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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A2
(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 000-31645
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)
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Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
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 November 30, 2000:
0 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.
(1) YES X NO (2) YES NO X
--- --- --- ---
Indicate by check mark which financial statement item the registrant has elected
to follow.
ITEM 17 X ITEM 18
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(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
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TABLE OF CONTENTS
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Page #
<S> <C>
DESCRIPTION OF THE BUSINESS .............................................. -1-
Introduction .................................................... -1-
General Development During Past Five Years ............. -2-
Mineral Exploration ........................... -2-
Exploration Research .......................... -2-
Metallurgical Research ........................ -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 Risk ....................................... -5-
Environmental .......................................... -5-
Management ............................................. -6-
Shareholders Rights Plan ............................... -6-
Legal and Regulatory Risks ............................. -6-
Gold and Precious Metal Pricing Risks .................. -7-
DESCRIPTION OF PROPERTIES ................................................ -8-
Metallurgical Laboratory ........................................ -8-
Core Laboratory ................................................. -8-
Exploration Properties .......................................... -8-
Alberta Properties ..................................... -8-
Manitoba Properties .................................... -9-
Prairie Gold Exploration ........................................ -10-
Prairie Gold Model ..................................... -10-
Prairie Gold in Athabasca .............................. -10-
Prairie Gold in Dawson Bay ............................. -12-
LEGAL PROCEEDINGS ........................................................ -13-
CONTROL OF THE REGISTRANT/COMPANY ........................................ -13-
NATURE OF THE TRADING MARKET ............................................. -14-
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS ....... -15-
Canadian Exchange Controls ...................................... -15-
TAXATION ................................................................. -16-
Disposition of Common Shares .................................... -17-
Dividends ....................................................... -17-
Capital Gains ................................................... -17-
United States Federal Income Tax Consequences ................... -18-
U.S. Holders .................................................... -18-
Distributions on Common Shares of the Company ................... -19-
Foreign Tax Credit .............................................. -19-
</TABLE>
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<TABLE>
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Disposition of Common Shares of the Company ..................... -20-
SELECTED FINANCIAL DATA .................................................. -20-
Stock Based Compensation ........................................ -22-
Recent Accounting Developments .................................. -23-
Dividends ....................................................... -23-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ...................................................... -23-
Liquidity and Capital Resources ................................. -23-
Results of Operations ........................................... -25-
Corporate Income and Expenses ................................... -26-
RISKS AND UNCERTAINTIES .................................................. -27-
DIRECTORS AND EXECUTIVE OFFICERS ......................................... -27-
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 ............................... -31-
Rights Plan ..................................................... -32-
DEFAULTS UPON SENIOR SECURITIES .......................................... -32-
CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES .. -32-
FINANCIAL STATEMENTS ..................................................... -32-
FINANCIAL STATEMENTS AND EXHIBITS ........................................ -33-
</TABLE>
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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>
NINE MONTHS FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDING ENDING ENDING ENDING ENDING ENDING
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998 1997 1996 1995
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
END OF PERIOD 1.5009 1.4720 1.5333 1.4305 1.3702 1.3641
HIGH FOR 1.5140 1.4720 1.5685 1.4305 1.3865 1.4267
PERIOD
LOW FOR 1.4310 1.4512 1.4198 1.3470 1.3287 1.3278
PERIOD
AVERAGE FOR 1.4716 1.4920 1.4835 1.3846 1.3636 1.3726
PERIOD
</TABLE>
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GLOSSARY OF SIGNIFICANT TERMS
Certain terms and their usage used throughout this Registration Statement are
defined below.
ALTERATION A change in the mineralogical make-up in the
rock brought about by physical or chemical
means; for example, by reactions with
brines.
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.
BASEMENT The part of the Earth's crust that occurs
beneath a cover of sedimentary rocks.
BASIN OR SEDIMENTARY BASIN A large depressed area in the Earth's crust
in which sedimentary rocks have accumulated.
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.
CARBONATE A sedimentary rock composed of minerals
containing carbon and oxygen in the form of
carbonate (CO(3)); for example, limestone.
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.
ELECTRIC LOG OR E-LOG A graphic or digital record of the measured
electrical properties of rocks in a drill
hole, recorded as a function of depth.
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.
FAULT A discrete surface separating two rock
masses which have moved past one another.
FORMATION OR GEOLOGICAL FORMATION A body of rock having easily recognizable
boundaries and properties that allow it to
be identified in the field without resorting
to microscopic or chemical analyses.
GRADE The relative quantity of ore-mineral content
in a mineralized body, e.g. grams of gold
per tonne or rock 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.
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LIMESTONE A rock predominantly composed of the mineral
calcite (calcium carbonate (CaCO(3)))
LINEAMENT A linear topographic or geophysical feature.
MAGMATIC A process involving molten rock.
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 DEPOSIT A body of rock enriched in naturally
occurring minerals of potential commercial
value.
MINERAL A naturally occurring homogeneous substance
having fixed physical properties and
chemical composition and 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.
OIL SAND DEPOSIT A porous body of sandstone containing liquid
hydrocarbons or bitumens.
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.
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 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.
SEDIMENTARY ROCK A rock originating from the weathering of
pre-existing rocks which is deposited in
layers on the Earth's surface by air, water
or ice.
STRUCTURE The physical arrangement of rock related to
its deformation by, for example, faulting.
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.
TIER 1 COMPANY The Canadian Venture Exchange Inc. currently
classifies issuers into two different tiers
based on standards including historical
financial performance, stage of development
and financial resources of the issuer. Tier
1 is the Exchange's premier tier and is
reserved for the Exchange's most advanced
issuers with the most significant financial
resources.
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 mineralogy and textures
of a rock changes during deep burial or by
contact with igneous rocks at high
temperature and/or pressure.
U.S. Refers to the United States of America.
WESTERN CANADIAN SEDIMENTARY A large area of sedimentary rock in western
BASIN Canada covering much 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.
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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
1 micrometre = 0.000001 metre
1 nanometre = 0.000000001 metre
SYMBOLS: Au = Gold
g/t = Gram per tonne
oz/ton = Troy ounce per ton
PGM = Platinum group metals
<PAGE> 9
PART 1
ITEM 1: DESCRIPTION OF THE BUSINESS
A. INTRODUCTION
The principle activity of Birch Mountain Resources Ltd. (the "Company" or
"Birch") is metallurgical research to develop methods to economically recover
microparticulate and nanoparticulate precious and non-precious metals from the
Company's exploration properties.
Birch is also an exploration stage company engaged in the search for
commercially viable deposits of microparticulate and nanoparticulate metals. The
Company has no assurance that such a commercially viable ore deposit exists in
any of its exploration properties.
The Common Shares of Birch Mountain Resources Ltd. were listed on The Alberta
Stock Exchange (now the Canadian Venture Exchange Inc.) ("CDNX") on January 31,
1995. On July 4, 1995, Birch Mountain Resources Ltd. completed 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.
merged 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 ("Mineral Permits") and
Metallic and Industrial Mineral Leases ("Mineral 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.
