial Statements
for 1999.
As at June 30, 2000, Birch had net working capital of $3,376,205. The primary
source of capital was the issuance of Common Shares.
RESULTS OF OPERATIONS
The net loss for the year ended December 31, 1998 was $2,890,369 or $0.13 per
share, compared to a net loss for the prior year of $4,539,479 or $0.205 per
share. In 1998, general and administrative expenses were $737,00 compared with
$1,144,000 in 1997, a reduction of 40%. To preserve working capital, the Company
reduced expenditures in all areas in 1998. The President accepted shares as
partial compensation for salary, the staff and consultants agreed to a voluntary
reduction in salaries and fees. These cost cutting measures continued into 1999.
The net loss for the year ended December 31, 1999 was $575,697 or $0.02 per
share, compared to a net loss for the prior year of $2,890,369 or $0.13 per
share due largely to the major write-down in mineral exploration costs in 1998.
In 1999, general and administrative expenses were $835,687 (including non-cash
items) compared with $737,371 in 1998, an increase of 13%. The higher expenses
in 1999 reflected the increased research and development plus an increase in
industry activities associated with the Company's co-development agreements with
major oil sands producers in Athabasca.
-26-
<PAGE> 34
During 1999, Birch increased its exploration and development expenses from the
previous year as a result of increased activities in the laboratory, plus
analysis of drill core received from oil sands mining companies. Work on the
Assessment Filing was initiated in 1999, culminating with a submission to
Alberta Department of Resource Development on April 28, 2000. This filing will
hold 1,600,752 acres (647,802 hectares) of Metallic and Industrial Mineral
Permits in the Athabasca valley and 204,959 acres (82,994 hectares) of Metallic
and Industrial Mineral Permits in the Birch Mountains in good standing for two
more years.
The net loss for the six months ended June 30, 2000 was $1,099,918 or $0.03 per
share, compared to $356,703 or $0.01 per share for the same period in 1999. A
large portion of the significant increase in expense in 2000 is attributable to
a consulting fee of $490,000 paid in shares to American Precious Metals Inc.,
and increases in expenses associated with higher levels of activity than were
incurred in 1999.
CORPORATE INCOME AND EXPENSES
Birch is engaged in technology development and mineral exploration and does not
have any production or revenue from sale of its technology or mineral
production. Though Birch has received some one-time payments from a Joint
Venture partner, the Company's only source of income from year to year is
interest earned on its term deposits. The interest income over the past three
years has varied with the amount of money in term deposits and has not been a
significant component of the Company's ability to operate, therefore, a
comparative analysis would not be meaningful.
The Company and its subsidiaries have no income from production since they are
presently at the exploration stage. The Company spends about $150,000 monthly
for management and shareholder services, outside consulting, laboratory
analysis, travel and other expenses. These monthly expenses are expected to
increase with increasing research and development activities, and will increase
significantly if and when the Company undertakes field-drilling activities.
ITEM 9A: RISKS AND UNCERTAINTIES
The Company's operating results are reported in Canadian dollars. It is expected
that a portion of the Company's revenues will be generated in foreign
currencies, including U.S. dollars, while the Company's expenses will be
generated in Canadian dollars. The exchange rate between the Canadian dollar and
foreign currencies has varied significantly over the past five years. To the
extent that foreign currency revenues are greater than expenses in a
strengthening foreign currency environment, there will be a positive impact on
the Company's income from operations. Conversely, if foreign currency revenues
are greater than foreign currency expenses in a weakening foreign currency
expenses in a weakening foreign currency environment, there will be a negative
impact on the Company's income from operations. This exchange rate risk, on an
annual basis, primarily reflects the impact of fluctuating exchange rates on the
net difference between total foreign currency revenues and foreign currency
expenses.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
The following table list the names of the Directors and Executive Officers of
the Company.
<TABLE>
<CAPTION>
DATE ELECTED COUNTRY OF
DIRECTOR/EXECUTIVE OFFICER POSITION(S) HELD OR APPOINTED RESIDENCE
-------------------------- ---------------- ------------ ----------
<S> <C> <C> <C>
Kerry E. Sully Chairman of the Board 1995 Canada
Douglas J. Rowe President, CEO & Director 1994 Canada
</TABLE>
-27-
<PAGE> 35
<TABLE>
<CAPTION>
DATE ELECTED COUNTRY OF
DIRECTOR/EXECUTIVE OFFICER POSITION(S) HELD OR APPOINTED RESIDENCE
-------------------------- ---------------- ------------ ----------
<S> <C> <C> <C>
Donald L. Dabbs Vice Pres., CFO & Director 1994 Canada
Myron A. Goldstein Director 1995 United States
Lanny K. McDonald Director 1995 Canada
Edward Rochette Director 2000 Singapore
John R. Houghton Corporate Secretary 1998 Canada
Hugh Abercrombie Vice President, Exploration 1998 Canada
</TABLE>
The Directors have served in their respective capacities since their election
and/or appointment and their term extends to the next Annual General Meeting of
Shareholders or until the office is vacated in accordance with the
Article/By-Laws of the Company. If a Director resigns or is removed, a successor
may be appointed by the remaining members of the Board of Directors. The
Executive Officers serve at the pleasure of the Board of Directors. No family
relationship exists between any Director or Executive Officer and any other
Director or Executive Officer.
No Director and/or Executive Officer has been the subject of any order,
judgment, or decree of any governmental agency or administrative body or of any
court of competent jurisdiction, revoking or suspending for cause any license,
permit or other authority of such person or of any corporation of which he is a
Director and/or Executive Officer, to engage in the securities business or in
the sale of a particular security or temporarily or permanently restraining or
enjoining any such activity.
PROFILES OF DIRECTORS AND EXECUTIVE OFFICERS
The following are profiles of the directors and executive officers, including
their principal occupations during the five years prior to the date hereof.
KERRY E. SULLY - CHAIRMAN OF THE BOARD OF DIRECTORS
Mr. Sully was elected by the shareholders as a director of the company in 1995
and has served as a director each year since 1995. Mr. Sully was appointed
Chairman of the Board of Directors of the company in June of 1998.
Mr. Sully has been President and CEO of CGX Energy Inc. since March, 1999, a
company first listed on the Canadian Dealing Network in March, 1999 and now
listed on the Canadian Venture Exchange Inc. He was President, Chief Executive
Officer and a director of Ranchmen's Resources Ltd., a company listed on the
Toronto Stock Exchange, from 1989 to 1995.
DOUGLAS J. ROWE - PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Mr. Rowe was one of the founders of the Company and has served in the position
of President, CEO and director from the formation of the company in 1994. Prior
thereto, Mr. Rowe was President and Chairman of the Board of Brougham Geoquest
Ltd., a company engaged in mineral exploration and Brougham Energy Corporation,
a company engaged in oil and gas exploration and development.
-28-
<PAGE> 36
DONALD L. DABBS - VICE-PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR
Mr. Dabbs was one of the founders of the Company and has served as the CFO and a
director since 1994. Mr. Dabbs was President, CEO and director of Niaski
Environmental Inc., a company listed on The Alberta Stock Exchange, from
February 1998 to August 1999 when he returned to Birch Mountain. He served as
Vice President of the Company from December 1995 to January 1998. He was
Regional Manager, Bovar Environmental, and Vice President of Concord
Environmental Corporation from 1988 to 1994.
MYRON A. GOLDSTEIN - DIRECTOR
Dr. Goldstein has over 25 years of experience in precious and base metal
exploration, and has been a director of the Company since 1995. Dr. Goldstein
was Chief Operating Officer for DiamondWorks Inc. from June 1995 to November
1998 and has served as President of Northern Exploration Ltd., a private
company, from February 1996 to present.
LANNY K. MCDONALD - DIRECTOR
Mr. McDonald is an independent business man and was Vice-President of Corporate
Development, The Calgary Flames of the National Hockey League from 1992 to
August 2000. From 1989 to 1992, he was Vice-President, Corporate and Community
Relations with the Calgary Flames. Mr. McDonald has been a director of the
company since 1995.
EDWARD ROCHETTE - DIRECTOR
Mr. Rochette is the Senior Vice-President of Ivanhoe Mines. From 1992 to 1995,
he was the Vice-President of Ivanhoe Capital. From 1980 to 1992, he was the
Manager-Lands of Nerco Minerals.
JOHN R. HOUGHTON - CORPORATE SECRETARY
Mr. Houghton served as a director of the company in 1998, and has been corporate
secretary since December of 1998.
Mr. Houghton has been a partner in the law firm Donahue and Partners since
February of 1999. Previously, he was a partner in the law firm of Mackimmie
Matthews from 1984 to 1999.
