UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Industrial Minerals, Inc.
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(Name of business issuer in its charter)
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Delaware 000-30651 06-1474412
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(State or other jurisdiction of (Commission File Number) (IRS Employer Identification No.)
incorporation)
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One Dundas Street West, Suite 2500, Toronto, ON, Canada M5G 1Z3
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(Address of principal executive offices)
Issuer's telephone number: (416) 979-4621
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, no
par value (Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ X ] Yes [ ] No
State issuer's revenues for its most recent fiscal year: $ 0
As of December 31, 2004, 85,424,936 shares of the Company's Common Stock, no par
value per share, were held by non-affiliates, which, based upon market closing
price on December 31, 2004, of $1.20 had a value of $102,509,923.20.
The number of shares of Common Stock of the Registrant outstanding as of
December 31, 2004 were 111,587,966.
DOCUMENT INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
Website Access to Company's Reports
Industrial Minerals, Inc.'s internet website address is
www.industrialmineralsinc.com. Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange
Act are not yet available free of charge through our website. It is the
intention of management to publish these reports on the Company's web site as
soon as reasonably practicable after they are electronically filed with, or
furnished to, the Securities and Exchange Commission. Until the reports are
available on the company's web site anyone can request the report from the
Company at the above address and the Company will furnish the report free of
charge.
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TABLE OF CONTENTS
PART I PAGE
Item 1. Description of Business 4
Item 2. Description of Property 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation 11
Item 7A Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 17
Item 9A. Controls and Procedures 17
Item 9B. Other Information 18
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and Management 23
Item 13. Certain Relationships and Related Transactions 24
Item 14. Principal Accounting Fees and Services 24
PART IV
Item 15. Exhibits, Financial Statement Schedules 25
SIGNATURES 26
3
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
Background
The Company was formed November 6, 1996. The name of the Company was
changed to PNW Capital, Inc. on May 16, 2000.
The Company is a successor registrant pursuant to Section 12(g) 3 of
the Securities Exchange Act of 1934, by virtue of a statutory merger of the
Parent, Winchester Mining Corp., a Delaware corporation, and its wholly owned
subsidiary, Hi-Plains Energy Corp., a Wyoming corporation, with Winchester
Mining Corporation being the survivor. There was no change to the issued and
outstanding shares of Winchester Mining Corporation, and all shares of Hi-Plains
Energy Corp. were retired by virtue of the merger.
On May 15, 2000, Winchester Mining Corp. completed a Share Purchase
Agreement with shareholders of Hi-Plains Energy Corp. in which Winchester Mining
Corp., a Delaware corporation, acquired all 780,000 shares outstanding of the
Registrant for the purposes of accomplishing a Merger of Hi-Plains Energy Corp.
and Winchester Mining Corp. The Merger was completed on May 15, 2000.
In 1996 the Company was listed on the OTCBB with the symbol WNCR. The
prior management raised funds for a mining property in the Northwest
Territories. The budget was spent and the Company remained inactive until March
of 1999. In March of 1999, the Company raised $150,000 to invest in online
gambling pursuant to Rule 504, Regulation D for US Investors and Pursuant to
Regulation S for foreign investors. The Company has since divested itself of
these acquisitions due to the questionable nature of the online gambling
industry. In September of 1999, Wayne Miller became president of Winchester
Mining, Corp. The Company commissioned Digicorp of Vancouver British Columbia,
Canada to develop websites for the Company: Hollywoodmall.net and
Pacificnorthwestmall.net. They have been under development since October of
1999. Radiant Communication of Vancouver was developing and managing these
websites until work was terminated in late 2000.
Bullseye Communication Group was hired to develop an overall marketing
plan for the Company and the two "mall" websites. All website and "mall"
development work was terminated in the fall of 2000, due to lack of capital and
difficulty of attracting business. According to Company records, Bullseye
Communication Group was paid a total of $5000 for development of the website.
In fall of 2000 the Company acquired 100% of the issued and outstanding
stock of PB&J Inc., a newly formed Colorado Corporation upon issuance of
47,460,000 shares of common stock to the principals of PB&J, who became the
management and Directors of PNWC.
4
The PB&J transaction was brought to the Company by Messrs. Silva &
McFarlane who were not officers and Directors or affiliates of the Company. The
transaction was completed as a share exchange.
The Board of Directors determined that the consideration for the
business concept of PB&J was adequate based upon the facts that: a) the company
had no active business. b) the business plan appeared to have potential, c) the
market price of the stock was very low. d) no other more promising businesses
were willing to be acquired, when the company had no capital to invest. There
was an arms length negotiation between the then Board of Directors and the
principals of PB&J. Two owners of PB&J Messrs. Silva & McFarlane became
officers, directors, and affiliates of the company after the PB&J transaction.
PB&J had developed magnetized package dispensing system for plastic
bags and dryer sheets for location on kitchen refrigerators. The product was
designed to offer enhanced convenience which management believed represented a
marketable product.
PB&J, the now wholly owned subsidiary had no prior business operations
in the prior two years, although the management did develop the concept and test
market the product on a limited local basis. The product has never been placed
in production nor significant marketing effort made due to lack of capital. PB&J
held a trademark license on the name Peanut Butter + Jelly, Inc. by assignment
from Joseph L. McFarlane the magnetic packaging and dispensing system.
On December 14, 2001, the shareholders adopted a reverse split of the
then issued and outstanding shares on a 100 for one basis, except that no
shareholder shall be reduced to less than 50 shares. The effective date of the
reverse split was January 7, 2002.
On January 31, 2002, PNW Capital, Inc. ("PNW" or the "Company"),
entered into a definitive acquisition agreement to acquire Industrial Minerals
Incorporated ("IMI"), a private Nevada corporation, owner of certain mineral
leases located in the Townships of Head, Clara and Maria in the County of
Renfrew and the Province of Ontario, Canada. The Agreement for Share Exchange
was executed January 31, 2002 and approved by the Board of Directors on January
31, 2002. The negotiation was at arms length.
Under the terms of the acquisition agreement, PNW exchanged a total of
31,511,700 shares of its common stock for 91% of the issued and outstanding
shares of IMI. By February 20, 2002 the Company received executed documents from
the participating shareholders of IMI representing 31,511,750 common shares
(91%) for the exchange of shares of IMI for common shares of PNW on a one for
one basis.
In the transaction IMI became a wholly owned subsidiary of PNW. The
Company nor its subsidiary currently have any revenue producing operations. The
stockholders of IMI became stockholders of PNW, and their rights as stockholders
are governed by the PNW articles of incorporation and bylaws, as currently in
effect, and the laws of the State of Delaware. Following the acquisition, PNW is
continuing on IMI's operations under the changed company name to Industrial
5
Minerals Inc. PNW's then current board of directors resigned and a new board of
directors was appointed after Notice pursuant to Section 14f of the Securities
and Exchange Act of 1934 was mailed to shareholders. Shareholders did not vote
on this appointment of directors.
The IMI transaction was introduced to the company by a shareholder of
the company who was not an officer or director or affiliate. The transaction was
approved by the Board, because the company had been unable to raise capital for
the PB&J project. The purchase consideration was negotiated based upon a summary
of report prepared by Ben Ainsworth of Ainsworth-Jenkins. This report prepared
by Mr. Ainsworth summarized previous reports by Kilborn Engineering Ltd., KHD
Canada Ltd., Pincock, Alan & Holt, Cominco Engineering Services Ltd and
Environmental Applications Group Ltd.
The Board of Directors approved the acquisition of IMI on January 31,
2002 and authorized the issuance of the shares on February 20, 2002. The vote
was unanimous to approve the agreement.
The PNW board of directors negotiated the acquisition agreement with
IMI and authorized the issuance of the exchange shares totaling 31,511,750 in a
transaction exempt from registration under Section 4(2), 4(6) and Regulation S
as applicable because the board of directors believes that this acquisition will
be to the benefit of shareholders.
The class of persons to whom the common shares of issuer were issued
was the holders of 91% of the common stock of Industrial Minerals, Incorporated,
a Nevada Corporation. The consideration for the issuance of issuers shares was
to acquire (by exchange) 91% of the shares of Industrial Minerals, Incorporated,
a Nevada Corporation. Subsequently, in May 2002, the subsidiary Industrial
Minerals, Inc. was merged into issuer in a statutory merger of a subsidiary in
to a parent pursuant to Section 253 of Delaware General Corporation Law.
On June 13, 2003, the officers and directors of the Company approved a
resolution to forward split the common shares of the Company on a two shares for
one basis, and a majority of the shareholders have indicated their written
consent to such action.
On July 24, 2003, Industrial Minerals Canada, Inc., a wholly owned
subsidiary of Industrial Minerals, Inc., and Mohawk Investment Group and
Community of Southend Reserve No. 200 and 209 and Southend Reindeer Development
Corporation signed a memorandum of understanding. The parties have agreed to
form a limited partnership for the purpose of conducting a business involving
the mining, milling, transportation, and the sale of graphite located on the
reserve. The community of Southend would have 50% interest while the Mohawk
Investment Group and Industrial Minerals Canada, Inc. would each have 25% of the
partnership.
As of March 14, 2004, negotiations have ended regarding the
Saskatchewan property. The parties to the memorandum of understanding signed
July 24, 2003 have not been able to successfully negotiate the necessary
contracts.
6
As of March 15, 2004, the Ministry of Environment of the Province of
Ontario has requested a storm water management plan from the Company. The
Company has retained Knight Piesold to author this plan and it is anticipated
that this plan will be submitted to the Ministry of Environment by May 15, 2005.