Birch undertakes geological and metallurgical research as part of its
exploration activities. Geological research has worked towards improving the
Prairie Gold exploration model. Metallurgical research has been directed towards
improving analytical methods and developing extraction and recovery processes
for micro- and nanoparticulate metals on the Company's Mineral Permits and
Mineral Leases. Because geological and metallurgical research is conducted as an
integral part of Birch's exploration, the Company has had no segregated
expenditures dedicated to research and development over the past three years.
Through its geological and
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metallurgical research efforts, Birch has identified a previously unreported
form of natural, non-precious nanoparticulate metal in rocks from its Athabasca
exploration property. Birch has developed proprietary processes to extract this
nanoparticulate metal from these rocks and has sought protection for this
intellectual property by filing a U.S. patent application. There is no assurance
that Birch's processes will be economically viable until appropriate tests using
large tonnage samples demonstrate complete technical and economic feasibility.
The information in this Registration Statement is current as of September 30,
2000, except where otherwise indicated. In this Registration Statement, any
references to dollars or "$'s" refers to Canadian dollars unless specifically
stated otherwise.
GENERAL DEVELOPMENT DURING PAST FIVE YEARS
Mineral Exploration
Initially, the business of the Company was primarily the acquisition and
exploration 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 its criteria for further exploration. The Company continues
exploration work on its 2.7 million acres (1.12 million hectares) of Mineral
Leases and Mineral Permits in Alberta and Special Exploration Permit in
Manitoba.
Exploration Research
Originally, Birch's research activities were directed towards developing the
Prairie Gold Model, a new mineral exploration model explaining a possible
process 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 metals on its Athabasca and Dawson Bay properties.
Metallurgical Research
As an outgrowth of its research related to improving the Prairie Gold Model,
Birch has developed new technology for the analysis and extraction of
microparticulate and nanoparticulate metals. Microparticulate gold and other
precious and non-precious metals were first reported in rocks from the Athabasca
region by the Geological Survey of Canada in 1994, based on the detection of
these metals by electron imaging and x-ray analysis. Since this time, Birch and
other companies and researchers have used the same techniques to examine surface
rock and drill core samples from this area. The results of these studies have
identified multiple locations on Birch's Athabasca Mineral Permits and Mineral
Leases where microparticulate precious and non-precious metals occur in the
rock. 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 are ineffective in detecting the metals shown
by electron imaging to be present in these rocks.
In 1999, Birch established its own metallurgical 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 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
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effective analytical, extraction and recovery processes can be designed and
tested.
Birch believes that the extremely small size of the metals in rocks from
Athabasca 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 extraction 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 related to nanoparticulate metals is on-going. Birch believes that its
research activities may provide new ways to focus exploration on its existing
properties and may be applicable to similar rocks in other sedimentary basins.
Therefore, Birch's continuing research 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 activities to
identifying additional opportunities.
PLAN OF OPERATION FOR 2000 AND THE FIRST SIX MONTHS OF 2001
Birch will continue work related to developing and improving its mineral
extraction and measurement technology in the Company's lab, with verification of
results in independent research laboratories. The Company is in the process of
establishing a Scientific Advisory Board composed of senior scientists from
industry and academia. As the nature of the science undertaken by the Company is
relatively new, most of the expertise in the area of nanomaterials science and
technology resides in academic research institutes. The initial members of the
Scientific Advisory Board are expected to be associated with universities.
The primary functions of the Scientific Advisory Board will be:
- to provide independent advice to the Board of Directors on scientific
matters,
- to advise management on the Company's scientific program, and
- to provide a liaison role with scientific institutions and researchers
on specific technical activities.
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 metal content in the Devonian limestone.
The Company does not currently plan to initiate its own field-drilling program
in the first six months of 2001. This, however, may change depending on the
results of on-going geological and laboratory analyses.
PRINCIPAL PRODUCTS AND MARKETS
The Company has no mineral production.
SALES AND REVENUE DURING PAST THREE YEARS
The Company has had no sales from production, and has only received $390,000
from the sale of exploration data
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plus incidental interest and other minor revenue.
B. SPECIAL CHARACTERISTICS OF OPERATIONS OR INDUSTRY
CONTRACTUAL AND FINANCING RISKS
The Company holds very large land blocks under Special Exploration Permit,
Mineral Permit and Mineral Lease issued by the provincial governments. Special
Exploration Permits and Mineral Permits require a level of exploration
expenditures each year in order to continue to hold the rights to explore 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 primary exploration land under Mineral Permits in good standing for two
years from the date of the previous assessment filing, February 11, 2000. Land
held under Mineral Permits in Alberta will require exploration assessment
filings with the Alberta Government in the year 2002 valued at $10.56 million if
the Company elects to continue to hold all of the land. The Company continues
its exploration and anticipates that the extent of exploration properties will
be reduced to areas Birch believes to be the most prospective. Annual rental
payments on Mineral Leases in the Athabasca valley will cost an estimated
$175,000 in the year 2001 and in each year thereafter. Exploration expenditures
or payment of $82,000 in the year 2001 and $176,000 in the year 2002 are
required to hold the Special Exploration Permits in Manitoba. There is no
assurance that the Company will be able to raise additional funds or have
sufficient exploration expenditures to be able to hold all the land in good
standing beyond the current term.
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 new mineral extraction 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 U.S. 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 and expensive.
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
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<PAGE> 13
financial condition, regardless of the final outcome of such litigation.
EXPLORATION RISK
Mineral exploration involves 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
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 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 discovered.
There is no conclusive evidence supportive of the occurrence of precious metals
in potentially economic concentrations or quantities on Birch's exploration
properties. There is no assurance that the Company has a commercially viable
mineral deposit on its exploration properties. Much more drilling and testing
will be required together with technical evaluations of the data before the
company can conclude that there is an economically feasible mineral reserve
suitable for development. The Company faces certain risks over and above those
of conventional mineral exploration companies. Conventional fire assay has not,
in general, produced repeatable precious metals concentrations above trace
levels for rocks from the Company's exploration properties. There is a risk that
an effective fire assay method may not be developed. The failure to obtain
repeatable precious metal concentrations by standard methods may mean that there
are no significant concentrations of precious metals. If Birch is not successful
in identifying a method to quantitatively determine precious metals
concentrations, it may or may not be possible to define a precious metal
deposit, if such a deposit exists. If a precious metal deposit can be defined, a
method for commercial production of precious metals may or may not be available.
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. The approval
of new mines in Canada has, for the past two decades, been the subject of
detailed review through a clearly established public hearing process. Vigorous
interventions by well-organized environmental groups in the public hearing
process have demonstrated their interest in resource development projects,
particularly if the development includes a mine. The Canadian Federal Government
has nearly completed a review, with a large number stakeholder groups, of the
Canadian Environmental Assessment Act, with the objective of reforming this
statute. The Company expects that more stringent regulations may be the outcome
of this process. Birch has established environmental policies and procedures
that it believes 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.
-5-
<PAGE> 14
MANAGEMENT
At September 30, 2000, Birch had nine employees working full time for the
Company, including Douglas J. Rowe, President and Chief Executive Officer,
Donald L. Dabbs, Vice President and Chief Financial Officer, and Hugh J.
Abercrombie, Vice President Exploration.
Birch also relies on the services of a number of consultants for technical and
operational guidance. Birch believes that its relations with its employees,
management 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 specific professional services, particularly in
the areas of drilling, analytical services, research 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 and explore for and delineate mineral deposits on the
Company's exploration 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 to deter fair offers for the Common
Shares of the Company, it may have the result of discouraging certain
transactions by making such transactions impractical.