HUGH J. ABERCROMBIE - VICE PRESIDENT, EXPLORATION
Dr. Abercrombie joined the Company as Manager, Exploration in February 1997 and
was appointed Vice-President, Exploration in November, 1998.
After completing post-graduate studies in 1989, Dr. Abercrombie worked for eight
years as a research scientist with the Geological Survey of Canada. His research
focused on low temperature metal transport in sedimentary basins and formed the
basis for Birch's Prairie Gold model.
-29-
<PAGE> 37
ITEM 11: COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The Company has six directors, two of whom are executive officers. The Company
also has a corporate secretary and one additional executive officer who is not a
director. The total cash remuneration paid or accrued during Fiscal 1999 to all
members of management (all executive officers and any other key personnel who
were employed by the Company or its subsidiaries or retained on a consulting
basis) was $237,830. No directors of the Company received any fees for providing
services as directors during the Company's 1999 Fiscal year.
The Company has in place a stock option plan dated November 2, 1994 (the
"Plan"), under which non-transferable options to purchase Common Shares (the
"Option") may be granted to directors, officers, employees and consultants of
the Company or an affiliate of the Company. The Plan contains early termination
provisions for certain situations. In addition, the Plan contains provisions
stating that the option period may not extend past five years and the number of
Common Shares issuable on exercise of outstanding stock options may not exceed
10% of the issued and outstanding Common Shares. The Plan is administered by the
Compensation Committee of the Board of Directors of the Company, who make
allocations to eligible persons after considering their present and potential
contributions and other relevant factors. The Plan was filed with The Alberta
Stock Exchange (now the Canadian Venture Exchange Inc.) and was approved by the
shareholders on November 2, 1994.
ITEM 12: OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
STOCK OPTION GRANTS
The following table sets forth details with respect to the outstanding options
and warrants as of June 30, 2000.
TYPE OF SECURITY: STOCK OPTIONS
<TABLE>
<CAPTION>
NUMBER OF SHARES BY PURCHASE PRICE OF
OPTIONEE OUTSTANDING OPTIONS DATE OF EXPIRY SHARES
-------------------------- ----------------------- ----------------------- ------------------------
<S> <C> <C> <C>
All Optionees other than 150,000 7/4/00 $0.76
Directors and Officers
150,000 7/4/00 $0.38
50,000 7/4/00 $0.59
250,000 9/14/00 $1.06
50,000 1/16/01 $0.70
105,000 11/21/01 $0.70
75,000 1/2/02 $0.70
100,000 3/24/02 $0.70
10,000 6/5/02 $0.70
150,000 3/9/03 $0.90
75,000 7/13/03 $0.22
</TABLE>
-30-
<PAGE> 38
<TABLE>
<CAPTION>
NUMBER OF SHARES BY PURCHASE PRICE OF
OPTIONEE OUTSTANDING OPTIONS DATE OF EXPIRY SHARES
-------------------------- ----------------------- ----------------------- ------------------------
<S> <C> <C> <C>
490,000 11/16/03 $0.35
30,000 7/26/04 $1.25
835,000 11/18/04 $1.36
Directors and Officers 150,000 7/4/00 $0.76
150,000 7/14/00 $0.38
250,000 9/14/00 $1.06
50,000 1/16/01 $0.70
100,000 11/21/01 $0.70
75,000 1/2/02 $0.70
100,000 3/24/02 $0.70
150,000 3/9/03 $0.90
50,000 7/13/03 $0.22
490,000 11/16/03 $0.35
670,000 11/18/04 $1.36
</TABLE>
TYPE OF SECURITY: COMMON SHARE PURCHASE WARRANTS
<TABLE>
<CAPTION>
NUMBER OF SHARES BY PURCHASE PRICE OF
OPTIONEE OUTSTANDING WARRANTS DATE OF EXPIRY SHARES
-------------------------- ----------------------- ----------------------- ------------------------
<S> <C> <C> <C>
All Optionees other than 228,153 11/10/00 $1.50
Directors and Officers 1,182,628 1/25/01 $1.50
Directors and Officers 63,370 1/25/01 $1.50
</TABLE>
ITEM 13: INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
There are no transactions that have materially affected or will materially
affect the Company in which any director, executive officer or beneficial holder
of more than 10% of the outstanding Common Shares, or any of their respective
relatives, spouses, associates of affiliates has had or will have any direct or
material indirect interest.
PART II
ITEM 14: DESCRIPTION OF SECURITIES TO BE REGISTERED
The Company has an authorized capital consisting of an unlimited number of
Common Shares, of which 33,552,966 are issued and outstanding as of the date of
this Registration Statement.
-31-
<PAGE> 39
The holders of Common Shares are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors. Holders of Common Shares are entitled to receive
dividends when, as and if declared by the Board of Directors in its discretion,
out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Shares are
entitled to share ratably in the assets of the Company, if any, legally
available for distribution to them after payment of debts and liabilities of the
Company after provision has been made for each class of stock, if any, having
liquidation preference over the Common Shares. Holders of Common Shares have no
conversion, preemptive or other subscription rights, and there are no redemption
or sinking fund provisions applicable to the Common Shares. All of the
outstanding Common Shares are fully paid and non-assessable.
The Company is authorized to issue an unlimited number of non-voting shares. The
holders of the non-voting shares are entitled to dividends, if, as and when
declared by the Board of Directors and, upon liquidation, to receive such assets
of the Company as are distributable to the holders of the non-voting and Common
Shares.
The Company is authorized to issue an unlimited number of preferred shares. The
preferred shares may be issued from time to time in one or more series, each
consisting of a number of preferred shares as determined by the Board of
Directors of the company who also may fix the designations, rights, privileges,
restrictions and conditions attaching to the shares of each series of preferred
shares. There are no preferred shares issued and outstanding. The preferred
shares of each series shall, with respect to payment of dividends and
distribution of assets in the event of voluntary or involuntary liquidation,
dissolution or winding-up of the Company or any other distribution of the assets
of the Company among its shareholders for the purpose of winding-up its affairs,
rank on a parity with the preferred shares of every other series and shall be
entitled to preference over the Common Shares and the shares of any other class
ranking junior to the preferred shares.
RIGHTS PLAN
On May 17, 2000 the Board of Directors (the "Board") of the Company adopted the
rights plan of the Company ("Rights Plan"), which was implemented pursuant to a
shareholders rights plan agreement (the "Rights Plan Agreement") of the same
date between the Company and Montreal Trust Company of Canada, as rights agent.
The shareholders of the Company approved the Rights Plan on June 22, 2000. The
purpose of the Rights Plan is, firstly, to protect shareholders of the Company
from unfair, abusive or coercive takeover strategies, including the acquisition
of control of the Company by a bidder in a transaction or series of transactions
that does not treat all shareholders equally or fairly or that does not afford
all shareholders an equal opportunity to share in any premium paid upon an
acquisition of control. Secondly, the purpose of the Rights Plan is to afford
both the shareholders of the Company and the Board adequate time to assess an
offer made for the Company's and to pursue, explore and develop alternative
courses of action in any attempt to maximize shareholder value.
The Rights Plan is not intended to deter a person from seeking to acquire
control of the Company if such person is prepared to make a takeover bid
pursuant to a Permitted Bid or Competing Permitted Bid in accordance with the
provisions of the Rights Plan. The Rights Plan is intended to make it
impracticable to acquire 20% percent or more of the outstanding voting shares of
the Company other than by way of a Permitted Bid or a Competing Permitted Bid.
This impracticability arises as a result of the fact that the Rights will
substantially dilute the holdings of a person that seeks to acquire control of
the Company other than by means of a Permitted Bid or a Competing Permitted Bid.
ITEM 15: DEFAULTS UPON SENIOR SECURITIES
-32-
<PAGE> 40
Not applicable.
ITEM 16: CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
Not applicable.
ITEM 17: FINANCIAL STATEMENTS
See pages F-1 through F-40, incorporated by reference.
ITEM 19: FINANCIAL STATEMENTS AND EXHIBITS
(1) Index to Financial Statements of Birch Mountain Resources Ltd.
Audited Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1999, 1998 and 1997
Consolidated Statements of Loss & Deficit for the years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Cash Flow for the years ended December 31,
1999, 1998 and 1997
Notes to and forming part of the Financial Statements
Unaudited Financial Statements
Consolidated Balance Sheets at June 30, 2000 and 1999
Consolidated Statements of Loss & Deficit for the six month periods
ended June 30, 2000 and 1999
Consolidated Statements of Cash Flow for the six month periods ended
June 30, 2000 and 1999
(2) Exhibits
1. Articles of Amalgamation
2. By-Law No. 1
3. Shareholders Rights Plan Agreement
4. Stock Option Plan
5. Employment Agreement with Douglas J. Rowe
*Exhibits incorporated by reference to the Form 20-F filed
on September 29, 2000.