In August 2004, the Company through its wholly owned subsidiary,
Industrial Minerals Canada, Inc., received notice from the Ministry of Northern
Development and Mines for the Province of Ontario that the Bissett Creek
Graphite Project Certified Closure Plan as per Subsection 141. (3)(a) of the
Mining Act for the Province of Ontario is now considered filed.
Industrial Minerals, Inc. through its wholly owned subsidiary
Industrial Minerals Canada, Inc. may now begin production of graphite on its
Bissett Creek Graphite Property. During production the Company must comply with
the Bissett Creek Graphite Closure Plan as filed.
Certain Risks
The Company's business is subject to numerous risk factors, including
the following:
The Company is in the process of developing its mineral property for
graphite at its Bissett Creek property. The company has built it's processing
building and installed equipment in preparation for attempted production of
graphite.
There has been minimal graphite production to date by the Company which
has occurred during the commissioning of the process. The Company has no
purchase orders for graphite to be produced by the Company. The Company hopes to
be in production for graphite before the end of its current fiscal year, which
is December 31, 2005, at its Bissett Creek mineral property. (Please see
"management discussion and analysis" as contained in Item 7 hereof.)
ITEM 2 - DESCRIPTION OF PROPERTY
After December 31, 2001 the Company has acquired and merged Industrial
Minerals, Incorporation a Nevada corporation into itself. The Company owns
mineral interests through its wholly owned subsidiary Industrial Minerals
Canada, Inc. in a graphite mineral property in Canada as follows:
The Company is the "lessee" of lease number 364704 consisting of the
following: All those parcels or tracts of land and land under water in the
Township of Head, Clara and Maria, in the County of Renfrew and Province of
Ontario, containing by admeasurement 564.569 hectares, be the same more or less,
composed of those parts of lots 21, 22, 23, 24 and 25, Concessions IV and V, and
part of the bed of Mag Lake and the bed of the unnamed lake, and lots 23, 24 and
25 and the north half of lots 21 and 22, Concession III as shown on the plan of
the geographic Township of Maria, designated as parts 1, 2, 3 and 5 on a plan
and a field notes deposited in the Land Registry Office at Pembroke as Plan
49R_11203, comprising mining claims EO 608306, EO 608346, EO 608347, EO 608374,
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EO 608348, EO 608373, EO 608349, EO 608372, EO 608369, SO 998760, SO 1084577, EO
800884, EO 800880, EO 800881, EO 608350, EO 608371, EO 608367, EO 608370, EO
608376, EO 608368, EO 608302, SO 1117797, SO 998754, SO 1117798, SO 998755, SO
1117799, SO 998756 and SO 998757.
On June 20, 2002, the Company acquired the following unpatented
graphite mining claims. SO 1249711 (11 units) SO 1249723 (3 units) SO 1234705 (2
units) They cover a total area of approximately 625 acres or 248 hectares. They
are located in Maria township in Ontario, Canada. The Company acquired the
graphite mining claims from Messrs. P. McLean and F. Tagliamonte and from the
estate of P. Lacombe. The Company paid $50,000 (Canadian) for the property. The
transaction to acquire the claims were at "arms length" with Sellers. Sellers
are not and were not affiliates of IMI at the time of the transaction. The
Company is responsible for a royalty in the amount of $20 (Canadian) per tonne
of graphite produced. The Company must pay an advance royalty of $27,000
Canadian yearly which will be recaptured once the property is producing and
there are sales.
The Company's mailing address is One Dundas Street West, Suite 2500,
Toronto, ON M5G 1Z3.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings, nor does
management believe that any such proceedings are contemplated.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders held in Toronto on August 25,
2004, the shareholders elected John Melnyk, Stephen W. Weathers and Thomas S.
Bamford and Larry Van Tol directors of the Corporation.
The shareholders also approved the appointment of Toski, Schaefer &
Co., P.C. as auditors for the fiscal year ending December 31, 2004.
The officers and directors of the Company were authorized to amend the
Company's Articles of Incorporation to increase the number of Common Shares
authorized from one hundred million (100,000,000) to two hundred million
(200,000,000).
Effective as of September 27, 2004, for all shareholders of record on
September 27, 2004, the common stock of the Company was forward split on the
basis of three shares for two shares issued and outstanding in the name of the
shareholder, i.e. for each two shares owned, the shareholder will, upon
surrender to the transfer agent of the old certificate, receive a new
certificate which reflects the ratio of the forward split on two old shares for
three new shares basis. Surrender of old certificates is required. Fractional
8
shares will be rounded up to the next whole share. The officers and directors of
the Company authorized the appropriate Articles of Amendment.
There were 887,350 shares represented in person and 36,597,777 shares
represented by proxy. Each of the directors elected received 100% of the votes
of the shares present. There were no votes recorded against any of the directors
elected at the meeting.
The shareholders voted to appoint Toski, Schaefer & Co., P.C. as
auditors, 37,478,127 for, 7,000 abstain and no votes against were recorded.
The shareholders voted to authorize increase in capital to 200,000,000
shares from 100,000,000 there were 37,479,927 for, 200 against and 5,000
abstain.
The shareholders voted to authorize a forward split on the basis of 3
shares for every 2 shares held there were 37,484,927 for and 200 against.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(a) The Registrant's common stock is traded in the over-the-counter
market under the symbol IDSM (OTC Bulletin Board Symbol). The table below sets
forth the high and low bid prices of the Registrant's common stock for the
periods indicated. Such prices are inter-dealer prices, without mark-up,
mark-down or commissions and do not necessarily represent actual sales. (NOTE:
Price adjusted for 3 for 2 forward split.)
2003 High Low
---- ---- ---
1st quarter 0.67 0.55
2nd quarter 1.02 0.42
3rd quarter 2.02 0.93
4th quarter 2.22 1.38
2004 High Low
---- ---- ---
1st quarter 2.14 1.65
2nd quarter 1.83 1.70
3rd quarter 2.03 1.60
4th quarter 2.10 1.02
(b) As of December 31, 2004, there were 313 shareholders of record of
the Registrant's common stock.
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(c) The Registrant has neither declared nor paid any cash dividends on
its common stock, and it is not anticipated that any such dividend will be
declared or paid in the foreseeable future.
Effective August 11, 1993, the Securities and Exchange Commission (the
"Commission") adopted Rule 15g-9, which established the definition of a "penny
stock," for purposes relevant to the Company, as any equity security that has a
market price of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require: (i) that a broker or dealer
approve a person's account for transactions in penny stocks; and (ii) that the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to be
purchased. In order to approve a person's account for transactions in penny
stocks, the broker or dealer must (i) obtain financial information and
investment experience and objectives of the person; and (ii) make a reasonable
determination that the transactions in penny stocks are suitable for that person
and that person has sufficient knowledge and experience in financial matters to
be capable of evaluating the risks of transactions in penny stocks. The broker
or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prepared by the Commission relating to the penny stock
market, which, in highlight form, (i) sets forth the basis on which the broker
or dealer made the suitability determination; and (ii) states that the broker or
dealer received a signed, written agreement from the investor prior to the
transaction. Disclosure also has to be made about the risks of investing in
penny stock in both public offerings and in secondary trading, and about
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
Dividends
The Company has not paid any dividends to date, and has no plans to do
so in the immediate future.
ITEM 6 - SELECTED FINANCIAL DATA
That in order to provide for the conversion of certain long term debt
to equity, the Board has determined that it is appropriate to issue 3,492,115
shares of Restricted Common Stock, for total debt to be converted of
$5,238,172.40 USD, consisting of principal in the amount of $4,969,891.16 USD
and interest accrued in the amount of $268,281.24 USD.
That by issuing shares of Restricted Common Stock to the creditors in
the amount of $5,238,172.40, the Board has determined that, in the exercise of
their best business judgment, the Company is receiving full, fair and adequate
consideration for the issuance of the shares.
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
CONSOLIDATED RESULTS
Twelve month periods ending December 31, 2004, 2003 and 2002
The Company had no revenue for 2004, 2003 and 2002.
Total expenses for professional fees were $86,932, $91,858 and $86,275
for 2004, 2003 and 2002 respectively.
Total royalty expenses were $16,660, $18,775 and $17,550 for 2004, 2003
and 2002 respectively. These expenses are the result of the Bissett Creek
Graphite property. The Company is required to pay a minimum yearly royalty of
$21,600 whether graphite is produced or not. These payments are due
semi-annually on March 6 and September 6 of each year. The Company has recorded
a prepaid expense in the amount of $3,330 representing the January and February
2005 portion of the royalty payment paid on September 6, 2004. There was no
prepaid expense recorded for the years ending December 31, 2003 and 2002
respectively. The fluctuations reported by the Company regarding this expense
are due to the recent strength of the Canadian dollar versus the United States
dollar. The Company is required to pay the royalty due in Canadian dollars and
that minimum royalty is $27,000 Canadian annually.
Total depreciation expenses were $131,674, $68,717 and $56,193 for
2004, 2003 and 2002 respectively.
Total management fees and salaries were $124,400, $56,127 and $ NIL for
2004, 2003 and 2002 respectively. During 2004 a former CEO was paid a salary of
$50,002 and $48,127 for 2003. During 2004 the current CEO was paid a management
fee of $10,000. The CFO was paid $24,000 in 2004 and a management fee in the
amount of $8,000 in 2003. The Company hired employees to begin commissioning the
plant located on the Bissett Creek Graphite Property in October of 2004 paying
these employees a total of $40,398 during 2004.