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.
Birch issued a news release on June 15, 2000 that contained certain statements
that were subsequently retracted or clarified in news releases issued on July
19, 2000 and September 27, 2000. Readers should therefore not rely on the news
release of June 15, 2000, but are referred to the news releases of July 19 and
September 27, 2000 for clarification. On June 16, 2000, the CDNX halted trading
of the Common Shares of Birch. Following a period of information review and
consultation, the Company agreed to: issue a clarifying news release (issued
September 27, 2000), allow the Exchange to conduct an independent technical
audit and provide an undertaking to the Exchange by insiders of the Company not
to trade in the Company's securities until the independent audit is complete. On
this basis the CDNX reinstated the Company's Common Shares for trading on
September 29, 2000. The independent auditor will determine whether or not there
is reasonable evidence of potentially economic concentrations of minerals and
reasonable evidence of potential commercial applications for the technology
under development. The specific scope of work includes:
- Summary review of past work on the Athabasca property and other Mineral
Leases held by the Company and how such work has been disclosed to the
public;
-6-
<PAGE> 15
- Review work relative to the identification of a "new form of precious
metal" within the context of a new ore deposit model and how such work
was disclosed to the public;
- Review the Company's approach to reviewing various assay methodologies
and the basis of the determination that they were unsatisfactory for
this "new form of previous metal" and new ore deposit model;
- Review the dissemination of the various assay results in press-releases
in terms of timing and completeness of disclosure;
- Review the sample preparation methodology and process development in
respect of the reported extraction methodology. This will require a
reasonable level of disclosure by the Company and the auditor has
reserved the right to have the process reviewed by individuals with the
appropriate academic qualifications if deemed necessary;
- Supervise test work at an independent laboratory, along with such other
conventional assay techniques as may be deemed appropriate by the
independent auditor. The location and protocol for the test will be
decided by the independent auditor after discussions with the Company;
and
- Produce a draft report to the CDNX outlining the results of the audit
and making recommendations for adequate disclosure to the public.
The independent technical audit is being conducted by Associated Mining
Consultants of Calgary, Alberta. The audit commenced October 6, 2000 and the
Company is advised that it should be completed by the end of the year.
The ramifications of the independent audit report conflicting with the Company's
assertions are difficult to predict and unknown to the Company at this time.
GOLD AND PRECIOUS METAL PRICING RISKS
If the Company were able to identify an economic mineral deposit on its Mineral
Permits or Mineral Leases, the price of precious and non-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
U.S. 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 September 29,
2000, the closing price for gold was US$273.65 per troy ounce. The following
table sets forth the average of the daily closing price for gold for the periods
indicated as reported by the London Metal Exchange:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
5 YR. AVG 1999 1998 1997 1996 1995
--------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
GOLD 337.00 279.00 294.00 340.00 388.00 384.00
(US$/TROY
OUNCE)
</TABLE>
-7-
<PAGE> 16
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 third parties.
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, wet chemical and instrumentation
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.
EXPLORATION PROPERTIES
Birch's Alberta properties are located in areas where, over the past six years,
major mining companies and junior mineral exploration companies have explored
for both precious metals and diamonds. In the period from 1994 to 1995, Lac
Minerals Ltd. and Tintina Mines Limited explored for precious metals in areas
which are now part of Birch's Athabasca property. In the period from 1997 to
1998, in a joint venture with Tahera Corporation, Birch explored for diamonds on
its Alberta properties. In 1999, Kennecott Canada Exploration Inc. recovered
diamonds from rocks drilled from the Birch Mountains on lands adjacent to the
Company's Birch Mountains property. Much of the information resulting from these
exploration programs is available to Birch through assessment reports filed with
the Alberta Government and through information acquired as part of exploration
property acquisitions.
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. The Company continues its
exploration and anticipates that the extent of exploration properties will be
reduced to areas Birch believes to be the most prospective.
Alberta Properties
The majority of Birch's Alberta properties are held under Mineral Permits issued
by the Provincial Government of Alberta. Mineral Permits may be held for up to
ten years and convey the right to explore, an option to convert to lease or
mine, work and remove metallic and industrial minerals when authorized under
Section 25 of the Metallic and Industrial Minerals Regulation of the Mines and
Minerals Act of Alberta. Assessment costs must be filed every two years against
an escalating work requirement ranging from $5.00 to $15.00 per hectare
(approximately $2.00 to $6.00 per acre) for each 2 year assessment period. Birch
owns a 100% working interest in virtually all Mineral Permits held in Alberta.
Some Mineral Permits are subject to a royalty payable to the original Mineral
Permit holder; Birch has the option to purchase most of these royalties for a
fixed price. A small
-8-
<PAGE> 17
minority convey a 1% royalty right to the original Mineral Permit holder or its
designees.
Birch also holds a number of Mineral Leases. Mineral Leases are granted by the
Alberta government and convey the right to explore and produce minerals, subject
to meeting development approvals. Mineral Leases are issued for 10 year
renewable terms and are held on the basis of an annual rental fee of $3.50 per
hectare ($1.42 per acre). Currently, the Company's Mineral Lease rental payments
are $12,887.75 per year, but they are expected to increase to approximately
$175,000 in the year 2001 as more Mineral Permits are converted to Mineral
Leases.
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 Mineral Lease and
Mineral Permit holders. The Athabasca oil sands mining area covers most of Birch
Mountain's Athabasca Mineral 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 sediments, nor in
the underlying Devonian limestone, which rights are owned by the Mineral Permit
and Mineral Lease holder.
Athabasca: At September 30, 2000 the Athabasca property comprises 100 Mineral
Permits and 5 Mineral Leases covering approximately 1,891,110 acres (765,305
hectares). The dates of issue of the Mineral 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: At September 30, 2000 the Birch Mountains exploration property
comprises 9 Mineral 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 Mineral Permits. Birch has identified a series of potential targets
for diamond exploration on its Birch Mountains Mineral Permits.
Caribou Mountains: The Caribou Mountains property comprises 19 Mineral Permits
issued in 1994, covering approximately 432,691 acres (175,104 hectares). Birch
has conducted preliminary precious metals exploration on the Caribou Mountains
property. These Mineral Permits will be allowed to lapse at the end of November,
2000, as they are no longer considered prospective by the Company.
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 Special Exploration Permits are renewable for
negotiable periods of up to five years with an escalating work
-9-
<PAGE> 18
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. There is no
conclusive evidence supporting the existence of 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 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 can 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
nanoparticulate 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 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 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
-10-
<PAGE> 19
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 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 sedimentary rocks.
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 Mineral Permit area contained gold
mineralization. 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 containing
detectable gold was obtained from Devonian carbonate rocks. Drill hole Ells Gold
No. 1 was drilled in 1988 across the Athabasca River from the site of the
original Athabasca Oils No. 1.