-33-
<PAGE> 41
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934, as
amended, the Registrant certified that it meets all of the requirements for
filing on Form 20-F and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized.
BIRCH MOUNTAIN RESOURCES LTD.
Date: October 10, 2000 Per: /s/ Douglas J. Rowe
------------------------
Douglas J. Rowe, P. Eng.
President and Chief Executive Officer
-34-
<PAGE> 42
BIRCH MOUNTAIN RESOURCES LTD.
AUDITORS' REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
F-1
<PAGE> 43
AUDITORS' REPORT
TO THE SHAREHOLDERS OF
BIRCH MOUNTAIN RESOURCES LTD.
We have audited the consolidated balance sheets of BIRCH MOUNTAIN
RESOURCES LTD. as at December 31, 1998 and 1997 and the consolidated statements
of loss and deficit and cash flow for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1998 and 1997 and the results of its operations and the changes in its cash flow
for the years then ended in accordance with generally accepted accounting
principles.
/s/ Barr Shelley Stuart
Calgary, Alberta CHARTERED ACCOUNTANTS
March 30, 1999
F-2
<PAGE> 44
BIRCH MOUNTAIN RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
<S> <C> <C> <C>
CURRENT
Cash and term deposits (Note 5) $ 475,188 719,316
Accounts receivable 142,057 185,435
Prepaids and deposits 191,410 349,218
--------- ---------
808,655 1,253,969
INVESTMENT (Note 6) 36,890 130,000
CAPITAL (Note 7) 146,714 215,423
MINERAL EXPLORATION COSTS (Note 8) 5,522,268 7,269,931
--------- ---------
$ 6,514,527 8,869,323
========= =========
LIABILITIES
CURRENT
Accounts payable $ 536,223 515,950
---------- ---------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 9) 16,562,977 15,720,950
DEFICIT (10,584,673) (7,367,577)
---------- ----------
5,978,304 8,353,373
$ 6,514,527 8,869,323
========== =========
</TABLE>
Approved On Behalf Of The Board:
/s/ Donald L. Dabbs Director
--------------------------------------------
/s/ Lanny K. McDonald Director
--------------------------------------------
F-3
<PAGE> 45
BIRCH MOUNTAIN RESOURCES LTD.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C>
EXPENSES
Salaries, management fees and $ 227,080 461,160
benefits
Office 176,104 233,619
Shareholder services and promotion 132,844 266,619
Legal and audit 131,085 121,957
Amortization 70,258 60,789
--------- ---------
LOSS BEFORE THE FOLLOWING 737,371 1,144,144
--------- ---------
Interest and other income (38,316) (130,835)
Loss on disposal of investment 105,000 -
Write-down of investments 143,220 529,267
Write-down of mineral exploration
costs (Note 8) 2,269,821 2,996,903
--------- ---------
2,479,725 3,395,335
--------- ---------
NET LOSS FOR THE YEAR 3,217,096 4,539,479
DEFICIT AT BEGINNING OF YEAR 7,367,577 2,828,098
--------- ---------
DEFICIT AT END OF YEAR $ 10,584,673 7,367,577
========== =========
LOSS PER SHARE (Note 10) $ (0.14) (0.21)
========== =========
</TABLE>
F-4
<PAGE> 46
BIRCH MOUNTAIN RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the year $ (3,217,096) (4,539,479)
Add items not involving a current cash
outlay
Amortization 70,258 60,789
Loss on disposal of investment 105,000 -
Write-down of investments 143,220 529,267
Write-down of mineral exploration
costs 2,269,821 2,996,903
--------- ---------
(628,797) (952,520)
Net changes in working capital
balances related to operating activities 221,459 112,055
--------- ---------
(407,338) (840,465)
--------- ---------
FINANCING ACTIVITIES
Issuance of common shares for cash 389,168 778,818
Issuance of common shares for mineral
rights 465,920 -
Share issuance costs (13,061) (1,274)
--------- ---------
842,027 777,544
--------- ---------
INVESTING ACTIVITIES
Purchase of investment (180,110) (10,753)
Proceeds on disposal of investment 25,000 -
Purchase of capital assets (1,549) (107,457)
Mineral exploration costs (522,158) (3,933,289)
--------- ----------
(678,817) (4,051,499)
--------- ----------
DECREASE IN CASH (244,128) (4,114,420)
CASH AT BEGINNING OF YEAR 719,316 4,833,736
--------- ---------
CASH AT END OF YEAR $ 475,188 719,316
========= =========
</TABLE>
F-5
<PAGE> 47
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 NATURE OF OPERATIONS AND GOING CONCERN CONSIDERATIONS
Birch Mountain Resources Ltd. is in the process of exploring its mineral
properties and has not yet determined whether the properties contain
economically recoverable reserves. The Company's ability to continue as a going
concern is largely dependent on its success in obtaining sufficient funds to
carry out exploration activities on its mining claims, preserving it's interest
in the underlying mineral claims, establishing the existence of economically
recoverable reserves, and the ability of the Company to obtain necessary
financing to complete the development and achieve future profitable production
or alternatively upon the Company's ability to dispose of it's interests on an
advantageous basis. It is not possible to predict whether financing efforts will
be successful, or if the Company will attain profitable levels of operation.
NOTE 2 BASIS OF CONSOLIDATION
These financial statements include the operations of the Company and its wholly
owned subsidiaries Dawson Bay Minerals Inc., Swift River Minerals Ltd., 777195
Alberta Inc. and Rockyview Development Limited and its subsidiaries.
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES
(a) Mineral Exploration Costs
The mineral properties are recorded at cost. Cost includes cash
consideration and the market value of shares issued, if any. All direct
and indirect acquisition and exploration expenditures are capitalized and
deferred until the properties to which they relate are placed into
production, sold, allowed to lapse, or abandoned. These costs will be
amortized over the estimated useful lives of the properties following the
commencement of production, or written off if the properties are sold,
allowed to lapse, or abandoned. The Company assesses the carrying value of
these mineral exploration costs annually and based on estimates, adjusts
the carrying amount for any impairments in value.
Properties acquired under option or joint venture agreements, whereby
payments are made at the sole discretion of the Company, are recorded in
the accounts at the time of payment.
F-6
<PAGE> 48
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b) Capital Assets
Capital assets are recorded at cost. Amortization is recorded at the
following annual rates:
Equipment - 20% to 30% declining balance
Computer software - 100% declining balance
Computer hardware - 30% declining balance
Automotive - 30% declining balance
Leasehold improvements - 20% straight line
Amortization is charged at one-half of the annual rate in the year of
acquisition of an asset.
(c) Deferred Income Taxes
The Company follows the tax allocation basis in accounting for income
taxes. Income tax legislation permits the flow through to shareholders of
income tax deductions relating to certain qualified mining expenditures.
This gives rise to deferred taxes which are deducted from the carrying cost
of the mineral exploration costs and the proceeds of share capital when the
expenditures are renounced.
(d) Measurement Uncertainty
The preparation of financial statements in conformity with generally
acceptable accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant areas requiring the use of
management estimates relate to the determination of impairment of mineral
exploration costs, reclamation obligations, and capital and other taxes.
Financial results as determined by actual events could differ from those
estimates.
NOTE 4 ACQUISITION
During 1998, the Company acquired all of the outstanding shares of 777195
Alberta Inc., which held certain mineral rights in the Athabasca region. The
cost of the acquisition, which was accounted for using the purchase method,
consisted of $25,000 cash and 770,000 common shares of the Company. The purchase
price has been allocated to mineral exploration costs.
F-7
<PAGE> 49
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 5 CASH AND TERM DEPOSITS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash, available for use $ 456,188 260,213
Cash, subject to restriction 19,000 459,103
--------- ---------
$ 475,188 719,316
========= =========
</TABLE>
Cash subject to restriction represents amounts on deposit as security for
letters of credit to the governments of Alberta and Manitoba. The 1997 amount
includes a deposit with the government of Indonesia.
NOTE 6 INVESTMENT
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Tintina Mines Limited $ -- 130,000
Tahera Corporation 36,890 --
--------- ---------
$ 36,890 130,000
========= =========
</TABLE>
During 1998, the Company disposed of all of its shares in Tintina Mines Limited
for proceeds of $25,000.
The cost of the Company's investment in 217,000 shares of Tahera Corporation,
formerly, Lytton Minerals Limited, has been written down to reflect its market
value at December 31, 1998. The shares are restricted from trading until May 21,
1999.