Other general and administrative expenses totaled $1,249,218, $897,804
and $360,227 for 2004, 2003 and 2002 respectively.
The Company has had a net loss of $561,153, $1,133,197 and $520,242 for
2004, 2003 and 2002 respectively. During fiscal year ending December 31, 2004
the Company had a gain from the extinguishment of debt in the amount of
$1,047,634. This gain along with interest income in the amount of $97 reduced
the Company's net loss from operations by $1,047,731 from $1,608,884 to a net
loss of $561,153. Investors should be cautioned that this is a one time gain and
for discussions concerning operating results in this report management will
discuss financial results from operations essentially ignoring this one time
gain in the amount of $1,047,634.
11
Liquidity and Capital Resources
The Company has cash on hand of $27,726 and a receivable as at December
31, 2004 of $105,925. The receivable of $105,925 is a result of tax input
credits owed to the company by the Government of Canada.
The Company has prepaid expenses of $15,540. This represents the unused
portion of an insurance policy in the amount of $12,210 that the company carries
for its building and equipment. This policy expires September 6, 2005. The
Company also has $3,330 in a prepaid royalty expense.
The Company has total deposits in the amount of $11,789 as of December
31, 2004 compared to $65,242 for the twelve-month period ending December 31,
2003. This represents a decrease of $53,453. The Company has on deposit with its
landlord $1,521 which represents one-month rent and common costs associated with
its premises located at 2500 One Dundas Street West, Suite 2500, Toronto,
Ontario, Canada M5G 1Z3. The Company has entered into a lease, which expires on
April 30, 2005 at which time the Company will continue to rent office space on a
month- to-month basis. The Company also has a deposit on equipment in the amount
of $10,000 and an advance against expenses to an employee in the amount of $268.
The Company has a long-term deposit of $230,000 with the Ministry of
Finance for the Province of Ontario. During the year ending December 31, 2004 a
Mine Development and Closure Plan has been filed with, and accepted by, the
Ministry of Northern Development and Mines, in accordance with the Mining Act,
R.S.O. 1990, Ontario Regulation 240/00, including the standards, procedures and
requirements of the Mining Code of Ontario. The Company's deposit in the amount
of $230,000 is a financial guarantee to the Province of Ontario ensuring that
there are enough funds on hand to effect a proper closure of the Bissett Creek
Graphite property. A balance of $70,400 is still owed on this deposit and is
reflected on the current balance sheet under accounts payable.
The Company had no revenue during the twelve-month period ending
December 31, 2004 and expects to have no revenue during the first quarter ending
March 31, 2005. The Company anticipates some revenue during the second quarter
of 2005 ending June 30 however as a start up company management has no
historical data to reasonably project the amount of revenue. Investors and
potential investors should be aware that the Company is currently seeking
customers for its graphite. Discussions are on going with potential customers
for graphite but there are no contracts concluded at this time. There can be no
guarantee that the Company will be successful in obtaining a contract for its
graphite.
The Company has total current liabilities in the amount of $238,383
which is made up of accounts payable, $120,326, $11,787 due to related parties
and $2,763 for the current portion of a mortgage payable. The Company also owes
$90,796 and $12,711 in notes payable and accrued interest payable respectively.
Investors and potential investors should be aware that the Company does not have
the funds on hand to pay these current liabilities in an orderly fashion. The
Company intends to continue to seek debt financing to complete this project from
non-affiliates, and possibly officers, directors and shareholders. No
12
commitments of any type have been made by any person or entity to provide
financing. Management has no plan to overcome the uncertainties surrounding the
Company's ability to continue as a going concern for a reasonable period of
time. Management will deal with issues as they arise but as a "start up" company
in a graphite mining attempt, the Company can neither predict nor solve, in
anticipation, the uncertainties of mining, capital raising, marketing or
operations. All risks and uncertainties inherent in any start up company exist
in the chosen area of the Company. The Company does not have any other plan in
place to provide capital or financing for its operations.
During the fiscal year ending December 31, 2002 the company secured a
first mortgage which has a balance outstanding of $15,395 as of December 31,
2004 included in this balance is the current principal payments required in
fiscal 2005 of $2,763. A payment monthly payment of $320 is required including
principal and interest for the next 32 months. The balance of $7,566 on August
29, 2007 is then due and payable. This mortgage carries an interest rate of 7%
compounded semi-annually not in advance.
The Company had current loans payable of $90,796 as of December 31,
2004. The Company was granted an extension regarding this debt to July 31, 2005
during the twelve-month period ending December 31, 2003. Investors should be
cautioned that virtually 100% of this debt is due and payable on July 31, 2005.
The Company has not begun any discussions to negotiate terms more favorable to
the Company concerning this debt. Should the Company not be able to retire this
debt on July 31, 2005 investors should be cautioned that the Company might not
be able to continue to operate.
During the twelve-month period ending December 31, 2004 the Company has
been able to secure additional debt financing in the amount of $2,001,980 from a
non-affiliated shareholder. On December 30, 2004 the Company issued 3,492,115
common shares in exchange for paying $4,969,891 and $268,281 in principal and
accrued interest owed. After this transaction the company had loans payable in
the amount of $90,796 and accrued interest in the amount of $12,711. Interest
will continue to accrue at the rate of 7% per annum until July 31, 2005 when the
total principal of $90,796 along with any accrued interest will become due and
payable. The interest rate associated with this debt will be 7% yearly.
Investors and potential investors should be aware that the Company does not have
the funds on hand to pay these current liabilities in an orderly fashion.
2004 highlights include:
1. Acceptance of Mine Closure Plan by Ministry of Northern Development and
Mines for the province of Ontario.
2. Completion of construction of process building and installation of
processing equipment.
3. Beginning of the commissioning phase of the equipment at the Bissett
Creek Graphite Property.
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While the Company has completed the above work on its Bissett Creek
Property the Company has established a budget as follows for fiscal year ending
December 31, 2005:
1. Installation of dryer $ 60,000
2. Commissioning of plant 80,000
3. General & Administrative 900,000
4. Professional fees 87,000
5. Management Fees & Salaries 360,000
------------
Total funds required $ 1,487,000
Investors should be aware that the above are estimates only and could
change as the project continues through the commissioning and start up phase
leading to production. It should be noted that costs of mining for fiscal 2005
are included in general and administrative costs detailed in point 3 above.
Through December 31, 2004, the company has been able to obtain debt
financing and was able to convert debt to equity.
As part of the financing discussed in the preceding paragraph the
Company secured a first mortgage in the amount of $17,000 on a house and
separate building during the fiscal year ending December 31, 2002. The balance
of this mortgage was $15,395 at December 31, 2004. The payments on this mortgage
are $320 monthly at an interest rate of 7% per annum, calculated semi-annually
not in advance. This mortgage matures August 29, 2007.
In addition to the Company's cash on hand of $27,726, receivable of
$105,925 at December 31, 2004 and subsequent to December 31, 2004 securing
$202,500 in new loans from a non-affiliated shareholder, the Company requires
additional financing in the amount of $1,150,849 to operate throughout fiscal
year ending December 31, 2005. Investors should note this additional financing
required assumes no revenue in fiscal 2005, as the Company has no historical
figures to accurately project revenue. Management believes the Company will
begin selling graphite, creating revenue beginning in the second quarter of
fiscal 2005. Any revenue received by the Company will reduce the financing
required.
Investors and potential investors should be aware that even though the
Company has been able to raise funds to December 31, 2004, the Company may not
be successful in obtaining satisfactory additional financing in the amount of
$1,150,849. There are no financing commitments currently in place for the
required funds in the amount of $1,150,849. The Company intends to continue to
seek debt financing to complete this project from non-affiliates, and possibly
officers, directors and shareholders. No commitments of any type have been made
by any person or entity to provide financing. Management has no plan to overcome
the uncertainties surrounding the Company's ability to continue as a going
concern for a reasonable period of time. Management will deal with issues as
they arise but as a "start up" company in a graphite mining attempt, the Company
can neither predict nor solve, in anticipation, the uncertainties of mining,
capital raising, marketing or operations. All risks and uncertainties inherent
14
in any start up company exist in the chosen area of the Company. The Company
does not have any other plan in place to provide capital or financing for its
operations.
Once production begins investors should be further cautioned that there
might not be a market for the Company's graphite. The Company is currently
seeking customers for its graphite. Several Companies have expressed interest in
the graphite and some have requested production samples from the Company's
Bissett Creek Graphite Property. Discussions are on going with potential
customers for graphite but there are no contracts concluded at this time. There
can be no guarantee that the company will be successful in obtaining a contract
for its graphite.
Investors and potential investors should be further cautioned that the
ultimate success of the Company relies on the Company's ability to successfully
mine and market its graphitic resource at a profit.
Contractual Obligations and Other Long-Term Liabilities
Industrial Minerals, Inc. has the following minimum commitments under
contractual obligations, including purchase obligations, as defined by the U.S.
Securities and Exchange Commission. A "purchase obligation" is defined as an
agreement to purchase goods or services that is enforceable and legally binding
on Industrial Minerals, Inc. and that specifies all significant terms,
including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction. Other
long-term liabilities are defined as long-term liabilities that are reflected on
Industrial Minerals, Inc.'s balance sheet under GAAP. Based on this definition,
the tables below include only those contracts, which include fixed or minimum
obligations. It does not include normal purchases, which are made in the
ordinary course of business.