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
-11-
<PAGE> 20
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 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 Oil Sands
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 an interval in Syncrude Canada Ltd. drill hole
11-7-AE-96-10W4 detected platinum and gold. The original results were
independently obtained by consultants working for Syncrude Canada Ltd. and were
confirmed by reanalysis. 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 the
model. Based on alteration patterns observed 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 reported
occurrence of natural nanoparticulate metal. This led directly to the
development of proprietary methods for detecting and extracting 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 reporting 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 a quarry at Mafeking, Manitoba. 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 Birch's Athabasca property. Crystalline rocks of the
Precambrian Shield underlie the Dawson Bay property and are
-12-
<PAGE> 21
overlain by clastic, carbonate and evaporite rocks of the WCSB. Unlike
Athabasca, Devonian rocks do not sit directly on basement, but are underlain by
older sedimentary rocks of the WCSB.
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. Exploration for
zinc-lead-silver deposits was conducted in the early to mid 1980's. Five holes
were drilled in 1985. None of the drill holes reported significant zinc or lead
mineralization.
Exploration for uranium was conducted in the region in the 1960's and 70's. No
significant concentrations of uranium were reported.
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
geochemical 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 on
Birch's Athabasca exploration property; 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 property. Preliminary results suggest the presence of at least
four major basement faults in the Special Exploration Permit area.
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 TYPE OF PERCENT OF COMMON
GROUP DESCRIPTION OF CLASS OWNERSHIP NUMBER OF SHARES 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.
-13-
<PAGE> 22
ITEM 5: NATURE OF THE TRADING MARKET
The Company's Common Shares trade on the CDNX, 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 merged
to form a new and larger exchange known as the CDNX. The Company was listed on
the new exchange as a Tier 1 Company and retained the symbol BMD.
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
Third Quarter $1.70 $1.00 195,675
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>
Trading of the Company's Common Shares on the CDNX was halted on June 16, 2000
and reinstated on September 29, 2000.
To the best of the Company's knowledge, as of October 31, 2000, 7,853,200 Common
Shares (23.6% of the issued and outstanding Common Shares of the Company) were
held by 49 registered holders in the U.S.. The Common Shares currently are not
listed for trading on any securities exchange in the U.S.. The Common Shares are
not registered to trade in the U.S. in the form of American Depository Receipts
or similar certificates.
-14-
<PAGE> 23
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 U.S.
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 U.S.. (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.
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 U.S. being a member
of the WTO);
-15-
<PAGE> 24
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.
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 U.S., 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
U.S. holder that is a corporation that carries on business
-16-
<PAGE> 25
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.
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 U.S., 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 U.S. 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
-17-
<PAGE> 26
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.
In the case of a non-resident holder to whom shares of the Company represent
taxable Canadian property and who is resident in the U.S., 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.
United States Federal Income Tax Consequences
The following is a discussion of possible U.S. 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 U.S., a corporation created or organized in
or under the laws of the U.S. 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 U.S..
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 U.S. and shareholders who acquired their stock through the exercise of
employee stock options or otherwise as compensation.
-18-
<PAGE> 27
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 U.S. Federal income tax purposes) the gross amount of such
distributions, to the extent that the Company has current or accumulated
earnings and profits. This 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 U.S. 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 U.S. corporations. A U.S. Holder, that is a corporation
may, under certain circumstances, be entitled to a 70% deduction of the U.S.
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 U.S. 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 U.S. 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.
-19-
<PAGE> 28
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.
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 9 month period
ended September 30, 2000, and the comparative period ended September 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>
NINE MONTHS YEAR ENDING
ENDING SEPTEMBER 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 tax (1,435) (514) (802) (3,217) (4,539) (1,941) (615)
Net (Loss) for the year (1,435) (514) (576) (2,890) (4,539) (1,291) (429)
</TABLE>
-20-
<PAGE> 29
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDING
ENDING SEPTEMBER 30, DECEMBER 31,
FINANCIAL 2000 1999 1999 1998 1997 1996 1995
-------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Loss) per Common Share (0.04) (0.02) (0.02) (0.13) (0.21) (0.07) (0.03)
Amounts in accordance with U.S.
GAAP:
(Loss) before income tax (2,309) (851) (1,661) (1,375) (5,521) (4,231) (2,030)
Net (Loss) for the year (2,309) (851) (1,884) (1,504) (5,521) (4,662) (2,268)
(Loss) per Common Share (0.07) (0.03) (0.06) (0.07) (0.32) (0.45) (0.22)
CASH FLOW DATA:
Amounts in accordance with
Canadian GAAP:
Net cash provided by (used in) (976) (430) (528) (592) (840) (1,085) (488)
operating activities
Net cash provided by financing 4,177 1,158 1,621 561 778 9,267 2,392
activities
Net cash used in investing (940) (465) (625) (213) (4,052) (4,878) (748)
activities
Amounts in accordance with U.S.
GAAP:
Net cash provided by (used in) (1,850) (703) (1,117) (1,263) (1,731) (3,731) (1,170)
operating activities
Net cash provided by financing 4,177 1,158 1,621 561 778 9,267 2,392
activities
Net cash used in investing (66) (192) (36) 458 (3,161) (2,232) (66)
activities
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDING YEAR ENDING
ENDING SEPTEMBER 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 13,561 8,592 8,982 8,188 10,155 13,687 4,512
Current liabilities 272 295 325 536 516 286 58
Long term debt -- -- -- -- -- -- --
Total Liabilities 272 296 325 536 516 286 58
Shareholders' equity 13,289 8,296 8,657 7,652 9,639 13,401 4,454
Amounts in accordance
with U.S. GAAP:
Total assets 8,914 5,185 5,210 5,054 5,422 9,846 3,317
Current liabilities 272 296 325 536 516 286 58
Long term debt -- -- -- -- -- -- --
Total Liabilities 272 296 325 536 516 286 58
Shareholders' equity 8,642 4,889 4,885 4,518 4,906 9,560 3,259
</TABLE>
-21-
<PAGE> 30
<TABLE>
<CAPTION>
SIX MONTHS ENDING YEAR ENDING
SEPTEMBER 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 Accordance 1,435 514 576 2,890 4,539 1,291 429
With Canadian GAAP
Exploration costs 874 273 589 671 891 2,646 682
Compensation Costs -- 64 496 85 91 294 919
Future tax provision -- -- 223 129 -- 431 238
-------------------------------------------------------------------
Net Loss For The Year 2,309 851 1,884 3,775 5,521 4,662 2,268
Under U.S. GAAP
-------------------------------------------------------------------
-------------------------------------------------------------------
Weighted Average Number
of Common Shares
Outstanding Under U.S.
GAAP 31,951 25,788 26,682 22,934 17,161 10,345 10,182
-------------------------------------------------------------------
Loss Per Share Under U.S.
GAAP 0.07 0.03 0.06 0.16 0.32 0.45 0.22
-------------------------------------------------------------------
Shareholders' Equity 13,288 8,296 8,657 7,652 9,639 13,401 4,454
Canadian GAAP
Exploration costs 4,646 3,407 3,772 3,134 4,733 3,841 1,195
-------------------------------------------------------------------
Shareholders' Equity U.S.
GAAP 8,642 4,889 4,885 4,518 4,906 9,560 3,259
-------------------------------------------------------------------
Mineral Exploration Costs
Canadian GAAP 10,102 7,631 7,829 7,196 8,555 7,619 2,793
Exploration costs 4,646 3,407 3,772 3,134 4,733 3,841 1,195
-------------------------------------------------------------------
Mineral Exploration Costs
U.S. GAAP 5,456 4,224 4,106 4,062 3,822 3,778 1,599
-------------------------------------------------------------------
</TABLE>
STOCK BASED COMPENSATION
U.S. GAAP requires stock based compensation to employees and directors to 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.