NOTE 7 CAPITAL ASSETS
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
Net Book Net Book
Cost Value Cost Value
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Equipment $ 154,518 82,074 154,518 101,413
Computer 169,629 52,136 168,080 96,293
Automotive 34,090 11,693 34,090 16,704
Leasehold improvements 1,583 811 1,583 1,013
--------- --------- ---------- ---------
$ 359,820 146,714 358,271 215,423
========= ========= ========= =========
</TABLE>
F-8
<PAGE> 50
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 MINERAL EXPLORATION COSTS
<TABLE>
<CAPTION>
Balance Additions Write-down Balance
Dec. 31, During During Dec. 31,
1997 the Year the Year 1998
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Alberta $ 6,119,514 263,560 17,289 6,365,785
Saskatchewan -- 34,057 34,057 --
Yukon 1,328,191 173,854 1,502,044 1
Manitoba 72,226 18,981 -- 91,207
Indonesia 500,000 216,431 716,431 --
Deferred tax effect of
flow-through
share renouncement (750,000) (184,725) -- (934,725)
----------- ---------- --------- ----------
$ 7,269,931 522,158 2,269,821 5,522,268
=========== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Balance Additions Write-down Balance
Dec. 31, During During Dec. 31,
1996 the Year the Year 1997
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Alberta $ 4,971,346 1,335,061 186,893 6,119,514
British Columbia 374,585 34,328 408,913 --
Yukon 250,242 1,077,949 -- 1,328,191
Manitoba -- 288,905 216,679 72,226
Indonesia 1,487,372 1,197,046 2,184,418 500,000
Deferred tax effect of
flow-through
share renouncement (750,000) -- -- (750,000)
----------- ---------- --------- ----------
$ 6,333,545 3,933,289 2,996,903 7,269,931
=========== ========== ========= ==========
</TABLE>
Included in mineral exploration costs are properties having a book value of
approximately $2,406,000 (1997 - $1,905,000) which have no cost base for tax
purposes.
F-9
<PAGE> 51
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 MINERAL EXPLORATION COSTS (CONTINUED)
(a) Alberta
The Company holds significant mineral rights interests in the Athabasca
region of northern Alberta.
During 1997, the Company entered into an option agreement whereby the
Company can earn a 51% interest in additional lands in the region with a
payment of $1,200,000 on or before September 18, 1999.
The Company is party to Co-Development Agreements with Syncrude Canada
Ltd., Suncor Energy Inc. and Shell Canada Limited. The agreements provide
for a co-operative development of the lands by bringing together the
holder of the oil sands rights and the holder of the metallic and
industrial mineral rights.
During 1998, the Company entered into various agreements with Tahera
Corporation (formerly Lytton Minerals Limited) involving certain
exploration data and diamond rights in the area. Under the agreements the
Company received $390,000 for the sale of the exploration data and 217,000
shares of Tahera Corporation for the option granted for the diamond
rights. The interest which could be earned by Tahera ranges from 30% to
75% dependent on the level of exploration expenditures.
During 1998, the Company acquired additional mineral rights in the area
through the issue of shares.
Certain lands in the Birch Mountains are subject to nomination for
preservation under the Special Places 2000 initiative of the Alberta
Government. The impact of the Special Places 2000 nomination can not be
properly assessed.
The Company has filed an assessment report with the authorities which
management believes will satisfy the Company's exploration commitment to
date. The next filing of assessment is due February 2000.
(b) Saskatchewan
Certain Saskatchewan property was acquired during 1998. The related costs
have been written off as the Company has no plans to become active in this
area.
F-10
<PAGE> 52
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 MINERAL EXPLORATION COSTS (CONTINUED)
(c) The Yukon
The Company did not exercise its option to purchase a 100% interest in the
Swift River Property in the Yukon and accordingly has written off the
costs related to this project. The Company maintains certain mineral
rights in the area as expenditure requirements have been met.
(d) Manitoba
The Company's exploration activity in Manitoba is in the Dawson Bay area.
Based on the results of an exploration program, the Company has retained
the land holdings of greatest interest.
(e) Indonesia
Through its subsidiaries, the Company was paying 100% of the costs to earn
a 90% interest in an exploration program being conducted in the province
of West Kalimantan, Republic of Indonesia.
The Company has advised the Government of Indonesia and its joint venture
partner that it intends to relinquish its Contract of Work on these
properties and accordingly all mineral exploration costs related to this
project have been written off.
These financial statements include $246,500 (1997 - $194,000) of accounts
payable relating to the estimated cost of discontinuing the Indonesian
operations and $175,000 (1997 - $175,000) of deposits with the Indonesian
Government.
F-11
<PAGE> 53
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 9 SHARE CAPITAL
The Company is incorporated under the jurisdiction of the Business Corporations
Act of Alberta.
(a) Authorized capital
Unlimited number of common voting shares
Unlimited number of preferred shares issuable in series
Unlimited number of non-voting shares
(b) Issued
<TABLE>
<CAPTION>
COMMON SHARES NUMBER AMOUNT
------------- ---------- ------------
<S> <C> <C>
Balance December 31, 1996 19,583,295 $ 14,943,406
Issued for cash
Series A warrants exercised 2,523,127 756,938
Stock options exercised 62,000 21,880
---------- ------------
22,168,422 15,722,224
Share issuance costs -- (1,274)
---------- ------------
Balance December 31, 1997 22,168,422 15,720,950
Issued for cash
Common shares 204,074 142,852
Flow through shares net of tax benefits
renounced of $184,725 1,172,860 225,776
Stock options exercised 47,000 5,540
Issued for payment of salary 65,217 15,000
Issued for acquisition of 777195 Alberta Inc. 770,000 431,200
(Note 4)
Issued for mineral rights 59,500 34,720
---------- ------------
24,487,073 16,576,038
Share issuance costs -- (13,061)
---------- ------------
Balance December 31, 1998 24,487,073 $ 16,562,977
========== ============
</TABLE>
During 1997, the Company issued 2,523,127 common shares upon the exercise
of the Series A warrants. These warrants entitled the holder to purchase
one common share for each whole warrant plus $0.30.
F-12
<PAGE> 54
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 9 SHARE CAPITAL (CONTINUED)
During 1998, the Company completed a private placement of 204,074 units at
$0.70 for aggregate proceeds of $142,852. Each unit consisted of one
common share and one common share purchase warrant. Each warrant entitled
the holder to purchase one common share at $1.00 until April 12, 1998. The
warrants expired without being exercised.
The Company issued by way of private placement, 1,172,860 flow through
units for aggregate proceeds of $410,500. Each unit consists of one common
share and one half common share warrant. At December 31, 1998, the Company
had incurred and renounced approximately $289,000 of its obligation.
The Company entered into an agreement with a management employee whereby a
portion of salary would be paid through the issuance of common shares. The
agreement results in the issuance of 130,434 common shares at $0.23 per
share for a six month period expiring March 31, 1999.
Subsequent to the year end, the Company completed a private placement of
2,900,000 units, of which 1,450,000 had flow through benefits. Each unit
consisted of one common share and one half common share purchase warrant
at $0.36. Each whole common share purchase warrant entitles the holder to
one common share at a purchase price of $1.00.
(c) Preferred Shares
An unlimited number of preferred shares may be issued in one or more
series, and the directors are authorized to fix the number of shares in
each series and to determine the designation, rights, privileges and
conditions attached to the shares of each series.
(d) Reserved for Issue
Options
The Company has a stock option plan under which the board of directors can
grant options to purchase common shares to senior employees, consultants,
and directors.
F-13
<PAGE> 55
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 9 SHARE CAPITAL (CONTINUED)
The Company has granted options on common shares as follows:
<TABLE>
<CAPTION>
PRICE
DATE PER EXPIRATION BALANCE EXPIRED/ BALANCE
GRANTED SHARE DATE DEC 31. 1997 ISSUED EXERCISED CANCELED DEC 31. 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Nov 1994 0.10 Nov 1999 40,000 40,000 --
July 1995 0.76 July 2000 150,000 150,000
July 1995 0.59 July 2000 143,000 78,000 65,000
July 1995 0.38 July 2000 400,000 200,000 200,000
Sept 1995 1.06 Sept 2001 600,000 350,000 250,000
Jan 1996 0.70 Jan 2001 300,000 100,000 200,000
Nov 1996 0.70 Nov 2001 150,000 150,000
Jan 1997 0.70 Jan 2002 75,000 75,000
Mar 1997 0.70 Mar 2002 125,000 125,000
Jun 1997 0.70 Jun 2002 30,000 30,000
Mar 1998 0.22 Mar 2003 -- 150,000 7,000 143,000
July 1998 0.22 July 2003 -- 210,000 210,000
Nov 1998 0.35 Nov 2003 -- 600,000 600,000
--------- ------- ------- -------- --------
2,013,000 960,000 47,000 728,000 2,198,000
========= ======= ====== ======== =========
</TABLE>
During 1998, certain options originally granted at prices ranging from
$1.55 to $2.75, were repriced at $0.70.