The following table provides aggregated information about Industrial
Minerals, Inc.'s outstanding contractual obligations and other long-term
liabilities as of December 31, 2004.
2005 2006 2007
---- ---- ----
Mortgage Payable & Interest $ 3,840 $3,840 $12,689
Office Lease (1) $ 2,964 - -
Loan Payable & Interest $ 107,744 - -
Contracts
Technical support $ 37,500 - -
Environmental Assessments $ 120,000 - -
Financial Assurance (2) $ 70,400 - -
Equipment Purchase $ 9,600 - -
---------- ------ -------
Total Contractual Commitments $ 352,048 $3,840 $12,689
15
(1) As of May 1 2005 the Company will retain the office on a month to month
basis.
(2) Outstanding balance of financial assurance due on or before May 31,
2005.
CRITICAL ACCOUNTING ESTIMATES
Accounting policies are integral to understanding this MD&A. The
consolidated financial statements of Industrial Minerals, Inc. are prepared in
conformity with GAAP, which requires the use of estimates, judgments, and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. Industrial Minerals, Inc.'s accounting
policies are described in Note 1 to the Consolidated Financial Statements.
Critical accounting estimates are described in this section. An accounting
estimate is considered critical if: the estimate requires management to make
assumptions about matters that were highly uncertain at the time the estimate
was made; different estimates reasonably could have been used; or if changes in
the estimate that would have a material impact on the Corporation's financial
condition or results of operations are reasonably likely to occur from period to
period. Management believes that the accounting estimates employed are
appropriate and resulting balances are reasonable; however, actual results could
differ from the original estimates, requiring adjustments to these balances in
future periods. The Corporation has discussed the development, selection and
disclosures of these critical accounting estimates with the Audit Committee of
Industrial Minerals, Inc.'s Board of Directors, and the Audit Committee has
reviewed the Corporation's disclosures relating to these estimates.
Going Concern
The critical assumption made by management of the Company is that the
Company will continue to operate as a going concern. The following is contained
in the notes to the financial statements and the company's auditors have
expressed a concern that the Company may not be able to continue as a going
concern.
"The Company's financial statement has been presented on the basis that
it is a going concern. The Company is in the exploration stage and has not
earned any revenues from operations. The Company's current liabilities exceed
current assets by $77,403 and the Company recorded a net loss amounting to
$561,153 during the year ended December 31, 2004. The Company's ability to
continue, as a going concern is dependent upon its ability to develop additional
sources of capital to operate it's Bissett Creek Property and ultimately,
achieve profitable operations. Management plans to obtain sufficient additional
debt or equity financing to finance operations, capital improvements and other
necessary activities to ensure the business becomes profitable. The accompanying
financial statements do not include any adjustments that might result from the
outcome of these uncertainties."
If the Company can not continue as a going concern the value of the
Company's assets may approach a level close to zero. Investors should be
cautioned that should the Company cease to operate the Company may recover a
small fraction of the original costs of its assets should a liquidation of the
Company's assets occur. Management estimates a recovery of approximately 5 cents
16
on the dollar in the event of a wholesale liquidation. Should this type of
liquidation occurred in 2004 an increase in loss of $1,946,868 would have
occurred with a corresponding decrease in stockholders equity from $1,918,427 to
a deficit position of $28,441.
Impairment of Long-Lived Assets
Industrial Minerals, Inc. periodically reviews the carrying value of
its long-lived assets held and used, other than goodwill and intangible assets
with indefinite lives, and assets to be disposed of when events and
circumstances warrant such a review. This review is performed using estimates of
future cash flows. If the carrying value of a long-lived asset is considered
impaired, an impairment charge is recorded for the amount by which the carrying
value of the long-lived asset exceeds its fair value.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any market risk sensitive instruments. Since operations
in Canada are in Canadian dollar denominated accounts, we do believe that we
have foreign currency risk in that as the Canadian dollar increases in value
against the United States dollar our operating costs increase when reported in
United States dollars.
Our product is quoted for sale in United States dollars.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
report beginning on page F-1.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A - CONTROLS AND PROCEDURES
The Corporation maintains disclosure controls and procedures designed
to ensure that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the specified time periods. As of the end of the period
covered by this report, the Corporation's Chief Executive Officer and Chief
Financial Officer evaluated the effectiveness of the Corporation's disclosure
controls and procedures. Based on the evaluation, which disclosed no significant
deficiencies or material weaknesses, the Corporation's Chief Executive Officer
and Chief Financial Officer concluded that the Corporation's disclosure controls
and procedures are effective. There were no changes in the Corporation's
internal control over financial reporting that occurred during the Corporation's
17
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Corporation's internal control over financial
reporting. However, the Company is a start-up Company and during the 4th quarter
of fiscal year ending December 31, 2004 the Company has begun hiring employees
to operate the Bissett Creek Graphite Mine. As a result of the expansion
management has put in writing a procedures manual so that all employees that
have the authority to make purchases on behalf of the Company have a procedure
so that the integrity of financial reporting can be maintained.
The Company intends to file an amendment to this report on or before
April 30, 2005 containing the report of the Company's independent auditors as to
the effectiveness of the Company's internal controls and procedures as required
by Section 404 of the Sarbanes-Oxley Act of 2002.
ITEM 9B - OTHER INFORMATION
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current Executive officers of Registrant at December 31, 2004 are:
NAME POSITION HELD TENURE
---- ------------- ------
Larry Van Tol President and CEO Annual
John Melnyk CFO, Secretary/Treasurer Annual
The persons who are directors of the Registrant at December 31, 2004 are:
NAME AGE
---- ---
Larry Van Tol 61
John Melnyk 55
Stephen W. Weathers 44
Thomas S. Bamford 55
Business Experience
The following is a brief account of the business experience during at
least the past five years of the persons designated to be new directors and
officers of the Registrant, indicating the principal occupation and employment
during that period by each, and the name and principal business of the
organizations by which they were employed.
18
LARRY VAN TOL, age 61, graduated with a Bachelor of Science degree in
Business Administration and Economics from the University of Minnesota in 1967.
From 1976 to present Mr. Van Tol has been the owner operator of Hilltop Florist
and Greenhouse in Mankato, Minnesota. Mr. Van Tol has been a director of
Security State Bank in Mankato. He has held this directorship since 1999. Mr.
Van Tol is a member of the audit, company policy, compensation, investment and
loan approval committees of Security State Bank. Security State bank is
privately held and the 3rd largest of Mankato's 28 Banks. Security State bank
has one location and $100 million in assets. Mr. Van Tol is also a director of
Bancommunity Service Corp. Bancommunity is the privately held holding company of
First National Bank of St. Peter, MN and Security State Bank of Mankato. Mr. Van
Tol has held this position since 1999. Mr. Van Tol was elected a Director of
Industrial Minerals, Inc. on October 24, 2003 and appointed President and CEO on
November 12, 2004.
JOHN MELNYK, age 55, studied Business Administration and Commerce at
the University of Alberta from 1970 to 1974. From 1974 to 1978 he managed a
sales territory for McQueen Sales Company, Ltd., a distributor of photographic
products. From 1978 to 1982 he was a self-employed sales agent in the
photographic industry. In 1982 he purchased an interest in a photo finishing lab
which he sold in 1994. From 1994 to present he has been a self-employed business
consultant. Mr. Melnyk also served as the President and a director of Murphy's
Investment Corp. a privately held Corporation which invests in various ventures.
He resigned his position in March 2002. Mr. Melnyk works full time for the
Company.
STEPHEN W. WEATHERS, age 44, earned his B. S. in Geology from Boise
State University. He has worked as an environmental geologist both in the mining
industry and oil and gas industry. His duties included permitting, environmental
compliance, environmental remediation/reclamation and natural gas asset
acquisitions both in the United States and Canada. Mr. Weathers worked for
Maxxim Environmental/Terracon from 1997 through 1999 and presently works in the
environmental remediation division for a Duke Energy Field Services which is a
natural gas processing company (1999-2002). Mr. Weathers also serves as a
director of Sun River Mining, Inc. which is seeking a business acquisition.
THOMAS S. BAMFORD, age 55, obtained a Bachelor of Science in Geological
Engineering from the University of Saskatchewan in 1971, Master of Science
(Geology/Geophysics) from the University of Saskatchewan in 1973, and a Masters
of Business Administration from the University of Saskatchewan in 1978.
Mr. Bamford is a member of the Association of Professional Engineers
and Geoscientists of Saskatchewan (APEGS). He became affiliated with APEGS in
1975. In 1995 Mr. Bamford established and operated a Calgary-based management
consulting and database/software development practice with emphasis on the
process of analyzing operational and economic performance for the oil and gas
industry. Current focus of this consulting practice is to design and organize
private financing and structuring for tax-effective and traditional oil and gas
investment vehicles in western Canada.
19
Mr. Bamford held the positions of President and CEO (1998-1999) and
Chief Financial Officer (1997-1998) of Westlinks Resources Ltd. Mr. Bamford was
a director of Westlinks Resources Ltd. from 1997 to 2000. Westlinks Resources
Ltd. was an Alberta Stock Exchange traded junior oil and Gas Company, which grew
through acquisition, merger and amalgamation.
Mr. Bamford began his career in 1975 with Saskatchewan Oil and Gas
Corporation (Saskoil) and remained with Saskoil (now Wascana Energy Inc.)
through 1995. He participated in various aspects of the technical, operating,
administration and financial growth of a start-up, private, oil company
(Saskoil) through its transition to a publicly traded senior production company
(Wascana Energy). Career development during this period focused on the design
and development of new business opportunities, processes, methods and systems as
well as providing special project leadership to these initiatives.