-22-
<PAGE> 31
INCOME TAXES
In December, 1997, the Canadian Institute of Chartered Accountants ("CICA")
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 accounting prescribed
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 CICA 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 CICA 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.
CAPITALIZED EXPLORATION COSTS
Under Canadian GAAP costs of acquisition of Mineral Permits and Mineral Leases
as well as the costs of exploration, analysis and testing of samples are
capitalized as mineral exploration costs. To comply with US GAAP, the costs
associated with exploration, analysis and testing are expensed as they are
incurred. In addition, acquisition costs for leases and permits that do not
provide for unrestricted exploitation rights are also expensed in the year of
acquisition.
ITEM 9: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Birch raised $2,162,352 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 $909,484 when shareholders
exercised warrants, plus $156,426 on the exercise of stock options by staff,
officers, directors and consultants.
-23-
<PAGE> 32
The Company has no material commitments for capital expenditures.
During the nine month period ended September 30, 2000, Birch raised $2,697,546
through the sale of the Company's Common Shares in a private placement.
Additionally, the Company raised $1,330,976 pursuant to the exercise of common
share purchase warrants and $335,904 pursuant to the exercise of stock options.
The funds raised during the prior three-years, plus the nine months ended
September 30, 2000 are summarized in the following table.
<TABLE>
<CAPTION>
EQUIVALENT $U.S.
DATE OF ISSUE NO. OF SHARES(UNITS) UNIT PRICE($CAN) TOTAL FUNDS RAISED($CAN) FUNDS RAISED(1)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON SHARES
1997 -- -- -- --
1998 1,376,934 $0.35 to $0.70 $553,353 $373,005
1999 3,391,305 $0.36 to $1.15 $1,609,000 $1,078,418
2000 - 9 months 2,365,256 $1.15 $2,697,546 $1,833,070
WARRANTS EXERCISED
1997 2,691,336 $0.30 to $0.75 $883,095 $637,798
1998 0 0 0 0
1999 26,389 $1.00 $26,389 $17,687
2000 - 9 months 1,322,226 $1.00 to $1.50 $1,330,976 $904,441
OPTIONS EXERCISED
1997 62,000 $0.10 to $0.59 $21,880 $15,802
1998 47,000 $0.10 to $0.22 $5,540 $3,734
1999 257,400 $0.22 to $0.70 $129,006 $86,465
2000 - 9 months 625,600 $0.22 to $1.36 $335,904 $228,258
</TABLE>
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 exploration 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.
-24-
<PAGE> 33
The Company has been able to raise the required financing to continue to meet
its obligations, 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 September 30, 2000, Birch had net working capital of $2,972,151. The
primary source of capital was the issuance of Common Shares.
RESULTS OF OPERATIONS
In 1999, general and administrative expenses were $835,687, other costs
amounting to $33,190, consisting of writedowns of investments and mineral
exploration costs were offset by interest income and a future tax recovery of
$226,800, resulting in a net loss of $575,697 or $0.02 per share. The increase
in general and administrative costs was due to increased activity.
1n 1998, general and administrative expenses were $737,371, other costs
amounting to $2,479,725, consisting of writedowns of investments and mineral
exploration costs were offset by interest income and a future tax recovery of
$326,727 resulting in a net loss of $2,890,369. 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.
In 1997, general and administrative expenses were $1,144,144, other costs
amounting to $3,395,335, consisting of writedowns of investments and mineral
exploration costs were offset by interest income resulting in a net loss of
$4,539,479.
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 Mineral Permits in the Athabasca
valley and 204,959 acres (82,994 hectares) of Mineral Permits in the Birch
Mountains in good standing for two more years.
The net loss for the nine months ended September 30, 2000 was $1,435,193 or
$0.04 per share, compared to
-25-
<PAGE> 34
$513,939 or $0.02 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. ("APM"), and increases
in expenses associated with higher levels of activity than were incurred in
1999.
In consideration of APM introducing the Company to parties that have been or are
instrumental in providing direction in developing analytical protocols, the
Company agreed to pay APM a fee equal to 500,000 Common Shares of the Company.
This fee is payable as to 350,000 Common Shares in consideration of
introductions to parties who have materially advanced the Company in its efforts
to develop an assay procedure and as to 150,000 Common Shares upon providing to
the Company a proprietary assay procedure which reliably confirms concentrations
of precious metals in the Company's Athabasca project rock equal to or greater
than 1 gram per tonne.
Pursuant to the terms of a Finder's Fee Agreement dated June 25, 1999, the
Company has issued 350,000 Common Shares at a price of $1.40 per share, being
the market price on the date of issuance. No proprietary assay procedure has yet
been provided to the Company by APM that has proven to be successful in reliably
confirming concentrations of precious metals in the Company's Athabasca project
rock.
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 main 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 research and exploration stage. The Company spends about
$170,000 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 exploration activities, and
will increase significantly if and when the Company undertakes field-drilling
activities.
FLOW-THROUGH ARRANGEMENTS
In consideration for cash proceeds, an investor receives a specified number of
flow-through shares, warrants and the right to receive flow-through deductions
in the form of Canadian exploration expense ("CEE") from the Corporation equal
to the subscription amount within a 24 month period. The flow-through deductions
can be applied against the income of the investor for Canadian tax purposes.
Furthermore, subject to statutory restrictions on resale, the investor can also
sell the shares on a public stock exchange.
At present, Birch is committed to several outstanding flow-through share
issuances. At September 1, 2000, Birch has yet to incur and renounce $946,033 in
CEE. Of that total, $31,615 has to be incurred by May 31, 2001, $898,6578 has to
be incurred by January 31, 2002 and the remaining $15,761 has to be incurred by
February 28, 2002.
By contractual agreement, Birch is required to spend the subscription proceeds
received from the issuance of flow-through shares on CEE. Generally, CEE from a
mineral exploration perspective is defined under the Tax Act to include any
expense incurred for the purpose of determining the existence, location, extent
or quality of a mineral resource in Canada or any expense incurred for the
purpose of bringing a new mine in a mineral
-26-
<PAGE> 35
resource in Canada into production in reasonable commercial quantities. However,
the definition of CEE excludes Canadian development expense ("CDE") or any
expense that may reasonably be considered to be related to a mine that has come
into production in reasonable commercial quantities or to be related to a
potential or actual extension thereof.
Generally, CDE from a mining perspective, is defined under the Tax Act to
include any expense incurred by the taxpayer in sinking or excavating a mine
shaft, main haulage way or similar underground work designed for continuing use,
for a mine in a mineral resource in Canada built or excavated after the mine
came into production, or in extending any such shaft, haulage way or work.
Furthermore, CDE includes certain costs to acquire rights, licences or
privileges to prospect, explore, drill or mine for minerals in a mineral
resource in Canada, certain rentals or royalties paid and computed by reference
to the amount or value of production from a mineral resource in Canada, and
costs to acquire any real property in Canada the principal value of which
depends upon its mineral resource content.