Warrants
During 1996, in conjunction with a private placement, the Company issued
1,676,000 special warrants. These warrants expired April 11, 1997 without
being exercised.
During 1998, in conjunction with the offering of flow through shares, the
company issued 586,430 warrants. Each warrant entitles the holder to
purchase one common share of the Company for $1.00 up to November 13,
1999.
F-14
<PAGE> 56
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 9 SHARE CAPITAL (CONTINUED)
(e) Escrowed shares
Under the requirements of the Alberta Securities Commission and the
Alberta Stock Exchange 12,483,040 common shares issued in connection with
the Company's initial listing as a Junior Capital Pool Corporation, its
major transaction, and its initial public offering were held in escrow. As
at December 31, 1998, all these shares have been released from escrow.
Under the terms of a voluntary pooling agreement an additional 8,528,366
common shares were also placed in escrow and are to be released equally
over five years. The remaining 5,117,022 common shares are still held in
escrow and will be released over the next three years.
NOTE 10 LOSS PER COMMON SHARE
The net loss per common share was calculated using the weighted average number
of common shares outstanding of 22,934,000 shares (1997 - 21,935,000 shares).
The effect of the stock options and warrants on the loss per share is
anti-dilutive.
NOTE 11 CONTINUING OBLIGATIONS
The Company rents premises and equipment under operating leases requiring annual
payments over the next five years as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $173,310
2000 173,310
2001 168,540
2002 166,950
2003 166,950
</TABLE>
F-15
<PAGE> 57
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 12 RELATED PARTY TRANSACTIONS
During the year, the Company had the following transactions with related
parties:
- Included in mineral exploration costs are amounts paid for
aircraft usage and airborne surveying services of $33,000
(1997 - $27,606) to a company controlled by a director;
- Included in salaries, management fees, and benefits are
management fees aggregating $8,817 (1997 - $102,022) which
were paid to companies employing the services of a director.
- Included in shareholder services and promotion are amounts of
$Nil (1997 - $38,316) paid to a company controlled by the
spouse of a director.
NOTE 13 INCOME TAXES
At December 31, 1998, the Company had approximately $9 million (1997 - $8.3
million) of tax deductions available to be applied against future years' income
for income tax purposes. These deductions consist of Canadian mining exploration
costs and undepreciated capital cost allowance, all of which are available for
carryforward indefinitely.
The Company also has available capital losses of $625,000 (1997 - $Nil) and
non-capital losses of $1,499,000 (1997 - $1,166,000) available to be carried
forward and applied against future income for income tax purposes, as follows:
<TABLE>
<S> <C> <C>
To 2001 $ 176,000
2002 387,000
2003 306,000
2004 297,000
2005 333,000
----------
$ 1,499,000
===========
</TABLE>
F-16
<PAGE> 58
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 13 INCOME TAXES (CONTINUED)
The Company has non-refundable investment tax credits available in the amount of
$38,000 (1997 - $38,000) to be carried forward against future income taxes
payable to 2005.
The Company also has research and development costs available in the amount of
$211,000 (1997 - $211,000) to be carried forward against future income for
income tax purposes, indefinitely.
The potential benefits relating to all of the above items have not been recorded
in the financial statements.
NOTE 14 SEGMENTED INFORMATION
The Company's principal business segment is the acquisition, exploration and
development of mineral properties. All of the Company's properties are in the
exploration stage. The Company's current activities are focused in western
Canada, as detailed in Note 8.
NOTE 15 UNCERTAINTY DUE TO YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use dates in 1999 to represent something rather than a date. The
effects of the Year 2000 Issue may be experienced before, on, or after January
1, 2000, and , if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 issue affecting the
Company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
F-17
<PAGE> 59
BIRCH MOUNTAIN RESOURCES LTD.
AUDITORS' REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
F-18
<PAGE> 60
AUDITORS' REPORT
TO THE SHAREHOLDERS OF
BIRCH MOUNTAIN RESOURCES LTD.
We have audited the consolidated balance sheets of BIRCH MOUNTAIN
RESOURCES LTD. as at December 31, 1999 and 1998, and the consolidated statements
of loss and deficit and cash flow for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 1999 and 1998, and the results of its operations and the changes in its cash
flow for the years then ended in accordance with Canadian generally accepted
accounting principles.
/s/ "Barr Shelley Stuart"
Calgary, Alberta CHARTERED ACCOUNTANTS
March 13, 2000
F-19
<PAGE> 61
BIRCH MOUNTAIN RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C> <C>
ASSETS
CURRENT
Cash (Note 5) $943,558 475,188
Accounts receivable 36,384 142,057
Prepaids and deposits 12,691 191,410
----------- -----------
992,633 808,655
INVESTMENT (Note 6) 15,930 36,890
CAPITAL (Note 7) 144,674 146,714
MINERAL EXPLORATION COSTS (Note 8) 7,828,506 7,195,948
----------- -----------
$8,981,743 8,188,207
=========== ===========
LIABILITIES
CURRENT
Accounts payable $324,727 536,223
----------- -----------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 9) 18,654,561 17,073,832
DEFICIT (9,997,545) (9,421,848)
----------- -----------
8,657,016 7,651,984
----------- -----------
$8,981,743 8,188,207
=========== ===========
</TABLE>
Approved on behalf of the Board:
/s/ Donald L. Dabbs
---------------------- Director
Donald L. Dabbs
/s/ Lanny K. Mcdonald
---------------------- Director
Lanny K. McDonald
F-20
<PAGE> 62
BIRCH MOUNTAIN RESOURCES LTD.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C> <C>
EXPENSES
Salaries, management fees and benefits $289,432 227,080
Shareholder services and promotion 222,769 132,844
Office 162,197 176,104
Professional fees 120,811 131,085
Amortization 40,478 70,258
----------- -----------
LOSS BEFORE THE FOLLOWING 835,687 737,371
----------- -----------
Interest and other income (71,096) (38,316)
(Gain) loss on disposal of investment (2,090) 105,000
Write down of investments 14,160 143,220
Write down of mineral exploration costs (Note 8) 25,836 2,269,821
----------- -----------
(33,190) 2,479,725
----------- -----------
LOSS BEFORE INCOME TAXES 802,497 3,217,096
Future income tax recovery (226,800) (326,727)
----------- -----------
NET LOSS FOR THE YEAR 575,697 2,890,369
DEFICIT AT BEGINNING OF YEAR 9,421,848 6,531,479
----------- -----------
DEFICIT AT END OF YEAR $9,997,545 9,421,848
=========== ===========
LOSS PER SHARE (Note 10) $(0.02) (0.13)
=========== ===========
</TABLE>
F-21
<PAGE> 63
BIRCH MOUNTAIN RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from interest $71,096 38,316
Cash received from deposit with the Government of
Indonesia 175,555 165,708
Cash paid to employees and suppliers (774,537) (796,087)
----------- -----------
(527,886) (592,063)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares for cash 1,656,061 573,893
Share issuance costs (34,594) (13,061)
----------- -----------
1,621,467 560,832
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on disposal of investment 8,890 25,000
Purchase of capital assets (38,438) (1,549)
Mineral exploration costs (595,663) (236,348)
----------- -----------
(625,211) (212,897)
----------- -----------
INCREASE (DECREASE) IN CASH 468,370 (244,128)
CASH AT BEGINNING OF YEAR 475,188 719,316
----------- -----------
CASH AT END OF YEAR $943,558 475,188
=========== ===========
</TABLE>
F-22
<PAGE> 64
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 NATURE OF OPERATIONS AND GOING CONCERN CONSIDERATIONS
Birch Mountain Resources Ltd. is in the process of exploring its mineral
properties and has not yet determined whether the properties contain
economically recoverable reserves. The Company's ability to continue as a going
concern is largely dependent on its success in obtaining sufficient funds to
carry out exploration activities on its mining claims, preserving its interest
in the underlying mineral claims, establishing the existence of economically
recoverable reserves, and obtaining the financing to complete the development
and achieve future profitable production or, alternatively, upon the Company's
ability to dispose of its interests on an advantageous basis. It is not possible
to predict whether financing efforts will be successful, or if the Company will
attain profitable levels of operation.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are expressed in Canadian dollars and are
prepared in accordance with accounting principles generally accepted in Canada.
These financial statements include the accounts of the Company and its wholly
owned subsidiaries, Dawson Bay Minerals Inc., Swift River Minerals Ltd., 777195
Alberta Inc., 846785 Alberta Ltd., and Rockyview Development Limited and its
subsidiaries.