He held the following positions at Wascana Energy, Inc. (formerly
askoil), Reserves and Evaluations Engineer (04/1975-09/1977), Educational Leave
(09/1977_04/1978), Reservoir Engineer (04/1978-12/1979), Director Planning and
Special Projects (01/1980-04/1983), Acting Vice-President, Finance
(11/1981-04/1982), Manager, Exploration Geology (04/1983-11/1985), Manager,
Business Development (11/1985-06/1987), Manager, Corporate Planning
(06/1987-08/1989), Manager, Research (05/1992-04/1994), Manager, Special
Projects (05/1992-04/1994) and Manager, Budgets and Reserves, (05/1994-12/1995).
Mr. Bamford was appointed a Director of Industrial Minerals, Inc. on
October 24, 2003.
No appointee for a director position has been found guilty of any civil
regulatory or criminal offense or is currently the subject of any civil
regulatory proceeding or any criminal proceeding.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires that the Company's officers and directors, and persons who own
more than ten percent of a registered class of the Company's equity securities,
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than ten percent
stockholders are required by regulation to furnish to the Company copies of all
Section 16(s) forms they file.
The following persons failed to file forms on a timely basis during the
past two fiscal years as required under Section 16(a) as follows:
None.
Conflicts of Interest
Members of the Company's management are associated with other firms
involved in a range of business activities. Consequently, there are potential
20
inherent conflicts of interest in their acting as officers and directors of the
Company. Insofar as the officers and directors are engaged in other business
activities, management anticipates it will devote only a minor amount of time to
the Company's affairs.
The Company's Board of Directors has adopted a policy that the Company
will not seek a merger with, or acquisition of, any entity in which any officer
or director serves as an officer or director or in which they or their family
members own or hold a controlling ownership interest. Although the Board of
Directors could elect to change this policy, the Board of Directors has no
present intention to do so.
There can be no assurance that management will resolve all conflicts of
interest in favor of the Company.
ITEM 11- EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Cash Compensation.
Compensation paid for all services provided up to December 31, 2004 (1)
to each of our executive officers and (2) to all officers as a group.
- ------------------------ --------- ---------- -------- -------------- ----------- ---------------- -------------------------
Name and Principal Year Salary Bonus Consulting Number of Securities Long Term Compensation/
Position Fees/Other Shares Underlying Option
Fees ($) Options/
SARS (#)
- ------------------------ --------- ---------- -------- -------------- ----------- ---------------- -------------------------
Robert A. Stoutley 2002 0 0 0 0 0 0
(Terminated as
President 2004)
2003 $48,127 0 0 0 0 0
2004 $50,002 0 0 0 0 0
- ------------------------ --------- ---------- -------- -------------- ----------- ---------------- -------------------------
Larry Van Tol, 2002 0 0 0 0 0 0
President & CEO
2003 0 0 0 0 0 0
2004 0 0 $10,000 0 0 0
- ------------------------ --------- ---------- -------- -------------- ----------- ---------------- -------------------------
John Melnyk, CFO 2002 0 0 0 0 0 0
Secretary/Treasurer
2003 0 0 $8,000 0 0 0
2004 $24,000 0 0 0 0 0
- ------------------------ --------- ---------- -------- -------------- ----------- ---------------- -------------------------
Officers as a Group 2002 0 0 0 0 0 0
2003 $48,127 0 $8,000 0 0 0
2004 $74,002 0 $10,000 0 0 0
- ------------------------ --------- ---------- -------- -------------- ----------- ---------------- -------------------------
21
SUMMARY COMPENSATION TABLE OF DIRECTORS
(to December 31, 2004)
- ----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Name Year Annual Meeting Consulting Number of Option Securities Underlying
Retainer Fees ($) Fees/Other Shares Exercised Options/SARS (#)
Fees ($) Fees ($)
- ----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Larry Van Tol, 2002 0 0 0 0 0
Director
2003 0 0 0 0 0
2004 0 0 0 0 0
- ----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
John Melnyk, Director 2002 0 0 0 0 0
2003 0 0 0 0 0
2004 0 0 0 0 0
- ----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Stephen W. Weathers, 2002 0 0 0 0 0
Director
2003 0 0 0 0 0
2004 0 0 0 0 0
- ----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Thomas S. Bamford, 2002 0 0 0 0 0
Director
2003 0 0 0 0 0
2004 0 0 0 0 0
- ----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Robert A. Stoutley 2002 0 0 0 0 0
(Former Director)
2003 0 0 0 0 0
2004 0 0 0 0 0
- ----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Richard H. Woodhead 2002 0 0 0 0 0
(Former Director)
2003 0 0 0 0 0
2004 0 0 0 0 0
- ----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
Directors as a Group 2002 0 0 0 0 0
2003 0 0 0 0 0
2004 0 0 0 0 0
- ----------------------- ------------ -------------- ------------- --------------- -------------------- ---------------------------
The following committees have been formed as of March 18, 2004 and
membership as of December 31, 2004 is as follows:
1) Nominating Committee - Members are Larry Van Tol, Stephen W.
Weathers and Thomas S. Bamford. Thomas S. Bamford and Stephen W. Weathers are
independent Directors as defined by the Sarbanes-Oxley Act of 2002. Larry Van
Tol ceased to be an independent director as of his appointment to the position
of CEO on November 12, 2004.
2) Audit Committee - Members are Larry Van Tol and Thomas S. Bamford.
Thomas S. Bamford is an independent Director as defined by the Sarbanes-Oxley
Act of 2002. Larry Van Tol ceased to be an independent director as of his
appointment to the position of CEO on November 12, 2004.
3) Compensation Committee - Members are Stephen W. Weathers and Thomas
S. Bamford. All Committee Members are independent Directors as defined by the
Sarbanes-Oxley Act of 2002. As the compensation committee was discussing
compensation surrounding the appointment of Mr. Van Tol to the position of CEO,
Mr. Van Tol resigned from this committee on October 20, 2004.
22
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the share ownership of officers, directors
and 5% or greater shareholders as of December 31, 2004.
- ---------------------------------------------------------- ----------------------------- -----------------------------
Name and Address of Beneficial Ownership Amount and Nature of Percent of Class
Beneficial Ownership
- ---------------------------------------------------------- ----------------------------- -----------------------------
Larry Van Tol, President, CEO & Director 647,250 Less than .1%
One Dundas Street West Suite 2500
Toronto, Ontario, Canada M5G 1Z3
- ---------------------------------------------------------- ----------------------------- -----------------------------
John Melnyk, CFO Secretary/Treasurer 5,701,200 (1) 5.1%
One Dundas Street West Suite 2500
Toronto, Ontario, Canada M5G 1Z3
- ---------------------------------------------------------- ----------------------------- -----------------------------
Stephen W. Weathers, Director 26,575 Less than .1%
One Dundas Street West Suite 2500
Toronto, Ontario, Canada M5G 1Z3
- ---------------------------------------------------------- ----------------------------- -----------------------------
Thomas S. Bamford, Director 450,000 (2) Less than .1%
One Dundas Street West Suite 2500
Toronto, Ontario, Canada M5G 1Z3
- ---------------------------------------------------------- ----------------------------- -----------------------------
Richard H. Woodhead, (resigned Director) 0 Less than .1%
One Dundas Street West Suite 2500
Toronto, Ontario, Canada M5G 1Z3
- ---------------------------------------------------------- ----------------------------- -----------------------------
Robert A. Stoutley, 0 0%
(Former President and CEO)
One Dundas Street West Suite 2500
Toronto, Ontario, Canada M5G 1Z3
- ---------------------------------------------------------- ----------------------------- -----------------------------
Krystar International 19,494,000 17.5
P.O. Box N-8198
East Bay Street
Management International Building
Nassau, Bahamas BWI
========================================================== ============================= =============================
Directors as a Group 6,825,025 5.2%
========================================================== ============================= =============================
(1) Includes Murphy's Investment Corp. and Olympic View Investments
(beneficially John Melnyk's wife)
(2) Includes 150,000 shares through the Bamford Family Trust
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 31, 2002, PNW Capital, Inc. ("PNW" or the "Company"),
entered into a definitive acquisition agreement to acquire Industrial Minerals
Incorporated ("IMI"), a private Nevada corporation, owner of certain mineral
leases located in the Townships of Head, Clara and Maria in the County of
Renfrew and the Province of Ontario, Canada. The Agreement for Share Exchange
was executed January 31, 2002 and approved by the Board of Directors on January
31, 2002. The negotiation was at arms length.
Under the terms of the acquisition agreement, PNW exchanged a total of
31,511,700 shares of its common stock for 91% of the issued and outstanding
shares of IMI. By February 20, 2002 the Company received executed documents from
the participating shareholders of IMI representing 31,511,750 common shares
(91%) for the exchange of shares of IMI for common shares of PNW on a one for
one basis.
In the transaction IMI became a wholly owned subsidiary of PNW. The
Company nor its subsidiary currently have any revenue producing operations. The
stockholders of IMI became stockholders of PNW, and their rights as stockholders
are governed by the PNW articles of incorporation and bylaws, as currently in
effect, and the laws of the State of Delaware. Following the acquisition, PNW is
continuing on IMI's operations under the changed company name Industrial
Minerals, Inc. PNW's then current board of directors resigned and a new board of
directors was appointed after Notice pursuant to Section 14f of the Securities
and Exchange Act of 1934 was mailed to shareholders. Shareholders did not vote
on this appointment of directors.