Neither CEE nor CDE includes an expense that is the cost, any part of the cost,
to the taxpayer of any depreciable property.
Under the Tax Act, a corporation has 24 months from the end of the month of the
day an agreement is made with a flow-through shareholder to incur CEE. A
corporation has to renounce the flow-through deductions to shareholders before
March of the first calendar year that begins after that period.
In situations where a corporation renounces more flow-through deductions to
shareholders than it was actually allowed under the Tax Act, it has to file a
statement to the Canada Customs and Revenue Agency specifying appropriate
reductions in excess flow-through deductions to shareholders. The shareholders
would be reassessed for income tax purposes based on this statement.
When a corporation renounces more flow-through deductions to shareholders than
is allowed, the corporation itself may be subject to a deductible tax under Part
XII.6 of the Tax Act in regards to the excess flow-through deductions.
Furthermore, the corporation may be subject to civil and in some instances,
criminal penalties depending upon the severity of the deficiencies that led to
the over-renunciation of flow-through deductions.
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.
-27-
<PAGE> 36
<TABLE>
<CAPTION>
DATE ELECTED OR
DIRECTOR/EXECUTIVE OFFICER POSITION(S) HELD APPOINTED COUNTRY OF RESIDENCE
-------------------------- ---------------- --------- --------------------
<S> <C> <C> <C>
Kerry E. Sully Chairman of the Board and Director 1995 Canada
Douglas J. Rowe President, CEO & Director 1994 Canada
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 AND DIRECTOR
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 a founder 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
-28-
<PAGE> 37
company engaged in oil and gas exploration and development.
DONALD L. DABBS - VICE-PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR
Mr. Dabbs was a founder 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> 38
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 September 30, 2000.
TYPE OF SECURITY: STOCK OPTIONS
<TABLE>
<CAPTION>
NUMBER OF SHARES BY
OPTIONEE OUTSTANDING OPTIONS DATE OF EXPIRY PURCHASE PRICE OF SHARES
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
All Optionees other than 5,000 November 21, 2001 $0.70
Directors and Officers
10,000 June 5, 2002 $0.70
75,000 July 13, 2003 $0.22
50,000 November 16, 2003 $0.35
30,000 July 26, 2004 $1.25
365,000 November 18, 2004 $1.36
Directors and Officers 50,000 January 16, 2001 $0.70
100,000 November 21, 2001 $0.70
75,000 January 2, 2002 $0.70
100,000 March 24, 2002 $0.70
150,000 March 9, 2003 $0.90
440,000 November 16, 2003 $0.35
470,000 November 18, 2004 $1.36
</TABLE>
-30-
<PAGE> 39
TYPE OF SECURITY: COMMON SHARE PURCHASE WARRANTS
<TABLE>
<CAPTION>
NUMBER OF SHARES BY
OPTIONEE OUTSTANDING WARRANTS DATE OF EXPIRY PURCHASE PRICE OF SHARES
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
All Optionees other than 228,153 February 10, 2001 $1.50
Directors and Officers
758,362 April 21, 2001 $1.50
351,114 April 25, 2001 $1.50
9,783 April 30, 2001 $1.50
Directors and Officers 5,870 April 21, 2001 $1.50
57,500 April 25, 2001 $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.
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.
-31-
<PAGE> 40
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
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-17, incorporated by reference.
-32-
<PAGE> 41
ITEM 19: FINANCIAL STATEMENTS AND EXHIBITS
(1) Index to Financial Statements of Birch Mountain Resources Ltd.
Report of Independent Auditors
Consolidated Balance Sheets for the years ended December 31, 1999, 1998
and 1997 and for the nine months ended September 30, 2000
Consolidated Statements of Loss and Deficit for the years ended
December 31, 1999, 1998 and 1997 and for the nine months ended
September 30, 2000
Consolidated Statements of Cash Flow for the years ended December 31,
1999, 1998 and 1997 and for the nine months ended September 30, 2000
Notes to and forming part of the Consolidated Financial Statements
(2) Exhibits
Exhibits incorporated by reference to the Form 20-F filed on September 29, 2000:
1. Articles of Amalgamation
2. By-Law No. 1
3. Shareholders Rights Plan Agreement
4. Stock Option Plan
5. Employment Agreement between the Company and Douglas J. Rowe dated
December 1, 1995
Exhibits filed herewith:
6. News Release of the Company dated September 27, 2000
7. Finders Fee Agreement between the Company and American Precious Metals
Inc. dated June 25, 1999
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: November 30, 2000 Per: /s/Douglas J. Rowe
---------------------------
Douglas J. Rowe, P. Eng.
President and Chief Executive Officer
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<PAGE> 42
BIRCH MOUNTAIN RESOURCES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
F-1
<PAGE> 43
TO THE SHAREHOLDERS:
BIRCH MOUNTAIN RESOURCES LTD.
AUDITORS' REPORT
--------------------------------------------------------------------------------
We have audited the consolidated balance sheets of BIRCH MOUNTAIN RESOURCES LTD.
as at December 31, 1999, 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 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, 1998 and 1997, 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/Meyers Norris Penny
Calgary, Alberta Chartered Accountants
March 13, 2000 (except as
to Notes 1 and 17, which are
as at November 24, 2000)
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph [following the opinion paragraph] when the financial
statements are affected by conditions and events that cast substantial doubt on
the Corporation's ability to continue as a going concern, such as those
described in Note 1 to the financial statements. Our report to the shareholders
dated March 13, 2000 is expressed in accordance with Canadian reporting
standards which do not permit a reference to such events and conditions in the
auditors' report when these are adequately disclosed in the financial
statements.
/s/Meyers Norris Penny
Calgary, Alberta Chartered Accountants
November 24, 2000
F-2
<PAGE> 44
BIRCH MOUNTAIN RESOURCES LTD.
CONSOLIDATED BALANCE SHEET
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30 DEC. 31 DEC. 31 DEC. 31
------------ ----------- ----------- -----------
2000 1999 1998 1997
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT
Cash (Note 5) 3,204,173 943,558 475,188 719,316
Accounts receivable 26,849 36,384 142,057 185,435
Prepaids and deposits 13,484 12,691 191,410 349,218
----------- ----------- ----------- -----------
3,244,506 992,633 808,655 1,253,969
INVESTMENT (Note 6) 15,930 15,930 36,890 130,000
CAPITAL (Note 7) 198,596 144,674 146,714 215,423
MINERAL EXPLORATION COSTS (Note 8) 10,102,037 7,828,506 7,195,948 8,555,331
----------- ----------- ----------- -----------
13,561,069 8,981,743 8,188,207 10,154,723
=========== =========== =========== ===========
LIABILITIES
CURRENT
Accounts payable 272,356 324,727 536,223 515,950
----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 9) 24,721,451 18,654,561 17,073,832 16,170,252
DEFICIT (11,432,738) (9,997,545) (9,421,848) (6,531,479)
----------- ----------- ----------- -----------
13,288,713 8,657,016 7,651,984 9,638,773
----------- ----------- ----------- -----------
13,561,069 8,981,743 8,188,207 10,154,723
=========== =========== =========== ===========
</TABLE>
Approved on behalf of the Board:
/s/ Donald L. Dabbs Director
------------------------------
Donald L. Dabbs
/s/ Douglas J. Rowe Director
------------------------------
Douglas J. Rowe
F-3
<PAGE> 45
BIRCH MOUNTAIN RESOURCES LTD.