(a) Mineral Exploration Costs
The mineral properties are recorded at cost. Cost includes cash
consideration and the market value of shares issued, if any. All direct
and indirect acquisition and exploration expenditures are capitalized
and deferred until the properties to which they relate are placed on
production, sold, allowed to lapse, or abandoned. These costs will be
amortized over the estimated useful lives of the properties following
the commencement of production, or written off if the properties are
sold, allowed to lapse, or abandoned. The Company assesses the carrying
value of these mineral exploration costs annually and based on
estimates, adjusts the carrying amount for any impairments in value.
Properties acquired under option or joint venture agreements, whereby
payments are made at the sole discretion of the Company, are recorded in
the accounts at the time of payment.
F-23
<PAGE> 65
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b) Capital Assets
Capital assets are recorded at cost. Amortization is recorded at the
following annual rates:
<TABLE>
<S> <C>
Equipment 20% to 30% declining balance
Computer software 100% declining balance
Computer hardware 30% declining balance
Automotive 30% declining balance
Leasehold improvements 20% straight line
</TABLE>
Amortization is charged at one-half of the annual rate in the year of
acquisition of an asset.
(c) Future Income Taxes
The Company has adopted the liability method of accounting for income
taxes (Note 3). Under this method, future income tax liabilities and
future income tax assets are recorded based on temporary differences -
the difference between the carrying amount of an asset or liability in
the consolidated balance sheet and its tax basis - at the rate enacted
at the date of the balance sheet. At the end of each year, future tax
assets and future tax liabilities are reassessed, and any changes in the
settlement value is reflected in income.
(d) Stock Options
No compensation expense is recognized when stock options are issued to
employees, service providers or directors. Any consideration paid by the
optionee on the exercise of stock options is credited to share capital.
(e) Cash
Cash includes cash on account and demand deposits.
(f) Flow-through Shares
Under Canadian income tax legislation, corporations are permitted to
issue shares whereby the Company agrees to incur qualifying
expenditures, as defined under the Canadian Income Tax Act, and renounce
the related income tax deductions to the investors. Share capital is
reduced by the estimated future income tax cost of the renounced
deductions as the expenditures are incurred.
F-24
<PAGE> 66
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) Use of Estimates
The preparation of financial statements in conformity with generally
acceptable accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant areas requiring
the use of management estimates relate to the determination of
impairment of mineral exploration costs and reclamation obligations.
Financial results as determined by actual events could differ from those
estimates.
NOTE 3 CHANGE IN ACCOUNTING POLICY
(a) During the year, the Company changed its method of accounting for income
taxes from the deferral method to the liability method described in Note
2. This policy has been adopted retroactively resulting in the
restatement of the December 31, 1998 financial statements as follows:
<TABLE>
<CAPTION>
As at December 31, 1998 AS REPORTED ADJUSTMENT RESTATED
----------- ---------- --------
<S> <C> <C> <C>
Mineral exploration costs $5,522,268 1,673,680 7,195,948
Share capital 16,562,977 510,855 17,073,832
Deficit (10,584,673) 1,162,825 (9,421,848)
Future income tax recovery - 326,727 326,727
Net loss for the year (3,217,096) 326,727 (2,890,369)
Net earnings per common share
Basic (0.14) 0.01 (0.13)
Fully diluted (0.14) 0.01 (0.13)
</TABLE>
(b) The Company has adopted retroactively, the new CICA Handbook
recommendations "Cash Flow Statements". Under this section, transactions
that do not require the use of cash and cash equivalents are excluded
from the statement of cash flow. Non-cash transactions excluded from the
statement of cash flow for the years ended December 31, 1999, and 1998,
are as follows:
- Payment of employee salary with shares $15,000 (1998 - $15,000); and
- Purchase of mineral rights with shares $43,500 (1998 - $465,920).
F-25
<PAGE> 67
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 4 ACQUISITIONS
During 1999, the Company acquired all of the outstanding shares of 846785
Alberta Ltd. which held a royalty interest and mineral leases. The cost of the
acquisition, which was accounted for using the purchase method, consisted of
25,000 common shares of the Company. The purchase price of $28,500 has been
allocated to mineral exploration costs.
During 1998, the Company acquired all of the outstanding shares of 777195
Alberta Inc., which held certain mineral rights in the Athabasca region. The
cost of the acquisition, which was accounted for using the purchase method,
consisted of $25,000 cash and 770,000 common shares of the Company. The purchase
price of $456,200 has been allocated to mineral exploration costs.
Both 846785 Alberta Ltd. and 777195 Alberta Inc. were dissolved during the year
ended December 31, 1999.
NOTE 5 CASH
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash, available for use $890,558 456,188
Cash, subject to restriction 53,000 19,000
----------- -----------
$943,558 475,188
=========== ===========
</TABLE>
Cash subject to restriction represents amounts on deposit as security for
letters of credit to the governments of Alberta and Manitoba.
NOTE 6 INVESTMENT
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Tahera Corporation $15,930 36,890
=========== ===========
</TABLE>
The cost of the Company's investment in 177,000 shares of Tahera Corporation,
formerly, Lytton Minerals Limited, has been written down to reflect its market
value at December 31, 1999. During 1999, the Company disposed of 40,000 shares
for net proceeds of $8,890.
F-26
<PAGE> 68
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7 CAPITAL ASSETS
<TABLE>
<CAPTION>
1999 1998
---- ----
NET BOOK NET BOOK
COST VALUE COST VALUE
---- ----- ---- -----
<S> <C> <C> <C> <C>
Equipment $182,672 91,292 154,518 82,074
Computer 179,914 44,549 169,629 52,136
Automotive 34,090 8,185 34,090 11,693
Leasehold improvements 1,583 648 1,583 811
---------- ----------- ----------- ----------
$398,259 144,674 359,820 146,714
========== =========== =========== ==========
NOTE 8 MINERAL EXPLORATION COSTS
BALANCE ADDITIONS WRITE DOWN BALANCE
DEC. 31, DURING DURING DEC. 31,
1998 THE YEAR THE YEAR 1999
---- -------- -------- ----
<S> <C> <C> <C> <C>
Alberta $7,104,740 613,983 3,619 7,715,104
Yukon 1 2,028 2,028 1
Manitoba 91,207 22,194 - 113,401
Indonesia - 20,189 20,189 -
------------ ----------- ---------- ------------
$7,195,948 658,394 25,836 7,828,506
============ =========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
BALANCE ADDITIONS WRITE DOWN BALANCE
DEC. 31, DURING DURING DEC. 31,
1997 THE YEAR THE YEAR 1998
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Alberta $6,654,914 467,115 17,289 7,104,740
Saskatchewan - 34,057 34,057 -
Yukon 1,328,191 173,854 1,502,044 1
Manitoba 72,226 18,981 - 91,207
Indonesia 500,000 216,431 716,431 -
----------- ----------- ---------- ------------
$8,555,331 910,438 2,269,821 7,195,948
=========== =========== ========== ============
</TABLE>
F-27
<PAGE> 69
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 8 MINERAL EXPLORATION COSTS (CONTINUED)
Included in mineral exploration costs are properties having a book value of
approximately $2,449,500 (1998 - $2,406,000) which have no cost base for tax
purposes.
(a) Alberta
The Company holds significant mineral rights interests in the Athabasca
region of northern Alberta.
During 1997, the Company entered into an option agreement to earn a 51%
interest in additional lands in the region with a payment of $1,200,000
on or before September 18, 1999. The option was not exercised.
The Company is party to Co-Development Agreements with Syncrude Canada
Ltd., Suncor Energy Inc. and Shell Canada Limited. The agreements
provide for a co-operative development of the lands by bringing together
the holder of the oil sands rights and the holder of the metallic and
industrial mineral rights.
During 1998, the Company entered into various agreements with Tahera
Corporation (formerly Lytton Minerals Limited) involving certain
exploration data and diamond rights in the area. Under the agreements
the Company received $390,000 for the sale of the exploration data and
217,000 shares of Tahera Corporation for the option granted for the
diamond rights. The interest that could be earned by Tahera ranged from
30% to 75% dependent on the level of exploration expenditures. Tahera
did not meet spending requirements and, as such, the Company retains its
interests in these lands.
During 1998 and 1999, the Company acquired additional mineral rights in
the area through the issue of shares.
Certain lands in the Caribou Mountains and Marguerite River area are
subject to nomination for preservation under the Special Places 2000
initiative of the Alberta Government. The Government has made
commitments to honour current holdings; however, there is some risk
certain lands will not be available for development. At the current
time, none of the Company's core holdings are subject to Special Places
2000 nomination.