The class of persons to whom the common shares of issuer were issued
was the holders of 91% of the common stock of Industrial Minerals, Inc., a
Nevada Corporation. The consideration for the issuance of issuers shares was to
acquire (by exchange) 91% of the shares of Industrial Minerals, Inc., a Nevada
Corporation. Subsequently, in May 2002 the subsidiary, Industrial Minerals, Inc.
was merged into issuer in a statutory merger of a subsidiary in to a parent
pursuant to Section 253 of Delaware General Corporation Law.
The officers and directors of the Company approved a resolution to
forward split the common shares of the Company on a two shares for one basis
effective June 13, 2003 based upon a majority of the shareholders giving their
written consent to such action.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
General. Toski, Schaefer, & Co., P.C. ("TSC") is the Company's
principal auditing firm. The Company's Board of Directors has considered whether
the provisions of audit services is compatible with maintaining TSC's
independence.
24
Audit Fees. The following table sets out fees billed to the Company by
TSC.
2004 2003 2002
Audit Fees $12,000 $9,000 $4,000
Audit Related Fees $5,000 $4,800 $4,800
The Company had no audit committee for 2002 and 2003 thus the Board of
Directors acted as the audit committee for the years 2002 and 2003. The Board
had no "pre-approval policies and procedures" in effect for the auditors'
engagement for the audit year 2002 and 2003.
The audit committee for the year 2004 recommended TSC for the audit
year 2004 and the shareholders at an annual meeting held in Toronto, Ontario,
Canada appointed TSC the company's auditors for the 2004 audit year.
The auditors' full time employees performed all audit work.
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) See attached Financial Statements.
(2) Not applicable.
(3) See (b) below.
(b) Exhibits filed with this annual report.
Exhibit No. Description
----------- -----------
3.1 Bylaws (1)
14.1 Code of Ethics (2)
31.1 Section 302 Certification (CEO)
31.2 Section 302 Certification (CFO)
32.1 Section 906 Certification (CEO)
32.2 Section 906 Certification (CFO)
(1)Incorporated by reference from the exhibits included with the
Company's prior Report on Form 8K filed with the Securities and Exchange
Commission, dated March 16, 2004.
(2)Incorporated by reference from the exhibits included with the
Company's prior Report on Form 8K filed with the Securities and Exchange
Commission, dated January 6, 2004.
(c) Not applicable.
25
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Industrial Minerals, Inc.
Date: March 16, 2005 By:/s/Larry Van Tol
-----------------------------
Larry Van Tol, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 16, 2005 By:/s/Larry Van Tol
-----------------------------
Larry Van Tol, President and CEO
Date: March 16, 2005 By:/s/John Melnyk
-----------------------------
John Melnyk, Secretary/Treasurer, CFO
DIRECTORS:
Date: March 16, 2005 By:/s/Larry Van Tol
-----------------------------
Larry Van Tol
Date: March 16, 2005 By:/s/John Melnyk
-----------------------------
John Melnyk
Date: March 16, 2005 By:/s/Stephen W. Weathers
-----------------------------
Stephen W. Weathers
Date: March 16, 2005 By:/s/Thomas S. Bamford
-----------------------------
Thomas S. Bamford
26
INDUSTRIAL MINERALS, INC.
AND SUBSIDIARY
(An Exploration Stage Company)
FINANCIAL STATEMENTS TABLE OF CONTENTS
December 31, 2004
PAGE
----
Report of Independent Registered Public Accounting Firm............... F-1
Consolidated Balance Sheets........................................... F-2
Consolidated Statements of Operations................................. F-3
Consolidated Statements of Cash Flows................................. F-4
Consolidated Statement of Stockholders' Equity........................ F-6
Notes to Consolidated Financial Statements ............................ F-7
27
TOSKI, SCHAEFER & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
555 International Drive
Williamsville, New York 14221
------
Telephone (716) 634-0700
Fax (716) 634-0764
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Industrial Minerals, Inc. and Subsidiary
(An Exploration Stage Company):
We have audited the accompanying consolidated balance sheets of
Industrial Minerals, Inc. and Subsidiary (formerly PNW Capital, Inc.) (An
Exploration Stage Company) as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2004. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The financial statements of PNW
Capital, Inc. as of December 31, 2001, including the amounts presented for the
period from inception (November 6, 1996) to December 31, 2001, were audited by
other auditors whose report dated February 13, 2002 on those statements included
an explanatory paragraph that described the Company's ability to continue as a
going concern as discussed in note 8 to the financial statements.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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.
We believe that our audits provide a reasonable basis of our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Industrial
Minerals, Inc. and Subsidiary as of December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in note 8 to the
financial statements, the Company is in the exploration stage and has not earned
revenues from operations. Those conditions raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters are also described in note 8. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/Toski, Schaefer & Co., P.C.
Williamsville, New York
March 4, 2005
(except for note 12, as to which
date is March 15, 2005)
F-1
INDUSTRIAL MINERALS, INC.
AND SUBSIDIARY
(An Exploration Stage Company)
Consolidated Balance Sheets
December 31, 2004 and December 31, 2003
December 31 December 31
2004 2003
(Audited) (Audited)
------------- ------------
Assets:
Current assets:
Cash $ 27,726 $ 585,934
Receivables 105,925 40,267
Prepaid expenses 15,540 10,462
Deposits 11,789 65,242
------------- ------------
Total current assets 160,980 701,905
Long-term deposits 230,000 -
Building and equipment, at cost, less accumulated
depreciation of $256,167 in 2004 and $124,493 in 2003 1,778,462 911,652
------------- ------------
Total assets $ 2,169,442 $ 1,613,557
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 120,326 $ 165,753
Accrued interest payable 12,711 -
Loans payable 90,796 -
Due to related parties 11,787 -
Current installments of mortgages payables 2,763 2,144
------------- ------------
Total current liabilities 238,383 167,897
Accrued interest payable - 83,579
Loans payable - 3,058,707
Mortgage payable, excluding current installments 12,632 14,332
------------- ------------
Total liabilities $ 251,015 $ 3,324,515
============= ============
Stockholders' equity:
Common Stock, par value $.0001; 200,000,000 shares authorized;
111,587,966 shares issued and outstanding for 2004 and
72,063,896 shares issued and outstanding for 2003 3,949 3,600
Additional paid-in capital 4,204,331 14,142
Deficit accumulated during exploration stage (2,289,853) (1,728,700)
------------- ------------
Total stockholders' equity (deficit) 1,918,427 (1,710,958)
------------- ------------
Total liabilities and stockholders' equity $ 2,169,442 $ 1,613,557
============= ============
See accompanying notes to consolidated financial statements.
F-2
INDUSTRIAL MINERALS, INC.
AND SUBSIDIARY
(An Exploration Stage Company)
Consolidated Statements of Operations (Audited)
Twelve months ended December 31, 2004, 2003 and 2002
and for the period from November 6, 1996 (Date of Inception) to
December 31, 2004
Nov. 6, 1996
(inception) to
2004 2003 2002 Dec. 31, 2004
-------------- ------------- ----------- -------------
Revenue $ - $ - $ - $ 15,537
-------------- ------------- ----------- -----------
Expenses:
Cost of revenues - - - 76,201
Professional fees 86,932 91,858 86,275 1,198,594
Royalty fees 16,660 18,775 17,550 52,985
Depreciation and amortization 131,674 68,717 56,193 264,876
Impairment of long-lived assets - - - 582,176
Management fees and salaries 124,400 56,127 - 180,527
Other general and administrative 1,249,218 897,804 360,227 2,698,149
-------------- ------------- ----------- -----------
Total expenses 1,608,884 1,133,281 520,245 5,053,508
-------------- ------------- ----------- -----------
Loss from operations (1,608,884) (1,133,281) (520,245) (5,037,971)
-------------- ------------- ----------- -----------
Other income:
Interest income 97 84 3 2,908
Gain from extinguishment of debt 1,047,634 - - 1,047,634
Other income - - - 594
-------------- ------------- ----------- -----------
Total other income 1,047,731 84 3 1,051,136
-------------- ------------- ----------- -----------
Net loss $ (561,153) $ (1,133,197) $ (520,242) $(3,986,835)
============== ============= =========== ===========
Net loss per common share issued $ (0.01) $ (0.02) $ (0.02)
-------------- ------------- ----------- -----------
Weighted average common shares outstanding 81,649,078 55,549,253 31,810,566
============== ============= ===========
See accompanying notes to consolidated financial statements.
F-3
INDUSTRIAL MINERALS, INC.