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30 DEC. 31 DEC. 31 DEC. 31
-------------------------- ----------- ----------- -----------
2000 1999 1999 1998 1997
(unaudited)
<S> <C> <C> <C> <C> <C>
EXPENSES
Salaries, management fees and benefits 410,888 204,275 289,432 227,080 461,160
Shareholder services and promotion 208,114 120,962 222,769 132,844 266,619
Office 181,742 118,622 162,197 176,104 233,619
Professional fees 723,445 85,083 120,811 131,085 121,957
Amortization 37,903 29,130 40,478 70,258 60,789
----------- ----------- ----------- ----------- -----------
LOSS BEFORE THE FOLLOWING 1,562,092 558,082 835,687 737,371 1,144,144
----------- ----------- ----------- ----------- -----------
Interest and other income (132,417) (44,962) (71,096) (38,316) (130,835)
(Gain) loss on disposal of investment -- -- (2,090) 105,000
Write down of investments -- -- 14,160 143,220 529,267
Write down of mineral exploration
costs (Note 8) 5,518 819 25,836 2,269,821 2,996,903
----------- ----------- ----------- ----------- -----------
(126,899) (44,143) (33,190) 2,479,725 3,395,335
----------- ----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES 1,435,193 513,939 802,497 3,217,096 4,539,479
Future income tax recovery -- -- (226,800) (326,727) --
----------- ----------- ----------- ----------- -----------
NET LOSS FOR THE YEAR 1,435,193 513,939 575,697 2,890,369 4,539,479
DEFICIT AT BEGINNING OF YEAR 9,997,545 9,421,848 9,421,848 6,531,479 1,992,000
----------- ----------- ----------- ----------- -----------
DEFICIT AT END OF YEAR 11,432,738 9,935,787 9,997,545 9,421,848 6,531,479
=========== =========== =========== =========== ===========
LOSS PER SHARE (Note 10) (0.04) (0.02) (0.02) (0.13) (0.21)
=========== =========== =========== =========== ===========
</TABLE>
F-4
<PAGE> 46
BIRCH MOUNTAIN RESOURCES LTD.
CONSOLIDATED STATEMENT OF CASH FLOW
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30 DEC. 31 DEC. 31 DEC. 31
------------------------ ---------- ---------- ----------
2000 1999 1999 1998 1997
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from interest 101,590 54,729 71,096 38,316 130,835
Cash received from Government
of Indonesia -- -- 175,555 165,708 --
Cash paid to employees and suppliers (1,078,039) (485,205) (774,537) (796,087) (971,300)
---------- ---------- ---------- ---------- ----------
(976,449) (430,476) (527,886) (592,063) (840,465)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares for cash 4,293,426 1,175,461 1,656,061 573,893 778,818
Share issuance costs (116,536) (17,158) (34,594) (13,061) (1,274)
---------- ---------- ---------- ---------- ----------
4,176,890 1,158,303 1,621,467 560,832 777,544
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on disposal (acquisition)
of investment -- -- 8,890 25,000 (10,753)
Purchase of capital assets (66,295) (29,172) (38,438) (1,549) (107,457)
Mineral exploration costs (873,531) (435,429) (595,663) (236,348) (3,933,289)
---------- ---------- ---------- ---------- ----------
(939,826) (464,601) (625,211) (212,897) (4,051,499)
---------- ---------- ---------- ---------- ----------
INCREASE (DECREASE) IN CASH 2,260,615 263,226 468,370 (244,128) (4,114,420)
CASH AT BEGINNING OF YEAR 943,558 475,188 475,188 719,316 4,833,736
---------- ---------- ---------- ---------- ----------
CASH AT END OF YEAR 3,204,173 738,414 943,558 475,188 719,316
========== ========== ========== ========== ==========
</TABLE>
F-5
<PAGE> 47
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
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.
These financial statements have been prepared by management in accordance
with generally accepted accounting principles on a going concern basis.
This presumes funds will be available to finance ongoing exploration,
operations and capital expenditures and permit the realization of assets
and the payment of liabilities in the normal course of operations for the
foreseeable future. The Company has incurred a net loss of $575,697 during
the year ended December 31, 1999 (1998 - $2,890,369; 1997 - $4,539,479) and
as at December 31, 1999 has a deficit of $9,997,545. 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. These financial statements do
not give effect to any adjustments which might be necessary should the
Company be unable to continue its operations as a going concern.
The Company has generally financed its exploration and operating costs
through public offerings and private placements. The Company is obligated
to incur certain levels of expenditures in order to maintain its rights to
continue exploration and development of certain of its mineral properties.
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.
(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.
F-6
<PAGE> 48
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
(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.
(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.
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>
F-7
<PAGE> 49
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
3. CHANGE IN ACCOUNTING POLICY (CONTINUED)
(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;
1997 - nil); and
- Purchase of mineral rights with shares $43,500 (1998 -
$465,920; 1997 - nil).
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.
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.
5. CASH
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash, available for use 890,558 456,188 260,213
Cash, subject to restriction 53,000 19,000 459,103
------- ------- -------
943,558 475,188 719,316
======= ======= =======
</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.
6. INVESTMENT
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Tintina Mines Limited -- -- 130,000
Tahera Corporation 15,930 36,890 --
====== ====== =======
</TABLE>
The cost of the Company's investment in 177,000 shares (1998 - 217,000
shares) of Tahera Corporation, formerly, Lytton Minerals Limited, has been
written down to reflect its market value at December 31, 1999. During 1999
and 1998, the Company disposed of 40,000 shares for net proceeds of $8,890.
F-8
<PAGE> 50
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
7. CAPITAL ASSETS
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
NET BOOK NET BOOK NET BOOK
COST VALUE COST VALUE COST VALUE
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Equipment 182,672 91,292 154,518 82,074 154,518 101,413
Computer 179,914 44,549 169,629 52,136 168,080 96,293
Automotive 34,090 8,185 34,090 11,693 34,090 16,704
Leasehold improvements 1,583 648 1,583 811 1,583 1,013
------- ------- ------- ------- ------- -------
398,259 144,674 359,820 146,714 358,271 215,423
======= ======= ======= ======= ======= =======
</TABLE>
8. MINERAL EXPLORATION COSTS
<TABLE>
<CAPTION>
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>
<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 5,506,746 1,335,061 186,893 6,654,914
British Columbia 374,585 34,328 408,913 --
Yukon 250,242 1,077,849 -- 1,328,191
Manitoba -- 288,905 216,679 72,226
Indonesia 1,487,372 1,197,046 2,184,418 500,000
--------- --------- --------- ---------
7,618,945 3,933,289 2,996,903 8,555,331
========= ========= ========= =========
</TABLE>
Included in mineral exploration costs are costs having a book value of
approximately $2,449,500 (1998 - $2,406,000) which have no cost base for
tax purposes.
F-9
<PAGE> 51
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
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 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.
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
- Began converting 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 leases in Saskatchewan were 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 leases, 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.
F-10
<PAGE> 52
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
8. MINERAL EXPLORATION COSTS (CONTINUED)
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 leases and, accordingly, the remaining mineral
exploration costs related to this project were written off.