The Company has filed an assessment report with the authorities which
management believes will satisfy the Company's exploration commitment to
date. The Company has been granted an extension on the next filing of
assessment to April 2000. Management believes spending requirements have
been sufficient to hold all Alberta lands until April 2002.
F-28
<PAGE> 70
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 8 MINERAL EXPLORATION COSTS (CONTINUED)
Subsequent to the year-end, the Company:
- Purchased certain mineral rights from Tintina Mines Limited and
NSR Resources Inc. Consideration consisted of 600,000 shares;
and
- Beganconverting certain mineral permits in its core holdings to
mineral leases. The conversion results in the strengthening of
the Company's land tenure.
(b) Saskatchewan
Certain property in Saskatchewan was acquired during 1998. The related
costs have been written off as the Company has no plans to continue
activity in this area.
(c) The Yukon
The Company did not exercise its option to purchase a 100% interest in
the Swift River Property in the Yukon and accordingly has written off
the costs related to this project. Birch Mountain maintains certain
mineral rights in the area as expenditure requirements have been met.
(d) Manitoba
The Company's exploration activity in Manitoba is in the Dawson Bay
area. Subsequent to the year-end, the Company entered into an agreement
with the Government of Manitoba whereby 25% of expenditures on Birch
Mountain's property, to a maximum of $28,000, will be reimbursed.
(e) Indonesia
Through its subsidiaries, the Company was paying 100% of the costs to
earn a 90% interest in an exploration program in the province of West
Kalimantan, Republic of Indonesia.
During 1998, the Company advised the Government of Indonesia and its
joint venture partner that it intended to relinquish its Contract of
Work on these properties and, accordingly, the remaining mineral
exploration costs related to this project were written off.
These financial statements include $194,000 (1998 - $246,500) of
accounts payable relating to the estimated cost of discontinuing the
Indonesian operations and $NIL (1998 - $175,000) of deposits with the
Indonesian government.
F-29
<PAGE> 71
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 SHARE CAPITAL
The Company is incorporated under the jurisdiction of the Business Corporations
Act of Alberta.
(a) Authorized capital
Unlimited number of common voting shares Unlimited number of
preferred shares issuable in series Unlimited number of non-voting
shares
(b) Issued
<TABLE>
<CAPTION>
COMMON SHARES NUMBER AMOUNT
------------- ------ ------
<S> <C> <C>
Balance December 31, 1997 22,168,422 $16,170,252
Issued for cash
Common shares 204,074 142,852
Flow through common shares net of tax
benefits renounced of $128,999 1,172,860 281,502
Stock options exercised 47,000 5,540
Issued in lieu of salary 65,217 15,000
Issued for mineral rights 829,500 465,920
------------ ------------
24,487,073 17,081,066
Share issuance costs net of tax benefit of $5,828 - (7,234)
------------ ------------
Balance December 31, 1998 24,487,073 17,073,832
Issued for cash
Common shares 1,901,305 1,041,001
Flow through common shares net of tax
benefits renounced of $223,009 1,490,000 344,990
Stock options exercised 257,400 129,006
Warrants exercised 26,389 26,389
Issued in lieu of salary 65,217 15,000
Issued for mineral rights 62,500 43,500
------------ ------------
28,289,884 18,673,718
Share issuance costs net of tax benefit of $15,436 - (19,157)
------------ ------------
Balance December 31, 1999 28,289,884 $18,654,561
============ ============
</TABLE>
F-30
<PAGE> 72
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 SHARE CAPITAL (CONTINUED)
During 1999, the Company completed private placements of:
- 2,900,000 units at $0.36 of which 1,450,000 were flow-through
units. Each unit consisted of one common share and one-half
common share warrant; and
- 491,305 units at $1.15 of which 40,000 were flow-through units.
Each unit consisted of one common share and one-half common
share warrant.
At December 31, 1999, the Company had incurred and renounced
approximately $378,000 of its commitment of $568,000. The Company
further renounced an additional $254,000 at February 28, 2000.
During 1998, the Company completed private placements of:
- 204,074 at $0.70 per unit. Each unit consisted of one common
share and one common share purchase warrant; and
- 1,172,860 flow-through units at $0.35 per units. Each unit
consisted of one common share and one-half common share warrant.
At December 31, 1998, the Company had incurred and renounced
approximately $289,000 of its obligation. The remainder was incurred and
renounced during 1999.
The Company entered into an agreement with a management employee whereby
a portion of salary would be paid through the issuance of common shares.
The agreement resulted in the issuance of 130,434 common shares at $0.23
per share for a six-month period expiring March 31, 1999.
Subsequent to the year-end, the Company completed a private placement of
2,345,691 units at $1.15 of which 1,160,000 were flow-through units for
gross proceeds of $2,697,546. Each unit consists of one common share and
one-half common share warrant. In addition, a commission of 25,000 units
amounting to $28,750 was paid in relation to this private placement.
(c) Preferred Shares
An unlimited number of preferred shares may be issued in one or more
series, and the directors are authorized to fix the number of shares in
each series and to determine the designation, rights, privileges and
conditions attached to the shares of each series.
(d) Reserved for Issue
Options
The Company has a stock option plan under which the board of directors
can grant options to purchase common shares to senior employees,
consultants and directors.
F-31
<PAGE> 73
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 SHARE CAPITAL (CONTINUED)
The Company has granted options on common shares as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF PRICE AVERAGE EXPIRY
OPTIONS RANGE PRICE DATE
------- ----- ----- ----
<S> <C> <C> <C> <C>
December 31, 1997 2,013,000 .10 - 1.06 .73 1999-2003
Granted 960,000 .22 - .35 .30 2003
Exercised (47,000) .10 - .22 .12 1999-2003
Cancelled (728,000) .38 - 1.06 .77 2000-2001
---------- ----------- -----
December 31, 1998 2,198,000 .22 - 1.06 .54 2000-2004
Granted 880,000 .22 - 1.06 1.36 2000-2004
Exercised (257,400) .22 - .70 .50 2000-2003
Cancelled (25,000) .70 .70 2002
---------- ----------- -----
December 31, 1999 2,795,600 .22 - 1.06 .80 2000-2004
========== =========== =====
</TABLE>
During 1998, certain options originally granted at prices ranging from
$1.55 to $2.75, were repriced at $0.70.
Warrants
In relation to private placements, the Company has the following
warrants outstanding:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF PRICE AVERAGE EXPIRY
OPTIONS RANGE PRICE DATE
------- ----- ----- ----
<S> <C> <C> <C> <C>
December 31, 1997 1,676,000 6.60 6.60 1998
Issued 790,504 1.00 1.00 1998-1999
Expired (1,880,074) 1.00 - 6.60 5.99
---------- ----------- -----
December 31, 1998 586,430 1.00 1.00 1999
Issued 1,695,653 1.00 - 1.50 1.07 2000
Exercised (26,389) 1.00 1.00 2000
Expired (586,430) 1.00 1.00
---------- ----------- -----
December 31, 1999 1,669,264 1.00 - 1.50 1.07 2000
========== =========== =====
</TABLE>
F-32
<PAGE> 74
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 SHARE CAPITAL (CONTINUED)
(e) Escrowed shares
Under the requirements of the Alberta Securities Commission and the
Alberta Stock Exchange, 12,483,040 common shares issued in connection
with the Company's initial listing as a Junior Capital Pool Corporation,
its major transaction and its initial public offering, were held in
escrow. As at December 31, 1998, all of these shares have been released
from escrow.
Under the terms of a voluntary pooling agreement, an additional
8,528,366 common shares were also placed in escrow and are to be
released equally over five years. The 3,411,348 common shares remaining
in escrow will be released over the next two years.
NOTE 10 LOSS PER COMMON SHARE
The net loss per common share was calculated using the weighted average number
of common shares outstanding of 26,681,000 shares (1998 - 22,934,000 shares).
The effect of the stock options and warrants on the loss per share is
anti-dilutive.
NOTE 11 CONTINUING OBLIGATIONS
The Company rents premises and equipment under operating leases requiring annual
payments over the next five years as follows:
<TABLE>
<S> <C>
2000 $212,238
2001 212,238
2002 212,238
2003 212,238
2004 11,704
</TABLE>
NOTE 12 RELATED PARTY TRANSACTIONS
During the year, the Company had the following transactions with related
parties:
- Included in mineral exploration costs are amounts paid for aircraft
usage and airborne surveying services of $78,000 (1998 - $33,000) to a
company controlled by a director; and
- Included in salaries, management fees, and benefits are management fees
aggregating $2,400 (1998 - $8,817) which were paid to companies
employing the services of a director.