AND SUBSIDIARY
(An Exploration Stage Company)
Consolidated Statements of Cash Flows (Audited)
Twelve months ended December 31, 2004, 2003 and 2002
and for the period from November 6, 1996 (Date of Inception)
to December 31, 2004
Twelve Months Ended Nov. 6, 1996
December 31, (inception)
--------------------------------------------- to Dec.31,
2004 2003 2002 2004
------------- ------------ ---------- ----------
Cash flows from operating activities:
Net loss $ (561,153) $(1,133,197) $(520,242)$(3,986,835)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 131,674 68,717 56,193 256,584
Provision for bad debts - - - 49,676
Stock issued for services - - - 414,606
Impairment of long-lived assets - - - 297,882
Gain on extinguishment of debt (1,047,634) - - (1,047,634)
Changes in:
Receivables (65,658) (20,673) (19,594) (110,094)
Inventory - - - (5,527)
Prepaid expenses (5,079) (4,062) (6,400) (16,080)
Deposits 53,453 (64,446) (796) (11,789)
Accounts payable and accrued expenses (115,827) 161,908 (38,243) (38,102)
Due to related parties 11,787 (180,000) (20,000) 406,787
------------- ------------ ---------- ----------
Net cash used in operating activities (1,598,437) (1,171,753) (549,082) (3,790,526)
------------- ------------ ---------- ----------
Cash flows from investing activities:
Purchase of building and equipment (998,484) (614,355) (217,207) (1,834,206)
Investment in Multiplex - - - (75,000)
Acquisition of goodwill - - - (149,057)
Loan to related party - - - (50,000)
Loan repayments - - - 4,493
Long-term deposits (159,600) - - (159,600)
------------- ------------ ---------- ----------
Net cash used in investing activities (1,158,084) (614,355) (217,207) (2,263,370)
------------- ------------ ---------- ----------
Cash flows from financing activities:
Net proceeds from sale of common stock - - - 744,859
Net proceeds from loans payable 2,001,980 2,283,335 754,920 5,040,235
Proceeds from mortgage - - 17,000 17,000
Principal payments on mortgage (1,081) (409) (115) (1,605)
Accrued interest payable 197,414 83,579 - 280,993
Cash acquired in acquisition of Peanut
Butter & Jelly, Inc. - - - 140
------------- ------------ ---------- ----------
Net cash provided by financing activities 2,198,313 2,366,505 771,805 6,081,622
------------- ------------ ---------- ----------
(continued)
See accompanying notes to consolidated financial statements.
F-4
INDUSTRIAL MINERALS, INC.
AND SUBSIDIARY
(An Exploration Stage Company)
Consolidated Statements of Cash Flows (Audited)
Twelve months ended December 31, 2004, 2003 and 2002
and for the period from November 6, 1996 (Date of Inception)
to December 31, 2004 (continued)
Twelve Months Ended Nov. 6, 1996
December 31, (inception)
--------------------------------------------- to Dec.31,
2004 2003 2002 2004
------------- ------------ ---------- ----------
Net increase (decrease) in cash $ (558,208) $ 580,397 $ 5,516 $ 27,726
Cash, beginning of period 585,934 5,537 21 -
------------- ------------ ---------- ----------
Cash, end of period $ 27,726 $ 585,934 $ 5,537 $ 27,726
============= ============ ========== ==========
Supplemental cash flow disclosures:
Cash paid for interest $ - $ - $ - $ 113
============= ============ ========== ==========
Cash paid for income taxes $ - $ - $ - $ -
============= ============ ========== ==========
Non-cash investing and financing activities:
Shares issued for debt 4,969,891 - - 5,564,891
============= ============ ========== ==========
Shares issued for services - - - 414,606
============= ============ ========== ==========
Shares issued for investment - - - 30
============= ============ ========== ==========
Shares issued for accrued interest 268,281 - - 268,281
============= ============ ========== ==========
Long term deposits financed by accounts
Payable 70,400 - - 70,400
============= ============ ========== ==========
Property costs financed by issuance
of common stock $ - $ - $ - $ 30,000
============= ============ ========== ==========
Equipment financed by:
Accounts payable - - - 200,000
Issuance of common stock - - - 5,000
------------- ------------ ---------- ----------
$ - $ - $ - $ 205,000
============= ============ ========== ==========
See accompanying notes to consolidated financial statements.
F-5
INDUSTRIAL MINERALS, INC.
AND SUBSIDIARY
(An Exploration Stage Company)
Consolidated Statement of Stockholders' Equity (Audited)
December 31, 2004
Deficit
Accumulated
Common Stock Additional During the
--------------------------- Paid-In Exploration
# of Shares Amount Capital Stage Totals
------------- ----------- ------------ ------------ ----------
Inception - November 6, 1996 - $ - - - -
Balance at December 31, 1998 252,500 25 505,143 (750,830) (245,662)
Issuance of stock for cash 30,000 3 146,618 - 146,621
Issuance of stock for services 55,000 6 274,994 - 275,000
Net loss - - - (259,404) (259,404)
------------- ----------- ------------ ------------ ----------
Balance at December 31, 1999 337,500 34 926,755 (1,010,234) (83,445)
Issuance of stock for cash 84,900 8 413,062 - 413,070
Issuance of stock for services 70,000 7 349,993 - 350,000
Issuance of stock for Multiplex
stock 3,000 1 29 - 30
Issuance of stock for acquisition 475,463 47 4,699 - 4,746
Net loss - - - (694,758) (694,758)
------------- ----------- ------------ ------------ ----------
Balance at December 31, 2000 970,863 97 1,694,538 (1,704,992) (10,357)
Issuance of stock for
compensation 30,000 3 59,997 - 60,000
Net loss - - - (67,251) (67,251)
------------- ----------- ------------ ------------ ----------
Balance at December 31, 2001 1,000,863 100 1,754,535 (1,772,243) (17,608)
Issuance of stock in connection
with acquisition of Industrial
Minerals Incorporated 35,000,000 3,500 (1,740,393) 1,696,982 (39,911)
Minimum 50 shares
post-split allocation 30,758 - - - -
Net loss - - - (520,242) (520,242)
------------- ----------- ------------ ------------ ----------
Balance at December 31, 2002 36,031,621 3,600 14,142 (595,503) (577,761)
Minimum 50 shares
post-split allocation 327 - - - -
2-for-1 split 36,031,948 - - - -
Net loss - - - (1,133,197) (1,133,197)
------------- ----------- ------------ ------------ ----------
Balance at December 31, 2003 72,063,896 3,600 14,142 (1,728,700) (1,710,958)
3-for-2 split 36,031,948 - - - -
Allocation on round-up
of shares 7 - - - -
Issuance of stock in settlement of debt 3,492,115 349 4,190,189 - 4,190,538
Net loss - - - (561,153) (561,153)
------------- ----------- ------------ ------------ ----------
Balance at December 31, 2004 111,587,966 $ 3,949 4,204,331 (2,289,853) 1,918,427
============= =========== ============ ============ ==========
See accompanying notes to consolidated financial statements.
F-6
INDUSTRIAL MINERALS, INC.
AND SUBSIDIARY
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
The Company was incorporated on November 6, 1996, as Winchester Mining
Corporation in the State of Delaware. On May 13, 2000, in connection with its
merger with Hi-Plains Energy Corp. the Company changed its name from Winchester
Mining Corporation to PNW Capital, Inc. On January 31, 2002, the Company
acquired 91% of the outstanding shares of Industrial Minerals, Incorporated. On
May 2, 2002, the Company merged the remaining 9% of Industrial Minerals,
Incorporated into PNW Capital, Inc. and changed its name to Industrial Minerals,
Inc.
(b) Nature of Operations
The Company is in the graphite mining industry, and has mineral rights on the
Company's Bissett Creek Graphite property in Ontario, Canada. Commissioning of
the plant began in September 2004 and it is expected that production will begin
in fiscal 2005.
(c) Basis of Presentation - Exploration Stage Company
The Company has not earned significant revenues from limited principal
operations. Accordingly, the Company's activities have been accounted for as
those of a "Development Stage Enterprise" as set forth in Financial Accounting
Standards Board (SFAS) No. 7. Among the disclosures required by SFAS No. 7 are
that the Company's consolidated statements of operations, stockholders' equity
and cash flows disclose activity since the date of the Company's inception.
Since the Company has not entered into production, it is classified as an
"Exploration Stage Company."
(d) Basis of Accounting
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting in accordance with accounting principles generally
accepted in the United States of America.
(e) Cash and Equivalents
For the purpose of the consolidated statement of cash flows, the Company
considers all highly liquid debt instruments, purchased with an original
maturity of three months or less, to be cash equivalents.
(f) Estimates
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
(g) Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, from 3 to 20
years. Significant improvements are capitalized, while expenditures for
maintenance, repairs and replacements are charged to expense as incurred. Upon
disposal of depreciable property, the appropriate property accounts are reduced
by the related costs and accumulated depreciation and gains and losses are
reflected in the consolidated statements of operations.
F-7
INDUSTRIAL MINERALS, INC.
AND SUBSIDIARY
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicated that the carrying amount of the assets may not be
recoverable. In determining whether there is an impairment of long-lived assets,
the Company compares the sum of the expected future net cash flows (undiscounted
and without interest charges) to the carrying amount of the assets. At December
31, 2004, no impairment in value has been recognized.
(h) Net Loss Per Share
Net loss per share is based on the weighted average number of common shares and
common share equivalents outstanding during the year.
(i) Other Comprehensive Income
The Company has no material components of comprehensive income (loss) and
accordingly, net loss is equal to comprehensive loss in all periods.
(j) Fair Value of Financial Instruments
The fair value of the Company's financial instruments approximated their
carrying values at December 31, 2004 and 2003.
(k) Segment Information
The Company's operating segments all involve the development of mineral rights
on the Company's Bissett Creek Graphite property for future production and sale
of large crystalline flake graphite.
(l) Income Taxes
The Company is liable for income taxes on future taxable income generated. As of
December 31, 2004, the Company has net loss carry forwards of $3,986,835, which
will be used as an offset to future taxable income. Due to the Exploration Stage
nature of the Company, a deferred tax asset has not been recorded at December
31, 2004.
(m) Principles of Consolidation
The consolidated financial statements include all accounts of Industrial
Minerals, Inc. and its wholly owned subsidiary, Industrial Minerals Canada, Inc.