These financial statements include $194,000 (1998 - $246,500; 1997 -
$194,000) of accounts payable relating to the estimated cost of
discontinuing the Indonesian operations and $NIL (1998 - $175,000;
1997 - $175,000) of deposits with the Indonesian government.
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 15,392,708
Issued for cash
Series A warrants exercised 2,523,127 756,938
Stock options exercised 62,000 21,880
----------- -----------
22,168,422 16,171,526
Share issuance -- (1,274)
----------- -----------
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-11
<PAGE> 53
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
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.
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, 1996 1,845,000 .10 - 2.75 1.20 1999-2001
Granted 230,000 1.55 - 2.40 2.18 2002
Exercised (62,000) .35 .35 1999-2000
--------- ----------- ------ ----------
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
</TABLE>
F-12
<PAGE> 54
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
9. SHARE CAPITAL (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF PRICE AVERAGE EXPIRY
OPTIONS RANGE PRICE DATE
--------- ----------- ------ ----------
<S> <C> <C> <C> <C>
December 31, 1996 (balance forward) 1,845,000 .10 - 2.75 1.20 1999-2001
Granted 230,000 1.55 - 2.40 2.18 2002
Exercised (62,000) .35 .35 1999-2000
--------- ----------- ------ ----------
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>
At December 31, 1996, the Company had the following outstanding
warrants:
<TABLE>
<CAPTION>
NUMBER OF
SERIES DATE PRICE PER SHARE WARRANTS EXPIRATION DATE
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A July 4, 1995 2 warrants + $0.30 5,046,255 January 31, 1997
Special July 12, 1996 1 warrant + $6.60 1,676,000
</TABLE>
During 1997, all of the outstanding Series A warrants were exercised.
The special warrants expired unexercised.
F-13
<PAGE> 55
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
(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.
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; 1997 - 21,935,000 shares). The effect of the stock options and
warrants on the loss per share is anti-dilutive.
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>
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;
1997 - $27,606) to a company controlled by a director; and
- Included in salaries, management fees, and benefits are management
fees aggregating $2,400 (1998 - $8,817; 1997 - $102,022) which were
paid to companies employing the services of a director.
13. INCOME TAXES
Future income tax assets consist of the following temporary differences:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Mineral exploration costs 744,855 717,165 124,197
Capital assets 117,689 99,628 68,279
Scientific research and development expenditures 94,471 94,471 94,471
Loss carry forwards 662,389 579,661 520,778
Share issuance costs 79,473 141,134 214,766
Valuation allowance (1,698,877) (1,632,059) (1,022,491)
---------- ---------- ----------
-- -- --
========== ========== ==========
</TABLE>
F-14
<PAGE> 56
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
13. INCOME TAXES (CONTINUED)
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; 1997 - $8.0 million)
which may be carried forward indefinitely; and
- Scientific research and development costs of $211,000 (1998 - $211,000;
1997 - $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 1997
---------- ---------- ----------
<S> <C> <C> <C>
Loss before taxes 802,497 3,217,096 4,539,479
========== ========== ==========
Expected tax recovery at 44.62% 358,074 1,435,468 2,025,516
Tax effect of expenses not deductible for tax purposes
Meals and other (7,241) (3,361) (10,903)
Non-deductible portion of capital gain (233) (11,713) --
Non-deductible portion of investment write down (1,580) (15,976) (59,040)
Resource allowance (62,045) (58,181) --
Share issuance costs 77,096 74,896 --
Losses of foreign subsidiaries (9,008) (321,965) (1,078,300)
Valuation allowance (128,263) (772,441) (877,273)
---------- ---------- ----------
Future Income Tax Recovery 226,800 326,727 --
========== ========== ==========
</TABLE>
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.
15. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable,
investment and accounts payable. There are no material differences between
their fair values and carrying values at the balance sheet date.
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.
F-15
<PAGE> 57
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
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:
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 as
well as acquisition costs for leases and permits that do not provide for
unrestricted exploration.
For U.S. GAAP cash flow statement purposes, mineral exploration costs would
be shown under operating activities rather than under investing activities.
For U.S. GAAP purposes, any write down of capitalized exploration costs
would be considered an operating expense and included in the determination
of operating loss for the period in which the write down occurred.
For U.S. GAAP purposes, shares held in escrow which are performance based,
have been excluded from the earnings per share calculation.
Under U.S. GAAP, the balance of any unspent funds raised under a
flow-through arrangement is considered restricted cash and would require
separate disclosure on the face of the balance sheet. In addition, such
restricted amounts would not be considered cash and cash equivalents for
cash flow reporting purposes. The amount of such restricted cash applicable
to future flow-through expenditures included in the balance sheet was
$346,096 at December 31, 1999 (1998 - $157,369; 1997 - $nil).
Future income taxes related to flow-through shares for renunciation of
qualified resource expenditures, are treated as a cost of issuing those
securities for Canadian GAAP. For U.S. GAAP, these costs are included in
the future tax provision.
For U.S. GAAP purposes, 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 required to be recorded for any period under
this method as the option price has been equal to the market price on the
date of the grant.
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 pro-forma disclosure is included as if the fair value based
method had been adopted. These costs 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%.
If these consolidated financial statements were prepared in accordance with
US GAAP, the impact on the balance sheets would be as follows:
<TABLE>
<CAPTION>
SEPT. 30, 2000 1999 1998 1997
-------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mineral exploration costs under Canadian GAAP 10,102,037 7,828,506 7,195,948 8,555,331
Exploration expenditures 4,646,000 3,722,562 3,133,504 4,732,545
---------- ---------- ---------- ----------
Mineral exploration costs under U.S. GAAP 5,456,037 4,105,944 4,062,444 3,822,786
========== ========== ========== ==========
Deficit under Canadian GAAP 11,432,738 9,997,545 9,421,848 6,531,479
Exploration expenditures 4,596,094 3,722,562 3,133,501 4,732,545
Compensation costs 1,661,473 1,661,463 1,164,882 1,080,376
Future income taxes 970,141 970,141 747,132 618,133
---------- ---------- ---------- ----------
Deficit under U.S. GAAP 18,660,446 16,351,721 14,467,366 12,962,533
========== ========== ========== ==========
</TABLE>
F-16
<PAGE> 58
BIRCH MOUNTAIN RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
17. MATERIAL DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
In addition, the impact on the consolidated statements of loss would be as
follows:
<TABLE>
<CAPTION>
SEPT. 30, 2000 SEPT. 30, 1999 1999 1998 1997
-------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net loss for the year under Canadian
GAAP 1,435,193 513,939 575,697 2,890,369 4,539,479
Exploration expenditures 873,531 273,000 589,054 (1,599,040) 892,116
Compensation costs -- 64,000 496,591 84,506 90,705
Future income taxes -- -- 223,009 128,999 --
---------- ---------- ---------- ---------- ----------
Net loss for the year under U.S. GAAP 2,308,724 850,939 1,884,351 1,504,834 5,522,300
========== ========== ========== ========== ==========
Loss per share under U.S. GAAP 0.07 0.03 0.06 0.07 0.32
========== ========== ========== ========== ==========
</TABLE>
The balances and transactions relating to September 30, 2000 or 1999 are
unaudited.
F-17