F-33
<PAGE> 75
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 13 INCOME TAXES
Future income tax assets consist of the following temporary differences:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Mineral exploration costs $744,855 717,165
Capital assets 117,689 99,628
Scientific research and development expenditures 94,471 94,471
Loss carry forwards 662,389 579,661
Share issuance costs 79,473 141,134
Valuation allowance (1,698,877) (1,632,059)
------------ ------------
$ - -
============ ============
</TABLE>
At December 31, 1999, the Company has the following deductions available which
have been reflected in the financial statements:
- Canadian mining exploration costs and undepreciated capital cost
allowance of $9.3 million (1998 - $9.0 million) which may be carried
forward indefinitely; and
- Scientific research and development costs of $211,000 (1998 - $211,000)
which also may be carried forward indefinitely.
In addition to the above, the Company has the following deductions available
which have not been reflected in the financial statements:
- Capital losses of $680,000 which may be carried forward indefinitely;
and
- Investment tax credits of $38,000 available for carry forward to 2005.
The income tax recovery differs from the amount that would be expected by
applying the current tax rates for the following reasons:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Loss before taxes $802,497 3,217,096
============ ============
Expected tax recovery at 44.62% $358,074 1,435,468
Tax effect of expenses not deductible for tax purposes
Meals and other (7,241) (3,361)
Non-deductible portion of capital gain (233) (11,713)
Non-deductible portion of investment write down (1,580) (15,976)
Resource allowance (62,045) (58,181)
Share issuance costs 77,096 74,896
Losses of foreign subsidiaries (9,008) (321,965)
Valuation allowance (128,263) (772,441)
------------ ------------
Future Income Tax Recovery $226,800 326,727
============ ============
</TABLE>
F-34
<PAGE> 76
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 14 SEGMENTED INFORMATION
The Company's principal business segment is the acquisition, exploration and
development of mineral properties. All of the Company's properties are in the
exploration stage. The Company's activities are focused in Western Canada, as
detailed in Note 8.
NOTE 15 FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable,
investment and accounts payable. There is no material differences between their
fair values and carrying values at the balance sheet date.
NOTE 16 UNCERTAINTY DUE TO YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. Although the change in date has occurred, it is not possible to conclude
that all aspects of the Year 2000 Issue that may affect the Company, including
those related to customers, suppliers, or other third parties, have been fully
resolved.
NOTE 17 MATERIAL DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principals (GAAP) in Canada.
Significant differences between GAAP in Canada and the United States that would
have an effect on these consolidated financial statements are as follows:
(a) Mineral Exploration Costs
Mineral exploration costs are accounted for in accordance with Canadian
GAAP as discussed in Note 2. For U.S. GAAP purposes, the Company
expenses exploration costs relating to unproven mineral properties as
incurred.
For U.S. GAAP cash flow statement purposes, mineral exploration costs
would be shown under operating activities rather than under investing
activities.
F-35
<PAGE> 77
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 17 MATERIAL DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
If these consolidated financial statements were
prepared in accordance with US GAAP, the impact on the
balance sheets would be as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Mineral exploration costs under Canadian GAAP $7,828,506 7,195,948
Exploration expenditures 4,057,346 3,468,287
------------ ------------
Mineral exploration costs under U.S. GAAP $3,771,160 3,727,661
============ ============
Deficit under Canadian GAAP $9,997,545 9,421,848
Exploration expenditures 4,057,346 3,468,287
------------ ------------
Deficit under U.S. GAAP $14,054,891 12,890,135
============ ============
</TABLE>
In addition, the impact on the consolidated statements of loss would be
as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net loss for the year under Canadian GAAP $575,697 2,890,369
Exploration expenditures 589,054 541,008
------------ ------------
Net loss for the year under U.S. GAAP $1,164,751 3,431,377
============ ============
Loss per common share under U.S. GAAP $0.04 0.15
=========== ===========
</TABLE>
(b) Other U.S. GAAP Issues:
(i) The Company has adopted APB Opinion No.25, Accounting for Stock
Issued and Employees ("APB 25"), to account for stock based
compensation to employees and directors using the intrinsic value
based method whereby compensation cost is recorded for the excess,
if any, of the quoted market price, at the date granted. As at
December 31, 1999 no compensation cost has been recorded for any
period under this method.
F-36
<PAGE> 78
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 17 MATERIAL DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
The Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"), issued in October 1995,
requires the use of the fair value based method of accounting for
stock options. Under this method, compensation cost is measured at
the date of grant based on the fair value of options granted and is
recognized over the vesting period.
SFAS 123, however allows the Company to continue to measure the
compensation cost of employees' and directors' in accordance with
APB 25 providing proforma disclosure is included as if the fair
value based method had been adopted. Additional compensation costs
of approximately $371,407 and $277,608 would have been recorded,
increasing the loss per share by $0.02 and $0.01 for 1999 and 1998
respectively. These amounts were calculated in accordance with the
Black-Scholes option pricing model, assuming no dividends are to be
paid, vesting occurring on the expiration of the grant, volatility
of 37%, 20%, 60%, 158%, and 136% for years 1999 to 1995
respectively, and an annual risk free rate of 5%.
(ii) Escrowed shares would be considered a separate compensatory
arrangement between the Company and the holder of the shares.
Accordingly, the fair market value of the shares at the time the
shares are released from escrow would be recognized as a charge to
income in that year with a corresponding increase in share capital.
Additional compensation costs of approximately $2,217,375 and
$2,234,200 would have been recorded, increasing the loss per share
by $0.08 and $0.09 for 1999 and 1998 respectively.
F-37
<PAGE> 79
BIRCH MOUNTAIN RESOURCES LTD.
CONSOLIDATED CONDENSED BALANCE SHEET
AS AT JUNE 30, 2000
(UNAUDITED)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Short Term Investments 3,643,035 933,633
Restricted Short Term Investments 38,000 15,000
Other Current 52,926 3,733,961 232,072 1,180,705
--------- ---------- ---------
INVESTMENTS 15,930 36,890
CAPITAL ASSETS 202,336 141,249
MINERAL EXPLORATION COSTS 9,980,767 10,199,033 7,468,589 7,646,728
--------- ---------- --------- ---------
TOTAL ASSETS $13,932,994 $8,827,433
============ ===========
LIABILITIES & SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts Payable $357,756 $422,003
=========== ==========
SHAREHOLDER'S EQUITY
Common Share Capital 24,672,701 18,183,981
Deficit (11,097,463) 13,575,238 (9,778,551) 8,405,430
----------- ---------- ---------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $13,932,994 $8,827,433
=========== ==========
</TABLE>
F-38
<PAGE> 80
BIRCH MOUNTAIN RESOURCES LTD.
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
EXPENSES
Shareholder Services and Promotion 142,900 88,103
Salaries, Mgmt Fees and benefits 271,959 122,983
Finder Fee 490,000
Office 117,405 74,777
Professional Fees 146,962 47,706
Amortization and Non Cash Charges 25,063 18,953
------------ ------------
LOSS BEFORE THE FOLLOWING 1,194,289 352,522
Interest and Other Income 98,259 $ (3,363)
Write-down of Mineral Expln Co (3,889) $ (818)
------------ ------------
94,370 (4,181)
------------ ------------
NET LOSS FOR THE PERIOD $ 1,099,918 $ 356,703
============ ============
DEFICIT AT BEGINNING OF PERIOD 9,997,545 9,421,848
------------ ------------
DEFICIT AT END OF PERIOD $ 11,097,463 $ 9,778,551
============ ============
LOSS PER SHARE: ISSUED +O/S $ (0.03) $ (0.01)
LOSS PER SHARE: FULLY DILUTED $ (0.03) $ (0.01)
SHARE CAPITAL
ISSUED AND OUTSTANDING 33,202,966 27,627,790
FULLY DILUTED BASIS 37,133,747 31,724,200
</TABLE>
F-39
<PAGE> 81
BIRCH MOUNTAIN RESOURCES LTD.
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash Received from Interest 68,946 9,778
Cash Received from Deposits with Govts 19,347
Cash Paid to employees and Suppliers (650,153) (581,207) (379,700) (350,575)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Shares for Cash 4,244,676 1,110,149
Share Issuance Costs (116,536) 4,128,140 1,110,149
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on Disposal of Investment
Purchase of Capital Assets (57,195) (13,488)
Mineral Exploration Costs (752,261) (809,456) (272,641) (286,129)
-------- -------- -------- --------
INCREASE (DECREASE) IN CASH $2,737,477 $473,445
CASH AT BEGINNING OF PERIOD 943,558 475,188
CASH AT END OF PERIOD $3,681,035 $948,633
---------- --------
</TABLE>
F-40