All material inter-company transactions have been eliminated.
(n) Recent Pronouncements
In April 2004, the EITF released Issue No. 03-06, Participating Securities and
the Two Class Method under SFAS No. 128, Earnings per Share, which addressed a
number of questions regarding the computation of earnings per share by companies
that have issued securities other than common stock that contractually entitle
the holder to participate in dividends and earnings of the company when, and if,
it declares dividends on its common stock. It requires that undistributed
earnings for the period be allocated to a participating security based on the
contractual participation rights of the security to share in those earnings as
if all the earnings for the period had been distributed in calculating earnings
per share. EITF Issue No. 03-06 is effective for fiscal periods beginning after
March 15, 2004. It requires that prior period earnings per share amounts be
restated to ensure comparability year over year. The adoption of EITF Issue No.
03-06 did not have an impact on the Company's financial position, results of
operations or cash flows.
F-8
INDUSTRIAL MINERALS, INC.
AND SUBSIDIARY
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment of ARB
No. 43, Chapter 4. The standard requires that abnormal amounts of idle capacity
and spoilage costs should be excluded from the cost of inventory and expensed
when incurred. The provision is effective for fiscal periods beginning after
June 15, 2005. The Company does not expect the adoption of this standard to have
a material effect on its financial position, results of operations or cash
flows.
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an
amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS 153
requires exchanges of productive assets to be accounted for at fair value,
rather than at carryover basis, unless (1) neither the asset received nor the
asset surrendered has a fair value that is determinable within reasonable limits
or (2) the transactions lack commercial substance. SFAS 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. The Company does not expect the adoption of this standard to have a
material effect on its financial position, results of operations or cash flows.
In December 2004, the FASB released its final revised standard, SFAS No. 123R,
Share-Based Payment. SFAS 123R requires that a public entity measure the cost of
equity based service awards based on the grant-date fair value of the award.
That cost will be recognized over the period during which an employee is
required to provide service in exchange for the award or the vesting period. No
compensation cost is recognized for equity instruments for which employees do
not render the requisite service. A public entity will initially measure the
cost of liability based service awards based on its current fair value; the fair
value of that award will be remeasured subsequently at each reporting date
through the settlement date. Changes in fair value during the requisite service
period will be recognized as compensation cost over that period. Adoption of
SFAS 123R is required for fiscal periods beginning after June 15, 2005. The
Company is evaluating SFAS 123R and believes it does not expect the adoption of
this standard to have a material effect on its financial position, results of
operations or cash flows.
NOTE 2 - BUILDING AND EQUIPMENT
Building and equipment are recorded at cost. A summary of building and equipment
at December 31, 2004 are as follows:
Building and improvements $ 551,521
Equipment 1,483,108
-------------
Total building and equipment 2,034,629
Less accumulated depreciation 256,167
-------------
Net building and equipment $ 1,778,462
=============
F-9
INDUSTRIAL MINERALS, INC.
AND SUBSIDIARY
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
NOTE 3- LOANS PAYABLE
Loans payable at December 31,
2004 and 2003 consists of the following:
Non-affiliated shareholder, unsecured, interest at 7%. 2004 2003
---- ----
No monthly installments are required.
Principal and accrued interest due July 2005. $ - $2,967,911
The entire amount, including accrued interest, was
Repaid through the issuance of common shares on
December 30, 2004 (Note 11)
Non-affiliated shareholder, unsecured, interest at 7%.
No monthly installments are required.
Principal and accrued interest due July 2005. $ 90,796 $ 90,796
-------- ----------
Total loans payable $ 90,796 $3,058,707
Less current portion $(90,796) $ -
-------- ----------
Loans payable non-current $ - $3,058,707
======== ==========
NOTE-4 MORTGAGE PAYABLE
Mortgage payable, seller, monthly payments of $320 with
interest at 7% beginning September 2002 through August 2007
and a balloon payment for the remaining balance due at August 2007.
Secured by real property located in Bissett Creek, Ontario, Canada. $ 15,395
Less current installments 2,763
---------
Mortgage payable, less current installments $ 12,632
=========
The aggregate maturity of the mortgage payable for the three years following
December 31, 2005 is as follows:
2005 $ 2,763
2006 2,955
2007 9,677
------
$15,395
======
NOTE-5 RELATED PARTY TRANSACTION
The Company was liable to two officers of the Company, for business related
expenses. The balance of this accounts payable amounted to $11,787 at December
31, 2004.
NOTE-6 COMMITMENTS
(a) Office Space
The Company is obligated under the terms of a lease for its Toronto office space
for monthly rent of $741 until April 30, 2005. After April 30, 2005, the Company
will occupy the premises on a month-to-month basis.
F-10
INDUSTRIAL MINERALS, INC.
AND SUBSIDIARY
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
(b) Leased Mineral Claim
In connection with leased mineral claims, the Company is required to make
royalty payments to the seller of $20 (Canadian dollars) per ton of graphite
carbon concentrate produced and 2.5% of net smelter return payable on any other
minerals derived from the property. An advance royalty of $27,000 (Canadian
dollars) per annum will be paid to the seller in semi-annual installments.
(c) Marketing
The Company is committed to pay to $7,500 monthly for marketing services. This
commitment ends on May 31, 2005.
(d) Mine Development and Closure
A Mine Development and Closure Plan has been filed with, and accepted by, the
Ministry of Northern Development and Mines, in accordance with the Mining Act,
R.S.O. 1990, Ontario Regulation 240/00, including the standards, procedures and
requirements of the Mining Code of Ontario. A financial assurance in the amount
of $230,000 has been accounted for as a long term deposit. The Company has paid
$159,600 to the Minister of Finance for the Province of Ontario leaving a
balance of $70,400 which is due and payable on or before May 31, 2005. This
financial assurance represents the amount that would be required to restore the
Company's Bissett Creek Graphite Property to it's original environmental state.
The money pledged for this financial assurance will be returned to the Company
once the Ministry of Northern Development and Mines is satisfied that the
obligations contained in the Mine Development and Closure Plan have been
performed by the Company. Should the Company not perform it's obligations
contained in the Mine Development and Closure Plan the Ministry of Northern
Development and Mines will restore the Company's Bissett Creek Graphite property
site to it's original environmental state using the $230,000 financial
assurance.
NOTE-7 CAPITAL STOCK
The Company issued 36,031,948 shares of common stock as the result of a 3 for 2
forward stock split. The forward stock split was effective on September 27,
2004. Shares and per share amounts were restated to reflect this forward stock
split. The Company issued an additional 7 shares so that no shareholder would
have a fraction of a share as a result of this 3 for 2 forward split.
The Company issued 3,492,115 shares of common stock to a non-affiliated
shareholder to convert $5,238,172 of debt to equity (Note 3 and 11).
F-11
INDUSTRIAL MINERALS, INC.
AND SUBSIDIARY
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
NOTE 8- GOING CONCERN
The Company's financial statement has been presented on the basis that it is a
going concern. The Company is in the exploration stage and has not earned any
revenues from operations. The Company's current liabilities exceed current
assets by $77,403 and the Company recorded a net loss amounting to $561,153
during the year ended December 31, 2004. The Company's ability to continue, as a
going concern is dependent upon its ability to develop additional sources of
capital to operate it's Bissett Creek Property and ultimately, achieve
profitable operations. Management plans to obtain sufficient additional debt or
equity financing to finance operations, capital improvements and other necessary
activities to ensure the business becomes profitable. The accompanying financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
NOTE 9- TRANSLATION OF FOREIGN CURRENCIES
The assets and liabilities of subsidiaries located outside of the United States
are translated in U.S. dollars at the rates of exchange at the balance sheet
dates. Foreign currency transaction gains or losses are reflected in the results
of operations.
NOTE 10-INCOME TAXES
The Company has made no provision for income taxes because the Company has
incurred operating losses in all periods and for all jurisdictions.
The FASB has issued Statement of Financial Accounting Standards Number 109 (SFAS
109) "Accounting for Income Taxes", which requires a change from the deferred
method to the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing liabilities.
The net deferred income tax asset consisted of the following components at
December 31, 2004 and 2003:
2004 2003
---- ----
Deferred tax asset:
Net operating loss carryforwards $3,986,835 3,425,682
Valuation allowance (3,986,835) (3,425,682)
----------- ----------
Net deferred income tax asset $ - -
=========== ==========
At December 31, 2004, the Company had net operating loss carryforwards of
approximately $3,986,835 for federal income tax purposes. These carryforwards if
not utilized to offset taxable income will begin to expire in 2018.
F-12
INDUSTRIAL MINERALS, INC.
AND SUBSIDIARY
(An Exploration Stage Company)
Notes to Consolidated Financial Statements
NOTE-11 EXTRAORDINARY GAIN FROM EXTINGUISHMENT OF DEBT
The Company converted $5,238,172 of debt consisting of $4,969,891 and $268,281
of principal and interest respectively into 3,492,115 restricted common shares
of the Company. This was converted at $1.50 per share and the Company's common
shares closed on December 30, 2004 at $1.20. The difference of $.30 per share at
the date of this transaction resulted in a gain of $1,047,634.
NOTE-12 SUBSEQUENT EVENT
During the first quarter of the Company's fiscal year ending December 31, 2005,
additional financing in the amount of $202,500 at annual interest rate of 10%
has been obtained. The principal along with accrued interest is due and payable
on December 31, 2005. A non-affiliated shareholder has advanced these funds.
F-13